Sunday, October 30, 2011
Saturday, October 29, 2011
imbalance anyone ??
pk:
" a tsunami of money flowing from the European core to peripheral economies"
steve's excellent understatement
"Conscious outsourcing and supply-chain management decisions by US multinationals
play an important role.."
play an important role.."
"national saving" is an expression we must ban from rational discussion
"saving" is the scots word for masturbation
roach clip: "America’s massive trade deficit is a direct consequence of an unprecedented shortfall of domestic saving"
"The United States has a classic multilateral trade imbalance. While it runs a large trade deficit with China, it also runs deficits with 87 other countries. A multilateral deficit cannot be fixed by putting pressure on one of its bilateral components. But try telling that to America’s growing chorus of China bashers.
America’s massive trade deficit is a direct consequence of an unprecedented shortfall of domestic saving. The broadest and most meaningful measure of a country’s saving capacity is what economists call the “net national saving rate” – the combined saving of individuals, businesses, and the government. It is measured in “net” terms to strip out the depreciation associated with aging or obsolescent capacity. It provides a measure of the saving that is available to fund expansion of a country’s capital stock, and thus to sustain its economic growth.
In the US, there simply is no net saving any more. Since the fourth quarter of 2008, America’s net national saving rate has been negative – in sharp contrast to the 6.4%-of-GDP averaged over the last three decades of the twentieth century. Never before in modern history has the world’s leading economic power experienced a saving shortfall of such epic proportions.
Yet the US found a way to finesse this problem. Exploiting what Valéry Giscard d’Estaing called the “exorbitant privilege” of the world’s reserve currency, the US borrowed surplus savings from abroad on very attractive terms, running massive balance-of-payments, or current-account, deficits to attract foreign capital.
The US current account, which was last in balance in 1991, hit a record deficit of $801 billion (6% of GDP) in 2006. This gap has narrowed in the past couple of years, but much of the improvement probably reflects little more than the temporary impact of an unusually tough business cycle.
This is where America’s multilateral trade deficit enters the equation, for it has long accounted for the bulk of America’s balance-of-payments gap. Since 2000, it has made up fully 96% of the cumulative current-account shortfall.
And that is what ultimately makes the China-centric blame game so absurd. Without addressing the root of the problem – America’s chronic saving shortfall – it is ludicrous to believe that there can be a bilateral solution for a multilateral problem.
Yet that is exactly what US officials, together with many prominent economists, believe America needs. Since the trade deficit is widely thought to put pressure on US jobs and real wages, the US-China trade imbalance has come under special scrutiny in these days of great angst. Yes, China does account for the largest component of America’s multilateral trade deficit – making up 42% of the total trade gap in 2010. Conscious outsourcing and supply-chain management decisions by US multinationals play an important role in exaggerating China’s share. But that does little to let China off the hook in the eyes of Washington.
Long-standing charges of currency manipulation provide the proverbial smoking gun that US politicians – of both parties – believe justifies the imposition of steep tariffs on China’s exports to the US (which totaled $365 billion in 2010). That was precisely the argument behind the US Senate’s recent overwhelming approval of a “currency bill” that took dead aim on China.
While it may be convenient to hold others accountable for America’s problems, this is bad economics driving bad politics. In an era of open-ended US government budget deficits and chronic shortfalls in personal saving, America is doomed to suffer subpar savings and massive multilateral trade deficits for as far as the eye can see.
In that vein, closing down trade with China, while failing to address the saving shortfall, is like putting pressure on one end of a water balloon. The Chinese component of America’s multilateral trade deficit will simply migrate somewhere else – most likely to a higher-cost producer. That would be the functional equivalent of a tax hike on beleaguered American families – hardly the solution that US politicians are promising.
This is not to ignore important US-China trade issues that need to be addressed. Market access should be high on the agenda – especially for a sluggish US economy that needs new sources of growth, like exports. With China now America’s third largest – and by far its most rapidly growing – export market, the US should push hard to expand business opportunities in China, especially as the Chinese economy tilts increasingly toward internal demand. China should be viewed as an opportunity, not a threat.
At the same time, the US government should come clean with the American public about charges of Chinese currency manipulation and unfair trade practices. The renminbi has, in fact, appreciated by 30% relative to the US dollar since mid-2005. In broad multilateral terms – a far more meaningful gauge because it measures a currency’s value against a broad cross-section of a country’s trading partners – the “real effective” renminbi currently stands about 8% above its most recent 12-year average (1998-2010).
Yes, China continues to accumulate a vast fund of foreign-exchange reserves. But this is as much the result of speculators’ “hot money” plays as it is a conscious and perfectly reasonable effort by Chinese policymakers to remain focused on financial stability and manage currency appreciation in a gradual, disciplined, and orderly fashion.
China-bashing in the US speaks to a corrosive shift in the American psyche. It deflects attention away from those truly responsible for perpetuating the greatest saving shortfall in history. Washington has been seduced by the political economy of false prosperity. That seduction has encouraged America to squander its savings and live beyond its means for nearly two decades. Now the game is up.
The ultimate test of any nation’s character is to look inside itself at moments of great challenge. Swept up in the blame game, the US is doing the opposite. And that could well be the greatest tragedy of all. After all, America’s 88 deficits did not arise of thin air."
America’s massive trade deficit is a direct consequence of an unprecedented shortfall of domestic saving. The broadest and most meaningful measure of a country’s saving capacity is what economists call the “net national saving rate” – the combined saving of individuals, businesses, and the government. It is measured in “net” terms to strip out the depreciation associated with aging or obsolescent capacity. It provides a measure of the saving that is available to fund expansion of a country’s capital stock, and thus to sustain its economic growth.
In the US, there simply is no net saving any more. Since the fourth quarter of 2008, America’s net national saving rate has been negative – in sharp contrast to the 6.4%-of-GDP averaged over the last three decades of the twentieth century. Never before in modern history has the world’s leading economic power experienced a saving shortfall of such epic proportions.
Yet the US found a way to finesse this problem. Exploiting what Valéry Giscard d’Estaing called the “exorbitant privilege” of the world’s reserve currency, the US borrowed surplus savings from abroad on very attractive terms, running massive balance-of-payments, or current-account, deficits to attract foreign capital.
The US current account, which was last in balance in 1991, hit a record deficit of $801 billion (6% of GDP) in 2006. This gap has narrowed in the past couple of years, but much of the improvement probably reflects little more than the temporary impact of an unusually tough business cycle.
This is where America’s multilateral trade deficit enters the equation, for it has long accounted for the bulk of America’s balance-of-payments gap. Since 2000, it has made up fully 96% of the cumulative current-account shortfall.
And that is what ultimately makes the China-centric blame game so absurd. Without addressing the root of the problem – America’s chronic saving shortfall – it is ludicrous to believe that there can be a bilateral solution for a multilateral problem.
Yet that is exactly what US officials, together with many prominent economists, believe America needs. Since the trade deficit is widely thought to put pressure on US jobs and real wages, the US-China trade imbalance has come under special scrutiny in these days of great angst. Yes, China does account for the largest component of America’s multilateral trade deficit – making up 42% of the total trade gap in 2010. Conscious outsourcing and supply-chain management decisions by US multinationals play an important role in exaggerating China’s share. But that does little to let China off the hook in the eyes of Washington.
Long-standing charges of currency manipulation provide the proverbial smoking gun that US politicians – of both parties – believe justifies the imposition of steep tariffs on China’s exports to the US (which totaled $365 billion in 2010). That was precisely the argument behind the US Senate’s recent overwhelming approval of a “currency bill” that took dead aim on China.
While it may be convenient to hold others accountable for America’s problems, this is bad economics driving bad politics. In an era of open-ended US government budget deficits and chronic shortfalls in personal saving, America is doomed to suffer subpar savings and massive multilateral trade deficits for as far as the eye can see.
In that vein, closing down trade with China, while failing to address the saving shortfall, is like putting pressure on one end of a water balloon. The Chinese component of America’s multilateral trade deficit will simply migrate somewhere else – most likely to a higher-cost producer. That would be the functional equivalent of a tax hike on beleaguered American families – hardly the solution that US politicians are promising.
This is not to ignore important US-China trade issues that need to be addressed. Market access should be high on the agenda – especially for a sluggish US economy that needs new sources of growth, like exports. With China now America’s third largest – and by far its most rapidly growing – export market, the US should push hard to expand business opportunities in China, especially as the Chinese economy tilts increasingly toward internal demand. China should be viewed as an opportunity, not a threat.
At the same time, the US government should come clean with the American public about charges of Chinese currency manipulation and unfair trade practices. The renminbi has, in fact, appreciated by 30% relative to the US dollar since mid-2005. In broad multilateral terms – a far more meaningful gauge because it measures a currency’s value against a broad cross-section of a country’s trading partners – the “real effective” renminbi currently stands about 8% above its most recent 12-year average (1998-2010).
Yes, China continues to accumulate a vast fund of foreign-exchange reserves. But this is as much the result of speculators’ “hot money” plays as it is a conscious and perfectly reasonable effort by Chinese policymakers to remain focused on financial stability and manage currency appreciation in a gradual, disciplined, and orderly fashion.
China-bashing in the US speaks to a corrosive shift in the American psyche. It deflects attention away from those truly responsible for perpetuating the greatest saving shortfall in history. Washington has been seduced by the political economy of false prosperity. That seduction has encouraged America to squander its savings and live beyond its means for nearly two decades. Now the game is up.
The ultimate test of any nation’s character is to look inside itself at moments of great challenge. Swept up in the blame game, the US is doing the opposite. And that could well be the greatest tragedy of all. After all, America’s 88 deficits did not arise of thin air."
Stephen S. Roach
Friday, October 28, 2011
exploitation trumps inequality
growing inequality is two equally capable and hard working specialists
that once earned similar incomes
now earning seriously disperate incomes
on the other hand
increased exploitation
might come with a raise in pay !!!!
that once earned similar incomes
now earning seriously disperate incomes
on the other hand
increased exploitation
might come with a raise in pay !!!!
Who are the 1% and What Do They Do for a Living?
There’s good reason to focus on the top 1%: they’re distorting our economy.Look, a crazy anti-capitalist anarchist carrying a bizarre sign incompatible with the basic tenents of liberals:
Or not.A lot of emphasis is on the “99%” versus the “1%” in these protests. But who are the 1% and what do they do for a living? Are they all Wilt Chamberlains and Oprahs and other people taking part in the dynamism of the new economy? Nope. It’s same as it ever was — high-level management and the financial sector.
Suzy Khimm goes through the numbers here. I’m curious about occupations. I’ll hand the mic off to “Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U.S. Tax Return Data“ by Bakija, Cole, and Heim. This is the latest and greatest report on occupations and inequality. Here’s a chart of the occupations of the top 1%:
It boils down to managers, executives, and people who work in finance. From the paper: “[o]ur findings suggest that the incomes of executives, managers, supervisors, and financial professionals can account for 60 percent of the increase in the share of national income going to the top percentile of the income distribution between 1979 and 2005.”The top 1% of managers and executives often means C-level employees, especially CEOs. And their earnings versus the average worker have skyrocketed in the past 30 years, so this shouldn’t be surprising:
How has this evolved over time? Can we get a cross-section of that protest sign above?
Same candidates. There’s a reason the protests ended up on Wall Street: The top 1% and top 0.1% comprises all the senior bosses and the financial sector.
One of the best things about Occupy Wall Street is that there is no chatter about Obama or Perry or whatever is the electoral political issue of the day. There are a lot of people rethinking things, discussing, learning, and conceptualizing the kinds of world they want to create. Since so much about inequality is a function of the legal structure known as a “corporation,” I’d encourage you to check out Alex Gourevitch on how the corporate is structured in our laws.
The paper notes that stock market returns drive much of the manager’s income. This is related to a process of financialization, something JW Mason has done a fantastic job outlining here. The “dominant ethos among managers today is that a business exists only to enrich its shareholders, including, of course, senior managers themselves,” and this is done by paying out more in dividends that is earned in profits. Think of it as our-real-economy-as-ATM-machine, cashing out wealth during the good times and then leaving workers and the rest of the real economy to deal with the aftermath.
Both articles mention chapter 6 of Doug Henwood’s Wall Street; anyone interested in how things have changed and where they need to go would be wise to check it out. It’s even available for free pdf book download here.
There’s good reason to focus on the top 1% instead of the top 10 or 50%. There is evidence that financial pay at this elite level is correlated with deregulation and the other legal changes that brought on the crisis. High-ranking senior corporate executives’ pay has dwarfed workers’ salaries, but is only a reward for engaging in shady financial engineering practices. These problems require a legal solution and thus they require a democratic challenge and a rethinking of how we want to structure our economy. Here’s to the 99% and Occupy Wall Street helping get us there.
Mike Konczal is a Fellow at the Roosevelt Institute.
old jargon has its uses
capitalist super exploitation
one might suggest this is the category of capitalist exploitation
that even the bourgeois might fight
i suspect in common use this is what pases as all of exploitation
the fair and square systemic variety
the variety price movement never grinds away
normal surplus
that is a product of systemic rationing
of jobs and credit
chronic cycling of macro demand as a fluxtuating constraint on sales
incomplete and corporately cisterned markets
etc etc
u know the shit that is like boring wall paper to bourgeois trained eyes
one might suggest this is the category of capitalist exploitation
that even the bourgeois might fight
i suspect in common use this is what pases as all of exploitation
the fair and square systemic variety
the variety price movement never grinds away
normal surplus
that is a product of systemic rationing
of jobs and credit
chronic cycling of macro demand as a fluxtuating constraint on sales
incomplete and corporately cisterned markets
etc etc
u know the shit that is like boring wall paper to bourgeois trained eyes
Tuesday, October 25, 2011
Transfer only macro the pro counter
The transfer system properly algorithmed could restore full employment
Rapidly and In perpetuity
Yes the fed accommodating helps
if the deficit surge is large enough
And yes accumulated debt needs management
Thru price level speed changes
And yes Lot bubbles will not be prevented
And trade gaps not closed
and commodity inflation
And asset markets will still bubble too
Rapidly and In perpetuity
Yes the fed accommodating helps
if the deficit surge is large enough
And yes accumulated debt needs management
Thru price level speed changes
And yes Lot bubbles will not be prevented
And trade gaps not closed
and commodity inflation
And asset markets will still bubble too
The bankers triggered the contraction but ... All these fucking yellow flag laps
Really it's smart to load all on wall street's head
But the stag is not their gig alone
It's a full elite class without a country romp
The crisis in the repo etc markets
at best
takes you as far as say spring 09
After that ....
The entire multinational corporate free range posse wanted this two track two speed
OECD
Yellow flag period of indefinite duration
But the stag is not their gig alone
It's a full elite class without a country romp
The crisis in the repo etc markets
at best
takes you as far as say spring 09
After that ....
The entire multinational corporate free range posse wanted this two track two speed
OECD
Yellow flag period of indefinite duration
Cyclops macro will never die
Relying solely on the fed to steer our production systemn
Is an obvious corporate shield move
The commanding heights remain in the hands of an appointed unimpeachable elite
Not only the credit but the depository and payment systems remain
In "private corporate " hands
As a capitalist active or passive what's not to like
Is an obvious corporate shield move
The commanding heights remain in the hands of an appointed unimpeachable elite
Not only the credit but the depository and payment systems remain
In "private corporate " hands
As a capitalist active or passive what's not to like
Monday, October 24, 2011
Chapter 12ers vs Part 1 ers
The pk distinction
The 1ers of course talk liquidity trap
and with this fly past the monetary macronauts
Sticky sticky and all that
But the 12ers actually call de facto for the socialization of investment
Surely that is a serious divide
The 1ers of course talk liquidity trap
and with this fly past the monetary macronauts
Sticky sticky and all that
But the 12ers actually call de facto for the socialization of investment
Surely that is a serious divide
Owen Paine is an active investor in radical novel notions
He may have holdings as well as interests
in notions Models and concepts
discussed by himself
in this blog
At all times
these views remain the property of Owen Paine's mind
And are his own views
They may in no way reflect
the views of Marx Engels and Lenin
Or
Mao tse tung for that matter
in notions Models and concepts
discussed by himself
in this blog
At all times
these views remain the property of Owen Paine's mind
And are his own views
They may in no way reflect
the views of Marx Engels and Lenin
Or
Mao tse tung for that matter
Sunday, October 23, 2011
Ricardo reis fiscal deval
Simple you wipe out payroll taxes both sides
And replace them with a vat that is universal
Ie covering all products
Tradeables and non tradable alike
If you share a currency with trading partners that are running big surpluses with you
like the piigs do with Germany
Then this is a way to improve relative labor cost
--end payroll tax--
without lowering nominal wages
Increase exports or reduce imports
and at the same time thru the increased vat
Maintain balanced budgeting
And unincreased total effect demand
And thus further contain import expenditures
by containing expenditures over all
Using
Substitution and income effects to correct trade imbalances
Of course a deval is a sharper option
When it's available
Because the substitution effect is greater
The domestic products are also reduced in relative price
A deval
unlike the payroll tax cut / vat increase
is simply the combo of
a tax on imports
And
a subsidy on exports
Not a general reduction in domestic production costs
And increase in the domestic prices of products
In fact if some part of income from reduced payroll tax
Is not spent the combined impact will be reduced expenditures
And replace them with a vat that is universal
Ie covering all products
Tradeables and non tradable alike
If you share a currency with trading partners that are running big surpluses with you
like the piigs do with Germany
Then this is a way to improve relative labor cost
--end payroll tax--
without lowering nominal wages
Increase exports or reduce imports
and at the same time thru the increased vat
Maintain balanced budgeting
And unincreased total effect demand
And thus further contain import expenditures
by containing expenditures over all
Using
Substitution and income effects to correct trade imbalances
Of course a deval is a sharper option
When it's available
Because the substitution effect is greater
The domestic products are also reduced in relative price
A deval
unlike the payroll tax cut / vat increase
is simply the combo of
a tax on imports
And
a subsidy on exports
Not a general reduction in domestic production costs
And increase in the domestic prices of products
In fact if some part of income from reduced payroll tax
Is not spent the combined impact will be reduced expenditures
Keynes GT chapter 12
The General Theory of Employment, Interest and Money by John Maynard Keynes: I. WE have seen in the previous chapter that the scale of investment depends on the relation between the rate of interest and the schedule of the marginal efficiency of capital corresponding to different scales of current investment, whilst the marginal efficiency of capital depends on the relation between the supply price of a capital-asset and its prospective yield. In this chapter we shall consider in more detail some of the factors which determine the prospective yield of an asset.
The considerations upon which expectations of prospective yields are based are partly existing facts which we can assume to be known more or less for certain, and partly future events which can only be forecasted with more or less confidence. Amongst the first may be mentioned the existing stock of various types of capital-assets and of capital-assets in general and the strength of the existing consumers’ demand for goods which require for their efficient production a relatively larger assistance from capital. Amongst the latter are future changes in the type and quantity of the stock of capital-assets and in the tastes of the consumer, the strength of effective demand from time to time during the life of the investment under consideration, and the changes in the wage-unit in terms of money which may occur during its life. We may sum up the state of psychological expectation which covers the latter as being the state of long-term expectation; — as distinguished from the short-term expectation upon the basis of which a producer estimates what he will get for a product when it is finished if he decides to begin producing it to-day with the existing plant, which we examined in Chapter 5.
II.It would be foolish, in forming our expectations, to attach great weight to matters which are very uncertain.[1] It is reasonable, therefore, to be guided to a considerable degree by the facts about which we feel somewhat confident, even though they may be less decisively relevant to the issue than other facts about which our knowledge is vague and scanty. For this reason the facts of the existing situation enter, in a sense disproportionately, into the formation of our long-term expectations; our usual practice being to take the existing situation and to project it into the future, modified only to the extent that we have more or less definite reasons for expecting a change.
The state of long-term expectation, upon which our decisions are based, does not solely depend, therefore, on the most probable forecast we can make. It also depends on the confidence with which we make this forecast — on how highly we rate the likelihood of our best forecast turning out quite wrong. If we expect large changes but are very uncertain as to what precise form these changes will take, then our confidence will be weak.
The state of confidence, as they term it, is a matter to which practical men always pay the closest and most anxious attention. But economists have not analysed it carefully and have been content, as a rule, to discuss it in general terms. In particular it has not been made clear that its relevance to economic problems comes in through its important influence on the schedule of the marginal efficiency of capital. There are not two separate factors affecting the rate of investment, namely, the schedule of the marginal efficiency of capital and the state of confidence. The state of confidence is relevant because it is one of the major factors determining the former, which is the same thing as the investment demand-schedule.
There is, however, not much to be said about the state of confidence a priori. Our conclusions must mainly depend upon the actual observation of markets and business psychology. This is the reason why the ensuing digression is on a different level of abstraction from most of this book.
For convenience of exposition we shall assume in the following discussion of the state of confidence that there are no changes in the rate of interest; and we shall write, throughout the following sections, as if changes in the values of investments were solely due to changes in the expectation of their prospective yields and not at all to changes in the rate of interest at which these prospective yields are capitalised. The effect of changes in the rate of interest is, however, easily superimposed on the effect of changes in the state of confidence.
III. The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made. Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible. If we speak frankly, we have to admit that our basis of knowledge for estimating the yield ten years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes to nothing; or even five years hence. In fact, those who seriously attempt to make any such estimate are often so much in the minority that their behaviour does not govern the market.
In former times, when enterprises were mainly owned by those who undertook them or by their friends and associates, investment depended on a sufficient supply of individuals of sanguine temperament and constructive impulses who embarked on business as a way of life, not really relying on a precise calculation of prospective profit. The affair was partly a lottery, though with the ultimate result largely governed by whether the abilities and character of the managers were above or below the average. Some would fail and some would succeed. But even after the event no one would know whether the average results in terms of the sums invested had exceeded, equalled or fallen short of the prevailing rate of interest; though, if we exclude the exploitation of natural resources and monopolies, it is probable that the actual average results of investments, even during periods of progress and prosperity, have disappointed the hopes which prompted them. Business men play a mixed game of skill and chance, the average results of which to the players are not known by those who take a hand. If human nature felt no temptation to take a chance, no satisfaction (profit apart) in constructing a factory, a railway, a mine or a farm, there might not be much investment merely as a result of cold calculation.
Decisions to invest in private business of the old-fashioned type were, however, decisions largely irrevocable, not only for the community as a whole, but also for the individual. With the separation between ownership and management which prevails to-day and with the development of organised investment markets, a new factor of great importance has entered in, which sometimes facilitates investment but sometimes adds greatly to the instability of the system. In the absence of security markets, there is no object in frequently attempting to revalue an investment to which we are committed. But the Stock Exchange revalues many investments every day and the revaluations give a frequent opportunity to the individual (though not to the community as a whole) to revise his commitments. It is as though a farmer, having tapped his barometer after breakfast, could decide to remove his capital from the farming business between 10 and 11 in the morning and reconsider whether he should return to it later in the week. But the daily revaluations of the Stock Exchange, though they are primarily made to facilitate transfers of old investments between one individual and another, inevitably exert a decisive influence on the rate of current investment. For there is no sense in building up a new enterprise at a cost greater than that at which a similar existing enterprise can be purchased; whilst there is an inducement to spend on a new project what may seem an extravagant sum, if it can be floated off on the Stock Exchange at an immediate profit.[2] Thus certain classes of investment are governed by the average expectation of those who deal on the Stock Exchange as revealed in the price of shares, rather than by the genuine expectations of the professional entrepreneur.[3] How then are these highly significant daily, even hourly, revaluations of existing investments carried out in practice?
IV. In practice we have tacitly agreed, as a rule, to fall back on what is, in truth, a convention. The essence of this convention — though it does not, of course, work out quite so simply — lies in assuming that the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change. This does not mean that we really believe that the existing state of affairs will continue indefinitely. We know from extensive experience that this is most unlikely. The actual results of an investment over a long term of years very seldom agree with the initial expectation. Nor can we rationalise our behaviour by arguing that to a man in a state of ignorance errors in either direction are equally probable, so that there remains a mean actuarial expectation based on equi-probabilities. For it can easily be shown that the assumption of arithmetically equal probabilities based on a state of ignorance leads to absurdities. We are assuming, in effect, that the existing market valuation, however arrived at, is uniquely correct in relation to our existing knowledge of the facts which will influence the yield of the investment, and that it will only change in proportion to changes in this knowledge; though, philosophically speaking it cannot be uniquely correct, since our existing knowledge does not provide a sufficient basis for a calculated mathematical expectation. In point of fact, all sorts of considerations enter into the market valuation which are in no way relevant to the prospective yield.
Nevertheless the above conventional method of calculation will be compatible with a considerable measure of continuity and stability in our affairs, so long as we can rely on the maintenance of the convention.
For if there exist organised investment markets and if we can rely on the maintenance of the convention, an investor can legitimately encourage himself with the idea that the only risk he runs is that of a genuine change in the news over the near future, as to the likelihood of which he can attempt to form his own judgment, and which is unlikely to be very large. For, assuming that the convention holds good, it is only these changes which can affect the value of his investment, and he need not lose his sleep merely because he has not any notion what his investment will be worth ten years hence. Thus investment becomes reasonably “safe” for the individual investor over short periods, and hence over a succession of short periods however many, if he can fairly rely on there being no breakdown in the convention and on his therefore having an opportunity to revise his judgment and change his investment, before there has been time for much to happen. Investments which are “fixed” for the community are thus made “liquid” for the individual.
It has been, I am sure, on the basis of some such procedure as this that our leading investment markets have been developed. But it is not surprising that a convention, in an absolute view of things so arbitrary, should have its weak points. It is its precariousness which creates no small part of our contemporary problem of securing sufficient investment.
V. Some of the factors which accentuate this precariousness may be briefly mentioned.
(1) As a result of the gradual increase in the proportion of the equity in the community’s aggregate capital investment which is owned by persons who do not manage and have no special knowledge of the circumstances, either actual or prospective, of the business in question, the element of real knowledge in the valuation of investments by those who own them or contemplate purchasing them has seriously declined.
(2) Day-to-day fluctuations in the profits of existing investments, which are obviously of an ephemeral and non-significant character, tend to have an altogether excessive, and even an absurd, influence on the market. It is said, for example, that the shares of American companies which manufacture ice tend to sell at a higher price in summer when their profits are seasonally high than in winter when no one wants ice. The recurrence of a bank-holiday may raise the market valuation of the British railway system by several million pounds.
(3) A conventional valuation which is established as the outcome of the mass psychology of a large number of ignorant individuals is liable to change violently as the result of a sudden fluctuation of opinion due to factors which do not really make much difference to the prospective yield; since there will be no strong roots of conviction to hold it steady. In abnormal times in particular, when the hypothesis of an indefinite continuance of the existing state of affairs is less plausible than usual even though there are no express grounds to anticipate a definite change, the market will be subject to waves of optimistic and pessimistic sentiment, which are unreasoning and yet in a sense legitimate where no solid basis exists for a reasonable calculation.
(4) But there is one feature in particular which deserves our attention. It might have been supposed that competition between expert professionals, possessing judgment and knowledge beyond that of the average private investor, would correct the vagaries of the ignorant individual left to himself. It happens, however, that the energies and skill of the professional investor and speculator are mainly occupied otherwise. For most of these persons are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public. They are concerned, not with what an investment is really worth to a man who buys it “for keeps”, but with what the market will value it at, under the influence of mass psychology, three months or a year hence. Moreover, this behaviour is not the outcome of a wrong-headed propensity. It is an inevitable result of an investment market organised along the lines described. For it is not sensible to pay 25 for an investment of which you believe the prospective yield to justify a value of 30, if you also believe that the market will value it at 20 three months hence.
Thus the professional investor is forced to concern himself with the anticipation of impending changes, in the news or in the atmosphere, of the kind by which experience shows that the mass psychology of the market is most influenced. This is the inevitable result of investment markets organised with a view to so-called “liquidity”. Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of “liquid” securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment to-day is “to beat the gun”, as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow.
This battle of wits to anticipate the basis of conventional valuation a few months hence, rather than the prospective yield of an investment over a long term of years, does not even require gulls amongst the public to feed the maws of the professional; — it can be played by professionals amongst themselves. Nor is it necessary that anyone should keep his simple faith in the conventional basis of valuation having any genuine long-term validity. For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs — a pastime in which he is victor who says Snap neither too soon nor too late, who passes the Old Maid to his neighbour before the game is over, who secures a chair for himself when the music stops. These games can be played with zest and enjoyment, though all the players know that it is the Old Maid which is circulating, or that when the music stops some of the players will find themselves unseated.
Or, to change the metaphor slightly, professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.
If the reader interjects that there must surely be large profits to be gained from the other players in the long run by a skilled individual who, unperturbed by the prevailing pastime, continues to purchase investments on the best genuine long-term expectations he can frame, he must be answered, first of all, that there are, indeed, such serious-minded individuals and that it makes a vast difference to an investment market whether or not they predominate in their influence over the game-players. But we must also add that there are several factors which jeopardise the predominance of such individuals in modern investment markets. Investment based on genuine long-term expectation is so difficult to-day as to be scarcely practicable. He who attempts it must surely lead much more laborious days and run greater risks than he who tries to guess better than the crowd how the crowd will behave; and, given equal intelligence, he may make more disastrous mistakes. There is no clear evidence from experience that the investment policy which is socially advantageous coincides with that which is most profitable. It needs more intelligence to defeat the forces of time and our ignorance of the future than to beat the gun. Moreover, life is not long enough; — human nature desires quick results, there is a peculiar zest in making money quickly, and remoter gains are discounted by the average man at a very high rate. The game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll. Furthermore, an investor who proposes to ignore near-term market fluctuations needs greater resources for safety and must not operate on so large a scale, if at all, with borrowed money — a further reason for the higher return from the pastime to a given stock of intelligence and resources. Finally it is the long-term investor, he who most promotes the public interest, who will in practice come in for most criticism, wherever investment funds are managed by committees or boards or banks.[4] For it is in the essence of his behaviour that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.
(5) So far we have had chiefly in mind the state of confidence of the speculator or speculative investor himself and may have seemed to be tacitly assuming that, if he himself is satisfied with the prospects, he has unlimited command over money at the market rate of interest. This is, of course, not the case. Thus we must also take account of the other facet of the state of confidence, namely, the confidence of the lending institutions towards those who seek to borrow from them, sometimes described as the state of credit. A collapse in the price of equities, which has had disastrous reactions on the marginal efficiency of capital, may have been due to the weakening either of speculative confidence or of the state of credit. But whereas the weakening of either is enough to cause a collapse, recovery requires the revival of both. For whilst the weakening of credit is sufficient to bring about a collapse, its strengthening, though a necessary condition of recovery, is not a sufficient condition.
VI. These considerations should not lie beyond the purview of the economist. But they must be relegated to their right perspective. If I may be allowed to appropriate the term speculation for the activity of forecasting the psychology of the market, and the term enterprise for the activity of forecasting the prospective yield of assets over their whole life, it is by no means always the case that speculation predominates over enterprise. As the organisation of investment markets improves, the risk of the predominance of speculation does, however, increase. In one of the greatest investment markets in the world, namely, New York, the influence of speculation (in the above sense) is enormous. Even outside the field of finance, Americans are apt to be unduly interested in discovering what average opinion believes average opinion to be; and this national weakness finds its nemesis in the stock market. It is rare, one is told, for an American to invest, as many Englishmen still do, “for income”; and he will not readily purchase an investment except in the hope of capital appreciation. This is only another way of saying that, when he purchases an investment, the American is attaching his hopes, not so much to its prospective yield, as to a favourable change in the conventional basis of valuation, i.e. that he is, in the above sense, a speculator. Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism — which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object.
These tendencies are a scarcely avoidable outcome of our having successfully organised “liquid” investment markets. It is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of Stock Exchanges. That the sins of the London Stock Exchange are less than those of Wall Street may be due, not so much to differences in national character, as to the fact that to the average Englishman Throgmorton Street is, compared with Wall Street to the average American, inaccessible and very expensive. The jobber’s “turn”, the high brokerage charges and the heavy transfer tax payable to the Exchequer, which attend dealings on the London Stock Exchange, sufficiently diminish the liquidity of the market (although the practice of fortnightly accounts operates the other way) to rule out a large proportion of the transactions characteristic of Wall Street.[5] The introduction of a substantial Government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States.
The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects and to those only. But a little consideration of this expedient brings us up against a dilemma, and shows us how the liquidity of investment markets often facilitates, though it sometimes impedes, the course of new investment. For the fact that each individual investor flatters himself that his commitment is “liquid” (though this cannot be true for all investors collectively) calms his nerves and makes him much more willing to run a risk. If individual purchases of investments were rendered illiquid, this might seriously impede new investment, so long as alternative ways in which to hold his savings are available to the individual. This is the dilemma. So long as it is open to the individual to employ his wealth in hoarding or lending money, the alternative of purchasing actual capital assets cannot be rendered sufficiently attractive (especially to the man who does not manage the capital assets and knows very little about them), except by organising markets wherein these assets can be easily realised for money.
The only radical cure for the crises of confidence which afflict the economic life of the modern world would be to allow the individual no choice between consuming his income and ordering the production of the specific capital-asset which, even though it be on precarious evidence, impresses him as the most promising investment available to him. It might be that, at times when he was more than usually assailed by doubts concerning the future, he would turn in his perplexity towards more consumption and less new investment. But that would avoid the disastrous, cumulative and far-reaching repercussions of its being open to him, when thus assailed by doubts, to spend his income neither on the one nor on the other.
Those who have emphasised the social dangers of the hoarding of money have, of course, had something similar to the above in mind. But they have overlooked the possibility that the phenomenon can occur without any change, or at least any commensurate change, in the hoarding of money.
VII. Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits — of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. Enterprise only pretends to itself to be mainly actuated by the statements in its own prospectus, however candid and sincere. Only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come. Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die; — though fears of loss may have a basis no more reasonable than hopes of profit had before.
It is safe to say that enterprise which depends on hopes stretching into the future benefits the community as a whole. But individual initiative will only be adequate when reasonable calculation is supplemented and supported by animal spirits, so that the thought of ultimate loss which often overtakes pioneers, as experience undoubtedly tells us and them, is put aside as a healthy man puts aside the expectation of death.
This means, unfortunately, not only that slumps and depressions are exaggerated in degree, but that economic prosperity is excessively dependent on a political and social atmosphere which is congenial to the average business man. If the fear of a Labour Government or a New Deal depresses enterprise, this need not be the result either of a reasonable calculation or of a plot with political intent; — it is the mere consequence of upsetting the delicate balance of spontaneous optimism. In estimating the prospects of investment, we must have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends.
We should not conclude from this that everything depends on waves of irrational psychology. On the contrary, the state of long-term expectation is often steady, and, even when it is not, the other factors exert their compensating effects. We are merely reminding ourselves that human decisions affecting the future, whether personal or political or economic, cannot depend on strict mathematical expectation, since the basis for making such calculations does not exist; and that it is our innate urge to activity which makes the wheels go round, our rational selves choosing between the alternatives as best we are able, calculating where we can, but often falling back for our motive on whim or sentiment or chance.
VIII. There are, moreover, certain important factors which somewhat mitigate in practice the effects of our ignorance of the future. Owing to the operation of compound interest combined with the likelihood of obsolescence with the passage of time, there are many individual investments of which the prospective yield is legitimately dominated by the returns of the comparatively near future. In the case of the most important class of very long-term investments, namely buildings, the risk can be frequently transferred from the investor to the occupier, or at least shared between them, by means of long-term contracts, the risk being outweighed in the mind of the occupier by the advantages of continuity and security of tenure. In the case of another important class of long-term investments, namely public utilities, a substantial proportion of the prospective yield is practically guaranteed by monopoly privileges coupled with the right to charge such rates as will provide a certain stipulated margin. Finally there is a growing class of investments entered upon by, or at the risk of, public authorities, which are frankly influenced in making the investment by a general presumption of there being prospective social advantages from the investment, whatever its commercial yield may prove to be within a wide range, and without seeking to be satisfied that the mathematical expectation of the yield is at least equal to the current rate of interest, — though the rate which the public authority has to pay may still play a decisive part in determining the scale of investment operations which it can afford.
Thus after giving full weight to the importance of the influence of short-period changes in the state of long-term expectation as distinct from changes in the rate of interest, we are still entitled to return to the latter as exercising, at any rate, in normal circumstances, a great, though not a decisive, influence on the rate of investment. Only experience, however, can show how far management of the rate of interest is capable of continuously stimulating the appropriate volume of investment.
For my own part I am now somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest. I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organising investment; since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles I have described above, will be too great to be offset by any practicable changes in the rate of interest.
Author’s Footnotes
By “very uncertain’ I do not mean the same thing as “improbable”. Cf. my Treatise on Probability, chap. 6, on “The Weight of Arguments”.
In my Treatise on Money (vol. ii. p. 195) I pointed out that when a company’s shares are quoted very high so that it can raise more capital by issuing more shares on favourable terms, this has the same effect as if it could borrow at a low rate of interest. I should now describe this by saying that a high quotation for existing equities involves an increase in the marginal efficiency of the corresponding type of capital and therefore has the same effect (since investment depends on a comparison between the marginal efficiency of capital and the rate of interest) as a fall in the rate of interest.
This does not apply, of course, to classes of enterprise which are not readily marketable or to which no negotiable instrument closely corresponds. The categories failing within this exception were formerly extensive. But measured as a proportion of the total value of new investment they are rapidly declining in importance.
The practice, usually considered prudent, by which an investment trust or an insurance office frequently calculates not only the income from its investment portfolio but also its capital valuation in the market, may also tend to direct too much attention to short-term fluctuations in the latter.
It is said that, when Wall Street is active, at least a half of the purchases or sales of investments are entered upon with an intention on the part of the speculator to reverse them the same day. This is often true of the commodity exchanges also.
The considerations upon which expectations of prospective yields are based are partly existing facts which we can assume to be known more or less for certain, and partly future events which can only be forecasted with more or less confidence. Amongst the first may be mentioned the existing stock of various types of capital-assets and of capital-assets in general and the strength of the existing consumers’ demand for goods which require for their efficient production a relatively larger assistance from capital. Amongst the latter are future changes in the type and quantity of the stock of capital-assets and in the tastes of the consumer, the strength of effective demand from time to time during the life of the investment under consideration, and the changes in the wage-unit in terms of money which may occur during its life. We may sum up the state of psychological expectation which covers the latter as being the state of long-term expectation; — as distinguished from the short-term expectation upon the basis of which a producer estimates what he will get for a product when it is finished if he decides to begin producing it to-day with the existing plant, which we examined in Chapter 5.
II.It would be foolish, in forming our expectations, to attach great weight to matters which are very uncertain.[1] It is reasonable, therefore, to be guided to a considerable degree by the facts about which we feel somewhat confident, even though they may be less decisively relevant to the issue than other facts about which our knowledge is vague and scanty. For this reason the facts of the existing situation enter, in a sense disproportionately, into the formation of our long-term expectations; our usual practice being to take the existing situation and to project it into the future, modified only to the extent that we have more or less definite reasons for expecting a change.
The state of long-term expectation, upon which our decisions are based, does not solely depend, therefore, on the most probable forecast we can make. It also depends on the confidence with which we make this forecast — on how highly we rate the likelihood of our best forecast turning out quite wrong. If we expect large changes but are very uncertain as to what precise form these changes will take, then our confidence will be weak.
The state of confidence, as they term it, is a matter to which practical men always pay the closest and most anxious attention. But economists have not analysed it carefully and have been content, as a rule, to discuss it in general terms. In particular it has not been made clear that its relevance to economic problems comes in through its important influence on the schedule of the marginal efficiency of capital. There are not two separate factors affecting the rate of investment, namely, the schedule of the marginal efficiency of capital and the state of confidence. The state of confidence is relevant because it is one of the major factors determining the former, which is the same thing as the investment demand-schedule.
There is, however, not much to be said about the state of confidence a priori. Our conclusions must mainly depend upon the actual observation of markets and business psychology. This is the reason why the ensuing digression is on a different level of abstraction from most of this book.
For convenience of exposition we shall assume in the following discussion of the state of confidence that there are no changes in the rate of interest; and we shall write, throughout the following sections, as if changes in the values of investments were solely due to changes in the expectation of their prospective yields and not at all to changes in the rate of interest at which these prospective yields are capitalised. The effect of changes in the rate of interest is, however, easily superimposed on the effect of changes in the state of confidence.
III. The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made. Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible. If we speak frankly, we have to admit that our basis of knowledge for estimating the yield ten years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes to nothing; or even five years hence. In fact, those who seriously attempt to make any such estimate are often so much in the minority that their behaviour does not govern the market.
In former times, when enterprises were mainly owned by those who undertook them or by their friends and associates, investment depended on a sufficient supply of individuals of sanguine temperament and constructive impulses who embarked on business as a way of life, not really relying on a precise calculation of prospective profit. The affair was partly a lottery, though with the ultimate result largely governed by whether the abilities and character of the managers were above or below the average. Some would fail and some would succeed. But even after the event no one would know whether the average results in terms of the sums invested had exceeded, equalled or fallen short of the prevailing rate of interest; though, if we exclude the exploitation of natural resources and monopolies, it is probable that the actual average results of investments, even during periods of progress and prosperity, have disappointed the hopes which prompted them. Business men play a mixed game of skill and chance, the average results of which to the players are not known by those who take a hand. If human nature felt no temptation to take a chance, no satisfaction (profit apart) in constructing a factory, a railway, a mine or a farm, there might not be much investment merely as a result of cold calculation.
Decisions to invest in private business of the old-fashioned type were, however, decisions largely irrevocable, not only for the community as a whole, but also for the individual. With the separation between ownership and management which prevails to-day and with the development of organised investment markets, a new factor of great importance has entered in, which sometimes facilitates investment but sometimes adds greatly to the instability of the system. In the absence of security markets, there is no object in frequently attempting to revalue an investment to which we are committed. But the Stock Exchange revalues many investments every day and the revaluations give a frequent opportunity to the individual (though not to the community as a whole) to revise his commitments. It is as though a farmer, having tapped his barometer after breakfast, could decide to remove his capital from the farming business between 10 and 11 in the morning and reconsider whether he should return to it later in the week. But the daily revaluations of the Stock Exchange, though they are primarily made to facilitate transfers of old investments between one individual and another, inevitably exert a decisive influence on the rate of current investment. For there is no sense in building up a new enterprise at a cost greater than that at which a similar existing enterprise can be purchased; whilst there is an inducement to spend on a new project what may seem an extravagant sum, if it can be floated off on the Stock Exchange at an immediate profit.[2] Thus certain classes of investment are governed by the average expectation of those who deal on the Stock Exchange as revealed in the price of shares, rather than by the genuine expectations of the professional entrepreneur.[3] How then are these highly significant daily, even hourly, revaluations of existing investments carried out in practice?
IV. In practice we have tacitly agreed, as a rule, to fall back on what is, in truth, a convention. The essence of this convention — though it does not, of course, work out quite so simply — lies in assuming that the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change. This does not mean that we really believe that the existing state of affairs will continue indefinitely. We know from extensive experience that this is most unlikely. The actual results of an investment over a long term of years very seldom agree with the initial expectation. Nor can we rationalise our behaviour by arguing that to a man in a state of ignorance errors in either direction are equally probable, so that there remains a mean actuarial expectation based on equi-probabilities. For it can easily be shown that the assumption of arithmetically equal probabilities based on a state of ignorance leads to absurdities. We are assuming, in effect, that the existing market valuation, however arrived at, is uniquely correct in relation to our existing knowledge of the facts which will influence the yield of the investment, and that it will only change in proportion to changes in this knowledge; though, philosophically speaking it cannot be uniquely correct, since our existing knowledge does not provide a sufficient basis for a calculated mathematical expectation. In point of fact, all sorts of considerations enter into the market valuation which are in no way relevant to the prospective yield.
Nevertheless the above conventional method of calculation will be compatible with a considerable measure of continuity and stability in our affairs, so long as we can rely on the maintenance of the convention.
For if there exist organised investment markets and if we can rely on the maintenance of the convention, an investor can legitimately encourage himself with the idea that the only risk he runs is that of a genuine change in the news over the near future, as to the likelihood of which he can attempt to form his own judgment, and which is unlikely to be very large. For, assuming that the convention holds good, it is only these changes which can affect the value of his investment, and he need not lose his sleep merely because he has not any notion what his investment will be worth ten years hence. Thus investment becomes reasonably “safe” for the individual investor over short periods, and hence over a succession of short periods however many, if he can fairly rely on there being no breakdown in the convention and on his therefore having an opportunity to revise his judgment and change his investment, before there has been time for much to happen. Investments which are “fixed” for the community are thus made “liquid” for the individual.
It has been, I am sure, on the basis of some such procedure as this that our leading investment markets have been developed. But it is not surprising that a convention, in an absolute view of things so arbitrary, should have its weak points. It is its precariousness which creates no small part of our contemporary problem of securing sufficient investment.
V. Some of the factors which accentuate this precariousness may be briefly mentioned.
(1) As a result of the gradual increase in the proportion of the equity in the community’s aggregate capital investment which is owned by persons who do not manage and have no special knowledge of the circumstances, either actual or prospective, of the business in question, the element of real knowledge in the valuation of investments by those who own them or contemplate purchasing them has seriously declined.
(2) Day-to-day fluctuations in the profits of existing investments, which are obviously of an ephemeral and non-significant character, tend to have an altogether excessive, and even an absurd, influence on the market. It is said, for example, that the shares of American companies which manufacture ice tend to sell at a higher price in summer when their profits are seasonally high than in winter when no one wants ice. The recurrence of a bank-holiday may raise the market valuation of the British railway system by several million pounds.
(3) A conventional valuation which is established as the outcome of the mass psychology of a large number of ignorant individuals is liable to change violently as the result of a sudden fluctuation of opinion due to factors which do not really make much difference to the prospective yield; since there will be no strong roots of conviction to hold it steady. In abnormal times in particular, when the hypothesis of an indefinite continuance of the existing state of affairs is less plausible than usual even though there are no express grounds to anticipate a definite change, the market will be subject to waves of optimistic and pessimistic sentiment, which are unreasoning and yet in a sense legitimate where no solid basis exists for a reasonable calculation.
(4) But there is one feature in particular which deserves our attention. It might have been supposed that competition between expert professionals, possessing judgment and knowledge beyond that of the average private investor, would correct the vagaries of the ignorant individual left to himself. It happens, however, that the energies and skill of the professional investor and speculator are mainly occupied otherwise. For most of these persons are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public. They are concerned, not with what an investment is really worth to a man who buys it “for keeps”, but with what the market will value it at, under the influence of mass psychology, three months or a year hence. Moreover, this behaviour is not the outcome of a wrong-headed propensity. It is an inevitable result of an investment market organised along the lines described. For it is not sensible to pay 25 for an investment of which you believe the prospective yield to justify a value of 30, if you also believe that the market will value it at 20 three months hence.
Thus the professional investor is forced to concern himself with the anticipation of impending changes, in the news or in the atmosphere, of the kind by which experience shows that the mass psychology of the market is most influenced. This is the inevitable result of investment markets organised with a view to so-called “liquidity”. Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of “liquid” securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment to-day is “to beat the gun”, as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow.
This battle of wits to anticipate the basis of conventional valuation a few months hence, rather than the prospective yield of an investment over a long term of years, does not even require gulls amongst the public to feed the maws of the professional; — it can be played by professionals amongst themselves. Nor is it necessary that anyone should keep his simple faith in the conventional basis of valuation having any genuine long-term validity. For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs — a pastime in which he is victor who says Snap neither too soon nor too late, who passes the Old Maid to his neighbour before the game is over, who secures a chair for himself when the music stops. These games can be played with zest and enjoyment, though all the players know that it is the Old Maid which is circulating, or that when the music stops some of the players will find themselves unseated.
Or, to change the metaphor slightly, professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.
If the reader interjects that there must surely be large profits to be gained from the other players in the long run by a skilled individual who, unperturbed by the prevailing pastime, continues to purchase investments on the best genuine long-term expectations he can frame, he must be answered, first of all, that there are, indeed, such serious-minded individuals and that it makes a vast difference to an investment market whether or not they predominate in their influence over the game-players. But we must also add that there are several factors which jeopardise the predominance of such individuals in modern investment markets. Investment based on genuine long-term expectation is so difficult to-day as to be scarcely practicable. He who attempts it must surely lead much more laborious days and run greater risks than he who tries to guess better than the crowd how the crowd will behave; and, given equal intelligence, he may make more disastrous mistakes. There is no clear evidence from experience that the investment policy which is socially advantageous coincides with that which is most profitable. It needs more intelligence to defeat the forces of time and our ignorance of the future than to beat the gun. Moreover, life is not long enough; — human nature desires quick results, there is a peculiar zest in making money quickly, and remoter gains are discounted by the average man at a very high rate. The game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll. Furthermore, an investor who proposes to ignore near-term market fluctuations needs greater resources for safety and must not operate on so large a scale, if at all, with borrowed money — a further reason for the higher return from the pastime to a given stock of intelligence and resources. Finally it is the long-term investor, he who most promotes the public interest, who will in practice come in for most criticism, wherever investment funds are managed by committees or boards or banks.[4] For it is in the essence of his behaviour that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.
(5) So far we have had chiefly in mind the state of confidence of the speculator or speculative investor himself and may have seemed to be tacitly assuming that, if he himself is satisfied with the prospects, he has unlimited command over money at the market rate of interest. This is, of course, not the case. Thus we must also take account of the other facet of the state of confidence, namely, the confidence of the lending institutions towards those who seek to borrow from them, sometimes described as the state of credit. A collapse in the price of equities, which has had disastrous reactions on the marginal efficiency of capital, may have been due to the weakening either of speculative confidence or of the state of credit. But whereas the weakening of either is enough to cause a collapse, recovery requires the revival of both. For whilst the weakening of credit is sufficient to bring about a collapse, its strengthening, though a necessary condition of recovery, is not a sufficient condition.
VI. These considerations should not lie beyond the purview of the economist. But they must be relegated to their right perspective. If I may be allowed to appropriate the term speculation for the activity of forecasting the psychology of the market, and the term enterprise for the activity of forecasting the prospective yield of assets over their whole life, it is by no means always the case that speculation predominates over enterprise. As the organisation of investment markets improves, the risk of the predominance of speculation does, however, increase. In one of the greatest investment markets in the world, namely, New York, the influence of speculation (in the above sense) is enormous. Even outside the field of finance, Americans are apt to be unduly interested in discovering what average opinion believes average opinion to be; and this national weakness finds its nemesis in the stock market. It is rare, one is told, for an American to invest, as many Englishmen still do, “for income”; and he will not readily purchase an investment except in the hope of capital appreciation. This is only another way of saying that, when he purchases an investment, the American is attaching his hopes, not so much to its prospective yield, as to a favourable change in the conventional basis of valuation, i.e. that he is, in the above sense, a speculator. Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism — which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object.
These tendencies are a scarcely avoidable outcome of our having successfully organised “liquid” investment markets. It is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of Stock Exchanges. That the sins of the London Stock Exchange are less than those of Wall Street may be due, not so much to differences in national character, as to the fact that to the average Englishman Throgmorton Street is, compared with Wall Street to the average American, inaccessible and very expensive. The jobber’s “turn”, the high brokerage charges and the heavy transfer tax payable to the Exchequer, which attend dealings on the London Stock Exchange, sufficiently diminish the liquidity of the market (although the practice of fortnightly accounts operates the other way) to rule out a large proportion of the transactions characteristic of Wall Street.[5] The introduction of a substantial Government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States.
The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects and to those only. But a little consideration of this expedient brings us up against a dilemma, and shows us how the liquidity of investment markets often facilitates, though it sometimes impedes, the course of new investment. For the fact that each individual investor flatters himself that his commitment is “liquid” (though this cannot be true for all investors collectively) calms his nerves and makes him much more willing to run a risk. If individual purchases of investments were rendered illiquid, this might seriously impede new investment, so long as alternative ways in which to hold his savings are available to the individual. This is the dilemma. So long as it is open to the individual to employ his wealth in hoarding or lending money, the alternative of purchasing actual capital assets cannot be rendered sufficiently attractive (especially to the man who does not manage the capital assets and knows very little about them), except by organising markets wherein these assets can be easily realised for money.
The only radical cure for the crises of confidence which afflict the economic life of the modern world would be to allow the individual no choice between consuming his income and ordering the production of the specific capital-asset which, even though it be on precarious evidence, impresses him as the most promising investment available to him. It might be that, at times when he was more than usually assailed by doubts concerning the future, he would turn in his perplexity towards more consumption and less new investment. But that would avoid the disastrous, cumulative and far-reaching repercussions of its being open to him, when thus assailed by doubts, to spend his income neither on the one nor on the other.
Those who have emphasised the social dangers of the hoarding of money have, of course, had something similar to the above in mind. But they have overlooked the possibility that the phenomenon can occur without any change, or at least any commensurate change, in the hoarding of money.
VII. Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits — of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. Enterprise only pretends to itself to be mainly actuated by the statements in its own prospectus, however candid and sincere. Only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come. Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die; — though fears of loss may have a basis no more reasonable than hopes of profit had before.
It is safe to say that enterprise which depends on hopes stretching into the future benefits the community as a whole. But individual initiative will only be adequate when reasonable calculation is supplemented and supported by animal spirits, so that the thought of ultimate loss which often overtakes pioneers, as experience undoubtedly tells us and them, is put aside as a healthy man puts aside the expectation of death.
This means, unfortunately, not only that slumps and depressions are exaggerated in degree, but that economic prosperity is excessively dependent on a political and social atmosphere which is congenial to the average business man. If the fear of a Labour Government or a New Deal depresses enterprise, this need not be the result either of a reasonable calculation or of a plot with political intent; — it is the mere consequence of upsetting the delicate balance of spontaneous optimism. In estimating the prospects of investment, we must have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends.
We should not conclude from this that everything depends on waves of irrational psychology. On the contrary, the state of long-term expectation is often steady, and, even when it is not, the other factors exert their compensating effects. We are merely reminding ourselves that human decisions affecting the future, whether personal or political or economic, cannot depend on strict mathematical expectation, since the basis for making such calculations does not exist; and that it is our innate urge to activity which makes the wheels go round, our rational selves choosing between the alternatives as best we are able, calculating where we can, but often falling back for our motive on whim or sentiment or chance.
VIII. There are, moreover, certain important factors which somewhat mitigate in practice the effects of our ignorance of the future. Owing to the operation of compound interest combined with the likelihood of obsolescence with the passage of time, there are many individual investments of which the prospective yield is legitimately dominated by the returns of the comparatively near future. In the case of the most important class of very long-term investments, namely buildings, the risk can be frequently transferred from the investor to the occupier, or at least shared between them, by means of long-term contracts, the risk being outweighed in the mind of the occupier by the advantages of continuity and security of tenure. In the case of another important class of long-term investments, namely public utilities, a substantial proportion of the prospective yield is practically guaranteed by monopoly privileges coupled with the right to charge such rates as will provide a certain stipulated margin. Finally there is a growing class of investments entered upon by, or at the risk of, public authorities, which are frankly influenced in making the investment by a general presumption of there being prospective social advantages from the investment, whatever its commercial yield may prove to be within a wide range, and without seeking to be satisfied that the mathematical expectation of the yield is at least equal to the current rate of interest, — though the rate which the public authority has to pay may still play a decisive part in determining the scale of investment operations which it can afford.
Thus after giving full weight to the importance of the influence of short-period changes in the state of long-term expectation as distinct from changes in the rate of interest, we are still entitled to return to the latter as exercising, at any rate, in normal circumstances, a great, though not a decisive, influence on the rate of investment. Only experience, however, can show how far management of the rate of interest is capable of continuously stimulating the appropriate volume of investment.
For my own part I am now somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest. I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organising investment; since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles I have described above, will be too great to be offset by any practicable changes in the rate of interest.
Author’s Footnotes
By “very uncertain’ I do not mean the same thing as “improbable”. Cf. my Treatise on Probability, chap. 6, on “The Weight of Arguments”.
In my Treatise on Money (vol. ii. p. 195) I pointed out that when a company’s shares are quoted very high so that it can raise more capital by issuing more shares on favourable terms, this has the same effect as if it could borrow at a low rate of interest. I should now describe this by saying that a high quotation for existing equities involves an increase in the marginal efficiency of the corresponding type of capital and therefore has the same effect (since investment depends on a comparison between the marginal efficiency of capital and the rate of interest) as a fall in the rate of interest.
This does not apply, of course, to classes of enterprise which are not readily marketable or to which no negotiable instrument closely corresponds. The categories failing within this exception were formerly extensive. But measured as a proportion of the total value of new investment they are rapidly declining in importance.
The practice, usually considered prudent, by which an investment trust or an insurance office frequently calculates not only the income from its investment portfolio but also its capital valuation in the market, may also tend to direct too much attention to short-term fluctuations in the latter.
It is said that, when Wall Street is active, at least a half of the purchases or sales of investments are entered upon with an intention on the part of the speculator to reverse them the same day. This is often true of the commodity exchanges also.
Never let the job bled majority know.....
The ability to return to full employment
prior to
the restoration of business confidence
Exists within the federal gubmints potential capacity
And without dire side effects or long run consequences
The market system can be pushed as well as pulled
It's as if you had a train with locomotives on both ends
And the biz whizz types operating from the locomotive on one end
Try try constantly to convince the job bled masses
"oh that's just a damn caboose back there
A nasty parasites hang out
Where politicians and rent seekers go to drink your blood "
prior to
the restoration of business confidence
Exists within the federal gubmints potential capacity
And without dire side effects or long run consequences
The market system can be pushed as well as pulled
It's as if you had a train with locomotives on both ends
And the biz whizz types operating from the locomotive on one end
Try try constantly to convince the job bled masses
"oh that's just a damn caboose back there
A nasty parasites hang out
Where politicians and rent seekers go to drink your blood "
Saturday, October 22, 2011
Total us property taxes state and local .....about 360 billion dollars
A rebate on the residential component of that
would make a nice aditional federal transfer conduit
Like health insurance premiums
Btw
Revenues from sales taxes are of a similar magnitude
http://www2.census.gov/govs/qtax/information_sheet.pdf
would make a nice aditional federal transfer conduit
Like health insurance premiums
Btw
Revenues from sales taxes are of a similar magnitude
http://www2.census.gov/govs/qtax/information_sheet.pdf
Friday, October 21, 2011
The vanguard party as solution to large n prisoners dilemma
For the effective cadre of a VP
going establishment would get bigger personal reward then intentional self marginalizing
By joining a VP
But this is the classic prisoner dilemma turned class based
For the exploited class to escape it's conditions a certain minority must act against each member of the minorities personal best interests and best life experience and soul development
Yup
Including ..........personal morality
All is diminished by the joining of a VP
See Tommy schellings goal posts model with crossing diagonal for graphication
going establishment would get bigger personal reward then intentional self marginalizing
By joining a VP
But this is the classic prisoner dilemma turned class based
For the exploited class to escape it's conditions a certain minority must act against each member of the minorities personal best interests and best life experience and soul development
Yup
Including ..........personal morality
All is diminished by the joining of a VP
See Tommy schellings goal posts model with crossing diagonal for graphication
Thursday, October 20, 2011
Too big to save
U hear this about
Italy these days
Total outstanding sovereign debt
plus a trillion and near a trillion and a half euros
Peanuts really
for the league of MNC CB's
Ie corporate clique dominated
And
decisively influenced
central bankers
Even the ECB acting alone can simply create that without much real consequence on prices
Asset
commodity
Industrial Product
wage rates
or otherwise
Value of euro ?
Well that is where the other league members enter
To preserve the forex relationships more or less as is
The others might need to increase euro reserves
And add more other moneys into the global currency systems
Two words there apply
Liquidity trap
Both ongoing and global
Italy these days
Total outstanding sovereign debt
plus a trillion and near a trillion and a half euros
Peanuts really
for the league of MNC CB's
Ie corporate clique dominated
And
decisively influenced
central bankers
Even the ECB acting alone can simply create that without much real consequence on prices
Asset
commodity
Industrial Product
wage rates
or otherwise
Value of euro ?
Well that is where the other league members enter
To preserve the forex relationships more or less as is
The others might need to increase euro reserves
And add more other moneys into the global currency systems
Two words there apply
Liquidity trap
Both ongoing and global
Monday, October 17, 2011
Spence On the post bretton woods era globalists poison apple as we begin bite number two
" ....These massive structural changes in the global economy present three great employment challenges worldwide, with different countries facing their own variants.
The first challenge is to generate enough jobs to accommodate the inflow of new entrants into the labor market. Clearly, a wide range of advanced and developing countries is failing to do so. Youth unemployment is high and rising. Even in fast-growth developing countries, surplus labor is awaiting inclusion in the modern economy, and the pressure is on to sustain job creation.
The second challenge is to match skills and capabilities to the supply of jobs – an adjustment that takes time. It is also a moving target. Globalization and major labor-saving technologies have thrown labor markets in many countries into disequilibrium. Skills mismatches abound. Moreover, with continuing rapid growth in developing countries, the global economy’s structure is far from static, and it seems clear that the pace of market adjustment is lagging that of structural change.
The third challenge is distributional. As the tradable part of the global economy
(goods and services that can be produced in one country and consumed in another)
expands,
competition for economic activity and jobs broadens. That affects the price of labor and the range of employment opportunities within all globally integrated economies. Subsets of the population
Have lost income expectationally if not absolutely
Many advanced countries – in fact, most of them – have experienced limited middle-income growth. In some European countries, where income inequality has remained in check, this has been a component of a deliberate strategy to maintain employment growth and competitiveness in the tradable part of the economy, with wage restraint partly shared across the income distribution. In the United States, income inequality has risen as the upper end of the income and education spectrum benefits from globalization, while the rest experience declining employment opportunities in the tradable sector.
For two decades prior to the 2008 crisis, employment levels were maintained – and downward pressure on incomes mitigated – by creating jobs in non-tradable sectors. In some cases, this took the form of rapid growth in government; in others, like the US, a pattern of excessive, debt-fueled consumption underpinned a large shift in employment to (non-tradable) services and construction. Indeed, government and health care (both largely non-tradable) accounted for almost 40% of net employment growth in the US between 1990 and 2008.
That pattern came to a sudden stop in the financial crisis of 2008. Private-sector leverage declined and public-sector leverage reached – and exceeded – sustainable limits, with Greece being only the most extreme example.
But expectations created by pre-crisis growth patterns adjust slowly. Because the dominant narrative still maintains that the pre-crisis period was normal, at least in terms of the growth pattern in the real economy, the perceived challenge is to restore growth according to the pre-crisis pattern. Unfortunately, this narrative cannot explain why, particularly in the advanced countries, growth is faltering and the employment engines have largely shut down.
Part of the answer consists in the long, lingering impact of financial crises and deleveraging, well documented by Carmen Reinhart and Kenneth Rogoff in their book This Time is Different. At the same time, the financial imbalances and distortions that precede a crisis delay appropriate and necessary responses to technological and global market forces in the real economy as well. In short, economies and policies adjusted in an unsustainable fashion, to some extent obscuring the need for a more sustainable pattern of adaptation.
What does it mean – for individuals, businesses, and governments – that structural adjustment is falling further and further behind the global forces that are causing pressure for structural change?
Above all, it means that expectations are broadly inconsistent with reality, and need to adjust, in some cases downward. But distributional effects need to be taken seriously and addressed. The burden of weak or non-existent recoveries should not be borne by the unemployed, including the young. In the interest of social cohesion, market outcomes need to be modified to create a more even distribution of incomes and benefits, both now and in inter-temporal terms. After all, underinvestment now implies diminished opportunity in the future.
The imperative of structural adjustment also implies that individuals, governments, and other institutions (especially schools) need to focus on increasing the speed of adjustment to meet rapidly shifting market conditions. Attention to both the demand and supply sides of job markets is required. This means not only matching skills to jobs, but also expanding the range of jobs to match skills.
Finally, global economic-management institutions need to address whether the pace of globalization, and its implied structural change, is faster than the capacity of individuals, economies, and societies to adjust can withstand. If so, the next challenge will be to find non-destructive ways to moderate the pace in order to bring capacity to adjust and the need for adjustment into closer alignment.
None of this will be easy. We do not now have well developed frameworks for understanding structural change. Nevertheless, the unemployed and underemployed, especially younger people, expect their leaders and institutions to try.
and others lose, certainly relative to expectations – and often absolutely.
The first challenge is to generate enough jobs to accommodate the inflow of new entrants into the labor market. Clearly, a wide range of advanced and developing countries is failing to do so. Youth unemployment is high and rising. Even in fast-growth developing countries, surplus labor is awaiting inclusion in the modern economy, and the pressure is on to sustain job creation.
The second challenge is to match skills and capabilities to the supply of jobs – an adjustment that takes time. It is also a moving target. Globalization and major labor-saving technologies have thrown labor markets in many countries into disequilibrium. Skills mismatches abound. Moreover, with continuing rapid growth in developing countries, the global economy’s structure is far from static, and it seems clear that the pace of market adjustment is lagging that of structural change.
The third challenge is distributional. As the tradable part of the global economy
(goods and services that can be produced in one country and consumed in another)
expands,
competition for economic activity and jobs broadens. That affects the price of labor and the range of employment opportunities within all globally integrated economies. Subsets of the population
Have lost income expectationally if not absolutely
Many advanced countries – in fact, most of them – have experienced limited middle-income growth. In some European countries, where income inequality has remained in check, this has been a component of a deliberate strategy to maintain employment growth and competitiveness in the tradable part of the economy, with wage restraint partly shared across the income distribution. In the United States, income inequality has risen as the upper end of the income and education spectrum benefits from globalization, while the rest experience declining employment opportunities in the tradable sector.
For two decades prior to the 2008 crisis, employment levels were maintained – and downward pressure on incomes mitigated – by creating jobs in non-tradable sectors. In some cases, this took the form of rapid growth in government; in others, like the US, a pattern of excessive, debt-fueled consumption underpinned a large shift in employment to (non-tradable) services and construction. Indeed, government and health care (both largely non-tradable) accounted for almost 40% of net employment growth in the US between 1990 and 2008.
That pattern came to a sudden stop in the financial crisis of 2008. Private-sector leverage declined and public-sector leverage reached – and exceeded – sustainable limits, with Greece being only the most extreme example.
But expectations created by pre-crisis growth patterns adjust slowly. Because the dominant narrative still maintains that the pre-crisis period was normal, at least in terms of the growth pattern in the real economy, the perceived challenge is to restore growth according to the pre-crisis pattern. Unfortunately, this narrative cannot explain why, particularly in the advanced countries, growth is faltering and the employment engines have largely shut down.
Part of the answer consists in the long, lingering impact of financial crises and deleveraging, well documented by Carmen Reinhart and Kenneth Rogoff in their book This Time is Different. At the same time, the financial imbalances and distortions that precede a crisis delay appropriate and necessary responses to technological and global market forces in the real economy as well. In short, economies and policies adjusted in an unsustainable fashion, to some extent obscuring the need for a more sustainable pattern of adaptation.
What does it mean – for individuals, businesses, and governments – that structural adjustment is falling further and further behind the global forces that are causing pressure for structural change?
Above all, it means that expectations are broadly inconsistent with reality, and need to adjust, in some cases downward. But distributional effects need to be taken seriously and addressed. The burden of weak or non-existent recoveries should not be borne by the unemployed, including the young. In the interest of social cohesion, market outcomes need to be modified to create a more even distribution of incomes and benefits, both now and in inter-temporal terms. After all, underinvestment now implies diminished opportunity in the future.
The imperative of structural adjustment also implies that individuals, governments, and other institutions (especially schools) need to focus on increasing the speed of adjustment to meet rapidly shifting market conditions. Attention to both the demand and supply sides of job markets is required. This means not only matching skills to jobs, but also expanding the range of jobs to match skills.
Finally, global economic-management institutions need to address whether the pace of globalization, and its implied structural change, is faster than the capacity of individuals, economies, and societies to adjust can withstand. If so, the next challenge will be to find non-destructive ways to moderate the pace in order to bring capacity to adjust and the need for adjustment into closer alignment.
None of this will be easy. We do not now have well developed frameworks for understanding structural change. Nevertheless, the unemployed and underemployed, especially younger people, expect their leaders and institutions to try.
and others lose, certainly relative to expectations – and often absolutely.
Directed trade
Even with free access to technical know how
There must also be access to foreign markets
How can a Nepal or Eritrea industrialize
When the MNC's control access to advanced markets?
Can emerges cross trade to any substantial extent?
What does it mean to self develop in a small bordered area ?
A solid agrarian base is sine qua non
Raw commodity trade is reliable but volatile
Cross border Trade
in food fibre fish flesh and feed
Plus
Ores and wood and ..
Other Resource extractions. ...
Can you boot strap with these alone ?
The lure of MNC assisted development dangles ever near the popular eyes ears and nose
In an open pluralistic system
There must also be access to foreign markets
How can a Nepal or Eritrea industrialize
When the MNC's control access to advanced markets?
Can emerges cross trade to any substantial extent?
What does it mean to self develop in a small bordered area ?
A solid agrarian base is sine qua non
Raw commodity trade is reliable but volatile
Cross border Trade
in food fibre fish flesh and feed
Plus
Ores and wood and ..
Other Resource extractions. ...
Can you boot strap with these alone ?
The lure of MNC assisted development dangles ever near the popular eyes ears and nose
In an open pluralistic system
The best way to be a cosmo
Open borders to trade ? No
Open borders to credit and funds flow? No
Open borders to immigration? Yes
End any international dimemsion to intellectual property system? Yes
Open borders to credit and funds flow? No
Open borders to immigration? Yes
End any international dimemsion to intellectual property system? Yes
House lot markets
The neo yeoman vice of our time
Not the family farm
But as bad
A. ---wildly too widely based ---
"investment " in a user owner "market" asset
That is pure relative value
And as volatile as a rattle snake in a hot sun
Neeeded
A George tax simulated thru a designed market mechanism
Enter uncle's lot bank
Not the family farm
But as bad
A. ---wildly too widely based ---
"investment " in a user owner "market" asset
That is pure relative value
And as volatile as a rattle snake in a hot sun
Neeeded
A George tax simulated thru a designed market mechanism
Enter uncle's lot bank
Policy is all about Dynamics
What if adjustment speeds of two related prices
Maybe one a stock price and the other a flow price don't sync up well?
Possible catastrophe and sure pareto inefficiency
Take relative national price level change
Versus forex adjustment
In most models that are comp stat models
These two only seem to synchronize
Because there really is no time line
It's a false simultaneity
That once you start setting the variables into time path create all sorts
Of unusual possible future histories
Yup just make everything a function of time and every function of time different and ....
The Paradox of comp stat u might call it
A very misleading paradox indeed
Adystem that operates in time
Modeled by a mechanism
That is without a time dimension
Add in the quantity versus price adjustment "lags" and .....
In fact what really
Gets captured by a point in time steady state calculation ?
Or with parameter settings changed by policy moves
at that point of time
Just what is the info content of such a "recalculation"?
Better perhaps to just work the policy levers
and respond to the changes in system state and specific array of conditions
By fast data systems backing up further working of the levers
Maybe one a stock price and the other a flow price don't sync up well?
Possible catastrophe and sure pareto inefficiency
Take relative national price level change
Versus forex adjustment
In most models that are comp stat models
These two only seem to synchronize
Because there really is no time line
It's a false simultaneity
That once you start setting the variables into time path create all sorts
Of unusual possible future histories
Yup just make everything a function of time and every function of time different and ....
The Paradox of comp stat u might call it
A very misleading paradox indeed
Adystem that operates in time
Modeled by a mechanism
That is without a time dimension
Add in the quantity versus price adjustment "lags" and .....
In fact what really
Gets captured by a point in time steady state calculation ?
Or with parameter settings changed by policy moves
at that point of time
Just what is the info content of such a "recalculation"?
Better perhaps to just work the policy levers
and respond to the changes in system state and specific array of conditions
By fast data systems backing up further working of the levers
Sunday, October 16, 2011
Wednesday, October 12, 2011
Hurrah for Cock eyed optimist agents
How else Under market guided privateer profit motivated capitalism
can innovation prevail ?
Wide spread belief
" this time is different "
feeds on itself
Time and again self confirming the audacity of agents
That is until....boing !!
can innovation prevail ?
Wide spread belief
" this time is different "
feeds on itself
Time and again self confirming the audacity of agents
That is until....boing !!
Dani bull's eye
"The Friedmanite perspective greatly underestimates the institutional prerequisites of markets. Let the government simply enforce property rights and contracts, and – presto! – markets can work their magic."
"In fact, the kind of markets that modern economies need
are not
self-creating, self-regulating, self-stabilizing, or self-legitimizing."
His examples:
"Governments must invest in transport and communication networks "
not self creating
"counteract asymmetric information, externalities, and unequal bargaining power"
not self regulating
"moderate financial panics and recessions "
Not self stablizing
" respond to popular demands for safety nets and social insurance."
Self legitimize
Of these nots
Not self creating
is the least appreciated
And not self legitimizing profound in a way rarely grasped
The middle two are about as far as most econcons go
"In fact, the kind of markets that modern economies need
are not
self-creating, self-regulating, self-stabilizing, or self-legitimizing."
His examples:
"Governments must invest in transport and communication networks "
not self creating
"counteract asymmetric information, externalities, and unequal bargaining power"
not self regulating
"moderate financial panics and recessions "
Not self stablizing
" respond to popular demands for safety nets and social insurance."
Self legitimize
Of these nots
Not self creating
is the least appreciated
And not self legitimizing profound in a way rarely grasped
The middle two are about as far as most econcons go
Monday, October 10, 2011
Statist liberals and social democrats love their tax systems
It is amazing how fearful of tax holidays
Our establishment lib-pwogs can be
It is as pronounced a prejudice as they're love of public goods
That is public goods in the narrow sense
Ie
Gub induced if not produced
tax fired outputs
Our establishment lib-pwogs can be
It is as pronounced a prejudice as they're love of public goods
That is public goods in the narrow sense
Ie
Gub induced if not produced
tax fired outputs
Saturday, October 8, 2011
Since demand at the margin is credit driven
We need a credit system that runs credit flow rates independent of changes
in expected default risk
In fact we prolly want credit flows to rise where they now slow
and slow where they now rise
Ie
Run Exactly the opposite of the change in rates
Produced by the " for private profit "guided Institutions
that predominant in our existing credit system
The use of the policy rate
to produce or better induce
this countercyclical flow speed
Fails because default is a qualitative break
In the rationing system which operates independently of the interest charge
Like tuition and admittance to harvard
The interest rate is not used as a means of selection anymore then tuition is
The means to regulate the size of the harvard freshman class
Both jobs and credit are ration systems
that select hires and borrowers
independently of accompanying interest charges
or wage rates
in expected default risk
In fact we prolly want credit flows to rise where they now slow
and slow where they now rise
Ie
Run Exactly the opposite of the change in rates
Produced by the " for private profit "guided Institutions
that predominant in our existing credit system
The use of the policy rate
to produce or better induce
this countercyclical flow speed
Fails because default is a qualitative break
In the rationing system which operates independently of the interest charge
Like tuition and admittance to harvard
The interest rate is not used as a means of selection anymore then tuition is
The means to regulate the size of the harvard freshman class
Both jobs and credit are ration systems
that select hires and borrowers
independently of accompanying interest charges
or wage rates
Wednesday, October 5, 2011
1/3 of federal deficit is artifact of recessionary slump
At full employment budget 350 billion net changes
in transfers (less) and taxes (more)
The auto stab system needs to be three times this dynamic and even then we'd need an auto correct for trade imbalance and a crisis discretionary system for blow outs like the 08 09 happenin'
in transfers (less) and taxes (more)
The auto stab system needs to be three times this dynamic and even then we'd need an auto correct for trade imbalance and a crisis discretionary system for blow outs like the 08 09 happenin'
Stateless income
"stateless income means profits earned in a country other than where the firm is headquartered and subject to tax only in a third country which imposes little or no tax."
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1875077
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1791769
"......fundamental thesis
the pervasive presence of stateless income tax planning changes everything. Stateless income privileges multinational firms over domestic ones by offering the former the prospect of capturing “tax rents” – low-risk inframarginal returns derived by moving income from high-tax foreign countries to low-tax ones. Other important implications of stateless income include the dissolution of any coherence to the concept of geographic source, the systematic bias towards offshore rather than domestic investment, the more surprising bias in favor of investment in high-tax foreign countries to provide the raw feedstock for the generation of low-tax foreign income in other countries, the erosion of the U.S. domestic tax base through debt-financed tax arbitrage, many instances of deadweight loss, and – essentially uniquely to the United States – the exacerbation of the lock-out phenomenon, under which the price that U.S. firms pay to enjoy the benefits of dramatically low foreign tax rates is the accumulation
of extraordinary amounts of earnings ($1 trillion or more, by the most recent estimates) and cash outside the United States."
Tax rents a go go !!!!
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1875077
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1791769
"......fundamental thesis
the pervasive presence of stateless income tax planning changes everything. Stateless income privileges multinational firms over domestic ones by offering the former the prospect of capturing “tax rents” – low-risk inframarginal returns derived by moving income from high-tax foreign countries to low-tax ones. Other important implications of stateless income include the dissolution of any coherence to the concept of geographic source, the systematic bias towards offshore rather than domestic investment, the more surprising bias in favor of investment in high-tax foreign countries to provide the raw feedstock for the generation of low-tax foreign income in other countries, the erosion of the U.S. domestic tax base through debt-financed tax arbitrage, many instances of deadweight loss, and – essentially uniquely to the United States – the exacerbation of the lock-out phenomenon, under which the price that U.S. firms pay to enjoy the benefits of dramatically low foreign tax rates is the accumulation
of extraordinary amounts of earnings ($1 trillion or more, by the most recent estimates) and cash outside the United States."
Tax rents a go go !!!!
Tuesday, October 4, 2011
Could all this north hem misery have only the euro zone as it's target
Perhaps there is no smart instrumentation here
Simplest level north amigo must take a hit too
Or else the contrast produces upheaval over there ...eh?
Imagine it's not about rebalancing trade and financial flows but
A blubber trim for the euro softies
How can you justify recovery policy in the amigo states without
A bold and nasty contrast
Yes if it's purely pigs their after but.......Is it ?
One has to wonder here
Why the naked hi fi rescue and return to apparent rich profit flow
While the real working and producing classes of people languish
Far far better to bail and then cover the job with at least a brief return
to prosperity for the job classes no ?
You know a few quarters of robust recovery
Is the notion of a two trillion dollar fiscal burst here and over there
Really that nasty a lesson in job class independence
From their hi fi benefactors ?
Using gubmint to snatch us out of the slump in short order ?
Then bing after the bail is buried under subsequent events
you double dip the northhemi
and blame it on the profligate gubmint buggary
Pull an austerian reaction
Much like we got
Only not immediately like we got
But after a few bright quarters of recovery
Whip up inflation and budgetary hysteria
But after the blame is long since moved on from the banksters
But how is that engineered ?
Simplest level north amigo must take a hit too
Or else the contrast produces upheaval over there ...eh?
Imagine it's not about rebalancing trade and financial flows but
A blubber trim for the euro softies
How can you justify recovery policy in the amigo states without
A bold and nasty contrast
Yes if it's purely pigs their after but.......Is it ?
One has to wonder here
Why the naked hi fi rescue and return to apparent rich profit flow
While the real working and producing classes of people languish
Far far better to bail and then cover the job with at least a brief return
to prosperity for the job classes no ?
You know a few quarters of robust recovery
Is the notion of a two trillion dollar fiscal burst here and over there
Really that nasty a lesson in job class independence
From their hi fi benefactors ?
Using gubmint to snatch us out of the slump in short order ?
Then bing after the bail is buried under subsequent events
you double dip the northhemi
and blame it on the profligate gubmint buggary
Pull an austerian reaction
Much like we got
Only not immediately like we got
But after a few bright quarters of recovery
Whip up inflation and budgetary hysteria
But after the blame is long since moved on from the banksters
But how is that engineered ?
The studio study and lab sector ...how big how fast ?
Damned if I know
But the notion you could use it's growth to replace an I austral sector strikes me as beyond dubious
Even with
air tight global intellectual property entitlement rights
..for now
But the notion you could use it's growth to replace an I austral sector strikes me as beyond dubious
Even with
air tight global intellectual property entitlement rights
..for now
Marshall Auerbach and laissez allez macro
There is a need for a state micro policy
A comprehensive central plan
Simply setting in place a lerner esque set of macro stabilizers and feed backs
thru the transfer system is not enough
Meta static n year out projections in continuous quarterly reformulation remain de rigor
Targets are necessary and the consequent injections and extractions to meet these targets are not a pure autopilot affair
Restating the obvious ?
Well the implicit assumption of an auerback RX is simply learner plus a humanist federal
Daygo gulag system
And that gulag system blots out the real task
Discovering a better path Forward
for the entire production system
Constant construction reconstruction creates new realities
That a purblind market mediate demand will not find fast enough...unassisted
A comprehensive central plan
Simply setting in place a lerner esque set of macro stabilizers and feed backs
thru the transfer system is not enough
Meta static n year out projections in continuous quarterly reformulation remain de rigor
Targets are necessary and the consequent injections and extractions to meet these targets are not a pure autopilot affair
Restating the obvious ?
Well the implicit assumption of an auerback RX is simply learner plus a humanist federal
Daygo gulag system
And that gulag system blots out the real task
Discovering a better path Forward
for the entire production system
Constant construction reconstruction creates new realities
That a purblind market mediate demand will not find fast enough...unassisted
The central plan starts at the borders
The national free market system stops at the border
International Trade and finance patents and licenses
Remain state policy areas
International Trade and finance patents and licenses
Remain state policy areas
Why not let uncle employ all of us ?
That's not a bad place to start
Ie gosplan I
Thesis
Analysis will reduce the uncle Inc op to true public goods only
Paradox :
The set of second best meliorisms like the WPA vanish with the removal of
Proerty and power constraints on
State action
The level of intervention in market design Subsidy and tax and regulation however
Is utterly totalitarian
But arrived at by discovery pro to type building
Ie
NEP Leninist bukharinite spontaneous historically accidental trial and error markets
rise by conscious scientific redesign to meet Stalinist unitary plan specifications
Ie gosplan I
Thesis
Analysis will reduce the uncle Inc op to true public goods only
Paradox :
The set of second best meliorisms like the WPA vanish with the removal of
Proerty and power constraints on
State action
The level of intervention in market design Subsidy and tax and regulation however
Is utterly totalitarian
But arrived at by discovery pro to type building
Ie
NEP Leninist bukharinite spontaneous historically accidental trial and error markets
rise by conscious scientific redesign to meet Stalinist unitary plan specifications
More humanist gulag talk
Forgotten fact
The discipline of the market
Is all about choosing what you pay for item by item
Why move away from that
Why turn possible choice into public goods calculation?
Actual Public production not just public provision
should be restricted to non rival non excludable goods and services
And what's more ....
The job hour content of a dollars purchases by a transfer recipient
versus a dollar of direct
uncle purchases is not decisive
There is no lump of hours that needs augmentation
No uncle only wage hours to disperse
or lump of purchase dollars in any sector for that matter that can't be enhanced
with zero real cost by use of uncle's limitless dollar mine
The problem in the end arises because the real out put gets tied to a set of price values
Where as the price system of any set of markets can adjust to any infusion of outside dollars ..and it can be designed to adjust with acceptable efficiency
What then requires direct uncle purchases? Well certainly not full employment
The use of tax and subsidy of course ends up interwoven everywhere
Gosmart will entail enormous amounts of data crunching to regulate these flows efficiently and with greatest welfare
The discipline of the market
Is all about choosing what you pay for item by item
Why move away from that
Why turn possible choice into public goods calculation?
Actual Public production not just public provision
should be restricted to non rival non excludable goods and services
And what's more ....
The job hour content of a dollars purchases by a transfer recipient
versus a dollar of direct
uncle purchases is not decisive
There is no lump of hours that needs augmentation
No uncle only wage hours to disperse
or lump of purchase dollars in any sector for that matter that can't be enhanced
with zero real cost by use of uncle's limitless dollar mine
The problem in the end arises because the real out put gets tied to a set of price values
Where as the price system of any set of markets can adjust to any infusion of outside dollars ..and it can be designed to adjust with acceptable efficiency
What then requires direct uncle purchases? Well certainly not full employment
The use of tax and subsidy of course ends up interwoven everywhere
Gosmart will entail enormous amounts of data crunching to regulate these flows efficiently and with greatest welfare
Restaurant kitchen productivity
Say we raise the real minimum wage to the 68 peak of $ 10.00 an hour
and indexed it to va per hour there after
What would restaurant fare cost to produce in a above ground market kitchen ?
Are there any above ground market kitchens ?
My guess we'd need central meal factories plus those scattered convenient locations
of fast food outfits with heaters and coolers behind a counter
Fancy on site kitchen cuisine would either involve massive wage theft of kitchen staff pay
Or under ground activity
Not Just undoc-ed but unwaged
What btw
What Is
the spectrum of cost shares of the meal production staff itself in a restaurant
and indexed it to va per hour there after
What would restaurant fare cost to produce in a above ground market kitchen ?
Are there any above ground market kitchens ?
My guess we'd need central meal factories plus those scattered convenient locations
of fast food outfits with heaters and coolers behind a counter
Fancy on site kitchen cuisine would either involve massive wage theft of kitchen staff pay
Or under ground activity
Not Just undoc-ed but unwaged
What btw
What Is
the spectrum of cost shares of the meal production staff itself in a restaurant
Saturday, October 1, 2011
Contingent payments
The full range of state dependent event dependent instruments has hardly been tapped
One can easel envision a complex of interrelated payments that in amount and timing flex with events and system state
Default insurance made universal could back stop an array of contingent payment agreements
Mediating the unit transfers of funds but allowing thru tax and subsidy algorithms for expectations to be fulfilled crucially
Example a manager might be obligated to make a fractional or super sized payment depending on eventualities outside his or her control
It would allow automatic reward and fining for management actions decisions and commitments
Only based on manager controllable features of the eventuality
Escrow compensation becomes contingency payments based on outcomes
The contracting proces becomes .....complex
But the inequities and hazards of fortune and happenstance can be minimized
Blunt fact
Today
The rigidity of unconditional non contingent obligations vastly constricts
agent and principal action
One can easel envision a complex of interrelated payments that in amount and timing flex with events and system state
Default insurance made universal could back stop an array of contingent payment agreements
Mediating the unit transfers of funds but allowing thru tax and subsidy algorithms for expectations to be fulfilled crucially
Example a manager might be obligated to make a fractional or super sized payment depending on eventualities outside his or her control
It would allow automatic reward and fining for management actions decisions and commitments
Only based on manager controllable features of the eventuality
Escrow compensation becomes contingency payments based on outcomes
The contracting proces becomes .....complex
But the inequities and hazards of fortune and happenstance can be minimized
Blunt fact
Today
The rigidity of unconditional non contingent obligations vastly constricts
agent and principal action
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