Potato Cartel

Sometimes financial journalism really irks me.  In this story, NPR asks if the United Potato Growers of America has become, "a veritable OPEC of spuds."  Yet, clearly the questions, correctly specified, is whether its the rise of PotatOpec.  Boom!  Nailed it!

Where Did the Moon Come From?

Economics and Finance are often criticized for not knowing enough.  The perception is that we haven't made enough progress on fundamental questions.  I've always wondered what the right amount of progress is supposed to be.  Some questions are hard to answer.  Thus, I'm always struck by scientific debates over seemingly fundamental questions.  Recently, at the new Perot Museum of Nature and Science in Dallas, I was struck by an exhibit explaining that scientists still disagreed about the moon's origins.  

Wikipedia has more information.  Consensus seems to be forming around the view that the moon was formed in a great impact with a proto-planet, though this view seems to be contradicted by some recent evidence.  Suppose this statement had been made about an economics conference, "Before the conference, there were partisans of the three 'traditional' theories, plus a few people who were starting to take the giant impact seriously, and there was a huge apathetic middle who didn’t think the debate would ever be resolved. Afterward there were essentially only two groups: the giant impact camp and the agnostics."

There are partisans of different views, some who think the debate will never be resolved.  Much less, this conference was held in 1984 and despite seeming growing consensus, none as been reached.  Would a conference today be closer to consensus?  Would it be farther?  Would the consensus views have fragmented into divergent views of what the Great Impact Hypothesis means?

My point is only that learning things is difficult.  In some cases, the answer may be that some phenomenon is a random process and the most we could ever hope to learn about it is a probability distribution.  That seems to be perfectly acceptable to the general public when a physicist cannot predict where an electron will be, but unacceptable when an economist cannot predict future movements of the economy or stock market.   

Duck Dynasty Thoughts

Robert H

Neither his nephew, grand nephews, nor Launchpad are getting the kind of education they will need when they inherit Scrooge McDuck's magnificent fortune. I get wanting to force work ethic into the next generation but sailors (?), pilots, and boy adventurers do not make good material for the future richest duck men in the duck world.  These duck people need to be developing their financial literacy and learning about how to help the duck poor, not serving as Scrooge's flunkies and gadflies.

Even more horrifying, in past comics scrooge has indicated that his heirs might receive not just most of his wealth but also take over his business.  And Donald, his closest relative, is a leading candidate as heir!  Again, this is an aging, out-of-work sailor who has spent the last few decades taking odd jobs and fantasizing about being a nazi.  Other than his heroic service as a commando in WWII, when he was dropped solo behind enemy lines and destroyed a Japanese air base housing the imperial army's supply of racist caricatures, very little about his life qualifies him to become one of the most powerful beings in Duckburg, much less the world.

Plus, what the hell is Scrooge doing exposing children to race cars, lasers, and aeroplanes?  Six year olds should not live their lives in a duck blur.  I get that Scrooge made his fortune adventuring, but there are only so many giant gold nuggets in the world, and Scrooge really needs to consider pushing his grand nephews in a different direction.  Even if he doesn't, let's wait until they are a little older before we start putting them in life threatening situations, k?

If the Mcduck and Duck families want to become the Duck dynasty, they need to start planning for the future.

Writing Tips from Winston Churchill

by Charlie Clarke

Riffing on the writing advice you learned in elementary school, Deidre McCloskey offers this anecdote:

Miss Jones filled us with guilt about using a preposition to end a sentence with.  Winston Churchill, a politician of note who wrote English well, knew how to handle her and the editor who meddled with his preposition-ended sentence.  He wrote in the margin of his manuscript corrected by a student of Miss Jones, "This is the sort of impertinence up with which I will not put."

Found in Economical Writing.

 

If Only There Was Some Place To Hedge Exchange Rate Risk

John Quiggin argues in Jacobin that Wall Street needs to shrink.  I think there are many persuasive arguments that the financial sector is too large, but I didn't think Quiggin made a very compelling case.  Particularly, this passage stood out quite a bit.

Since differences in inflation rates have generally been small, and changes in patterns of comparative advantage are usually gradual, it was expected that market-determined exchange rates would be relatively stable, contrasting with the sharp devaluations (of as much as 20 or 25 percent) occasionally forced on governments during the Bretton Woods era. This stability would, in turn, help to stabilize national economies. 

In fact, the reverse has been the case. Exchange rates have gyrated wildly even in the absence of significant changes in fundamentals. For example, the Australian dollar traded at $US1.10 when it was first floated in 1983, before falling below 50 cents and then rebounding all the way back to $1.10. The current rate is around $US 0.90. These fluctuations have had catastrophic effects on trade-exposed sectors like manufacturing.

The central bank of a country can only target one thing.  If the central bank decides to print money and buy foreign exchange in such a way to keep its foreign exchange rate with some other currency constant, it cannot conduct counter-cyclical monetary policy.  It cannot let the currency fall during recession to stimulate exports and help the faltering economy recover.  After the fall of Bretton Woods, many countries decided that stabilizing their currency was not the appropriate goal, and they'd be better off conducting counter-cyclical monetary policy to help prevent recessions.  Thus, it's very strange to point to the instability of exchange rates, when countries obviously knew they were trading the stability of their exchange rates for more control of the stability of their economies.

He goes on to point out that the gyrations in the exchange rate were devastating to manufacturing.  What a strange point to make in a piece about the excess of the financial sector!  One of the benefits of a highly developed financial sector is that manufacturing firms can hedge their exposure to foreign exchange risk.  By trading sometimes complex derivatives, firms can lock in the price at which they export by offsetting any changes in the exchange rate with derivatives contracts.  Their counter-parties may in part be import firms looking to lock in the price of their imports.  And if the relative prices are off, speculators or just "insurance sellers" will step in and absorb the foreign exchange risk in exchange for a risk adjusted return.

There is considerable risk in the world and one thing a well-developed financial market can do is carve up that risk, so that a company or person can only hold the right kind of risk.  McDonald's is willing to hold the risk that their burgers don't sell abroad, that's a risk they understand and is central to their business, but they may not want to hold the risk that the profits they make abroad are worth considerably less in US dollars due to exchange rates they have little to do with.  If there are considerable risks of this type, a well developed financial sector can carve them up and sell them off to individuals more able and willing to bear them.  Ironically, the way they'd do this is with complex financial derivatives.

Explaining Jokes to Bob Murphy

by Charlie Clarke

Bob Murphy finds Krugman saying something monstrous:

 We won’t be able to pay for the kind of government the society will want without some increase in taxes…on the middle class, maybe a value added tax….And we’re also going to have to make decisions about health care, doc pay for health care that has no demonstrated medical benefits. So the snarky version…which I shouldn’t even say because it will get me in trouble, is death panels and sales taxes is how we do this.

Murphy's reaction is, "Ha ha ha, the government deciding who lives and dies because it’s taken over health care, and right-wingers are routinely mocked for making the exact same claim. How droll."

Of course, Murphy completely misses the joke.  Paul Krugman is equating not covering health care that has no demonstrated benefits to a "death panel."  That's a ridiculous thing to do.  It is funny and snarky, because Republicans actually do this!  Even though every insurance company ever, private or public, has to decide what procedures to cover, it is somehow a monstrous death panel when the government does it.  Granted, it's easy to see how people like Bob Murphy who think it's perfectly acceptable to equate taxation and theft can miss the irony.

The deeper irony is that the well-informed academic critique of health care on the right argues that this is actually the main problem with health care in this country.  Due to government subsidies, people buy too much health insurance, perform too many high cost, low benefit procedures and drive up the costs of health care.  They would argue that the primary cost benefit of national single payer systems is rationing health care and not improving efficiency.  I think the point has merit, but apparently Republicans don't.  Ironically, I was first convinced this argument had merit by Paul Krugman's Age of Diminished Expectations as an undergraduate.

New Finance Research Shows Finance Researchers Are Awesome

The paper shows that PhDs in Finance and Economics manage money better than non-PhDs.

"Several hundred individuals who hold a Ph.D. in economics, finance, or others fields work for institutional money management companies. The gross performance of domestic equity investment products managed by individuals with a Ph.D. (Ph.D. products) is superior to the performance of non-Ph.D. products matched by objective, size, and past performance for one-year returns, Sharpe Ratios, alphas, information ratios, and the manipulation-proof measure MPPM. Fees for Ph.D. products are lower than those for non-Ph.D. products. Investment flows to Ph.D. products substantially exceed the flows to the matched non-Ph.D. products. Ph.D.s’ publications in leading economics and finance journals further enhance the performance gap."

Hat tip: Marginal Revolution