Saturday, November 22, 2008

Dabbling in Anarchism

Normally I consider myself an anarco-theist was capitalist tendencies, but what's in a name?

At any rate, this Rothbard sounds like an interesting dude (expect for maybe the part about supporting Pat Buchanan). I'm going to read his book on the Great Depression. Just don't ask me when.

What made the Depression Great.

All the movies, I expect.

But seriously, there are lots of people using lots of suspect analogies at this point, and we should at least get straight which terms correspond to what. Yves has some thoughts about this that I can't claim to have completely processed yet, but they are interesting.
... one thing that continues to surprise me is the frequency with which the US in 2007-2008 is being compared to the US of 1929-1930. I've mentioned in passing that China is in the position that the US occupied in the late 1920s: a massive manufacturer that was generating large trade surpluses, to the point where the imbalance was destablizing (under a gold standard, the US was sucking the metal out of its trade partners; the modern analogy is China's massive foreign exchange reserves). And as the US was the epicenter of the Great Depression, we cannot be certain of the trajectory of this economic crisis until we have a sense of how bad things are getting in China and how good its policy responses are.
By the way, the first thing this makes me realize is that my understanding of the Depression is totally deficient. For example, I know that the US saw massive deflation. But at the same time, relative to gold, I also know that the dollar was substantially devalued. So was there actually any deflation at all in terms of gold? I also know that Germany saw hyperinflation and ended up defaulting on its debts. What happened to France and England though. Was the depression inflationary or deflationary? In terms of pounds or francs, or in terms of gold?

Next, we might wonder how useful the great depression is as an analogy is to being with. I mean except for Iraq and parts of Africa, no one has seen the entire productive apparatus of their society bombed with the last decade. Okay, the US has built a lot of houses that are uniquely useless for making more stuff, but this hardly seems comparable in scale.

Also, comparing the US debt to the German debt between the wars also seems a bit suspect. The German debt was basically a monetized grudge. China is likely to be a bit more pragmatic if push comes to shove, and find some way to force the US into Chapter 11 more gracefully, both for our sake and their own. And the Japanese are like lapdogs. I mean this is a culture built around taking direction from teenage girls who dress up like Southern belles. We'll send them two million Barbies and call it even.

Things that sane people are not sitting around reading on a Saturday night

Here's an interesting piece Warren Buffet wrote back in the seventies, dealing with a paradox I've been at a loss to explain myself -- if equities represent an ownership stake in a business with real assets, why are they such shit in an inflationary environment (historically speaking, of course). So check out

How Inflation Swindles the Equity Investor

an unsually long and detailed piece from a bygone age of Buffettelia.

A propos of nothing, it's interesting to me how long Buffett has focused on the way the market works "in aggregate". Now that I've read years of his letters, I see that it is a theme with him. He pretends to ignore macro questions, and I really do believe that he spends little time thinking about what economists think growth will be next year in Argentina. 1.2% by the way. At the same time, he almost always has one eye on the overall state of the economy and the markets with respect to their historical norms. When he says to buy stocks, it's because they have historically returned 6% in real terms from the current levels of valuation. When he says that America will end up share-cropping, it's because the aggregate math of spending more than you earn simply becomes unsustainable at some point. And when he talks about the market, he always, always includes a disclaimer that in aggregate, we simply cannot beat the market. In fact, as he puts it in the article, in aggregate, we cannot even reduce our exposure (buyer for every seller). It makes me wonder if the only important things in investing are patience, humility, and not blowing up with borrowed money.

Thursday, November 20, 2008

Managed bankruptcy for GM

Luis Zingales has a piece at VoxEU that is the most sensible thing I've seen written on GM (which isn't saying much, I know, but the thing is worth reading anyhow).
We believe that a Chapter 11 bankruptcy filing for GM is the only possible solution. However, we recognise that in the current environment, there are several likely inefficiencies associated with the bankruptcy process. In particular, if we do nothing and wait for GM to file for bankruptcy, which would likely happen in a month or so, we would risk a bad outcome of the proceedings, namely an inefficient liquidation of the company and a substantial amount of social disruption from the sudden loss of jobs. We therefore propose that the government oversee a prepackaged bankruptcy for GM that would give the company the restructuring it badly needs and avoid inefficient liquidation.
Finally, something lucid. You can't bailout the morons at GM with just cash. The history of the company and the industry proves that if nothing else. At the same time, the last thing we need right now is a large and panicked bankruptcy and liquidation of the company which sets of a chain reaction in the suppliers, lenders, employees, etc ... The government needs to provide debtor-in-possession financing and allow the private lenders who are still onthe hook to force an orderly restructing of the company. Shareholders should be wiped out and all management should be canned.

The next question is why we don't follow this same model with the big banks.

If we are going to have a government, now is the time for it to LEAD -- not be the dog wagged around by the ass-end captains of private industry who have already proven their incompetence beyond a shadow of a doubt.

Wednesday, November 19, 2008


Predicting the returns for an entire stock market are darn near impossible, and in the short-term I don't think you can do much more than guess. Over the longer-term, however, you can appeal to a bit of historical science to make a more educated guess. The simple conclusion is that when stocks are expensive, the markets future returns are low, and when they are cheap, the future returns are high.

The PE in the chart below is based on E being the average of ten years of trailing earnings, the idea being to average out the business cycle.

The money hole

I thought this was Warren Buffett quote was very funny:
[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head...
It kinda reminds me of Douglas Adams' parody of money on prehistoric earth:
"Thank you. Since we decided a few weeks ago to adopt the leaf as legal tender, we have, of course, all become immensely rich."

Ford stared in disbelief at the crowd who were murmuring appreciatively at this and greedily fingering the wads of leaves with which their track suits were stuffed.

"But we have also," continued the Management Consultant, "run into a small inflation problem on account of the high level of leaf availability, which means that, I gather, the current going rate has something like three deciduous forests buying one ship's peanut."

Murmurs of alarm came from the crowd. The Management Consultant waved them down.

"So in order to obviate this problem," he continued, "and effectively revaluate the leaf, we are about to embark on a massive defoliation campaign, and . . . er, burn down all the forests. I think you'll all agree that's a sensible move under the circumstances."

Tuesday, November 18, 2008

Broken Record

Either I am a terrifically narrow-minded and boring person, or when you have a truly good and simple idea, you find that it appears everywhere. Please don't respond to this question. I only ask it a propos of James Surowiecki's column in the New Yorker where he discusses the state of global agriculture and the Perils of Efficiency.

His basic point is that 'market reforms' have over-optimized the agricultural system and made it more fragile; more crops are now grown in fewer places as countries have moved away from food security, and the centralization of this system has made it more vulnerable to the propagation of initially small shocks vis a vis when this system was less efficient and more redundant -- ie with everyone growing their own food.

While I think this is a valid and insightful description of the current situation (and one that can be applied to the over-optimization of our financial system as well, which is in fact the context I found it in) it is profoundly misguided as a piece of analysis. Because the conclusion he draws from this bit of thinking is that the problem is due to the de-regulation and 'marketization' of agriculture, implying that the way global agriculture looks today is the way markets inevitably end up looking.

I can't think of ANYTHING that is less of a free market than agriculture. Seriously. To use the centralization of global argiculture in a few highly, highly subsidized places like Kansas as a paradigm for the natural endpoint of markets is to fundamentally miss the point. Surowiecki claims that the elimination of all the little subsidies people used to use to control agriculture -- the marketing boards and grain reserves and millions of tiny distortions -- has made the system more 'free market'. This is crazy. We didn't exchange these subsidies for an unsubsidized market. We exchange a ton of little subsidies, for a few giant, centralized, subsidies that not only tremendously distorted the agricultural markets, but threw a giant red state monkey wrench into our entire political system. Agriculture today isn't more 'free market' than 30 years ago unless all you are counting is the sheer number of regulations. But who cares about how many bad laws there are -- what I want to know is how bad the laws are.

They are bad.

They are almost always bad.

This is the basic insight of classic liberal thinking a la Adam Smith. It is still as completely valid today as it was then. Surwiecki is not providing a counter-example to this point. The financial meltdown is not disproving this thesis. Rather, these problems are proving that a few giant distortions that create fundamental mis-alignments of interest and perverse incentives on a grand scale are even more dangerous than a lot of small misalignments that maybe reduce efficiency, but tend to cancel each other out systemically (two sides of the same coin I guess, actually).

The danger is, indeed, monoculture, and the susceptibility of monoculture to a virus. But monoculture is fundamentally anathema to the idea of markets. In fact, if you think about the dangers of monoculture and where it crops up, you are very quickly led back to the single biggest monoculture of all -- the government. Interestingly, the monoculture at the heart of our current problem is the US government's ability to print money, and the fact that it was willing to print a lot more of it than it should have, creating a type of monoculture that propagated down the lines as the government printed money, the banks took it and lent it out, people used it to finance their houses and spent it on cheap plastic shit from China, and the Chinese lent it back to the US government so the whole loop could start over again. What makes the loop run, both forward, and, now, backwards, is monoculture. Federal Reserve monoculture. Chinese monoculture. Banking regulation monoculture. Without these bottlenecks, the feedback loop that created this problem is much less stable, the (mis)-alignment of interests much less precise, the propagation of problems much less rapid. But these features of the system aren't created by market principles, but by governments, and the way the centralization that is the hallmark of government propagates throughout a system once it is introduced at one point.

This leads me to my thesis for this morning: the government is a virus.

Friday, November 14, 2008

Kashkari and the Cash and Carry Economy

There are lots of fairly sophisticated theories out there about how we got ourselves into our present national financial dilemma. There are people who write terrific stuff about how the incentives of lenders and investors were not aligned. There are folks who blame the greed of Wall St. There are those who think the whole thing started with the miscalculation of a once proud technocrat who found a flaw in his equations. There are even those who think that the whole thing can be chalked up to simple government incompetence.

Of course these things are all true. They have all had an impact and are all (partially) to blame. But to me, none of them gets at the fundamental problem we are facing, not just in the US but globally. Fundamentally we no longer trust this economic and political system.

I don't mean this in an ideological sense, as if we might somehow come to trust socialism or authoritarianism more. The question is not which ideology you think best optimizes the parameters of freedom, development, and justice. No, I mean to say that we no longer trust that any of these political systems is actually working for us. Everywhere you look in the world you see the same basic pattern -- huge, highly centralized political units run by tiny enclaves of the well connected. Once upon a time we (foolishly, certainly) trusted that these people actually ran their countries with at least one eye towards the benefit of 'the people', whoever that is. Our problem, fundamentally, comes from the fact that these political units have an enormous influence over our lives, and yet we no longer feel that we have any control over them, we no longer trust that those in charge of them have our collective benefit in mind.

In short, the cause of the sub-prime crisis in neither economic nor technical. It was not the result of too little or too much regulation. It is the result of something at once much simpler and much deeper. It is the result of a basic breakdown in our trust in government, the result of a lost decade of crony capitalism, the result of the US sliding incessantly towards the fate that has ever hovered at the edge of our country, and which has engulfed so many other colonies in our hemisphere -- the sub-prime crisis happened because we have become a banana republic.

And we have taken the rest of the world with us.

Once you believe that your government only exists to enrich itself and those connected with it, there is simply no way back from the abyss. If no one capable of even contemplating our mutual benefit is in charge, then it is every man for himself. Trust and cooperation are the foundations of all societies and all economies, whether they are organized along socialist or free market principles. Without that trust, it doesn't matter what you call your crumbling sham of a system.

So no, I don't think that Bush and Paulson and Kashkari are chumps, as Rep. Elijah Cummings so delicately puts it. I just think they are more rational than the rest of us -- they are first in the race to fuck everybody before they get fucked.