Consider this, from Charles Mackay's 19th-century classic, "Memoirs of extraordinary popular delusions and the madness of crowds", talking about the South Sea Bubble:
But the most absurd and preposterous of all, and which shewed, more completely than any other, the utter madness of the people, was one started by an unknown adventurer, entitled "A company for carrying on an undertaking of great advantage, but nobody to know what it is." Were not the fact stated by scores of credible witnesses, it would be impossible to believe that any person could have been duped by such a project.
Bitcoin, anyone? As the bizarre unregulated "currency" seems on the point of unravelling, with the collapse of the Mt. Gox exchange, it's worth asking how on earth anyone ever fell for such a thing. A means of exchange with its own argot, including miners and brokechains? Just a glance at the gibberish on the bitcoin.com website ("Much of the trust in Bitcoin comes from the fact that it requires no trust at all") should have warned off all but the most foolish and venal. Yet as countless examples throughout history show us, there has always been a market for such schemes.
In what was surely a harbinger of impending doom, it was only earlier this month that the lovable Winklevoss twins launched something modestly dubbed Winkdex, a bitcoin price tracker. The brothers have been playing around in this particular sandbox for some time, even launching a bitcoin ETF during 2013. At the time of the launch, one of the business commentators on Slate commented that the prospectus read like something out of Harry Potter.*
There's a rather sad photo in the media today, with a couple of forlorn looking individuals sitting on a low wall outside the Mt. Gox offices in Tokyo. One of them has a placard saying "Mt. Gox -- are you solvent?" It's impossible to put any conventional meaning on that term in the context of bitcoin. What the poor guy is really asking is, "can I have my real money back, please?' I fear he already knows the answer to that.
Let's return to Charles Mackay for the end of the South Sea Bubble anecdote:
The man of genius who essayed this bold and successful inroad upon public credulity, merely stated in his prospectus that the required capital was half a million, in five thousand shares of 100l. each, deposit 2l. per share. Each subscriber, paying his deposit, would be entitled to 100l. per annum per share. How this immense profit was to be obtained, he did not condescend to inform them at that time, but promised that in a month full particulars should be duly announced, and a call made for the remaining 98l. of the subscription. Next morning, at nine o'clock, this great man opened an office in Cornhill. Crowds of people beset his door, and when he shut up at three o'clock, he found that no less than one thousand shares had been subscribed for, and the deposits paid. He was thus, in five hours, the winner of 2,000l. He was philosopher enough to be contented with his venture, and set off the same evening for the Continent. He was never heard of again.
The founder of Mt. Gox has vanished off the radar, and nobody actually knows who started bitcoin in the first place. Sounds like history is repeating itself.
*Which turns out to be quite apt. Although "Mt Gox" gives an impression of solidity, it is in fact just a set of initials, and the M stands for....magic!
UPDATE -- February 28: It's being reported that Mt. Gox has now filed for bankruptcy in Japan. That certainly seems to provide a definitive answer to that placard waver's plaintive question. It appears that the bankruptcy filing was made in response to pressure from US regulators. Anyone with any exposure to other bitcoin exchanges should probably be guided accordingly.
Wednesday 26 February 2014
Sunday 23 February 2014
The prodigal son and the one percent
You don't read this blog for biblical exegesis, and nor should you. But whether or not you have any religious affiliation, even if the only time you've crossed the portal of a house of worship was when your parents took you along for baptism or circumcision, you almost certainly know the parable of the Prodigal Son. (It's only in Luke's gospel; you can find it here).
If you've thought about that parable for more than a second, you've probably taken sides. Are you with the father, who welcomes back his wastrel offspring, or with the prodigal's brother, who resents the treatment his "worthless" brother receives on his return to the family home? Which side of that question you're on will largely correspond to whether you lean to the left or to the right politically.
All this is just to urge you to read a wonderful little essay by David Brooks of the New York Times, who riffs off the parable to draw some interesting and profound lessons about some of the key issues in modern politics, especially the inexorable increase in inequality. If you're at all familiar with the NYT's politics, you won't need to read the article to know that Brooks sides with the father rather than the resentful son.
Whether or not you believe that the Bible is the word of God, Brooks offers up a useful reminder of its lingering historical resonance, at a time when a surprising number of evangelists have managed to convince themselves of the existence of something they call "the prosperity gospel". It's hard to read Luke that way. Did you notice that Brooks's title refers to the prodigal sons, plural? That's not a typo.
If you've thought about that parable for more than a second, you've probably taken sides. Are you with the father, who welcomes back his wastrel offspring, or with the prodigal's brother, who resents the treatment his "worthless" brother receives on his return to the family home? Which side of that question you're on will largely correspond to whether you lean to the left or to the right politically.
All this is just to urge you to read a wonderful little essay by David Brooks of the New York Times, who riffs off the parable to draw some interesting and profound lessons about some of the key issues in modern politics, especially the inexorable increase in inequality. If you're at all familiar with the NYT's politics, you won't need to read the article to know that Brooks sides with the father rather than the resentful son.
Whether or not you believe that the Bible is the word of God, Brooks offers up a useful reminder of its lingering historical resonance, at a time when a surprising number of evangelists have managed to convince themselves of the existence of something they call "the prosperity gospel". It's hard to read Luke that way. Did you notice that Brooks's title refers to the prodigal sons, plural? That's not a typo.
Tuesday 18 February 2014
rUK tries hardball
With the Scottish referendum on independence now just over six months away, the pro-Union side (the "rest of the UK", or rUK as it's becoming known) is starting to talk tough. Prime Minister Cameron, whose name shows his strong Scottish antecedents, has made an emotional plea for a "no" vote, arguing that the UK is much stronger together. Most of the other arguments, however, have focused on economic and financial issues, possibly in recognition of the Scots' reputation for being canny with their money.
Chancellor George Osborne stated flatly last week that Scotland would not be allowed to keep the pound if it voted to leave the UK, a message quickly echoed not only by the other main party leaders but also by Bank of England Governor Mark Carney -- who has, of course, had a ringside set for two independence votes in Quebec. The SNP government in Edinburgh waved this threat away, pointing out the huge costs to rUK businesses if the common currency vanished, threatening to reject their portion of the shared national debt if Scotland were booted out of Sterling, and all the while quietly relying on the backup possibility of adopting the Euro.
But not so fast with that! In an unexpected intervention, EU President Barroso cautioned that it would be very difficult for an independent Scotland to "jump the line" of existing EU applicants and gain quick EU entry, which would require all of the existing members (including rUK) to agree. Since Scots are generally much more pro-Europe than their southern neighbours, it's hard to see the EU actually booting them out, but the threat has now been uttered.
And finally we hear from none other than Gordon Brown, unlamented on both sides of the border, with a warning that Scots would lose their UK pensions if they were to secede. He argues that the national insurance fund that currently pays the pensions on both sides of the border would have to be split up, with rUK maintaining the lions' share. The smaller Scottish fund would be much more volatile and potentially less adequate than the current pooled arrangement. This is a cunning argument, given that older voters tend to turn out at the polls in much larger numbers than the young -- though whether this proves to be the case in a referendum, rather than a routine election, remains to be seen.
Watching all of this unfold from Canada is fascinating. In the two Quebec referenda one got the uncomfortable sense that the Ottawa government was at the mercy of events, reluctant to weigh in too heavily on the side of federalists within la Belle Province. Evidently UK politicians have no such qualms. One interested spectator is undoubtedly Quebec Premier Pauline Marois, who is angling to hold an election in the next few weeks, with the hope of setting the wheels in motion for yet another referendum after that.
A defeat for the Scottish Nationalists in September would undoubtedly put a crimp in her plans, and might also put some backbone into the Ottawa government. But if the Scot Nats win -- and Alex Salmond is one of the most appealing politicians in the UK, whatever you think of his main policy platform -- then all bets will be off on this side of the Atlantic too.
Chancellor George Osborne stated flatly last week that Scotland would not be allowed to keep the pound if it voted to leave the UK, a message quickly echoed not only by the other main party leaders but also by Bank of England Governor Mark Carney -- who has, of course, had a ringside set for two independence votes in Quebec. The SNP government in Edinburgh waved this threat away, pointing out the huge costs to rUK businesses if the common currency vanished, threatening to reject their portion of the shared national debt if Scotland were booted out of Sterling, and all the while quietly relying on the backup possibility of adopting the Euro.
But not so fast with that! In an unexpected intervention, EU President Barroso cautioned that it would be very difficult for an independent Scotland to "jump the line" of existing EU applicants and gain quick EU entry, which would require all of the existing members (including rUK) to agree. Since Scots are generally much more pro-Europe than their southern neighbours, it's hard to see the EU actually booting them out, but the threat has now been uttered.
And finally we hear from none other than Gordon Brown, unlamented on both sides of the border, with a warning that Scots would lose their UK pensions if they were to secede. He argues that the national insurance fund that currently pays the pensions on both sides of the border would have to be split up, with rUK maintaining the lions' share. The smaller Scottish fund would be much more volatile and potentially less adequate than the current pooled arrangement. This is a cunning argument, given that older voters tend to turn out at the polls in much larger numbers than the young -- though whether this proves to be the case in a referendum, rather than a routine election, remains to be seen.
Watching all of this unfold from Canada is fascinating. In the two Quebec referenda one got the uncomfortable sense that the Ottawa government was at the mercy of events, reluctant to weigh in too heavily on the side of federalists within la Belle Province. Evidently UK politicians have no such qualms. One interested spectator is undoubtedly Quebec Premier Pauline Marois, who is angling to hold an election in the next few weeks, with the hope of setting the wheels in motion for yet another referendum after that.
A defeat for the Scottish Nationalists in September would undoubtedly put a crimp in her plans, and might also put some backbone into the Ottawa government. But if the Scot Nats win -- and Alex Salmond is one of the most appealing politicians in the UK, whatever you think of his main policy platform -- then all bets will be off on this side of the Atlantic too.
Wednesday 12 February 2014
Nothing to see here
Exactly as expected, Finance Minister Jim Flaherty's Federal Budget statement contained almost nothing new. The government is staying on its chosen course of deficit reduction, with a clear aim of hitting a budget surplus in 2015, just in time to finance all kinds of giveaways in advance of the Federal election scheduled for October of that year.
There are no new taxes (although the government is continuing to target loopholes and accelerate revenue collection) and no significant new spending programs. There are further cuts to the public service, together with signs that the government is about to crack down on the perverse* practice of allowing public servants to "bank" sick day allowances and cash them in when the quit or retire. That'll play well at the bargaining table.
There are a number of populist initiatives aimed at making consumers feel better, though in truth they amount to almost nothing. The most eye-catching is a pledge to end the practice whereby Canadians pay more than their American neighbours for identical goods, but: (a) there are no details of how this will work; (b) the Competition Bureau has already disavowed any interest in policing this; (c) the marketing boards that keep Canadian prices for things like eggs and dairy products at multiples of US levels are politically sacrosanct; and (d) with the Canadian dollar about 15% below its recent highs, the price differentials are rapidly becoming a non-issue anyway.
Much of the supposed reduction in spending under this government is illusory. As many commentators have noted, huge military procurement programs (new fighter jets, new helicopters, replacement destroyers, ice-breakers and more) have been delayed and bogged down for years and even decades, thanks to the staggering incompetence of successive governments and the military top brass. All these plans are still on the drawing board, so there stands to be a huge explosion in spending once they finally come to fulfillment.
All told, the government is projecting a deficit of C$2.9 billion for the year -- but that's only after allowing a $3 billion contingency. This is the same accounting trick that Paul Martin patented in the early to mid 1990s, and for the same reason: to disguise the speed with which the fiscal situation is improving, and thereby deflect pressure for higher spending, at least until it suits the government to deliver it.
The contingency did, however, produce an enlightening moment at Flaherty's post budget press conference. When a reporter pointed out that the government could project a surplus in the current year if it did not include the contingency fund, Flaherty agreed, but then said that the resulting surplus, that is, the difference between $2.9 billion (the deficit) and $3 billion (the contingency) would be only $100,000! You wouldn't trust this guy to give you the correct change when you buy your morning coffee at Timmy's, but apparently it's OK for him to be in charge of the nation's finances.
* Why do I say it's perverse? In principle it's a good thing that employees don't have to worry too much about taking a reasonable number of sick days each year. But because they can be "banked" and cashed in later, the current system actually provides an incentive for people to turn up at work even when they're sick, and pass their ailments on to their co-workers.
There are no new taxes (although the government is continuing to target loopholes and accelerate revenue collection) and no significant new spending programs. There are further cuts to the public service, together with signs that the government is about to crack down on the perverse* practice of allowing public servants to "bank" sick day allowances and cash them in when the quit or retire. That'll play well at the bargaining table.
There are a number of populist initiatives aimed at making consumers feel better, though in truth they amount to almost nothing. The most eye-catching is a pledge to end the practice whereby Canadians pay more than their American neighbours for identical goods, but: (a) there are no details of how this will work; (b) the Competition Bureau has already disavowed any interest in policing this; (c) the marketing boards that keep Canadian prices for things like eggs and dairy products at multiples of US levels are politically sacrosanct; and (d) with the Canadian dollar about 15% below its recent highs, the price differentials are rapidly becoming a non-issue anyway.
Much of the supposed reduction in spending under this government is illusory. As many commentators have noted, huge military procurement programs (new fighter jets, new helicopters, replacement destroyers, ice-breakers and more) have been delayed and bogged down for years and even decades, thanks to the staggering incompetence of successive governments and the military top brass. All these plans are still on the drawing board, so there stands to be a huge explosion in spending once they finally come to fulfillment.
All told, the government is projecting a deficit of C$2.9 billion for the year -- but that's only after allowing a $3 billion contingency. This is the same accounting trick that Paul Martin patented in the early to mid 1990s, and for the same reason: to disguise the speed with which the fiscal situation is improving, and thereby deflect pressure for higher spending, at least until it suits the government to deliver it.
The contingency did, however, produce an enlightening moment at Flaherty's post budget press conference. When a reporter pointed out that the government could project a surplus in the current year if it did not include the contingency fund, Flaherty agreed, but then said that the resulting surplus, that is, the difference between $2.9 billion (the deficit) and $3 billion (the contingency) would be only $100,000! You wouldn't trust this guy to give you the correct change when you buy your morning coffee at Timmy's, but apparently it's OK for him to be in charge of the nation's finances.
* Why do I say it's perverse? In principle it's a good thing that employees don't have to worry too much about taking a reasonable number of sick days each year. But because they can be "banked" and cashed in later, the current system actually provides an incentive for people to turn up at work even when they're sick, and pass their ailments on to their co-workers.
Tuesday 11 February 2014
Two out of four ain't bad
Just for a change of pace....
I started watching CBS's "50th anniversary" tribute to the Beatles -- marking a half century since their appearance on the Ed Sullivan Show -- with some trepidation, but ended up enjoying it thoroughly. The music was front and centre, with talk kept to a reasonable level. Provided you PVR'd it -- at least 60 minutes of the bloated 150 minute running time was ads -- it was a lot of fun. Just a few thoughts...
* Ringo was an under-rated drummer. One of the show's gimmicks, well achieved, was to segue from a Beatles performance on the Sullivan show to a modern band doing the same song. Right at the start, "All My Loving" received that treatment, and Ringo's drumming from all those years ago knocked spots off the guy from Maroon 5 who was trying to recreate the sound.
* And speaking of Ringo, who'd have expected that his voice would have lasted so much better than Paul McCartney's? Poor old Macca no longer has the range to sing his own songs without obvious discomfort in the higher registers, whereas Ringo belted out his rather more limited repertoire without missing a note.
* George Harrison's songs, though much less numerous than John and Paul's, seem to have aged well, and were over-represented in the material covered by the guest artistes. "Something" and "While my Guitar Gently Weeps" were among the highlights of the show, both featuring a wasted but still rocking Joe Walsh.
* What percentage of Eurythmics earnings did Dave Stewart actually receive?? The duo "reunited" for the occasion. Annie Lennox belted out an impassioned version of "The Fool on the Hill". Stewart wandered on after the first verse, listlessly picking at a guitar while wearing an expression of profound ennui. He must have been awfully good in the mixing room, or somewhere.
* If there was a bum note anywhere, it was hit by Eric Idle, who came on wearing a beige raincoat, looking like a poster boy for edema, and delivered a startlingly unamusing monologue about the Rutles, which went down like a lead balloon. Was he ever actually funny? Actually, having seen Nuns on the Run, I don't need you to answer that.
One thing's for sure: it's hard to imagine any of today's popular music stars meriting similar treatment to Paul and Ringo in 2064.
I started watching CBS's "50th anniversary" tribute to the Beatles -- marking a half century since their appearance on the Ed Sullivan Show -- with some trepidation, but ended up enjoying it thoroughly. The music was front and centre, with talk kept to a reasonable level. Provided you PVR'd it -- at least 60 minutes of the bloated 150 minute running time was ads -- it was a lot of fun. Just a few thoughts...
* Ringo was an under-rated drummer. One of the show's gimmicks, well achieved, was to segue from a Beatles performance on the Sullivan show to a modern band doing the same song. Right at the start, "All My Loving" received that treatment, and Ringo's drumming from all those years ago knocked spots off the guy from Maroon 5 who was trying to recreate the sound.
* And speaking of Ringo, who'd have expected that his voice would have lasted so much better than Paul McCartney's? Poor old Macca no longer has the range to sing his own songs without obvious discomfort in the higher registers, whereas Ringo belted out his rather more limited repertoire without missing a note.
* George Harrison's songs, though much less numerous than John and Paul's, seem to have aged well, and were over-represented in the material covered by the guest artistes. "Something" and "While my Guitar Gently Weeps" were among the highlights of the show, both featuring a wasted but still rocking Joe Walsh.
* What percentage of Eurythmics earnings did Dave Stewart actually receive?? The duo "reunited" for the occasion. Annie Lennox belted out an impassioned version of "The Fool on the Hill". Stewart wandered on after the first verse, listlessly picking at a guitar while wearing an expression of profound ennui. He must have been awfully good in the mixing room, or somewhere.
* If there was a bum note anywhere, it was hit by Eric Idle, who came on wearing a beige raincoat, looking like a poster boy for edema, and delivered a startlingly unamusing monologue about the Rutles, which went down like a lead balloon. Was he ever actually funny? Actually, having seen Nuns on the Run, I don't need you to answer that.
One thing's for sure: it's hard to imagine any of today's popular music stars meriting similar treatment to Paul and Ringo in 2064.
Sunday 9 February 2014
Black markets
This is an equal opportunity blog. Since I dissed David Olive's leftish musings in the Toronto Star a couple of pots ago, it's only fair that I do the same to a piece in today's National Post by none other than Conrad ("Lord") Black, he of no fixed citizenship. Black has a well-deserved reputation as a fine (if somewhat florid) writer on history; today we learn why he doesn't say much about economics.
The difference between Olive's piece a couple of days ago and Black's today is this: with Olive, I could see the points he was trying to make and could attempt to refute them, whereas with Black, I have no idea what he's trying to say. It's economics, Jim, but not as we know it. The Post doesn't like people copying bits out of its articles to paste into blogs -- they ask you to obtain a license, with vague threats of consequences if you don't -- so I invite you to follow the link and read the article for yourself. Just don't go leaving it around for impressionable young economists to read.
The difference between Olive's piece a couple of days ago and Black's today is this: with Olive, I could see the points he was trying to make and could attempt to refute them, whereas with Black, I have no idea what he's trying to say. It's economics, Jim, but not as we know it. The Post doesn't like people copying bits out of its articles to paste into blogs -- they ask you to obtain a license, with vague threats of consequences if you don't -- so I invite you to follow the link and read the article for yourself. Just don't go leaving it around for impressionable young economists to read.
Thursday 6 February 2014
Let's get fiscal
Stephen Harper's Conservatives are the most ideologically committed right wing government any developed nation has endured since the days of the Iron Lady. Nothing encapsulates their worldview so much as their commitment to eliminating the federal budget deficit before the next election, due in 2015. This commitment, truth be told, has little to do with fiscal rectitude per se. Rather, it gives the Tories an excuse to eviscerate all manner of social programs and roll back decades of co-operation between the federal and provincial levels of government. It also paves the way for a perfectly cynical attempt to buy votes in the 2015 election, by introducing a raft of tax cuts for the middle classes.
The deficit elimination plan appears to be on track, if not ahead of schedule, but there's no chance that Finance Minister Jim Flaherty will make any significant changes when he tables his annual budget next week. The state will continue to be shrunk, and Flaherty will continue to set the stage for the shameless bribes that everyone knows he will offer in twelve months' time.
With the Senate scandal rolling on, the government's fiscal stance generally receives surprisingly little attention in the national political arena. Neither the opposition NDP nor the reviving Liberal party dares even to suggest that they might consider tax increases, so such debate as does take place is held largely on the terms that the Tories have set.
That said, it does seem that the NDP believes that the deficit reduction agenda is being pushed too hard at a time when the economy is expanding only slowly. That view was endorsed to a degree by the IMF in a recent report, which mildly suggested that the government might need to take its foot off the fiscal brake if it appeared that its austerity efforts were harming growth prospects. Evidently the Fund is not aware that Flaherty and Harper have a very precise, election driven plan for when they will take their foot off the brake and jam it down on the gas pedal.
According to this recent column by an NDP-leaning columnist, the official opposition is moving away from the balanced budget "fetish" and would allow the process of eliminating the deficit to drag out for an extra year or two if that would help revive growth. That's a very reasonable view, but it's not one that I find very comforting coming from the NDP, or from columnists like Tom Walkom. As he puts it,
"While deficits should be eliminated over time, the idea of a balanced budget should not become a fetish".
Trouble is, nobody can really believe that either Walkom or the NDP finance critic, Peggy Nash, really means the first part of that statement. When times are tough, most leftish or centrist politicians will see a case for "Keynesian" deficit spending to goose the economy. And when times are good? Why, the rising tide of revenues makes it the perfect opportunity to dust off all those spending plans that have been sitting on the shelf, just waiting for the funding situation to improve. Deficit and debt reduction doesn't get a look-in.
Back in the 1980s, Canadian governments of both left and right always talked about eliminating budget deficits when the time was right, but never actually did it, regardless of how well the economy was doing. It took a modicum of actual spending restraint imposed by Finance Minister Paul Martin in the 1990s, and a heaping helping of good luck in the shape of a strongly-growing US economy, finally to get the fiscal situation under control.
Similarly, for much of the past decade, the UK government (under Gordon Brown as first Chancellor, then PM) always saw the strength in the economy as a cause for more rather than less public spending. Unlike Paul Martin, Brown's successor, George Osborne, has not been bailed out by a favourable international environment as he tries to sort out the fiscal mess. As a result, austerity seems set to stay in place in the UK for a few more years yet.
The Harper Conservatives are an odious and cynical bunch, and their fiscal policy is directed at obtaining political advantage rather than securing the best interests of the country as a whole. But if the NDP is going to fight the 2015 election on a platform of unfunded government spending, they had better hope that Canadian voters have short memories.
The deficit elimination plan appears to be on track, if not ahead of schedule, but there's no chance that Finance Minister Jim Flaherty will make any significant changes when he tables his annual budget next week. The state will continue to be shrunk, and Flaherty will continue to set the stage for the shameless bribes that everyone knows he will offer in twelve months' time.
With the Senate scandal rolling on, the government's fiscal stance generally receives surprisingly little attention in the national political arena. Neither the opposition NDP nor the reviving Liberal party dares even to suggest that they might consider tax increases, so such debate as does take place is held largely on the terms that the Tories have set.
That said, it does seem that the NDP believes that the deficit reduction agenda is being pushed too hard at a time when the economy is expanding only slowly. That view was endorsed to a degree by the IMF in a recent report, which mildly suggested that the government might need to take its foot off the fiscal brake if it appeared that its austerity efforts were harming growth prospects. Evidently the Fund is not aware that Flaherty and Harper have a very precise, election driven plan for when they will take their foot off the brake and jam it down on the gas pedal.
According to this recent column by an NDP-leaning columnist, the official opposition is moving away from the balanced budget "fetish" and would allow the process of eliminating the deficit to drag out for an extra year or two if that would help revive growth. That's a very reasonable view, but it's not one that I find very comforting coming from the NDP, or from columnists like Tom Walkom. As he puts it,
"While deficits should be eliminated over time, the idea of a balanced budget should not become a fetish".
Trouble is, nobody can really believe that either Walkom or the NDP finance critic, Peggy Nash, really means the first part of that statement. When times are tough, most leftish or centrist politicians will see a case for "Keynesian" deficit spending to goose the economy. And when times are good? Why, the rising tide of revenues makes it the perfect opportunity to dust off all those spending plans that have been sitting on the shelf, just waiting for the funding situation to improve. Deficit and debt reduction doesn't get a look-in.
Back in the 1980s, Canadian governments of both left and right always talked about eliminating budget deficits when the time was right, but never actually did it, regardless of how well the economy was doing. It took a modicum of actual spending restraint imposed by Finance Minister Paul Martin in the 1990s, and a heaping helping of good luck in the shape of a strongly-growing US economy, finally to get the fiscal situation under control.
Similarly, for much of the past decade, the UK government (under Gordon Brown as first Chancellor, then PM) always saw the strength in the economy as a cause for more rather than less public spending. Unlike Paul Martin, Brown's successor, George Osborne, has not been bailed out by a favourable international environment as he tries to sort out the fiscal mess. As a result, austerity seems set to stay in place in the UK for a few more years yet.
The Harper Conservatives are an odious and cynical bunch, and their fiscal policy is directed at obtaining political advantage rather than securing the best interests of the country as a whole. But if the NDP is going to fight the 2015 election on a platform of unfunded government spending, they had better hope that Canadian voters have short memories.
Sunday 2 February 2014
Dazed and confused in Toronto and DC
The Toronto Star's oft-befuddled business columnist, David Olive, recently penned this wonderfully confused piece about the challenges facing new Federal Reserve boss, Janet Yellen. Start with these two quotes:
"Yellen’s two predecessors each failed on the issue that arguably matters most, which is to identify and end wildly excessive speculation that puts the global economy at risk. They did not curb the easy money Fed practices that financed the ultimately ruinous speculation that cost eight million Americans their jobs in the Great Recession and destroyed more than 400,000 jobs in Canada."
And just a paragraph or two later:
"U.S. economic conditions have gradually improved, due to the Fed’s unprecedented policy to provide the economic stimulus that gridlocked politicians will not, by means of the Fed’s controversial policy of buying a staggering $75 billion (U.S.) worth of federal debt each month, a practice called “quantitative easing” (QE)."
Pop quiz, David. That "buying a staggering $75 billion worth of federal debt each month" differs from "the easy money Fed practices that financed the ultimately ruinous speculation" how, exactly? I'd say it's just more of the same, except in an unprecedentedly extreme form.
Or consider this:
"Bernanke also became a convert to Keynesian economics, by introducing and holding to his QE practices, of which economic purists despair no matter the obvious good they have done."
That sentence can only suggest that Olive has never read a word of Keynes, or at least not of the General Theory, which is the book on which so-called Keynesian economics is largely based.
In truth, though, I don't want to be too hard on Olive, fun though that is, because he seems to perceive very well what Janet Yellen's big challenge is. Back to the article:
"Yellen needs to keep promoting economic growth, but in a way that doesn’t spark renewed instability from the recklessness of financiers who caused the Great Recession."
Oh indeed, as that great economic savant Omar Little would say. Olive has just demonstrated that he understands the problem, even if he has little clue about what needs to be done about it. To date, alas -- and it's obviously very early days as far as Janet Yellen is concerned -- there's not much evidence that the Fed knows how to get from here to there either. The taper may be underway, but the gyrations in markets over the past couple of weeks could yet become severe enough to spook the Fed into slowing down the process, and once that happens, it's not clear that there's a Plan B in the wings. And remember, even after the Fed stops buying new securities altogether, there's upwards of $4 trillion on its balance sheet as a result of three rounds of QE, and at some point that will have to be dealt with.
Alan Greenspan got us into this mess with his hubristic and reckless policy moves at a time when the US economy was, for the most part, in no need of easy money. Ben Bernanke arguably had little choice than to do more of the same once the financial crisis hit, though his pre-crisis pronouncements suggest that he was always longing to do a "helicopter drop" of money into the economy, just to observe the results. Now it's up to Janet Yellen to find a way out. Good luck, Ms Yellen -- just be sure not to take any advice from David Olive.
"Yellen’s two predecessors each failed on the issue that arguably matters most, which is to identify and end wildly excessive speculation that puts the global economy at risk. They did not curb the easy money Fed practices that financed the ultimately ruinous speculation that cost eight million Americans their jobs in the Great Recession and destroyed more than 400,000 jobs in Canada."
And just a paragraph or two later:
"U.S. economic conditions have gradually improved, due to the Fed’s unprecedented policy to provide the economic stimulus that gridlocked politicians will not, by means of the Fed’s controversial policy of buying a staggering $75 billion (U.S.) worth of federal debt each month, a practice called “quantitative easing” (QE)."
Pop quiz, David. That "buying a staggering $75 billion worth of federal debt each month" differs from "the easy money Fed practices that financed the ultimately ruinous speculation" how, exactly? I'd say it's just more of the same, except in an unprecedentedly extreme form.
Or consider this:
"Bernanke also became a convert to Keynesian economics, by introducing and holding to his QE practices, of which economic purists despair no matter the obvious good they have done."
That sentence can only suggest that Olive has never read a word of Keynes, or at least not of the General Theory, which is the book on which so-called Keynesian economics is largely based.
In truth, though, I don't want to be too hard on Olive, fun though that is, because he seems to perceive very well what Janet Yellen's big challenge is. Back to the article:
"Yellen needs to keep promoting economic growth, but in a way that doesn’t spark renewed instability from the recklessness of financiers who caused the Great Recession."
Oh indeed, as that great economic savant Omar Little would say. Olive has just demonstrated that he understands the problem, even if he has little clue about what needs to be done about it. To date, alas -- and it's obviously very early days as far as Janet Yellen is concerned -- there's not much evidence that the Fed knows how to get from here to there either. The taper may be underway, but the gyrations in markets over the past couple of weeks could yet become severe enough to spook the Fed into slowing down the process, and once that happens, it's not clear that there's a Plan B in the wings. And remember, even after the Fed stops buying new securities altogether, there's upwards of $4 trillion on its balance sheet as a result of three rounds of QE, and at some point that will have to be dealt with.
Alan Greenspan got us into this mess with his hubristic and reckless policy moves at a time when the US economy was, for the most part, in no need of easy money. Ben Bernanke arguably had little choice than to do more of the same once the financial crisis hit, though his pre-crisis pronouncements suggest that he was always longing to do a "helicopter drop" of money into the economy, just to observe the results. Now it's up to Janet Yellen to find a way out. Good luck, Ms Yellen -- just be sure not to take any advice from David Olive.
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