Category Archives: insight

Book Review: The End of Influence

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Brad de Long and Stephen S. Cohen have a new book called The End of Influence: What Happens When Other Countries Have the Money.  It’s an interesting, informative, provocative and relevant read, providing context for the economic position the US finds itself in now. Perhaps of more direct interest, the issues of currency manipulation (done to the US), foreign policy, industrial (and defence) policy, trade deficits and long-term structural problems within an economy are definitely relevant to South Africa.

The rise of the Asian Tigers (and Japan and China included in the wider group) and the role government policies on both sides of the Pacific played there should hold lessons for South Africa.  Hell, even France and Britain are thrown in for good measure, demonstrating the successes and failures of neo-liberal market oriented policies.

This book must really be read in conjunction with This Time is Different as together they reinforce the unavoidable conclusion that overzealous reducing regulation, liberating markets and increasing financial complexity are almost guaranteed to lead to disaster. The Anglo-Saxon mantra for a couple of decades at least now has been that those very things were the answer to our problems, not the cause.

I read the book on holiday. It’s not the traditional rip-roaring holiday read, but the style is light enough to enjoy and doesn’t have the density of statistics and numerical proof offered by This Time is Different. The explanation of how we got to where we are are fascinating and definitely food for thought for South Africa and other emerging markets, but their prognosis of how the US’s power will fade dramatically now that they no longer have The Money is even more evocative. I spent as much time holding my kindle to one side while thinking about the implications as I did reading the words and frantically clicking the next page button to get to the next page.

Buy it, read it and join the conversation on economic policies for South Africa and emerging markets.

Brad de Long has an economics (and a few others things) blog that I read from time to time. I’ve also watched several of his economic lecture videos available freely on iTunes University.  He’s worth paying attention to. I haven’t had contact with his co-author before, but if de Long likes writing with him he’s probably smarter than most people you or I have heard of before.

We can’t all be Germany

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Some interesting thoughts on what drives Germany’s apparent success.

The article does understate the problem that Germany’s success is significantly export driven – not everyone can export for obvious reasons.

Also, the author notes that consumption has grown more slowly than economic growth without understanding that is exactly the source of an export-encouraged boom. Growth in consumption will also grow imports!

NBMR – still relevant

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With several life insurers reporting financial results, including horribly broken measures of new business profitability such as VNB margin or VNB / PVFNBP, it feels like time to roll out New Business Margin on Revenue again and describe why it is a much better measure.

It is a good time, but I don’t currently have the time. I’m going to try to prepare a basic spreadsheet example to make it clearer. I’ve also decided on a provisional treatment of pure financial instruments that I hope will give useful results.

Watch this space.

Prediction Update : US Yields stayed low

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In August 2011 I predicted that, against cries of hyperinflation and debt crisis in the US, yields would stay low.

Specifically, I said:

Prediction: If the US debt is downgraded in the next 6 months, yields won’t increase by more than 0.2% 6 months after the downgrade. In other words, there might be a small, temporary uptick, but within 6 months yields will have returned to below 0.2% above the day before downgrade.

S&P downgraded the US a few days later on 5 August.  Yields on 10 year US bonds were 2.56%, Currently, US 10 year yields are just below 2.00%. Clearly, 6 months after the downgrade (and at every point in between) US yields have stayed low, well below the upper limit of my prediction.

If you were still listening to the “obviously” right concerns over high inflation from quantitative easing and relaxed monetary policy in the middle of a huge liquidity trap and massive reduction in private spending, it’s time to reset your views.

For every complex problem…

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For every complex problem, there is a solution that is clear, simple and wrong.

Greece is a complex problem. Paul Krugman points to this Choose Your Own Adventure on the Greek crisis. Much like the original books, there are many, many nasty ends.

Read it, try it, explore a few paths. This is the best resource I’ve seen recently to explain exactly how bad almost all the alternatives are, and how there are no really good outcomes from this mess.

Rest of The World, watch out.

No nationalisation, more certainty and probably higher taxes

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There are times when I’m impressed with elements of government and the ANC. It took them far too long, they allowed too much debate and uncertainty, but their ultimate conclusions on nationalisation and how to direct additional mineral wealth back into the fiscus, further develop a beneficiation industry around the mining industry are solid.

I always maintained that “nationalisation” isn’t necessarily appropriation of assets without compensation, although the popular views and worst fear-mongering viewed this as the only possibility. It’s refreshing to hear that “nationalisation” was considered on its merits against private operation of firms rather than just as a way to redistribute wealth. (Ok, at least one article wasn’t mad panic.)

The increase in taxes is also basically expected. Although new and changing taxes does add uncertainty, it provides a sense that the rules are being followed.  Tax rates on energy companies in many Middle Eastern countries is high – sometimes near 50%. So the government fiscus does benefit from the energy that belongs to all its citizens.

It’s also a, slightly sneaky, way of re-settting historical land ownership and mineral right royalties and licensing. If “we got it wrong and sold them too cheaply in the past, we can always recoup through higher or new taxes”. Maybe a little cynical but not surprising.

The real free market fanatics will no doubt be in uproar about higher taxes destroying jobs and misallocating resources. There is a debate here, but the free market fanatics all too quickly forget that it’s hard to argue that the value of the minerals under our country have been fairly priced. Those markets can easily be described as “failed markets” with a number of externalities involved.

Even the hardest neoclassical economist will recognise these are very real limitations on Adam Smith’s invisible hand.

More utterly misguided criticism of medical schemes

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I wish this would be the last time I say this (or the first or the second):

“Medical Schemes are non-profit entities are don’t make profits for shareholders.” There are administration companies that charge administration fees that have shareholders and make profits. However, if my medical scheme pays me a greater benefit, they will be removing a benefit from someone else or making everyone pay more in contributions.

It really is a simple idea, but clearly this misguided “GP” doesn’t understand the first thing about the organisation he is criticising.  Note that I’m not commenting on a particular medical scheme’s practices, but rather the universal reality of medical schemes.