Roger Farmer: Idiopathic Tardus Augmenti


You have to read this if only because of the wonderful header. Translated from latin loosely says, “I don’t know why growth is slow.” Farmer asks why growth has suddenly slowed and he is not satisfied by the state of research into the matter. This is the secular stagnation hypothesis of Larry Summers and others.

I think that one needs to start by asking why American growth was so strong during the 20th century (and late 19th for that matter). I would argue that unbridled animal spirits of the American innovator was a key reason. At the turn of the last century there was no reason to see why the United States would do so well while the richer country of the time Argentina would do so badly. I think there is a larger role that freedom to innovate played.

The US was one place where anyone could get rich on the back of an idea – living the American dream. To some extent this was helped by the lack of enforcement of many protections for intellectual properties. For example the music industry (recorded sound) initially was founded on the basis that US copyrights were only on the sheet music and performances were exempt from paying royalties. US radio stations even today enjoy the right to play music without paying royalties.

To some extent this “public domain” type of thinking allows for rapid innovation. A wild west for intellectual property if you will. This leads to short life for exploitation but more stuff can be built on previous innovations.

Today on the other hand the US is the leader in protection of intellectual rights. Copyrights since the Sonny Bono acts, the Mickey Mouse trademark, patent rights on pharmaceutical products with marginal innovation, the list goes on. The worst of the lot is patents on business practices. Yes you read that right, the US recognizes patents on business methods. For example Amazon has the patent (and consequent monopoly) on 1-click buying. A US bank claimed that a method of hedging against weather movements was a protected patent. There is a crazy amount of such stupidity in the US now.

What this does is create inefficient monopolies. Success is defined as having lawyers to defend your innovations. Pharma companies spending time and money on fighting generics on expired patent drugs are an example. Oracle is claiming billions from Google for using bits of software code (which it publishes as open source).

Larger companies effectively kill off new innovators.

There is some evidence of lower social mobility in the US already. Perhaps the American dream is not realizable any more for most people.

And innovation suffers as a result.

Perhaps it is not that America is facing secular stagnation, it is just losing its special sauce. Now it is no different from the rest of the world. Crony capitalism and state socialism may have won after all.


Musings on Bennett Brewings


Bennett University had a “Bennett Brewings” talk in a coffee and conversations format with Dr S P Kothari, former deputy dean of Sloan School of Management at MIT. As is the case with many of these talks it is the anecdotes that stay with you. Here are a few thoughts that stuck with me.

1. We Indians are a self-satisfied bunch

Cyprus, a nation of about 800k people, gets about 2 million visitors each year. Yet they are worried about the future of tourism and are worried about how to make it more attractive to travellers. The president of one of Finland’s universities worries about how to improve the innovation culture at her university. Yet as Dr Kothari says when he meets Indian government officials all he hears is, “everything is fine” and “we are the fastest growing” without us being anywhere near Cyprus or Finland or most other parts of Asia or the West in terms of tourist arrivals, innovation or per capita income. This speaks of utter complacency.

2. There is a desperate need for decentralization

In the US, local government – the town council for the most part, is in charge of every day-to-day activity like garbage collection, police force, fire brigade, the school system (curriculum, teacher appointment, etc.). His own example was his town of about 3-35,000 people. What this means is local accountability. Corruption gets handled because people can see who is stealing from the town funds, etc. Having so much power in India concentrated in the state and union governments removes much of this accountability. As we are just about to begin the budget session, I cannot but be amazed that we still have secrecy associated with the budget making process. Are we not a democracy? Can we not have a discussion about what goes in and what stays out of the budget? Why the secrecy?

3. The size of the productivity gap

A friend of the professor runs a farm in the US which is about 1900 acres in size. He asked the audience members to guess the number of workers the friend employs. Try to guess the number. The answer is four. Think of the productivity gap.

4. Failure of the judiciary

The US Supreme Court hears about a hundred cases each year. India’s Supreme Court hears over a thousand each month. What does that say about the quality of the subordinate judiciary?

Eye of Siva

What are Structured Credits?


I have been facing a lot of questions around structured credits and what they are. Mostly this follows a post on the internet which used standard balance-sheet/cash-flow analysis to figure out a structured note and while it made for sensational reading, was not completely fair to the readers if the objective was educational.

There are two types of credit (or loans or whatever): cash flow and structured. Cash flow loan is where a business is able to demonstrate its performance and says I need to (expand) (store inventory) etc. A bank or lender assesses the repayment ability of the business and lends accordingly. So when your housing loan is approved based on your income the bank is taking a call that your cash flow is sufficient to meet the EMI.

But what if you have no cash flow. Take education loans. The bank looks at the cash flow (!) of an 18 or 22 year old looking to do a bachelors or masters and says no way. Or look at start-ups. No existing business. So does this mean no credit can be extended in these cases? No. This is where structured credit comes in.

In an education loan, the bank may take a parent’s guarantee. A businessman starting a business may put up his house as collateral (known in the parlance as Loan Against Property or LAP). A businessman who has an existing company may borrow on that company’s strength for a new venture. If this creates a pledge on the shares of the first company it is called Loan Against Shares or LAS.

In structured finance it makes little sense to look at the balance sheet or cash flow of the borrower. What is important is the strength of the collateral or guarantor. This is why structured finance desks at banks are separate from the normal lending. Why rating agencies have different corporate and structured teams.

To understand structured credit look at the value of the collateral or strength of the guarantor. Does the collateral cover the principal and interest components? What if there is a fall in the value of shares or property? Do you have enough buffer? What is the financial flexibility (ability to borrow) of the collateral provider/guarantor? These are the questions to ask.


Oxi thoughts


So the Greeks voted Oxi (No) in the referendum on austerity. It was an interesting vote. The citizens were asked to vote on a set of proposals that were no longer on the table (indeed they were a draft not even approved by the eurogroup). It was a way for the greeks to express anger. Ok, so be it.

What happens now?

First, the ECB will have to decide if it wants to continue funding Greek banks. With bonds trading at around a third of face value, prudence suggests the haircut on Greek debt should be increased. That alone will cause many banks to go bankrupt. ECB cannot lend to insolvent counterparties. You get the point.

Next, assuming the status quo on ECB, banks will run out of currency in a matter of days. The fiscal math has gotten terrible recently and the primary surplus has vanished. The government will probably have to resort to issuing IOUs as a stop gap till a new currency can be printed. In the next 3-6 months a new drachma has to be introduced. It will probably trade at a big discount to the euro.

If that is the path taken, Greece will have exited Euro membership. Technically membership of the EU is contingent on euro membership, so they could exit the EU as well. This has the additional implication that they need to start having border controls, new visa system (that could have a big impact on tourism), etc.

The geopolitical implications of EU-exit can be very large:

Turkey could be a big beneficiary and be able to join the EU.

Russia could get a foothold as it could be seen as a savior, lending money when no one else would.

Lastly Greece has an oversized defense budget relative to the rest of Europe. It is a recent democracy and civil institutions are badly developed (note the poor tax collection as an example). In a very bad outcome scenario a military coup cannot be ruled out, especially one backed by Russia.

This will be interesting to watch from outside. Very bad for the greeks themselves.

Some links. I’ll try and keep adding more here.


nairu in 2014

What to read: monetary policy


Two quick links on monetary policy:

1. Tim Duy has the best lead in to the Fed’s decision today. Charts, charts and charts.

2. Arvind Subramanian, Chief Eco Advisor to Govt of India, writes on real interest rates in India.



What to read: June 3


So there is this thing called the Paternoster. Taken from the first two words of the Lord’s prayer (our fater = pater noster), this refers to the rosay like mechanism that drives this elevator. Picture below from Wikipedia explains how it works. Basically it is a non stop lift that goes pretty slowly, so one climbs on and off when it is moving.

Now if this was the Burj Khalifa lift you’d get your body chopped off before you can get on, but these are slow moving giving enough time to clamber on or off.

So anyhow the country that has the most of these paternosters is Germany (some 231 still in operation according to the Washington Post story below). Even Sri Lanka seems to have one of these.

It seems sort of appropriate that Germany is at the top of the list, right? The absurd story is that they are now thinking that you need training before using these sort of lifts.


Only one item left today: Zero Hedge has a nice infographic on the relative differences between Democrats and Republicans when it comes to different occupations.

I’ll see if I can upload it later because it is giving me an error, but here is a link anyway.

indians in the USA CF_4B4NUoAA8_FK

What you should read: May 27



Why is that no European country dared to take on FIFA? Why was it left to the Americans to get involved?

NY Times story

Business Insider on the guy who “turned”

Quote of the day from Swiss criminal proceedings: “it is suspected that irregularities occurred in the allocation of the FIFA World Cups of 2018 and 2022.” You think?

Gloom and doom from Ambrose Evans-Pritchard over at the Telegraph.

Cullen Roche has some important points to make regarding the Efficient Markets Hypothesis.

A professor failed an entire class. This seems to be a fictional story but it serves to illustrate the failure of socialism well:

An economics professor at a local college made a statement that he had never failed a single student before but had recently failed an entire class. That class had insisted that Obama’s socialism worked and that no one would be poor and no one would be rich, a great equalizer.

The professor then said, “OK, we will have an experiment in this class on Obama’s plan”. All grades will be averaged and everyone will receive the same grade so no one will fail and no one will receive an “A”…. (substituting grades for dollars – something closer to home and more readily understood by all).

After the first test, the grades were averaged and everyone got a “B”. The students who studied hard were upset and the students who studied little were happy.

As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little. The second test average was a “D”! No one was happy.

When the 3rd test rolled around, the new average was an “F”.

As the tests proceeded, the scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else.

To their great surprise, ALL FAILED and the professor told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great, but when government takes all the reward away, no one will try or want to succeed.

Human nature will always cause socialism’s style of government to fail because the world has producers and non-producers (makers and takers).

It could not be any simpler than that.

Indian origin kids have dominated the Scripps Spelling Bee winning the last 7 years in a row and 11 of the last 15.

The Economist writes on how Indian immigrants to the United States really stand out relative to other nationalities when it comes to education and income levels.

indians in the USA CF_4B4NUoAA8_FK


What you should read: May 26


Bloomberg carries a great story in charts of China’s spectacular stock market performance. The Schenzen index has doubled this year alone.

Did China launch yet another massive fiscal stimulus?

Shamelessly copied from Marginial Revolution’s Tyler Cowen:

Given that non-financial total corporate debt is estimated by McKinsey to amount to $12.5tn, Chinese companies are paying on a nominal basis some $812bn in interest payments each year. In real terms, this amounts to $1.35tn. This is not only significantly more than China’s projected total industrial profits this year; it is slightly bigger than the size of a large emerging economy such as Mexico.

Tyler also writes about the success that Bihar had in increasing enrollment of girls in school by giving each schoolgirl a bicycle.

How to travel in style? Answered by Real Men Real Style.

Why are written and spoken French so different? Andrew McKenzie takes a crack at answering this question on Quora.


What to read today: May 19


One and done. Bruegel has done the job for me by summarizing all the recent economic debates on whether the economy is self correcting.



What you should read today


Heard in the Hutong: The Chinese View of India

Benedict Evans on Apps versus the Web and why the future is mobile, except it isn’t.

Sanjeev Sanyal says the world population will top earlier and at a lower level than the World Bank believes.

And if you are in for an economics paper read, Roger Farmer’s Animal Spirits, Persistent Unemployment and the Belief Function is worth a good time slot (warning: pdf).

The European Centre for Medium Range Weather Forecasts is forecasting a super El Nino this year. Here is Bob Tisdale talking about it.



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