Private Market Bubble

Every time a company goes public and the price pops, you get a long line of economists talking about how this is inefficient and that the company has left money on the table.

Well, Facebook just IPO'd and there was no "pop". This is not being trumpeted as a triumph of efficiency.

It may be part of an underwriter’s responsibility to support an IPO at the offering price, but the fact that Morgan Stanley and its partners were forced to wage such an epic battle to do so in the final hour of trading on Friday indicates a pricing failure. Simply put, the artificial demand distorted the market — until Monday, when the shares tumbled 11%. With Morgan’s Stanley backstop gone, the market priced Facebook at a more authentic level, $34, or about $10 billion less by market capitalization than the offering price. “The underwriters completely screwed this up,” Wedbush analyst Michael Pachter told the Wall Street Journal. The offering “should have been half as big as it was, and it would have closed at $45.”

Looks like if shares go up you lose, and if shares go down you lose as well. I think this reveals something quite different.

1. Facebook has been actively traded on private markets for quite some time now, so this wasn't an IPO in the traditional sense as there had been extensive price discovery long before the company officially went public. I don't know how options were prices for recent pre-IPO hires, but the usual stuff that gets done prior to an IPO (valuation, price discovery, finding buyers) had all been taken care of.

2. There is a pre-IPO internet bubble on, with angels, VCs, and companies paying too much for private concerns.

This group needs a robust post-IPO bubble so they can make money on top of the inflated prices they are already paying. That may not happen. If so, the pricking of this bubble will be very interesting, and very different, from the late 90s asset bubble.But the truth is that Facebook’s valuation had grown so large — thanks to several huge venture-capital rounds totaling a record-breaking $2.2 billion — that by the time the offering reached the public, it was already overpriced. In other words, insiders (and others, like Goldman Sachs, which invested $500 million last year at a $50 billion valuation) bid up the company’s stock price, leaving little upside for public investors. “The I.P.O. system only works if it preserves a balance between public and private investors,” writes the New Yorker‘s John Cassidy. “If this balance is upended, and virtually all of the rewards are reserved for insiders, ordinary investors will refuse to play the game. A dearth of I.P.O.s would hurt insiders along with everybody else."

Why? Why should a corporation give unearned upside to any entity, whether it's Goldman Sachs or Joe Sixpack? The article seems to contradict itself in the next paragraph:

But the various problems with Facebook’s IPO reinforce some of the worst stereotypes about Wall Street: That it’s skewed toward insiders and top banks to the detriment of average Americans.

 I'm not sure how average Americans, staying away from an expensive valuation, did anything to their detriment while helping out insides and top banks who over payed and were looking for a greater fool but didn't find one.

Big Data, Big Blindspots

I really liked this post on some of the more subtle problems with sampling.

Now here's where we get to the math. The logician, computer scientist, and fellow UCLA faculty Judea Pearl uses a graph theoretic approach to logic that emphasizes using counter-factual understandings to get at the underlying structure of causation. (His magnum opus is Causality. For an introduction relevant to the social sciences see Morgan and Winship.) One of Pearl's most interesting deductions is the idea of conditioning on a collider. If a case being observed is a function of two variables then this will induce an artifactual negative correlation between the variables. This is true even if in the broader population there is no correlation (or even a mild positive correlation) between the variables.

Totally true. And that's assuming you have clean data to begin with. I have another great example of that, which shows how correlation really is not any kind of causation at all.

Real wages, nominal debt

SRW says that, in a balance sheet recession,

The only way out of a post-Keynesian depression is to increase real wages relative to the real burden of debt. In the post-Keynesian story, inflation is helpful only if real incomes hold steady, or, at very least, fall more slowly than the real value of prior debt.

I'm not sure if this is true.

Debt is nominally denominated, so its real burden goes up in a deflationary environment. This means that, even if real wages remain flat or fall, real debt burdens will fall so long as nominal wages increase regardless.

So, even if my old $100 salary bought two loaves of bread and my new $200 salary buys one loaf, I am still better off carrying the burden of my $1000 debt. Here, my real income is worse, my nominal income is better, but my debt burden is lighter.

If the Government uses its monopoly power as a producer of NFA(e) and writes everyone a check, then the non-Govt sector has more nominal wealth, but real wealth is unchanged (it may be redistributed). If this increase in nominal wealth boosts AD and factories start humming and the unemployment line shortens, then the real wealth of the economy increases as well as there is more sweat and atoms producing real output.

Economic Theory and Durable Goods

Sexy title, no?

A strict consumable good is one that will be consumed (used up) in this period. A durable is something that will last many periods, although you can think of a fraction of it being used up per period. So a new roof is a durable, you'll need to replace it again in 30 years, but 15 years from now you will not have half a roof, you will just have a roof with 15 years left of life.

Megan's blog runs the standard story on durables:

Normal economics has two pieces of advice about how to buy consumer durables:

1.  Buy them when interest rates are low (cheaper to borrow the money; and you weren't going to earn anything at the bank anyway).  

2.  Don't buy them when your income takes a one-time hit (if the 'crops' have been bad the last few years--like they've been since the Great Recession--it's best to focus on buying things that get used up: food, haircuts, doctor visits; you can keep driving the Corolla). 

Recessions are times when 1 and 2 usually push in opposite directions, but in practice 2 wins the battle: Durable purchases collapse in a recession. 

 Well, yes and no.

The main durable in the household sector is housing. The price of housing is very much determined by the price of financing -- when financing is cheap housing prices go up, and when financing is expensive, housing prices go down. In other words, housing is an asset for which the levered and unlevered prices are very different.

Therefore, housing, a durable, is a terrible thing to buy when interest rates are low because that means financing is cheap and therefore housing will be expensive. Better to buy a house with a high interest rate loan, for a lower price, and then refinance into lower interest rate loans when rates fall.

But, people buy when money is cheap. If Monetarists want a mechanism by which interest rates impact the economy, this would be it. Low interest rates encourage consumer spending via horizontal credit expansion beacause they use the money to buy housing. That increase in AD then brings the economy into full employment.

However, when the fall in AD is caused by over-consumption of housing due to cheap money, offering more cheap money to buy those assets at their fully leveraged priced is truly pushing on a string. Even more than ZIRP.

Facebook vs Google

It's tough to know what goes on inside of companies. In general, they are much more random, chaotic, and yes, even stupid than thoughts. When you have a lot of people with partial knowledge in a political culture, stuff happens, often for no good reason. So, while I don't agree with what ReadWriteWeb has to say about Facebook vs Google, my own guess is likely wrong as well. Here's RWW:

All that profile information you've filled out over the years on Facebook? That's not just there for your friends and colleagues to see, or for self-expression. Facebook is also able to use much of it to target the advertising you see on Facebook. (And, eventually, potentially all over the Web, the way Google does.) 

Would you rather know who someone is, or what they are interested in right now? If I were starting a business from scratch, I'd much rather have intent than profile information because profile information is what you use to sell something when you don't have intent. It's second best, designed to help in reach, and not the actual moment of closing when the wallet comes out and money moves from A to B.

Brand advertising, disassociated from intent from the inception, has a natural home on Facebook, but I still think Google's ad business is a better one to be in, fundamentally.

I think Google is scared of Facebook because Facebook is successfully competing with the Web, and Google makes money by selling ads on websites, for websites.

Making your nut: MMT is really not Monetarism

A while ago I posted why I thought, contra Interfluidity, that MMT was not monetarism. I stand by this assertion. Interfluidity countered by saying that Sumner (sort of an idiot-savant of the Monetarist school) supported a payroll tax holiday and gave a couple of links in the comments. Here's one.

In actuality, Sumner advocates for an employer side cut after holding his nose and saying it's "far less efficient than monetary stimulus". In my opinion, this is a far cry from the MMT position as a payroll tax holiday immediately as monetary stimulus is a fairy tale, but you can make up your own mind. What's more interesting is the reasoning, which shows why MMT and Monetarism as, in fact, like chalk and cheese.

Monetarist believe that the Fed can control the price level (really -- "The Fed controls the price level") although the mechanism they use for this, controlling the quantity of reserves, has no way to enter the real economy because reserves are used to payment settlement, and bank lending is not reserve constrained.

So, why do Monetarists believe an employer side payroll tax holiday will be helpful at all?

For very complicated reasons it is hard to directly cut the nominal wages of workers. But you can cut the nominal labor costs to companies very easily—just reduce payroll taxes. Now that the Keynesian fiscal stimulus has not worked, the Obama team is looking at new ideas. They are rediscovering the merits of sticky-wage theories of the business cycle, which I am one of the few economists to still adhere to

"Sticky wage theories of the business cycle" means that, since employees will not accept nominal wage cuts, in deflationary environments where real prices are falling, sticky nominal wages means that the real marginal cost of labor goes up, and employers can only respond by firing people -- hence unemployment.

It's true that nominal wages are sticky downwards, but employers fire people when sales fall because demand is not there. There's a straightforward story for why nominal wages are sticky downwards, and it should be obvious to anyone who has taken out a loan -- debt (and interest) is nominal. People carrying debt have to make a nominal nut every month.

If you have a loan which requires a payment every period, that loan balance and monthly nut is nominal, and will not change. In a deflationary environment, the real burden of nominal debt grows, which is what triggers defaults. When loans default, banks write down capital, which constrains their ability to extend further credit as bank lending is capital constrained (not reserve constrained, as Monetarists believe). As credit contracts, prices fall further, as assets that are traditionally bought on margin have a different cash price and leveraged price. Houses would cost less if mortgages were outlawed.

This is the "debt deflation" spiral and Monetarists miss it because they don't, ironically, have debt in their models. The ignore it by thinking it's just a transfer. As MMT gets bank lending right, it understands the horizontal component of money, and thus avoids this mistake.

Keen vs Krugman

In general, I'm not a fan of Steve Keen's work for two reasons:

1. He ignores the vertical component of money which, I think, is important and also necessary in understanding the monetary system.
2. I find his computer models a needlessly complicated way to do something that (to me) is simpler with basic double entry book keeping and t-tables.

However, in his back-and-forth with Paul Krugman, Keen is absolutely right. Paul says

If I decide to cut back on my spending and stash the funds in a bank, which lends them out to someone else, this doesn’t have to represent a net increase in demand.

This used to be my model of banking as well -- what does it matter if people save more by putting more money in the bank? That just gives banks more money to lend out, right? Wrong. Academic macroeconomics does not understand how banks work. Loans create deposits. Bank lending is not reserve constrained.

Is MMR just politics?

Still trying to get my head around what the material differences are between MMR and MMT. MMR claims to be "economics without politics" and when someone claims to be "without politics" I've found that they are, essentially, very political indeed. In fairness, in today's society how can one now be. Pace Lenin, "you may not be interested in politics..." etc.

MMR seems to claim that MMT does not focus enough on private sector credit expansion and banks (what Mosler calls the horizontal element) and fixates excessively on the Government deficits (vertical element). This is news to me, as I came to MMT through bank operations, and think that it considers and embraces both. Indeed, hard to make sense of the monetary system without looking at both, even though operationally the lines are not always as clear as one would like.

Maybe "economics without politics" just means libertarian politics, which tries to take politics out of the financial system altogether? There is a natrual affinity between Austrians, gold bugs, and libertarians precisely because of this interest in making things less political. So, what I first dismissed as a cynical platitude, I now salute as a clever pun on words.

Pull from the comments:

'Actually, MMT’s design to bring the state back to “center stage” is wrong. There’s no “money monopolist”. There’s no “Without a government deficit, there would be no private saving.” There’s no rationale for setting prices. There’s no rationale for the job guarantee. That’s the whole point. When you visualize the picture correctly...MMT’s desire to bring the state “back to center stage” is wrong.'
--Cullen Roche, bit.ly/GJyjRt

This is purely a list of political oughts, so I guess that is at the heart of what MMR is. An (ironically) pro-bank political take on MMT. Because the Government is a "money monopolist" if your definition of "money" is NFA(e). There's over $10T worth of this stuff outstanding, and it's doing something, and it only has one source. You cannot ignore it, you need to understand it. And there are rationals for setting prices and the job guarantee -- rationales I find unconvincing -- but to deny their very existence is an exaggeration.

If MMR is all about facts, then why exaggerate and say things that just aren't true?

Finally, I don't see MMT as desiring to bring the state "back to center stage" but simply looking at things as they are. The State already occupies some stage -- center, left, right, forward, aft, whatever -- and the stage occupied in a fiat economy is simply different from a stage occupied in a gold-standard economy. This is a fact, not a political position, just as a country that uses a foreign currency locally is different from one that uses its own. You may disagree with the degree of sovereignty a state has, or should have, but that's different from refusing to recognize what actually is.

Politics of PK

Business Insider believes that Goldman embraces PK in their analysis. I don't see it.

In a study presented at the Brookings Panel on Economic Activity on March 22-23 in Washington D.C., Bradford DeLong and Lawrence Summers examine the effectiveness of fiscal policy in a depressed economy. Specifically, they use a simple model to explore the effects of fiscal stimulus in an environment when (1) monetary policy is constrained by the zero bound on nominal interest rates; and (2) a boost to output today brings longer-run benefits for the productive capacity of the economy (for example, by avoiding "scars" or "hysteresis" in the labor market). They call such an environment a "depressed" economy.

They reach two conclusions. First, while the fiscal multiplier is low, perhaps as low as zero, in a normal situation, fiscal stimulus today would be highly effective in affecting output both now and in the future. Second, temporary fiscal stimulus could be self-financing (and may well reduce long-run debt-financing burdens) when one takes into account the effects of present stimulus on the evolution of future output and debt-to-GDP ratios.

The DeLong and Summers paper, unsurprising for two Democrats, only talks about higher Government spending (G), not higher deficits (G-T).

The "higher G" argument to "prime the pump" is K, not PK.

It's also fun to see how careful the authors are to remain on the good side of Monetarists, who continue to set the orthodoxy for macro. Does any of this sound like PK to you?

In normal times the logic of Taylor (2000) that stabilization policy should be left to the monetary authority still holds.

The fear is that expansionary fiscal policy will lead to a collapse in confidence in the government, and a spiking of interest and inflation rates to previously-unseen values.

Sovereign debt crises can be triggered by rises in spending due to expansion

All basic gold-standard stuff.

JKH writes a really long post

JKH has written a really long post on "S = I + (S – I)". Cool! Even after the really long comment threads written on the topic here, I still cannot figure out why this is important (although I agree that it is true).

I'm not very bright, so I use simple models to try and understand things.

Let's imagine a brand new world. T=0.

It has one entity with a monopoly on violence who can create demand for a currency only it can create. Therefore a monopoly on violence extends to a monopoly in issuing currency.

The non-currency issuers have no currency to spend unless the currency-issuer firsts prints some currency into existence, gives it to the non-currency issuers, and then doesn't take all of it back again as taxes.

G-T.

Suppose the currency issuer sells debt to "fund" the printing. The people to buy the debt are the non-currency issuers, and the only money they have to buy the debt with is the currency that was just issued to them (and not taxed back). If the currency issuer sells debt equal to every unit they issued, then all the non-currency issuers will be left holding is the debt.

There are many non-currency issuers. Some are companies. Some are households. Some are foreigners. They trade the currency between themselves. Or not. Or partially. They can issue debt, but that doesn't change net currency in the non-currency issuer sector.

By consolidating the three different types of non-currency issuers into one, the model becomes a two sector model (currency issuer, non-currency issuer).

I do not understand what S=I+(S-I) adds to or changes this, but I hope to be enlightened on this soon.

The Myth of High Powered Money

What is G-T?

When the Government spends (credits money in a non-Govt bank account) but doesn't tax it all bank (debiting money in that non-Govt bank account) what do you call the residual left in the non-Govt sector? On the Government side this is called the deficit (flow) or the national debt (stock). But what do you call it on the non-Government side?

I refer to it as "Net Financial Assets (equity)" because 1) we're talking about a financial asset here, not a real asset, and 2) the associated liability is out of sector. Therefore, unlike financial assets created in sector, the liability portion is booked as equity, not non-equity liability.

You cannot right call this savings (or net savings) because this causes all kinds of confusion as documented in the S=I debates rocketing around the internet these days. It does get close to the lay person's intuition about what "savings" are, or even what "nominal savings" are, but I don't think that term has been generally helpful.

You cannot really call it the nominal equity base that the private sector then leverages via the horizontal channel (gross financial assets) because all kinds of other things make up the equity value in non-Govt balance sheets.

You cannot call it "high powered money" or M0 because that actually refers to reserves, and reserves are a reactive function in that G-T generates a bank deposit, which generates a reserve by double entry book keeping. That reserve then either needs to be drained or it doesn't. But the causality is clear: NFA(e) creation causes reserve creation, but reserve creation does not necessarily lead to NFA(e) creation. NFA(e) is the private sector's nominal nest egg.

(Note: I'm ignoring exports etc. as I'm including foreign sectors as "non-Govt", because by Govt I mean the entity that is the currency monopolist).

Don't trust the data

A nice post from the always interesting Venkatesh Rao on Big Data, and how it will eat us. (A small and geeky aside: reading Rao is seeing someone who has always lead with strong Ti suddenly discover Ni. His lack of fatigue remains extraordinary to me). You should read the post, because it's interesting and fun, and note this:

Data is also a world begging for tight vertical integration of the supply chain from raw, unrefined wild data all the way to AI programs whispering insights into CEO ears. If you are a Republican, the holy grail vision is a dashboard-driven company that will allow a CEO to run it as if he/she were driving a car, with no additional human involvement above minimum-wage levels. If you are a Democrat, the competing vision is the similarly empowered citizen (at the moment, the Republican vision is winning). I expect a keynote at the next Strata titled “Big Data and Little People” (hashtag #OccupyData).

Well, maybe. In my experience though, data without context is meaningless and can often lead one astray. I once designed a massive call center where, through Erlang C modeling, we thought we could run a very efficient operation using very high occupancy rates for the agents. In practise, the load, response time, and queuing looked nothing like our models. Calls weren't being answered, people were on hold forever, we had trunking problems, etc. The solution came from spending time on the floor. Even though an Erlang C model says you will have 99% occupancy, the truth is that humans need a break between calls before they are ready psychologically to task switch to the next one. In practice, you get 90% occupancy at the agent level, max. Because we modeled higher occupancy, we understaffed, so wait time increased, which caused abandonments to increase, which caused in-period re-dials to increase, which increased load, which trunked, which increase (apparant) load more etc. The solution was to acknowledge reality and put a 90% cap on occupancy. We staffed a little more, but suddenly everything started to behave just as the models predicted. I don't think any quantity of Big Data whispering into a CEO's ears would have produced this insight.

Confused about MMR

There's a long comment thread I would recommend re: S=I + (I-S).

Honestly, I'm still confused by this distinction they're making, because I'm not sure what difference it makes. At a sector level, I stick with Net Financial Assets (equity) instead of "savings" because there's lot of ambiguity around the word "saving", and at an agent level, it seems that if you spend some of your income on an apple you want to consume next period you are saving, but if you intend to eat that apple sooner you are no longer saving. I'm actually sure that's right from a NIPA perspective, but it obscures for me the key intuitions I found in the Harless post, and when Mosler calls savings the "account of record" for investment. Maybe it was the other way around.

Anyway, I must be stupid.

Moving on, I become even more confused about what MMR's beef is with MMT. I suspect it's because MMR suspects that MMT is really Communist. The irony is unimaginably delicious. But first, this post:

For instance, when the USA runs a current account deficit and a budget deficit that does not offset the leakage in the current account the private sector position has been described as experiencing a “net loss” in some MMT literature. But no clarification as to the specifics of this “net loss” is provided (in terms of real or financial wealth) and the reader is likely to come away from the lesson believing that the private sector position is automatically worse off if the government does not deficit spend at all times. But this is clearly not the case as the majority of private sector real wealth creation occurs through the horizontal banking system through credit creation. This can clearly be seen over the period from 1997q1 to 2008q2 when the government budget deficit failed to offset the current account deficit in 38 of the 42 quarters and household net worth increased by 110% while corporate profits rose by 140%. Clearly, the private sector did not experience a “net loss” over this period even though the budget deficit failed to offset the current account leakage.

The confusion arises from the difference between real wealth and financial wealth as well as misunderstanding saving. A good way to think about all of this is to understand that the private sector can create real wealth entirely independent of the government. A farmer does not need the government to turn 1 cow into 10. But the farmer has achieved real wealth creation regardless of the government’s spending position. What the government must generally do over time is help to facilitate the wealth accumulation process by providing the net financial assets to help the private sector monetize this real wealth. But it’s important not to put the cart before the horse here. It’s best to think of government as being a facilitator of wealth creation and not the driver. Hence, our focus on S=I+(S-I) with the emphasis on the idea that “the backbone of private sector equity is I, not Net Financial Assets.” The idea is not novel, but simply clarifies the understanding of the private sector component.

Talk about confusing!

1. Whether the private sector is better or worse off if the Government runs deficits or surpluses depends on whether the private sector lacks or has excess net financial equity (assets). Without this context, there is no "better" or "worse".

2. I have no idea if the majority of private sector real wealth creation happens through bank loans. Is raising a child real wealth creation? Do you need a bank loan for that?

3. 1997-2008 is a terrible time period, because of this thing called credit bubbles. If you don't understand how credit bubbles happen, you really don't understand the interplay between vertical and horizontal money creation.

4. The government mustn't "facilitate the wealth accumulation process by providing the net financial assets to help the private sector monetize this real wealth". It must correctly fund the private sector's demand for net financial assets (equity) so as to maintain full voluntary employment, without politically unacceptable levels of inflation.

5. Government can create real wealth too. (Heresy, I know. Please observe, I'm not saying that it does very often, or that it does it well, or that it should do it. I'm merely pointing out that it is, at least, theoretically possible, and there are probably an example or two we can all think of where this has happened if we're being honest with ourselves).

The EU: Towards and ever closer Union

Over the weekend, a friend of mine argued that the founders of the Eurozone knew that a monetary union without a fiscal union would come undone. So they sowed the seeds of a fiscal crises into the EZ, gambling that the unavoidable pain would be enough to force fiscal union but not so much that the monetary union itself would crumble. At the heart of all of this would be to bind Germany and France together irrevocably.

The ECB continues to try and thread this needs with its latest bail out -- more money, more time, but more pain. If the pain ceased, the push for fiscal union would also cease.

Kicking the can down the road is normally considered idle procrastination. This is different. This is deliberate procrastination. If Greece falls today, nobody knows what kind of economic domino effect it will have on other debtors like Portugal, Italy, and Spain, or the rest of the Europe. Europe has selected the muddle-through and draw-random-recovery-lines option. The honest and inevitable choice -- a wild default or even Greece's departure from the EU -- is impossible for euro ministers to imagine suffering through, for today. Meanwhile, Greece suffers.

Not deliberate procrastination. An engineered application of political pressure. We'll see if it's been calibrated correctly.

MMT is not Monetarism

Interfluidity claims that monetarism shares more with MMT than we all think.

I think MMTers, market monetarists, and Keynesians have almost everything in common other than tribe and affiliation.

He then goes on to recommend a pro-cyclical inflation indexed government savings account. Crazy.

When seeing these hare-brained schemes, I always wonder just what problem SRW is trying to solve. There must be some policy reason I'm not seeing for complicated, rube-goldberg, counter-productive ideas. But let's review in detail:

SRW would give people a government backed, $200,000 max, inflation indexed savings account (real rate of zero). This is meant to help people with inflation.

Fine, so US has 300M people, so assume we have a 50% usage rate of this account, so a total of $3x10^13 is going to be in this thing. I don't even know what this number is.

Saudi decides to jack up oil prices. We get cost-push inflation of, say, 7%. In Steve's world, the Government would need to print an extra $2,100,000,000,000 and pump that into savings accounts. 12 zeroes makes that a US Trillion. The US National debt is $15T.

So, because of inflation, SRW is going to print $2T, an increase of over 10% of the national debt (not deficit).

What does everyone think is going to happen to inflation now? Instead of helping people during high-inflationary periods, this will trigger hyperinflation by design.

It gets worse in periods of negative growth -- account holders will need to take haircuts. So, you guessed it, when the economy is shrinking, the Government is going to start reducing the number in people's bank accounts. Nominal outstanding debt will stay the same, of course, so you'll get debt deflation the way we did in the Depression.

I can see the middle class singing Hosannas now.

If Steve claims MMT and monetarism are the same, maybe it's because he doesn't understand the differences.

S=I+(I-S)?

Commenter Greg points me to this post: More on Savings and Investment

“It is perfectly possible to hold the international balance constant, have the government reduce debt, and have “people” save more.

“People’s” financial savings consists of claims on firms and claims on government. If I perform some work for a firm that (however infinitessimally) increases the firm’s real economic value, and I accept as payment a share of that firm’s stock, I have performed the economic act of saving, and increased the net saving of “people” — of the household sector. Net private sector financial assets have not increased: my “savings” is the firms’ obligation, the household sector’s surplus is offset by the business sector’s deficit.

But much of what we call saving is exchanging real resources for claims on the private business sector. And as long as the private business sector doesn’t entirely squander those real resources, that act contributes to macroeconomic S. If the private business sector does squander the resources, then while I still perceive my contribution as “saving”, the value of macroeconomic S = I does not increase, and my claim amounts to a transfer from other shareholders of the firm.

It seems similar to this same theme raised in Interfluidity (here and here). At any rate, I think they are all related.

Honestly, I'm having difficulty making head or tail of the discussion. I'm not sure what distinction they are making, and I don't know why the distinction I think they are making is important. It seems to be that, the usual sector de-composition is between the Government and non-Government sector, where Government is the currency issuer (consolidated Treasury and Federal Reserve function) and non-Government is everyone else (all currency users, includes foreign Governments). I think they are saying that within the non-Government sector, distinguishing the household from commercial sector is important, but I don't know why.

Anyone care to enlighten me?

Thanks

End the Money Market Fund

According to Megan McArdle, new rules may put money market funds out of business:

At last, the government is proposing new rules, which are supposed to make MMFs less risky. The funds would have to raise new capital, and some minor withdrawal limitations would be imposed on customers. They would also have to offer a floating net asset value instead of the current "guarantee" that if you deposit a dollar, you'll always get at least that dollar back...

...If passed as proposed, the rules would seemingly put the MMFs out of business. And perhaps that's the point--Paul Volcker, for one, has been an outspoken critic of money market funds, which originated as a way to dodge the interest rate caps on bank accounts during the inflationary 1970s."

There shouldn't be money market funds. There should be unlimited FDIC insurance on all bank accounts. It should be easy to "put a dollar in, get a dollar bank" (with no guarantee as to what that dollar will get you).

LBO Chop Shop

With Mitt's running for president, Private Equity is in the spotlight. Mitt hasn't done a great job of defending it, but large parts of what they do are pretty indefensible. For the best attempt, check out Epicurian.

Carried interest, in particular, is clearly a loop hole written into law by the Private Equity industry, for the Private Equity industry. If they wish to be taxed at capital gains rates, then they should invest as LPs. This area is clearly indefensible, but I don't anticipate it changing.

Second is the financial engineering that comes with that tax benefits of leverage. If one is to have a tax on corporations, then there's a good argument for making interest payments on debt tax deductible. Better, though, to stop taxing corporations altogether.

Third, there is Epicurian's defense of the infamous dividend recap, where the PE firm takes cash out of the company as a dividend, and lets the firm take on more debt. If the firm goes bankrupt, the PE company keeps the money they extracted earlier.

One more wrinkle is worth discussing. This is the relatively recent phenomenon of financial sponsors borrowing additional debt through their portfolio companies during the life of their investment, and using the proceeds to pay equity dividends to themselves and their limited partners. These are known as dividend recapitalizations, or “dividend recaps.” Often, financial sponsors can use such recaps to withdraw money equal to or even in excess of their initial equity investment. This leaves the portfolio company with an increased debt burden and the financial sponsor playing with house money. Many people outside the industry, including our friends Messrs. Kwak and Surowiecki, don’t like dividend recaps, because it loads up the portfolio companies with risky debt while appearing to reduce private equity’s skin in the game. This is very true.

However, having participated in or observed a number of such deals, I must strenuously disagree with Mr. Kwak’s contention that the lenders which participate in such transactions are unsophisticated dupes. They lend with eyes wide open, and an impressive amount of company-specific due diligence. Normally, a company is able to take on a bigger debt load because the financial sponsor and company management prove to new lenders that they have improved the company’s earnings power and free cash flow enough to sustain it.

Epicurious fails to mention whether the lenders in question get paid when they make the loan, or when the loan gets paid back.

Look for shocks

Baseline Scenario succumbs to its bias, and gets the causality wrong.

So there are two possible reasons why these people make the top 1 percent. One is that they are talented, hardworking people who succeed (financially) despite what they majored in—but then why are talented, hardworking people overrepresented in these majors? The other is that they are children of the elite who go to elite schools, study whatever they feel like, and succeed because of their upbringing and connections. (The reasons are not mutually exclusive.) Given the increasing evidence that America, the land of opportunity, is actually one of limited social mobility, I think we can’t overlook the latter explanation.

If talent and a strong work ethic is heritable, through genetics or upbringing or some combination of the two, then one would expect limited social mobility.

The real test of social mobility in a system is how it responds to shocks. Say, someone who is lazy and an idiot is born into Bill Gates' family. He might be wealthy, but what would his income be? Or suppose a hard working genius was born to a poor family in New York? Would they be left to languish, or would they be successful?

What Google cannot help you with

Google's PageRank algorithm is good at goal directed queries -- "flowers", "cheap airline tickets", or "nearest library". It is not good at non-directed queries, like "funny", "inspirational", "entertain me".

Facebook is great at entertaining people who have no goal cheaply. Instead of making content like TV stations do, it just parades photos of your friends, which are very entertaining because they are your friends. If you want to waste time, Facebook is the place to go (and this is why social games on Facebook are so inane, but also so successful).

This new Google ad is interesting because the queries are exactly the type of queries that Google was bad at, but Google+ hopes to be better at.

"Awesome things you can do with a paperclip"
"Awesome things you can do"
"Awesome things"

Delicious was actually great at this, back when it was a live product. TechCrunch doesn't get it at all.