Tag Archives: recession

Risk vs. uncertainty

Austrian economist Hans-Hermann Hoppe writes about cash holdings

Risks (instances of class probability) are contingencies against which it is possible to take out insurance, because objective long-run probability distributions concerning all possible outcomes are known and predictable. We know nothing about an individual outcome, but we know everything about the whole class of events, and we are certain about the future. Insofar as man faces a risky future, then, he does not need to hold cash. To satisfy his desire to be protected against risk, he can buy or produce insurance. The sum of money that he spends on insurance is an indication of the height of his aversion to risk. Insurance premiums are money spent, not held, and are as such invested in the physical production structure of producer and consumer goods. The payment of insurance reflects a man’s subjectively felt certainty concerning (predictable) future contingencies (risks).

In distinct contrast, insofar as man faces uncertainty he is, quite literally, not certain concerning future contingencies, i.e., as to what he might want or need and when. In order to be protected against unpredictable contingencies at unpredictable moments, he cannot invest in producer goods (as in the case of risk insurance); for such investments would reflect his certainty concerning particular future needs. Only present, instantly serviceable goods can protect against unpredictable contingencies (uncertainty). Nor does a man want to invest in consumer goods for uncertainty protection. For an investment in consumer goods, too, is an expression of certainty concerning specific momentary or immediately impending wants. Only money, on account of its instant and unspecific wide-ranging salability, can protect him against uncertainty. Thus, just as insurance premiums are the price paid for protection against risk aversion, so cash holdings are the price paid for protection against uncertainty aversion.


The ET interview with Steve Ballmer is worth reading-

When do you see the recession ending?
Well I actually don’t think we are in a recession — I don’t use that word and I say it’s a reset. Recession some times implies going down, and coming up. I think this is a situation where the economy got to an unsustainable level based upon too high a level of borrowing, particularly by business and private individuals, and it’s sort of like all of that air has to come out and it takes a while. And the government in some sense does not want it to come up too fast because there is too much societal pain if it all comes out. So, this stimulus in some sense is designed to let air out more slowly. Instead of being over quickly, it may take longer to get over, but it’ll be less painful, which I respect. So I don’t know if it will be fully reset for another year, two years. At that point, we will get that GDP growth. GDP growth comes from four sources — population growth, productivity, innovation and debt. Too much of economic growth in the last 10 or 15 years has been from debt. Once we reset, I think the only sources of GDP growth will be productivity and innovation, and some from population…

Do you see Japan’s recent history repeating itself in the US, looking at what happened during last decade?
I hope not. Ask an economist, I am not one. The way it’s explained to me is that the Japanese did not confront some of the problems during the past decade. And then when they did, they did some unusual things. I am sure economists in US universities have studied that phenomenon, but everybody is also trying to avoid too much social pain. I hope that (a repeat of Japan) does not happen. It’s not good for any-body to have stagnation in the world’s largest economy…

Has Microsoft missed out on search innovation? You did try to create a stronger rival by attempting to acquire Yahoo, but that did not materialise?
Google has done a great job — they have built a great business, they are dominant, regulators can decide what that means. The question is: Will they face any competition, and will the search market be an area of high or low innovation? The level of innovation in any category is high when there is competition. We have competition from this funny thing called Linux, which does not even require it to be successful. We have the best and the worst of competition — we have a competitor that’s going to keep competing whether it’s successful or not because it does not require financial resources, it’s keeping our prices down.

So are there innovations to be done in search, and the answer is clearly yes. I can’t speak for Indian languages, but in English, the average search query is 2.2 words because people have learnt that if you type longer queries, you get worse answers. Is there an opportunity for innovation here? I think so. Almost half of all queries never answer somebody’s questions — so 50% of the time you don’t get what you are looking for — that’s interesting. The material that people are looking for on the internet gets broader every day, so the opportunity to be dynamic is quite large. We also think there is a lot of opportunity to invent in business models. Google did a great job of inventing a business model, but is it always going to stay the same?

Unfortunately, search is a game where being in it, it’s expensive to open the door — you have to be willing to invest in R&D to scan billions of documents on the internet. It’s not cheap, it’s like competing with Boeing in the airplane business. You can’t be a little start up….

Speaking of Google, here’s one on aesthetics vs. mechanics.


To put things in perspective, a couple of paragraphs from 18th century French economist Turgot. From the Mises blog

The general freedom of buying and selling is therefore the only means of assuring, on the one hand, the seller of a price sufficient to encourage production, and on the other hand, the consumer, of the best merchandise at the lowest price. This is not to say that in particular instances we may not find a cheating merchant and a duped consumer; but the cheated consumer will learn by experience and will cease to frequent the cheating merchant, who will fall into discredit and thus will be punished for his fraudulence; and this will never happen very often, because generally men will be enlightened upon their evident self-interest.

To expect the government to prevent such fraud from ever occurring would be like wanting it to provide cushions for all the children who might fall. To assume it to be possible to prevent successfully, by regulation, all possible malpractices of this kind, is to sacrifice to a chimerical perfection the whole progress of industry; it is to restrict the imagination of artificers to the narrow limits of the familiar; it is to forbid them all new experiments; it is to renounce even the hope of competing with the foreigners in the making of the new products which they invent daily, since, as they do not conform to our regulations, our workmen cannot imitate these articles without first having obtained permission from the government, that is to say, often after the foreign factories, having profited by the first eagerness of the consumer for this novelty, have already replaced it with something else. It means forgetting that the execution of these regulations is always entrusted to men who may have all the more interest in fraud or in conniving at fraud since the fraud which they might commit would be covered in some way by the seal of public authority and by the confidence which this seal inspires, in the consumers. It is also to forget that these regulations, these inspectors, these offices for inspection and marking, always involve expenses, and that these expenses are always a tax on the merchandise, and as a result overcharge the domestic consumer and discourage the foreign buyer. Thus, with obvious injustice, commerce, and consequently the nation, are charged with a heavy burden to save a few idle people the trouble of instructing themselves or of making enquiries to avoid being cheated. To suppose all consumers to be dupes, and all merchants and manufacturers to be cheats, has the effect of authorizing them to be so, and of degrading all the working members of the community. [emphasis mine]

From an ET interview of former RBI governor YV Reddy-

I think we can see some contrasting situations. While the UK is more transparent on public ownership, the US is somewhat reluctant. There is an increasing reference to the Swedish experience. When Sweden had a banking crisis, its government took over the banks temporarily, cleaned them up and handed them back to the private sector.

But, I think, globally there is no consensus on how these things should be treated. My understanding is that there is a consensus that banks need to be treated as public utilities. Once you term something as a public utility it has to be owned and managed by the government. Otherwise, it has to be intensely regulated. I think the banking industry is likely to be treated as a public utility.

My monopolistic “public utility” managed fourteen power cuts in a single day. The situation is only going to get worse.

I didn’t know Swapan Dasgupta could write like this. He sounds like an out-of-power US Republican discovering the virtues of free markets, and predicts an economic collapse of the UK, and India-

Since they discovered the welfare state as an alternative to Soviet-style Communism, socialists have successfully spread the message that a “caring state” is more important than either families or social communities. In Britain, the state intrudes into every sphere of life from healthcare and education to providing unemployment benefits and pensions. It even tries to prescribe social attitudes. The result is a gargantuan bureaucracy and government spending that equals half the GDP of an economy that shrunk 3.5 per cent last year.

Britain is approaching an economic nightmare. But it is curious that its tax-and-spend profligacy is the ideal of those who tom-tom “inclusive growth” in India. Last week, Rahul Gandhi admitted that 90 per cent of welfare spending is frittered away in waste and corruption. However, rather than balk at this outrage, both he and his economist Prime Minister have preferred a bigger role for government over more incentives to individuals and families. The PM doesn’t believe that a low tax regime is a moral imperative of good governance; to him good economics is mega spending.

In comparative terms, India is still a notch below Britain in both prosperity and economic promiscuity. But if a fragile and self-serving coalition assumes power after May 16, increases budgetary expenditure dramatically – which it surely will do-and adds to the already unsustainable fiscal deficit, Indians may once again experience that sinking feeling of the 1970s. The entrepreneur-driven national exuberance of a year ago may well be subsumed by a sense of helpless decline.

Actually, it will be worse than Blighty. The British state is well-meaning but bloated, plodding and intrusive; India’s will be uncaring, inefficient, corrupt and increasingly criminal.

Cynicus Economicus is angry

Most alarming of all, the greatest and most listened to cynicism is coming out of China – who see the QE policies of Western governments for what they are – harbingers of inflation. How desparate is it when it takes a totalitarian state to ram the truth home?

This is why I am writing an unusually angry post. I am sick of the lies that issuing forth, and I am sick and tired of the way in which the insiders appear to win, regardless of the cost to the rest of the economy. I have watched in horror as these bailouts have chewed up the wealth of the Western economies, both present and future wealth. I have watched in horror as governments have issued ever more debt to support their profligacy and support insolvent banks. I have watched in horror as central banks have commenced monetising government debts, and likely engineering inflationary defaults whilst risking eventual hyper-inflation.

Above all, it really does appear that governments and central banks are willing to sacrifice ever greater swathes of the economy to rescue incompetent and insolvent financial institutions. The only explanation that fits the facts is the grubby clubbiness of the system. It is not the great New World Order conspiracy, but rather the conjunction of interests between well placed individuals. Each, in their own way, moving forwards for their own personal gain. It is not the activity of great conspirators, but rather the collective movement of little men, of people who can think only of their personal gains. Money, vanity, power.

Turgot is right about the government, isn’t he.


Pramod pointed me towards a new economics blog some days back – Cynicus Economicus – who, in his latest post, analyzes the nature of the present recession. The West is on the verge of bankruptcy, he says; China and other developing economies are holding trillions of dollars worth of IOUs which the US cannot pay back. And governments are making the situation worse by burying their heads in the sand. Some days back, he said that the UK government was bankrupt a la Zimbabwe.

It is an “unwelcome” break from the regular Austrian theory, because while both predict armageddon and some very painful years ahead if the government doesn’t step out of the way soon, C.E’s doomsday predictions are decidedly worse (as in fear, not in quality).

No expense spared

The Economic Times editorializes

Obama announced on Wednesday a salary cap of $500,000 (Rs 2.4 crore) for top executives at companies that receive taxpayer-funded largesse. The move, reminiscent of controls in state-controlled planned economies, including our own pre-reform era, is an obvious attempt to address public anger before the President seeks more taxpayer money to fix the US banking system.

It follows quick on the heels of reports of generous bonuses ($4 billion) paid to Merill Lynch executives just before it was taken over by Bank of America, and of the lavish lifestyles of some of the now-disgraced investment bank honchos.

John Thain, ex-chief of Merrill Lynch, spent $35,000 on a commode and former Tyco boss Dennis Kozlowski spent $15,000 on an umbrella stand. Calling Wall Street bonuses shameful and expressing disgust at chiefs who reward themselves for failure, Obama said the curbs were aimed at “taking the air out of the golden parachute.”

Thain spent $35,000, Kozlowski spent $15,000, some one even got himself a $1,500 trash can; and Obama spent $150,000,000 on his inauguration, a third coming from his supporters. But didn’t everybody’s favorite economist say that even if you pay some one to dig a pit and fill it again, that helps the economy? Surely buying trashcans helps too. If you can pay pit-diggers, why not people like Thain?

I think people have lost all sense of perspective and have gone crazy. That’s why they can’t see the situation for what it really is – a big government engineered mess. Not all of them though. Read this comment from the BW article linked to above-

John, you make too much sense. Congress doesn’t seem to understand that “economics” comes from the word meaning “household management”. If we all ran our households like they run our country, we would have creditors threatening our lives. I can’t believe we actually run our economy based on the “wisdom” of John Maynard Keynes. He had no concept of future generations. I’ll have to research his personal life to understand how anyone thinks it is a good idea to pass that kind of debt to your children and grandchildren. These are the same liberals who are always faulting conservatives’ lack of compassion? Wake up, America, we are being robbed blind by the people we “hired”.

Vipin writes about what will happen post recession

Note that since the cause of the crisis is misallocation of resources, we would like economy wide churning. Firms must readjust production processes, some firms will have to reduce employee count, these people will then be employed elsewhere (the time lag between the two registers a high rate of unemployment), some firms will have to shut down, other firms will have to produce new products (less luxury villas, more apartments for instance), and so on. And soon enough we will be back to a rather normal state of affairs.

Not understanding this process is the root cause of many dangerous proposals floating around in the press.


In fact what we really need is more savings, and it’s a good thing that household reduce consumption and increase savings during recessions, we need more resources to restructure production.

Some other perspectives. The Austrian Economists say-

Goldman Sachs has released a report that the economy is going deeper into recession, not recovering. They have also predicted that the bank bailout will exceed $4 trillion. The Washington Post headline this morning is that the economic signs are getting worse, not better. Michigan is officially the hardest hit state by this economic downturn, but California is right behind. Cut backs are taking place everywhere from Starbucks to colleges nationwide.


As readers of this blog know, neither Steve nor I endorsed Ron Paul in his presidential bid even before the negative press concerning his newsletter came out. But I think Ron Paul has been the only political actor I have heard who understands what is going on. As he recently said, politicians and policy makers in Washington think they see a house on fire and they are providing water to put the fire out, but instead what they are doing is pouring gasoline on the fire. As I have said several times on the blog, we are turning a “crisis” into a catastrophe through the policy actions taken.