Monday, February 26, 2018

26/2/18: South Korea Avoids Sunk Cost Fallacy

As shown consistently by economists, Olympic Games are a vanity project that wastes public resources, scarce public resources. In this case, South Korea's swift decision to demolish ( its flagship Olympic stadium is a welcome case of cutting the future costs of maintaining the White Elephant. Or, in terminology of VUCA management: an act of avoiding the sunk cost fallacy.

You can read on economics of Olympic Games (err... Olympic waste) by following links from here: and and here: Have fun.

In the mean time, make sure you know your stance should your city/country attempt to bid for the next Olympic Waste.

Sunday, February 25, 2018

25/2/18: Syria: a Web of VUCA

In his column this week, Tyler Cowen, of Bloomberg View, sums up the VUCA nature of the ongoing conflict in Syria. In fact, his article is more fundamental than that. He paints a coherent picture of how Syria conflict serves as a fertile ground for growth of Black Swan-type tail risks (risks of large scale impact events with low or zero historical predictability).

In simple terms, in Syria, the U.S. and Russia (and their auxiliary proxies) combine three key VUCA factors:

  • Ambiguity: represented by the inability to distinguish and delineate clearly the adversarial actors involved in each individual incident: Russian proxies are met with American proxies, amidst a veritable soup of various other actors;
  • Uncertainty: represented by lack of clear, stated in advance, and transparently enforced objectives by major actors, most commonly the U.S., but also Russia and Iran;
  • Complexity: captured by a complex web of interests, internal-to-Syria and global objectives, etc. 
As Cowen correctly warns, incidents like the alleged Russian proxies-led attack on the U.S. and Kurdish compound can create a potential for a large scale risk materialization or blow-out. Or, put into more academic language,  VUCA environment is self-sustaining: ambiguity, uncertainty and complexity interact to produce a cyclical reinforcement of Volatility (risk). The vicious cycle repeats, amplifying the extent to which VUCA impact (size of the potential forthcoming systemic shock), likelihood (probability of a systemic forthcoming shock), proximity (timing of the systemic shock) and velocity (speed with which the forthcoming shock arrives) rise.

Read Cowen's article in full here: and read these excellent descriptors of how complexity of Syrian conflict is evolving: and here:

25/2/2018: Tax Havens and Financial Secrecy ca 2018

The notion of what defines a tax haven is a complex one and does not easily lend itself to a precise definition. This presents numerous problems. As a personal example is an academic paper that I am currently working on with three other co-authors in which we had to use several different definitions of tax havens, primarily because the official (OECD) designations were so deeply politicized as to exclude a wide range of countries.

Tax Justice Network this week published its Financial Secrecy Index ( The Index is based on 20 tax policy-specific indicators, which are described here ( and in broad terms provides a view of just how open the country is to facilitating tax avoidance or tax evasion through its financial laws, regulations and systems. The 20 indicators are:

  • Banking secrecy
  • Wealth Ownership disclosures, covering: existence of a public Trust and Foundations Register, Recording of Company Ownership disclosures, and Other Wealth Ownership
  • Limited Partnership Transparency, Public Company Ownership, Public Company Accounts
  • Country-by-Country Reporting, and Corporate Tax Disclosure, Legal Entity Identifier, and Tax Administration Capacity
  • Consistent Personal Income Tax
  • Does the jurisdiction facilitate tax avoidance and encourage tax competition with its treatment of capital income in local income tax law? Is there tax court secrecy, and are there harmful tax structures, e.g. bearer shares; use of large banknotes, existence of trusts with flee clauses, etc
  • Public Statistics disclosures about international financial, trade, investment and tax position
  • Anti - Money Laundering regime 
  • Automatic Information Exchange, Bilateral Treaties, and International Legal Cooperation
Using the methodology described in the above link, the Tax Justice Network arrive at the country rankings in terms of how open the country system is to facilitation of tax avoidance and evasion, including through provision of financial secrecy and non-disclosure facilities that help international companies and investors avoid tax payments in their jurisdictions of origin.

The results are surprising, because they stand in a stark contrast to politically sanitized version of tax avoidance lists published by the likes of the toothless and politically controlled OECD:

Here's the top shocker: the U.S. - a country that routinely bullies other jurisdictions when it comes to extracting tax data that serves the American own purposes is number two most active tax avoidance facilitation countries in the world.  Germany, another stalwart of anti-tax avoidance rhetoric and co-sponsor of the OECD's BEPS anti-tax avoidance process alongside the U.S. is ranked number 7. Japan is number 13. Canada is number 21. And so on.

Another surprise, Ireland - previously ranked 37th in 2015 Index, with a secrecy score of 40 (see, the country is now ranked 26th, with a secrecy score of 51 (this year's country report here: In other words, things are not quite improving for Ireland.

A third surprise is Lichtenstein. This country has been commonly accused of being a major secrecy tax haven for financial flows, quite often, without any serious consideration of the more recent reforms in the country's financial services sector. Yet, Lichtenstein ranks lowly 46th in the index, just below Norway. IN the same vein, Cyprus - that has been effectively labeled a dirty money Island for Russian mobsters during 2011 financial restructuring episode - ranks reasonably low at 24th place, well better than Germany - a country from which these accusations originated.

These, and other considerations, arising from the Index results should remind us of the complexity involved in assessing the extent of financial and tax systems facilitation of illicit and ethically questionable activities. Tax havens come in all forms and shapes, some benign, others damaging to the socio-economic environments, many having an adverse impact only in the long run.

It is quite easy for the media to label a jurisdiction a safe haven for crime. It is much harder to establish an empirical basis to either support or reject such a label.

Friday, February 23, 2018

23/2/18: Ireland's Migration Policies are Working Well

How to do immigration policy right? Ireland's CSO has published some new data on educational attainment in Ireland, covering 2017 results. The data is available here: One table stands out on the issue of migration:
Click on the image to enlarge

Despite the report itself focusing on 3rd level attainment as a 'catch all' category, what really matters in terms of future quality of the workforce is more advanced education. And in this area, Irish migration system shines. Both, EU15 ex-Ireland & UK and non-EU migration pathways are working to enhance the stock of human capital in the country when it comes to honours tertiary degrees and post-tertiary education.

This is amazing, because the two pathways are distinct in terms of regulations covering mobility (access for immigrants). And both seem to be working well.

Of course, other factors contribute, beyond policy / regulatory facilitation, including Ireland's amazingly open society, welcoming people and social networks that support easy integration of those who want to integrate. But Ireland's policymakers and civil servants, who often act as the early contributors to this mobility also deserve credit. While problems and bottlenecks remain and need addressing, credit should be given where credit is due.

Wednesday, February 21, 2018

21/2/18: Cryptos Fans Checkmating Themselves on Petro

Venezuela launched the Petro, an oil-backed cryptocurrency that is supposed to augment (strike that: replace) the totally debased fiat currency the country has. And the launch is a pure gas, surrounded by bombastic claims from crypto-fans who can't be bothered to read the script.

Behold the following bits from the priceless writeup by the Bloomberg (

Apparently, Dubai has an asset-backed or commodity-backed currency. It does not.

Apparently, currency is what makes Dubai Dubai. It does not.

Apparently, all that differentiates Dubai from Venezuela is... err... I am not sure what it might be in the eyes of the cryptos experts, but here is a tangible metric of difference:

One ranks 179th in the world in Economic Freedom Index, another ranks 10th. And similar rankings differences apply across all reputable measures of economic, social, legal and political institutions quality, and country risk measures.

But, not to be outdone by their own ignorance, the crypto-fans brigade soldiers on:

Free markets led by some of the most corrupt, venally politicized Government officials in the world.

Check mating oneself publicly is, apparently, a required condition for being a crypto expert these days.

Friday, February 9, 2018

9/2/18: Markets Mess: Sunday Business Post

My Sunday Business Post article from last week on the beginnings of the stock markets troubles:

As predicted: we had a messy week, with no catalyst to inflict a real, much needed and deeper correction onto grossly overvalued markets.

My next instalment on the continued mess is due this Sunday. Stay tuned.

9/2/18: Money Velocity and Signals of Households Leverage Risks

Fed has a problem, folks. Not a new one, but a very, very persistent one: velocity of money.

Here is the data:

What does this mean? The velocity of money is defined as the frequency at which a unit of currency is used to purchase domestically-produced goods and services within a given time period. As FRED database states, "it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy."

The Fed measures this parameter across three metrics:

  • M1, the narrowest component of money which covers currency in circulation (notes and coins, traveler’s checks, demand deposits, and checkable deposits. "A decreasing velocity of M1 might indicate fewer short- term consumption transactions are taking place. We can think of shorter- term transactions as consumption we might make on an everyday basis."
  • The broader M2 includes M1 plus saving deposits, certificates of deposit (less than $100,000), and money market deposits for individuals. Comparing the velocities of M1 and M2 provides some insight into how quickly the economy is spending and how quickly it is saving. When M2 is above M1, there are net savings being accumulated in the economy.
  • Per FRED: "MZM (money with zero maturity) is the broadest component and consists of the supply of financial assets redeemable at par on demand: notes and coins in circulation, traveler’s checks (non-bank issuers), demand deposits, other checkable deposits, savings deposits, and all money market funds. The velocity of MZM helps determine how often financial assets are switching hands within the economy."
So here is what we have as of 4Q 2017:
  • M1 velocity stands at 5.488, lowest reading since 1Q 1973 and 48.6 percent below pre-crisis highs. Which is in part probably reflective of the reduced importance of physical cash in our payments systems, but is also indicative of shrinkages across demand deposits money - the stuff we have in our bank accounts. Note: demand deposits capture electronic transactions, so changes in physical cash spending are offset by changes in electronic cash spending;
  • M2 velocity is now 26 quarters running below pre-crisis peak, down 35.1 percent on pre-crisis highs. The metric rose in the last quarter to 1.431 from 1.427 in 3Q 2017, but the levels are still below 1Q 2016. Which suggests that savings are weak.
  • Broadest money velocity is at 1.299, unchanged on 1Q 2016 and below pre-crisis highs for the 40th quarter running. The indicator is barely off historical lows of 1.295 achieved in 2Q 2017. MZM velocity is currently 63.4 percent below pre-crisis highs.
  • Finally, the gap between the M2 and M1 velocities (a measure of savings) is at negative 4.1 which indicates dis-saving in the economy.

Patently, there are no signs in this data of any positive Fed QE impact on households' balances or propensity to spend. Equally, there is no sign of a serious balancesheet recovery for the households. Yes, the rate of dissaving has fallen from M2-M1 velocity gap of 8.7 around 2007-2008 to current 4.1, but that still implies no deleveraging. Longer term U.S. households financial wellbeing remains under water, with only less liquid assets, such as property and financial investments underpinning household assets and no significant savings cushion held in liquid assets forms.

Equally patent is the fact that the traditional indicators of forward inflationary pressure (e.g. money velocity) are not quite in agreement with the measured inflation (which has exceeded the Fed target four months in a row now and has been beating analysts' expectations over the last three months). The only way the two figures can be reconciled is via increased debt levels on household balances sustaining consumption growth. Not a great sign for the future, folks.

9/2/18: Angus Deaton on Monopolization and Inequality

For anyone interested in the topics of wealth inequality, structure of the modern (anti-market) economy and secular stagnation, here is an interview with economist Angus Deaton on the subject of market concentration, rent seeking and rising inequality:

I cover this in our economics courses, both in TCD and MIIS, as well as on this blog (see here:

In simple terms, rising degree of oligopolization or monopolization of the U.S. (and global) economy is, in my opinion, responsible for simultaneous loss of dynamism (diminished entrepreneurship, weakened innovation) in the markets, the dynamics of the secular stagnation and, as noted in our working paper here (, for the structural decline in our preferences for liberal, Western, values.

As Deaton notes, "Monopoly, I think, is a big part of the story. Both monopoly and monopsony contribute to lower real wages (including higher prices, fewer jobs, and slower productivity growth)—just a textbook case! But there are things like contracting out, which are making it much harder at the bottom, or local licensing requirements—mechanisms for making rich people richer at the expense of stopping poor people starting businesses and stifling entrepreneurship. There are also more traditional mechanisms other than rent-seeking, like the tax system. All these affect the distribution of income very directly. One of the things that seem to be going on more than it used to be is rent-seeking that’s redistributing upwards."

While I agree with his top level analysis on the evils of monopolization, I find the arguments in favour of unions-led 'redistribution downward' to be extremely selective. Unions co-created the current rent-seeking system through (1) collusion with capital owners, and (2) selective redistribution based on membership, as opposed to merit. In other words, unions were the very same rent seekers as corporations. And, just as capital owners, unions restricted redistribution downstream to select few workers at the expense of all others. Which means returning unions to a monopoly power of representation of labor is a fallacious approach to solving the current problem. Instead, we need to make people shareholders in capital via direct provision of carefully structured equity.

Disagreements aside, a very good interview with Deaton, worth reading.

Wednesday, February 7, 2018

7/2/18: American Wages, Corporotocracy & Why the Millennials Should be Worried

Pooling together a range of indicators for wages, Goldman Sachs' Wage Tracker attempts to capture more accurate representation of wages dynamics in the U.S. Here is the latest chart, courtesy of the Zero Hedge (

According to GS, wage growth is not only anaemic, at 2.1% y/y in 4Q 2017, and contrary to the mainstream media reports and official stats far from blistering, but it has been anaemic since the Global Financial Crisis. The latter consideration is non-trivial, because it implies two things:

  1. Structural change, consistent with the secular stagnation thesis, that is also identified in the GS research that attributes wages stagnation to increasing degree of concentration of market power in the hands of larger multinational enterprises (or, put more succinctly, oligopolization or monopolization of the U.S. economy); and
  2. A decade long (and counting) period in the U.S. economic development when growth has been consistent with continued leveraging, not sustained by underlying income growth.
The first point falls squarely within the secular stagnation thesis on the supply side: as the U.S. economy becomes more monopolistic, the engines for technological innovation switch to differentiation through less significant, but more frequent incremental innovation. This means that more technology is not enabling more investment, reducing the forces of creative destruction and lowering entrepreneurship and labor productivity growth.

The second point supports secular stagnation on the demand side: as households' leverage is rising (slower growth in income, faster growth of debt loads), the growth capacity of the economy is becoming exhausted. Longer term growth rates contract and future income growth flattens out as well. The end game here is destabilization of the social order: leverage risk carries the risk of significant underfunding of the future pensions, it also reduces households' capacity to acquire homes that can be used for cheaper housing during pensionable years. Leveraging of parents leads to reduced capacity to fund education for children, lowering quantity and quality of education that can be attained by the future generation. Alternatively, for those who can attain credit for schooling, this shifts more debt into the earlier years of the household formation for the younger adults, depressing the rates of their future investment and savings.

Goldman's research attempts to put a number on the costs of these dynamics, saying that in the longer run, rising concentration in the American private sector economy implies a 0.25% annual drop in wages growth since 2001. While the number appears to be small, it is significant. From economic perspective this implies 3.95% lower cumulative life cycle earnings for a person starting their career. And that is without accounting for the effects of the Great Recession. A person with a life cycle average earnings of USD50,000 would earn USD940,000 less over a 30-year long career under GS estimated impact scenario, than a person working in the economy with lower degree of corporate concentration. 

The 0.25% effect GS estimate is ambiguous. So take a different view: prior to the Global Financial Crisis, longer term wages growth was averaging above 3% pa. Today, in the 'Best Recovery, Ever' we have an average of around 2.2-2.4%. The gap is greater than 0.6-0.8 percentage points and is persistent. So take it at 0.6% over the longer term, forward, the lower envelope of the gap. Under that scenario, life cycle earnings of the same individual with USD 50,000 average life cycle income will be lower, cumulatively, by USD 1.53 million (or -6.4%). 

That is a lot of cash that is not going to be earned by people who need to buy homes, healthcare, education, raise kids and save for pensions.

Remember the "Don't be evil" motto of one of these concentration behemoths that we celebrate as the champion of the American Dream? Well, their growing market power is doing no good for that very same Dream.

Meanwhile, on academic side of things, the supply side secular stagnation thesis must be, from here on, augmented by yet another cause for a long term structural slowdown: the rising market concentration in the hands of the American Corporatocracy. 

Friday, February 2, 2018

2/2/18: Irish Media and the Property Crisis: A New Paper

A new paper covering the history of the financial crisis in Ireland, from the media complacency perspective, has been published by the New Political Economy journal. "The Irish Newspapers and the Residential Property Price Boom" by Ciarán Michael Casey (see references my warnings about the Irish property market in 2005 comment to the Irish Times.

For completeness of the record, here is my 2004 article for Business & Finance magazine stating my, then, view on the property market in Ireland:

2/2/18: CFR: What Financial Economics Tells Us About Bitcoin

My new contribution to the Cayman Financial Review is available, covering the key aspects of the fundamentals (or lac of such) behind the crypto currencies valuations: