Friday, March 26, 2004

Dr. Greenspan, turn off the bubble machine!

The Federal Reserve Governors are said to have a primary responsibility for preventing inflation or deflation in the economy and maintaining a stable economic environment free of recessions and bubbles, through the use of monetary tools like regulating interbank interest rates and controlling the money supply. Their activities are closely linked with the Treasury Department, whose Secretary meets with the Fed Chairman, Alan Greenspan on a regular basis. Since the Fed is a quasi-independent organization linked to the Federal Reserve banking system it tends to look out for banking and securities interests, and government interests, while trying at the same time trying to make responsible decisions protecting the economy at large. This can be a daunting task so criticism of its actions should never be levied without caution and qualification.

In recent years, the threat of inflation has been minimal, while the economy has been sluggish, so the Fed has dropped interbank interest rates to very low levels. In turn, bank prime rates, mortgage rates, and consumer credit rates have dropped accordingly. This results in temporary dislocations, which later result in more long term effects. For example, when mortgage rates drop, existing homeowners refinance, dropping their monthly mortgage payments so they have more to spend on consumer goods. Consumers run up their credit buying balances since interest payments are lower. This stimulates a sluggish economy. Senior citizens and others whose income derives substantially from investments tend to shift their investments out of interest bearing instruments and into equities or real estate where returns may be higher, at least temporarily. As this process progresses, home buyers also make adjustments. Since their payments are less, they can afford to pay more for the real estate they buy. This drives up real estate prices, offsetting to some extent the effects of low interest rates. Eventually, bubbles start to develop. The real estate market starts to inflate, creating a real estate bubble, and the demand for equities in the stock markets begins to outstrip earnings, creating a stock market bubble.

Meanwhile the sluggish economy is causing a reduction in tax revenues, and federal and state deficits start to develop, the effects of which are often discounted because interest rates are low. But, eventually, either the economy picks up and inflation rears its ugly head and interest rates are increased to meet it, or as in the current environment, the economy contines to be sluggish, employment refuses to pick up, and the bubbles get larger and larger and eventually burst.

If the Fed continues to view only aggregate inflation rates to trigger interest rate increases, the bubbles (inflation in real estate and equity prices) continue to grow. The government will continue to run deficits which will threaten federal retirement programs like social security and medicare, and the seniors, who rely on these programs and regular investment income will be put in jeopardy. Dr. Greenspan has recently called for reductions in these retirement benefits at the same time as his low interest rates are driving seniors away from stable long term interest based investments into speculative equity investments.

It is my contention that interest rates should start to be increased now. Although aggregate inflation rates are still low, real estate and equity price inflation rates are high. The real estate market is already overheating in growth areas, and the P/E ratios of stocks are at historically high levels. The markets have recognized this so the stock market volatility has increased markedly with fits and starts on every news story hitting the press. These low interest rates, and the stock and real estate market bubbles that develop from them, discourage long term investment and encourage speculation, and puts those dependent on investment income in jeopardy.

Dr. Greenspan, it’s time to turn off the bubble machine!

Saturday, March 06, 2004


This is a discussion of the methods and purposes of discourse. People engage in discourse for many reasons. It can be for fun, to strengthen ones resolve on currently held positions, or to get at more fundamental truths about the way things are.

Engaging in discourse for fun usually involves humor and put-downs (zingers) to make a winning point at the adversary’s expense. There is no claim to logic.

Discourse to strengthen one’s resolve on currently held positions also does not rely on logic as much as selecting information which supports one’s position, while suppressing or ignoring information which conflicts with it.

To get at more fundamental truths requires close attention to avoiding logical fallacies, and close examination of the underlying assumptions that are basic to a firmly held position.

If two or more people are engaging in a discourse, but there is not agreement on what the purpose of the discourse is, it can become very frustrating. If one person is trying to make serious points to get at more fundamental truths and another is engaging in the discourse for fun or to strengthen a currently held position there is a basic disconnect which can lead to frustration or anger.

What follows applies mainly to what must be avoided if the purpose of the discussion is to get at more fundamental truths.

Logical Fallacies

Logic involves deducing conclusions from accepted assumptions through a series of steps where each step can be deduced from the prior step, leading to valid conclusions. Appeals to authority, ad hominem attacks, testimonials, inflammatory rhetoric, etc. are considered logical fallacies which cannot be used to support or validate a position. Logic fallacies are welcome in discourse for fun, but generally are not valid in strengthening a currently held position, unless the position is held on primarily emotional grounds. Discussions based on faith require no logical foundation, and logical fallacies are often used in such discussions. Logical fallacies are enumerated at several places on the internet. Here are a couple:


Engaging in discourse to get at truth involves first examining assumptions that each party brings to the table. For example, if one party hold that free markets always bring about the best economic results and the other party does not accept this assumption, there is no need to discourse further. At that point, an examination of the assumption should proceed and arguments should be made for or against the assumption are in order. Or qualifications should be placed on the assumption that both can agree on.


Clichés are frequently used catch phrases that can mean different things to different people. For example, “liberal” can mean as the dictionary says, 1. Befitting a man of free birth, 2. Bestowing in a large and noble way; generous; bountiful; openhanded, 3. Bestowed in a large way; abundant; bountiful; ample, or 4. Archaic Free from restraint; unchecked; licentious. A so-called liberal person using the term might interpret it in the first or second way, while a so-called conservative person using it might mean it in the fourth way. Likewise, the term “conservative“ might be used by a so-called liberal person to impugn the motives of a so-called conservative person implying stinginess or fixed attitudes, whereas the so-called conservative might view it as conserving worthwhile values. Other clichés often used without definition to put down groups, rather than attribute meaning include “socialist” and “fascist”. The use of clichés in discourse is just another logical fallacy if a common meaning is not clear to both parties, and is usually met by returning “zingers” which put down the cliché user. This only leads to anger and frustration.

Emotional Arguments

Emotional arguments do not submit to logical scrutiny. Any attempt to argue logically against a position that arises from emotions is futile. Therefore, in any discourse aimed at finding truth, if one feels emotion creeping into the argument, it’s time to sit back and relax and examine why the emotion is entering the argument. Are critical underlying assumptions being challenged indirectly? What are they? Are they valid? How you been offended by a zinger? Are you frustrated by flying clichés? Are you responding to an illogical personal attack, etc? Find the cause before proceeding.

Selective Argument

It is human nature to gravitate towards literature or pundits that reinforce one’s closely held positions. In the process, it’s easy to overlook logical fallacies used by authors or pundits expounding one’s own position, while recognizing those being used by someone promoting an adversarial position. For this reason, it’s wise to avoid authors and pundits of all stripes, who use emotional and one sided arguments to support their positions. You can usually detect these people by their predictability. The same applies to think tanks. They are usually sponsored by people or organizations that want to promote a specific viewpoint. Therefore, if you know the viewpoint they are promoting you can predict what their position will be.

In making arguments which aim at truth, it’s usually better to make your own logical arguments. If that’s not possible, present only the arguments of others which do not appeal to logical fallacies or which attempt to present both sides of the story. It’s usually not hard to tell if someone is trying to be fair-minded on an issue.

The Fog and Snow Index

People who make long-winded, round-about arguments in an emotional way usually don’t clearly understand what they are talking about or are intentionally trying to make up for lack of truth with verbosity. If one clearly understands a point, arguments can usually be made in a concise and clear way.

Pundits usually have to provide some opinion on a regular basis whether they really have anything profound to contribute, or not. This usually leads to weak, long-winded arguments about minor or perfunctory matters that are best left to undiscriminating readers.

The same applies to some book authors. They publish all their recent columns in a book to make some more money. Or they have to publish a book every couple years to make a living. Or they have a TV or radio show and see a book every couple years as a way to make some extra money from the same audience they have cultivated on their show. They take advantage of the second purpose of discourse, the reinforcement of currently held positions, without regard to the logical validity of the arguments.

Are the positions you hold in your overall best interests?

The positions one holds may not arise from logic at all. We adopt positions because our parents held them, because they accord with our religious convictions, because our circle of friends holds them, because we like an advocate of a particular position, because we haven’t really thought about them, because they applied in a previous time but may no longer be in our interests, and many other reasons. Times and attitudes change. It’s worthwhile to take the time to reevaluate our positions and our basic assumptions from time to time to make sure what we are advocating is really in our own interests. I believe there are many people today who hold positions which may have been valid in the past, but which no longer are in their own interests. There are also people who hold positions that they think will be of advantage to them in the future, when they have moved to a higher station, but the higher station is an illusion which never comes. And, people tend to identify with power and celebrity vicariously, and therefore overlook advantages which accrue to power and celebrity but will never accrue to themselves. In a few words, promote and vote your self interest. The democratic system depends on it.