Friday, July 18, 2014

NPR is the problem

Not literally of course. But they do represent the responsible, sober, official position on matters economic and thus it's good to remind oneself of exactly what that is after spending some time in the vapors of the Internets. From Richard Fisher of the Dallas Fed:
First, I believe we are experiencing financial excess that is of our own making. When money is dirt cheap and ubiquitous, it is in the nature of financial operators to reach for yield. There is a lot of talk about “macroprudential supervision” as a way to prevent financial excess from creating financial instability. My view is that it has significant utility but is not a sufficient  preventative.

Quite possibly.
When we buy a Treasury note or bond or an MBS, we pay for it with reserves we create. This injects liquidity into the economy. This liquidity can be used by financial intermediaries to lend to businesses to invest in job-creating capital expansion or by investors to finance the repairing of balance sheets at cheaper cost or on better terms, or for myriad other uses, including feeding speculative flows into financial markets.

When the Fed pay for something by creating a reserve, that reserve does not enable lending by a financial intermediary nor does to repair a balance sheet. In the interview itself, Fisher said that the Fed had done it's job by creating reserves, and now it's Congress' job to get Americans to spend them.

But you don't spend reserves.

Instead the Fed should tell Congress that Americans cannot spend reserves, and that Congress needs to run higher deficits to encourage spending.

This is essentially why I see MMT and MMR as differences without a distinction, as this consensus view is, in my opinion, the core problem to solve.

Thursday, July 17, 2014

Market Caps when there is no Market

Recently, I wrote about the crazy valuations of companies in our current Internet 2.0 bubble, arguing that it was not Sarbox, poorly considered as that piece of legislation might be, which was leading to the dearth of IPOs, but instead simple supply and demand effects where there was so much private demand for these tech companies that they did not need to go to the public markets for capital.

As always, everything is a self portrait. The Epicurian Dealmaker puts it very well:
So, therefore, one should firmly embed notions such as the “market capitalization” of short squeeze scams such as CYNK in pulsating neon scare quotes, so the great unwashed and their blinkered guides in the media do not take them as anything other than arithmetic exercises. So, also, one should not take reported implied market values from the technology economy, such as Series D or pre-IPO round investments by professional investors in vaporware startups, as anything other than the revealed price preferences of that particular investor in that particular company. The fact that Fidelity invested $100 million for a 1% stake in the illiquid equity of Doofr-rama does not make a strong case that Doofr-rama’s “value” is $10 billion. All it really tells you is Fidelity desperately wanted 1% of Doofr-rama. If you want to know why, you better go ask Fidelity.
From this perspective, one should not ask why Uber is valued at whatever it is valued, one should ask why the last round of investors in Uber wanted it so badly.

Wednesday, July 16, 2014

Consumer debt ratios

Mosler shows how consumer credit expansion coincided with periods of economic growth and, as one would expect, higher employment and wage growth:
Circled are the credit expansion from the ‘regrettable’ S and L expansion (over $1 trillion back when that was a lot of money), the ‘regrettable’ .com/Y2K credit expansion (private sector debt expanding at 7% of GDP funding ‘impossible’ business plans), and most recently the ‘regrettable’ credit expansion phase of the sub prime fiasco.

All were credit expansions that helped GDP etc. but on a look back would not likely have been allowed to happen knowing the outcomes.
So the question is whether we can get a similar credit expansion this time around to keep things going/offset the compounding demand leakages that constrain spending/income/growth.
Based on this, I would say that the household sector has de-leveraged, but without some "irrational exuberance" they are not going to start leveraging up again to produce another boom. What is also interesting is how the booms to supported by a mix of credit bubbles (very damaging to the economy when they pop) and asset bubbles (less damaging). The asset bubble in primary markets, aka Internet 2.0, seems to be too small to be impacting household debt levels at a national scale.

Wednesday, July 09, 2014

Tom Perkins on the Internet Bubble 2.0

An aside from the New Yorker:
Instead, [Tom Perkins] blames the [San Francisco gentrification] problems on social and monetary policy set by Washington—low interest rates and the recent Keynesian interlude. In Perkins’s eyes, San Francisco’s tech boom is the result of these policies. The venture market is a risky, low-return investment environment, but it’s currently the only option available for reasonable returns. If interest rates rise once more, wealth will settle into other spaces.
Actually, I agree. While Sarbox may be a bad law, tech companies aren't staying private because being public is so bad, they are staying private because now there is plenty of money there. In our current economic climate of low interest rates and too-small deficits, money seeking a return has few options and VC, plus later mezzanine rounds, provide some return. You no longer need to go public to reach a $1B valuation.