Wednesday, October 7, 2015

Is monetary policy a science?

No, it's not. So says William White, in an interview earlier this year.

White is the formerly the head economist at the Bank for International Settlements, in Basel.

Read the whole thing, but here is a short excerpt:
What would help to improve monetary policy? 
I’ve become more and more convinced that the fundamental problem with the central banks – and for that matter with the broader economic community – is this insistence that the economy is a kind of machine that you can describe with many equations.
The reality is, that the economy is a complex adaptive system. Like a forest. The distinction between the monetarists and the Keynesians is nothing compared to this. The difference between all of these models and the kind of insights that you get from working with economies as complex adaptive systems are totally different. That is not yet accepted. 
How does a complex adaptive system function?
If you accept this complexity, then you have to accept a number of things that most central banks have not yet fully incorporated into their thinking. One of them is: these systems break down all the time. If the economy is the most complex adaptive system that mankind has ever created, it will break down on a regular basis. 
Historically it has broken down on a regular basis. And, like the boy scouts, we should be prepared for it. Fact of the matter is, when we went into this crisis, we were not prepared for it. And it’s not much better now. There was no bank insolvency regime, no deposit insurance, no memorandum of understanding – all these things that should have been in place, but they just weren’t.

Thursday, January 29, 2015

Proving a Theory by Imagining It to be True

A highlight of the American Economic Association humor session, earlier this month in Boston, was a short talk by Zach Weinersmith. You may know his web cartoon, Saturday Morning Breakfast Cereal.

Weinersmith's talk is to economics what Spinal Tap is to heavy metal rock 'n' roll.

A couple of key quotes:

"I only have about five minutes, so I'm only going to propose one structural change to society." (at 1 min. 23 seconds)

"Having proven the theory both by stating it and by imagining it to be true, I want to move directly to policy implications." (at 6 min.57 seconds).

It's good, and you can watch the video here.

Full disclosure, I appeared earlier on the same bill, as Merle Hazard. I'm hoping no video surfaces of my bit. Hard to judge from the stage, but I do not think my five minutes went over too well. I had better keep my day job.

Tuesday, January 20, 2015

Zero Interest Rate: Like Quantum Physics

It might be, says William White, formerly the wise and prescient chief economist of the Bank for International Settlements.
When interest rates cannot go lower anymore, when they hit the Zero Lower Bound, monetary policy might work like quantum mechanics. Take this simple example from the world of physics: Classical Newtonian mechanics only work when the mass of a body is big enough. When the mass is too small, you are in quantum mechanics. These are completely different ways of looking at the world. The Zero Lower Bound might be the quantum mechanics of monetary policy. Things just do not operate in the same fashion. If you think things do operate the same way, you might make a very dangerous mistake.
This is from an interview with him last month, in the Swiss newspaper Finanz und Wirtschaft.

Monday, December 29, 2014

Demarest and Fischer on the Collapse of Civilizations

What kind of insights into the frailties of civilization would you get if you were a genius archaeologist, expert on the Maya, with a PhD from Harvard, living in a tent in Guatemala? Read this piece in which Arthur Demarest, and his interlocutor, Ted Fischer, both of Vanderbilt, talk about how and why civilizations collapse. Gloomy stuff, with no prediction intended on my end, but interesting and well worth the time.

The related audio podcast is excellent, too. A highlight is the unusual, but persuasive, way in which Demarest thinks about ideology and religion. This comes up eleven minutes into the conversation.

Thursday, November 13, 2014

Worth reading: Greenspan and Tett

This discussion, between Alan Greenspan and the brilliant Gillian Tett of the Financial Times, is well worth reading. It's an interview at the Council on Foreign Relations in New York two weeks ago.

The former Fed chairman comments on the difficulties he sees when the Fed needs to remove the easing it has applied. His comments on gold are maybe the most surprising of all. (He seems to love it.)

Surprising and thought-provoking stuff. I sent it to my clients recently.

(There is a video of the discussion online, too.)

Thursday, October 23, 2014

A Debate with Myself

Have the long-term, equilibrium valuation multiples of the stock market increased?

THESIS: in a fiat money world, inflation insurance is worth paying a premium for. This raises valuation multiples like the price/earnings ratio and q (price / replacement value). Deflation, which would hurt equities, is no longer much of a risk, now that it is so easy to create money.

ANTITHESIS: An arbitrage exists. If companies trade for more than it would cost to create them, which appears to be the case now, business people will start them, sell shares in public offerings, and pocket the difference. This is more apparent with the q ratio than price/earnings. And there is no limit to number of companies that can be created and sold off. Prices will get competed back down to replacement value (or in other words, the q ratio will tend back toward a value of 1.0).

SYNTHESIS: Fiat money creates the venture capital industry! or at least supports it.

Tuesday, September 30, 2014

Advice to a Younger Me

I sometimes try to imagine what, in my maturity, I would say to a younger me. What useful advice could the married-with-kids, 52-year-old Jon Shayne give to the me who was in college?

For one, I could encourage the younger me to trust my own instincts more, and to worry less about what others think.

Of course, that advice is easier to give than to follow.

For the most part, I have a hard time coming up with anything useful I could tell a younger me. But recently, I figured out something that might have been useful, back when. A truly insightful bit of advice that the me-of-today could have given to the Jon Shayne of the early 1980s.

When I was in college at Harvard, the course catalogue was very thick. It was a paper book of perhaps 350 pages. One of the courses was titled, "Compunications," with a p. My college roommate, John Rabinowitz, and I used to laugh about it. We never took the course; we were liberal arts students. We just noticed it in the catalogue. The name struck us as pretty ridiculous.

This was probably 1981 or '82. The course description said that computing and telecommunications were in the process of merging, so much so that it would soon no longer be useful to think of them as two separate fields. According to the catalogue pitch, we should think of them as one field: compunications. The logic of this was lost on me, because John and I were too busy chortling about how the word sounded.

What impresses me now is that the professor who created this course, whoever he or she was, was completely correct. None of us students had cell phones, nor personal computers. We still used land lines and typewriters at that point. But the professor apparently foresaw, in some sense at least, the internet and voice-over-IP telephony.

So my advice to the young me: you can pretty much ignore the whole course catalogue, except for "Compunications." It is not as silly as it sounds. Quite the contrary. Master it, and you will have a lot of fun, and will wind up owning a few islands in warm, sunny places.

Although I guess this rhymes with the advice, "Plastics," given to Dustin Hoffman's character in The Graduate (1967).

Is there a moral here? Well, perhaps only that outlandish ideas are not necessarily bad. They are sometimes brilliant.