Will the US Military Be Used Against Tea Parties and Americans?

Are “tea parties” and the average Americans target of the coming political repression?

From the Offthegrid.com (source Charleston Voice) [bold original]

A theoretical report about the future use of the military as a police force within the United States is causing a firestorm of controversy. The report, Full Spectrum Operations in the Homeland: A “Vision” of the Future, was written by a retired Army Colonel and describes how future warfare will be conducted on American soil. The report depicts a scenario where the U.S.  Military will have to use its power against the American public. 

The study begins by laying out how the U.S. Army’s Operating Concept 2016-2028 will include military operations throughout the United States. The outrageous report goes on to describe a theoretical situation where the U.S. Army is sent in to a city that has been taken over by Tea Party “insurrectionists”. 

The report starts in an eerie almost prophetic tone and then goes on to demonize tea party members and “immigrant-bashing by right-wing demagogues”… 

“The Great Recession of the early twenty-first century lasts far longer than anyone anticipated.  After a change in control of the White House and Congress in 2012, the governing party cuts off all funding that had been dedicated to boosting the economy or toward relief…” “…. By 2016, the economy shows signs of reawakening, but the middle and lower-middle classes have yet to experience much in the way of job growth or pay raises.  Unemployment continues to hover perilously close to double digits, small businesses cannot meet bankers’ terms to borrow money, and taxes on the middle class remain relatively high.  A high-profile and vocal minority has directed the public’s fear and frustration at nonwhites and immigrants.  After almost ten years of race-baiting and immigrant-bashing by right-wing demagogues, nearly one in five Americans reports being vehemently opposed to immigration, legal or illegal, and even U.S.-born nonwhites have become occasional targets for mobs of angry whites.”

Read the rest here

If the above account is accurate, then this represents signs of paranoia by the political class.

Poll: Occupy Wall Street versus Tea Party, Cut Between Partisan Party Lines

Each day that passes, my theory about Occupy Wall Street as a re-election campaign strategy for President Obama has been generating more confirmations.

From Pew Research (bold emphasis mine)

About four-in-ten Americans say they support the Occupy Wall Street movement (39%), while nearly as many (35%) say they oppose the movement launched last month in New York’s financial district.

By contrast, more say they oppose the Tea Party movement than support it (44% vs. 32%), according to the latest survey by the Pew Research Center for the People & the Press and The Washington Post, conducted Oct. 20-23 among 1,009 adults. One-in-ten (10%) say they support both, while 14% say they oppose both.

Partisanship plays a strong role in attitudes about the two movements. About six-in-ten Republicans (63%) say they support the Tea Party. That jumps to 77% among Republicans who describe themselves as conservative. Just 13% of Democrats support the Tea Party movement, while 64% are opposed.

About half of Democrats (52%) – and 62% of liberal Democrats – say they support the Occupy Wall Street movement. Among Republicans, 19% say they support the anti-Wall Street protests, while more than half (55%) oppose them.

Independents have mixed opinions of the Occupy Wall Street movement: 43% support the movement and 35% are opposed. By contrast, the balance of opinion among independents toward the Tea Party is much more negative: Just 30% support the Tea Party movement while 49% are opposed.

Pew Research essentially confirms the Gallup survey who also showed earlier that only a segment of the American population has been in favor of Occupy Wall Street.

We must remember that the Tea Party has served as a critical influence in turning the tide to favor Republicans during the 2010 Congressional elections.

In the realization that election season nears and that the approval ratings for both Congress and the President are at record lows, which in essence diminishes the odds of the re-election of the Democrat incumbents, thus the seeming urgency for the beleaguered Democrats (through their allies) to organize, mobilize, finance and expand a populist movement that could neutralize the Tea Party forces.

So the Occupy Wall Street movement basically rests on the political gimmickry of class warfare which advocates the expansion of government control in the delusional belief that the ends will justify the means.

Importantly, the Pew survey above has been exhibiting how Occupy Wall Street and the Tea party movement appear to be galvanizing across partisan party lines, which essentially has been confirming my theory.

So far on this account, the survey suggests that Occupy Wall Street as rather a new movement that rides on fancy noble but unattainable abstract goals has been achieving their objective as a prominent counterbalance to the Tea Party movement.

But this has yet to spillover to President Obama’s approval ratings or to his re-election odds.

The Intrade prediction market says that as of this writing Obama’s re-election odds is at 48.7%.

It is interesting and fascinating to witness how people have been so gullible as to be unwittingly used and manipulated to support political causes whose benefits only accrues to politicians seeking office. This also clearly shows how politics can strip or rob people of their common sense.

Occupy Wall Street: More Evidence of President Obama’s Re-election Campaign

I harbored suspicions that Occupy Wall Street could be part of President Obama’s re-election campaign strategy. And the unfolding events seem to be validating my position.

From Intelhub.com

As the Occupy Wall Street protests have grown and evolved we have seen a major change in overall direction coming from the most vocal supporters.

While many still claim that this is not a political movement, the unfortunate fact is that everyday we see more and more evidence that the establishment left has, at least in part, co opted the movement.

Yesterday’s so called Millionaires March has drawn major media attention around the world, with support popping up in places that most wouldn’t think would support protesters targeting the financial district.

Linette Lopez, writing for the Business Insider, revealed that the real powers behind the march were numerous extreme leftist organizations with open socialist and communist ties.

Now here’s who they are specifically:

-The Working Families Party

-UnitedNY

-New York Communities for Change

-Strong Economy For All Coalition

-VOCAL-NY

-Community Voices Heard

Those are some pretty established New York groups that span across the state, and they have some powerful people behind them.

So we have super leftist organizations running large scale protests for the Occupy Wall Street protesters yet we are supposed to believe that this is not a political movement?

While it is clear that these organizations do not speak for ALL the protesters, a growing majority are seemingly falling in line with groups who openly support one of Wall Streets biggest supporters, President Barack Obama.

Read the rest here

Considering that President Obama’s approval rating has been drifting at a nadir (record low from many polls as gallup or Quinnipiac University), thereby diminishing his chance of re-election...

From Gallup

And considering that the tea party movement has served as an influential force in shifting the political tide as revealed by the last Congressional elections…

From Reuters.com

President Obama desperately needs a gimmick…and real quick

And there’s no easier way to pander to the masses than to resort to groupthink gimmickry which have mostly been based on class warfare (Buffett Taxes), nationalism (via protectionism also here) and racism.

For the left, desperate times call for desperate measures

Graphic: Differences and Shared Interests of Occupy Wall Street and the TEA Party

A Venn Diagram showing the differences and shared interests of the Occupy Wall Street and the Tea Party movements

(hat tip Professor Steve Horwitz. Source here)

US Midterm Elections: Rebalancing Political Power And Possible Implications To The Financial Markets

``The most enthusiastic supporters of such unlimited powers of the majority are often those very administrators who know best that, once such powers are assumed, it will be they and not the majority who will in fact exercise them." Friedrich von Hayek, The Constitution of Liberty

Trick or treat.

The way we celebrate Halloween will similarly be parlayed into the political sphere next week.

One of which would have an important bearing in the global financial markets.

While everyone will likely be focused on the US Midterm elections, what would seem crucial would be the US Federal Reserves’ formal announcement of its next phase of ‘credit easing’ policies: Quantitative Easing 2.0.

But we will deal with both.

US Midterm Elections: A Rebalancing Act

We shouldn’t expect much from the US Midterm elections. From our perspective, what is likely to change will only be the redistribution of the political power, from a lopsided stranglehold of Congress by the Democratic party into a more balanced exposure with that of the Republicans, that should serve as a control from an abuse of political power.

As political analyst Stratfor’s George Friedman rightly describes[1],

The Democrats will lose their ability to impose cloture in the Senate and thereby shut off debate. Whether they lose the House or not, the Democrats will lose the ability to pass legislation at the will of the House Democratic leadership. The large majority held by the Democrats will be gone, and party discipline will not be strong enough (it never is) to prevent some defections.

In other words, Democrats would likely lose their capability to highhandedly ram down the throats, or railroad unpopular ‘socialist’ policies to the American public, similar to the Obamacare, where polls say that a majority, or 53% of the public, has favoured its repeal[2]. And obviously such a backlash is likely to get translated into votes.

Figure 1: Every Action Has A Consequence; A Likely Political Comeuppance (chart from Danske Bank)

Apparently, the Democrats haughtily put into motion President Obama’s former Chief of Staff Rahm Emmanuel inglorious advise[3],

``You never let a serious crisis go to waste. And what I mean by that it's an opportunity to do things you think you could not do before”.

And since every action has consequences, the unintended ramifications from these unilateral political actions, perhaps construed as an abuse of power, could likely be a political comeuppance next week. Moreover, there are many signs where public sentiment appears to have shifted incrementally towards accepting more libertarianism[4].

And another very important setback for the incumbent party has been the failed effects of the cumulative stimulus programs in bolstering the US economy, which has been predicated on mainstream economics.

And one of the repercussions from this failure has been the spontaneous emergence of Tea Party Movement groups[5] in 2009, which amazingly has expanded swiftly and now accounts for anywhere 15-25% of the US population according to some estimates[6].

Tea Party groups basically protest on the burgeoning role of government interventionism in the US political economy.

Yet like anywhere else, under a democracy, people will likely be voting, not for idealism or ideology or platform, but against what they would perceive as either proponents of injustice or fear. In short, elections are mostly about symbolisms based on sentiment or voter emotions.

So whether it is the Philippines or in the US, journalist Franklin Pierce Adams (1881-1960) observations should resonate emphatically ``Elections are won by men and women chiefly because most people vote against somebody rather than for somebody.”

And one reason why I think there wouldn’t be much change even with a prospective rebalancing of political power, or political gridlock as many have labelled them, is that many who run for office only piggyback on so-called principles only when public sentiment supports them.

Eventually once elected into office, these principles usually get sloughed off when personal conveniences weigh in.

And recent history has shown this.

The passage of the Emergency Economic Stabilization Act of 2008[7] should serve as a good example. The bill was initially rebuffed at the first vote at the US House of Congress on September 29^th, but following the paroxysm in the financial markets possibly in response to this, the House reversed and ratified it, on October 3^rd, in a bipartisan support. Ironically, this law serves as one of the main anchors for today’s monumental swing in political sentiment.

Also, political competition represents mostly a zero sum game where one gains at the expense of another. As Henry Louis Mencken rightly pointed out ``Under democracy one party always devotes its chief energies to trying to prove that the other party is unfit to rule - and both commonly succeed, and are right.”

The implication is that a house divided could translate to more political horse trading and backroom dealing, where the administration may either lean towards more a centrist stance or risk a political impasse from maintaining the present hardcore path of left leaning policymaking.

And unlike the past, where both the Congress and the Executive branch had been controlled by a single party, which seem to have made the Democrats think that they had a blanket mandate to foist laws as they see fit, the reconfiguration of power will likely make prospective policies more public sentiment sensitive.

And I’d like add that those who think that political ‘pragmatism’ equates to politics as operating in a fixed state will likely be been proven wrong again, if current polls will be actualized into votes, this Tuesday.

People’s dependence on government isn’t a constant for the simple reason that economic laws ultimately shape politics.

And where redistributive policies or programs would have reached its limits or to paraphrase Milton Friedman, there is no such thing as a free lunch, politics will have to come home to roost to face the new reality.

The recent lifting of the legal retirement age in France, in spite of the crippling protests and riots[8], should serve as a vivid example of the unsoundness of the welfare state system. Eventually, unsustainable systems crumble under their own weight, regardless of what people think.

Pragmatism isn’t about the false belief of sustained public’s acceptability of free lunch policies, on the contrary, pragmatism is about understanding the limits of redistribution operating under the ambit of the natural laws of economics.

Political Gridlock And The Financial Markets

And how should a divided government fare for the financial markets?

Based on past performance, they would seem favourable.

According to Danske Bank research team writes[9], (bold emphasis mine)

Interestingly, periods with the White House controlled by a Democrat and Congress controlled by the Republicans – a situation that is likely to be in place from 20 January 2011 - have seen the best average equity market performance. One important caveat is, however, that this result is heavily influenced by the fact that the period 1995-99, during which President Clinton faced a Republican-controlled Congress, coincided with the technology equity market boom.

When looking solely at the party controlling Congress, equities have performed better during periods of Republican control than in periods of Democratic Congress majority. This could indicate that from the point of view of investors, a Republican-controlled Congress is generally seen as less likely to put through legislation that is hostile to business, both in terms of tax policies, but also in terms of regulation issues. In the current situation, with financial sector regulation issues likely to remain high on the agenda in 2011-12, a Republican-controlled Congress could be seen as less likely to enact further measures to tighten regulation.

We can only conclude that the financial market conditions and the economic environment will likely be dependent on the kind of relationship that would emerge and cultivated from political diversity.

Nevertheless our caveat remains, past performance are not reliable indicators of the future, and that many other factors may influence the hue of US politics.

But if the chances of reduced government intervention in the economy are increased from a political gridlock, then the new political arrangement would likely boost business confidence, and thus becomes a positive influence, rather than undermine it.

And only the politically blind and those addicted to unsustainable inflationary big government would see this as some fictitious horror tale.

And as before, they will always miss out being right.

---

[1] Friedman, George U.S. Midterm Elections, Obama and Iran Stratfor.com October 26, 2010

[2] Rasmussen Reports, Health Care Law, October 25, 2010;

thehill.com POLL: Dislike of healthcare law crosses party lines, 1 in 4 Dems want repeal, October 6, 2010

[3] Wall Street Journal OpEd, A 40-Year Wish List, January 28, 2009

[4] See US Politics: A Libertarian Renascence?, October 29, 2010

[5] Wikipedia.org Tea Party Movement

[6] Examiner.com Video: Tea Party struggling in its efforts to find leadership, April 12, 2010

[7] Wikipedia.org Emergency Economic Stabilization Act of 2008

[8] Wall Street Journal Editorial, Dissecting French Schizophrenia, October 29, 2010

[9] Danske Bank, Much ado in the week ahead, Weekly Focus October 29, 2010

How Myths As Market Guide Can Lead To Catastrophe

``This is how humans are: we question all our beliefs, except for the ones we really believe, and those we never think to question.” -Orson Scott Card

If I told you that the global financial markets have been simply looking for reasons to correct from its overbought position, would you buy this argument?

For many the answer is no. People look for news to fill this vacuum or what is known as a “last illusion bias” or “the belief that someone must know what is going on[1]”.

Because it is the proclivity of man to seek more complicated explanations, the Occam Razor’s rule[2]-the simplest solution is usually the correct one- is usually perceived as inadequate. Yet even if profit taking is a real phenomenon on the individual level, outside of the realm of statistics or news linkages, this is usually deemed as inconceivable by an information starved mind.

I would surmise that such a human dynamic could be a function of esteem based reputational incentives, or the need to seek self-comfort in being seen as “sophisticated”.

And stumbling from one cognitive bias to another, this camp usually associates cause and effects to “availability heuristic” or what we simplistically call “available bias” or the practice of “estimating the frequency of an event according to the ease with which the instances of the event can be recalled”[3]. And this is so prevalent in newspaper based accounts of how the markets performed over a given period.

Though we can’t discount some influences from news on a day-to-day basis, they may contribute to what we call as “noise”, since they represent tangential forces that are distant to the genuine “signals” that truly undergirds market actions.

In other words, people frequently mistake noise for signals.

And worst, for financial market practitioners scourged by an innate “dogma” bias, a characteristic seen among the extremes, particularly in the Pollyanna and Perma Bear camps, the attempt to connect the cause and effects of market actions and the political economy is largely predicated on spotty reasoning; specifically what I call as “Cart Before the Horse” reasoning - where X is the desired conclusion, therefore event A results to X.

This can actually be read as combining both logical fallacies (Begging the Question and Post Hoc Ergo Propter Hoc) and cognitive biases, particularly Belief bias or the “evaluation of the logical strength of an argument is biased by their belief in the truth or falsity of the conclusion[4]”, from which they apply behavioral decision making errors by selective perception or choosing data that fits into their desired conclusion (while omitting the rest), by the focusing effect or placing too much emphasis on one or two aspects of an event (at the expense of the aspects) and by the Blind Spot bias or reasoning that fails to account of their personal prejudices.

In short, the deliberate misperception of reality is a representation of distorted beliefs on how the world ought to be.

Clearing Cobwebs Of Cognitive Biases and Logical Fallacies

Let apply this into today’s market actions.

In the US equity markets, the bulls have fallen short of SEVEN CONSECUTIVE[5] weeks of broad market gains following Friday’s SEC-Goldman Sachs related sell-off as the week closed mixed for key US bellwethers.

The S&P 500 was the sole spoiler among the big three benchmark, where the Dow Jones Industrials and the technology rich Nasdaq still managed to tally seven straight weeks of advances (despite Google’s 7.59% loss prior to the Goldman Sach’s news).

Yet in spite of Friday’s selloffs, the week-on-week performance by the different sectors constituting the S&P had been also been mixed (see figure 1).

Figure 1 US Global Investor: Weekly Sectoral Performance and stockcharts.com: S&P 500 Financial Sector

This means that while Friday’s market selloff had been broad based, it wasn’t enough to reverse the general trend over the broader market, even considering the largely overheated pace of the ascent for the overall markets. Yes, we have been expecting a correction[6] and perhaps this could be the start of the natural phase of any market cycle.

Moreover, while the SEC-Goldman Sachs (explanation in the below article) news may have triggered the selloff on Friday, the largest loss over the week had been in the materials and telecom sectors with the Financial, where Goldman Sachs belongs, took up the fourth position.

Considering that the S&P Financial Index took a severe drubbing on Friday (down 3.81%-see left window), this only exhibits that the sector’s muted loss on a weekly basis had been an outcome of an earlier steep climb or an upside spike!

In short, in whatever technical indicator (MACD, moving averages, or Relative Strength Index) one would look at, the US financial sector has been severely in overstretched and overbought conditions which have been looking for the right opportunity for a snapback. Apparently, the SEC-Goldman event merely provided the window for this to happen.

Perma Bears: Broken Clock Is Right Twice A Day

Now for the Perma bear camp, whom have been nearly entirely wrong since the crash of 2008, seems to have nestled on the current hoopla over the SEC-Goldman Sachs as the next issue to bring the house down.

And like a broken clock that is right only twice a day, never has it occurred to them that since markets don’t move in a straight line, they can be coincidentally ‘right’ for misplaced causal reasons.

Their horrible track record in projecting a market crash early this year predicated on the US dollar carry trade bubble and the Greek Debt Crisis has only manifested events to the contrary of their expectation in terms of both the markets and the political economy. Instead, what seem to be happening are the scenarios which we have had pointed out[7].

Here is Oxford Analytica on the US dollar carry trade[8], ``As financial markets possess a demonstrable tendency to overshoot expectations, the carry trade probably is stoking market euphoria in certain places. However, this may only be partially significant, as underlying fundamentals still inform a large cross-section of investment activities.” (bold emphasis mine).

As you can see the deepening lack of correlation, which highlights on the glaring lapses in causality linkages, from which the 2008 crash became a paradigm for the mainstream, is now being accepted as “reality”. The rear-view mirror syndrome or the anchoring bias is becoming exposed as what it is: A fundamental heuristical flaw, which cosmetically had been supported by misleading reasoning.

And as for the Greek Tragedy, the resolution is increasingly becoming a bailout option. Writes the Businessweek-Bloomberg, ``The euro may receive a temporary boost to $1.38 when Greece accesses a 45 billion euro ($61 billion) bailout plan before traders reestablish bets that the shared currency will decline, according to UBS AG.[9]”

And Morgan Stanley’s Joachim Fels, who among the mainstream analysts we respect, decries the prospective action, ``The bail-out and the ECB's softer collateral stance set a bad precedent for other euro area member states and make it more likely that the euro area degenerates into a zone of fiscal profligacy, currency weakness and higher inflationary pressures over time.[10]” (bold highlights mine)

The difference between us and Mr. Fels is that we look at the political incentives that impels the decision making process of policymakers-where the default option or the path dependency by any government, in a world of central banking, has been towards inflationism as recourse to any critical economic problem.

And Mr. Fels appears to be reading the market along our lines.

Price inflation, which Mr. Fels warns of, is starting to creep higher and becoming more manifest even in economies that have been expected to have lesser impact from inflation due to more monetary constraints, such as the Eurozone (see figure 2).

Figure 2: Danske Bank: Will Nasty Inflation Challenge the ECB?

The Danske team, led by Allan von Mehren, expects an inflation surprise[11] to challenge the European Central Bank (ECB) based on 3 factors, rising oil prices, rising food prices and depreciating Euro.

For us, these factors are merely symptoms of the political actions and not the source of inflation.

And for those plagued by the said dogmatic biases, they keep repeatedly asking the wrong question-“where is inflation?”-even when (corporate and sovereign) bonds, commodities, stocks, derivatives and most market signals have been pointing to inflation, across the world.

The fact that inflation is in positive territory for most economies, already dismisses such a highly flawed argument.

Yet, the narrowed focus or the ‘focusing effect’ or excessive tunneling on business or industrial credit take-up or unemployment rates or on rangebound sovereign yields (particularly in the US) purposely disregards the fact that inflation is a political process.

Government which resorts to the printing press as the ultimate means to resolve economic predicaments can only reduce the purchasing value of every existing currency from the introduction of new ones.

Tea Parties As Signs Of The Reemergence Of The Bond Vigilantes

In addition, such outlook neglects the fact that

-inflation has existed even during high period of unemployment rates as in the 70s,

-consumer credit isn’t the principal cause of inflation but intractable government spending and

-as argued last week, governments will opt to sustain low interest rates (even if it means manipulating them-e.g. quantitative easing) as a policy because ``governments through central banks always find low interest rates as an attractive way to finance their spending through borrowing instead of taxation, thereby favor (or would be biased for) extended period of low interest rates.[12]”

Moreover, for a population with a deepening culture of dependency on government welfare programs, the inclination is to accelerate government spending[13] in order to keep up with public demands for more welfarism. And this can only be funded by borrowing, inflation, and taxes in that pecking order.

Why taxes as the lowest priority? Because to quote Professor Gary North[14], ``Politicians fear a taxpayer revolt. Such a revolt is unlikely until investors cease buying Treasury debt. For as long as the government can run deficits at low interest rates, that is how long they will continue.”

The ballooning Tea Party in the US, for instance, which reportedly accounts for 15-25% of the population is relatively a new spontaneously organized political movement that has apparently emerged in response to the prospects of significantly higher taxes.

For the politically and economically blinded progressives to demean this as “superficial” accounts for as utter myopia. How superficial is it to resist a runaway government spending spree, which should translate to prospective higher taxes and or lower standards of living via inflation?

As author and Professor Steven Landsburg rightly argues[15], ``Once the money is spent, the bill must eventually come due—and there’s nobody around to foot that bill except the taxpayers. We are locked into higher current spending and therefore locked into higher future taxes. The president hasn’t lowered taxes; he’s raised and then deferred them. To say otherwise is—let’s be blunt—a flat-out lie.” (bold highlights mine)

Instead, the superficiality should be applied to the fabled belief that government spending and inflationism will account for society’s prosperity. Name a country over human history that has prospered from the printing press or inflationism?!

Hence, the emergence of the Tea party movement appears to sow the seeds of a taxpayer revolt, or as seen in the market, the soft resurfacing of the long absence in the bond vigilantes, who could be simply waiting at the corner to pounce on the policy mistakes based on the delusions of grandeur by charlatan governing socialists and their followers, at the opportune moment.

Until the tea partiers gain a political upperhand, the deflation story is nothing but a justification to undertake more inflationism.

The Siren Song Of Inflation

Going back to the naïve outlook for deflation, the lack of borrowing from both domestic and overseas savings doesn’t close the inflation window, in fact it enhances it. This will entirely depend on manifold forces as culture, habit (or addiction)[16], time constancy of political sentiment and political tolerance and etc...and importantly, the attendant policies in response to the political demands.

Nevertheless, Morgan Stanley’s Spyros Andreopoulos enumerates why inflation is seemingly a siren song[17] for policymakers in dealing with a gargantuan and burgeoning debt problem.

From Mr. Andreopoulos (bold emphasis his, italics mine):

``Public debt overhang: The higher the outstanding amount of government debt, the greater the burden of servicing it. Hence, the temptation to inflate increases with the debt.

``Maturity of the debt: The longer the maturity of the debt, the easier it is for a government to reduce the real costs of debt service. To take an extreme example, if the maturity of the debt is zero - i.e., the entire stock of debt rolls every period - then it would be impossible to reduce the debt burden if yields respond immediately and fully to higher inflation. Hence, the longer the maturity of the debt, the greater the temptation to inflate.

``Currency denomination of the debt: Own currency debt can be inflated away easily. Foreign currency-denominated debt on the other hand cannot be inflated away. Worse, the currency depreciation that will be the likely consequence of higher inflation would make it more difficult to repay foreign currency debt: government tax revenues are in domestic currency, and the domestic currency would be worth less in foreign currency. So, the temptation to inflate increases with the share of debt denominated in domestic currency.

``Foreign versus domestic ownership of debt: The ownership of debt determines who will be affected by higher inflation. The higher the foreign ownership, the less will the fall in the real value of government debt affect domestic residents. This matters not least because only domestic residents vote in elections. Note that unlike domestic owners, foreign owners may not necessarily be interested in the real value of government debt since they consume goods in their own country. But they will nonetheless be affected by the inflation-induced depreciation. So, the temptation to inflate increases with the share of foreign ownership of the debt.

``Proportion of debt indexed to inflation: By construction, indexed debt cannot be inflated away. Hence, the higher the proportion of debt that is indexed to inflation, the lower the temptation to inflate.

``To these purely fiscal arguments we add another dimension, private sector indebtedness:

``Private sector debt overhang: An overlevered private sector may generate macroeconomic fragility and pose a threat to public balance sheets. Hence, high private debt also increases the incentive to inflate.

As per Mr. Andreopoulos perspective, there are many alluring technical reasons on why the political option is to inflate rather than adapt market based austerity or to allow market forces to clear up previous imbalances so as to move to the direction of equilibrium.

And combined with today’s prevailing economic dogma and direction of political leadership, the path dependency will most likely be in this direction.

Real Economic Progress And Deflation

None the less, real progress is characterized by increasing efficiency and technological advances that decreases costs of production and increases in output.

The result of which is a rising value of purchasing power of money or “deflation” (see figure 3) and not higher inflation which is the result of excessive government intervention.

Figure 3: AIER: Purchasing Power of the US dollar

This was mostly the case in the United States until the introduction of the US Federal Reserve in 1913, from which the US dollar has been on a steady decline or where the only thing constant today is to see the US dollar collapse in terms of purchasing power.

Going to the US government’s Bureau of Labor Statistics’ inflation calculator, $100 US dollars in 1913 is now only worth $4.55. That’s a loss of over 95%!

So aside from death and taxes, another thing certain in this world is that the value of paper money is headed to its intrinsic value-Zero[18]!

Yet it is funny how protectionists, who stubbornly argue about the “overvalued” currency of the US as the main source of her problem, have been only been asking for more of the same nostrums, instead of looking at WHY these has emerged on the first place.

Like in reading markets, belief in myths can be the greatest error that could lead to tremendous losses that investors can get entangled with.

As former US President John F. Kennedy once said, ``The great enemy of the truth is very often not the lie -- deliberate, contrived and dishonest, but the myth, persistent, persuasive, and unrealistic. Belief in myths allows the comfort of opinion without the discomfort of thought.”

---

[1] Wikipedia.org, List of cognitive biases

[2] Wikipedia.org, Occam Razor

[3] Taleb, Nassim Nicolas; Fooled By Randomness, p. 195, Random House

[4] Wikipedia.org, Belief Bias

[5] The emphasis on seven is meant to highlight the degree of overextension or overheating

[6] See US Stock Markets: Rising Tide Lifts Most Boats And Is Overbought

[7] For my earlier treatise on the US dollar carry bubble see What Has Pavlov’s Dogs And Posttraumatic Stress Got To Do With The Current Market Weakness?, and Why The Greece Episode Means More Inflationism for my discourse on the Greece crisis.

[8] Oxford Analytica; Dollar Carry Trade No Longer a Sure Bet, Researchrecap.com

[9] Businessweek, Greek Bailout in ‘Matter of Days” to Boost Euro, UBS Says, Bloomberg

[10] Fels, Joachim, Euro Wreckage Reloaded April 16, 2010, Morgan Stanley Global Economic Forum

[11] Mehren, Allan von; Euroland: Nasty inflation surprise will challenge ECB, Danske Bank

[12] See How Moralism Impacts The Markets

[13] See Where Is Deflation?

[14] North, Gary The Economics Of The Free Ride

[15] Landsburg, Steven; Tax Relief, Obama Style, thebigquestions.com

[16] See Influences Of The Yield Curve On The Equity And Commodity Markets

[17] Andreopoulos, Spyros; Debtflation Temptation

[18] See Paper Money On Path To Return To Intrinsic Value - ZERO