The Long View

A Certain Loss of Grip

When macrohistory gets weird, it tends to get weird everywhere and at once. This thought occurred to me, though not for the first time, when I came across Andrei Lankov's recent query, Is the Dear Leader Losing His Grip?:

Pyongyang leaders are still in full control of their country...However, over the past year or so, something strange has begun to happen in Pyongyang...The recent currency reform is the best example of such weird and self-defeating policy decisions...last November the government initiated currency reform that was meant to undermine the power of black-market merchants.

The reform was modeled on confiscation-oriented currency reforms once used in the Soviet Union and other communist countries. One morning, the populace suddenly learned that old bank notes were null and void and had to be changed for new ones within a week. The exchange rate was set as 1:100, so, for example, 1,000 "old" won should be exchanged for 10 "new" won. Accordingly, all retail prices and fees were also reduced one hundred times. Harsh exchange limits were introduced: only the equivalent of US$30 in cash could be changed by one person...The measures are standard for communist-style currency reform...However, North Korea's planners also did something unexpected: they claimed that nominal wages and salaries would not change. In other words, a person who prior to the reform received a monthly salary of 3,000 won, would still receive 3,000 won, but paid in the new currency. Effectively, it meant that all wages in the country suddenly increased 100 times.

These measures appear to have had predictably regrettable consequences. This report from The American Thinker may not be far off the mark:

Sources say that food situation in N. Korean military have rapidly deteriorated since the second half of last year. Civilians learned to survive without government ration, but soldiers cannot survive unless the state provide them with food. Stopped food aid from international community dealt a serious blow to them.

According to one of the sources, since the latter part of last year, many units can only provide a few dozen corn kernels or a couple of potatos (per meal) and they have only enough for two meals (a day.) Order came down to make soldiers sleep in the afternoon and not put them into training or work as much as possible.

Back during the Cold War, reports suggesting that a Communist state might have mismanaged itself into an existential crisis were met with considerable interest. The prospect of the failure of a Communist state was taken as proof that the West was right. Today, though, I think that North Korea, Cuba, and Venezuela could all undergo regime change in a (classical) liberal direction without the change bolstering Western self-confidence at all. And why is this? Well, consider Vanity Fair's recent piece on how the fund-manager Michael Burry foresaw and profited from the mortgage-derivatives collapse:

In his quarterly letters he coined a phrase to describe what he thought was happening: "the extension of credit by instrument.” That is, a lot of people couldn’t actually afford to pay their mortgages the old-fashioned way, and so the lenders were dreaming up new financial instruments to justify handing them new money. “It was a clear sign that lenders had lost it, constantly degrading their own standards to grow loan volumes,” Burry said. He could see why they were doing this: they didn’t keep the loans but sold them to Goldman Sachs and Morgan Stanley and Wells Fargo and the rest, which packaged them into bonds and sold them off. The end buyers of subprime-mortgage bonds, he assumed, were just “dumb money.”

A couple of years earlier, he’d discovered credit-default swaps. A credit-default swap was confusing mainly because it wasn’t really a swap at all. It was an insurance policy, typically on a corporate bond, with periodic premium payments and a fixed term. For instance, you might pay $200,000 a year to buy a 10-year credit-default swap on $100 million in General Electric bonds. The most you could lose was $2 million: $200,000 a year for 10 years. The most you could make was $100 million...

The credit-default swap would solve the single biggest problem with Mike Burry’s big idea: timing. The subprime-mortgage loans being made in early 2005 were, he felt, almost certain to go bad. But, as their interest rates were set artificially low and didn’t reset for two years, it would be two years before that happened.

You didn’t buy insurance on the entire subprime-mortgage-bond market but on a particular bond, and Burry had devoted himself to finding exactly the right ones to bet against. He likely became the only investor to do the sort of old-fashioned bank credit analysis on the home loans that should have been done before they were made. He was the opposite of an old-fashioned banker, however. He was looking not for the best loans to make but the worst loans—so that he could bet against them.

It surprised him that Deutsche Bank didn’t seem to care which bonds he picked to bet against. From their point of view, so far as he could tell, all subprime-mortgage bonds were the same. The price of insurance was driven not by any independent analysis but by the ratings placed on the bond by Moody’s and Standard & Poor’s.

This system was run by some of the smartest people in the world, working in what was arguably the freest and most efficient market in the world. What do you do when the best is not good enough?

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Well, at least as an interim measure, you could visit New Jersey, where from May 14 to May 16 the Steampunk World's Fair will be held in Piscataway:

Welcome to a three-day expedition into yesterday’s future! (And no, that doesn’t mean the present!) SPWF is the first East Coast event to welcome Steampunks, Neo-Victorians, Retro-futurists, Gas Lamp Fantasists, and any and all others who consider themselves part of steampunk into a weekend long festival celebrating all things steamy!

This subculture has its own music.

I don't see anything about airships.

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Speaking of yesterday's future, we may note these policy prescriptions by David Goldman:

The US economy simply can't run on 20% unemployment. Consumers will go to the mattresses, retail and service business will drop like flies, investors will pull in their horns, and things will get worse. The only way to reverse the problem is to persuade capital to take more risk, and the only available policy lever to accomplish this is the elimination of taxes on capital income­interest, dividends, and capital gains. As the Obama administration is proposing the precise opposite (an increase in taxation of all these categories supposedly for Medicare) it is more likely that policy will aggravate the problem rather than cure it.

As a preliminary matter, let me note that it is unhelpful to lump ordinary unemployment figures with the underemployed and discouraged workers to produce a Depression-level statistic. 20% unemployment, you say? Why not add the malingering dead and make it 99%?

In any case, may I also suggest that if capital does not want to take risks then maybe it is on to something? As Goldman himself has pointed out, there is a dearth of genuinely promising new technologies to invest in. Green technology still produces more economic bads than goods, in the sense that very little of it will be used without a public subsidy. Private-sector medicine is a racket. US demographics can support steady-state consumption at best and China is simply not set up to function as a global consumption-engine. Encouraging investment at this point, investment for investment's sake, is something the Dear Leader might do.