Blog Reading: It's Like A Sponge

Goodbye Laowai Goodbye is letting things get to him.

Been pretty fucking depressed lately. Haven't slept well at all the past several days, barely leaving the house, not shaving, wearing the same fucking clothes. Looked in the mirror this afternoon and barely recognized myself with all the stubble and the baggy, blood-shot eyes. Been talking with my high school friends, some of whom hadn't even graduated from high school, and they're talking about making six figures and buying houses and motorcycles. I'm wondering how the hell I'm going to get out of my mom's house. God, what the hell happened to me?
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Part of the reason:

I'm thinking of cutting down on my blog reading. It's like a sponge; it can expand to however much free time I have. And do I really get anything useful from following the latest gotcha from Andrew Sullivan or Brad DeLong?

His solution:

I'll probably still check out the China related blogs just because catching up on the quoditian life of ex-pats out there is a bit more interesting than the latest predictable partisan harrangue about Beltway politics.
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Actually Wayne knows a lot about cinema, and quite a bit about China. Go check him ou, he needs cheering up.

Deflation: Assymetric Risk and Hedging Your Bets

Paul Krugman has a piece on deflation in The New York Times. The run-round of the problems deflation provokes, and the difficulties of the liquidity trap are fine, but it goes no further. Why are we sinking into a possible global deflation (come to mention it why am I so sure we are: try a solid theory which is panning out OK up to now), here we are offered no explanation. Sometimes it is suggested that the problem is the 700 word limit. I'm not convinced, we still seem too eager to score points with George W for my taste, and too willing to put all our bets on that 'press this button' inflation targeting formula. What we need is to be more imaginative and to hedge our bets. Getting things wrong could be very costly.

Now for some quibbles: "but the central bank's immobility is one main reason why Germany seems set to follow in Japan's footsteps" I'm sorry, here the problem is not 700 words. The euro has been the reason for the immobility. Not sending Greece; Spain and Portugal into inflation hyperspace. The immobility comes from being caught between a rock (monetary policy) and a hard place (lack of fiscal manouvreability) Demography is the MAIN reason Germany is set to follow Japan. There that only needed a paragraph.

How about a reasoning test. Will the relatively higher inflation of the mediterranean 3 save them from future deflation. Answers in less than 700 words....

Well, I'll save you the trouble. The answer is: NO. Argentina went into deflation you will remember.

Next candidate: Bulgaria. Reasons: Lev-Euro peg, loads of IMF money, Corrupt Politicians, and population exodus. How do I know? Because they're coming here to Spain and explaining it to me.

Incidentally, apart from the technological timidity of the inflation targeters, aren't the helicopter money people also a little unimaginative? We know one of the major structural difficulties is the North-South imbalance. Well why not drop this money over some third world countries (tied to the necessary institutional conditions of course)? If the problem of inflation is global, we need to think globally too. This is the real critique of Bush-ism, abandonment of the global perspective. I don't mind if the US wants to play hegemon, just that they should earn the right. Or is the 'big hammer' approach only for Iraq? Or is all this also 'politically unacceptable'. Painful it might be to swallow, but it might be a damn site better than having no pensions.

The preferred solution. Use the moral-harzard strength of the Iraq victory to enforce a drop in the dollar, put a gun to the heads of the Europeans and the Japanese, and tell them: reform or else. Only one snag, IT WON'T WORK. Oh, never mind............

The Fed still has some tricks up its sleeve. Now would be a very good time to announce an inflation target. But it's also clear that the Fed could use some help, at home and abroad. Alas, it's not getting that help. The Fed's European counterpart, the European Central Bank, has been far less aggressive in cutting rates. There are economic, institutional and psychological reasons for this passivity, but the central bank's immobility is one main reason why Germany seems set to follow in Japan's footsteps. European governments aren't much help, either. Bound by the "stability pact," which limits the size of the deficits they are allowed to run, they have been cutting expenditures and raising taxes even as their economies falter. The Bush administration is, of course, notably unconcerned about deficits. Aren't the tax cuts in the pipeline exactly what the economy needs? Alas, no. Despite their huge size — if you ignore the gimmicks, the latest round will cost at least $800 billion over the next decade — they pump relatively little money into the economy now, when it needs it. Moreover, the tax cuts flow mainly to the very, very affluent — the people least likely to spend their windfall. Meanwhile, state and local governments, which are not allowed to run deficits — we have our own version of the stability pact — are slashing spending and raising taxes. And both the spending cuts and the tax increases will fall mainly on the most vulnerable, people who cannot make up the difference by drawing on existing savings. The result is that the economic downdraft from state cutbacks (only slightly alleviated by the paltry aid contained in the new tax bill) will almost certainly be stronger than any boost from federal tax cuts. In short, those of us who worry about a Japanese-style quagmire find the global picture pretty scary. Policymakers are preoccupied with their usual agendas; outside the Fed, none of them seem to understand what may be at stake. Of course, it's possible, maybe even likely, that their nonchalance will be vindicated. Most analysts don't think we'll find ourselves caught in a liquidity trap. And even the Fed believes — or is that hopes? — that a surge in business investment will save the day. But few analysts saw the Japanese quagmire coming either, and there is now a significant risk that we will find ourselves similarly trapped. Even so, we won't have deflation right away. But by the time we do, it will be very hard to reverse.Like the Fed, I hope that doesn't happen. But hope is not a plan.
Source: New York Times
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Spam, spam, spam spam spam.....

There is no doubt that spam is a problem. The problem is many of the proposed solutions seem worse than the problem itself. Any suggestions......help!!!

The libertarian roots of the Internet run deep. It was the place where innovation trumped experience, where the little guy had as big a megaphone as the largest network, where the small business could reach a global market, where the public could regulate far better than any government. No one imagined that the megaphone would become so loud or that it would speak so often of penis enlargement pills and opportunities for unusual financial transactions in Nigeria.

As the quantity of spam rises to drown out other e-mail, the libertarian is being replaced by the draconian. Regulate it, ban it, censor it, tax it, the cries rise up. Do something, anything, to keep it out of my mailbox.Internet companies boast of their spam-fighting tools. There are, in fact, a wide range of proposals for taming spam. Some involve technological innovation or legislation; many involve both. "It is clear we must act,' Senator John McCain, Republican of Arizona, said last week at a hearing on spam before the Commerce Committee, which he heads. "For Congress's part, we should make no mistake. Unless we can effectively enforce the laws we write, those laws will have little meaning or deterrent effect on any would-be purveyor of spam."

Most of the bills in Congress are built around imposing penalties for sending deceptive e-mail, like a message from "jenny" with the subject of "About last night." Some also want to make it easy to spot spam, typically by requiring the label ADV in the subject line of commercial e-mail. But what exactly is spam? Some say it is any e-mail you didn't ask for. But if that standard were applied to postal mail, entire industries like credit cards and catalogs would come to a halt. Those companies want to ensure that any crackdown on spam doesn't prevent them from moving their business into the electronic age. So far, the bills in Congress say that it is enough to let e-mail recipients opt out and to give them an easy way to avoid future e-mail. Some states are considering a tougher standard, banning all e-mail to people who don't opt in, or request it.

Others are taking matters into their own hands. Volunteer spam fighters are creating lists of Internet addresses of spammers to boycott. And some Internet service providers are preparing to dig even deeper moats around people's in-boxes, blocking mail from anyone the recipient doesn't already know. The biggest potential reductions in spam may come from some more radical ideas, like imposing a small fee, like a postage stamp, for sending e-mail. And much of the spam problem could be stopped if the recipient of an e-mail message could verify the identity of the sender. But checking ID's at the door, in effect, is quite a change for a system virtually hardwired for libertarian anonymity.
Source: New York Times
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Springing the Trap

Whilst I regard the work of Paul Krugman on liquidity traps as seminal, I am not convinced that simply focusing on the liquidity - or viscosity - trap is the best available strategy. None of the proposals for 'escape' convince me, partly because I feel they do not resolve the fundamental problem of 'expectations', that is the problem of the chicken and egg situation: we will only escape when we believe we can escape, we will only get 'lift off' when we believe we have lift off, and we will only do either, or both, of these things, when we ourselves are convinced we have a path which isn't 'simply foolin around'. Wasn't it Churchill who said, you can fool some of the people all of the time (they must be the foolish of 'foolproof path' fame) or all of the people some of the time, but what you can't do is fool all of the people all of the time. To achieve this lift-off 'convincingly' we need to have a strategy that convinces. Simply following the advice of attempting to have a universal devaluation (despite the IMF's declarations to the contrary, global deflation is what we may be facing) - the 'so called' foolproof path - ,or of 'commiting to being irresponsible', falls down on the principle test: these proposals fail to convince. The problem with the 'liquidity trap' type analyses is that they look at the effect not the cause.

Here references to Keynes do not help us too much, since he was writing while we were on the ride up, and we are trying to cope with the beginings of the ride down (in the end we're all 'free riders', but there's no 'easy-rider' solution, Ughh!). If we don't get to grips with the relationship between human reproduction and ideas, we're going nowhere fast. Having said all this, orthodox viscosity trap analysis is remarkably unimaginative in its solutions. The technology of money has changed a lot since Keynes' time, and there are proposals to make use of these changes. The latest joint effort by Woodford and Eggerston, notices this, but, after an approving nod, moves on. Why? Because such proposals will attract political opposition. This is really the heart of our present difficulties. Few are prepared to grasp at solutions which may really offer (at least temporary, vital, time-buying) solutions, since the political opposition may be to strong. The globalisation of labour, and positive affirmation of immigration is another clear case in point here. So we are left with 'pension reforms' (read reductions)and the dismantling of welfare. Are these more political popular, it depends on which circles you move in, and what sense of vision you have, I suppose. Oh, never mind.......

We do not here explore the possibility of relaxing the constraint by taxing money balances, as originally proposed by Gesell (1929) and Keynes (1936), and more recently by Buiter and Pani..... (1999) and Goodfriend (2000). While this represents a solution to the problem in theory, there are substantial practical difficulties with such a proposal, not least the political opposition that such an institutional change would be likely to generate. Our consideration of the optimal policy problem also abstracts from the availability of fiscal instruments such as the time-varying tax policy recommended by Feldstein (2002). We agree with Feldstein that there is a particularly good case for state-contingent fiscal policy as a way of dealing with a liquidity trap, even if fiscal policy is not a very useful tool for stabilization policy more generally. Nonetheless, we consider here only the problem of the proper conduct of monetary policy, taking as given the structure of tax distortions. As long as one does not think that state-contingent fiscal policy can (or will) be used to eliminate even temporary declines in the natural rate of interest below zero, the problem for monetary policy that we consider here remains relevant.
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Meantime Joerg writes with his own sense of vision, taking as his starting point and inspiration my recent post on the Monarch butterfly.

Here is a little metaphor - rather baroque, I will admit, but I just could not resist: Like the circadian clock and the sun compass ensure that the monarch butterfly manages to navigate its path to survival, humans rely on coordinating their calendars and agendas to optimize economic results. Constant light causing the monarchs´ circadian clock to malfunction might seem akin to the "liquidity trap" at the zero bound of interest. Flying straight into the sun then is the monarchs´ way of attempting to keep their cash indefinitely. Similarly, without leverage to further its multiple agendas, human society skids along on the flat plane of horizontal time...

That is where I think the Post-Keynesian recipe of introducing a penalty on liquidity should be followed. There are two ways to conceptualize the situation:

1) Non-neutral money - the Keynesian/Post-Keynesian assumption. Technically, there are no fundamental obstacles keeping it from being implemented. When everything else will have failed, there is going to be a consensus for a renovatio monetarum: money that is automatically devalued at regular intervals. The ECB is talking about using RFID chips on Euro notes in the fight against counterfeiters. If that generation of money fails, new notes - equipped with more RAM - may need to be introduced (Keep them regularly updatable, I would say...). We might be en route to money that "ages" - relieving the stress society is supposed to undergo from a "deteriorating" age composition by increasing velocity significantly.


2) Neutral money - the monetarist framework. It implies acceptance not only of deflation but probably depression, too. A new equilibrium would finally occur after massive reductions of prices - including wages. There might be a flight to gold - even a remonetization of gold. Quite a few Austrians are looking forward to the Dow and gold crossing their paths - downwards and upwards resp. - at about 3000 or lower... (definitely a price level where marking gold to market and then remonetizing it
is feasible). There can, however, be no doubt that micropayments will be a feature of the future. Even with gold as base money we would still witness the introduction of software money to handle the vast increase in transactions involving small amounts.


Regular revaluation and gold have historically provided the two most stable monetary systems: Ancient Egypt operated on depreciating money for 1600 years - until the Romans took over Egypt. Byzantium managed to achieve 800 years of price stability under a gold standard. Intuitively, I cannot imagine why initially randomly distributed gold should be reinstituted as money. But if we are really headed for a gold mania, then the Asian markets will be soaking up gold like a dry sponge. There can be no doubt that western central banks should keep their gold - rather than sell it all off in a futile attempt to stem the tide of a gold price rise that might certainly go higher than the previous high somewhere beyond 800$.