The title of this blog post is a little quip I came up with (1). People seem to like it.
[OK, I’m not keeping up this blog. I should keep on using it as a place for thoughts and fun.]
Anyway, here are two fantastic TRUMP articles that are must-reads in their entirety. Even some of Pettis’s lengthy replies in the comments are excellent (2). Both happen to be from economists, but they aren’t economic analysis in the typical sense. Neither of them are what you are expecting.
Note that Pettis is dripping with sarcasm throughout this piece, though it can sometimes be tough to draw the line between the intentional sarcasm and a creeping elitist arrogance. That’s OK with me, this guy is really smart.
I do disagree with a couple of his lazier points – hey he did write this in one take on a long airplane trip without proofing it.
First, he ends up saying that even if we did end up with POTUS TRUMP it wouldn’t be that bad, because Congress would stymie him. To me that’s saying that our choice of POTUS really doesn’t matter that much. It does. A lot.
Second, he gets lazy on immigration (3), saying that because it’s always worked out, we should just keep doing it the way we’ve been doing it until we’re sure it no longer works. He’s abandoning his own call for historical analysis and deeper thinking in favor of simple trend following without considering the underlying drivers. There is no cost-benefit or trade-off analysis to consider whether we could enter a phase in which likely benefits are marginal but possible (even if unlikely) negative outcomes could be very large. It strikes me as a reckless hedge fund-y way of doing things – one of those funds that does some leveraged narrow arbitrage or carry trade year after year, getting amplified benefits until things go x-sigma in the wrong direction one year and it blows up. Like that hedge fund, Pettis suggests an approach that guarantees that a large negative outcome would fully evolve before it could be addressed. That’s not responsible, intellectually honest, or insightful; that’s superficial social media “we’ve always been a country of immigrants” memery.
Side note: In addition to teaching economics at Peking University, Pettis founded and runs a record label in China.
Minsky was a somewhat marginal economist during his lifetime, but has enjoyed a large resurgence in the wake of the GFC. His main thing is that stability breeds instability and that the capitalist financial system necessarily amplifies it and so you’ve got to do something about that, because it’s a feature, not a bug that can be eliminated. One of his vignettes is that finance goes in cycles from “hedge finance” to “speculative finance” to “ponzi finance” to bust, which we call “The Minsky Moment”. Hedge finance is fully amortized borrowing against operating cash flows. Speculative finance is borrowing against operating cash flows to pay interest, but the debt likely needs to be rolled over. Ponzi finance relies on capital appreciation to even pay off all interest due – increasing debt levels are often needed unless (usually outside, macro) events happen to favor the borrower. Minsky is calling out Trump as ponzi borrower that macro events favored… and who knew when (or was lucky) to take money off the table and leave others with the smoldering remains. And Romney. I love the smell of externalizing costs and survivorship bias in the morning!
1 It’s a riff on the old line “He’s a stupid person’s idea of what a smart person sounds like.”
2 A taste from one of his comment replies “The worst of them is the lover of all cultures who leaves his home in the US (or Europe) to find the authenticity that he believes cannot exist there, and has decided that he wants to help protect the culture of whatever developing country he chooses to live in from rapacious western agglomeration… For these people the “authenticity” they want means a slightly more sophisticated set of cultural stereotypes… I am infuriated by the way they insist on discrediting these Chinese musicians if they make music that sounds like it was made by people who live in huge, polluted, traffic-jammed cities, who get to school by subway and spend hours on smart phones and computer games, which is exactly what they are, but celebrate them as heroes defending authentic China if they, many of whom have never even seen a farm animal, make music that sounds like it was composed by nomadic horsemen who roam the Gobi Desert or by cheerful peasant girls from river villages in Yunnan.”
3 From one of his comment replies “But we’ve had a winning strategy for 250 years. Let’s keep doing it until the first time we actually fail. Let’s wait to see if there ever is a time that is different. Once we’ve encountered a group of immigrants — a nation, race or ethnic group — that truly has failed to live up to our standard immigrant success after two or three generations, then we can discuss changing our strategy”