Video: There is No Great Stagnation

Click here for a VentureBeat article summarising Musk's many big ideas.

Krugman Perpetuates Myth of the Zero Lower Bound

Professor Paul Krugman

Professor Krugman just published a column where he deserves kudos for sticking his neck on the line and predicting that the Bernanke Fed is not creating a bubble in bonds, and "probably not" in stocks either.

While the argument on whether or not Bernanke is blowing bubbles is interesting and worthy of discussion (although only time will tell for sure), that's not what this post is about.

In the column Krugman makes a somewhat tangential comment about what economists often refer to as the 'zero lower bound problem' on where a central bank can set interest rates. Here's Krugman's quote:

"True, it (the Fed) can’t cut rates any further because they’re already near zero and can’t go lower. (Otherwise investors would just sit on cash.)"

Krugman's statement is problematic for several reasons:

First, it's misleading and patently false of Dr. K to say that the Fed "can’t cut rates any further" when in fact it can. There is no economic or natural law which prevents the Fed from setting nominal rates at exactly zero, or at a negative rate.

Whether they should be set at zero or negative is another question. In short, Dr. K needs to replace "can't" with something like "could but shouldn't because...".

Second, I suggest that it would be helpful if Dr. K was a little more precise so that people understand why the Fed "can't" (shouldn't) set zero or negative rates but Denmark's central bank can set a negative deposit rate, and now Drahgi at the ECB is openly discussing this as well.

To be clear, I'm not endorsing negative rates. I'm only saying that negative rates are possible and that some central banks are experimenting with negative rates as a policy tool.

And finally, yes, perhaps if the Fed were the only central bank to pursue a negative rate policy then investors may sit on cash, move their money elsewhere, etc. But if enough central banks around the world kept driving rates further and further into negative territory then it would be very surprising if this didn't help generate inflation, in which case people would probably not be sitting on cash as Dr. K suggests but rather spending it before money lost its purchasing power.

The long perpetuated myth of the zero lower bound is starting to be challenged more and more, and for a more detailed academic discussion of the zero lower bound myth see here. 

Bad QOTD: "Mobile broadband demand on board aircraft is exploding"

The story with Qualcomm's very poorly worded 'exploding' quote is here, and the reminder of what can go wrong when introducing new technology on flights is in the below video.

The PolyCapitalist's New Bitcoin Price Target Is...

As regular TPC readers will know I'm rather fond of alternative currencies like Bitcoin, the Little Virtual Currency that Could.

And so too now is the U.S. Treasury Department's Financial Crimes Enforcement Network, or FinCen.

As the above linked-to WSJ article notes the exchange rate for Bitcoin has been on a tear of late, with the currency trading up 57% during this week alone.

The recent runup in Bitcoin's price has apparently been driven by events in the Eurozone, as well as the additional credibility conferred on the currency now that FinCin has officially acknowledged its interest in virtual currencies like Bitcoin and outlined its criminal enforcement plans. If you're long Bitcoin getting the Fed's attention is apparently a good thing (at least in the short-term).

Now, naturally, readers of blogs like this one have one big question on their minds: where is the price of Bitcoin heading next? 

For the answer to that question I'll turn this post over to the brand new PolyCapitalist Research Department (PCRD), which is my crack team of ambitious research quants. All male 20-somethings straight out of the best schools. Take it away, PCRD!

PCRD: Thank you, TPC. We are very pleased to announce that we are initiating research coverage of Bitcoin with an opening price target of....

TPC: Now, now wait just a minute, hold on there PCRD. As the head of this blog I feel we have a responsibility to our readers. So before you guys go out and announce a price target maybe we should first discuss how you went about valuing Bitcoin?

PCRD: We're so glad you asked us that, TPC, as we put a lot of work into this. First, we developed a rich quantitative data set. For example, we researched what a Bitcoin can buy in the real world and what those items cost in traditional currencies such as U.S. dollars. We also looked at what if any exchange rate conversion expenses exist. And so on.

TPC: That sounds like an excellent start. What else did you do to determine the proper price of a Bitcoin?

PCRD: We next built a rather detailed MS Excel model which factored in other data, such as price trends, liquidity analysis, and other temporal factors.

TPC: Excellent. Did you perform any further analysis?

PCRD: Yes we did. We also stress tested our model by running several different scenarios based around Black Swan type events. For example, we ran a Monte Carlo simulation on the impact to Bitcoin's exchange rate with the euro if Cyprus left the Eurozone.

TPC: Or a Black Swan 'outlier' like another Bitcoin market crash?

Pin-up found in the PCRD cubicles

PCRD: Uh, right!

TPC: Ok, great. So I'm dying to know what price target you guys came up with for Bitcoin?

PCRD: Well, as robust as our modeling was we decided to scrap what the spreadsheet told us and just use the price target set by the guys over at bitcointalk.org. They seem have a better feel for Bitcoin's momentum and how this market is going to play out. They also seem like real stand-up fellas, and they even refer to their "Bitcoin exit strategies".

TPC: Got it. Yeah. Um. Guys, I really appreciate all the work you have been doing but I think we're going hold off on setting a Bitcoin price target for now. Better yet, I think we're just going to close down the entire PCRD.

What Happened to Cyprus's Deposit Insurance Scheme?

So much for all quiet on the Eurozone front, a quiet which barring election rumblings from Italy has largely been enjoyed since Drahgi's LTRO blitz.

While it's unclear whether this weekend's 'bailing in' of Cyrpiot depositors will prove the trigger point for the final Eurozone reckoning, what is clear is that all the 'crazies' who have been stashing their money under their mattresses perhaps weren't so crazy after all.

One thing I'm curious about, which I haven't seen discussed in any detail anywhere else, are the mechanics behind what happened to Cyprus's deposit insurance scheme.

For example, is the insurance scheme, like the entire Cypriot banking system, insolvent? If yes, by how much? Could it be recapitalized through a tax? Etc.

The high level details of Cyprus's deposit insurance program, which goes by the name Deposit Protection Scheme (DPS), are discussed on the Central Bank of Cyprus's webpage here. As has been widely reported, depositors in Cypriot banks are supposed to be fully insured for €100.000 "per depositor, per bank".

Some reports state that if Cyprus's banks were allowed to fail then the small, fully insured depositors would be made whole. So do depositors who have €100.000 or less of insurable deposits have recourse for legal action in Cyprus?

One thing is clear: if I were a Cypriot depositor I would much rather have cash right now than shares in an insolvent bank.

Understanding the Wealth Effect (2013 Edition)

What tool is available to a U.S. central banker who is faced with a) sluggish economy b) high unemployment c) and near-zero interest rates combined with d) an unwillingness to set negative nominal interest rates?

Enter the 'wealth effect'.

From Wikipedia:

The wealth effect is an economic term, referring to an increase in spending that accompanies an increase in perceived wealth. 

Consumption may be tied to relative wealth. People should spend more when one of two things is true: when people actually are richer, objectively, or when people perceive themselves to be richer—for example, the assessed value of their home increases, or a stock they own goes up in price.

Unfortunately or fortunately (depending on what side of the trade you're on), we've seen this story before and we very well know how it ends. The only question that we don't know the answer to is when will today's bubble turn to bust.

Video: Bill Emmott's 'Good Italy, Bad Italy - Girlfriend in a Coma' (Full Video)

Video: Are Large Banks Too Big for Trial?

As perhaps part of the growing evidence that Too Big to Fail is becoming a bipartisan issue (more on this here), the below video incredibly has already garnered 150,000 page views at the time of this post.

Paraphrasing the key exchange:

Warren's Q: "When was the last time regulators took a bank charged with wrongdoing to trial?"

Regulator's A: "Uhh, we'll have to get back to you on that."

h/t Counterparties

Google + Kurzweil: "What an amazing, slightly terrifying combination"

I disagree with Jon Mitchell's take on the fantastic news that Ray Kurzweil has joined Google in a full-time role in Mountain View as Director of Engineering.

Inventor and futurist Ray Kurzweil joins Google

Pairing the iconoclastic futurist/inventor with arguably the most innovative technology company in the world is not scary but very exciting (although I catch Jon's drift).

Much as it did when it hired Vint Cerf, one of the internet's father figures, Google has once again boosted its nerd/geek street cred with the addition of Kurzweil to its roster of science and tech luminaries.

This is definitely a coup for Larry Page & Co. Not quite on the same level as when Princeton's fledgling Institute for Advanced Study landed Einstein. But after the Pope of Science made his way to New Jersey many of the leading physicists, mathematicians and scientists of the day followed. No doubt Kurzweil's arrival in Mountain View should have a similar effect in drawing today's pioneers in the areas where Ray has made significant contributions, such as speech recognition and artificial intelligence.

Ray begins his new gig on December 17. Congrats to Ray and Google, and we anxiously await the results of your collaboration!

When the UK Previously Looked to a Canadian to Run the Bank of England

Just a quick historical note on the somewhat stunning news that Mark Carney, the current head of the Bank of Canada (and a Canadian citizen), has been asked and has accepted the job of running the Bank of England.

Graham Towers and Montagu Norman 

I say 'somewhat' because students of history may know that as Montagu Norman's 24 year reign at the Old Lady of Threadneedle Street was winding down the then head of the Bank of Canada, Graham Towers (also a Canadian citizen), was considered as a leading candidate to replace Norman.

Norman and Towers worked closely together during World War II to support the price of sterling during the Battle for Britain, and much of the UK's gold (as well as France's) was sent to Canada to protect it in the event of a Nazi amphibious invasion of Britain. However, for reasons possibly lost to posterity Towers was either never offered or accepted the job.

Analogies about how England's national football coach is often  foreigner and how the Carney choice really isn't all that different are of course flooding the media airwaves right now. Perhaps the economic, patriotic, and security considerations that come with heading the national football club and central bank aren't really as far apart as one might think?

An issue which isn't under much doubt is that Mark Carney, like Graham Towers in his day, is simply a very good candidate for the job.

Looking ahead, the one thing that is certain is that Mr. Carney will have very big shoes to fill. Even with the financial crisis and the challenges faced by the City of London over the past several years, there can be little doubt that Sir Mervyn King has proven to be one of the finest central bankers of his age. Sir Mervyn recently gave an excellent lecture at the LSE on inflation targeting, which can be viewed here.

Another point is that the Carney choice further confirms London's status as the most welcoming of the major financial centers to foreigners and capital alike. Take that New York!

Upsetting the Apple-cart: Google Just Torpedoed the iPhone's Profit Margins

Google's Nexus 4

Google just released its latest in-house Nexus branded smartphone and if you read the various reviews of this device over at The Verge, All Things D, VentureBeat, etc. you'd likely come away rather underwhelmed.

Mind you, most of these reviews are on the whole rather positive about the Nexus 4's hardware and Android 4.2 (Jelly Bean) software. But many of the reviewers couldn't see their way past the Nexus 4's lack of LTE 4G data speeds.

For example, here's the conclusion of a Nexus 4 review by The Verge's Josh Topolsky, arguably gadgetdom's #1 geek:

The Nexus 4 is absolutely wonderful, but it's also vexing. Frustrating. Annoying. It's easily the best Android phone on the market right now, and has some of the most powerful software that's ever been put on a mobile phone. It's an upgrade from last year's Galaxy Nexus in every way. It's terrific — save for one small thing. 

In the US, a flagship phone without LTE is like a muscle car with no wheels. For other networks in other countries, and for the lucky T-Mobile customers out there that are getting great speeds on its HSPA+ network — great. No problem. Go get this phone. But for others — many others — it's hard to imagine buying this device when you know it's a generation behind in terms of network technology.

For a phone and an OS built for the cloud, I think it's unacceptable to not offer a version that takes advantage of our fastest mobile networks.

That's a pretty damning indictment from the former Editor-in-Chief of Engadget, and not exactly the kind of endorsement one would be looking for if you're interested in making the case, as I will be in this article, that Google's latest offering represents a very real threat to Apple's iPhone business.

Continue reading the full article at SeekingAlpha here.

The Body Clock: Why You're So Tired All The Time

Full disclosure: as a night owl I am actively waging a campaign to 'debunk the social stigma around late risers'.

For more on this topic here's a good read.

h/t Counterparites

Sandy's Key Lesson Applies to More Than Bad Weather

The NY Times is out with a story today chronicling all the warnings about Gotham's vulnerability to storms and flooding.

Loss of life and economic devastation are made all the more tragic when we realize that these losses were at least in part preventable.

But as an anonymous source close the New York government officials put it:

"until things happen, people aren’t willing to pay for it".

Indeed.

As Nassim Taleb, et al have written about, there are deep psychological and evolutionary roots to our species' tendency to ignore seemingly low probability, catastrophic events until it is too late.

Explain this 'insurance' thing to me one more time?

Perhaps as the human species was evolving and facing a daily battle for survival there was a prohibitive cost to planning too far into the future. Now, however, with the hunting/foraging days long gone for most of us, we're still stuck traveling through life with the same 'Cave Man software' of our forefathers.

With Mother Nature having reminded us what she's capable of there will likely be some changes to storm protection systems along the East Coast. But unfortunately I'm not terribly optimistic that we can extrapolate the lessons of Sandy to other systemic risks, such as asteroid collision, climate change, and number one focus of this blog, financial crises.

Sadly, the Cave Man is still in charge of this joint.

A Good Evening to Stay Indoors and Watch a Movie

Dear East Coast, hang in there and hold on tonight! -TPC

Bob Balaban eyes the shifting weather in Moonrise Kingdom

Video: Mervyn King on Twenty Years of Inflation Targeting

A very accessible, excellent talk from the Governor of the Bank of England on the past two decades of financial and central bank history, and the need to rethink the policy of inflation targeting. 

Podcast with better audio quality here.

Speaker(s): Professor Sir Mervyn King

Chair: Professor Craig Calhoun

Recorded on 9 October 2012 in Old Theatre, Old Building.

Since 2008, we have experienced the worst financial crisis and recession since the 1930's. What challenges does this pose to the intellectual foundations of monetary policy? Do we need a new approach?

Mervyn King is the Governor of the Bank of England. Before joining the Bank he was Professor of Economics at the LSE, and a founder of the Financial Markets Group.

Video: Nobel Prize Winner Al Roth On 'Repugnant' Transactions

Congratulations, Al and Lloyd Shapley!

The below presentation by Al Roth, whose work on kidney exchanges you might recognize from Freakonomics, was made at Google in 2007. The presentation introduces you to Roth's work on repugnant transactions and market design.

Be warned that parts of Roth's presentation are a bit wonkish, but you can skip ahead to 28:12 mark if you're interested in his kidney work.

Adventures in Alternative Currencies: Bitcoin Goes Mainstream

Continuing on with our series covering adventures in alternative currencies, many were quick to proclaim the death of Bitcoin, particularly following the June 2011 bursting of the Bitcoin bubble. For example, here is some doomsaying from the normally reliable Tyler Cowen; and for a pessimistic economic historian's take see here.

But following an undeniably rocky road the little digital currency that could appears to be having the last laugh. A good read can be found here on how Bitcoin is beginning to go mainstream.

At this stage the obvious first question is why has the decentralized, 100% digital currency proven so resilient? Scientific American provides one good answer:

When they (a merchant) finalize a deal in Bitcoin, they do so knowing that the transaction can never be reversed. The Bitcoin network doesn't edit its ledger. As such, merchants no longer have to worry whether they are charging a stolen credit card. 

"'The fraud mitigation is big for Internet merchants, because they are all handling card-not-present transactions. And the business has to eat the loss if the payment is reversed later on,"' Gallippi says. "'Using Bitcoin, a business can receive a payment from any country on the planet, instantly, with no risk of fraud."'

In addition to helping cut down on fraud costs for merchants, Bitcoin is chic. Using Bitcoins to transact business is a mark of digital savvy for both tecno hipsters and the merchants who cater to them.

What the future ultimately holds for Bitcoin is less interesting to me than a more general issue, which is the apparent growing trend in alternative currencies coming into existence.

We have already seen some Congressional saber rattling about Bitcoin prior to its flash crash. Will governments continue to tolerate it, Bristol's new pound note, etc., while they remain small? Or will we see a more formal move in the not too distant future to stamp out these fledgling alternatives to government fiat money? As the article points out, government's might have a hard time shutting down Bitcoin:

But perhaps most consequential for the future of Bitcoin—in order to shut down a peer-to-peer currency exchange, one would have to terminate every node on the network. The few lawyers who have studied Bitcoin all agree that the currency inhabits a legal gray area. No one really knows how governments would react if it gains traction, but many consider the exchanges to be the easiest target for people who want to regulate Bitcoin. Decentralizing the exchanges would make that job nearly impossible. Bitcoin developers are quickly proving that they can design decentralized alternatives to even the most sophisticated financial institutions. 

"It's the asset prices, stupid"

In a good post titled 'Why Obama is Winning' Harold James points out that political strategist James Carville's famous "it's the economy, stupid" quip from the 1992 U.S. presidential election campaign has gained a new twist:

...the lesson about the economy’s electoral salience is being subtly reformulated. It is no longer the real state of the economy, but rather the perception of asset markets, that is crucial. And the perception can be far removed from reality, which means that the more the prevailing political wisdom assigns decisive electoral importance to the economy, the greater the temptation to view monetary policy’s impact on asset prices, and not on long-term growth, as crucial.

What James is basically saying is that people feel wealthier when asset prices - stocks, bonds, real estate, etc. - go up in value. This phenomenon -- the so called 'wealth effect' -- can make those who don't read The PolyCapitalist and the other recommended sites listed on the right side of this blog feel like the real, fundamental economy is doing better than it actually is. Or so the theory goes. 

Further, positive feelings about how the economy is trending due to rising asset prices can in turn drive higher consumer consumption and business investment, which in turn can increase GDP. At least in the short (and possibly) medium run.

For how long can this wealth effect ponzi-esque scheme go on? In other words, are programs like QE3 nothing more than an macroeconomic cheap trick?

No one knows for sure because, like much of modern macroeconomic theory, we are conducting a live, empirical test of the theory. And this test has arguably been running since at least 1987 (the year Alan Greenspan became Chairman of the Fed), if not 1971 (the year Nixon severed the U.S. Dollar's anchor to the price of gold).

What this means longer-term, according to James, is further politicization of the Federal Reserve and other central banks around the world:

Republicans will blame their defeat in November on the Fed’s monetary stimulus (if not on the ineffectiveness of Mitt Romney’s blunder-filled campaign). 

Meanwhile, in Europe, many national leaders, looking at Obama and the Fed, may conclude that they would do better with more direct control over the central bank. Given the difficulty of establishing such control over the European Central Bank, the euro’s next great challenge may be growing sentiment in favor of a return to national currencies.

In other words, expect central banks to remain in the politial bullseye following the 2012 U.S. and 2013 German elections, regardless of the their outcomes.

Will major reform be applied to central banks? For example, there has been open discussion of terms limits for the Federal Reserve Chairman.

Perhaps changes like term limits, greater Fed transparency, etc. are in the cards longer-term. But I am personally skeptical that any significant reforms will be enacted at the Federal Reserve prior to the end of the U.S. dollar's global hegemony.

Why Italy Isn't In Such Bad Shape, But the U.S. and UK Are

Bill Gross runs PIMCO's huge flagship bond fund which, having engaged in an untimely shorting of U.S. Treasuries, has hit a bit of a rough patch in recent times. Some have suggested that the 69-year old might be a few years past the recommended portfolio manager retirement age and that it's no longer as useful as it once was to read his monthly investment newsletters.

Think again.

While Gross's timing on shorting U.S. treasuries has been poor, and his revealing in this month's column of memory issues is a little unnerving, his analysis of the fundamentals and medium to long-term sovereign fiscal picture remains sound.

Take his updated 'Ring of Fire II' chart, the first version of which he first published a few years back. The chart (below) plots countries by both their annual public sector deficit (y-axis), which is the difference between government spending and taxes, and what is termed a 'fiscal gap' (x-axis). The fiscal gap takes into account future expenditures, which in the U.S.'s case include entitlements such as Social Security, Medicare, and Medicaid.

As you can see from the chart Italy appears to be in better fiscal shape than several 'Ring of Fire' members like the U.S., Japan and the UK.  How is this possible? Italy has been experiencing what economists refer to as a 'speculative attack' from the sovereign bond market, while the three Ring of Fire countries are currently enjoying record low yields on their government debt. 

Continue reading the full article here.

Boomerang: Apple's "It Just Works" Promise to Customers

iPhone Maps app icon: what's wrong with this picture?

Mapplegate, the PR fiasco surrounding Apple's new iPhone mapping software, doesn't appear to be going away anytime soon. You can read all about the details elsewhere but I wanted to make a couple general observations.

First, flashback to 2008 and Apple's launch of their cloud email/calendar syncing product called MobileMe. From MacRumors and Fortune:

Mr. Jobs called the MobileMe team into a town hall meeting in one of Apple’s auditoriums after the service launched with problems and garnered unflattering reviews from noted tech commentators like Walt Mossberg of The Wall Street Journal. 

Mr. Jobs reportedly asked the assembled engineers and other MobileMe team members, “Can anyone tell me what MobileMe is supposed to do?” When one of those employees then volunteered a satisfactory answer, Mr. Jobs followed up with, “So why the fuck doesn’t it do that?”

He (Jobs) then spent some 30 minutes berating the team, telling them that they had “tarnished Apple’s reputation,” and that they, “should hate each other for having let each other down.” 

He added, “[Walt] Mossberg, our friend, is no longer writing good things about us.” 

Jobs appointed a new executive on the spot to run the MobileMe team. 

The MobileMe story may suggest that the iron fist with which Jobs ran Apple may now be missing, but it also helps explain why Apple's new map software problems are getting so much media attention.

Ever since Jobs returned to Apple the mantra he emphasized over and over again about new products was "It Just Works". What you're seeing here is what happens when, contrary to what you promise customers, something not only doesn't work but actually fails in very unpleasant ways. From NY Times tech guru David Pogue:

99 percent of it (iOS6 Maps), Apple says, is accurate. Unfortunately, when the overall data set is that huge, even half a percent of faulty data means a lot of flaws. And the trouble is, you never know when you’re going to encounter one. One wild goose chase, and you’ll find it hard to trust the software again. 

So Apple has written a beautiful, well-designed app — and fed it questionable data. It’s as though you just got a $1,500 professional coffee maker and then poured moldy beans into it.

The actual map with safe instructions

Whenever Apple stumbles, be it Maps, MobileMe, antenna-gate, Foxconn sweat shops, and my personal favorite (because I experienced it) - the irrecoverable Time Capsule hard drive failure - people pounce. People love to call out hypocrisy and shoot down 'hollier than though' types at the first sign of indiscretion. They did the same thing with Google and its 'Don't Be Evil' motto everytime Google engaged in an anywhere remotely questionable practice. It also doesn't help Apple right now that it's the world's largest company in terms of market capitalization and price to perfection, meaning it can't afford to execute sloppily.

The blow to Apple's promise to customers that everything just works certainly doesn't help the company. But whether or not Apple's maps fiasco figures prominently into this blog's prediction that Apple is nearing its high water mark remains to be seen. For more on the future of Apple, Holman Jenkins of the WSJ also has a good read.