Opinion

Felix Salmon

Counterparties

Nick Rizzo
Aug 23, 2011 04:46 UTC

Among television news outfits, the UK’s Sky News and its correspondent Alex Crawford absolutely owned the arrival of Libyan rebels in Tripoli over the weekend. Here’s how they did it. Speaking of a scramble in Libya, oil companies from nearly every major country are about to start fighting for a share of Libya’s new oil production deals.

Can Venture Capitalists time the market?

Canadian opposition leader Jack Layton has died of cancer, only a few months after leading his New Democratic Party out of the minor party political wilderness and into second place.

Malcolm Gladwell writes about the NBA lockout. I agree with him that former Red Sox owner Tom Yawkey was a racist, and that the NBA owners are not generally a sympathetic lot. I disagree with almost every other word in his piece.

American craft beers like Brooklyn Brewery and Goose Island are the hot new trend in the British beverage industry, the Guardian reports.

Behold, the Meta-Pizza, a pizza made of pizza-flavored snacks.

COMMENT

I am not a Gladwell fan but I thought this was actually a pretty good piece. Maybe you should consider a post explaining exactly what it is you disagreed with.

Posted by johnhhaskell | Report as abusive

How to get $12 billion of gold to Venezuela

Felix Salmon
Aug 23, 2011 01:59 UTC

Ever since the news broke last week that Hugo Chávez wanted to transport 211 tons of physical gold from Europe to Caracas, I’ve been wondering how on earth he possibly intends to do such a thing.

There are 99 tons already being held at the Bank of England; according to the FT, the plan is to transfer other gold to the Bank of England from custodians such as Barclays, HSBC, and Standard Chartered; then, once it’s all in one place, um, well, nobody has a clue what might happen. Here’s the best guess from the FT:

Venezuela would need to transport the gold in several trips, traders said, since the high value of gold means it would be impossible to insure a single aircraft carrying 211 tonnes. It could take about 40 shipments to move the gold back to Caracas, traders estimated.

“It’s going to be quite a task. Logistically, I’m not sure if the central bank realises the magnitude of the task ahead of them,” said one senior gold banker.

I put the ever-resourceful Nick Rizzo on the task, but he came up with little more: the market in physical gold is tiny, and largely comprised of nutcases. The last (and only) known case of this kind of quantity of gold being transported across state lines took place almost exactly 75 years ago, in 1936, when the government of Spain removed 560 tons of gold from Madrid to Moscow as the armies of Francisco Franco approached. Most of the gold was exchanged for Russian weaponry, with the Soviet Union keeping 2.1% of the funds in the form of commissions and brokerage, and an additional 1.2% in the form of transport, deposit, melting, and refining expenses.

It’s not much of a precedent, but it’s the only precedent we’ve got; my gut feeling is that Venezuela would be do well to get away with paying 3.3% of the total value of the gold in total expenses. Given that the gold is worth some $12.3 billion, the cost of Chávez’s gesture politics might reasonably be put at $400 million or so.

It seems to me that Chávez has four main choices here. He can go the FT’s route, and just fly the gold to Caracas while insuring each shipment for its market value. He can go the Spanish route, and try to transport the gold himself, perhaps making use of the Venezuelan navy. He could attempt the mother of all repo transactions. Or he could get clever.

In the first instance, the main cost would be paid by Venezuela to a big insurance company. I have no idea how many insurers there are in the world who would be willing to take on this job, but it can’t be very many, and it might well be zero. If Venezuela wanted just one five-ton shipment flown to Caracas in conditions of great secrecy, that would be one thing. But Chávez’s intentions have been well telegraphed at this point, making secrecy all but impossible. And even if the insurer got the first shipment through intact, there would be another, and another, and another — each one surely the target of criminally-inclined elements both inside and outside the Venezuelan government. Gold is the perfect heist: anonymous, untraceable, hugely valuable. Successfully intercepting just one of the shipments would yield a haul of more than $300 million, making it one of the greatest robberies of all time. And you’d have 39 chances to repeat the feat.

Would any insurer voluntarily hang a “come get me” sign around its neck like that? They’d have to be very well paid to do so. So maybe Chávez intends to take matters into his own hands, and just sail the booty back to Venezuela on one of his own naval ships. Again, the theft risk is obvious — seamen can be greedy too — and this time there would be no insurance. Chávez is pretty crazy, but I don’t think he’d risk $12 billion that way.

Which leaves one final alternative. Gold is fungible, and people are actually willing to pay a premium to buy gold which is sitting in the Bank of England’s ultra-secure vaults. So why bother transporting that gold at all? Venezuela could enter into an intercontinental repo transaction, where it sells its gold in the Bank of England to some counterparty, and then promises to buy it all back at a modest discount, on condition that it’s physically delivered to the Venezuelan central bank in Caracas. It would then be up to the counterparty to work out how to get 211 tons of gold to Caracas by a certain date. That gold could be sourced anywhere in the world, and transported in any conceivable manner — being much less predictable and transparent, those shipments would also be much harder to hijack.

How much of a discount would a counterparty require to enter into this kind of transaction? Much more than 3.3%, is my guess. And again, it’s not entirely clear who would even be willing to entertain the idea. Glencore, perhaps?

But here’s one last idea: why doesn’t Chávez crowdsource the problem? He could simply open a gold window at the Banco Central de Venezuela, where anybody at all could deliver standard gold bars. In return, the central bank would transfer to that person an equal number of gold bars in the custody of the Bank of England, plus a modest bounty of say 2% — that’s over $15,000 per 400-ounce bar, at current rates.

It would take a little while, but eventually the gold would start trickling in: if you’re willing to pay a constant premium of 2% over the market price for a good, you can be sure that the good in question will ultimately find its way to your door. And the 2% cost of acquiring all that gold would surely be much lower than the cost of insuring and shipping it from England. It would be an elegant market-based solution to an artificial and ideologically-driven problem; I daresay Chávez might even chuckle at the irony of it. He’d just need to watch out for a rise in Andean banditry, as thieves tried to steal the bars on their disparate journeys into Venezuela.

COMMENT

What is the big deal anyway ? India imports nearly 800-1000 tons of physical gold every year and China is close to that number. All this gold is used for jewelry and hence actually travels every year. Obviously, commercial modes are well established to transport physical gold in hundreds or even thousands of tons a year.

Posted by rsksquare | Report as abusive

Where Haiti’s money has gone

Felix Salmon
Aug 22, 2011 20:55 UTC

What happens when you drop billions of dollars onto a country like Haiti? Immediately after the earthquake happened, in January 2010, I said that “one of the lessons we’ve learned from trying to rebuild failed states elsewhere in the world is that throwing money at the issue is very likely to backfire”. But that’s exactly what we did — with predictable results.

I’d urge you to read Janet Reitman’s full 12,000-word Rolling Stone article on what an enormous amount of foreign aid has done for Haiti; it’s a wonderful piece of journalism, albeit a very depressing one.

The first thing to note is that most of the money given to Haiti hasn’t even started to be spent yet: a whopping $11 billion was pledged by donor countries and financial institutions in the wake of the earthquake, but if you take the US as a good example, it’s so far managed to spend just $184 million of the $1.14 billion allocated to the country. Even the Red Cross is barely halfway into its $479 million fund — all of which has been earmarked for Haiti, and none of which can be spent elsewhere, no matter how much better it might be put to use in some other context.

But even the amount of money that has been spent has been harmful in its own way. Haiti has been known as “the Republic of NGOs” for well over a decade now, but the earthquake just turbocharged their presence while devastating everything else, leaving foreign aid the only game in town:

“I’ve had two ministers come up to me this week, personally, and ask what’s in it for them,” says a frustrated IHRC official. “Since money grows on trees in this disaster, the attitude among Haitian officials is: Just call up your buddies in Washington, and they’ll send another check.”

Meanwhile, given that it’s difficult to effectively spend money in Haiti, millions of dollars are making their way to people like our old friends at Dalberg:

There was significant grumbling in aid circles, for example, when the department awarded a $1.5 million contract to a New York-based consulting firm called Dalberg Global Development Advisors. Glenn Smucker, an anthropologist who specializes in Haiti, was asked to brief the Dalberg team, which included several summer associates from Harvard Business School. “They were nice people, but they struck me as naive about Haiti,” he says. “They asked the appropriate questions and were eager to learn, but from what I gathered, they had never lived overseas, didn’t have any disaster experience or any background in urban planning, and they’d never carried out any program activities on the ground. Only one of them spoke any French. They were being asked to do extremely important things that they had no background to do.”

One of Dalberg’s assignments was to do an assessment of a broad, bow-tie-shaped swath of land near the Corail camp, where thousands of Haitians had moved earlier that spring. Even as refugees were streaming onto the land and establishing squatter camps, the State Department hoped to create new communities in the area as part of an attempt to depopulate Port-au-Prince. It was the second time in three months that consultants had assessed the area, and after Dalberg was finished, a team of experts from USAID was brought in to reassess the assessments. “One of the sites they said was habitable was actually a small mountain,” says Bill Vastine, one of the experts on the USAID team. “It had an open-mined pit on one side of it, a severe 100-foot vertical cliff, and ravines.” After looking at the photos in Dalberg’s report, he said, “it became clear that these people may not even have gotten out of their SUVs.” The process of assessments and reassessments dragged on for months. In the end, only one of the six sites approved by Dalberg was deemed viable for relocation.

I’m pretty sure that when individuals and politicians committed billions of dollars to Haiti, they weren’t intending for it to be spent on callow HBS types who generate headlines like “With Andrew Stern’s Help, US Executes Holistic Rebuilding Approach in Haiti”.

Meanwhile, Haiti’s suffering if anything is getting worse. Not only are new shantytowns springing up in places like Corail, but disease is now spreading disastrously: cholera hadn’t been seen in Haiti for more than 60 years, before the earthquake; it has now infected more than 250,000 Haitians, with no sign that it’s remotely under control.

It’s worth remembering, too, that there was reason for optimism regarding the rebuilding of Haiti. There was lots of money, and the country’s right on America’s doorstep, which also helps. On top of that, it had the best conceivable international ambassador in Bill Clinton, backed up with the full support of the US government in the form of his wife’s oft-stated commitment to getting Haiti back on its feet.

Development is a tricky game, easy to get wrong; as a rule, it only works when the people providing the aid are working at the margin, helping to strengthen existing projects, industries, and institutions, rather than trying to build them all from scratch. Let’s target it where it can be most effective, rather than where there happens to have been a newsworthy natural disaster. Of course Haiti needed help after the earthquake, but $11 billion was far too much for the fragile and damaged economy to bear. It’s a lesson worth remembering, the next time a natural disaster triggers another wave of appeals for financial aid.

COMMENT

http://en.wikipedia.org/wiki/Tied_aid
Tied aid is foreign aid that must be spent in the country providing the aid (the donor country) or in a group of selected countries. A developed country will provide a bilateral loan or grant to a developing country, but mandate that the money be spent on goods or services produced in the selected country.

Haiti: Where Did The Money Go? Episode 3
http://www.youtube.com/watch?v=pa7CUhSrA Uc

Posted by thezenhaitian | Report as abusive

Why the bank-settlement talks are likely to drag on indefinitely

Felix Salmon
Aug 22, 2011 17:26 UTC

Today brings dueling stories in the NYT and the WSJ on the status of the bank foreclosure-settlement talks. At issue is the question of whether the banks should be given immunity with respect to lawsuits surrounding their securitization shenanigans. Here’s the WSJ, saying quite clearly that they won’t:

U.S. and state officials dismissed the push for broad immunity as a “nonstarter,” according to a federal official involved in the talks, but they have countered with a narrower offer. It would cover robo-signing and other servicer-related conduct but leave banks open to potential legal action for wrongdoing in fair lending and securitization, according to people familiar with the situation. Attorneys general in California, Delaware, Massachusetts and New York have said they are investigating mortgage-securitization practices.

In the NYT, by contrast, Gretchen Morgenson says that New York’s Eric Schneiderman is pushing back against a federal attempt to give banks immunity on such matters:

Mr. Schneiderman and top prosecutors in some other states have objected to the proposed settlement with major banks, saying it would restrict their ability to investigate and prosecute wrongdoing in a variety of areas, including the bundling of loans in mortgage securities.

So, is immunity with respect to mortgage securitization a nonstarter, or is it the whole reason why banks would dream of signing the settlement in the first place? I suspect it might be both. If I was a bank, I wouldn’t dream of paying billions of dollars in return for a narrow settlement precluding further prosecution about robo-signing and the like: it just wouldn’t make economic sense to do so. At the same time, if I were Schneiderman, in the middle of a detailed investigation into what banks’ mortgage departments got up to in the run-up to the crisis, I certainly wouldn’t want that investigation rendered moot and toothless before it had even been concluded.

If you’re expecting this settlement to be announced any time soon, then, prepare for disappointment: these are the kind of talks which often fall apart at the final hurdle. The Justice Department is on the record as wanting to “bring billions of dollars of relief to struggling homeowners”, but it’s not obvious that this settlement is the best way to do that, or even that any kind of mechanism for delivering that relief is credibly in place. So my expectation is that the talks are going to drag on, yet another contingent liability hanging over the head of America’s largest banks. It’s an outcome that no one really wants, which weirdly makes it the kind of outcome most likely to happen.

COMMENT

Yes Danny Black, but Reuters won’t let me say you blow smoke out of your A$$ … sorry!

Posted by hsvkitty | Report as abusive

Why a lighter bike doesn’t make you faster

Felix Salmon
Aug 22, 2011 15:58 UTC

I’m very late to Jeremy Groves‘s wonderful little paper where, using himself as a subject, he timed his bike commute on a heavy steel bike and on a much lighter carbon bike. After riding 1,520 miles back and forth from Sheffield to Chesterfield Royal Hospital and carefully timing every journey, he came to an inescapable conclusion: the lighter bike wasn’t any faster than the heavier one. And this on a long journey where small differences would, you would think, add up: the round-trip commute was 27 miles long, with 2,766 feet of total ascent. That’s the kind of uphills where saving 9lbs of bike makes a real difference.

So, what’s going on here? Groves has his own theories, mainly surrounding the idea that big factors, like the weight of the rider and the amount of drag, completely obliterate smaller factors like the weight of the bike and the resistance of the tires. But I think there might be something else going on, too. Here’s Joshua Foer on what he calls the “OK plateau”:

In the 1960s, the psychologists Paul Fitts and Michael Posner described the three stages of acquiring a new skill. During the first phase, known as the cognitive phase, we intellectualize the task and discover new strategies to accomplish it more proficiently. During the second, the associative phase, we concentrate less, making fewer major errors, and become more efficient. Finally we reach what Fitts and Posner called the autonomous phase, when we’re as good as we need to be at the task and we basically run on autopilot. Most of the time that’s a good thing. The less we have to focus on the repetitive tasks of everyday life, the more we can concentrate on the stuff that really matters. You can actually see this phase shift take place in f.M.R.I.’s of subjects as they learn new tasks: the parts of the brain involved in conscious reasoning become less active, and other parts of the brain take over. You could call it the O.K. plateau.

The skill of riding a bike fits perfectly into this scheme. It’s not easy to learn at first, but over time we get better at it, until we’re so good at it that we basically stop thinking about it, and stop trying to get any better than we are. I’m sure that a doctor like Groves has much better things to think about on his commute than his bicycling technique.

When I switched from a heavier bike to a lighter one, I felt as though I was going faster, but I have no idea whether that’s empirically true. Certainly the lighter bike is much more maneuverable, which is very handy on New York’s potholed streets. And it’s easier to get up hills, even if I’m not getting up them any faster.

As Kent Peterson notes, a lighter bike can make your journey more comfortable. That doesn’t mean it will make your journey more comfortable: ultra-light racing bikes in fact tend to be rather uncomfortable things. But when you’re riding up a hill at your normal speed, you’re generally happier when you weigh less. That’s why people buy lighter bikes: at the margin, they’re likely to make any given bike ride a little more pleasant. Which is not the same thing as saying it’ll be faster. Leave the racing to the racers: the rest of us are just happy being happy.

(Via Vanderbilt)

COMMENT

I had similar experience. I have a 1980′s Nishiki touring bike with a chromoly frame that is 30-plus pounds. The tires are 28′s. It’s a large bike (I’m told it’s too big for me by all the bike shops). I recently got a 56cm Cannondale CAAD8 and the tires are 25′s. This bike frame is aluminum and the bike weighs about 20 pounds. It’s no faster on most terrains and is slower on downhills. It does get up hills easier and perhaps a little faster. I love both bikes but was surprised that the Cannondale wasn’t quicker and faster (that’s what I bought it for). The chromoly frame feels more responsive and quicker than the aluminum. I couldn’t afford carbon.

Posted by TomBisson | Report as abusive

The stupid complexities of the tax code

Felix Salmon
Aug 22, 2011 13:50 UTC

James Stewart, on Saturday, looked at the narrow issue of how to tax carried interest, and made the very good point that it’s really just a small part of the much broader issue raised by the fact that we tax capital gains at a much lower rate than earned income:

The root of the problem highlighted by Mr. Buffett is the disparity between tax rates on capital gains and ordinary income. Were these rates the same, the debate over how to treat carried interest would vanish, along with much of the disparity between tax rates for the rich and people like Mr. Buffett’s secretary.

Is that so unthinkable? … Even some hedge fund and private equity officials concede that the argument for lower capital gains rates rests more on faith than science. “I’ve seen study after study that says lower capital gains rates have no impact on behavior,” the hedge fund official told me.

That view is also backed by a growing amount of academic research questioning the premise that lower capital gains rates promote growth. The evidence “is murky, at best,” said Leonard E. Burman… author of “The Labyrinth of Capital Gains Tax Policy.”

“It’s not the panacea for economic growth that advocates make it out to be,” he said. Mr. Buffett himself lent empirical support to this view in his column. “I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off,” he said.

The system we have right now — where we tax earnings from capital at much lower rates than we tax earnings from labor — is counterintuitive. If you have money, you really have no choice but to invest it somehow, and when you invest it you’re generally going to try to maximize the return you get on that investment. That’s true whatever the capital gains tax might be. On the other hand, people really do have a choice whether or not — and how much — to work. Taxing labor will, at the margin, mean less of it.

Meanwhile, the way that the capital gains tax is structured, it actually encourages bad investment. Here’s Alan Blinder, writing when the same debate came up four years ago:

Why do we have a preference for capital gains in the first place? The main argument is that lower taxes on capital gains boost investment. But the evidence on that point is iffy at best…

A far more important objection is that the tax preference for capital gains undermines capitalism — a system in which capitalists, not the state, are supposed to make the investment decisions. When I discuss this issue with my Economics 101 students, I show them an example of a proposed investment that loses money before tax (and which, therefore, should be rejected) but which actually turns a profit after tax because of the preferentially low capital gains rate. (Accountants and tax lawyers live this example every day.) The government thus induces people to make bad investments, which is a good way to run an economy into the ground. Come to think of it, that’s just what the old Soviet Union did. It invested copiously, but badly.

BUT would taxing capital gains like other types of income imperil our economy? No. The Tax Reform Act of 1986 did exactly that, and it did not end capitalism as we know it. In fact, the gross domestic product in 1987 and 1988 grew at about the same rate as in 1985 and 1986, and the investment share of G.D.P. barely budged.

Here’s a simple suggestion, then, for the super-committee taking the latest long hard look at US fiscal policy. Rationalize the tax code, pick a number for any given annual income, and declare that number to be the tax rate — no matter whether it’s for personal income or corporate income, income from labor or income from capital gains. It would probably put a significant number of tax lawyers and accountants out of work, but I’m sure they could find productive employ elsewhere.

If you did this while abolishing all the corporate tax loopholes and individual tax deductions, you could even sell the whole thing as a tax cut, keeping everybody happy.

But it’s not going to happen, because of the incentives facing politicians. If the tax code is complicated, and if politician are permanently fiddling with loopholes and deductions, then there are always monied interests throwing large amounts of money at those politicians in an attempt to move the tax code to their advantage. Simplify the tax code, and all that money goes away. No elected politician is ever likely to vote for that.

COMMENT

DogFase: Consumption would be better than savings. Consumption would result in ordinary taxable income to someone else, plus the multiplier effect of the money flowing thru the system.

As time goes on I also get confused about the logic of Long Term Cap Gains set at 365 days. That is a huge tax cut to simply hold onto an asset for several days to get a 57% cut in the tax rate. Especially for hard assets like Real Property, which shouldn’t be so speculative anyway.

Posted by april876 | Report as abusive

Counterparties

Nick Rizzo
Aug 22, 2011 06:13 UTC

It appears Muammar Gaddafi’s regime in Libya has more or less fallen. Right now, I’m thinking about Mahdi Ziu (from this great April Times article on the Libyan revolution), and wishing that Tim Hetherington and Chris Hondros were taking pictures in Tripoli today.

Manhattan District Attorney Cy Vance, Jr. will apparently ask a judge to dismiss all charges against former IMF head Dominique Strauss-Kahn.

“Groupon is the invisible hand of capitalism sucker punching good restaurants that deserve to succeed and helping out mediocre venues that deserve to fail.” – Bloomberg critic Ryan Sutton on his new crusade against bad restaurant deals.

Representatives from the Obama administration are said to be pressuring New York Attorney General Eric Schneiderman into settling with major banks over “dubious foreclosure practices.” And Bloomberg reports that the largest banks have received as much as $1.2 trillion in loans from the Fed.

Skype will acquire group messaging startup GroupMe for a reported $85 million. GroupMe’s been around less than eighteen months; angel investors like Lerer Ventures have made quite a bit of money, while Series B leader Khosla has almost tripled its investment in barely nine months. One expects founders Jared Hecht and Steve Martocchi also came out nicely, though still a far cry from Zuckerberg money.

The boy was 13 when a dawn immigration raid abruptly ended his father’s four-year quest for political asylum in Britain. By nightfall of that day in 2005, father and son were hundreds of miles from home, locked in the privately run Yarl’s Wood Immigration Removal Center here, scheduled for deportation to their native Angola in the morning.

Instead, shortly after midnight, the despondent father, Manuel Bravo, 35, walked to a stairwell with a bed sheet and hanged himself. The note he left said why: so that his orphaned boy could stay in Britain.

-Yesterday’s incredible, front page NYT piece on a particularly awful British asylum situation is like a cross between Charles Dickens and Zadie Smith. If you haven’t already, please, please read it.

COMMENT

One more thing …Danny_Black … WAS all that money paid back? I had trouble finding info that said it was. Perhaps you can find a source to back up what always seems to be “your take” and opinion rather than facts.

http://www.prwatch.org/news/2011/08/1092 4/money-still-owed-federal-bailout-15-tr illion-still-owed-treasury-federal-reser ve

Posted by hsvkitty | Report as abusive

Chart of the day, Swiss franc edition

Felix Salmon
Aug 22, 2011 05:07 UTC

EURCHF-vol-surface-082211.png

This chart comes from Eric Burroughs, who calls it “one of the best gauges for showing the extreme nervousness over what the endgame really is in Europe”. But I’m assuming here that you’re not the kind of person who looks at FX volatility surfaces on an everyday basis, so it might be worth a little bit of explanation.

The chart is showing how expensive it is to buy options on the EUR/CHF exchange rate — that is, the number of Swiss francs per euro. When the Swiss franc strengthens, as it has been doing of late, the exchange rate goes down. The current exchange rate can be seen in the middle the “Delta” axis, where it says “ATM” — that stands for “at the money”. So everything to the left of that line — the PUT contracts — shows the price of a bet that the Swiss franc is going to strengthen. And everything to the right of the line — the CALL contracts — shows the price of a bet that the Swiss franc is going to weaken.

Now the Swiss franc has appreciated a lot against the euro of late — you could get more than 1.5 Swiss francs to the euro this time two years ago, while a couple of weeks ago the exchange rate dropped to as low as 1.03, and it’s still at 1.12 right now. To put it another way, a 100 Swiss franc meal in Zurich would have cost you €65 two years ago, €76 one year ago, and €89 today. At this point, the Swiss franc is so strong that the Swiss National Bank is doing everything in its power to try to weaken it. So the time to bet on a strengthening Swiss franc was clearly in the past.

But just look at the chart — it’s much higher on the left-hand side, the PUT side, than it is on the right-hand side. That’s known as “skew”, and it means that the market is decidedly bearish on EUR/CHF. If you want to bet that the exchange rate is going to go back up, that will cost you quite a lot of money. But if you want to bet that the exchange rate is going to continue to decline, that’s going to cost you an absolute fortune.

And in fact the market seems to think that even if the Swiss National Bank manages to weaken the Swiss franc in the short term, over the long term its efforts won’t count for much. The lowest parts of the chart — the cheapest bets of all — are the ones saying that the Swiss franc is going to weaken over the long term of 18 months to 2 years. Meanwhile, the highest parts of the chart — the most expensive bets you can make — are the ones saying that the Swiss franc is going to strengthen a lot over the long term of 18 months to 2 years.

Some of this activity is hedging, of course, rather than speculation. Let’s say you’re one of those corporate chieftains attending Davos in January as a Strategic Partner. That’ll cost you 590,000 Swiss francs. In 2011, that was €457,000. But as of right now your Davos membership fee has already risen to €523,000; you might well want to lock it in right there before it goes any higher. (If you’re unfortunate enough to be paying in dollars, it’s even worse.)

But the main message of the chart is that people are almost irrationally worried right now. The Swiss franc is a classic flight-to-safety play, a bit like gold or Treasury bills. That’s why it has appreciated so much of late. But the markets are saying that its recent appreciation might only be the beginning, and that the Swiss franc might well end up being worth more than the euro pretty soon. Here’s how Burroughs puts it:

When the skew starts to normalize, then the market may be convinced that Europe is getting a handle on this crisis. We are far from that point.

I’ll trust Eric to keep an eye on this chart — I wouldn’t know where to start even trying to build such a thing. But it seems clear to me that he’s right: we’re going to wait a long time before this chart stops sloping down and to the right. Which is another way of saying that we’re going to continue to have a crisis in Europe for the foreseeable future.

COMMENT

Interesting to note that while the Swiss Franc is high against the Euro, the Euro is still at the upper levels of historical values against the US Dollar. You need $1.44 to buy €1.00 today, but back in the days of the post launch “market test” of the Euro’s strength IIRC one Euro could only buy $0.87.

In global terms, aren’t they the only ones that really matter since they are the two world currencies fighting it out to be the World’s main Reserve Currency?

Posted by FifthDecade | Report as abusive

The global crisis of institutional legitimacy

Felix Salmon
Aug 22, 2011 02:21 UTC

While watching another Arab government get toppled on Sunday evening — this time that of Muammar Gaddafi, in Libya — I was also reading George Magnus’s excellent note for UBS, entitled “The Convulsions of Political Economy”; you can find it chez Zero Hedge.

Convulsions is right — not only in the Arab world, of course, but also in Europe and the US. And the result is arguably the most uncertain outlook, in terms of the global political economy, since World War II ended and the era of the welfare state began.

As Magnus says:

It seems that we are having sometimes esoteric tiffs between Keynesians and Austrians about if and how governments should sustain jobs and growth. But, deep down, we are having a much more significant debate as we are being forced to redefine what we think about the rights and obligations of citizens and the State.

Most fundamentally, what I’m seeing as I look around the world is a massive decrease of trust in the institutions of government. Where those institutions are oppressive and totalitarian, the ability of popular uprisings to bring them down is a joyous and welcome sight. But on the other side of the coin, when I look at rioters in England, I see a huge middle finger being waved at basic norms of lawfulness and civilized society, and an enthusiastic embrace of “going on the rob” as some kind of hugely enjoyable participation sport. The glue holding society together is dissolving, whether it’s made of fear or whether it’s made of enlightened self-interest.

In Europe, the speed with which the transmission has been thrown violently into reverse is nothing short of astonishing. The whole second half of the 20th Century was devoted to building strong European institutions which would maximize cooperation and minimize mistrust and finger-pointing between member states. Great statesmen put European unity on a par with narrow national self-interest, and the resulting institutions — the euro, of course, but also things like the Schengen Agreement and the European Convention on Human Rights — transformed the blood-soaked continent of the 1940s into a peaceful and prosperous model for how disparate countries could successfully work together to the benefit of them all.

And the US, of course, the global hegemon, a continent unto itself, stood as a beacon for the rest of the world: 300 million disparate people coming together to create something unprecedented — an economic, political, and military colossus built on solidly democratic principles. E pluribus unum.

But countries and institutions can ultimately survive only with the will and consent of those they govern — and that consent is evaporating around the world. Europeans have no love for Europe’s institutions, be they the euro or the ECB or the EFSF. Unemployment, in much of Europe, has reached the point of no return — the point at which it becomes endemic, stubbornly immune to attempts to tackle it. In turn, that results in broad-based cynicism and disillusionment when it comes to politics and politicians generally.

And then on this side of the pond we have Rick Perry — harbinger and prime example of the way in which mistrust in federal institutions has moved from the fringe to the mainstream. Indeed, what we see with Perry is far more than mistrust — he actually denies most federal institutions their existential legitimacy, and has written a book explaining at length how everything from Social Security to federal bank regulation is in fact unconstitutional.

When Perry accuses Ben Bernanke of treachery and treason, his violent rhetoric (“we would treat him pretty ugly down in Texas”) is scary in itself. But we shouldn’t let that obscure Perry’s substantive message — that neither Bernanke nor the Fed really deserve to exist, to control the US money supply, and to work towards a dual mandate of price stability and full employment.

For the first time in living memory, someone with a non-negligible chance of winning the US presidency is arguing not over who should head the Fed, but whether the Fed should even exist in the first place.

Looked at against this backdrop, the recent volatility in the stock market, not to mention the downgrade of the US from triple-A status, makes perfect sense. Global corporations are actually weirdly absent from the list of institutions in which the public has lost its trust, but the way in which they’ve quietly grown their earnings back above pre-crisis levels has definitely not been ratified by broad-based economic recovery, and therefore feels rather unsustainable. Meanwhile, the USA itself has undoubtedly been weakened by a shrinking tax base, a soaring national debt, a stretched military, and a legislature which has consistently demonstrated an inability to tackle the great tasks asked of it.

It looks increasingly as though we’re entering Phase 2 of the global crisis, with 2008-9 merely acting as the appetizer. In Phase 1, national and super-national treasuries and central banks managed to come to the rescue and stave off catastrophe. But in doing so, they weakened themselves to the point at which they’re unable to rise to the occasion this time round. Our hearts want government to come through and save the economy. But our heads know that it’s not going to happen. And that failure, in turn, is only going to further weaken institutional legitimacy across the US and the world. It’s a vicious cycle, and I can’t see how we’re going to break out of it.

Update: emptywheel responds.

Update 2: as does Ezra.

COMMENT

It is true that our overall attempt to ‘better” the economy has left us into debt. I do agree with you that this is a cycle in which we are just leading ourselves into bigger debt. I read an article on Europe in which Europe’s government is trying to make a central financial authority sort of like the United States’. It boggles my mind to think that they would want to create something similar to our government even though our government is pretty much ‘failing’ us right now. But it also leads me to question that maybe our overall idea of government isn’t bad, just our leaders making bad decisions.The New York Times

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