Sunday, November 28

New York vs. London vs. The World's Great Cities

A recent NY Times op-ed comparing New York's virtues to the world's great cities sparked a debate amongst friends on how The Big Apple compares to London.

I've been in London for all of seven weeks now, but here are some observations:
  • Conversations in London are a lot more interesting, possibly due to the quality of the education system and high-brow media (i.e., Fox vs. BBC, or FT vs. WSJ); definitely a higher general level of awareness of what's happening around the world in London
  • Food is surprisingly good and more reasonably priced than expected in London, probably due to the still favorable exchange rate of the U.S. dollar. However, New York probably has the edge here.
  • Tap water is not as good in London, and Brita filtering only partially addresses its shortcomings (I came from the San Francisco Bay Area and Hetch Hetchy spoiled me)
  • Tube vs. Subway: both aren't much fun; the Tube is more bearable and impressive in terms of its reach; central London is also surprisingly walkable so i rarely take the tube. London also has a nifty bike rental program.
  • (Very subjective) Music is more to my liking in London; my first trip to the gym was greeted with an Armin van Buuren live set, something I don't think I've ever heard at a U.S. gym.
  • Livability: London is definitely more livable than NY, and not just because the buildings are shorter. London's less densely populated and the weather is better. Nooks and crooked streets lend character; ample green space for dog lovers, and you can take your dog on public transports; citizens are trusted to drink alcohol in public, etc.
  • Timing: it's a fascinating time to be in London with what's happening in Europe, although perhaps the same could soon be true for U.S.
While they both have their respective strategic advantages, here are some of London's: more cosmo/international experience sans empire. The Brits, with their global history, are a little more at home around the world than Americans, and arguably the rest of the world feels more at home in London than in NY. London perhaps also has a geographic/time zone advantage over New York: in the morning you can trade with Asia, and in the afternoon you can trade with America. Also, many of the world's most fastest growing financial products (currencies, derivatives, gold, etc.) are heavily traded or headquartered in London, not NY. Overall, London is more international than NY.

'la romantique'
In terms of NY vs. other worldly cities, with the U.S. still in the throes (and largely in denial) of its relative decline, living in NY could have the bittersweet feeling of being on location of what was until just recently the world's center of gravity. NY is obviously still good. But to use the metaphor of a great social event, you know you arrived late as the party is clearly fading. In fact, I believe NY's zenith probably was in 1962. Cities like London and Paris (here's a cute New York vs. Paris blog), which have had plenty of time to come to terms with their loss of empire, may perhaps feel more comfortable in their downsized shoes.

If you're looking for the world's the most up-and-coming dynamic places right now, then Shanghai, Singapore, Sydney, Cape Town, Dubai, Hong Kong and Mumbai would trump both New York and London. I also agree with the NY Times author that Chicago, which seems to be doing relatively well in terms of popularity, is the quintessential American city.

What do you think?

Saturday, November 27

“We’re not Greece!” “We’re not Ireland!” “We’re not Portugal!”

While the name of the country changes, the "We're not _____!" plea from a revolving panoply of European officials has become all too familiar.

Can any of Europe's politicians -- or anyone at all -- definitively state at which country's doorstep the rolling European debt crisis will ultimately stop? The short answer is no.

Europe's Two Big Challenges

The Economist has a comprehensive summary of the latest developments in this sad saga; the violence, which first turned deadly in Greece this spring, unfortunately shows no sign of abating in Ireland. From the article:
"[Germany's] Mrs Merkel and Mr Schäuble are continuing to insist on two proposals.
One is that the EU treaties must be amended to give permanent status to the European Financial Stability Facility. Without this, they say, the rescue fund will expire in 2013. But investors know from experience that treaty amendment is neither simple nor quick (it took years to push through the Lisbon treaty). Insistence on treaty change makes them nervous.
So, even more, does the second German demand: that future bail-outs must include debt-restructuring provisions to impose some losses (“haircuts”) on investors."
With respect to challenge #1, it is quite clear that Eurozone popularity is waning in certain quarters. Any treaty change could prove problematic, particularly in Ireland where such changes must be put to a referendum vote.

Europe's Web of Debt
On #2, haircuts to bondholders, it is worth taking another look at the complex edifice of european debt. The interlocking nature and size of cross-border debt holdings explains why European leaders fear allowing any one domino (Greece in May, Ireland this week) to fall.

Germany is the biggest checkbook in the EU and, quite understandably, is insisting that the private sector share in the cost of any future sovereign debt defaults. Otherwise what is the point of distinguishing between the debt of different countries?

But can Europe's delicately interwoven debt and banking market cope with haircuts, particularly to senior debt? The current Irish crisis was sparked by discussion of losses on subordinated debt (80% in the case of Allied Irish Bank). Tellingly, Irish debt costs have continued rising even after its bailout was confirmed. This is in part due to rumors that senior debt holders may also be forced to take losses.

As former chief IMF economist Simon Johnson and LSE's Peter Boone recently wrote "market participants are good at thinking backwards: if they can see where a Ponzi-type scheme ends, everything unravels". In other words, the market for troubled sovereign debt depends on the ability of countries like Ireland and Spain to 'roll over' their borrowings until their economies begin growing again. (Ireland's economy began shrinking again earlier this year, and Spain's is projected to shrink for 2010.) Without economic growth the odds that troubled sovereign debts will ever be repaid in full (without outside help) is almost certainly nil.

In the months since the spring Greek crisis, the quasi-explicit bailout guarantee by the "troika" (EU, IMF, and ECB) has been the Eurozone debt market's linchpin. Now the bond market is calculating that Germany's insistence on private sector loss sharing by 2013 means than holders of certainly Greek, Irish, Portuguese debt, and perhaps the debt of other nations, will be forced to incur losses. Instead of waiting  around to find out the precise haircut percentage, investors are exiting risky pan-european sovereign debt positions post-haste.

China to the Rescue?

Ultimately, the answer to the question of where the Euro-debt unmerry-go-round stops depends on how far the ECB, IMF and German taxpayers are willing to go.

Simon Johnson thinks the ECB and Germans neither can or will, respectively, step up to the plate. He also questions whether the IMF has enough resources to bailout a country the size of Spain, let alone Italy or France. He goes on to speculate that if one of the large Eurozone nations needs a bailout that China, with its $2.6 trillion in reserves, may be asked to recapitalize the IMF. The attraction for China: increased global standing and leverage on contentious issues, such as its policy of maintaining an artificially low currency.

I believe that China may expand its existing role in Europe's debt crisis. However, European and U.S. officials will be reluctant to surrender center stage to China and will minimize Beijing's participation. While the exact form of the ultimate resolution is unclear, it will be a European-U.S. led solution.

Looking Ahead

The question of whether membership in the euro currency union is a good idea has taken root. Iceland's President has recently been talking up his country's relatively quick bounce back from bankruptcy abyss. Part of Iceland's rebound can be explained by the fact that it was able to devalue its own currency, which helped its export sector. In contrast to Ireland, Iceland also chose not to bail out its insolvent banks. The Czech Republic, slated to become part of the currency bloc, recently demurred on whether it would follow Sweden's path of never adopting the euro.

On the subject of whether any countries will abandon the euro currency all together, the consensus view popularized by Professor Barry Eichengreen was that joining the euro was irreversible due to the risk of sparking a bank run. But as NY Times columnist Paul Krugman states, this incentive to keep the euro vanishes when a bank run (like the one currently underway in Ireland) has already taken place.

Many questions remain, but one thing is certain: even with Ireland's bailout (the specifics are expected to be announced on Sunday before Asian markets open) the Eurzone crisis is far from over. Investors looking to insulate themselves from events may want to consider hedging currency risk through various inverse Euro ETFs, or by investing in precious metals.

Does Capitalism Depend On Population Growth?

Sometime in 2011 the world's population is projected to pass 7 billion.

However, if current trends in birth rates hold eventually the planet's population will top out around the year 2050. Does the survival of capitalism, as PIMCO's Bill Gross recently speculated, depend on population growth?

Courtesy of The Economist.

What to Do When the FBI Raids Your Hedge Fund

An entertaining read on the ongoing hedge fund insider trading shakedown from Bloomberg's Johnathan Weil.

Friday, November 26

Gold's Strange Bedfellows

Today Floyd Norris ponders the rise in the price of gold in a NY Times piece, which perhaps more accurately could be titled "Let's Hope the Price of Gold Crashes".

I encourage you to read it in full, but if you don't have time it can be simply summarized as yet another gold hit job by a major media organization. Wall Street Journal opinion makers had previously been leading the anti-gold media charge; in particular investing 'guru' Jason Zweig and Matt Phillips of the MarketBeat blog have both bad mouthed the barbarous relic. Perhaps the NY Times is now aiming to give the WSJ a run for its anti-yellow metal money?

What Zweig, Phillips and now Norris have perhaps all failed to realize is that in barbarous monetary times, relics do well.

However, the above journalists' dislike of gold doesn't compares with the vitriol from Warren Buffet's longtime partner at Berkshire Hathaway, Charlie Munger. In what is a clear case of hating on both the game and the playa, Munger calls all gold owners "jerks".

If the fiercely competitive and politically opposite WSJ and NY Times seem like strange anti-gold bedfellows, consider the following bizarre 'gold lovers': followers of media shock jock Glen Beck and the hedge fund investor he refers to as a "economic war criminal", George Soros, both own loads of gold; countries as culturally and economically diverse as Russia, Mauritius, India, Saudi Arabia, Sri Lanka, Iran, Bangladesh and China have all been increasing their gold reserves; citizens have been acquiring Au in both economically underperforming America and booming Germany, where Frankfurt university professor Wilhelm Hankel recently remarked:
"You cannot find a bank safe deposit box in Germany because every single one has already been taken and stuffed with gold and silver. It is like an underground Switzerland within our borders"
Returning to Norris' article, he speculates that part of the appeal of gold is that it serves as a proxy ballot box for the general dissatisfaction people feel towards the inability of their political leaders to tackle economic problems.

In other words, the rising price of gold reflects an investor vote of no confidence in the world's economic leadership. But besides Munger, can anyone really blame investors for feeling this way?

Federal Reserve Public Relations in the YouTube Age

The Federal Reserve and its policy of quantitative easing (aka printing money) both have serious image problems. Significant controversy and disagreement has been generated recently by the Fed's QE2 program, resulting in an ongoing communications battle between the Fed's advocates and critics.

This amusing cartoon video, which 'explains' quantitative easing and the current economic situation in a rather simplified (and in some instances erroneous) fashion, has already generated nearly 3 millions views on YouTube. The video's appeal is undeniable: we were all children once upon a time and are practically hardwired to trust cute, entertaining cartoon characters.

Meanwhile the Federal Reserve is hardly sitting idly by. Its New York branch has taken a slightly more high-brow approach with this comic book, a medium typically reserved for pre-teens and up. Like the cartoon, the comic book attempts to explain how the Federal Reserve system and monetary policy work to someone unfamiliar with macroeconomics.

The comic book builds on Ben Bernanke's 60 Minutes television interview and Washington Post QE2 op-ed in that both reflect the Fed's understanding that it needs to engage in more public outreach. The historically secretive Fed correctly recognizes that business as usual won't work anymore.

The comic book also demonstrates the Fed's understanding that to get its message across it will need to employ a media strategy that goes beyond its usual menu of press releases, speeches, and well-timed leaks to news reporters like the WSJ's John Hilsenranth.

But how effective are the Fed's new openness and media strategy?And at what point does the Fed's communication cross the propaganda line?

Some, including influential Yale Professor Robert Schiller, argue that government policies should be purposely shrouded in what is effectively 'Newspeak'. For example, Schiller makes the case that "bailouts" should now be called "orderly resolutions". This framing, Schiller states, can help to ensure that the public 'gets it' when the economic going gets tough.

Perhaps more so than at any other point in its history, the Federal Reserve is under the public spotlight. Discussion of putting an end to the Fed's dual mandate of price stability and full employment is openly being considered.

Whether or not the Fed's mandate should or will change is an open question. However, it appears unlikely that Fed secrecy, as it has been historically been practiced, will survive.

Thursday, November 25

Video: Rare David Einhorn Interview on Shorting, Rating Agencies, Apple & Gold

I'm a big fan of David Einhorn's investment strategy, particularly his ability to identify accounting shenanigans at firms such as Lehman Brothers and Allied Capital, both of which he successfully shorted. (He wrote a well received book on his rather disturbing saga with Allied Capital.) He also rarely gives public interviews so the following video caught my attention.

The contribution of the credit rating agencies to the financial crisis have been well documented. Dodd-Frank financial 'reform' failed to make any material changes to rating agency model, which contains an inherent conflict of interest (bond issuers make payments to rating agencies, which incentivizes issuers to 'shop' for better ratings). To address this problem Einhorn simply advocates that credit rating agencies, such as Moody's (which he is short), should be abolished. Of note, famed investor Warren Buffet has been steadily reducing his large Moody's holdings.

Einhorn also discusses how a value investor like himself can be long Apple, which many have argued is in a bubble, as well as his current gold holdings (the largest position in his hedge fund). For more from Einhorn on his rationale for owning gold see this NY Times op-ed.

A Dark Cloud Appears Over Sunny Silicon Valley

Perhaps the marquee billing at this week's Web 2.0 Conference in San Francisco was the face-off between two super VCs: John Doerr of Kleiner Perkins of California & Fred Wilson of Union Square Ventures, which is based in New York.

The conversation was facilitated by provocateur John Heilemann of NY Magazine, who is still just as interesting with his now less frequent tech coverage as he is with his current political analysis.

It was the first time the rival East and West coast VCs have appeared together for an interview, and the debate covered the hottest startups, current valuations, and overall technology trends.

Is There a Tech Bubble?

Facebook, unsurprisingly, received a lot of airtime during the conversation. In a controversial remark, Wilson referred to Facebook as simply “a photo sharing site with a chat feature". Both VCs agreed that there appears to be a “bubble" in private market valuations, which may be driven by Facebook's rumored $41 billion value.

Facebook's current value may be due in part to an insufficient supply of stock in the private secondary market where it is bought and sold. In other words, if Facebook were trading publicly right now it would be valued at less than $41 billion. But that's just half the bubble story. The two VCs didn't comment on how much of Facebook's valuation is due to the stratospheric market caps of some publicly traded tech companies. However, public and private tech valuations largely move in sync, so it could be wise for investors in tech stock market darlings such as Netflix, Amazon, Google, and Apple to heed the VC's "bubble" warning.

Shifting to the IPO market, fellow VC Bill Gurley recently argued that the current anti-IPO trend among private companies – spearheaded by Facebook – could pose long-term problems for the technology eco-system. There may be very good reasons for why Facebook shouldn't go public now (e.g., would shed unwelcome light on their confidential financials). However, Doerr argued that “the IPO window is currently open” and that more great companies should consider going public.

East Coast vs. West Coast

Of the two VCs, Wilson appeared to be the more insightful. He noted how APIs have obviated the need for startups to have a local biz dev presence. This and other trends help explain why tech innovation is dispersing geographically away from the once almighty Silicon Valley. In contrast to the stately Doerr, Wilson came across as still possessing fire in his belly and looking to disrupt the status quo. For example, Wilson argued that the open Android platform will ultimately come to dominate the currently higher profile iPhone platform.

When it comes to John Doerr, one always has to read between the lines of his legendary hyperbole. And to be blunt, Doerr came across as somewhat of a tech antique from the 90s. He makes repeated positive mention of that era's tech bubble promoter extraordinaire, Mary Meeker, as if the passing of a decade is enough to make everyone forget her disastrously overly bullish calls. When the subject of Apple's upopular iOS app gatekeeper protocols came up, Doerr sounded like a politician, delicately dancing around for fear of upsetting his Valley pal and neighbor, Steve Jobs.

Silicon Valley's Not As Bright Future?

Doerr's reluctance to publicly confront Apple's restrictive App Store is indicative of the dark cloud which has recently emerged over historically shiny, happy Silicon Valley. The innovation center of gravity may be shifting at least in part because Silicon Valley has become the land of entrenched oligarchs, fighting over fiefdoms and turf. The recent 'Angelgate' is perhaps yet another sign of this rather disturbing development.

Looking ahead, tech entrepreneurs seeking to disrupt may in fact be better off not automatically flocking to venerable Silicon Valley.

Tuesday, November 16

A Surprising Key to Unlocking U.S. Job Growth & Global Competitiveness

"Once we open up to the inevitability of our demise, we can lighten up about it and begin to transform the situation"
                                                                                       -Zen proverb

The United States is suffering through a very serious economic challenge. Unemployment is nearly 10%. State and local governments are facing bankruptcy. Consumer confidence is low, and probably heading lower. And the federal government's debt trajectory means the U.S. will soon be spending $1 trillion a year in just interest.

How is the U.S. going to lift itself from this morass? One surprising key to restoring U.S. jobs and economic competitiveness is a complete overhaul of the tax system.

Many people believe that any proposal to overhaul the tax system is politically DOA; there are simply too many special interests lined up to oppose major (or even minor) changes. Yet interestingly today came news of a bipartisan proposal to substantially alter federal tax policy by reducing income taxes and moving towards a consumption based tax system.

The Fundamental Problem with Income Taxes

I've long argued that taxing income is suboptimal economic policy. When an individual generates sufficient income, that individual is able to cover their own expenses. In contrast, when an individual does not earn enough income then financial assistance must be obtained from others. On the whole I believe society is better off when individuals are income self-reliant. This goal may not be achievable by everyone (e.g., disabled), or at all times (e.g., recession). But it is nonetheless a goal for which society should generally strive.

One way society can help individuals achieve this goal is through the elimination of as many disincentives to earning income as possible. The income tax creates several disincentives, some of which are illustrated in the following example:
Imagine you have a job which pays an annual income of $40,000, and one day you are offered the opportunity to earn an extra $1,000 for completing a project. However, the government will tax this $1,000 at a rate of 99%, meaning your take home pay from this project would be only $10. You would also need to keep the receipt for the project and report the project on your income tax return. If the only thing that appealed to your about the project was the amount of money you'd take home (e.g., no work experience benefit or other perks), would you take the project? I imagine most would probably pass. 
What if the government instead taxed the project at 75%. You'd probably be more likely to take the project now, but you may still pass if you're only going to net $250 of the $1,000. What if the tax rate was lowered to 35%? We're getting warmer now. Would you take the project if the tax rate was lowered to 0%? Perhaps most now would. But for those who still wouldn't: if the extra filing requirement was eliminated would that seal the deal?
The key takeaways from this example are:
  1. Tax rates and ancillary requirements, like record keeping and reporting, can affect our decision making when it comes to income
  2. Individuals possess different tax rate and hassle thresholds
In the real world precise measurements of just how much of a disincentive the income tax is is difficult to obtain due to individual preferences. However, we can see logically from the example how disincentives do exist at a variety of tax rates and reporting requirements.

A simple summarization of the above: don't tax things, like income, that you want to encourage.

Tax Code Complexity Stifles Job Growth

If you think the U.S. tax system isn't all that complex, check out the below video of Treasury Secretary Tim Geithner.

Not even Tim Geithner, who's job as Treasury Secretary includes overseeing the IRS, can navigate the complexity of the U.S. income tax system!

A powerful job growth argument for moving away from the U.S.'s current income tax based system is that doing so would eliminate significant bureaucratic complexity. Tax simplification would help individuals and small businesses, who often have difficulty dealing with the 65,000 pages of the U.S. tax code without hiring expensive tax accountants. Small businesses have created 65% of new jobs in the U.S. over the past 17 years. Reducing paperwork and filing burdens on this sector of the economy could help generate much needed job growth.

What's the Alternative to an Income Tax?

In contrast to income, society's best interests are not always served by consumption. Put simply, consumption can be a bad thing. This is particularly true in the case of overconsumption, which can lead to a low savings and investment rate as well as over indebtedness. Consumption that generates negative externalities which aren't or cannot be offset is also undesirable. An example of a consumable item which can lead to negative externalities is tobacco. Take the following personal example:
I enjoy the occasional 'victory' cigar. But by smoking cigars I may increase my chances of developing lung cancer. And if I develop lung cancer I may incur significant medical expenses. Under the current system some of my cigar-related medical expenses may end up being paid for by others.  
In a perfectly fair economic world, one coud argue that cigars should be taxed at the precise rate necessary to cover all medical costs associated with cigar related lung cancer. In this way only cigar smokers would cover the costs of cigar related lung cancer.

Some state and local governments have actually created tobacco taxes, which are often referred to as 'sin taxes'. Sin taxes, and your state and local sales taxes, are a form of consumption tax. Sin taxes are often placed on goods such as alcohol, tobacco and other products which generate externalities (like additional health care costs). In some cases the funds raised from sin tax are specifically allocated towards the prevention or costs associated with the 'sin'. For example, tobacco taxes may be used for advertising against smoking.

But should we try and tax cigars at the precise rate necessary to cover the associated health care costs, and then try and allocate those funds towards only cigar related lung cancer costs? The snort answer is no. The complexity and additional bureaucracy of trying to do so would make this effort extremely inefficient and costly.

So does that mean consumption taxes are not viable? Actually, no. Sin taxes, or your state or local sales tax, are not the only types of consumption taxes.

How the 'Fair Tax' Would Address Consumption Tax Criticisms

At the end of the Tim Geithner video there is a plug for the Fair Tax. What is it?

There are numerous arguments against consumption taxes. Below is a list of the main ones along with how the Fair Tax addresses each concern (in parentheses):
  • Consumption Taxes are Regressive: Everyone has to pay consumption taxes whereas those with low income don't have to pay income taxes. Therefore consumption taxes disproportionately impact the less well off. (This depends on how the consumption tax is structured and implemented. The Fair Tax attempts to avoid being regressive through 'prebates')
  • Economic drag: The U.S. economy is driven by consumption and any tax on consumption will make the current economic situation worse. (This would probably be true in the short-term. The Fair Tax recommends a phased implementation approach to mitigate this issue. However, over the long-term a number of policy experts, including former Federal Reserve Chairman Alan Greenspan, disagree that a consumption tax would be a drag. Many economists consider it the ideal tax system for driving economic productivity.)
  • Complexity: trying to determine the exact tax rate to apply to cigars for the medical costs is difficult if not impossible to calculate. (The Fair Tax sidesteps this issue by applying a uniform tax rate across all consumption.)
  • Lobbying: By trying to come up with targeted sales taxes you open the door to endless legislative lobbying by interest groups to tinker with the tax rate.  (The Fair Tax sidesteps this issue by applying a uniform tax rate across all consumption.)
  • Disruption: Hundreds of thousands, it not millions of jobs (i.e., accountants, auditors, tax preparation software companies, lawyers, and lobbyists) have invested their careers in the current income tax system. A complete overhaul of the tax system would create widespread employment displacement.  (Yes, there would be change. But the economy would be better served by deploying these individuals to productive areas of the economy, which is discussed here.)
  • Accomplishes Nothing, Just Replaces One Tax for Another: Switching to a consumption tax would be a distraction from addressing the fundamental budget problem, which is a mismatch between government spending and tax revenue. (The Fair Tax could lead to economic growth, which in turn could generate more tax revenue to help address government fiscal imbalances.)
  • It Will Never Happen: Too many political interests are invested in the current tax code. A fundamental overhaul has too many political enemies. (This is an intellectually lazy approach to argument which attempts to dismiss an idea without addressing its merits.)
That's quite a list! Does a consumption tax like the Fair Tax stand a chance? Is the Fair Tax even the best consumption idea? There are others.

I'm not a Fair Tax expert. But I'm intrigued by what appears to be a very well thought out proposal which addresses many consumption tax concerns.

Looking Ahead

It is easy to get discouraged when contemplating whether seemingly intractable big problems, like the current economic situation or tax reform, can ever be addressed. Thankfully some solace can be found in U.S. history.

At the turn of the 20th century, very few thought the grip on government held by powerful business trusts, such as John D. Rockefeller's Standard Oil, could be addressed. The great trusts of that day simply wielded too much power, or so it was thought. It took over 10 years and a force of personality as strong willed as Teddy Roosevelt, but Standard Oil was eventually broken up.

During the Great Depression in the 1930s, very few thought the powerful bankers which had profited from stock market speculation could be regulated. But along came a relentless prosecutor named Ferdinand Pecora, and his tenaciousness was instrumental to enacting financial regulations. Those reforms ushered in a half-century of financial system stability.

In the current environment, the upshot of running out of tarmac is that the U.S. is close to exhausting all the suboptimal choices; government will soon be forced to do the right thing.

In other words, don't underestimate the likelihood of tax system overhaul and good economic ideas like shifting from the current bureaucratic income tax system to something like the Fair Tax.

Scientists Propose One-Way Trip to Mars

Not a suicide mission, mind you, but a proposal to send the real life version of 'Space Cowboys' (older astronauts) on a one-way mission to Mars to begin permanent colonization of the red planet.

And what's the big justification for a one-way trip? Scientists argue it would cut mission costs by 80%.

From the article:
Schulze-Makuch believes many people would be willing to make the sacrifice.
He and Davies believe a Mars base would offer humanity a "lifeboat" if Earth became uninhabitable.
"We are on a vulnerable planet," Schulze-Makuch said. "Asteroid impact can threaten us, or a supernova explosion. If we want to survive as a species, we have to expand into the solar system and likely beyond."
I agree with Schulze-Makuch that numerous people would volunteer to become the first human Martians. But the additional time and cost of bringing back the first human visitors to Mars may well be worth it.

While humans have been exploring space for almost five decades, space travel is still dangerous. Turning the first human trip to Mars also into the first human colony sounds like great bang-for-the-buck, but it is fraught with risk. Schulze-Makuch's suggestion may accelerate the initial timetable, it could also set the overall long-term space exploration and colonization effort back.

Reflecting its longheld "first you must go slow before you can go fast" approach, it's unsurprising that Schulze-Makuch's proposal was greeted by a lack of NASA enthusiasm.

But Schulze-Makuch's suggestion that the private sector might be interested in taking on such risks introduces all sorts of interesting property rights and legal questions. For example, will or should the first visitors to Mars be allowed to stake a claim?

Sunday, November 14

Is Economic Propaganda Ethical?

Ever wondered why government officials use fancy sounding terms like 'quantitative easing' instead of the much easier to understand 'printing money' when they both effectively mean the same thing?

Yale Professor Rober Shiller, who correctly predicted the housing market crash, weighs in on this topic with a piece in this weekend's NY Times. In the article he describes how to handle the inevitable next financial crisis.

His rather surprising answer?  By using the right vocab.

In what so far as I can tell is a first by an esteemed member of the academic community, Schiller goes on public record rationalizing the use of propaganda by government officials.

Shiller states:
"in times of crisis...confidence (expressed by the government) is also vital, even if government can’t absolutely guarantee that it’s justified...for people who don’t fully understand the financial system’s complexities "
In other words, Shiller is making the argument that it's not only ok, but advisable for the government to be less than frank with voters. During a financial crisis, Shiller argues, this lack of candor is actually in the public's own good.

Putting aside the subject of the ethical responsibilities of public officials for a moment, the first question is would Shiller's recommendation even work?

To help answer that question we can turn to a recent example from early 2008, prior to the apex of the financial crisis. On March 28, 2008, Fed Chairman Ben Bernanke, testifying before Congress about the housing market, made the now infamous false assurance that the subprime real estate crisis was "contained".

There are two possibilities here: either a) the Fed Chairman honestly believed that the Fed's actions had magically put the breaks on the real estate meltdown; or b) he was consciously using propaganda to reassure people, as Shiller advocates.

Regardless of which of these two possibilites is correct, what we do know is that his reassurances did absolutely nothing to prevent the financial crisis, which hit full force later that year in September. Perhaps Bernanke's comment postponed the crisis, but postponement may in fact have made it worse by allowing the problem to further fester under a blanket of false Fed confidence.

Are 'bailouts' and 'printing money' hopelessly beyond the general public's understanding, as Shiller believes? And instead of coming up with the proper vocab, shouldn't officials and financial experts be working on how to prevent the next financial crisis?

Video: Why Printing Money is referred to as 'Quantitative Easing'

Armchair Budget Balancer - You Play Congress & the President

Something nifty courtesy of the NY Times. Here's the description of their new, interactive budget balancing tool:
"Today, you’re in charge of the nation’s finances. Some of your options have more short-term savings and some have more long-term savings. When you have closed the budget gaps for both 2015 and 2030, you are done. Make your own plan, then share it online."
Related article here.

Update: There has been some criticism of the lack of options provided in the NY Times' tool. For example, the option of switching from an income tax to a consumption tax (e.g., Fair Tax) was left out. According to the NY Times Economics blog this was done due to the fact that such a change is not politically feasible. I expressed my disappointment in the comments that an economics blog was concerning itself with political feasibility at the expense of promoting optimum economic policy:
"There are a lot of great ideas that don't garner much support in Congress. This may explain why Congress's approval rating is around 10%."

Saturday, November 13

David Brooks and Dick "Buy Lehman" Bove Perpetuate TARP Profitability Myth

David Brooks
Some myths just won't die. And if repeated often enough they can become legend.

Banking analyst and regular CNBC talking head Dick Bove is doing his part to keep the TARP was 'profitable' myth afloat. Joining this cause is NY Times columnist David Brooks, who on a recent episode of Charlie Rose made it abundantly clear that accounting is not his forte. Like Bove, Brooks mistakenly believes that TARP is 'profitable'.

To my knowledge Brooks, who based on appearances could easily be mistaken for an accountant, is no financial expert. So perhaps he can be forgiven for sending his proselytizing mouth into terra incognita. Bove, on the other hand, should definitely know better.

As discussed previously herehere, and here, the only way to claim that TARP is profitable is by viewing it in isolation of the entire government bailout, which in addition to TARP includes GSE conservatorship, Fed asset purchases, etc. Bailing out Fannie and Freddie alone could wind up costing taxpayers trillions, thereby swamping any gains seen by TARP.

The results of TARP are intimately connected and influenced by the other government bailout programs. Claiming that the relatively small TARP bailout sliver is profitable is intellectually dishonest and emblematic of the accounting shenanigans which continue to distort the balance sheet picture of our financial system and government.

Is there a political motivation behind the repeated claims of TARP profitability? Establishing this perception would certainly make the the banking sector look better in the eyes of taxpayers. It would also cast a more favorable light on the massive government intervention initiated by 'Government Sachs' and Treasury Secretary Hank Paulson and then furthered by the Obama administration.

Unfortunately this notion of TARP profitability seems to have gained a toehold in the mass media. As such we can expect to see future government bailouts justified on myopic, misleading accounting.

Thursday, November 11

Chimerica Rap Video: U.S.-Sino Currency Rap Battle

When to Pull the Plug

Is there another subject that is both more complex and deeply personal than medical ethics?

Seven years ago this subject came up in a conversation with World Business Academy Founder and President, Rinaldo Brutoco. In the dictionary next to the world 'polymath' there should be a picture of Rinaldo.

Rinaldo and I were going over a speaking circuit checklist, discussing the subjects he felt qualified to lecture on. It was a long, diversified list, and he confidently checked every box except one: medical ethics.

Realizing that this was a topic that not only stumped Rinaldo, but also left him uncomfortable or unable to defer to another expert, I promptly tabled further contemplation of the subject. For me, the topic reemerged during the recent health care reform debate when rumors of  "death panels" began circulating about.

Below is a preview from the highly regarded PBS program Frontline, which will be profiling medical ethics in an upcoming program.

Watch Facing Death on PBS. See more from FRONTLINE.

Here is the press release from the show:
"How far would you go to sustain the life of someone you love, or your own? When the moment comes, and you’re confronted with the prospect of “pulling the plug,” do you know how you’ll respond? Unfounded rumors of federal “death panels” grabbed headlines last summer, but the real decisions of how we die -- the questions that most of us prefer to put off -- are being made quietly behind closed doors, increasingly on the floors of America’s intensive care units. In this film, FRONTLINE gains access to the ICU of one of New York's biggest hospitals to examine the complicated reality of today’s modern, medicalized death. Here we find doctors and nurses struggling to guide families through the maze of end-of-life choices they now confront: whether to pull feeding and breathing tubes, when to perform expensive surgeries and therapies or to call for hospice. The film also offers an unusually intimate portrait of patients facing the prospect of dying in ways that they might never have wanted or imagined."
Venturing into a discussion of medical ethics often becomes deeply emotional. Perhaps there is no better illustration of the gap between the intellectual disciplines, such as economics, medicine and philosophy, which have attempted to provide insights into medical ethics, and our humanity.

Does Money Buy Happiness?

“Gross national product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts the destruction of our redwoods and the loss of our natural wonder in chaotic sprawl. It counts napalm and the cost of a nuclear warhead, and armored cars for police who fight riots in our streets.”
"Yet the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile.”
-Robert F. Kennedy, 1968
While interest in qualitative economic indicators, such as happiness, has grown substantially in recent years, the above quote from over four decades ago suggests a longstanding interest in holistic economic measurements which encompass more than the venerable gross product of a nation, or individual income.

Research on subjective indicators, such as happiness, has lead to new and interesting economic insights. Observing the growth in happiness related research prompts interesting questions in its own right: has the world become more complex, therefore necessitating more sophisticated heuristic techniques in heretofore underexplored economic provinces? Or has the development of modern social science methods, in fields such as statistics, psychology and micro-econometrics, made recent scholarship possible in areas previously rife with challenge?

Happiness and Income

Can money truly buy happiness? Perhaps no other question throughout history is responsible for as much debate. In recent years economists have been able to put this question to actual scientific test. Research has shown that happiness is in fact directly related to income. However, income aspirations increase alongside income growth, thereby undercutting the favourable effect of income growth on happiness. In other words, the concept of diminishing marginal returns appears to apply when measuring happiness derived from income (Easterlin 2001).

In addition, while wealthier individuals appear happier than those less well off at certain points in a life cycle (‘context specific’), over the entire life cycle (‘context free’) actual experienced happiness remains constant on average (Easterlin 2001). In short, the answer to life’s age-old debate is “yes”, but with limitations. Further, happiness derived from money is not absolute, but relative (Duesenberry 1949; Blanchower & Oswald 2001).

Further happiness research has provided a number of interesting, and perhaps surprising insights:
  • A high correlation has been shown between income and happiness across countries (Deaton 2008)
  • Income and happiness are positively correlated but other institutional factors, such as local autonomy may be a more important determinant than income on happiness (Frey and Stutzer 2000).
  • On an individual level, well-being over a life cycle plots a U-shape curve, with the happiness trough occurring in life’s middle years and peak happiness occurring both early and later in life. This pattern suggests a release of aspirations and adaptation to one’s life circumstances (Blanchower & Oswald 2001).

Happiness is a direct but subjective measure, and like all subjective measures it has quantification limitations. For example, Blanchower & Oswald point out that the evolution of a word’s meaning over time may pose challenges (e.g., ‘happy’ may no longer mean exactly the same thing today as it did 40 years ago). This creates significant challenges for the measurement of happiness, particularly across time and space. 

Easterlin goes on to point out that scientists have begun to discover the effects of genetic traits on disposition, which in turn influences (and perhaps ultimately determines) happiness. Contrasting with Deaton’s comparative country findings, individual countries such as Japan have experienced rapid income growth but no material upward or downward change in happiness during the same period (Vennoven 1993).

Blanchower & Oswald studied happiness in modern Great Britain and the United States. In the case of the U.S., over the past 30 years happiness has been declining while per capita income has been rising. However, real wages over this period have largely remained stagnant (Mishel and Bernstein 2007).
There is also some criticism over whether society should invest its scarce resources in the measurement of something as nebulous as happiness? Does a sufficiently precise and agreed upon definition of what happiness is even exist? Without one there will be intractable problems with measurement. 
Finally, there is a fundamental philosophical criticism of whether or not happiness is, or should be, a shared cultural goal. In other words, should everyone adopt Taoism’s motto of “happiness is my duty”? There is no definitive global, or perhaps even national, answer to this question.


Overall, while there appears to be a correlation between income and happiness, definitively determining causation may prove elusive. Also, the question of whether income is a derivative of happiness or vice versa is unclear. The subjective nature of happiness and the difficulty of measuring it across cultures, time and space places limitations on reaching strong comparative economic conclusions. 

However, while happiness research (and perhaps research into other qualitative measures) carries limitations, it is an important area of research due to the perhaps even more problematic limitations of existing objective measures, such as GDP per capita. Objective measures may also fail to take into account all economic incentives and goals. 

Perhaps the argument for the usefulness of happiness as an economic indicator is strengthened when it is not pitted solely in relation to income, but rather combined with other subjective and objective measures to form a more comprehensive picture. For example, the Prosperity Index was recently launched by the London based Legatum Institute. The index ranks countries across eight different wealth and well-being measures, including a number of subjective measures such as ‘Trust in Others’ and ‘Satisfaction with Health’. The purpose of the index is to “provide new insights into the factors that produce successful countries and fulfilling lives”.

The Legatum Prosperity Index also makes use of other qualitative data sources and indexes, including:
  • Global Peace Index
  • Global Competitiveness Index (World Economic Forum)
  • Governance Indicators (World Bank)
  • Index of Economic Freedom (Wall Street Journal/Heritage Foundation)
  • Freedom in the World Report (Freedom House)
The Prosperity Index is indicative of growing interest in happiness measures by governments from around the world. For example, the U.K. recently announced that its Office of National Statistics will be surveying the British population in an attempt to measure well-being, along with sustainability measures. The decision to pursue this study follows the recommendation of Nobel Prize winning economists Joseph Stiglitz and Amartya Sen. The U.K.’s announcement follows similar moves by governments in France and Canada (Rumsey 2010). Overall, the measurement of happiness would appear to be on the rise.

The proliferation of subjective economic indicators continues unabated. Looking ahead, the emergence of new qualitative economic lenses through which social scientists may attempt to better understand the world suggests strong interest, and perhaps funding, for further research on the economics of happiness and other subjective measures.

Tuesday, November 9

Taking a Geopolitical Vacation

An interesting read on a rather unusual approach to taking a holiday from STRATFOR.

Quote of the Day

In reference to World Bank President Robert Zoellick's recent gold standard op-ed in the Financial Times, the quote of the day comes from the WSJ:
"mentioning the word "gold" in the orthodox Keynesian company of the Financial Times is like mentioning the name "Palin" in the Princeton faculty lounge"
In related news, gold has throttled well past $1400, as predicted.

Common Ground in Krugman vs. Ferguson

Paul Krugman & Niall Ferguson
Hard as it may seem to believe in today's world, there was a time when not all bankers were reviled.

Equally shocking, perhaps, is that prior to the 1980s the U.S. financial system really didn't experience a major financial crisis for the previous half century. This also was an era of significant economic progress for America as a whole.

For several months now Professors Paul Krugman and Niall Ferguson have been squaring off on camera and in print over whether the U.S. needs a second government stimulus to kickstart the economy. You can check out videos of their their respective arguments on CNN here and here.

While there is a large gap on where they stand in the fiscal debate, there is a topic where they appear to share common ground, and that is the need to fix banking.

Monday, November 8

Post Dodd-Frank: The Future of U.S. Banking and Financial Regulatory Reform

Interesting article over at Seeking Alpha from David Warsh on this topic. You can read it here, and below are my thoughts:


Great article and I completely agree with you that Dodd-Frank doesn't go far enough in putting our banking regulation back on sound footing. Also, great to see SA Editors putting this topic in the Editor's Choice spotlight.

And if Soss is the next Volcker, then it would be wonderful if his name was put forward. But if he is what you say then I imagine the political timing won't work, especially given the dithering over Elizabeth Warren that we've seen of late. The Republicans might be willing to accept a Volcker-inflation slaying clone, but only if Warren (and perhaps the new Consumer Protection bureau) were sacrificed in exchange. Would that be a good trade?

Is Bailing Out Irish Banks Worth the Blood and Violence?

Sunday, November 7

World Bank President Zoellick Gift Wraps Gold $1400+

'Tis soon to be the season of giving, and the monetary gifts to gold owners are getting off to an early start.

Not to be outdone by Federal Reserve Chairman Ben Bernanke's recent 'QE2' goody bag, World Bank President Robert Zoellick has penned an editorial in the Financial Times calling for a global monetary debate on returning to a gold standard of sorts.

Zoellick's proposal is for a basket of the world's leading currencies - the dollar, euro, yen, pound, and renminbi - to be paired with gold (which he describes as "an international reference point of market expectations") in a new Bretton Woods styled monetary order.

Gold really didn't need much of a reason to finally poke its head above $1400/oz, but Zoellick's op-ed and the gold chatter that's sure to follow will almost certainly provide the nudge.

Meantime gold owners can sit back, grab a bag of popcorn, and enjoy what's about to happen to the price of your Au.

Too Big to Save: Is Ireland the 'Lehman' of Europe's Sovereign Debt Crisis?

One of the most articulate and knowledgeable authorities on the financial system and crisis is MIT Professor and former IMF Chief Economist, Simon Johnson.

In two must watch videos Professor Johnson clearly explains why another financial crisis is inevitable unless specific steps are taken to prevent one.

Saturday, November 6

Video: Keynes vs. Hayek Rapoff (Round 1.5)

From the Economist's recent conference in New York. Update: this post was originally titled 'Round 2' as it was the second rapoff, but a new 'Round 2' was just released here.

Here's the original Keynes vs. Hayek, which is coming up on close to 2 million views on YouTube.

$10.2 Trillion

Per the IMF, that's the amount of money fifteen major developed-country governments will be borrowing in 2011.

That represents an increase of 7% over 2010, and 27% of the 15 countries combined annual economic output.

More thoughts and analysis of these figures at the WSJ Econ Blog here.

Will Professor Niall Ferguson's prediction of a U.S. fiscal crisis come in on the early side of his forecast?

Morbidly Cool Website: The 'Impact Catastrophe Calculator'

Following up my recent post on the Ultimate Black Swan, if you're curious about how much damage different types of asteroids would do if they struck earth check out the 'impact catastrophe calculator'.

You can customize your asteroid along the following parameters:
  • Diameter - a prepopulated list gives asteroid sized options such as a school bus, the Empire State Building, or the London
  • Density - i.e., ice, porous rock, iron, etc.
  • Impact Angle
  • Velocity
  • Surface type struck (i.e, sedimentary rock, water, etc.)
A brief video showing your asteroid careening for earth plays, which is then followed up with a damage report detailing the crater size, etc.

Friday, November 5

Has Federal Reserve Secrecy Become Untenable?

The most interesting aspect of the Fed's new 'quantitative easing' announcement (aka QE2 ) was not its $600,000,000,000 price tag.

Nor Fed Chairman Ben Bernanke's op-ed in the Washington Post which stated that a key benefit of QE2 is higher stock prices.

I believe the most interesting, and perhaps significant, questions relate to the impact on the Fed's ability to maintain secrecy in wake of the unprecedented media coverage of QE2.

A Well Telegraphed Event

Regular Fed watchers of course know that an oft used Fed strategy is to communicate upcoming policy shifts through speeches and leaks to the press well in advance of the actual vote and formal policy change announcement. The Fed's thinking here is that this strategy provides time for market participants to acclimate to an upcoming policy change, thereby avoiding a sudden (and perhaps unwelcome) monetary surprise.

Anyone following the general financial press was probably aware no later than September that QE2 was going to be announced at the November Fed meeting. Media coverage of QE2, including my first writeup, began appearing as early as June.

Wednesday, November 3

Of Bonds, Bubbles, and the "Sean Connery of Bonds"

The ultimate Bond
James Bond aficionados interested in a guide to the world of bonds (government, investment grade, emerging markets, etc.) will enjoy this cheeky video from the FT.

In the video various categories of bond investments are compared to the main actors to don the role of 007 -- Roger Moore, Pierce Brosnan, Daniel Craig, and of course the original HMSS agent, Sean Connery.

Who was your favorite actor to play James Bond?

Tuesday, November 2

For All Mankind

To get the country back on track does the United States need a big, audacious "man on the moon" type goal?

Whether converting the energy infrastructure from fossil fuels to clean energy, or sending humans to Mars (and returning them), would an ambitious, forward looking project of this scale help us regain our confidence and vitality?

Looking back at the original man on the moon project, I highly recommend For All Mankind, the 1989 Academy Award nominated documentary by Director Al Reinert. It is a great film with a superb soundtrack, which features Brian Eno. A brief sample clip from the beginning of the movie is  below. And for home theatre buffs with a good subwoofer, I highly recommend cranking up the Saturn V rocket launch scene.

Absolutely amazing what the United States was able to accomplish 40+ years ago with the technology of the day.