FDR Redux

I am as much a Hayekian on depression matters as anyone, but I question the assertion that "uncertainty" explains all that is happening right now. While this particular administration appears to have less than the usual understanding or respect for unintended consequences, it is not as if they are massacring the Cossacks right now. If anything, big business has been overly well-treated by this administration's insistence on bailing out all and only the corporatest of the corporatists.

The problem is the constant perceived need to inflate bubble after bubble, sometimes on what seems like a whim. So many parts of the economy are out of whack with where they should be it is amazing. Keynes cited "sticky wages" as the reason for government stimulus - but really, whose wages are sticky these days? Mine aren't. My company could announce across-the-board 10% cuts tomorrow and lose maybe 10% of its employees, but in the large part remain intact. We would not have much of a choice, and really in private concerns where there is some employee ownership sometimes a pay cut is not the worst thing.

The sticky wages are the government wages. Here in California we get side-by-side headlines of 12% unemployment and public employees complaining about having to forgo their annual 3% cost of living adjustment - the same public employees who earn far more than their private counterparts for less productive tasks. If anything is a good excuse for privatizing state functions during a recession, that must be it: private companies can hire, fire, and adjust wages far more nimbly. And no, it is not because they are cruel evil capitalists, it is because they are beholden to the laws of economics on a day-to-day basis.

The other alternative, which aside from punishing savings in favor of borrowing is relatively equivalent, is inflation. However, the inflation needs to be across-the-board. In this sense, the actions of the Fed buying its own debt then lending the cash to banks through the reserve banking system is probably the most equitable way to go about things. It injects money at the base. Sure, it makes some bankers disproportionately wealthy, but it also inflates the money supply from the bottom and limits ability of politics to dictate economics. Unfortunately, this mechanism seems to have fallen out of favor with the new administration, which prefers to administer the cash based purely on who paid for its election fund. The UAW wants a piece of GM? We can buy that! Swing states are hurting? Let's pour stimulus funds on them so they'll vote democrat in '12!

The big silver lining is that they have spent their political capital early, and set themselves up to have a very rough 2012. As of now, it looks like at least one house of Congress is going to turn Republican, which means my favorite type of federal government - deadlocked. Why is this bad for 2012? Stimulus funds run out in 2011, and if there are enough deficit hawks in one house to prevent a redux, then Obama can't pull a Roosevelt '36. By which I mean, of course, tanking the economy for 3 straight years by feeding special interests and killing golden gooses, then pouring stimulus money on the masses for 12 months leading up to reelection thanks to the illusion of sinking unemployment, only to run out of other people's money after the election and sink the economy even deeper for the next two years.


Space launch - closing a business case

Futron did a great study in (I believe) 2003 that looked at the price elasticity for space launch, and all established markets had essentially none. The reason is that, for military payloads, telecom sats, etc, sticker price of the launch is 3-5% the total system cost (difficult to believe, but true). By comparison, things you could blow at launch up account for 6-10X the cost of the launch itself. Add to that the cost of capital on a multi-billion $$ piece of hardware, and it doesn't take much to realize that the 2 R's - reliability and responsiveness - are much more important than sticker price. The study also found a small but reliable human space flight market, on the order of 5-50 per year sustainably at going costs. It looked at several other options - on-orbit servicing, research, manufacturing - and did not find a business case closing in the near to medium term.

The worst thing - the elasticity is so low that, if you lower your prices the added demand does not keep up. Your revenue goes down as you lower prices! The market actually solves to make space launch as expensive as possible!

It is somewhat bleak, but it also somewhat "IBM broadcasts demand for computers at 2 mainframes per year". I have been able to identify three possible ways out of the trap:

1) Demand elasticity is not the only type of elasticity. There is also supply elasticity, and space has much better characteristics there. Supply elasticity is the inverse of demand elasticity - it is the change in price versus change in units supplied. Launch rate is the most important variable for driving down prices. It's not all paying forward either - with launch rate comes responsiveness, which delivers more value so you can charge more. It also means reliability if you are geared to meet the launch rate (if not you're just doing sloppy work).

2) Reusability. Most people think this only applies if you get a stage back intact, but there is a gradient of reusability. The advantage to spaceflight is probably far greater for recovery of parts. If you can get several engines, turbopumps, computers, and other cost drivers back in good enough shape to do really good post mortems, you will be able to improve both the R's in a remarkable manner. This is far more important than simply trading out manufacturing cost for refurbishing cost early in the industry. Having actual hardware to autopsy against telemetry is extremely useful and would make rocket engineering a little more like automotive engineering and a little less like surgery.

3) Feedback. It is currently best to build extremely expensive satellites, because launch is unresponsive and there is no in-space infrastructure to repair mistakes. The Futron survey did not force execs to consider how they would change their own engineering and development processes in a world where launch was 1/2 or 1/10 the cost - it was mainly asking what the advantage to the business would be for launching current payloads. With high-volume turn-key launch solutions, it starts to make more sense to standardize and modularize payloads. This is good in two ways - first, the payloads are cheaper. That's a good thing simply because when you divide the cost of payload, you multiply the elasticity of the launch by the same factor. If my payload goes from 5% to 20% of total system cost, I will start bargain shopping. Second, it means quantity over quality, and that is great for an industry where launch rate is the primary driver. It leverages demand into supply elasticity.


Been gone for a while...

But, what's 4 months without readers? Why? I went and got a full time job and I love it. I'm still building rockets, but much bigger ones. I'll keep the company name under wraps, but let's just say We're really excited about this upcoming week.

I also moved to Hollywood, which is an experience in itself. Mojave was what it was, and in some ways the iso/desolation was breathtaking. I also dominated the b'ball and the flatball field, competition not being quite as stiff out there.

My views on this great nation and others like have changed little. I'm a little more cautiously optimistic about the collapse of Western society than I was in January, but a little more pessimistic about the likelihood of a seventies-style economic malaise that seems to be entwining itself into every aspect of our lives. The scarceness of jobs is not going away any time soon, certainly not here in Los Angeles. But the good news is that I think we have reached a breaking point with a lot of Americans, where the government is pushing up against its glass ceiling. Certainly demographics are helpful in some ways here; while we all want our entitlements, we also get more fiscally conservative as we grow older. Ignore Europe if you're means-testing that last statement. Forecast for the year - my favorite government takes hold in November - split houses of congress with slim majorities, and an effectively lame-duck president. A state of California that whose creditors are screaming louder that its special interests. And hopefully a couple/few successful launches. That government is best which governs the least.

The AIDS Miracle that was not

I saw a documentary about AIDS in Zambia last night – “The Lazarus Effect”, free on YouTube Red Channel. I was astounded by the way they talked about ARV’s (anti-retrovirals) – it was like they were just a given. As though, at some point in the early 2000’s, some beneficent hand (God, the Zambian government, Butros Butros Gali) sprinkled them across the land like manna. Not even a mention of the evil capitalist society and the greed-mongering pharmaceutical companies that developed the drugs and now give them away at or below cost to the poor of the world.

I mean, it’s really amazing: AIDS in the United States started out as, and still remains, a disease that primarily effects homosexuals. I am not making a judgment on homosexuality here, but I am making a judgment on human nature. Anywhere else, AIDS would have been ignored at best. Here? We mobilized hundreds of billions over the course of 25 years and we cured it, and now we give it away to the less fortunate. No other culture in human history has ever had the combination of empathy and expendable resources to do something like that. Not even close.

And yet, not a mention of it in the documentary.


The true "downward spiral"

Libertyworks published a great collection of graphs showing plummeting tax revenues for corporate and personal income taxes. Keynesians like to talk about a downward spiral of deflation - money supply drops due to financial crisis, which causes prices to fall; but prices fall faster than wages so companies go out of business, which destroys more capital, which in turn shrinks the money supply, etc. Keynes prescribes massive government deficit spending.

I'm astonished this has lasted 80 years. I pointed out in my last post that deficit spending borrows from the same pool of money that would otherwise be made available to businesses. This was a causal argument. I personally don't buy the sticky wages argument either - in a country with a high savings rate (something else the Fed suppresses, by the way, that would have saved our ass this time around), temporary loss of a job is not a catastrophe and there is plenty of investment cash to replace the jobs lost. That is all assuming that few people employ salary and benefits cuts and furloughs in bad times (again, something that is much more difficult when half of all workers are public employees).

Now, with these graphs, it is also becoming clear why we have a downward spiral at all. Government, in order to pay for its largesse both fiscally and politically, first goes after the most productive members of society first. In response, they stop taking risks, which leads to fewer jobs created, which leads to fewer tax revenues, which leads the government to hit the richest even harder, etc. We see this particular brand of insanity with an executive branch admonishing banks for not lending out one side of the mouth, then auctioning off record piles of debt to them out the other side.



A long word that most people just take on faith. I get the concept of deficit spending, but I find a huge, glaring logical inconsistency. If you are not just printing money (which worked wonders for Zimbabwe and Argentina), you must borrow that money. By borrowing money, you are taking away cash that would otherwise be lent to businesses.

We see this today - the stimulus and TARP funds are in bank reserves right now to shore up bank balance sheets against "toxic assets" with little resale value. But what if they weren't? Where would they go? But where did those TARP funds come from? Banks, somewhere, be they American banks or foreign banks or foreign central banks. Banks with liquid assets, who had invested wisely in the bubble years or got lucky at the crash, and seeing a bad economy, ran to the treasury for "safe" investments. Treasury was all to willing to oblige. But what if their had not been massive deficit spending to finance?

- First, there would have been more demand for the same supply of "safe" treasury assets. This alone would have caused an expansion of the money supply and made the Fed redundant because it would have forced interest rates to zero or even lower.
- As those interest rates dropped, commercial investments would have looked better and better to banks. So banks would have started lending and investing. Currently fashionable argument is that banks aren't lending because the economy is bad. Really, banks aren't lending because the US treasury is offering a sweet deal to finance massive government spending. All that stimulus cash would still have found its way to the market, it just would have been in the form of small business loans, M&A, and mortgages. The current Obama fetish with admonishing bankers for not lending is laughable and see through - it is the direct result of his policies.
- We would also still get plenty of foreign investment. China would start to act like Japan did in the '80's, buying up cheap real estate and taking controlling interests in large American firms. Is this worrisome? Sure. But is it more worrisome than China taking a large interest in the federal government, on which we depend for national security against... China? No, not even remotely.

You can talk about multipliers all you want, but they all apply just as well to private lending; and without deadweight loss incurred by government hamfistedness in the economy. So they apply better to private lending. Banks won't just sit on money if they have it and if the market drives interest down on treasury bonds; they will invest or die. It's the same reason why I'm lathering at the mouth about buying a house as soon as I can; you can get good investments cheap right now.

The main point is, in a fractional reserve system, the amount of liquidity is set by the reserve rate, the rules about what constitutes a collateral asset, and the inflation rate. If government is borrowing to spend, it is taking liquidity from business.


The difference between paying and forcing, blurred again

Matt Taibbi at TrueSlant posts a terrific article about the causes of the financial crisis. I like a lot of his points:

“For what we’ve learned in the last few years as one scandal after another spilled onto the front pages is that the bubble economies of the last two decades were not merely monstrous Ponzi schemes that destroyed trillions in wealth while making a small handful of people rich. They were also a profound expression of the fundamentally criminal nature of our political system, in which state power/largess and the private pursuit of (mostly short-term) profit were brilliantly fused in a kind of ongoing theft scheme that sought to instant-cannibalize all the wealth America had stored up during its postwar glory, in the process keeping politicians in office and bankers in beach homes while continually moving the increasingly inevitable disaster to the future.”

He nails it pretty well. In a word, the US financial system is a giant compulsory Ponzi scheme, with politicians and business executives at the top and the rest of us getting screwed. The blame for the crisis should be shared, he says, and letting either the Wall Streeters or the politicians off the hook is dogmatic. It’s similar to the Rand/Marx dichotomy that isn’t: “There is some small class of people who have great power and use it to steal from everyone else. Invariably, I belong to the second group.” It’s a teens-level redux of class warfare.

Taibbi suggests that both the politicians funneling dirty money to election funds, and the businesspeople providing that money by taking their points off toxic deals and buying vacation homes in the Caribbean, were both equally guilty:

“This GSE story is a big one, but if it gets used as a path back to a “The Market Reacted Rationally” version of history, we’re screwed. It has to be looked at as an important part of a diabolical whole, a symbiotic scheme in which the banks and the state were irreversibly intertwined in an enterprise that on both sides was never about market economics, but crime. Because otherwise… the diversionary notion that one side or the other is wholly to blame is part of what makes the whole scam possible.”

I cannot quite buy this evil incarnate at the top of the mountain theory. Taibbi ignores the difference in projected power between two groups of people. Businesses can only balance the books in their favor, politicians can use force against any form of blowback. There is a qualititative difference there, and just following the money does not quite tell the story. For instance, I’ve pointed out before that bankers’ actions were perfectly rational if one considers the implicit guarantee from the Fed, Treasury, and Congress that they would not be allowed to fail – by forceful edict. There were two ways this trading could have played out when the system crashed. In the market version, conservative banks who had eschewed growth for the last decade would watch as the paper tigers of the BoA’s and Citigroups collapsed, and use their hard-won capital to purchase the remains at pennies on the dollar. This happened in a few cases, like Wells Fargo picking up Wachovia, but it was not to the extent that it should have been to break up the too-big-to-fails once and for all. In the corporatist version, the government would step in and save bad banks from their bad investments using money forcefully extracted from taxpayers. This happened and is still happening and will happen for the next 50 years.

Rationality does not just mean seeing bad investments for what they are and avoiding them. Taibbi ignores game theory. Rationality requires weighing the risks including the reactions of others. If there is a player in the game who can tilt the field in your favor unfairly, game theory suggests you court that player and play the tilted field. That is exactly what Wall Street did – rationally. The only short term gains here were election cycles.


The Avatar post!

Maybe twice a year I see a movie that is worth the money and the 2-3 hours. Usually such a movie has a great story line, but for the most part those are tapped out. What I really want from a movie is something that will put me in another world. It could be an understated character-and-atmosphere film like No Country for Old Men, or it could be a comedy or horror flick that suspends certain rules of society and follows them to logical conclusion like The Devil's Rejects or Old School.

I would also lump into this category movies like The Matrix, which don't so much place me in another world with their story and characters, as with the technology they use to tell build the world. These films are more about world building than they are about storytelling. Avatar is a tremendous example of this - certainly the best since The Matrix, and maybe the best since The Wizard of Oz made color the technical standard of the future. Not only was the 3D experience completely immersive, but it seamlessly integrated the computer world with the cellulite.

There were a number of times when I truly felt like I was inside the world. There were the exquisite scenes where the main character was learning to fly, and the battle that included floating mountains in mist, aircraft and helicopters, and flying pterosaurs. But there was also a quality of depth to the faces during conversations which placed you right in the circle. Where past 3D films looked something like a diorama, with 2D cutouts at different 3D depths, there was a gradualism in the Avatar 3D world.

An then there was the story. Because you can make a great movie with only effects, but you cannot make a truly groundbreaking one without a story. On the one hand, I enjoyed the love story quite a bit (but then I'm a sap). It was felt natural, and I've got to say 'em are some hot aliens. I found the rest of the story to be vapid and empty, though. It retreaded ground already trod to death, and it did so with no shades of gray or ballsy plot twists or even depth of character. 3D movie, 1D characters was something I saw a lot on the internet - and it is true. The story itself is the same old Silent Spring re-telling about how humans of the future, and by metaphor the present, are ruled by large corporations which are driven solely by a profit motive that inexorably leads to the destruction of the environment and aboriginal cultures with the help of corrupt military mercenaries.

The best part about the movie’s “pantheism” or “gaiaism” or whatever is that it unwittingly (I presume) blows a fatal hole in its own metaphor. Obviously, if the biomass of Earth were sentient and communicative as the biomass on Pandora was, one would have to approach things like, say, mining and forestry, quite differently. In the context of the movie’s world, the response of the main characters is quite ethical and reasonable. Although, on the other hand, the response of the businesspeople is clearly allegorical and lacks any depth whatsoever… Giovanni Ribisi’s momentary pauses for effect notwithstanding, of course.

The problem for the holier than thou set is that it bears no parallel to reality. If you are not dealing with sentient plant life, then it makes perfect sense to cut down the tree. Likewise, it makes perfect sense to replant the tree and foster a diverse forest ecosystem around it once you are done with the area, provided of course you own the property and hope to continue to be able to make money off it for generations. And if you are mining, it makes a great deal of sense to reclaim the land when the mine closes, so you don’t get a bad rep for you company and therefore end up shut out of other rich resources by the people who live nearby. The fatal conceit is the idea that reality must support your faith, that ideally science must find a justification for your beliefs, when in fact the converse is true.

Likewise for the Na’Vi. We hear things like “We don’t have anything they want.” A perfectly true statement for a people who apparently never get sick thanks to the protection of their planetary organism and live quite fantastical lives flying on their neurologically-joined pets and not-breaking their “natural carbon fiber reinforced” bones and and living harmoniously within just heirarchical tribal structures and transferring their consciousness intact to the biomass organism when they do die. And if that was representative of the lives of pre-technical humans or, say, modern Islamic societies, then it would be a valid metaphor to the intrusions of the Western world into our developing neighbors.

But it’s not. The fact is, poor people do live brutal lives, both at the hands of nature and at the hands of their neighbors. They do want medicine, education, surplus food, and cell phones; regardless of whether they particularly like the people they are getting them from. And they are led by demagogues who twist their words, feed them false information, and promise things that they have no intention of delivering.

It did not need to be this way. Star Wars was groundbreaking both for its technology and its story, as was The Wizard of Oz, and 2001: A Space Odyssey. If the stakeholders had had some balls, there were a lot of places to take the plot besides a dramatic re-telling of Silent Spring with some Little Bighorn mixed in. But in the end, Cameron et al. went the safe route. The produced a technical masterpiece on the bare minimum story, and it is still a great movie.