Found via Simoleon Sense.
At a closed meeting held in Boston in October 2009, the room was packed with high-flyers in foreign policy and finance: Henry Kissinger, Paul Volcker, Andy Haldane, and Joseph Stiglitz, among others, as well as representatives of sovereign wealth funds, pensions, and endowments worth more than a trillion dollars—a significant slice of the world’s wealth. The session opened with the following telling question: “Have the last couple of years shown that our traditional finance/risk models are irretrievably broken and that models and approaches from other fields (for example, ecology) may offer a better understanding of the interconnectedness and fragility of complex financial systems?”
When the time comes to write each quarterly report, I frequently start by listing all the developments which have most struck me during the quarter, and all of the issues which I consider most important. The latter list is increasingly dominated by big global issues - limits to growth, the disconnect between growth and welfare, environmental destruction, and the revenge of Gaia, to take a few which range beyond the unmended cracks in the financial system and the many vulnerabilities of stockmarkets.
None of this usually helps me to write the report, because the subjects are too big, the timetables too vague, and the implications for pricing of the Fund's securities relative to alternatives hard to determine. Yet the evidence of approaching limits, and of the ill-heeded consequences of past development, is coming closer and closer to home.
Much of the current Indonesian boom comprises the burnup of irreplaceable resources: unsustainable development without heed to externalities. And the same is true in too much of Asia. When I first came to Malaysia, jungle reserves seemed huge relative to the population and to the level of exploitation. How quickly that changes: from the air one now sees extraordinary urban sprawl, and heartbreaking devastation. It used to be a joy of life in the tropics that ugly development eyesores were quickly greened over, or even reclaimed by the jungle: now I am told that the topsoil is completely gone in many areas.
The video to the right is one which I considered mentioning on this site when it was first published, but hesitated to do so, in case my sophisticated readers thought it too simple. The power of compounding is very well understood by value investors, and bullish Asian analysts, yet not fully appreciated by all. The limits to exponential growth are well understood by another group, which includes indigenous tribes and others who are close to nature. The two groups do not necessarily overlap. Yet compound growth of financial assets may only be possible in a world experiencing economic growth. We have lived through a period when this has been unusually rapid and smooth, and arguably attributable to the discovery and exploitation of fossil fuels. This simple animation illustrates the limits to growth, and Liebig's law of the minimum. It comes to my mind repeatedly, in varying contexts, which are no longer distant and abstract - I commend it to you.
Via Farnam Street.
Renowned surgeon, writer (Better, Complications, and The Checklist Manifesto), and medial thinker Dr. Atul Gawande interviews with WPUR's On Point. In this wide ranging interview, Dr. Gawande covers healthcare reform, measuring the quality of healthcare, the value of checklists, lowering the cost of healthcare, what healthcare can learn from agriculture.
Illusory Prosperity - Ludwig von Mises on Monetary Policy
"Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not a real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth [i.e. the accumulation of savings made available for productive investment]. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later, it must become apparent that this economic situation is built on sand."
Ludwig von Mises, The Causes of Economic Crisis (1931)
Historical note - The U.S. stock market lost more than two-thirds of its value over the following year
If one looks back to the recent housing crisis, it is clear that the policy emphasis on easy money was one of the primary elements that created the illusory prosperity of the housing bubble and eventually led to crisis. The same is true of the various other crises that we have observed over the past decade. At present, I am convinced that the misguided policies that have been pursued in response to the recent downturn will again be reflected as significant new strains within a few years, if not sooner. While we will exercise as much latitude as possible to accept moderate investment exposures when the evidence is supportive, we have to be aware of the longer-term outcomes that are being set in motion by the present course of monetary and fiscal recklessness.
Perhaps more than any other economist, Ludwig von Mises got the theory of money and credit right, because he made distinctions between various forms of money and credit that are often conflated by other theorists. The amount of real physical investment in the economy is, and must be, precisely equal to the amount of output not allocated to consumption but instead to savings. Unlike many other economists, Von Mises not only recognized this identity, but carried it through to what it implied for monetary policy. Specifically, he observed that all real investment in the economy must be financed by real savings, while the creation of financial claims (which he called "circulation credit" or "fiduciary credit") in the absence of those savings tends to distort prices rather than output.
What follows are writings that I have selected from Von Mises work. The warnings that he gave prior to the Great Depression were particularly acute. Though Von Mises concerns unfortunately went mostly unheeded, they speak volumes about the origins of the recent crisis, and the risks that we are likely to face in the years ahead. As you read these, keep the recent housing crisis and the recent actions of the Federal Reserve in mind.
Thanks to Matt for passing this along.
David Einhorn is the president of Greenlight Capital and the author of Fooling Some of the People All of the Time, a compelling account of his battle with Allied Capital (NYSE: AFC). Einhorn also presciently called attention to Lehman Brothers' irregular accounting practices just prior to that firm declaring bankruptcy in September 2008.
Many of us at the Fool admire Einhorn for his investing ability and dedication to the principles of transparency and honesty. In the first part of our interview, he spoke about Allied, the Securities and Exchange Commission, and the ongoing threat to our financial system.
Looking back at the carnage created by the bursting of the credit bubble, it’s natural to scratch your head and ask “How did we ever let that happen?”. Behavioral economics exists to answer questions like this.
Last week Chris sat down with Dan Ariely, gallivanting behavioral-economics-researcher-extraordinaire, who is breathing new life into this previously obscure field of study. The resulting interview is full of fresh, non-intuitive insights and shines light on how the human brain is often hard-wired for irrational action when it comes to money.
One of the key takeaways for us was how Dan’s research provides an empirical explanation for why inflation will likely win the day: our mental programming leads us to prefer behavior that favors it.
Most people can count calories. Many have a clue about where fat lurks in their diets. However, fewer give carbohydrates much thought, or know why they should.
But a growing number of top nutritional scientists blame excessive carbohydrates — not fat — for America's ills. They say cutting carbohydrates is the key to reversing obesity, heart disease, Type 2 diabetes and hypertension.
"Fat is not the problem," says Dr. Walter Willett, chairman of the department of nutrition at the Harvard School of Public Health. "If Americans could eliminate sugary beverages, potatoes, white bread, pasta, white rice and sugary snacks, we would wipe out almost all the problems we have with weight and diabetes and other metabolic diseases."
It's a confusing message. For years we've been fed the line that eating fat would make us fat and lead to chronic illnesses. "Dietary fat used to be public enemy No. 1," says Dr. Edward Saltzman, associate professor of nutrition and medicine at Tufts University. "Now a growing and convincing body of science is pointing the finger at carbs, especially those containing refined flour and sugar."
Americans, on average, eat 250 to 300 grams of carbs a day, accounting for about 55% of their caloric intake. The most conservative recommendations say they should eat half that amount. Consumption of carbohydrates has increased over the years with the help of a 30-year-old, government-mandated message to cut fat.
And the nation's levels of obesity, Type 2 diabetes and heart disease have risen. "The country's big low-fat message backfired," says Dr. Frank Hu, professor of nutrition and epidemiology at the Harvard School of Public Health. "The overemphasis on reducing fat caused the consumption of carbohydrates and sugar in our diets to soar. That shift may be linked to the biggest health problems in America today."
To understand what's behind the upheaval takes some basic understanding of food and metabolism.
If you’re ever in the mood for a glimpse of raw nature that closely parallels the human condition, read Annie Dillard’s Pulitzer Prize winning Pilgrim at Tinker Creek. We are all, in her well-documented tale, mantises eating and being eaten, mindlessly thrusting and flailing about in activity that would make little sense to a visitor from another space-time. What mimics the pelvic thrust of the male mantis is really the struggling ego of the human being, stretching for more habitable space, gasping (metaphorically) for purer air, reaching for dominance over what we know not. Herman Melville, speaking through the visage of Captain Ahab in Moby-Dick, writes that “all mortal greatness is but a disease.” The egos that seek renown, however, are hard to kill and expert at masquerading and wearing disguises. Even those advocating or living by the Golden Rule can be held suspect to some chemical – this time above the belt – that says, “Look at me, look at me.” Presidents, Dalai Lamas, and yes, bond managers are more than likely infected and affected as opposed to philanthropically or altruistically directed and intentioned.
If so, I’m not sure how one escapes from the philosophical darkness of this self-described “Tinker Creek.” Eastern religions speak to seeking the Buddha mind – an “unconscious” consciousness that supposedly confirms an “inner worldly” worldliness. Theoretically this can lead to Nirvana, which is the absence of ego – an antibody against Ahab’s mortal disease. “Nirvana” it is said, “soars on wings that whisper.” Perhaps, but almost all of us come into this world screaming and the decibels diminish but never really whisper as the chemicals of old age work their will. We are all, more than likely, doomed to be mantis-like – some of us eating, some of us being eaten, but none quite aware as to why we are at the dinner table in the first place.
Americans, unlike their developed world counterparts, have been eating their fill lately, and supping at a dinner table laden with pork and tax breaks for all. Unequivocally, we have been playing the part of the female mantis, munching on the theoretical heads of future generations, while paying no mind to the wretches that will eventually be called upon to pay the bills.
