Wednesday, February 25, 2015

Money and Gold

An article by John Tamny gives me an opportunity to opine on some topics I've been thinking a lot about. Mr. Tamny expresses an opinion common on the libertarian Right, also held by people like Steve Forbes and Rand Paul. These are people I respect because they get the biggest of the big issues right, namely that economic freedom is the most effective way of reducing poverty and improving living standards. So I'm distressed to have to disagree with them.

The problem is that they are looking for utopian simplicity. Thus they take a grain of truth and exaggerate it into absolute certitude. In extreme forms this leads to completely stupid policy suggestions such as going on the gold standard or abolishing the Fed.

For example, Mr. Tamny makes a claim that is simply not true. He argues that money is money is money, and that the euro is just as good (or bad) a currency as the mark or the franc or the drachma. Greece's problems were not caused by the euro, nor would they be solved by leaving the euro. Indeed, Greece leaving the euro is just as unreasonable as Mississippi leaving the dollar, even though it's vastly poorer than New York or California.

He writes:
In truth, money is solely a measure. I have bread, I want your wine, but you don’t want my bread. Money makes a transaction possible between a baker and vintner with differing wants simply because it’s historically been viewed as a stable “ticket” that allows producers of actual wealth to measure what they produce on the way to trade. Money facilitates exchange, and that’s why a common dollar has long made so much sense. That’s why the euro still makes sense.
He uses an analogy from physics. Whether one measures the distance from Chicago to Milwaukee as 90 miles or 150 kilometers, it's still the same distance. The same is true of money: drachmas, dollars, or euros--there is no real difference.

Of course Mr. Tamny is right on some level. Printing up bits of colored paper does not produce wealth. Devaluing a currency changes no comparative advantage between countries. But he's also wrong. While good money creates no wealth, bad money can certainly destroy it. A country that lacks liquidity or secure banks will be neither productive nor wealthy. And that's the difference between Greece and Mississippi. The latter has good money, while the former doesn't.

Let's count the advantages of Mississippi. Many payments are made independently of Mississippi's wealth. Social security recipients receive the same benefits in Ole Miss as they do in the Big Apple. Military pay is the same, as are payments for civil service and postal employees. Thus a significant fraction of Mississippi's income does not depend on current economic circumstances. By using the dollar they are essentially insured against temporary misfortune.

Greece has none of those benefits.

People in Mississippi can move to New York and vice versa. We both speak the same language, share much of the same culture, drive the same cars, and eat the same food. I could move to Mississippi and within a couple months establish residency, obtain a driver's license, register to vote, join a church, and find a job. In a word, in the dollar zone the labor market is very liquid.

Nominally, Greeks have many of the same rights in Germany, but in practice they don't. Very few Greeks speak German, and even fewer Germans speak Greek. Political institutions are completely different in the two countries. Apart from the exceptional few, Greeks working in Germany can't aspire to anything more than the most menial, low-paid job. And Germans have almost no reason ever to move to Greece. By comparison with the dollar zone, labor markets in the EU are massively inefficient.

Even worse, land title, property rights, investment opportunities, taxes, and almost everything about money do not mean the same thing in Greece as they do in Germany. It's likely not possible to accurately translate the word collateral from one language to the other. That means banking customs have to be different between the countries. A German bank working under German rules will not be successful in Greece, and vice versa. They can't do business the same way.

In order to have a functioning banking system there has to be a lender of last resort. Walter Bagehot describes that necessity precisely in his famous 1873 book entitled Lombard Street. Then the (privately owned) banking department of the Bank of England served that role. In New York and Mississippi it is the Federal Reserve Bank system that does the dirty. Without that guarantee of liquidity all banks in any country will inevitably collapse, credit will disappear, and the economy will shrink.

Mississippi has access to liquidity from the Fed. Deposit insurance applies there as much as it does in New York. Greece, on the other hand, has no guarantee of liquidity unless it follows banking rules set by Germany. Accordingly, Greek banks will eventually fail and everybody knows that. You can't have a growing economy without stable credit markets.

Greece will eventually have to repatriate its banking system. That is, it will have to establish an institution similar to the Fed or the ECB that operates under rules consistent with Greek labor and financial customs. In a word, it needs a drachma. The drachma will not cause economic growth--on this Mr. Tamny is correct--but it is an essential prerequisite before economic growth can occur.

(Mr. Tamny discusses smaller countries that peg their currencies to the dollar or the euro. That works as long as those governments possess sufficient foreign reserves to be a credible lender of last resort. Failing that, the peg will eventually fail. See, e.g., the Argentine peso - dollar peg in effect from 1991 to 2002.)

So it is not true to say that money makes no difference. It makes a huge difference.

Another common simple fix to all our economic woes is to re-institute the gold standard. Mr. Tamny only hints at this in this article, but I'd like to take the topic full on.

Unlike what Mr. Tamny claims, money is not a fixed measure of value in the way a mile is a fixed measure of distance. Money is instead a social convention. You can spend dollars because I'm willing to accept them. That's all there is to it. The value of money is determined by social convention, otherwise known as expectations. I expect a dollar to buy me a donut tomorrow morning. If tomorrow the price of a donut went up to $5, and then the following morning down to thirteen cents, then my faith in the dollar would waver. I'd look for another way to settle my debts.

Inflation is caused when people expect their dollars to buy less tomorrow than they buy today. So they will spend their dollars today. Inflation is not caused by the Fed, or by Congress, or by the price of gold.

Deflation is caused when people expect their dollars to buy more tomorrow than they buy today. So they will stash their dollars and spend them tomorrow. Deflation is not caused by the Fed, or by Congress, or by the price of gold.

Inflation and deflation are caused by changes in expectations. Now in extreme cases--e.g., helicopter drops of massive amounts of currency--the Fed can change expectations. And the Fed certainly tries to change expectations. Mr. Tamny undoubtedly recalls the famous words that Janet Yellen uttered on July 15th of last year. Did she say something about "patience" and "data-driven analysis?" Or was it the other way around? Every speech ever made by Ms. Yellen (or Mr. Bernanke before her) sounds exactly the same. Some days the market moves up. Other days the market moves down.

The Fed is irrelevant. Nothing they do matters at the margin. (Nothing, that is, except their role as the lender of last resort.) All these people who hyperventilate about how the Fed is doing it wrong (or right), or who care about what magic words the Chairman will utter next week or next month, are wasting their time and breath. The Fed has nearly zero control  over inflation, velocity, exchange rates, money supply, interest rates, or anything else.

So now the gold bugs want to have the Fed regulate the price of gold. The largest consumers of gold are jewelry buyers in India. How regulating the jewelry business in India is going to help the US economy is a big mystery to me. But it gets worse. Any regulatory agency is eventually captured by the industry it is trying to regulate. So the Fed (which has no other important function except to serve as the lender of last resort) will eventually kowtow to the needs of Canadian miners and Indian jewelers.

In Mr. Bagehot's day gold was used to reconcile debts between countries. So if an Englishman owed money to a Frenchman, the debt would be settled in the common currency--gold. That led to all sorts of opportunities for arbitrage and fraud, as the book describes.

Today it's much more efficient. We have a foreign exchange market that trades more than $5 trillion dollars every day. It's the biggest, most liquid, most efficient market on earth. But the gold bugs don't like it--they want to force all trades to go through gold first. Why?

Compare that amount with what the people who fret over the feckless Fed are worried about. At the height of quantitative easing, the Fed was pushing less than $3 billion per day into the economy. Our Fed fretters predicted imminent inflation and forecast a rise in the gold price to over $2000/oz. But it's less than 0.1% of the daily currency trade. It's a gnat on the back of an elephant. QE had absolutely zero impact on inflation in the US. It was a complete non-event.

Further Reading:

Saturday, February 14, 2015

Working on the Railroad

This post is inspired by Guy Miller's reminiscence reprinted (from Counterpunch) in Socialist Viewpoint, entitled Blood on the Tracks. The title is misleading. Despite Mr. Miller's efforts to be angry at capitalists like Warren Buffett, I sense more an overwhelming pride in his profession. This fellow loves the railroads and all they stand for.

I knew Mr. Miller--more an acquaintance than a friend--back in the days when the Chicago branch was at 180 N. Wacker. I vaguely recall a conversation I had with him after he first got a job with the Chicago & Northwestern. I was one of those College Boys who didn't know too much about real work, so he and I didn't have much in common. But I was genuinely curious what railroad guys did all day.

I confess that I underestimated him. I thought his getting a union job was just a political ruse and that eventually he'd get tired of it and go back to college like the rest of us. So I'm pleased to read that he retired 37 years later from the Union Pacific. That actually squares with my impression of him back then. Mr. Miller was a man you could trust.

You don't work for the railroad for 37 years unless you're trustworthy, reliable, and sober. The best thing the Socialist Workers Party (SWP) ever did for me was the drug discipline--its absolute prohibition on using any illegal drugs. No doubt that was true for Mr. Miller as well. Even today, a primary criterion for employment at the Union Pacific is that you be drug-free. How many children of the 60s could meet that standard?

Railroading is not like working in a factory. It's a skilled job that requires close attention. There is little room for error (as the accident at Lac-Megantic, Quebec, illustrates, where 42 people died). Mr. Miller describes it nicely.
You’re given a stack of track bulletins, each one with specific, complicated instructions. Each one of these bulletins can be a question of life and death. In the course of your run you are constantly interacting with dispatchers, train masters, yardmasters, track foremen, control operators, other trains and emergency personnel. Many of these radio conversations require exact wording, and a long ritualized formula: “Engineer on UP7215 East calling foreman Brown in charge of track bulletin 624 issued on September 24, between mile post 281.6 to mile post 285.7, over.” And so on back and forth the exchanges go over and over, with every word repeated exactly.
It's like being an airline pilot.

Or at least it was like being an airline pilot. For as in that profession much of the work is being computerized and automated. Voice radio communication is what we, today, would call low bandwidth. Much more efficient is the high speed, digital communication from computer to computer. Both the track bulletins and the operator's response can be computerized, and you can take humans out of the equation. Just as the military flies drones all over the world piloted from a bunker outside Las Vegas, so the Union Pacific could drive trains from a control room in Omaha.

Mr. Miller recounts how train crews have gradually been shrinking over the years. Firemen got off in the 1960s. Apprentice engineers disappeared with the shift from steam to diesel. Brakemen and helpers left the tracks with the caboose. Today trains are run by two-man crews: an engineer and a conductor.

Recently the union signed a tentative agreement with BNSF to move to one-man crews--just an engineer. The conductor would work from an office off the train. The company added all kinds of bennies to sweeten the pot, buying off the union negotiators. But, as Mr. Miller reports, it wasn't good enough. The union rank & file voted down the deal, so BNSF is stuck with the two-man crews for the moment.

But only for the moment. Automating trains is a compelling project. Most accidents are caused by human error, so taking humans out of the loop will surely improve safety. No longer will one need to worry about misunderstanding static-filled radio lingo, fatigue, or lack of complete information. A computer can track sensors on every wheel every second--no human could do that. Engineers will stay on board for a few more years as a sentimental relic, but soon they, too, will be gone.

Factory jobs are increasingly done by robots. Over-the-road truck drivers will be displaced within a decade. Airline pilots have ever less and less to do (though they're furthest from redundancy). That railroads should be exempt is impossible.

And now the rot spreads into the white collar workforce as well. Us College Boys can't sleep well anymore, either. Computers have eliminated my dad's old profession--travel agent. Human lawyers are increasingly unemployed because of computers. IBM is working hard to displace the doctor. And we professors are finding our jobs increasingly automated.

So Mr. Miller, retired, speaks fondly about the job he did in the past. And his pride is well-placed. He is an honorable man who did an honorable job. And judging from his article he must have done it very well. But the times they are a changing, and the job that Mr. Miller did doesn't need to be done anymore. That's sad, but that's the way it is.

Further Reading:

Tuesday, February 3, 2015

The SWP Defends Civilization

The following official statement of the Socialist Workers Party (SWP) campaign for DC city council appeared in the February 9th issue of The Militant.
The Socialist Workers Party opposes Jew-hatred and joins in fighting it whenever it raises its head. We support the right of return for all Jews to move to Israel if they choose. And we demand Washington open its doors to all who seek refuge here.
Astonishing!

The conspiracy theorists among us will proclaim an evil plot by Jack Barnes to betray the principles of not just Trotskyism, but Marxism as well. They will say that the Party is moving to the Right.

I have no clue about how the Party reaches decisions these days, and maybe this is an edict from Mr. Barnes himself. But why? Why would the Socialist Workers Party--long a champion of the Palestinian cause--all of a sudden come out in support of the Jewish right of return?

Did they just lose their marbles? Is Mr. Barnes a secret Republican? Does Mr. Barnes have such hypnotic sway that he can make 180 degree turns with no objections from the rank and file? Is Glova Scott (the African-American woman charged with issuing the campaign statement) a mentally-ill, unthinking person trained to spout off whatever words Mr. Barnes puts into her mouth?

No, no, no, and no.

The statement is a break from the past, but as we shall see, perhaps not a very big one. It is entirely consistent with the history of the SWP.

The Party has never been antisemitic. It wasn't when I was a member. It has not been antisemitic since I started writing about them on this blog (or its predecessors). It isn't now. The Party has always tried to be pro-Palestinian and anti-Zionist, without being antisemitic.

It's a pretty narrow needle to thread. When I was a member we called for a democratic secular state in Palestine in which the rights of both Palestinians and Jews would be respected. That was a completely impractical demand, but I can attest to our sincerity. I believed it myself, and I have no reason to think my comrades thought differently. It was not a fig leaf for antisemitism.

So it is possible (at least with some mental gymnastics) to be anti-Zionist without hating Jews. What is impossible is to support Hamas. Hamas is intrinsically an antisemitic organization. Any group which supports Hamas is, to the extent they understand what they're talking about, antisemitic.

The SWP has not supported Hamas for many years, as this blog has documented, most recently here. Few other groups on the Left have such a record. Apart from the SWP, all of the grouplets and blogs I follow support Hamas--and I will accuse them of antisemitism.

The grouplets defend themselves in silly ways. Louis Proyect, for example, simply claims that antisemitism doesn't exist. Even funnier is Socialist Action's (SA) efforts to condemn tiny, non-examples of antisemitism while ignoring the elephant in the room.

In a recent article about Greece, SA expresses displeasure with Syriza's new coalition partner, a conservative group known as ANEL. "It has close ties with the Greek Orthodox Church, is pro-NATO, and homophobic; and its leader Kammenos has made anti-Semitic comments—accusing Greek Jews of paying less in taxes than Orthodox Greeks." Criticizing Jews, or public policy directed toward Jews, is not evidence of antisemitism. If Jews are receiving government bennies then it is fair politics to put that on the table, just as it is possible to criticize affirmative action in this country without being racist. It is hypocritical of SA to point out the mote in ANEL's eye without apologizing for their enthusiastic support for Hamas. ANEL criticizes a social benefit; Hamas advocates mass murder. SA can't tell the difference.

The SWP does understand that difference. So now let's get to the Party's novel, seemingly pro-Zionist position. While that is a change, it's not a very big one and is entirely consistent with their Trotskyist heritage.

Like all other Western political thought, Marxism grew out of the Enlightenment. It is based on a shared meaning of justice and freedom. In order for Marxism to have some slight chance of success, Enlightenment values have to prevail. Socialism--hard enough as it is--simply can't work in a pre-modern, tribal society, obsessed with a nihilistic, murderous world view. That's why Marx always held that the first socialist countries would be advanced, European ones, such as England or Germany. The Party's line has always been that the success of Stalinism was due to Russia's backwards economy and political culture.

If the odds in Russia were long, then surely they're piss-poor in any kind of Hamas-dominated country. You can't have wannabe mass murderers running the place and expect socialism to survive. In order for socialism to have a chance, civilization must be present at some level.

The only civilized country in the Middle East is Israel--by civilized, I mean a country that holds some variant of Enlightenment values. Therefore, if socialism is to have a chance, it has to go through Israel first. Accordingly, the path to socialism is not the abolition of Israel, but rather the building of a socialist revolution within Israel. So The Militant is now covering workers' movements in Israel, such as this strike by kosher chicken butchers (scroll down).

Of course as a matter of practical, revolutionary politics, this is no more realistic than empty demands for a democratic, secular Palestine. Socialism won't happen in Israel nor anyplace else. But at least it has some big principles right. The Party's new position can distinguish between mass murderers and revolutionaries. That's a big improvement over most of the American (or world) Left, who have fallen hook, line and sinker for Hamas' antisemitism.

The Socialist Workers Party--whatever the status of its internal discourse or the mental health of its members--is part of the civilized world. We can have a conversation with them. They don't support mass murder in the Middle East.

Further Reading:

Saturday, January 24, 2015

Election Eve: Greece

We'll let Tariq Ali (a long time British Leftist who at least orbits Trotskism) be our guide to tomorrow's Greek elections. An interview with him appears in Counterpunch.

Let's stipulate that Syriza, the radical Leftist party headed by Alex Tsipras, will probably win the election. That's not in too much doubt. The interesting question is what happens after that. Mr. Ali's lede indicates.
If SYRIZA wins it will mark the beginnings of a fightback against austerity and neo-liberalism in Europe. Two concurrent processes will be in motion from the beginning of the victory. There will be a strong attempt by the EU elite led by Germany to try and tame SYRIZA via a combination of threats and concessions. The aim of this operation is simple. To try and split SYRIZA at a very early stage.
Let's leave aside the term neo-liberalism for the moment--that ill-defined boogeyman. Mr. Ali predicts that the EU (specifically Germany) cares enough about Greece to engage in ornate political machinations, eventually reaching some compromise accord with the new Syriza government.

I don't think that's likely. I think Germany wants to expel Greece from the Eurozone. They have no interest in any compromise.

In 2010 Greece signed an agreement with the EU, the IMF, and the ECB (the Troika) in exchange for a bailout. This prevented a default on Greek debts. In return, Greece agreed to austerity measures, including structural reforms and privatization of government assets. Austerity has been especially difficult.

Greece hugely over-regulates large swathes of its economy, as this article about drug stores indicates. One needs a government license to sell products such as Tylenol or Advil. Thus Greece is plagued with an overpaid, inefficient workforce, along with under-served, needlessly poor consumers. Regulations prevent people from buying products they want and need, much as the taxi medallion system prevents consumers from procuring taxi services conveniently and cheaply.

Syriza represents the protected workers, who despite their inefficiency nevertheless feel entitled. This is the conservative movement in Greece, doing everything possible to maintain the status quo. They want to stay in the Eurozone, because their standard of living depends on cheap credit from Germany. But they don't like structural change, because that will open up the market to the benefit of consumers.

Accordingly, Syriza wants to ditch "austerity," and replace it with a free lunch, i.e., more cheap loans from abroad. It won't work. The Germans won't lend the money. Further, I think Germany believes they can expel Greece relatively painlessly now, i.e., it won't result in a Euro-wide financial crisis.

So contrary to Mr. Ali's prediction of a tense negotiation, I predict an early Grexit. The Troika will yield only on the most superficial, cosmetic points. Syriza can't give that much away--they campaigned on their ability to renegotiate. But they won't be able to deliver. So unless Syriza completely caves, Greece will default on its debt.

Default means that the ECB will cut off the Greek banks. Euros within Greece will flee the country as fast as they can. The Greeks will be forced to print up Drachmas in order to pay their employees. Greeks, who don't yet know the meaning of poverty, will soon find out.

Neo-liberalism is a dysphemism for efficiency and globalization. Contrary to what Mr. Ali maintains, efficiency benefits consumers first and foremost. Walmart, for example, assures always low prices because of the efficiency of their supply chain. Globalization gives consumers more choices in what to buy. They can purchase the best possible product and the cheapest possible price from anywhere in the world.

So neo-liberalism, properly understood, is good for human beings. It has pulled 400,000,000 Chinese out of poverty. But I take Mr. Ali's point--it's bad for the workers in highly protected, over-regulated, uncompetitive industries. Those, unfortunately, are Syriza's constituents.

Countries that have rejected neo-liberalism are either poor, very poor, or total basket cases. Argentina is perhaps the best off of the bunch. Because of an earlier default, they haven't been able to access foreign capital markets for a couple of decades now. But they're still able to buy products on the global market.

Venezuela, while not yet in default, has destroyed its own economy. Its trade with the rest of the world is in terminal decline. The oil industry lies in ruins because of stunningly bad management and lack of foreign investment. Shoppers Beggars now wait in line for things like milk and toilet paper.

Cuba has long since renounced trade. Recent TV clips filmed on Havana's seaside boulevard show as much--the dilapidated buildings, the ancient cars, the small-town traffic, etc. Like Venezuela, even common consumer goods are tightly rationed. Nobody is allowed to buy anything. This is the socialism of poverty.

We need not speak of North Korea, the current socialist utopia.

There is much in Mr. Ali's article that I agree with. He says,
[The European Union is] in a very bad state. It subordinated politics to economics and was undemocratic from the very beginning. Blaming ‘lazy Southerners’ for the crisis is grotesque. Its not just the Left which argues this (in fact the Left has been with some exception very weak on the EU), but hedge-fund kings like George Soros who recently said: “My worst fears are confirmed…This is what I was afraid of, that the Euro would be preserved. …pervert the venture, and destroy the European Union. Instead of the solidarity (the EU) was supposed to have embodied, it became every country for itself.” And Pope Francis in the Vatican, to the left of every EU govt today proclaimed that: “The great ideas that inspired Europe seem to have lost their attraction, only to be replaced by the bureaucratic technicalities of its institutions.” The single-formula approach on the currency union is dead in the waters of the Mediterrenean. An alternative needs to be developed. It would be better if this were done by common agreement, but that is unlikely so new radical governments might have to take unilateral decisions.
This is mostly correct. And the first step to dismantling the euro is a Grexit. A more graceful way will be found to facilitate a further breakup. The euro was always a very bad idea.

Just to be clear, this post predicts that:

  • Syriza will win tomorrow's election.
  • Greece will be out of the Eurozone before the end of 2015.
Tell me if I'm wrong.

Further Reading:

Monday, January 19, 2015

Are Swiss Bankers Stupid?

Are Swiss bankers stupid?

Yes, answer most commentators. Paul Krugman thinks their depegging the franc from the euro is simply inexplicable. Scott Sumner is similarly perplexed. He calls the act "panicky." Megan McArdle writes "[f]rom an economist’s perspective, this seems like the wrong decision, not just because of the chaos, but because, as Krugman notes, this is going to be hell on the exporters." But she's more generous--they're not stupid. Instead they just made a politically-motivated mistake.

Only the New York Sun editorializes in favor of the gnomes. "Congratulations to the doughty Swiss, we say." But then they ruin their argument with gold-buggery, claiming the world should go onto the gold standard.

So I will rise--somewhat lamely--in defense of the Swiss. But the main purpose of this post is to explain precisely what happened, especially to those who don't follow the financial news as closely as I do.

The Swiss National Bank (SNB) is a private bank that serves as the country's equivalent to the Fed. It has a special deal with the government that enables it to act as a central bank. That is, it is the lender of last resort, guaranteed never to be illiquid, and accordingly it can print money. It's charged with a mission: "It is obliged by Constitution and statute to act in accordance with the interests of the country as a whole. Its primary goal is to ensure price stability, while taking due account of economic developments."

So last Thursday at 9:30 am the SNB did some very strange things. First, they reneged on a pledge they had made to peg the Swiss franc (CHF) to the euro (EUR). The promise had been reiterated even just days before, and that the bank would renounce it so precipitously took everybody by surprise.

The pledge consisted of this. The SNB guaranteed that the euro would never cost less than 1.20 francs. If the euro cost more than that the SNB would print francs (they can print as many as they want) and buy euros until the market priced them at CHF 1.20 or above. Because the euro has been weak, the SNB was printing goo-gobs of francs to maintain the peg. Accordingly, the SNB owned lots and lots of euros.

The Swiss actually had a good problem--they were trying to keep their currency from rising (identical to keeping the euro from falling). Any central bank can do that by simply printing more money. The opposite problem--the one now faced by Russia or Venezuela among others--is to keep their currencies from falling. Those countries have to sell foreign reserves to make that happen--which works until they run out of foreign exchange. Russia, for example, can't print euros or Swiss francs.

So there was, in fact, no intrinsic reason why the Swiss couldn't just keep printing francs indefinitely and maintain the peg forever. That's what they said they'd do. And they did that until they broke their promise.

What happened is that within minutes of the announcement the euro dropped from 1.20 francs to 1.05 francs, or about a 13% drop. (As of this writing, 1.01 francs buys a euro.) This in a market where fluctuations are typically in the 0.1% range or less, and it put a number of foreign exchange brokers out of business. Also hurt were Polish and Hungarian homeowners. Since the zloty and the forint are not regarded as stable currencies, home mortgages in those two countries were issued in Swiss francs, thought to be the gold standard. Those poor slobs now owe 20% more on their mortgages than they did last week.

So that's the first mystery--why did they break their promise? The second mystery is why they did it on Thursday morning at 9:30 am, in the middle of a trading day? Normally--according to the wise and the good--such announcements are made over a weekend, just after the close on Friday. This gives people a chance to adjust and plan, and so minimize losses. The Swiss didn't do that--instead they picked the most disruptive time possible--the morning of a busy trading day.

So it's been described as a "panicky mistake," the kind of thing you'd do if you're in a corner with only bad options. But that hardly describes Switzerland. The problem with the "panic theory" is there was no good reason for the SNB to panic. There are any number of things that could have solved their problem (if they had a problem) that wouldn't have been as disastrous. They could, for example, have moved the peg from 1.20 to 1.18--a small but meaningful change. That would have shocked the markets, but hardly been the "disaster" that happened.

Conventional wisdom has it that the cause of the SNB's decision was the imminent quantitative easing by the European Central Bank (ECB), the keepers of the euro. The ECB has promised that they were going to print euros in an attempt to induce inflation in the Eurozone. Inflation is needed because governments and people are hopelessly in debt. Inflation effectively lowers the interest rates on existing debt.

Of course printing euros will lower the value of the euro, which means the Swiss would have to print overtime to maintain the peg. The Swiss apparently decided they didn't want to do that. So now people are predicting that the euro will fall to parity with the dollar (as I predicted here, quite by accident).

But the ECB's quantitative easing, while imminent, does not spell crisis for the SNB. It has been announced for some months now--no surprise there--and likely had already been priced into the market. So I simply don't buy the panic theory. I think the Swiss acted with due diligence.

One reason people claim this was a mistake will be massive deflation in Switzerland. Any exports to the Eurozone are now 19% more expensive than before. This will kill exporters, such as the vaunted watch industry. And no doubt this is a problem. But as this Der Spiegel article (in German) indicates, the Swiss are already adjusting. There is a concerted move to lower wages across the board. Swiss in border areas (e.g., Basel or Geneva) can easily buy groceries in Germany or France at a considerable discount. So deflation will hurt them in the short term, but probably not the medium or long term. In a year they'll have adjusted.

Another reason for thinking it's an error is that the SNB will lose credibility. They said they'd keep the peg indefinitely, and then they broke their word--in the most dramatic way imaginable. But the incredible Swiss are crying all the way to the bank--their currency is now worth 19% more than before. Every Swiss citizen is now substantially richer than they were before.

So I think the SNB dropped the peg for good reasons. And here they are:

1) While deflation is bad for debtors, the Swiss are not in debt. Indeed, quite the opposite. They're global creditors. Deflation is good for creditors. So if any country can withstand a bout of deflation, Switzerland can.

2) The Swiss franc is not going to be a reserve currency. It's a tiny country with only eight million people. There is no way they can bail out the euro, which is what everybody was expecting. Far from being a mistake, breaking the peg was the right thing to do. It corrected the previous error of making the peg in the first place.

3) As a small country dedicated to free markets and free trade, the Swiss do not have much macroeconomic control over their economy. They can't regulate either inflation or unemployment. All they can do is set the value of their currency. By tying it to the euro they forfeited even that control. The SNB has credibly reclaimed what little power it once had.

4) Anybody who has savings in Swiss francs is now 19% richer than they were last week. Most Swiss bank savers are Swiss. So what's wrong with that?

5) By doing it suddenly and dramatically, the prevent anybody gaming the system to Swiss disadvantage. Also, all the bad news is out there. There are no more shoes to drop. Folks can get back to their business.

So I don't think the Swiss are stupid. But even smart people make mistakes. We'll know that by this time next year--if unemployment rises substantially then yeah. But I don't think that will happen. Switzerland has never been a low-cost country. Their products are not price sensitive. They'll be able to adjust.

Further Reading:




Monday, January 12, 2015

Beware the Amazons!

I have not read Adrienne Mayor's new book, entitled The Amazons: Lives & Legends of Women Warriors Across the Ancient World. It would never have crossed my radar screen but for an article in Socialist Action.

From the preview at amazon.com it looks to be charmingly written and beautifully researched. Appropriately, it's doing well in the sales rankings and has been widely reviewed elsewhere. I have read two "bourgeois" reviews from The Independent and the Wall Street Journal. There's nothing wrong with the book. It's just that I have lots of other stuff to read first that's more important to me.

Ms. Mayor's opus concerns female warriors from Scythia. That land was in Central Asia, and the warriors (both men and women, as the WSJ points out) were members of nomadic tribes who depended on finding new pastureland and/or booty for survival. Occasionally they attacked Greek communities (unsuccessfully, I gather), inspiring a voluminous and enduring series of myths about Amazon warriors. They caught the Greek imagination.

Ms. Mayor writes
After Heracles, Amazons were the single most popular subjects in Greek vase paintings. Amazons appeared in city murals and monumental civic sculptures in Athens and other Greek cities; tombs and places linked to Amazons were revered in the Greek and Anatolian landscape.
Ms. Mayor's effort is to separate fact from fiction--what was true about the Amazons, and what was myth. It's a book about art, culture, fashion, archaeology, and sex. I think it will be a bestseller.

So why am I writing about a book that I have no plan to read? It's because of the odd, idiosyncratic review provided by Socialist Action's resident feminist, Christine Marie, entitled A challenge to the myth of male dominance. Ms. Marie reads much more into the book than I think is there.

The title of Ms. Marie's review gives the game away. She reduces a complex, romantic tale to a cardboard cutout. Mayor's book is little more than an anecdote to justify some Marxist theory.

Her first claim is that the very existence of female warriors is in doubt. Of course that's not true--we have Amazons even today--the US military is almost completely gender-integrated. Ms. Marie thinks that we males are sent into paroxysms of psychological despair by the mere thought of female warriors. Then how does she explain the idolization of said Amazons in today's video games?

Second, she suggests that the acknowledgement of women soldiers has been the secret knowledge of Marxist anthropologists.
Collections of works by Marxist feminist anthropologists such as Eleanor Burke Leacock are kept in the public eye thanks only to small radical publishing houses. And so, when academic publishers commit to printing a new book that challenges the mainstream on these questions, it should be celebrated.
This ultimately reduces to a conspiracy theory--that well-known academics (almost all of whom are Leftists, and the majority are women) are somehow keeping important knowledge under wraps. How could this happen? And why?

Then comes the bizarre argument that because women died in battle, therefore there is a threat to male dominance. The logic escapes me. I do not see the connection between the title of Ms. Marie's piece and the substance of Ms. Mayor's book. Over 700,000 British soldiers died in World War I, many of them in futile attempts to move the front lines by a few hundred yards. Is that an argument for male dominance? And yet Ms. Marie will have us believe that the discovery of graves of a few hundred female battle victims implies that women were equals way back when.

And then there is the category error. She is taking a tale from history and turning it into a fact of anthropology. Ms. Mayor's book looks to be a rousing good tale, analogous perhaps to the myriad Civil War stories. These are at best anecdotes. And true enough--collect enough anecdotes and eventually you get data. But Ms. Marie has one anecdote and from there she argues for Marxist anthropology. The premise does not justify the conclusion.

Any effort to do anthropology has to take into account evolutionary psychology. From what I've read, there is nothing in Ms. Mayor's book that contradicts evoPsych. Nor as a work of history would one expect it to. But anthropology looks at a much bigger canvas over a much longer timeframe. Marx knew nothing about genes or genetics, nor did he have any ability to track their propagation through human populations. We have that toolkit today, at least in rudimentary form.

I don't expect Ms. Marie to change her mind. A person's political opinions are likely innate, or at least not changeable after age 30 or so. It all depends on what categories you put things in, and what values you consider important. To use Arnold Kling's language, Ms. Marie puts everything in terms of an Oppression/Liberation axis. Women are oppressed, and the political goal is to free them.

I prefer (in this context) the Civilization/Barbarism axis, i.e., that rules of civilized behavior are a crucial ingredient of our modern world. Civilization requires some limits on freedom. Men, for example, are not allowed to form street gangs with the purpose of going out to rape women, Genghis Khan style. Women, on the other hand, need to provide domestic life that keeps families and communities intact. When these institutions break down, we'll all be much worse off.

So Ms. Marie is from Mars and I'm from Venus, or whatever. I relinquish any effort to alter her world view. But I will suggest that she could become better at making her own case if she knew more. And that, of course, applies to me as well. So I'll make a deal with her. If she reads one book that I recommend, then I shall return the favor. The goal is not to change minds (impossible), but rather just to inform.

My recommendation for Ms. Marie is Steven Pinker's The Blank Slate. I don't agree with everything in that book. It's also somewhat dated. Nevertheless, I think it makes the strongest case against Marxist anthropology as historically understood. Now a reformulation of Marxism is possible, but that will require some understanding of evolutionary psychology.

I await Ms. Marie's instructions for what book I am to read. I promise to review it here.

Further Reading:

Saturday, January 3, 2015

Predictions for 2015

I used to be in awe of public prognosticators. Anybody who could publish a set of predictions in venues like Time Magazine or Barron's surely must know something about the future. Of course they don't know any more than I do. Not even Nobel Prize winners can predict the future any better than me.

The other side of that coin is that I can't predict the future any better than them. I have learned that my stock market picks are useless. Accordingly, my only investments now are in broad-market index funds. I make no effort to time the market.

My forecasts for larger economic and political changes are slightly better than random. For example, I have long predicted that either a Democrat or a Republican will win the next presidential election--and I have yet to be wrong. Seriously, long before the events occurred, I correctly predicted the collapse of the Venezuelan economy, the instability of the Euro, the decline of China relative to the US, and much more. But none of these were particularly out on a limb.

So with that disclaimer, here are my predictions for 2015. A few of them are pretty safe, and some of them are not much more than guesses. We'll see how well I do a year from now.

They are listed in no particular order.

Enjoy.

  1. Oil will continue its decline for the first half of the year, and then recover to a stable price, probably around $70/barrel.
  2. Interest rates will remain low. The 10-year treasury will end the year yielding less than 2.5%.
  3. The Fed will probably not raise interest rates, but if they do it will be inconsequential. Too much money will be flowing in from abroad for it to make any difference.
  4. Wages will not go up in nominal terms. Workers will not get a raise. The extra-high minimum wages imposed in places like Seattle and Chicago will not be a trend.
  5. While nominal wages will hold steady, real wages will rise because of continuing deflation. The collapse of oil and commodity prices will spread through the economy. Utility costs will decline.
  6. Food prices will decline in 2015 because of successive years of good weather.
  7. Housing will be soft, and rental costs will top out and begin to decline.
  8. A key driver of deflation will be the continued rise of the dollar. Accordingly, prices of imports will go down, forcing a price decline on American manufacturers. The USDJPY will climb to 150, and the EURUSD will fall to parity.
  9. The stock market will not crash, but it will trend lower over the year.
  10. Tsipras (SYRIZA) will win the Greek election, and in consequence Greece will be pushed out of the Euro. This will cause considerable short-term damage to the Euro economy, but it will drive Greece into long-term depression and poverty. Greece will become a third world country.
  11. al-Assad will be overthrown in Syria. The new head of government will realize that the Alawites cannot win a war of attrition and will seek a cease-fire arrangement with its enemies. This will formalize new international boundaries between a truncated Syria (Damascus, Homs, and the coast) and the Islamic State. The Syrian war may continue between IS and the Kurds, and also over Aleppo between IS, remnants of the Free Syrian Army, and the remaining Christian population. The government will stay out of it.
  12. There will be no dramatic events among Trotskyists. All of the the grouplets will suffer a slow decline in membership. There will be no important conventions this year. Jack Barnes will not write a book.
  13. The shit will hit the fan in Illinois after Bruce Rauner becomes governor. The pension & budget crisis is too acute to postpone. I predict (more in hope than any other reason) that Illinois will become a Right-To-Work state, and that the public employee unions will be forced to take significant haircuts.

Further Reading: