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On Weigel

Dave Weigel inspired me to quit reading Hit and Run for a couple of years. His posts seemed straight out of DailyKos.

Regarding the actual outing/firing/ratfucking, I don't really have an opinion.

Hendry vs Soros

A few weeks ago, Hugh Hendry took down Jeffrey Sachs. This time, the always provocative Hendry goes after George Soros.

Among the popular bears, he's one of the few (only?) that is highly bearish on Asia.

They've got us beat on that

I don't know how much all of you dear readers have been following the World Cup, but it doesn't take long to notice one thing: the US flag makes a hideous decoration theme. See here.


Article in The Atlantic on Paul Romer's charter cities idea.

TJIC with a nice thought experiment re: working conditions.

Swiss tell Feds to fuck off. UBS should just pull out of the US, watch its inevitable slow-motion implosion from a safe distance, and laugh all the way to the bank, so to speak. Heck, if they did that, I'd fly to Switzerland and open an account myself.

$5000 per squirrel.

A subtle change in sentiment

Perhaps it's the solstice having a subconscious effect somewhere in the recesses of human brains. Today, there was a subtle change in the collective market mood. I sold all my bullish positions and started taking shorts (via BGZ).

Disclaimer: Anyone who mimics my decisions deserves to lose all their money.

The Anti-Internationale

Tea Parties pop up in Moscow, among other places.

A Strange Orthodoxy

My beliefs often fall outside the mainstream. I say this with a bit of pride; individualism is prized by the American culture. The national psyche cheers the archetype of the lone radical, confident in his eccentricity, who eventually convinces the entire world of his views. Our national mascot is the underdog. It is the inevitable legacy of a country founded by persecuted religious minorities. It is the echo of the omnipresent Jesus myth that lies beneath so much of our culture and shared values - America will remain a Christian nation long after it becomes a secular one.

But the persistant iconoclast must confront one of two uncomfortable possibilities: either all the world is mad or he is. Rebelling against the majority offers no greater assurance of finding truth than following the whims of the masses. There are more trailblazers that die in the dessert than lead their people to a promised land, more Time Cubes than Theories of General Relativity.

But economics offers ample sanctuary for the misfit. In more objective sciences, the weight of accumulated empirical evidence squeezes out non-comformity over time. Economics has long defied attempts to introduce objectivity. Especially in macroeconomics, thought seems driven by the tides of fashion and political convenience as much as it is influenced by fact. Islands of misfits recognize the illegitimacy of the forces deployed against them and hold out until the tide raises their side once again.

That is not to say that Economics does not have its own orthodoxy, defined by the authors of the latest textbooks for college Economics 101 and 102. These are the views that perculate through the financial press. Armed with some minimal knowledge of the principles of free exchange financial journalists are capable of challenging the grossest acts of economic illiteracy committed by the politicians and officials entrusted, foolishly, with the welfare of millions.

It is only after the discourse passes into subjects more complicated than supply and demand curves that we discover the limited imaginations of the interlocutors. Appropriately named for our purposes, the magazine "The Economist" bemoans European governments slowing the growth rates of their public budgets in an attempt to please nervous investors concerned that the governments will not pay back what they have borrowed. We are told that this minor retrenchment from flagrant excess will certainly herald recession, doom, and stagnation. The eventual end of American government stimulus programs is also feared to plunge the world economy into darkness. The Economist does not question the palliative affect on a flagging economy of any marginal increase in the rate of government spending.

Are they aware of the ample empirical evidence that contradicts the standard worldview? Do they know about the many counterexamples of countries that prospered under so-called austerity? I doubt they are so intellectually curious. The orthodoxy is a safe place to be. No writer was ever banished to writing ad copy for the Libertarian Party for the sin of parroting the official lines of the treasury and Fed.

Are they bothered by a twitch of doubt that the politicians responsible for passing massive spending programs might not be objective voices in judging their worth?

Over at the Marginal Revolution blog run by George Mason economists, a commenter writes: 1981 Margaret Thatcher cut UK government spending in the middle of a recession, and against the advice of 391 economists that it would worsen the recession, and UK GDP started its recovery the same quarter. In 1991 Ruth Richardson in NZ cut government spending against the advice of 15 economists, and NZ GDP started its recovery the same quarter. There are a number of other cases of expansionary fiscal consolidations, and there's a causal theory to explain why this can happen - see (shortly, it's that cutting government spending improves people's expectations about the future of the economy and taxes, so they start investing more right now). Of course, correlation does not prove causation, and perhaps there is something about the EU countries now that is so different as to the cases I cite as to make those results no longer likely to hold, but Krugman writes as if he has forgotten entirely about the 1980s and 1990s."

("Krugman" is an economist so reliably socialist that he takes three left turns at intersections.) Later on Marginal Revolution, Tyler Cowen points to this must-read David Brooks column, which provides more evidence against the stimulus orthodoxy:

Edward L. Glaeser of Harvard compared the change in employment in each state to the amount of stimulus money it has received. He found a slight relationship between stimulus dollars and job creation, but none at all if you set aside three states: Alaska and the Dakotas.

Alberto Alesina of Harvard has surveyed the history of debt reduction. He’s found that, in many cases, large and decisive deficit reduction policies were followed by increases in growth, not recessions. Countries that reduced debt viewed the future with more confidence. The political leaders who ordered the painful cuts were often returned to office. As Alesina put it in a recent paper, “in several episodes, spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions.”

This was true in Europe and the U.S. in the 1990s, and in many other cases before. In a separate study, Italian economists Francesco Giavazzi and Marco Pagano looked at the way Ireland and Denmark sharply cut debt in the 1980s. Once again, lower deficits led to higher growth.

This is a radical column. It contains a whiff of Austrianism. If David offered this information to a cable news anchor, he would be treated as dangerous and a bit whacky.

I am not an expert on Macroeconomics, just an interested outsider. But I am smart enough to realize that there is debate in academia on the effectiveness on standard policy perscriptions. And the opposition arguments have bite. I can't share The Economist's implicit faith in textbook Keynesianism.

Macroeconomics has a strange orthodoxy because so much of the discipline is outside of it. While media seems unaware that any other position exists, many big names in the field publicly doubt the wisdom of monetary and fiscal stimulus. Many of these big names hold research positions at top universities, a few have Nobel prizes.

It's a shame that the nuances of the debate are hidden from the public consciousness.

Government response to financial panics

Jonathan Wilde initiated a discussion about forecasts of future economic growth and the prospects for deflation rather than inflation. This prompted a debate about appropriate government policies in the face of a fiscal collapse:

Is the price [of bailing out Wall Street] worth the cost? Should AIG, the institution that stupidly wrote credit default swaps on CDOs backed by shitty bonds based on even shittier mortgages, exist at all? We've perpetuated the shittiness in the system. I think we'd have been better off if the USG had let AIG and the banking institutions go bust. The information cloud encapsulating AIG and big Wall Street institutions needs to evaporate or else better, smarter information can't take its place.

To which Steve Ingram responded:

Hoover allowed the banks to fail; believed the deleverage had to occur and the market will get it right. Guess what? It didn't get it right. It spilled over to other healthy areas of the economy and basically took everything down, including the little main street guy that lost his savings.

To this I added three thoughts for consideration:

1. Today the little main street guy wouldn’t lose his savings. The little guy’s savings are backed up by the Federal Deposit Insurance Corporation. And his income is protected to some extent by unemployment insurance and Social Security Disability Insurance. And his pension is backed up to some extent by the Federal Pension Guarantee Corporation, and supplemented by Social Security. Etc.

So maybe we don't need government to engage in new interventions today -- not because intervention is always wrong, but because we already have sufficient interventions in place to keep the little guy from panicking.

2. How about this alternative scenario: Instead of bailing out the big guys the US focused on bailing out the little guys?

Imagine that while debating the bailout of Wall Street and the auto industry in 1998, the US sells gobs of bonds in anticipation. Then the US announces, “We’ve decided not to bail out any firms; you’ll have to stand or fall on your own. Yes, some firms will fail, and unemployment will rise. In anticipation, we’ve stockpiled enough cash to provide unemployment insurance until 2020 without debasing the currency. Thus the American consumer can be reasonably confident of his income, and can continue consuming, albeit at a slower rate. Firms that can sell to that consumer can feel reasonably confident of having sales, albeit at a slower rate. And everybody else – well, best of luck to you.”

3. Of course, if the US did this, lots of investors would end up burned, and would henceforth be more reluctant to lend/invest. This "friction" in the system would create a drag on the economy -- at least, relative to the go-go days of the mid-2000s.

So here's the big question: Should government try to make people feel confident in the face of uncertainty? Many aspects of government intervention, both during the current crisis and more generally, seemed to be designed to reduce people’s fear of loss, and increase people’s willingness to take risks. Is that sound public policy?

The FDIC helps people feel comfortable depositing money in financial institutions. I suspect the FDIC is sound policy. We could expect every consumer to incur the cost of investigating the soundness of every financial institution he invests in, but this would be pretty inefficient. Moreover, the fear of a bank failure can trigger a run on a bank, causing the very event that is feared. Deposit insurance seems to defuse this self-defeating fear, producing social benefits that arguably justify the social intervention.

Government blesses certain ratings agencies -- Moody's, Fitches, Standard & Poors (S&P) -- and gives certificates to "Certified" Public Accountants, all in an effort to provide people with greater assurance about data. Is this just a fool's errand?

Is there sound public policy in, for example, keeping interest rates low, thereby encouraging greater investment (and correspondingly less savings) than would otherwise occur? I’m iffier about this. The Austrians clearly don’t think so. Yet if we live in a world in which positive externalities exceed negative ones then society may well have an incentive to induce you to take risks beyond those that you would choose to take based solely on self-interest. Because classical economics suggests that positive externalities (consumer surpluses) are part of most typical voluntary transaction, leaving people to act only on the basis of self-interest (producer surplus) may result in a level of economic activity that is sub-optimal from the perspective of society.

Finally, is it desirable for a president to appear at the scenes of disasters and offer reassurance? Perhaps, in the short run. But these reassuring words arguably make it harder to remind people that we live in a world of risk, that we can console ourselves that this generation faces a lower risk of imminent death or injury than any generation preceding it, and that we might benefit from stoically acknowledging and facing risk. I suspect we’d all be better off if we could acknowledge that the risk of harm from most types of terrorism is not worth the cost of trying to thwart terrorism. I suspect we’d all be better off if we concluded that the benefits from capital punishment are not worth the cost of implementing capital punishment. And I suspect we’d all be better off if we concluded that the cost of protecting various industries is not worth the cost. But I’m not sure how to create a system that rewards leaders for this type of INaction.

Commercial of Note

Gold news

I'm the paranoid sort, so if I said that the government would do its best to tax gold into possession or outright confiscate it, one would be excused in brushing it off. But if HSBC's top metals guy says it, one should probably pay more attention.
Speaking at the FT Silver conference in London yesterday, lead-off speaker John Levin, HSBC Bank's Managing Director, Global Metals and Trading (HSBC is one of the world's top precious metals traders and its vaults in the U.S. and Europe hold huge holdings of gold and silver bullion) recounted conversations with some of the U.S.'s top asset managers controlling massive amounts of capital asking if HSBC had the capacity in its vaults to store major gold purchases. On being told that the bank's U.S. vaults had sufficient space available he was told that they did not want their gold stored in the U.S.A. but preferably in Europe because they feared that at some stage the U.S. Administration might follow the path set by Franklin D. Roosevelt in 1933 and confiscate all U.S. gold holdings as part of the country's strategy in dealing with the nation's economic problems.
In other news, the GDX, an ETF that tracks a basket of gold mining stocks, has greatly outperformed the major indices over the last month. Click for a larger picture.

My most recent thoughts on the market involved the major indices rallying into a final rally and then entering a cyclical bear market which would take them to at least their March 2009 lows over the next 12-18 months. I thought gold, and hence, gold stocks, would follow the market down. My plan was to invest heavily in physical gold and gold miners at that time. Now, I'm no longer sure. The GDX outperformance might be a sign that some sort of decoupling between the broader market and gold is taking place. I fear I have too little exposure to gold, having bought a small amount of bullion at around $1200. I'm thinking about using a very small amount of my portfolio to buy far out-of-the-money LEAPs on GDX. Lots of risk, lots of leverage, and small total amount wagered.