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On Greece and the Market Psychology of Bailouts

September 12, 2011 Leave a comment

“You know the first time someone plays poker they are afraid to bluff. The second time they decide bluffing is great. By the third time they are so confused about who is bluffing and when that they might as well just hand their chips to the best player at the table and save everyone the time and effort or taking the chips.  I think the central bankers and governments have gotten so confused they are bluffing with a few low off suit cards and don’t even realize the cards are face up.”

More here at Zero Hedge.

Categories: Economics, Institutions, Money

Greek Bond Death Watch: Current Time is Oh Shit O’Clock

September 12, 2011 Leave a comment

http://www.bloomberg.com/apps/quote?ticker=GGGB1YR:IND

The Good News today: The Chinese are signalling interest in buying Italian bonds (here is the best piece on the news). While Greece is probably too far gone, shoring up Italy and (hopefully) Spain should limit most of the spillover to world markets.

Categories: Economics, Money

What I’ve Been Wrapping My Mind Around

August 26, 2011 1 comment

Neo-Chartalism, or Modern Monetary Theory

For the uninitiated, the best primer I can find is here.

I love economics because a 90 year old theory can suddenly become “new” and “hip”. Dismal science indeed.

Essentially, MMT is the ramification of the abandonment of the gold standard. It studies the issuance of fiat currency with floating exchange rates (meaning the market sets the exchange rate, rather than the government… i.e. the Euro floats, the Renminbi does not).

Wikipedia:

Because the government can issue its own currency at will, MMT maintains that the level of taxation relative to government spending is in reality a policy tool that regulates inflation and unemployment, and not a means of funding the government’s activities per se.

On the surface, this might seem to go against all common sense and imply that running federal budget deficits doesn’t matter, but that is not the case. MMT merely implies that a government that issues its own currency cannot go bankrupt in the same sense that individuals or firms go bankrupt because it can print as much money as it needs to pay that debt. So while not constrained by debt or interest rates, governments are constrained by the specter of hyperinflation. Once a currency becomes hyperinflated, the government that is issuing the currency loses legitimacy and the business community will install a new government. The acknowledgement of the role of the business community in legitimizing government makes MMT (or rather, the Functional Finance Theory that is derived from MMT) all the more interesting to me.

From the aforementioned primer:

Functional Finance is an economic theory based on the following principles:

  • The government is an entity created by the people and for the people. It exists to further the prosperity of the private sector – NOT to benefit at its expense. If this entity is allowed to exist for its own benefit or becomes corrupted by a concentration of power, it will become susceptible to dissolution via the populace’s rejection of that government.
  • Governments should be actively involved in regulating and helping build the infrastructure within which the private sector can generate economic growth. The economy is a complex dynamical system with irrational participants. It cannot be expected to regulate itself or behave rationally at all times. Therefore, some level of government intervention and involvement is not only beneficial, but necessary. But ultimately, it must be the private sector that is the driver of economic growth. While government can aid in this process it cannot be expected to be the primary driver of innovation, productivity and growth.
  • Money is always created by the state and must therefore be regulated by the state; however, ultimately the private sector must accept this legal tender as the currency unit. Therefore, the private and public sectors should best be thought of as being in partnership with one another and not opposing forces. Government by the people and for the people is not the antagonist in this story, but rather an entity that should be best utilized to maximize private sector prosperity.
  • Government deficit spending and tax collection should be maintained at a rate that does not impose financial hardship on the private sector. Because the Federal government is not a state or household it should not manage its balance sheet for its own benefit. Rather, taxes and government spending should be managed in a way that most benefits the private sector and encourages private sector prosperity, productivity, innovation and growth.
I haven’t been this excited by monetary economics since I first discovered the Austrian school in 2008. For the last week or so I’ve been combing through the blogs of L. Randall Wray and Warren Mosler. I know that a lot of my economic ideology is schizophrenic, but MMT seems to bring it all together for me.
Categories: Economics, Money

If you read one thing about political economy all year, read this interview with Michael Hudson

Stumbled across this interview with one of my favorite economists, Michael Hudson. He is not from Harvard or MIT or Chicago, so he doesn’t get as much attention as the Paul Krugman’s of the world, but he punches well above his weight when it comes to his abilities to articulate what is happening within the political economy of the world.

The interview is long but you should read the entire thing. It is honestly the best piece I have read on political economy in at least 2 years. The tl;dr version is that Obama long ago sold out the Democratic constituency to Wall Street, the deficit debate is all political theater, the bailouts vested the power of Wall Street in the same way that the railroad land giveaways vested the power of the robber barons, Greece will default and get kicked out of the EU, the financial estate is essentially at war with the public… it’s all stuff you’ve probably heard before, but Hudson does an exceptional job of tying it all together.

I feel like most people are still asking “How did it all happen?”, when what we really need to do is ask “What is happening right now?”. The vast majority of people believe the propaganda pushed out by the media. No one reads or listens with skepticism and objectivity anymore, and I don’t mean to rant, but maybe they never did. Is there just too much noise? How can you explain the entire political economy without debasing your argument by making it sound like a wild conspiracy?

I think this is the point that a lot of mainstream middle Americans don’t get: it isn’t that there is a group of Illuminati who sit in a lair somewhere and have discussions about how well their plan is going, it is that there are outsiders and insiders: the insiders understand what is happening and do their best to work within the system and profit from it, while the outsiders, some of whom know what is happening, are the majority who get screwed.

The only thing we can really do about it is stop caring about money; stop caring about year-over-year GDP growth; most of all, stop believing what you are told. You are not “informed” because you watch both MSNBC and Fox News, you are not one of the people who “get it” because you vote Democrat, read the Huffington Post, and have a Noam Chomsky book or two sitting on your bookcase that you probably never read. I’m stoked that you are at least a social progressive, and I am glad that you read more books than the Bible, but do yourself a favor and divorce your conceptions from the pop cultural memeosphere. We all have an emotional and cognitive investment in the world as we see it, but we are often unaware of exactly how and when these investments were made… and we sure as hell don’t check on them with half the alacrity we reserve for our financial investments.

Health Care: It’s about delivering efficient outcomes

Megan McArdle is “freaking out a little bit”. She is really worried about the implications of the fact that Pharma isn’t spending as much money on R&D as it did the year before.

Here is the meat and potatoes of her argument:

While some drugs are simply an added expense (think chemotherapy prolonging the lives of people who would otherwise have died sooner), many of the real blockbusters substitute for labor-intensive treatment.  Statins instead of cardiac catheterizations or coronary bypasses.  Avandia instead of amputations.  Hydrochlorothiazide instead of nursing home care for your massive stroke.

Her analysis is logically correct, but I think she is missing the bigger picture. Pharmaceuticals are a tool to get a job done, as are “labor-intensive treatments”, and also preventive medicine, and holistic medicine… the point I am trying to make is that there are a number of substitutes for current medical treatments that do not involve pharmacology, unfortunately none of these other substitutes are as profitable as drugs (people like drugs because they don’t require much personal effort to be effective, as opposed to most preventive medicine, and usually when people are at the point where they need Lipitor, the spectre of death is hanging over their heads to remind them that they better take their Lipitor… he wasn’t there before to remind them to take their fish oil or order a salad instead of french fries). Each tool has a certain level of cost-to-benefit efficiency when it comes to delivering healthcare outcomes, and after decades of pharmaceuticals being the best “bang for your buck”, we have long since been at a point where our marginal American healthcare dollars are better spent on other things.

The fact that returns to pharmaceutical R&D have been falling isn’t surprising to me. Pharmacology has been one of the “low hanging fruits” described by Tyler Cowen in his “Great Stagnation” hypothesis, and within this context it would make sense that we might have reached a technological bottleneck that is preventing us from creating a blockbuster drug that will do for cancer or Alzheimer’s what statins did for arteriosclerosis. From an economic standpoint, generally all returns are diminishing over time. As competition increases and technological process forces changes to the ideal business model, firms are simply unable to do the same thing for decades upon decades and expect it to remain at the same level of profitability.

Where I think McArdle completely misses the point is in her assertions that reduced pharmaceutical R&D spending may lead to a situation where “health care expenses might actually rise faster than we expect”. Assuming she is not making the error of confusing costs with outcomes, and that she is referring to constant outcomes

Health care is not so much a consumable good as it is an outcome… not an end in and of itself, but instead a means towards longevity and quality of life. Today’s standard of whatever would constitute “world class healthcare” will assuredly be less expensive in the future than it will today. Whatever new discoveries or technologies that will improve healthcare outcomes above today’s benchmark will assuredly cost more, and that is because people will literally be paying for extra years to be added on to their lives or for those last years to be more peaceful and comfortable. It is these newer longevity and quality of life technologies that are the primary cost drivers (of course, that is to say nothing of the price distortions caused by government interference in the marketplace and cartelization/misregulation within the field of medical service providers… or of the irrational components of society’s demand, which are exacerbated by the Phrma complex and its army of marketers and lobbyists).

This distinction between costs and outcomes is very important to make, because it is a misunderstanding of outcomes that has driven medical costs as high as they are. Life expectancy is rising everyday, as is quality of life for the elderly, so you compare tomorrow’s costs with today’s costs because the outcomes are going to be different. Doctors (or at least the good ones) tell us to take preventive measures, such as exercising and eating right, because they are by far the most cost-efficient ways to deliver optimal medical outcomes (an example of an outcome would be: still being able to enjoy X quality of life level at the age of Y). Someone who doesn’t want to exercise or watch their diet can still live to be just as old as someone who does take these preventive measures, but they will most likely be taking thousands of dollars worth of drugs, and have had who-knows-how-many procedures, and even then, it is doubtful that their quality of life would objectively be at the same level as Mr. or Mrs. Preventive Medicine.

McArdle attempts to sequester the most common liberal sentiments into a neat opening paragraph:

Worried about me-too drugs?  The medicalization of human variability in order to medicate them into compliance and/or sell them quack cures of dubious value?  Ever-rising prices for brand name drugs pushing seniors into penury?

Well, you can breathe a (slight) sigh of relief.  For the first time ever last year, the global drug industry cut its R&D spending.  The trend is expected to continue, at least in the near term.

If you’ll excuse me, the rest of us will be over here in the corner, freaking out a little bit.

I actually am worried about all those things, except for the last one: seniors aren’t being pushed into penuary… they are just spending more money to squeeze every last bit they can from life. Today they have the option of taking expensive drugs and doing expensive treatments and procedures that weren’t even around 10 years ago. Having that option is a benefit, not a cost.

McArdle’s worry is unfounded unless you own pharmaceutical stocks or are skeptical of our society’s ability to recognize the efficacy of the many alternatives to pharmacology. I will give her the benefit of the doubt and assume McArdle is more firmly planted into the latter camp, although I betcha a 90-day supply of generic diazepam that she also relates with the former. I also suppose that we all, as taxpayers, have stake in this game since the government is the biggest buyer of healthcare, but this should be more reason for us to want to explore the more progressive modalities of medical treatment as individuals. My biggest fear is that someone will draw the conclusion that we should be subsidizing pharmaceutical R&D (maybe we do already? I wish we wouldn’t).

We need a way to measure the efficiency of every marginal dollar spent on health care, measured in terms of outcome. People have a complete disconnect from this concept; part of this is because of capitalism, and part of this is because of human nature. When it comes to life and death situations, we hardly ever do an actual cost-benefit analysis to see if it is worth it to give Grandma another round of chemotherapy so that she can see her next birthday… maybe the money would have been better spent sending Grandma on a trip to the place she always wanted to go, but was never able to: increasing the quality life side of the outcome equation rather than the life expectancy side. Maybe we need to reform our capitalist culture so that we don’t put such a high value on excess or quantification. Maybe it is a good thing that the drug companies aren’t spending as much money making new drugs for us to take, it might force us as a society to move away from pharmacology and towards other modalities of medical care that are more cost-efficient and, perhaps at our current position on the tech curve, more efficient at delivering the outcomes we really want.

Now BitCoins are being stolen

http://arstechnica.com/tech-policy/news/2011/06/bitcoin-the-decentralized-virtual-currencyrisky-currency-500000-bitcoin-heist-raises-questions.ars

Is this a problem intrinsic to computer technology? Someone can design the most sophisticated or elegant system, but all it takes is one hacker to bring it crashing down. And with a decentralized P2P network like bitcoin, you have potentially millions of people trying to game the system, and absolutely no one who is getting paid to keep watch. Look at all the problem’s that Sony is having with its online networks right now, and they have a dedicated staff of professionals and ex-hackers on watch to keep their system secure.

Institutions are never formed within a vacuum, and the Darwinian processes by which they survive necessitates a security apparatus if any degree of longevity and functionality is to be achieved.

Bitcoin

May 30, 2011 2 comments

Today’s lesson: Money is only worth something because someone with a gun says it is worth something.

If you don’t know what Bitcoin is, this is as good a place to start as any other.

The only reason Bitcoin is worth anything is because some nice/crazy/kooky/internet people decided it would be fun to buy some. It simultaneously riding the crescendo of two large memes:

1) Bankers/The Man is evil.

2) The Internet will save the world.

Now that people have bought in, the bubble has begun. The meme of Bitcoin is spreading, more misinformed people are feeding the flames by buying Bitcoins, and the price for them is doubling every couple of weeks/months depending upon whom you ask.

Classic asset bubble: people are buying something they think is valuable. It is not. The people who devised the plan in the first place, who own the valueless asset which they bought at a fair (basically zero) price, will ride the bubble up and cash out (if they are smart). The losers will end up holding the worthless asset, which in this case hardly even meets the definition of an economic asset: something that is valuable.

The stimulus for this post:  This guy is supposedly putting all his savings into Bitcoin.  These are the people whose musings and “advice” one should ignore at all costs. Not only is putting your entire life savings into a single asset incredibly risky, the volatility of Bitcoin’s price should be reason enough to make it an unfit “investment” (as a speculative gamble, I don’t anything wrong with buying bitcoin, although I also don’t see anything wrong with playing blackjack, or roulette for that matter. All three are only marginally worse than the equity market). This guy is either doing a classic pump and dump or he just has his head up his ass. Reminds me a lot of the guy who wrote this book.

People like Jerry Brito, who are in the business of predicting and profiting from tech fads, have been some of the currency’s biggest cheerleaders. As a technologist, he understands and is right about all the “on paper” advantages of Bitcoin, but he doesn’t understand the political economy of it. First, Bitcoin is not really a currency, it is a private asset, more analogous to buying property on the moon than to dollars or even gold.

There are many different currencies in the world. Currency needs to have utility. I generally hold my own savings as dollars (and dollar-denominated assets) because the places I go accept dollars, and the governments that compel me to pay taxes only accept payment in dollars. Some people prefer to hold on gold because it is really easy to convert gold into dollars anyway, and gold has intrinsic value, aesthetically and industrially.  Other prefer to hold euros because they live in the EU and pay taxes in euros and the local goods and services are denominated in euros. But in the case of Bitcoin, I have no utility from holding them. The pool of goods and services I can buy with them is small, and even if it grows 100 fold over the next year, it will still be small compared to the pool of goods and services I can buy with dollars. I also can’t pay taxes in Bitcoin. If this doesn’t seem like a big deal, take into consideration that the only reason the dollar has achieved primacy is because it is the only way to pay your debts owed for living within and benefiting from the social capital brought to you by the world’s greatest imperial superpower. The only reason dollars are worth anything is because the US military can fuck you up. It is literally illegal to not accept dollars as a form of payment within the US. People cannot be coerced into taking Bitcoin as payment, unless someone wants to step up and use Bitcoin as the national currency (which won’t ever happen, as I’ll explain).

Bitcoin won’t take off for the same reason Esperanto never took off: top-down systems “designed” by intellectuals to be “better” usually cannot gain enough critical mass to catch on without being co-opted by a violent, authoritarian institution. There is are tremendous political incentives for governments that adopt fiat currencies within a fractional reserve central banking model. Being able to debase your own national currency allows a government to decrease its real debt, stimulate short run aggregate demand (a convenient way to keep the peasants distracted and employed during a time of financial crisis), or pay for large expenditures such as wars. There are no political incentives for using Bitcoin. It is an inherently decentralized system that has no role for institutional authority, and so the institutional authorities will not use it.

Getting back to the compulsive gambler that inspired me to write all of this in the first place, the price for Bitcoins will continue to rise as it gains name recognition, but ultimately it is a classic asset bubble and it will pop (I will be generous and give it 3-8 years) as people realize that Bitcoins have no value except for what other people think they are worth. So maybe putting all your money into Bitcoin is a moneymaker for now, but many have been sent to the poorhouse trying to predict the top of an asset bubble. At least when you are buying real estate and the market crashes, you still own actual real estate. When the Bitcoin bubble crashes, all the losers will have is some 0’s and 1’s in a computer file.

Categories: Economics, Hackers, Money