Who is the Man with the Name that Rhymes ?If the name don't rhyme it ain't mine.

This is a chart from the Carpe Diem blog showing the increase in college education costs, U.S home prices, and the consumer price index. If we had a housing bubble, the skyrocketing costs of higher education is a super bubble.

How did we get here? There's no way the value of that education has kept track with its price.

Well, private lenders are part of the story.

Private lenders cropped up marketing easy credit to students, while at the same time giving kickbacks to schools that shuttle students to these private lenders. The more these schools raised rates, the more students turned to the private lenders, and the profits for the school and the lender kept rising.

Obviously this isn't the case at all universities, but it is at enough. Remember the big settlements Andrew Cuomo got from NYU and U Penn over accepting kickbacks from Citibank? You know that if those guys were caught, there were many more out there doing the same.

The Higher Education Bubble: It's About to Burst [Carpe Diem via My Money Blog]

Mimicking the behaviour of ants, bees and birds started as a poor man’s version of artificial intelligence. It may, though, be the key to the real thing

ONE of the bugaboos that authors of science fiction sometimes use to scare their human readers is the idea that ants may develop intelligence and take over the Earth. The purposeful collective activity of ants and other social insects does, indeed, look intelligent on the surface. An illusion, presumably. But it might be a good enough illusion for computer scientists to exploit. The search for artificial intelligence modelled on human brains has been a dismal failure. AI based on ant behaviour, though, is having some success.

Ants first captured the attention of software engineers in the early 1990s. A single ant cannot do much on its own, but the colony as a whole solves complex problems such as building a sophisticated nest, maintaining it and filling it with food. That rang a bell with people like Marco Dorigo, who is now a researcher at the Free University of Brussels and was one of the founders of a field that has become known as swarm intelligence. ...

(author unknown)

CONFESSION: I wasn't very nice to Newt Gingrich in this week's print column, on the mosque near ground zero. But I really don't understand what's got into him.

(author unknown)03423617973439910156

Here's an interesting article on the life and times of 24-year-old Jordan Kavoosi, who has made a business of plagiarism. His Essay Writing Company employs writers from across the country, and will deliver a paper on any subject for $23 per page. In addition, his company will get it done in 48 hours, and he guarantees at least a B grade or your money back. From the article: "'Sure it's unethical, but it's just a business,' Kavoosi explains. 'I mean, what about strip clubs or porn shops? Those are unethical, and city-approved.'"

Read more of this story at Slashdot.

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(Cross-posted from the Google Voice Blog)

A little over a year ago, we released an early preview of Google Voice, our web-based platform for managing your communications. We introduced one number to ring all your phones, voicemail that works like email, free calls and text messages to the U.S. and Canada, low-priced international calls and more—the only catch was you had to request and receive an invite to try it out. Today, after lots of testing and tweaking, we’re excited to open up Google Voice to the public, no invitation required.

Over the past year, we’ve introduced a mobile web app, an integrated voicemail player in Gmail, the ability to use Google Voice with your existing number and more. Over a million of you are now actively using Google Voice, and many of the features released over the past year (like SMS to email and our Chrome extension) came as a result of your suggestions, so thanks!

If you haven’t yet tried Google Voice, we can’t wait for you to try it out and let us know what you think. Check out our revamped features page to learn about everything Google Voice can do, and if you haven’t seen it yet, this video provides a good overview in less than two minutes:



We’re proud of the progress we’ve made with Google Voice over the last few years, and we’re still just scratching the surface of what’s possible when you combine your regular phone service with the latest web technology. It’s even more amazing to think about how far communication has come over the last couple hundred years. To put things in context, we created this infographic to visualize some recent history of human communication and how Google Voice uses the web to help people communicate in more ways than ever before (click the image for a larger version):



Update 10:53AM: Just to clarify, though we've opened up sign-ups, Google Voice is still limited to everyone in the U.S. for now.

Posted by Craig Walker & Vincent Paquet, Google Voice Product Managers

The Pragmatic Capitalist submits:

There’s great concern over the sustainability of US deficits. Most of the fear mongering, hyperventilating, flat earth economists believe foreigners will at some point stop “funding” our spending. The hyperinflationist crowd likes to keep a very close eye on US government bond auctions hoping foreign demand for debt will dry up, auctions will begin to fail and interest rates (and inflationary pressures) will surge as the United States effectively defaults (which is technically impossible) and dies the death that so many of these people wish upon it.

Unfortunately, 99% of the inflationistas have a very poor understanding of reserve accounting so their arguments have not only been wrong for a very long time, but they never really carried any weight to begin with (as one reader eloquently put it – “at some point being right has to count for something” – the inflationistas have been horribly wrong throughout this downturn). So what is really happening when the government auctions off bonds? Let’s take a look.

Complete Story » The Pragmatic Capitalist

Economists find a treasure trove of information to study and analyze in an imaginary place set 20,000 years into the future in a galaxy known as New Eden.(author unknown)

A popular question on our Webmaster Help Forum is in regard to best practices for organic link building. There seems to be some confusion, especially among less experienced webmasters, on how to approach the topic. Different perspectives have been shared, and we would also like to explain our viewpoint on earning quality links.

If your site is rather new and still unknown, a good way marketing technique is to get involved in the community around your topic. Interact and contribute on forums and blogs. Just keep in mind to contribute in a positive way, rather than spamming or soliciting for your site. Just building a reputation can drive people to your site. And they will keep on visiting it and linking to it. If you offer long-lasting, unique and compelling content -- something that lets your expertise shine -- people will want to recommend it to others. Great content can serve this purpose as much as providing useful tools.

A promising way to create value for your target group and earn great links is to think of issues or problems your users might encounter. Visitors are likely to appreciate your site and link to it if you publish a short tutorial or a video providing a solution, or a practical tool. Survey or original research results can serve the same purpose, if they turn out to be useful for the target audience. Both methods grow your credibility in the community and increase visibility. This can help you gain lasting, merit-based links and loyal followers who generate direct traffic and "spread the word." Offering a number of solutions for different problems could evolve into a blog which can continuously affect the site's reputation in a positive way.

Humor can be another way to gain both great links and get people to talk about your site. With Google Buzz and other social media services constantly growing, entertaining content is being shared now more than ever. We've seen all kinds of amusing content, from ASCII art embedded in a site's source code to funny downtime messages used as a viral marketing technique to increase the visibility of a site. However, we do not recommend counting only on short-lived link-bait tactics. Their appeal wears off quickly and as powerful as marketing stunts can be, you shouldn't rely on them as a long-term strategy or as your only marketing effort.

It's important to clarify that any legitimate link building strategy is a long-term effort. There are those who advocate for short-lived, often spammy methods, but these are not advisable if you care for your site's reputation. Buying PageRank-passing links or randomly exchanging links are the worst ways of attempting to gather links and they're likely to have no positive impact on your site's performance over time. If your site's visibility in the Google index is important to you it's best to avoid them.

Directory entries are often mentioned as another way to promote young sites in the Google index. There are great, topical directories that add value to the Internet. But there are not many of them in proportion to those of lower quality. If you decide to submit your site to a directory, make sure it's on topic, moderated, and well structured. Mass submissions, which are sometimes offered as a quick work-around SEO method, are mostly useless and not likely to serve your purposes.

It can be a good idea to take a look at similar sites in other markets and identify the elements of those sites that might work well for yours, too. However, it's important not to just copy success stories but to adapt them, so that they provide unique value for your visitors.


Social bookmarks on YouTube enable users to share content easily

Finally, consider making linking to your site easier for less tech savvy users. Similar to the way we do it on YouTube, offering bookmarking services for social sites like Twitter or Facebook can help spread the word about the great content on your site and draw users' attention.

As usual, we'd like to hear your opinion. You're welcome to comment here in the blog, or join our Webmaster Help Forum community.

Written by Kaspar Szymanski, Search Quality Strategist, Dublin

Yes, you’ll have more freedom as your own boss. But you may also face longer hours — and a degree of loneliness.

By PHYLLIS KORKKI

Buttonwood's notebook Debt, the markets and the economy Buttonwood A forty (and two thousand) year view Images: 

WHEN we talk about bubbles, we tend to think of recent history but in fact this is an age-old phenomenon. (Note to patient readers; this is a long post because it is a condensed version of my BCA speech.)

Asset bubbles and rising debt levels go together. And it is not just government debt we have to worry about. US private sector debt has increased as a proportion of GDP from around 60% in the early 1950s to almost 300% at its peak.

Some increase in debt may have been inevitable as societies became more sophisticated. Many would say a certain degree of debt is beneficial since it allows individuals and companies to smooth their consumption over the cycle.

Others would say it doesn’t matter. In aggregate, the world owes the money to itself; debt is just an accounting issue. A family is no poorer if a wife lends money to her husband, or vice versa. Another rationale is that asset prices have also been rising so that one needs to look at both sides of the balance sheet; it is net, not gross, debt that matters.

But that is wrong. Gross debt levels matter because, as is well known, the value of debt is fixed in nominal terms while the value of assets can fluctuate. High gross debt levels thus create a number of flash points when creditors start to doubt the value of their collateral, and when the debts have to be rolled over. These crisis points are now rippling through the system; first US homeowners, then investors in structured products, then banks, and now sovereigns.

It is no coincidence that this massive debt explosion has coincided with the end of the Bretton Woods system of the early 1970s. This destroyed the final link to gold and crucially, removed the balance of payments constraint from the concerns of economic policymakers, at least in the developed world.

The author Richard Duncan compiled this chart from IMF data showing the growth in foreign exchange reserves since the end of Bretton Woods. From modest origins, they climbed above $1 trillion in the early 1970s before accelerating to almost $7 trillion in recent years. It is his contention that these reserves allowed surplus countries to expand their money supplies, while the deficit countries were not forced to cut back.

It was true that, in the main, developed countries found that they could run deficits without being punished by the markets. Indeed, eventually, they found that they could depreciate their exchange rates without being penalised by their creditors in the form of higher yields. This was an easy option in the short-term. But it was a bit like the 25-year old who boasts that smoking, drinking and overeating hasn't harmed him; the bad habits will catch up with him eventually.

Floating exchange rates gave countries an escape valve after the 1970s. And that was very important because attitudes were changing in another area of government policy. As one contemplates today’s massive fiscal deficits, it seems incredible to remember that Keynesianism was virtually discredited in the mid-1970s. A Labour prime minister, Jim Callaghan, said

"We used to think that you could spend your way out of recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists and that in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step."

He was describing what used to be known as the stop-go cycle, in which governments entered office eager to expand the economy (think of the Barber boom in the early 1970s) only to slam on the brakes as inflation rose. One could describe it as the Keynesian ratchet in which each turn seemed to bring higher inflation.

After a chaotic 1970s, the wolrd came up with a new system, based on the use of monetary policy. Inflation  would be tamed by an independent central bank, and monetary policy would be used to limit the exzcesses of the cycle. The system appeared to work brilliantly. It delivered the great moderation, two decades of steady growth with generally declining inflation and very mild recessions. There was an enormous boom in the financial markets, as lower inflation allowed nominal yields on bonds and equities (and thus capital values) to rise substantially.

And so we turn to Hyman Minsky who argued that these periods of moderation lead eventually to speculation and crisis. Rising asset prices encourage people to borrow money and buy assets, most obviously in the housing market. Initially, people take out loans where they can meet both interest and capital repayments; then they take out loans where they can only meet the interest; in the final Ponzi stage (for which read subprime) they cannot even meet the interest payments but need rising prices to service the debt (essentially by flipping the asset).

It is my contention that we switched from a Keynesian ratchet to a monetary ratchet. Lower rates encouraged more borrowing and higher asset prices; when those prices faltered, central banks worried about a repeat of the debt deflation of the 1930s so they slashed rates to help markets recover. This became known as the Greenspan put after 1987, the first time it was clearly used but it was used many times, arguably most egregiously in 1998 after the collapse of LTCM.

The end game of this process seems clear in retrospect, even though it may not have been at the time. Valuations were driven to historically unprecedented levels, first in shares in 2000 and then in housing in 2006. And interest rates have reached the event horizon of zero.

Let us think about that for a moment. The Bank of England was set up in 1694. For the next 300 years which included world wars, the Great Depression, a century or so of alternating deflation and inflation between 1815 and 1914, and the bank never previously felt the need to reduce rates below 2%. And this is combined with a fiscal deficit which, relative to GDP, is unknown outside world wars; one in four of the pounds spent by the British government is borrowed from the markets. Even with all that, the Bank of England has been obliged to add QE on top.

If zero rates and huge deficits were the answer to mankind’s problems, we would have discovered this long ago. After all, governments would be delighted to borrow as much as they can for as little as possible.

What the authorities are clearly trying to do is to wind up one more round of the ratchet. If asset prices are higher, balance sheets will look healthy; if interest rates are low, borrowers can service their debts. Indeed, the Bank of England doesn’t think British house prices are too high, even though they are well above historical averages relative to incomes; they are rational when compared to real interest rates. But who has been setting real interest rates? The bank, of course, at both the short (and via QE) at the long end.

This may be an early sign that central banks are falling into their old habits. Bubbles are very hard intellectually to deal with. Those who ride the bubble look smart; those who try to buck it, like the late Tony Dye, get fired. The bubble will often accompany a growing economy, rising corporate profits and rising tax revenues; governments, regulators and central banks tend to feel that all is well, and that the wisdom of their policies is being amply demonstrated.

But it is surely very hard to argue now that the right thing for central banks to do about bubbles is to ignore them, on the grounds that it is easy to clean up after they burst. The cost of the financial sector crisis has been enormous; never mind the actual bail-out, think of the lost tax revenues.

Surely it is clear that the monetary expansion of the last 30 years led to asset price, not consumer price, inflation perhaps because the rise of China and south-east Asia represented a massive deflationary shock for the manufactured goods sector.

The fundamental contradiction at the heart of the recovery is that the markets are dependent on the governments for support, but many governments are also dependent on the markets. The European debt crisis has shown there is a limit to the extent that markets will be willing to finance government deficits, and also a limit to the extent that politicians want to be dependent on markets. European countries, with Germany in the intellectual lead, are now acting to withdraw the stimulus. Eventually, one would expect the US to be forced, by political rather than financial pressures, to follow suit.

Given that economies may have to slam on the fiscal brakes, and that interest rates are already near zero, central banks may be forced into other means of boosting the economy, in particular quantitative easing or QE. I confess to being rather cynical about QE. We know of occasions in history when it didn’t work (Japan) and we know when it resulted in hyperinflation (the Weimar republic). We don’t know of any occasions when it definitely did work.

And we know it is a tactic that is ancient. The Emperor Nero was short of a few denarii to pay his soldiers so he created some more by debasing the currency. In effect he financed his deficit by printing money, just as the Bank of England has bought £200 billion of gilts from a country with a £157 billion deficit. Of course, Nero didn’t have any economists to give his actions a sophisticated spin. But were his actions really that different?

I am not arguing that we are heading for hyperinflationary hell. But I think we have in the course of this long debt boom started to confuse claims on wealth with wealth itself. And I think that has been a further negative effect of the bubble mentality.

Indeed, just to provoke you, how about thinking of the last 40 years as one long bubble, in which fiat money has led to asset price inflation. Before you dismiss the idea, think about this; with gold at $1250 an ounce, the dollar has lost 97% of its purchasing power in terms of what used to be though of as "real money" since 1971. The Romans took 200 years to achieve the same effect, cutting the amount of silver in their copins by 96%. Progress!

Go back to the early 18th century and there was another experiment with fiat money conducted by John Law on behalf of the French regent. Law was hired to improve the regent’s finances and believed that a shortage of currency was holding back French growth. His clever scheme combined QE, subprime lending and an emerging markets fund.

A new bank was formed, Banque Generale, and the regent decreed that taxes could be paid in notes issued by the bank, effectively making them legal tended. Meanwhile, the Compagnie l’Occident was created to exploit the trading opportunities in the Mississippi basin, the emerging market of its day. Banque Generale lent investors the money to buy shares in this great opportunity and the money raised from the issue was used to repay the monarchy’s debts. In short, money was created via a roundabout fashion to buy government bonds; an exact description of QE.

Investors bought shares because of the promise of a high dividend. But the Mississippi delta was a swamp with no prospect of generating any actual earnings. So the key was to keep pushing up prices; this was achieved by the offer of new shares which investors could buy with only a small deposit.

The scheme faltered when some chose to take profits. So Law resorted to guaranteeing to buy the shares at a set price (think of the TARP) involving the creation of more money. When people doubted the value of the bank notes, the company bought the bank (think Fannie Mae and Freddie Mac) to keep the system going. Eventually the whole thing collapsed some four years after it started.

Now I am not trying to suggest that, in the last forty years, the global economy has not become a lot wealthier. Clearly one can point to three great changes in productivity; the entry of the communist world into the capitalist system; the use of technology to spread information and reduce frictional costs; and the entry of women into the developed world workforce.

But I think it is possible to argue that the development of the bubble mentality has distorted monetary policy, led to the rise of an overpowerful rent-seeking financial sector, and in the Anglo-Saxon economies, led to the excessive focus of investment in housing. Some of this wealth may prove illusory and just like John Law, attempts to prop up asset prices that have lost relationship with the wealth of the underlying economy, may end up being a failure.

 

(author unknown)

Buttonwood's notebook Debt, the markets and the economy Buttonwood A forty (and two thousand) year view Images: 

WHEN we talk about bubbles, we tend to think of recent history but in fact this is an age-old phenomenon. (Note to patient readers; this is a long post because it is a condensed version of my BCA speech.)

Asset bubbles and rising debt levels go together. And it is not just government debt we have to worry about. US private sector debt has increased as a proportion of GDP from around 60% in the early 1950s to almost 300% at its peak.

Some increase in debt may have been inevitable as societies became more sophisticated. Many would say a certain degree of debt is beneficial since it allows individuals and companies to smooth their consumption over the cycle.

Others would say it doesn’t matter. In aggregate, the world owes the money to itself; debt is just an accounting issue. A family is no poorer if a wife lends money to her husband, or vice versa. Another rationale is that asset prices have also been rising so that one needs to look at both sides of the balance sheet; it is net, not gross, debt that matters.

But that is wrong. Gross debt levels matter because, as is well known, the value of debt is fixed in nominal terms while the value of assets can fluctuate. High gross debt levels thus create a number of flash points when creditors start to doubt the value of their collateral, and when the debts have to be rolled over. These crisis points are now rippling through the system; first US homeowners, then investors in structured products, then banks, and now sovereigns.

It is no coincidence that this massive debt explosion has coincided with the end of the Bretton Woods system of the early 1970s. This destroyed the final link to gold and crucially, removed the balance of payments constraint from the concerns of economic policymakers, at least in the developed world.

The author Richard Duncan compiled this chart from IMF data showing the growth in foreign exchange reserves since the end of Bretton Woods. From modest origins, they climbed above $1 trillion in the early 1970s before accelerating to almost $7 trillion in recent years. It is his contention that these reserves allowed surplus countries to expand their money supplies, while the deficit countries were not forced to cut back.

It was true that, in the main, developed countries found that they could run deficits without being punished by the markets. Indeed, eventually, they found that they could depreciate their exchange rates without being penalised by their creditors in the form of higher yields. This was an easy option in the short-term. But it was a bit like the 25-year old who boasts that smoking, drinking and overeating hasn't harmed him; the bad habits will catch up with him eventually.

Floating exchange rates gave countries an escape valve after the 1970s. And that was very important because attitudes were changing in another area of government policy. As one contemplates today’s massive fiscal deficits, it seems incredible to remember that Keynesianism was virtually discredited in the mid-1970s. A Labour prime minister, Jim Callaghan, said

"We used to think that you could spend your way out of recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists and that in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step."

He was describing what used to be known as the stop-go cycle, in which governments entered office eager to expand the economy (think of the Barber boom in the early 1970s) only to slam on the brakes as inflation rose. One could describe it as the Keynesian ratchet in which each turn seemed to bring higher inflation.

After a chaotic 1970s, the wolrd came up with a new system, based on the use of monetary policy. Inflation  would be tamed by an independent central bank, and monetary policy would be used to limit the exzcesses of the cycle. The system appeared to work brilliantly. It delivered the great moderation, two decades of steady growth with generally declining inflation and very mild recessions. There was an enormous boom in the financial markets, as lower inflation allowed nominal yields on bonds and equities (and thus capital values) to rise substantially.

And so we turn to Hyman Minsky who argued that these periods of moderation lead eventually to speculation and crisis. Rising asset prices encourage people to borrow money and buy assets, most obviously in the housing market. Initially, people take out loans where they can meet both interest and capital repayments; then they take out loans where they can only meet the interest; in the final Ponzi stage (for which read subprime) they cannot even meet the interest payments but need rising prices to service the debt (essentially by flipping the asset).

It is my contention that we switched from a Keynesian ratchet to a monetary ratchet. Lower rates encouraged more borrowing and higher asset prices; when those prices faltered, central banks worried about a repeat of the debt deflation of the 1930s so they slashed rates to help markets recover. This became known as the Greenspan put after 1987, the first time it was clearly used but it was used many times, arguably most egregiously in 1998 after the collapse of LTCM.

The end game of this process seems clear in retrospect, even though it may not have been at the time. Valuations were driven to historically unprecedented levels, first in shares in 2000 and then in housing in 2006. And interest rates have reached the event horizon of zero.

Let us think about that for a moment. The Bank of England was set up in 1694. For the next 300 years which included world wars, the Great Depression, a century or so of alternating deflation and inflation between 1815 and 1914, and the bank never previously felt the need to reduce rates below 2%. And this is combined with a fiscal deficit which, relative to GDP, is unknown outside world wars; one in four of the pounds spent by the British government is borrowed from the markets. Even with all that, the Bank of England has been obliged to add QE on top.

If zero rates and huge deficits were the answer to mankind’s problems, we would have discovered this long ago. After all, governments would be delighted to borrow as much as they can for as little as possible.

What the authorities are clearly trying to do is to wind up one more round of the ratchet. If asset prices are higher, balance sheets will look healthy; if interest rates are low, borrowers can service their debts. Indeed, the Bank of England doesn’t think British house prices are too high, even though they are well above historical averages relative to incomes; they are rational when compared to real interest rates. But who has been setting real interest rates? The bank, of course, at both the short (and via QE) at the long end.

This may be an early sign that central banks are falling into their old habits. Bubbles are very hard intellectually to deal with. Those who ride the bubble look smart; those who try to buck it, like the late Tony Dye, get fired. The bubble will often accompany a growing economy, rising corporate profits and rising tax revenues; governments, regulators and central banks tend to feel that all is well, and that the wisdom of their policies is being amply demonstrated.

But it is surely very hard to argue now that the right thing for central banks to do about bubbles is to ignore them, on the grounds that it is easy to clean up after they burst. The cost of the financial sector crisis has been enormous; never mind the actual bail-out, think of the lost tax revenues.

Surely it is clear that the monetary expansion of the last 30 years led to asset price, not consumer price, inflation perhaps because the rise of China and south-east Asia represented a massive deflationary shock for the manufactured goods sector.

The fundamental contradiction at the heart of the recovery is that the markets are dependent on the governments for support, but many governments are also dependent on the markets. The European debt crisis has shown there is a limit to the extent that markets will be willing to finance government deficits, and also a limit to the extent that politicians want to be dependent on markets. European countries, with Germany in the intellectual lead, are now acting to withdraw the stimulus. Eventually, one would expect the US to be forced, by political rather than financial pressures, to follow suit.

Given that economies may have to slam on the fiscal brakes, and that interest rates are already near zero, central banks may be forced into other means of boosting the economy, in particular quantitative easing or QE. I confess to being rather cynical about QE. We know of occasions in history when it didn’t work (Japan) and we know when it resulted in hyperinflation (the Weimar republic). We don’t know of any occasions when it definitely did work.

And we know it is a tactic that is ancient. The Emperor Nero was short of a few denarii to pay his soldiers so he created some more by debasing the currency. In effect he financed his deficit by printing money, just as the Bank of England has bought £200 billion of gilts from a country with a £157 billion deficit. Of course, Nero didn’t have any economists to give his actions a sophisticated spin. But were his actions really that different?

I am not arguing that we are heading for hyperinflationary hell. But I think we have in the course of this long debt boom started to confuse claims on wealth with wealth itself. And I think that has been a further negative effect of the bubble mentality.

Indeed, just to provoke you, how about thinking of the last 40 years as one long bubble, in which fiat money has led to asset price inflation. Before you dismiss the idea, think about this; with gold at $1250 an ounce, the dollar has lost 97% of its purchasing power in terms of what used to be though of as "real money" since 1971. The Romans took 200 years to achieve the same effect, cutting the amount of silver in their copins by 96%. Progress!

Go back to the early 18th century and there was another experiment with fiat money conducted by John Law on behalf of the French regent. Law was hired to improve the regent’s finances and believed that a shortage of currency was holding back French growth. His clever scheme combined QE, subprime lending and an emerging markets fund.

A new bank was formed, Banque Generale, and the regent decreed that taxes could be paid in notes issued by the bank, effectively making them legal tended. Meanwhile, the Compagnie l’Occident was created to exploit the trading opportunities in the Mississippi basin, the emerging market of its day. Banque Generale lent investors the money to buy shares in this great opportunity and the money raised from the issue was used to repay the monarchy’s debts. In short, money was created via a roundabout fashion to buy government bonds; an exact description of QE.

Investors bought shares because of the promise of a high dividend. But the Mississippi delta was a swamp with no prospect of generating any actual earnings. So the key was to keep pushing up prices; this was achieved by the offer of new shares which investors could buy with only a small deposit.

The scheme faltered when some chose to take profits. So Law resorted to guaranteeing to buy the shares at a set price (think of the TARP) involving the creation of more money. When people doubted the value of the bank notes, the company bought the bank (think Fannie Mae and Freddie Mac) to keep the system going. Eventually the whole thing collapsed some four years after it started.

Now I am not trying to suggest that, in the last forty years, the global economy has not become a lot wealthier. Clearly one can point to three great changes in productivity; the entry of the communist world into the capitalist system; the use of technology to spread information and reduce frictional costs; and the entry of women into the developed world workforce.

But I think it is possible to argue that the development of the bubble mentality has distorted monetary policy, led to the rise of an overpowerful rent-seeking financial sector, and in the Anglo-Saxon economies, led to the excessive focus of investment in housing. Some of this wealth may prove illusory and just like John Law, attempts to prop up asset prices that have lost relationship with the wealth of the underlying economy, may end up being a failure.

 

(author unknown)

Buttonwood's notebook Economic growth, money supply and energy Buttonwood For those who really want to be pessimistic

FROM time to time, one reads analyses that are so gloomy they make your humble blogger seem like Voltaire's Dr Pangloss. Normally, they have the perverse effect of making me feel more cheerful. But having read Dangerous Exponentials, a report by Tim Morgan of the broker Tullett Prebon, I have to accept he has a point.   

There are two main elements to the report, two sets of exponential relationships. The first is the growth in government debt, money supply and inflation. There has been a step change in the figures since 1971, when the link to gold was removed; in past posts, I have discussed the monetary ratchet, in which lower interest rates leads to more debt, which leads to asset bubbles, which then pop; when they pop, authorities cut rates again and the whole cycle starts again. This process has reached its logical conclusion with rates at zero. The authorities have responded by resorting to QE, money printing. This has not resulted in high inflation (yet) because the velocity of money has collapsed (if you like, the money has been hoarded). Tullett warns that QE will have to be rapidly withdrawn when velocity picks up and is doubtful that will be the case. 

The other exponential relates to population and energy. Tullett describes the views of a commentator called Chris Martenson who argues that

The current population of the earth is sustainable only because of an abundant supply of hydrocarbons, and principally of oil.

Tullett argues that global population growth really started to take off in the 19th century, as man learned to exploit hydrocarbons initially coal. These hydrocarbons were a very effective replacment for human labour, creating a massive productivity boost. They allowed food to be produced with fewer people, the released labour to move into industry and the developed world to escape the Malthusian trap in which a growing population exceeded the food supply, causing famine and disease.

Now you can probably see where this argument is going - peak oil - and will be suitably cynical. We have been hearing predictions about resource constraints since the late 1960s.  But the world tends to come up with new supplies of energy and the peak gets postponed.

But Tullett has a more subtle point, and one which seems rather telling. Yes, new energy sources are discovered (tar sands, deepwater oil) but they are much more expensive to produce, both in terms of money and the energy required to extract it.

If you view the wealth of mankind as a function of the equation EROEI, the energy return on energy invested, this is a serious deterioration. The wealth added per unit of energy extracted is declining. But the structure of our societies is built not just on abundant energy but on cheap energy. Think of all those American suburbs without public transport which require people to drive miles to get to work or visit shops.

Whether the result of this deterioration is economic cataclysm, as Tullett hints, is impossible to tell. But I think the broker is right in arguing that the lack of focus on this energy in/energy out equation is

the greatest single black hole in the toolkit that economists use to understand the dynamics of the society in which we live. 

RESPONSE: Thanks for the comments and Doug Pascover is right, the closing mixed metaphor is very ugly. It is not my job to defend Tullett but perhaps my summary didn't do justice to its case. I don't think it's just a matter of higher energy prices leading to lower consumption. The key is the equation; it takes energy to extract energy; the steel for the rigs, the power needed to operate pumps or to refine the oil, or transport the gas etc etc. So as we saw in 2007, higher oil prices can lead to higher prices for other commodities as well. This is in part a tax on consuming nations and a benefit for producing nations. But another way of looking at it is a tax made by the planet on all of us; it simply requires more effort to extract its resources. Doesn't that equate to a fall in our collective wealth?

Yes, we may be able to use energy more efficiently. but given that the cost of extracting oil from tar sands in Canada is so much higher than getting it from the sands of Saudi Arabia, these savings will have to be very great indeed. Alternative energy sources are, in the absence of technological breakthoughs, quite expensive so still shift the energy in/energy out equation in the wrong direction. 

As for the green revolution and food, a lot of this comes down to embedded energy uses, in terms of fertiliser, tractors, irrigation pumps etc. (Not to mention the way we transport stuff round the planet so that nothing is out of season.)     

(author unknown)

Buttonwood's notebook Economic growth, money supply and energy Buttonwood For those who really want to be pessimistic

FROM time to time, one reads analyses that are so gloomy they make your humble blogger seem like Voltaire's Dr Pangloss. Normally, they have the perverse effect of making me feel more cheerful. But having read Dangerous Exponentials, a report by Tim Morgan of the broker Tullett Prebon, I have to accept he has a point.   

There are two main elements to the report, two sets of exponential relationships. The first is the growth in government debt, money supply and inflation. There has been a step change in the figures since 1971, when the link to gold was removed; in past posts, I have discussed the monetary ratchet, in which lower interest rates leads to more debt, which leads to asset bubbles, which then pop; when they pop, authorities cut rates again and the whole cycle starts again. This process has reached its logical conclusion with rates at zero. The authorities have responded by resorting to QE, money printing. This has not resulted in high inflation (yet) because the velocity of money has collapsed (if you like, the money has been hoarded). Tullett warns that QE will have to be rapidly withdrawn when velocity picks up and is doubtful that will be the case. 

The other exponential relates to population and energy. Tullett describes the views of a commentator called Chris Martenson who argues that

The current population of the earth is sustainable only because of an abundant supply of hydrocarbons, and principally of oil.

Tullett argues that global population growth really started to take off in the 19th century, as man learned to exploit hydrocarbons initially coal. These hydrocarbons were a very effective replacment for human labour, creating a massive productivity boost. They allowed food to be produced with fewer people, the released labour to move into industry and the developed world to escape the Malthusian trap in which a growing population exceeded the food supply, causing famine and disease.

Now you can probably see where this argument is going - peak oil - and will be suitably cynical. We have been hearing predictions about resource constraints since the late 1960s.  But the world tends to come up with new supplies of energy and the peak gets postponed.

But Tullett has a more subtle point, and one which seems rather telling. Yes, new energy sources are discovered (tar sands, deepwater oil) but they are much more expensive to produce, both in terms of money and the energy required to extract it.

If you view the wealth of mankind as a function of the equation EROEI, the energy return on energy invested, this is a serious deterioration. The wealth added per unit of energy extracted is declining. But the structure of our societies is built not just on abundant energy but on cheap energy. Think of all those American suburbs without public transport which require people to drive miles to get to work or visit shops.

Whether the result of this deterioration is economic cataclysm, as Tullett hints, is impossible to tell. But I think the broker is right in arguing that the lack of focus on this energy in/energy out equation is

the greatest single black hole in the toolkit that economists use to understand the dynamics of the society in which we live. 

RESPONSE: Thanks for the comments and Doug Pascover is right, the closing mixed metaphor is very ugly. It is not my job to defend Tullett but perhaps my summary didn't do justice to its case. I don't think it's just a matter of higher energy prices leading to lower consumption. The key is the equation; it takes energy to extract energy; the steel for the rigs, the power needed to operate pumps or to refine the oil, or transport the gas etc etc. So as we saw in 2007, higher oil prices can lead to higher prices for other commodities as well. This is in part a tax on consuming nations and a benefit for producing nations. But another way of looking at it is a tax made by the planet on all of us; it simply requires more effort to extract its resources. Doesn't that equate to a fall in our collective wealth?

Yes, we may be able to use energy more efficiently. but given that the cost of extracting oil from tar sands in Canada is so much higher than getting it from the sands of Saudi Arabia, these savings will have to be very great indeed. Alternative energy sources are, in the absence of technological breakthoughs, quite expensive so still shift the energy in/energy out equation in the wrong direction. 

As for the green revolution and food, a lot of this comes down to embedded energy uses, in terms of fertiliser, tractors, irrigation pumps etc. (Not to mention the way we transport stuff round the planet so that nothing is out of season.)     

(author unknown)

eldavojohn writes "It's no secret that Google doesn't create content, but rather helps people find it. And Google News is no different. So what does the company plan to do about complaints from the news industry that profits are dropping drastically? In a lengthy and comprehensive article, The Atlantic diagnoses the problem and looks at Google's plan to 'save' the symbiotic organism it is attached to, which older generations have traditionally branded 'the news.' The answer, of course, hinges on moving news from dead tree print to the information age via Google's many projects: Living Stories, Fast Flip, and YouTube Direct. But Google is also exploring the more traditional options of displaying ads and designing a paywall so users can easily migrate back to subscriptions like the newspapers of yore. You may also recall that last week the Internet was abuzz with the idiocy of suggestions the FTC had aggregated from inside the industry. Ars brings mention of other proposed plans, both good and bad, from the FTC's report on ideas that newspaper companies are kicking around."

Read more of this story at Slashdot.

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TechCrunch submits:

By Sarah Lacy

As I walked in the headquarters of the Jawa Pos—the flagship newspaper of one of South East Asia’s largest print media empires—I was wondering just how screwed my profession is; globally I mean.

Complete Story » TechCrunch

Lexington's notebook How the police seize your stuff Lexington Work hard, obey the law and have your property seized

HE ARRIVED in Houston with $500 in his pocket. A man he met on the Greyhound bus gave him a room until he found his feet. Zaher El-Ali, a Jordanian immigrant, worked hard and built up a small business renovating and selling cars and houses. He is now a proud American citizen. But, ridiculous though it sounds, his truck is in trouble with the law.

(author unknown)04684015004799272671

Lexington's notebook How the police seize your stuff Lexington Work hard, obey the law and have your property seized

HE ARRIVED in Houston with $500 in his pocket. A man he met on the Greyhound bus gave him a room until he found his feet. Zaher El-Ali, a Jordanian immigrant, worked hard and built up a small business renovating and selling cars and houses. He is now a proud American citizen. But, ridiculous though it sounds, his truck is in trouble with the law.

(author unknown)04684015004799272671