Thomas Frank on the Democratic Party, Their Credibility Trap, and the Beleaguered Middle Class

“In its quest for prosperity, the Party of the People declared itself wholeheartedly in favor of a social theory that forthrightly exalted the rich—the all-powerful creative class.

To the liberal class, every big economic problem is really an education problem, a failure by the losers to learn the right skills and get the credentials everyone knows you’ll need in the society of the future.

Professional-class liberals aren't really alarmed by oversized rewards for society's winners; on the contrary, this seems natural to them -- because they are society's winners. The liberalism of professionals just does not extend to matters of inequality; this is the area where soft hearts abruptly turn hard.

Of course Republicans do it too. The culture wars unfold in precisely the same way as the liberal virtue-quest: they are an exciting ersatz politics that seem to be really important but at the conclusion of which voters discover they've got little to show for it all besides more free-trade agreements, more bank deregulation, and a different prison spree.”

Thomas Frank


"What is most important for democracy is not that great fortunes should not exist, but that great fortunes should not remain in the same hands. In that way there are rich men, but they do not form a class."

Alexis de Tocqueville


"People of privilege will always risk their complete destruction rather than surrender any material part of their advantage.  Intellectual myopia, often called stupidity, is no doubt a reason.  But the privileged also feel that their privileges, however egregious they may seem to others, are a solemn, basic, God-given right.  The sensitivity of the poor to injustice is a trivial thing compared with that of the rich."

John Kenneth Galbraith

The examples of the credibility trap are apparent, especially in the Democratic Party because their own contradictions are so glaring.  It is harder to see in the Republicans because their hypocrisy in serving the wealthy faithfully in economic matters while duping the public with inflammatory cultural issues is almost a trademark.

But as Frank relates, the middle class is being badly abused and neglected by both professional political parties.  And this is unfortunate, because it is a strong and stable middle class that provides a large social organization its coherence and durability.

I do not see meaningful reform coming until the status quo in American party politics is repudiated and renewed again with a more democratic focus on people.

The powerful, those who built and have been fabulously rewarded by the current system, will oppose any threat to their exorbitant privilege, which they see as perfectly equitable and justified and fully well-deserved, with all the wiles and power moves that they can deploy, even against their own.

When one has all that a normal person could possibly need and even want, those who continue on playing for blood, who are generally 'afflicted'  in some manner— for those personalities it becomes all about the game, and winning for its own sake, and power.  And there will never be enough people and things to fill their emptiness.

This growing dichotomy, this gulf between appearance and reality, between policy and outcomes, will not only strain the social fabric, but historically is the kind of human dynamic that can light a fire in hearts and minds, despite increasingly desperate attempts to discredit, suppress, and then extinguish it.

And there are too often consequences that no rational person would wish happen.  And yet they do, and with some striking, almost cyclical, regularity.  Such is the weakness of human nature, and the wonderful power of self-delusion.

Caught in the Aftermath of a Minsky Moment by a Credibility Trap

"I think this is where the academics are kind of clashing with the practitioners. I think on paper negative rates make a lot of sense if you're running academic models, but in reality they make no sense.  Having seven or eight trillion dollars of debt trading at negative rates, having thirty year JGB's trading at fifty basis points is absolutely ludicrous. This experiment that's going on we all know will end poorly at some point in time, I just don't know when that time is...

I think that one of the fears that they have is a run on cash. If they told you and I that they're going to tax your deposits by a hundred basis points, well it's better to put it in a safe or under your mattress. And that's why you see a resurgence in gold. The more they move to negative rates, the more gold is gonna take off because there's no carrying cost."

Kyle Bass, Hayman Capital

This comment [quoted below] about a recent column by Paul Krugman is written by someone I consider to be an ethical and intelligent mainstream economist. It was so simply and eloquently put that I am using it here on my site.  It expresses almost perfectly why there is a broad movement growing in the US that rejects all the  establishment candidates from both parties

And it goes without saying that the words I put in front of it are completely my own, and most likely go far beyond what this person said so well.  We have disagreed on some things at times, but I hope in an amicable way.  This is how knowledge is created from the raw material of data.

What I find to be highly significant right now is how badly the status quo is assessing and reacting to this current political situation.  There is an unmistakable desire for honesty, transparency, and reform in this country, especially among the young.  But those who view themselves as the powerful, the thought leaders, seem to be retreating into a comfortable story that they tell each other.   It is a story about how good things really are, if only the stupid and naive public could be made to understand it. Few may actually believe it in their hearts, but it is a story that serves their cause: it is expedient.

I don't wish to single Mr. Krugman out, not at all, because he is hardly the worst among mainstream commentators and economists.  He is merely symptomatic of these times, more a follower and participant than an original thinker or leader. Like his peers, he has seen others doing it, and it has worked for them.  As Louis Brandeis once said, the government teaches by example.   

What the privileged fail to realize is that by continuing to push forward with their winning strategy, because nothing powerful enough has risen up yet to stop them, will at some point shake the American republic to its foundations.

Since our current system of finance and money is so heavily reliant on confidence in its integrity, I fear that this break in trust, that is already showing signs of advanced development, will lead to a serious tear in the social and economic fabric.  This is certainly something that we have seen before in this country, but thankfully not for many, many years.

Some people will view this gathering storm as an opportunity to gain more power for themselves and their friends, and will attempt to use it as such.  And some ruthlessly so I am sure.  And that is dangerous. It is unfortunate that real change that can provide a more constructive alternative is not happening, because the very serious people, what Larry Siummers categorized as insiders, keep rationalizing the status quo to themselves, and deny anything that suggests that the prevailing system has failed, that they may have failed in anything.  I have called this the credibility trap.

If the fortunate few decide to continue to push down this rising trend towards reform and justice, eventually resorting to force as confidence and willing compliance continues to decline, then history suggests that the Pandora's box that they will open will carry many of them, and far too many innocents, to a place where they would not wish to go.

We do not have 'capitalism;'  what we have is plunder.   We have a corrupt system of kleptocracy ruled over by the big money power of a relative few individuals and organizations, what FDR called 'organized money'.  And a system based on the primacy of selfishness, power,, unbridled greed and a free hand to cheat and deceive and manipulate will serve to create a kind of hell on earth.

I think it is time for all of us to take a deep breath and seriously consider where our passions are taking us, and what this spirit of contentiousness and willfulness is causing us to say and do. The ultimate irony is when we become that which we hate.  I would wish all of us to step back and see what we may become before this goes too far.

Saturday, April 16, 2016 at 05:32 AM (in reaction to the two recent PK columns on Sanders):

"Paul Krugman has decided that if there is any way to destroy a decent, humble, caring, thoughtful candidate for president, a candidate who offers the possibility of actual change in domestic and foreign policies that have created so many problems for so many people for so long, if there is any way, any word that can be used, to destroy that candidate then destruction there will be.

What Krugman has done however is show me what wild intolerance, what authoritarian political thinking in an American context amounts to, and the attempts by Krugman at destruction of a decent person and candidate will with me turn me completely away from the desired effect.

Were I a student of Paul Krugman, I would smile and nod as if in agreement and very quietly go in the opposite direction. After all, I fortunately learned early on which teachers always had to be agreed with.

I have no idea where this disdain for a truly decent person and candidate comes from, obviously not from the person, nor do I care about the psychology on where the disdain comes from. Krugman is being as fierce as can be, harsh as can be. I record the fierceness and harshness, know such an anti-intellectual posture can never be for me and move away.

"As you know, I’m only saying these things because I’m a corporate whore and want a job with Hillary.

Related: Paul Krugman, Why I Haven't Felt the Bern


Jesse in reply:

Paul, you will obtain no objection to that self-confession from me, although it is purposely and dramatically overstated so as to discredit it.   No, you are caught by an idea, to a particular economic arrangement that seems to be failing most people, and to what history is likely to see as a systematic and continuing abuse of power.

This is not capitalism; this is mere plunder by a powerful few. We are caught in the aftermath of a 'Minsky Moment' by a credibility trap, and it has been going on for far too long.

In your defense, there is a lot of this sort of creative rationalization of a rotten system going around these days. It is fashionable.   And that is a big part of the problem.

What Does the Recent Fall in the Price of Gold 'Prove?'

"And this means that it is deeply, deeply wrong to think of rising gold prices when bond yields are low as some kind of symptom of monetary excess."

Paul Krugman, 10 September 2011

So don't think of gold as an indicator of monetary excess when it is going up,  but when it is going down it can be used to prove your hypothesis of a lack of excess, as PK does in the new article cited below. 

But there is some wiggle room between excess and hyperinflation, and degrees of excess, and I would agree if the argument he presented was well reasoned and well tempered, which is it not.  It is just over the top, playing to the crowd. Well, that's show biz, and perception management.

I really would have preferred not to reference this article below, but I am afraid I must because it establishes one important point. It does not have much else to recommend it.  And I have decided to avoid most other articles like this that deal in 'goldbuggery.'  You know where I tend to place my focus, and name calling is what one does when their arguments are insubstantial.  And then it becomes de rigueur on both sides, and thought fails. No need to add to the hysteria.

In taking his victory lap for his economic theory in this manner, Mr. Krugman endorses the ability of gold to predict monetary dislocation and policy error. I would also add that it is a strong indicator of real interest rates.  When they are negative they are good for gold, and when they offer a fair return, they are not.  This is without regard to the nominal level of inflation, Paul.  But you knew that, or ought to have known that.  But the key takeaway is that Krugman admits that gold does matter, and he watches it.  And will use it in his data when it serves his purposes.

I think that is important. He would likely dodge this and say that it does not matter, but merely shows that some people believe that it does and therefore they buy it. When one deals in otherworldly economic models, they can make them do almost anything. The thing that economics does best is rationalizing as you wish after the fact.  There is a paper, by the way, about Gibson's Paradox by Larry Summers that PK can read if he wishes to see a more 'wonkish' linkage.  Oh that's right, he caught up with that in 2011.

But I guess it is ok to use it as an indicator that all is well on the monetary front when it is going down, as he does today.

I will take an aside, and say that the claims that monetization are not yet causing inflation proves nothing. All that proves is that one can give wheelbarrows of money to their friends to prop up their bad debts, as long as the friends keep the money in their own bank and trading accounts.  The first result will be bubbles in financial assets, and the accumulation of wealth in a narrow segment of the target population. 

But I do think that we have passed from the phase where gold is irrelevant and can be ignored, to the point where even 'very serious people' must take it seriously, and deal with it in some manner,  with fear and ridicule.

Open interest generally does not RISE when prices are falling, and people are fleeing away from a particular investment vehicle, especially a commodity. When a 'long' position sells, it closes, and open interest, or the number of contracts, goes down. Open interest increases on falling prices when short selling is pressing a market lower against a steady demand from legitimate investment. But that is a detail, and not in his models.

As you know I only became interested in gold because of my study of currencies back in the 1990s.  And I do not favor a return to a gold standard, although it is painfully obvious that the existing monetary arrangement for trade based on the dollar is as unstable as is the euro in Europe, and for many of the same reasons.  The dollar regime has simply lasted longer, for some of its own scale and reasons. 

And I do not favor austerity as a policy, and believe in the efficacy of stimulus when applied effectively and directly to a demand/employment condition of deadlock or stagnation brought on by a credit bubble collapse as we are in now.   I am what would be called a 'progressive.' 

But all the stimulus one can muster will not repair a system that is still broken and corrupt.  It is like sending aid to some third world nation where it is diverted by the ruling warlords from ever reaching the people, save for some crumbs.  And Paul Krugman, in his zeal for his cause, seems to miss this. 

That is the FDR model, applying stimulus directly to creating jobs and increasing the median wage while reforming the system. And that is most certainly not what we have today.  We are bailing out the banks while allowing their abuses to go unpunished, and the system to be substantially unreformed, for the sake of  'the system,' or more properly the status quo.  And the status quo is quite happy with things as they are, because they are gettin' paid as they say in the vernacular.

I have said for quite some time that the outcome I see from this mistaken policy is stagflation, or as some may choose to call it, the new normal.  It is the price that the public must pay to sustain a system of corporatism, historic inequality, and injustice.

Repressing dissent like the Occupy Movement, limiting people's investment options, and managing perceptions will only go so far.  One needs an exit strategy from a period of sustained and pervasive policy error and corruption.  And that must include real reform and change.  The new normal is not self-sustaining, but is an unnatural equilibrium that must be maintained by force, economic and otherwise. 

Once again, a plea for civility. The future will be what it will be. And all the name calling and repression, financial or otherwise, all the violent language on both sides will only make things worse. 

Chris Hedges is right on some critical things.  This is tied in with the death of the liberal class as an effective bulwark against the rapaciousness and lawlessness of corporation and those who serve their interests, the rise of extremism, and the decline of the individual overshadowed by the rise of the state.   In the parlance of the 1960's,  the liberal class has 'sold out.'  The price varies.

When the tide goes out you not only see who is naked, you see who they are naked with.

Willfulness can take many forms, whether it be a personal desire for riches, or power, or just to be 'right' at any cost, even through control frauds.   It is when those desires override conscience and justice that things begin to go horribly wrong.  It teaches by example, it is contagious, and it breeds.

So the only thing that this recent episode in the metals markets proves is that if you give the Banks enough money and regulatory latitude they can bend the markets to their will. And we already knew that. What is going on in the precious metals markets is apparent to those who look at the trading patterns, the volumes, and the open interest.

The only thing that is lacking is the exact reason, the motive for this, the disaster that has been averted, or the corruption and decay that is being concealed.

Markets are based to a large part on confidence. And when confidence breaks it is hard to get it back. And these jokers on Wall Street are stretching it to the limit, whether they realize it or not.

Gold Does Not Glitter
By Paul Krugman
April 15, 2013

So, the slide in gold has turned into a rout. As Joe Weisenthal says, this should be seen as really good news, because it offers strong evidence that the goldbug/inflationista view of the world — which says that we need to stop all efforts at monetary and fiscal stimulus lest we turn into Weimar — is, in fact, all wrong.

But Joe is, I think, deluding himself if he imagines that this will make any difference. After all, the inflationista view of the world has been repeatedly, devastatingly wrong on many fronts — interest rates, inflation, the effects of austerity. Has anyone other than Narayana Kocherlakota (who deserves big props for intellectual flexibility) actually changed his or her mind in response?

In fact, by and large the goldbug response to each failed prediction has been to claim that evil government officials are hiding the truth. Interest rates are low? That’s because the Fed is suppressing them. How can it do that, year after year, without causing runaway inflation? Oh, actually we have runaway inflation, but the BLS is faking the numbers (and independent measures, like the Billion Prices Index, are part of the plot).

Read the entire article here.