A basic flaw in the American Constitutional system ! Fix the system not the blame!

There is a real issue with democracy and taxation - popular politicians since Ancient Greece will make the rich pay for benefits for the masses, buying votes with other people's money. The answer is not the crude conservative idea of "starve the beast" but real tax reform as in 1987 and limits on tax loophole creation and real fiscal restraint, the budget control process used in the Clinton balanced budget program - any new costs or loss revenue has to be matched with set asides - if you cut taxes (or create a new tax benefit or loophole) you have to cut expenditures, if you increase expenditures in one area you have to cut another area or raise revenue - it makes a lot of sense and controls the beast not wounding or killing it. The counter cycle problem can be solved with real reserves - like building up the unemployment trust funds in good times and using them in bad without running up debt. http://www.wiredbrain.net/reserves.htm

Fix the system not the blame! Individuals, no matter how heroic and dramatic must adjust and play in the terms set by political, economic, ideological markets - Political parties are a mixture of regional and national voluntary associations struggling to gain power in order to satisfy their big egos and deliver benefits to their supporters. They market programs that attract support, money, volunteers, and voters. Different constitutional systems set the terms where the competition plays out - the market conditions have a great influence on outcomes.

The American system is a unique mixture of divided sovereignty designed to limit the power of any individual or institution.  Republican Government as designed by the 18th century writers was meant to be the principally in the commons - the House of Representatives with the unique power to raise taxes. Taxes with the approval of representatives of the taxed (the right to tax is the right to destroy) was the key element of the British system since the 16th century and the main issue of colonial rule, no taxation without representation. The Senate were the representatives of States not voters designed to protect the share of sovereignty held by the states. The executive was designed to be small, weak and symbolic - but a unpleasant necessity because of civil unrest and problems with foreigners and remaining colonial ambitions of stronger nations.

The Civil War, the 14th amendment which applied federal standards to the states and protected all citizens with federal laws, the great foreign wars, the great depression, mass media, and mass marketing supported by money have created the Imperial Presidency.  Tax policy is now set in the White House and lobbied through the congress. The British Kings then ruling landed elites used patronage, bribes, threats, rotten boroughs, and any means necessary to get money out of the commons with tax policies that protected their wealth but supported standing Armies and foreign colonial adventures which in turn give them more authority, patronages, and ways of controlling the commons. The landed aristocracy did not want to pay taxes the burden was shifted to commerce, taxes on basics, booze and food, (corn laws) a variety of mercantile policies (tea tax, stamp tax) and they also used debt.  This was viewed as tyrannical by the liberals and in the American Colonies causes a rebellion since the taxed would not take it anymore.

Well there we go again - a ruling elite in the executive which controls taxes to build military power and support foreign adventures, and using their money, marketing tools, patratonage to dominate the house. The House does not control the executive but the Chief executive can control the house. The Parliamentary system is designed to make the government a creature of the commons. The people through the party system send representatives and a majority selects a government from among their own. There is growing Presidential power in Britain but the undivided sovereignty of the commons is still a cherished principle as it is in almost all democracies.

The popular peoples representatives like spending other peoples money to benefit their voters and get re-elected. A democratic government will go on a Robin Hood policy taking the money of the rich to support popular benefits for the many. That is why the constitution tried to avoid democracy which meant to the founders "mob rule" and certain failure leading to a tyrant raising up to establish order. The ruling elite sense that only by "starving the beast" can the country be saved from ruin. There are no longer many constitutional limits on Federal actions, there are no longer strong independent states, there is no longer a senate protecting states rights, the judiciary places few limits on the federal reach, so only starvation of revenue will stop the masses from taxing the rich to death and bringing the economy to disaster.

BUT - the British, Canadian, and growing in Europe is a sense of prudence, of fiscal responsibility, of limits on worker rights, benefits, welfare costs, health costs, retirement payments, without going to extremes.  The founding fathers assumed the voters would be tax payers and guard their resources but with mass democracy most citizens are not income tax payers. They pay payroll taxes that are designed to give them individual benefits but are not committed to paying for the cost of general government. They pay for local government, schools and services through property taxes and support the states with sales taxes but only a minority are serious federal income tax payers. Corporate taxes become part of the price system so everyone pays them indirectly.

Now the issue is proportional representation based on taxes - the issue is representation without taxation - tax him, don't tax me, tax that man behind the tree - the elites system designed in the US constitution somehow needs to be restored to limit popular democracy. Not a popular message but a reality everywhere. The ravages of popular democracy have ruined a naturally rich society in Argentina, is driving old Europe into crisis, and is a problem that will not go away - since the first democracy in Ancient Greece.

True not crude conservatives or new labor or practical social democrats can run a prudent fiscal policy of the likes of Mr. Blair, Mr. Clinton, they can control costs, reform welfare, modernize administration, face down unreasonable union demands, and tame the beast rather than beat it to death. This Bush government should go for real tax reform - simplification, VAT, and the budget reform and control act requiring set asides and pay backs - any increase in one area requires either revenue to pay for it or cuts somewhere else - a wonderful simple and critical idea. It worked for a number of years - tough, no fun, hard but it worked - and leads to budget sanity, long term growth, lower taxes, low interest rates, a stable currency, the rich getting richer but the poor have opportunity, good education, basic safety nets, and peace and prosperity.

Mr. Chrétien, who is to deliver a keynote address on the global economy at the G8 summit in Evian, France, compared his 10-year stewardship of the Canadian economy to Mr. Bush's record. He noted that under the Republicans, the U.S. economy has become weak with rising unemployment while Canada (and Great Britain) is enjoying low interest rates, strong job creation and growth of 2.5 per cent expected this year.

And the prime minister laid part of the blame for the troubled U.S. economy on Mr. Bush's doorstep for running up big deficits with massive tax cuts and huge military spending.

"We still have surpluses. The Americans will have a $500-billion deficit this year and it is a right-wing government. If we were to equal that we would have to have a $75-billion deficit. Imagine!" he said.

While Mr. Chrétien claimed to have a good personal rapport with Mr. Bush, he admitted he doesn't see eye to eye with him on most major issues because of the ideological gulf between them, particularly on social issues.

"Of course we don't think alike on many issues. On social issues, he is a conservative. I am for free choice on abortion. He is not. He is against gun control. I am for it. He is for capital punishment. I am against it. I am a Liberal," he said.

During the conversation, Mr. Chrétien went out of his way to praise former Democratic president Bill Clinton and noted the two leaders remain close friends and continue to golf together.

Mr. Chrétien telephoned Mr. Bush this week to talk about the G8 summit and to help heal the rift that developed after Canada refused to join the U.S.-led war in Iraq. Canada's stand led the president to cancel a scheduled visit to Ottawa on May 5.

The prime minister's comments are unlikely to improve relations with the president, who is known to be sensitive to criticism.

This administration takes risks -

It has a personality that cuts through complexity with simple ideas, principles and a lots of guts - but this may not work! Who knows?

People will follow a confident and firm leader even when wrong - compared with a person who is uncertain, cautious, prudent, too reflective and careful - but right.

I'm taking about an economic policy that has to take hold by November 2004 to set the conditions for a Republic dynasty or a they may get a crash of 1928 type, depression (at least recession) and a revival of the Democrats. Tax cuts, deficits, weak dollar and war may work - but who knows, it is very risky?

Most likely prudence, multilateralism, traditional counter-cycle methods (unemployment payments and short term pump priming, as suggested by the congressional Democrats) and a calm hopeful environment would be more successful than theses bold and grand risks. (Watch Tony Blair and GB for an example of an economy which is doing better by being prudent but fair and competent)

Beyond Monte Carlo: Introduction to Imprecise Probabilities

The basic ideas of uncertainty, risk and Imprecise Probabilities are counter-intuition Counterintuitive - so acting by intuition, fundamentalist principle, a sense of empowerment, pride, arrogance, dogma - cause people to do just the wrong thing while being very sure they are right.

The human psychology is not built on a probability theory but wants certainty and takes guesses as good enough. Survival could not depend on getting everything right but taking action is the face of risk and uncertainty. If when faced with choice we tried to figure out the odds we would be stymied and never do what is necessary. While we know the fact that we are acting in ignorance and it may not work we tend to bypass that knowledge and go ahead. People gamble all the time under great risk but somehow use magic, faith, mystery, to make us feel better.

http://science.ntu.ac.uk/rsscse/ts/gtb/lesser.pdf

Complex systems tend to be counterintuitive - NOW markets are made up of people who are behaving partly rationally and based on analysis of risk, chance, probability and systems choice - but also on guess, passions, guess, uncertainty and mob rule.  Guessing how other actors guess is played out in game theory which is also uncertain.

The US imported $700 billion dollars more in goods than it exported leaving a current account deficit of about $400 billion - (we export services and collect foreign earnings) The intuitive "gold theory" is that currencies have to balance over time - we ship out "gold" to pay for imports so the domestic gold supply is lower - thus gold buys more - deflation - prices go down -

The countries that take our gold have more of the stuff so prices increase - our cheaper prices vs. their higher prices means we should export more and import less.  Milton Friedman

Thus the Spanish empire imported lots of Gold and had lots of inflation - prices are a balance between the supply of money and the supply of goods - more goods than money the prices drop - more money than goods and prices go up.

Now complex systems become counterintuitive because they are complex. Money is not gold but a complex commodity based on faith and trust. The money supply is manipulated by the central banker by buying bonds and putting out cash into the banking system or the other way around - the open market committee does influence the money supply  - it also adds or reduces reserve requirements that allow banks to loan out more or less money. Money loaned become deposits so debits become credits. Globalization where trillions of "tokens" are exchanged and "hedged" with derivative products, futures and options on futures - adds to the complexity. So the intuitive gold theory become counterintuitive international exchange markets.

The exporting countries - Oil OPEC, Japan and China and to some extent Europe took the extra cash to invest in US assets. The re-circularization of cash reduced their inflation and kept the American Golden Goose buying their products. It financed the American national debt since they saved more than we do. Now those foreign investments loss 25% in currency and are paying close to nothing.  Do they have somewhere else to go? Will their central banks defend the dollar or protect their local currencies from going too high? Is there enough anti-American fear and passions to encourage a desire to weaken our arrogance and being bullies. No one knows!

Stocks Set to Ease as the Dollar Weakens
Tue May 27, 2003 08:58 AM ET
By Denise Duclaux

NEW YORK (Reuters) - Stocks are expected to open lower on Tuesday as investors straggle back from a three-day holiday weekend to face further deterioration in the dollar and a calendar packed with economic data.

The euro galloped to record highs against the dollar early Tuesday. The euro's more than 13 percent rise on the dollar this year has been fueled by the large U.S. trade deficit and relatively attractive euro zone interest rates. Wall Street fears fewer foreign investors will want to buy U.S. securities in a weak-dollar environment.

"The continued strength of the euro currency and weakness of the dollar is basically weighing on the market right now," said Phil Flynn, vice president and senior market analyst at Alaron Trading Corp.

http://reuters.com/newsArticle.jhtm l;jsessionid=QSL4LFA3E3ROOCRBAEKSFEY?type=businessNews&storyID=2825342

The euro soared to $1.1914 in Asian trading, before slipping back slightly to $1.1895 as trading opened in Europe.

Driven down by U.S. economic woes including the trade deficit, the weak dollar could help recovery in the United States by boosting exports and fattening corporate earnings. Ordinary Americans, however, will run into higher prices for imported cars, televisions and other goods.

The euro had its previous peak of $1.1884 on Jan. 4, 1999, three days after the currency was launched in an effort to better integrate Europe's economies.

A 16-month rally has erased a long slump against the dollar that began as soon as the euro was introduced and saw its value tumble as low as 82 U.S. cents. European economists and politicians say the rise corrects a long undervaluation, though some are getting edgy about its effect on Europe's export-dependent economy

Euro at all-time highs beyond $1.1886 is the biggest gamble by a risk happy administration - all the cards will be on the table by November 2004 - It is worthwhile to try to control events and not just go along for the ride ..

Yes, Virginia, the US secretary of the treasury does not set prices on global currency markets - talk is cheap - the market is BIG - but it is time for the G8 all to buy dollars -

maybe by chance - no one knows the future - and the forces just may balance themselves out with little net effect - not very good but not so bad. no one knows it's all a big gamble with the economy, global stability, and our welfare.

The REAL problem is not tomorrow, today or yesterday but decades of current account deficits building an overhang on all markets - (1/3 of the problem is foreign oil - and we do nothing to cut oil import costs which is a real sin for which we may have to pay for CAFE and tax incentives to buy gas guzzlers) Iraq maybe able to produce over 3 million barrows a day and save us by cheap oil priced in deprecated dollars - oil is now 30% cheaper in dollars than Euros - Iraq tried to price their oil in Euro which may have been their cardinal sin - (SUV tax break to hit $100,000 A loophole that allows small-business owners to deduct $25,000 for luxury sport-utility vehicles will grow to $100,000 under the $350-billion stimulus plan)

American consumers have been the economic super power buying, buying, buying while the rest of the world (and American OEM's suppliers overseas) were happy to sell, sell and put the excess dollars earned back into US assets, mainly treasuries that paid for the budget deficits that supported more consumption and growth.  This flow has built trillions of American assets in foreign hands. Their Governments and Central banks want to protect their markets and investments so wish us well - BUT physics takes over a some point - the currency has to adjust to cash flows (more out than in) and then what?  

The good news:

It takes a year (or more) for the positive effects of currency revaluations, stimulus of tax cuts, low mortgage and other long term interest rates and open market activity (buying bonds by the fed puts cash into the banking system, hold bond prices high and interest rates low) but it takes time for FED and policy actions to take effect - higher import prices allow increased domestic prices, increase profits in dollars of operations overseas of American companies, higher profits that support higher stock prices and encourage domestic capital investments, expansion, hiring more people; while lower interest rates encourage mortgage refinancing and support continual consumer spending, while recovery means more income and paying more taxes that improves the fiscal picture and encourages foreign investments - and set up the conditions for a long term Republican dynasty in Congress OR

The bad news:

A falling dollar discourages foreign investment in government securities to finance our deficits and a supports a sell off in the stock markets forcing higher interest rates to save the dollar from free fall and the higher returns necessary to attract foreign investments over an increased risk premium - the lack of liquidly (buyers with cash on hand) causes a fall in equity prices which still are well above long term P/E equations, tight income growth or even decline causes a fall in the housing market, pushing deflation as too many goods chase too few customers, and the shit will hit the fan... the Democrats can win with the simple idea of "throw the bums out" without the new bums having any clear alternatives.

With Treasury yields at their lowest in over four decades and no end to dollar weakness in sight, foreign investors may balk at funding a new and rapidly growing U.S. deficit. If that happens, Treasury yields could move back up, denting stocks and prompting a fresh wave of dollar selling in the process. And then, the greenbacks' weakness may not be so benign.

 http://reuters.com/financeArticle.jhtm l?storyID=2816843&newsType=usDollarRpt&menuType=currencies

In addition to helping U.S. exports, the Administration seems to be counting on a weaker currency to ward off deflation. That would give big companies some breathing room to raise prices on their products. And for now, Snow & Co. apparently aren't too worried about any fallout for U.S. assets. Until these most recent comments, Team Bush's tepid support for a strong dollar appeared to be paying off, with equities moving higher despite a lack of foreign participation, and Treasury yields moving to their lowest levels in over 40 years.
NOT SO BENIGN? Still, the benefits of the weaker dollar will be realized only if the U.S. recovery accelerates to full speed — and that rebound ultimately reverse the greenback's weakness. Continued global economic uncertainties are keeping foreign appetites for U.S. assets at a low ebb, while the combined current-account and fiscal deficits increase the need for investment inflows to stop the dollar falling.
        With Treasury yields at their lowest in over four decades and no end to dollar weakness in sight, foreign investors may balk at funding a new and rapidly growing U.S. deficit. If that happens, Treasury yields could move back up, denting stocks and prompting a fresh wave of dollar selling in the process. And then, the greenbacks' weakness may not be so benign.

"Deflation: determinants, risks and policy options." 

What should be done - quickly before a very bad and negative cycle sets in - and a set of unhappy expectations - "we have more to fear than fear itself"

A big fear is the loss of a likely major Republican Governmental Dynasty - (just like last time in 1930's Republican lost power in congress for the rest of the century) The great depression was magnified by almost everyone doing the wrong thing based on a false and obsolete ideology Say's law, the gold standard, protectionism, belt tightening and that prosperity was just around the corner.

One simple guide is to do just the reverse of policies in the 1930's - Sooner rather than later - open world markets, inflate the currency (get off the gold standard) support the banking system to clear bad debt - support the poor and employed, dispose of surplus product by starting a war -

The administration and congress should:

Raise the minimum wage to the 20 years average (and keep it at a price inflated index )

Keep paying unemployment and granting extensions

More aid to states and local governments to maintain employment and demand - call it homeland defense -

It's OK to have deficits by short term expenditures (tax cuts are hard to make for short periods - but there are suggestions for tax holidays on double taxation of payroll taxes) aid to states, but big enough to matter - 1% of a 10 trillion GDP is 100 billion - the $400 billion debt this year is just about right but too structural causing long term problems, and not well targeted. BUT it was the most popular and most likely to pass so is much better than something that couldn't happen. If the multiplier is 1.75 - while really targeted programs can go as high as 2.5 - that is almost a trillion dollars holding up the GDP by up to 10% - so a 5% decline becomes a 5% growth - we hope and pray by the 2004 election - this is not an exact science.

The attempts to shore up the market by cuts in capital gains and dividend taxes are unlikely to work in stimulating investment in new plant and equipment in a depressed, over supplied, deflationary market conditions but could avoid further declines, bankruptcies and does increase the money supply through savings and gets the Republican war chest (mainly for congress where they intend to establish a dynasty) to $100 million or before the election even starts. That amount of money really keeps people in line - go along and you get along - resist and the wrath of the almighty dollar will decent upon you.

The weaker dollar does help - increases exports, raises import prices, and is inflationary - good but not any sudden and shocking currency crisis -  

The Central Bank:

Expand the money supply by buying long term bonds on the open market committee - this raises bond prices, lowers long term rates, encourages refinance and puts money into the economy - the money in the banks and peoples hands has a much higher multiplier than tax cuts

http://www.nytimes.com/2003/05/24/opinion/24KRUG.htm l?ex=1054353600&en=64adc97250ad1e2b&ei=5062&partner=GOOGLE

This may also suggest why structural factors—such as the introduction of

a legal minimum wage, unemployment benefits, and support for low income groups—have

been associated with a decline in the cyclical volatility of output. However, the failure of

wages to adjust in response to sustained declines in demand would eventually lead to rising

unemployment and the costs noted above.

1. There has recently been a marked increase in concerns of a generalized decline in prices

in both industrial and emerging market economies. With Japan, China, Germany and several other

Asian economies already experiencing declining prices, the worry has been that deflationary

pressures could deepen, and even spread more widely. This is against a background of

massive declines in global equity markets; significant excess capacity and widening output

gaps; repeated disappointments over the pace of global recovery; geopolitical uncertainties;

and the impact on activity of higher oil prices.

http://www.imf.org/external/pubs/ft/def/2003/eng/043003.pdf

http://www.imf.org/external/pubs/ft/def/2003/eng/043003.htm

 http://news.google.com/news?hl=en&edition=usa&q=deflation&btnG=Search+News

32. A review of the historical episodes yields three main conclusions: first, deflation and

deflationary expectations can take root surprisingly quickly; second, deflation can impose

severe economic costs, unless it reflects primarily positive supply shocks; and third,

determined and vigorous policies can make a critical difference to ending deflation

effectively and relatively quickly.11

10 The recent experience of Japan, where mild deflation has been accompanied by near

stagnation in output, and a very different experience of China where less persistent deflation

has been accompanied by strong productivity gains and output growth are examined in

Section IV below.

37. Deflation in the late 1920s and early 1930s was qualitatively and quantitatively

different than that during the 19th century. In the United States, the consumer price index

(and the GDP deflator) declined by 24 percent from August 1929 to March 1933, after

having been virtually flat from 1921 to 1929. This decline was accompanied by a fall in real

GDP of almost 30 percent. Similar price declines occurred in other countries; from 1929 to

1933, prices fell by 25 percent in Japan and 20 percent in Sweden.

 http://money.cnn.com/2003/05/23/markets/bondcenter/bonds/index.htm  

The latest catalyst for the bond rally is remarks from the head of the Bank of Japan, Toshihiko Fukui. This is the Alan Greenspan of Japan.

According to the Japan Times, Fukui said Friday, "the world's major economies are on the verge of accelerated disinflation as deflationary pressures grow on a global scale."

Here's a direct quote the Bank of Japan chief from the article: "I think world price movements are about to trigger accelerated disinflation." And he said this at a news conference so there's no doubt that this is the message he intended to deliver.