This profile of Freeman Dyson is must reading for all those who admire creative — and courageous — thinking. It’s even more important reading for those who tend to toward group-think.
Beyond Dyson’s scientific genius, John Tierney admires his “humanism and optimism.”
“Beginning in 2003, the Fed filled the liquidity punch bowl. Low rates and the weakening dollar created a monumental carry trade (borrow dollars, buy anything). This transmitted the Fed’s monetary excess abroad and into commodities. As the punch bowl overflowed, even global bonds bubbled (prices rose, yields fell), contributing to the global housing boom.”
— David Malpass, March 27, 2009
Good analysis from, of all people, George Soros. The credit default swap (CDS)/no uptick/mark-to-market/regulatory capital interplay has been a killer.
the CDS market offers a convenient way of shorting bonds, but the risk/reward asymmetry works in the opposite way. Going short on bonds by buying a CDS contract carries limited risk but almost unlimited profit potential. By contrast, selling CDS offers limited profits but practically unlimited risks. This asymmetry encourages speculating on the short side, which in turn exerts a downward pressure on the underlying bonds. The negative effect is reinforced by the fact that CDS are tradable and therefore tend to be priced as warrants, which can be sold at anytime, not as options, which would require an actual default to be cashed in. People buy them not because they expect an eventual default, but because they expect the CDS to appreciate in response to adverse developments. . . .
The third step is to recognize reflexivity, which means that the mispricing of financial instruments can affect the fundamentals that market prices are supposed to reflect. Nowhere is this phenomenon more pronounced than in the case of financial institutions, whose ability to do business is so dependent on trust. A decline in their share and bond prices can increase their financing costs. That means that bear raids on financial institutions can be self-validating.
China proposes a new world reserve currency to replace the dollar and, it hopes, launch a new era of global monetary stability. In a paper released Monday in Beijing, central bank governor Zhou Xiaochuan wrote:
Theoretically, an international reserve currency should first be anchored to a stable benchmark and issued according to a clear set of rules, therefore to ensure orderly supply; second, its supply should be flexible enough to allow timely adjustment according to the changing demand; third, such adjustments should be disconnected from economic conditions and sovereign interests of any single country. The acceptance of credit-based national currencies as major international reserve currencies, as is the case in the current system, is a rare special case in history. The crisis again calls for creative reform of the existing international monetary system towards an international reserve currency with a stable value, rule-based issuance and manageable supply, so as to achieve the objective of safeguarding global economic and financial stability.
It’s an interesting concept, and as I contemplate the proposal I’ll air my praise and criticisms. I’m initially skeptical of a single IMF-managed currency and of Zhou’s suggestion that this will allow nations more flexibility in their own monetary policies. Hyperflexible monetary policies, especially in the U.S., were the source of the problem. But it’s too bad we ever arrived at this point. If the U.S. had better managed the stability of the existing world reserve currency — the dollar — there would be no need for a new “super-sovereign” currency. We had a good thing going, and we blew it.
I’ve written lots about the dollar and its nexus with China (here, here, here, and here).
Thanks to Steve Forbes for reprinting an excerpt of a 2008 article of mine in the Far Eastern Economic Review.
Dollar Defense
The value of money is not like any other product, whose value is set in the marketplace. The value of money in a floating-rate environment where fine-tuning central banks print money cannot be ”set by the market.” This is an illusion. Money is not a product or commodity. Money is an abstract concept — a measuring rod, a standard of value, a unit of account that must remain constant over time. Only then can workers and businesses, entrepreneurs and investors engage in meaningful trade, risk new money in forward-looking ventures, and lend and borrow money on reasonable terms. Movement in the value of money is not a helpful ”adjustment” but harmful noise that impairs the transmission of all-important information. How can one determine the price of a house or a complex mortgage security, for example, when the value of money itself is under suspicion?
To achieve a dynamic and growing economy, you need an utterly undynamic, stone-cold unit of money. It is the information-rich creative spikes of entrepreneurship and profit — or economic entropy — that comprise all economic growth. A high-entropy message requires a low-entropy carrier.
The great events of the globe increasingly are governed by the movements of world currencies. We need a return to currency stability. But that requires a return to dollar stability. And the dollar is the responsibility of the Federal Reserve.
— Bret Swanson, in the Far Eastern Economic Review
Energy conservation? Forget it. The goal, says Bob Metcalfe, should be to produce “squanderably abundant, cheap and clean energy.”
That’s exactly right. No one can understand the energy debate — or any technology or policy debate, really — without understanding this fundamental Metcalfe insight, which is also the big theme of the best book on energy, Peter Huber’s and Mark Mills’ The Bottomless Well.
Squanderable abundance. Supply creates its own demand. That is the motto of this blog.
Charles Murray asks whether America’s unique character, and its freedoms, can be preserved. He’s worried but, looking toward scientific rumblings that bear witness on crucial social and economic questions, tilts toward optimism.
The possibility that irreversible damage will be done to the American project over the next few years is real. And so it is our job to make the case for that reawakening. It won’t happen by appealing to people on the basis of lower marginal tax rates or keeping a health care system that lets them choose their own doctor. The drift toward the European model can be slowed by piecemeal victories on specific items of legislation, but only slowed. It is going to be stopped only when we are all talking again about why America is exceptional, and why it is so important that America remain exceptional. That requires once again seeing the American project for what it is: a different way for people to live together, unique among the nations of the earth, and immeasurably precious.
Michael Lewis diagnosing political insanity as only he can:
1) To the political process all big numbers look alike; above a certain number the money becomes purely symbolic. The general public has no ability to feel the relative weight of 173 billion and 165 million. You can generate as much political action and public anger over millions as you can over billions. Maybe more: the larger the number the more abstract it becomes and, therefore, the easier to ignore. (The trillions we owe foreigners, for example.) (more…)
As the Internet’s power grows — dominating our public discourse and driving deeper into every industry and commercial realm — it becomes a bigger target. As the key platform of our knowledge economy, it invites mischief, or worse.
Most digital citizens know the hassles and even dangers of viruses, phishing, and all manner of mal-ware. But cybersecurity is a much broader and deeper topic, and will grow ever more so. The Center for Strategic and International Studies published a good report on December 8 detailing the threats and offering recommendations to “the 44th Presidency.” CSIS suggested a number of specific actions, among them:
(1) a comprehensive national strategy; (2) that the White House lead the effort; (3) that we “regulate cyberspace”; (4) that we authenticate identities; (5) modernizing old laws not suited to the digital networked world; (6) building secure government systems; and (7) not starting over, given what they saw as the previous administration’s productive start.
Yesterday the Senate Commerce Committee moved the ball forward with a hearing on the topic, including the head of the CSIS study James Lewis, nuclear engineer Joseph Weiss, cyber-guru Ed Amoroso of AT&T, and Eugene Spafford of Purdue University’s Center for Education and Research in Information Assurance and Security — better known by its brilliant acronym, CERIAS. (more…)
As the wireless world continues to churn out terrific new hardware and software innovations and network speeds, Engadget talks about the industry in depth with AT&T’s wireless chief Ralph de la Vega.
Must reading from The Wall Street Journal on the never-ending AIG bailout and the political shenanigans and multi-billion-dollar cover-ups that go far beyond $165 million in contractual bonuses.
Taxpayers have already put up $173 billion, or more than a thousand times the amount of those bonuses, to fund the government’s AIG “rescue.” This federal takeover, never approved by AIG shareholders, uses the firm as a conduit to bail out other institutions.
Matthew Slaughter of Dartmouth’s Tuck business school with another good paper showing why global engagement is hugely important to American productivity and wealth.
Yet another remarkable dispatch from James Fallows on China’s attempts to navigate the global financial crisis. His conclusions:
(1) the Chinese people are less likely to revolt en masse in bad times than is often suspected. Even now, things are a lot better than ever before. Fallows quotes one Shanxi province party official:
Do you understand? If it had not been for Deng Xiaoping, I would be behind an ox in a field right now. . . . Do you understand? My mother has bound feet!
(2) China has at least a very good shot at achieving a truly innovative economy. Listing several new high-tech firms producing the best voice-recognition software he’s ever seen and some of the world’s most advanced batteries for everything from iPhones to new electric cars, Fallows writes:
In Beijing, in Shanghai, in Shenzhen, and elsewhere, I’ve recently visited companies that are trying to use the disruption of this moment to enter wholly new markets and do what so few Chinese firms have yet done: make high-tech, high-value products that bring high rewards.
These largely mirror my own views. In fact I couldn’t help but notice Fallows’ concluding sentences:
Many Chinese companies will fail or make mistakes under today’s intense pressure. But many are using the moment to prepare for their next advance. The question for Americans to think about is how we are using the same moment.
Here were the final sentences of my economic history of China’s 30-year rise, released during last summer’s Beijing Olympics:
What seems undeniable is that the next hundred years will be a Chinese century. The biggest question for politicians and business leaders in the U.S. is whether, through a recommitment to entrepreneurial capitalism, it will be another American century as well.
Stock markets are up markedly after word spread the last few days that we would finally — finally — get some relief from mark-to-market, or “fair value,” accounting. The Financial Accounting Standards Board today, in a hearing before the House Finance Committee, promised new guidance on FAS 157 in the next few weeks. Many financial stocks are up 50-100% or more since Warren Buffett and many lawmakers commented on the need for reform at the start of the week.
The real credit, however, goes to Brian Wesbury, who’s been pounding away and comments on video here. To Steve Forbes, with his bold Wall Street Journal op-ed that opened the floodgates on the matter last week. And to David Malpass, who identified the mark-to-market problem over a year ago in early 2008.
The S&P 500 is up more than 10% since mark-to-market reform looked possible.
Calm and reasoned discussion in debates over broadband and Internet policy are rare. But Saul Hansell, in a series of posts at the NYTimes Bits blog, does an admirable job surveying international broadband comparisons. Here are parts I and II, with part III on the way. [Update: Here’s part III. And here’s a good previous post on “broadband stimulus.”]
So far Hansell has asked two basic questions: Why is theirs faster? And why is theirs cheaper? “Theirs” being non-American broadband.
His answers: “Their” broadband is not too much faster than American broadband, at least not anymore. And their broadband is cheaper for a complicated set of reasons, but mostly because of government price controls that could hurt future investment and innovation in those nations that practice it.
Ask America. We already tried it. But more on that later.
Hansell makes several nuanced points: (1) broadband speeds depend heavily on population density. The performance and cost of communications technologies are distance-sensitive. It’s much cheaper to deliver fast speeds in Asia’s big cities and Europe’s crowded plains than across America’s expanse. (2) Hansell also points to studies showing some speed-inflation in Europe and Asia. In other words, advertised speeds are often overstated. But most importantly, (3) Hansell echoes my basic point over the last couple years:
. . . Internet speeds in the United States are getting faster. Verizon is wiring half its territory with its FiOS service, which strings fiber optic cable to people’s homes. FiOS now offers 50 Mbps service and has the capacity to offer much faster speeds. As of the end of 2008, 4.1 million homes in the United States had fiber service, which puts the United States right behind Japan, which has brought fiber directly to 8.2 million homes, according to the Fiber to the Home Council. Much of what is called fiber broadband in Korea, Sweden and until recently Japan, only brings the fiber to the basement of apartment buildings or street-corner switch boxes.
AT&T is building out that sort of network for its U-Verse service, running fiber to small switching stations in neighborhoods, so that it can offer much faster DSL with data speed of up to 25 Mbps and and Internet video as well. And cable systems, which cover more than 90 percent of the country, are starting to deploy the next generation of Internet technology called Docsis 3.0. It can offer speeds of 50 Mbps. . . .
The motto of this blog is “Supply creates its own demand.” But in the current crisis, this central insight of economics is being turned on its head. After all this time, the argument over which comes first, supply or demand, is still in many ways the chief economic debate.
Here’s Russell Roberts with a good, brief explanation of why GDP accounting does not good economics make. GDP, or Consumption + gross Investment + Government spending + eXports – iMports, is just an “ex post” way of describing what happened, or what the component parts of past output were. The perennial line that “70% of GDP is consumption” is one of the most misleading slogans in all of economics. GDP is, after all, gross domestic product. Consumption, which is fairly easy to measure, is just a way at deriving production, or output, or supply.
“Cap and trade, in other words, is a scheme to redistribute income and wealth — but in a very curious way. It takes from the working class and gives to the affluent; takes from Miami, Ohio, and gives to Miami, Florida; and takes from an industrial America that is already struggling and gives to rich Silicon Valley and Wall Street “green tech” investors who know how to leverage the political class.”
— The Wall Street Journal, March 9, 2009
As nearly every indicator of economic growth plummets, the Net maintains its rise. Given my research on the growth of the Internet, I’m always interested in the latest data. Here are year-end estimates, courtesy of Andrew Odlyzko at the University of Minnesota.
Monthly U.S. traffic by year-end 2008 was about 1.5 exabytes (10^18) per month, for an annual growth rate of around 50-60%. (An exabyte is a million terabytes, or a billion gigabytes.) My research suggests the Net should continue to grow at an annual compound rate of around 56% through 2015.
Bravo, Steve Forbes!
What is most astounding about President Barack Obama’s radical economic recovery program isn’t its breadth, but its continuation of the most destructive policies of the Bush administration. These Bush policies were in themselves repudiations of Franklin Delano Roosevelt, Mr. Obama’s hero.
The most disastrous Bush policy that Mr. Obama is perpetuating is mark-to-market or “fair value” accounting for banks, insurance companies and other financial institutions. The idea seems harmless: Financial institutions should adjust their balance sheets and their capital accounts when the market value of the financial assets they hold goes up or down. […]
Mark-to-market accounting is the principle reason why our financial system is in a meltdown. The destructiveness of mark-to-market — which was in force before the Great Depression — is why FDR suspended it in 1938. It was unnecessarily destroying banks.
Speaking at the Eco:nomics conference, Al Gore once again sounded his “planetary emergency” alarm even as he refused to discuss the matter with Danish environmentalist Bjorn Lomborg.
he was challenged by Mr. Lomborg, the Danish skeptical environmentalist who thinks the world would be better off spending more money on health and education issues than curbing carbon emissions.
“I don’t mean to corner you, or maybe I do mean to corner you, but would you be willing to have a debate with me on that point?” asked the polo-shirt wearing Dane.
“I want to be polite to you,” Mr. Gore responded. But, no. “The scientific community has gone through this chapter and verse. We have long since passed the time when we should pretend this is a ‘on the one hand, on the other hand’ issue,” he said. “It’s not a matter of theory or conjecture, for goodness sake,” he added.
Reporting from the conference, Kim Strassel interviews big-time CEOs who regret getting on the cap-and-tax train.
In other news, the Washington, D.C. global warming — er, climate change — rally was cancelled due to snow.
Maximum Entropy