"It is easy to confuse what is with what ought to be, especially when what is has worked out in your favor."
- Tyrion Lannister

"Lannister. Baratheon. Stark. Tyrell. They're all just spokes on a wheel. This one's on top, then that's ones on top and on and on it spins, crushing those on the ground. I'm not going to stop the wheel. I'm going to break the wheel."

- Daenerys Targaryen

"The Lord of Light wants his enemies burned. The Drowned God wants them drowned. Why are all the gods such vicious cunts? Where's the God of Tits and Wine?"

- Tyrion Lannister

"The common people pray for rain, healthy children, and a summer that never ends. It is no matter to them if the high lords play their game of thrones, so long as they are left in peace. They never are."

- Jorah Mormont

"These bad people are what I'm good at. Out talking them. Out thinking them."

- Tyrion Lannister

"What happened? I think fundamentals were trumped by mechanics and, to a lesser extent, by demographics."

- Michael Barone

"If you want to know what God thinks of money, just look at the people he gave it to."
- Dorothy Parker

Saturday, July 12, 2014

reach for yield

Back on the Grid and Ready to Talk Financial Oversight and Human Nature by Jared Bernstein

Liquidationism in the 21st Century by Krugman

Bill Maher on Real Time on HBO described some conservative lies as Zombie lies, they won't die, like trickle-down economics.

Krugman on the BIS:
Throughout the annual report, balance-sheet problems are treated as if they were equivalent to the kind of real structural problems the bank used to claim were at the root of our troubles. That is, they’re treated as a good reason to accept a protracted period of high unemployment as somehow natural, and to reject artificial stimulus that might alleviate the pain.

From 2011
Once, as Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was “sugar,” and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt. 
Wrong, Romer snapped back. Stimulus is an “antibiotic” for a sick economy, she told Geithner. “It’s not giving a child a lollipop.”

euthanasia of the rentier

The Rentier Would Prefer Not to Be Euthanized by J.W. Mason
Here’s another one for the “John Bull can stand many things, but he cannot stand two percent” files. As Krugman says, there's an endless series of these arguments that interest rates must rise. The premises are adjusted as needed to reach the conclusion. (Here's another.) But what are the politics behind it? 
I think it may be as simple as this: The rentiers would prefer not to be euthanized. Under capitalism, the elite are those who own (or control) money. Their function is, in a broad sense, to provide liquidity. To the extent that pure money-holders facilitate production, it is because money serves as a coordination mechanism, bridging gaps — over time and especially with unknown or untrusted counterparties — that would otherwise prevent cooperation from taking place. [1] In a world where liquidity is abundant, this coordination function is evidently obsolete and can no longer be a source of authority or material rewards. 
More concretely: It may well be true that markets for, say, mortgage-backed securities are more likely to behave erratically when interest rates are very low. But in a world of low interest rates, what function do those markets serve? Their supposed purpose is to make it easier for people to get home loans. But in a world of very low interest rates, loans are, by definition, easy to get. Again, with abundant liquidity, stocks may get bubbly. But in a world of abundant liquidity, what problem is the existence of stock markets solving? If anyone with a calling to run a business can readily start one with a loan, why support a special group of business owners? Yes, in a world where bearing risk is cheap, specialist risk-bearers are likely to go a bit nuts. But if risk is already cheap, why are we employing all these specialists? 
The problem is, the liquidity specialists don’t want to go away. From finance’s point of view, permanently low interest rates are removing their economic reason for being — which they know eventually is likely to remove their power and privileges too. So we get all these arguments that boil down to: Money must be kept scarce so that the private money-sellers can stay in business. 
It’s a bit like Dr. Benway in Naked Lunch: *
“Now, boys, you won’t see this operation performed very often and there’s a reason for that…. You see it has absolutely no medical value. No one knows what the purpose of it originally was or if it had a purpose at all. Personally I think it was a pure artistic creation from the beginning. 
“Just as a bull fighter with his skill and knowledge extricates himself from danger he has himself invoked, so in this operation the surgeon deliberately endangers his patient, and then, with incredible speed and celerity, rescues him from death at the last possible split second…. "
Interestingly, Dr. Benway was worried about technological obsolescence too. “Soon we’ll be operating by remote control on patients we never see…. We’ll be nothing but button pushers,” etc. The Dr. Benways of finance like to fret about how robots will replace human labor. I wonder how much of that is a way of hiding from the knowledge that what cheap and abundant capital renders obsolete, is the capitalist?

EDIT: I'm really liking the idea of Larry Summers as Dr. Benway. It fits the way all the talk when he was being pushed for Fed chair was about how great he would be in a financial crisis. How would everyone known how smart he was -- how essential -- if he hadn't done so much to create a crisis to solve?

[1] Capital’s historic role as a facilitator of cooperation is clearly described in chapter 13 of Capital.
 * where Steely Dan got its name.

euthanasia of the rentier


The Euthanasia of the Rentier by Krugman
A commenter quotes John Maynard Keynes:
The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.
It is, of course, a perfect quote for our times, too. It comes from thelast chapter of the General Theory — a chapter that definitely bears rereading in the light of current debates.
For what Keynes describes in this chapter is, pretty much, a condition of secular stagnation — of persistently low returns on investment, in which there is a chronic oversupply of saving. He believed, in 1936, that this would be the state of affairs in the decades ahead, and was of course wrong in that belief. But he wasn’t wrong about the possibility of such a state of affairs, and since Larry Summers came out as a secular stagnationist, the view that we may well be there now has gone mainstream. 
What struck me, looking at what Keynes wrote, were his remarks on interest rates and the return to capital: low rates of interest, he suggested,
would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. 
Actually, for now at least profits remain high — but bond yields are very low. 
What Keynes didn’t say, but now seems obvious, is that the rentiers are unlikely to accept their euthanasia gracefully. And therein, I’d argue, lies the ultimate explanation of the persistent clamor for monetary tightening despite weak economies and low inflation. I’ve described on a number of occasions how tight-money advocates are constantly shifting their arguments — it’s about inflation; no, it’s about sound market functioning; no, it’s about financial stability — but always with the same bottom line: rates must rise now now now. 
Well, what I think we’re hearing is the sound of rentiers and those who, explicitly or implicitly, work for them, demanding their natural right to earn good returns even if the resource they control isn’t actually scarce anymore. They are not willing to go gently into their euthanasia.

pension funds

"The next big theft by Wall Street will be the incessant front-running with short sales of net liquidations by pension funds. "

commenter Darryl FKA Ron

Larry Page echoes Alexander Cockburn

via Econospeak

I totally believe we should be living in a time of abundance, like Peter Diamandis' book. If you really think about the things that you need to make yourself happy - housing, security, opportunities for your kids - anthropologists have been identifying these things. It's not that hard for us to provide those things. The amount of resources we need to do that, the amount of work that actually needs to go into that is pretty small. I'm guessing less than 1-percent at the moment. 
So the idea that everyone needs to work frantically to meet people's needs is just not true. I do think there's a problem that we don't recognize that. I think there's also a social problem that a lot of people aren't happy if they don't have anything to do. So we need to give people things to do. We need to feel like you're needed, wanted and have something productive to do. 
But I think the mix with that and the industries we actually need and so on are-- there's not a good correspondence. That's why we're busy destroying the environment and other things, maybe we don't need to be doing. So I'm pretty worried. Until we figure that out, we're not going to have a good outcome. 

Friday, July 11, 2014

Waldman and welfare economics

Welfare economics: housekeeping and links by Steve Randy Waldman

And he tweets a link to a blog post from the past in response to Krugman's column.

Depression is a choice by Steve Randy Waldman

stagflation and the 1970s and international macro

The Lucas critique
Permanently raising inflation in hopes that this would permanently lower unemployment would eventually cause firms' inflation forecasts to rise, altering their employment decisions. In other words, just because high inflation was associated with low unemployment under early 20th century monetary policy does not mean that high inflation should be expected to lead to low unemployment under every alternative monetary policy regime.
With hysteresis, permanently lower inflation translates into permanently higher unemployment.

Rereading Lucas and Sargent 1979 by Simon Wren-Lewis

A commenter points to Krugman's take:

Rudi Dornbusch and the Salvation of International Macroeconomics (Wonkish)

Fallacies of Immaculate Causation

Currencies, Prices, and Mike Mussa (A Bit Wonkish)

Hermetic Economic Cults (Wonkish)

Exchange Rates and Wages

New Frontiers in Economic Barbarism

History Roolz

The Bridge

AV Club reviews The Bridge "Yankee"

conservative macro

Is the Fed Behind the Curve? by Cecchetti and Schoenholtz

John Taylor believes in the concept of resource slack. As do those who argue there's no longer slack in the economy.

commenter gman:

size of bond market is much larger than stock market

CHART: The 10-Year US Treasury Note Yield Since 1790

4 percent is normal or goal of the Fed?

Actually goal is minimal inflation and unemployment.


Market monetarist views are a mish-mash of the good and the silly that don’t belong together anyway by Tony Yates

Wednesday, July 09, 2014

internal transfers

Explaining Piketty: inequality and the financial crisis by France Coppola

German, Japanese and - above all - Chinese lending to the US is the so-called "savings glut" that is widely blamed for creating the financial instability that led to the financial crisis. But Piketty argues that this source of capital is tiny compared to that generated by rising inequality WITHIN the US (my emphasis):
"...this internal transfer between social groups (on the order of fifteen points of USnational income) is nearly four times larger than the impressive trade deficit the United States ran in the 2000s (of the order of four points of national income). The comparison is interesting because the enormous trade deficit, which has its counterpart in Chinese, Japanese, and German trade surpluses, has often been described as one of the key contributors to the “global imbalances” that destabilized the US and global financial system in the years leading up to the crisis of 2008. That is quite possible, but it is important to be aware of the fact that the United States’ internal imbalances are four times larger than its global imbalances. 
"So the total amount of capital available for investment in the US at this time was far larger than the imported "savings glut" caused by its trade deficit. And because the US was importing capital, all of that capital had to be invested WITHIN the US***. As I've noted already, the corporate sector was (and is) running a structural surplus. That leaves the household sector and the government sector to absorb the capital. No wonder lenders aggressively targeted those households most in need of money. They had to put that capital somewhere****, and poor households were both the easiest to lend to (because they needed the money) and gave the best returns (because they were the highest risk). Financial innovation enabled far more of this capital than usual to find its way to poorer households: the concentration of risk that would normally have limited individual lenders' exposure to poorer quality borrowers was dispersed across the globe through securitisation and amplified with derivatives.

yield curve inverting

Fed Watch: When The Fed Starts Raising Rates by Tim Duy

Tuesday, July 08, 2014

the interest rate

DeLong RTs:

Andy Harless:

"I'm somewhere between neo-Fisherite (all-powerful future policy signal in current rate) & paleo-Keynesian (policy signals useless) extremes"

Sunday, July 06, 2014