markjgsmith

The problem with some finance writing

2023-07-11 18:38:00 +0700 by Mark Smith

This going to end up sounding kind of complainy, sorry.

I was listening to the latest Eurodollar University Podcast episode Where did it all go? It was all a lie. and it starts off with a bit describing quantitative tightening using quotes from a finance article. It perfectly illustrates the problem with many finance articles. This isn’t a hit on Eurodollar University per-se, I know he’s just quoting other people’s words, but I think this type of dynamic in financial writing is a bit endemic in the industry.

It’s worth listening to the segment first, it starts at ~00:50. It’s about the main stream view of quantitative tightening. I’ve pulled out the main steps to this logic chain:

1. Quantitative easing is a way to stoke animal spirits.
2. It’s the exact opposite of quantitative tightening.
3. They are depressing animal spirits by pulling money out of the economy.
4. The FED only directly controls short term rates.
5. By selling bonds they are pushing down the price of long term securities.

I listened to this and was like, yeah sort of makes sense, but either I’ve missed something, or there is some missing information. Remember it’s delivered via audio rather than text. I guess in an ideal world I would be consuming more text, but my internet access is such that I have to do a lot offline, hence lots of podcasts.

Let’s go back over it in more detail, this illustrates vaguely my thought process as I listened:

1. Quantitative easing is a way to stoke animal spirits.
   • Yup high level statement, things get easier, people feel more confident, exuberant sentiment, they do more stuff, take more risk, trade more etc.
   • Note they didn’t say how that was implemented.
   • That would have been helpful, even if it’s obvious to many, it’s not obvious to all, especially newbies.
   • So already at step 1, the very foundation of the logic chain we are missing a vital brick.
   • The finance monster just took a bite out of your working memory.
   • You are forced to do mental gymnastics along the lines of "ok let’s keep going, that will probably become obvious".
2. It’s the exact opposite with quantitative tightening.
   • Yup quantitative easing made sense, so it makes logical sense that tightening would be the exact opposite. Remember we are still doing mental gymnastics, holding that missing brick for the finance monster. We are ok but a little unstable.
3. They are depressing animal spirits by pulling money out of the economy.
   • That sounds good, finally we get implementation detail. But it’s not for our missing brick, it’s the implementation of the opposite of the missing brick. Ok hold on while I create even more space in memory for that. It’s f-ing with the base brick, so worst case is that you have to double the amount of memory, because you now have a logic chain with a brick and an entire separate logic chain without a brick. But the missing brick now has implementation detail, so in a way you have freed up a bit of memory but, you have to use up memory to compute that, so it’s like a little bit worse but then better as long as you can still remember how we got here. Anyway, moving on…
4. The fed only directly controls short term rates.
   • This appears to be completely separate from the previous logic chain, so we have to park the unstable two headed logic chain from before, heave ho.
   • That was quite heavy, but it’s parked now.
   • Uh oh we are getting behind now, what was this FED stuff again? Yes the FED changes rates.
   • Yes indeed the FED does change interest rates, makes sense, but wait what kind of rates did they say?
   • Oh no too late, no time, we’ve missed that, we’ll have to park that now too. Heave ho.
5. By selling bonds they are pushing down the price of long term securities.
   • Ok so we start here with a parked unstable double headed logic chain that sort of makes sense, and another parked statement about some kind of rates that also made sense but there’s a brick missing, i.e. it’s also unstable.
   • Selling bonds? Hold on that’s new, yet he’s saying it as if he’s been banging on about bonds for ages. But he hasn’t. Oh ok, let’s go with it anyway assume the best.
   • Why are they selling bonds? It’s totally not obvious, even though he’s pretending it is.
   • And remember we are already using a shitload of memory to balance all the previous memory debt incurred.
   • You need to compute it yourself.
   • The writer is offloading both memory and compute onto you dear reader.
   • So let’s unpark our unstable double headed logic chain from before. Heave ho.
   • Rewind, remember that we are talking about quantitative tightening, which was pulling money out of the economy. Ok, right.
   • So selling bonds is tightening. Ok but why?The answer I think is something like, they sell bonds, which people buy, i.e they pay for them with money they have, thus money is pulled out of the economy.
   • But wait there’s more, what’s this ‘pushing down long term prices’ bit?
   • Why do prices get affected?
   • Oh look, again we are having to compute for the writer.
   • Selling bonds probably means there are more bonds in the market. They create and sell bonds so effectively they are diluting the existing bond market. I might have this wrong, I’m not an expert.
   • The overall market is bigger, i.e. it’s size is inflated, so the bonds that were originally there are worth less.
   • Why don’t they just say it’s bond inflation? Same as money inflation. Why are we constantly describing similar things using different mental models? Anyway…
   • Oh look and just to confuse us even more, the writer is now calling them both bonds and long term securities. They are the same thing. You have to compute that too.

A finance explanation that uses up so much tech debt doing the explanation that it’s basically impossible to quickly understand the issue because the writer has used up all your memory and compute.

Oh the irony, an explanation of how the economy avoids bankruptcy, is itself doing a very effective job of bankrupting the minds of the people it’s teaching.

It’s basically a fractal, at which point I’m out. Fuck this this shit, it’s probably best to just walk away and listen to something else.

I say all this knowing that this article that I’m writing is kind of slap dash. I don’t have the time or resources to spend editing it until it’s perfect in every dimension. I’m sorry about that. I’m learning too. I guess my gripe is that a lot of finance articles have similar issues. It’s weird to me that no one else is complaining.

I’m left wondering how different the world would be if the explanations were better. At a macro level don’t these types of explanation just restrict the total number of people that can learn about how finance works? The total compute capacity of humans is likely finite without adding more neurons. Are people doing this on purpose or are we just terrible at explanations?

Is it any wonder the world has issues understanding money, if we can’t even balance the books explaining the thing, how are we ever going to balance the books doing the actual thing?