Why am I holding Euros???

The most obvious question to oneself these days, especially if one's a fund or an institutional, is Why aren't we bailing out of Europe...If you're the client, the question to your advisor: Why are you holding on to Euros?  The obvious explanation is: cognitive dissonance. The hypothesis was advanced by  psychologist Leon Festinger (1957).It became popular among political pundits and business types quite rapidly when, years later,  Newell and Simon* integrated Festinger's insights into their own hypothesis concerning human problem-solving.

The Newell-Simon model as it is now labelled, named after Allen Newell and Herbert Simon,  describes how human beings make decisions, ie. solve problems. It becomes especially enlightening when it describes how people react during the intellectual logistics of problem-solving: the intelligence phase, design phase and choice phase.

How do investors react to conflicting attitudes: you hold Euros but everyone calls a crash.

Decision-makers, when in doubt,  will "listen" 'more' to information that supports their belief system than to information that disrupts or questions their belief system.  The underlying hypothesis is that the individual seeks to reduce dissonance or accompanying discomfort created by conflicting information that undermines his position. He will settle for 'satisficing' information without claim to making the optimal decision.

But in many cases, he will side with inputs that justify his original position. Of course, the more individuals are rationally bound (you don't have all the info) the more they will attempt to adjust in a timely satisficing way to the facts. If the former, You could be a die-hard and lose your pants and that of your clients, notwithstanding the information;  if the latter, you could be pragmatic, give yourself and others the benefit of the doubt, and bail-out. After all, the well-known economist and investor John Maynard Keynes evoked the perfect reaction to relieve the dissonance: "When the facts change, I change my mind. What do you do, sir?"

So why are some investors still holding on to the Euro securities...for the same reasons that some European leaders keep promoting austerity measures for public policy notwithstanding the adverse results being generated in  Greece, Spain and Italy.

The dissonance:
Firstly, even though things are difficult in Europe, they're difficult all-around the world. Some will argue that they're already overexposed in equities, in BRICs, in US and other sovereign currency-issuer securities, and even gold-it can collapse on a wind-shift....after which deliberation they move on and argue the next....

...Eurozone economies are not in as bad a condition as selected data suggest. It's quite reasonable to experience hiccups during 'policy transitions' after traveling over rocky roads. And Southern European roads are very rocky according to northern Europeans. Things will smooth themselves out over time. The worst case is if Greece defaults. Let it exit. Nudge Greece out gracefully. The Zone is saved.  This is the message that is being conveyed by European leadership as social tensions in certain countries become more forceful. If that doesn't work out as planned....they move on and argue the next....

...Europe is 'too big to fail'. (Remember Lehmann et al). The US and China won't let it happen- this is Europe, not some mismanaged bank. Some refer to this position as highly speculative; other would consider it quite realistic. Either way, their rationalization recalls Lord Byron's popular but mistranslated line found in his Childe Harolde's Pilgrimage :

   When falls the Coliseum, Rome shall fall;
   And when Rome falls--the World.'

The Eurozone rendition is "When falls the Euro, Europe shall fall; And when Europe falls---the World."

It would carry more credence if it was the US, however.

Here's my take:  If China's growth is projected downwards, if Germany's order book starts doesn't refill to 2010 levels (I don't think it will refill for a long while) and  growth in the US is revised downwards, then you should have bailed to liquid USD, until the facts change!!! If you didn't, think about it.

*I credit Fictional Reserve Barking, Oct 2, 2011, author (Circuit, ) and reader  (JHCraw) for the reference to Herbert Simon's work.

Fictional Reserve Barking invites Keynes and Godley  to Dinner 

Fictional Reserve Barking (FRB), not yet completed its first anniversary from inception, has assumed the role of one of the most daring commentaries on national and international political and economic policy on the B-sphere. Admittedly sympathetic to post keynesian monetary theory, FRB has again challenged the reasonableness and timeliness of everyman's expectation that Central Bankers cause and hence should solve all the problems of Government and Public Finance. In its December 31, 2011 issue, FRB has demonstrated again why it is considered a must and best read for economic policymakers and pundits alike. Never faltering from its underlying prescriptive mission, FRB continuously substantiates the empirical legitimacy of its optics, realigning and calibrating vision as the facts require, but never wavering on the paradigm invoked.

To say that Fictional Reserve Barking and its prolific author Circuit, is merely a keynesian sounding board is to demean the intellectual prowess of its endeavor. To even suggest is to stunt the brilliant insights that Circuit and moreso the FRB's Wall of Fame profess. And Wall of Fame it is! Among the cherished heritage FRB preserves and promotes, one finds classic Keynes, Galbraith, Godley in continuous medley with such contemporary classicists Lavoie, Seccareccia, Volcker, Bernanke, Wolf, Wray, Krugman, Mosler, Lerner,  the BIS. Never admonishing, always respectful, FRB is a classical Podium of Great Policy in the making.

As one of its readers noted a while back, FRB never assumes as own the merit of others: it is by far the most serious and integral online conversation in political economy in the language, similar to Martin Wolf of the Financial Times for both scope and depth, and come the day, as notorious.

You may not agree with the script , but you never move on offended. Accessing FRB is like sitting back for a brilliant and enjoyable conversation over the dull-made-glamorous. There was a time when accountants and investment bankers were boring. Then they became glamorous-pin-up persons for the young and ambitious. History has shown them rich yet infamous and forever dull. FRB makes policymakers, economists and central bankers the new pin-ups: exciting, audacious, bright and magnanimous when they have courage, but not necessarily rich. Therein lies the rub! or is it the crux?

The latest FRB commentary on the role of the Bank of Canada in defining economic policy and delimiting monetary responsibility from fiscal initiatives, and then going on to analyze the impact of deficit spending on household and business investment is a superb application of Godley's sectoral balance to Canadian political economy and the planning process for 2012 Canadian public finance.

Take the time to savor the latest Classic on Carney, Household Debt, Bank of Canada and Government spending:

It'll change the way you look at economic policy.

Happy New Year.

Washington Post, Mr. Strauss-Kahn, IMF and the EuroDebt Crises

The Washington Post highlighted an article dated June 6, 2011 covering the Strauss-Kahn vs Sofitel Hotel Maid. One should restrain from commenting the case. The courts will decide on whether there are legal consequences to Mr. Strauss-Kahn's actions, and the French people will decide the political future of Mr. Strauss-Kahn.  

The human interest perspective of the article was intelligent and very refreshing. In general, the article would have been excellent had it not been for one unfortunate mishap. Early on, one reads incredulously the comment by the Post's journalist- Mr. Brad Dennis, who is following the case:

"Monday’s hearing was the latest development in a scandal that has sparked an  international media frenzy, tossed the IMF into chaos and endangered the agency’s efforts to stabilize the European debt crisis."

I have a problem appreciating that the IMF is in state of chaos and a greater problem understanding why  Mr. Strauss-Kahn's absence from the IMF should endanger the efforts to stabilize the European Crisis.

The man has been with the IMF for four years since 2007. His  presence certainly did not prevent the global financial collapse of recent years that surfaced in 2007, nor did it appease the intensity of subsequent recessions, nor contain the quasi meltdowns of Iceland and Ireland and the debt crises of Greece and Portugal. This type of hyperbole or if it's the rendition of a third-party remark should be cautioned.

One can appreciate the figurative scope of the comment had it been a Keynes or a Mr. Paul Volcker. Even then! I am certain that Mr. Strauss-Kahn does not perceive himself in the same league as the former two, nor with Messrs. Bernanke or Greenspan. Nor did he aspire to be in that league. Mr. Strauss-Kahn's ambitions were, metaphorically speaking, groomed for greener fields.

The IMF as an institution is not charismatic, and its governors do not intend that it be predicated as such.  One hesitates to think of the embarassment felt by IMF personnel when one suggests that their reputations are tied to one person. One hesitates to think of the embarassment felt by its governors when a reputable newspaper suggests that the organization they oversee is only one layer deep and just that good!

If either is the case, spare the needy the expense of a sham and close it down.

That the future of Greece, of Portugal, indeed of the Eurozone Debt-Crisis, or any other sovereign in the world should be yoked in this manner to Mr. Strauss-Kahn, is inconceivable and moreso unacceptable. Mr. Strauss-Kahn is a competent economist, and was a fine Minister of Finance; but to reduce an Institution whose global stature and mandate is so critical to the development and stability of one hundred eighty-seven countries, to one person is scandalous! Mr. Strauss-Kahn himself would disapprove the comment.

If the above turmoil and discomfort is true, that is also a scandal.  Then some overseers and regulators should have the courage and decency to step down for having failed to ensure transparency and accountability, and be replaced with competent people.

If, on the other hand, the IMF is in chaos because the incident in New York can unravel other similar disclosures, that is a governance issue of a different type. The readership requires the precision to avoid such ambiguity. 

On the succession issue: one should caution the Eurocentrism that is pervading the IMF and the World Bank. There are very good people with very good ideas beyond Europe, quite deserving of the opportunity to change things and make a difference.

This is a reprint of a posting that appeared on June 8, 2011

41st Parliament and the Rise of Rhetoric

Somewhere in the Maritimes, a brilliant and distinguished historian, former student of an indomitable icon-blaster, is writing the History of Canada: The Harper Moment 2011-2016. 

That’s a long time ago!

She wears original fabrics: brands that are now fetish. She recalls with some nostalgia the Scottish-British, New England-American and Italian origin of the wears. Her spouse anecdotes that she enjoys the classics: George Eliot, George Sand and Colette. He enjoys William Vollmann and David Foster Wallace: reads vintage 50 years and over. Eclectics and dandies are all classics by now. Classic types form a perfect mélange. I never asked her why she wore no Canadian fabrics.

I was asked to read her final manuscript. When publishers ask for my ‘feelings’. I usually insinuate that the texts no longer feel like Pauline Kael, George Woodcock or James Wood. 

In this author's case, the impression is different. In her introduction, our distinguished historian cites Santayana: Those who cannot remember the past are condemned to repeat it. Thereto, she narrates by metaphor and analogy. As such, the story of the 41^st Parliament is an assemblage of brilliant minds, like the Solvay Conference of 1927, wherein participated the best and the brightest (who quilled that?) minds of the time to declare the 'correct version' of quantum theory. That’s a long time ago!  Almost one hundred twenty-five years ago, and as an aside,  although there was some compromise over the  'better version', not the definitive version, physicists still don’t understand the theory. To some extent, Parliament is also about versions of national interest and national solutions to problems in dealing with that reality, wherein hopefully, the better solution will be found and implemented.

The author will reconstruct the ‘road taken’ that led to that monumental rhetorical theatre that marked the beginning of an epochal political assembly. She will narrate the rise of a lone-gun, Mr. Stephen Harper, the  devolution of a Liberal tradition with Messrs. Martin and Ignatieff, la Grande Seduction of Mr. Layton and the parsimonious and successful campaigns of both talented Mrs. May and Mr. Mulcair.  Mostly, she commends the Return of the Natural: sine qua non-Mr. Robert Rae. It would have been a great assembly without Mr. Rae; it became a monumental Parliament with Mr. Rae. All Halberstam's best came to town for this High Noon.

She further emphasizes in her Introduction that ‘No Commons had auspiced such eloquence as the 41^st Commons. No assembly of able voices had delivered their prescriptions and denouncements with such thunder, abandon and conviction within the walls of the Commons since the Golden Ages of Canadian Oratory which had witnessed the towering elocutions of Diefenbaker, Douglas, Pearson, Trudeau, and then the riveting interlocutions between Trudeau, Stanfield, Caouette and Broadbent. In fact, no Parliament in recent memory could evince so much controversy, vibrato, passion vexation and admiration as the 41^st Parliament’

The author singles out the personas: the audacity and confidence of Mr. Harper, the compassion and incisiveness of Mr. Layton, the passion and insight of Mr. Rae, and the  trenchant pindarisms of Messrs. Dion,  Mulcair, Coderre, May, Goodale, Cotler-all versing and reversing History; all and more deciding and non-deciding the future of the Criminal Code; disclaiming visions and  claiming revisions of the Electoral Map-all embattled veterans and inspired novices denouncing injustices towards seniors, workers, families, inadequate pensions, inappropriate working conditions, climate change, first nations, minorities, regional development and on...all glazed by the revel of high rhetoric.

As enlightened a critic and competent an author, she will focus on the semiotics that embellish and legitimate the oral bravados and bravuras of  great Parliamentarians. She will highlight that Mr. Harper, alone, won a majority Government without Quebec; that Mr. Layton became the first federal NDP leader to assemble a Loyal Opposition and carry  the Quebec majority, that Mrs. May was the first leader of the Green Party to bench as sole representative of her Party and finally, our distinguished scholar will underline that Mr. Rae-after a self-imposed political exile, as some say, returned to lead a liberal opposition, attempt to rebuild a tradition whose ways and means were fragmented and scattered in places so unknown as to be forgotten. It was a session where Messrs. Harper and Rae traveled the country more than any Leaders of  previous decades-the former redefining charisma and the ‘average Canadian’, the latter constructing an appropriate organization and redefine the Liberal tradition.  Mr. Harper, according to our author, will have succeeded; Mr. Rae will have encountered too many politically illiterate obstructions that should have been shelved up front.

On the strategic plane, Mr. Harper will have adjudicated his Government’s fiscal and industrial policy in the midst a strong Canadian dollar, of rising unemployment, growing income disparity and regional disparities, depleting housing and health services, increasing federal, provincial and municipal deficits and overall increases in debt-servicing. Notwithstanding, our distinguished historian will point out the institutional cautions of the Bank of Canada, the IMF and the World Bank in face of a resurgence of Keynes, circuit theory,  and chartalism which signaled the oncoming of another major seismic rupture in the classical economic model- the same undetected symptom that had preceded and perpetrated the financial collapse of 2007 and the ensuing recessions, and had pervaded the ineffectiveness and undermined the economic policy efforts of Mr. Harper's minority governments. She identifies Mr. Harper's success notwithstanding this global pandemonium,  resulting from his intelligent rendition of Canada’s performance in contrast to the declining growth rates and higher unemployment rates of the European and the American economies, but avoiding comparisons with evident economic prosperity in industrial Asia.  In fairness, she counterpoints the passionate interventions of Messrs. Layton and Rae, in that order, who remind the Government of the continuous depletion of natural resources and public infrastructure, the increasing costs of education, health and transportation, the commensurately decreasing quality of services in those sectors, and the insidious threat of privatization of critical public assets as well as the significant decline of per capita net disposable income. In a vein similar to her opposition colleagues, Mrs. May's ire will raise subtle bickers when she exposes the disinvestment of the government towards the environment and voice her concern that Canada's position in securing the contracted compliance in that sector is no longer credible, as is its foreign policy with respect to the Arctic no longer credible. Mr. Rae and Mr. Layton will remind Government of the heightening tensions in federal-provincial relations, impoverished conditions of Canadian fresh water supplies, fisheries and the timber industry and will raise the stakes of the deliberation pointing out the demise of Canada's manufacturing industry, the burden of taxation on a shrinking  middle-class and the global snicker that Canada is returning to a primary sector economy with an underlying dependency matrix. All, from the Ottawa Assembly, at High Noon.

Our author will conclude her introduction by citing the indomitable M. Marcel Trudel, vindicated by Quebec after generations of neglect by political clerics that either couldn’t read the great rogue mind and/or had no clue how to decode meanings from facts and data.  She will then rhetorically challenge the readership to find another modern-era Canadian Parliament whose participants had displayed more intensity, more imagination and more passion deliberating the State of our Union.

She will acknowledge in an epilogue the long and fruitful discussions she cherished with another renowned historian, credit the best of the script to him and the worst to herself while

somewhere in Alberta, the credited historian, renowned through his own efforts,  student of the implacable ironist and tyrant of the word, will be editing his Master's wits, dating the latter's dantesque memoirs, proofreading speeches, articles, and resetting the correspondence for his second volume on The Fall and Rise of Canadian Polity: The Orators. He will outline  Speaker Milliken’s era which preceded the Harper Moment and highlight the selection of young Mr. Sheer as Speaker for the 41st Parliament of Canada….and after a slight distraction, refocused his thoughts and selecting a HB 2, Mirado classic pencil from his leather pouch, will jot down in his three-holed Hilroy Canada Exercise book from his own childhood “By ascribing a Moment to the Harper term, my most distinguished colleague lavishes enormous notoriety upon Mr. Harper in anticipation of Clio's verdict.”
...and then returning to his own work, footnotes besides a circle of names ‘Ambition…the glorious fault of angel and gods’ [Alexander Pope].

[Part 2 to be continued]