# An article written by me for Seeking Alpha on the TED Rate…

See here for article.

# Is it better to rent or buy? The big question.

This is a question that I have seen various times on social media. I’ll get to the point. My feeling is that buying is an idea that has been pushed heavily over the years by those who have bought their house for very cheap and who have seen it appreciate heavily. In addition, the majority of retail banks’ business is in the mortgage market where they glean interest through mortgage provision. You only have to look to the most recent financial crisis to see how far reaching the mortgage business is.

I wrote a recent article on London house pricing and why they have increased so heavily. A basic summary is that a combination of banks allowing less leverage & therefore a bigger initial deposit has increased rate of renting while low interest rate policy, quantitative easing and low housing stock has caused the price rise. This has caused people to rent more, yet it seems their real goal is to own a home. Why?

Dear Emily,

I’m 30 years old, and my husband and I are thinking about buying a house. He’s all for it, but frankly, I’m terrified of the idea of taking on a mortgage. I know a number of people who lost their homes during the financial crisis. The housing market seems like it isn’t the sure thing everyone said it was. And we have significant student loan debt as it is. So my question is—is homeownership really all it’s cracked up to be? And what should young people do when they’re already swimming in debt as is?

Dear Renter:

I distinctly remember the time in 2006 when a relative told me I should “definitely” buy a house because “the housing market always goes up.” This was obviously not good advice, though it certainly reflects prevailing wisdom at the time. And I can see why in the wake of the housing crisis, you’d fear that the housing market always goes down. Which is also not true.

There is one unambiguous argument in favor of buying a house: Sometimes it is hard to rent the house you want. In most places, if you want to live in a single-family detached house, there are not many rental options, certainly not long-term ones. So you may find yourself coming up short on good rentals, and buying may be the only way to get what you want.

However, let’s assume that you are happily renting someplace and your only motivation to buy is financial. Is it cheaper to rent or buy? In equilibrium, the answer is: The price to rent or buy should be about the same. Why is that?

Imagine that rents were so high that you could buy a place and rent it out and still have loads of money left over—even after paying the mortgage, maintenance, and everything else. If that happens, the market will adjust. People will start coming in, buying properties, and renting them out. But as apartment-hunters have more options to choose from, rental prices will fall. And they’ll fall to the point where the rental price just about covers the cost of owning.

Alternatively, if rents were so low that owners would lose money renting houses, they’d stop doing it. But as the number of available rentals goes down, the prices will go up. And they’ll go up to the point where the rental price will cover the cost of owning.

This is an example of what economists call “equilibrium” and it means that ultimately, it will likely cost you about the same to rent or to buy.

You can also try to do this calculation directly. Think about what it costs you to rent. Then think about what it would cost to buy the same quality house. Take into account the mortgage, of course, but also insurance, maintenance, foregone interest on the down payment, and the value of your time spent fixing things that the landlord would fix in a rental. I suspect you’ll find that the costs are about the same.

Given this reality, the only other strong argument for buying a house is the view that the “housing market always goes up,” so when you sell, you’ll make money. But you don’t have to go very far back in history to see that isn’t true, so it’s probably not a great argument. The housing market also doesn’t always go down, so that’s not a great argument, either.

As to your debt question: Student debt may limit your ability to get a mortgage, but it shouldn’t keep you from buying a house if you want to. Your housing debt is collateralized by your house, so unless the value of your house goes down so much that you’re underwater on your mortgage, it’s not debt in the same sense that your student debt is.

A final note: Time horizon matters. There are a lot of fixed costs with buying a house: you pay the realtor, closing costs, etc. If you are going to own a house for 30 years, these do not matter much. But if you’re planning to sell in a few years, they significantly raise the effective buying price. And if you rent, so much the easier to flee the coming war with Australia.

There are various reasons why someone may want to buy a home as seen above. I am of the opinion that the initial outlay of a down payment could be better invested elsewhere. Note that any 20 year period of investing (and reinvesting dividends) in the SP500 has only led to a profit. See here:

If the rationale for buying is that you have an investment in the end then in my opinion, it holds up as pretty weak. If you add in the costs associated with being a mortgage borrower (interest payments, maintenance, insurance, renovation etc), would you be able to achieve a 246% return in a 20 year period? This is one huge opportunity cost, as well as being a very illiquid one.

I understand the above is great hindsight analysis, but the fact is that no one has ever lost money over a 20 year period while investing in the SP500 (as long as we are calculating purely from the principle investment, and with dividends reinvested). Many people have lost money on home ownership due to it being an illiquid asset.

Of course, you are able to release equity in your home to finance other investments, however this is not necessarily a given investment strategy in the future due to no knowledge of future house price appreciation or viability for remortgaging. And this brings me onto the next point.

Buying may be seen as more attractive, but what % of your income does your mortgage take up? Rent may be £1500 and a mortgage £1300, but would your emergency fund be able to cover mortgage payments if you lost your job? What if you’re utilising 60% of your income paying a mortgage plus home ownership costs? Renting provides a certain flexibility in an economic climate where the future is very uncertain. If you lose your job, you can quickly move to somewhere with lower payments, and avoid a very big mess.

At the end of the day, there are personal circumstances that come into it. But always bear in mind opportunity cost and longer term costs that may not be associated with renting.

‘I refuse to pay someone’s mortgage’

But you don’t mind giving banks interest payments? Interesting (ha).

Remember, mortgage in French means ‘death pledge’. Obviously death in this sense means until the loan obligation ends, but there are funny connotations with it as well.

A mortgage is classes as a liability until it’s paid off. A house is not an asset until that obligation is fulfilled. In addition, considering buying a home as an investment is poor, since house prices have barely outpaced inflation over the last 60 years. This does not make it a poor purchase, however.

The following video gives a roundup of what I have said:

Note, the mortgage calculation equation is wrong. It should be E = P×r×(1 + r)n/((1 + r)n – 1),  where E = monthly payment owed to the bank, P$= loan amount, r = interest rate of loan, n = amount of months loan is for Let me know your thoughts in the comments, on Twitter and below. # The UK property market is a bubble. For the last 10 years, London has been experiencing a massive rise in house prices. It’s practically impossible for a first time buyer to get on the ladder – banks don’t want to lend with as much leverage (the money borrowed relative to salary, credit rating and initial down payment) and this is seriously pricing out buyers young and old. The issue is certainly countrywide, however, London buyers face the biggest hit as seen by the following chart. Source: Hometrack.com The dashed line is the UK housing price index; the filled line is London’s housing price index. There is roughly a 75% difference between the two measures (at current levels). But why has this happened? If we note the above chart we see that the recent acceleration began from about 2009/10. During this period, the Bank of England had decreased interest rates to their lowest level ever and had introduced something known as Quantitative Easing. I won’t go too deep into the intricacies of it*, but they end up increasing the amount of money in circulation to boost consumer spending and increase inflation to try and normalise the economy after the 2008 crash. If you can’t get a good return on your money by leaving it in a bank account (interest rates are too low) then where is the next best place? Property. London is the draw for these people with cash holdings in the UK. *For those who may understand this part: during QE, the central bank purchases bonds from institutions (banks, pension funds, hedge funds) in order to service government spending (the Northern Rock, RBS bailout etc). What do these institutions do with the cash? Re-invest into other assets (property, private equity etc. since the yield on bonds is so low it’s not in their interest to re-enter that asset class as heavily). This is also why the stock markets have been rallying while earnings data for companies have been extremely poor. So what happens when you can’t afford to buy? You’re forced to rent. Home ownership last year dropped to its lowest rate in 30 years. In February 2016, it had fallen to 58% in London. London’s peak ownership during the housing boom of the early 2000s was 64% and England’s was 71%. Peak ownership and the new ownership as of Feb last year is shown by the following chart. I don’t want to get too political/ideological here, but what this shows is a transfer of wealth from the ‘haves’ (landlords, pension funds who own property etc) to the have nots (first time buyers, young people). Additionally, remember Margaret Thatcher’s ‘Right to Buy’ scheme? People were able to buy their council houses at a massive discount – 20 years later they’re worth 4/5 times more. This disturbance of the supply/demand dynamic has not helped with the velocity of long term price increases. Additionally, foreign investors have caused a massive rise in London house prices especially. Above I mentioned investors using property as cash holdings, but why else? Well, the appreciation of London property far outweighs the rate of inflation in a relatively short time horizon. This means that the cash they have used on the property appreciates by the difference between inflation and annual appreciation, minus any costs from taxes/solicitors etc. For them, it’s merely a bank account which is going to give a better rate of return than a traditional account, be less risky than investing in stocks or shares and much of the time, and they can get around capital controls in their countries (see RussiaChina etc). What this also shows is another massive longer term issue which is low wage growth. Relative to our (I was born in 1992 so pretty much anyone from 1988-1999) parents, we earn 20% less on average. Source: Trading Economics You can see that the marginal weekly increases in wages over the last 16 or so years have been in constant decline. We have not been above 4% since 2010. This is where a slight bitterness comes in, since it is the baby boomers (those born just after the war) and our parents who have kind of gotten us into this situation (more so the baby boomers though)! Now if we combine that with rising house prices, do we really stand a chance of getting onto the ladder. So what can be done about this problem? Many say that building more houses will fix the issue. This is merely my opinion, but this is not a long term solution. What needs to be done is for global central banks to re-assess their strategies of programmes such as Quantitative Easing and increase their respective base rates. By increasing the base rate, you are simply increasing the cost of investment by restricting the supply of credit. You may say this is a very bad idea since growth is still quite low, but I think that has been equally as bad is the no interest rate policy that has been followed post 2008, where the majority of people have not been able to save while cheap money has been given to the ‘haves’. Alternatively, (and this is going against my free-market conditioning) we could introduce a land value tax. So for example, if the need for housing is greater in some areas vs others, we can apply larger taxes on the land owners who wish to use the land for other gains. The key here is ‘land owners’ and not land occupiers. This deters the building of say a shopping centre in an area where you could build 300 houses instead. How this could work well in London is levying higher taxes on foreign investors who use property merely as a ‘bank account’ and do not live there. As mentioned before – close the gap on the yearly appreciation by levying a higher tax on purchase. We must remember that this housing issue is not just a UK problem. Scandinavian cities, Vancouver, Toronto, San Francisco, New York, Hong Kong, Singapore, Tokyo are all experiencing the same problems. When you see such a correlation, you have to begin to wonder as to what is causing it, and since most central banks in the developed world have been following the same monetary policy process, or are highly interdependent on each other’s economy, some bells have to start ringing. Follow me on Twitter @DavidBelleFX and check out my blog www.davidbellefx.com for economic opinion, market commentary and trade calls. Thanks for reading. # Is Trump totally mental to dismantle Dodd-Frank? Dodd Frank was introduced after the financial crisis to prevent excessive and dangerous banking practices that partly caused the 2008 meltdown and the requirement of taxpayers to bail out large investment banks and other institutions. I think to answer the above question, the mechanism by which the 2008 crash occurred must be explained. Here is a very simple note on why it happened. I won’t go through all of the terms of the legislature because there are so many, and quite frankly, I don’t have the relevant experience to comment on some parts of it, but the parts that I do understand I will do my best to explain and evaluate. In short, Dodd Frank is there to increase moral hazard on banks to protect the end consumer. Moral Hazard – lack of incentive to guard against risk where one is protected from its consequences, e.g. by insurance. Banks were deemed too big to fail. They knew that the taxpayer would have to bail them out. Dodd Frank’s introduction makes them more susceptible (in theory, but I’ll come onto this later) to accountability. The introduction of The Financial Stability Oversight Council and Orderly Liquidation Authority and Consumer Financial Protection Bureau 1) force banks to increase capital base (increase liquidity) if they are deemed to hold too much systematic risk and also break up banks for the same reason (ha, as if that would ever happen) and 2) the CFPB prevents mortgage brokers from earning high commissions via predatory practices (giving out subprime mortgages like they’re sweets) whereby they earn higher interest payments but the assets end up having a higher default risk. What could Trump possibly benefit from by deregulating these areas? Well, he has quite a few ex Goldman executives around him. He has some of the biggest tech firms and conglomerates on his advisory team. These firms need access to capital and credit. Trump is a believer in trickle down economics (stupidly) whereby firms who provide jobs will eventually have their wealth trickle down to the workforce that they have created jobs for. This is absolute rubbish and has been proven not to work – look at the increasing disparity between executive pay and lowest paid workers in the majority of large firms. The issue here is that repealing Dodd-Frank may mean rejecting the accountability measure that should be placed on banks when dealing with a product such as mortgage backed securities where everyone who owns a home or is renting from a landlord can be affected when they are traded – or when the system fails. I think there has been too much emphasis placed on Dodd-Frank being the main development in banking regulation and process, however. Basel III has been a far greater and more far reaching introduction. Whether you want to attribute the following to Dodd-Frank or Basell III is negligible, because all that is really apparent about the following quote is that systematically, the risk is essentially the same if not subjectively worse: Just how much has bank capital increased since the passage of Dodd-Frank? It all depends on what you mean by capital. According to the FDIC, at the end of 2015, commercial banks had “total equity capital” of$1.8 trillion.  This is certainly higher than the $1.5 trillion that existed at the time of Dodd-Frank’s passage. But bank assets also increased. What matters is the ratio of bank capital to total bank assets. At the passage of Dodd-Frank that ratio was 11.1. At year-end 2015, it was 11.2. Some apparent increases in bank capital relative to risk-weighted assets are due to the fact that banks have massively shifted into low risk-weight assets. Under a system of risk weighted capital, the required capital is a function of the target capital level times the risk weight of the volume of the asset. For example whole mortgages have historically had a risk weight of 50%. So if one holds$100 million in whole mortgages and the target capital is 8%, then actual capital is not $8 million but rather$4 million (8 x 0.5).  Needless to say the risk weights have come under considerable scrutiny, especially since assets like Greek government debt were given risk weights of zero.

Since Dodd-Frank, commercial banks have more than doubled their holdings of U.S. Treasuries, which require zero capital.  Banks have also increased their holdings of mortgage-backed securities and municipal debt, which also have low risk weights.  The point is that banks haven’t really raised lots of new capital as much as they’ve gamed the risk-weights to appear to have more capital.

https://www.alt-m.org/2016/03/18/did-dodd-frank-increase-bank-capital/

So the argument that repealing Dodd-Frank based on reducing systematic risk actually vanishes pretty quickly, since nothing has really changed when looking at the books. I would argue it has actually been made worse, except the introduction of Dodd Frank has simply allowed a veneer of respectability and accountability to be placed onto banks.

If this is the case, then Dodd Frank is merely protecting consumers via bureaucracy – which in this case isn’t necessarily bad. I would argue that the necessity to prevent practices such as being able to buy naked credit default swaps on failing assets while selling that failing asset to someone else (imagine being able to buy insurance on your neighbour’s house, setting fire to it, then collecting the insurance money – Goldman were doing that with collateralised debt obligations), which only Europe have done is necessary. Increasing pre and post trade transparency and reporting on bank risk is vital to be able to monitor systematic risk.

But let’s think of this. Has Dodd-Frank prevented Deutsche Bank or Santander from repeatedly failing stress tests in the US? Nope.

I think that repealing Dodd Frank won’t make much of a difference to systematic risk at all by looking at the last paragraph of the quote. So Trump is a madman, but this isn’t really a time which is going to absolutely wreck the world.

# Trump and May Set to meet

Later today President Trump and U.K. Prime Minister Theresa May will meet in Washington.

There will be a press conference following the meeting at which Trump is sure to praise and encourage the U.K.’s efforts over Brexit. He is also likely to take the opportunity to bash the EU much to the chagrin of Merkel, Junker et al.

Yesterday saw the release of Q4 GDP data in the U.K which showed that the inflationary effect of the weaker pound and a perceived slowdown in consumer spending is yet to have any effect on growth.

Sterling continues its recovery. Its performance since the Brexit vote could be characterized as “taking the lift down and is taking the stairs back up!”

The pound has recovered 5% of the “flash crash” Brexit fall against the dollar and continues to be steady against the Euro.

Next week sees “Super Thursday in the U.K. when the Bank of England will issue its Quarterly Inflation Report and the MPC will make its decision on interest rates. Bank of England Governor Mark Carney has already stated that the Bank are watchful and will act pre-emptively should inflation start to increase “outside the normal cycle”.

Mar. Carney has already announced his intention to leave his position in June 2019. Whilst he hasn’t, as yet, taken on the almost mythical status of a Greenspan or Bernanke he was certainly the right man in the right place to steer than Bank of England into calmer waters following the debt crisis.

It is to be hoped that his successor is already being groomed with the departure coming at a critical juncture in Brexit. The U.K. will need to be careful not to become “Manchester United after the departure of Sir Alex Ferguson!”

Later today (1.30GMT) sees the release of Q4 GDP data in the U.S.

This is expected to see a healthy increase from 1.4% in Q3 to 2.1%. Economic activity continues to pick up in the U.S. Jobless figures are at the level which equate to “full employment” below 5%.  The dollar index has fallen (slightly) every week since the turn of the year and we could see the uptrend recommence should this data surprise at all to the upside.

President Trump has done pretty much all he can other than to “invoke the Spirit of the Alamo” upset Mexico over the past week or so. It seems the wall will be built but the question remains “who will pay for it?

80% of Mexico’s exports are to the United States. America has an eighty billion dollar trade deficit with Mexico. To a certain extent, they need each other but the onus is on Mexico as President Trump is well aware!

A 20% tax on Mexican imports is a double edged sword. It will pass the burden onto the U.S. consumer but could also drive importers of Mexican goods to look elsewhere to source product.

# Why Are Economists Wrong?

Andy Haldane has recently come out to apologise about the forecasts the Bank of England and experts had made in the wake of the EU Referendum. After having missed the occurrence of the 2008 financial crisis and totally misjudged the Brexit vote, is the Bank in disrepute?

Claims made by leading economic thinkers include statements of ‘fact’ (when it comes to experts providing opinion, the average Joe Public will take this as fact) such as:

“Britain’s shock vote to leave the EU has unleashed a wave of economic and political uncertainty that likely will drive the UK into recession,” Samuel Tombs, Pantheon Macroeconomics.

David Owen, the chief European economist at Jefferies International, said a technical recession – two consecutive quarters of contraction – may now be a given, followed by a period of very slow growth. He also said the UK’s long-term economic potential, known as trend growth, would be lower, “which has to impact the valuation of assets, particularly equities”.

(Guardian, 24th June 2016)

George Osbourne tweeted:

…as a result of Mark Carney’s presser which can be seen here, where they also expected a 20pc fall in the pound, which, by the way, was totally not unexpected – you can read about this in an article I wrote a month or two ago. In actuality, post referendum, we are experiencing very good economic conditions. Business confidence is up in Q4 2016 vs Q3 2016, inflation is at the highest level in 2 years (yet Andy Haldane is now arguing that inflation is going to hurt British consumers, after being a dove for a long time – talk about flip flopping), one of the biggest industries, construction, is seeing a boom, even in the face of higher material costs for builders, and finally, UK Q4 growth was better than expected.

This isn’t meant to be a total critique specifically of the post referendum expectations from the Bank and many expert economists, but a critique of forecasting of many events by economists, as well as their decision making along the line.

Consistently through history, economists have misjudged or mis-forecasted events, from the Great Depression, to Reagan’s ‘Trickle-down economics’, which many still feel holds weight today, to the predicting the financial crisis of 2008.

In 1999, The Economist wrote to the UK’s leading academic practitioners of the dismal science to find out whether it would be in our national economic interest to join the euro by 2004. Of the 165 who replied, 65 per cent said that it would. Even more depressingly, 73 per cent of those who actually specialised in the economics of the EU and of monetary union thought we should join – the experts among the experts were the most wrong.

(The Telegraph, August 2016)

I believe that it is because although economists use varying models, these models are consistently going to be outdated where human behaviours change according to environmental, technological, financial and resource bases advances and evolution. Models used 70/80 years ago are still being used today. A model that worked in a post war world doesn’t necessarily work today. It could lead you to ask why have interest rates consistently been on a decline for 30 years? Why are real wages decreasing long term? Evidently something is wrong with our economic system and I believe that a key reason for this is the lack of credible forecasting from our central banks and government economists, as well as other variables such as increasing inequality, which I think can also be attributed to certain post war mechanisms (hint, baby boomer created mechanisms).

In trading, you can argue that an analyst can have a totally different view of the market to a trader. The issue is that one is well, analysing, and one is actually putting their balls on the line and aiding price discovery – and everything is based on price discovery or supply and demand equilibrium. What is the punishment for Andy Haldane saying that there is the ‘potential’ for a post referendum recession apart from having to make an apology? Not much apart from a red face and an article critiquing him by an MT4 FX trader. A trader would lose or gain. There is something on the line but this leads me onto something that I feel economists totally forget about markets.

Pricing in is the notion that the market discounts everything. The price you view now is the price of all information known in the market. For example, one could look at the dollar rally we experienced from late summer to the December rate hike and consider the high of 118.5 as that being the market including all information based on the belief that a hike would have occurred, since we are now trading 200-250 ticks off of that price. The dollar tends to fall after US rate hikes anyway for about 6 months after. Slight tangent there, but the point is that economists tend to miss this a lot. Traders do not. A 15% fall in GBP was predicted by the IMF a year before Brexit. Traders knew this – they’d been shorting cable from $2.00 highs. They were just waiting for a catalyst to be able to capitalise on that fall – and in my opinion, it would have occurred anyway over time. It’s the same with the Trump vote. There were heavy predictions of a stock market crash… we are hitting all time highs on Dow and SP500, and we can see the same phenomenon among economists working. In both cases, we saw economists over-estimate the effect of negative events and totally underestimate the effects of anything positive that could be taken from these two political decisions. To be honest, I was guilty of this on Trump. I thought he would win, but I did not expect there to be such strong risk on behaviour in bonds and equities. Conversely, we saw the opposite occur with the 2008 financial crisis. There were probably mutterings of ‘it’s housing, how can that go wrong’? Well in this case, the negatives were discounted totally. Part of this was due to ratings agencies providing smoke and mirrors to the actual situation, and part of this was due to the belief that if anything did go wrong, it would be so staggeringly bad that it just… couldn’t happen. We also have the issue of data being provided sometimes 3 months too late (inflation forecasts for example). Economies are sensitive ecosystems. Supply and demand shocks can occur and change things very quickly during those periods. However, this is where I feel a more market analyst based approach has to be taken by economists rather than simply always adhering to macroeconomic models – humans aren’t rational beings all the time in relation to economics shocks, and the data lags don’t always reflect this. For example, I found it strange that the BoE cut rates by 25 BP back in August. You could say it was because they were trying to be accomodative, but then you have Andy Haldane coming out with statements that there are inflation risks, when we all know that monetary policy takes 12 months to take effect (however I think that just shows the Bank’s lack of forecasting ability and we go back in circles again). One thing that I think that certain economists are really understating is the effect that China blowing up will have. Balls on the line, January 2018 that credit bubble will go boom (I can edit this if it happens in Feb). # The 4 Best FREE Online Economics Courses Here are some of the best economics courses that I have found that are free to view. MIT have developed a huge library of free courses from economics to history subjects. This is the best in my opinion since it provides the absolute full undergraduate course, including econometrics and other economics related maths subjects. Well worth it if you are a Uni student studying economics. Alison provides more basic economics courses. Very good for beginners and not so intense as the MIT course, this will give a beginner-intermediate understanding once completed. Marginal Revolution University provides again, an in depth but not too intense, economics course provision which can take you from not knowing anything, to knowing more than 90% of people out there. All the others are great, but you don’t necessarily need to know all the theory which isn’t pertinent to the understanding of everyday economics. The capital markets and finance section pretty much solves all of those questions that people have (what is an interest rate, for example). Also a very interesting section on buying a home vs renting (I am of the same opinion as the host :)). Email me at dbelle@davidbellefx.com or catch me on Twitter if you have any questions! # Why can a test for breast cancer with a supposed very high positive accuracy rate yield in reality, a tenth of the accuracy? This article is from this website: https://betterexplained.com/articles/an-intuitive-and-short-explanation-of-bayes-theorem/ Please bear in mind that this is simply to examine probability outcomes and the biases we have when faced with a problem when deducing probabilistic outcomes. There are many medical variables to take into account with medical tests of any kind and this article doesn’t include outcome variance in age, environmental contributing factors, hereditary factors etc. Bayes’ theorem was the subject of a detailed article. The essay is good, but over 15,000 words long — here’s the condensed version for Bayesian newcomers like myself: • Tests are not the event. We have a cancer test, separate from the event of actually having cancer. We have a test for spam, separate from the event of actually having a spam message. • Tests are flawed. Tests detect things that don’t exist (false positive), and miss things that do exist (false negative). • Tests give us test probabilities, not the real probabilities. People often consider the test results directly, without considering the errors in the tests. • False positives skew results. Suppose you are searching for something really rare (1 in a million). Even with a good test, it’s likely that a positive result is really a false positive on somebody in the 999,999. • People prefer natural numbers. Saying “100 in 10,000″ rather than “1%” helps people work through the numbers with fewer errors, especially with multiple percentages (“Of those 100, 80 will test positive” rather than “80% of the 1% will test positive”). • Even science is a test. At a philosophical level, scientific experiments can be considered “potentially flawed tests” and need to be treated accordingly. There is a test for a chemical, or a phenomenon, and there is the event of the phenomenon itself. Our tests and measuring equipment have some inherent rate of error. Bayes’ theorem converts the results from your test into the real probability of the event. For example, you can: • Correct for measurement errors. If you know the real probabilities and the chance of a false positive and false negative, you can correct for measurement errors. • Relate the actual probability to the measured test probability. Bayes’ theorem lets you relate Pr(A|X), the chance that an event A happened given the indicator X, and Pr(X|A), the chance the indicator X happened given that event A occurred. Given mammogram test results and known error rates, you can predict the actual chance of having cancer. ## Anatomy of a Test The article describes a cancer testing scenario: • 1% of women have breast cancer (and therefore 99% do not). • 80% of mammograms detect breast cancer when it is there (and therefore 20% miss it). • 9.6% of mammograms detect breast cancer when it’s not there (and therefore 90.4% correctly return a negative result). Put in a table, the probabilities look like this: How do we read it? • 1% of people have cancer • If you already have cancer, you are in the first column. There’s an 80% chance you will test positive. There’s a 20% chance you will test negative. • If you don’t have cancer, you are in the second column. There’s a 9.6% chance you will test positive, and a 90.4% chance you will test negative. ## How Accurate Is The Test? Now suppose you get a positive test result. What are the chances you have cancer? 80%? 99%? 1%? Here’s how I think about it: • Ok, we got a positive result. It means we’re somewhere in the top row of our table. Let’s not assume anything — it could be a true positive or a false positive. • The chances of a true positive = chance you have cancer * chance test caught it = 1% * 80% = .008 • The chances of a false positive = chance you don’t have cancer * chance test caught it anyway = 99% * 9.6% = 0.09504 The table looks like this: And what was the question again? Oh yes: what’s the chance we really have cancer if we get a positive result. The chance of an event is the number of ways it could happen given all possible outcomes: Probability = desired event / all possibilities The chance of getting a real, positive result is .008. The chance of getting any type of positive result is the chance of a true positive plus the chance of a false positive (.008 + 0.09504 = .10304). So, our chance of cancer is .008/.10304 = 0.0776, or about 7.8%. Interesting — a positive mammogram only means you have a 7.8% chance of cancer, rather than 80% (the supposed accuracy of the test). It might seem strange at first but it makes sense: the test gives a false positive 9.6% of the time, so there will be a ton of false positives in any given population. There will be so many false positives, in fact, that most of the positive test results will be wrong. Let’s test our intuition by drawing a conclusion from simply eyeballing the table. If you take 100 people, only 1 person will have cancer (1%), and they’re nearly guaranteed to test positive (80% chance). Of the 99 remaining people, about 10% will test positive, so we’ll get roughly 10 false positives. Considering all the positive tests, just 1 in 11 is correct, so there’s a 1/11 chance of having cancer given a positive test. The real number is 7.8% (closer to 1/13, computed above), but we found a reasonable estimate without a calculator. ## Bayes’ Theorem We can turn the process above into an equation, which is Bayes’ Theorem. It lets you take the test results and correct for the “skew” introduced by false positives. You get the real chance of having the event. Here’s the equation: $\displaystyle{\Pr(\mathrm{A}|\mathrm{X}) = \frac{\Pr(\mathrm{X}|\mathrm{A})\Pr(\mathrm{A})}{\Pr(\mathrm{X|A})\Pr(\mathrm{A})+ \Pr(\mathrm{X | not \ A})\Pr(\mathrm{not \ A})}}$ And here’s the decoder key to read it: • Pr(A|X) = Chance of having cancer (A) given a positive test (X). This is what we want to know: How likely is it to have cancer with a positive result? In our case it was 7.8%. • Pr(X|A) = Chance of a positive test (X) given that you had cancer (A). This is the chance of a true positive, 80% in our case. • Pr(A) = Chance of having cancer (1%). • Pr(not A) = Chance of not having cancer (99%). • Pr(X|not A) = Chance of a positive test (X) given that you didn’t have cancer (~A). This is a false positive, 9.6% in our case. It all comes down to the chance of a true positive result divided by the chance of any positive result. We can simplify the equation to: $\displaystyle{\Pr(\mathrm{A}|\mathrm{X}) = \frac{\Pr(\mathrm{X}|\mathrm{A})\Pr(\mathrm{A})}{\Pr(\mathrm{X})}}$ Pr(X) is a normalizing constant and helps scale our equation. Without it, we might think that a positive test result gives us an 80% chance of having cancer. Pr(X) tells us the chance of getting any positive result, whether it’s a real positive in the cancer population (1%) or a false positive in the non-cancer population (99%). It’s a bit like a weighted average, and helps us compare against the overall chance of a positive result. In our case, Pr(X) gets really large because of the potential for false positives. Thank you, normalizing constant, for setting us straight! This is the part many of us may neglect, which makes the result of 7.8% counter-intuitive. # Why do I dislike the Eurozone so much? You have probably seen me banging on about the Eurozone with words such as ‘toxicity’, ‘failed experiment’, and ‘f*cking stupid idea’. I previously wrote about why I voted out (because the EZ is failed and we need to be as far away from its alcoholic, abusive father as possible) but I want to go a bit further and break down why I feel the Eurozone is failed. A lot of excerpts will be taken from Rosa’s book, Euro Error, written in April 1999 (he almost predicts what would happen over the next decade). The root cause of the toxicity is the currency union. Using the same currency for 19 different varied economies cannot work. It would be akin to treating someone with a bruised leg and someone with a gunshot wound with the same dose of painkiller. It can’t work because monetary policy is adopted as a tool to accommodate and constrict to complement fiscal policy. In this way, you have to start asking why it was implemented, and from what I feel, it is to have Europe as a statist entity. The State’s expenditure is, in a way, the national economy’s overhead cost. We are reaching the point where these overheads prove to be excessive and drag down businesses’ potential to create wealth. Which is to say, in the final analysis, that the responsibility for Europe’s malaise falls on the policy that was chosen and the people who were responsible for implementing it. Contrary to the litany of governments that hide from any criticism behind the “tyranny of the financial markets” and the “constraints of globalization,” supposed to deprive them of any room for maneuver, it should be clearly recognized that the financial policy of the State, the “macroeconomic” policy, is not dictated by the international environment. It results, in fact, from a choice that is basically political and not economic: that of the construction of a European State, intended to superimpose itself on the national states. Dr Jean-Jacques Rose, Euro Error. This currency union forces governments to adopt very restricted fiscal policy which in turn forces them to adopt low productivity, low wages, low growth, high unemployment in certain states, while governments have to force more and more spending. As a key current theme in the wake of Brexit, Trump, Italy and Austria, I feel the next excerpt from Rosa is key: The rise of xenophobia in France and Germany, for example, is a particularly worrisome consequence of the loss of jobs and the declining growth. It now constitutes a political risk that cannot be overlooked. This political backsliding, traditional in difficult times, is explicitly tied to growing unemployment, as the foreigner is accused of stealing jobs from the nationals. Let us not forget that a similar phenomenon developed in Great Britain at the time of economic stagnation under the impetus of Enoch Powell, and in the United States in the years of uncertainty, when Governor Wallace and other politicians of the extreme right mobilized a considerable fraction of the votes. All this undercurrent was rendered inconsequential by the return of prosperity. This shows that moralizing speeches on their own have little chance of reversing the trend toward political extremism if the economy continues to drag, thereby destroying jobs. I tweeted this last night: Yes, people are using racism as anti-immigration rhetoric to support their so called ‘arguments’. But look at the reasons why people do this. I see a lot of words explaining how these people are hugely uneducated, which is why they voted out – then how do you expect them, if they are so uneducated, to be able to explain European stagnation? So they go to the thing that seems alien, and which must be the cause. Don’t get me wrong, I have absolutely no sympathy for these people when they are spewing hateful bullshit. But it’s absolutely brain dead not to recognise the reasons why, when the rise of populism has occurred in various different countries. I also wrote about the rise of Trump, and the same findings of rising unemployment amongst the working and middle classes were found. Note that unemployment rates in Greece, Italy and Spain are 23.4%, 11.6% and 18.1% respectively. Note further what Rosa says re mass unemployment: If the situation of the unemployed had remained that of the interwar years, today’s unemployment would be politically insupportable. At the time, the one who lost his job was often the only financial support of his family. The standard of living was low. Compensation was limited and offered neither systematic protection in old age nor health insurance. Under such conditions, unemployment that strikes more than 10 percent of the working population must cause an intense social mobilization and instigate a speedy revision of economic policies. One hears, particularly on the left, that well-compensated unemployment is better, after all, than poorly paid work. Better to be an unemployed person in Europe than a hamburger-flipper in the United States. This thesis is caricatured in the recently popularized idea suggesting that our time might see the advent of the “end of work.” Companies and markets would like that. This proposition suggests that there is no way to avoid it. The search for high productivity which international competition imposes on us will reduce the demand for low skilled labor. We should look to a new era of leisure. In essence, the availability of welfare payments to the unemployed (which combined with a fixed monetary policy increases fiscal spending) has put governments into a sense of security whereby a higher level of unemployment is socially sustainable, when in fact, it isn’t in the eyes of those it is hitting. E.L. Jones said that the reason why Europe has come so far in the last 60 years is that there is competition between states. Yet the introduction of the Euro has taken this competition away whereby again, fiscal spending cannot be complemented by changing monetary policy dependent on specific conditions. Having said all of this, I am not going to say that countries have been entirely fiscally responsible alongside the rigid monetary policy. Greece, for example, has a ‘rules are meant to be broken‘ mentality, almost. You notice that with many houses in the country, some are part finished. This is so they aren’t classed as a legal dwelling, and so do not have to pay as much tax as a finished dwelling. EUR 285bn remained unpaid in taxes in 2012 in Italy (18% of GDP). This fiscal irresponsibility had a huge part to play in why Greece required a bailout, with massive structural deficits and accounting measures which had hidden the levels of debt that they had (the Maastricht Treaty meant they could only have 3% of GDP as a budget deficit when Greece had upward of 10%). Troika then had to bail them out in order to allow for liquidity and spending so that they wouldn’t totally collapse, which has then caused further fiscal conservatism. But Greece could have been able to ease the impact of the financial crisis and a reduction in demand alongside the changing economic cycle – but this couldn’t happen because the ECB sets the rate of interest on the Euro. In essence automatic stabilisers require both flexible monetary AND fiscal policy to be able to work with changing economic cycles. Rosa also says something on macroeconomic responsibility: For the end of growth and the advent of permanent unemployment in Europe are, in fact, explained by this disinflationary policy implemented at the beginning of the Eighties and then reactivated, after a brief interlude of recovery at the end of the decade, by the Bundesbank’s restrictive policy. Conservative monetary policies have a secondary effect of driving up the currency exchange rate and penalizing exporters as well as domestic producers, who are then faced with increased competition from imports whose prices have gone down. That generates fear, an unfounded fear of “globalization.” Actually, competition from the poor countries is irresistible not because of their low wages. More to the point is that our products are too expensive, and our wages also, insofar as their domestic price does not change, or in any case not instantaneously, with the increase in the exchange rate. It is our currencies’ rates of exchange that penalize export, bolster imports particularly from emerging countries, and make our wages prohibitive compared to those of foreign countries. The fear of globalisation does sound quite familiar… This was very brief and there are more topics involved, but I just wanted to provide an explanation of why a currency union doesn’t work. # The economic costs of mental illness… The evidence gathered is compelling. Over the next 20 years, NCDs (non communicable diseases) will cost more than US$ 30 trillion, representing 48% of global GDP in 2010, and pushing millions of people below the poverty line. Mental health conditions alone will account for the loss of an additional US$16.1 trillion over this time span, with dramatic impact on productivity and quality of life. The above statistic found by the World Economic Forum is frightening. Mental illness is essentially being demonstrated as being one of the biggest global economic risks in our generation.$16tn is a huge figure. If we factor in other diseases, such as cardiovascular disease, diabetes, cancers, respiratory diseases etc, we reach a net potential GDP loss of $30tn. It has been found that cardiovascular diseases and mental illness will have the greatest economic burden, and there is no surprise since stress, anxiety, depression and cardiovascular problems are very closely linked. The WHO have said: These NCD-driven concerns are markedly higher than those reported for the communicable diseases of HIV/AIDS, malaria and tuberculosis. However, the ‘fix’ for non mental issues are in fact an economically ‘cheap’. A recent World Health Organization report underlines that population-based measures for reducing tobacco and harmful alcohol use, as well as unhealthy diet and physical inactivity, are estimated to cost US$ 2 billion per year for all low- and middle-income countries, which in fact translates to less than US$0.40 per person. Mental illness treatment, on the other hand, face much higher costs of scaling up to improve the situation drastically. The new study calculated treatment costs and health outcomes in 36 low-, middle- and high-income countries for the 15 years from 2016-2030. The estimated costs of scaling up treatment, primarily psychosocial counselling and antidepressant medication, amounted to US$ 147 billion. Yet the returns far outweigh the costs. A 5% improvement in labour force participation and productivity is valued at US$399 billion, and improved health adds another US$ 310 billion in returns.

However, current investment in mental health services is far lower than what is needed. According to WHO’s “Mental Health Atlas 2014” survey, governments spend on average 3% of their health budgets on mental health, ranging from less than 1% in low-income countries to 5% in high-income countries.

The scaling up figure adds up to roughly $3.7bn extra having to be spent (merely an average of the sample and not country specific). The Lancet found the following: The net present value of investment needed over the period 2016–30 to substantially scale up effective treatment coverage for depression and anxiety disorders is estimated to be US$147 billion. The expected returns to this investment are also substantial. In terms of health impact, scaled-up treatment leads to 43 million extra years of healthy life over the scale-up period. Placing an economic value on these healthy life-years produces a net present value of $310 billion. As well as these intrinsic benefits associated with improved health, scaled-up treatment of common mental disorders also leads to large economic productivity gains (a net present value of$230 billion for scaled-up depression treatment and $169 billion for anxiety disorders). Across country income groups, resulting benefit to cost ratios amount to 2·3–3·0 to 1 when economic benefits only are considered, and 3·3–5·7 to 1 when the value of health returns is also included. Note that the above figures are per year. These figures are also only for 36 of 195 countries. What are the actual economic effects of mental illness on the economy? The first and most important is that people take themselves out of work. This firstly decreases productivity whereby you have output decreases, whether short term absenteeism or longer term removal from the workforce, but also increases the dependency on the welfare system, whereby the government spends more on healthcare, receives less in income tax (assuming the person has taken themselves fully out of work), spends more on unemployment welfare and receives less on VAT where those out of work have less disposable income to spend on goods and services. In a previous article, about why Trump won, I wrote about the increase in pain killer medication consumption between 2008 and now: 43.5% of men not in labour participation had taken pain killer medication the day before surveyed. This is over double those of employed men. The stat among women is not as great, but employed women are on long term pain killer medication at a greater proportion when employed, lesser so when not in the labour force. Staggeringly, 2/3 were complaining of emotional pain, depression or tiredness. 6% of prime age working men, therefore, believe that they are too ill to be able to work. Since 1968, that figure has quadrupled, where the rate was 1.8%: The trend for women is different. We have seen a social change where women have dropped out of housework and entered the labour force which has masked the rise in women reporting being ill or disabled and taking themselves out of the labour force: I would argue that there is a strong causation between being long term unemployed, depression and the consumption of prescription pain medication. However please don’t take this as fact, as it has not been tested. For the Lancet Commission on Investing in health, the value of a 1 year increase in life expectancy in low-income and middle-income countries was estimated to be 2·3 times per person national income, and 1·6 times per person national income worldwide Previously I had compared cost of treatment to other NCDs such as treatment of obesity and smoking & drinking. However, individual treatments for mental illnesses are still quite low when compared to country health budgets: After standardising for population size, the cost is actually quite low; for depression treatment, the average annual cost during 15 years of scaled-up investment is$0·08 per person in low-income countries, $0·34 in lower middle-income countries,$1·12 in upper middle-income countries and \$3·89 in high-income countries (table 2). Per person costs for anxiety disorders are nearly half that of depression.

The cost:benefit of treating mental illness, however, is far less that communicable disease:

For example, a return on investment analysis for malaria, also for 2016–30, but using the full value of a statistical life-year, estimated benefit to cost ratios in the range of 28:1 to 40:1.37 An investment case done for maternal, reproductive, neonatal, and child health obtained a benefit to cost ratio of less than 10:1 for 2013–35,36 which is closer to the results obtained in this study. Inclusion of other benefi ts arising from scaled-up treatment of common mental disorders that could not be captured though the present modelling exercise, notably reduced welfare support payments, and improved outcomes for other affected people (eg, partners and children of women with perinatal depression) would generate higher ratios of benefi t to cost

Source: World Health Organization on behalf of the Roll Back Malaria Partnership Secretariat. Action and Investment to defeat Malaria 2016–2030: For a Malaria-Free World. 2015. World Health Organization, Geneva

This could be one reason a to why more isn’t spent on mental illness treatment. Governments are unable to see black and white statistics based on cost:benefit analysis. With malaria, you can treat with vaccines; to decrease infant mortality, you improve the post natal care, ensure the child is vaccinated and improve the conditions of which the mother gives birth in. But with mental health it is no where near as binary. You cannot simply take a pill and be cured. There are various different ways in which people can be treated, and some cost more than others. A government policy maker would look to optimise as best possible, and at the current stage, there are a lot of external unseen variables that are hard to factor in to health care provision (as horrible as that sounds).

However, I believe that government spending on mental illnesses will increase when the benefits of treating a mental health condition is proven to provide benefit to other non communicable diseases such as cardiovascular disease.

From the data shown, it is clear that we are faced with a burden of non communicable disease. One criticism that I would have of what I read is that I think that mental illness can have a greater causation toward other NCDs in which the cost:benefit ration should be greater. I know it was mentioned in once of the sources but I feel the link could go further, especially as a stream to push policy makers to spend more on mental health.