Debt Alarm Ringing
By John Mauldin
Addicted to Debt
Lost Exorbitant Privilege
Frankfurt, Cleveland, Golf, and Here and There
| John Mauldin Chairman, Mauldin Economics |
Debt Alarm Ringing
By John Mauldin
| John Mauldin Chairman, Mauldin Economics |
How saving the liberal world order became harder
Political extremism is only one response to failing economic systems
Wolfgang Münchau
© Yorgos Karahalis/Bloomberg
You hear it all the time: we need to defend our liberal, multilateral economic order. If you want to get a roomful of people in places like Davos to keep nodding their heads to exhaustion, this is what you say.
I disagree vehemently with that statement. I believe that we are facing a fundamental choice between solving the problem and solving the crime — between addressing the issues or playing a blame game. The G20 Eminent Persons Group on Global Financial Governance argues that our multilateral institutions need repair. This is no doubt true but I would go further than proposed suggestions for greater efficiency and more inclusiveness.
Politicians like Donald Trump, Viktor Orban and Matteo Salvini have risen to power because of the deep malfunctioning of our systems of global capitalism. Brexit is not the result of Russian meddling or an alleged reporting bias of the BBC, but of a long series of unresolved political conflicts and the rentier business model the UK chose to pursue inside Europe’s single market. The global financial crisis and our policy responses exposed how the system had become unsustainable.
The eurozone is a perfect example of a liberal system that has become complacent and unstable: since it was plunged into crisis, European authorities have made persistent attempts to paper over the cracks. Contrary to the advice of the IMF, the EU keeps pretending that Greek debt is sustainable, and bases its judgment on growth forecasts that are plainly ludicrous. EU member states do not address the issue because they do not wish to recognise losses in their bilateral loans.
The political shocks in Italy stem from a dysfunctional monetary union andan unsustainable immigration regime. I fail to see how Italy and Germany can remain locked in the same monetary system unless we have reforms that both countries reject, whether it is a political union or a single safe asset, or reforms to align economic and judicial systems.
The EU’s legendary tendency to kick the can down the road has left us with a situation in which it makes no sense to talk about the eurozone crisis in the past tense. Greek and Italian debt are less sustainable today than they were in 2010 when the crisis began, and Germany is less willing to support the eurozone today.
Ideally we would fix the system. But instead we are procrastinating and hoping that something comes up. Emmanuel Macron, the French president, had ideas of how to reform the eurozone, but his proposals have deflated to almost nothing. The chance to reform came and went.
As in the early 1930s, libertarian economic systems were self-destructing because of their inbuilt tendency to produce financial and social instability. We are doing better than we did 90 years ago at stabilising gross domestic product. But the observation that many advanced countries have had more or less robust GDP growth and low unemployment misjudges the underlying political dynamic, which is much more influenced by variables such as income inequality, lack of housing and fears of job insecurity among the middle-classes.
Another parallel with the 1930s has been a tendency for the stalwarts of the liberal order to double down — through pro-cyclical austerity, bonus payments for bankers, a monetary policy that drives up asset prices or through free trade agreements that limit the independence of national courts — on harmful policies.
The tell-tale signs of the demise of liberal democracy have been visible long before the more recent electoral upsets. You know you are in trouble when you cannot impose a financial transaction tax because your banks threaten to shift their transactions to a tax haven. Or when countries cannot increase corporation tax for the same reason. Or when large car and chemical manufacturers can engage in persistent criminal behaviour and get away with it. What corrupts liberal systems is a breakdown of checks and balances in our economic life.
But political extremism is only one response to failing liberal systems. You may dismiss cryptocurrencies as just another bubble. But I would not bet my hard-earned bitcoins on our ability to preserve the money-issuing monopoly of the state indefinitely. As the aftermath of the financial crisis demonstrated, that monopoly is critical for liberal financial systems to secure basic macroeconomic stability. It is the one and only policy instrument we have that arguably still works. Saving the liberal world order will become progressively harder the weaker that instrument becomes.
If you really care about the liberal multilateral order, free trade and the EU, the least helpful thing you can do is to defend the status quo and hyperventilate about populists. Our problem is not the other team, but our team.
The Big Blockchain Lie
Nouriel Roubini
NEW YORK – With the value of Bitcoin having fallen by around 70% since its peak late last year, the mother of all bubbles has now gone bust. More generally, cryptocurrencies have entered a not-so-cryptic apocalypse. The value of leading coins such as Ether, EOS, Litecoin, and XRP have all fallen by over 80%, thousands of other digital currencies have plummeted by 90-99%, and the rest have been exposed as outright frauds. No one should be surprised by this: four out of five initial coin offerings (ICOs) were scams to begin with.
Faced with the public spectacle of a market bloodbath, boosters have fled to the last refuge of the crypto scoundrel: a defense of “blockchain,” the distributed-ledger software underpinning all cryptocurrencies. Blockchain has been heralded as a potential panacea for everything from poverty and famine to cancer. In fact, it is the most overhyped – and least useful – technology in human history.
In practice, blockchain is nothing more than a glorified spreadsheet. But it has also become the byword for a libertarian ideology that treats all governments, central banks, traditional financial institutions, and real-world currencies as evil concentrations of power that must be destroyed. Blockchain fundamentalists’ ideal world is one in which all economic activity and human interactions are subject to anarchist or libertarian decentralization. They would like the entirety of social and political life to end up on public ledgers that are supposedly “permissionless” (accessible to everyone) and “trustless” (not reliant on a credible intermediary such as a bank).
Yet far from ushering in a utopia, blockchain has given rise to a familiar form of economic hell.
A few self-serving white men (there are hardly any women or minorities in the blockchain universe) pretending to be messiahs for the world’s impoverished, marginalized, and unbanked masses claim to have created billions of dollars of wealth out of nothing. But one need only consider the massive centralization of power among cryptocurrency “miners,” exchanges, developers, and wealth holders to see that blockchain is not about decentralization and democracy; it is about greed.
For example, a small group of companies – mostly located in such bastions of democracy as Russia, Georgia, and China – control between two-thirds and three-quarters of all crypto-mining activity, and all routinely jack up transaction costs to increase their fat profit margins. Apparently, blockchain fanatics would have us put our faith in an anonymous cartel subject to no rule of law, rather than trust central banks and regulated financial intermediaries.
A similar pattern has emerged in cryptocurrency trading. Fully 99% of all transactions occur on centralized exchanges that are hacked on a regular basis. And, unlike with real money, once your crypto wealth is hacked, it is gone forever.
Moreover, the centralization of crypto development – for example, fundamentalists have named Ethereum creator Vitalik Buterin a “benevolent dictator for life” – already has given lie to the claim that “code is law,” as if the software underpinning blockchain applications is immutable.
The truth is that the developers have absolute power to act as judge and jury. When something goes wrong in one of their buggy “smart” pseudo-contracts and massive hacking occurs, they simply change the code and “fork” a failing coin into another one by arbitrary fiat, revealing the entire “trustless” enterprise to have been untrustworthy from the start.
Lastly, wealth in the crypto universe is even more concentrated than it is in North Korea. Whereas a Gini coefficient of 1.0 means that a single person controls 100% of a country’s income/wealth, North Korea scores 0.86, the rather unequal United States scores 0.41, and Bitcoin scores an astonishing 0.88.
As should be clear, the claim of “decentralization” is a myth propagated by the pseudo-billionaires who control this pseudo-industry. Now that the retail investors who were suckered into the crypto market have all lost their shirts, the snake-oil salesmen who remain are sitting on piles of fake wealth that will immediately disappear if they try to liquidate their “assets.”
As for blockchain itself, there is no institution under the sun – bank, corporation, non-governmental organization, or government agency – that would put its balance sheet or register of transactions, trades, and interactions with clients and suppliers on public decentralized peer-to-peer permissionless ledgers. There is no good reason why such proprietary and highly valuable information should be recorded publicly.
Moreover, in cases where distributed-ledger technologies – so-called enterprise DLT – are actually being used, they have nothing to do with blockchain. They are private, centralized, and recorded on just a few controlled ledgers. They require permission for access, which is granted to qualified individuals. And, perhaps most important, they are based on trusted authorities that have established their credibility over time. All of which is to say, these are “blockchains” in name only.
It is telling that all “decentralized” blockchains end up being centralized, permissioned databases when they are actually put into use. As such, blockchain has not even improved upon the standard electronic spreadsheet, which was invented in 1979.
No serious institution would ever allow its transactions to be verified by an anonymous cartel operating from the shadows of the world’s authoritarian kleptocracies. So it is no surprise that whenever “blockchain” has been piloted in a traditional setting, it has either been thrown in the trash bin or turned into a private permissioned database that is nothing more than an Excel spreadsheet or a database with a misleading name.
Nouriel Roubini, a professor at NYU’s Stern School of Business and CEO of Roubini Macro Associates, was Senior Economist for International Affairs in the White House's Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank.
Buttonwood
When does the case for long-term investment make sense?
Paul Samuelson showed why time horizons matter less than commonly thought
ONE LUNCHTIME around 1960 a professor proposed a wager to a colleague. Flip a coin and call “heads” or “tails”. If you call right, you win $200. If you call wrong, you pay $100. This is a favourable bet for anyone who would take it. Even so, his colleague refused. He would feel the loss of $100 more than the gain of $200. But he would be happy, he said, to take 100 such bets.
The professor who offered the bet, Paul Samuelson, understood why it might be refused. A person’s capacity for risk could no more be changed than his nose, he once said. But he was irked by his colleague’s willingness to take 100 such wagers. Yes, the likelihood of losing money after that many tosses of the coin is vanishingly small. But someone who takes very many bets is also exposed to a small chance of far bigger loss. A lot of bets, reasoned Samuelson, were no safer than a single bet.
This lunchtime wager was of more than academic interest. It drew the battle lines in a debate on the merits of long-termism. Samuelson challenged the conventional wisdom that his colleague embodied. In later work, he used the bet as a parable. He showed that, under certain conditions, investors should keep the same fraction of their portfolios in risky stocks whether they are investing for one month or a hundred months. But what Samuelson’s logic assumed does not always hold. There are cases where a long-term horizon works in investors’ favour.
To understand the debate, start with the law of large numbers. It means that the more often a favourable gamble is repeated, the more likely it is that the person who takes it comes out ahead. Though a casino may lose on a single spin of the roulette wheel, over a large number of spins its profits are determined by the slight advantage in odds (the “house edge”) it enjoys. But a casino that would take a hundred $100 bets would not refuse a single bet of the same size.
That was part of Samuelson’s beef. If his colleague dislikes a single bet, after 99 bets he should refuse the 100th. By this logic he should also refuse the 99th bet, after 98 bets. And so on until all bets are spurned.
Clouds on the horizon
Only a naive reading of the law of large numbers would support a belief that risk is diminished by more bets, said Samuelson. The scale of potential losses rises with the number of bets. “If it hurts much to lose $100,” he wrote, “it must certainly hurt to lose 100 x $100.” Similarly, it is foolish to believe that by holding stocks for the long haul—taking multiple bets on them—you are sure to come out ahead. It is true that stocks have usually yielded higher returns than bonds or cash over a long period. But there is no guarantee they will always do so. Indeed if stock prices follow a “random walk” (ie, an erratic and unpredictable path), long-term investing holds no advantage, said Samuelson.
This logic begins to fray if you relax the random-walk assumption. Stock prices appear to fluctuate around a discernible trend; they have a tendency, albeit weak, to revert to that trend over very long horizons. That means stocks are somewhat predictable. If they go up a long way, given enough time they are likely to fall, and vice versa. In that case, more nervous sorts of investors are able to bear a higher exposure to stocks in the long run than they would be able to in the short run.
Samuelson’s reasoning also assumes that people’s taste for risk does not vary with how rich or poor they are. In reality, attitudes change when a target level of wealth is within reach (say, to pay for retirement or a child’s education) or when outright poverty looms. When such extremes are far off, it is rational to take on more risk than when they are close. The calculus also changes with a broader reckoning of wealth. Young people, with decades of work ahead, hold most of their wealth in “human capital”, their skills and abilities. This sort of wealth is a hedge against riskier kinds of financial wealth. Indeed the more stable a person’s career earnings are, the greater the hedge. It follows that young people should hold more of their wealth in risky stocks than people who are close to retirement.
Samuelson vigorously disputed the dogma of long-termism, which says that the riskiness of stocks diminishes as time passes. It doesn’t. That is why long-dated options to insure against falling stocks are dearer than short-dated ones. The odds of winning favour risk-takers over time. But they are exposed to big losses in the times when they lose. Still, it would also be dogmatic to say that time horizon does not matter. It does—in some circumstances. What Samuelson showed is that it matters less than commonly thought.
In Yemen, Cracks in the Saudi Alliance Begin to Show
The UAE doesn’t need a unified Yemen to secure its interests, but Saudi Arabia does.
By Xander Snyder
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