The Bear's Lair: Modern accounts are instruments of deception

November 17, 2014

One of the courses I took at business school was "Analysis of Financial Reports," in which we learned to deconstruct all the scam accounts that had proliferated in the late 1960s boom. Most of these companies, undone by negative cash flow, went bust after 1970. We were informed by the professor that the Financial Accounting Standards Board (FASB), set up in 1973, was introducing new and more rigorous accounting principles, so that pretty soon all the accounting scams of the late 1960s would become impossible. Accounts would become readily comprehensible, with few differences in approach between those of different companies.

Well, that didn't last long!

The Bear's Lair: Governments can't spend their way out of trouble

November 10, 2014

Japan caused a euphoric rise in global stock markets last week by raising the cap on its "quantitative easing" purchases of government bonds to 80 trillion yen a year ($720 billion, some 14% of Japan's GDP.) Yet even with the huge "stimulus" and the declining yen to which it has led, Japan can still barely get its GDP growth rate up to 1%, while its budget deficit is some 8% of GDP. Other countries have tried similar approaches to stimulating their economy and have similar problems. Keynesian public spending stimulus, touted recently by the IMF as the solution to the problem of global economic sluggishness, isn't working. It's worth pondering why not.

The Bear's Lair: Malthus was just 220 years early

November 3, 2014

The average earnings of U.S. men between 25 and 34 with only a high school diploma have fallen 25% since 1979, according to Census Bureau data. Women in the same category have done better, but their earnings also have fallen. Given that GDP per capita has risen 73% in real terms since 1979 on World Bank data, those are shocking statistics. Their implication is that the value of the labor of people with ordinary skills has gone into a deep decline even as the country and the world has gotten richer. In other words, Thomas Malthus' gloomy prophecies, written in 1798, were not wrong. They were merely early.

The Bear's Lair: Silicon Valley is now a short

October 27, 2014

All bubbles burst eventually. Google has become a bigger political donor than Goldman Sachs. The tech sector is no longer the naïve capitalist entity that was startled by the Microsoft antitrust lawsuit in 1998. Venture capital money has flowed profusely into it for half a decade and valuations have reached to the sky. Some of its manifestations seem to have reached their natural limits, while others are running up against increasing legal and ethical concerns. In summary, even more than in 1999, for savvy investors the sector is now a short.

The Bear's Lair: When Socialism can appear to work

October 20, 2014

Bolivian President Evo Morales last weekend won re-election by a smashing margin. His eight-year rule has weakened Bolivian property rights, indulged in frequent nationalizations and demonized capitalism. Yet it has also produced Bolivia's best growth rates in several decades, far better than the orthodox and admirable policies pursued in 1985-2003. Thus Morales' policy of making Bolivian clocks run backwards seems reflected by the apparent successful defiance of theory in his economics. In reality, however, there is a fairly simple explanation, and it is an important lesson for other poor countries.

The Bear's Lair: Infrastructure is generally a bad investment

October 13, 2014

The International Monetary Fund's latest World Economic Outlook, in an unholy alliance with Larry Summers, claimed this week that a surge in publicly funded infrastructure spending would provide an increase in economic output with no downside risk. The truth is almost precisely the opposite: by indulging in ill-thought-out and boondoggle-filled public infrastructure spending, governments in rich countries leave their long-suffering taxpayers gasping for their next dinner.

The Bear's Lair: Half a trillion is still a lot of money

October 6, 2014

The latest estimate by the Congressional Budget Office of the federal deficit in the year to last Tuesday was $506 billion. The deficit is expected to improve marginally this year, then jump back above $500 billion next year and worsen steadily for the next decade and thereafter. Given that we are five years into an economic "recovery," this won't do. Fourteen years of sloppy fiscal policies have left the U.S. fiscal position in a parlous state, only partly disguised by two decades of cheap money. Drastic action needs to be taken.

The Bear's Lair: Fed policy makes spendthrifts of us all

September 29, 2014

Last week's inflation figures showed that the Federal Reserve's over-expansionary monetary policy wasn't revealing itself in inflation. But that doesn't mean it's doing no damage.

The Bear's Lair: Get on with it!

September 22, 2014

The Federal Reserve last Wednesday did not even remove the "considerable period" from its language about when it might start raising interest rates, thus delaying the likely start of rate rises even further than expected. This repeats its mistake of 2004-06, when it raised the federal funds rate at only one-quarter of a percent per meeting, undertaking 17 such tiny rate increases over a two-year period.

The Bear's Lair: The best peace conference of all

September 15, 2014

The bicentenary of the Congress of Vienna, organized to settle the questions outstanding from the 22-year Napoleonic Wars, is a slightly uncertain date. The Congress itself opened officially on October 1, 1814, and the Final Act was signed on June 9, 1815. But on the other hand, the British Foreign Secretary Robert, Lord Castlereagh, arrived in Vienna on September 13, 1814, and the official bicentenary conference (in Vienna, naturally) opens September 17. So this seems as good a week as any to celebrate the conference that (because the 1919 Treaty of Versailles was a failure and there was no peace conference after World War II) was effectively the foundation of the global system we inhabit today. It established a number of principles of international governance, some of which we have kept and others that we would do well to re-apply."

The Bear's Lair: The death spiral of capitalism

September 8, 2014

No less than six sovereign borrowers are now paying negative nominal interest rates on their 2-year borrowing in euros. In other words, they are making money by going into debt. In real terms, medium-term U.S. TIPS and British index-linked gilts have had negative interest rates for several years. Contrary to the views of the happy Keynesians around us, this is very dangerous indeed. If negative interest rates were to persist, the world's stock of capital would eventually disappear. Without capital, we'd be back up the trees.

The Bear's Lair: Where's the growth going to come from?

September 1, 2014

"We wanted flying cars, and they gave us 140 characters," said venture capitalist Peter Thiel in 2011. He put his finger on a central dilemma of the New Economy: its innovations can make money (usually through redirecting advertising sales), but they add little or nothing to the overall stock of human knowledge or long-term happiness. Professor Robert Gordon postulated last year that we may have come to the end of the era of perpetual growth. His theory looked foolishly pessimistic, but as the current sluggish expansion limps on, it begins to look more plausible.

The Bear's Lair: Are we better off than in 2000?

August 25, 2014

The NASDAQ Composite Stock Index this week broke out to 14-year highs, reaching levels not seen since March 2000. It came within 10% of its all-time closing peak of 5,048.62 on March 10 of that year (by the end of that month it was already below current levels.) At that time I thought, along with many commentators, that absent major inflation we would not see that NASDAQ level again in our lifetimes, unlike the Dow Jones and S&P 500 indices. It is thus worth pondering why the index had reached such nosebleed levels again, and what about today's environment might justify higher valuations than in 2000.

The Bear's Lair: The emerging markets picture darkens

August 18, 2014

Ever since the fall of Communism and the rise of the Internet, future growth has appeared to lie in emerging markets. Modern communications have made it much easier for multinationals to run international supply chains that take advantage of their abundant resources and cheap labor, while emerging markets people have become far more connected to the world economy, to their great advantage. Yet just as globalization itself has begun to reverse, as I discussed last week, so the era of emerging markets emergence may be coming to a close—at least for the next decade or so.

The Bear's Lair: Has the globalization clock gone Bolivian?

August 11, 2014

Fifteen years ago, it appeared that globalization was the most important trend of our time, and was irreversible. Since then, the Doha round of trade talks has been stalled for years and even the modest progress trumpeted last December has been blocked by India, home of a new government supposedly dedicated to the free market. Has the globalization clock, like that on the Bolivian Congress, gone into reverse? And does this have deeper implications for the time-direction of the world economy in general?

The Bear's Lair: Scotland's too small but Britain's just fine alone

August 4, 2014

As an instinctive opponent of Scottish independence but supporter of Britain leaving the EU, I have to face an epistemological reality: the two positions are at first sight inconsistent with each other. As a rational man, I find that disquieting, so I thought I'd look at the economic effects of both moves and determine whether, economically at least, my instincts were right or whether ethnic sentimentality had overwhelmed me.

The Bear's Lair: Is business a force for free markets?

July 28, 2014


Traditionally, business was the most important political backer of free markets, which made sense because business needs markets in order to exist at all. However, in the last generation, the views of business, as expressed by the U.S. Chamber of Commerce and other outlets, have increasingly diverged from the free-market ideal. As crony capitalist ideas have come to dominate business thinking, so crony capitalism itself has come to dominate the U.S. economy, with dire results for productivity growth and the living standards of Americans.

The Bear's Lair: World War I is still damaging us today

July 21, 2014

A fascinating new book, "Archduke Franz Ferdinand Lives!: A World Without World War I," by Richard Ned Lebow (Palgrave Macmillan, 2014) looks at history's likely trajectory if the Sarajevo assassin Gavrilo Princip had missed. He concludes that, while much would be changed, we would at best be only modestly better off. However, Lebow is not an economist and he misses two enormous economic factors that would almost certainly be different in a world without World War I. His "worst-world" scenario might have derailed us, but absent that, 2014 without World War I would probably enjoy much greater prosperity than today's real world.

The Bear's Lair: Technology appears to be wrecking markets

July 14, 2014

The New York Attorney General's lawsuit against Barclays' dark pool is yet another example of banks' increasing resemblance to asbestos manufacturers. But it also reflects an uncomfortable truth: Whether through "fast trading," through the new area of "crypto-currencies" or through the increasing frailty of bank and corporate security systems, technology is transforming previously well-understood markets into insider-dominated scams. The implications for the future of a free economy are dire indeed.

The Bear's Lair: Is finance developing asbestos-like legal risk?

July 7, 2014

The French bank BNP Paribas is about to be fined $9-$10 billion for doing business with Iran, a country with which the U.S. is finding common ground in Iraq. Since 2008, the U.S. and the trial bar have obtained fines and settlements from global banks totaling $88 billion (as of early June.) Now medium-sized U.S. banks such as Sun Trust are being zapped with fines—$968 million to settle claims over its mortgage practices.


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