"Suffering and evil are nature’s admonitions; they cannot be got rid of; and the impatient efforts of benevolence to banish them from the world by legislation, before benevolence has learned their object and their end, have always been more productive of evil than good."
-The Economist, regarding proposals for a sewer in London, 1848
via
20 March 2013
18 March 2013
Senator Portman, Conscience Impostor
Paul Krugman:
In the same spirit, from The Onion:
Matthew Yglesias beats me to a point I was planning to make. Sen. Rob Portman has made headlines by declaring his support for gay marriage after learning that his own son is gay, and apparently we’re supposed to praise him for his new enlightenment. But while enlightenment is good, wouldn’t it have been a lot more praiseworthy if he had shown some flexibility on the issue before he knew that his own family would benefit?
I’ve noticed this thing quite a lot in American life lately — this sort of cramped vision of altruism in which it’s considered perfectly acceptable to support only those causes that are directly good for you and yours. We even have a tendency to view it as “inauthentic” when people support policies that aren’t in their self-interest — when a rich man supports higher taxes on the rich, he’s somehow seen as strange, and probably a hypocrite.
Needless to say, this is all wrong. Political virtue consists in standing for what’s right, even — or indeed especially — when it doesn’t redound to your own benefit. Someone should ask Portman why he didn’t take a stand for, you know, other people’s children.
In the same spirit, from The Onion:
“Let’s hope his kid has a tough time finding affordable health care.”
17 March 2013
Links of the Week: 15 March 2013
Author of the spectacularly wrong ‘Dow 36,000′ has new thoughts on the stock market
Michael W. Clune on Masters of the Universe What Was Neoliberalism?
Don't Believe Restauranteurs Who Say They're Going to "Pass On" the Cost of Obamacare
Restaurants Will Pass on Costs by Going Out of Business, or Why Macroeconomics Matters in Real Life
Increasing the Minimum Wage does not lower Employment, Continued
"A note to Dutch innkeepers: If you are going to host a convention of lock pickers, and you promise them free Wi-Fi, it is probably a futile gesture to then require paid access with a password."
"We're not going to give up on destroying the health care system."
Michael W. Clune on Masters of the Universe What Was Neoliberalism?
Don't Believe Restauranteurs Who Say They're Going to "Pass On" the Cost of Obamacare
Restaurants Will Pass on Costs by Going Out of Business, or Why Macroeconomics Matters in Real Life
Increasing the Minimum Wage does not lower Employment, Continued
"A note to Dutch innkeepers: If you are going to host a convention of lock pickers, and you promise them free Wi-Fi, it is probably a futile gesture to then require paid access with a password."
"We're not going to give up on destroying the health care system."
14 March 2013
Priority Number One: White House Tours
Funny, I don't remember where "White House Tours" fits on Maslow's Hierarchy of Needs, but the implication of all of this pout-rage is that it belongs before security of employment, security of resources, health, respect of others, respect by others, problem-solving, lack of prejudice, and acceptance of facts.
Ezra Klein:
Marty Gilens:
Ezra Klein:
There’s bargaining power for Republicans in upholding the convenient fiction that we can make these cuts and no one will really hurt, because government spending is just wasteful and unnecessary. But the effort here isn’t to make sure no one hurts. It’s to make sure no one with the political capital to do something about it hurts. As such, the minor inconveniences of the politically powerful have become a national crisis, even as some of the politically powerless are losing not just a White House tour, but the very roof over their heads....in which he quotes...
Marty Gilens:
When preferences diverge, the views of the affluent make a big difference, while support among the middle class and the poor has almost no relationship to policy outcomes. Policies favored by 20 percent of affluent Americans, for example, have about a one-in-five chance of being adopted, while policies favored by 80 percent of affluent Americans are adopted about half the time. In contrast, the support or opposition of the poor or the middle class has no impact on a policy’s prospects of being adopted.
13 March 2013
Quote of the Day: Lockpickers
"A note to Dutch innkeepers: If you are going to host a convention of lock pickers, and you promise them free Wi-Fi, it is probably a futile gesture to then require paid access with a password."
via
via
07 March 2013
Terminology and Meaning (short, hopefully sweet)
It's not always clear what precisely we mean when we use terms in our models. When I think of 'depreciation,' as in the Solow Growth Model, this is mostly what I think of.
06 March 2013
Quote of the Day - Coase
"The world of zero transactions costs has often been described as a Coasean world. Nothing could be further from the truth." -- Ronald H. Coase
Context:
etc.
Context:
Ronald Coase is often credited with discovering that the market, left to its own self-interest, could solve the problem of negative externalities without government—assuming property rights and low transactions costs for defending those rights. But Coase explicitly rejected this notion, writing:
"The world of zero transactions costs has often been described as a Coasean world. Nothing could be further from the truth." -- Ronald H. Coase, The Firm, the Market, and the Law (Chicago: University of Chicago Press, 1988, p. 174).via
etc.
Layman's Guide to the Bond Market
Another correspondent chimes in:
So, say I want to borrow some money for one year. I offer a $1000 bond for sale at, say, $990. If you want to lend me this money, you agree to give me $990 now, and I agree to give you $1000 in one year. This difference, $10, is what determines the interest rate, in this case, 10/990 = .01 = 1% (good deal for me!). This is the price I must pay to borrow this money. What is it that determines this interest rate, that is, what determines the difference between what I get now and what I have to pay in a year? For simplicity, we'll just say that it's mostly based on what you, the lender, or the buyer of my bond, think of my likelihood of paying you back, and the difference between what the money is worth to you today versus what it is worth to you in one year (the "time value of money").
The other way to look at a bond is from the buyer's perspective. As we've already said, the person buying a bond is really lending money to the person selling the bond. As we saw above, the interest rate is the price the bond seller (money borrower) must pay in order to borrow the money. From the perspective of the bond buyer (money lender), the interest rate is the "rate of return" on the money loaned. Think of it this way: you've found yourself with an extra $990. What do you want to do with it? You could put it in a checking account, where in one year you will still have $990, no more, no less. You could buy something that you think will go up in value, like stock, or a commodity like gold or oil. If you do that, you're hoping that you'll be able to sell it in the future (say one year) for more than you bought it for. On the other hand, you could also lose money if whatever you buy goes down in value. So on the one hand (checking account) you have virtually no risk of losing your money, but absoluely no chance of growing the money. On the other hand (stock, commodity) you have the chance to make a lot of money, but also the chance of losing a lot (as much as all of it, if the company you buy stock in, for example, goes bust). A bond is a sort-of middle-of-the-road between those two extremes. You will earn more than a checking account, but less than best-case stock or gold purchases. The risk is less than that of stocks or commodities, because you will get back what the bond says you will get back, unless the company goes bust. (With a stock, it could lose value if the company is struggling, but still in business.)
So this is pretty straightforward, right? I want to borrow some money, and you have some lying around, so we agree a price and we're both happy, right? Not so fast! From my perspective, not much can happen from here. I will pay you in one year. But this is not the end of the story for you. You've lent me your extra funds for one year, mainly because you didn't expect to need them. But now, six months into our agreement, suddenly you need your money! D'oh! What are you going to do? I don't have to pay you back, and in the world of high finance, I'm not going to do anything I don't have to. That gives you only one real option: find another person that you can sell my debt to. Maybe in our little miniature model of high finance, there is a third person. Call him Hans. Hans also has some extra cash, but he doesn't want to tie it up for a whole year, so he's been keeping it in a checking account earning nothing. Now you come along with an offer to Hans: buy this bond with only six months left before the payoff. You need your money back now, and Hans gets a productive place to put his money for six months.
Since you gave me $990 in exchange for me giving you $1000 in one year, you tell Hans that, since it's now six months into that year, that you'll sell him my bond for $995. This way you get the same interest rate that you were expecting, except for only half the year, and Hans gets the same interest rate for the other half-year. You and Hans make your deal, and now Hans holds my bond. This matters not a whit to me, because I wasn't going to try and hunt you down to pay you back in a year; you would've come to me, my bond in hand, and asked for your money back. Now, instead of you, Hans will come to me at the end of the year and get the $1000.
Now let's add one complication. What would happen if, when you and Hans were negotiating to sell my bond, Hans'd had other options? What if a fourth person, call her Martha, had been also offering to sell a six-month bond of her own? She only wants to borrow $1000 for six months. She's offering her bond for sale for only $992. Remember that you are trying to sell my bond for $995. What luck do you expect to have selling my (virtually) identical bond for more money? You're going to have to sell my bond for $992 if you want any hope of selling it. Remember that we said that the price that a bond sells for when it it "new," that is, when it is sold by its original borrower, determines the interest rate. The $1000 bond I sold you for $990 had an interest rate of 1%. So what is the interest rate on Martha's bond? (1000-992)/992 = 0.8%, but since this bond is only for six months instead of a year, the effective interest rate is twice that, or 1.6%. So what has happened here is that the prevailing interest rate has gone up from 1%, when I sold you my bond, to 1.6%, when Martha is offering to sell her bond. What has this done to my bond (your asset)? It has decreased its value. You can't sell it for the $995 that you'd want to in order to get the rate of return that you'd anticipated. You have to sell it for $992, which means that you only earned 0.4%. Now, if you hold your bond until its "maturity," that is, until the time that I agreed to pay you back, you would get the money we agreed to, unless I went bankrupt. But once you start buying and selling "used" bonds, that is, bonds whose original buyers wish to sell them, you face the same risk you face with assets like stocks and gold.
This is how the selling price of ("used") bonds moves in the opposite direction as the current interest rate. I hope this helps. If I've just made a pig's breakfast of the whole thing, let me know below.
(*Note: Math is simplified for explanatory purposes. Real interest rate calculations are slightly more involved.)
Could you explain this in simple English? I don't have any training in economics, but I want to understand. For example, why is it that the interest rate and the price move in opposite directions? I thought the interest rate was the price.Excellent idea! The first thing to understand is what exactly a bond is. A bond is just a debt. If I am selling bonds, what I'm really doing is borrowing money. What I am selling is the promise to pay a certain amount of money at a set date in the future, and I am selling that for a price less than the amount I will pay at the future date.
So, say I want to borrow some money for one year. I offer a $1000 bond for sale at, say, $990. If you want to lend me this money, you agree to give me $990 now, and I agree to give you $1000 in one year. This difference, $10, is what determines the interest rate, in this case, 10/990 = .01 = 1% (good deal for me!). This is the price I must pay to borrow this money. What is it that determines this interest rate, that is, what determines the difference between what I get now and what I have to pay in a year? For simplicity, we'll just say that it's mostly based on what you, the lender, or the buyer of my bond, think of my likelihood of paying you back, and the difference between what the money is worth to you today versus what it is worth to you in one year (the "time value of money").
The other way to look at a bond is from the buyer's perspective. As we've already said, the person buying a bond is really lending money to the person selling the bond. As we saw above, the interest rate is the price the bond seller (money borrower) must pay in order to borrow the money. From the perspective of the bond buyer (money lender), the interest rate is the "rate of return" on the money loaned. Think of it this way: you've found yourself with an extra $990. What do you want to do with it? You could put it in a checking account, where in one year you will still have $990, no more, no less. You could buy something that you think will go up in value, like stock, or a commodity like gold or oil. If you do that, you're hoping that you'll be able to sell it in the future (say one year) for more than you bought it for. On the other hand, you could also lose money if whatever you buy goes down in value. So on the one hand (checking account) you have virtually no risk of losing your money, but absoluely no chance of growing the money. On the other hand (stock, commodity) you have the chance to make a lot of money, but also the chance of losing a lot (as much as all of it, if the company you buy stock in, for example, goes bust). A bond is a sort-of middle-of-the-road between those two extremes. You will earn more than a checking account, but less than best-case stock or gold purchases. The risk is less than that of stocks or commodities, because you will get back what the bond says you will get back, unless the company goes bust. (With a stock, it could lose value if the company is struggling, but still in business.)
So this is pretty straightforward, right? I want to borrow some money, and you have some lying around, so we agree a price and we're both happy, right? Not so fast! From my perspective, not much can happen from here. I will pay you in one year. But this is not the end of the story for you. You've lent me your extra funds for one year, mainly because you didn't expect to need them. But now, six months into our agreement, suddenly you need your money! D'oh! What are you going to do? I don't have to pay you back, and in the world of high finance, I'm not going to do anything I don't have to. That gives you only one real option: find another person that you can sell my debt to. Maybe in our little miniature model of high finance, there is a third person. Call him Hans. Hans also has some extra cash, but he doesn't want to tie it up for a whole year, so he's been keeping it in a checking account earning nothing. Now you come along with an offer to Hans: buy this bond with only six months left before the payoff. You need your money back now, and Hans gets a productive place to put his money for six months.
Since you gave me $990 in exchange for me giving you $1000 in one year, you tell Hans that, since it's now six months into that year, that you'll sell him my bond for $995. This way you get the same interest rate that you were expecting, except for only half the year, and Hans gets the same interest rate for the other half-year. You and Hans make your deal, and now Hans holds my bond. This matters not a whit to me, because I wasn't going to try and hunt you down to pay you back in a year; you would've come to me, my bond in hand, and asked for your money back. Now, instead of you, Hans will come to me at the end of the year and get the $1000.
Now let's add one complication. What would happen if, when you and Hans were negotiating to sell my bond, Hans'd had other options? What if a fourth person, call her Martha, had been also offering to sell a six-month bond of her own? She only wants to borrow $1000 for six months. She's offering her bond for sale for only $992. Remember that you are trying to sell my bond for $995. What luck do you expect to have selling my (virtually) identical bond for more money? You're going to have to sell my bond for $992 if you want any hope of selling it. Remember that we said that the price that a bond sells for when it it "new," that is, when it is sold by its original borrower, determines the interest rate. The $1000 bond I sold you for $990 had an interest rate of 1%. So what is the interest rate on Martha's bond? (1000-992)/992 = 0.8%, but since this bond is only for six months instead of a year, the effective interest rate is twice that, or 1.6%. So what has happened here is that the prevailing interest rate has gone up from 1%, when I sold you my bond, to 1.6%, when Martha is offering to sell her bond. What has this done to my bond (your asset)? It has decreased its value. You can't sell it for the $995 that you'd want to in order to get the rate of return that you'd anticipated. You have to sell it for $992, which means that you only earned 0.4%. Now, if you hold your bond until its "maturity," that is, until the time that I agreed to pay you back, you would get the money we agreed to, unless I went bankrupt. But once you start buying and selling "used" bonds, that is, bonds whose original buyers wish to sell them, you face the same risk you face with assets like stocks and gold.
This is how the selling price of ("used") bonds moves in the opposite direction as the current interest rate. I hope this helps. If I've just made a pig's breakfast of the whole thing, let me know below.
(*Note: Math is simplified for explanatory purposes. Real interest rate calculations are slightly more involved.)
05 March 2013
Chavez and Markets
Early prediction for the rest of the week: world commodity markets will go totally haywire while traders figure out the new lay of the land. Oil, obviously, but since various futures are relatively good substitutes, and futures impact spot prices*, all commodities will likely be screwy for a bit.
*This is a point of contention, I know, but I am asserting it, and, on this, I am not alone.
*This is a point of contention, I know, but I am asserting it, and, on this, I am not alone.
The Treasuries Market and the Federal Reserve
A correspondent writes:
The price of a 'used' bond (as opposed to a newly-issued bond) moves inversely with the interest rate of near substitutes (mainly those newly-issued bonds). That is, if the interest rate on new Treasury bonds falls (due, say, to increased demand), the market value of existing Treasuries will rise, because they pay a higher rate of interest than the new bonds. (Side note: the demand for bonds can be alternately seen as the supply of loanable funds. If we graph the bond market, the market value of the bonds is the price, and the demanders are lenders. If we graph the loanable funds market, the interest rate is the price, and the suppliers are the lenders. The same information is conveyed by each approach; the difference is merely in presentation.)
The BI article is concerned with an opposite situation. If the demand for Treasuries falls, the interest rate will rise, driving down the market value for existing bonds, such as those on the Fed's balance sheet.
What the article left out was the fact that a fall in the demand for Treasuries means that there must be a corresponding rise in the demand for an equivalent safe asset, and such a beast has not been seen in the wild for some time. The reason so many lenders flock to Treasuries in the first place is that there doesn't at this time exist an similarly safe liquid asset. This is why lenders are happy with such exceedingly low returns.
(Of course the interest rate on Treasuries could rise because supply has fallen, but most political and economic observers would welcome that novel and exciting development.)
(Perhaps some further thoughts to follow...)
UPDATE: I've posted a layman's explanation of how the bond market works, and why prices and interest rates move in opposite directions, here.
I started to read this article, The Fed Is Starting To Prepare For A Future PR Nightmare, and I have to admit I do not understand it. Here I am ready to be awarded a Masters degree in economics. Yet I have not learned enough about money, banking, government fiscal policy, and central banking, to understand the points being made in this article.Basically, the Federal Reserve earns revenue each year on its assets (mainly bond holdings). After its operating expenses are deducted, the profits are remitted to the Treasury. This has the effect of refunding much of the interest payments that the Fed receives from Treasury.
The price of a 'used' bond (as opposed to a newly-issued bond) moves inversely with the interest rate of near substitutes (mainly those newly-issued bonds). That is, if the interest rate on new Treasury bonds falls (due, say, to increased demand), the market value of existing Treasuries will rise, because they pay a higher rate of interest than the new bonds. (Side note: the demand for bonds can be alternately seen as the supply of loanable funds. If we graph the bond market, the market value of the bonds is the price, and the demanders are lenders. If we graph the loanable funds market, the interest rate is the price, and the suppliers are the lenders. The same information is conveyed by each approach; the difference is merely in presentation.)
The BI article is concerned with an opposite situation. If the demand for Treasuries falls, the interest rate will rise, driving down the market value for existing bonds, such as those on the Fed's balance sheet.
What the article left out was the fact that a fall in the demand for Treasuries means that there must be a corresponding rise in the demand for an equivalent safe asset, and such a beast has not been seen in the wild for some time. The reason so many lenders flock to Treasuries in the first place is that there doesn't at this time exist an similarly safe liquid asset. This is why lenders are happy with such exceedingly low returns.
(Of course the interest rate on Treasuries could rise because supply has fallen, but most political and economic observers would welcome that novel and exciting development.)
(Perhaps some further thoughts to follow...)
UPDATE: I've posted a layman's explanation of how the bond market works, and why prices and interest rates move in opposite directions, here.
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