Tin soldiers and Than Shwe coming,
We're finally on our own.
This summer I hear the drumming,
Four dead in Rangoon-o.
Gotta get down to it
Soldiers are cutting us down
Should have been done long ago.
What if you knew him
And found him dead on the ground
How can you run when you know?
Four killed as Burma Troops open fire
Wouldn't it be ironic, in a world where Zionists, Christian Fundamentalists, and Islamic radicals are all reaching for the Theocratic Ring of power, if the Buddhists were the group to inspire a re-think of the relationship between government and the people?
What a perilous situation for China. The Burmese Junta uses Tiananmen-like tactics on its dissidents and China's leaders are caught between the rock that they too might need to follow a similar path to retain power in the future, and the hard place that these tactics are, in a world, far removed from 1989, with instant communication open not just to the wealthy but to virtually all, ultimately self-defeating. If a Saffron revolution gets going, I suspect the Burmese Junta might not be its only victim
What a perilous situation for any oppressive regime. How can the Burmese Junta be wrong, but others right?
Has a butterfly just flapped its wings?
Thursday, September 27, 2007
Sunday, September 23, 2007
On Gary North's curious deflation call
My opinion was requested on Gary North's analysis that the Fed is deflating, contained in How Bernanke has snookered us all, so I went to his site to check out his views. To my surprise, I discovered that he now charges for his views (fortunately I still get a twice weekly blast, including the article in question from the Daily Reckoning). The cynic in me says that a shift to fee based commentary tends to engender overstated simplistic analysis and the argument that the Fed is deflating when growth in the monetary base is slowing but still positive seems to me an oversimplified overstatement.
But I'll add my two cents worth anyway, and given that my views are still free to you, 2 cents worth for nothing seems like good value to me. Of course, those 2 cents don't buy what they used to.
I assume that Mr. North argues within the framework of the quantity theory of money, i.e. crudely put, more is inflationary and less is deflationary. His conclusion of deflation also assumes stable money multipliers such that a decrease in the monetary base leads to decreases in broader money. If the MBase can fall while broader money supplies rise, the MBase will not be a good predictor as was the case when the money multipliers broke down when the Fed was aggressively adding reserves in the early 90s with little increase in inflation.
Of late the multiplier between the MBase and M2 is rising. Assuming John Williams' Shadow Stats are correct, that between what used to be M3 and the MBase is rising even faster, which suggests, a la, Doug Noland, that things are a bit out of the Fed's control.
I tend to agree with Mr. Noland's view that the monetary system is out of control, although I take a more narrow view of the transmission mechanism. During the Asian crisis, the Asian CBs, once they were forced to admit they had a problem, tried hard to tighten, but resolution of their international deficits swamped their efforts. Their currency overvaluations had first to be resolved before the tightening could have an effect. Thus we saw a large almost one step spike in inflation, as a result of previous monetary easiness and currency overvaluation, followed by a normalization.
The problem, in my view, with traditional quantity theory is that it was based on a far more autarkic model, or at least one in which international imbalances would tend towards balance, as IMF policy requires. Open capital accounts make such analysis much more complex in the event, such as exists now with the US, when international imbalances are large and growing.
I like to think of the accumulated foreign official sector holdings of US$s as "stored deflation" in that it gives these foreign CBs bonds to sell (the quantity of which, in toto, is far in excess of what the Fed currently holds, btw) which, when sold, will withdraw liquidity from the market, other things equal.
If and when the accumulation of these holdings goes into reverse, as they must, assuming the current system isn't changed, the Fed will face a similar dilemma as the Asian CBs. If they want to stop an inflationary spiral, they will need to tighten internally while the international markets are tightening for them. That is, US bonds will need to find their clearing yield based on private sector preferences, a yield I believe will have 2 digits, not 1.
But the Fed faces a problem the Asian CBs didn't have to worry (much) about, the derivatives monster. A spike in interest rates will push the big banks' derivatives books into insolvency, and as the derivatives books go, so do the banks themselves.
Assuming the Fed doesn't want that to happen, they will need to be the buyer of last resort in the bond market. That is, in order to keep the financial system functioning reasonably smoothly, without letting interest rates spike, the Fed will need to take these foreign official sector holdings released into the market on its balance sheet, which means the monetary base will rise.
In a sense, this is almost the reverse of the problem Greenspan faced in the early 90s as foreign holdings started to rise dramatically. The buzz phrase back then was "pushing on a string", the Fed let the MB grow by double digits for years without much effect on inflation. Now, using the same metaphor, if the Fed pulls on that string, it will break.
The underlying problem is this- bond yields are, due to years of public sector intervention, way too low to attract private sector interest. Somebody has to eat this loss, and in the event, as I suspect, this somebody is the Fed, Gary North will see the monetary base expand rapidly (as he notes at the end of his analysis, with agreement from me) and inflation will be the result, whether Bernanke likes it or not.
But I'll add my two cents worth anyway, and given that my views are still free to you, 2 cents worth for nothing seems like good value to me. Of course, those 2 cents don't buy what they used to.
I assume that Mr. North argues within the framework of the quantity theory of money, i.e. crudely put, more is inflationary and less is deflationary. His conclusion of deflation also assumes stable money multipliers such that a decrease in the monetary base leads to decreases in broader money. If the MBase can fall while broader money supplies rise, the MBase will not be a good predictor as was the case when the money multipliers broke down when the Fed was aggressively adding reserves in the early 90s with little increase in inflation.
Of late the multiplier between the MBase and M2 is rising. Assuming John Williams' Shadow Stats are correct, that between what used to be M3 and the MBase is rising even faster, which suggests, a la, Doug Noland, that things are a bit out of the Fed's control.
I tend to agree with Mr. Noland's view that the monetary system is out of control, although I take a more narrow view of the transmission mechanism. During the Asian crisis, the Asian CBs, once they were forced to admit they had a problem, tried hard to tighten, but resolution of their international deficits swamped their efforts. Their currency overvaluations had first to be resolved before the tightening could have an effect. Thus we saw a large almost one step spike in inflation, as a result of previous monetary easiness and currency overvaluation, followed by a normalization.
The problem, in my view, with traditional quantity theory is that it was based on a far more autarkic model, or at least one in which international imbalances would tend towards balance, as IMF policy requires. Open capital accounts make such analysis much more complex in the event, such as exists now with the US, when international imbalances are large and growing.
I like to think of the accumulated foreign official sector holdings of US$s as "stored deflation" in that it gives these foreign CBs bonds to sell (the quantity of which, in toto, is far in excess of what the Fed currently holds, btw) which, when sold, will withdraw liquidity from the market, other things equal.
If and when the accumulation of these holdings goes into reverse, as they must, assuming the current system isn't changed, the Fed will face a similar dilemma as the Asian CBs. If they want to stop an inflationary spiral, they will need to tighten internally while the international markets are tightening for them. That is, US bonds will need to find their clearing yield based on private sector preferences, a yield I believe will have 2 digits, not 1.
But the Fed faces a problem the Asian CBs didn't have to worry (much) about, the derivatives monster. A spike in interest rates will push the big banks' derivatives books into insolvency, and as the derivatives books go, so do the banks themselves.
Assuming the Fed doesn't want that to happen, they will need to be the buyer of last resort in the bond market. That is, in order to keep the financial system functioning reasonably smoothly, without letting interest rates spike, the Fed will need to take these foreign official sector holdings released into the market on its balance sheet, which means the monetary base will rise.
In a sense, this is almost the reverse of the problem Greenspan faced in the early 90s as foreign holdings started to rise dramatically. The buzz phrase back then was "pushing on a string", the Fed let the MB grow by double digits for years without much effect on inflation. Now, using the same metaphor, if the Fed pulls on that string, it will break.
The underlying problem is this- bond yields are, due to years of public sector intervention, way too low to attract private sector interest. Somebody has to eat this loss, and in the event, as I suspect, this somebody is the Fed, Gary North will see the monetary base expand rapidly (as he notes at the end of his analysis, with agreement from me) and inflation will be the result, whether Bernanke likes it or not.
Thursday, September 20, 2007
Is the globalization put expiring?
Whose put is it?
Many readers of financial commentary are likely familiar with the phrases "Greenspan put" and "Bernanke put." These phrases refer not to an actual contract but to a belief that the two successive Fed Chairman would ensure that fear of cascading defaults should not be part of the calculus of financial speculators.
In my usual role as an iconoclast I take a different view of the source of this put. It is not, I argue, faith in the abilities of these two men and their money machines which has kept a floor under equity and bond markets over the past 15 or so years, but faith in the economic virtues of globalization.
This isn't to argue that Greenspan and Bernanke haven't done their job of enforcing the faith, they have. Each time faith in the current experiment in monetary globalization fades, the Fed punishes the unbelievers. But the faith which backs the put is not, I contend, in these two men, but in the virtues of a globalized economy- economies of scale and reductions in redundancies.
I argue that the faith is not in the Fed Chairmen because there have been other Fed Chairmen who played fast and loose with policy, Arthur Burns comes to mind, who did not inspire the same effects. Loose monetary policy during Burns' time, when economies were more autarkic, led much more rapidly to domestic inflation- an effect I believe will become more prevalent as time passes.
War and free trade as opposites
Although there are many bumps in the road to a truly globalized economy, notably impediments to the free movement of labor, and the desire to retain sovereign rights to issuing debt, which most nations are loath to lose, in my view, the stake in the heart of the current attempt to globalize, which mirrors the cause of the end of last attempt in the early 20th Century, is war, and the fear it engenders, loss of sovereignty.
The commercial benefits of economies of scale arise, in part, due to the reduction in redundancies. David Ricardo's work on free trade and comparative advantage speaks to these benefits. And, I believe, the willingness of the financial world to accept what would, in other eras, have been considered imprudently loose policy, as prudent, is due, in large part, to the hoped for benefits at the end of the globalization rainbow. Nor, I believe, is this faith misplaced, in theory. Sadly, for those invested in globalization, theory needs to become practice for the benefits to accrue. Redundancies need to be reduced in order for the hoped for future to materialize and war is the greatest impediment in their reduction.
Waging war effectively requires just the opposite intent as free trade commerce- redundancies become necessary because you cannot rely on your enemy to trade with you. You cannot partake in your enemy' comparative advantage nor can he in yours as they will both be used against each other.
US military might as accepted comparative advantage and its loss
The US, in the aftermath of the first Gulf War, due to the wisdom of Bush the elder's administration in operating under the aegis of the United Nations and opting for a police action rather than a change in sovereignty, found itself in the position of both having a comparative advantage in warfare, and having the trust of other nations that the advantage would not be used against them. Other nations of the world, back then, did not, in the main, fear that comparative advantage. They were content to pay the US for its services when the need arose as the US would pay the Saudis for their comparative advantage in producing oil.
The change in tactic by the team of Bush the younger, away from the UN, and towards unilateralism, has engendered this fear of the US' comparative advantage in war. This fear has led to a resurgence in military spending in other nations- redundancies are coming back into vogue.
And it is this return of redundancies, from military might, to energy and food, which signals the expiration of the globalization put to me. Resources will not be seen as something which are shared and directed to those with comparative advantage at using them, but things to be hoarded by each group, for fear of getting left out.
Moreover, globalization requires a breakdown of national boundaries, such as partially occurred with the Euro, the imposition of which was, in my mind, the high point for this round of globalization. Of late, the trend seems more towards the breakdown of previously unified political blocks. Iraq itself seems ready to degenerate into 3 separate countries, which will engender further redundancies. If the current intra-European tensions become more intense, due to further inflation, et. al. and the Euro itself is abandoned, globalization will be truly dead, for this era. I'm not forecasting this, but the possibility seems open.
Why should the put expire?
If, instead of betting on the expected reality of the virtues of free trade, which have been slow in coming of late, people had merely hoped for the virtues of free trade, there would be no put to expire. But massive bets, built on the faith that international imbalances would not be a problem in a globalized economy, which would be, to some extent, true if such would come to pass soon, have been placed. Each of these bets, as with all financial transactions which settle in the future, has an expiration date, so too, conceptually, do the aggregate of those bets.
As faith in the realization of imminent globalization fades, concern over the resolution of international imbalances will grow. What used to be considered un-problematic (Cheney's purported quip that deficits don't matter) will be seen in a new light, call it financial revelation. Failure to resolve these imbalances gracefully will only exacerbate the growing distrust between nations. In extremis, international trade itself will decline and a new round of autarkic minded governments could come to power as happened during the days of FDR.
Of course, current trends need not be continued. The US could reduce its presence in Iraq and let them operate under their own sovereignty, and avoid further confrontations with Iran. The US could, that is, come back to the UN and use its military as a UN police force of sorts. Unfortunately, having invaded one country, it will be far more difficult to earn the same trust which was evident after Gulf War I. Moreover, the domestic drive for war is difficult to stop once war finance has metastasized through an economy and significantly altered the flow of funds. These changes will be difficult to make, and thus I don't see much hope for the globalization put living much longer.
Brass Tacks
Although I suspect the globalization put is expiring I don't think this will mean that Bernanke will stop enforcing the faith as he has been doing. Rather, I believe that their efforts in adding liquidity will create more inflation than they have in the past, as seems to be happening now. Faith in the virtues of globalization masked concerns over imbalances and monetary laxity, and the lack of faith will have the opposite effect, the leaving Bernanke and his successors in the "anguished" position of Arthur Burns.
A breakdown of trust between nations, such as might occur if international imbalances are not resolved gracefully, may well reawaken faith in the virtues of hard money. One doesn't need to trust in a foreign nation's monetary policy when imbalances are settled in Gold, rather than currency.
As a practical matter, investments in the precious metals and commodities in general should thrive if the scenario I've painted comes to pass. On the flip side, the current period of low interest rates will likely end, which will weigh heavily on both bond and equity prices.
Many readers of financial commentary are likely familiar with the phrases "Greenspan put" and "Bernanke put." These phrases refer not to an actual contract but to a belief that the two successive Fed Chairman would ensure that fear of cascading defaults should not be part of the calculus of financial speculators.
In my usual role as an iconoclast I take a different view of the source of this put. It is not, I argue, faith in the abilities of these two men and their money machines which has kept a floor under equity and bond markets over the past 15 or so years, but faith in the economic virtues of globalization.
This isn't to argue that Greenspan and Bernanke haven't done their job of enforcing the faith, they have. Each time faith in the current experiment in monetary globalization fades, the Fed punishes the unbelievers. But the faith which backs the put is not, I contend, in these two men, but in the virtues of a globalized economy- economies of scale and reductions in redundancies.
I argue that the faith is not in the Fed Chairmen because there have been other Fed Chairmen who played fast and loose with policy, Arthur Burns comes to mind, who did not inspire the same effects. Loose monetary policy during Burns' time, when economies were more autarkic, led much more rapidly to domestic inflation- an effect I believe will become more prevalent as time passes.
War and free trade as opposites
Although there are many bumps in the road to a truly globalized economy, notably impediments to the free movement of labor, and the desire to retain sovereign rights to issuing debt, which most nations are loath to lose, in my view, the stake in the heart of the current attempt to globalize, which mirrors the cause of the end of last attempt in the early 20th Century, is war, and the fear it engenders, loss of sovereignty.
The commercial benefits of economies of scale arise, in part, due to the reduction in redundancies. David Ricardo's work on free trade and comparative advantage speaks to these benefits. And, I believe, the willingness of the financial world to accept what would, in other eras, have been considered imprudently loose policy, as prudent, is due, in large part, to the hoped for benefits at the end of the globalization rainbow. Nor, I believe, is this faith misplaced, in theory. Sadly, for those invested in globalization, theory needs to become practice for the benefits to accrue. Redundancies need to be reduced in order for the hoped for future to materialize and war is the greatest impediment in their reduction.
Waging war effectively requires just the opposite intent as free trade commerce- redundancies become necessary because you cannot rely on your enemy to trade with you. You cannot partake in your enemy' comparative advantage nor can he in yours as they will both be used against each other.
US military might as accepted comparative advantage and its loss
The US, in the aftermath of the first Gulf War, due to the wisdom of Bush the elder's administration in operating under the aegis of the United Nations and opting for a police action rather than a change in sovereignty, found itself in the position of both having a comparative advantage in warfare, and having the trust of other nations that the advantage would not be used against them. Other nations of the world, back then, did not, in the main, fear that comparative advantage. They were content to pay the US for its services when the need arose as the US would pay the Saudis for their comparative advantage in producing oil.
The change in tactic by the team of Bush the younger, away from the UN, and towards unilateralism, has engendered this fear of the US' comparative advantage in war. This fear has led to a resurgence in military spending in other nations- redundancies are coming back into vogue.
And it is this return of redundancies, from military might, to energy and food, which signals the expiration of the globalization put to me. Resources will not be seen as something which are shared and directed to those with comparative advantage at using them, but things to be hoarded by each group, for fear of getting left out.
Moreover, globalization requires a breakdown of national boundaries, such as partially occurred with the Euro, the imposition of which was, in my mind, the high point for this round of globalization. Of late, the trend seems more towards the breakdown of previously unified political blocks. Iraq itself seems ready to degenerate into 3 separate countries, which will engender further redundancies. If the current intra-European tensions become more intense, due to further inflation, et. al. and the Euro itself is abandoned, globalization will be truly dead, for this era. I'm not forecasting this, but the possibility seems open.
Why should the put expire?
If, instead of betting on the expected reality of the virtues of free trade, which have been slow in coming of late, people had merely hoped for the virtues of free trade, there would be no put to expire. But massive bets, built on the faith that international imbalances would not be a problem in a globalized economy, which would be, to some extent, true if such would come to pass soon, have been placed. Each of these bets, as with all financial transactions which settle in the future, has an expiration date, so too, conceptually, do the aggregate of those bets.
As faith in the realization of imminent globalization fades, concern over the resolution of international imbalances will grow. What used to be considered un-problematic (Cheney's purported quip that deficits don't matter) will be seen in a new light, call it financial revelation. Failure to resolve these imbalances gracefully will only exacerbate the growing distrust between nations. In extremis, international trade itself will decline and a new round of autarkic minded governments could come to power as happened during the days of FDR.
Of course, current trends need not be continued. The US could reduce its presence in Iraq and let them operate under their own sovereignty, and avoid further confrontations with Iran. The US could, that is, come back to the UN and use its military as a UN police force of sorts. Unfortunately, having invaded one country, it will be far more difficult to earn the same trust which was evident after Gulf War I. Moreover, the domestic drive for war is difficult to stop once war finance has metastasized through an economy and significantly altered the flow of funds. These changes will be difficult to make, and thus I don't see much hope for the globalization put living much longer.
Brass Tacks
Although I suspect the globalization put is expiring I don't think this will mean that Bernanke will stop enforcing the faith as he has been doing. Rather, I believe that their efforts in adding liquidity will create more inflation than they have in the past, as seems to be happening now. Faith in the virtues of globalization masked concerns over imbalances and monetary laxity, and the lack of faith will have the opposite effect, the leaving Bernanke and his successors in the "anguished" position of Arthur Burns.
A breakdown of trust between nations, such as might occur if international imbalances are not resolved gracefully, may well reawaken faith in the virtues of hard money. One doesn't need to trust in a foreign nation's monetary policy when imbalances are settled in Gold, rather than currency.
As a practical matter, investments in the precious metals and commodities in general should thrive if the scenario I've painted comes to pass. On the flip side, the current period of low interest rates will likely end, which will weigh heavily on both bond and equity prices.
Tuesday, September 18, 2007
Northern Rock queuers: Don't they get it?
Meanwhile, anxious Northern Rock customers, who waited through the night to take out their savings this morning, were branded "irrational" by the chairman of the Financial Services Authority. This is London
Why, you might be wondering, would the Chairman of the FSA brand those queueing to withdraw their savings from Northern Rock, "irrational?" Surely it isn't irrational to worry about one's deposits in a bank with a very imbalanced balance sheet?
Perhaps the people queueing to withdraw their deposits didn't get the memo.
"What memo?" you ask.
The memo which said that all deposits in the anglo world's financial system would be made good, guaranteed by the government, as is being done to the remaining deposits at Northern Rock. As the deposits at Northern Rock, and likely those at any other financial institution caught in this mess, are to be made whole, in more fiat money, of course, the queuers deserves to be branded irrational. Right?
Not so fast. While in small doses, such actions will not have a large effect, en masse, a policy of this sort will lead to significant currency debasement. In that case, at current rates of interest, getting one's deposits out of the system and into the precious metals seems quite rational indeed.
Gordon Brown might be pleased to have dodged this bullet, but I wonder how he feels about selling off Britain's gold, under $300 per oz. Who knows, Gordon, that stuff might come in handy some time soon.
Why, you might be wondering, would the Chairman of the FSA brand those queueing to withdraw their savings from Northern Rock, "irrational?" Surely it isn't irrational to worry about one's deposits in a bank with a very imbalanced balance sheet?
Perhaps the people queueing to withdraw their deposits didn't get the memo.
"What memo?" you ask.
The memo which said that all deposits in the anglo world's financial system would be made good, guaranteed by the government, as is being done to the remaining deposits at Northern Rock. As the deposits at Northern Rock, and likely those at any other financial institution caught in this mess, are to be made whole, in more fiat money, of course, the queuers deserves to be branded irrational. Right?
Not so fast. While in small doses, such actions will not have a large effect, en masse, a policy of this sort will lead to significant currency debasement. In that case, at current rates of interest, getting one's deposits out of the system and into the precious metals seems quite rational indeed.
Gordon Brown might be pleased to have dodged this bullet, but I wonder how he feels about selling off Britain's gold, under $300 per oz. Who knows, Gordon, that stuff might come in handy some time soon.
Friday, September 14, 2007
Open letter to Tom Engelhardt
Tom,
I admire your courage in broaching the topic of the Zionist influence on American policy outlined by Mearsheimer and Walt.
When I read their book, Barbara Tuchman's almost wistful memories of her assimilationist-minded family, described in Practicing History, came to mind.
In my view, the promise of the modern world- transcending the tribal aspects of religion without losing the lessons therein, applied to all men, died when the Zionists wrestled control of public Judaism from the assimilationists. The radical, retrograde dreams of a tribal Islamic theocracy, which seemed to be dying a well deserved death with the dissolution of the Ottoman Empire, were thereby revived, as were the always slumbering dreams of a Christian Theocracy in America.
The unintended irony of supposed monotheists who proclaim, a la, Boykin, that "my god is bigger than your god," would be comical if its effects weren't so tragic.
I still have faith that the public discourse of man will, one day, come to accept the truth of monotheism- all the great religions are but different reflections of the same eternal truths. And that day can't come soon enough for me. Tribalism is such a drag.
I wish the assimilationists success in their philosophical counter-attack on Zionism. More importantly, I pray on behalf of all my Jewish friends, and the millions of other good people of that faith, that the pendulum doesn't swing too far the other way. In our still tribal world, this is a perilous tightrope to walk.
dreaming of a day when we can all live together accepting our differences,
The Dude
I admire your courage in broaching the topic of the Zionist influence on American policy outlined by Mearsheimer and Walt.
When I read their book, Barbara Tuchman's almost wistful memories of her assimilationist-minded family, described in Practicing History, came to mind.
In my view, the promise of the modern world- transcending the tribal aspects of religion without losing the lessons therein, applied to all men, died when the Zionists wrestled control of public Judaism from the assimilationists. The radical, retrograde dreams of a tribal Islamic theocracy, which seemed to be dying a well deserved death with the dissolution of the Ottoman Empire, were thereby revived, as were the always slumbering dreams of a Christian Theocracy in America.
The unintended irony of supposed monotheists who proclaim, a la, Boykin, that "my god is bigger than your god," would be comical if its effects weren't so tragic.
I still have faith that the public discourse of man will, one day, come to accept the truth of monotheism- all the great religions are but different reflections of the same eternal truths. And that day can't come soon enough for me. Tribalism is such a drag.
I wish the assimilationists success in their philosophical counter-attack on Zionism. More importantly, I pray on behalf of all my Jewish friends, and the millions of other good people of that faith, that the pendulum doesn't swing too far the other way. In our still tribal world, this is a perilous tightrope to walk.
dreaming of a day when we can all live together accepting our differences,
The Dude
Saturday, September 08, 2007
Greenspan the collectivist forgot about Gold
The human race has never found a way to confront bubbles. Alan Greenspan
It has been a few decades since Al Greenspan was a devotee of Ayn Rand, and it shows. I'm not much of a fan of Rand as I found her philosophic views tended to steam roll over the, in my view, important questions of consciousness and totally missed Hume's point on the failure of reason alone, however, she did have her moments. Her steadfast defense of gold as money is a case in point- a point obviously lost on Greenspan over the decades.
Greenspan's quote above is, in my view, true if one assumes that confronting a bubble means stopping it entirely thereby saving all participants from its nasty effects. The interplay of ignorance, deception and concentration of power with respect to money makes me doubt that we ever will find a way to avoid such problems, en masse. Of course, the same can be said for many of the ills mankind faces. As the saying goes, you can lead a horse to water but you can't make him drink (or in this case, think).
I wonder from whence Greenspan came up with this idea of saving everyone, which is a very collectivist conception. If freedom means anything it must include the freedom to fail as well as succeed. Perhaps Greenspan thought of himself as a monetary messiah.
However, there is another way to interpret the quote above. The human race did come up with a way to confront bubbles but the Central Bankers have been endeavoring to take it away- Gold.
Moving one's savings out of a financial system run amok and into Gold is a way to confront bubbles. Those, like me, who have taken this route have managed to preserve far more purchasing power than those who stayed in the system, despite the best efforts of the Central Banks. They apparently believe that truth is a matter of faith- the more people who believe a proposition, the truer it becomes.
Gold's ability over the millennia to retain purchasing power was, I believe, one of the key reasons it was chosen as a basis for western monetary systems as commerce emerged from Feudal Europe.
Although a gold standard will not stop bubbles from forming, its effects on the behavior of people in such systems tended to facilitate the termination of the bubbles which did form- making their duration shorter and the end result clean up faster. It did this by giving the people a way to both escape the system and vote on it at the same time, which in turn tended to keep the bankers on their toes. I doubt the derivatives mess would have grown nearly as large, thus making its clean up easier, had such a system been in place- a point worth considering whenever you read some commentary on the intractable problems appearing as the world tries to fix this disaster.
Greenspan's faith in the abilities of central bankers, who, as another of his mentors, Arthur Burns, warned in The Anguish of Central Banking, must operate in a political climate, is his blind spot in this regard as it leads him to the collectivist view that they should govern the many. I hope the human race learns once again that we did find a way to confront bubbles, we just threw it away.
It has been a few decades since Al Greenspan was a devotee of Ayn Rand, and it shows. I'm not much of a fan of Rand as I found her philosophic views tended to steam roll over the, in my view, important questions of consciousness and totally missed Hume's point on the failure of reason alone, however, she did have her moments. Her steadfast defense of gold as money is a case in point- a point obviously lost on Greenspan over the decades.
Greenspan's quote above is, in my view, true if one assumes that confronting a bubble means stopping it entirely thereby saving all participants from its nasty effects. The interplay of ignorance, deception and concentration of power with respect to money makes me doubt that we ever will find a way to avoid such problems, en masse. Of course, the same can be said for many of the ills mankind faces. As the saying goes, you can lead a horse to water but you can't make him drink (or in this case, think).
I wonder from whence Greenspan came up with this idea of saving everyone, which is a very collectivist conception. If freedom means anything it must include the freedom to fail as well as succeed. Perhaps Greenspan thought of himself as a monetary messiah.
However, there is another way to interpret the quote above. The human race did come up with a way to confront bubbles but the Central Bankers have been endeavoring to take it away- Gold.
Moving one's savings out of a financial system run amok and into Gold is a way to confront bubbles. Those, like me, who have taken this route have managed to preserve far more purchasing power than those who stayed in the system, despite the best efforts of the Central Banks. They apparently believe that truth is a matter of faith- the more people who believe a proposition, the truer it becomes.
Gold's ability over the millennia to retain purchasing power was, I believe, one of the key reasons it was chosen as a basis for western monetary systems as commerce emerged from Feudal Europe.
Although a gold standard will not stop bubbles from forming, its effects on the behavior of people in such systems tended to facilitate the termination of the bubbles which did form- making their duration shorter and the end result clean up faster. It did this by giving the people a way to both escape the system and vote on it at the same time, which in turn tended to keep the bankers on their toes. I doubt the derivatives mess would have grown nearly as large, thus making its clean up easier, had such a system been in place- a point worth considering whenever you read some commentary on the intractable problems appearing as the world tries to fix this disaster.
Greenspan's faith in the abilities of central bankers, who, as another of his mentors, Arthur Burns, warned in The Anguish of Central Banking, must operate in a political climate, is his blind spot in this regard as it leads him to the collectivist view that they should govern the many. I hope the human race learns once again that we did find a way to confront bubbles, we just threw it away.
Wednesday, September 05, 2007
On uncertainty of the Orwellian variety
During times of universal deceit, telling the truth becomes a revolutionary act. George Orwell
I suspect when Frank Knight wrote about uncertainty he was referring to that which occurs inadvertently. There is, however, another variety of uncertainty which is evoked by language intended to deceive- the uncertainty of which George Orwell wrote. War is peace. Freedom is slavery. Ignorance is strength- you get the picture. The aim of those who employ these tactics is to confuse the masses, which they do. But, as Orwell warned, if thought corrupts language, language can also corrupt thought. This type of deceit usually backfires because to tell a lie convincingly you must believe it yourself.
Take the most recent case of Sen. "wide stance" Craig, who wants us to believe that a resignation is not a resignation, or to be fair, an intent to resign is not really an intent to do so. The cynic in me argues that his true intent was to give the masses what they wanted and when things calmed down to remind us that he didn't really resign. While I find the gestapo tactics of the police in this matter to be a bit harsh I find his attempts to wriggle out from under even worse. Better, I think, to be straight up front- of course this is difficult when you're trying to distract people from the skeleton in the closet (who apparently doesn't want to come out).
Moving to economics, I find the linguistic gymnastics deemed necessary by the powers that be quite comical. Having massaged the statistics, or in the case of M3, dropped them down the memory hole altogether, and having declared the economy to be strong, robust, best ever (take your pick of positive adjectives) and not wanting to shout "fire" in a not yet burning theater, our economic solons are in something of a bind. They can't say that the financial infrastructure of our nation is teetering on the brink, or that the sub-prime loans problem is becoming a mess for the broader economy so they declare it contained. Heck, we can't even use the phrase "bail-out" when the government bails out the banks and their victims. If our economic managers ever wish to get ahead of the game they are going to have to try to tell the unvarnished truth and avoid managing expectations.
On the topic of sub-prime loans, I wonder if our foreign creditors would have been so eager to buy them in packaged bulk if they had been properly named- poorly collateralized loans to people unlikely to repay. I suspect bonds bearing that name would not have sold nearly as well.
Of course, the fun doesn't end there. The whole infrastructure of finance has been torn apart by Orwellian confusion. Banks, by virtue of all the linguistic gymnastics, as Paul Krugman and then BBK President Axel Weber put it, are no longer banks. Paul Kedrosky calls the current mess a non-bank bank run, a styling of which Orwell would be most proud.
The root cause of the mess, in my view, was a desire to do an end run around the Depression-era baking regulations by changing the names. If a bank was forbidden to do something a new entity was created, think Mahonia Ltd. and Enron, and it was done, all off balance sheet and outside of regulations. The US government is no slouch in this department either, although they simply declare more and more deficits to be off balance sheet. Thus a US$425B (through July) increase in the public debt becomes a deficit of US$157B.
Of course, as we are now learning, just because something is off the "official" balance sheet does not mean it won't have an effect. Rather, it means that the traditional tools we had used to solve such problems are no longer effective because the problems are "hidden" in the newly created non-bank financial sector. As Axel Weber put it:
The current turmoil in the financial markets has all the characteristics of a classic banking crisis, but one that is taking place outside the traditional banking sector.... the only difference between a classic banking crisis and the turmoil under way in the markets is that the institutions most affected at the moment are conduits and investment vehicles raising funds in the commercial bond market, rather than regulated banks. These entities were inherently vulnerable to a sudden loss of confidence on the part of their funders because “there is a maturity mismatch” on the part of financial institutions that have invested in long term mortgage-backed or asset-backed securities using short-term finance.
The rhyme from Sir Walter Scott's Marmion comes to mind: Oh what tangled webs we weave when first we practice to deceive.
I'm glad I stuck with my Gold, which, by the way, isn't non-Gold gold, but the physical variety.
I suspect when Frank Knight wrote about uncertainty he was referring to that which occurs inadvertently. There is, however, another variety of uncertainty which is evoked by language intended to deceive- the uncertainty of which George Orwell wrote. War is peace. Freedom is slavery. Ignorance is strength- you get the picture. The aim of those who employ these tactics is to confuse the masses, which they do. But, as Orwell warned, if thought corrupts language, language can also corrupt thought. This type of deceit usually backfires because to tell a lie convincingly you must believe it yourself.
Take the most recent case of Sen. "wide stance" Craig, who wants us to believe that a resignation is not a resignation, or to be fair, an intent to resign is not really an intent to do so. The cynic in me argues that his true intent was to give the masses what they wanted and when things calmed down to remind us that he didn't really resign. While I find the gestapo tactics of the police in this matter to be a bit harsh I find his attempts to wriggle out from under even worse. Better, I think, to be straight up front- of course this is difficult when you're trying to distract people from the skeleton in the closet (who apparently doesn't want to come out).
Moving to economics, I find the linguistic gymnastics deemed necessary by the powers that be quite comical. Having massaged the statistics, or in the case of M3, dropped them down the memory hole altogether, and having declared the economy to be strong, robust, best ever (take your pick of positive adjectives) and not wanting to shout "fire" in a not yet burning theater, our economic solons are in something of a bind. They can't say that the financial infrastructure of our nation is teetering on the brink, or that the sub-prime loans problem is becoming a mess for the broader economy so they declare it contained. Heck, we can't even use the phrase "bail-out" when the government bails out the banks and their victims. If our economic managers ever wish to get ahead of the game they are going to have to try to tell the unvarnished truth and avoid managing expectations.
On the topic of sub-prime loans, I wonder if our foreign creditors would have been so eager to buy them in packaged bulk if they had been properly named- poorly collateralized loans to people unlikely to repay. I suspect bonds bearing that name would not have sold nearly as well.
Of course, the fun doesn't end there. The whole infrastructure of finance has been torn apart by Orwellian confusion. Banks, by virtue of all the linguistic gymnastics, as Paul Krugman and then BBK President Axel Weber put it, are no longer banks. Paul Kedrosky calls the current mess a non-bank bank run, a styling of which Orwell would be most proud.
The root cause of the mess, in my view, was a desire to do an end run around the Depression-era baking regulations by changing the names. If a bank was forbidden to do something a new entity was created, think Mahonia Ltd. and Enron, and it was done, all off balance sheet and outside of regulations. The US government is no slouch in this department either, although they simply declare more and more deficits to be off balance sheet. Thus a US$425B (through July) increase in the public debt becomes a deficit of US$157B.
Of course, as we are now learning, just because something is off the "official" balance sheet does not mean it won't have an effect. Rather, it means that the traditional tools we had used to solve such problems are no longer effective because the problems are "hidden" in the newly created non-bank financial sector. As Axel Weber put it:
The current turmoil in the financial markets has all the characteristics of a classic banking crisis, but one that is taking place outside the traditional banking sector.... the only difference between a classic banking crisis and the turmoil under way in the markets is that the institutions most affected at the moment are conduits and investment vehicles raising funds in the commercial bond market, rather than regulated banks. These entities were inherently vulnerable to a sudden loss of confidence on the part of their funders because “there is a maturity mismatch” on the part of financial institutions that have invested in long term mortgage-backed or asset-backed securities using short-term finance.
The rhyme from Sir Walter Scott's Marmion comes to mind: Oh what tangled webs we weave when first we practice to deceive.
I'm glad I stuck with my Gold, which, by the way, isn't non-Gold gold, but the physical variety.
Wednesday, August 29, 2007
From risk to uncertainty and back again (I hope)
The facts of life in this regard are in a superficial sense obtrusively obvious and are a matter of common observation. It is a world of change in which we live, and a world of uncertainty. We live only by knowing something about the future; while the problems of life, or of conduct at least, arise from the fact that we know so little. This is as true of business as of other spheres of activity. The essence of the situation is action according to opinion, of greater or less foundation and value, neither entire ignorance nor complete and perfect information, but partial knowledge. If we are to understand the workings of the economic system we must examine the meaning and significance of uncertainty; and to this end some inquiry into the nature and function of knowledge itself is necessary.
Frank Knight: Risk, Uncertainty and Profit
When I was 11 my father decided to go back to school and study the Liberal Arts; specifically Philosophy. Thus I had the good fortune, at an impressionable age, to browse through the views of many of the noted Philosophers, in particular Locke, Berkeley and Hume.
I remember the first time I browsed (read would imply greater understanding than was evident) Hume's essay on Human Understanding. It was a humbling experience. While the book was written in English, and, according to my public school educators, I could already read at a college level, I couldn't understand the arguments. Fortunately I was young enough to not write off the essay as "unintelligible," instead realizing I needed more study to grasp the, as I later learned, important arguments therein.
I get the sense that others have encountered similar difficulty grasping complex arguments in literature, although, it seems to me, without recognizing the fact. Take President Bush's recent statement about Graham Greene's novel, The Quiet American:
The Federal Reserve's experiences over the past two decades make it clear that uncertainty is not just a pervasive feature of the monetary policy landscape; it is the defining characteristic of that landscape. The term "uncertainty" is meant here to encompass both "Knightian uncertainty," in which the probability distribution of outcomes is unknown, and "risk," in which uncertainty of outcomes is delimited by a known probability distribution. In practice, one is never quite sure what type of uncertainty one is dealing with in real time, and it may be best to think of a continuum ranging from well-defined risks to the truly unknown.
Enough prologue though, let's move on to Knight's views.
As the opening quote states, the difference between risk, which Knight defines as measurable uncertainty and uncertainty proper, i.e. unmeasurable, is a matter of personal opinion, or as I like to put it, one man's risk is another man's uncertainty. A well grounded sense of the world transforms a good deal of uncertainty to risk and vice versa.
Perhaps then, one can understand Greenspan's statement that uncertainty is not just a pervasive feature of the monetary policy landscape; it is the defining characteristic of that landscape as an (I suspect unintended) indictment of Central Banking. Perhaps accepting the view that Central Bankers can make the world a better place- a view I suspect most Central Bankers accept, turns what could be defined as risk, in their minds, to uncertainty. If monetary policy rarely creates better outcomes but monetary policy makers assume it does, they will, from time to time, be surprised at the outcomes which follow their actions, that is learn that they were operating in an environment of Knightian uncertainty. Alden Pyle's naiveté might not only be evident in military interventions but economic ones as well- let's call it The Quiet Central Banker.
And these Central Bankers and other economic officials would like you to share their uncertainty. They wish to mold investor expectations through commentary and intervention such that you see the world through their lens.
Thus, it seems to me, they turn what might be apprehended as a clear risk of financial disaster into uncertainty of its probability in the minds of many and thus engender the very volatility they claim to wish to curtail . If you accept, or more cynically, believe that many others will accept the views of Henry Paulson, presented on March of this year that; We have a very strong global economy. We have a global economy with low inflation, high levels of liquidity and I feel very comfortable with the global economy, then the recent market gyrations were surprising. Equally, if you adhere to the views of those like Jim Cramer that additional Fed liquidity, which, in my view, are a cause of the problem, is likely to fix things, you may well be surprised at the outcome. If you believe that financial deregulation, which allowed banks to securitize mortgages and let derivatives grow unchecked, is an unalloyed good, you too might be operating in uncertainty, but be ignorant of that fact, and thus be surprised at the outcome.
For Frank Knight, the difference between a successful entrepreneur and a failure lies in their differences in opinion. The former operates, more or less, in an environment of risk while the latter operates, ignorantly, in an environment of uncertainty. Transforming a good deal of uncertainty to risk can be done by adopting more accurate opinions of how the world works and how we, through the medium of consciousness, interact with it..
So, in this case, to transform uncertainty to risk one should "fight the Fed." To the extent our current problems were foreseeable, and many predicted them, they are a result of risks transformed into uncertainties by faith in false doctrine.
I'll close with another excerpt from Knight: But in economics a distrust of general principles, fatal as it is to clear thinking, will be inevitable as long as the postulates of theory are so nebulous and shifting. They can hardly be made sufficiently explicit; it is imperative that the contrast between these simplified assumptions and the complex facts of life be made as conspicuous and as familiar as has been done in mechanics.
The present essay is an attempt in the direction indicated above. We shall endeavor to search out and placard the unrealities of the postulates of theoretical economics, not for the purpose of discrediting the doctrine, but with a view to making clear its theoretical limitations. There are several reasons why the approximate character of theoretical economic laws and their inapplicability without empirical correction to real situations should be especially emphasized as compared, for instance, with those of mechanics. The first reason is historical and has already been indicated. The limitations of the results have not always been clear, and theorists themselves as well as writers in practical economics and statecraft have carelessly used them without regard for the corrections necessary to make them fit concrete facts. Policies must fail, and fail disastrously, which are based on perpetual motion reasoning without the recognition that it is such.
Frank Knight: Risk, Uncertainty and Profit
When I was 11 my father decided to go back to school and study the Liberal Arts; specifically Philosophy. Thus I had the good fortune, at an impressionable age, to browse through the views of many of the noted Philosophers, in particular Locke, Berkeley and Hume.
I remember the first time I browsed (read would imply greater understanding than was evident) Hume's essay on Human Understanding. It was a humbling experience. While the book was written in English, and, according to my public school educators, I could already read at a college level, I couldn't understand the arguments. Fortunately I was young enough to not write off the essay as "unintelligible," instead realizing I needed more study to grasp the, as I later learned, important arguments therein.
I get the sense that others have encountered similar difficulty grasping complex arguments in literature, although, it seems to me, without recognizing the fact. Take President Bush's recent statement about Graham Greene's novel, The Quiet American:
The argument that America's presence in Indochina was dangerous had a long pedigree. In 1955, long before the United States had entered the war, Graham Greene wrote a novel called, "The Quiet American." It was set in Saigon, and the main character was a young government agent named Alden Pyle. He was a symbol of American purpose and patriotism -- and dangerous naiveté. Another character describes Alden this way: "I never knew a man who had better motives for all the trouble he caused."
After America entered the Vietnam War, the Graham Greene argument gathered some steam. As a matter of fact, many argued that if we pulled out there would be no consequences for the Vietnamese people.
It has been a while since I read the book but I don't recall any of Greene's characters arguing that an American pull-out would have no consequences for the Vietnamese- the book's focus was on the naiveté of going in and expecting positive results. Further, although this is a small point, Greene's argument didn't "gain steam," it became self-evident. The naive Alden Pyle's of America's ruling class had self-inflicted a wound on American prestige in international circles by opting to intervene in IndoChina. The Iraqi analog also seems self-evident, but that is just my opinion.
And opinion, personal opinion, and its effects, is the theme of this essay.
President Bush, it seems to me, assuming he read the book and is not relying on his speech writers' understanding thereof, views Greene's arguments through the self-imposed lens that American military intervention is, in both Vietnam and Iraq at least, wise. Greene's arguments fell on deaf ears in that case. One must be open to the possibility that contrary arguments might be correct, i.e. be able to entertain them, to understand those arguments. Aristotle's quote that it is the mark of an educated mind to be able to entertain an idea without accepting it comes to mind.
But I digress.
The notion of Knightian uncertainty is making the rounds again in the aftermath of recent credit and equity market volatility. In reading some of the comments referencing Knight's views, I get that same sense that the arguments of Frank Knight's Risk, Uncertainty and Profit often fall on deaf ears. This is perhaps not surprising as Mr. Knight was first a philosopher before he became an economist and understanding his views requires an understanding of epistemology, the study of what it means to know something. As he put it: If we are to understand the workings of the economic system we must examine the meaning and significance of uncertainty; and to this end some inquiry into the nature and function of knowledge itself is necessary.
If you read Knight's views without a fair bit of grounding in epistemology you may well find yourself at the impasse I found when I first read Hume, or when I try to read an advanced book on Organic Chemistry.
The Federal Reserve's experiences over the past two decades make it clear that uncertainty is not just a pervasive feature of the monetary policy landscape; it is the defining characteristic of that landscape. The term "uncertainty" is meant here to encompass both "Knightian uncertainty," in which the probability distribution of outcomes is unknown, and "risk," in which uncertainty of outcomes is delimited by a known probability distribution. In practice, one is never quite sure what type of uncertainty one is dealing with in real time, and it may be best to think of a continuum ranging from well-defined risks to the truly unknown.
Enough prologue though, let's move on to Knight's views.
As the opening quote states, the difference between risk, which Knight defines as measurable uncertainty and uncertainty proper, i.e. unmeasurable, is a matter of personal opinion, or as I like to put it, one man's risk is another man's uncertainty. A well grounded sense of the world transforms a good deal of uncertainty to risk and vice versa.
Perhaps then, one can understand Greenspan's statement that uncertainty is not just a pervasive feature of the monetary policy landscape; it is the defining characteristic of that landscape as an (I suspect unintended) indictment of Central Banking. Perhaps accepting the view that Central Bankers can make the world a better place- a view I suspect most Central Bankers accept, turns what could be defined as risk, in their minds, to uncertainty. If monetary policy rarely creates better outcomes but monetary policy makers assume it does, they will, from time to time, be surprised at the outcomes which follow their actions, that is learn that they were operating in an environment of Knightian uncertainty. Alden Pyle's naiveté might not only be evident in military interventions but economic ones as well- let's call it The Quiet Central Banker.
And these Central Bankers and other economic officials would like you to share their uncertainty. They wish to mold investor expectations through commentary and intervention such that you see the world through their lens.
Thus, it seems to me, they turn what might be apprehended as a clear risk of financial disaster into uncertainty of its probability in the minds of many and thus engender the very volatility they claim to wish to curtail . If you accept, or more cynically, believe that many others will accept the views of Henry Paulson, presented on March of this year that; We have a very strong global economy. We have a global economy with low inflation, high levels of liquidity and I feel very comfortable with the global economy, then the recent market gyrations were surprising. Equally, if you adhere to the views of those like Jim Cramer that additional Fed liquidity, which, in my view, are a cause of the problem, is likely to fix things, you may well be surprised at the outcome. If you believe that financial deregulation, which allowed banks to securitize mortgages and let derivatives grow unchecked, is an unalloyed good, you too might be operating in uncertainty, but be ignorant of that fact, and thus be surprised at the outcome.
For Frank Knight, the difference between a successful entrepreneur and a failure lies in their differences in opinion. The former operates, more or less, in an environment of risk while the latter operates, ignorantly, in an environment of uncertainty. Transforming a good deal of uncertainty to risk can be done by adopting more accurate opinions of how the world works and how we, through the medium of consciousness, interact with it..
So, in this case, to transform uncertainty to risk one should "fight the Fed." To the extent our current problems were foreseeable, and many predicted them, they are a result of risks transformed into uncertainties by faith in false doctrine.
I'll close with another excerpt from Knight: But in economics a distrust of general principles, fatal as it is to clear thinking, will be inevitable as long as the postulates of theory are so nebulous and shifting. They can hardly be made sufficiently explicit; it is imperative that the contrast between these simplified assumptions and the complex facts of life be made as conspicuous and as familiar as has been done in mechanics.
The present essay is an attempt in the direction indicated above. We shall endeavor to search out and placard the unrealities of the postulates of theoretical economics, not for the purpose of discrediting the doctrine, but with a view to making clear its theoretical limitations. There are several reasons why the approximate character of theoretical economic laws and their inapplicability without empirical correction to real situations should be especially emphasized as compared, for instance, with those of mechanics. The first reason is historical and has already been indicated. The limitations of the results have not always been clear, and theorists themselves as well as writers in practical economics and statecraft have carelessly used them without regard for the corrections necessary to make them fit concrete facts. Policies must fail, and fail disastrously, which are based on perpetual motion reasoning without the recognition that it is such.
Friday, August 24, 2007
FT's Lex forgets: investors drool too
The credit hullabaloo is toppling many perceived truths. Triple-A means safe, for example. And terrified investors rush into gold. If there was ever a time for gold to demonstrate its safe-haven status, it was Monday. Yields on three-month Treasury bills plummeted almost 200 basis points as investors scrambled for government paper. Surely, this dramatic flight to quality should have pushed gold through the roof. Yet the price of gold did not shift from exactly $657 per troy ounce from Friday to Tuesday.
Either all bullion traders holiday together or investors prefer to trust the US government with their money more than they do gold. That is not as silly as it sounds. Gold is, after all, just a metal, and sentiment can be as irrational as for a high-risk asset. It is not even scarce. Nearly all the gold ever mined is still above ground. Only about 10 per cent of 2007 demand is for industrial use, whereas three-quarters of demand is for jewellery. It also provides no yield – although the way Treasuries are moving, that may not be a relative disadvantage for long. FT
Many readers are likely familiar with the experiments of Pavlov with dogs. Pavlov would ring a bell each time the dogs were fed and then he found that the dogs would salivate (drool) after hearing the bell even when they weren't fed.
One feature of the black boxes used to make trading decisions is to make those traders like Pavlov's dogs. They have no sense of fundamentals, like if they are getting fed (i.e. buying low), but simply react blindly to stimuli. Investors have bought US bonds during the past few crisis, therefore, Pavlov's dogs are sure these are the things to buy.
This process is aided by timely intervention with this effect in mind.
Further experimentation by Pavlov showed that the dogs eventually stopped drooling after a period of just hearing the bell without getting fed.
I suspect the conditioned reaction to financial crisis will also wear off. Meanwhile, I advise one to think twice when hearing a bell.
Either all bullion traders holiday together or investors prefer to trust the US government with their money more than they do gold. That is not as silly as it sounds. Gold is, after all, just a metal, and sentiment can be as irrational as for a high-risk asset. It is not even scarce. Nearly all the gold ever mined is still above ground. Only about 10 per cent of 2007 demand is for industrial use, whereas three-quarters of demand is for jewellery. It also provides no yield – although the way Treasuries are moving, that may not be a relative disadvantage for long. FT
Many readers are likely familiar with the experiments of Pavlov with dogs. Pavlov would ring a bell each time the dogs were fed and then he found that the dogs would salivate (drool) after hearing the bell even when they weren't fed.
One feature of the black boxes used to make trading decisions is to make those traders like Pavlov's dogs. They have no sense of fundamentals, like if they are getting fed (i.e. buying low), but simply react blindly to stimuli. Investors have bought US bonds during the past few crisis, therefore, Pavlov's dogs are sure these are the things to buy.
This process is aided by timely intervention with this effect in mind.
Further experimentation by Pavlov showed that the dogs eventually stopped drooling after a period of just hearing the bell without getting fed.
I suspect the conditioned reaction to financial crisis will also wear off. Meanwhile, I advise one to think twice when hearing a bell.
Wednesday, August 22, 2007
Learn from RISE of Ancient Rome, I say
Last week's warning from David Walker, comptroller general of the US, to learn from the fall of Rome led me to reconsider, by which I mean go back and re-read a few books, the utility of that oft used comparison. After further reflection I think a far more apt analogy to our (i.e. the United States) situation is the rise of Rome from effective city-state to Empire, rather than its fall. I believe a study of the rise of Rome teaches more useful lessons because the US, as currently constituted, more closely resembles the Roman Republic after the Punic Wars than it does the Empire prior to its fall.
Prior to the wars with Carthage (the Punici in Latin, i.e. Phoenicians) Rome had managed to expand its domain in the Italian peninsula, in the main, without changing its Republican government. For the most part the conquered states within the peninsula adapted well to the Roman modes of government and language. Indeed, all the Latin tribes spoke some form of Latin.
The growth of the United States within what are now the contiguous states between Mexico and Canada followed a similar path in that each expansion was able to be added without changing the form of government or language.
Once Rome had gained control of the peninsula, as when we gained control of the contiguous states, attention was turned to growth across the seas- growth which, in Rome's case, eventually led to the demise of the Republican forms and which, in our case, seems to be leading us down the same path, which is why I find that earlier period a more apt analogy than the fall.
Consider this view from J. A. Richards' The History of the World Vol IV: Now the system which worked while the city was self-contained, while it was actually a city within a domestic area of adjoining territory, proved itself defective as soon as the dominion of the city expanded, but not at first conspicuously. The Latin and Italian allies had their grievances, but they were of a fixed and therefore of a tolerable kind. Through the great wars the Senate and the nobles maintained their high character for public spirit in spite of many blunders. But the mere fact that war was being conducted on a large scale brought into prominence the impracticability of a system which annually changed its generals and disbanded its armies.
In other words, as we are currently learning, the Republican model of reasonably frequent elections and thus changes in leadership which had proven effective (in Rome and elsewhere over the centuries) in maintaining domestic support by giving the people a "say," however limited, in government proved ineffective when conducting large scale wars of long duration. Remember this the next time you hear some politician on TV, from either side of the aisle, speak of the long term War on Terror. Long wars and Republican forms of government do not mix.
Rome "solved," in a manner, this problem much as we have, although we tend to use local governors, by adopting a provincial system, which Richards' explains: The next step [in the provincial process] was the reduction of the whole [recently conquered by Rome] area to the form of a province, the "command" of a Roman governor exercising the imperium [i.e. absolute rule]. It was his business to preserve order and to collect the revenue for which his province was responsible. A constitution was laid down for the province, adapted to its special conditions, and the governor was supposed to act in accordance with the provisions of the constitution.
The position of provincial imperator became a much sought after prize- many Romans looked on Roman political office as a stepping stone to such appointments, as it came without the conditions imposed by the Roman constitution. Having tasted absolute (in many ways) power, Roman governors, like Julius Caesar, saw that form of government as a better model for Empire.
Julius Caesar and his adopted son Augustus led Rome through the last stages of the demise of the Republic and birth of the Empire.
Some (many) of you might be wondering if my choice of the rise of Rome as Empire as more apt analogy for our current situation implies the view that we will be as successful as Rome in making a similar transition. I don't think we will be as successful as Rome in that endeavor.
The first and foremost reason I don't see us following that path is the difference between our military expansion and Rome's. Rome proved quite capable, even while Hannibal was causing problems within the peninsula, of fielding sufficient men to fight on multiple fronts. Rome fought and won the Macedonian War, thus gaining a foothold in the heart of the Hellenic world, while the Second Punic War was ongoing.
The two centuries which followed the destruction of Carthage were, admittedly with quite a few setbacks, years of Roman military success- years which eventually led to Roman dominion over the entire Mediterranean.
By contrast, and, I believe, fortunately, we have proven to be less adept at bringing foreign powers to heel. It has been more than 5 decades since we last "won" a war against a major power. Korea, Vietnam, and more and more obviously Iraq, are demonstrating the limits of our military power in a world where human rights for peoples of all colors are valued and news travels around the world in the blink of an eye. The sensibilities of the modern world and speed of communication are, at least thus far, far less amenable to Empire than was the case two millennia ago.
The second reason I don't see us following Rome to Empire lies in the expanded "say" of US citizens in our Republican government and the enforced indoctrination of our young in the virtue thereof. We have, I believe, many more Cicero-like characters around these days.
Wars of foreign conquest over the past 5 decades of our history have fomented more or less peaceful domestic rebellion. Anti-War politicians find their way to power much easier than was the case in Rome.
Certainly things could change. There are those who seem as prepared to discard the old forms of government as were the Caesars, but, thus far, they have not been of the same quality as those two. Had Julius and Augustus been less successful militarily their attempts to lead Rome from Republic to Empire might well have ended differently. Rome, in that scenario, might have collapsed back on its Republican forms much as Britain did after its Empire proved too difficult to maintain.
George Bush, in my view, is, in a sense, correct when he warns of the consequences of Iraq becoming another Vietnam. Given our reliance on imported oil to fuel both our economy and military expansion- an Achilles heel which Rome did not have, I doubt we will get another bite at the apple of Empire if we lose "our resolve," to quote the President, in Iraq.
It seems to me that it is either now or never for Empire. Losing Iraq likely means a fall back to the old forms, i.e. a true conservatism.
We will see what the future holds.
p.s. I'm still working on the Knightian uncertainty essay
Prior to the wars with Carthage (the Punici in Latin, i.e. Phoenicians) Rome had managed to expand its domain in the Italian peninsula, in the main, without changing its Republican government. For the most part the conquered states within the peninsula adapted well to the Roman modes of government and language. Indeed, all the Latin tribes spoke some form of Latin.
The growth of the United States within what are now the contiguous states between Mexico and Canada followed a similar path in that each expansion was able to be added without changing the form of government or language.
Once Rome had gained control of the peninsula, as when we gained control of the contiguous states, attention was turned to growth across the seas- growth which, in Rome's case, eventually led to the demise of the Republican forms and which, in our case, seems to be leading us down the same path, which is why I find that earlier period a more apt analogy than the fall.
Consider this view from J. A. Richards' The History of the World Vol IV: Now the system which worked while the city was self-contained, while it was actually a city within a domestic area of adjoining territory, proved itself defective as soon as the dominion of the city expanded, but not at first conspicuously. The Latin and Italian allies had their grievances, but they were of a fixed and therefore of a tolerable kind. Through the great wars the Senate and the nobles maintained their high character for public spirit in spite of many blunders. But the mere fact that war was being conducted on a large scale brought into prominence the impracticability of a system which annually changed its generals and disbanded its armies.
In other words, as we are currently learning, the Republican model of reasonably frequent elections and thus changes in leadership which had proven effective (in Rome and elsewhere over the centuries) in maintaining domestic support by giving the people a "say," however limited, in government proved ineffective when conducting large scale wars of long duration. Remember this the next time you hear some politician on TV, from either side of the aisle, speak of the long term War on Terror. Long wars and Republican forms of government do not mix.
Rome "solved," in a manner, this problem much as we have, although we tend to use local governors, by adopting a provincial system, which Richards' explains: The next step [in the provincial process] was the reduction of the whole [recently conquered by Rome] area to the form of a province, the "command" of a Roman governor exercising the imperium [i.e. absolute rule]. It was his business to preserve order and to collect the revenue for which his province was responsible. A constitution was laid down for the province, adapted to its special conditions, and the governor was supposed to act in accordance with the provisions of the constitution.
The position of provincial imperator became a much sought after prize- many Romans looked on Roman political office as a stepping stone to such appointments, as it came without the conditions imposed by the Roman constitution. Having tasted absolute (in many ways) power, Roman governors, like Julius Caesar, saw that form of government as a better model for Empire.
Julius Caesar and his adopted son Augustus led Rome through the last stages of the demise of the Republic and birth of the Empire.
Some (many) of you might be wondering if my choice of the rise of Rome as Empire as more apt analogy for our current situation implies the view that we will be as successful as Rome in making a similar transition. I don't think we will be as successful as Rome in that endeavor.
The first and foremost reason I don't see us following that path is the difference between our military expansion and Rome's. Rome proved quite capable, even while Hannibal was causing problems within the peninsula, of fielding sufficient men to fight on multiple fronts. Rome fought and won the Macedonian War, thus gaining a foothold in the heart of the Hellenic world, while the Second Punic War was ongoing.
The two centuries which followed the destruction of Carthage were, admittedly with quite a few setbacks, years of Roman military success- years which eventually led to Roman dominion over the entire Mediterranean.
By contrast, and, I believe, fortunately, we have proven to be less adept at bringing foreign powers to heel. It has been more than 5 decades since we last "won" a war against a major power. Korea, Vietnam, and more and more obviously Iraq, are demonstrating the limits of our military power in a world where human rights for peoples of all colors are valued and news travels around the world in the blink of an eye. The sensibilities of the modern world and speed of communication are, at least thus far, far less amenable to Empire than was the case two millennia ago.
The second reason I don't see us following Rome to Empire lies in the expanded "say" of US citizens in our Republican government and the enforced indoctrination of our young in the virtue thereof. We have, I believe, many more Cicero-like characters around these days.
Wars of foreign conquest over the past 5 decades of our history have fomented more or less peaceful domestic rebellion. Anti-War politicians find their way to power much easier than was the case in Rome.
Certainly things could change. There are those who seem as prepared to discard the old forms of government as were the Caesars, but, thus far, they have not been of the same quality as those two. Had Julius and Augustus been less successful militarily their attempts to lead Rome from Republic to Empire might well have ended differently. Rome, in that scenario, might have collapsed back on its Republican forms much as Britain did after its Empire proved too difficult to maintain.
George Bush, in my view, is, in a sense, correct when he warns of the consequences of Iraq becoming another Vietnam. Given our reliance on imported oil to fuel both our economy and military expansion- an Achilles heel which Rome did not have, I doubt we will get another bite at the apple of Empire if we lose "our resolve," to quote the President, in Iraq.
It seems to me that it is either now or never for Empire. Losing Iraq likely means a fall back to the old forms, i.e. a true conservatism.
We will see what the future holds.
p.s. I'm still working on the Knightian uncertainty essay
Thursday, August 16, 2007
Central Bankers take toys and go home
If you don't have children peer back in your memory and try to recall a time when a group of you were playing a game. Then when the game wasn't progressing the way one child, who happened to own the toys, wanted, he upends the game board, or simply takes the toys away and leaves.
If you have children you most likely see this from time to time.
Watching the gold market trade the past few days, I get the same sense. It is as if a group of guys decided that if we don't play by their rules, they will destroy the game for all. The global financial system becomes Hotel California, you can check out any time you like, but you can never leave.
When did finance become an all-or-nothing proposition? When Central Banks took the place of a gold standard. Prior to that time, gold was the preferred place to store value during imbalance resolution phases. Now, we are all, apparently, stuck on the Titanic and all warning bells have been disconnected.
Heck, even Dennis Gartman sees things that way, although he views the policy with agreement.
But this policy has consequences, most notably, it transforms risk into Knightian uncertainty- a transformation I will explain in my next post.
If you have children you most likely see this from time to time.
Watching the gold market trade the past few days, I get the same sense. It is as if a group of guys decided that if we don't play by their rules, they will destroy the game for all. The global financial system becomes Hotel California, you can check out any time you like, but you can never leave.
When did finance become an all-or-nothing proposition? When Central Banks took the place of a gold standard. Prior to that time, gold was the preferred place to store value during imbalance resolution phases. Now, we are all, apparently, stuck on the Titanic and all warning bells have been disconnected.
Heck, even Dennis Gartman sees things that way, although he views the policy with agreement.
But this policy has consequences, most notably, it transforms risk into Knightian uncertainty- a transformation I will explain in my next post.
Tuesday, August 14, 2007
Carlo Ponzi - Fed Chairman, and the current crisis
Central banks around the world have been injecting funds into markets in response to an undesired and unwelcome spike in short-term rates suggested that demand for reserves was outstripping supply. The following is a rundown of the totals and excerpts from any statements issued Friday by the regulators. WSJ
Federal Reserve
Thursday: $24 billion
Friday: $38 billion (tranches of $19 billion, $16 billion and $3 billion)
European Central Bank
Thursday: €94.84 billion ($130 billion)
Friday: €61.05 billion ($83.56 billion)
The Bank of Canada
Friday: 1.64 billion Canadian dollars ($1.55 billion).
Bank of Japan
Friday: one trillion yen ($8.39 billion)
Swiss National Bank
Friday: two to three billion Swiss francs ($1.68-$2.51 billion) [estimate]
The Reserve Bank of Australia
Friday: 4.95 billion Australian dollars (US$4.18 billion)
The Monetary Authority of Singapore
Friday: 1.5 billion Singapore dollars (US$986.1 million)
...........
FRANKFURT/SINGAPORE (Reuters) - Central banks in the world's leading economies pumped money for a third day into the financial system on Monday, but in smaller amounts as investor nerves steadied over the dangers of a credit squeeze.
The European Central Bank lent out an extra 47.67 billion euros ($65.29 billion) in overnight funds, its smallest amount since lending rates shot up last Thursday on fears European banks faced huge exposure to risky U.S. mortgage debt. The ECB noted that markets were beginning to return to normal.
While the Atlantic Hurricane season has been slow (so far) it appears that a whale of a storm just hit the financial markets. You know things are grim when the sedate FT prints articles that seem more at home on a blog. Jeremy Grant's Learn from fall of ancient Rome, official warns US reads like something I would write. Of course crisis periods usually evoke crisis warnings and we are experiencing a crisis, aren't we?
We don't need no st-ee-nking crisis
Judged solely by the actions of the world's Central Banks a credit crisis seems obvious. Yet, having been around the financial block for a few decades I'm a bit confused. Crises ain't what they used to be.
I was an economic consultant out in SE Asia during the 97-98 crisis and remember it well. By the time the Fed decided to act, in September of 98, most Asian equity indices had lost at least half of their value, and many, much more. For instance, Singapore's Straits Times Index had fallen from Jan-97's 2216.8 to 826.93 by Sept of 98.
In the US, the Dow Jones Index had fallen from a spring 98 peak of just over 9000 to around 7500 when the Fed eased in September of that year- roughly a 17% decline.
Meanwhile Russia was defaulting on its foreign debt and Brazil was on the brink.
Now that's a crisis.
The current crisis, at least judging by equity indices, seems much more tame.
Asian equity indices have fallen, but only by 10% or so from early year peaks. European equity indices have fallen by similar amounts of 10% or so. The Dow Jones Index is down about 850 pts from it's peak of 14K or just over 6%. That's 1/3 of the 98 equity decline that got the Fed into action a decade ago. And I am unaware of any Russian style sovereign debt defaults this go round.
If the current crisis is, judging by equity indices, orders of magnitude less severe, than what's the deal? What makes this a crisis?
The wrath of the Derivative's God
The most glaring difference between the 98 crisis and the current period is the growth of derivatives in general and credit derivatives in particular.
According to the OCC, the total notional value of derivatives for US banks in Q2 1998 was US$28T, of which interest rate derivatives totalled some US$20T and credit derivatives totalled some US$129B.
As of Q1 2007, the total notional value of derivatives for US banks was US$144T (a quadrupling over 10 years), of which interest rate derivatives totalled some US$119T (6 times the 98 amount) and credit derivatives totalled some US$10T (an almost 10 fold increase over the decade).
Another difference is the concentration of exposure into fewer banks. In 1998 derivatives exposure was spread across 8 big banks, while currently (again according to the OCC report) Commercial bank derivatives activity is heavily concentrated in the three largest dealers, which hold 89%of all contracts.
Back when I was trying to explain derivatives to Asian Central Bankers I used to tell them to think of derivatives as leverage- more derivatives equals more leverage. So in the 10 years since that last crisis, leverage has increased dramatically AND been concentrated into fewer and fewer hands.
Increased leverage means that it takes less unanticipated price action to create a crisis. A decade ago, equity indices could fall 20-30% before Central Bankers warned of a crisis while now a mere 10% move evokes the same warning.
Increased concentration of exposure into fewer and fewer institutions also decreases the amount of unanticipated move necessary before alarm bells ring. A tremendous amount of leverage concentrated into three institutions, which, as an aside, was just the type of situation Glass-Steagle and the other post depression financial regulations were trying to avoid, is a recipe for disaster- when one goes the market goes with it. Good thing those regulations were repealed.
In other words, increased leverage and concentration makes our financial institutions much less resilient to unanticipated shocks. As any leveraged futures trader who has been burned can tell you, the more leverage you use, the better speculator you need to be, or as we will discover, the better placed your friends need to be
What if Robert Rubin had founded LTCM?
I see more than coincidence in the recent actions of Central Banks and the news that Goldman Sachs' Global Equity Opportunities Fund just got a US$3B shot in the arm. Financial industry consolidation and the seeming revolving door between high level Wall St. executive positions (most notably Goldman Sachs, from whence came Hank Paulson) and the US Treasury should set collusion alarm bells ringing.
I wonder if the LTCM fiasco would have been resolved differently if one of their founders had taken the job as US Treasury Secretary. In the event, LTCM was liquidated, while Goldman Sachs' Global Equity Opportunities Fund will likely continue operations.
Carlo Ponzi, Fed Chairman
Most press stories explain the recent liquidity additions as a concerted attempt by the world’s central banks to restore confidence in the global financial system.
How does the financial industry lose confidence? by losing other people's money.
How can the financial industry maintain confidence? Let's go back to the early 20th century and inquire as to the actions of one Carlo Ponzi (thus the eponymous scheme) whose Securities Exchange Company advertised a 50% return in 90 days:
as news of the audit hit the street, the whiff of insecurity began to work its magic, creating a run on the Securities Exchange Company. But it seemed as though Carlo had an inexhaustible supply of cash: all of the investors who that lined up to withdraw their deposit each received their cash plus 50 percent.
And as the audit progressed, the auditors were stumped. The company kept meticulous records of all deposits and withdrawals. No one was being cheated, and no law had been broken. The only thing that they couldn't find was how the company made its fantastic profits. When asked, Carlo indignantly replied that that was a company secret.
Carlo Ponzi maintained confidence in his scam by ensuring that depositors were able to withdraw funds. That is, so long as he was able to survive the run on his bank, i.e. seemed to have an inexhaustible supply of cash, he could stay in business.
I assume that one use of Central Banker liquidity will be to ensure that Hedge Fund investors get their money back, i.e. that redemptions will be allowed. Nothing kills confidence more than finding out you can't get your money back, just ask California or Florida real estate flippers.
I guess it's good to be a high net worth individual these days, as opposed to an average Joe who took Greenspan's advice and took out an adjustable rate mortgage a few years back, eh.
But Carlo Ponzi did not have the deep pockets that our financiers have. Let's go back to the early 20th Century again:
The feds responded to this [ being told that investment methods were a secret- exactly what Hedge Funds say today] by placing a restraining order on the company, prohibiting it from accepting any further deposits while the investigation was proceeding. Carlo, glimpsing impending doom, hired the well-respected William McMaster to handle public relations until the investigation blew over. This move didn't turn out so well for our friend Carlo. Shortly after being hired, McMaster issued a statement to the press that the Securities Exchange Company had never--not even once--conducted a single foreign financial transaction.
Again, investors created a run on Carlo's company, and again, Carlo appeared to weather the storm, even serving coffee and donuts to depositors as they waited. But eventually the toll of the investigation and revelations took their course, and more and more investors showed up to withdraw their money, until eventually the money ran out. On August 9, 1920, Carlo's bank issued a statement that it could no longer honor checks from the Securities Exchange Company. Two days later, Carlo's criminal record was released to the public.
Back when Carlo was being forced to repay investors, a dollar was worth something- about 1/20th of an ounce of Gold. Carlo couldn't just print Ponzi money and give it out.
Now the banks can, in essence, do just that. When they are faced with the modern form of a bank run- hedge fund redemptions, Central Banks can just inject liquidity into the system (Ponzi money) and the problem is solved, sort of.
What price confidence
The effect of bail-outs like these, as opposed to the liquidation forced on poor Carlo Ponzi, is a devaluation of the currency, inflation.
Back in 1998 much of the inflation was masked by the dire straits faced by Russia and other emerging economies. Their need to acquire US$s to repay debt and build up sufficient reserves to avoid a repeat of the crisis acted to drain much of the added liquidity from the system.
The situation now could not be more different. If the problem of 98 was a lack of US$ reserves among emerging market nations, the problem now is too much. Moreover the people short of $s are not emerging market nations, but western hedge fund managers and those who supplied them the leverage, a few western banks.
Aside from location, another difference between the emerging market nations that were short US$s a decade ago and the hedge funds and money center banks short US$s now is productive capacity. Emerging market nations could (and did, the swing from emerging market current account deficits in 97-87 to surpluses now has been well documented) produce goods to earn $s and repay their debts, the hedge funds and banks will not.
In other words, the increased liquidity a decade ago tended to finance, inter alia, increased productive capacity. I doubt the same will follow this time round.
So, what price confidence? Inflation, and lots of it. Financial industry consolidation guarantees that liquidations will be few and far between and bail-outs, more and more common.
The limits of Arbitrage
Who knows, we might even reach the point where investors realize that an ounce of Gold in hand might just be worth quite a bit more than US$666 of Ponzi money invested in a hedge fund.
The reason being, one cannot guarantee, in a real sense, investments that are too good to be true, particularly investments that don't finance productive capacity. There's only so much real money to be made arbitraging, which is what a fund that doesn't invest in productive capacity does. Parasites that outgrow their hosts, kill them, and then die themselves.
When the universe of arbitragers was small, real positive returns were possible, but as that universe has grown at much faster rates than that of productive capacity, real returns are getting harder and harder to come by. The only thing Central Bankers can guarantee is currency, not value- a lesson which will become more and more obvious as the next few months pass.
Federal Reserve
Thursday: $24 billion
Friday: $38 billion (tranches of $19 billion, $16 billion and $3 billion)
European Central Bank
Thursday: €94.84 billion ($130 billion)
Friday: €61.05 billion ($83.56 billion)
The Bank of Canada
Friday: 1.64 billion Canadian dollars ($1.55 billion).
Bank of Japan
Friday: one trillion yen ($8.39 billion)
Swiss National Bank
Friday: two to three billion Swiss francs ($1.68-$2.51 billion) [estimate]
The Reserve Bank of Australia
Friday: 4.95 billion Australian dollars (US$4.18 billion)
The Monetary Authority of Singapore
Friday: 1.5 billion Singapore dollars (US$986.1 million)
...........
FRANKFURT/SINGAPORE (Reuters) - Central banks in the world's leading economies pumped money for a third day into the financial system on Monday, but in smaller amounts as investor nerves steadied over the dangers of a credit squeeze.
The European Central Bank lent out an extra 47.67 billion euros ($65.29 billion) in overnight funds, its smallest amount since lending rates shot up last Thursday on fears European banks faced huge exposure to risky U.S. mortgage debt. The ECB noted that markets were beginning to return to normal.
While the Atlantic Hurricane season has been slow (so far) it appears that a whale of a storm just hit the financial markets. You know things are grim when the sedate FT prints articles that seem more at home on a blog. Jeremy Grant's Learn from fall of ancient Rome, official warns US reads like something I would write. Of course crisis periods usually evoke crisis warnings and we are experiencing a crisis, aren't we?
We don't need no st-ee-nking crisis
Judged solely by the actions of the world's Central Banks a credit crisis seems obvious. Yet, having been around the financial block for a few decades I'm a bit confused. Crises ain't what they used to be.
I was an economic consultant out in SE Asia during the 97-98 crisis and remember it well. By the time the Fed decided to act, in September of 98, most Asian equity indices had lost at least half of their value, and many, much more. For instance, Singapore's Straits Times Index had fallen from Jan-97's 2216.8 to 826.93 by Sept of 98.
In the US, the Dow Jones Index had fallen from a spring 98 peak of just over 9000 to around 7500 when the Fed eased in September of that year- roughly a 17% decline.
Meanwhile Russia was defaulting on its foreign debt and Brazil was on the brink.
Now that's a crisis.
The current crisis, at least judging by equity indices, seems much more tame.
Asian equity indices have fallen, but only by 10% or so from early year peaks. European equity indices have fallen by similar amounts of 10% or so. The Dow Jones Index is down about 850 pts from it's peak of 14K or just over 6%. That's 1/3 of the 98 equity decline that got the Fed into action a decade ago. And I am unaware of any Russian style sovereign debt defaults this go round.
If the current crisis is, judging by equity indices, orders of magnitude less severe, than what's the deal? What makes this a crisis?
The wrath of the Derivative's God
The most glaring difference between the 98 crisis and the current period is the growth of derivatives in general and credit derivatives in particular.
According to the OCC, the total notional value of derivatives for US banks in Q2 1998 was US$28T, of which interest rate derivatives totalled some US$20T and credit derivatives totalled some US$129B.
As of Q1 2007, the total notional value of derivatives for US banks was US$144T (a quadrupling over 10 years), of which interest rate derivatives totalled some US$119T (6 times the 98 amount) and credit derivatives totalled some US$10T (an almost 10 fold increase over the decade).
Another difference is the concentration of exposure into fewer banks. In 1998 derivatives exposure was spread across 8 big banks, while currently (again according to the OCC report) Commercial bank derivatives activity is heavily concentrated in the three largest dealers, which hold 89%of all contracts.
Back when I was trying to explain derivatives to Asian Central Bankers I used to tell them to think of derivatives as leverage- more derivatives equals more leverage. So in the 10 years since that last crisis, leverage has increased dramatically AND been concentrated into fewer and fewer hands.
Increased leverage means that it takes less unanticipated price action to create a crisis. A decade ago, equity indices could fall 20-30% before Central Bankers warned of a crisis while now a mere 10% move evokes the same warning.
Increased concentration of exposure into fewer and fewer institutions also decreases the amount of unanticipated move necessary before alarm bells ring. A tremendous amount of leverage concentrated into three institutions, which, as an aside, was just the type of situation Glass-Steagle and the other post depression financial regulations were trying to avoid, is a recipe for disaster- when one goes the market goes with it. Good thing those regulations were repealed.
In other words, increased leverage and concentration makes our financial institutions much less resilient to unanticipated shocks. As any leveraged futures trader who has been burned can tell you, the more leverage you use, the better speculator you need to be, or as we will discover, the better placed your friends need to be
What if Robert Rubin had founded LTCM?
I see more than coincidence in the recent actions of Central Banks and the news that Goldman Sachs' Global Equity Opportunities Fund just got a US$3B shot in the arm. Financial industry consolidation and the seeming revolving door between high level Wall St. executive positions (most notably Goldman Sachs, from whence came Hank Paulson) and the US Treasury should set collusion alarm bells ringing.
I wonder if the LTCM fiasco would have been resolved differently if one of their founders had taken the job as US Treasury Secretary. In the event, LTCM was liquidated, while Goldman Sachs' Global Equity Opportunities Fund will likely continue operations.
Carlo Ponzi, Fed Chairman
Most press stories explain the recent liquidity additions as a concerted attempt by the world’s central banks to restore confidence in the global financial system.
How does the financial industry lose confidence? by losing other people's money.
How can the financial industry maintain confidence? Let's go back to the early 20th century and inquire as to the actions of one Carlo Ponzi (thus the eponymous scheme) whose Securities Exchange Company advertised a 50% return in 90 days:
as news of the audit hit the street, the whiff of insecurity began to work its magic, creating a run on the Securities Exchange Company. But it seemed as though Carlo had an inexhaustible supply of cash: all of the investors who that lined up to withdraw their deposit each received their cash plus 50 percent.
And as the audit progressed, the auditors were stumped. The company kept meticulous records of all deposits and withdrawals. No one was being cheated, and no law had been broken. The only thing that they couldn't find was how the company made its fantastic profits. When asked, Carlo indignantly replied that that was a company secret.
Carlo Ponzi maintained confidence in his scam by ensuring that depositors were able to withdraw funds. That is, so long as he was able to survive the run on his bank, i.e. seemed to have an inexhaustible supply of cash, he could stay in business.
I assume that one use of Central Banker liquidity will be to ensure that Hedge Fund investors get their money back, i.e. that redemptions will be allowed. Nothing kills confidence more than finding out you can't get your money back, just ask California or Florida real estate flippers.
I guess it's good to be a high net worth individual these days, as opposed to an average Joe who took Greenspan's advice and took out an adjustable rate mortgage a few years back, eh.
But Carlo Ponzi did not have the deep pockets that our financiers have. Let's go back to the early 20th Century again:
The feds responded to this [ being told that investment methods were a secret- exactly what Hedge Funds say today] by placing a restraining order on the company, prohibiting it from accepting any further deposits while the investigation was proceeding. Carlo, glimpsing impending doom, hired the well-respected William McMaster to handle public relations until the investigation blew over. This move didn't turn out so well for our friend Carlo. Shortly after being hired, McMaster issued a statement to the press that the Securities Exchange Company had never--not even once--conducted a single foreign financial transaction.
Again, investors created a run on Carlo's company, and again, Carlo appeared to weather the storm, even serving coffee and donuts to depositors as they waited. But eventually the toll of the investigation and revelations took their course, and more and more investors showed up to withdraw their money, until eventually the money ran out. On August 9, 1920, Carlo's bank issued a statement that it could no longer honor checks from the Securities Exchange Company. Two days later, Carlo's criminal record was released to the public.
Back when Carlo was being forced to repay investors, a dollar was worth something- about 1/20th of an ounce of Gold. Carlo couldn't just print Ponzi money and give it out.
Now the banks can, in essence, do just that. When they are faced with the modern form of a bank run- hedge fund redemptions, Central Banks can just inject liquidity into the system (Ponzi money) and the problem is solved, sort of.
What price confidence
The effect of bail-outs like these, as opposed to the liquidation forced on poor Carlo Ponzi, is a devaluation of the currency, inflation.
Back in 1998 much of the inflation was masked by the dire straits faced by Russia and other emerging economies. Their need to acquire US$s to repay debt and build up sufficient reserves to avoid a repeat of the crisis acted to drain much of the added liquidity from the system.
The situation now could not be more different. If the problem of 98 was a lack of US$ reserves among emerging market nations, the problem now is too much. Moreover the people short of $s are not emerging market nations, but western hedge fund managers and those who supplied them the leverage, a few western banks.
Aside from location, another difference between the emerging market nations that were short US$s a decade ago and the hedge funds and money center banks short US$s now is productive capacity. Emerging market nations could (and did, the swing from emerging market current account deficits in 97-87 to surpluses now has been well documented) produce goods to earn $s and repay their debts, the hedge funds and banks will not.
In other words, the increased liquidity a decade ago tended to finance, inter alia, increased productive capacity. I doubt the same will follow this time round.
So, what price confidence? Inflation, and lots of it. Financial industry consolidation guarantees that liquidations will be few and far between and bail-outs, more and more common.
The limits of Arbitrage
Who knows, we might even reach the point where investors realize that an ounce of Gold in hand might just be worth quite a bit more than US$666 of Ponzi money invested in a hedge fund.
The reason being, one cannot guarantee, in a real sense, investments that are too good to be true, particularly investments that don't finance productive capacity. There's only so much real money to be made arbitraging, which is what a fund that doesn't invest in productive capacity does. Parasites that outgrow their hosts, kill them, and then die themselves.
When the universe of arbitragers was small, real positive returns were possible, but as that universe has grown at much faster rates than that of productive capacity, real returns are getting harder and harder to come by. The only thing Central Bankers can guarantee is currency, not value- a lesson which will become more and more obvious as the next few months pass.
Wednesday, August 08, 2007
Apocalypse Now for the US$
The truth happens to an idea. William James
"Apocalypse" is but one of many words whose meaning in the minds of many, due to oft repeated misuse, has drifted from its origins.
A literal translation of the Greek is "lifting of the veil" or simply, the revealing. It does not refer to the end of life or the end of the world, but rather to the end of deception and the unveiling of the truth- noticing and discussing the once ignored elephant in the room...perhaps those barbarians will over-run Rome, perhaps that volcano will erupt...you get the picture.
Of course, if you have bet on a deception being true, or at least being able to be maintained and milked, then apocalyptic times when deceptions are revealed as such might well seem like the end of the world.
How fittingly ironic (for those with a hint of schandefreude) to think that the many fundamentalist sects who have been praying for the "end of the world" as prophesied in the Book of Revelations, i.e. The Apocalypse, in hopes of being swept out of the mess of the earth, leaving the rest of us behind, may well have their apocalypse, the truth- that we are all going to have to make due with this little planet.
Who knew ancient Greek would come in handy?
But it is not with the broader sense of the apocalypse in mind that I write, rather it is with a narrower sense of an economic apocalypse in mind that I write today - an unveiling of the inherent risks of the current dollar based international exchange rate system.
In today's UK Telegraph, Ambrose Evans-Pritchard writes, China threatens 'nuclear option' of dollar sales.
Uh-oh.
And what is the 'nuclear option'?
Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.
"Apocalypse" is but one of many words whose meaning in the minds of many, due to oft repeated misuse, has drifted from its origins.
A literal translation of the Greek is "lifting of the veil" or simply, the revealing. It does not refer to the end of life or the end of the world, but rather to the end of deception and the unveiling of the truth- noticing and discussing the once ignored elephant in the room...perhaps those barbarians will over-run Rome, perhaps that volcano will erupt...you get the picture.
Of course, if you have bet on a deception being true, or at least being able to be maintained and milked, then apocalyptic times when deceptions are revealed as such might well seem like the end of the world.
How fittingly ironic (for those with a hint of schandefreude) to think that the many fundamentalist sects who have been praying for the "end of the world" as prophesied in the Book of Revelations, i.e. The Apocalypse, in hopes of being swept out of the mess of the earth, leaving the rest of us behind, may well have their apocalypse, the truth- that we are all going to have to make due with this little planet.
Who knew ancient Greek would come in handy?
But it is not with the broader sense of the apocalypse in mind that I write, rather it is with a narrower sense of an economic apocalypse in mind that I write today - an unveiling of the inherent risks of the current dollar based international exchange rate system.
In today's UK Telegraph, Ambrose Evans-Pritchard writes, China threatens 'nuclear option' of dollar sales.
Uh-oh.
And what is the 'nuclear option'?
Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.
Shifts in Chinese policy are often announced through key think tanks and academies.
Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.
Remember the Frank Capra movie, Mr. Smith goes to Washington? I think we're seeing the first act of Mr. De Gaulle goes to Beijing.
Former Federal Reserve Chairman Alan Greenspan recently tried to assuage fears of Chinese sales (and we know how prescient Mr. "variable rate mortgages are a great deal" is) of US bonds because, China would not have anyone to sell the securities to.
When the London Gold Pool collapsed in 1968 and the US began quiet negotiations with European $ holders to stop them from trying to convert their $s to gold, De Gaulle, in a sense, didn't have any one to sell his US$s to either...but that didn't keep their value up.
The reason being that prices aren't set in the market, but in market participants' minds. The market is merely a medium in which such changes become manifest. To wit, as many a suburban home owner is becoming painfully aware, your house doesn't need to be "on the market" for its value to fall. Nor does China have to sell bonds for people to realize that they aren't worth as much as previously thought.
When I think of the opening quote from William James, the truth happens to an idea, I think of an apocalypse. The quality of "truth" or "reality", if you prefer, is applied, in the minds of many, to an idea to which it previously was not. Even though the idea may have always been, from some perspective, "true" it is only when "truth" is applied to the idea in each individual mind that change occurs.
And so, I believe, it will.
When De Gaulle asked for his Gold in the late 60s he pointed to the elephant in the room of the Bretton Woods system- that US$s are worth only what you can get in trade for them. Even though Nixon denied his request Pandora's Box had been opened and inflation accelerated out of control.
China, in my view, just pointed to the elephant in the room again- the value of the US$ is by statute "elastic" and only retains value to extinguish US$ based debts, public and private. It has no guaranteed exchange value with anything real. This is printed on every $ bill, of every denomination, which is why these $ apocalypses are so nasty. Once you get it, you do a Homer Simpson.... Doh!
Let the mad rush for value in the great game of financial musical chairs commence.
ps These things take time...first the apocalypse then the period of upset (or tribulation in the vernacular) then action...but once the apocalypse happens the action becomes inevitable
Tuesday, August 07, 2007
Freedom's March - My chat with President Bush
The trend is clear: In the Middle East and throughout the world, freedom is on the march. President Bush
I agree with President Bush, freedom is on the march. Of course, freedom, in a sense, has been on the march for many centuries - freedom, that is, from nonsense, from deceptions, intentional and inadvertent, and from modes of behavior both individual and cultural that no longer work.
Of course, my sense of freedom may not be shared by the President. At least, according to this article, he has been thinking about it- freedom, that is, and history, and how the world works (better late than never):
Ahem.
Mr. President, I'm going to begin with a crucial question; Do the times make the individual, or do great individuals make the times?
Yes, I assumed you believed the latter. Let me try, using some examples from history, to persuade you to the former view.
Let's go back to the latter half of the 18th Century when freedom's march was accelerating through the western world and examine the paths of two nations; France, and the United States (a title, by the way, which more appropriately captures the sensibilities of freedom than the more monolithic "America") and two individuals, George Washington and Napoleon Bonaparte.
Sir, as you are a lover of freedom, a love I share, you most likely look back at wonder at the latter half of the 18th Century. In 1750, Monarchical systems of government, with greater or lesser degrees of absolutism, were the norm, and had been for many centuries. A mere 50 years later;
There were many principal actors on these stages during this momentous era. I'm going to argue that those actors who pursued the cause of freedom found the wind filling their sails, so to write, until, and this is the important part, they stopped pursuing that cause- conflating their own desires with grander ideas.
In other words, believing that great individuals made the times, or as the thought has been framed, created their own reality, was usually the downfall of those great individuals.
As you have mentioned him lately, I'll begin with our first President, George Washington, to whom you refer as No. 1.
The great virtue of George Washington was not his military mind; he lost more battles than he won and was not an active participant in the two significant Colonial victories at Saratoga and Yorktown; but his overriding sense of the importance of stepping down from power, which he did twice- first after winning the war as Commander in Chief, and secondly after serving two terms as President.
While Washington was not immune to the temptations of power, at pivotal moments, the manifestation of his republican sensibilities saved these United States from the convulsions experienced by France.
Sadly, for the French, instead of George Washington, they had Marat, Robespierre, and Napoleon leading them to freedom- three men who found the ring of power too seductive to give up voluntarily.
And yet, while they were ending the tyranny of others they found the winds of freedom filling their sails.
While Marat, Robespierre and the Jacobins were destroying the advantages of the old aristocracy, the people were, in the main behind them, and fortune favored them. But, as they consolidated power in their persons, fortune turned against them.
How odd to think that Marat would survive agitation against the absolute power of the House of Bourbon only to be stabbed in his bath tub by Charlotte Corday- a scene which became a foil for one of the chief propagandists of the time, Jacques-Louis David, in his Death of Marat.
That's right, sir, the Jacobins had their own version of Fox News. Jacques-Louis David painted, you decided. As a noteworthy aside, David narrowly escaped the guillotine when the reign of terror ended and the blame therefor was being apportioned.
Napoleon, I believe, offers a wonderful counter-point to George Washington, and is a great example of how the winds of freedom can fill one's sails one moment, and then blow against you the next.
Napoleon carried the spirit of the enlightenment throughout continental Europe, destroying the entrenched aristocracy so effectively that they never recovered. Fortune smiled on him as he stormed through Italy and Austria and weakened Ottoman control of Egypt, although he failed to wrest control of the Mediterranean from the British.
His triumphs in the Continent were also immortalized by David in the famous Napoleon Crossing the Alps.
After a coup, he seized control of France, having himself named First Consul for life. Many of the reforms he instituted in the early part of his reign still remain, and for a moment, after signing the Treaty of Amiens, Europe was almost ready for peace.
History might view Napoleon as a promoter of Freedom instead of merely a great General who overstepped if he had chosen differently, but, in the event, ambition got the better of him and he declared himself Emperor- a declaration that evoked powerful forces against him.
People, it seems, love liberators, but hate dictators and it is possible for one person to be a liberator one month and a dictator the next.
The winds of freedom which had aided his rise did not fill his sails against the Haitians, the loss of which likely led him to sell French holdings in North America to the United States for a pittance. While he managed to retain control of Continental Europe for a decade, he was never able to gain control of the seas.
In 1812 Napoleon invaded Russia. He entered Moscow hoping to be declared the new ruler only to find the city deserted and soon burning. Perhaps Napoleon's drive to be Emperor in the mold of Augustus was not in accord with the spirit of freedom and victories which had seemed so easy a few years earlier became impossible. As the aura of invincibility left him, his opponents grew in number and boldness.
And the rest, as they say, is history.
Napoleon was exiled to Elba, escaped, and led a successful coup only to lose the final decisive battle at Waterloo. He was a prisoner the rest of his life.
The point I'm trying to make, sir, in comparing Washington to Napoleon is that if one wishes to be a great man on the world stage AND enjoy a full and free life, the path of Washington is much preferable to that of Napoleon. Washington manifested a deep understanding and appreciation of freedom, the rule of law, and the place of any individual within a political system espousing those ideals.
Napoleon did not.
Fortunately, for you, your part as actor on the world stage is not yet complete, there are choices still to be made.
Let me close with another anecdote from the life of No. 1.
It was summer of 1781, French Count Rochambeau had been trying for almost a year to convince George Washington to drop his sense of honor lost over his defeat in New York. Washington, according to his letters, was almost obsessed with getting New York back, striking a decisive blow against tyranny, so to write.
If No. 1 had "stayed the course" history might well be different. In the event, he dropped his honor, listened to reason and set sights on the South. Cornwallis' defeat at Yorktown which soon followed effectively ended the war.
Here's an excerpt from Ellis' His Excellency George Washington: In his diary entry for July 30 [1781], Washington confessed his concern about "my obstinacy in urging a measure [driving the British out of NY City] to which his [Rochambeau's] own judgment was oppos'd." Three days later he wrote Robert Morris to request delivery of thirty transport ships in Philadelphia as soon as possible, observing that New York had been "laid aside" and that "Virginia seems to be the next object."
Food for thought.
I agree with President Bush, freedom is on the march. Of course, freedom, in a sense, has been on the march for many centuries - freedom, that is, from nonsense, from deceptions, intentional and inadvertent, and from modes of behavior both individual and cultural that no longer work.
Of course, my sense of freedom may not be shared by the President. At least, according to this article, he has been thinking about it- freedom, that is, and history, and how the world works (better late than never):
At the nadir of his presidency, George W. Bush is looking for answers. One at a time or in small groups, he summons leading authors, historians, philosophers and theologians to the White House to join him in the search.
Over sodas and sparkling water, he asks his questions: What is the nature of good and evil in the post-Sept. 11 world? What lessons does history have for a president facing the turmoil I'm facing? How will history judge what we've done? Why does the rest of the world seem to hate America? Or is it just me they hate?
You might be surprised to learn that your author, The Dude, was NOT invited to the White House to shoot the breeze with the Prez (then again, if you know me you wouldn't be surprised at all, lol).
Ahem.
Mr. President, I'm going to begin with a crucial question; Do the times make the individual, or do great individuals make the times?
Yes, I assumed you believed the latter. Let me try, using some examples from history, to persuade you to the former view.
Let's go back to the latter half of the 18th Century when freedom's march was accelerating through the western world and examine the paths of two nations; France, and the United States (a title, by the way, which more appropriately captures the sensibilities of freedom than the more monolithic "America") and two individuals, George Washington and Napoleon Bonaparte.
Sir, as you are a lover of freedom, a love I share, you most likely look back at wonder at the latter half of the 18th Century. In 1750, Monarchical systems of government, with greater or lesser degrees of absolutism, were the norm, and had been for many centuries. A mere 50 years later;
- the United States had declared its freedom from the crown of King George- a declaration which was, in a sense, an external manifestation of Britain's domestic drive for freedom from monarchy which began with the Magna Carta
- the absolute monarchy of the House of Bourbon in France was destroyed through revolution
There were many principal actors on these stages during this momentous era. I'm going to argue that those actors who pursued the cause of freedom found the wind filling their sails, so to write, until, and this is the important part, they stopped pursuing that cause- conflating their own desires with grander ideas.
In other words, believing that great individuals made the times, or as the thought has been framed, created their own reality, was usually the downfall of those great individuals.
As you have mentioned him lately, I'll begin with our first President, George Washington, to whom you refer as No. 1.
The great virtue of George Washington was not his military mind; he lost more battles than he won and was not an active participant in the two significant Colonial victories at Saratoga and Yorktown; but his overriding sense of the importance of stepping down from power, which he did twice- first after winning the war as Commander in Chief, and secondly after serving two terms as President.
While Washington was not immune to the temptations of power, at pivotal moments, the manifestation of his republican sensibilities saved these United States from the convulsions experienced by France.
Sadly, for the French, instead of George Washington, they had Marat, Robespierre, and Napoleon leading them to freedom- three men who found the ring of power too seductive to give up voluntarily.
And yet, while they were ending the tyranny of others they found the winds of freedom filling their sails.
While Marat, Robespierre and the Jacobins were destroying the advantages of the old aristocracy, the people were, in the main behind them, and fortune favored them. But, as they consolidated power in their persons, fortune turned against them.
How odd to think that Marat would survive agitation against the absolute power of the House of Bourbon only to be stabbed in his bath tub by Charlotte Corday- a scene which became a foil for one of the chief propagandists of the time, Jacques-Louis David, in his Death of Marat.
That's right, sir, the Jacobins had their own version of Fox News. Jacques-Louis David painted, you decided. As a noteworthy aside, David narrowly escaped the guillotine when the reign of terror ended and the blame therefor was being apportioned.
Napoleon, I believe, offers a wonderful counter-point to George Washington, and is a great example of how the winds of freedom can fill one's sails one moment, and then blow against you the next.
Napoleon carried the spirit of the enlightenment throughout continental Europe, destroying the entrenched aristocracy so effectively that they never recovered. Fortune smiled on him as he stormed through Italy and Austria and weakened Ottoman control of Egypt, although he failed to wrest control of the Mediterranean from the British.
His triumphs in the Continent were also immortalized by David in the famous Napoleon Crossing the Alps.
After a coup, he seized control of France, having himself named First Consul for life. Many of the reforms he instituted in the early part of his reign still remain, and for a moment, after signing the Treaty of Amiens, Europe was almost ready for peace.
History might view Napoleon as a promoter of Freedom instead of merely a great General who overstepped if he had chosen differently, but, in the event, ambition got the better of him and he declared himself Emperor- a declaration that evoked powerful forces against him.
People, it seems, love liberators, but hate dictators and it is possible for one person to be a liberator one month and a dictator the next.
The winds of freedom which had aided his rise did not fill his sails against the Haitians, the loss of which likely led him to sell French holdings in North America to the United States for a pittance. While he managed to retain control of Continental Europe for a decade, he was never able to gain control of the seas.
In 1812 Napoleon invaded Russia. He entered Moscow hoping to be declared the new ruler only to find the city deserted and soon burning. Perhaps Napoleon's drive to be Emperor in the mold of Augustus was not in accord with the spirit of freedom and victories which had seemed so easy a few years earlier became impossible. As the aura of invincibility left him, his opponents grew in number and boldness.
And the rest, as they say, is history.
Napoleon was exiled to Elba, escaped, and led a successful coup only to lose the final decisive battle at Waterloo. He was a prisoner the rest of his life.
The point I'm trying to make, sir, in comparing Washington to Napoleon is that if one wishes to be a great man on the world stage AND enjoy a full and free life, the path of Washington is much preferable to that of Napoleon. Washington manifested a deep understanding and appreciation of freedom, the rule of law, and the place of any individual within a political system espousing those ideals.
Napoleon did not.
Fortunately, for you, your part as actor on the world stage is not yet complete, there are choices still to be made.
Let me close with another anecdote from the life of No. 1.
It was summer of 1781, French Count Rochambeau had been trying for almost a year to convince George Washington to drop his sense of honor lost over his defeat in New York. Washington, according to his letters, was almost obsessed with getting New York back, striking a decisive blow against tyranny, so to write.
If No. 1 had "stayed the course" history might well be different. In the event, he dropped his honor, listened to reason and set sights on the South. Cornwallis' defeat at Yorktown which soon followed effectively ended the war.
Here's an excerpt from Ellis' His Excellency George Washington: In his diary entry for July 30 [1781], Washington confessed his concern about "my obstinacy in urging a measure [driving the British out of NY City] to which his [Rochambeau's] own judgment was oppos'd." Three days later he wrote Robert Morris to request delivery of thirty transport ships in Philadelphia as soon as possible, observing that New York had been "laid aside" and that "Virginia seems to be the next object."
Food for thought.
Thursday, August 02, 2007
Whew! It's not terrorism II
The U.S. Department of Homeland Security in Washington said there was no indication of terrorism in the disaster. Six killed in Minneapolis road bridge collapse
Perhaps we ought to think about initiating a war against these pesky infrastructure gremlins who are, at least these days, far more lethal than al-Qaeda.
One interesting quote I found on the tragedy:
Perhaps we ought to think about initiating a war against these pesky infrastructure gremlins who are, at least these days, far more lethal than al-Qaeda.
One interesting quote I found on the tragedy:
Catherine Yankelevich tumbled into the Mississippi River. "Cars started flying and I was falling and saw the water," she said. She climbed out the driver's side window and swam to shore uninjured.
"It seemed like a movie, it was pretty scary," said Yankelevich. "I never expected anything like this to happen here."
Tuesday, July 31, 2007
Did ya' hear the one about the budget deficit?
When I was a little boy (when I was just a boy)
And the Devil would call my name (when I was just a boy)
I'd say "Now who do, (who-oo)
Who do you think you're fooling?" (when I was just a boy)
Paul Simon - Loves me like a rock
As a card carrying member of the "reality based" community I don't believe that one can transform a turd into a rose by calling it such. The only thing, in my view, which would flow from a successful (i.e. getting everyone to refer to turds as roses) propaganda effort is the loss of meaning of the word "rose."
Or as Shakespeare put it in Romeo and Juliet;
What's in a name? that which we call a rose
By any other name would smell as sweet;
Equally, a turd called a rose, would smell as nasty.
Yet, it seems government officials don't read much Shakespeare, (or notice the different smells which roses and turds emit) for they think, by having the word "inflation" refer to other things than it used, different effects will flow from rising prices, or by having the phrase "budget deficit" refer to different things, different effects will flow from its rise.
I'll bet that any time you find yourself listening to a Republican vs. Democratic pundits' debate (boy do I miss SNL's Point-CounterPoint....Jane you...) on the deficit you'll hear two whoppers; 1) that Bush inherited a large surplus from Clinton 2) that Bush is halving the deficit this year.
Let's see if the left mouth knows what the right hand has been counting, to stretch a cliche, and go to the US Treasury's Debt to the Penny site.
*Debt and deficit as of Jul 27, 2007
As you can see, there was no surplus during the Clinton years, every fiscal year ended in deficit (albeit a quite small one in 2000) and there is no way that the deficit in 2007 will be half what it was in 2004, even if he says it is so.
It strikes me as quite comical to read this in the FT but a few weeks ago: Issuing a mid-year update of the budget outlook, the White House estimated that the deficit would drop to $205bn (€149bn, £101bn) by the end of September, lower than the previous projection of $244bn made in February and then to see Henry Paulson going to Congress hat in hand this week to ask that the Debt limit be raised again, especially when one considers that it was last raised in Mar 2006 by US$781B.
Obviously deficits ain't what they used to be. The FT can report a "deficit" of $205B expected by the end of the fiscal year in September, meanwhile the Treasury site tells us that the change in the debt over the year (what used to be a deficit) is already $412B.
By the way, don't step in the dog rose over there.
And the Devil would call my name (when I was just a boy)
I'd say "Now who do, (who-oo)
Who do you think you're fooling?" (when I was just a boy)
Paul Simon - Loves me like a rock
As a card carrying member of the "reality based" community I don't believe that one can transform a turd into a rose by calling it such. The only thing, in my view, which would flow from a successful (i.e. getting everyone to refer to turds as roses) propaganda effort is the loss of meaning of the word "rose."
Or as Shakespeare put it in Romeo and Juliet;
What's in a name? that which we call a rose
By any other name would smell as sweet;
Equally, a turd called a rose, would smell as nasty.
Yet, it seems government officials don't read much Shakespeare, (or notice the different smells which roses and turds emit) for they think, by having the word "inflation" refer to other things than it used, different effects will flow from rising prices, or by having the phrase "budget deficit" refer to different things, different effects will flow from its rise.
I'll bet that any time you find yourself listening to a Republican vs. Democratic pundits' debate (boy do I miss SNL's Point-CounterPoint....Jane you...) on the deficit you'll hear two whoppers; 1) that Bush inherited a large surplus from Clinton 2) that Bush is halving the deficit this year.
Let's see if the left mouth knows what the right hand has been counting, to stretch a cliche, and go to the US Treasury's Debt to the Penny site.
| Year | Debt | Deficit |
| 1996 | 5224 | |
| 1997 | 5413 | 189 |
| 1998 | 5526 | 113 |
| 1999 | 5656 | 130 |
| 2000 | 5674 | 18 |
| 2001 | 5807 | 133 |
| 2002 | 6228 | 421 |
| 2003 | 6783 | 555 |
| 2004 | 7379 | 596 |
| 2005 | 7933 | 554 |
| 2006 | 8507 | 574 |
| 2007 | *8919 | *412 |
As you can see, there was no surplus during the Clinton years, every fiscal year ended in deficit (albeit a quite small one in 2000) and there is no way that the deficit in 2007 will be half what it was in 2004, even if he says it is so.
It strikes me as quite comical to read this in the FT but a few weeks ago: Issuing a mid-year update of the budget outlook, the White House estimated that the deficit would drop to $205bn (€149bn, £101bn) by the end of September, lower than the previous projection of $244bn made in February and then to see Henry Paulson going to Congress hat in hand this week to ask that the Debt limit be raised again, especially when one considers that it was last raised in Mar 2006 by US$781B.
Obviously deficits ain't what they used to be. The FT can report a "deficit" of $205B expected by the end of the fiscal year in September, meanwhile the Treasury site tells us that the change in the debt over the year (what used to be a deficit) is already $412B.
By the way, don't step in the dog rose over there.
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