The importance of knowing history

Again, a brilliant episode from Paul Volcker’s ‘Keeping at it’:

That evening, I learned something more about the power of Connally’s political instincts. After a formal dinner in a grand palazzo at the top of one of Rome’s seven hills, he stood and, seemingly extemporaneously, extolled the triumphant achievements of ancient Rome, of Italy, of modern European civilization.

We ministers of finance bore responsibility for bringing the world’s monetary affairs, and indeed humanity itself, into greater harmony. The impact was electric.

Once viewed as a crude Texas bully insensitive to the need for international cooperation, Connally seemed to reveal himself as an erudite, if forceful, global statesman. Within four weeks, an agreement was reached.

Connally was the guy famous for telling Europeans that dollar was America’s currency but Europe’s problem. The episode that Volcker refers to was in the early Seventies just after 15th August 1971 when America suspended the gold window and wanted to devalue the dollar.

The Bretton Woods agreement was still in force and Europeans were reluctant to accept a revaluation of their currencies. It was in that context that this incident took place. 

The importance of knowing history, for men and women in public affairs, cannot be overstated.

Volcker on Iacocca

Lee Iacocca passed away on 2nd July 2019. As a young management graduate in the Eighties, I read his book on how he turned around Chrysler Motors, with awe and admiration. I was reading the book, ‘Keeping at it’ by Paul Volcker on my flight to London today. What he had written on the turnaround of Chrysler made for interesting reading:

The government’s backbone in demanding the sale of Chrysler’s executive planes over the persistent complaints of the new chairman, Lee Iacocca, helped resonate with the public.* A well-designed “K-car” was just coming into production and Chrysler became competitive. All of the creditors, including the US Treasury, ultimately could make millions: the new loans extended in the crisis included warrants for new stock. Those warrants (contracts that give the owner the right to buy stock at a set price over a certain time period) surged in value as the company recovered.

Iacocca, a flamboyant master salesman, pleaded with the new Reagan administration to cancel the warrants, arguing that they were essentially an unearned and undue reward. He didn’t win. Chrysler ended up paying more than $300 million to buy back and cancel warrants held by the Treasury. My wife sent me a little typewritten note, enclosing an ad for Don Diego cigars featuring a handsome Lee Iacocca, cigar in hand. The note read: “Would you give a loan to this man?” My handwritten reply: “Not willingly!”

What is interesting to us in this narrative is how the bailout was structured. It is not a lesson just in the case of bailouts. It is a general lesson. Government support or subsidy or bailouts must involve reciprocal obligations and accountability on the part of the beneficiaries.

The real economy does not need rate cuts

The Federal Reserve will announce its interest rate decision tomorrow (Wednesday). Financial markets expect a rate cut of 25 basis points or even 50 basis points. But, William Dunkelberg, Chief Economist at the National Federation of Independent Businesses, beautifully and in very simple language establishes that the real economy does not need interest rate cuts. If anything, credit availability, cost of loans, unmet credit needs are all at near five-decade lows. Read the whole thing here. It is worth it.

It is clear that the Federal Reserve under Jay Powell has really flattered to deceive in respect of decoupling monetary policy from asset prices. Now, it is fully captured, it appears. One still entertains a faint hope that the Federal Reserve Open Market Committee will surprise us pleasantly with some spine.

In a sense, William Dunkelberg’s article really is a succinct capture of all that is wrong with ‘The Rise of Finance’ that Gulzar Natarajan and I had documented.

It happens during the day

Chanced upon the review of three books by Quinn Slobodian in ‘Boston Review’. The three books are ‘dark’ in his view, especially the first one, he reviews: The Age of Surveillance Capitalism: The Fight for a Human Future at the New Frontier of Power by Shoshana Zuboff.

He takes exception to her comments on how media influences behaviour:

One could ask whether her description doesn’t flunk the Cultural Studies 101 test by failing to acknowledge that the media’s designers don’t dictate directly its use and consumption. We hear a great deal about what companies “aim” to do through baroque projects of “behavioral modification,” but, as with the Cold War brainwashing techniques she references, we have little evidence that these efforts work—except for generating ever greater contracts for those pronouncing their own effectiveness. [Link]

But, let us listen to the testimony of Jim Balsillie, former CEO of ‘Research in Motion’ (remember Blackberry?):

Second, social media’s toxicity is not a bug — it’s a feature. Technology works exactly as designed. Technology products, services and networks are not built in a vacuum. Usage patterns drive product development decisions. Behavioral scientists involved with today’s platforms helped design user experiences that capitalize on negative reactions because they produce far more engagement than positive reactions. [Emphasis mine]

Third, among the many valuable insights provided by whistleblowers inside the tech industry is this quote: “the dynamics of the attention economy are structurally set up to undermine the human will.” Democracy and markets work when people can make choices aligned with their interests. The online advertisement-driven business model subverts choice and represents a foundational threat to markets, election integrity and democracy itself. [Link]

Indeed, the comment about on-line reminds me of advertising itself. I just did a blog post on it yesterday.

More importantly, very powerful lines above. The point to note here is obvious: it is not the subversion of the tech. platforms by populists, demagogues, far-Right and other extremists that is the issue. The platform is the subversion.

That is why it was disappointing to read that Stanley Druckenmiller, otherwise an intelligent man, criticise the Trump Administration’s consideration of anti-trust investigations of the tech. companies in the USA.

So, Zuboff is not exactly wrong. It is ‘dark’ for the rest of us because we don’t know (or cannot be bothered to fathom) how the ‘rich’ and the ‘connected’ operate. Looks like that is the stuff of the second and, even more so, the third book reviewed.

The second book he reviews is Darkness by Design: The Hidden Power in Global Capital Markets by Walter Mattli. A key paragrph from the review:

Mattli shows how the shape of financial governance—and lack thereof—was pushed by a small elite of investment entities. The advantages gained by those able to make costly investments in computerization began to concentrate wealth at the upper end of exchange’s members, including the “national commercial and non-U.S. ‘universal’ banks” that deregulation had allowed to enter. By 2000, the twenty-five second-tier firms had less than 10 percent of the market capitalization of the top ten. Household name titans such as Barclays, Credit Suisse, Citigroup, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley, and JP Morgan dominated. 

The third book he reviews is Katharina Pistor’s The Code of Capital.

In fact, he summarises it very well:

Katharina Pistor’s The Code of Capital is also an urgent tract. The difference, in her telling, is that the law doesn’t always ride a white horse. It comes as often to perpetuate injustice as redress it.

Further, the following statements are both profound and true. In other words, the State is the protector – or it ought to be – and the villain. The problem is, in other words, the State is captured and hence, aids the evasion of taxes by the rich whom it supposedly has to now bring back into its tax net!:

The concentration of wealth and its evasion of state attempts at its capture through taxation also do not happen by escaping law or the state, but through the law and the state—through projects of legal “encoding,” to use Pistor’s dominant metaphor.

Quinn Slobodian highlights a few things from Pistor’s book that ought to be of interest to those in Finance. Very few would even be aware of them:

Pistor introduces us to new sites and conventions created to offer protection for capital mobility and insulation from democratic states, places with their own acronyms, where PRIME Finance (Panel of Recognized International market Experts in finance) protects PRIMA (the Place of Relevant Intermediary Approach convention).

So, the point is that it is not about shining light on people operating covertly, in darkness, outside the pale of law. There is collusion. There is capture. State and the law have facilitated it.

Perhaps Pistor’s book is similar to the one by Brink Lindsey and Steven M. Teles: ‘The Captured Economy‘. I have begun reading it.

A response to Martin Wolf

Mr. Wolf wrote:

The US focus on bilateral imbalances is economically illiterate. The view that theft of intellectual property has caused huge damage to the US is questionable. The proposition that China has grossly violated its commitments under its 2001 accession agreement to the World Trade Organization is hugely exaggerated.

Response #1

“A landmark study by the MIT economist David Autor attributed the loss of 985,000 manufacturing jobs in the United States from 1999 to 2011, or about 20 percent of the total job losses in the sector during this period, to the so-called China shock of exposure to increased competition from China.” (Source:

Response #2

“When China entered the WTO in 2001, it promised to sign the Government Procurement Agreement, which requires government purchases to be made on a non-discriminatory and transparent basis, “as soon as possible.” Sixteen years later, this has not happened. As a first step, the Trump administration should demand that the Chinese government sign the GPA without further delay. But down the road, the administration may be forced to ask Congress for additional authority. If turning over our technological crown jewels to a foreign power is against the national interest, then our government should have the power to prevent it. But wielding this power without blowing up the international trade regime will not be easy.” (William Galston, Wall Street Journal, 9th August 2017)

Response #3

“This paper links the sharp drop in U.S. manufacturing employment after 2000 to a change in U.S. trade policy that eliminated potential tariff increases on Chinese imports. Industries more exposed to the change experience greater employment loss, increased imports from China and higher entry by U.S. importers and foreign-owned Chinese exporters. At the plant level, shifts toward less labor-intensive production and exposure to the policy via input-output linkages also contribute to the decline in employment. Results are robust to other potential explanations of employment loss, and there is no similar reaction in the EU, where policy did not change.” (Source: ‘The Surprisingly Swift Decline of U.S. Manufacturing Employment’ by Justin R. Pierce and Peter K. Schott –

Response #4

“This paper examines the relationship between county-level mortality rates and exposure to an important economic shock, the trade liberalization associated with the U.S. granting of Permanent Normal Trade Relations to China. We calculate exposure to PNTR as the employment-weighted average exposure of the industries active in each county. We then estimate the relationship between PNTR and mortality using a differences-in-differences framework that nets out any time-invariant county characteristics, as well as annual shocks that affect counties identically. We find that exposure to PNTR is associated with an increase in mortality due to suicide and related causes, particularly among whites. These results are consistent with that group’s relatively high employment in manufacturing, the sector most affected by the change in trade policy. We find that these results are robust to various extensions, including an alternate empirical specification that places no restrictions on the timing of the effects of the policy change as well including controls for changes in state health care policy and exposure of other counties in the surrounding labor market.” (“Trade Liberalization and Mortality: Evidence from U.S. Counties” by Justin Pierce and Peter K. Schott, Federal Reserve Board, November 2016 –

Martin Wolf #2

“the best way for the west to deal with China is to insist on the abiding values of freedom, democracy, rules-based multilateralism and global co-operation. These ideas made many around the globe supporters of the US in the past.”

“This is the most important geopolitical development of our era. Not least, it will increasingly force everybody else to take sides or fight hard for neutrality. But it is not only important. It is dangerous. It risks turning a manageable, albeit vexed, relationship into all-embracing conflict, for no good reason.”

Response #1:

“the West’s 25-year bet on China has failed.” (‘The Economist’ March 1, 2018 –

Response # 2

“in negotiations with then-President Barack Obama, China’s president Xi had agreed not to turn a series of manmade islands that China had created in the South China Sea into military installations. But then China did just that.” (John Pomfret, Washington Post, 23rd August 2018)

Response #3:

“I believe that we have no adequate economic playbook for competition with China. Last time we competed with or had a long difficult strategic relationship with a large communist country was during the Cold War, and our approach to that was simply not to trade with them. Now, one of our largest trading partners is in fact a communist country, and I don’t think that the economists have given us much of a playbook to protect our companies and our people.” (Ash Carter, Defence Secretary in the Obama Administration, Interview to ‘Politico’, February 19, 2018 –

What it costs the world for Alexa to answer your queries?

My friend and co-author Gulzar Natarajan pointed me to an article by Gillian Tett in FT on how private equity has grown over the years when public markets and public listing were the fashion since the Eighties. I then caught up with a few others of hers. One of them was on what it costs humans to be able to use their modern technological gadgets and devices that are founded on ‘artificial intelligence’.

That article had a link to this one: ‘Anatomy of an AI system’. It could be one of the most important articles you would read in 2019.

To me, the article underscores, for the umpteenth time, the fact that humans are incapable of grasping (let alone comprehending) what they unleash. They wade into waters that they can scarcely fathom and the splash and the spillovers are something that they cannot ever hope to get a grip on or control. Sample this:

it took Intel more than four years to understand its supply line well enough to ensure that no tantalum from the Congo was in its microprocessor products. As a semiconductor chip manufacturer, Intel supplies Apple with processors. In order to do so, Intel has its own multi-tiered supply chain of more than 19,000 suppliers in over 100 countries providing direct materials for their production processes, tools and machines for their factories, and logistics and packaging services. 20 That it took over four years for a leading technology company just to understand its own supply chain, reveals just how hard this process can be to grasp from the inside, let alone for external researchers, journalists and academics.

We are doomed not because we have damaged the environment, not becasue we are running out of water; not because we have run up too much debt; not because we have accumulated too much wealth in too few hands but because we know not and refuse to admit we know not.

Who makes recessions in America?

I stumbled upon the website of CMG and Mr. Steve Blumenthal’s weekly missive called ‘On my radar’. He had penned one of his recent letters based on David Rosenberg’s presentation at the John Mauldin’s Strategic Investment Conference. Must attend one of them soon. At least, an impressive array of speakers.

One thing one has to like, admire and envy about David Rosenberg is that in 2011 or so, he switched to being an equity market bull and rode the wave all the way up to 2018. He has again turned bearish now. Full credit to him for such intellectual openness. It requires a lot of discipline and intellectual integrity to be able to switch.

This is a clear case of seeing things as they are likely to be rather than as what one likes them to be. Not easy at all.

The presentation and the slides are, as usual, very informative and perceptive. I have a minor/major quibble about the causality attributed to Federal Reserve tightening for economic recessions in America. That is a false framework, in my view.

Recessions happen not because the Fed hikes interest rates. The Federal Reserve tightening merely confirms that the cycle had run its course. The Fed’s mistake is not that it overtightens but that it does not tighten enough and early. Indeed, what it does is to tighten too late and even then it does too little only. But, that is enough to topple the apple cart of the economy because, by then, it had accumulated so many excesses that it does not need too many excuses to topple over.

So, who makes recessions in America? It is the Federal Reserve and financial institutions that pay little heed to accumulating risk and passing them on to the rest of the society. The Federal Reserve is still the villain but not with its ‘restrictive’ or ‘normalisation’ stance but with its ‘low and easy for long’ stance.

‘Blaming the Fed’ for recessions plays into the hands of politicians and the financial market types who would prefer a perpetual flow of funds at cheap rates. They can earn the returns and pass on the risks to the broader society and taxpayers.

In response to the criticisms that the Fed tightenened and precipitated a recession, the Federal Reserve eases aggressively and keeps rates too low for too long in the next cyle. That is what the Federal Reserve did in 2001-07. The result was 2008. Again, the Federal Reserve has repeated 2001-07 between 2009 and 2017 and the result is likely far worse.