Jamesian Philosophy Refreshed

    Bloomberg Business recently ran a retrospective by Andrea Wong about what she calls the “petrodollar deal” between the US and Saudi Arabia, a deal she says was created in the summer of 1974, when treasury Secretary William Simon and an assistant, Gerry Parsky, went on a diplomatic mission for the Nixon administration. Simon passed away in 2000. Parsky, though, is still alive, and Wong seems to have been working in large part from Parsky’s recollections.   Simon “understood how to sell the Saudis on the idea that America was the safest place to park their petrodollars.” A “strikingly simply” barter developed. The US would buy Saudi oil, and would provide the Sauds with military and diplomatic cover.   In return, the Saudis would buy lots of US Treasury bonds, becoming a huge part of the financing of the ballooning US debt. There was also a diplomatic cable sent from King Faisal to the US Treasury months later, dealing with one small but critical a...

In our last post devoted to the mathematics of finance, we mentioned that the standard deviation of a bell curve showing the range of possible returns from an asset can be employed as a surrogate for its risk. I'd like to pursue that point a bit. It is the chanciest corporations,  the ones that do have significant risk, that have to bribe you into buying their bonds with a higher return than their safer brethren need offer: thus, a trade-off. One way of looking at the trade-off is this: suppose I come into your neighborhood and offer to play a simple game. You will roll a pair of dice I provide and I will give you $1,000 times the number shown on the dice when they come to rest. I require only that you pay me $1,000 before we begin. The lowest possible score is 2, so the lowest possible pay-out is twice what you’ll pay me up front. This, then, (if I am honest and actually have the money I’m offering to pay) is a can’t-lose proposition for you. The worst outcome is ...