Tuesday

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Random Opening

I’m not a big fan of Facebook, but I was dealing with a migraine Sunday afternoon and looking for some low-impact ways to spend time, so I was browsing FB. A friend posted this picture on Facebook, and I was impressed enough to post it here. Her caption: “This is Keukenhof Park in Holland. I was here . . . during Easter week in the spring and it truly is this beautiful.”

Econ Tuesday

Some more Nassim Taleb, an excerpt from one of the best articles of the year (on the thought of Dylan Grice), and a video about the recovery phenomenon that is Iceland.

Taleb

I’m about one-third of the way through Taleb’s Antifragility. It’s good, but I think I may have read too much commentary about the book and listened to too many interviews with him. It almost feels like I’m reading the book for the second time. If you’re looking for more Taleb, here’s an unflattering article about him (which I’ve read) and here’s a lengthy interview with him (which I haven’t watched).

Grice

Here’s perhaps the best finance article of the young year: Dylan Grice: Witch Hunts, Inflation Fears, and Why I’m Bearish in 2013 (here’s a non-pdf link to same article). It merits this lengthy excerpt, an excerpt that, I wish, every person in America would read and absorb into his bones:

Grice asked his audience what happens when a government creates, say, $1 trillion out of whole cloth. (Whether by direct printing of money or by interest rate adjustments, it’s all “basically the same mechanism,” Grice said.) The answer is simple: It spends it, one way or another. It builds a road, or a school, for instance. “If we print a trillion dollars, we can now spend a trillion dollars,” Grice said. “We have absolutely benefited from this. We have a trillion dollars that otherwise we wouldn’t have had. But the question is: Who pays for that trillion dollars?”

On the one hand, you have direct, tangible beneficiaries of that money – government contractors who see an uptick in business, employees they hire or pay more as a result, and so on as multipliers play out. But those who miss out on the windfall pay the cost, in the form of slightly higher prices for goods and services. For instance, maybe one of these
non-beneficiaries would have bought a new house, Grice said, but a newly enriched contractor got it first by offering to pay a little more – the cost, in other words, is slightly higher prices for goods and services, even though not everyone has extra money to pay those new prices.

But Grice framed this a little differently than it’s taught in Economics 101; when government expands the money supply in such ways, Grice said, “what it’s done really is redistributed the wealth.”

This has consequences. Non-beneficiaries get angry at those who are newly better off – after all, thanks to their increased ability to spend, you might have missed out on your dream house or been priced out of your favorite restaurant. The beneficiaries, meanwhile, feel victimized as well. Their response, Grice said, is: “‘We didn’t do anything wrong. We got the contracts, we employed people – we did what we were supposed to do!’”

This, Grice believes, is the deeper cost of loose monetary policy. “What we’ve effectively done with this $1 trillion increase, this $1 trillion money-printing exercise, is to turn society against itself,” he said. “We’ve actually weakened the trust, we’ve weakened the fabric of
society.”

* * *

Grice came armed with historical data intended to illustrate that the link between inflation and societal breakdown has a long track record, dating back at least as far as ancient Rome.

According to Grice’s data, the silver content of ancient Roman currency dipped from approximately 50% to next to nothing during the 3rd century, around the same time that the emperor Diocletian began widespread persecution of Christians within the Roman Empire.

Grice presented an overlaid graph purporting to show that, as the rate of inflation rose in England during the late 16th and early 17th centuries, the incidence of witch trials spiked. Similarly, the beginning of Robespierre’s infamous guillotine-heavy “Reign of Terror” during the French Revolution “coincides with a collapse in the currency,” Grice said. (“Notice I say ‘coincides,’” Grice cautioned, “not ‘causes.’”)

Perhaps the “most spectacular” – and most familiar – example, according to Grice, is the rampant inflation in Weimar Germany that paved the way for Hitler’s rise to power and the Holocaust.

Grice acknowledged that he was presenting “very, very extreme examples,” although he noted that the most recent period of inflation in the US – the 1970s – had its own milder symptoms of social breakdown. “This was a decade wracked with social tension, wracked with political scapegoating,” Grice said. He said the 1970s album by the Sex Pistols, “No Future,” captured the 1970s zeitgeist nicely – money and saving are essentially about creating “links to the future,” Grice said, and those bonds frayed in the ’70s.

Iceland

Do you remember what country was the epicenter of the 2008 financial crash? No, not England (that’s starting now). Not the U.S. It was Iceland. But the country is flourishing now, just four years later. Why? It let its banks fail, wrung the junk out of the system, and built from the ground up. The rest of the world should listen: