Argentines have Italian blood, and in the best Italian tradition, they also learned that there are better stores of value than their own national currencies.
We are all Italo-Argentines now - Ben Bernanke has just acted on his speech which delivered the nickname Helicopter Ben (and that nobody took too seriously back in 2002). The United States of America's Central Bank has just declared to the world: we want to be a Banana Country, please follow us. It is this new Central Banker's belief that you can rescue an economy by printing your way out of trouble, in other words, that you can rescue an economy by inflating your way out of trouble. I believe its always been about establishing a balance between Keynesian economics and Friedman economics, but, not sure how much even Keynes would agree with this one. Last I checked, inflation was bad for the economy, and inflation is created by excess money pursuing too few goods. We have a problem of too few goods, and it is the countries' belief that by printing money, there will be an incentive to buy more goods, thus produce more goods... or worse yet that the additional money will pursue the same goods, thus increasing the nominal value and growth of our economy... The problem is that those that produce goods, and those that buy goods are not producing/purchasing not because of a lack of confidence but because of an excess of debt - so, Bernanke will essentially will be inflating us out of our debt.
My friends, before we know it, when all is said and done about this episode we will all be Argentina - and when the whole world plays the same trick, we will all go back to the age when Gold was a currency not a commodity... because when something has a fixed supply, it will always have an upward value bias against those things that don't, especially when there is an intent to augment the supply with a free hand. There might be deflation in the short-term, but, salvaging this crisis will simply mean funny money and significant inflation in the future.
Wednesday, December 17, 2008
Tuesday, November 18, 2008
A special point about doing business or the creation of wealth
There are a lot of "exchanges" in society that can potentialy create value, but, they not always happen due to miopic thinking by one of the parties.
The first point in a business exchange should always be about creating value - can we combine our assets/strengths in a way that we can create value for a third party? If value is created, then it should be shared between those creating it - the problem is that necessarily the question about splitting the value comes up and it ususally leads to conflicts that then eliminate the possibility for an exchange.
Its the same between employees and owners, debtholders and equityholders, or even between rich and poor in society.
Having an understanding of the concept of fairness and transparency helps the negotiating parties to pie-enhancing situations in a way that both parties are better off doing the transaction than not doing it. Of course, different views of fairness or of relative contributions could also hamper the value creating initiatives.
The first point in a business exchange should always be about creating value - can we combine our assets/strengths in a way that we can create value for a third party? If value is created, then it should be shared between those creating it - the problem is that necessarily the question about splitting the value comes up and it ususally leads to conflicts that then eliminate the possibility for an exchange.
Its the same between employees and owners, debtholders and equityholders, or even between rich and poor in society.
Having an understanding of the concept of fairness and transparency helps the negotiating parties to pie-enhancing situations in a way that both parties are better off doing the transaction than not doing it. Of course, different views of fairness or of relative contributions could also hamper the value creating initiatives.
Sunday, November 9, 2008
From Smith to Keynes to Smith and Back
I was reading the other day an Argentine columnist that was arguing that there are two (not necessarily invisible) hands in the economy - one that guides individual decisions into collective good (Adam Smith)...But, that sometimes can lead to collective harm (as the excesses we havejust witnessed) and then another (somewhat discredited for the last 20years) visible hand that is required to bring things back into normalcy-> John Maynard Keynes (and The General Theory of Employment, Interestand Money) and his concept of having government spending replaceconsumer spending...
The piece that Krugman wrote today is more or less arguing the samething and providing some background to what we are living... Goldman didan excellent summary of the liquidity trap we might be going into (whichKrugman points in his article)... Which then connects the dots -> insituations with high real interest rates, the fed can be effective bylowering nominal interest rates, but, when real interest rates can onlygo to zero or negative, monetary policy completely loses significance(Japan in the 90's and the situation we might be in today), so you needfiscal stimulus...
It all comes back to policies of this administration and Fed: 1) we will deeply regret driving that budget deficit higher and higher (that ismoney badly needed right now), and 2) Bernanake should have never cutrates the way he did in 2007, he needed them now.
When Consumers Capitulate By PAUL KRUGMAN
Published: October 31, 2008
The long-feared capitulation of American consumers has arrived.According to Thursday's G.D.P. report, real consumer spending fell at an annual rate of 3.1 percent in the third quarter; real spending ondurable goods (stuff like cars and TVs) fell at an annual rate of 14percent. To appreciate the significance of these numbers, you need to know thatAmerican consumers almost never cut spending. Consumer demand kept rising right through the 2001 recession; the last time it fell even fora single quarter was in 1991, and there hasn't been a decline this steepsince 1980, when the economy was suffering from a severe recessioncombined with double-digit inflation. Also, these numbers are from the third quarter - the months of July, August, and September. So these data are basically telling us whathappened before confidence collapsed after the fall of Lehman Brothersin mid-September, not to mention before the Dow plunged below 10,000. Nor do the data show the full effects of the sharp cutback in theavailability of consumer credit, which is still under way.So this looks like the beginning of a very big change in consumerbehavior. And it couldn't have come at a worse time.It's true that American consumers have long been living beyond their means. In the mid-1980s Americans saved about 10 percent of theirincome. Lately, however, the savings rate has generally been below 2percent - sometimes it has even been negative - and consumer debt hasrisen to 98 percent of G.D.P., twice its level a quarter-century ago. Some economists told us not to worry because Americans were offsettingtheir growing debt with the ever-rising values of their homes and stockportfolios. Somehow, though, we're not hearing that argument much lately.Sooner or later, then, consumers were going to have to pull in theirbelts. But the timing of the new sobriety is deeply unfortunate. One istempted to echo St. Augustine's plea: "Grant me chastity and continence,but not yet." For consumers are cutting back just as the U.S. economyhas fallen into a liquidity trap - a situation in which the FederalReserve has lost its grip on the economy.Some background: one of the high points of the semester, if you're ateacher of introductory macroeconomics, comes when you explain how individual virtue can be public vice, how attempts by consumers to dothe right thing by saving more can leave everyone worse off. The pointis that if consumers cut their spending, and nothing else takes theplace of that spending, the economy will slide into a recession,reducing everyone's income.In fact, consumers' income may actually fall more than their spending,so that their attempt to save more backfires - a possibility known asthe paradox of thrift. At this point, however, the instructor hastens to explain that virtueisn't really vice: in practice, if consumers were to cut back, the Fedwould respond by slashing interest rates, which would help the economy avoid recession and lead to a rise in investment. So virtue is virtue after all, unless for some reason the Fed can't offset the fall in consumer spending. I'll bet you can guess what's coming next. For the fact is that we are in a liquidity trap right now: Fed policy has lost most of its traction. It's true that Ben Bernanke hasn't yetreduced interest rates all the way to zero, as the Japanese did in the1990s. But it's hard to believe that cutting the federal funds rate from1 percent to nothing would have much positive effect on the economy. In particular, the financial crisis has made Fed policy largely irrelevant for much of the private sector: The Fed has been steadily cutting away,yet mortgage rates and the interest rates many businesses pay are higher than they were early this year.The capitulation of the American consumer, then, is coming at a particularly bad time. But it's no use whining. What we need is a policy response.The ongoing efforts to bail out the financial system, even if they work,won't do more than slightly mitigate the problem. Maybe some consumers will be able to keep their credit cards, but as we've seen, Americanswere overextended even before banks started cutting them off. No, what the economy needs now is something to take the place ofretrenching consumers. That means a major fiscal stimulus. And this timethe stimulus should take the form of actual government spending rather than rebate checks that consumers probably wouldn't spend. Let's hope, then, that Congress gets to work on a package to rescue the economy as soon as the election is behind us. And let's also hope thatthe lame-duck Bush administration doesn't get in the way.
The piece that Krugman wrote today is more or less arguing the samething and providing some background to what we are living... Goldman didan excellent summary of the liquidity trap we might be going into (whichKrugman points in his article)... Which then connects the dots -> insituations with high real interest rates, the fed can be effective bylowering nominal interest rates, but, when real interest rates can onlygo to zero or negative, monetary policy completely loses significance(Japan in the 90's and the situation we might be in today), so you needfiscal stimulus...
It all comes back to policies of this administration and Fed: 1) we will deeply regret driving that budget deficit higher and higher (that ismoney badly needed right now), and 2) Bernanake should have never cutrates the way he did in 2007, he needed them now.
When Consumers Capitulate By PAUL KRUGMAN
Published: October 31, 2008
The long-feared capitulation of American consumers has arrived.According to Thursday's G.D.P. report, real consumer spending fell at an annual rate of 3.1 percent in the third quarter; real spending ondurable goods (stuff like cars and TVs) fell at an annual rate of 14percent. To appreciate the significance of these numbers, you need to know thatAmerican consumers almost never cut spending. Consumer demand kept rising right through the 2001 recession; the last time it fell even fora single quarter was in 1991, and there hasn't been a decline this steepsince 1980, when the economy was suffering from a severe recessioncombined with double-digit inflation. Also, these numbers are from the third quarter - the months of July, August, and September. So these data are basically telling us whathappened before confidence collapsed after the fall of Lehman Brothersin mid-September, not to mention before the Dow plunged below 10,000. Nor do the data show the full effects of the sharp cutback in theavailability of consumer credit, which is still under way.So this looks like the beginning of a very big change in consumerbehavior. And it couldn't have come at a worse time.It's true that American consumers have long been living beyond their means. In the mid-1980s Americans saved about 10 percent of theirincome. Lately, however, the savings rate has generally been below 2percent - sometimes it has even been negative - and consumer debt hasrisen to 98 percent of G.D.P., twice its level a quarter-century ago. Some economists told us not to worry because Americans were offsettingtheir growing debt with the ever-rising values of their homes and stockportfolios. Somehow, though, we're not hearing that argument much lately.Sooner or later, then, consumers were going to have to pull in theirbelts. But the timing of the new sobriety is deeply unfortunate. One istempted to echo St. Augustine's plea: "Grant me chastity and continence,but not yet." For consumers are cutting back just as the U.S. economyhas fallen into a liquidity trap - a situation in which the FederalReserve has lost its grip on the economy.Some background: one of the high points of the semester, if you're ateacher of introductory macroeconomics, comes when you explain how individual virtue can be public vice, how attempts by consumers to dothe right thing by saving more can leave everyone worse off. The pointis that if consumers cut their spending, and nothing else takes theplace of that spending, the economy will slide into a recession,reducing everyone's income.In fact, consumers' income may actually fall more than their spending,so that their attempt to save more backfires - a possibility known asthe paradox of thrift. At this point, however, the instructor hastens to explain that virtueisn't really vice: in practice, if consumers were to cut back, the Fedwould respond by slashing interest rates, which would help the economy avoid recession and lead to a rise in investment. So virtue is virtue after all, unless for some reason the Fed can't offset the fall in consumer spending. I'll bet you can guess what's coming next. For the fact is that we are in a liquidity trap right now: Fed policy has lost most of its traction. It's true that Ben Bernanke hasn't yetreduced interest rates all the way to zero, as the Japanese did in the1990s. But it's hard to believe that cutting the federal funds rate from1 percent to nothing would have much positive effect on the economy. In particular, the financial crisis has made Fed policy largely irrelevant for much of the private sector: The Fed has been steadily cutting away,yet mortgage rates and the interest rates many businesses pay are higher than they were early this year.The capitulation of the American consumer, then, is coming at a particularly bad time. But it's no use whining. What we need is a policy response.The ongoing efforts to bail out the financial system, even if they work,won't do more than slightly mitigate the problem. Maybe some consumers will be able to keep their credit cards, but as we've seen, Americanswere overextended even before banks started cutting them off. No, what the economy needs now is something to take the place ofretrenching consumers. That means a major fiscal stimulus. And this timethe stimulus should take the form of actual government spending rather than rebate checks that consumers probably wouldn't spend. Let's hope, then, that Congress gets to work on a package to rescue the economy as soon as the election is behind us. And let's also hope thatthe lame-duck Bush administration doesn't get in the way.
Monday, March 17, 2008
Bear Stearns 10.5 years after
Bear Stearns is no more today, it was sold for $2 a share to JP Morgan, at 33% of its price in 1985. I had my first job at Bear Stearns, and there I started learning of the intricacies of the capital markets. More than 10 years have gone by, and I have come and gone through five other jobs, gone back to school, seen bubbles come and go... but seeing Bear go down makes me put a lot of things into perspective.
First, careers, just like investment returns, needs to be seen/measured/understood not in days or years, but, decades. It is almost surreal to see that the work of 85 years (at BSC) could be taken down in a matter of days (although it was really the work, bad decisions of the last three years - or the foray, or the manner in which they embraced the opportunities in the mortgage industry).
The Fed is scrambling now in what I think is the most important questioning of the world of fiat money created in the early 70's. Credit expanded like it never did before these last few years, and with credit, the economy also went along, and with it asset prices. The problem is that asset values need to be supported by real incomes, real earnings, and if these are based on credit, which ultimately also has a limit, then we have a problem.
In the simplest way of explaining what I mean - more money was lent than there is and people that lent it are asking for it back... there is simply no equity that can support the real value if all the credit is called back.
Human self-interest and greed can take down in one day what responsible behavior builds in over 100 years.
The saddest part for me will be what "Bear Stearns" will represent to my kid when in 20 years he asks me about my first job decision... it will mean either nothing to him (probably) or have a negative connotation....
First, careers, just like investment returns, needs to be seen/measured/understood not in days or years, but, decades. It is almost surreal to see that the work of 85 years (at BSC) could be taken down in a matter of days (although it was really the work, bad decisions of the last three years - or the foray, or the manner in which they embraced the opportunities in the mortgage industry).
The Fed is scrambling now in what I think is the most important questioning of the world of fiat money created in the early 70's. Credit expanded like it never did before these last few years, and with credit, the economy also went along, and with it asset prices. The problem is that asset values need to be supported by real incomes, real earnings, and if these are based on credit, which ultimately also has a limit, then we have a problem.
In the simplest way of explaining what I mean - more money was lent than there is and people that lent it are asking for it back... there is simply no equity that can support the real value if all the credit is called back.
Human self-interest and greed can take down in one day what responsible behavior builds in over 100 years.
The saddest part for me will be what "Bear Stearns" will represent to my kid when in 20 years he asks me about my first job decision... it will mean either nothing to him (probably) or have a negative connotation....
Saturday, January 5, 2008
Pensamientos sobre el futuro de Puerto Rico...
Las vacaciones en PR me llevaron a pensar en el futuro de la isla y en posibles soluciones al estancamiento que ha experimentado desde los anios 70's.
Que paso con aquellas dos decadas doradas de los 50's y los 60's? Por que se ha estancado el progreso de PR en los ultimos 30 anios? No eran los retos mayores y las posibilidades de exito menores en el anio 50 que lo que son hoy? Como un pais entonces pobre, hambriento, analfabeto y descalzo pudo ser ejemplo para el mundo entero y que le pasa a un pais hoy educado, relativamente rico, saludable y con abundancia?
Yo creo que hay mucha escasez de cosas necesarias para el progreso que existian en abundancia al lado de Don Luis Munoz Marin:
1) Enfocar los esfuerzos en metas medibles, logrables y concretas que tengan que ver con el crecimiento economico y no con el status
2) Establecer los incentivos para que la meritocracia lleve a los mejores puertorriquenios a dar lo mejor por su pais
3) Pensar en aquellas cosas que nos hacen diferentes y entender nuestras limitaciones
Metas economicas reales
El liderato de PR tiene que promover localmente (y con la cooperacion del Congreso de EEUU) que se prorrogue la discusion de status por 25 anios - nadie puede tocar el tema ni avanzar el tema del status en PR por ese periodo. Que perdida de tiempo, esfuerzo y talento mas grande que trabajar en algo que sabemos no nos lleva a ningun lugar (el pais esta dividido 50/50) y que aparte coloca en distintos bandos a gente que tiene similares ideas economicas? Propongo que haya una meta - triplicar el ingreso bruto per capita en los proximos 25 anios y colocarse entre los primeros 20 estados de la nacion. Que tiene que ver el status con el crecimiento economico? Que tiene que ver el status con la capacidad de produccion de bienes y servicios que tiene el pueblo de Puerto Rico? Un liderato que oriente al pais en esta direccion lograra grandes cosas.
Establecer incentivos para que los mejores trabajen por PR
Cuan cansados estamos todos de los politicos carreristas y de sus andanzas? Pq no establecemos un programa (dentro de esos 25 anios) en el cual se paguen sueldos competitivos en la industria y se atraiga verdadero talento para lograr los grandes retos economicos de PR. Se prohibiria la discusion de status y se promoverian las metas alrededor de temas economicos para que el mejor talento de PR trabaje en equipo para lograrlo.
Pensar en nuestras cosas unicas y en nuestras limitaciones
PR tiene muchas cosas que lo hacen diferente y tiene una situacion especial. Debemos entender que el exito economico se basa en producir mas de aquello que nos hacen unicos relativo a la competencia. Somos un pueblo donde nuestro mayor activo es nuestra gente, de pocos recursos naturales y de una situacion que no nos permite tener grandes economias de escala. Somos un pueblo bilingue, alegre, con mucho gusto e historia por la musica, de rica tradicion literaria y de historia, gozamos de un clima calido, estamos rodeados de agua salada, tenemos un bosque tropical, experiencia con tormentas tropicales, tenemos una capital con 500 anios de historia, tenemos buenas escuelas de ingenieria, nos gusta el deporte (los americanos), etc.... es importante que nos enfoquemos en producir diferenciacion porque en la diferenciacion esta la sustentabilidad y el nivel del progreso economico... por otro lado tenemos limitaciones geograficas significativas, de poblacion, de costos de transporte y hasta hace un tiempo teniamos tambien limitaciones de falta de metas, de mentalidad chica, de falta de ambicion, de hambre por cosas que inhiben el progreso economico (como lo es la discusion de status), entre otras.
Que paso con aquellas dos decadas doradas de los 50's y los 60's? Por que se ha estancado el progreso de PR en los ultimos 30 anios? No eran los retos mayores y las posibilidades de exito menores en el anio 50 que lo que son hoy? Como un pais entonces pobre, hambriento, analfabeto y descalzo pudo ser ejemplo para el mundo entero y que le pasa a un pais hoy educado, relativamente rico, saludable y con abundancia?
Yo creo que hay mucha escasez de cosas necesarias para el progreso que existian en abundancia al lado de Don Luis Munoz Marin:
1) Enfocar los esfuerzos en metas medibles, logrables y concretas que tengan que ver con el crecimiento economico y no con el status
2) Establecer los incentivos para que la meritocracia lleve a los mejores puertorriquenios a dar lo mejor por su pais
3) Pensar en aquellas cosas que nos hacen diferentes y entender nuestras limitaciones
Metas economicas reales
El liderato de PR tiene que promover localmente (y con la cooperacion del Congreso de EEUU) que se prorrogue la discusion de status por 25 anios - nadie puede tocar el tema ni avanzar el tema del status en PR por ese periodo. Que perdida de tiempo, esfuerzo y talento mas grande que trabajar en algo que sabemos no nos lleva a ningun lugar (el pais esta dividido 50/50) y que aparte coloca en distintos bandos a gente que tiene similares ideas economicas? Propongo que haya una meta - triplicar el ingreso bruto per capita en los proximos 25 anios y colocarse entre los primeros 20 estados de la nacion. Que tiene que ver el status con el crecimiento economico? Que tiene que ver el status con la capacidad de produccion de bienes y servicios que tiene el pueblo de Puerto Rico? Un liderato que oriente al pais en esta direccion lograra grandes cosas.
Establecer incentivos para que los mejores trabajen por PR
Cuan cansados estamos todos de los politicos carreristas y de sus andanzas? Pq no establecemos un programa (dentro de esos 25 anios) en el cual se paguen sueldos competitivos en la industria y se atraiga verdadero talento para lograr los grandes retos economicos de PR. Se prohibiria la discusion de status y se promoverian las metas alrededor de temas economicos para que el mejor talento de PR trabaje en equipo para lograrlo.
Pensar en nuestras cosas unicas y en nuestras limitaciones
PR tiene muchas cosas que lo hacen diferente y tiene una situacion especial. Debemos entender que el exito economico se basa en producir mas de aquello que nos hacen unicos relativo a la competencia. Somos un pueblo donde nuestro mayor activo es nuestra gente, de pocos recursos naturales y de una situacion que no nos permite tener grandes economias de escala. Somos un pueblo bilingue, alegre, con mucho gusto e historia por la musica, de rica tradicion literaria y de historia, gozamos de un clima calido, estamos rodeados de agua salada, tenemos un bosque tropical, experiencia con tormentas tropicales, tenemos una capital con 500 anios de historia, tenemos buenas escuelas de ingenieria, nos gusta el deporte (los americanos), etc.... es importante que nos enfoquemos en producir diferenciacion porque en la diferenciacion esta la sustentabilidad y el nivel del progreso economico... por otro lado tenemos limitaciones geograficas significativas, de poblacion, de costos de transporte y hasta hace un tiempo teniamos tambien limitaciones de falta de metas, de mentalidad chica, de falta de ambicion, de hambre por cosas que inhiben el progreso economico (como lo es la discusion de status), entre otras.
Subscribe to:
Posts (Atom)