As you can see, M2 has been growing at a reasonably steady rate for the past 15 years.  BASE made up a reasonably constant proportion of M2 up until the end of 2008.  At that point the Fed had to dramatically increase the BASE money supply in order to keep M2 expanding at roughly the accustomed rate.

There are a number of different ways of looking at this.  It could be that this is simply the new normal and the the Fed’s balance sheet will henceforth make up a higher percentage of the overall money supply than has generally been the case.

Alternatively, you could view the situation as essentially benign.  The Fed’s balance sheet is relatively large because it had to respond to the crisis.  It will shrink over time as the economy recovers.  My guess is that this is Chairman Bernanke’s preferred assessment.

The pessimists among us tend to believe that quantitative easings are a bit like wars in the Middle East.  Much easier to get into than out of.

I’m inclined towards pessimism, or at least skepticism about the existence of free lunches.  The Fed’s extraordinary actions over the past few years may well have taken some of the bite out of the crisis, but my guess is that we pay for them through either inflation or uncomfortably tight monetary policy down the road.

(Data source:  St Louis Federal Reserve)

3) A plan that exempts from future Medicare cuts anyone born before 1957 — about a quarter of the population, which includes me — is neither brave nor serious. See “canny or cynical: take your pick” above.

This may not be brave, but is definitely serious.

Old people are numerous and prone to voting.  They also have a choice.  If you are in your mid-fifties or older today there is a reasonable chance that you will be dead before the country’s fiscal situation implodes.  It therefore makes sense to veto any proposal that reduces benefits.

There are plenty of voters under the age of 54, but they are in a very different situation.  Barring untimely demise, these Americans will live to see the nation’s fiscal Waterloo.  They therefore have an incentive to accept painful reforms in order to avert the otherwise inevitable disaster.

The political reality is that no reform that adversely impacts current AARP members has any chance of adoption.  It is neither brave nor serious to ignore that fact.

In fact, the firm’s real talent isn’t knowing what the price will be, but what the price is. And Goldman clearly hit the mark with the $50 billion valuation implied by its $450 million investment in Facebook last week. The firm also rigged up a deal to make $1.5 billion in Facebook shares indirectly available to its well-heeled clients, and every sign is that the offer was oversubscribed.

If the offer was oversubscribed then Goldman clearly did not “hit the mark”.  Having more willing buyers than shares to sell means the price was set too low and Goldman left money on the table – to the detriment of their clients, the existing shareholders of Facebook.

At the present time Democrats currently have two plausible alternatives:

1. Pass, however grudgingly, the President’s tax deal
2. Dig their heals in and ensure that:
   1. The President is severely damaged (What use is a President who can’t even rally his own party?)
   2. Democrats take the blame for everyone’s taxes going (Can’t avoid that when you willfully torpedo a bipartisan deal)
   3. The replacement deal to extend the Bush tax cuts will be done by the next Congress, in which Democrats will have even less leverage (Because that’s what happens when you lose the house)

Since most Democrats are not actually certifiable, it is only a matter of time before they back down and take option 1.

There are a fair number of people who seem to believe that, if they stick to their guns, house Democrats will somehow be able to negotiate a better deal.  This is pure fantasy.  The Democrats have precisely zero leverage in this situation.  Republicans already have a deal they like.  If the Democrats refuse to get on board they will be more than happy to blame Democrats for a tax hike, then force an even better deal next year.

Since all of the above is obvious to pretty much everyone involved, the political tactics being employed by house Democrats seem thoroughly mystifying.

One plausible explanation is that this little piece of political theater is aimed, not at the general public, but at Democratic primary voters.

Democrats who are losing their seats are taking the opportunity to position themselves as true guardians of the faith, just in case they want to run in 2012.  While those Democrats who survived the recent slaughter certainly don’t want to open themselves to a potential primary challenge from the left by being seen as too willing support a deal that the folks who vote in Democratic primaries aren’t too fond of.

Everyone knows a climb down is coming, but precisely which Democrats are held responsible for this humiliation by the party faithful may have a big influence on a lot of Democratic careers.

This was entirely predictable, but very disheartening for those of us who would like to see the deficit reduced mainly through expenditure control.  What Republicans have apparently failed to grasp is that time is not on the side of fiscal conservatives.  As this insightful article points out, the longer we wait the more inevitable tax increases become:

To understand the stakes facing fiscal conservatives, one must appreciate how demographics, program indexing methods and political realities combine to stack the deck against them. By bipartisan consensus, we won’t cut the benefits of those already in retirement; we won’t send a $2000 check to an 85-year-old widow in January and then cut it back to $1600 in February. Both parties (including the most conservative members) repeatedly reaffirm their dedication to this principle.

As a result, with each new class of retirees there is a new set of politically inviolate benefit obligations. Moreover, due to the wage-indexation of the initial benefit formula, the minimum threshold of politically acceptable future benefits rises with each subsequent class of retirees. So, with each year of delay the share of the problem eventually solved by tax increases inevitably rises.*

Well before 2037, unless we cut benefits for those already retired, a tax increase could not be avoided even if the entirety of payments to new beneficiaries were shut off. Thus, if action is delayed for several years, virtually all of the “solution” will consist of tax increases.

Our potential success in constraining the growth of taxpayer burdens therefore depends largely on when a solution is enacted. It is not so simple as deciding a particular solution is faulty, tearing it up, and trying again in a few years on the hope that conservatives’ political position will then be stronger. Such a strategy naively ignores demographic realities. Enacting Simpson-Bowles by contrast would allow conservatives to lock in constraints upon cost growth that simply will not be achievable under a delayed solution.

Republicans may not actually be serious about deficit reduction.  Or they may be calculating that they will be able to negotiate a better deal next year.

If the latter is true they are making a serious gamble.  The election largely wiped out Democratic moderates.  The Democrats who remain are likely to be more committed to closing the fiscal gap with new taxes, and very much aware that they only need to stall in order to get their way.

The Republicans have the opportunity right now to shape the deficit debate by endorsing some variant of the ‘bi-partisan’ Simpson-Bowles plan.  If they instead try and push a Republican plan next year the chances of getting a deal drop to near zero.  Unfortunately for the country, failure to get a deal is effectively the same as voting for higher taxes.

* Reference to a chart showing projected increase in Social Security beneficiaries has been omitted from the quote

“I hope there’s a money tree somewhere to pay for all of this.”

“There used to be a money tree, but the magic pony ate it.”

“Don’t worry about the magic pony.  It may eat money trees, but it craps pure un-rationed efficient high-quality government health care for every American.”

The 1950s was the era of the 90 percent top marginal tax rate, and by the end of that decade live gate receipts for top championship fights were supplemented by the proceeds from closed circuit telecasts to movie theaters. A second fight in one tax year would yield very little additional income, hardly worth the risk of losing the title. And so, the three fights between Floyd Patterson and Ingemar Johansson stretched over three years (1959-1961); the two between Patterson and Sonny Liston over two years (1962-1963), as was also true for the two bouts between Liston and Cassius Clay (Muhammad Ali) (1964-1965). Then, the Tax Reform Act of 1964 cut the top marginal tax rate to 70 percent effective in 1965. The result: two heavyweight title fights in 1965, and five in 1966. You can look it up.

The lesson can be summed up in two words – INCENTIVES MATTER

1. The consumers and taxpayers saved from a disastrous attempt at reform
2. The Democratic caucus which has been saved from having to pass it’s own disastrous attempt at reform

Scott Brown may just have saved a lot of Democratic political careers.