Kevin Lester

Kevin Lester
Contributor since: 2013
Company: Validus Risk Management Ltd.
"But that doesn't mean we should ignore what looks like some empirical truths"
I'm not sure I would agree that you can draw lessons from a specific crisis and call them empirical truths. In a dynamic system, surely 'truths' are much more subjective?
That being said, I do agree with with your thoughts on the politicization of economics - but is that not inevitable in a 'soft science'?
There are a number of misunderstandings (deliberate or not) about the Austrian position in this article, including the classic inflation straw man. I always chuckle when I see articles like this, which claim that the current lack of CPI means that current policy (QE etc.) must be working perfectly well, and the Austrian position has been thoroughly debunked. Hayek himself would have probably agreed that QE would lead to growth (likely without excessive consumer price inflation) in the current environment. It is the long run misallocations of capital (and the related consequences) that he would have worried about.
Excellent analysis. The degree of triumphalism expressed by the anti-RR camp worries me in itself. Once the debate becomes so emotive, you can be sure that efforts to actually 'find the truth' will take a back seat.
Hi Chris,
Regarding Weimar, weren't the government printing money to pay their bills? In particular, their international creditors? In my mind, this is not wildly different from buying bonds (in effect, IOUs). Agree its not exactly the same thing (Weimar liabilities were likely not tradeable, for example), but either way the monetary base goes up. This does not lead to automatic and immediate inflation, but surely it does create inflationary risks?
Re. government spending, I would argue that its not really falling:
Interesting article Michael - I share many of your fears. As Dylan Grice recently wrote: "Inflation is slow and is a long-term problem. You will not see it suddenly - such fears I've never understood." It's like a heavy smoker claiming that he is proof that cigarettes don't cause cancer because he is still OK - just because the impact is not immediate does not mean that the threat does not exist.
I also found the ebullient reaction to the alleged flaws in the Rogoff-Reinhart studies interesting, and a little worrying, as if the idea that excessive debt levels are in anyway dangerous can now be safely ignored...
Roger - you may be surprised to hear this, but I actually agree with a lot of what you say. I am also very skeptical about assurance from the Euro Group (this group is simply the euro zone's finance ministers). My point was simply that this reassurance will likely be at least partially persuasive to the man in the street in Europe, especially as many Europeans view Cyprus as an offshore financial center and tax haven, and put it in a different category to Greece or Spain.
I do not personally like the idea of taxing small depositors at all, especially when there is a deposit guarantee in place. I would also be furious if I were such a deposit holder. But someone has to pay right? I think having a 94% bailout, and coughing up 6% yourself is more reasonable than expecting someone else (German taxpayers, for instance) to pay 100% of the cost.
In any case, my main point is not whether this is right or wrong - frankly, I'm not going to able to influence it anyway. However, I think many people who view this as a sign that the EUR will weaken significantly, or even break up entirely, may be missing a key point: by forcing countries to pay their own way (at least partially), the integrity of the currency is protected. The alternative is use expansive monetary policy to avoid the problem (temporarily). That is the real risk to currency. However, in the short term, anything is possible!
No problem - the markets can be stressful. Good luck.
It is simply my view. I might be wrong (something I actually do point out in the article!), and I'm sorry if this offends you, but surely a difference in viewpoints is what makes a market...
By the way, Validus is an FSA regulated firm - I can assure you that the FSA have not yet banned free speech!
Thank you for the comment - and, no, I have not worked with any Nigerian royalty thus far. As far as your comment about 'theft', I suppose you have a point, if you consider any tax to be theft. Is raising income tax also theft in your view?
Let me put it to you this way. You put your money in a bank which pays you 7% interest on a USD or EUR deposit. The bank then collapses, as it has invested your deposit in risky securities (which should hardly surprise you - how else could they run a profitable bank whilst paying deposit rates in excess of 5-7%).
Who should pay for this? You get 93.25% of your deposit back, having been bailed out by the government. Has the government 'stolen' 6.75% from you? If you say yes, which I presume you do, then I would suggest your views are much more akin to those of the former Soviet Union than mine.
In my opinion, your main error (at least in terms of the Japan scenario), is that you assume current policy will lead to debt sustainability. As you write in the original article:
"The end of deflation makes Japanese public finances more sustainable, as part of it is 'inflated away' and, if successful, leads to reduced real interest rates and rising incomes."
Unfortunately, the math does not work. Japan currently spends about 25% of its tax revenue on interest payments alone. That is with interest rates at pretty much zero. Even a little inflation wipes them out. Once Japan achieves its 2% inflation target, its all over from a debt sustainability perspective. And that's when you see hyperinflation.
Actually, my argument depends on hundreds of years of recorded history (i.e. facts). Your argument depends on an unproven and highly debated (although undoubtedly clever) theory based upon the experiences of a single country over a relatively short time horizon.
Also, when thinking about inflation, why do you ignore asset price inflation? I suggest that the S&P is not at a record high based on fundamentals alone.
Just because we haven't seen broader inflationary pressure yet does not mean it is not building. No one can know what the future holds in this regard, but history would indicate that once governments start directing monetary policy, inflation is only a matter of time.
I was at a conference yesterday with a formal central banker and IMF official who said that the global financial crisis marks the end of independent central banking (and the end of inflation targeting) - this rings true based on recent developments (e.g. BOE. BoJ etc.), and surely only heightens the risks of further currency debasement.
You say this is not rocket science. I agree. Rocket science is based on hard science. The frameworks you refer to are not. However, the history of fiat currencies gives a pretty clear idea of where this is likely to end.
"But the policies are still continuing, interest rates are still at record lows and the Fed is buying $85B a month in public debt and mortgage backed securities"
Are you assuming that interest rates are accurately pricing risk? Despite the fact that the Fed has monetized about half of the US government debt since the financial crisis began? I would seriously question this premise.
Also, you dismiss the idea that inflation in commodities is a sign of currency debasement. I would suggest you look at the strong correlation between the price of commodities such as oil or gold and the size of the Fed's balance sheet.