Quote of the Day

In a 2015 paper Mr. Borio and colleagues examined 140 years of data from 38 countries and concluded that consumer-price deflation frequently coincides with healthy economic growth. If he’s right, central banks have spent years fighting disinflation or deflation when they shouldn’t have, and in the process they’ve endangered the economy more than they realize.

“By keeping interest rates very, very, very low,” he warns, “you are contributing to the buildup of risks in the financial system through excessive credit growth, through excessive increases in asset prices, that at some point have to correct themselves. So what you have is a financial boom that necessarily at some point will turn into a bust because things have to adjust.”

He describes this as a “pincer movement” in a working paper he wrote with several colleagues this year. On one hand, globalization and other (often benign) factors make it harder for central banks to gin up inflation by cutting interest rates. On the other hand, by slashing rates in pursuit of that hard-to-attain inflation target, they create imbalances in the financial system that lead to crises like the one in 2008.

It’s not that other economists are blind to financial instability. They’re just strangely unconcerned about it. “There are a number of proponents of secular stagnation who acknowledge, very explicitly, that low interest rates create problems for the future because they’re generating all these financial booms and busts,” Mr. Borio says. Yet they still believe central banks must set ultralow short-term rates to support economic growth—and if that destabilizes the financial system, it’s the will of the economic gods.

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The financial panic caught experts by surprise because they had assumed that the financial system (and the economy as a whole) would, through the inscrutable workings of the invisible hand, find a sustainable balance of saving, investment, consumption and other variables independent of central-bank policies.

Mr. Borio, in contrast, can explain exactly where dangerous financial imbalances come from: the incentives policy makers accidentally create for bad decisions on Main Street about borrowing and investment. The misallocation of resources during the booms requires a prolonged and miserable process of reallocation during and after a recession.

We should expect any serious monetary theory to explain a financial crisis, Mr. Borio insists. The only time he sounds genuinely dismissive of conventional wisdom during our conversation is on this point: “You know, in many of these models, how do they explain the Great Financial Crisis? They explain it as a meteorite coming from nowhere—it’s an exogenous shock, it’s productivity that all of a sudden for some unexplained reason collapsed, or people all of a sudden decided to save more, but without an explanation. In my most cynical moments, I say ‘shocks’ are a measure of our ignorance, not a measure of our knowledge.”

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Above all, “it’s important to be thinking of these things all the time.” Policy makers should keep a constantly watchful eye on financial conditions, not only in the depth of a crisis or the height of a worrisome bubble. The problem comes when “95% of the time you carry out your policy as if these factors didn’t matter, and then when you see that the economy is running red hot and you see obvious signs of financial imbalances, you start moving.”

- Why Central Bankers Missed the Crisis

Wisdom Of The Week

1. Ignoring small or imperceptible effects

Parfit produces an apparently plausible view: When benefits are considered as gained pleasures or avoided pains, "to be benefits at all, they must be perceptible." A pleasure must be noticable or it is no pleasure at all. In practice, this belief exists as a "threshold" - a point on the scale of magnitude below which all effects are ignored. Parfit quotes Glover:

"Suppose a village contains 100 unarmed tribesmen eating their lunch. 100 hungry armed bandits descend on the village and each bandit at gun-point takes one tribesman's lunch and eats it. The bandits then go off, each one having done a descriminable amount of harm to a single tribesman. Next week, the bandits are tempted to do the same again, but are troubled by new-found doubts about the morality of such a raid. Their doubts are put to rest by one of their number who does not believe in the principle of divisibility. They then raid the village, tie up the tribesmen, and look at their lunch. As expected, each bowl of food contains 100 baked beans. The pleasure derived from one baked bean is below the descrimination threshold. Instead of each bandit eating a single plateful as last week, each takes one bean from each plate. They leave after eating all the beans, pleased to have done no harm, as each has done no more than sub-threshold harm to each person."

Parfit goes on to explain his view that benefits and harms can be real and valuable, even when imperceptibly small. The view that a benefit is no benefit if it is too small to be noticed is often produced in defence of egoistic actions: overfishing (when considering the effects only on other humans) leading to a collapse in numbers, and pollution can both be justified if we assume that there is some threshold below which a harm does not count. An imperceptible effect, with sufficient extent or repetition, can be very terrible indeed.

2. Ignoring small chances

"It is sometimes claimed that, below some threshold, small chances have no rational or moral significance."
This view is used to support the idea (amongst others) that it is not worth voting in elections: the likelihood of making a difference is too small. But consider, if a difference is made, it is likely to be a very valuable one - for the election of government can affect every member of the population for some years. If we assume that one-in-a-million chances can be reasonably ignored, what would we say to the builder of a nuclear power station who uses 1000 components, each with a one-in-a-million chance of catastrophic failure per day? If the consequences have a large potential value (perhaps due to a large extent) or there are many chances for the action to occur, sometimes a consideration is significant, despite its almost-impossible odds.

3. Ignoring the effects of sets of acts

"It is natural to assume ... If some act is right or wrong because of its effects, the only relevant effects are the effects of this particular act."
This assumption is mistaken in cases of overdetermination and coordination problems. "X and Y simultaneously shoot and kill me. Either shot, by itself, would have killed. Neither X nor Y acts in a way whose consequences is that an extra person dies. Given what the other does, it is true of each that, if he had not shot me, this would have made no difference." If we make this mistake, we reach the conclusion that neither X nor Y have acted wrongly.

4. The "Share-of-the-Total" view

Parfit also describes another mistake, which he calls the "Share-of-the-Total" view. "Suppose that I could save either J's life or K's arm. I know that, if I do not save J's life, someone else certainly will; but no one else can save K's arm." Should I save someone's life or save someone's arm? We must be careful to choose the best outcome, which may not coincide with our impression of producing the most benefit, or else K's arm will be lost unnecessarily.

- Five Mistakes in Moral Mathematics, Reasons and Persons by Derek Parfit

Quote of the Day

No kidding !

A Eulogy for a Cow: How Commodified Animals Die

We were seated in the front row by the door through which the animals exited, so as each cow left the ring, we were able to look into her face. As I sat there and met the gaze of cow after cow, I felt deeply ashamed to be human. To be a member of a species that so systematically breeds, raises, uses up, sells, kills, and consumes not just cows but many other species felt sickening and unforgivable.
This feeling only intensified when a Holstein cow with ear tag #1389 limped through the door into the ring. She was small for her breed, and the impacts of her life as a commodity producer were easily legible on her body. Her tail was docked, her hide was covered in scrapes and abrasions, and she had an auction sticker with a barcode stuck to her side. Her frame was slight, and her ribs and hip bones protruded visibly beneath her skin. One of her back legs was not bearing weight (the source of her limp). Her udders hung to the ground and were red with mastitis. Compromised mobility and mastitis are common in cows used for dairy, especially those at the cull market auction, since both of these ailments frequently signal a cow’s declining productivity.

- More Here

Quote of the Day

Quote of the Day

When another blames you or hates you, or people voice similar criticisms, go to their souls, penetrate inside and see what sort of people they are. You will realize that there is no need to be racked with anxiety that they should hold any particular opinion about you.

- Marcus Aurelius

Quote of the Day

Let us meet with bravery whatever may befall us. Let us never feel a shudder at the thought of being wounded or of being made a prisoner, or of poverty or persecution.

- Seneca, Letters from a Stoic

Quote of the Day

No question is more sublime than why there is a Universe: why there is anything rather than nothing.

- Derek Parfit

Quote of the Day

The dirty little secret of journalism is that it really isn't a profession, it's a craft. All you need is a telephone and a conscience and you're all set.

- Andrew Sullivan

Wisdom Of The Week

Ai Weiwei: I grew up in the most restrictive society. We paid so much for any gesture or show of attitude. Then I came to the West, I went to the Lesbos beach where people are dying daily, and I posed as a single child. I was confused and surprised by so many people being against this act. I want to understand why they were against it. Humans are so fixed in their ways: when to sleep, when to eat, our educational systems that teach us what we can or can’t do, all these religious reasons and fake moral structures. I don’t understand why you would set yourself up to be afraid.

On the Lesbos beach people are dying daily, not just Alan Kurdi. This criticism is so fake — a fake emotional condition they set up for one instance. Come on, thousands are dying. Maybe the one next to him was his brother. Maybe the way he was lying on the shore was different. But the media never showed his brother, stuck in the rocks just fifty meters away. Why don’t people talk about him? Why don’t they know his name? This kind of soap opera sentiment controls the mainstream mind and makes society the way it is today. Nobody cares, people only want their own emotions not to be affected, to not to be touched. They can still feel comfortable. They want to decide when they will shed tears.

IB: And yet you did this and there was an eruption of criticism.

Ai Weiwei: My response to this criticism is, ‘What the fuck? You want me to go do it again?’ But who cares about a single photograph, a single post, really? A single boat flips over and seven hundred people die. The media doesn’t care. A person drives a car into a few people in London and CNN covers it for a week; a boat flips over and complete silence. It is just so fake.

People are blind — they will never be enlightened beyond their own experience. You see many people visit Buddhist temples, but do you think they understand even a small sense of Buddhism? Do people understand anything about Buddhist philosophy? They love it, but don’t understand it. When they don’t love it, everybody abandons it. It is not that they abandon it because of the depth of their understanding; they have just become lazy and stupid.

IB: I think we have a long history of willful ignorance. But throughout the world there is also a long history of taking the voice of the poet or artist seriously. One thing that frustrates me right now is that in the United States we have many strong poets and artists voicing extraordinary truths, but we don’t see the larger public embracing them, and throughout American history they have virtually been ignored by the political elite. Why do you think this is such a characteristic of American culture?

Ai Weiwei: I can only talk about today. I don’t know the history. Today, people are overwhelmingly taken with materialism. As a result, the individual has become disassociated from the meaning of life and the concerns of humanity. I think this is one purpose of capitalism and it has been very successful in the United States. The capitalist system will not accept a life of abstract thinking in dealing with aesthetics. Reality is too strong in capitalism. It is about material possessions, money, power and status.

- The Conditions of Empathy, Ai Weiwei