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Coming Up For Air
Sep. 29th, 2010 02:26 pmA half-way decent morning, probably because the person I wanted to speak to at the DynoRod franchise wasn't in for the day, and I didn't have to have any dealings with Thames Water. Oh, and Jim from the Property Management Co that runs next door phoned me back and said all the right soothing words to calm me down.
Anyhoo, there's a boiler to be installed downstairs tomorrow, so I can focus on that until Friday morning, when Thames might or might not turn up. The most calming thing that Jim said was that, even if this Thames-Water lot also say that it's a private pipe, when John from DrainCo comes through with his report we will be able to prove them wrong. That was a bit of a comfort.
I'm no longer expecting the DynoRod franchise to do anything with regard to the hose -- so I'm not going to be annoyed if that's what they say tomorrow. I'll just send off the letter of complaint to DynoRod and British Gas.
+++++++
In the land of economics, there's an interesting poker analogy with the current Monetary Policy Committee. Quite often in poker tournaments the right decision is either to raise all-in or to fold, while to call is easily the worst decision of the three options.
This "any decision has a higher EV than no decision" runs counter to committee-think, and it's currently being exposed in the MPC.
Basically, we are facing two possible scenarios/threats - deflation or inflation. There's no "golden mean" recovery. We have debts that have to be reduced, and either the people who built up those debts will have to repay (thus reducing consumption and leading us down the deflationary path) or those debts will be effectively wiped out by inflation (thus letting the debtors get out of jail free, but penalizing those people too stupid to spend money when they should have (i.e., savers). This is the inflationary path.
In parallel to this, we have an asset price bubble. Anyone who imagines that this is sustainable is a fool. However, it is not a necessary conclusion that it must burst. Real asset prices could fall gradually over one or two decades. If we take the deflationary path, this fall will be in absolute terms. Now, we know how reluctant people are to sell a property for less than they paid for it. The result is that the deflationary path will dramatically slow down property movement.
If we take the inflationary path, property prices can stay stable, but lose their value in real terms. Once again, this gives debtors their get out of jail free card. It also has the added bonus of keeping the market more liquid than it would have been otherwise.
The ridiculous thing (to me) is that the MPC is trying to avoid both of these scenarios, looking for a golden "middle ground". Any movement in interest rates will be for negative rather than positive reasons. Put them up if you think that inflation is the greatest threat. Introduce more quantitave easing if you think that deflation is the greatest threat.
And, of course, both can be a threat at the same time. It's quite possible for two members of the MPC to vote in opposite directions, even though they agree what will happen over the next five years, because one of the members would be thinking in terms of two years ahead while the other will be thinking in terms of five years ahead.
So, I guess my point is, we either have to follow Adam Posen and boost QE, or we follow Andrew Sentance and raise interest rates. The thing is, if Posen is wrong there will be a big negative EV, and if Sentance is wrong there will be a big negative EV. But if we do nothing, there will be a guaranteed moderate negative EV. The expected EV from doing SOMETHING is probably (I think, caveat caveat, blah blah) higher than the less volatile certain negative EV from doing nothing. But, because what we in the insurance world call the Probable Maximum Loss is higher if the MPC does SOMETHING, the MPC elects to do nothing, and take the guaranteed smaller loss.
The interesting numbers from the revised Q2 figures show that real incomes fell, but consumption rose. In other words, the savings ratio dropped. This doesn't sit well with the theory that everyone was paying down debt. What it does indicate is that the "home-grown" recovery might make up a bit for the export-based non-recovery. But the problem is, obviously, that this home-grown recovery is built on the straw of more borrowing (or depletion of savings).
In fact, the depletion of savings will probably be getting a hearty cheer (in secret) from the Treasury. Perhaps even the most noble of British consumers gets a bit tired of paying down debt every month. Those numbers militate rather more for an increase in interest rates rather than an increase in QE. But the drop in real wages argues for the opposite. That seems to argue for an economy with an incredible amount of slack to be taken up before inflation accelerates.
But I think that last argument is false. Inflation, as we have seen in the past, is not just a product of a overheating economy. It can often pick up pace in an economy where there is a lot of slack.
There's seemingly an increasing consensus for the "deflationists" at the moment, forever harking back to Japan in the 1990s. And yet this ignores how different the west is from the Japan of the 1990s (and also the state of the stockmarket when the crash began).
Basically the Japanese stockmarket and property market was an asset bubble that put that of the west to shame. Any stimulus from one side of the government was undone by the other. And, most importantly, Japan in 1990 did not have the high price inflation of the 1970s as a memory.
The Labour Party's new leader yesterday proclaimed that "we are the optimists". Personally I'd interpret that as "we are the ones with the head in the sand". I'm all too aware of meetings where everyone sits around saying how wonderful everyone is and maintains that a "positive attitude" is vital. Then, one day, the company goes broke, and all of the people who attended those board meetings are traumatized, because they have woven a web of "positive attitude" "optimistic" self-deceit. Optimism is all very well, but blind faith in defiance of all reality isn't optimism; it's mad.
__________________________
Anyhoo, there's a boiler to be installed downstairs tomorrow, so I can focus on that until Friday morning, when Thames might or might not turn up. The most calming thing that Jim said was that, even if this Thames-Water lot also say that it's a private pipe, when John from DrainCo comes through with his report we will be able to prove them wrong. That was a bit of a comfort.
I'm no longer expecting the DynoRod franchise to do anything with regard to the hose -- so I'm not going to be annoyed if that's what they say tomorrow. I'll just send off the letter of complaint to DynoRod and British Gas.
+++++++
In the land of economics, there's an interesting poker analogy with the current Monetary Policy Committee. Quite often in poker tournaments the right decision is either to raise all-in or to fold, while to call is easily the worst decision of the three options.
This "any decision has a higher EV than no decision" runs counter to committee-think, and it's currently being exposed in the MPC.
Basically, we are facing two possible scenarios/threats - deflation or inflation. There's no "golden mean" recovery. We have debts that have to be reduced, and either the people who built up those debts will have to repay (thus reducing consumption and leading us down the deflationary path) or those debts will be effectively wiped out by inflation (thus letting the debtors get out of jail free, but penalizing those people too stupid to spend money when they should have (i.e., savers). This is the inflationary path.
In parallel to this, we have an asset price bubble. Anyone who imagines that this is sustainable is a fool. However, it is not a necessary conclusion that it must burst. Real asset prices could fall gradually over one or two decades. If we take the deflationary path, this fall will be in absolute terms. Now, we know how reluctant people are to sell a property for less than they paid for it. The result is that the deflationary path will dramatically slow down property movement.
If we take the inflationary path, property prices can stay stable, but lose their value in real terms. Once again, this gives debtors their get out of jail free card. It also has the added bonus of keeping the market more liquid than it would have been otherwise.
The ridiculous thing (to me) is that the MPC is trying to avoid both of these scenarios, looking for a golden "middle ground". Any movement in interest rates will be for negative rather than positive reasons. Put them up if you think that inflation is the greatest threat. Introduce more quantitave easing if you think that deflation is the greatest threat.
And, of course, both can be a threat at the same time. It's quite possible for two members of the MPC to vote in opposite directions, even though they agree what will happen over the next five years, because one of the members would be thinking in terms of two years ahead while the other will be thinking in terms of five years ahead.
So, I guess my point is, we either have to follow Adam Posen and boost QE, or we follow Andrew Sentance and raise interest rates. The thing is, if Posen is wrong there will be a big negative EV, and if Sentance is wrong there will be a big negative EV. But if we do nothing, there will be a guaranteed moderate negative EV. The expected EV from doing SOMETHING is probably (I think, caveat caveat, blah blah) higher than the less volatile certain negative EV from doing nothing. But, because what we in the insurance world call the Probable Maximum Loss is higher if the MPC does SOMETHING, the MPC elects to do nothing, and take the guaranteed smaller loss.
The interesting numbers from the revised Q2 figures show that real incomes fell, but consumption rose. In other words, the savings ratio dropped. This doesn't sit well with the theory that everyone was paying down debt. What it does indicate is that the "home-grown" recovery might make up a bit for the export-based non-recovery. But the problem is, obviously, that this home-grown recovery is built on the straw of more borrowing (or depletion of savings).
In fact, the depletion of savings will probably be getting a hearty cheer (in secret) from the Treasury. Perhaps even the most noble of British consumers gets a bit tired of paying down debt every month. Those numbers militate rather more for an increase in interest rates rather than an increase in QE. But the drop in real wages argues for the opposite. That seems to argue for an economy with an incredible amount of slack to be taken up before inflation accelerates.
But I think that last argument is false. Inflation, as we have seen in the past, is not just a product of a overheating economy. It can often pick up pace in an economy where there is a lot of slack.
There's seemingly an increasing consensus for the "deflationists" at the moment, forever harking back to Japan in the 1990s. And yet this ignores how different the west is from the Japan of the 1990s (and also the state of the stockmarket when the crash began).
Basically the Japanese stockmarket and property market was an asset bubble that put that of the west to shame. Any stimulus from one side of the government was undone by the other. And, most importantly, Japan in 1990 did not have the high price inflation of the 1970s as a memory.
The Labour Party's new leader yesterday proclaimed that "we are the optimists". Personally I'd interpret that as "we are the ones with the head in the sand". I'm all too aware of meetings where everyone sits around saying how wonderful everyone is and maintains that a "positive attitude" is vital. Then, one day, the company goes broke, and all of the people who attended those board meetings are traumatized, because they have woven a web of "positive attitude" "optimistic" self-deceit. Optimism is all very well, but blind faith in defiance of all reality isn't optimism; it's mad.
__________________________
