Banks’ Excess Reserves (Almost) Literally Off the Charts
EPJ tipped me off to the fact that the excess reserves have (had?) surpassed the $1 trillion mark. In this Fed graph, it looks literally off the charts, but when you click to see the data [.txt], it lists the last data point as a measly $994.7 billion. Chump change.
For those who like statistics, the year/year percentage increase in excess reserves has come way down from its high of about 49,000% a couple months ago.
Fort Hood Aftermath
At first I thought they were overreacting (as is their wont), but I “get” why the AM right-wingers are going nuts over the media coverage. There was a long story on NPR this morning interviewing Muslims in the military and how they’re dealing with the stereotypes etc.
Note that I am all for that, but I can’t help think that NPR is playing favorites. After the Oklahoma City bombing, did NPR rush to interview militia members and ask if they felt uncomfortable at work, or if they felt the need to stop wearing camo for fear that prejudiced people would jump to the wrong conclusions?
Last point: The interviewed an enlisted guy (Muslim) who said, “I’m an American first, we have a job to do, I don’t view us as attacking Islam, this isn’t a religious war.”
The other statements are fine, but that first one struck me as odd: If he considers himself an American first and a Muslim second, I assume he’s not very devout, right? If a Protestant said, “I’m an American first, and a Christian second,” I would think he needs to re-read his Bible.
Democracy Is More Important Than Avoiding Paradox
I can’t stop reading Tyler! He knows so much, and his views are so similar to mine, and so when we disagree… Aaaaaaaa! I can’t stand it!!
While discussing a voting procedure that one of his readers had asked about, Tyler said:
The main question to get out of your head is whether or not range voting satisfies Arrow’s Impossibility Theorem. (In fact it doesn’t, most forms of range voting violate the independence of irrelevant alternatives, but don’t worry about that!). There’s no major reason why a democratic system should follow all of Arrow’s axioms as defined across universal domain, which means you have to rule out the very possibility of paradoxes. Can anyone do that? No, not even when you’re deciding which book to read next. (But should you stop reading? No.) We do, however, care if the system can:
1. Deliver decent economic growth and an acceptable level of civil liberties.
2. Build consensus and legitimacy going forward, and
3. Toss out the truly bad politicians.[Emphasis in Tyler’s original.]
If you don’t know what Arrow’s Theorem is, here’s a link [.pdf] but I’ll give you the thumbnail sketch. (Note that I actually have a proof of Arrow’s Theorem that I wrote up for undergrad students in my Game Theory class, so please don’t say in the comments that I’ve misunderstood the theorem. However, I admit that my discussion of the historical context of Arrow and his mission may be apocryphal; I’m simply repeating what an NYU professor told us in class one time. I haven’t read this in a book.)
OK so Arrow wanted to inject some rigor into the analysis of different social decision problems. Basically, if you have a collection of people with different preference rankings over possible outcomes (like distribution of wealth, whether women have to wear veils, whether Tom Palmer should have blogging privileges, etc.) then how do you aggregate those diverse preference rankings into one collective Social Welfare Ordering? More casually, how do you take everyone’s unique utility function and generate a social utility function? How do you know which “state of the world” is both feasible and achieves the highest level of “social well being”?
Economists had known for some time (e.g. the work of Condorcet) that there were problems with things like majority-rule voting. In fact for any proposed system, economists had found undesirable attributes. (E.g. with majority voting you can get cycling. If you have just 3 candidates and you use a two-stage election, the order can matter.)
OK so Arrow just wanted to rule out all the stupid voting procedures–the ones plagued by cycling etc.–so economists could focus on the remaining set of sensible ones, in order to decide which they liked best, which were most consistent with liberal values of tolerance etc.
Arrow came up with a bunch of axioms that, on the surface, seem pretty innocuous and all but one of them seem perfectly sensible for a voting system we can believe in. For example, one of the axioms says that if every single individual in society thinks outcome X is better than outcome Y, then the “social welfare ordering” had darn well better agree that outcome X is better than outcome Y. The other axioms are not as simple and self-evidently desirable, but they’re pretty innocuous as I say.
But guess what? Arrow found to his surprise–and again I’m just relying on what the NYU guy said, maybe he was embellishing and Arrow actually had a hunch to guide his axiom choice–that the set of aggregating rules (“voting procedures” if you will) that satisfied his axioms was empty! In other words, if you found a voting system that satisfied 3 of the axioms, it would necessarily violate the 4th. (BTW some expositions describe it as 5 axioms, where 1 is “universal domain,” but the way I learned it universal domain–meaning we don’t put any restrictions on the type of preferences people can have–was just assumed as part of the original problem, so that’s why I think Arrow’s Theorem only uses 4 axioms.)
Now that you have that background, you will understand my middle-aged-angry-man comment to Tyler’s post:
Tyler wrote:
There’s no major reason why a democratic system should follow all of Arrow’s axioms as defined across universal domain…
I think the major reason is, “The axioms all sounded perfectly innocuous and reasonable when Arrow first dreamed them up, since his original intent was just to rule out all the self-evidently undesirable voting procedures and focus on the sensible ones.”
And then when Arrow realized he had just ruled out every possible voting procedure, people moved the goalposts.
If it were called Arrow’s Reasonability Criteria, I think social democrats would be citing it all over the place to justify their desired reforms, just like they use Pareto Optimality. But since Arrow’s axioms should have been a game ender, out the window they go.
Now as far as Tyler’s analogy with book reading: To my knowledge, no one has come up with a proof showing that very sensible rules to use in book selection will contradict each other. If I’m understanding him, Tyler seems to want me to prove, “I can avoid paradox in my rules of book selection.” But that’s not what’s going on with voting. The issue isn’t that I’m demanding someone to justify voting. No, I’m demanding that proponents of voting explain why they are ignoring Arrow’s demonstration that the rules violate quite sensible features.
Last point: This really isn’t about voting. I’d have to think about it more carefully, but I think Tyler could come back and say, “OK then champ, please explain to us why you continue to espouse the wonders of a private property order, when its ‘rules’ necessarily violate Arrow’s Theorem?”
Assuming that’s correct, then perhaps it’s close to what Tyler was saying about books. But as you know, I like to err on the side of criticizing Tyler.
Environmental Activists Label Waxman-Markey a "Huge Mistake"
This is actually a very nice video. (HT2 Rob Bradley) Obviously I disagree with their advocacy of a carbon tax & rebate scheme, but what they are saying makes a lot of sense if you were really worried about climate change and thought that governments sometimes did the right thing.
In contrast, I don’t see how anybody who really thinks climate change is a threat can be for the current bills in DC. If you want to know why, just watch this video, especially the middle part about offsets.
Bond Buccaneer Bleg: Murphy vs. Sumner
Do any of the esteemed Free Advice readers have experience with the bond market? I don’t mean, “Did you know that price and yield move in opposite directions?” I mean, do you really understand bond math etc.?
I ask because Scott Sumner and I are launching volleys at each other (he from his ivory tower, me from my armchair), and we’re stuck on a fairly crucial point. Here he gives a lengthy rebuttal (or it might be a rejoinder at this point, I’ve lost track) to my response to his “Does Macro Need a New Paradigm?” post.
(BTW I am having trouble logging on to Free Advice this morning. Is it because I’m getting mad hits from Sumner’s link? I don’t know whether to hope for that or not. I.e. I’m going to be annoyed if I start to hit the big time and learn that my host can’t handle it.)
Anyway one of the key issues is that Sumner claims the massive spike in the TIPS yield (in fall 2008) could be due to a collapse in inflation expectations. I thought “no way!” because by definition the TIPS yields aren’t supposed to be affected by price inflation concerns.
Scott said yes that’s true for newly issued TIPS, but for “off the run” TIPS there would already have been a significant amount of pent up CPI hikes, which would then unwind (as it were) if investors expected the CPI to fall drastically from 2008 – 2010 let’s say.
I thought that at best this effect would just cause a one-shot adjustment in the market price of older TIPS, so that the yield-to-maturity would be basically the same for older or newer TIPS. To bolster my case, I emailed Scott this graph, showing a 10-year TIPS and a 5-year TIPS, that both mature within 3 months of each other in early 2011. As you can see from the link, their yields were virtually identical on the way up, and then diverged only slightly coming back down.
Scott said that the picture is consistent with his thesis.
Thus we’re once again stuck. Like all good economists, Scott and I can look at the same chart and say, “Yep, just like I predicted”–even though we totally disagree with each other.
Any help? Anyone?
China May Let Yuan Appreciate Against USD: "It’s Started!"
Man what good is YouTube? I had the perfect link for this story–when the French authorities release the elevator in the Eiffel Tower (with Lois underneath it) accidentally activating the countdown on the nuclear bomb inside. I can’t believe all the irrelevant garbage that was coming up on my searches instead of that gem from cinematic history.
Anyway here’s the news:
China sent its clearest signal yet that it was ready to allow yuan appreciation after an 18-month hiatus, saying on Wednesday it would consider major currencies, not just the dollar, in guiding the exchange rate.
In its third-quarter monetary policy report, the People’s Bank of China departed from well-worn language on keeping the yuan “basically stable at a reasonable and balanced level.” It hinted instead at a shift from an effective dollar peg that has been in place since the middle of last year.
“Following the principles of initiative, controllability and gradualism, with reference to international capital flows and changes in major currencies, we will improve the yuan exchange-rate formation mechanism,” the central bank said in a 46-page monetary policy report.
The comments, published just days before a visit to Shanghai and Beijing by U.S. President Barack Obama, set out the possibility of a return to exchange rate appreciation that began with a landmark July 2005 revaluation.
The yuan strengthened by nearly 20 percent against the dollar until concern over the impact of the global financial crisis prompted Beijing to hit the brakes in the middle of last year to protect exporters.
The yuan has been stuck at around 6.83 per dollar ever since, drawing increasing ire from other countries, especially as it has followed the dollar downwards against other currencies.
The dollar has dropped 13 percent against a basket of major currencies including the yen and euro since mid-February.
I am not making an official prediction–I haven’t spent enough time studying China specifically–but this could spell trouble if you believe in Austrian business cycle theory. China’s monetary aggregates have been growing like gangbusters lately, which they had “no choice” to do since the dollar was falling against other currencies and China had a peg to the dollar.
So if I’m reading the situation correctly, China pumped in a bunch of new money and now may be idling the spigot. Fortunately there is a lot of trade liberalization and other pro-market reforms occurring in Asia generally (I co-authored a research paper for an investment firm on this recently), so that should absorb some of the slack.
Like I said, I’m not making an official prediction, but it wouldn’t surprise me if there is a major “correction” in China within a year. If I were in stocks, I would still much rather be in Asia than the West.
Who’s Afraid of Deficits?
Paul Krugman, Aug. 27, 2009:
So new budget projections show a cumulative deficit of $9 trillion over the next decade. According to many commentators, that’s a terrifying number, requiring drastic action — in particular, of course, canceling efforts to boost the economy and calling off health care reform.
The truth is more complicated and less frightening. Right now deficits are actually helping the economy. In fact, deficits here and in other major economies saved the world from a much deeper slump. The longer-term outlook is worrying, but it’s not catastrophic.
The only real reason for concern is political. The United States can deal with its debts if politicians of both parties are, in the end, willing to show at least a bit of maturity. Need I say more?
…
But what about all that debt we’re incurring? That’s a bad thing, but it’s important to have some perspective. Economists normally assess the sustainability of debt by looking at the ratio of debt to G.D.P. And while $9 trillion is a huge sum, we also have a huge economy, which means that things aren’t as scary as you might think.Here’s one way to look at it: We’re looking at a rise in the debt/G.D.P. ratio of about 40 percentage points. The real interest on that additional debt (you want to subtract off inflation) will probably be around 1 percent of G.D.P., or 5 percent of federal revenue. That doesn’t sound like an overwhelming burden.
Now, this assumes that the U.S. government’s credit will remain good so that it’s able to borrow at relatively low interest rates. So far, that’s still true. Despite the prospect of big deficits, the government is able to borrow money long term at an interest rate of less than 3.5 percent, which is low by historical standards. People making bets with real money don’t seem to be worried about U.S. solvency.
The numbers tell you why. According to the White House projections, by 2019, net federal debt will be around 70 percent of G.D.P. That’s not good, but it’s within a range that has historically proved manageable for advanced countries, even those with relatively weak governments. In the early 1990s, Belgium — which is deeply divided along linguistic lines — had a net debt of 118 percent of G.D.P., while Italy — which is, well, Italy — had a net debt of 114 percent of G.D.P. Neither faced a financial crisis.
So is there anything to worry about? Yes, but the dangers are political, not economic.
…
So don’t fret about this year’s deficit; we actually need to run up federal debt right now and need to keep doing it until the economy is on a solid path to recovery. And the extra debt should be manageable. If we face a potential problem, it’s not because the economy can’t handle the extra debt. Instead, it’s the politics, stupid.
Paul Krugman, March 11, 2003 (HT2 Ben Lee):
With war looming, it’s time to be prepared. So last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.
…
Last week the Congressional Budget Office marked down its estimates yet again. Just two years ago, you may remember, the C.B.O. was projecting a 10-year surplus of $5.6 trillion. Now it projects a 10-year deficit of $1.8 trillion.And that’s way too optimistic. The Congressional Budget Office operates under ground rules that force it to wear rose-colored lenses. If you take into account–as the C.B.O. cannot–the effects of likely changes in the alternative minimum tax, include realistic estimates of future spending and allow for the cost of war and reconstruction, it’s clear that the 10-year deficit will be at least $3 trillion.
So what? Two years ago the administration promised to run large surpluses. A year ago it said the deficit was only temporary. Now it says deficits don’t matter. But we’re looking at a fiscal crisis that will drive interest rates sky-high.
A leading economist recently summed up one reason why: “When the government reduces saving by running a budget deficit, the interest rate rises.” Yes, that’s from a textbook by the chief administration economist, Gregory Mankiw.
But what’s really scary–what makes a fixed-rate mortgage seem like such a good idea–is the looming threat to the federal government’s solvency.
That may sound alarmist: right now the deficit, while huge in absolute terms, is only 2–make that 3, O.K., maybe 4–percent of G.D.P. But that misses the point. “Think of the federal government as a gigantic insurance company (with a sideline business in national defense and homeland security), which does its accounting on a cash basis, only counting premiums and payouts as they go in and out the door. An insurance company with cash accounting . . . is an accident waiting to happen.” So says the Treasury under secretary Peter Fisher; his point is that because of the future liabilities of Social Security and Medicare, the true budget picture is much worse than the conventional deficit numbers suggest.
Of course, Mr. Fisher isn’t allowed to draw the obvious implication: that his boss’s push for big permanent tax cuts is completely crazy. But the conclusion is inescapable. Without the Bush tax cuts, it would have been difficult to cope with the fiscal implications of an aging population. With those tax cuts, the task is simply impossible. The accident–the fiscal train wreck–is already under way.
…But my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt.
And as that temptation becomes obvious, interest rates will soar. It won’t happen right away. With the economy stalling and the stock market plunging, short-term rates are probably headed down, not up, in the next few months, and mortgage rates may not have hit bottom yet. But unless we slide into Japanese-style deflation, there are much higher interest rates in our future.
I think that the main thing keeping long-term interest rates low right now is cognitive dissonance. Even though the business community is starting to get scared…investors still can’t believe that the leaders of the United States are acting like the rulers of a banana republic. But I’ve done the math, and reached my own conclusions–and I’ve locked in my rate.
Note to fair-minded readers: I’ve snipped out the parts about us being in a liquidity trap now (while we weren’t back in 2003). Those aren’t relevant to the contradictions above. The fact that we’re in a liquidity trap (according to Krugman) right now shouldn’t affect his opinions of the 10-year deficit forecasts or whether markets are correct in shrugging off deficit concerns.
Another Equation of "Religion" With "Falsity"
Folks, don’t flip out, I totally get why Tom Palmer and now Joe Romm are writing in this fashion. But strictly speaking, to call something “a religion” doesn’t mean it’s thereby false. Even in a secular context, all it means is that the people who believe in the claims aren’t being objective and rational about it. So you can argue that they have no basis for believing they’re right, but strictly speaking you can’t pat yourself on the back for blowing somebody up just by demonstrating “the belief system is a religion to him.”
Earlier I mentioned Jerry O’Driscoll’s take-down of Palmer on this particular point. In this post I want to document a similar thing in Joe Romm’s saga against the Superfreak writers. Romm starts his post by asking: “Is calling global warming a religion the same thing as denying global warming science?”
This is a rhetorical question, but it’s clear from the rest of his post that Romm thinks the answer is “YES!!” After his rhetorical question, Romm writes:
While the authors of Superfreakonomics, which is riddled with basic scientific errors, have started to issue some retractions, they continue to embrace self-contradictory denial of the basic science.
In mid-October, economist Steven Levitt wrote a blog post titled, “The Rumors of Our Global-Warming Denial Are Greatly Exaggerated,” which asserted:
Like those who are criticizing us, we believe that rising global temperatures are a man-made phenomenon and that global warming is an important issue to solve. Where we differ from the critics is in our view of the most effective solutions to this problem.
Then in another red-herring-filled post from last month, “The SuperFreakonomics Global-Warming Fact Quiz,” Levitt asserted that “we believe” it is “TRUE” that “The Earth has gotten substantially warmer over the past 100 years.” And he writes of that statement — that “fact” — (and 5 others), “It is our impression that none of the six scientific statements above is at all controversial among climate scientists.”
Duh. In fact, the most recent survey of the scientific literature signed off on by every major government in the world, including the Bush Administration, concluded “Warming of the climate system is unequivocal.”
Unfortunately for the Superfreaks, their book is once again searchable on Amazon, so everyone can confirm it contains the following sentence — the very first one I criticize them for in my original debunking when I broke the story of their error-riddled book:
Any religion, meanwhile, has its heretics, and global warming is no exception.
That is a staggeringly anti-scientific statement. It should be retracted. It should certainly not be repeated, as Levitt is now doing on his blog! [Bold in Romm’s original.]
I’m actually really glad that Romm wrote this post up, because I think it will make my case a lot better than if I tried to prove my point with actual religion. In the theological case, I would have said that even though Christianity is (obviously) a religion, stating that fact doesn’t prove that therefore Christian beliefs are incompatible with science. They could be, of course, and I fully concede that in practice many Christians–especially evangelicals hopped up on Genesis–will literally attack science. But my point is that to call a belief system “a religion” is not the same thing as saying “it’s opposed to science” or especially “it yields false answers.”
I think we can see this very clearly in a less controversial area, namely the global warming debates. Levitt and Dubner wrote that global warming is a religion that has its heretics. Everybody knows exactly what they are talking about.
Now Romm is trying to say, “No no no! If you concede that the globe is warming and that it is caused by man’s activities, then you must retract your claim that ‘global warming is a religion and it has heretics.'”
Of course there’s nothing contradictory in Levitt and Dubner’s claims here. They can endorse the basic scientific claims behind anthropogenic global warming, and still point out that people like Joe Romm treat the issue as a religious one, complete with man’s sin, the need for painful atonement, and the punishment of heretics.
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