Resolutions for Congress

We - are young but getting old before our time
We'll leave the TV and radio behind
Don't you wonder what we'll find
Steppin' out tonight
--Joe Jackson

Ron Paul offers some New Year's Resolutions for Congress on his way out the door:

Reread Article 1, Section 8 of the Constitution and the Bill of Rights before taking the oath of office at the start of the year. Most legislation developed by Congress is in direct violation of the oath.

End wars overseas. All wars currently being prosecuted are unconstitutional.

End all foreign aid. It creates perverse incentives for both friends and enemies.

Stop accumulating debt. Cease Federal Reserve monetization of federal debt.

Learn more about free markets and their capacity for advancing prosperity far beyond the power of legislation or regulation.

Resolve not to intervene in voluntary contracts between consenting adults.

Stop bailing out failed yet politically connected companies and industries.

Stop forcing people to engage in commerce that they don't want to. Stop prohibiting people from buying and selling what they do want to.

Stop trying to legislate your ideas of fairness.

Protect property rights.

What a fine 2013 it would be if Congress actually took these on.

Demographics of Freedom

Hey
Think the time is right 
For palace revolution
--The Rolling Stones

In 1770s America, it is estimated that less than half of the colonial population favored secession from Britain. I've seen estimates from 1/3 down to 5%. This fraction constituted those people who valued freedom above all else--those aligned with the Live Free or Die idea. Adams, Franklin, Jefferson, et al...they were seen as radicals and extremists.

At least 1/3 of the population were Tories--loyal to Britain. The remaining people were betwixt and between with no significant opinion either way.

This had to have created an interesting dynamic during the Revolutionary War. A minority fighting for the right to be free. Another group of equal or greater size partial to the other side. And a large mass of inertia. Considering the cultural context, our victory is all the more remarkable.

This was not a battle ordained or prosecuted by the majority rule of democracy.

After the US won its independence, people from around the world flocked to America. The draw was not safety. The US was already gaining global recognition as a rough and tumble place. No, the draw was freedom and its seemingly unlimited possibilities. Millions of people left it all behind to immigrate to the Land of Opportunity.

While I have not seen demographic data to this effect, it seems likely that the fraction of Americans partial to the Live Free or Die idea swelled during the 1800s. Immigrants added to the ranks, and many Tories left the country for Canada and other places.

Over the past hundred years, however, the Live Free or Die fraction has been declining. Once again, it appears that those who value freedom among all else are a minority.

The majority is populated by people willing to cede freedom for security--safety of both the physical and social variety. This group is willing to employ the strong arm of government to act on their behalf. As government grows larger in this capacity, freedom gets smaller.

Once again, we have a minority of people increasingly troubled at their loss of freedom.

Picture of Gold

Nothin's gonna save you from a love that's blind
Slip to the dark side you cross that line
--John Cafferty and the Beaver Brown Band

Gold is getting oversold on both daily and weekly horizons. The weekly chart shows GLD on support at about 160. If it breaks thru, 150 is the next support level.

Not a bad place for some adds, it seems to me. Not only due to the technicals, but also given the macro picture as even more money printing seems likely as part of the 'fiscal cliff' charade.

Should we break to 150 GLD, will likely look at more adds.

position in gold

UK Welfare Trap

Standing in line marking time
Waiting for the welfare dime
'Cause they can't by a job
--Bruce Hornsby

Prof John Cochrane shares more data on marginal taxes associated with welfare benefits (other recent posts here and here). On both carts the horizontal axis denotes gross (i.e., before tax) annual wage income from work and the vertical axis shows after tax annual income from both work and welfare benefits. At current conversion rates, 5000 pounds equals about $8000.

The first chart, representing single workers 25 yrs of age or younger, indicates virtually no reward for 7500/ pounds per yr of gross wages. Approximately 84% of the wages are lost in welfare benefit withdrawals. The way to think about this on the chart is that the flatter the line, the less additional after tax income is gained from more gross wage income.

The second chart, representing single parents with two kids, indicates virtually no reward for work below 5000 pounds/yr of gross wages. Then, after a work tax credit kicks in at about 5000, then a subsequent marginal tax rate of 70-95% for the remainder of the wage horizon. There is little point in taking on incrementally more work past 5000 pounds per yr.

As Cochrane notes, most UK benefits are not time sensitive. Thus, the poverty trap gets passed down thru generations.

Thought provoking example of how disincentives drive productivity (and standard of living) into the gutter.

Regulating Small Biz Out of Biz

Don't ask me what I want it for
If you don't want to pay some more
--The Beatles

Classic example of how government regulations drive small operators out of business. Approximately 350,000 small tax preparers will be forced to take down their shingles because they do not meet new IRS licensing requirements.

The reduced competition will result in higher costs and reduced innovation.

Commitment of Traders Optimism

Ain't got no regrets
And I ain't losing track
Of which way I'm going
Ain't gonna double back
--Lou Gramm

Commitment of traders (COT) data suggest a healthy dose of optimism among equity index futures traders. Traders have not been this long S&P futes in years.

Traders have only been persistently long in three periods over the past five years: late 2006 as we were putting in a rounding top prior to the credit collapse, late 2008 into the lows of the selling cascade, and now.

position in SPX

Drugs and Violent Crime

Things are different today
I hear every mother say
--Rolling Stones

How to achieve more peace on earth? Following Ron Paul's lead on less government intervention, I suspect that the single, most effective action that the federal government can do to reduce violent crime in the US is to withdraw from the 'war on drugs.' Do this and watch shootings et al decline.

If government still feels the need to be involved in drugs to some degree, then it might scrutinize the role of selective serotonin reuptake inhibitors (SSRI) on violent crime. SSRIs are a common class of anti-depressent drugs made popular by blockbusters Prozac (LLY) and Zoloft (PFE). On the surface, the presence of SSRIs in school shootings as well as other violent crimes seems a compelling one.

no positions

More Laws Constitute More Violence

And the men who spurred us on
Sit in judgment of all wrong
They decide and the shotgun signs the song
--The Who

Ron Paul reflects on the aftermath of the Newtown massacre. The Left's emotional calls for more gun control were balanced by the Right's emotional calls for mandatory armed security in schools.

Because government is legalized force, more laws constitute more violence. RP observes that real solutions rest in peaceful cooperation rather than in involuntary force.

Toward the end of his missive, he discusses the tradeoff between freedom and security, a topic of many pages on this site.

"Do we really believe government can provide total security? Do we want to involuntarily commit every disaffected, disturbed, or alienated person who fantasizes about violence? Of can we accept that liberty is more important than the illusion of state-provided security? Government cannot create a world without risks, nor would we really wish to live in such a fictional place. Only a totalitarian society would even claim absolute safety as a worthy ideal, because it would require total state control over its citizens' lives. We shouldn't settle on substituting one type of violence for another. Government's role is to protect liberty, not to pursue unobtainable safety."

Indeed, the American design is one that favors liberty over security--as famously punctuated by Patrick Henry.

Correlation and Causation

So true
Funny how it seems
Always in time
But never in line for dreams
--Spandau Ballet

Several times recently I have read statements claiming that correlation does not mean causation. Quite true. One morning a few months back I noted a small puddle of water on my basement floor near a corner wall. It had been raining heavily through the previous night. "Rain must be getting in somewhere," I thought.

Before donning the rain gear and heading outside, I decided to inspect the area above the leak, including various pipe runs in the vicinity. That's when I spied a drop of water hanging from copper tubing heading into the hot water heater. Upon closer examination, a slight leak had developed in a joint connecting two pieces of tubing, and the water drops were occasionally squeezing through the joint and dropping to the floor.

I had mistakenly presumed that the puddle on the floor was caused by the rain. Seemed reasonable--particularly because the rain was heavy and there hadn't been much rainfall in weeks. Because the puddle and rain showed up at the same time, their presence was correlated ('co-related'). But the cause of the floor puddle turned out to be something else, rendering the correlation between rain and puddle meaningless (what stats folks sometimes refer to as 'spurious').

Whenever one or more independent variables are regressed on an independent variable, the results bear the limitation that causality cannot be construed from the data alone. Even if a strong relationship between X and Y is detected, we don't know whether X caused Y or vice versa--or whether one or more unaccounted-for variables render the observed X/Y correlation spurious.

In empirical studies, analysts can try to reduce potential for false conclusions by 'controlling' for other variables that might influence relationships of interest. In most social settings, however, it is difficult to control for the myriad variables that might influence the findings.

Unfortunately, much social science research has been moving in the direction of empirical, multivariate studies. Because most of these studies explicitly or implicitly seek to determine/verify cause and effect relationships, the validity of the findings are usually severely limited. Lacking the careful controls of the lab bench, empirical studies are generally incapable of unearthing cause:effect findings that are highly convincing.

Moreover, it is also possible that simple linear models where X is thought to cause Y misspecify true relationships between variables. Senge's (1990) work demonstrated that feedback loops may reinforce or balance real-life systems that reduce directionality between variables.

Given the empirical difficulties, how can accurate conclusions about causality be reached? One way is to favor reasoning over statistics when conducting analysis. For example, the Austrian school of economics employs praexology, the study of human action grounded in a relatively small set of axioms about nature and human behavior, to deduce economic relationships.

For example, we can also deduce that, because people generally prefer leisure over work, and less work over more work, that people will be prone to act in ways that permit acquisition of more income (physical or psychic), with the least amount of effort. The prospect of getting something for nothing is the primary cause of most political behavior because people recognize that their situations can be made better on the backs of the productive effort of others.

We should also note that numerical data are not totally useless in studying causality. In fact, longitudinal series of proposed dependent variables that include known points where independent variables have been changed can be effective ways to investigate cause and effect.

For example, the 200+ year series of federal debt and deficits (two dependent variables) shown a few posts back includes labels of several possible independent variables thought to influence levels and trends of the proposed dependent variables. One of them is war. Because several wars take place over the horizon, and debt/deficits move in similar directions each time, there can be little doubt that war causes higher debt and spending. These patterns are consistent with deductive reasoning that suggests similar outcomes.

Longitudinal data are particularly useful when there is a lag between changes to independent variables and changes to the dependent variable. Back to the debt/deficit chart, note that the labels associated with the institution of the Fed (1913) and Nixon's closing of the gold window (1971) were followed by large increases in debt and deficits--after an initial lag. This lag could have been deduced ahead of time as time associated with establishing new institutional arrangements and routines. We should expect some lag between cause and effect here.

On the other hand, pinning the change in debt and deficits these two independent variables is not as convincing as the war variables that were 'turned on and off' multiple times. To gain more understanding of the effect of the Fed and removal of the gold standard, it would be nice to dismantle the Fed and go back on the gold standard, and then study changes to federal debt and deficits. We can only hope for such an opportunity!

Potentially, then, there is some causal information available from time series data. Studying US homicide rates in relationship to changes in gun control laws and gun ownership can yield some sense of cause and effect. When US homicide rates decline following weaker gun laws and increasing gun ownership, then that is consistent with theoretical predictions of causality.

Of course, studying additional periods of changing gun control laws and gun ownership would be more convincing. While hard to do with US data alone, it is possible to do so by looking at changes in gun control laws and gun ownership in other countries. I am pretty sure such research has been done, but I have only been privy to snippets here and there.

Thus far, the snippet data are consistent with the pattern observed in the US data. The lower the gun controls and the higher the gun ownership, the lower the violent crime. The more situations where such a pattern holds, the greater the evidence of causality.

References

Senge, P. 1990. The fifth discipline. New York: Doubleday.

Monetizing Debt in High Gear

But somehow I can't believe
That anything should happen
I know where I belong
And nothing's gonna happen
--Tal Bachman

Nice observations here by Frank Shostak. Discussing the FOMCs recent announcement to add $45 billion in monthly Treasury bond buys to already $40 billion in monthly mortgage purchases, he estimates that the Fed's balance sheet will grow from $2.9 trillion now to $4 trillion by end of 2013.

This is what 'monetizing debt' looks like when kicked into high gear.

As any reasoned person understands, printing money does not create wealth. The Fed's idea, really the Keynesian idea, is to create credit out of thin air and hope that it stimulates economic activity. Thus far, however, most of the credit created has stayed on bank balance sheets, where banks have been using it to trade in their own accounts.

Shostak states that we should be thankful that the banks are not aggressively aggressively lending all of this credit money, because it would create serious inflationary consequences.

The Fed seems to think that they could easily reverse their easy money policies should aggressive lending begin. This is highly doubtful.

The growing enormity of this problem makes me increasingly skittish about holding cash. In fact, I'm viewing the current weakness in gold prices as an opportunity to swap dollars for metal.

position in gold