Government vs. Private Incentives

From an article discussing the recent natural gas find by Noble Energy:

Communications Minister Efthymios Flourentzos struck a note of optimism, saying that as a public listed company, Noble would always announce a more conservative estimate of the quantities of natural gas, so as not to run afoul of the New York Securities and Exchange Commission.

So what? Does that mean that a government company would announce a much more liberal estimate because it would not be penalized at all for being wrong? That sounds an awful lot like the rest of government functions.

Further in the article:

University of Cyprus professor and member of the group of experts appointed to advise the government, Panos Papanastasiou agreed, saying the find was "possibly the second largest offshore gas find in the last decade".

"Companies are usually conservative. They don't announce figures and then downgrade them because they run the risk of being penalized,"  Papanastasiou said.

It almost sounds like there is no easy way to hold a government agency or company accountable (i.e penalizing) if they make a costly mistake or misrepresent matters. Call me a cynic, but people are still under the delusion that government officials and employees are public servants.

Also in the article:

The minister added that some sort of national company needed to be created to manage the existence of hydrocarbons in Cyprus' EEZ, giving the state a "decisive role" in wealth management.

With all due respect, why? A national energy company gives too much incentive to the government to perform mischief, taking the proceeds from exploration and production and wastefully spending on social programs, neglecting necessary reinvestment in fields to maintain production. See Venezuela, for example, where oil production is declining and they can not get international investors interested, though you would think that with them producing oil, they could surely fund reinvestment to maintain a cash flow stream... except for those social programs!

The private sector would run the exploration and production better because they at least are accountable to shareholders (corporations have the agent problem, but governments are the ultimate example of the agent problem), and would probably maximize resources extracted from the field. The government can just take its royalties and taxes and be happy without having to manage a company.

Except, of course, if Cypriots want more government involvement in their lives through a national company adding significantly to the coffers, resulting in a government likely to lavish them with social programs and handouts. If they want to disincentivize themselves even more from self-reliance, then I suppose they deserve the government they have. They will likely realize too late what a mistake that would be.

The first thing you must remember is to get the hell out of Brussels as quickly as you can

Somehow I do not think Michael O'Leary is going to be invited back to Brussels. Bureaucrats never like to hear how inept and idiotic they are.

Amusing Points:

• First three minutes and thirty-five minutes
• Timestamp 5:30: "and British Airways, which used to be the world's favorite airline, isn't even the UK's favorite [airline] anymore, we [Ryanair] are!
• Timestamp 6:45: "We got an email back last Friday saying, 'I'm sorry the [European] Commission can't pay for a Ryanair flight because there's a ban on low-fare flights within the Commission.'"
• Timestamp 7:40: "The first thing you must remember today is to get the hell out of Brussels as soon as you can."
• Timestamp 8:25: "[L]ower prices beats higher prices every time, unless you work in the Commission where, of course, by law you can only buy higher prices because, let's face it, the European taxpayer is going to pay for it anyway."
• Timestamp 9:20: "...We take your bags from you on departure so we can carry them here and give them back to you on arrival, unless, of course, you flew British Airways, in which case we lose 50% of them in between.

There are a few more humorous moments after, along with plenty of good ribbing at the European Commission. 

Of course, the Commission flunky had to point out that the Commission deciding to deregulate the airline market as part of the single market allowed Ryanair to exist. Which begs the question of the use of regulation in the first place, eh?

Christmas is Coming - Game of Thrones Edition

Source: WICB on Tumblr, originally from ONTD.

A Teachable Moment in Skyward Sword

So when you first buy adventure pouches in Skyward Sword, the first one is 300 rupees. The second is 600, and the third 1200.

Call me amused...thanks to Nintendo for a teachable moment about supply and demand (decreasing supply of pouches and increased demand from you buying them resulting in price increases for each incremental purchase until supply is exhausted). Pity that they couldn't give Beedle a better story to illustrate that point.

Just think, if they had, how many fewer people would consider higher prices in abnormal times to be price gouging when in reality it reflects 1) the sudden scarcity of the product; and 2) the pricing mechanism use by store owners to ration it out to those with the most desire and ability to pay. That does raise another point: in normal times, it is cheaper to prepare for risks (insurance, stockpiling, etc) than in abnormal times...

Want to read another example of pricing in chaotic times? Daniel Abraham's first few chapters of The Dragon's Path is a rather well written tale to that effect. If I was an economics professor, I'd look to real life and fiction to find good supporting anecdotes like that.

Status Quo Bias: The Devil Ye Ken versus the Devil ye don't

It is that time of year when everyone is assessing where they are in their life, what they've done, what they've not done, and what they want to do next year. I find the whole effort somewhat amusing, because ultimately though people will want to change matters, they somehow decide not to at the last moment.

At the heart of the matter is status quo bias. We prefer that which we know and have shaped ourselves around to that which we do not know. Certainty over uncertainty, minimizing pain through avoiding change even if it might be for the better.

However, what if that change is for the better? Would you regret not having gone through the effort to execute it?

For example, I refer you to one of my favorite passages in Diana Gabaldon's Outlander series (and no, it's not one of the romance novel moments, though Diana writes those amazingly well too...), since it calls out a two psychological biases (status quo and authority):

"Better the Devil ye ken, than the Devil ye don't," Murdo Lindsay said, shaking his head lugubriously. "Handsome Harry was nain sae bad."

"No, he wasna, then," agreed Kenny Lesley. "But ye'll ha' been here when he came, no? He was a deal better than that shite-face Bogle, aye?"

"Aye," said Murdo, looking blank. "What's your meaning, man?"

"So if Handsome was better than Bogle," Lesley explained patiently, "then Handsome was the Devil we didna ken, and Bogle the one that we did - but Handsome was better, in spite of that, so you're wrong, man." [Emphasis mine] 

"I am?" Murdo, hopelessly confused by this bit of reasoning, glowered at Lesley. "No, I'm not!"

"Ye are, then," Lesley said, losing patience. "Ye're always wrong, Murdo! Why d'ye argue, when ye're never in the right of it?"

"I'm no arguin'!" Murdo protested indignantly. "Ye're takin' exception to me, not t'other way aboot."

"Only because you're wrong, man!" Lesley said. "If ye were right, I'd have said not a word."

"I'm not wrong! At least I dinna think so," Murdo muttered, unable to recall precisely what he had said. He turned, appealing to the large figure seated in the corner. "Mac Dubh, was I wrong?" 

The tall man stretched himself, the chain of his irons chiming faintly as he moved, and laughed.

"No, Murdo, ye're no wrong. But we canna say if ye're right yet awhile. Not 'til we see what the new Devil's like, aye?" Seeing Lesley's brows draw down in preparation for further dispute, he raised his voice, speaking to the room at large. "Has anyone seen the new Governor yet? Johnson? MacTavish?"

In case you did not figure it out, Mac Dubh, or Jamie Fraser, is the authority among the prisoners in this book. We'll leave aside a discussion about the magnificence of a man like Jamie Fraser.

I sincerely hope that passage triggered some thoughts within you about the merits of sticking to your goals for the next year. I know that 2011 was predicated around various changes to my status quo. Some of those I executed more successfully than others:

• Career - I decided it was time to apply for an MBA, so my applications are currently out there
• Personal life - sorry, but this is private! You can ask me in person.
• Investing: reading more than ever, and starting to journal my thoughts (albeit inconsistently)

So, for 2012, what will I be doing to change the status quo? Well, I certainly will not be protesting Wall Street or anything. And I view it as futile to protest the government, as if they'll listen and change things for the better (edit: Who knows, maybe they will, in some cases like SOPA, though I'm still a pessimist overall here thanks to the NDAA 2012, which continues the trend of the past 10 years).

• Career - the MBA, or plan B
• Personal life - again, this is private! I may post a passage from the The Dragon's Path in the future to illustrate the risks I see right now which I will be mitigating via actions for my personal situation (hint, part of it has something to do with what the Medean Bank did as a counter to the notion that power tends to corrupt, certainly among sovereigns and conquerers).
• Investing:
• Reading certain authors I respect on a regular basis (Jeremy Grantham and James Montier, though I think their Keynesian framework is wrong; John Hussman; and a few others)
• Journaling on a weekly basis
• Education: 
• Learning a foreign language (something I've never managed to do so far)
• CFA studies

My plate is certainly full for next year! With discipline, I'll accomplish it. Whatever your desires next year are to change your status quo (and for most of us, I believe we ought to), I wish you the best of luck and determination in executing your plans.

Bias in MBA questions: Community Service

One of the schools I am applying to, which shall remain unnamed, asks the question of how I shall give back to the community, as charitable service is one of the values they highly esteem. I believe this question is loaded with bias and misunderstanding:

1) It assumes that the only way of giving back to the community is through charity, ignoring the value accruing to society through individuals specializing and taking advantage of comparative advantage through free trade:

I.e. I specialize in medicine and you specialize in growing food; rather than both of us doing this, resulting in more medical services and more food available for society through each of us utilizing our talents and trading with others for goods it makes more sense for them to produce for us, as we produce a service for them.

2) It fails to acknowledge the consumer preferences of the individual - perhaps no matter the mix of activities in his daily life, an hour of charity does not add value for him on the margin, meaning that "charity" performed by him would only occur if someone abrogated his liberty;

3) It fails to consider the opportunity cost to society of an hour given to charity by the individual versus spent on activities where he has a comparative advantage:

For example, what if he is an entrepreneur adding value through new products, services, or research? And what if, on the margin, an hour expended by him on those adds more value to society than an hour expended at the soup kitchen. Wouldn't it make more sense for him to spend his time on the former? Wouldn't that truly be giving back to the community, since he is adding value that otherwise would not have been created?

I find this question sad, because it seems to indicate the university's preference for non-value added service over value-added voluntary trade among individuals, the latter which has caused the wealth of nations. Hence, this university is lower on my preferred school list.

Ideology Matters

Suppose I presented an argument to you regarding why banks are not lending out nearly as much money as pre-crisis (never mind statements I have heard on to the effect that lending is tough because it feels like they are pushing on a string to pursue desired growth):

1) The Federal Reserve is holding interest rates artificially low via open market operations, which may require the use of the printing press to sustain when the market becomes suspicious of the creditworthiness of the U.S. government, which is highly likely to result in high inflation, which to anyone who is not a numpty means that loans created at today's rates will sustain economic losses;

2) The Federal Reserve will raise interest rates sometime in the next year or two because it can not sustain low rates without the threat of high inflation, which is not desired, meaning that any loans created today have a real chance of bearing losses since deposits (the funding source for loans) may ratchet up to a 3-5% interest rate whereas mortgages created now may have a 4.5% rate.

Basically, I have presented to you a predicament: I do not see any real solution to the conundrum of what banks should do to lend profitably. No matter what they do, I believe there will be economic losses. The real questions would be 1) which scenarios are most likely; and 2) is there any way to make a profit based on the scenario?

Yet, for some ineffable reason, when I was explaining this to the EPA employee sitting to my right on the train back from New York, he said I was making an argument for nationalizing the banks! Anyone who knows me knows that is not what I believe. More importantly, how the hell do you get to that point from my argument, when I am trying to explain why banks are being cautious in lending?

Basically, I think ideology matters. No free-market rational person would think that the scenarios above argue in favor of bank nationalization. However, a person who believes that government is a force of good (such as an EPA employee), and that banks are sitting on money that they should be lending out to help people who are hurting (rather hypocritical, since he ranted about how the banks were irresponsible in lending pre-crisis, ignoring the stupidity of Basel II, the hypocrisy of Barney Franks, Mr. "I want to push the string on subprime", and the negative real interest rate regime of Greenspan/Bernanke post dot-com bubble), maybe the scenarios above suggest that a private actor will not lend out money, so the government should nationalize banks for the good of the people.

Never mind that the second scenario I described above would be a repeat of the savings and loan crisis, where the taxpayers footed the bill. Never mind that the first scenario I described above could be a repeat of stagflation.

N.B. I should list my skepticism about the U.S. government's creditworthiness at another time. But I will add I was not surprised that this person focused on the rise in interest rates due to an increased risk premium as bad, while ignoring the cause of it, mainly Congress's propensity to expand the budget each year. If you have an accumulation of bad decisions, then at some point everyone realizes that. The realization is not bad - it is necessary. Sadly, he could not understand that.

Bring on contagion...

One of my friends has been debating with me the fear of contagion in the eurozone. Quite frankly, any country with a debt to GDP threshold above 90% has faint hope of recovering without some damage inflicted on the public or holders of its bonds.

Furthermore, from Professor David Beim of Columbia University: 

European leadership needs to organize an orderly debt restructuring immediately, but is afraid that if it does so, Portugal will be next in line and others will not be far behind. The best way to control this contagion is to require that any country granted a debt restructuring must leave the euro. 

To be honest, wouldn't the contagion be warranted because of irresponsibility in those other countries? So are we saying that politicians want to avoid the consequences of their bad actions, that they want all the upside and none of the downside? How typical, to be honest.

Perhaps we should differentiate first between deserved and undeserved medical contagion. Undeserved would be smallpox or the Black Plague before vaccines were invented and people did not understand hygiene. Deserved would be the numpties who refuse to give their children their MMR vaccines - if we have a resurgence of diseases like polio or measles, mumps or rubella thanks to idiotic parents, while I sympathize with the kids who suffer for their parents' idiocy, the parents' suffering will be well deserved.

So, coming back to the financial market, we should ask if there is undeserved financial contagion? Absolutely. Autumn of 2008 and March 2009 were rife with solid companies trading at dirt cheap prices thanks to fear. This is when people who follow Buffett's maxim to "be greedy when others are fearful" make their money.

However, with each of these countries, their debt situation is such that we have to be skeptical about their ability to make investors whole and keep their countries sound, especially considering that sovereign default is a lot more common than people think: according to Reinhart and Rogoff, between 1800 and 2000, eleven European countries had 67 instances of default, with Greece being in default for 50% of time since independence in 1829. Hence, I would place them in the "deserved financial contagion" category. Hence, why I told my friend to bring on the contagion.

Any investor stupid enough to lend money to these governments deserves the mark-to-market pain, haircuts and possible default. Any member of public willing to buy into the irresponsibility of their politicians deserves their comeuppance, harsh as that sounds. Because last I checked, action without consequence breeds terrible decisions. Profits without losses born by the risk-takers results in terrible capital allocation. If there is one thing I am sad about, it is that the politicians will not receive the blame they should.

If I appear more cynical, it is because I am re-reading A Song of Ice and Fire, in which government is nothing but a set of thugs and no one in power even cares about the collateral damage on the peasantry in their wars. If there is one thing to be said for today's politicians, they pretend to care.

N.B. Please either kick Ireland, Portugal, Spain, Greece, Italy, France and any other relatively irresponsible government out of the eurozone, or let the responsible governments (Germany and Austria) get out and leave the rest to their shenanigans. A common currency is not essential for free flow of capital.

Also, per this chart, if the drachma came back, I would be very excited about a holiday in Greece. Letting them resume their persistent devaluation would be awesome for me as a tourist, though I still would feel sorry for the Greek citizens who allowed it to happen.

Who knows, maybe a vacation home in Greece could be come cheap thanks to government irresponsibility, if it triggers a serious bout of inflation. Though Greek is low on my list of languages to learn. I should probably consider Argentina first.

 

Winter is coming...

I'm a bit (okay, I'm very) late on the whole Game of Thrones mania with the HBO show. Which is surprising since I've probably re-read A Song of Ice and Fire three times while waiting for A Dance with Dragons.

So, without further ado, a lighter post.

Though I think some people would have said winter was here during the "Snowtober" weekend. Sigh.

Winter is coming...how I would love to have this image on my credit card. Sigh.

Or, this one, courtesy of Lannister Blonde:

If you're cynical about education and government...

If you're cynical about education and government, then Arnold Kling's latest blog post over at Econlog may be of interest to you. Reading the first part of it, I consider myself fortunate that I concentrated in Economics and Mathematics at Georgetown. Quite frankly, the world does not need to hire someone whose academic work consisted mainly of essays on Beowolf and other English literature.

However, the part where I have to wonder how idiotic our discrimination laws are came at the end:

The NCRC (National Career Readiness Certificate) may face an even more serious threat than employer indifference: on September 1 the Obama administration filed a racial-discrimination complaint against Leprino Foods Co., which makes mozzarella cheese, over its use of WorkKeys assessments to screen job applicants at its plant near Fresno, Calif. According to the complaint, only 49 percent of black, Hispanic, and  Asian applicants passed the tests, in contrast to 72 percent of white applicants (a Leprino spokesman declined to comment on the allegations). The federal action was perhaps inevitable. Decades ago many employers routinely tested applicants in basic math and English—but the tests began to disappear during the 1970s when courts made it clear that if the scores showed a "disparate impact" on blacks, Hispanics, and members of other minority groups, employers could be liable.

Think about it for a moment. An employer, seeking to hire the best employees, uses a test that is agnostic about race, but tests people on math and science skills. This is a merit based test, in other words. If a person does not pass, that person does not merit the job. That should be the end of the story.


Why should an employer dumb down a test and potentially get less qualified employees just to show that the test rejects an equal number of minorities and majorities? Considering how dismal state education is, these tests are a proof that the government is a terrible educator. And so, the government has to argue that racial discrimination is occurring, rather than look at the root cause, itself.


Thus, we come to a rather ordinary psychological bias at the end of the day, the ability to find blame in everyone else but yourself. Is it surprising that the government has this same bias? Or rather, faced with the evidence that various state and federal education initiatives are not truly working, in addition to the possibility that governments can not change cultural mores of certain groups that may de-emphasize the value of education, that the government can not acknowledge its fault and chooses to succumb to a rather ordinary bias while accusing an employer of racial bias?


I would say it is ironic, but if there is one rule about government and bureaucrats besides the notion that "power tends to corrupt, and absolute power corrupts absolutely," it is that you can count on them doing the wrong, idiotic thing rather than understanding a common sense notion that an employer may just want to hire the most qualified individuals as part of maximizing his profits for his owners, which is what he is supposed to do.

Thoughts on Europe

Honestly, I am too busy with more important matters to write much on Europe, through my recent perusal of the Economist on the eurozone crisis could provide sufficient material for another post criticizing the Economist.

John Cochrane's opinion piece summarizes my views best. However, I wish to write them in my words.

On the policy front, I can not help but think that the problem boils down to:

1. No credibility that Greece will be able to pay its bills, and hence an inevitability of default;
2. Greece can not inflate its way out because it has no control over monetary policy (I'm shedding tears that they default on a payment plan via inflation... not really);
3. Eurozone banks that loaded up on Greek bonds because of the tempting yields and no need to hold capital against those bonds per Basel II capital requirements now are caught with their pants down because they do not have a capital buffer for defaults (honestly, doesn't that sound like the regulators giving a subsidy to eurozone nations by incentivizing banks to buy government debt, creating an artificial demand that reduces the interest rate those sovereign nations needed to pay to issue their debt?);
4. Funnily enough, no one has mentioned the insurance companies, but they likely hold government bonds too. They likely have some capital to charge off against, but they will still be affected.
5. "Those who do not remember history are doomed to repeat it," or This Time is Different syndrome: 2000-2007 was abnormal insofar as there was a paucity of sovereign defaults. We're really regressing to the mean, which was inevitable because of the stupidity/corruptness of politicians
6. Unlike prior default periods, because people suffered from This Time is Different syndrome and the regulators made matters much worse by not requiring any capital be set aside to back purchases of government bonds, the financial system is much more exposed to systemic risk, ironically the thing regulators are supposed to prevent.

There is probably more to it, but that is what I am able to discern.

I can not help but analogize this to the United States and California though. Why? Let's say that California had an excruciating amount of debt which it could not service. Naturally, it can not inflate its way out because it uses the U.S. dollar for its currency as part of its currency union with the rest of the United States. Naturally banks and insurance companies across the U.S. will have some Californian bonds in their liquidity portfolios or insurance float, and hence a Californian default will eat into their capital and hurt them.

But the U.S. dollar itself won't be hurt by a Californian default - it will still be used in the currency union. California can still pay its debts in U.S. dollars as long as their government enacts austerity measures. If it does not, California can restructure and continue paying in U.S. dollars, but at higher rates.

So the U.S. dollar would not necessarily be threatened by a Californian default. But it would likely be if California was bailed out, because nationalizing Californian debt would add to inflationary pressures on the U.S. dollar since the federal debt would go up.

That to me is the Greek situation - a Greek default will be painful because the regulators created systemic risk. However, the euro itself, the currency, would not be threatened by this systemic risk unless a bailout occurred because of the added inflationary pressure of "Europeanizing" this debt.

So ultimately, my thoughts are that the government was instrumental in creating this mess. To believe that they can fix the system when their prior fixes destabilized the system is to continue to run an experiment proving the definition of insanity.

N.B. I sincerely hope that the Slovakian parliament can not reach a compromise on endorsement of expanding the eurozone bailout fund. Besides the fact that it is highly irresponsible of Europe to expect poor Eastern European nations to bailout a wealthier neighbor who could not control its spending, I clearly think a bailout will be worse for the system than letting the default occur, the banks which have bad assets to be hit, and people needing to learn the hard way that "this time is not different."

Of course, I'm not a European, so why should I care?

Stupid Environmentalists...

Over the past year, I've become quite interested in the Canadian oil sector. I find the revolution in North American energy in general to be intriguing: fracking of shale gas resulting in a potential new normal of low prices for natural gas; the Alberta oil sands, and steam assisted gravity drainage (a friendlier extraction process for oil from the sands than current strip mining); and revisitation of light oil reservoirs with new technologies that can extract more oil from them than in the past (for example, some companies, like Crescent Point, believe that rather than a 5% oil recovery factor from reservoirs, new technology could lead them to have a 25-30% recovery factor).

I would think that with high oil prices, people in the United States would welcome such developments, since the majority of that oil will come here. Canada does not have the access built to ship that oil or the bitumen for processing, to Asia yet.

Of course, that does not account for the nutters in the environmentalist movement (actually, I consider them all to be rather inconsistent and illogical, but they have a right to free speech, so I get to enjoy the stupid gems that come out of their mouths).

For example, from the FT (full article):

Erich Pica, president of Friends of the Earth US, one of many environmentalist groups opposed to oil sands development, says: “Whether to approve this pipeline [Keystone XL, which will transport bitumen from Alberta, Canada, to the Gulf of Mexico, since Canada does not have enough refining capacity for the bitumen production expansion that is occurring] is the most important environmental decision President Obama will make before the election.

“If he sides with greedy oil companies instead of people and the climate, he will essentially be urging a huge part of his base to sit out the election.’’

Okay.

First, those greedy oil companies:

1. What's wrong with making a profit? That profit means that people value what oil companies produce.
2. Oil companies are composed of people. They aren't magical entities of robots. So when you say "greedy oil company," do you stop to think of the insult to the hard working oil field workers, engineers, and yes, executives, that are producing a product that people want?
3. Do they think of the people backing these oil companies, including hedge, mutual and pension funds? What about individual investors? In all likelihood, some of these environmentalists or their connections have a financial dependence on these companies doing well for their retirement portfolios to perform well. I suppose environmentalists are welcome to shoot themselves in the feet.

Next, the people:

1. If oil companies are making a profit, that means that people want or need their product. So, to restrict access to that product means that the U.S. may have shortages of that product, driving up oil prices. Is that really friendly to the U.S. populace?
2. There is no credible alternative for transportation, be it the short commute (or 2 hours, for me), or the college road trip, other than oil and natural gas (if you have a CNG vehicle). Even the electric cars coming on to the market in 2012 will have a capacity of 100-120 miles per charge. The technology has a long way to go. And if they think oil companies are deliberately slowing down electric technology development (which some environmentalists probably do think), they're even more idiots than I thought.
3. Oil and natural gas are used for more than transportation. Other goods, such as fertilizer (we need to eat, after all) and plastics depend on those inputs. Depriving the U.S. of incremental Canadian oil would raise the prices for these other goods, both directly via higher input prices and indirectly via higher transportation costs. Is it really people-friendly to advocate that people be forced to spend more money to buy their basic necessities? 
4. Again on transportation, if oil prices in the U.S. are higher due to less supply from Canada and a harder time getting supply from elsewhere (or maybe Canada sells to Asia, and then Asia turns around and sells back to the U.S., which certainly adds to the cost), then leisure for the U.S. populace became more expensive. You wanted to fly to Tahoe to ski? That'll be $100 more dollars per airplane ticket, thank you very much. If that's people-friendly, then I'm scared to know what's people-unfriendly.

Finally, the climate:

1. Let's think about this. Canada is a developed nation with a sound rule of law, and respect for the environment, even in the corporate world. Do people really think that the Canadian government would let oil sands development occur without funds set aside to restore the land after the reserves are extracted? Maybe environmentalists do, but in that case, they are guilty of ignorance: according to Jeff Sundquist, CAD$1 billion in bonds have been posted to ensure environmental reclamation.
2. Oil extraction in other countries we rely on, such as Nigeria, is a lot less friendly. If we do not get oil from Canada, our demand is likely not going to go down, so we'll need to get it elsewhere. Maybe we'll demand more then from other nations with laxer environmental standards, and inadvertently contribute to environmental destruction there? Wouldn't that be climate unfriendly? File that under the law of unintended consequences.

In my opinion, incremental Canadian oil will find its way to market, one way or another. Maybe it'll go to Asia. Maybe to the U.S. through a circuitous route. But it would be a damn shame to let environmentalists dictate our energy policy, as it seems they can not answer the question, "And then what?" 

An Excerpt Worthy of Thought

From Jim Grant's review of "Grand Pursuit: The Story of Economic Genius" by Sylvia Nasar:

There isn't room for every economist in this book or any other, but I myself missed the voice of Jacques Rueff, the 20th-century theorist who was able to demonstrate the superiority of the classical gold standard over the faux gold standard devised by Keynes (incorporated in the Bretton Woods system of 1944-71) or the paper-money regime advocated by Fisher and Friedman.

I missed, as well, Murray Rothbard, who blamed the Great Depression on the Hoover administration. It didn't intervene too little, Rothbard unconventionally sought to show in his 1963 book, "America's Great Depression," but rather too much. The economics profession just smiled at this contention, but the unsolved case of the depression of 1920-21 counts heavily for Rothbard's thesis. It was a deep and painful slump (a young Army veteran, Harry S. Truman, lost his Kansas City haberdashery to bankruptcy), with the wholesale price index dropping by 37% and the measured rate of unemployment tripling to 12%.

But it ended. Why it ended will mystify anyone who has taken to heart the arguments of Keynesians for more fiscal and monetary stimulus to revive today's economy. To meet the crisis that spanned the administrations of Woodrow Wilson and Warren Harding, the Treasury ran a budget surplus and the Fed raised interest rates. Yet the slump did end, and the 1920s roared. 

Honestly, this seems to be an episode that everyone who is not in favor of government intervention, or who has some sympathy to Austrian economics, points out. This may be confirmation bias, but I look at it to and ask myself that if mainstream economics can not explain the Depression of 1920-21 and how it ended without intervention (and quickly too!), then enough is missing in their theory to doubt the contention that intervention will work here.

See also George Selgin's post on this, which I had previously mentioned. There have likely been plenty of other austere recoveries in world history. It is a shame that economists, for whom world history is supposed to be the dataset off which they derive their macroeconomic theories, might have failed to consider evidence that contradicts their views. Or is it confirmation bias?

Blending Teas...

Editor's Note: I originally created this blog to cover the spectrum of my interests, other than investing, which I've decided is best not to blog about, thanks to regulators and the like. So much for free speech there, eh?

While this blog has evolved into a somewhat cynical view on the government while also commenting of certain biases, such as scarcity bias, both an economic and personal interaction bias (I swear, I need to blog about it at some point, but only if the person in question allows me to do so!), occasionally I like to inject some of the joie de vivre aspects that dominated this blog in its early life, and which was the intention to keep here.


Recently, thanks to a colleague, I've rediscovered my penchant for drinking tea. Usually I eschew tea and coffee because of the caffeine - five years ago I absolutely needed it (coffee) because of two hour daily commutes each way followed by dance practice until midnight (I was competing in open ballroom dancing at the time - and therefore needed all the time I could get for practice). After doing that for a year or so, I stopped and had a saner commute and dance practice schedule. And today, I have a pretty sane commute schedule and dance only for fun now.

At times I've picked up the coffee habit again - when one of my economist friends in the government introduced me to the Bialetti stove-top espresso maker. Or when I briefly reconsidered competitive dancing again, and the household I stayed at in New York was one where french-press brewed coffee was a regular morning and afternoon ritual. I still use that Bialetti if I'm absolutely tired from the night before and have a long drive ahead of me, but that's maybe once every two weeks. Hardly much compared to once or twice a day as in the past.

As for tea, when I was in Hong Kong back in 2009 to visit a close friend from Georgetown and see the sights (and suffer hot weather and humidity that did not dissipate in the evening, mind you, making Hong Kong a place that I would probably not want to live in long term), we drank green tea with every meal. And my friend there introduced me to her tea habit, with a stunning variety of green and white teas. And some curious black tea blends, like a lychee black tea.

But like the coffee habit, I discovered I didn't care for the sleep disruption by drinking all the caffeine. Maybe five years ago I would not have noticed, but even in 2009 when I went to Hong Kong I had weaned myself off caffeine enough that it was quite a jolt. And I preferred, at the time, to keep it as a potential jolt for fatigued days.

So why the change now?

For one thing, I've recently been enjoying taking my afternoon Sunday tea at Leopold's in Georgetown, but using the rooibos chai blend from Harney and Sons for my tea while also enjoying the gruyère cheese and caramelized onion tea sandwich. And for another, my colleague introduced me to his portable tea steeper. So, for the past week, I've been on a kick, brewing loose leaf rooibos chai tea and enjoying it.

Incidentally, when it comes to tea, while I prefer loose leaf, I am not as much of a snob as some literary characters I know, such as Frank Randall in the Outlander series:

Frank made a face; an Englishman to the bone, he would rather lap water out of the toilet than drink tea made with teabags. The Lipton's had been left by Mrs. Grossman, the weekly cleaning woman, who thought tea made from loose leaves messy and disgusting.

And two other points in favour of loose leaf, in my opinion, are that 1) I can steep it two to four times, depending on the leaf, and still have good flavour; and 2) I seem to have more variety, and exotic ones at that, including exotic blends, than with tea bags.

Recently though, I've reintroduced green and white tea back into my tea mix, but in small quantities. I've decided that I want to acclimate myself to small quantities of caffeine (useful for whenever I am at friend's house, where we cap off the night's dinner with espresso), and I also want to experiment with blending different tea varieties.

Thus far, I've only mixed the rooibos chai with a green tea, and with a green tea and King Peony tea leaves. I prefer the latter blend. I think I may next try blending King Peony tea leaves with cinnamon and cardamom. Ditto the green tea leaves. And with all the mint and basil growing in my garden, I think an herbal tisane and green tea blend is on the list too.

Anyway, it's a fun little thing for me to do while I am bogged down in studying for the CFA and pursuing other one year goals.

Lindy Hop and the Heisenberg Uncertainty Principle

"Five minutes of embarrassment rather than an hour of wondering," I said to my friend in response to her invitation to join her in the intermediate/advanced lindy hop class yesterday evening. And found to my surprise that instead of five minutes and then skedaddling into the main dance room, I ended up in the class for the full hour.

So, what happened? If I recall, the class I am referring to was supposed to be a class for non-beginners. And before last night, there were maybe one or two other times in my life that I had ever done lindy hop, and one of those times was a long time ago, as a sophomore at Georgetown. Hell, I've danced Argentine Tango more than I've danced lindy hop, and I definitely consider myself to be a beginner there. And I received confirmation after the class that I was a beginner still, by virtue of the voting apparatus known as dancing with a different partner to live music.

If I had to guess, I would invoke the Heisenberg Uncertainty Principle, which basically says that for a pair of variables, if you attempt to measure one with more certainty, the other is less measurable with certainty. At least, that's how I remember it from high school chemistry.

However, what was the pair here? There is class difficulty as stated, and my ability to handle the class. I am not certain that is a pair.

Regardless, here's what I think happened:

At the beginning of the class, we were asked to dance for a little bit, which allowed the instructors to see how we danced. Of course, you slap you your head, that's going to alert them to the presence of a rank beginner in their class and perhaps cause them to go slower. Which I feel they did.

So if I had not been present (nor any of the other beginners, which I am certain there were there), would the class truly have been more skewed towards advanced and gone faster through the basic movement they wanted to teach before moving onto variations on it? My suspicion is yes.

So maybe there was a pair there after all. And while my suspicion is yes, I can not be certain. If I was in the class, I know I could handle it because I did. But if I was not, I do not know if they would have taught it the same way, or it would have been more advanced. Hence, the uncertainty principle in life.

Or you could just say its a misapplication of quantum physics to real life...

But you would be missing the larger point - the class was bloody fun!

N.B. If only I had pictures, but maybe from another night at Jam Cellar I will.

Some links...

It's been a while since I posted, and while I am irked about the NLRB's strike against free, voluntary trade between employees and Boeing for the common worker against evil, corporate America, I'm not irked enough to blog in full.

Or rather, since I like to talk about comparative advantage and free trade, to utilize a Ricardian model, my current comparative advantage lies in improving my financial skills via the CFA curricula, whereas others comparative advantages are in economics blogging, such as Don Boudeaux of Cafe Hayek, or George Selgin of Free Banking. Clearly, if we traded, both parties would be better off:

1) I would gain free time to pursue CFA studies (and to also work on one of my weaknesses that I view as essential to correct, Spanish), while getting to post top-notch content that is often wittier than mine; and

2) Any site I link to will likely have a gain in traffic. A very small gain, mind you, but the marginal cost of these blogs trading with me is nil, so the cost/benefit analysis for them is also in favour of them trading with me.

Hence, why I am engaging in free trade today with these blogs. Known to some as outsourcing. Known to the NLRB as something to be discouraged because of hurting the American worker. But nevertheless, free trade that should be unfettered.

Without further ado, the links:

A) What I thought, at Age 16, Academia was Supposed to be

David Henderson posts the excerpts from Heather MacDonald's piece on the Great Courses product in the City Journal (published by the Manhattan Institute). Yet another article from an economist I admire pointing to the potential savings that can be accrued by letting market forces actually dictate how consumers (parents and students) get their product and what they learn (to a degree). How? 1) Content Delivery, allowing economies of scale through spreading of costs over a larger customer base than a university; and 2) tailoring the course to the desires of the audience (if they want to learn about the American Revolution, that's what they'll get).

Is online content delivery bad? Well, I met a person recently who teaches physiology at Georgetown's School of Nursing, but as an online course. She loves it, her students love it, and so far it works. And then there's the next step, which is the content of a superstar professor becoming more available to a broader audience (what Greater Courses seems to do), such as Aswath Damodaran. So, it can work. Reason enough that experimentation here should occur, and would be more likely to occur if all college costs per paid by the consumers, and not via subsidies.

Also, as an Indian, I quite frankly do not mind those "dead whites men of the Western world." Philosophy is universal, but I am a classical liberal, and therefore could care less about the race of a person compared to the person's actual ideas! Give me John Locke and "Life, Liberty and Property" any day!

B) An Austere Recovery

Besides being a superb site for a crash course in free banking, a la Scotland before 1845 or so, I find it worth visiting for George Selgin's regular posts. One of his more recent ones takes a look at actual history, and recounts an episode of U.S. history where austerity was the solution - the Depression of 1920-21, during which unemployment went from 1.4% to 11.7% on the high end of calculations (Lebergott) and 3.0% to 8.7% (Romer) on the lower end.
 Did the U.S. government hasten the recovery by means of deficit spending and other "stimulus" programs? Not in the least. instead, it stuck to conducting business as usual which, in those naive days before Keynes revealed that prudence and thrift were shopworn Victorian shibboleths, meant reverting to its prewar budget and retiring its wartime debt.[...] Instead of spending more than it had been, the Harding administration steadily cut expenditures, exclusive of debt retirement, from just over $6.4 billion in fiscal 1920 to just under $3.3 billion in fiscal 1923--a whopping 45 percent! [Emphasis added] As a percentage of GNP, Randy Holcombe shows, Federal outlays fell from just over 7 percent to well under 4 percent.* 


Selgin has some other statistics in there - industrial production fell by 30 percent during that depression, and so on. The point being that the 1920s is remembered for the Roaring Twenties (and Prohibition). Who remembers being taught about the Depression of 1920? I believe the first I read of it was in Security Analysis by Graham and Dodd. And yet, we should be taught it, because it is a clear case that the Keynesian macro model of Aggregate Demand and Aggregate Supply and the need to stimulate to get the economy on track may well be false.

When history provides such a clear example of austerity and positive results - another being 1946 when government expenditures were drastically cut despite Keynesian cries that it would lead to another depression, but instead it hallmarked the start of a prosperous era in U.S. history (and why when we say "postwar", we mean post World War II) - I begin to doubt the intellect of people who would have us believe austerity is a bad idea.


Yes, I'm talking to you, Economist editors and Henry Blodget (I never trusted you during the dot com bubble, why the hell should I trust you now?). If you thought the Republicans were reckless during the debt ceiling negotiations, then I suppose you think that Harding was what? Beyond reckless? Never mind the inconvenience of actual historical facts that belie your assertions.

N.B. The CFA curricula include Keynesian economics in its subject matter. Needless to say, you all know what I'll say when asked about it.

C) Incentives Matter

From Cafe Hayek's Quotation of the Day, the note that the sons of merchants were the most eager to learn foreign languages.

That's it! I love free trade! Even if the NLRB doesn't. Thank goodness they don't regulate bloggers like me.

Why so slow?

I helped my sister sign on for Online BillPay at Wachovia tonight. And then we tried to access it because we were going to use it to fund her investment account. But Wachovia/Wells Fargo stated that it will be 1 to 3 business days before she'll have access to it. Seriously? She's already enrolled in Online Banking. How hard is it to enroll her in the Online BillPay?

Maybe in the 90s this delay would have been acceptable. But this is an example, to me, of where servicing needs to continually be on its toes because of ever increasing expectations of customers. Wachovia just lost my respect for that long a delay for such a simple function. Granted, they already destroyed any respect I had for them when they screwed up so massively that Wells Fargo bought them on the cheap, but the Wells Fargo name had given back some reputational hue, or so I thought. Well, all it look was 5 minutes for them to destroy a decent reputation, again.

As an aside, I think it rather cool that the brokerage my sister and I use allows us to fund our investment accounts via a bank's billpay function. I do not remember having that option last year, so at least they are continuing to be on their toes.

About bloody time...

The S&P rating agency downgraded the U.S. government debt (but not by much). My thoughts are:

1) Why did it take so long?

2) Given that we are already over the 90% Debt to GDP ratio threshold discussed with Reinhart and Romer in This Time is Different, implying less economic growth because of the drag of terrible fiscal policy on the economy, perhaps the rating downgrade should have been more than one rung down.

3) Given that you could see Debt to GDP rapidly increasing from 2002 to 2010 (from 58.5% to 89.9% - it's over 90% now given that we now have over $14.3 trillion in debt, and GDP was estimated to be $14.7 trillion by end of 2010), such that the ratio's growth rate was 5.5% annualized from 2002 to 2010 versus only 1.8% annualized from 1980 to 2002, it's really a shock why we did not get downgraded sooner.

Those rates seem small, but we're talking about compounding here. A 5.5% annualized rate for debt growth is not sound. Hell, with all the borrowing we've done, we should be aiming for a negative debt growth rate. Neither Congress nor the President really got that memo. Hence, the downgrade.

Much good as it will really do. Maybe it will be a wakeup call. But judging from what I saw on CNN this morning, with an administration official dismissing the downgrade, it will not be.

The end of the Space Age?

Author's Note: I read the Economist semi-regularly. Occasionally I really react to an article. The below is one of those occasions. Of course, my reaction could be incorrect. But I would not be writing it if I thought so.

The lack of imagination, or rather, the lack of faith in the market evinced by The Economist in its July 2nd edition is astounding. They seem to forget that the major inventions that changed our lives for the better were not the result of government spending (not all of them, and I am not convinced by those who argue that the Internet could only have come about because of government spending with DARPA, because in an alternative history, humans desiring to communicate better and better may have stumbled upon it themselves and commercialized it much sooner, perhaps having us enter into a dot com bubble in the 80s instead).

For example, the steam engine. The railroad. Oil and gasoline. Insulin (from Eli Lilly). The automobile. The telegraph. The telephone. The copier. I'm tempted to say the computer, but that may have been started because of the government, though again, in an alternative history, I see no reason why it couldn't have been privately innovated initially for private consumption. Actually, for every single innovation funded by the government, I pretty much see the potential that it could have been funded more serendipitously by a venture capital firm. More haphazard and uncertain, liberal central planners would say. More spontaneous, consumer driven, and sustainable, I say, as a believer in markets.

Or maybe the Economist believes we're now in an era that only big bucks, coerced from taxpayers, can fund space innovation and exploration. If so, then why the hell has NASA technology stayed so far in the past, running on 70s and 80s era computers? Why the hell have they not iterated in their space technology? Maybe because there was no real incentive for improvement (no profits on the horizon since they were not a company selling a product), they didn't really improve. And hence why the space program kept using such old technology. The Economist themselves point out the error of a lack of P&L incentives when they mention the "benighted International Space Station (ISS), surely the biggest waste of money, at $100 billion and counting, that has ever been built in the name of science." If it had been conceived in the name of profits though, it might have been a different story.

So, in my opinion, it's high time to shut down any space program. The Economist itself points out in another article that people in the United States do not particularly care about it, which matters because right now it is their money the government, which runs deficits, is spending, or perhaps wasting from their point of view. Let private entrepreneurs risk their capital making something commercially viable, even if only for the rich, which is what Elon Musk and Sir Richard Branson are doing. If anyone has a chance of it, then it is the entrepreneurs. For if they make it a luxury good initially, proving the concept, would not the drive for efficiency and expanding one's market, as well as general technological improvement in other fields that may become applicable to space, end up causing a private entrepreneur to reinvest profits to make his product more and more available to the general market? That's what happened with cars and computers, after all (actually, nearly any market driven product, so far as I can tell, including phones, as shown in the video below). Why not let that happen with space? It just may take longer than the phone that was $4,000 (before adjusting for inflation) in the 80s when introduced, and now can be obtained for $39 with a contract, and maybe $100-200 without a contract. (Note: The prior example was a DVD player that sold for $300 and now sells for $50, or is unnecessary because you have a good laptop or just stream movies from Amazon, but I thought the cell phone example from the video was better. Also, note that the economy grew during this period when these products declined in nominal and real prices. So maybe, just maybe, price deflation is good, and does not necessarily lead to GDP deflation, unlike what central bankers seem to believe with their efforts to halt asset price deflation to what might be their equilibrium level.)

At the end of the day, maybe the Economist is too zero-sum. Or maybe they believe some problems just can't be solved by the market, by private entrepreneurs seeking to make a profit. (How many people really want to travel in space?). I, on the other hand, am more an optimist. And maybe many people don't care about space right now. But if the price becomes right, that market will probably expand, like other markets have. I am not ready to write off the end of the Space Age because indebted governments that have to borrow to pay their bills decide not to fund a space program any more. I believe that entrepreneurs have the best chance of delivering space to us, as has happened before. And while people may think the market is not there, that's why private people should risk their money - they're the only ones who lose if they're wrong, whereas everyone loses if it is the government spending the money.

NB: Ultimately, our society was not formed via central planning. The ships that navigated the Atlantic with colonists were privately chartered ships from England and the Netherlands (not sure about France and Spain). The colonies that arose that were successful were the ones with more freedom to do as they would. So it could be with space. Central planning is probably not going to create a vital, vibrant frontier that people want to explore. Private entrepreneurs who create the ships and make them cheap enough to charter ultimately will, and then those pioneering people with capital who always seem to emerge in a society allowing some freedom go ahead and create a life on that vibrant, dangerous frontier where a world of opportunity exists. They existed in the 17th and 18th century, why not now or in the future? It's happened before, after all. On Earth.

Also, I did not see this video until after I wrote this in an email to a friend, but I find that it eloquently expresses my point about markets and how they deliver valuable stuff we desire at incredibly cheap prices, given the chance. (H/T CafeHayek for the video)

Some Links

Lest you think this blog has fully transformed from one which started as a travelogue of sorts interspersed with thoughts (an accident of its birth, I assure you) to one with just random economic thoughts that may bore you (there is a rule about economists only being invited once to cocktail parties), I was on vacation recently. And by recently, I suppose I mean May. And at some point I'll probably put up pictures from Edinburgh, which will be a fun post.

But for now, some links that caught my eye:

1) Quantifying History: Two Thousand Years in One Chart



Or, as Don Boudreaux at Cafe Hayek wrote:


Lest we forget, amidst the daily/weekly/monthy/yearly ups and downs of the market, the market is an historically off-the-charts (almost literally) innovation machine.


Absolutely agreed. A chart, in this case, makes me very optimistic, provided we continue to bolster our economic freedom. Which leads us to...


2) Economic Freedom vs Income (and a whole host of other metrics lest you make the standard accusation that economists care only about economic growth)

Yes, the last bit is a political statement. I would argue this is an ideological statement. It's the argument that a government that stays small and lives within its means is one that promotes the most growth in all quality of life aspects. It's the argument that a country with secure property rights (as our Declaration of Independence put it, "Life, Liberty, and the Pursuit of Happiness", borrowing from John Locke's "Life, Liberty, and Property") best promotes economic growth (for example, how secure would you feel about investing if tomorrow the government seized your pensions to pay its bills, as happened in Argentina, or maybe not seize your pension, but borrow from it and give IOUs to say that you'll pay it back, as occurred with U.S. government workers recently). It's the ideological statement that a laissez faire system is the one that's best, never mind what our history books from 4th grade on teach us. At least, I remember being taught that in school, but maybe that's because going to private school is better than....


3) California Public Schools Considering De-Emphasizing Homework


I remember learning via doing homework. How else was I to learn how to read, write, critically argue (well, maybe you readers think differently) a point, do simple and advanced math (including statistics), and later understand more complex topics like economics, politics, investing, and so on? By magic? Or just staring at a chalkboard and listening to a teacher all day? Without practice, without something to make a skill a habit, how do you really learn?


I've lost most of my Spanish skills, for the simple reason that after passing the required proficiency level at Georgetown, I ceased to use it. If with that, then why not with anything you learn? Especially if it happens to be something important, like being able to read. Surely reading should be assigned as homework?


Maybe I'm just reacting with anecdotes to illustrate my thinking, and the statistics say that homework is not meaningful for learning.


Or maybe we're just trying to dumb our (public) schools down even more than they are right now. If I have kids, I definitely will do my best not to send them to a public school.


Well, I hope I've left on a controversial note!

Why is everyone afraid of default?

Far be it from me to say that default is jolly good, but honestly, if anyone had ever read This Time is Different, they would realize that the fast decade with a lack of sovereign defaults is the exception to the rule. And if it is the exception, then really, why is everyone in a tizzy over the prospect of a nation or four in Europe potentially on the verge of default because they can not get their fiscal house(s) in order? We've been able to handle it before.

And if we're not able to now, whose fault is that? Those bankers? Or those regulators? Mayhaps our regulatory institutions are not robust enough to handle failures - that certainly seems to be my opinion, given how Basel II, a creation of regulators, stated that for European banks, they could treat any EU government bond as gilt bonds and hence hold practically no capital against them. So what do you think happened? Of course they loaded up on bonds from Greece, Ireland, Spain, Italy and Portugal.

But what about if there was no such regulation incentivizing those banks to hold those bonds? They would have had to judge, on their own, how much capital to hold against the prospect of default of those assets (rather than not needing to hold any against those bonds), which would have A) reduced the amount they would hold in the first place because it would be a hit against their capital base (less capital would be available for holding against lending for other assets); and B) forced them to consider the prospects of default for nations with weaker finances, and judge whether to hold those assets at all (which would have resulted in the market better pricing those assets based on risk and perhaps keeping those profligate countries from actually becoming too profligate because they couldn't get as good an interest rate as Germany).

In other words, which institution is the more robust given limited information? Regulators? Or the market? If in past decades we had plenty of sovereign defaults and ultimately handled them, and there was less regulation then; and today we're in a panic and not sure we can handle a default, mayhaps more regulation makes our system weaker? And mayhaps the market, with incentives less skewed by regulators (it really is an important point how the skewed incentives of Basel II probably will cause a lot of havoc on European bank balance sheets by weighting them much more towards risky government bonds than they likely would have held) would have been more robust and capable of handling such a situation, even limiting the extent of it since less asset buying of those governments' bonds would have occurred and hence less damage could be inflicted in the case of default.

Sadly, most people have an anti-market bias, so this rumination is likely to convince no one.

In any case, I'll leave you with this interview with Jamie Dimon (H/T Devon Shire).

Inflation Essential for Transition to Industrial Economy?

Far be it from me to say that I have odd dinner discussions...

Anyway, I hosted a dinner tonight, which I am still reeling from. I made sangria (red wine, brandy, triple sec, blackberries, pomegranate juice, lemon juice, orange juice and club soda). Additionally, one of my guests kindly brought some American whisky as a contribution to my liquor collection. Which I appreciate. The majority of my collection is Scotch (Glenfiddich, Glenmorangie, Laphroig, and another one), though I also have a Rip van Winkle bourbon and a High West rye, courtesy of my friend Jeff.

But to get back to the point, at my dinner tonight, we discussed the essentiality of inflation for a transition from an agrarian to an industrial economy. Which, if you follow this blog, you will not be surprised at the fact that it came up in conversation. But you'll probably be glad that you weren't at the dinner table for it! Though maybe not - the food we had tonight was stuffed tomatoes (panko, tomato pulp, basil, almonds, olive oil, salt, and buffalo mozzarella for the stuffing), tortilla espanola, a grain and zucchini salad, a mango and fruit salad, and espresso. In my opinion, the food may have compensated for the discussion. And if it didn't, I would certainly have provided ample libations to assist in ignoring an argument among economists.

Anyway, why is it that an agrarian economy is fine sans inflation, but an industrial economy requires it? For that was the implicit point that my friend was making when he argued that the Federal Reserve was created to help stabilize the banking system (though, if any of us remember 2008, we have to doubt that it truly stabilized it!). Does anyone realize that computers are deflationary in pricing? You get more computing power each year without paying more, which is deflationary. And yet, the computer industry is not suffering. The computer industry is competing, and competing quite vigorously, aiming to deliver products to us at lower prices than the prior year when considering computing power. As a consumer, this is great! We consider this to be fine!

So why do we consider deflation to be evil? Clearly, price deflation is good for consumers with savings, since their savings increase in purchasing power during that period. Also, during one of the most robust periods in U.S. economic history, where average GDP doubled, the CPI decreased from 138 in 1869 to 93 in 1889 (The period of 1910 to 1914 is 100 here, The Case for Gold, p. 164 and 167). This is price deflation, which is evil according to people like Bernanke. But think for a moment: is it evil that 20 years later, I can buy the basket of essential goods for my survival at 32.6% less? I would think this a blessing. And yet, central bankers today consider deflation, such as this, to be bad. Never mind the fact that the economy grew during this period, proving that price deflation does not equate to economic downfall.

Maybe central bankers consider deflation evil because government debt becomes more expensive during deflation. On the contrary, with inflation, a dollar is debased and is worth less, so the debt burden is lightened. So maybe central bankers are subject to a very primitive bias: "Whose bread I eat, his song I sing."

To circle back to the headline of the blog post, if during the period of 1869 to 1888, when we were certainly experiencing economic growth sans inflation while going towards a more industrial economy, shouldn't that prove that we don't need inflation for an industrial economy? Or, to put it another way, why is it essential that the US dollar inflated to be worth so much less today than in 1913 in order to grow our economy? Why is it essential that people who saved money were penalized by inflation to grow the economy, when in prior periods this was not necessarily the case? If during the late 1800s we grew our economy with price deflation, why can't we grow our economy now with price deflation?

I'm unconvinced of certain people's arguments that inflation, created via the Federal Reserve, is essential for economic growth. To me, it seems essential to avoid a crippling debt burden from bad fiscal policy (inflate our money away, and the debt will not be as much of a burden!). In other words, we are paying for the sins of the politicians via inflation. If we grew our economy via price deflation during 1869 to 1888, then there is no reason why that can't occur now, except for government intervention. The switch from agrarian to industrial does not convince me either. If anything, an industrialist would want to know that the money he receives is sound (since he may be doing contracts from far places), and hence would prefer a money that is not debased in value.

In sum, I am unconvinced of my friend the government economist. Quite frankly, I view it as a case of A) "Whose bread I eat, his song I sing"; and B) mainstream economics thinking, which embraces the "euthanasia of the rentier" and forgets that the rentier is the one who provides the capital that allows new businesses to be created, through bonds he buys, IPOs he participates in, seed capital he provides to startups, deposits that he makes at banks which are lent out to small businesses, and so on. Maybe in government land, inflation is good, but from where I stand, my savings are being degraded each year unless they keep up with inflation, which can be hard in certain years (for example, during a period of hyperinflation, or a year where a stock market bubble bursts and takes down all stocks).
N.B. Sadly, I am convinced that most people don't realize that a primary factor in inflation is the Federal Reserve. "Power tends to corrupt, and absolute power corrupts absolutely."

Cognitive Dissonance on Government vs Private Sector Investment

Just a thought resulting from a conversation last Thursday at the Cato Institute:

If it's crazy for a venture capitalist to invest in something, why is it sane for the government to invest in the exact same thing? And if you support the government investing in it, and yet question the supposed market failure of the venture capitalist not being crazy enough to invest in it, aren't you undermining your own argument for the government investing in something? Because after all, with the venture capitalist, his clients and he understand the risks and it's only their money at risk. With the government, it's our money at risk (without our explicit consent), and government has a repeated history of failure in industrial policy.

It's quite a cognitive dissonance that I ran into during that conversation, and worth thinking through in full here, but for now it's up here to remind me to do so, rather than being forgotten in the mists of sleep.

Reading "Getting Our Way" and its Resonance with our Current Foreign Policy

A friend of mine, knowing my avid interest in history, particularly of the Anglo-American strain, recently lent me a book she had enjoyed, Getting Our Way.

I've just started reading it, but already I'm enthralled and nodding my head. Though the book's audience is intended to be the British people, I can't help but think how applicable the book's discussion is to American foreign policy:

Foreign policy - what is to be done - and diplomacy - how it is to be done - begin and end with the national interest. Without that, all is drift and muddle. Nowadays, to our damage as a nation, we have allowed the necessary rigour of foreign policy to become diluted by fashionable but fraudulent notions of the post-modern state, which elevate the daft utopianism of 'global values' at the expense of the national interest. 


And how that resonates with our foreign (mis)adventures over the past decade! Iraq, Afghanistan, and Libya certainly seem to quality as "drift and muddle."

Enough ink has been spilled over Libya, incidentally, but I would argue that view of foreign policy casts the Secretary of State and the President as utterly negligent of our national interest. And that is even before you consider that our actions in Libya, essentially war, are likely unconstitutional.

As I read Getting Our Way, I'll be writing more about my thoughts on it.

And for now, I leave you with some of the articles/media I've been reading on our current foreign policy debacle. No doubt people will disagree with the views in these articles/podcasts. No doubt some people may consider my entertainment of the views in these articles as extreme. But I have to ask, since we are supposed to live in a nation under the rule of law rather than the rule of man, why is it too much to ask that the President follow the Constitution? Especially when pre-election, he stated that it is required by the Constitution that the President seek a declaration of war from Congress before non-defensive military acts can commence (excepting conditions under the War Powers Act, which the current situation does not meet).

Or maybe we're just encountering that old bias Lord Acton so eloquently expressed: All power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men, even when they exercise influence and not authority: still more when you superadd the tendency or certainty of corruption by full authority. There is no worse heresy than that the office sanctifies the holder of it. [Emphasis added]


The emphasis above is usually on the first sentence. In this case I choose to emphasize the second sentence since I have no doubt plenty of people think Obama a great man, but I think Obama's actions recently proved that insight of Acton's.


Anyway, I hope these articles and the podcast cause you to think from a different viewpoint if you disagree with my viewpoint above.


By What Authority Has Obama Gone to War in Libya?

Why We Should Be Against Armed Humanitarianism

UN "Authorization" is the Emperor's New Fig Leaf

What Happened to the American Declaration of War? - a great piece by Stratfor discussing why American presidents neglect of the declaration of war has had a negative impact on their political prospects.

Libya, War Power and Impeachment - podcast with Rep Tom McClintock's reaction on our acts in Libya, its unconstitutionality, and the potential for impeachment

Why the Libyan War is Unconstitutional

Thank Goodness for the CSA...

Because with it, I get great quality food at a cheaper price than I'll usually find at a supermarket. It's a win-win transaction. Though that's not to say that my supermarket transactions are not win-win. They are - otherwise I would not make them. But during the summer and fall, when I have the CSA option, I get more value from that than transacting at the supermarket.


One of the websites I frequent, the Mises Institute, happily reminded me of such while also teasing about the philosophy of a number of farm stand customers:


I am engaging in an enterprise that is the essence of pure capitalism while surrounded by those to whom the very word "capitalism" is one of the greatest of obscenities. It is voluntary exchange; it is a relationship where everyone feels as if they have won. Isn't that the essence of the free market?


Anyway, I thought it amusing and thought-provoking in the sense that articles about everyday activities can be at times. I honestly wonder what one of those customers who Mugnaini would think if they read this article. Would a lightbulb go off in his or her head? Would that person gain an appreciation of another viewpoint that would give that person some more perspective? Or would that person fall prey to confirmation bias and dismiss it as hogwash? 


If you want to read the Mugnaini's whole entry, click here.

A Curious Statistic

Reading through the latest policy analysis from the Cato Institute (Bankrupt: Entitlements and the Federal Budget by Michael Tanner), I was struck by the following statistic: the wealth of all millionaires (defined in the report at people earning $1 million or more per year) is approximately a year of U.S. GDP.

The total obligations of the U.S. government, including off-balance sheet liabilities of Medicare and Social Security are around 9 times GDP. To put this in further perspective, the federal government's revenues, as a percentage of GDP, have averaged 17.7% since 1950. From 2000 to 2010, the average was 17.2%. (Data source) If all our tax revenues were set aside to pay for these liabilities, it would take 50 years to do so (assuming the luxury of not needing to spend for defense, transportation, NIH, and other programs). Of course, since we already overspend tax revenues today, it's not as if we can set aside an amount each year for Medicare and Social Security right now.

But maybe we need to tax the rich? Class warfare and all that jazz, right? Well, remember the above. Confiscating the entire wealth of the wealthiest people in the US will reduce those liabilities only by 11%. (It would also be blatantly immoral, arbitrary, anti-property rights, and ruinous in regard to any incentive to work hard or innovate to create a high demand product consumers want and become wealthy as a result.) And I highly doubt most people who are not rich want to pay higher taxes. I certainly don't. So at least be a bit skeptical the next time the popular topic of class warfare comes up as a budgetary solution.

While I certainly am not an expert in regard to how to solve the problem (the above policy analysis has good ideas though), it seems obvious to me that one way of not solving the problem is higher taxes. Consequently, spending and obligations need to go down (much of those liabilities are future obligations, so cutting the promised benefits would cut the off balance sheet liabilities of Medicare).

Ultimately, I wonder if Medicare and Social Security are even morally sound. I dislike it that 12+% or so of my pre-tax payroll each year goes to pay for retirement and medical care for people who never saved enough money for healthcare and living because of government promises (moral hazard). And by paying that tax, that creates the expectation that I've paid into the system and hence should get something out of it. But unlike traditional insurance, where your premiums from that year go into a pool that will pay for you should an event occur, or annuities where your money goes into a pool that will pay you out when the annuity event occurs, Medicare and Social Security takes the money I pay today and immediately pays it out to cover the costs of current beneficiaries. (Isn't that a Ponzi scheme? I guess the government is allowed to run Ponzi schemes, but no one else is.) So by the time I'm eligible, none of the money I paid in is there - I'm depending on people younger than me to pay for this program. More likely, I'm depending on my fiscal prudence because I doubt Medicare and Social Security will survive as it is today by the time I am eligible. And that makes me just a bit furious at the inequity of the situation.

In regard to Medicare, instead of my taxes going to the government, maybe I would be better off with a private insurance company setting up an elderly healthcare insurance policy or annuity where you can pay into it from whenever you choose, and what you get out is based on when you subscribed to the policy and the amount of premiums you paid. Ditto Social Security taxes either going into a private account that I can invest, even if restricted to index funds unless you pass an exam showing that you're an investment expert and hence can be given full control; or Social Security taxes going into a private annuity. I think it would get rid of the moral hazard of people not saving enough because they're depending on government promises. And I think it would reduce demand pressures on healthcare spending too, because instead of the elderly using other people's money for their medical bills and hence not worrying too much about silly things like "How much is this going to cost?", it'll be their money from their policy and they'll have more incentive to minimize costs (i.e. more preventative measures). Finally, because the private healthcare and retirement solutions would be dependent on the premiums I've paid in and the investments I've made, it would be a much more equitable and hence morally fair solution than our current government scheme (and I use scheme in all its negative connotations).

Oh, and those who don't pay into a private healthcare policy account like that or a special retirement account? Well, they can reap the lack of benefits that they sowed. Irresponsibility should have consequences. That it does not because of the current entitlement scheme is an example of moral hazard, one that ought to be remedied. Maybe not in as radical way as I'd like, but it needs to be. Otherwise, my generation is going to be stuck paying for the budgetary sins of our grandfathers and fathers.

Note: Consider listening to this podcast from the Cato Institute, where I got some of the above statistics. When I have the time, I'll likely read the policy paper they put out on the subject. If you happen to know of any contrary views, please forward them to me, as I believe one should always understand the opposition's viewpoint to see if they have any valid points or if they're just rent-seekers determined to preserve the status quo.


Further Note: Reference #122 in the analysis points to a study of Switzerland's healthcare system where individuals can purchase a long term contract while young that extends into their elderly years. Apparently this system works quite well, probably in large part because the individual gets it and it is tied to the individual no matter where he or she is employed, unlike the U.S. where if we want to enjoy the tax benefit of healthcare we get it through the employer and lose it when leaving that employer. At some point, after the insanity of tax time is over, maybe I'll get a chance to read it.

Lambasting Green Energy

Otherwise known as "We have seen green economies before. We've seen them function quite nicely. We saw them in the 13th century." And do you really want to go back to that? A bit of hyperbole, in my opinion, but hopefully it helps people go beyond the emotions of green energy.

Another interesting factoid: 2 jobs lost in Spain for every one "green" job created. Curious. Now, I admit I'd like to find that reference so I can post it. Always be aware of the bias that "to understand is to believe." But if I can find it, maybe that'll allow for less skepticism about that factoid.

But at the end of the day, I think this video says it quite compellingly (if you don't want to read the book The False Promise of Green Energy. Especially since the powerful statistics presented reasonably in the book are quickly presented here for you to hear.