The Second Parchment

On Economics, Finance, Politics and Music

Category: U.S. Politics & Economy

Sinking Strategies


Earlier in class my professor said something that’s been sitting in my mind while I review my notes for my risk management exam tomorrow. He said: “Sometimes, when you’re drowning, keep drowning. Don’t look for ropes and branches to pull you out of water.” He was referring to a strategy once employed by the financial strategists of General Electric (G.E.) prior to and after President Obama’s rescue stimulus given to the firm. In times when the firm suffered from losses (or intentionally sought losses?), G.E. took advantage of the U.S.’ tax credit laws to generate positive cash flows. Although irrelevant to this particular discussion, here’s a representative paragraph on G.E.’ accounting strategies quoted from The New York Times:

Its extraordinary success is based on an aggressive strategy that mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore. G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax law firm. Indeed, the company’s slogan “Imagination at Work” fits this department well. The team includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress.

G.E. generated positive cash flows from the U.S.’ I.R.S. tax credits under circumstances in which profits weren’t in the firm’s favor. The maintenance of positive cash flows for a certain time period, holding other relevant variables constant, increased the firm’s asset values. With G.E.’s impressive business model and human resources, the firm can then switch gears to the conventional profit-seeking strategies whenever it deems optimal.  So when you’re sinking, the most intuitive solution might be getting out of the lake as soon as possible. But it doesn’t imply optimality. Sometimes you just need to hold your breath a little bit longer and simply enjoy the aquatic scenery surrounding you.



Respected economists don’t always argue via working papers or mathematical models. Remember the drama between Professor Rogoff & Stiglitz in 2002? These are my favorite lines.

“The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain the time profile of its fiscal deficits, things generally get worse instead of better.”

“If only you had crossed over 19th Street from the Bank to the Fund a little more often, Joe, maybe things would have turned out differently.”

Read the full open letter here.

Gender Equality in Indonesia’s Military Academy


37 years after the United States Military Academy at West Point started admitting female cadets as their students, The Republic of Indonesia’s Military Academy at Magelang recently announced that it will start accepting female cadets–known as tarunis–for this year’s applicants (equivalent to members of the Class of 2017).

Priorities are given to high school students with previous background or experience in military and semi-military trainings, such as graduates of my high school, Taruna Nusantara SHS, and former members of Indonesia’s national flag hoisting team.

Unlike the case at West Point whereby the decision was mainly based on the passage of the Equal Right Amendments in 1972, there seems to be no particular recent regulatory reform in Indonesia that preceded this historical decision. It was formalized after members affiliated with the Indonesian military consensually deemed the promotion of gender equality within the military academy as important. Quoting a paraphrase from Major General Istu Hari Subagio regarding the decision, “the acceptance of female cadets [to the academy] is a realization of the Indonesia’s military’s effort to achieve gender equality. They will be educated together with the male cadets (tarunas), at the same place, with the same academic courses.”

Irrelevant side note: the U.S. is also currently dealing with an issue related to equality—marriage equality. Listen to the SCOTUS’ oral argument of Windsor v. United States here. Download the transcript of the hearing here.

Roubini at NYU


Professor Nouriel Roubini is in town! (Yes, this Roubini). A group of us just had a two-hour lunch with him. Our discussion mainly revolved around the global economy and international trade, both his areas of expertise, but he also touched on several current domestic economic issues. His talk wasn’t really highlighted by value judgments (academics are often very careful about the opinions they assert, which I value very highly). He did, however, made some statements that I think are interesting: a) China should consider lowering its 40-50% savings rate, despite him acknowledging that this behavior has been partially stimulated by the ‘fear’ that the Chinese future will be dominated by the elderly not qualified for employment opportunities that boost the Chinese economy, b) there is a decline of hegemonic political power within the G-7 countries, and the global economy has been shaped by the G-20 countries instead, c) there would have been a massive collateral damage had the U.S. government not provided extra liquidity to its failing banks in 2007-2008, d) current U.S. zero-bound interest rate policy has caused a spillover over other monetary policies pursued in other countries.

He briefly talked about the Euro crisis, and I was curious as to his opinion on the European Central Bank’s role in the eurozone. Unlike the Bank of Japan and the Federal Reserve, the ECB has no privilege or prerogative to conduct quantitative easings (QEs) to lower spreads with respect to the German bunds. The Lisbon Treaty regulates this. I asked his opinion on this, considering that spreads in 7 eurozone countries have been very large over the past 3-4 years. This is a paraphrased, simplified version of what he said:

“The monetary policy objective in the Eurozone is discrepant from that of Japan or the United States. In the United States, the Federal Reserve is constitutionally mandated to focus on improving the following two variables: price stability in unemployment rates. The ECB has no similar mandate; in fact, it places a small emphasis on the latter variable. It aims to maintain price stability within the eurozone more than reducing unemployment rates of its member countries.”

I guess this makes sense—no German citizens would like to see their price of commodities being volatile in exchange for more Greek college graduates having higher level of employment (is this true?). QEs sometimes involve fiscal transfers as well, which is highly unpopular among constituents. This extrapolation is very tenuous though, one can argue that this is true if there’s actually relevant supporting polls on this particular issue.

Now, if we take Professor Roubini’s statement as granted, we can conjecture what will the ECB’s Taylor Rule look like. Since the ECB focuses on price stability more than unemployment, the parameter assigned to the former variable is expected to be much greater compared to the coefficient assigned to the latter variable. This would be an exciting econometrics project for anybody out there interested in monetary economics.

Update: Yesterday’s FT article (March 5th) indirectly corroborated Professor Roubini’s comment on ECB’s main role. “…the ECB has no formal role in managing unemployment. Its one purpose in life is to guarantee price stability by keeping inflation “close to, but below” 2 per cent over a deliberately unspecified medium term.”

A Short Note on the U.S.’ Quantitative Easing

I feel the urgency to write this post after I watched this misleading animated clip on the Federal Reserve’s quantitative easing policy. I think most economics students or current affairs aficionados can refute nearly most of the things mentioned in the clip, but I’d like to point out one good thing about Chairman Bernanke’s successful in his pursuit of purchasing what most of us would consider junk assets.

Read this post from the Economist. The Fed’s large-scale asset purchases have been profitable so far. Secretary Geithner literally received a total of $89 billion dollars in profits from the subprime assets the Fed’s purchased after QE1, QE2, and QE3. Chairman Bernanke did use Americans’ tax revenues and did utilize it capacity to print money in the beginning, but in the end, the citizens’ money have been incrementally restored.

Anti-Feds, the two fluffy bears in the clip included, would then argue that the Fed’s money printing would lead to inflation. Printing money means inflation, they’d say, disregarding the fact that the U.S. economy’s money velocity has shown a negative trend and that its GDP growth has demonstrated a positive trajectory since the 2008 financial crisis. But as shown from the graph below (quarterly), The Fed’s quantitative easing policies have not, and will not, lead to a Zimbabwean inflation that most anti-Fed zealots have claimed.


Though one can argue that mild inflation is bad, it has some positive features as well. Borrowing becomes cheaper as debt becomes less valuable as prices are expected to increase. One’s debt decreases in real terms. One last thing. It’s widely known that quantitative easings lower interest rates on selective assets (an important feature that’s not mentioned at all in the clip). Take a look at this graph showing how real investments have increased post-2008.

I acknowledge that in elaborating my arguments above I might have oversimplified some data. Furthermore, I haven’t actually done proper academic research on this. But in general, one can be positive about the Fed’s unconventional monetary policy. The unjustifiable detestation towards the Fed and Chairman Bernanke is often fueled by irrational preconceived notions and a strict adherence to an anti-government ideology. If we really want to learn or refuse to be indoctrinated, I personally think that we should refrain from committing this error.

Update: The NYTimes recently reports that the U.S. economy contracted in late 2012. This had nothing to do with the Fed’s action though. It’s mainly attributable to the significant decrease in military spending. 

On Government Deficits


I am currently working on a project about formulating appropriate policies in response to the impending U.S. fiscal restraint, also colloquially known as the fiscal cliff. To avoid any form of partiality, the first paper I read was the one written by the Congressional Budget Office, a non-partisan federal agency whose specialty is in providing analysis of the federal budget of the U.S. government.

CBO’s paper reinforces my belief that Rand Paul was not simply vocalizing his Republican predecessors’ political ideology when expressing his detestation towards budget deficits. Indeed, macroeconomic models in our economic textbooks are correct in showing that deficit spending is favorable in the short run–when nobody spends, the government, in a purely economic perspective, has the authority to be the ‘spender of last resort’ by increasing spending or extending tax cuts. (Note that I am discussing this issue from a purely economic perspective without taking into account the concept of government legitimacy in welfare-redistribution. If you are a libertarian, you might disagree that boosting aggregate demand through taxing or government spending is one of the roles of the government). In the short run, no economic agents living in the present cares about the existence of public debt—none of them is concerned about the significance of the rapid ticking of the debt clock located on Manhattan’s 6th avenue.

But in the long run, as most economists and conservative politicians like Paul Ryan would argue, debt is an issue.

a. The increase in debt or the constant implementation of deficit spending, without being followed by an appropriate expansionary measure in monetary policy,  would increase interest rates and thus discourage investments in at least two ways. First, as national saving decreases, the fund available for private-investment purposes will be limited; hence it increases interest rates and disincentives investors to invest in capital-intensive projects. Second, the increase in government spending will drive the economy to produce above its natural rate, increases output, but will then crowd-out investment as interest rates rise. The private investment sector will  therefore have less share of  the country’s economic output, as short-run GDP growth is attributable to government spending, not to private investments.

b. Even in a circumstance in which expansionary monetary policy took place, debt would still be a problem. Endogenous growth models–derived from the world-famous Solow growth model–predict that the decrease in savings would lead to the decrease in capital, an input essential to long-term growth. It is not the increase of demand for goods stemming from deficit spending that promotes long-run growth. Capital accumulation, in addition to growth of worker’s productivity and technological progress, is the key to increasing an economy’s real growth rate.

c. As the paper indicates, having debt would restrict “policy makers to use [fiscal policy] to respond to unexpected challenges.” It should be noted that the ability for government to spend under debt is subject to investors willingness to purchase treasury securities during open market operations. During ‘unexpected challenges’, which I assume to be unpredicted financial crises or events that lead to a decrease in investor/consumer confidence (such as the 9/11 attacks), it is not impossible that investors would be reluctant to lend to the federal government as its government bonds or treasury securities would no longer be perceived as risk-free. This shows that excessive debt would hinder the federal government’s effort in altering its fiscal policy appropriately.

Deficit spending is therefore a temporary panacea for the business cycle. This however, does not mean that the government should not consider spending under debt at all, because the significance of the impact of the ‘panacea’ is not something that is predetermined. Additionally, some might argue that the economy is not a simple disjuncture between Keynesian and neo-classical economics: deficit spending that would bring the economy out of short-term recession would not necessarily afflict the economy in the long run. A single removal of economic disturbance in the short run, by increasing debt, might result in a positive compounding effect in the future.

Note: IMF predicts that U.S.’ debt to GDP ratio is around 70-102%, while Indonesia’s is around 24.5-25%. Imagine how massive an economic boom Indonesia would experience if President Yudhoyono were to be successful in persuading DPR to spend more. 

Irrelevant note: I honestly think Nick Jonas did great in the 25th anniversary of Les Miserables. It is indeed difficult to detach yourself from the preconception that Nick is affiliated with the Jonas Brothers when you first watch it, but once you are over it, you would realize that his voice and character fit Marius Pontmercy’s.

On The 2012 U.S. Elections Night

For me, the U.S. Elections Night (or Elections Breakfast; we are around 8 hours ahead of Uncle Sam), was different than it was four years ago. Back in 2008, I lived in a semi-military dorm with limited access to live international news. I remember having problems connecting to the WiFi network just to follow updates by the NYTimes.

Being a college student at an American institution, located in the United Arab Emirates, with +-300 students from 89 countries constituting the student body, things are more lively now. I slept around 1:30 AM and woke up at 4:30 AM to see on whose shoulders America decides to put their hopes and weights. My colleagues and I went to Beach Rotana hotel to attend the Elections Breakfast organized by the American Chamber of Commerce. Ambassador Michael Corbin, U.S. government officials, and foreign representatives to the UAE were there as well.

It was great. The group of NYU Abu Dhabi students I went with was diverse, as usual: social conservatives and liberals, fiscal hawks and doves, Americans and non-Americans. Watching them arguing against Anderson Cooper and teasing Fox News anchors while munching rice crispy cereals, at 6 AM in the morning, was such an eccentric experience. We had a special session with Ambassador Corbin (who clarified that he’s a career ambassador, not an ambassador appointed by the Democrats) during which some of us were busy looking at our Twitter feeds for updates. Sorry Your Excellency–we just could not let a tiny second of updates slip away.

Inside the ballroom, there were around 10-15 TV screens and two large projector screens. When Ohio was announced as a blue state, our eyes were locked at state of Florida. Florida, one of the swing states, was unsurprisingly a close race. Obama eventually won with a statistically small margin, to the chagrin of my Republican friends. Also, unexpectedly, Romney did not win the popular votes.

In the end, Fox News announced that Obama is re-elected, followed by CNN. Yes, Fox News did it first. The re-elected president will once again lead America with a Republican-dominated congress and a non-filibuster-proof Senate. Tough job indeed. We wish you good luck, Mr. President. And congratulations, the U.S. of America.

Irrelevant notes: 1) Coldplay’s concert film will be out on November 19th. Better check the schedule of your local cinemas now. 2) You should all listen to Lea Salonga’s ‘Sun and Moon’ and be enchanted. 3) I’ve been wondering–who will replace Secretary Clinton position, now that she’s about to leave?

Bernanke in Action

The U.S. Federal Reserve in action: Chairman Bernanke announced hours ago that the Fed will be buying $40 billion of mortgage-backed securities every month until U.S.’ lofty unemployment rate declines to a desired level. The quantitative easing announcement led to an overnight increase in the Dow Jones Industrial Average by 1.5%, “its highest level since December 2007.”

Did not know this happened as you overslept yesterday? I would recommend joining the group consisted of people who missed the chance to buy low and sell high!

A Short Note on Libertarianism

How do you call a person who supports Obama’s approach to LGBT rights but agrees with Romney’s proposal to deregulate Wall Street by overhauling the Dodd-Frank Act? A libertarian–according to Daniel Moseley of University of North Carolina at Chapel Hill.

…it is commonly held that libertarians are economically conservative and socially liberal…

I have not done any thorough research, but some (American scholars) believe that the coexistence of the two ideologies–fiscal conservatism and social liberalism–is inherently paradoxical. In the United States and around the world, it seems to be difficult to conceive a government that reduces both non-military and military spending at the same time; consequently, the party is extremely under-represented in any political spectrum.

Or, there might be a lot of people supporting the idea. It is just that they do not bother incrementally climbing up the ladder until its recognition is on par with that of the typical right & left political parties. This Wikipedia list shows that most libertarian parties were established in the early 2000s or late 1990s, except the one in the U.S. I can imagine how huge a collective action is needed to inculcate potential voters with the party’s considerably novel ideology.

Side note: after perusing the ideologies of Indonesia’s political parties promoted during the 2009 elections (there were 38 parties involved!), I can not find any implicit and explicit statements regarding their support and/or opposition to libertarianism. This lives up to my expectation.

On Paul Ryan

Here is an intriguing article about the recently-announced Republican candidate for U.S. Vice President. Where else can we find an athletic Ayn Randian prom king who hunts deers with a traditional bow and arrow? While his hobbies might make him look like a political demigod, lets not forget how bellicose (center-left) economists have been with regard to his (in)famous ‘Path to Prosperity.’


1. A more comprehensive biography from the New York Times. According to the article, he was a ‘PhD’ among his freshmen peers when it comes to economic policies. He has been an apostle of Hayek since his senior year in high school. I am suspicious of the possibility that his staunch belief in a laissez-fair market & fiscal conservatism were not properly challenged by Keynesian principles during his college years.

2. Congressman Ryan voted for the Emergency Economic Stabilization Act of 2008, also colloquially known as the $700 billion bail out bill. I guess he dithered after he watched this live.

3. How could one be a devout Roman Catholic and an Ayn Rand devotee at the same time? A response from Bloomberg News.