A criminal act

Then again, Bernanke and other central bankers claim that their low interest rate policies have preserved the world from an economic depression. What’s your conclusion when you look back on the last decade since the financial crisis?
I’m of the view that the world-wide suppression of interest rates over the past ten years has been not only inadvisable but, on moral grounds, something very near to a crime.

That’s a tough judgement.
By that I mean that the suppression of interest rates has served to advantage one class of people: The savers have been disadvantaged whereas big banks have been very greatly advantaged, and the financial community has been advantaged. In short: the saver’s loss has been the speculators’ gain. So, the ordinary working person has been disadvantaged and that is apolitical. To speak metaphorically but, I still think truthfully, that kind of policy is bordering on criminal – and I stand by that. [Link]

An important extract from the interview that Jim Grant of the eponymous ‘Interest Rate Observer’ gave ‘Neue Zuercher Zeitung’ in Switzerland.

The French Ambassador to the US makes sense

The French Ambassador to the United States of America stepped down from his office on 19th April 2019 and he gave a blunt interview to ‘The Atlantic’. Well worth reading. (ht: Nandakumar). Sample these:

I don’t think that anything irreparable is happening in the U.S. I don’t know what would have happened in France if Marine Le Pen had been elected, because our institutions are much weaker.

Let’s look at the dogma of the previous period. For instance, free trade. It’s over. Trump is doing it in his own way. Brutal, a bit primitive, but in a sense he’s right. What he’s doing with China should have been done, maybe in a different way, but should have been done before. [Link]

… The case of Trump for me, it’s not so much Donald Trump, it’s not so much a person, but it’s a political phenomenon…..

…. For me, the identity crisis is the symptom, but it’s not the disease. In France, we optimistically believed that Macron’s election meant that we had found the recipe against populism. He was a new leader, with new ideas, elected on a centrist platform. Apparently we were wrong. ….

…. There is a misconception about Trump which is American and French: saying Trump is an accident, and when Trump leaves power, everything will go back to business as usual. That’s the dream of Washington, D.C. [Link]

The complex case for rejecting AND using plastics and wearing cotton AND silk, leather and fur

A fascinating article on why the ban on plastics is not necessarily, if its overall impact on the environment is understood correctly, an unalloyed good thing as is being made out to be. An eye-opener just as the article on cotton vs. synthetic clothing was. The law of unintended consequences never ceases to fascinate me.

University of Sydney economist Rebecca Taylor started studying bag regulations because it seemed as though every time she moved for a new job — from Washington, D.C., to California to Australia — bag restrictions were implemented shortly after. “Yeah, these policies might be following me,” she jokes. Taylor recently published a study of bag regulations in California. It’s a classic tale of unintended consequences. …

….. People in the cities with the bans used fewer plastic bags, which led to about 40 million fewer pounds of plastic trash per year. But people …. still needed bags. …..This was particularly the case for small, 4-gallon bags, which saw a 120 percent increase in sales after bans went into effect. [Link]


…. Trash bags are thick and use more plastic than typical shopping bags. “So about 30 percent of the plastic that was eliminated by the ban comes back in the form of thicker garbage bags,” Taylor says. On top of that, cities that banned plastic bags saw a surge in the use of paper bags, which she estimates resulted in about 80 million pounds of extra paper trash per year……

….. A bunch of studies find that paper bags are actually worse for the environment. They require cutting down and processing trees, which involves lots of water, toxic chemicals, fuel and heavy machinery. While paper is biodegradable and avoids some of the problems of plastic, ….. …. the huge increase of paper, together with the uptick in plastic trash bags, means banning plastic shopping bags increases greenhouse gas emissions. That said, these bans do reduce nonbiodegradable litter. [Link]

You can read the rest in the original itself. But, you have got more than a gist of it.

Now, let us turn to cotton vs. fur and leather. There was this great article in Quartz in February 2019. I thought I had blogged on it but I had not. The author of the article, Ephrat Livni begins the piece well:

Being “good” isn’t as easy as it might first seem. In theory, it’s as simple as minimizing the harm you cause. This is the line of thinking that often prompts people to make decisions like giving up meat, or, in the case of clothing, refusing to wear any materials made from animals—specifically leather, fur, silk, pearls, wool, and feathers.

But in reality, we live in a big, complex, connected world, and the consequences for our actions and decisions aren’t always easy to assess. Sadly, the possible ways that we can cause harm are seemingly infinite, and the chances of our doing so practically inescapable. And sometimes what seems like the simplest or most correct approach, when examined closely, is actually just another tricky thicket of moral quandaries. [Link]

Look at how ethically difficult it gets to choose to wear cotton and synthetics than silk:

In 2010, the majority of textiles produced in the world, 85%, were woven from cotton and polyester. Neither of these fabrics uses any animals—one is natural, and the other synthetic. “Both are responsible for widespread pollution of waterways, soils, and air,” Kwasny writes. “Both consume enormous amounts of resources.” ….

…. Cotton, for example, is the world’s most profitable nonfood crop, and 11% of pesticides used worldwide are sprayed on these plants. …. nearly all the water in Pakistan’s Indus River—97% of it—is devoted to growing cotton. It takes about 5,300 gallons of water to make a cotton t-shirt and a pair of jeans, …. Every time we wash a polyester item, we’re releasing plastics into the world’s waterways and ultimately leading to the death of flora and fauna.  …..

………. to spin enough silk for a kimono requires thousands of silkworms, and that sericulturalists kill these worms once they’ve spun a cocoon around themselves. But the work of farming silk involves a deep interaction with the natural world. …….. Nothing went to waste, and throughout the silk-creation process, farmers and artisans acknowledged that their lives were intertwined with those of the worms.

Similarly, when Kwasny visits a mink fur farm in Denmark, she remarks on the astounding care the creatures receive. ….. she notes that the mink farmers are much closer to nature than most people. They know their minks and check in on them from morning until night, feeding them, cleaning up their spaces, ensuring that the animals are healthy and getting along. During mating season, the humans look in on the minks every 20 minutes to make sure males and females are happy. They raise the puppies whose mothers die in childbirth and they get to know them. And the farmers themselves don’t gloss over the darker parts of their profession; they admit that each creature they raise has an individual character, that sometimes they grow attached to the animals, and that the nature of their work is bloody. [Link]

What are the lessons?

(1) At a policymaking level, one has to be patient and consider ALL evidence, all costs and benefits and exercise judgement even as one is acutely aware of how little one knows and might have missed out a lot. That would definitely make for better policy with appropriate and essential mitigation for the costs. Then, be humble about the policy choice taken and that also gives us the mindset to be open to new evidence and change course, without associating it with losing face.

(2) At the individual level, Melissa Kwasny, the author of the work, ‘Putting on the dog: the animal origins of what we wear’ has many lessons:

(a) In order to have a reciprocal relationship with the world, then, we have to be aware that it’s impossible to be ethically pure. It’s pleasant to think of oneself as a kind and gentle person, but it’s better to be brutally honest and understand that the best any of us can do is be “goodish.”

(b) Instead, it’s better to accommodate complexity and reject blanket answers that are convenient but untrue, and avoid insisting upon a foolish consistency, which as Ralph Waldo Emerson famously said, is the “hobgoblin of little minds.” Emphasis are mine.

In other words, the absolutism of the ‘do gooders’ is a bigger threat than we realise.

(c) This is the gem:

In a reciprocal relationship, you take only what you need, rather than as much as possible. …. Reciprocity begins with awareness. It is guided by respect and restraint. It always involves an expression of gratefulness.

Taking according to one’s need IS NOT the same as giving according to need. That is central planning and communism combined. This is individual, voluntary restraint.

Distilling it further:

  • Awareness (of the limitations of our knowledge and) of complexity and avoidance of absolutism – i.e., awareness that one can only be ‘goodish’ and not GOOD
  • Restraint (taking for need instead of pandering to greed) AND
  • Respect for nature borne out of recognition of interdependence

Misguided answers for wrong diagnosis

A month ago, my friend Manu Bhaskaran asked me for my thoughts on the column by Martin Wolf in FT titled, ‘monetary policy has run its course’. See here. Martin Wolf’s article was a partial analysis of this paper that I have not read.

The article is one of the relatively better ones by Martin Wolf. It acknowledges the problems with monetary policy response to so-called deficient demand, policies aimed at creating ‘conventional’ inflation. Here is the relevant paragraph that most of us can agree with:

If the central bank wants to raise inflation in an economy with structurally weak demand, it will do so by encouraging the growth of credit and debt. It might then fail to raise inflation, but create a debt crisis. That is deflationary, not inflationary.

Thus, the pre-crisis monetary policy, aimed at raising inflation, has now created the opposite: a deflationary debt overhang that works via what Richard Koo of Nomura calls “balance-sheet deflation”. That in turn leads to still lower nominal (and real) rates. Thus, the financial mechanisms used to manage secular stagnation exacerbate it. [Link]

My feeling is that Martin Wolf meant to write ‘post-crisis’ and not ‘pre-crisis’ in the paragraph above. That is a relatively minor issue.

His intellectual dilemma is apparent in the paragraph preceding the above, in the FT article. He disagrees with Claudio Borio of BIS that monetary policy does influence real long-term interest rates. If monetary policy does not influence them, why take so much pains to cut or raise short-term policy rates? Except to those steeped in theory, those who watch the real world will agree with BIS. Incidentally, the BIS paper that Martin Wolf writes also highlights the spillover problem from developed country policies to other countries. Read the following extract from the abstract of the paper:

… external influences on countries’ real interest rates appear to reflect idiosyncratic variations in interest rates of countries that dominate global monetary and financial conditions rather than common movements in global saving and investment. [Link]

While disagreeing with the premise of Borio and BIS, Martin Wolf agrees with the implication that flows from their premise as cited in the quoted paragraph above! You can see his dilemma or contradiction.

Much of the problem lies in defining secular stagnation as deficient demand instead of defining it as a secular stagnation or decline in potential growth. The ‘deficient demand’ school calls for persistent stimulus – low rates, zero rates and negative rates. Now that they have not worked, the clamour has turned to fiscal policy and that is where the ludicrous modern monetary thoery kicks in.

But, before we evaluate the question of whether fiscal policy is the answer, let us acknowledge the full extent of the damage that the misguided monetary policy solution to the wrongly defined problem of deficient demand has wrought.

The problem with monetary policy solutions to the wrongly defined problem of secular stagnation or deficient demand is not just the creation of ‘deflationary debt overhang’ but far worse.

Engineered low interest rates have caused the decoupling of the financial economy from the real economy; have caused asset prices (including real estate and even bitcoin which is not an asset) to decopule from fundamentals (incomes of households and earnings of companies) and have fomented worker angst, income and wealth inequality and have even contributed to the rise of Big Tech and market concentration as cheap interest rates allow technology companies to use the currency of their overvalued stocks to buy upstarts and smother competition.

Fiscal policy, in the Western world, too has its limits. Contingent liabilities and pension obligations are not recognised. If they are added, the fiscal situation is dire. Finland showcases the problem. Read the following extract from another FT article:

The lesson from Finland may be that trying to make health and elderly care costs sustainable involves the types of political choices few governments are willing to make, raising questions about long-term economic growth and the health of public finances for increasingly cash-strapped governments across Europe. [Link]

The clamour for some stimulus or the other will go away if the problem of secular stagnation is correctly defined as the problem of secular decline in potential growth with declining labour force growth and with declining gains from productivity. Much of the technological improvements (you can charge your phone by keeping it on top of mine) are not frontier advancements in nature.

What would the answers to such a problem of a secular decline in potential growth?

Immigration is ruled out because of its political and social effects. Population growth is conditioned on public and private decisions made decades earlier. It cannot be engineered overnight.

Real investments that spark productivity gains are not made easily. Merger and acquisitions, stock buybacks, real estate investment are not the stuff of productivity gains. It is not as though low interest rates are being used to spur investments that deal with climate change. Instead, it is producing the short-term boost to aggregate demand that makes the climate problem worse.

My friend TCA Srinivasa Raghavan, on the evening of the 17th April, shared with me an article that he had written in October 2008. He has been prescient. On deficient demand, he wrote:

Perhaps things need to change now and we need to view macroeconomic policy not merely through the demand prism. After all, 80 years after the Great Depression, a situation of sustained globally deficient aggregate demand, on a scale comparable to the Great Depression, is unlikely to emerge because of three factors: Growth in China and India, the gains in productivity that new technologies are bringing and, of course, the removal of the restraint that Keynes’ ‘barbarous relic’ imposed on global liquidity.

There is really no limit to how much money can be pumped in to restore confidence. In that sense, the Keynesian deficient demand system could have gone past its expiry date. [Link]

His prescience was not just limited to dismissing the deficient demand argument but arguing that growth will be dicated by physical resources (think climate) and asset-price speculation created by excess capital looking for higher returns. If anything, in the last ten years, growth has been driven more by speculation (with all the attendant costs described earlier) than being dictated to by the limit of physical resources.

He anticipated the consequence of such an economic growth process:

Left ideas will begin to look smarter. [Link]

Writing in October 2008, he limited himself to the above extraordinary  one-line warning at the end of the article. Subsequent developments have shown that he has been spectacularly right on the Left!

He agreed that the solutions pursued in the immediate aftermath of the crisis (exemplified by the collapse of Lehman Brothers) were necessary but correctly concluded that the extant macro-economic framework was not equipped to handle the problem.

The solutions pursued in 2008 were not withdrawn in time and were kept in place for too long distorting incentives and much else.

So, are we in a cul-de-sac? Sort of. But, defining the problem correctly will at least avoid running up costs arising from the pursuit of wrong answers. The status quo is worse. We not only do not have answers but central bankers in advanced countries have also compounded the problem.

Redemption starts with acceptance that one has been wrong. Then, minds will open up and right solutions will begin to emerge, even if gradual, to begin with.

Gradual and cautious immigration of the sort that Japan is trying might work. There should be redistribution through higher rates of tax (but not usurious that it defeats the purpose) on higher incomes and through tax on capital gains. There should be some caps on technological developments that raise worker anxiety and lower wages simultaneously. Such technological innovations actually store up much bigger troubles. Business and commercial leadership must lead by example in rebalancing the economy between assets and income and between capital and labour. Finally, may be, the answer lies in higher interest rates!

(p.s: Do read Andrew Smithers’ letter in response to Martin Wolf’s article)

STCMA – 15th March 2019

Study Links Eggs to Higher Cholesterol and Risk of Heart Disease [Link]

Across the globe, a question of air safety becomes a question of American leadership [Link]. I agree. America dithered a bit and damaged itself a lot in the process. Some pilot friends explained the nasty ‘penny pinching’ that Boeing did. Sad and condemnable. Chalk one more entry in the journal of ‘how capitalism is destroying itself’

Elbridge Colby urges America to take India’s side [Link]

Disturbing story of the treatment of Kazakh Muslims by China [Link]

This is from February 14. A fascinating long read on China’s mistreatment or harassment of young Marxists [Link]

Aarati Krishnan provides some good statistics on aggregate wage growth and breaks it down well. She explains why the economy is lacking the spark it needs. Well written. [Link]

On Thursday, 108 economists and statisticians put out a note urging that agencies associated with the collection and dissemination of economic statistics should not be subject to any political interference. [Link].

Some question the timing but the appeal has gained in legitimacy in recent months. The government’s many moves on different statistical data have raised more queries than answered them.

Honestly, this requires much more than a cursory mention. The article on how we need to save our ignorance from artificial intelligence is rich with philosophical implications and questions too. [Link]

Towers of meaninglessness

I could not have read a more contrasting article to the one that I had just blogged about on the science of poverty. This is far, far removed from the world that Charles Cooper is concerned about and rightly so.

I scoured the online comments on the article to see if anyone commented on the health implications to people of so many towers coming up to pass the data on from one tower to the other a teeny-weeny bit faster, not to mention the ugliness of it all – spoiling the landscape: “English coastal cliffs”. Together with cellular phone towers, are there radiation implications for people?

Further, as someone has commented below, what benefit is it of to the society – does it improve capital allocation which is the alleged benefit of capital markets (as per textbooks)?

In other words, what is the purpose and meaning of it all?

Read this comment from a reader:

My firm used to make $1bn a year doing it. They are stealing from legitimate order flow from institutional and retail investors. They “ping” the market tens of thousands of times a minute making and cancelling orders. Why the major institutions don’t demand changes is just another sign of the full institutional corruption in the capital markets. The exchanges don’t want to fix it because they want the phony volume. It’s a complete scam.

Wonder if, in the end, these folks pursuing the speed of light for their stock trades will end up like Charles Duhigg’s ‘1.2mn dollar’ friend?

Thank you, Saurabh, for sharing these articles.

[Postscript: Matt Levine has a contrarian piece. He says that there is no morality involved in HFT. I do not agree because the issue is not just about me hitting the keyboard few milli/nano seconds faster than someone else. The algorithms also confuse or ping the market. See the online FT comment pasted above.]

Science of poverty

My friend Rajeev Mantri had sent this article some three weeks ago. But, I stumbled upon this only today. Most (almost all) things life are accidents. We do not make them happen. Even reading articles.

It is a very important article. Very interesting and useful. Most of us have heard of ‘poverty trap’. There is a reason why it is called a trap. It is hard to get out of, despite one’s best efforts. The odds are stacked against them, in many ways. What this article brings to us is scientific evidence that poverty is, indeed, a trap.

However, let me start with a (minor) criticism:

Quite how the science of poverty could be leveraged to help the poor come out of poverty is not explained. But, that is not his goal in writing the article. His purpose is to exhort fellow humans to take poverty as a disease and not as a voluntarily or willingly assumed condition or something that is wholly attributable to sloth, indolence and lack of effort.

His practical policy prescripton is to continue with anti-poverty programmes:

We should leverage the lessons of the science of poverty rather than ignore them. Poverty alleviation programs like conditional cash transfers, for example, reward parents or caregivers with direct payment for taking actions, like ensuring school attendance or arranging for preventative care. They encourage stress alleviation and long-term planning that is far upstream of doing well on an exam—they provide exactly the kind of certainty that the poverty-stricken brain needs.


It’s easy to attach a post-facto narrative of talent and hard work to my story, because that’s what we’re fed by everything from Hollywood to political stump speeches. But it’s the wrong story. My escape was made up of a series of incredibly unlikely events, none of which I had real control over.

This is a hugely important philosophical statement. I am so glad he made it. That shows a highly evolved mind. Very, very rare.

Despite reading this or even while reading this, some of us continue to believe that we did it and we make things happen. At best, our effort are necessary conditions.

This is the important message for policymakers:

First, that the stresses of being poor have a biological effect that can last a lifetime. Second, that there is evidence suggesting that these effects may be inheritable, whether it is through impact on the fetus, epigenetic effects, cell subtype effects, or something else.

This science challenges us to re-evaluate a cornerstone of American mythology, and of our social policies for the poor: the bootstrap. The story of the self-made, inspirational individual transcending his or her circumstances by sweat and hard work. A pillar of the framework of meritocracy, where rewards are supposedly justly distributed to those who deserve them most.

What kind of a bootstrap or merit-based game can we be left with if poverty cripples the contestants? Especially if it has intergenerational effects? The uglier converse of the bootstrap hypothesis—that those who fail to transcend their circumstances deserve them—makes even less sense in the face of the grim biology of poverty. When the firing gun goes off, the poor are well behind the start line. Despite my success, I certainly was.

The bigger question is: Do goverments have resources for this?  Do they have the mind to do this? Do they have the moral authority and the courage to acquire (fiscal) resources to tackle this? Are the rich ready and willing to pay up for this? Even if the answers to all these questions are YES, how would it translate into reality – efficacy on the ground – in terms of results?

But, one thing is clear: given the scientific evidence that successive generations are poor not because they choose to or that they did not make the effort but because they are made to stand well behind the starting line, the society has both an economic and a moral obligation to help them in whatever ways they can.

Thanks for sharing the article, Rajeev.