Keynes and Joan Robinson on Our Crisis
Only Keynes's animal spirits can intoxicate our hung-over economies
Neither increased government spending nor austerity can solve the world economy's problems on their own. We must give entrepreneurs a reason to rediscover their exuberance
- John Llewellyn
- reprinted with permission from The Observer, where it was published 22 August 2010
John Maynard Keynes at home in London, 1940. Photograph: Corbis
It was Joan who set me straight. Joan Robinson. Joan, who, as a young academic in Cambridge, had sat each evening at the feet of John Maynard Keynes. Joan helped me back in 1970.
I was experimenting with indicators of consumer and business confidence to see whether they could improve the ability of Wynne Godley's models of the British economy to track the data of the day. When Joan asked what I was doing and I told her, I was nonplussed when she replied that it was "not the point".
"Confidence indicators tell you only about the present," she said, "and that is not very important." What Maynard was concerned about, she went on, was "animal spirits" – the optimism of businessmen to borrow and spend today, even though the resulting output can be offered for sale only in a future that is intrinsically unknowable.
While Joan's riposte struck me forcibly, I did not for many years fully take her point. Today, however, I appreciate that what Joan was trying to get into my head was, and remains, of fundamental importance.
Every year, households and companies save part of their income. That saving has to be borrowed and spent, otherwise the economy slides into recession. But borrowing has to be paid back, and with interest, so it had better finance investment, rather than mere consumption.
Hence the fundamental significance of animal spirits. As Joan explained, entrepreneurs may be "confident" that their revenues will continue to exceed their costs. But that does not mean they will feel sufficiently spirited to expand capacity. That requires faith that, in the unknowable future, demand will be higher than at present.
That is broadly the situation in most western economies today. In aggregate, the corporate sector is in no mood to borrow on the scale needed to ensure that the economy's full rate of saving gets spent.
In response, governments have stepped in to fill that borrowing and spending "hole". By so doing, they are preventing demand from falling. But while it is currently easy for governments to borrow – to sell bonds – the resulting levels of debt will eventually worry investors. Then, as in the early 1980s, governments will have no option but to tighten fiscal policy. And that damages demand: 1982 saw zero growth among members of the OECD for the first time in its history.
OECD governments must therefore do what they reasonably can to inculcate the belief that the future will be a good one. But here opinion is divided. While it is too soon to be sure how much fiscal tightening each government will actually do, the rhetoric differs from country to country.
US policymakers judge that animal spirits are best maintained by keeping aggregate demand as high as possible near term. That is understandable. Americans fear depression – in the Great Depression, US output fell, peak to trough, by a staggering 30%, more than in any other country.
Reassuring continental Europeans, however, particularly Germans, about the future is likely to involve promising them that the state finances will remain sound, even if at the risk of weakening demand. That too is understandable. It was hyperinflation, not the Depression, that so fundamentally seared the German psyche.
So what of the UK? Are Britons more like Germans, or Americans? Probably, as in many cultural matters, they are in between, in which case UK political rhetoric, which places more emphasis on deficit reduction than in the US, but less so than in Germany, is understandable.
It is a pity that Joan is not alive today to talk to those who, in analysing a world that is increasingly globalised in trade, make the mistake of thinking that it also has a globalised culture. A full and proper recovery, when it comes, will happen because entrepreneurs' animal spirits are rejuvenated. The most that governments can do meanwhile is draw the best possible balance between supporting demand today and delivering a sound fiscal position tomorrow.
John Llewellyn is a partner in Llewellyn Consulting, was global chief economist at Lehman Brothers, and one-time head of economic forecasting at the OECD
Your editor has a personal crisis this morning and will file her daily blog for paid subscribers later today. Meanwhile I have posted something for our readers, all and including pre-subscribers, to ponder. The author is a New Zealander who sent me his article and got me permission to reprint it from The Observer, a British Sunday newspaper.
Closed-End Funds Beat ETFs
Macquarie's Economic Research (Australia) put out the cutely-titled Macqro Forecast today. It predicts for 2011 risks balanced between inflation and growth. Here are some extracts mostly about the Pacific Rim:
The Asian recovery of the past 18 months has been largely independent of developed world demand and there is a danger that an excessive focus on growth results in policy settings that are too loose.
Exports to China hit a sluggish patch, after being an important contributor to regional recovery in 2009. Some of this just seems to reflect an inventory cycle. Policy is also having an impact, both the clampdown on energy intensive industries and the administrative squeeze on real estate, although the latter started to ease. Overall it looks as though the soft patch for Chinese imports should prove temporary and growth seems likely to pick up in coming months, which should offset slower demand for Asian exports from G3.
Concerns about the global cycle might lead to a slight pause in the interest rate tightening cycle, although the rhetoric from central bankers suggests the situation will need to deteriorate significantly to prevent further rate hikes. A soft period for global growth leaves central banks behind the curve, considering that current policy settings are very loose and economic activity has normalised.
However, risks for 2011 seem fairly well balanced between inflation and growth, and we are less worried than consensus about inflation, consistent with our relatively conservative growth forecasts.
Macquarie is an investment bank Down Under.
Yesterday the stock rally faltered and gold went up sharply. Gold for December delivery, the most actively traded contract, gained $24.60, or 2%, to close at $1,271.70/oz on the Comex (NY Mercantile Exchange). Richard Suttmeier, chief market strategist for ValuEngine,, commented:
Gold broke out above this month’s risky level at $1263.8 to a new all time high at $1276.5. Lower yields and strong gold are signs of risk aversion.
While mine is a perverse reading of the election results, I think the Tea Party primary gains may actually help the Democrats. The new ideological players are unlikely to paddle for the center as we move toward Election Day. Scott Brown in MA went mainstream after he got a Senate seat; but I think some of the newbies are too nutty to do this.
Their doctrinaire commitment could allow the Democrats to paint themselves as the more sensible, more reliable alternative during the faceoff, picking up centrist votes and those of people who fear the unknown.
I think grizzly-bear moms and gold fit together and if my feeble political prognosticans prove valid, this is NOT a good time to stock up on precious metals. Because of the rising price, AngloGold-Ashanti, the leading African mining co, will raise $1.37 bn to unwind forward sales of gold which are hurting its earnings. AU entered into these contracts to finance new mine development, doing exactly the same thing that Ashanti Gold, then a Ghanaian company, did a decade ago before the last surge in gold prices. AU of Johannesburg, South Africa picked up the Ghanaian firm on the cheap as these hedges went very wrong. We had owned Ashanti and now look at hedge books before we buy gold mining stocks.
AU is using proceeds from this huge sale of equity and a convertible bond to remove the gold hedged which sold gold forward at under $450/oz. OF course this waters its stocks.
If you insist on buying gold, we have a suggestion below for paid subscribers.
Correction: in my blog yesterday I attributed the last paragraph about the idiocy of buying T-bonds to Warren Buffett. In fact the comment was by my source, Shawn Allen. I would love an angry phone call from the Oracle of Omaha, but in it interests of accuracy I am correcting the error now.
More about gold, emerging market bonds, potash, drug discovery, security, generics, and IT below. Instead of telling you the countries I am telling you the sectors at the suggestion of Jason from marketing. Mostly I am talking about closed-end funds. While most of my super performance results from our trolling the small and mid-cap markets of the world for neglected stocks offering great prospects, I am not going to ignore the biggest pricing anomaly out there, the discount on closed-end funds. Under economic theory, it should not exist, but happily for us, it persists and provides profit opportunities.
If you do not own the two stocks covered below, consider this a trading alert.
Warren Buffett Warning
Canadian newsletter editor Shawn Allen wrote quoting Warren Buffett about comparing expected returns from bonds and stocks. In his 1984 letter, Buffett states:
“We believe that many staggering errors by investors could have been avoided if they had viewed bond investment with a businessman’s perspective. For example, in 1946, 20-year AAA tax-exempt bonds traded at slightly below a 1% yield. In effect, the buyer of those bonds at that time bought a 'business' that earned about 1% on book value that moreover, could never earn a dime more than 1% on book), and paid 100 cents on the dollar for that abominable business.
“If an investor had been business-minded enough to think in those terms - and that was the precise reality of the bargain struck – he would have laughed at the proposition and walked away. For, at the same time, businesses with excellent future prospects could have been bought at, or close to, book value while earning 10%, 12%, or 15% after tax on book. Probably no business in America changed hands in 1946 at book value that the buyer believed lacked the ability to earn more than 1% on book. But investors with bond-buying habits eagerly made economic commitments throughout the year on just that basis. Similar, although less extreme, conditions prevailed for the next two decades as bond investors happily signed up for twenty or thirty years on terms outrageously inadequate by business standards.
“Today, once again investors are happily buying long-term bonds on terms that are outrageously inadequate by business standards. It's an abomination.”
Shawn edits www.investorsfriend.com
More for paid subscribers from Britain, Spain, Australia, Canada, Israel, and lots from Germany for a change.
Marxists and Markets
Starting Sept. 27, Euroclear, the inter-market bank settlement group, will accept payments and debits in renminbi, also called yuan, the Chinese currency, in which some Hong Kong securities, and all Shanghai and Shenzhen ones are denominated. There were about 70 bn RMB in Hong-Kong-settled transactions in H1 this year after the Bank of China allowed Hong Kong to settle trades in Chinese currency late last year. Based in Brussels, Euroclear handles cross-border transactions involving domestic and international bonds, equities, derivatives, and investment funds.
The market is still digesting the impact of the watered-down compromise on new capital requirements for banks. These will come into force in 7 years. The Bank for International Settlements, the central bank of central banks, in Basel, Switzerland, reached the so-called Basel III deal over the weekend. This Jean Claude Trichet called “fundamental to assure long-term growth and stability”. Mr. Trichet heads the European Central Bank which had to cut its own ambitious reform agenda because of German resistance to meaningful regulation short-term. Bank analysts, wise-men economists, and wise guys from back offices are still trying to figure out the impact, some saying the banks got a free pass, while others fear that even before the new reserves for risky business come into effect, the banks will have to start raising more capital to cover them. My comment will come later.
Here is an extract from one of the last short essays written by the late Tony Judt, published in The New York Review of Books dated Sept. 30, on Czeslaw Milosz's book, The Captive Mind. Judt wrote:
“When I first taught the book in the 1970s, I spent most of my time explaining to would-be radical students just why a 'captive mind' was not a good thing. Thirty years on, my young audience is simply mystified: Why would someone sell his soul to any idea, much less a repressive one? By the turn of the 21st century, few…American students had ever met a Marxist. A self-abnegating faith was beyond their imaginative reach. When I started out, my challenge was to explain why people became disillusioned with Marxism; today, the insuperable hurdle ...is explaining the illusion itself.
“Contemporary students do not see the point... Repression, suffering, irony, and even religious belief: these they can grasp. But ideological self-delusion?...
“There is more than one kind of capitivity...The true mental captivity of our time lives elsewhere. Our contemporary faith in 'the market' rigorously tracks its radical 19th century doppelgänger—the unquestioning belief in necessity, progress, and History. Just as the hapless British Labour chancellor in 1929-31, Philip Snowden, threw up his hands in the face of the depression and declared that there was no point opposing the ineluctable laws of capitalism, so Europe;'s leaders today scuttle into budgetary austerity to appease 'the markets.'
“But 'the market'--like 'dialectical materialsm'--is just an abstraction: at once ultra-rational (its argument trumps all) and the acme of unreason (it is not open to question). It has its true believers—mediocre thinkers by contrast with the founding fathers, but influential withal; its fellow travelers—who may privately doubt the cliams of the dogma but see no alternative to preaching it; and its victims, many of whom in the US especially have dutifully swallowed their pill and proudly proclaim the virtues of a doctrine whose benefits they will never see.
“Above all, the thrall in which an idology holds a people is best measured by their collective inability to imagine alternatives. We know perfectly well that untrammeled faith in unregulated markets kills; the rigid application of what was until recently th 'Washington consensus' in vulnerable developing countries—with its emphasis on tight fiscal policy, privatization, low tariffs, and deregulation—has destroyed millions of livelihoods... But in Margaret Thatcher's deathless phrase, 'there is no alternative.'
“It was in just such terms that communism was presented to its beneficiaries following World War II; and it was because History afforded no apparent alternative to a Communist future that so many of Stalin's foreign admirers were swept into intellectual captivity. But when Milosz published The Captive Mind, Western intellectuals were still debating among genuinely competitive social models—whether social democratic, social market, or regulated market variants of liberal capitalism. Today, despte the odd Keynesian protest from below the salt, a consensus reigns...
“There is nothing innocent about Western (and Eastern) commentators' voluntary servitude before the new-panorthodoxy...In this sense at least, they have something truly in common with the intellectuals of the Communist age. One hundred years after his birth, 57 years after the publication of his seminal essay, Milosz's indictment of the servile intellectual rings truer than ever: 'his chief characteristic is his fear of thinking for himself.'”
After that serious reading, here is part of a fun email I got from Elliott Gue which I have cut because it is full of lots of atmospheric chatter which is supposed to make you think he knows all about the plans of the Rockefeller family. Gue edits The Energy Stragegist and his note offers subscriptions to this weekly at $696/yr. We publish almost daily and charge less. Gue (or his marketeer) writes:
“This Under-the-Radar Millionaire-Maker is Paying a 10% Yield Right Now. And the Stock is Poised to Gap Higher in the Next 6 Months and Triple Upon Being Acquired!
“This deepwater driller that I believe the Rockefellers will move to seize control of is an offshore deepwater driller. The company operates a fleet of over 40 units comprised of drill ships, jack-up rigs, semi-submersible rigs and tender rigs. They have 7,000 employees across 15 countries on five continents.
“Consolidation in the offshore drilling rig industry is rapidly approaching. This narrowing of the field of play would only improve the pricing and earnings visibility for this millionaire-maker’s services.
“Such consolidation activities may be in the form of transactions for specific offshore drilling units or entire companies. I believe the Rockefellers will acquire this under-the-radar winner and then turn around and use the firm as a powerful M&A vehicle. This millionaire-maker will definitely take part in the future consolidation of deepwater oil extraction services.
“Future M&A activity aside, the company is on an amazing organic growth track. With a backlog of projects worth nearly $30 billion and rapid-fire expansion plans, current quarterly earnings targets are going to he hit and exceeded for years to come.
“The Founder and CEO is a Buccaneer Billionaire Who Has Been Compared to Oil Titan John D. Rockefeller!
“The founder of this under-the-radar deepwater driller comes from humble beginnings. The son of a welder, this modern-day Rockefeller used hardball tactics to build his company into a powerful deepwater driller.
“This entrepreneural genius made an early bet many thought was insane. Years ago, his company broke one of the cardinal rules of the rig business. It ordered two "ultra-deepwater" rigs, capable of drilling in waters at a depth of at least 7,500 feet, for nearly $900 million—on spec. It didn’t have a single contract from an oil company to guarantee them. Demand exploded and the company charges a whopping $600,000 a day for its services!
“The CEO sees years of strong demand ahead. And I’m inclined to believe that he’s right. After all, the amount of oil pumped from deepwater fields will double between 2010 and 2015, according to the U.S. Energy Information Administration. Douglas-Westwood, a consulting firm, says capital spending on deepwater oil will rise to $25 billion annually by 2012.
“Suffice it to say that the CEO is part of new breed of entrepreneurs that is busy reshaping the oil business. Having been described as secretive and a workaholic by the press, he appears to have the same business philosophy as John D. Rockefeller, who once noted publicly, “Competition is a sin.”
“The company is a winner. The CEO is great. But I saved the best part for last...”
For paid subscribers, I identify Mr. Gue's stock pick. Note that there is a “Rockefeller” subscription discount in effect for the first quarter of Mr. Gue's service, so it only costs $99, after which the regular price kicks in. There is also news from Israel, Canada, Australia, Thailand, Brazil, Britain.
Tonight is the beginning of Rosh Hashanah, the Jewish New Year,
celebrated for two days in the Diaspora where we live. There will be
no more blogs this week. The holiday starts in the evening, as is
standard for Jewish festivals, because of how the Bible defines the
start of a day (see below).
According to tradition, this is also the birthday of the whole world,
which was supposedly created in six days by a God Stephen Hawkings
says does not exist. Actually, the Bible story is taken with a grain
of salt also by the rabbis, if not by Bible-thumpers of the
The reason: the Bible is written in Hebrew, which rabbis can read.
Rather than starting off “in the beginning God created the heavens and
the earth”, the standard English translation, the Bible actually
begins with a more subtle verbal phrase. It reads more like “When in
the beginning, God was creating the heavens and the earth.”
The end of the first day's events is paradoxical too. Both in Hebrew
and in English, the day ends after God has created light. The key
phrase is: “It was evening, it was morning, of the first day.” The
problem is that there was no way to know it was evening, morning, or a
day, as the sun had not yet been created.
From this, astronomically savvy Jewish sages decided that maybe the
first day was a few million years long, corresponding to Big Bang or
whatever Hawkings and his fellows are positing now.
May you have a good, happy, healthy, and prosperous New Year. More for
paid subscribers from Israel, Britain, Mexico, Australia, Croatio,
Canada, Britain, Greece, Belgium, Chile, and Thailand.
Read more »
Jewish New Year
This newsletter was delayed by technical issues at the site. I am sending it regardless of the problems, which may make it hard to read, because of the coming Jewish holiday I am preparing for. The web hosting company has not responded to my calls and emails for 4 hours so they may have other issues.
Tonight is the beginning of Rosh Hashanah, the Jewish New Year, celebrated for two days in the Diaspora where we live. There will be no more blogs this week. The holiday starts in the evening, as is standard for Jewish festivals, because of how the Bible defines the start of a day (see below).
According to tradition, this is also the birthday of the whole world, which was supposedly created in six days by a God Stephen Hawkings says does not exist. Actually, the Bible story is taken with a grain of salt also by the rabbis, if not by Bible-thumpers of the evangelical persuasion.
The reason: the Bible is written in Hebrew, which rabbis can read. Rather than starting off “in the beginning God created the heavens and the earth”, the standard English translation, the Bible actually begins with a more subtle verbal phrase. It reads more like “When in the beginning, God was creating the heavens and the earth.”
The end of the first day's events is paradoxical too. Both in Hebrew and in English, the day ends after God has created light. The key phrase is: “It was evening, it was morning, of the first day.” The problem is that there was no way to know it was evening, morning, or a day, as the sun had not yet been created.
From this, astronomically savvy Jewish sages decided that maybe the first day was a few million years long, corresponding to Big Bang or whatever Hawkings and his fellows are positing now.
May you have a good, happy, healthy, and prosperous New Year. More for paid subscribers from Israel, Britain, Mexico, Australia, Croatio, Canada, Britain, Greece, Belgium, Chile, and Thailand.
Pity Rupert Murdoch 2nd try
Today my Wall Street Journal was not delivered so I called their toll-free number to complain. Wendy who answered told me there was a “transport alert” for Manhattan and that my paper would be delivered by the end of the afternoon. I told her that was not good enough and I wanted a credit for the missed paper. She then said “okay, if you go to the store and buy a copy” presumably somewhere outside Manhattan. This I agreed to do to get a refund for the undelivered issue. I have never run into this kind of interrogation over a missed paper before. Can it be that Rupert Murdoch is trying to cut costs?
Certainly he is embarrassed by the continuing revelations of cellphone tapping in Britain by another of his dailies, The New of the World. Now press secretary to British premier David Cameron, its former editor, Andrew Coulson, claims to have no knowledge of telephone intercepts beyond those for which he resigned in 2007. This was over the calls between Princes William and Harry. The reporter responsible went to jail. Rumors swirl about others whose phones were hacked into by the hacks of TNOTW, like ex-PM Tony Blair and lots of other pols, fed, it has been noted, by The New York Times, a rival to Murdoch's WSJ.
Something odd happened last week which led me to a stroll down nostalgia lane, and a stock sale. I was a reporter in Paris in the 1980s when Barclays Bank worked out the first foreign bank noncumulative preferred stock sale to USA retail investors. Although my beat was continental Europe, I turned out the be the only reporter on The Banker's staff with a US brokerage account. So I got to tell the world about this new instrument, which became a cornerstone of my own portfolio and, when I started Global Investing in 1991, of that of many readers.
Barclays used its establishment links to craft the instrument. The Bank of England, their central bank, agreed to treat this preferred stock as part of the bank's capital, allowing the bank to use it to offset 14 times as much borrowing and lending business, under the capital adequacy rules of the day. These leverage rules are set by the central bank of central banks, the Bank for International Settlements (BIS) of Basel, Switzerland.
Then the British Treasury chipped in with another bonus, agreeing to allow American investors to collect a refund of “advance corporate tax” Barclays had paid Her Majesty's Government, substantially boosting the interest rate received.
Britain wanted to make Barclays into a national champion and the regulators of the City of London all chipped in to help. hus was born a “hybrid instrument” which combined the benefit of common stock to bank capital with a payout like that of bonds but paid quarterly like US stocks.
Soon thereafter the initiative Barclays had taken was copied by other British banks, and Irish banks which had a similar tax regime. Then banks from other countries worked out similar deals, among them Banco Santander of Spain. The typical foreign bank preferred share was priced at $25, redeemable in 10 years, and paid high quarterly dividends.
Those days have passed. Barclays is the survivor among Britain's once numerous High Street banks, but it is about to be headed by an American, Bob Diamond, with less clout in the City. In any event, the Bank of England no longer responds to pressures from the government, having been granted its independence by the Blair government. The British Treasury is now seriously taxing banks for having grown to big to fail, rather than encouraging them to boost their balance sheets. The BIS is drafting new rules on leverage and capital adequacy to make it harder to fiddle with hybrids.
Moreover the payment of some tranches of preferred dividends by banks which had been rescued by the UK government was blocked by European Union competition authorities to level the playing field for other banks which had not received aid. This applied to Royal Bank of Scotland preferred shares which had not yet reached maturity, but not to older issues. Moreover, in some cases, inside owners got their dividends but not outside ones, a reversal of normal shareholder rules.
And in this new world I got an extraordinary notice about one of our positions, essentially warning that I and my followers were cornering the market.
This occurred last week and details are furnished for paid subscribers below as well as a new stock pick for yield. We offer company news as well from Australia, Chile, Spain, Belgium, Greece, Britain, France, China, Israel, and South Korea.