Selecting for Cynicism in the Ivy League

I did high-school in Chile, graduating in 1985—but I only got around to applying to U.S. colleges in 1990. When I finally did apply, I was a flat broke 22 year-old—naturally, I applied only to need-blind schools: There was no point in getting into a college I couldn’t afford. So I pinned my college hopes almost exclusively on Ivy League schools, because all of them had need-blind admissions. 

Baker Library Tower
Dartmouth College

This wasn’t as fool-hardy as it sounds. I had the grades and the test scores—99 percentiles. But what I later realized made me so attractive to admissions committees was that I’d done stuff: Travelled through the Peruvian jungle, complete with a run-in with Shining Path guerrillas. Protested the Pinochet dictatorship, and gotten sprayed by a guanaco (water cannon) for my troubles. Lived through a 7.7 earthquake. Taught English as a second language. Written a first novel.

(I’d also done a few things which I realized wouldn’t go down so very well with the various admissions committees—like arranging my first FMF threeway at 19, brokering a sizable pot sale at 20, and other such adventures. These achievements I kept to myself.)

So when the envelopes from the various admissions committees finally got to my mailbox, they were all fat—I was lucky enough to have my pick of schools.

For fairly ridiculous reasons mostly having to do with the nearby Skiway and the shiny computers every freshman was supposed to get on arrival, I chose Dartmouth as my school. When I got to Hanover as a proud member of the Class of ‘95, I was surrounded by kids who were completely different from me.

Not in their brains or even their backgrounds. Most of them were—like me—private school kids of well-to-do parents. Most of them were—like me—incredibly smart, yet fairly arrogant about those smarts. Most of them—like me—had read pretty much everything, and could talk—knowledgeably—about just about anything.

But there was one big difference between me and my peers:

Community service, and volunteer work.

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The Tidal Forces Ripping Europe Apart

In July of 1994, a comet named Shoemaker-Levy 9 crashed into Jupiter—it was quite a sight. 

According to astronomers, Shoemaker-Levy was a comet that was captured by Jupiter’s gravity twenty or thirty years before it was discovered. As the comet circled Jupiter, at one point it passed the Roche limit—the line around a large mass where its gravity will rip apart a smaller mass by way of tidal forces. 

Comet Shoemaker-Levy,
after Jupiter’s tidal forces
ripped it apart. 

By the time Shoemaker-Levy crashed into Jupiter, tidal forces had had their way with the comet. As the picture shows, it was no longer a single comet—it was a string of small lumps of rock and ice

Tidal forces are pulling the European Union apart. 

On one end, European governments have taken on debt and liabilities—both public and private—which they cannot possibly meet. These debts and liabilities are near-term enough that there is only one way to characterize many of the smaller European states: They are insolvent. 

On the other end, Europe is unwilling to carry out sovereign default of any one of its member nations. Indeed, there is a sense that—constant drumbeat of the Germans aside—Brussels is unwilling to even contemplate the very notion of sovereign default and debt restructuring. Brussels and the European Central Bank believes in bailouts, not default, because they believe that the entire European project rests on the non-default status of all the EU members. They believe that all EU debt is backed by the entire EU, no matter how irresponsible the EU country that issued the EU debt. 

As we watch Europe get closer and closer to the Global Depression, we are seeing as these two opposing forces—insurmountable debt vs. unwillingness to default and restructure—pull the continent apart as surely and relentlessly as tidal forces. 

Let’s first look at the debts and responsibilities the Europeans have taken on, which they cannot fulfill. 

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New Posting Schedule

To My New Readers and Kind Fans, 

Due to personal circumstances, from now on I will be posting about macro-economics, business and finance every Tuesday and Friday at noon EST. 


My everything-else post will come out on Sunday at 6pm EST. 

GL

The Boiling Frog: Effects of QE2 On The Bottom 80% of the U.S. Population

An old metaphor: If you take a frog and drop it into a roiling pot of boiling water, it’ll jump right out, unscathed. But if you put that same frog in a pot of cold water, and then slowly raise the heat, that frog won’t move. It’ll stay in that pot of water, calm as can be, right up until it is boiled to death. 

  

Would you boil this little guy?

I’ve been arguing that the unpayable Federal government debt, coupled with irresponsible Federal Reserve policies, will inevitably lead to a hyperinflationary event and currency collapse. In order to prepare for a web seminar on hyperinflation in America, I’ve been looking at the issue of how to safeguard assets before a currency collapse, and how to identify opportunities in the midst of a hyperinflationary crisis. 

  

But along the way—inevitably—it’s led me to consider the issue of the effects of hyperinflation on the American people. Not even hyperinflation—just regular old rising consumer prices: How will they affect the average household.
 
It’s disturbing.
 
Even if you don’t buy my hyperinflation call in the least—and a lot of very smart people don’t—the recently announced Quantitative Easing 2 policy of the Federal Reserve has had and will have a profound effect on the dollar.
 
And a profound effect on the American people—especially the bottom 80%. 

Bernanke’s stated purpose in QE2 is to spark consumer spending, and thereby reignite the economy. To do this, Bernanke and the Fed will pump $600 billion into the Treasury bond market, in monthly $75 billion increments—at minimum. According to the Fed’s statement, if more “liquidity” is needed, then by golly, more liquidity will be pumped into the economy.

  

QE2 is really the official start of a race-to-the-bottom debasement of the U.S. dollar. 

No one doubts this—and no one would dispute that such a currency debasement will bring about upward pressures on consumer prices across the board. Indeed, this is the explicit purpose of QE2: The Fed is trying to induce inflation, as it believes that inflation will bring about a reignition of the stagnant American economy.

A lot of commentators have been discussing what QE2 will mean for equities and the various bond markets. People are talking about the Treauries’ yield curve—but not much about what QE2 will mean for the rest of the American population: The middle class, the working poor, the poor, and even the upper-middle class.
 
So let’s give it a go:

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The Acid-Laced Satire of Pixar’s Movies

Since the release of its first movie, Toy Story, in 1995, Pixar animation studios has had one of the most remarkable winning streaks in motion picture history. 

  

As of this year, they have released eleven movies—all of them international blockbusters. Combined, these pictures have grossed $6.63 billion (unadjusted) worldwide—just at the box office. God Alone knows how much Pixar has grossed through video and DVD sales; an additional $10 billion is a reasonable guess. 

  

But if Pixar’s movies had been merely successful, they wouldn’t be noteworthy. There are lots of film studios that have released extraordinarily successful pictures that no one remembers—or which no one wants to remember. 

  

What sets Pixar apart is the quality of its movies: They’ve all been good. 

  

Some were merely very good, like A Bug’s Life (1998) and Cars (2006). Several have been excellent, like Monsters, Inc. (2001), the three Toy Storys (1995, 1999, 2010), Finding Nemo (2003), Ratatouille (2007)

  

A few have transcended the medium of film altogether, and become art. I would argue (very good-naturedly) that The Incredibles (2004), Wall-E (2008), and Up (2009) all fit into the category of art. (As an aside—again, very subjectively—I would say that the most beautiful of all the Pixar movies was probably The Incredibles; it was certainly the best lit, with a painterly eye for composition and color that would have pleased Néstor Almendros or Gordon Willis.) 

  

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Two More Nails In The Dollar’s Coffin—the Republican “Victory”, and the Fed’s QE2

So on Wednesday, not only did the Republicans win control of the House of Representatives, but the Federal Reserve finally took the plunge with Quantitative Easing 2—

—in other words, on the very same day, the U.S. dollar got the ol’ one-two punch—right to the groin: 

  

First the spend-and-cut-taxes Republicans won the Congress—and then, the Fed opened the money spigot with QE2. 

  

Light at the end of the tunnel?

Talk about a bad hair day! The issue is no longer if the dollar will be killed—it’s now a matter of when.

  

Full disclosure: Though I am a fiscal and social conservative, I have always sneered at the Republican Party’s fiscal policies. 

The Republicans have always espoused “smaller government” and “fiscal prudence”—but in the last 40 years, it was the Democrat’s president, Bill Clinton, who actually made government smaller. Shrub, Bush, Ford, Nixon, even the dubiously sainted Ronald Reagan all made government bigger: Bigger in absolute terms, bigger as a percentage of GDP—bigger government has been the real mantra of the Republican Party. 

As for “fiscal prudence”—nominally, the Republican Party is in favor of balanced budgets. But ever since Richard Nixon said, “I am a Keynesian”, there hasn’t been a single Republican president who has managed to balance the budget. Cutting taxes without cutting spending is not a viable definition of “fiscal prudence”—but that’s what Republicans have been selling as viable macro-economic policy for close to 40 years. 

  

The reason is simple. Long ago, the Republicans and the Democrats came to a tacit understanding: The Republicans let the Democrats spend all they want on various Big Government programs, while the Democrats let the Republicans cut all the taxes they want and spend all the money they want on defense. That way, both parties look good with their voters. 

The cost of this Faustian bargain? The Deficit. 

  

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The Contradictions In The Life of A Fluffer

A “fluffer” is the person on a pornographic film shoot who makes sure that the male lead has an erection, and can thus “perform” at the appropriate moments. Remember Boogie Nights? Remember the fat little tub-o’-lard brilliantly played by Phillip Seymour Hoffman? The one who had a secret homosexual crush on Mark Wahlberg’s porn-star character? That’s a fluffer. 

  

Brad DeLong is Paul Krugman’s fluffer. 

  

Brad DeLong

DeLong is an economist at UC Berkeley, a Neo-Keynesian like his charge. (I’m sure I’ll get an earful for that characterization). Basically, Krugman and DeLong and their followers think that fiscal spending via deficits is the only way to turn around the economy. Fiscal spending, according to this macro-economic worldview, is the determining factor in the growth of a modern economy.

  

DeLong has worked with Krugman on quite a few different projects—but DeLong’s real job is making sure Krugman stays hard, and stays aimed at the appropriate hole, as it were. I mean, after all, he’s Krugman’s fluffer—that’s his job: To keep the talent erect and ready to perform, while dispatching any and all distractions. 

  

Full disclosure: I was one of those distractions that got Krugman all soft. I wrote a piece where I pointed out that Krugman was clearly opening the inference for readers to think that a war might be the only solution for America’s fiscal problems. 

  

DeLong called me “batshit insane”—which I sort of liked, actually. Sort of like the name of the super-villain in a cheesy James Bond rip-off: “My name is Insane—Batshit Insane.” I was thinking of having business cards made up. 

  

Anyway: Recently, DeLong called for either the resignation of David Broder of the Washington Post, or the resignation in protest of the Washington Post staff, or a combination thereof. Why? Because according to DeLong, Broder’s most recent editorial was calling for a war with Iran, in order to save the U.S. economy. 

  

Hmmm . . . 

  

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