Recent Posts

Sunday, October 4, 2015

Net Financial Assets And Equity

An old debate about "Net Financial Assets," a term used in by Modern Monetary Theory (MMT) was reopened by Steve Roth at the article "Where MMT Gets Its Accounting Wrong -- And Right." This generated a lot of comments, and a response by Steve Randy Waldman at interfluidity ("Translating Net Financial Assets"). This also generated discussion at Mike Norman Economics. I largely agree with Steve Waldman's view, but I just want to offer what I think is a more introductory version of what I understand to be the underlying issue. That is, does it make sense to "net out" equity?

Friday, October 2, 2015

2015 Lift-Off Isn't Looking So Good. Let's Start Talking About 2016!

Chart: ISM Manufacturing New Orders

Although Fed speakers have been promising a rate hike "in 2015," for what seems like forever, the latest data have possibly pushed the "lift-off date" into 2016. I may be premature with this, as the Fed may want to do a token hike to get the 0% monkey off their back. However, with risk markets swooning, such a move could easily look incredibly stupid, even if it appears useful psychologically.

Wednesday, September 30, 2015

Bearish Links

I just wanted to comment on two bearish articles of interest.
  • Warren Mosler has been showcasing weak economic data. The Fed manufacturing survey chart at the end of this article looks quite bearish. Although one can argue that there are signs that point to a possible recession, a serious recession requires the business sector to start laying off workers. Other than a few sectors, there has not been a lot of hiring, so there is less obvious need for layoffs. This could allow the "automatic stabilisers" to keep the economy going on a slow growth path.
  • This article by Yves Smith discusses the potential for systemic risk as a result of the problems of large over-levered commodity traders. Although I would not be surprised if some entities blow sky high, it is unclear whether this will expand beyond the already weakened commodity sector. Although derivative counterparty risk is presumably a concern, the counterparties tend to create facts on the ground by seizing collateral quickly. A bankruptcy judge might attempt to reverse those seizures, but that reversal would take considerable time. This is not a possibility that will foster an immediate crisis. Unless people have been doing some remarkably stupid things (which I recognise is entirely possible), I do not see how this can infect the wholesale funding market for the universal banks, which was the problem in 2008. We would need a cascade of other defaults by firms in the "real economy" in order to make people question bank balance sheets once again.

Sunday, September 27, 2015

Introductory Comments On Interest Rates And Currencies

Given the chance that the Fed will possibly hike rates within the next year -- assuming that nothing will cause them to push back "lift off" once again -- the question arises as to what effect this will have on the economy. In my view, a couple of rate hikes will do little to change the conditions in the domestic economy, given that the U.S. housing market is not exactly a major driver of growth. Instead, the effect would likely show up via financial markets, most notably the currency market. (Of course, risk markets may get hysteric about a Fed rate hike; I have no idea why any responsible adult would believe that a marginal rise in short-term funding would have any effect on the fair value of equities.) In this article, I give an overview of how I analyse the relationship between interest rates and the value of the currency; I hope to discuss some historical episodes in later articles.

Wednesday, September 23, 2015

Banks Borrowing Short And Lending Long

Now that there appears to be a chance that the Fed could possibly hike rates by at least a little bit within a few months (maybe), there is increasing interest on what the effects would be on the economy. One area of contention is the effect on the banking system. In my view, you will need a microscope to find the direct effects on banking system profitability (I ignore any macroeconomic feedback from rate hikes, which are an entirely more awkward question). That is not to say that enterprising bank CEOs would not seize upon blaming the Fed for their own failures of leadership. It appears that the belief that the level of interest rates affect bank profitability are based upon inapplicable historical analogies, as well as blurring the distinction between liquidity risk and interest rate risk.

Saturday, September 19, 2015

Book Review: Shock Exchange

The book Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead, by Ralph W. Baker Jr., is an interesting blend of a personal memoir and an analysis of the defects of modern capitalism as was uncovered by the Financial Crisis. Ralph Baker worked as an investment banker, and formed the "Shock Exchange," a travelling youth basketball team/mentorship programme based in Brooklyn (web site:  . In addition to teaching the kids basketball skills, the programme also taught them the fundamentals of investing. Interestingly enough, the players in the programme had a better idea of how the American economy was unravelling than the various "experts" on television. "If a bunch of 12-year-olds from the inner city could see it then why couldn't they?"

Thursday, September 17, 2015

Transparency Is Not Working - Bring Back Opacity

The Fed did not hike at today's meeting, and it is unclear whether policymakers will follow through on their repeated threat to hike rates "in 2015." In my mind, this is embarrassing. The Fed should go back to their pre-1990s policy of saying practically nothing. (Although they should announce the level of the policy rate; it was silly to have to guess what it is.) In other words, the a Fed announcement would consist of one short sentence. Their forward guidance is hapless; if they say little, they may be able to develop a reputation for inscrutability rather than what they've got now.