Illusions and Delusions

A binomial dialectic gives the illusion of progress. We should not delude ourselves that the the new tax cuts will be more effectively distributive.

Distributive measures added to the tax-cut extension will be consolidated by merging financial interests. The short-term relief provided suffers the illusion of a counter-cyclical, long-term distributive trend. All the rhetoric about the unfairness of the extension is a Burkeian gaming strategy, binomially determined with the illusion of caring about the people that are sure to suffer a massive detriment the tax policy will extend. Hope that springs eternal, especially in this case, binomially determined, admits to delusion.

Ninety-eight percent, despite the compromise, will suffer no illusion of the extended detriment. The benefit will accumulate into the top two percent with the appearance of populism provided by the Tea Party delegation who very callously oppose the extension of unemployment compensation, for example, which is hardly a populist sentiment.

Interesting how direct access of populist sentiment is limited to conservative values and principles. While unemployment compensation is sure to reverse the deflationary trend by providing the demand businesses need to reduce unemployment (everybody wins in a populist fashion), the Tea Party advocates tax cuts for the rich, which will cancel-out the extended benefit of the compensation, extending the risk of default instead.

Tea Party sentiment will extend unemployment as an expected value, suffering the delusion it will cause employment and thus deficit reduction. Unemployment, however, in Reaganesque, supply-side fashion, does not cause employment and reduce debt. Unemployment rises, the demand for debt increases, and risk continues to accumulate in the gamma proportion.

The expected value of the accumulated risk is about a trillion dollars. Half of that is already consolidated. The other half is expected to be consolidated as monetary and fiscal policy combines in the next two years to fight deflation.

Interest rates will be low to "accommodate" deflation and "ease" the mounting debt. Monetary policy will be applied to prevent a depressionary trend (a point at which the gamma risk is poised for catastrophic distribution and marginal tax rates must settle at 90% to conserve the stakes). A macro-risk ceiling is maintained to conserve the value of the risk (the arbitrage spread).

Accommodation and easing gives the illusion of prosperity. It appears that wealth is expanding, but this is actually risk being extended to consolidate the reward. Equity values, for example, will be pushed to peak levels (along with peak oil, etc.), forever suggesting a recovery that, again, is a hope that springs eternal (the benefit forever arbitraged--economically hedged if not politically compromised--into a detriment).

Slow growth, persistent unemployment and the demand for debt will be risk derived from a financial sector that continues to consolidate. The consolidation of too-big-to-fail institutions will be allowed to be even bigger to manage the extreme demand for debt (the risk of default). As the demand for capital requirement increases, the economy deflates. If there is not a double dip, it will be very close, nevertheless. Preventing the double dip is to reduce the gamma risk (demand for increasing marginal tax rates), not economic growth.

A binomial realignment, as we have seen, will not reverse the deflationary trend, but will bounce it along the upper limit. The political economy of any portfolio is to play the bounce off the ceiling (which measures the expansion and contraction of the risk arbitraged in the gamma proportion).

Investors should not suffer the illusion of risk being managed in an alpha proportion. Preventing a double dip is for the purpose of extending risk into default and consolidation of the equity. It is not to spread the risk, which prevents default, consolidation, and the demand for debt (reducing gamma to arbitrage in the alpha dimension, measuring real economic growth and cost-saving innovation).

A populism that calls for extreme marginal tax cuts while reducing budget deficits suffers a delusion of massive proportion. A current populist sentiment that suffers the illusion of power by merely accepting conservative principles is to allow the empirical power of popular consent to be used against them.