Monthly Archives: January 2016

Learning the hard way. Is there any other?

“Education is what survives when what has been learned has been forgotten”

Language is great. When used properly, you can sometimes come up with some easy to read, compressed wisdom. And making reading easy and short is not an unwanted or unnecessary outcome. It is paramount in our present “low intellectual effort” social environment. In that sense, I get lots of complaints about my posts. Not that they induce the remotest doubt that I should adapt to the easy-reading, no-substance, dominant posts of today. Private banking weekly “résumés” are guaranteed to make you laugh -or sob, in a heavyhearted remembering of what the “homo sapiens” once was like. No new ideas to share, and a compendium of financial press statements and reasoning of the lowest level. Yet it is exactly what their clients and readers want.

People talk monetary policy like it was soccer. As a Spanish politician, now defunct, once said: if everybody only spoke of what he knew about, there would be a planetary silence that we could all take advantage of in order to read and learn. Twain also cleverly phrased the problem. It ain’t what you don’t know, but what you think you know and you don’t, that will get you into trouble. Most investors think they know what they are doing because Fed chairs have eliminated downside risks for what seems an eternity. They don’t. They are in serious trouble today.quotes-about-education-hd-wallpaper-19

Brainless, memory-worn investors, humbled now to a degree, are getting what their educational level has entitled them to. Only education might have prevented investment patterns that enabled the last financial boom (and the previous ones). Greed always follows fear in the investment cycle, and only strict educational levels can help us humans remain disciplined at all times. Particularly if CB’s are playing cheerleaders and conducting the herd to economic suicide (with the inestimable support of the sell side segment of the securities industry). Investors followed the pied piper of Hamelin in droves, because once they had forgotten 2008, those memories gone, there was nothing else left to prevent them from doing so. And it sure helped that Ben played his Hamelin pied piper role magnificently. I hope history will be able to assign responsibilities for all the grief and misgivings his conduct has produced. More than a few Central Bankers ought to be jailed by the time this financial clean up is over. Highly unlikely though -save for isolated cases like Iceland.

Following up on compressed, easy to read wisdom, but somewhat bloodier, the adage about bulls and bears making money -while pigs get slaughtered-, is also a universal truth. A truth that had been deep frozen by the “easy money” and the  “put for all” idiotic Fed policy. Greed has been relentlessly rewarded by CB’s -generating a pervasive moral hazard environment for the masses. We ran out of examples of risk materializing in heavy losses for imprudent investors. Investors were bailed out time and again at no cost. CB’s sponsored the party and ensured an “all you can drink” punch bowl use. I have felt like a priest recommending sexual constraint in a permanent non-stop sexual orgy, assuaged with lots of alcohol and drugs in order to make it last.

But, if something could not go on forever, it was certain to stop at some point. Yellen and Fisher finally understood the printing orgy had gone too far, for too long. Bubble pricing in financial assets, excessive risk undertaking by investors, and notorious malinvestment were all too evident. All their fed-talk about the strength of the US economy is bullsh.. to cover their backs. And they know it. Anyway, even if they try to hide the reasons for tightening us out of the easy money mess, we have to credit them for being brave enough to try to put an end to the party. Regrettably, their decision will induce gargantuan consequences that were baked in the cake by then. If global money magnitudes remain more or less stable, the traditional investment rules and adages will be applicable again. And even if that is undoubtedly good news for the long run, we will likely be unable to get to that point -while remaining financially alive. Continue reading

Kalecki plotted Central Banks’ actual course.

The rate of interest, or income tax, is reduced in a slump, but not increased in the subsequent boom. In this case, the boom will last longer, but it must end in a new slump: one reduction in the rate of interest or income tax does not, of course, eliminate the forces which cause cyclical fluctuations in a capitalist economy. In the new slump, it will be necessary to reduce the rate of interest or income tax again and so on.

Thus in the not too remote future, the rate of interest would have to be negative, and income tax would have to be replaced by an income subsidy. The same would arise if it were attempted to maintain full employment by stimulating private investment: the rate of interest and income tax would have to be reduced continuously.”

Political aspects of full employment (emphasis mine). M Kalecki. Spring 1942 lecture.

imagesThe quote above is a great synthesis of the actual state of affairs. Obviously, the easy money FED chairs, Greenspan, Bernanke and Yellen (not to forget Arthur Burns, the hawk that morphed to Dove/Nixon-puppet) never read that paper. It’s not that this excerpt hasn’t been used before. Brilliant, it cuts to the chase, and therefore it comes as a surprise that it is not well known by mainstream economists. Really the text says it all -when judging economic policy in the last two decades. You just have to combine Kalecki’s implied prognosis for an easy money policy (lowering rates ends up in increasingly negative rates), with the well-known Von Mises statement about the inevitability of a melt-down after an easy money and credit orgy. Monetary and fiscal policies efficacy, truly revealed.

Seventy-some years after Kalecki wrote that lecture, we are now in the midst of the remote future suggested. We have negative rates spreading around, and income tax is about to be compensated with an entitlement scheme for every single citizen -in countries with an outstanding economic reputation. No other government than Finland is now suggesting a salary for all (employed or unemployed, rich or poor) of around 800 dollars a month, for a final cost of 20% of GDP annually, and coming close to the income levels of public sectors in Japan or the US. We are not far from Kalecki’s prediction of paying out in entitlements more than what we obtain with taxation. Yet this is only the beginning. Helicopter money and nirping of our savings (outlawing the use of cash just to make sure negative rates do their job) are being actively discussed. QE for the people (a nice slogan for a viral strain of “helicopter money”) is increasingly being touted as the new tool of (delusive) economic policy. The apex of economic madness it must all be. If not, what else (hat tip: Nespresso)?

b2ac113cdd5fc256ce2a4e43ecd3da41What’s to follow next? Indefinite incrementally higher negative rates (lower rates again and again), and more and higher out payments financed with helicopter money?  Do we have a roadmap to economic heaven?

To heaven, it sure will not be, but more likely to Dante Alighieri’s description of the reading on Hell’s entrance (“Lasciate ogne speranza, voi ch’intrate“). I must have seen that reading before (maybe in a previous incarnation I can’t remember) because it has been some time now since I ran out of hope that we could gradually solve our economic quandaries. Of course, we can live without hope if we are aged enough. But can millennials do well at that?

freedom of choiceFiscal stimulus (lowering taxes or increasing public expenditure above the government income level), and/or monetary stimulus (more money, cheaper money, or both) are a self-defeating strategy in the long run. By now even mainstream economists begin to grasp the inevitability of the route described by Kalecki. He really thought that fiscal spending stimulus (as opposed to lowering taxes) could do better than tax reduction stimulation. Maybe, but the dead end is equally clear to me. Overspending, relative to public budget income levels (be it lowering taxes or increasing public expenditure), or easy money, always end up somewhere in the Kalecki path. So much for Keynesian stimulus. To corroborate that, just ask the Finns in a couple of years. Continue reading