Food for Thought: Sunday July 7, 2013

Robert P. Murphy: Can the Fed Become Insolvent?

This is the central issue in today's monetary economics' scene. My take on it is that it is mainly the losses that the Fed suffers that the government does not recuperate that cause CPI inflation to arise. However, this concerns what I would call deep CPI inflation in the sense of inflation independent of the policy response of the monetary authority. When deep inflation/deflation arises the Fed typically changes interest rates to get rid of the inflation effects, but this prevents only what I would call shallow inflation/deflation. The deep inflation/deflation remains in the form of a long term higher or lower position of interest rates. Over longer periods of time the residue of such influences causes trade imbalances between nations for as long as the exchange rate effects are not let run their course. More on it later.

The Economist: World GDP

A clear falling trend in world GDP growth persists to this day, signalling that elation over so called improving economic conditions are only locally justified, if that at all.

Sam Ro: A Detail In The Jobs Report Is Flashing An Inflation Warning Signal

- labor market conditions as defined by employment/population ratio are not improving
- workers that do get jobs go into low wage jobs, diminish the pool of labor for higher wage jobs
- this gives rise to inflation?

Is this how stagflation emerges? I doubt it will happen, though, because US inflation has been subdued according to the most recent CPI report.

Marco Arment: Lockdown, why Google Killed Reader

Google Reader is just the latest casualty of the war that Facebook started, seemingly accidentally: the battle to own everything.While Google did technically “own” Reader and could make some use of the huge amount of news and attention data flowing through it, it conflicted with their far more important Google+ strategy: they need everyone reading and sharing everything through Google+ so they can compete with Facebook for ad-targeting data, ad dollars, growth, and relevance.
RSS represents the antithesis of this new world: it’s completely open, decentralized, and owned by nobody, just like the web itself. It allows anyone, large or small, to build something new and disrupt anyone else they’d like because nobody has to fly six salespeople out first to work out a partnership with anyone else’s salespeople.
That world formed the web’s foundations — without that world to build on, Google, Facebook, and Twitter couldn’t exist. But they’ve now grown so large that everything from that web-native world is now a threat to them, and they want to shut it down. “Sunset” it. “Clean it up.” “Retire” it. Get it out of the way so they can get even bigger and build even bigger proprietary barriers to anyone trying to claim their territory.
Well, fuck them, and fuck that.

Well said. It is basically the imperial mindset applied to the modern virtual landscape. I expect its effects to be about as rotten as its motivation.

Pandaemonium: CYNICS, SKEPTICS, ATOMISTS AND RELATIVISTS

I enjoyed this piece tremendously. A good read.

Fedcenter

Might be useful? I need to tinker with this for a bit.

Paul Krugman: Potential Mistakes (Wonkish)

Yes I think the issue of estimating potential GDP is a very serious complication in judging the economic status of nations and probably the main reason for mess ups on both sides of the debate... More on this later.

Michael Hudson: The Bubble Economy as a 2 part play for Privatisation

Hudson may end up having had the longest term view of things if his prognosis turns out remotely right. Crisis -> corrupt austerity / monetary hawkdom -> government insolvency -> privatization of the public domain?

Food for Thought: Wednesday July 3, 2013

This is a big deal. Hot money is now fleeing China “abruptly”
Yes, arguably this is a big deal, but there is something the author of this article completely omits. The abrupt change did not happen last month, it happened in early 2013 when the inflows of capital into China spiked upwards. This corresponding outflow is the return to normal from that unnaturally elevated situation. Why did the spike take place? This is the question that should be asked here.

Food for Thought: Friday June 29, 2013

Doug Short: Two Measures of Inflation: Headline and Core Way Below Fed Target

Which is of course a rather odd thing when the Fed has just engaged in QE Infinity and most of the debate surrounding Fed policy references the possibility of a "taper" of QE in the near future. I see this as corroborating evidence of the thesis that the Fed has to engage in a LOT more QE to sustainably stave off deflation. It needs to permanently monetize debt to produce a sufficient long term effect. It can do so via QE but this involves an abuse of the balance sheet and a permanent artificial expansion of the liabilities side of the Fed's ledger. The question is what political consequences this will have. Another issue is what the effect of this on monetary incentives is and whether the wealth redistribution engendered by this policy disturbs the natural innovation and production driving features of capitalism. Yet another question is whether this is "fair".

ps. just that the Fed needs to do a lot of QE does not mean it will strictly have to... The situation is complex because it incorporates the effect of market expectations. If the market expects the Fed to do an X amount of QE and acts on this expectation, this is equivalent to the Fed already doing that much QE. If it communicates with enough convincing power, it achieves the effect simply by broadcasting the signal. Read up on the views of Scott Sumner and his fellow Market Monetarists for more on this.

pps. my thesis is not very consistent with the recent movements in the US treasury market. So I suppose they carry an implicit prediction of this trend reversing in the near future. It wouldn't be the first time treasury yields made a "headfake" of this kind, though. A combination of disinflation + rising yields is probably more consistent with economic bullishness after an expected Fed response to the disinflation, so perhaps my theory can be combined with some optimism along these lines...


Doug Short: NYSE Margin Debt: Was April a Cyclical Peak?

In nominal terms, real margin debt at the end of May 2013, the latest available data, shows a slight month-over-month decline of 2.1% (1.9% in nominal terms). Will we look back at April as a cyclical peak for margin debt like we saw in 2000 and 2007? And does that anticipate a major market peak as we saw twice in the 21st century?

See also the earlier: Margin Debt Hitting Levels Only Seen ONE Other Time in History! By Chris Kimble

Margin Debt continues to pose a highly ominous sign to the US stock market at this stage. I dislike the use of nominal values in these charts. A ratio of some kind would be more useful, but I'd have to think about which ratio is appropriate here. Margin debt to GDP seems too simplistic, since the stock market's size relative to GDP also quite wildly fluctuates (which, NB, is another reason to be suspicious of the market rally).

Quartz: The humanities are not in crisis. It’s just that more people are going to college

Even the chart that this rumor was originally based on shows a stabilization/stagnation of the % of people majoring in humanities and only a decline during the 70s.

Erick Erickson Sees Inflation, But The Only Thing That's Inflated Is His Derp

If food inflation was ever a big issue since the crisis, it doesn't seem to be one now, at least judging by bread and milk prices. Useful charts for debunking myths surrounding this topic. Not sure how happy I am with this popularization of the term derp in economic debate, but I don't intent to participate in its usage.

Zillow: Case-Shiller House Price Index expected to show over 12% year-over-year increase in May
Which would be rather odd considering home prices have barely outperformed CPI inflation historically. It is trivial to say such a dynamic would be short-lived unless the CPI also makes unusual jumps from here on. As my first link in this post displays, however, there is no indication of such a thing being in the cards whatsoever. See also: Asymptosis: What Caused the (Next) Housing Bubble? (Six Graphs)

It Takes A College Diploma To Convince People Not To Waste Money On Name-Brand Meds


Kind of illustrative of how brands and marketing work in general. I notice that people massively overpay for well known branded models of smartphones especially. I doubt this principle is solely at play in the medical product market.

Science Daily: Large-Scale Quantum Chip Validated: Prototype Quantum Optimization Chip Operates as Hoped

I suspect the development of quantum computing to become a major wake up call to those who assumed Moore's Law can only be broken to the downside. These are reputed to speed up certain operations as much as 3600 times.

It's Official: Student Loan Rates Will Double Monday

This could turn out to be a pretty big deal considering a lot of people with loans like these are already in vulnerable position and student loans are the US government's largest asset class.

Things that bother me about the financial/economic discussion world

Everybody has an opinion. Everybody writes in complex abstract language. Most arguments take effort to understand and the effort is not guaranteed to pay off. On account of these things combined, most arguments go unheard. Many arguments are useless, academically, pragmatically, financially, or, most commonly, all three.

How to set yourself apart? Get used to this: you can't. Assume you go unheard. Assume you are seen as an idiot unworthy of attention. From there, dose your energy wisely.

You can be right and not get a hearing. You can be right and fail to convince anyone. You can be right and mess up your explanation. You can be right but irrelevantly so. You can think you are right, but be blatantly wrong. This happens to the best of "us". To be right, acknowledged and rewarded is the far off exception that may as well be ruled out.

Are you sure you want to be in this spot? Is this what you want to squander a lifetime on? Am I sure? I ponder this as I write this blog. All the time. I must overcome this skepticism with every post I write. A part of me refuses to be so autistic.

Economists of various persuasions split off into different schools, each claiming to be uniquely privvy to the truth while alleging the others stumble aimlessly in the dark. Do they take themselves seriously, I wonder? They must know that when 10 schools claim 10 different things that only one can be right on, a die roll's chance renders one's own odds rather unenviable. But even this omits something. There is no guarantee that any school is right.

I have always held that finance/economics is fundamentally a Nietzschean world. The Socratic mind can not orient in chaos like this. All Socrates has to say is "get out", for there is no truth to gain here. To keep going in the world of monetary abstraction requires a drive more sinister than one towards "knowledge". I want to say it is a mere drive to deceive, but this is too simple. It is a form of deception that at times shows a constructive face. To assert a false theory is open it to the attacks that transform it into a more truthlike shape. The process is not corrupt at its core. But it is insidious.

Is it worth learning the trade? Where is this supposed to lead me, exactly? And what alternative do I have?

These existential tangles beset me. I must ensure not to be a slave to my intellectual drives. This mental obsession should be a tool, not a master. I can not let myself be like them.

Food for Thought: March 19 2013

Webster Tarpley: New Pope Francis I Supports the Wall Street Sales Tax, Opposes Austerity, Globalization, and the International Monetary Fund

I don't see this getting mentioned a lot. In light of how this man's election defied prior expectations it looks like his ascent carries a special political significance.

ps. I can't fully vouch for Tarpley's accuracy and reliability in these matters.

Why Social Mobility In The United States Is A Total Myth

Whenever any statement is made about economic mobility, the yardstick that is used is always the extent to which people are able to move between the quintiles within one society. I'd like to instead see a measure of absolute income mobility. It is conceivable that a society would lose relative income mobility in the conventional statistical sense BY having certain of its members get richer, something that in isolation should rarely be a reason for complaints by anyone. A measure of absolute income mobility would avoid such pitfalls and not implicitly praise policies that distribute misery evenly among a society's members.

I'm personally inclined to think that relative mobility is almost a complete red-herring. It's a psychological abstraction of which the relevance can only be justified by the legitimization of envy. Absolute mobility tells you what a person's real prospects for living standards improvement are.

Also, things like these make me think that for anyone who isn't afraid of a little technical work, the mobility prospects in the USA are quite enviable:
DevBootCamp
App Academy

Noah Smith: John Taylor's Austerity Model

A good comprehensive post detailing how Taylor's model is a work of obfuscationary political hackery. If you're in a hurry, skip the whole post, stick to this paragraph and laugh:

5. There is no Zero Lower Bound.Note that in the monetary policy rule written above, there is nothing that says that interest rates can't go negative. In other words, Taylor assumes what most New Keynesian models assume, which is that there is no Zero Lower Bound (or that we're always far from it). Any of you who are familiar with the New Keynesian DSGE literature will recognize that Taylor's result is a very common result in this literature: Away from the ZLB, fiscal policy is not very effective. The "New Old Keynesians" such as Paul Krugman and Gauti Eggertsson, who advocate fiscal stimulus, explicitly make reference to the ZLB as the reason stimulus works. Taylor just ignores that idea in this paper.

Top REPUBLICAN Leaders Say Iraq War Was Really about Oil

Wars are rarely fought for one reason only. If the war wasn't fought "for" oil it would sure still have been one hell of a nice convenience. Whether oil was a (or the) main reason or more of a side-concern is really a matter of cosmetics.

FFT March 18 2013: The Procrustean Haircut

Food for Thought March 18 2013: The Procrustean Haircut

Social Democracy for the 21st Century: The Classical Gold Standard Era was a Myth

The gold standard is ultimately just a promise to exchange paper liabilities for gold at some distant point in the future. While that "point" is being pushed further and further away through financial layering, it turns into more and more of an empty formality that is peripheral rather than central to the system as a whole. The evolution from gold standard to paper standard is a gradual one. Even during this "clasical gold standard era" the creep towards a transformation of the system was well underway.

Barry Ritholtz: WTF Were They Thinking?

Ritholz questions whether a locality as small and insignificant as Cyprus can set off a crisis on a Eurozone-wide scale. My thoughts coincide with those of commenter GMS777:

Barry, you ask if economic malfunctions in a country with a GDP of $23 billion pose a risk to the global economy.

Could the assassination of an obscure Austrian archduke touch off a World War?

 Ritholtz' reaction doesn't do much to temper my "fears"; there's plenty of ominous context to this development to go around.

FFT; March 17 2013: Budgets, Balances and Bamboozlement

Food for Thought; March 17 2013: Budgets, Balances and Bamboozlement

chicagosean: Cliffs Notes: Jack Schwager’s “Hedge Fund Market Wizards” in Two Paragraphs

I think I'll just stick to index funds, get a decent fraction of these market wizards' returns at no risk, no fee and no effort and spend my time productively mocking things on an internet blog.

ekathimerini.com: Cyprus depositors face up to 10% haircut as part of bailout deal agreed at Eurogroup

This reminds me of a certain ant-deflationist Gary North post in which he brought forth the argument that if banks see no profit in lending out deposits, they will also refuse to take them on and/or pay interest on them anymore. I don't know if it's quite a simple for them to do that, so maybe this is instead the means by which losses from deposits are avoided; after all periodic haircuts are equivalent to a fee on deposits. Score one for deflationism? Several people I respect cry outrage at this deal, saying it will lead to bank runs. 

See also: 
Zero Hedge: Germany And IMF's Initial Deposit Haircut Demand: 40% Of Total
JPMorgan Asks "Has Europe Bazookaed Itself In The Foot", Answers "Yes"
Is Euro-geddon Nigh?

Steve Keen: Solving the Paradox of Monetary Profits

Show this paper to people who bring up the fallacious story that when banks lend out 100$ at 10% interest, there is 110$ to be repaid, which is purportedly impossible from the money that is floating around in the system. Long story short: the payment is made from transactions that make existing money change hands, i.e. circulation of money rather than the money itself. These videos show Keen's modeling approach to the same issue: Keen Crash Course

David I. Stern & Kerstin Enflo: Causality Between Energy and Output in the Long Run
Stephan B. Bruns, Christian Gross, David I. Stern: Is There Really Granger Casualty between Energy Use and Output?

I had to look up what exactly Granger Causality means and much of the analysis in these papers goes way over my head, but it seems to lend support to the notion that energy availability induces economic growth rather than the reverse. This would corroborate my views on the halting of the steep rise in energy use per capita in the 70s being a major turning point in monetary history and a primary cause of much of the financial malaise in the decades that followed (by which I mean, first high inflation, then a steeply expanding credit market in proportion to GDP, and a wedge driven between productivity and compensation pervading both developments).

Econbrowser: The Cyclically Adjusted Budget Balance: Shrinking Rapidly

A cyclically adjusted budget balance doesn't make much sense when the business cycle relative to which it is calculated was one built on top of a massive toxic credit bubble. Returning to the Great Moderation incorporates a return of the vertical trajectory of the credit market size relative to GDP. I'm more inclined to think that the reason why the US treasury is not under interest rate stress is because the Fed is poised to engage in debt monetization. This does not cause net inflation in as far as doing so counteracts the deflationary pressure of the debt-overhang that is thus neutralized. I'll write a post to address these issues specifically in the near future.

Econbrowser: What's going to happen to the Fed's balance sheet?

This discussion is interesting enough, but I'm pretty sure it is incompatible with Steve Keen's Monetary Circuit Theory's account of the workings of debt in an economy. A return to the Great Moderation can only happen in two ways: either the private sector needs to generate a massive amount of debt that it believes will be repaid in aggregate in natural ways, or the Fed needs to start monetizing such debts (i.e. become the repayer of last resort by buying up debt and ripping it up or doing something equivalent) or implicitly commit to doing so in the future. Since the former is positively implausible, the second is what a bull market and "recovery" imply will happen. This means the Fed has no credible exit strategy. It is the source and the engine of the credit boom that sends the market higher. It will be injecting not just liquidity into the market but capital, redistributed from holders of the Dollar and fixed income assets denominated in Dollars by means of monetary rent-extraction. Strangely enough this is something Steve Keen himself does not talk about. He talks about how a debt-jubilee would "fix" the situation, but pays no attention to the fact that a debt-jubilee via the public debt market is being engineered by the Fed already.

Social Democracy for the 21st Century: Woods on “Sound Money” and Deflation: A Critique

Another great two-sided perspective on an important monetary issue.

CNN: The Internet is a Surveillance State

The internet is just a double-edged sword in this regard. Take some freedom, give some freedom. I don't see particularly strong reason for alarmism except in proclaiming that the good old days of the internet during which many of the good bits without the bad aren't in the same ways around anymore. And it's still possible to derive great anonymity from internet activity if you handle yourself with care.

Ritholtz: 12 Cognitive Biases That Endanger Investors

I'm missing loss aversion on this list. It seems to me that like many other people speaking on this subject, Ritholtz overvalues humility in decision making. Perhaps a lack of humility is the main respect in which most people need to be corrected, but that doesn't make it the only direction in which one stray the wrong way. To invest well, in the sense of minimizing regret (in the sense of not missing a better deal than the one you made) rather than minimizing losses, you need to not just guard yourself from overestimating your insight but from underestimating it as well. This also annoys me about it when people drive the "confirmation bias" warning to to far an extreme: it is perfectly natural to be suspicious of information that conflicts with existing beliefs. If you formed those beliefs on the basis of rational analysis and proper data gathering, you should defend them from the assault of the noisy influx of inputs impinging on your senses. Confirmation bias is an error of the extent to which this process is given weight, not its application proper.

Steve Keen: Debunking Macroeceonomics

Great comprehensive Keen article on the broad critique of macroeconomics.