The following is the beginning of an opinion in the UK Telegraph by Rob Arnott (founder and chairman of Research Affiliates) and John Tamny (editor of RealClearMarkets). Both men are ideologues and charlatan's of economic theology.

Back in the dark economic days of the late 1970s and early 1980s, truly revolutionary change on taxation improved the economic outlook in both Great Britain and the United States.

With demand-driven Keynesian thinking having proved ineffective as an economic stimulant, classical thinkers possessing a greater affinity for the works of Adam Smith and John Stuart Mill successfully filled the gaping policy void. Nigel Lawson perhaps articulated the new/old thinking best when he noted Britain's fundamental economic defect "was not a shortage of demand but a failure of supply."

[SOURCE: Rob Arnott & John Tamny | UK Telegraph | 12 January 2009]

This is a high level statement of opinion. Yet it is an opinion that erroneously equates coincidental events without understanding or even acknowledging macro-economic developments. Raising or lowering taxes alone do not all by themselves stimulate the broad crescendo of economic developments that occur in any age: especially, in the absence of legitimate new investment opportunities (except buying and selling paper) or when self-interest demands forms of investment that are narrow-minded and monopolistic.

For instance, no increase or decrease of taxation would have changed the economic outlooks in 1252. Or 1811. Or 1888. Or 1935.

During the 1970s and 1980s, massive changes in consumer goods, consumer entertainment, electronic devices, and computer technology opened up a tremendous amount of investment opportunity. Videos created a video production industry, video stores, and VCR recorders. Ditto the cassette tape and the CD industry. Cable tv required electronic boxes that had to be installed, and cable programming boomed from 3 to 5 stations, to 30, 40, 80, and more than 100. Consumer goods created half of the food industry at the supermarket, and the aluminum can changed the the way soft drinks were distributed. Computers went from the size of a desk to sitting on a corner of the desk, and computers intervened everywhere in every single line of industry and service, from the assembly line of factories to the registers at retail outlets to the desks of accountants and journalists and college students.

Lax taxation did not create this historical situation, and high taxation levels would not have restricted what occurred at all. The changes to human culture was too tremendous.

If you buy something for $8 and sell it for $14 under the given tax conditions, raising taxes will increase the cost to $9, but then you can sell for $15. Notice that the increase gets factored into the cost. The resulting revenue is thus increased, and all salaries come out of revenue. Since the difference between sale and cost is still $6, nothing has occurred which changes the incentive of the business. This is true within a range of percentage rates. I am using a simple analogy as a metaphor for how taxation alone does not "open up", "release", or "create" investment opportunities.

This was known by John Stuart Mill during the 1800s. The same John Stuart Mill for whom (according to the Telegraph opinion) "classical thinkers" have a greater "affinity" by making insinuations quite antithetical to the original thinker's reality based ideas.

The median income since 1970 however has not changed, while larger and larger percentages of wealth accumulated to the top 0.5%. Like the galleons of Spanish gold, there was so much money and investment opportunity that no one paid attention to the unequal distribution of economic gains. Social costs increased on those who worked hard but earned less value from their wages. The rate of poverty has also increased. Government meanwhile created deficit spending and downsized investments in social and economic infrastructure.

Here's another silly statement.

But history says tax increases are rarely the revenue generators that they're presumed to be. As Adam Smith wrote, high taxes "frequently afford a smaller revenue to government than what might be drawn from more moderate taxes".

More importantly, history in both the UK and the US shows that the best way to increase tax revenue from top earners is paradoxically to tax them less. The percentage of federal revenues paid by the top 1pc of US earners rocketed (from 15 to 35pc) when the rate of taxation fell.

What?

Notice how the putative "fact" at the end does not have a date, or a context. It's just rounded-off numbers. The ACTUAL history is that if you have a lot of loopholes and a higher tax rate, you can cut out the loopholes and decrease the tax rate a small amount (from 90 to 70 for instance) and raise more money through taxation. This is true even while the opinion's quoting of Adam Smith is akin to finding a passage in the bible that justifies your favored predilection. The statement is anecdotal.

But the silliness continues throughout the "opinion". Here is the last statement in the Telegraph "opinion" piece.

When all's said and done, there is no company formation and there are no wages without capital. Rather than creating false growth through wealth redistribution, the better, more-proven path would be to reduce penalties on work and investment for all. If this were done, the UK economy would boom due to increased productivity and any lack of consumption would quickly become an afterthought

WRONG.

The cycle of investment opportunity is fickle. It's occurrence is due to historical timing. All taxes do is distribute the burdens of society and economic infrastructure as a cost to government, because making social and economic costs as an individual burden is exploitative and (more importantly) terribly inefficient. We tax ourselves and pay the costs because the alternative will cost too much and tend to focus on short-term profit at the expense of long term development, when a long term horizon of 20 or so years is necessary. Private investors can't wait 20 years before showing a 2 or 3 % gain.

This is the real lesson, if there be one to learn, by Mr. Obama.

But the authors of the opinion in the telegraph article only presume a specious policy decision, and then use it to attempt limitations on the issue of government involvement and government investment spending. This is like presuming that flushing the toilet will inhibit free-thinking, so the discussion gets focused on how to contain the smell, and everyone wonders why the pile of smelly shit just won't go away. Sooner or later someone will have the courage to admit the need to flush the toilet. Instantly the false prophets will raise a howler about the ramifications. Free-thinking will go away, they will say, but not everyone will be intimidated by the backward stupidity.

Free-thinking can't go away. Flushing or not flushing the toilet is not going to inhibit or promote free-thinking, but it will create a pile of stinky manure. Likewise, investment opportunity or the lack thereof is not a function of taxation.

This notion of taxation being able to create investment opportunity in absence of the context and the economic conditions is, like the toilet example, inhibiting the understanding of how we function as a healthy, creative, effective society. Similar to the above analogy, if you apply the wrong solution to a misunderstood problem, all you get is a bigger mess.

I didn't come up with this analogy, but the story is a relevant parallel to the economic situation between the United States and the Asian exporters that manufacture more than 95% of everything Americans buy.

7 people crash on a desert island, 6 Asians and one American. The 6 Asians are assigned jobs, one fishes, one hunts food, one collects firewood, one grows vegetables, one makes clothes and another builders shelter. The American’s job is to live in the shelter and consume the food and clothes. He feels good about himself - after all, the 6 Asians only have jobs because of him, he gives their day some purpose.

How long before the 6 realize they are better off kicking him off the island?

Proof once again that math is an architecture built upon assumptions. If the assumptions are wrong, so is the math.

For instance, 2+2 = 4 and 2 * 2 = 4 are both equal to 4. But that is because multiplying by 2 means adding the same number twice. If however we built an entire theory upon this happy coincidence we might start thinking 10 + 10 = 10 * 10 , and be wrong by 80 digits.

Click here for the webpage.

THE FLOWCHART THAT BECAME THE FINANCIAL CRISIS

picture courtesy of Barry Ritholz at ritholtz.com

Dr. Jurgen Zentek, a professor at the University of Veterinary Medicine Vienna, reported that he fed one group of laboratory mice traditional corn and another group GE corn made by the Monsanto Company. The GE crop is bred to survive being sprayed by herbicide and to produce its own insecticide. The mice maintained their diets for 20 weeks, long enough to produce four litters of offspring.

Zentek found that the mice who dined on modified corn had fewer litters, fewer offspring, and more instances of complete infertility than those receiving a conventional diet. Not only that, but the infertility of the GM-corn-fed rodents became more pronounced with each passing litter.

I'll source it later.

Anything that uses a GM corn product, or a derivative of corn, is tainted. This includes the infamous High Fructose Corn Syrup. Quite possibly the modified proteins that the DNA produce to credit its own insecticide is having a negative effect on the hormonal systems of the mice. Now ask yourself, what are the long term implications upon the human hormonal systems from something humans ingest every single day for 40 years?

This could easily be determined with more research and study. I wonder how much of the "Breast Cancer" and "Prostate Cancer" research is doing here. Or is that well-advertised fund merely creating drugs for the drug companies to sell?

It is my belief that the rise in cancer rates due to hormonal dysfunctions is related to diet : eating quantities of processed food, of which for most processed foods (soda included) is nearly 90% composed of GM corn or GM corn derived products.

These are a series of quotes from the blog of Barry Ritholtz.

Thank you Barry.

No one can argue that the trend has been down. Volatility often signals a trend change. For how long, i don’t know.

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It means that I can’t hold on to a position for a decent gain, and it means I get to practice trading through drawdowns. I hope this choppy period is over soon, but I’ll keep taking my setups as they come no matter what. All I know is that streaks happen, they’re unpredictable, and I sure like them better when they’re the winning kind!

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I think nasty choppy trade like this indicates lighter volumes and itchy trigger fingers. There isn’t much conviction out there in terms of market direction. We are clearly waiting for some significant macroeconomic event to drive the market in one direction or the other. Of course I think that this will be some kind of reflationary event.

It’s hard to know what might be the trigger but it is clear that the $ will not go to the sky, and treasury yields will not go to zero. I have been seeing quite a lot of volatility in the long bonds, and that often presages a fall in price, whatever the instrument.

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This is, in my experience, typical as markets progress toward capitulation. The tempo increases, as do the violence of the oscillations, until even the most dedicated traders are “thrown” from the horse or wisely decide to step back to the sidelines and let others’ blood be shed instead of their own.

Kinda like playing Space Invaders, or musical chairs.

We’re some time away from the end of this game, IMHO. We’re not seeing swings increasing in size … yet.

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today the Dow was up 150, but the Nasdaq was flat, the Philly semiconductor index was down 2%, and the XLF was down nearly 1.5%. This baby’s going lower; however, I’d rather not initiate a new short position unless we get a significant rally (at least 8%).

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The short interest data I have looked at recently tells me that hedge funds are not providing the liquidity they have in the past by shorting stocks. They are deleveraging and are basically hamstrung. They will get creamed with redemptions, as who will pay 2 and 20 for mutual fund type returns? The result is a market that has lower than capitulation volume with choppy trading. Also a market where no short squeezing can take place on a macro basis.

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As leverage leaves, paper stays, creating relatively light volume. Programs are moving levels quickly, as correlation rises. Arbs can’t hold positions.

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It’s bigger trouble than that because as equities continue to fall banks have less to loan. Why banks are all invested in each other I have no idea but it’s going to be part of what will cause the total collapse. The Asian banks are now taking it from falling housing. Each bank will take out the next. Who’s the next Lehman I have no idea. Puts are too expensive on banks.

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Well, the market will go lower. It is simple. “Leverage” is another word for “Margin Financing”. When the “outsourcing” of computer risk modeling is allowed…. the end result is extreme leverage on the non-fundamentally sound derivative CD “Swaps” or “Insurance” if you prefer. You have to admit a great “Marketing” job was done all-around. Question(Thinking)…. If there were less people around (Population) when the Great Depression occured (Industrial Economy, People with the means/mindset to survive)……. Since there are alot more people now (Financial Economy) would it stand to reason that with a low unemployment level say @10 to 15% and our special American social system (Unemployment Benefits and the like) in place could this lower rate now be just as financially devestating as the Great Depression rate of @25%?? I think it might be. I think an economic belief is dying. Monatary policy has its uses, but, when the pendulum swings further in one direction(Forced by a belief) it will swing back harder in the other. (Chicago School). Heterodox is the only way to go. Understand the systems as if it were a living, breathing entity.

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What I see in this is analogous to the screech when a mike gets too close to the speaker. Sometimes it is just unpleasant but it is sometimes destructive of the speaker cone or amplifier components if it is allowed to grow too loud or go on unchecked for too long. Even if not destructive, it is usually beneficial to stop the ringing so that the sound system can return to “normal” function (even thought the ringing is also a normal characteristic of such systems).

To correct the deafening screech, one must either move the mike away from the speaker (reduce the feedback coupling) or turn down the amplifier (increase the loss in the feedback loop) or change the time response (add delay) in the system.

If the analogy of amplifier feedback system analysis holds, in the economic feedback system of the stock market, to correct this ringing (price volatility), the system must have a loss and or delay introduced to prevent excessive instability. This solution is simple in concept but it is very difficult in the complexity of real world politics to make such an adjustment.

The wheel is turning and you can’t slow down,
You can’t let go and you can’t hold on,
You can’t go back and you can’t stand still,
If the thunder don’t get you then the lightning will.

-–The Grateful Dead , The Wheel

Deductions and Standard Deductions on your taxes are the same thing as the government giving you a subsidy.

Think about it.

You’ve already paid the money. When you fill out the tax forms, you are applying to receive some of this money back or — god forbid — how much you owe. But you already gave the government the money last year.

Subtracting from something you’ve already paid is the same as someone giving you money to pay for something.

I just thought I’d make this thought process clear for anyone out there who cares.

I am responding to this blog post by Matthew Yglesias, who is an interesting and intelligent fellow -- except that his economic views tend to be colored more with a philosophical predilection than are flavored by a view of history.

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even if we manage to halt the slide into recession we’ll have created a situation in which it’s difficult to return again to growth.

We ain't halting this slide. Every volcano must run its course, and right now the pyroclastic flow is still not near completion.

Also, government providing funds for an end result is different than government paying off the debts of the company, or buying the shares of the company, or appointing officials to the management of the company.

Acting like this is a fluke or an historical aberration is indicative of someone who doesn't know the history of laws and government interaction with the legal basis of the marketplace over the last 350 when we were a few British colonies on the East coast, or the same said history for the entire 4,000 years of human civilization.

Corn is subsidized by the government. So are you. That's why you get "deductions" and "Standard deductions" on your tax form. So are various vegetable crops, and peanuts, and steel, and even the big daddy, oil. More than 1,000 companies are allowed to use Bermuda banks to skirt the tax laws. When toxins from China were found in baby food, when spoiled meat and poisoned spinach spread across the nation, government actions had everything to do with the banning and recalls.

Selling government bonds and using government debt instruments as elements in the portfolio baskets of companies is an inescapable fact.

And don't you ever wonder why a lot of "public service ads" appear on radio shows and various advertising outlets, ... yes, just like the favored national newspapers back to the Andrew Jackson days, government business is another form of subsidization.

Did someone say Halliburton?

Government is always involved, one way or another. We however make the choice as to how government -- we the people -- is involved and to what extent. We can choose the best use of resources or we can deny that those resources exist and call it socialism like it was a whore.

And furthermore ... as for this comment ...

A lot of this talk has an air of socialistic hubris about it...outside of a relatively narrow range of utility-type activities, [state-owned enterprises] are collosal flops

Utility-type activities only??

The post office The FAA The DMV The Police The National Forest Service OSHA The Coast Guard The National Guard CSPAN The GAO

With all due respect, Mr. Yglesias, Me-thinks you applied the philosophical principle to thickly.

After eight years of having Republicans call me an un-American troop-hating fag-loving socialist, after months of John McCain embracing the hate to a level where his own supporters were calling out for Barack Obama to be assassinated, no one is going to be permitted to tell me with a straight face that "oh you know, both sides do it."

Your side was abominable. Your side was hateful. Your side race-baited. Your side gay-baited. Your side lied like we've never seen in recent presidential campaign history. Your side used a tax-cheat who would do better under Obama's tax proposal to be your everyman on the issue of taxes. Your side, in a veiled effort at race-baiting, said Obama doesn't put his country first. Your side had the audacity to call Obama a socialist. Your side suggested he was a Muslim. Your side suggested he was a terrorist. Your side suggested he was Osama bin Laden.

Spare me the crap about how both sides do it. You people are a disgrace, you've been a disgrace for eight long years, and all your hate and lying and venom and vitriol finally bit you in your collective fat ass.

Democrats don't do nasty, and they certainly don't do it well. Lord knows I wish they did, but they don't. Republicans elevate it to a religion. You are the party of Rush Limbaugh and Ann Coulter and Sean Hannity. Angry, bitchy, bitter and elitist. What do we have to compare? Jesse Jackson, I often hear from my Republican friends. Um, maybe in 1980 when he was relevant. It's been 28 years, got any other examples? Michael Moore, you say? What has Michael Moore said - name one thing - that's comparable to the filth that regularly issues forth from Limbaugh, Hannity and Coulter and, of late, McCain and Palin?

Democrats, when they skewer (which isn't often enough), do it with biting truth. Republicans skewer, early and often, with vicious lies. It goes back to a more general philosophy that liberals have: If we just tell them the truth, the people will agree with us. Republicans are far less sanguine. They know that a good lie beats the truth any day of the week.