If US cities were poker hands, America's invisible hand would have folded Las Vegas long ago for there is nothing capitalist about gambling. Aside from being an anti-capitalist theme park (about which, more later), Vegas, as it is affectionately known, competes with Southern California, wherein a large portion of US fruits and vegetables are grown, for Lake Mead's water. Me, I'd take food over black jack any day.
If I were a talk radio host I might authoritatively assert, "we should just shut Vegas down, move the people elsewhere in the country and be done with it- simple, really." Fortunately (for both you and me) I'm not a talk radio host and thus, on occasion, take a moment to reflect on the practical difficulties of policy proposals.
Can you imagine the hue and cry from the media (jealous, no doubt, at the attention I'd be receiving), the various governments (rightly fearing a loss of tax revenue), the banks (who'd have to increase the pace of debt write-offs with no hope of return) and, last but not least, the people forced to relocate. Yep, it's an absurd idea.
Except it isn't.
Vegas was a bad bet. Yet not only have we (i.e. us Americans, to greater or lesser degrees) continued to play it, we've bet heavily on what is a sure loser. Consider. It is a city which produces nothing economic, yet requires not only a large volume of water (precious stuff in the desert), but electricity as well. Imagine the boon to other users of Colorado River hydro-power and water if Vegas was allowed to return to the desert it was. Imagine the economic benefits accruing from reallocation of Vegas labor into more economic pursuits than income redistribution.
What's that, you say, gambling isn't economic? Nope. Gambling is as un-economic as theft. Income changes hands but nothing comes from the exchange. In a sense, Vegas is like Wall St.- a place where economics eats its own arm.
Nonsense, you say, Wall St. is about investing, not gambling.
Not so much these days, I counter.
Consider a few definitions before hyper-ventilating.
Gambling: a zero-sum game in which money changes hands leaving the world in exactly the same state
Investment: a non-zero-sum game in which money is exchanged for capital which is put to use in the pursuit of profit, thereby changing the world (admittedly sometimes not for the better) in the process
How much of Wall St. engages in the former instead of the latter?
But I digress.
As a practical matter folding Vegas would be difficult for us. The US has proven its skills breaking virgin territory, and its impotence in reforming already existing territories (see also nation building). China, by contrast, would have little difficulty evacuating Vegas, just ask the millions of former residents of the Three Gorges Dam area.
On the topic of evacuations, Michael Bloomberg is probably scratching his head wondering why it was so easy to evacuate much of lower Manhattan in August and now so difficult to evacuate Zuccotti Park but a few months hence. Note to Mike, it wasn't the police, but the shared sense of dire consequence if they didn't evacuate in August, and, I suspect, if they do evacuate now- the fear of being swamped by Irene or Wall St. respectively.
In a sense, Occupy Wall St. wants to fold Vegas too- the Vegas that is Wall St.
I can't say I blame 'em. Let's fold Vegas, stop gambling and start investing (which, as an added benefit, might give some of the protesters something better, i.e. working, to do- just saying). Why are we taking lessons (or, as seems more the case, not taking the lessons) on Capitalism from China?
ps As a closing note, I sometimes chuckle to recall the vigor with which men like Morgan and Rockefeller fought to avoid exchanging their businesses for money- they much preferred the latter than the former. These days many can hardly wait to sell out. There might be a lesson in that.
pps As I recently received notice of a (now-deleted) comment on this post which assumed my view was more literal than metaphoric let me set the record straight. I'd much rather get Vegas out of Wall St. than Nevada (although the latter has its merits).
Thursday, November 17, 2011
Tuesday, September 06, 2011
The Price of Bank Immortality?
ZURICH, Sept 6 (Reuters) - Switzerland is set to partially meet a U.S. ultimatum and deliver an estimate of the amount of assets held by U.S. residents in secret accounts at Swiss banks, possibly up to $30 billion, a newspaper reported on Tuesday.
Citing unnamed sources, the TagesAnzeiger reported that Switzerland would hand over on Tuesday details that the FINMA financial markets regulator has gathered from banks in recent months on accounts held by Americans with more than $50,000. Thomson/Reuters
If you happen to be one of the reported tens of thousands of US citizens with a hidden account in Switzerland, now might be a good time to contact a tax attorney and take advantage of the IRS' Offshore Voluntary Disclosure Initiative (OVDI) which expires on 9/9/2011. If UBS' previous disclosure of a few hundred US account holders back in 2008 didn't faze you, and the above news excerpt doesn't scare you, indulge me a few more minutes of your time. The days of bank secrecy, at least for big banks which have needed bail-outs, may be ending. In the not too distant future UBS' acronym might better be translated as Used to Be Secret, and they might not be alone.
Modern Technology, goes the cliche, has transformed the world. Within the last century armies lost the ability to be formed and moved in secret as satellites peer down on the world. Untold millions of cameras record our every move in both urban and suburban areas augmented by camera equipped police cars on the roads. Computers listen in on our phone conversations and eavesdrop on email, searching for key words or phrases begging, and receiving, deeper human scrutiny.
The practice of Finance has also been transformed. When I worked at Chase Manhattan in the late 80s deal tickets were hand written and confirmed either by phone or Telex. Auditing bank trading and accounts required hundreds of accountants and many trees worth of paper. Bank secrets were easier to keep if only because of the manpower required to unearth them. Now the same technologies which allowed banks to cut thousands of back office employees from payrolls are being used to scrutinize account holders and their transactions. Automated Database searches can do in a millisecond what used to take millions of man hours.
Clever minds at the IRS (and, I suspect, the Treasury and Military) were no doubt quite pleased to see banks adopting the new technology. As satellites made it extremely difficult to hide an army, networked computer bank records will make it extremely difficult to hide a financial transaction.
How long (if such isn't already being implemented covertly) before governments around the world have real time access to all account data? Imagine a world in which you no longer file your taxes, the IRS simply sends you a bill or return. Worse, there may be no tax bills or returns as withdrawals are made directly by the IRS, in real time.
Forget about the declining separation of church and state (and aspirations of the union thereof by US right-wing zealots), a more pressing concern might well be the declining separation of money and state.
Of course, as bastions of Capitalism, at least according to their press releases, the Big Banks would, you'd think, surely object to any such union. Alas, these institutions have, it seems to me, chosen immortality, granted by the state, in return for much greater scrutiny. UBS (Used to Be Secret) tried to fight a July 2008 John Doe summons of US account holders, but they quickly folded, not long after US government support of AIG gave them a back-door bailout (how causal the coincidence I leave to you to decide). One wonders how many clever bureaucrats watched banks increase their credit market leverage hoping the inevitable collapse would leave them with real leverage over the banks.
Of course, the battle over this issue is far from over. Banks will fight to maintain what they can of client secrecy. Yet, if they keep lining up at the bailout line, they can hardly be expected to bite the hand feeding them. Lack of solvency will equal lack of secrecy.
It would be ironic if big banks and their clients lost their autonomy, and potentially their wealth and freedom (penalties are most severe) by forgetting one of Capitalism's maxims, there's no such thing as a free lunch (or bailout).
Citing unnamed sources, the TagesAnzeiger reported that Switzerland would hand over on Tuesday details that the FINMA financial markets regulator has gathered from banks in recent months on accounts held by Americans with more than $50,000. Thomson/Reuters
If you happen to be one of the reported tens of thousands of US citizens with a hidden account in Switzerland, now might be a good time to contact a tax attorney and take advantage of the IRS' Offshore Voluntary Disclosure Initiative (OVDI) which expires on 9/9/2011. If UBS' previous disclosure of a few hundred US account holders back in 2008 didn't faze you, and the above news excerpt doesn't scare you, indulge me a few more minutes of your time. The days of bank secrecy, at least for big banks which have needed bail-outs, may be ending. In the not too distant future UBS' acronym might better be translated as Used to Be Secret, and they might not be alone.
Modern Technology, goes the cliche, has transformed the world. Within the last century armies lost the ability to be formed and moved in secret as satellites peer down on the world. Untold millions of cameras record our every move in both urban and suburban areas augmented by camera equipped police cars on the roads. Computers listen in on our phone conversations and eavesdrop on email, searching for key words or phrases begging, and receiving, deeper human scrutiny.
The practice of Finance has also been transformed. When I worked at Chase Manhattan in the late 80s deal tickets were hand written and confirmed either by phone or Telex. Auditing bank trading and accounts required hundreds of accountants and many trees worth of paper. Bank secrets were easier to keep if only because of the manpower required to unearth them. Now the same technologies which allowed banks to cut thousands of back office employees from payrolls are being used to scrutinize account holders and their transactions. Automated Database searches can do in a millisecond what used to take millions of man hours.
Clever minds at the IRS (and, I suspect, the Treasury and Military) were no doubt quite pleased to see banks adopting the new technology. As satellites made it extremely difficult to hide an army, networked computer bank records will make it extremely difficult to hide a financial transaction.
How long (if such isn't already being implemented covertly) before governments around the world have real time access to all account data? Imagine a world in which you no longer file your taxes, the IRS simply sends you a bill or return. Worse, there may be no tax bills or returns as withdrawals are made directly by the IRS, in real time.
Forget about the declining separation of church and state (and aspirations of the union thereof by US right-wing zealots), a more pressing concern might well be the declining separation of money and state.
Of course, as bastions of Capitalism, at least according to their press releases, the Big Banks would, you'd think, surely object to any such union. Alas, these institutions have, it seems to me, chosen immortality, granted by the state, in return for much greater scrutiny. UBS (Used to Be Secret) tried to fight a July 2008 John Doe summons of US account holders, but they quickly folded, not long after US government support of AIG gave them a back-door bailout (how causal the coincidence I leave to you to decide). One wonders how many clever bureaucrats watched banks increase their credit market leverage hoping the inevitable collapse would leave them with real leverage over the banks.
Of course, the battle over this issue is far from over. Banks will fight to maintain what they can of client secrecy. Yet, if they keep lining up at the bailout line, they can hardly be expected to bite the hand feeding them. Lack of solvency will equal lack of secrecy.
It would be ironic if big banks and their clients lost their autonomy, and potentially their wealth and freedom (penalties are most severe) by forgetting one of Capitalism's maxims, there's no such thing as a free lunch (or bailout).
Thursday, August 11, 2011
Why is the Invisible Hand in My Pocket While China Grows Unchecked?
Gold Soars. Stock Markets Tank. US Debt Downgraded. China Calls for End to Dollar Dominance. Riots in London.
Devotees of Rapture Theory are likely wondering why they got left behind during the Tribulation. More worldly, modern persons, who eschew eschatology might nonetheless be worrying about TEOTWAWKI (which is, ironically enough, the same thing). Devotees of Cyclical Theories of History (Kondratiev, Strauss and Howe, Hinduism) are likely seeing the end of a K-wave, the Fourth Turning, or the coming of Shiva, respectively.
Was it just a little over a decade ago that the New American Century was dawning? History itself, according to some, was ending. With free markets across the globe open 24 hours a day the invisible hand was sure to make our future bright.
Then the invisible hand started picking pockets, crashing the Tech market in which many had invested, and foreclosing on houses in which even more had not only invested but lived.
What happened to the invisible hand? Was it always just a scam- a means to shift income to an increasingly select few?
Back when Francis Fukuyama was proclaiming the End of History, faith in the free-market inspired invisible hand's virtue was hard to challenge publicly. A few years ago, echoes of that faith still resonated, as was evident when the presumed bastions of free markets, the banks, were saved from the effects of their own unwise speculations and lending. Today, the natives seem a bit (in London, a lot) more restless. It might, given current conditions seem a bit odd to resurrect that rapidly fading totem so let me try to explain.
Recently I've been reviewing the work of Mancur Olson, particularly the role of interest (or ownership, if you wish) in fostering an invisible hand effect, or in the US' case of late, the lack thereof. In The Economics of Autocracy and Majority Rule: The Invisible Hand and the Use of Force Martin McGuire and Mancur Olson argue persuasively (in my view): that whenever a rational self-interested actor with unquestioned coercive power has an encompassing and stable interest in the domain over which this power is exercised, that actor is led to act in ways that are, to a surprising degree, consistent with the interests of society and of those subject to that power. In other words, for the socially virtuous invisible hand to manifest some person or group has to think they own now and will in the future, their domain- that they are part of the realm.
McGuire and Olson's argument begins with a hypothetical discussion of a bandit's transition to a benevolent dictator: Consider the interests of the leader of a group of roving bandits in an anarchic environment. In such an environment, there is little incentive to invest or produce, and therefore not much to steal. If the bandit leader can seize and hold a given territory, it will pay him to limit the rate of his theft in that domain and to provide a peaceful order and other public goods. By making it clear that he will take only a given percentage of output – that is, by becoming a settled ruler with a given rate of tax theft – he leaves his victims with an incentive to produce.
According to this view, free markets, which were apparently considered a condicio sine qua non- a necessary condition- of the virtuous invisible hand are rather simply a medium for aligning interests, which can be either those of a bandit or of a long term owner. Multiple financial crises over a relatively short period of time are a sign that banditry, not long term ownership are the aims of large players in our free markets. What long term owner wants multiple crises over a short period of time?
For a real world example of the difference between a bandit and an owner, consider the case of JP Morgan. Whatever his initial designs as a young man, from his mid-50s until the creation of the Fed in 1913 Mr. Morgan had great power over (owned, some rightly argued) American finance. As McGuire and Olson argue, the more control he gained the more he seemed to care about systemic solvency, of course, not without expecting great gains for himself. Morgan knew that long term American financial difficulties were not at all in his interests. A growing American economy was a condicio sine qua non for a wealthier JP Morgan. While hardly a benevolent dictator, I hold to my view expressed here: I’m confident if JP Morgan were running the Fed, credit growth would have been restrained long ago. There is some merit to having someone "own" an issue- unlike Greenspan, Geithner, Rubin et alios, who claim no responsibility.
These days, American finance is run and regulated by people who have much less "skin in the game." As I argued previously (here): It's apparently much better to work in a senior position at a money center bank than to own one. For JP Morgan, risking insolvency to make Wall St. analysts happy would have been absurd. The benefits accruing to him (higher dividend pay-outs for a few quarters- selling bank shares was considered silly then) would have been overshadowed by the potential loss in corporate stock value. Today's money center bank CEOs, whose compensation is heavily skewed towards cash can run a bank into the ground and, in the event a bail-out isn't forthcoming, retire in luxury.
Consider the case of Dow Kim, detailed in the aptly titled NYTimes article, On Wall Street, Bonuses, Not Profits, Were Real: For Dow Kim, 2006 was a very good year. While his salary at Merrill Lynch was $350,000, his total compensation was 100 times that — $35 million.....But Merrill’s record earnings in 2006 — $7.5 billion — turned out to be a mirage. The company has since lost three times that amount, largely because the mortgage investments that supposedly had powered some of those profits plunged in value. Richard Fuld, ex-CEO of Lehman Brothers, earned some $45M in 2007, one year before that firm went bust.
Had Mr. Kim or Mr. Fuld held large stakes in their respective firms would they have been so reckless? Would the real sector in the US be starved of cash, as is currently the case, if the reckless behavior of those like Mr. Kim, Mr. Fuld and others hadn't required their and other financial firms to be bailed out? The large additions to public sector debt caused by the recent bail-outs are one of the main reasons the US debt rating was recently downgraded.
Meanwhile, over in ostensibly communist China, the invisible hand seems to be working just fine. China's political leaders think like owners and through, at times, admittedly coercive policies, impose that view on others. While China's middle class grows by leaps and bounds the American middle class is shrinking fast.
What can be done? Assuming there is something to the views of McGuire and Olson, and I do so assume, the US needs leaders who think like owners instead of hit and run bandits. Cash pay-outs and easily converted stock-option grants need to be replaced by long term equity holdings- players need to be forced to have "skin in the game". Regulators too might perform better if their compensation was tied to disaster avoidance (imagine if FDIC regulators received bonuses if no banking crisis occurred not only during but 5 years after their tenure).
In short, the US would be well served by reviving faith in the virtue of ownership. Large public companies with diffuse ownership structures have been treated as disposable ATMs by senior officials. Forcing people to have "skin in the game" before allowing them to make policy decisions seems like a good idea. Even my local bank, of which I'm a shareholder, requires Directors to have a reasonably large stake therein.
Sunday, August 07, 2011
Them's Fighting Words
As the war of public words between the US and China escalates, the old adage- When you owe the bank $1Mil, you owe the bank. When you owe the bank $10Bil, they owe you - springs to mind, with a nasty twist. Chillingly, both parties are nuclear armed with significant standing armies.
Following S&P's downgrade of US debt China's Xinhua news offers the following wise economic advice:
China, the largest creditor of the world's sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China's dollar assets.
To cure its addiction to debts, the United States has to reestablish the common sense principle that one should live within its means.
S&P has already indicated that more credit downgrades may still follow. Thus, if no substantial cuts were made to the U.S. gigantic military expenditure and bloated social welfare costs, the downgrade would prove to be only a prelude to more devastating credit rating cuts, which will further roil the global financial markets all along the way.
To cure its addiction to debts, the United States has to reestablish the common sense principle that one should live within its means.
S&P has already indicated that more credit downgrades may still follow. Thus, if no substantial cuts were made to the U.S. gigantic military expenditure and bloated social welfare costs, the downgrade would prove to be only a prelude to more devastating credit rating cuts, which will further roil the global financial markets all along the way.
Alas, sometimes economic wisdom clashes with political reality. Chinese calls for US military expenditure cuts will prick US hawks' ears the wrong way. I can hear them now- this has been China's goal all along.
I fear the world just took a step closer to the abyss of war.
Thursday, August 04, 2011
A New (and most interesting) Blog
NewPopulationBomb by historian Jack Goldstone whose Revolution and Rebellion in the Modern World was an enlightening read.
Today's post, La Grande Revolution, Encore is quite pertinent for modern America.
To wit: Is there a lesson here for today, or is this ancient history? In fact, the parallels are remarkable. Just as today, the elites in the US are confusing their self-interest with principles of freedom from taxation, when in fact the critical principle is that the country must have sufficient revenues to cover its necessary expenses and service its debts. As to the deficit, conservatives blame it on Obama just as 18th century French elites blamed their deficit on the king. But just as in France, the greater portion of the the long-term deficit in the US is being driven by population change, which the President cannot affect. The number of Americans over 65 will double over the next forty years, from 50 to 100 million. The increases in medicare and social security costs that this will bring cannot be covered by simply cutting spending unless we decide to toss out these programs altogether.
Wednesday, August 03, 2011
When is a Non-Default a Default?
'When I use a word,' Humpty Dumpty said, in rather a scornful tone, 'it means just what I choose it to mean — neither more nor less.'
'The question is,' said Alice, 'whether you can make words mean so many different things.'
'The question is,' said Humpty Dumpty, 'which is to be master — that's all.'
'The question is,' said Alice, 'whether you can make words mean so many different things.'
'The question is,' said Humpty Dumpty, 'which is to be master — that's all.'
The US Government, according to most press reports, has, by virtue of a last minute- a self-designated limit, it seems worth noting- deal, avoided default. Amazingly, both the process and situation are even more confusingly convoluted than my opening sentence.
Imagine a world in which the debtor determines whether or not he is in default. In that world defaults would be rare events indeed. Alas for the debtors, but fortunately for the solvent, our world doesn't work that way, no matter how things might appear.
In our world, debtors don't determine default, creditors do.
Here's what some important US Government creditors have recently been saying:
1) China: (Xinhua News) With its debt already almost equaling its gross domestic product, the United States, as a major anchor of the increasingly globalized world economy and the issuer of the dominant international reserve currency, needs to roll out more responsible and effective measures to balance its budget and restore the economic health of itself and the world.
2) Russia: (Reuters) They are living beyond their means and shifting a part of the weight of their problems to the world economy...They are living like parasites off the global economy and their monopoly of the dollar. - Russian Prime Minister Vladimir Putin
3) China: (RawStory) China's foreign exchange reserves will continue following the principle of diversified investment, enhancing risk management and minimising the negative impact of volatility in global financial markets," People's Bank of China governor Zhou Xiaochuan said in a statement.
"Large fluctuations and uncertainty in the US treasury bond market will affect the stability of international monetary and financial systems, which will hurt the global economic recovery."
Also on Wednesday, the Chinese ratings agency Dagong downgraded the United States for the second time since November, with a continuing negative outlook.
"Large fluctuations and uncertainty in the US treasury bond market will affect the stability of international monetary and financial systems, which will hurt the global economic recovery."
Also on Wednesday, the Chinese ratings agency Dagong downgraded the United States for the second time since November, with a continuing negative outlook.
Meanwhile my preferred measure of US credit worthiness (and market in which nations of less military prowess might express their views more safely), the value of Gold in US$s continues to set new records.
With combined holdings on some $1.28T of US Treasuries, China and Russia are, unlike the US, in a position to declare the US in default, which brings us back to the big egg. Humpty Dumpty's great fall might prove prophetic (and hopefully, beneficially cathartic) but it's his words that haunt me.
The question is, which is to be the master- that's all.
Once words (like default, creditworthy, war, ally, etc.) lose their agreed upon, dictionary meanings, might is eventually used to make right. The US Kabuki Play that was the debt ceiling debate has apparently failed to convince our militarily armed creditors we have jumped back from the abyss. They seem to think our non-default still looks like a near default, and are taking action. Will we continue our dance, putting off hard (but oh-so-necessary) decisions hoping to distract our creditors with drama, or will we make honest strides towards resolving our debt issues, which, first and foremost, must include growth policies (of the non-rent-seeking kind)?
As an aside, the notion that our debt problems can be solved simply through broad spending cuts or tax increases is absurd to me (and likely to our creditors). If the US economy does not resume growing fast the Washington crowd can crow about avoiding default all they want, but the rest of the world will know otherwise and act accordingly.
If the Washington crowd chooses the former "more of the same" option, we might have to have a contest (a.k.a. War) to answer Humpty Dumpty's question- which is the master?
In hindsight, it might have been better to self-declare default and immediately start picking up the pieces instead of watching and waiting while the big egg teeters on the precipice. After all, we know how the rhyme ends.
Luckily, capitalism doesn't require putting the pieces back together again. Indeed, capitalism works best when the broken pieces are used to make newer, better things than a silly egg on a wall, destined to fall.
Full Disclosure: Long Gold
Thursday, June 23, 2011
Can You Fake....a Capitalism?
We don't have a precise read on why this slower pace of growth is persisting. Ben Bernanke
Fed Chairman Ben Bernanke is confused. Interest rates are low, liquidity is flowing freely and equity prices are up between 15-20% year-on-year. Why then, Bernanke wonders, isn't the US economy growing as a capitalist economy should grow under such conditions?
Perhaps the US is just faking a Capitalism.
Most definitions of Capitalism include reference to private ownership of the means of production which exist on a "for profit" basis- i.e. survival of the fittest.
While worthy of discussion in their own right I'll only note in passing that ownership of the means of production is far from private in its early 20th Century sense and that existing on a "for profit" basis likely implies not existing (as opposed to being bailed out) if losses are excessive, hoping to draw your, and perhaps Mr. Bernanke's, attention to the graph below.
Fed Chairman Ben Bernanke is confused. Interest rates are low, liquidity is flowing freely and equity prices are up between 15-20% year-on-year. Why then, Bernanke wonders, isn't the US economy growing as a capitalist economy should grow under such conditions?
Perhaps the US is just faking a Capitalism.
Most definitions of Capitalism include reference to private ownership of the means of production which exist on a "for profit" basis- i.e. survival of the fittest.
While worthy of discussion in their own right I'll only note in passing that ownership of the means of production is far from private in its early 20th Century sense and that existing on a "for profit" basis likely implies not existing (as opposed to being bailed out) if losses are excessive, hoping to draw your, and perhaps Mr. Bernanke's, attention to the graph below.
source: BEA
Stripped of econo-jargo, the graph above depicts changes over time of new capital (means of production like factories, tools, etc.) investment compared to annual national output or GDP. As you can see, such investment has been generally declining for a decade. We in the US are at a plateau like a weight lifter who won't add extra weight to his work-outs. A more clever economist than I, Tyler Cowen, describes the US' condition as The Great Stagnation.
For all the official talk of stimulus, there is virtually no capital investment happening in America. Is it any wonder unemployment remains high?
The " Constant revolutionising of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation," which, Karl Marx argued, "distinguish the bourgeois [Capitalist] epoch from all earlier ones" is not a current feature of American political-economy.
Can you fake a Capitalism?
I think we're doing about as good a job as Meg Ryan did above. While some might wish "to have what she's having" I prefer the real thing and I suspect most Americans would too.
A few suggestions:
- let's focus on the real economy instead of the monetary quantifications thereof
- let's stop stimulating the economy and start investing in it
- let's stop being financialists and start being capitalists again
As JS Mill wrote: Capital, by persons wholly unused to reflect on the subject, is supposed to be synonymous with money. To expose this misapprehension, would be to repeat what has been said in the introductory chapter. Money is no more synonymous with capital than it is with wealth. Money cannot in itself perform any part of the office of capital, since it can afford no assistance to production. To do this, it must be exchanged for other things; and anything, which is susceptible of being exchanged for other things, is capable of contributing to production in the same degree.
Paraphrasing Clinton (for Bernanke): It's the capital, stupid!
Tuesday, May 17, 2011
Judicial Variations on Rape
rape (v.)
late 14c., "seize prey, take by force," from Anglo-Fr. raper "to seize, abduct," a legal term, probably from L. rapere "seize, carry off by force, abduct" (see rapid). Latin rapere was used for "sexual violation," but only very rarely; the usual Latin word being stuprum, lit. "disgrace." Sense of "sexual violation or ravishing of a woman" first recorded in English as a noun, late 15c. (the noun sense of "taking anything -- including a woman -- away by force" is from c.1400). The verb in this sense is from 1570s. Related: Raped; raping. Uncertain connection to Low Ger. and Du. rapen in the same sense. Rapist is from 1883.
According to Bloomberg, the agent's first question to the suspected criminal was, "We’re here to find out if there’s an innocent explanation.” The suspected criminal in the case was not Dominique Strauss-Kahn, but Bernard Madoff. Both men have been accused of rape, if you'll permit its broader meaning. An examination of the differences and similarities between their cases and treatment by the Justice system exposes curious divergences in current Judicial sensibilities on crime.
Before going further, in anticipation of a justified critique, let's pause and consider the broad use of "rape". I assume many (perhaps most) female, and quite a few male readers will take offense at the use of the same term in both cases. I don't intend to downplay the alleged thuggish actions of Mr. Strauss-Kahn towards a hotel maid. If the allegations against him are true, he, in my view, is a criminal. His victim (or victims as seems to be the case) has suffered and may bear the scars, both visible and invisible for life. Yet, so too will the many more numerous victims of Mr. Madoff (who interestingly also had something of a reputation as a "seducer" to use a term applied to Mr. Strauss-Kahn).
In blunt terms I'm all for jail terms for convicted rapists in its broadest sense. My question is this. Why do financial rapists, who admittedly inflict, in many cases, less acute trauma but to many more victims deserve the benefit of the doubt and more gentle handling than physical rapists by our Justice system?
Mr. Madoff confessed the crime to his sons, who then alerted the FBI. Despite the confession, and years of SEC investigations, as detailed in Harry Markopolos' book No One Would Listen, the first question asked of Mr. Madoff, as noted above, was, "We’re here to find out if there’s an innocent explanation.”
I doubt that was the first question asked of Mr. Straus-Kahn, who was arrested within 6 hours of the alleged crime (in my next post I'll examine more thoroughly the incredible speed with which the NYPD managed to nab an official who had cleared immigration and might be expected to have diplomatic immunity- talk about cutting through red tape).
At his arraignment, Mr. Madoff was released to house arrest despite failing to provide the Judge's recommended 4 signatures (only his wife and son signed) on a $10M bail bond.
Mr. Strauss-Kahn is in Rikers after the Judge refused a $1M cash bond and similar offer of house arrest at his daughter's residence in NY.
The moral of the story is apparently this. It's better, in the sense of preferred US Judicial treatment, to rape many financially than to rape a few physically. Those raped physically can not only hope to see their rapist in jail, they can sue for damages in civil court. Those raped financially are quite lucky to see their rapists in jail. More often they not only lose their investment, they have to bail out (financially) their rapists!
late 14c., "seize prey, take by force," from Anglo-Fr. raper "to seize, abduct," a legal term, probably from L. rapere "seize, carry off by force, abduct" (see rapid). Latin rapere was used for "sexual violation," but only very rarely; the usual Latin word being stuprum, lit. "disgrace." Sense of "sexual violation or ravishing of a woman" first recorded in English as a noun, late 15c. (the noun sense of "taking anything -- including a woman -- away by force" is from c.1400). The verb in this sense is from 1570s. Related: Raped; raping. Uncertain connection to Low Ger. and Du. rapen in the same sense. Rapist is from 1883.
According to Bloomberg, the agent's first question to the suspected criminal was, "We’re here to find out if there’s an innocent explanation.” The suspected criminal in the case was not Dominique Strauss-Kahn, but Bernard Madoff. Both men have been accused of rape, if you'll permit its broader meaning. An examination of the differences and similarities between their cases and treatment by the Justice system exposes curious divergences in current Judicial sensibilities on crime.
Before going further, in anticipation of a justified critique, let's pause and consider the broad use of "rape". I assume many (perhaps most) female, and quite a few male readers will take offense at the use of the same term in both cases. I don't intend to downplay the alleged thuggish actions of Mr. Strauss-Kahn towards a hotel maid. If the allegations against him are true, he, in my view, is a criminal. His victim (or victims as seems to be the case) has suffered and may bear the scars, both visible and invisible for life. Yet, so too will the many more numerous victims of Mr. Madoff (who interestingly also had something of a reputation as a "seducer" to use a term applied to Mr. Strauss-Kahn).
In blunt terms I'm all for jail terms for convicted rapists in its broadest sense. My question is this. Why do financial rapists, who admittedly inflict, in many cases, less acute trauma but to many more victims deserve the benefit of the doubt and more gentle handling than physical rapists by our Justice system?
Mr. Madoff confessed the crime to his sons, who then alerted the FBI. Despite the confession, and years of SEC investigations, as detailed in Harry Markopolos' book No One Would Listen, the first question asked of Mr. Madoff, as noted above, was, "We’re here to find out if there’s an innocent explanation.”
I doubt that was the first question asked of Mr. Straus-Kahn, who was arrested within 6 hours of the alleged crime (in my next post I'll examine more thoroughly the incredible speed with which the NYPD managed to nab an official who had cleared immigration and might be expected to have diplomatic immunity- talk about cutting through red tape).
At his arraignment, Mr. Madoff was released to house arrest despite failing to provide the Judge's recommended 4 signatures (only his wife and son signed) on a $10M bail bond.
Mr. Strauss-Kahn is in Rikers after the Judge refused a $1M cash bond and similar offer of house arrest at his daughter's residence in NY.
The moral of the story is apparently this. It's better, in the sense of preferred US Judicial treatment, to rape many financially than to rape a few physically. Those raped physically can not only hope to see their rapist in jail, they can sue for damages in civil court. Those raped financially are quite lucky to see their rapists in jail. More often they not only lose their investment, they have to bail out (financially) their rapists!
Tuesday, May 03, 2011
The Market Whisperer
Admittedly, it took more than a Cesar Millan "tsst" to stop Silver (and Gold and Oil) in its tracks. Raising the margin requirements (details of which are most ably covered by Jesse at his Café Américain), killing Osam bin Laden, and continuing to promise an end to debt monetization helped, especially given the context- a highly leveraged market apparently overloaded with new longs.
Of course, as The Dog Whisperer himself will warn, he is a trained professional. Don't try these techniques at home.
Whether this proves a permanent rehabilitation or simply a pause that refreshes remains to be seen.
It is, as I plan to discuss in my next post, most difficult for the ship of state to change direction.
Monday, May 02, 2011
An Interesting Read on US Involvement in Libya
The Libyan War, American Power and the Decline of the Petrodollar System
Being a lazy man, I'm always pleased to discover someone else has done the heavy lifting of ideas I should have fleshed out in my own arguments. The article linked above provides context- and as Peter Dale Scott is both a better scholar and writer than I, in much better form- to the views in my post on Osama bin Laden.
Being a lazy man, I'm always pleased to discover someone else has done the heavy lifting of ideas I should have fleshed out in my own arguments. The article linked above provides context- and as Peter Dale Scott is both a better scholar and writer than I, in much better form- to the views in my post on Osama bin Laden.
Panetta, Petraeus, Osama?
Timing, they say, is everything.
Less than a week ago, Leon Panetta was replaced as CIA Director by Gen. Petraeus, and nominated as Secretary of Defense.
Today, the world learns of Osama bin Laden's death.
What other changes are in the offing?
Less than a week ago, Leon Panetta was replaced as CIA Director by Gen. Petraeus, and nominated as Secretary of Defense.
Today, the world learns of Osama bin Laden's death.
What other changes are in the offing?
Sunday, May 01, 2011
After Osama
Osama bin Laden, according to CNN, has been killed in a firefight with US forces in Pakistan and his body has been recovered.
Almost a decade ago, bin Laden, in hopes of, according to some reports, inspiring a jihad and bleeding US financial strength, inter alia, directed the attacks on the Twin Towers and Washington D.C.
Now, only his ghost remains. The jihad he hoped to inspire has thus far been thankfully quashed, but the US has been bleeding financially for that decade.
What next?
Aside from a substantial increase in Prez. Obama's political capital, which might deflect the right wing's attempts to dismantle the welfare state, inter alia, (and thus indirectly shift market sentiment, to wit, increase negative sentiment on US bonds) direct effects on market psychology and prices (and eventually the underlying fundamentals), at first blush, include:
1) A temporary (duration dependent on, inter alia, announced US policy changes in the next few days) resurgence in $ assets, and consequent decline in Gold and Silver. A rise in US debt market prices. A decline in oil prices.
2) Increased speculation on oversea troop levels in Afghanistan- will they be brought home, will they be redeployed, will they remain the same?
3) Will the Islamic world, in the event troops remain in Afghanistan or are redeployed either in Iraq or Libya, come to the view that US peacemaking after Osama is colonialism in disguise?
4) Medium term, a status quo military presence in the Islamic world, with a significant cause célèbre removed, will not only continue to negatively impact the US budget, it may also increase Islamic resistance (thus further increasing the price of military action), and reduce foreign willingness to finance what may seem more like colonialism than peacekeeping.
The ball is in the Obama administration's court. Like 9/11, this is a key pivot point.
Much has changed in the US over the past 10 years. Will this opportunity to change course be grasped, as a similar opportunity was grasped in the aftermath of 9/11? Will the story simply fade from media consciousness in a few days- signaling an opportunity squandered (or deftly avoided depending on perspective)? What, if any, will the new course be?
From a financial perspective, this seems to me a wonderful opportunity to begin to significantly reduce military expenditure without losing face at home. US military adventures abroad since 9/11 brought forward the US budget's "day of reckoning" by many years. Either the US buys some time by reducing such expenditure or the financial day of reckoning will continue to creep forward.
Without the goal of bin Laden's capture as cloak of respectability, assuming military deployments continue unchanged, the financial day of reckoning might leap instead of creep forward as foreign demand for US debt and willingness to sell oil "cheaply" dries up further.
Ten years ago the world went to war.
What next?
Full Disclosure: Long Gold
Almost a decade ago, bin Laden, in hopes of, according to some reports, inspiring a jihad and bleeding US financial strength, inter alia, directed the attacks on the Twin Towers and Washington D.C.
Now, only his ghost remains. The jihad he hoped to inspire has thus far been thankfully quashed, but the US has been bleeding financially for that decade.
What next?
Aside from a substantial increase in Prez. Obama's political capital, which might deflect the right wing's attempts to dismantle the welfare state, inter alia, (and thus indirectly shift market sentiment, to wit, increase negative sentiment on US bonds) direct effects on market psychology and prices (and eventually the underlying fundamentals), at first blush, include:
1) A temporary (duration dependent on, inter alia, announced US policy changes in the next few days) resurgence in $ assets, and consequent decline in Gold and Silver. A rise in US debt market prices. A decline in oil prices.
2) Increased speculation on oversea troop levels in Afghanistan- will they be brought home, will they be redeployed, will they remain the same?
3) Will the Islamic world, in the event troops remain in Afghanistan or are redeployed either in Iraq or Libya, come to the view that US peacemaking after Osama is colonialism in disguise?
4) Medium term, a status quo military presence in the Islamic world, with a significant cause célèbre removed, will not only continue to negatively impact the US budget, it may also increase Islamic resistance (thus further increasing the price of military action), and reduce foreign willingness to finance what may seem more like colonialism than peacekeeping.
The ball is in the Obama administration's court. Like 9/11, this is a key pivot point.
Much has changed in the US over the past 10 years. Will this opportunity to change course be grasped, as a similar opportunity was grasped in the aftermath of 9/11? Will the story simply fade from media consciousness in a few days- signaling an opportunity squandered (or deftly avoided depending on perspective)? What, if any, will the new course be?
From a financial perspective, this seems to me a wonderful opportunity to begin to significantly reduce military expenditure without losing face at home. US military adventures abroad since 9/11 brought forward the US budget's "day of reckoning" by many years. Either the US buys some time by reducing such expenditure or the financial day of reckoning will continue to creep forward.
Without the goal of bin Laden's capture as cloak of respectability, assuming military deployments continue unchanged, the financial day of reckoning might leap instead of creep forward as foreign demand for US debt and willingness to sell oil "cheaply" dries up further.
Ten years ago the world went to war.
What next?
Full Disclosure: Long Gold
Tuesday, April 19, 2011
S&P Downgrade: Be Afraid, Be Very Afraid
In boom times, credit rating agencies, like S&P, are thought to have the foresight of the Fates- figures of Greek (et al.) Mythology who spun, measured, and cut the threads of life. As boom turns to bust, these credit rating agencies fall into the trap of spinning too much thread which is only measured and cut after credit death occurs.
After getting caught looking in the rear view window a few too many times, our Fates of credit appear to be attempting an image rehab with Big Game- the long term credit rating of the United States. Of course, as S&P is made up of real people, not mythical figures, they aren't as brave as Clotho, Lachesis and Atropos and thus are merely threatening to measure the life-span of US AAA credit (i.e. shifting the outlook to negative), rather than pronouncing a definite end.
For my money (and let's be clear, the debt under review is that upon which the $s in my pocket are valued) S&P's focus on the debt ceiling sideshow in Congress as catalyst for default is likely misguided. Then again, I wouldn't be totally shocked to see the newbies in Congress force a default of a few bond payments just to make the Prez (who gets no more respect from me since his invasion of Libya) look bad and thus win more votes. Yes it would be colossally stupid and therefore, not out of the question. S&P puts the odds at 1 in 3.
Assuming Congress avoids the colossally stupid option and raises the debt ceiling, the "no risk of US default" views of Barry Ritholtz and Yves Smith et alios would seem to suffice. The US issues the currency in which its debt is paid, in somewhat similar fashion to the Tech companies of the 90s. So long as our foreign creditors continue buying US debt, default would be self inflicted.
If I was playing the role of the credit fate, Lachesis, who measures the thread, I wouldn't be watching the shenanigans in Congress but rather our creditors' perception of rising confusion and dissent in the US. Our nation seems adrift in a self-inflicted sophisticated fog.
We are promoters of freedom currently engaged in 3 colonial projects (Iraq, Afghanistan and now, Libya) which engenders great confusion. We want control, but we don't want to be seen grabbing it coercively. We are confused. Colonies, as history attests, are difficult ventures when such policies are overt. Covert colonialism seems to me a contradiction in terms.
Congressional pissing matches over the debt ceiling are another sign of great confusion. Those who cheer Tea Party "balance the budget" principles would, in the event the right flexes its muscles, discover the rapid reduction of government employment and spending in a highly leveraged economy creates most unpleasant effects.
This isn't to argue against deficit reduction in general (I suspect terminating our covert colonial ventures and redirecting that labor force back home on infrastructure would go a long way towards solving many problems) just the method on offer.
Worse than our confusion, from the perspective of the single party Chinese, is the dissent, notably that from S&P. While the Chinese ruling party has apparently learned to deal with US political kabuki, the notion of a US ratings agency downgrading its outlook on US debt must strike them as odd indeed. Having invented paper money, the Chinese know it rests on faith- faith that is eroded by dissent, ergo their rigorous crackdowns on such.
Eventually the Chinese, whose faith in US economic policy making was shaken during the debt crisis of 2008-09, will tire of the confused games in the US and force us to deal with them with real currency, not the funny money we call US Federal Reserve Notes. Far worse for the US than default is enforced real currency dealings. As with all sophisticated cultures, reality is a bitch.
After getting caught looking in the rear view window a few too many times, our Fates of credit appear to be attempting an image rehab with Big Game- the long term credit rating of the United States. Of course, as S&P is made up of real people, not mythical figures, they aren't as brave as Clotho, Lachesis and Atropos and thus are merely threatening to measure the life-span of US AAA credit (i.e. shifting the outlook to negative), rather than pronouncing a definite end.
For my money (and let's be clear, the debt under review is that upon which the $s in my pocket are valued) S&P's focus on the debt ceiling sideshow in Congress as catalyst for default is likely misguided. Then again, I wouldn't be totally shocked to see the newbies in Congress force a default of a few bond payments just to make the Prez (who gets no more respect from me since his invasion of Libya) look bad and thus win more votes. Yes it would be colossally stupid and therefore, not out of the question. S&P puts the odds at 1 in 3.
Assuming Congress avoids the colossally stupid option and raises the debt ceiling, the "no risk of US default" views of Barry Ritholtz and Yves Smith et alios would seem to suffice. The US issues the currency in which its debt is paid, in somewhat similar fashion to the Tech companies of the 90s. So long as our foreign creditors continue buying US debt, default would be self inflicted.
If I was playing the role of the credit fate, Lachesis, who measures the thread, I wouldn't be watching the shenanigans in Congress but rather our creditors' perception of rising confusion and dissent in the US. Our nation seems adrift in a self-inflicted sophisticated fog.
We are promoters of freedom currently engaged in 3 colonial projects (Iraq, Afghanistan and now, Libya) which engenders great confusion. We want control, but we don't want to be seen grabbing it coercively. We are confused. Colonies, as history attests, are difficult ventures when such policies are overt. Covert colonialism seems to me a contradiction in terms.
Congressional pissing matches over the debt ceiling are another sign of great confusion. Those who cheer Tea Party "balance the budget" principles would, in the event the right flexes its muscles, discover the rapid reduction of government employment and spending in a highly leveraged economy creates most unpleasant effects.
This isn't to argue against deficit reduction in general (I suspect terminating our covert colonial ventures and redirecting that labor force back home on infrastructure would go a long way towards solving many problems) just the method on offer.
Worse than our confusion, from the perspective of the single party Chinese, is the dissent, notably that from S&P. While the Chinese ruling party has apparently learned to deal with US political kabuki, the notion of a US ratings agency downgrading its outlook on US debt must strike them as odd indeed. Having invented paper money, the Chinese know it rests on faith- faith that is eroded by dissent, ergo their rigorous crackdowns on such.
Eventually the Chinese, whose faith in US economic policy making was shaken during the debt crisis of 2008-09, will tire of the confused games in the US and force us to deal with them with real currency, not the funny money we call US Federal Reserve Notes. Far worse for the US than default is enforced real currency dealings. As with all sophisticated cultures, reality is a bitch.
Thursday, February 17, 2011
Social Security as an Interest Rate Swap
If you think of just the interest rate aspects of Social Security as a swap, those who depend on benefits are receiving fixed at 0% mind you (guaranteed interest income from non-existent bonds) and paying floating (COLA) which is rising. Oddly enough, this hasn't been a disastrous trade (I've heard of far worse swaps) over the past few years as the floating rate was near (and sometimes below) 0%.
Although they are a dying breed (compared to the late 90s) financial market traders (who obviously should have unionized in the early 90s) still pop up at cocktail parties, dinners etc. If you're not a trader and get caught in a conversation with one you might find the jargon confusing and the reduction of all life's problems into trading metaphors exasperating. In the case of Social Security, however, a bit of trader reductionism might help sway those wearing rose colored glasses who feel reform isn't a pressing matter.
Admittedly, given what happened the last few times Social Security has been reformed- regressive tax increases, the proceeds of which were deposited in the Treasury's general fund- I can understand the trepidation with which Social Security supporters approach talk of future reforms.
Some, like Mark Thoma, proclaim it isn't a problem at all, in the sense of having a major impact on our fiscal health "Look at the CBO projections," they say.
We'll get to that in a second.
Others, like Robert Reich and Brad DeLong suggest entitlement finance isn't much of a problem, IF taxes are increased (Mr. Reich argues for increasing the cap thus reducing the regressivity of the program) and/or benefits cut. They both admit, however, that tax increases aren't on the table which, as Mr. DeLong notes requires a ballot box fix. In his words, "What is the solution to our long-run deficit problem? It is simply this: elect honorable and intelligent women and men to Congress."
On reflection he adds, " I guess our long run fiscal problem is really dire and insoluble."
Maybe it is, indeed.
Taking our cue from Mr. Thoma, let's look at the CBO projections, and for more detail, the Board of Trustees Report from which the CBO took many of its assumptions.
Using the CBO's central scenario, Social Security self-finances (removing the fictitious interest earned from non-existent bonds, i.e. restricting income to taxes) through roughly 2016 and then runs modest deficits through 2019. The total shortfall from 2011-2019 is less than $150B.
I can see Mr. Thoma's point.
Yet, projections are only as good as the assumptions therein, as the financial crisis of recent years attests. The SS Board of Trustees, in their central scenario, assumes CPI inflation of 2.8% p.a. for 2011-2019 and medium term unemployment of 5.5%. The CBO assumes 2.5% inflation and 5.0% unemployment in the medium term.
The SS Board of Trustees' worst case scenario assumes CPI of 3.8% and medium term unemployment of 6.5%. Under that scenario Social Security isn't self-financing in the immediate future with increasing deficits which total $690B from 2011-2019. To put that in context, President Obama's budget includes a 6-year, $556B surface transportation program.
Thinking a bit about those economic assumptions, I'm starting to wonder if the CBO hired their worst case scenario seers from the banking industry. Those guys seem to think a stress test is flagging down a cab instead of having a waiting limo.
Let's try to imagine a worse than worst case scenario. Actually, we don't have to imagine it. Conditions from the mid 70s to early 80s in the US when inflation raged provides a real world example.
Doing some very rough spreadsheet analysis using the Trustees' data, if inflation rises at 6%, SS deficits hit $100B in 2014 and $445B in 2019 for a 2011-2019 total deficit of $1.7T.
If inflation rises at 8%, SS deficits exceed $100B in 2013 and by 2019 they are over $700B for a 2011-2019 total deficit of $2.8T, which seems to me like an awful lot of money.
The projections above aren't even a reasonable worst case as I've retained the Trustees' employment forecasts. If the nation is in the midst of a structural unemployment period, which I (and some at the Fed) suspect, receipts will be lower and payments higher.
Why do others not see what I see? I might be crazy (and if you knew me personally you wouldn't dismiss that notion easily) or I might just be noticing how a fiction, even one of which you are aware on some level, corrupts thought.
Most reasonably diligent people who've researched the problem are aware that SS is a pay as you go system. There are no income generating bonds. In the relatively low interest rate environment of the past 5 years imputed interest income from the SS "surplus" was roughly $100B per year- small potatoes. Yet the stock of "surplus" has grown to $2.5T (not really, just in the spreadsheets used for analysis). What happens when interest rates start to rise, or as some might argue, normalize.
Each basis point of lost income (not including additional deficits) is worth $250M per year. Each % of lost income is $25B. If bond yields return to a more normal (over a long run view of the US) 6% we're talking $600B per year which many models assume will appear (from where, I have no idea) as income.
On the outflow side, using the CBO 2011 expense figure of $730B, each % increase in COLA (cost of living adjustment) is $7B- tiny potatoes. Of course, even tiny potatoes add up. A 5% COLA is $35B. The other funny thing about potatoes, if you bury them in some dirt and wait a year, they COMPOUND. Adding insult to injury, the basis of calculation will increase as more people (think Baby Boomers) start taking Social Security.
This is starting to smell like a really bad trade to me.
If you think of just the interest rate aspects of Social Security as a swap, those who depend on benefits are receiving fixed, at 0% mind you (guaranteed interest income from non-existent bonds) and paying floating (COLA) which is rising. Oddly enough, this hasn't been a disastrous trade (I've heard of far worse swaps) over the past few years as the floating rate was near (and sometimes below) 0%. Given current conditions, however, I doubt even Goldman could sell such a swap these days, but I'm sure they'd love to take the other side.
On that note, here's a solution for our times. Wall St. should securitize Social Security cash flows and pawn off the risk somewhere (there's bound to be more semi-intelligent life in the Universe), making a tidy bundle in the process.
On a serious note, if you remove interest income from the CBO's projections and imagine a more inflationary future you'll see the problem I see. Assuming the US isn't going to pull an Enron or a Madoff, by which I mean leaving those who trusted them holding an empty bag (they've already taken and spent their money) making these people whole is likely to be a significant problem unless economic conditions improve dramatically.
I'll close with a paragraph from a 1988 paper by Alicia Munnell, then FRB Boston's Director of Research, delivered during a Trustees symposium on the build-up in trust fund assets.
What happens if trust fund surpluses do not produce any new saving? That is, if they are simply offset by deficits in the rest of the federal budget. In this case, the surpluses will have contributed nothing to overall saving and capital accumulation and taxpayers will be no richer than they would have been otherwise. The full burden of supporting the beneficiaries will fall on the taxpayers in the second half of the period - just as if the system had been financed on a pay-as-you-go basis all along. The only effect of accumulating Social Security surpluses would have been to alter the composition of federal revenues over time. General government expenditures during the first half of the period would be financed by the relatively regressive payroll tax rather than the more progressive income tax, and future benefit payments would be financed by general revenues.
Although they are a dying breed (compared to the late 90s) financial market traders (who obviously should have unionized in the early 90s) still pop up at cocktail parties, dinners etc. If you're not a trader and get caught in a conversation with one you might find the jargon confusing and the reduction of all life's problems into trading metaphors exasperating. In the case of Social Security, however, a bit of trader reductionism might help sway those wearing rose colored glasses who feel reform isn't a pressing matter.
Admittedly, given what happened the last few times Social Security has been reformed- regressive tax increases, the proceeds of which were deposited in the Treasury's general fund- I can understand the trepidation with which Social Security supporters approach talk of future reforms.
Some, like Mark Thoma, proclaim it isn't a problem at all, in the sense of having a major impact on our fiscal health "Look at the CBO projections," they say.
We'll get to that in a second.
Others, like Robert Reich and Brad DeLong suggest entitlement finance isn't much of a problem, IF taxes are increased (Mr. Reich argues for increasing the cap thus reducing the regressivity of the program) and/or benefits cut. They both admit, however, that tax increases aren't on the table which, as Mr. DeLong notes requires a ballot box fix. In his words, "What is the solution to our long-run deficit problem? It is simply this: elect honorable and intelligent women and men to Congress."
On reflection he adds, " I guess our long run fiscal problem is really dire and insoluble."
Maybe it is, indeed.
Taking our cue from Mr. Thoma, let's look at the CBO projections, and for more detail, the Board of Trustees Report from which the CBO took many of its assumptions.
Using the CBO's central scenario, Social Security self-finances (removing the fictitious interest earned from non-existent bonds, i.e. restricting income to taxes) through roughly 2016 and then runs modest deficits through 2019. The total shortfall from 2011-2019 is less than $150B.
I can see Mr. Thoma's point.
Yet, projections are only as good as the assumptions therein, as the financial crisis of recent years attests. The SS Board of Trustees, in their central scenario, assumes CPI inflation of 2.8% p.a. for 2011-2019 and medium term unemployment of 5.5%. The CBO assumes 2.5% inflation and 5.0% unemployment in the medium term.
The SS Board of Trustees' worst case scenario assumes CPI of 3.8% and medium term unemployment of 6.5%. Under that scenario Social Security isn't self-financing in the immediate future with increasing deficits which total $690B from 2011-2019. To put that in context, President Obama's budget includes a 6-year, $556B surface transportation program.
Thinking a bit about those economic assumptions, I'm starting to wonder if the CBO hired their worst case scenario seers from the banking industry. Those guys seem to think a stress test is flagging down a cab instead of having a waiting limo.
Let's try to imagine a worse than worst case scenario. Actually, we don't have to imagine it. Conditions from the mid 70s to early 80s in the US when inflation raged provides a real world example.
Doing some very rough spreadsheet analysis using the Trustees' data, if inflation rises at 6%, SS deficits hit $100B in 2014 and $445B in 2019 for a 2011-2019 total deficit of $1.7T.
If inflation rises at 8%, SS deficits exceed $100B in 2013 and by 2019 they are over $700B for a 2011-2019 total deficit of $2.8T, which seems to me like an awful lot of money.
 |
| all figures US$Bil |
Why do others not see what I see? I might be crazy (and if you knew me personally you wouldn't dismiss that notion easily) or I might just be noticing how a fiction, even one of which you are aware on some level, corrupts thought.
Most reasonably diligent people who've researched the problem are aware that SS is a pay as you go system. There are no income generating bonds. In the relatively low interest rate environment of the past 5 years imputed interest income from the SS "surplus" was roughly $100B per year- small potatoes. Yet the stock of "surplus" has grown to $2.5T (not really, just in the spreadsheets used for analysis). What happens when interest rates start to rise, or as some might argue, normalize.
Each basis point of lost income (not including additional deficits) is worth $250M per year. Each % of lost income is $25B. If bond yields return to a more normal (over a long run view of the US) 6% we're talking $600B per year which many models assume will appear (from where, I have no idea) as income.
On the outflow side, using the CBO 2011 expense figure of $730B, each % increase in COLA (cost of living adjustment) is $7B- tiny potatoes. Of course, even tiny potatoes add up. A 5% COLA is $35B. The other funny thing about potatoes, if you bury them in some dirt and wait a year, they COMPOUND. Adding insult to injury, the basis of calculation will increase as more people (think Baby Boomers) start taking Social Security.
This is starting to smell like a really bad trade to me.
If you think of just the interest rate aspects of Social Security as a swap, those who depend on benefits are receiving fixed, at 0% mind you (guaranteed interest income from non-existent bonds) and paying floating (COLA) which is rising. Oddly enough, this hasn't been a disastrous trade (I've heard of far worse swaps) over the past few years as the floating rate was near (and sometimes below) 0%. Given current conditions, however, I doubt even Goldman could sell such a swap these days, but I'm sure they'd love to take the other side.
On that note, here's a solution for our times. Wall St. should securitize Social Security cash flows and pawn off the risk somewhere (there's bound to be more semi-intelligent life in the Universe), making a tidy bundle in the process.
On a serious note, if you remove interest income from the CBO's projections and imagine a more inflationary future you'll see the problem I see. Assuming the US isn't going to pull an Enron or a Madoff, by which I mean leaving those who trusted them holding an empty bag (they've already taken and spent their money) making these people whole is likely to be a significant problem unless economic conditions improve dramatically.
I'll close with a paragraph from a 1988 paper by Alicia Munnell, then FRB Boston's Director of Research, delivered during a Trustees symposium on the build-up in trust fund assets.
What happens if trust fund surpluses do not produce any new saving? That is, if they are simply offset by deficits in the rest of the federal budget. In this case, the surpluses will have contributed nothing to overall saving and capital accumulation and taxpayers will be no richer than they would have been otherwise. The full burden of supporting the beneficiaries will fall on the taxpayers in the second half of the period - just as if the system had been financed on a pay-as-you-go basis all along. The only effect of accumulating Social Security surpluses would have been to alter the composition of federal revenues over time. General government expenditures during the first half of the period would be financed by the relatively regressive payroll tax rather than the more progressive income tax, and future benefit payments would be financed by general revenues.
Tuesday, February 15, 2011
US Budget: Entitlement Funding Inflection Points
Within a decade there will no longer be additional surplus funds to be used to purchase US bonds which will have to then be sold on the open market. Call it peak SS Trust Funds, although peak trust might be even more apt. Captive Bidding at the auction: How Bond Vigilantism was swamped
A few years ago, I shared my concerns about Social Security and other entitlement program funding (see above and A New Head: Imagine there's no Social Security Fund). Mine was no voice crying in the wilderness (I'm not that clever), but one of a chorus singing to an audience of deaf policy makers (perhaps my off-key voice was disturbing). These underfunded entitlement programs, according to those in charge at the time, wouldn't be an issue for 10 or more years.
While it has only been 3 years and 4 months since I shared my concerns, the underfunding, in my view, is likely to become a big issue, not just amongst TV's talking heads, but in trading rooms around the world, this year- we are near to reaching an entitlement funding inflection point- mainly due to the sharp rise and long duration of unemployment, which will have, I believe, a profound effect on the US bond market.
The inflection point- when the lack of surplus entitlement funds forces the Treasury to fund the entire deficit in the open market- will force bond investors, if they haven't already, to take a fresh look as US Federal finance at the worst time- a look that will include concerns like the following:
The language of the Social Security Trust Fund gives the illusion that it is an investment fund with tradable economic assets that can be held until needed to pay the benefits of future employees. But it is a fund in name only. It holds no real assets. Consequently it does not generate funds to pay future benefits. These so-called trust fund “assets” (essentially US Treasury IOUs) simply reflect the accumulated sum of funds transferred from Social Security over the years to finance other government operations. Former Congressional Budget Office Director June O’Neill
In an earlier post on the topic I argued (facetiously):
If the SS Trust Fund doesn't really exist, the national debt is at least $2T less than the current $9.05T. Under that head, the debt ceiling hasn't been a "real" issue for many years. In the language of my last post, it isn't that a large portion of the Treasury Market is captive, the US National Debt is actually far smaller, by at least $2T, than assumed. If all intergovernmental holdings are essentially fictitious accounting entries, the US Federal Public Sector debt to GDP ratio is actually 37%
While the Trust Fund doesn't exist except as fictitious accounting entries, the liabilities thereof most certainly do (assuming we don't want a replay of recent Egyptian protests here in the US). Just as entitlement surpluses reduced borrowing requirements and kept US bond yields much lower than they would otherwise have been, entitlement deficits will increase borrowing requirements and, I believe, push US bond yields much higher than they would otherwise be.
At this key inflection point, instead of subtracting "intragovernmental holdings" (the euphemism for the fictitious trust fund assets, now totaling some $4.6T) from total debt (leaving a 65% debt to GDP ratio), the total debt figure (nearly 100% of GDP) must be used to perform credible analysis, like calculating interest payments. This may explain the rather curious (to my mind) forecast of entitlement surpluses for many years ahead in the President's Budget. Once the surpluses become deficits the unfunded liabilities previously hidden by cash accounting methods become active just as an option, which wasn't delta hedged- option lingo for net present accounting- becomes active when its strike price is crossed. (a wonderful description of the different accounting methods can be found here)
Call it "Fiscal death, Derivatives-style."
Entitlement Funding, Long Term Unemployment and Bond Yields
As noted earlier, the rise and duration of unemployment has brought the "moment of truth" forward by reducing entitlement receipts (unemployment reduces tax receipts) and increasing outlays (formerly employed retirement aged people begin receiving SS). Fiscal Year-to-date, the off-budget surplus is just $25B, a 50% reduction from the same period last year.
The baby boomer rush to retirement has not only begun, it has been accelerated by the employment recession. Moreover, the cap on SS taxes means that an income surge among high earners, which might raise GDP, will do little to raise entitlement receipts. The only solution to that problem is employment, and lots of it.
That solution, however, carries its own fiscal risks. Rising employment means rising consumer demand (especially for gas to drive to work again) and thus, in all likelihood, higher inflation. Higher inflation (the President's Budget forecast assumes inflation remains at or under 2% through 2016) means higher interest charges on the debt stock and increased SS outlays as COLAs rise. This sunny forecast assumes no disruptions in foreign appetite for US debt.
Interestingly we may have reached a "damned if you do and damned if you don't" point with respect to employment data driven bond market reaction. If unemployment remains the same or rises, and trust fund deficits need to be financed from general receipts, bond yields should rise due to increased supply. If unemployment starts to fall as one would expect in a normal recovery, bond yields should rise as inflation pressures increase.
Geez, maybe that's why bond yields have been rising lately?
Full Disclosure: Short US Treasuries
A few years ago, I shared my concerns about Social Security and other entitlement program funding (see above and A New Head: Imagine there's no Social Security Fund). Mine was no voice crying in the wilderness (I'm not that clever), but one of a chorus singing to an audience of deaf policy makers (perhaps my off-key voice was disturbing). These underfunded entitlement programs, according to those in charge at the time, wouldn't be an issue for 10 or more years.
While it has only been 3 years and 4 months since I shared my concerns, the underfunding, in my view, is likely to become a big issue, not just amongst TV's talking heads, but in trading rooms around the world, this year- we are near to reaching an entitlement funding inflection point- mainly due to the sharp rise and long duration of unemployment, which will have, I believe, a profound effect on the US bond market.
The inflection point- when the lack of surplus entitlement funds forces the Treasury to fund the entire deficit in the open market- will force bond investors, if they haven't already, to take a fresh look as US Federal finance at the worst time- a look that will include concerns like the following:
The language of the Social Security Trust Fund gives the illusion that it is an investment fund with tradable economic assets that can be held until needed to pay the benefits of future employees. But it is a fund in name only. It holds no real assets. Consequently it does not generate funds to pay future benefits. These so-called trust fund “assets” (essentially US Treasury IOUs) simply reflect the accumulated sum of funds transferred from Social Security over the years to finance other government operations. Former Congressional Budget Office Director June O’Neill
In an earlier post on the topic I argued (facetiously):
If the SS Trust Fund doesn't really exist, the national debt is at least $2T less than the current $9.05T. Under that head, the debt ceiling hasn't been a "real" issue for many years. In the language of my last post, it isn't that a large portion of the Treasury Market is captive, the US National Debt is actually far smaller, by at least $2T, than assumed. If all intergovernmental holdings are essentially fictitious accounting entries, the US Federal Public Sector debt to GDP ratio is actually 37%
While the Trust Fund doesn't exist except as fictitious accounting entries, the liabilities thereof most certainly do (assuming we don't want a replay of recent Egyptian protests here in the US). Just as entitlement surpluses reduced borrowing requirements and kept US bond yields much lower than they would otherwise have been, entitlement deficits will increase borrowing requirements and, I believe, push US bond yields much higher than they would otherwise be.
At this key inflection point, instead of subtracting "intragovernmental holdings" (the euphemism for the fictitious trust fund assets, now totaling some $4.6T) from total debt (leaving a 65% debt to GDP ratio), the total debt figure (nearly 100% of GDP) must be used to perform credible analysis, like calculating interest payments. This may explain the rather curious (to my mind) forecast of entitlement surpluses for many years ahead in the President's Budget. Once the surpluses become deficits the unfunded liabilities previously hidden by cash accounting methods become active just as an option, which wasn't delta hedged- option lingo for net present accounting- becomes active when its strike price is crossed. (a wonderful description of the different accounting methods can be found here)
Call it "Fiscal death, Derivatives-style."
Entitlement Funding, Long Term Unemployment and Bond Yields
As noted earlier, the rise and duration of unemployment has brought the "moment of truth" forward by reducing entitlement receipts (unemployment reduces tax receipts) and increasing outlays (formerly employed retirement aged people begin receiving SS). Fiscal Year-to-date, the off-budget surplus is just $25B, a 50% reduction from the same period last year.
The baby boomer rush to retirement has not only begun, it has been accelerated by the employment recession. Moreover, the cap on SS taxes means that an income surge among high earners, which might raise GDP, will do little to raise entitlement receipts. The only solution to that problem is employment, and lots of it.
That solution, however, carries its own fiscal risks. Rising employment means rising consumer demand (especially for gas to drive to work again) and thus, in all likelihood, higher inflation. Higher inflation (the President's Budget forecast assumes inflation remains at or under 2% through 2016) means higher interest charges on the debt stock and increased SS outlays as COLAs rise. This sunny forecast assumes no disruptions in foreign appetite for US debt.
Interestingly we may have reached a "damned if you do and damned if you don't" point with respect to employment data driven bond market reaction. If unemployment remains the same or rises, and trust fund deficits need to be financed from general receipts, bond yields should rise due to increased supply. If unemployment starts to fall as one would expect in a normal recovery, bond yields should rise as inflation pressures increase.
Geez, maybe that's why bond yields have been rising lately?
Full Disclosure: Short US Treasuries
Monday, February 14, 2011
The Lost Secrets of the Federal Reserve
I have a very esoteric mind....if I could just remember where I put it. A. Burns
The problem with esoteric institutions, from the Priests of Ancient Egypt to today's Federal Reserve is the difficulty in retaining the well-hidden secrets these institutions are built upon. The more successfully esoteric the institution, the greater the risk "essential"- a claim deserving of vigorous debate, in my view- secrets will be lost.
The priests of Ancient Egypt, whose understanding of Nile flood cycles, inter alia, made them one of the first economic policy makers in the historical record, hid their knowledge of seasonality behind a dense a screen of esoteric theology. The science, or exoteric understanding of the effects of the earth/sun relationship was left to younger cultures, uninhibited by Egyptian taboos on such studies, to "discover."
The Egyptians worshiped the Sun and made sacrifices and offerings thereto (thus enriching the priests). The Greeks openly theorized about the sun and many other things and thus developed a more accurate world view.
In more modern times, the US Federal Reserve, the Creature from Jekyll Island, as some have called it, was formed in secret, around secrets.
I'd like the share some of those secrets (assuming I've actually divined them- an assumption the reader must determine for himself):
1) Industrial Capitalism is (and can continue to be in the future) so efficient that an ever increasing percentage of an ever increasing number of people can do nothing and yet receive the necessities of survival.
2) The social utility of money- i.e. the elastic variety of modern Central Banks- is (and has been for decades) decreasing as an allocator of capital resources and increasing as an allocator of (ever increasing) labor resources.
In other words, the problems of economics once a nation industrializes (and more so when nations trade freely) are not on the production side (the already sufficient pie, if you will, can yet grow) but on the distribution side (how shall the pie be sliced).
Consider, as an example, US agricultural production:
We, in the US, can not only feed ourselves, we can generate an exportable surplus using less than 2% of labor resources. Food is easy, which explains, in part, the obesity problems of the modern world.
Food, houses, clothes, transportation (most likely not of the automobile variety), education and health care, to name a few key "necessities" of life can be produced in excess of demand. The problem, in my view, lies in how to distribute the goods.
One solution, chosen by men steeped in the tradition of the Protestant work ethic, was the use of elastic money to keep idle hands from "the devil's work." Rather than a massive expansion of welfare, which, I believe, would be more intellectually honest and restrict money's social utility to capital resource allocation- i.e. the hard money advocated by Ron Paul, inter alios- money would be (and still is, with decreasing efficiency) used to soak up excess labor resources and "explain" the vagaries of goods distribution within a society to modern sensibilities.
Paradoxically, Rep. Paul favors not only hard money, but also further decreases in transfer payments, i.e. welfare and "make work." Hard money, in my view, generates increased efficiency- more goods for less labor- which, in turn, generates unneeded labor resources. Hard money "end the Fed" advocates need to ponder the unnecessary, but existent population problem. Swift's modest proposal of eating Irish babies, which we can expand, in the modern world, to eating unemployed people (Soylent Green!) strikes me as most unsavory. (I couldn't resist)
State enforced population restriction, like China's "one child" policy could be used, at risk of imposing human for "natural" selection on humanity. How would we know which humans are worth bringing to life?
The esoteric solution of the Federal Reserve, aided by the views of JM Keynes, worked, in my view, tolerably well so long as the secret of excess labor was understood by its leaders and national capital infrastructure wasn't in need of retooling. Greenspan's statistical fumblings with productivity coupled with his anti-welfare/anti-inflation views suggest to me that the secret was not well transmitted as does the lack of import placed on previously believed key elements of the Fed's role in fomenting social stability embodied in Humphrey Hawkins legislation. The financial sector, taking its cue from the confused Fed thinks its function is to make money rather than allocate capital resource.
The secret has been lost.
Thus, it seems to me, the current problem of long term unemployment. The policies of the idle wealthy, or leisure class, desirous of maintaining and bequeathing to their progeny their position at the head of the pie cutting table via reductions in transfer payments implemented by the financial sector risk increased social tensions, and increasingly widespread populist uprisings, such as we are witnessing in Egypt and other nations.
Solving this problem, in the context of the need to recapitalize our transportation system away from the automobile (and goods trucking) towards more efficient means, will be most difficult unless we are willing to slay a few sacred cows. The protestant work ethic inspired elastic monetary system insulates the real (production) sector from necessary conforming to new reality (decline in US and world oil production) pressures until a crisis is reached. Hard money would make the necessary transportation (and other sector) changes easier, but would increase the social tensions noted above. Increased transfer payments in the proposed hard money system should alleviate these tensions.
Sadly, as noted, the hard money advocates are not fond of such transfer payments. Perhaps they will be fonder of such socially calming methods when the turmoil in the Middle East rears its head closer to home.
The problem with esoteric institutions, from the Priests of Ancient Egypt to today's Federal Reserve is the difficulty in retaining the well-hidden secrets these institutions are built upon. The more successfully esoteric the institution, the greater the risk "essential"- a claim deserving of vigorous debate, in my view- secrets will be lost.
The priests of Ancient Egypt, whose understanding of Nile flood cycles, inter alia, made them one of the first economic policy makers in the historical record, hid their knowledge of seasonality behind a dense a screen of esoteric theology. The science, or exoteric understanding of the effects of the earth/sun relationship was left to younger cultures, uninhibited by Egyptian taboos on such studies, to "discover."
The Egyptians worshiped the Sun and made sacrifices and offerings thereto (thus enriching the priests). The Greeks openly theorized about the sun and many other things and thus developed a more accurate world view.
In more modern times, the US Federal Reserve, the Creature from Jekyll Island, as some have called it, was formed in secret, around secrets.
I'd like the share some of those secrets (assuming I've actually divined them- an assumption the reader must determine for himself):
1) Industrial Capitalism is (and can continue to be in the future) so efficient that an ever increasing percentage of an ever increasing number of people can do nothing and yet receive the necessities of survival.
2) The social utility of money- i.e. the elastic variety of modern Central Banks- is (and has been for decades) decreasing as an allocator of capital resources and increasing as an allocator of (ever increasing) labor resources.
In other words, the problems of economics once a nation industrializes (and more so when nations trade freely) are not on the production side (the already sufficient pie, if you will, can yet grow) but on the distribution side (how shall the pie be sliced).
Consider, as an example, US agricultural production:
- 1900: 41 percent of workforce employed in agriculture
- 1930: 21.5 percent of workforce employed in agriculture;
- Agricultural GDP as a share of total GDP, 7.7 percent
- 1945: 16 percent of the total labor force employed in agriculture;
- Agricultural GDP as a share of total GDP, 6.8 percent
- 1970: 4 percent of employed labor force worked in agriculture;
- Agricultural GDP as a share of total GDP, 2.3 percent
- 2000/02: 1.9 percent of employed labor force worked in agriculture (2000); Agricultural GDP as a share of total GDP (2002),
- 0.7 percent
We, in the US, can not only feed ourselves, we can generate an exportable surplus using less than 2% of labor resources. Food is easy, which explains, in part, the obesity problems of the modern world.
Food, houses, clothes, transportation (most likely not of the automobile variety), education and health care, to name a few key "necessities" of life can be produced in excess of demand. The problem, in my view, lies in how to distribute the goods.
One solution, chosen by men steeped in the tradition of the Protestant work ethic, was the use of elastic money to keep idle hands from "the devil's work." Rather than a massive expansion of welfare, which, I believe, would be more intellectually honest and restrict money's social utility to capital resource allocation- i.e. the hard money advocated by Ron Paul, inter alios- money would be (and still is, with decreasing efficiency) used to soak up excess labor resources and "explain" the vagaries of goods distribution within a society to modern sensibilities.
Paradoxically, Rep. Paul favors not only hard money, but also further decreases in transfer payments, i.e. welfare and "make work." Hard money, in my view, generates increased efficiency- more goods for less labor- which, in turn, generates unneeded labor resources. Hard money "end the Fed" advocates need to ponder the unnecessary, but existent population problem. Swift's modest proposal of eating Irish babies, which we can expand, in the modern world, to eating unemployed people (Soylent Green!) strikes me as most unsavory. (I couldn't resist)
State enforced population restriction, like China's "one child" policy could be used, at risk of imposing human for "natural" selection on humanity. How would we know which humans are worth bringing to life?
The esoteric solution of the Federal Reserve, aided by the views of JM Keynes, worked, in my view, tolerably well so long as the secret of excess labor was understood by its leaders and national capital infrastructure wasn't in need of retooling. Greenspan's statistical fumblings with productivity coupled with his anti-welfare/anti-inflation views suggest to me that the secret was not well transmitted as does the lack of import placed on previously believed key elements of the Fed's role in fomenting social stability embodied in Humphrey Hawkins legislation. The financial sector, taking its cue from the confused Fed thinks its function is to make money rather than allocate capital resource.
The secret has been lost.
Thus, it seems to me, the current problem of long term unemployment. The policies of the idle wealthy, or leisure class, desirous of maintaining and bequeathing to their progeny their position at the head of the pie cutting table via reductions in transfer payments implemented by the financial sector risk increased social tensions, and increasingly widespread populist uprisings, such as we are witnessing in Egypt and other nations.
Solving this problem, in the context of the need to recapitalize our transportation system away from the automobile (and goods trucking) towards more efficient means, will be most difficult unless we are willing to slay a few sacred cows. The protestant work ethic inspired elastic monetary system insulates the real (production) sector from necessary conforming to new reality (decline in US and world oil production) pressures until a crisis is reached. Hard money would make the necessary transportation (and other sector) changes easier, but would increase the social tensions noted above. Increased transfer payments in the proposed hard money system should alleviate these tensions.
Sadly, as noted, the hard money advocates are not fond of such transfer payments. Perhaps they will be fonder of such socially calming methods when the turmoil in the Middle East rears its head closer to home.
Tuesday, February 08, 2011
JPM Begins to Believe (in Gold) ...about time, eh?
Trinity (seeing Neo turn to face an Agent): What's he doing?
Morpheus: He's beginning to believe.
Today's Wall St. Journal reports, JPMorgan will accept Gold as a type of collateral:
Gold hasn't reinvented itself as a currency yet. But it is getting closer.
J.P. Morgan Chase & Co. (NYSE: JPM - News) said it will allow clients to use the metal as collateral in some transactions. For example, a hedge fund wanting to borrow money for a short period can put up gold as collateral and use the borrowings to invest elsewhere, betting on making a better return. Typically, banks accept only Treasury bonds and stocks in such agreements.
By making the announcement, J.P. Morgan is effectively saying gold is as rock solid an investment as triple-A rated Treasurys, adding to a movement that places gold at the top tier of asset classes.
Alexander Bain famously (at least in my view) argued: Belief is often accompanied by strong emotion, yet emotion, as such, does not amount to believing. Fictitious narratives may stir the mind more strongly than real; we may disbelieve and yet tremble...... We are thus driven to the alternative query— Is, or is not, Belief essentially related to Action, that is, volition? I answer, it is. Preparedness to act upon what we affirm is admitted on all hands to be the sole, the genuine, the unmistakable criterion of belief. Columbus shewed his belief in the roundness of the earth, and in the existence of an unbroken ocean between Europe and the east coast of Asia, when he undertook his voyages. The Emotions and The Will
In other words- under this head- by adopting this policy, and acting upon it, JPM is demonstrating its belief in Gold as an asset class.
For their next trick I hear they plan on re-inventing the wheel.
Staying in Henny Youngman banker mode (Take my money--Please!) JPM just figured out that Gold might be as valuable as triple-A rated Treasuries (Take my money and give me your Gold-- Please!!).
The WSJ authors add (and the hits just keep on coming): In the past, worries about a lack of liquidity in the gold market have prevented banks from taking gold as collateral. But as investors piled into the market in recent years, the market has deepened.
But seriously folks, there's no liquidity in the Gold market, just Gold, on one side, and liquidity, on the other. Prices in that market, which have risen by roughly 500% since 2001, explaining, perhaps JPM's policy shift, reflect participants belief in the relative values thereof (Gold vs. liquidity).
Sadly, JPM might discover, as Neo did in the Matrix, that the "real world" of specie collateral is, for bankers, drab and gray compared to the exciting times of the Financial Matrix year 1999.
As Morpheus might put it, you've been living in a dream world JPMorgan. Welcome to the credit desert of the real (money, that is).
To wax explicit (and make this essay actionable), if JPM has finally gotten around to seeing the virtues of Gold collateral based trading, it will be in their interest to see it holds its value. If you haven't gotten on the Gold train yet, you might want to consider it.
Remember, it ain't a bubble until the big banks get involved.
Full Disclosure: Long Gold, no position in JPM
Morpheus: He's beginning to believe.
Today's Wall St. Journal reports, JPMorgan will accept Gold as a type of collateral:
Gold hasn't reinvented itself as a currency yet. But it is getting closer.
J.P. Morgan Chase & Co. (NYSE: JPM - News) said it will allow clients to use the metal as collateral in some transactions. For example, a hedge fund wanting to borrow money for a short period can put up gold as collateral and use the borrowings to invest elsewhere, betting on making a better return. Typically, banks accept only Treasury bonds and stocks in such agreements.
By making the announcement, J.P. Morgan is effectively saying gold is as rock solid an investment as triple-A rated Treasurys, adding to a movement that places gold at the top tier of asset classes.
Alexander Bain famously (at least in my view) argued: Belief is often accompanied by strong emotion, yet emotion, as such, does not amount to believing. Fictitious narratives may stir the mind more strongly than real; we may disbelieve and yet tremble...... We are thus driven to the alternative query— Is, or is not, Belief essentially related to Action, that is, volition? I answer, it is. Preparedness to act upon what we affirm is admitted on all hands to be the sole, the genuine, the unmistakable criterion of belief. Columbus shewed his belief in the roundness of the earth, and in the existence of an unbroken ocean between Europe and the east coast of Asia, when he undertook his voyages. The Emotions and The Will
In other words- under this head- by adopting this policy, and acting upon it, JPM is demonstrating its belief in Gold as an asset class.
For their next trick I hear they plan on re-inventing the wheel.
Staying in Henny Youngman banker mode (Take my money--Please!) JPM just figured out that Gold might be as valuable as triple-A rated Treasuries (Take my money and give me your Gold-- Please!!).
The WSJ authors add (and the hits just keep on coming): In the past, worries about a lack of liquidity in the gold market have prevented banks from taking gold as collateral. But as investors piled into the market in recent years, the market has deepened.
But seriously folks, there's no liquidity in the Gold market, just Gold, on one side, and liquidity, on the other. Prices in that market, which have risen by roughly 500% since 2001, explaining, perhaps JPM's policy shift, reflect participants belief in the relative values thereof (Gold vs. liquidity).
Sadly, JPM might discover, as Neo did in the Matrix, that the "real world" of specie collateral is, for bankers, drab and gray compared to the exciting times of the Financial Matrix year 1999.
As Morpheus might put it, you've been living in a dream world JPMorgan. Welcome to the credit desert of the real (money, that is).
To wax explicit (and make this essay actionable), if JPM has finally gotten around to seeing the virtues of Gold collateral based trading, it will be in their interest to see it holds its value. If you haven't gotten on the Gold train yet, you might want to consider it.
Remember, it ain't a bubble until the big banks get involved.
Full Disclosure: Long Gold, no position in JPM
Monday, February 07, 2011
An Email Assertion: Austrianism is Dead
In a recent email debate I wrote the following, which I thought some might find interesting:
I remain somewhat puzzled at the notion of an Austrian resurgence as, in my view, Austrianism is dead. When modern nation-states were emerging in Europe in the 19th Century the views of Menger had a chance to make policy differences. Once the welfare state promoters won WWII Austrianism, due to intransigence on the part of party intellectuals, died as a political guide.
Austrians, in my view, argue from a tabula rasa perspective, yet the slate is already full. Achieving Austrian goals would require a cultural revolution akin to that seen in Russia and China within the past century, the Confederate States of America in the 19th, or, more ominously, the downfall of the Roman system of slave labor.
In Menger's time peasantry was still common. A culture existed which could provide for itself (or at least which was believed to do so well enough that the devil taking the hindmost wasn't a concern). Importantly, populations were much smaller then. Without industrial food production etc. large numbers would starve long before they learned to farm, and small farms would ensure that populations (and profits derived from commerce therewith) remained at those lower levels.
Debating whether we should have a welfare state is like debating whether we should have TV or the internet- the Rubicon was crossed long ago and humanity has adapted thereto. The issue now is how to manage the system we have, regardless of how one would create a system ex nihilo, given those extremely rare opportunities in history when slates are truly clean.
Of course, in the event of some nasty, protracted and globally destructive war, dusting off their books would seem a wise decision (with the understanding that no welfare means a hands off approach on indigenous ways of life).
On a related note, Keynesianism, under the same head, is just as dead. Policy was implemented with his views in mind, but where to from here remains to be seen.
Will the next über-Economist please stand up!
I remain somewhat puzzled at the notion of an Austrian resurgence as, in my view, Austrianism is dead. When modern nation-states were emerging in Europe in the 19th Century the views of Menger had a chance to make policy differences. Once the welfare state promoters won WWII Austrianism, due to intransigence on the part of party intellectuals, died as a political guide.
Austrians, in my view, argue from a tabula rasa perspective, yet the slate is already full. Achieving Austrian goals would require a cultural revolution akin to that seen in Russia and China within the past century, the Confederate States of America in the 19th, or, more ominously, the downfall of the Roman system of slave labor.
In Menger's time peasantry was still common. A culture existed which could provide for itself (or at least which was believed to do so well enough that the devil taking the hindmost wasn't a concern). Importantly, populations were much smaller then. Without industrial food production etc. large numbers would starve long before they learned to farm, and small farms would ensure that populations (and profits derived from commerce therewith) remained at those lower levels.
Debating whether we should have a welfare state is like debating whether we should have TV or the internet- the Rubicon was crossed long ago and humanity has adapted thereto. The issue now is how to manage the system we have, regardless of how one would create a system ex nihilo, given those extremely rare opportunities in history when slates are truly clean.
Of course, in the event of some nasty, protracted and globally destructive war, dusting off their books would seem a wise decision (with the understanding that no welfare means a hands off approach on indigenous ways of life).
On a related note, Keynesianism, under the same head, is just as dead. Policy was implemented with his views in mind, but where to from here remains to be seen.
Will the next über-Economist please stand up!
HuffPo's 30 Pieces of Silver?
"The love of money" goes the old saying, "is the root of all evil."
I didn't even finish reading the news headline on AOL's purchase of The Huffington Post before the old adage popped into my head.
Confused?
Allow me to explain.
HuffPo's readers can likely recall Ms. Huffington's MoveYourMoney project- an attempt to shift the flow of funds away from big banks and towards smaller community based financial institutions. How intriguing to find, mere months from the inception of such a project, a big money deal from AOL- owned, in large part, by Big Finance (top institutional holders include BlackRock (partially owned by BoA), Capital Group, Vanguard, BoNY, and State Street) which will pay HuffPo's owners some $300M in cash.
Is the $300M in cash- a substantial increase from Judas' 30 pieces of silver- a bribe?
Not, I think, in the crude, direct sense. Yet, it (the big money) will likely perform similar functions in the minds of recipients and those functions, and subsequent effects, are the subject of this essay.
Big Finance distributes big money and big money modifies the behavior of recipients. Some such recipients, unlearned in the art of keeping money, certain sports stars or lottery winners come to mind, prove the old adage about fools and their money. Other recipients demonstrate more wisdom in money retention, yet, in some cases, at a cost.
Have you ever heard or read about the difference between owing the bank $100K or owing them $1Bil? In the first case, you clearly owe the bank and they will ruin you financially if you don't pay. In the second, the bank really owes you and they will be ruined if you don't pay.
Reversing the arrow of causation, if you have $300M in a bank (or the financial markets supported thereby) instead of the bank owing you, you, in a sense, owe the bank. Just as stock option grants increased participation in tech company success in the late 90s (and left many earnest wanna-be millionaires holding an empty bag when the currency proved of little value) so too do big money payouts today (whether the currency in this case will prove of more durable value remains to be seen). A personal fortune of a couple $100M, very often makes one, as Gordon Gecko once remarked, a player- a participant- in a game one has a new-found vested interest.
Few and far between are men like Ted Turner who convert their wealth into ranch-land and retire on the range.
My point being: big finance distributes big money and big money recipients who wish to hold on to their loot will participate in big finance, even, I suspect, (although I have no direct knowledge thereof) in the case of HuffPo's owners, despite their "break the banks" advocacy.
Is this rank hypocrisy?
In my view, yes.
Of course, I haven't been offered $300M for my blog.
This, it seems to me, is the problem (not that I haven't been offered the loot) but an honest reflection of what would happen if such were offered.
Imagine writing a wonderful blog that attracted millions of minds, or as HuffPo did, combining a number of opinion blogs with news, most ably I must add. Imagine being offered 10s of millions of dollars for it a few years later? Would you turn it down?
If one truly wished to be a "gadfly" (in the Socratic sense) to Big Finance, I think you would have to turn it down. Thus the problem. Those able to attract attention and mold opinion also attract money, which aligns their interests with those against whom they rail.
It's a conundrum with no easy answer (except waiting for the currency of the moment to be withheld to new gadflies, or rapidly decline in value).
Fortunately, my very intermittently updated blog has no chance of attracting such viewership or lucre, so I won't have to take that test- a test that ensnares most who rise to the level of testing.
The love of money, indeed.
Disclosure: No positions in any companies noted
I didn't even finish reading the news headline on AOL's purchase of The Huffington Post before the old adage popped into my head.
Confused?
Allow me to explain.
HuffPo's readers can likely recall Ms. Huffington's MoveYourMoney project- an attempt to shift the flow of funds away from big banks and towards smaller community based financial institutions. How intriguing to find, mere months from the inception of such a project, a big money deal from AOL- owned, in large part, by Big Finance (top institutional holders include BlackRock (partially owned by BoA), Capital Group, Vanguard, BoNY, and State Street) which will pay HuffPo's owners some $300M in cash.
Is the $300M in cash- a substantial increase from Judas' 30 pieces of silver- a bribe?
Not, I think, in the crude, direct sense. Yet, it (the big money) will likely perform similar functions in the minds of recipients and those functions, and subsequent effects, are the subject of this essay.
Big Finance distributes big money and big money modifies the behavior of recipients. Some such recipients, unlearned in the art of keeping money, certain sports stars or lottery winners come to mind, prove the old adage about fools and their money. Other recipients demonstrate more wisdom in money retention, yet, in some cases, at a cost.
Have you ever heard or read about the difference between owing the bank $100K or owing them $1Bil? In the first case, you clearly owe the bank and they will ruin you financially if you don't pay. In the second, the bank really owes you and they will be ruined if you don't pay.
Reversing the arrow of causation, if you have $300M in a bank (or the financial markets supported thereby) instead of the bank owing you, you, in a sense, owe the bank. Just as stock option grants increased participation in tech company success in the late 90s (and left many earnest wanna-be millionaires holding an empty bag when the currency proved of little value) so too do big money payouts today (whether the currency in this case will prove of more durable value remains to be seen). A personal fortune of a couple $100M, very often makes one, as Gordon Gecko once remarked, a player- a participant- in a game one has a new-found vested interest.
Few and far between are men like Ted Turner who convert their wealth into ranch-land and retire on the range.
My point being: big finance distributes big money and big money recipients who wish to hold on to their loot will participate in big finance, even, I suspect, (although I have no direct knowledge thereof) in the case of HuffPo's owners, despite their "break the banks" advocacy.
Is this rank hypocrisy?
In my view, yes.
Of course, I haven't been offered $300M for my blog.
This, it seems to me, is the problem (not that I haven't been offered the loot) but an honest reflection of what would happen if such were offered.
Imagine writing a wonderful blog that attracted millions of minds, or as HuffPo did, combining a number of opinion blogs with news, most ably I must add. Imagine being offered 10s of millions of dollars for it a few years later? Would you turn it down?
If one truly wished to be a "gadfly" (in the Socratic sense) to Big Finance, I think you would have to turn it down. Thus the problem. Those able to attract attention and mold opinion also attract money, which aligns their interests with those against whom they rail.
It's a conundrum with no easy answer (except waiting for the currency of the moment to be withheld to new gadflies, or rapidly decline in value).
Fortunately, my very intermittently updated blog has no chance of attracting such viewership or lucre, so I won't have to take that test- a test that ensnares most who rise to the level of testing.
The love of money, indeed.
Disclosure: No positions in any companies noted
Subscribe to:
Posts (Atom)
