Flashman Letters

Discorso Bruno Leoni 2012 - Tyler Cowen - Worth the watch

Loading...

via www.youtube.com

Director's Chair: John Mauldin - The European Debt Endgame- Click to Link - Totally worthwhile

Director's Chair: John Mauldin - The European Debt Endgame

by The Institute for... on May 30, 2012

In this five-part INET “From the Director’s Chair” interview, INET Executive Director Robert Johnson talks with financial commentator John Mauldin about Mauldin’s new book Endgame: The End of the Debt Supercycle and How It Changes Everything.

Mauldin says that we’re facing “a fundamental restructuring in Europe.” And what’s more, “it’s not just Greece.”  Mauldin suggests that Europe faces three fundamental problems: sovereign debt, insolvent banks, and trade imbalances. “All three have to be solved for Europe to be made workable,” he says.

Can Europe save itself?

via ineteconomics.org

How Political Clout Made Banks Too Big to Fail

Another reason that large banks are politically influential is that their demise can create a catastrophic disruption in the economy -- or so policy makers believe. Whether they are right is irrelevant.

Suppose a large asteroid is hurtling toward Earth and has a 5 percent chance of hitting us, creating $10 trillion worth of physical damage to the U.S. Should the president authorize a $700 billion mission to destroy the asteroid and stave off disaster? If you reason in purely statistical terms, the expected cost of failing to act (0.05 × $10,000 billion = $500 billion) is much less than the cost of acting.

But if the president spends the money to stop the asteroid, nobody will know whether it would indeed have hit the Earth, had he neglected to act. By contrast, if he does nothing, he has a 5 percent chance of going down in history as the president who knowingly failed to avoid catastrophe. Doesn’t the operation to destroy the asteroid suddenly look much more appealing? And, after all, the aerospace industry would be delighted to be paid to work on the mission. Perhaps because all of the experts would, directly or indirectly, benefit from the proposed mission, the public would start hearing that the chances of disaster are really 10 percent to 20 percent. With those odds, the $700 billion mission would make sense, both politically and statistically.

The circumstances that make policy makers succumb to the “too big to fail” doctrine are similar. An important difference, however, is that a Federal Reserve chairman’s resolve to bail out banks actually increases the likelihood of disaster, since the implicit promise to intervene has a perverse influence on the banks’ willingness to take risk.

via www.bloomberg.com

Biderman & Santschi On Europe's Delusions And Money-Printing Illusions

People need to stop expecting simple solutions" is how David Santschi succinctly describes to Charles Biderman the delusion that so many European leaders (and seemingly US and European investors) perceive our world. The prevalence of lying and delusion in Europe is what worries the TrimTabs' chaps the most - especially since in a Fiat money system (where money is backed by nothing but confidence) - with the people running the system lying on a grand scale, the chance of systemic failure are very high. He is careful to point out that this is not just a European issue, we in the US are just as delusional, but the European issues are simply more acute. Simply put, "losses have to be recognized honestly" and Biderman's bro' asks rhetorically "why on earth are we five years on still trying to bailout bondholders and banks so they don't lose money on their crappy debt - it's crazy." The two gentlemen of the Bay Area then describe why money-printing does not solve the problem as Europe faces solvency, not liquidity, problems (detailing exactly our thoughts on the fact that so many of the supposed solutions have/will fail and "there aren't any painless solutions to a debt problem". Avoiding all EUR-exposure, holding USD cash/TSYs short-term, and gold as a long-term insurance cover is how they suggest one is positioned. While the tone is less 'ranty', the content is just as pithy - six minutes well-spent for a summary of why Europe's (and the US) problems are far from over - no matter how much hope is placed in CB largesse.

 

via www.zerohedge.com

Spain faces 'total emergency' as fear grips markets - Telegraph

Mr Roberts said the collapse in Spanish tax revenues is replicating the pattern in Greece. Fiscal revenues have fallen 4.8pc over the last year, and VAT returns have slumped 14.6pc. Debt service costs have risen by 18pc.

The country is caught in a classic deflationary vice: a rising debt burden on a shrinking economic base. “Once you get into such a negative feedback loop, you can move beyond the point of no return quickly,” he said.

via www.telegraph.co.uk

Yes, the Future of the Global Economy Is Worse than I Had Imagined. Why Do You Ask?

Sovereign Bond Yields Falling All Over The Place: Here's The REAL Story Of What's Happening To Government Bond Markets Around The World: Yields are shooting higher in Spain and Italy this morning, but actually that obscures the truth about what's going on in the government bond department. The fact of the matter is that yields are plunging left and right.

• The yield on the US 10-year bond has just fallen below 1.7%. UPDATE: the yield has just hit 1.6713%, a brand new record low.
• In Germany, the 10-year has fallen to a new record of 1.33%.
• UK borrowing costs have hit a record low of 1.73%.
• In Finland, the yield on the 10-year is 1.624%. You guessed it, that's a record low.
• Sweden: The 10-year yields 1.405%. Same deal.
• In Australia, the 10-year has dropped close to a record low of 3.061%.
• Canadian 10-year yields at 1.87% are close to a record low.
• Japan's 10-year: 0.85%.
• Swiss 10-year: 0.59%.

Get the point?

All around the world, people are clamoring for the safety of government debt...

via delong.typepad.com

Spain, Bankia and the credibility problem

If the potential costs to Spain of a euro exit are piling up, wouldn’t that make it less likely to exit — and therefore increase its credibility in the eyes of investors?

Not really, says Pettis. At least, not beyond a certain point, which comes about here:

Pettis writes:

When the cost of misbehavior is very low, at the left-hand extreme on the graph, it doesn’t take much for policymakers to misbehave, and so there is a relatively high probability that investors will take a small loss.  As we move right along the horizontal axis, increasing the cost of misbehavior increases credibility because it reduces the likelihood of misbehavior.

But only up to a point.  At the extreme, if the cost of misbehavior is infinitely high, even a very low probability of misbehavior will worry investors, so clearlyat the left extreme of the graph credibility will also be very low, just as it was on the left extreme.  Credibility rises, in other words, up to a point and begins to decline again as the cost of misbehavior, invertly correlated with the probability of misbehavior, rises.

How does this apply to Spain?

Let us assume that we are worried that Spain might leave the euro, in which case it will be unable to service that part of its debt which it is not able to redenominate into pesetas (its foreign and official debt, most probably).  Spain and Germany want to convince investors that Spain won’t leave the euro, and one way they do so is by increasing the amount of Span’s foreign and official debt (which is what is happening through LTRO and Target 2).

This is partially a way of saying: “Look, by our increasing the cost of a Spanish exit from the euro, we are clearly reducing the probability that Spain will choose to do so, so you investors should respond positively by increasing your appetite for Spanish debt.”  But will credibility actually increase? Not necessarily.  Credibility might have increased tow or three years ago when most market players believed that the cost of a Spanish exit was low.  In that case increasing the cost while reducing the probability would have reduced the expected loss to the investor, and so he would probably bring money back to Spain and in so doing reduce even further the probability of a Spanish exit.

But since the expected loss is a product of two factors – the likelihood of exit and the cost of exit – as they rise at some point we must hit the hump in the curve at which Spain and Germany can no longer increase credibility.  Why?  Because as they increase the “dangerous” kind of debt, the impact of a lower probability of exit is less than the impact of a higher cost of exit, and so credibility drops rather than rises.  At that point, further steps to shore up credibility can actually damage credibility

via ftalphaville.ft.com

Why Can’t People Understand National Accounting?

What does all this mean then? Put simply, the financial sector balances framework means that when the government sector runs a deficit, the non-government sector runs a surplus of equivalent size. So, to move any sector balance in an open economy, you need to move the other two balances exactly opposite in equivalent measure. To reduce the government deficit in any period, the private balance and the capital balance must increase by the exact same amount in that period.

Thinking about government deficits this way opens a whole new understanding of what cutting deficits means for the economy. What it should mean to you is that deficits are the effect and not the cause. Budget deficits are the result of the ex-post accounting identity between the sectoral balances and should not be a primary goal of public policy. Let me give you an example.

Why are deficits so high? What I have been saying is that private debt is the problem. Debt has been a substitute for income due to stagnant wages. Now that the credit bubble’s asset price inflation has turned to deflation, people, businesses and banks have found themselves saddled with debts that are not adequately underpinned by asset collateral. Businesses have done some serious heavy lifting here and debt in the corporate sector is not a problem. But households are still over-indebted. As long as household financial assets provide insufficient collateral for the debts that depend on them, the household sector will continue to maintain a reduced level of consumption and investment as a percentage of income to deal with that debt. Businesses see this and reduce their investment too. And we get stuck in a lower-investment, higher savings world that leads to deficits.

So, in that context, attempts at austerity make things considerably worse. If the government cuts back, the private debt overhang will still be there and the private sector will simply have less money to deal with it. The household sector will still attempt to keep its net saving, its surplus, high and so government cuts will be felt primarily in the form of reduced household consumption and increased private sector defaults. In the context of a still weak banking system, that could create the kind of downward spiral we witnessed during the Great Depression as banks failed. It creates the kind of paradox of thrift that makes deficit reduction harder which we are witnessing in the euro zone as many of us including James Montier predicted.

In my view, austerity is a failed paradigm. Clearly, government shouldn’t have wasteful programs to begin with. So there should be no need to cut them to cut a deficit. Moreover, the deficit is the result of an ex-post accounting identity between private savings, and capital account and government balances. It makes zero sense to target the effect (deficits) instead of the cause (excess credit growth and malinvestment). In plain English that means the policy prescriptions are the economic input and the deficit is the output. Focus on the policy and policy goals, not deficits.

The way I look at this crisis puts me into Ray Dalio’s camp. The right narrative for what has happened is that the depression has been the result of significant malinvestment that was built up during the so-called ‘Great Moderation’ as a result of loose monetary policy at the Fed and other central banks in a world awash in

via www.economonitor.com

Why Can’t People Understand National Accounting?

What does all this mean then? Put simply, the financial sector balances framework means that when the government sector runs a deficit, the non-government sector runs a surplus of equivalent size. So, to move any sector balance in an open economy, you need to move the other two balances exactly opposite in equivalent measure. To reduce the government deficit in any period, the private balance and the capital balance must increase by the exact same amount in that period.

Thinking about government deficits this way opens a whole new understanding of what cutting deficits means for the economy. What it should mean to you is that deficits are the effect and not the cause. Budget deficits are the result of the ex-post accounting identity between the sectoral balances and should not be a primary goal of public policy. Let me give you an example.

Why are deficits so high? What I have been saying is that private debt is the problem. Debt has been a substitute for income due to stagnant wages. Now that the credit bubble’s asset price inflation has turned to deflation, people, businesses and banks have found themselves saddled with debts that are not adequately underpinned by asset collateral. Businesses have done some serious heavy lifting here and debt in the corporate sector is not a problem. But households are still over-indebted. As long as household financial assets provide insufficient collateral for the debts that depend on them, the household sector will continue to maintain a reduced level of consumption and investment as a percentage of income to deal with that debt. Businesses see this and reduce their investment too. And we get stuck in a lower-investment, higher savings world that leads to deficits.

So, in that context, attempts at austerity make things considerably worse. If the government cuts back, the private debt overhang will still be there and the private sector will simply have less money to deal with it. The household sector will still attempt to keep its net saving, its surplus, high and so government cuts will be felt primarily in the form of reduced household consumption and increased private sector defaults. In the context of a still weak banking system, that could create the kind of downward spiral we witnessed during the Great Depression as banks failed. It creates the kind of paradox of thrift that makes deficit reduction harder which we are witnessing in the euro zone as many of us including James Montier predicted.

In my view, austerity is a failed paradigm. Clearly, government shouldn’t have wasteful programs to begin with. So there should be no need to cut them to cut a deficit. Moreover, the deficit is the result of an ex-post accounting identity between private savings, and capital account and government balances. It makes zero sense to target the effect (deficits) instead of the cause (excess credit growth and malinvestment). In plain English that means the policy prescriptions are the economic input and the deficit is the output. Focus on the policy and policy goals, not deficits.

The way I look at this crisis puts me into Ray Dalio’s camp. The right narrative for what has happened is that the depression has been the result of significant malinvestment that was built up during the so-called ‘Great Moderation’ as a result of loose monetary policy at the Fed and other central banks in a world awash in

via www.economonitor.com

Why Wrestlers and Judo Players are so much tougher than everyone else (inc. BJJ Players). Hint - those sports aren't fun.

BJJ is fun. You can roll for 40 minutes and have fun. That is impossible in Judo or wrestling. In Judo and wrestling you have to try hard every time. They always train hard against the clock - and short - 5 -6 minutes ( the super unpleasant zone). There are no easy rolls. They practice having things suck. BJJ players have fun rolling around - it is a totally different mindset. Not surprsingly if you practise for character and toughness you get character and toughness.

Here is some science behind this:

Interesting new review by German researchers in the journal Pain on pain perception in athletes, aggregating the results of 15 previous studies (abstract here; press release here). Some key insights:

• Athletes clearly have higher pain tolerance than the general population. That's a correlation, but what about causation? Does hard training increase your pain tolerance, or do naturally tough bastards tend to take up sports? There's no clear answer, but a strong hint comes from one 12-week study of non-athletes in which aerobic training significantly increased their pain tolerance. It could be a mix of both factors, though.

• These measurements of pain tolerance aren't taken during or immediately after exercise. It's well known that exercise helps you block out pain, but these are measurements of "baseline" pain tolerance, independent of adrenaline and endorphins and so on.

• While athletes showed increased pain tolerance, they didn't show any difference in pain threshold (the level of stimulus at which they start perceiving pain). In other words, it's not that athletes don't feel pain -- they feel it the same as everyone else, but they've learned to cope with or ignore it.

• "[E]ndurance athletes had a moderate tolerance for pain and their scores were fairly uniform. Athletes involved in game sports had a higher tolerance for pain than other athletes, but the results varied widely, suggesting that endurance athletes are more alike in their physical and psychological profiles, while athletes involved in game sports are more diverse. "

• The findings about pain threshold vs. pain tolerance are consistent with the literature on chronic pain management. Exercise helps pain patients improve their quality of life, but doesn't decrease the actual amount of pain they feel. They're just able to tolerate it better.

• A final quote from the paper, which I think is on the money: "Athletes are frequently exposed to unpleasant sensory experiences during their daily physical efforts, and high physical and psychological resistances must be overcome during competitions or very exhausting activities. However, athletes are forced to develop efficient pain-coping skills because of their systematic exposure to brief periods of intense pain. Therefore, pain coping is an integral part of athletic training, and coping skills are important features in the development of athletic character."