Jamesian Philosophy Refreshed

I'm not sure I understand this, or agree with Bloomberg's analysis, but I'll put it in here anyway. An Aug. 15th Bloomberg story, by Vincent Cignarella (portrayed above), starts with this: The central banks of Australia and New Zealand each recently lowered their benchmark interest rate. According to conventional wisdom, this should have weakened their respective currencies, giving their business a stimulative shot in the arm when functioning as exporters. But that didn't happen. Rather, the lowered interest rates resulted in ... stronger currencies. What's going on? If you don't understand why that result is counter-intuitive, you might want to take a step back, Consider a common FX trader's trick known as the "carry trade." The idea is: borrow money in the currency of a country where interest rates are low, then trade it for the currency of another country where interest rates are high, and lend the money out there. You're buying cred...

Stirred by the latest controversy over who might have gotten it all started, stirred too by some of the tweets in my feed in recent days, I've been wondering what Henry George might think about bitcoins. I'm not a Georgist, but I have long regarded his point of view with fascination, and  I discussed his theory of credit in particular in one passage of my book on the economic crisis of 2007-08. The theory of interest can give us some basis for extrapolating to what HG might think and say about cryptocurrencies were he around today to learn of them. In his classic work, PROGRESS AND POVERTY (1879), George proposed a thought experiment thus, "[I]f wealth consisted but of the inert matter of the universe, and production of working up this inert matter into different shapes [then] interest would be but the robbery of industry, and could not long exist." So: did he in fact see interest as theft? No, because the premise of that thought experiment is invalid. Some w...

When I was young, there was a lot of talk about "planned obsolescence," especially in the automotive industry. The idea was that the Detroit Big Three (who dominated the auto manufacturing world in those distant days) were deliberately creating cars that would wear out in four to five years and need to be replaced. This was understood to be both rational and predatory behavior, a sign of how buyers and sellers are necessarily at odds. Because how could makers not want repeat business? And how could motorists not want long lasting vehicles? Nobody uses that expression any more today. Perhaps the theory now seems somewhat silly. The duration of cars has significantly expanded since the days when that expression was a thing. And the Cubans have demonstrated throughout the Castro era that it is perfectly possible to keep even 1950s era Detroit vehicles on the road in working condition into the second decade of the 21st century. How? Did the "planning" go wrong, or...

  Finance studies the way in which liquid resources, cash and cash-like stuff, moves about in a broader economy, and – if all works well – gets to where it is needed. Finance is a branch of economics, and so as you might suspect is concerned with “supply” and “demand.” But it is concerned with a very particular branch of each. Consider the cash that some people have saved. We’ll call them the Jones’. They’ve put cash away somewhere – in a safe, let us imagine, or in a pillow case – where it is immediately available to them should they want it. Consider also that there are other people and institutions who very much want the use of that cash. These others may have a very restaurant and a distinctive brand, but may need a new infusion of cash in order to expand the restaurant, perhaps making it a chain. In this case, the idea naturally arises that the Jones’ money might be lent to the restauranteurs, as equity (in which case the Jones’ expect a share of profit) or as debt (in...

A quotation from Zachary Karabell's book, Superfusion: How China and America Became One Economy and Why the world's Prosperity Depends on It (2009). [By] 2003, the U.S. economy had become a mystery to most of the people charged with explaining it [a mystery] that was perfectly captured by Alan Greenspan in testimony to Congress [two years later]   when he confessed to confusion about the 'interest rate conundrum' of  long-term rates staying flat even as central bank rates fluctuated widely. That conundrum has only become more prevalent since, and China and technology are the causes -- along with the inability of people and institutions to adjust their models and orthodoxies. The statisticians kept measuring what they could measure and therefore kept missing the radical shifts that had occurred.

My recent reading has included a novel kindly given me by a friend for Christmas, TOP PRODUCER written by Norb Vonnegut and brought out in 2009 by St. Martin's Press. SPOILER ALERT: On the off chance you haven't read this novel yet and plan to do so: please don't read further. The book begins by taking the metaphor of Wall Street as a "shark tank" quite literally. The boss of a hedge fund --or, strictly speaking, of a fund of hedge funds -- is murdered by being fed to the sharks at an aquarium. It turns out that the dead man, Charlie Kelemen, was engaged in various financial shenanigans that unsurprisingly made him enemies, and part of this was the blackmail of other people involved in financial shenanigans. The protagonist of the story is a friend of Charlie's named Grover O'Rourke, who works at the prop desk of a second-tier investment bank, and is a "top producer" there. Whether he was named after a president or a muppet is unc...

I'm reading through a book by Hunter Lewis, co-founder of Cambridge Associates and the Mises Institute. The book is WHERE KEYNES WENT WRONG (2009). I'm mentioning it today because of the material in the chapter "How Keynesian was Keynes?," which I found intriguing.  About much of the material in the rest of the book, I'm long since jaded, but some of this was new to me. In 1948, writing in the American Economic Review , John H. Williams said he had had a conversation with Keynes (the famous economist had died between that conversation and this article).   Keynes allegedly told Williams "that the easy monetary policy was being pushed too far, both in England and here [the US], and emphasized interest as an element of income, and its basic importance in the structure and functioning of private capitalism. He was amused by my remark that it was time to write another book because the all-out easy money policy was being preached in his name, and replied...

So with my astonishment noted as yesterday., let me proceed on the subject of Islamic Finance. This is a set of practices (and accompanying theories) that have grown up to allow devout Muslims to make use of their savings, without keeping them in a mattress on the one hand and without committing the offense Muslims call riba on the other. Riba is often understood to mean contracted-for rates of interest on debt in general. How does finance work without interest? There are lots of ways to go about answering that question. I've recently read a book by Muhammad Akram Khan entitled What is Wrong with Islamic Economics?   that holds among much else that rather too much ingenuity has been expended on trying to devise a system of finance without interest. The simple answer he prefers is that riba in the relevant sense is quite a narrow range of conduct, and completely distinct from the practice of charging for a borrower's access to investment capital.  R...

Picking up a discussion we had been engaging in of late about the types of risk faced (and, one must hope, managed) by financial institutions....   Default risk is the risk that some counterparty with which the risk manager’s own concern is doing business, and from whom they are receiving contracted-for payments, will stop making those payments. They might stop payment either with malice aforethought (as with crooks who take your valuables, promise you a series of payments, and then skip town), or they may stop payment due to some financial crisis that leaves them incapable of doing so. In other words, your own liquidity risk as defined above is somebody else’s default risk. Interest-rate risk is the risk that a change in interest rates will undermine the value of an entity’s assets. For example: on any given day there is some risk that a central bank’s decision to increase interest rates will hurt the value of stocks (because it makes lending money relatively more attra...