Sunday, November 22, 2009

Book Review: Keynes, The Return Of The Master

It's good practice to pick up a book, from time to time, that you know you're going to disagree with. Knowing why you favor one idea over another requires knowing both. This was the reason why I read Keynes: The return of the master by Robert Skidelsky.

Having already written a three volume biography of Keynes, Skidelsky covers a lot of territory in 193 pages. In order to understand how Keynesianism might help us today, one must first understand Keynes the man, the times in which he lived, and his historical role. Skidelsky does an excellent job with the grand sweep of history and fleshing out Keynes the man. It is only when he is trying to explain today's muddled situation, with floating exchange rates and complex international savings/investment relationships that the book loses its rhythm.

Keynes was not just an economist. He was a philosopher whose main interest was economics. His moral philosophy was conventional, even Victorian by today's standards. He was an unapologetic capitalist who set out to solve what he saw as capitalism's biggest problem; unemployment. He lived at the dawn of modernity, the industrial revolution was in full swing, and the rise of communism and fascism were real threats to capitalist democracies. If a way could be found to maintain low unemployment, it would lead to a more harmonious world.

Among economists, both then and now, Keynes's greatest, and most controversial insight, was realizing the difference between risk and uncertainty. Risk is quantifiable. Risk can be managed using math and science. Our reasoning abilities can be used to predict the future with a fair degree of accuracy. But scientific risk management will only get us so far. Uncertainty is more like an enveloping fog, thick in some parts, thinner in others, always obscuring our expectations of what the future will bring. In a world of uncertainty, we make progress by trial and error, reverting to convention to get us through the mysterious shroud. When the most logical path is hidden and unknowable, scientific reason is of no practical benefit.

This does much to explain our present situation. Our computer models have failed us. Our reasoning abilities have become useless at predicting what is to come next, and so we revert to Keynes. He got us through this before, he can do it again.

There is a lot to like about Keynes. He seems to have been a kindly old gent, a revolutionary and independent thinker. Skidelsky points out that all the schools of economic thought have some amount of real world truth. The economics of capitalism is very much a work in progress. I still think my disagreements with Keynes are still valid, like a high savings rate represents a failure of growth, rather than an increase in real wealth, or that flooding the markets with depreciating cash will produce an overall good. Most of all, like all people of the political left, Keynes tends to assign greed, avarice, and self-interest only to the business class. The political class is assumed to be altruistic and working for the benefit of all. I have to think that if Keynes were alive today, he would be reconsidering that assumption.

I recommend this book for the general reader. Skidelsky writes in plain language and for the most part, treats his adversaries fairly. I would have liked it more if he had spent more time on the collapse of the Bretton-Woods Agreement and the resulting inflation, but maybe he'll have more to say about that in the next one.

Sunday, November 15, 2009

The Currencies Of Last Resort

As one of my favorite bloggers, Sybil's Star often says, "you can take the gold out of the standard, but you can't take the standard out of the gold." A case in point was the 1970's.

gold 68-99

In 1971, President Nixon took the U.S., and the rest of the world, off the gold standard. Gold prices went up, as expected, but soon began to settle. The OPEC oil embargo of 1973 caused another bump, but again gold prices soon began to settle. Then, inflation kicked-in, and the gold market has been a roller coaster ride ever since.

Flying under the radar, silver (the poor man's gold) is even more instructive. Inflation causes more uncertainty about the future than even warfare.

silver 1792-1993

The first little bump is war with England (1812-15), the second is the Civil War (1860-65). World Wat I (1914-18) caused a minor ripple, while the depression and World War II were non-events, as far as silver was concerned. Then there is the inflation of the 1970's.

But why is this so? Everyone knows that gold has no intrinsic value, and silver has very little. As is often argued, the metals have no more real value than the circular rock money used by the people on the Pacific island of Yap.

Yap stone money

Gold and silver are only rocks too. It is the value we place on them that determines their worth. Given the resources we have, there is nothing else to use.

In a recent interview, President Obama said:

“A lot of independents, Democrats and Republicans -- all are concerned about is what are we going to do about this long-term debt,” Obama told ABC’s Jake Tapper Monday. “We've got to show people that we are responsible stewards for their taxpayer dollars and that we're taking some serious steps to at least lay the foundation -- the pathway -- for bringing those deficits down over the next several years.”

An unnamed White House official followed up; “Democrats have to reassure voters we are not being reckless.” Here's why.

Gold 2000-09

silver 2000-09

Inflation is coming. Got rocks?

Sunday, November 8, 2009

Twitter In The Over 50 Club

A buddy of mine at work, who is roughly the the same age as me (55), informed me one day that he had been "talked into signing up with Facebook." He then went on to describe how stupid and pointless it is. I asked him about Twitter;

"Oh hell no", he said. "I can see where teenagers would like it. They can talk on the phone for 3 hours about nothing. But what am I going to tell everybody, that I cut my toenails today? Who gives a shit!"

I have to admit, I'm somewhat sympathetic to this view. I signed up with this stuff last March, and although I've found it interesting in a sociological kind of way, I haven't been able to make much use of it. As the conversation with my friend went on, I told him that I had followed on endurance auto race from Japan, courtesy of Drayson Racing. It triggered some long forgotten memories.

DraysonRacing Good morning from Okayama. We are approx. an hour from the start of Asian Le Mans Series Race 2. Jonny will again start from the pole.4:03 PM Oct 31st from TweetDeck

DraysonRacing The car has now taken its place at the point of the grid. We are approx. 20 mins from the green flag. 3 hours,/136 laps will be run today.4:41 PM Oct 31st from TweetDeck

In the early '60's, Major League Baseball was almost always played during the day. Most stadiums didn't have lights yet, and even for those that did, night games were a novelty. For a school aged kid, this presented a problem until the invention of the pocket sized transistor radio. Whether a jock or a nerd, cool guy or dweeb, on certain days in October, the kid with the transistor radio was the most popular kid in school.

DraysonRacing GREEN FLAG!4:58 PM Oct 31st from TweetDeck

During recess, we'd follow that poor kid around the playground like a pack of dogs waiting for their bowls. At lunchtime, you would have seen us all out on the grass, Indian Council style, in a circle, cross-legged, in silence, staring at the tiny magic box.

DraysonRacing Give & take of traffic has us back 14 secs to the leader; ahead of 3rd by 2.5 secs. All-told, the gaps remain close; 2 hrs, 14 min to go.5:44 PM Oct 31st from TweetDeck

As time went on, they came out with a little ear piece that connected to the radio with a wire. That meant that if a kid was sufficiently discreet, he could listen in class. Updates could be whispered. or notes could be passed, and we could all stay informed. One time I remember, the teacher was writing on the blackboard with her back turned to the class when a kid near the front and off to the side held up his binder with the message:


and that's when it clicked. Waiting for the Twitter updates had turned me into a 10 year old again.

DraysonRacing Drayson Stop 2 - Lap 87, 55 mins remaining - Shell Fuel, Michelin Tyres and a Driver Change. Jonny IN, Paul Out. Running P3. Great stop!7:04 PM Oct 31st from TweetDeck

Of course, the kid would eventually get caught. No worries, another would have one and the updates would continue. As the saying goes, history doesn't repeat itself, it rhymes.

DraysonRacing 15 mins remaining and Jonny is 10 seconds behind the Audi in P4.7:43 PM Oct 31st from TweetDeck

On March 20, the regular race season opens with the 12 hours of Sebring. I don't know if other teams are doing this yet. Multiple Twitter updates could be as good a way to "watch" the race as any.

DraysonRacing 6 minutes and 2 seconds remain. Jonny calls in to confirm the Audi within his sight is for position. It definitely is!7:52 PM Oct 31st from TweetDeck

DraysonRacing 1.5 seconds, 4 minuts remaining between Drayson and P47:53 PM Oct 31st from TweetDeck

DraysonRacing Jonny flashes by just off the rear of the Audi... 0.475 seconds!7:54 PM Oct 31st from TweetDeck

In any case, I've found another use for Twitter. It took a long time, but it was just a matter of staying with it. Sooner or later, the Law of Unintended Consequences kicks in.

DraysonRacing Jonny takes P4. White flag lap!!!7:57 PM Oct 31st from TweetDeck

DraysonRacing Team ends 2009 'World Tour' on high note! P4!!! Highest Privateer Finisher! Fastest race lap, again, by Jonny.8:01 PM Oct 31st from TweetDeck

That's all for today. It's time to cut my toenails.

Wednesday, November 4, 2009

More From The Transparency Wars

In a clear case of the Empire striking back, Mel Watt, a Democrat from North Carolina, who chairs the domestic monetary policy and technology subcommittee of the House Financial Services Committee has "gutted" H.R. 1207, the bill to audit the Federal Reserve. Some possible motivations for Mr. Watt's actions come from American Banking News.
Bank of America (NYSE:BAC) has its headquarters in his congressional district, which is based in Charlotte...Watt’s largest contributors included American Express (NYSE: AXP), Wachovia, Bank of America and the American Bankers Association. Altogether the financial industry donated over $217,109 to Watt, which was over 35 percent of the overall contributions he received.

Bloomberg reports on the key provisions taken out of the bill:
The bill, with 308 co-sponsors, has been stripped of provisions that would remove Fed exemptions from audits of transactions with foreign central banks, monetary policy deliberations, transactions made under the direction of the Federal Open Market Committee and communications between the Board, the reserve banks and staff

Ron Paul, the author of H.R. 1207, plans to offer an amendment when the new bill reaches the floor. Barney Frank, the Chairman of the Financial Services Committee said the legislation will likely be rolled into the broader financial regulation package, currently still in progress.

And speaking of Bloomberg, the story of they're lawsuit, filed under the Freedom of Information Act against the Federal Reserve Bank of New York, seems to have disappeard. When last heard from, the government had 30 days to appeal. Those 30 days were up in early October, but there's been no news on the outcome. My only guess is that there must be some back room negotiations taking place.

One thing for certain in all this; finding out what the government is doing with our money is not going to be easy.

Sunday, November 1, 2009

A Presidential Clunker?

Edmunds car guides have been around since 1966. In 2006 they ceased paper publication and went all online as They have become a "must use" site for anyone buying a new or used car. So when they came out with a report that the governments Cash for Clunkers (CARS) program cost the taxpayers $24,000 per vehicle, it raised a few eyebrows, including some within the White House.

At issue is this; How many cars would have been sold without the subsidy? The president's Council of Economic Advisers says 700,000 based on total sales. Edmunds estimated it to be 125,000 using standard and widely accepted methodology as Francis Cianfrocca reports in New Ledger:

The analysis was based on an examination of parallel sales trends of vehicles (like luxury cars) that were NOT eligible for a CARS subsidy. These trends showed a steady improvement in overall vehicle sales over the subsidy period. Edmunds assumed the historical sales ratios between luxury cars and non-luxury models, and they compared them to the actual sales increase observed for the CARS-eligible categories. That gave them an above-trend increase of about 125,000 units.

What would have happened had we done something different is a problem economists face all the time. Digging through historical data and finding trends is a daily occurrence. The interesting point here is that the auto industry seems to be improving without government help. We'll know more over the next few months; if sales plummet below historical trends, then the subsidy helped; if trends continue, then no subsidy was necessary.

This is why economics is such a good way to find out what is really going on. The party in power always has an interest in showing that they are doing the right thing. It is the duty of the opposition to present alternatives. Through it all, the unheralded economist searches for the truth. To the extent the economists remain apolitical, they can be trusted.