Odd Resonances

A current question in economic circles is why the massive expansion of the money supply as aresult of the Federal Reserve’s strenuous efforts to deal with the financial crisis and ensuing general recession has led to utterly no discernible inflationary pressures, at least in the short term. After all, it’s a generally accepted fundamental precept of modern macroeconomic theory that, ceterus paribus (ah, such as old fashion phrase, a whiff of napalm in the morning), an expansion of the monetary supply will generate inflationary pressures, and we have witnessed over the last year a veritable explosion in the money supply.

The succinct and apparently indisputable answer is that the expansion of the money supply has occurred in tandem with a slowing in its velocity, dressed up with the occasional pontification about appreciating the difference between statistics that are expressions of first derivatives and those which express second order derivatives. Without honoring the mathematical window dressing, let’s accept that observation as simple, gospel truth.

What is stunning to me is that the idea resonates with the long-discarded ideas of an English engineer-civil servant-social theorist named Clifford Douglas who in the early 20s developed an idea of Social Capital. I am currently reading a magisterial exegesis of the poetry of Ezra Pound, and, before falling in with Mussolini’s fascism, Pound was temporarily captivated by the ideas of Douglas.

Douglas was not talking about the money supply. Douglas was not a Marxist (he felt the attribution of all value ultimately to labor and toil of the contemporary working classes and peasantry was fallacious). He was not an economist (not even by the more flexible standards of his day). He may have been a crackpot. But his diatribes on cost accounting and contempt for the reliance on markets to both price and value goods and services are seductive.

In a nutshell, he argued, with respect to capital, not the money supply, that the velocity of capital, not the quantity of it, explained the vicious grip of banks and the financial interest on the general economy. His argument echoed that of the American populists and progressives of a generation earlier that Wall Street held the country in its talons, crucifying Man on a Cross of Gold as surely as our Savior suffered on a Roman cross of timber. In a wonderful analogy, he made the argument that to ignore velocity would lead one, in the context of demographics, to claim that, because everyone who is born eventually dies, the birth rates and the death rates must be identical, and so the population must be stable, which it patently is not. These statistics are matters of rates, not absolute quantities (and it hardly required the invocation of Calculus to understand it).

I’m not sure if Douglas is worth exploring, or not. He was a whacko, and, like Pound, more than a whiff of anti-semeticism pervades his writing. But clearly, all of the post World War II macro orthodoxies are being found wanting. Hence, you have Paul Krugman reading Hyman Minsky. Thus, the endless invocations of the same few phrases of John Mayard Keynes (efforts to restore ‘animal spirits’ by fiat seem to me about as likely to succeed as efforts to repulse the Mongols by sending the patriarch and his bishops beyond the city walls to parade the icons before the approaching horsemen).

It’s enough to make me wonder if these issues are, at bottom, really issues of the economy, at all.

Non Quant Indicators

that the credit markets are close to deconstructing again. Not sure if they mean anything. But two salient factoids are being systemically forced down the throats of those who trade:

1. The U.S. housing market is continuing to deteriorate, and the deterioration, so far, has no end point.
2. The financial services sector, and the debt instruments generated over the last decade, cannot survive point 1, and so it, its equity and its contractual obligations are valueless.

Given enough time, which it has had, the federal government can step in to sponsor a utility-like financial services sector that will meet the needs of the general economy (point 1), but the consequences of point 2, over the intermediate to long term, are quite opaque.

Vive l'opaquace!

Confirmation Bias

'Confirmation bias' is a term to describe the tendency of the human mind, once a conclusion has been drawn, to emphasize subsequently received information that supports the decision or conclusion and to diminish, distinguish or otherwise minimize the significance of information which contradicts, undermines or otherwise calls it into question.

The current reporting of the trends on residential housing prices offers countless examples of confirmation bias in action. The operative conclusion/decision is the conviction which has prevailed for the last several generations in the United States that house prices always go up, that your home is your best investment, etc. The date coming in recently, to put it mildly, calls that conventional wisdom into question.

All of that data is bad for homeowners, homebuilders, anyone in the real estate business. Some of it is less bad that others. But none of it is exactly positive. However, it is possible to draw some second-order inferences that are non-negative. If the rate of new home construction has falled below the absorption rate for new home inventory and below the rate of household formation, that implies that eventually the situation should turn around. If interest rates are being held at artificially low levels to make mortgages less expensive, that results in an affordability index that would support increased levels of home ownership (if only the sidelined new home owners weren't scared to death of losing their shirts of 'the biggest purchase you'll ever make").

But, even though all the data is bad, the talking heads find someone willing to say something neutral, and the headline writers twist those words into something positive. I really don't think this is the machinations of the National Association of Realtors or the Homebuilders at work. I think it's confirmation bias in action.

Which would suggest that we have a ways to go before it's purged.

The Bush Legacy, Memorial Day 2009

Ever notice how in the last year of the second term of a presidency voices are raised in speculation about the hallowed legacy that the incumbent soon to be departed will leave behind? The fund raising machine is cranked up one last time for the benefit of an ever more grandiosie presidential library and respectful columns written about His concern for His legacy dominating His remaining waking hours of Power.



Well, it's Memorial Day Weekend, time to consider legacies and such, even if we haven't heard too much about the Bush legacy recently. Dick Cheny is out there defending torture, the invasion of Iraq and various other crimes and mistakes, to what purpose I know not. But as to the legacy, all is quiet on that front (apologies to Erich Maria Remarque, another good Memorial Day read, in any country, though he wrote as a German after the Great War).



Perhaps there won't be one. Perhaps we will simply roll it all back to 2000. I think that right now if you gave people that choice, without much thought, they'd grab it. In retrospect, most of the 'productivity' gains of the last eight years resulted from 'innovations' in the financial services sector, and just about everyone would like to pretend like that never happened. So, take her back to 2000, skipper.



Well, there is a little problem with that. If you take house prices back to 2000 (not that far really), house prices have to fall roughly another 30% (nation-wide, based on the Case Shiller index, peak to trough), or as far again as they've already fallen (a bit worse that the more adverse scenario of the recently completed stress test exercise). Awful, but in the ballpark of people's tolerable reality dosage. The real horror would be in taking levels of economic activity back to that level. If you reverse 8 years of 2.2% annual economic growth, you drop the standard of living by some 15-16%. That is not quite a Depression Era level of readjustment, but it's far worse than anything since World War II in the United States.



That prospect exceeds the dosage of any tolerable reality check. But, it's a distinct possiblity, if not already baked in. Kinda leaves a guy wondering where the recent stock market rally came from (not that I'm betting against it continuing).



Of course, the Clinton Legacy was Bush, so maybe the Dems better keep quiet. To borrow the title, itself borrowed, of course, of Dean Acheson's memoirs, Messrs. Geithner and Summers, at least, were Present at the Creation of the current economic mess, even if Phil Gramm played the role of Gilgamesh.

Minsky, Path Dependency and the Hegelian Dialectic

It's been all downhill since the Hegelian dialectic was hijacked by the Marxists and became dialetical materialism. Start with a mode of argument--thesis, anthesis and synthesis-and deploy it to analyze problems in 19th century political economics. And you have a concept that takes into consideration the prosaic and indisputable observation that the seeds of the next problem are generally found in the solutions to the current problem. An economic and political context in crisis yields an outcome, dependent on the prevailing correlation of forces, and, lo and behold, the new stasis has in it an internal tension that results in eventual crisis, which in turn yields a resolution that creates yet another new set of circumstances, that in turn . . .



And so you have dialectical materialism for idiots. I mean, there is a great deal more to it than that, if you are interested.



In its most recent iteration there is the lovely thought that future outcomes are path dependent, which is even easier. I believe path dependency can be summed up in the observation that what happens eventually depends on what happens between now and then. And that differing intermediate outcomes either foreclose or increase the probability of different ultimate outcomes.



Path dependency is a useful corrective to what Hyman Minsky referred to as the Olympian fallacy. The Olympian fallacy, which also has theological overtones and resonate with chaos theory, holds that a prime mover can set a process or policy or strategy in motion and it will inevitably lead to the desired outcome. Nice as it is to think that the butterflies wings half a world away cause the typhoon, the thought has little practical application in human affairs. Rather, in application, the ideal is transformed into the real, or becomes something alien to those who originally imagined it.



So, it's not entirely clear how all this will come out. But it's pretty clear that future choices and options will be determined by choices made today and the outcomes of those choices. And perhaps by choices made in the past, which are only working out as real world outcomes today.

Death of the Sinecures?

Our economy is littered with sinecures.

Technically, I suppose a sinecure in a position, generally a government or academic appointment, in which very little in the way of work, effort or responsibility in required of the incumbent, who nonetheless enjoys a handsome income from the position. In 18th century England, the politics of the day depended heavily on a patronage system involving sinecures, livings and rotten boroughs, which in turn were political appoints, clerical positions and parliament seats filled through appointment by a senior member of the local nobility. In 19th century America, political patronage filled precisely the same role--I had a great grandfather who was the Republican postmaster of Omaha, Nebraska for decades, as a party stalwart and veteran of the Grand Army of the Republic (not something my Georgia kin deemed appropriate to notice officially).

So much for the history lesson. The modern American economy is littered with positions that amount to sinecures. Today's Republicans love to take pot shots at public sector sinecures--as though a horse breeder named Michael Brown had been appointed head of FEMA at the time of Katrina through some merit driven process. And the academic bureaucracy that has developed over the last century probably has more than its fair share of positions in which time serving well positioned bureaucrats have found themselves a safe haven, pending retirement in a decade or perhaps a generation.

But we have private sector sinecures, as well, if you take a somewhat expansive definition of sinecure, and consider any job offering a heavy paycheck for light lifting a form of sinecure. Consider all those divorcees peddling real estate to their still married sororiety sisters. That gig rolled to a close about a year ago. Consider all those credit managers and service managers at sleepy auto dealerships where business has been slow for years, but where the axe finally fell last week. The pay was good, the work was easy, you just had to be a good fit with the family that owned the place. Now, gone. Poof.

On another level, think about all the businesses that serviced the needs of booming sectors of the recent credit-bubble inflated economy. A read an internal memo circulated at J.P. Morgan trying to control car hire, tipping and deal toy expenses. These are probably not good times to be an event planner on Manhattan or in Southern California. Not too sure how the personal trainers and life coaches are doing, either.

Finally, how about good old print journalism? Every decent sized community in the country has a daily newspaper that fewer and fewer people read. Every daily newspaper has local news coverage--business, sports, community affairs. All that requires staffing. To hear the publishers lament, their communities will be culturally impoverished with the loss of that coverage. Perhaps, but if readership is collapsing, and craigslist has ended the want ad gravy train, something is going to give. I don't think the replacement of want ads by craigslist will diminish the vitality of community culture, any more than a shrinking real estate section or using the email instead of the Sunday supplements to flog department store sales will.

But what will change are the job prospects of those reporters. Journalism is apparently one of the favorite majors at the University of Oregon. Mock if you will, call it an English major without the rigor of taking a course in Shakespeare, but it was a major of choice for kids looking for sinecures.

And it appears that the sinecures are being squeezed out of the economy. Oh well, back to work.

A Better Class of Victim

For the last half century in the United States the victims of any economic downturn were invariably the same, at least in the sense that they generally came from the bottom half of the income distribution. Oh, occasionally there'd be some regional variety--petroleum geologists in the Oil Patch back in the 80s, a bunch of white shoe paperhangers in the 60s (i.e., go-go year stock brokers), the occasional wave of aeronautical engineer layoffs in Southern California as the defense cycle turned, the almost comical dot.com geek zillionaires turned burger flippers. But, on the whole, the burden generally and relentlessly fell on the unionized worker, the craftsman, Joe Sixpack, AS the people for whom he voted dismissively labelled him.



Now, the for the first time, we may actually be in a situation where the pain and the burden falls disporportionately on the well employed, well-educated and well off. The 32% of the population that doesn't own a home are spectators to the popping of the housing bubble. The majority of Americans will less than $50,000 in financial assets (or is it $15,000) are not taking the paper losses on their 401ks that their supervisors, and their supervisors' managers, are letting pile up unopened. You've got to have some wealth to feel its destruction. And the elements in the service sector which are for the first time bearing the brunt of the downturn include lawyers and architects as well as retail clerks and minimum wage waitstaff. When an auto dealership closes, the credit manager, sales manager and service manager are all out of a job, not just the floor sales reps and the cleaning staff.



I don't want to overstate this. But the political implications of economic distress that really touches the midle class and the upper middle class in this country is unexplored territory. Conventional wisdom is that the reaction will be conservative--politically and socially. I don't doubt for a minute that in this instance there will be a conservative social reaction. But the political one is harder to call. The political right is so thoroughly tainted with responsibility that it is difficult, for a couple of election cycles, at least, to see it benefiting, even if Team Obama flubs completely. If Team Obama muddles through, I could see a shift to the right as the slog gets longer and longer and memories fade about how the mess came about in the first place. But, in the short term, it's hard to see it.



In terms of historical precedent, I'd offer two conflicting possibilities. One is the rise of fascist tendencies in '30s Europe. The other is the Populist/Progressive movements in the United States of a century ago. I'd guess we're more likely to see a reprise of the latter than the former (in the United States, at least), but I'm far from certain.