Sayonara . . .

The shifts in geopolitical alignments haven’t slowed, nor has the broad direction of movement changed. China and Russia’s gravitational pull is slowly drawing in a disparate group of nations, all in their different ways eager to lessen US influence.

If America won’t cede its post-Soviet hyperpower status and accept a more balanced and complex world, it’s likely to be a troubled decade or two. With their foreign policy heavily driven by desire and politics rather than reality, it’s not easy to be particularly hopeful.

And then there’s the economic storm clouds massing just over the horizon: gross overindebtedness; persistent imbalances; central banks and governments fighting symptoms rather than causes; looming demographic shifts; and so on ad nauseam.

Interesting times, certainly.

As for me, I haven’t felt any desire lately to comment on these developments, fascinating though they are. Whether that will change any time soon, I don’t know. So, for the moment, sayonara.

Galbraith: Varoufakis and the recent negotiations

James Galbraith spent eight days in February traipsing around Europe with Yanis Varoufakis.^[1]

“I stayed with the tech teams, from the 11th to the 17th, including the Brussels meeting,” says Galbraith. “I was in the boiler room with the Greek guys, the working stiffs.”

He’s shared the experience via an article in Fortune. The frequent lack of professionalism and coordination on the European side shocked him.

‘The Global Economy Has Entered The Crack-Up Phase’ | Interview with David Stockman

Interesting interview with David Stockman about the many malformations brought about by decades of monetary and fiscal mismanagement. Since the crisis official intervention has been relentless and extreme. In Stockman’s view, the room for manoeuvre is narrowing rapidly.

The fundamental error throughout has been official unwillingness to allow creditors to suffer. It’s led them, and therefore us, into a terrible cul-de-sac.

Economic Advantages of an Independent Scotland

Would they agree on the right things? A generous welfare state and economic success aren’t incompatible for small nations — there are several examples of this just across the North Sea from Scotland. But since a stretch of tough economic times in the early 1990s, Denmark, Sweden, and Finland have combined their generosity with remarkable efficiency and economic savvy (Norway, with its vast oil riches, hasn’t had to make quite as many hard choices). They and other successful small states tend to balance their budgets, export more than they import, and invest heavily and smartly in infrastructure and R&D. As Skilling tells it, they have designed their economies to be globally competitive.“

Being a small country offers a lot of in-principle upside, brings with it significant risks, and is what you make it — but it’s only for serious countries,” Skilling replied when I emailed him about Scotland.

So is Scotland serious? Skilling thinks it is, but the leaders of the “Yes” movement don’t seem to be quite there yet.

via The Economic Advantages of an Independent Scotland – Harvard Business Review.

Update (13.09.14):

I just read The Economist article linked to in this piece. It’s blackly negative about the prospects for an independent Scotland but if you do get to it, make sure you also read the comments thread. It’s far, far more interesting.

Cyniconomics . . .

An engaging economics site written by two asset management veterans.

“Our blog is based on our portfolio management experience and F.F.’s ongoing research, and motivated by our respective midlife crises. Most people drive around in convertibles and reinterpret their wedding vows. We made up new names and started the blog.”.

They do good work. No nonsense, clear, aligned with reality (to the extent anyone nowadays can work out what that is) and enjoyable. Their latest (“Planning for Future Rate Hikes: What Can History Tell Us that the Fed Won’t?”) is as good a point of introduction as any. Have a look and perhaps, like me, you’ll also work your way through some of their back catalogue.

Hugh Hendry Throws in the Bearish Towel | The Reformed Broker

Is this capitulation emblematic of a market top, as Hendry jests above? Is he doing his followers any favors by turning bullish now, after a 40% growth rate in the market’s sentiment toward stocks (expanded PE multiple) backed by very little in the way of earnings, sales or economic growth? Is there anything to gain by such a late-in-the-game admission?

And what if he’s actually been right all along about how at risk everything is? What if future events play out just as he’d been predicting over the last five years after he gives in? Can he turn back? Can he resurrect the old playbook in time should the crash begin shortly?

This game is really hard, even for the smartest guys who play it, guys like Hugh Hendry who can get almost all of the facts right and yet still reach a precisely incorrect conclusion. And if that can happen to him, think about how difficult the prediction game can be for the rest of us.

[Hugh Hendry Throws in the Bearish Towel | The Reformed Broker]

Indeed.

Boy, do I empathise with Hendry. It’s been a rotten time for anyone attempting to be “rational” about equities. Still, all of us who’ve been around for a while ought to have taken on board one simple lesson. Keynes put it best: “Markets can remain irrational a lot longer than you and I can remain solvent.” And even that’s assuming our (the would-be bears) take on things is in fact rational. I still think it is, but . . . .

In any case, it does feel good not to be beating my head in on this particular brick wall any more (or not much!). With a bit of luck, Hendry will have at least some time to savour the same peculiar pleasure.

Money demand and free banking

Although it’s unlikely to excite anyone outside the tiny fraternity of monetary “trainspotters”, I can’t not mention Detlev Schlichter’s latest piece at The Cobden Centre. It’s a sweetly crafted (and much needed) response to various lines of argument run by some free bankers.

Put simply, free banking means letting banks run under the same laws as any other business, without special benefits or constraints. No central bank, no lender of last resort, no official deposit insurance, no bank regulators, in fact no government involvement in money or banking whatsoever. Radical, for sure, particularly after a century of central banks, fiat currencies, escalating crises and (lately) visceral disdain for bankers. Mainstream economists, if they think about the idea at all, are appalled at the very notion. It’s definitely the 100 to 1 nag in the banking stakes.

Free bankers believe that under such conditions the market would choose some form of “inelastic, inflexible, apolitical money as the basis of the financial system.” Usually that means gold. They also believe competitive pressures, together with the sobering discipline of operating without a safety net, would produce a surprisingly conservative result. It’s far from an unfounded belief; there’s quite a bit of supportive historical evidence from various countries and times.

Like me, Schlichter sees free banking as the best alternative in this imperfect world, not only in terms of banking but also in the flow on effects to everything else. So his argument isn’t with the principle but with certain claims about its operations and their supposed benefits:

The free bankers are correct to point to real-life frictions in the process of satisfying a changed money demand via an adjustment of nominal prices. The process is neither smooth nor instant, but then almost no market process is in reality. Their explanation that a rise in money demand will lead to a drop in money velocity and that this will, on the margin and under normal conditions, encourage additional FRB [fractional reserve banking]and thus an expansion of bank-produced money also strikes me as correct. Yet, the free bankers fail, in my view, to show convincingly why this process would be faster and smoother than the adjustment of nominal prices, and in particular, why the extra bank credit that also comes into existence through FRB would not generate the problems that the Austrian School under Mises has explained extensively.

For anyone still interested (hello . . . hello??), read on here.

P.S. If you’re really interested in money, credit, financial systems and so on, it might be worth paying a visit to my other site, which deals with little else.

Something truly new may be afoot

Luddites have been with us from the start and always been proven wrong. New types of jobs invariably emerged to make up for those lost through technology, and our standard of living climbed ever higher. No surprise, really. Markets, providing they’re relatively unhindered, are tailor-made to take care of coordination problems of this sort.

Question is, are we justified in expecting a similar outcome today or is something qualitatively different unfolding?

For markets to work, the income flowing to households must be sufficient to enable them to consume the final fruits of the productive process while also saving enough to fund the investment necessary for its continued growth. As automation and robotics move up (and for that matter down) the value chain, and more and more jobs simply vanish,