Monthly Archives: February 2012

Up at Crooked Timber there’s a neat game of political simulation: you are a politician with all the power required and have to solve the Greek debt problem, through a dialogue with your civil service adviser on the choices to make; it is pretty neat.

I ended up with some default with EIB investment support within the eurozone at the end of the game, which would be a passable solution, even though my preferred solution remains the Icelandic route, which isn’t offered in the game. Fair enough, as it’s a bit unlikely to happen unless forced on by events: for it to be taken it would take circumstances that make it obviously the least worst of the remaining options, and we’re quite some distance from this so far.

What I’d want to do today is not find a solution but try to guess, as a passive observer, what will happen. I believe lots of what happened in this crisis, and many others, can be largely explained by the structure of the institutions involved. To a significant extent, politicians have limited leeway: what they can do is constrained, by the internal logic and inertia of the institutions they are part of, and by the limits of realpolitik — many things are just not acceptable to their constituency and a politician moving too far away, even if within their constitutional role, would not last long, and they know it.

I certainly don’t believe there is a superior intelligence ordering everything in a logical way, nor that the conspiracy theories have much ground in reality, for instance the neoliberal cabal popular among some supposedly enlightened thinkers. There are neoliberals in Europe, and elsewhere, certainly, but they are not so organised as to agree with each other precisely on everything, let alone be in control of politicians, or anything much. The world is chaotic and probably doesn’t have the reasoned order people like to see in it — everything would be so much simpler if it did. It’s a natural human instinct to try and find order and logic in the world, to make sense of it; but I believe there’s many cases where there just isn’t that much to find out, disappointingly.

So, let’s make a few predictions. I have weighted them with odds. The horizon is about two years.

  1. In 18 months time, Greece will not be in the news anymore (odds: 90%). This is an easy one: the media, and that includes the blogosphere, doesn’t have that long an attention span, and there’s so much news that can come from Greece: either it blows up, and that’s rather narrow in time, or it doesn’t and muddles along, and it is not interesting any more.
  2. The EU as a whole will service all of Greece’s government bond portfolio in some way or other (odds: 80%). Many pundits have commented that the official sector (EU and IMF) share of debt left by last week deal is unsustainable and should have been reduced with a more comprehensive default. That it isn’t sustainable is probably right, but there are few reasons to cancel the debt now. Operationally the EU is going to send enough funds Greece’s way so that the Greek government will probably operate close to a balanced budget for the next few years, same result as they would have achieved with a full blunt default. Notionally the debt servicing is funded by further loans, which, notionally again, makes the problem worse, but in practice they’re more like a call option on Greece’s recovery: if it goes better than expected, or just merely as well, the creditors may get some money back, and if it doesn’t, they can always cancel the notional loans later on when repayment comes due and is unrealistic. This has two great advantages politically: first, it gives the rest of Europe time to get used to the idea of de-facto fiscal transfers, and secondly, it gives the European authorities a bargaining chip with future Greek governments, who have something to gain from renegotiating the terms of the call option. With a full default, they could go back to the old ways undisturbed. This is consistent with the general nature of European construction: it is built semi-chaotically, in small incremental steps that are not always fully consistent with each other in their details, but where the broad direction, towards further integration, is clear.
  3. Greece may or may not leave the eurozone, but if so it will be the only country to do so (odds: 90%). I think there’s a good chance it won’t leave, because of both public opposition within Greece itself (for better or worse) and the fear the governments of the rest of the Eurozone have of the collateral damage of a disorderly exit. If there is an exit, the collateral damage is likely to be both big enough to convince everybody not to try again but not so big as to create a proper Armageddon.

In other words, I think the most important determinants of the crisis is institutions as they are now, what is politically acceptable now, and what financial flows are happening in the next few months, and how the now will evolve. Part of political action is to talk about twenty years or further horizons, but action remains pragmatic as it is much easier to actually do something in the short term. Paradoxically I think a failing of many observers is to discount the short term, and its dynamic nature, too much — and that despite their own very short attention span!

So Apple crossed $500 and is seemingly going unstoppably up. I think we’re clearly in bubble territory. It’s not that the product is bad, it’s pretty good. The walled garden is naughty but you can see how and why the customers tolerate or even like it (a bit less junk than on more open platforms).

Let’s review the prospects.

A pile of bricks

User friendly (credit: Lauridsen

The product is mature, now the latest iteration of the iPhone has fixed the mediocre camera it has about everything you can expect from a smartphone. The iPad may do with a retina-like display and some slight improvement here and there in the next iteration, but that’s at most one step away from maturity. You could add a device mid-way in screen size between phone and tablet, à la Samsung Note, but that’s not that big a deal and most people won’t get all three sizes. Desktop and music players have been mature for a while. So unless they come up with a magic thing out of their hat there’s no new paradigm shifting product in the pipeline — and that’s harder to pull without a visionary at the helm in any case. So there’s little scope for expansion via product introduction.

Now market share. Many pundits see them gaining market share. The problem here is that it’s a premium product. No premium product gets 80% market share at a premium price, which would, by definition, not be premium anymore. Every hipster and other premium consumer who wants an Apple device already has one, or the whole range. With mature products the renewal rate will slow down, and market share, while it still has a bit of scope to extend to capacity, is pretty constrained. They can sell some to hipsters in Asia, but there’s so many people in developing countries who are going to spend $700 on a mobile phone that has pretty much the same functionality as the $250 competition. What is the average salary there?

The competition might be a bit less slick, and offer a less smooth experience to degree, but they’re basically there on functionality and not that far away on the rest, and they’re eager to catch up and have ample scope to compete on price; which the non-premium crowd, in China or elsewhere, is sensitive to. What can Apple do? Either they compete on price, but then they have to shrink their margins and lose exclusivity premium. It’s not obvious that would translate to increased profit even if they sold several times more units. Or they can remain premium but will stagnate due to market saturation.

Now from the stock market perspective there’s the classic symptoms of idealising a good company that can’t do no wrong, has a tremendous recent financial record, and whose product people who trade the market use (they all used Blackberries a few years ago, and it worked for a while for the stock…). Apple is already the largest company in the US by market cap, and when you’re that big it’s pretty hard to grow. It’s not that the valuation compared to financials is totally out of whack, but it cannot go on forever growing like it has done recently, but in the short term it has hardly anything restraining raw momentum — I feel there’s even a smell of capitulation in the bear camp. Hard to see how it couldn’t be a bubble. As any bubble, it may have some long mileage left in it.

Then there’s the patent troll thing as well. This is corporate hooliganism. If it was Goldman Sachs doing it they’d get much maligned for it, and rightly so. I wish the Occupy crowd would throw bricks into Apple glass stores a bit more often: patent trolling and rent seeking is bad karma, my friends. Though on a financial level, I think it’s a pretty much zero sum game which will be settled to be broadly neutral to all the large parties involved, less lawyer fees.

Disclosure: long Apple option straddle at 500 expiring February 17. (This is a tactical trade which doesn’t really relate directly with the above: fundamentals don’t play out on a weekly time frame.)

I’m at risk of becoming a John Kay fan-blog, but he’s discovered MMT this week, and tries to debunk the MMT view that it is government taxes that give currencies their value:

A theory called chartalism, which sounds cranky, or modern monetary theory, which sounds better, argues that money derives its value from the willingness of governments to make payments and accept taxes in it. But this is easily refuted. Suppose the Scottish government would only accept payment in highland cows. There would be an active trade in highland cows to meet tax payments, but people would continue to take their banknotes – English pounds, euros, or US dollars, as Tesco preferred – not cattle to the shops. The ingenious folk at RBS would quickly create tradeable highland cattle certificates.

While this is operationally undeniably true — highland cows being an inconvenient enough unit for trading, people wouldn’t take them to the shop however valuable they become due to their value for tax paying purposes — does it invalidate MMT? By collecting taxes in the currency it issues, the government does have some leverage to influence its value, but it may indeed not be the essential thing that makes people use currencies. A failed government might find its currency abandoned for day to day trading, whatever the law says.

It would be interesting to see how much of the Greek economy keeps on using the euro as a unit of trade (pricing, savings) if the Greek government leaves the Eurozone. In an economy with a strong tourism sector, they have a ready made influx of banknotes, and unless they become North Korea, it should remain practical for Greeks to operate euro bank accounts in non-Greek banks, and in the SEPA area they could easily pay each other by doing transfer between those accounts. Private operators could even set up a network of euro-dispensing ATMs. So you could well end up with a two speed society where only public sector employees use the new currency and try to exchange it as soon as they get paid for euros that are used by the private sector, top down from the tourism sector, and less at risk of quickly losing their value. It’s quite possible that the Greek government has already lost enough credibility that it couldn’t get (all) Greeks to use a new currency it issues, even if it wished to.

If taxes have only a marginal role in making a currency valuable, and things like trust in a stable issuer and conventions are a more overwhelming factor in their continued used, maybe we can get rid of taxes completely. A good thought experiment is to try and think what happens to a system where state spending is still done by government with the currency it issues but tax is not used as the inflation regulation mechanism, as per Warren Mosler‘s famed:

Taxes function to regulate aggregate demand, and not to raise revenue per se.

To reduce the system to its simplest form, what happens if we have a system:

  • All government expenditure is funded by currency issuance
  • The treasury is not allowed to save or borrow (no bonds, no savings, funds are released by the central bank only to pay public sector employees and suppliers)
  • The central banks is still in charge of maintaining an inflation target, through the interest rate it charges on reserve
  • It may not be essential, but let’s also assume the replacement of coins and notes with electronic money, which enables the central bank to charge negative rates on reserves (if cash exists only electronically, it cannot be kept under the mattress to escape the negative rate)

So we’ve still got an inflation control mechanism: the central bank can compensate any government spending profligacy by charging punitive rates on bank reserves which should suck up excess liquidity as soon as it’s spent by the government.

The detailed implications of such a system are beyond me, but I suspect this could well work out. Perhaps the hardest thing to get right would be to have people keep trust in the currency after the abolition of taxes, even if could be formally proven it’d work on paper. Trust depends on more than mere facts, unfortunately.

If taxes are not even useful to give value to a currency, what are they useful for? The obvious thing that comes to mind is redistribution, but this also seems immediately invalid, because anything that can be done by taxing some and giving to some others, can also be done by giving more to the others. The government just needs to make more cash or services awards to the needy, which will be, in negative, at the expense of the wealthy. Given how tricky it is to collect tax efficiently from the wealthy, this seems outright desirable. So, as such, the idea that you could operate with no taxes is independent of the desired size of government — it’s an operational question that leaves the size of government question free.

Sounds too good to be true? First, it’s not that “good” as such: it’s an operational change that need not change anyone’s net position, beyond reducing administrative burden some, or actually merely moving it around to the enlarged positive awards system. Second, if untrue, it would be enlightening to understand the mechanism through which it would not work.

John Kay is a most excellent writer, who publishes a weekly column in the Financial Times. He helpfully also posts it on his personal website, which I get through a RSS subscription.

This has been redacted away in the meantime, but this week installment’s first paragraph, emanating surely from deep in the entrails of the FT machine, was a lament saying approximately, from memory: “don’t copy paste this, quality journalism costs money, link to the FT website instead (link provided)”. The link was to John’s article inside of the FT website which sits, unless you reach it via a search engine, behind a paywall (a registration page, with limited “free” articles). I hope the redacting means John Kay is within his rights to republish his own work and will keep on doing it.

Whether that message was addressed to the columnist or to his offsite readers, I find it interesting that the FT is resorting to begging. The herald of capitalism trying to convince people should buy their product because they’re nice guys doing nice things? And seemingly thinking that people might not bother if left to their own devices? Is this the beginning of the end?

The financial press is in a better position than most of the legacy press. Their core customers are almost price insensitive: they can charge a multiple of a regular newspaper’s price without much risk of losing many readers, and they’re quite conservative: boardrooms are dominated by older men, some of whom may still use a hired hand to move their mouse and provide printed reports on what happens on the interweb. So they should keep a fairly solid core customer base that’s relatively immune to technological change.

On the other hand they’re losing their function as fast as the rest: looking up stock and other financials prices in finely printed columns of paper is clearly redundant, and will go the way paper encyclopedia have. Regular newspapers have had a similar problem with their classifieds section. If the FT made any money charging the funds they published the price of, that will soon be gone.

Now let’s try to hunt for the “quality journalism” bit. What’s in the FT? Regurgitation of agency news and company regulatory feeds is already available online. Aggregation is possibly a useful function but cheap to do by anyone wanting a bit of attention online as well, and it’s easier online to have multiple aggregators so that each niche, each peculiar cross section of interest, can be better served than via a one size fits all paper.

Commentary is another staple, but the web is full of people having opinions. Most of which is rubbish, and I help as much as I can to add to the pile, but it has to be said the best of the blogosphere is now competitive with what you get in major newspapers, without the filling material produced by the straightjacket of having to produce a fixed word count on a clocked basis — columnist do get bad weeks, bloggers can keep quiet when they have nothing to say, though some of the latter haven’t realised this. The best opinion leaders also understand they need online visibility as well; and so, like John Kay, publish online simultaneously. So sooner or later most or all opinion that’s worth reading will be online and free to read.

So, is there some in depth journalism left? Occasionally, I presume that, yes, there is. They may do the odd investigation where they discover something that wasn’t published elsewhere before. At the best of times, it’s even a socially useful function. How much of the paper is that? 5% at most I’d guess. Do you need to have this function attached to a legacy printed newspaper? This is a problem all serious newspapers have. We don’t know for sure the exact institutional form that this sort of activities will take in the future; a mix of volunteers, foundations and independent state agencies perhaps; but I think the likeliness that it’s going to be funded by the cover price of the Victorian version of the tablet computer is remote.

So, yes, the FT is toast. They should be courageous and visionary and publish their last issue, wave the world goodbye, and move on to other things, individually, because legacy organisation rarely respond well to radical change. Better to start from scratch than get the old auntie to change her ways. Leave when the party is still going strong. Will they do that? No. They will be in denial and decline slowly for two decades, endlessly trying to convince uninterested former readers of their vanished utility; and eventually, when hardly anybody but people in the waiting room at the crematorium read it, the FT will go into liquidation. Its last contribution may be as a live study of why doomed organisations find it so hard to exit gracefully and economically.