"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, October 04, 2014
Friday, October 03, 2014
Last month, in a post about the new census figures, I argued that the stagnation in wages is the defining fact about modern American politics. But it’s also a phenomenon that goes back a long way—to the Reagan years and beyond. Between 1969 and 1980, the median household income barely grew at all. (In inflation-adjusted 2013 dollars, it went from $47,124 to $47,668.) After the steadily rising living standards of the postwar decades, this stagnation came as a big shock to Americans, and it helps to explain the political backlash that Reagan rode to power. For the first two years of his Presidency, the economy was in recession and the median household income actually fell. But from then on, it started to grow. Between 1983 and 1988, when his second term ended, it went from $46,425 to $51,514—an increase of about eleven per cent.
Rising incomes are what really distinguished the Reagan recovery from the Obama recovery, and that, I suspect, is why the two Presidents enjoyed such different political fortunes. (According to Gallup, Reagan’s average approval rating during his second term was 55.3 per cent. That’s about ten points higher than what Obama has averaged so far in his second term.)
Thursday, October 02, 2014
As Fed Retreats From Stimulus, Central Banks Overseas Expand Theirs by BINYAMIN APPELBAUM, JACK EWING and NEIL GOUGH
WASHINGTON — As the growth of the United States economy outstrips the rest of the developed world, American policy makers are allowing Europe, Japan and even China to seek a little more prosperity — at the expense of Americans.
The Obama administration and the Federal Reserve have watched quietly in recent years as foreign governments and central banks have chipped away at the dollar value of their currencies, strengthening their export industries in the hope of stimulating their economies.
The trend is likely to intensify over the next year as the Fed retreats from its own stimulus campaign while the European Central Bank and the Bank of Japan expand their efforts. Mario Draghi, the head of the European Central Bank, said on Thursday that it would begin a new round of bond purchases this month.
The United States has long argued that markets should determine the value of currencies and criticized nations that try to manipulate exchange rates. The current silence reflects both the simple reality that the American economy needs less help than the rest of the developed world and the judgment of officials that the United States would benefit greatly from stronger global growth. That, they say, would be true even if, in the short term, it makes the country’s goods a little harder to sell and jobs a little harder to find.
You’re seeing American officials turn a blind eye to Mario Draghi talking down the euro, and turn a blind eye to interventions by the Chinese, because in both cases they’re making the judgment that having a stabilized situation and decent growth prospects in these countries is far more important,” said Adam Posen, president of the Peterson Institute for International Economics. “I tend to agree with that.”
American leaders have embraced and celebrated a strong dollar as evidence of a strong economy. It lets Americans buy more foreign goods and borrow more cheaply from foreign countries. It also may draw foreign investors to American financial markets, supporting the rise of asset prices.
But the rise of the dollar carries large risks, too. It makes it harder for American companies to sell goods and services. It may be contributing to the sluggish pace of domestic inflation. And some economists warn that letting the dollar rise is not a sustainable method of encouraging growth.
“A strong dollar, fueled by higher U.S. interest rates, will likely expose vulnerabilities in other parts of the world,” Stephen King, chief global economist at HSBC, wrote in a research note on Thursday. “Latin American countries already flirting with recession would certainly not welcome a tightening of U.S. monetary conditions.” Some economists said the United States should seek to limit the dollar’s rise through diplomacy and policy, and that the Fed should seek to limit its divergence from other central banks by extending its stimulus campaign.
A recent report by the Bank for International Settlements, essentially the bank for central banks, also questioned the global benefits of a stronger dollar, predicting it would tighten financial conditions because foreign banks rely heavily on dollar funding.
Continue reading the main story
But Stephen Cecchetti, a professor at Brandeis University, said the world had a strong interest in Europe’s health. “It’s going to create some instability, but the alternative is worse,” said Mr. Cecchetti, former chief economist of the Bank for International Settlements. “You don’t want to be around if there’s a real depression in Europe.”
The central bank still has not fully deployed the arsenal of a modern central bank to improve growth in Europe. It has refrained from the large-scale purchases of government debt undertaken by the Fed, the Bank of Japan and the Bank of England.
But in recent months it has sought to push down the value of the euro through a variety of measures. In September, the central bank offered loans that were practically interest-free to commercial banks that promised to lend the money to businesses and consumers.
On Thursday, after a board meeting Naples, Italy, the central bank outlined a two-year plan to buy private sector assets, including bank loans packaged into securities. “These purchases will have a sizable impact,” Mr. Draghi said at a news conference after the meeting.
One euro, which bought $1.39 in April, bought only $1.26 at the end of September. “We needed to bring the euro down and we still need to bring the euro down,” Christian Noyer, a central bank board member from France, said in a recent interview with the French broadcaster Radio 1.
While such efforts are usually aimed at increasing exports, the central bank is focused on imports, too. A weaker euro raises the price of imported fuel and other products, which could help budge inflation. Prices in the eurozone last month increased at an annualized rate of just 0.3 percent, far below the 2 percent pace the central bank and other major central banks in the developed world regard as best for sustainable growth.
“This is a currency war where stealing inflation rather than growth is the goal,” economists at the British bank HSBC wrote in a report published on Wednesday. The question, they said, “is whether the U.S. economy can generate sufficient inflation internally to tolerate the deflationary impact of a stronger dollar.”
So far, American officials primarily seem frustrated that the European Central Bank continues to act slowly. James Bullard, president of the Federal Reserve Bank of St. Louis, last year became the rare official to call publicly for stronger action when he told an audience in Frankfurt that the central bank should buy government bonds.
Another question is whether the programs will provide a sufficient jolt. A similar lending program started by the Bank of England in 2012 has not reversed the decline in small-business lending in that country.
“Nobody’s hiring, nobody’s investing, nobody’s spending,” said Stefano Micossi, the director general of Assonime, an Italian business group. “There is no demand for credit. The system is not constrained by the funding side. The banks are awash in liquidity.”
Japan, which has been grappling with the problems confronting Europe for more than two decades, is also seeking growth through currency moves. Under the “Abenomics” stimulus campaign that Prime Minister Shinzo Abe began in early 2013, the Bank of Japan has agreed to double the money supply, and the price of yen in dollars has dropped by about 24 percent.
The results have not met expectations. Japan’s trade deficit has increased while inflation remains weak. The Japanese economy shrank by 7.1 percent in the second quarter after a sales tax increase.
The country’s struggles may show the limits of devaluation, according to Mr. Posen of the Peterson Institute. He noted that demand was less sensitive to small changes in price for the kinds of high-end goods that dominate the exports of Japan and other developed countries.
The government remains publicly committed to its stimulus campaign. But some analysts see signs of tension between the head of the bank, Haruhiko Kuroda, and politicians who are wary that the rise in import prices will provoke consumer resistance.
“Kuroda is much more powerful than other board members for sure, but not necessarily than politicians,” said Hiromichi Shirakawa, Japan economist at Credit Suisse in Tokyo and a former central bank official. “This is scary as the markets have been expecting additional easing by the bank within a couple of months.”
China’s economic rise was built on the suppression of its currency to support cheap exports at the expense of domestic consumption. Then, beginning in 2010, China let the renminbi rise about 20 percent against the dollar as part of its effort to encourage a transition away from export-led growth. But this year, with the economy growing at the slowest pace in more than a decade, China once again pressed down on the renminbi. Its value has fallen about 2 percent against the dollar so far this year.
“It was a way to stimulate the economy without resorting to full blown credit and investment-driven stimulus,” said Diana Choyleva, the head of macroeconomic research at Lombard Street Research in London.
While that small change has prompted little criticism from the United States, the looming question is whether China will continue.
During the financial crisis, China’s government-controlled banking system pumped money into the economy, doubling its assets over a five-year period. Many companies and local governments are now struggling to repay those debts, and authorities are reluctant to treat the pain with another major burst of lending.
Yu Yongding, a senior fellow of the Chinese Academy of Social Sciences in Beijing and a former member of the central bank’s monetary policy committee, said it was imperative for the P.B.O.C. not to blink.
“China needs to adjust its economic structure urgently,” Mr. Yu said. “The combination of the high leverage ratio, high financing costs and low profitability is a serious threat to China’s financial stability.”
But Mr. Yu said the bank might be required to take new steps if the outlook darkened. Andrew Colquhoun, head of Asia-Pacific sovereign ratings at Fitch in Hong Kong, said further devaluation had obvious attractions. Noting the appreciation of the currency since 2010, Mr. Colquhoun said, “The authorities might think they could give some of that back through the renminbi in the event consumption faltered.”
"People have been calling on the economics profession to make some fairly serious revisions to the way the subject is taught.... I think there’s one thing that really can’t be denied: when this particular phoenix rises from the flames, it ought to leave the Efficient Markets Hypothesis back in the ash pit.... Efficient markets gets a chapter of its own in John Quiggin’s Zombie Economics as an idea that won’t go away, no matter how thoroughly it’s refuted.... The temptation will be to try and avoid going “cold turkey” on efficient markets, by reducing the overarching claims, but hanging on to the general story that markets are 'broadly efficient'.... The hypothesis that there is no information in the past history of share prices which can be used to predict the future... doesn’t work.... Companies like AQR have been offering funds based on them, and generally outperforming, for ages. And when you get to anything stronger than the very-weak form versions, the performance is really quite embarrassing. Robert Shiller’s share of the Nobel Prize was for noticing that securities prices are, in general, much too volatile to make sense as forecasts.... DeLong, Summers, Shleifer & Waldmann have shown that there is no real theoretical basis to the idea that 'traders competing against each other make markets efficient'--it’s just as likely that they create meaningless volatility. Market prices are... a weighted average of the views of a large group of well-resourced and intelligent people with an incentive to get things right. But nobody would build a theory of politics around the infallibility of opinion polls.... All that’s really left of market efficiency is a sort of woolly idea that 'it’s difficult to make money in the stock market'. Which it is, but it’s pretty difficult to make money in any other way too, a fact which has fewer implications for fundamental economic truth than you’d think..."(via DeLong)
Wednesday, October 01, 2014
Affleck leans into his inner lunk to make Nick a bit of a doofus who only realizes how everybody else in the world sees him far too late. He's good here, as good as he's been on screen. But it's Pike whom audiences will be talking about and arguing about and discussing long after they've screened the film. She seizes hold of Flynn's conception of a woman slowly losing control over her own narrative with gusto, and Fincher reacts splendidly. There's a sequence around the midpoint — a monologue where Amy lays out everything that Nick has made her become over the course of their marriage — that might be the best thing the director has ever done. It's exhilarating and terrifying and nauseating, the roller coaster of that big fight at 3 a.m. that nearly ended everything, then somehow ended back in safe harbor, encapsulated in one woman's words.
"What have we done to each other?" Nick asks as the film begins, and at its heart, Gone Girl knows that for all of the blood shed and all of the horrors uncovered, the worst thing Nick and Amy ever did was assume the other would allow them to be the protagonist in the story of their lives. And as the whirlpool opened, each found, to their horror, the other swimming not to support them but for the opposite side of the drain.
Rather than hauling those three musketeers into Judge Thomas Wheeler’s court, which his lawyers will do next week, Greenberg should be taking them out to dinner. The only mystery about the lawsuit is why Wheeler allowed it to proceed this far. In 2012, Judge Paul Engelmayer, a federal judge in New York, tossed out a similar case, noting that A.I.G.’s board had voluntarily agreed to the terms of the September, 2008, bailout, seeing it as the only option to avoid bankruptcy. For whatever reason, Wheeler, whom George W. Bush appointed to the bench in 2005, decided that the case raises sufficient legal issues to proceed.
Perhaps he is taking seriously Boies’s contention that the bailout violated the Fifth Amendment, which prevents the federal government from seizing private property without proper compensation. But, of course, this wasn’t a seizure—it was a bailout. Or perhaps Wheeler wants to explore whether the Fed overreached the lending authorities that Section 13.3 of the 1932 Federal Reserve Act grants it. There’s no doubt that this statute was drawn up vaguely, but that was deliberate. During the Great Depression, as in September, 2008, the Fed faced a potential cataclysm, and it needed some freedom to maneuver, which Congress granted it.
Tuesday, September 30, 2014
The Pimco Perplex by Krugman
It’s fairly clear that the events of 2011 are a large part of the story of Bill Gross’s abrupt departure from Pimco; as Neil Irwin says,
A disastrous bet he made against United States Treasury bonds in 2011 led to three years of underperformance and billions in withdrawals.
And Joshua Brown has some choice quotes:
Gross compounded the move by being extremely vocal about his rationale – he went so far as to call Treasury bonds a “robbery” of investors given their ultra-low interest rates and the potential for inflation. He talked about the need for investors to “exorcise” US bonds from their portfolios, as though the asset class itself was demonic. He called investors in Treasury bonds “frogs being cooked alive in a pot.”
But why was Gross betting so heavily against Treasuries? Brad DeLong tries to rationalize Gross’s behavior in terms of a coherent story about an impending U.S. recovery, which would lift us out of the liquidity trap. But Gross wasn’t saying anything like that. Instead, he was claiming that the Fed’s asset purchases — QE2 — were holding rates down, and warned that the impending spike in rates when QE2 ended would derail recovery.
So why did he believe all that? It all comes down, I’d argue, to liquidity trap denial.
Since 2008 the basic logic of the economic situation has been that the private sector is trying to run a huge surplus, and the public sector isn’t willing to run a corresponding deficit. The result is an economy awash in desired savings with nowhere to go. This in turn means that budget deficits aren’t competing with private borrowing, and therefore need not drive up interest rates. This isn’t hindsight; it’s what I and others have been saying since the very beginning.
But a lot of people — politicians, of course, but also a lot of people in finance — have just refused to accept this account. They have clung to the view that budget deficits must lead to higher interest rates. You might think the failure of higher rates to materialize, year after year, would cause them to reassess — indeed, would have caused them to reassess years ago.
Instead, however, many of them made excuses. Above all, the big excuse was that rates would have gone higher if only the Fed weren’t buying up the stuff. So QE2 acquired a much bigger role in their thinking than it deserved, leading to confident predictions of soaring rates as soon as it ended. And Gross put his money — and more importantly, his investors’ money — where his mouth was.
And he was wrong. QE2 ended, and nothing happened to rates.
You can see why I found Gillian Tett’s apologia for Gross — that he was blindsided by central bank intervention — frustrating. For one thing, that’s accepting a model that has failed with flying colors; but beyond that, Gross’s really bad call was almost exactly the opposite, his claim that rates would soar when the Fed’s intervention ended.
As I’ve said, Gross of all people shouldn’t have fallen into this trap, since his own chief economist understood liquidity trap logic better than almost anyone. But finance people seem weirdly determined to believe in a macro canon whose hold on their perceptions appears to be completely unbreakable, no matter how much money it causes them to lose.
Monday, September 29, 2014
Sunday, September 28, 2014
The Washington Post treated us to "five myths about billionaires" this morning. Incredibly, they missed the most obvious one: that billionaires know anything special about what is good for the country and the world.
Most billionaires (at least those who didn't inherit the money) are probably smart and hard-working, but so are millions of other people. What most distinguishes someone like Bill Gates from the hundreds of thousands of other software entrepreneurs is luck and sharp elbows. Suppose IBM had refused to allow Gates to keep control of the Dos operating system? Gates might still be very rich, but certainly not the richest man in the world. Alternatively, if the government still enforced anti-trust laws Microsoft might have faced serious penalties for engaging in textbook anti-competitive practices to get and keep a near monopoly in operating systems, Gates also would not have the fortune he has today.
Anyhow, there is no reason to think that Gates' luck and ruthlessness make him particularly competent to pass judgement on world poverty, education, or any of the other issues for which he is now viewed as an authority. The same applies to the other billionaire policy types cited in the piece. While these people obviously have the money to ensure that their views carry force in the world, there is no more reason to think that these billionaires' judgements on public policy carry particular value than the judgements of people who win the lottery.