Video: Ferguson, Rattner, Murray, etc. on What's Happened to the American Dream?

Video: Raghuram Rajan, Niall Ferguson, etc. on The Future of Capitalism

This video from the Milken Institute Conference unfortunately appears to begin after the panel has already begun and cuts abruptly, but still features a very good discussion of economic issues in the U.S., Asia, and Europe.

Video: The Great Stagnation vs. The Singularity

For anyone who missed Tyler Cowen's presentation at the Singularity Conference from earlier this year.

My $0.02 on Krugman's and Delong's Inflationista Potshots

Here's Delong's OH BOY: NIALL FERGUSON PRACTICING ECONOMICS WITHOUT A LICENSE DEPARTMENT

And my comment (which for some reason won't load onto Brad's blog so I'm posting it here):

I'll readily admit that I'm not an expert on CPI methodologies, and I am inclined to believe that the BLS has many well intentioned and highly educated professionals using defendable methodological practices. However, I share Ezra's feeling that something doesn't smell right on inflation numbers.  

Over the past decade how can official cost of living figures have gone up so little when they supposedly take into account the following items: 

-Housing
-Medical
-Fuel
-Food
-Education 

These are some of the largest cost items for most consumers, and in the last decade up to the financial crisis many saw double digit price increases (in some cases in a single year). 

The BLS's CPI calculator says that $1 in 2001 has the same buying power as a $1.17 in 2007, so yes, the BLS is picking up at least some of the perceived inflation in these categories. However, do the BLS number capture the full picture? 

One thing is for certain: the CPI was utterly useless with respect to the housing bubble as it does not include housing prices, only rent. This despite the fact that nearly 70% of all American homes are owner occupied.

It's convenient to dismiss anyone questioning official government statistics as a conspiracy crank. However, under reporting of inflation by a government bureaucracy would be useful in terms of reducing that same government's expenses in the form of lower cost of living adjustments for government workers and TIPs expense. Under reporting inflation also provides ammunition for the Greenspan-Bernanke Fed to not have to raise interest rates and thereby dampen exuberance. 

In other words, many stand to benefit from the under reporting of inflation. It is therefore reasonable to cast a skeptical eye on these numbers, especially when they fly in the face of everyday experience.

A final point I'd add is that economics is too important to be left to economists, particularly with most of the 'license' holders (econ PhDs) having completely failed to identify in advance the biggest economic event since the Great Depression.

Video: Niall Ferguson vs. Jeffrey Sachs

Transcript below:

Fareed Zakaria: Jeff, you were at Occupy Wall Street. You've in a sense lent it support. Why do you do that? What do you think is going on there?

Jeffrey Sachs: Well, I think they have a basically correct message that when they say "we are the 99 percent," that they're reflecting the fact that the top one percent not only ran away with the prize economically in the last 30 years, but also took the power, manipulated it, twisted it, broke the law. Brought the world economy to its knees actually, and it's time to correct things. And I think that that's what Occupy Wall Street is really about. The fact that every marquee firm on Wall Street broke the law in a major way, it's now paying a series of fines. Some people are going to jail. People are disgusted about this.

Fareed Zakaria: But isn't what has caused the one percent or five percent of the top to do well, these very broad forces of technology, the information revolution which have empowered global knowledge workers, which have empowered capital rather than labor? So if it's all these much bigger structural forces, is it going to be remedied by some kind of political solution like a Buffett tax?

Jeffrey Sachs: I don't think it is all that. I think that markets caused a widening of inequalities in just about every high-income country. But some governments did something constructive about it, where starting in 1981 the U.S. government amplified this in quite reckless ways.

Because when Ronald Reagan came to office, rather than saying we have globalization, we have competition, we now have to do something about our skills, our technology and so forth, he said that government is not the solution to our problems. Government is the problem. It was a fateful call. And this is the path that we've been on for 30 years of dismantling that part of our social institution which – institutions which could actually help with job training, help with education, help with science and technology in a more effective way.

But more than that, Wall Street didn't just gain from globalization, it has been completely reckless. They gamed the system. They packed toxic assets. They sold them to unwitting investors. They let the hedge funds bet against them. And the SEC is finally calling them to account.

But the public is disgusted because after that happened, lo and behold, the next thing is that they begged for bailouts; they got the bailouts. The moment they got the bailouts, they said, "Leave us alone", "deregulate", "free markets". So they're completely hypocritical in this behavior.

We want everything of ours until we need help, then we want your help, once we get your help, then we want everything again. And it's that kind of impunity that has brought people out around this country deeply angry.

Niall Ferguson: Well, first of all, I think it's important to avoid criminalizing one percent of the population which you just did, Jeff. I mean, there's no question that major financial institutions have been fined and rightly so. But to turn that into an indictment of three million people seems to me -

Seems to me actually rather reckless. And having watched what you said at Occupy Wall Street, I have to say I thought you overstepped the mark and ceased to be an academic and became a demagogue at that point.

Jeffrey Sachs: Whoa, Niall. You're the one who said that this -

Niall Ferguson: No, let me – no, let me finish, Jeff.

Jeffrey Sachs: The last time bankers came close to ruling America -

Niall Ferguson: Hang on, hang on. I let you have – I let you have your say.

Jeffrey Sachs: No, don't call me names like this.

Niall Ferguson: This is a demagoguic argument especially for somebody who knows that the principal driver of inequality has actually been globalization, not malpractice by Wall Street.

The second part of your argument is that banks misbehaved in Europe, too. I mean, those countries that did not go down the Reagan route have got banks that are insolvent, banks that were guilty of incompetence and malpractice.

So you argued that this was something specific to the United States. And the faults of – and the faults of Ronald Reagan.

Jeffrey Sachs: Of course it was.

Niall Ferguson: Just a second. The banks in Europe are in just as big a mess but they didn't go down the Reagan route. So it's not only bad economics, but it seems to me it's bad history and certainly bad politics.

Jeffrey Sachs: Let's talk what I said and what is important here. And what I've said is that in a society that is so unequal as ours and where the very top has abused the system repeatedly in the banks, the CEOs of this country taking home take-home pay hundreds of times their workers' pay, unlike any other part of the world, the hedge funds and the banks got unbelievable terms of the deal to get capital gains taxes, carried interest down to 15 percent tax rates. So outrageous compared to what the rest of America bears.

Niall Ferguson: You can't believe that this is the reason why the bottom quintile of the population is in poverty and has very limited social mobility. That's nothing to do with what happens on Wall Street, as you well know. The real problem that we have in this country, it seems to me, is declining social mobility, and not enough is said about that.

Jeffrey Sachs: Well, I write a great deal about it. And the big difference of social mobility -

Niall Ferguson: Right. And what is the principal of -

Jeffrey Sachs: The big difference of social mobility in this country is the lack of public financing for early childhood development, for daycare, for preschool, for early cognitive development, for nutrition programs, for decent schools, unlike all of the rest of the high-income world. We do not help the poor. And that's why our social mobility has come to the lowest level of any of the high-income countries.

And we are 10 or 15 percentage points lower in government revenues to help for that. And I'm asking in the book for just a few percentage points and some decency at the top that they start paying their taxes at a decent rate so that we can actually pay for preschool and pay for childcare. And that's what low social mobility is about, Niall.

Niall Ferguson: But when you look at the quality of public education in this country, you can't simply attribute its low quality to a lack of funding. And I think there's a legitimate argument that the biggest obstacle to social mobility in this country right now is not the fat cats of Wall Street, whom I do not rush to defend, but the teachers unions, who make it almost impossible to improve public school in cities like New York where we are today.

Fareed Zakaria: But would you comment on Jeff's basic point which is, you know, yes, it's not true that the gap has been produced entirely because of government policy, but that you could use government policy and government resources to help in various ways. Education may be one part of it, child nutrition would be another part of it. You know, and that that becomes impossible because you're taxing at 14 percent and spending at 23 percent?

Niall Ferguson: So a major problem here is that the projects of transforming the United States into something more like a European country does imply significant increase in taxation as well as in expenditure. And there are two obstacles to this. One, it's very clear that this would not be timely given the situation that the economy finds itself in. And two, most Americans don't believe that that is going to deliver the kind of improvement that they would like to see in education.

Look how the federal government fares and the programs that it does spend a lot of money on. Health care, social security, I mean, it's already insolvent with its provision through Medicare. This is one of the hugest unfunded liabilities in the world. And the answer that Jeff has to the U.S. problem is let's create an even bigger federal spending program on public education. I mean, it's just not credible, Jeff.

Jeffrey Sachs: Niall, you're confusing so many issues. My point is that if we are going to be decent and competitive, we have to invest in it. That's paying the price of civilization. That costs money. The fact that the United States collects in total revenues at all levels of government right now about 27 percent of national income compared with 35 percent and above in other countries is the gap of decency right now where -

Fareed Zakaria: But it's also the gap you're saying of competitiveness. Now, the path to competitiveness for you is a larger government that spends more, correct?

SACHS: If it invests properly, of course.

Niall Ferguson: You can understand why people might be skeptical about that.

Jeffrey Sachs: I'm talking about investment in education. I'm talking about investment in job skills. I'm talking about investment in science and technology. Talking about investment in 21st century infrastructure. And we've been for 30 years demonizing government. We've been demonizing taxation. We have neglected to understand that a proper economy runs on two pillars, a market and government. And until we come back to that basic level of understanding that we need a mixed economy, not just a market economy, we'll continue to fail.

Niall Ferguson: Well, I'm sure the Chinese are listening to this debate with glee thinking, well, there are still academics in the west who think that the route to salvation is to expand the role of the state because that's certainly not what is happening in China. It is not what is happening in India. It is not what is happening in Brazil. The most dynamic economies in the world today are the ones which are promoting market reforms and reining in the rule of the state, which in those countries grew hypertrophically in the 20th century and that is a big problem in Jeff Sachs' argument.

Jeffrey Sachs: Thank you for the lecture. But the catching up phenomenon is quite different from the problems that the United States or other high income societies face right now, and for us -

Niall Ferguson: The problem is the falling behind phenomenon.

Jeffrey Sachs: - and for us to be able to have high prosperity at the living standards we want, we need training, we need education, we need infrastructure, we need governments that can pay for that.

Niall Ferguson: But you forgot and we need higher progressive taxation on the private sector, because that's the most important part –

Jeffrey Sachs: And we need the rich to pay their way, absolutely. Because they've run away with the prize. And they've run away with the prize –

Niall Ferguson: There's a simplification.

Fareed Zakaria: Unfortunately -

Jeffrey Sachs: That's part of the solution, stop calling it just one thing, Niall.

Fareed Zakaria: All right. I don't think – I think this is one of the rare cases where I was superfluous as a moderator. Jeff Sachs, Niall Ferguson, thank you very much.

What is Money? (or How is Money Created?)

I just did a Google search on 'what is money?' and 'how is money created?', and many of the top results are probably confusing for someone looking for a simple explanation of the broader concept of money.

(Note: this post is not about physical cash or coin, which I trust most people correctly understand to be minted by the government. It is instead about a more complete measure of money in all its physical and non-physical forms: cash, coin, demand deposits, savings, etc.)

Courtesy of Dan Hind here's a simply explanation of how money is created:

Banks create money through the act of lending it. They don't have to limit themselves to lending out the money deposited with them. In fact, they can end up lending huge multiples of the money they hold in reserve. 

When they authorise a loan or extend credit in the form of an overdraft, the money is conjured out of nowhere.

So there you have it. Banks create the vast majority of the money supply out of thin air (electronic bits these days) when they make loans. Simple, right? Here's Dan again:

The economist and ironist JK Galbraith once wrote that "the process by which banks create money is so simple that the mind is repelled. When something so important is involved, a deeper mystery seems only decent". Offered the unadorned truth, stripped of any technocratic flim-flam, we can scarcely believe it. It seems preposterous that money should have such humble origins, as though it is beneath money's dignity that it should begin life at a banker's keystroke.  

The truth about money creation is a bit like the end of The Wonderful Wizard of Oz, when it turns out that there is no all-knowing wizard, only an old man behind a curtain, making things up as he goes along.

A perhaps more interesting question is why the subject of how money is created is not taught in secondary school? The reason can't be that it's too complicated. But as one of the commenters on Dan's article notes:

 "it is truly preposterous how little the public knows about arguably the single most influential conception humanity has ever created."

Education Site: Educate yourself on various aspects of the financial industry with classes from accredited online colleges.

Book Review: 'Sustainable Wealth' By Axel Merk

Axel Merk’s Sustainable Wealth is very readable personal finance guide to today’s increasingly complex investment world. The book contains a wealth of practical information, and it can be particularly useful for novice investors who are interested in learning more about the role of macro forces and currencies, and how they influence markets.

About the Author

Axel was born in Munich, Germany and grew up in a family of investors. It was during college that he first began investing on behalf of clients. His academic training is in finance and computer science, and he has lived in many parts of Europe before relocating to the U.S. He is the founder and CIO of Merk Investments, a Palo Alto, California based mutual fund focused on currencies. In his personal life he is a distance runner and pilot, and he is married with children. Axel Merk also gives regular media interviews and periodically writes for SeekingAlpha.

Sustainable Wealth

With his book, written following the financial crisis in 2008, Merk aimed to reach an audience that is intelligent and interested but not necessarily educated in economics or currencies. While Merk runs a currency mutual fund, the book is not aimed at currency traders. Rather the book primarily targets the man in the street who is concerned with the actions of today’s policymakers. In the book Merk describes the pressures between where the market would like to go and the interference run by policymakers. Understanding this pull-push dynamic is at the heart of Sustainable Wealth.

One of the key themes of the book is the idea that “there is no such thing as a safe asset” and that investors may want to take a diversified approach to something as “mundane as cash”. The book contains a number of helpful, easy to understand explanations about the fundamental nature of the world’s current debt problem, and ways to address it on a personal level.

During an interview, Merk emphasized his independent opinion. That certainly can bee seen with his often seemingly minority view on the euro versus the U.S. dollar over the past 12+ months. Other than the temporary slide in the euro last summer to $1.18, Merk’s view on the euro has more or less proven correct. However, it is worth keeping in mind that Merk runs a currency mutual fund inside the United States, and that one of the ways in which more American investors would take an interest in his fund is if they are concerned about the fate of the U.S. dollar.

Continue reading the full review at SeekingAlpha here.

Software Is Eating The World

The tech world was roiled this week by Google's acquisition of Motorolla and HP's corporate makeover. Here's a good read from Marc Andressen (HP board member, VC and Netscape co-founder) on the current state of tech and where things are headed.

The Xinjiang 13 and Chinese Appeasement

A disturbing report from Bloomberg about several elite U.S. universities not standing up to Chinese suppression of academic research freedom and free speech:

They call themselves the “Xinjiang 13.” They have been denied permission to enter China, prohibited from flying on a Chinese airline and pressured to adopt China- friendly views. To return to China, two wrote statements disavowing support for the independence movement in Xinjiang province. 

They aren’t exiled Chinese dissidents. They are American scholars from universities, such as Georgetown and Massachusetts Institute of Technology, who have suffered a backlash from China unprecedented in academia since diplomatic relations resumed in 1979. Their offense was co-writing “Xinjiang: China’s Muslim Borderland,” a 484-page paperback published in 2004. 

“I wound up doing the stupidest thing, bringing all of the experts in the field into one room and having the Chinese take us all out,” said Justin Rudelson, a college friend of U.S. Treasury Secretary Timothy Geithner and former senior lecturer at Dartmouth College, who helped enlist contributors to the book and co-wrote one chapter.
The sanctions, which the scholars say were imposed by China’s security services, have hampered careers, personal relationships and American understanding of a large, mineral- rich province where China has suppressed separatist stirrings. Riots and attacks in Xinjiang in July left about 40 people dead.

In the race to embrace China's riches the leaders of elite U.S. academic institutions (who should know better) seem to have forgotten that China is run by a brutal, freedom-suppressing dictatorship. Yet Stanford, the University of Chicago, Duke and NYU have or are in the process of building branch campuses in mainland China. Have many of the U.S.'s best universities forgotten that history has not looked kindly on those who have cozied-up to regimes like China's current one?

The Xinjiang 13 incident also smacks of the same problem in academia which Oscar Winning Director Charles Ferguson documented in his must-watch film Inside Job. Has the academy not learned anything about the importance of professional ethics these past few years?

Full article on the Xinjiang 13 here.

Video: Barry Eichengreen on Why Economics Needs History

Berkeley Professor Barry Eichengreen discusses the importance of history to the study of economics and other topics in the below video.

A summary of Professor Eichengreen's recent book, Exorbitant Privilege, can be found here; a video lecture he gave on this book can be viewed here. 

So far Germany's current generation of leaders seem to be as committed to supporting the current Eurozone project as Professor Eichengreen has suggested they would . However, it's less than clear to me whether Germany has the appetite or capacity to support countries such as Spain and Italy should a full blown debt crisis ignite in these two large countries. Perhaps Germany would prefer a smaller Eurozone, comprised primarily of more economically homogeneous northern European countries instead of the current version which includes slow growing Club Med countries?

Video: U.S. Brain Drain Problem Undermining Competitiveness & Job Creation

Addressing this issue should be a 'no-brainer'. Congress' inability to do so is shameful.

Visit msnbc.com for breaking news, world news, and news about the economy

Visit msnbc.com for breaking news, world news, and news about the economy

Video: Niall Ferguson -- Will the Financial Crisis Lead to America's Decline?

Courtesy of FORA.tv, a July 2010 panel discussion with David Gergen, Mort Zuckerman and Niall Ferguson at the Aspen Institute broken out in subject chapters in the links below.

01. Introduction      05 min 08 sec
02. Financial Crisis Accelerated West to East Power Shift     07 min 50 sec
03. American Business Culture Is Healthy     06 min 44 sec
04. Threat of Rapid Decline    03 min 53 sec
05. Complexity Theory and National Strength    02 min 30 sec
06. Debt and Stimulus    03 min 22 sec
07. Innovation Only Helps by Creating Domestic Jobs    02 min 59 sec
08. Growing Education Gap    02 min 38 sec
09. A World Without a U.S. Superpower    04 min 55 sec
10. Q1: U.S. Headed Toward Capitalism or Socialism?    02 min 48 sec
11. Q2: What Happened to Budget Surplus    02 min 00 sec
12. Q3: Coping with China Graduating Thousands of Engineers    02 min 37 sec
13. Q4: How to Manage the Deficit    05 min 05 sec
14. Q5: Low Birth Rate in China    02 min 52 sec
15. Q6: Federal Reserve and Treasury Contribution to Crisis    03 min 26 sec