04 July 2014

Channeling Yoda

Today Krugman, finally, says it (likely, written before the Brazil World Cup road collapse, for just a touch of international irony). The Jedi tinged title, of course.
Since 2008, however, our economy has been awash in unemployed workers (especially construction workers) and capital with no place to go (which is why government borrowing costs are at historic lows). Putting those idle resources to work building useful stuff should have been a no-brainer.

From the point of these endeavors, and being Vulcan Mind Melded, the phrase "capital with no place to go (which is why government borrowing costs are at historic lows)" is what matters. There is a reason that all that moolah, whether Chinese, German, or USofA, decided to assault the American housing market: all those multi-million dollar CEOs just couldn't (and can't) find productive use of fiduciary capital. They borrow, at near zero cost, to buy back stock, to buy competitors, and dole out much of it to themselves. In other words, they re-cycle all that moolah amongst themselves. Is it any wonder that we're not much better off, as a country? The United States of Mississippi.

All those quants, and especially the amateur wannabes, just can't get it through their thick heads that, if you want to understand the future, looking at the past is of limited value. For natural processes, where God makes the rules (and, thus, the rules don't change) the past very much informs the future. In human endeavors, especially finance and banking, where Men make the rules (and, thus the rules change, most often opaquely to those not in on the gag) looking to the past to inform the future leads to, well... The Great Recession. "House prices have been rising exponentially, so they must always rise exponentially! Give us more sub-prime ARMs!!" OK, not a direct quote that I can cite, but that does explicate the behavior.

In finance and banking, one might say, "follow the money". And that's a reasonable approximation. A better one is to follow the incentives, since the money, as water, finds its own level. Money flows according to the plane of incentive. Right now, the incentive is purely fiduciary. If that continues long enough, what Stein said of Oakland will be true of the entire United States of Mississippi, "There is no there, there."

In other words, the problem of capital allocation and increasing productivity aren't a post Great Recession manifestation. They *caused* The Great Recession. The holders of fiduciary capital, in the prelude to The Great Recession, wouldn't or couldn't find productive use (in the sense of physical production) for the money. So, it all flowed into fiduciary instruments. The lowest risk, historically, was USofA housing. Spanish beach condos as well, but that's another episode. A Ponzi scheme, self-generated, in the sense that there was no single Mr. Ponzi, short of the guy running Countrywide (Angie Mozilo). Or, as one participant observed, a game of musical chairs; hoping that one's company always finds a seat when the music stops.


Scott R. said...

Interesting post today by Brett Arends (MarketWatch / WSJ):


Kinda similar to your position.

Your thoughts?

Scott R.

Robert Young said...

Krugman's Friday column dealt with the interest rate and physical investment situation. I was considering a "I told you so, and Pauly likes me" piece, but skipped it.

2) is quite wrong. It was money from the "sidelines" which swamped housing and generated The Great Recession. Many have written about cash sitting in corps and households. That's money on the sidelines. Here's a picture: http://en.wikipedia.org/wiki/S%26P_500#mediaviewer/File:S%26P500_%281950-12%29.jpg

5) is mostly wrong. They're carrying debt to do financial manipulations, given the dive in interest rates (short and long, which he otherwise understands).

On the whole, I'd say he's of the Austrian persuasion. Can't recall reading any of him before, so that's a SWAG.

And, I came across a site via R-bloggers, which had a quote from Poincare. So, I looked up some others, not wanting to poach that one, and, it turns out, he's got lots of good ones. Added one today. There are no coincidences, only ignorance.