Three Things I Think I Think – No, You’re Wrong, Edition

Here are some things I think I am thinking about:

1) Called out by Andreessen.  Last week on Twitter I mentioned that oil prices were on the verge of their worst decline in decades.   Marc Andreessen of Netscape and Venture Capital fame called me out for posting this chart and calling it “the worst decline”:

“Best.” @cullenroche https://t.co/aObXfp1br8

— Marc Andreessen (@pmarca) December 18, 2015

@cullenroche Perhaps, but there have been massive technological advances in extraction over the last decade. And geopolitical shifts… — Marc Andreessen (@pmarca) December 18, 2015

@pmarca Totes magotes. As I like to say, a long-term bet on commodities is a bet against human innovation.

— Cullen Roche (@cullenroche) December 18, 2015

Great points by Marc.  But that raises a more interesting discussion – are commodity price declines necessarily good or bad?  I think the answer is it depends.  Over long periods of time commodity prices tend to decline or remain flat in real-terms.  That makes sense since commodities make up a good chunk of the inputs in inflation.  But as we move to an increasingly service oriented economy and one in which technology is driving down the cost of everything, we have to keep things in the right context.  Commodity prices should fall in real terms over the long-term, but in the short-term these commodity price declines could be more consistent with sharp declines in aggregate demand (or the result of unsustainable booms in demand) as appears to be the case with the current state of the markets.  So, I don’t think it’s totally wrong to call this commodity price decline “bad” as it seems to be consistent with a global environment that is more “bad” than “good” in the short-term.

2) Barry & Paul blame the banks.  Here is a piece by Paul Krugman citing a piece by Barry Ritholtz in which both blame the banks for the financial crisis.  I have to admit that I find this blame game rather boring. Can anyone really be so confident about such a complex event that they can blame one group?  Worse, Paul and Barry are sympathetic to aggregate demand driven economics (as am I), but here we find them blaming supply side mechanics for an entire economic downturn.  How does that fit?  After all, banks are simply suppliers of credit.  They don’t force people to borrow.  Nobody takes out a new loan with a gun to their head.  Yes, there was widespread fraud and all that, but isn’t it safe to say that the blame for the crisis was pretty widespread as well?  Borrowers were greedy and speculating on houses.  Bankers were greedy and loosened lending standards.  The government emphasized policy that promoted home ownership.  Who should we blame the most? I don’t know, but if you’re a believer in aggregate demand driven economics then it’s very hard to blame the boom in housing primarily on supply side mechanics….

Additionally, this blame game looks more like political posturing than anything else.  When we place blame purely on bankers we’re usually arguing that the government didn’t cause the crisis.  And when we’re protecting the bankers we’re usually arguing that the government had a lot to do with it.  The arguments on this topic are always so black and white.  I don’t understand that.  The crisis was the result of many moving parts that all came together to cause a big boom in credit, housing and derivatives.  But there’s no supply without the demand.  So, saying that the bankers caused the crisis or didn’t cause the crisis is like saying that it takes one to tango.  That clearly isn’t true.

Update – Barry notified me that he has in fact been much broader with who he blames for the crisis.  Sorry if I misrepresented, Barry.

3)  Debt Free Money Makes No Sense.  As the understanding of endogenous money has increased in recent years there has been a movement to create “debt free money”.  I keep seeing this in various places and some MMT people recently discussed the matter (I won’t get into the errors in the MMT view since I’ve covered that thoroughly elsewhere).  The basic argument for “debt free money” is that banks create most of the money and since debt is bad then we should create debt free money by having the government create money.

This misunderstands the fact that government issued money is a liability of the government.  It’s not “debt free”.  It’s just a liability for the public sector instead of the private sector (as is the case with bank deposits).  Financial assets necessarily involve the existence of financial liabilities.  There’s no such thing as “debt free money” just like there’s no such thing as “asset free money”.  Double entry bookkeeping necessarily holds that assets have corresponding liabilities.  Balance sheets balance.  Believing in debt free money defies the most basic logic of accounting.

On the matter of having the government issue all credit in the economy…well, that is a whole different debate and not one I have the time or space to touch on here….

4)  Bonus Thing I Am Thinking About – Getting Real Macro.  I’ve gone all these years in life without reading a Carl Sagan book.  That was a big mistake.  Sagan was the greatest American astrophysicist of all-time.  He was, you could say, the greatest “macro” thinker in American history.  In his recent collection of 2015 book recommendations Toby Nangle cited my recommendation of Sagan’s “Pale Blue Dot”:

“The best book I read this year was Pale Blue Dot by Carl Sagan. Why? In a world of disjointed politics, falling growth and declining entrepreneurship Sagan’s grand vision of the world reminds us of all the untapped capacity in the human race and how much more we’re capable of.”

As we head into 2016 and what has been a bit of a dreadful year all around, we could probably all lose our minds a bit in the sorts of dreams that Carl Sagan had for the human race and the future.