More on advocacy versus forecasting at Credit Writedowns

This is a quick note. About a year ago I told you there would be less policy advocacy and more policy forecasting at Credit Writedowns. It was clear to me then and it is yet more clear now that policy makers are wedded to their previously chosen set of policy remedies. In Europe, for example, I wouldn’t expect the ECB to step in as a lender of last resort unless things are on the verge of absolute collapse. How did I put it last week: “I expect the ECB to dither. The cognitive dissonance is too large.” That’s it exactly.

But should the ECB step in? In my post running through Italian default scenarios, I told you that’s really a meaningless question. Let me put it a different way: why would you give a flying leap – you know I wanted to use a different word, right? Why would you care if the ECB should do anything? Does that help you make money or help you keep your job? I’m not a European policy maker and I imagine neither are you. Put simply: it doesn’t matter what the ECB should do. It matters what they will do. See the difference?

Look, everyone gets hot under the collar about these thing, talking in very moralising terms.

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  • “The Greeks and Italians are profligate, lazy moochers, sponging off of us.” or
  • “The Germans and the Dutch are cunning little devils, free riding off of our weak currency.”
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You know the arguments. I don’t give a damn about any of that any more. It means nothing to my bottom line whether Greeks are deficit-loving euro sponges or Germans are mercantilist euro free riders. What matters is how the political economy of all of this plays out on the real economy and the financial markets.

Yeah, I have deficit fatigue, bailout fatigue, crisis fatigue – all of that. So what? The point has to be to look beyond the emotion, the ideology, and the national pride and figure out how this affects you and then protect yourself against downside scenarios. Hope for the best but plan for the worst!

What I have been telling you for nigh on four years now is that this is no garden variety recession or crisis. This is the big cahuna. And I think that means deficit fatigue, bailout fatigue, crisis fatigue – all of that – will enter the picture. Emotion, ideology, and national pride will affect policy choices, 100% guaranteed. And this will cause policy errors, gaffes of monumental proportions. That’s what an epic crisis means; it means forcing policy makers to get it right again and again and again or face economic Armageddon.

As the euro crisis has proceeded, I have been cognizant of this. Yet, I have believed that fear of economic collapse would continue to produce a pro-reflationary response – not that this response would be optimal, by the way. However, as we near the prospect of that collapse, the potential for crucial policy errors – ones that create deadweight loss and deflate the economy the most – increases and therefore it behoves us to play out the Black Swan scenarios. So that’s what I have started to do.

I have some additional thoughts on this score for a later date. I should add that reflating the economy isn’t necessarily the best economic policy – particularly if this reflation increases credit instead of writing it down. Credit Writedowns is the name of this site for a reason. So I will not ‘advocating’ reflationary policies for reflation sake. All I care about now is writing about how not to get caught out – avoiding monumental downside risks in investing and business decisions by getting the economics and the likely outcomes right and avoiding getting overly invested in ideology and morality plays. We are now in a permanent risk-off environment. Everything else follows from that. If you see me getting emotional and letting my moralising and my ‘feelings’ get in the way of my analysis, I hereby give you the permission to slap me upside the head to knock some sense into me. Anyway, that’s my piece.

We are still in fundraising mode here though! Thank you to everyone who has donated to the effort. I count 30 donors already! Very exciting. Go. GO. Go. Please keep it up. By the way, changes that have already been made since this began: we now have a server twice as powerful as the old one and the feed is now full feed instead of summary feed. Many more changes are to come with your help.

P.S> – Just because i say I want to avoid morality plays clouding my forecasting ability, doesn’t mean they won’t. This is where your knocking sense into comes into play and you can feel free to let loose in the comments.

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5 Comments
  1. Edp says

    You do a great job both in analytics and insight. I believe you once said that as a “people” lose faith in their countries institutions that those people become more tribal and tend to only deal with those they know. How many points of GDP growth does that shave off western democracies? An Unintended Consequence of leadership following the letter of the law but not the spirit of the law…a squandering of “goodwill”. Your recent postings on Congressional Insider trading and the failure of ISDA to “trigger” default on a 50% voluntary haircut were great.
       I reviewed the “Corernor” report on the Wicked Witch of the West from the 1939 movie “The Wizard of Oz. The corernor asserted that she, the “witch” was not only “really” dead but “truly and sincerely dead” as well!  Wow…there’s the distinction! So why not an insurance “life” policy that fails to pay because although you are really dead your not virtually dead, that your digital memory will live forever on cloud servers.
       It’s a mess out there…thanks for the compass!

  2. Edp says

    You do a great job both in analytics and insight. I believe you once said that as a “people” lose faith in their countries institutions that those people become more tribal and tend to only deal with those they know. How many points of GDP growth does that shave off western democracies? An Unintended Consequence of leadership following the letter of the law but not the spirit of the law…a squandering of “goodwill”. Your recent postings on Congressional Insider trading and the failure of ISDA to “trigger” default on a 50% voluntary haircut were great.
       I reviewed the “Corernor” report on the Wicked Witch of the West from the 1939 movie “The Wizard of Oz. The corernor asserted that she, the “witch” was not only “really” dead but “truly and sincerely dead” as well!  Wow…there’s the distinction! So why not an insurance “life” policy that fails to pay because although you are really dead your not virtually dead, that your digital memory will live forever on cloud servers.
       It’s a mess out there…thanks for the compass!

  3. Matt Stiles says

    So about forecasting, then.  Interested to hear your thoughts:

    Do you see a reversal of trade accounts as a result of Europe’s inevitable unwinding?  Will places like Italy and Spain be ripe for manufacturing investment at the expense of Germany due to the ability for the former to devalue their currencies? 

    Will other Anglosphere countries benefit due to the possession of sovereign currencies? 

    Will rising wages in China, protectionism, revaluation or bubble bursting cause a sharp drop in Chinese exports and drive a rebirth of manufacturing in the US?  Or will trouble elsewhere in the world keep the US dollar high and keep the trade deficit game going?

    What are interest rates likely to be 5 years, 10 years from now if the Euro collapses?  How will that affect capital flows along the structure of production?  Will makers of “higher order” or “lower order” goods be best off?  We’ve had a huge 40 year trend toward lower order.  Will that be reversed? 

    We keep hearing of demographic fundamentals that are not ideal going forward.  Entitlement program problems are related.  When will the tipping points be for these factors?  How will demographics influence policy? 

    Is political instability in the US and EU a Black Swan waiting to be hatched? 

    Who benefits? Who is affected most by the turmoil? 

    1. Matt Stiles says

      oops, just read “Running through Italian Default Scenarios” and you answered half of those questions already. 

    2. Edward Harrison says

      I think I got to a lot of that as you said but the entitlements are going to be a big deal this next century given longer lifespans and an aging population overall due to lower birth rates. Old people vote and so they will defend their benefits. This isn’t an immediate problem but something that will become ever more acute over the next 10 or 20 years.

      In the US, you also have ridiculous levels of military spending. I don’t see this coming down though. I think the US would rather run deficits than address the military budget meaningfully. Just my opinion of course.

  4. Matt Stiles says

    So about forecasting, then.  Interested to hear your thoughts:

    Do you see a reversal of trade accounts as a result of Europe’s inevitable unwinding?  Will places like Italy and Spain be ripe for manufacturing investment at the expense of Germany due to the ability for the former to devalue their currencies? 

    Will other Anglosphere countries benefit due to the possession of sovereign currencies? 

    Will rising wages in China, protectionism, revaluation or bubble bursting cause a sharp drop in Chinese exports and drive a rebirth of manufacturing in the US?  Or will trouble elsewhere in the world keep the US dollar high and keep the trade deficit game going?

    What are interest rates likely to be 5 years, 10 years from now if the Euro collapses?  How will that affect capital flows along the structure of production?  Will makers of “higher order” or “lower order” goods be best off?  We’ve had a huge 40 year trend toward lower order.  Will that be reversed? 

    We keep hearing of demographic fundamentals that are not ideal going forward.  Entitlement program problems are related.  When will the tipping points be for these factors?  How will demographics influence policy? 

    Is political instability in the US and EU a Black Swan waiting to be hatched? 

    Who benefits? Who is affected most by the turmoil? 

  5. Matt Stiles says

    So about forecasting, then.  Interested to hear your thoughts:

    Do you see a reversal of trade accounts as a result of Europe’s inevitable unwinding?  Will places like Italy and Spain be ripe for manufacturing investment at the expense of Germany due to the ability for the former to devalue their currencies? 

    Will other Anglosphere countries benefit due to the possession of sovereign currencies? 

    Will rising wages in China, protectionism, revaluation or bubble bursting cause a sharp drop in Chinese exports and drive a rebirth of manufacturing in the US?  Or will trouble elsewhere in the world keep the US dollar high and keep the trade deficit game going?

    What are interest rates likely to be 5 years, 10 years from now if the Euro collapses?  How will that affect capital flows along the structure of production?  Will makers of “higher order” or “lower order” goods be best off?  We’ve had a huge 40 year trend toward lower order.  Will that be reversed? 

    We keep hearing of demographic fundamentals that are not ideal going forward.  Entitlement program problems are related.  When will the tipping points be for these factors?  How will demographics influence policy? 

    Is political instability in the US and EU a Black Swan waiting to be hatched? 

    Who benefits? Who is affected most by the turmoil? 

    1. Matt Stiles says

      oops, just read “Running through Italian Default Scenarios” and you answered half of those questions already. 

    2. Edward Harrison says

      I think I got to a lot of that as you said but the entitlements are going to be a big deal this next century given longer lifespans and an aging population overall due to lower birth rates. Old people vote and so they will defend their benefits. This isn’t an immediate problem but something that will become ever more acute over the next 10 or 20 years.

      In the US, you also have ridiculous levels of military spending. I don’t see this coming down though. I think the US would rather run deficits than address the military budget meaningfully. Just my opinion of course.

  6. Jim H says

    The forecasting aspect of your blog is what I like the most about it. I avoid “advocacy blogs” of all stripes for many, many reasons – not the least of which because they are useless in determining “what comes next.” Advocacy blogs are also horrific in choosing their facts and ignoring those that are inconvenient to their arguments.

    That said…I still think people enjoy hearing your own “morality” from time to time, Edward. I know I do, anyways. There’s nothing wrong with forecasting while at the same time stating, clearly, your own views about the topic (aka…you think this event will happen due to ‘these reasons’, but that if ‘this policy’ was followed things would be better). You’ve done that quite well on this blog, I’ve thought. Or to phrase it another way, I think you do a superb job of mixing in your forecasts along with presenting your own views on topics.

  7. Anonymous says

    The forecasting aspect of your blog is what I like the most about it. I avoid “advocacy blogs” of all stripes for many, many reasons – not the least of which because they are useless in determining “what comes next.” Advocacy blogs are also horrific in choosing their facts and ignoring those that are inconvenient to their arguments.

    That said…I still think people enjoy hearing your own “morality” from time to time, Edward. I know I do, anyways. There’s nothing wrong with forecasting while at the same time stating, clearly, your own views about the topic (aka…you think this event will happen due to ‘these reasons’, but that if ‘this policy’ was followed things would be better). You’ve done that quite well on this blog, I’ve thought. Or to phrase it another way, I think you do a superb job of mixing in your forecasts along with presenting your own views on topics.

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