The U.S. dollar needs to depreciate, Dilma

Last week, I referred you to an incoherent attack on American monetary policy by Brazilian president Dilma Rousseff. She argued that “economies that issue reserve currencies,” i.e., the United States, “are resorting to undervalued exchange rates to ensure their share of global markets.”

There are two basic errors with this claim. First, the only reason the dollar is the world’s reserve currency is because other governments—including Brazil’s—want it to be. No one forced the Brazilians to buy $200 billion of U.S. assets over the past five years. Second, the U.S. dollar is not undervalued. If it were, we would be earning large current account and trade surpluses. Instead, we run deficits.

Dilma had it backwards. The United States has not been taking advantage of the rest of the world—it is the rest of the world that has been taking advantage of us. The only way to peaceably resolve the imbalances that have resulted from decades of protectionism by the surplus countries of the world is through a large depreciation of the U.S. dollar.

A tax reform you probably haven’t heard of

All tax systems are inherently unfair. Only if everyone paid the state for the value of the services provided (or if no one paid any taxes because the state did not exist) would it be possible to justify a particular tax schedule as morally superior to all alternatives. But neither of those regimes are realistic. After all, most government spending is meant to prevent or ameliorate severe poverty. If the beneficiaries of that government spending could afford to pay the amount of taxes that is “fair,” they would not need to receive state aid in the first place.

Suppose the government confined itself to providing basic physical security to its citizens. It is still not clear what would constitute a “fair” system. Would the salaries of the police and the cost of their equipment be split equally among all members of the population? Or do those with more property derive greater value from the security that the state provides?

So every tax system has to be somewhat arbitrary. This does not mean, however, that there are no better systems than the one we have. Today, I will present a practical alternative that is never discussed: the progressive continuous income tax.

How should you think about passive investing?

It is exciting to speculate on the markets. Betting on the future level of UK interest rates, the price of nickel, or the exchange value of the Vietnamese dong versus the Thai baht requires skill, insight, and luck. Consistently making money in the markets requires incredible discipline, intelligence, and time. That is why most of us will never make a living just by investing.

But we still invest all the time, even if it is just a decision whether to leave money in a savings account or stock up on canned food. Most people also have 401k (or 403b) accounts and IRA accounts. Despite the enormous sums of money people put away for retirement, they spend very little time thinking about the best way to do it.

Luckily for you, I used to help some of the world’s biggest and most sophisticated investors with this problem.

The Germans kind of like the euro crisis

Thanks to the IMF/WB fall meetings this week in D.C., a lot of finance ministers, central bankers, and other folks have been in town giving presentations. I had a chance to go to a lunch lecture today to hear from someone who is a senior member of the German government. He said something pretty surprising.

What are stock and bond prices predicting for growth?

In today’s confusing markets, many people are wondering whether stocks are cheap or dear, just as they wonder whether bonds represent great value or a massive bubble. The first question everyone needs to answer before making a trade is: what is already implied in the market price? My purchase of Sony stock was particularly ill-timed because I had yet to understand this concept.

Tonight I will look at what the relative yields on stocks and bonds tell us about the market’s expectations for real profit growth. If you have a strong opinion on the future profitability of American public companies, you can use this metric to help determine whether you should buy or sell shares.

Which is the bigger burden?

Every so often, the Establishment likes to work itself up over the magnitude of the U.S. government’s debt, invariably on behalf of “the children.” But the government’s debt is small potatoes compared to the other liabilities on the American balance sheet. We ignore those at our peril.

Just how bad is the U.S. employment situation?

Everyone knows that the job losses in the 2007-2009 recession were deep and that the recovery has been slow. Less well-known, however, is the scope of the damage relative to history.

Dick Cheney, Modern Monetary Theorist, was mostly right

In 2002, Vice-President Dick Cheney told the Bush Administration’s economic team that “deficits don’t matter.” When the incident became public a few years later, he was lampooned in the press as an innumerate Neanderthal. Turns out, oddly enough, that he was mostly right and his persecutors were mostly wrong.

The Norwegians should stop whining

Polite opinion was pleased by the SNB’s decision last week to hold down the Swiss franc against the euro. One group, however, was not: Norwegians.

Introduction

My first experience with markets came when I decided to buy shares of Sony at the beginning of the new millennium. I knew that the Playstation 2 had been very popular in Japan and would soon be reaching the United States. I did not know, however, that this had already been incorporated into Sony’s stock price. Nor did I know that almost every stock, especially those of technology companies, was grossly overvalued. I bought at the very top of the market. Had I held onto those shares until today, I would have lost more than 85% of my initial investment. That’s before counting the cost of inflation. I’m pretty sure that Bernie Madoff’s victims will end up doing better.

Since then, I have learned a few things. I worked at a macro hedge fund and got inside the heads of the world’s smartest investors. Now I spend my time studying the history of central banking. My goal is to tell you what I’ve learned with clear prose and thoughtful charts. Hopefully I will add to your insight. Maybe I’ll even help you make avoid losing lots of money. At the very least, I expect you to be entertained.

All the best,

MCK