A layman's view of the economy

First of all, I proudly present a 2-minute short that I animated!

…And the same thing on YouTube, in case one loads better than the other:

One thing I learned making the film is that my Russian accent colors not only my words, but any noise coming out of my mouth. So I'm not the most versatile voice actor.

Anyway, we certainly have a debt crisis, and easy credit policies keep producing still more debt. I don't think interest rates have ever stayed so low for so long, everywhere.

Economists argue both for and against debt expansion [1], as they argue about everything.

My own take is as simple as my sparse knowledge ought to make it:

  • Unprecedented conditions produce unprecedented outcomes.
  • Booms are usually gradual, and busts are sudden.

No unusual boom has gradually arisen from unusual monetary policy, and it's been a while. But something unusual ought to happen in unusual conditions! Thus one expects a sudden, unusual bust down the road.

That's it. It's like a physicist's proof [2] that one's attractiveness peaks at some distance from the observer. At the distances of zero and infinity, visual attractiveness is zero (you can't see anything.) Therefore, attractiveness as a function of distance has a maximum somewhere in between. True, kinda, and it didn't take a lot of insight into the nature of attractiveness – much like my peak debt proof doesn't require an understanding of the economy [3].

Will today's "Brexit" trigger the global downturn predicted by Yossi Kreinin's Rule of Unprecedented Conditions? Probably not by itself. I think it's a symptom more than a cause [4], and the big bad thing comes later.

In the meanwhile, here's to hoping that my little film (started when "Grexit" was a thing, completed just in time for Brexit) was funnier than the average forward from grandma [5].

Happy Brexit! And if you follow people on Twitter, there's a strong case for following me as well.

[1] Bibliography: Nobody Understands Debt except Krugman; Does Krugman Understand Debt?

[2] I think a particular famous physicist said it, but I forget who.

[3] …and I can't say I have any understanding of the economy. That said, I've owed and paid off a lot of debt, and got to negotiate with many bankers. And I can tell you that "debt is money we owe to ourselves", Krugman's catchphrase, feels unconvincing to creditors – as many people and whole nations have found out.

[4] In fact, I just got an email from an asset manager saying that it's good for the UK in the longer run, elevating Brexit from a symptom to a cure. But he didn't say "good for everyone", and then I'm not sure his crystal ball is better than yours or mine.

[5] I linked to /r/forwardsfromgrandma since, regardless of the politics of either its members or their grandmas, I ought to give credit for the brilliant term – it's definitely funny because it's true. I've watched many relatives acquire the habit of forwarding various wingnut stuff as they age. Most frighteningly, my own urge to email such things gets harder to resist every year. I can sense my own ongoing grandmafication; between you and me, an animated short about debt might be a part of "it." Scary, scary stuff.

119 comments ↓

#1 Dmitry on 06.25.16 at 2:42 pm

Funny Economics – economists cannot agree even on basics.

I used to read Krugman's blog and I dropped few years ago. I could listen to his controversial views saying debt does not matter and other stuff which borders socialism and populism … But then he voiced that everyone who disagrees is either idiots or liars. Oh well

#2 Yossi Kreinin on 06.25.16 at 3:01 pm

I think every economist has operating conditions where he functions. An "efficient market" economist wouldn't see a bubble if it hit him on the head, but he'll see a government deficit problem. A "Keynesian" economist will compare average P/E ratios with the yield of low-risk investments and call a bubble, but he'll never see a government deficit problem.

Things would be easier if there were a EULA telling exactly when an economist is worth listening to.

#3 ivan on 06.26.16 at 9:58 am

Ты всё пела? Это дело: Так пойди и попляши!

#4 Marvy on 07.02.16 at 10:09 am

Re: EULA. Easy, just ask: when's the last time you saw/predicted a bubble/deficit/whatever?

#5 Yossi Kreinin on 07.02.16 at 11:28 am

I dunno, I think Dean Baker correctly called the last 2 bubbles (dot com & housing) and right now he says "no bubble" on the theory that lower interest rates should result in higher non-bubbly P/E rations (sounds sensible) and then also on the implicit assumption that low interest rates are sustainable and will not result in say a wave of bankruptcies – which is something you expect him to believe on ideological grounds. Do you trust him based on his good track record?

#6 Marvy on 07.07.16 at 11:37 am

Hm, not enough data.

#7 Yossi Kreinin on 07.09.16 at 10:50 am

That's almost always the case.

#8 Some Gal on 07.12.16 at 8:40 pm

Nice animation and article.

Re: predicting the bubble, and predicting in general I want to recomend the book the Black Swan by Taleb (I'm sure a lot of you already know it)

#9 Yossi Kreinin on 07.12.16 at 9:30 pm

Thanks!

As to swans – one man's black swan is another man's white swan. It's black if it's not in your model. The same bubble that sold Taleb's books was called by Baker in 2002 using very simple analysis. Timing is hard, but spotting a bubble in itself is not necessarily hard, I think.

#10 Some Gal on 07.13.16 at 9:08 pm

I agree with your point mostly. You might theoretically see if there is a over price/bubble/problem but the issue is as you say *when* will it burst *and* if it will finally do it. A new unexpected event can certainly change the status quo in no time. Also, there is irrationality …
I took good note of Baker BTW, I'll read about it. Looks very insightfull.

#11 Yossi Kreinin on 07.13.16 at 11:52 pm

I agree that you can have, for instance, a stock bubble in terms of inflated P/Es and then interest rates will drop and it's no longer inflated and now it's really hard to argue that you called a bubble correctly since it didn't pop and now there's no longer a bubble. I think they all do pop eventually, unless kept on life support by a party with an infinite money supply, timing the pop sure is hard though.

Baker speaks relatively plainly for an economist, and I think he has many good points; his review of Piketty on YouTube is the good one, I think, definitely in a different league from the politically close Varoufakis'. The downsides for me are that he believes deeply in two things I'm skeptical about – a political ideology (doesn't even matter which, just not my kind of weed to smoke), and quantitative macro models (which would be fine if he cared to discuss them, what he often does though is quote their predictions as gospel. Maybe for a more well-read person than me this part is easier to deal with because they'd know the models and their limitations just by the context where he quotes them.)

BTW as of now my animation looks like a failed experiment, in that most people didn't even bother to watch it, few viewers liked it, judging by the various like counts, and I suspect many didn't even get it, because of the MBS references and the like. Next time, I'll probably try another kind of subject.

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