During the recent US presidential election, California voted to change it’s state constitution to exclude gay couples from being married (proposition 8). Prior to the election, the Californian supreme court had overturned a regular law that banned gay marriage as being unconstitutional. Thus the (successful) move by social conservatives to change the state’s constitution.
Via Andrew Sullivan (1, 2, 3, 4) and in a demonstration of the move towards David Brin’s “Transparent Society,” I give you http://www.eightmaps.com where you can see the names, addresses, employer and amount donated of everybody that gave money to the proposition 8 campaign, all arranged on a Google Maps mash-up.
What a phantasmagorically strange conflict the Arab-Israeli war had become! Here was a Saudi-educated, anti-Shiite (but nevertheless Iranian-backed) Hamas theologian accusing a one-time Israeli Army prison official-turned-reporter of spying for Yasir Arafat’s Fatah, an organization that had once been the foremost innovator of anti-Israeli terrorism but was now, in Mr. Rayyan’s view, indefensibly, unforgivably moderate.
I don’t want to take a side here, just marvel at the incredible ability of the human mind to twist itself into such knots of conspiracy and ideology.
Brad Setser (there are lots of pretty graphs on his site):
There is only one way to square a record trade surplus with the sharp fall in reserve growth:
Hot money is now flowing out of China. Here is one way of thinking of it:
The trade surplus should have produced a $115 billion increase in China’s foreign assets. FDI inflows and interest income should combine to produce another $30-40 billion. The fall in the reserve requirement should have added another $50-55 billion (if not more) to China’s reserves. Sum it up and China’s reserves would have increased by about $200 billion in the absence of hot money flows. Instead they went up by about $50 billion. That implies that money is now flowing out of China as fast as it flowed in during the first part of 2008.
And in December, the outflows were absolutely brutal. December reserves were up by $20 billion or so after accounting for valuation changes – but the fall in the reserve requirement alone should have pushed reserves up by at least $25 billion. Throw in a close to $40 billion trade surplus and another $10 billion or so from FDI and interest income, and the small increases in reserves implies $70 billion plus in monthly hot only outflows … That’s huge. Annualized, it is well in excess of 10% of China’s GDP. Probably above 15%.
The mystery being, of course, who is doing the “hot money” transfers. Chinese companies? Investors from Taiwan or Hong Kong? Investors from further abroad? Brad seems to suspect the second:
Over time, if hot money outflows subside, China’s reserve growth should converge to its current account surplus (plus net FDI inflows). That implies ongoing Treasury purchases – though not at the current pace – barring a shift back into “risk” assets. And if hot money outflows continue, watch for Hong Kong and Taiwan to buy more Treasuries. The money flowing out of China doesn’t just disappear … it has to go somewhere.
Alex Tabarrok has had an interesting idea. It’s short enough to quote in its entirety:
Rationality is a property of equilibrium. By this I mean that rationality is habitual and experience-based and it becomes effective as it becomes embedded in the rules of thumb and collective wisdom of market participants. Rules of thumb approximate rational decision rules as market participants become familiar with an economic environment. Individuals per se are not very rational; shift the equilibrium enough so that the old rules of thumb no longer apply and we are likely to see bubbles, manias, panics and crashes. Significant innovation is almost always going to come accompanied with a wave of irrationality. When we shift to a significant, new equilibrium rationality itself is not strong enough to tie down behavior and unmoored by either reason or experience individuals flail about liked naked apes – this is the realm of behavioral economics. Given time, however, new rules of thumb evolve and rationality once again rules but only until the next big innovation arrives.
It seems appealing to me on a first read, but there are plenty of questions to go with it.
There is a language difficulty here. On one level, an equilibrium is defined by the actions of everybody aggregating to demand and supply in any given instant, so we are always in an equilibrium by definition. On another level, an equilibrium is a deeper, fundamental attractor that (at least in the short run) exists independently of people’s choices. In what follows, I will call the first “where we are” and the second “the attractor”.
Why would agents use rules of thumb instead of making decisions on a fully-rational basis? Is it just because they aren’t entirely rational people (not very satisfying) or are there constraints that induce a fully rational individual to use rules of thumb?
Under what market mechanisms do the individually sub-rational agents aggregate to collectively rational decision-making when we are close to the attractor and – potentially – to collectively irrational decision-making when we are far away from the attractor?
What form of decision rules do the sub-rational (rule of thumb) agents use? Could we say that agents use taylor-series approximations around the point they believe to be the attractor, with the exact location of the attractor being uncertain? If so, would it be interesting to imagine that simple agents use first-order (i.e. linear) approximations and sophisticated agents use second-order (quadratic) approximations?
What is the source of uncertainty? With my example in the previous paragraph, why doesn’t everybody instantly know the new location of the attractor and adjust their rules of thumb accordingly?
How do agents learn? Could we bypass this question by proposing that agents update their understanding of where the attractor is in a manner analogous to firms setting prices in the Calvo pricing (i.e. a fixed percentage of agents discover the truth in any given period)?
Important: Much of this post is mistaken (i.e. wrong). It’s perfectly possible for America to have an M1 money multiplier of less than one even if they were an entirely closed economy. My apologies. I guess that’s what I get for clicking on “Publish” at one in the morning. A more sensible post should be forthcoming soon. I’m leaving this here, with all its mistakes, for the sake of completeness and so that people can compare it to my proper post whenever I get around to it.
Update: You can (finally) see the improved post here. You’ll probably still want to refer back to this one for the graphs.
At the time of writing, the latest figure (for 17 December 2008) was 0.954. That’s fascinating, because it should be impossible. As far as I can tell, it has been made possible by the wonders of financial globalisation and was triggered by a decision the US Federal Reserve made at the start of October 2008. More importantly, it means that America is paying to recapitalise some banks in other countries and while that will help them in the long run, it might be exacerbating the recessions in those countries in the short run.
Money is a strange thing. One might think it would be easy to define (and hence, to count), but there is substantial disagreement of what qualifies as money and every central bank has their own set of definitions. In America the definitions are (loosely):
M0 (the monetary base) = Physical currency in circulation + reserves held at the Federal Reserve
M1 = Physical currency in circulation + deposit (e.g. checking) accounts at regular banks
M2 = M1 + savings accounts
They aren’t entirely correct (e.g. M1 also includes travelers cheques, M2 also includes time/term deposits, etc.), but they’ll do for the moment [you can see a variety of countries’ definitions on Wikipedia].
The M1 Money Multiplier is the ratio of M1 to M0. That is, M1 / M0.
In the normal course of events, regular banks’ reserves at the central bank are only a small fraction of the deposits they hold. The reason is simple: The central bank doesn’t pay interest on reserves, so they’d much rather invest (i.e. lend) the money elsewhere. As a result, they only keep in reserve the minimum that they’re required to by law.
We therefore often think of M1 as being defined as: M1 = M0 + deposits not held in reserve.
You can hopefully see why it should seem impossible for the M1 money multiplier to fall below 1. M1 / M0 = (M0 + non-reserve deposits) / M0 = 1 + (non-reserve deposits / M0). Since the non-reserve deposits are always positive, the ratio should always be greater than one. So why isn’t it?
Step 1 in understanding why is this press release from the Federal Reserve dated 6 October 2008. Effective from 1 October 2008, the Fed started paying interest on both required and excess reserves that regular banks (what the Fed calls “depository institutions”) held with it. The interest payments for required reserves do not matter here, since banks had to keep that money with the Fed anyway. But by also paying interest on excess reserves, the Fed put a floor under the rate of return that banks demanded from their regular investments (i.e. loans).
The interest rate paid on excess returns has been altered a number of times (see the press releases on 22 Oct, 5 Nov and 16 Dec), but the key point is this: Suppose that the Fed will pay x% on excess reserves. That is a risk-free x% available to banks if they want it, while normal investments all involve some degree of risk. US depository institutions suddenly had a direct incentive to back out of any investment that had a risk-adjusted rate of return less than x% and to put the money into reserve instead, and boy did they jump at the chance. Excess reserves have leapt tremendously:
Excess Reserves of Depository Institutions (USA, Accessed: 7 Jan 2009)
Adjusted Monetary Base (USA, Accessed: 7 Jan 2009)
If we think of M1 as being M1 = M0 + non-reserve deposits, then we would have expected M1 to increase by similar amounts (a little under US$800 billion). In reality, it’s only risen by US$200 billion or so:
M1 Money Stock (USA, Accessed: 7 Jan 2009)
So where have the other US$600 billion come from? Other countries.
Remember that the real definition of M1 is M1 = Physical currency in circulation + deposit accounts. The Federal Reserve, when calculating M1, only looks at deposits in America.
By contrast, the definition of the monetary base is M0 = Physical currency in circulation + reserves held at Federal Reserve. The Fed knows that those reserves came from American depository institutions, but it has no idea where they got it from.
Consider Citibank. It collects deposits from all over the world, but for simplicity, imagine that it only collects them in America and Britain. Citibank-UK will naturally keep a fraction of British deposits in reserve with the Bank of England (the British central bank), but it is free to invest the remainder wherever it likes, including overseas. Since it also has an arm in America that is registered as a depository institution, putting that money in reserve at the Federal Reserve is an option.
That means that, once again, if Citibank-UK can’t get a risk-adjusted rate of return in Britain that is greater than the interest rate the Fed is paying on excess reserves, it will exchange the British pounds for US dollars and put the money in reserve at the Fed. The only difference is that the risk will now involve the possibility of exchange-rate fluctuations.
It’s not just US-based banks with a presence in other countries, though. Any non-American bank that has a branch registered as a depository institution in America (e.g. the British banking giant, HSBC) has the option of changing their money into US dollars and putting them in reserve at the Fed.
So what does all of that mean? I see two implications:
Large non-American banks that have American subsidiaries are enjoying the free money that the Federal Reserve is handing out. By contrast, smaller non-American banks that do not have American subsidiaries are not able to access the Federal Reserve system and so are forced to find other investments.
The US$600+ billion of foreign money currently parked in reserve at the Fed had to come out of the countries of origin, meaning that it is no longer there to stimulate their economies. By starting to pay interest on excess reserves, the US Federal Reserve effectively imposed an interest rate increase on other countries.
In the USA, the CBO has just released a microscopically-detailed breakdown on how federal taxes are paid for by household for the years 1979 through to 2005 inclusive. Everything is provided by quintile, with the top 20% being broken down into percentiles 81-90, 91-95, 95-99, 99.0-99.5, 99.5-99.9, 99.9-99.99 and the top 0.01%.
It includes, for each of those groups:
Effective Federal Tax Rates (Total Tax, Individual Income Tax, Social Insurance Tax, Corporate Income Tax and Excise Tax);
The share of federal government revenue for each of those;
