Monday, October 31, 2011
Here's How It Works...
If you ban short-selling, people can't hedge, and when they want to manage risk on a position, they have no choice but to sell.
Saturday, October 29, 2011
More Books, Less Protest
Before I get to the focus of my post, I wanted to make some comments about the Occupy Wall Street phenomenon. While I understand and accept the frustration as it relates to wealth inequality in this country, and that Wall Street has become the target for built-up ire, I have to say that the movement has started to come across more and more like a bunch of misguided simpletons. I say that because it feels like it is getting co-opted by people with bad ideas. To wit, I've seen Michael Moore at the site in Lower Manhattan and on TV talking about how capitalism has failed -- and that idea has definitely gained traction in the message of the protesters. But, let's think about it for a minute -- capitalism is normally a system where winners and losers get their just rewards. At the point in time when the big banks got bailed out, it was no longer capitalism nor the free markets at play. What we witnessed was crony capitalism, which is a totally different animal. And the suggestion that deregulation is to blame also seems overstated. The financial services industry is chock full of rules and regulations -- that they were sometimes misguided and unenforced is again a black eye for crony capitalism, not the free markets. So, with that out of the way...
I just finished reading Depression, War, and Cold War by Robert Higgs. I was actually pretty excited about it because Mssr. Higgs is a very well regarded Austrian economist and historian, who occasionally draws praise even from his ideological opponents. In any event, the part that had me interested was that (by reputation) the book successfully challenged the standard narrative that World War II brought the country out of the Great Depression. In truth, I had perhaps set my expectations too high -- not because I came away thinking that the traditional orthodoxy is correct, but because there was no silver bullet argument in the book that altered my own level of conviction about the correct interpretation. Perhaps, what I should have recognized is that neither side has an incontestable version of the impact of the war. Nevertheless, I did come away from the book with important questions that leave doubt about what is often thrown out as fact. Some examples:
-While unemployment dropped to 1.2% during the war, in large measure it was the result of 10 million men who were conscripted, and another 6 million men who volunteered only to avoid the draft and likely assignment to infantry.
-While GDP spiked up during the war period, private investment represented only 3 to 6 percent in any given year. It was not until after the war was actually over that we see private investment back to levels that matched those in 1929.
-Even before the war, the New Deal was unable to bring about any self-sustaining recovery, in large part because the policies implemented did not engender the private investment that's needed to create jobs. Again, it was not until after the end of the war that we see GPI begin to approach pre-Depression levels. Higgs spends a bit of time discussing the notion of regime uncertainty and how the FDR presidency was very anti-business, both in policy and personality, exacerbating the problems of trying to get recovery going.
-The U.S. lived in a command economy during the war, which is to say life was not easy. Many products and services were simply not available. Even if money was being made, consumers could not enjoy the fruits of their labor in this period.
-An interesting quote: "Simply by sniffing the data for the years 1941-46, one ought to have smelled a rat. Consider that between 1940 and 1944, real GDP increased at an average rate of 13 percent -- a growth spurt wholly out of line with any experienced before or since. Moreover, that extraordinary growth took place notwithstanding the movement of some 16 million men (equivalent to 28.6 percent of the total labor force of 1940) into some armed forces at some time during the war and the replacement of those prime workers mainly by teenagers, women with little or no previous experience in the labor market, and elderly men. Is it plausible that an economy subject to such severe and abruptly imposed human-resource constraints could generate a growth spurt far greater than any other in its entire history? Further, is it plausible that when the great majority of the servicemen returned to the civilian labor force -- some 9 million of them in the year following V-J Day -- while millions of their relatively unproductive wartime replacements left the labor force, the economy's real output would fall by 22 percent from 1945 to 1947? The utter implausibility of such developments suggests that scholars have placed far too much weight on the metaphor of a war time production 'miracle'." (pp. 136)
-As an addendum to the quote, Higgs notes that given it was a command economy, any rational way of tracking market prices, as part of keeping track of GDP during that period, is incredibly difficult and unscientific, given that such measures were "manifestly arbitrary". Which arguably again calls into question the degree of recovery.
In hindsight, the thought that struck me while reading the book was that war sure was an unpleasant way of trying to get the country back on track. And we say that knowing two things now: the results from fiscal policy on the scale of war are inconclusive in achieving their stated aim, while anything short of it is conclusively unable to do what is needed.
I just finished reading Depression, War, and Cold War by Robert Higgs. I was actually pretty excited about it because Mssr. Higgs is a very well regarded Austrian economist and historian, who occasionally draws praise even from his ideological opponents. In any event, the part that had me interested was that (by reputation) the book successfully challenged the standard narrative that World War II brought the country out of the Great Depression. In truth, I had perhaps set my expectations too high -- not because I came away thinking that the traditional orthodoxy is correct, but because there was no silver bullet argument in the book that altered my own level of conviction about the correct interpretation. Perhaps, what I should have recognized is that neither side has an incontestable version of the impact of the war. Nevertheless, I did come away from the book with important questions that leave doubt about what is often thrown out as fact. Some examples:
-While unemployment dropped to 1.2% during the war, in large measure it was the result of 10 million men who were conscripted, and another 6 million men who volunteered only to avoid the draft and likely assignment to infantry.
-While GDP spiked up during the war period, private investment represented only 3 to 6 percent in any given year. It was not until after the war was actually over that we see private investment back to levels that matched those in 1929.
-Even before the war, the New Deal was unable to bring about any self-sustaining recovery, in large part because the policies implemented did not engender the private investment that's needed to create jobs. Again, it was not until after the end of the war that we see GPI begin to approach pre-Depression levels. Higgs spends a bit of time discussing the notion of regime uncertainty and how the FDR presidency was very anti-business, both in policy and personality, exacerbating the problems of trying to get recovery going.
-The U.S. lived in a command economy during the war, which is to say life was not easy. Many products and services were simply not available. Even if money was being made, consumers could not enjoy the fruits of their labor in this period.
-An interesting quote: "Simply by sniffing the data for the years 1941-46, one ought to have smelled a rat. Consider that between 1940 and 1944, real GDP increased at an average rate of 13 percent -- a growth spurt wholly out of line with any experienced before or since. Moreover, that extraordinary growth took place notwithstanding the movement of some 16 million men (equivalent to 28.6 percent of the total labor force of 1940) into some armed forces at some time during the war and the replacement of those prime workers mainly by teenagers, women with little or no previous experience in the labor market, and elderly men. Is it plausible that an economy subject to such severe and abruptly imposed human-resource constraints could generate a growth spurt far greater than any other in its entire history? Further, is it plausible that when the great majority of the servicemen returned to the civilian labor force -- some 9 million of them in the year following V-J Day -- while millions of their relatively unproductive wartime replacements left the labor force, the economy's real output would fall by 22 percent from 1945 to 1947? The utter implausibility of such developments suggests that scholars have placed far too much weight on the metaphor of a war time production 'miracle'." (pp. 136)
-As an addendum to the quote, Higgs notes that given it was a command economy, any rational way of tracking market prices, as part of keeping track of GDP during that period, is incredibly difficult and unscientific, given that such measures were "manifestly arbitrary". Which arguably again calls into question the degree of recovery.
In hindsight, the thought that struck me while reading the book was that war sure was an unpleasant way of trying to get the country back on track. And we say that knowing two things now: the results from fiscal policy on the scale of war are inconclusive in achieving their stated aim, while anything short of it is conclusively unable to do what is needed.
Tuesday, October 25, 2011
Quote of the Day
Came across this gem on the Capitalist Exploits website:
"Though no one can go back and make a brand new start, anyone can start from now and make a brand new ending." - Carl Bard
"Though no one can go back and make a brand new start, anyone can start from now and make a brand new ending." - Carl Bard
More Good Ideas
This from a piece by Joe Gagnon, discussing the recent announcement regarding the Home Affordable Refinance Program (HARP).
"The Administration plans to improve HARP in several dimensions, most notably by removing the 125 percent loan-to-value ceiling, by eliminating the need for a new appraisal in many cases, by lowering fees for borrowers, and by waiving some representations and warranties that lenders are required to make to the housing agencies."
As background, the program was originally set up to allow those with Fannie and Freddie guaranteed loans to re-finance even if they were currently above the traditional 80% LTV limit. You know, so they could go out and spend more money on iPads.
"The Administration plans to improve HARP in several dimensions, most notably by removing the 125 percent loan-to-value ceiling, by eliminating the need for a new appraisal in many cases, by lowering fees for borrowers, and by waiving some representations and warranties that lenders are required to make to the housing agencies."
As background, the program was originally set up to allow those with Fannie and Freddie guaranteed loans to re-finance even if they were currently above the traditional 80% LTV limit. You know, so they could go out and spend more money on iPads.
Monday, October 24, 2011
A Thought Question
Given that I have an interest in economic policy and like to read about it, I was asked by someone what my platform would be if I was running for President. In response, I offer up my set of guiding principles that could hopefully lead to better government and constructive policy ideas.
-Simplify the tax code. That probably means a flat tax and getting rid of all the loopholes and deductions. The issue, of course, is that in the short term it places a greater burden on lower income and middle class folks. Which probably makes it a non-starter. My response, without some empirical study to back it up, is that it would even out over time and be an engine for economic growth going forward.
-There should probably be some sort of means testing for entitlement programs.
-End our overseas excursions on behalf of liberty. And deal with the crony bidding system in place as it relates to the exchange between private defense companies and the military. I plan to expand on this point in a later post, but trust me when I tell you that the current system is outrageous.
-The government is simply an inefficient allocator of resources. But, unlike the true blue Libertarian crowd, I don't necessarily subscribe to an anarcho-capitalist vision. With that said, the size and scope of government's powers must be checked.
-Finally, the "PhD Standard" at the Federal Reserve (to quote Jim Grant) is a problem -- the idea that they can effectively target interest rates has been shown a fallacy these past 10 or 15 years. I'm not sure what that means policy-wise, but it needs to be addressed.
-Simplify the tax code. That probably means a flat tax and getting rid of all the loopholes and deductions. The issue, of course, is that in the short term it places a greater burden on lower income and middle class folks. Which probably makes it a non-starter. My response, without some empirical study to back it up, is that it would even out over time and be an engine for economic growth going forward.
-There should probably be some sort of means testing for entitlement programs.
-End our overseas excursions on behalf of liberty. And deal with the crony bidding system in place as it relates to the exchange between private defense companies and the military. I plan to expand on this point in a later post, but trust me when I tell you that the current system is outrageous.
-The government is simply an inefficient allocator of resources. But, unlike the true blue Libertarian crowd, I don't necessarily subscribe to an anarcho-capitalist vision. With that said, the size and scope of government's powers must be checked.
-Finally, the "PhD Standard" at the Federal Reserve (to quote Jim Grant) is a problem -- the idea that they can effectively target interest rates has been shown a fallacy these past 10 or 15 years. I'm not sure what that means policy-wise, but it needs to be addressed.
NGDP Targeting
I've mentioned it several times lately because it is getting more attention as a possible policy idea, so here is Scott Sumner's explanation of what it is.
Thursday, October 20, 2011
Maybe a CMT could help
There was a throwaway comment in a post by Karl Smith about a month back that got me thinking. In particular, the folks who are arguing for more monetary and fiscal stimulus rely, in part, on the notion that we have fallen off our glide path as it relates to the trajectory of GDP. Here's the chart -- I have added my own trendline in red:
As someone who definitely takes an interest in technical analysis as a tool for investing, I find it curious that economists think the patch between 2002 and 2008 should somehow be deemed the new baseline. If you think the economy was in the midst of a major bubble, which I do, and that perhaps there was an illusion of wealth at work, then why isn't a resumption of the pre-bubble trendline more appropriate?
Wednesday, October 19, 2011
You say potato...
On one of the blogs I follow, there has been an ongoing debate between the Austrians and the MMT'ers over the notion of whether the U.S. (as a monopoly issuer of its currency, who holds no debts in a foreign denomination) can default. On the face of it, it seems like a silly exercise. I think it is safe to say that the Fed can print up as many dollars as it wants to repay the country's debts. But, from my seat, that isn't the real concern. It is whether in the exercise of that power they end up debasing the currency and destroying its purchasing power.
To give a little context to the proceedings, as NGDP targeting starts to go mainstream, the MMT'ers are saying that inflation is our friend and can get the economy going again. The counter-argument is that the same distortions and intertemporal effects that caused the most recent dust-ups in the economy are again at play, and the ending will look pretty similar to what we saw already. At the crux of it is whether interest rates will shoot up at some point when the papering-over no longer causes the same high that it has in the past. And to that point, the MMT folks don't think rates will rise because the Fed can manage them to whatever extent they please.
But, it feels like this back and forth is really over semantics. No, the U.S. won't literally default, even if rates go higher. But, the citizenry that saves in U.S. dollars might have some major issues in the future using them to actually buy anything.
To give a little context to the proceedings, as NGDP targeting starts to go mainstream, the MMT'ers are saying that inflation is our friend and can get the economy going again. The counter-argument is that the same distortions and intertemporal effects that caused the most recent dust-ups in the economy are again at play, and the ending will look pretty similar to what we saw already. At the crux of it is whether interest rates will shoot up at some point when the papering-over no longer causes the same high that it has in the past. And to that point, the MMT folks don't think rates will rise because the Fed can manage them to whatever extent they please.
But, it feels like this back and forth is really over semantics. No, the U.S. won't literally default, even if rates go higher. But, the citizenry that saves in U.S. dollars might have some major issues in the future using them to actually buy anything.
Still Changing The Channel...
On the heels of my earlier post, we have this recent turn of events to contemplate.
Update: And another county heard from.
Update: And another county heard from.
Tuesday, October 18, 2011
Our Intellectual Opponents Got Nothing
Take an hour and listen to this talk/conversation/interview with Kyle Bass of Hayman Capital, who successfully shorted subprime a few years back. My favorite nuggets:
-"Zero interest rate policy is a trap. I don't think you can ever leave it until you restructure. Right, if you layer on double-digit deficits and debt on a zero interest rate policy, then you're spring-loading your expenses. Your expenses get to be many multiples of your revenues."
-"The one question you have to ask yourself if you're investing capital today is does debt matter. Because if it doesn't, go buy stocks, go buy houses, go buy bonds, lever up, because everything's going to be fine if debt doesn't matter. But if it does matter, like it has for the last 3000 years every time, well then you better think a little harder about what...how you're allocating your assets and why."
Elsewhere he walks through why the Keynesian experiment is destined to fail and why the historical "widow-maker" (shorting JGBs) stands ready to make some people gawd-awful rich in the next couple of years. Overall, really good stuff.
-"Zero interest rate policy is a trap. I don't think you can ever leave it until you restructure. Right, if you layer on double-digit deficits and debt on a zero interest rate policy, then you're spring-loading your expenses. Your expenses get to be many multiples of your revenues."
-"The one question you have to ask yourself if you're investing capital today is does debt matter. Because if it doesn't, go buy stocks, go buy houses, go buy bonds, lever up, because everything's going to be fine if debt doesn't matter. But if it does matter, like it has for the last 3000 years every time, well then you better think a little harder about what...how you're allocating your assets and why."
Elsewhere he walks through why the Keynesian experiment is destined to fail and why the historical "widow-maker" (shorting JGBs) stands ready to make some people gawd-awful rich in the next couple of years. Overall, really good stuff.
Monday, October 17, 2011
The Only Sober Guy In The Room
I am going to chalk it up to the fact that there must be something huge and gargantuan that I don't understand, but on the face it, it seems to me that everyone is just crazy.
On Friday, I linked to a speech given by Paul Krugman, and focused on an excerpt where he alluded to the notion of government filling in the void for balance sheet constrained consumers when it comes to spending. I called it moral hazard, I called it inflating away the problems, I implied that I think that it will cause problems later. Whatever it is, though, it seems to represent a Keynesian point of view that does not think a funding crisis is possible as long as we are in a liquidity trap. Over the weekend, I read a post on Bob Murphy's site about Krugman and how he was again singing the praises of IS/LM in anticipating interest rates in the US. The overarching point was that in the US and in Europe the Central Banks are intervening, but rates are only shooting up in Greece (where there are solvency concerns) and not here -- which I guess is a roundabout way of saying the IS/LM model was proven correct that the size of bond issuance, in and of itself, is not the determining factor in where rates will go. That conclusion gives me pause, but rather than re-hashing the same objections in relation to the same Keynesian, we'll re-focus.
Skip down to the comments section for the post on Murphy's site that I linked to -- a couple of folks (representing the MMT side of the debate) argued that it all boils down to the following: you must look at whether a country has its liabilities denominated in a free floating, non convertible currency of which it is monopoly issuer. In other words, you need to see whether a country's Central Bank remains unconstrained and can guarantee everything/print as much as it wants. Again, there is this belief amongst the most popular strains of economic thought that you can print and print and print without consequence.
On the one hand, you have Krugman claiming victory when a funding crisis is something that can sneak up on you at any moment. (And, to put it in perspective (1) the economy is still flat to down despite humongous budget deficits, and (2) I believe the markets seem incapable of focusing on more than one thing at once, which is Europe for now -- when it isn't anymore, then we'll see how the US looks.) On the other hand, you have the MMT, quasi-monetarists who think the Central Bank can also print with reckless abandon and there is never a risk of funding crisis. And that seems to be the consistent theme, and why I have no comfort with any of these theories -- they really believe that printing worthless pieces of paper and inflation itself can right the ship.
Money should be a store of value. If the government debases it, it is punishing the most responsible amongst us who are savers and living on fixed incomes. Low rates force individuals out into the market and to speculate as a means of staying even. CPI is a number put out by the BLS that seems to be under control, but inflation can be far more pernicious.
Maybe I'm missing something. I hope that I'm missing something. I fear that I'm not.
On Friday, I linked to a speech given by Paul Krugman, and focused on an excerpt where he alluded to the notion of government filling in the void for balance sheet constrained consumers when it comes to spending. I called it moral hazard, I called it inflating away the problems, I implied that I think that it will cause problems later. Whatever it is, though, it seems to represent a Keynesian point of view that does not think a funding crisis is possible as long as we are in a liquidity trap. Over the weekend, I read a post on Bob Murphy's site about Krugman and how he was again singing the praises of IS/LM in anticipating interest rates in the US. The overarching point was that in the US and in Europe the Central Banks are intervening, but rates are only shooting up in Greece (where there are solvency concerns) and not here -- which I guess is a roundabout way of saying the IS/LM model was proven correct that the size of bond issuance, in and of itself, is not the determining factor in where rates will go. That conclusion gives me pause, but rather than re-hashing the same objections in relation to the same Keynesian, we'll re-focus.
Skip down to the comments section for the post on Murphy's site that I linked to -- a couple of folks (representing the MMT side of the debate) argued that it all boils down to the following: you must look at whether a country has its liabilities denominated in a free floating, non convertible currency of which it is monopoly issuer. In other words, you need to see whether a country's Central Bank remains unconstrained and can guarantee everything/print as much as it wants. Again, there is this belief amongst the most popular strains of economic thought that you can print and print and print without consequence.
On the one hand, you have Krugman claiming victory when a funding crisis is something that can sneak up on you at any moment. (And, to put it in perspective (1) the economy is still flat to down despite humongous budget deficits, and (2) I believe the markets seem incapable of focusing on more than one thing at once, which is Europe for now -- when it isn't anymore, then we'll see how the US looks.) On the other hand, you have the MMT, quasi-monetarists who think the Central Bank can also print with reckless abandon and there is never a risk of funding crisis. And that seems to be the consistent theme, and why I have no comfort with any of these theories -- they really believe that printing worthless pieces of paper and inflation itself can right the ship.
Money should be a store of value. If the government debases it, it is punishing the most responsible amongst us who are savers and living on fixed incomes. Low rates force individuals out into the market and to speculate as a means of staying even. CPI is a number put out by the BLS that seems to be under control, but inflation can be far more pernicious.
Maybe I'm missing something. I hope that I'm missing something. I fear that I'm not.
Sunday, October 16, 2011
This May Have Legs
Courtesy of Brent Cook:
Israeli airport security has a better idea than the full-body scanner
The Israelis are developing an airport security device that eliminates the privacy concerns that come with full-body scanners at the airports.
It's a booth you can step into that will not X-ray you, but will detonate any explosive device you may have on you. They see this as a win-win for everyone, with none of this crap about racial profiling. It also would eliminate the costs of a long and expensive trial. Justice would be swift. Case closed!
You're in the airport terminal and you hear a muffled explosion. Shortly thereafter an announcement comes over the PA system... "Attention standby passengers - we now have a seat available on flight number XXXX. Shalom!"
Israeli airport security has a better idea than the full-body scanner
The Israelis are developing an airport security device that eliminates the privacy concerns that come with full-body scanners at the airports.
It's a booth you can step into that will not X-ray you, but will detonate any explosive device you may have on you. They see this as a win-win for everyone, with none of this crap about racial profiling. It also would eliminate the costs of a long and expensive trial. Justice would be swift. Case closed!
You're in the airport terminal and you hear a muffled explosion. Shortly thereafter an announcement comes over the PA system... "Attention standby passengers - we now have a seat available on flight number XXXX. Shalom!"
Friday, October 14, 2011
Closing The Week With A Flurry
I just got through reading a recent talk given Paul Krugman in England. As someone who is trying to be open and receptive to all channels of economic thought, I must say, he is pretty smooth and eloquent. Having said that, the following passage really jumped out at me:
"Suppose, in particular, that the government can borrow for a while, using the borrowed money to buy things like infrastructure. The true social cost of these things will be very low, because the spending will be putting resources that would otherwise be unemployed to work. And government spending will also make it easier for highly indebted players to pay down their debt. If the spending is sufficiently sustained, it can bring the debtors to the point where they're no longer so severely balance-sheet constrained, and further deficit spending is no longer required to achieve full employment."
I am troubled. If I think back to my earlier post about Keynes and his theory, what I am reminded of is the notion that the government is put in a position to pick winners and losers -- they are assumed able to allocate money in an efficient manner. Krugman's scenario also reeks of moral hazard. If you keep reading after the quote above, he objects to the notion of having people face up to their bad decisions (particularly those that were levered) as it will be the mechanism by which it takes far longer to reach recovery. So, in the end, there is no true cleansing of the problem. Instead, we inflate, which strikes me as setting us up for the next crisis. And, through all of it, it seems beyond possible to him that eventually the federal government will face its own funding crisis in the picture he's painted. But, hey, what do I know -- he's a Nobel laureate and I'm just a guy who's read a couple of books on economics.
"Suppose, in particular, that the government can borrow for a while, using the borrowed money to buy things like infrastructure. The true social cost of these things will be very low, because the spending will be putting resources that would otherwise be unemployed to work. And government spending will also make it easier for highly indebted players to pay down their debt. If the spending is sufficiently sustained, it can bring the debtors to the point where they're no longer so severely balance-sheet constrained, and further deficit spending is no longer required to achieve full employment."
I am troubled. If I think back to my earlier post about Keynes and his theory, what I am reminded of is the notion that the government is put in a position to pick winners and losers -- they are assumed able to allocate money in an efficient manner. Krugman's scenario also reeks of moral hazard. If you keep reading after the quote above, he objects to the notion of having people face up to their bad decisions (particularly those that were levered) as it will be the mechanism by which it takes far longer to reach recovery. So, in the end, there is no true cleansing of the problem. Instead, we inflate, which strikes me as setting us up for the next crisis. And, through all of it, it seems beyond possible to him that eventually the federal government will face its own funding crisis in the picture he's painted. But, hey, what do I know -- he's a Nobel laureate and I'm just a guy who's read a couple of books on economics.
Addendum to my post on the Hicks model...
As promised, as my understanding of IS/LM grows, I plan to add to my commentary on it. So, here's the deal -- I was talking about the zero lower bound and how the IS curve shifts to the left, to a point where the LM curve is flat. In essence. what's going on is that the given interest rate in order to achieve full employment has gone negative -- the "liquidity trap". In other words, the LM curve goes horizontal (since the vertical axis is interest rates) because it is not possible for nominal rates to go negative, even though that's what the model is telling us is needed for full employment. Thus, in such a scenario, the Keynesian belief is that the act of government spending to increase aggregate demand should not cause rates to rise, and there will be no crowding out. In the liquidity trap, desired savings is greater than desired investment, so the government is simply making use of those excess funds. The image below hopefully clarifies that point (pulled from a Krugman piece).
Narrative Versus Reality
As should be clear by now, when there is a topic that I find interesting and want to explore a little bit, this blog has become the venue where I can riff on it and see whether any interesting conclusions can be fleshed out. With that in mind, this posting covers a subject that I have often wondered about, but never spent any time really examining until now. Consider yourself warned.
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It is well documented how the United States ran budget surpluses in the late 90s (a fact that can be observed here). At the same time, while the public debt was going down, the national debt was continuing to increase every year (a fact that can be observed here and here). So, what explains the difference, and what are the implications?
As a starting point, it is important to understand that the national debt consists of two pieces: the public debt (which per the Treasury website covers "all federal debt held by individuals, corporations, state or local governments, foreign governments, and other entities outside the United States Government" and includes "Treasury Bills, Notes, Bonds, TIPS, United States Savings Bonds and State and Local Government Series securities") and intragovernmental holdings ("IG") (again, per the Treasury website, these are "Government Account Series securities held by Government trust funds, revolving funds and special funds"). The first piece is that which you hear about all the time when there is a treasury auction. The latter is comprised of government borrowings from trust funds, like social security, the civil service retirement and disability fund, and the military retirement fund. It is debt, like any other, that needs to be repaid, or else the programs that it borrows from will not be able to pay out to their beneficiaries.
Thus, by implication, if the public debt portion was decreasing in the late 90s, but the national debt was still going up, the explanation must lie in a substantial increase in the IG category. The question is, on order of magnitude, whether this more obscure piece was increasing at a rate consistent with recent historical trend, or whether it ramped up and therefore calls into question the legacy of a prudent and fiscally responsible government during that period.
Specifically, below is the degree of IG borrowing that occurred (with the given annual (surplus)/deficit in parentheses next to it):
1991: $162.7 Bn ($269.2 Bn)
1992: $109.0 Bn ($290.3 Bn)
1993: $91.8 Bn ($255.1 Bn)
1994: $78.1 Bn ($203.2 Bn)
1995: $117.2 Bn ($164.0 Bn)
1996: $143.4 Bn ($107.4 Bn)
1997: $166.4 Bn ($21.9 Bn)
1998: $182.3 Bn (($69.3) Bn)
1999: $255.7 Bn (($125.6) Bn)
2000: $254.1 Bn (($236.2) Bn)
2001: $261.5 Bn (($128.2) Bn)
At first blush, it would appear that the surpluses from 1998-2001 also coincided with large jumps in the IG segment. An important disclaimer is that the social security trust fund was taking in a lot more money than it was paying out, largely due to the tremendous job growth that was witnessed (contributing to both the surplus and the funds available to borrow on the IG side). However, it is also clear that the government could be accused of a little bit of tricky accounting, in that it still borrowed a whole lot and used the IG avenue to make it less obvious.
Nevertheless, my goal here was not to impugn the reputation of the late 90s. Just to point out that always lost in the narrative is that there was a bubble forming (which calls into question just how solid things really were), and, when you factor in the IG issue, that the government was potentially misleading in its presentation of the true shape and scope of things.
And with that, thanks for playing.
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It is well documented how the United States ran budget surpluses in the late 90s (a fact that can be observed here). At the same time, while the public debt was going down, the national debt was continuing to increase every year (a fact that can be observed here and here). So, what explains the difference, and what are the implications?
As a starting point, it is important to understand that the national debt consists of two pieces: the public debt (which per the Treasury website covers "all federal debt held by individuals, corporations, state or local governments, foreign governments, and other entities outside the United States Government" and includes "Treasury Bills, Notes, Bonds, TIPS, United States Savings Bonds and State and Local Government Series securities") and intragovernmental holdings ("IG") (again, per the Treasury website, these are "Government Account Series securities held by Government trust funds, revolving funds and special funds"). The first piece is that which you hear about all the time when there is a treasury auction. The latter is comprised of government borrowings from trust funds, like social security, the civil service retirement and disability fund, and the military retirement fund. It is debt, like any other, that needs to be repaid, or else the programs that it borrows from will not be able to pay out to their beneficiaries.
Thus, by implication, if the public debt portion was decreasing in the late 90s, but the national debt was still going up, the explanation must lie in a substantial increase in the IG category. The question is, on order of magnitude, whether this more obscure piece was increasing at a rate consistent with recent historical trend, or whether it ramped up and therefore calls into question the legacy of a prudent and fiscally responsible government during that period.
Specifically, below is the degree of IG borrowing that occurred (with the given annual (surplus)/deficit in parentheses next to it):
1991: $162.7 Bn ($269.2 Bn)
1992: $109.0 Bn ($290.3 Bn)
1993: $91.8 Bn ($255.1 Bn)
1994: $78.1 Bn ($203.2 Bn)
1995: $117.2 Bn ($164.0 Bn)
1996: $143.4 Bn ($107.4 Bn)
1997: $166.4 Bn ($21.9 Bn)
1998: $182.3 Bn (($69.3) Bn)
1999: $255.7 Bn (($125.6) Bn)
2000: $254.1 Bn (($236.2) Bn)
2001: $261.5 Bn (($128.2) Bn)
At first blush, it would appear that the surpluses from 1998-2001 also coincided with large jumps in the IG segment. An important disclaimer is that the social security trust fund was taking in a lot more money than it was paying out, largely due to the tremendous job growth that was witnessed (contributing to both the surplus and the funds available to borrow on the IG side). However, it is also clear that the government could be accused of a little bit of tricky accounting, in that it still borrowed a whole lot and used the IG avenue to make it less obvious.
Nevertheless, my goal here was not to impugn the reputation of the late 90s. Just to point out that always lost in the narrative is that there was a bubble forming (which calls into question just how solid things really were), and, when you factor in the IG issue, that the government was potentially misleading in its presentation of the true shape and scope of things.
And with that, thanks for playing.
Quotable
Courtesy of the colleague that I mentioned the other day (paraphrasing slightly):
"Doesn't matter if it's an A, B, C or worse -- no property is too big a challenge. I've managed places before where I had to walk around with a gun."
More later.
"Doesn't matter if it's an A, B, C or worse -- no property is too big a challenge. I've managed places before where I had to walk around with a gun."
More later.
Thursday, October 13, 2011
Quick Hits
-The argument for higher taxes on upper income folks is a morality tale, not an economic one. But, in fairness, the proposal could be way more punitive (think FDR and retained earnings). Nevertheless, while it might satisfy people to do something, I don't think it would ultimately improve the general state of the economy.
-With the first two weeks of the NBA season cancelled, and more games in peril, sports has done little to catch my attention lately.
-The volatility in the real estate market that used to create great buying opportunities (think early 90s) is probably gonna be harder to come by -- credit that to the institutionalization and commoditization of the asset class.
-With the first two weeks of the NBA season cancelled, and more games in peril, sports has done little to catch my attention lately.
-The volatility in the real estate market that used to create great buying opportunities (think early 90s) is probably gonna be harder to come by -- credit that to the institutionalization and commoditization of the asset class.
Wednesday, October 12, 2011
Back Again
The debate over the IS/LM model has been getting a lot of attention lately in blogland, while I have been creating excuses not to try and understand it. But, perhaps inspired by the photo in the previous post, I decided it was high time to see what so many Keynesians turn to when in doubt. And, in that endeavour, I myself turned to the writings of the king Keynesians (Krugman, Roubini) for a little education about money printing magic.
As a starting point, see model below:
As a starting point, see model below:
It is described as a short-term model of the economy that helps to show how interest rates are determined. Let's go piece by piece.
The IS curve describes the combination of interest rates and income that clear the goods and services market (i.e., think investment/spending = savings/production). The curve is a function of consumer spending, government spending, investment and net exports -- the inputs of the cherished Aggregate Demand that you always hear about. So what explains the curve's slope...well, demand side economics, of course. The logic goes that lower interest rates will lead to greater spending, which will lead to greater production and economic expansion, which leads to more income, some portion of which will go towards savings, ultimately re-establishing the original balance (assuming the desired investment is not greater than this additional savings). And so the virtuous cycle goes.
But the IS curve alone does not pin down interest rates. So enters the LM curve that relates the combinations of interest rates and GDP that match the supply and demand for money, which is ultimately a trade off between liquidity and returns. The Fed controls this market by increasing and decreasing the supply of money -- the lever by which they manage the level of the Fed Funds rate. Generically, higher rates will encourage people to forgo liquidity and consumption, muting demand, while lowering rates will do the opposite. But, as the curve tries to capture, GDP plays an important role, for its increase triggers a matching effect on the demand for money (there is an increase in the volume of transactions in the economy which favors liquidity). Accordingly, the curve slopes upwards because rates must rise in order to temper the demand that comes from increased income.
Put together, the intersection point on the chart between IS and LM is where loanable funds and liquidity preference are in equilibrium with each other.
Which brings us to the here and now. When private demand drops meaningfully, and the Fed lowers rates in response but there is no rebound in the economy, the entire IS curve shifts to the left -- eventually the equilibrium point with LM occurs at the zero bound (0% rates), the level at which the LM line goes horizontal. The Keynesians have argued that in such a scenario fiscal and monetary boosts are needed to move the IS curve back to the right (remember government is part of the IS function) -- and, given the horizontal nature of the LM curve, running huge deficits and tripling the money supply should not have any impact on rates, because in a liquidity trap, people are simply holding cash as a store of value and economic activity has dried up. And therein lies the free lunch. You can spend, spend, spend to goose GDP, but you don't face the consequences of higher rates because of government crowding out the private sector. Joy.
To be clear, the above is simply my first attempt at trying to understand what's going on. The nuances will continue to be fleshed out as I work my way through this stuff. And as I learn some more, so will you.
Food For Thought
As I've mentioned before, I work in the real estate investing business focused on multifamily. Recently, I was talking with one of my colleagues about the state of that universe and where the opportunities exist. He is someone who's been buying and managing these kinds of properties for about 40 years, so he's seen it all -- and when he decides to opine on the lay of the land, he's definitely the guy in my office that it's worth paying attention to.
Generally, the big institutional markets (i.e., population and job centers that are the most constrained) are back to major league pricing. Most assets sell for a 4-cap, and I actually heard about a deal in the Seattle area that is expected to price with a 3-handle. In other words, you can't make these investments and expect much pop -- they probably have to be longer term holds and there are no real bargains to be had.
The middle ground, as in the slightly less expensive assets in less constrained markets that are still on the radar of smaller institutional players, definitely hit a speed bump following the US debt downgrade. I witnessed several deals that I was involved with get pulled or fall apart. Still, with all the liquidity that's out there, these deals also have a lot of money chasing them and are getting bid up (to the extent they are closing).
Which leads us to the third group, which is where the conversation turned, because it is probably the only area that provides interesting return levels. The view is that the entrepreneurial buyer is going to have to move further out of the risk curve. We're talking C-assets in unconstrained markets, where price per pound is very attractive relative to repro, and the strategy will be to manage efficiently and intensely with no additional capital put in -- a few years down the road, you can probably re-finance and pull out all your original equity. These are the assets where the institutional buyers won't venture, which means they have less money chasing them, and cap rates are at meaningfully higher levels. Again, there is something more binary to these trades, because you're talking about sketchier properties in scarier places. But, the adventurous and experienced shouldn't care and will be able to take advantage.
Anyway, in the big picture and thinking about it in terms of the conversation that this blog regularly tries to have, that the category described above is where investors probably have to go, is seemingly another symptom of monetary policy run amok. We are forced into speculation and greater risk -- and if things get worse, every category above will probably see damage.
Generally, the big institutional markets (i.e., population and job centers that are the most constrained) are back to major league pricing. Most assets sell for a 4-cap, and I actually heard about a deal in the Seattle area that is expected to price with a 3-handle. In other words, you can't make these investments and expect much pop -- they probably have to be longer term holds and there are no real bargains to be had.
The middle ground, as in the slightly less expensive assets in less constrained markets that are still on the radar of smaller institutional players, definitely hit a speed bump following the US debt downgrade. I witnessed several deals that I was involved with get pulled or fall apart. Still, with all the liquidity that's out there, these deals also have a lot of money chasing them and are getting bid up (to the extent they are closing).
Which leads us to the third group, which is where the conversation turned, because it is probably the only area that provides interesting return levels. The view is that the entrepreneurial buyer is going to have to move further out of the risk curve. We're talking C-assets in unconstrained markets, where price per pound is very attractive relative to repro, and the strategy will be to manage efficiently and intensely with no additional capital put in -- a few years down the road, you can probably re-finance and pull out all your original equity. These are the assets where the institutional buyers won't venture, which means they have less money chasing them, and cap rates are at meaningfully higher levels. Again, there is something more binary to these trades, because you're talking about sketchier properties in scarier places. But, the adventurous and experienced shouldn't care and will be able to take advantage.
Anyway, in the big picture and thinking about it in terms of the conversation that this blog regularly tries to have, that the category described above is where investors probably have to go, is seemingly another symptom of monetary policy run amok. We are forced into speculation and greater risk -- and if things get worse, every category above will probably see damage.
Monday, October 10, 2011
The "Place Your Bets!" Post (Sort of)
A few weeks ago I thought that the market was going lower, particularly if it fell below the 1120 level on the S&P (for at least a couple of days). So far, no dice. And as Keynes himself once remarked: "When the facts change, I change my mind. What do you do, sir?"
More to the point, while not necessarily giving up on my general thesis of the market's eventual destination, I think that the opportunity exists in the short-term to play the other side of that trade (to my eye, perfectly appropriate given the reference to Keynes above).
The obvious question, why? Let's start with the charts -- as suggested, the market has held up. However, it is still within a range (1120 to 1215ish) that needs to be broken to the upside before I will have any conviction to put money behind the idea (see 3 month daily below).
As for the fundamentals behind the idea (actually, "fundamentals" is to misstate it completely, because this trade is totally based on more parlor tricks -- in other words, nothing's changed, the can has simply been kicked down the road a little further), I give credit to Bill Fleckenstein (and his network) for identifying the following: the announcement out of the ECB about the 12-month and 13-month LTROs should provide enough liquidity to relieve (for now) a lot of the pressure that was building in Europe. Specifically, while not out-and-out monetizing of debt, the ECB is providing liquidity to all 7,500 banks that have access to it in exchange for whatever questionable collateral they offer up. And given that Europe's plumbing issues were the biggest reason to think we were (are) headed lower, this move should put many minds at ease and get the hedgies and other money managers to put their money back to work.
Thus, the landscape is now a little different. And if it plays out, my plan is to buy some end-of-year SPY calls to get a little leverage on it.
More to the point, while not necessarily giving up on my general thesis of the market's eventual destination, I think that the opportunity exists in the short-term to play the other side of that trade (to my eye, perfectly appropriate given the reference to Keynes above).
The obvious question, why? Let's start with the charts -- as suggested, the market has held up. However, it is still within a range (1120 to 1215ish) that needs to be broken to the upside before I will have any conviction to put money behind the idea (see 3 month daily below).
As for the fundamentals behind the idea (actually, "fundamentals" is to misstate it completely, because this trade is totally based on more parlor tricks -- in other words, nothing's changed, the can has simply been kicked down the road a little further), I give credit to Bill Fleckenstein (and his network) for identifying the following: the announcement out of the ECB about the 12-month and 13-month LTROs should provide enough liquidity to relieve (for now) a lot of the pressure that was building in Europe. Specifically, while not out-and-out monetizing of debt, the ECB is providing liquidity to all 7,500 banks that have access to it in exchange for whatever questionable collateral they offer up. And given that Europe's plumbing issues were the biggest reason to think we were (are) headed lower, this move should put many minds at ease and get the hedgies and other money managers to put their money back to work.
Thus, the landscape is now a little different. And if it plays out, my plan is to buy some end-of-year SPY calls to get a little leverage on it.
Musical Monday
Clowns to the left of me,
Jokers to the right,
Here I am
Stuck in the middle with you
Jokers to the right,
Here I am
Stuck in the middle with you
Wednesday, October 5, 2011
Words To Pass Along
"Your time is limited. so don't waste it living someone else's life. Don't be trapped by dogma - which is living with the results of other people's thinking. Don't let the noise of others' opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become."
"Do you want to spend the rest of your life selling sugared water, or do you want a chance to change the world?"
-Steve Jobs
"Do you want to spend the rest of your life selling sugared water, or do you want a chance to change the world?"
-Steve Jobs
Now Playing: Morton's Fork
Without committing myself to one theory or ideology, I think I see the merits of an economic approach that doesn't fall back on bad habits to solve our problems. Having said that, the likelihood of a policy similar to that which came under President Harding in 1920-21 seems incredibly unlikely. Which leaves us with what's left.
On the one hand, there are those who believe that we are in a liquidity trap, and think that monetary policy alone can't generate the inflation, err, growth, that is needed to get the economy back on the pre-bubble-bursting trajectory. There is a need for "unconventional" fiscal policy -- in other words, more government programs to stimulate jobs.
Then you have the folks who believe that the monetary authorities have the power to get NGDP ramped up again, which will lead to the inflation, errr, growth, that is preferred. They don't necessarily believe in the idea of a liquidity trap, and think it is more a matter of central bank conviction to convince the masses that they will do whatever is necessary to get NGDP cranking at some pre-determined target level.
With the requisite disclaimer that I offered up-front, I think the second group is making better use of historical precedent. The example of a liquidity trap most often cited by the first group is Japan, which has been stuck in multiple lost decades at this point. But, as Scott Sumner (perhaps the most interesting voice for the second group) points out, the BOJ always basically stepped on the brakes at the first hint of inflation. Contrast that with the recent moves by the SNB -- they wanted to devalue the Franc, and lo and behold they did it by promising to print as much money as needed. There is something to be said for aggressive action.
So, I think in the end that one of these theories will prevail -- jawboning from the Republican presidential candidates aside. Unfortunately, though, in this battle of economic ideas, it is similar to watching two teams that I don't really like playing each other -- in other words, I'd rather change the channel.
On the one hand, there are those who believe that we are in a liquidity trap, and think that monetary policy alone can't generate the inflation, err, growth, that is needed to get the economy back on the pre-bubble-bursting trajectory. There is a need for "unconventional" fiscal policy -- in other words, more government programs to stimulate jobs.
Then you have the folks who believe that the monetary authorities have the power to get NGDP ramped up again, which will lead to the inflation, errr, growth, that is preferred. They don't necessarily believe in the idea of a liquidity trap, and think it is more a matter of central bank conviction to convince the masses that they will do whatever is necessary to get NGDP cranking at some pre-determined target level.
With the requisite disclaimer that I offered up-front, I think the second group is making better use of historical precedent. The example of a liquidity trap most often cited by the first group is Japan, which has been stuck in multiple lost decades at this point. But, as Scott Sumner (perhaps the most interesting voice for the second group) points out, the BOJ always basically stepped on the brakes at the first hint of inflation. Contrast that with the recent moves by the SNB -- they wanted to devalue the Franc, and lo and behold they did it by promising to print as much money as needed. There is something to be said for aggressive action.
So, I think in the end that one of these theories will prevail -- jawboning from the Republican presidential candidates aside. Unfortunately, though, in this battle of economic ideas, it is similar to watching two teams that I don't really like playing each other -- in other words, I'd rather change the channel.
Tuesday, October 4, 2011
For Your Consideration...
A couple of long-term charts to look at. First, the Dow (monthly):
Next, the S&P (monthly):
Next, the S&P (monthly):
I hesitate to make any bold proclamations, but those are some ugly looking patterns that appear to be forming.
Monday, October 3, 2011
More Like Laissez-Unfair
As I continue my self-designed program in economics, I keep running into a debate about whether Herbert Hoover was a proponent of laissez-faire or bigger government in the aftermath of the crash of 1929. It is with some detail that Murray Rothbard discusses that subject in America's Great Depression and concludes that Hoover was anything but a free marketeer. More recently, a briefing paper by Steven Horwitz, put out by the Cato Institute, draws the same conclusion.
The facts to consider are as follows:
-Federal spending (in constant 1929 dollars) doubled in the period 1929-1933
-Federal budget deficits in 1931 and 1932 were 52.5% and 43.3% of total federal expenditures, respectively (which are larger than any such deficits run between 1933 and 1941 during the peak of the New Deal)
-Hoover was a great supporter of public works programs, argued vociferously for businesses not to lower wages (even though it was a pronounced period of deflation), supported legislation that greatly empowered unions, stifled any immigration through his 1930 executive order, and signed the Smoot-Hawley tariff into law
-The litany of programs in 1931 that he signed into law included putting tax dollars towards propping up troubled financial institutions and targeting loans to specific sectors
-The Revenue Act of 1932 was the largest peactime tax increase in American history
The above does not even delve into the efforts that he made as Commerce Secretary in the 1920s that did not make it to law. Thus, it should be clear that his reputation as a staunch advocate of laissez-faire economics is undeserved.
And, as a final coup de grace, here is a quote from Raymond Moley, an original member of FDR's "Brain Trust":
"[W]e found every essential idea enacted in the 100-day Congress in the Hoover Administration itself. The essentials of the NRA, the PWA, the emergency relief setup were all there. Even the AAA was known to the Department of Agriculture. Only the TVA and the Securities Act was drawn from other sources. The RFC, probably the greatest recovery agency, was of course a Hoover measure, passed long before the inauguration."
Source: http://www.cato.org/pubs/bp/bp122.pdf
The facts to consider are as follows:
-Federal spending (in constant 1929 dollars) doubled in the period 1929-1933
-Federal budget deficits in 1931 and 1932 were 52.5% and 43.3% of total federal expenditures, respectively (which are larger than any such deficits run between 1933 and 1941 during the peak of the New Deal)
-Hoover was a great supporter of public works programs, argued vociferously for businesses not to lower wages (even though it was a pronounced period of deflation), supported legislation that greatly empowered unions, stifled any immigration through his 1930 executive order, and signed the Smoot-Hawley tariff into law
-The litany of programs in 1931 that he signed into law included putting tax dollars towards propping up troubled financial institutions and targeting loans to specific sectors
-The Revenue Act of 1932 was the largest peactime tax increase in American history
The above does not even delve into the efforts that he made as Commerce Secretary in the 1920s that did not make it to law. Thus, it should be clear that his reputation as a staunch advocate of laissez-faire economics is undeserved.
And, as a final coup de grace, here is a quote from Raymond Moley, an original member of FDR's "Brain Trust":
"[W]e found every essential idea enacted in the 100-day Congress in the Hoover Administration itself. The essentials of the NRA, the PWA, the emergency relief setup were all there. Even the AAA was known to the Department of Agriculture. Only the TVA and the Securities Act was drawn from other sources. The RFC, probably the greatest recovery agency, was of course a Hoover measure, passed long before the inauguration."
Source: http://www.cato.org/pubs/bp/bp122.pdf
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