Gas stations vs. department stores

I thought this chart here from the Illusion of Prosperity blog was pretty telling, and I think it says just about everything you need to know about what Fed policy has done for and to our economy over the last decade-plus (obviously the internet has a role to play here as well, but that dynamic alone cannot and does not account for a tripling of the ratio in a dozen years). Regardless of the reasons behind the spike in this chart, it's clear that inflationary monetary policy is powerless to restore lost retail jobs, but certainly ensures that we all spend more and more of our paychecks at the pump and the grocery store.

Pretty awesome, right? Hooray, Bernanke!

And hey, while we're at it, let's share another semi-terrifying chart from the same blogger.

Good times. Sooner or later, nobody will have any home equity at all, and then we'll all be living on Easy Street. Which will be good, because gas will be so expensive that we won't be able to afford to drive to any other streets. I can't wait.

Quote of the Week

If you're like me (or like this guy), you got plenty sick of seeing Bob Costas' face on NBC during the Olympic coverage this summer. Be that as it may, Costas was on with Conan last week, and he took some pretty funny shots at NBC, endearing himself to some of the viewers and redeeming himself at least a little bit in the process. He's still a smug, smarmy, takes-himself-way-too-seriously little troll, but at least he seems willing to acknowledge that fact at times.

Either way, I got a kick out of his appearance on Conan, and he gets this week's honor for his ironic sense of humor.

This week's QUOTE OF THE WEEK

"I'm sure you'd be the first to attest, Conan, that when it comes to the tough calls, NBC usually gets them right."
                               - Bob Costas

Watch the video below to see the context. Good stuff.

Breaking down cities

NPR's Robert Krulwich had a really cool post up the other day, featuring the work of French artist Armelle Caron. Caron's project was to take overhead maps of cities (and their blocks), then to rearrange and categorize the chunks of land that were carved out by the roads and avenues in that city.

New York, then, starts like this:

And ends up like this:

Pretty boring, really, but that's not at all surprising to anyone who's been to New York and is familiar with its cookie-cutter grid system.

There are some more interesting ones over in Europe, in cities that have been around longer and therefore are a little less centrally-planned.

This here is Paris (also surprisingly boring):

And this is Berlin:

And this little jigsaw puzzle of insanity is Istanbul:

As Krulwich pointed out, I can't imagine what it's like to walk around that city. What would your hometown look like?

[NPR]

Song of the Week(end)

It's been a fun week around here, hasn't it? Well, now it's time for the weekend, which means it's time for some tunes, and instead of going with that country music again, it's time to take it back to the old school with some awesome '90s rap.

So even though I promised my co-worker that I'd give consideration to this fantastic parody song, I have no choice but to roll with this awesome mash-up of A Tribe Called Quest and Pharcyde, two of my favorite rap acts of all time. Given my good friend's musical leanings, I'm sure he'll forgive me my trespasses.

Have a good weekend, people. Don't do anything I wouldn't do out there. 

Bernanke's Terror Alert Scale

Since I'm such a frequent critic of Federal Reserve policy, I'm pretty sure there's no way I can let yesterday's "aggressive", "unprecedented", "open-ended" announcement of what amounts to permanent quantitative easing ("QE") go by without comment. Indeed, I won't.

There's about a million different angles from which I could attack this latest policy announcement (it's desperate, it's ill-timed, it's dangerous, it fans the flames of inflation at a time when the economy can ill afford it, it jacks up the Fed's balance sheet leverage to astonishing and terrifying levels, it makes me wonder just how freaking bad things are out there if the Fed feels like this is a "reasonable" step, and it therefore isn't exactly confidence-inspiring), but I'm not even going to bother with any of those approaches. Instead, I'm actually going to celebrate (yes, you heard me), because this means that the end of the era of Fed-manipulated markets is now imminent. The Fed fired its last meaningful bullet yesterday, and now the endgame is at hand. Let me explain what I mean.

In the immediate aftermath of 9/11, the newly-created Department of Homeland Security unveiled its "Homeland Security Advisory System" (better known to most as the "terror alert level" or "terror alert scale"), a color-coded, semi-ambiguous chart indicating just how scared we all should be of a terrorist attack at any given moment. The intent of the program was in large part to impact the psychology of citizens, making them more vigilant and aware of their surroundings when times warranted.
 
Unfortunately, the terror alert scale was an utter failure. Since the level was essentially always set to either "yellow" or "orange", nobody ever really paid any attention to it. It simply became a part of the background noise, consistently ignored because of its ubiquity. People are able to remain vigilant and aware only for short periods of time—when they're asked to do so for years at a time, they simply become complacent. Not surprisingly, the terror alert scale was eventually retired, presumably still set to "orange".

The Fed's latest QE program similarly attempts to impact the psychology of the American citizens—if consumers and investors know that the Fed is committed to always printing money, they'll be more likely to step out on the risk scale and start spending and investing money (while it's still worth something) rather than waiting around until tomorrow. It theoretically creates a certain sense of urgency that the Fed has been laughably unable to instill up until now.

Unfortunately, perma-QE is likely to fail in the same manner that the DHS terror alert scale ultimately failed. Sure, QE-∞ will cause a Pavlovian short-term rally in the markets, just like the terror alert scale caused us all to be super-vigilant at airports for about 3 months. But sooner or later, this perma-QE will just fade into the background like the "orange alert" that we all ritualistically ignored after a while.

The simple fact is, "QE always" is "QE never", just like anything else that was once rare but then became ubiquitous (like, say, a college education). Once a new baseline expectation has been set and adjusted to, this "easing" simply becomes part of the landscape, and it will become increasingly difficult—if not impossible—for the Fed to effect incremental change. In all areas of life, ubiquity brings along with it an ironically increased invisibility—call it the paradox of ubiquity. Ubiquity breeds irrelevance, for Fed policy just like anything else.

To date, previous QE programs have been effective because they have been sudden, strong, and powerful—like a quick shot of cold air on a hot summer day. But once we've turned the AC on full blast and left it there for months at a time, does anybody even notice it anymore? Or do they only notice when it's taken away? I'd argue the latter, which means that the days of the Fed influencing the market with incremental policy proposals are largely in the past.

So as I said to lead off this rant, the Fed has now fired its last meaningful bullet (some intrepid journalists in fact called it a bazooka), and it sure as hell better work and work quickly. Because if it doesn't, they're going to have to do something far beyond drastic to ever have any impact on the economy (or markets) again, now that they've made permanent QE the baseline.

At some point in the not-too-distant future, the market will experience another correction, and the economy will tilt into another recession. The question is, what will the Fed do then, and will it have any impact whatsoever? The Bernanke Terror Alert Scale is now definitively set to "red"—to have any future effect, Bernanke will have to invent a new color, and I for one don't think that's possible.

So congratulations, Chairman. You've seemingly pulled off the impossible and printed yourself into irrelevance. Enjoy these next few weeks or months of Fed-fueled market rallies while you can—I'm betting this may be the last time you'll ever see them.

Clip of the Week

Time for this week's Clip of the Week, brought to you once again by NASA.

Yes, that means I'm passing up on some good football highlights from NFL Week 1, notably from Robert Griffin III and David Akers. I'm also passing on a delightfully deceptive defensive play from the Baltimore Orioles' Manny Machado, yet another head-scratching play in the Orioles' bizarre sleight-of-hand season.

I'm also passing up on some seriously excellent animal-related videos, including this one about how birds' communication patterns mimic those of humans (and how Beethoven used birds as his muse), this one that features a daredevil family of ducks, and this cat just chillin'.

Other random stuff includes this amazing "Obama campaign video" from the Daily Show and Larry David (it's the second video on that page, but the first one is excellent too), this cool underwater wonderworld, and The Roots' ?uestlove killing it on the pots and pans.

But NASA has been churning out some eye-opening stuff lately, and I'd be remiss if I didn't pass this one along. According to NOAA, this year through August has seen the most extreme climate (coldest winter months, hottest summer months, longest droughts, most soaking rains) of any year in U.S. history. That's terrifying, even if you're a right-wing whacko who thinks that global warming is a hoax cooked up by scientists in a basement for God knows what reason.

Alright, good talk. Enjoy your Clip of the Week. It's... something.

"System D" and taxation

I came across an interesting blog post over at Naked Capitalism this week, talking about the virtues of the so-called "Système Débrouiller" (or System D), which has become the shorthand name for the world's underground economy. Citing a TED talk from journalist Robert Neuwirth, Lambert Strether writes:

If [System D] were united in a single political system, one country, call it The United Street Sellers Republic, the USSR, or Bazarristan, it would be worth 10 trillion dollars every year, and that would make it it the second largest economy in the world after the United States.

At first glance, that's an eye-opening statistic, one that immediately makes us think of black markets and tax cheats and wink-and-a-nod cash transactions in parking lots or back alleys (and to be fair, that's in large part what Neuwirth is talking about there).

But I think that's the wrong image to evoke, and I'll instead refer back to a post of mine from earlier this year that discusses another piece of the puzzle (I was going to write a whole new blog post about this issue, but then I realized I'd already done a pretty good job of laying out the basic points, so I'm self-plagiarizing for the sake of reiteration and redundancy). The bolded emphasis is new, added by me today.

Ultimately, the strength of a state depends entirely on its ability to collect taxes from its citizens. One could argue that the United States is relatively strong in this regard (its "Black Economy" is nowhere near the levels of Italy and Greece), but it still does not collect nearly enough tax to pay its annual bills. If it in fact tried to raise its tax rates in order to close that gap—as Italy is now trying to do, in effect—it might find that the "Black Economy" would grow significantly as a result. 

Those who argue that raising tax rates would harm economic growth are therefore certainly correct, although perhaps not in the way they might imagine. Instead of actually decreasing the overall amount of economic activity, a higher tax rate might just lead to a decrease in the amount of "official" economic activity, as more and more transactions went off the record. It's quite possible (if not probable) that's what happened in Italy over the last decade, which would help explain the nation's pitiful "official" economic statistics. 

If citizens (of any nation) begin to feel that their tax burden is too high—or that their government is misusing their tax dollars—they will always find ways to avoid paying their tax bill. Sometimes this will be through outright misrepresentation and fraud, but often it will be much more subtle and therefore much harder to prove. If a mechanic fixes a friend's car for free, with the understanding that his doctor friend will return the favor in the future by dispensing free medical care, the level of "economic activity" (in terms of favors exchanged) is the same whether or not cash actually changes hands. But in one case, the government can collect taxes on the transactions, and in the other case, the government cannot (at least not easily). 

The choice to do these transactions "on the record" or "off the record" depends entirely on the mechanic and the doctor's respective faith in their government, and whether they feel that their leaders are operating in good faith with respect to taxation. Unfortunately, once that good faith bond has been broken, it can be incredibly difficult to restore, as Italy and Greece are now learning. As the U.S. tries to solve its own deficit and debt problems, it too will end up facing a similar dilemma—how can it extract more money from its citizens without pushing more economic activity down into the underground, beyond its reach? 

The strength of the state, ultimately, is only as good as the citizens' belief in that state and its leaders. Break that bond, and the state can suffer even as many of its citizens continue to thrive—at least in the short run. But in the long run, both the state and its citizens suffer together, and that's where Italy and Greece now find themselves.

"System D", at least originally, referred not to a "black market" economy as we've come to know it, but simply to what might more correctly be termed the "MacGyver economy" or the do-it-yourself economy.

If we as citizens want to avoid adding dollars to the official GDP statistics (and therefore creating taxable moments), one way to do so is to be more resourceful and do a lot more things for ourselves (or with help from our friends). If we all grow our own foods and cook them and eat them at home, there's nothing there that will ever be captured by a government GDP statistic—and yet, we've all got ourselves a full belly, same as if we went to the grocery store and loaded up a cart with fruits and veggies.

The simple fact is, the government can only measure and tax transactions for which there is some record, or where some sort of exchange (of currency) was made. What can the government do about an informal exchange of favors?

Have you ever helped a friend move? Have you ever called up your doctor friend and asked him what he thinks about your aching knees and hacking cough? Have you ever invited a friend over for drinks and asked her for some free off-the-record financial advice? All of these things have economic value, and yet they'll never be part of the formal, measured, taxable economy—none of these are taxable moments, and it's nearly impossible for the government to track the transactions down, with no record of their occurrence.

But ultimately, is there really any fundamental difference? Is our nation really any more prosperous in one case versus the more formal alternative? I'd say no, and that in fact the system in which we trust each other and exchange favors without a record may even be stronger than the alternative—a community (however small) that trusts each other implicitly and doesn't require the keeping of records is a strong community indeed.

Ultimately, this is all an issue of trust. if you think your neighbor is unlikely to hold up his end of the bargain, you'll force all of these transactions onto the record in order to protect yourself. But if you instead think it's the GOVERNMENT that's unlikely to operate in good faith, well that's a whole different issue, isn't it?

Over the next several decades, I think this dynamic will be an important one not just in Europe but throughout the world. Do we trust each other as citizens more than we trust the government, or vice versa? If it's the former, then I wouldn't expect tax revenues to be picking up any time soon, regardless of the actual level of economic activity being performed. Should be interesting to watch.

[Naked Capitalism]