Outsourcing the Blog to Jon Stewart
This isn’t so much funny as clever. (If you don’t understand the Costanza part, speak up. If no one else can adequately explain, I will swoop in and save the day. Sometimes I don’t know what you kids would do without me.)
Last thing about the blog’s recent hiatus: When I said that I could tell how big a fan someone was, but how many days it took to notice and email me, I didn’t mean that I have a list of everybody and am writing down the date. What I mean is, when the blog was first down, a flurry of people emailed me that day. But then, every day after, I would still get one or two people. Even a full week after it was down, I’d get people saying, “Hey Bob, I tried to visit your blog today and I’m getting this weird message…”
“Hey Bob, Your Blog Is Down!”
Yes, I had noticed. (The funny thing is, I could determine how big a fan you were, based on how many days went by before you noticed and emailed me.)
I am in the process of moving to a different host. I’ll tell the whole sordid tale once that is down. The URL will still be the same, it’s just that a different company will be hosting it. My understanding is, there might be another interruption while the intertube waves propagate through the ether after the switch, or something like that.
Heads Krugman Wins, Tails Hard Money Loses
I really am swamped with my “day job” for the next month or so, meaning blogging will be sparse. But at this point, I think someone needs to write Portrait of the Artist as a Keynesian Man. In this post, Krugman shows just how many degrees of freedom he has to work with:
Some readers have asked why, given my scornful discussions of the “confidence fairy” story about fiscal austerity (will that be my lasting contribution to economic discourse?), I’m willing to take seriously the idea that ECB rate hikes had a huge impact via expectations.
That’s a good question, but I do have answers.
[Krugman then talks about two differences, which you can read if you’re interested.–RPM]
Finally, the whole euro situation is fraught with multiple equilibria and the risk of self-fulfilling panics — which means that there can sometimes be disproportionate responses in a way that doesn’t make sense when we’re talking about budget cuts.
You see, Krugman is allowed to invoke “multiple equilibrium” and “self-fulfilling panics” when spinning his yarns. With a clever guy like Krugman, he therefore can always “see” his predictions coming to fruition, day in and day out.
I’ve already pointed out a great example, when Krugman first cited Italy as proof that large debt loads wouldn’t invite the bond vigilantes, and then when Krugman cited Italy as proof that the ECB needed to print more to stave off the bond vigilantes (who had suddenly lost their invisibility cloak).
Today, I’ll point out a similar story–or should I say stories–with Germany. To wit, in a Nov. 21 post memorably titled “Real Austrian Economics,” Krugman used Germany’s status as a safe haven to underscore his theme about the folly of austerity:
Austria is, by most comparisons, a very successful economy, with low unemployment and a current account surplus. Its fiscal outlook is slightly better than Germany’s, according to IMF projections…
Yet Austria has had almost exactly the same interest rate experience as France. In June, both Austria and France had 10-year rates of 3.43%, 44 basis points above Germany’s 2.89. As of today, German rates were down to 1.91, but French rates were up to 3.47 — and Austrian rates up to 3.44. Both countries, in other words, have seen their spreads more than triple.
What exactly is going on here? Is the market worried about bank exposure? Is it pricing in a possible euro breakup? Lots to chew on here. But one thing is clear: fiscal rectitude — which the Austrians have displayed even more than the Germans — is no protection.
Now look carefully at those numbers. Krugman is here trying to conclude that the Austrian government isn’t earning brownie points from bond investors, even though they said “adieu, adieu” to high deficits. And Krugman’s evidence is that the yield on Austrian 10-year bond rates rose a whopping 1 basis point since June, as the European debt crisis really heated up.
Oh wait, that’s not fair to Krugman. It wasn’t actually the absolute move (again, of 1 basis point) in Austria’s bond yield that he was citing, but rather the spread between Austrian and German yields. So really what is happening here, is that when investors got really worried and rushed into German bonds (pushing down their yields), Krugman said, “Aha! Told you! Fiscal responsibility, i.e. a relatively tame debt-to-GDP ratio, is a sham.”
Then, three days later, in a post titled “The Apocalypse Trade,” Krugman wrote:
I really wasn’t planning on blogging on Thanksgiving Day. But what’s going on in Europe deserves a mention.
So, the big story: German bonds are now being priced as a risky asset — what the FT calls the “apocalypse trade“. The interest rate on bunds, at 2.21% as I write this, is still very low by historical standards. But it’s above the rate on UK bonds (2.17%) and way above the rate on US bonds (1.88%).
The way to see this is that the market is in effect pricing in a real possibility of eurozone collapse.
In particular, market expectations seem to assume that the ECB will remain utterly indifferent to its responsibilities. The German breakeven rate, an implicit forecast of inflation over the next 5 years, is just 1 percent. That’s a disaster level, implying severe deflation in the debtor nations — or, more likely, a euro breakup.
Awesome all around.
Do you see the artist at work? Remember, on November 21, the fact that investors had been fleeing into German bonds (and thus driving down their yields, relative to Austrian bonds) was cited as evidence in favor of Krugman’s views on deficit spending. Then, a mere three days later, the fact that investors were fleeing out of German bonds (and thus driving up their yields, presumably relative to Austrian bonds but I didn’t bother checking), was cited as evidence in favor of Krugman’s views on money printing.
Awesome all around.
One last clarification: It’s possible to have a view on economic policy, that is invariant to the observed data. For example, if it rains tomorrow, I will say, “Bernanke should tighten.” If it doesn’t rain tomorrow, I will say, “Bernanke should tighten.” There’s nothing weird about that.
What would be weird is if it rains tomorrow and I say, “See what I mean? Bernanke should tighten. And get yourself some galoshes.” And then if it doesn’t rain, I also say, “Gosh sometimes I amaze even myself. I told you idiots, Bernanke should tighten. I hope you folks stocked up on water bottles, cuz we’re in for a drought.”
The Financial Entangling Alliances Thicken
From CNBC:
The world’s major central banks unleashed coordinated action Wednesday to ease the increasing strains on the global financial system, a move that sent stock markets up sharply.
The European Central Bank, U.S. Federal Reserve [cnbc explains] , the Bank of England and the central banks of Canada, Japan, and Switzerland are all taking part in the operation, which is designed to “enhance their capacity to provide liquidity support to the global financial system.”
The ECB said in a statement the banks are making it cheaper for banks to get U.S. dollar liquidity when they need it, starting next Monday.
They are also taking steps to ensure banks can get ready money in any currency if market conditions warrant.
…
Fears of more financial turmoil in Europe have already left some European banks dependent on central bank loans to fund their daily operations. Other banks are wary of lending to them for fear of not getting paid back.Such constraints on interbank lending can hurt the wider economy by making less money available to lend to households and businesses.
You have to like the last part: They’re doing it for the average household, not the big bankers sitting on sovereign debt.
Although the Fed likes to say that it “bears no exchange rate risk” in such swaps, and though (back a few months when they expanded the swap lines with Europe in a different “coordinated central bank action”) they like to stress that the Fed isn’t on the hook when the ECB lends the dollars to European banks, strictly speaking this isn’t true. If the Fed gives $50 billion in dollars to the ECB, which (at those market prices) gives $50 billion worth of euros to the Fed, then the ECB lends out the dollars to private banks and, before they repay the loans, the euro crashes against the dollar…then the ECB has no means of acquiring dollars to repay the Fed. Even though the ECB has a printing press, it is configured for euros, not dollars.
The experts tell us that these types of arrangements are necessary, lest the whole (financial) world fall apart. Back in September 2008, when many of us were vociferously objecting to TARP and Bernanke’s incredible monetary inflation, the experts told us such things were necessary lest the whole world fall apart.
The current round of interventions will not solve the problem. Down the road–probably much sooner rather than later–the central banks of the world will engage in some further extraordinary measures, again lest the whole world fall apart.
Even so, printing money doesn’t fix the underlying problems. No matter what they do, eventually the whole financial world will fall apart.
Karl Smith Shouldn’t Start a Mutual Fund
I really like Karl Smith as a person. During our debate–where Karl knew he was entering the lion’s den of Mises fans–one of his slides said he was going to “teach Bob how to dance.” At the time I was so busy analyzing his arguments, I didn’t realize that was a white guy joke. Awesome.
Having said that, Karl’s recent post on Apple’s low stock price boggles my mind:
I have a theory.
On the one hand you can buy Apple stock for $375 a share and pay $7 to ScottTrade. On the other hand I also have a trash can in which you can deposit your $375, pay me $5 and I will set it on fire for you.
Clearly, I am offering the better deal as in both cases you have approximately zero probability of getting your money back and I am willing to burn it for $5 whereas you have to pay ScottTrade $7.
Now that’s not quite true. Apple’s stock price is sustained by the fact that if it goes low enough someone will buy the whole company and liquidate it. However, current investors shouldn’t be under any delusions that Apple has any plans whatsoever to provide them with a return on their investment.
As Arnold Kling might say: Thank You for your donation to the Steve Jobs Consumer Product Enrichment Fund, have a nice day.
It took me a few minutes to even understand what the heck Karl was talking about. One of his commenters spelled it out:
The gist of the joke I think is that companies are supposed to give dividends. Even tech companies. Even ones with huge market shares are supposed to provide a return and spin their assets back to their investors.
Because someday we’ll all be dead, and the company won’t exist anymore. At some point you have to return the assets or your stock is just a meaningless piece of paper. The East India Company had a huge market share also once upon a time.
I agree with this guy, that this must be what Karl is driving at. (Or, as Winston Churchill would say, this is that at which Karl must be driving.)
I have some questions then for Karl:
(1) Does his theory apply to all companies that don’t pay dividends, or just Apple?
(2) If Apple’s stock price is effectively a bubble (at least above a certain level), it’s been going on for a while, hasn’t it? I mean, people buying Apple stock right now aren’t giving their money to Apple, they’re giving it to other investors. So the question is, “Will I be able to sell this to someone else down the line, for more money than I paid?”
(3) If this is how Karl views non-dividend paying stocks, how can he support fiat money?
(4) Karl’s offhand remark about the liquidation possibility provides insight into why his explanation is silly. Suppose Apple’s management stopped reinvesting its net income into product development, and instead started buying nothing but Treasury bonds. Over time, all of Apple’s existing equipment, licenses, etc. were converted into an exponentially growing stockpile of Treasury bonds. Does Karl still think buying a claim to that pile of assets would be equivalent to burning your money in a trash can?
The Fed and Big Bank Nexus
A reader sends me this interesting Bloomberg piece. It is a familiar story, but armed with some FOIA data, it spells out just how much the Fed bailed out the major banks and kept it all from Congress.
Murphy Smackdown: DeLong on Mises
I am going to do a full write-up for Mises.org once I get my day job under control, but those of you who have been following DeLong’s assaults on Mises might be interested in his latest post. For the context, DeLong hasn’t been able to figure out why Mises says printing paper money won’t fix a depression, since (DeLong claims) Mises says that mining more gold would do the trick. DeLong speculated that maybe Mises believed in a labor theory of value when it comes to money, because that was the only way DeLong could make sense of Mises’ strange views.
In the comments of his original volley, I said to DeLong that the solution was easy: Though he supported the gold standard, Mises didn’t think digging up more gold would fix a depression once it started. (To me this was obvious, since for Mises the depression is caused by the unsustainable real configuration of the capital structure, which developed during the prior inflationary boom.) I invited DeLong to provide me a quote where Mises said that digging up more gold would cure a depression.
Here is DeLong’s response. Make sure you read my comment. What’s really funny is that I’m sure both of us are walking away from this thinking, “Boy I just crushed that guy.”
More Trouble for the Alleged Faith/Reason Dichotomy: Acts of the Apostles
I am working my way through Acts of the Apostles (the first book after the four gospels), which chronicles the adventures of the early Church after Jesus ascends to heaven. Saul was a Pharisee who persecuted Christians (and approved of them being put to death), but then had his famous road to Damascus conversion, afterwards becoming the “Paul” who wrote epistles (letters) that are included in the New Testament.
Before I make my main point, I want to share this passage because it struck me as funny (Acts 17: 16-21):
The Philosophers at Athens
16 Now while Paul waited for them at Athens, his spirit was provoked within him when he saw that the city was given over to idols. 17 Therefore he reasoned in the synagogue with the Jews and with the Gentile worshipers, and in the marketplace daily with those who happened to be there. 18 Then certain Epicurean and Stoic philosophers encountered him. And some said, “What does this babbler want to say?”
Others said, “He seems to be a proclaimer of foreign gods,” because he preached to them Jesus and the resurrection.
19 And they took him and brought him to the Areopagus, saying, “May we know what this new doctrine is of which you speak? 20 For you are bringing some strange things to our ears. Therefore we want to know what these things mean.” 21 For all the Athenians and the foreigners who were there spent their time in nothing else but either to tell or to hear some new thing.
I think the Athenians would have loved the blogosphere.
Now on to my main point. Note the verb I underlined in the passage above. And in the next chapter we read one of my favorite portions of all the Bible (Acts 18: 24-28):
24 Now a certain Jew named Apollos, born at Alexandria, an eloquent man and mighty in the Scriptures, came to Ephesus. 25 This man had been instructed in the way of the Lord; and being fervent in spirit, he spoke and taught accurately the things of the Lord, though he knew only the baptism of John. 26 So he began to speak boldly in the synagogue. When Aquila and Priscilla heard him, they took him aside and explained to him the way of God more accurately. 27 And when he desired to cross to Achaia, the brethren wrote, exhorting the disciples to receive him; and when he arrived, he greatly helped those who had believed through grace; 28 for he vigorously refuted the Jews publicly, showing from the Scriptures that Jesus is the Christ.
Does this sound like the early Church operated on how loudly somebody said, “I really feel this is right!” ? Do you think when Apollos “vigorously refuted the Jews publicly, showing from the Scriptures that Jesus is the Christ,” that he just kept waving them around, saying, “You have to have faith guys, c’mon!” ?
In fact, the passage above specifically says that Apollos greatly helped those “who had believed through grace.” In other words, Apollos came in and teaching correct doctrine, based on his “mighty” knowledge of the Scriptures, he accurately instructed people who had earlier just believed without really knowing why their beliefs were true.
Don’t misunderstand, I’m not claiming Apollos was a scientist. What he taught, both before and after the Christians had equipped him with more knowledge, was not empirically based in the modern sense of the word.
Having said that, it is a complete misunderstanding of how serious religious people think, to say they don’t use their reason. The Book of Acts is replete with Paul in particular reasoning (the Bible’s verb) over and over with the people he is trying to convince that Jesus was the Messiah prophesied in the Jewish Scriptures.
If atheists/agnostics want to continue justifying their stance by saying they have a monopoly on reason, I guess I can’t stop you. But you are demonstrably wrong. If you want to say theists use their reason very badly, OK fine. But it is simply not true that Christians (and other theists as far as I know) reject the use of reason.
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