I just started to read Stabilizing an unstable economy by Hyman Minsky. In this book published in 1986, Minsky argues that the financial capitalist system is endogenously more prone to instability than stability and that we should reform to avoid “IT” (the Great Depression) to reproduce. In the 2008 preface, there is a summary of his agenda for reform that I found particularly relevant to the current financial situation.
- employment rather than welfare, with the government acting as employer-of-last-resort, because employment provides more opportunity and dignity than welfare and because welfare – paying people not to work – is inflationary
- universal child allowance
- payroll tax elimination
- policies encouraging greater equality of wages
- allow retirees to work without losing Social Security benefits
- tax policies encourage equity finance rather than debt finance
- policies encouraging small- to medium-sized banks, with less regulation the smaller a bank is.
- increase oversight of banks trough the use of the Fed’s discount window instead of FOMC
- zero reserve requirements with interest-earning positive reserve balances
In April 2008, Jean-François Noubel gave a talk on the Future of Money in Paris. If you understand French, are not familiar with money and want to sit and relax and learn about it, I highly recommend watching this video. I hope this will be eye-opening for you.
For non-French speakers and those already familiar with money, I want to share some of my notes as I think J-F Noubel found excellent metaphors to explain complex concepts:
- Money is an invisible architecture. An architecture is something human designed that defines the rules on how the components of a system relate to accomplish the system’s purpose. Inevitably in software development, the architecture of the system influences how software developers contribute to the system, leading them to good and poor division of work and determining speed of development, maintenance and execution. A monetary system is very similar to a software architecture in the sense that a monetary system is fundamentally an information system, which relate to establishing value and tracking exchanges, with very precise rules defined and refined over time by humans. It is invisible because we’ve got so familiar with it that it’s like air we breathe.
- Our current monetary system is like the Monopoly game: there are only losers. Just like the game of Monopoly and many natural phenomenon, our monetary system obeys the Pareto law of self-aggregation: 20% of the population own 80% of the wealth, 250 individuals own 60% of the World’s wealth. This is because money attracts money: the more you have it, the easier it is to make more. Just like in Monopoly the winner takes it all, and as a result cannot play with the other players who lost, so he lost as well. Just like we could change the rules of Monopoly to make it impossible for a winner to take it all, we could change the rules of our monetary system to make sure distribution of wealth is more equal.
- Money is like water, and the money system is like an irrigation system in a garden. You don’t want your water to end up in one spot, but distribute it equitably in the way that maximizes the fruits, beauty, diversity and long-term health of your garden. This metaphor is particularly relevant as “currency” comes from current, so etymologically money is the thing that flows between us.
- Money influences our culture (society) just like water influences our culture (garden). Our current monetary system forces us into competition and extreme optimization of processes making our overall society less resilient to shocks. No only do we depend more than ever on each other, but as we optimize we end up in a monoculture. It’s like having one giant field of genetically modified corn, instead of a lot of small fields, each with a different variety. Not optimized, but much more resilient to a pandemic.
Here is a link I found where some of these metaphors are also discussed.
There are many reasons why the Yen may be a good long-term bet:
- If you see the Yen as a share of Japan, Inc., it is a country where unemployment is at a historical 9-year low, whose population is one of the most educated in Asia, with the biggest savings rate in the world (and one of the main creditors of the US), and whose yield curve is pointing to an increase in interest rates.
- It is undervalued by 21% with regards to the US dollar according to the Economist’s Big Mac Index shows.
- The undervaluation of the Yen has a lot to do with the “carry-trade”, a process that will surely revert as soon as the yield of US assets, particularly equities decreases, or as the Bank of Japan increases its interest rate once global inflationary pressures gives them some comfort.
Note that this last point makes the Yen a particularly good hedge against the fall of the US equities as this graphical comparison between the Dow Jones Industrial Average and Yen/USD conversion rates shows (when the DJI decreases, the Yen increases, most notably during the late February mini-crash).Note: As I wrote this article, the last 5 days have seen a relatively large decrease (-1.13%) of the US dollar agains the Yen.
If all this does not convince you, consider that according to sources mentioned in this Financial Times article, “One object of Mr Buffett’s affection could be the yen”
One simple way to invest in the yen is the CurrencyShares Japanese Yen Trust (FXY), which is roughly equivalent to holding Yens on a Japanese deposit account. In addition to the appreciation or depreciation, the trust may pay a monthly interest to shareholders based equal to the Bank of Japan Overnight Call Rate minus 27 basis points, minus the Trust’s expenses. Note that under Internal Revenue Code section 988, gains or losses related to an investment in FXY will be viewed as ordinary income or loss for U.S. federal income tax purposes.
Another way is to invest in Japanese stocks. I don’t believe that companies traded on US market through ADRs are very attractive in the face of a raising Yen: the US is typically a very large market for them and a raising Yen’s weigh on their exports would offset any effect of the exchange rate on their share price.
S&P Case/Shiller data for the month of April 2007 and earlier months is available here.
Biggest drops were in Detroit, MI (-2.45%) and Miam, FL (-1.21%).
Biggest gains were in Seattle, WA (+1.31%) and Dallas, TX (+1.29%).
According to data published by the Bureau of Economic Analysis available here, the 0.16% quarterly growth (equivalent to ~0.6% annualized rate) is the worst since 02Q4 when it had increased by only 0.05% from the previous period (equivalent to 0.2% annualized rate).