"Equality"? Give me a break

The World Economic Forum is probably the most absurd "economic" organisations in the world. Famed for its ludicrous "competitiveness reports", it also produces other useless and complete harebrained "reports, like the "gender gap index".

The complete absurdity and nonsense of this type of work is apparent in its own methodology.

For example, Ireland demonstrates comparable "inequality" because men have a life expectancy of only 96% of that of women. The longer women live relative to men the more "equal society is apparently. So imagine if we could produce some "gender equality" policies that shifted this 96% figure to 90% or even 50% - hey that would probably generate a boost to the aggregate "equality" ranking.

The same absurdity appears in all the other comparable scores the boost the supposed "gender" equality as women increasingly dominate outcomes for men in education, representation in professional classes etc.

Next look at the male/female birth ratio. As pure statistical indicator, a low female to male birth ratio is in fact a boon to women - as China is now finding out. Women have complete control of the partner selection process. Men are increasingly left into the middle ages at the fringes of society. Perversely, this supposed "inequality" towards women is in fact leaving men not women disadvantaged in Chinese society.

I don't think I will bother with this report.

Tricks of the trade

One of my favourite, non-moralist based, parables against protectionism or mecantilism comes via Brad de Long (I can no, longer find the link).

In a fictional country that exported grain and imported cars, a protectionist movement developed that demanded imports of cars stop in favour of domestically produced cars.

As this movement built political momentum (”protect the jobs”, "buy local") a billionaire announced that he had discovered a technology that would allow for the transformation of grain, of which the country produced plenty, into cars, which the country at present imported. On the back of a substantial government grant (!), the billionaire built a sprawling site on the coast, protected by massive security. He employed a workforce that was sworn to secrecy and then began buying up large amounts of the locally produced grain.

The grain was shipped into the secretive site in trainloads and amazingly cars were shipped out to be sold to customers. The billionaire was a national hero, lauded by politicians for single handedly ending the need to import cars. No longer were imports needed. In addition, he was also a big buyer from domestic farmers (buying "local"). And of course he employed people and made huge profits which provided corporate tax revenues.

The country was universally in awe of this national miracle of economics, except for one curious journalist who managed to infiltrate the secretive site, into which the grain went and cars emerged.

This journalist discovered that the site, hidden from outside eyes, consisted of little more than a massive rail freight and dock facility. The grain was being transferred from the incoming trains on to bulk transports sailing off to foreign countries. At a different point, car transports were arriving, unloading their cargo onto trains heading off to be sold across the country.

Green investor update

With the end of the third quarter it is time to get an update on our green investments courtesy of HSBC.

It looks like another bad quarter, underperforming the broad equity market index by about 0.5%. On the bright side, performance is consistent. Consistently under performing the equity market, as I predicted but certainly not what HSBC or our friendly reporter at the Financial Times, Kate MacKenzie, predicted.

Since 2008 an investor in this HSBC green fund would have lost more than 20% against a standard global equity benchmark. Ouch. That is what I call suffering for your principles.

But then, maybe it isn't all about principles. Maybe some people do buy into the "green is the future" malarkey. There is an apt investment lesson in that case. Don't let your emotions bias your use of and interpretation of data. In this case, the data and facts pointed to subsidy reliant "green" industries and companies being poorly positioned to improve their profitability or grow their businesses. The clear message was sell.

More quantitative easing for the UK?

Now here is an interesting news article in the Telegraph:

Bank of England's Adam Posen calls for more quantitative easing
The Bank of England should restart the printing presses and pump more money into the economy to prevent a "lost decade" of low growth and high unemployment, one of its senior policymakers Adam Posen has said.

So called "quantitative easing", or QE, accomplishes one thing and one thing only; it produces inflation. So how is that any use as a policy instrument to be used to "prevent a 'lost decade' of low growth and high unemployment"? Well, it does two major things:

1. It deflates real wages, on the premise that real wages are flexible. A fair enough assumption at the moment given that unemployment is high generally there won't be too much resistance from or bargaining power with sellers of labour who might see the true value of their time fall.
2. It deflates the stock of debt. Governments in particular borrow over long terms at fixed rates of interest. Inflation which is higher than expected at the time of issue will mean that the amount these governments will need to repay will be smaller in real terms (they will be paying back in the future using devalued money). In fact, if inflation is high enough they might end up paying back less than they borrowed.

Now think about that second point for a moment. Astute readers understand instantly that debt is a two sided coin. One person's debt is another person's asset. So, if higher than expected inflation means that borrowers might not have to pay back as much as they thought, or even as much as they borrowed, then the person who lent them the money is losing out by exactly the same amount. All we are witnessing is a transfer of wealth, not a creation of wealth or indeed a "destruction of debt" (which in fact is impossible for the reasons noted).

So what is the benefit? Is there any benefit? Well, I'm glad you asked, because the answer is yes/probably/sometimes.

Yes, in that for an economy facing the opposite case where inflation is unexpectedly negative and large (deflation) currently extended borrowers can easily find themselves in a debt death spiral. Instead of paying back less than they planned in case of higher than expected inflation, they might find themselves paying back much much more than they expected if prices fall over time. At the moment we certainly have over extended borrowers aplenty. An extremely widespread occurrence of such a debt death spiral (debt deflation) would indeed be a potential threat I for one would prefer to not test. Think of Greek, or Irish public finances for example. What if the debt stock which looks worryingly large and is increasing turned out to be a multiple of what we currently estimate it to be because every €100 that needs to be paid back in 20 or 30 years time turns out to be a massive €150 or €200 in today's money due to deflation? Can you imagine the crippling debt effect?

So inflation is probably a benefit in these circumstance, but not unequivocally so. Consider what happens if QE is successful. Debtors avoid the debt spiral and the €100 that, say, the Irish government needs to pay back lender in 20 years time turns out unexpectedly to be more like €50 or even €20 in today's money. Huzzah, the taxpayer is saved!!! Well, hold your horses there pilgrim. Who is on the receiving end of the now devalued €50 or €20. Look no further than yourself in retirement. Yep, pensions are funded predominantly by bond assets. The unexpected inflation has robbed you of the expected value of your savings in retirement. It isn't without reason that inflation is referred to as a tax on savers. In this case it is a tax, because the benefit mostly accrues via government accounts in reduced public debt repayment.

So that is the choice that we are looking at with Posen's policy suggestion. There is no outright economic gain here, but a potential aid to adjustment (reducing the price of labour), plus a potential redistribution of wealth, as noted from government bond holders to governments (and possibly from foreign holder of those bonds to your domestic government - which is a local benefit as a type of tax on foreign lenders) and from today's savers to today's debtors. If you fear the debt spiral scenario enough (and perhaps if many of your creditors are foreigners) it becomes a policy worth considering.

Implied default rates and compounding probabilities

I nice little primer on calculating implied default rates over at irisheconomy.ie. These are calculated under the assumption of no arbitrage, in that the expected value of the security with (implied or assumed) zero risk must be equal to or in excess of (under risk aversion) the expected value (probability weighted value) of the risky security.

The example there comes out for Ireland at about a 40% implied probability of default at some point over ten years. Sounds high, but think about this; a 40% probability of default in any of the next 10 years is equivalent to 5% probability of default in any single year.

Risk compounds just like interest rates.

Irish politicians handy policy check list

I thought I would post a handy reference guide to some of the things I think will range from being simply useless to downright dangerous as the government and assorted politicians strive to save their skins and make people believe the fantasy that they "manage the economy" (of course "the economy" just is - they can only meddle with it for better or worse).

A starter list of things for politicians not to do (as the verbiage continues this might build):

• boost consumer confidence
• restore foreign confidence
• just about anything to do with "confidence" basically
• training schemes
• job "creation" schemes
• just about any hairbrained scheme where the objective is to "create" jobs
• "knowledge economy" strategy
• "innovation hub" strategy
• "global education centre" strategy
• just about any type of "strategy" - meaning in truth industrial policy

When does a recession become a depression?

About now in the case of Ireland I would reckon.

There is no formal description of what a "depression" is. Even the term "recession" is subjective and can vary in its definition.

I am using it to refer to a significant and persistant decline in real national income per capita. For Ireland, that means roughly looking at GNP (not GDP). And with the CSO release of national accounts data for the second quarter we find that Ireland has now moved into its third year of falling quarterly GNP:

It is also pretty meaningful, in that our real income (in aggregate) is 17% lower than immediately prior to the onset of this depression.

I would fully expect this to continue a bit longer yet. The economy is trying to deflate itself (i.e. Irish prices need to fall relative to other countries) and we have to repay a lot of debt owed to foreigners, which means no available capital to invest (it isn't the banks' fault) and a need to cut back on consumption to repay these foreigners.

These are pretty drawn out adjustments occurring. This is one drawn out depression we are in the midst of.