Was The Department Of Defense Behind Facebook’s Controversial Manipulation Study? Submitted by Tyler Durden on 07/01/2014 23:05 -0400 Reality Twitter Twitter University of California lang: en_U in Share 28 Submitted by Michael Krieger of Liberty Blitzkrieg blog , I’ve spent pretty much all day reading as much as possible about the extremely controversial Facebook “emotional contagion” study in which the company intentionally altered itsnews feed algorithm to see if it could manipulate its users’ emotions. In case you weren’t aware, Facebook is always altering your news feed under the assumption that there’s no way they could fill your feed with all of your “friends’” pointless, self-absorbed, dull updates (there’s just too much garbage). As such, Facebook filters your news feed all the time, something which advertisers must find particularly convenient. In any event, the particular alteration under question occurred duringone week in January 2012, and the company filled some people’s feeds with positive posts, while others were fed more negative posts. Once the data was compiled, academics from the University of California, San Francisco and Cornell University were brought in to analyzethe results. Their findings were thenpublished in the prestigiousProceedings of the National Academy of Sciences. They found that: For people who had positive content reduced in their News Feed, a larger percentage of words in people’s status updates were negative and a smaller percentage were positive. When negativity was reduced, the opposite pattern occurred. These results suggest that the emotions expressed by friends, via online social networks, influence our own moods, constituting, to our knowledge, the first experimental evidence for massive-scale emotional contagion via social networks. You probably know most of this already, but here is where it starts to get really strange. Initially, the press releasefrom Cornell highlighting the study said at the bottom: “The study was funded in part by the James S. McDonnell Foundation and the Army Research Office.” Once people started asking questions about this, Cornell claimed it had made a mistake, and that there was no outside funding. Jay Rosen, Journalism Professor at NYU, seems to find this highly questionable. He wrote on his Facebook page that: Strange little turn in the story of the Facebook “emotional contagion” study. Last month’s press release from Cornell highlighting the study had said at the bottom: “The study was funded in part by the James S. McDonnell Foundation and the Army Research Office.” Why would the military be interested? I wanted to know. So I asked Adam D.I. Kramer, the Facebook researcher, that question on his Facebook page, where he has posted what he called a public explanation. (He didn’t reply to my or anyone else’s questions.) See: https://www.facebook.com/akramer/posts/10152987150867796 Now it turns out Cornell was wrong! Or it says it was wrong. The press release now reads: “Correction: An earlier version of this story reported that the study was funded in part by the James S. McDonnell Foundation and the Army Research Office. In fact, the study received no external funding.” Why do I call this strange? Any time my work has been featured in an NYU press release, the PR officers involved show me drafts and coordinate closely with me, for the simple reason that they don’t want to mischaracterize scholarly work. So now we have to believe that Cornell’s Professor of Communication and Information Science, Jeffrey Hancock, wasn’t shown or didn’t read the press release in which he is quoted about the study’s results (weird) or he did read it but somehow failed to notice that it said his study was funded by the Army when it actually wasn’t (weirder). I think I would notice if my university was falsely telling the world that my research was partially funded by the Pentagon… but, hey, maybe there’s an innocent and boring explanation that I am overlooking. It gets even more interesting from here. TheProfessor of Communication and Information Science, Jeffrey Hancock, who Mr. Rosen mentions above, has a history of working with the U.S. military, specifically the Minerva Institute. In case you forgot what this is, the Guardian reported on it earlier this year. It explained: A US Department of Defense (DoD) research program is funding universities to model the dynamics, risks and tipping points for large-scale civil unrest across the world, under the supervision of various US military agencies. The multi-million dollar program is designed to develop immediate and long-term “warfighter-relevant insights” for senior officials and decision makers in “the defense policy community,” and to inform policy implemented by “combatant commands.” Launched in 2008 – the year of the global banking crisis – the DoD ‘Minerva Research Initiative’ partners with universities “to improve DoD’s basic understanding of the social, cultural, behavioral, and political forces that shape regions of the world of strategic importance to the US.” SCG News has written one of the best articles I have seen yet on the links between the Facebook study and the Department of Defense. It notes: In the official credits for the study conducted by Facebook you’ll find Jeffrey T. Hancock from Cornell University. If you go to the Minerva initiative website you’ll find that Jeffery Hancock received funding from the Department of Defense for a study called“Cornell: Modeling Discourse and Social Dynamics in Authoritarian Regimes”. If you go to the project site for that study you’ll find a visualization program that models the spread of beliefs and disease. Cornell University is currently being funded for another DoD study right now called“Cornell: Tracking Critical-Mass Outbreaks in Social Contagions”(you’ll find the description for this project on the Minerva Initiative’s funding page). So I went ahead and looked at the study mentioned above, and sure enough I found this: There he is, Jeff Hancock, the same guy who analyzed the Facebook data for Cornell, which initially claimed funding from the Pentagon and then denied it. I call bull*****. Stinking bull*****. So it seems that Facebook and the U.S. military are likely working together to study civil unrest and work on ways to manipulate the masses into apathy or misguided feelings of contentment in the face of continued banker and oligarch theft. This is extremely disturbing, but this whole affair is highly troubling in spite of this. For one thing, although governments and universities need to take certain precautions when conducting such “research,” private companies like Facebook apparently do not. Rather, allthey have to do is get people to click “I accept” to a terms of service agreement they never read, which allows companies to do almost anything they want to you, your data and your emotions. What we basically need to do as a society is completely update our laws. For starters, if a private corporation is going to lets say totally violate your most basiccivil liberties as defined under the Bill of Rights, a simple terms of service agreement should not be sufficient. For more invasive violations ofsuchrights, perhaps a one page simple-to-read document explaining clearly whichof your basic civil libertiesyou are giving away should be mandatory. For example, had Facebook not partnered at the university level to analyze thisdata, we wouldn’t even know this happened at all. So what sort of invasive, mind-****ing behavior do you think all these large corporations with access to your personal data are up to. Every. Single. Day. The Faculty Lounge blog put it perfectly when it stated: Academic researchers’ status as academics already makes it more burdensome for them to engage in exactly the same kinds of studies that corporations like Facebook can engage in at will. If, on top of that, IRBs didn’t recognize our society’s shifting expectations of privacy (and manipulation) and incorporate those evolving expectations into their minimal risk analysis, that would make academic research still harder, and would only serve to help ensure that those who are most likely to study the effects of a manipulative practice and share those results with the rest of us have reduced incentives to do so. Would we have ever known the extent to which Facebook manipulates its News Feed algorithms had Facebook not collaborated with academics incentivized to publish their findings? We can certainly have a conversation about the appropriateness of Facebook-like manipulations, data mining, and other 21st-century practices. But so long as we allow private entities freely to engage in these practices, we ought not unduly restrain academics trying to determine their effects. Recall those fear appeals I mentioned above. As one social psychology doctoral candidate noted on Twitter, IRBs make it impossible to study the effects of appeals that carry the same intensity of fear as real-world appeals to which people are exposed routinely, and on a mass scale, with unknown consequences. That doesn’t make a lot of sense. What corporations can do at will to serve their bottom line, and non-profits can do to serve their cause, we shouldn’t make (even) harder—or impossible—for those seeking to produce generalizable knowledge to do. If you read Liberty Blitzkrieg, you know I strongly dislike Facebook as a company. However, this is much bigger thanjust one experiment by Facebook with what appears to be military ties. What this is really about is thefrightening reality that these sorts of things are happening every single day, and we have no idea it’s happening. We need to draw the lines as far as to what extentwe as a society wish to be data-mined and experimented onby corporations with access to all of our private data. Until we do this, we will continue to be violated and manipulated at will. For some of my Facebook critical articles from earlier this year, read: The Chief Operating Officer of Facebook Wants to Ban the Word “Bossy” How UK Prime Minister David Cameron Paid Thousands of Dollars for Facebook “Likes” How Facebook Exploits Underage Girls in its Quest for Ad Revenue This Man’s $600,000 Facebook Disaster is a Warning For All Small Businesses Average: 4.92 Your rating: None Average: 4.9 ( 25 votes)
How Twitter Algos Determine Who Is Market-Moving And Who Isn't Submitted by Tyler Durden on 01/11/2014 15:15 -0500 Bridgewater ETC HFT Indiana Reuters Twitter Twitter in Share 2 Now that even Bridgewater has joined the Twitter craze and is using user-generated content for real-time economic modelling, and who knows what else, the scramble to determine who has the most market-moving, and actionable, Twitter stream is on. Because with HFT algos having camped out at all the usual newswire sources: Bloomberg, Reuters, Dow Jones, etc. the scramble to find a "content edge" for market moving information has never been higher. However, that opens up a far trickier question: whose information on the fastest growing social network, one which many say may surpass Bloomberg in terms of news propagation and functionality, is credible and by implication: whose is not? Indeed, that is the $64K question. Luckily, there is an algo for that . In a note by Castillo et al from Yahoo Research in Spain and Chile, the authors focus on automatic methods for assessing the credibility of a given set of tweets. Specifically, they analyze microblog postings related to “trending” topics, and classify them as credible or not credible, based on features extracted from them. Our results shows that there are measurable differences in the way messages propagate, that can be used to classify them automatically as credible or not credible, with precision and recall in the range of 70% to 80% . Needless to say, the topic of social media credibility is a critical one, in part due to the voluntary anonymity of the majority of sources , the frequent error rate of named sources, the painfully subjective attributes involved in determining good and bad information, and one where discerning the credible sources has become a very lucrative business. Further from the authors: In a recent user study, it was found that providing information to users about the estimated credibility of online content was very useful and valuable to them. In absence of this external information, perceptions of credibility online are strongly influenced by style-related attributes, including visual design, which are not directly related to the content itself. Users also may change their perception of credibility of a blog posting depending on the (supposed) gender of the author. In this light the results of the experiment described are not surprising. In the experiment, the headline of a news item was presented to users in different ways, i.e. as posted in a traditional media website, as a blog, and as a post on Twitter. Users found the same news headline significantly less credible when presented on Twitter. This distrust may not be completely ungrounded. Major search engines are starting to prominently display search results from the “real-time web” (blog and microblog postings), particularly for trending topics. This has attracted spammers that use Twitter to attract visitors to (typically) web pages offering products or services. It has also increased the potential impact of orchestrated attacks that spread lies and misinformation. Twitter is currently being used as a tool for political propaganda. Misinformation can also be spread unwillingly. For instance, on November 2010 the Twitter account of the presidential adviser for disaster management of Indonesia was hacked. The hacker then used the account to post a false tsunami warning. On January 2011 rumors of a shooting in the Oxford Circus in London, spread rapidly through Twitter. A large collection of screenshots of those tweets can be found online. Recently, the Truthy service from researchers at Indiana University, has started to collect, analyze and visualize the spread of tweets belonging to “trending topics”. Features collected from the tweets are used to compute a truthiness score for a set of tweets. Those sets with low truthiness score are more likely to be part of a campaign to deceive users. Instead, in our work we do not focus specifically on detecting willful deception, but look for factors that can be used to automatically approximate users’ perceptions of credibility. The study's conclusion: "we have shown that for messages about time-sensitive topics, we can separate automatically newsworthy topics from other types of conversations. Among several other features, newsworthy topics tend to include URLs and to have deep propagation trees. We also show that we can assess automatically the level of social media credibility of newsworthy topics. Among several other features, credible news are propagated through authors that have previously written a large number of messages, originate at a single or a few users in the network, and have many re-posts." All of the above is largely known. What isn't, however, is the mostly generic matrix used by various electronic and algorithmic sources to determine who is real and who isn't, and thus who is market moving and who, well, ins't. Once again, courtesy of Castillo, one can determine how the filtering algo operates, (and thus reverse engineer it). So without further ado, here is the set of features used by Twitter truth-seekers everywhere. Those are the variables. And as for the decision tree that leads an algo to conclude if a source's data can be trusted and thus acted upon, here it is in its entirety. First, verbally: As the decision tree shows, the top features for this task were the following: Topic-based features: the fraction of tweets having an URL is the root of the tree. Sentiment-based features like fraction of negative sentiment or fraction of tweets with an exclamation mark correspond to the following relevant features, very close to the root. In particular we can observe two very simple classification rules, tweets which do not include URLs tend to be related to non-credible news. On the other hand, tweets which include negative sentiment terms are related to credible news. Something similar occurs when people use positive sentiment terms: a low fraction of tweets with positive sentiment terms tend to be related to noncredible news. User-based features: these collection of features is very relevant for this task. Notice that low credible news are mostly propagated by users who have not written many messages in the past. The number of friends is also a feature that is very close to the root. Propagation-based features: the maximum level size of the RT tree is also a relevant feature for this task. Tweets with many re-tweets are related to credible news. These results show that textual information is very relevant for this task. Opinions or subjective expressions describe people’s sentiments or perceptions about a given topic or event. Opinions are also important for this task that allow to detect the community perception about the credibility of an event. On the other hand, user-based features are indicators of the reputation of the users. Messages propagated trough credible users (active users with a significant number of connections) are seen as highly credible. Thus, those users tend to propagate credible news suggesting that the Twitter community works like a social filter. And visually: Get to the very bottom of the tree without spooking too many algos, and you too can have a Carl Icahn-like impact on the stock of your choosing. Source: " Information Credibility on Twitter " Average: 5 Your rating: None Average: 5 ( 3 votes)
US Blasts Germany's Economic Model; Germany Blasts Right Back... And May Use Snowden As Leverage Submitted by Tyler Durden on 10/31/2013 15:19 -0400 Barack Obama China Eurozone Germany Global Economy Gross Domestic Product Hong Kong International Monetary Fund Ireland Italy Portugal Treasury Department Twitter Twitter Unemployment in Share 2 The chart below showing the portion of GDP generated through net exports by select group of trade surplus countries is well-known to most. Except, it seems, to the Treasury. Apparently to Jack Lew's henchmen it comes as a complete shock that Germany's exports account for 41.4% of GDP - 50% more than traditionally evil "mercantilist" China. It is also a complete shock to the US Treasury that the current layout of the Eurozone - the same Eurozone that the Fed has stepped in on numerous occasions to bailout, common currency and all - was simply to facilitate German exports to fellow European countries. Which is probably why, after years of saying nothing, in its semi-annual currency report released yesterday and "employing unusually sharp language, the U.S. openly criticized Germany's economic policies and blamed the euro-zone powerhouse for dragging down its neighbors and the rest of the global economy." You see it was all Germany's fault. From the Treasury's report : Germany has maintained a large current account surplus throughout the euro area financial crisis, and in 2012, Germany’s nominal current account surplus was larger than that of China. Germany’s anemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro-area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment. The net result has been a deflationary bias for the euro area, as well as for the world economy. Ireland, Italy, Portugal and Spain are all now running current account surpluses as import demand in those economies has declined. Thus the burden of adjustment is being disproportionately placed on peripheral European countries, exacerbating extremely high unemployment, especially among youth in these countries, while Europe’s overall adjustment is essentially premised on demand emanating from outside of Europe rather than addressing the shortfalls in demand that exist within Europe. The WSJ adds : With the latest report, the Treasury Department has now criticized the world's three largest economies after the U.S. for their economic policies. The focus on Germany represents a stark shift in the Obama administration's economic engagement with one of its most important allies. Since the early stages of the euro-zone debt crisis in 2010, U.S. officials often avoided public criticism of Germany given its central role in keeping the currency bloc intact . President Barack Obama and his top officials worked carefully behind the scenes to prod Germany without antagonizing it publicly. Why the US would scramble to antagonize a Germany which as recently as a week ago was shocked to find out the NSA was spying on its beloved Angela Merkel is a mystery but apparently now that the fiction that Europe is "fine" and nobody can criticize it has ended and is no longer necessary because Spain is, in its own words, recovering, it is fair game to throw Germany and all other nations that dare to export better and more competitive goods and services than the US. under the bus. Because, you see, unless every "ally" of the US has the same "growth" model of internal consumption funded by titanic amounts of debt, be it household, corporate of sovereign, and is in the same insolvent boat at the end of the day as the US, they deserve to be spat upon. Which also means that the reverse is also true and Germany can stop pretending that the US is some paragon of economic growth or stability. And unlike other painfully impotent US "allies" (cough francec ough) whose eagerness to engage the US would go as far as summoning an ambassador for a brisk walk along the Champs Elysees, but never farther, Germany is in no way afraid to speak up against the former global hegemon, whose "reserve" status is evaporating by the day. Here is Germany response again via the WSJ : "The trade surpluses reflect the strong competitiveness of the German economy and the international demand for quality products from Germany," the German Economics Ministry said in a statement Thursday, responding to a report from the U.S. Treasury published Wednesday that bluntly criticized Germany's economic policies and blamed the euro-zone powerhouse for dragging down its neighbors and the rest of the global economy. "The U.S. government should critically analyze its own economic situation," said Michael Meister, a senior lawmaker and close ally of Chancellor Angela Merkel, criticizing the high debt level in the U.S., which "doesn't just unsettle , but has negative effects on the global economy." " The German economy is competitive, with record-high employment—so it's really not understandable why we're being blamed for this success ," Mr. Meister added. It is quite understandable: Germany is refusing to adopt the principles of the Fairness Doctrine and alongside that, revert to the teachings of those great philosopher-thinkers Marx, Engels, Lenin and Stalin. The Economics Ministry said the country's domestic economy is the main pillar of its growth, noting that both investment in Germany and consumer demand are increasing. It also said the U.S. criticisms are at odds with the International Monetary Fund's stance: "Furthermore, the IMF also doesn't see economic policy distortions as the basis for Germany's trade surplus." ... The report also provoked strong reactions from European economists. Holger Schmieding, chief economist at Berenberg, denounced the accusation that Germany is pursuing a beggar-thy-neighbor policy as "nonsense," given the strong euro and a fall in Germany's trade surplus with the euro-zone over the past five years. "The German export growth story is mainly in emerging markets like China, the implicit criticism that Germany should export less and consume more—there I have my doubts because periphery economies don't have products Germans would consume ," Mr. Brzeski said. Naturally, this is all just high-level political bickering, however unlike the Syrian debacle where Obama was schooled by the former KGB agent, the US president is dangerously close to antagonizing whatever pillars of support in the "priced to perfection" western world he has left. Still, the last laugh will likely be Germany's. Following media reports that Germany is considering granting asylum to Edward Snowden , Germany's politician and member of the Green Party Christian Strobele moments ago sent out the following picture from his visit to Russia, alongside Snowden. Ich komme gerade von Gesprch mit #Snowden . Bringe seinen Brief an BR mit. Details erst morgen http://t.co/F9XQ9i4J08 pic.twitter.com/6xhR7IgdxU — Christian Strbele (@MdB_Stroebele) October 31, 2013 Because what better way to unite the rest of the world against the former Globocop that is the US, than to show that anyone who is terrified ot spending one extra day in the formerly great nation, can feel safer in Hong Kong... or Russia... or Germany... or increasingly more places that just want to tell America "enough." Finally, if and when Germany, Russia and China all sit down and finally agree to the new and improved trilateral alliance, that's when things will finally get exciting. Average: 4.71875 Your rating: None Average: 4.7 ( 32 votes) !-- - advertisements - .AR_2 .ob_empty {display: none;} .AR_2 .rec-link {color: #565656;text-decoration: none;font-size: 12px;} .AR_2 .rec-link:hover {color: #565656;text-decoration: underline;font-size: 12px;} .AR_2 {float: left;width:50%} .AR_2 li {list-style: none outside none !important;font-size: 10px;padding-bottom: 10px;line-height: 13px;margin:0;} .AR_2 .ob_org_header {color: #000000;text-decoration:bold; margin-left: 0px; font-size:14px;line-height:35px;} .AR_3 .rec-link {color: #565656;text-decoration: none;font-size: 12px;} .AR_3 .rec-link:hover {color: #565656;text-decoration: underline;font-size: 12px;} .AR_3 .rec-src-link {font-size: 12px;} .AR_3 li {padding-bottom: 10px;list-style: none outside none !important;font-size: 10px;line-height: 13px;margin:0;} .AR_3 .ob_dual_left, .AR_3 .ob_dual_right {float: left;padding-bottom: 0;padding-left: 2%;padding-top: 0;} .AR_3 .ob_org_header {color: #000000; text-decoration:bold; margin-left: 0px; font-size:14px;line-height:35px;} .AR_3 .ob_ads_header {color: #000000; text-decoration:bold; margin-left: 0px; font-size:14px;line-height:35px;} -- - advertisements - This company is about to destroy Bank of America - Find out the 1 small company that is poised to end the banking model as we know it… Login or register to post comments 23083 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Guest Post: Analysis of the Global Insurrection Against Neo-Liberal Economic Domination and the Coming American Rebellion Snowden Withdraws Russia Asylum Request; Nine Countries Deny Application 2012 Year In Review - Free Markets, Rule of Law, And Other Urban Legends Gold Reaches $1,900 Again - Supported by Risk of U.S. Recession, German Euro Risk and Wikileaks China Gold Cables Euro Creator Mundell Blasts CNY Depegging, Says May Erode Stability In Global And Chinese Economies
Why the Federal Reserve will taper in September Submitted by Eugen Bohm-Bawerk on 07/19/2013 14:25 -0400 Bank of New York Ben Bernanke Bond Federal Reserve Federal Reserve Bank Federal Reserve Bank of New York fixed Housing Bubble Mortgage Backed Securities New York Fed Quantitative Easing System Open Market Account Twitter Yield Curve This article was originally published at Bawerk.net . You may also follow us on twitter at @EBawerk Something peculiar has been going on the treasury market during the latest round of quantitative easing (QE). If we study the chart provided below we find that treasury rates increased as soon as a QE-program was enacted, and fell immediately after its termination. Take the TSY 10 year for example; as soon as QE1 was implemented rates rose rapidly from a low of 2.08 per cent to a high of 4.01 per cent. What is striking about this is the fact that the low was set three days into the program, while the high was set three days after the program. A similar development occurred under the QE2 program. Rates reversed their sharp downtrend from the peak set around the end of QE1. A notable difference in the QE2 cycle was the apparent front-running by the market. Investors had obviously learnt how QE impacted various asset classes, so the rate peak came at the middle of the program, not at the end as witnessed under QE1. Still, the collapse in rates right after the program ended was significant. Then came the maturity extension program (MEP) with a dual – unofficial – mandate. First of all, it was designed to “twist” the yield curve by swapping short term treasury paper for long term. In other words, the yield compression was now a wanted result; while in QE1 and 2 the fight against deflation was used as excuse to bail out Wall Street. In the MEP it was the federal government that needed bail out. And this brings us to the second, unofficial, reason for MEP. With forward guidance incorporated, short term paper was essentially positively yielding cash equivalents for the primary dealers. The Fed told them that prices on shorter maturities would be fixed. Voila, the federal government could easily sell papers along the curve. That rates fell during the MEP-program should not come as a surprise. When QEEVA was introduced on the other hand, rates remained stable at a low level. Rates started to climb first when hints of “tapering” to the QEEVA program was provided. This is the exact opposite of what we have seen in previous programs! Source: Federal Reserve (Fed), own calculations We also looked at the impact FOMC have had on the stock market since Greenspan “ the-stock-market-causes-GDP” took the helm at the Federal Reserve. We tested the FOMC impact by compiling an alternative SP500 index. The alternative index simply traded at 0 on both the day of an FOMC press release and the following day. On all the remaining days the alternative index traded just as the real SP index. The result speaks for itself: Without trading on the FOMC-days the index is actually trending downwards. So much for following William McChesney Martin`s dictum of “ taking away the punch bowl just as the party gets going. ” The gang that took root at the FOMC under the Greenspan and Bernanke era added liquor whenever the chance presented itself! In terms of capital destruction no single individual has probably caused more harm to the world than Greenspan; and we include the global elite from 1939 to 1945 when making this statement. More specifically for the stock market we see that the SP index behaves more in line with QE1, QE2 and MEP. It goes up until the punch bowl is actually taken away. Then it plunges until Bernanke panics and pour more liquor to keep the party going. Source: Federal Reserve (Fed), own calculations We now know that the stock market behaves as usual, so what can explain the marked change in the treasury market? To answer this we looked at QE relative to marketable treasury bills, notes and bonds outstanding. However, the MEP paired with forward guidance complicates our analysis, so we need to find a way to compare apples with apples. We therefore express both the treasury holdings by the Fed and marketable paper outstanding in 10-year equivalents. Let us start with the Federal Reserve. The first chart depicts the stock perspective, namely the total asset side of the Federal Reserve ledger. The second chart shows the flow perspective in terms of weekly change in both mortgage backed securities (MBS) and treasury securities (TSY). Source: Federal Reserve H.4 (Fed), own calculations Source: Federal Reserve H.4 (Fed), own calculations We then convert this information to ten year equivalents by utilizing the data found in the System Open Market Account (SOMA) held by the New York Fed. Source: Federal Reserve Bank of New York - SOMA (Fed), own calculations Source: Federal Reserve Bank of New York - SOMA (Fed), own calculations We then proceed to outstanding marketable TSY paper available. We use the data as reported by the Treasury Monthly Statement of the Public Debt (MSPD) to get a breakdown by maturity. However, in order to put the whole thing into context we present the reader with a much more interesting chart compiled with statistics from the “ Historical Statistics of the United States – Colonial times to 1970” and the Federal Reserve Z.1. statistics Source: Federal Reserve Z1 (Fed), Historical Statistics of the United States from Colonial Times to 1970, Bureau of Economic Analysis (BEA), own calculations After some chart-porn we are finally ready to answer the question posed at the beginning: why do interest rates behave different in this QE-cycle while stocks do not? The next chart show the reader the staggering fact that the Fed is about to be the buyer of TSY. If they maintain the current program the Fed will gobble up more than 100 per cent of net issuance by December. In other words, the Fed has become both the indiscriminate buyer and the only buyer. If there is one thing economist learn at University it is the simple fact that the price is set at the margin. But what happens when one single buyer becomes the entire market all the way up to the margin? Well, at that point the “market” price is fully dependent on this single buyer. Source: Federal Reserve Bank of New York – SOMA (Fed), US Treasury Direct – Monthly Statement of the Public Debt (MSPD), own calculations The main difference between QEEVA and the previous programs is simply that the Fed has become the market. So when the Fed hints about tapering, the front-running holders of already issued TSY jump the ship and overwhelm the Fed program. Prices drop, yield spikes and the stock market is getting an additional boost as bonds-sellers park their cash in the SP bubble! Conclusion: The multi-bubble machine called the Fed is at it again. This time they managed to create a gigantic bond bubble which will dwarf both the dot-com- and the housing bubble combined. Average: 5 Your rating: None Average: 5 ( 17 votes)
Japan: From Quagmire To Abenomics To Collapse Submitted by Eugen Bohm-Bawerk on 07/28/2013 12:34 -0400 Activist Shareholder Bank of Japan Bond Census Bureau default Demographics Fractional Reserve Banking Japan Monetary Base Monetary Policy Money Supply None Twitter Yen Japan: From Quagmire To Abenomics To Collapse This blog post was originally posted at Bawerk.net . You may also follow us on twitter @EBawerk Part I: Toward the abyss Japan has been in a stable, but unsustainable, equilibrium for years. Its leaders know it is unsustainable and in their immense wisdom, decided to manage the whole system in order to achieve a sustainable development. However, this will prove fraught with danger since moving an unsustainable system away from its steady-state runs the risk of unleashing a gale wave of unintended consequences. The problem of course is that the peoplenow in charge of moving the Japanese system from its current constellation have absolutely no idea on how to get it from where it is back on sound footing. The reason is simple, as with most policy quacks they are taught by other quacks. Some of the teachers even have Ph.D.’s. in quackery to prove to lesser quacks who truly master the art of quacking; we call them economists. Economists are a group of people that look upon the social structure called the economy with condescension and arrogance. They see it as their task to manipulate other people in order to build confidence. If confidence is high, then economic growth, prosperity and bliss will come automatically. The problem is that when people feel down they do not spend money. And when people do not spend money, economic growth turns into contraction and people feel even worse in what turns out to be a self-reinforcing cycle of less growth, less confidence and even less growth and so on in perpetuity. This is basically how Prime Minister Abe and his newly installed lackeys at the Bank of Japan see as the situation in Japan today. In the early 1990s people lost confidence for some unexplained reason, and because the supposedly omniscient masters did not do enough manipulation back then, confidence was never regained; which essentially explains the predicament Japan is in now. The real reason is more fundamental though and we will explain what happened in Japan. Before we do so, it is of the utmost importance for the reader to know what gross domestic production, or gross domestic consumption (GDC) as we call it, really is. It is essentially the amount of money spent on goods and services over a specified period of time. In other, and more “technical terms”, we can say that GDC is comprised of the monetary base * leverage in the fractional reserve banking system * money circulation. The central bank manufactures monetary base at its own discretion. However, the broader money supply is dependent on a solvent banking system. If banks under the jurisdiction of the central bank are insolvent they cannot increase their balance sheet, or leverage up on the base money. After a financial crisis it is therefore hard for the central bank to create inflation since legacy assets held by the banks will weigh on their ability to create additional demand deposits. In addition, as banks hold back on money creation, transactions will inevitably drop. As you can see, it is actually true that an activist monetary policy can create growth in gross domestic production, but only because the very concept measures inflation of broad money supply and nothing else. From this follows a surprisingly well hidden fact; the debt to GDC ratio is important only because it measures whether debt is created at a rate faster or slower than monetary inflation. This is why it has become so important for the new Japanese administration to create nominal GDC growth. They are desperate to inflate away the big pile of debt they have accumulated of which there is zero chance of ever being repaid. Put bluntly, they want to default covertly through inflationary resource confiscation. If we look at the monetary breakdown of Japanese GDC we see a negative velocity effect. That means only a fraction of existing money circulates during the period of measurement (one year). However, by raising it to something greater than one – ceterius paribus – Japan could lift its GDC from the current level of Yen500tr to Yen800tr and simultaneously reduce the debt ratio from 230 per cent to 140 per cent! Alternatively, they could double the monetary base and again – ceterius paribus – reduce the debt ratio to around 100 per cent. Please note that none of this creates any value at all, but only help to redistribute real wealth to the government which can squander it as the ruling class see fit. Source: Bank of Japan (BoJ), Cabinet Office (CAO), own calculations The second thing the reader needs to know about economics is that debt can have a positive or a negative effect on wealth creation, depending on what kind of deb. If the debt is made with the intent of making a subsequent sale, id est. a business loan, it will help increase capital accumulation. However, if the debt is taken on to fund current consumption it will decumulate the capital stock and make society poorer. In our work, we usually divide between good, bad and destructive debt. Good debt consists of business loans. Bad debt is defined as household and financial sector loans while government debt fit right into our category called destructive debt. Basically, debt need to have an intrinsic yield high enough to pay back the resources it helped claim from society, plus interest, for it to be considered good. Note, debt that is dependent on others yield or production, such as taxpayers, is not self-sufficient and cannot create prosperity. With this in mind we look at what happened to Japan before and after it crashed in the 1990s Source: Bank of Japan – Flow of Funds (BoJ), own calculations Japan in the 1980s and 1990s show a remarkable resemblance to the US during the 2000s. In the midst of bubble finance, the system funded bad debt in droves. This pulled capital out of the system without replenishing it. Conventional wisdom tells you that the 1980s was a decade of spectacular growth for Japan, but truth be told they actually got a lot poorer by consuming capital. When the Bank of Japan (BoJ) felt compelled to raise interest rates sharply from 1989 to 1990 the malinvestments could no longer be funded. The bust was inevitable. When the bubble finally burst as a consequence of the misaligned capital structure, the government stepped in and bailed out the bad debt by adding destructive debt. Of course, this policy benefitted the corporative part of the economy, such as big banks and politically connected businesses, but at the expense of zombifying the economy. Bad investments continued to drain the system of scarce capital, while the government doubled down in a desperate attempt to kick-start money multipliers and velocity. But money multipliers could not be expanded because the banking system was rendered unable to increase base money leverage since they continued to fund capital projects that bled the economy dry. In a desperate attempt to rectify the lack of “private sector” initiative the Japanese leaders schooled in Keynesian multipliers knew that their wasteful spending would at one point fund itself through higher tax income. Now, that did not work out as they hoped as spending soared while income kept falling. Source: Ministry of Finance (MoF), own calculations and projections Note that bond issuance has been larger than tax revenues since 2009 and under very conservative assumption will continue to be so for the foreseeable future. Japan has ended up in a rather peculiar situation in which revenue abide by the” laws” of deflation while spending reflects that of a system in inflation. Conclusion In an attempt to bail out unsound investments, Japan cemented an economic structure that was unsustainable. This lead directly to persistent capital consumption and a “lost decade(s)” Part II: From quagmire to Abenomics. Unsurprisingly the policy lead to a massive increase in debt levels. In order to feed the unsustainable system, consecutive Japanese governments threw money at it with the perverted consequence of depriving corporations of capital. Government debt grew inexorably while corporations got squeezed. Source: Bank of Japan – Flow of Funds (BoJ), Cabinet Office (CaO), own calculations The central bank reacted by lowering interest rates from a peak of 6 per cent in the winter of 1990/91 to a low of 0.5 per cent in 1995. In addition they expanded their balance sheet by lending to banks against legacy assets. The insolvent banking system and the overleveraged household sector did not crave liquidity for more than refinancing outstanding bad debt, so the increased base money ended up as excessive reserves in the BoJ deposit account. Sounds familiar? Source: Bank of Japan (BoJ) Source: Bank of Japan – Flow of Funds (BoJ), own calculations Now, the initial measures taken may seem tepid compared to what we have been accustomed to today, but these were dramatic and unprecedented steps back then. It is also striking to see how similar the development prior to the bust and response taken after was compared to what we see across the western world today. Needless to say, it does not bode well for the future. As Japan moved forward in the 1990s and 2000s it became obvious, even to the policy makers, that the situation was unsustainable, with nothing less than a Greek style fiscal Armageddon on the horizon. Tax revenues were dropping and bond issuance rising. New taxes introduced to fund the rapidly growing state harmed private capital accumulation even more. The corresponding spending growth was found mostly in debt service- and social costs. Those two categories account today for more than 50 per cent of total spending, and bar a default or dramatic cut in transfers to a rapidly ageing population, will only continue to eat into the overall budget. Source: Ministry of Finance (MoF), own calculations For Japan is not only in a dire fiscal situation, they are also the oldest country in the world. Social spending is growing exponentially and the demographic dividend they enjoyed up to the mid-1990s is now turning against them. There will be many more dependents and far fewer breadwinners as we move forward. The demographics in Japan would overwhelm the country even if their fiscal situation was sound. Source: US Census Bureau, own calculations Source: Ministry of Finance (MoF), own calculations The only thing clueless policy makers could come up with in this dire situation was even more of the same. With the election of Shinzo Abe in December 16 th the people of Japan elected a man based on a promise of shake up the Bank of Japan. The resemblance to William Jennings Bryan and his famous “Cross of Gold” speech is eerie. The Japanese would not be “crucified on a cross of gold” any more. They elected a man who promised to free them of the shackles from a strong yen and save the day with creation of paper wealth. This is the perfect recipe for disaster. Conclusion: Public debt is reaching ridiculous levels and spending will only grow from here. When big bulges of old people start to retire they will be dissaving and it will be impossible for the big banks to use excess deposits to roll over government debt. Collapse is at this stage inevitable. Part III has recently been submitted to Bawerk.net Average: 4.545455 Your rating: None Average: 4.5 ( 11 votes)
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