Prof. Bob Higgs has a very interesting article that tries to unravel the puzzle of “Hyperinflation” or the lack thereof. Here is the most interesting part of the article.

The preceding combination of events poses a great challenge to economic analysts. How can we explain that the fantastically enormous explosion of bank reserves has not given rise to bank lending that would greatly expand the money stock and thereby drive up prices in general?

The most obvious answer, of course, is that the banks are simply sitting on the reserves, rather than lending them to customers. And why are they doing so? The usual answer is that since late 2008, the Fed has paid the banks a rate of interest on their reserves at the Fed. This interest rate has recently been in the range 0-0.25 percent. Although this is not nothing, it verges very closely on nothing. And if one notes that the purchasing power of money has fallen at least a bit, it is clear that the banks are realizing a negative real rate of return on their holdings of excess reserves at the Fed.

Moreover, they are doing so notwithstanding that they appear to have the option of lending at 3.25 percent to their best corporate customers and at higher rates to their less creditworthy customers. Why are they forgoing the opportunity to earn huge sums by switching out of excess reserves at the Fed into commercial loans and investments? The answer would seem to be that that are so frightened of the risk associated even with loans to their best customers that they are loath to lend. After some volatility up and down and then up again between the summer of 2008 and early 2010, total loans and investments of all commercial banks have settled for more than a year at a level only about 2 percent greater than their level at the beginning of 2008. This increase of about $200 billion amounts to only a small fraction, about 13 percent, of the increase in their excess-reserve balance at the Fed during the same period.

I think this analysis completely misses the point. Let’s take a look at the bank capital requirements for various types of loans.

Cash and equivalents weight = 0
Government securities weight = 0
Interbank loans weight = 0.20
Mortgage loans weight = 0.5
Ordinary loans: weight = 1.0
Standby letters of credit weight = 1.0

You will see that Cash and equivalents have a capital requirement of zero, whereas for ordinary loans and letters of credit requirement is 100%.

So for a Bank of Bailout that issues corporate loan at the rate of 3.25% to Too Big to Fail Inc.  has to keep 100% of that loan as reserve capital. If BoB loans out $100,000 to TBF Inc, therefore earns $3250 in interest that year, ROE = 3250/100,000 = 3.25%. This is assuming, cost of capital is 0%, which I think is a reasonable assumption because they can borrow at 0% from the fed.

Now what happens if BoB lends this $100,000 borrowed from the Fed at 0% and lends it to another bank at 1 year LIBOR rate of 0.73%. Bank is required to keep 20% in reserves, or $20,000. What would be the ROE in this case? 730/20,000 = 3.65%. A better return than lending to ABC corporation.

What if the bank lends this $100,000 right back to the Fed? It earns $250 from the lending and it still has the $100,000 dollars that it would have had to keep in equity(reserves) if it had lent it to TBF Inc. Equity for this type of loan is 0%, therefore ROE is infinite. This is why Banks have no incentive to lend to TBF Inc.


Our tribal forefathers blamed devastation wreaked by nature on the wrath of God. They found it necessary to do “something” to mollify the angry forces – which often meant sacrificing birds, animals, or even human beings to those Gods. Keynesian economics is the modern day equivalent of such bloodletting in the name of doing something.

Keynesians assert that digging ditches, breaking windows, and fighting wars create prosperity.

Android is turning out to be an extremely lucrative proposition, ironically, not for Google but for Microsoft.

I have not dived into the Google’s last 10-Q filing, but I would surprised if they are making any serious money from Android business. The OS itself is distributed free of cost to the handset maker. The way Google could potentially make money is through App sales and advertising. Google could expand mobile advertising without expending tremendous resources on a mobile OS platform that is distributed free of cost. Moreover, Android is not necessarily locked into Google’s marketplace. Recently Amazon had launched a competing Android apps store.

But how does Microsoft make money from Android?

Android apparently violates several mobile patents held by Microsoft. Since Android is open sourced and distributed for free, Microsoft has chosen to pursue the handset makers in litigation battles. The first major handset maker to succumb to pressure from Microsoft was HTC. Now it seems, others will follow soon – starting with General Dynamics Itronix.

Microsoft Corp. and General Dynamics Itronix have signed a patent agreement that provides broad coverage under Microsoft’s patent portfolio for General Dynamics Itronix devices running the Android platform. Although the contents of the agreement have not been disclosed, the parties indicate that Microsoft will receive royalties from General Dynamics Itronix under the agreement.

“We are pleased to have reached this agreement with General Dynamics Itronix, which is an example of how industry leaders address intellectual property,” said Horacio Gutierrez, corporate vice president and deputy general counsel of Intellectual Property and Licensing at Microsoft.

According to some reports, HTC pays $5 for every handset sold to Microsoft. Not sure how much General Dynamics Itronix will pay.

Update June 29, 2011:

Well, Android is throwing more money at Microsoft. Here is the latest:

Microsoft Corp. and Velocity Micro, Inc., have signed a patent agreement that provides broad coverage under Microsoft’s patent portfolio for Velocity Micro Inc. Android-based devices, including Velocity Micro, Inc.’s Cruz™ Tablet. Although the contents of the agreement have not been disclosed, the parties indicate that Microsoft will receive royalties from Velocity Micro, Inc., under the agreement.


Reviewers who got early access to mango update for Windows Phone 7 have great things to say about its features, usability, emotional appeal etc. Here is Katherine Boehret of the WSJ on Mango:

The operating system is a mix of elegance and whimsy that’s a treat to use. Mango is sprinkled with delightful animations on nearly every screen. These include icons that swing out like tiny doors when selected, and little dots that race across the top of the screen when something is loading onto the phone. The result is a playful yet functional interface.

I planned to write a blog on some possible improvements that could be done to the WP7 user experience. Hopefully I will find time soon. In the mean time, here is Joe Belfiore demonstrating some of the features of Mango.


From CNet – Five thing we love about mango.

Update 2:

From Engadget -

Make no mistake, Microsoft isn’t playing coy in the smartphone market any longer. The folks in Redmond are making a significant jump forward in the mobile arena, announcing that the upcoming version of Windows Phone, codenamed “Mango,” will be heading to a device near you in time for the holidays. As its competitors have raised the bar of expectations to a much higher level, Microsoft followed suit by adding at least 500 features to its mobile investment, which the company hopes will plug all of the gaping holes the first two versions left open.

Somalia was ruled by Marxists from 1976 until the civil war and collapse of the state –  run by the Somali Revolutionary Socialist Party politburo. Since that time Somalia has been a stateless society.

The progressive left often relishes destroying strawman version of libertarianism by pointing to a country destroyed by a bunch of socialist “experts” who thought they knew how to run other people’s lives better than people themselves could – former communist country, Somalia. Somalia, to them, is an example of what it would be like to live in “libertopia”.

I am not an anarchist by any stretch of imagination. But I found this article quite interesting, especially, coming from BBC of all places.

The main markets of the Somali capital, Mogadishu, are busy places, giving the impression that business is brisk.

It is not just the daily needs of food and clothing that are available. The latest electronic gadgets can also be bought.

What would somali’s do without an FCC to allocate spectrum to their favorite cronies?

The business success story of the last 20 years has been the growth of the mobile telecommunications sector.

Somali telecoms expert Ahmed Farah says the first mobile telephone mast went up in Somalia in 1994, and now someone can make a mobile call from anywhere in the country.

Of course, there are always young men with large guns in many of these images of Somalia. I have never been to Somalia, so I don’t know how pervasive this phenomenon is. However, if this were a dictatorship, with young men in uniform carrying those guns, somehow people feel better than they would from seeing men without uniform carrying similar weaponry.

Somalia is no paradise, neither are most of the countries in the continent of Africa. It wouldn’t be fair to compare Somalia to those of the West, but compared to it neighbours, I would say Somalia is doing alright, and  may be much better than most.

Further Reference:

Stateless in Somalia – Ben Powell

Somalia after State Collapse: Chaos or Improvement ( working paper )

I have been meaning to pursue blogging for a while now. More than a year ago I setup this website specifically with that in mind. Until recently, I had all the excuses in the world for not doing it more often. I could do a great job of convincing anyone, most importantly me, as to why I just could not find the time to do this. Well, I hope it changes now. Here are a few reasons why I wanted to blog in the first place.

1. Writing my thoughts down or trying to communicate in a way that clarifies the subject matter to me and others forces me to think more deeply.
2. My thoughts will exist for my own future reference.
3. Many times when I read something, I get a vague recollection of something I had seen or read in the past. It usually frustrates me when I cannot place exactly when, where or how. This way, at least, some of these ideas could be searched or referenced again in the future.
4. There is no better way to get good at something than to just do it, and do it often – in this case writing.
5. Pressure of peer/public review makes me do that extra diligence.

It is not exhaustive a list, but it’s a start

A Keynesian economist is like a doctor who prescribes blood transfusion from the left hand to the right hand of a patient, regardless of what afflicts the patient. If patient doesn’t recover, it is always because transfusion wasn’t big enough.

How many Keynesians does it take to change the light bulb? Keynesians don’t change light bulbs, they are busy breaking good light bulbs to stimulate the economy.

After an interesting first class of the mandatory macroeconomic course, I left the classroom with a lot on mind. I have very little time develop these thoughts, or to put them into words. As I had guessed upon receiving the syllabus, the professor is a follower of what could be generally termed as Keynesian economics. She seemed reasonable and open to ideas contrary to hers. Let me make this clear, the reason I am taking this course is because I am open minded to ideas.

I am not going list all the ideas that I found agreeable. What would be the point of it? I am not even going to spend time trying to prove my professor wrong on every single point on which I find myself in disagreement. That will be too arrogant on my part; after all, this is just my first formal macroeconomics class ever. I am trying to find ways to understand the other side. I am just going to focus on one particular topic – inflation versus deflation.

About 10 minutes into the session, the professor asked a vague question – if one had to pick between inflation and deflation, what should he/she choose? I answered deflation. Now, I know in most recessions price levels fall. However, the question remains – what is wrong with falling prices in general, not under some specific abnormal situation?

I received all the answers I have already heard from other experts who fear a bogeyman called falling prices: people will delay purchases as they wait for prices to fall, aggregate demand will fall, servicing debt will become more burdensome – this last part that I agree with, but why should policy favor debtors as opposed to savers? I pointed out that most technology products have experienced falling prices for as long as had them. The response I heard from the students and professor was – it is just one sector of a large economy, and it is still bad when the overall price level declines – even a slow, steady rate of decline (fraction of a percentage), as was clear from professor’s explanation of the logic behind Fed’s target interest rates.

I argued that whole of 19th century, in the U.S., prices fell steadily, yet the economy went through a phenomenal growth period known popularly as the industrial revolution. Professor was not buying it. So I decided to dig up some data at (granted, data is not that great for period prior to 1930s), and here is what I found:

“$66.00 in the year 1900 has the same “purchase power” as $100 in the year 1801.”

So it is clear that prices declined for a whole century, but what happened to GDP?

Real GDP went up from about 7.75 billion (2005 dollars) to 422 billion, an astonishing growth of about 5400%, a lot more than 2300% growth experienced in the 20th century.

Figure 1 (source:

Later on, professor went on to explain Phillips Curve(figure 1) that purportedly showed inverse relationship between inflation and unemployment. In other words, lower unemployment will cause employers to bid up the wages of the scarce labor, thereby causing rate of inflation to rise. Similarly, high rate of unemployment will push down wages and therefore the rate of inflation. Sounds good, but it is not that simple! A fully employed growing economy with high productivity also produces a lot more goods than it would otherwise, so the wages(income) compete for a lot more consumer goods. Why would there be a general rise in prices unless there is a faster growth in money supply than the rate of growth in output?

Here is a chart I found in a recent St. Louis Fed report(Figure2) which just proves my point – there is no evidence of a relationship between inflation and unemployment.

Figure 2 – (Click on the image for a sharper view.)

It looks pretty clear to me that deflation is not the monster that many mainstream economists make it to be. Of course, there are always exceptions but that applies also to argument in favor of a steady rate of inflation.

I have a few other thoughts on that class, but I will save them for another time.