Climateer Investing: January 2013

Thursday, January 31, 2013

IP: Samsung Superbowl Ad Mocks Lawsuits (AAPL)

Make no mistake, this is a gigantuan F.U.

Frontrun the Dopers: "These 4 States Will Reform Their Marijuana Laws in 2013"

From Reason Magazine:

It's been only two months since Washington and Colorado voters legalized recreational marijuana, but the advocates who raised millions to pass Amendment 64 and Initiative 502 aren't wasting time celebrating. In addition to helping craft the rules and regulations in the Centennial and Evergreen states, they're also providing support to state legislators who will introduce marijuana bills—more than 20 altogether—in 2013.

"While not all of them will pass," says Morgan Fox of the Marijuana Policy Project (MPP), the debates around them will be different than in years past. "What I'm hearing is that a dam broke," says Jill Harris, managing director of strategic initiatives for the Drug Policy Alliance (DPA). "Before Colorado and Washington, the idea of legal marijuana existed in the realm of fantasy. But after Colorado and Washington, we can have a more serious conversation."

With the start of the 2013 legislative session, that conversation has officially begun. Incremental reforms are going to happen in the next 12 months, even if the next state to fully legalize marijuana doesn't do so until 2014 or (more likely) 2016. We asked the folks at MPP, which was instrumental in the passage of Amendment 64, and DPA, which led the charge in Washington, which state legislatures could make big changes to their marijuana laws in 2013. These are the four they told us about.

1. Medical Marijuana in New Hampshire
New Hampshire in recent years has come painfully close to legalizing medical marijuana, but can't seem to seal the deal. In 2009, Democratic Gov. John Lynch vetoed the first medical marijuana bill to pass the Republican-led state legislature, even though U.S. Attorney John Kacavas—an Obama appointee—said his office wouldn't prosecute patients. A 2011 version of the bill never made it to Lynch's desk, due to language allowing for dispensaries, which Kacavas opposed. The 2012 version of the bill was more conservative, limiting marijuana only to specific caregivers and patients, but was once again killed by Lynch....MUCH MORE

As Victims Jockey, Peregrine Financial Group Founder Gets 50 Years Jail Time for 20 Year Fraud

From Reuters via the Chicago Tribune:

A judge on Thursday sentenced the founder of Peregrine Financial Group to 50 years in prison for looting hundreds of millions of dollars from the brokerage, saying his customers would probably never recover the money they lost.

Russell Wasendorf Sr., who had tried to kill himself just before the fraud was uncovered last year, received the maximum sentence allowed by law and was ordered to pay $215.5 million in restitution for his nearly 20-year scheme.

A local hero in Iowa known for his charitable work and lavish lifestyle, Wasendorf triggered the collapse of the brokerage through his fraud. The scam shook investors' confidence in the U.S. futures industry, already rattled by the failure of larger rival MF Global less than a year earlier.

"I'm very sorry for the financial and emotional damage I've caused to investors and employees of Peregrine Financial Group," Wasendorf said in a feeble voice at a sentencing hearing in Cedar Rapids, Iowa.

"I feel I fully deserve whatever sentence I am given," he said. "My guilt is such I will accept that sentence."

Chief Judge Linda Reade of the U.S. District Court of the Northern District of Iowa said former Peregrine customers will probably never get all their money back....MORE

And from Tulsa World before the sentencing:
Victims jockey to maximize refunds in Iowa fraud case

The judge overseeing the bankruptcy of an Iowa brokerage is facing an unusual decision about how to distribute its remaining assets: Should customers whose highly regulated accounts were looted by the founder get larger refunds than those who had riskier investments that weren't touched?

Customers who traded foreign currency through Peregrine Financial Group Inc. say their money is sitting in bank accounts that can be traced directly to them - and they want it back. Yet seven months after the company collapsed when Chairman Russell Wasendorf Sr. confessed to a stunning fraud, they haven't received a dime.

Other customers who traded commodities such as oil and corn have received up to 40 percent back - even though Wasendorf looted their accounts to expand his business empire and fund his lavish lifestyle....MORE

Putin May (or May Not) Have Hired Boyz II Men to Make Russians Have Sex

From Foreign Policy's Passport blog:

You may have seen via social media today that the Moscow Times is reporting that Vladimir Putin has hired Boyz II Men to play a concert in Moscow as part of a campaign to encourage Russians to procreate and raise the country's flaggin birth rate. This is not true. More precisely, it may or may not be true but it hasn't been "reported" by anyone.

Here at Passport, we love a good wacky Vladimir Putin story as much as the next guy (Okay, probably more than the next guy) but when people are just making things up about the Russian president, we have an obligation to call bullshit.

It all started when Moscow Times reporter Lena Smirnova decided to put a cheeky lede on her interview with the '90s-era slow-jam masters, who have an upcoming concert in Moscow:

President Vladimir Putin's crusade to raise the country's birth rate is set to get the support of three powerful voices on its behalf.
A baritone and two tenors, that is.
The stylish trio of Boyz II Men, the most successful R&B group of all time, is coming to Moscow on Feb. 6. The group will perform a selection of their classic and new romantic ballads, hopefully giving Russian men some inspiration ahead of St. Valentine's Day.

Very clever! But it's obvious from the context, and the fact that it's never mentioned again, the Smirnova is in no way suggesting that Putin actually hired Boyz II Men for this purpose. Boyz II Men and many other groups frequently perform in the Russian capital without the president's involvement....MORE

PIMCO's Bill Gross: "Credit Supernova!"

This is one of Mr. Gross' best letters in the last couple years.
For a while in 2011 Bill adopted the orotund style of a sophomore creative writing class and it was really bad.

Here's professional scribbler Matt Phillips, former WSJ/MarketBeat bigwig giving notes to Gross:
March 2, 2011

Where should we start? Bond king — or former bond king? – Bill Gross is out with his monthly investment outlook note. Mr. Gross is not merely satisfied managing the world’s largest bond fund. (Pimco Total Return Fund: $240.7 billion in assets in December.) Nay, he fancies himself something of a scribe, and his monthly investment outlook is where he talks his book for a few hundred words spicing it up with some belabored metaphors and a self-serving analogy, or several. But there are a few things that stick in our craw about this month’s note....MORE

That's just the warm up.
Gross may have been paying attention--since then the writing has gotten tighter and the subject matter is no longer Mr. G.

From PIMCO:

This is the way the world ends…
Not with a bang but a whimper.
T.S. Eliot

They say that time is money.* What they don’t say is that money may be running out of time.

There may be a natural evolution to our fractionally reserved credit system which characterizes modern global finance. Much like the universe, which began with a big bang nearly 14 billion years ago, but is expanding so rapidly that scientists predict it will all end in a “big freeze” trillions of years from now, our current monetary system seems to require perpetual expansion to maintain its existence. And too, the advancing entropy in the physical universe may in fact portend a similar decline of “energy” and “heat” within the credit markets. If so, then the legitimate response of creditors, debtors and investors inextricably intertwined within it, should logically be to ask about the economic and investment implications of its ongoing transition.

But before mimicking T.S. Eliot on the way our monetary system might evolve, let me first describe the “big bang” beginning of credit markets, so that you can more closely recognize its transition. The creation of credit in our modern day fractional reserve banking system began with a deposit and the profitable expansion of that deposit via leverage. Banks and other lenders don’t always keep 100% of their deposits in the “vault” at any one time – in fact they keep very little – thus the term “fractional reserves.” That first deposit then, and the explosion outward of 10x and more of levered lending, is modern day finance’s equivalent of the big bang. When it began is actually harder to determine than the birth of the physical universe but it certainly accelerated with the invention of central banking – the U.S. in 1913 – and with it the increased confidence that these newly licensed lenders of last resort would provide support to financial and real economies. Banking and central banks were and remain essential elements of a productive global economy.

But they carried within them an inherent instability that required the perpetual creation of more and more credit to stay alive. Those initial loans from that first deposit? They were made most certainly at yields close to the rate of real growth and creation of real wealth in the economy. Lenders demanded that yield because of their risk, and borrowers were speculating that the profit on their fledgling enterprises would exceed the interest expense on those loans. In many cases, they succeeded. But the economy as a whole could not logically grow faster than the real interest rates required to pay creditors, in combination with the near double-digit returns that equity holders demanded to support the initial leverage – unless – unless – it was supplied with additional credit to pay the tab. In a sense this was a “Sixteen Tons” metaphor: Another day older and deeper in debt, except few within the credit system itself understood the implications.

Economist Hyman Minsky did. With credit now expanding, the sophisticated economic model provided by Minsky was working its way towards what he called Ponzi finance. First, he claimed the system would borrow in low amounts and be relatively self-sustaining – what he termed “Hedge” finance. Then the system would gain courage, lever more into a “Speculative” finance mode which required more credit to pay back previous borrowings at maturity. Finally, the end phase of “Ponzi” finance would appear when additional credit would be required just to cover increasingly burdensome interest payments, with accelerating inflation the end result.

Minsky’s concept, developed nearly a half century ago shortly after the explosive decoupling of the dollar from gold in 1971, was primarily a cyclically contained model which acknowledged recession and then rejuvenation once the system’s leverage had been reduced. That was then. He perhaps could not have imagined the hyperbolic, as opposed to linear, secular rise in U.S. credit creation that has occurred since as shown in Chart 1. (Patterns for other developed economies are similar.) While there has been cyclical delevering, it has always been mild – even during the Volcker era of 1979-81. When Minsky formulated his theory in the early 70s, credit outstanding in the U.S. totaled $3 trillion.† Today, at $56 trillion and counting, it is a monster that requires perpetually increasing amounts of fuel, a supernova star that expands and expands, yet, in the process begins to consume itself. Each additional dollar of credit seems to create less and less heat. In the 1980s, it took four dollars of new credit to generate $1 of real GDP. Over the last decade, it has taken $10, and since 2006, $20 to produce the same result. Minsky’s Ponzi finance at the 2013 stage goes more and more to creditors and market speculators and less and less to the real economy. This “Credit New Normal” is entropic much like the physical universe and the “heat” or real growth that new credit now generates becomes less and less each year: 2% real growth now instead of an historical 3.5% over the past 50 years; likely even less as the future unfolds.

Not only is more and more anemic credit created by lenders as its “sixteen tons” becomes “thirty-two,” then “sixty-four,” but in the process, today’s near zero bound interest rates cripple savers and business models previously constructed on the basis of positive real yields and wider margins for loans. Net interest margins at banks compress; liabilities at insurance companies threaten their levered equity; and underfunded pension plans require greater contributions from their corporate funders unless regulatory agencies intervene. What has followed has been a gradual erosion of real growth as layoffs, bank branch closings and business consolidations create less of a need for labor and physical plant expansion. In effect, the initial magic of credit creation turns less magical, in some cases even destructive and begins to consume credit markets at the margin as well as portions of the real economy it has created. For readers demanding a more model-driven, historical example of the negative impact of zero based interest rates, they have only to witness the modern day example of Japan. With interest rates close to zero for the last decade or more, a sharply declining rate of investment in productive plants and equipment, shown in Chart 2, is the best evidence. A Japanese credit market supernova, exploding and then contracting onto itself. Money and credit may be losing heat and running out of time in other developed economies as well, including the U.S....MUCH MORE

Currency Wars in the Era of Unconventional Monetary Policies: Interpreting Monetary Policy’s Impact on Exchange Rates...

As FT Alphaville said this morning:

You gotta roll with fashion:

I suppose we better spend some more time on the currency wars thing then. *sigh* (Personal FTAV note – why are we still calling it currency wars?)...

More Alphaville after the jump. First up Econbrowser:

Over a week ago, Bundesbank President Jen Weidmann warned against the politicization of Japanese monetary policy, as the BoJ was pressured for more expansionary policy. [1] Nouriel Roubini warned that a currency war could be self-defeating as each country’s laxer monetary policy merely resulted in higher commodity prices. [2] I have been wondering exactly how expansionary monetary policy can influence exchange rates in an era of unconventional monetary policy. And even if it can’t affect exchange rates, is that a reason for not pursuing expansionary policy.

Figure 1: Nominal value of US dollar (blue, left axis), and Fed funds rate (%) (red, right axis).

NBER defined recession dates shaded gray. Source: Fed via FRED, NBER.

Exchange Rate Determination in a New Era
Several months ago, the Economist noted that the usual determinants of (advanced country) exchange rates no longer seemed to affect currency values in the traditional fashion ( Currencies: The weak shall inherit the earth, October 6, 2012):

...Other things being equal, the increase in money supply that a bout of quantitative easing brings should make that currency worth less to other people, and thus lower the exchange rate.
Ripple gets a raspberry
Other things, though, are not always or even often equal, as the history of currencies and unconventional monetary policy over the past few years makes clear. In Japan’s case, a drop in the value of the yen in response to the new round of QE would be against the run of play. Japan has conducted QE programmes at various times since 2001 and the yen is much stronger now than when it started.
Nor has QE’s effect on other currencies been what traders might at first have expected. The first American round was in late 2008; at the time the dollar was rising sharply (see chart). The dollar is regarded as the “safe haven” currency; investors flock to it when they are worried about the outlook for the global economy. Fears were at their greatest in late 2008 and early 2009 after the collapse of Lehman Brothers, an investment bank, in September 2008. The dollar then fell again once the worst of the crisis had passed.
...
David Bloom, a currency strategist at HSBC, a bank, draws a clear lesson from all this. “The implications of QE on currency are not uniform and are based on market perceptions rather than some mechanistic link.”
As the article points out, the most robust determinant of exchange rates has typically been short term interest differentials (in my view, it’s actually real interest differentials, as in the Dornbusch-Frankel model -- see this survey). Now, it is asserted, it’s long term real bond yields. For more, see this recent WSJ article. (Also, it’s clear that risk is important, as discussed in this IMF working paper)....MORE

And back to Alphaville:

The euro seems like a sensible place to start. What with it likely being the probable ‘loser’ and all… *double sigh due to concentration on G4 currencies while the fact is it’s the smaller currencies which are unlikely to be able to stand up to the bigger kids*
First, from Credit Suisse:

In our view, the competitive devaluations of developed market currencies is a (not unwelcome) by-product of policymakers’ attempts to lower real bond yields. At the zerobound, policymakers can no longer help their economies by cutting nominal yields – and thus have to resort to lowering real yields by pushing up inflation expectations, leading to a lower real yield (which, in turn, pushes down the currency).

There is an important element of contagion in this process: if a country does not expand its balance sheet, then its currency appreciates against those of the countries that do. Currency appreciation continues until the deflationary pressures associated with an overly strong currency become too large and the country is forced to join in the trend of central bank balance sheet expansion. In the case of emerging markets, central banks often engage in unsterilised intervention to keep their currency from appreciating too far (unsterilised because the cost of intervention can be too high for the central bank when US rates are below local GEM rates).
We do not see an end to this process until real bond yields fall to a level that stabilises government debt to GDP and the unemployment rate in developed world.
With that in mind the current change in relative balance sheet size between the Fed and the ECB is worth noting as it does seem to be consistent with recent euro strength....MUCH MORE

Natural Gas Tumbles on Smaller than Expected Withdrawal

We had been seeing guesses of a 200-210 Bcf withdrawal
The week being reported, the fourth week in January is historically the coldest week of the year in the United States. (actually the Northern Hemisphere but let's be Americentric for a while)
The front futures are down 7 cents at $3.27, here's the five-minute chart from FinViz:

From the EIA:
Weekly Natural Gas Storage Report

for week ending January 25, 2013. | Released: January 31, 2013 at 10:30 a.m. | Next Release: February 7, 2013

Working gas in underground storage, lower 48 states Summary text CSV JSN
				Historical Comparisons
	Stocks billion cubic feet (Bcf)			Year ago (01/25/12)		5-Year average (2008-2012)
Region	01/25/13	01/18/13	change	(Bcf)	% change	(Bcf)	% change
East	1,391	1,520	-129	1,500	-7.3	1,289	7.9
West	398	416	-18	399	-0.3	349	14.0
Producing	1,013	1,060	-47	1,105	-8.3	860	17.8
Salt	244	260	-16	256	-4.7	132	84.8
Nonsalt	769	800	-31	850	-9.5	728	5.6
Total	2,802	2,996	-194	3,004	-6.7	2,498	12.2

Summary

Working gas in storage was 2,802 Bcf as of Friday, January 25, 2013, according to EIA estimates....MORE

Awakened Dragon: Chinese stocks are back in bull market territory (YINN; YANG)

Along with the Nikkei, although for very different reasons, one of our favorite equity markets.
From Bespoke Investment Group:
China Golden Cross Coming

After declining for the better part of the last three and a half years, the Chinese stock market has finally woken up a bit. Since reaching a multi-year low on the first trading day of December, China’s Shanghai Composite is now up 21.56% on a closing basis, which puts it in a fresh new bull market. The gains in the Shanghai Composite have begun to turn its moving averages around as well, and as long as the index doesn’t collapse over the next couple of trading days, it will experience the elusive “golden cross.”

The golden cross is thought to be a bullish technical formation, and it occurs when the 50-day moving average crosses above the 200-day moving average as both moving averages are rising. While not a perfect technical indicator, it has historically been a good predictor of prices for quite a few indices. But how about for the Shanghai Composite?

There have only been six prior golden crosses for the Shanghai Composite going back to 1990, and below we highlight the index's performance in the week, month and three months following these six events. As shown...
Continue reading... (Must be a Bespoke Premium member to view.)

Previously:
Shanghai, Nikkei: Sweet Moves

...Actually we were late getting to the Japan story, screwing around until the Abe victory before realizing how big the move would be. On Shanghai we were there within a day or so of the turn.

Shanghai Index, Nikkei 225 Inflate Nicely (YINN; YANG)
With the Shanghai Composite up 16.5% From the Lows, How High Can it Fly

And many more.

Supply Chains: "China no longer to be self sufficient in food"

From AgProfessional:

China has decided to stop pursuing the goal of being self sufficient in food production, a Chinese government official announced this week, according to the South China Morning Post. The rapid urbanization of the country is spurring the need for more food.

Chen Xiwen, director of the Chinese Communist Party’s top policy making body for rural affairs, told a forum last weekend that food supplies would come under increasing pressure as incomes improved. Despite the country’s adoption of more production agriculture technologies, Chen admitted that the country could not “turn back the clock” when it comes to imports.

“During the process of urbanization, we must pay attention to modern agricultural development and to farm product supplies, but of course, we certainly cannot pursue self-sufficiency,” he said....MORE

Chesapeake Energy's Problems Run Deeper Than Canning McLendon Can Cure (CHK)

Despite the billions in asset sales to date the debt is still a huge headwind.
From John Kemp at Reuters:
McClendon's exit will not solve Chesapeake's problems

Shareholders must be hoping the removal of Aubrey McClendon as Chesapeake's chief executive will end the corporate governance discount attached to the company's share price and unlock superior returns. They are likely to be disappointed.

Removing McClendon does not the resolve the company's basic problem: it is the second-largest producer in a market (U.S. natural gas) which has been transformed by the advent of a new technology (hydraulic fracturing) and now faces years of oversupply as well as a radical change in the cost of production which has left many old assets stranded and devalued.

Shareholder activists like Carl Icahn have focused on governance issues. But even a quick look at the performance of Chesapeake's share price compared with the price of the main product it produces shows the company has been felled by the drop in natural gas prices rather than governance problems.

TRACKING GAS PRICES DOWN
Chesapeake's shares have broadly tracked changes in gas prices and peers like Devon Energy where no governance problems have been alleged ().

Chesapeake's shares rose sharply following the announcement of McClendon's departure. Chesapeake is up by about 20 percent since the recent low on Jan 10, more than the 7 percent increase in Devon's share price over the same period.

But it hardly qualifies as a "surge". Chesapeake's share price is still down 7 percent compared with the same time last year, about the same as Devon's 11 percent loss. Both companies have seen their share prices fall by 30-35 percent over the last two years. Natural gas prices have dropped around a quarter over the same period.

Icahn has been generous in his praise following McClendon's decision to quit the company, but like other activists he now needs to accentuate the positive: he owns a large number of the company's shares.

"Aubrey has every right to be proud of the company he has built, the world class team of people at Chesapeake and the collection of assets he has assembled, which in my opinion are the best portfolio of energy assets in the country," Icahn said in a statement released on Tuesday.

"While it is known that some of these assets will be sold by the company in due course, I do not believe that this will in any way effect the ultimate realisation of Chesapeake's potential. I am confident that history will prove Aubrey has been correct about the value of natural gas in general and the value of Chesapeake in particular."

History is unlikely to prove any such thing. Chesapeake does indeed have fantastic assets. But their value has been drastically changed by the shale revolution. Chesapeake's new chief executive will confront the same problem as his predecessor.

STRANDED ASSET PORTFOLIO
Like Exxon, which bought XTO in 2010, and Shell, which bought East Resources in 2010, Chesapeake's strategy was designed for a world where gas prices averaged $6 or $8 per million British thermal units in the long-term....MORE

Wednesday, January 30, 2013

Jubilation: Keynes and the Euthanasia of the Rentier

A few years ago I confessed:

...Last year, when it seemed that everyone had become a Keynes expert I thought I should read his "The General Theory of Employment, Interest and Money".
(here's an online version at Marxists.org [!])

It's a heavy slog but now it takes strangers longer to recognize my mental resemblance to Homer Simpson:
("Stupidity got us into this mess and stupidity will get us out."; "I'm not a man who's easily impressed. Hey, a blue car." etc.)....

One of the more interesting bits is at the end of the book:

...I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure. This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment. In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour costs of production plus an allowance for risk and the costs of skill and supervision.

Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce.

I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.

Thus we might aim in practice (there being nothing in this which is unattainable) at an increase in the volume of capital until it ceases to be scarce, so that the functionless investor will no longer receive a bonus; and at a scheme of direct taxation which allows the intelligence and determination and executive skill of the financier, the entrepreneur et hoc genus omne (who are certainly so fond of their craft that their labour could be obtained much cheaper than at present), to be harnessed to the service of the community on reasonable terms of reward.

At the same time we must recognise that only experience can show how far the common will, embodied in the policy of the State, ought to be directed to increasing and supplementing the inducement to invest; and how far it is safe to stimulate the average propensity to consume, without foregoing our aim of depriving capital of its scarcity-value within one or two generations. It may turn out that the propensity to consume will be so easily strengthened by the effects of a falling rate of interest, that full employment can be reached with a rate of accumulation little greater than at present. In this event a scheme for the higher taxation of large incomes and inheritances might be open to the objection that it would lead to full employment with a rate of accumulation which was reduced considerably below the current level. I must not be supposed to deny the possibility, or even the probability, of this outcome....

-Chapter 24. Concluding Notes on the Social Philosophy towards which the General Theory might Lead

Now, ignoring the shot at financiers, the only way I can read "the euthanasia of the rentiers" is as a reference to debt extermination over time as 0% interest rates crush passive investment and/or a flood of money printing.

That being the end, the difference between Keynes and Hoover's Treasury Secretary Andrew Mellon (as reported by Hoover):

"Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people."

is not as large as one might first expect.
Krugman in his intro to The General Theory doesn't seem to see it that way:

...Book VI, at the opposite end of The General Theory, really is a kind of dessert course. Keynes, the hard work of creating macroeconomics as we know it behind him, kicks up his heels and has a little fun. In particular, the final two chapters of The General Theory, though full of interesting ideas, have an impish quality. Keynes tells us that the famous victory of free trade over protectionism may have been won on false pretenses – that the mercantilists had a point. He tells us that the “euthanasia of the rentier” [376] may be imminent, because thrift no longer serves a social function. Did he really believe these things, or was he simply enjoying tweaking the noses of his colleagues? Probably some of both....

while right-of-center historian and economist Michael Hudson sees the 'euthanasia' as calling for a Jubilee:

Q: The source of the present crisis is the rentier system that the last financial revolution engineered since the 1980s?

MH: Savings have been lent out without increasing production or living standards. Much has indeed been lent out to finance gambling using junk mathematics and debt-leveraged takeovers. But the big picture is that the debt overhead has soared without corresponding means in the ability to pay this debt.

BOX 1

What’s the rentier economy by Hudson

«A century ago when the classical economists, Adam Smith, John Stuart Mill, in the reform era, tried to say: look, there are some incomes that are not earned. Rent is not earned, it’s an excess price. Interest is not earned, it’s a monopoly price. Monopoly profits aren’t earned, they’re extortionate. All this was viewed (by classical economists) as something that government regulators should get rid of, either by not permitting it in price, or by holding the monopolies in the public domain, or by the land itself being either nationalized or taxed. The classical economists divided almost the entire economy into productive and unproductive labor, into wealth, and overhead, into real income and costs. This threatened the vested interests with taxing away their free lunch, so you have an anti-classical reaction that is epitomized by the Chicago school of anti-government, anti-tax people whose leader, Milton Friedman, said there’s no such thing as a free lunch. Well, classical economics was all about the free lunch. Look at Ricardian rent theory. That’s all about the free lunch. The role of modern economic theory — I should call it post-modern economic theory and statistics — is to pretend that the banks, the landlords and the monopolies actually earn their income instead of extracting it from the (productive) economy. »

Q: The best solution for the financial world is to induce the euthanasia of the rentier system as Lord Keynes suggested once (Chapter 24, Concluding Notes) in his General Theory of Employment, Interest and Money (1936)?

MH: By that, he meant a debt write-down. This is the only ultimate solution. As Adam Smith noted in 1776, no government ever has repaid its foreign debt. Today one can say the same thing about the private sector. Bankruptcy seems to be the indicated way to wipe it out. Governments are postponing this resolution by bailing out creditors – not debtors....

But maybe Hudson and Krugman aren't so far apart. Hudson ends the interview saying:

..As Paul Krugman explained once this rentier aspect was not transitional neither its euthanasia was gradual.

The link is to Krugman's Introduction!
Inspiration for this whole ramble is a seven year old Tyler Cowen post at Marginal Revolution:

Krugman’s introduction to Keynes’s General Theory

However, any idiocy is entirely my own.

"Fake Portuguese Economist Unmasked"

From the Guardian:

And to some lighter news out of Portugal, where a fake economist duped the nation for months. Our correspondent Giles Tremlett reports:

Artur Baptista da Silva had become one of the most authoritative voices on Portuguese television, using his experience as an economist and United Nations consultant to explain why so much austerity was bad for the bailed-out country's economy.

But now it turns out that the 61-year-old economist who explained so seriously – and clearly – the damage being inflicted on the country by the austerity measures demanded by the troika of lenders (EU, IMF and ECB) was a conman with at least two jail terms behind him....MORE

HT: Professor Greg (hardest working textbook salesman in show business) Mankiw who headlined his post:

He didn't know the secret handshake

Prop Bets: Get Your Super Bowl Prop Bets (and former WSJ'er Mark Gongloff does a driveby)

From Grantland, Jan. 28:
Super Bowl Prop Bets
From the shrewd to the ridiculous, you can put your money down on just about any situation

The one thing I didn't do during my year in Vegas was stick around for the Super Bowl. Instead, I went to Indianapolis and saw the New York Giants blow out the overmatched New England Patriots. At least, that's what I remember having happened. Although I've moved out of Sin City and retreated East, I wanted to go back and spend one Super Bowl weekend in town to experience the electric energy and wondrously woeful decision making that goes into the heaviest-bet contest in American sports.

That starts today with this deep, deep dive into the world of Super Bowl prop bets. For the uninitiated, casinos around the world (like the LVH, whose list I'll be working from in this piece) produce hundreds of "prop bets" or "exotics" that allow you to bet on events that are, at worst, tangentially related to the Super Bowl. How slim can the relationship be? Oh, you'll see. And if you're just overwhelmed by seeing any sort of line, I'll be explaining the different types of bets along the way.

I went through the prop bets for last year's game,¹ and while I didn't publish the bets that I ended up making, I took the safest bet on the market and saw it lose for the only the sixth time in Super Bowl history. But more on that later. If I have one basic strategy for betting props, it's to try to bet against what I would imagine a drunk idiot coming to Vegas would bet two hours before gametime. Of course, I also have to make sure that I'm not the drunk idiot when I'm placing the bets. I'll post a list of the props I took on Twitter this weekend.

There's no way I can go through each of the hundreds of different bets that the LVH offers, so as I did last year, I'm going to try to highlight bets in a number of different categories that might interest you both in terms of your take on the outcome of the game and the various different categories of minutiae surrounding the contest.

Five Prop Bets for a Close Game
Will there be overtime?
Yes: +700
No: -1000
Let's start with one of the simplest ones to understand. As a quick primer, I'll explain how these bets work. The "+700" figure next to "Yes" means that a bettor would receive $700 back in profit if they bet $100 on the event occurring before it actually happened. If you held this winning ticket with $100 and brought it to the counter, you would be handed back $800 (the $700 profit plus your initial $100 bet). The "-1000" figure next to "No" replaces the positive sign at the beginning with a negative sign; it indicates that you have to bet the dollar amount in question to win $100. In this case, if you wanted to win $100 betting against the possibility that there would be overtime, you would need to bet $1000. If there's no overtime, you would win $1100 (the $100 profit plus your initial $1000 bet).

Where it makes sense, I'll try to chip in with some logic as to whether the bet makes sense. In this case, the "Yes" bet suggests that overtime will occur 12.5 percent of the time, while the "No" bet suggests that the game will end in regulation 91.7 percent of the time. Eagle-eyed readers will note that those two figures add up to 104.2 percent; that 4.2 percent is the vig that Vegas takes from the bets. To estimate what the "true" probabilities are, we have to adjust for the vig, which reduces the "Yes" probability to an even 12 percent and the "No" probability to exactly 88 percent....

...Five Prop Bets for a Big Niners Win...

...MUCH MORE

Grantland followed that up with "All the Prop Bets Fit to Print" today:

From overtime to Madonna's hair, there are plenty of opportunities to throw your money around on Super Bowl Sunday...

Finally, the guy who first exposed me to Grantland, former MarketBeat and WSJ Online Poobah, Mark Gongloff with some, ahhh, different, prop bets:

StockRay Virtual Market Lets You Bet On Obama, Kim Kardashian, France, For Some Reason

Hi, there, do you like things? You know, things. Different kinds of things, like President Obama and Kim Kardashian and...uhhh...France?

Well, you're in luck because now you can express your enjoyment for those random things at a new virtual stock market called StockRay, which has recently gone live.

I may end up wasting a lot of time on this, but then again I may soon wander away from boredom. It's still too early to tell. StockRay says it is a New York-based startup founded by a couple of guys, "Treymour and Matt," who graduated from Harvard "a few years ago." So obviously we'll be talking about an IPO in five years. Or not! It depends on how much more engaging this thing gets.

One thing that makes me want to do more with it is that I desperately want to short the vastly overpriced Black-Eyed Peas. But I just got started and don't have enough fake cash to borrow Black-Eyed Peas shares, which recently traded at nearly 24 fake dollars.

So I bought 20 shares of Yoga to start off with and am slowly building my portfolio. Yoga seems underpriced to me at $9.83. Obviously the market doesn't have a lot of liquidity just yet, because my purchase of 20 shares of Yoga a little while ago seems to have helped jack up the price on the day.

So I've been searching for other random things to buy -- and what's available is super random, from Atheism to Downton Abbey. There is even a thing called White Collar. I don't even know what that is, but it is down 3 percent on the day.

The most actively traded stock appears to be Beer, up 44 percent on the day. Since buying Yoga, I have also bought shares in Gun Control and Stephen Colbert (both value plays)....MUCH MORE

Mckinsey-- $57 Trillion Infrastructure Investment Required by 2030 (and how to save a Trillion a year)

From McKinsey Global Institute:

Insufficient or inadequate infrastructure—and the resulting congestion, power outages, and lack of access to safe water and roads—is a global concern. Typically, the debate about the growing need for infrastructure focuses on whether financing is sufficient to meet it. But, in fact, there are clear ways to create more and better infrastructure for less.

Just keeping pace with projected global GDP growth will require an estimated $57 trillion in infrastructure investment between now and 2030. That’s nearly 60 percent more than the $36 trillion spent over the past 18 years, according to Infrastructure productivity: How to save $1 trillion a year, a report from the McKinsey Global Institute and McKinsey’s infrastructure practice. The $57 trillion required investment is more than the estimated value of today’s infrastructure. And this figure does not include costs such as clearing maintenance backlogs, meeting development goals in emerging countries, and making infrastructure more resilient to climate change. But given widespread fiscal constraints in the wake of the global financial crisis, even assembling the minimum investment required to meet growth predictions is a challenge.

Yet practical steps could boost productivity in the infrastructure sector—a long-time laggard—by as much as 60 percent, thereby lowering spending by 40 percent for an annual saving of $1 trillion. Over the next 18 years, this would be the equivalent of paying $30 trillion for $48 trillion worth of infrastructure....MORE

HT: FT Alphaville's The Closer post.

We have a real love/hate relationship in our thinking on McKinsey. On one hand we link to their reports, such as the above or McKinsey--"Manufacturing the Future: The next Era of Global Growth and Innovation (DDD; SSYS ).

On the other hand we post stuff like:

"Is McKinsey & Co. the Root of All Evil ?"
Yves Smith Says Nice Things About McKinsey & Co. (they're in the business of propping up diseased managements)

It's a bit like a Multiple Personality Disorder.

"Goldman Warns That Rising Euro May Prompt ECB Action Soon" (EUR/USD)

Following up on "Chartology: Why European Exporters are worried (EUR/USD)" and "As The Euro Soars, This Is Where The "Max Pain" In Europe Is".
EUR/USD 1.3569 last.
From ZeroHedge:

Via Goldman Sachs,

One risk factor for the economic outlook is the exchange rate. The trade-weighted Euro has appreciated by 2.5% since the beginning of this year and by almost 5% since the announcement of the OMT in September.

To be sure, this appreciation comes after a significant weakening of the Euro in the preceding 12 months on the back of rising concerns about the stability of the Euro area, and the Euro TWI is still more than 1% below its average since 2008.

Moreover, export expectations are improving on the back of the pick-up in the global industrial cycle despite the appreciation of the Euro. The index of ‘new exports orders’ in the PMI survey, for example, rose to a level of 48.8 in January after reaching a trough of 44.7 in September. Thus, there is so far no indication that the exchange is putting the ‘gradual recovery’ scenario at risk.

When asked about the exchange rate in the January press conference, President Draghi said that “… the exchange rate is certainly a very important element as far as growth and price stability are concerned, and we certainly use it as one of the elements in our economic assessment”. However, he also said that “… so far, both the real and the effective exchange rate of the euro are at their long-term average.”

But a further strengthening at a similar same pace to what we have observed in recent months would eventually weigh more meaningfully on the economy, and this in turn would lead to a change in the “medium-term outlook for price stability”. The ECB, we think, would react in this case by cutting rates, in an attempt to slow the upward momentum of the exchange rate.

...And while Goldman notes that deposit shifts have begun to 'normalize', fragmentation remains and lending to corporates continues to decline...

...MORE

Not the Onion: "JPMorgan bet against itself in "Whale" trade" (JPM)

Okay kids, this has gotten stupid. The banks are too large.
Time, maybe, to dissolve the corporation and revert to a partnership structure. Try playing (allowing) these games in an unlimited liability company and see how long it is before you're on permanent dumpster-diving detail.
From Reuters:

There is a new twist in the London Whale trading scandal that cost JPMorgan Chase $6.2 billion in trading losses last year. Some of the firm's own traders bet against the very derivatives positions placed by its chief investment office, said three people familiar with the matter.

The U.S. Senate Permanent Committee on Investigations, which launched an inquiry into the trading loss last fall, is looking into the how different divisions of the bank wound up on opposite sides of the same trade, said one of the people familiar with the matter.

The committee is expected to release a report on its investigation in the next few weeks.
The people familiar with the situation did not comment on the dollar value of the opposing trades placed by JPMorgan Chase & Co's (JPM.N) investment bank traders, which was much smaller than the total positions put on by the CIO.

The intra-bank trading was not mentioned in a 129-page report JPMorgan released on January 16, which chronicled some of the bank's risk management failures. The scandal has led to a number of management changes at JPMorgan and has sullied CEO Jamie Dimon's image as a hands-on risk manager....MORE

Policy Heads-up: "Obama’s New Chief of Staff on Climate Change"

From MIT's Technology Review:

President Obama says he intends to address climate change. Who he picks to fill key posts will show how serious he is. In picking Denis McDonough to serve as his new chief of staff, he’s picked someone who clearly considers climate change a serious problem (see “Obama Still Needs to Make the Case for Dealing with Climate Change”).

Prior to working for Obama, McDonough served as a senior fellow at the Center for American Progress. While there, he argued that the United States—along with other industrialized countries—has an obligation to help poor countries deal with climate change related problems and to help them reduce their reliance on fossil fuels. If his writings at the time are any indication, he could push both for market-based policies for addressing climate change and for funding to help poor countris adapt to climate change as it happens. But it’s not clear he would emphasize clean energy R&D–his writings seem to emphasize deployment of existing technology.

In a 2007 article, he argued for enacting policies “that offer the most vulnerable communities in the world the support they need to combat the impact of climate change and help them and the rest of the world transition to a low-carbon global economy. This is a climate debt the industrialized world owes to these poor nations.”...MORE

I believe it may be time to respond to the Nigerian gentleman who has been after us to set up a joint venture, I've got a feeling there is going to be a lot of money flowing:

Dear Sir, Request for Urgent Business Relationship

ALHAJI D. BAYERO
TEL/FAX: 234-90-406917
FAX: 234-90-409188
LAGOS, NIGERIA


	Dear Sir,
	Request for Urgent Business Relationship
	I am the group managing director of the Nigeria National Petroleum Corporation (NNPC) and a member of the ad hoc committee set up by the federal government of Nigeria to review contracts awarded by the past military administration between 1985-1993. The members of the committee are interested in the importation of goods into the country with the funds presently floating in the Central Bank of Nigeria/Nigeria National Petroleum Corporation (NNPC) foreign payments account. Our request is anchored on our strong desire to establish a lasting business relationship with you and your company. We hence solicit your partnership to enable us transfer into your account the said funds. You have been recommended to us in confidence and we were assured of your ability and reliability to prosecute business transaction that require maximum confidentiality. Origin of Fund This fund is presently floating in the Nigeria National Petroleum Corporation (NNPC) foreign payments account with the Central Bank of Nigeria (CBN). This is as result of grossly over invoiced contracts which were executed for the NNPC during the last administration in Nigeria, and are presently under verification. To this effect, the present administration in Nigeria set up an adhoc committee to identify, scrutinize and recommend for payment all valid contracts that have been fully executed. In the course of our assignment, we have identified a lot of misappropriated and inflated funds which are presently floating in the suspense account of the Central Bank of Nigeria ready for payment. The companies who executed their contracts have been fully paid. It is now part of the over inflated sum of USD25,320,000.00 that we intend to transfer into the foreign account. I have therefore been mandated as a matter of trust by the members of the committee to look for a foreign partner into whose account we could transfer the sum of USD25,320,000.00 (twenty-five million, three hundred and twenty thousand US dollars) only. Hence I am writing you this letter. We have agreed to share the funds thus:...

While You Were Sleeping: Nikkei Up 2.28% Overnight

Because we're doing this blog thing out in public you are seeing our higher probability and/or lower risk ideas. Not a lot of esoterica in instruments or tactics, no extremely short-term (nano-seconds to minutes) ideas, no strategies based on proprietary information or black-box algos.

I repeat this somewhat disheartening (for those looking for magic) message because I made a declarative statement in a December 17 headline "Japan's Nikkei is In the Early Stages of an Historic Move".
I don't do that very often, preferring to navigate by the aphorism:

It is better to remain silent and be thought a fool, than to open your mouth and remove all doubt*

The "Historic Move" post ended with:

...As another Dow Jones story commented:

...Utilities were a major beneficiary of the LDP victory, with Tokyo Electric Power soaring 32.9%, as the new ruling party is discussing restarting the nation's idle nuclear power plants. Kansai Electric Power also shot up 17.7%....
That's not just short covering, that's a whole new mindset.

This move in Japanese equities is the real deal (although "real" returns won't be so hot for yen-denominated purchasers) and offers an opportunity. In the January 11th post "No typo: Analyst sets Nikkei 63 million target" (it's Société Générale's Dylan Grice) the first line was: "Sometimes investing is easy."

What that referred to is the idea expressed by Brutus in Julius Caesar Act 4, scene 3:

There is a tide in the affairs of men.
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat,
And we must take the current when it serves,
Or lose our ventures.

It really is that straightforward. The "63 Million..." post ended:

...A couple characteristics of big bull markets:

1) Once the move is underway waiting for a pullback almost guarantees you will be underinvested. Everybody is waiting for a pullback, not everybody has the fearlessness/foolishness to committ.

2) The market will find a way to make your day-to-day prognostications and pronouncements look stupid.

Ease in, even if you have to grit your teeth and shut your eyes.
Sixty three million baby!

The Nikkei 225 closed at 9,828.88 on Dec. 17. Since then it's up 1285 points, 13%.
And we were weeks late getting to the story.

From MarketWatch:
Asian stocks rally, Nikkei hits 33-month high

An improved economic outlook boosted Asian markets Wednesday, lifting stocks in Hong Kong and Australia to near two-year highs, while Japanese shares ended at their highest level in 33 months, also fueled by earnings optimism.

Japan’s Nikkei Stock Average JP:100000018 +2.28% surged 2.3% to end at its best level since April 27, 2010.

Hong Kong’s Hang Seng Index HK:HSI +0.71% rose 0.7% and Australia’s S&P/ASX 200 AU:XJO +0.16% climbed 0.2% to reach their highest closing values since April 2011. The session marked a tenth day of gains for the Australian benchmark.

China’s Shanghai Composite Index CN:000001 +1.00% added 1%, while South Korea’s Kospi KR:SEU +0.43% and Taiwan’s Taiex XX:Y9999 +0.40% each advanced 0.4%....

...MORE

*From The Quotations Page:

...It's been attributed to many persons, but seems to have its roots in the Bible:

It is better to remain silent and be thought a fool, than to open your mouth and remove all doubt . -- George Eliot
Better to remain silent and be thought a fool than to speak out and remove all doubt.-- Abraham Lincoln (also attr. Confucius)
It is better to keep your mouth closed and let people think you are a fool than to open it and remove all doubt.-- Mark Twain (1835-1910)
Even a fool, when he holdeth his peace, is counted wise: and he that shutteth his lips is esteemed a man of understanding. -- Bible, 'Proverbs' 17:28.

There are no citations for Lincoln or Twain. I have my doubts about Confucius.

Thomas Jefferson on Invention and Patents

"...Considering the exclusive right to invention as given not of natural right, but for the benefit of society, I know well the difficulty of drawing a line between the things which are worth to the public the embarrassment of an exclusive patent, and those which are not. As a member of the patent board for several years, while the law authorized a board to grant or refuse patents, I saw with what slow progress a system of general rules could be matured."

-Thomas Jefferson to Isaac McPherson, 13 Aug. 1813

HT: The Conversable Economist
Economics of Ideas: Paul Romer and Thomas Jefferson

Wow: Dubai Unveils Awesome 360˚ Photo From Atop the World's Tallest Building

The interactive view will either be the cause of, or the cure for, acrophobia in a lot of people.

The al Maktoum Photography Award website asks "Is this the Greatest Image on Earth?" about the 2.5 GigaPixel Panorama.
They may have a point.
From DVICE:

When Tom Cruise ditched his stuntmen to scale the world's tallest building for Mission Impossible 4, images of the actor perched atop the Burj Khalifa could only hint at how dizzying the view might have been. Now, thanks to a new interactive panoramic photo released by the Emirate of Dubai, we can all get a taste of that vertigo-inducing perspective.

Captured by Dubai-based photographer Gerald Donovan, the 360-degree panoramic image is composed of 70 individual photos, 48 of which are panoramic images shot using a mechanized tripod at a resolution of 80 megapixels. The amazing images show the entire Dubai cityscape, as well as the surrounding skies and seashore, all in stunning high resolution from 2,717 feet in the air.

If you have a fear of heights, or get put off balance easily, you may want to forgo the very responsive interactive version and instead take a look at the video below....MORE

Gross National Happiness: On Alternatives to GDP and the Easterlin Paradox

For going on two decades there has been talk of using measures other than GDP to gauge the well being of societies, with the term Gross National Happiness having an even longer (and royal) pedigree dating to the early 1970's when the term was used by Bhutan's Dragon King, Jigme Singye Wangchuck.

In 2009 the concept became a bit of a meme and could be seen in worldwide media and heard in the swankest salons. In November of '09 Oxford's Practical Ethics blog said:

Happiness and the Dragon King

As so often, I’m with King Wangchuck. The former King of Bhutan, the fourth ‘Dragon King’, coined the term, Gross National Happiness (GNH). Governments, he thought, should aim to boost the nation’s well-being, rather than target Gross National Product (GNP). He used the phrase after his coronation, an event which, unfortunately, his citizens couldn’t follow on the box – because, until a decade ago, Bhutan didn’t have TV. The erstwhile King appears a happy man himself – which may, or may not, be connected to his being married to four queens.

Once a country has achieved a certain level of income per head, there is no straightforward correlation between economic growth and happiness. Professor Richard Layard, a Labour Peer, sometimes called Britain’s happiness Tsar – puts the threshold at a little over £10,000 – the amount at which basic needs can be satisfied. Above that level nations can become richer without necessarily becoming happier....

By March 2012 the folks at the United Nations were institutionalizing the concept. From the NYT:

The U.N. Happiness Project

Next Monday, the United Nations will implement Resolution 65/309, adopted unanimously by the General Assembly in July 2011, placing “happiness” on the global agenda.

“Conscious that the pursuit of happiness is a fundamental human goal” and “recognizing that the gross domestic product [...] does not adequately reflect the happiness and well-being of people,” Resolution 65/309 empowers the Kingdom of Bhutan to convene a high-level meeting on happiness as part of next week’s 66th session of the U.N. General Assembly in New York.

An impressive array of luminaries will be speaking for this remote Himalayan kingdom. His Royal Highness the Prince of Wales will open the meeting via a prerecorded video missive. The Nobel laureate Joseph Stiglitz will speak on “happiness indicators,” as will the economist Jeffrey Sachs. The Bhutanese prime minister will represent King Jigme Khesar Namgyel, the reigning Dragon King of the Bhutanese House of Wangchuck. (The kingdom became a constitutional monarchy in 2007.)

For the 32-year-old Dragon King — Bhutan means “land of dragons” in the local Dzongkha language — U.N. Resolution 65/309 represents a global public relations triumph and the realization of a hereditary ambition, initiated by his grandfather 40 years ago, to establish Gross National Happiness (G.N.H.) as an alternate model to Gross National Product (G.N.P.) as a measure of national progress.

“A family should have a good house, have sufficient land if one is a farmer, and have a modest level of labor-saving devices to save precious time used up by excessive physical work,” explains Karma Ura, a leading public intellectual and artist who serves both as adviser to the king at home and as a G.N.H. ambassador abroad.

He has designed the country’s bank notes, denominated in the local currency known as ngultrum or nu, which is tied to the Indian rupee. He has promoted Gross National Happiness at the European Commission in Brussels and will do so again on Monday at the United Nations in New York.

For his services, Karma Ura received a knighthood from the king, which includes the ancient honorific title, dasho, and a sword that Ura bears as proudly as his G.N.H. patriotism. The “true forms of wealth,” he says, are being blessed with a “ravishing environment,” “vibrant health,” “strong communal relationships” and “meaning in life and freedom to free time.”...

That's where things stood or so I thought.

Here's The Atlantic, Jan 10, 2013:

Yes, Money Does Buy Happiness: 6 Lessons from the Newest Research on Income and Well-Being

For a long time, we knew that there was a happiness plateau, a point where more money basically stopped buying greater satisfaction. Maybe we were wrong.

Reuters
Fittingly or ironically, the dismal science has a lot to say about happiness.

The classic economic story about money and well-being goes something like this. Money buys happiness, sure, but only up to a point. Once basic needs are taken care of, extra money has diminishing (or non-existent) returns. Perhaps richer people use their money to move to richer areas, where they no longer feel rich. Perhaps relative income -- how much you have compared to your friends -- is matters much more than absolute income -- how much money you have, period.

Economists call it the "Easterlin Paradox." You call it the "Keeping Up With the Jones' Principle."

And a new research paper calls it total bunk. Or, in the economists' parlance, "based on empirical claims which are simply false." People with more money have higher reported well-being, they say, all the way up to the top 10 percent of earners. Here are the 6 most interesting observations from "The New Stylized Facts about Income and Subjective Well-Being," a discussion paper by Daniel W. Sacks, Betsey Stevenson, and Justin Wolfers.

(1) Richer countries are happier. Here's a simple graph to make a simple point. The researchers plotted 122 countries' responses to a Gallup World Poll on well-being against each nation's real GDP per capita (adjusted for purchasing power) and found a strong correlation.
Upshot: Well-being rises with income at all levels of income, across countries.

(2) ... But every next dollar won't buy the same amount of happiness. The straight line can be deceptive at first blush. The graph is *not* telling you that every next $1,000 on your paycheck is worth the same gains in satisfaction. Instead, the relationship is logarithmic. That means doubling your income from $1000 to $2000 raises satisfaction by the same amount as doubling your income from $10,000 to $20,000. Not that these findings are as binding as the law of gravity, but this would suggest that, to equal the happiness boost you felt from getting raise from $30,000 to $60,000, another $30,000 wouldn't do the trick: You would have to double your income again, to $120,000.

(3) Richer countries get happier as they get richer. That first graph answers the question: Do countries with more income report more happiness? The answer seems to be yes. But what about a different question: Do individual countries report more happiness as their incomes rise? Also, yes. The next graph looks the 25 biggest countries in the world and shows the linear relationship between well-being and household income.

(4) There is no "happiness plateau" (or it's much higher than we thought). Those lines tell us three important things. First, the lines go up. More money, more happiness. Second, the lines go up in parallel, more or less. Across language, culture, religion, ethnic background, the same amount of extra money seems to buy the similar amount of extra happiness. Third, the lines go up in parallel and they don't flatten out. There is no "Easterlin plateau", no satiation point, no bright line where money suddenly loses the ability to improve well-being....MORE

In March 2012 Sir Samuel Brittan pitched the conservative view in his Financial Times column:

The pursuit of happiness is no job for government

The pursuit of happiness has a venerable tradition in British political economy. Jeremy Bentham, the late 18th century founder of utilitarianism, defined it thus: "By the principle of utility is meant that principle which approves or disapproves of every action whatsoever, according to the tendency which it appears to have to augment or diminish the party whose interest is in question if that party be the community in general, then the happiness of the community; if a particular individual then the happiness of that individual. The interest of the community then, is what? - the sum of the interest of the several members who compose it."

This principle is not as obvious as it may sound. In Bentham's time it was challenged by many rival principles; for instance, judging actions by their contribution to French glory or the furthering of the Prussian state. Nearer to home it was challenged by the Aristotelian eudemonia, which valued happiness only so far as it contributed to the philosophical idea of a good life....MORE

Sir Sam got his knighthood "for services to economic journalism".
Me, I'll go with Robertson Davies:

Happiness is always a by-product. It is probably a matter of temperament, and for anything I know it may be glandular. But it is not something that can be demanded from life, and if you are not happy you had better stop worrying about it and see what treasures you can pluck from your own brand of unhappiness.