Friday, 20 April 2012

Classical mercantilism a consequence of gold standard

Mercantilism makes sense when countries are on a gold standard. The main economic job of a government was to ensure a sufficient money supply to meet the demand for it. If they didn't then rates would rise and that would crimp economic growth. But to do this requires additional gold. If your country isn't one of those that discovered vast gold underground then you need to buy that gold in from overseas. But international trade was then usually executed in gold. Clearly buying gold with gold can't make sense to anyone other than arbitrageurs, so next best is domestically produced goods, services, commodities.

Tuesday, 17 April 2012


I think I can simply state what it is about The Great Reflation which makes me a little uncertain.  It blurs the distinction between the author's descriptive and prescriptive tendencies.  Clearly as an engaged political animal he has a lot of opinions in his head about how economies should be run, and in particular concerning the behaviour of central banks.  That's fair enough for him to have this opinion.  On the other hand, as the author of an investment advice book, he has a responsibility to have a clear-eyed view of how the markets are, not how he'd like them to be.  Now, I'm not saying that his advice is predicated on any kind of assumption of the inevitability of some kind of Austrian utopia; he does a decent job characterising the difference between current reality  and the Austrian model, but for my taste, his description of this reality is too clouded with Austrian bias. I could well imagine a fully signed-up Austrian economist being able to characterise politico-economic reality without so much drum-beating and propagandising.  And indeed I reckon it would result in a book with better investment advice.  I'd rather know that the market contained participants of an Austrian persuasion and those positively disposed towards paper money growth.  We often pitch Austrians against Keynes, but I think they should be pitted against John Law.  This is a decent binary split of all market participants, across any number of asset classes.  And each has their time of ascendancy and recovery.

Monday, 9 April 2012

The Great Reflation greatly compressed

A brief summary of the book.  Changes in the availability of money and credit drive financial markets, and the 2008 credit crunch was the biggest episode in history (even in inflation adjusted terms).  Use elements of value investing, momentum trading and market psychology to preserve and grow your capital.  Expect inflation and asset price volatility along the way.  Asset class breakdown: real estate will be below trend for years, precious metals are a speculative bubble the timing of whose bust is unknowable, the US dollar will lose value against a basket of currencies and stock and corporate bond markets are a decent bet.  In other words, a fairly conventional prediction.

Saturday, 7 April 2012

Who is J Anthony Boeckh?

I bought 'The Great Reflation' by J Anthony Boeckh when it first came out in 2010 and read it then.  I enjoyed it, with reservations, and  thought I'd read it again now, and I'll make a couple of postings on how it strikes me the second time around.  The first thing I try to do when reading a book like this is to peg the author, place him in my mental framework of financial or economic theorists.  The obvious place to start is with the endorsement quotations which come with the book.  I like to try to tie all these commentators up so I can understand what, if anything, is really new in what they/re saying.  Next I look at the bibliography and index to see who I've read before, who he's referencing, the quality of his sources,.  I then look at the acknowledgements, the preface, the author information section.  

The author has been the main driving force behind Bank Credit Analyst from 1968-2001.  Their client base covers just about every kind of institution involved in finance, including central banks and sovereign wealth funds.  I mention central banks in particular, since the book is quite critical of leading Western central banks.  He's not, however, crazily critical like the libertarian, Hayek-inspired, Irving Fisher-inspired modern day critics, personified in American politics by Ron Paul.  The author was an academic, and he also worked for a G7 central bank.  He's helped found the Fraser Institute, a think tank which seems to have seen one of its main goals as the education of Canadians to the risks of central planning and the benefits of letting people make their own choices.   He was listed in 1974 as on the founding board of directors.  Their most famous contribution of common understanding of economic and policy issues is the 'tax freedom day' - the date in the calendar year up to which we are said to be working exclusively for the government.  It is your effective tax rate times 365, rounded to the nearest day.  So clearly this body is in the business of empowering citizens to hold governments to account.

Early editorial advisors included mister public choice theory and Nobel laureate James Buchanan, Austrian  theorist number two and Nobel laureate, Friedrich Hayek and monetarist Nobel laureate Milton Friedman.   One of the founders, Sir Anthony Fisher, had previously, in Britain, in 1955, founded the Institute of Economic Affairs.  He'd set this up after having read Hayek's "Road to Serfdom" and taken advice from Hayek himself (then at the L.S.E.) on how best to serve the cause of libertarian freedom.  This was, and possibly still is, the most important British think tank.  The I.E.A. hosts the shadow monetary policy committee, a group of media-aware economists who meet and pretend to be the Bank of England monetary policy committee, delivering alternative reality, Hayekian versions of the committee's deliberations.  These deliberations are widely reported in the British financial press. Check out Adam Curtis's awesome cultural story of the Fishers and the hidden history of think tanks.  Fisher not only set up the I.E.A. and the Fraser, but also 150 others around the world.  According to this history, the think tanks were all about convincing opinion formers, including reporters, of the rightness of the warning of Hayek most clearly set out for the general reader in his "Road to Serfdom".

So I see Boeckh as following in this tradition, of politically motivated, proselytising, but with much more of a financial markets spin, and clearly also with an angle to influencing and making a profit.

Now there are many possible ways in which a finance professional could profit from listening to Boeckh's advice.  And many of them surely do.  First, they can learn a particular strand of economics from him.  Second, he could offer them macro-economic predictions from which they can profit. Third, in case they weren't already libertarian,   they could become exposed to libertarian ideas.  Fourth, they could learn to deliver to their own investor base a well-thought out rationale (perhaps a post-rationalisation) for their investing style.  Fifth, they can understand how government policy may be about to change, and position themselves to profit from this.  There are many more.

A key point, I think, is the point made by Curtis - these think tanks already knew the truth, so, paradoxically, they were about following a framework's axioms through to policy level decisions, not about the broad search for truth.  This caused them to be somewhat closed in their thinking.  So I re-read "The Great Reflation" as a kind of propaganda, though I see the author as on the more centrist side of the debate. He's after all in the business of offering actionable advice to investors, and the quality of that kind of advice can be measured.

Friday, 6 April 2012

Willy Wonka

Willy Wonka was an unusual business man.  He executed succession planning through a pure stochastic process, he was acutely keen to agency risk, he believed himself and his business to be morally superior to its competitors, he exploited low wage workers from overseas, spent excessively on research and development in a lavish headquarters, he was personally besotted with his own product yet was revolted by the way his consumers consumed it, and he remunerated his staff with the product of their very own labour.  He also has a pathological distrust of the patent protection process.  Dahl's own ambivalence towards this candy man of business is surely reflected in the name choice - a veiled reference to masturbation.