Interesting. Dollar is up, the markets are up. People who have been holding other currencies are seeing the US market as a bargain now. The implication is that they think stocks aren't going to go much lower.
Tue, 30 Sep 2008
Mon, 29 Sep 2008
Investments are always comprised of a mixture of liquid and illiquid investments. Investment houses (banks, mutual funds, hedge funds, insurance companies) all have certain expectations of their customer's demand for cash. They keep enough liquid investments (cash, treasury bills, short-term bonds) to be able to supply this demand. But they make more money off the illiquid investments (they have to pay more in order to persuade people to tie up their money).
The problem in a panic is that the investment houses run out of cash. If they can, they'll refuse redemption. "Sorry, but you can't get your cash back right now." If they're obligated to supply cash, then cash is king. Whomever can supply them with cash will end up owning them, or a considerable portion.
This panic is going to be worse than usual, though. Ordinarily, in a panic, most institutions have sound finances. Parties with cash are more than happy to purchase the illiquid but sound investments. This time, nobody really knows what investments are sound. That means that the people with cash are going to demand a higher price for their cash than usual in a panic. Once that happens, some of the institutions will have valuations lower than their cash demands. In other words, bankrupt.
Much pain ensues. Anybody wise enough to be holding cash will be in a very good position. Many (most) of these investments are productive investments, and for pennies, or even dimes on the dollar, are definitely worth buying, even if you have to buy some investments with zero value. Everything has a right price.
Wed, 24 Sep 2008
Quoted without comment, from A History of US, "The First Americans", page 133:
For trifles, as knives, bells, looking glasses, and such small merchandise which cost him four English pounds, a French trader had commodities that sold at his return for 110 pounds.--Richard Hackluyt, 1598
The English have no sense; they give us twenty knives .... for one beaver skin.--Algonquin Indian, 1634
Tue, 23 Sep 2008
There is a lot of ruin in a nation. Here is the $20 Austrian economist's version of what has happened, and what will happen:
When I say "only", "all" and "no", I am exaggerating for the sake of understanding. It's easier to understand how things work when you take them to their limits.
Free markets respond to their version of planning: prices. For this to work, prices need to be accurate. The supply of money needs to be constant (no, Mr. Bernanke, not inflating at whatever you guess to be the growth of the economy; constant). Government needs to not frick with things. No policy-based taxation, quotas or tariffs. No minimum or maximum prices. No bailouts of companies "too big to fail." No rules against monopolization.
If these rules are observed, then companies that make their customers happy will succeed, and those that do not will fail. When no company makes their customers happy, customers will not spend money. They will save their money, instead. This will drive down the cost of money. Companies will have more money available to them to create new products that make customers happy. Alternatively, when all companies are making their customers happy, the cost of money will go up, and only those customers making their customers happiest will be able to afford new investment.
What happens when those rules are broken? First, if you create new money which has no value to buy with it, you have made the cost of money go down temporarily. This leads companies to invest in new products, which they expect customers to be willing to buy with the money they've saved ... only this new money didn't come from saving. It was created from nothing. It was a lie.
What has happened in the U.S. is that the Fed created new money starting in 1997. This led to the dot-com boom. People spent money to create businesses they thought would be huge hits. They thought there was lots of new money to build businesses and later buy the products. There wasn't. Same thing in 2003. It was very cheap to borrow money and build houses. The homebuilders did very well. Unfortunately, they were building them for people who hadn't really saved, and couldn't really afford them.
Every time the central bank creates a boom, it MUST be followed by a bust. The boom creates incorrect investments, and the bust consists of revaluing those investments to their new, lower value. Companies go bankrupt and their assets are sold off. Homeowners cannot pay their mortgage and lose their house (which isn't such a bad deal for them since they had no money down, were renters before and will be renters again).
Government bail-outs interrupt this process by stopping the revaluing. Only when the assets have been revalued, and sold off, will the economy recover as those assets are applied to new productive purposes. Prices are information and communication; interfering with them by applying arbitrary value is just another form of government censorship. It destroys market planning and substitutes central government planning (and we all know how well THAT works).
Where did the Fed get the money from to do these failouts? By printing up new money. This is EXACTLY the wrong thing to do. It will send the wrong signal to companies and individuals. It will be that much longer before assets get repriced.
Banning shorting of financial stocks is more censorship. If you have money, and think a stock is going to go down, and you short a stock, you borrow somebody's stock and sell it. That drives the price down, which reduces other people's interest in shorting the stock. It also brings tomorrow's price into the present. If you're wrong in your guess, and the stock price goes up, you lose your money and cannot make these bets again. If you're right, and the stock goes down further, you have done the market a service and you get rewarded for it.
Prices are speech.
Wed, 17 Sep 2008
Network Neutrality is a sticky issue, commingling separate issues. Let me handle them one by one.
Far and away the biggest "first mile" providers are the telephone and cable companies. Why? Because they had legislated monopolies, guaranteed to be profitable. They don't anymore, but then again, they already have cables in place. Any overbuilders are often prohibited from installing their own poles by law, and the incumbents are allowed to charge large "make ready" costs to overbuilders. Disincentives for foot-dragging? Nonexistent. So we're not talking about a free market for providers here. Expect competition to work poorly.
Linear infrastructure is hard. Think of multiple kinds of pipes, roads, and wires. The infrastructure MUST be 100% contiguous to have any value at all. There are huge up-front costs to create this. A right-of-way must be negotiated, and the infrastructure must be built. Once built, it is a sunk cost. It's hard for today's prices to pay for yesterday's sunk costs. Expect competition to work poorly.
Network providers are selling a commodity. All Internet access is the same, by definition. Prices are easy to discover. Not much room for price differentiation (except by bandwidth). Acme Networks might try to, say, give their customers better bandwidth to Youtube, but Beta Networks can buy the same type of faster pipe to Youtube, and for the same price. Youtube has no interest in giving any network an exclusive deal, since their value is in uniform accessibility all over the network. Expect ruinous competition.
On top of all of that, you have the fact that a lot of the Internet bandwidth is consumed in copyright violations. The copyright holders get grumpy at that, and keep pressuring the ISPs to take steps to stop file sharing. Naturally, the ISPs don't get any money from the copyright holders, and have little interest in providing worse service for their customers. On the other hand, cable networks aren't designed for symmetric use (such as you need for many peer-to-peer applications). Such connections are often shared (see next paragraph) and the more file sharing the less bandwidth.
Network providers oversell. When you buy a "5 mbps" connection from an Internet provider, they know full well that you will only be using a fraction of that bandwidth at any moment. When you want it, you need it, but you don't often want it. Consequently, the network providers oversell their connection. They can sell 10 "5 mbps" connections over the same 5 mbps pipe, and everybody will feel that they have 5 mbps. Works fine for Internet browsing. Doesn't work so well for downloading music and video.
This market will usually have one, sometimes two, and rarely three providers (phone, cable, and WiFi/WiMax). We have more than one provider for technological reasons: phone wire was for phone and cable wire was for video. But fiber to the home is coming. Once one company runs fiber to the home, nobody has any reason to overbuild. That one fiber can bring all three types of connectivity: phone, video, and Internet). Not likely that an overbuilder will get enough take-up to justify the cost of installation.
Price differentiation, and indeed, service differentiation only makes sense in a market with choices. Corporate-owned fiber to the home has no provision for choices. Don't look at the past to justify network neutrality. Look to the future, where every communication technology into someone's home is owned by a monopoly.
Having said all that, a better future is available by neighbors pooling their resources and building out their own fiber. Bring it to a central standard connection point to which providers bring wholesale services. Rather than merely fighting against network neutrality we should be convincing people to solve their problems through the creation of a market for connectivity. Coercion bad, markets good. You don't have to be a pacifist to believe that.
Paul Graham, who expressed a fair amount of common sense in his Mind the Gap essay, drops the ball when it comes to speculators. He says that speculators don't create wealth. Oh, but they do.
Speculators create value for people by shifting wealth in time. Let's say that we're running out of oil, and oil will be much more expensive in a few years. Speculators will invest their capital in buying oil now with the idea of selling it later when it's more expensive. An inevitable result of that is to increase the demand, and thus price of oil.
If the speculator is right, they have earned their wealth by increasing the price of oil now, so that people can make plans to use less of it in the future when it costs a lot more. If the speculator is wrong, they lose their wealth, and with it their ability to speculate.
Fri, 12 Sep 2008
Jonathan Haidt wrote an opinion piece on What Makes People Vote Republican, in which he posits that Republicans are neither insane nor stupid (duh) by voting for Republican politicians. I think his question would be more accurate if he tried to find out why people want to vote on anything. He asks
"Why in particular do working class and rural Americans usually vote for pro-business Republicans when their economic interests would seem better served by Democratic policies?"to which I reply
"Why in particular do working class and rural Americans want to have government solve their problems when they would seem better served by freedom?"
Or a Libertarian might ask "What makes people vote Republican or Democrat?" I think that the analysis would go pretty much along the same lines as Haidt's article: people are seeking ingroup (e.g. global warming), authority (e.g. Al Gore), and purity (of their bodily essences, free from pollution, pesticides, herbicides).
No, I think it's more likely that people don't vote for Democrats because they Don't Like Democratic Policies."
Tue, 02 Sep 2008
It is that promise that has always set this country apart, that through hard work and sacrifice, each of us can pursue our individual dreams, but still come together as one American family - to ensure that the next generation can pursue their dreams as well,
Barack, dear, there is no "one American family". You see, families are not run like nations, nor nations like families. In a family (usually; and on death, enforced by the courts), resources are pooled. What the husband earns, the woman earns half of, whether she is working herself, or whether she is a stay-at-home mom.
Same thing; reverse the genders. Keep doing that for the rest of this posting so that I can keep the writing simple.
Families eat meals together. You get what Mom cooked, whether you like it or not. Of couse, Mom also wants her cooking to be appreciated, so she takes the family's tastes into account. Everybody knows each other and there's a small handful of people and they can all be heard as individuals.
Families share a house. The adults running the family have to agree on what furniture to put in the house, what colors to paint the house, how large or small a house they can afford, where the house will be, how many bedrooms it will have, etc. Everything is up to negotiation and the kids get a say also.
I hope, Barack, that you can see that a family makes decisions successfully, that no nation can make. There are simply far too many people, far too many voices, far too many opinions. A nation is not a family, and no comparison should ever be made between the two.
But I'm just one individual, and I doubt that you are listening to me. It's inevitable, then, that I will not get what I want during this election, and that you will disappoint me. There is a solution, though, which could make me like you. STOP DOING THINGS FOR ME THAT I COULD DO MYSELF. Your job is to keep the peace. That's it. Everything else -- including the few things that the Constitution actually calls for you to do: post roads, minting coins, standardize weights and measures, regulate commerce with foreign nations, promoting the useful arts -- all these things I can arrange within the zone of peace that is is your job to create.
Stop doings things for me. Get out of my way. Let me do them myself. I'm not a child, I'm not your child, I'm not part of your family, I'm an adult, I can make my own decisions.