Wednesday, December 21, 2011

7th Art: The Intouchables (2011)

"The Intouchables" is one of the best movies I've seen this year. Box office first-runner in France, a witty, intelligent and politically incorrect movie based on real events. As politically incorrect as real life is, and yet deeply human and positive.

François Cluzet reminds me of Dustin Hoffman in his best roles, and Omar Sy puts together the best of Sidney Poitier and Eddie Murphy.

The paragliding scene shows the city where I and Sophie got married (Beaufort) painted on the Alpine background.

Tuesday, December 6, 2011

Blame the USPS?

How important is the economic inefficiency and, why not, income inequality (think about e-commerce millionaires) created by the price subsidizing and cross-subsidizing of long-distance online commerce implicit in the artificially low USPS mailing fees structure found in the US?

Buying and selling decisions in Europe are more affected by distance, resulting in a lower amount of wasteful individual item packaging and long-distance routing. European fees structures also favor local brick & mortar retailers. In the US, consumers buy an excessive amount of small-value items through e-commerce because the cost of shipping them individually across long distances is too low. Without this price subsidy, consumers would resort more frequently to local retailers, which should be able to sell for less due to bulk shipping, handling and packaging.

Monday, December 5, 2011

Euromed Management Rises to 35th Place in the 2011 Financial Times Ranking

Euromed Management rose to the 35th place in the new European ranking of the FT

The two best European business schools are now located in France: HEC Paris and Insead. London Business School fell to a third place.

Of the top 36 programs 10 are in the UK, 8 in France, 4 in Spain, 3 in the Netherlands, 2 in Germany, 2 in Switzerland, 1 in Austria, 1 in Belgium, 1 in Finland, 1 in Ireland, 1 in Italy, 1 in Portugal, and 1 in Sweden.

Reforms undertaken by French business schools (Grandes écoles) years ago have clearly paid off, and there's yet momentum in the system. Among them, paying per performance, recruiting among the best in the world, teaching in many languages (with a significant share in English and French), and offering high-value alternative curricula that you cannot find in American or British business schools.

Tuesday, November 29, 2011

The Simple Logic of Fiscal Discipline

One of the main arguments used against fiscal discipline during a crisis is that it would make the fiscal situation worse. You don't need to think too hard to know that this is the leftist equivalent of the rightist Laffer curve argument for growth. Daniel Gros kills cartoonish-Keynesian dreams with a shot of cold logic:

So what should governments do? Abandon austerity because financial markets might be shortsighted? This would only delay the day of reckoning as debt ratios would increase in the long run.

  • A country which enters a period of heightened risk aversion with a large debt overhang faces only bad choices.
  • Implementing credible austerity plans constitutes the lesser evil, even if this aggravates the cyclical downturn in the short.

All in all, the conclusion is that it difficult to argue that the peripheral countries in the Eurozone should abandon attempts to reduce their deficits because the results will arrive only in the long run.

Tuesday, November 22, 2011

Overstating the Financial Sector Contribution to the Economy

Haldane and Madoures summarize their research in this post. As expected, it's not only the real estate industry that was artificially inflating the potential output of many countries, the financial sector was overstating the real size of the economy too. As they conclude:
If risk-making were a value-adding activity, Russian roulette players would contribute disproportionately to global welfare. And if government subsidies were the route to improved well-being, today’s growth problems could be solved at a stroke. Typically, this is not the way societies keep score. But it was those very misconceptions which caused the measured contribution of the financial sector to be over-estimated ahead of the crisis.

Friday, November 18, 2011

The Link Between Monetary Policy and Fiscal Transfers in the Eurozone

This article by Hans-Werner Sinn presents an interesting perspective on the role of the ECB throughout the crisis, and how fiscal transfers have in fact been taking place through the monetary channel:
Because the printing presses in the periphery are still running at full speed, the Bundesbank has had to turn its own presses into shredding machines in order to destroy the money that has flooded in from the South. Since September, the Bundesbank has given no net credit to the German banking system; it instead borrows from it. After deducting the deposit facility, the net refinancing of credit the Bundesbank gave to German banks is now negative.

The Carnival of the Inconsequential

The carnival of the inconsequential: they know what's wrong with society, but what they know about society is wrong. Jeffrey Sachs however likes it...

US National Debt About to Cross the 100% of GDP Mark

According to the U.S. National Debt Clock it's at 99.9% and rising right now. Last time was during World War II. Meanwhile, the Super Committee discusses the sex of the angels.

Wednesday, November 16, 2011

The Last Bastion of Central Bank Independence

What you won't read on the WSJ, the FT and The Economist: investors are awaking for the fact that sovereign debt isn't as risk free as they thought it is. The fact that it's showing up in the weaker and more indebted economies in Europe is solely related to the fact that these countries cannot manipulate their currency, because they abide by the only independent central bank remaining in the world. This transforms them in the earliest victims of the trend.

So much better for them, at least they are being forced to do their homework before it's not too late, and they may be the first to get out of the next wave of troubles: the slow but inevitable worldwide rise of sovereign debt nominal rates.

At the core of the current mess is the fact that countries shouldn't have ever got used to the idea that financing their excessive spending at nominal rates of 3% or less is sustainable. The carnival will end for all at some point, through financial constraints (as it's happening in Europe) or through inflationary revenues (as it will surely happen in most of the rest of the world).

I hope that in the process the last bastion of central bank independence, the European Central Bank, doesn't fall. The world will sorely need a benchmark when the tide changes.

Monday, November 14, 2011

Laibson's Sensible Financial Tips

Economist David Laibson from Harvard gives sensible financial tips that go against conventional wisdom in this CNN Money article. Here's one that markets appear to be ignoring: obsess about dangers ahead, not about past dangers:

Q: The overseas markets have been hammered by the potential collapse of European debt and accounting scandals in Asia. Why put more money in these markets?

A: It is true that as we get further away from well-regulated markets, international investing becomes a problem. I recommend buying publicly traded securities only in well-regulated markets. And the bad news about Europe is already priced into securities.

Have Piracy and Digital Distribution Reduced Music Quality?

According to research by economist Joel Waldfogel, the answer is "no":
While the traditional purveyors of recorded music – the major record labels – have suffered since Napster, good music has continued to make its way to market. Independent labels account for a growing share of successful music, measured both by critical acclaim and sales. While many producers of recorded music have been made worse off by changes in technology, there is no evidence that the volume of high-quality music, or consumers, have suffered.

Sunday, November 13, 2011

How Urban Infrastructure in France Allowed me to Make Economically Efficient Lifestyle Changes

After a rough transition settling down in France, I find myself finally able to enjoy again some fine HBO productions. And the process of accessing them involved significant technological and lifestyle changes. First, following the same parsimonious principles that led us to get rid of car ownership in our household (we rent when needed, and this is proving to be a highly profitable move), we chose to not have a large TV set and instead to use movie theaters and computers for video entertainment. This was another winning strategy: we've been enjoying more time out, and the reduction of personal clutter and waste at home is really significant.

What is more interesting however is how French urban infrastructure allowed me to engage in these lifestyle changes very efficiently. Not just because of generally good mass transportation systems, but also because of the way digital content is distributed in the country. My entire digital subscription comes from Orange, an obvious choice since it broadcasts most HBO series in France, besides offering an even better lineup of movies than HBO does. It offers me high-speed urban ADSL (much faster than the ADSL service that I had in the rural-like conditions of Minnesota), and in some buildings the system is being upgraded to jaw-dropping fast optical fiber.

Through the ADSL line I get three services together: high-speed Internet, unlimited domestic and international phone calls, and digital video subscription (live and on demand based on the Netflix unlimited downloads model). The three services together, including content from HBO and other English and Portuguese language channels, cost me only about US$79. I'm paying less than half the value that I was paying for lower service in the US, and don't forget that the euro is overappreciated despite the "euro crisis" chattering.

But the most important benefit is the flexibility that the service offers me. The on-demand content is excellent and we can watch it in our computers and Android phones (Apple devices not allowed - Apple policy is to enslave its users to the iTunes Shop). It means that I can for example watch the latest episode of "Boardwalk Empire" on my high-def Android screen using high-quality in-ear headphones while I ride the subway back home. By the way, I'll later post on "Boardwalk Empire" and "Game of Thrones." For now I'll just say that HBO did it again with both series.

Friday, November 11, 2011

The Pervasiveness of Agency Problems in Financial Markets

A WSJ article by Mike Mayo gives some interesting personal insights on the pervasiveness of agency problems in financial markets. Here's an example:
Other companies limited my access to senior executives. An analyst without access to executives—and the one-on-one insights that investors often pay for—can be perceived to be at a disadvantage compared to his or her peers. Goldman Sachs was fairly up front about it, a rarity in the industry. I had recently initiated coverage on the firm, so I had few established relationships I could leverage. When I told one point of contact at the company that I'd like to have more meetings with management, he told me that the firm wasn't singling me out—they treated everyone that way. When I pushed a little harder for a meeting, I received a message that we needed to "have a conversation."

Feeling like a student being reprimanded by a teacher, I was told that the most efficient use of management's time was for the executives to generate money for the firm instead of talking to the 20 or so analysts covering the company. An analyst like me would simply have to be patient. While I could live with this—to a degree—the gatekeeper added one more point: A consideration in granting analysts meetings with management of Goldman Sachs was the analyst's standing, influence and knowledge. "In other words," the gatekeeper added, "we evaluate you."
What is obvious is that there is no simple solution to these agency problems, as long as there is excessive concentration of financial power in financial markets. Regulation and central banks have typically reinforced concentration. I always believed that financial markets needed regulatory frameworks that promote above all competition, regional and political decentralization, and smaller scales, but since Alexander Hamilton (or maybe the Medici?) the world has taken the opposite direction. And nothing that has been done by current governments has changed this trend.

Wednesday, November 9, 2011

John Taylor on America's Decline as a Hegemon

John Taylor, sharp as usual:
"As the U.S. has moved away from the principles of economic freedom—instead promoting short-term fiscal and monetary interventionism with more federal government regulations—its leadership has declined. Some, even in the U.S., may cheer the decline, but it is not good for the world or for the U.S."

Tuesday, November 8, 2011

Thursday, October 27, 2011

Crisis Haiku

Here's my contribution to the universe of economic crisis haiku (as seen in the The Economist):
Uncertainty rules
While the economy suffers
Politics rejoices
You can vote for the best haiku here.

Tuesday, October 11, 2011

The Century-Old Death of Jefferson's America

This interesting segment from Rothbard's "A History of Money and Banking in the United States" discusses the role of puritanism in 19th century American politics and how the original libertarian tendencies of the Democratic Party of Jefferson had disappeared by the beginning of the 20th century and given place to the populist and corporatist party in the tradition of Jennings Bryan (a prohibitionist and opponent of Darwinism) that is yet alive today:

The Transformation of 1896 and the death of the third party system meant the end of America's great laissez-faire, hard-money libertarian party. The Democratic Party was no longer the party of Jefferson, Jackson, and Cleveland. With no further political embodiment for laissez-faire in existence, and with both parties offering "an echo not a choice," public interest in politics steadily declined. A power vacuum was left in American politics for the new corporate statist ideology of progressivism, which swept both parties (and created a short-lived Progressive Party) in America after 1900.

The Progressive Era of 1900–1918 fastened a welfare-warfare state on America that has set the mold for the rest of the 20th century. Statism arrived after 1900 not because of inflation or deflation, but because a unique set of conditions had destroyed the Democrats as a laissez-faire party and left a power vacuum for the triumph of the new ideology of compulsory cartelization through a partnership of big government, business, unions, technocrats, and intellectuals.

Bastiat on Slavery and Tariffs as Plunder

Here's what he said in the opus "The Law" (1850):

Slavery and Tariffs Are Plunder

What are these two issues? They are slavery and tariffs. These are the only two issues where, contrary to the general spirit of the republic of the United States, law has assumed the character of plunder.

Slavery is a violation, by law, of liberty. The protective tariff is a violation, by law, of property.

Its is a most remarkable fact that this double legal crime - a sorrowful inheritance of the Old World - should be the only issue which can, and perhaps will, lead to the ruin of the Union. It is indeed impossible to imagine, at the very heart of a society, a more astounding fact than this: The law has come to be an instrument of injustice. And if this fact brings terrible consequences to the United States - where only in the instance of slavery and tariffs - what must be the consequences in Europe, where the perversion of law is a principle; a system?

Monday, October 10, 2011

And the Economics Nobel Goes to Sargent and Sims

Here's the announcement. A slap on the face of fiscal stimuli that only stimulate politicians' hunger for power. Congratulations to both for a deserved prize.

PS: an accessible and important interview with Sargent on the state of macroeconomics and the crisis is available here.

Saturday, October 8, 2011

Bastiat's Nightmare

Winter is coming, and with it a new labor strikes season commences in France, a lively symbol of what's wrong with Europe. But differently from what many people think, unions and strikes by themselves are not the problem, as so brilliantly explained Bastiat in his historical defense of freedom of association and right to unionize.

We hear about how Europe is in trouble because of not being an "optimal currency area," or because of excessive debt, or because of bailouts.

Rubbish. The US, Brazil and China shouldn't qualify as optimal currency areas and won't disappear in a ground hole because of that. The Soviet Union didn't end because it wasn't an optimal currency area.

Excessive government debt is a big problem, but Japan is not burning in Third World hell because of excessive debt. The speed of debt accumulation in the US after the misadministrations of the dynamic duo Bush & Obama is probably more significant than in most European countries (hard to be sure due to skeletons in the closets here and there), but the US will not go "puff" because of debt.

Bailouts create moral hazard and injustice for sure. But bailouts are as old as the creation of the very first human government, and repeat themselves with amazing regularity throughout history. Humanity progressed everywhere despite bailouts.

So, why is Europe in trouble then? It's because of the deeply entrenched entitlement culture of its citizens. This is the real problem behind European strikes, bailouts and debt. It beats bad governance, it beats corruption, it beats silly monetary theories. It represents the rejection of Bastiat's hope:
I want not so much free trade as the spirit of free trade for my country. Free trade means a little more wealth; the spirit of free trade is a reform of the mind itself, that is to say, the source of all reforms.
Europe is in trouble because it lives Bastiat's nightmare. As simple as that.

Friday, October 7, 2011

Fame and Merit Don't Correlate

Steve Jobs was a political motivator, and that's why we hear all the ludicrous comparisons with Thomas Edison and Graham Bell (yes, the press deeply tires me). The truth is that, even at the peak of Apple's recent success, it barely surpassed 10% of the personal computer market share. How can somebody be so revolutionary while having to work so hard to achieve a 10% market share is one of those puzzles that can only be explained by political scientists, not by economists.

If you want to know about the real heroes of modern technological business and innovation, people who really changed the world and who made America the power it is today, then don't look for those who had time to worry about the color of computer cases. Look for people that in only 40 years multiplied single machine processing capabilities by six orders of magnitude. Learn about people like Gordon Moore, Andy Grove and Robert Noyce, among many others of equal importance but even lower popular fame.

Thursday, October 6, 2011

Not Only the Death of a Technological and Business Giant

Yes, Steve Jobs was a great entrepreneur and contributed immensely to human innovation. Absolutely true. The world would be a better place if more people would have his genius and drive, and if they could also enjoy today that rare (and gone) moment of entrepreneurship and innovative freedom that took place in the America of his youth.

Now, in the name of historical correctness, let's make it clear that Jobs was much more a political motivator and a salesman than a great engineer or designer. Many of his misattributed inventions did exist much before he marketed them, and were created by other inspired technical minds, inside and mostly outside of Apple. His main skills - obviously very important ones - were the ability to capture the spirit of times, coordinate the efforts of talented designers and engineers, and discover the free lunch sitting around.

I've never been an Apple user, I never bought even 1 cent of Apple products for myself, and I'll tell you why. First, because Jobs' business model was directed to people that couldn't do it by themselves (don't take it as an offense, his is an important contribution). You cannot get a technical and business model that's more centralized, proprietary, closed, overpriced, and, why not, paranoid than the Jobs' model. So I just rejected it - doesn't match my personality and preferences - and many of my geekiest friends did the same. He was a political motivator after all, so his products have the characteristics of political cult (driven by quality, point taken), and true geeks, true engineers, true hackers, in the great old Vernian tradition of a world of unbridled innovation, would run away from Jobs like they would run from the devil. Besides, Jobs was known for his authoritarian tendencies and for questionable political judgements.

Anyway, his passing represents more than the loss of a technological and business giant. With him dies the last cycle of joyful technical innovation and free enterprise that humanity experienced. Sad and dark times those we've been living through instead.

PS: I don't say it from the perspective of somebody that has never used an Apple product. Others in my family use Apple products, and I need to deal with their qualities and weaknesses on a daily basis.

Friday, September 30, 2011

Posner on Government Workforce Size

Posner busts some myths regarding the size of government workforce in developed countries:
The percentage of public employees in the workforces of these [advanced] countries ranges from 6.35 percent in Singapore to 33.87 percent in Sweden. Indeed the three lowest countries, and the only ones with fewer than 10 percent public employees, are Japan, Singapore, and Taiwan. The highest countries after Sweden are Denmark (32.3 percent) and Norway (29.25 percent)... The United States is in approximately the middle, with 16.42 percent. Surprisingly, it is well ahead of Israel, Spain, Italy, Germany, France, and Portugal. The European countries with the lowest percentage of public workers are the Netherlands and Austria, but Portugal is only slightly above the Netherlands.
Many get this information wrong because they tend to associate government workforce with bureaucracy and bureaucracy with GDP share of government spending. These dimensions may correlate but the correlation is far from perfect, among other reasons, due to different levels of government transfers in each economy.

Thursday, September 29, 2011

Time to Kill the Hellenistic Myth

Essential article by Guy Sorman on the origins of the modern Greek state. He explains:
It all began with the Romantics, when Chateaubriand, great writer yet also wonderful fibber, then Lord Byron, thought they could retrieve in Greece the sources of occidental civilization. A misunderstanding for which we are now paying the price: if it is true that the Greek live on the same land as Aristotle and Pericles, there is no great continuation between the Hellenic civilization and modern Greece. The Byzantium line, from which modern Greeks proclaim they descend from, is a weak one. Mark Twain was more realistic: when visiting Athens in 1865, he admitted he had only met a few shepherds, whose sheep were grazing amid the ramshackle columns of the Parthenon. Those Greeks, actually, were a Christian tribe among others in the Ottoman Empire. Yet just as Don Quichotte dreamt that an ugly peasant girl was the love of his life, Europeans wanted all Greeks to be Hellenics. We cannot blame the Greeks for taking advantage of the situation: throughout the whole 19th century, the Greek state‘s finances were supported by the British, the French and the German.

Saturday, September 24, 2011

No Mr. President, Technology Doesn't Cause Mass Unemployment

And so we discover that the American President is a Luddite:

But President Obama also spreads disinformation according to Market Watch:

Republicans have mocked President Barack Obama for suggesting that more jobs might be available if not for the increasing use of machines such as bank ATMs. But does the president make a legitimate point?

By and large, economists and executives say no.

For one thing, there are actually more bank tellers in the U.S. now than there were five, 15 or even 25 years ago, when ATMs first became widely available. Except for a small drop after the recent recession, the number of tellers has risen gradually for the past century.

Sunday, August 21, 2011

Synology DiskStation, iTunes Server and Time Machine: the Forgotten Ports

A hint for those who aren't able to connect their iTunes to the Synology DiskStation iTunes server or who are having a hard time getting the Time Machine directory to present itself on the Finder: on the DiskStation interface (DSM 3.1), check all the appropriate built-in application ports ("Bonjour," "Synology Assistant," "iTunes Server," etc.) and create a custom rule opening the TCP range from 9997 to 10000. This last step solved all network connection problems between our Mac and the DiskStation services.

Wednesday, August 17, 2011

The Sensible Ms. Merkel

The New York Times declares that Merkel and Sarkozy's "pledge for euro unity may not be enough to satisfy [financial] markets."

What the NYT doesn't tell you is that to not "satisfy [financial] markets" is exactly what should have been done since 2008.

And isn't it refreshing to hear a politician like Merkel saying something intelligent for a change? Truth hurts, but must be dealt with. Let's call it Merkelnomics, so here it goes:
Mrs. Merkel repeated that there was “no magic wand” to solve all the problems of the euro, arguing that they must be met over time with improved fiscal discipline, competitiveness and economic growth among weaker states.
"No magic wand" are courageous words when said by a politician like Ms. Merkel. Unfortunately, what are a few drops of wisdom in a sea of nonsense?

Wednesday, August 10, 2011

The Abandonment of a Governance Ethical Principle

When you start hearing again and again the argument that a country cannot default on its debt because it can redeem it with fiat money, it's a sign that a cause is lost. People may not have understood it yet, people may not have faced the consequences yet, but at this point, unfortunately, a fundamental governance ethical principle has been abandoned.

And let's not forget that redeeming debt with fiat money is just one train stop away from not being able to redeem it even with fiat money. Ask Brazil.

Friday, August 5, 2011

The Burden of Excessive Creditability

And so the "theory" goes: a flexible exchange rate plus financial trustworthiness should equal a ticket to macroeconomic paradise. In normal times, this isn't only solid, it's good sense.

But during these days of planned global monetary chaos, ask the Swiss what they've been thinking of the "theory." It isn't their fault: they have done their homework, but the burden has an insidious alien origin.

The irony is that, for once, they may be having Eurozone envy. An interpretation that won't be found neither in the WSJ nor in the FT, after all their readers may have more important things to learn, such as that Portugal and Ireland are less creditable than Venezuela and Pakistan.

Wednesday, August 3, 2011

Some Unpleasant Bonds Arithmetic

At a 2.66% yield (today), a 10 year Treasury will appreciate 30% throughout its lifetime. Naturally, it could appreciate faster than 2.66% per year during the initial years or months, but it would mean that, later on, the yield would have to be lower than 2.66%. The accumulated appreciation throughout 10 years cannot surpass 30% anyway.

From this simple arithmetic, there can only be two scenarios: (1) bonds are extremely overpriced or (2) America is heading to a Japanese-style lost decade.

Now, in your typical retirement portfolio you may find guaranteed-return funds that promise (yet) to pay 3% per year or more, depending on the binding rules. Under the assumption that these funds will keep their promises and remain solvent, the return over ten years accrues to at least 34%. So you have a guaranteed ten-year bonus of 4% or more over the 10-y Ts. On the other hand, guaranteed-return funds provide valuable insurance against a bonds market collapse. If it happens, then you'd be well positioned to do some bargain hunting.

No matter what happens, and unless you're planning to play short-term dice with the pros, the 3% (or more) guaranteed-return account is a clear winner.

That's why I'm saying: bye-bye bonds, see you next time!

Sunday, July 31, 2011

7th Art: A Separation (2011)

One of the best movies of the last few years comes from the most unexpected country: Iran. The movie is called "A Separation" ("Jodaeiye Nader az Simin") and was directed and written by Asghar Farhadi.

As it always happens in closed societies, talented artists overcome censorship through labyrinthine stories and indirect denunciation of the establishment. "A Separation" is a masterful example of the power of art to circumvent restrictions to freedom of expression.

If you like strong and realistic dramas with the most impressive direction and acting, and because of limited distribution won't have the opportunity to enjoy it on the silver screen, make sure to find a DVD copy and to watch it! Here is the trailer:

Thursday, July 28, 2011

The Origins of America's Fiscal Ruin

According to this opinion article in the Wall Street Journal, the politics of unfulfillable promises are at the root of the problem:
This is the road to fiscal perdition. The looming debt downgrade only confirms what everyone knows: Congress has made so many promises to so many Americans that there is no conceivable way those promises can be kept. Tax rates might have to rise to 60%, 70%, even 80% to raise the revenues to finance these promises, but that would be economically ruinous.
The same could be said about most modern western nations. History books may one day register the fact that this was the main legacy left for future generations by 20th century's fascist and socialist utopias.

Tuesday, July 26, 2011

The US Debt Ceiling Deadlock

We get to the point where three things have become clear:

(1) The US is being governed by two political factions that are unable, even under the most extreme circumstances, to put the nation's interests above their own partisan goals. Are you surprised? I'm not. This is the fulfillment of a trend that has started decades ago.

(2) The President is poorly equipped as a negotiator. His political strength, the reason why he got elected, is that he's a messianic politician. But messianism is normally the reason why political crises flourish. Are you surprised? Given his track history in politics, I'm not.

(3) The radicalization of the discourse among the supporters on the two sides of the aisle only proves that each faction is fully capable of energizing the cliques on their sides.

McArdle for example argued that:
Obama, meanwhile, seemed to be going out of his way to isolate Boehner from his more militant caucus members--praising Boehner's willingness to cut a deal, if only it weren't for the crazies on the far right. Perhaps this makes Obama look like a nice guy to people who don't understand the GOP intra-party dynamics, but of course, it poisons an already poisonous relationship between Boehner and the tea-partiers. If I were feeling uncharitable, I might argue that Obama seems to be willing to lower the chances of getting a deal, as long as he raises the chances that the other guys get the blame. And frankly, I'm not feeling very charitable right now.
Maybe they will yet reach an agreement in time. But all of this is evidence that we're living through an unordinary political moment that may have significant global economic consequences, which won't limit themselves to the relatively simple and eminently technical negotiations regarding debt ceilings.

Sunday, July 24, 2011

Fred Kofman on Activism and Leadership Responsibility

The Norway tragedy makes this statement by Fred Kofman on activism and leadership responsibility more relevant than ever (in Conscious Business: How to Build Value Through Values, via Juliano Torres):
The easiest way to bring a group together is to find a common enemy and blame it for the group's misery. In the long run, however, that strategy destroys the group's spirit.

Thursday, June 30, 2011

The Greek Problem is a Fiscal Problem, Period

There's a tendency among analysts in the US and the UK to treat the Greek debt crisis as a currency crisis, and to associate the Greek crisis with the Argentina currency board downfall. These arguments appear to be convincing at first sight (what explains their popularity) but are nonetheless deeply flawed.

The inevitable reality that applies to all countries is that you cannot solve a deep government budgetary problem with monetary measures. You have to solve the deep government budgetary problem, period.

Comparing Greece with Argentina is however ludicrous. Argentina had a weak national currency based on a deeply flawed monetary arrangement which lacked any real backing. Greece on the other hand is full member of a monetary zone based on a solid currency, the euro, backed by a large federation of important economies. The crisis has only served to confirm the euro's strengths.

To argue that the solution to Greece is to leave the eurozone is as laughable as to argue that Arkansas would be better off by leaving the dollar monetary zone once it faces budgetary or debt refinancing difficulties. Its fiscal problems wouldn't magically go away just by adopting a new (and probably weak) currency, and many new difficulties would be created.

Saturday, June 11, 2011

The Age of Financial Regression

The Economist's Buttonwood teaches basic lessons of economics to a Nobel Prize winner (here and here) while bringing forward a note by the Deutsche Bank that uses an interesting public choice argument to explain how we're seeing the rise of the age of financial regression:
With such a large overhang of Debt across so many developed countries it's likely that the financial markets regress back some way towards the controls that were commonplace for decades post WWII. The alternative if this doesn't happen is the risk of widescale Sovereign and Bank defaults across Developed markets over the next few years. So we'd argue that the next few years could be characterised by 'financial regression' as the financial system deals with the huge debt problem by pulling back from the free unfettered, free flowing cross border capital markets developed over the last 30 years.

Tuesday, June 7, 2011

The Impossible Monetary Economics of Star Trek (Part 2)

In reply to a previous post, a reader suggested that the problem of scarcity in the Star Trek universe has mostly been solved, so human economic needs such as to accumulate wealth wouldn't necessarily apply. I disagree. The problem is that scarcity can be a technically insurmountable or a subjective problem, and therefore cannot be eliminated by technical means, in reality, it cannot be eliminated by any means. You can replicate a da Vinci with some level of precision, but there will always be only one original da Vinci, therefore its scarcity cannot be waved away with technology.

Were you to move from Andoria to Earth, you would inevitably face some sort of scarcity. You would surely not be able to live wherever you wanted, even if you were extremely wealthy (think about a Bill Gates' hypothetical wish to live in the White House). Even if you could trade your place on Andoria for a place on Earth, some sort of moneyed transaction would for sure take place, unless the decision, instead of being taken by free people, would be made through central planning. I don't think, however, that Rodenberry envisioned the Federation as a totalitarian system.

Love cannot be replicated or easily replaced, so it will always be scarce (as we've seen happening in many Star Trek episodes). Death itself was not vanquished in the series, so there's scarcity of life and health.

And where there's scarcity there will be money, or some sort of quasi-money. How it's labeled doesn't really matter, as long as it serves the same functions of money, that is, a social networking tool that allocates scarce resources efficiently in a complex and decentralized economy, contemporaneously or across time. After all, money and its financial derivatives are the human invention that got the closest to working as a time machine, allowing wishes to be transferred from the present to the future (think about savings) or vice versa (think about credit).

Tuesday, May 31, 2011

In Defense of Meritocracy (Part 2)

My Second article in a series of two, where I explain how meritocracy is behind the success of the most developed Latin societies, is now available at (in Portuguese). I translate a passage:
Particularly worrying is the case of Brazil. After importing the worst from the antimeritocratic movement in Europe, without having ever implemented or understood the ideal of republican or confederate meritocracy, it now imports, apparently with pleasure, the worst from the antimeritocratic movement in America. It is essential to recognize that, in the case of Brazil, a country of predominantly Latin culture, if there is a chance to emulate successful countries that are culturally close, this emulation must pass through the strengthening of Brazilian meritocratic institutions. This is exactly the opposite of what governments have been doing in Brazil.

Monday, May 23, 2011

Federal Reserve, the Mondustrial Authority of the United States

Since the beginning of the financial crisis, it became pretty obvious to me that the Fed had decided to abandon its duties to sound monetary policy so it could use its money printing powers to directly solve the problems of a certain number of large and insolvent banks. John Taylor defines and analyzes these exotic and newly acquired functions of the Fed. He says:
Although some have pointed to an increase in the demand for money or reserves due to flight to quality during the financial crisis, this examination of the dynamics of the Federal Reserve’s balance sheet and other factors shows that it was due to the increase in loans and securities purchased by the Federal Reserve in order to assist specific firms and sectors. ...

But rather than go further in this direction it would be more appropriate for the Federal Reserve to begin to move back to monetary policy rather than what I have called here mondustrial policy. ...

[Nonetheless,] it may be difficult for the Federal Reserve to move in this direction or to exit from its current policy. It is already going down a path to purchase $700 billion more in securities backed by mortgages, credit card debt, student loans, and auto loans. It has stated that these actions are necessary because of the financial crisis. But are there no limits to increasing the size of such purchases in the future? And once the Federal Reserve owns these securities, they will be politically difficult to sell. ...

What justification is there for an independent government agency to engage in such industrial policy?
Taylor also offers evidence that the humongous issuing of bank reserves was the cause of the inordinate fall in monetary multipliers and velocities of circulation seen in the US after the crisis, and not the contrary. As he explains:
But the very severity of the panic in 2008 makes it difficult to convince people that there was not a panic-driven increase in the demand for the monetary base at that time, and I frequently hear economists and economic students sticking to [this] interpretation. ... [However,] the months since the start of QE2 are not even close to the panic observed in the fall of 2008. So it is ... difficult to argue that the Fed was responding to a panic-driven or otherwise autonomous increase in the demand for the monetary base. Much more likely is that — as in the fall of 2008 — banks simply absorbed the increased supply of the monetary base which the Fed used to finance QE2. In fact, if you look at the chart (which goes through April 2011), you can see the same inverse relationship between the money multiplier and the monetary base during QE2 as during 2008--2009

Sunday, May 22, 2011

Local Hatred as a Long-Term Phenomenon

Voigtländer and Voth apply spatial econometrics to the question of historical anti-Semitism in Europe and find evidence that hatred is a long-term local phenomenon, as they explain in this post:
Our findings thus reinforce recent research in economics that documents just how persistent culture is. Raquel Fernandez and Alessandra Fogli (2009) show that the fertility of the children of immigrants to America is still influenced by what is happening in their parents’ home countries; Nathan Nunn and Leonard Wantchekon (2009) argue that areas in Africa affected by the slave trade in the 19th century still show lower levels of trust; and Saumitra Jha (2008) found that Indian cities with a history of peaceful coexistence between Muslims and Hindus have had lower levels of inter-ethnic violence in the recent past. In this context, our findings are striking because they concern anti-Semitism, a trait without any direct economic benefit (and probably some harmful economic consequences over the long run), and because we document persistence over a much longer time horizon than other studies.

Thursday, May 19, 2011

The Euro: a Documentary

One of my students at Euromed Management, Guillaume Allier, produced and directed a nice documentary (in French) about the euro. It's titled "L'Euro: petite histoire... d'une grande monnaie?"

It's divided in five parts, which can be watched below. Enjoy!

Partie 1 : La longue marche vers l’euro

Partie 2 : Le fonctionnement de l’euro

Partie 3 : L’euro sur l’économie européenne

Partie 4 : Quelles perspectives pour l’euro ?

Partie 5 : Sauver l’euro ?

Wednesday, May 11, 2011

Facts Versus Complacency in Currency Markets: Reaching a Dangerous Crossroad

Dollar against trade-weighted currency basket - or how to debase a currency (click on the graph to magnify)

Axel Merk writes a very interesting article in the Financial Times about the state of currency markets. His analysis matches most of my own insights on what has been going on. First, he explains the dollar weakness despite the fact that there's a debt crisis going on in parts of Europe:
Imagine a country that spends and prints trillions to patch up any problem.

Now imagine another country where there is no central Treasury, meaning that bail-outs are less easy, and which has a central bank that’s mopped up liquidity over the past year, rather than engage in quantitative easing.

Why does it surprise anyone that the latter, the eurozone, has a stronger currency than the former, the US? Because of peripheral countries’ debt refinancing issues? And the potential for contagion? These are real and serious issues, but in our assessment, they should be primarily priced into the spreads of eurozone bonds, not the euro itself.
Then he explains, among other reasons, why so many believe that Ben Bernanke lacks intellectual credibility as monetary authority:
Think of it this way: in the US, Federal Reserve chairman Ben Bernanke has testified that going off the gold standard during the Great Depression helped the US recover faster than other countries. Fast forward to today: we believe Bernanke embraces a weaker currency as a monetary policy tool to help address the current state of the US economy. What many overlook is that someone must be on the other side of that trade: today it is the eurozone, which is experiencing a strong currency, despite the many challenges faced within the 17-nation bloc.
He concludes by stating that, due to the monetary and fiscal policy mistakes that have yet been made, it's going to be very hard for the US to avoid high inflation in the medium to long term:
In the US, the day investors come to the reality that inflation, rather than fiscal discipline, is the path of least political resistance may be the day the bond market won’t be as forgiving. Unlike the eurozone, where consumers stopped spending and started saving a decade ago, the highly indebted US consumer may not be able to stomach higher interest rates. The large US current account deficit also makes the dollar more vulnerable to a misbehaving bond market than the eurozone.

In the medium term, we are far more concerned about risks to the US dollar than those posed by the Greek drama to the euro.
No matter what happens, one thing is clear: a financial crossroad has been created where many investors will heavily gain while many others will heavily lose.

Friday, May 6, 2011

No Matter How You Cut It, QE Remains Wrong

The Federal Reserve is fully committed to a "fire at will" monetary experiment called Quantitative Easing (QE). It basically means that the central bank allows affiliated banks to exchange all kinds of "colorful" pieces of paper for another "colorful" piece of paper called dollar. Note that only banks are allowed to participate: you're not allowed to bring any of your own colorful pieces of paper (such as your house title or your high school diploma) to the Fed and exchange it for dollars.

The interesting thing about QE is that, no matter how you try to explain its effects on the economy, you get to the conclusion that it's wrong. If you're one of those economists that think that printing high-powered money as if there's no future has avoided an American output collapse without creating inflationary pressures, then you need to explain the fast rate of depreciation of the dollar and the increasing price of commodities while unemployment remains high, investment low and growth anemic. If you say that it's not the dollar that is weakening, that it is the price of commodities and other currencies that are frothing, then it doesn't really matter: the monetary policy is wrong anyway for creating such frothing (no need to get into the merit of what a bubble really is as long as it is QE that is causing it).

I'm for a much simpler explanation for the monetary policy problems that we're experiencing. It's a combination of two typical problems in central banking: (a) central banks historically overestimate negative output gaps (remember the 70s!) and (b) the inflationary effects of monetary expansions can take a very long time to happen, particularly after a long period of stability and falling but yet high central bank credibility. In other words, we should never underestimate the power of denial when it comes to potential output and NAIRU calculations. On the other hand, central bank credibility has only gone down since the beginning of this crisis.

On the subject, The Economist's Buttonwood asks the gazillion dollar question on frothing asset and commodity prices:
The equity market sell-off could be ascribed to the same weak growth numbers that sparked the commodity decline. Nevertheless, it does draw attention to the contradictions inherent in this long bull-run. Central banks are holding interest rates low (and using QE) because the economy is weak. But if the economy is weak, why have equity and commodity prices done so well?

Wednesday, May 4, 2011

In Defense of Meritocracy (Part 1)

My first article in a series of two where I defend meritocracy as an alternative or complement to democracy is now available at (in Portuguese). I translate a passage:
Meritocracy is present in several aspects of successful political and economic systems. The free market, for example, is one of the most important decentralized meritocratic institutions, a fact ignored even by economists. In it, those that offer goods or services are compensated according to the market value, and those who demand are able to acquire them if willing to pay the necessary compensation. The arrangement is meritocratic, because the decision-making power stems from the economic capacity of those who supply and demand.

Tuesday, May 3, 2011

Attention Fed: Headline Inflation Matters

This is the conclusion of Hellen Mees at
Even if the current spike in headline inflation proves to be transitory, past experience suggests that it may well lead to a permanent increase in real hourly wages. Unless monetary policymakers in the US favour feverish boom-and-bust cycles with prolonged periods of high unemployment, they had better start paying close attention to headline inflation, like their counterparts at the ECB do.

Sunday, May 1, 2011

7th Art: Inception (2010)

There's no question that "Inception" is an entertaining movie, but I see a troublesome trend here: just like in science, could it be the case that overspecialization is taking a toll on the movie industry? I couldn't shake off a sense of disconnectedness throughout the enterprise, and enterprise is what it felt like to me, not storytelling. Good enterprising naturally, technically well done, but it didn't sink in. A lot like science as it's done these days.

Examples of that: no matter how good is the virtual reality rendering in those recent movies, acting remains detached from the environment. It's the chroma key syndrome. Besides, the overuse of video game-like action sequences in contemporaneous movie making is becoming really boring, and this is from someone that is young enough to have played first-person shooter games somewhat avidly. All the tech wizardry in these movies feels a lot like those jazz fusion songs of the 80s that were probably fun to play but were not so fun to listen to.

In other words, stick to the originals: Tarkovsky's "Solaris" for narrative and emotional depth, and the Wachowskis' "The Matrix" for surreal daredevilry.

Saturday, April 30, 2011

7th Art: The Kennedys (2011) and Political Censorship in Hollywood

In this nice the Atlantic interview, Joel Surnow, producer and writer of series like "24" and "Miami Vice," talks about political censorship in left-dominated Hollywood and the cancelling of the series "The Kennedys" by the History Channel. Here's a segment:
TA: You're a super-successful writer/producer. How did these events impact you?

JS: It makes me very sad. Hollywood is extremely concerned about civil liberties. I can't tell you how many movies and projects have been produced about the McCarthy era. Where's the outrage for what happened here?

TA: Even though people in Hollywood are mostly liberal, I thought the real master of this town was the bottom line—TV ratings and box office ticket sales. With The Kennedys, you've got subject matter and stars who almost guarantee viewers. Doesn't that trump political or personal loyalties?

JS: One would think so. But do you think the news business only cares about the bottom line? If so, why isn't everyone in the news business emulating the Fox News Channel? Because most people who work in media have one worldview, and it doesn't care for a conservative outlook. Look, I'm an agnostic filmmaker. I don't put politics in my entertainment. Never have. I've been a journeyman doing this for 25 years. 24 was never considered a problematic show—until there was a New Yorker article by Jane Mayer that reported that I was a conservative.
The irony is that here in France we will enjoy this nicely done series on one of the major over-the-air broadcast channels: France 3. Another case of heavy-handed politics stomping basic freedoms in America?

Monday, April 25, 2011

The Unbearable Lightness of the Dollar

(Click on the graph to magnify)

The graphs shows the dollar value of one euro since June 9 2010. I cherry-picked the initial date as the most recent bottom of the euro. The depreciation trend since then is quite impressive.

It poses some interesting macroeconomic questions. If it represents a movement towards the reduction of the American trade deficit, then we should see a rebalancing of the capital account too. It could happen through an even greater decrease in investment (probably not an interesting outcome) or an increase in saving. Where will the increased saving be coming from? If it isn't the government, then households will have to do it, otherwise investment will fall even further compared to what it is today.

Alternatively, if not matched by higher saving, this trend will have to stop at some point, or it will need to be matched by higher prices in dollar, in other words, inflation. Just extrapolating the trend (silly, I know, but this is just a baseline exercise) indicates a matching yearly inflation rate of around 23%.

It took decades for macroeconomists to see so much action in their field.

Wednesday, April 20, 2011

The Map of Social Liberalism in Europe

Marek Hlavac has produced some very interesting maps on social liberalism (some Americans may want to call it social libertarianism) in Europe (HT Selva Brasilis). The one below for example represents attitudes towards sex and family (green means more liberal, red means more traditional):

Saturday, April 16, 2011

The Impossible Monetary Economics of Star Trek

I always thought about writing an article on one of the silliest scientific mistakes in Star Trek: the belief that plenty is enough to satisfy human needs and, as a corollary, to make money disappear. Funny how Gene Roddenberry had a shallow quasi-Marxist view of how the monetary side of an advanced economy should (not) work.

Well, no need to write this article anymore. Gabriella Cordone has done an amazing job researching the monetary inconsistencies in the series, and explaining some of its economic problems in this article, a translation of the original in Italian. Quoting her:
Let’s start with the Roddenberry rule. No money in the Federation! Easy to say... not so easy to do. ...

When TNG arrived on the silver screen, the Great Bird of the Galaxy Gene Roddenberry had been deceased for several years, but apparently his rule kept following his characters; at least that seemed the intention. In Star Trek: First Contact, here comes Captain Picard again, who talks with Lily and, answering her question about the Enterprise: “How much this ship cost?” he answers “The economics of the future is somewhat different. You see, money doesn’t exist in the 24th century.” “No money? You’re telling me you’re not paid?” Lily is surprised. “The acquisition of wealth is no longer the driving force in our lives. We work to better ourselves and the rest of Humanity.” Despite Lily’s surprise (that mirrors the whole audience’s surprise), the line does not leave doubts: money does not exist and it’s not for money that you work. Picard and company are explorers and the risks they run are no different from those ran in the past by people like Amundsen or Livingston. The prestige of making a discovery exists since ages ago, the honor of being the first to know something and bring back the knowledge to the rest of humanity is drive enough for men like the Federation officers.

This is the lesson Roddenberry wanted to give, saying that in the Federation there was no money, word by word. ... What’s not clear enough, though, is the question Picard doesn’t answer: how things are done when a workforce is involved? Lily had difficulty in putting together the metal needed for building the capsule of Cochrane’s rocket, while apparently the metal needed for the Enterprise costs nothing... Let’s assume that miners do not exist and any heavy work is not done by men. But there must be - along the process of building a starship - some boring job that men have to do and they might do only for remuneration. So what, if not money?

Thursday, April 14, 2011

Brasilia, the City on the Edge of Forever

I lived a good part of my life in Brasilia, Brazil's capital. The city was created from scratch by government decree. Historically speaking, cultural trends reach their apex in Brazil with a substantial lag relative to central nations, and the construction of Brasilia was no exception. Its planners, designers and architects came to symbolize the last breath of modernism in architecture, so the city was unlucky to have been heavily influenced by an architectural school whose failures were at that point becoming evident, and also by communist ideology and a religious-like faith in central planning.

There's no need to say that the results were negative. Brasilia is known for being unfriendly to its dwellers. Some have called it "the soulless city," others have called it the "fantasy island." It's also called the "monumental city," many times pejoratively ("people don't enjoy living and working inside monuments" is a commonly heard complaint in Brasilia). I personally find Brasilia's monuments to vary in appearance from plain ugly to nightmarish.

As time goes, the city looks to me more and more like the ideal location for a postwar fascistic dystopia. Economist Marcos Bittencourt for example recently wrote a very good article (in Portuguese) that explains the many failures of Brasilia as a livable city. It's a personal judgment naturally, but I've been to only one city that is uglier and less urban friendly than Brasilia, and this city is São Paulo - and I've been to many places. Economist Tyler Cowen has been recently to Brasilia and summarized well how it looks like to an outsider:
Could this be the strangest city I have visited? ... It resembles an old science fiction movie and yes I like old science fiction movies.
Cowen hits the bull's-eye: Brasilia looks and feels exactly like a sixties sci-fi z-movie, and ages as badly as sci-fi z-movies from the sixties do. In reality, I've always wondered why is it that very few people have realized that one of the most well-known backdrop drawings in the Star Trek explicitly paid homage to Brasilia. Compare the two pictures below:

The first picture shows the Tantalus Penal Colony in the Star Trek episode "Dagger of the Mind" while the second picture shows the Palacio da Alvorada, the residence of the President of Brazil. The similarities between the two buildings are clearly not coincidental, and, some may suggest, tongue in cheek, prophetical...

It's unfortunate that Brasilia had to be built at the wrong time and place (unremarkable nature, geographically isolated, extremely dry weather). Had it been built during any other couple of decades, and at a more livable location, it would probably be a glorious city. So be it: at least, Brasilia will become the ultimate monument to an age of questionable aesthetic preferences, misguided "humanism," and failed ideologies: the city on the edge of forever.
PS: Cowen made it clear that he thinks that "Brasilia works reasonably well." Relative to other cities in Brazil, this may indeed be true, but it clearly comes at a high cost to the average Brazilian taxpayer.