Economische aanraders 07-04-2019

Economiswche aanraders

Economische aanraders: Veren of Lood biedt u op zondag wekelijks een inkijkje in (minstens) 15 belangrijke of informatieve artikelen en interviews die vooral de voorafgaande 7 dagen op economisch terrein verschenen op onafhankelijke sites.

De kop is de link naar het oorspronkelijke artikel, waarvan de samenvatting of de eerste (twee) alinea’s hier gegeven worden. Er zijn in deze rubriek altijd verschillende economische scholen vertegenwoordigd, en we streven er naar die diversiteit te handhaven.

We nemen wekelijks ook een paar extra links op naar artikelen die minder specialistische kennis vereisen. Deze met *** gemerkte artikelen zijn ons inziens ook interessant voor lezers met weinig basiskennis van economie.

It’s Not a Recession, It’s a “Global Economic Slowdown” – George Pickering
3 april

For much of the past several months it has been almost impossible to open the pages of any business section, or skim through any article on current economic events, without encountering the same ominous phrase: global economic slowdown.
The quickness with which this new buzzword has crept its way into the centre of the public conversation offers a striking illustration of the general mood in the financial world at present, especially outside the relatively lively U.S. economy. Whatever might be said about the shallowness of Keynes’ “animal spirits” interpretation of the causes of business cycles, it is difficult to shake the impression that a general, intangible economic pessimism has been a major reason why “global economic slowdown” — a phrase which has often been explained and justified only very vaguely — has so readily been adopted as the default prediction for 2019’s economic outlook.
Quantitative easing and the ‘hot potato’ effect: Evidence from euro area banks – Ellen Ryan, Karl Whelan
5 April

The EU’s asset purchase programme saw its central banks’ reserve balances increase to unprecedent levels. This column analyses the response of banks in the euro area to this expansion in system-wide reserves, in particular whether they absorbed the excess liquidity or tried to push it off their balance sheets. The findings suggest that banks dealt with the increased reserves with the purchase of debt securities or paying down funding sources rather than lending to the real economy.
***Alberta’s Regional Carbon Tax Is a Recipe for Disaster – Robert P. Murphy
5 april

The Fraser Institute in Canada recently released my study critiquing the province of Alberta’s approach to carbon pricing. My analysis for Fraser confirms what I’ve been arguing on the pages of IER for years: in the United States, conservatives and libertarians should run from any “carbon tax deal” that promises to shrink the size of government while battling climate change. No matter their promises, in practice government-imposed “carbon pricing” schemes never live up to the guidelines for “efficiency” laid down by their proponents. In this post I’ll illustrate myth vs. reality in the case of Alberta.
The Climate Leadership Plan (CLP)
As I explain in my Fraser study, the province of Alberta implemented a Climate Leadership Plan (CLP) in November 2015. It included a carbon tax (at CA$30/ton which will increase to $50 by 2022).
Yet the CLP includes more than just a mere “price on carbon.” It allocates a third of the carbon tax revenue to “green” investment projects, designed to promote a transition to a low-emission economy. It also includes specific climate objectives, such as an annual cap (100 megatons) on oil-sands emissions, and phasing out coal-fired electrical generation by 2030.
Zombie firms, weak banks, and depressed restructuring in Europe – Dan Andrews, Filippos Petroulakis
4 April

Europe’s productivity problem is partly due to the rise of zombie firms that crowd out growth opportunities for others. This column explores the tendency for weak banks to evergreen loans to zombie firms to avoid realising losses on their balance sheet. Measures to strengthen bank balance sheets will be enhanced by insolvency regimes that encourage corporate restructuring.
US Dollar Status as Global Reserve Currency Edges Down Further – Wolf Richter
1 april

Is the euro dead yet? And how is the Chinese Renminbi doing?
Total global foreign exchange reserves, in all currencies, rose to $11.4 trillion in the fourth quarter 2018, according to the IMF’s just released COFER data. These foreign exchange reserves do not include the Federal Reserve’s holdings of dollar-denominated assets, such as Treasury securities and mortgage-backed securities. But the amount of USD-denominated exchange reserves ticked down to $6.62 trillion, and the dollar’s share of global foreign exchanges reserves dropped to 61.7%, the lowest since 2013.
In 1999, the euro became an accounting currency in the financial markets, replacing the European Currency Unit. On January 1, 2002, Euro banknotes were released into circulation and gradually replaced the national banknotes of the original member states of the Eurozone. Note the drop of the dollar’s share, from 71.5% in 2001 to 66.5% in 2002. Today, the euro has replaced 19 national currencies. And the dollar’s share is down to 61.7%:
ECB Inflationists are Crippling Europe – Alasdair Macleod
1 april

Last week, the ECB announced the reintroduction of targeted long-term refinancing operations for the third time. TLTRO-III is scheduled to start from next September. The idea is to make yet more money available for the banks at attractive rates on condition they increase their lending to non-financial entities.
The policy is justified because the ECB sees growing signs the Eurozone economy is stalling, possibly badly. The weaker Eurozone economies are moving into outright recession, and Germany’s motor exports appear to have dramatically slowed, putting a constraint on her whole economy.
The ECB’s reintroduction of TLTRO is an offer of yet more monetary and credit inflation, despite the evidence that unprecedented waves of monetary inflation in the last ten years have failed in all the objectives for which they were designed, except two: governments have continued to get the funds to spend without meaningful restraint, and insolvent banks have been preserved.
The Japanification of the World – Charles Hugh Smith
5 April

Zombification / Japanification is not success; it is only the last desperate defense of a failing, brittle status quo by doing more of what’s failed.
A recent theme in the financial media is the Japanification of Europe. Japanification refers to a set of economic and financial conditions that have come to characterize Japan’s economy over the past 28 years: persistent stagnation and deflation, a low-growth and low-inflation economy, very loose monetary policy, a central bank that is actively monetizing debt, i.e. creating currency out of thin air to buy government debt and a government which funds “bridges to nowhere” and other stimulus spending to keep the economy from crashing into outright contraction.
The parallels with Europe are obvious, but they don’t stop there: the entire world is veering into a zombified financial, economic, social and political status quo that is the core of Japanification.
Malinvestment: Have We Learned Anything Since the Last Recession? – Bradley Thomas
2 april

A growing number of economists are predicting the current economic boom will turn to bust in 2019. When recession does come, will economists simply call for more of the same — namely endless government spending?
After all, in the wake of the 2008 financial crisis, most economists told us the problem was the private sector was not spending and investing enough. So, we were told, government must step in and make up the difference with deficit spending to get “idle resources” — like capital goods and labor — back to work.
But what should the government be spending on? Apparently, anything.
This is not an exaggeration. For example, noted Cal-Berkeley economist Brad DeLong insisted in 2009 “At this point, anything that boosts the government’s deficit over the next two years passes the benefit-cost test — anything at all.”
Such thinking reveals one of fatal flaws of mainstream economics: the idea that all the economy is one big homogeneous blob. As Friedrich Hayek put it, “Mr. Keynes’ aggregates conceal the most fundamental mechanisms of change.”
The missing link between income inequality and economic growth: Inequality of opportunity – Shekhar Aiyar, Christian Ebeke
3 April

There are contrasting theories on the relationship between income inequality and growth, and the empirical evidence is similarly mixed. This column highlights the neglected role of equality of opportunity in mediating this relationship. Using the World Bank’s new Global Database on Intergenerational Mobility, it shows that in societies where opportunities are unequally distributed, income inequality exerts a greater drag on growth.
Can Government Stimulus Bring Us Out of Recessions? – Frank Shostak
2 a[ril

When signs of economic weakness emerge, most economics experts are quick to embrace the ideas of John Maynard Keynes.
For most economists, the Keynesian remedy is always viewed with positive benefits — if in doubt just push more money and boost government spending to resolve any possible economic crisis.
In this way of thinking, economic activity is presented in terms of the circular flow of money. Spending by one individual becomes a part of the earnings of another individual, and spending by another individual becomes a part of the first individual’s earnings.
So if for some reason people have become less confident about the future and have decided to reduce their spending this is going to weaken the circular flow of money. Once an individual spends less, this worsens the situation of some other individual, who in turn also cuts their spending.
Kondratiev – Riding the Economic Wave – George Kerevan
4 april

LET’S escape Brexit and see what’s happening in the wider world. Most forecasters are gloomy about global economic prospects. According to Schroders, doyen of UK assets managers: “We forecast a more stagflationary environment in 2019 with global growth set to slow and inflation to rise”. The Davos World Economic Forum predicts a “sharp drop-off in world trade growth, which fell from over 5 per cent at the beginning of 2018 to nearly zero at the end”. Forbes business magazine warns: “The biggest problem for the global economy in 2019 will be massive business failures that could also lead to bank failures in emerging markets”.
Of course, the forecasters have been wrong before but it is clear that the main analysts of the global capitalist economy are pessimistic about current trends. They are right to be worried.
The international economy operates in pulses christened Kondratiev waves after Nicolai Kondratiev (1892-1938), the Russian economist and statistician who first identified them. These K-waves consist of an expansionary upswing lasting normally 15-20 years, followed by a downswing of similar length. We are now in such a downswing that could last till the 2030s.
What causes Kondratiev pulses? There is a rich literature trying to identify the cause, in particular the work of the Belgian economist, the late, great Ernest Mandel. Crudely, it works like this. Social and economic conditions mature to spark a runaway investment boom in the latest cluster of new technologies. After a period, excess investment and increased competition lower rates of profitability, curbing the boom.
Capitalism (aka Self-Ownership) Is the Only Moral Economic System – Gary Galles
5 april

With all the “turn that over to the government, too, so someone else will have to provide it for you” proposals that have come from Democrat Presidential hopefuls already, candidates are actually being asked if they are a “socialist” or a “capitalist.”
Bernie Sanders, who has called for “economic rights” guarantees to be treated as Constitutional rights, admits being a socialist. Representative Alexandria Ocasio-Cortez, who may want even more people to live at everyone else’s expense, is on the same bandwagon: “Capitalism is an ideology of capital–the most important thing is the concentration of capital and to seek and maximize profit.” Consequently, “capitalism is irredeemable.”
However, other candidates, proposing or supporting very similar changes, have claimed they are (modified) capitalists.
Elizabeth Warren has said “I am a capitalist to my bones…I believe in markets. What I don’t believe in is theft.” Along the same lines, she has said, “I love what markets can do. I love what functioning economies can do. They are what make us rich; they are what create opportunity. But only fair markets, markets with rules. Markets without rules is about the rich take it all…And that’s what’s gone wrong in America.” Kamala Harris offered a similar complaint that “the rules aren’t applying equally to all people.” Joe Biden asked, “What happened to a moral responsibility, to a moral capitalism?” Beto O’Rourke followed up his claim to be a capitalist with “Having said that, it is clearly an imperfect, unfair, unjust and racist capitalist economy.”
Unfortunately for these candidates (and for Americans if voters don’t understand better), every one relies on false assumptions about markets and governments.
Market is Delusional: This is Not a Rate-Cut Economy – Wolf Richter
3 april

Growth in the service sector backs off from red-hot spurts last year but remains strong.
Based on 30-day federal funds futures prices at the moment, the market sees a 57% chance that the Fed will cut rates one notch or more by its December 11 meeting. The market sees no measurable chance of a rate hike. The Fed would generally cut rates because the economy gets in trouble. So let’s see.
The services sector, accounting for about 70% of the US economy, has been backing off from the red-hot spurts experienced for brief periods in 2018 that had been similar to the red-hot growth spurts in 2015. In both 2015 and 2018, “real” GDP (adjusted for inflation) grew 2.9%, the fastest growth since the Great Recession. And the latest data shows that the economy is now reverting from the top of the range to the middle of the range.
Unveiling the effects of macroprudential policies: The IMF’s new iMaPP database – Adrian Alter, Gaston Gelos, Heedon Kang, Machiko Narita, Erlend Nier
3 April

The IMF’s new iMaPP database integrates five major existing databases to build a comprehensive picture of macroprudential policies in use globally. This column shows how this rich dataset provides novel insights into the non-linear effects of changes in loan-to-value limits as one example of how better data can help policymakers to use macroprudential tools more precisely and effectively.
The Fed Guarantees No Recession for 10 Years, Permanent Uptrend for Stocks and Housing – Charles Hugh Smith
1 April

Those who own stocks and housing now will continue getting richer, those who don’t will be priced out of these markets.
A classified Federal Reserve memo sheds new light on the Fed’s confidence in its control of the economy and the stock and housing markets. In effect, the Fed is guaranteeing that there will be no recession for another 10 years, and that stocks and housing will remain in a permanent uptrend.
Paraphrasing the memo, we have the tools to insure that stocks and housing do not just remain at a permanently high plateau but continue to move higher in a permanent uptrend.
I’ve marked up a chart of the S&P 500 and the Case-Shiller Housing Index to illustrate the Fed guarantee. As you can see, stocks and housing will at a minimum double in the 2019-2029 period, and could do much better.
The Fed memo refers to the enormous success of the Fed’s dovish about-face since December: (again, paraphrasing the memo): The Federal Reserve’s management of policies and market expectations since December prove that we can reverse any downturn and reignite expansion of stock and housing valuations at will. We can thus guarantee a permanent expansion of stock and housing valuations into the indefinite future.
***Public debt through the ages – Barry Eichengreen, Asmaa El-Ganainy, Rui Esteves, Kris Mitchener
1 April

The history of sovereign debt evolved over time along with the purposes for which governments borrowed: first state building, then public-good provision, and most recently social welfare and entitlements. Although many periods when debt-to-GDP ratios rose explosively culminated in funding crises, debasements and restructurings, less widely appreciated are episodes of successful debt consolidation achieved through rapid growth or budgetary discipline. This column analyses the economic and political circumstances that made these debt consolidation episodes possible.

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