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Archive for November, 2010

Just went through this article on the WSJ that talks about new models of economics that are arising in response to the crisis, and focuses on an agent-based modeling mechanism being developed by a physicist.  Don’t get me wrong, I like agent based modeling.  However, you want to predicate the simplified behavior of your agents on empirical evidence of those behaviors, and you want to compare them to observable results.  Ideally, the system your observing is simpler than the world in toto, so you can safely decide on what constitutes noise.  You know, standard scientific method.

Economics has long suffered from an issue of having no good laboratory.  All economists can do is examine data generated in the real world, which is ruled by so many variables as to be nearly useless for providing good data.  Couple that with the difficulty of accurately measuring the variables you want, and it’s no wonder economics is so vague about its models.

However, in the past decade, we’ve had these MMO thingies arise.  Large communities of interacting economic agents, engaged in limited, well documented economic transactions.  Operators have full control over macro constants and can observe with absolute precision the results of changes to them.  We know Eve Online has their in-house economist, but what about the other games?  And why is this veritable trove of applicable data being…completely ignored?

Probably ignorance, when you get down to it.  OH well.

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Since my last post went into economics, this post can talk about fun stuff.

I’ve been playing WoW, levelling an old Warlock of mine.  Thoughts:

Too many spells.  I don’t have enough hotkeys.

I can’t fathom levelling as anything but Demonology now.  Destro uses too much mana.  Affliction may work, but feels…boring.

The new content makes me happy, and levelling is fast.  I reaffirm my admonition to ditch heirloom items; they mess up the flow too badly.

When December 7 hits, I’m gonna try to wait out the hordes and then float in behind on my main.  Hitting 85 is no big deal; most of us will be there by the New Year.  After that, maybe we can do raiding!  Either way, I think people are in for something of a shock when they hit those Cata dungeons.  They take no prisoners.  I healed a warrior wearing 85 heroic raid-ready gear; it was still difficult to keep him up in a normal difficulty 5-man.  Please, stop ignoring your CC and pay attention to the crap on the ground.  Press your buttons correctly.

Otherwise, your healers will run out of mana and you will die.  It’s an issue.

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I Gots Nothin’ to Say

I wish I had more to post about.  I do.  I mean, even given my usual lack of posting time, I just….haven’t had much to say.  Economically, things are struggling along.  Generally, we’re seeing an anemic recovery, which was probably in the pipes the instant October passed with no major crisis: we could move into holiday season mode, stop worrying about work and jobs and not having them for a bit, while we focus on trying to have some fun with families.

Black Friday sales keep getting compared to last year, which bugs me.  It’s good to see things are up from 2009, but we sort of expect that.  How were we compared to 2008?  Well, it appears about even…just as the recession was getting really rolling.  What I remain curious about is: how steep were the markdowns?  How was the revenue?  What about margins?  If margins compressed, marginally increased revenues won’t help much going into next year.

Regardless, it means things are steady.

The other thing worries me about the recovery is a recent post I read at ZeroHedge.com (cross-posted from another site) which points out that the massive income disparity in America means that the economy can actually register tepid growth, but with much of that growth being due to the incomes of relatively few:

The top 20% pay the vast majority of the taxes: According to the Congressional Budget Office (CBO), the top 20% paid 86.3% of all Federal income taxes, 43.6% of Social Security, 87.8% of corporate taxes and 34.1% of Federal excise taxes. After including earned-income tax credits, the bottom 60% of households paid less than 1% of all Federal income taxes, and the households between 60% and 80% paid 13%.

Now, if we assume that taxation rates correlate somewhat with income levels, we see that the top 20% of the population earned…a rather significant portion of the income.  I know that I have always paid at least 20% of my income in federal taxes, even back when I was working a college part-time job, so I feel pretty confident asserting that it isn’t that the bottom 80% aren’t paying a decent chunk of their income in taxes…rather, we’re seeing evidence of a massive disparity in wealth distribution.

What that implies is that the spending habits of a relative minority can have an impact on aggregate numbers, hiding the experience of others.  Take it this way: the GDP of the US simply doesn’t have anything me or (probably) you.

It’s for this reason that I have issues with the Black Friday stats: I know enough statistics to know that they can often tell you very little.  If average spending per shopper was x, and the number of shoppers was y, all that tells me is that they took total sales, z, and divided it by y to get x.  It tells me nothing about the distribution of expenditures.  I kinda want to know that.  Did lots of middle class people feel super comfortable dashing out and spending on christmas purchases this past weekend?  Are they going to spend more?  With personal income up 4.1% on the year, but savings rates also up over last year a tad, we would expect, at best, a 4.1% increase in expenditures (we’ll go ahead and call unemployment static, though I know this is a really gross generalization).  Yet I’m seeing 9.2% increases over last year reported.  Where would the money come from to sustain that, exactly?  We’d have to see a decline in savings to support more expenditures, right?

Anyway, enough analysis of moneys.  The waters are murky and sluggish.  Let’s just have fun.

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I keep hearing about the people who bought homes they just KNEW they couldn’t afford, and are totally living beyond their means.  These people just need to suck it up and take the hit, I hear.  They’re really what’s wrong, I hear.

I tend to hear this from excessively prudent people, people who say it with a certain smugness, as a smile curls upon thinned lips, eyes and nose slightly upraised in both righteous indignation and satisfaction at the vindication of their own worldview.

Let’s consider these folks, 4-5 years ago, who bought a house as the early 2000-2001 recession slowly ended, in the face of super-low interest rates, floods of fiscal stimulus (in the form of a massive tax cut), and the growth rate one expects as excess capacity is put to use.  We were explicitly, as a nation, told by our president to go to the mall and buy stuff.  I remember that and laughing a bit, but knowing people would.

From a macroeconomic perspective, the tax cuts and interest rate cuts would have little to no direct impact on the majority of the US population.  The majority of the tax cut went to the very small portion of the populace that earns an exorbitant amount of the money in the nation.  On top of this, we included capital gains tax cuts.  Finally, we had low interest rates, making the cost of taking debt rather low.  There are some relatively obvious consequences of this sort of policy.  The first is that the massive fiscal stimulus would be channeled into financials.  Seriously, this isn’t hard.  Most very wealthy people – such as those earning incomes of over $250,000 – don’t have much left to buy.  As a portion of their income, direct consumption is much lower than it is for a lower income earner.

It works like this: there exists something of an upper limit on the rate of growth of your tastes versus your income.  Once you hit a certain point of wealth, your inability to spend your income as you earn it means you move it into financials (which produce additional cash flow).  What this means is that money begets money, and more money begets money faster.  Corporate tax cuts do not translate into additional production or lower prices.  Instead, they translate into lower costs.  Reduced costs for a business do not prompt them directly to lower prices or increase production, both of which would provide a tangible benefit to consumers.  Since prices are set by the market, a business doesn’t need to lower prices unless market forces require it.  Certainly there is no direct pressure to increase wages as a response to lowered costs…those aren’t linked at all.

Corporate tax cuts translate directly into increased shareholder equity.  That’s really it (particularly since the “shareholder equity portion of the balance sheet is where everything goes to make all the other values sum to zero.  I always liked that maneuver).

Now, the thinking here is supposed to be supply side oriented: financial investment is equated, somehow, with capital development.  That’s where this all gets weird.  The value of a stock price really isn’t directly connected to jack squat about a company.  If I buy a company’s stock…I’m not giving them any money.  They may be able to issue additional stock at the new price, gaining some cash for capital purchases, but then they’re diluting my stock value and I get all ragey and bitch at them for it.  Instead, they buy the stock back…at the new inflated price, which actually amounts to removing capital from the company.  So seriously, after an IPO, the value of a company’s stock has exactly no effect on their capital investments.

Really, a stock is a lot like a bond that gets handed back and forth, has no maturity date, and may or may not offer an income stream.  Look at a non-dividend paying stock, like Amazon or Google.  If they’re not going to offer dividends (so the stock offers no cash flow value), the only time the stock can provide value is if someone else wants to buy it.  Any financial product derives value from having some final exchange value.  Someone at the end of a chain will convert it to something else.  But…there isn’t anyone to do that for something like Amazon stock, because the only sort of entity who could do that would be a buyer of the company as a whole…and who exactly is gonna buy Amazon at its current price?  No one.  So why would I buy their stock, when I have no guarantee of a final convertibility value?  I’m effectively speculating that other people are bigger fools than I am.

That’s very much like gambling.  And who wins at a casino?  The house.  That’s right, the financial intermediaries.  They make a profit regardless.  For letting us gamble.  But see, they’ve made us think this is all fine and dandy, that this isn’t gambling at all…it’s investment!  We’re all like little venture capitalists, doing our part to help build the economy of America, and making a buck in the process.  But if stock market purchases don’t do this, then it’s all an illusion.

So all those tax cuts, if they helped spur money into stock markets or speculative activity, really just handed money to the banks.  They didn’t help the productive economy at all, not directly.  So maybe the banks took that money, that capital, and used it to secure loans!  Sure, but to whom?  If the efforts of the government didn’t directly increase consumer demand, instead increasing financial (speculative) demand, then banks would tend to lend money to…speculators.  In fact, the way to get money into the hands of people to spend it was to lend it to them.  If banks hadn’t been able to lend against their capital, then the demand surge would never have happened.  Corporations were seeing increased sales and reduced costs, with no wage pressure, because people were borrowing to finance demand.

Why?  Because banks made them offers that were retarded on the part of the banks and told everyone this was a sure thing.  Seriously.  When I am told by an expert that this is a sure thing, that I’ve done this for hundreds of other people, they’re all doing great, you can have this nice stuff and be able to afford it because that’s how things work now, I have an awful lot of incentive to believe that expert.  They even tell me they’ve run all the paperwork and it all works out, I can totally afford this; we’ll refinance down the road, everyone does and it always works out.

Everyone I knew was looking into housing as an investment back in the mid-2000s…because it was a SURE THING.  While “sure thing” is usually a red flag, they had experts on all sides telling them this was true (alongside telling them returns on the stock market are always 10% per annum if you’re immortal and never need to sell stock, which you are, aren’t you?).  When experts start telling you that, start telling you they checked and you qualify, well, you tend to go with them.  When they let you take out a massive loan with no proof of employment and no money down, and that this is totally cool, no worries…well, you tend to go with that.  These people are experts, right?

Now, the experts got paid either way, and these people who got suckered are being told to man up and take their losses.  They should have known better.  What?  How would they have known better?  Exactly how much research would they have needed to do when the Chairman of the fucking Federal Reserve was effectively telling them that no, seriously, it’s all cool?  At the time, all the people who “knew better” were fringe lunatics being laughed at by everyone on the inside.

When an entire nation suckers someone and then says “whoops, sorry, you should have known better, pay up” that seems rather…unfair.  Shouldn’t the banks have known better?  Shouldn’t the apparent experts have known better?  Shouldn’t someone have been, you know, honest?  I find it hard to work up outrage on people not paying their mortgage when, near as they can tell, nobody knows what the fuck is going on; that the people who reassured them everything would be fine are now knocking at their door going “You should have known better” and they’re just supposed to meekly go with it.

That sounds like a load of bullshit.

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I like Jack McHugh’s missives, which I read on The Big Picture (in the Think Tank), for a simple reason: they always begin with “Good Evening:”.  They follow that up with quiet, neutral observations which, if I were to imagine them being read aloud, would be spoken by a grizzled older man with a glass of good scotch (no ice) who has no real investment in pleasing anyone, but is simply calling it as he sees it.  It’s both refreshing and comforting (despite the extraordinary anxiety the subject matter inevitably produces).  I recommend his latest.

And I readily admit, I read this while sipping a very nice Glenfiddich.

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