The Visible Hand

2012 Market/Economy Predictions

2012-01-04T01:19:00.000-08:00

(See 2011 Market/Economy Predictions for past year's predictions & scores.)

Again sticking with a deflationary theme for 2012, with a strong dollar. Deleveraging and relatively bigger problems elsewhere in the world keep Treasury rates down despite worsening debt picture in the US.

	S&P500	Gold	Oil	DXY	TNX	TYX	Case-Shiller SF MSA	Case-Shiller 20-composite	Unemployment (U-6)
Starting value	1257	1520	99	80.2	1.87%	2.89%	133.22	141.97	15.6%
My prediction	1000	1250	60	90	2%	3%	125	135	17%
Actual value

Bonus prediction: Obama doesn't get reelected, due to a poor economy.

Note: the Case-Shiller numbers reported in December are for October, and the unemployment numbers reported in December are for November.

2011 Market/Economy Predictions

2011-01-04T00:29:00.000-08:00

(See 2010 Market/Economy Predictions for past year's predictions & scores.)

I'm sticking again with a deflationary theme for the next year. Given the makeup of the new Congress, it'll be more difficult for the USG and Fed to keep extending and pretending.

	S&P500	Gold	Oil	USDEUR	USDJPY	TNX	TYX	Case-Shiller SF MSA	Case-Shiller 20-composite	Unemployment (U-6)
Starting value	1257	1421	91	0.75	81.79	3.3%	4.36%	138.84	145.32	17%
My prediction	1000	1250	60	0.80	90	3%	4%	125	130	19%
Actual value	1257	1520	99	0.77	78	1.87%	2.89%	133.22	141.97	15.6%

Note: the Case-Shiller numbers reported in December are for October, and the unemployment numbers reported in December are for November.

ABCT and debt-based monetary systems

2010-11-01T00:44:00.000-07:00

The Austrian business cycle theory (ABCT) gives a causal explanation of the boom-bust cycle observed in economies. In a nutshell, the explanation is: 1) credit expansion lowers interest rates artificially, giving the appearance of greater capital/savings than is actually present in the economy, and fueling the undertaking of projects that wouldn't be undertaken without the artificially lowered rates (this is the boom -- think condo developments springing up in Vegas), and 2) malinvestments made during the boom are recognized and liquidated, causing the bust (think unfinished or foreclosed condos in Vegas).

I think the ABCT has it right, and I've been thinking about how it fits in with some of the ideas about debt-based monetary systems (such as the one we have in the US) that I've discussed here and here. Some ideas:

1: Our debt-based monetary system guarantees that we're always in a boom or a bust.
As discussed in my Credit Money Fun post, our monetary system guarantees that we're either in a credit expansion or a credit contraction. Therefore, combining this insight with ABCT, we see that our economy is always either in a boom or a bust phase! The length can vary -- I would argue that we've been in a long credit expansion/boom phase since the Great Depression ended in the mid-forties, and are now entering a protracted bust phase. From this perspective, there may be something to the various wave/Kondratieff cycle theories.

2: What commences the bust phase?

ABCT assumes that banks can create money (or fiduciary media, as Mises calls it). This is certainly true of our monetary system today. Mises states that what commences the bust phase is:

The breakdown appears as soon as the banks become frightened
by the accelerated pace of the boom and begin to abstain from fur-
ther expansion of credit. The boom could continue only as long as
the banks were ready to grant freely all those credits which business
needed for the execution of its excessive projects, utterly disagreeing
with the red state of the supply of factors of production and the
valuations of the consumers. [p.569 Human Action, Scholar's Edition]

Mises pins the responsibility for the end of the expansion on the banks, i.e. the suppliers of money, who become afraid that their loans won't get paid back.

There is another possibility, however: the borrowers become frightened (because they're unable to service any more debt, for example) and demand for credit drops. Given that the a debt-based monetary system must expand or be doomed contract (i.e., it has self-limiting, ponzi-scheme dynamics) a drop in demand will force a credit contraction, leading the economy into a bust phase per ABCT. Today, this is more than a mere possibility, as it looks to me like credit demand is way down and the private sector is looking to shed debt (the public sector is another story).

3: How does actual productivity and wealth creation impact the boom-bust cycle?

What role does productivity and actual wealth creation play in a debt based monetary system? It is this: it gives backing to more debt, thus allowing the ponzi to go on longer. An entire industry, the banks, exists to "monetize" productivity and real wealth. They try to push debt on everyone, those who need it and those who don't alike. An example would be taking out a loan backed by shares in a company. Even for individuals and companies who don't need to borrow, the debt merchants can make it seem really attractive to borrow. People and companies who don't need to borrow money do it anyway because they think they can get a return. Whatever their rationale, this borrowing converts real wealth into money supply.

The irony here is that by allowing the ponzi to go on longer, real wealth creation only makes the resulting inevitable bust that much bigger. Our monetary system is designed to fail us.

4: Present goods are always valued more than future goods, so aren't we doomed to boom/bust?

If there's going to be any lending at all, there will be interested associated with it. Doesn't this imply that a bust is inevitable, as we get the same dynamic of ever-expanding interest needing to be paid? I don't think so, but I believe you have to make it possible to pay loans off with something other than cash.

In a debt-based system all money is borrowed, so there is no stable monetary base (if all loans are paid off, you have no money left in circulation).

Let's say we have a gold-based monetary system, and there are 1000 ounces of gold in existence. Loans are made for the entire 1000 ounces, say at 10% due in a year. Assuming the gold supply doesn't expand at 10% next year, there won't be enough cash (gold), to pay off the loans even if the real wealth in the economy grew at that rate. To avoid the bust, we have to allow for the possibility of paying off some of the loans with something other than gold. Examples might be equity or goods.

Credit-money fun

2010-04-20T00:13:00.000-07:00

The US is on a credit-money monetary system, meaning, quite simply, that money is debt. Two simple rules apply in this system:

1) Money is borrowed into existence.
2) Money carries interest.

From these rules, we can derive some fun results.

First, an almost trivial one: if all debts are paid off, there would be no money left in circulation. Fun!

Second: Suppose there are only two actors in the economy: the Bank and the Producer. Furthermore, suppose that in year 1, there is $100 total money in the system. By rule 2), this $100 carries some embedded interest cost, say 10% due in a year. In year 2, how much money must there be for a) the total money supply not to shrink and b) have no debt defaults? There will need to be $110: $10 new dollars will need to be created to pay the interest, plus $100 new dollars will need to be created to replace the money that is "maturing." By rule 1), all money is borrowed into existence, which means that the Producer will have gone to the Bank to borrow $110 in year 2 (the Bank doesn't barter -- they only take dollars for repayment of debt). Since the Bank isn't running a charity, it will require $110 worth of collateral to back the newly increased money supply. But now, of course, this $110 carries an embedded interest cost, let's say again 10% due in a year. On to year 3, etc., and we get compounding interest, which grows exponentially. The result is that to avoid a decrease in money supply (deflation, noooo!!!) and debt defaults (in which the Bank repossesses the Producer's collateral), the Producer must be able to provide an exponentially increasing amount of collateral to the Bank. (Changing the interest rate and the term doesn't change the fact of exponential growth, just timelines.) Fun!

Reserves, capital, and me

2010-03-04T02:35:00.000-08:00

Constraints on Lending: Reserves vs Capital

I had an interesting conversation with a former executive at a commercial bank (let's call him D), who confirmed for me some things related to our monetary system which I had been reading about here and here (particularly the comments).

In a nutshell, these sources assert that bank lending is not constrained by reserves. D confirmed for me that during his tenure as a commercial banker, he never had to worry about his bank's reserve ratio -- loans were made without regard to it. The biggest constraint on lending (on the supply side) was bank capital, or the capital ratio. D told me that if you asked any bank president what his bank's reserve ratio was, most wouldn't have any idea. Capital ratios are a whole other ball of wax though, and careful attention is paid to them by management.

If loans come first, how do banks keep their reserve ratios in line? First of all, reserve requirements have been steadily eroded in the US banking system, with sweep accounts and other "innovations." Second of all, if the banking system is short reserves, the Fed accommodates it by injecting more. But note: the Fed follows loan issuance, it does not cause it.

Observe that this completely invalidates the traditional money multiplier model of the US monetary system as taught in econ 101, wherein the Fed injects new reserves which then get multiplied into the money supply via fractional reserve lending. If banks lend regardless of reserves, it follows that the money supply is not determined by the level of reserves in the system.

Applications to Current Situation

Applied to today's situation in the banking system, this insight leads to some interesting conclusions. It's been well-publicized that excess reserves have reached a level around $1T. This has caused many to ask why banks aren't lending out this huge horde of reserves, and others to predict massive inflation around the corner when banks do start to lend it out. Armed with our insight, we can refute the first group: since lending isn't reserves-constrained, the $1T number is irrelevant. The second group may or may not be right, but since reserves don't matter, their reasoning is certainly wrong.

If reserves don't matter, capital matters a great deal. And here is where the US banking system is desperately in need -- banks have taken huge losses which have decimated their capital base. D observed that many banks today are open with capital ratios which would've been unheard of in normal conditions (as low as 2%), and the only thing saving them from being shut down is that the FDIC doesn't have enough staff to handle all the closures which need to occur. Additional hits to capital are still in the pipeline in the form of future CRE losses, for example.

Given that we know bank lending is capital-constrained and banks are short on capital, we can predict that lending isn't about to take off anytime soon -- quite the opposite, in fact.

The Fed's Role: Rhetoric vs Reality

Ben Bernanke and other Fed officials have repeatedly stated that their goal is to restore the flow of credit, i.e. bank lending. As examples of steps they have taken to achieve this goal, they have pointed to actions such as lowering the Fed Funds rate, MBS purchases, and TARP. Knowing what we now know about reserves and capital, we can say that the first two actions are non-events, except for one possible exception which I will take up in the next section. Lowering the Fed Funds rate and MBS buys have made bank reserves more plentiful than ever, but bank lending is capital-constrained not reserves-constrained. Of the three, TARP has certainly had the biggest impact by injecting capital into the banking system. However, it appears that the hits to capital are of a magnitude that exceeds even the $700B TARP capital injections. Given that securitization and SIVs and the like are now history, and access to capital is difficult, capital constraints appear to be severe. Even after TARP, many banks are teetering on the edge of insolvency.

There appears to be one further step which the Fed could take to get banks lending, which I would now like to discuss.

The Fed's Role: Are They Really Trying to Get Banks to Lend?

Banks' capital ratios are impaired, and any new loan they make without increasing capital drags their capital ratio down even further. Any new loan, that is, except for one kind -- to the US Government. D confirmed that banks do not have to include Treasuries in the denominator of the capital ratio -- lending to the USG is always possible, even for banks whose capital ratios are on the brink. Of the many risks of making bank loans -- default risk, capital risk, liquidity risk, market risk, etc. -- Treasuries suffer from just two: interest rate risk and duration risk. If I buy a 30-year Treasury today, rates could spike next week, leaving me with a loss. Likewise, a bank holding a 30-year Treasury as an asset would need to have a matching duration liability.

An answer to both of these risks is for a bank to lend to the US government very short term by borrowing from the Fed. If the Fed wished, it could offer the banks a spread in a no-lose arbitrage strategy: borrow from the Fed at the Fed Funds rate for 90 days (the borrowing term is typically overnight, but the Fed can offer to roll these loans for any length of time), and buy a Treasury of similar or shorter duration, i.e. 3 months or less. All the Fed would have to do is to lower the Fed Funds rate below the 3 month Treasury bill rate. Since the Fed can lower the Fed Funds rate to any amount they like, it would appear that they have a sure-fire way of giving the banks a profitable spread, which would certainly spur bank lending as Ben Bernanke & Co. have said they wish to do -- they would be literally giving the banks a guaranteed profit with no downside, in the process allowing the banks to recapitalize themselves. When I asked D about this as a possible Fed strategy, he said he would have to think about it, but couldn't see anything wrong with it off the top of his head.

There is only one kink in this argument -- the Fed Funds rate has stayed consistently above the 3 month Treasury bill:

(See also Are Fed interest rates high or low?)

It would appear that this guaranteed way to spur bank lending isn't something that interests the Federal Reserve. I think this indicates that their stance is currently very deflationary despite all their protestations to the contrary. My conspiracy theory is that this is because the Fed is a bank, and bankers generally prefer deflation as long as they don't go bust -- and the Fed can't go bust, what with the taxpayer backing them. But that's a subject for a different post.

2010 Market/Economy Predictions

2010-01-02T21:55:00.000-08:00

	S&P500	Gold	Oil	USDEUR	USDJPY	TNX	TYX	Case-Shiller SF MSA	Case-Shiller 20-composite	Unemployment (U-6)
Starting value	1115	1098	80	0.6979	93	3.84	4.64	135.81	146.58	17.2%
My prediction	800	900	50	0.8	90	4	5	-15%	-15%	19%
Actual Value	1257	1421	91	0.75	81.79	3.3	4.36	+2% (138.84)	-0.8% (145.32)	17%

Note: the Case-Shiller numbers reported in December are for October, and the unemployment numbers reported in December are for November.

UPDATE as of 1/3/2011: filled in the actual values in the table above. Too pessimistic across the board as a result of my belief that the USG and Fed could not fight the deflationary forces prevailing in the private sector. They were able to do so in 2010 on the back of skyrocketing federal debt.

The Matrix: Inflation/Deflation Edition

2009-12-13T13:23:00.000-08:00

Pretty much every investing blog or observer I tend to pay attention to agrees that hard economic times lie ahead (in the investable time horizon, say 2-5 years). The main debate is about whether these hard economic times will be accompanied by inflation or deflation, which would largely determine how you invest your savings to best ride out the storm. The arguments get pretty heated, and from what I've seen the main areas of disagreement can be distilled basically to two dimensions: 1) Does the Fed want to cause inflation? and 2) Is the Fed able to cause inflation even if it wanted to?

Here's a sampling of where various sources fall in this matrix:

	1) Fed wants to inflate	2) Fed does not want to inflate
A) Fed is able to inflate	Peter Schiff, Gary North	Steve Keen¹, EconomicPolicyJournal²
B) Fed is not able to inflate	David Rosenberg, Bob Hoye	fdralloveragain, Karl Denninger, Mish Shedlock³

¹Keen states that the current crop of central bankers should reflate, but is reluctant to do so due to their neoclassical economics philosophy.
²This is Wenzel's current position as I write this, but he changes his views as new data comes out.
³Mish has said that if Congress (but not the Fed) decided to inflate, it could do so.

The hardest-core inflationists are in A1, the hardest-core deflationists in B2. Interestingly, everyone outside of A1 is predicting deflation before any inflation as of the writing date.

The basic argument of the B) group is that the Fed can't push on a string, i.e. it needs borrowers to increase the money supply. What separates group A) from B) here is usually a disagreement of whether the government itself can step in and be the "borrower of last resort" on a large enough scale to counteract the private sector contraction in borrowing.

A major area of division between groups 1) and 2) comes down to who really runs fiscal/monetary policy: the bankers (who prefer deflation because they'd rather repossess the collateral for their loans than get paid back in devalued dollars) or the politicians (who prefer inflation because it allows them to "keep" their promises, at least in nominal terms).

Another division is the meaning of higher interest rates. Interestingly, both groups view this as a precursor of their predicted end-result: for inflationists, high cost of borrowing is supposed to cause the government to print more money to cover its operations; while for deflationists higher cost of borrowing means that the government will be forced to abandon its policy of reckless borrowing and spending, which will eliminate the only source of credit growth currently propping the system up.

Where do you fall on this matrix? Place your wagers.

Are Fed interest rates high or low?

2009-12-03T01:12:00.000-08:00

This question is imprecise. It's sort of like asking "are banana prices high or low?" The old Henny Youngman line is apt: "compared to what?"

Since we have a debt-based monetary system, for the money supply to expand, the banks have to lend. So the question of "are interest rates high or low" can be restated as "are interest rates such that they would restrict or induce bank lending"? Let's consider this question.

The current effective Fed funds rate is 0.12%. This means that a bank that wants to make a loan but lacks reserves must pay that much to obtain reserves so it can make the loan. Clearly the bank must charge more than 0.12% interest on the loan to make a profit. Since the fed funds are borrowed for a short term, they thus set a lower bound on the rate at which banks extend short term credit (90 days or less).

So we can restate the subject question once again, as: "does a short-term interest rate of 0.12% restrict or induce bank lending"?

Now we come to the "compared to what?" part. We know the banks must get more than 0.12%, or no lending will take place. Are there borrowers out there willing to pay that much? To determine this, let's look at the market-driven rate for the safest borrower of them all, the US Government. As I write this, the interest rate on a short term Treasury bill is 0.05%, about 2.5x lower than the banks need for a profitable spread. Therefore, in the current environment a bank cannot make money lending to the USG. They might be able to lend to someone else at a higher rate, but that is a much riskier proposition (heck, banks don't even want to lend to each other!). If the Fed truly wanted to be accommodating, the Fed funds rate should be below the 3-month bill rate.

Here's the graph of this spread of time:

And here's another look:

The M2 falling since the spring of 2009 to now also suggests that the Fed has actually been running a tight policy.

Therefore the answer to the question above is: Fed interest rates are probably too high right now for the banks to lend profitably. Why the Fed would want this to be so is an interesting question.

Minsky Moments vs Mises Cycles

2009-10-27T00:16:00.000-07:00

I had read about the work of the economist Hyman Minsky, which seemed related to the Austrian school's exploration of credit bubbles, but was never sure how the two were similar or different. I came across a good explanation from Frank Shostak on mises.org (which obviously views things from the Austrian perspective, but I think gives Minsky fair treatment):

Does the Current Financial Crisis Vindicate the Economics of Hyman Minsky?

Some highlights:

According to Minsky, the financial structure of a capitalist economy becomes more and more fragile during the period of prosperity. In short, the longer the prosperity, the more fragile the system becomes. Minsky argued,
In particular, over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance.[2]
This framework of thinking comprises the essence of what Minsky dubbed the "Financial Instability Hypothesis" (FIH).

Another aspect of the FIH is that, during good times, banks and other intermediaries strive to innovate with regard to the assets they acquire and the liabilities they market.[3] This means that, during good times, financial intermediaries (Minsky labeled them as "merchants of debts") try to lure investors to buy the debt by means of sophisticated innovations. The chase for making more profits causes players in financial markets to place their money in various investments that have very little substance — such as subprime-mortgage-backed securities. What makes these investments attractive is sophisticated packaging and the relatively high rate of return.[4]

But, once economic conditions change, the true state of many borrowers comes to the surface and leads to a crisis. Lenders curtail their supply of funds and borrowers are pushed to bankruptcy, for they cannot renew their borrowing to pay debts — a financial crisis emerges.

According to Minsky's story, then, as time goes by, both borrowers and lenders tend to become reckless, which ultimately leads to a financial crisis. But why should it be this way?

Minsky's description of what would happen during a credit bubble seems dead on. Where do the Austrians diverge? The key difference is the source of credit expansion -- is it backed by real savings, or is it funny-money conjured up by fractional reserve banks? Austrians argue that if credit expansion fueled by an increase in savings, this is a pure benefit to the economy:

In the same way that real savings sustain the producers of final consumer goods, such as the shoemaker in our example, savings also fund the production of tools and machinery. In this sense, loaned real savings are the key for economic expansion. It is real savings that fund the production of tools and machinery, which in turn permits the expansion of final goods and services. This increase permits a further increase in savings that can now support the buildup of a more sophisticated production structure.

Can there be malinvestments if credit expansion is fully backed by savings? Yes, however:

Obviously, when a saver lends his savings, he takes a risk. However, the facts of reality tend to straighten things out fairly quickly.

Let us assume that, as a result of incorrect expectations, too much real savings have been invested in the production of cars, and too little invested in the production of houses. The effect of the overinvestment in the production of cars is to depress profits, because the excessive quantity of cars can only be sold at prices that are low in relationship to the costs that went into making them. The effect of underinvestment in the production of houses, on the other hand, will lift their prices in relation to costs, and will thus raise housing profits.

This process will lead to a withdrawal of real savings from cars and a channeling of it toward houses, implying that, if investment goes too far in one direction, and not far enough in another, counteracting forces of correction will be set in motion.[5]

Channeling of credit backed by real savings into investments has a corrective feedback mechanism: if it's invested poorly, a "bust" will result, but it will be confined to a particular industry and will therefore be relatively small. This is the market at work.

The situation is different when lending is unbacked by saving.

Trouble erupts, however, when real savings do not back up lending. Lending that is not backed up by real savings emerges when a lender creates fictitious claims on final consumer goods and lends these claims out. Now, the borrower who holds the empty money, so to speak, exchanges it for final consumer goods. Note that the borrower takes from the pool of real savings without any additional real savings having taken place, all other things being equal. The genuine wealth producers who have contributed to the pool of final consumer goods — the pool of real saving — discover that the money in their possession will get them fewer final goods. The reason for that is that the borrower has consumed some of the final goods. What we have here is the diversion of real wealth (final consumer goods) from wealth-generating activities towards the holders of new money, which emerged "out of thin air."

As the pace of unbacked credit expands, relative to the supply of real savings, less becomes available to genuine wealth generators, all other things being equal. Consequently, with less real savings, less real wealth can now be generated. (Remember that real savings are required to support the life and well-being of individuals who are engaged in the various stages of production.) In the extreme case, if everybody were to just consume without making any contribution to the pool of real saving, then eventually no one would be able to consume anything.

(By the way that last is a one-sentence illustration of why the Keynesian focus on consumption as the driver of economic growth is absurd.) Unbacked credit prevents the functioning of the market's corrective mechanism -- as long as it flows. Eventually, the flow of unbacked credit must stop (deflationary bust), or reach a climax in which the currency itself is repudiated (hyperinflationary bust). The existence of unbacked credit is traced to the existence of fractional-reserve banking, but such a system can't survive in a free market. The only way FRB can survive is via a government-protected monopoly headed by the central bank:

The modern banking system can be seen as one huge monopoly bank, which is guided and coordinated by the central bank. Banks in this framework can be regarded as branches of the central bank. Through ongoing monetary management, i.e., monetary pumping, the central bank makes sure that all the banks engage jointly in the expansion of credit "out of thin air." The joint expansion in turn guarantees that checks presented for redemption by banks to each other are netted out. In short, by means of monetary injections, the central bank makes sure that the banking system is "liquid enough" that banks will not bankrupt each other.

So here in a nutshell we have the similarity and the difference between Minsky's FIH and the Austrian theory of the business cycle:

So while Minsky's story accurately describes the present financial-market turmoil, it does not provide any satisfactory explanation based on previously established and identified phenomena. It arbitrarily puts the blame for instability on the capitalistic economy without even making the slightest attempt to establish a logical verification for this claim. We have seen, however, that it is the existence of the central bank that lays the foundation for financial instability. This means that, contrary to Minsky and the other post-Keynesians, the source for current financial turmoil is likely to be the central bank, i.e., the Federal Reserve's monetary policies.

Minsky's FIH is a very special subset of the Austrian business cycle theory, and because he takes the existence of the central bank as a given, he is forced to look elsewhere for the root causes of instability, and blames the capitalist system itself. But really, all this proves is that capitalism with a central bank monopoly on money ain't capitalism!

Amazing revisionist history: Hitler was a pawn in Stalin's game to unleash WW2

2009-10-11T01:22:00.000-07:00

In Icebreaker, Viktor Suvorov (original Russian version here) turns the standard history of WW2 on its head. This standard account has Hitler igniting WW2 with his invasion of Poland in 1939, then turning on the overly trusting Stalin despite their non-aggression pact, catching the surprised USSR woefully unprepared for war, and drawing the Soviets into a conflict which they had hoped to sit out. Every point of this account is disputed and stood on its head by Suvorov, using evidence gathered from official Soviet sources, military publications, and personal memoirs of the major figures involved. The author served in Soviet military intelligence, and the book views the historical record through the eyes of a military intelligence analyst, which often gives it the feel of a detective novel, with the author picking through a historical crime scene, carefully gathering clues and interpreting them. It's a fascinating, fast-paced read.

In a nutshell, Suvorov's take on the outbreak of WW2 is this: Hitler's invasion of Poland was actually coordinated with and encouraged by Stalin, who viewed the signing of the Molotov-Ribbentrop Pact (in which Poland was partitioned) as a masterstroke of Soviet foreign policy. The reason Stalin was so eager to sign the pact is that he calculated, correctly as it turned out, that Hitler's invasion of Poland would be a casus belli for England and France, and would therefore kick off a general war in Europe. Why did Stalin hope for a war on the continent? Because he (as well as Lenin) viewed war as a prerequisite for a Soviet-led communist revolution in all of Europe. Hitler was to be the "icebreaker" of revolution in Europe, decimating its populations, weakening its armies, and making it ripe for a Red Army invasion in which it could call itself a "liberator". Far from wanting to sit the conflict out, Stalin was using Hitler as his pawn, waiting for an opportune moment to strike Germany while its army was occupied in the West, and from there to fan out to the rest of the continent.

Far from being surprised by a war with Germany, the USSR had started intensive preparations for it as soon as the non-aggression treaty was signed. So much for Stalin trusting Hitler.

Far from being unprepared for war, by June, 1941 the USSR had built up an army whose military might was unmatched at that time. It had vast numbers of modern planes, tanks, armaments, and personnel trained in offensive warfare. All these were concentrated on the German and Romanian borders -- in an attacking posture. The Soviet Union had planned for war, and was ready for war, just not the kind of war that it ended up having to fight. Hitler preempted a Soviet invasion by a mere two weeks (which he himself might not have realized, since he had delayed Operation Barbarossa several times, and had it been delayed once more, they might be speaking Russian in Europe now). Even though Hitler must have realized that fighting a two-front war had to be a losing proposition for Germany, he had no choice, facing as he was an imminent Soviet invasion.

Staggered by the kind of surprise blow it had been planning for Germany, the Red Army had to fight a defensive war for which it had not trained. All of its vast armaments and supplies gathered at the border, including thousands of tanks and planes, had been destroyed or had to be abandoned. It would take until 1945 for the Red Army to reach Berlin, a destination they had been planning on reaching much sooner.

For me, Suvorov's theory helps to explain some facts which never made much sense under the standard historical account. Stalin didn't trust his own shadow, but we're supposed to believe he trusted Hitler? Why did Hitler open an Eastern front before concluding operations in the West when history had shown that two-front wars were suicidal for Germany? Why did Soviet generals like Zhukov who were in charge during the early, disasterous part of the war, hold on to their positions instead of getting the standard Stalin treatment for failure?

There is lots more in the book, which I highly recommend to anyone interested in history (or just a captivating story). An updated English version is available.

Video materials:
In English: Talk on CSPAN by Victor Suvorov
In Russian: Documentary film based on Suvorov's work (in 18 parts): Part 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18

California Traffic School Online Test Answers

2009-10-06T00:39:00.000-07:00

Wow, that took forever. Here's a tip: if you disable Javascript, you can click through the test a lot faster... Saving these in case I have to take this thing again:

When you are planning to make a turn at an intersection, you must use your turn signal for the last _______ feet before you reach the intersection.

B.100

California's Basic Speed Law states _______________.

D. never drive faster than is safe for present conditions

When you park alongside a curb, the front and back wheels must be parallel within ____ of the curb.

B. 18 inches

The speed limit when passing a school while children are present (unless otherwise posted) is ____ mph.

B. 25

If you park alongside a curb with your car facing downhill, you should set the parking brake and ______________.

C. turn the wheels into the curb

To avoid potentially dangerous confrontations _______________.

D. all of the above

IPDE stands for ____________________.

A. Identify, Predict, Decide, and Execute

The four basic categories a driver can use to group information are signs, signals, and roadway markings, the highway, motorized vehicles, and ___________.

C. non-motorized highway users

Always search the area in and near your intended path of travel ____ in front of your car.

C. 4 seconds

Truck drivers probably can't see your vehicle if ______________.

B. you cannot see the truck driver in his or her side mirrors

California State Law requires motorcycle riders to ride with helmets on ________________.

A. any time they are on the roadways

In almost _____ of motorcycle collisions, it is the fault of the driver not the motorcyclist.

C. two-thirds

A large tractor-trailer often appears to be going at a faster speed because of its size.

B. False

While crossing a crosswalk, pedestrians should keep to their ________.

A. right

Bicyclists can legally make left turns from the left lanes as well as move left to pass other vehicles or bicycles.

A. True

Bicycle riders _________________.

B. can move into the left-turn lane when needed

Which of the following types of road users are prohibited from crossing a railroad crossing gate while the gate is closed?

D. All of the above

Babies up to 20 lbs. and age ____ or less should ride in a child safety seat that is secured to the back seat and faces to the rear of the car.

A. one

Which of the following statement(s) are true about air bags?

D. All of the above

Which is the safest place for children under 12 when traveling in a car?

B. Back seat

Do not use your high-beam headlights under which of the following conditions?

C. Both A and B

Your taillights should be visible ___________ to the rear of your vehicle if your car was made in 1969 or later.

B. 1000 ft

Your brakes should be capable of stopping your vehicle within a distance of 25 ft or less from an initial speed of ____ mph.

B. 20

Tires inflated to the recommended pressure will improve gas mileage and ______________.

A. vehicle control

A flashing red light means ________________.

D. stop, look, evaluate, and proceed when safe

If you come to a yield sign, __________________.

B. yield to traffic in the cross street

_________ signs provide service-related information, such as where to find food, lodging, or gas.

C. Blue

Which braking technique provides a smooth transition from acceleration to braking?

A. Cover braking

It is illegal to make a U-turn _____________.

D. all of the above

You may drive for no more than ____ feet in a center left-turn lane.

D. 200

When making a right or left turn, if your view is blocked, you must do which of the following?

C. Yield and move very slowly until you have good visibility

Which of the following is one of the two most common mistakes when entering the freeway?

B. Suddenly slowing or stopping

In order to avoid last minutes moves, you should anticipate hazards to come. To do this, look down the road ______ seconds ahead.

C. 10 to 15

Carpooling and riding buses and trains are good ways to __________________.

D. all of the above

When driving on a three-lane freeway, you should use the left lane as the __________.

A. passing lane

When you encounter roadwork in a construction zone, you should __________________.

A. not stop to watch road work

If you are forced to share a narrow mountain road with oncoming traffic, always allow __________ to proceed first.

C. the uphill driver

Passing is prohibited on two-lane roadways when you are within _____ feet of a railroad crossing.

C. 100

On open highways in rural areas, which of the following hazards and driving challenges should you be aware of?

When you drive uphill, use a ___________ to make climbing the hill easier for your car.

B. lower gear

Animals may wander onto the roadway, especially ___________.

C. at night

Most drugs taken for headaches, colds, hay fever, allergies, or to calm nerves can make you drowsy and affect your driving.

A. True

If you have not designated a driver in advance ________________.

C. take a taxi, call someone who has not been drinking for a ride

The best source of information about how drugs or medicine can affect your driving ability is ____________.

B. your doctor

In 2006, alcohol was involved in ______ % of all fatal crashes.

B. 32

Alcohol first impairs your _________.

C. judgment

Alcohol is a _____________.

A. depressant

Having food in your stomach keeps alcohol from being absorbed __________.

A. quickly

It takes about __________ for alcohol to work its way out of your body.

D. two hours

If the vehicle is registered in your name when you are convicted of Driving Under the Influence of alcohol or other drugs (DUI), the court may take your vehicle away for up to ____ days.

C. 30

The Zero tolerance law applies to drivers _________.

A. under the age of 21

If you are carrying an alcoholic beverage in your car and it is open it should be ____________.

D. put in the trunk of your car

When you apply for a driver license, the law considers that you have given implicit consent to a test of ________________.

B. the alcoholic content of your blood

The best rule for fog is ___________.

C. to avoid driving

The roads are most slippery _________________.

A. when it first starts to rain

California law states that you must drive with your headlights on from ____ minutes after sunset until ____ minutes before sunrise.

B. 30; 30

If you are following another vehicle at night, switch to low-beams when you get closer than ___ feet.

B. 300

In a standard passenger car, partial hydroplaning can start at about __ mph.

C. 35

If you run off the pavement, you should _______________.

D. all of the above

If your tire blows out ___________________.

D. all of the above

If your brakes fail _____________________.

D. A and C

If you do not have the proper insurance coverage, your driving privileges will be suspended for _________.

C. a year

The minimum amount of auto insurance in California is $____ for a single death or injury, $____ for multiple deaths or injuries, and $____ for property damage.

C. 15,000; 30,000; 5,000

If you are involved in a collision, you should ________________.

D. all of the above

If you are involved in a collision and property damage is over $750 dollars, you must report the collision to the DMV within ____ days.

A. 10

Whenever you approach parked cars __________________.

A. increase the space between your car and the parked car

California's Basic Speed Law requires you to _____________.

D. never drive faster than is safe for present conditions, regardless of the posted speed limit

When you are sure you have the legal right-of-way, a good safety rule is _____________.

B. never insist on it

When backing up your car you should ___________.

B. look over your right shoulder through the rear window and back up slowly

The DMV keeps a record of your 1 point traffic convictions for ____ months.

D. 36

If you get ____ points in 36 months, you are considered a negligent operator.

C. 8

When you are within 100 ft of an uncontrolled railroad crossing and the tracks are not visible for more than 400 ft in either direction, you must slow down to a speed of ______ mph.

A. 15

If you become angry or upset while driving, you should _____________.

B. park the car and cool down

It is unlawful for anyone under 21 years of age to drive with a blood alcohol level of_____ % or more.

C. 0.01

In a standard passenger car, partial hydroplaning can start at about __ mph.

C. 35

When you come to a corner with a stop sign, you should stop __________________.

C. behind the crosswalk or limit line

At an intersection with four stop signs or with no stop signs, you must yield the right-of-way to _______________.

B. the car that reached the intersection first

Persons age 21 or older who drive with a blood alcohol concentration (BAC) of ______% or more, are driving illegally.

C. 0.08

As a driver, which of the following can you adjust to reduce the chances of a collision?

C. Your speed and position

Before changing lanes you must ______________.

A. see if it is safe before making the move

California law requires motorcycle riders to ride with helmets ___________________.

A. any time they are on California roadways

If the brake lights of several cars ahead of you flash, you should _____________.

D. let up on the accelerator and prepare to stop

You can increase visibility in dense fog by using your ________________.

C. low-beam headlights

The speed limit when passing a school while children are present (unless otherwise posted) is ____ mph.

B. 25

When passing another car, you should not pull back in front of it until _________________.

A. you can see its full front in your rearview mirror

When driving you should stay at least _______________.

C. 3 seconds behind the vehicle in front of you

Why are Princeton economics professors so bad?

2009-09-05T02:31:00.000-07:00

Seems like my alma mater specializes in employing highly visible economic cranks. Bernanke, Krugman, and Blinder come to mind. Here's the latest from Blinder via Robert Wenzel:

Blinder Rants: "Princeton economics professor Alan Blinder rants at the horrors of a congressional audit of the Fed, in one of the most backward articles I have seen in some time.In a Council on Foreign Relations piece, he claims the Fed is just doing a wonderful job"

The Insolvency of the Fed - Philipp Bagus - Mises Institute

2009-09-03T14:54:00.000-07:00

A good discussion of how the quality of the Fed's balance sheet, and not just its size, impacts the value of the currency. The reason is that if the Fed ever wanted to reduce the number of dollars outstanding by redeeming the assets on its balance sheet for dollars, having trash assets would make it difficult to do so.

The Insolvency of the Fed - Philipp Bagus - Mises Institute:

"Since the crisis broke out, the Fed has continuously weakened the quality of the dollar by weakening its balance sheet. In fact, the assets the Federal Reserve holds have deteriorated tremendously. These assets back the liability side of the balance sheet, which mainly represents the monetary base of the dollar. The assets of the Fed, thereby, hold up the value of the dollar. At the end of the day, it is these assets that the Fed can use to defend the dollar's value externally and internally. Thus, for example, it could sell its foreign exchange reserves to buy back dollars, reducing the amount of dollars outstanding. From the point of view of the buyer of the foreign exchange reserves, this transaction is a de facto redemption.

In the first stage of the crisis that lasted until September 2008, the Federal Reserve did not increase its balance sheet. Instead, the Fed changed its balance sheet's structure. These changes are very important for the value of the currency. Imagine that the Fed announces tomorrow that is has sold all its gold and has bought Zimbabwean government bonds with the revenues. The Fed would explain this move by arguing that the stability of the Zimbabwean economy would be crucial for the US economy and the welfare of mankind. This action by itself would not change the quantity of money at all, which shows that concentrating exclusively on the quantity of money is not sufficient to evaluate the condition of a currency. Qualitative issues can be even more important than mere quantities. In fact, an asset swap from gold to Zimbabwean government bonds would mean a strong deterioration of the quality of the dollar.

While this example might sound extreme, something similar happened during the first stage of the sub-prime crisis. The Fed weakened the composition of its balance sheet not in favor of the Zimbabwean economy but in favor of the US banking system. The Federal Reserve sold good assets in order to acquire bad assets. The good assets were not gold but mainly the still highly-liquid US treasury bonds in the category of 'securities held outright.' The bad assets were not Zimbabwean government bonds but loans given to troubled banks backed by problematic and illiquid assets. This weakened the dollar."

It should be noted that they have other ways of supporting the dollar, and given the huge overhang of dollar debt outstanding (which means people went short dollars to buy assets, so an unwind of that trade is dollar-supportive) the dollar may be okay for a while anyway. But as far as Fed asset buying & selling, having assets noone wants means that they only have the gas pedal, and no brake.

Credit Expansion, Crisis, and the Myth of the Saving Glut - George Reisman - Mises Institute

2009-09-01T02:14:00.000-07:00

Great article dealing with Greenspan & Bernanke & Co's favorite excuse...err, explanation, for what caused the housing bubble:

Credit Expansion, Crisis, and the Myth of the Saving Glut - George Reisman - Mises Institute

"The alleged saving entering the American economy via deficits in its current account is in fact largely not saving at all, but the byproduct of US credit expansion and money supply increase. Dollars today are a virtual global money. And in conformity with Ricardo's principle concerning the distribution of the precious metals throughout the world based on the relative size of the economies of the various countries, most of the additions to the supply of dollars and short-term claims to dollars cannot remain in the possession of Americans but must gravitate into the ownership of foreigners. This creates a deficit in the balance of trade and in the whole of the so-called current account. While it may appear that increased foreign holdings of dollars and short-term dollar-denominated securities represent foreign investment, the truth is that much or possibly even all of the alleged foreign saving entering the United States is nothing other than a consequence of US credit expansion and money supply increase."

In other words, before the dollar "savings" could be accumulated by the Chinese, these dollars had to be "produced" and spent by the American consumer. How were these dollars produced? By the Fed-supervised credit boom.

When China reinvested these dollars back into US debt, the US was able to run a "deficit without tears". For a historical perspective (post Bretton Woods, but pre-closing of the gold window), see Jacques Rueff's "The Monetary Sin of the West", p.23, where I first saw the phrase; those deficits did end with tears in time. So do the present ones.