Sunday, July 31

Dilbert Prepares for Financial Meltdown

(Click to enlarge)

Evil on Display: Anders Brievik and Insane Acts Committed by Sane People

Perhaps it would be easier to understand the horrific Norwegian killings if they were committed by someone with a history of mental illness and/or violence.

Or perhaps we could more quickly file away this tragedy into a tidy, little mental compartment if the killing was conducted by someone with far less skill and fewer economic advantages.

And perhaps over time more details will emerge to reveal a picture of someone with a history of hate or unsound mind.

But early portraits painted by people who knew him suggest a rather disturbing alternative, which is that Anders Brievik was a seemingly 'normal' Norwegian.

From one of his classmate friends of four years:
I do not know what drove Anders. But, unfortunately, I do not think he is crazy. It would have created a comfortable distance between us if I thought he was. Nothing I know about him from our school days or what I have read in his so-called manifesto suggests that. Rather, he is cold, intelligent and calculating. The Anders I knew was not a monster. 
And as the saying goes, he was not an island. He was product of our society. He was one of us.
Sadly, There is Nothing New Here

If in fact he is a sane, even likeable person as some suggest, who also can kill without concern for those he slaughters, what are we to make of Anders Brievik?

Any student of history is well aware of the unfortunate reality that people like Brievik are nothing new. Many, particularly here in Europe, had hoped the ideologies which fuel Brievik-like personalities, capable of inflicting immense harm to a great number of people not personally known, had been buried decades ago. But the carefully orchestrated supernova of violence conducted by Brievik reminds us that this flame has not in fact gone out yet.

In the wretched corner of history occupied by the Brieviks of the world resides Nazism, which, for better or for worse, has received the lion's share of attention. I say for better or worse because the Nazi-like crimes committed under Stalin, Mao, and others often do not receive the same level of emphasis as those committed under Hitler.

Some who studied the Nazi leadership on trial at Nuremberg stated that the single most important personal quality which contributed to the ability of these humans to try and exterminate Jews (and others) was a lack of empathy. In place of a sense of caring about individuals and collective humanity, which exists in varying degrees in the vast majority of us, instead resided a bottomless black hole devoid of the ability to feel what others feel.

Harm-justifying venom can be easily poured into such minds. Rather than rejecting ideas which you and I would find unconscionable, harming others can seem logical. Seemingly sophisticated moral philosophies, justifications, and ends-means rationalizations enable such people to shoot kids "not just once, but twice, to be sure".

The Anti-Change

Brievik's bomb and gun shots were basically an attack on change. Put simply, Brievik didn't like the way things were going in Norway and decided to effectively sacrifice his freedom of movement for at least 20+ years-to-life (Norway doesn't have the death penalty) to let the world know about it.

For those who don't have the time or inclination to read his 1,000+ page 'manifesto', the change he lashed out against goes by the name of globalization. Brievik would probably prefer that we refer to it as multiculturalism, but globalization and multiculturalism are inextricably linked. Reductionist arguments which try and isolate multiculturalism from globalization are idiosyncratic and counter-productive.

The purpose of this post is not to debate the merits of globalization, but it was interesting to note the stark contrast between Brievik's hate for Norway's immigrants with a recent talk on the contribution of immigrants to Britain's intellectual history. One quarter of Britain's Nobel prize winners were born abroad, as were a large number of America's. Is freedom of movement what the Brieviks of the world would have end, or are they ok with allowing just the Albert Einsteins in?

What is Evil?

Norwegians are hurting badly from this heinous crime and asking how one of their own could commit such an act. Some would like to see the whole episode go away and also deny Brievik the publicity and attention he seeks. From the lack of headlines of late on the BBC and other respectable news agencies it would seem that some clearly understand the essential role of the media to his carefully calculated plan. Hats off to media leaders who recognize this and have taken appropriate action. But what about those who are still trying to gain more information and understand why this happened?

Outside of the religious world people often scoff at whether the imprecise, black-and-white concept of 'evil' is useful. But what other word comes close to giving this its proper name?

Leave it to the shrinks to classify and rationalize empathy-devoid personality types. For the rest of us 'normal' people the word evil will suffice.

Friday, July 29

Video: Financial Repression in China

Victor Shih, Assistant Professor of Political Science at Northwestern University, on China's three trillion dollars of foreign exchange reserves. Shih discusses how China could run out of reserves pretty quickly in the event of a crisis.

Shih has collected data on banks and wealthy households in China, and he warns that the wealthiest 1% of households hold enough deposits in the banking system that if they start moving money out of the country, $3T could start to seem like a much smaller number.

Capital flight on the order of half a trillion -- that's no problem for China's banking system, Shih says, because China has the world's highest required reserve ratios, acting as cushion. But at around the $1T mark, the central bank would be forced into large-scale asset sales to avoid illiquid banks.


Monday, July 25

My Dream TV Setup and the Present Nightmare

I'm not a huge TV or movie watcher, but I would like to do the following:
  1. hang a flat panel HD TV on my wall
  2. connect it wirelessly to broadband internet so the only cable I need is the TV power cord
  3. use my smartphone or laptop as my remote
  4. and (here's the hard part) watch all the world's video content (in full HD resolution when available), whenever I want for a reasonable price.
That's my seemingly simple (in terms of the necessary technology) TV dream.

Now, let me introduce you to the present state, which amounts to a nightmare of massive fragmentation.

TV Hell

Not surprisingly given the money at stake, nearly every major tech firm, media conglomerate, TV manufacturer, along with a number of innovative startups, are angling for a piece (or more often control) of the connected TV market. The result is today's dizzying array of incompatibile and walled off offerings, such as:
  • Content sources: iTunes,  Bravia Internet, Hulu, SeeSaw, Plex, Netflix, Freeview, LoveFilm, etc.
  • Wireless technologies: WHDI, WiDI, WirelessHD, Wireless USB, WiGig (see Wired's article for more on this topic)
  • Devices: separate boxes like Apple TV, Boxee, Revue, Roku, PS3, Xbox, and TVs like LG's Smart TV and Google TV which have features built into the TV itself
The net-net of this media-tech cacophony is consumer confusion and painfully slow progress on delivering a complete wireless HDTV solution.

The failure is not for lack of effort. Google TV tried to bring it all together and promptly had the door slammed in its face by the major U.S. television networks. Scrappy startups like Boxee and Plex have developed innovative offerings, but they lack the heft at present to deliver the goods. On the content side, Hulu is great, but it engages in an extensive game of cat and mouse to keep users from outside the U.S. and Canada from accessing the site. The same is true of the BBC's iPlayer for users outside the UK. Apple has a lot to offer, but Apple TV can't do full HD and the iTunes pricing model makes it significantly more expensive than Netflix. Lovefilm doesn't stream content in HD, only standard definition at present.

It is Netflix, with its large catalogue of streaming HD content, that is perhaps the best of the lot. But it is only available in North America at present and (worse) the company is still beholden to content owners which means it can't control prices (e.g., the recent unpopular price increase).

In short, many have tried but everyone including some of the most creative and powerful companies in the world have failed to deliver wireless, on-demand HD TV.

Keeping the Dream

For now the Big Boys have all decided that, rather than sharing with other kids in the sandbox they're going to try to keep their toys to themselves. But what they fail to realise is that on demand, HD, wireless, anywhere, any device TV is coming whether content owners (Hollywood) like it or not. Hollywood can either get out in front of this tsunami and try to ride the wave of the future, or it will get crushed by it.

The future of TV will look something like Spotify or Netflix, meaning it will be:
  • On demand
  • HD
  • With a comprehensive library of content
  • And reasonably priced for all you can watch
When? The wireless and smart device technology exists right now, so it's all about content licensing. It was hoped that 2011 would be the breakthrough year for connected TV, but it's July and I don't see it happening.

Hollywood and content owners are fighting tooth-and-nail to maintain the lucrative status quo for another season. Freeview, talk of Netflix international expansion, and perhaps other important steps are in store for 2012, so here's to hoping we'll see major advances in wireless HD TV next year.

Friday, July 22

Video: Barry Eichengreen on Why Economics Needs History

Berkeley Professor Barry Eichengreen discusses the importance of history to the study of economics and other topics in the below video.

A summary of Professor Eichengreen's recent book, Exorbitant Privilege, can be found here; a video lecture he gave on this book can be viewed here

So far Germany's current generation of leaders seem to be as committed to supporting the current Eurozone project as Professor Eichengreen has suggested they would . However, it's less than clear to me whether Germany has the appetite or capacity to support countries such as Spain and Italy should a full blown debt crisis ignite in these two large countries. Perhaps Germany would prefer a smaller Eurozone, comprised primarily of more economically homogeneous northern European countries instead of the current version which includes slow growing Club Med countries?

Thursday, July 21

Updated: Greece to Engage in 'Selective' or 'Restricted' Default

Eurogroup head Jean-Claude Juncker
The undeniable fact that a Greek credit event was imminent was prognosticated here in late May. The situation on the ground in Greece, the lack of political will in the Eurozone, and the simple arithmetic all made kicking the Greek debt can much further down the road simply improbable.

Now, at last, we have all but final confirmation from the horse's mouth of what many since last year have known all along: Greece will default.

What happens next?

This is much more difficult to predict and will depend on just how exposed fragile financial institutions are to the ripple effects of default, and how credible the new package which accompanies Greece's default. If contagion spreads uncontrollably to Italy and/or Spain, look out below!

Update: On the newly announced Eurozone bailout program, economist Willem Buiter has a nice quote: “The EFSF has gone from being a single-barreled gun to a Gatling gun, but with the same amount of ammo. It needs to be increased in size urgently.” 

The failure of Europe's leaders to increase the size of the bailout fund speaks to the lack of political appetite in Germany and other northern European countries to support further bailouts, as well as a failure to understand just how big Europe's debt problem is.

Any predictions on the half-life of the latest can-kicking measure before there's blood in the water again?

Bailing Out Too Big to Fail: Here We Go Again

The sorry state of Bank of America's financial position, which is trading at less than half its book value, may necessitate yet another bailout.

From Bloomberg's Jonathan Weil:
Ask anyone what the most immediate threats to the global financial system are, and the obvious answers would be the European sovereign-debt crisis and the off chance that the U.S. won’t raise its debt ceiling in time to avoid a default. Here’s one to add to the list: the frightening plunge in Bank of America Corp. (BAC)’s stock price. 
At $9.85 a share, down 26 percent this year, Bank of America finished yesterday with a market capitalization of $99.8 billion. That’s an astonishingly low 49 percent of the company’s $205.6 billion book value, or common shareholder equity, as of June 30. As far as the market is concerned, more than half of the company’s book value is bogus, due to overstated assets, understated liabilities, or some combination of the two.
But wasn't Dodd-Frank supposed to prevent us from having to bail out the megabanks again?

Until we embrace comprehensive financial reform, such as well thought through proposals like 'Limited Purpose Banking' outlined by Professor Laurence Kotlikoff, we will continue to be faced with the prospect of bailing-out reckless and/or incompetent Too Big to Fail megabanks.

Video: Profile of Michael Burry of 'The Big Short'

Why Bankrupt America Needs a Third Political Party

From Boston University Professor Laurence Kotlikoff:
The Republicans and Democrats have done a terrible job of managing our country and economy, transforming the American dream into a nightmare. They’ve squandered our youth and wealth in endless wars we couldn’t win, and spent six decades running an intergenerational Ponzi scheme, racking up huge official and unofficial debts for our children to pay. 
By some measures, the U.S. is now in worse fiscal shape than Greece. True, our official debt is a much smaller percentage of economic output. But our unofficial debt is much larger. The unofficial debt includes primarily the obligation to pay 78 million baby boomers roughly $40,000 a head each year of their very long retirements in Social Security, Medicare and Medicaid benefits. To get our overall fiscal gap under control, the U.S. must cut spending or raise tax revenue by $20 trillion over the next decade, far more than either the president wants or the House Republicans seek.
Full must read op-ed at Bloomberg.

Thursday, July 14

Reinhart and Rogoff on Why Heavily Indebted Economies Can't Grow

Coinciding with Moody's placing the U.S. debt rating on negative review, Carmen Reinhart and Ken Rogofff remind us that country's will high debt levels often struggle to grow (attention Paul Krugman, they're talking to you!):
Our empirical research on the history of financial crises and the relationship between growth and public liabilities supports the view that current debt trajectories are a risk to long-term growth and stability, with many advanced economies already reaching or exceeding the important marker of 90 percent of GDP. Nevertheless, many prominent public intellectuals continue to argue that debt phobia is wildly overblown. Countries such as the U.S., Japan and the U.K. aren’t like Greece, nor does the market treat them as such. 
Indeed, there is a growing perception that today’s low interest rates for the debt of advanced economies offer a compelling reason to begin another round of massive fiscal stimulus. If Asian nations are spinning off huge excess savings partly as a byproduct of measures that effectively force low- income savers to put their money in bank accounts with low government-imposed interest-rate ceilings -- why not take advantage of the cheap money? 
Although we agree that governments must exercise caution in gradually reducing crisis-response spending, we think it would be folly to take comfort in today’s low borrowing costs, much less to interpret them as an “all clear” signal for a further explosion of debt. 
Several studies of financial crises show that interest rates seldom indicate problems long in advance. In fact, we should probably be particularly concerned today because a growing share of advanced country debt is held by official creditors whose current willingness to forego short-term returns doesn’t guarantee there will be a captive audience for debt in perpetuity. 
Those who would point to low servicing costs should remember that market interest rates can change like the weather. Debt levels, by contrast, can’t be brought down quickly. Even though politicians everywhere like to argue that their country will expand its way out of debt, our historical research suggests that growth alone is rarely enough to achieve that with the debt levels we are experiencing today. 
The full Reinhart and Rogoff article can be found here.

Monday, July 11

Has the ECB Left the Italian Rearguard Wide Open to Speculative Attack?

During the ongoing debt saga in Europe's periphery, the European Central Bank (ECB) has actually had some success fending off speculative attacks. Hedge fund manager Hugh Hendry, for one, sounded like he was licking his wounds when he remarked last year that trying to short Europe had in effect become too 'expensive'.

The ECB's working assumption has always been that preventing the spread of contagion to Spain was of paramount importance. While it's true that Italy has most always been included when discussing the PIIGS debt problem, there was a sense that because Italian debt is largely held domestically by Italians (like Japan's situation, although not as high as their 95% domestic holding level) that the risks of unstable debt dynamics there were relatively low.

All that apparently changed suddenly on Friday as Italian bond spreads widened and, perhaps even more troubling, key Italian bank stocks plunged. As Italian regulators race to curb short selling, today both Italy's largest bank, UniCredit, and Intesa Sanpaolo are limit down, which triggered a halt to trading in their shares.

Has the ECB in its successful efforts to prevent financial contagion from spreading to Spain left Italy vulnerable to speculative attack? Or is Italy's rolling-over merely a sign of the realization on the part of government officials that they simply can't go on playing the kick-the-can down the road game indefinitely? Treasury Secretary Geither seemed to concede as much during a Sunday morning interview on Meet the Press.

For how bad things could get if Italy implodes (the country is home of the world's third largest bond market after the U.S.'s and Japan's) the below chart provides some perspective.

Update: There are reports that today (Tuesday) the Italian central bank, acting perhaps on the behalf of the ECB, has been buying Italian debt, and that the ECB will need to step in again for Italy's debt auction on Thursday or it will fail.

Every time European central banks step in to purchase sovereign debt the value of the euro will ratchet down accordingly.

Foreskin Man

San Francisco's political battle over circumcision has produced a new comic book character known as Foreskin Man.

Sunday, July 10

How to Fix Our Optimism Deficit

Europeans, Japanese, and even rose-colored glasses wearing Americans are suffering from what has been described as an 'optimism deficit'. This rather unthreatening sounding phrase should not be mistaken for an insignificant economic problem.

Optimism fuels all sort of important economic activities, such as entrepreneurship, saving for the future, and social cohesion. It may in fact be the most fundamental immediate challenge facing the developed world today. But with pre-election political gridlock setting in, our leaders are big on rhetoric and short on concrete actionable ideas which can restore confidence.

There is one idea, however, that I believe could make a significant impact on restoring optimism, but before getting to that a brief personal backstory.

Blowing Bubbles

I lived in San Francisco and worked in tech during Dot Com bubble and bust a decade ago, and it taught me a lot of lessons. But perhaps the most important one didn't come until several years afterwards.

Having been away from California for a few years since the burst, I moved back (this time to Southern California) in 2003. To my disbelief I began noticing similarities between the still nascent housing bubble and the one which I had just recently had a front-row vantage. The tech bubble seemed still too fresh in my mind for the kind of speculation on housing that was taking place. While the assets were different (tech stocks vs. real estate), the underlying psychology was eerily familiar.

I did not have the foresight of Michael Burry, Steve Eisman, and the founders of garage startup hedge fund Cornwall Capital to cash-in on this observation. Instead I simply ignored peer pressure and pesky real estate salespeople who warned me that if I didn't purchase a home now I would be "priced out of the market forever". Another memorable ribbing from that era was the "you're throwing your money down the drain" by renting year-after-year. When the 2008 financial crisis hit it made the Tech Bubble look like a small financial radar blip.


Witnessing two significant financial crashes in such close proximity to each other left an indelible lesson, which was to never underestimate how quickly a large number of people can forget a traumatic financial event.

This month marks the four-year anniversary from what was arguably the canary in the coal mine moment, the July 2007 collapse of two Bear Stearns hedge funds, both of which were heavily invested in mortgage securities. Bear Stearns itself blew-up approximately nine months later, and it would take until September 2008 for the crisis to reach its nadir with the simultaneous implosion of Lehman Brothers, AIG, Merrill Lynch, and a bevy of other financial firms.

The case of Citigroup bears special mention. Its collapse and bailout marked the third time in last quarter-century that the firm needed to be rescued by the government (the other two instances being the 1982 Latin America debt crisis and the late 1980s bust in commercial real estate which sparked the S&L crisis). Yes, that's right, about once every 8 years on average Citibank blows-up and needs a taxpayer funded bailout. If an inglorious banking prize equivalent to baseball's golden sombrero doesn't already exist then one should be created and promptly awarded to Citi!

While Rogoff and Reinhart caution against the following type of thinking, I do suspect that this time is different from 2003-2004. I don't believe as many people have forgotten the financial crisis as did the dot com bust, and not just because the 2008 crisis was much more spectacular in its magnitude. There are two big differences between then and now:

1. Protracted high unemployment, which in the U.S. is at 9.2%, and in places like Spain is over 20%.

2. The sovereign debt crisis that is hitting not just European countries such as Greece, but is also hammering away at confidence in the U.S. with daily headlines about nearing the debt ceiling.

A sense of widespread and growing economic unease can be seen in recent polling data:
A New York Times/CBS News poll finds that 39 percent of respondents believe “the current economic downturn is part of a long-term permanent decline and the economy will never fully recover.” (in October, only 28 percent of people believed the U.S. economy was in permanent decline -- marking an 11-point increase between now and then) 
The survey is only one of a recent spate indicating widespread distress over the state of the economy. On June 8, a CNN poll found that 48 percent of Americans believe another Great Depression is either very likely or somewhat likely.
The 2008 financial crisis was a severe blow to economic confidence and optimism, by far the biggest since the Great Depression. The most important and personal asset for the vast majority is housing, which lost one-third of its value from the peak and recently began a double dip. This combined with high unemployment and the suffocation of too much debt is at the heart of the current economic unease.

What Did Taxpayers Receive in Exchange for Bailing-out Banks?

The fundamental instability of the financial system was laid bare for all to see during the 2008 crisis. The public also got a glimpse of just how dangerous Too Big to Fail financial institutions are as governments around the world rushed to bailout megabanks and firms like AIG with taxpayer money. What did taxpayers get in exchange? As much as Paul Volcker, Adair Turner, Sheila Bair, and other well meaning and respected technocrats would like us to believe that Dodd-Frank, Basel III, etc. repaired the foundational cracks, the ongoing sovereign debt crisis casts serious doubts on these claims.

Today, people aren't wondering whether the next proverbial shoe will drop. People are instead bracing for when the next economic tsunami will make landfall. Will it be this week with Greece, end of this month with the U.S. debt ceiling, or sometime around the next major elections, when historically (and peculiarly) financial crisis seem to appear? The exact timing is uncertain, but there is broad understanding that another major financial crisis will strike, and perhaps soon.

This sense of pending chaos has left many people in a state of economic paralysis and dealt a collective blow to confidence and optimism. As Austin Powers would put it, we've lost our economic mojo.

A Key to Fixing Our Optimism Deficit

A big key to restoring economic optimism is the establishment of a sturdy foundation for the financial system.

Our current financial system is opaque and not well understood by the general public or many experts, such as macro economists, almost all of which failed to see the crisis coming. Apocalyptic terms are often employed when discussing it, and a fear that it may come crashing down at any moment feeds existential worry and creates a drag on productive economic activity. For example, concern of another crash inhibits lending and investment, reduces entrepreneurial risk taking, and may be responsible for the stockpiling of cash we're seeing at many large corporations, like Apple which is sitting on approximately $60 billion.

How best to provide the financial system with a rock solid foundation? Is simply restoring Glass-Steagall enough? I don't think so.

The most far-reaching, comprehensive and achievable plan is the one outlined by Professor Laurence Kotlikoff, which he calls Limited-Purpose Banking. I believe that title may in fact do a disservice to his well thought through ideas, which go far beyond banking and include insurance and other areas of the financial system (e.g., regulatory consolidation of the 120 government agencies currently charged with supervising various elements of the financial system).

Professor Kotlikoff has written a book on his ideas, which you can find in the Good Books and Films section of the right-side column of this blog, titled Jimmy Stewart is Dead: Ending the World's Ongoing Financial Plague with Limited Purpose Banking (the Stewart reference is to the thespian's role as the likeable community banker, George Bailey, in It's a Wonderful Life). You can listen to an excellent talk he gave at the London School of Economics here. His proposal has generated bi-partisan political, regulatory and intellectual support around the world. Mervyn King of the Bank of England has been one of its foremost champions.

Without going into all the technical details, Limited-Purpose Banking basically removes leverage from the financial system and makes the entire system more like mutual funds, which did not collapse or suffer from fraud during the recent financial crisis.

Here are some of the promises of Limited-Purpose Banking:
  • We’ll never have another financial collapse.
  • We’ll never see a run on banks ever again. 
  • We’ll never see insurance companies insuring the uninsurable. 
  • We’ll get rid of all the con jobs underlying the current financial system. 
  • There will be no more insider rating deals, liar loans, director sweetheart deals, bonuses which amount to corporate theft, bribing of Congress. 
In short, we’ll have a financial system that’s honest and that we can trust. The financial plague will be cured, once and for all.

To bring back economic optimism we must build a new, more stable foundation for economic activity. This foundation can be created with a new financial system like the one proposed by Professor Kotlikoff, who is quite optimistic about the likelihood that his ideas will ultimately be implemented. It may take one more financial crisis and bailout of the banks to get the public and politicians on board with this type of reform, but I agree with Professor Kotlikoff that something along the lines of the reforms he's outlined will happen eventually.

Saturday, July 9

FDIC's Bair: "They Should Have Let Bear Stearns Fail"

Today's must-read interview is with just-departed FDIC Chairwoman Sheila Bair, who sets the record straight on:
  • where Paulson, Bernanke, and Geithner went wrong (e.g., bailing out Bear Stearns)
  • the disconnect between President Obama's 'heart' and the people he chose for his economic team 
  • what the future holds for Too Big (or more accurately 'Too Bigger') to Fail
Bair's argument on letting Bear fail is that it would have sent a strong signal to the larger, more systemically integrated firms, like Lehman, that they should raise capital because the government was not going to bail out everyone. Whether Lehman could have in fact raised sufficient capital in the wake of Bear being allowed to fail is a great counterfactual question. 

One has the impression from reading Sorkin's Too Big to Fail that Dick Fuld and Co. either expected Paulson to bail Lehman out, or that the storm would pass soon enough for the prices of Lehman's assets to recover. Paulson purportedly appealed directly to Fuld to raise capital on numerous occassions in 2008. However, given the Federal Reserve's bailout of Bear, Fuld's skepticism that the systemically more important Lehman would be allowed to go under is understandable. If Bear had been allowed to fail Fuld likely would have come away with an entirely different interpretation of how things might play out should his back get pushed up against the wall, as it did during that fateful September of almost three years ago.

The interview also makes reference to former CFTC head Brooksley Born. For anyone who hasn't watched it already I highly recommend Frontline's profile of her battle with Greenspan, Rubin and Summers on the regulation of derivatives, a Wall Street product which Warren Buffet has called "financial weapons of mass destruction".

South Sudan: A How-to Guide on Setting Up a New Country

Tea Partyers, Seasteaders, the mapmaking industry, and all others pushing for more independent sovereigns are taking notes on how the world's newest nation, South Sudan, just came into existence.

There is quite a long to-do list that comes with starting a new country, including:
  • Minting coin and printing currency (South Sudan Pound)
  • Writing a national anthem
  • Determining citizenship
  • Securing a seat at the United Nations
  • Designing a flag (pictured above)
  • Picking a capital city (Juba)
  • Securing your country internet domain name
  • Creating a postal system and printing stamps
  • And, the perhaps the all important selection of a national football (soccer) team
More on what all is needed to get South Sudan up and running over at the BBC and CNN.

Wednesday, July 6

Chart of the Day: Generation U

Perhaps its time to rename Gen Y as Gen U, as in Generation Unemployed.

Not surprisingly, the PIIGS occupy five of the top seven spots in this primarily European country sample. Chronically unemployed young males are often a key ingredient in social unrest and revolution.

Tuesday, July 5

Investment Implications of Prolonged Financial Repression

Interesting read from Joe Roseman, former head of Moore Capital PM and Head of Macro Research, on the investment implications of 'prolonged financial repression'. Some highlights:
One of the issues that appears to have really confused economists is why corporates have steadfastly refused to participate in a new capital investment cycle? Why has new hiring been virtually non-existent? 
Standard econometric equations get this wrong because equations can’t think. Econometrics will look for the last time that interest rates were this low, looking at what worked before. 
I would argue that such equations do not have the requisite history built into them to recognise a period when three out of four cylinders in the engine of growth have been impaired. Econometric equations can’t think, but Sir Martin Sorrell of WPP certainly can. 
To quote Sorrell; “Most importantly, post-Lehman and the several corporate crises, we have seen a concern, or even fear, amongst Chairmen and CEOs and in the boardroom about making mistakes and a consequent emphasis on cost containment and unwillingness to add to fixed expenses and capacity.” 
Sorrell goes on to say that “Western-based multi-nationals are said to have over $2tr in cash on their balance sheets, but unemployment remains at stubbornly high levels, with only increases in temporary employment and limited expansion in fixed capacity in Western markets. Hence, a willingness to invest in the brand and maintaining or increasing market share, rather than increasing capacity and fixed expenses.” 
Governments don’t have the cash so print it. Households don’t have the cash so borrow it when they can. Banks don’t have the cash so skim it from savers. Corporates have the cash and just hoard it.
And the possible investment implications?
Not everywhere in the world has the same macro-impairment as the major Western economies, thereby allowing many corporates to develop growth strategies based outside of the G7. Having a cheap(er) currency certainly helps those companies. 
The market seemingly does not value cash sitting on the balance sheet highly. I wonder if that is a mistake. Cash, it is argued, offers optionality to the holder to take advantage of falling (asset) prices should they occur. On the same basis it may also be being undervalued on balance sheets.
I wonder if standard tests of “value” are missing the true value of the cash sitting on balance sheets? In a world where black swans are as common as starlings, having high net cash balances is a major plus. I also wonder whether that same optionality to use cash to buy cheap assets should also be valued higher.
In closing, he wondering whether the M&A department of foreign corporates would view weak currencies, like the pound or U.S. dollar, as an opportunity to acquire cash-rich businesses in the UK or U.S., respectively.

Full writeup here.

Sunday, July 3

The Greatest Trick Lenders Ever Pulled?

A pretty good candidate in my mind was substituting the term 'credit' for 'debt'.

Not all too long ago, 'debt' was clearly understood as something that, simply put, was bad.

But 'credit'? Oh boy, give me some of that!

There is a lot more to the credit/debt bubble than rebranding. But it's interesting to observe the different terms used for the same or like things, and the effect such differences can have on adoption and/or support. Some other examples:
The observation on swapping 'debt' for 'credit' and other interesting thoughts from this talk and Q&A with novelist (and non-economist) John Lanchester.

Friday, July 1

What's the Difference Between 'Financial Repression' and 'Macroprudential Regulation'?

Axel Weber and German Chancellor Angela Merkel
The most striking remarks made by former Bundesbank Chief and ECB frontrunner Axel Weber in a recent WSJ interview were his comments on the possibility of using financial repression to solve the Greek and wider European debt crisis:
“Ultimately, there will be a debate about financial repression. Take what we had in Germany — the Zwangsanleihe [compulsory loans introduced after World War I to help make reparation payments]. If voluntary contributions don’t add up, then the one tool that is still on the shelf is financial repression.”
To my knowledge, this is the first time a major senior policymaker (albeit one who recently stepped down) has publicly used the term 'financial repression'. As economist Carmen Reinhart and others have noted, the policies associated with financial repression are typically couched under the more benign, positive sounding 'macroprudential regulation'.

Update: News today emerged that Weber will become Chairman of Swiss megabank UBS, which perhaps explains the reasoning behind his choice of words.

Economic Newspeak

The term 'financial repression' was first coined in 1973 by two Stanford economists, and the word choice was intended to disparage developing economies which enacted what were deemed to be anti-competitive (and hence anti-growth) policies. In other words, the term 'financial repression' was invented with negative connotations in mind.

Can the contrast between 'financial repression' and 'macroprudential regulation' be viewed along the same lines as the difference between 'quantitative easing' and 'printing money'? The two monetary terms can mean approximately the same thing, although those who oppose Fed policies, like QE2, tend to embrace the use of the latter, which is arguably both more provocative and transparent to a broader audience.

This blog has in the past been highly critical of other examples of opaque, economic 'newspeak', such as Yale Professor Robert Shiller's argument that terms like 'bailout' should be replaced with ‘orderly resolution’ so that the voting public 'gets it'.