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.