Chinese Inflation, and Next Recession Musings

Optimistic CBO Economic Assumptions

Bad Neighborhoods as a Unifying Theme

Singularity > Climate Change > Peak Oil > Financial Crisis

While lying awake late at night worrying about what kind of world my children will inherit, I find it helpful to come up with schemas for the most obvious and inevitable of the large societal problems.  It makes them seem slightly more manageable to place them in order of importance, or time.  Further, being clear on what are the biggest and most important problems is an essential prerequisite to thinking about solutions: these problems all interact, and solutions to the smaller of them may not be radical enough to address the larger of them.

In this post, I would like to argue for the above ordering of problems.  I mean the '>' symbol in two senses: "A > B" meaning both "The main impact of A will fall later in time than the main impact of B", and also "A is a more serious and fundamental threat to humanity than B".  While a full explication of the arguments would occupy a number of books, today you are going to have to make do with a single measly blog post, albeit longer than usual.

Thinking about Government Debt

US Debt Projections

Consequences of Government Debt Default

Five Centuries of Inflation

Debts and Defaults in History

Implications of Unmeasurable Capital

I was very struck by a piece by Steve Randy Waldmann at Interfluidity yesterday, entitled Capital Can't be Measured.  He is basically arguing that modern financial institutions are sufficiently complex that the concept of their "capital" is subject to measurement errors of the same order of magnitude as the capital itself.  This rang true to me, and put into words something that had nagged at me in reading about financial reforms, but had not come clearly to the surface of mind.

Sure, “hard” capital and solvency constraints for big banks are better than mealy-mouthed technocratic flexibility. But absent much deeper reforms, totemic leverage restrictions will not meaningfully constrain bank behavior. Bank capital cannot be measured. Think about that until you really get it. “Large complex financial institutions” report leverage ratios and “tier one” capital and all kinds of aromatic stuff. But those numbers are meaningless. For any large complex financial institution levered at the House-proposed limit of 15×, a reasonable confidence interval surrounding its estimate of bank capital would be greater than 100% of the reported value. In English, we cannot distinguish “well capitalized” from insolvent banks, even in good times, and regardless of their formal statements.