Economische aanraders 15-03-2020
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.
***Goodbye to All That: The Demise of Globalization and Imperial Pretensions – Charles Hugh Smith
The decline phase of the S-Curve is just beginning.
Globalization and Imperial Pretensions have been decaying for years; now the tide has turned definitively against them. The Covid-19 pandemic didn’t cause the demise of globalization and Imperial Pretensions; it merely pushed the rickety structures over the edge.
It’s human nature to reckon the current trend will continue running more or less forever, and that temporal, contingent structures are permanent. Globalization flourished because a unique set of conditions created fertile ground for the transfer of production to China and other emerging economies and the global expansion of the magic elixir of skyrocketing consumption, credit.
***Oil price wars in a time of COVID-19 – Rabah Arezki, Rachel Yuting Fan
A combination of supply and demand shocks has sent oil prices plunging and financial markets tumbling. This column argues that if the decline in oil prices persists, it will erode the fragile macroeconomic and social stability of countries, especially in the Middle East and North Africa, that have been hit by the novel coronavirus.
The Fed Panicked, and Its Rate Cut Is Making the Economy Worse – Daniel Lacalle
The Federal Reserve’s monumental mistake of cutting rates this past week can only be understood in the context of the rising God complex among central planners: an overwhelming combination of ignorance and arrogance.
Less than a week ago, several members of the Federal Reserve board reiterated—rightly so—that cutting rates would not have a significant impact in a supply shock like the current one. We must also remember that the Federal Reserve already cut rates in 2019 and inflated its balance sheet by 14 percent to almost all-time highs in recent months, completely reversing the virtually nonexistent prior normalization. Only a few days after making calls for prudence, the Fed launched an unnecessary and panic-inducing emergency rate cut and caused the opposite effect of what they desired. Instead of calming markets, the Federal Reserve’s 50–basis point cut sent a message of panic to market participants.
What the stock market tells us about the consequences of COVID-19 – Stefano Ramelli, Alexander Wagner
The novel coronavirus represents a fearsome risk which is stirring feverish behaviour by investors worldwide. This column shows that initially, economic expectations about international trade underlay movements in the stock prices of individual firms; later, concerns about corporate debt began to play a role.
Why Sweden’s Negative Interest Rate Experiment Is a Failure – Frank Shostak
According to the Financial Times’s February 20 article “Why Sweden Ditched Its Negative Rate Experiment,” economists are pondering whether Sweden’s central bank experiment with negative interest rate was a success.
Sweden’s Riksbank, the world’s oldest central bank, introduced negative interest rates in early 2015. The reason given by central bank policymakers for the introduction of the negative interest was to counter deflation. Note that for the period November 2012 to December 2014 the average yearly growth rate of the consumer price index stood at –0.1 percent.
According to the Financial Times analysts, it is still too early to judge whether negative rates have worked or have caused lasting damage to the economy and finance sector.
We Anticipate a Period of Severe Market Turbulence that Will Create New Opportunities for Patient Investors – Karen Parker Feld
It’s the combination of disease attributes and systemic fragility that makes the situation so dangerous, yet difficult for most people to comprehend.
We have been closely monitoring developments related to the coronavirus since late January, and concluded several weeks ago that it poses a potentially significant risk to human life, global supply chains and economies around the world. Paladin has long considered the possibility that some geopolitical event of unknown origin might disrupt asset markets that are broadly overvalued and at risk of an abrupt change in sentiment.
Modern Monetary Theory Is an Old Marxist Idea – Claudio Grass
Modern monetary theory, or MMT, has been getting a lot of attention lately, often celebrated as a revolutionary breakthrough. However, there is absolutely nothing new about it. The very basis of the theory, the idea that governments can finance their expenditures themselves and that therefore deficits don’t matter, actually goes back to the Polish Marxist economist Michael Kalecki (1899–1970).
MMT says that the national debt means that we owe the money to ourselves, so the central bank in combination with the political branch, which gives its blessing and approval, can now together spend as much as they want without facing any consequences. In other words, we can print our way to prosperity. The only real problem according to the theory is that there is not enough money and not that resources are scarce and therefore limited.
Measuring the impact of malfunctioning credit markets on productivity – Tim Besley, Isabelle Roland, John Van Reenen
Since the Global Crisis, there has been a renewed awareness of how frictions in credit markets can damage economic efficiency due to a higher cost of capital and/or capital being misallocated away from its most productive uses. This column presents a new methodological approach for calculating the cost of credit frictions which can be implemented with relatively simple data in multiple contexts. It finds that credit market frictions explain half of the fall in UK productivity in the Great Recession and depress output by 28% on average.
Price Of Physical Gold Decouples From Paper Gold –
In the last month, from 14 February 2020 to 14 March 2020, we have seen a record number of orders, record order revenue and a record number of visits to our newly renovated and extended bullion centre at 45 New Bridge Road in Singapore.
For the above-mentioned period, we have served 2,626 customers with a sales revenue of more than SGD 50 M, which is 477% higher compared to the same period last year.
The last few days have been our busiest days of all time. Our staff members have been doing a fantastic job in going out of their way to serve as many customers as possible.
Will More Easy Money Strengthen the Ailing Economy? – Frank Shostak
In the Wall Street Journal article from February 21, 2020 “The Central Bank Advised to Use Tool Kits Aggressively during Trouble,” it is suggested that a group of top Wall Street economists recommend that central banks consider a more aggressive monetary stance to counter future economic slumps.
Because of the very low level of interest rates in countries such as the US, the central banks are left with almost no ammunition to revive the overall demand should the economic crisis erupt, so it is held.
Historic Volatility Tells Me This Stock Market is in the Middle of an Equally Historic Crash – Wolf Richter
A gigantic spike at the very end after two of the craziest trading days I’ve seen. Here’s how my trades went. But that’s it for me. I’m staying out of this market, it’s just too crazy.
Holy moly, that was fast and whiplash inducing. Today, the S&P 500 exploded higher by 9.3% to 2,711, nearly erasing yesterday’s 9.5% plunge, which had been the steepest plunge since the 22.6% DOW collapse on Black Monday in 1987, which had been the steepest in history. Today’s action was a classic bear-market rally. Even I could see it coming after yesterday’s plunge. “That was fast, too fast,” I mused yesterday, as the S&P 500 Index was going to heck in a straight line.
The Coronavirus Won’t Be the Cause of the Next Bust, but It Will Make It Worse – Frank Shostak
Global policymakers moved to ease public anxiety over the coming economic hit from the coronavirus as analysts warned of a severe slowdown in growth and a possible recession if the virus continues to spread. The US Federal Reserve cut interest rates on Tuesday, March 3, in an emergency move designed to shield the world’s largest economy from the impact of the coronavirus. The central bank said it was cutting rates by a half percentage point to a target range of 1.00 to 1.25 percent.
“The Damage Is Not Theoretical” – It’s Deep, Global, & Pervasive – Sven Henrichs
We just witnessed a global collapse in asset prices the likes we haven’t seen before. Not even in 2008 or 2000. All these prior beginnings of bear markets happened over time, relatively slowly at first, then accelerating to the downside.
This collapse here has come from some of the historically most stretched valuations ever setting the stage for the biggest bull trap ever. The coronavirus that no one could have predicted is brutally punishing investors that complacently bought into the multiple expansion story that was sold to them by Wall Street. Technical signals that outlined trouble way in advance were ignored while the Big Short 2 was already calling for a massive explosion in $VIX way before anybody ever heard of corona virus.
Unpleasant convergence: Country spreads in advanced and emerging economies – Benjamin Born, Gernot Müller, Johannes Pfeifer, Susanne Wellmann
Country spreads have traditionally been discussed in the context of emerging market economies, which tend to have high and volatile spreads. This column analyses spreads for both emerging and advanced economies before and after the Global Crisis. It argues that an ‘unpleasant convergence’ took place after 2008 and that the behaviour of country spreads in advanced economies is now similar to that in emerging economies. This is due to a both a decline in the volatility of the spreads for most emerging economies and an increase in volatility for advanced economies.
Why “Social” Entrepreneurship Is No Substitute for “Market” Entrepreneurship – Per Bylund
There is a lot of confusion regarding what entrepreneurship is and how entrepreneurs earn profits. This confusion causes a distinction between “market” entrepreneurship and “social” entrepreneurship that does not, in fact, exist.
Generally speaking, “social entrepreneurship” is the providing of value to those in need with the implied understanding that there is no “room” for earning profits. But this type of activity is either charity, plain and simple, or it is a fundamental misunderstanding of entrepreneurship. This becomes clear if we distinguish between value creation (really, facilitation) and distribution (value capture). They are often misunderstood as being the same thing—or value creation is overlooked completely.
European Bank Stocks Collapse to March 2009 & 1988 Levels – Nick Corbishley
Just how much lower can they go? To Zero. And the ECB’s negative interest rates are driving them closer to it.
Over the past three weeks, stocks in Europe have plunged by 22.5%, their worst decline since the collapse of Lehman Brothers. The sell-off has been across the board but the worst of it has been reserved for the banking sector, whose shares have been relentlessly crushed and re-crushed for 13 years.
On Monday, the Stoxx 600 Banks index, which covers major European banks, plunged 13%. Today, after a knee-jerk bounce-back that then fizzled, the index closed essentially flat, back where it had been in March 2009.
The Good Luck Ran Out Because The Dollars Did – Jeffrey Snider
Jay Powell has a lot of catching up to do, and very little time to do it. He’s squandered so much already. First his emergency rate cut blew up in his face and now his dud of a bazooka. Before the market got going, officials had already added a 25-day allotment (of bank reserves, of course) on top of the usual overnight and 14-day terms.
Obviously, it wasn’t enough; or, more accurately, it wasn’t the right thing. Undeterred, Powell’s Fed decided at some point during the disastrous morning to just say, screw it, and raise the roof. In a matter of hours, a 3-month (84-day) “repo” auction was announced, conducted, and closed.
***Why Medicare for All Would Require Huge Tax Increases – Hal Snarr
Medicare for All is listed as the top priority of Democratic presidential candidate Bernie Sanders. He describes it as a single-payer system that is “free at the point of service” as there will be no premiums, deductibles, copays, or surprise bills. It will cover more services (dental, hearing, vision, long-term care, substance abuse treatment, etc.) than what the present Medicare system covers. It will also stop the “pharmaceutical industry from ripping off the American people” by capping prescription drug prices.
Medicare for All sounds wonderful until you get into the economic weeds of it.
What the Fed Can Do: Print and Buy, Buy, Buy – Charles Hugh Smith
Everyone with a pension fund or 401K invested in stocks better hope the Fed becomes the buyer of last resort, and soon.
Much has been written about what the Federal Reserve cannot do: it can’t stop the Covid-19 pandemic or reverse the economic damage unleashed by the pandemic.
But let’s not overlook what the Fed can do: create U.S. dollars out of thin air and use these dollars to buy assets either directly or through proxies.
Let’s also not overlook how much the Fed can print/buy. The Fed’s balance sheet currently stands at $4.24 trillion. Doubling this to $8.5 trillion would bring the balance sheet to 39% of U.S. GDP ($22 trillion) and 7.5% of total U.S. household assets ($113 trillion). In the context of GDP and household assets, doubling the balance sheet would be extraordinary but not destabilizing.
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