Stealth Jubilee

Central banks have been blowing a lot of air – should I say life? – into western economies. The U.S. and European central banks have used their fiat power to print trillions of dollars and euros, bailing out the banks here, and both banks and sovereigns there.

We can call this period a jubilee. Not a party for the Queen, but rather, I mean, the Biblical, once-in-fifty-year release of debtors from their obligations. With a modern twist: this is a stealth jubilee, low-grade and gradual. Short-term interest rates are being kept at the lower bound of zero, while inflation is around 2% per year. So the real rate of return to savers, at least savers with money in the bank or Treasury Bills, is negative. They earn about zero in nominal terms, and about negative 2% after taking account of inflation. Normally, T-bills would beat inflation.

This is a slow transfer of wealth from creditors to debtors, taking place through monetary policy rather than a rewriting of contracts. In theory, the same result could be achieved legislatively or judicially. We could just keep interest rates at natural (i.e. higher) levels, and then have all creditors pay 2% of the face value of the notes and bank deposits they hold into a pool, to be distributed pro-rata to debtors.

But we are doing it by Federal Reserve policy, instead. A jubilee via committee -- the Federal Open Market Committee, to be precise.

Is our stealthy, slow-mo jubilee a good thing, or a bad thing? The degree of jubilation this policy induces for you will likely depend on your politics, and what you think the world would look like if we did not do it.

At the risk of sounding too calculating: when I am thinking as an investor, rather than as a citizen, I just take a cue from Nietzsche and regard it as beyond good and evil. Either way, it is useful to see that it is happening.

Orlando, the Stock-Picking Cat, meets Nate Silver

A piece I wrote for Paul Solman's Making Sen$e page, at the PBS NewsHour site, is up today.

Against Writing

An excellent post from the blog Farnam Street, which I like, on the arguments against writing.

The basic idea is that writing and reading are not a good substitute for dialogue, and that is hard to disagree with. (Though even a monologue is better than nothing.)

The classic example of the literate non-writer is Socrates, whom we know through Plato rather than from his own writings.

The 20th Century philosopher Sidney Morgenbesser is a modern example, and his recorded quotations here are wonderful. One of my favorites of his, spoken on his death bed: "Why is God making me suffer so much? Just because I don't believe in him?"

Outsourcing Your Own Job

This is an amusing story, making the rounds today, about a software engineer who outsourced his own job without telling his bosses. He pocketed the cost difference and it worked, for a while.

Second Smithers Interview

My follow-up interview with British economist Andrew Smithers is up at Paul Solman's "Making Sen$e" (PBS NewsHour) page.

Our discussion is about the decades-long decline in labor's share of output. Andrew sees bonus-oriented management compensation as the main cause, and, at the link, gives more of his reasoning. He sees some merit in the idea that a weaker environment for antitrust regulation may also be part of it, and he considers the bottom-line effect on the earnings of the S&P 500.

Pam, the Flood, and Erosion

My clients uniformly tell me how much they like talking to Pam Wilmoth, who runs the office here at Shayne & Co. Me too!

She is the president of the the homeowners' association in her neighborhood, where she and her neighbors are still dealing with the some of the aftermath of the 2010 Nashville flood. Her neighborhood could use help from local students of engineering or architecture, or firms in those fields, to help them deal with erosion. WSMV-TV interviewed her, here, about this. The link currently has only the text from the interview, not the video.

(The reporter calls her Pam Miller; her full name is Pam Wilmoth-Miller.)

Good Chart on Profit Margin Reversion

U.S. corporate profit margins are, in aggregate, wide now, and at risk of reverting to the mean.

The second chart in this piece by John Hussman, who is a money manager and a former professor of economics at Michigan, is interesting as evidence of this.

(I have blogged about this topic before, here.)

Whether the problem is pervasive across the economy, or isolated within particular industries, is hard to know. If the cause is a weak bargaining position for employees because unionization has declined, or because foreign competition has increased, then the widening of profit margins is probably fairly pervasive across income statements in nearly all industries. If, however, the cause is weaker antitrust enforcement, then the wider margins may be limited to industries in which concentration has increased over the past two or three decades. And a third possibility is that if Andrew Smithers is correct in his argument (discussed at second link above) that the widening is caused by the bonus culture run amok, then the effect may be mostly in companies that have incentive-heavy management compensation cultures.

It may be a mix of these. Anyway, the fact that capital is getting a bigger piece of the pie than it used to is much clearer than the "why."