ALEX CAMPBELL'S TUMBLELOG

theeconomist:

Daily chart: which countries have the biggest debts? Judged by its towering sovereign-debt burden and budget deficit, Japan should be a concern for investors. Yet there are good reasons why the euro-zone countries are first in the firing line.

Daily chart: which countries have the biggest debts? Judged by its towering sovereign-debt burden and budget deficit, Japan should be a concern for investors. Yet there are good reasons why the euro-zone countries are first in the firing line.

reblogged from theeconomist

reblogged from continuum

Look, I think the biggest problem the country has right now is not the budget deficit. The biggest problem the country has right now is the jobs deficit. Yes, there’s a risk that we will misplay things and make the mistakes of the 1970’s, and have inflation and have excessive borrowing.

But far and away the larger risk is that we will make the mistakes of 1937, and that we will not have a recovery that is sustained, that we will make the mistakes that Japan made, and that we will have a decade or two of stagnation. The right question to be focused on is how to stimulate demand.

Look out there, guys. The Treasury bond rate, Treasury note rate for ten years is 2.85 percent. Nobody is failing to invest because 2.85 percent is too much. They are failing to invest because there are no customers in their store. They are failing to invest because their factories are sitting empty. They are failing to innovate because they’re not sure how large the market for the product will be.

That is the problem that we need to address. By the way, an extra percent a year on the growth rate for the next five years will do more for the budget than any amount of the entitlement-cutting that’s under discussion.

From this fascinating interview with Larry Summers. Yes, the same interview in which he calls the Winklevoss twins assholes.

The second part of my interview with Rory Sutherland for www.nextness.com.au is now up. Don’t miss it!

I worry that after you’ve been in advertising for 20 years and you’ve been reasonably materially successful, I no longer feel that same fear buying a flat screen TV – “oh god, what if I make the wrong decision” - that 90% of consumers do. Because if I cock up and the thing goes bad, it doesn’t cheer me up much, but I can go and buy another one.
Whereas for 70% of the population that isn’t even an option. If my TV goes bang, I’m screwed. And I think we sometimes misunderstand a lot of consumer behaviour once you become a little too prosperous. So I think there’s quite a bit there – try never to lose that, even if you become more prosperous as things go on. Never forget what it’s like to be frightened of making a bad purchase.

Complex systems that have artificially suppressed volatility tend to become extremely fragile, while at the same time exhibiting no visible risks. In fact, they tend to be too calm and exhibit minimal variability as silent risks accumulate beneath the surface. Although the stated intention of political leaders and economic policymakers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite. These artificially con- strained systems become prone to “Black Swans”—that is, they become extremely vulnerable to large-scale events that lie far from the statistical norm and were largely unpredictable to a given set of observers. Nassim Taleb and Mark Blyth, ‘The Black Swan of Cairo’ in Foreign Affairs (May / June 2011)

A few weeks ago I was at the Asian Marketing Effectiveness awards in Shanghai. While there I was lucky enough to interview the one and only Rory Sutherland for www.nextness.com.au.

Rory is an esteemed TED talker, vice chairman and executive creative director of OgilvyOne UK, and president of the IPA.

Read part one of the interview here. Part two to come tomorrow.

And here’s an extra bonus part of the interview that we couldn’t quite squeeze into the Nextness post:

So you’ve talked about how the English speaking world is grossly over-supplied with media. How do you think this is playing out in our culture?

The thing that frightens me is really a by-product of globalisation as much as anything - as much as digitisation - which is what you might call the disappearance of the middle class.

Twenty years ago it was perfectly possible to make a decent living as say the 25th most successful writer in Denmark. You could probably make a living as the 200th most successful writer in Britain. Now, you’re either J.K. Rowling or you’re starving in a garage. Digital trends seem not to be doing any favours in terms of distribution of wealth.

Tyler Cowan talks about this in his book The Great Stagnation. One of his points that really interests me is that when Henry Ford invented the automobile, he effectively created ten million blue collar jobs - for gas station attendants to change the the oil, for people to build the roads, for people to do all this stuff.

So everybody in the United States got much richer from about 1900 to about 1974. Things that were once luxuries in 1900 became ubiquitous - like the refrigerator went from being a rich man’s ludicrous luxury to something most households had.

What we’re seeing now is that Facebook creates six billionaires, it has 800 employees, and that’s about it. There’s an extent to which we’re not actually creating worthwhile employment. We’re creating value, but whether we’re creating really worthwhile, rewarding employment and distributing the wealth in a reasonably (or at least recognisably) egalitarian way is really up for debate.

Yes, and the idea of the Great Stagnation is that we’ve picked all the low hanging fruit in Western economies…

Given the general perception that innovation is proceeding exponentially, I agree that Tyler Cowan is right to sound a warning note about that. His arguments are that:

1) there isn’t anything obvious in the pipeline that you can democratise

2) consumer goods in Western nations are so cheap that more and more money goes into things like property, which are to a great extent economically useless

In the West, I think evidence of this is things like 3D TV, which is evidence you’re slightly scraping the bottom of the barrel.

Here in China it’s much easier, because there are probably 500 or 600 million people with no toilets, so plan A is pretty easy. Install them. So they have all this low-hanging fruit still to harvest.

What stands in the way of the future, most often, is the past. It’s yesterday’s sluggish institutions. Yet, instead of reimagining and rebooting those institutions, we keep reviving and resurrecting them — zombielike — hoping that by bringing them back from the dead, we can keep the status quo humming along for just a little while longer, that we can eke out the last meager, shriveled morsels of returns from seeds laid down during the industrial age. “The Capitalist’s Paradox” in Harvard Business Review (as an aside, this is an extremely accurate description what’s happening in the advertising industry)

A 40′ container filled with household goods, shipped from Shanghai to Houston, Texas costs $6169.93. Reverse the trip and ship the same container from Houston to Shanghai and the cost is $3631.07. That’s because 60% of containers on ships coming from the US to China are empty, which means Maersk and other shippers are desperate to sell container space. ‘The ley lines of globalisation’ (via Marginal Revolution)

The tsunami of cheap credit that rolled across the planet between 2002 and 2007 has just now created a new opportunity for travel: financial-disaster tourism. The credit wasn’t just money, it was temptation. It offered entire societies the chance to reveal aspects of their characters they could not normally afford to indulge. Entire countries were told, “The lights are out, you can do whatever you want to do and no one will ever know.” What they wanted to do with money in the dark varied. Americans wanted to own homes far larger than they could afford, and to allow the strong to exploit the weak. Icelanders wanted to stop fishing and become investment bankers, and to allow their alpha males to reveal a theretofore suppressed megalomania. The Germans wanted to be even more German; the Irish wanted to stop being Irish. Michael Lewis beautifully sums up how the financial crisis happened in his latest Vanity Fair article, ‘Beware of Greeks Bearing Bonds’

I spoke to another hedge fund in London so perplexed by the many bad LBOs Icelandic banks were financing that it hired private investigators to figure out what was going on in the Icelandic financial system. The investigators produced a chart detailing a byzantine web of interlinked entities that boiled down to this: A handful of guys in Iceland, who had no experience of finance, were taking out tens of billions of dollars in short-term loans from abroad. They were then re-lending this money to themselves and their friends to buy assets—the banks, soccer teams, etc. Since the entire world’s assets were rising—thanks in part to people like these Icelandic lunatics paying crazy prices for them—they appeared to be making money.

Yet another hedge-fund manager explained Icelandic banking to me this way: You have a dog, and I have a cat. We agree that they are each worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners, but Icelandic banks, with a billion dollars in new assets. “They created fake capital by trading assets amongst themselves at inflated values,” says a London hedge-fund manager. “This was how the banks and investment companies grew and grew. But they were lightweights in the international markets.”

‘Wall Street on the Tundra’ - Michael Lewis’s excellent Vanity Fair article on Iceland’s economic collapse

When Neil Armstrong took his small step from Apollo 11 and looked around, he probably thought, Wow, sort of like Iceland—even though the moon was nothing like Iceland. But then, he was a tourist, and a tourist can’t help but have a distorted opinion of a place: he meets unrepresentative people, has unrepresentative experiences, and runs around imposing upon the place the fantastic mental pictures he had in his head when he got there. When Iceland became a tourist in global high finance it had the same problem as Neil Armstrong.

[Icelanders] inhabited their remote island for 1,100 years without so much as dabbling in leveraged buyouts, hostile takeovers, derivatives trading, or even small-scale financial fraud. When, in 2003, they sat down at the same table with Goldman Sachs and Morgan Stanley, they had only the roughest idea of what an investment banker did and how he behaved—most of it gleaned from young Icelanders’ experiences at various American business schools. And so what they did with money probably says as much about the American soul, circa 2003, as it does about Icelanders. They understood instantly, for instance, that finance had less to do with productive enterprise than trading bits of paper among themselves. And when they lent money they didn’t simply facilitate enterprise but bankrolled friends and family, so that they might buy and own things, like real investment bankers: Beverly Hills condos, British soccer teams and department stores, Danish airlines and media companies, Norwegian banks, Indian power plants.

‘Wall Street on the Tundra’ - Michael Lewis’s excellent Vanity Fair article on Iceland’s economic collapse

Notice that no one asked, What might Icelanders want to do? Or even: What might Icelanders be especially suited to do? No one thought that Icelanders might have some natural gift for smelting aluminum, and, if anything, the opposite proved true. Alcoa, the biggest aluminum company in the country, encountered two problems peculiar to Iceland when, in 2004, it set about erecting its giant smelting plant. The first was the so-called “hidden people”—or, to put it more plainly , elves—in whom some large number of Icelanders, steeped long and thoroughly in their rich folkloric culture, sincerely believe. Before Alcoa could build its smelter it had to defer to a government expert to scour the enclosed plant site and certify that no elves were on or under it. It was a delicate corporate situation, an Alcoa spokesman told me, because they had to pay hard cash to declare the site elf-free but, as he put it, “we couldn’t as a company be in a position of acknowledging the existence of hidden people. ‘Wall Street on the Tundra’ - Michael Lewis’s excellent Vanity Fair article on Iceland’s economic collapse

Like the debate over climate change itself, the debate over climate economics looks very different from the inside than it often does in popular media. The casual reader might have the impression that there are real doubts about whether emissions can be reduced without inflicting severe damage on the economy. In fact, once you filter out the noise generated by special-interest groups, you discover that there is widespread agreement among environmental economists that a market-based program to deal with the threat of climate change — one that limits carbon emissions by putting a price on them — can achieve large results at modest, though not trivial, cost. There is, however, much less agreement on how fast we should move, whether major conservation efforts should start almost immediately or be gradually increased over the course of many decades. ‘Building a Green Economy’, Paul Krugman in the New York Times