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October 24, 2011

DOOM: Doom schmoom! Gimme my money!

DOOOOM

When I was in college, I had a deadbeat roommate who borrowed $100 from me and never paid it back. In retrospect, the fault was mine: he had no job, no prospects of getting a job, and no wealthy relatives to sponge off of. But he assured me that his intentions were honorable, so I went ahead and loaned him the money. Credit card companies are making the same mistake I made, only for a vastly larger sum of money. Good luck collecting on that debt, guys. I've been waiting on that loaned-out hundie for more than twenty years now.

The big Eurozone summit over the weekend didn't accomplish much. If you read between the lines and parse the language in the carefully-phrased public statements, it's pretty clear that nothing of substance was achieved. At base, the issues are intractable: what's good for Germany and the more industrious northern nations of Europe is disastrous for the less productive south, and vice versa. The problem is inherent in the very design of the Eurozone, and cannot be "fixed".

Where do the Europeans plan to get the funding for their beefed up EFSF, by the way? Their eyes are turning to China and Brazil. But investors there can read a balance-sheet and see the demographic trends, so if I were the European finance ministers I wouldn't hang my hat on that avenue of funding.

Two eternal verities:

1. Without economic growth, you cannot have a social safety net.
2. Governments create nothing, and are not productive.

Debt securities: it all started in Florence, Italy. FYI: Italy spends 14% of its aggregate output on pensions for public-sector retirees. That's going to be a familiar number for nearly every level of government here in the US as our public-sector healthcare and pension costs continue their inexorable rise.

I don’t think this was the “positive sign” that so many investors were hoping to see out of the EU talks.

The red state in your future? I would be careful with this absolutist narrative: demographic trends are likely to play out in unpredictable ways going forward. I think it is a given that citizens will flee from the high-tax, socially dysfunctional "blue" states -- but they will carry their dysfunctions right along with them when they enter the "red" states. (Remember that as recently as the 1960's, California was as "red" as Texas.) It's silly to think that the massive financial problems in a state like California, Illinois, or New York (or even Rhode Island) can be safely fenced in.

Pretty little lies.

Let’s be crystal clear about this. To tell a 50 year old pretty lies about the soundness of a pension plan is one of the most wicked and irresponsible things you can do without actually shedding blood; people who believe these phony promises will not make the extra savings, work the extra years or otherwise take steps to protect themselves until it is too late.

From the NYT article about Rhode Island:

Until this year, Rhode Island calculated its pension numbers by assuming that its various funds would post an average annual return on their investments of 8.25 percent; the real number for the last decade is about 2.4 percent.
Yeah, reality is a stone cold bitch, ain't it? Money that can't be paid out, won't be, no matter what the government and courts say.

Note to Thomas "Porn-stache" Friedman: the world is far from flat.

Why China copies instead of innovating. R&D is expensive and time-consuming, and often leads to unproductive dead-ends. Also, entrepreneurship and invention require a certain individualism and non-conformist mindset that does not come naturally to many Chinese people. China is also in a hurry to get rich before their demographic bulge kills them, and copying is a lot faster (and cheaper) than inventing. Much of China's long history is composed of almost getting to be a world power, but not quite making it. Some of this is simply historical accident, but much of it has to do with Chinese culture and character as well.

[Anecdote: I remember reading an essay a few years back about an American professor who taught in a Chinese business school for a semester. He assigned a final project to his class full of hopeful future Chinese MBA's: come up with a unique business-plan and present it to the class. As an example, he took the class through the creation of a plan for a fast-food franchise. Later, when everyone turned their projects in? More than half were business plans on how to start a fast-food franchise, and others in similar fields like restaurants or convenience stores.]

The OWS protesters? Short version: they're idiots. Stinky, hairy, flabby, noisy idiots.

Hyperinflation: can it happen here? We're fools if we think we're somehow immune from the same folly and lack of foresight as other nations and empires throughout history. Even sober-minded central bankers can be panicked by events over which they have no control, and they are exquisitely prone to pressure by politicians. The notion of a purely independent central bank is nonsense; the whole conception of a central (national) bank is political, and central bankers are political animals whether they wish to admit it or not. This is doubly true in the age of fiat money.

Well, given how Europe has evolved in the postwar years, this is pretty much business-as-usual: smiles in public, backbiting and despair in private. It's really amazing how bad the political class is right now, both here and in Europe. I don't even think the motley collection of European rabble-rousers, tyrants, calcified aristocracy, and faded royalty during the runup to World War I were this bad. It doesn't bode well for the future.

The Four Horsemen of the (Financial) Apocalypse: Japan, Greece, Zimbabwe, and France. What's notable about all these examples of financial DOOM is that all were either caused by or exacerbated by political idiocy. Politicians of whatever nationality seem to be constitutionally unable to keep their fingers out of things. They think in a flawed syllogism: a) something needs to be done; b) X is something; c) therefore X must be done. (Whatever "X" is.) But sometimes, it's best to just do nothing. Inaction carries its own risks, of course, but sometimes it really is the best course of (in)action.

In case you forgot, Spain and Portugal are still boned.

The Keynesian notion of "aggregate demand" is nonsense. I've thought so for years. It's facile to think that if only we could stimulate demand for more N (where N is an arbitrary product or service) then more N would inevitably be produced. In theory more demand produces more supply, but it is not a linear or even particularly causal process. In reality supply is constrained in many dimensions that are not directly influenced by demand (the demand for N may be infinite, but in a world of scarce resources with alternative uses, there's only so much raw material, labor and capital to go around). Sometimes supply creates demand that didn't exist before (how many people knew they wanted an iPad before Apple invented it?). And the classical governmental action of favoring demand over supply -- price controls -- has failed utterly every time it has been tried. Instead of stimulating supply, it eliminates supply (because why would producers keep producing something at a loss?). Prices are how a free marketplace allocates scarce goods (and we live in a universe where nearly everything is scarce in one way or another). When that pricing signal is warped by governmental interference, the results are almost always harmful.

Even the Italians are turning sour on high-speed rail.

Times is hard when even brown liquor can't turn a profit.

UPDATE 1: Dividend stocks. There was a time when investing in this kind of stock was the norm.


---------------------
"This is just my sleeping-on money. I keep the serious cash underneath the bed."


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posted by Monty at 08:33 AM

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