Why Another US Recession Is On The Cards (and possibly worse)

During the recent US political bickering about its national debt, I’ve had many conversations and read many articles about everything from causes to potential solutions to downright frustration. I was thinking about writing an economics focused blog post for a while, and the current debacle has given me some motivation to write about.

So, going back to the title of this post – I agree with those who are contemplating that another US recession might be right around the corner. The one thing we do know for sure is that the US is still in recovery mode from the Great Recession caused by the financial crisis in 2008. And now, we have all been witnesses to the US government being on the verge of default. Thankfully, Congress came to at least some sort of agreement and was able to increase the debt ceiling. Unfortunately, it wasn’t enough to convince S&P Credit Ratings Agency to downgrade the US debt from AAA status to AA+ (basically from complete assurance that the US government would pay the interest on its debt on time to some assurance. The world markets responded in dramatic fashion, with major stock indexes around the world falling more than 5% in single day’s of trading. They financial markets certainly did not behave as if “the US still has an AAA rating”, as President Obama said in a recent speech. I’ll come back to this debt assurance downgrade in a bit

The proposal finally accepted by Congress when the debt ceiling was increased consisted entirely of spending cuts with no tax increases. Right after one recession, such fiscal policy is risky. Unemployment is already high, and GDP growth (economic growth) has relatively stagnated. Because government spending is a direct injection into the economy which increases GDP, from a purely economic standpoint these cuts will hurt the economy more than any equivalent tax increases. Tax increases provide additional income to the government which can be reinvested into the economy. During tough times, people save more and invest less…so by tax increases the government would be reducing savings, and injecting those foregone savings back into the economy. What I’m basically saying is that tax increases would hurt the economy less than spending cuts. Either way though, by trying to balance its budget during non-boom times, the government is risking putting the economy back into recession.

Back to the ratings downgrade – because of all the political bickering on Capitol Hill and an unsatisfactory solution by Congress to the debt problem (complete solution the problem has once again been postponed), The US’ creditworthiness has been put into question. It will now be much harder for the government to borrow more funds in the future, and it will only have to pay greater interest on the bonds it issues. (The US government borrows money by issuing IOU bonds to investors and promising interest on those bonds). With increased borrowing costs, the government will have a much harder time fiscally stimulating the economy the way it did back in 2008…so even if somehow politicians unilaterally accepted that for the sake of economic recovery more spending is needed…the government would only make a lesser impact than with an AAA credit rating.

Another option the government has for spurring economic recovery is expansionary monetary policy…but that has its own problems attached such as increased inflation. Now, inflation would be good for the government as its debts would be worth less, but high inflation would harm the economy overall. Another interesting solution I’ve read about involves the Federal Reserve (the bank the government borrows lots of money from) just forgiving the almost 2 trillion dollar debt the government owes it. This sounds like a great idea, but I’m unsure what negative consequences this would have. Perhaps the Fed’s weakened ability to loan funds to banks?

The fact of the matter is that the US economy is once again in peril. Spending cuts will hurt the economy overall, and tax increases wouldn’t do much better (they would still hurt the economy overall). The government could inflate its way out of debt, but that has potential catastrophic results for the public which suddenly will be able to afford less goods. In my humble opinion, the government should go for a mixture of all three policies and hope for the best in terms of corporate economic growth. Otherwise we may be heading for the collapse outlined so convincingly in this awesome video: http://www.youtube.com/watch?v=Jjv-MtGpj2U

Why Absolute Selfless Altruism Does Not Exist

I have often had conversations with people who maintain that charitable or altruistic acts sometimes are committed in the strictest sense of selflessness – without any gain to the charitable person. I like to disagree. After discussions every now and then with family, friends, and teacher’s I’ve developed some reasoning to back-up the statement: absolute selfless altruism does not exist. I’m going to be referring to utility in the economic sense, so if you are unfamiliar with it, this is a good starting point to learn more.

I’m going to stay away from biological evolutionary altruism for the time being and focus on the everyday ethical notion of altruism. So, here goes – selfless altruism doesn’t exist because of the very existence of a motivation for the altruistic act. The person helping concludes that his/her help will make someone better off than before. And it is this knowledge which makes absolute selflessness (change in utility < 0) impossible, because this knowledge is in itself a utility gain to the helper. I’m basically arguing that from an economic standpoint, the person helping is always gaining something – it may be a concrete sense of goodwill, or just the simple knowledge that they have helped someone (this knowledge implies (at the very least, some) satisfaction, and hence I consider it to be a utility gain). Therefore, I contend that all acts of generosity have some degree of self-interest attached.

A counter-example I was given to this reasoning was the story of a boy who lost his life saving his younger brother in a flood (the younger brother survived). But how could the boy have been acting with self-interest if he risked his own life you ask? I responded that this example too fits in within my reasoning that selfless altruism does not exist. But how could the boy have been acting with self-interest if he risked his own life you ask? (Please note now, that I highly admire the courage of the boy, and in no way mean to disrespect his efforts in saving his younger brother) My answer is the following – it’s not the question of what the boy gains from death that’s important, but the notion of  absence of gains from living, i.e. the boy subconsciously concluded that surviving and losing his brother would be much, much worse for him, then death and the knowledge of the survival of his brother (or the possibility of both of them surviving somehow).

At the heart of this argument is idea that economic self-interest reigns supreme in all decisions. And by no means do I want to discredit any acts of generosity as purely selfish (they’re obviously not). What I do want to discredit though is the negative connotation which often arises when someone mentions self-interested altruism. Humans are self-interested as well as social animals. This is not a dichotomy, nor a paradox. Humans can help others while being self-interested and vice versa. In fact, I’d love to see an economic theory one day which is not based around maximizing personal utility, but based around maximizing a mixture of personal and group utility. I believe that there is nothing wrong with helping someone to feel good. From a utilitarian perspective, such acts of generosity are extremely efficient and effective. And even from a moral one, I don’t think there’s anything immoral in this. In fact, under some schools of philosophy, this is completely moral.

Continuing with a connection to a previous blog post in I mentioned Ayn Rand and individualism – although Rand considered herself the ultimate individualist, I don’t consider her to be such at all, because the ultimate individualist should appreciate the self-interest present in altruism. Rand abhorred philanthropists and in The Fountainhead, on numerous occasions mocked them for being charitable only to feel good. What Rand ironically missed is the individualism being displayed by the philanthropists. In fact, the feel-good-factor itself undermines Rand’s distaste for the altruistic.

I sincerely hope that I have convinced those initially disagreeing with me that ‘selfless’ in the everyday sense is actually meaningless, and that there is nothing wrong with the idea of self-interested altruism. I encourage people to be as charitable/generous/philanthropic as they can, because they will be maximizing not only the additional utility they can give to someone else, but also to themselves.

Fun Program For Making Digital Music

 

Once upon a time, I used to have almost daily access to Mac computers. My favorite program by far was GarageBand and I absolutely loved playing around with different tracks, experimenting, and ultimately creating my very own music. This was about 5 years ago when I was still in Middle School. Since then I have continued making music, albeit on real physical instruments such as acoustic and electric guitars, and a keyboard. However after recently getting into electronic music (thanks to my younger brother), my musical self started itching for a digital mixing program. Only problem was that I no longer had access to a Mac and was now thoroughly a Windows user. To quench my thirst for electronic music making – enter Mixcraft 5.

Mixcraft 5 (among many other similar programs) has proved to be a great alternative to GarageBand, and works seamlessly with Windows. This program, developed by Acoustica, has countless pre-integrated tracks and instruments, but also allows for communication with a MIDI enabled instrument, microphone, and video devices. The application is user friendly, has an attractive layout, and best of all can be used for both audio and video mixing and editing.

So far I’ve been using the 14 day free trial but already within two days the program has convinced me that an official purchase would be worth the 70-odd dollars that the licensed version costs.

The one song I’ve composed so far you can listen to at http://soundcloud.com/anu-maheshwari . SoundCloud, by the way is a great website which allows users to publish their audio to the web for sharing. At some point, I think I’ll write a post about all the great Cloud-based web services which are currently available.

So, go try out Mixcraft and SoundCloud for yourself, and also take a listen to my composition! Happy music-making and listening!

XKCD Reveals Another Trivial But Entertaining Internet Phenomenon

XKCD is a truly remarkable web comic. It has the right mixture of intellectuality and humor and is a constant delight for those of us seeking witty delights. A very cool feature of each comic is the roll-over fine text which contains sometimes additional layers of wit, and sometimes just downright interesting trivia.

In a recent comic humoring many of our dependencies on Wikipedia to appear knowledgeable and intellectual, the roll-over text also gives this gem of trivia:            ” Wikipedia trivia: if you take any article, click on the first link in the article text not in parentheses or italics, and then repeat, you will eventually end up at ‘Philosophy’. “

Try it out for yourself, it’s quite fun! I was able to  go from Brighton, Iowa to Philosophy after 17 link clicks. I’ve tried this out a few times now, and philosophy somehow always turns up. I wonder what interesting mechanism lies behind this (I doubt it is mere coincidence).

Don’t forget to leave a comment with the starting wiki page and how many clicks you needed to get to philosophy!

On the Value of Value Investing

In my last blog post, I mentioned that largely individual disregard for negative externalities and high risks was a major cause of the financial crisis of 2007-2010 in which institutions engaging in trading complicated CDO (collateralized debt obligations), ABS (asset backed securities) and other similar synthetic financial ‘products’ managed to derail the entire global financial landscape forcing governments to step in and clean up the mess left by high risk, short-term oriented financial strategies. For an industry which lauds free-market principles, government intervention must have been a real blow to the strict belief in ‘market fundamentalism’. An article by Joseph Stieglitz, renowned economist, which asserts the relevance of Keynesian economic policies today also mentions the “incompetence of financial institutions in assessing risk and creditworthiness” – functions which should be paramount to any monetary lending activities.

While I will focus on the importance of reevaluating Keynesian policies over supply-side economics in a future post, I’m going to make the rest of this post be about niches of the finance industry which do focus on the long-term, try to assess external risks and creditworthiness meticulously, and why more of such practices are useful for any macro-economy.

This niche that I am talking about are institutions and individuals engaging in value investing – investing in stocks and equity based on their perceived intrinsic value and a future rise in this value. Benjamin Graham was one of the prominent founders and proponents of the theory of value investing beginning in 1928, and he was also the mentor of the most famous and successful value investor today – Warren Buffet (Buffet has ventured into the exotic credit derivatives world too, but for the most part he has been a value investor).

While value investing offers significantly less returns than high risk trading, the lower individual risk also corresponds with lower losses and ultimately lower risk to the external financial environment. The great upside to this investment strategy though is that it incentivizes investment in firms with perceived high value (optimistic future prospects (vision), stable management etc) and also provides incentives to firms to engage in activities which raise their value. If a high value is associated to firms with a perceived net positive on the world, then this form of investing can be considered a representative of the compromise of individual- and group-interest for the realization of both private profits and community profits (i.e. economic growth, more jobs, technological development etc). Examples of where the value investing mentality has made tremendous impact is in start-up technology companies. Companies such as Facebook and Google have through initial funding based on (at least some) value investing principles grown into organizations with widespread positive social impact (just think of the recent Arab revolutions), and in the case of Google have already churned out massive profits.

With the boom in internet companies and increasing interest in renewable energy, value investing in the form of increased venture capital and growth capital should lead the way and signal to other large financial institutions (such as investment banks with private equity departments) that value investing can yield long-term private profits and social profits too.

Ultimate Egoism Is Not Ultimately Good For The World

I have recently finished reading The Fountainhead, Ayn Rand’s epic of a novel heralding human egoism as the ultimate virtue. One of my high school teacher’s noted Rand’s seductive abilities, and I have to admit that I was indeed to quite an extent seduced by the book and its underlying values. The whole notion of individuals steadfastly holding to their ideals, not answering to anyone else, and only doing things in their rational self interest at first glance appealed to me a lot.

However, with more reflection, I also noticed why ultimate egoism of the Randian variety is an unreachable, and unfavorable ideal. Humans are inherently social. Yes, self-interest determines much of our lives, especially economically, but not to the extent that we completely disregard others. We have emotions, we have empathy, we have sympathy, succinctly put – we care for others too. The main problem with Rand’s view of human nature is that the ultimate egotist would fail to see the consequences of his/her actions on the extended environment, thus leading to a long-term net loss of utility and welfare for the entire environment in which the individual egotist exists. As a global society, we have already seen the great devastation caused by largely individual disregard for negative externalities during the financial crisis of 2007-2010.

This brings me to Schroedinger. In one of his 1956 lectures at Cambridge University on Mind and Matter, Erwin Schroedinger defined consciousness as providing “the mechanism for adapting to a changing surrounding”. He ventured further to even postulate that “evolution falls in the realm of consciousness” as evolution is a biological response to changes in environment. While Schroedinger acknowledged that evolution takes place through mutations of genes in individuals, he also asserted that it is the net result of evolution in a multitude of individuals which is biologically significant. He also mentioned that “for a solitary animal egoism is a virtue that tends to preserve and improve the species; in any kind of community it becomes a destructive vice”. He then gave the example of bees, ants, and termites in their primary communities “having given up egoism completely”. Unfortunately, a slightly disturbing anecdote about “worker bees that go astray to the wrong hive and being murdered” concluded the example on a morbid note, and paralleled somewhat to current human society.

As humans have become increasingly interconnected and interdependent, in our immediate communities (and sometimes even larger extended ones), we have consciously evolved towards a greater altruistic identity as we realize that the well-being of others has a profound impact on our well-being. Examples of this include family members often sacrificing their self-interest for the well-being of their kin (in the form of working jobs they don’t enjoy, feeding others before themselves etc) and soldiers risking their lives for the protection of their country and its ideals. However, a widespread ‘global altruism’ is still lacking. Luckily enough, evolution (both biological and social) is a continuing process and we can individually consciously contribute towards a broader outlook towards the well-being of all things living.

To me it seems that Ayn Rand got human nature only half-right. Without doubt, as individuals humans are self-interested, but in communities rational egotism makes way for irrational egotism and rational group-interest. Ayn Rand was a staunch critic of altruism, saying that people were only ‘trying to be altruistic’ so that they could be championed in society. If I could have met her, my question to her would be “but why is that so bad”? While she had a point that true altruism is exceedingly hard to find, I don’t think it should be looked down upon at all. In fact this ‘trying to be altruistic’ aspect of human nature should be inherently good for communities. It represents a compromise between the self and the community. ‘Trying to be altruistic’, humans will work for the greater good of their communities while at the same time quenching personal desires of seeking recognition and ‘feeling good about themselves’. Perhaps this is the best philosophy for humans to follow.

A quick introduction

 

After seeing my friend’s blog http://boundlessrationality.wordpress.com come to life in the blogosphere, I was inspired to start a little something too.

As of May 31, 2011, there is no theme yet to my blog. I know that I wouldn’t mind writing about fiction, non-fiction, economics, politics, current events, philosophy, sports, or other myriad topics (so pretty much EVERYTHING).

The title and address of this blog is my syllogism for evolution of ideas… and I’ll use this blog as a platform to share my ideas with the world, while trying to notice any trends in my writing topics and style (You can probably guess by now that I like science).

Stay tuned for more!