Archive for the 'Economics & Finance' Category

Little Man, What Now?

I’ve often seen this 1932 book footnoted in histories touching on Weimar Germany; not having previously read it I had been under the vague impression that it was some sort of political screed. Actually it is a novel, and a good one. The political implications are indeed significant, but they’re mostly implicit rather than explicit.

Johannes and Emma, known to one another as Sonny and Lammchen, are a young couple who marry when Lammchen unexpectedly becomes pregnant. Their world is not the world of Weimar’s avant-garde artists and writers, or of its risque-to-outright-degenerate cabaret scene. It is far from the world of a young middle-class intellectual like Sebastian Haffner, whose invaluable memoir I reviewed here. Theirs is the world of people at the absolute bottom of anything that could be considered as even lower-middle-class, struggling to hold on by their fingernails.

When we first meet our protagonists, Sonny is working as a bookkeeper–he was previously a reasonably-successful salesman of men’s clothing, working for the kindly Jewish merchant Mr. Bergmann, but a pointless quarrel with Bergmann’s wife, coupled with a job offer from the local grain merchant (Kleinholz) led to a career change. Sonny soon finds that as a condition of continued employment he is expected to marry Kleinholz’s ugly and unpleasant daughter, never an appealing proposition and one which his marriage to Lammchen clearly makes impossible. Lammchen is from a working-class family: her father is a strong union man and Social Democrat who sees himself as superior to lower-tier white-collar men like Sonny.

When Sonny and Lammchen set up housekeeping, their economic situation continually borders on desperate. Purchasing a stew pot, or indulging in the extravagance of a few bites of salmon for dinner, represents a major financial decision. An impulsive decision on Sonny’s part to please Lammchen by acquiring the dressing table she admires will have long-lasting consequences for their budget.

The great inflation of Weimar has come and gone; the psychological damage lingers. Sonny and Lammchen’s landlady cannot comprehend what happened to her savings:

Young people, before the war, we had a comfortable fifty thousand marks. And now that money’s all gone. How can it all be gone?…I sit here reckoning it up. I’ve written it all down. I sit here, reckoning. Here it says: a pound of butter, three thousand marks…can a pound of butter cost three thousand marks?…I now know that my money’s been stolen. Someone who rented here stole it…he falsified my housekeeping book so I wouldn’t notice. He turned three into three thousand without me realizing…how can fifty thousand have all gone?

Inflation is no longer the problem, unemployment is. There are millions of unemployed, and those who do hold jobs are desperately afraid of losing them and will do anything to keep them.

Read the rest of this entry »

Here’s the S-1.


Is this company really worth the $100 billion or so implied by the IPO pricing? A few points of comparison: the market capitalization of Duke Energy is $29 billion. Target stores is $36B. Yahoo is $19B while Amazon is $101B and Cisco Systems is $89B. CSX railroad is $22B, Ford is $38B, and General Electric is $194B.


Do you think a $100B valuation for Facebook is realistic? What strategies and future environments could lead to this number being sustainable or even understated?


(I don’t have any direct financial interest in Facebook currently, but may do something with the stock at some point, more likely in the short than in the long direction. This post is for sharing of general information and discussion and does not represent financial advice.)

The hot energy story of the last few years has been the vast expansion in the available supplies of natural gas, and the very significant economic implications thereof. I though it might be interesting to take a look at the past, present, and future of this commodity.
The first known use of natural gas was by the Chinese, circa 500 BC…they captured gas from places where it was seeping to the surface, transported it in bamboo pipelines, and burned it for a heat source to distill seawater and capture the resulting salt and fresh water. The modern gas era began circa 1800 with the use of gas for lighting–initially of streets and later of homes and other buildings. Since there was no network of gas wells and long-distance pipelines, the gas used for these applications was usually not true natural gas, but rather “town gas,” made by heating coal. (Gas stoves seem to have become popular circa 1880, and apparently had quite an impact….I’ve read that the term “gas-stove wife” was enviously applied to women who were so fortunate as to have one of these appliances and were thereby spared the labor of tending a wood or coal stove, and hence had some leisure time available.)


The transition from coal gas to true natural gas had to wait on the build-out of a long-haul pipeline network, which took place mainly from 1920 to 1960. Although electricity became the glamor “fuel” and displaced gas in many cases for cooking and heating, the generation of electricity itself has in recent years become a major source of gas demand. Natural gas is also important as a feedstock for the production of fertilizer and of various plastics. By the early 2000s, there were serious concerns that the US was running out of natural gas–see for example this 2003 TIME Magazine story. The article cites Alan Greenspan’s concerns that high nat gas prices would make us uncompetitive in many industries, as well as citing direct economic pain inflicted on consumers. The only solution seemed to be large-scale imports of natural gas via LNG (liquified natural gas) ships. (Gas is far more difficult to transport than oil, because it needs to be liquified in order to make the volumes manageable, which in turn requires refrigerating it to very low temperatures.) In late 2005, US natural gas prices hit an inflation-adjusted level of almost $16 per million BTUs.


The price is now about $2.50 per million BTUs. What happened?

Read the rest of this entry »

Arthur Brooks (surely one of the very few people to pursue a career as a professional player of the French horn before becoming a professor of business and government) has a good piece in today’s WSJ.

The opposite of earned success is “learned helplessness,” a term coined by Martin Seligman, the eminent psychologist at the University of Pennsylvania. It refers to what happens if rewards and punishments are not tied to merit: People simply give up and stop trying to succeed.

During experiments, Mr. Seligman observed that when people realized they were powerless to influence their circumstances, they would become depressed and had difficulty performing even ordinary tasks. In an interview in the New York Times, Mr. Seligman said: “We found that even when good things occurred that weren’t earned, like nickels coming out of slot machines, it did not increase people’s well-being. It produced helplessness. People gave up and became passive.”

Read the whole thing.

Richard Epstein:

So what next? The best first step is to free up labor markets world wide. Specifically, we need policies that take aim at the unbearable political forces that seek to tighten the regulatory noose on voluntary labor markets.
 
Unfortunately, the dominant attitude of macroeconomists is to assume that nothing that takes place within the labor market (of which Krugman never speaks) is large enough to influence the large macro trends to which they attribute today’s high employment rates.
 
The blunt truth is exactly the opposite. The calcification of labor markets is the primary impediment to economic recovery. The direct effects of government regulation of labor can matter far more than the indirect effects of macroeconomic policy, whether Keynesian or austerity-based. Neither austerity nor lavish public expenditures will improve the overall situation, which is why the massive increase in American public debt has not nudged unemployment rates down. The only workable solution has to stress job creation, not by misdirected subsidies, but by dismantling the government obstacles to market exchange.

A couple of high-quality links that come to me from people I know and that may be of interest to Chicagoboyz readers:

-Beat The Stockmarket’s Blog looks to be very good on, of course, markets and trading. Check it out.

-To see a truly interactive magazine at play, check out RC Pilot (there’s a free demo at the link). I find the content extremely interesting overall despite my low level of interest in radio-controlled models per se. There is a lot of good aviation content inside, and RC technology is increasingly relevant WRT drones and other hot topics. You will probably like RCP if you are any kind of technophile.

(I’m going to permalink these sites for future reference.)

Nick Schulz interviews Jim Manzi about Manzi’s forthcoming book Uncontrolled: The Surprising Payoff of Trial-and-Error for Business, Politics, and Society. Excerpt from the interview:

We are all, to some extent, the prisoners of our experience. Like everyone, my experiences have surely created numerous biases to which, by definition, I am blind. But I have drawn some conscious lessons from my various jobs. Mostly, I suppose they relate to humility about how much harder it is to get anything done out there in the world than it seems like it ought to be when you read about it in a book or discuss it in a conference room. 

A good example is that I think that most mainstream economists radically underestimate the importance in any business of what in another context Carl von Clausewitz called “friction.” Headquarters rarely knows what is going on in the field; people in frontline positions have little idea of the big picture, and react to local conditions as best they can; entrepreneurs are mostly making it up as they go, and so on. Economists are of course aware of this issue conceptually, but their attempts to incorporate it into their models of the firm and the economy are inadequate in the extreme. As compared to mainstream economic doctrine, therefore, I believe that uncertainty plays a far bigger role in real world decision-making, that quantitative models of the economy are less useful as guides to action, and that trial-and-error learning as embodied in existing institutions and practices is more important.

(via Grim’s Hall)

Recently Bloomberg had an article about Italian gas prices exceeding $9/gallon.

Austerity measures introduced by Prime Minister Mario Monti’s government have pushed Italian gas prices to the highest in Europe, an average of 1.82 euros per liter, or $9.17 per gallon, with taxes accounting for about 54 percent of the total,

The article goes on to talk about how this price increase impacts ordinary Italians just attempting to get around and go to their job.

The Italians hit hardest by higher gas taxes are those like teacher Cioni — working people who live in areas poorly served by public transportation.

Even in the US, where taxes on gasoline are high but do not comprise 54% of the total cost like they do in Italy, driving now requires actual trade-offs as you near $5 / gallon gas.

In the suburbs of Chicago you typically drive long distances during the normal course of the day. For instance it is over 30 miles from the Chicago loop downtown to Naperville each way. Since you probably will be driving around a bit when you get there, it is reasonable to think that you might burn 3-4 gallons of gas depending on traffic and mileage, along with $5 in tolls (depending on the route you take). If you figure that gas is $5 / gallon, then that round trip just cost TWENTY DOLLARS. Note that this analysis doesn’t consider the wear and tear on your car… this is just the incremental cost of the journey.

I remember growing up that $20 was a lot of money. You could live for a few days with $20 in your pocket (just the occasional fast-food meal, some gas, etc…). Now you spend $20 EVERY TIME YOU GET IN THE CAR.

This type of taxation does severely punish the “working” poor. It doesn’t punish the poor who aren’t working nearly as much, because they can take the laborious time to use whatever public transportation is available. The working poor, on the other hand, are essentially “on the clock” and if you are near or a bit above minimum wage you are probably taking home maybe $10 / hr after taxes. Thus the trip from Naperville (or a nearby suburb) to and from Chicago just took up TWO HOURS of your working time.

A family member who lives in Naperville talked about a neighbor who works at a popular (casual) restaurant in the city as a waitress and I started doing the math in my head… the money would have to be significantly better than from a local restaurant just to make up for the difference in gas prices and tolls alone.

I expect that over time gas prices at this level will significantly impact car-buying behavior.  When I purchased an Altima in 2010 (which I subsequently sold to a family member because it was too big for my parking garage and accumulated wear and tear) I bought a 4 cylinder engine, which made me seem like a minority on the highway because everyone else seemed to have a 6 cylinder.  However, the 4 cylinder engine (which is fine for a cruising car like the Altima, it isn’t a sports car after all) gets better gas mileage which will pay off very quickly with gas at $5 / gallon.

I expect that kids learning to drive will begin to associate driving with a very high marginal cost – i.e. each time you get in the car, money is flying out of your pocket.  When I started driving insurance costs were the big barrier, followed by the price of the car and then gasoline.  Thus once you bought and insured the car, you might as well drive it. Behavior that lasts a lifetime often begins when you are first starting out, so those that are starting driving today might view it as an occasional luxury or something to do as a necessity rather than as an activity in the normal course of life.

For the working poor, high gas prices tied to high taxes (especially in Europe) make their lives much more difficult because it cuts right against their take-home pay and often they need to drive to reach their jobs.  Since the poorer individuals often live far from where the jobs are located in the service sector (i.e. downtown Chicago is where a lot of night life is but the cheaper housing is often in the far-flung suburbs) this will limit their opportunities to local employers which could cut their opportunities significantly.

For younger people starting out, the incremental cost of a trip will make driving a much more “thoughtful” experience and trips will often be combined or deferred altogether.  Since habits you develop as a teenager often stay with you for many years or even a lifetime this could cause a seismic shift in behavior, away from driving.  Whether that is good or bad depends on your position; it certainly hurts the vitality of the economy because for most parts of America public transportation is not convenient, reasonably priced, or even available.

Cross posted at LITGM

Today governments across the United States are facing budget shortfalls caused primarily by making promises in terms of pensions and benefits to workers that no longer are supportable. Recently I was in California and I saw this sign in a bathroom at a popular tourist attraction.

The key concept to understanding how we got into this predicament is the word “craven”. Here is the official definition per Webster:

lacking the least bit of courage : contemptibly fainthearted

Politicians lacked the courage to stand up to public sector workers, predominantly the unionized ones like teachers, firefighters, and policemen, because negotiating with them seemed to be all downside:

1) If they are angry, they can go on strike, disrupting schools, hospitals and essential public services
2) They are voters (predominantly Democratic) and represent a (mostly) unified voting block that is prepared to petition to achieve their goals in the media (which is usually sympathetic to their cause, since they are mostly Democratic, too)
3) Many of them (Police, Firefighters, and to some extent teachers) present sympathetic postures to the public; fighting with them is a no-win situation (even if you win, you lose)
4) Their army of retirees often are still local and also vocal and organized and prepared to demonstrate as well, although they are not in a position to block essential services

Thus the “craven” route was simply to capitulate – write up promises to TODAY’s government workers and RETIREES and then just “kick the can” into the future to the date when those promises came due. Today’s politicians won’t be there when the bills come due (Daley most famously sold off Chicago’s assets, signed long term unaffordable deals for labor peace, and walked off into the sunset) so this fits their short term strategy to a tee.

However, in the near term, I think that politicians’ inherent “craven” behavior will work in REVERSE, giving us an opportunity to tackle the root cause of the problem. How do I come to that (preliminary) conclusion?

It is simple – there are really only two solutions available for politicians today (in places like Illinois, California, and Detroit, where it is literally collapsing) and in the near term in more well run or well funded places:

1) Raise taxes AND cut services drastically to pay for union benefits and pensions
2) grab a hold of the problem, cut payments to today’s workers and retirees and cut their benefits and costs, thus leaving more dollars for services TODAY and the opportunity to AVOID tax increases

So let’s say that you are a politician running for office in a few years – what do you promise constituents?  You have to promise #2 - that you won’t cut services today and won’t raise taxes - or you won’t get elected.  I’d love to see people run for office on a platform of #1 and get elected – it won’t happen.  Now what will actually happen a lot is that politicians will promise #2 but do a variant of #1 to get elected (because it is VERY hard to take on the entrenched unions when you come into office) – but then the financials will collapse further and they will be FORCED into making a harder choice, or they will come up for re-election and be drummed out of office.

Soon the EASIER or “more” craven approach will just be to get elected on a basis of reducing government costs on the backs of existing workers and retirees and chopping compensation to avoid raising taxes or reducing services.  Thus the entire process that led to our current debacle will operate in reverse, with bad consequences and subsequent demonizing for government employees as the root case of the issue.

Government workers, especially unionized ones, will see many victories but a long term defeat on all these issues.  In the end sympathies won’t be enough to offset the crippling taxes and immense service cuts that are necessary to pay for past politician promises.  The politicians will side with the majority, who will have to reform the system, even though this reform will be rocky and filled with failures and vitriol.

Politically craven behavior, which dug this grave, will work in reverse.  This is a hope, at least.

Cross posted at LITGM

From a Washington Post story about Dick Cheney’s heart transplant (via Instapundit):

A study published last November found that treatment similar to what Cheney received costs $167,208 for every year of life saved. Treatments that “buy” a year of life for $50,000 or less are considered cost-effective, and those costing $50,000 to $100,000 are generally considered acceptable. (A European study in 2011 found the device much less of a bargain, at a cost of $414,275 for year of life saved).
 
Who gets a donor heart when one comes available depends on many variables, including body size and blood type. The most important one, however, is a person’s clinical condition and immediate availability for surgery.
 
There are strict guidelines for placing someone in the most urgent category and the decision is made by a team of many specialists. Moving someone to the top of the list who shouldn’t be there would be hard to do and would open a hospital to major sanctions. Both Bull and John said they are confident Cheney got no special breaks.

From the quoted passage: Treatments that “buy” a year of life for $50,000 or less are considered cost-effective, and those costing $50,000 to $100,000 are generally considered acceptable. [My italics.]

The unstated assumptions here are that 1) third parties will pay for transplants and therefore get to decide which patients will be considered to receive transplants, and 2) third parties will allocate the limited supply of transplantable organs.

Read the rest of this entry »

Kevin D. Williamson:

Under our current arrangements, market forces are eliminated or excluded in more than half of all U.S. health-care transactions (and the president’s health-care reform, if it stands, will reduce the scope of real market activity radically), while in K–12 education, market forces are excluded in 90 percent of the transactions or more. It is not a coincidence that these are among the worst-performing sectors of American public life. The tragedy is that they are among the most important. Once the 1985 [regulatory] regime was in place, the development of wireless Internet and similar products ceased to be in the main a political problem and became an engineering problem. We have dysfunctional political institutions, but Americans are excellent at solving engineering problems. Where it is possible to do so, we reap extraordinary benefits from converting political problems into technical problems. But there is a very strong tendency among self-styled progressives to convert technical problems into political problems.

President Obama’s decision to support a southern section of Keystone XL is a commitment to build a pipeline to nowhere. Until extra oil supply hits Cushing, OK from Canada, there is no purpose to building a pipeline from the Gulf of Mexico to there. And that’s the kind of economic development, President Obama apparently likes, the dig a hole then fill it in variety.

Keynesians see nothing wrong with this sort of useless development that doesn’t actually meaningfully enhance an economy’s productive capacity. The actual construction project is a stimulus and that’s fine with them. But those that follow the Austrian school find such development a key factor in setting up future economic trouble because it’s malinvestment, siphoning off investment money to little useful purpose other than to shorten the tanker car runs Warren Buffet is making profits off of.

It’s been reported that GE CEO Jeffrey Immelt, who is also head of Obama’s jobs council, is increasingly appalled at the President’s economic ideas. Charlie Gasparino says:

Friends describe Immelt as privately dismayed that, even after three years on the job, President Obama hasn’t moved to the center, but instead further left. The GE CEO, I’m told, is appalled by everything from the president’s class-warfare rhetoric to his continued belief that big government is the key to economic salvation.

The “Just Unbelievable” title of this post does not refer to Mr Immelt’s belated recognition of the problems with Obamaism (if such has really occurred–the Gasparino story is based soley on unidentified sources)–but rather to the headline that the major financial website Business Insider chose to put on this story:

GASPARINO: Here’s Why GE CEO Jeff Immelt Is Going To Stab Obama In The Back

(The “stab in the back” phrase does not actually appear in the Gasparino article, but was added by the BI author or headline-writer)

Read the rest of this entry »

Ann Althouse has a good post today. I can’t get through her Captcha system so I thought I would post a few comments here. This NY Times op-ed piece is the source for her observations. It is behind the Times’ idiotic payment wall so go to her blog for the link.

TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.

That certainly states the issue clearly. What does he complain about ?

I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.

I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work.

What specifically is the problem ?

Read the rest of this entry »

When I was a consultant I traveled throughout the US and worked in many different states and regions. I grew up in the Midwest, where my core values were shaped. A general description of these values in business would be a variant of the “golden rule” – from wikipedia:

The Golden Rule or ethic of reciprocity is a maxim, ethical code, or morality that essentially states either of the following:

(Positive form): One should treat others as one would like others to treat oneself.
(Negative/prohibitive form, also called the Silver Rule): One should not treat others in ways that one would not like to be treated.

This concept describes a “reciprocal” or “two-way” relationship between one’s self and others that involves both sides equally and in a mutual fashion.

This sort of approach wasn’t out of the “goodness of your heart”, it was a fair and reasonable way to approach your customer or supplier. An example – you are working on a job at a price that you both agreed upon, and then you find that things are significantly different than planned and you will come up far short of your original profitability or even lose money on the job – what do you do?

You approach the customer, subtly, and describe some of the new or unseen events that have changed the scope of the project since inception. The customer has a few options – they can 1) give you nothing and tell you to “eat the difference” 2) split the difference on some of the unforeseen items which may not make you whole but softens the blow 3) not change the current deal at all but implicitly or explicitly tell you that there are future opportunities to make yourself whole.

More often than not, we eventually came to a #2 type resolution, although it was often linked with a #3 type opportunity. Rarely were we just told to “pound sand” and take the #1 option.

Why is it this way? On the surface it would seem that, as a customer, #1 would always be preferable. You have a binding contract, why not stick it to your vendor? A few reasons – a bitter vendor is unlikely to do good work, and will look at the contract in detail to find a way to stick it back to you by living to the “letter” not “spirit” of the agreement. An additional component is that if you behave as if life was a series of single transactions with no consequences to others (i.e. a series of #1 events), you eventually end up with a reputation as a “bad customer” and this will come to damage you in various ways; often it will get raised from the vendors boss to the customers’ boss at the golf course or some other type of less formal venue; and most companies don’t want a reputation for being difficult and vindictive. An additional element is that this type of behavior is generally not how people in the Midwest live their lives – it will probably be correlated with other types of behaviors (selfishness, not looking out for co-workers, extreme ambition) that will lead to at least a mild ostracism or at least career damage.

The second part of a series of #1 issues is that the SUPPLIER can just walk away from the job in the first place if they aren’t going to earn a sufficient profit. Sure, you can sue them, but the courts take forever and meanwhile, whatever project you hired the supplier for in the first place is languishing (i.e. a product launch, or a cost reduction project, etc…). This is a variant of the golden rule on the part of the supplier, which means that they have an obligation to do the best work possible under the spirit of the agreement to make the purchaser look good.

In my limited experience the apex of #1 experiences on all side was New York. Even the simplest item became a desperate bargaining scrum, with both sides scouring the other for weaknesses and gleefully “sticking it to them” whenever possible. If you approached a NY transaction with the attitude of a midwesterner, you were going to get screwed, because they were going to walk all over you and push for favorable terms and lord over you their advantages while you would be loathe to use the same tactics in return. Soon even the dimmest types have to take on #1 attitudes, and then regular update meetings are just taking turns throwing the other guy “under the bus” and scheming to leverage the fine print. A real joy.

The difficulty with #1 behavior is that it “negates” itself when confronted by both parties using this set of tactics. Now you get back to equilibrium, but the entire transaction and work effort is bitter and poisoned. As far as future work, you just “roll forward” your grievances into the NEXT transaction and find ever more creative ways to win with #1 tactics in the future, as both sides escalate.
Read the rest of this entry »

CommodityOnline:

India’s crude oil imports from Iran is facing a risk of potential disruption as increasing US and EU sanctions make it impossible for Indian ships to obtain insurance.

Greg Scoblete, The Compass Blog (Real Clear World):

I imagine if I were an Indian official, I’d be a bit peeved to learn that acting “responsibly” means privileging the interests of the United States over my own country. Nevertheless, Burns has a point. After all, India may rely on Iran for 12 percent of its oil imports, but look at what the United States has been willing to do for India:
 

Presidents Obama and Bush have met India more than halfway in offering concrete and highly visible commitments on issues India cares about. On his state visit to India in November 2010, for example, President Obama committed the U.S. for the very first time to support India’s candidacy for permanent membership on the U.N. Security Council.

 
I don’t know about you, but if the U.S. was asked to forgo 12 percent of its oil imports in exchange for another country’s endorsement for a seat on a multilateral forum, I’d make the trade. I mean, c’mon, 12 percent? The U.S. gets about that much from the Persian Gulf – and we barely pay that area any attention at all…

Europa:

“The EU-India free trade agreement will be the single biggest trade agreement in the world, benefiting 1.7 billion people,” said president Barroso. “It would mean new opportunities for both Indian and European companies. It would mean a key driver for sustainable growth, job creation and innovation in India and Europe.”
 
The EU is India’s largest trading partner, accounting for about €86bn of trade in goods and services in 2010. Bilateral trade in goods rose by 20% between 2010 and 2011.”

Asia Times Online:

Last year Israel supplied India with $1.6 billion worth of military equipment and is India’s second-largest defense supplier after Russia. Sales are only going to rise. Indian defense procurements from Israel in the period 2002-07 have touched the $5 billion mark.

And this doesn’t even get into the China-EU-US-Israel-Saudi Arabia wheels-within-wheels complications when it comes to arms deals, hoped for arms deals, trade deals, hoped for trade deals, energy politics, and the rest of it….

It’s not 1985, now is it? The past is a different country, a Russian (Soviet)-oriented Cold War country used to thinking in terms of “Kissengerian” alliances and blocs. An intellectual adjustment may be needed. It’s like 3-D chess out there….

Speaking of energy:

“Was Saudi Arabia involved?” (Asia Times Online.) If it makes you feel better, let me point out that Saudi petrodollars continue to fund all sorts of interesting educational activities on the subcontinent, in Africa, and elsewhere, along with Iranian monies. So that’s nice.

Back in 2008-9, when it seemed that the world was about to implode, I wrote this article about how odd it was that JP Morgan Chase stepped in and bought an entire bond issue from the State of Illinois, at a time when no one else was interested in our debt.

The US government has been buying its own debt for some time now. The WSJ today had an article entitled “Treasurys Face Tougher Path” that sums up our dilemma:

“If we remove the Fed’s purchasing and remove the trillions in Treasurys they hold, what would be the true market value of Treasurys?… I think we would certainly have failed auctions at the current interest rates if the Fed was not the majority purchaser”

A different article in today’s WSJ called “EU Banks Stashing Cash for Safety” reported that European banks were “parking” their money with central banks rather than lend out to customers, purchase securities (like bonds, above), or loan it to one another.

The 8 giant European banks that have disclosed their annual results in recent weeks reported holding a total of about $816 billion in cash and deposits at central banks as of Dec 31… that is up 50% from a year earlier… The stockpiling… represented a collective response to the growing pressures on the European Financial system. By storing funds at central banks in Europe, the US, and elsewhere, banks assure that their money is safe.

As the article above states, we don’t know what the price of debt would be if the US government wasn’t purchasing a substantial portion of the total issuance. It likely would be higher. And in Europe, with losses looming on Greek debt, banks are now questioning their position in the debt markets and apparently “parking” their money more and more rather than purchasing government debt issues.

In the US we take for granted that we can keep issuing debt to fund our ballooning deficit and that we can find willing buyers at miniscule interest rates. We are also putting our hand on the scale by buying back a lot of the securities that we are auctioning off (try explaining that one to someone who isn’t sophisticated in finance). Like everything else, this works until it doesn’t, and with banks and the US government not buying bonds in the same quantities, who IS going to want to load up on Treasurys at these rates?

In parallel, the stock market is returning more than ever when dividends are taken into account. There never has been a time in recent history where stocks (assuming dividends and share buy-backs) are returning such a high premium over debt. Thus why would individuals want to purchase Treasurys when (cash) returns in stocks are so much higher?

It will be interesting to see how this all plays out. My guess is that it will end badly.

Nothing is so unsettling to a social order as the presence of a mass of scribes without suitable employment and an acknowledged status…The explosive component in the contemporary scene is not the clamor of the masses but the self-righteous claims of a multitude of graduates from schools and universities. This army of scribes is clamoring for a society in which planning, regulation, and supervision are paramount and the prerogative of the educated. They hanker for the scribe’s golden age, for a return to something like the scribe-dominated societies of ancient Egypt, China, and the Europe of the Middle Ages. There is little doubt that the present trend in the new and renovated countries toward social regimentation stems partly from the need to create adequate employment for a large number of scribes…Obviously, a high ratio between the supervisory and the productive force spells economic inefficiency. Yet where social stability is an overriding need the economic waste involved in providing suitable positions for the educated might be an element of social efficiency.

Read the rest of this entry »

Erin O’Connor links to George Eliot:

It is an interesting branch of psychological observation to note the images that are habitually associated with abstract or collective terms — what may be called the picture-writing of the mind, which carries on concurrently with the more subtle symbolism of language. Perhaps the fixity or variety of these associated images would furnish a tolerably fair test of the amount of concrete knowledge and experience which a given word represents, in the minds of two persons who use it with equal familiarity. The word railways, for example, will probably call up, in the mind of a man who is not highly locomotive, the image either of a “Bradshaw,” or of the station with which he is most familiar, or of an indefinite length of tram-road; he will alternate between these three images, which represent his stock of concrete acquaintance with railways. But suppose a man to had successively the experience of a “navvy,” an engineer, a traveller, a railway director and a shareholder, and a landed proprietor in treaty with a railway company, and it is probable that the range of images which would by turns present themselves to his mind at the mention of the word “railways,” would include all the essential facts in the existence and relations of the thing. Now it is possible for the first-mentioned personage to entertain very expanded views as to the multiplication of railways in the abstract, and their ultimate function in civilization. He may talk of a vast net-work of railways stretching over the globe, of future “lines” in Madagascar, and elegant refreshment-rooms in the Sandwich Islands, with none the less glibness because his distinct conceptions on the subject do not extend beyond his one station and his indefinite length of tram-road. But it is evident that if we want a railway to be made, or its affairs to be managed, this man of wide views and narrow observation will not serve our purpose.

Probably, if we could ascertain the images called up by the terms “the people,” “the masses,” “the proletariat,” “the peasantry,” by many who theorize on those bodies with eloquence, or who legislate for them without eloquence, we should find that they indicate almost as small an amount of concrete knowledge — that they are as far from completely representing the complex facts summed up in the collective term, as the railway images of our non-locomotive gentleman. How little the real characteristics of the working-classes are known to those who are outside them, how little their natural history has been studied, is sufficiently disclosed by our Art as well as by our political and social theories.

Read the whole Eliot passage plus Erin’s post.

See also Peter Robinson’s post about Khrushchev and Soviet management practices, which I see as being pretty related.

In this post, I link to a brief news item that discusses the most expensive cities in the world to live. knirirr was kind enough to leave a comment.

Interesting – I was surprised to see London so low down the list.

knirirr makes his living as an academic. He works at a prestigious college in the United Kingdom. Even adjusted for different currencies, his pay lags about 25% behind what a comparable American prole slaving in the Ivory Tower would earn. And professor salaries in the UK are considered to be pretty posh compared to most of the world.

If anyone is wondering as to the reason for this disparity, it is because the US government has guaranteed loans that college students take out to finance their educations. With all that money coming in, centers of higher learning have applied themselves to spending the wealth. Hence, academics in America earn significantly more than their foreign cousins.

There is a lot more to the issue, enough to warrant a few other posts on the subject. But the main reason I mention it here is that knirirr’s comment got me to thinking about disparity of income.

How would those cities on the list fare if one factored in the per capita GDP of the countries where they are located? According to this list, a few revisions would have to be made.

Perhaps surprisingly, cities in the top spots would still be even more expensive places to live if one considers average per capita income.

According to the article, the cost of living in Zurich is 176% compared to New York City. This means Zurich is the most expensive city to call home in terms of money spent to live there. But since the average wage of the Swiss people is five to ten percent less than citizens of the United States, the cash shelled out for rent and food would take a greater percentage of their pay checks.

The same goes for the number two city. It might cost 166% to live in Tokyo, Japan than it would to dwell in New York, but the average Japanese citizen earns about 72% of the wage that the average American takes home. If GDP was included in the calculations, then Tokyo would climb above Zurich so far as relative expense was concerned.

The real shakeup, of course, comes at the very bottom of the list. Karachi, Pakistan is supposed to be the least expensive place to live as one could make a home for only 46% of the cost to live in New York. But considering that the average yearly wage in Pakistan is about 5% of the average wage earned in the US, and suddenly it is obvious that the vast majority of Pakistanis can only think of living there to be an impossible dream.

(Cross posted at Hell in a Handbasket.)