Friday Links and Thoughts

 It blows my mind how large JP Morgan is.

The total notional exposure of all of JP Morgan's trades has been estimated to be $79 trillion. That's "trillion", with a "T", from a company with an equity value of $140 billion, and falling quickly.

This seems to completely go against the Rodrik argument that markets need to be embedded into governance.  To give an idea of scale, global GDP is only around $63 trillion.  Similarly, Spanish banks are dealing with borrowing levels of  €1.15tr, while Spanish GDP is only €1.41tr.  The top 5 banks in the United States have combined assets of $8.5tr, which is over half of U.S. GDP.  How is this sustainable or, more importantly, not fragile?  Natural environments that have endured for millennia never have animals big enough to crash the entire ecosystem.  Why are we allowing our economies to have gigantic banks?

The republicans are roughing up military alternative energy policy again.  Those ruffians.  It looks like allowing the military to do what they want is alright when it involves large amounts of fossil fuels, but becomes something legislation needs to solve when it starts involving biofuels.

More Greek debt/capital flow drama.  Politics is twisting itself into unsolvable knots; capital is slowly hissing out of the country.  It seems peculiar how this could be controlled further.

Puerto Rico's debt is quite fragile, although I don't know if I would call it a "black swan" like this article.  It frustrates me how often "Black Swan" is used to describe low probability, high impact events.  To me, Taleb's formulation of the Black Swan is an epistemological one.  It's an argument that we don't know what happens at low probabilities, and that these low probabilities are the ones that carry the greatest historical significance.  For day to day affairs, I think more often of fragility and tail risk.

All the money is flowing from peripheral Euro countries and flying into Germany and the United  States.  This is interesting, as it reflects grave fears about the ability of the peripheral Euro countries to pay back their debts.  However, what does this say about perceptions of Germany in the event of a Euro breakup?  Considering the astronomical, unknown costs of a Euro breakup, shouldn't the bond yield for Germany be higher?  After all, they are the ones who will have to bear the weight for most of the lost debt.

David Beckworth brings up an interesting link between indebtedness and expectations of nominal income growth.  While it indicates NGDP targeting may help circumvent a balance sheet recession, it also indicates that NGDP targeting results in financial fragility.  This connection is intriguing because artificial stability in one domain (NGDP) creates fragility in another (debt).  This contrasts with Evan Soltas' recent look at how NGDP targeting helps robust business growth.  If the structural signals are not confused for the macroeconomic noise, markets allocate resources better.  In this other domain, stability in NGDP actually creates more dynamism among businesses.  This is an important general problem for the analysis of fragility.  Does fragility in one domain promote the same in others, or does stability in one domain promote antifragility in others?

Capital flows: the umbrella you have to return when it rains.  BRICs are all suffering capital flight; bad news for the stability of finance.