Europe has been relatively quiet recently, except for occasional bursts of news coming from or about German Chancellor Angela Merkel. The euro has been relatively strong: it has risen a little over 7% against the U. S. Dollar since the beginning of the year. Relative interest rate spreads on sovereign debt in the eurozone have remained relatively steady.
However, there still remains a lot of work to do in Europe and with all the disagreements among the leaders as well as everything else happening in the world the bailouts and other financial relationships are just not getting done. Let’s just say one shouldn’t get too comfortable in this quiet.
Something concrete for the near term: the European banks are starting their second round of stress tests this weekend. This second round is supposed to be “sufficiently stringent” this time.
We’ll see! They sure weren’t very “stringent” the first time around.
The question is whether or not confidence in the European banking and financial system can be returned so that other matters can be dealt with.
Beyond that, meetings will continue among the leaders of the European nations. Whether or not they can craft a bailout plan is still up in the air. In addition, the process for how the nations are to conduct their fiscal affairs also needs to be decided upon. Problems will still linger until they achieve some more coordination in budget-setting…hard for sovereign nations to give up.
But, speaking of sovereign nations, the problem of sovereign debt still overhangs the financial
markets.
Kenneth Rogoff, who co-authored the book “This Time is Different”, stated in Berlin yesterday that Greece and Ireland will need to restructure their debts. (See http://www.bloomberg.com/news/2011-03-02/rogoff-says-debt-restructuring-inevitable-in-greece-ireland.html.)
Rogoff also added that Spain and Portugal may be forced to do the same thing.
Bondholders, he argued, may have to take losses as large as 40 percent of their holdings of this sovereign debt.
“If Spain were to have a restructuring of central government debt, I don’t think it would end there” said Rogoff, “Spain is just too big.” Other countries facing a restructuring might then include Belgium and more.
But, this is not all!
Europe is facing more inflation. For one, the United Nations announced that world food prices rose to a record level in February and may exceed this level over the next few months. Furthermore, the turmoil in the Middle East is not easing price pressures as the pressure on oil prices increases.
The new element in this latter situation is that Asian countries like China and India now have the wherewithal to hedge against the unrest in the Middle East by shoring up their oil reserves. Even as these oil importing countries add to world demand as their economies grow they also have the financial resources to stockpile reserves in a way that presents a new dynamic to global markets.
And, the money is there for this process to continue worldwide: “What can best be described as ‘the unintended consequences of quantitative easing’ (on the part of the Federal Reserve in the United States) have played a major role. With many emerging nations addicted to their dollar currency pegs, easy US monetary policy finds its way into every nook and cranny of the global economy.” This written by Stephen King, group chief economist at HSBC in “Central Banks Risk Wrecking Recovery” (http://www.ft.com/cms/s/0/cab418ce-44c3-11e0-a8c6-00144feab49a.html#axzz1FMM69iWr).
These “unintended consequences” will continue to plague commodity markets worldwide. Nations and investors have the dollars or the access to dollars to keep these prices rising and this access will not go away soon.
So what about an increase in interest rates?
Well, for the twenty-second month the European Central Bank (ECB) held its main interest rate steady at 1%. Jean-Claude Trichet, ECB president, stated that inflation was a worry and although the rate was held at the current level for the time being, it certainly could rise in April.
Inflation in the eurozone was 2.4% in February, above the target limit of the ECB which is 2.0%.
Rising interest rates can only put more pressure on the governments in Europe, just as rising inflation rates can increase calls from Germany for greater government discipline in fiscal affairs.
“Back in Europe” things are still unsettled. As to the undercurrents going on above look out for the following:
First, the bank stress tests will show little or nothing and will give financial markets very little additional confidence in the European banking system;
Second, no agreements will be reached within the European Union until some of the nations within the EU restructure their debt and the pain of the fiscal situation will then become very obvious;
Third, this restructuring of debt and the continued increase in inflation will put Merkel and Germany in an even stronger position to get a more conservative process of fiscal oversight included in any package that the EU agrees upon;
Fourth, the ECB will hold off an increase in its main interest rate for as long as it can so that a rise in the rate will not serve as a cause of the debt restructuring and will allow the leaders in the EU to craft a new relationship in as orderly fashion as possible.
Inflation will continue to rise in Europe and in the rest of the world and this will put central banks under greater and greater pressure to begin to combat the inflation. Politically, this is still going to be very hard because of the mediocre economic recovery now taking place and the political unrest being caused by governmental restructurings. But, that is another story.
Thursday, March 3, 2011
Wednesday, March 2, 2011
The Bear and the United States Dollar
I continue to be a long-term bear on the United States Dollar.
The credit inflation that is looming on the horizon in the United States over the next decade is daunting. Financial leverage is going to increase once again and financial innovation, spurred on by advances in information technology, is going to this future.
This is what people do in a period of strong credit inflation.
Chairman Bernanke says he doesn’t see any signs of a buildup of inflationary expectations.
This analysis comes from a man who has been late for every economic event during his ten-years of leadership in Washington, D. C.
Inflationary expectations may not be showing up significantly in bond yields, but inflationary expectations continue to dominate the markets for the U. S. Dollar.
Inflationary expectations are not showing up to any extent in the government bond market because of the pressure kept on this market by the Fed’s quantitative easing efforts. The Fed, given the magnitude of its actions, can keep even long term interest rates lower than they would be otherwise.
The Federal Reserve cannot achieve the same success in the foreign exchange market, especially if it is flooding the financial markets with liquidity.
Foreign exchange markets look for governments that are “out of control” in terms of their fiscal affairs. Large deficits and growing levels of debt contribute to an environment of credit inflation. That is, not only does the government debt increase in such an environment, but the incentives are established by the government so that private debt levels also increase. If such credit inflations are observed by foreign exchange markets to be excessive relative to what is occurring in other countries, the value of the currency in the country that is least disciplined will decline relative to these other countries.
The last time the foreign exchange markets appeared to believe that the United States government was managing its budget in a relatively prudent way was in the late 1990s. Beginning in early 1995 when the Clinton administration began bringing the fiscal deficits of the country under control, the value of the dollar against major currencies (Federal Reserve series) rose by almost a third until January 2001 when Bush 43 took over as President.
The value of the dollar reached its near term peak in February 2002, just after 9/11, after the “flight –to-quality bid up the currency during this uncertain time. However, the budget policies of the Bush 43 administration became clearer to foreign exchange markets as the spring of 2002 progressed and the value of the dollar began to decline.
The credit inflation begun during the Bush 43 presidency continued into the Obama administration. From February 2002 through February 2011, the value of the dollar declined by almost 36%!
Some recovery took place in the value of the dollar last year as a result of the turmoil in the sovereign debt markets in Europe. However, to me, when United States credit inflation surfaced again in the late summer of 2010, it was very obvious that the focus of foreign exchange markets turned almost immediately toward selling the dollar.
The event of the late summer was the speech by Chairman Bernanke which introduced the forthcoming QE2, the second round of quantitative easing. The value of the dollar has fallen since then, indicating that the attention of foreign exchange markets was still on the lack of fiscal and monetary discipline in the United States government.
Since the summer of 2010, the value of the dollar against major currencies has declined by about 9%.
Furthermore, foreign exchange markets are showing no confidence in the fights now taking place in the United States Congress concerning the “battle-over-the-budget.”
To me, foreign exchange markets are saying that there is no leadership on fiscal matters (or monetary matters) in the United States government. Everything is the same as it has been for the last fifty years. And, we see no evidence that anything will be changed in the foreseeable future.
In addition, the rise in the price of oil due to the turmoil in the Middle East seems to raise further questions about the United States economy and this is adding to the downward pressure on the value of the dollar.
How much more will the dollar have to fall?
Barry Eichengreen, an expert of the international monetary system, gives us his estimate in the Wall Street Journal this morning. He argues that “the dollar will have to fall by roughly 20%.” The time frame seems to be over the next five years or so. (See http://professional.wsj.com/article/SB10001424052748703313304576132170181013248.html?mod=ITP_thejournalreport_0&mg=reno-wsj.)
Given this scenario, Eichengreen also sees the role of the United States dollar as the world’s primary reserve currency declining. Besides the lack of fiscal discipline in the United States and the proliferation of financial innovation in the world, he argues that there are now some legitimate alternatives to the dollar in global trade. The euro and the Chinese yuan are being used more and more in world trade and given the further decline in the value of the dollar this trend for the euro and the yuan will continue.
This outlines the picture that I am working with when I take my bearish position with respect to the long-run value of the United States dollar. In a world where capital flows very fluidly throughout the world, even a country as powerful as the United States, a country that possesses the globe’s reserve currency, cannot operate as if the rest of the world doesn’t exist.
Yet, that seems to be the view of the leaders of the United States and I don’t see that attitude changing anytime soon. Thus, the value of the dollar will continue to decline.
The credit inflation that is looming on the horizon in the United States over the next decade is daunting. Financial leverage is going to increase once again and financial innovation, spurred on by advances in information technology, is going to this future.
This is what people do in a period of strong credit inflation.
Chairman Bernanke says he doesn’t see any signs of a buildup of inflationary expectations.
This analysis comes from a man who has been late for every economic event during his ten-years of leadership in Washington, D. C.
Inflationary expectations may not be showing up significantly in bond yields, but inflationary expectations continue to dominate the markets for the U. S. Dollar.
Inflationary expectations are not showing up to any extent in the government bond market because of the pressure kept on this market by the Fed’s quantitative easing efforts. The Fed, given the magnitude of its actions, can keep even long term interest rates lower than they would be otherwise.
The Federal Reserve cannot achieve the same success in the foreign exchange market, especially if it is flooding the financial markets with liquidity.
Foreign exchange markets look for governments that are “out of control” in terms of their fiscal affairs. Large deficits and growing levels of debt contribute to an environment of credit inflation. That is, not only does the government debt increase in such an environment, but the incentives are established by the government so that private debt levels also increase. If such credit inflations are observed by foreign exchange markets to be excessive relative to what is occurring in other countries, the value of the currency in the country that is least disciplined will decline relative to these other countries.
The last time the foreign exchange markets appeared to believe that the United States government was managing its budget in a relatively prudent way was in the late 1990s. Beginning in early 1995 when the Clinton administration began bringing the fiscal deficits of the country under control, the value of the dollar against major currencies (Federal Reserve series) rose by almost a third until January 2001 when Bush 43 took over as President.
The value of the dollar reached its near term peak in February 2002, just after 9/11, after the “flight –to-quality bid up the currency during this uncertain time. However, the budget policies of the Bush 43 administration became clearer to foreign exchange markets as the spring of 2002 progressed and the value of the dollar began to decline.
The credit inflation begun during the Bush 43 presidency continued into the Obama administration. From February 2002 through February 2011, the value of the dollar declined by almost 36%!
Some recovery took place in the value of the dollar last year as a result of the turmoil in the sovereign debt markets in Europe. However, to me, when United States credit inflation surfaced again in the late summer of 2010, it was very obvious that the focus of foreign exchange markets turned almost immediately toward selling the dollar.
The event of the late summer was the speech by Chairman Bernanke which introduced the forthcoming QE2, the second round of quantitative easing. The value of the dollar has fallen since then, indicating that the attention of foreign exchange markets was still on the lack of fiscal and monetary discipline in the United States government.
Since the summer of 2010, the value of the dollar against major currencies has declined by about 9%.
Furthermore, foreign exchange markets are showing no confidence in the fights now taking place in the United States Congress concerning the “battle-over-the-budget.”
To me, foreign exchange markets are saying that there is no leadership on fiscal matters (or monetary matters) in the United States government. Everything is the same as it has been for the last fifty years. And, we see no evidence that anything will be changed in the foreseeable future.
In addition, the rise in the price of oil due to the turmoil in the Middle East seems to raise further questions about the United States economy and this is adding to the downward pressure on the value of the dollar.
How much more will the dollar have to fall?
Barry Eichengreen, an expert of the international monetary system, gives us his estimate in the Wall Street Journal this morning. He argues that “the dollar will have to fall by roughly 20%.” The time frame seems to be over the next five years or so. (See http://professional.wsj.com/article/SB10001424052748703313304576132170181013248.html?mod=ITP_thejournalreport_0&mg=reno-wsj.)
Given this scenario, Eichengreen also sees the role of the United States dollar as the world’s primary reserve currency declining. Besides the lack of fiscal discipline in the United States and the proliferation of financial innovation in the world, he argues that there are now some legitimate alternatives to the dollar in global trade. The euro and the Chinese yuan are being used more and more in world trade and given the further decline in the value of the dollar this trend for the euro and the yuan will continue.
This outlines the picture that I am working with when I take my bearish position with respect to the long-run value of the United States dollar. In a world where capital flows very fluidly throughout the world, even a country as powerful as the United States, a country that possesses the globe’s reserve currency, cannot operate as if the rest of the world doesn’t exist.
Yet, that seems to be the view of the leaders of the United States and I don’t see that attitude changing anytime soon. Thus, the value of the dollar will continue to decline.
Tuesday, March 1, 2011
Will the Financial Industry Dance Alone?
Last Wednesday, February 23, I argued that “The Music’s Begun Again..” (http://seekingalpha.com/article/254474-the-music-s-begun-again-time-to-start-dancing), and I fully believe that to be the case.
The economy has been growing. Since its low point in the second quarter of 2009, real Gross Domestic Product (GDP) has risen by 4.4%. The compound rate of growth has been approximately 0.7% per quarter which works out to an annual rate of roughly 2.9% per year. So the economic recovery continues.
However, capacity utilization of the manufacturing industries remains low, at 76.1% in its latest reading, substantially below the previous peak of around 82%. Even this peak was the lowest peak since the 1960s when the series was originally constructed.
My calculation for under-employment still hovers above 20%, again a high for the period following the 1960s
And, this, of course, raises the fear of a period of economic “stagflation” for the United States. Although the economy is recovery, one certainly could not apply the term “robust” to describe it.
From the credit side…more and more evidence comes in every day that the credit inflation that began in the 1960s continues. Although the world is going through a massive re-structuring, our leaders in the government continue to cry…more of the same…more of the same.
As with the last fifty years, credit inflation begins with the Federal government. The national debt is set to more than double over the next ten years and none of our leaders seem to be really seriously concerned about it.
For the debt to double over the next ten years, government debt would need to increase at a compound rate of about 7.2% per year during this time period. This is not too different from the compound rate at which the gross federal debt increased annually over the fifty years which began in January 1961.
During this period of time, the United States saw the biggest buildup in private financial leverage in the history of the country and also saw the biggest spurt of financial innovation ever to take place in the world.
Aided by advancements in information technology, the world of finance seemed to take on a life
of its own, separate from what was going on in the real economy. Employment in finance rose to approach 50% of all employment in the country as the number of financial institutions and the number of financial instruments traded ballooned.
We were getting a glimpse of the future.
Thanks to our leaders in Washington, D. C., and elsewhere, the “music” is playing again and, as we read daily, people have begun to dance once again in earnest. We read that auto sales are up because the auto companies have gotten auto finance to step up to the dance floor.
But, sovereigns are also leading the charge. Check out a lead in the Financial Times, “Sovereigns Turn to Pre-crisis Financial Wizardry” (http://www.ft.com/cms/s/0/53b445a0-4045-11e0-9140-00144feabdc0.html#axzz1FMM69iWr). It seems as if Portugal, and others, are getting back to “structured finance technology” with the use of Credit Default Swaps (CDSs) and Collateralized Debt Obligations (CDOs) to help themselves climb their way out of the current crisis in the sovereign debt market.
What else?
Did I hear someone say that issues of mortgage-backed commercial real estate securities are back? They are, and in a fairly big way. (See http://dealbook.nytimes.com/2011/02/28/commercial-real-estate-breathes-life-into-a-moribund-market/?ref=business.) Morgan Stanley and Bank of America have recently completed a $1.55 billion deal while others have sold roughly $5 billion in mortgage-backed securities so far this year. And, more is on the way.
The quote I like…from Brian Lancaster, as securitization specialist at the Royal Bank of Scotland…”Things have going from vicious to virtuous.”
It seems that car loans and collateralized loan obligations “are showing signs of life.”
And, the trading platforms built on the latest technology are beginning to fight for “territory.” GFI, a London interdealer broker, launched a swaps trading platform in advance of what is being done in the United States. (See http://www.ft.com/cms/s/0/e107d684-4369-11e0-8f0d-00144feabdc0.html#axzz1FMM69iWr.) Whereas firms in the United States are having to wait on the Commodities Futures Trading Commission for the new rules and regulations forthcoming from the Dodd-Frank legislations, others are getting a head start on them.
Technology booms ahead…while the regulators scramble to catch up to 2008. The Financial Crisis Inquiry commission just released information that the Office of the Comptroller of the Currency questioned several aspects of how Citigroup valued certain troubled securities way back in February 2008: seems as if “weaknesses were noted.” The question concerns whether or not Citigroup should have reported this information in its public documents. (See http://www.ft.com/cms/s/0/3b673370-4399-11e0-b117-00144feabdc0.html#axzz1FMM69iWr.)
My point is that we are still re-hashing what went on or what went wrong two or more years ago. The world has moved on since then. Information technology has moved on since then.
Note the headline in the New York Times: “For South Korea, Internet at Blazing Speeds is Still Not Fast Enough.” (http://www.nytimes.com/2011/02/22/technology/22iht-broadband22.html?scp=1&sq=for%20south%20korea,%20internet%20at%20blazing%20speeds%20is%20still%20not%20fast%20enough&st=cse) South Korea is seeking to have every home in the country connected with speeds of one gigabit per second. And, this is for homes.
One should also read about the changes that are coming to banking for individuals and families in places like India and Africa! This, while American banking is constrained by archaic restrictions that is causing it to lag behind much of the rest of the world in terms of customer delivery.
And, if all this is happening for the consumer, what is taking place in the biggest, most sophisticated financial institutions? Anyone for some science fiction? And, we are just worried about “flash trading”?
Regulation always lags behind the private sector. In the credit inflation of the last fifty years, the gap widened considerably. But, in re-fighting the last war will Congress and the regulators drive more business “off shore”?
The music has begun to play again. Credit inflation is underway. Further financial innovation is right on its heals. The economic recovery is underway…but, I fear, finance is going to go its own way again.
The economy has been growing. Since its low point in the second quarter of 2009, real Gross Domestic Product (GDP) has risen by 4.4%. The compound rate of growth has been approximately 0.7% per quarter which works out to an annual rate of roughly 2.9% per year. So the economic recovery continues.
However, capacity utilization of the manufacturing industries remains low, at 76.1% in its latest reading, substantially below the previous peak of around 82%. Even this peak was the lowest peak since the 1960s when the series was originally constructed.
My calculation for under-employment still hovers above 20%, again a high for the period following the 1960s
And, this, of course, raises the fear of a period of economic “stagflation” for the United States. Although the economy is recovery, one certainly could not apply the term “robust” to describe it.
From the credit side…more and more evidence comes in every day that the credit inflation that began in the 1960s continues. Although the world is going through a massive re-structuring, our leaders in the government continue to cry…more of the same…more of the same.
As with the last fifty years, credit inflation begins with the Federal government. The national debt is set to more than double over the next ten years and none of our leaders seem to be really seriously concerned about it.
For the debt to double over the next ten years, government debt would need to increase at a compound rate of about 7.2% per year during this time period. This is not too different from the compound rate at which the gross federal debt increased annually over the fifty years which began in January 1961.
During this period of time, the United States saw the biggest buildup in private financial leverage in the history of the country and also saw the biggest spurt of financial innovation ever to take place in the world.
Aided by advancements in information technology, the world of finance seemed to take on a life
of its own, separate from what was going on in the real economy. Employment in finance rose to approach 50% of all employment in the country as the number of financial institutions and the number of financial instruments traded ballooned.
We were getting a glimpse of the future.
Thanks to our leaders in Washington, D. C., and elsewhere, the “music” is playing again and, as we read daily, people have begun to dance once again in earnest. We read that auto sales are up because the auto companies have gotten auto finance to step up to the dance floor.
But, sovereigns are also leading the charge. Check out a lead in the Financial Times, “Sovereigns Turn to Pre-crisis Financial Wizardry” (http://www.ft.com/cms/s/0/53b445a0-4045-11e0-9140-00144feabdc0.html#axzz1FMM69iWr). It seems as if Portugal, and others, are getting back to “structured finance technology” with the use of Credit Default Swaps (CDSs) and Collateralized Debt Obligations (CDOs) to help themselves climb their way out of the current crisis in the sovereign debt market.
What else?
Did I hear someone say that issues of mortgage-backed commercial real estate securities are back? They are, and in a fairly big way. (See http://dealbook.nytimes.com/2011/02/28/commercial-real-estate-breathes-life-into-a-moribund-market/?ref=business.) Morgan Stanley and Bank of America have recently completed a $1.55 billion deal while others have sold roughly $5 billion in mortgage-backed securities so far this year. And, more is on the way.
The quote I like…from Brian Lancaster, as securitization specialist at the Royal Bank of Scotland…”Things have going from vicious to virtuous.”
It seems that car loans and collateralized loan obligations “are showing signs of life.”
And, the trading platforms built on the latest technology are beginning to fight for “territory.” GFI, a London interdealer broker, launched a swaps trading platform in advance of what is being done in the United States. (See http://www.ft.com/cms/s/0/e107d684-4369-11e0-8f0d-00144feabdc0.html#axzz1FMM69iWr.) Whereas firms in the United States are having to wait on the Commodities Futures Trading Commission for the new rules and regulations forthcoming from the Dodd-Frank legislations, others are getting a head start on them.
Technology booms ahead…while the regulators scramble to catch up to 2008. The Financial Crisis Inquiry commission just released information that the Office of the Comptroller of the Currency questioned several aspects of how Citigroup valued certain troubled securities way back in February 2008: seems as if “weaknesses were noted.” The question concerns whether or not Citigroup should have reported this information in its public documents. (See http://www.ft.com/cms/s/0/3b673370-4399-11e0-b117-00144feabdc0.html#axzz1FMM69iWr.)
My point is that we are still re-hashing what went on or what went wrong two or more years ago. The world has moved on since then. Information technology has moved on since then.
Note the headline in the New York Times: “For South Korea, Internet at Blazing Speeds is Still Not Fast Enough.” (http://www.nytimes.com/2011/02/22/technology/22iht-broadband22.html?scp=1&sq=for%20south%20korea,%20internet%20at%20blazing%20speeds%20is%20still%20not%20fast%20enough&st=cse) South Korea is seeking to have every home in the country connected with speeds of one gigabit per second. And, this is for homes.
One should also read about the changes that are coming to banking for individuals and families in places like India and Africa! This, while American banking is constrained by archaic restrictions that is causing it to lag behind much of the rest of the world in terms of customer delivery.
And, if all this is happening for the consumer, what is taking place in the biggest, most sophisticated financial institutions? Anyone for some science fiction? And, we are just worried about “flash trading”?
Regulation always lags behind the private sector. In the credit inflation of the last fifty years, the gap widened considerably. But, in re-fighting the last war will Congress and the regulators drive more business “off shore”?
The music has begun to play again. Credit inflation is underway. Further financial innovation is right on its heals. The economic recovery is underway…but, I fear, finance is going to go its own way again.
Friday, February 25, 2011
Is the Future of Finance "Post-Human"?
Thursday, February 17, I put up a post titled “The Future of Finance is Getting Closer” (http://seekingalpha.com/article/253645-the-future-of-finance-is-getting-closer). In this post I discussed the changing world of finance and how it is being impacted by changes in information processing and the spread of information. I write on this subject fairly frequently because I believe that the continued improvement in information processing and the continued spread of information are going to dominate the future of finance…and everything else.
A reader of this post expressed concern over this assessment: derryl, stated that “John seems to be describing, not a post-industrial world, but a post-human world. Disembodied minds trading in information.”
I don’t believe that I am describing a “post-human world.” Information processing and the spread of information has been going on for a long, long time. Let me put this in context. Freeman Dyson, Physics Professor Emeritus at the Institute for Advanced Study in Princeton wrote in review (New York Review of Books, March 10. 2011) of the new book by James Gleick, “The Information: A History, A Theory, A Flood” that “Everywhere around us, wherever we look, we see increasing order and increasing information.” This is true both in the living world as well as the non-living world.
Dyson goes on to qualify this statement. This “unending supply of information is a glorious vision for scientists. Scientists find the vision attractive, since it gives them a purpose for their existence and an unending supply of jobs.” Scientists work with the increasing amount of information to identify and work with the increasing amount of order.
The concern by derryl only becomes real if the amount of information that exists is finite. Then the advancements of information technology can conceivably capture and model all that is and we evolve into “post-human world”.
The world being described by Dyson is a world in which the questions never end because the amount of information in this world is growing and will continue to grow. Thus, there will always need to be humans because there will always be questions to ask and inferences to be made.
This world Dyson sees is continually requires humans to be around to gather the new information being produced and incorporate into new concepts and models.
This is even more true of “human” activities like finance and investing. All the studies of complexity theory argue that the behavior of humans is much more “complex” than the behavior of non-living things. The reason for this is that modeling humans requires more information and more sophisticated models than is required to model non-living things. Thus, building models relating to investment behavior in a world where the total amount of information is increasing is something that cannot become “post-human.”
Dyson captures this reality by writing that “The vision is less attractive to artists and writers and ordinary people…Ordinary people may not welcome a future spent swimming in an unending flood of information.”
We see the problems in modeling human behavior in the book “The Quants” (See review: http://seekingalpha.com/article/188342-model-misbehavior-the-quants-how-a-new-breed-of-math-whizzes-conquered-wall-street-and-nearly-destroyed-it-by-scott-patterson.) In this book, the author describes what has been called a quant-led collapse: specifically the August 2007 market meltdown. “This meltdown came in what is known as the “shadow banking system” and not the true banking system (for) the Federal Reserve really didn’t seem to know what was going on. The first catastrophe came when the Bear Stearns hedge funds were instructed to file for bankruptcy on July 30, 2007. The melt-down started in earnest on Monday August 6.” Quant firms suffered large losses on “toxic” assets.
But, the “Quants” are still in business. And, the “Quants” are still using sophisticated mathematical models to invest. As with all human problem solving activity, the humans have learned from the 2007 experience. They have modified or re-built their models to take into account the new information that has been gathered and processed. And, they now have more robust models than they did before the financial collapse.
This is a highly quantitative world, yet it is not post-human and in my view will never be post-human. Humans are problem solvers and in playing this role they must build models, test models, modify models and use models to make decisions or explain things. Humans are information users. And, in the world we are moving into will be even more information and information processing driven. It will be “smaller and faster.” (See http://seekingalpha.com/article/225773-the-new-world-order-smaller-and-faster-part-2.)
This world, however, is going to be a more volatile world, it is going to be a world that changes faster, and it is going to be a world that requires people to adapt to the changes that they see going on around them. One cannot “lock” themselves into the world of the past.
History has shown that the spread of information and information technology cannot be stopped. It’s spread may be postponed for a while, but it eventually will succeed in spreading.
Laws and regulations must take account of this. Congresses and regulators must take account of this. Dictators and autocrats must take account of this. Presidents and Prime Ministers must take account of this.
A danger is that this world bifurcates…divides into two…those that can work within the new paradigm and those that adjust, for whatever reason, to the new paradigm. We are seeing some of the consequences of such division. The income distribution is being determined more and more by the amount of education a person has. Jobs are splitting more and more between service jobs and manufacturing jobs. But, even this is not all. Even clerk-like service jobs are being replaced by new technology. Jobs are more plentiful in information technology and finance than in jobs connected with “making things.” Health care is going to be an employment magnet but even there the clerk-like jobs are going to be replaced by new technology.
As a consequence of these developments, under-employment has grown substantially and will not decline much in upcoming years. Capacity utilization in the manufacturing industries will remain at historical lows. A substantial re-structuring is going to have to occur in the economies of the developed nations.
The point I am trying to make is that the world is going through a period of major transitions…economically, politically, and culturally. This is a once-in-a-century thing. As with major transitions in the past, the human element has not been eliminated, but the structure of human involvement in the world has changed dramatically.
Such change can be disturbing. I know that I am feeling the effects of this change in my life…and it is not just because I am getting older!
A reader of this post expressed concern over this assessment: derryl, stated that “John seems to be describing, not a post-industrial world, but a post-human world. Disembodied minds trading in information.”
I don’t believe that I am describing a “post-human world.” Information processing and the spread of information has been going on for a long, long time. Let me put this in context. Freeman Dyson, Physics Professor Emeritus at the Institute for Advanced Study in Princeton wrote in review (New York Review of Books, March 10. 2011) of the new book by James Gleick, “The Information: A History, A Theory, A Flood” that “Everywhere around us, wherever we look, we see increasing order and increasing information.” This is true both in the living world as well as the non-living world.
Dyson goes on to qualify this statement. This “unending supply of information is a glorious vision for scientists. Scientists find the vision attractive, since it gives them a purpose for their existence and an unending supply of jobs.” Scientists work with the increasing amount of information to identify and work with the increasing amount of order.
The concern by derryl only becomes real if the amount of information that exists is finite. Then the advancements of information technology can conceivably capture and model all that is and we evolve into “post-human world”.
The world being described by Dyson is a world in which the questions never end because the amount of information in this world is growing and will continue to grow. Thus, there will always need to be humans because there will always be questions to ask and inferences to be made.
This world Dyson sees is continually requires humans to be around to gather the new information being produced and incorporate into new concepts and models.
This is even more true of “human” activities like finance and investing. All the studies of complexity theory argue that the behavior of humans is much more “complex” than the behavior of non-living things. The reason for this is that modeling humans requires more information and more sophisticated models than is required to model non-living things. Thus, building models relating to investment behavior in a world where the total amount of information is increasing is something that cannot become “post-human.”
Dyson captures this reality by writing that “The vision is less attractive to artists and writers and ordinary people…Ordinary people may not welcome a future spent swimming in an unending flood of information.”
We see the problems in modeling human behavior in the book “The Quants” (See review: http://seekingalpha.com/article/188342-model-misbehavior-the-quants-how-a-new-breed-of-math-whizzes-conquered-wall-street-and-nearly-destroyed-it-by-scott-patterson.) In this book, the author describes what has been called a quant-led collapse: specifically the August 2007 market meltdown. “This meltdown came in what is known as the “shadow banking system” and not the true banking system (for) the Federal Reserve really didn’t seem to know what was going on. The first catastrophe came when the Bear Stearns hedge funds were instructed to file for bankruptcy on July 30, 2007. The melt-down started in earnest on Monday August 6.” Quant firms suffered large losses on “toxic” assets.
But, the “Quants” are still in business. And, the “Quants” are still using sophisticated mathematical models to invest. As with all human problem solving activity, the humans have learned from the 2007 experience. They have modified or re-built their models to take into account the new information that has been gathered and processed. And, they now have more robust models than they did before the financial collapse.
This is a highly quantitative world, yet it is not post-human and in my view will never be post-human. Humans are problem solvers and in playing this role they must build models, test models, modify models and use models to make decisions or explain things. Humans are information users. And, in the world we are moving into will be even more information and information processing driven. It will be “smaller and faster.” (See http://seekingalpha.com/article/225773-the-new-world-order-smaller-and-faster-part-2.)
This world, however, is going to be a more volatile world, it is going to be a world that changes faster, and it is going to be a world that requires people to adapt to the changes that they see going on around them. One cannot “lock” themselves into the world of the past.
History has shown that the spread of information and information technology cannot be stopped. It’s spread may be postponed for a while, but it eventually will succeed in spreading.
Laws and regulations must take account of this. Congresses and regulators must take account of this. Dictators and autocrats must take account of this. Presidents and Prime Ministers must take account of this.
A danger is that this world bifurcates…divides into two…those that can work within the new paradigm and those that adjust, for whatever reason, to the new paradigm. We are seeing some of the consequences of such division. The income distribution is being determined more and more by the amount of education a person has. Jobs are splitting more and more between service jobs and manufacturing jobs. But, even this is not all. Even clerk-like service jobs are being replaced by new technology. Jobs are more plentiful in information technology and finance than in jobs connected with “making things.” Health care is going to be an employment magnet but even there the clerk-like jobs are going to be replaced by new technology.
As a consequence of these developments, under-employment has grown substantially and will not decline much in upcoming years. Capacity utilization in the manufacturing industries will remain at historical lows. A substantial re-structuring is going to have to occur in the economies of the developed nations.
The point I am trying to make is that the world is going through a period of major transitions…economically, politically, and culturally. This is a once-in-a-century thing. As with major transitions in the past, the human element has not been eliminated, but the structure of human involvement in the world has changed dramatically.
Such change can be disturbing. I know that I am feeling the effects of this change in my life…and it is not just because I am getting older!
Federal Reserve QE2 Watch: Part 3.3
The Federal Reserve injected $73 billion more reserve balances into the banking system in the banking week ending February 23, 2011.
The Federal Reserve has injected $272 billion into the banking system since the end of last year, since December 29, 2010.
Reserve balances at Federal Reserve Banks totaled $1.290 billion at the close of business on February 23, 2011.
Excess reserves for the banking system averaged almost $1.220 billion for the two weeks ending February 23, 2011.
QE2 rolls on!
And commercial banks still seem to prefer holding onto the cash rather than lending the money out. And, it seems as if a large percentage of the funds being pumped into the banking system are now going to foreign-related financial institutions. (http://seekingalpha.com/article/254004-why-is-most-of-the-fed-s-qe2-cash-going-to-foreign-related-banking-institutions)
The major mover of bank reserves is still the Fed’s purchase of US Treasury securities. The Fed added $23 billion more Treasury securities to its portfolio last week. Holdings of Treasury securities are up almost $200 billion since December 29, 2010.
The Treasury still continues to move money around. In the past week it reduced balances it holds in it’s General Account at the Fed by almost $32 billion. (This action puts reserves into the banking system.)
Since December 29, 2010, the Treasury has reduced it’s balances in the General Account by about $66 billion.
Last week the Treasury also reduced the amount of funds it holds in it’s Supplementary Financing Account by another $25 billion. The Treasury reduced these balances by $75 billion since December 29. As the Treasury spends out of these accounts it puts reserves into the banking system. (For more on the Treasury’s Supplementary Financing Account see my post: http://seekingalpha.com/article/199444-the-fed-s-new-exit-strategy.)
As the Treasury has moved funds around since the end of last year it has put more than $140 billion into the banking system that has ended up as reserve balances.
There are three conclusions I have drawn from the financial statistics I have seen:
First, the Fed is scared silly that the smaller banks in the United States (all banks other than the largest 25) will experience a massive series of failures before the FDIC can close a sufficient number of them in an orderly fashion;
Second, the largest 25 banks in the country are having a feast on the low borrowing costs that the Fed is maintaining (the FDIC reported that 95% of all bank profits in the fourth quarter of 2010 went to the largest banks in the United States, http://seekingalpha.com/article/254700-u-s-banking-system-is-still-in-trouble);
Third, given the mobility of capital in the world today, the Federal Reserve has become the central bank of the world and is supplying funds for potential bubbles in commodities and natural resources globally.
My question: Is conclusion one above sufficient justification for the resulting consequences of the Fed’s policy as observed in conclusions two and three?
The Federal Reserve has injected $272 billion into the banking system since the end of last year, since December 29, 2010.
Reserve balances at Federal Reserve Banks totaled $1.290 billion at the close of business on February 23, 2011.
Excess reserves for the banking system averaged almost $1.220 billion for the two weeks ending February 23, 2011.
QE2 rolls on!
And commercial banks still seem to prefer holding onto the cash rather than lending the money out. And, it seems as if a large percentage of the funds being pumped into the banking system are now going to foreign-related financial institutions. (http://seekingalpha.com/article/254004-why-is-most-of-the-fed-s-qe2-cash-going-to-foreign-related-banking-institutions)
The major mover of bank reserves is still the Fed’s purchase of US Treasury securities. The Fed added $23 billion more Treasury securities to its portfolio last week. Holdings of Treasury securities are up almost $200 billion since December 29, 2010.
The Treasury still continues to move money around. In the past week it reduced balances it holds in it’s General Account at the Fed by almost $32 billion. (This action puts reserves into the banking system.)
Since December 29, 2010, the Treasury has reduced it’s balances in the General Account by about $66 billion.
Last week the Treasury also reduced the amount of funds it holds in it’s Supplementary Financing Account by another $25 billion. The Treasury reduced these balances by $75 billion since December 29. As the Treasury spends out of these accounts it puts reserves into the banking system. (For more on the Treasury’s Supplementary Financing Account see my post: http://seekingalpha.com/article/199444-the-fed-s-new-exit-strategy.)
As the Treasury has moved funds around since the end of last year it has put more than $140 billion into the banking system that has ended up as reserve balances.
There are three conclusions I have drawn from the financial statistics I have seen:
First, the Fed is scared silly that the smaller banks in the United States (all banks other than the largest 25) will experience a massive series of failures before the FDIC can close a sufficient number of them in an orderly fashion;
Second, the largest 25 banks in the country are having a feast on the low borrowing costs that the Fed is maintaining (the FDIC reported that 95% of all bank profits in the fourth quarter of 2010 went to the largest banks in the United States, http://seekingalpha.com/article/254700-u-s-banking-system-is-still-in-trouble);
Third, given the mobility of capital in the world today, the Federal Reserve has become the central bank of the world and is supplying funds for potential bubbles in commodities and natural resources globally.
My question: Is conclusion one above sufficient justification for the resulting consequences of the Fed’s policy as observed in conclusions two and three?
Thursday, February 24, 2011
United States Loses 355 Banks in 2010
One December 31, 2010, the FDIC reported that there were 7,657 insured depository institutions in the United States. This was 355 less than the 8,012 institutions that were in existence on December 31, 2009. (157 banks were officially closed by the FDIC in calendar 2010.)
This is up from the 293 institutions that dropped out of the industry in 2009.
In the fourth quarter of 2010, the number of insured depository institutions in the United States dropped by 104 depository institutions.
The number of banks on the FDIC’s list of problem banks rose from 860 to 884 at the end of the year.
The FDIC does not list how many of these problem banks went out of business in the fourth quarter of 2010 or were acquired by or merged into other institutions during this period. But, the picture is not quite as rosy as New York Times columnist Eric Dash reports this morning: “And only 24 lenders were added to the government’s list of troubled banks, the smallest increase since the financial crisis erupted in late
2007.” (http://dealbook.nytimes.com/2011/02/23/banking-shows-signs-of-a-turnaround/?ref=business)
Most of the banks leaving the banking industry were on the smaller size.
Furthermore, the list of problem banks does not include many other banks that are facing serious problems but have not yet qualified to be put on the FDICs list of problem banks. Need I mention the name of Wilmington Trust Bank, a bank that was considered by almost everyone as a bank that was doing OK. Then came the news of its sale last November. (http://seekingalpha.com/article/234027-wilmington-trust-sold-at-45-discount)
The problem list is a proxy for the number of institutions that are severely stressed, but does not include all that are still experiencing questionable futures. These latter banks have just not crossed the statistical threshold to be considered “problem banks.” Still 12% of the banking system is on the problem list.
I have been arguing for more than a year now that the actions of the Federal Reserve have been aimed at keeping things calm in the banking industry so that the FDIC can close or arrange acquisitions for troubled banks in an “orderly” fashion. This, I believe, has been one of the reasons that the Fed’s target interest rates have been kept near zero for such a long time. It is also part of the reason for the Fed’s second round of spaghetti tossing, or, quantitative easing (QE2).
The FDIC has needed the calmest environment possible to oversee a dramatic reduction in the number of banks in the banking system. As reported above, the banking system has almost 650 fewer banks in existence now than were in the banking system on January 1, 2009. That is a reduction of almost 8% of the banking institutions that existed at that time.
The other fact that does not bode well for the smaller banks in the country was just reported by the Associated Press: the profits of the big banks represented 95% of all bank profits in the fourth quarter of 2010. The big banks earned $20.6 billion of the $21.7 billion in profits earned by the banking industry as a whole. That is, only about 1.4% of the 7,657 banks noted above with assets of more than $10 billion saw these earnings.
And, bank lending. Bank lending continues to drag. I reported in my post of February 21, 2011:
“bank lending was abysmal over the past 6-week period and the last 14-week period.
Since the end of the year, loans and leases at the largest 25 domestically chartered banks in the United States dropped dramatically by about $50 billion, much of this coming in consumer lending although loan amounts were down across the board. Loans and leases held roughly constant in the eight weeks that preceded December 29 at these large banks.
In the rest of the banking system, the declines in the loan portfolio came primarily before the end of the year. After falling by about $60 billion in November and December, loans at these institutions rose slightly in the first six weeks of 2011. Notable decreases came in both residential lending and in commercial real estate loans, each declining by a little more than $20 billion over the last 14-week period.” (http://seekingalpha.com/article/254004-why-is-most-of-the-fed-s-qe2-cash-going-to-foreign-related-banking-institutions)
My question still remains, “why should the commercial banks be lending?” A large number of the banks have balance sheets that are not in very good shape, interest rates are abysmally low, and there are still quite a few sectors of the economy, housing, commercial real estate, consumer loans, state and local governments, that are experiencing serve financial difficulties themselves.
Having $1.2 trillion of excess reserves in the banking system is not justification for the banks to be lending…especially the smaller banks.
If the banks don’t lend right now it avoids the possibility of putting another bad loan on their balance sheets. In that way they can focus on their existing bad loans.
Some people looking for “green shoots” in the banking industry claim that they have found them. Unfortunately, I have not yet found a lot to raise my spirits.
This is up from the 293 institutions that dropped out of the industry in 2009.
In the fourth quarter of 2010, the number of insured depository institutions in the United States dropped by 104 depository institutions.
The number of banks on the FDIC’s list of problem banks rose from 860 to 884 at the end of the year.
The FDIC does not list how many of these problem banks went out of business in the fourth quarter of 2010 or were acquired by or merged into other institutions during this period. But, the picture is not quite as rosy as New York Times columnist Eric Dash reports this morning: “And only 24 lenders were added to the government’s list of troubled banks, the smallest increase since the financial crisis erupted in late
2007.” (http://dealbook.nytimes.com/2011/02/23/banking-shows-signs-of-a-turnaround/?ref=business)
Most of the banks leaving the banking industry were on the smaller size.
Furthermore, the list of problem banks does not include many other banks that are facing serious problems but have not yet qualified to be put on the FDICs list of problem banks. Need I mention the name of Wilmington Trust Bank, a bank that was considered by almost everyone as a bank that was doing OK. Then came the news of its sale last November. (http://seekingalpha.com/article/234027-wilmington-trust-sold-at-45-discount)
The problem list is a proxy for the number of institutions that are severely stressed, but does not include all that are still experiencing questionable futures. These latter banks have just not crossed the statistical threshold to be considered “problem banks.” Still 12% of the banking system is on the problem list.
I have been arguing for more than a year now that the actions of the Federal Reserve have been aimed at keeping things calm in the banking industry so that the FDIC can close or arrange acquisitions for troubled banks in an “orderly” fashion. This, I believe, has been one of the reasons that the Fed’s target interest rates have been kept near zero for such a long time. It is also part of the reason for the Fed’s second round of spaghetti tossing, or, quantitative easing (QE2).
The FDIC has needed the calmest environment possible to oversee a dramatic reduction in the number of banks in the banking system. As reported above, the banking system has almost 650 fewer banks in existence now than were in the banking system on January 1, 2009. That is a reduction of almost 8% of the banking institutions that existed at that time.
The other fact that does not bode well for the smaller banks in the country was just reported by the Associated Press: the profits of the big banks represented 95% of all bank profits in the fourth quarter of 2010. The big banks earned $20.6 billion of the $21.7 billion in profits earned by the banking industry as a whole. That is, only about 1.4% of the 7,657 banks noted above with assets of more than $10 billion saw these earnings.
And, bank lending. Bank lending continues to drag. I reported in my post of February 21, 2011:
“bank lending was abysmal over the past 6-week period and the last 14-week period.
Since the end of the year, loans and leases at the largest 25 domestically chartered banks in the United States dropped dramatically by about $50 billion, much of this coming in consumer lending although loan amounts were down across the board. Loans and leases held roughly constant in the eight weeks that preceded December 29 at these large banks.
In the rest of the banking system, the declines in the loan portfolio came primarily before the end of the year. After falling by about $60 billion in November and December, loans at these institutions rose slightly in the first six weeks of 2011. Notable decreases came in both residential lending and in commercial real estate loans, each declining by a little more than $20 billion over the last 14-week period.” (http://seekingalpha.com/article/254004-why-is-most-of-the-fed-s-qe2-cash-going-to-foreign-related-banking-institutions)
My question still remains, “why should the commercial banks be lending?” A large number of the banks have balance sheets that are not in very good shape, interest rates are abysmally low, and there are still quite a few sectors of the economy, housing, commercial real estate, consumer loans, state and local governments, that are experiencing serve financial difficulties themselves.
Having $1.2 trillion of excess reserves in the banking system is not justification for the banks to be lending…especially the smaller banks.
If the banks don’t lend right now it avoids the possibility of putting another bad loan on their balance sheets. In that way they can focus on their existing bad loans.
Some people looking for “green shoots” in the banking industry claim that they have found them. Unfortunately, I have not yet found a lot to raise my spirits.
Wednesday, February 23, 2011
The Music Has Begun Again, Start Dancing?
John Maynard Keynes is remembered for many quotes and one of the most memorable ones is his claim that “In the long run we are all dead.” Keynes wrote this remark to criticize the belief that inflation would acceptably control itself without government intervention. That is, he argued that the theoretically determined equilibrium of an economy was not a good guide to the future in a very volatile economic situation.
The statement has been used, however, as an excuse for choosing the economic policy of a government based short run outcomes. The most prominent short run outcome sought over the past fifty years has been the maintenance of high levels of employment…or, low levels of unemployment.
The problem is that fifty years of government stimulus, basically credit inflation, aimed at achieving low levels of unemployment have created a cumulative build up in debt and a general attitude toward debt that perpetuates a desire for “more-of-the-same.”
And, over this past fifty years, the purchasing power of the dollar has declined by 85%; the under-employed in the country are in excess of 20% of the working force; and the income distribution has become dramatically skewed toward higher income recipients.
Not surprisingly, the economic and financial crisis of the past few years has been met with calls for more fiscal stimulus and wide-open monetary policy. The result: yearly federal government budget deficits of over $1.5 trillion with an estimated cumulative deficit over the next ten years in excess of $15 trillion. In terms of monetary policy, excess reserves in the banking system have reached $1.2 trillion. All this, of course, to get the economy going again.
Here, however, is where moral hazard enters the picture. The behavior patterns of finance people, developed over the last fifty years, “kicks in” once people see that the same old spending habits of the government are still in place.
I call your attention to the opinion piece by John Plender in the Financial Times this morning, “Bad Habits of Credit Bubble Make Worrying Comeback.” (http://www.ft.com/cms/s/0/26d644be-3ea8-11e0-834e-00144feabdc0.html#axzz1EmwjGnnL)
Mr. Plender begins: “Here we go again. The start of the year in debt markets has been marked by record low yields on junk bonds, declining underwriting standards and a return of the more dangerous innovations of yesteryear such as payment-in-kind toggles which allow borrowers to issue more debt to pay the interest bill. Even covenant-life loans, where normal borrowing conditions are shelved, have made a comeback in the leveraged buyout market and elsewhere, at a time when hapless small and medium sized firms are hard pressed to find credit.
A surplus of savings over investment is thus building up in the system and the US is once again accommodating the savings gluttons with an ongoing commitment to loose policy…No surprise, then, that the search for yield is back in evidence. With Federal Reserve chairman Ben Bernanke keeping policy interest rates at rock bottom, investors are being driven into riskier assets such as junk bonds and leveraged loans.”
Has the “music” started up once more so that people must start dancing again? Someone call “Chuck” Prince, former chairman of Citigroup, to get his “take” on the timing.
Fifty year policies are not just present in the economic policies of government. They exist elsewhere as well. Check out the Tom Friedman’s column “If Not Now, When?” in the New York Times this morning. (http://www.nytimes.com/2011/02/23/opinion/23friedman.html?hp)
Here Friedman discusses energy policy: “For the last 50 years, America (and Europe and Asia) have treated the Middle East as if it were just a collection of big gas stations: Saudi station, Iran station, Kuwait station, Bahrain station, Egypt station, Libya station, Iraq station, United Arab Emirates station, etc. Our message to the region has been very consistent: ‘Guys (it was only guys we spoke with), here’s the deal. Keep your pumps open, your oil prices low, don’t bother the Israelis too much and, as far as we’re concerned, you can do whatever you want out back. You can deprive your people of whatever civil rights you like. You can engage in however much corruption you like. You can preach whatever intolerance from your mosques that you like. You can print whatever conspiracy theories about us in your newspapers that you like. You can keep your women as illiterate as you like. You can create whatever vast welfare-state economies, without any innovative capacity, that you like. You can undereducate your youth as much as you like. Just keep your pumps open, your oil prices low, don’t hassle the Jews too much — and you can do whatever you want out back.’”
Fifty years is a long time. The buildup of fifty years of economic policies and energy policies can result in a lot of excess baggage hanging around that must be dealt with. A fifty-year build up not only requires a major re-structuring of nations and economies, it also requires a huge shift in the mindset of many, many people.
You want the deficit to come down in the short run and monetary policy to be reversed because it is potentially inflationary? It just ain’t going to happen in the near term.
You want an energy policy that is going to immediately get us off of oil so that we can stop subsidizing dictators and autocrats in the Middle East? It just ain’t going to happen in the near term.
And, so on and so on…
What seems to be missing is the leadership to change our mindset and develop a new paradigm that will set us on a pathway to re-structure our economy and our lives. I don’t think we want to dance the same old dance we have been doing for the past fifty years. Yet, it seems as if we have no choice but to start dancing again because the bank has begun to play the music once more.
The leadership just does not seem to be here, either in America, or in Europe, or in Asia. And, no one is strong enough to want to inflict on people the consequences of ‘getting the house in order again.’ I guess one can say, in line with the earlier comments of the mayor-elect of Chicago, Rahm Emanuel, that the leadership in the United States (and in Europe and in Asia) has “”let a crisis go to waste!”
The question that is still unanswered is “Has Keynes’ long-run arrived yet or do we still have to wait for it?” If it has not arrived yet, then it is still to come. Payment will be collected sometime. However, if this ‘long-run’ is still to come then my advice to those that work in financial institutions or in the financial markets is…start dancing again if you haven’t already started for the music has begun once again.
The statement has been used, however, as an excuse for choosing the economic policy of a government based short run outcomes. The most prominent short run outcome sought over the past fifty years has been the maintenance of high levels of employment…or, low levels of unemployment.
The problem is that fifty years of government stimulus, basically credit inflation, aimed at achieving low levels of unemployment have created a cumulative build up in debt and a general attitude toward debt that perpetuates a desire for “more-of-the-same.”
And, over this past fifty years, the purchasing power of the dollar has declined by 85%; the under-employed in the country are in excess of 20% of the working force; and the income distribution has become dramatically skewed toward higher income recipients.
Not surprisingly, the economic and financial crisis of the past few years has been met with calls for more fiscal stimulus and wide-open monetary policy. The result: yearly federal government budget deficits of over $1.5 trillion with an estimated cumulative deficit over the next ten years in excess of $15 trillion. In terms of monetary policy, excess reserves in the banking system have reached $1.2 trillion. All this, of course, to get the economy going again.
Here, however, is where moral hazard enters the picture. The behavior patterns of finance people, developed over the last fifty years, “kicks in” once people see that the same old spending habits of the government are still in place.
I call your attention to the opinion piece by John Plender in the Financial Times this morning, “Bad Habits of Credit Bubble Make Worrying Comeback.” (http://www.ft.com/cms/s/0/26d644be-3ea8-11e0-834e-00144feabdc0.html#axzz1EmwjGnnL)
Mr. Plender begins: “Here we go again. The start of the year in debt markets has been marked by record low yields on junk bonds, declining underwriting standards and a return of the more dangerous innovations of yesteryear such as payment-in-kind toggles which allow borrowers to issue more debt to pay the interest bill. Even covenant-life loans, where normal borrowing conditions are shelved, have made a comeback in the leveraged buyout market and elsewhere, at a time when hapless small and medium sized firms are hard pressed to find credit.
A surplus of savings over investment is thus building up in the system and the US is once again accommodating the savings gluttons with an ongoing commitment to loose policy…No surprise, then, that the search for yield is back in evidence. With Federal Reserve chairman Ben Bernanke keeping policy interest rates at rock bottom, investors are being driven into riskier assets such as junk bonds and leveraged loans.”
Has the “music” started up once more so that people must start dancing again? Someone call “Chuck” Prince, former chairman of Citigroup, to get his “take” on the timing.
Fifty year policies are not just present in the economic policies of government. They exist elsewhere as well. Check out the Tom Friedman’s column “If Not Now, When?” in the New York Times this morning. (http://www.nytimes.com/2011/02/23/opinion/23friedman.html?hp)
Here Friedman discusses energy policy: “For the last 50 years, America (and Europe and Asia) have treated the Middle East as if it were just a collection of big gas stations: Saudi station, Iran station, Kuwait station, Bahrain station, Egypt station, Libya station, Iraq station, United Arab Emirates station, etc. Our message to the region has been very consistent: ‘Guys (it was only guys we spoke with), here’s the deal. Keep your pumps open, your oil prices low, don’t bother the Israelis too much and, as far as we’re concerned, you can do whatever you want out back. You can deprive your people of whatever civil rights you like. You can engage in however much corruption you like. You can preach whatever intolerance from your mosques that you like. You can print whatever conspiracy theories about us in your newspapers that you like. You can keep your women as illiterate as you like. You can create whatever vast welfare-state economies, without any innovative capacity, that you like. You can undereducate your youth as much as you like. Just keep your pumps open, your oil prices low, don’t hassle the Jews too much — and you can do whatever you want out back.’”
Fifty years is a long time. The buildup of fifty years of economic policies and energy policies can result in a lot of excess baggage hanging around that must be dealt with. A fifty-year build up not only requires a major re-structuring of nations and economies, it also requires a huge shift in the mindset of many, many people.
You want the deficit to come down in the short run and monetary policy to be reversed because it is potentially inflationary? It just ain’t going to happen in the near term.
You want an energy policy that is going to immediately get us off of oil so that we can stop subsidizing dictators and autocrats in the Middle East? It just ain’t going to happen in the near term.
And, so on and so on…
What seems to be missing is the leadership to change our mindset and develop a new paradigm that will set us on a pathway to re-structure our economy and our lives. I don’t think we want to dance the same old dance we have been doing for the past fifty years. Yet, it seems as if we have no choice but to start dancing again because the bank has begun to play the music once more.
The leadership just does not seem to be here, either in America, or in Europe, or in Asia. And, no one is strong enough to want to inflict on people the consequences of ‘getting the house in order again.’ I guess one can say, in line with the earlier comments of the mayor-elect of Chicago, Rahm Emanuel, that the leadership in the United States (and in Europe and in Asia) has “”let a crisis go to waste!”
The question that is still unanswered is “Has Keynes’ long-run arrived yet or do we still have to wait for it?” If it has not arrived yet, then it is still to come. Payment will be collected sometime. However, if this ‘long-run’ is still to come then my advice to those that work in financial institutions or in the financial markets is…start dancing again if you haven’t already started for the music has begun once again.
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