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  • Hard Money, Soft Money And Asset Bubbles [View article]
    Can't agree with the notion that it is impossible to tamp down wild speculation. Taking that argument to its logical conclusion, it is irrelevant whether we try and leverage market-based incentives or top-down government laws and regulations to address speculative risks resulting in damaging bubbles and distortions that must be worked out.

    My thesis is that government intervention, particularly thru money printing and artificially (not market determined) interest rates, is the key enabler for the most wild swings in damaging market and economy bubbles and mal investments. Not that bubbles and distortions won't happen otherwise; but, that those swings are vastly amplified by government (both in its genesis and then thru the interventions in response).

    Combine a sound money, gold based money system--as the foundation, with some smart government regulations that keep incentives of the market to work -- such as causing actors to actually eat losses, hence reducing gross speculation, and we would have a sounder system, with more robust growth.
    May 26 02:40 PM | Likes Like |Link to Comment
  • Hard Money, Soft Money And Asset Bubbles [View article]
    Secular stagnation theory, to me, is yet another set of proposed band aids, wrapped in a new (or remade) theory, to address the myriad, unrecognized market distortions that we have been enabling, via the government, thru continuous money and credit expansion from an unpegged fiat currency. Traditional borrow and spend and money printing is not working, so rationalizing theorists (Krugman, Summers, et al) have come up with "secular stagnation" to justify even more money printing, borrowing and spending.

    It is not a coincidence that serial financial crises and bubbles and explosion of complex financial products really took off after the dollar was fully unpegged from gold in 1971.

    If we are in secular stagnation, what is its cause and why is it lingering? Why do we "need" bubbles to overcome secular stagnation.

    What if our growth stagnation is actually the resultant impacts of untethered money printing and an economy increasingly addicted to ever expansion of credit. What if that economy is reaching diminishing returns due to that root cause?
    May 26 02:18 PM | Likes Like |Link to Comment
  • Hard Money, Soft Money And Asset Bubbles [View article]
    Shareholder: Nice bit of debate. I've conceded right upfront that there is a legitimate role for government (albeit limited), and that market failures can be both governemt and market generated. You have conceded that the effectiveness of governemt is an empirical, case by case question.

    It is hard to determine causal variables by trying to pinpoint one or two variables without viewing the problem from a supply chain perspective. There are many daisy chain enablers in the value chain that ended in the 2008 market failure. Like the original Ford cars, you have to view the problem of making, selling, marketing and distributing the products end to end and holistically.

    This is why I start with government. Governemt tinkering with interest rates--usually keeping them artificially low, and printing lots of fiat money, provides both the gas and the oxygen for enabling the firestorm . .

    Provide that as context, then allow the evolution of ever more complex financial supply chains to emerge, where actors of all stripes (Wall Street, Main street, and government actors) all find a way to profit from the milieu.

    I agree with your point about derivatives. That is an area of unimaginable damage we will face in the future. 2008 was merely the beta test.

    But, the opaque derivatives TNT is just a symptom of the convoluted, crony law making, enabled by government, over many decades.

    That is why I use the metaphor of Frankenstein's monster. To talk about adding this law or that rule on top of the monster is sort of like missing the point. How does one even fathom the impact of so called deregulation on parts of the law structure, when no one really comprehends how the monster was built or how it works. Sure, actors will shape the laws to achieve undesirable rent capture. But, it is up to our government to simplify and stop those crony carve outs.

    We need to simplify complexity and get the convoluted tapestry of law swept away. Go back to a sound money system where money is backed by something that cannot be manipulated (at least not as much as fiat money).

    I don't think we will ever go back to a time of true free markets in money. For example, FDIC is here to stay. That insurance, designed to prevent bank runs, has worked fairly well, while creating the moral hazard of banks speculating with our deposits. So, assuming banks are incentivized to gamble, go back to a much simpler Glass-Steigal, to prevent that gambling by those defined as protected banks. Then, for all the rest,require all to register as LLP's so that any losses by the company the partners eat. No longer socializing losses.

    This is what I mean when I say, it is government's fault. Dodd-frank is emblematic of what is wrong with the system. A convoluted set of laws layered on a foundation of already convoluted and incomprehensible laws. We don't even agree on the full set of causes of the latest crisis, yet we layer on more mess that just ensures that private actors will find a way to game the system--legally.

    I always find it interesting to hear people claim it is Wall Street at fault for the crisis due to things like uncontrolled derivatives manufacturing or low down payment loans. But, it is government that has enabled that convoluted system and, in most cases, it is public and private actors, working within the system for their own benefit, that are creating the market failures.

    We forget that the best way to incentivize good behaviors and outcomes is thru the fierce resultants of the market--where it is impossible to socialize losses.

    If we can get back to a simpler system, where some protections exist to prevent runs on banks, but where public and private actors then have to eat the consequences of their actions, we would be in a much better place.

    The starting point of that simpler system is one where easy money printing and artificial and grossly distortionary interest rates do not incentivize gross mal-investments and wild speculation--the likes of which we are seeing now yet again.

    And a simpler and comprehensible set of laws, where government isn't captured by special, narrow interests, that prevents (or reduces likelihood) of the evolution of Frankenstein like financial engineering and complex supply chains where actors get what they want while legitimately being able to claim no responsibility . .
    May 26 11:25 AM | 1 Like Like |Link to Comment
  • Hard Money, Soft Money And Asset Bubbles [View article]
    Sorry shareholders unite. You have created another straw man that I never implied, but you are making up for me.

    I do not disagree that there is a role of government in ensuring an optimal economy. Government is critical in establishing the rules of the game, via law, private property rights, security, etc.

    But, the agents of government are not incentivized to optimize efficiency or effectiveness, so we try to keep government limited to the minimum in which it can and should do things that free markets cannot do as well. One example is providing for a military.

    Not sure I would frame as "complementary." Government is an enabler of effective markets. It can also be a killer of free markets. Many of the items you list I would argue, are not done well by government and are actually hurting the very people the regulators were designed to assist. The volumes of data showing how governments help create and sustain monopolies is extensive. The amount of research to show how regulators end up helping a small set of protected at the expense of the many is legion.

    One thing that free markets can do well is sort out the prices of goods and services and productive efforts. Free markets are amazing at doing that. That is the essence of the argument above. When you get government agents in charge of shaping prices, the value of money included, you usually get catastrophe . . .
    May 25 09:26 AM | 2 Likes Like |Link to Comment
  • Hard Money, Soft Money And Asset Bubbles [View article]
    Not sure last point. My observation is that current government intervention is making most people poorer, blowing even bigger bubbles that will pop and make most of us even poorer, while a very small subset may win amongst the ruins. That is not theory. That is the reality we are living now . . .
    May 24 11:44 AM | 1 Like Like |Link to Comment
  • Hard Money, Soft Money And Asset Bubbles [View article]
    Not a fan of the creation of false staw men arguments that are easily knocked down.

    The essence of a good Austrian, or more free markets- based, argument, is not that markets are perfectly efficient or perfect. The essence is that it is better than the alternative. The alternative is that government guided markets inevitably always make the results of Frankenstein markets far, far worse for everyone.

    Put simply, it is not that free markets prevent market failures or that market failures cannot emerge in the private sector. It is simply that irrespective of where the market failure emerges, government intervention exacerbates the failure and then government intervention to mitigate the damage from bubbles and other market failures only exacerbates the failures further . . . And, I many cases, government intervention enables the failure at the start . . .

    The Sweden versus Norway argument is not persuasive. Leveraging the Mao argument, we don't have enough data points to make a conclusion. Particularly, we don't have enough time to assess. And it is simply hard to compare one Frankenstein monster performance with another Frankenstein monster performance -- at one Polaroid snapshot in time. Who knows how the Sweden and Norway experiments will turn out in long run. How do we even account for all the variables, in any case . . .

    Additionally, ironically, the argument that Norway went the better path by restricting loan to value, is very inline with the premise of avoiding government intervention in the first place. Monetary policy gone wild really kicked in, in 1971, when we went fully off the gold standard. That really enabled lots of cheap and free money for decades--across currencies. So, in a way, Norway's constraint on credit growth is a 2d best solution to a broader, government induced credit expansion occurring for decades across all fiat currencies.

    Again, a Frankenstein monster fix of an already adulterated economic structure. Hard to separate cause and effect in the current distorted world.
    In many ways, there is an implicit arrogance on the view that governments can effectively isolate the causal variables to manage economies in the first place. This is implicit the Norway versus Sweden "controlled experiment" . . .

    Bottom line, irrespective of the source of the emergence of bubbles and other market failures, government induced interest rate and price controls, abundant and ever growing fiat money, and other interventions, are wildly exacerbating and enabling bubbles far in excess of what a constrained monetary system would do--where value and prices are tied down to something that cannot be manipulated by governments (e.g., intrinsic value currency versus fiat currencies).
    May 24 10:18 AM | 4 Likes Like |Link to Comment
  • 'Keynesian' Myths And Misunderstandings [View article]
    I think if u follow Cullen's excellent work on endogenous money, even in a fractional loan system, there are really very few practical limits on money creation. When people and institutions need loans, the bank issues the loans and then gets the needed reserves to make sure reserve ratios are met. The reserve ratio is not a practical constraint.

    I agree with you that banks don't want to do bad or unprofitable loans, but in crazy markets and crazy career incentives structures, banks can expand money a lot more than is warranted by basic economics . . .
    Mar 11 11:04 AM | Likes Like |Link to Comment
  • 'Keynesian' Myths And Misunderstandings [View article]
    The problem with endogenous money theory as you depict it is that you assume (in effect) that money/debt growth has no limits. I agree in endogenous money as a better way of explaining a credit based economy. But, there are limits to debt expansion, even if hard to quantify. So, Mauldin may be technically wrong, but if you assume we have far surpassed the limits of credit expansion, where assets and debt are bloating out of all proportions from what anyone would say is productive capital uses, and not enabling long term growth, then the precepts that Mauldin relies on still hold. We are building asset bubbles while mis allocating credit on bad spending.

    Maybe pump priming can work in certain instances. But, right now, continuous, multi decade pump priming gone extreme, given our current context, is hurting our long term growth and our very livelihood--especially, when it comes crashing down . . .
    Mar 10 12:54 PM | Likes Like |Link to Comment
  • The Crisis Of Modern Economics [View article]
    Spot on Jake. 100 years from now, people will be wondering how we fell under the spell of unquestioned, economic ideology that says that we can invent growth via lots of cheap money, and un constrained and ever growing debt, that is badly spent . . .

    The unquestioned Krugman ideology (and unfortunate, political consensus) will end badly . . .

    I generally don't believe in conspiracy theories. I do believe we can be swayed by economic theories and assumptions (explicit and implicit) that continually guide us to poor political and economic policies.

    But, ironically, if you divorce yourself from abstract, incorrect economic theories and assumptions (ideology) and simply ask the common person their perceived value from how we spend money (stock buy backs and twitter PE in US; ghost cities in China), we all know in our guts that we are spending badly and that this is in fact the root cause of our bubbles and failed long-term growth. But our economics and the "aggregate demand" ideological consensus allow us to ignore our own common sense . . .

    The economic profession has a lot to account for in this story . . .
    Feb 9 10:33 AM | 3 Likes Like |Link to Comment
  • Shiller's CAPE: A Statistical Fluke [View article]
    Big picture, I think the article misses the main point of cape. Whether u assume constant profit growth or not is not the point. CAPE helps identify the lumpiness in profit growth and P growth. While growth rates over long historical periods can produce a best fit regression line (e.g., historically derived constant profit growth assumption), it is also true that P can overshoot normalized E at certain periods of time--meaning CAPE helps us determine when P is toppy compared to normalized E for a specific period of time. Sure, u could fit straight lines across long periods, but in any one distinct bucket of time, normalized E can be lower than the trend line.

    In fact, a constant E growth path is problematic over long periods. It is not altogether clear the changing trajectory of growth. I would argue that many systemic facts argue for much lower growth going forward for some time. So, if true, not only is P toppy compared to normalized E assuming the author's historically derived growth rate but is particularly toppy to the, as yet, unknown Future E growth rate . . .
    Jan 22 10:46 AM | Likes Like |Link to Comment
  • The Rally Will End When Share Buybacks Slow Down [View article]
    Well stated Vahan.
    Dec 11 03:54 PM | Likes Like |Link to Comment
  • A Look At Corporate Earnings Growth, Liquidity Traps And The Law Of Diminishing Returns [View article]
    JS: I've been struggling with this issue of narrow M2 growth being constrained to strong hands for stock and bond purchases for some time.

    If you ask Hussmann and others, QE is all psychological. I like Hussmann a lot, but I strongly believe it is more than psychological. My theory, mirroring Yours, is M2 increase is felt by a limited set of strong hands in the economy (while not felt by most--either in terms of quantity or velocity). This includes rehypothecation of collateral several times over to enable stock/bond purchasing.

    I think it would be a real service if you (and others) who understand these issues can lay it our very clearly and simply--literally laying out using your double entry accounting methodology, how it can work, and then showing how the extra money drives stock price increases.

    If this can be shown clearly, maybe we can clarify once and for all how QE, and extra fiat money, helps a few financially strong, while not circulating in the wider economy.

    Hope that makes sense . . .
    Nov 28 03:26 PM | Likes Like |Link to Comment
  • The Stock Market Bubble's Achilles' Heel [View article]
    It is easy to bash the bubble argument with, well it hasn't popped yet--so they must be wrong. But, the real evidence will be in the next major stock downturn, not in the timing--which no one can forecast. Assuming the downturn happens soon (e.g., next month, or next year or two?), the real question is not when, but how big. If only 20% correction and then the market happily grinds on higher for the next 10 years, then the poo-pooers of the bubble argument will be right. But, if the downturn is deep and devastating for much wealth and puts our economy In a deeper hole, then the bubble argument is CORRECT--irrespective of the timing. Time will tell.

    My money is we are witnessing the greatest experiment in monetary asset bubble blowing in history and that it will end very, very badly.

    But, given that many can read statistics in many ways (e.g., poo-pooing the massive buying of equities on margin as not determinative), I'm afraid that until the bubbles burst, we'll have these differences of opinion.

    Oct 27 04:27 PM | 2 Likes Like |Link to Comment
  • Move Along Folks, Bernanke Hasn't Been Blowing Bubbles [View article]
    The whole argument above depends on a circular tautology. Markets are forward looking depends on the assumption that markets are rational and reflect real value. But, what if markets are not rational and follow whatever the Zeit Geist of the day happens to be in the medium term (even if, maybe they are rational in the long term). All the money printing by the Fed is enabling this irrational market momentum -- for the time being . . .
    Oct 26 11:56 AM | Likes Like |Link to Comment
  • The Worrying U.S. Path Toward High Inflation [View article]
    By definition, fed pays at whatever price irrespective of price, so by definition there is over paying going on.
    Oct 26 09:53 AM | Likes Like |Link to Comment