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2014-05-22 08:31 by Karl Denninger
in Editorial , 256 references Ignore this thread
The Death Of Reason *
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A few days ago I penned an essay entitled How Allegedly-Reasonable People Wind Up Labeled BS Artists, in which I went after Paul Craig Roberts on his claim (circling the conspiracy-minded like a hive full of angry hornets) that the Fed had "secretly" bought up $140+ billion in Treasuries in Belgium.

I pointed out that if you're going to make such a claim then you are effectively claiming that The Fed has committed and is committing bank fraud on a continuing basis -- so just come out and say it.

So what did he write as a follow-up?  A couple of days ago he claimed this:

In response to our account of the mysterious large rise in Belgium’s Treasury purchases , it was suggested that the transaction would show up on the Fed’s balance sheet. However, the Fed is under no obligation to show the transaction.

Gee, who "suggested" that Paul?  Got a problem with attribution over there?

Paul goes on to talk about GAAP standards and the claim that a corporation does not have to itemize and disclose the details of "any event that represents less than 5% of its assets."

Ah, but that's not the whole story, you see.  The reason is that The Fed has statutory requirements in its operation; specifically, the Fed is barred from lending against an obligation of a foreign government.  (10A(2))

There are a number of other restrictions as well.  Swap lines are legal because the obligation is in US Dollars, and must be repaid in dollars.  If the swap had to be repaid in Euros, for example, it would be illegal because the Euro is an obligation of a foreign government.  That would result in The Fed taking currency risk -- an act that is explicitly against the law.

Now there is a fly in the ointment, of course, in that if you lend against a US Obligation that happens to be somewhere other than in the US you might have trouble seizing the collateral if the government involved disappears out from under you.  

But the fact remains that if you're going to argue that The Fed is engaged in some secret set of transactions that are questionable at best, and quite-possibly flatly illegal, then show your work.

Oh, and don't point to the Flow of Funds statement (the Fed Z1) either -- especially when you simply make things up that aren't actually there.  Anyone who's read me for any length of time knows damn well that I go over that thing (although I freely admit to not going over every single line) on a quarterly basis.  It is important to note that the Z1 is an attempt to capture all credit market flows that come into or touch US institutions.  

But wait -- Paul pointed to an alleged change that facially appears to sort of validate his thesis, right?


The line Paul cites ("Credit Market Borrowing") is a rate change, not a level, and is both seasonally adjusted and annualized.  

The level (that is, total amount) of "Rest of World" exposure as of last report among entities The Fed tracks in the US (2013/Q4) was 2,889,455, or $2,889 billion.  That is an advance of $64.9 billion in actual dollars over the last quarter (Fed table Z1/Z1/LA264104005.Q), not $142 billion. 

So no, Paul, what you claimed is not "hidden" in there.  How desperate do you have to be to scour a document that you ought to be familiar with and then take a SAAR (that is, seasonally-adjusted annualized rate of change!) figure and try to claim that it's a one-quarter difference and thus "this is where it might have been hidden"?

In short: smiley

In addition, since Paul insisted on trying to defend a blown thesis with something that looks good but doesn't pass the 15 second smell test (if you know what you're looking at) he managed to get me to spend another 15 seconds reading some of his other material while I was looking for something that I could fact-check.

That was unfortunate (for him), because I ran across this recent missive of his:

Not even Japan and Germany posed a threat to the US. Neither country had any prospect of invading the US and neither country had any such war plans.

Let’s assume Japan had conquered China, Burma, and Indonesia. With such a vast territory to occupy, Japan could not have spared a single division with which to invade the US, and, of course, any invasion fleet would never have made it across the Pacific. Just as was the fate of the Japanese fleet at Midway, an invasion fleet would have been sitting ducks for the US Navy.

Assume Germany had extended its conquests over Europe to Great Britain, Russia and North Africa. Germany would have been unable to successfully occupy such a vast territory and could not have spared a single soldier to send to invade America. Even the US superpower was unable to successfully occupy Iraq and Afghanistan, countries with small land areas and populations in comparison.

So the argument appears to be (again, left unsaid but broadly-hinted at) that we shouldn't have entered WWII at all.  We shouldn't have done anything when the Japanese bombed Pearl Harbor.  We had no dog in the fight.  The Japanese invasion of China would have ultimately stopped there of its own weight. We had no right to do anything except protest loudly after Pearl was immolated by Japanese bombs.

Same with Germany and Hitler.  We had no right to interfere.  If the entire European Continent was left speaking German and every single Jew was rounded up and exterminated from Russia's border to the Atlantic, we still had no right to interfere. Leave aside obligation; we're talking about whether it would be correct on a moral and ethical basis to come to someone else's aid in that circumstance.  Of course we all make these decisions without the benefit of hindsight at the time we make them (and did then) but what Paul appears to be arguing is that in the fullness of time when the facts are known if we could go back and do it again we shouldn't.

Really?  You're going to piss on the grave of one of my Uncles who served in WWII, along with the grave of my father who would have gone to fight but was barred from doing so because he had TB and they wouldn't take him?  Never mind all of those who went to fight and never came home.

Paul goes on to reference Ukraine, which I suspect is what prompted his missive in the first place.  I just had an interesting call yesterday afternoon; Press TV wanted a comment from me on the Ukraine situation. I wasn't available for a formal interview but I did give them one over the phone. I suspect they were looking for something simple in a 30 second sound-bite.  What they got was something else entirely; who knows if they ran it.

See, Ukraine is not a simple situation and trying to distill it down into "US Bad, Russia Good" or "US Good, Russia Bad" is intellectually dishonest -- and that's being kind.

So what I attempted to lay out in the short time I had (and I might have failed simply due to the limits of time) is that:

  • The US has clearly been interfering in political affairs in Ukraine, and has no right to be there doing so.  That's a "bad."
  • Russia has clearly been interfering in political affairs in Ukraine, and has no right to be there doing so.  That's also a "bad."
  • The United States had its head firmly planted in its ass when it failed to take into account the fact that Russia had, in Crimea, its only deep-water 12 month naval port. To believe they would simply walk away from that is both unreasonable and stupid.

  • Russia, and the United States, are both refusing to recognize the right of a people to choose their government including its replacement or dishonor as they direct.  That very right is the foundation of the United States and as such our abuse of same is especially galling, but human rights do not have political borders -- therefore the same charge applies to Russia.

  • Ukraine, on its own volition, entered into a vassal state agreement with Russia where it obtained single-source energy supplies at below market rates, essentially taking welfare from Russia.  It is beyond stupid to believe that this was an actual "gift"; there is always a price associated with same and if you're going to act like you have a right to some other nation's resources by other than a free-market purchase at market prices don't be surprised when that quid-pro-quo shows up at your front door -- in a tank.

There was more, but I think you get the idea.  This isn't a simple situation and neither side is "right."  Arguably the worst part of it is that Ukraine itself has acted in ways contrary to its own best interest when it came to energy flows and has put itself in a box from which there is no easy or quick escape.  Entitlement mentality is lethal not only among individuals but nations as well; there is always a price exacted.

I think the situation over in Ukraine sucks and because there is no simple answer it has a particular quality to its sucking that could quite-easily lead to some really ugly outcomes, including a (for real, with lots of bullets flying) civil war that has the risk of spreading beyond the nation itself.

War sucks -- on that point PCR and I agree.  I also have grave concerns and issues with sending our troops into any sort of combat where the goal and rules of engagement are other than "kill anything that moves until the other side sues for peace."  In my view if you're not doing it that way then you're not justified in going at all, and yes, I understand that this means that a lot of civilians will die.  

Now let's deal with that point -- civilian deaths -- because Paul seems to think that this is an argument against war. Indeed, he leads his piece with:

Did you know that 85 to 90 percent of war’s casualties are non-combatant civilians? That is the conclusion reached by a nine-person research team in the June 2014 issue of the American Journal of Public Health. The deaths of soldiers who are fighting the war are a small part of the human and economic cost. Clearly, wars do not protect the lives of civilians. The notion that soldiers are dying for us is false. Non-combatants are the main victims of war.

Nope.  Those people are not victims.  They're legitimate targets.  I reach this conclusion predicated on our Declaration of Independence, a document that lays forth principles that I accept as factual.

To the point, I accept the following as natural laws:

  • All persons have unalienable rights as a consequence of being human. Governments do not bestow rights because you cannot bestow that which you do not first possess.  Governments can only protect or disabuse individual rights.

  • Those rights include life, liberty and pursuit (but not guarantee) of happiness.

  • Governments are instituted among populations with and by the consent of the governed for the explicit and sole legitimate purpose of securing those rights.  That is, government only has one legitimate purpose -- to protect and secure individual rights, providing the means and forum for redress of wrongs that one individual commits against another. 

The simple fact remains that if you honor the premise that all governments only exist with the consent of the governed then there are no true innocents in a war except for infants and children and the responsibility for their casualty falls on the shoulders of their parents as the negligent parties because by definition if you live in a land as a citizen you are responsible for allowing the government of that land to exist and act beyond its just powers.  If that government does something evil and unacceptable and you get killed as a consequence when war breaks out that's part and parcel of your dereliction of the duty that comes with citizenship and is the price of your decision to sit in silence while said outrages take place instead of putting a stop to them.

Sleeping while on duty is a good way to get yourself killed whether you're in the military or not.

Perhaps the risk of you getting killed as a direct and proximate consequence of your gross negligence might wake you up to your responsibility to not allow a government to continue to exist that undertakes any actions beyond the just boundary of defending individual rights!

The lesson we ought to learn from this centers on making sure we don't make those sorts of mistakes in other places, both now and in the future.  Dependence is bad.  Single-source dependence is really bad, especially when coupled with implicit or explicit subsidy.  As I have previously noted in my writing on this matter so-called "trade" as a sop to mollify what could otherwise turn into a military excursion does not work when we're talking about single-source, non-market-based "trade."  That is in fact the state of being a vassal and when you finally reject the other party and try to tell him "get out!" (irrespective of how and why) the guns are rather likely to come out simply because the other guy sees this as your violation of what he believes was a bargain; you got the benefit you negotiated for and then screwed him.  Since he can't take recourse to the courts in your nation and in his he can't enforce his judgment that leaves him with only recourse to guns.  (As an aside, isn't it interesting how this is the same situation that arises with various "prohibition" style items within a nation?)

It's easy to find a way to twist and distort so as to make a claim -- whether it has to do with war or whether it is something more mundane, such as trying to claim a seasonally adjusted and annualized figure is in fact a single-quarter change in level.

However, both wind up being, on even cursory examination, no better than trying to claim that 2 + 2 = 6.

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