-A good read today over at Casey Research about the philosophy of the stoics.
-Quickly running through the charts -- now might be the time to start a small bond short.
-Related to some of my recent posting on Minsky and my own view of economics, I came across an interesting post about exogenous vs. endogenous money. The comments afterwards are actually even better. My takeaway -- the same as before. Whichever side you fall on, the Fed plays a big role. And our collective fates (higher inflation) have already been sealed.
-The Yen continues to play the same game. No resolution yet on which way it is going to break.
Friday, September 28, 2012
Saturday, September 22, 2012
The Path We're On...
Ray Dalio (via Fleck, via valueinvestingworld.com):
“It takes an awful lot of printing to convert the naturally deflationary forces of a deleveraging into a highly inflationary deleveraging. It rarely happens, but when it does, it happens in a classic manner that is worth noting. In all deleveragings (both deflationary and inflationary) the average maturity of debt is shortened as the risks of either default or inflation rise. As buyers of bonds have less demand for them, central banks lengthen the maturities of their purchases, increasing debt monetization. At first that is beneficial, though it is a modest negative for the currency. If taken too far so that it is out of balance with the deflationary forces of austerity and debt restructuring, it will drive lenders out of the currency and out of longer-duration bonds, which will require the central bank to tighten to stem that flow. This is when bond vigilantes are in control and the central bank has little or no maneuverability. You can tell when that phase occurs because the yield curve steepens with long rates rising. The collapse of the currency pushes inflation, nominal growth and interest rates up, and the currency down, in a self-reinforcing spiral. Bonds and stocks perform terribly in this ugly inflationary environment, particularly in real terms, because the currency in which their cash flows are denominated collapses and inflation rises more than discounted. The collapse in the currency produces high returns in storeholds of wealth like gold, which rise is value in local currency terms, reflecting the decline of the value of the currency in gold terms.”
“It takes an awful lot of printing to convert the naturally deflationary forces of a deleveraging into a highly inflationary deleveraging. It rarely happens, but when it does, it happens in a classic manner that is worth noting. In all deleveragings (both deflationary and inflationary) the average maturity of debt is shortened as the risks of either default or inflation rise. As buyers of bonds have less demand for them, central banks lengthen the maturities of their purchases, increasing debt monetization. At first that is beneficial, though it is a modest negative for the currency. If taken too far so that it is out of balance with the deflationary forces of austerity and debt restructuring, it will drive lenders out of the currency and out of longer-duration bonds, which will require the central bank to tighten to stem that flow. This is when bond vigilantes are in control and the central bank has little or no maneuverability. You can tell when that phase occurs because the yield curve steepens with long rates rising. The collapse of the currency pushes inflation, nominal growth and interest rates up, and the currency down, in a self-reinforcing spiral. Bonds and stocks perform terribly in this ugly inflationary environment, particularly in real terms, because the currency in which their cash flows are denominated collapses and inflation rises more than discounted. The collapse in the currency produces high returns in storeholds of wealth like gold, which rise is value in local currency terms, reflecting the decline of the value of the currency in gold terms.”
Thursday, September 20, 2012
Hmmm - Part 2
Over here, I pointed out a seeming concession from Brad DeLong regarding the risks of low interest rates. With a bit more time, I notice another point to quibble with, which speaks more directly to the core argument in his post.
He chooses to favor the current entrepreneur over the current retiree/saver. I’m curious, how does an expected debasement of future profits impact incentives for the current entrepreneur? Which, of course, is not helped any when those future profits are also made to be more uncertain in the context of an unstable economy driven by low interest rates and Ponzi financing.
He chooses to favor the current entrepreneur over the current retiree/saver. I’m curious, how does an expected debasement of future profits impact incentives for the current entrepreneur? Which, of course, is not helped any when those future profits are also made to be more uncertain in the context of an unstable economy driven by low interest rates and Ponzi financing.
My Song
I recently wrote that I no longer plan to read any more long-form versions of economic theory. (Actually, that may be a lie – I still have one such book left on my shelf that I’ll probably get around to.) That being said, it won’t preclude me from following my regular assortment of blogs and the occasional article that touches on the subject. But, as a going concern, my interest is more in the ideas and people that have done something tangible, not who just sit around bloviating in ivory towers.
Nevertheless, as a final report of sorts, I want to summarize what I’ve taken away from my self-styled syllabus, covering much of my reading in the past few years. Not Keynesian, nor Austrian, but Binarian…
-The money supply is kind of endogenous, but not to an infinite degree. Still, the interest rates set by the Fed very much impact whether or not the consequences will be perilous. When the Fed makes money easier, and makes the cost of borrowing for investment (or anything else) lower, the tendency to speculate (for both good and bad) is encouraged. And sometimes we end up with bubbles.
-As a corollary to that first point, the neoclassical view is that the money supply is exogenous – as in, the Fed increases base money which then correlates to greater lending by banks. For those that support the endogenous position, the banks create loans before they have the reserves, and the Central Bank simply accommodates that behavior after the fact with management of the money supply. However you slice it, though, the Fed is playing a role. And, it is a rhetorical question and already answered above, but do we think that higher costs or lower costs on debt are more likely to lead to overshooting of expectations and less restraint in the up-front analysis by a potential borrower?
-Once an entitlement program is designed and implemented, you can forget about trying to get rid of it later. Politicians want to get re-elected, so doing something unpopular in the short term (even if the more distant pay-off is credible) is not in their playbook. That’s why the deficits that we face now are structural, not cyclical. And you can only imagine how much worse they will be when interest rates return to more normalized (i.e., higher) levels.
-No, a slight decrease in the rate of growth of astronomical deficits should not be deemed a reduction or austerity. Put differently, it is always a choice between what's realistic and wishful thinking. Wishful thinking still seems to be winning out.
-There can be no boom without a bust, despite what J.M. Keynes would have you believe.
-In a world fraught with uncertainty, as is often acknowledged by economists of all stripes, it is almost comical how all of these “scientists” can be so utterly certain of their own positions and theories. As compared to the investor, who has to tread much more carefully with his convictions, and definitely must be guided by the facts.
-The gold standard may not be the ideal solution for what ails us, but it’s clear that its cessation has facilitated massive distortions over time.
-Capitalism is a bit unstable, but that feature allows the shrewd to get ahead. Having winners and losers is the name of the game. Not do-overs when you’re too big to fail.
Reading about economics has been an eye-opener. It started at a pivotal moment in my life and helped me to navigate some tricky times. Ultimately, it has fostered my contrarian side and made me more skeptical. All of which is healthy.
Nevertheless, as a final report of sorts, I want to summarize what I’ve taken away from my self-styled syllabus, covering much of my reading in the past few years. Not Keynesian, nor Austrian, but Binarian…
-The money supply is kind of endogenous, but not to an infinite degree. Still, the interest rates set by the Fed very much impact whether or not the consequences will be perilous. When the Fed makes money easier, and makes the cost of borrowing for investment (or anything else) lower, the tendency to speculate (for both good and bad) is encouraged. And sometimes we end up with bubbles.
-As a corollary to that first point, the neoclassical view is that the money supply is exogenous – as in, the Fed increases base money which then correlates to greater lending by banks. For those that support the endogenous position, the banks create loans before they have the reserves, and the Central Bank simply accommodates that behavior after the fact with management of the money supply. However you slice it, though, the Fed is playing a role. And, it is a rhetorical question and already answered above, but do we think that higher costs or lower costs on debt are more likely to lead to overshooting of expectations and less restraint in the up-front analysis by a potential borrower?
-Once an entitlement program is designed and implemented, you can forget about trying to get rid of it later. Politicians want to get re-elected, so doing something unpopular in the short term (even if the more distant pay-off is credible) is not in their playbook. That’s why the deficits that we face now are structural, not cyclical. And you can only imagine how much worse they will be when interest rates return to more normalized (i.e., higher) levels.
-No, a slight decrease in the rate of growth of astronomical deficits should not be deemed a reduction or austerity. Put differently, it is always a choice between what's realistic and wishful thinking. Wishful thinking still seems to be winning out.
-There can be no boom without a bust, despite what J.M. Keynes would have you believe.
-In a world fraught with uncertainty, as is often acknowledged by economists of all stripes, it is almost comical how all of these “scientists” can be so utterly certain of their own positions and theories. As compared to the investor, who has to tread much more carefully with his convictions, and definitely must be guided by the facts.
-The gold standard may not be the ideal solution for what ails us, but it’s clear that its cessation has facilitated massive distortions over time.
-Capitalism is a bit unstable, but that feature allows the shrewd to get ahead. Having winners and losers is the name of the game. Not do-overs when you’re too big to fail.
Reading about economics has been an eye-opener. It started at a pivotal moment in my life and helped me to navigate some tricky times. Ultimately, it has fostered my contrarian side and made me more skeptical. All of which is healthy.
Wednesday, September 19, 2012
"Hedging"
You may remember a recent post where I outlined the story that will come from Keynesians after the next round of QE does not have the desired effect. Lo and behold, Paul Krugman is already setting the stage:
“…we actually can hope that the Fed’s new policy will boost housing as well as operating through other channels, and therefore that it can act more like conventional monetary policy in fostering recovery.
That said, I’m still skeptical about whether monetary policy alone can come close to doing enough…”
Bob Murphy finishes the story by dredging up Krugman’s position way back when:
“To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”
“…we actually can hope that the Fed’s new policy will boost housing as well as operating through other channels, and therefore that it can act more like conventional monetary policy in fostering recovery.
That said, I’m still skeptical about whether monetary policy alone can come close to doing enough…”
Bob Murphy finishes the story by dredging up Krugman’s position way back when:
“To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”
Yen Update - Part 22
The 78 level continues to hold. And looking at the chart below, I would suggest that the descending triangle formation still has some life left to it, though it should be resolved by election time.
Friday, September 14, 2012
We're Not Japan
In the context of the current economic malaise, one of the clichés that often gets thrown out there is that the U.S. will turn into Japan – that is, suffer multiple lost decades because of a liquidity trap that monetary policy alone cannot help the economy escape from.
Hogwash.
Japan is a highly homogenized and xenophobic culture with meaningful individual savings. Why does it matter? Well, as compared to the U.S., Japan has been able to fund itself largely through the citizenry. As a consequence, despite various efforts in the past where the government has tried to implement fiscal stimulus, the BOJ has always eventually taken steps to mitigate the impact (Scott Sumner has written several posts over the years speaking to this reality; see here and here). In part, because of a concern for those institutions and the old Japanese folks that own bonds and/or live off of fixed incomes, the BOJ stands ready to dampen fiscal policy at the first whiff of inflation. Accordingly, the expectations shift that might normally come with government largesse is weakened.
Now, contrast that with the U.S., where the fear is deflation. And, even better, where a large chunk of our debt is held by foreigners. The reservations that exist in Japan about going all-in on QE do not exist. Yesterday was proof positive of that and I believe that a meaningful shift in expectations has actually occurred. People anticipate economic activity and growth – witness the move up in interest rates and the action in equity markets. Not to suggest that it will be sustainable and that productive growth will result. Simply, that bubbles will be blown, paper wealth will be created, and at some point in the future it will crater again.
So, the moral of the story: any central bank with full control over a fiat currency cannot possibly fail if the objective is to create inflation.
One last point. Given the above, why have I spent time and money shorting the Yen (with an ultimate aim of shorting JGBs in the future)? Demographics are working against the Japanese and the savings that propped up the bond market in the past are beginning to dwindle. Either they will need to go out to the capital markets to sell bonds (and see rates rise) or they monetize the debt to save their domestic bondholders (and kill the currency). One of those two will happen…eventually :)
Hogwash.
Japan is a highly homogenized and xenophobic culture with meaningful individual savings. Why does it matter? Well, as compared to the U.S., Japan has been able to fund itself largely through the citizenry. As a consequence, despite various efforts in the past where the government has tried to implement fiscal stimulus, the BOJ has always eventually taken steps to mitigate the impact (Scott Sumner has written several posts over the years speaking to this reality; see here and here). In part, because of a concern for those institutions and the old Japanese folks that own bonds and/or live off of fixed incomes, the BOJ stands ready to dampen fiscal policy at the first whiff of inflation. Accordingly, the expectations shift that might normally come with government largesse is weakened.
Now, contrast that with the U.S., where the fear is deflation. And, even better, where a large chunk of our debt is held by foreigners. The reservations that exist in Japan about going all-in on QE do not exist. Yesterday was proof positive of that and I believe that a meaningful shift in expectations has actually occurred. People anticipate economic activity and growth – witness the move up in interest rates and the action in equity markets. Not to suggest that it will be sustainable and that productive growth will result. Simply, that bubbles will be blown, paper wealth will be created, and at some point in the future it will crater again.
So, the moral of the story: any central bank with full control over a fiat currency cannot possibly fail if the objective is to create inflation.
One last point. Given the above, why have I spent time and money shorting the Yen (with an ultimate aim of shorting JGBs in the future)? Demographics are working against the Japanese and the savings that propped up the bond market in the past are beginning to dwindle. Either they will need to go out to the capital markets to sell bonds (and see rates rise) or they monetize the debt to save their domestic bondholders (and kill the currency). One of those two will happen…eventually :)
Thursday, September 13, 2012
Today's Move
The meat of the Fed statement is the following:
1) to purchase an additional $40 billion of mortgage-backed securities each month, open-ended; and
2) to keep the federal funds rate at 0 to 1/4 percent until at least mid-2015.
From my view, these are both small steps towards an ultimate embrace of nominal GDP targeting. Under that framework, rather announcing a specific dollar amount of purchases, they would simply say that they are going to buy treasuries, MBS, etc. until the growth path of nominal GDP is at a certain percentage target (5%, to pick a number). Nevertheless, that is simply a function of semantics - the end game is beginning to get clearer.
1) to purchase an additional $40 billion of mortgage-backed securities each month, open-ended; and
2) to keep the federal funds rate at 0 to 1/4 percent until at least mid-2015.
From my view, these are both small steps towards an ultimate embrace of nominal GDP targeting. Under that framework, rather announcing a specific dollar amount of purchases, they would simply say that they are going to buy treasuries, MBS, etc. until the growth path of nominal GDP is at a certain percentage target (5%, to pick a number). Nevertheless, that is simply a function of semantics - the end game is beginning to get clearer.
Tuesday, September 11, 2012
Yen Update - Part 162
The price action has not been my friend. Currencies are tricky, especially when there is a race to the bottom going on. The Yen is testing a support line at 78 which, if broken, would mean my FXY put trade is probably a loser. Could just be about the news flow this week -- maybe everyone is anticipating QE3 and a ruling in Germany that clears the way for Draghi to act. In any event, we will watch and see what happens. A chart below tells the story.
Friday, September 7, 2012
Hmmm...
He seemingly wrote exactly what he meant, but it does strike me as an odd comment from the likes of Brad DeLong – that the risk associated with low interest rates is a growth in Ponzi financing. After all, that is a big concession to the line of argument that the Fed is dangerous to the economy through its manipulation of rates, causing bubbles that will invariably go bust.
Gaps Will Be Closed
In conjuring up the title of this post, I sort of pictured a very cinematic moment. Imagine the end of a movie, a montage of scenes where all the various storylines are reaching a crescendo, all with a core character's voice serving as narrator, uttering the phrase above.
With that as prelude, I'm really thinking about the price action today. This morning's job report was bad, bad, bad. And now it would seem that QE3 is a fait accompli. Gold and the miners like the news and have gapped up. While it stands to reckon that they will continue to far higher levels over time, the gap from today will be closed. That is all.
With that as prelude, I'm really thinking about the price action today. This morning's job report was bad, bad, bad. And now it would seem that QE3 is a fait accompli. Gold and the miners like the news and have gapped up. While it stands to reckon that they will continue to far higher levels over time, the gap from today will be closed. That is all.
My Voting Dilemma
I want to talk a bit about the fiscal visions that the two parties are offering in this election, as it is the policy issue that is most important to me whenever I think about how to vote. Both sides have economists at the ready to defend any ludicrous idea and to couch any bad policy concept in economic theory that simply can’t be falsified. In other words, neither is prepared to deal with reality.
With any supercycle, there is an endpoint. To my thinking, we have reached that marker in the current one, which is built around debt financing at the individual, corporate and sovereign levels. Reading Irving Fisher and Hyman Minsky has been helpful in developing my view on this subject, despite my other reservations about their theories (and such ideas generally). They note that there are two outcomes when there is a huge build-up of debt in a capitalist system – either a debt deflation that flushes the system clean (but can take a while to play out and is painful for everyone) or government intervention to prop prices up and continue the march higher, but with greater instability underpinning the system. The choice in the United States, of course, has been a preference towards intervention. With every overreach on the upside, the decision has been to try and mitigate any downside. What we’re left with is balance sheets that get more and more bloated, and inflation risks that became more and more obvious and perilous.
The Republicans are feigning some sort of acceptance of Austrian principles. Spare me. There is nothing austere about what they offer up. More defense spending, more tax cuts, minimal spending cuts or diminishing of government’s role. The Democrats – well, they think everything can be paid for if we just wish for it hard enough. There are hard choices to be made, and there really is nothing about what either side brings to the table that suggests either is prepared to endure those consequences. The three areas of concern are defense spending, health care and social security. And, yes, social security is a concern (despite what some of the left-wing punditry say). Demographically, things are working against us (where there are fewer workers to support each new generation of entrants into the program), and the fact that the government commonly borrows from the trust fund to pay for itself, it seems highly implausible that they will ever be able to pay back those intra-governmental loans without further monetizing of the debt (which means any dollar paid in today is probably worth a whole lot less on the back end). I just started reading a book that talks about the issues of health care policy in this country, so I will hold off on that topic until finished, but it seems to me that the changes we currently see in no way lower the costs nor reduce the deficits over time. Finally, the military, another area where pork-barrel spending is just the norm and expectation (see Higgs, Robert). But, that’s what you get when most politicians are bought off and paid for.
So, to my original point, neither side is going to put this country on a sustainable path. They will default to interventions when problems arise, and further build out the bureaucracy that makes everything inefficient and more costly.
As it relates to taxes, I do think that a rising tide will lift all boats. If the economy is doing well, tax rates that are a few percent higher on the upper end will not stunt us. But, in the midst of a deep recession, not exactly a policy initiative that will engender entrepreneurship. At the same time, lowering taxes even more right now, not exactly the answer either (unless you implement some sort of tax holiday). Having said that, I think you could lower taxes if you were really prepared to get rid of loopholes, which neither party is. I think the interest deduction related to home ownership should be eliminated, both as a way to discourage speculation in that space, and to encourage the density in cities that I am now fully on board with for a host of reasons.
After going through the above, don’t misread me – there is a role for government. But, it needs to be measured and restrained. To have it plug the hole every time some Keynesian economist tells us there is a demand problem is to set us up for greater instability in the future and higher inflation. Neither of which is good.
So, in closing, I face a dilemma. And there’s not any clear solution on the horizon. Maybe Bill Fleckenstein has it right. Let’s just try every bad idea out there, have the absolute blow-up that will come, and we can move forward with a cleaner slate.
By that logic, the better question for me should be "Who’s worse?". Maybe they’ll get my vote.
With any supercycle, there is an endpoint. To my thinking, we have reached that marker in the current one, which is built around debt financing at the individual, corporate and sovereign levels. Reading Irving Fisher and Hyman Minsky has been helpful in developing my view on this subject, despite my other reservations about their theories (and such ideas generally). They note that there are two outcomes when there is a huge build-up of debt in a capitalist system – either a debt deflation that flushes the system clean (but can take a while to play out and is painful for everyone) or government intervention to prop prices up and continue the march higher, but with greater instability underpinning the system. The choice in the United States, of course, has been a preference towards intervention. With every overreach on the upside, the decision has been to try and mitigate any downside. What we’re left with is balance sheets that get more and more bloated, and inflation risks that became more and more obvious and perilous.
The Republicans are feigning some sort of acceptance of Austrian principles. Spare me. There is nothing austere about what they offer up. More defense spending, more tax cuts, minimal spending cuts or diminishing of government’s role. The Democrats – well, they think everything can be paid for if we just wish for it hard enough. There are hard choices to be made, and there really is nothing about what either side brings to the table that suggests either is prepared to endure those consequences. The three areas of concern are defense spending, health care and social security. And, yes, social security is a concern (despite what some of the left-wing punditry say). Demographically, things are working against us (where there are fewer workers to support each new generation of entrants into the program), and the fact that the government commonly borrows from the trust fund to pay for itself, it seems highly implausible that they will ever be able to pay back those intra-governmental loans without further monetizing of the debt (which means any dollar paid in today is probably worth a whole lot less on the back end). I just started reading a book that talks about the issues of health care policy in this country, so I will hold off on that topic until finished, but it seems to me that the changes we currently see in no way lower the costs nor reduce the deficits over time. Finally, the military, another area where pork-barrel spending is just the norm and expectation (see Higgs, Robert). But, that’s what you get when most politicians are bought off and paid for.
So, to my original point, neither side is going to put this country on a sustainable path. They will default to interventions when problems arise, and further build out the bureaucracy that makes everything inefficient and more costly.
As it relates to taxes, I do think that a rising tide will lift all boats. If the economy is doing well, tax rates that are a few percent higher on the upper end will not stunt us. But, in the midst of a deep recession, not exactly a policy initiative that will engender entrepreneurship. At the same time, lowering taxes even more right now, not exactly the answer either (unless you implement some sort of tax holiday). Having said that, I think you could lower taxes if you were really prepared to get rid of loopholes, which neither party is. I think the interest deduction related to home ownership should be eliminated, both as a way to discourage speculation in that space, and to encourage the density in cities that I am now fully on board with for a host of reasons.
After going through the above, don’t misread me – there is a role for government. But, it needs to be measured and restrained. To have it plug the hole every time some Keynesian economist tells us there is a demand problem is to set us up for greater instability in the future and higher inflation. Neither of which is good.
So, in closing, I face a dilemma. And there’s not any clear solution on the horizon. Maybe Bill Fleckenstein has it right. Let’s just try every bad idea out there, have the absolute blow-up that will come, and we can move forward with a cleaner slate.
By that logic, the better question for me should be "Who’s worse?". Maybe they’ll get my vote.
On to November
With the conventions now behind us, election coverage for the next two months will move into overdrive, and probably overkill. From the outset, I thought the President would be re-elected, and nothing about the past two weeks has changed that position.
I grew up a Republican, in the midst of as blue a state as you can find – partly because of my grandmother, partly because I always had the contrarian gene. But about 3.5 years ago, I decided to lose any affiliation, not seeing either party as representative of my evolving views of the world. Socially, I think the Democrats get some of it right, with respect to abortion and gay rights and the notion that no one should die because they can’t afford to see a doctor. On the other hand, they live in a fantasyland with respect to paying for their vision, and do default to more government programs whenever at a loss for how to solve a problem. The Republicans, by contrast, carry a social platform that is cringe-worthy, and in no shape or form stand for the fiscal conservatism that used to define them (and always carried a lot of weight for me). Both sides, in my opinion, have a set of special interests that co-opt them, and both ultimately kowtow to Wall Street. Doug Casey frames it well – there is the evil party and the stupid party.
Which leaves me in a bind. I don’t feel any great compulsion to vote. Even from a greed perspective, I think my investments stand to do well regardless of the winner. My wife asked me the other day who she should vote for, feeling like it would be a choice between bad and worse. There are too many issues to expect to be wholly satisfied, so you must end up prioritizing. For her, that probably means Obama. For me, it probably means sitting this one out.
I grew up a Republican, in the midst of as blue a state as you can find – partly because of my grandmother, partly because I always had the contrarian gene. But about 3.5 years ago, I decided to lose any affiliation, not seeing either party as representative of my evolving views of the world. Socially, I think the Democrats get some of it right, with respect to abortion and gay rights and the notion that no one should die because they can’t afford to see a doctor. On the other hand, they live in a fantasyland with respect to paying for their vision, and do default to more government programs whenever at a loss for how to solve a problem. The Republicans, by contrast, carry a social platform that is cringe-worthy, and in no shape or form stand for the fiscal conservatism that used to define them (and always carried a lot of weight for me). Both sides, in my opinion, have a set of special interests that co-opt them, and both ultimately kowtow to Wall Street. Doug Casey frames it well – there is the evil party and the stupid party.
Which leaves me in a bind. I don’t feel any great compulsion to vote. Even from a greed perspective, I think my investments stand to do well regardless of the winner. My wife asked me the other day who she should vote for, feeling like it would be a choice between bad and worse. There are too many issues to expect to be wholly satisfied, so you must end up prioritizing. For her, that probably means Obama. For me, it probably means sitting this one out.
Wednesday, September 5, 2012
Propensity for Density
I really enjoyed Triumph of the City by Edward Glaeser (2011). Much like Jane Jacobs, he makes the case in favor of cities – for love, for profit, for a greener planet. But, where Jacobs seemingly spent a great deal of her time trying to maintain the character of her city, the low-lying Greenwich Village in New York, Glaeser is strongly in favor of density and newer high-rises to bring people together.
Some of his points:
-Innovation is borne of personal interaction and proximity to other smart people, where ideas can be debated, tested and perfected. Cities, clearly, offer such a setting. Particularly those with an educated populace that may be there in the first place because of strong academic institutions.
-Cities are greener than suburban sprawl because of the greater walking and use of public transportation. If the green movement is serious in its cause, it should be acting to promote the redevelopment and growth of cities to create the supply that will make it more affordable for all. If for no other reason, though, then to provide a precedent for the billions in India and China that are slowly moving towards a middle class existence and will have a far larger carbon footprint than the US.
-While maintaining the character of a city is compelling, all that is done through restriction of building is to make it more expensive (and thereby less accessible), stymieing the agglomeration elements that make cities dynamic.
-Like Jacobs, he sees that industrial/company towns (like Detroit) kill the innovative spirit that density engenders, making it harder for the city to reinvent itself when the golden goose has run its course.
-The presence of poor people and slums can be an indication of success. Many of those folks are there because of the greater opportunity that cities provide.
-The push for home ownership by the Federal government is a blow to the growth of cities, and thus a blow to economic growth.
As far as investment implications, nothing too novel or outlandish. In today’s environment, that which will ultimately help the economy to find its footing will likely find its origins in a city. So, if you’re looking to allocate dollars in real estate, it probably doesn’t make sense to stray too far from that action.
Some of his points:
-Innovation is borne of personal interaction and proximity to other smart people, where ideas can be debated, tested and perfected. Cities, clearly, offer such a setting. Particularly those with an educated populace that may be there in the first place because of strong academic institutions.
-Cities are greener than suburban sprawl because of the greater walking and use of public transportation. If the green movement is serious in its cause, it should be acting to promote the redevelopment and growth of cities to create the supply that will make it more affordable for all. If for no other reason, though, then to provide a precedent for the billions in India and China that are slowly moving towards a middle class existence and will have a far larger carbon footprint than the US.
-While maintaining the character of a city is compelling, all that is done through restriction of building is to make it more expensive (and thereby less accessible), stymieing the agglomeration elements that make cities dynamic.
-Like Jacobs, he sees that industrial/company towns (like Detroit) kill the innovative spirit that density engenders, making it harder for the city to reinvent itself when the golden goose has run its course.
-The presence of poor people and slums can be an indication of success. Many of those folks are there because of the greater opportunity that cities provide.
-The push for home ownership by the Federal government is a blow to the growth of cities, and thus a blow to economic growth.
As far as investment implications, nothing too novel or outlandish. In today’s environment, that which will ultimately help the economy to find its footing will likely find its origins in a city. So, if you’re looking to allocate dollars in real estate, it probably doesn’t make sense to stray too far from that action.
Tuesday, September 4, 2012
Recidivism
I try to turn away, but I get sucked back in.
I do have one more thought to put out there after reading the second Minsky book. Often, I hear about a golden age for the economy in the period following WWII up until the mid-60s/early-70s – as Minksy points to 1966 as the turning point, we’ll use that as the end date. The usual suggestion is that it validates Keynesian theory, even as guys like Minsky call the period an anomaly in an otherwise volatile history for capitalism.
Well, what if we take Minsky’s theory at face value – that in the aftermath of a crash, there is a period of time where risk is kept in check because of the frayed nerves (and balance sheets) of bankers and investors. And what if we also point out that even as risk returns, that there is still then a period characterized by hedged financing before things get crazy.
Then consider when this “golden age” actually took place. After a great depression and a world war – basically, a 16-year period of incredible disruption and insecurity. Is it reasonable that people weren’t rushing back to make big bets and placed a premium on liquidity? Layer in the following as well – WWII was a period of rationing and living without. I don’t have the statistics handy, but I would reckon that Americans had a greater level of savings at the end of the war relative to any other recent period.
So, now we combine high savings (and a greater margin of safety and more liquidity to work through), with a lower level of risk-taking, and we should be surprised that things took a little while to get out of hand again?
My point: maybe this notion of a golden age is really nothing more than a slightly longer version of what has been playing out over and over again since the Fed came around. It’s not about some adherence to an institutional framework that was more stable (and that some people like to credit to Keynesian theory), it was simply the same train wreck playing out a bit more slowly because of exogenous factors that are not typical of any other period.
I do have one more thought to put out there after reading the second Minsky book. Often, I hear about a golden age for the economy in the period following WWII up until the mid-60s/early-70s – as Minksy points to 1966 as the turning point, we’ll use that as the end date. The usual suggestion is that it validates Keynesian theory, even as guys like Minsky call the period an anomaly in an otherwise volatile history for capitalism.
Well, what if we take Minsky’s theory at face value – that in the aftermath of a crash, there is a period of time where risk is kept in check because of the frayed nerves (and balance sheets) of bankers and investors. And what if we also point out that even as risk returns, that there is still then a period characterized by hedged financing before things get crazy.
Then consider when this “golden age” actually took place. After a great depression and a world war – basically, a 16-year period of incredible disruption and insecurity. Is it reasonable that people weren’t rushing back to make big bets and placed a premium on liquidity? Layer in the following as well – WWII was a period of rationing and living without. I don’t have the statistics handy, but I would reckon that Americans had a greater level of savings at the end of the war relative to any other recent period.
So, now we combine high savings (and a greater margin of safety and more liquidity to work through), with a lower level of risk-taking, and we should be surprised that things took a little while to get out of hand again?
My point: maybe this notion of a golden age is really nothing more than a slightly longer version of what has been playing out over and over again since the Fed came around. It’s not about some adherence to an institutional framework that was more stable (and that some people like to credit to Keynesian theory), it was simply the same train wreck playing out a bit more slowly because of exogenous factors that are not typical of any other period.
Monday, September 3, 2012
Minsky and Moving On
Perhaps I couldn’t get enough, but I decided to try another book from Hyman Minsky, this time Stabilizing An Unstable Economy (1986). In it, he attempts to expound on his Financial Instability Hypothesis which first saw itself contemplated in his earlier work on Keynes.
The gist is that capitalist economies are inherently unstable because of the liability structures that they engender. And in having quick response from governments and central banks to counter the risk of debt deflations when those structures get out of control and blow up, we are invariably left with a build-up of pressures for inflation and subsequent investment booms (that also must finally bust). Call it a vicious/virtuous cycle, but the idea is that in the aftermath of a bust, but as the economy remains stable over a prolonged period of time, and revenues and capital gains start to return, the risk tolerances of investors and bankers start to grow and more innovative and expansive investment opportunities appear and are pursued. Financing start outs as hedged, turns into speculative, and finally becomes ponzi in nature.
Part of the problem is that there are so many non-member financial institutions, that Federal Reserve policy only impacts behavior with a lag, since financing from alternate sources is still available. Another issue is that open market purchases, rather than use of the discount window, displaces the Fed from a real understanding of the business that member banks are conducting. Add to that, much of the lending is a function of the bank’s own endogenous money creation, not nearly as much tied to the growth of the money supply by the Fed. And when things implode for these banks, that the government stabilizes employment and revenues (allegedly) through fiscal policy, and that the Fed replaces crap assets on bank balance sheets with “safe” treasury securities, the banks (once they are back to their more profit-seeking ways, as “tranquility attenuates uncertainty”) are armed with the capital levels to finance all sorts of behavior. But, because there was no debt deflation in the middle, the price level from where this process begins again is higher each time. Ergo, inflation.
He deems all of this a foregone conclusion in capitalism and thinks certain institutional reforms are needed to try and avoid it. He has a whole list of ideas, but of course there are a few that stuck out to me. One, that debt deflation is painful, but will correct itself eventually, thereby leaving the economy without the overhang of inflationary pressures that come from bail outs and leave the threat of an even bigger next bust – but the preference is still for the inflationary route. Also, there is some component of nationalization of industry that is required. Blah, blah, blah…
Anyway, there is more, it’s just not that interesting to me. At this point, I’ve done my fair share of indulging the various economic theories and have come to one conclusion – most of these guys are full of it. I’ve wasted enough time. I’m much more interested in the people and ideas that are productive and profitable. So, going forward, that will be my focus. Farewell, pseudo-scientists.
The gist is that capitalist economies are inherently unstable because of the liability structures that they engender. And in having quick response from governments and central banks to counter the risk of debt deflations when those structures get out of control and blow up, we are invariably left with a build-up of pressures for inflation and subsequent investment booms (that also must finally bust). Call it a vicious/virtuous cycle, but the idea is that in the aftermath of a bust, but as the economy remains stable over a prolonged period of time, and revenues and capital gains start to return, the risk tolerances of investors and bankers start to grow and more innovative and expansive investment opportunities appear and are pursued. Financing start outs as hedged, turns into speculative, and finally becomes ponzi in nature.
Part of the problem is that there are so many non-member financial institutions, that Federal Reserve policy only impacts behavior with a lag, since financing from alternate sources is still available. Another issue is that open market purchases, rather than use of the discount window, displaces the Fed from a real understanding of the business that member banks are conducting. Add to that, much of the lending is a function of the bank’s own endogenous money creation, not nearly as much tied to the growth of the money supply by the Fed. And when things implode for these banks, that the government stabilizes employment and revenues (allegedly) through fiscal policy, and that the Fed replaces crap assets on bank balance sheets with “safe” treasury securities, the banks (once they are back to their more profit-seeking ways, as “tranquility attenuates uncertainty”) are armed with the capital levels to finance all sorts of behavior. But, because there was no debt deflation in the middle, the price level from where this process begins again is higher each time. Ergo, inflation.
He deems all of this a foregone conclusion in capitalism and thinks certain institutional reforms are needed to try and avoid it. He has a whole list of ideas, but of course there are a few that stuck out to me. One, that debt deflation is painful, but will correct itself eventually, thereby leaving the economy without the overhang of inflationary pressures that come from bail outs and leave the threat of an even bigger next bust – but the preference is still for the inflationary route. Also, there is some component of nationalization of industry that is required. Blah, blah, blah…
Anyway, there is more, it’s just not that interesting to me. At this point, I’ve done my fair share of indulging the various economic theories and have come to one conclusion – most of these guys are full of it. I’ve wasted enough time. I’m much more interested in the people and ideas that are productive and profitable. So, going forward, that will be my focus. Farewell, pseudo-scientists.
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