Working Papers

Martin Armstrong is Back

Fresh from the longest ever jailing for civil contempt in a federal white-collar case in the US, Martin Armstrong is back. You can read a much longer profile of him and others like him in The New Yorker.

I don’t have much time for cycle theories. When I worked in financial markets I met numerous advocates for various cycle theories among fund managers. Strangely, I always wound-up being the one who paid for lunch. However, his story is an interesting one. I’m always suspicious when someone gets locked-up for an incidental crime that hadn’t taken place before the prosecutors got involved and when everyone in the case seems to have copped a plea bargain. Even if I’m completely wrong in my suspicions, there are plenty of other cases like it pointing to the decline of the rule of law in the US.

posted on 30 September 2011 by skirchner in Economics, Financial Markets, Rule of Law

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A Partial Defence of Alessio Rastani

The Torygraph is all over Alessio Rastani and who can blame them for wanting to stick it to the pretentious Beeb over their seeming lack of quality control. Turns out that Rastani is a ‘talker not a trader’ with somewhat limited credentials on both counts. While his now famous opinions are highly questionable, this doesn’t exactly set Rastani apart from the vastly more credentialed talking heads routinely used by the Beeb and others to fill air time.

The sad fact is that a PhD from Oxbridge or an Ivy League school and a stellar career at the IMF and/or an investment bank more often than not yields a set of opinions and insights only slightly less dubious than those of Rastani.

posted on 28 September 2011 by skirchner in Economics, Financial Markets, Media

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Financial Repression: Coming Soon to a Market Near You

It’s not inflation you have to worry about:

It is conjectured here that the pressing needs of governments to reduce debt rollover risks and curb rising interest expenditures in light of the substantial debt overhang (combined with the widespread “official aversion” to explicit restructuring) are leading to a revival of financial repression—including more directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, and tighter regulation on cross-border capital movements.

posted on 10 September 2011 by skirchner in Economics, Financial Markets

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Sovereign Wealth Funds as ‘Social Control of Public Wealth’

The Greens are big supporters of making greater use of sovereign wealth funds. This op-ed in The Age helps explain the appeal of sovereign wealth funds to the left:

contemporary Left thinkers have increasingly argued that the ‘‘financialisation’’ of society - the replacement of government-funded retirement with individually-funded savings invested in financial markets, the privatisation of core services, the increasing ownership of society by hedge funds and the explosive use of credit - needs some tempering through social control of public wealth.  That could come through government ownership of vehicles such as sovereign wealth funds.

In other words, the role of SWFs is to disintermediate the private sector from saving and investment decisions. This is perfectly understandable coming from a left-wing perspective. However, it begs the question as to why so many Coalition MPs, such as Malcolm Turnbull and Josh Frydenburg, are also such enthusiastic supporters of SWFs.

The private sector already saves and invests for the future through private capital markets. It is governments that routinely squander future wealth thorough increased public spending and borrowing. Increased public saving via a SWF sounds virtuous, until you recognise that public saving is just deferred government spending. Unless you think future governments are going to make better spending decisions than the governments we have actually had, the argument for increased public saving via a SWF is decidedly weak.

In this op-ed, I argue that some of the objectives behind a sovereign wealth fund could be better achieved through binding fiscal responsibility legislation. If a politician supports a SWF, but opposes fiscal responsibility legislation, then you know they can’t be trusted with a SWF.

posted on 07 September 2011 by skirchner in Economics, Financial Markets, Fiscal Policy

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How to Fix a Conflicted RBA Board

I have an op-ed in today’s AFR arguing for monetary policy decision-making to separated from the Reserve Bank Board. Full text below the fold (may differ slightly from edited AFR text).

continue reading

posted on 07 September 2011 by skirchner in Economics, Financial Markets, Monetary Policy

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Selling the Gold Stock as Bailout of Last Resort

Michael Lewis quotes a senior Bundesbank official on selling the gold stock to meet an ECB insolvency:

The E.C.B. itself might face insolvency, which would mean turning for funds to its solvent member governments, led by Germany. (The senior official at the Bundesbank told me they already have thought about how to deal with the request. “We have 3,400 tons of gold,” he said. “We are the only country that has not sold its original allotment from the [late 1940s]. So we are covered to some extent.”)

The IMF bailed itself out by selling its gold stock. Why not the members of the ECB?

posted on 21 August 2011 by skirchner in Economics, Financial Markets, Gold

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Why Raising the US Debt Ceiling Was a Mistake

I have an article at The Conversation arguing that failure to raise the US debt ceiling need not have led to sovereign debt default:

It was the failure of US politicians to acknowledge the policy implications of long-run budget sustainability that decided the recent ratings action by Standard & Poor’s. Failing to raise the debt ceiling would not have led to debt default if US politicians had taken the necessary decisions to put the budget on a sustainable footing. Raising the debt ceiling kicks the problem down the road and creates the risk of a far more serious fiscal crisis in future.

A fiscally responsible US president would have joined with responsible members of Congress in refusing to sign a further increase in the debt ceiling. The Obama administration could have used the unthinkable prospect of debt default to force spendthrift members of Congress to reduce government spending and stabilise expectations for the future path of net debt that are currently weighing on economic growth.

Congress and the Administration know that if they lead the US to default on its obligations, the American people will sweep them from office. For politicians, incentives don’t come much stronger than that.

My CIS colleague Adam Creighton has been making similar points in Crikey, although I’m far better disposed towards quantitative easing than he is.

See also Jonah Goldberg, Wake Up and Smell the Tea.

posted on 11 August 2011 by skirchner in Economics, Financial Markets, Fiscal Policy, Monetary Policy

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Monetising the US Gold Stock

Monetising the US gold stock is a tried and true method of keeping the bond bailiffs at bay:

the nation owns about a quarter billion ounces of gold, valued at the quaint old figure of $42 2/9 per ounce. This stock serves as collateral for about $11 billion of gold certificates on the books of the Federal Reserve. The Treasury and the Fed could swap the old certificates for new ones based on a value closer to the current market price of $1,650 per ounce. To balance its books, the Fed would credit the Treasury’s account an additional $400 billion or so. This should be enough for even our improvident government to run for a few more months. Such an accounting transaction has the attraction of being done before in identical circumstances, as pointed out by my colleague Alex Pollock. In 1953, the Fed similarly “monetized” the gold after the Congress failed to pass an increase in the debt ceiling. This by the way, highlights the bipartisan nature of debt-ceiling dramatics. At the time, Republicans held the presidency and majorities in both chambers of the Congress.

Plenty of irony there for gold bugs.

posted on 30 July 2011 by skirchner in Economics, Financial Markets, Gold

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Be Careful What Jim Grant Wishes For

A gold standard won’t do what Jim Grant says it will:

Supporters of the gold standard like to point out that since creation of the Fed in 1913 the dollar has lost 95% of its value.  Well in 1913, the dollar was convertible into an ounce of gold at $20.86 an ounce.  So while the dollar has lost 95 percent of its value, gold has appreciated even more rapidly than the dollar has depreciated.  If gold had kept its value in 1913, its value today would be somewhere between $400 and $500 an ounce.  Accept for argument’s sake the claim of supporters of the gold standard that the recent run up in the value of gold was caused by a loss of confidence in the dollar.  Would it not be reasonable to conclude from that assumption that if the dollar were made convertible into gold, people would then start selling off their gold, the threat of dollar depreciation having been eliminated?

But wait.  If people started selling off their gold, the value of gold would decline.  If the real value of the gold fell from its current value back to its value in 1913 when the dollar was convertible into gold at $20.86, the value of would lose two-thirds to three-quarters of its value.  We are talking about two or three hundred percent inflation.  Does that make feel more confident about the value of your savings?

posted on 19 July 2011 by skirchner in Economics, Financial Markets, Gold

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Friedman Was a Hedgehog

John Cochrane: ‘economic events should be unforecastable, and their unforecastability is a sign that the markets and our theories about them are working well.’

posted on 16 July 2011 by skirchner in Economics, Financial Markets

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How the Financial Crisis Inquiry Commission Suppressed Dissent

Peter Wallison responds to the Report of the Democratic Staff of the House Oversight and Government Reform Committee:

The report of the Democratic staff of the House Committee on Oversight and Government Reform—although it attempts to call my conduct into question as a member of the Financial Crisis Inquiry Commission—actually indicts the Commission. The facts are these. From the outset of its “investigation” the Commission’s chair, Phil Angelides, was intent on reporting that the financial crisis was caused by greed, misconduct and lack of regulation of the private sector, exculpating government housing policy from any significant responsibility. Evidence of this can be seen in the fact that in December 2009—before any investigation had been done—Angelides handed the commission members a list of hearings that the Commission would hold over the succeeding 8 months. Those hearings focused on the private sector’s role in the financial crisis, and paid scant attention to the government’s role. This was fully in accord with the interests of the House and Senate Democrats, who were intent on establishing this narrative as a basis for enacting the Dodd-Frank Act, which sought to impose substantial new regulation on the U.S. financial system.

posted on 16 July 2011 by skirchner in Economics, Financial Markets

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Federal Election Betting Market Odds and Carbon Sunday

Simon Jackman updates federal election betting market implied probs. See if you can spot carbon Sunday!

Sadly, Malcolm Turnbull still doesn’t get it.

posted on 14 July 2011 by skirchner in Economics, Financial Markets, Politics

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GSE Debt: ‘Treasuries with Higher Yield’

Why worry about US Treasuries when they’re buried in agency debt:

The expansion of agency debt not only imposes risk and realized losses on taxpayers—we recall the $160 billion that the U.S. Treasury has been forced to put into Fannie and Freddie to prevent their financial collapse—it also increases the cost of Treasury’s direct financing by creating a huge pool of alternate government-backed securities to compete with Treasury securities, and thus increases the interest cost to taxpayers.

So although agencies are not “officially government debt,” they undoubtedly increase the required interest rates on Treasury securities, in my judgment, and thus increase the federal deficit. The greater the amount of agency securities available as potential substitutes for Treasuries, the greater this effect must be. As a manager of a major institutional investor told me recently, “We view Fannie and Freddie MBS as Treasuries with a higher yield—so now we own very few Treasuries.”

posted on 14 July 2011 by skirchner in Economics, Financial Markets

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MNI-Deutsche Börse Economic Forecasting Competition – Final Round

Congratulations to Jos Theelen of the University of Amsterdam, who took out first prize in the MNI-Deutsche Börse Economic Forecasting Competition. Along with Daiwa Capital’s Mike Moran and myself, Jos was the only other person to place in two of the three forecasting rounds.

This was my first foray back into forecasting since the financial crisis and it was interesting to see that many of the pre-crisis forecasting relationships still hold. The final June round was particularly brutal, however, given the bearish turn in the US data.

Hopefully, MNI-DB will turn this into a regular event. There are too few independent, public tests of economic forecasting ability.

posted on 13 July 2011 by skirchner in Economics, Financial Markets

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All Their Own Work

FRANKLIN D. RAINES, chief executive of Fannie Mae, May 16, 2000:

It was Congress that chartered Fannie Mae and later Freddie Mac as private shareholder-owned corporations, so Congress deserves the lion’s share of the credit for the successes of the secondary market and the housing finance system today. What Congress did turned out to be absolutely brilliant—it created a system that harnesses private enterprise and private capital to deliver the public benefit of home ownership. And it maximizes this public benefit while minimizing the public risk, and without spending a nickel of public funds.

From Morgenson and Rosner’s Reckless Endangerment.

posted on 13 June 2011 by skirchner in Economics, Financial Markets

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