Wednesday, October 12, 2011

The Root Causes

A little while back there was an interesting post at Decline of Empire.  In it the author takes issue with both John Mauldin and Barry Ritholtz. I think most people would find this odd because they are generally considered to be two of the more bearish financial prognosticators out there – maybe not in the league with Nouriel Roubini – but bearish none-the-less.
I think the reason for his discontentment, is that both Mauldin and Ritholtz, broadly speaking fit into the advisor/pundit category.
In finance everyone talks their book.  If someone in finance is making a grand pronouncement on principal, you can just about guarantee that these principals will help their current position.  So when you choose who to advise you on your money, you want to pick someone who’s interests are not apposed to yours.  This is where the pundit/advisor steps in.  The pundit-part is how you find out about them.  They go on CNBC and give some story based on their analysis of the situation.  Presumably there analysis is a more generalized version of what they are telling their clients; thus limiting the risk that your advisor is taking the opposite side against you (see Goldman).
One problem with the pundit/advisor model is that certain types of investement advise messages are more popular than others.  In the post-WW2 world of finance, the optimistic advisor has generally done much better than the pessimistic one.  Even in our current black cloud of economy you can get a market run up to get excited over, and if you are wrong – most everyone is wrong with.
But if most people like optimistic news, there are always a few that want more balanced news, or possibly even really bad news.  Thus you will have a handful of always negative advisors (often selling gold), or balanced fund advisors (usually with a mix of short market strategies).
And here is where our author has a problem with Mauldin and Ritholtz.  They are part of the system.  They may lean toward the more skeptical part of the system, but they are still within it.  If they actually thought (and they probably don’t) that the entire system was going to collapse, and that you should by a property with a nice cave and fresh water, they would have nothing to sell you: they are not in the real-estate business after all.
So our author, who thinks we are at the end of road.  If not going to the cave, certainly on a long term contraction.  I presume that he goes after the gloomy pair of  Mauldin and Ritholtz because they are closer to conflicting with his opinions than the outright cheerleaders (CNBC). I myself often find myself thinking that the duo seem to pull short of where the logic of their arguments would lead them.
However, to say that their advise is nonsensical strikes me as being a bit hubristic.
So if you are mad at the doomsayers for not being gloomy enough, where might that lead you:
Decline of the Empire, 9 July 2011 (hat tip: NC).
I've got some news for people like John Mauldin, Barry Ritholtz, Carmen Reinhart and Ken Rogoff—this time is different, but not in the sense you intend. To understand what is happening in the United States, it is necessary to go far beyond an historical survey of financial crises. You must consider the specific historical circumstances that led to the current crisis. Such a review would include but not be limited to the following observations—
·         The United States has been hemorrhaging manufacturing jobs for 30 years.
·         Almost all of the income gains made during that time went to the top 10% of wage-earners, with most of them going to the top 1%. Wealth inequality grew accordingly.
·         Health care costs have been soaring all that time.
·         College tuition costs skyrocketed at a pace far beyond the rate of inflation.
·         Households took on more and more debt to replace lost income.
·         We had not one, but two, substantial economic bubbles during the last 15 years. Without those bubbles, how much would the U.S. economy have grown?
·         The private debt to GDP ratio grew and grew, clearly indicating that more and more debt was required to add an additional point of GDP.
·         The Federal Government more and more became the tool of monied special interests.
And so forth. …The "historical observations" I listed above are in fact the root causes of our current predicament.
And in each case, the historical trend has not changed, or has gotten worse. Households now have only slightly less debt than they did before the crisis, but trillions of dollars of housing wealth has disappeared. Health care costs continue to soar, as do college tuitions. Income gains still go to the wealthiest Americans. In short, nothing has changed.
…I'm sorry, but no amount of convenient, hopeful rationalization is going to change the American disaster while the roots of the crisis remain in place. The financial meltdown was the proximate, not the ultimate, cause of America's economic woes.
Oddly enough, I think the author is mistaken as to root causes.  IMO he is mostly describing root conditions.
The root causes, again IMO, would be a mixture of
  1. Within the U.S.A. an end to the special conditions afforded by World War 2 production/destruction
  2. A declining marginal return on science, engineering innovation, industrial production, medical innovation, etc.: an expanded version of Tyler Cowen’s  “low hanging fruit is gone” argument
  3. Declining marginal returns of resource extraction
  4. Increases in consumption due to increased wealth
  5. Increases in consumption due to increased population
  6. Fragmentation of culture due to increases in wealth
  7. Decreasing frequency, but increased sizing of disasters that inter-relate with global connectivity.
  8. Etc.

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