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August 13, 2012 7:42 PM   Subscribe

"Some date the crisis to August 9 2007, the day it became clear that Europe’s banks were up to their necks in US housing debt. The ECB flooded markets with €95bn of liquidity. It seemed a lot of money then. The term “trillion” was still banned by the Telegraph style book in those innocent days. We have since learned to swing with the modern dance music from central banks." [Five years on, the Great Recession is turning into a life sentence]
posted by vidur (101 comments total) 13 users marked this as a favorite

 
If most everyone has finally given up, things are probably going to start to get better.
posted by humanfont at 7:50 PM on August 13, 2012 [4 favorites]


Has anyone lit the Gold Bug signal?

This seems like a fairly astute summary of the current situation, but would love for Mutant to weigh in with his thoughts.
posted by maxwelton at 8:18 PM on August 13, 2012 [2 favorites]


If most everyone has finally given up, things are probably going to start to get better.

No, we're still on course for a very high risk of Greek, Italian or Spanish Euro exit. Nobody has enough money to bail out Italy or Spain if things go too wrong, and if there's a default in one of those two it's full cats sleeping with dogs financial armageddon.

There's a long process of de-leveraging going on, and it isn't finished yet. The resultant pain *certainly* isn't finished yet.
posted by jaduncan at 8:20 PM on August 13, 2012 [3 favorites]


If most everyone has finally given up, things are probably going to start to get better.

I find it hilarious that the pre-2008 wisdom that no financial crisis of this magnitude could ever occur in Europe / US is now being applied to China...
posted by Jimbob at 8:25 PM on August 13, 2012 [3 favorites]


would love for Mutant to weigh in with his thoughts.
You should be adding this to your RSS reader seeing as it's Mutant's blog.
posted by Talez at 8:25 PM on August 13, 2012 [15 favorites]


As the article points out, it's not over untiil either defaults or inflation happen.

There is no other way out.

That's why gold is up, in anticipation.

Junior mining stocks FTW, if you have the balls.
posted by unSane at 8:27 PM on August 13, 2012 [1 favorite]


The author believes that the Oklahoma City Bombing was an FBI sting and that Clinton's killed Vince Foster for some reason. So yeah, maybe that's an ad hominem attack and we should treat all texts with equal validity or maybe the guy with tin foil viking helmet and the Lyndon LaRouche face tattoos may not be the most likely to understand complex things.
posted by allen.spaulding at 8:28 PM on August 13, 2012 [21 favorites]


Or he may be reliable in some areas and not in others.
posted by unSane at 8:51 PM on August 13, 2012


And therefore not worth my time figuring out which is which.
posted by JackFlash at 9:11 PM on August 13, 2012 [6 favorites]


A quick perusal of his op-eds for the Telegraph suggests that he knows his onions when it comes the the Eurozone.
posted by unSane at 9:12 PM on August 13, 2012


I've been reading Evans-Pritchard's Euro-economics pieces for a few years now and I've found him to seem fairly prudent after-the-fact. It's also possible he's just a pessimist and this is a good time for pessimistic prognostication, but I tend to cautiously trust him. Especially since, as an American, I have trouble finding reliable writers about eurozone economics (i like fistfulofeuros, but cant help but find them naive about the breakup-or-full-fiscal-union odds).
posted by kernel_sander at 9:29 PM on August 13, 2012


A quick perusal of his op-eds for the Telegraph suggests that he knows his onions when it comes the the Eurozone.

A quick perusal of this one seems like he's in thrall to stringing together random thoughts on the subject and hoping it hangs together. Like this:

Western central banks -- in thrall to inflation-targeting -- cut short-term interest rates ever lower. They set the price of credit too low, forcing pension funds and insurers to hunt frantically for yield to match their books.

That's a bizarre read of the 2000s and I'm being nice. It's spoken authoritatively, but it's not really reflective of reality. That's not why interest rates were cut in 2008. It also sounds vaguely conspiratorial - and ungrounded - like the author's totally crazy nonsense he's never disowned. The whole article seems this way.

I'd trust a flat-earther over this guy.
posted by allen.spaulding at 9:30 PM on August 13, 2012 [2 favorites]


Pritchard is supposed to be some kind of authority on the EU? okay. This guy has been 'the glass is completely empty' forever.
posted by H. Roark at 9:32 PM on August 13, 2012


Pritchard is supposed to be some kind of authority on the EU? okay. This guy has been 'the glass is completely empty' forever.

There is a possibility that the glass is completely empty.
posted by unSane at 9:37 PM on August 13, 2012 [2 favorites]


He's on the right track, but what he's missing is that government spending is completely disjoint from the ability of the economies underneath those governments to support it. Just printing money doesn't fix the problem. You can't inflate away your debts when you're running the kind of deficits we're running. When you are a perpetual borrower, trying to inflate out of your past borrowings eventually leads to hyperinflation. And the destruction in a hyperinflation is epic -- if it's sufficiently severe, the entire economy can be wiped out.

This is why I've been arguing for years that we need to just take our lumps and let the system deflate. Money printing is what got us in this problem in the first place. We didn't have 'a savings glut', we had a money glut. Every time we've had an economic problem over about the last twenty years, the Federal Reserve has stepped in and aggressively made damn sure we didn't fix it, and they did it by flooding the world with dollars. We didn't really have an excess of wealth we didn't know what to do with -- we had an excess of wealth tokens, of claims on wealth. Issuing all those extra tokens hid the pain, but the pain was sending an important message that we were doing bad stuff, and needed to stop. By suppressing those messages, we made, and continue to make, the underlying problems worse.

We will not be able to avoid any pain by printing money. All we can do is defer them, and make them more severe. The more printing we do, the problems become. The economy is shifting to serve the people who print money (Wall Street) instead of the people who create wealth (Main Street). All that supposed 'growth' is fake, false prosperity built on illusion, and much or all of it will have to be unwound, once the Ponzi scheme can't be supported any longer.

Liquidity injection, in the environment we're in now, is treating an addiction problem by taking more drugs.

Hey, we feel better, it's got to be the right solution!
posted by Malor at 9:41 PM on August 13, 2012 [8 favorites]


Western central banks -- in thrall to inflation-targeting -- cut short-term interest rates ever lower. They set the price of credit too low, forcing pension funds and insurers to hunt frantically for yield to match their books.

That's a bizarre read of the 2000s and I'm being nice. It's spoken authoritatively, but it's not really reflective of reality.


What on earth are you talking about? Rates all through the 2000s were crazy low by historic standards. How do you think the housing bubble got so enormous? The Fed cut rates to an insane degree to buoy the economy, and the ridiculously cheap rates set off the borrow/buy/borrow more/buy more bubble that the housing market turned into.

And now? They've been at zero for, what, three years now? Four? This is insane behavior. We are so wildly out of adjustment that we can't make money any cheaper, all we can do is create it against poorer and poorer collateral.
posted by Malor at 9:46 PM on August 13, 2012 [4 favorites]


I suspect everything is going to be fine and the markets will soon soar SOAR like an eagle. Mainly because during the boom everyone said everything would be great forever that it wouldn't crash and if it did it would be a soft landing. And none of this happened. Now everyone is saying we're doomed DOOMED.

For often perceptive Eurozone stuff I quite like David McWilliams. Although he can be annoying he is a engaging speaker.
posted by Damienmce at 9:47 PM on August 13, 2012


We will not be able to avoid any pain by printing money.

No, but deflation isn't the solution as it doesn't get rid of the debt -- in fact it exacerbates it.

There are only two solutions to the debt -- default or inflation (which erodes the debt). They amount to the same thing in the end, since default drives up borrowing costs and leads to inflation, and inflation erodes the ability to borrow, and causes default.

It comes down to the question as to whether we (or rather the US and the EU) will honor the debts of the past or pass on the costs of them to those who benefited (mostly China and the far east).

The current crisis is a consequence of continually deferring pain. Someone, somewhere, has to take the pain eventually. On the current tack, it's Joe Blow and he'll be taking it up the ass for another decade or so.
posted by unSane at 9:51 PM on August 13, 2012 [2 favorites]


And now? They've been at zero for, what, three years now? Four? This is insane behavior. We are so wildly out of adjustment that we can't make money any cheaper, all we can do is create it against poorer and poorer collateral.


Re-read that section. They were insanely low and got lower, but not due to inflation targeting. It was a desperate attempt to prop up an economy, not due to fears of inflation. And the idea that the main result was that institutional investors searched for better yields? Sure, there were knock-on effects, but the main result of cheap money was that we kept pumping up a housing bubble where properties were turned into hot potatoes that kept getting flipped and inflated and subsidized all the way - while we were writing more and more paper on top of it.
posted by allen.spaulding at 9:51 PM on August 13, 2012


the main result of cheap money was that we kept pumping up a housing bubble where properties were turned into hot potatoes that kept getting flipped and inflated and subsidized all the way

Not after 2008.
posted by unSane at 9:53 PM on August 13, 2012


There are only two solutions to the debt -- default or inflation (which erodes the debt).

Well, obviously there's a third, which is PAY THE FUCKER OFF, but I suspect we're beyond that politically.
posted by unSane at 9:55 PM on August 13, 2012 [2 favorites]


He gets some things right and is confused about others. The bigger problem is that he's basically making a weird version of the morally bankrupt structuralist argument for inaction. That is to say, he's telling us that there's all these endemic problems that all work together and that preventing or correcting any one of them wouldn't help and therefore unless we could correct all of them (which of course we can't) then the only thing we can do is what for it all to work itself out on its own. Which is total bullshit and also repugnant.

The fact is that while all these things are interconnected and solving one of them wouldn't have prevented the others, the sum total of the clusterfuck we have would be much less than it is were any one of those various factors not present. And some of those things are past events which we can't change, but others are ongoing or future events which we can change.

Put another way, since we're concentrating on what he has to say about the Eurozone (and he's pretty much right on that topic, as far as I can tell), in the long run the systemic problems that created the crisis today must be corrected for this crisis not to happen again, or continue at a persistent low-level. That is to say, for a common currency to work, you need fiscal integration (Euro-wide control of spending) or roughly equivalent balance-of-trade. That is, all regions can't be net exporters to each other, like Germany is, which isn't logically possible. They can't all be net importers from each other, either, which also isn't logically possible. If there's not fiscal integration that can act as an offset for trade-imbalances, then all the regions have to roughly be in trade-balance with each other. Which would be great, really, but there's no way to get to this outcome by fiat, and so it's no more likely in the near future than is fiscal integration. Which means that the systemic problems with the Euro aren't going to go away anytime soon.

What this means is that there's kicking the can down the road and then there's kicking the can down the road. Kicking it down the road is the only "solution" now which avoids a breakup (or partial breakup into a northern nucleus rump Euro) but you can just give it a kick as if you're actually doing something but not really doing something, hoping that that appearance of activity will temporarily stave off disaster, or you can do something substantial which really will stave off disaster for, say, a few years while you plod ahead trying to accomplish those much more difficult systemic reforms that are so politically unlikely. Can you guess what the Europeans have done so far?

All this applies to the global problems this writer discusses, as well. They are all real problems and need long-term global solutions. They can't be solved now. But some things can be solved now and, most importantly, many of those things affect real people's real lives right this very minute. Keynes famously said that in the long run we're all dead and this was exactly the context in which he wrote that. To whatever degree to which a depression represents long-term systemic problems, yes, those problems should be addressed. But in the long-term, we're all dead. What matters most to us is solving the problem that affect us while we're alive, those of us now who are unemployed and hungry, and not putting out the fire in front of you because of long-term worries is just as foolish in its own way as is not saving for the winter. It's certainly a piss-poor excuse for what is often either simple laziness or an indifference to the suffering of others.
posted by Ivan Fyodorovich at 9:56 PM on August 13, 2012 [5 favorites]


What matters most to us is solving the problem that affect us while we're alive, those of us now who are unemployed and hungry, and not putting out the fire in front of you because of long-term worries is just as foolish in its own way as is not saving for the winter.

But this really does just kick the can down the road. The 'much more difficult systemic reforms that are so politically unlikely' will never happen. To act as if they will is madness, and coninues the current transfer of wealth to the banksters.
posted by unSane at 10:04 PM on August 13, 2012


Malor wrote:

"He's on the right track, but what he's missing is that government spending is completely disjoint from the ability of the economies underneath those governments to support it. Just printing money doesn't fix the problem. You can't inflate away your debts when you're running the kind of deficits we're running. When you are a perpetual borrower, trying to inflate out of your past borrowings eventually leads to hyperinflation. And the destruction in a hyperinflation is epic -- if it's sufficiently severe, the entire economy can be wiped out."

Here's one simple example for you can just ignore whatever Malor and those like him write on this topic: Spain.

Malor would have you believe that the underlying problem that has caused this mess is "government spending". Except that there's a very poor correlation between deficit/debt and who has suffered the worst of this recession and who has recovered from it the most quickly. Spain was running a budget surplus while Germany was running a deficit, and its debt as a percent of GDP was lower than the UKs'. And yet Spain is in deep trouble.

Also: if someone uses the word "hyperinflation" in the context of this discussion, you can also safely ignore them as cranks. Many, many people who are like-minded with Malor predicted three years ago that by today the US would be suffering from "hyperinflation" and I'd be willing to bet, as he just told us that he's been preaching this message for a long while, that in his comment history you will find him making exactly such a prediction that have subsequently not only been proven false, but laughably false. The hard money people have confidently made a cluster of predictions on the basis of their moral certainty about how money and economics works, and they've been proven wrong. Ignore them.
posted by Ivan Fyodorovich at 10:10 PM on August 13, 2012 [30 favorites]


Balance sheet recession. Debt for equity swap for PIGS bank bonds held by German banks. Job done.
posted by Damienmce at 10:12 PM on August 13, 2012 [1 favorite]


"To act as if they will is madness, and coninues the current transfer of wealth to the banksters."

You are thinking about something different than what I wrote. I'm not even sure how to answer your comment because this is only peripherally about "the banksters". And, specifically, in the case of the Euro, the effective short-term solutions are pretty much the opposite of what the banksters prefer.
posted by Ivan Fyodorovich at 10:17 PM on August 13, 2012


Debt for equity swap for PIGS bank bonds held by German banks.

Equity in Spain, Italy and Greece?
posted by T.D. Strange at 10:20 PM on August 13, 2012


Many, many people who are like-minded with Malor predicted three years ago that by today the US would be suffering from "hyperinflation" and I'd be willing to bet, as he just told us that he's been preaching this message for a long while, that in his comment history you will find him making exactly such a prediction that have subsequently not only been proven false, but laughably false. The hard money people have confidently made a cluster of predictions on the basis of their moral certainty about how money and economics works, and they've been proven wrong.

This is absolutely true. But is also true that in economics, what you expect to happen always happens, just not when you're expecting it. There are only three ways out of the current crisis -- inflation, default or growth. Growth is currently only possible if it'sf fuelled by printing money, which leads to inflation. Default is infeasible in countries with a sovereign currency, since they can always print money in the denomination of the debt. And that leaves...?

It hasn't happened yet. Doesn't mean it won't happen. Own real things.
posted by unSane at 10:21 PM on August 13, 2012 [1 favorite]


Spain was running a budget surplus while Germany was running a deficit, and its debt as a percent of GDP was lower than the UKs'. And yet Spain is in deep trouble.

In fairness, given that a lot of that surplus was predicated on property taxes and the construction sector that provided a glut of both residential property and hotel rooms it's hard to see that it would ever have been that sustainable. The Spanish property collapse was very predictable given the degree of leveraging going on and the "this time it's different" assumption of continued growth for more and more property at high prices.

It's not impressive to have a surplus at the top end of the Keynesian cycle combined with terrible economic fundamentals and an economic dependence on a continuing housing boom; tulip traders had rather impressive amounts of money too until they didn't. Once the banks hit trouble, they had to choose between letting their financial system suffer extreme damage or paying off the risk on the state level.
posted by jaduncan at 10:42 PM on August 13, 2012 [1 favorite]


What Happened to Europe? : Democracy and the decisions of bankers.
posted by the man of twists and turns at 10:52 PM on August 13, 2012 [1 favorite]


There are only three ways out of the current crisis -- inflation, default or growth.

What about some deflation without default. Or inflation without hyperinflation. Or some combo of these in an up and down sideways muddle through it sort of way until real growth finally catches up. Does everything have to be an end of the world cathartic cleansing by violence sort of prediction? Long chronic pain seems the real nightmare we are living. Chronic pain you feel boxed into a corner unable to handle stress every little problem magnified the future seems black.
posted by stbalbach at 10:59 PM on August 13, 2012 [4 favorites]


We could always try stagflation.

Everything old is new again.
posted by the man of twists and turns at 11:12 PM on August 13, 2012


Ambrose Evans-Pritchard's transformation from a proto-Tea Party conspiracy theorist into a sober economic analyst seems as symptomatic of recent history as does other kinds of credit bubble.
posted by GeorgeBickham at 11:14 PM on August 13, 2012 [4 favorites]


Trusting Evans-Pritchard's opinion on Europe is like trusting Hannibal Lecter's opinion on veganism.
posted by Skeptic at 11:15 PM on August 13, 2012


jaduncan: "It's not impressive to have a surplus at the top end of the Keynesian cycle combined with terrible economic fundamentals and an economic dependence on a continuing housing boom;"

Impressive is your word. Ivan Fyodorvich merely stated they were in a better position than other countries who are now pointed to as paragons of fiscal respectability.

I have a podcast for you. Just be sure to ignore the ideological tripe about fiscal stimulus and blah blah blah. (maybe I'll write down my thoughts on the delusional thinking of the right sometime that this podcast sparked, but not now) The economic arguments he makes for further action from the Fed, on the other hand, are solid.
posted by wierdo at 11:27 PM on August 13, 2012


Oh, and I missed something: stbalbach, how exactly do you plan on deflating the currency without triggering another wave of defaults? Perhaps you've gotten used to it as the new normal, but you might note that default rates are still sky high. The last thing we need to do is turn a liquidity problem into a structural one.
posted by wierdo at 11:29 PM on August 13, 2012


Funny that no one has mentioned that it's no surprise that the Telegraph has printed an anti-Europe column.
posted by KokuRyu at 11:46 PM on August 13, 2012 [1 favorite]


would love for Mutant to weigh in with his thoughts.
You should be adding this to your RSS reader seeing as it's Mutant's blog.


Eek... Crazy graph overload. I'd prefer he was constrained to text here on metafilter. The word ruminator that I am.
posted by panaceanot at 11:49 PM on August 13, 2012


Political trouble bubbles in Italy and Spain

Reason: German Politician Threatens a Veto on Future Bailouts For Greece
posted by the man of twists and turns at 12:09 AM on August 14, 2012


Impressive is your word. Ivan Fyodorvich merely stated they were in a better position than other countries who are now pointed to as paragons of fiscal respectability.

I think you're thinking that I disagree more than I do; I'm just pointing out that was largely because Spain wasn't paying the price to deal with large and systemic risk in the banking and construction sectors. Given that both depended on a property boom, the positive position was largely illusory if Spain had the position that ultimately it would support the domestic banking sector.
posted by jaduncan at 12:57 AM on August 14, 2012 [1 favorite]


And yes, the Euro fundamentally doesn't work because the German and French companies can outcompete the perhipery. Considering there's a free market without the possibility for currencies to float or the compensating flows of government money under fiscal union, that's hugely problematic.

Germany's allegedly great fiscal position and the periphery's structural requirement to take on debt cannot be easily separated. It has a great fiscal position that is contingent on the same European export markets that it is destroying.
posted by jaduncan at 1:02 AM on August 14, 2012 [2 favorites]


During a time of prosperity, lots of people have money, spend it, borrow against the future value of it. Then rentiers move in, take most of the money, and the economy goes into a tailspin. The thing is, the money isn't gone, it's just been removed from the many to the few. And then the solution inevitably these days is to let the rentiers keep the money, and force everyone else to suffer. Why do we not take back a fraction of the often obscene profits from the rentiers? Obviously this is a gross simplification, but the solution is always to try and squeeze the last drop from those with nothing, rather than taking a small amount from those who have everything.
posted by maxwelton at 1:28 AM on August 14, 2012 [7 favorites]


And yes, the Euro fundamentally doesn't work because the German and French companies can outcompete the perhipery.

But, why? The Greeks, Italian, Spanish, Irish, etc. aren't fundamentally more stupid or less hard-working than the Germans and French.

Lack of competitiveness didn't drive the bubbles in Spain and Ireland. On the contrary, it was the bubbles that drove the loss of competitiveness. Spain and Ireland were quite competitive until about a decade ago. Germany outsourced a lot of its manufacturing to those two countries at the time. But the property bubble sucked up all the available capital and even human resources that were needed to remain competitive in other fields. Nobody invested in industry, which offered "paltry" returns of 5-10%, when the real estate market offered returns of 15-20%. Likewise, many schoolkids dropped out at 16 to start working as builders, rather than complete their education to work in badly paid jobs in other sectors. The result was a huge diversion of capital and human resources from productive economic sectors to purely speculative ones. Spain and Ireland, at least, were hit with a "resource course", the "Dutch disease", without having any actual resources.

The good thing is that, as Holland comprehensively showed, the "Dutch disease" can be cured.

Considering there's a free market without the possibility for currencies to float or the compensating flows of government money under fiscal union, that's hugely problematic.

People keep pointing at this, without bothering to consider two things:

First, the crises in Spain and Ireland, on one hand, and in Italy, Portugal and Greece, on the other, are rather different. Spain and Ireland were driven to the rocks by reckless private spending and credit, following the Anglo-American model, whereas Portugal, Greece and Italy's problem is a lumbering public sector.

Secondly, the situation in Spain and Ireland isn't at all unlike that in Britain, which is outside the eurozone. British politicians keep blaming the "euro crisis" as the reason for their own economic problems, but, side-by-side, their numbers aren't all that different (in some aspects, they are even worse) than those of Spain and Ireland. Despite all of the Bank of England's quantitative easing, and sterling's "floatability", Britain's growth figures are just as dismal as those of Ireland and Spain, and this although the British property bubble remains basically un-popped. Spain has much higher unemployment figures, but Spain's job market has long been a rather curious (and sick) beast.

When reading British comment on the eurozone, especially from conservative sources such as the Telegraph, one can never avoid the impression that there's a transparent attempt to divert outsiders from Britain's own economic troubles.
posted by Skeptic at 1:47 AM on August 14, 2012 [6 favorites]


In fairness, given that a lot of that surplus was predicated on property taxes and the construction sector that provided a glut of both residential property and hotel rooms it's hard to see that it would ever have been that sustainable.

Actually, the surplus wasn't all that based on property taxes, which are relatively low in Spain (arguably, high property taxes would have prevented such a ridiculous property bubble). Local authorities are very dependent on property taxes, but the central government far less so. And as mortgage payments were tax-deductible, the property bubble also funneled money out of the public treasury. What has nuked the surplus and turned it into a deficit is that the general slump has decimated all tax income, while driving up expenses (all those unemployment benefits). But even so, Spain's public sector deficit isn't all that high compared to other countries, and its public debt remains lower than that of Germany. What is scaring investors away is the state of finances in Spain's banking sector, and the prospect that the public treasury will be ultimately saddled up with its banks' bad debts, as in Ireland.

The Spanish property collapse was very predictable given the degree of leveraging going on and the "this time it's different" assumption of continued growth for more and more property at high prices.

Oh, I kept predicting it, and shaking my head at the foolishness of it for a decade. Arguably, Spain's government could have saved up even more, but I don't think that would have helped much. Instead, the government should have worked harder to pop the property bubble before it reached its preposterous size, for instance by ending the tax-deductibility of mortgage payments and taking away the local authorities' incentives to propel property prices ever upwards. It wasn't done because there were too many vested interests involved, not least the parties' and politicians' own finances.
posted by Skeptic at 2:08 AM on August 14, 2012


Actually, the surplus wasn't all that based on property taxes, which are relatively low in Spain (arguably, high property taxes would have prevented such a ridiculous property bubble). Local authorities are very dependent on property taxes, but the central government far less so.

...which is the next bailout requirement for the Spanish state: the regions are already queuing up. Structural dependencies on a continued boom. I don't think one can easily separate that out from the central state though. It's not like Madrid can just let Valencia or Andalusia default.

Instead, the government should have worked harder to pop the property bubble before it reached its preposterous size, for instance by ending the tax-deductibility of mortgage payments and taking away the local authorities' incentives to propel property prices ever upwards. It wasn't done because there were too many vested interests involved, not least the parties' and politicians' own finances.

And scrolling down, we fundamentally agree. I prepared a position paper on the similarities of the Irish and Spanish property crashes to the UK. I can't post it on the web for confidentiality reasons, but it pretty much pointed to the same trend lines that the UK saw in the 80s and tsked at the political power of financial services and the intertwining of mutual interest with local elites.

So, yeah. Plus ca change, eh?
posted by jaduncan at 2:17 AM on August 14, 2012 [1 favorite]


I also apologise if the above is somewhat incoherent, I've been up for 36 hours working on a completely different position paper. *sighs*
posted by jaduncan at 2:18 AM on August 14, 2012


...which is the next bailout requirement for the Spanish state: the regions are already queuing up.

Local authorities != regional governments.

Spanish local authorities are largely self-financed through property taxes, but they have relatively few competences. During the boom times, many of them splurged in vanity projects, and are now broke, but their impact is limited.

Spanish regional governments, on the other hand, are the opposite. They are in charge of most social services (including, quite preposterously, education and the health service), but they don't collect many taxes themselves (except for the Basque Country and Navarre, which have special fiscal compacts linked to feudal privileges going back centuries). Instead, they get their money from the national treasury after some protracted haggling. Their fiscal troubles are thus not directly linked to the decline in income from property taxes, but to the decline of all tax income (plus, in some cases such as Valencia, some pretty irresponsible spending as well).
posted by Skeptic at 2:41 AM on August 14, 2012 [1 favorite]


You can't inflate away your debts when you're running the kind of deficits we're running. When you are a perpetual borrower, trying to inflate out of your past borrowings eventually leads to hyperinflation.

It's somewhat amazing that people are still going on about hyperinflation. At what point does this bogeyman die? Or, will we still have to listen to this nonsense in another five years?

And while it's interesting to see somebody like the author recognize inequality as a driving force the whole story is a bit too neat and a great deal is allowed to slip through the cracks. Absolutely nothing is said of how historically low taxes, financialization and deregulation are powerful enablers of the asset bubbles and rampant debt creation. Indeed it is arguable whether the entire crisis could've been averted had the governments of the West not succumbed to neoliberalism and effectively abandoned government-sponsored investment in the economy. The key question might be to ask why the "excess savings" were all directed into building houses nobody would ever need rather than real investment in infrastructure, wages, and innovation.

Ultimately growth demands growth. Investment yields surplus profits that require more investment. But what is to be done when enormous surpluses have accumulated and they simply cannot (or, via corruption, deliberately will not) be directed towards proper new sound investments?

Capitalism fails then, strangely enough, because it runs out of options, out of choices, out of imagination; a profound lack of competition for capital inevitably leads to tremendous malinvestment and then, ultimately, to real demand destruction. The market, which is supposedly the producer of choices par excellence, always fails to produce enough choice.

And we are surrounded by market failures. In education, healthcare, politics, and even in in the day-to-day reality of living there are billions of people who are not happy, who are underserved, who are desperate and full of all sorts of demands, hopes and dreams. But this demand cannot or will not be capitalized and investors would rather pile in to CDOs and manufacture false demand -- ie inflate bubbles -- than try to address all the sincere demand and deprivation around them. Why is this?

Ultimately it's clear that what plagues the economy isn't really the zero-bound or trade imbalances. On a deeper level it seems a profound lack of imagination combined with a severe ideological rigidity and a deeply fascist, overwhelming homogeneity has now made growth impossible. The crisis then, as Deridda understood, is that the future has disappeared. This is an awful turn of events and one can only hope that, in the presence of no future, such lacking articles are the worst of what's to come.
posted by nixerman at 2:54 AM on August 14, 2012 [7 favorites]


Well, obviously there's a third, which is PAY THE FUCKER OFF, but I suspect we're beyond that politically.

That's generally what's happening in the US. Some large fraction of the continuing fall in household debt is from defaults, but iirc a larger part is from just gradually paying it off. It's keeping economic growth down, and I imagine it will continue for a long time, but it doesn't necessarily mean some kind of catastrophe. Just more of the same, for a while. It might make the next recession worse than it would otherwise be, but I don't think that's due for a while because of some very depressed industries bouncing back a bit, keeping things slightly positive for now.

Europe, I dunno if they can generally manage that sort of outcome. Seems to me that sovereign debt is harder to manage than is household or corporate debt, due to politics. So many commentators seem certain of what will happen there, I don't trust any of them.
posted by sfenders at 4:26 AM on August 14, 2012 [1 favorite]


Indeed it is arguable whether the entire crisis could've been averted had the governments of the West not succumbed to neoliberalism and effectively abandoned government-sponsored investment in the economy. The key question might be to ask why the "excess savings" were all directed into building houses nobody would ever need rather than real investment in infrastructure, wages, and innovation.

nixerman, the fact is that the governments of the West (and not just the West, see the current Chinese property bubble), far from abandoning government-sponsored investment in the economy, have been quite actively complicit in directing all that money into real estate speculation. In the US through Freddie and Fannie, in Spain through the cajas, in China through the public banking sector.

Both right- and left-wingers like to see the public and the private sector as completely different entities, in order to denigrate one and laud the other. In fact, there are too many intertwined interests to separate them so easily. When government dominates, the politicians quickly become moneymen. When finance dominates, the moneymen quickly become politicians...and viceversa.
posted by Skeptic at 5:04 AM on August 14, 2012 [1 favorite]


Seems to me that sovereign debt is harder to manage than is household or corporate debt, due to politics.

Yes, that's my point. When a government has a choice between enforcing hardship and printing money, it almost always prints money, ie issues debt denominated in its own currency. Historically low interest rates have allowed the US to postpone its financial cliff year after year. The only thing that will provide the political will be a crisis.

In my opinion, inflation is almost certain to be the 'solution', since it erodes debt without actually requiring legislators to agree on anything. Whether it's 'hyper' or not, who knows?

I remember seeing a graph recently which showed what proportion of the US debt was due to revolve in the next couple of years. It's increased massively because short-term debt is so cheap. But of course that also means that if debt gets more expensive the impact on the US will be rapid and potentially catastrophic.

Sovereign governments basically can't go bankrupt because they can always print money to pay their debts. And I think that is what the US will be forced to do at some point. And everyone else will be forced to follow suit to remain competitive.

Basically, inflation doesn't happen until it does. That's my belief, anyway.
posted by unSane at 5:59 AM on August 14, 2012


Inflation isn't simply about money supply. As long as the economy sucks you can print as much money as you want. The bet becomes your ability to reduce the money supply once you start to approach "normal".

I mean, I have a big short treasuries position personally, but that doesn't necessarily mean I think the end result of the massive monetary easing has to be above normal inflation.

sovereign debt is harder to manage than is household or corporate debt

well no. Private debt can only be managed through fiscal means. Actually the best demonstration of the added difficulty of private debt is the current sovereign crisis because those sovereigns have surrendered their ability to use monetary policy.
posted by JPD at 6:46 AM on August 14, 2012 [1 favorite]


Every time I see something like this, I think of David Hackett Fischer's The Great Wave, which makes no predictions but pretty clearly laid out a case that if the economic trends from the late medieval period forward in western Europe continued then we were/are in for a period of significant economic dislocation.
posted by immlass at 7:14 AM on August 14, 2012


Inflation isn't simply about money supply. As long as the economy sucks you can print as much money as you want. The bet becomes your ability to reduce the money supply once you start to approach "normal".

This. If the money isn't getting to the people who pay for the goods and services to chase after them (and by all accounts it's not) inflation is going to be completely absent.

People don't watch the Fed like a hawk and increase prices in response to quantitive easing.
posted by Talez at 7:31 AM on August 14, 2012


JPD: "The bet becomes your ability to reduce the money supply once you start to approach "normal"."

There are lots of ways to do that. You could raise taxes. You could pay higher interest on reserves to keep the money from circulating. You could do the traditional thing and shrink the central bank's balance sheet.

There's no way this Fed is letting inflation take hold. They've been allowing inflation to remain unhealthily close to negative for years now. There's not really any reason to expect that bias to change absent a radical change in the board.
posted by wierdo at 7:47 AM on August 14, 2012 [1 favorite]


Consumer price inflation in the Eurozone has already been well above the ECB target for most of the past two years. It's fallen a bit lately following commodities prices, and could well rise in the near future for the same reason.
posted by sfenders at 7:49 AM on August 14, 2012


Yeah, but it's still really an open question as to whether QE is inflationary or not. Most bankers, including Bernanke, will tell you it isn't. It's just swapping short term debt for long term debt.

It also differs from conventional monetary policy in that the Fed is taking interest rate risk onto its balance sheet. If interest rates rise that could get messy.
posted by unSane at 7:50 AM on August 14, 2012


Many, many people who are like-minded with Malor predicted three years ago that by today the US would be suffering from "hyperinflation" and I'd be willing to bet, as he just told us that he's been preaching this message for a long while, that in his comment history you will find him making exactly such a prediction that have subsequently not only been proven false, but laughably false.

This is unfair and unjust. If you actually take the time to read what I've written, what I've said over and over and over again is that we must ultimately have one of two outcomes; a deflationary crash, or a hyperinflationary runaway, but that it will take a number of years for a runaway to happen. A deflationary crash can happen anytime, all it would take is the system realizing that the debts can't be paid back, but hyperinflation is going to take, well.... I was saying a decade in the 2010 timeframe, so let's call it another eight years. If you're not seeing serious inflation, or a deflationary crash, by 2020, then let's reconsider.

But remember that you can't define inflation by governments statistics, because they are meaningless. Define inflation for yourself, in terms of the standard of living you can afford on a number of dollars, in your own life. I'm noticing very strong inflation in many of the things I buy. Some of these are attributable to weather, but not most of them.

Gasoline comes to mind. It was $1.40 not too long ago.
posted by Malor at 8:58 AM on August 14, 2012


Gasoline comes to mind. It was $1.40 not too long ago.

Real Gas price inflation over the last 36 years is about 1.1% annually, and that's with the end point being cyclically high and significantly above the marginal cost of production.
posted by JPD at 9:13 AM on August 14, 2012 [1 favorite]


You'd have to go back to 2004 to find gasoline at $1.40 a gallon.

Or should we rely on your anecdata instead of government sources?
posted by notyou at 9:24 AM on August 14, 2012


Is that directed at me? go to the EIA website. That's where I got my data from. Its a cyclical commodity.
posted by JPD at 9:37 AM on August 14, 2012


This was cute:
The ECB flooded markets with €95bn of liquidity. It seemed a lot of money then. The term “trillion” was still banned by the Telegraph style book in those innocent days.
posted by doctornemo at 10:04 AM on August 14, 2012


Should have been clear.

That bit of incivility was directed at this:
But remember that you can't define inflation by governments statistics, because they are meaningless. Define inflation for yourself, in terms of the standard of living you can afford on a number of dollars, in your own life. I'm noticing very strong inflation in many of the things I buy. Some of these are attributable to weather, but not most of them.
I should have made clear that I was also responding to "not too long ago."
posted by notyou at 10:23 AM on August 14, 2012


This is unfair and unjust.

No, it really isn't, because you clearly have absolutely no idea what you're talking about:

But remember that you can't define inflation by governments statistics, because they are meaningless. Define inflation for yourself, in terms of the standard of living you can afford on a number of dollars, in your own life. I'm noticing very strong inflation in many of the things I buy. Some of these are attributable to weather, but not most of them.

Gasoline comes to mind. It was $1.40 not too long ago.


This is literally nonsense. Inflation is not and cannot be defined by fluctuations in commodity or consumer good prices like milk or gas. This is so basic that for you to write what you did means you understand nothing at all on this issue. This "government statistics are meaningless" BS is the worst and saddest of rationalizations for your continually being wrong.

I was saying a decade in the 2010 timeframe, so let's call it another eight years. If you're not seeing serious inflation, or a deflationary crash, by 2020, then let's reconsider.

You should rest a bit, or you'll tire yourself out constantly moving those goalposts.

You, Peter Schiff, and the rest of the Austrian gold bug loons were wrong, are wrong, and continue to be wrong on inflation and everything else, and to continue screeching about hyper inflation that's just around the corner but the governments are just hiding THE TRUTH just makes you look more and more pathetic.
posted by Sangermaine at 10:46 AM on August 14, 2012 [3 favorites]


Sangermaine, you might want to dial back your contempt as it's not doing you or your arguments any favours.
posted by unSane at 10:49 AM on August 14, 2012


The exclusion of energy and food prices from core inflation is well-motivated but it also has problems, in that it can mask inflation, as opposed to cyclical price variation, in those goods. Despite being from USA Today, this article is pretty well-rounded.
posted by unSane at 10:55 AM on August 14, 2012


Observe, Smithers, how they quibble and bicker, while the rate at which my fortune grows continues unabated. Divide and rule... divide and rule...

Excellent... (steepled fingers touch pursed lips)
posted by Artful Codger at 10:59 AM on August 14, 2012 [1 favorite]


But remember that you can't define inflation by governments statistics, because they are meaningless.

Why don't those who believe so strongly that the CPI is meaningless provide a meaningful substitute?

Here's an interesting response from the "Ludwig Von Mises Institute":

What, then, is the real rate of inflation if the CPI is inaccurate? The truth is that there is no good way to gain a true measure of inflation, especially in this era when the Federal Reserve System is flooding the economy with new dollars. All we can say for certain is that inflation, with all its evils and distortions, has become what seems to be a permanent part of our economy.

If there is no way to measure inflation, maybe we've been in hyperinflation for the last few years and just didn't know it?
posted by Golden Eternity at 11:22 AM on August 14, 2012


Why don't those who believe so strongly that the CPI is meaningless provide a meaningful substitute?

You mean like this? The truth is probably somewhere in-between...
posted by sfenders at 11:31 AM on August 14, 2012


The 6.6% inflation-adjusted return on stocks that Burns and other fat cats have expected over the past century, one that has trumped the 3.5% of actual US GDP growth, may be an "historical freak" of recent times that may not be seen again according to Bill Pimco in his Investment Outlook for August. And that means folks will need to work harder and longer than ever before.

He may be a bond man, but he rags on the experience of the past 30 years in bonds as well. Like many, he also predicts that developed countries will pursue an inflationary solution; but even if inflation works sweep away liabilities, it "doesn't create real wealth and it doesn't fairly distribute its pain and benefits to labor/government/or corporate interests." He concludes by declaring that a "Cult of Inflation" may have only just begun.

By the way, does no one think the U.S. could default within the next 50 years? I guess it's unimaginable for most everyone?
posted by jimmymcvee at 11:37 AM on August 14, 2012


Work. Now there's a really fucking radical thought.
posted by unSane at 11:46 AM on August 14, 2012


according to Bill Pimco Gross in his Investment Outlook for August
posted by Golden Eternity at 11:47 AM on August 14, 2012 [1 favorite]


yes. I suspect Bill Gross has no reason at all to attempt to make an argument for a lower equity risk premium. None at all.

The return on the stock market is not purely a function of GDP growth because earnings growth for public companies is not purely a function of GDP growth, and hence ROE and Dividend payouts. If all companies were public and all companies were unlevered and all companies had to reinvest all their profits, then yes, Bill Gross would be correct.


the equity risk premium exists because of the greater volatility of equities over time, because the cost of equity is risk free rate + the ERP, equity financed companies have to have an ROE greater than ROA for the aggregate economy and will over time make capital allocation decisions that allow them to earn something that approximates their cost of equity.
posted by JPD at 11:55 AM on August 14, 2012


Gross is arguing that the 6.6% figure is an accident of initial conditions and has been sustained in part by screwing worker remuneration down harder and harder, to the point where it can't go much lower.

We understand why the ERP exists. The question is whether it's actually sustainable given present conditions.
posted by unSane at 12:02 PM on August 14, 2012


your logic doesn't make sense. The ERP derives from the riskiness of equities, it has nothing to do with the return on capital.
posted by JPD at 12:06 PM on August 14, 2012


If equities can't sustain the returns required to compensate investors for the risk they take by purchasing them, then that's a big problem and it most certainly does have to do with the return on capital.
posted by unSane at 12:10 PM on August 14, 2012


Valuation is what matters. Gross is right in one respect - that 73-08 bull market is an accident of history. But that accident is that the perceived ERP in '73 was greater than reality and the perceived ERP in '08 was much lower than reality. rolling multi-year ROE over time has actually been pretty consistent.

If you thought the world was fairly valued (and people were valuing dividends properly) and you thought GDP growth was going to permanently slow, that's fine - it just means you will get more of your return in cash rather than in capital appreciation, because businesses have less of an opportunity to make investments in their business in excess of their CoE. If they continued to over invest in low return assets the market will price the assets at less than book, and then some enterprising young gent comes along, buys the assets for less than book and starts paying out the capital.
posted by JPD at 12:13 PM on August 14, 2012


If equities can't sustain the returns required to compensate investors for the risk they take by purchasing them, then that's a big problem and it most certainly does have to do with the return on capital.

I'm not sure I totally understand what you are trying to say. Stocks underperforming increases the perceived ERP over time. You want to be investing in equities when the ERP is high. Companies that earn below their cost of equity will trade below the book value of their assets, and the literature on the outperformance of low p/b low roe shares is quite rich.
posted by JPD at 12:18 PM on August 14, 2012


That's a massive 'if', since currenty equity prices have a growth factor baked into them. On the timeline of your average investor, the price you pay for your investments is going to have a massive effect on the return. Every round of QE, for example, has goosed equities nicely (don't fight the Fed etc) but unless it results in actual GDP growth, it just drives down the ROE even further.
posted by unSane at 12:20 PM on August 14, 2012


Yes price is paramount - on any timeline. And I'm not saying US equities are especially cheap. I'm not sure what this "Growth factor" of which you speak is, but Gross isn't saying equities are expensive. He's saying that US GDP growth is permanently lower and therefore returns to equities are going to be permanently lower.

In reality historical GDP Growth and Equity returns are if anything negatively correlated because valuation pretty much dominates everything.

The best performing stock market of the 20th century was Sweden.
posted by JPD at 12:25 PM on August 14, 2012


Sangermaine, you might want to dial back your contempt as it's not doing you or your arguments any favours.
unSane

No, there is no argument. That's why these positions are worthy only of contempt.

There is not a shred of evidence for your or Malor's position. The only response is that the evidence is "meaningless" and hiding the truth of the real inflation which conveniently apparently can't be measured at all. But you're really sure it's happening because prices at the grocery store are up and you have to "[d]efine inflation for yourself, in terms of the standard of living you can afford on a number of dollars". There is a mega-drought going on and we're probably going to see some pain at the grocery store as a result; this does not mean inflation has gone through the roof. This is exactly the problem with pointing to food or energy to measure inflation.

Or if it isn't happening, then we'll hear the continued declaration that, "Well, it hasn't happened yet but it's right around the corner, any day now, you're measuring too soon, etc!"

There is no argument. This is not a debate between two equally valid interpretations. At this point it's like the climate change or evolution "debate".

I get that you strongly believe in your position, but there is simply no evidence to support the position. And worse, the available evidence contradicting your position is dismissed as lies in the classic style of all conspiracies.
posted by Sangermaine at 12:31 PM on August 14, 2012


You are tilting at windmills. I don't have a position. I haven't defined anything, I'm not sure of anything, and I don't appreciate having to wipe spittle off my face when I'm having a discussion on Metafilter.
posted by unSane at 12:44 PM on August 14, 2012


Consumer price inflation in the Eurozone has already been well above the ECB target for most of the past two years. It's fallen a bit lately following commodities prices, and could well rise in the near future for the same reason.

And then there's the case of the UK "inflation puzzle" - I've even made an FPP about it: Britain Is Puzzled by Its Inflation Problem in a Downturn.). I made the FPP in 2010, but comically, every year the economists find themselves, yet again, surprised by higher than expected inflation: UK inflation in surprise rise to 2.6 percent (2012). It's like that joke about incompetent snow removal service in Chicago - "This year, yet again, winter caught Chicago Municipal Services by surprise". You'd think after regular as clockwork higher inflation figures, the economists would have learned to adjust their models, so they are not, yet again "surprised", but economists are some of the least likely people to adjust their models in response to mere reality.

Going over the discussion in that old FPP is quite instructive. I wonder what the new theories are about the "UK inflation puzzle", and what it means vs countries like Spain, that are in the Euro, but don't control the Euro. Britain controls their currency. So puzzle away.
posted by VikingSword at 12:56 PM on August 14, 2012


I don't think that British inflation is much of a puzzle: Britain has been running a chronic budget deficit since well before the crisis and the BoE has been churning out money since it struck. The only puzzling thing about this is that some people are still pretending to be surprised by it.
posted by Skeptic at 1:15 PM on August 14, 2012


I stopped where he started looking for some region to blame it on. The "cause" was/is unbridled greed. Emphasis on unbridled.

US: Reinstate Glass-Stiegel. Burn down the casinos. Simple rules anyone can understand; you break them, your corporation dies. Today. Restore civilian government. Implement campaign-finance reform. End ALL lobbying. Create, fund, execute a major energy program. Single-payer healthcare.

No? Then quit complaining.
posted by Twang at 2:19 PM on August 14, 2012 [1 favorite]


Valuation is what matters. Gross is right in one respect - that 73-08 bull market is an accident of history. But that accident is that the perceived ERP in '73 was greater than reality and the perceived ERP in '08 was much lower than reality.

I'm not convinced it makes sense to talk about what the real "risk premium" was in '08 this soon, if ever. According to Damodaran, "Given the volatility in stock returns, you should be wary of equity risk premiums computed with less than 40 or 50 years of data (almost always the case with emerging markets) and be skeptical even when longer periods are used (the standard error, even with the 1928-2011 data, is about 2.36%)." I wonder if it makes sense to make historical assessments of risk at all because of historical selection bias. At the time in '08 so much was unknown about the full reality of the crisis, what the government would do, how effective it would be. Maybe one could argue that there was a 75% chance we would end up in another great depression and a 25% chance we would end up where we are today, and based on that the ERP was fair. It could possibly be argued that we were very luck during world war II, the Cuban missile crisis, and in other ways as well. Stock prices are factoring in many possible outcomes, and what we are calling the "real ERP at the time" based on current historical data is a result of one particular outcome of a set of many possible outcomes. We only think the ROE was high now because we happen to have been very lucky. The Equity Risk Premium seems like it should be called Equity Uncertainty Premium.

You want to be investing in equities when the ERP is high.

I think this is just saying you want to invest in stocks when the expected earnings (dividends, expected price increase) are very high compared to treasury yields. But how do we know the real "risk" of owning a stock? Maybe ERP is high but not high enough to justify the real risk. The only thing we can rely on is historical data, which could be argued is susceptible to selection bias as discussed above. It may be true that correlating stock earnings directly to GDP is wrong, but it may also be wrong to predict future earnings based on past earnings. The world is changing quickly.
posted by Golden Eternity at 3:48 PM on August 14, 2012


"Sangermaine, you might want to dial back your contempt as it's not doing you or your arguments any favours."

I regretted the tone of my comment directed to Malor last night after I wrote it. But I also sympathize with Sangermaine.

Economics is a very frustrating topic on MetaFilter and, well, everywhere. You know, it's actually a lot like linguistics or, rather, language. Everyone is a language user and so most everyone believes they know something about language qua language. But they don't and, worse, their intuitions are very often wrong. This is the case with economics for many of the same reasons. Both on the left and right what dominates is some combination of conventional wisdom (received through the popular media) and gut intuition. And most of this is either facile or outright wrong. But it's also often deeply conventional and deeply intuitive, so most people hold to these false beliefs very strongly.

Macroeconomics is especially problematic because it can be quite counterintuitive. A lot of the concepts it deals with like money and debt and such have ordinary intuitive meanings and properties that are very different from what they are in the context of a macroeconomic analysis.

I mean, think about it like this — you don't even need to make the argument I made in the previous paragraph to show how the ordinary and ubiquitous argument against "debt" is based in a deep intuition that is badly misleading people. The intuition is that...debt is bad. We all feel debt is bad. Usury is a biblical sin. We don't like being in debt to others. It just seems like a bad thing by nature and so then it's obvious that if a little of it is bad, then a lot of it is a whole lot worse. Arguments then follow from there. And so people everywhere — both on the right and left, because it seems so reasonable and obvious — say that "you can't solve a debt problem with more debt". They say this with absolute confidence and certainty. And the really, really weird thing to me about this is that most of the people who say this have actual experience in their lives that demonstrates that this isn't true. Maybe they were once young people with no higher education, a low-paying job, and a car loan that was more than they could comfortably pay...and then they took out student loans and got a college education. Or maybe they are business owners (or executives) who are losing sales because of old equipment, the lost sales forcing them to draw on short-term credit to make payroll or other short-term expenses...so they arrange a big loan to finance an equipment upgrade or opening a new location or remodeling or whatever. People finance their way out of bad situations all the time. The intuition that the last thing you should do when you are in debt is get more in debt is false. Obviously, there's truth to it in the exact sense that you don't pay off credit card bills with other credit cards. But that only tells you that all debt isn't equal.

But, anyway, if people assert things that they have actual experience demonstrating that they're not true, it's even worse when the things they're comparing aren't comparable, anyway. Household debt is not equivalent to sovereign debt. It's not.

All these threads are like minefields — there's hard-money nonsense on the right (and sometimes left) and there's "global finance is the root of all evil" on the left (and sometimes right) and every thread is filled with hoary tropes, ignorance, misconceptions, repeated sloganeering, etc. It's really, really hard not to be short-tempered.
posted by Ivan Fyodorovich at 4:15 PM on August 14, 2012 [3 favorites]


"I stopped where he started looking for some region to blame it on. The 'cause' was/is unbridled greed. Emphasis on unbridled."

Yeah, see? This is know-nothingness. In the case of the Euro problems, which you're referring to with your "region to blame it on", the trigger was the financial bubble and collapse. It wasn't the cause.

I don't...I can't even...well, whatever.
posted by Ivan Fyodorovich at 4:24 PM on August 14, 2012


the ordinary and ubiquitous argument against "debt" is based in a deep intuition that is badly misleading people. The intuition is that...debt is bad.

The superficially similar and increasingly popular arguments that "too much debt" can cause certain problems at a macro level, on the other hand, are more convincing. At least, it doesn't seem safe to assume that one can get away with ignoring their existence.

If someone says "you can't solve a debt problem with more debt", it's a bit unfair to assume that they're simply extrapolating from the experience of their cousin who had a problem with credit card abuse. They could be (mis)quoting Bill Gross: My original question – “Can you solve a debt crisis by creating more debt?” – must continue to be answered in the negative ...
posted by sfenders at 5:00 PM on August 14, 2012


The whole concept of the ERP is potentially problematic. The Equity Premium Puzzle has led some people to conclude that the ERP is a statistical anomaly.
posted by unSane at 6:06 PM on August 14, 2012


yes and the refutation for the equity premium puzzle is contained in the first sentence of your link

t is based on the observation that in order to reconcile the much higher returns of stocks compared to government bonds in the United States, individuals must have implausibly high risk aversion according to standard economics models.

We actually do know that people have a much higher level of risk aversion relative to what standard economic models predict. That's also why Low P/B stocks outperform the market as a whole.

If you want to argue for a lower equity risk premium, fine - but that also mean the risk of large drawdowns for equities has also structurally shifted lower.

Again the "luckiness" of an economy via GDP growth isn't an input into the equity risk premium. Equities outperform because they are riskier, they outperform what would expected from the historic volatility because humans are more risk averse to the potential for large drawdowns of capital than they should be.

I mean I think we all accept that the relationship between risk and return is something we believe in no?

I think this is just saying you want to invest in stocks when the expected earnings (dividends, expected price increase) are very high compared to treasury yields. But how do we know the real "risk" of owning a stock? Maybe ERP is high but not high enough to justify the real risk. The only thing we can rely on is historical data, which could be argued is susceptible to selection bias as discussed above. It may be true that correlating stock earnings directly to GDP is wrong, but it may also be wrong to predict future earnings based on past earnings. The world is changing quickly.

Most long-term studies of determining cheapness use Price to Book rather than earnings so you are basically saying what the future cashflows from those assets are going to be worth - which is a function of future ROE and their ability to reinvest at a similar ROE. Company specific ROE tends to mean revert to the market cost of equity, so yes actually in aggregate and over many time periods its actually ok to use past returns to forecast future returns - as long as you paying a price lower than the present value of the future cashflows associated with those returns.

Again price will always dominate over your ability to forecast cashflows.
posted by JPD at 6:59 PM on August 14, 2012 [1 favorite]


Another problem I have with the ERP is that it's based on an unobservable quantity - the expected return of equities. I'm just not convinced that the ERP is really quantifiable in a meaningful way, since it requires such long tranches of historical data, but fundamental market conditions can change radically during that time. I'm also not convinced it's really a helpful metric on the timeline of individual investors -- after all the ERP from 1979 to 2009 was basically zero, and it's varied wildly from decade to decade.

I've spent many MANY long hours trying to work up and test quant strategies and one of the huge takeaways from that is that the inductive fallacy is indeed a fallacy in the markets, in the sense that just because the market behaved a certain way over the previous period doesn't mean that it will behave the same way over the next period. You can get certain strategies t work fantastically on historical data that then just self-destruct in actual markets, because you just curve fitted. Even doing your optimization on small subsets of the data and then running tests on non-fitted data is just a more elaborate version of curve-fitting.

So with ERP we have an extremely limited data set with very wide variance... it's hinky to the max.
posted by unSane at 7:11 PM on August 14, 2012


I agree with you about the lack of helpfulness of it to individual investors. I was just remarking on what I think is wrong with Gross' logic. I don't really need to know what the ERP is because I'm just trying to maximize returns rather than forecasting long-term asset returns and matching future liabilities with future cashflows.

Most quant strategies don't work because the are playing in a part of the world that is highly efficient. We only know two strategies have outperformed over time - price momentum and low P/B and we think we can track that back to the sort of behavioral finance-y stuff. If your strategy isn't about profiting from innate human behavioral errors then its hard to find inefficiencies that don't get arbitraged away.
posted by JPD at 7:22 PM on August 14, 2012


‘Economic suicides’ shake Europe as financial crisis takes toll on mental health

For Wrong-Headed Reasons, E.U. Leaders Are Leaning Toward A Greek Exit
posted by the man of twists and turns at 12:27 AM on August 15, 2012


Sort of amusing that we had this conversation about equity returns and GPD last night and today the finance blogs are hottening up with this

FTAlphaville's Abridged Version
posted by JPD at 5:17 AM on August 15, 2012


Why wouldn't banking sector equity returns should correlate well to GDP growth in developing economies, just due to increased savings, growing financial transactions, increased lending, etc? The "dilution growth" mentioned in the article seems highly dubious, as dilution always does. Why would majority owners dilute their own shares? Is it possible that foreign/minority shareholders are diluted more than domestic/majority shareholders?
posted by Golden Eternity at 11:36 AM on August 15, 2012


I don't quite get the dilution argument either. If companies are issuing more paper to access capital, and they get the same return on the incoming capital as they do on their existing capital, then presumably the dividend is unchanged and it's not dilutive.

If you have 100m shares out at $1 and your return is $10m, and you issue another 100m, and your return is $20m, that's not dilutive (given rational valuations).

It's dilutive when, for example, a junior minor sitting a potentially big discovery has to continually issue paper to cover ongoing operational costs, eg exploration, drilling, assays, land acquisition. But that's pretty atypical. Normally you're not issuing shares to cover expenses.

Maybe I'm just misunderstanding.
posted by unSane at 12:16 PM on August 15, 2012


If companies are issuing more paper to access capital, and they get the same return on the incoming capital as they do on their existing capital, then presumably the dividend is unchanged and it's not dilutive.

Because they almost never get the same return on the new capital. You are of course correct, if they got the same return it wouldn't be dilutive.
posted by JPD at 1:36 PM on August 15, 2012


Why wouldn't banking sector equity returns should correlate well to GDP growth in developing economies, just due to increased savings, growing financial transactions, increased lending, etc?

Capital cycle is way way way more important for returns. Because people chase growth, high GDP growth tends to correlate really strongly with capital investment above the natural rate of reinvestment. Makes GDP grow even faster, but reduces the marginal return on capital.

Its basically the reason why GDP and asset price returns are if not negatively correlated, uncorrelated.
posted by JPD at 1:39 PM on August 15, 2012


Reason: Germany, Not Greece, Should Leave The Euro and The Euro Crisis Has Historical Parallels With Past European Crises

Naked Capitalism: Spain Out Of Options
posted by the man of twists and turns at 12:31 AM on August 16, 2012


Capital levies for debt redemption
But all this naysaying does not bring the sovereign debt problems in some Eurozone nations any closer to an end. The crisis rolls on. If it lasts long enough, the problems may drag the Eurozone into a negative spiral of recession and debt that risks exacerbating the crisis and a possibly leading to the collapse of the Eurozone.

In the face of these multiple dilemmas, governments should consider imposing one-off capital levies on the rich in order to refinance and bring down national debt
posted by the man of twists and turns at 3:51 AM on August 17, 2012


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