The paradox of financial innovation

Back in 1964 Kenneth Arrow showed that, in theory, competitive markets could produce optimal allocations as long as there were state-contingent securities which allowed people to trade risks and so insure against them. The problem is, he said, that: 

Many of the economic institutions which would be needed to carry out the competitive allocation in the case of uncertainty are in fact lacking.

Almost thirty years later, Robert Shiller showed that this remained the case. “The insurance industry has not devised policies that insure against many…causes of fluctuations in incomes” he wrote in Macro Markets in 1993.

He proposed creating GDP-linked securities which people who were optimistic about economic growth could buy whilst those worried about recession could go short. This would allow ordinary people to buy (via insurance companies (pdf)) insurance against recession. In the same spirit, he showed, securities could be created whose prices were linked to the incomes of specific occupations. These would serve a signalling function, showing young people which jobs to enter and which avoid, and an insurance role, allowing people to hedge the risk of a decline in demand for their skills. And, he added, we could also have house price futures. Young people who fear not being able to get on the "housing ladder" could buy these as insurance against rising prices, whilst people worried about falling prices (such as Buy-to-Let landlords or those planning on downsizing) could go short.

In ways such as these, financial markets could help people spread risk better.

But almost sixty years after Arrow and thirty after Shiller, such markets still don’t exist or do so in still-rudimentary form. Judged by the standard of Arrow’s ideal of complete state-contingent markets, we’ve seen astoundingly little useful financial innovation during my long lifetime. And this is not to mention the other failures of the financial system such as its tendency to generate crises; to commit crime; to mis-sell useless products; and (in the UK at least) fail to finance industry: for every pound that UK banks have lent to non-property SMEs, they have lent £11 in residential mortgages.

What we have seen in recent years, though, is a lot of innovation of dubious utility such as non-fungible tokens, special purpose acquisition companies, initial coin offerings, platforms to facilitate the mug’s game that is day-trading, and Mintme’s plan for people to issue tokens in themselves. And then there is the fact that it is not obvious what (lawful) need is fulfilled by cryptocurrencies.

Why, then, do we have so little useful innovation and so much useless?

It’s because of a collective action problem. Imagine we had a thriving market in, say, house price futures. Who’d gain? The main beneficiaries would be ordinary people who could trade away their house price risks. Those who devised the securities, however, would get only origination fees, which should in principle be bid down as other firms entered the market.

And markets don’t spring up from nothing. In his excellent An Engine Not a Camera Donald MacKenzie describes how Leo Melamed, head of the CME, encouraged growth of stock index futures, one of the few examples of useful financial innovation. A market, said Melamed, “is more than a bright idea. It takes planning, calculation, arm-twisting and tenacity to get a market up and going. Even when it’s chugging along, it has to be cranked and pushed.” In other words, it requires somebody to solve a collective action problem. Markets must be liquid but liquidity is a collective good: it requires many traders to come together.

Financial innovation, therefore, suffers from the problem described by William Nordhaus – that producers of new innovations capture only a “minuscule fraction” of their social gains. Which means that innovation is under-provided by the market.

What’s not under-provided, however, are forms of innovation in which innovators can extract big rewards. And these come from being able to, in Keynes’ words, “pass the bad, or depreciating, half-crown to the other fellow.”

What we have here, then, is a simple failure of capitalism – the fact that the pursuit of private profit prevents the fulfilment of genuine social need. Mariana Mazzucato’s point that the state can be a source of innovation applies especially to finance. State ownership of financial institutions might be necessary to solve the collective action problem that blocks useful innovation. One could imagine state-owned banks originating GDP or occupation-based securities which the government then gives to everybody as part of people’s QE. When I say state ownership, I mean ownership that forces banks to become providers of public service (and not just in the context of improving financial innovation) rather than the botched nationalizations of 2008 that left the monkeys in charge of the zoo.

You might think this is a Marxian demand. In this context, though, it’s not. There’s a tradition in Marx (which I’m not wholly comfortable with) which sees markets as irrational, alienating and sources of chaos and unfreedom. Advocating more financial markets is therefore unMarxist. What it is, though, is bog-standard orthodox economics. If we really want to achieve the fundamental theorem of general equilibrium economics in which free markets are Pareto-optimal, we need more complete markets – and this requires state ownership and control of banks.

Which gives us a delightful paradox – that in a sense, conventional economics is more radical than Marxism.

Comments

[Rich]

Can't imagine how a house price future would work at the moment. Young people have no spare money to buy the financial product. And no one is going to take the other side of that losing bet since it's the government which is determined to drive up prices no matter what.

[aragon]

"Gibbit" should have been "Gibbet". Wikipedia has the gory details.

https://en.wikipedia.org/wiki/Gibbeting

https://en.wikipedia.org/wiki/Halifax_Gibbet

"A full-size non-working replica", foiled again...

[Richard H]

The creations of Fannie Mae and Freddie Mac seem to match exactly the pattern you identify - the US government decides they'd like a market in mortgage backed securities to exist, so they muck in and start making them.

[James Peach]

Financial market "innovations" are usually either ways to transfer risk in complex and convoluted ways that are not immediately apparent to the end investor or ways to extract rents from unsophisticated customers who don't know any better. The only positive financial innovation I can think of in the last decade is Transferwise. I feel like part of the reason for a lack of financial innovation is not the Nordhaus argument (profits from innovation are rapidly competed away) but that it's much easier and more profitable to rip people off than it is to create a truly innovative product.

[Nick Drew]

On the matter of property futures: not a lot of people know this ...

... but just before it went bust, Enron was planning to make a market in UK property futures: (they were going to buy Canary Wharf to be the important "large physical keystone" that traders in new markets typically need - just as they had built Teesside Power to be the core of their burgeoning power- and gas-trading businesses in the UK).

As well as the primary hedging application CD describes in the piece above, it was going to have regional flavours (basis points, in the jargon) so that people who (e.g.) knew they were going to retire away from London, or needed one day to move back to London, could lock in favourable regional spreads to avoid future surprises. Needless to say, it could be used for speculation as well (and importantly so, because that's what adds to liquidity).

How would Enron make a turn? Easy - the same way they did in half a dozen other markets they created: as an ultra-efficient market-maker

Didn't happen of course ...

[rsm]

Why can't the Fed and other central banks simply offer things like a VIX index that functions as a stock (not something like VXX which you have to keep trading daily or it will decline)?

Then banks and market makers can properly hedge panics. The Fed would be providing upfront, explicit insurance instead of implicit, wait-for-the-panic-then-react insurance.

Why force banks to do anything? Simply have public banks do what you want to see.

I think you all miss the point of finance: traders like to trade. Why does the government have to shut down every little thing that ppl like to do? The government should provide financial insurance to everyone, and let people play. Markets are not violent; trading is voluntary. Forcing your view onto markets is immoral.

@ Rich: you can take the short side of housing futures by borrowing the underlying in enough volume that you can immediately move price lower by selling. Then you repurchase them at the lower price. You borrowed in volume, sold high, bought low. You can make short-term profits in this way that still doesn't affect long-term holders who will just see blips in an upward trend. Basically, the innovation of finance is that everyone can win; all counterparties can book a profit because balance sheets expand and remain so indefinitely.

[GrueBleen]

So, like Topsy, it just growed (market capitalism, that is). Or maybe it's just an emergent phenomena, and has never been news.

[Rik Keating]

Good article, and agree that the lack of private sector (rent seeking?) incentives do inhibit financial innovation for socially useful markets such as GDP linked bonds and house price futures.

However I think there are potentially some positive things to say in respect of the crypto space here. Although we're still at pretty early days in terms of the technology / adoption, I think there's reason to be optimistic that these could actually spawn useful innovation.

A couple of examples: firstly - remittances. With more widespread adoption / increased internet access, it's conceivable that FX / remittance fees could be cut considerably versus current levels. There's already some evidence of this with Bitcoin, but the volatility / convertibility issues limit this currently. Still, this seems to be more of a technical issue as opposed to a binding constraint (think of a well regulated stablecoin for example) and considering the scale of global remittances (World Bank estimates $551B in 2019), this is potentially a big win.

Secondly - smart contracts hosted on the blockchain (eg those that currently exist on Ethereum). These already allow for pretty specific events to be hedged / speculated on (eg will Donald Trump be declared the eventual winner of the 2020 election / will 2020 GDP be above x%). These are still pretty early stage markets, and there are important technical issues to be ironed out (eg the Oracle problem), but these don't seem insurmountable considering the potential gains. The question / extent of government involvement is a tough one though...

[ltr]

Two questions that I think critically important:

How could there be significant hunger in Western Europe?

https://www.nytimes.com/2021/03/16/business/hunger-food-insecurity-europe.html

Has the "European Project" failed?

https://www.nytimes.com/2021/03/18/opinion/coronavirus-vaccine-europe.html

[ltr]

Financial innovation, therefore, suffers from the problem described by William Nordhaus – that producers of new innovations capture only a “minuscule fraction” of their social gains. Which means that innovation is under-provided by the market.

What’s not under-provided, however, are forms of innovation in which innovators can extract big rewards. And these come from being able to, in Keynes’ words, “pass the bad, or depreciating, half-crown to the other fellow.”

[ This essay is brilliant. ]

[Blissex]

«Kenneth Arrow showed that, in theory, competitive markets could produce optimal allocations as long as there were state-contingent securities which allowed people to trade risks and so insure against them.»

That is a typical prevarication of Economists, barely yet cleverly disguised with that ", in theory", as Arrow rather showed that it is possible to find some of extremely unrealistic and very narrow assumptions under which that may happen. Just as worthless as the Second theorem of Welfare Economics.

That insurance options in general, and those from "state-contingent securities" in particular, are usually quite desirable is however quite a different thing, and realistic.

[Blissex]

«it could be used for speculation as well (and importantly so, because that's what adds to liquidity)»

My impression is that speculation adds to (or rather uses) liquidity only when the markets already have plenty of it, when liquidity dries up most speculators disappear and contribute to the problem.
JK Galbraith in 1954 already wrote as an example:

"Margin trading must be defended not on the grounds that it efficiently and ingeniously assists the speculator, but that it encourages the extra trading which changes a thin and anaemic market into a thick and healthy one.”

[Blissex]

«How could there be significant hunger in Western Europe? https://www.nytimes.com/2021/03/16/business/hunger-food-insecurity-europe.html»

AS Brad DeLong (who has now recanted neoliberalism as a failed idea) has pointed out, a large part of the right thinks that there should be more inequality, and that includes the idea losers should really lose instead of there being a safety net provided by social insurance, also as a salutary lesson to others.

From that kind of point of view more hungry beggars on the streets, India-style, would be a definite improvement, both as proof that "the markets" are indeed awarding everybody what they deserve, and also as an incentive to work hard and obediently for the masses of employees.

That POV is less common in Europe than the USA, but is still fairly popular in eastern Europe, and in the UK.

[ltr]

Blissex,

I am grateful for each of the fine comments. As for the response to "significant hunger in Western Europe," I still do not understand that seeming absence of political sensitivity to the problem. The problem has startled me, since I would have thought any European political consensus would have dictated against allowing such a problem to emerge.

Has "social democracy" become broken in Sweden or in France?

[ltr]

Blissex:

As Brad DeLong (who has now recanted neoliberalism as a failed idea) has pointed out, a large part of the right thinks that there should be more inequality, and that includes the idea losers should really lose instead of there being a safety net provided by social insurance, also as a salutary lesson to others.

[ I am thinking this through, but the neoliberal consensus I think extends beyond just "right". ]

[ltr]

What we have here, then, is a simple failure of capitalism – the fact that the pursuit of private profit prevents the fulfilment of genuine social need. Mariana Mazzucato’s point that the state can be a source of innovation applies especially to finance....

[ Watch what the Chinese are doing now in shaping domestic finance products and companies. Much of the Chinese efforts to end poverty has involved state-directed finance.

Businesses "in" a 4G or 5G phone are found in rural China. The point is not just farming, but forming a farm cooperative with the business of farming conducted through phones and farm management as well. ]

[Blissex]

«Has "social democracy" become broken in Sweden or in France?»

My guess is that it had become a lot weaker, as "neoliberalism" has spread. This has made some superficial people think that the EU is institutionally neoliberal, where instead it is just that the majority of EU governments are different shades of neoliberal. The brutally neoliberal J Cowley as editor of the "The New Statesman" wrote appositely, criticizing a "dangerous trot":

http://www.newstatesman.com/politics/2014/11/ed-miliband-s-problem-not-policy-tone-and-increasingly-he-seems-trapped
“Miliband’s [ ... ] might have to accept before long – or the electorate will force him to – that Europe’s social-democratic moment, if it ever existed, is fading into the past.”

BTW I don't think it is fully daded, but it has become weake. Why this has happened has several reasons, but my usual top ones are about the concept of "taking care of our own", which is the basis for social-democracy (as opposed to socialism), and more precisely about what elites and masses think of as "our own". Certainly most of them don't think much about extending the NHS or free school meals to Congo or Papua, so the congolese or papuans are obviously not considered "our own", and obviously given June 2016 the 27 members of the EU are not considered "our own" in the UK, and in England the "scrounging scots" are barely (if that much) "our own".

My top guesses for the causes of the shrinking of the extent of "our own" among many voters are:

* In part for collapse of the soviet threat, in part because of the "revolt of the elites", the western ruling classes that previously regarded (because of opportunism or paternalism) most of the servant classes as "our own" no longer do so, they regard them as costs to minimize as before the social-democratic era.
* In part because they "got theirs" and have become pension and property rentiers, many members of those servant classes no longer regard those below them in the lower rungs of the servant classes as "our own", but as "scroungers" or simply ignorable.

[ltr]

I don't think it is fully dated, but it has become weaker. Why this has happened has several reasons, but my usual top ones are about the concept of "taking care of our own"...

[ Really incisive comment; excellent. ]

[James Charles]

"In part for collapse of the soviet threat,. . . "
The 'faked' 'Soviet threat'?
“Taken together, these four volumes constitute an extraordinary commentary on a basic weakness in the Soviet system.
The Soviets are heavily dependent on Western technology and innovation not only in their civilian industries, but also in their military programs.
An inevitable conclusion from the evidence in this book is that we have totally ignored a policy that would enable us to neutralize Soviet global ambitions while simultaneously reducing the defense budget and the tax load on American citizens.”
“ His book tells at least part of the story of the Soviet Union's reliance on Western technology, including the infamous Kama River truck plant, which was built by the Pullman-Swindell company of Pittsburgh, Pennsylvania, a subsidiary of M. W. Kellogg Co. Prof. Pipes remarks that the bulk of the Soviet merchant marine, the largest in the world, was built in foreign shipyards. He even tells the story (related in greater detail in this book) of the Bryant Chucking Grinder Company of Springfield, Vermont, which sold the Soviet Union the ball-bearing machines that alone made possible the targeting mechanism of Soviet MIRV'ed ballistic missiles. “
http://www.crowhealingnetwork.net/pdf/Antony%20Sutton%20-%20The%20Best%20Enemy%20Money%20Can%20Buy.pdf
https://www.youtube.com/watch?v=Sah_Xni-gtg

[rsm]

"the idea losers should really lose instead of there being a safety net provided by social insurance, also as a salutary lesson to others."

This is not the policy of the Fed anymore. They let Lehman's fail as a warning, but that resulted in much worse outcomes than they were expecting. So now they bail everyone out by buying bonds or whatever financial instruments are suddenly illiquid due to a panic.

We just have to explain that the Fed's liquidity does not come from taxes. No one pays. Free insurance ...

[Blissex]

«explain that the Fed's liquidity does not come from taxes. No one pays.»

That "liquidity" and especially that "No one pays" are so ridiculous, as if handing out "liquidity" were not as a rule a gift of purchasing power and thus highly redistributive from those not so favoured, that they look like pure City/Wall Street propaganda, just like the equally laughable notion of «Free Insurance» that follows.

[Blissex]

«If we really want to achieve the fundamental theorem of general equilibrium economics in which free markets are Pareto-optimal, we need more complete markets – and this requires state ownership and control of banks.»

Having written somewhat obliquely earlier "typical prevarication of Economists", the above is also what I was referring to.

Basing an argument for “state ownership and control of banks” on the thoroughly comical models of “general equilibrium economics in which free markets are Pareto-optimal” seems to me quite delusional or wykehamist, because my guesses as to why our blogger is making such an argument are:

* A delusional earnest belief in the substance and realism of “general equilibrium economics” and Arrow's market completeness theorem.

* The wykehamist earnest belief that the matter of whether there is “state ownership and control of banks” depends on persuading right-wingers with their own arguments.

* The instrumental purpose of showing that if the right-wingers inconsistently reject such arguments then they are hypocrites, "gotcha!". If so such cleverness seems to me both delusional and wykehamist, because such prevarications have been exposed before many times to negligible practical effect (see most notably "vox clamantis in deserto" Steve Keen).

[ltr]

What tragedy:

http://www.xinhuanet.com/english/2021-03/21/c_139825660.htm

March 21, 2021

Londoners hit by "staggering" drop in life expectancy due to COVID-19
Analysis by the King's Fund health think-tank saw the biggest falls in life expectancy in London, from 81.3 to 78.8 for men and 85 to 83.4 for women. They said it was worse than any fall since the Second World War, according to the Evening Standard.

LONDON -- Life expectancy among Londoners has fallen sharply as a result of COVID-19, with men living on average 2.5 years less and women 1.6 years less, making the drop worse than any since the Second World War.

Experts described the data, from Public Health England (PHE), as "staggering", the London-based Evening Standard newspaper reported, adding that poorer male Londoners suffered the biggest drop, losing an average 3.3 years.

The statistics come from PHE's Wider Impacts of COVID-19 on Health (WICH) monitoring tool, which details the indirect effects of the pandemic on the population's health and wellbeing....

[ltr]

Forgive me, but I am unable to find the original life expectancy article and report with Google. I have no idea why, but will look again later.

The point however as the epidemic is thankfully brought under control in the UK is what have we learned in these months, what changes are called for?

[rsm]

"as if handing out "liquidity" were not as a rule a gift of purchasing power and thus highly redistributive from those not so favoured,"

Whose account was debited to fund Quantitative Easing? From where was money redistributed?

The Fed can favor everyone by printing and fully committing to inflation-proofing a basic income.

"the equally laughable notion of «Free Insurance» that follows."

Imagine that the Fed sets inflation expectations at zero by buying and selling inflation swaps as part of open market operations. Who loses?

[Nanikore]

Blissex, I would again second your fine commentary.

Just on the second welfare theory. The blogger (who I also give my thanks) says that Arrow "shows..."

Interesting choice of verb. "Shows" what and how?

My understanding of the Second Welfare theory is that it overrides the First (The Equity/Efficiency Tradeoff - the best support Neo-liberalism could possibly have) and makes the case for government intervention to redistribute resources, but only in the case of lump sum fiscal transfers. This would presumably rule out capital controls, import controls, or any other direct intervention by government in resource allocation (eg credit rationing, industrial subsidies, any type of central planning over the quantity of production). It basically elevates the market mechanism in its efficiency over resource allocation, but allows the winners to compensate the losers (after it has done its job), but only through a lump sum fiscal transfer. I am not sure what this would even mean for progressive income taxation. I would like to know more about what exactly they mean by "a lump sum fiscal transfer" - what examples do they have in mind.

It is on the two welfare theorems that I think that neo-classical economics and neo-liberalism are, at their philosophically foundations, fundamentally linked.

Anyway, please correct me, and I would love to hear your views.

[Blissex]

«My understanding of the Second Welfare theory is that it overrides the First (The Equity/Efficiency Tradeoff - the best support Neo-liberalism could possibly have) and makes the case for government intervention to redistribute resources, but only in the case of lump sum fiscal transfers.»

I think that the first/second theorems can be discussed either on the merits, or their import.
Discussing their merits is pointless because that depends entirely on the assumptions, which are ludicrous. Much of (sell-side) Economics is "let's find a ludicrous model in which X is provable and then say claim X has been proven while not saying 'in this ridiculous model' or dissembling it in a footnote".

As to the import of those theorems:

«basically elevates the market mechanism in its efficiency over resource allocation, but allows the winners to compensate the losers (after it has done its job), but only through a lump sum fiscal transfer.»

Please don't worry too much about "lump sump fiscal transfer", it really does not matter, no sell-side "Economist" really cares about that because the role of the first/theorems is quite simple:

* First, support "efficiency" policies that "coincidentally" redistribute upwards, saying that redistribution can be compensated for later by political decision.

* Second, once those policies are enacted, nothing happens, no or risible compensation is given. Which is perfectly sensible politically: given that the upwardly redistributive policies have already been done, why ever should their beneficiaries pay compensation to the loser? In exchange of what?

«It is on the two welfare theorems that I think that neo-classical economics and neo-liberalism are, at their philosophically foundations, fundamentally linked.»

I think that they are the icing on the cake that enables the two steps above, rather than the fundamental link, which is J.B. Clark's "three parables", of which the critical one ("the distribution of income between laborers and capitalists is explained by the relative factor scarcities/supplies and marginal products");

http://www.politicaleconomy.org/gaffney.htm
https://www.aeaweb.org/articles?id=10.1257/089533003321165010

[Blissex]

«no sell-side "Economist" really cares about that because the role of the first/theorems is quite simple: [... first redistribute upwards, second don't pay any "lump sum fiscal transfer" ...]»

There is another related role: to allow "sell-side" Economists to expunge any discussion of the distribution of income from "sell-side" Economics (because the markets give everybody their just deserts"), saying it is a purely political matter.

This applies both to distribution within the ruling classes between businesspeople and rentiers and between finance and land rentiers, and more widely to the distribution between the ruling classes and the servant classes.

Another topic that they allow as a side effect to ignore is development policies (subsumed by the notion of "efficiency").

In practice development and distribution, which were the central topics of the "classical" political economists, have largely disappeared from "sell-side" Economics which can be summed up in this update to a well known church hymn (my usual quote):

All things bright and beautiful,
All creatures great and small,
All things wise and wonderful,
"The Markets" made them all.

The rich man in his castle,
The poor man at his gate,
"The Markets" made them high and lowly,
And ordered their estate.

(the first bit is "development Economics", the second bit is "distribution Economics").

Imagine a "heavenly" chorus made of Friedrich Hayek, Milton Friedman, John Rockefeller, Marcus Goldman, singing it :-).

[Nanikore]

On the decline of social democracy in Europe, this is a downside of globalisation and the cosmopolitanisation of the elite. Ex EU commissioners now work for Goldman Sachs. ECB Presidents worked for Goldman Sachs and went to MIT. This is reflected across the board in economics departments, central banks, government and industry.

The people who are making key decisions or advising ministers are not for example, the people who were behind the post-war German (or Japanese) 'miracle' or the formation of social democratic systems on the continent and elsewhere and often know little of the history behind it. They are mirror images of what MIT taught them.

You basically get a uniform and homogenised view of the world.

It's not that different in the UK actually. How many economists would know anything about the industrialisation of Britain?

[James Charles]

“The focus on equilibrium and prices is due to the hypothetico-axiomatic method, a.k.a. the deductive methodology. The axioms are postulated that people are individualistic and focus on maximising their own satisfaction (named ‘utility’, in honour of Jeremy Bentham, the first economist to argue for the legalisation of the then banned practice of charging interest; Bentham, 1787). Next, a number of assumptions are made: perfect and symmetric information, complete markets, perfect competition, zero transaction costs, no time constraints, fully flexible and instantaneously adjusting prices. McCloskey (1983) has argued that economics has been using mathematical rhetoric to enhance the impression of operating scientifically. Equilibrium will not obtain, if only one of the axioms and assumptions fails to hold. But their accuracy is not tested. Yet, one can estimate the probability of obtaining equilibrium.
Despite the claims to rigour, the pervasive equilibrium argument and focus on prices reveal a weak grasp of probability mathematics: Since for partial equilibrium in any market, at least the above eight conditions have to be met, if one generously assumed each condition is more likely to hold than not – corresponding to a probability higher than 50%, for instance, 55% – then the probability of equilibrium equals the joint probability of all conditions, which is 0.55 to the power of 8: less than 1%. As the probability of each of the eight conditions being an accurate representation of reality is likely significantly lower than 55% (most having a probability approaching zero themselves), it is apparent that the probability of partial equilibrium in any one market approaches zero (Werner, 2014b). For equilibrium in all markets, these very low probabilities have to be multiplied by each other many times. So we know a priori that partial, let alone general equilibrium cannot be expected in reality. Equilibrium is a theoretical construct unlikely to be observed in practice. This demonstrates that reality is instead characterised by rationed markets. These are not determined by prices, but quantities: In disequilibrium, the short side principle applies: whichever quantity of supply and demand is smaller can be transacted, and the short side has the power to pick and choose with whom to trade (not rarely abusing this market power by extracting ‘rents’, see Werner, 2005).1
Without equilibrium, quantities become more important than prices.”
https://www.sciencedirect.com/science/article/pii/S0921800916307510#bb0295

[ltr]

Nanikore:

On the decline of social democracy in Europe, this is a downside of globalisation and the cosmopolitanisation of the elite....

[ Interesting and important, but this suggests that a European elite had become increasingly uncommitted to social democracy since globalizing does not as such limit social democracy.

The Chinese are globalizing but increasing, broadening and protecting social-economic benefits. The new 5-year plan emphasizes continuing to increase social-economic benefits while opening.

After all, the ending of severe poverty through a population of 1.4 billion was a monumental accomplishment and the Belt and Road Initiative did not limit domestic social-economic benefits. ]

[ltr]

Imagine, France confronting hunger which should be unthinkable but "comically" sending French warships to the South China Sea. This is Macron diverting attention from French social-economic needs by inventing a scapegoat. Wild conservatives in Britain are intent on the same sort of diverting.

[ltr]

Blissex:

There is another related role: to allow "sell-side" Economists to expunge any discussion of the distribution of income from "sell-side" Economics (because the markets give everybody their just deserts"), saying it is a purely political matter....

[ Perfect. I am grateful for these comments. ]

[ltr]

Again, forgive me for posting about a reported life expectancy loss in the UK in 2020 since I have found no original source for the report. I assume the report was mistaken.

[ltr]

The report of life expectancy loss was from:

https://www.standard.co.uk/news/london/men-women-life-expectancy-drop-covid-phe-b925123.html

Londoners hit by ‘staggering’ drop in life expectancy because of Covid
Researchers said the fall was worse than any since the Second World War.
By Ross Lydall

[ I can find no original source. ]

[Blissex]

«This demonstrates that reality is instead characterised by rationed markets. These are not determined by prices, but quantities: In disequilibrium, the short side principle applies: whichever quantity of supply and demand is smaller can be transacted, and the short side has the power to pick and choose with whom to trade [...] Without equilibrium, quantities become more important than prices.»

Those "determined by prices, but quantities" and "quantities become more important than prices" are rather overwrought claims, even if the general gist as to the importance of disequilibrium is quite good. Additional notes:

* Marshall and Walras developed marginalist models that differed as to whether "tatonnement" matched demand with supply acting on quantities or acting on prices (IIRC the walrasian model was one were quantities were assumed and prices adjusted, but it could be vice-versa).
* A long lost and quite important distinction is between "general gluts" (or shortages) in which *all* markets are in disequilibrium, and "special gluts" (or shortages) in which only some markets are in disequilibrium.

«and the short side has the power to pick and choose with whom to trade»

Here I will add something that is very important but somehow scarcely if ever mentioned: in a trade the two sides are not symmetrical, as intuition demands there is a "buyer" and a "seller", and the "buyer" is the side that after the transaction is less liquid, and vice-versa the seller. Shifts in the liquidity of balance sheets are exceptionally important for states, business and individuals (see JM Keynes, H Minyky, M Pettis) and one of the many bad aspects of neoclassical models is that they are designed to obfuscate such shifts (for both technical and political reasons, the technical one is to avoid a multiple local maximums, the politial ones are the consequences).

[Blissex]

“This demonstrates that reality is instead characterised by rationed markets.”
«Those "determined by prices, but quantities" and "quantities become more important than prices" are rather overwrought claims [...] Marshall and Walras developed marginalist models that differed as to whether "tatonnement" matched demand with supply acting on quantities or acting on prices»

I have been too elliptical here, and should make my meaning clearer: that "reality is instead characterised by rationed markets" is amazingly stupid as written in a criticism of general equilibrium neoclassical models, because those models are very explicitly founded on the assumption that *all markets are rationed*, that is prices are greater than zero (for "economic goods"), because an explicit assumption is that demand is insatiable and only limited by the cost supply vs. income (the same thing...).

What the authors should have said to make sense is that the critical assumption of marginalist theory that all markets are perfectly competitive (not "free" as the propaganda goes) that is all sellers and all buyers are price-takers, is not realistic.

Note: how can markets at the same time be rationed by productions costs/income and be perfectly competitive? Please ask Arrow, Debreu and Lucas, I am sure they can make a case which is better than "infinite number of both suppliers and sellers in infinite markets across all of eternity" :-)

[ltr]

Blissex, just terrific.

As for M. Pettis, though, there seems to be no understanding the nature of and planning for the Chinese economy. Pettis is always wrong in analysis on China. (I mean always wrong.)

[ltr]

Boris Johnson, of course, has a perfect opportunity to extend trade and investment relations with China, to the important benefit of both countries. However, there will be much opposition and I have no sense yet as to whether Johnson will take the opportunity.

[rsm]

Regarding retail traders, Dillow's view is outdated. See https://www.zerohedge.com/markets/jpm-makes-surprising-discovery-daytraders-are-evolving-and-starting-hedge-their-massive :

"retail investors are rapidly learning and adapting to how to trade the market."

"Retail activity appears to be substantially higher in the options market than in the cash equity market."

"In terms of sector preferences, most of the sectors are similar in retail exposure, with the exception of Utilities and Real Estate. In those two sectors, the retail participation is much lower than average."

"What this shows is that retail investors are heavy buyers of VIX puts, likely with the intention of earning the roll down of the VIX term structure. Also quite remarkably, the number of call-buying trades on QQQ is quite significant but is outweighed by put-buying trades. This is in stark contrast to the order flow in the underlying equity market, where retail traders have been net buyers of QQQ and related ETFs. This suggests to JPMorgan that retail investors are now buying Nasdaq/QQQ puts as likely hedges for the long cash equity positions!"

"The bottom line is that retail investors, having suffered several bruising falls in their favorite basket of names, are learning how to trade like Wall Street's top pros and hedging their profits by doing precisely what "hedge" funds do - not only going short the offsetting index pair trade, in the case of tech names that would be the QQQs, but doing so with substantial leverage."

Dillow is just afraid that little guys like me are outperforming him ...