Monthly Archives: May 2015

Beating and doping a dying donkey.

Albert Einstein conspicuously suggested, that the main difference between genius and stupidity was …, that the former had its limits. Stupidity is on the rise in a planet where groupthink is the norm. Furthermore, experience teaches us that groupthink begets stupidity, or, to say the least, they are undoubtedly highly correlated.

I keep on saying that there has to be a limit to everything. Put stupidity on the list of things that need an urgent regulatory limit. It is more urgent than limiting the expansion of too-big-to-fail’s. Hi Janet: happy to see how I take your point of view on the advantages of regulation vs monetary policy?

Confusing a donkey for a Ferrari shows stupidity at its top. As you try to increase the donkeys performance, you end up with no Ferrari … and a dead donkey as well. Add the unpleasant reality that you are not going to be happy during the years spent whipping the donkey, while trying to achieve a cruising 55 mph speed. Perpetual frustration is not what Buddists would recommend in order to achieve your personal nirvana.

I am 57 years old and absolutely nothing in my body works like I am still 21. I try to use wisdom to make up for other lost abilities, but, no matter how hard I try, it never seems to add enough to balance it all out.  At least wisdom helps me peacefully assume that I will never go past the 100 meter mark below 11 secs again. Or any other physical feat. That doesn’t mean we can’t be happy. In fact, as I grow in wisdom and lose on everything else, I live and increasingly happier and enjoyable life. I just have to realize I am not a yuppie (my generation’s desideratum) but an intellectually active loving grandfather, and a passable skipper.

The world’s economy has been steadily degrading from Ferrari, to donkey. We can only change that to an extent, and not before some hard work, plenty of time, and intelligent decisions to accompany the two previous requirements. Working out ten hours a day will not help me get my athletic high marks back again. Most likely, I will just generate some additional unwanted health problems. Equilibrium is always more important than growth, speed or achievement. It is always the journey that counts, not the destination (yes, in economics as well).

Keynesian cocktails, and euthanizing the saver and or the rentier (as John Maynard fervently wished) only jeopardize the donkey’s health, and certainly do not contribute to increasing his performance to something remotely similar to a Ferrari. Painting the donkey in red is as far as I would go, and only if I was pressed to do so. Flogging, or doping the donkey, makes no sense at all.

donkey-pulled-cart-gazaMoreover, now that the economy has morphed into a donkey, we have been loading the donkey like a drunken 19th century farmer as well. We load the donkey with debt and entitlements, steal a substantial portion of his food (with corruption of all kinds) and expect it to race faster still?

Come on Mr. Groupthink (wherever you are). Donkeys are not all that bad. You have to see the positive side of things. All assets come with a liability, and all balance sheet reductions also reduce the liability side. Maybe a donkey is not fast, or elegant, but it helps preserve the planet, fertilizes our land, and gives us more time to think and interact while travelling. In any case, a donkey is what we’ve got right now. And it works with a carrot and a stick. If you steal the carrot, overload the donkey, and use the stick intensively, you will end up carrying the entitlement and debt load on your own.

We are seven trillion souls alive right now, over time we will (in all likelihood) not be able to hold on to more than one house and car per family. The price of buying them will probably not be the main constraint. Maintenance and real estate taxes will make it unaffordable. But we will live longer than our grandparents, will also be able to work less, and we will remain fully active until well into our eighties or nineties (unless we are particularly unlucky). We are not getting such a bad deal after all.

So why not get rid of the whip, relax and enjoy the countryside and the trip, and begin to think of ways to engineer an improvement of the abilities of our donkey. Not feeding it ever higher doses of Keynesian drugs, but improving our genetic engineering capabilites. Think “Dolly” (yes, I am aware she is not a donkey).

This time around I will not engage in some additional sarcastic Keynesian thrashing. Ben and Paul deserve every bit of it, but it is a waste of time and energy. In fact the Keynesian mule (doctrine) is already dead, you can smell the corpse already. And we all know it’s hopeless to beat a dead horse.

The world’s economic infrastructure works on inputs in order to generate an output that has to be sold. Provided all output is sold, supply -in the Keynesian reviled long run-, always generates its own demand (Say). In fact prosperity is mainly about generating as much net output as possible, and simultaneously ensuring that it is sold. Unsold or unwanted output is a drag on the system that has to be constantly purged. Massive bail-outs are counterproductive because they fail to revamp the supply side. As a clear example of what I say, we have an obese financial sector in the US (and almost everywhere), and instead of allowing the GFC to streamline it, we have reinforced its weight as a percentage of GDP. As Paul Volcker constantly suggests, half of it is redundant.

financial-services april15

Generating output is not that difficult, as long as there is not excessive overcapacity installed. It requires a decent combination of technology, capital, and human resources to originate positive added value. If you can access the adequate resources at a market price, and the business model is more or less right, you are likely to get going. And yes, I know all sectors show overcapacity today. The fact being it should not be there, if we had allowed the Wicksellian interest rate to reign (vs the central bank directory imposed rates), and we had made a habit of a permanent healthy creative destruction of inefficient supply. Combing excess capacity in construction of finance, just to name two sectors, is going to take a long time. Particularly with an unhappy army of unemployed tensely watching.

Selling what you produce (be it a product or a service) is the difficult part. Henry Ford hit a home run when he began to make cars to serve people’s needs, and not the other way around. In order to get the product or service sold, you have to generate enough interest on the demand side. And additionally the demand side has to be able to pay for it. Your pricing has to consider the buying power of your target client. Business should be conducted with an embedded “build to order” mentality. Where is the need, how do you define it precisely, and how you configure your output to satisfy it, at a price that is payable by your prospective customer, and generates value for you. That’s a truism, both from a macro and a micro perspective.

It’s that simple, really. In a healthy system, some enterprises have to go bust when they do not get their business model right, in order to adapt global output to the requirements of the demand side (capex and consumption demand). A wise old axiom. Joseph Schumpeter discovered creative destruction a long time ago. Keynesian groupthink has forgotten that we need it on a daily basis. The supply side has to be in constant evolution to adapt to the new needs and buying power of the demand side. Doing that daily, will ensure we keep a Say based stable equilibrium in the real economy (the financial economy is a different story as Mr. Minsky proved not that long ago). Schumpeter would have been bewildered for months if had seen the GFC bailouts.

Fiscal or monetary shots are shortcuts to be used sparsely if at all. They can provide a quick fix for aggregate demand, but they are more addictive than heroin. Even prescribers end up with some characteristic hallucination symptoms. Intellectually sound people like Larry Summers are even advocating economic ¡free lunches! (not to mention brainless politicians in “Podemos”  or “Syriza”, that also think money printing or fiscal profligacy are the route to prosperity). Maybe they should read Milton Friedman: “there’s no such thing as a free lunch”. Economics 101. Continue reading