Book Review: The Deficit Myth

I first read about Stephanie Kelton in the Financial Times in their "Lunch with the FT" series. In that series, FT reporters meet their quarry at a restaurant, eat great food, talk about stuff and then the reporter writes their article in the FT. The idea is that readers, such as yours truly, get to vicariously eat lunch with the subject. The article describes the food eaten and the itemized bill as well! At any rate, that article was eye opening for me. That was the first time I read about a contrarian idea that Money (aka, cash, aka moolah) was invented as means of credit and not as a means of barter as is widely believed. Per popular wisdom, long ago, humans started bartering goods to receive things they needed in return for things they had but did not need. Soon, they were using sticks, shells and stones as currency in open markets and that lead to standardization into Money. Stephanie Kelton's ilk posit that, in fact, Money was first invented as a form of credit. Meaning, people took things from others and in return gave them tokens of credit (such as sticks, shells, stones) that could later be called in for return favors. The first recipient of the token could then pass that token to someone else with the same rights of an expected return favor. What they posit is more an economic theory than a scientific fact. They call this theory "Modern Monetary Theory". 

Understanding money is important to public policy that in turn affects everything in our life. You and I can only earn money, but, only Government can print money. How money is distributed across the economy and who earns how much money can sometimes be taken for granted and other times be questioned with equal fervor. Some people are willing to kill for money and others find ways to give it up completely. I can write a pretty long dramatic prose just on this topic of understanding money only because it is such an enigma to me. Out of consideration for you, my dear reader, I decided not to do that. However, I did decide to read the book and write about it here. That book is Stephanie Kelton's June 2020 book named "The Deficit Myth: Modern Monetary Theory and the birth of the people's Economy". 

I have to say: this is by far the simplest and most interesting economics book that I have read. It begins with the meat of the topic in the very first few pages. I remember the aha moment I had when I was listening to chapter one, walking on a nature preserve trail near my house. I could not resist but look up to the sky, amused and awed at the same time about how simple the concept was. It starts with the idea that Government Income (Taxation) and Government Spending are two unrelated things and are not the same as Household Income and Household Spending that are highly related. In Econ 1, I studied that Governments should strive for a balanced budgets such that Tax income should equal Spending. Now, Modern Monetary Theory (MMT) turns that on its head. It posits that Government Income (Taxation) is not really a means of Income in the sense of "Profit" or "Surplus". It is simply a number on a ledger that can be increased at will by Sovereign, Fiat Currency Governments. Let me try to say in a few lines what Kelton takes a whole chapter to say - forgive me for butchering this. MMT says that Tax was not invented as a means for Governments to collect money that can then be spent on public projects. Old world Rulers instead invented Tax as a means to coax their subjects into working for them. The Rulers decided that they would simply take a percentage of the Subject's Produce without giving them any Credit Tokens. Unless, of course, the subjects worked on the Ruler's Projects such as building roads, forts, and iron smithy. In that case, the Ruler would offer the Subject a Credit Token (a stick, shell, or a stone) and then, when the Tax Man came around, the Subject would simply offer up one of the shells to show that they had worked on the Ruler's project and hence are exempt from offering produce. Hence, there was always an incentive for the Subject to work for the Ruler as long as the Produce was dearer than the labor spent on the Ruler's Projects. That is how Money was first invented as a Credit Token that replaced domestic Produce for taxation. Then, a secondary economy sprouted around these credit tokens as people started trading these tokens for other kinds of work between each other. For example, a farmer could offer one of his hard earned Credit Tokens to a iron smith to produce an augur. Hence, by MMT, the Ruler could simply continue to offer as many Credit Tokens (a.k.a. dollars) as they wanted and as long as they wanted work done. The only limitation that the Rulers must be wary of is limitation of physical resources. Meaning, the Ruler cannot expect to purchase goods and services after all able men are already occupied and after all grains and water is already consumed. In the modern world such unbridled demand would lead to inflation. Inflation is the only real limit to Government Spending.

Now that I have butchered the whole thing for you - I suggest you go read the book!

At any rate. Kelton opens the book with some eye opening, mind blowing positions. After the first chapter, she goes on to refute other misgivings and fervent objections to an idea that Uncle Sam can spend spend spend. She addresses current thinking that each dollar spent in the US must be accounted for in taxes. She addresses trade deficits, national debts, balance of payments, entitlements (Social Security, Healthcare, Welfare) and all other so called budget deficit expenses that are going to doom our country. It is very clear to me (the reader) that MMT has in fact addressed these and it is almost a panacea to many of our problems today. I was surprised that this has not already been done in the US Government. I agree with her representation that politics and not economics is the driving factor in Washington DC and I am appalled that politicians do nothing to improve human conditions in spite of an easy way out. Human suffering, in this case, is a more easily reparable state than the CBO (Congressional Budget Office) would lead you to believe. All in all, MMT makes a important case for Governments to solve all human problems with a stroke of a pen (or a keystroke on a keyboard). 

I must admit, I got a million questions from people with whom I shared my thoughts. The first question was "But, isn't that simply socialism/communism". Communism or Socialism, which erstwhile USSR had, and today's China has, is Government Ownership of all resources in the nation. In communism, Government owns everything and allows Subjects to partake of those resources in "equal" parts. In Socialism, Government owns a master license to all resources and it allows private citizens to partake of the license to produce, consume such that all private activity affects social gain. Now, if I run my uneducated mind on high gear, I could reach the conclusion that eventually, the US Government, under the influence of MMT, could spend money to the point that they elbow out all private companies and all resources in the country would then be owned by the Government. Ergo, Communism. However, I do feel that is a big leap of imagination and nothing else. To keep it simple, I will only say that the US Constitution simply won't allow the Government to take over private sector. The more I think of the questions I got about this book, the more I feel that those questions are simply unfounded doubts and suspicions. I feel that the Ronald Reagan administration successfully screwed everyone's mind about how Governments work. I agree that there have been many political thoughts in US about "less government", but, Reagan administration turned a lot of those thoughts into policy. 401k (vs pension), social security delays (1983 amendments), tax cuts and many others turned the public spending conversation in the wrong direction. Today, Tens of millions of people are at best living an ordinary life and some, at worst, dying early in poverty, and I think Reaganomics has a role to play in it. MMT might be the anti-Reagan medicine to resolve many living condition issues for all of us. I do not mean to say that Kelton's book compares MMT to Reagan or any other past policies. This paragraph was just my thought process after having read the book.

I say that Kelton's book and the whole MMT concept can unleash human potential much like how torrential April rain can bring May flowers.

Today, that Lunch with the FT article is one of the top article on the "Lunch with the FT: Top 10 interviews of 2020" and Bernie Sanders is the Senate Budget Committee chairman. I cannot wait for Joseph Biden to apply some of these MMT principles to US public policy to bring it out of stupor.

All in all, I highly recommend reading this book.

Book Review: No Rules Rules - Reed Hastings and Erin Meyer

I finished a nice book on organization culture. Its called No Rules Rules. I would most definitely add this one to my previous list of memorable books in 2020. This book is about Netflix's organization culture and how it helps them innovate. Some of my close friends may know that I sometimes enjoy reading, of all the things to read, profit and loss statements, balance sheets and cash flow statements of public companies. No, I don't do it for my work, I genuinely enjoy reading those statements without any context. Public companies release statements every 3 months and even juicer ones at the end of the year. These are like photographs of a person. Looking at a photo, you could say how happy, healthy the person is or what that person is doing at that point in time. Looking at statements is similar. When I looked at Netflix's statements way back in 2002, 03, 04, I could not understand what they did and how they could sustain anything in future. Of course, I was not alone and I am definitely aware that I am not as smart to understand these things. My point is that this book is the tell-all tale for those questions I had. 

I must say that the content speaks directly to owners and managers of any size of a team. I think that Reed Hastings (the founder and CEO of Netflix) and Erin Meyer (Prof at Insead) did a great job of melding reality (Hastings) with science and academia (Meyer). They took turns with Hastings explaining how he sees Netflix and Meyer explaining and backing it up with the science. Hastings opens with describing his prior exit at Pure Software and what he learns from it. Then, he introduces the culture of "Freedom and Responsibility" - F&R (Spiderman anyone?). The first few chapters clearly lays out the unique mechanisms and results of this F&R culture. There are a few examples of how F&R failed in other organizations - I felt like those failures were just inserted in there simply to show what F&R is and isn't. The point of noting those failures is not to say that Netflix alone can do F&R but, that "anyone can do it, as long as..." they also do a few other things that Netflix does. I am guessing that a lot of readers will simply lose the book in this introduction to F&R. It simply is too bold and it glosses over many real challenges that F&R bring to any organizations. Fear not, because soon, the book explains that one key element of F&R is that Netflix hires only rockstars and meticulously unhires those who are not rockstars. It explains that the age old, top down, command and control structure is not compatible with Netflix and it recommends that when you want to drive innovation (as opposed to safety and error prevention), you must hire rockstars and give them all the F&R they can handle. 

The remaining book (after the introduction in chapter 1) peels the layers on the Netflix culture. If you just see the chapter names in that book, you can see these "layers". At the end of the book is chapter 10 which the reader must read in order to understand limitations of the Netflix culture and how they are solving for it. I really liked that the authors admit that when going global and multi-cultural, their experience is not "one size fits all". Somewhere in the book Hastings says that he was researching global cultures when he read Meyer's first book "Culture Map".

Towards the end, Hastings and Meyer clarify reality that Netflix really operates at the "edge of chaos". That there are reasons why other companies would not want to do this. An example would be airline companies - they must not operate as Netflix does, not should Exxon Mobil. Hastings clarifies that the Netflix culture is good for "Innovation" not good for "Error Prevention".

Overall, I feel that this is a great book for any owner, manager, entrepreneur or student of business. For many readers, this will look idealistic, utopian and "Netflix-only". To me, this is the secret sauce of why companies such as Netflix are able to churn out quarter after quarter of monopolistic growth while others struggle. At this point, I must mention Bob Eiger's business autobiography in which he has dedicated a chapter on how he set the foundations for pivoting Disney into a tech company. It is clear to me that many other CEOs and Shareholders are going to want to pivot themselves to be tech companies. This book may be a great introduction to the "how".

 

Memorable books I read this year

 I just finished another book. This one was called "Caste - the origins of our discontents". This was the third book I read this year to understand and relate to the race issues we are facing in the United States. Like many of you, I was deeply affected by the Trump election in 2016 and the ensuing four years. I still believe that all societal ills from the last century and prior are coming to an end, and I still feel that we are only at the cusp of a new awakening because of technology. I feel strongly that many technologies are going to become much more ubiquitous and cheap in future and that will bring people closer. Believing what I believe, when I felt and sensed 4 Trump years, I was shaken to the core. I could not make up my mind whether I was wrong and indeed, evil will dig roots in technology or that I was right and this was just the last hurrah for evil before it disappeared in an abyss where it belongs. I needed to understand and I did what I like to do most. I read 3 books. I must list these at the top of my most memorable books of 2020.

• Caste - the origins of our discontents
• White Fragility: Why It's So Hard for White People to Talk About Racism
• How to be an anti-racist

Early this year, I read a book by Jill Lepore and was enthralled and also challenged by her writing style and historical detail. Then, I stumbled upon a critique she had written early on about Clayton Christensen (1952-2020). Clayton Christensen wrote about the relation between innovation and disruption (I cannot do justice in one sentence). His books such as The Innovator's Dilemma are often read in business school and boardrooms around the world. Jill Lepore tore down that part of his legacy in a scathing critique in the New Yorker magazine. That article was an explosion in my brain and I had to re-orient the contents of my skull. The reason that article came into my sights was that Jill Lepore's wrote another book this year about Data Science (history of). This book covered the life of a corporation named "Simulmatics" in 1960s. Simulmatics was the prototype data science company. A very interesting read.

• These truths: A history of the United States
• If Then: How Simulmatics corporation invented the future

I have recently had a few health issues. When I saw a recommendation for "Why We Sleep" on gatesnotes.com, I immediately picked it up. This book is an eye opener. No wait. This book is a brain opener. All us humans seek so much in life including success, happiness, patience, stamina, longevity and whatever else humans may want. One of the easiest way to eventually arrive at your station is to sleep more and sleep better. It turns out sleep is a biological process that we still have not understood well at all. This book seems to be the first ever that normal humans like us can read without being misled. All in all, this book was amazing insight into what happens when we sleep. I did write about this earlier this year. Similarly, I found Bill Bryson's book about the human body very interesting. He has covered each system of the body in vivid and interesting language over all chapters. The book does not waste time and is unputdownable. 

• Why We Sleep: Unlocking the power of sleep and dreams
• The Body: A guide for occupants

The last book I will remember for long that I read this year is Thomas Piketty's Capital in the 21st Century. I must admit clearly that I did not understand 80% of the deep economic science that he as written. However, he has used examples of Aristocrats and Rentiers to explain how capital works and how it has fared over the last couple of centuries up until today. I am not sure whether he makes a case for one policy over the other - for that, I probably need to read his newest book called Capital and Ideology. However, to me it felt like he has clearly laid out how modernity has been impacted by capital and why we need different systems for humans to thrive in future (I am thinking about my children here). In my opinion, capital ownership and capital itself are going through seismic shifts. Too many angles to this to write in one or two sentences.

• Capital in the twenty-first century

Note: I did not actually read all these. I listened to these on audible. 

Book Review: The Body by Bill Bryson

The Body by Bill Bryson is a great book. This is an informative, educational book. It is not a college textbook - meaning it is not trying to teach biology to students of the body. It is not meant for diagnosing medical conditions or to classify medical problems of the body. This is not a manual of the human body that one can read to fix or change the human body. It is merely a guidebook - just as the subtitle "A Guide for Occupants" proposes. However, what a great guidebook it is! I was enthralled and could not stop. Once again, this was one of the first few books I listened to on my brand new audible subscription. Hence, it is possible that my curiosity about the audible format played into me liking the book very much. Anyway, let me focus on the book.

This book is split into 23 chapters spread over 14 hours of audio. Most chapters deal with individual systems in the body such as the brain, nervous, reproduction, respiratory, immune - you get the idea. Within each chapter, though, Bill Bryson goes into interactions of these systems with each other and with human society of today. For example, here is a quote: "The heart is the most mysterious of our organs. For a start it looks nothing like the traditional symbol associated with Valentine's day and the lovers symbol carved into tree trunks and such.". Then, there are other chapters that deal with how we got here over the hundreds of thousands of years past, what are our current travails and how might the future look like. After listening to the entire book, I was left feeling very well informed and also with a lot of questions about ourselves. I mean, for all we know about ourselves, it appears we still don't understand everything that really matters. Cancer, aging, emotions such as love, hate, what happens when we sleep, brain function - there is so much we just don't know. Throughout this book, my mind drifted to sci-fi novels and movies in which humans have augmented their trivial knowledge of human body with abundant imagination of the human body.

Apart from being a good inward looking scientific narrative of the human body, Bill Bryson additionally related me (the reader) to many events in human history. This is key! When the book weaves in narratives from human history, it brings human body to life (sorry for the pun). Meaning, the book relates the human body to human condition. This really drives the book deeper into the mind. This is what turns the book from being a thick, opaque biology textbook to being a easily readable true story narrative.

My only complain is that I have already forgotten many parts of the book - I blame it partly on listening to the book on 1.65 times normal speed and for multi-tasking when listening. In that sense, this is not a life altering book that will leave a mark on your mind. It is merely a guide to the human body that you will want to read once and use as a ready reference.

Happy reading!

These Truths

These Truths is a great book by Harvard Historian Jill Lepore. It traces American Political History from it's discovery to 2016. This year, for the first time, I purchased an audible.com subscription and this book was the second audio book I ever listened to. The first being Hans Rosling's Factfulness. These Truths and Factfulness are both books recommended by Bill Gates on his blog gatesnotes.com.

These Truths was a great eye opener to me - especially so because I immigrated to the United States for work and started my life as an American citizen in 2015 without any formal training in her history. Until I read this book, I was equal parts amazed and consternated about how and why Americans made political decisions they did. Trump's election was the most perplexing phenomenon to me. That piqued my interest and aroused suspicion that I was naive, that there was something about her that I just didn't know. Reading Gates' review about the book, it was clear to me that I needed to read the book!

I was not ready for it! Not having had any formal American Education in the K-12 sense, These Truths was a tsunami of information for me. The book starts somewhere near the discovery of America, covers pre-constitution times, goes into details of how the constitution itself was written, the lives of individual founding fathers, then goes into details of civil war and the winning over of all states, of the years up to emancipation, then voting rights for blacks (and all other struggles), Jim Crowe, women's suffrage, the evolution of the three branches of government (supreme court was a toothless in the beginning), amendments, failures of amendments (ERA), civil rights, voter suppression and a 100 other things that I have already forgotten.

I found the book very interesting, well narrated (by Jill Lepore herself) and fast paced. The book has a confident style (meaning, it leaves no dispute in the mind of the reader) that comes across as a statement of facts (rather than a statements of opinion).

I learnt many things about America - some consequential and others not so much. For example, the word "polls" meaning elections comes from a past usage of the word "poll". "Polls" are the tops of the heads as seen by a person sitting on high ground watching a crowd of humans. An election (a "poll") was simply the process of counting heads in a room (and apportioning 3/5ths of white vote to black persons).

Through this book, it is evident to me that the founding fathers had no clue or any prescience about how the future would play out. Too many people in today's world apply way too much significance and weight to the constitution itself and have completely forgotten the times and events between 1776 (declaration of independence) and 2020 (today). This is convenient to many because at the very best, they can prolong the needless ambiguity of a 200 year old document into current and future days. At worst, they can cause considerable harm by halting the progress of our nation and its people. Without reading this book (or any other good history book), it feels like the constitution is a bible and we are all christians (or quran and muslim etc.). After having read the book, it is clear the facts are much more nuanced.

In case one does not know (as I did not know), the words "These Truths" come from the preamble to the declaration of independence. The complete sentence is: "We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness."

I am glad I follow gatesnotes.com and I am glad I read this book. I highly recommend it.

healthcare for 27 year old "kids"

I am fed up of what is going on in the political arena with the 2012 elections coming up. What really irks me is that I am not seeing too many people talk anything good about Obamacare (aka Patient protection and affordable care act.). There are way too many sound bytes talking about what is not right about it, very few about what is right. NY Times covered a few points well in an Five Obamacare Myths, but we need more. Lots more! I feel like analysts and naysayers are missing the point. I read someplace that "kids who are healthy will be mandated to buy insurance, even though they don't need - just to pay for the older and sicker folks who need more healthcare than them". First of all the people whom that article called "kids" are really full blown 26 year old adults. I say this because, per this new law, "kids" under the age of 26 will be allowed to stay on their parents health insurance, which means they will not have to buy health insurance. About folks who are more than 26, if they don't buy insurance, they either have to be rich or crazy. Consider the case of the rich. Lets say that a rich 27 year old falls sick with a major illness or meets with an accident in which no liability can be proven. This person will have to pay for healthcare from their pocket. If they can project their  expenses to be much lesser than what they will pay for insurance over a few years, by all means they should go without it and stick with the mandated penalties. However, how many people (as a percentage) are actually so rich that they can pay for healthcare without feeling the pinch? Consider those who are too poor or too sick to buy health insurance. What will they do? They wait till they are deathly sick or are in need of emergency healthcare and then off load their entire burden of healthcare upon the taxpayers who in all probability purchasing insurance in the first place. So, as of today, in any case, the taxpayer ends up paying for themselves as well as these people who don't have any insurance. The new law mandates that those who don't have insurance should either buy it or pay penalty. In principle, the new law, actually disallows free rides. Now, there might be tax credits and rebates which allow the poor to get a better deal on insurance than the rich, however, its still better than a free ride. Additionally, I bet that having insurance (and the free preventive healthcare - by law) will lead to better overall health of citizens, which in turn lead to fewer people needing expensive healthcare. In effect, adults who are 27 and above will very likely be better off buying health insurance than not under the new law. I just don't see how they get the short end of the stick.

Where to put those dollars?

With the market and economy as it is, there are many sound bytes to catch on what should one do with savings. Nothing seems sure. Stocks seem to be the "falling knife", gold seems too be highly inflated beyond its true value, treasury is backed by a non AAA country (!!). So, why not add my two sound bytes to the noise?

I am old fashioned. I like stocks and the old world thought process on stocks. In times of slowdowns and recessions, I caught words of an old man who was talking on TV. He talked about Altria (NYSE:MO) - a stock that has been somewhat beaten along with the rest of the market. Its a profitable company and relies mostly on its subsidiary Philip Morris - the tobacco company. It has a consistent dividend history and at today's price its dividend yield is 5.91%. So, I used the stock screener on Zacks to look for more. My stock screener was simple. Look for stocks that have a market cap above 1.5 billion $, is currently profitable and has a dividend yield greater than 9%. I was happy to find a stock that I already own. Alliance Bernstein (NYSE:AB). Alliance Bernstein is an asset management firm owned by the french insurance group AXA. They also have funds that they sell to the public. Their earnings history is pretty consistent and did not buckle under the subprime crisis. They seem to be fairly insulated from the credit markets as well. They make most of their money by managing other people's money and providing investment advice. Their stock price has no reason to go up and down just because the general market goes up and down. Their net fund flows could change and that could impact earnings in volatile markets, but that does not seem to have happened. So, I feel, not only is it an undervalued stock, it also is a great dividend play. I am going to double down on my position next week. Another stock that caught my attention was NYSE:PT. That is a telecom company that services Portugal, parts of Brazil and Africa. This has a market cap of 7.8 billion $ and currently yields 11% on dividend. Its currently not profitable, but boasts a good current ratio and good D/E ratio. It is a utility, so is probably independent of consumer tastes. Only major changes in underlying technology can unseat its business. I think it will make a great dividend play to ride out the recession.