Zero-sum society redux

PJ O'Rourke wrote a thought provoking WSJ editorial on zero-sum economics, but he is not the first to bring up the issue of zero-sum macroeconomic behavior. One of the best-sellers in economics during the early 1980's was Lester Thurow's Zero-Sum Society.  

This is a recurring theme when growth slows. If there is no increase in the economic pie, there will have to be discussion on how to take some of the economic share of another group. Growth theory  has always been one of the difficult modeling issues of economics. Growth is often driven by innovation but the factors that will drive innovation are often not clear. Hence, a slow growth period will bring out the doom-sayers because they cannot see a path to higher growth. Consequently we then focus on the zero-sum argument. If the president believes there are limited growth opportunities, there will more focus on redistribution of wealth. Growth will not be a viable solution. It belays a lack of optimism on future economic prospects that effort will be rewarded with economic expansion. This is consistent with the Fed view of limited growth. An Age of Pessimism could be upon us. This is similar to the early 1980's, yet the markets were surprised by the faster growth of the post 1982 period. 

Economics and social interaction

"Man's economy is, as a rule, submerged in his social relations." - Karl Polanyi

from Capitalism takes Command: The social transformation of nineteenth-century America edited by Michael Zakim and Gary J. Kornblith

A quote to keep in mind as we head into 2013. We have spent the last year focusing on the view that there is large inequity and capitalism is bad. The rich are evil and should have their money taken away. The rich, however defined, should not be allowed to have their wealth and it is actually the work of others. 

There is a problem of inequity in the US and other countries, but forcing change in social relations will not provide us with a better economic system.  The solution to problems in the US is growth and opportunity and not fighting over what is viewed as a limited economic pie.

Catastrophe risks are real

By definition, all but the last doomsday prediction is false. Yet it does not follow, as many seem to think that all doomsday predictions must be false; what false is only that all such predictions but one are false.

Catastrophe: Risk and Response  Richard A. Posner

Judge Posner provides a nice little book on issues of catastrophe risk. These risks are real and need to be addressed even if the events are very unlikely to occur.  Cost benefit is not easy to apply in these cases but it still serves as a way to judge the size of the problem. Yet, how can it be easy to judge the cost of a pandemic, an asteroid hitting the earth, global warming? It is not, but just because it is hard does not mean that we have avoid the discussion and not try to plan for these events. As aptly put in the quote, most predictions will be false except for the last one.

EM central banks gold buyers

Brazil and China are among the EM central banks that are buying gold. They are starting at a low base relative to G7 countries but there is a clear indication that holding gold reserves is believed to be  a good diversification strategy.

Philippines     +36% or 1.6 mm oz
Brazil             +56% or   .6 mm oz
Mexico          +17% or   .6 mm oz
South Korea  +79% or 1.0 mm oz

In six of the last seven quarters, central bank buying has been above 100 tonnes. Still central bank buying was only 9% higher over the year while ETF buying was up over 50% for the year. The major Eurosystem, Sweden and Switzerland  central banks are still subject to the third gold agreement which does not expire until 2014. The agreement limits sales but central banks have not fulfilled the maximum allowable tonnes that can be sold. It is not binding like first agreement when central banks were active sellers. 

The reason for central bank buying is separate from the usual view that gold is an inflation hedge. With interest rates near zero, gold  can be viewed as a good reserve currency hedge. Gold is the only safe assets as defined by the IMF which is not a liability of a someone else. Gold is being proposed as a zero risk weighted item by the FDIC per a Financial Institution letter from June 18, 2012.

Of course, this is still a drop in the bucket relative to what was sold during the 19 years ending in 2008. Central banks then sold about 10 million ounces a year. What is clear is that central banks especially in emerging markets want to hold other assets than dollars, euros, or yen.