Sunday, January 31, 2010

Keynes on Government Stimulus, Digging Holes


This is part five of our discussion of John Maynard Keynes and his 1936 book The General Theory of Employment, Interest and Money.  So far, we have uncovered some very interesting ideas buried in the famous economist's most well known work.  Here is what we discussed in parts 1-4:
For part five, we thought it was high time to discuss government stimulus.  John Maynard Keynes is often credited with originating the ideas for the various government stimulus efforts that are currently being employed by almost all of the major nations of the world.  But how accurate is this really?  As we will see below, it is quite fascinating to read what Keynes actually said about certain government stimulus efforts.

All quotes below can be verified for their accuracy by referencing the full text, which is available online for free here.

Chapter 22, Section III
The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.

This is the basic game plan employed by Keynesians, or in other words, every central banker.  Booms should not be stifled and busts should be battled with government stimulus.  The opposing view presented by Austrian Economists is that booms lead to busts and thus booms should be prevented from getting out of control in the first place.

Chapter 8, Section IV
In the United States, for example, by 1929 the rapid capital expansion of the previous five years had led cumulatively to the setting up of sinking funds and depreciation allowances, in respect of plant which did not need replacement, on so huge a scale that an enormous volume of entirely new investment was required merely to absorb these financial provisions; and it became almost hopeless to find still more new investment on a sufficient scale to provide for such new saving as a wealthy community in full employment would be disposed to set aside. This factor alone was probably sufficient to cause a slump. And, furthermore, since “financial prudence” of this kind continued to be exercised through the slump by those great corporations which were still in a position to afford it, it offered a serious obstacle to early recovery.

Keynes says that the massive excesses created by the boom were enough to cause an inevitable slump.  This inevitable slump became the great depression.  One would think that it would logically follow that we should try to prevent booms from getting too out of hand (the Austrian argument) but based on the first quote in this article, Keynes clearly did not feel this way.

Chapter 8, Section IV
…in Great Britain at the present time (1935) the substantial amount of house-building and of other new investments since the war [since the end of WWI in 1918] had led to an amount of sinking funds being set up much in excess of any present requirements for expenditure on repairs and renewals, a tendency which has been accentuated, where the investment had been made by local authorities and public boards, by the principals of “sound” finance which often require sinking funds sufficient to write off the initial cost some time before replacement will actually fall due; with the result that even if private individuals were ready to spend the whole of their net incomes it would be a severe task to restore full employment in the face of this heavy volume of statutory provision by public and semi-public authorities, entirely dissociated from any corresponding new investment…Yet is not certain that the Ministry of Health are aware, when they insist on stiff sinking funds by local authorities, how much they may be aggravating the problem of unemployment.

A housing boom that led to a massive bust.  Where have we heard this story before?  Keynes was against the government efforts of his time to spend money to stimulate the housing market.  He said it aggravated unemployment.  Name one central banker who holds this position.

Chapter 10, Section VI
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

To the layman (aka those with common sense) the above argument strikes one as utter insanity.  Thankfully, we have prominent economists such as nobel laureate Paul Krugman who advocates such ideas.  Krugman even featured this passage on a recent blog post.  So rest assured, the above makes total sense.  Forget the fact that Henry Hazlitt debunked this theory in 1946 with his work Economics in One Lesson.  Hazlitt called this the broken window fallacy.


Economics in One Lesson by Henry Hazlitt:
A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Two hundred and fifty dollars? That will be quite a sun. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.

Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has had to replace the window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $250 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.

The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.

A very basic economic concept known as opportunity cost describes this as well.  How can this possibly be overlooked by anyone that claims to be economist?

Regardless, people such as Paul Krugman conveniently forget one important aspect of Keynes's argument:

Chapter 16, Section III
“To dig holes in the ground,” paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services.

"Paid for out of savings" is the crux.  A country such as China, with their massive reserves, may actually benefit from government stimulus.  This is only true because the source of the stimulus is savings.  The US has major deficits and thus stimulus efforts are not coming out of savings but out of debt.  This is a big difference and most central bankers are conveniently ignoring this fact.

Thursday, January 28, 2010

Wall Street 2: Is Greed Still Good?


The sequel to the 1987 movie Wall Street, officially titled Wall Street: Money Never Sleeps, is due to hit theatres on April 23rd.  The official trailer was released today so take a look:


The Wikipedia article describes the film's plot as such:

The film is set 23 years after the first film, in June 2008, and Gordon Gekko has just been released from prison. Despite his initial attempts to warn Wall Street of the forthcoming economic downturn and stock market crash, no one believes him due to his reduced standing in the financial world. Gekko decides to re-focus his attention on rebuilding his relationship with his estranged daughter, Winnie. Due to their time apart, and the fact that Winnie blames Gekko for her brother Rudy's suicide, she avoids any contact with him. At the same time, the mentor of young Wall Street trader Jacob unexpectedly dies, and Jacob suspects his hedge fund manager of being involved in the death. Jacob, who is Winnie's fiance, seeks revenge and agrees to Gekko's offer of help, in return for which Jacob agrees to help Gekko with Winnie.

Reasons to be hopeful about the new Wall Street movie:
  • Oliver Stone is back to direct
  • Michael Douglas is back as Gordon Gekko
  • The financial crisis has given the creators ample material to work with
Reasons to be skeptical about the new Wall Street movie:
  • We are trading in Charlie Sheen for Shia LaBeouf? What a downgrade.
  • Gordon Gekko comes back as an old and (most embarrassingly) poor man
  • Long awaited sequels usually suck.  For every Rambo 4 you have ten Indiana Jones and the Kingdom of the Crystal Skulls (and we know who also starred in that)
  • Greed was kind of cool in 1987.  Greed looks a lot less cool in 2010.
  • Seriously, did we mention that Shia LaBeuof is in it? Argh.

Friday, January 22, 2010

The Crude Oil ETFs Stink!


A Norwegian oil rig collapses into the sea, just like the collapse of your oil ETF

In prior posts we have shown how, with commodity based ETFs (Exchange Traded Funds) and ETNs (Exchange Traded Notes), the performance can vary among the precious metals funds and why the levered and inverse funds suffer huge performance drag.  There seems to be great interest in the various oil based funds so we wanted to examine how their performance compares with the spot price of crude oil itself.

There are five funds available to US investors that are meant to track the price of crude oil:

USO - United States Oil Fund (ETF)
USL - United States 12 Month Oil Fund (ETN)
OIL - iPath Crude Oil (ETN)
DBO - PowerShares DB Crude Oil (ETF)
OLO - PowerShares DB Crude Oil (ETN)

Let's compare the performance of these five funds versus the spot price over varying time periods.  For our historical crude oil price data we used the Cushing, OK WTI Spot Price from the US Energy Information Administration website.  The first row shows the futures price and the next five rows show each fund.  The final column, tracking error, shows the difference between the change in value of the spot price and the change in value of the price of each fund.



Over the last three months, the tracking error for DBO and OLO have been respectable, at less than 2%.  USL is the third best with a tracking error of 2.28%.  USO and OIL both have pretty significant tracking errors for this short of a time span, at 4.6% and 5.02% respectively.



Moving out to a one year time span, our tracking error order stays the same as before, with DBO and OLO having the best performance, followed by USL, USO and OIL.  With that being said, the tracking error for all five funds is just atrocious.



Moving out further to a 1.5 year time span, we have the same performance order as before.  This time, DBO and OLO really separate themselves from the other funds.  USL is a bit farther behind while USO and OIL suffer terrible performance.  We chose this time frame because it matches the inception of OLO.



With our time span stretched back to just under 2 years, we can see that DBO significantly outperforms the other funds.  We chose this time frame because it begins at the inception of USL.  OLO was left off of this list because it does not have performance numbers that stetch back this far.

What do these results tell us?  The tracking error for all five funds is significant and can vary greatly depending on the sampled period.  DBO and OLO are by far the best choices for investors and the only ones we would recommend if one simply has to own an oil ETF or ETN.  USL is a bit worse over all time periods so we see no reason to choose this fund.  USO and OIL have simply horrific tracking errors over all sampled periods and are borderline criminal in our opinion.

To go along with this post, we have updated our Commodity ETFs and ETNs Google Docs Spreadsheet.  This is our list of commodity funds that seek to track the performance of specified commodities. We have excluded 2x and other levered funds because we think they are lousy investments and borderline scams.  Since our last update of this document back in October, we have removed UOY, the MacroShares $100 Oil ETF, because it has been delisted.  We have added OLO, the PowerShares DB Crude Oil ETN, and have also updated the average daily volume information for all funds.

Monday, January 18, 2010

Hugo Chavez: The Mickey Mouse Presidente


 Hugo Chavez: The Mickey Mouse Presidente

As much as we enjoy criticizing the US government and its economic policies, from time to time we do like to remind ourselves how much worse things could be.  Case in point: Venezuela.  Hugo Chavez is doing his best to run that country into the ground and looks to be succeeding.

On January 8th we learned that Venezuela devalued its currency:

The government devalued the bolivar by half on Friday and imposed a 4.3 bolivars per dollar rate, putting an end to the VEF2.15 rate which had been in place since 2005.

The Venezuelan people responded (somewhat) rationally the next day as Nervous Venezuelans buy TVs after devaluation:

Shouting "buy, buy, the world is going to die," Venezuelans went on a frantic shopping spree on Saturday following a sharp currency devaluation that is expected to drive up prices.

"I've been lining up for two hours outside to buy a television and two speakers because by Monday everything is bound to be double the current price," said Miguel Gonzalez, a 56-year-old engineer standing in the tropical sun outside a popular store.

State run television and radio stations avoided using the word "devaluation," preferring the word "adjustment." One pro-Chavez radio station responded to critics of the measure by playing a popular Argentine song called "Imbecile."

Inflation, the highest in the Americas, at 25 percent last year, reached 103 percent in 1996 after a previous president lifted exchange and price controls.  

The title of the article is idiotic.  What the heck would the author do if their money was losing 25%+ of its value per year?  If the author was rational, they would rush to dump cash for goods as soon as possible, just like these people.  Of course, it would probably be smarter to spend money on food (or perhaps a visa to leave the country) than to buy TVs but these are the people that voted for Chavez so what can one expect?


What do I do now?

In response to his people's rush to buy goods, Chavez decided to enforce price controls:

President Hugo Chavez denied that a devaluation of a five-year-old foreign currency peg will lead to a hike in consumer prices and warned that his government will hunt down retailers and companies that raise their prices.

"At this moment there isn't any reason for anyone to increase their prices," Chavez said Sunday during his television show. Shoppers have flooded stores purchasing televisions and home appliances fearing that prices will increase following a devaluation of the bolivar announced by Chavez on Friday.

"I don't understand why people are standing in line. They are victims of terrorist media campaigns creating fear that prices will rise," he said.



Hugo Chavez being undoubtedly baffled by something

What a buffoon. Price controls always lead to shortages.  ALWAYS.  This man is criminally stupid.  The article continues...

Chavez called on the National Guard to help the government fight speculation and price increases, saying without giving details that he wanted it deployed on the streets to hunt down speculators. The government, Chavez said, will "seize any businesses and shops that are participating in speculation."

True to his word, yesterday Venezuela nationalized a French owned retailer:

Venezuela's socialist President Hugo Chavez on Sunday nationalized a chain of supermarkets controlled by France's Casino (CASP.PA) on charges of price gauging after the government devalued the bolivar currency.

"Because of multiple violations of Venezuelan laws the Exito chain will now belong to the republic, there is no way back," Chavez said on his weekly television show.

In his 11 years in office, Chavez has nationalized large swathes of the economy, including major oil projects along with electricity and telecommunications companies.

In what must be merely a coincidence, today came news that a Venezuela natural gas auction closed with no offers.  Imagine the audacity of those greedy capitalists not showing up with their money.  It is as if they think they are above doing business with people who do not respect property rights or contracts.  What a bunch of elitists.

In a truly stunning development for an energy rich country, Venezuela has been hit by power outages:

Venezuela has been hit by unplanned power cuts which the government blames on a drought hitting hydro-electricity.

The government announced this week that the entire country would be affected by energy rationing, with rolling blackouts in different areas on different days.

Yes, it was the damned weather's fault.  Of course, the government could not even enact rolling blackouts without messing that up.  The article continues...

Venezuelan President Hugo Chavez has reversed his decision to ration electricity in Caracas a day after nationwide power cuts were announced.

Mr Chavez said there had been mistakes in introducing rolling blackouts in the capital, and people did not know when their neighbourhoods would be affected.



It's their fault

Meanwhile, we learn that President Chavez has taken time out of his already busy schedule to denounce Playstation games:

Those games they call 'PlayStation' are poison. Some games teach you to kill. They once put my face on a game, 'you've got to find Chavez to kill him'.

Games, said Chavez, "promote the need for cigarettes, drugs and alcohol," adding "That's capitalism, the road to hell."

What is poison is Hugo Chavez's economic policies.  He would do the world and the Venezuelan people a huge favor by stepping down and leaving everyone alone but you know that won't happen.  It is others who are to blame for the problems facing Venezuela and he will do his best to fix things.

Freedom's Vision of Monetary and Political Reform



We are regular readers and commenters on the economics blog Nathan's Economic Edge.  Nathan Martin of the aforementioned blog and Bill Still of The Secret of Oz have joined together to publish a document named Freedom's Vision.  Martin describes Freedom's Vision thusly:

The hope is that [the Freedom's Vision documents] explain the basis for change in the same way that the Federalist Papers did when Hamilton and Madison were exchanging ideas about the Constitution. Thus, we await and welcome your ideas, and even your criticisms.

And with that, we would like provide our thoughts on the proposals outlined therein.

The three key proposals of Freedom's Vision are (1) monetary reform, (2) political reform and (3) a new direction for the future:

1. Monetary Reform – We must replace our unjust, debt-backed money system and cleanse debt and derivatives without creating severe inflation or deflation; without creating a supreme “moral hazard;” and without crashing the entire global economic system in the process.

2. Political Reform – We must exclude large special interests from political decision-making. Removing this influence will accomplish a great deal in ensuring that the quantity of money remains under control and that politicians can go back to working and thinking on behalf of the people, not just in the short term, but also in the long term.

3. Direction for the Future – A change of direction is clearly needed. We are rudderless, and without proper goals to move forward our economy and society will continue to drift. While we feel this is desperately needed, we are focusing on the first two for now. When successful with the other two, the third will follow, but we need to be thinking about direction now!
    Monetary Reform
    The first proposal - monetary reform - is a non-starter.  A radical restructuring of our monetary system is impossible at the moment because of a lack of political will.  Ron Paul is struggling to even get a basic audit of the Federal Reserve, so attempting to replace that institution at this time is just not feasible. Freedom's Vision even admits this...

    One way or another, this over-leveraged system is going to crash and be replaced by something else.

    The current system must be allowed to reach its inevitable conclusion and finish itself off before a replacement can be seriously considered.  What will the end of the current monetary system look like?  Nobody knows but it will not be pretty.  When it does happen, our view is that a temporary stop-gap solution will be needed to calm the waters before a brand new system can be put in place.  Freedom's Vision outlines a transition period between the current monetary system and the proposed one but speaks as if the current monetary system is as it stands today and not after a collapse, which is the only time that the proposal has a realistic chance of being implemented.

    Thus, the proposal needs to outline how to pick up the pieces after a collapse.  The most obvious candidate for this role is one or more gold backed currencies.  For this reason, we feel that gold bugs, hard money advocates and the backers of Freedom's Vision are natural allies, so it is perplexing to us why Martin dismissed the usefulness of gold in his essay The Fallacy of Gold Backed Money.  His points in that essay are well noted but the usefulness of gold as a temporary solution is overlooked.  In the time of panic, people natural grasp for what they have been able to trust in the past.  Gold has a long and storied history of wealth preservation and thus fits this role perfectly.  Bringing gold bugs and hard money advocates into the conversation also increases the potential backers of Freedom's Vision by leaps and bounds.

    Political Reform
    Let's move on to the second proposal - political reform.  We think it is a mistake to list this proposal second in that it is naturally the first step towards getting monetary reform and not the other way around.  There is zero political will to change the monetary system but there is definitely a growing desire among the people for political change.  The public is waiting for a third party that represents both fiscal conservatives that have been betrayed by Republicans and anti war liberals that have been betrayed by the Democrats.  These two groups have more in common than the mashed together Republican base of religious southerns and rich people or the Democratic base of social liberals and poor people.  Think about it.

    Thus, Freedom's Vision can be most effective today by focusing on the creation of a viable third party that represents fiscal conservatives and anti war liberals.  Fiscal conservatives are covered by the monetary proposals but the anti war liberals are left out in the cold by the proposal.  There are notes in the proposal about war in general but Freedom's Vision does not mention either Iraq or Afghanistan once.  This is an oversight both from a politically opportunistic angle and a fiscal conservative one, since the wars are damn expensive.

    A New Direction for the Future
    A new direction for the future is a collection of proposals containing everything from education, energy, science, medicine and space exploration.  These are all nice points of discussion but are frankly not worth talking about when the government is going broke.  The priority is to cut the size of government and any and all new programs should only be considered once current levels of spending are reigned in.

    Final Words
    In conclusion, we feel that Freedom's Vision has some interesting proposals but misses the mark in a few ways.  #1 the focus should be on political reform via the creation of a viable third party.  Monetary reforms can enter the discussion but quite frankly voters have no interest in this subject and gaining their support does not require it anyway.  A better tactic is to gain their approval through issues they already understand, such as government spending and the two wars, and then introduce them to monetary reform once they are already on board.  At that point, monetary reform will be a natural extension of the general platform of the party.

    Once a third party is in place with clout (it does not need to take the presidency or majority of either house) only then will the ball begin to roll.  The monetary reforms are nice to discuss but they are a non-starter until the current system collapses.  Feel free to write proposals and discuss them at length but it is nothing but a hobby for the time being.  Once the system collapses and the aforementioned third party is represented, only then will monetary reform be possible.  This path to successful reform will be unbelievably difficult but it at least has a chance while all other methods seem entirely impossible.

    And with that we leave the reader with the full version of Freedom's Vision embedded below for perusal:

    Saturday, January 9, 2010

    When Stable Value Isn't So Stable


     
    A lot of uproar was generated last week because of an article posted on Zero Hedge titled This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied.  The crux of the article is the proposed change to money market rule 2a-7, which specifies that fund managers can suspend redemptions to allow for the orderly liquidation of fund assets.  In other words, if the markets freeze like they did in the fall of 2008, holders of money market funds may not be able to withdrawal their money.

    Who exactly is surprised by this?  The proposed change in law merely reflects the blunt truth that money market funds as a whole can hardly withstand a run on the bank scenario.  Liquidity is an illusion that is swept away during a panic.

    Besides, for those looking for a story with real teeth, I suggest examining the current rules governing stable value funds and what has already happened to those who invested in these funds.  Stable value funds are similar to money market funds but are somewhat less known because they are only available in retirement accounts.  According to the Stable Value Investment Association, stable value funds are defined as follows:

    Stable Value Funds deliver safety and stability by preserving principal and accumulated earnings. They are similar to money market funds but offer considerably higher returns. Their returns make them comparable to intermediate bonds minus the volatility. They are the largest conservative investment in defined contribution retirement plans with over $642 billion in assets

    Tell that to the workers at Chrysler. This story seems to have been buried by the financial crisis of 2008 but it is one of the most important:

    An unnerving new crack emerged in the $520 billion stable-value fund market as an offering for workers at Chrysler LLC dropped 11%, highlighting strains in yet another supposedly safe investment.  The loss at the fund, which is part of the retirement program for white-collar workers at Chrysler, is the latest sign of trouble for these products.

    Stable-value funds, available only in tax-deferred savings plans such as 401(k)s, are designed to provide capital preservation and smooth, positive returns. But Chrysler Stable Value Fund B, offered to certain Chrysler employees and retirees through company savings plans, paid out only 89 cents on the dollar when the fund was liquidated earlier this year. Chrysler declined to say how much money was in the fund.

    "They advertise it as being basically guaranteed. That's why I put money into it," says Johnnie Johnson, a 63-year-old retired Chrysler electrical engineer in Plymouth, Mich. "I'm pretty frustrated with this whole thing." He says he had nearly $80,000, roughly 20% of his total retirement savings, in Chrysler Stable Value Fund B.

    Problems in stable-value funds can become particularly acute when many investors make withdrawals at once, which is what happened in the Chrysler fund this year.

    Employer-initiated events that can cause mass withdrawals, such as a plan termination or the employer's bankruptcy, generally aren't covered by stable-value contracts. Typically, these events are known in advance and the employer and stable-value manager can negotiate coverage that lets investors withdraw their money without taking a loss.

    Investors in Chrysler Stable Value Fund B say there was no sign that the fund was in trouble until they received their distribution checks, which were far smaller than they expected.

    These workers were taken to the cleaners and the best part is that it was all perfectly legal.  Stable value funds are supposedly backed by insurance wrappers that pay out in the event of investment losses but the legal loopholes allow for the screwing of investors, as we saw in this case.  The amount of payout by the wrappers is even under dispute, so in the event of failure investors might not be made whole.



    Going back to the Stable Value Investment Association definition, stable value funds are "similar to money market funds but offer considerably higher returns."  How exactly are these considerably higher returns generated?  In 2008, the average stable value fund returned 4.58 percent, compared with 2.89 percent for money markets.  Risk and return are directly correlated.  If you are garnering higher return, by definition you must be either (1) taking on higher risk or (2) committing fraud.

    Unfortunately, for any specific fund, investors have no way to find out which of these two scenarios apply.  This is because, unlike money market funds or mutual funds, stable value funds are not required to disclose their holdings in any way whatsoever.

    I attempted to contact Prudential about getting either the specific holdings or the market-to-book-value ratio for one of their sizable stable value funds.  Prudential refused to disclose this information and was rudely dismissive of the request.  This despite the Stable Value Investment Association's claim that the market-to-book-value ratio must be disclosed at least once a year by stable value fund managers.  This fund is currently generating a guaranteed 4.59% return per year.

    And what of the insurance companies themselves that wrap these funds?  Who are they and how healthy are they?  Well, by one metric AIG wraps nearly 8% of stable value fund assets, so that should tell you about all you need to know.

    We look at the stable value funds as a potential black swan event that could hit sometime in the next few years.  As the baby boomers retire, funds will be withdrawn from stable value funds.  This will make these funds increasingly fragile going forward, and a general market panic of any kind could produce fund failure.  A couple of high profile fund collapses will generate a "who could have predicted" response from the usual big shots.  With stable value funds currently comprising 36% of all retirement fund assets, this would be no small scale event.  We have no way of knowing what the government's response to the above scenario would be, but after the cold shoulder given to the Chrysler workers, investors should not assume that the government will step in and make these funds whole.  Protect yourselves accordingly.

    Saturday, January 2, 2010

    Hunter Lewis: Keynesianism is an Intellectual Bubble



    Embedded below is a short interview with Hunter Lewis, the author of Where Keynes Went Wrong.  We have not read this book yet but after reading a bit of Keynes ourselves, Mr. Lewis is basically stating word for word what we have been saying on this site.  Specifically, Lewis states that:
    • Behind all of the bubbles that we have had is a Keynesianism intellectual bubble
    • It’s Keynes's playbook that is guiding all of these policies and programs - print a lot of money, reduce interest rates, bailout failing financial institutions and government stimulus
    • Keynesianism is appealing to politicians because it helps them get through the next election.
    • Keynes basically felt that you couldn’t have too much debt.
    Watch the Hunter Lewis interview (link here):