Chester Sing

On Jim Rogers and False Statements

Ladies and Gentlemen,

First of all, I would like to thank those who took time to comment – particularly to those who did so with courtesy which is to be expected of civilized people.

Before I proceed, I would like to make it known that I adhere to a great many of libertarianism’s principles – that governments generally should keep their noses off economic/business directing for instance. But I am also a utilitarian. If making an exception to my libertarian belief could result to less pain overall, then I am willing to make compromises.

Now, let’s get to the point.

“The Commission estimates that so-called financial instruments in the ‘trading book’ total £12.3 trillion (13.7 trillion euros), equivalent to about 33pc of EU bank balance sheets.”
*Source (ftalphaville.ft.com/bl.../)

How big is £12.3 trillion or $17.3 trillion? According to this (flagcounter.com/factbo...) source, the latest GDP of the US is $13.8 trillion. And this is just the exposure of banks in the EU.

A portion of this amount will probably get purchased and honored if a fire sale is held. How much? I do not know. One thing I know, however, is that a fraction of this amount is big enough to wipe out many.

Therefore, the argument that the unemployment increase will be marginal if financial institutions are allowed to fail, to me, is not believable.

A number of you seem to be absolutely sure that the outcome in the event that financial institutions are allowed to fail would be better. But I have yet to see any strong proof.

Is Japan’s decade-long stagnation really attributable to the rescue made to its financial institutions after the crash of the late 80s? Are you absolutely sure that is not because of other factors?

Economics is not a hard science. Controlled experiments are unheard of in macroeconomics. Please try to keep this in mind.

Now, a commentator suggested that the Great Depression could have been shortened if banks were allowed to fail. I have news – they were allowed to fail.

“In the first six months of 1929, 346 US banks collapsed, and that was just the beginning of a series of bank runs.”
*Source – (www.independent.co.uk/...)

It is a misconception that President Hoover acted exactly the way President Obama is acting now. On the contrary, President Hoover, probably did the opposite.

Is there proof that the Great Depression could have been shortened if a Jim Rogers-like approach was taken? I am not aware of any so pray enlighten me.

I also have yet to hear a case wherein an economy recovered as a direct cause of allowing failed financial institutions. Once again, I would like to be enlightened.

A rational human being submits to logic. Trust that I will submit if sufficient evidence is presented.

I have the utmost respect for Jim Rogers which I thought should have been apparent by reading the first paragraph of my article. Please do not get me wrong. I am merely criticizing his position on the crisis.

Regards,

On Jim Rogers and False Statements

Roscat,

I'd like to invite you to check out these links -

www.ft.com/cms/s/0/774....

ftalphaville.ft.com/bl.../

I suggested that there is no strong proof that Japan's decade long stagnation was caused by its government's fiscal and monetary actions. By saying that, I acknowledged that Japan's economy did underperform.

I found two well-respected economist who took my argument to another level. According to them, Japan's measures in the early 90s, on the contrary, was a relative success. If it had any faults, it is in that they did not do more.

Regards,

On Jim Rogers and False Statements

Everyone,

I am reposting my reply to Roscat. I forgot to enclose his remarks in quotation marks.
----------------------
Roscat,

I will try address each of the remarks you made on your second comment.

“All those gains are only on paper! They rely on assets that should have never been valued at that price. They are off-balance sheet. They cannot be compared with assets on the balance sheet.”

I apologize but I do not understand what you are trying to get at.

Let me explain myself, once again. If you are pertaining to the £12.3 trillion mentioned in the following link (ftalphaville.ft.com/bl...), this amount is estimated the nominal value of “financial instruments” in the trading books of EU banks. If I am not mistaken, this is the estimated value of outstanding derivative contracts.

The point that I was trying to make is that if banks start to fail, god knows what will happen to these instruments that are interlinked in a complicated web. Personally, I am not confident that there will be takers for a large portion of these instruments if governments start reigning in on their “rescue” attempt. If buyers are cautious now (I think the yields in US Treasuries speak for itself), can you imagine how they would behave then?

You brought up accounting so I will touch on the matter a little. I’m sure you know how written contracts are recorded in the balance sheets. These liabilities are usually recorded based on estimated loss – not on maximum loss. And we all already know that, generally, companies lean towards optimism when making their estimates.

Now, let’s hypothetically assume that Citibank’s derivative liabilities are recorded at $100 billion, can you even start to imagine the real size of that liability?

It’s not only banks that will take it on the chin if these instruments start to dissolve. Remember, many businesses rely on these contracts as insurance for movement in the foreign exchange market, etc.

“Here is some proof. Housing in the CA, FL, NV, AZ markets was allowed to fail. Guess what happened? Assets were purchased at fire-sale prices, with cash money on hand. Extrapolate that.”

I apologize, once again, but it is not clear to me what this proves. Would you care to elaborate?

“Pretty sure, just like many economists before you and I.”

I am trying to get someone who is in a better position to comment on this particular issue. I will try to get back to you on this matter.

“Actually Economics is a hard science and extrapolation can be achieved using the right examples. If you need help with that, please let me know. See example above, and many other economies before this time.”

To be perfectly honest with you, I am surprised at this comment. I’ll let Dr. Nassim Nicholas Taleb speak on my behalf on this matter.

“Yes, but your timeframe if insufficient. If they were allowed to continue failing, the market was going to adjust itself. They were eventually bailed-out.”

Earlier, I wrote a reply to Austrian. Would you care to reply to that?

“Here's enlightenment for you. The aforementioned foreclosures, and the Sweden example. It is very similar.”

I will try to read on Sweden’s case. I will also try to get a third party to comment on it.

“Here's how you envision this: take the profits now, but take the losses in 10-30 years. How is that for pain? Because in the end, you will still follow that curve giving you 3-5% growth. Yes, it's demographics plus advances in productivity. Baring that, you cannot get to the numbers showed recently.”

Please see my reply to Austrian.

Regards,

On Jim Rogers and False Statements

Roscat,

I will try address each of the remarks you made on your second comment.

All those gains are only on paper! They rely on assets that should have never been valued at that price. They are off-balance sheet. They cannot be compared with assets on the balance sheet.

I apologize but I do not understand what you are trying to get at.

Let me explain myself, once again. If you are pertaining to the £12.3 trillion mentioned in the following link (ftalphaville.ft.com/bl...), this amount is estimated the nominal value of “financial instruments” in the trading books of EU banks. If I am not mistaken, this is the estimated value of outstanding derivative contracts.

The point that I was trying to make is that if banks start to fail, god knows what will happen to these instruments that are interlinked in a complicated web. Personally, I am not confident that there will be takers for a large portion of these instruments if governments start reigning in on their “rescue” attempt. If buyers are cautious now (I think the yields in US Treasuries speak for itself), can you imagine how they would behave then?

You brought up accounting so I will touch on the matter a little. I’m sure you know how written contracts are recorded in the balance sheets. These liabilities are usually recorded based on estimated loss – not on maximum loss. And we all already know that, generally, companies lean towards optimism when making their estimates.

Now, let’s hypothetically assume that Citibank’s derivative liabilities are recorded at $100 billion, can you even start to imagine the real size of that liability?

It’s not only banks that will take it on the chin if these instruments start to dissolve. Remember, many businesses rely on these contracts as insurance for movement in the foreign exchange market, etc.

Here is some proof. Housing in the CA, FL, NV, AZ markets was allowed to fail. Guess what happened? Assets were purchased at fire-sale prices, with cash money on hand. Extrapolate that.

I apologize, once again, but it is not clear to me what this proves. Would you care to elaborate?

Pretty sure, just like many economists before you and I.

I am trying to get someone who is in a better position to comment on this particular issue. I will try to get back to you on this matter.

Actually Economics is a hard science and extrapolation can be achieved using the right examples. If you need help with that, please let me know. See example above, and many other economies before this time.

To be perfectly honest with you, I am surprised at this comment. I’ll let Dr. Nassim Nicholas Taleb speak on my behalf on this matter.

Yes, but your timeframe if insufficient. If they were allowed to continue failing, the market was going to adjust itself. They were eventually bailed-out.

Earlier, I wrote a reply to Austrian. Would you care to reply to that?

Here's enlightenment for you. The aforementioned foreclosures, and the Sweden example. It is very similar.

I will try to read on Sweden’s case. I will also try to get a third party to comment on it.

Here's how you envision this: take the profits now, but take the losses in 10-30 years. How is that for pain? Because in the end, you will still follow that curve giving you 3-5% growth. Yes, it's demographics plus advances in productivity. Baring that, you cannot get to the numbers showed recently.

Please see my reply to Austrian.

Regards,

On Jim Rogers and False Statements

Austrian,

Thank you for your comment.

In this link - www.huppi.com/kangaroo... - you will find a fairly detailed account of the Great Depression.

Please allow me to correct myself for the statement, “On the contrary, President Hoover, probably did the opposite.” You and Roscat are right - it is an exaggeration to say that he did. But it is undeniable that the two differed greatly in the way each addressed or is addressing their respective crisis at the onset.

If the account in the link is accurate, then it is to be believed the President Hoover only started aggressively acting on the crisis then in 1931. It was early in that year that the Reconstruction Finance Corporation was formed. President Hoover, at first, tried to withhold from drastic interventions for a significant number of months. Unemployment breached 15% already by the time he started with heavier measures.

By no means does the rise in unemployment to over 15% by the end of 1930 disprove your opinion that the Great Depression could have been less painful and protracted if the US government kept its hands off. To see the effectiveness of the economy’s ability to recover independent of aid, it should have been left longer.

Now, if your view – that the economy should just have been left to itself - is correct, then GNP and unemployment improvements should have been faster than its improvements as it really transpired. Do you agree?

Below is the progression of the US economy after measures have been taken according the same link:

1932 – GNP falls to 13.4% and unemployment rises to 23.6%.
1933 – GNP falls 2.1% and unemployment rises to 24.9%.
1934 – GNP gains 7.7% and unemployment falls to 21.7%.
1935 – GNP gains 8.1% and unemployment falls to 20.1%.
1936 – GNP gains 14.1% and unemployment falls to 16.9%.

I will stop here because I speculate that as years move toward the beginning of the Second World War, the figures start to get murkier. The nearer to the war the years get, the harder it is to segregate the effect of economic measures from the effect of the demand increase caused by an upcoming war.

My question is if the economy was left to itself, would the progress in GNP and unemployment have been faster? Is your answer is yes, would you care to elaborate your reasons?

Regards,

Housing Crisis Is Key to Economic Recovery

Hi Asbytec,

If you make a trip to the Manila, please e-mail me. I think we'll have lots to talk about.

On Feb 22 09:38 AM Asbytec wrote:

> I meant paradigm shift, in reference to another blog in this site,
> not paradise. Paradise is where I retired, too.