You might think this means that someone who actually did the work and tried to calculate expected profits would clean up, taking money from all the people playing musical chairs.
Warren Buffett made his money like this. He's the most successful stock-investor in the world, and the second richest person (after Bill Gates).
But Warren Buffet isn't really a stock investor (he is but thats not where he made his money). So if you're saying he's one of the stock investors playing musical chairs - I don't think you're correct.
Buffet buys "good companies" he invests in businesses more then stocks. If you're saying Buffet made his money by doing what this article said then I think you're right.. ;-)
I think you're playing semantic games. Buying stock in a business is investing in it. Either you're buying new issuance, in which case it goes straight into the company's bank account, or you're increasing the stock's price, thereby increasing the price at which new issuance can be expected to be made, not to mention other things like stock options for incentives / hiring, etc.
The other investment is lending, but I don't think you're suggesting that Buffet is primarily making money buying bonds, or getting even more involved with short-term loans.
You and Sam_Odio are both correct, it is a semantic argument (and I do realize at the end of the day its all stock...)
I consider Buffet's traditional buy-and-hold strategy to be a different form of investing then those that tend to buy based solely on the expected performance of the stock price.
Buffet isn't buying based on the expected performance of the stock price + dividends? Maybe buffet has a longer time horizon than most investors, but that's the only real difference I can see.
But Warren Buffet isn't really a stock investor (he is but thats not where he made his money). So if you're saying he's one of the stock investors playing musical chairs - I don't think you're correct.
---
If you look at Berkshire Hathaway Holdings' balance sheet (1), you'll find their largest asset class is "Equity securities." Equity securities == stock.
Most other assets on the balance sheet are consolidated from subsidiary companies in which Berkshire... holds stock.
What most people don't realize is that buying stock is investing in the business.
My understanding is that Warren Buffett is a good stock investor and a great manager. If you look at his portfolio he likes to buy and hold companies. The CEOs of the companies that he buys unanimously say that they have learned a tremendous amount from him.
Therefore there is strong argument for saying that he makes winners rather than buying them. And the first big winner that he made was a textile company that he bought because he realized it was perfectly positioned to sell insurance instead. The name of that company is Berkshire-Hathaway.
Buffett has another key advantage. Many of his profitable deals are not publicly available. For example look at the Goldman Sachs deal he did last year. He bought $5 billion in preferred stock that pays a perpetual 10%/year, with a 5 year option for $5 billion in stock at $115/share. They then were able to talk up his investment as a "vote of confidence", and he threw his weight into TARP.
If we assume a 5% discount rate, he spent $5 billion for $10 billion in future earnings, with a 5 year option that is potentially worth a lot more than that. That is worthwhile even if he only thought they had a 30-40% chance of surviving. It isn't hard to come out smelling like roses when opportunities like that get offered to you.
Oh, but it did work. It worked when it was actually practiced from the late 40s to the 70s when the US experiences the highest rates of economic growth in its history. During the 70s the US had about the highest average income levels in its history too (this was briefly matched during the Clinton administration but then incomes fell again).
No, it failed to cure the depression - World War II cured the depression. It was not practiced from the 40's to the 70's. The average family paid 4% in federal taxes in 1950. JFK cut taxes in the early 60's which caused a spurt of economic growth. Reagan cut tax rates (revenues actually INCREASED) in the 80's which again caused a period of growth. We have still not paid the price for FDR (Social Security) and Lyndon Johnson's (Medicare) programs because we have been borrowing money for 30 years. I guess you must think that trillions of dollars of debt is a sign of a good economy.
Sounds about right (both).
Causes of this downturn:
--Low interest rates/easy money during the Greenspan years (central planning)
--The housing crisis precipitated by government interventions such as Fannie, Freddie, anti-redlining regulations, etc. encouraging/forcing banks to lend to those who would be unable to repay.
The future has yet to pan out but I, for one, expect the pork ("stimulus") to offer some short-term boosts/bubbles as people make cash grabs. But in the long term as people realize that the green paper is being devalued and they are encouraged to make poor investments things will get markedly worse or at best we'll miss out on what could have been. E.g., people are building windmills and ethanol stills instead of coal plants and oil rigs because the former are subsidized and the latter increasingly regulated. Unfortunately, it's a gamble as to whether windmills will match the effort put into them and there's a growing consensus that ethanol costs more than it affords outright.
Think of it this way: If you put a dollar into a decent investment, you might expect a $1.10 in return. Similarly if you made a bad investment you might get $0.95 back. Now expand that to the net worth of the whole country. Depending on how well we manage our existing wealth in spite of the disincentives, it could take a long time to burn through 60 trillion dollars a nickel at a time. Maybe we'll continue to grow but the opportunity costs will mean it happens by pennies instead of by nickels.
"Thus lowering interest rates increases investment — it reduces the cost of getting money, which reduces the cost of making stuff, which means more things can make a profit."
The problem with this reasoning is that Keynes only considers the demand side for capital. What about the supply side? Will lower interest rates encourage savings?
Government printing money increases capital? Do you even know what "capital" means? By your definition Zimbabwe has extreme amounts of capital ... that seems to have done them a lot of good.
So those are Keynes’ prescriptions for a successful economy: low interest rates, government investment, and redistribution to the poor. And, for a time — from around the 1940s to the 1970s — that’s kind of what we did. The results were magical: the economy grew strongly, inequality fell away, everyone had jobs.
Retribution and government investment may or may not be good ideas, but they are orthogonal to the problem of the business cycle.
For some reason, Keynes missed the entirely obvious fact that the fall in aggregate demand originates in collapsing credit bubbles. The credit bubbles happen for a very specific reason - a bug in the Anglo-American tradition of banking in which banks do not match their maturities. When the credit bubbles collapse, and people's bank accounts are wiped out, they stop spending. The supply/demand curve for luxuries and durables goes vertical as people cut expenses in a futile attempt to fix their balance sheets. When they stop buying cars, Detroit lays off workers.
The economy was more stable from the 40's through the 70's because the creation of FDIC insurance de facto turned banking into 100% reserve, maturity matched system (de facto, even though it still had a veneer of the old system). Effectively, with an FDIC insured bank, the individual deposits their money with the government, and then the government gives banks a separate license to print money to make loans. This broke down when the shadow banking sector grew up, and started maturity mismatching without the formal backing of the government.
In summary - the business cycle is really misnamed. It's the "banking cycle". To stop cyclical unemployment, fix the banks.
Well, the simple fact is that the above quote from the article is completely wrong.
The 80ies was one of the longest periods of sustained US GDP growth (and the 40ies&70ies weren’t that magical). During the 80ies the USA tacked on the equivalent of Germany’s GDP to itself.
The business cycle has since the 1970's has been a bit worse than the cycle from '45 to 75. Nothing like the current financial crisis happened during that time.
I don't know how the overall growth rates compare. GDP calculations are full of subjective assumptions. I think there is some truth to the statement that the rate of economic growth has slowed, but that's a much longer argument, and not relevant to my original point which was about the business cycle.
> The business cycle has since the 1970's has been a bit worse than the cycle from '45 to 75. Nothing like the current financial crisis happened during that time.
Nothing like the current financial crises happened since the 1930ies. Then again, the structure of the economy radically changed since that time (think globalisation).
> I don't know how the overall growth rates compare. GDP calculations are full of subjective assumptions.
The 80ies and the 90ies was one of the best and longest periods of economic growth for the USA. Since 1982 (before the current mess) there was only a small recession in 1990 and a quarter long one in 2001.
GDP is probably one of the least subjective measures that there is. I don’t know what other measure would be less objective. You also seem to ignore the extremely high inflation in the 1970ies.
This is not brief. It's not one of the better things I've red on Keynes. It doesn't treat alternative economic theories seriously. And lastly and most important of all, economics discussions on hacker sites are as bad if not worse then political and religious discussions.
I agree, it's a rather poor summary of Keynes. The author seems to be writing it in order to cheerlead government intervention, not because Keynes is particularly relevant to the current causes of the financial crisis. A great deal of ink has been spilled since Keynes on topics like the endogenous money supply and debt deflation. The author doesn't seem to show any awareness that there are both post-Keynesian and non-Keynesian insights that significantly complicate his neat little package.
Keynes is self contradictory, he's not the most unambiguous of writers, a particularly bad case of the two armed economist.
And as the parent pointed out, there are both anti-Keynesian theories, and there are also many post or neo-Keynesian theories. There's lots of things, and this doesn't concern itself with any of them. Which is fine, you can write what ever you like, I just don't like seeing it on HN.
I don't like seeing on HN because there can not be good discussion from it.
Economics is just complex and interesting enough that geeks easily get into it, have that great light bulb moment of understanding, and immediately start opining about it, long before they've reached a deeper understanding.
It's akin to someone understanding Newtonian physic, being elated about getting it, and getting into internet arguments with people who understand the theory of relativity.
And you can't explain the differences between Newtonian and relativistic physics in a short post And the time required to explain it to random Joe on the internets, is just not worth it.
I think what you mean is that because political economy is closer to dogma than to natural science, rational discussion focused on discovering objective truth is just a waste of time. Economical political decisions are made by men to serve other men, and should be adjusted accordingly not to be incontestable dogma supported by spikes of intellectual masturbation. Eppur si muove!
No, arijo, biohacker42 didn't say anything close to "rational discussion focused on discovering objective truth is just a waste of time". It's just your idea, and a stupid idea to boot. I downvoted both of your comments accordingly.
Disussing dogma is a waste of time and energy. Economic decisions should focus on solving real people problems in pragmatic terms (in an agile way if you wish). Elaborate intellectual theories, though eye-candy, do not stand on firm reality grounding (think of Locke's madman concept - one who makes impeccable and rigorous reasoning based on flawed data and assumptions). That's all I was trying to express in my comment above.
I think the problem is that you're trying to analyze a work in isolation but then draw from it broad conclusions.
It would be kind of like taking Newton's Principia and using it alone to point out flaws in string theory, without taking into account all the objections and clarifications that have come to Newtonian mechanics in-between.
but isn't that what economists themselves are trying to do all the time - describe the whole of the world with either incomplete or unproven theories or both? at least we can see the results...
Yes I have, and I enjoyed reading it quite a bit. I've also read Locke, Smith, Ricardo, Malthus, Marx, D'Annunzio, Polanyi, Hayek, Schumpeter, Kalecki, John Kenneth Galbraith, Friedman, Olson, North, a selection of other rational choice folks, developmental state literature, modernization theory literature, Gilpin's IPE, marxist IPE including a great deal of world-system theory (Wallerstein, Arrighi, Braudel), historical institutionalist political economy, constructivist political economy, and a smattering of post-Keynesians.
Just because I think his argument isn't relevant to the current crisis, has flaws, and has negative political implications, doesn't mean I haven't read it or don't think it's a brilliant piece of writing.
Like jpeterson said above, this piece takes a document that's been worked over by economists, political economists, scholars, and practitioners for the last 75 years and presents it in isolation, while nevertheless drawing conclusions from Keynes for the present day, ignoring everything that's come in between.
So those are Keynes’ prescriptions for a successful economy: low interest rates, government investment, and redistribution to the poor. And, for a time — from around the 1940s to the 1970s — that’s kind of what we did. The results were magical: the economy grew strongly, inequality fell away, everyone had jobs.
Until the 1970s, where inflation climbed up and up and up and finally peaked at over 15%.
According to my amateur understanding, economists disagree about exactly how the US got into that mess (which is why Keynes was regarded with some suspicion), but it's important to note that the Fed got us out of it by raising the crap out of interest rates and triggering a recession (as Keynes would have predicted).
It used to be, Keynes says, that wealthy men just thought investing was the manly thing to do. They weren’t going to sit around and calculate what kind of bonds yielded the greatest expected return. Bonds are for wusses. They were real men. They were going to take their money and build a railroad.
But they don’t make rich people like that anymore. Nowadays, they put their money in the stock market. Instead of boldly picking one great enterprise to invest in, they shift their money around from week to week (or hire someone else to do it for them). So these days, it’s the stock market that stimulates most new investment.
Even accepting this explanation, it is worth asking why they don't make rich people who invest in building real stuff rather than chasing paper anymore. What happened to the innate human drive, curiosity and so on? Why is it that downturns in 19th century corrected themselves, but now we need more and more government intervention, progressively more every cycle?
In Economics cause and effect are often difficult to separate, but one reasonable hypothesis is that the widespread adoption of Keynesian policies themselves caused rich people to chase paper, leaving it to government/Federal Reserve to manipulate the stock market to try to stimulate investment indirectly. In other words, Keynesian policies beget more Keynesian policies, in the process generating a whole bunch of Keynesian economists who can "correctly" claim "We told you"; we reach the point where the government runs most of the economy, robbing people of initiative ("we don't make real men anymore").
If you travel to socialist countries, you will observe this in effect. The population displays a curious passivity ("that is the government's problem"). No one thinks about taking the initiative because the incentives systems are all wrong.
> If you travel to socialist countries, you will observe this in effect.
That is so true. There are countries in which government jobs are the most prized jobs (high salary, flexible working hours and extremely high job security).
I'm usually outspoken against obvious non-hacker news on this site. I'm being a hypocrite because I've been looking to write up a folksy 'leaves on the fire' economic analogy for a while and this presented a good opportunity.
Although, honesty, it doesn't have to be things we all need.
They could hire people to do anything. This is why inspecting
the stimulus money for waste is so ridiculous - waste is
perfectly fine, the important thing is to get the money into
circulation so that the economy can get back on track.
The madness begins. You could hire people to throw bricks through the windows of rich people. And - indeed - you will get the economy moving. Once, perhaps more than once. But people have memories, and your ability to pull this trick declines every time you use it. The actions the government has on the economy change the way that it responds to stimulus for subsequent events. When Keynes wrote his stuff it was like putting leaves on the fire. Whoosh! A century on... it's still like putting leaves on the fire.. except the heat has gone and the leaves aren't getting hot enough to light up.
If you print and redistribute money to the unemployed on a means-tested basis, you are directly punishing the people who have accumulated wealth (the purchasing power of their money is eroded) for the benefit of those who didn't (that's why they're able to pass the means-test). Why would rational people expose themselves to economies that do this to them?
Capitalism seems to go through frustrating cycles of
booms and busts. [...] The right solution was to take
their money away. Give it to the poor, who will spend
it on something useful, like food and clothing.
No, the right solution is for the government to permanently stay out of it, and let it stabilise of its own accord. That way, over the course of time, people learn to moderate their behaviour, and you don't create moral hazard traps all over the place that take the heat out of the fire.
A commenter wrote, "We are in the process of debunking Keynes yet again." Although the stimulus is "Keynsean", it's operating in an environment that is substantially different to that which he knew and wrote about. For this reason, I don't think it's any more valid to use the current situation as a criticism of Keynes any more than as a valid criticism of capitalism.
Another commenter wrote, "In summary - the business cycle is really misnamed. It's the "banking cycle". To stop cyclical unemployment, fix the banks."
The current system does have a very influential banking cycle. However, the perspective of 'business cycle' is preferable to 'banking cycle'. A certain proportion of people overextend themselves. It's an aspect of human nature. You have correction periods where they get pulled up for these errors. It is a more universal perspective. There is an inevitability about the business cycle regardless of government action, whereas the same is not true of a 'banking cycle'. Adjusting banking policy won't change human nature.
A book about recursion effects (i.e. the way a stimulus event will cause the system to respect to the same stimulus event differently in the future) is _The Crash of 2008 and What it Means: The New Paradigm for Financial Markets_ (Soros, 2009). It's not really about the 2008 crash, that's just a cute veneer he's put on it to sell more copies of a book that's really a book about philosophy with a very economic bent.
For a stronger Keynsean defence, read Read _Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism_ (Akerlof/Schiller, 2009) for a purist criticism of recent politics and defence of the Bush/Obama stimulus. Though I disagree with the core, the breakdown of 'animal spirits' is useful in its own right, and surely a better lens for viewing what goes in in an economy than 'efficient markets'.
Something that's long-term scary about the current situation is that the political might of nation-state governme...
It seems you are suggesting that the best solution to a stalled economy is not to have government stimulation, but to let it "stabilise of its own accord". Has this been tried? Any examples? For some reason I thought that there was a general consensus that the government needed to prop up banks and stimulate the economy.
Smoot-Hawley was "letting things stabilize"? What about the ERA and Reconstruction Finance (spending on infrastructure like Hoover Dam)? How about bailouts for financial institutions and subsidized home loans?
It's too bad Hoover let things stabilize on their own. One wonders what might have happened if he actually did something!
People did things, no doubt about it. The wisdom of those things is another matter. The ERA was a protectionist measure that is today cited as worsening affairs. Reconstruction finance was a good idea, but started in 1932, after 2 years of financial disaster. Hoover's initial responses did not take aggressive action to shore up the money supply or failing banks.
Of course debates on the causes of the Great Depression are endless. Which is why I was careful to say that the Great Depression followed, but was not caused, by that action. However many prominent economists including Milton Friedman and Ben Bernanke have concluded that the primary cause was the contraction in the money supply.
In their view the Federal Reserve did not act fast enough to counter the shrinking monetary supply or to prop up failing banks. The result was multiple rounds of bank panics, the closing of over 40% of all US banks within 4 years, and (after Roosevelt came in) the declaration of a national bank holiday, and an executive order forbidding private speculation in gold. The rapid loss of 1/3 of the money supply was both a cause and effect for the general economic disaster.
Whether or not you agree with this theory, understanding that Ben Bernanke believes it will help you understand why he took the actions he did last year.
They did things. But they did not immediately try to shore up failing banks or stabilize the money supply, which are both parts of the recipe that we use now.
On a related note, the full crisis only hit last year after the Fed decided to let a major financial firm fail.
I must admit that there are many potential financial disasters that could still hit which would make last year seem minor. I have no clue how the fed plans to unwind the what, half trillion in commercial ARM loans that are under water and set to reset in the next year or two. Obama is incredibly dependent on the Chinese willingness to continue borrowing from the USA. We have a lot of work to do to get debt levels back to reasonable amounts. And I'm not at all sure that the disaster was enough to really scare people into becoming fiscally responsible.
However for the moment people seem convinced that the sky is not falling. There are signs of economic recovery out there. There is even a chance that when the official statistics are done we'll be no longer in a recession. So even if a bigger crisis hit, there would be a good cause to call it a second crisis rather than a continuation of the one last year.
And there would be historical precedent for that. Our current problems come from an asset bubble that was pumped up from attempts to stimulate the monetary supply to head off deflation after the dot com collapse. But people don't think of the recent financial crisis as a continuation of the dot com collapse, despite the connection.
In fact, the Great Depression followed the beginnings of the first major attempt to actually "do something" about the bust portion of the boom-bust cycle that had been going on for a long time. It's arguable (and argued by Rothbard and some other economists) that government intervention greatly lengthened the Great Depression.
Historian Thomas Woods argues that President Harding's laissez faire economic policies during the 1920/21 recession, combined with a coordinated aggressive policy of rapid government downsizing, had a direct influence (mostly through intentional non-influence) on the rapid and widespread private-sector recovery
"Woods...believes it to be a watershed case proving that free markets adjust prices and supplies much more efficiently than any government coordinated action, and that Keynesian philosophy ignores the '21 episode because it suggests government intervention is not required in such crises."
"Inspecting the stimulus money for waste is so ridiculous — waste is perfectly fine, the important thing is to get the money into circulation so that the economy can get back on track."
The implicit goal of inspecting for waste is to reduce moral hazard. Repeatedly, all over the world, we see that corruption and a lack of trust in government can have significant negative effects, including both high rates of tax delinquency and divestment from domestic assets.
If you print and redistribute money to the unemployed on a means-tested basis, you are directly punishing the people who have accumulated wealth (the purchasing power of their money is eroded) for the benefit of those who didn't (that's why they're able to pass the means-test).
Why would rational people expose themselves to economies that do this to them?
Amongst other reasons:
- the cost (in terms of wealth taken) of redistribution is less than the cost of letting things sort out (eg in fallen asset prices or lost opportunities)
- (for those with only a little accumulated wealth) the prospect of attempting to accumulate wealth -- but failing at it -- is very likely and the consequences of failing at it are very high
...though as always a specific situation requires specific analysis, and there's no particular reason to believe the math works out one way or the other in a given scenario (and, also, to pretend to know the shape of someone else's preferences).
You might be able to do better than means-tested (flat-rate payouts to everyone! minksy-style "employer of last resort" arrangements!) but the underlying dynamic doesn't materially change: (loosely speaking) devaluing currency by X% takes away a lot more wealth from billionaires then from dollar-menuaires; if programs A and B both result in X% devaluation but A is means-tested and B isn't the difference in "cost of program" to the wealthy would be a rounding error.
No, the right solution is for the government to permanently stay out of it, and let it stabilise of its own accord. That way, over the course of time, people learn to moderate their behaviour, and you don't create moral hazard traps all over the place that take the heat out of the fire.
People are stupid and will not learn crap. We've seen it over and over and we'd see it again and again.
The rise in unemployment is due to the mass mis-allocation of resources caused by government intervention into the economy.
Principally, the creation of the central bank and it's long term policies of credit expansion (with moral hazard), low interest rates (underpricing of risk) and of debasement of the currency.
Also, the creation of government backed housing lending institutions (also with moral hazard) that made low interest high risk loans (expanding credit and risk) and tax distortions that encouraged investments in overpriced assets.
*The best solution is probably a small tax on each trade.*
Don't we already have a tax on stock market trades - The Capital Gains tax? And since it is higher for short-term trades this already provides disincentive to engage in speculative trading.
The best solution is probably to let the speculators fall on their faces and serve as examples for the rest instead of punishing the responsible investors to create a bail out.
One glaring issue I see is that if you redistribute wealth and "give it to the poor, who will spend it on something useful, like food and clothing", then the next time they need money for useful things, where do you think they will look?
This logic assumes that the poor will take the money they need, then go forward continuing to look for employment as if they'd never been given a handout. This is not practical.
John Maynard Keynes’ great insight was to see that all of this was nonsense. The job market is a very special market, because the people who get “bought” are also the people doing all the buying. After all, why is it that people are hired to farm wheat? It’s because, at the end of the day, other people want to buy it. But if lots of people are out of a job, they’re doing their best to save money, which means cutting back on purchases. And if they cut back on purchases, that means there are fewer people for business to sell to, which means businesses cut back on jobs.
Except this applies to all other markets too. If people can't sell stuff, they won't be able to buy stuff, and this effect can balloon in the same manner. Good luck with your economics, Aaron.
[I line-by-lined the entire post for Aaron pointing out some things, and it came out really, really long. By far my longest comment here - Aaron and others, I hope you find some value in this. I'm exhausted, and I've not edited this with tremendous rigor, but I hope there is value here]
I actually know a lot of Keynes. He was a very smart man and had some interesting ideas, but there were a lot of problems too. The original piece had some problems with it, so I'm going to comment here and let Aaron know via email. If it suits him, I would be happy to be republished, or to contribute to his site so as to spread knowledge. I consider myself in the service of humanity, as I believe he does, so the more we can fight ignorance, the better. Last time I made a commentary like this he asked that I email him with it, so I'm doing so this time at me@aaronsw.com, and I do so humbly this time.
In the article, there is a mix of interesting ideas, some not-so-good ideas, and some ethical judgments. I think he and I have several of the same end goals, so I'm just going to point out a few points that I think could be tweaked so as to account for secondary effects and make the best world possible.
> But they’re typically forced back to the fundamental conclusion of the textbook: that people are just demanding to be paid too much.
One thing to remember is that an employee's "fully loaded cost" is more than his take-home pay. There's employer-side social security tax tax and unemployment insurance, benefits, and administrative costs on the business side. On the employee side, they pay income tax and social security tax. So a business might pay $107,000 to an employee in annual salary and expenses, but the employee gets $50,000 after taxes. Generally, a gap between fully-loaded costs and takehome compensation increases unemployment.
> But if lots of people are out of a job, they’re doing their best to save money, which means cutting back on purchases.
> Everyone knows why: put some money away today and it’ll be worth more tomorrow.
Okay - why is money worth more tomorrow? Because, the theory goes, by putting it in the bank, you're asking the bank to lend it out for you. The bank guarantees an interest rate to the saver while charging a higher rate to the borrower. The borrower puts down collateral that the bank can sell if they don't pay. So, when people save more, the banks immediately have more to lend, so people who want to do interesting things can take the money and do the interesting things. These interesting things - building computers, cars, producing medicine, improving the quality of circuits, rennovating and improving real estate, building new real estate, and so on - makes the world "wealthier" - that is, there's new cool stuff, and better old stuff in the world. With this new and better stuff, the borrower makes more money. They pay the bank back plus interest, the bank pays the saver their money with interest, and all is good. The saver's money is worth more tomorrow (the money saved comes back, plus the interest) because it was used to better the world, and someone paid for that privilege.
That's the theory anyway - in practice, banks don't actually do that any more. Which brings us to our next point:
> Money isn’t worth anything on its own, it’s only useful because it can buy things.
Kind of true, yes - but what you're talking about is what's called, "Money as a fiat currency". Anything can, and has been, money in the past. If I wrote a certificate that said, "Sebastian guarantees he'll work ten hours for you in the future on any legal project of your choice", and you trust me, I'll have just created "money". That's money backed by my labor. In the past, to standardize money, a few things have been done: It's been made into coins made out of precious metals that are of uniform values. It's been a result of trustworthy warehouses issuing certificates about the quality of goods in their warehouse, such as wheat or tobacco. Then people can exchange those certificates instead of c...
One of the reasons I read Hacker News is for the great comments on submissions, and this is one of the best I've seen. Thanks for taking the time to write that.
This is a long post, mostly filled with things that are either irrelevant to what I said or obviously wrong. But the basic place where it disagrees with Keynes is that it adopts the old-time monetarist view that printing money always "debases" the currency. This seems intuitive, but it's been proven just wrong. During the period I mention when we kept interest rates low, the economy grew steadily. When monetarist targeting was tried (under Volcker), we got a huge recession. The recent problem wasn't caused by low interest rates but a housing bubble. If Greenspan had simply given a speech pointing out the bubble instead of repeatedly denying it, it could have been averted.
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[ 4.7 ms ] story [ 143 ms ] threadWarren Buffett made his money like this. He's the most successful stock-investor in the world, and the second richest person (after Bill Gates).
But Warren Buffet isn't really a stock investor (he is but thats not where he made his money). So if you're saying he's one of the stock investors playing musical chairs - I don't think you're correct.
Buffet buys "good companies" he invests in businesses more then stocks. If you're saying Buffet made his money by doing what this article said then I think you're right.. ;-)
The other investment is lending, but I don't think you're suggesting that Buffet is primarily making money buying bonds, or getting even more involved with short-term loans.
I consider Buffet's traditional buy-and-hold strategy to be a different form of investing then those that tend to buy based solely on the expected performance of the stock price.
---
If you look at Berkshire Hathaway Holdings' balance sheet (1), you'll find their largest asset class is "Equity securities." Equity securities == stock.
Most other assets on the balance sheet are consolidated from subsidiary companies in which Berkshire... holds stock.
What most people don't realize is that buying stock is investing in the business.
1) Berkshire's 10Q: http://www.berkshirehathaway.com/qtrly/2ndqtr09.pdf
Therefore there is strong argument for saying that he makes winners rather than buying them. And the first big winner that he made was a textile company that he bought because he realized it was perfectly positioned to sell insurance instead. The name of that company is Berkshire-Hathaway.
Buffett has another key advantage. Many of his profitable deals are not publicly available. For example look at the Goldman Sachs deal he did last year. He bought $5 billion in preferred stock that pays a perpetual 10%/year, with a 5 year option for $5 billion in stock at $115/share. They then were able to talk up his investment as a "vote of confidence", and he threw his weight into TARP.
If we assume a 5% discount rate, he spent $5 billion for $10 billion in future earnings, with a 5 year option that is potentially worth a lot more than that. That is worthwhile even if he only thought they had a 30-40% chance of surviving. It isn't hard to come out smelling like roses when opportunities like that get offered to you.
Maybe it just can't be done right. Maybe the problem is people.
The future has yet to pan out but I, for one, expect the pork ("stimulus") to offer some short-term boosts/bubbles as people make cash grabs. But in the long term as people realize that the green paper is being devalued and they are encouraged to make poor investments things will get markedly worse or at best we'll miss out on what could have been. E.g., people are building windmills and ethanol stills instead of coal plants and oil rigs because the former are subsidized and the latter increasingly regulated. Unfortunately, it's a gamble as to whether windmills will match the effort put into them and there's a growing consensus that ethanol costs more than it affords outright.
Think of it this way: If you put a dollar into a decent investment, you might expect a $1.10 in return. Similarly if you made a bad investment you might get $0.95 back. Now expand that to the net worth of the whole country. Depending on how well we manage our existing wealth in spite of the disincentives, it could take a long time to burn through 60 trillion dollars a nickel at a time. Maybe we'll continue to grow but the opportunity costs will mean it happens by pennies instead of by nickels.
The problem with this reasoning is that Keynes only considers the demand side for capital. What about the supply side? Will lower interest rates encourage savings?
Retribution and government investment may or may not be good ideas, but they are orthogonal to the problem of the business cycle.
For some reason, Keynes missed the entirely obvious fact that the fall in aggregate demand originates in collapsing credit bubbles. The credit bubbles happen for a very specific reason - a bug in the Anglo-American tradition of banking in which banks do not match their maturities. When the credit bubbles collapse, and people's bank accounts are wiped out, they stop spending. The supply/demand curve for luxuries and durables goes vertical as people cut expenses in a futile attempt to fix their balance sheets. When they stop buying cars, Detroit lays off workers.
The economy was more stable from the 40's through the 70's because the creation of FDIC insurance de facto turned banking into 100% reserve, maturity matched system (de facto, even though it still had a veneer of the old system). Effectively, with an FDIC insured bank, the individual deposits their money with the government, and then the government gives banks a separate license to print money to make loans. This broke down when the shadow banking sector grew up, and started maturity mismatching without the formal backing of the government.
In summary - the business cycle is really misnamed. It's the "banking cycle". To stop cyclical unemployment, fix the banks.
The 80ies was one of the longest periods of sustained US GDP growth (and the 40ies&70ies weren’t that magical). During the 80ies the USA tacked on the equivalent of Germany’s GDP to itself.
This article is poorly written and a waste of time. I suspect that the author’s motivations for it are more political than it is economical. http://www.blogmybrain.com/stock_apps/graphical_economy/NIPA...
http://investintaiwan.nat.gov.tw/en/env/stats/gdp_growth.htm...
I don't know how the overall growth rates compare. GDP calculations are full of subjective assumptions. I think there is some truth to the statement that the rate of economic growth has slowed, but that's a much longer argument, and not relevant to my original point which was about the business cycle.
Nothing like the current financial crises happened since the 1930ies. Then again, the structure of the economy radically changed since that time (think globalisation).
> I don't know how the overall growth rates compare. GDP calculations are full of subjective assumptions.
The 80ies and the 90ies was one of the best and longest periods of economic growth for the USA. Since 1982 (before the current mess) there was only a small recession in 1990 and a quarter long one in 2001.
GDP is probably one of the least subjective measures that there is. I don’t know what other measure would be less objective. You also seem to ignore the extremely high inflation in the 1970ies.
And as the parent pointed out, there are both anti-Keynesian theories, and there are also many post or neo-Keynesian theories. There's lots of things, and this doesn't concern itself with any of them. Which is fine, you can write what ever you like, I just don't like seeing it on HN.
I don't like seeing on HN because there can not be good discussion from it.
Economics is just complex and interesting enough that geeks easily get into it, have that great light bulb moment of understanding, and immediately start opining about it, long before they've reached a deeper understanding.
It's akin to someone understanding Newtonian physic, being elated about getting it, and getting into internet arguments with people who understand the theory of relativity.
And you can't explain the differences between Newtonian and relativistic physics in a short post And the time required to explain it to random Joe on the internets, is just not worth it.
Thus good discussion is impossible.
It would be kind of like taking Newton's Principia and using it alone to point out flaws in string theory, without taking into account all the objections and clarifications that have come to Newtonian mechanics in-between.
Just because I think his argument isn't relevant to the current crisis, has flaws, and has negative political implications, doesn't mean I haven't read it or don't think it's a brilliant piece of writing.
Like jpeterson said above, this piece takes a document that's been worked over by economists, political economists, scholars, and practitioners for the last 75 years and presents it in isolation, while nevertheless drawing conclusions from Keynes for the present day, ignoring everything that's come in between.
Try this on for size: http://mises.org/etexts/austrian.asp
And in case you're wondering: yes, I'm being sarcastic.
Until the 1970s, where inflation climbed up and up and up and finally peaked at over 15%.
According to my amateur understanding, economists disagree about exactly how the US got into that mess (which is why Keynes was regarded with some suspicion), but it's important to note that the Fed got us out of it by raising the crap out of interest rates and triggering a recession (as Keynes would have predicted).
It used to be, Keynes says, that wealthy men just thought investing was the manly thing to do. They weren’t going to sit around and calculate what kind of bonds yielded the greatest expected return. Bonds are for wusses. They were real men. They were going to take their money and build a railroad.
But they don’t make rich people like that anymore. Nowadays, they put their money in the stock market. Instead of boldly picking one great enterprise to invest in, they shift their money around from week to week (or hire someone else to do it for them). So these days, it’s the stock market that stimulates most new investment.
Even accepting this explanation, it is worth asking why they don't make rich people who invest in building real stuff rather than chasing paper anymore. What happened to the innate human drive, curiosity and so on? Why is it that downturns in 19th century corrected themselves, but now we need more and more government intervention, progressively more every cycle?
In Economics cause and effect are often difficult to separate, but one reasonable hypothesis is that the widespread adoption of Keynesian policies themselves caused rich people to chase paper, leaving it to government/Federal Reserve to manipulate the stock market to try to stimulate investment indirectly. In other words, Keynesian policies beget more Keynesian policies, in the process generating a whole bunch of Keynesian economists who can "correctly" claim "We told you"; we reach the point where the government runs most of the economy, robbing people of initiative ("we don't make real men anymore").
If you travel to socialist countries, you will observe this in effect. The population displays a curious passivity ("that is the government's problem"). No one thinks about taking the initiative because the incentives systems are all wrong.
That is so true. There are countries in which government jobs are the most prized jobs (high salary, flexible working hours and extremely high job security).
This for me at least is a sad phenomenon.
http://news.ycombinator.com/item?id=786552
If you print and redistribute money to the unemployed on a means-tested basis, you are directly punishing the people who have accumulated wealth (the purchasing power of their money is eroded) for the benefit of those who didn't (that's why they're able to pass the means-test). Why would rational people expose themselves to economies that do this to them?
No, the right solution is for the government to permanently stay out of it, and let it stabilise of its own accord. That way, over the course of time, people learn to moderate their behaviour, and you don't create moral hazard traps all over the place that take the heat out of the fire.A commenter wrote, "We are in the process of debunking Keynes yet again." Although the stimulus is "Keynsean", it's operating in an environment that is substantially different to that which he knew and wrote about. For this reason, I don't think it's any more valid to use the current situation as a criticism of Keynes any more than as a valid criticism of capitalism.
Another commenter wrote, "In summary - the business cycle is really misnamed. It's the "banking cycle". To stop cyclical unemployment, fix the banks."
The current system does have a very influential banking cycle. However, the perspective of 'business cycle' is preferable to 'banking cycle'. A certain proportion of people overextend themselves. It's an aspect of human nature. You have correction periods where they get pulled up for these errors. It is a more universal perspective. There is an inevitability about the business cycle regardless of government action, whereas the same is not true of a 'banking cycle'. Adjusting banking policy won't change human nature.
A book about recursion effects (i.e. the way a stimulus event will cause the system to respect to the same stimulus event differently in the future) is _The Crash of 2008 and What it Means: The New Paradigm for Financial Markets_ (Soros, 2009). It's not really about the 2008 crash, that's just a cute veneer he's put on it to sell more copies of a book that's really a book about philosophy with a very economic bent.
For a stronger Keynsean defence, read Read _Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism_ (Akerlof/Schiller, 2009) for a purist criticism of recent politics and defence of the Bush/Obama stimulus. Though I disagree with the core, the breakdown of 'animal spirits' is useful in its own right, and surely a better lens for viewing what goes in in an economy than 'efficient markets'.
Something that's long-term scary about the current situation is that the political might of nation-state governme...
edit: Honest question, btw.
It is understandable that some are reticent to repeat the experiment.
It's too bad Hoover let things stabilize on their own. One wonders what might have happened if he actually did something!
Of course debates on the causes of the Great Depression are endless. Which is why I was careful to say that the Great Depression followed, but was not caused, by that action. However many prominent economists including Milton Friedman and Ben Bernanke have concluded that the primary cause was the contraction in the money supply.
In their view the Federal Reserve did not act fast enough to counter the shrinking monetary supply or to prop up failing banks. The result was multiple rounds of bank panics, the closing of over 40% of all US banks within 4 years, and (after Roosevelt came in) the declaration of a national bank holiday, and an executive order forbidding private speculation in gold. The rapid loss of 1/3 of the money supply was both a cause and effect for the general economic disaster.
Whether or not you agree with this theory, understanding that Ben Bernanke believes it will help you understand why he took the actions he did last year.
Exactly my point. In the beginning of the great depression, they did things. They didn't try letting things stabilize on their own.
On a related note, the full crisis only hit last year after the Fed decided to let a major financial firm fail.
I must admit that there are many potential financial disasters that could still hit which would make last year seem minor. I have no clue how the fed plans to unwind the what, half trillion in commercial ARM loans that are under water and set to reset in the next year or two. Obama is incredibly dependent on the Chinese willingness to continue borrowing from the USA. We have a lot of work to do to get debt levels back to reasonable amounts. And I'm not at all sure that the disaster was enough to really scare people into becoming fiscally responsible.
However for the moment people seem convinced that the sky is not falling. There are signs of economic recovery out there. There is even a chance that when the official statistics are done we'll be no longer in a recession. So even if a bigger crisis hit, there would be a good cause to call it a second crisis rather than a continuation of the one last year.
And there would be historical precedent for that. Our current problems come from an asset bubble that was pumped up from attempts to stimulate the monetary supply to head off deflation after the dot com collapse. But people don't think of the recent financial crisis as a continuation of the dot com collapse, despite the connection.
Historian Thomas Woods argues that President Harding's laissez faire economic policies during the 1920/21 recession, combined with a coordinated aggressive policy of rapid government downsizing, had a direct influence (mostly through intentional non-influence) on the rapid and widespread private-sector recovery
"Woods...believes it to be a watershed case proving that free markets adjust prices and supplies much more efficiently than any government coordinated action, and that Keynesian philosophy ignores the '21 episode because it suggests government intervention is not required in such crises."
The implicit goal of inspecting for waste is to reduce moral hazard. Repeatedly, all over the world, we see that corruption and a lack of trust in government can have significant negative effects, including both high rates of tax delinquency and divestment from domestic assets.
Why would rational people expose themselves to economies that do this to them?
Amongst other reasons:
- the cost (in terms of wealth taken) of redistribution is less than the cost of letting things sort out (eg in fallen asset prices or lost opportunities)
- (for those with only a little accumulated wealth) the prospect of attempting to accumulate wealth -- but failing at it -- is very likely and the consequences of failing at it are very high
...though as always a specific situation requires specific analysis, and there's no particular reason to believe the math works out one way or the other in a given scenario (and, also, to pretend to know the shape of someone else's preferences).
You might be able to do better than means-tested (flat-rate payouts to everyone! minksy-style "employer of last resort" arrangements!) but the underlying dynamic doesn't materially change: (loosely speaking) devaluing currency by X% takes away a lot more wealth from billionaires then from dollar-menuaires; if programs A and B both result in X% devaluation but A is means-tested and B isn't the difference in "cost of program" to the wealthy would be a rounding error.
People are stupid and will not learn crap. We've seen it over and over and we'd see it again and again.
Principally, the creation of the central bank and it's long term policies of credit expansion (with moral hazard), low interest rates (underpricing of risk) and of debasement of the currency.
Also, the creation of government backed housing lending institutions (also with moral hazard) that made low interest high risk loans (expanding credit and risk) and tax distortions that encouraged investments in overpriced assets.
One glaring issue I see is that if you redistribute wealth and "give it to the poor, who will spend it on something useful, like food and clothing", then the next time they need money for useful things, where do you think they will look?
This logic assumes that the poor will take the money they need, then go forward continuing to look for employment as if they'd never been given a handout. This is not practical.
Except this applies to all other markets too. If people can't sell stuff, they won't be able to buy stuff, and this effect can balloon in the same manner. Good luck with your economics, Aaron.
I actually know a lot of Keynes. He was a very smart man and had some interesting ideas, but there were a lot of problems too. The original piece had some problems with it, so I'm going to comment here and let Aaron know via email. If it suits him, I would be happy to be republished, or to contribute to his site so as to spread knowledge. I consider myself in the service of humanity, as I believe he does, so the more we can fight ignorance, the better. Last time I made a commentary like this he asked that I email him with it, so I'm doing so this time at me@aaronsw.com, and I do so humbly this time.
In the article, there is a mix of interesting ideas, some not-so-good ideas, and some ethical judgments. I think he and I have several of the same end goals, so I'm just going to point out a few points that I think could be tweaked so as to account for secondary effects and make the best world possible.
> But they’re typically forced back to the fundamental conclusion of the textbook: that people are just demanding to be paid too much.
One thing to remember is that an employee's "fully loaded cost" is more than his take-home pay. There's employer-side social security tax tax and unemployment insurance, benefits, and administrative costs on the business side. On the employee side, they pay income tax and social security tax. So a business might pay $107,000 to an employee in annual salary and expenses, but the employee gets $50,000 after taxes. Generally, a gap between fully-loaded costs and takehome compensation increases unemployment.
> But if lots of people are out of a job, they’re doing their best to save money, which means cutting back on purchases.
> Everyone knows why: put some money away today and it’ll be worth more tomorrow.
Okay - why is money worth more tomorrow? Because, the theory goes, by putting it in the bank, you're asking the bank to lend it out for you. The bank guarantees an interest rate to the saver while charging a higher rate to the borrower. The borrower puts down collateral that the bank can sell if they don't pay. So, when people save more, the banks immediately have more to lend, so people who want to do interesting things can take the money and do the interesting things. These interesting things - building computers, cars, producing medicine, improving the quality of circuits, rennovating and improving real estate, building new real estate, and so on - makes the world "wealthier" - that is, there's new cool stuff, and better old stuff in the world. With this new and better stuff, the borrower makes more money. They pay the bank back plus interest, the bank pays the saver their money with interest, and all is good. The saver's money is worth more tomorrow (the money saved comes back, plus the interest) because it was used to better the world, and someone paid for that privilege.
That's the theory anyway - in practice, banks don't actually do that any more. Which brings us to our next point:
> Money isn’t worth anything on its own, it’s only useful because it can buy things.
Kind of true, yes - but what you're talking about is what's called, "Money as a fiat currency". Anything can, and has been, money in the past. If I wrote a certificate that said, "Sebastian guarantees he'll work ten hours for you in the future on any legal project of your choice", and you trust me, I'll have just created "money". That's money backed by my labor. In the past, to standardize money, a few things have been done: It's been made into coins made out of precious metals that are of uniform values. It's been a result of trustworthy warehouses issuing certificates about the quality of goods in their warehouse, such as wheat or tobacco. Then people can exchange those certificates instead of c...