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What are the rules? And what are the judgments?

Remember my co-worker who was thinking about walking away from his mortgage? Well, he recently did exactly that. His mortgage was around $2500/month. Now he's renting a similar sized house (maybe a bit smaller) for about $1200/month. Financially, it's a no-brainer for him.

When I talk to him about it, he doesn't see himself having any role in what went wrong--"You know, Jonathan, I work hard, pay my taxes, and keep my promises, but when the housing market does something as crazy as this, I really have no other choice."

In other words, the fact that his house dropped in value by $200,000 is something akin to a natural earthquake or hurricane. He had nothing to do with it. He's a victim. His purchase of the house was something within the rules, within the background structure of society. It's something that people do at a certain point in their lives. It was not a judgment.

Of course, I don't see it that way. He bought the house at a bubble peak. When someone makes a purchase by taking out a loan, he's making a judgment call. Sure, there are background rules - mortgage laws, tax rates, interest rates, etc. But the purchase is a judgment about the future value of that purchase. And people are indeed responsible for that judgment.

My co-worker sees himself as a good citizen who follows the rules and was victim of the whims of nature. I see him as a good citizen who follows the rules and made a bad judgment for which he bears some responsibility.

I bring this up because there was a recent essay by Gonzalo Lira called "The Coming Middle-Class Anarchy" (not the good kind) in which he talked about a retired couple who are simply giving up on the system.

Just like the poker player who’s been fleeced by all the other players, and gets one mean attitude once he finally wakes up to the con? I’m betting that more and more of the solid American middle-class will begin saying what Brian and Ilsa said: Fuckit.

Fuck the rules. Fuck playing the game the banksters want you to play. Fuck being the good citizen. Fuck filling out every form, fuck paying every tax. Fuck the government, fuck the banks who own them. Fuck the free-loaders, living rent-free while we pay. Fuck the legal process, a game which only works if you’ve got the money to pay for the parasite lawyers. Fuck being a chump. Fuck being a stooge. Fuck trying to do the right thing—what good does that get you? What good is coming your way?


When the backbone of a country starts thinking that laws and rules are not worth following, it’s just a hop, skip and a jump to anarchy.

TV has given us the illusion that anarchy is people rioting in the streets, smashing car windows and looting every store in sight. But there’s also the polite, quiet, far deadlier anarchy of the core citizenry—the upright citizenry—throwing in the towel and deciding it’s just not worth it anymore.

The essay got a lot of readers and was reprinted in innumerable places. The featured couple is a lot like my co-worker: they follow the rules, pay their taxes, etc. They're middle America.

What few people notice about Lira's couple is that they took out a massive loan during their retirement! Is that wise? Isn't that risky? Retirement should be a time of thrift, a time to live off your accumulated savings, not the time to take out a massive loan for a house in a gated community on the golf course. I guess the easy credit of the past few decades has become such an essential part of American life that taking a big loan during retirement is, ahem, par for the course.

What bugs me about both the couple in Lira's essay and my co-worker is a refusal to see how their poor judgment was a big part in their current woes. They see the bursting of the housing bubble as a random event that they had no way of predicting.

Sure, when middle-class people say "fuckit", that doesn't bode well for society. But what's worse is when people refuse to take responsibility for their own foolish, risk-laden decisions. The next decade is going to teach some painful lessons.

More monetary omens?

One of the stalwart stocks of the past couple of years is Dollar Tree.

An argument can be made that DLTR is an inflation "canary in the coal mine". If most things get more expensive, and everything at the Dollar Tree stores stays the same price, it's more attractive to consumers. Is DLTR's price action warning of inflation?

Similarly, Coinstar's stock has been on fire lately. The argument for it being an inflation canary is much weaker. More money sloshing around means more loose change, and more worthless change?


My current thoughts about the endgame of our financial woes is hyperinflation in terms of dollars, but I'm expecting it well into the future (3-5 years).

Show me the money!

A rare entertaining yet informative article from Sports Illustrated about how far sports agents are willing to go to recruit clients:

"Hey, Kanavis, my name is Josh Luchs. I'm a sports agent, and I flew here from Los Angeles specifically for you," I said. "You're a great player and I came a long way, and I'd really appreciate it if you would sit down and talk to me for a few minutes."

Kanavis said, "Sure, man. Come on in."

We sat on his couch, and I gave him my spiel. I told him about myself and asked him questions, trying to connect with him. After about half an hour, Kanavis said to me, "Josh, you seem like a pretty good guy, can I share something with you?"


"I need some help. My mom lost her job and she's sick and she hasn't been able to make her rent. If I don't come up with $2,500, she is going to get evicted from her apartment."

"I don't know," I said. "Let me think about it. I'll come by tomorrow and let you know."

That night I sat in my hotel room making a list of pros and cons in my head. Sure, it was breaking NCAA rules, but I would be helping Kanavis out. How would I feel if my mom was sick and I didn't have money to help her? I went through this for hours and finally decided to do it. The next morning I went to the bank, pulled out some of my bar mitzvah money, $2,500 in cash, showed up at Kanavis's door and told him, "Kanavis, I gave this a lot of thought, and I want to help you out. I know how I would feel if it was my mom."

"Thank you so much," he said. "You're my boy, man. You're really coming through for me."

I went back to my hotel and for a little while I felt good, but then the phone rang. It was a teammate of Kanavis's calling.

"Hey, man, Kanavis told me you're a pretty good dude," he said. "I got this problem, and I need some help. My father is really sick and he is losing his apartment and I need $2,500. Do you think you can help me out the way you helped Kanavis?"

Hong Kong, Singapore >>> Switzerland

Secret banking is shifting from Switzerland to the far east:

For centuries, Switzerland has been the sanctuary of choice for wealthy people seeking to hide their fortunes and evade taxes. Now, amid a growing crackdown on Swiss private banking, the rich are flocking to Singapore and Hong Kong, which still offer some of the world’s most secret accounts.

Blogroll disabled

I'm not sure anyone actually uses blogrolls anymore, but ours has been disabled due to malware warnings.

HBO hits a home run

I finally got around to watching the series premiere of Boardwalk Empire starring everyone's favorite weird-looking guy Steve Buscemi. Here's a trailer:

The casting is super; every actor fits the role perfectly. The show must cost a bucket of money to make because it really looks like the 1920s.

Mark Wahlberg is listed as a producer, meaning "Marky Mark" is now a serious television industry success with Boardwalk Empire and Entourage on his resume.

Hendry on Hedge Funds

The always interesting Hugh Hendry gives an interview with a BBC program in which he defends the hedge fund industry and also predicts its demise.

Grooveshark Test

I've been waiting for something like this to come along. Embedding Youtube videos to play songs is a workaround, but the videos are distracting.

This is "Your Hand in Mine" by the Texas instrumental band Explosions in the Sky. I swear I've heard this song before on the TV show Friday Night Lights but the internets only say it was used in the movie by the same name from 2004.

In which I defend Paul Krugman

I think Paul Krugman is the modern day Grand Shaman leading the giant village known as the "USA" to financial ruin. Having said that, I must now defend him. Gonzalo Lira, an excellent commenter on the economy, wrote a blog post taking apart Krugman's fallacious argument that deficits got the US economy out of the Great Depression.

The prosperity the United States experienced in the two decades after World War II had nothing to do with deficit spending, and everything to do with the fact that it was the only industrialized nation still standing after a total world war—so the rest of the world was forced to buy from the U.S. because there was no one else left to buy from.

Deficits had nothing to do with it.

(italics in original)

I agree with Lira that Krugman's arguments are wrong. I just don't think Lira's argument is right.

Suppose that there are only two small neighboring villages in the world. Your village, Twin Peaks, has a grocery store, hardware store and a computer store. The other village, Cicely, has a grocery store, clothing store, and car dealership.

People from Twin Peaks and Cicely generally buy groceries from their villages' own grocery stores. However, if you as a resident of Twin Peaks, want some clothes, you travel to Cicely to buy them. If someone in Cicely wants plywood, they travel to Twin Peaks to buy it.

If by chance Cicely's grocery store blows up due to a gas leak/fire, then an argument can be made Twin Peaks's grocery store will benefit. Its direct competition is out of the picture. Residents of both villages will now have to buy from Twin Peaks's grocery store.

But say the entire village of Cicely burns down. Now where will the people of Twin Peaks get their clothes and cars? Current productive resources will have to be shifted from groceries, hardware, and computers into clothes and cars. This is a net negative because the division of labor has taken a step back.

So, are countries more like directly competing stores or complementary specialized villages? I would argue they are the latter. The rest of the world being blown up during WWII was a net negative for the US as we could no longer trade for a lot of the stuff we used to. That's my argument and I'm open to counter-arguments.

So why do I say I defend Krugman? Because a prior article about Krugman in the New Yorker attributed to him a similar point:

Krugman’s tribe was academic economists, and insofar as he paid any attention to people outside that tribe, his enemy was stupid pseudo-economists who didn’t understand what they were talking about but who, with attention-grabbing titles and simplistic ideas, persuaded lots of powerful people to listen to them. He called these types “policy entrepreneurs”—a term that, by differentiating them from the academic economists he respected, was meant to be horribly biting. He was driven mad by Lester Thurow and Robert Reich in particular, both of whom had written books touting a theory that he believed to be nonsense: that America was competing in a global marketplace with other countries in much the same way that corporations competed with one another. In fact, Krugman argued, in a series of contemptuous articles in Foreign Affairs and elsewhere, countries were not at all like corporations. While another country’s success might injure our pride, it would not likely injure our wallets. Quite the opposite: it would be more likely to provide us with a bigger market for our products and send our consumers cheaper, better-made goods to buy.

In this case, Krugman is correct. Simply put: division of labor and specialization raise the standard of living; blowing up capital lowers it. Post-WWII prosperity was not a result of the rest of the world being blown up.

Ooh ooh call on me, call on me!

In a post below, I linked to Michael Burry's article in the NY Times from this past April entitled, "I Saw the Crisis Coming. Why Didn't the Fed?" He writes,

Since then, I have often wondered why nobody in Washington showed any interest in hearing exactly how I arrived at my conclusions that the housing bubble would burst when it did and that it could cripple the big financial institutions. A week ago I learned the answer when Al Hunt of Bloomberg Television, who had read Michael Lewis’s book, “The Big Short,” which includes the story of my predictions, asked Mr. Greenspan directly. The former Fed chairman responded that my insights had been a “statistical illusion.” Perhaps, he suggested, I was just a supremely lucky flipper of coins.

Mr. Greenspan said that he sat through innumerable meetings at the Fed with crack economists, and not one of them warned of the problems that were to come. By Mr. Greenspan’s logic, anyone who might have foreseen the housing bubble would have been invited into the ivory tower, so if all those who were there did not hear it, then no one could have said it.

I have a pretty simple answer to the question Burry asks in the title of his column. Anyone want to guess what it is?

Malcolm Reynolds finally speaks

Actually, it's his doppleganger Dr. Michael Burry who was one of the first to figure out the toxicity of CDOs from subprime mortgages and make a ton of money betting against them. As chronicled in Michael Lewis's excellent The Big Short, Burry is an interesting character-- a former neurology resident who quit medicine to start a hedge fund which was probably more successful than 99.9% of funds out there. Yet, he felt like his clients never really appreciated him, and the stress of running the fund caused him to shut down the fund.

His sole public statement after closing down the fund in 2008 was a column in the NY Times. That is, until now.

A third video cannot be embedded for some reason, but you can watch it here.

From his investments in farmland and gold, I think it's fair to infer that Burry sees inflation in the future.

What's a little disconcerting to me is the question asked in the video that I couldn't embed: whether shorts are to blame for the financial crisis. I can hardly believe people still think like this. Shorts risk their own assets by taking large bets against the market (usually). They provide liquidity. Most important of all, they provide information. The market will eventually find a new clearing price with that new information, but the new price is a function of the underlying prospects of the business, not the fact that some shorts discovered that information and by their actions, the public at large became aware of it.

Gold Market Manipulation

Back in the late 1990s when I first began learning about gold, I found some conspiracy theorists who argued that the "true" price of gold should be much higher, and would be so if not for the actions of central bankers around the world. Some of these people were simply wackjobs; others dressed up in suits and testified before Congress about their theories. Since I believe that a conspiracy of any more than three people is doomed to failure, I assumed these nuts were just part of the package that comes with believing anything out of fashion. See also: libertarianism.

I also know that manipulating any liquid market is near impossible, and poses significant risks to the would be manipulator. If I tried to keep the DJIA low by selling, I would be the one that lost money when prices went up. Even if I had a billion dollars, there's simply no way I could control the DJIA. Heck, even a trillion wouldn't be enough. Trying to manipulate the market is a set up for severe long term losses.

Since then, I've seen more and more respectable people claiming that there is indeed manipulation in the gold market. It seems to be a given among people familiar with the market. The theoretical reasons why this is even possible have to do with the fact that the gold market is not transparent. Only in 1997 did the world find out the size of the gold market:

Deals involving about 30 million troy ounces, or 930 tonnes, of gold valued at more than $10 billion are cleared every working day in London, the international settlement centre for gold bullion.

This is the first authoritative indication of the size of the global gold market, and was revealed yesterday by the London Bullion Market Association.

With the blessing of the Bank of England, the association overturned years of tradition and secrecy to provide statistics illustrating the size and depth of the London market.

The volume of gold cleared every day in London represented nearly twice the production from South African mines in a year, Mr. Alan Baker, chairman of the association, pointed out.

That much gold was trading hands without the exchange rates being made public. That certainly suggests that the overt market could indeed be massaged a bit by the opaque market players.

Recently, an article was published on Zero Hedge detailing evidence of attempts at price manipulation. Essentially, there is a massive difference in the behavior of the price of gold between day and night. A liquid, free market should ideally trade the same general way at all times. But according to the data, one of the best performing investment strategies over the last decade would have been to short the intraday market and go long overnight. It would have returned a 20-bagger over the last decade, more than the just a shade under 4-bagger earned by being long gold all the time. That certainly sounds fishy to me. I could hypothesize various explanations for this phenomenon, but none of them would hold a candle to the most obvious: someone is trying to manipulate the market and keep the price of gold down.

If this indeed is the case, then the manipulation is simply gunpowder for an eventual future explosion in price.

Short, with leverage

As of this past Friday, my trading account is now 55% invested in BGZ--the triple leveraged inverse ETF.

You'll know how much of a fool I am in a few months.

Interest in a gold economy, part deux

I came across this thought experiment on another website. I don't know the answer for certain, but it helped clarify a few things in my mind.

The key difference between our world and the hypothetical fixed-gold reserve world is that in the latter, money keeps getting more valuable. If I loaned out a one ounce gold coin, when that coin was returned to me, it would be worth more. There's a built-in "interest".

One might argue that because of this, there would be no nominal interest in such an economy: loan some money, and when you get it back, you receive more value. However, if that was the case, then nobody would loan anybody any money. That same interest could be earned by burying the gold in your back yard and digging it up later.

For loans to exist, there would be have to be some additional nominal interest on top of the "built-in interest". Because of the "built-in interest", the nominal rates would probably be lower than in our world, though actual interest rates ("built-in" + nominal) would probably be similar.


We can make a general statement that the rate at which money becomes more valuable in such an economy is the rate of growth of that economy. As goods and services become more plentiful, yet the amount of money stays constant, money becomes more valuable. The rate of growth of the value of money would have to be close to the rate of growth of the economy.

So why would anybody loan out any money in such an economy? He would have to believe that the debtor has the means to outperform the general economy. That's the only way the creditor could be paid back a greater return than he could get by burying the gold in his back yard.


Santelli goes nuts again