How Does Amazon Avoid Creating It’s Own Mini-Depression? ($AMZN, #economics)

According to a new article at Slate, Amazon will soon (within the next 12 months) be offering it’s Kindle e-reader device for “free.” Here’s the part of the story that interested me the most:

Every time Amazon drops the price of the Kindle, sales of the device and sales of Kindle books increase dramatically.

This is curious. According to conventional economic views of the business-cycle, depressions occur when nominal price shocks occur in the economy which reduce the amount of aggregate spending, promoting further price decreases by businesses, which lead to even more reductions in spending as consumers become convinced that if they just wait a little bit longer, they can buy what they need at a lower price.

Next thing you know, spending has collapsed into the notorious and much-feared “death spiral” and the economy grinds to a halt. Mass unemployment, the fall of social morality and Huns impaling the babies of screaming mothers on top of their bayonets. The yooj.

But at Amazon, every time they lower prices, people spend more.

How come when Amazon does it, it creates more business and an environment where everyone (consumers and Amazon as a business) prospers, but when it happens in the economy at large, we get a death spiral and impaled babies?

Somewhere, there’s a disconnect between micro and macro. The secret (that the Keynesians never share and refuse to explain) is how and why this necessarily happens. Good luck figuring it out, I still haven’t!

The Total Vapidity Of Modern Economic Thinkers (#economics)

Here are three responses to the prompt, “Identify the biggest unanswered questions in economics and predict what breakthroughs will define it a decade or two hence” from some of the so-called brightest young minds in economic thinking today. But beware– one of the three is a parody, not a sincere response.

Response #1

I see a big payback to integrating psychology, anthropology, and history into economics more directly, using real-world data to understand how prices, output, and inequality relate to institutions, norms, education, and taxes. And vice versa.

Response #2

The modeling of agents with bounded rationality will help us build economic models (in particular, macroeconomic and financial models) and institutions that better take into account the limitations of human reason

Reason #3

In an increasingly globalized world, the search for answers will necessarily require a much deeper understanding of three areas that interest me. One, we need a better understanding of the interlinkages across countries in trade, finance, and macroeconomic policy.

Which is which? For the answer, visit Eric Falkenstein’s blog.

Notes – The Snowball, By Alice Schroeder: Part I, Chap. 1-4 (#buffett, #valueinvesting)

The following are reading notes for The Snowball: Warren Buffett and the Business of Life, by Alice Schroeder (buy on Amazon.com). This post covers Part I: The Bubble, Chap. 1-4

Why Warren Buffett is driven to make money

The first chapter of The Snowball opens with the author interviewing Buffett in his office at Kiewit Plaza. She asks,

Where did it come from, Warren? Caring so much about making money?

Interestingly, Buffett’s response is something of a non-sequitur:

Balzac said that behind every great fortune lies a crime. That’s not true at Berkshire.

Are we supposed to believe this means Buffett is ultimately a moralizer? That he’s driven to make money just to show it can be done in an honest fashion? If so, where does THAT come from? You see, Buffett didn’t answer the question posed to him.

We also learn that Buffett reads voraciously, and that he watches CNBC (on mute, just to get the scroll of news stories and market developments). Every good investor knows CNBC is a bunch of noise, it is not edifying and it is distracting. It’s peculiar that a long-term oriented, value investor like Buffett would make CNBC part of his daily routine.

Buffett travels to Sun Valley, Idaho, July 1999

We begin to see Buffett as a completely self-absorbed individual. As he travels with a contingent of his family (children and grandchildren) to the Allen & Co. “elephant-bumping” retreat in Sun Valley, the man never looks out the window of his G4 and

He sat reading, hidden behind his newspapers, as if he were alone in his study at home

where, apparently, he treats his significant other, Astrid Meeks, in similar fashion, as noted in a later chapter which depicts Astrid as something of a live-in hamburger-making, Coke-delivering otherwise-invisible person who tries not to disturb the Great Warren during his nightly routine of hours of online bridge and conversations with his insurance lieutenant, Ajit Jain, at 10PM at night. Everyone’s entitled to their flaws and interpersonal relationships seem to be one of Buffett’s.

Which is interesting, because he goes to great pains in Sun Valley to be liked by everyone. Buffett

liked few things more than getting a free golf shirt from a friend [Allen & Co.'s president and organizer of the outing]

and he

went out of his way not to be disliked by anyone

Somewhat peculiar juxtaposed social relationships for a man who waxes philosophical about the Inner Scorecard versus Outer Scorecard in life, one being a measure of self as seen by self, the other being a measure of self as seen by others. You’d think neglecting your family while making pains to impress social acquaintances would register on the Inner Scorecard, but no matter.

This isn’t a Beat Up Buffett blog– the man has a lot to teach and I have a lot to learn. I just find these items odd as I read.

The festivities in Idaho are noteworthy because of what an extremely above-average experience it is for the people involved when compared to daily existence for the Average American, let alone the Average Human Being. To wit, after “white water river rafting” down a stream lined with ambulances and quick response teams for safety (and, one might imagine, helicopter gunships for security),

the guests were handed warm towels as soon as they put down their paddles and stepped out of the rafts, then served plates of barbecue

In addition,

Reporters were banned [from covering the outing]… [the various money managers in attendance represented] more than a trillion dollars [in combined wealth under management]

This is unusual company, an elite group within society, wittingly or not. There is nothing wrong with this level of affluence, it’s simply worth mentioning to set Buffett’s life into context– he’s not of us, at least not at this point in his career.

The key scene at Sun Valley is Buffett’s economic-prediction-as-financial-market-lesson-speech in which he lectures the newly minted tech bubble millionaire crowd on economic cycles and sound investing. A few notes:

• Most people treat stocks like chips in a casino; Buffett sees the chips represent ownership in businesses (entities that create more chips over time)
• Technology is not a guaranteed win for investors; history is replete with new technologies that made huge improvements in everyone’s standard of living, yet few had made investors rich (ie, the automobile, and the 3,000 original manufacturers that had over time combined into 3 major firms in the US; airline industry, $0 made in the aggregate stock investments in the industry’s lifetime)
• Valuing is not the same as predicting
• What you’re doing when you invest is deferring consumption and laying money out now to get more money back at a later time. And there are really only two questions. One is how much you’re going to get back, and the other is when.
• As interest rates vary, the value of all financial assets change
• Three ways the stock market can grow faster than the economy:
  • interest rates fall and remain below historic levels
  • share of the economy going to investors as opposed to employees, government, etc., remains above historic levels
  • the economy grows faster than normal
• Book value: the amount of money that had been put into the business and left there
• Ultimately, the value of the stock market can only reflect the output of the economy; on average, the return of the stock market is about 6% a year

Buffett also makes reference to “Lord Keynes”; not that it’s a big secret, but I don’t know anyone who isn’t a Keynesian who refers to Keynes that way (with prestige and respect for the State-granted honorific). If it wasn’t obvious otherwise, I’d say this is evidence enough of Buffett being a Keynesian.

Buffett also lives by the rule, “Praise by name, criticize by category.” That’s very Dale Carnegie-esque (and we know from later chapters that Buffett is a graduate of the Dale Carnegie program, a set of social principles admired at valueprax, as well).

Enter the Munger

In Part I, we’re also introduced to Buffett’s curmudgeonly friend and business partner, Charlie Munger.

Munger is a graduated of Harvard Law School. He also

admired [Benjamin] Franklin for espousing Protestant bourgeois values while living as he damn well pleased

We also learn a curious fact about Munger’s charitable practice, which

took the form of a Darwinian quest to boost the brightest

but often took the form of “noblesse oblige” because he attached many strings to his giving which were “for the recipients own good, because he knew best” (Schroeder’s articulation). Munger and Buffett are famous for their hands-off, passive management approach to their acquired businesses; yet when it comes to charity, Munger is a world-saver who tries to micro-manage things to an almost tyrannical degree. It seems like a mismatch, but, when combined with his love of Franklin’s philosophical pragmatism and his background at Harvard, it fits the egotistical elitist mold quite well.

Munger, like Buffett, reads a great deal, tearing through newspapers and periodicals everywhere he goes. And Munger, like Buffett, seems quite impressed with his father– Munger carries his father’s old briefcase and vacations at his father’s old Minnesota cabin, while Buffett has a shrine-like portrait of his father in his office and claims he’s “never seen anybody quite like him.”

Revisiting the theme of “Why does Buffett watch CNBC?”, Buffett is subscribed to several newsletters about stocks and bonds and he reads the daily, weekly and monthly operating reports of the Berkshire subsidiary companies. For someone with a long-term orientation, it seems puzzling he would be fascinated or concerned with this kind of contemporaneous minutiae, but perhaps his is simply a mind that thrives on volumes of data to create patterns, impressions and meaning.

Finally, when we learn about Buffett’s two scorecards, we also learn that Buffett pays “close attention” to the rankings of the world’s wealthiest people. This standing would appear to reside on the Outer Scorecard which Buffett warns against measuring one’s life against.

Notes – Gary North On Inflation, Deflation And Japan (@DrGaryNorth, #inflation, #deflation, #japan, #money)

The following notes cover Austrian economist Gary North’s views on the chances of inflation and deflation in the US and Japanese monetary systems, derived from a 5-part article series on the subject found at LewRockwell.com:

Why Deflation Is Not Inevitable (Sadly), Part 1: John Exeter’s Mistake

• Fed will attempt to stabilize money supply before hyperinflation; “mass inflation, yes; hyperinflation, no. Then deflation.”
• Deflation will not take place unless the CB stops making new money
• When prices fall, you are richer, but you pay no income tax on your profits (deflation is good)
• Not-money: if you pay a commission to exchange, the asset is not truly liquid
• Gold is a mass inflation hedge, not a deflation hedge
• According to Exter/deflationists, gold is supposedly both an inflation hedge and a deflation hedge– the only asset possessing this virtue
• We have never been able to test Exter’s theory of gold as a hedge against price deflation because there has never been a single year in which CPI has fallen (Q: what did gold price of Yen do in 2009 Japanese CPI decrease?)
• Consumer price indexes should be based upon goods and services that are rapidly consumed; not price of homes and other prices of “markets for dreams”
• Central banks inflate, they do not deflate
• “When housing is bought on the basis of ‘I’ll get rich,’ the market begins to resemble a stock market. When it is bought on the basis of ‘I can live here for what I can rent,’ it is more like the toilet paper market”
• The skyrocketing price of housing under Greenspan was not reflected in the CPI; the collapsing price of housing under Bernanke was not reflected in the CPI
• Consumer prices did not fall during the 2008-09 crisis because the money supply did not fall; if the money supply shrinks, there will be price deflation; watch the monetary statistics

Why Deflation Is Not Inevitable (Sadly), Part 2: The Deflationists’ Myth of Japan

• The money supply shrank in the US 1930-33 (Q: Why did the Fed allow money supply to shrink? Does this weaken North’s argument that the Fed will always inflate rather than deflate going forward?)
• The US and Japan had similar CB policies until late 2008, when the Fed “went berserk”
• Japan’s M2 was mildly inflationary from 1992-2009; CPI was slightly deflationary over the same period of time but never worse than 1% in any 12mo period; prices rose 2% 1997 and 2008
• There has been no systemic price deflation in Japan
• Japan is more Chicago School than Austrian
• Statistical conclusions about Japan:
  • CPI in Japan fell little 1992-2009, no more than 1% per annum
  • BoJ did not inflate the currency to overcome systemic price deflation, because it didn’t exist
  • Collapse of Japanese RE prices did not affect CPI
  • Collapse of Japanese stock market prices did not affect CPI

Why Deflation Is Not Inevitable (Sadly), Part 3: Why Currency Withdrawals Don’t Matter

• The Japanese economy is starting to become price competitive; this will have ramifications higher up the corporate command chain
• Estimates of US currency held outside the United States range from 50-70%
• Rise of credit transactions such as credit cards have minimized the role paper currency plays in everyday transactions
• Currency withdrawals from the banking system which are not later redeposited are deflationary due to the reserve ratio mechanism
• Monetary deflation can occur as a result of deliberate Fed policy:
  • increase legal reserve requirement
  • sell assets
  • allow bank collapse to occur by not funding FDIC with new money to offset withdrawals

Why Deflation Is Not Inevitable (Sadly), Part 4: High Bid Wins

• All economics systems are governed by principles of:
  • supply and demand
  • high bid wins
• The increase in the Fed’s balance sheet (monetary base) has been offset by increase in excess reserves held at banks; thus, no price increases
• Deflationists’ claim: “Commercial banks will not start lending until the recovery is clear. The recovery is a myth. So, banks will not start lending, no matter what the FED does. The largest banks remain over-leveraged. They will not be able to find borrowers at any rate of interest, so the capital markets will collapse (except gold), and then consumer prices will fall.”
• North’s response: “the largest banks are making money hand over fist. It is the local banks that are failing. The FED has done what it was set up to do in 1913: protect the largest banks.”
• Inflationists’ claim: “Commercial banks will start lending when the recovery is clear. The FED will probably not contract the monetary base all the way back to August 2008, because this would bring on another crisis comparable to September 2008. The FED will not risk bankrupting the still highly leveraged megabanks. It will therefore not fully offset the decrease in excess reserves. It will not “wind down” all the way, if at all. Bernanke fears 1930—33 more than anything else. So, the money supply will rise. Prices will follow.”
• “The increase in excess reserves has been voluntary. The bankers are afraid to lend, even to the U.S. Treasury.” (Q: Why are bankers afraid to lend, even to the Treasury?)
• “The FED is in complete control over excess reserves. It pays banks a pittance to maintain these reserves. It is legally authorized to impose fees.”
• Why the Fed maintains its current policy:
  • doesn’t have to sell assets
  • doesn’t have to face rising long-term interest rates due to expanding money supply
  • doesn’t have to worry about collapsing housing market as interest rates go to 25-40%
  • doesn’t face a corporate bond market collapse
• Monitoring money supply changes is key to predicting consumer price increases

Why Deflation Is Not Inevitable (Sadly), Part 5: Conclusion

• J Irving Weiss and his son Martin, recommended 100% T-Bills since 1967; it takes $6400 to buy what $1000 bought in 1967
• Deflationists confuse asset prices with consumer prices
• Deflationists believe low interest rates lead to debt build up but lower ones won’t stabilize; cost of capital can fall to zero and no one will borrow
• This is John Maynard Keynes theory, who therefore recommended the government should borrow and spend to avoid this fate
• There is not a shortage of borrowers today, corporate bond rates are around 6%, not 0%, implying there are people looking to borrow at positive rates of interest
• Capital markets — markets for dreams, priced accordingly
• Consumer prices rise comparably to increases in M1 in the US and M2 in Japan
• Deflationists confuse money (in a bank account) with dreams (imputed asset prices in capital markets)
• At the supermarket, prices are slowly rising in the US and slowly falling in Japan