Not Now John.

Not nah John
We’ve got to get on with the film show.
Hollywood waits at the end of the rainbow.
Who cares what it’s about
As long as the kids go?

Roger Waters

In 1991 the Japanese economy busted after over a decade of booming prices in capital and durable goods. The housing boom is paramount, with mortgages running for as much as 99 years. The only way a famuly could afford to buy a house was if their grandsons picked up the tab. We were told there was no way house prices would go down in Japan because of the lack of available space, but this was not the reason why prices surged. The reason was a credit expansion.

There is nothing wrong in promising to pay for a present good with future goods yet to be produced but we must admit there is some uncertainty in the whole affair. If someone is willing to wait for 99 years to get their principal back (at least the last installment) then that person (and his heirs) must be willing to endure a lot of uncertainty in the process. Now, the fact the debt itself became an asset that could be freely exchanged in the market, might have served as an incentive for people to engage in such transactions, but in the end, those assets must remain with someone willing to hold them and take the risk. Or so it should if there wasn’t a lender of last resort that will either buy that asset at face value outright or accept it as collateral for more loans.

As it turns out, in Japan, there was no one available to keep those assets at the prices required by their owners, that is, the banking system. Instead of allowing their liquidation, the BoJ came in and bailed-out the banks. The irony is that in the US a lot of people scorned the Japanese Way, saying no way this would happen in America. In the land of the brave if a business has to fail it does. They were perhaps naïve, believing the legacy of the Founding Fathers still ruled the country in the 1990’s when, in fact, it has been slowly but surely set aside ever since the moment it was written in paper. Americans didn’t have to wait long. In 1998 the LTCM went bust. We must remember this was a company put in place to arbitrage – or so they thought – “inefficiencies” in asset prices. There is definitely some hubris in the whole affair, investors paying the price for defying the gods of science. Their sin: the pretense of knowledge. But if investors were wiped out, all those allowing them to build such massive positions were not. The financial system was crammed with moral hazard and no effort was made to purge it, quite the opposite.

And this brings us to 2008, Lehman and the supposed need for QE to prevent the meltdown of the financial system. American investment banks held assets of very dubious quality. They represented future promises of payment that were going to be partially or wholly defaulted. In order to keep the value of those assets, the pricing system had to be perverted and prices are a fundamental part of economic coordination. What is being achieved with QE is that similar investments (other than subprime for obvious reasons) will continue to be made. If liquidations had been allowed, the capital goods (and claims on capital goods) held by the banks would have been purchased by investors at prices that would have allowed those same goods to have been put to better (or more economical) uses. QE worked to prevented any possibility of recovery from taking place. It channeled and forced (through taxation and regulation) individuals to finance inadequate capital structures and business plans. Now we face an over-twenty-years-ongoing recession. And that is the best case scenario.


Green Shoots

Green Sprouts

Source: JPM (taken from Zerohedge)

Yes folks there is a recovery going on. So much that people no longer buy at Macy’s or JC Penney. Instead they go to Tiffany or Louis Vuitton.


Crossing the Rubicon – X



Big in Japan

(Things are easy when you’re big in Japan)

The case for Japan is a simple one or is it not? Stagnant for 20 years, the Japanese Government wants to believe their economy touched bottom. Now, all it needs is some stimulus to resume growth (is it a coincidence that the Spanish and Greek prime-ministers said exactly the same? And, at least, the Spanish premier, begs the ECB to do the same). If the Americans tried to stimulate their economy via QE – Quantitative Easing, the Europeans chose to keep their currency by performing QE – Qualitative Easing. The Japanese are going to try and be bolder and will go for QQE – Quantitative and Qualitative Easing, that is, doubling the size of their money offering while buying assets of less perceived quality. To be absolutely fair, the FED and the ECB also used both strategies. The FED did the twist while the ECB was never shy to increase the size of their balance sheet, before and after Draghi’s speech. Continue reading

On Banking Definitions

Peter Bruegel the Elder, The Tower of Babel (1563), Kunsthistoriches Museum, Vienna.

Peter Bruegel the Elder, The Tower of Babel (1563), Kunsthistoriches Museum, Vienna.

Whenever someone leaves something into the custody of another, usually but not necessarily against a fee, the contract between the two parties is said to be a deposit and that something must be surrendered on demand. The custodian cannot use the thing delivered or, if goods are fungible, must at all times keep the same quantity of the good under custody. When someting is delivered for another to use, usually but not necessarly against a fee, then the contract arising is called a loan. The loan is not callable on demand but has an agreed term for the delivery of the thing lended.

Regardless of definitions, whenever someone makes a bank deposit, it is actualy lending that money to the bank. He may feel this is unfair or incorrectly so. But it is unwise to treat the matter differently.

Nicholas Oresme

Gustav Klimt, Nuda Veritas (1899), Osterreichisches Theatermuseum, Vienna

Gustav Klimt, Nuda Veritas (1899), Osterreichisches Theatermuseum, Vienna

According to Murray Rothbard, the only novel though of Nicolas Oresme, for the advancement of economic science, was the first correct formulation of the world famous Gresham’s Law, some 200 years before Sir Thomas Gresham’s own description of the phenomena. The fact that good currency disappears from circulation when a less valuable one is forcefully introduced had been observed at least since Ancient Greece. There is a reference to this phenomena in Aristophanes play The Frogs, which implies that it was common knowledge and easily understood by the average theatre-goer in the late 5th Century BC. What is remarkable about Oresme is that he points the reason for this behaviour and explains the chain of events that lie underneath: it is as a reaction to government coercively imposing a fixed-price to the currency after debasing it. This drives out of the market the under-priced currency, which people will try to sell abroad at the higher market price, while keeping the debased coins for usage in local transactions. Outside Political Economy, Modern Finance applies this law to the valuation of derivative contracts when more than one underlying asset is allowed to be delivered at the settlement date. When calculating the price of the derivative, it is assumed that the underlying that will be exchanged at settlement is the cheapest-to-deliver or CTD. Continue reading

Lincoln, the Movie and the Glorified Racist Despot

Every time Abe is deified, government grows, Freedom suffers and the individual citizen is deeply hurt

February, 2013 by Sergio Alberich

So, last night I went to the movies and after almost 3 hours watching Spielberg’s latest work I left the room felling very uncomfortable about the screenplay. I hear the critics are in love with the motion picture that has been nominated to 12 Oscar Awards categories. I think its narrative was too slow and no more than 2 hours were needed to tell the story portrayed there. Sally Field and her kid are quite annoying and some of the characters mumble all the time. Anyways, that is not what I want to discuss, and liking or not the movie is up to everyone’s own subjective and undisputed valuations. What I would like to point out is how inaccurate the movie is. How much it beatifies Lincoln and praises the Federal Government. Continue reading

From Aristotle to St. Thomas Aquinas

Benozzo Gozzoli, The Triumph of St. Thomas Aquinas (1471), Musée du Louvre, Paris

Benozzo Gozzoli, The Triumph of St. Thomas Aquinas (1471), Musée du Louvre, Paris

It was St. Thomas Aquinas who baptised Aristotle. Plato had more or less been a constant source of inspiration for the Christian thinkers from the very beginning, but Aristotle, with its appeal to senses and a description of the world based in how it appeared to man’s eyes, was a bigger challenge. The understanding of Aristotle’s philosophy under the light of Christianity had begun before St. Thomas. His mentor, St. Albert the Great was a worthy predecessor, but there is no doubt that as Aristotle was the systemiser of the Greek world and it was St. Thomas who achieved the same result for Christendom based on the ideas of the Stagirite. From St. Thomas onward Aristotle became The Philosopher in the Western World. The movement for nation states to impose themselves above the Church was also a revolt against Aristotle’s preeminence. Continue reading

The Building Blocks of Society

Eugène Delacroix, 1830, Liberty Leading the People, Musée du Louvre, Paris

Eugène Delacroix, 1830, Liberty Leading the People, Musée du Louvre, Paris

Institutions are the building blocks of civilization. Despite the future being unknown, they help individuals to anticipate the consequences of their own actions. Institutions such as marriage, language, markets, justice or money, etc. come to be by the repeated behaviour of many people creating patterns that every individual expects his fellowman to keep. This means institutions have to be stable enough to allow for repeated patterns of behaviour to be incorporated and yet, dynamic enough to allow better ways of serving each and every individual’s goals to spring. Continue reading

The Cyprus, the Germany and the Russia


Yesterday evening the Cypriot Parliament took the only sensible decision at this stage which was nothing at all. I think this is a Mexican standoff where, unlike in a duel, the first to shoot is at a disadvantage. We had an anticipation of what was to be when the Cypriot finance minister resigned after a thorough consideration of his options: a) to be killed by an angry mod in the streets of Nicosia b) to be killed by a shot in the back of the neck by a professional assassin (or possibly in a more violent fashion) c) both d) none of the above. Later the parliament was roughly given the same choice and resigned from passing a law. If nothing is done, then Cyprus will have to leave the euro and will have no choice but to devaluate its currency. This outcome is harmful to both Russia and Germany, so Nicosia reckons they will have to move. Continue reading

Crossing the Rubicon – IX



The Queen

Another One Bites the Dust

(And another one gone, another one bites the dust)

A bank rescue is being attempted in Cyprus by the European Union, the IMF, the ECB and the Cypriot Government. The full tab is expected to be of 17Bn euros of which the EU wants bank depositors to contribute with 5.8Bn. The first sentence takes care of the what, when, where and by whom, while the second is a pretty condensed version of the how. Five of the six questions people ask (or should ask) when they want to know about something. This leaves us with the trickiest one: the why. And the honest answer to that is I do not know and can only speculate about it. Continue reading