Archive for September, 2012

Must Read Article on the Big Financial Picture

September 23, 2012

Zerohedge has Simon Johnson explaining the panoramic view of the world’s financial risk:

On Japan:

Instead, for the last two decades, Japan’s government has been running large deficits, borrowing and then spending the savings of the young. When the elderly finally demand their savings back in the form of pensions, the government will need to reduce its budget deficit of 8% of GDP and start running a sizeable budget surplus. Unless there is a sudden burst of romance and fertility, there will be far fewer Japanese taxpayers in the future to pay this debt.

Collapse! But a slow, inexorable one.  Not one you’d want to make a movie about.

On the U.S.:

The blue line is the Fed’s interest rate, which of course is zero today.  Look how with each economic crisis, the target rate is lowered, and, subsequently, the amount of debt held by consumers rises.  The chart would be far more alarming if they used a percentage on the right side for publicly held debt.  Instead, so the line wouldn’t scream up past the top of the chart, they made is a ratio of publicly held debt over the Gross Domestic Product.  So, when it goes up one full unit, that means a 100 percent increase!  And it has gone up about 200 percent!  That last decrease is probably a factor of credit opportunities drying up due to failing banks and skittish lenders.

The alliance that leads to unsustainable finance here is simple: the US financial system earns large ‘rents’ (excess returns to labour and capital) from the implicit subsidies offered by taxpayers. These rents finance a massive system of lobbyists and campaign donations that ensures ‘pro-bailout’ politicians win elections regularly.

Each time the US has a crisis, politicians and technocrats admit their errors and buttress regulators to ensure that ‘it never happens again’. Yet still it happens, again and again. We are now on our third round of the so-called Basel international rules for banks, with the architects of each new reform admonishing the previous architects for their mistakes. There’s no doubt that the US will someday soon be correcting Basel 3 and moving on to Basel 4, 5, 6 and more.

The problem that the country faces is that with each crisis, the financial risks are getting larger. If continued in this manner, bailing out the system will eventually be unaffordable. When the US finally runs out of enough savers to buy the bonds needed to bail out the system, it will suffer the ultimate collapse. (For more detail, see Schularick and Taylor 2012.)

so, like Margaret Thatcher said, the problem arises when you run out of other people’s money.

On Europe:

So the total value of the derivatives is 19 times the GDP of the Eurozone.  Derivatives are complex and can be less risky due to having a concurrent opposite derivative to cancel out the balance sheet, but the huge risk is if one country (or two!) decide to withdraw from the union, it all goes haywire as the national currency makes all the fancy accounting worthless.

For example, if a German bank has a contract with a French bank and an opposite identical contract with a German pension fund, it can net those two contracts and report the ultimate risk as zero. (Of course there is counterparty risk, but under standard agreements, derivatives are cleared instantly at liquidation so the counterparty risks can be netted).

But if investors start to believe that there will be new currencies in each country, then the two contracts in this example are no longer offsetting so they must not be netted. It is reasonable to think that after any demise of the euro, the contracts between two German counterparties will be converted into deutsche marks, while contracts with international partners will be disputed or maintained in a euro proxy.

As a result, risk officers at banks should understand that if the Eurozone breaks up, all banks in Europe face enormous and unaccountable currency risk. Each of their ‘euro’ assets and liabilities needs to be examined to understand into which currency it would be converted. (For more discussion on redenomination issues, see Nordvig and Firoozye 2012.)


The lesson from all these troubles is clear: the relatively recent rise of the institutions of complex financial markets, around the world, has permitted the growth of large, unsustainable finance. We rely on our political systems to check these dangers, but instead the politicians naturally develop symbiotic relationships that encourage irresponsible growth.

The nature of ‘irresponsible growth’ is different in each country and region – but it is similarly unsustainable and it is still growing. There are more crises to come and they are likely to be worse than the last one.

Yeah, what he said.

Syrian Spillover

September 23, 2012

Sadly, predictable:

The armed forces of Syria and Jordan clashed Saturday after Syria fired into Jordanian territory, where thousands of refugees have fled from an 18-month-long civil war between the Bashar Assad regime and opposition fighters.

Has it really been 18 months? I’m losin’ it.

So, by my count, the civil war in Syria has now overflowed into Jordan, Iraq, Lebanon, and, indirectly, Iran (Iran being all too happy to ship weapons of mass destruction to Syria with the attendant risk of war with Israel)  100% of the countries that share borders with that country have had cross-border incursions of violence.




Gettin’ Hot on the Border…

September 22, 2012

More action at the Sinai border:

“Three gunmen infiltrated Israeli territory from central Sinai. Two were killed by the Israeli army, the third detonated the explosives vest he was wearing,” the source said.

“According to our information, an Israeli soldier was killed,” he said, in the attack in which the Israeli military said all three assailants also died.

DEBKAfile is always on top of Arab-Israeli conflicts, and has more here:

Sgt. Netanel Yahalomi, 20, from Nof Ayalon was killed and a second Israeli soldier was seriously injured in a clash with terrorists from Sinai Friday. The attackers reached the border near Mt. Harif in southern Israel wearing bomb belts and heavily armed with automatic weapons and grenades for a major terrorist attack and opened fire on the troops guarding work on the border fence.

If I were a bible thumper, I’d think things are beginning to line up in a particularly alarming fashion….

Does being skinny help you live longer?

September 17, 2012

For about 30 years, the consensus of researchers has been that caloric restriction (CR) extends lifespan.

Nematodes, mice, fish, and other animals were studied and the conclusion was that this was the only way to increase longevity.

The evidence was so persuasive that many researchers began to practice caloric restriction (CR) themselves. Millions of dollars of grant money were awarded to researchers who could show that eating less meant living longer.

In 1987 the National Institute on Aging began its landmark study with rhesus monkeys to see if the observed benefits of CR could be extended to primates (i.e. humans). Another, shorter study with rhesus monkeys ran concurrently with another lab in Wisconsin.

The smaller study from Wisconsin excitedly published its results in 2009 and the New York Times splashed the conclusion across the front page: Caloric restriction increases the lifespan of rhesus monkeys! At long last, we could infer that CR in humans would help us live longer.

But there was a problem.

The researchers had a serious bias to contend with. Many of them practiced CR themselves and were depending on funding for their livelihood. The funding wouldn’t continue if their data showed that CR didn’t work. When monkeys died early on CR, they threw out data that didn’t match their preconceived notions of reality and claimed that the deaths were not age-related! It turns out that they threw out half of the data so that the results could get them on the front page of the New York Times.

Two weeks ago, the researchers from the National Institute on Aging sheepishly revealed the results of the larger CR study. After 25 years, the two groups of animals, whether they were starved or fed a normal diet, died at about the same age. Worse yet, even some expected results like cardiovascular health, diabetes, etc. didn’t show up that much different except in males.

As they scratched their heads at the unexpected results, other researchers who had been more critical of the consensus of opinion found that many of the supposedly persuasive rat studies showed that a third of the rats didn’t respond to CR diets at all, but researchers threw out the results because they thought the rats were somehow abnormal.

Perhaps most compelling is that researchers can allow themselves to be so biased, and this affects their studies negatively. Anthropogenic global warming, anyone?

For a great article on the above, see this article.

Also, here’s the story from the New York Times. Article

As for me? I’ve long said that because the body wants to maintain homeostasis, attempting to change that dramatically is usually fruitless, and perhaps harmful.

Exercise is far more healthful in my opinion than restricting your diet. You may not lose weight, but you will be healthier in the long run. People who do both are admirable, but it really is a catabolic process (i.e. breaking down) and in my opinion, unless done in moderation, typically results in problems.

Also, any sustained exercising at your target heart rate longer than one hour is probably not beneficial.