This chart shows a daily plot of S&P500 Index prices. For each price, a letter marks the value for the date and you can see the page A1 main headline for that day from the Wall St. Journal in the legend. Since there are so may days shown not all the headlines are readable on this chart. But the most recent headlines, starting at bottom of legend, are visible.

Daily Wall St. Journal Headlines Tag S&P500

Now consider the same chart with the dates and headlines displayed only for the day on which the price changed from the previous day by a magnitude exceeding 3%. This graph  plots the changes. The headlines are labeled as before.

Wall St. Journal Headlines for +/- 3 % S&P 500 Daily price changes

The interesting result is that all the headlines are about government actions that could affect the markets, not economic/market action. It seems that judging politicians and central bankers is the primary investment skill needed now.

“In just one month, I have virtually turned bankrupt, the entire country has gone bankrupt,” one worker told the Associated Press this week. “I fought my bank to close my account and get 5 million rubles ($1,000) in cash, and I want to buy at least something before my money turns into dust,” said another, who found many supermarket shelves already cleaned out by consumers. From Germany in the 1920s to Argentina in early 2000 to Zimbabwe just a few years back, the scene is always the same: prices skyrocket as personal savings are destroyed. In Belarus, the prices of apples and diapers have already more than doubled; gas (if it can be found at all) is up 25%.

The cause of the collapse wasn’t profit-hungry speculators or nefarious free-market bankers, but a highly authoritarian government beset by massive regulation,intervention, state-ownership of businesses and spending. Government-controlled entities generate 70% of gross-domestic-product; inflation is conservatively running at 16% a year.

You can read his entire article here. This is a taste of what USA has coming if the Fed doesn’t precisely time its reductions in the printed money inserted into the system by actions such as QE2. Do think they will get it right?

The latest surprising discovery in the 2500 pages of ObamaCare is how the rules will explicitly kill jobs. When you read the reason for this job killing, the nominal cause is a rule concerning the mechanism to provide a subsidy for people enrolling in a policy from one of the ObamaCare “exchanges”.

But one wonders if this effect, which could have been avoided,  derives from a government lust to create more dependencies on itself.

Read the analysis and explanation in Wall Street Journal, 25 APRIL 11: How Health Reform Punishes Work, by DANIEL P. KESSLER.

In this excerpt, the deadly “minimum” is revealed:

This new entitlement—which the chief actuary of the Centers for Medicare and Medicaid Services estimates will cost more than $100 billion per year once it is fully implemented—will damage the country’s long-term fiscal outlook. It also will introduce far-reaching negative effects on rewards to work and bizarre new inequities into American life.

The health law establishes insurance exchanges—regulated marketplaces in which individuals and small businesses can shop for coverage—and minimum standards for the insurance policies that can be offered. Because the policies will be so costly, there’s a subsidy for buyers that phases out as family income rises. This sounds reasonable—but the subsidies required to make a “qualifying” insurance policy affordable are so large that their phaseout creates chaos.

 

http://www.youtube.com/watch?v=661pi6K-8WQ&feature=player_embedded

We’ve Become a Nation of Takers, Not Makers

He lays out some facts about the size of government relative to the private sector, to show why so many states and the federal government are nearing the point of financial collapse. In the case of states, which cannot print money as can the federal government, such collapse occurs when the state cannot pay its bills because revenues are dwarfed by its obligations. His article provoked our thinking about the limits, if any, to the size of government.

Government continually grows bigger. But how big, ultimately, can it get? What happens if every citizen becomes a government worker? What if  government collect 100% of all private income? Under what conditions will the electorate become furious at the governments it installed and from which they enjoyed so many “free lunches”? At what point does the electorate realize the government has become dangerously large, intrusive and grasping, and no longer legitimate? In other words, is there a tipping point at which voters switch from active annoyance with their government to rage and the urge to destroy it? We believe their is such a point, and it will occur if the Government takes too much of the voters’ money.

We think there’s a way to roughly analyze when the tipping point will occur. At this point, voters will become so infuriated that they elect radical reformers or even demonstrate violently.

In the last regard, fury is clearly possible when people feel personally threatened. For example, we can see how violence is rearing its head in Wisconsin, as unionists, desperately fearful their government union monopoly and their taxpayer-paid pensions will end, are formally threatening the livelihoods of small business owners throughout the state. The threats are intended to induce the owners to post signs in their stores supporting unions. Here are two links to the news reports:

(Wisconsin Unions Get Ugly, WSJ, 1 APRIL 2011)

Are Union Boycott Threats in Wisconsin Legal?

To understand the analytical framework, we turn to empirical economics, in which stylized games are played with real people and the results measured and compared to the initial theory. In the “Ultimatum Game” (UG), there are two players and a Referee. The Referee gives a sum of money (the Amount) to Player 1 who is told he can retain all the money for himself after an amount of Player 1′s choosing is offered to Player 2 and accepted. The catch is that if Player 2 rejects the offer, both Players get nothing.

In theory, Player 2 should accept an offer of any amount, even $.01, since the amount is better than nothing. Well, that’s theory. In real life experiments, it turns out that almost all Player 2′s require between 20% and 50% of the total to be offered before Player 2 accepts. There seems to be an innate concept of fairness or ego (pride) involved.

Note that if Player 2 rejects an offer from Player 1, it means Player 2 is making himself tangibly worse off on purpose, because the offer fails to satisfy an emotional need in Player 2′s own judgment. We claim that in this case, Player 2 reached his personal tipping point, at which emotion dominates rationality.

(A good summary of this game and its research results is given in Wikipedia.)

Now, consider the game in reverse: Player 1 gets all the money initially, as before, but now Player 2 makes the offer. Player 1 can keep only the amount remaining after Player 2 takes some for himself. In this Reverse Ultimatum Game (RUG), if Player 1 decides to accept the remainder, he keeps it, but if he rejects the remainder, both players get nothing. The RUG is essentially the same as the UG. We imagine if our analysis is correct, Player 1 in the RUG would need to retain 50% to 80% of the initial Amount.

Here is the leap to our tipping point problem: Label Player 1 the Electorate, and Player 2 the Government. The Amount is the total income earned in the country. Call the portion the Government takes taxes. When the Electorate refuses to accept the remainder after the Government takes taxes, then both Players get nothing. This is the tipping Point.  We say that this Tipping Point occurs when government takes between 20% and 50% of total income. Notice in this situation, since the Electorate cannot simply avoid taxes, their only response at their tipping point may well be rage leading to very strong outcomes. No one likes the RUG pulled out from under him!

Of course, we have applied a result in a one-time game between two individuals to a composite of a game played among millions of people with a single Player 2. Yes, this is a stretch, but it does illuminate that people really have inherent limits to what they can tolerate when shares are apportioned. These limits are experienced in a specific dimension, in this case, the amount of money the Government allows them to keep.

Given the fractional requirements illustrated above, we are at the tipping point of taxation.

Economist Herb Stein famously said: “If something cannot continue forever, it will stop.” We now see many socio-economic systems in USA that cannot continue as they are forever, and which seem to be close to the point at which they could easily move into damaging and chaotic states. Let’s take a look at some of our favorites: But first, we need to roughly define a “Tipping Point”.

What’s a Tipping Point?

Every system has limits, including social systems. For every system there is some generalized boundary of system behavior and its use of resources that constrains system operation. When a system reaches its boundaries, some form of dramatic behavior can ensue. As systems approach these boundaries, they may cross their “tipping point.”

The “tipping point” is the state of the system at which catastrophic and usually unpredictable results emerge. For a simple, physical example, consider a sand pile. If you add sand by dripping handfuls on a flat plate, eventually you will have a cone and then it eventually takes only one more grain of sand to cause the whole pile to collapse. For socio-economic systems, people’s behaviors will change as the tipping point is neared. What will happen when these systems get close to their limits? We will make this general question more specific in several current socio-economic systems.

The Banking System Tipped

We have already seen a painful example of a system that tipped over its boundary: Banking. When people and corporations are unable to pay their debts (induced in large scale by government easy-borrowing policies), they default. Defaults vaporize money (the amount owed and not paid back), promoting deflation and breed wide distrust by lenders and leading to a freeze in economic transactions. Then government succumbs to the urge to stop the crisis by “bailing out” the biggest debtors. These government payments (effectively making money materialize) thus relieve the borrowers of the consequences of the risks they freely chose to take. Bailouts are examples of “moral hazard”, which is a condition in which risk-takers expect no unpleasant consequences since they expect to be indemnified by other People’s Money (OPM).

Systems Near Their Tipping Point

We have compiled a series of some of the more obvious social systems near their tipping points. We present them in tabular form, describing the system, a natural tipping point, and give some examples of what could happen once the tipping point is reached. This is the heart of the matter, and will affect almost everyone. We give a number for each system described, starting with Banking.

Financial

Demographic

Health Care System

State and Local Government

Foreign Affairs

The Biggest System: For How Long Can Government Itself Continue to Function so Incompetently?

People choose their governments for pretty basic reasons, such as maintenance of a legal system, operation of courts and enforcement of contracts, construction of shared infrastructures, protection from foreign invasions. Governments have naturally massively expanded beyond these basic roles, but one expects that whatever they do should at least be done reasonably well, even if not really in their charter. We are starting to see that governments have become so big they cannot successfully solve the problems they were elected to solve, let alone efficiently operate in their vast regulatory systems.

Government failures to competently manage recovery from natural disasters set off alarms, because one expects government to at least get that function right. Such management is one of the few things governments are actually required and expected to provide the tax payers.

Since the attacks of Sept. 11, 2001 (a failure of our expensive intelligence bureaucracy) the world has seen these catastrophic events and others:

• Tsunami in the Indian Ocean,
• Hurricane Katrina,
• Global flu pandemic,
• Global financial crisis
• Earthquake in Haiti,
• Oil spill in the Gulf of Mexico,
• Devastating floods in Australia and New Zealand.
• Earthquake in New Zealand
• Japanese earthquake, tsunami and nuclear crisis.

It seems that despite national governments having an uncontroversial mission to help its citizens recover from disasters, every government has been incompetent in trying to do so. This government incompetence seems evident even with the Japanese in their current crisis-the same Japanese who have the most disciplined society in the world, and who were famously meticulous in their preparations for earthquakes and tsunamis. Has government size reached a tipping point where it collapses under its own bureaucratic weight and becomes generally incompetent?

In many socio-economic systems in USA, this fear seems born out.

So are the Democrats just stupid as a group, unable to see reality or recklessly uncaring? I say they are not stupid, but they are so ideological as to be blind, and they suffer power lust. Even worse, as Charles Krauthammer writes, they are also deeply cynical. He says the Democrats want to pander to Americans and cut spending only minimally, in hopes such false largess will gain victory for The OBAMA! on 2012.

As Krauthammer writes below, The OBAMA! actually is denying there is any budget problem, hoping this Big Lie will help Him get re-elected!

“On Tuesday, Democratic Sen. Joe Manchin of West Virginia denounced Obama for lack of leadership on the debt. It’s worse than that. Obama is showing leadership. With Lew’s preposterous claim that Social Security is solvent for 26 years, Obama is preparing to lead the charge against entitlement reform as his ticket to reelection.”

Read the whole article here:

Charles Krauthammer: “Et Tu, Jack Lew?”

A recent article by Steve Greenhut in the Orange County Register elegantly describes the situation and the political framework. Quoting Greenhut (who refers to the Little Hoover Commission report):

This is a battle over the future of California, as communities spend more than a third of their budgets on pensions (plus even more for other retirement costs for public employees, such as health care), which means “an intensifying fight for diminishing resources from which government can pay for schools, police officers, libraries and health services.” And because public employees “appear to have little incentive to push for reforms,” they, too, will suffer, as they look at cutbacks in public services. Per the report, “A pension cannot grow without a job attached to it.” Maybe that reality eventually will get the unions’ attention.

Yet I’m convinced that the state’s public employee unions will take the state over the cliff rather than pare back their generous benefits. What happens when these pension costs push the state toward insolvency and the dominant political players refuse to give in? We might get to watch this unfold, and the result is unlikely to be pretty.

Little Hoover hit on the real problems: Governments are in the position of paying employees for more years in retirement than they worked thanks to the very low retirement ages creating, in essence, a shadow workforce that costs as much as the real workforce but doesn’t do any work! Police, fire and other public safety pensions must be addressed – California politicians cannot make a devil’s bargain and put the biggest part of the problem off the table, as did Wisconsin Gov. Scott Walker, who made a craven political calculation.

What will happen as the unions and the Democrat politicians (elected with massive help from union dues) defend their pension goodies? This is a system at it’s Boundary. Meaningful changes to make the system financially sustainable will hurt those who got the sweetheart deals, or the entire state can suffer by working to provide the pensioners with a risk-free future.

She has made this report available on various web sites, such as

www.businessweek.com/go/11/usainc

www.kpcb.comusainc

We provide it here for your convenience:

Mary Meeker’s Brilliant Analysis of USA’s Financial Condition

This is worth reading and thinking about, and then engaging in informed conversations with folks you know—or even with unwashed media reporters.

In our Humble Opinion, this is a masterful work explaining some hard and unpleasant truths.

http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf