Article Collection 06/15/14

first economistMacroeconomics

What happens when the economy baffles economists? Excellent and easy read.

Are the lack of major wars hurting economic growth? Great article by GMU’s Tyler Cowen (responsible for one the internet’s most popular economics blogs – Marginal Revolution). This is a subject near and dear to me, and I find myself in complete agreement. The standard argument for the end of the US Great Depression was an “increase in demand” brought about by entry into WWII, a conclusion I’ve never bought into. It has always seemed to me the end of the Great Depression wasn’t just an “increase in aggregate demand QED.” I see it as a result of the productivity revolution created by the technological, mathematical, scientific and organizational advances which constituted structural reform of the US economy – most of which were government funded – that came about directly as a result of fighting and winning a total war, a war for survival. Any increase in or resumption of aggregate demand came about only after US and global structural change occurred (being the only one not bombed into pieces and hence the world monopolist of currency and manufacturing helped as well).

Neat brief Paul Volker interview with The Daily Princetonian.

US CEOs expect Q2 growth to be weaker than forecast. The IMF, BOA and others confirm this in their expectations as well. In particular the IMF has stated the US “will need to keep interest rates lower for longer than the markets expect” which I find entertaining, as I’m not convinced the US can raise interest rates at all, even BOA agrees the natural rate of interest has likely fallen to a new historical low.

The Baltic Dry Index continues to be abysmal, suggesting falling global growth from lower Chinese economic growth and continuous shortfalls in demand for goods in deflationary Europe and stagnant US. (Really this should not come as a surprise given Fed tapering and Chinese slowdown.)


Author of best-seller Drive The Surprising Truth About What Motivates Us (youtube intro here) gives a Ted Talk about motivation. To summarize, rewarding fixed goals and rewarding creativity are two different problems and the ideal incentives differ.

Now Bill Ackman’s “Everything you need to know about finance and investing in under an hour” is most certainly not everything you need to know, but nonetheless it lifts the lid off financing in business, which is important in understanding the microeconomics of the firm.

Decentralized cab company impersonator Uber has run into problems expanding into Europe’s heavily regulated and unionized taxi markets. Across Europe from London to Madrid to Berlin cabbies recently went on strike in protest of Uber, and in a beautiful and predictable Streisand effect, at least according to the London data Uber new registrations were up over 850% during the strike. Who knew denying service would encourage customers to seek alternatives? In NYC the right to operate a taxi costs about $1.3 million, a clear result of regulation which has created a market for taxi medallions.

From NPR, 4 Decades of College Degrees in One Graph. Self explanatory.

In 3 charts, Vox shows US workers falling behind global peers in key skills, resolving this skill gap will be imperative given global competition, high US wages, and the inevitable growth of automation.

Fracking has turned out to be a success, significantly reducing the US trade deficit, thereby relieving pressure on the US fiscal deficit, and otherwise turning the US into what others have called “the Saudi Arabia of natural gas.” This surge in production has allowed tougher regulation on less clean forms of energy like coal, with little negative effects. All in all, even greens have begun to embrace natural gas as a stopgap while we wait for solar energy to become financially feasible to implement; there’s hope here as solar in fact has already come a long way.

A visual aid on how fracking works to obtain natural gas. Charting world carbon emissions shows the extent to which China has become the world largest carbon polluter, also of note is India’s subtle but definite emissions trend upwards.

A tumblr showing Detroit falling apart.

How Walmart is killing the American Flag Business, encouraging protectionism by another name and with patriotic strings attached.

Elon Musk says he lost a multi-billion-dollar contract when SpaceX didn’t hire a public official, an article from Quartz describes suspected corruption in the awarding of contracts to ferry satellites into orbit (among other badass things). Overall an excellent anecdote concerning problems that are no doubt pervasive throughout the system.

Lies, damned lies and sex-worker statistics – interesting and another example of how vested interests have an incentive to keep the money flowing.

Legal Pot is Crippling Mexican Drug Cartels; surprise, surprise.

The trend of video-game firms hiring economists has been an interesting one, this article by Reason interviews one of the better known economists to be hired by a firm and goes into what he’s doing there. It’s interesting stuff.

According to ZH, so far in 2014 GM has recalled more cars than it sold in 2012 and 2013 together. I suppose this is one area where the Jihadists have it correct.


As background, the 2012 NYT article Imagining a Remapped Middle East explaining how 5 countries could turned into 14. Earlier a 2011 article in the New Yorker does comprehensive coverage of the roots of Obama’s foreign policy (a great read btw), importantly his administration considers crises as unique and uncorrelated. Now Al-Qaeda fan-boys ISIS and its army of veterans from the conflicts in Libya, Egypt, Chechnya, Afghanistan, Iraq, Syria, and Yemen taking weapons from the US in Syria to then use against US ally Iraq would seem to thoroughly discredit the Obama view that individual conflicts are unrelated. For an up-to-date vision of future Obama policy in Iraq, I think Vox is on point.

What about ISIS? Well this overview is a must-read, if for no other reason than the author is a phenomenal writer. Similarly, who makes up the Jihadists? What is ISIS about to do? Well this nifty powerpoint explains some ideas.

An estimated 800 ISIS/ISIL (no relation to Sterling Archer) fighters seized Mosul, defeating two Iraqi divisions totaling as high as 30,000 men in a stunningly lopsided victory – I suspect simply because the 30,000 Shia were not willing to die to protect Sunni Mosul who hate their Shia defenders from Sunni ISIS. Not to be Captain Hindsight, but it also seems clear US troops were pulled out before the Iraqi military was a capable fighting force, something both Iraqis and Kurds told us as we were pulling out. ISIS/ISIL summarily looted banks for nearly half a billion dollars of fiat (Iraqi dinars) and gold bullion (more by IBT here), becoming the world’s richest terrorist organization with around $2 billion in the process. What kind of US military gear did ISIS capture? Check out their celebratory slideshow and more from ZH.

For the broader overview on why the seizure of Mosul came as a surprise (to the US at least, again the Iraqis and Kurds saw this coming), as per usual Foreign Policy has an excellent piece.

It seems some US special forces will be deployed to Iraq. Iran has also deployed attack helicopters and elite forces of the Republican Guard into Iraq to halt ISIS advances; furthermore Iran has offered to cooperate with the US. China also has a vested interest in the region (oil) and has offered assistance to the Iraqi government. Incidentally our NeoCons, NeoLibs and US media are already in fear-mongering mode proclaiming ISIS is plotting the next 9/11. First, this threat is as overblown as “homemade terrorism,” second, one could hypothesize the NeoCons are conveniently ignoring ISIS exists as a result of US foreign policy, rather than in spite of it. I think the moral of the story is, when you’re a terrorist organization you have to balance on a knife’s edge between being too unknown to recruit, and being too successful wherein you attract big foreign adversaries. ISIS would appear to have slipped into the latter category; when Iran and the US are talking about military cooperation, you know shit just got real.

If you’re familiar with insurgencies and rebel groups, you’ve probably noticed one distinct commonality across regions and religions – they seem to adore Toyota pickup trucks.

More ISIS/ISIL overviews in Mapping Jihadist Resurgence Across IraqIraq Update: Kurds Take Kirkuk, Al Qaeda Surges Toward Baghdad, insurgents gobble up Iraq’s largest refinery, Jihadists seize two more towns 30 miles from BaghdadTeenagers rush to join the call to defend city from ISIS militants who are fighting just 45 miles away – and Iraq’s last Christians say they fear being wiped out, Deutsche Bank on risks to Iraq’s oil infrastructure.

Also maps: Jihadist activity and major pipelines, a strategic overview, 5 key maps of the Middle East Crisis, Sunni/Shia distributions.

According to the NYT (and ZH summary) ISIS/ISIL claim to have executed 1700 captured Iraqi soldiers, and released pictures (full pictures here, note a few near the end are graphic) although that number hasn’t been confirmed. It wouldn’t surprise me to find they’ve rounded up and executed military-age Shia men, not just Iraqi soldiers.


What’s happening in Eastern Ukraine is very simple, rational, and straightforward. This guy always manages to hit the nail on the head.


An overview of the huge polarization gap in US politics, and a ZH summary with visuals. Also some analysis on the midterm elections by Goldman Sachs. Personally I expect a narrow Republican victory resulting in majority control of the Senate.

Nice piece about our patronizing of nerds, the “princess complex” and the problems that can arise when they clash. Props to the author.

We’re nearly to the 100th anniversary of World War I, what for my money is the most terrible and unnecessary war we have ever fought against our fellow man. World War II emerged directly from festering wounds of WWI, and in the case of WWII there was clearly a good side and an evil side. WWI though is not so simple to categorize in black and white terms, there are no clear “bad guys” and yet it was the pinnacle in the mechanization of slaughter. The Independent has been assembling 100 articles on WW1 in a list here, and they are phenomenal. A more humorous article assembles German quotes about American soldiers in WW1.

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Article Collection 04/02/14


Ray Dalio’s excellent “How the Economic Machine Works” which we watched in class. Reality obviously much more complicated than this, however this is definitely a reasonable overview of the baseline; if you’re enterprising, there is also the paper version.

Excellent video by the BCC on “How China Fooled the World” (link working) which explains China’s response to the 2008 Financial Crisis, China’s subsequent boom, and the extent to which overextended credit is threatening Chinese growth today. Strongly encourage watching this in it’s entirety. Searching “China’s ghost cities” on youtube provides plenty more content to watch (although our media might be guilty of some over-embellishment and schadenfreude).

The US Federal Reserve just released the “FRB/US Model,” the Fed’s formal model of the US economy; this is interesting as this model has never been released to the general public before. They describe the model and how it works, and then link you to the new webpage where the model is hosted; sadly to use model one must have E-views version 7, but nonetheless reading the first link provides insight as to how the Fed economists model the US economy.

Excellent and concise analysis by JP Morgan about the rise in the US government’s entitlement spending crowding out necessary investments in infrastructure, natural resources, training and energy. Note that US government tax revenue is usually around 17-20% of GDP, hence trending entitlement spending seen here will soon be around 75% of government tax revenue, which (imo) is batshit crazy insane.

Why mortgage origination is slowing in the US: (1) higher rates since this time last year as a result of Fed tapering and (2) JP Morgan loses money when it makes a mortgage, presumably other banks face similar conditions. So both the demand side says no to higher rates, and the supply side can’t make money even with rates where they are. As a result, less mortgages are issued.

US Jobs report indicates 192,000 jobs were added in March 2014, below expectations as unemployment rate remains 6.7%. Graphical breakdown of jobs added by industry in February and March and unemployment rate by industry.

Interesting look current droughts and the recent inflation in global food prices.

High Frequency Trading (explained briefly and explained in laborious detail): Excellent writer Michael Lewis has a new book (he’s the author of Liar’s Poker, Moneyball, The Blind Side, The Big Short, etc.) called Flash Boys on High Frequency Trading (HFT) has been making waves. Here’s two videos of him being interviewed on the Daily Show with Jon Stewart as well as Bloomberg TV. Taking the opposing view is a (brilliant) PhD physicist I regularly follow the blog of explaining some criticisms of HFT in 2009, and again in 2011. Famous investor Dennis Gartman gets behind HFT as well. My views probably mirror Gartman’s the most; though I do think the liquidity provided by HFT is illusory, akin to the airbag in your car that works all the time, except in front-end collisions. What does an HFT look like? Well, HFT firm Virtu accounts for 5% of US equity market volume and the results look like this.

A quick review of the Eurozone, it’s banking system, economy and the possibility of secular stagnation.

Abenomics, Japan’s massive QE monetary expansion, appears to be stalling out and could fall into full retreat if the planned consumption tax hikes are implemented. Essentially the BOJ is trying to create inflation, devaluing the Yen and boosting exports while simultaneously spurring domestic consumption and increasing domestic wages. Unfortunately because Japan imports much of its energy and resources that go into producing products to export, a devalued Yen creates cost-push inflation such that the only way to export more is to lower domestic wages, rather than raise them. Imported Liquid Natural Gas prices have just hit a 5 year high, while wages have been declining for 21 consecutive months, these looming consumption tax hikes could be the straw that breaks the camel’s back. Update: apparently the consumption tax hikes of April 1st have already been blamed for a 25% fall in sales.

A [terrible] cartoon which [kinda] explains the velocity of money.

Emerging markets have been taking a beating as liquidity flows back into the U.S. in the wake of Fed tapering of monetary policy; Dani Roderick discusses some of these problems, and Kenneth Rogoff also explains his view on emerging markets.

Death Knell sounds for Brazil’s economic strategy,” interesting.

Robert Shiller on deflation and austerity.

Brad DeLong on disentangling cycle from trend in economic growth.


Interested in the future of Hampton Roads? Several of my ODU professors work in the ODU Forecasting Project doing reports and research on the state and future of the local economy, here is the full report for 2013.

Income and wealth inequality: I’ve said the OWS movement that attacking the “top 1%” was simplistic to the point of being moronic. It’s never been the top 1%, but rather the top 1% of the top 1%, thus the top 0.01% who are the problem. These are your kleptocrats, plutocrats and oligarchs. And yeah, they own a lot of the pie.

USA’s 20 best and worst paying jobs; although the list isn’t perfect.

Survey results of the highest paying IT and CS skills.

Why a Harvard Business School Professor thinks “50% of colleges won’t be here in 20 years.”

How Being a Doctor Became The Most Miserable Profession,” both eyeopening and worrying.

Some examples of questionable market regulations, such the occupational licensing that inhibits competition and the battle between foot-carts and restaurants. Gordon and Bremmer discuss Xi Jinping’s options with regard to reforming China.

Jeffrey Frankel on problems with regulating markets in ways that are removed from market incentives. Speaking of failed incentives, a retiring SEC lawyer recently wrote a piece criticizing the SEC employees for working towards transitioning to Wall Street, rather than protecting consumers from it.


Putin’s Brain – excellent article on Russian geostrategy and where Putin fits in to it. 

A really cool chart of current migration in the world.

The worst Ebola outbreak in seven years recently occurred in Guinea, Bloomberg maps out the details of the disease with a 40-90% fatality rate.

Al Qaeda now controls more territory in the world than ever.” I believe they mean it’s more widely distributed than ever; also the map is not one of Islamic fundamentalism as it leaves out ISIL/ISIS and other active jihadist groups.

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China Article Collection

An ongoing anthology of articles relating to China’s investment bubble.

2014 Update: China’s 2014 Reform To-Do List – the depth and breadth of this list confers how serious the government feels the problems are. One major concern is regulating shadow banking, such as rehypothecation of commodity collateral such as in CCFDs. An important distinction is that while in the U.S. rehypothecation by broker-dealers cannot exceed 140% of the loan amount to a client under SEC rule Rule 15c3-3, China doesn’t have similar regulations yet. A decent flowchart visual of what happens in stage 1 and stage 2.

4/14/14 Chinese Yuan and copper both take a beating; what is most interesting here is Y/Y M2 growth evidencing a slowdown in credit markets.

4/10/14 March trade is down and China has avowed no new stimulus is on the horizon, still skeptics examine China’s reported trade and GDP figures for distortions, believing the reality to be worse than it appears.

4/9/2014 Another default, this time a small manufacturer which Reuters discusses; looking towards the future “Analysts widely expect more defaults on loans, bonds, and shadow bank products this year. Semiconductor, software, and commodities firms are among the most at risk for default, a Reuters analysis of more than 2,600 Chinese companies showed.” 

4/7/2014 Very interesting piece by FT suggesting mounting collusion between developers and shadow banks.

4/3/2014 UBS describes “Bazooka Theory,” or why they don’t expect more Chinese stimulus in the near future; in other words expect growth to continue to slow unabated. Also Quartz does a contrarian piece arguing China may not have a real estate bubble; well argued but I’m not buying it, and even without a real estate bubble there is still a broader investment bubble.

4/1/2014 Potential high-yield bond default, this time Xuzhou Zhongsen Tonghao New Board Co., a ‘building materials’ company from Jiangsu who cannot make their 10% coupon payment. Update: apparently they made a deal to get the current interest payment funded, thereby staving off default.

3/27/2014 CCFD importer deal cancellations are surging; directly quoting, “The problem is that once one importer defaults on a contract, suddenly counterparty risk regarding all of China (and certainly those using commodities on Letters of Credit, recall China Commodity Funding Deals) soars, forcing other offshore exporters to collapse liquidity terms when dealing with Chinese buyers, and demand payment on truncated timeframes, resulting in a closed loop of liquidity evaporation from trade networks, which in turn forces local banks to step in and provide liquidity at precisely the time when banks are suddenly far more selective [of] who they issue loans to.”

3/26/2014 China’s liquidity pipeline slams shut as companies scramble for the last drops of liquidity; a restatement of previous articles, albeit thorough.

3/25/2014 Signs of trouble as bank run unfolds, “ordinary depositors swarmed a branch of Jiangsu Sheyang Rural Commercial Bank in Yancheng in economically troubled Jiangsu province on Monday.” As of now, there is no depositor’s insurance.

3/24/2014 Prices on real estate continue to slow in growth, and in some areas prices are falling outright as developers slash prices to liquidate inventory. In Hong Kong groups of homeowners have apparently taken to the street demanding money back after the houses they purchased have since fallen in price.

3/23/2014 HSBC’s flash PMI print shows evidence Chinese growth is, in fact, slowing. Much more importantly, Chinese Vice Minister of Finance Zhu Guangyao publicly indicates China’s policy makers are uneasy about Janet Yellen’s comments regarding QE and tapering, and the necessary global liquidity implications.

3/22/2014 “How China imported $70 billion of physical gold without affecting the price.”

3/20 Highsee Group steel maker in Shanxi has defaulted on RMB 3 billion due to the plunge in domestic steel prices, a result of slowing growth. It also appears Hong Kong’s high end real estate market is collapsing and the subsequent scramble for liquidity is underway, best line: “and like every game theoretical outcome, he who defects first, or in this case sells first, sells best.” This furthermore raises the question of Chinese corporate executive’s incentives, surely these real estate developers realize the market is already saturated before they break ground? Probably the best and clearest chain of causal reasoning yet to describe the relationship between RMB, commodities, credit, growth, and how it’s failing (scroll down to bullet points) .

3/19 Morgan Stanley issues some excellent analysis mirroring my own inclinations, even recognizing the reality of a financial Minsky-moment on the horizon. They seem to also agree on a 1-2 year debt implosion timeline. Also today Copper futures slide to a new 5-year low; copper futures seem to routinely (since mid-2011 at least) collapse prices in high volatility sell-offs, it would be interesting to compare these sell-offs to the corresponding news and data releases. Additionally, more evidence of China’s real estate market is slowing.

3/18/2014 The future of China in terms of energy appears bright; although these will take time to develop, the reserves are there. Goldman Sachs’ long and very detailed analysis of Chinese Commodity Funding Deals (CCFDs), i.e. the use of commodities as collateral for loans which has been underpinning Chinese GDP growth.

3/17/2014 Another Chinese corporate default, Baoding Tianwei Baobian Electric (TBE), totaling around $0.5 billion and which the government states it will not bailout; maintaining a hard line zero-bailout policy is encouraging shadow banks to conduct better pricing in of risk-premium, “some 66 percent of new Chinese developer dollar-denominated bonds sold this year are trading below their issue price amid the collapse of a private real estate company and news the housing market is cooling.”

3/15/2014 CCB broadens Yuan trading band, intending to squash carry-trade speculators, but not at zero cost to domestic consumers. South China Morning Post on some of the problems underlying China’s many popular shadow banking trust products.

3/14/2014 “China’s Credit Nightmare Explained in One Chart

3/11/2014 Copper prices collapsing to 2010 levels and then 2009 levels – copper is pledged and repledged (via multiple layers of rehypothecation) as underlying collateral similar to coal (collateral for sizable trusts maturities), iron (record stockpiles), and likely many other commodities, even as their prices are falling. From BOA, monthly trust products coming due through January 2016, most of these appear collateralized with commodities, for example the “Magic” Chongqing property trust product. China Morning Post covers Slowing credit creation in China.

3/10/2014 Chinese credit growth is slowing; if shadow banking lending is decelerating, this is likely due to liquidity fears concerning existing product maturity schedules. Yet even as Chinese markets start to unwind, real estate prices continue to surge. While I speculate the manufacturing and corporate investment bubble will collapse in 2015-2016 when trust and shadow bank bonds are unable to meet redemptions, this is complicated by the real estate market, which could burst at any time, tightening liquidity and thereby preemptively triggering the corporates. Real estate prices seem to peak and reverse (and thus bubbles burst) much faster according to market dynamics (herd behavior) of investors whereas bonds issued have specific redemption dates at which we can expect them to pass or fail. Current failing credit issuance in China could stress real estate as lower loan creation indicates a peak in home prices (stymieing the willingness of lenders and/or borrowers to speculate further at the given price). When Chinese pollution reforms occur and slow growth, as they inevitably must, commodity prices should collapse.

3/09/2014 After corporate bond default, copper, iron, yuan, corporate bond prices all falling. Also some interesting, simple analysis of China’s real estate bubble.

3/07/2014 China posts second largest trade deficit on record, with analysis; clearly global demand is slowing. Importantly the expected rates of return necessary to support debt repayments are jeopardized, lower demand means lower returns, implying more defaults on repayment.

03/06/2014 A solid analysis of Chinese credit markets, as they begin pricing in risk due to the default of Chaori Solar; another by NC here.

3/05/2014 Premier Lee Keqiang’s list of Chinese 2014 policy goals and SocGen’s analysis thereof; of course achieving them alongside a 7.5% growth rate is nigh impossible. Also implications of the potential default of Chaori Solar.

03/04/2014 Very cogent argument by Michael Pettis regarding emerging markets, excerpted and full.

3/03/2014 Chinese Banks show too-connected-to-fail linkages

2/20/2014 ZH cites large quantity of research on the Chinese credit bubble; incredible.

2/19/2014 ZH compiles a list of likely upcoming Chinese trust defaults

2/16/2014 Michael Pettis’s insightful piece on Chinese banks’ share prices; ZH explains with videos “How China fooled the world” with credit creation.

2/14/2014 Charlene Chu explains Why China’s banking system is in so much trouble, and more on the $15 trillion expansion of shadow bank lending since 2009. Also

2/12/2014 Report showing China’s coal industry firms trading at or below book value of assets, suggesting skepticism as to the quality of assets; predictions of 1/16/14 come true. (Also is coal rehypothecated into synthetics to the extent copper was?)

2/02/2014 China’s skyscraper construction binge, list of 100 skyscrapers of over 1000ft tall currently under construction or proposed, and top 100 skyscrapers in the world.

1/31/2014 On China’s Risky Credit Boom; interesting analysis with words rather than numbers.

1/29/2014 JP Morgan warns avoiding China defaults will now amplify future problem – shadow banking’s implicit assurance of government protection and bailout is probably resulting in moral hazard problems akin to those in the US shadow banking system circa 2007-2008. Note that some borrowers face rates of up to 20%. This chart in particular is shocking if true, indicating the shadow banking sector, depending on one’s definition of it, is 36% to 84% of China’s GDP; amazing. Interestingly, this later (and poorly sourced) Financial Times article seems to believe the shadow banking system is quite small; of course gross size isn’t as relevant as the likelihood of default, interlinkages, and the recovery rate on loans across the system.

1/28/2014 China’s Households “Massively” Exposed to Housing Bubble that “Has To Burst”

1/16/2014 Excellent coverage of Chinese credit markets and the implications of “Credit Equals Gold #1 Collective Trust Product” shadow banking entity being on the verge of default. Map of the trust product; apparently coal is functioning as collateral which seems well, frankly, nuts – as global commodity demand is largely driven by China’s growth, if growth in China were to stall, commodity prices, e.g. shadow banking credit instrument loan collateral, will stall and then fall. I’m not sure to what extent margin-calls can be issued in the Chinese shadow banking system, but regardless if collateral value falls then potential balance sheet losses, which are systemically deflationary, accumulate in a corresponding magnitude. (Are these losses incurred explosively, asymptotically or linearly?)

  • This commodity-based collateralization seems worryingly characteristic in China. If/when this bubble implodes, expect a massive deflationary shock to global commodity prices and thus emerging market (EM) balance sheets, thereby their economies, and in proxy, their political stability. This is a topic for revisiting under “global implications” of Chinese deflationary credit-shock, which, as manifested by the commodity linkages, will hit EMs far, far worse than the US housing bubble’s deflationary shock of 2007-2008 or even the ongoing EU sovereign debt crisis. (Perhaps this could be examined with econometric modeling?) Such shocks often result in interstate or instrastate war, as shown in the work of James Fearon, these guys, etc.

1/09/2014 Worries about Local Government Finance Vehicles (LGFV) as rates increase and the changing nature of shadow banking regulations under Doc 107.

1/07/2014 Michael Pettis considers China’s growth target of 7.5% GDP to be extremely implausible. Contains solid analysis of flaws in the Chinese growth model.

1/02/2014 George Soros on China

8/12/2013 China’s Ghost Cities

7/13/2013 Wealth Products Threaten Chinese Banks with Ponzi Scheme Style Risk

6/24/2013 Presenting Chinese Wealth Management Product’s (WMP) infinite loop of risk.

6/10/2013 Financial Times excellent series of Up Shibor Creek articles.

5/23/2013 Rehypothecation of copper underlying in Chinese shadow financial synthetics.

4/20/2013 Jim Chanos of Kynikos discusses bubbles in China with a slideshow.

2/20/2013 Introduction to China’s “fang nu,” or, housing slaves.

07/19/11 Exposing China’s Shadow Banking Industry, and so it begins. At the time SocGen was putting the size of China’s shadow banking sector at RMB10 trillion

Academic Papers

Bank Run Models:

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Article Collection 03/12/14


George Soros on “The World Economy’s Shifting Challenges

Deutschbank predicts which hedge fund strategies will work – and how well – in 2014. I suspect this will turn out to be more accurate than inaccurate.

Goldman Sachs’ major macro worries in 2014 – includes their top 5 risks to their forecast and another top 5 risks to their market view. More recently, Goldman has cut their forecast of US 2014Q1 GDP growth from 3% to 1.5%.

US most overvalued firms in terms of price to sales ratios (as opposed to other common metrics such as price to earnings, price to book, and price to free cash flow). Also from Goldman with more digression. For a full picture, see Seth Klarman’s excellent letter to his investors. There is also Mohamed A. El-Erian’s examination of what is going on with investment in the US, and a related overview of what’s up with capex investment relative to history and expectations. Some analysis from SocGen, “2013 was a year of weakening cash flow growth, lower profit growth, deteriorating earnings quality, and corporates pilling on the debt.” Interestingly it seems corporate America agrees on balance, as management is quietly selling off their holdings, suggesting even company management feels their stocks are overvalued.

Why are firms in the above discussion overvalued? Well here is more evidence that the Fed’s quantitative easing is your Huckleberry – tapering and hints of future rate hikes cause distress because markets are worried about what happens when money ceases to be free. (Reduction of purchases, i.e. “tapering,” should be worrying as markets have underperformed since the initial December taper dropped us from $80 billion to $65 billion per month, now April purchases are to be scaled down further to $55 billion per month. However I wouldn’t worry too much about rate hikes as the Fed can’t raise rates very high when the US’s total public debt is $17 trillion and counting, every rate hike of 1% is another $200 billion to our annual interest expense, i.e. it is nearly impossible to go from the current 0.25% to say, 5.25% as our annual interest payment would go from $225 billion to over $1 trillion.)

Did the “Obama Stimulus” work? It depends how you define work; some seem to think it worked far better than I do, but this definition of “work” is looser than mine; we debt financed a loan and then threw much of the money away, so I would say the return on investment from the stimulus was terrible. I also find the “stimulus was too small” claim ludicrous in light of the huge obstacles in efficiently enacting fiscal policy. There is also the lack of a counterfactual, as the stimulus did not occur in a vacuum but rather the Fed was engaging in policy as well, and this would mean any fiscal policy’s effects get overstated.

To the extent that QE has reduced unemployment and boosted confidence, it could be considered a success. For the counterfactual, we need only look at the EU. However, to the extent that QE has attempted to unleash a wealth effect it has failed, as wealth inequality is getting worse. In order for a wealth effect to fuel consumption, wealth must be more widespread rather than centralized. Incidentally, if firms seek to boost profits, they buyback shares and maximize shareholder value by cutting superfluous jobs, however those losing their jobs now consume less, pay less in taxes, and need more government benefits; shareholders gain wealth, perhaps triggering a wealth effect increasing consumption of luxury items, they also pay less in taxes – wealth appreciation taxed as capital gains rather than income – than perhaps the people laid off originally. The result can be less tax revenue alongside higher government expenditure thus greater deficits, and greater centralization of wealth. I don’t have a problem that surgeons make way more than clerks (income inequality), I do however have a problem with people in possession of far more money than surgeons paying a lower effective tax rate than clerks (wealth inequality). The cynical, but not wrong, concise overview of QE’s effects.

Unemployment rises to 6.7%, number of working people aged 55-63 surges to new record high; the labor force participation rate is lowest in 40 years, while the young are working less than ever.

Laugh riot that is the Obama budget proposal.

Fannie and Freddie predictably to get a bullet to head; the proposed replacement mechanism looks cute on paper, though we’ll have to see what the lobbyists do and further research on the new questionable incentive structures is warranted.

Related, the housing market is not quite as fixed as you might think it is; and despite population growth home ownership rates are near 1996 levels.

More housing market news: home sales are markedly slowing and we’re seeing increases in the number of all-cash buyers, slowing sales is not surprising given the Fed taper and subsequent rise in mortgage rates. The Q4 rise in student loan debt to a new all-time high of $1.08 trillion has finally been blamed for slowing home sales, “20 percent of buyers under the age of 33, the prime group of first-time buyers, delayed their purchase because of outstanding debt. 56 percent of younger buyers who took longer to save for a downpayment identified student debt as the biggest obstacle.” I’ve been saying this was inevitable for over 2 years now: high student loan debt, weak job market, large expected (and necessary) future tax increases, the need for young people to buy homes at artificially high prices, and the need for young people to consume more than ever in order to fuel economic growth – the math simply doesn’t work. But then again I’m also that crazy guy who dares to say “housing is not an investment” because, well, it isn’t.

International Monetary Fund (IMF) forecasting failures; note, few forecasters do any better, this is the norm rather than the exception, for example see forward guidance projections. Forecasting is hard.

Russia, Ukraine, EU and the role of natgas. Incidentally, the Ukrainian yield curve is massively inverted. A bailout (by EU, as EU’s already weak banking system is very exposed to Ukraine) will probably be necessary to avoid default, although credit default swap spreads suggest the market still finds Argentina and Venezuela to be higher default risk (or conversely “lower chance of bailout”) than the Ukraine.

Very cogent argument by Michael Pettis regarding emerging market fragility, excerpted and full.

How to turn $1 in to $175,000 in Venezuela.

EU admits monetary union leads to “increased unemployment and social hardship”; to survive in present form the EU must have full fiscal union, however this all but requires political union and thus will not happen. Disinflation and deflation are also souring hopes of any EU recovery.

Global debt reaches $100 trillion, up $30 trillion from 2007; related is this excellent critique of the present state of global finance.

Abenomics lets out what is likely to be its final whimpers: December 2013 turns into rout, the trade deficit explodes from energy imports and less global demand, equity markets seem to have lost momentum, and nuclear power plants are to be brought back online mid way through 2014 out of necessity. Growing the money supply via QE can probably fix many things, but it can’t fix demographics. For those interested in the similarities between Japan’s 1989-crisis-until-now and the US 2008-crisis-until-now, this article from 2008 is a must read.

Bitcoin: MtGox implosion; Wired’s full story of MtGox; MtGox user information ransom demands; and a complete price history of Bitcoin itself (as well as a full report by Goldman Sachs). Of course we’d be remiss not to link Shit Bitcoin fanatics say 1, Shit Bitcoin fanatics say 2 and Bitcoin’s COO explains what Bitcoin is.

In similar news, US penny stock pump-and-dump charlatans “AwesomePennyStocks” have finally been shut down; good riddance.


The emergence of the so called “next industrial revolution,” a theory I subscribe to, has raised questions about the future of labor markets. The reality is capital remains a substitute for low-skill and repetitive-task labor. For example Momentum Machine’s burger making machine (given McDonald’s recent domestic and global sales declines, expect increased automation soon as a cost cutting measure), and the ongoing death of conventional retail by internet. Expect these trends to continue and then accelerate; some policy responses are discussed here by Laura Tyson and here by Kenneth Rogoff.

An interesting NYT article on low-wage workers.

No, women do not make $0.77 for every $1 a man makes; it’s around $0.95 or $0.96.

Even with my libertarian leanings, something about Henry George’s land-tax, as opposed to taxing the property built upon the land, has always made a lot of sense to me.

In the US, a recent study by a University of Maryland Law Professor indicates debt collectors abuse the legal system.

Demographically the EU also faces problems with nasty microeconomic repercussions specifically in labor markets. One result is lower future tax revenue streams despite huge entitlement burdens.

Is the US too corrupt for a single-payer system? In brief – yes – as our lobbyists hold far too much sway over the political system and financial allotments for single-payer to ever work. Recent polling data also suggests a large number of people are not going to sign up for Obamacare.

Amazon boosted the price of Prime Membership from $79 to $99, and it probably won’t matter. My demand for amazon is inelastic even in light of a 25% price hike.


More on why we shouldn’t expect the UK to participate in sanctioning Russia: London’s real estate market, wherein London, and its current real estate bubble, currently represents 22% of the UK’s GDP and hence probably much of the UK’s “recovery.” NYT article here.

Is NSA trying to infect your computer with Malware? Yes.

What happens when drones replace soldiers? War, repression, and neo-feudalism all become cheaper. (Note while the conclusions are interesting, as history nerd the “history” cited in this article is lazy, eye-roll worthy stuff at best.)

Nick Brown Smelled Bull, long but very entertaining article about uncovering bullshit; highly recommend. (Alan Sokal is also a hero of mine.)

President Obama and Secretary Kerry have frozen President Putin’s Netflix account.

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Article Collection 10/01/13

Game Theory: game of chicken
Update: Surveys blame Republicans for shutdown, they bluffed and lost.


Jobless Recoveries Likely in U.S. Future, Much Like in Europe – A recent paper by Brookings, one of the top think tanks in the world, attempts to explain unemployment persistence, e.g. why is the unemployment rate in the U.S. not falling? The full paper is here, and is not the easiest of reads, but you can get an idea what Economists do. A friendly discussion on this paper and a few others has been done in The Economist here. I sympathize with their views on the subject, although my inclination is structural unemployment is high because of labor misallocation being ingrained during the past two asset bubbles (stocks 1997-2000, housing 2001-2007).

Audio interview of Tyler Cowen’s The Average is Over – A new book by economist Tyler Cowen of GMU (his economics blog, Marginal Revolution, is one of the most popular on the internet) tries to look at the future of the US labor market as capital technology replaces labor. He answers questions like, what are the new jobs, where does society head, and how do things look in this not-to-distant future.

Merkel takes a solid W in Germany – Many implications for the future of the Eurozone, most obvious is, assuming Merkel can form a government, more bailouts of indebted Eurozone countries by the wealthier Germans are likely. Expect the EU to limp along.

Greek reservists call for a coup – Self explanatory; Greece needs to leave the Euro and go back to the drachma.

Eurozone’s Calm Before the Storm – by Nouriel Roubini, another economist who predicted the 2007-2008 housing bubble and financial crisis, he also accurately predicted we’d have a slow recovery

Japanese Politician Admits: Default by 2020 – I’ve covered this before.

China’s empty cities – A result of China’s shadow banking sector.

Schiller on Housing – Robert Shiller discusses bubbles in the housing market

14 questions about the Fed you were afraid to ask – Nifty guide to the Federal Reserve.

“Fed’s low interest rates may go on for decades” – Some interesting reasoning by Bill Gross of PIMCO

QE’d Market – What happens to the inflated market when, inevitably, the Fed tapers?

US poverty is increasing – QE thus far has been a wealth transfer to the wealthiest and our “recovery” lacks legs. Not exactly “new” news, but important to know.

CBO on U.S. deficits – Deficits are shrinking at present, but will explode again around 2016 as Medicare expenses climb.

What will change in Economics over the next 20 years? – A brief piece on the future of economics by Eichengreen.


Failure to Launch: Structural Shift and the New Lost Generation – This is an excellent piece by the Georgetown Center for Public Policy, if you click “Full Report” you can download it as a pdf file. So they analyze the past, present and expected future job market for young people (e.g. those born in the 80s, 90s, 2000s) and come to a number of important conclusions. I strongly advise taking a look at it, even if that only consists of reading the conclusion.

Venezuela runs out of Toilet Paper – Price Ceilings in action

Is College Worth It? – A nice visual data analysis using inductive reasoning. The short answer is yes; but finish, major in something practical, and get good grades while doing so.

Phone Bloks – Nifty idea, although I doubt it will catch on. Wouldn’t be surprised if this was getting crowd sourced funding via a service like kickstarter.

Chipotle’s brilliant Scarecrow Commercial, and Fod’s Parody – Solid bit of marketing; this what models of monopolistic competition in Microeconomics suggest monopolistically competitive firms will do in order to differentiate products to their customers.

How Detroit went broke – Enlightening. I covered Detroit briefly here.

Unions now opposing parts of Obamacare – Although initially chief supporters of the ACA, presumably upon reading it they have realized the ACA is going to be expensive and cost them either jobs or benefits. As a result they’re lobbying for free lunches.

Republican’s in North Carolina enact tax reform – Critics say “it’s a regressive flat tax,” I disagree, in many respects it appears more progressive than the current tax system.

Missouri Lawmakers Override Veto of “Good Samaritan” Law – Regulation existed, likely lobbied for by insurance companies, which prevented out-of-state doctors from providing free or charitable services to the poor. Missouri finally figured out that’s a stupid law.

Strippers are Protected by Labor Laws, says Judge – I only question the decision to become a stripper if that $7.25 minimum wage you’re fighting for is that big of a deal after tips.

Why the Convention View of Immigration is Wrong – A very good overview and analysis of the economics of immigration

How crystal meth saved Albuquerque – This is a hat-tip to the impact the show Breaking Bad (rip Heisenberg) has had, not about real crystal meth.

Rational choices of crack addicts – The demand for crack by crack addicts is downward sloping; in other words crackheads are rational, says science.

Police made 1 marijuana arrest every 42 seconds in 2012 – Wonderful use of scarce resources.

War on illegal drugs failing, medical researchers warn – Unsurprisingly, medicine is beginning to realize what economists predicted a long time ago: prohibition drives up prices and encourages violence, quality and accessibility of illegal drugs are both higher than before the drug war began, and it’s led to consumption of drug substitutes like synthetic marijuana that are actually dangerous.


War, space, and the evolution of Old World complex societies – article using agent-based simulation in a rather novel way. I’m skeptical about some of the methods and conclusions, but nonetheless it’s a cool application of modeling and simulation.

What percentage of the Syrian rebels would like to kill you? – Brief bit on the composition of Syria’s rebel forces.

The NSA Has Built Its Own, Secret, Warrantless, Shadow Social Network, And You’ve Already Joined It – Not surprising

Silk Road shutdown, bitcoins confiscated – The ebay of black market commerce, Silk Road, has been shutdown, it’s founder arrested and $1.2 billion in bitcoin seized, although I’m not sure how exactly you can “seize” digital currency…

“Why I gave up my US passport” – confessions of US expats who decided to give up their citizenship, do you see any common complaints?

Kaiser Foundation’s ACA estimator – you can plug numbers and information into their calculator and approximate your costs if you were to purchase insurance under the ACA.

Posted in Capitalism, Eurozone, Finance, Incentives, Labor, Labor Market, Macroeconomy, Microeconomics, Monetary Policy, Monopoly, Political Economy, Public Finance, Rent seeking | Leave a comment

Article Collection 9/9/13

A collection of [what wonks like myself find is] interesting stuff.


List of Upcoming September Events

Roubini: Autumn’s Known Unknowns (Uncertainty about upcoming global events)

Robert “Bob” Shiller (of Case-Shiller Index fame) says in a video interview on the housing recovery, “None of this is Real […] the housing market has become very speculative.”

Hyman: The Original Subprime Crisis. History has plenty to tell you about the future if you’re willing to listen to it.

Calculated Risk: The Future is still Bright! A concise but data driven argument for a strong(er) economic recovery to come. My own expectations are less of ‘strong acceleration’ and more of ‘limping along acceleration’ in the short-run to long-run, and some very big problems in the long-long-run (in ~20 years).

The Atlantic: The Derp and Fall of Inflation Fear Mongers. So in 2007-2008 several people predicted inevitable and immediate hyperinflation in the economy due to the government’s response. They were absolutely wrong, the problem in 2008 was deflation, not inflation fears. In the long-long-run (~20+ years) heavy or hyperinflation (an implicit default) becomes much more likely if the national debt remains high and growing.

Brad DeLong: Whose Central Bank?

Reuters: The other big question at Jackson Hole. Talking about the future of post-Bernanke Fed policy when either Summers or Yellen is at the head; particular focus is on tapering QE.

Washington Post: The crisis is over. The challenges for central bankers are only beginning.This article is similar to the above by Reuters, but perhaps more accessible.

Rogoff: Are Emerging Markets Submerging?

Mahoney (of Moody’s): US Equity Prices are Attractive; I disagree, we’ll see what happens when the Fed begins to taper QE.

Mahoney (of Moody’s): Is The Dollar’s Reserve Currency Status At Risk? I’d agree here; I think the risks are in the long-run, not short-run.

VOX: What is shadow banking? In macro we will cover this in some detail, but this overview is very good.

OECD: EU employment projections are in a word, terrible, through at least 2014. As per usual in countries with rigid labor markets, unemployment is highest with young and lower skilled workers.

Friedman: China’s American Bailout? A discussion of China’s current problems, and how the Fed might help.

WSJ: China’s shadow banking system. (The video provides a decent but quick overview of shadow banking.)

A more comprehensive overview of China’s slowdown.

A nice overview of China’s real estate bubble, and another covering the ensuing credit bubble. There’s the full panoply of speculation, massive growth in leverage and loans outstanding, and creative lending practices in order to funnel credit to subprime borrowers, just like the US in 2007 and Japan in the late 1980s.

The Guardian: India’s Economic Downturn


Tim Hartford: Trial, error and the God complex. A video Ted Talk explaining the role of evolution (trial and error) in economics and life in general.

Healthcare Policy: House Bid to Undo Dialysis Cuts Shows Lobbyists’ Muscle. One of interesting (depressing?) facts of US Healthcare Policy is that it has long been driven substantially by lobbying power. The End Stage Renal Disease Program initiated in 1972 is a great example, it provides Americans with chronic kidney disease coverage under Medicare. What’s odd about this is why CKD, why not some other disease? (Well for one the kidney dialysis lobbyists paraded a person attached to their kidney dialysis machine on the floor to give testimony; pandering to emotions at its best.) This is simply selective socialism by lobbyists, the privatization of profits and socialization of costs. 

Rauh: Public Sector Pensions Are a National Issue and Cochrane: The value of Public Sector Pensions. Many state and municipal governments are simply not going to be able to pay their pension obligations, as a result expect many more San Bernadinos and Detroits. I’ve touched on this several times before. A longer audio interview with Josh Rauh is available here; it’s excellent and really merges the fields of economics, actuaries, accountants and financiers.

Matt Taibbi: Ripping Off Young America: The College-Loan Scandal. Matt is an outstanding financial journalist with many excellent comprehensive articles to his name. This one is also pretty good.

Modeled Behavior: Doubling McDonald’s Salaries A Great Way to Get Workers Replaced By Machines. You know, just like Wawa’s touchscreen ordering system. Capital replacing labor in this area is inevitable, but not necessarily bad; it’s normal economic evolution, Schumpeter’s creative destruction.

Food Inflation: McDonald’s testing revamped “dollar” menu. This has an obvious relationship to the above article by Modeled Behavior.

99-Year-Old-Man Works for Minimum Wage For Over 30 Years. This amazing guy retires with a pension in his 60s, moves to the US, gets a jobs as a janitor and then works for another 33 years.

SBA: Impact of Regulatory Costs on Small Firms (only a few of the bullet points are applicable here). This is an area I find interesting, calculating the “unseen” costs to small businesses of regulation, accountancy, etc. that larger firms often have in-house staff to deal with. Small firms must contract these services out, which can be quite expensive. It is worth noting however, the SBA is a lobbying group, so just be aware they have incentives here.

Cato: A Microeconomic Look at Regulatory Overkill. A better and more informative resource than the above SBA link.

An article about a commission of famous policymakers examining the Drug War. (You mean the Drug War isn’t working? Now who’d have thunk, considering how “successful” alcohol prohibition was.)

Art Carden: The Drug War: What is It Good For?

Art Carden: “Underpants Gnomes” Political Economy. Now I will do an entire post devoted to this concept, and it’s actually something I’ve used as an example in class before. It’s great at showing the flaw in the logic when policy is examined haphazardly by ignoring 2nd and 3rd order effects (there is often a political motive to oversimplify cause and effect) . This is the “law of unintended consequences” and is intimately related to Bastiat’s “broken window fallacy.”

Criminologists Kates and Mauser examine “Would Banning Firearms Reduce Murder and Suicide?” in the Harvard Journal of Law & Public Policy (a 46 page professional article, hosted on scribd but downloadable as a pdf)


Poll: Majority of Americans Approve of Sending Congress To Syria (The Onion)

Washington Post: 9 questions about Syria you were too embarrassed to ask, a halfway decent overview of what is going on in Syria and why; it also appears to be honest about how little we can do about it. I’m tempted to link the Team America: World Police theme song here.

Here’s How to Track the Pentagon’s Airborne Command Posts Over the Internet. The idea being we’d have at least one of these near Syria before launching any strikes; if you were a hedge fund, this is an example of information you’d likely use to trade on.

Eric X Li: A tale of two political systems. A Chinese take on Chinese versus Western concepts of economic and political development. Interesting, although it’s usually best to take Ted Talks with a grain of salt.

Using Metadata to Find Paul Revere. This is one of the most awesome things I’ve ever read, while technically quantitative sociology, there is significant overlap to microeconomic analysis. Summary: What if the British were using very simple network analysis (like the NSA does) in 1776? In the footnote at the bottom the author links another pretty cool paper on Paul Revere and network analysis.

WSJ: The Science of Winning Poker. This whole article is about the application of game theory to poker; we will cover some basic game theory in class.

Rajan: The Paranoid Style in Economics (I’d have titled this “Why professional economists making oodles of money still argue with one another and throw tantrums like children.”)

Interesting: Third century A.D. Chinese explorer/diplomat writing about visiting the Roman Empire.

Most Surprising Things About America, According to An Indian International Student – It’s always intriguing to hear what others think of us.

How should two lost people find each other? If you and a friend are lost in the woods and trying to find one another, does being drunk help? You might be surprised.

Syrian Army Hacks US Marine Core Website

Posted in Capitalism, Economic Development, Economic Growth, Economic Theory, Finance, Incentives, Inflation, Labor Market, Macroeconomy, Microeconomics, Monetary Policy, Moral Hazard, Political Economy, Public Finance, Rent seeking, Technology | Leave a comment

Public Goods and Government R&D

English: Economies of scale surd

Economies of Scale

So I just saw a review of a new book recently out called The Entrepreneurial State. The author Mariana Mazzucato has written a book on the feedback loops between technological progress, government and the private sector. In short she’s supporting the same conclusion I’ve mentioned in class numerous times, one I came to unilaterally in the past few years: government support of R&D is critical for the economy, it’s a quasi-public good. Only the government has the ability to raise the capital necessary to finance construction of the massive – and inherently risky – economies of scale needed for paradigm-shifting technological development.

The problem I see with her argument though is that she demonizes the uber free market people, without apparently mentioning the crowding-out of government R&D by entitlement spending. She is clear to address that the US leads the world in innovation and government spending on R&D, and addresses Europe’s shortfalls.

Yet if free-marketeers are such a concern, how is this the case? Europe’s big government should be far ahead of the US in terms of R&D spending, but it isn’t; rather Europe’s entitlement spending, similar the trend in the US, is likely crowding-out the rest of government public-good spending. In the US, NASA isn’t being sacrificed for “free markets,” it’s being sacrificed by Republicans and Democrats for more defense and entitlement spending respectively. Politicians are giving away cookies from the cookie jar without making the investments necessary to bake more cookies.

Either way the book appears promising and has subsequently been committed to the overcrowded labyrinthine dungeon of my Amazon wishlist; for those less interested in reading, she has a 17 minute TEDx¹ talk here. If you recall I criticized big pharma for their “R&D sunk cost” justifications of high prices, she further undermines their argument.

¹ She wins ugliest scarf and ugliest Powerpoint I’ve ever seen, she even appears to have color coordinated the two together? It figures, the economist who writes something in agreement with me turns out to be an oddball.

Posted in Capital, Economic Growth, Public Finance, Technology | Leave a comment