Let’s spread the word that inflation is growth
September 30, 2012, 3:23 pm
Filed under: Uncategorized

I noted here a response to a Kids Prefer Cheese post in which Yglesias explained his expert business-and-economics-correspondent view that market actors are required to be indifferent between economic growth and price growth (i.e. inflation). They should, and therefore will, treat them both indistinguishably, and make decisions accordingly. Hence, ‘NGDP’ is all we need to care about.

Kids Prefer Cheese has now responded to Yglesias’s post, pointing out that, in reality, market actors actually don’t behave that way: investment growth correlates to GDP growth but has no meaningful correlation with inflation. It seems that market actors haven’t gotten Yglesias’s memo that they are supposed to perceive anticipated inflation as just another sort of coming ‘growth’ that automatically militates for increased investment.

I kinda wonder what happens next. We know that Yglesias is Reality-Based, because he told us so years ago. But Reality doesn’t seem to be cooperating here; people are apparently refusing to be homo economicus yglesias. So this confounds the parallel Yglesias mandate to argue for whatever appears to be ‘Keynesian’ i.e. involve the government spending and inflating as much as possible. Why won’t market actors just behave how Matthew Yglesias has figured out a priori they should! Argh.

Probably what needs to happen next is that Yglesias just needs to blog harder about it. Or maybe a Kickstarter project to buy up copies of Yglesias’s undergrad econ texts to send to CFOs and the like. Well, I for one can’t wait to see how it turns out.

Links: CDX, NGDP, and the LC
September 29, 2012, 9:11 am
Filed under: Uncategorized

Lots of folks reacted with surprise that the next HY index would include names that don’t trade, but I’m nonplussed. How is this really different from all the previous indexes and vintages that contain tons of names that basically don’t trade? (And no I’m not counting a name that dealers ‘quote’ with a 200bps bid/offer as a name that ‘trades’.) Now sure, this complicates the matter of settling a credit event if/when one of those things happens, but practically the whole credit derivatives business – i.e. the business of making bets contingent on credit events – seems to have gone through its adolescence on the simplifying assumption that there would be virtually no credit events. (Which, you have to admit, made the whole thing easier, infrastructure-wise, etc.) So again, that’s nothing new.

Kids Prefer Cheese on the idiocy of NGDP-based analysis, citing that NGDP smooshes a price and an income quantity together. Yglesias, drawing no doubt on his many years’ experience as a corporate CFO or similar, has a response that amounts to saying that at the margin market actors can’t and/or shouldn’t distinguish between the two, between inflation and economic growth. If you’re wondering whether to buy the marginal sprocket-making machine, and you’re told by God that inflation will soon make your cash worth much less, you’re supposed to think of that in the same terms as if you were told by God that the economy, including the sprocket business, is due to for a boom. So there. Now personally, I don’t know: if I were told by God that inflation would eat away at my cash, and without genuine economic growth, I might be buying TIPS, or gold. What’s so special about the sprocket machine? Besides, under an inflation no-growth scenario am I even sure the sprocket business market share doesn’t (relatively) suffer – which would argue for some belt-tightening and layoffs? (Surely such a thing could affect the market’s buying habits in a non-uniform way – it couldn’t?) So this raises the question: What if market actors, all the homo economicus yglesiases out there, don’t behave precisely as Yglesias’ college texts said they must? Well, that’s unpossible.

Captain Capitalism will not recycle and, to me, has a great argument: “Want to rummage through my garbage? Go ahead.” One of the indicators of progress is how we dispose of our trash. Used to be, people would dump human waste out their window into the back alley (which I assume they still do in vulgar, backwater places like France), and piles of trash outside of town or down the hill. Most Westernized places then progressed to using trash-collection systems, increasing both convenience and sanitation. That progress has ceased and reversed in the past couple decades however, because for some reason society has decided to devolve some of its trash-sorting and -processing functions back onto the household, which is a setback both in terms of convenience and of sanitation. It’s no different really from a ‘green’-led mass movement insisting that rather than centralized water-purifying we all should be forced to purify our own water of bacteria after it comes out of the tap. Kids being given pamphlets at school extoling the virtues of Boiling Your Own Water To Save The Earth, etc. Face it, I don’t know this isn’t coming.

Economist Garett Jones points to some startling economic findings by economists that paying people to be unemployed increases the number of people who are unemployed. Astounding. A real head-scratcher. I’m not sure I believe it. It’s just so outlandish.

South Bend 7 starts out talking about ‘Modern Family’ which I take to be some sort of TV show that everyone is required to pretend to like now, but of course has a larger point:

This is why Obama will win. It does not matter what he does or says. He can say and do exactly the same things Romney does (which he will do, depressingly often) but his supporters will love him for it because he is Cool and Romney is not. Obama was elected in 2008 because he was Cool. That has not changed since then, so he will be re-elected in 2012.

As you know, I agree 100%.

Thomas Hoenig of the FDIC has put forth a better alternative to Basel capital rules, based on ‘tangible equity’, which at first glance sounds good. And it appears to also satisfy tireless Per Kurowski‘s (and my, if no one else’s) longrunning complaints about how risk-weighting distorts credit allocation and perpetuates a false ‘safety’ illusion. But I think it has approximately 0% chance of being implemented, in part because the Basel approach means lots of high-paying jobs (regulation is a white-collar jobs program; a point also made here by Sober Look) but also, crucially, because the approach is not named after some sophisticated-sounding European city. Smart People are just never gonna adopt some set of risk rules not named after some sophisticated-sounding European city. Free tip from me to you, Thomas Hoenig.

Gormogons does the math on the Obama ad campaign involving a daughter asking her mom for $18,000 to pay for birth control. This whole thing is probably too stupid on too many levels to even think about further but what confuses me is why the daughter thinks she needs to pre-fund all her birth control purchases in particular. Why isn’t she also asking her mom to borrow for, oh I don’t know, $25,000 for lattes (say, budgeting them at 2-3 lattes a week, so $10/wk x 50 weeks x 50 years)? Or for that matter $1+mm for her housing? Surely she’s gonna need housing the rest of her life. Here’s the other issue: given that the Obamacare tax is now projected to be costing folks – including the girl’s mother – an extra $2-3k per year, as long as the mother thinks she’ll live more than another 5-10 years or so, isn’t she supposed to jump all over this deal? Oh nevermind. JUST VOTE FOR OBAMA.

I was honestly surprised to read that Judge Strikes Down a Dodd-Frank Trading Rule. I didn’t really know that judges could strike down regulations. It just doesn’t seem to happen. Are we sure they can do this?

If you’re distressed by my relative lack of non-BS output recently (I know you’re out there) you can blame Pastorius, who pointed me to this series on the Laurel Canyon music scene that I’ve been devouring. It’s sort of the Rosetta Stone of internet conspiracy theories. (That link is part I; the rest can be accessed here in the ‘Inside the LC’ section.) I love the whole thing, even down to the ’90s-vintage site design and awkward navigation. Really takes me back to when the whole internet was like this. I feel infinitely wiser and only a little bit dumber for having read it all.

It’s not that pollsters are biased, it’s just that elections are stolen
September 27, 2012, 2:26 pm
Filed under: Uncategorized

One of the odder aspects of this pre-election polling season has been the mystery of the Party-ID. As I have only learned this year, current Best-Practices Polling Methodology apparently involves (a) polling people, (b) asking what party they’re in, and then (c) re-weighting the answers from (a) according to what the pollster believes the ‘real’ party makeup of the electorate (as opposed to those he polled) is.

[SLIGHTLY DEVASTATING UPDATE: After actually reading up on poll methodology some, rather yhan just (R) complaints about it, I’m not at all sure the above is the case. It seems like what most polls do, rather, is build a demographic model of what they think the electorate is like, and try to sample so that the demographics match that model? If the resulting sample ends up D+10 that’s how the cookie crumbles. In a way this is still weird but differently so, and still amounts to baking a fudge factor into their polling – but depending on whether you buy that you may or may not consider the rest of the post, which I’m leaving intact, even more BS than my usual.]

[UPDATE 2: Just for completeness, here’s one of the articles that made the rounds claiming explicitly that pollsters weight results to match a turnout model, and here’s one saying no they don’t, that’s only the cheap ones, the good ones weight results to match a demographic model. I just. I don’t know what to think now.]

Importantly, the ‘real’ party-makeup of the electorate is gauged by looking at the results of prior elections.

Now, I am not a statistician or pollster but this is truly weird to me. Naively, it is not how I would have ever designed a poll from scratch. It seems to insert an extra moving-part, an extra thing that you have to model, into your statistics for no good reason. Instead of estimating f(x) they have decided that f(x)=g(h(x)): and now they have to estimate both g(*) and h(*). Needless to say, errors can pile up quickly when you do this sort of thing. (Why stop at party-ID for example? Why not also ask whether the people you polled are left-handed or right-handed, and then ‘correct’ for the handedness-breakdown not matching that of the country? There’s virtually no end to the ‘corrections’ one could come up with.)

And this is not a small effect either. It is now routine to hear claims, from conservatives desperately seeking some cause for comfort (and also from Borepatch), that due to the Party-ID Problem, all the polls that show Obama 3-5 points up are ‘really’ showing Romney 3-5 points up, if you re-weight the party ID properly (or undo the pollsters’ weighting). In other words, this fuzzy Party-ID re-weighting procedure, whatever it is, seems to be be capable of generating not 1- or 2-point swings as one might have imagined to be tolerable, but for 8- or 10-point swings.

That is insane. Especially considering that all these polls advertise having a ‘margin of error’ of 3 points or some such. When the Party-ID correction can cause such a swing you may as well throw the actual poll out the window because it is just some random noise you are throwing on top of a model of Party-ID that you have built. And when we hear about these ‘poll results’, what we are really being shown is more or less just the result of them hitting F9 on their dynamic Party-ID model. I have never, in any prior election season, heard of such a big effect stemming solely from the Party-ID correction. So what is going on here? Is there a method to this madness? I think there is.

Conservatives of course think it traces to bias. The pollsters and media are all in the tank for Obama, and want to demoralize conservative voters, so they are cooking the books. One problem with this theory is that (even if that’s what the biased pollsters/media are trying to do) who’s to say the outcome would be ‘demoralize’ rather than ‘fire up’? The bigger problem with this theory though is that it sounds insane.

But the problem with just saying the theory is insane is that modern-day poll methodology virtually asks for such a theory. Because (unless I am misinterpreting) it really does seem to be the case that all these pollsters use models which contain an arbitrary, internal dial – how/whether to re-weight for Party-ID – that as far as I have been able to tell, pollsters can tweak however they like and whose details they don’t share, or perhaps even consider proprietary. If your polling methodology amounts to: ‘we poll a small group of people, and then multiply the results by a secret factor whose provenance we respectfully decline to explain’, all I can say is don’t come complaining to me with ‘they’re attacking SCIENCE!’ when people accuse you of cooking the results, because I’m not going to be very sympathetic.

But I don’t for one second believe all the pollsters are ‘biased’ nor do I think they are stupid, either. If they were this would have led to severe poll vs. election mismatches that would have come out in prior elections. I do recall some noise that Bush v. Gore deviated from pre-election polls, but nothing like the Party-ID effect we’re seeing here. We would have seen a much bigger effect than that if the Party-ID correction were such a problem. So in fact, when pollsters say (as I’m sure they would) that they need the party-ID correction to get their poll predictions to match the outcome, I guess I’m inclined to believe them. There may be some amount of overcorrection going on right now due to over-fitting to the 2008 election, which was an outlier (lots of people expressing disgust for Bush, (R) voters suppressed, lots of voters voting for Obama so they could prove how non-racist they were, etc.) But I doubt it’s anything so dramatic as could turn an Obama 3-5 point “polling” (i.e. polling model) advantage into a Romney 5+ point victory.

After all, keep in mind, I do still expect Obama to win in November. After the votes are counted, I mean.

So (if I’m right) we seem to have a situation where every single pollster, whenever they do a poll, needs to ‘correct’ all their (D) results upward and their (R) results downward by, let’s say, 5% each. They all think they need to do this because the (D) vs. (R) breakdown they observe in their polls doesn’t match what they saw in 2008/10 and (therefore) what they expect to see in the election. And let’s ditch the insane-sounding theory that they’re all doing this intentionally because they’re in the tank for Obama. This gives rise to a mystery.

To spell out the mystery, this would mean that when pollsters randomly sample ‘likely voters’, they consistently get one sort of (D)/(R) breakdown, but whenever elections are actually held – and presumably in November this will happen too – they get a significantly different (D)/(R) breakdown. Every time. So predictably, and so significant, that they need to include it as an explicit correction in their model. And again, let’s assume they’re not doing this just because they’re biased; they really are trying to construct the most accurate polls they can.

But why, and how, could there be such a consistent and persistent mismatch between every random sample of LVs in every poll and the likely party-ID makeup of the electorate as counted after the election?

I think it can only mean that the pollsters have refined their polls so effectively that they are picking up the effect of election cheating.

Think about it. If all your random unbiased samples of likely voters come out 50-45 in favor of the (R), but then the ‘election turnout’ (i.e., after the votes are ‘counted’…) ends up being so different from your samples that the (D) wins 45-50, i.e. a 10-point swing, the most likely explanation is the very simple and straightforward one that the election was stolen via cheating in the vote-counting process. Somewhere between likely voters becoming actual voters, and those votes being counted, surely at least some cheating – ballot-box stuffing, ‘lost’ ballots, votes misregistered, etc. – took place. That cheating more or less causes an 8-10 point swing in party-ID each election (i.e. between actual voters and the results after they’ve been ‘counted’), and this is what we’re seeing all modern polls having to ‘correct’ for. Simple.

These polling models are picking up (albeit inadvertently) the effect of this cheating via the fact that their polled samples never seem to match their predicted election results when it comes to party breakdown. But of course they don’t match. The election results come from ‘vote counting’, and cheating takes place when votes are counted. Now before you protest, yes surely there is cheating on both sides, but nowadays and in the current environment it would appear the (D)s effectively have perhaps a baked-in 8-10 point advantage in the cheating arms-race and so all election-outcomes (vs. unadjusted polls) have to reflect that. In particular, the party-ID breakdown you see when you look at election results reflects this cheating asymmetry. And as it turns out, (D)s just plain cheat better than (R)s right now. This could change at any time of course, and then we would see the Party-ID correction break the other way.

So it’s really very simple: there is no giant conspiracy among pollsters and media, and ‘bias’ isn’t unduly affecting their results. They are, in the main, conscientiously trying to build and update models of the election outcome that are as accurate as possible. It’s just that the election outcome will have cheating in it while all these polls don’t, not really (what would be the point?). So pollsters have to correct for that to be accurate. What they are calling a Party-ID correction would probably be more accurately termed a ‘election-cheating fudge factor’, but we can forgive them this polite terminology.

The bottom line is, conservatives aren’t wrong to think it ‘looks weird’ that all polls need to be corrected D+5 or D+10: they are just misdiagonising and overthinking the reason. The reason is just election cheating that tends to give (D)s a 5-10 extra points or so. Whenever you see a poll with that correction in it, just mentally treat that correction as the poll’s implicit prediction of how much one party will successfully cheat by. Nowadays polls appear to predict a 5-10 point advantage in cheating for the (D)s. Once you understand that everything then becomes clear and simple.

So, now you can sleep better at night knowing that. You’re welcome.

It’s always been a big government, so it’s ok
September 25, 2012, 2:34 pm
Filed under: Uncategorized

Looks like I may not have been the only one confused by this Yglesias post where he excuses, or downplays, or debunks, or something the richness that’s been flowing to DC. That’s because, instead of just moving on to write about his condo or whether there’s enough local hipster bars for him to go to or something, he decided to uncharacteristically follow it up and clarify with a whole separate post.

And full credit to him, because I understand his point now. Yes, more money has been flowing to DC, but it’s not due to any recent ‘big government’ policy change or anything. It’s just that everyone has finally figured out the stakes involved in the ‘big government’ we already had and so they’ve been ramping up their influence-peddling to match accordingly.

So, good point, as far as that goes. Sure, it could totally be the case that the inequality and money flow into the DC area is just due to elites playing catchup with the big government monster they had built up. What I can’t figure out though is what Yggie thinks that’s a counterargument against.

After all, if we all agree then that DC is getting richer mostly due to all the lobbyists and lawyers that sprung up like mushrooms to feed off all the laws and regulations that incentivize massive influence peddling, then regardless of how we got there or which specific ‘policies’ caused it, you’d think a lefty might think that’s a bad development and at least frown on it a little. But nope, not Yggie! If we can’t point to a recent policy change that caused this bifurcated society of a bubble-zone DC siphoning money from the rest of the country, then well, that’s just the way the cookie crumbles. We should all just make our peace with funding DC to support the lifestyle to which they’ve (only recently) figured out they’d like to become accustomed, and that’s that. Thus speaketh Yglesias, DC-area resident and political pundit.

September 25, 2012, 11:43 am
Filed under: Uncategorized
  • In just about the daftest commentary I’ve ever seen on this topic (which is saying a lot), William Cohan tries to talk himself into thinking that the ‘London Whale’ lost JP Morgan depositors’ money. (HT Dealbreaker) Of course if he were to try to produce any single depositor that actually lost money as a result of this action that (supposedly) lost depositors’ money he would fail. Sneaky London Whale, he lost their money in such a subtle and intricate way that everyone still has all their money. What Cohan is really (I guess) saying is that the loss weakened JP Morgan’s capital position vs. it not happening, and so that increases, by whatever infinitesemal amount, the probability of a default on their deposit liabilities in the event of a bank run etc. etc. bla bla. That is perhaps ‘true’ but the same exact thing happens any time a JP Morgan loses money on anything, similarly, when they make money their balance sheet & credit presumably becomes that much better. But unless their depositors have been taking and conscientiously-updated a counterparty-risk provision against their deposit accounts none of them will see any of this as any kind of loss or gain. It’s as if the author has just discovered the concepts of counterparty risk, deposits as liabilities, the fractional-reserve banking system…
  • David Friedman makes the good point that in the global warming debate, the two sides disagree about whether certain choices are costs or benefits. This clearly confounds any attempt at an objective, definitive cost-benefit analysis, when folks can’t even agree on the sign. And as I probably wrote in one of my various global-warming magnum opus pieces, when different groups of people are working from different cost functions, the issue becomes automatically ‘political’, not purely scientific.
  • I’m sure the title of this Yglesias post, Washington’s Riches Are About Politics, Not Policy, is supposed to mean something, but I’ve read it 10 times and I still can’t figure out what. What is the difference between ‘politics’ and ‘policy’ to him? I’m sure there is one, but my eyes glaze over trying to parse it. As far as I’m concerned the title could have been, equally accurately, “Washington’s Riches Are About Policy, Not Politics”. Well anyway, sometimes you just gotta call a post something. The piece is equally confusing, he seems to acknowledge the ‘rising affluence’ of Washington DC while at the same time denying that it can possibly have anything to do with the federal government. His key question seems to be, “But I’d like to hear these gentlemen spell out in detail what changes in government policy they think have this impact [=making DC richer]. In most respects it seems to me that the American economy is much less politicized in 1972 than it was in 2012…”. As if, absent spelling out such ‘changes in government policy’, the enriching can’t have occurred, or we needn’t notice it, or something. I think what’s really going on is that guys like Yglesias have a mental model of society as a sort of stationary random process in a kind of equilibrium that gives us a controlled science experiment that responds in predictable ways to inputs: if such-and-such inputs caused such-and-such effect at time 1, they will also cause that same effect at time 2. Similarly, if you see an effect at time 2, and there were some inputs, but those inputs were there and didn’t cause the exact same effect at time 1, then those inputs can’t have caused the time-2 effect. Needless to say, this is all very foreign to how I think of human society, and I now think that’s why a lot of lefty retorts sort of go over (or under, rather) my head.
  • Credit – Zemblanity, long read but interesting.
  • Bob Murphy explains why Scott Sumner is insane.
  • The Fed owns 27% of all duration. Or as an Yglesiocrat might put it, ‘the market is still willing to lend to us at really low rates so we should borrow even more and us it to do a bunch of infrastructure’.

Half-baked ideas I could never back up for posts I’m never going to write
September 24, 2012, 9:45 am
Filed under: Uncategorized

Home Alone 2 is just a thinly-disguised reimagining of Midnight Cowboy.

There should be no field goals allowed in football overtime. A football game that ends on a field goal is a disgrace.

Kids used to be funnier on TV in the late ’70s-mid ’80s.

‘Smartphones’ and iPods/Pads have made society fundamentally more girly.

A positive side effect of iPods, of course, is lower crime.

If you’re making a commercial with a lot of people in it, there can be a white guy, but he has to be a nonthreatening hipster.

Hipsterism of course is the ‘safe’ white guys’ way of reasserting their whiteness without being tarred as racist skinheads.

It should be illegal for schools to assign ‘homework’. To study and work is why we send them to school for N hours per day; ‘homework’ is an admission of failure in their basic mission.

Attack Ads, Circa 1800
September 22, 2012, 11:36 am
Filed under: Uncategorized

I’ve waxed poetic about the negative campaigning of yore and many thanks to reason for proving that I wasn’t just imagining things:


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