Deriving Strength from Weakness

Too-big-to-fail (bailed-out) financials are short the dollar and long commodities. The weak dollar strengthens their balance sheets, repaying the TARP with a profit supported by quantitative easing ($2 trillion so far with another half trillion expected).

QE--considered free, easy, no-risk money by big financials--weakens the dollar to make too-big-to-fail strong, which is exactly what we do not need.

First of all, the QE supporting the economy-of-scale is not, free, easy, and at no risk. It weakens everyone else to make too-big-to-fail strong (Hamiltonian political-economic modeling).

For every virtue (strength) there is a vice (weakness), and it is philosophically loaded. The Hamiltonian model, for example, postulates that making sure the elite stay economically strong in zero-sum (levying taxes that the non-elite pay with a regressive burden) makes everyone strong (promotes the general welfare).

Jeffersonians, arguing in opposition, expostulated the Hamiltonian model bonds the non-elite to a ruling class elite that has bonding authority through the force and legitimacy of public authority, extending the rents (the risk) just like the crown did.

Jeffersonians were technically correct. Essentially, the rich buy bonds (the debt) to be paid by the non-rich. The business cycle ensures the bonding authority--reduction of net worth, bankruptcy, foreclosure and an increased demand for debt. The debt over-accumulates into a crisis proportion. It is supported by leveraging schemes perpetrated by an over-accumulated capital that "makes" (rigs) markets, extending the risk (the rent) for non-elite consumption, just like the crown did.

The non-elite are stuck with the risk and the elite enjoy the reward, making us all strong?

The Hamiltonian thesis is not only logically inconsistent but empirically, technically, disconfirmed with a persistent tendency to weaken the dollar with inflation and slow growth. It is no coincidence that a weak dollar benefits the wealthy and hurts everyone else.

A weak dollar punishes fixed incomes and incomes that are in decline, like we have now. It is the result of an over-accumulation of wealth and slow growth (what is supposed to make us all strong, and growing, in a Hamiltonian fashion).

That free, easy, no-risk money QE provides big banks is not free--it is the product of declining net worth. It is not easy--there is nothing easy about living with your net worth in decline and nothing easy about applying the political process to keep it that way. It is not without risk--keeping it that way is at considerable political risk (like King George found out) and, despite what mainstream economists say, the risk does not vanish into thin air like middle-class net worth supposedly does. It is conserved. It goes somewhere.

Technically, it is clear that bailing out too-big-to-fail firms, and a monetary policy (QE) that finances this economy-of-scale consolidation instead of growth, is a scheme for deriving strength from weakness. The risk is consolidated (conserved) and distributed to "the masses" (The Sovereign People) just like the crown did, accumulating royal-sized bank accounts (and gamma risk) derived at the expense of commoners. The model is clearly Hamiltonian.

QE is modeled to support a weak dollar, benefiting the rich at the expense of everyone else. If the $2.5 trillion is not used to write down the principle and generally replevin the losses of the middle class, QE will be a net gain for the elite and a net loss for the non-elite. It strengthens our weaknesses, supporting the deflationary trend and the need for budget deficits, which is the core-inflation component the Fed is trying to achieve.

Supposedly, the slow growth will check the Fed's bias for inflationary risk. The model is largely void of adding supply which strengthens the dollar and reduces unemployment--it does not fit the Hamiltonian model of gaining strength from the weakness of others (a moral hazard that is not assumed by the model).

The moral hazard is the most important assumption of economic modeling, giving philosophical content to empirical values. A certain, critical value of the model is considered to be a categorical virtue or vice, and therefore imperative, depending on the assumed moral hazard.

While we tend to think of ethics as being value that is unempirically derived, we still have to measure and identify what indicates the assumed value, or how we "know" something is a hazard (the psychology of signal detection). In the same way, we tend to think science yields value not philosophically derived. Knowing something, however, is a philosophical pursuit.

How you know when you "know" something is a function of the scientific method (the philosophy of science), distinguishing between belief (like ideology) and knowledge (objective truth). Arguments that tend to adhere to ideological assumptions tend to ignore objective truth to avoid having to throw out the model based on legitimate, empirical knowledge.

For example, the Fed has announced QE-2 and, at the same time, that big banks can once again pay dividends. This means that QE will begin distribution to shareholders (and the risk inversely distributed in proportion to the number of shares you own). The reward largely distributes to rich people with newly consolidated middle-class wealth, and the risk distributes proportionately to commoners whose wealth has been recently consolidated.

The new (ex nihilo) capital will be converted into more consolidated wealth (the power to command the marketplace) just like Hamiltonians say it should (by moral imperative).

Based on all the empirical evidence, however (technically speaking, of course), consolidation is the problem to be solved, not the solution. What is empirically confirmed (signaled) is the political will (the exercised imperative of power) to support the Hamiltonian model.

Confirmed is the power to apply a model that assumes consolidation of wealth and power is a virtue that paves the path to the good life (moral living), not a vice. How does this model, however, stand up to what we know?