Reasons Unbeknownst

I have some assumptions about economics, finance, and trends but I don’t spend much time looking at how things would have to change to accommodate my weird predictions. So that’s what I’m writing about tonight… Tonight I make omelets.

My condensed take on the economic camps’ assumptions about our predicament: The Austrians assume job growth resulting from lower taxes will organically release us from the Great Recession. The Keynesian camp assumes deficit spending will save us. I think both are wrong in this case. The housing boom masked the fact that the middle class is shrinking due to automation and global wage arbitrage. Neither of which show any signs of abating.

Both camps assume that for 300 years the middle class will remain stable. They do that because their models (mainly Keynesian) get too complex unless you assume all things are equal. So the complexity of their models preclude the notion that demographics and common sense can come into play. This is probably why they missed the housing bubble. My take assumes accelerating societal change.

The Austrian school isn’t so burdened by math (they did see the housing bubble coming) but its practitioners are burdened by political assumptions about fairness and justice (Bastiat and Rand). The social consequences of a shrinking middle class aren’t a concern for most Libertarians. But in the long run you start to have serious problem with a society with no middle class (so I’ve heard).

In short, they Keynsians think they can avoid the inevitable and the Austrians just don’t give a damn. So nobody is writing much about the problem.

In the back of my head I’ve remained optimistic that the brains in Washington can transition society to a future where there is no middle class because of rampant productivity growth which will (not ironically) make increased wealth redistribution palatable. This rising productivity simultaneously solves the deficit problem. Then I read this unfortunate bit of research today from Julius Wilson via The Atlantic:

“A neighborhood in which people are poor but employed is different from a neighborhood in which many people are poor and jobless. Many of today’s problems in the inner-city ghetto neighborhoods—crime, family dissolution, welfare, low levels of social organization, and so on—are fundamentally a consequence of the disappearance of work. “

So there are two problems for the future. The first is dealing with the potentially outdated financial framework that assumes a healthy, stable middle class (think 30 year mortgages). And the second is the psychological ramifications of joblessness even with bountiful welfare benefits.

So politicians are going to have to look at how to make wealth redistribution work given the understanding that you can’t just throw money at the jobless and expect them to avoid dysfunction.

Woohoo! I’m writing again. It feels good. (and cooking, mostly high end omelets). My thoughts from the last week:

“In this case it’s the application of reason to the study of the financial
behavior of irrational, social, creatures (humans). AKA economics. ”

“20 years ago we could blame the lack of information for our inability to fix the world’s problems. Now we’re the bottleneck.”

On CA:
“Our taxes are high but they’re not nearly high enough to pay for all of the earth fixing programs we like to “fund”.

“California is basically a giant version of an idealistic student at Berkeley with a Visa who has never taken a class on personal finance.”

“Don’t forget California. The Republicans are supposed to come in and cut taxes and spending but they find it’s a lot easier to just cut taxes.”

On wholistic medicine:
“It’s called the placebo effect and it does work but, like Peter Pan, only if you believe.”

On Keynesian misconceptions and fiscal shenanigans:
“Krugman (liberal) thinks Obama isn’t doing enough to stimulate the economy. Their prevailing wisdom is that you do need to worry about deficits but not until we’re through this recession. Otherwise we could get caught in a deflationary spiral (see Great Depression).
A deflationary spiral would collapse tax receipts and would grow the deficit. This is why unfunded spending and low GDP both have a negative impact on the dollar.”

“Giving away mortgages on crack houses only makes them crack homes.”

On the moon:
“Some of us Luddites think we should pay down the deficit before space travel becomes a priority.”

“Baby boomers already saw a guy on the moon. At this point in their lives they’re going to vote for more drug benefits. The baby boomers get what they want.”

On Socialism:
“Socialism is basically the Apple model. Things cost more but you get a strong leader (Jobs) and nationalistic pride (the Apple brand/ lifestyle), and you don’t have to worry about evil monopolies because you assume the government monopoly is benevolent.

Some of us prefer an open model with fierce competition. Brands aren’t as important because if companies are dropping prices fast and innovating faster, nobody will remain king of the hill. This is Capitalism but it requires regulation.

Bill Gates was completely wrong when he likened Open Source to Communism. Socialism consists of government run monopolies. Bill Gates as a politician in other words.

Socialism is basically the admission that the lobbyists have won, no regulation will pass, and it’s time to pray for competent bureaucrats. We Americans have trouble admitting that, probably given our history of occasionally tarring and feathering corrupt politicians.

Though I think we should take from the rich and give to the poor (within reason, wealth divides are growing) it doesn’t mean the government has to expand out from the department of motor vehicles and start running our supermarkets. If you don’t see the problems inherent in letting the government run businesses then you’ll probably like Socialism.”

On law:
“If regulation is just legislation and you assume laws are enforced then leadership should only consist of representatives. A Representative Democracy is arguably the antithesis of strong leadership.”

On Toyota:
“I think you should engineer safe gas pedals rather than change the behavior of the throttle system.”

“Toyotal Recall” My highest ranked comment this week but it looks like some headline writers at Fox news thought it up a few days before me.

On dog lovers eaten by their own dogs:
“You would expect man hungry dogs to eat a man so that’s not ironic but the fact that he is the supposed leader of their wolf-pack is.”

On Graphine based processors:
“I doubt that other than supercomputers the effort will be in reaching that level of performance. For most of us they’ll try to slow them down to only what is required for the application to reduce power consumption. Cell phones lasting a week on a charge would be nice.”

“Dixon Ticonderoga Number Two processors.” My second highest rated thought for the week according to Reddit.

” I think the concept of “good enough” may start to apply in the near future.
I would rather have a cell phone or PC that uses 5 watts than something that requires 150 but can render full length Pixar movies.
GPUs will probably jump on this for performance but it’s hard to argue many people are dissatisfied with current top of the line graphics.”

“Watch your cpu use, even during compiling, a lot of the bottleneck these days is IO. Most people are surprised what their CPU can do after installing a good SSD.”

Asia Times is one of the best sites for articles on global economics but I have a beef with an assumption by one of its authors. I see this a lot and I think it’s just wrong:
“Were the adverse effects of excessive money creation and huge budget deficits not to appear at all, much of economic theory would have to be rewritten. It would mean that excess money creation could magically disappear, leading to no real world effects.”

If you assume that no change (currency stability) means no effect then yes, they’d have to rewrite economic theory. But if you assume the world is changing then you have to consider the possibility that incredibly loose monetary policy might offset natural deflationary forces. In other words, no change means something strange is going on.

In this case the pain felt by society would be the high prices relative to what they should be paying. So perhaps without all of the money printing gas would be $1 a gallon. We don’t see the fact that we’re paying $3 as a problem because we’re used to it. But that’s a real impact on society when jobs are vanishing.

If that is in fact happening it’s the perfect tax because standard of living goes down due to job loss, furloughs, etc. while prices are stable. The alternative is prices rising when wages and employment are stable. Scenario one is no less painful but it’s harder to point the finger because job losses probably feel like more of a personal failure than $6 gas.

Photo by Iveta on Flickr.

The economist takes a stab at the robot debate but like most of the commenters I was left wanting more…

“What policy makers need to worry about is the impact of autonomous technology in a world of seven billion people where nearly all of them do non-mental tasks to earn a living. Robotic engineers, graphic designers, architects, etc… are a long way off. Robots that can negotiate a light assembly environment and put the cell phone in a box along with a bunch of pieces of paper are maybe a decade or two away. They will also be able to assemble the cell phone, or sew the shirt, or pick the fruit, or work behind the McDonalds counter or stock the store shelves. The Industrial Revolution displaced massive numbers of workers. But they were displaced into new jobs that machines could not do. A robot that can do anything a low to medium skilled worker can do, can do any new low to medium skilled job. There are no new jobs for the displaced that can’t be automated. Western Europe, Japan and the US have had a huge number of these jobs go to China, Vietnam, etc… These Western economies will actually gain as automated light industrial and textile factories return. A robot costs the same to operate in China as Glasgow, but shipping from Glasgow to London is considerably less. But what happens to China and the rest of the world? All those workers who left the farm have no intention of going back to the farm. What will they do?

Is it really progress if GDP doubles while the unemployment rate skyrockets? What if the standard of living rises but only in the average, not median sense? I’m still clinging to the belief that this recession and joblessness are not solely the result of a Chinese savings glut and subsequent credit bubble collapse. They are also the result of a people not able to adapt quickly enough to a (quasi) capitalist economy that is now subject to something like Moore’s law.

There is a strong egalitarian slant to our thinking as Americans. I don’t know how we’re going to reconcile that belief with increasing unemployment. There is a fear of robots replacing factory workers but I work on software that automates dozens of jobs in the name of improved healthcare deliver systems. No mechanical arms are necessary to obsolete most jobs in America. Maybe in the future we’ll have PDF pushers instead of paper pushers but it seems unlikely.

I’m intently watching this play out. How web based media adapts to new economic realities will shape politics going forward. Media may not be controlled by a handful of media corporations in the future but it certainly will be shaped by media figureheads (populisits) and the angst of the masses.

This recession (which I tend to believe is the first real affront to the status-quo by creative destruction) is far from over in my opinion but I sincerely do hope I’m wrong. If the stock market continues to rise then my worldview is going to need a major overhaul.

I have a system of beliefs I use to view the world and it has served me pretty well in making predictions but it has a big hole. So I drive around in my theory without a complete understanding of the engine, but it gets me from point a to point b effectively.

I’m confused by the fact that something that is not really a need can have value. We pay people to make us laugh but you can’t survive on laughter despite that famous quote about medicine. I have a theory and I’m going to use ‘laughter’ in place of anything intangible that we want but don’t need that we might pay money for.

Our ability to pay for laughter is equal to GDP (Gross Domestic Product) minus something I’ll call NTNP. Necessary tangible national product. NTNP is the economic value of the production of things like food, housing, transportation, clothing. Basic necessities which are the foundation of the economy in the 3rd world but that also exist in the 1st world. The NTNP as a percentage of GDP is probably a lot higher in places like Ethiopia where people struggle to survive and don’t spend $100 a month on HBO.

So in my thought experiment GDP = NTNP + EMNP. EMNP is the reason Eddie Murphy is a fabulously wealthy comedian, it’s the value of everything produced people buy after they’ve paid for necessities. Funny people in Ethiopia probably aren’t very wealthy because in Ethiopia they eat tomatoes, we throw them.

For the sake of argument
US economy: 20% NTNP and 80% EMNP.
Mexico: 50% NTNP and 50% EMNP.
Ethiopia: 90% NTNP and 10% EMNP.

The interesting point is that even if you’re having a bad year in Ethiopia the economy will never collapse due to a lack of confidence like it can in America. Eddie Murphy National Product on the other hand is ephemeral, subject to the whims of collective grumpiness.

One of my beliefs is that accelerating technological change is squashing the middle class. When everybody is driving electric cars in ten years there will be a million or so mechanics out of work because electric cars are so much easier to maintain. That’s just one example. The newspaper business is on the brink of collapse due to the Internet, etc.

I’m going to coin a new term to describe what our middle class is facing. Schumpeter came up with creative destruction. Kurzweil has accelerating change. Mash them together and you get the ugly term Accelerating Destruction.

EMNP will continue to shrink in the future as the rich get richer. Why? Because wealthy people only have so much time to go to the movies and Olive Garden. But those businesses employ a heck of a lot of middle class people.

We need to learn to live with deflation. The number one criticism of deflation is that it strangles the economy because people stop spending and wait for things to get cheaper in the future. If that was really a problem nobody would ever buy a laptop. Fear of deflation is probably due to the knowledge that our bubble economy sat precariously atop debt funded pillar of happy thoughts.

I get the sense that policy makers know that confidence is a prerequisite (hence the blind optimism) but they don’t seem to get that the confidence was paid for with unsustainable debt.

Wealth redistribution is not technically fair in my opinion (Bastiat) but it may be the only way to prevent the complete collapse of capitalism given accelerating destruction. Someone has to keep the people paying for laughter.

Well, lots going on. I just moved, job is getting crazy, NewsDiego is getting more upgrades, time is short. I miss writing as much as I used to.

On the plus side, I got a new Moka Express Italian coffee maker which is why I’m writing this..

Hell of a stock market rally. Not convinced this is a bottom. The government could come in and surreptitiously mask the astronomical losses but it will cause inflation (eventually).

My theory from a few months ago was that you can’t really have inflation until the asset bubbles have all completely collapsed. It never felt quite right so I revisited it and came up with a better theory.

In my view, there are two types of asset bubbles. The first is of the housing bubble nature. Decreasing regulation, lending standards, and interest rates create irrational exuberance and excessive borrowing, gambling, and leverage. Prices shoot up and then crash.

The second bubble is harder to spot because there is no run up in prices. I’ve written about this before but the idea starting to get more mainstream.

http://www.techradar.com/news/world-of-tech/what-if-our-tech-is-good-enough–589169?src=rss&attr=all

“The problem of ‘good enough’ is a huge headache for the tech industry. When your computer isn’t good enough – when a slow processor, meagre memory and tiny hard disk struggle with even everyday tasks – you’ll buy a better model as soon as it becomes available.

Now, though, the weakest link isn’t your PC: it’s you.

Will a 200-core processor make you type an email more quickly, make you work more productively or make your Facebook status updates any more amusing?”

The second bubble was simply the side effect of an inefficient economy. It’s now deflating because hardware is good enough. The hardware industry will be the first to collapse as systems on a chip will eventually dominate. Netbooks are a step in that direction.

Software will continue on as a driver of growth but it too will eventually succumb to standardization and the open source movement. New ideas will require new software but the industry as we know it will probably grow and then shrink. The growth of the software industry will come at the expense of the jobs being automated by that software.

Innovation will spring from the social side effects of communication technology. In fifteen years rich people will not be founders of tech startups. They will be incredibly smart organizers and communicators and then there will be the artists. But I guess you could argue that artists are just smart communicators.

We will all be better off on average after these industries collapse but there will be a massive push to tax the wealthy to maintain a middle class. If we would just let asset prices track the fall of the second type of bubble I mentioned everything would be just fine. Wages would come way down but prices would be dropping even faster.

It’s pretty apparent that our rudimentary financial system cannot cope with the deflation of the first type of asset bubble. I doubt it will be able to cope with the second, larger type.

I think I just figured something out. If the government / treasury print money and mail checks to people it will only hasten the decline of the economy because inflation is hard to control and it creates inefficiency and uncertainty.

Insight:
The inflation vs. deflation debate is largely irrelevant. Standard of living can decline during inflation or deflation. Asset price to income ratios will normalize but real middle class income will necessarily decline as the 2nd great bubble deflates. Our banking system is not designed to cope with this sort of change.

So regarding stock markets. To the extent that prices are based on earnings they will decline. Inflation may actually happen on the way down which could push stock prices higher but if we get to that point the currently rally will have collapsed long before.

Inflation is the government’s tool to smooth out economic fluctuations. But they are attacking an albatross with a fly swatter and everybody is debating the brand of fly swatter.

The 3rd world isn’t sitting on a bubble of job creating inefficiency. Not only do they get to skip the installation of phone lines (they’re starting with cell towers) but they don’t have to deal with the collapse of a middle class employed erecting telephone poles.

Good new TED Talks:
Cell phones and poverty:

Electric Cars:

Finally some criticism of CNBC is starting to spread through the interwebs. Great ending…

The people who are saying this stimulus bill will work are the same people who said there was no housing bubble.

This stimulus legislation is an empty gesture/package. It’s too small to make a difference given the magnity/gravitude of the situation and the deficit left in its wake will only contribute to the decline of the dollar.

Local hero Rich Toscano recently chimed in with a great (but flawed in my opinion (because of China)) article that got me thinking. If the only thing that really matters is foreign perception of dollar weakness in this whole mess then it make sense to focus my prognosticating on the global mind-games that must be going on right now. So here are some thoughts on how this plays out:

Theory #1:
Governments and central banks around the world are delaying the inevitable devaluation of their currencies for as long as possible. If they’re the last currency standing then there is a chance that they become the world’s next reserve currency. This allows them to buy time by sticking other countries with the bill.

When the next reserve currency emerges, dollar, yuan, or otherwise, the central bank in charge of it will no longer have to constantly worry about flight to other currencies. This is when I think hyperinflation really becomes a possibility. This is also when I think it will make sense to buy real estate and maybe gold.

Theory #2:
I used to think that hyperinflation was paradoxical. If the economy is cratering, how is it that wages can go up? I have a new theory on this. Zimbabwe’s economy is currently suffering from hyperinflation. It is based on production of things needed for survival. Our economy largely consists of jobs and products designed to accommodate wants. In an economy based on needs production has to continue or people die. In an economy based on wants production can fall until it becomes an economy based on needs.

Theory #3:
A wants based economy creates service sector jobs. A needs based economy is largely automated (with the exception of 3rd world countries). If my theory is correct then job losses now should gather steam until they’re worse than during the great depression. This is the case because back in the 30s we were a country of farmers without robots. People kept their jobs because those jobs (literally) put food on the table. Now we’re a country of accountants, mortgage brokers, and life coaches.

Theory #3b:
Hyperinflation will not happen in the US unless and until:
a> We either lose reserve currency status due to a lack of fiscal discipline
b> Or we remain the reserve currency but our bought time runs out.
c> And we become a needs based economy (it’s hard to imagine how painful this would be).

Timeline:
So what happens next? Here’s my best guess:
2009 – People really start to understand that it is different this time. The stimulus package fails and job losses mount. Home prices continue to decline because rents decline and price to rent ratio reversion to mean works its inevitable magic. States like California begin to face insolvency, increasing the burden on the Federal government (including the Treasury).

2010 – Government failures in large European needs-based economies. We’ll be in nearly as bad shape but people don’t expect much from the government here in the US so the outrage will be a bit less severe. Those governments will respond by printing money and mailing stimulus checks to their citizens thus destroying their currencies and credit ratings. The Euro breaks down.

2011 – US vs. China showdown. The country with the happiest citizens wins the reserve currency war. China isn’t a democracy but they’re worried about social unrest just like we are. Democracy and accelerating change are mutually exclusive. I give the edge to China’s currency here.

2012 – The end of deflation. Buy land. The US begins its transition to a needs based economy. Productivity growth means that wealth redistribution is going to be massive. Out of necessity. The Republicans were right up until about 1990. They’re still right about free markets but they’re dead wrong on redistribution.

If you’re wondering why most economists didn’t see this coming it’s all explained right here on Economist’s View.

Random thought of the day:
My biggest monthly expense, outstripping rent, food, and even beer… is federal tax. Maybe we should all look at the bright side of this financial mess. By losing our jobs we will also lose our biggest expense.

In that vein, something like 10% of famous quotes go like this:
“We don’t stop playing because we grow old; we grow old because we stop playing.”

I was thinking about writing some software that would autogenerate these things.
We don’t X (for, because, to) Y, we Y (for, because, to) X.
Some completely nonsensical examples:
We don’t eat because we’re hungry, we’re hungry because we eat.
We don’t strive for greatness, greatness strives for us.
We shouldn’t exercise to get in shape, we should get in shape so that we might exercise more.

I think this is where Horatio Caine from CSI Miami gets his quotes:
“When you have everything, sometimes it feels like nothing”

Quick thought on Black Friday sales being ugly but better than expected. All of the people who decided to forgo car and truck purchases due to the recession are likely to spend some the money they saved on holiday shopping.

This looks like a shift from big ticket items (cars) to small ticket (gifts). Those looking for any sign of the bottom are quick to latch on to these stats. I’m not convinced that we’re through the woods yet in spite of economic deforestation / bailouts.

For next time. The graying of credentials. Degrees are losing their luster as employers learn to ask the right questions and interpret online reputation.

Image by net_efekt

Sometimes I post in the comments of blogs I like and realize that they might make for decent blog posts so here are my thoughts on the market from Critical MAS.

Back in the day the smartest people in the room thought that the earth was at the center of the universe. They had fancy diagrams explaining the solar system and top calligraphers documenting the system.

There aren’t many calligraphers left these days. They’ve been replaced by anchors on CNBC.”

Other stuff:

• Made some Improvements to NewsDiego, a local news site I’m building for San Diego.
• NYTimes cover story on VoiceOfSanDiego’s success as a new breed of news org.
• Signed up for Twitter, @kirkfhouse , need to start using it more
• Met with some entrepreneurs the other day. Interesting talk about the future of small business
• To summarize their thoughts – Automating customization is key. This is a problem I’ve faced trying to do local news across the country with Houndwire.com.
• Business idea: Using news statistics to adjust ad campaigns in real time without human intervention.
• Business idea: Layoffs are partly a result of businesses not considering the possiblity of simply cutting wages. The problem is partly due to inflation expectations. During inflation people generally don’t take pay cuts. Inflation is no longer a problem, at least for now. Businesses should offer pay cuts before laying people off only if it makes financial sense. The other problem is that businesses aren’t used to deflation so they aren’t well versed in cost cutting. Landlords are in the same boat. They don’t cut rent. If your boss cuts your pay and your landlord doesn’t cut your rent you might have to move. If you own a home you’re just screwed.
• My Xbox 360 died. They’re fixing it for free. Going to get Netflix tied into it. When I get my own place I’m not getting cable if I have Hulu and Netflix. Need a good front end for media file playing, preferably with RSS/Torrent support
• I predicted the economic trouble we’re in but I’m not really sure how America and the world will deal with the dramatic lifestyle changes that are going to be required.
• Optimistic about the future of this country. A real economy not based on debt will probably suffer from deflation. If we can break the cycle of inflation in spite of monetary policy then I’ll have even more hope.
• Deflation is like tough love. We’re not going to spend just because we’re afraid of inflation eating away at our wealth. We’re going to have to actually have money to buy things.
• Watching price drops on SSDs with glee. The Intel X25-E keeps me awake at night. No good reviews yet. Nobody is using IOMeter to compare random write IOPs. What the hell. This thing will also shine on application installation and database benchmarks

Update, some numbers on IO now available, these are RAID-0: