12 Aug

CPI read

US inflation (CPI measure) was 5.4% annualized in July, a rate unchanged from the previous month and fractionally above expectations.

Crude stocks were marginally less down than expected.

The Senate passed a $1T (i.e. $1MMM) infrastructure bill, with cross party support. A federal budget framework of $3.5T was also agreed by the Senate (very narrowly, 50-49).

A deficit of $302MMM was notched up in July. At that rate, that’s a deficit of $3.6T: a lot of money. A trillion here, a trillion there, and pretty soon we’re talking real money. Stocks went up, more all time highs. The dollar dropped to 93 (DXY), but it’s still very high. Treasuries were unbothered. Nothing matters, until everything matters. The sentiment of the market is that everything will turn out OK. Maybe that’s correct. The market is probably an unbiased indicator.

UK Housing market

Banks are problematic institutions. They transform illiquid risky assets into money, which is liquid and risk free. But they can only do this by assigning all the risk to the government. Ultimately, governments cannot afford, politically, to see bank deposits vaporized. So all the incentives for bankers to balance risk and reward, at least as far as risk to depositors is concerned, is removed. To compensate for this, banks are subject to mind-bogglingly complex regulation to prevent them taking too much risk. The result of this is that banks compete with each other by being better at finding loopholes in the regulation. Every so often there is a crash, taxpayers bail out the banks, and another set of loopholes is plugged, but only at the cost of making bank regulation even more complex and gameable.

Because housing and land constitutes by far the biggest asset on banks’ balance sheets, the side effect of this policy is to make housing a one-way bet for investors, but an unaffordable luxury for those who want to actually consume housing services.

It’s a mess. It’s becoming a consensus on the left that it’s a sort of conspiracy to enrich the rentier class. I don’t actually think this narrative is true. It’s more likely that some reasonable-sounding policies to improve the stability of the financial system had unforeseen consequences. But, whatever the origin of the problem, it has become a very serious one and has created a formidable intersection of interest groups which see radical reform as likely to do them serious economic harm.

Tyranny of merit

I just listened to Luigi Zingales and Bethany McLean interview Michael Sandel about his latest book. For a review, look here.

Sandel argues that we all rationalize unjustified rewards. It’s hard to believe we passed an exam because we were lucky with our choice of parents.

He argues that Blair & Clinton & Obama had a rhetoric of meritocracy, which resulted in their parties being abandoned by the very voters those parties were established to represent.

The willingness of the Democrats to become the party of producer interest and concentrated power is the story of the last few decades. It was played out not only in the USA but in the UK and Western Europe too. It has lead to the rise of demagoguery exemplified by Trump, Farage, Orban and le Pen (senior and junior).

He argues that the GFC showed that the highly rewarded leaders of the finance industry were actually not very good at their job. Insanely, Jamie Dimon is now a multi-billionaire for vaporizing the equity of the bank where he was the CEO.

He also points out that it is difficult to separate out monetary reward from respect. This is true in the USA, but maybe elsewhere. The heavier taxation of income from labour than income from capital shows the balance of priorities. The ludicrous “carried interest exemption” shows where power lies in modern society.

A few other thoughts:

• Meritocracy does not recognize the contribution of others to the success of leaders.
• Economic price is a measure of scarcity relative to demand. To a large extent, this is a measure of luck. The ability to master contour integration or matrix algebra would not have resulted in any special status in almost every human society that has ever existed, until today’s.
• Fewer and fewer class mixing institutions exist. The elite now travel in private jets and yachts, and no longer take the bus, as Harold Wilson undoubtedly did.
• There is an increasing separation of communities. America, and probably many other countries, are much more segregated by wealth than they ever were in the past.
• Equality of opportunity is a slippery concept. This is something that the elite struggle to comprehend, but the down and out has no problem with.
• A challenge for any meritocracy is a question of measurement. Almost always a proxy is used. A meritorious trader is one who made the biggest profits. But there is no assurance that this is a good measure of actual talent.