Felix Salmon

Paul Krugman and Megan McArdle both point to this chart today:

What you’re looking at here is the plight of the long term unemployed in the wake of the Great Recession. If you look at the economy before the recession (the blue line), it works pretty much as you think it would: as the number of job openings goes up, the long term unemployment rate goes down. But then the crisis happened, and now we’re in a Bizarro world where the long term unemployment rate goes up even as the number of job openings increases.

It’s worth looking at this chart in the context of one which might be more familiar:

What you’re looking at here is initial claims for unemployment (the blue line) and the unemployment rate (the red line); both are rebased to 100 at the end of 2007. You can see that initial claims have historically been a very good leading indicator when it comes to the unemployment rate. And that’s perfectly intuitive: if the number of people newly claiming unemployment each week is going down, you’d expect the overall unemployment rate to follow.

But there’s something worrying about this chart: although the unemployment rate is indeed coming down, it’s not coming down as fast as you’d expect it to, given the sharp drop in initial unemployment claims. In other words, people aren’t becoming newly unemployed, but the unemployment rate is still staying stubbornly high. Which is another way of saying that this time around, the long-term unemployed are finding it particularly difficult to get back to work.

I decided to put together the exact same chart, only instead of using the overall unemployment rate, I’d look at just the long-term unemployment rate — the proportion of people who have been unemployed for more than 27 weeks. This is what I found:

The blue line, in this chart, is exactly the same as the blue line in the chart above it. But the red line is long term unemployment — which is at massively unprecedented levels.

This chart tells me two things. Firstly, it is indeed the long-term unemployed who are the reason why the unemployment rate overall isn’t coming down as fast as it should be. And more importantly, there’s a quiet humanitarian disaster happening right under our noses. Here’s McArdle:

Short of death or a debilitating terminal disease, long-term unemployment is about the worst thing that can happen to you in the modern world.  It’s economically awful, socially terrible, and a horrifying blow to your self-esteem and happiness.  It cuts you off from the mass of your peers and puts stress on your family, making it likely that further awful things, like divorce or suicide, will be in your near future.

McArdle and Krugman differ on the policies that should be enacted to address this emergency — but they agree that policies should be enacted to address this emergency, with urgency. That’s where they both part ways with Congress, which is much more interested in deficit reduction than it is in trying to make a dent in the long term unemployment rate.

The lesson of the past few years is that this is not a normal recovery: corporate profits are doing great, while total employment remains anemic. We can’t trust the invisible hand to generate the millions of jobs that are needed, especially with regards to the long-term unemployed. With gridlock in Washington, the result is a huge amount of unnecessary human misery.

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The Bureau of Economic Analysis is “essentially rewriting economic history” all the way back to 1929, according to the bureau’s head of national accounts. By adding in the value of American companies’ intellectual property to the way it calculates GDP, the bureau is increasing its estimate of the size of the US economy by roughly 3%. That’s an increase equal to the size of the Belgian economy, Robin Harding points out.

“On a purely technical level, this should more precisely match GDP in any one quarter to the actual economic value the nation generates in that span,” says Neil Irwin. But perhaps more importantly, it points to a shift in how governments value the role intangible ideas play in economic growth. The US  is one of the first to adopt a new international standard for GDP accounting, set by the UN in 2008.

The new data reclassifies R&D as a capital investment akin to a company buying a new tractor or factory, rather than simply the cost of doing business. Estimates from the BEA show this change alone increased GDP by $300 billion (nearly 2%) in the base year of 2007.

The accounting change also includes creative works — the intellectual property behind movies, music, books, and even paintings. In another post, Harding suggests this part of the change may be controversial, as it “will amount to the first official estimate of the value captured from the laws of copyright.”

The American economy is increasingly intangible. Last year, the US Department of Commerce detailed the impact of IP-heavy industries: they employ 40 million people in the US (27.1 million directly and 12.9 million indirectly) and contribute just over a third, or $5.06 trillion, to US GDP. Those IP-intensive jobs also pay 42% more than other industries. – Shane Ferro

On to today’s links:

Servicey
7 lessons on how to fix an economy – David Wessel

Felix
The story of the Boston bombing wasn’t “whatever our readers happen to be finding on the Internet” – Reuters

Charts
How underwater mortgages killed the economy – WaPo

Tax Arcana
The hot new tax-avoidance trend: Classifying your business as a REIT – NYT
The economic case for an Internet sales tax – Economist
eBay is emailing its users to help kill a proposed Internet sales tax – Reuters
The tax treatment of “ice cream cakes and similar items” – State of Wisconsin

Alpha
Investors are pouring billions into the latest hot housing asset: rentals – Bloomberg
This is exactly what the housing market needs – Matthew Yglesias

EU Mess
European austerity isn’t working – debt is up and growth is flat – Guardian
Bill Gross: austerity is not the “way to produce real growth… You’ve got to spend money” – FT

Oxpeckers
The Koch brothers may buy the LA Times and Chicago Tribune – NYT

Ugh
The securities industry isn’t a fan of its employees’ privacy – WSJ

Find Your Own Meaning
Goldman Sachs hosts a hedge fund conference at Yankee Stadium – NY Post

It’s Academic
“An attempt to describe intelligence as a fundamentally thermodynamic process” – Inside Science

Primary Sources
Teachers unions rethink investing in funds that publicly advocate slashing pensions – American Federation of Teachers

Meta-Takedowns
Herdon responds to R&R’s response to Herdon’s takedown of R&R – Business Insider

Probably True
Microsoft Office is the “quiet villain of global finance” – Breakingviews

And, of course, there are many more links at Counterparties.

One of the funnier subplots in the media universe these days is the one about Aereo. Aereo is the kind of company which sounds like a thought experiment, but it’s very real: it takes free broadcast signals, uploads them to the cloud, and rents them out — at a fee — to people who want to watch broadcast TV on their computers. It’s a way of showing the broadcast networks how silly it is that they don’t put their programming online, and it’s also an argument for why cable companies shouldn’t have to pay through the nose for the right to retransmit content which has always been free-to-air.

Real-world companies are largely immune to thought experiments, however, and so it was only when Aereo started operating in the real world that the court cases and ultimatums started being thrown around. If Aereo isn’t shut down, say the broadcasters, they might have no choice but to take their networks off the air entirely. This of course would effectively kill Aereo, whose CEO is rather desperately drawing an analogy between the right to receive broadcast TV and the right to vote.

“The real question is a consumer question: Can you rightfully disenfranchise 50 million consumers?” he asked. “Is that what the preferred policy is?”

In the event that the networks did go through with it, he speculated that other programmers would be quick to replace them in the role of public broadcasters. “That spectrum is incredibly valuable. Somebody’s going to take advantage of that,” he said.

The 50 million number, by the way, should not be considered particularly reliable: it’s Aereo’s guess as to the number of people who ever watch free-to-air TV, even if they mainly watch cable or satellite. (Maybe they have a hut somewhere with an old rabbit-ear TV in it.)

But Aereo is absolutely right that America’s broadcast spectrum is incredibly valuable. The problem is that it’s much more valuable to cellphone companies than it is to broadcasters. The government has a plan to start a series of cleverly-designed auctions, whereby broadcast spectrum would end up being bought from broadcasters and consolidated in the hands of wireless-data companies who value it more highly. That plan can’t be put in place too quickly: the fact is that we’re living in a world where TV broadcasts create much less value than wireless companies could realize with a fraction of the bandwidth.

At the same time, broadcasters are realizing that their retransmission revenues are significantly more valuable than the marginal advertising revenues they get from households which are still reliant on rabbit ears. That trend is only going to strengthen going forwards, especially given that most new TV sets can’t even receive broadcast signals in the first place. What’s more, broadcasters can give themselves a little extra leverage if they shut down their free-to-air service (and Aereo). Once that happens, then if they refuse to provide retransmission rights during negotiations over retransmission rights, the cable companies’ customers will be cut off from their content entirely.

None of this is going to happen quickly, or cleanly. But broadcast TV is rapidly becoming an obsolete technology, and the distinction between cable channels and broadcast channels is a distinction which has outlived its usefulness. Aereo’s very existence is testimony to the silliness of the status quo, and the logical end point is for all the current broadcast spectrum to end up in the hands of institutions which can use it much more effectively as digital bandwidth.

The losers in this process will be Aereo, of course, and also the households which still rely on broadcast TV — somewhere between 10% and 15% of the total. I suspect, however, that those households are precisely the ones with the least amount of political clout. Which means that sooner or later, they’re going to lose their access to free-to-air broadcast TV. They won’t like it, but there’s pretty much nothing they can do to prevent it.

*Update: I’m informed that it’s actually illegal to sell a TV which can’t receive over-the-air broadcast signals. That said, it’s legal to sell a “monitor” which only has HDMI inputs, and which is designed to be used mainly as a TV.

The Boston bombing and subsequent manhunt was in many ways the first big interactive news story. It wasn’t the first big event to be covered obsessively on social media, but it was the first big event where millions of people became part of the story themselves. Some did so through choice, combing through photographs on Reddit or 4chan; others simply happened to be in Boston and saw their public lives, as broadcast to the world on social media, become part of the story just by dint of where they were.

The result was a veritable deluge of streams, in a world where the news has become a hard-to-navigate rapids at the best of times. For anybody who wanted to stay on top of what was happening without drowning in noise, experience and level-headedness were invaluable, and were displayed most prominently by Pete Williams of NBC.

But while Williams was the most visible of the people who got it right, there were many others, mostly unsung, working at places like the NYT. The paper’s public editor, Margaret Sullivan, rightly praises its editors for “staying away from unconfirmed reports” and treating with suspicion anything coming from “unnamed law enforcement sources”.

In the tradition of journalistic oxpeckers everywhere, Sullivan concludes that the NYT’s “reporting from Boston all week was fast, deep and accurate”. Which is the truth, but it’s not the whole truth: I’m quite sure that a very large part of the credit should go to the editors in New York, rather than the reporters in Boston. In a story this sprawling, no one reporter, and no one law-enforcement source, can possibly see anything approaching the big picture; it falls to the editors to take the various streams of information coming into the newsroom, many of which outright contradicted each other, and to weave them into a coherent and accurate whole.

Anybody who was on Twitter over the past week knows how hard that job was. It’s an exercise in massively multivariate real-time Bayesian analysis: as the news streams in from multiple sources over the course of the day and night, every new piece of information has to be analyzed in light of everything else that’s already known, or thought to be known. A clear on-the-record statement from the governor can be assumed to be perfectly reliable, but just about nothing else can be — not even the reporting of your own employees, who can easily make good-faith errors during such an extended and chaotic story. Sleep deprivation alone can account for that.

An experienced editor will use her hard-earned judgment to weigh the relative reliability of all the different sources of information. Some people added enormous value on Twitter — Seth Mnookin, for instance, had fewer than 7,000 followers on Sunday, and more than 40,000 by the end of the week, for good reason. Others, like Williams, proved their reliability on television, even as their rivals at other channels were reporting things which turned out to be false.

There’s an art to working out where to find fast and reliable information, and to judging new information in light of old information, and to judging old information in light of new information. And there’s an art to synthesizing everything you know, from hundreds of different sources, into a single coherent narrative. It’s not easy, it’s not a skill that most people have, and it’s precisely where news organizations add value.

But in this particular case, as Noah Brier points out in a post headlined “Being Part of the Story”, it’s something that millions of people ended up attempting to do, on the fly, anyway:

Everyone wanted to be involved in “the hunt,” whether it was on Twitter and Google for information about the suspected bomber, on the TV where reporters were literally chasing these guys around, or the police who were battling these two young men on a suburban street. Watching the new tweets pop up I got a sense that the content didn’t matter as much as the feeling of being involved, the thrill of the hunt if you will. As Wasik notes, we’ve entered an age where how things spread through culture is more interesting than the content itself.

The crowdsourced hunt was, in the end, unambiguously counterproductive: it hurt much more than it helped. But it wasn’t just Redditors and hive minds which got caught up in this particular mindset. If you look at the missteps of outlets like the New York Post and CNN, it’s easy to see them in this light — breathlessly passing on every new tidbit of information, rather than taking their function as editors and filters as seriously as they should have done.

Which brings me to an important and quite wrong essay from Ben Smith, the editor of BuzzFeed, and his colleague John Herrman.

Under the old rules, a responsible citizen passed any potential bit of news he could find on to the professionals. The professionals collected tips, corroborated them, published the ones that panned out. Reporters could protect their readers from bad information — indeed, for reporters, the story was defined largely by what was kept from the public…

Now we should assume our readers and viewers see virtually everything that we see. We can no longer decide which rumors and scraps of information should be dignified with publication — a sufficiently compelling scrap of information, be it a picture of a man with a black backpack or an anonymous, single-sentence Reddit post from the scene of the crime, will become news on that merit alone…

The media’s new and unfamiliar job is to provide a framework for understanding the wild, unvetted, and incredibly intoxicating information that its audience will inevitably see — not to ignore it. A Reddit post seen by millions without context is worse for the story, and the public, and to the mission of reporting than the same post in a helpful and informed context seen by many more. Reporting is no longer a question of whether or not to dignify new and questionable information with attention — it’s about predicting which of it will influence the story, and explaining, debunking, or contextualizing it the best we can. That is, incidentally, what our readers want.

It’s possible that Smith and Herrman are right that their readers are clamoring for BuzzFeed to explain, debunk, and contextualize the constant stream of noise and misinformation coming from Reddit and Twitter. But I suspect that if there is such a clamor, it’s coming from a vocal minority. For one thing, only a minority of BuzzFeed’s visitors come for hard news at all. And of those who do, only a minority of them care very much what BuzzFeed’s interpretation is of the material they’re reading on Reddit and Twitter. Finally, by their nature, Reddit and Twitter are going to be presenting a different narrative to each of their millions of users: what BuzzFeed’s editors are seeing on those platforms is not going to be the same thing that BuzzFeed’s readers are seeing.

It’s undoubtedly true that in the age of social media, it’s become very easy for anybody to peer behind the news curtain and see the chaotic raw material from which it is produced. But that in no way weakens the onus on responsible and experienced news editors to filter that material and form it into a fast, deep and accurate report. Indeed, the value added by those editors has never been more obvious than it is in situations like this one.

Smith and Herrman are absolutely wrong that a compelling yet false factoid, being shared willy-nilly across various social-media platforms, “will become news on that merit alone”. News is something true and important and relevant; it is not, and should never be, misinformation. Neither is it “whatever our readers happen to be finding on the internet”. Smith and Herrman are essentially taking a hugely important story, here, and reducing it to the status of covering a viral meme: the Gangnamization of terror. I have no problem with news stories covering viral sensations, but they’re what you do after you cover the important stuff. They’re not the important stuff themselves.

Which is not to say that BuzzFeed did a bad job last week. Debunking corrosive memes is a genuine public service, and it’s great that outlets like BuzzFeed and Gawker are doing it. Where I part with Smith and Herrman, however, is in their implication that everybody else — the NYT, the WSJ, the Boston Globe, Reuters, Bloomberg, CNN — should be doing it as well. That’s silly, and I can’t believe that many people would want to live in a world where a relatively small number of Redditors could effectively set the news agenda for the entire country.

On Monday, I received an email from someone calling herself Sarah Hanson, in which she claimed that she had successfully auctioned off 10% of her post-tax future income for the next ten years, raising $125,000 in the process. I wasn’t the only journalist to hear from Hanson: she had already, at that point, managed to score an interview with VentureBeat, which in turn begat lots of other coverage around the internet. But various aspects of the story didn’t smell right, to me, so I sent an email to VentureBeat, asking if they were sure this girl was for real. It turns out that she almost certainly isn’t. I was perfectly happy for VentureBeat to write the debunking; in fact, that was the perfect place for it to happen: there was very little point in me writing a story saying “some person you probably haven’t heard of is very unlikely to actually exist”.

Given the amount of information pouring onto the internet every minute, it’s statistically inevitable that a substantial amount of that information is going to be erroneous — especially when the source is something as unedited as Reddit or Twitter. No mainstream journalism outlet should allow its coverage of a major story to be hijacked by backchannel noise — especially when a large part of the value such outlets provide is that they filter out the noise and transmit only a reliable signal. Just because your readers can peer behind the curtain, doesn’t mean you have any responsibility to yank it open yourself.

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The leaders of the G20 met in Washington today; their official communique was sent out, like any grand pronouncement, as a Word document posted on a Russian website.

The world’s most powerful finance ministers and central bankers appeared to be working through some serious confusion today. Even India’s finance minister seemed a bit puzzled by all the talk of Europe: “It was supposed to be a G20 meeting, but for a moment I thought it was a G7 meeting”, he said.

Three days after a grad student dismantled the widely-held idea of a 90%-of-GDP tipping point for national debt, the G20 agreed to move away from the idea of setting specific national debt targets. This a big change — just three years ago, the G20’s richest nations pledged to cut their deficits in half by this year. Now, as Reuters notes, Europe is not just re-thinking austerity, but promising to slow it down.

The IMF, which previously endorsed Britain’s austerity program, has now changed its stance on debt. That may augur a direct confrontation with the Cameron government. Just today, the UK had its credit outlook downgraded by Fitch, in part because of a “weaker fiscal and economic outlook”.

Mohamed El-Erian blames the IMF for some of the global policy confusion. While he admires the Fund’s “highly respected” analysis and “world class insight”, he says that policy implementation “frequently falls hostage to pressure from its political masters in advanced economies.”

His case in point: during the Cyprus crisis, the IMF signed on to a flawed rescue plan, then quickly retracted its support. The “IMF felt it had no choice but to succumb to pressure by European politicians,” El-Erian writes. Neil Irwin, on the other hand, applauds the IMF for changing its mind on debt and says that the IMF has now become the kind of friend who urges you to work less and drink more. (At the end of a long week, we at Counterparties appreciate those kind of friends.)

The G20 bigwigs also seemed unsure about the effectiveness central banks’ easy monetary policy. On Friday, there were no G20 objections to Japan’s two-year $1.4 trillion monetary stimulus program. But the FT’s Chris Giles says that, after years of low rates and stimulus, the world’s central bankers feel they’re effectively flying blind, in an “environment of uncertainty about the way economies work and how to influence recoveries with policy”.

Ex-ECB executive board member Lorenzo Bini Smaghi summed up the meetings. “We don’t fully understand what is happening in advanced economies,” he said. – Ryan McCarthy

On to today’s links:

Regulators
The SEC is moving past the financial crisis and onto a “bold and unrelenting” enforcement program – Bloomberg

Even More TBTF
Mortgage REITs, the latest systemic threat to the US financial system – WSJ

Data Points
Canadians surpass Americans in net worth – WSJ

Politicking
If at first you don’t succeed: Simpson and Bowles are back with another deficit plan – Bloomberg
The new Simpson-Bowles plan in full (pdf) – Moment of Truth

Tech
Is there a new tech “rust belt”? – WSJ

Correlation
Generational attitudes on sushi and gay marriage – Mother Jones

Progress
Abe’s growth plan for Japan includes getting more women to lean in – FT

Deals
Dude, Blackstone isn’t getting a Dell – WSJ

Random
The European Spreadsheet Risks Interest Group exists, and is predictably awesome – EuSpRiG

Alpha
“Two traders with a Bloomberg terminal” no longer guarantees hedge fund prosperity – Economist

And, of course, there are many more links at Counterparties.

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Isolate corporate boards from shareholders at your own risk. That’s the message of a new study by Lucian Bebchuk, a professor of law and economics at Harvard. There’s a popular school of thought which argues that corporate boards should be given extra ability to ignore demands from shareholders — like Bill Ackman’s adventures at JC Penney or David Einhorn’s agitation with Apple, for example — because they will lead to short-term, unsustainable gains.

Bebchuk writes that “empirical evidence provides no support for the claim that board insulation is overall beneficial in the long term; to the contrary, the body of evidence favors the view that shareholder engagement, and arrangements that facilitate it, serve the long-term interests of companies and their shareholders”. Bebchuk also finds that keeping a board isolated will cause more long-term problems than it solves.

Bebchuck’s findings run counter to the recent arguments against the increasing antagonism of activist investors. Andrew Ross Sorkin thinks shareholder democracy can become just a way for billionaires to very publicly sue each other “in hopes of creating a fleeting rise or fall in a company’s stock price”. He quotes a memo from corporate lawyer Martin Lipton, assailing Einhorn’s attack on Apple:

The activist-hedge-fund attack on Apple — in which one of the most successful, long-term-visionary companies of all time is being told by a money manager that Apple is doing things all wrong and should focus on short-term return of cash — is a clarion call for effective action to deal with the misuse of shareholder power.

Lipton, who has made a career insulating corporate boards from the power of shareholders, is far from a disinterested party. He isn’t alone in his criticism, however. Jill Priluck thinks that “while shareholders can be disciplinarians who right the wrongs of abusive directors, many boardroom activists advance some of the most destructive short-term thinking in business today”. Priluck identifies a key structural problem – ostensibly longer-term institutional investors like pension and mutual funds have become increasingly allied with shorter-term, activist investors. – Ben Walsh

On to today’s links:

Inequities
Where the world’s poorest people live, according to the World Bank – WSJ

Must Read
Gabby Giffords’ devastating op-ed on the Senate’s failure to pass background checks for gun buyers – NYT

Wonks
How a student took on two of the world’ s most prominent economists — and won – Reuters
Reinhart & Rogoff have it backwards: low growth causes higher debt to GDP ratios – Arindrajit Dube
“Dube investigates the causal element, which is the one that’s relevant for policy purposes” – Matt Yglesias

EU Mess
Was the gold sell-off triggered by a European collateral squeeze? – Izabella Kaminska

Good Luck With That
The next generation of house flippers are convinced that this time it’s different – Reuters

Legitimately Good News 
From 2005 to 2011, US infant mortality fell 12% – NYT

Earnings
Morgan Stanley still trying to figure out this whole bond-trading business – John Carney

Data Points
Evidence that “Americans simply don’t know one another very well” – Esquire

Defenestrations 
Rich Ricci, Barclays’ head of investment banking, is stepping down – DealBook

How Quaint! 
A dairy company is narrowing its pension gap with “20 million kilograms of maturing cheese” – FT

Your Daily Outrage
Suze Orman is teaching a personal finance class at a for-profit college that loads students with debt – Huffington Post

And, of course, there are many more links at Counterparties.

A correspondent writes, via email:

Since much of the seed capital of Matter was Kickstarter funded, isn’t it worth asking why the backers aren’t coming along, so to speak?

I know the absolute answer, but the usual issues of founder sweat equity versus angel capital apply, it seems to me. It’s likely that the angel funding via Kickstarter is pretty substantial on a term sheet basis relative to other early stage investing. At the very least, it’s an interesting topic vis a vis what Kickstarter is and isn’t: the Verge just did a piece about how it’s not a store. Fine. But what exactly is it then? It would be one thing if it was used to put the screws to Sand Hill Road, but the people left holding the bag aren’t really Fred Wilson.

This is an easy one, but it’s also important. Kickstarter is not a store, but it’s definitely not a place to raise seed-round equity. The money that gets raised by a company on Kickstarter isn’t debt, and isn’t equity: it’s operating revenues. From a business-plan perspective, Kickstarter revenues are basically pre-orders.

Last September, NPR asked a simple question: “When A Kickstarter Campaign Fails, Does Anyone Get The Money Back?”. It’s a question with a simple answer: No. To take just one example, look at the Geode. It raised $350,000 a year ago, but most of its backers — who are complaining vociferously in the comments section — seem to have received nothing. And while the founder didn’t just abscond with the money (he was eventually tracked down by the Charleston Post and Courier), it’s pretty clear that the Geode is Exhibit A for people who think of Kickstarter as SkyMall for vaporware.

There is one small piece of good news from the Geode fiasco: while the manufacturer has disappeared, and Kickstarter certainly isn’t giving anybody their money back, some commenters have managed to get refunds from their credit-card companies. If you do back a Kickstarter where you’re expecting a reasonably valuable thing in return, then it makes sense to use a credit card, rather than say a debit card or PayPal, to make your payment. (Just as it makes sense, if you’re buying an airline ticket, to use a credit card just in case the airline goes bust before your flight.)

That said, NPR’s question does make it clear that there’s a pretty explicit contractual relationship between the company and the funder: cash goes one way, goods and/or services flow the other way, a few months later. The money counts as revenues, not as funding, and the liability for the company is not a cash liability but rather one of deliverables.

But if it’s wrong to think of Kickstarter funding as debt finance, it’s even more wrong to think of it as equity finance. Kickstarter money is pretty much the cheapest money that an entrepreneur can raise, and that’s great: anything which makes it easier to generate some cashflow for startups can generally be considered a good thing. And Kickstarter is very clear that it’s not going to jump onto the crowdfunding bandwagon that was included in the JOBS act. Other companies can try to provide platforms for small companies selling off micro-chunks of micro-equity: that’s not what Kickstarter is about.

Matter did give out some equity, carefully, to important partners like Clearleft, which is wonderfully recycling the proceeds from yesterday’s sale into a small incubator. Matter’s backers, however, would and should neither want nor expect to see their pledges converted into some kind of equity. Most of the backers — 1,775 of the 2,566 in total — gave $25 or less: it’s clearly impractical for any company to deal with that many shareholders owning such tiny stakes. And people who subscribed after Matter launched have in some cases given just as much money; it’s not clear why the people who prepaid should get some kind of equity stake, while all other customers don’t.

Clearly there’s a bit of an asymmetry here: whenever you back a Kickstarter project, you’re running the risk of unexpectedly losing everything, while there’s no countervailing upside risk of some windfall down the road. But that’s the genius of Kickstarter. It gives creative people and entrepreneurs a way of asking for money without seeming to be begging, and it gives funders a way to be able to support the people they like and admire within the familiar wrapper of a commercial transaction. It’s a fine line to walk, and Kickstarter has done a very good job of not turning it into a contractually-binding funding operation, be it debt or equity or something in between.

For people who are used to looking at the world in terms of capital structures and funding costs, this can be weird: at one event in Davos this year, I met a successful businessman who was genuinely offended at how cheap the effective funding cost was for startup companies using Kickstarter. But backers of Kickstarter projects don’t think that way, and it’s worth noting that Kickstarter caps the amount that any one person can give at $10,000.

On the internet, there are lots of people who are generous and enthusiastic. That’s a great resource to be able to tap into. Let’s not try to turn it into something which is all lawyered up and financial.

This chart comes from Arindrajit Dube, who has a fantastic post chez Rortybomb on whether high debt causes lower growth or whether it’s the other way around. What you’re looking at is the famous Reinhart-Rogoff dataset, as made available by their critics (and Dube’s colleagues), Herndon, Ash and Pollin. Reinhart and Rogoff are the poster children for the statement that high debt loads cause lower growth, especially once those debt loads exceed 90%. But do they?

There does seem to be an inverse correlation between debt and growth, but Dube shows that the correlation is strongest at low levels of debt, below 30% of GDP, rather than at high levels of debt. Countries with debt of 30% of GDP have a significantly lower growth rate, on average, than countries with debt of 10% of GDP, while the numbers at debt ratios above 90% have much wider error bars and are much less useful.

But let’s grand the correlation, for the sake of argument: the next question is whether the correlation implies causation, and if so, which way the causation flows. Here’s Dube:

Here is a simple question: does a high debt-to-GDP ratio better predict future growth rates, or past ones? If the former is true, it would be consistent with the argument that higher debt levels cause growth to fall. On the other hand, if higher debt “predicts” past growth, that is a signature of reverse causality.

That’s what you’re seeing in the charts. Both of them have the same axes: GDP growth on the y-axis, and debt/GDP on the x-axis. Both of them plot the correlations in the dataset, with the dark line being the signal and the dotted lines showing the 95% confidence interval. And just as in the main dataset, the correlations are much clearer at low levels of debt/GDP than they are at higher levels.

But the two charts are different, all the same, especially at levels of debt/GDP above that 90% level. If you look at the left-hand chart, it shows that it really doesn’t matter how much debt you have: you’re likely to average about 3% GDP growth a year over the next three years. On the other hand, if you look at the right-hand chart, it shows that the more debt you have, you’re significantly more likely to have experienced low growth in the past three years.

In other words, the causation here seems about as clear as causal analysis can ever be: low growth causes high debt, rather than high debt causing low growth. Indeed, once you get past 90% of GDP, your debt load doesn’t seem to have any significant effect on future growth at all!

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The fallout over the Reinhart and Rogoff errors continues. Yesterday’s debate circled around what this all means for austerity. Today, the debate widened, taking a few steps backwards in search of perspective. The economic profession as a whole – along with that of the bloggers who popularize it – ended up coming  in for criticism and soul-searching.

The authors at the heart of the controversy did continue to argue about the substance of the criticisms. RR published their second response, conceding that the UMass paper has indeed found a “significant mistake” in their data on international debt-to-GDP ratios. They said that their overall argument, however, remains valid. Meanwhile, Robert Pollin and Michael Ash, two of the UMass researchers, kept pushing in an FT op-ed this morning, saying that the time has come to “rethink austerity economics”.

Both Josh Barro and Matt Yglesias took issue with one of the most common interpretations of RR’s work  – the existence of a sort of economic tipping point for countries with debt-to-GDP ratios above 90% – and argued that new evidence makes that thesis extremely weak. Other bloggers, however, moved on from the argument over minutiae in the data to ask what this mistake means for the field of economics.

Chris Dillow questions whether today’s economists value the right skills. He says that RR’s errors “reflect a culture which prizes” the ability to produce brilliant, explanatory theories over the “dull pedantry” of meticulously examining data. Justin Fox likens the debate to “watching the sausage of macroeconomics being made.” Data is relatively scarce in the field, he says. As a result, we should “acknowledge that our knowledge is limited and proceed anyway on a mix of data, theory, and intuition.”

Peter Frase uses the controversy to rail against non-academic econobloggers, or “wonks”, who parrot the findings of academics:

When Wonkblog presents the findings of Reinhart and Rogoff without comment, they are implicitly telling us, “trust these people—they’re famous academic economists”. This is because they don’t have the ability to do what people like Paul Krugman did, and actually assess the correctness of the famous economists’ claims.

Zach Beauchamp echoes Frase’s sentiment, wondering if “the new spate of academic-study blogging might, far from informing the public, actually be lulling it into a false sense of intellectual security”.

Paul Krugman, writing no less than three posts on the issue, just wishes policy-makers would stop using research which hasn’t gone through peer review to validate their political views. After pointing out RR’s clear errors, he concludes that “the larger story is the evident urge of Very Serious People to find excuses for inflicting pain.” – Shane Ferro

On to today’s links:

The Fed
The Fed may be creating “abnormal growth that looks precancerous” – Jesse Eisinger

Right On
An imperfect immigration reform bill would still be enormously positive for America – Eduardo Porter

Takedowns
The self-defeating, self-interested push for financial literacy – Helaine Olen

New Normal
How student debt is hurting homeownership and auto sales – Liberty Street Economics

TBTF
Fed’s Stein: There is actually a subsidy for too big to fail banks – Federal Reserve

Popular Myths
Sorry Millenials, but you’re part of the least entrepreneurial generation – Quartz

Earnings
BofA’s disappointing first quarter: both lower expenses and lower revenue – Reuters
BofA’s full first quarter earnings release – Bank of America

Servicey
How not to make =SUM errors in Excel – Quartz
Acetaminophen is good for your existential problems – The Awl

Your Daily Outrage
Foreclosure-relief checks are bouncing – NYT

Niche Markets
The cupcake market is crumbling – WSJ

Advanced Strategy
Before the late 1990s, no one used the phrase “business model” – Quartz

Interesting
Seeing a digital rendering of your elderly self makes you save more for retirement – Cass Sunstein

Oxpeckers
The Boston Marathon is in Boston, and other facts the New York Post got right – Vanity Fair
CNN’s 90 minutes of error-strewn reporting – TPM

Billionaire Whimsy
Dan Loeb buys Sandy Weil’s yacht for about $50 million – CNBC

So There
You can blame your parents for why you don’t go to the gym – NYT

Ugly
T Boone Pickens is suing his son for cyberbullying – Forbes

Stuff We’re Not Linking To
The meatpacking district is “in the infancy stages of being gentrified” – NYT

And, of course, there are many more links at Counterparties.

When Matter launched, last year, co-founder Bobbie Johnson told Christopher Mims that “done right, we can offer something valuable and remain sustainable in the medium term.” Little did he know how close he was to hitting the nail on the head: it turns out that it’s not “the medium term” which is going to provide Matter’s sustainability, so much as a term sheet from Medium.

This morning, Matter announced that it’s being acquired by Medium, the Ev Williams company which makes it incredibly easy to put up really good-looking articles online. (That’s where my own most recent longform article appeared; it recently generated its 150,000th pageview.) This is fantastic news for both companies.

Medium, which already has first-rate editorial talent in the form of Evan Hansen and Kate Lee, now owns a company which produces fantastic articles on a regular basis, and which makes those articles look great. With the Matter team in-house, Medium will learn a lot about exactly what writers and editors want and need. What’s more, it now will have real revenues — and the ability to play around with different ways of generating those revenues. From the Matter FAQ:

We still think that selling individual articles and subscriptions is a great way to fund long-form journalism, and we’ve got no immediate plans to change that model. But we also want MATTER to evolve. Experimenting with tweaks to the model and the way we distribute our content will be a vital way of making MATTER robust in the long term. Joining Medium means we can get the help we need to run those experiments.

I’ve been saying for a while that Matter should look for ways that readers can pay them after they read a story, rather than before. It’s the distinction between forcing people to pay and letting people pay; my feeling is that it would massively increase the number of people interacting with Matter’s content, while also — quite possibly — increasing its revenues as well. (Especially since some small number of people will give significantly more than the 99 cents they’re limited to at the moment.)

I hope that Matter doesn’t feel too constrained by obligations to its existing subscribers: I’m quite sure that very few of them would mind very much if Matter allowed a bunch of its stories to come out from behind the existing paywall. But beyond its new-found ability to experiment with its business model, Matter more importantly now has access to some of the best designers and technologists in Silicon Valley, and as a result should be able to produce ever more gorgeous, immersive, and interactive journalism.

Both Matter and Medium have created spaces where longform articles can breathe, free of banner-ad intrusions. Both of them are looking forward to building a sustainable business around such articles. Now that they’ve merged, I’m optimistic that they’ll continue to innovate and help build the future of how people — amateur writers and professional journalists both — are going to want to express themselves online.

CMA is out with its quarterly Global Sovereign Debt Credit Risk Report, which includes this league table:

CPD stands for cumulative probability of default, which means that according to the market, Argentina has an 84.5% chance of defaulting at some point in the next five years. Calculating these probabilities is more art than science: Thomson Reuters puts the 5-year default probability at 71%, but both TR and S&P agree that the one-year default probability is about 50%.

How can that be, in a world where it seems all but certain that Argentina is going to default this year?

Well, for one thing, life is never as sure as bloggers make it out to be. But also, all the standard default probabilities assume that if Argentina defaults, bondholders will get back only 25 cents on the dollar. Which is improbably low. Argentina has both the ability and the willingness to pay its debts; it just doesn’t want to pay holdouts, and is likely to be forced into technical default as a result. This is a long way from the kind of outright debt repudiation that we’ve recently seen in countries like Ecuador, and it’s fair to assume that if and when it defaults, Argentina will try its hardest to ensure that its bondholders (holdouts excepted, of course) get repaid in full on everything they’re owed.

So let’s look at the 1-year CDS, which is currently trading at about 38 points up front. That means that if you want to insure $100 of Argentine debt, you need to pay $38 to do so. On top of that, if Argentina does default, you’re going to need to deliver a bond in order to get your $100 back. The way that default probabilities are calculated, they assume that defaulted bonds are going to cost about $25 each. So if you buy protection for $38, and then spend another $25 on the bond you have to deliver, you’re paying $63 in order to get your $100 payout, for a profit of $37. On the other hand, if Argentina doesn’t default within a year, you lose your $38 insurance policy, for a loss of $38. Since the profit and the loss are roughly equal, that means the probability of default is roughly 50%.

What happens, however, if the price of the defaulted bonds doesn’t fall to $25? Right now the cheapest-to-deliver bond is trading at about $33, and I doubt that it’ll fall much further than that, even if Argentina doest default. In that case, the profit to someone who bought protection drops to $29, while the loss if Argentina fails to default within a year remains $38. You wouldn’t take that trade if the probability of default was only 50%: the implied probability of default now rises to something more like 60%. And remember too that the price of the cheapest-to-deliver bond could conceivably rise post-default, depending on the actions of the Argentine government and how it decided to intervene in the markets. After all, the Argentines have a strong political interest in minimizing the profits of those who have bet against them.

The fact is that the markets know full well that countries like Argentina can and will default occasionally, despite the fact that standard CDS calculations always think of defaults as one-off events. (Just look at the presence on the league table of Argentina, Pakistan, Ukraine, and Iraq, all of which have defaulted in recent years and seem to be reasonably likely to do so again within the next half-decade.)

In a fascinating new paper, for the Deutsche Bundesbank, Klaus Adam and Michael Grill try to calculate an optimum sovereign default strategy: they try to work out when it makes sense for a sovereign to default, and when it doesn’t. And it all comes down to what they call λ, a variable which measures the cost of default to a country. They write:

We first consider — for benchmark purposes — a setting without default costs (λ=0). As we show, the full repayment assumption is then suboptimal under commitment and sovereign default is optimal for virtually all productivity realizations. This holds true independently of the country’s net foreign asset position. We then show for “prohibitive” default cost levels with λ≥1, default is never optimal.

The thing to remember, as you read this, is that λ is a variable, even though for the purposes of the paper it’s treated as though it doesn’t change. And while λ might well be relatively high for a country like Germany, the more that a country defaults, the lower it becomes. After all, a lot of the cost of default is related to the lack of market access, and countries like Argentina have precious little market access even if they don’t default.

What we’re seeing in countries like Argentina and Ecuador, I think, is a rational response to λ falling to levels very close to zero. When that happens, such countries will default quite often — and that frequent default will be baked in to bond prices no matter how healthy the country’s broader economy. As a result, the “official” default probabilities for serial defaulters like Argentina are almost always going to be understated. Although I still think that buying 1-year protection on Argentina right at current levels is probably quite a good bet.

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The ur-text of the international austerity movement may have a few damning errors in it — including, it seems, some silly Excel mistakes. Mike Konczal set off a near-riot in the econoblogosphere today with this post, which summarizes a new paper that takes aim at seminal 2010 work by Carmen Reinhart and Kenneth Rogoff. The paper concludes that R&R made significant errors in their work:

The full extent of those errors transforms the reality of modestly diminished average GDP growth rates for countries carrying high levels of public debt into a false image that high public debt ratios inevitably entail sharp declines in GDP growth…

RR’s incorrect stylized fact has contributed substantially to ensuring that “traditional debt management issues should be at the forefront of public policy concerns” (RR 2010a p. 578). Specifically, RR’s findings have served as an intellectual bulwark in support of austerity politics. The fact that RR’s findings are wrong should therefore lead us to reassess the austerity agenda itself in both Europe and the United States.

R&R’s widely-cited research has been adopted by the austerity movement – a movement that Rogoff, for one, has been part of for over a decade. As Tim Fernholz notes, R&R’s work has been praised by Tim Geithner and Olli Rehn, and R&R personally briefed 40 senators on their findings. The main takeaway from R&R has been that countries with a debt-to-GDP ratio above 90% have had a negative growth rate, on average, since 1946.

This notion has huge implications for Europe, where debt-to-GDP ratios are near the theoretical danger zone, and for the US. But three economists at the University of Massachusetts tried to replicate R&R’s 2010 results and found them guilty of excluding data, spreadsheet errors and unorthodox weighting of certain countries.

Missing data from Australia, Canada and, particularly, New Zealand, changed the entire conclusion of R&R’s paper, the authors find. They say that the average growth rate for countries with debt-to-GDP ratios above 90% was 2.2%, not -0.1% as R&R suggest.

Matt Yglesias jokes that “naturally this is going to change everything. Or, rather, it will change nothing.” The Reinhart/Rogoff case for austerity, he says, has always got the causation backwards: low economic growth leads to high levels of government debt, not the other way around. FT Alphaville notes that it’s nearly impossible to directly blame R&R for policy mistakes: their findings were “simply used as a post-hoc justification for policy that was inevitable”. Paul Krugman thinks this could discredit one of the main pillars of the “intellectual edifice of austerity”. Tyler Cowen, for his part, wonders if the mistakes mean he should just pay less attention to economic research.

R&R have issued a quick response their critics, complete with a data table. They don’t mention their Excel error, but they do say that their critics’ findings agree with the main premise of their 2010 paper – that higher debt leads to lower growth. They also note that the BIS, IMF and OECD have all come to similar conclusions. They also warn against turning their work into an endorsement. “We are very careful in all our papers to speak of ‘association’ and not ‘causality’”, they write, a little disingenuously. – Ryan McCarthy

On to today’s links:

Awesome
Interactive charts of inequality along NYC’s subway lines – New Yorker

Inefficient Markets
The world’s largest carbon emissions market is down 40% to a record low – Reuters

Alpha
In the past two days, John Paulson has lost more than $1 billion on gold – Bloomberg

Wonks
“The IMF is now among the strongest voices against excessive fiscal austerity” – Neil Irwin

Regulators
Five years after the financial crisis, the SEC may finally get around to reforming money-market funds – WSJ

China
Drop in spending by government officials “may be the largest factor” slowing Chinese growth – WSJ
Chinese growth slows to 7.7% in first quarter – Reuters

Nothing To See Here
Gallery owner tied to the Russian mob indicted for organizing high-stakes poker games – NYT

Bold Moves
The DOJ is invoking wartime powers to extend statutes of limitations for financial crimes – WSJ

Revolving Door
“When corruption problems really get bad is when you don’t even see the corruption” – Matt Yglesias

Subcultures
“It’s not 100 hours of manual labor, or even intellectual labor. It’s 100 hours of being there” – Matt Levine

Possibly Useless Data
When cicadas emerge, markets produce double their average historical returns – Market Watch

Innovation
John Doerr uses Google Glass to cheat at Scattergories – BetaBeat

EU Mess
No, Germans aren’t poorer than Italians or Greeks – Vox EU

Cephalopods
Goldman’s revenue jumps to $10 billion – Goldman Sachs

And, of course, there are many more links at Counterparties.

Maud Newton has a good introduction to the art of Molly Crabapple, whose new paintings are being raucously exhibited at a storefront gallery on the Lower East Side. The new work was born of Occupy, and shares much of its ethos:

“Occupy favored art that was populist,” she told me last month… Theirs was art, Crabapple says, “that was passionate, accessible, unironic—art that bled and took sides. It was art out of the gallery and into the streets, into life. I hope it presented an alternative, a good strong alternative to detached, ironic uber-expensive art whose primary purpose is to fill up an oligarch’s loft.”

Newton places Crabapple in what she calls a “vanguard” of “artists are dedicated to a more democratic art world”, and quotes Jerry Saltz’s important essay on how the “art world” is fragmenting into multiple “art worlds”. Saltz’s piece, interestingly enough, is illustrated with a photograph of Keith Haring’s 1982 opening at another downtown storefront art gallery. For all that Crabapple wasn’t even born in 1982, the similarities are obvious: a flat, populist, all-over aesthetic with a real propensity to go viral; the gallery merely one part of a much broader cultural attack.

It’s not that such things are entirely absent from the higher-end art world these days: indeed, you can see them in any number of artists from Duke Riley to Takashi Murakami. Rather, what’s interesting to me is the way that a new economics of art is emerging — one which has much less emphasis on the Priceless And Transcendent Unique Object, and which relaxes much more easily into simple enjoyment of the art itself, whatever form it takes.

Crabapple, for instance, in her Kickstarter campaign for the current show, promised to give 538 backers art objects ranging from a signed Molly Crabapple million dollar bill, all the way up to one of the 9 big paintings which anchor the show. Those hundreds of backers are excited to be supporting the project; they’re not, in general, worried about things like edition sizes, or certificates of authenticity, or all the other trappings of art-world seriousness which mainly exist to give potential buyers the illusion that they’re purchasing something which has some kind of secondary-market resale value.

There are many successful artists these days, from Shepard Fairey to Damien Hirst, who are taking this path — who are selling art to consumers who enjoy it, without making a big deal about how unique it is or how much it might rise in value. These artists tend to want to disintermediate galleries, who are generally wedded to the art-as-investment narrative, or at least to the idea that there’s a certain amount of money that any given artwork is “worth”. That’s very different from the practice of, say, Roberto Dutesco, whose Soho storefront sells his photographs of horses in much the same way that the shop next door might sell sofas. The photos are expensive, but not because they have any particular resale value: the major auction houses won’t even accept them. (The last time one of them came up for auction, in Berlin, it sold for the same price as Dutesco’s book.)

Dutesco’s photographs have decorative value, and they look expensive, and they’re actually extremely good at filling up an oligarch’s loft, if the oligarch isn’t particularly interested in detached, ironic uber-expensive art. In fact, they are just as much at home in Soho as limited-edition Fairey posters are in Los Feliz. And just like Fairey, Dutesco can make a very good living selling his art, as a decorative consumption good, directly to the people who put it straight up on their walls.

This kind of thing is not entirely new, but I think it’s becoming more common, thanks to the way in which the internet allows artists to reach a niche audience much more easily than they ever could before. I’m a big fan of Etsy, in this regard; I’ve used it myself to buy the work of the brilliant Stephanie Tillman, who sells her wonderful, darkly hilarious embroideries online at ridiculously low prices. Much like Dutesco, every piece is unique, but anybody else can come along subsequently and buy their own virtually-identical version. Originality and scarcity are not what matters; it’s the art that matters.

The high-end art world naturally mistrusts all these artists, as it mistrusts just about anybody who tries to sell their own work rather than going through a gallery. If an art lover buys art directly from an artist without a gallery, you’re not going to have any third party reassuring yourself that you’re making a good decision, or that the piece will be worth much more in the future. The art world lives on third-party validation, and galleries really do earn their money, in that without them, the art they sell would be worth much, much less.

But as that world shrinks down to a hard and shiny plutocratic core, alternative models are bound to present themselves — and with them, a whole new idea of what art is and should be. When you procure art via Etsy or Kickstarter, you’re basically going back to the old patronage model, trusting your instincts, going with what you love. It’s incredibly easy to be very snobbish about a lot of this art, but in many ways its very attraction is the way in which it has no particular interest in ending up on the walls of MoMA.

We no longer live in a world where a small group of the self-appointed elite can simply tell the rest of us what is good and what isn’t. We’re going to make our own determinations of what we love, and we’re going to be happy transgressing boundaries in doing so: many of the comments on my post about technologists buying art, for instance, were from techies who said that they do buy art; it’s just that the art they buy is likely to be a piece of hardware, like the iPhone, or maybe a Telsa car. Their point is well taken: people pay a premium for such things just because they love their aesthetics, and want to own them and interact with them. They’re quite art-like, in that way.

I hope this world expands, and that many more artists will be able to carve out a niche for themselves selling pieces directly to the people who love what they do. Museums and curators will always exist, searching for narratives and art-historical importance. But if the internet is going to democratize art, and I think it probably will, then those tastemakers are going to have to be marginalized in the process. Instead, in places like Etsy and Kickstarter, a thousand flowers will bloom.

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What’s a retailer to do with a widening gap between rich and poor customers? Starbucks is the latest chain to target America’s “hourglass economy.” By cutting 10% off its grocery-store coffee bags while keeping in place the price hikes it put in place in its cafés last year, Starbucks is simultaneously pushing both its discount and premium products.

It’s a sensible strategy: low-wage occupations have dominated new jobs in the last few years, even as high-earners captured 121% of the income gains of the economic recovery. In 2011, the WSJ noted Procter & Gamble’s “high and low” approach to consumers by promoting its expensive Olay and Gillette products, while introducing a bargain dish soap for the first time in 38 years. The shrinking of the middle class “required us to think differently about our product portfolio and how to please the high-end and lower-end markets,” a P&G executive told the WSJ. “That’s frankly where a lot of the growth is happening.” Frito-Lay, Anheuser-Busch InBev, and ConAgra have also developed or expanded their offerings at both ends of their product lineups, according to LEK Consulting.

This is a strategy recently-ousted JC Penney CEO Ron Johnson would have been wise to pay attention to, writes Rita McGrath. Johnson’s goal of turning the retailer into “Bloomingdale’s for the mass market” was a non-starter “because the mass market is gone.”

Which isn’t to say this approach works for everyone. After trying to go high end with smoothies and salads, McDonald’s has now reverted to emphasizing its Dollar Menu more aggressively this year after promotions of its more expensive menu items failed to  “resonat[e] with consumers,” in the words of CEO Don Thompson. – Peter Rudegeair

On to today’s links:

EU Mess
Can we all admit the Euro is an economic failure? – Tim Duy

Charts
Why you should be thrilled by the collapse of the price of gold – Joe Weisenthal

Anti-Goldbuggery
Warren Buffet on gold: bandwagon investors  ”create their own truth – for a while” – Ivan Hoff
Five reasons that might explain the yellow metal’s price collapse – Matt Phillips

Quotable
Corporate governance runs on a “system unworthy of Soviet-era sham democracies” – James Stewart

Housing
Elizabeth Warren’s statistically savvy dismantling of regulators’ $9.3 billion foreclosure settlement – Lisa Pollock
More people doesn’t necessarily equal higher land prices – Noah Smith

New Normal
The terrifying, self-perpetuating reality of long-term unemployment – Matthew O’Brien
“If you’ve been out of work for more than six months, you’re essentially unemployable” – Brad Plumer

Hope/Change/Etc.
How to cash in on your time in the Obama administration: tastefully – Noam Scheiber

Cephalopods
Goldman Sachs may have just inadvertently strengthened the case for breaking up the big banks – Simon Johnson
The full GS research report on the Brown-Vitter bill – Hamilton Place Strategies
Already overpaid board members get a $75,000 pay raise – DealBook

Deals
Dish Network offers to buy Sprint for $25.5 billion in cash – Reuters
A $13 billion merger would create the biggest company in the field of genetic testing - Reuters

Awesome
A lesson in Finnish bus lines and creativity – Guardian

Compelling
Activist investors promote destructive, short-term thinking – Jill Priluck

Remuneration
The top 25 hedge fund managers earned a total of $14 billion in 2012 – Institutional Investor

TBTF
Citi reports 31% increase in quarterly profit – Reuters

Alpha
“Income is the new Facebook” – Stephen Gandel

And, of course, there are many more links at Counterparties.

The total amount of gold in the world, according to Thomson Reuters, is 171,300 metric tonnes, or 5.5 billion troy ounces. What that means is that every time the price of gold falls by $100 an ounce, as it did on Friday and it has done again today, the value of the world’s gold falls by more than $500 billion.

That doesn’t mean investors have lost $1 trillion in the space of two trading days. Some gold is used in industry or jewelry, and there’s a huge amount in central banks, which don’t mark to market and therefore aren’t really investors as we normally understand the term. Still, with a “market capitalization” at the end of 2012 of about $9 trillion, the gold market is not much smaller than the NYSE, is twice the size of the Nasdaq, and is almost three times the size of the Tokyo and London stock exchanges.

As a result, the falling price of gold is more important than simply being an opportunity for schadenfreude around the likes of Glenn Beck or John Paulson or Zero Hedge. At the end of 2012, for instance, Paulson owned 21.8 million shares of GLD. Those have sunk some 19%, or $30 per share, since then — a total loss of more than $650 million, for Paulson and his investors. But that’s just a drop in the bucket compared to the $1.6 trillion wiped off the value of gold more generally during the same period.

To put that number in context, the NYSE has risen 6.6% since the end of 2012, a rise in value of some $930 billion. Which means that the value of gold has been falling faster than the value of stocks has been rising. But gold is held in much more concentrated hands: most people have very little exposure to it, while a relatively small number of investors have huge allocations. As a result, the wealth effect from the fall in gold prices is likely to be felt quite acutely.

Gold is the classic zero-coupon perpetual bond: an asset whose industrial value is a tiny fraction of its cash value, and which represents, as Joe Weisenthal says, a costly failure of markets to efficiently allocate capital to where it is best invested. Goldbugs are by their nature defeatist and pessimistic; get enough of them together at the same time and they become self-fulfilling. (That’s why they tend to be so evangelical about their beliefs.)

So what does the fall of the gold price mean for the rest of us? The first thing to worry about is the wealth effect: if people have suddenly lost a trillion dollars, does that mean they’re going to spend less, and hurt the broader economy as a result?

I doubt that, somehow. About 2,500 tonnes of gold is tied up in gold ETFs. That’s about 80 million ounces, which translates to investor losses of about $16 billion in the past couple of days. On top of that, there have probably been about $3 billion of losses in the futures market. Those numbers — a proxy for the gold positions which are marked to market regularly — are relatively modest: they’re much smaller than the $100 billion or so that has been wiped off the valuation of Apple this year alone.

What’s more, very few investors have leveraged positions in gold, and when asset bubbles burst, it’s normally the leverage, more than the bursting bubble itself, which does the most damage.

Still, there will be pain — pain which is necessary to break the gold fever. It’s important that goldbugs are seen to not only have silly beliefs, but also to have lost a substantial amount of money. Gold is a fear trade rather than a greed trade — it’s defensive, and defensive investors are always particularly loss-averse. If you lose money betting on high-flying tech stocks, that’s much more likely to be money you can afford to lose than if you lose money after putting your life savings into precious metals. (Silver, as befits its status as the “B” share of gold, is also being hit badly today.)

The biggest problem in the markets right now is that they’re still far too risk-averse. Fear-based assets like gold, Treasury bonds, and cash are in high demand, while there isn’t enough money flowing through greed-based assets like stocks and bank loans and into the economy as a whole. Even if the stock market is expensive, the number of primary and secondary offerings remains low; similarly, banks are not expanding their loan books nearly fast enough.

What the system needs, then, is a stark reminder that fear-based assets can be just as risky as greed-based assets. Rising interest rates can eat away the value of your bond portfolio, inflation can erode your cash, and as for gold (or bitcoins, for that matter), well, it can plunge in value literally overnight.

My hope is that the price of gold will continue to fall, that goldbugs will look increasingly silly, and that as a result Americans with savings will conclude that the best thing to do with those savings is to put them to work in a productive manner, rather than self-defeatingly trying to protect what they have.

At the end of the 1990s, and again in the mid-2000s, we had greed bubbles. Both those bubbles burst, and the weird result was a fear bubble, which manifested itself in negative risk-free real interest rates and a soaring price of gold. Let’s hope that what we’re seeing right now is the fear bubble bursting. It’s what the world needs.