Quotulatiousness

June 25, 2011

Tim Harford analyzes the ECB’s real problem

Filed under: Economics, Europe, Humour — Tags: , — Nicholas @ 10:30

Tim Harford puts the head of the ECB (Essex Community Business association) on the couch:

“With all due respect, doctor, I don’t think it’s me who needs to see a shrink.”

“Don’t worry. A lot of people feel a bit awkward when they first lie on this couch. This is a safe, non-judgmental space.”

“I wish the Essex Community Business association was as relaxed.”

“But you’re the chairman of the ECB association. Tell me why you feel that way.”

“Look, I always felt that the ECB association was supposed to be an informal talking shop, a way for people with shared interests to make new friends and perhaps even launch joint projects. Everyone was really happy when Georgios, the new owner of the Plaka Taverna, wanted to join — the more the merrier.”

[. . .]

“So if I understand the situation, you’re lending money to Georgios that you know he can never pay back, and demanding that his staff make sacrifices they are transparently unwilling to make, in order to protect Mr Saville’s bank, in order to protect José, who in some unspecified way is connected to Georgios’s fate.”

“It does sound a bit strange when you put it like that. I think the theory is that if we don’t throw money and yell impractical and unwelcome management advice at a transparently bankrupt business, then maybe a perfectly viable business will be damaged. Especially since there won’t be any money left, because we’ll have given it all to Georgios, who will have given it all to his waiters. Does that make sense?”

June 22, 2011

What is a balance-sheet recession?

Filed under: Cancon, Economics, USA — Tags: , , — Nicholas @ 12:07

Stephen Gordon has some really nasty looking diagrams explaining just what a balance sheet recession looks like:

I had never heard the expression “balance-sheet recession” before this recent episode, and it’s time I got around to a comparison of the household balance sheets of the US and Canada. Of all my “Canada is not the US” posts, this is the one that makes me most grateful.

The quarterly data goes back to 1990, and it’s good to put the last few years in context. I’ve scaled all the series by price (the consumption spending deflator) and population. Here is the net worth series:

There’s been talk of a Japan-like ‘lost decade’ in the US; that seems optimistic. US real per capita net worth is back to what it was back in 1999.

More (and somewhat scarier) diagrams at the original post. It doesn’t even finish on a high note:

The US data go back to 1952, so I was able to check the last time the real, per capita value of US housing equity was at its current level. Even after looking at all of these graphs, the answer astonished me: 1978. Nineteen seventy-freaking-eight.

June 10, 2011

Cold War thinking on Chinese-US relations

Filed under: China, Economics, History, USA — Tags: , , — Nicholas @ 09:13

Brad Glosserman asks if China is using its new-found economic muscle to bankrupt the United States.

One popular narrative credits the end of the Cold War to a US strategy to bankrupt the Soviet Union. Well aware of the advantage conferred by its superior economic performance, Washington pushed Moscow into a military competition that drained the USSR of its resources. In this narrative, US President Ronald Reagan’s push to create a missile defence system — realistic or not — was the straw that broke the Soviet back.

Are Chinese strategists pursuing a similar approach to the United States? Is Beijing pushing US buttons, forcing it to spend increasingly scarce resources on defence assets and diverting them from other more productive uses? Far-fetched though it may seem — and the reasons to be sceptical are pretty compelling — there is evidence that China is doing just that: ringing American alarm bells, forcing the US to respond, and compounding fiscal dilemmas within the United States. Call it Cold War redux.

If that is indeed China’s strategy, then they’re wasting their efforts: without strong action in the very near term, the US government is going to bankrupt the country with no additional help from overseas required. The “popular narrative” Glosserman refers to handily glosses over the fact that the Soviet economy had been on a downward slide for decades. The Reagan-era military build-up merely hastened the end for Soviet economics, it did not bring it on in the first place. As Adam Smith famously noted, there is a lot of ruin in a nation, but eventually it does go smash — especially if no efforts are made to avert that nasty ending.

H/T to Jon, my former virtual landlord, for the link.

June 8, 2011

New tactic on delinquent student loans: SWAT teams

Filed under: Education, Law, Liberty, USA — Tags: , , , — Nicholas @ 12:32

Thinking about getting behind on paying back your student loan? Think again:

Kenneth Wright does not have a criminal record and he had no reason to believe a S.W.A.T team would be breaking down his door at 6 a.m. on Tuesday.

“I look out of my window and I see 15 police officers,” Wright said.

Wright came downstairs in his boxer shorts as a S.W.A.T team barged through his front door. Wright said an officer grabbed him by the neck and led him outside on his front lawn.

After the public humiliation, he was then handcuffed and chucked into the back of a police car for 6 hours, along with his three young children. He’ll think twice before getting behind on his student loans, right?

Perhaps not: they weren’t even his loans: the SWAT team was looking for his estranged wife.

Ontario’s (pathetic) choices in the next election

Filed under: Cancon, Economics, Politics — Tags: , , , , , , — Nicholas @ 12:04

Read ’em and weep:

Dalton’s McGuinty’s record is so well known it barely justifies repeating: the health tax he promised not to introduce, but did. The HST. The eco tax. The soaring power bills. The epic borrowing. The multiple boondoggles. The “wage freeze” that turns out not to apply to police, nurses, civil servants or anyone who actually gets paid by the government. The big bonus for eHealth workers for overseeing a billion dollars in wasted spending. Stop me before I break into tears.

Tim Hudak says he’ll end the agony, but can’t be believed. Sorry Tim, but it’s true. If the campaign platform recently released by the Tories was handed in as a project in a first-year finance class, it would be returned with suggestions that the author find another line of interest. Like line dancing; something that doesn’t involve numbers, or adding and subtracting. Mr. Hudak says he’ll raise spending on all the important programs, but make up for it by finding “waste”. We all know that isn’t going to happen. Politicians never find waste. What they find is that if they keep spending money, their chances of re-election improve. The federal Tories have been promising to find waste for five years now, and have jacked up spending every year.

It’s been widely understood that this election was the Tories’ to lose . . . and they’re determined to do exactly that. This is how the NDP might finally get another chance to form a government . . . perhaps the misery of the Rae experiment has finally been forgotten. Between McGuinty and Hudak, the NDP could run a cardboard cut-out of Jack Layton and be (significantly) more appealing to the average Ontario voter.

June 3, 2011

For the federal government, $1B is a rounding error

Filed under: Bureaucracy, Cancon, Economics, Government — Tags: , , — Nicholas @ 10:46

Terence Corcoran glares balefully at what the federal government considers “deep cuts”:

We are destined for two days of political self-congratulation in Ottawa. Throne speech Friday. Budget Monday. Prime Minister Stephen Harper and his Finance Minister, Jim Flaherty, will use these opportunities to heap praise on their even-keeled and prudent handling of the economy, their deft manoeuvring of federal finances through the global storm, and their unwavering determination to guide us through the many uncertainties that lie ahead.

What they will not talk about is how they are going to balance the federal budget on target. Even less likely are any signs of enthusiasm for what should be a Conservative priority: reducing government spending.

That project has been shuffled off to Tony Clement at Treasury Board, where he will chair a small Cabinet committee that will dither away for a year trying to find the fiscal equivalent of nickels and dimes in a piggy bank the size of the House of Commons. Their first year target is $1-billion in cuts in departmental budgets of $120-billion, a spending reduction of less than 1%.

This is not good enough, not even close. For future years, Mr. Clement’s team will be hunting for an additional $3-billion in annual savings aiming for a total reduction of $4-billion by 2014, or about 1.3% of Ottawa’s total expenses of $300-billion.

As anyone who has ever done a family budget, or worked through tough times on a corporate budget, a 1% cut is a piece of cake, not much more than a rounding error.

May 31, 2011

How do you say “Doom!” in Chinese?

Filed under: China, Economics — Tags: , — Nicholas @ 09:32

Remember that calm, reassuring phrase “don’t worry”? Okay, time’s up. You can forget it now:

Falling land prices may prompt Chinese property developers to write down the value of their assets, forcing a sober reassessment for those with vast land holdings, according to a survey released Monday by Credit Suisse.

Most at risk are those mainland Chinese and Hong Kong developers who added aggressively to their land banks in 2009 and 2010, the prices of which could come under pressure amid Beijing’s ongoing credit tightening, the investment bank said.

[. . .]

Prices for land sold at auction were down 20% so far this year, the report cited one industry expert as saying. Other data indicated price declines of up to 50% for the year to date, although the figures were affected by slumping transaction volumes in cities such as Beijing, possibly overstating the true rate of declines, the report said.

Meanwhile, the tighter credit conditions are having a “double impact” upon developers, Credit Suisse said.

On one hand, delays in mortgage approvals mean developers are having to wait longer to get paid than they did in earlier times. Today’s leaner environment has also resulted in a rise in buyers backing out of purchasing commitments on new projects because they can’t secure financing.

Remember that old joke about it being time to get out of the market when even the cab drivers have stock tips? It’s been time to get out of the Chinese real estate market since every small-time operator started buying up “choice” plots of land. It’s a classic sign of a bubble (when uninformed buyers are rushing in to get in on the “sure thing”), and those who can read the signs before they become ubiquitous are those who survive the collapse of the bubble in the best shape.

May 29, 2011

Are we facing a crash in the value of the US dollar?

Filed under: Economics, Politics, USA — Tags: , , , — Nicholas @ 11:25

Conrad Black certainly makes a strong case to expect it sooner, rather than later:

When Barack Obama took office, the official normal money supply of the United States was about $1.1-trillion. The $3-trillion in federal budget deficits that have been run up since then have largely, technically, escaped the money supply, though accretions have almost doubled the official total, an unheard of rate of growth (about 40% annualized) in a hard-currency country. About 70% of this debt has been paid by the issuance of bonds to the central bank of the United States, the Federal Reserve, a subsidiary of the United States government. Whatever the balance sheets say, this has produced the effect of a money-supply increase, which has brought pump-priming to a level of over-achievement not seen since Noah felt the compulsion to build an ark. And the annual trillion-dollar deluge is forecast to continue for a decade.

The world’s reserve currency, the fabled vehicle of the “faith and credit of the United States,” is now virtual money — a symbol for all the other massive problems afflicting the U.S. economy. The imported share of America’s oil consumption, for instance, has gone from 20% to 60%. Large suppliers like Iran and Venezuela have become hostile countries. Yet Americans remain neurotic about paying half the gas price of other oil-importing countries.

But he says that we shouldn’t look to Europe to save the day:

Meanwhile, the European Union is a water-logged vessel in a tempest, frantically bailing. In the six weeks since French finance minister Christine Lagarde last bravely proclaimed her personal fantasy that Greece would not default, the interest on Greek government notes has risen from 20% to 26%. Germany will not indefinitely remain so encumbered with guilt for the Third Reich that it will go on eating the costs of the false prospectus Goldman Sachs assisted Greece and others to file when they joined the Euro. The Germans have only tolerated it up to now because the strain Greece, Portugal, Ireland, Spain and eventually others put on the European banking system and the Euro,keep the Euro in fairly close downward mode with the U.S. dollar, which assists German exports. What a splendid irony that Germany, reviled as the rampaging hun in olden time, is now being entreated by genuflecting masses of its former ungrateful subjects to occupy and dominate them again, at least economically. (The Bundesbank’s uniforms are less stylish than those of the Wehrmacht.)

The EU is in hot contention with the United States as the Sick Man of the Great World Economic Powers, because less than 40% of Eurozone citizens work and over 60% are on benefits of some sort. But not to be discounted in this gripping Olympic contest for total fiscal immolation is geriatric, debt-ridden, stagnating Japan, a great but terribly beleaguered and demoralized country.

How’s that for your daily dose of DOOM? Pretty DOOM-ish, isn’t it?

May 27, 2011

Colby Cosh: It wasn’t a market failure that caused the sub-prime fiasco

Filed under: Economics, Politics, USA — Tags: , , , — Nicholas @ 10:52

He’s quite right, not that the powers-that-be will take away the correct lesson from the experience:

What I see when I look at the origins of the financial pandemic is the story “government-sponsored enterprises that subsidize crazy lending practices and puppetize legislators fail.” Mortgage-writing institutions did things throughout the late 1990s and early oh-ohs that weren’t just likely to turn out badly; they made enormous amounts of loans that were practically certain to go bust in the short-to-medium term, loans that your mother could have told you would go sour. It wasn’t a “free” market that relaxed mortgage underwriting standards to the point of annihilation; it wasn’t a “free” market that put unskilled workers in million-dollar homes in the Sand States, or that spent too long ignoring the rising default rates that resulted.

We know this, in part, because we know how slightly freer mortgage markets traditionally behaved; they “redlined” the living heck out of low-income neighbourhoods. Because redlining resulted in racial discrimination — critics would just say it is racial discrimination — there has been a concerted attempt among economists to absolve the major U.S. anti-redlining statute, the Community Reinvestment Act of 1977, from any role in creating the housing bubble. Obviously it won’t do to pin the crisis on a 1977 law, but there is such a thing as the straw that broke the camel’s back; the CRA was followed by an even more intense fusillade of statutory and regulatory measures consciously designed to increase home ownership in America without making homes less expensive and valuable per se.

May 25, 2011

How to analyze bubbles and crashes

Filed under: Books, China, Economics, History, Media — Tags: , , — Nicholas @ 07:06

Warren C. Gibson reviews Boombustology by Vikram Mansharamani, which looks at the boom and bust pattern frequently seen in economics, with special emphasis on China:

The author’s macro lens includes Austrian business cycle theory. That theory says inflation of the money supply causes a drop in interest rates, which is misinterpreted as an increased aggregate preference for saving over consumption, leading to investments in more roundabout means of production. When it becomes clear that there has been no such preference shift, these undertakings are seen to be at least partial mistakes, requiring write-offs and retrenchment — a bust. The boom is the problem, not the bust, which is the market’s attempt to realign itself to the realities of time preference. Austrian business cycle theory has great merit but leaves some things unexplained.

Mansharamani’s micro lens includes the concept of reflexivity. Market participants don’t just observe prices but also influence them. Reflexive dynamics occasionally give rise to instabilities in which rising prices lead to increased demand. A simpler term would be a “bandwagon effect.” I recall an office party in 1980 where one of the secretaries asked about buying gold — precisely at the peak, as it turned out. All she knew about gold was that it was way up and therefore must be going higher. I should have realized that when you see financially unsophisticated people like her climbing on a bandwagon, you can be pretty sure there’s no one left to sell to and nowhere for prices to go but down, which is where gold and silver prices went in 1980, and in a big hurry.

From psychology Dr. M. borrows ideas and data about cognitive biases. For example, subjects asked to guess some bland statistic, like the number of African countries that belong to the UN, are influenced by the spin of a wheel of fortune: When the wheel lands on a high number, they guess higher. He translates this and a dozen other cognitive biases into irrational market behavior that can foster booms and busts.

He introduces his biology lens with an analogy to the spread of an infectious disease. When the prevalence of a disease reaches a high level, the infection rate necessarily slows and the disease begins to wane, just like the 1980 gold market. But it is devilishly difficult to “inoculate” oneself against infectious ideas. Individual investors who can do so have a decent chance to beat the market averages over time, I believe. (Those who would pursue these ideas in greater depth would do well to find James Dines’s quirky and expensive but worthwhile book, Mass Psychology.)

Governments don’t have the power to prevent booms and busts — but they sure do have the ability (and too often, the will) to extend booms as long as possible, which only makes the necessary correction that much more painful.

May 18, 2011

China facing recession?

Filed under: China, Economics — Tags: , — Nicholas @ 12:03

At risk of setting my hobby horse to full gallop, reports like this one are starting to sound a few mild alarms about the real state of China’s economy. But accepting official Chinese government statistics like this isn’t going to help:

The Chinese central bank has responded to overheating in its economy by raising interest rates four times since October 2010. Inflation has subsequently cooled, slowing to 5.3 percent in April, but the economy is still roaring with a 9.7 percent increase in gross domestic product for the first quarter.

The rate moves have raised questions about whether the government is going too far to slow things down, and whether the country can accomplish its desired transition from an export-driven economy to growth based more on internal consumption.

As I’ve said several times before, you can’t trust these kinds of numbers because they’re not independently generated from reliable data. They’re numbers that range from kinda-sorta in the same ballpark as reality all the way out to the lower stratosphere. The people providing the numbers are subject to rather more risk than just losing their jobs if they displease the government. Honesty is not a virtue when your life may depend on providing the “right” answer.

As Monty puts it:

I’ll keep hammering this point as long as I’m able: The Chinese “economic miracle” is mostly a sham. The Chinese are awash in cheap Western money, essentially, and when that money dries up (which it is doing right now), the Chinese don’t have much of a domestic market to fall back on. Plus, in case anyone forgot, they’re still run by Communists who don’t really believe in that whole “capitalism” thing.

I’ve ridden this hobby horse many times before. I don’t doubt that I’ll be riding it many times again in the future.

May 16, 2011

Stephen Gordon: should Canadians be buying cheaper US stocks?

Filed under: Cancon, Economics, USA — Tags: , , — Nicholas @ 13:02

Is now a good time to buy American stocks?

As the dollar appreciates, there are more articles in the financial press commenting on how U.S. stocks are becoming cheaper from the point of view of Canadian buyers. I am probably the last person from whom you should take investment advice, but there are some things to think about when you’re trying to decide if a stock is cheaper or if it is simply worth less.

Buying USD-denominated assets is in large part a bet against the Canadian dollar. Since 2000, Canadians who bought the S&P500 index instead of the TSX have generally regretted it [. . .] The average CAD return on the TSX was 11 per cent more than the CAD return on the S&P500 over the past decade. [. . .]

But that doesn’t necessarily mean that U.S. stocks are a bad deal, because they have one very attractive property: they generate higher returns for Canadians during bad times. This is the sort of correlation that is most valued by investors: we are willing to pay extra for assets that pay off most when extra money is most needed. For example, most people buy fire insurance, even though it is a money-losing investment for almost all households. Even though the odds of a fire are small, homeowners are still willing to pay for an asset that pays off when their house burns down.

I’m not in a hurry to invest in American stock right now, as I still see the US government’s debt addiction having the potential to drag down the US market much further. Not that staying in Canadian stocks insulates me from such things . . . but the impact should be lighter on Canadian holdings than on US positions.

May 13, 2011

QotD: The financial legacy of the Baby Boomers

Filed under: Economics, Quotations — Tags: , , , , , — Nicholas @ 00:05

Greg Mankiw links to a WSJ piece about our negative bequest to our children. It’s a point I’ve made many times myself (and am sometimes accused of bashing the elderly because of this). A good quote from the WSJ piece:

     [R]egardless of how much they have contributed, the hard reality is that the federal government has already spent it. No matter how deserving they are, it is younger generations of workers who have to come up with the money.

It is morally wrong to force young people to make good on false promises made before they were even born. It is an outrage, a scandal, a shame on our society. A society that invests in the old at the expense of (actually, to the large detriment of) the young cannot survive. A caring and kind society cares for the weak and elderly and helpless; a dynamic and just society allows the young to grow and prosper on their own merits. If America is to prosper as a nation, the young must be given room to build families and careers. To build lives, without the onerous, crushing burden of debt run up by their forebears.

Never mind questions of ethics or “fairness”: it’s just math. The numbers do not, cannot, and will not ever even up, no matter what accounting tricks the government uses. Until we fundamentally change how the Big Three entitlement programs (SS, Medicare, Medicaid) work, we will continue to load up our young people with a crippling load of debt they had no hand in accruing.

“Monty”, “A hot cup of DOOM!, no cream, no sugar”, Ace of Spades H.Q., 2011-05-12

April 18, 2011

True Finn party surges to 39 seats in Finnish election

Filed under: Europe, Politics — Tags: , , , , — Nicholas @ 15:53

From nowhere to third-largest party:

The True Finns finished just behind the conservative NCP and the Social Democrats on around 19%.

While the Social Democrats have called for changes on EU bail-outs, including the planned Portuguese rescue, True Finns opposes the plans altogether.

A hostile Finnish government could theoretically veto the package.

Unlike other eurozone countries, Finland’s parliament can vote on whether to approve the measures.

Correspondents say the increased sway of Euro-sceptics in Finland’s parliament could hold up any further bail-out deals.

As the biggest party, the NCP is tipped to lead the next government with former Finance Minister Jyrki Katainen likely to become prime minister of whatever coalition emerges, replacing Mari Kiviniemi of the Centre Party.

Gavin Hewitt called it a “tremor” with an “epicentre” in Finland:

A few years ago the True Finns were a fringe party, that received almost no attention. So what happened? The vote was not just about the bailout. There was anxiety about unemployment and fears of a jobless economic recovery. Reductions in pensions had angered many workers. The party also tapped into fears about immigration.

What makes this election so significant is that it follows a pattern across Europe. Establishment and incumbent parties are being rejected. Nationalist parties are gaining influence.

In the Netherlands, the anti-Islam MP Geert Wilders leads the country’s third largest party. In Italy the Northern League — hostile to immigration and wary of the EU — is increasingly powerful. In France, Marine Le Pen — who wants to abandon the euro — is showing strong support in the polls.

Recently, writing in the Financial Times, Peter Spiegel questioned whether we were seeing the emergence of a European Tea Party. Certainly there is a strong sense of alienation and dissatisfaction. Immigration is a key factor. It is shaking governments. There are more than 24 million people without work in the EU and there is no appetite to welcome new arrivals. That is why the migrants from Tunisia are sparking such tension between Italy and France.

As important as immigration is unemployment. In countries like Italy and Spain there is talk of a “lost generation” that cannot find work. There is a growing awareness that Europe may be a low-growth area.

H/T to Elizabeth, who reminded me that I had an obligation to report the final results after having posted links to the election race twice before.

The real secret weapon of the “China economic miracle”

Filed under: China, Economics, Government — Tags: , , , , — Nicholas @ 10:35

Chriss W. Street thinks the Chinese banks are about to suffer a crisis moment:

It is ironic that China is demanding greater control of the World Bank and International Monetary Fund, just as the nation’s banking system is about to be devastated by the white hot flames of inflation.
From a distance, China’s economy seems to be the poster child of sustainable growth. Recent government reports show the economy expanding by 9.7%, retail sales up a blistering 17.4%, foreign reserves at $3 trillion, and inflation only 5.4%. But these statistics mask a dark side; Chinese communist authorities have been artificially holding down fierce inflationary pressures by subsidizing consumer prices.

[. . .]

The less known and far more important secret-weapon of the “China Economic Miracle” is the absolute control of the banking industry by China’s four largest state-owned banks (“SOB”); Industrial and Commercial Bank, Agricultural Bank, People’s Bank of China and Construction. Since the government does not provide adequate social welfare programs and restricts its citizen’s investment options to bank accounts, about 40% of Chinese household income is deposited in SOBs each month. The SOBs then leverage the deposits by ten times and loan 75% of this massive amount of cash at extremely low interest rates to state-owned-enterprises (“SOE”). The other 25% of lending is allocated to real estate development.

China is no stranger to bankers making risky loans to communist party officials and their crony real estate developers. During the Asian Financial Crisis of the mid-1990s, it is estimated that 40% of all SOB loans were non-performing and most were written off. The Chinese paid for the SOB losses with a 76% devaluation of their currency that crushed the people’s buying-power by 76%. From 1997 to 2004 Chinese frivolous lending was somewhat restrained, but since 2003 the bureaucrats have mandated a massive expansion of lending. In comparison to the U.S. and Europe where bank lending is flat, SOBs have been expanding loans by 25% annually.

H/T to Jon for the link.

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