Additional Thoughts on US Debt and Treasury Shorting

To add to my prior posts on the S&P “Downgrade” and treasury shorting, here are a few additional thoughts and links:

Via Ezra Klein, more on why the end of quantitative easing is bad for treasury prices:

The dominant view among liberals is that the low, low yields on Treasurys reflect the market’s serene confidence that America will make good on its debts. But some of the investors and economists I spoke to while reporting out my piece on the debt ceiling disagreed.

PIMCO’s Bill Gross and former-Reagan budget director David Stockman both think Treasurys look safer than they are because the central bank, as part of quantitative easing, is buying up so many of them. “There’s a terrible mispricing of the potential negative aspects of this debt situation,” Gross says. “When the Federal Reserve gets out of the Treasury market on June 30th, the question becomes who will buy them at these yields, and I don’t know who would.” Gross, incidentally, has put his money where his mouth is by making a big and very public play against Treasurys.

But he’s not alone. Stockman, for instance, is even blunter. “It’s a hothouse, an artificially rigged market,” he says. And once the Fed exits, “there’s nothing to keep it from collapsing.” Stockman worries that people are underestimating the capacity of investors to wake up to the mispricing and exploit it. “It shouldn’t be underestimated that once the smart investors figured out that the subprime and housing mortgage market was busted, they went after it hammer and tong brought about a dramatic change in pricing in 12 months. If they start that on Treasurys, you’ll have a different world a year from now.”

The Federal Reserve disagrees with them. Otherwise, they wouldn’t be exiting the market in June. They point to the end of the first round of quantitative easing, when they backed out of the market and private demand rushed into replace their purchasing, keeping yields low. They think that’ll happen this time, too. We’ll know who’s right soon enough.

Via Paul Krugman, more on why the S&P “Downgrade” doesn’t matter:

I continue to be amazed by how much attention and credence is being given to the S&P “warning” on US debt. I mean, this was supposedly a warning about the safety of US debt. So if it mattered, we should have seen a jump in interest rates on April 18, the day of the announcement. Um, here’s the 10-year bond rate:


People, this was a non-event.

Joe Weisenthal at Business Insider sees some symbolism:

It’s official. The bond market is holding up a gigantic middle finger to the market, as Treasuries across the board are now HIGHER post S&P downgrade of the US debt outlook.

The 30-year had fallen the farthest, so it’s comeback is breathtaking.


Of course the kiddie market, stocks, are still down.

In fact, within 24 hours the equity market has nearly bounced back, further indicating yesterday’s turmoil was caused by panic instead of a rational reaction to new news:

Via Ezra Klein, Democrats and Republicans use this news to continue to be dysfunctional:

Democrats think S&P’s announcement proves them right. Republicans think S&P’s announcement proves them right. Felicia Sonmez reports: “Republicans argued that the news illustrates the gravity of the country’s debt crisis and the need for any debt ceiling vote to be accompanied by a plan to tackle the country’s longer-term fiscal problems…Meanwhile, a group of more than 100 House Democrats led by Rep. Peter Welch (D-Vt.) on Monday reiterated its call for a “clean” debt limit vote, or a vote with no conditions attached. In a statement, Welch contended that the New York Stock Exchange’s sharp drop in reaction to the Standard Poor’s ratings change Monday morning could be a harbinger of worse things to come if a political showdown on the debt limit raises doubts about whether the country will fulfill its financial obligations.”

In summary, [if it mattered], does S&P’s decision mean we have too much debt, or that we need to raise the debt ceiling? I won’t go there.

Via Barry Ritholtz, more on why S&P doesn’t matter and why Bill Gross does:

What does Standard & Poor’s action lowering the U.S. outlook to “negative” mean? What are the likely ramifications of the U.S. deficit and debt? I do not want to conflate two completely different issues, so let’s take each in turn.

First, I have stopped paying any attention to anything that S.&P. says or does. Its performance over the past decade has revealed it to be incompetent and corrupt – it sold its AAA ratings to the highest bidder. It is the broker who lost all your money, the girlfriend who cheated on you, the partner who stole from you. Since the portfolios we run never rely on its judgment or analysis, we simply do not care what it says about credit ratings.

But big bond managers like Bill Gross of Pimco do matter – he invests hundreds of billions of dollars. We pay close attention when smart managers like him announce they are out of the Treasury market, which he did last month.

Many people misunderstand the U.S. deficit. First, it is stimulative to both the economy and the markets. Look at what happened under Reagan and Clinton and most of Bush II – the economy recovered from recession and the markets rose along with the deficit.

After Standard & Poor’s missed the greatest collapse in history – indeed, they helped create it by rating junk mortgage backed securities Triple AAA – they are now over-compensating. As I mentioned on The Big Picture, there is an old Wall Street joke about analysts: “You don’t need them in a Bull Market, and you don’t want them in a Bear Market.” That especially seems apt with regard to S.&P.

The deficit has been with us for a long time. Since investors are continuing to lend money to Uncle Sam at exceedingly low rates, there does not appear to be any real fear of a default. That is what matters most to bond buyers — and it why I never care what S.&P. thinks on this.

Ezra Klein explains where the deficit came from in the first place:

I find that some of my conservative readers take great offense when I bring up the continued contribution that policies like the Bush tax cuts or the Medicare Prescription Drug Benefit are making to the deficit. They think it’s a partisan point, or that I’m blaming Republicans for the debt accumulated while Obama has been in charge. But it’s really not. It’s just the situation we’re in, and it needs to be described accurately.

Our current tax rates are historically low, and have made a major contribution to the deficit. Revenues have to be part of any solution — and I still think Obama is ducking reality when he proposes to make most of the Bush tax cuts permanent. Meanwhile, we need to raise the debt ceiling because of the combined impact of a large number of policies passed over many previous congresses. This isn’t something either party can duck, or hold hostage.

And finally, via BusinessWeek, a graphic on historical debt ceilings (click for larger image):

Ok, I’m done!

Well? Why Are You Short Treasuries?

In response to my last post on the S&P “downgrade,” Matt asks, “Well?  Why are you short treasuries?” Fair question. A couple very simple reasons (with slightly detailed explanations).

First off, this is not investment advice!

Now that I really think it through, there are actually two and a half reasons I’m short treasuries. The first two reasons are based on my market outlook and expectations of monetary policy. I’ll start with these.

1.) Short term interest rates have essentially been at zero percent since December 2008. That’s more than two years, and is unprecedented. Given that we experienced an unprecedented recession (unprecedented at least in recent memory), sustained low interest rates were absolutely the correct policy. In fact, according to Paul Krugman’s back of the envelope calculation using CBO estimates of unemployment and GDP growth, we should continue to see near zero interest rates until the end of 2013. And his reasoning makes sense to me.

Here’s a chart to put the short-term interest rate levels in perspective:

ChartObject Federal Funds Rate History (Effective Rate 1955 - 2008)

But the key here is that eventually rates will have to rise as the economy begins to heat up with all of this cheap money floating around. I have no idea when that will be, but I do know that rates won’t go much lower. And since bond (treasury) prices are inversely related to interest rates, unless the interest rates turn negative (which is extremely unlikely – that would mean cash would yield a higher return than treasuries), the prices of short term treasuries are effectively up against a ceiling. There’s plenty of room for prices to go down (as rates rise), but not all that much room to go up.

And the market won’t move based on when interest rates actually increase. It’s going to move based on when people expect that rates will increase in the future. But then what about when people expect that people will expect that rates will increase in the future? And then what about when people expect that people will expect that people will expect…that’s why the market’s so unpredictable. But I do know that at some point somebody’s going to expect something. And it hasn’t happened yet. So for a while I’ve kept my eye on shorting treasuries. Which brings me to point number two.

2.) The Fed has been experimenting with an unconventional form of monetary policy called quantitative easing (or QE for short). It’s a fairly intimidating name for the relatively simple act of buying treasuries with longer maturities than t-bills (that’s not to say that the decision of which treasuries to buy is simple). The Fed traditionally only sets short term interest rates, which is primarily accomplished by maintaining Fed funds rate targets. The idea of QE is that if the Fed can increase demand for treasuries with longer maturities, prices will increase and longer term interest rates will decrease below where they otherwise would have been. All else equal, lower long term rates is expansionary and should help speed up the economy.

There’s also a bit of an expectations game here too (if the Fed signals that they will buy long term treasuries, the market will price most of it in before they even do, so then they won’t need to actually buy them, but then they’d lose signaling credibility, so they buy them anyway), which isn’t as relevant so I won’t get into it.

So where does that leave us? Well, the Fed has been buying a ton of treasuries over the past couple years, further driving up the prices of treasuries at all positions on the yield curve. Here’s a chart showing Fed ownership of treasuries at different maturities as a result of QE:

The Fed has signaled (but not openly declared) that there won’t be much more quantitative easing, and that means that eventually the Fed is going to want to unwind at least some of these positions to decrease the size of their balance sheet (and reduce their own exposure to rising rates). This will have the opposite effect of QE — instead of increasing demand and thereby driving treasury prices up, now the Fed will have to increase supply as they get out of these positions, driving prices down. In fact, even without selling any treasuries, if the Fed just stops buying, this should also drive prices down since demand would decrease. This decrease in prices would likely happen as a result of supply and demand even if interest rates stay constant.

So the combination of these two points — that the sustained low interest rates have to rise at some point and that the Fed isn’t expected to continue driving prices up by buying longer-term treasuries (and may even sell some) — gives me two good reasons to short treasuries. One’s based on an interest rate expectation, and one’s based on a supply and demand expectation.

And now to the half reason, which is actually related to my post yesterday on S&P. As I mentioned yesterday, I think S&P’s decision to change their outlook was a bit ridiculous. But it still happened. I also think the equity market reaction was a bit ridiculous. But that still happened too. Now we go back again to the expectations game. If people think the government might default, regardless of whether or not it’s a rational thought, default risk could be factored into the price of treasuries, which would drive the prices down. To me this is the weakest of the arguments to short treasuries — it’s essentially a bet on the market panicking — but it wouldn’t be the first time.

And since the best way (that I can think of) to take advantage of these three expectations is to short treasuries, that’s what I’ve done.

Again, this is not investment advice!

Congratulations Mr. Lieber, I think you just unintentionally got me to write one of my longest posts ever! And I was planning on writing a boring and dry post on blues hip-hop fusion. I suppose that will have to wait until tomorrow.

A Summary of Summaries on the S&P “Downgrade”

James Fallows summarizes two thoughts that pretty much summarize my thoughts on the topic:

I agree with Clive Crook’s puzzlement about the S&P downgrade “bombshell” today:

“S&P adduces no new information that I can see. Competent ratings of opaque instruments such as, oh, mortgage-backed securities would be very useful to investors (not that ratings agencies troubled to provide competent ratings in that case, obviously). But why should anybody need that kind of help in judging the soundness of US government bonds? S&P knows nothing about them that you or I don’t know.”

And I like James K. Galbraith’s derisive guffaw, as reported by Dave Lindorff:

At least one economist burst out laughing on hearing about the S&P announcement. “They did what?” exclaimed James Galbraith, a professor of economics at the University of Texas in Austin, who formerly served as executive director of the Congressional Joint Economic Committee. “This is remarkable! It certainly will confirm the suspicions of those who have questioned S&P’s competence after its performance on the mortgage debacle.”

S&P, as well as the other two big ratings firms, all notoriously failed completely to spot the looming disaster of the banking collapse and financial crisis, and famously issued A ratings to mortgage-backed securities that later proved to be virtually worthless paper…

As Galbraith explains it, “US debt consists of bonds issued in US dollars, which I assume the S&P analysts know. How can the US possibly default on its own currency? The obligation is in nominal dollars, which is to say when the bond retires, the US issues a check in dollars to cover it.”

Since the US prints its own currency (or actually just issues electronic payments to create new money) whenever it needs it, as Galbraith puts it, “As long as there is diesel fuel to power up the back-up generators that run the government’s computers, they will have the money to back their own bonds.”

I know that markets run on fear, greed, instinct, and panic as much as on logic. But seriously, how could this non-story have dominated the news today?

1) To repeat Clive Crook’s point, S&P knows nothing more about U.S. budget prospects than you or I do. They’re saying they have an opinion on the state of Congressional-White house dealings on the budget. Fine. Go on a talk show or start a blog.

2) To repeat James Galbraith’s different but also true point, as long as the U.S. government doesn’t tie itself up in debt-ceiling insanity, it is not going to default on dollar-based bonds. It can’t. It controls the “means of production” for the dollars to pay off those bonds. If you’re worried about inflation, fine. But that’s a different matter, with a lot of other variables that count for more than S&P’s feelings.

Couldn’t agree more. In the interest of full disclosure, I’m short treasuries (for other reasons), but I don’t plan to start buying credit default swaps.

The Global Stock Market

For a while now I’ve been curious to see a time-series chart of global stock market capitalization by region. I’ve looked, and have been unable to find one. So I downloaded some data from the World Federation of Exchanges, and made my own. Whenever someone says “the world stock market,” this is what they’re talking about:

And in real 2010 dollars:

Get Your Trade On

The physical kind. Kid Dynamite has an interesting post on buying nickels. There’s no good way to quote it, so here’s the entire post:

Ok kids – I’m going to let you in on another blockbuster trade.  This one is a slam dunk – principal protected, GUARANTEED not to lose money (in notional terms at least), and I’m not even kidding about that.  I debated writing about this, as Redhead Ted and I gave serious thought to putting this trade one, but perhaps one of my readers can suggest some logistical improvements that would make the trade possible.  Here goes:


Yep – I said it – United States Nickels – the 5c kind.  Like minded arbitrageurs already know that the U.S. Nickel (75% copper, 25% nickel) has more than 7 cents worth of metal in it at current copper prices.  A commenter on my blog noted this several weeks ago, pointing me toward a Michael Lewis interview.  Lewis asserted that one of the characters (rumored to be Michael Burry) in his book, The Big Short, had manged to purchase 20mm nickels, giving the justification “I like nickels,” when asked by the Fed why he wanted them.   I explained the trade to Redhead Ted, who immediately flew into a Pavlovian arbitrage-induced frenzy, getting another friend involved, and screaming at me on email “WE HAVE TO PUT THIS TRADE ON NOW! I WANT TO DO IT THIS WEEK!”

The Nickel Arb has some appealing characteristics:  1) You’re getting a 40%+ instant “profit” on the value of the metal: pay 5c, get 7c worth.  2) It’s principal protected. If the value of copper plummets, your nickel is still worth a nickel.  The only cost is your cost of carry – which in today’s ZIRP market, is very low, assuming you have uninvested cash on hand.  3) You have free upside: forget copper stocks or ETFs – you can buy actual copper at a discount via nickels!

The first problem with nickels, though, is that you need a lot of them.  A million nickels, a mere $50k worth, weighs almost 6 tons.   I’m sure one of my readers can do the math on how much space 1mm nickels takes up.  Then there’s the issue of procuring them.  Ted told me that he talked to a friend of a friend who said he could get us the nickels though.  We were seriously considering trying to do this, but I bailed for a key reason:  the logistical pain versus the lack of an exit plan.

See, the bigger problem is that  it’s illegal to melt down nickels for profit. So how do you get out of the trade?  I told Ted that it was a Greater Fool Trade – that the only way to sell these nickels was to find another schmuck who thought they were getting a bargain in metal value, and plug them with our 11,000 pounds of nickels.  Ted replied “coin collectors,” which made me laugh, even though he was serious.  Can you imagine trying to sell these things on EBAY?  One roll at a time?  His thesis was that as we bought up nickels, the US Government would adjust the composition of the nickel to make it cheaper and less valuable.  This, of course, would make our “old” copper nickels more “valuable” (from a hype and supply and demand perspective, at least) and more desirable.  There’s still the same problem though – how do you realize the value?

Readers will be aware that there is a liquid secondary market for older U.S. coinage with silver composition – but as far as I know, it is not illegal to melt these coins down, which is why they trade around their metallic intrinsic value.  If you can’t melt down the coins though (like the nickels), what kind of person would pay you a premium to their 5c face value for them?  Is my belief in rationality causing me to miss a slam dunk trade here in the Nickel Arb?

In the end, I told Ted, “If I could magically press a button and have this trade on, I’d absolutely do it.  However, given the headache in buying, transporting, storing, and then selling massive quantities of nickels, I think I’m going to skip it for now.”  But wait… that gives me an idea – there should be an ETF for this! The Kid Dynamite Physical Nickel ETF!

Run with it, readers… run with it.

This sounds like it could lead to some sort of black market currency melting operation.

Tax Advice From Greg Mankiw

Or not. Yesterday Professor Mankiw posted this on his blog:

Tax Fact of The Day

“The U.S. effective corporate tax rate on new investment was 34.6 percent in 2010, which was the highest rate in the OECD and the fifth-highest rate among 83 countries. The average OECD rate was 18.6 percent, and the average rate for 83 countries was 17.7 percent.”

Okay. He chose not to add any commentary, but he’s obviously implying that he believes the rate is too high based solely upon the fact that other countries have lower rates. I suppose that’s a reasonable starting point for a discussion. But his data is extremely misleading. Because the correct way to measure the tax burden on U.S. corporations is to look at what they actually pay, after accounting for all additional provisions in the tax law (i.e., loopholes). The effective tax rate.

So let’s take a look at that. From the New York Times:

So now the tax rate only seems to be unreasonable for a few select industries. What about corporate taxes paid as a percentage of GDP (i.e., the corporate tax burden relative to the size of the economy)? This is probably the best way to compare our effective tax policy with the policies of other OECD countries. Luckily, Ezra Klein had a great post answering this exact question late last year:

Consider this graph, which shows corporate tax rates against the OECD average. As you can see, we’re on the high side:


That’s the evidence for the conservative view. Our rate is about one standard deviation higher than the OECD average. But here’s the thing:

This confirms Mankiw’s data that the U.S. has higher tax rates. Ezra continues:

If you actually look at the amount of money our corporate tax raises, we’re about one standard deviation beneath the OECD average:


The reason is simple enough: Our corporate tax code is complicated. A lot of businesses, like S-corporations and partnerships, don’t pay corporate taxes. Others use loopholes and exemptions and deductions to push their actual rate way down. We could have a simpler code with lower rates that would raise more money.

So U.S. corporations actually pay 1 standard deviation below the OECD average, while U.S. tax rates are 1 standard deviation above the average. There seem to be two take aways from this. First, it’s obvious that we probably need either better tax laws, better tax collectors, or both. And second, maybe we should consider raising the rates (or lowering rates and eliminating loopholes, resulting in a higher effective rate).

Regardless, the conclusion is the opposite from what Professor Mankiw’s “Tax Fact of the Day” would have you imply. If anything, U.S. corporations don’t pay nearly as much as other OECD countries, and the advantage seems to be unfairly skewed by industry. As Ezra says: “We could have a simpler code with lower rates that would raise more money.” And then everyone wins.

An Interesting Take on the Market

I’m not sure how many of my readers will find this interesting, but I did. Even though the stock market has practically doubled in value since the low in March 2009, when evaluating cumulative returns over the prior 10-year period, we’re only up 1.4%. Which is in the lowest decile of quarterly cumulative 10 year returns over the period 1926-2010. One could interpret this to imply that the market still has a ways to go.

We Make Lots Of Stuff

About 20% of all stuff in the world, actually. From the Boston Globe, via Colin Whooten (no blog) and Scott Sumner:

Americans make more “stuff’’ than any other nation on earth, and by a wide margin. According to the United Nations’ comprehensive database of international economic data, America’s manufacturing output in 2009 (expressed in constant 2005 dollars) was $2.15 trillion. That surpassed China’s output of $1.48 trillion by nearly 46 percent. China’s industries may be booming, but the United States still accounted for 20 percent of the world’s manufacturing output in 2009 — only a hair below its 1990 share of 21 percent.

“The decline, demise, and death of America’s manufacturing sector has been greatly exaggerated,’’ says economist Mark Perry, a visiting scholar at the American Enterprise Institute in Washington. “America still makes a ton of stuff, and we make more of it now than ever before in history.’’ In fact, Americans manufactured more goods in 2009 than the Japanese, Germans, British, and Italians — combined.

American manufacturing output hits a new high almost every year. US industries are powerhouses of production: Measured in constant dollars, America’s manufacturing output today is more than double what it was in the early 1970s.

It’s all weighted by dollars, as it should be, but I’d love to see it weighted by…weight.

Food Prices

There’s been much talk in the media about how the initial protests in Tunisia, Egypt, Yemen, and Jordan were, at least partly, sparked by unrest due to rising commodity and food prices. What’s been discussed much less is the underlying cause of these price spikes. Is it speculation, or an actual increase in consumption (or a decrease in yields)?

I hadn’t thought much about it until a reader sent me this article written by Joel Brinkley, a Stanford journalism professor who’s a foreign correspondent for the NYT (syndicated in my hometown’s daily newspaper):

The world is heading into a food crisis again, barely three years after the last one in 2008. That, not political reform, animated the riots and demonstrations across the Arab world and beyond – until Tunisia’s president fell from power on Jan. 14. After that, hungry demonstrators aimed higher.

Now, whatever the final results in Tunisia, Egypt, Yemen, Algeria and other states that have been under siege, millions of people in these places still will not be able to afford enough food for their families.

Okay so far. He continues:

Who’s to blame for all of this? America and other wealthy nations, in large part. When commodity prices begin to rise, Western speculators start buying commodity shares, driving prices even higher. After hearing about poor wheat crops in Russia and Ukraine last August, speculators drove the wheat price up by 80 percent.

These are some pretty bold assertions. There have been many inconclusive debates about whether financial trading in commodities is the cause of the recent spike in prices, and I find it a bit misleading to conclude that financial speculators are the cause.

In fact, Paul Krugman disagrees with Brinkley, suggesting it’s much more likely a different form of speculation: commodity hoarding. Not by the west, but by China:

I’ve been getting a fair bit of correspondence insisting that political unrest, in the Arab world and elsewhere, is being caused by … Ben Bernanke. You see, quantitative easing is responsible for rising food prices, which leads to riots, which — OK, there are a lot of broken links in that chain. But it surely is time to take a look at food prices and commodity prices more broadly.

During the last commodity price spike, less than three years ago, many people laid the blame at the feet of speculators. I never accepted that as the prime cause, mainly because so many of the speculation-did-it people seemed confused about the difference between buying a futures contract and actually hoarding physical stocks; as a very useful analysis by Sanders and Irwin (pdf) puts it,

Index fund buying is no more “new demand” than the corresponding selling is “new supply.”

True, high futures prices can provide an incentive to accumulate physical stocks. But during the 2007-2008 price surge there was little evidence of such accumulation.

What about this time?

First and foremost, China: it’s clear from news coverage that Chinese demand is driving the markets. As I and others have been pointing out, we’ve got a bifurcated world right now, with advanced economies still depressed but emerging economies in an inflationary boom; commodity prices are reflecting the boom part of the picture.

But Chinese demand isn’t just a matter of fundamentals: all the evidence suggests that there’s a lot of physical hoarding going on. Chinese farmers are apparently hoarding lots of cotton, while China is holding record stockpiles of iron ore.

So the case for a speculative component is a lot stronger this time around. But — and this is important — the speculation is not being driven by financialization, by all those index fund investors going long. Cotton hoarding seems to be taking place at the level of individual Chinese farmers and factories, with no indication that they’re being influenced by the futures market.

So the answer seems to be speculation. Of which kind? I find Krugman’s position to be a bit more compelling.

Update: About an hour after I posted this, Krugman made a case for low grain yields also contributing to the rising prices.

Tuk Tuk Rides

I’ve always found bargaining to be interesting from both a behavioral economics and a cultural perspective. Chris Blattman had a great post on bargaining fractions a couple years back, specifically focusing on taxi fares. To summarize, in many countries there’s no taxi meter, and it’s appropriate (and often necessary) to negotiate a rate. Chris has found that the final negotiated price in a given country is usually a pretty consistent fraction of the driver’s initial offer price (assuming you’re a decent negotiator). But what’s interesting is that this fraction varies significantly between countries. Chris then talks about a few negotiation strategies that will help a traveler get down to a given country’s fraction without paying too much of a “foreigner premium.” I won’t repeat them, it’s worth a read if you’re interested.

Based on my experiences in Cambodia, I’ve got one strategy to add. In Phnom Penh the most common way to get around is by tuk tuk, which is a carriage pulled by a motor bike. The drivers are generally very friendly and helpful, but this won’t stop them from taking advantage of someone who’s too nice (or ignorant). I’ve found that when I ask a driver how much for a ride to my destination across town, they usually start at $4-$5 depending on the distance, and then after a couple rounds of negotiation (which can include pretending to walk away), I can usually get the price down to $2-$2.50, never lower. So I would say Cambodia’s bargaining fraction is about .5.

What’s interesting is that when I start out by offering to pay $1, the driver will usually counter with $3, and I can almost always get the price down to $1.50 (if I care to put in the effort). Again, 50% of the driver’s first price, but the diver starts lower since I framed the negotiation around $1. While it doesn’t sound like a lot to be bargaining for, this is the only way to get around town, and it can add up with 5-6 rides a day over a couple weeks. And this price is definitely still much higher than what the locals pay.

So, at least here, if you know the approximate fair value of what you’re bargaining for, I’d say always throw in the first offer to get the best price.

Then again, the cheapest, fastest, and most fun way to get around here is to flag down a motor bike driver, and then jump on the back. A ride just about anywhere in town will be $0.50-$1. My favorite experience was when I waved down a moto driver to ask him how much for a ride, and his response was, “Eh, whatever you want! Hop on!”  He got $3.