Sunday, May 30, 2010

MIA, Brecher, and the Tamil Tigers

It's fun to compare this hysterial NY Times piece on Maya Arulpragasam with Gary Brecher's pieces on the Tamil Tigers (RIP). It's even more fun to throw in Easy Rider, seeing as how Dennis Hopper died this weekend (RIP also).

Warning btw. Everything linked to above may make you lose your lunch.

A friend asked me recently if they should watch Easy Rider. I'd seen it recently because I ride, and it has motorcycles in it. I told them "no" for three reasons -- two small, and one big.

The first (small) reason is that it has 70s pacing, and I've found that most people cannot stand movies with 70s pacing.

The second (small) reason is that there are some movies with 70s pacing (The Conversation, Blood Simple, Point Blank) that has enough other stuff in it to make it worthwhile. Either a clever plot, or a fantastic ending, or cool characters. Easy Rider has none of those redeeming elements. The plot is so stupid even the movie doesn't bother with it, the ending is lame, and the characters are dated.

Now here's the third (big) reason. Easy Rider is not famous for its plot, ending, or characters. It's famous because it encapsulated a time in history, and as Le Wik says, is "A landmark counterculture film, and a "touchstone for a generation" that "captured the national imagination"". Sure. But what was countercultural then is mainstream now, the generation is not your generation, and far from capturing your imagination, you'll just find it trite.

Arulpragasam is today's "edge".


Thursday, May 27, 2010

Mark Thoma gets a clue

Bravo to Mark Thoma for cottoning on to something that's been blindingly obvious to the rest of us for years now:
Initially I was critical of how the tax cuts were targeted since so much ended up going to saving rather than consumption. This is the part I am rethinking.

There are different types of recessions, and this one can be termed “a balance sheet” recession. It had a big impact not just on bank balance sheets, but on household (and, for that matter firm) balance sheets as well. Households were particularly hard hit due to declines in stock prices and declines in the value of housing. These losses were large, they upset plans for things such as retirement, and households needed to refill the holes in their balance sheets that had been created (this includes paying off debt).

How do they refill their balance sheets? By saving more and consuming less (paying off debt is a form of saving). Thus, as the recession took hold, we saw a large increase in the saving rate and a corresponding fall in consumption. The tax cuts were an attempt to reverse the decline in consumption, but instead they mostly raised the amount that went into saving.

But that has a benefit. Households are not going to start consuming normally again until their balance sheets are repaired. The faster the holes in their balance sheets are refilled, and tax cuts can help with this, the faster the households can return to their normal rates of consumption — a prerequisite for the economy to return to normal.
I shouldn't be too hard on him though, he's an academic economist and therefore handicapped in understanding household behavior, finance, and the economy. Still, this is excellent progress!

Wednesday, May 26, 2010

More on the yield curve, and Greece

Some further thoughts on recent posts (most of this is captured in the comments, but I thought I would bring it up as well).

1. Chartalists (or MMT) talk about "setting the yield curve to zero" by having the Government set a price (%) on bonds and issuing as many as is demanded, instead of what it does now which is sets a certain quantity, and then has the market clear to set the price.

In practice, because bonds get resold, and because they are not consumption goods (especially at short durations -- the value of a 3 month treasury note is not set by a downward sloping demand curve, it's set by its interest rate) the Government cannot actually increase or lower price by adjusting the quantity.

However, for longer durations, the willingness to pay for a bond depends on what the individuals inflation expectations are, and therefore I can see a distribution of expectations, and therefore a spread in willingness to pay. This would create a downward sloping demand curve and the Govt could set the price by adjusting quantity. Therefore, at longer durations I believe bonds would act as consumption goods in this sense.

Still, the most sensible approach would be to eliminate bond issuance entirely. It's a remnant of our gold standard days.

2. The Greek Central Bank can credit and debit accounts by simply marking them up or down -- just like the Federal Reserve, and unlike US States. Therefore, the eurozone is more like a cluster of multiple currency issuers who restrict money creation by... political rules (like the 3% limits). I'm actually not sure how fiscal discipline is imposed, formally or informally. If anyone has a succinct answer, please note it in the comments!

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Sunday, May 23, 2010

Is Greece like the US, or like a US State?

This was a great thread at Mosler -- be sure to read the comments that are quite excellent. The Chartalist story has been that Greece, since it cannot issue currency, is like a US State and is therefore a credit risk while the US Federal Government can (and does) issue currency all the time and therefore need never default on US$ liabilities.

The comment thread pointing out that the Greek Central Bank can mark accounts up and down, just like the Federal Reserve, and therefore the Eurozone is more like a collection of currency issuers bound by fiscal agreements, and not like US States at all. An excellent discussion followed, where a core question came up:
Since the US Treasury cannot run an overdraft at the Central Bank, is the Govt really unconstrained in spending?
Ultimately, I think this comes down to what your definition of "constraint" is. It is true that the Treasury cannot run an overdraft at the Fed, while other member banks can, and that this rule was put in place so the Govt would be spending constrained and could not "monetize" debt. It is also true that the concept of "monetizing debt" is meaningful in a gold standard world, but has no meaning in a fiat world. And it is even more true that while formally, the Treasury cannot run an overdraft in the Fed, in reality the Fed would clear a cheque from the Treasury no matter what its account balance was. The Fed bailed out the UAW, AIG, Goldman Sachs, Fannie, Freddie, Citi, GM, Chrysler, GMAC and more -- there is no way it would not bail out the US Govt over an accounting entry. And if it didn't, it's next move would be to dissolve itself since a payment clearing system that does not include the Government is useless.

MMT always prides itself on focusing on "operational reality", and I think this is a situation where the formal rules ("no Treasury overdraft at the Fed") are at odds with the informal reality ("Fed will clear Treasury checks, no matter what") and that fixating on the formal rules takes you farther away from reality, it does not bring you closer.

Changing the formal rule (enabling a Treasury overdraft at the Fed) is conceptually radical, because it means we need to know we are no longer on a gold standard, operationally simple, and a formal recognition of operational reality.

Marshall is correct. The US does not have a Greece problem, but Greece does not have a California problem either.

Friday, May 21, 2010

Setting the yield curve to zero

I recommend reading the comment thread on this post over at Nick Rowe's for my conversation with RSJ. I'm not an academic economist and therefore have no emotional or psychological investment in their models, so I view Nick's original question as omphalitic (and yes, that may not be a word, but I'm trying to be kind).

RSJ had excellent points about how you could operationalize the flat MMT yield curve (short answer -- you cannot; you can just set FFR to zero and stop issuing bonds) but then followed-up by saying the distinction between a currency issuer and a currency user is "stupid" because it leads to all manner of bad decisions.

I cannot think of anything more fundamental and useful than recognizing and understanding this distinction, and I think we're seeing the bad decisions that come from not understanding it.

Monday, May 17, 2010

The Big Short

I just finished reading Michael Lewis's "The Big Short" and thought it was great fun. He exaggerates for color, I'm sure, but I think the core is true.

Some reactions:

1. It's amazing how long bubbles can go. I thought we were in a real estate bubble back in 03/04 and my brilliant strategy was to not buy.

Wrong on multiple counts. The bubble, then about 4 years old, had another 4 years to go before it finally popped (and even now, in some areas houses have not budged off their peak). Those who did not jump in left a lot of money on the table.

Secondly, I had no idea what a CDS was, and had no idea I could short the bubble in different ways. I might have shorted REITS, but I'm not sure I knew what those were either, or if I could short them.

Thirdly, even if I had shorted REITs, I would have been cleaned out. In The Big Short, Lewis describes experts in 05, 06, 07 sweating bullets because their short positions were being tested and the bubble still had no burst.

It's like buying AAPL when the first generation iPod came out. You'd need to wait 3 years before getting any appreciation.

2. At a certain point, one of the characters in the book talks about the lowly place of the ratings agencies. He remarks that they should be the superstars of the financial world, and are instead the no talent hacks in bad suits.

This gets to the central role of finance -- credit assessment. The public purpose of banks is to make loans that get paid back. Nothing more, nothing less.

The only actor on Wall Street who seems to actually be in the credit assessment business doesn't get paid based on the accuracy of their forecast. I see nothing being done in the regulatory realm to address this. I think this explains the entirity of our financial system.

3. Lewis ends the chapter sort of certiain, sort of not, that the theft and fraud perpetrated by the sector 30 years ago was about to end. I don't know what time frame he had in mind, but the system seems to still be robust. It will take harder times than we have for Glass–Steagall 2.0 to come to pass.

Thursday, May 13, 2010

The Trouble with Austrians

This comment sums up the problem I have with Austrians:
[Topic is unfunded liabilites held by US Govt]As far as I know no economist is saying that the US will run out of money. Every economist I have read understands that in a fiat currency system default is a decision that the state and the monetarty authority take.

What “unfunded obligations” means is unfunded in real terms, not in nominal terms. We all know the state can create as much money as it wants.
What confusion between real and nominal!

All that we have available to consume in a period is 1) what is produced in that period (determined, in part, by capital goods built up in previous periods) and 2) inventory left over from the last period.

That is all. There is nothing else available.

"Funding" a future liability in real terms means stock piling vast amounts of inventory so it will be available for drawdown in that future period. In the case of social security and medicare, it means building lots of stuff old people will buy (walking sticks, false teeth, Depends) and stocking them in massive warehouses, along with huge barrels of medicine, ready for the Boomers.

Or we could just make all that stuff when the need presents itself.

Social Security is a nominal liability. The US Govt will cut a cheque, and that cheque will clear. There is no guarantee about what the cheque will be able to buy. During each period, taxes and transfer payments determine how the period output and inventory stock is distributed amongst the populace. This distribution is a political decision that can be made at any time. Raising taxes to fund higher social security payouts just risks increasing unemployment amongst the (smaller) working population, leaving retirees with even less goods and services to spend their Treasury money on.

Sunday, May 02, 2010

Historians should go further

An unintentionally funny interview from Niall Ferguson
Q How does Africa fit into all this?

A In the eyes of the Chinese, it is a place with a lot of commodities and very poor infrastructure, and the Chinese have figured out they can access the commodities if they provide the infrastructure. So, they have a pretty instrumental view of Africa. Given the West has a sentimental view of Africa, which is they want to [help with] water, give it aid, help Africans by giving them free malaria meds. And China, of course, thinks that’s absurd. They want to come in and buy stuff, give them highways in return. And right now that model is working better.

Q Working better for China or Africa?

A Working better for Africa. Just look at the growth rate. Africa is enjoying … rapid growth, and it is mostly on the back of sales of commodities and the improvement of infrastructure. By comparison, we’ve had 50 years of development aid and achieved less. So [it is] not pretty in the sense that what China does is bolster regimes in Sudan. They aren’t really concerned about people being authoritarian. They are authoritarian, why should they worry about governance in Africa? It is not their vision of what matters, and if they can deliver economic growth and raise African living standards, you can’t really blame the Africans for saying: ‘OK, these people ask less of us [than] the aid agencies of the West and governments in the West.’
Of course, the West had a similarly instrumental view of Africa once upon a time. I wish Niall had spoke about how, say, Egypt did under Evelyn Baring.