Fragiler-than-it-seems-Brazil, continued

I've worried before about whether Brazil's economic and political progress would falter if commodity prices swooned. Via MR, this FT article not only puts a number on that...

Plug in 2005 commodity prices, for example, and Brazil’s $23bn trade surplus would become a $20bn deficit.

... it also calls out another worrisome trend, the explosion of consumer leverage.

Bank credit is now growing at a 20 per cent annual clip.

That has given Brazil’s economy an appearance of strength, but also risked stretching it thin. Typically, Brazilians now spend a quarter of disposable income on debt payments. At the height of the US credit boom, by contrast, American households spent about 15 per cent.

With the real now at 1.57 vs. the dollar - higher than it ever got in 2008 - I am pondering whether now is the time to trim my Brazil investment exposure...

Is taxing debt a good idea?

Paul Volcker thinks so; I don’t know, but it’s an interesting idea that would be a sea change in U.S. corporate finance. Here’s a great WSJ chart on how the U.S. has one of the highest corporate tax rates in the developing world, but collects a relatively small share of revenue.


I’m not sure I get how this math works, though:

Headed by former Federal Reserve Chairman Paul Volcker, the bipartisan presidential tax-policy panel also is examining the way multinational corporations pay taxes. The group is considering whether to replace the current system, which taxes global income, with one that taxes only profits generated in the U.S. Such a move could provide more revenue for the Treasury by simplifying a system that has provided multinationals multiple ways to navigate transborder tax rules to minimize payments to the government.

Such changes could raise tens of billions of dollars in tax revenue.

Via Felix Salmon.

The first tech bubble? 1720

Robin Hanson passes on this well-reasoned argument that tech bubbles preceded dot-coms by several centuries:

Although 1720 is not generally viewed as a period of technological novelty, we argue in this paper that there were at least three critical innovations that took place in a very short span of time; two of which were financial innovations, the other was a major potential shift in the configuration of global trade. The first innovation was financial engineering at a national scale. The Mississippi Company and the South Sea Company issued equity shares in exchange for government debt; in effect converting the national debt into corporate stock. …

The second innovation was an incipient shift in global trade. Both of the companies were set up to exploit trade in the Americas. … The third innovation was also financial. The first publicly traded insurance corporations were chartered in Great Britain 1720, as a result of the Act. As such, they represented a new model of capital formation for maritime insurance firms – in a nation built on maritime trade.

These do seem like indisputably valuable innovations in the long-run (like, say, ATMs, as opposed to securitization).

(or has securitization just passed through its initial collapse, preceding a long and fruitful contribution to human economic activity?)

I would be interested to see similarly far-reaching historical analysis on commodity cycles. I have the impression that real commodity prices have fallen throughout human history, but I lack the facts to back it up.

Debt as important as climate

That's the case Tom Friedman makes in the NYT. For human existence on the planet, perhaps not, but for the United States of America, absolutely. The seeming inability of American legislative and executive branches to behave in a fiscally responsible manner is a big source of frustration to me personally (for example, in the healthcare debate that I opted out of).

Emanuel Derman on financial sector returns

Here:

Last night I held a panel at Columbia about the economic system and the principles that should govern it. One interesting question raised but not answered by Prof Bhagwati was: Why are the returns to the finance industry so great? No one had a really good explanation but two reasonable ones were: the existence of cartels, and secondly, that financial firms' outsize returns are periodically wiped out by risks they weren't paying adequate insurance for. [emphasis mine]

Those both sound reasonable to me. More specifically, I find the cartel argument (or more broadly speaking, obstruction of competition) compelling for retail banking (e.g. through high switching costs and lack of transparency), traditional investment banking (e.g. M&A advisory, IPOs, debt issuance, etc.), and private equity (e.g. the emergence of mega-deals and club deals in the last boom). I find the high returns/tail risk argument compelling for trading operations, hedge funds, and private equity (e.g. the massive use of leverage that fueled the last boom).

Incidentally, I used to work in finance and at the time rather enjoyed Derman's My Life as a Quant.

Update: Felix Salmon looks at a similar question for credit cards:

It’s pretty clear from this chart that between them, the big credit card issuers absolutely have the ability to set prices. It’s also clear just by looking at their marketing materials that none of them is particularly interested in competing with the others by reducing the maximum interest rate that they charge.

In most contexts, a chart like the one above would I think bespeak a competitive market. But in credit cards, I’m not so sure.