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SOME people with hypersensitive sniffers say the whiff of future inflation is in the air. What’s that, you say? Aren’t we experiencing deflation right now? The answer is yes. But, apparently, for those who are sufficiently hawkish, the recent activities of the Federal Reserve conjure up visions of inflation.
The central bank is holding the Fed funds rate at nearly zero and has created a mountain of bank reserves to fight the financial crisis. Yes, these moves are unusual, but these are unusual times. Concluding that the Fed is leading us into inflation assumes a degree of incompetence that I simply don’t buy. Let me explain.
First, the clear and present danger, both now and for the next year or two, is not inflation but deflation. Using the 12-month change in the Consumer Price Index as the measure, inflation has now been negative for three consecutive months.
It’s true that falling oil prices, now behind us, were the main reason for the deflation. Core C.P.I. inflation, which excludes food and energy prices, has been solidly in the range of 1.7 percent to 1.9 percent for six consecutive months. But history teaches us that weak economies drag down inflation — and ours will be weak for some time. Core inflation near zero, or even negative, is a live possibility for 2010 or 2011.
Ben S. Bernanke, the Fed chairman, is a keen student of the 1930s, and he and his colleagues have been working overtime to dodge the deflation bullet. To this end, they cut the Fed funds rate to virtually zero last December and have since relied on a variety of extraordinary policies known as quantitative easing to restore the flow of credit.
These policies basically amount to creating new bank reserves by either buying or lending against a variety of assets. But quantitative easing is universally agreed to be weak medicine compared with cutting interest rates. So the Fed is administering a large dose — which is where all those reserves come from.
The mountain of reserves on banks’ balance sheets has, in turn, filled the inflation hawks with apprehension. But their concerns are misplaced. To understand why, start with the basic economics of banking, money and inflation.
In normal times, banks don’t want excess reserves, which yield them no profit. So they quickly lend out any idle funds they receive. Under such conditions, Fed expansions of bank reserves lead to expansions of credit and the money supply and, if there is too much of that, to higher inflation.
In abnormal times like these, however, providing frightened banks with the reserves they demand will fuel neither money nor credit growth — and is therefore not inflationary.
Rather, it’s more like a grand version of what the Fed does every Christmas season. The Fed always puts more currency into circulation during this prime shopping period because people demand it, and then withdraws the “excess” currency in January.
True inflation hawks worry about that last step. (Did someone say, “Bah, humbug”?) Will the Fed really withdraw all those reserves fast enough as the financial storm abates? If not, we could indeed experience inflation. Although the Fed is not infallible, I’d make three important points:
•
The possibilities for error are two-sided. Yes, the Fed might err by withdrawing bank reserves too slowly, thereby leading to higher inflation. But it also might err by withdrawing reserves too quickly, thereby stunting the recovery and leading to deflation. I fail to see why advocates of price stability should worry about one sort of error but not the other.
•
The Fed is well aware of the exit problem. It is planning for it, is competent enough to carry out its responsibilities and has committed itself to an inflation target of just under 2 percent.Of course, none of that assures us that the Fed will hit the bull’s-eye. It might miss and produce, say, inflation of 3 percent or 4 percent at the end of the crisis — but not 8 or 10 percent.
•
The Fed will start the exit process when the economy is still below full employment and inflation is below target. So some modest rise in inflation will be welcome. The Fed won’t have to clamp down hard.
SKEPTICAL? Then let’s see what the bond market vigilantes really think.
The market’s implied forecast of future inflation is indicated by the difference between the nominal interest rates on regular Treasury debt and the corresponding real interest rates on Treasury Inflation Protected Securities, or TIPS. These estimates change daily. But on Friday, the five-year expected inflation rate was about 1.6 percent and the 10-year expected rate was about 1.9 percent. Notice that the latter matches the Fed’s inflation target. I don’t think that’s a coincidence.
But if the inflation outlook is so benign, why have Treasury borrowing rates skyrocketed in the last few months? Is it because markets fear that the Fed will lose control of inflation? I think not. Rising Treasury rates are mainly a return to normalcy.
In January, the markets were expecting about zero inflation over the coming five years, and only about 0.6 percent average inflation over the next decade. The difference between then and now is that markets were in a panicky state in January, braced for financial Armageddon; they have since calmed down.
My conclusion? The markets’ extraordinarily low expected inflation in January was both aberrant and worrisome — not today’s. As long as expected inflation doesn’t rise much further, you should find something else to worry about. Unfortunately, choices abound.
Alan S. Blinder is a professor of economics and public affairs at Princeton and former vice chairman of the Federal Reserve. He has advised many Democratic politicians."
Most of the media seem to have interpreted today’s lower-than-expected increase in the producer price index as good news. I’m not so sure. If you were worried that 5% inflation was just around the corner, then naturally you will have felt relief. Personally, I was more worried about deflation, and I still am. The inflation risk, if it exists at all, is in the distant future, and you could even argue that deflation in the short run increases the risk of high inflation in the long run. It’s hard for me to see how falling prices today are good news at all. And prices – excluding food and energy – did fall in May according to the PPI.
You might worry about energy and commodity prices feeding through to the broader price level. I’m worried about that too, but not in the way you might think. Undoubtedly some of that feed-through is already happening, and it hasn’t been enough to keep core producer price growth on the positive side of zero. I’m worried about what happens when commodity prices (1) stop rising (which they must do eventually) and/or (2) start falling again (which they may well do if the recent increases have been driven largely by unsustainable forces such as stockpiling by China). If core prices are already falling, and only energy prices are keeping the overall PPI inflation rate positive, what happens when energy prices stop rising?
What worries me particularly is that about 70% of the costs of production go to labor, and the forces of deflation work very slowly in the labor market. The data that are coming out today are only the tip of the iceberg. We’re already seeing evidence of the loss of upward inertia in compensation. Wage growth is decelerating, and, based on all historical experience, the deceleration is likely to continue – in this case, to continue to the point where it becomes deflationary.
I’m not talking about what will happen in the next 6 months; I’m talking about what will happen over the next 5 years. “Green shoots” – however green they may be – do not presage an imminent end to deflationary wage pressure. And they certainly don’t presage the beginning of inflationary wage pressure. Consider everything that has to happen before the wage pressure reverses and becomes inflationary:
Output must stabilize.
Output must start growing.
Output must grow faster than trend productivity.
Firms must slow layoffs to the normal rate.
Firms must remobilize slack full-time employees (workers who are still on the full-time payroll but aren’t being asked to produce much, because businesses have been trying to reduce inventories).
Firms must bring part-time employees back to full time. (This recession in particular has been characterized by the tendency to reduce hours rather than laying off employees.)
Hiring (which has been falling rapidly) must stabilize.
Hiring must rise to the point where it equals the normal rate of layoffs, to get total employment to start rising.
Hiring must become rapid enough that employment starts to grow faster than the population.
Hiring must become rapid enough that employment growth is faster than the sum of the population growth & labor force re-entry. In other words, net hiring has to be fast enough to absorb all the workers who will start looking for jobs again once there are more jobs around to look for.
The unemployment rate must start declining.
The unemployment rate must decline by 4 or more percentage points, which, by historical experience, will take a matter of years.
Firms must start competing for labor.
Firms must start raising wages.
Firms must raise wages faster than trend productivity growth.
Maybe – just maybe – we have already reached step 1. Step 2 may be just around the corner. There is no evidence thus far that we are approaching step 3. As for steps 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, and 15......that show may come to town eventually, but...I don’t see much need to start reserving tickets in advance.
DISCLOSURE: Through my investment and management role in a Treasury directional pooled investment vehicle and through my role as Chief Economist at Atlantic Asset Management, which generally manages fixed income portfolios for its clients, I have direct or indirect interests in various fixed income instruments, which may be impacted by the issues discussed herein. The views expressed herein are entirely my own opinions and may not represent the views of Atlantic Asset Management.
WASHINGTON -- U.S. annual inflation slid deeper into negative territory in May as consumer prices posted their largest annual decline in almost 60 years.
Still, a slight rise from the prior month and an increase in core prices that exclude food and energy support the growing sentiment at the Federal Reserve that deflation risks have waned. However, there's little evidence that inflation is taking hold, either, a concern that has crept into bond markets in recent weeks.
The consumer price index rose 0.1% in May from April, the Labor Department said Wednesday, below economist expectations for a 0.3% increase in a Dow Jones Newswires survey.
The core CPI, which excludes food and energy prices, also rose 0.1%, in line with expectations.
Unrounded, the CPI rose 0.096% last month. The core CPI advanced 0.145% unrounded.
Consumer prices fell 1.3% compared to one year ago, the largest 12-month decline since April 1950. That's way below the 2% annual rate of inflation that most Fed officials think is consistent with their dual mandate of price stability and maximum employment.
Earlier this month, San Francisco Fed President Janet Yellen said that after once favoring 1.5% as an inflation objective, "I think if I now had to write down a number, I'd probably write 2%."
Annual inflation was above 5% as recently as last August, before last year's energy and commodity price drops kicked in and the global recession eased pressure on import prices.
But the annual CPI decline aside, Ms. Yellen and others at the Fed have little to worry about. Annual inflation rates should turn positive later this year given the recent rise in energy prices. And the less-volatile core CPI index was up 1.8% in May from one year ago, which is more in line with the Fed's objective.
"The recent data on inflation shows that the risks of deflation, which entered the minds of many central banks around the world over the last 18 months, the risks seem to be significantly attenuated," Fed Governor Kevin Warsh said Tuesday. Rather, inflation dynamics are "closer to a zone of price stability," he said.
According to Wednesday's CPI report, energy prices rose 0.2% in May from April, and were down 27.3% over the last 12 months. Gasoline prices rose 3.1% last month, while food prices slid 0.2%.
Transportation prices, meanwhile, increased 0.8%. Airline fares fell 1.5%, though new vehicle prices increased 0.5%.
Housing, which accounts for 40% of the CPI index, fell 0.1% for a third-straight month. Rent increased 0.1%, as did owners' equivalent rent. Household fuels and utilities prices slid 1.3%. Lodging away from home advanced 0.1%.
In a separate report, the Labor Department said the average weekly earnings of U.S. workers, adjusted for inflation, fell 0.3% in May, an indication that paychecks aren't keeping pace with prices, which could threaten consumer spending.
Current Account Deficit Shrinks
A broad measure of U.S. international transactions shrank in early 2009 because of the recession to its smallest level in seven years.
The U.S. current account deficit dropped to $101.5 billion during January through March, the Commerce Department said Wednesday. The deficit was the smallest since fourth-quarter 2001.
The $101.5 billion deficit exceeded economists' expectations for a deficit of $85.0 billion in the first quarter.
In the fourth quarter, the deficit stood at $154.9 billion, revised up from an originally reported $132.8 billion.
The current account balance combines trade of goods and services, transfer payments, and investment income.
The first-quarter shortfall of $101.5 billion made up 2.9% of gross domestic product, which was last reported at $14.090 trillion in current dollars for the three months ended March 31. That was the smallest share of GDP since 2.8% in first-quarter 1999. The record high was 6.6% at the end of 2005. The fourth-quarter 2008 current account gap of $154.9 billion represented 4.4% of a GDP of $14.200 trillion.
GDP is the broad measure of economic activity in the U.S.
Most of the current account balance is made up of trade in goods and services. A $91.2 billion first-quarter shortfall in goods and services trade was lower than the fourth-quarter's revised $144.5 billion. The fourth-quarter gap was initially estimated at $140.4 billion.
First-quarter imports fell to $373.4 billion from $469.4 billion. "All major and most sub-major commodity categories decreased," Commerce said.
Exports fell also. First-quarter sales dropped to $249.4 billion from $290.6 billion, with declines in chemicals, petroleum, capital goods, and cars.
While U.S. trade of goods was at a deficit, services trade was at a surplus. The surplus fell, though, to $32.8 billion from $34.3 billion in the fourth quarter.
Also contributing to the current-account deficit was a $29.6 billion shortfall in unilateral current transfers. Transfers are one-way payments from the U.S. to other countries and one-way payments from abroad into the U.S. The $29.6 billion shortfall is smaller than a $31.5 billion deficit in the fourth quarter.
Examples of current transfers include U.S. government grants, foreign aid, private remittances to workers' families abroad, and pension payments to foreign residents who once worked in a particular country.
Offsetting the overall current-account deficit was a $19.3 billion surplus of income, down from a $21.1 billion surplus in the fourth quarter.
The trade report showed that foreigners bought a net $56.9 billion of U.S. Treasury securities during the quarter, down from $81.5 billion of purchases in the prior three months.
Foreigners sold $15.5 billion worth of U.S. corporate bonds during the quarter, after net sales of $3.8 billion the previous quarter. They sold $45.3 billion of agency bonds, up from $21.4 billion in fourth-quarter sales.
Meanwhile, foreigners bought a net $6.0 billion of U.S. stocks, after selling $3.9 billion in the fourth quarter.
A Treasury Department report Monday said foreign and U.S. investors moved capital out of U.S. assets in April, the first month of the second quarter. The switch in capital flows reflect investors' greater appetite for risk. Net outflows in April, including short-term securities and changes in bank deposits, totaled $53.2 billion, according to the Treasurys International Capital report, compared with the inflows of $25 billion in March.
Wednesday's Commerce Department data said foreign direct investment in the U.S. increased $35.3 billion, after rising $96.8 billion in the fourth quarter. "The slowdown was more than accounted for by a slowdown in net equity capital investment in the United States and, to a much lesser extent, a shift from positive to negative reinvested earnings," Commerce said. .
The debate over economic policy has taken a predictable yet ominous turn: the crisis seems to be easing, and a chorus of critics is already demanding that the Federal Reserve and the Obama administration abandon their rescue efforts. For those who know their history, it’s déjà vu all over again — literally.
For this is the third time in history that a major economy has found itself in a liquidity trap, a situation in which interest-rate cuts, the conventional way to perk up the economy, have reached their limit. When this happens, unconventional measures are the only way to fight recession.
Yet such unconventional measures make the conventionally minded uncomfortable, and they keep pushing for a return to normalcy. In previous liquidity-trap episodes, policy makers gave in to these pressures far too soon, plunging the economy back into crisis. And if the critics have their way, we’ll do the same thing this time.
The first example of policy in a liquidity trap comes from the 1930s. The U.S. economy grew rapidly from 1933 to 1937, helped along by New Deal policies. America, however, remained well short of full employment.
Yet policy makers stopped worrying about depression and started worrying about inflation. The Federal Reserve tightened monetary policy, while F.D.R. tried to balance the federal budget. Sure enough, the economy slumped again, and full recovery had to wait for World War II.
The second example is Japan in the 1990s. After slumping early in the decade, Japan experienced a partial recovery, with the economy growing almost 3 percent in 1996. Policy makers responded by shifting their focus to the budget deficit, raising taxes and cutting spending. Japan proceeded to slide back into recession.
And here we go again.
On one side, the inflation worriers are harassing the Fed. The latest example: Arthur Laffer, he of the curve, warns that the Fed’s policies will cause devastating inflation. He recommends, among other things, possibly raising banks’ reserve requirements, which happens to be exactly what the Fed did in 1936 and 1937 — a move that none other than Milton Friedman condemned as helping to strangle economic recovery.
Meanwhile, there are demands from several directions that President Obama’s fiscal stimulus plan be canceled.
Some, especially in Europe, argue that stimulus isn’t needed, because the economy is already turning around.
Others claim that government borrowing is driving up interest rates, and that this will derail recovery.
And Republicans, providing a bit of comic relief, are saying that the stimulus has failed, because the enabling legislation was passed four months ago — wow, four whole months! — yet unemployment is still rising. This suggests an interesting comparison with the economic record of Ronald Reagan, whose 1981 tax cut was followed by no less than 16 months of rising unemployment.
O.K., time for some reality checks.
First of all, while stock markets have been celebrating the economy’s “green shoots,” the fact is that unemployment is very high and still rising. That is, we’re not even experiencing the kind of growth that led to the big mistakes of 1937 and 1997. It’s way too soon to declare victory.
What about the claim that the Fed is risking inflation? It isn’t. Mr. Laffer seems panicked by a rapid rise in the monetary base, the sum of currency in circulation and the reserves of banks. But a rising monetary base isn’t inflationary when you’re in a liquidity trap. America’s monetary base doubled between 1929 and 1939; prices fell 19 percent. Japan’s monetary base rose 85 percent between 1997 and 2003; deflation continued apace.
Well then, what about all that government borrowing? All it’s doing is offsetting a plunge in private borrowing — total borrowing is down, not up. Indeed, if the government weren’t running a big deficit right now, the economy would probably be well on its way to a full-fledged depression.
Oh, and investors’ growing confidence that we’ll manage to avoid a full-fledged depression — not the pressure of government borrowing — explains the recent rise in long-term interest rates. These rates, by the way, are still low by historical standards. They’re just not as low as they were at the peak of the panic, earlier this year.
To sum up: A few months ago the U.S. economy was in danger of falling into depression. Aggressive monetary policy and deficit spending have, for the time being, averted that danger. And suddenly critics are demanding that we call the whole thing off, and revert to business as usual.
Those demands should be ignored. It’s much too soon to give up on policies that have, at most, pulled us a few inches back from the edge of the abyss."
The curious case of rising Treasury bond yields continues to attract various theories and explanations in the market. The latest doing the rounds is that it may have nothing to do with rising interest rate expectations at all. Rather, it is more about the yield curve becoming the function of an exceptional rate of supply, as well as some unusual market dynamics stemming simply from, well, unusual times.
Barclays Capital points out the Fed would otherwise have to raise rates to as much as 5.5 per cent by the end of next year to meet current market expectations based on the two-year yield. They suggest this is somewhat unrealistic given ongoing rising unemployment and negative pressures on the economy.
Among those backing the over-supply theory on Tuesday was also Dallas Federal Reserve president Richard Fisher. He told Fox Business news (our emphasis): Long-term, as Milton Friedman said, sustainable inflation is a monetary phenomenon so we are going to have to be careful as an institution — the Federal Reserve — to make sure that we pull things back in, at the right time…And presently, I don’t believe the reason that rates are backing up has to do with a lack of confidence in the Federal Reserve. I think it has to do largely with a very simple phenomenon, supply and demand. There’s an enormous need for the Treasury to borrow. You mentioned the numbers earlier. Today about $35 billion will be financed through operations, $65 billion this week as you mentioned. Probably a trillion over this remainder of this fiscal year and under these circumstances, rates are indeed backing up as you mentioned in the Treasury sector, particularly at the longer end of the yield curve. I don’t think it’s unusual. I don’t think it’s wrong. I don’t think it’s odd. It’s just happening.”
In agreement too were primary treasury dealers. According to a Bloomberg survey, 15 of the 16 US government security dealers said policy makers would likely keep the target for overnight loans between banks in a range of zero to 0.25 percent this year. Bloomberg quoted one of the dealers as saying:
“The market seems wrong on this one,” said Eric Liverance, head of derivatives strategy in Stamford, Connecticut, at UBS AG, one of the dealers. UBS predicts that the Fed will remain on hold until June 2010. “High unemployment and a continued bad housing market will prevent the Fed from raising rates.”
Nevertheless, some still remain sceptical that massive supply alone can by enough of an explanation to justify the bond-yield conundrum. David Rosenberg of Gluskin Sheff writing on Tuesday was among those seeing some genuine inflationary forces at play. As he wrote:
The question is what is driving yields higher and what will cause the run-up to stop? Well, much is being made of supply and massive Treasury issuance, and to be sure, this has accounted for some of the yield backup but not nearly all of it — after all, Aussie bond yields has soared more than 100bps despite the country’s fiscal prudence. Clearly, the ‘green shoots’ from the data has been a factor forcing real rates higher. The doubling in oil prices and the rise in other commodity prices has generated some increase in inflation expectations, and the 40%+ move in equity prices and sustained spread narrowing in the corporate bond market has triggered a flight out of safe-havens (like Treasuries), and part of the move has been technical in nature owing to convexity-selling in the mortgage market with refinancings plummeting since early April. But, he added, those forces could easily be reversed by the end of the year:
Where we think the greatest potential will be is in inflation expectations — they should reverse course in coming months. Three different articles in today’s Wall Street Journal (WSJ) lead us to that conclusion: • More Firms Cut Pay to Save Jobs (page A4) • To Sustain iPhone, Apple Halves Prices (B1) • In Recession Specials, Small Firms Revise Pricing (B5)
The sudden flattening of the curve experienced in the last two sessions, meanwhile, did see something of a reversal on Tuesday. But, according to Barcap, that doesn’t necessarily mean the market should be counting on more steepening in the near-term.
As they explain, the continued unwinding of “steepener” trades on profit-taking, could very easily push front-end yields higher once again:
But while yields on traditional bond securities stay elevated, overnight rates in the Treasury repo market appear to be heading lower. Dow Jones reported on Monday that two-year treasury issues are now also so sought after that like just like 10-year securities they have begun trading at negative rates. As the wire report stated:
1601 GMT [Dow Jones] There’s still a severe shortage of 10-year Treasurys in overnight repo. And now the two-year’s also quoted negative, at -0.05%, though not as deeply as the -2.65% rate on the benchmark, according to GovPx. A negative rate means borrowers are paying an additional premium to get their hands on the security. All other issues trading close to 0.30% general collateral.
What you're saying then, is that, for example, when people buy 2 year bonds from the govt, some people are buying because: 1) They think that the interest rate of the bond reflects the interest rate expected for the next two years: "interest rate expectations" 2) There aren't enough 2 year buyers for the govts needs, so it has to raise the price by paying a higher interest rate: "an exceptional rate of supply" So, one group is holding out for higher interest because they know that the govt needs to pay them more right now, while the other group is holding out because they don't want to buy a bond at a yield below inflation going forward. But shouldn't there be more demand if investors were certain that inflation was going to be below these yields? And shouldn't inflation hawks want a rate safely above the expected rate of inflation? Couldn't this then just be an equilibrium between the two? Or what am I missing? Everything?
June 3 (Bloomberg) -- Spanish workers are finding that the cure for a decade-long borrowing binge may just make things worse.
As Spain sinks deeper into recession and the jobless rate heads for 20 percent, the highest in Europe, employers are telling workers to accept wage cuts if they want to stay competitive. That’s making it harder for households to tackle a debt load built up during the country’s economic boom and equivalent to 18,000 euros ($25,700) per person.
“There’s a Catch-22 problem for Spain,” said Dominic Bryant, an economist at BNP Paribas SA in London, referring to the 1961 novel by Joseph Heller that highlights a no-win situation faced by a World War II pilot trying to avoid duty. “The solution for the competitiveness problem makes their debt problem worse. By squeezing wages you weaken the domestic economy further.”
Annual growth of almost 4 percent over a decade turned Spain into an engine of Europe’s economy, boosting pay and prices as a building boom encouraged households to rack up 800 billion euros in debt. More than a year into a housing slump that helped spark the worst recession in six decades, the challenge is to trim labor costs and pay back loans without hobbling the country’s route to recovery.
For Patricio Zuniga, a 40 year-old builder in Madrid, that’s looking difficult after a 50 percent wage cut since the peak of the boom in 2007.
Burden
“We only just make it to the end of the month and we’ve already run through our savings,” said Zuniga, whose mortgage burden is now 80 percent of his family’s income. “They say: ‘If you like it you can take it and if not, well, that’s it.’”
BNP’s Bryant doesn’t expect domestic demand to grow until the second half of 2011.
At 70 percent of gross domestic product last year, Spain’s mortgage and consumer credit burden is the largest of the euro region’s major economies and compares with 45 percent for the bloc as a whole, European Central Bank data shows.
Spain is also one of the countries threatened most by deflation. Consumer prices fell annually in March for the first time since 1952 and dropped 0.8 percent in May. The rate for the bloc as a whole was zero.
“Deflation raises the size of your debt,” said Gayle Allard, vice rector at Madrid’s Instituto de Empresa business school. “It’s hard to think of a worse combination of factors than you’ve got here.”
Pay
While influential unions are still managing to win pay raises, that may change as unemployment surges. Companies’ wages grew 3.5 percent in March on the year. In the same month, workers at Seat, a unit of Volkswagen AG, agreed to a salary freeze to convince management to manufacture its Q3 vehicle in Spain.
ArcelorMittal, the world’s largest steelmaker, will temporarily lay off 11,964 workers in Spain until the end of the year, the MCA-UGT union said today.
“When the downturn starts to affect those represented by the unions, that’s when they tend to become more sensitive to what’s going on in the economy,” said Gregorio Izquierdo, head of research at Madrid’s Institute of Economic Studies.
Temporary workers are already seeing pay cuts. At 29 percent, Spain had twice as much temporary employment as the average in the 27-member European Union last year and the highest in the bloc, according to the EU’s statistics office.
Worried
For many workers, lower wages are wiping out the benefits of the ECB’s interest-rate cuts since the economic crisis intensified last year.
“You can imagine how worried I am,” said Pedro Sanchez Abellan, 30, in Madrid. He took a 25 percent salary reduction this year in a temporary job installing security systems, to earn 900 euros per month, making it harder to pay off a 3,000- euro loan.
Spain’s slump has seen a series of companies including property developer Martinsa-Fadesa SA shed workers as they seek protection from creditors.
Shares have dropped. Second-largest lender Banco Bilbao Vizcaya Argentaria SA and third-largest builder Fomento de Construcciones & Contratas SA have both fallen more than 40 percent since the end of 2007. Spain’s services industry contracted more sharply in May than the previous month, as an index based on a survey of purchasing managers by Markit Economics fell to 39.1 from 42.3 in April.
Squeeze
Falling wages would squeeze public finances. With the European Commission forecasting a deficit at 9 percent of GDP this year, investors are charging more to hold Spanish debt. The extra interest demanded over German bunds is more than triple what it was last year.
“If there’s negative wage growth, that implies income tax receipts are going to be falling, and so other things being equal it becomes more costly to repay its existing debt,” said Ben May, an economist at Capital Economics in London.
One of Spain’s most pressing problems is that it has become less competitive since the euro was created in 1999, with Commerzbank AG estimating based on labor costs that it has become 10 percent more expensive relative to the rest of the currency bloc.
“The only way for Spain to recover the lost competitiveness of the last 10 years will be for a sustained drop in prices and wages,” said Luis Garicano, a professor at the London School of Economics.
That means debt burdens will keep rising for workers such as Zuniga, the builder. His 1,680-euro monthly mortgage payment eats up most of the combined 2,000 euros he and his wife earn.
“The mortgage is only three years old, we’ve got 30 years left to go,” he said.
Bikkuri shimashita (surprise, surprise), as they say in Japan.
What is going on there? In stark contrast to all the bleak news lately about plunging exports, factory closures and mounting lay-offs, official figures on Friday showed one of the biggest surges on record in second-quarter industrial output. Some commentators leapt on the figures to proclaim the worst of the current slump is over for the world’s second largest economy. At the very least, according to some analysts, companies are beginning to “normalise” activity after a period of aggressive inventory reduction (The Honda effect).
The FT reports that Japan’s industrial output bounced back 5.2 per cent in April compared with the previous month, a stronger rise than analysts expected and a boost to hopes. What’s more, with government stimulus spending starting to support demand and manufacturers starting to reverse the drastic cuts to production imposed by a collapse of demand since late last year, the Ministry of Economy, Trade and Industry said surveyed manufacturers expected their output to rise a further 8.8 percent in May and 2.7 percent in June.
However - and there is an important “however” - signs of looming deflation and government data showing that seasonally adjusted unemployment had hit 5 per cent (its highest level for half a decade) suggested that Japan’s economic woes are indeed, far from over.
Even so, the second consecutive monthly rise in industrial output comes amid a distinct lightening of the mood surrounding an economy that suffered record contractions in both of the last two quarters, notes the FT:
The Bank of Japan last week upgraded its assessment of the Japanese economy for the first time in nearly three years, saying exports and production were beginning to bottom out and the effects of state stimulus spending would soon be felt. A supplementary budget clearing the way for the government’s latest Y15,400bn economy boosting package of measures is expected to be enacted today (Friday).
However, (that “however” again) “prospects for final demand for Japanese products in key markets such as the US and China remain unclear and at least some of the current upswing in output is likely to be replenishing inventories depleted by drastic recent production cuts”.
Richard Jerram, economist at Macquarie Securities Japan, notes that the strong April output figures follow sharp cuts to output in the first quarter, due to companies taking production well below final demand in order to burn off excess inventory:
As this process runs its course, output needs to adjust higher in order to stabilise inventories, and this began in April. The trade data on Wednesday gave the first sign of this process, with export volumes up 7.8 per cent from March. Similarly, output rose 5.2 per cent month on month in April and METI is projecting further gains of 8.8 per cent in May and 2.7 per cent in June. As is often the case when the cycle is bouncing, the output data are beating firms’ short-term projections.
Having just seen the worst two quarters on record, quarterly growth in the second quarter of about 10 per cent will be the best on record, according to Jerram, although that will “probably be surpassed” in the third quarter.
Nevertheless, this will still leave output about 15 per cent lower than in the first-half of 2008, before the Lehman shock hit, he adds.
There are two key concerns: First, excess capacity, “with the bounce taking capacity utilisation rates (and profit margins) back only to levels typically seen at the troughs of previous cycles”. Second is that underlying deflation is worsening and set to persist for a prolonged period.
Indeed, the news might all look good today but it’s by no means time to break out the daiginjo sake yet. As Chiwoong Lee of Goldman Sachs writes in a research note on Friday: “We expect production to sustain growth until the autumn, but we note the potential for a downturn later in the fiscal year (starting April) given deteriorating employment conditions and weak consumption”.
May 19 (Bloomberg) -- What the U.S. economy may need is a dose of good old-fashioned inflation.
So say economists including Gregory Mankiw, former White House adviser, and Kenneth Rogoff, who was chief economist at the International Monetary Fund. They argue that a looser rein on inflation would make it easier for debt-strapped consumers and governments to meet their obligations. It might also help the economy by encouraging Americans to spend now rather than later when prices go up.
“I’m advocating 6 percent inflation for at least a couple of years,” says Rogoff, 56, who’s now a professor at Harvard University. “It would ameliorate the debt bomb and help us work through the deleveraging process.”
Such a strategy would be risky. An outlook for higher prices could spook foreign investors and send the dollar careening lower. The challenge would be to prevent inflation from returning to the above-10-percent levels that prevailed in the 1970s and took almost a decade and a recession to cure.
“Anybody who has been a central banker wouldn’t want to see inflation expectations become unhinged,” says Marvin Goodfriend, a former official at the Federal Reserve Bank of Richmond. “The Fed would have to create a recession to get its credibility back,” adds Goodfriend, now a professor at Carnegie Mellon University’s Tepper School of Business in Pittsburgh.
Preventing Deflation
For the moment, the Fed’s focus is on preventing deflation -- a potentially debilitating drop in prices and wages that makes debts harder to repay and encourages the postponement of purchases. The Labor Department reported May 15 that consumer prices were unchanged in April from the previous month and were down 0.7 percent from a year earlier.
“We are currently being very aggressive because we are trying to avoid” deflation, Fed Chairman Ben S. Bernanke told an Atlanta Fed conference on May 11.
The central bank has cut short-term interest rates effectively to zero and engaged in what Bernanke calls “credit easing” to spur lending to consumers, small businesses and homebuyers.
Bernanke, 55, said the risk of deflation was receding and that the Fed was ready to reverse course when needed to maintain stable prices and prevent an outbreak of undesired inflation. The Fed has implicitly defined price stability as annual inflation of 1.5 percent to 2 percent, as measured by a price index based on personal consumption expenditures.
Lifting Prices, Wages
Even after all the Fed has done to stimulate the economy, some economists argue that it needs to do more and deliberately aim for much faster inflation that would also lift wages.
With unemployment at a 25-year high of 8.9 percent, workers are being squeezed. Wages and salaries rose 0.3 percent in the first quarter, the least on record, according to the Labor Department, as companies including Memphis, Tennessee-based based package-delivery company FedEx Corp. and newspaper publisher Gannett Co. of McLean, Virginia slashed pay.
Given the Fed’s inability to cut rates further, Mankiw says the central bank should pledge to produce “significant” inflation. That would put the real, inflation-adjusted interest rate -- the cost of borrowing minus the rate of inflation -- deep into negative territory, even though the nominal rate would still be zero.
If Americans were convinced of the Fed’s commitment, they’d buy and borrow more now, he says.
Mankiw, currently a Harvard professor, declines to put a number on what inflation rate the Fed should shoot for, saying that the central bank has computer models that would be useful for determining that.
Gold Standard
In advocating that the Fed commit itself to generating some inflation, Mankiw, 51, likens such a step to the U.S. decision to abandon the gold standard in 1933, which freed policy makers to fight the Depression.
Faster inflation might be preferable to increased unemployment, or to further budget stimulus packages that push up the national debt, says Mankiw, who was chairman of the Council of Economic Advisors under President George W. Bush.
The White House has forecast that the budget deficit will hit $1.84 trillion this fiscal year, or 12.9 percent of gross domestic product. Rogoff doubts that politicians will be willing to reduce that shortfall by raising taxes as much as needed. Instead, he sees them pressing the Fed to accept faster inflation as a way of easing the burden of reducing the deficit.
Easier Debt Repayment
Inflationary increases in wages -- and the higher income taxes they generate -- would make it easier to pay off debt at all levels.
“There’s trillions of dollars of debt, in mortgage debt, consumer debt, government debt,” says Rogoff, who was chief economist at the Washington-based IMF from 2001 to 2003. “It’s a question of how do you achieve the deleveraging. Do you go through a long period of slow growth, high savings and many legal problems or do you accept higher inflation?”
Laurence Ball, a professor at Johns Hopkins University in Baltimore, says it’s risky to try to engineer a temporary surge in inflation because it might spark a spiral of rising prices.
Even so, he sees good reasons for the Fed to lift its implicit, medium-term inflation target to 3 percent to 4 percent from 1.5 percent to 2 percent now.
To battle recession, the Fed had to cut interest rates to 1 percent in 2003 and zero in the current period. That implies its inflation target has been too low because it’s left the Fed running up against the zero bound on nominal interest rates.
Inflation Advantage
“The basic advantage of pushing inflation a little higher is that it would make it less likely that we run into the problem of the interest rate hitting zero and the Fed not being able to stimulate the economy if necessary,” Ball says.
John Makin, a principal at hedge fund Caxton Associates in New York, wants the Fed to go further and target the level of prices instead of simply a rate of inflation. Such a policy would mean that if inflation fell short of 2 percent over a period of time, the Fed would have to push inflation above that rate subsequently to make up for the shortfall and keep prices rising on the desired trajectory.
While that might sound radical, it’s the same sort of policy that Bernanke advocated Japan follow in 2003 to fight deflation. In a speech in Tokyo that year, then-Fed Governor Bernanke called on the Bank of Japan to adopt “a publicly announced, gradually rising price-level target.”
‘Bad for Creditors’
Some investors are already worried that Bernanke will go too far. “We’re on the path of longer-term, higher inflation,” says Axel Merk, president of Merk Investments LLC in Palo Alto, California. “It’s good for debtors but it’s bad for creditors. It’s dangerous and irresponsible.”
Billionaire investor Warren Buffett, chairman of Berkshire Hathaway Inc. in Omaha, Nebraska, suggested that faster inflation was all but inevitable.
“A country that continuously expands its debt as a percentage of GDP and raises much of the money abroad to finance that, it’s going to inflate its way out of the burden of that debt,” he told the CNBC financial news television channel on May 4, adding, “That becomes a tax on everybody that has fixed- dollar investments.”
At one level, that suggests that the Bank's policies are working. But it also underscores how challenging the next few years will be for our central bank.
As Liam Halligan has pointed out, the word "deflation" doesn't feature once in this latest Inflation Report. Looking back to the February report [2.9Mb PDF], I can find around half a dozen references, and a detailed explanation of what deflation could mean for the economy.
Of course, it was precisely that fear which led the Monetary Policy Committee to start its policy of quantitative easing (QE) the following month.
As Mervyn King emphasised in last week's press conference, the Bank thinks that it's too soon to judge the impact of that policy. But it clearly thinks that the combination of rate cuts and QE has helped to lower the risk of a sustained period of falling prices.
According to the latest Report, the MPC now thinks "there are significant risks to the inflation outlook in each direction". In February, it thought the the balance of risks "were slightly on the downside".
You can overdo the shift in the Bank's thinking. Remember how the governor went on (and on) about the degree of uncertainty.
Still, three months ago, it thought there was a less than 10% chance that CPI inflation would be above target in two years' time. Now (see Chart 5.7, p48) it thinks there's a roughly 20% chance of that happening, while the risk that inflation will be negative in two years' time has fallen, from about 1 in 4, to 1 in 10.
As I said when I first raised this point a few weeks ago, it's a long way from here to worrying about inflation. But, at the very least, the new forecasts suggest that there's less room for the economy to grow rapidly after 2010, without raising inflation, than we might have hoped.
It's also a reminder of the very fine line the Bank will be walking, if and when a self-sustaining recovery does arrive.
Mervyn King's fairly downbeat assessment of the economy last week helped to douse city speculation about how and when QE would be put into reverse.
However, the implication of the Bank's own report is that even with a fairly weak recovery, the MPC will be grappling with those questions sooner than you might think.
This is particularly important when one considers the UK's somewhat mixed standing in international markets.
Last week's grim economic news from the Eurozone economies reminded us that the UK has a big advantage in this crisis which those countries lack - the ability to print our own money (or to create it electronically, as we must learn to say).
As long as it doesn't cause inflation, QE should help boost demand and lessen the cost of the recession. But, as Mervyn King admitted last week, one of its direct - indeed, less intended - effects ought to be to push down the currency.
That is bad news for any foreigner sitting on British assets. The Bank can't afford to scare investors even more with the suggestion that it is relaxed about the government inflating away its debt.
Now, as it happens, sterling has gone up since QE began (and it rose again today). It just shows that the currency markets never do what they're supposed to do - though the pound is still far below where it was last summer.
The Bank's policy is only one factor affecting sterling. And if it's bringing the recovery closer, a lot of investors will consider that a plus for the pound.
Be in no doubt - if there is now a smaller risk of a long period of falling prices, that is extremely good news. With our high level of public and private debt, deflation would be a worse disaster for the UK than for almost any other major economy.
But we might pay a heavy price if investors start to think that the Bank is taking us too far the other way. "
For readers who have the time and interest to follow up on the topic Zero Hedge commenced yesterday discussing money liquidity and the shadow banking system, the best place to start is with Friedrich Hayek's seminal Prices and Production, published in the depression days of 1935. Curiously Hayek discerned the critical role of the shadow banking system long before the advent of securitization, derivatives and other products that today have caused the monetary supply problem to reach a screaming crescendo. A very salient sample is presented below:
"There can be no doubt that besides the regular types of the circulating medium, such as coin, notes and bank deposits, which are generally recognised to be money or currency, and the quantity of which is regulated by some central authority or can at least be imagined to be so regulated, there exist still other forms of media of exchange which occasionally or permanently do the service of money. Now while for certain practical purposes we are accustomed to distinguish these forms of media of exchange from money proper as being mere substitutes for money, it is clear that, other things equal, any increase or decrease of these money substitutes will have exactly the same effects as an increase or decrease of the quantity of money proper, and should therefore, for the purposes of theoretical analysis, be counted as money.
In particular, it is necessary to take account of certain forms of credit not connected with banks which help, as is commonly said, to economize money, or to do the work for which, if they did not exist, money in the narrower sense of the word would be required. The criterion by which we may distinguish these circulating credits from other forms of credit which do not act as substitutes for money is that they give to somebody the means of purchasing goods without at the same time diminishing the money-spending power of somebody else. This is most obviously the case when the creditor receives a bill of exchange which he may pass on in payment for other goods. It applies also to a number of other forms of commercial credit, as, for example, when book credit is simultaneously introduced in a number of successive stages of production in the place of cash payments, and so on. The characteristic peculiarity of these forms of credit is that they spring up without being subject to any central control, but once they have come into existence their convertibility into other forms of money must be possible if a collapse of credit is to be avoided."
Great 500+ page read for a Sunday afternoon. As for some more generic, brief (and modern) thoughts, I provide a few personal observations.
First, a run through the orthodox framework.
A basic account of money supply starts with the monetary aggregates that matter most for CPI inflation: in the case of the US this includes cash balances in aggregates such as the M2 (total deposits) or MZM (zero maturity money/cash plus bank claims and money market funds). The traditional recent definition of "available stock" of money consists of the cash notional of money printed by the central bank (outside money) and how much the banking system has created by making loans (inside money). Of course, due to the deposit multiplier effect, the inside money is much bigger than outside money. For the purposes of this narrative, the impact of securitization and derivatives (tier 3 and 4) will not be discussed currently as the complexity involved would take a big turn for the uglier. It will, however, be a topic pursued in the future.
The chart below shows the relative composition of inside money (mostly deposits) was almost ten times the outside money (monetary base) prior to the recent crisis.
Furthermore, as the historical chart demonstrates below, while rare, it has occurred, most notably during the Great Depression, that the broader money stock and monetary base moved in opposite directions.
A looking at the other side of the equation: demand, is the desired cash balances held by the public. Money demand rises via transactions demand with a growing economy, and falls when interest rates rise as zero-yielding cash becomes less attractive. Some math: money demand is the inverse of the velocity of money. If MV=PY (where M is money stock, V is velocity and PY is nominal GDP), then (1/V) = (M/PY), which is the level of money stock relative to nominal GDP. For households, 1/V can be represented as the desired money holdings as a share of nominal income. If a household decided to increase their money holding to 9 months of income from 6 months (a process occuring pervasively in the current environmen tof job and otherwise insecurity and lack of trust), V would fall to 1.33 from 2x.
This is, in simple terms, the standard approach. As the bolded section of Hayek's quote demonstrates, however, it does not go far enough. What he is trying to convey, is that the economy, like any other constantly shifting "ecosystem" can create its own media of exchange in order to "economize" on the use of inside and outside money for use in the purchasing of assets. Once assets themselves can serve as collateral, allowing for leverage purchases, they also take on money-like properties. And, herein lies the rub, when financial assets serve as collateral for borrowing to purchase yet more assets (margin purchasing), this kind of shadow money becomes especially potent in driving asset price overshoots and bubbles. The chart below demonstrates the various parts of the credit cycle from the perspective of shadow money.
A good form summary of a credit bubble is presented below, compliments of Credit Suisse:
It starts with some genuine investment opportunity almost always related to a real improvement in technology or fundamentals. As strong price performance turns into a boom, optimistic investors desire to buy more on margin. They leverage up, usually using the buoyant asset itself as collateral. Lenders are all too willing to benefit by funding these purchases – after all, in the worst case, they will be holding valuable collateral. Borrowing terms such as haircuts, loan-to-value ratios, or margin requirements get easier. New money flows in, and associated financial assets begin to take on money-like attributes.
As buying on leverage accelerates, prices and credit conditions blow past what is warranted by fundamentals. There is a monetary expansion in the broad sense of shadow money, but when the bust comes this is quickly reversed. Lending conditions tighten, collateral prices plummet, and highly leveraged optimists are wiped out. Now cash is king; investors do not want houses, stocks, tulips or asset-backed commercial paper. To accommodate this demand for cash the government/central bank must quickly and forcefully expand the monetary base or else the increase in money demand can lead to a painful general deflation.
Meanwhile, the sudden disappearance of good collateral in the financial system has created a dangerous de-leveraging that could feed on itself. The government may respond by increasing its own debt, since public collateral in the forms of treasury bills and such do still have funding liquidity, and by flooding the market with government paper the leverage collapse can be better managed. In this example effective money (meaning shadow money plus the conventional money stock) falls sharply, but it would have fallen much more without aggressive policy actions.
As shadow money is a pro-cyclical, boom-time phenomenon, serving as a medium of exchange to finance a bubble, it affects asset prices directly, but only indirectly affects goods and services prices. An approach to estimate shadow money is calculating the immediate cash embodied in various debt securities: this can be done using asset haircuts in repo markets as well as current market values at FMVs in four points in time: early '07, 2008 Pre Lehman, 2008 Post Lehman, and currently.
If the market had outstanding securities worth $100 billion and repo haircuts of 5%, then effective money would be $95 billion. If prices fell 50% and repo haircuts rose to 20%, effective money would be ($100* 0.5)*(1-20%) = $40 billion. Some asset haircuts are presented below in the attempt to determine effective money.
The exhibit below estimates the size of effective US money stock as a sum of inside and outside money as well as shadow money, broken by private and public.
A simplified breakdown of public and private effective money stock is presented on the next chart.
Lastly, in order to demonstrate the dramatic outflow in private shadow money in the immediately pre/post Lehman economy, and just how effectively subdued the public shadow money response has been in dealing with the pull back of the private sector. Credit Suisse estimates that since 2007 the shadow money in private debt securities (IG, HY bonds, non-agency RMBS, CMBS and ABS) has fallen by 38% or $3.6 trillion to $5.9 trillion, mostly due to a drop in market values, a scarcity of new issuance and, most importantly, a huge increase in repo haircuts. To compensate for this, public shadow money represented by treasuries, agency bonds and agency RMBS, has risen by $2.8 trillion, driven by an unprecedented ramp up in treasury and MBS issuance, and an increase in relevant asset prices.
It is immediately obvious that the expansion of public shadow money is no match for the massive contraction seen in the private side. In this light, the question of the efficacy of the QE rollout and other public shadow money expansion has a tinge of futility to it, and not just in terms of money supply inflection points. The continued risk aversion by banks means inside money contraction, and not outside money expansion, is the threat. Not just the wilful allowance of rising inflation by policy makers, but, much more relevantly, a recovery in loan creation is needed. As Keynes noted, in assessing money demand, in addition to interest rates and growth, the subject of "liquidity preference" is critical - the desire by the public to hold (often abnormally large) cash balances as buffers in times when bad economic outcomes are feared, such as currently. As liquidity preference is a mass psychology phenomenon, it is impossible to quantify and predict. A huge increase in cash demand at a time of weak growth is a rare, dangerous and deflationary occurrence, and tends to occur exactly at financial crises such as this one. The administration's, and the media's, massaging of mass psychology through the constant and repeated message that all is well, in order to rekindle the liquidity preference by the general public, makes all the sense in the world, as absent its intangible "benefit" the road to recovery is doomed from the onset.
But is even this propaganda machine doomed, in a more subversive way? As households whose HELOCs have been cut or whose home equity has diminished, firms whose commercial property has collapsed in value, and banks whole ability to borrow in collateral markets to raise cash has fallen, all face the same problem: as the ability to raise cash has fallen, actual cash holdings must rise. And, unfortunately for the Obama administration, this is not a temporary hoarding, this is a permanent rebalancing in the trillions of dollars order of magnitude. As money demands skyrockets, the velocity of money plummets.
In the pro-cyclical boom of 2002-2007 many components of everyday lives became a derivative of the shadow money system: repo lending became critical to credit creation; home equity extraction became a key means to smooth consumer spending during period of low or no income; off-balance sheet funding of various assets became a major earnings generator for commercial banks. Yet the process appears not to have affected money demand and supply: regular bank loan growth was limited, keeping money stock from soaring, and money demand was held back by beliefs in easy availability of borrowing against collateral. Most dangerously, economic policy, first through Greenspan then Bernanke, was complicit in allowing the boom by emphasizing price level inflation and not effective money. With regular M2 and MZM money supply and demand effected only indirectly by the credit boom and a massive output gap following the 2001 recession, it was never an issue that inflation would soar. A similar credit boom occurred with no inflation in the 1920s also, another period where a major collateralized credit pyramid was built virtually on top of a reasonably stable money stock. The reason, then, as now, key decision-makers did not notice a massive credit pyramid was being built, is because traditional money indicators, which this post argues are essentially useless in the context of today's much more sophisticated from a money and liquidity perspective economy, were fairly stable. If there is one "crime" for which the most two recent chairmen of the Fed should be held in ridicule in hsitory books, it is precisely this. And yet while Greenspan may be somewhat forgiven due to his less academic nature, Bernanke, who was a depression "specialist", should have seen our current predicament coming from miles. That he failed to do so is why future historians and market pundits will not spare him the criticism of being among the primary culprits for the current, multi-generational crisis. In the meantime, the propaganda issuing from every media source is to be expected (and in some ways welcomed) - it merely demonstrates that the administration finally grasps the severity of the problem, and the need for confidence to rematerialize, even if it is through the current meme of Green Shoots (whose very existence is flawed flawed upon more than a cursory examination, whether it is due to seasonal factors, subsequent economic data adjustments, or outright misrepresentations).
Yet now that any hope of a preventative approach has failed and we are stuck with the consequnces, what happens? In order for there to even be hope of recovery, money stock has to rebound. Not only Bernanke, or Geithner, but Obama himself has now demontrated that he is on the same page with regard to explanding the shadow money stock (while presumably providing better oversight and supervision).
For now, the immediate focus should be on whether confidence can return: in collateral, in lending, in risk taking, in entrepreneurship. In the meantime, any talk of inflation is premature. The deflationary shock has to wear off first, and in many asset classes it has not even accelerated yet.
It is ironic that shadow money and credit are not just the dynamo that drives the free market, but also its Achilles heel. While most of the time they serve a useful purpose, currently their purpose is a destructive one as long as they continue to trendline away from recent asymptotes. If history is any indication, the overshoot to the downside will likely be just as severe as the upside overshoot was protracted. In that case, nothing the Fed does can accelerate inflation. Also, while possible that Bernanke has something up his sleeve, it is improbable.
Thus while the market continues trading on a sepculative basis and conjecture rooted in the casino psychology that has gripped equity markets (and recently credit markets as well), the long term picture is much less sanguine as the excesses of the credit cycle from the past 60 years wear off and not only asset prices but also repo haircuts find a new equilibrium.
What is certain is that the near-term economy will be driven in spurts and starts as mass psychology shifts from one extreme to another. The next catalyst in my view will be the interplay of the impact of stimulus spending coupled with the failure of the green shoots materializing into anything worthwhile. And while this will make the life of daytraders interesting, the traditional buy and hold approach to asset accumulation must be delayed indefinitely, until the critical equilibrium discussed above is achieved. Until that happens, anyone who claims the economy is headed in the right direction (either much higher or much lower), is merely spreading their own agenda or has an opinion that is fundamentally not rooted in actual facts.
Thanks to Credit Suisse for primary observations and ideas and hat tip to Gunther."
"as the ability to raise cash has fallen, actual cash holdings must rise. And, unfortunately for the Obama administration, this is not a temporary hoarding, this is a permanent rebalancing in the trillions of dollars order of magnitude. As money demands skyrockets, the velocity of money plummets."
This sounds to me like your saying that a Flight to Safety does just that. Money ends up in safe investments. However, this is real money. So some people have money.
"For now, the immediate focus should be on whether confidence can return: in collateral, in lending, in risk taking, in entrepreneurship. In the meantime, any talk of inflation is premature. The deflationary shock has to wear off first, and in many asset classes it has not even accelerated yet."
Shouldn't we attempt to attack the Fear and Aversion to Risk and the Flight to Safety with disincentives to save and incentives to invest? I'm not sure how we would know that they work until we try them.
As for QE, if short term interests rates are low, and longer term rates begin to go up, then you have a disincentive to save and a longer term signal of confidence. That seems good to me. It won't work on its own, but with rising stocks, a short term sales tax decrease, tax incentives for investment, and some govt spending, you can at least have a plan to attack the problem. It doesn't strike me as a priori false or doomed to fail.
As for the casino, I never get that analogy, since there's a winner: namely, the casino. The money doesn't disappear.
If people did not sometimes do silly things, nothing intelligent would ever get done.
Frazer's account of the magical and religious views of mankind is unsatisfactory; it makes these views look like errors.
Are you not really a behaviourist in disguise? Aren't you at bottom really saying that everything except human behaviour is a fiction?" — If I do speak of a fiction, then it is of a grammatical fiction
Could one imagine a stone's having consciousness? And if anyone can do so—why should that not merely prove that such image-mongery is of no interest to us?
An 'inner process' stands in need of outward criteria
For a large class of cases--though not for all--in which we employ the word "meaning" it can be defined thus: the meaning of a word is its use in the language.
What Copernicus really achieved was not the discovery of a true theory but of a fertile new point of view.
mathematics is a motley of techniques and proofs.
Everything that can be said, can be said clearly.
Whenever he does anything, this is before his mind. In a way, how are we to know whether to say he believes this will happen or not?
Asking him is not enough. He will probably say he has proof. But he has what you might call an unshakeable belief. It will show, not by reasoning or by appeal to ordinary grounds for belief, but rather by regulating for in all his life
I did not get my picture of the world by satisfying myself of its correctness; nor do I have it because I am satisfied of its correctness. No: it is the inherited background against which I distinguish between true and false.
All testing, all confirmation and disconfirmation of a hypothesis takes place already within a system. And this system is not a more or less arbitrary and doubtful point of departure for all our arguments; no it belongs to the essence of what we call an argument. The system is not so much the point of departure, as the element in which our arguments have their life.
What I hold fast to is not one proposition but a nest of propositions.
At the core of all well-founded belief, lies belief that is unfounded.
Knowledge is in the end based on acknowledgement.
At the end of reasons comes persuasion.
Nothing is so difficult as not deceiving oneself.
The way you use the word "God" does not show whom you mean — but, rather, what you mean.
One can mistrust one's own senses, but not one's own belief. If there were a verb meaning "to believe falsely," it would not have any significant first person, present indicative.
What has to be accepted, the given, is — so one could say — forms of life.
If a lion could talk, we could not understand him.
An entire mythology is stored within our language.
There are, indeed, things that cannot be put into words. They make themselves manifest. They are what is mystical.
Scepticism is not irrefutable, but obviously nonsensical, when it tries to raise doubts where no questions can be asked. For doubt can exist only where a question exists, a question only where an answer exists, and an answer only where something can be said.
The mystical is not how the world is, but that it is.
The subject does not belong to the world, but it is a limit of the world.
It is quite impossible for a proposition to state that it itself is true.
What do I know about God and the purpose of life? I know that this world exists. That I am placed in it like my eye in its visual field. That something about it is problematic, which we call its meaning. This meaning does not lie in it but outside of it. That life is the world. That my will penetrates the world. That my will is good or evil. Therefore that good and evil are somehow connected with the meaning of the world. The meaning of life, i.e. the meaning of the world, we can call God. And connect with this the comparison of God to a father. To pray is to think about the meaning of life.
Make sure that your religion is a matter between you and God only.
La Bête: Mon cœur est bon, mais je suis un monstre.
You can never plan the future by the past.
We must all obey the great law of change. It is the most powerful law of nature, and the means perhaps of its conservation.
Economy is a distributive virtue, and consists not in saving but selection. Parsimony requires no providence, no sagacity, no powers of combination, no comparison, no judgment.
A very great part of the mischiefs that vex the world arises from words.
It is the nature of all greatness not to be exact.
The march of the human mind is slow.
Liberty, too, must be limited in order to be possessed.
If any ask me what a free Government is, I answer, that, for any practical purpose, it is what the people think so, — and that they, and not I, are the natural, lawful, and competent judges of this matter.
A state without the means of some change is without the means of its conservation.
Better to be despised for too anxious apprehensions, than ruined by too confident a security.
Our patience will achieve more than our force.
Politics and the pulpit are terms that have little agreement.
All government, indeed every human benefit and enjoyment, every virtue, and every prudent act, is founded on compromise and barter we give and take; we remit some rights, that we may enjoy others
It is one of the finest problems in legislation, What the state ought to take upon itself to direct and what it ought to leave, with as little interference as possible, to individual discretion.
History is a preceptor of prudence, not of principles.
No rational man ever did govern himself, by abstractions and universals.
I always distinguish between a man's talkative and writative character.
A revolution will be the very last resource of the thinking and the good.
... all that wise men ever aim at is to keep things from coming to the worst. Those who expect perfect reformations, either deceive or are deceived miserably.
Man acts from motives relative to his interests; and not on metaphysical speculations.
Before men can transact any affair, they must have a common language to speak otherwise all is cross-purpose and confusion.
We owe an implicit reverence to all the institutions of our ancestors.
You may talk of the tyranny of Nero and Tiberius; but the real tyranny is the tyranny of your next-door neighbor... Public opinion is a permeating influence, and it exacts obedience to itself; it requires us to think other men's thoughts, to speak other men's words, to follow other men's habits.
It is good to be without vices, but it is not good to be without temptations.
Why should it not be the whole function of a word to denote many things?
It may justly be urged that, properly speaking, what alone has meaning is a sentence
We become obsessed with 'truth' when discussing statements, just as we become obsessed with 'freedom' when discussing conduct...Like freedom, truth is a bare minimum or an illusory ideal
Like 'real', 'free' is only used to rule out the suggestion of some or all of its recognized antitheses. As 'truth' is not a name of a characteristic of assertions, so 'freedom' is not a name for a characteristic of actions, but the name of a dimension in which actions are assessed.
[O]rdinary language is not the last word: in principle it can everywhere be supplemented and improved upon and superseded. Only remember, it is the first word.
...our common stock of words embodies all the distinctions men have found worth drawing, and the connections they have found worth marking, in the lifetime of many generations: these surely are likely to be more numerous, more sound, since they have stood up to the long test of survival of the fittest, and more subtle, at least in all ordinary and reasonable practical matters, than any that you or I are likely to think up in our armchair of an afternoon – the most favorite alternative method.
The situation in which I would properly be said to have evidence for the statement that some animal is a pig is that, for example, in which the beast itself is not actually on view, but I can see plenty of pig-like marks on the ground outside its retreat. If I find a few buckets of pig-food, that's a bit more evidence, and the noises and the smell may provide better evidence still. But if the animal then emerges and stands there plainly in view, there is no longer any question of collecting evidence; its coming into view doesn't provide me with more evidence that it's a pig, I can now just see that it is.
Nor is there any reason why the state should not assist the individuals in providing for those common hazards of life against which, because of their uncertainty, few individuals can make adequate provision. Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance—where, in short, we deal with genuinely insurable risks—the case for the state’s helping to organize a comprehensive system of social insurance is very strong.
"Adam Smith's Recommendations on Taxationby Nadia Weiner, Director of the Adam Smith Club of Sydney, Australia
Although Adam Smith is often quoted, the so-called "Father of Economics" has rarely been read, either by his detractors or his admirers. Consequently he is often misunderstood.
Smith, who made such a strong stand against the protectionist mercantile system of trade of his day, devoted over ONE THIRD of his masterpiece An Inquiry into the Nature and Causes of the Wealth of Nations, to discussing the subject of government revenue and the methods by which it may be best collected, including new taxes. This is not generally known.
When examining the different forms of taxation, Smith adheres to four maxims which a good tax should conform to:
1. "The subject of every State ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the State."
2. "The tax each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, and the quantity to be paid, ought all to be clear and plain to the contributor, and to ever other person."
3. "Every tax ought to be levied at the time, or in the manner in which it is most likely to be convenient for the contributor to pay it."
4. "Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the State."
Bearing all these things in mind, there are two types of taxation which obtain Smith's recommendations: a tax on luxury consumables and a tax on ground-rents (the annual value of holding a piece of land).
On the subject of luxury consumables, he is adamant about the definiton of 'luxury' and of 'necessary.' By his definition, a 'necessary' may vary from place to place and from time to time. At the time of his writing, linen shirts, leather shoes and a minimum of food and shelter were definitely to be regarded as essential to a minumum decent standard of living. Taxes on salt, soap, etc., he harshly criticized as inequitably taking from the poorest elements of society. Taxes on luxuries, which were to include tobacco, he considered excellent in that no one is obliged to contribute to the tax: "Taxes upon luxuries have no tendency to raise the price of any other commodities except that of the commodities taxed ... Taxes upon luxuries are finally paid by the consumers of the commodities taxed, without any retribution."
More deserving of priase is the tax on ground-rents: "Both ground- rents and the ordinary rent of land are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before. Ground-rents, and the ordinary rent of land are, therefore, perhaps the species of revenue which can best bear to have a peculiar tax imposed upon them."
Excise, customs, taxes on profits, were, according to Smith, either expensive to collect, as in the case of excise, or disincentives to produce, as in the tax on profits. He reserves harsh words for taxes which occasion the invasion of privacy, and on the subject of excise he says: "To subject every private family to the odious visits and examination of the tax-gatherers ... would be altogether inconsistent with liberty."
The harshest condemnation of all, however, was for taxes upon labour: "In all cases, a direct tax upon the wages of labour must, in the long run, occasion both a greater reduction in the rent of land, and a greater rise in the price of manufactured goods, than would have followed from a proper assessment of a sum equal to the produce of the tax, [levied] partly upon the rent of land, and partly upon consumable comodities."
Getting Involved in Bitcoin
-
When bitcoin value skyrocketed in late 2013, everyone suddenly started
paying attention to this unusual currency. A large number of online
businesses alrea...
Corporate ETFs and Risk Appetite
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Via Bloomberg : Bond ETFs Awash in Pain May Be Red Flag for Risk Appetite
(1) 2018-01-22 14:56:05.415 GMT By Dani Burger and Sid Verma (Bloomberg) —
U.S. c...
Whose Gold Is JP Morgan Dumping Now?
-
Author’s Note: This piece is unfinished, but the data presented here is
simply too important not to publish. They say phrasing allegations in the
form of...
The beginning of the end
-
borrowed wisdom is still wisdomGreetings readers!
After 10 years, I am going to stop blogging at aguanomics.
I am doing this because I have written quite ...
*Sigh* No Forest
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In a move that should surprise no one, Canadian/Chinese forestry company
Sino-Forest filed for bankruptcy in Canada yesterday. The timing of the
filing sh...
Lahti
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I am in Lahti, Finland, to give a talk at the Lahti Symphony's Sibelius
Festival. I've been wanting to visit since I encountered Osmo Vänskä's
revelatory B...
Change Is Good (Website Redesign)
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Hey out there! Just a heads up to let you know that this blog has moved!
All this content has been migrated over to my primary website,
alexandragardner.ne...
Whether (and how) America can survive Trumpism
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Georgetown Professor Thomas Zimmer joins us to talk about polarization and
extremism, and what insights American and world history provide as to
whether ...
The ideas of Liberal liberals
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Nearly 30 years ago now I dropped out of a PhD exploring the communitarian
critique of liberalism. My interest in liberalism continued through
articles, ch...
Nine Chapters on the Semigroup Art
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While Googling something or other, I came across Nine Chapters on the
Semigroup Art, which is a leisurely introduction to the theory of
semigroups. (While ...
Peston Picks is moving
-
[image: Cardboard Boxes on a trolley]
My blog is dead. Long live the new blog. Or to put it another way, my page
- and those of other BBC bloggers - is hav...
Moving on
-
Stephanomics is dead. Long live Stephanomics. Today's news is that this
blog is moving to a new home with a fresh format.
I know, change is hard, but the...
20 years later
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I created this blog in September 2004 with no particular purpose other than
to write a bit about Latin America and foreign policy. I'm writing more at
Su...
Sad Puppies Delete Their Own Weblog Posts!
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Brad Torgersen deletes his own weblog posts: **Rogers Cadenhead**: [Brad
Torgersen's 'Science Fiction Civil
War'](http://workbench.cadenhead.org/news/3742/...
FTX and an old blog post
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A long time ago I wrote a blog post about rehypothecation with brokers. It
is - unsurprisingly - relevant again.
In some sense crypto provides fast-track...
Schäublenomics
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The veteran German will be the most familiar face around the table as the
eurozone’s longest serving finance minister, having taken office in late
2009.
...
Rooting for Wuhan
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This, with one key correction that you will notice in the second paragraph,
is the latest edition (mailed out Feb. 9) of my occasional e-mail
newsletter, w...
Some Links
-
(Don Boudreaux) TweetWriting in the Wall Street Journal, NYU physicist
Steven Koonin reports on how the Biden White House inadvertently told the
truth abou...
Inflation is not a virus, and it's not going up
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Inflation is not like a virus that spreads through a population. A rising
price in one part of the economy cannot "infect" a price in another part of
the e...
Strategy, and a Mandelson 'Masterclass'
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Being able to do strategy has something in common with being artistic,
mathematical, sporty, philosophical or a natural leader. Most people could
be made ...
Historic Chart of the Day
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Based on today's Census Bureau report on April retail sales, consumer
spending at "*Food Services and Drinking Places*" (restaurants and bars,
see red li...
Michael Lewis breaks news from 2008
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Michael Lewis, of Liar's Poker fame, has emerged as a leading writer of the
credit crisis and its aftermath. I wish there were 10 of him. And if only
one o...
Friday Feature: Gilmer's Learning Solutions
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Thanks to Arkansas’s Education Freedom Accounts, families can choose
Gilmer’s Learning Solutions’ Christian microschool, created by a former
public school ...
Soros on Oil and Agriculture
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From Bloomberg News:
George Soros’ $21 billion fund returned 8% last year, which is incredible
not only in light of the global crisis, but also given hi...
A Former Expat on China: Grim
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1. LaoWhy86 on YouTube Spent the last few days catching up on my China
reading and viewing, mostly those articles and videos friends, clients and
readers w...
Adjust contrast of a pdf free
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Closer to the eye of the shooter, this is because Preview is quite
literally applying a filter to each individual page of the PDF you are
saving. the proce...
It's really very simple
-
[Note: I am pushing this article live two days early because ZeroHedge
somehow managed to get a hold of it and post it before I did. Needless to
say, I do...
PLEASE READ: Website Update In Progress
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Most readers know we've been hard at work behind the scenes rebuilding the
guts of the PeakProsperity.com website.
For a few months now, we've been sayin...
Drop list elements if
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I am doing a simulation in R that generates a list of simulated data
objects and then simulates emergent behavior on them. Unfortunately, it
chokes on “dat...
What’s the best type of healthcare system?
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If we’re going to improve our healthcare system, it’s worth looking closely
at the experiences of other rich democratic countries. There are two
principal ...
Long Live the Future
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This is the last of more than a thousand columns published in the Express,
which began when Denis Jambart and Christophe Barbier, asked me to be one
of the...
Best Nu Skin ReDesign ageLoc Galvanic Body Spa
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Nu Skin ReDesign ageLoc Galvanic Body Spa Is Cheap, But It Isn't Two-Penny
Product*Nu Skin ReDesign ageLoc Galvanic Body Spa* is the leading product
among ...
110. Great Expectations: The Implacable Externality
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*I saw a sign in front of a shop the other day that read, "We will exceed
your expectations." So I walked in expecting them to exceed my
expectations. By t...
Creative Destruction in Small Business Bankruptcy
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Two distantly related items caught my eye this morning, as both reinforce
the need for "creative destruction" as a response to all-too-common small
busines...
Goodbye to Credit Writedowns
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Good morning everyone, I have some exciting — and also – sad news to tell
you today. First, I am going to Bloomberg as a Senior Editor. And I am
going to...
Crisis Talk is Moving!
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Dear Crisis Talk readers, In an act of consolidation and collaboration,
Crisis Talk is merging with the World Bank's Private Sector Development
blog, where...
Morning News: December 3, 2024
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Welcome to the Post-American New World Disorder Will Trump’s Dollar
Diplomacy Roil Global Trade? China Targets Critical Metals in Tit-for-Tat
Response to U...
Save pdf smaller size mac online
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High image quality, bring your ideas to life save pdf smaller size mac
online beautiful presentations. and instantly got the shrunken file!
Although the de...
Maximize the Resale Value of Your Car
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Filed under: Travel Industry, Did You Know
Did you know...
There are some easy things you can do to get more money for your used car,
with a little less ...
IEA World Congress 2021
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A few words on the International Economics’ Association online World
Congress, July 2-6, on the theme “Equity, Sustainability and Prosperity in
a Fractured...
Inside Goldman’s ABACUS Trade
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Today, in the Huffington Post, I posted a document that shows an earlier
incarnation of the ABACUS trade (although, not that different from the one
that ha...
calculated risk calls a bottom
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with some qualifications, but a bottom call nevertheless. this is not to be
taken lightly. bill is the best working commentator on US housing markets,
and ...
The Inheritance of Molecular Machinery
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It turns out mtDNA is inherited directly from the mother to its offspring,
and I just had the idea that perhaps the molecular machines responsible for
repl...
Options Action: OptionApps Top 5 for 2017-06-28
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Options Action: OptionApps Top 5 for 2017-06-28 Academic Algorithms: ( Term
LT-ST Difference ) Ticker Stock Name Close Difference 1 CAMP
CALAMP CO...
Brainteasers From My Dad
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When my sister and I were little, our Dad would challenge us with riddles
and word games. I mentioned three in my eulogy for Dad: 1. Imagine a
two-volume d...
The Dove at Peace
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Leila Abu-Saba, 1962-2009 The Dove, Leila Abu-Saba, passed away on October
8, 2008 after a five-year battle with breast cancer. She leaves behind her
husba...
Adjust contrast of a pdf free
-
Closer to the eye of the shooter, this is because Preview is quite
literally applying a filter to each individual page of the PDF you are
saving. the proce...
Energy
-
With almost 600 coal plants shut down since 2010, we are racing towards
a grid reliability crisis of our own making. Millions of Americans are at
risk of e...
Wisconsin in Last Place for Start-up Activity
-
The Kauffman Foundation has just released its report on startup activity.
Wisconsin comes in last place in startup density. Figure 1: Source:
Kauffman Foun...
How to Believe in Free Speech
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Almost all libertarians earnestly say, "I believe in free speech."
Normally, though, this goes way beyond the right to speak freely. Most
libertarians al...
New Growth Rate Cycle Date Determined for the U.S.
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Today ECRI is announcing May 2016 as a new growth rate cycle trough date
for the U.S. Growth rate cycles are alternating periods of accelerating and
decele...
Quick update
-
I just logged in for the first time in ... five years. I am occasionally
thinking about restarting this blog, but blogging is not what it was, plus
current...
Back In Business
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After six months offline, Economic Principals’ site has returned to life.
Betweentimes, EP has been appearing on Substack since March […]
Mind the Gap? Rethinking the Investor Gap Equation
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Morningstar released the latest version of Mind the Gap, an annual piece
which shares with its readers analysis that "measures the costs of bad
timing".
I...
Every Pop-up Must Span a Gully
-
Every pop-up must span a gully. -- Duncan Birmingham
The gully I aim to span with my pop-ups is the imaginary separation between
the interior world of t...
Suspected rebel officers jailed in Ecuador
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AFP QUITO — A judge ordered 14 police officers held in preventive detention
as court proceedings began against the alleged perpetrators of a rebellion
in E...
Record Job Openings Not As Impressive As It Sounds
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I'm seeing a lot of headlines about a record high number of job openings.
While it's technically true that the number of job openings (as reported
in the...
Invitation to connect on LinkedIn
-
LinkedIn
Emre,
I'd like to add you to my professional network on LinkedIn.
- Emre
Emre Deliveli
Freelance Consultant & Economics Columnist at 'Self-Emp...
The Japanisation Of Europe
-
By now it should be clear that the monetary experiment currently being
carried out in Japan (known as “Abenomics”) is fundamentally different from
the kind...
The search for the best middle-class tax cut
-
Say you want to help struggling middle-class families by cutting their
taxes. Say you want to figure out an actually helpful plan to do that, and
not just ...
A Better Stablecoin on a Perp DEX
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Creating a stablecoin position on a perp exchange is hard, but it should
be easy. It not only caters to demand, but it also adds liquidity to perp
marke...
Puzzle: Crack the Combination XI
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The combination of a lock is four digits long and each digit is unique,
that is, each occurs only once in the combination. The following are some
incorrect...
Charmin quietly cuts roll size by 10%
-
Did they think we wouldn’t notice? New Charmin toilet paper rolls are 4″
wide. Historically toilet paper has been sold in rolls that are 4.5″ wide.
Did the...
The Flipping and Flopping Edition
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Slate Money on President Obama’s flip-flop on the 529 college savings plan,
the FCC’s flip-flop on net neutrality, and Shake Shack’s flipping of
burgers bu...
Financial policy: Looking forward
-
Washington is turning its attention to the future, having put out most of
the financial fires. The crisis seems to be over, but questions remain
about how ...
Ceterum autem censeo Twiterinem esse delendam
-
The fresco is housed in a room that is small, but quite ornate. Four
corner-anchored medallions define the lower-than-expected ceiling's
borders. Though ...
Why Do Americans Still Hate Welfare?
-
"Welfare" remains a charged word in the American lexicon, even though it's
rarely talked about as a political issue any more. But why?
Jay Rock’s hearing
-
Friends of the blog, Vertrue and its subsidiary Adaptive Marketing, found
themselves the subject of a Senate Commerce Committee hearing yesterday
entitled,...
Live tweeting the Friday Night Dump
-
We are now offering a subset of our Pro data via Twitter. Find out more by
clicking here: https://premosocial.com/footnotedFND
Markets & Trump
-
Brouwer & Janachowski November 9, 2016 This Week: Markets settling down.
Probably less disruption than the headlines imply. As we write in the
morning se...
100 Positive News from 2023
-
Many bad things happened in 2023. You already know them. Many tragic events
were so terrible we will never forget them and we shouldn’t. You can easily
f...
Did You Know That Gary Weiss Speaks?
-
Yes, he does, or to put it another way, I do. My well-received speaking
engagements have spanned many topics, from media bias in the Middle East to
Ayn Ran...
Democratising public institutions: Reform needed!
-
If Bahamians got through the implementation of Value Added Tax, they can
get through anything. Thus the confidence I have in reforming our public
instituti...
Moving on
-
Moving on
Finally, at long last, I can tell you what I've been up to with finding a
new home for this blog. I've created a new, community-based science
b...
Paul Krugman on Food Economics
-
Paul Krugman doesn't typically write about food, so I was a little
surprised to see this. Still, I think he got most things right, at least
by my way of...
Dear Committee Members
-
Like many who spend their lives in the ivory tower, I enjoy academic
satires. That includes Richard Russo's novel *Straight Man*, the movie *Wonder
Boys...
Drop everything and go out to the Gaza border!
-
Drop everything and go out to the Gaza border!
We refuse the occupation of the strip, we refuse starvation!
The government of starvation and exterminati...
Book Summary: Why Nations Fail
-
Recently I read the book Why Nations Fail: The Origins of Power, Prosperity
and Poverty by Daron Acemoglu and James A. Robinson. Why nations fail is of
cou...
Cole-Frieman & Mallon 2025 Q2 Update
-
July 10, 2025 Clients, Friends, and Associates: As we close out the second
quarter of what has been an eventful year for the digital asset sector, we
would...
2016 as a ten-letter word
-
In the end of November, as it is the case every year since 2004, Oxford
Dictionaries revealed their choice for the word of the year. For 2016, they
settled...
Carrie Gracie
-
Campaign for Equal Pay I have noticed that individuals who make a
difference, often don’t set out with that intention. Usually, an event in
peoples’ lives ...
25 or 50 Next Week?
-
*Mid-week market update*: The combination of the Quarterly Census
Employment and Wages (QCEW) weakness and a soft PPI report has moved the
market to expect...
Speaking trip this April
-
I'm speaking at Libertycon in Tbilisi on April 20th, will probably either
go or come via London. Anyone interested in a talk? I'll probably be in
Europe ...
Einstein’s First Lecture in Britain
-
Tidying a few things up ahead of the start of term I discovered this old
clipping, yellowed with age, and decided to scan it before it disintegrates
entire...
Incentives Matter, Indeed
-
Friend Ennyman rights a great piece on the role of incentives, here's the
conclusion: "Whether it's meeting deadlines, forming good habits in our
children ...
Cash transfers in other countries
-
Here’s a Newsweek story about cash transfer programs in Brazil, South
Africa, and Mexico. A mostly favorable story, too. Of course there’s no
mention of th...
InfoVis vs. i|e
-
People have set out varying hopes and interpretations for the term
“Information Aesthetics,” and they mostly differ from what this
organization was creat...
China has much to teach us. John Roberts does not.
-
So, I don’t really write here any more. I write at drafts.interfluidity.com
instead. Please follow that feed or subscribe by e-mail. I do still offer
perio...
Byron Wien Announces “The Ten Surprises” for 2013
-
Byron Wien, Vice Chairman of Blackstone Advisory Partners, yesterday issued
his list of “The Ten Surprises for 2013″. This is the 28th year Byron has
given...
Residential Roofing Choices For Flat Roofs
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There are a lot of different types of residential roofing material
available for residential units. Some are more common than others and some
are cheaper...
herbal untuk jantung dan darah tinggi yang ampuh
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Apakah Anda tahu bahwa madu mampu memberikan M segala macam manfaat bagi kesehatan
manusia? Madu diakui mengingat bahwa zaman kuno sebagai obat, dan penggun...
Obama’s vague Buffett Rule a political ploy
-
A few thoughts on the economics and politics of President Obama’s
tax-the-rich “Buffett Rule” and new debt reduction “plan”: 1) What problem
does the Buffe...
This blog has moved
-
To a new blog-support vendor. You can read the latest posts by clicking
here. If you're a regular reader, thank you and please update your
favorites to the...
The Surface: I Came, I Saw, I Left
-
I went to the Microsoft store in Times Square yesterday to see for myself
the new Surface tablet with the spiffy keyboard, since nobody I know
actually ...
Financial Markets Will Move To Asia
-
Chicago, they invented the Soybean futures contracts. But now, China uses
more soybeans than ... *READ THE REST OF THE ARTICLE ON THE NEW WEBSITE:
JIM ROGE...
Is Deep Research deep? Is it research?
-
I’m working on a first draft of a book arguing against pro-natalism (more
precisely, that we shouldn’t be concerned about below-replacement
fertility). Tha...
A CryptoFiction
-
Here’s a micro-story I started with the Access Crypto Summit flash fiction
prompt in mind, left half done, and then belatedly finished off anyway,
because ...
Knowledge Problem archive 2002-2020
-
This is the archive of the Knowledge Problem blog, all 4,690 posts. The
search function will help you locate posts on the various topics Mike and I
wrote a...
Comment perdre du ventre ?
-
Une brioche, voici le nom que l’on donne au ventre lorsqu’il est un peu
trop rond. « On pourrait presque le pétrir avec les mains, un peu comme on
prépare ...
Multiplication of unlawful disjunctions
-
Charles B. writes: Apparently, birds are not considered wild animals by
law. Reference here, where apparently feeding them in parks in permitted
except if ...
-
*above: While Menzies was far from without fault, on many issues today's
Liberal Party would be unrecognizable for him. *
*Dr Tristan Ewins*
Much ...
Aspiring Rationalist Ritual Compendium
-
Published on September 13, 2025 4:09 AM GMT
*Posting this here in advance of Petrov Day.*
This is intended to be an archive of rationalist ritual material....
Let a Thousand New Green Deals Bloom
-
I write that “[a] decentralized ecological approach would recognize that
managing emissions is one part of a larger equation that includes the
natural carb...
12 September 2025 – today’s press releases
-
GDP: Govt must scrap their growth-crashing jobs tax Mandelson: Lib Dems
call for Parliament to vet next US Ambassador Lib Dems reveal rate of
agricultural,...
Clinton’s Lost Votes
-
https://www.facebook.com/rchusid/posts/2670987959585088 Establishment
Democrats love to blame third party voters for Clinton losing, but The New
York Times...
Awaiting my execution: A letter from Iran
-
BREAKING: Saman Naseem’s execution did not go ahead as originally scheduled
on the morning of Thursday 19 February. More information to come. Saman
remains...
Allan Meltzer's Life Work
-
The Hoover Press and the Mercatus Center have just released a new book on
Allan Meltzer's contributions to economics. The book is comprised of papers
th...
The Argentina Siren Song And Where Else It Is Sung
-
I’m back! After an extended leave of absence I’ve decided to start writing
again.
Let’s start with a story familiar to those that read MM in my first ter...
Do Higher Wages Mean Higher Standards of Living?
-
Editor's note: We have updated macroblog's location on our website,
although archival posts will remain at their original location. Readers who
use RSS sho...
The End
-
I started this blog back in 2008. What a ride it's been! Thanks to all who
took the time to interact with me -- I profited greatly from the
experience. And...
Downright intuitive and comical
-
I was on my hands and knees yesterday scrubbing a LOT of blood off a tennis
court. And yes, we won. Note to friends - my tennis is not that good, but,
I am...
AI Agents for Economic Research
-
The objective of this paper is to demystify AI agents – autonomous
LLM-based systems that plan, use tools, and execute multi-step research
tasks – and to...
Exhibition: Man's Inhumanity to Man
-
[ Meanwhile... in Guatemala - Mark Vallen. 1988. Pencil on paper 10" x 14".
On view at Man's Inhumanity to Man. Military death squads were responsible
for ...
Adjust contrast of a pdf free
-
Closer to the eye of the shooter, this is because Preview is quite
literally applying a filter to each individual page of the PDF you are
saving. the proce...
Recovering ancient voices from clay pots
-
MIT reports recovering voices from high-frame-rate video of a potato-chip
bag, extracting information from vibrational displacements as small as
1/100 of a...
Bond vigilantes call for “Day of Rates”
-
Flustered by the obstinate refusal of US interest rates to move up, bond
vigilantes are resorting to the revolutionary tactic *du jour*: Twitter!
In a thr...
My money-saving student days in the 1960s | Letter
-
Responding to an article on budgeting tips, *Robert Webb *recalls raising
money when a rag stunt went wrong
Your article (‘It more than halved my rent’: ...
Big D Has Your Rivalries Right Here
-
Editor's Note--Well that wasn't how we like it last week. 2-4. But this
week is rivalry week in the college where you throw out the records and
teams play ...
Environmentalists Are China's Useful Idiots
-
In his drive to achieve absolute power, Vladimir Lenin could count on
Western progressives and opportunist executives to serve as "useful
idiots." Today'...
Rebecca Wilder is moving to the EconoMonitors
-
I've decided to migrate News N Economics over to my new blog, The Wilder
View, on the Roubini EconoMonitors platform.
Really, I jumped at the opportunity t...
Monday Morning Readings
-
I've really been slacking on the posting lately. The must read:
July Economic Data Summary
Recommended:
Turning Dumpsters Into Swimming Pools
A Simple Expl...
Never trust a lawyer ...
-
... even when they're (supposed to be) on your side.
Ted Gioia has the breaking news:
*Authors win a big lawsuit against AI—but the judge says they may ...
We’ve moved to www.nudges.org. Come with us.
-
Nudges.wordpress.com has been a great home for the Nudge blog over the past
year and a half, but it’s time to move on. Where to? www.nudges.org. That’s
rig...
What to do?
-
by liberal japonicus from
https://everything.typepad.com/blog/2025/08/typepad-is-shutting-down.html
Typepad is shutting down August 27, 2025 We have made t...
Infrastructure roulette
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In some respects it's reasonable to think about city council as being a
kind of club.
Everyone who owns property in Wellington is a member of the Welling...
PFM Blog announcement: we are moving!
-
iStock.com/tumsasedgars Posted by Teresa Curristine, Holger van Eden, and
Richard Allen DEAR PFM BLOG USERS – The PFM Blog will be transferring to a
brand ...
To Save America’s Cities, We Need to Let Them Fail
-
Downtown Los Angeles
America's flagship cities have become laboratory experiments for social
justice. Heavily controlled by political leaders who subscri...
Inside Bright Star
-
Read about Jane Campion's film Bright Star, chronicling the love affair
between John Keat and his neighbor Fanny Brawne, as well as the poems and
love lett...
COOPERATION IS PROFITABLE
-
part of my new - ELITE MANAGEMENT THEORY series
Personal interests are paramount – most important.
The smaller the cooperating group is the better it refle...
The Harsh Truth About India’s Godmen
-
Late last month, two Indian states and the national capital were upended by
rioting mobs protesting their spiritual leader’s conviction on two counts
of ...
The Bailout: By The Actual Numbers
-
by Paul Kiel
Quick, how many billions in the red are taxpayers on the bailout of GM?
AIG? Fannie and Freddie? Is it true that the government has reaped ...
America's attempted Quartet sophistry
-
This piece was originally published at the Middle East Channel. As
more information seeps out from the Quartet principals meeting held in
Washington ...
Check Out The New Quantifiable Edges!
-
Quantifiable Edges has undergone a complete site overhaul! Part of that
overhaul included moving the blog. New posts can be found at the address
below:
h...
Printable Bookmarks With Quotes
-
Creative Handmade Bookmarks Design With Quotes – Google Search with regard
to Printable Bookmarks With Quotes Printable Bookmarks With Quotes | Second
Star...
DOE CWG Report “Moot”?
-
Somewhat breaking news. A court filing (from 9/4) from DOE has noted that
the Climate Working Group has been disbanded (as of 9/3). This was done to
make...
Yet Another Bad Analysis of AI
-
In the past I've commented on bad discussions of thinking, intelligence,
brains, and computers, such as those by Gary N. Smith, Doug Hofstadter, Arthur
Gar...
The World Cup and Making Soccer Less Boring
-
It is World Cup time, a good time to reintroduce two posts I did one of the
last times we had the World Cup capture the imagination. One of them
suggests ...
Banking fraud - is dishonesty the new greed?
-
It has not been a good month for the financial industry: JPM's ever growing
CDS trading (and apparently mismarking) loss; PFG Best's appreciation for
Adobe...
Does Death Exist? New Theory Says ‘No’
-
Many of us fear death. We believe in death because we have been told we
will die. We associate ourselves with the body, and we know that bodies
die. But ...
When Do Consumer Boycotts Work?
-
Uber, Starbucks, Budweiser. These are just a few of the brands that have
faced consumer boycotts for taking supposedly political stances in the past
few ...
“Goodnight, and Good Luck”
-
My February 2016 valedictory editorial note on the home page of Al Jazeera
America the day we closed down. Still proud of the work we did, and the way
we c...
Moved Over
-
I’ve been blogging away over at my new blog at Next New Deal, come join me
over there! Here’s the new rss feed. I might post here once in a great
while, m...
Carolina Wolf: Carolina Wolves, #1
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All it takes is a spark of Grrrrl power to set the swamp on fire! Debra
Henry is living the meek librarian cliche, except for the teeny hint of
magic in h...
Prediction Markets and the Kelly Criterion, Part 5
-
Perhaps the most famous proponent of the Kelly Criterion is Edward Thorp.
He founded the M.I.T. Blackjack Club, published various papers on gambling
and ...
The paradox of insular language
-
We often develop slang or codewords to keep the others from understanding
what we’re saying. Here’s an example (thanks BK) of the lengths that some
are goi...
Flash Commentary No, 1460b
-
• Fundamentals Could Not Be Stronger for Gold and Silver, nor Weaker for
the U.S. Dollar and Stocks, Despite Fed or Market Nonsense to the Contrary
• There...
If something can't go on forever, it will stop
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This is my last post at/as Shock Minus Control. As I mentioned in my
December post, my youngest son (now 7 months) had a congenital heart defect
repaired a...
Goldman Sachs comes late to the game
-
The Financial Times ran a story Monday about Goldman Sachs becoming the
first big dealer to orient its business around electronic fixed-income
trading and ...
Whoop!
-
That is the sound of the gravitational waves hitting the LIGO detector. A
chirp. That is also the sound of the celebratory hurrah’s from the gravity
commun...
Quantum Information Supremacy
-
I’m thrilled that our paper entitled Demonstrating an unconditional
separation between quantum and classical information resources, based on a
collaboratio...
test
-
“Virtual worlds are going to be one of the first killer apps for
blockchains and perhaps the deepest users of them.” – Fred Ehrsam,
Co-Founder, Coinbase ...
Muni Madness
-
"Investors are ignoring warning signs in the $2.8 trillion municipal-bond
market, raising the risk of a reckoning, according to some market
specialists. Nu...
The politics of the General Will in Thailand
-
Excerpts from Cultural policy as general will and social-order
protectionism: Thailand’s conservative double movement Michael K. Connors
International Jour...
Sometimes, it's right on front of your eyes ...
-
The authors of this piece have failed to apply Occam's Razor in
interpreting the central empirical finding.
https://www.aei.org/research-products/report...
The Fed: Independence vs. Accountability
-
Needing a break from the social sickness displayed so prominently in recent
days, I will distract myself with a post on economic policy, specifically,
Fede...
Thatcherism is dead: Thatcherism lives
-
Thatcherism is dead. It has ceased to be. It has expired and gone to meet
its maker. It has kicked the bucket, shuffled off this mortal coil and
joined the...
Bonds And Money
-
The US bond market is getting hammered lately as investors and traders
realize that (a) the economy is not collapsing and (b) the Fed will keep
rates hig...
Deepseek gets F+ in Econ
-
LLMs have trouble with this pretty-basic economics question:
Prompt: “*Is this factually accurate?*
*Positively correlated price-quantity pairs reveal th...
Announcement
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So it is with some sadness that I have to announce that I’m going to be
leaving True/Slant. Starting in a few days I will be back blogging
exclusively at w...
Update: A Tax Compromise Offered in Illinois
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Earlier this month I highlighted a potential tax compromise brewing in
Illinois. State senate Republicans and Democrats released a proposal to
increase I...
10 Seconds Into The Future
-
The low inflation and low interest rate environment that we experienced in
the last 20 years was only possible as inflation was exported away to low
cost p...
Issues Associated with the Current Election
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Picture Credit: derek visser (modified to exclude extraneous comments) ||
Trump and Harris are more similar than different. Both favor the rich, they
lie, ...
Help wanted: incrementalist systems builder
-
a.k.a Toolsmith a.k.a. Geek To help forecast a hot CE product in one of the
world’s largest retailers (located in Seattle). Apply within.
‘If she killed my girl she must die’
-
An Australian woman charged with poisoning her friend must be executed if
found guilty, says the victim’s father.
A Few Quick Announcements
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By James As I wrote a couple of years ago, I don’t post here anymore. I
just have a couple of updates for people who subscribe and may be
interested in my ...
RTO Gets Serious: October 1
-
If ever a week was ripe for delaying your return to the office, it was
this one. Hurricane Idalia cleared out the weather up and down the coast,
brin...
Is my pessimism justified?
-
I'm increasingly pessimistic about prospects for meaningful reform in the
wake of the financial crisis, and feel that a repeat, quite possibly on an
even l...
The Years Of Writing Dangerously
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Thirteen years ago, as I was starting to experiment with this blogging
thing, I wrote the following: [T]he speed with which an idea in your head
reaches th...
Occupy Wall Street - Marine vs 30 Cops
-
Speaking of the police. Here is a link to a video of a soldier - in uniform
- protesting the treatment of demonstrators by the police.
http://perezhilton....
England Expects (note on Dunkirk)
-
First of all, let nobody say Christopher Nolan lacks a sense of humor: for
the second time, he’s kept Tom Hardy under a voice-distorting face mask for
almo...
Uncle Warren Explains It All to You
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[image: Time for Daddy’s little dividend]
*“Sure, sure.”*
— Sidney J. Mussburger, *The Hudsucker Proxy*
Apparently some doddering old fart in Omaha, Nebr...
Low Volume Melt Up
-
*FN:* On the way down there is volume. On the way up, there is less...
waaaay less (especially for this time of the year).
Can you say algos?
So what does...
Goodbye Scienceblogs
-
Goodbye Scienceblogs
NOTE: This blog has moved. The Frontal Cortex is now over here.
I've got some exciting news: Starting today, the Frontal Cortex will ...
US Continuing Jobless Claims Fall by 3.86M
-
Continuing Jobless Claims in the United States decreased significantly last
week to 21,052,000 from a record high of 24,912,000 in the previous week.
The n...
Penny Stock Research Sources
-
Penny Stock Research Sources Just because you don’t hear about penny
stocks every day on your daily news, doesn’t mean that the penny
stock market goes wit...
Hello world!
-
Welcome to WordPress. This is your first post. Edit or delete it, then
start writing!
The post Hello world! appeared first on My WordPress.
Moving Just A Click Away
-
Tomorrow I’ll be starting to blog at National Geographic Magazine, along
with Ed Yong, Virginia Hughes, and Brian Switek. All the archives of the
Loom (f...
The Market Ticker - The Pattern of The Market
-
*Looks awfully similar to 2008.*
*Rotation back and forth, with most of the gains coming in a handful of big
names with big stories -- but no earnings to...
Arguing with Children
-
The other day the New York Times ran an op-ed about Greta Thunberg, the
teenage environmental activist. The TL;DR is that activism, particularly
the activi...
The Oil Drum writers: Where are they now?
-
- Nate Hagens is at The Monkey Trap
- JoulesBurn (Brian Maschhoff) is at Picojoule
- Euan Mearns is at Energy Matters
- Heading Out (Dave...
Mom Has Stacked Dinner Party Roster
-
GOLDEN, CO—Their eyes widening in amazement as the 43-year-old rattled off
the names of heavy hitter after heavy hitter, impressed members of the
Dreesh...
An Autopsy of American Exceptionalism
-
I’m writing this in a Parisian cafe in the year 2050. I’m doing a reverse
Hemingway, trying to become a better writer as I get into my 70s while I [
… ]
This is the end
-
Ladies and gentlemen, this is the final post I will be publishing at The
Reformed Broker....
The post This is the end appeared first on The Reformed Brok...
narratives everywhere
-
As investment professionals, we are faced with stories big and small. We
should spend more time evaluating how we analyze and react to them.
Porsche’s Next Flagship Will Be an EV Crossover
-
Despite hardcore motorsport enthusiasts collectively proclaiming the 911 as
Porsche’s greatest model of all time, it’s presently being outsold by the
all...
Save pdf smaller size mac online
-
High image quality, bring your ideas to life save pdf smaller size mac
online beautiful presentations. and instantly got the shrunken file!
Although the de...
The Senator Vs. the C.I.A.
-
Last week, Senator Dianne Feinstein, the chair of the Senate Select
Committee on Intelligence, announced “grave concerns” that C.I.A. officers
had …
New Book: ESCAPING PATERNALISM
-
by Mario J. Rizzo and Glen Whitman Book description The burgeoning field of
behavioral economics has produced a new set of justifications for
paternalism. ...
Gaza: Journalism is a Capital Crime
-
The world is rightly outraged by Israel’s systematic extermination of much
of the Gaza press corps. Over 200
The post Gaza: Journalism is a Capital Crime...
Thomas Struth: Striving for the big picture
-
Review by Tim Connor
As a photography student at Kunstakademie *Düsseldorf* in the 1970s, Thomas
Struth learned to create big, highly detailed pictures wi...
Assorted on India
-
India’s growth in the 2000s: Four facts
The rupee: Frequently asked questions
Talk is cheap
Conclusion: there is precious little fundamental reason for...
Trading the Odds on Monday – June 15, 2009
-
Friday’s session looked like a playbook example concerning -form a
historical and statictical perspective- the most probable outcome based on
those setups ...
Notes on Chinese inflation
-
http://noelmaurer.typepad.com/aab/2010/01/i-have-your-chinese-consumer-price-inflation-right-here.html
I don’t see that much of a mystery. The primary way i...
Go On Till You Come to the End; Then Stop
-
Go On Till You Come to the End; Then Stop
ScienceBlogs is coming to an end. I don't know that there was ever a really
official announcement of this, but t...
Pakistan Update
-
This morning in Islamabad, UNHCR and other UN staff held a special ceremony
to pay homage to colleagues killed in the bombing of the Pearl Continental
Hote...
To Russia With Love
-
Conspiracy theories are dangerous things and should generally not be
believed. OTOH, if the most benign among the plausible interpretations is
not all th...
Ten Years Since the Biggest VIX Spike Ever
-
Ten years ago today, we witnessed that largest one-day VIX spike in the
nearly three decade history of the VIX. On that day, the VIX rallied from
a prior...
The Final Addiction
-
< A few statements from evolutionary biologists: “Immunization is also
making once-rare or non-existent genetic variants of pathogens more
prevalent …....
The US Treasury’s missed opportunity
-
The US Treasury recently published the first in a series of reports
designed to implement the seven core principles for regulating the US
financial system ...
We've Moved!
-
If you're reading this, it means you've been following the
http://georgewashington2.blogspot.com address. We switched over to
WordPress, and from now on...
-
This site remains available as an archive of my informal writings between
2007-2013. For those interested in current commentary, I now post a regular
weekl...
Trump Indictment # 4 - Georgia-Part One
-
Fulton County Georgia District Attorney Fani Willis spoke about the Georgia
Grand Jury Indictment issued yesterday. A review of the Indictment and my
thoug...
Save pdf smaller size mac online
-
High image quality, bring your ideas to life save pdf smaller size mac
online beautiful presentations. and instantly got the shrunken file!
Although the de...
Should losers from free trade be compensated?
-
It's been a while... far too long. Suffice to say that my day job has been
keeping me very busy this year and has made blogging difficult. I want to
rect...
Aging Might Not Be Inevitable
-
There are biological underpinnings to aging—and so researchers are
investigating cell manipulations, transfusions of young blood, and chemical
compounds th...
Good Chart Checklist
-
Note: this was prepared for my ECON 3403 students, and is a list of all of
the mistakes I commonly see in student charts. Please add your suggestions
for t...
Donald Trump’s Brand Takes a Haircut
-
The Donald Trump brand has been bruised so badly by the presidential
candidate’s controversial remarks on Mexican immigration that some
marketing and licen...
Please Use Zerohedge.org
-
As zerohedge.com is currently experiencing technical issues, please use the
following website for all the latest updates: www.zerohedge.org while we
resolv...
Politics=The art of the possible Political Theory=Theory of the good, just,etc. society. Political Economy=The art of the possible Economics=Theory of economic behavior
Political Parties are comprised of: 1) Policies 2) Interest Groups 3) Ideologies 4) Cultural views
Don's Hermeneutics: Like Rabbi Yishmael's Rules, Only Not
"Searle's Sagacity":
"If a person can't explain something simply, then they don't know what they're talking about. The only exception being Kant."
"Corollary to Searle's Sagacity":
"questions should be simple and comprehensible, and meant to elicit a simple explanation."
"Samuel Johnson's Dictum":
One thing about passing fifty years of age is that I now feel old enough to invoke what I call Samuel Johnson's Dictum. It is thus: If I invoke a view based on an author that I read in the past, and that view is not actually held by that author, I'm more than willing to claim the view as originating with me. The beauty of this Dictum is that it is self-referential. It is based upon my reading of Johnson and on Boswell, but I can't remember the actual references that led me to believe that Johnson believed something like this. In any case, I do.
"Burke's Principle":
Another of my motley list of nostrums is what I call Burke's Principle. Burke's Principle holds that there is a distinction between: 1) Political Theory: A theory of the perfect society, the good life, etc. Your general political philosophy. 2) Politics: The rather messy art of governing which involves dealing with what is possible on earth and compromising as the need arises.
"Burke's Rule": "All government, indeed every human benefit and enjoyment, every virtue, and every prudent act, is founded on compromise and barter. "
"Burke's Paradox": "Mere parsimony is not economy. Expense, and great expense, may be an essential part in true economy."
"Burke's Prescience":
"You can never plan the future by the past.
Letter to a Member of the National Assembly (1791)"
"Burke's Wisdom":
"A very great part of the mischiefs that vex the world arises from words.
Letter to Richard Burke"
"Bagehot's Principles":
1) If the Fed exists, it will be the Lender Of Last resort, and that has to be taken in to account in real world Political Economy. It should lend freely in a crisis to solvent banks.
2) The rules for LOLR( from here on down this includes any government guarantee ) intervention should be clear, public, and followed, otherwise Moral Hazard is ineffective. All guarantees must be explicit.
3) The terms must be onerous.
4) The LOLR should get something valuable in return.
Here are a few others:
5) The taxpayer's interests should come first.
6) Moral Hazard needs to be constantly applied by quickly liquidating problem banks in normal times.
7) Any entity receiving a guarantee will have to be supervised or regulated effectively, and violations should be quickly and severely punished.
8) There is no doubt that any entity receiving a LOLR guarantee will need to be more conservative in its practices in order to limit the liability of the taxpayer.
9) There should be a class of financial concerns that can act more freely, but they should not receive LOLR guarantees. They will be strictly supervised or regulated though, and are subject to laws against fraud, etc."
"Who can forget the end of "Planet of the Apes" when Charlton Heston, kneeling before the half-buried remains of the Statue of Liberty, slams his fists into the sand and cries, "You maniacs! You blew it up! Ah, damn you ... damn you all to hell!"
Now imagine the same scene, but with a half-buried Morgan Stanley building standing in for Miss Liberty and a time-traveling Walter Bagehot playing the lead and you've got the perfect Hollywood dramatization of the real-life tragedy that, with luck, is having its denouement on Wall Street.
Bagehot? The great Victorian man of letters, best remembered today as the second and most celebrated editor of the British magazine The Economist, wasn't exactly a hunk. But he certainly could have delivered those futile last lines with real conviction, for he was among the first to recognize the vast destructive potential of that newfangled weapon of Victorian finance: the modern central bank.
Bagehot first alerted readers to this potential and offered his suggestions for containing it in an article that appeared in The Economist after the great panic and credit crisis of 1866. That panic witnessed the spectacular collapse of Overend, Gurney & Co., which had long been Great Britain's premier investment house.
Bagehot understood that, during such panics, the Bank of England alone commanded the confidence needed to serve other financial firms as a "lender of last resort." But as Bagehot put it later in his book "Lombard Street: A Description of the Money Market" (1873), the bank's "faltering way" -- its arbitrary and inconsistent use of its unique lending powers -- tended only to make things worse.
"The public," Bagehot wrote, "is never sure what policy will be adopted at the most important moment: it is not sure what amount of advance will be made. ... And until we have on this point a clear understanding with the Bank of England, both our ability to avoid crises and our terror at crises will always be greater than they would otherwise be."
The ultimate source of trouble, Bagehot believed, was the very existence of the Bank of England and the special privileges it enjoyed. But because nothing save a revolution seemed likely to do away with the "Old Lady of Threadneedle Street," as it was called, Bagehot's preferred, practical solution was for the bank expressly to commit itself to lending freely during crises, though on good collateral only, and at "penalty" rates.
The restrictive provisions were supposed to limit aid to otherwise solvent firms panic had rendered illiquid.
Bagehot's recommendation has since become a sort of master precept of central banking -- albeit one that's mainly honored in the breach by central bankers.
To be fair to today's central bankers, there's never been much agreement on how to apply Bagehot's rule in practice. Just what do "good collateral" and "penalty rates" mean in times like these?
While no one might precisely be able to define good collateral -- and one can debate whether the rate at which banks offer to lend unsecured funds to other banks, known as the London Interbank Offered Rate, or LIBOR rate, plus 8 percent constitutes a "penalty" rate -- who even pretends that recent central bank lending has been based on good collateral?
But rescuing insolvent firms is the least of it. The real damage comes from the Treasury's utter lack of any consistent last-resort lending rule. The recently enacted financial institutions bailout bill does little to clarify this.
That's just the sort of thing that troubled Bagehot almost a century and a half ago, when central banks were still in their swaddling clothes. Yet central bankers and governments still don't get it, despite the lip service they pay to this great thinker from our past."
"The Unwisdom of Crowds Financial panics still require what Walter Bagehot prescribed--that practical men violate their own principles. by Christopher Caldwell 12/22/2008, Volume 014, Issue 14
Neither Barack Obama nor John McCain had much of value to say about the financial crisis as it raged through the headlines this fall. Rather than shred their campaign strategies, they played it safe, as most politicians would have. But in the name of justice we ought to recall that there was one candidate who did foresee our predicament with considerable accuracy when it still lay far in the future. Ron Paul, in almost every speech he made during the Republican primaries, spoke of bubbles, reckless credit growth, and the "unsustainability" of present policy. So why isn't there more demand for the common-sense solutions he put forward? Because common sense is not much use in a financial panic.
This was the great discovery of Walter Bagehot, the prolific 19th-century essayist and journalist, who was editor of the Economist from 1860 to 1877. (His name rhymes with gadget.) Ninety-nine percent of the time, common sense is a synonym for practicality. But in a serious banking crisis, doing the commonsensical thing--hunkering down and counting your pennies--has proved to be not practical at all. Bagehot's Lombard Street is an insider's look at the Bank of England, and at the principles on which political and financial leaders act when advanced economies come under pressure. Those principles are depressing in the extreme for anyone with an uncomplicated idea of how a democracy works. But they are effective. That is why, in the so-called Anglo-Saxon world, Bagehot's book still provides the bedrock of policy thinking during financial emergencies, including our present one.
Lombard Street was published in 1873, seven years after the sudden collapse of Overend, Gurney & Co., a bank that lost £11 million, spread panic among investors, sparked a run, and became "the model instance of all evil in business." The crisis made such a deep impression on British finance and government that the country did not have another bank run for 141 years--not until Northern Rock collapsed in the summer of 2007. (English investors must have longer memories than American ones. Most of our own noxious subprime mortgages were contracted, and the securities built on them concocted, after Enron became our own model instance of evil in 2001.) It was the Bank of England that took charge of averting panic, during the Overend, Gurney crisis and thereafter. It did so by injecting credit into the economy, by bailing people out. Bagehot approved of this. Many ordinary retailers could not pay their suppliers until they got the money for the things they sold. Without credit, they would be ruined, and the ruin would spread to those to whom they owed money. This was not a question of moral failing, it was just the way a modern economy worked.
But the modern economic system interacts with the modern political system--democracy--in a rather uncomfortable way. Indeed, at more than one juncture in Lombard Street, Bagehot framed the problem of booms and busts as part of the "increasingly democratic structure of English commerce." People in a democracy are most comfortable when their institutions do the same things that they would do as individuals. In a crisis, banks--like everyone else--reflexively hoard their money. But a central bank must do the opposite. It must lend freely.
This was the most basic affront to common sense that the Bank of England presented, but it was not the worst. The worst was that the bank could carry out its necessary duties as a lender of last resort only by breaking the law. The basis of the bank's operating procedure--and of its soundness--was the Bank Act of 1844. We would call it a regime of sound money. It included stringent caps on the ratio of notes issued to reserves held. These caps were hewed to when the economy was running smoothly. Yet at the time Bagehot was writing, a quarter century later, the law had already been suspended three times. Not just that. "No similar occasion has ever yet occurred," Bagehot wrote, "in which it has not been suspended." So the law on which the solvency of the British nation rested was ironclad, except when someone felt a need to break it.
Stranger still, never did the Bank of England acknowledge its duty as the lender of last resort. Some of its governors even denied that any such duty existed. Bagehot thought the bank should come clean about what it really was:
There should be a clear understanding between the Bank and the public that, since the Bank hold our ultimate banking reserve, they will recognise and act on the obligations which this implies--that they will replenish [the reserve] in time of foreign demand as fully, and lend it in times of internal panic as freely and readily, as plain principles of banking require.
But there was a reason for the central bankers' dissembling. If the bank ever acknowledged a duty to rescue banks by generous extensions of credit, it would create a form of moral hazard. Thomson Hankey, a Bank of England director whom Bagehot much admired (and to whom the financial writer James Grant devotes an admiring essay in his new book Mr. Market Miscalculates), called Bagehot's lender-of-last-resort views "the most mischievous doctrine ever broached in the monetary or banking world in this country."
In practice, Bagehot was right and Hankey was wrong. The bank was beyond question the lender of last resort. In principle, Hankey was right and Bagehot was wrong. Unless there was a real, credible threat that a bank would be allowed to fail, the guarantee of rescue would simply get priced into any financial bubble that developed, making things worse when the bubble popped. The situation required what we would now call "strategic ambiguity"--both Hankey's doctrine and Bagehot's practice, which contradicts it.
The situation today requires the same mix. Central banking is thus often a high-stakes game of chicken. And sometimes, when banks enter the game insufficiently scared, it will be played out to the end. It certainly was in September when the U.S. Treasury terrified the financial world by not coming to the rescue of Lehman Brothers. This was a catastrophe in terms of Bagehot's practice, but it will produce benefits in terms of Hankey's principle. It will discourage people from paying more than is reasonable for assets on the belief that they come equipped with an insurance policy (the promise of a central bank rescue) that has been underwritten by taxpayers. The Republicans who nearly derailed the Treasury's Troubled Assets Relief Program in September played a similar role.
A final problem is that there are limits to how accountable a central bank can be. Everyone is always hollering for clear rules and transparency. But a dirty secret of regulation is that it frequently influences conduct most effectively when it is capricious and opaque. Any regulatory system will reveal its vulnerabilities over long use. If it addresses economic problems in a predictable way, savvy investors will find a way to "game" that predictability. You can draw an analogy with antidepressant drugs. There is no permanent right match of medication for a depressive. Antidepressants work only until the mind (or is it the brain?) finds a way around them, at which point a new, unfamiliar drug must be substituted. In the same way, no matter how good the content of a regulatory regime, it must change periodically if big market players are to be kept from profiting off it.
As Bagehot outlined his system, he was conscious that the practical realities of banking required him to heap paradox upon paradox. There is a hint of both Andrew Jackson and Thomas Aquinas in the way he referred to central banking as an "unnatural" thing in its very conception. "The business of banking ought to be simple," he wrote. "If it is hard it is wrong." If it is hard, the banker is either delegating poorly or has entangled his institution in complex transactions where it has no business. According to Bagehot, "Adventure is the life of commerce, but caution, I had almost said timidity, is the life of banking."
Centralizing a society's cash reserves is complicated, reckless, and artificial:
A republic with many competitors of a size or sizes suitable to the business, is the constitution of every trade if left to itself, and of banking as much as any other. A monarchy in any trade is a sign of some anomalous advantage, and of some intervention from without. . . . The natural system of banking is that of many banks keeping their own cash reserve, with the penalty of failure before them if they neglect it.
In his ideas of company size, Bagehot harkened back to the 18th century rather than ahead to our own. To modern eyes, Bagehot is, as a factual matter, simply wrong. The natural tendency under free-market conditions is towards consolidation, and even monopoly. If you want small firms, you must protect them through government--whether this means Teddy Roosevelt-ian trust-busting, French-style subsidies to tobacconists, the EU's hounding of Microsoft, or the NIMBY anti-Wal-Mart campaigns aimed at preserving Mom-and-Pop stores. Bagehot sometimes contradicted himself on this point, noting also that "a large bank always tends to become larger, and a small one tends to become smaller," but his application of the word unnatural to a large central bank was frequent and must be taken as his settled view. It is curious that Bagehot, a contemporary of Marx, came to the opposite (and false) conclusion about how firms evolve.
Where Bagehot would agree with Marx is in his belief that there is something predictably destabilizing about modern economies. You don't need banks to have a precarious economy, or one liable to speculation--Bagehot noted that there were no banks, as we would understand them, in 1720, at the time of the South Sea Bubble and the Mississippi Scheme. But modern banking is precarious by design. "In exact proportion to the power of this system is its delicacy," he wrote. "I should hardly say too much if I said its danger." The power, delicacy, and danger all have the same source. In fact they are just different names for the same thing: leverage.
At the very opening of the book, Bagehot illustrates with exquisite simplicity how, at least in a boom economy, traders on margin can "harass and press upon, if they do not eradicate, the old capitalist." The old capitalist in question is the poor sap who believes all this stuff about neither-a-borrower-nor-a-lender-be and is foolish enough to be using his own cash:
If a merchant have £50,000 all his own, to gain 10 per cent on it he must make £5,000 a year, and must charge for his goods accordingly; but if another has only £10,000, and borrows £40,000 by discounts (no extreme instance in our modern trade), he has the same capital of £50,000 to use, and can sell much cheaper. If the rate at which he borrows be 5 per cent, he will have to pay £2,000 a year; and if, like the old trader, he make £5,000 a year, he will still, after paying his interest, obtain £3,000 a year, or 30 per cent, on his own £10,000. As most merchants are content with much less than 30 per cent, he will be able, if he wishes, to forego some of that profit, lower the price of the commodity, and drive the old-fashioned trader--the man who trades on his own capital--out of the market.
Later, Bagehot showed that this need for leverage is no different for those selling money than it is for those selling dry goods. The banker can no more choose not to lend than the merchant can choose not to borrow:
The bill-broker has, in one shape or other, to pay interest on every sixpence left with him, and that constant habit of giving interest has this grave consequence: the bill-broker cannot afford to keep much money unemployed. He has become a banker owing large sums which he may be called on to repay, but he cannot hold as much as an ordinary banker, or nearly as much, of such sums in cash, because the loss of interest would ruin him.
In finance, once you can have leverage, you must have leverage. Once you have some leverage, getting more of it than your competitors is a matter of survival. And when governments and central banks debate whether to loosen or tighten up money, they face a constant clamor from the financial world to permit more leverage still. That is why, even in democracies, the instruments of monetary policy tend to be kept far from the influence of voters, and even hidden from view. Otherwise, credit tends to spiral. Bubbles result.
Nothing could be more foolish than to assume that this process of spiraling speculation is unleashed by "greed," unless by greed you mean human nature. Credit spirals are a darker aspect of the world Adam Smith described in The Wealth of Nations and Bernard de Mandeville did in the Fable of the Bees. Just as society can be improved by the uncoordinated action of the selfishly motivated, an economy can collapse for reasons having nothing to do with anybody's cupidity.
We should be moral in the way we think about money, but a credit system tends to make a mess of moral accounting. Bagehot described London's financial district as "a sort of standing broker between quiet saving districts of the country and the active employing districts." Decent, puritanical Suffolk farmers want to put their money in a safe place; Lancashire entrepreneurs want money to put to work. Thanks to London bankers, both can follow their wishes and make a profit in the process. We have an idea that the Suffolk dairyman is the "moral" party here (he's saving) and the Lancashire speculator the "immoral" one (he's gambling). But, once a banking system intervenes, they are both gambling and they are both saving. In good times you are welcome to mouth the folkloric cliché that holds farmers to be better people than financiers. When depression looms, you had better realize that the rain falls on the just and the unjust.
Many Americans who have wound up underwater on their houses and maxed out on their credit cards are greedy, climbing, brand-intoxicated, materialistic shopaholics who thought the world owed them a living. But just as many of them are not. They are trapped, as surely as financial institutions are, in a system based on wild borrowing. Participation in this system is not exactly required, but it is not exactly optional, either. One's quality of life is determined not just by one's purchasing power but also by one's relative economicstanding. Chagrin at seeing one's neighbors get richer faster may be a sign of bad character, but do not for a minute assume there is nothing to feel chagrin about! When it comes to the very goods people deem most essential--the proper mate; the schooling of one's children; the size, location, elegance, and comfort of one's house--relative standing is more important than absolute wealth.
Those who kept their money in savings banks in the 1990s lost out to those who did things we are supposed to disapprove of, like "spending money they didn't have," borrowing profligately to invest in stocks and even bonds, which appreciated at an average of 15 percent a year over the decade. Among rich people, how one entered the present decade had more to do with how one had done in the stock market than with how one had done in the labor market. Is that just? Of course it's not! It's easy to see now. But while the boom was going on there was all sorts of rationalizing about why it was okay that the social hierarchy should be reordered through stock and housing speculation. One line of argument was that people who did not have a ton of money in stocks, as well as those who rented rather than bought the houses they lived in, were foolish. This line of argument peaked at the turn of the decade, when Americans elected a president who had argued that the public was foolish for not launching its retirement savings onto the open seas of the stock market.
Bagehot saw that a speculative mania eventually sweeps up everyone in its path. "Every great crisis reveals the excessive speculations of many houses which no one before suspected," he wrote, "and which commonly indeed had not begun or had not carried very far those speculations, till they were tempted by the daily rise of price and the surrounding fever." Avaricious people get hurt, but it is in the nature of crashes that they are not the ones who get hurt most. A tragic figure present in almost every historic account of speculation and collapse in history is the person who believed, year after year, that the boom was an illusion, and held himself aloof until, at the very last minute, whether out of self-doubt or deference to the opinions of his fellow man, he entered the fray and was (having bought at the top, rather than the bottom, of the market) wiped out. What a wicked irony! His punishment is as much for his long and wise forbearance as for his momentary weakness.
So the "cultural contradictions of capitalism" run deeper than we thought. The classic idea, as laid out in their different ways by the economist Joseph Schumpeter and the sociologist Daniel Bell, is that capitalism rewards diligence; diligence produces wealth; wealth begets idleness; and idleness undermines capitalism. But when, as now, push comes to shove, we can ask whether there is really anything particularly capitalist about the virtues of diligence and self-restraint. The real capitalist virtues appear to be optimism and luck. From a central-banking perspective, the cultural contradictions are not results of capitalism but elements of it.
The problem with central banking is that it reacts to a system that has been mismanaged by rewarding the managers. That is why objections to central banking, although they can come from the right (Ron Paul, Jim Bunning) or the left (Barney Frank, William Greider), tend to be populist. Bagehot was no populist. He was comfortable with the idea that what some people think should be more important than what other people think:
Almost all directors who bring special information labor under a suspicion of interest; they can only have acquired that information in present business, and such business may very possibly be affected for good or evil by the policy of the Bank. But you must not on this account seal up the Bank hermetically against living information.
Although he would surely fault Treasury Secretary Hank Paulson for many things, the criticism most often heard at present--that Paulson is too close to former colleagues on Wall Street, where he worked for years as CEO of Goldman Sachs--would strike Bagehot as misplaced.
Because it is on Wall Street, alas, that "the state of credit" is to be determined:
The state of credit at any particular time is a matter of fact only to be ascertained like other matters of fact; it can only be known by trial and inquiry. And in the same way, nothing but experience can tell us what amount of "reserve" will create a diffused confidence.
To be blunt, credit is successfully reestablished when financial elites say, "When." Credit is close to a synonym for the mood of the ruling class. To say an economy is based on credit is to say it is based on animal mysteries. Glamour, prestige, élan, sprezzatura, cutting a figure . . . that is what the economy is made of. It is a rather terrifying thought. Viewed as Bagehot viewed it, from the perspective of a central bank in a crisis, an advanced economy looks an awful lot like a primitive economy."
"Loyal readers, please take a moment to check out Gretchen Morgenson’s column this week. She’s taken a close look at the buyout of Bear Stearns organized by the Federal Reserve, and she has come to an intriguing conclusion: that the Fed not only wanted to prevent financial havoc - it also wanted to deter speculators who were betting on big banks to fail.
Adherents of the Walter Bagehot school of central banking - and I have been among them at times - have cried foul at the sight of big bailouts and the granting of emergency credit at low interest rates. The Bagehot argument is that emergencies that arise from the risks that banks have chosen to take should not be treated with overwhelming sympathy. Emergency credit should be offered, yes, but at rates that will make banks think twice about using the safety net again. That’s not the case this time around (neither in the United States nor in Britain, and probably not in Europe either by the time the folks in Brussels are finished), so the central banks may be telling financial institutions that they can take silly risks without fear of disaster.
But if Morgenson is right, there is a long-term purpose here, too: to reduce the winnings of those who bet on failure, and thus to reduce the incentives to bring that failure to pass. And let’s face it, the speculators aren’t operating in a vacuum; their bets can start to snowball with market sentiment, as they did against Lehman Brothers last week. Still, the Bagehot argument (often called moral hazard) is also a powerful one - which one do you agree with?"
"In his 1873 book “Lombard Street,” the closest thing to a user’s guide to central banking, Walter Bagehot criticized the Bank of England’s handling of earlier panics by responding “hesitatingly, reluctantly, and with misgiving.”
Federal Reserve Chairman Ben Bernanke, who has read his Bagehot and kept a copy in his Princeton office when he was a professor, responded to recent developments first by pumping money into the markets through the New York Fed’s open-market operations and then last week by easing the terms on loans to banks from the Fed’s discount window.
Bagehot (pictured at right) still makes for good reading at times like this.
“What is wanted and what is necessary to stop a panic is to diffuse the impression, that though money may be dear, still money is to be had. If people could be really convinced that they could have money if they wait a day or two, and that utter ruin is not coming, most likely they would cease to run in such a mad way for money. Either shut the Bank at once, and say it will not lend more than it commonly lends, or lend freely, boldly, and so that the public may feel you mean to go on lending. To lend a great deal, and yet not give the public confidence that you will lend sufficiently and effectually, is the worst of all policies; but it is the policy now pursued.”
Robert Feldman, Morgan Stanley’s chief economist for Japan, writes in a note today that it’s key to distinguish between internal discredit — private domestic lenders retreating — and external discredit, which Bagehot defined as a foreign drain on a bank’s money. (Bagehot’s solution to the problem of external discredit is to still lend freely but “at very high rates.”) That doesn’t apply in today’s floating rate system, Feldman says, and exchange rates don’t provide a good substitute, with the dollar’s drop against the yen suggesting we have external discredit while the strengthening against the euro saying we don’t.
Feldman writes: “My view is that the modern counterpart of ‘external discredit’ is moral hazard. The credit of the U.S. IS a problem, since no one knows how big the subprime and related housing market problems really are. Given how poorly banks know their clients, the ‘high rates’ part should come into play. There is no way to re-establish confidence unless those who have made loans to questionable borrowers pay a price for rash lending. Only then will markets regain confidence that risk is under control.
“The next stage of the credit problem — and whether it affects the real economy seriously — depend on eliminating the moral hazard,” Feldman says. “The faster the moral hazard in eliminated, the less impact on the real economy.”
Fed officials are acutely aware of the moral hazard, having resisted action for weeks to not be seen as bailing out risky investments. But they also don’t want a crisis to feed on itself. The Fed stressed its statement, in lowering the discount rate for banks, that it would accept “a broad range of collateral…including home mortgages and related assets.” The central bank sought to reassure a market that had been roiled by risky investments in subprime mortgages.
That’s how the Bank of England halted a panic in 1825, as Bagehot recounts: “A panic, in a word, is a species of neuralgia, and according to the rules of science you must not starve it. The holders of the cash reserve must be ready not only to keep it for their own liabilities, but to advance it most freely for the liabilities of others. They must lend to merchants, to minor bankers, to ‘this man and that man,’ whenever the security is good. In wild periods of alarm, one failure makes many, and the best way to prevent the derivative failures is to arrest the primary failure which causes them. The way in which the panic of 1825 was stopped by advancing money has been described in so broad and graphic a way that the passage has become classical. ‘We lent it,’ said Mr. Harman, on behalf of the Bank of England, ‘by every possible means and in modes we had never adopted before; we took in stock on security, we purchased Exchequer bills, we made advances on Exchequer bills, we not only discounted outright, but we made advances on the deposit of bills of exchange to an immense amount, in short, by every possible means consistent with the safety of the Bank, and we were not on some occasions over-nice. Seeing the dreadful state in which the public were, we rendered every assistance in our power.’ After a day or two of this treatment, the entire panic subsided, and the ‘City’ was quite calm.”
"Bagehot advocated in 1873 that a Lender of Last Resort in a crisis should lend at a penalty rate to solvent but illiquid banks that have adequate collateral. The doctrine has been criticised as having no place in our modern interbank market, but this is wrong. Bagehot’s prescription aims to eliminate the coordination problem of investors at the base of the crisis. It is still a useful guide for action when the interbank market stalls.1 It makes clear that discount-window lending to entities in need may be necessary in a crisis.
Bagehot's doctrine, however, is easy to state and hard to apply. It requires the central bank to distinguish between institutions that are insolvent and those that are merely illiquid. It also requires them to assess the collateral offered. Central banks, because of information limitations, are bound to make mistakes, losing face and money in the process. This doesn’t mean they should not try. Poor collateral versus massive liquidity
The collateral should be valued under “normal circumstances”, that is, in a situation where the coordination failure of investors does not occur. This involves a judgment call in which the central bank values the illiquid assets. A central bank that only takes high quality collateral will be safe, but will have to inject much more liquidity and/or set lower interest rates to stabilise the market. This may fuel future speculative behavior. Some of this may have happened in the Greenspan era, in the aftermath of the crisis in Russia and LTCM, and after the crash of the technological bubble. The ECB and the Federal Reserve have accepted now partially illiquid collateral that the market would not. This seems appropriate and releases pressure to lower interest rates to solve the problem, something that should be done only if there are signs of deterioration in the real economy. The problem is that central banks are extending the lender of last resort facility outside the realm of traditional banks to entities, like Bear Stearns, that they do not supervise and, therefore, over which they do not have first hand information. How does the Fed know whether Bear Stearns or other similar institutions are solvent? It seems that the Fed is not following Bagehot’s doctrine here.
Finally, if banks and investors are bailed out now, why should they be careful next time? This is the moral hazard problem: help to the market that is optimal once the crisis starts has perverse effects in the incentives of market players at the investment stage. The issue is that only when the moral hazard problem is moderate does it pay to eliminate completely the coordination failure of investors with central bank help. When the moral hazard problem is severe, a certain degree of coordination failure of investors - that is, allowing some crises - is optimal to maintain discipline when investing and, amending Bagehot, some barely solvent institutions should not be helped."
http://www.house.gov/jec/imf/blueprnt.htm
"This goal is not new. In fact, it underlay Walter Bagehot's (1873) classic policy prescriptions for domestic central banking: to lend freely at a penalty rate on good collateral. Bagehot argued an elastic and immediate supply of liquidity was essential to an effectively structured lender of last resort, and that appropriate loss sharing rules in the form of collateral requirements and penalty interest rates would discourage abuse of the safety net."
"By slashing interest rates too much in 2007-2008, the Fed has accentuated the foreign drain and thus made the alleviation of the domestic drain more difficult. Yet, despite this mistake, Bagehot would approve of other actions the Fed has taken to deal with the domestic drain by unblocking specific impacted domestic markets. These include (1) swapping Treasury bonds for less safe private bonds, (2) opening its discount window to shaky borrowers, and (3) maybe even rescuing Bear Sterns. He would also approve of the relaxation of capital constraints on Fannie Mae, Freddy Mac and so on, for mortgage lending. Yet these measures will be insufficient if the foreign drain continues.
To repeat Bagehot's Rule: "very large (domestic) loans at very high rates are the best remedy for the worst malady of the money market when a foreign drain is added to a domestic drain." The Fed, and the U.S. government more generally, have so far got it only half right."
"More than a century ago, a British economic journalist, Walter Bagehot, set out the classical principles for a central bank acting as lender of last resort: lend freely in a crisis at a penalty rate against collateral. Adapted to international lending, Bagehot's rule is the proper rule for a restructured, more effective IMF."
The market maker of last resort function can be fulfilled in two ways. First, the central bank can make outright purchases and sales of a wider range of securities than they currently do. Second, central banks can accept a wider range of securities as collateral in repos, and in collateralised loans and advances at the discount window than they currently do. Following Bagehot’s rule, the MMLR should buy these securities outright or accept them as collateral only on terms that would imply a stiff financial penalty to the owner.The central bank of course already applies a liquidity ‘haircut’ even to liquid instruments offered as collateral in repos or at the discount window.Because the MMLR would have to establish a buying price ‘in the dark’, that is, unaided by recent relevant market prices, and would inevitably take on much more credit risk than central banks have become accustomed to, the ‘haircuts’ should be severe – a financial version of ‘short back and sides’.
"Further crises in 1857 and 1866 prompted the debate between Bagehot and Thomson Hankey, a director and former governor of the Bank of England. Notwithstanding the Bank’s undoubted responsibility, as trustee of the nation’s reserve, to support the financial markets, Bagehot wrote: If we ask how the Bank of England has discharged this great responsibility, we shall be struck by three things: first, . . . the Bank has never by any corporate act or authorised utterance acknowledged the duty, and some of its directors deny it; second, (what is even more remarkable), no resolution of Parliament, no report of any Committee of Parliament (as far as I know), no remembered speech of a responsible statesman, has assigned or enforced that duty on the Bank; third (what is more remarkable still), the distinct teaching of our highest authorities has often been that no public duty of any kind is imposed on the Banking Department of the Bank; that, for banking purposes, it is only a joint stock bank like any other bank; that its managers should look only to the interest of the proprietors and their dividend; that they are to manage as the London and Westminster Bank or the Union Bank manages. (1873, 153–54) Although the Bank usually in the end supplied the market, its “faltering way” caused needless uncertainty and more severe panics than if it communicated clearly that it could be counted on (Bagehot 1873, 64). According to Bagehot, the rules— to lend freely at penalty rates on sound collateral—under which assistance would be provided should be stated also. The public is never sure what policy will be adopted at the most important moment: it is not sure what amount of advance will be made. The best palliative to a panic is a confidence in the adequate amount of the Bank reserve, and in the efficient use of that reserve. And until we have on this point a clear understanding with the Bank of England, both our liability to crises and our terror at crises will always be greater than they would otherwise be. (1873, 196–97)"
One which doesn't quite:
http://www.portfolio.com/views/blogs/market-movers/2008/05/13/bernanke-on-bagehot?rss=true "Bernanke on Bagehot
I doubt a week has gone by since last summer during which I haven't seen some pundit or other trot out Walter Bagehot's dictum that in the event of a credit crunch, the central bank should lend freely at a penalty rate. More often than not, this is contrasted with the actions of the Federal Reserve, which seems to be lending freely at very low interest rates.
Ben Bernanke, in a speech today, addressed this criticism directly:
What are the terms at which the central bank should lend freely? Bagehot argues that "these loans should only be made at a very high rate of interest". Some modern commentators have rationalized Bagehot's dictum to lend at a high or "penalty" rate as a way to mitigate moral hazard--that is, to help maintain incentives for private-sector banks to provide for adequate liquidity in advance of any crisis. I will return to the issue of moral hazard later. But it is worth pointing out briefly that, in fact, the risk of moral hazard did not appear to be Bagehot's principal motivation for recommending a high rate; rather, he saw it as a tool to dissuade unnecessary borrowing and thus to help protect the Bank of England's own finite store of liquid assets. Today, potential limitations on the central bank's lending capacity are not nearly so pressing an issue as in Bagehot's time, when the central bank's ability to provide liquidity was far more tenuous.
I'm no expert on Walter Bagehot, and in fact I admit I've never read Lombard Street. But I'll trust in Bernanke as an economic historian on this one, unless and until someone else makes a persuasive case that Bagehot's penalty rate really was designed to punish the feckless rather than just to preserve the Bank of England's limited liquidity."
"So, we have, what I will call "Grant's Graham For Investing":
1) Decent Size
2) Current Assets Exceed Liabilities By Two Times
3) 10 Continuous Years Of Profit
4) 20 Continuous Years Of Dividends
5) 10 Years Of Earnings Growth Exceeding 33%
6) Price To Earnings Ratio Less Than 15
7 ) Price To Book Ratio Less Than 1.5"
"Cake As Gift Theory":
Now, I feel similarly about government incentives. When Fannie and Freddie tempted investors, this led to the housing bubble. I think that I'm going to call this the Cake As Gift Theory. I hand you a cake assuming that you have the good sense to eat it over time, and you gorge yourself and eat it at one sitting and get sick. Clearly I'm responsible for this by handing you the cake. Give you a gift or incentive, clearly I must assume that it will cause you to be irrational.
"Spigot Theory":
One other pet theory I have about finance, besides Bagehot's Principle, is the Spigot Theory. I might rename it. It applies to the low rate of interest or the sloshing pool of money explanations for the current crisis. Turn the tap too far, then you can't stop the tub from overflowing, even if you're a human agent standing right next to the tub. I call this a mechanistic explanation as opposed to an explanation based on human agency.
"The Pragmatic Milton Friedman Principle":
The Pragmatic Milton Friedman Principle. Friedman introduced a concept called the Negative Income Tax. He proposed it saying that it was a pragmatic compromise between the Welfare State and a basic libertarian position.
"Hardy's Harangue": To Me:
"There is no scorn more profound, or on the whole more justifiable, than that of the men who make for the men who explain. Exposition, criticism, appreciation, is work for second-rate minds. "
"Titchmarsh's Two Truths":
1)"Perhaps we could regard numbers as a sort of medium of exchange, like money. Most people are really interested in the goods and services which the world offers, and to them money is only a symbol for these. But it is not a meaningless symbol. A system of barter, in which we do without money and merely exchange goods, would be very inconvenient, and practically impossible in a complicated society. So a system in which we reduce all mathematics to statements such as "I have more fingers than you have noses" would be too cumbrous to contemplate seriously. Numbers are symbols, and very useful and interesting ones. To mathematicians who work with them every day they acquire a reality at least equal to that of anything else. "
2) "The question what numbers are has been much debated by philosophers, and they do not seem to have reached any agreement about it. There is nothing particularly surprising or distressing about this. It has been said that mathematicians are happy only when they agree, and philosophers only when they disagree. Philosophic doubts about the nature of number have never prevented mathematicians from getting on with their calculations, or from agreeing when they have got the right answer. So perhaps the situation is satisfactory to all parties. "
"Thoreau's Truth":About Government: "I heartily accept the motto, "That government is best which governs least"; and I should like to see it acted up to more rapidly and systematically. Carried out, it finally amounts to this, which also I believe--"That government is best which governs not at all"; and when men are prepared for it, that will be the kind of government which they will have. Government is at best but an expedient; but most governments are usually, and all governments are sometimes, inexpedient."
"Will's Warning": Concerning The Use Of "Socialism": Hyperbole is not harmless; careless language bewitches the speaker's intelligence. And falsely shouting "socialism!" in a crowded theater such as Washington causes an epidemic of yawning.
"Kling's Principle":About Regulated Banks And Unregulated Financial Entities "The banks seem to find a way to take risks, and the unregulated folks seem to find a way to get guarantees."
"Janeway's Dictum": On Political Economy "Political economy is not a science, it's a clinical art, like medicine."
"Cowen's Creed": On Policies
"YOU CAN’T TURN BAD TO GOOD The good New Deal policies, like constructing a basic social safety net, made sense on their own terms and would have been desirable in the boom years of the 1920s as well. The bad policies made things worse. Today, that means we should restrict extraordinary measures to the financial sector as much as possible and resist the temptation to “do something” for its own sake."
"Hendry's Heartfelt":
"I antagonise people,' says Hugh Hendry. 'It's part of my skill set."
"Diebel's Dare:
"You can’t be forced out further on the yield curve than a perpetual.”
"Peston's Promise": Good Until ...
"And, as I've been pointing out for some time, we are being asked to provide life support to a swathe of the real economy, from steel makers to car manufacturers.
The Government will succumb and will lend taxpayers' money to non-financial companies.
In a way, there's no choice, because we'll be hobbled for years as an economy if our few remaining manufacturers and exporters are wiped out."
"Trader's Narrative's Due Diligence":
"The process of investigation undertaken by an party to gather material information on actual or potential risks involved in a financial transaction or relationship."
My Favorite Dish: A Ritz Salad Apples, grapefruit and potatoes in a mayonnaise sauce. Delicious!
Favorite Writer: Claud Langham
Best Philosophical Analysis Ever: "You would not enjoy Nietzsche, sir. He is fundamentally unsound."
The Quotes Above
W. Bagehot, R.W. Emerson, M. Proust, W.H. Auden, W. Bagehot, P.Levine
Read J.L. Austin "A Plea For Excuses" here:
http://www.ditext.com/austin/plea.html
Read " Reflections on the Revolution in France by Edmund Burke 1790" here:
Read Remarks by Governor Ben S. Bernanke Before the National Economists Club, Washington, D.C. November 21, 2002Deflation: Making Sure "It" Doesn't Happen Here"
You who live secure In your warm houses Who return at evening to find Hot food and friendly faces:
Consider whether this is a man, Who labours in the mud Who knows no peace Who fights for a crust of bread Who dies at a yes or a no. Consider whether this is a woman, Without hair or name With no more strength to remember Eyes empty and womb cold As a frog in winter.
Consider that this has been: I commend these words to you. Engrave them on your hearts When you are in your house, when you walk on your way, When you go to bed, when you rise. Repeat them to your children. Or may your house crumble, Disease render you powerless, Your offspring avert their faces from you.
Translated by Ruth Feldman And Brian Swann
For me, being a Jew means feeling the tragedy of yesterday as an inner oppression. On my left forearm I bear the Auschwitz number; it reads more briefly than the Pentateuch or the Talmud and yet provides more thorough information. It is also more binding than basic formulas of Jewish existence. If to myself and the world, including the religious and nationally minded Jews, who do not regard me as one of their own, I say: I am a Jew, then I mean by that those realities and possibilities that are summed up in the Auschwitz number.
– Jean Améry, At the Mind's Limits, p. 94
Style is not something applied. It is something that permeates. It is of the nature of that in which it is found, whether the poem, the manner of a god, the bearing of a man. It is not a dress. W. Stevens
Man can embody truth but he cannot know it. W.B. Yeats
Do you approve of violence, Miss Boon? Nor do I. It reeks of spontaneity C. Langham
J.L. Austin
'there is no simple and handy appendage of a word called "the meaning of the word (x)"'
...our common stock of words embodies all the distinctions men have found worth drawing, and the connections they have found worth marking, in the lifetime of many generations: these surely are likely to be more numerous, more sound, since they have stood up to the long test of survival of the fittest, and more subtle, at least in all ordinary and reasonable practical matters, than any that you or I are likely to think up in our armchair of an afternoon – the most favorite alternative method
L. Wittgenstein
94. But I did not get my picture of the world by satisfying myself of its correctness; nor do I have it because I am satisfied of its correctness. No: it is the inherited background against which I distinguish between true and false.
95. The propositions describing this world-picture might be part of a kind of mythology. And their role is like that of rules of a game; and the game can be learned purely practically, without learning any explicit rules.
96. It might be imagined that some propositions, of the form of empirical propositions, were hardened and functioned as channels for such empirical propositions as were not hardened but fluid; and that this relation altered with time, in that fluid propositions hardened, and hard ones became fluid.
97. The mythology may change back into a state of flux, the river-bed of thoughts may shift. But I distinguish between the movement of the waters on the river-bed and the shift of the bed itself; though there is not a sharp division of the one from the other.
98. But if someone were to say "So logic too is an empirical science" he would be wrong. Yet this is right: the same proposition may get treated at one time as something to test by experience, at another as a rule of testing.
99. And the bank of that river consists partly of hard rock, subject to no alteration or only to an imperceptible one, partly of sand, which now in one place now in another gets washed away, or deposited.
100. The truths which Moore says he knows, are such as, roughly speaking, all of us know, if he knows them.
L. Wittgenstein On Certainty Go here To Read http://budni.by.ru/oncertainty.html
From "The Snowfall" by D. Justice
The landmarks are gone. Nevertheless
There is something familiar about
this country.
Slowly now we begin to recall
The terrible whispers of our elders
Falling softly about our ears
In childhood, never believed till now.
Jackson's Rules Of The Road
I'm going to be a happy idiot And struggle for the legal tender Where the ads take aim and lay their claim To the heart and the soul of the spender And believe in whatever may lie In those things that money can buy Thought true love could have been a contender Are you there? Say a prayer for the pretender Who started out so young and strong Only to surrender
Gotta do what you can just to keep your love alive Trying not to confuse it with what you do to survive
And in the end they traded their tired wings For the resignation that living brings And exchanged loves bright and fragile glow For the glitter and the rouge And in the moment they were swept before the deluge
Don't confront me with my failures I had not forgotten them
But its a long way that I have come Across the sand to find you here among these people in the sun Where your children will be born You'll watch them as they run Oh its so far the other way my life has gone
I caught a ride into the city every chance I got I wasn't sure there was a name for the life I sought Now I'm a long way gone down the life I got I don't know how I believed some of the things I thought
Rock me on the water Sister will you soothe my fevered brow Rock me on the water, maybe Ill remember Maybe Ill remember how Rock me on the water The wind is with me now So rock me on the water Ill get down to the sea somehow
But you said "morocco" and you made me smile And it hasn't been that easy for a long, long while And looking back into your eyes I saw them really shine Giving me a taste of something fine Something fine
"In camp too, a man might draw the attention of a comrade working next to him to a nice view of the setting sun shining through the tall trees of the Bavarian woods (as in the famous water color by Dürer), the same woods in which we had built an enormous, hidden munitions plant.One evening, when we were already resting on the floor of our hut, dead tired, soup bowls in hand, a fellow prisoner rushed in and asked us to run out to the assembly grounds and see the wonderful sunset.Standing outside we saw sinister clouds glowing in the west and the whole sky alive with clouds of ever-changing shapes and colors, from steel blue to blood red.The desolate grey mud huts provided a sharp contrast, while the puddles on the muddy ground reflected the glowing sky.Then, after minutes of moving silence, one prisoner said to another, 'How beautiful the world could be!'
Groucho Marx to S J Perelman: “From the moment I picked up your book until I put it down, I was convulsed with laughter. Some day I intend reading it.”
Posts
1) They think that the interest rate of the bond reflects the interest rate expected for the next two years:
"interest rate expectations"
2) There aren't enough 2 year buyers for the govts needs, so it has to raise the price by paying a higher interest rate:
"an exceptional rate of supply"
So, one group is holding out for higher interest because they know that the govt needs to pay them more right now, while the other group is holding out because they don't want to buy a bond at a yield below inflation going forward.
But shouldn't there be more demand if investors were certain that inflation was going to be below these yields? And shouldn't inflation hawks want a rate safely above the expected rate of inflation? Couldn't this then just be an equilibrium between the two? Or what am I missing? Everything?