Currency Issuers vs Currency Users

I’ve heard a lot of tax policy debates lately, perhaps due to the 2017 Tax Cuts and Jobs Act or perhaps due to growing concerns about inequality. Of course, debating taxes is something of a national pastime (going back to British tax policies preceding the American Revolution) and I live in California (a state known for high income taxes).

An important foundational concept that is almost always overlooked in these debates is that there are two types of taxing authorities. There are currency issuers and there are currency users.

Countries like the US, the UK, Japan, China, Switzerland, and so on create their own currency. They are currency issuers. They do not need to collect taxes in order to spend or operate.

Cities, US states, and members of currency unions (like Eurozone members) use currency, but do not create their own. They are currency users. They cannot operate without tax revenue (unless they have credit and can borrow). 

Failure to distinguish between currency issuers and currency users or speaking about their respective policies synonymously is to misunderstand the nature of taxes.

MSCI World vs MSCI ACWI

When comparing the MSCI World Index vs the MSCI All-Country World Index the other day, I was surprised by how closely they’ve tracked each other over the past 30= years. Since their inception in 1988, cumulative returns differ by just 5% while the annualized difference is .02%!

The MSCI World Index only includes stocks of “developed” markets (think the US, Western Europe, Japan, Canada, Australia, etc), while MSCI ACWI includes stocks in both developed and emerging markets (think China, India, Brazil, etc). Since emerging markets have bounced around between 10-15% of global market cap in the past decade (and were much smaller prior to that), the risk and returns of the MSCI World and MSCI ACWI indices have been nearly identical.

What does this mean for investors? Firstly, I think its safe to say that selecting a vehicle and cost structure is more important than deciding between these two indices. A large index fund may have the edge with MSCI ACWI since it will likely have access to local exchanges in emerging markets, while an index-based SMA may hold an edge in MSCI World. Every investor and situation is different and these differences are likely larger than any difference between these two indices.

Secondly, if all else is equal, I would personally opt for MSCI ACWI due to its inclusion of emerging markets. If EM declines as a percentage of global market cap, then MSCI ACWI will likely match MSCI World. If it outperforms and increases as a percent of market cap from 10-15% to 20% or 25%, then there is some relative upside without much relative downside. Of course, all else is rarely equal.

RIP: Jack Bogle

Jack Bogle’s impact on investing is difficult to overstate. Although best known for founding Vanguard and launching the first retail index fund, Bogle’s largest impact may have been saving investors more money than anyone else in history. It still amazes me that someone would willingly turn down the opportunity for millions and billions for no reason other than to give it to others. Bogle was a rare breed and we are lucky to have his example (especially those of us working in the financial services). 

Rather than keeping ownership of Vanguard to himself, he structured the firm as a mutual company effectively owned by its funds’ investors. Bogle could have assured himself a much higher income and would have almost certainly become a billionaire many times over had he owned Vanguard outright. Instead, those billions and billions of potential profits subsidized the expenses of Vanguard’s funds and drove investor costs down. Of course, Vanguard has also driven costs down across the entire money management industry. It is difficult to say what the world would look like without Bogle or Vanguard, but I suspect we would all be paying a lot more expenses. So where does this extreme generosity come from?

Despite growing up in difficult circumstances during and after The Great Depression, Bogle always felt he had enough (he even wrote a book on the topic titled “Enough”). One of Bogle’s favorite stories to share was this one: 

At a party given by a billionaire on Shelter Island, the late Kurt Vonnegut informs his pal, the author Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch 22 over its whole history. Heller responds, “Yes, but I have something he will never have . . . Enough.” 

Bogle shared that Kurt Vonnegut had also taught him that:

“we should catch young people before they become CEOs, investment bankers, consultants, and money managers (and especially hedge fund managers), and do our best to poison their minds with humanity.”

Bogle had enough and he spent a lot of time imploring others to think and reflect on their professional responsibilities (as opposed to their business interests) and recognize the “true treasures” of life (rather than money). 

History is filled with “philosopher” kings and many billionaires grace us with their opinions that we should all adopt a mindset of enough. Yet, Bogle lived it until the very end. Just a few weeks ago, Bogle shared this in an interview:

Jane Wollman Rusoff: Any regrets?

Jack Bogle: No regrets. I’m not a “trillionaire” like Abby Johnson [Fidelity chairwoman], who is supposed to be worth [$15.4 billion]. I wouldn’t even know what to do with a number like that. We have a nice, small house. We have shelter when it rains, snows or is windy. The kids and grandkids are well. I have the Armstrong Foundation, which has now reached a decent size — and I feel like it could do some good for others.

RIP Jack.

World Population Cartogram

I’m continually amazed by the work that Max Roser, of Our World in Data, creates. I feel like I know population sizes fairly well, but I still learn something every time that I look at one of these maps. Click the image for the ginormous hi-res image.

Source: https://ourworldindata.org/world-population-cartogram

Inflation Rates vs Interest Rates

While recent posts have myth-busted the narratives that money printing causes inflation and money printing drives up rates, even a quick glance at the same data shows that there is a stronger relationship between inflation and interest rates. The conventional view is that long-term rates move in response to inflation, although it is worth noting that long-term rates are less volatile than the inflation rates that drive them. Thus, the R² (or goodness of fit) is not that high, but there is a visible correlation nonetheless.

We’ll start with the world’s largest economy, the US:

And the Euro Area:

China:

Japan:

And finally, the UK:

808 Years of Inflation Data!

I was recently looking up some UK inflation data and noticed that the Bank of England publishes inflation data going back to 1210!

Source: Federal Reserve, Bank of England

Since this is a a very short post and the inception of this UK data set slightly predates the life of William Wallace (a resident of the UK’s current borders), I feel compelled to share my favorite Braveheart meme (from the Scottish independence referendum of 2014).

Do Increases In The Money Supply Drive Up Interest Rates?

Similar to last week’s post, we’ll be asking if increases in the money supply lead to higher interest rates?

Let’s look at the money supply and 10-year interest rates in the five largest economies. First up: the US.

The Eurozone:

China:

Japan:

The UK:

The verdict: increases in the money supply do not necessarily lead to higher interest rates. In fact, the above data from the five largest economies during a period of unprecedented expansion in the monetary base shows zero evidence that increases in the money supply drives rates higher. Apologies to the self-described bond vigilantes and Tea Partiers for the cognitive dissonance.

Do increases in the money supply cause or accelerate inflation?

Do increases in the money supply cause or accelerate inflation?

Let’s consider the evidence…

First, a chart of the annualized percentage changes in the money supply (M1) and consumer price index (CPI).

We can also look at the same data, but use the absolute value of the money supply. Again, inflation does not seem correlated with increases in the money supply.

Let’s look at other economies and monetary bases. First up: the Eurozone.

A look at China:

A look at Japan:

And finally, the UK:

Verdict: increases in the money supply do not necessarily cause or accelerate inflation. The above charts represent decades of data from the five largest economies during a period of unprecedented increases in the money supply. I understand that there is a logical rationale and belief that printing money leads to inflation, but it is simply not true. I am not sure what more evidence can be provided, yet the myth persists nonetheless.

The Case for Sustainable Investing

Source: The New Yorker

If a cartoon is worth a thousand words, then the above should suffice for a blog post about sustainable investing.

Will Donating Money Help Reunite Separated Families?

Following the Trump administration’s decision to separate families, I’ve felt a mix of sadness for the families, anger at those directing & facilitating this policy, and troubled by the stories of neglect and abuse coming out of the childrens’ “shelters.” Like many, I was moved to donate towards family reunification efforts but eventually opted not to. My intention in writing this is not to discourage anyone from donating towards important causes, but to illustrate that some problems cannot be solved by fundraising more donor dollars.

Without getting into the history, details, or politics of immigration policy, a major barrier preventing separated families from reuniting was the detained parents’ lack of money to post bail. If the arrested parents could pay for a bail bond, they could be released and reunited with their children. Immigration bail bonds reportedly cost between $1,500 and 10,000 and several organizations fund bail for detained immigrants.

The Solutions
However, after reading up on immigration bail bonds and reading about the viral fundraising successes, it was clear that more than enough money had been raised by dedicated immigration bail bond funds. If there were only one kid per family (roughly 2,500 kids) and the maximum allowable bail of $10,000 was set in every case, it’d only take $25M to bail out at least one parent from each family. Some organizations raised that amount single-handedly. In short, additional dollars donated would have no impact on the issue of family separations (although the early donors may have had a marginal impact and all donations can hopefully be used to fund bail bonds unrelated to family separations).

The second area I looked into was legal services. It’s difficult for residents of the US to understand the legal system and even harder for a new immigrant (and especially under the duress of being separated from their children)! However, my back-of-the-napkin analysis also indicated that the organizations doing this work had raised more than enough to hire sufficient legal personnel. The primary problem does not seem to be lack of funds or capacity for hiring enough people, but the government has not properly documented all the people that they’ve detained and likely deported many parents without their child(ren). It has and will continue to take time to reunite families and it’s difficult to see how more money will expedite the process at this point.

What I Did Do
While I declined to donate, I did advocate in small ways; posting on social media, mentioning here, joining a local rally with my family and friends, and continuing to advocate and donate to organizations that attack the root problems in Central America. Trump created and enacted the policy and had the power to reverse it, which he eventually did when it’s existence and details became known and deeply unpopular even within his family, party, and among his staunchest supporters. In this case, media attention, public scrutiny and advocacy, and legal action were the influential factors.

Should I donate at all?
The point of this post is not “don’t donate.” I believe in giving and giving generously, but giving money isn’t always helpful (and can sometimes be harmful). I find that my initial reaction to donate is often based on a desire for some sense of agency (“don’t just sit there, do something!”) or driven by my ego (“good job Matt, you’re helping out”), which are not good reasons to donate. I believe that if we ignore false narratives and selfish desires, then we can be more efficient and effective with what we do give. At some point, I should probably post some case studies of instances where I did donate, rather than solely focusing on times that I declined. I believe that we should give, but thoughtfully.