Economische aanraders 16-06-2019
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.
The return of the policy that shall not be named: Principles of industrial policy – Reda Cherif, Fuad Hasanov
The ‘Asian miracles’ and their industrial policies are often considered as statistical accidents that cannot be replicated. The column argues that we can learn more about sustained growth from these miracles than from the large pool of failures, and that industrial policy is instrumental in achieving sustained growth. Successful policy uses state intervention for early entry into sophisticated sectors, strong export orientation, and fierce competition with strict accountability.
For those who don’t understand inflation – Alasdair Macleod
This article is a wake-up call for those who do not understand the true purpose of monetary inflation, and do not realise they are the suckers being robbed by monetary policy. With the world facing a deepening recession, monetary inflation will accelerate again. It is time for everyone to recognise the consequences.
All this year I have been warning in a series of Goldmoney Insight articles that the turn of the credit cycle and the rise of American protectionism was the same combination that led to the Wall Street crash in 1929-32 and the depression that both accompanied and followed it. Those who follow statistics are now seeing the depressing evidence that history is rhyming, though they have yet to connect the dots. Understandably, their own experience is more relevant to them than the empirical evidence in history books.
They would benefit hugely from a study of the destructive power of the Smoot-Hawley Tariff Act combining with the end of the 1920s credit expansion. The devastating synergy between the two is what crippled the American and global economy. And as we slide into a renewed economic torpor, contemporary experience tells us the Fed and all the other central banks will coordinate their efforts to restore economic growth, cutting interest rates while accelerating the expansion of money and credit. The current generation of investors argues that this policy has always worked in the past (at least in the past they have experienced) so the valuation-basis for financial assets and property should stabilise and improve.
The Countries with the Most Monstrous Corporate Debt Pileups: US Fizzles in 24th Place! Canada Shines in 11th Place – Wolf Richter
China’s corporations deleverage, forced or otherwise.
US “nonfinancial” corporate debt – this excludes debt by banks and by businesses that are not incorporated – rose to a record $15.2 trillion in the fourth quarter, according to data released by the Bank for International Settlements last week. To show how much of a burden this debt is, how it compares to other countries, and to eliminate the effects of inflation, the BIS also expresses this debt as a percent of nominal GDP. Given the growth of GDP in Q4, the ratio of corporate debt to GDP, at 74.4%, was unchanged from the upwardly revised Q3, and was down a tad from the record in Q2 of 74.9%.
The prior record of US corporate debt had been set in Q4 2008, at $10.7 trillion, as corporate debt had begun to unwind noisily, following the Lehman Brothers bankruptcy, and as GDP growth had turned sharply negative. In Q4 2018, corporate debt in dollar-terms was 42% higher than at the prior peak in Q4 2008. When measured as a percent of nominal GDP, the peak in Q4 2008 was 72.5% of GDP.
Money Velocity and Economic Growth – Frank Shostak
After rising to 2.198 in Q3 1997, the ratio of US Gross Domestic Product (GDP) to money supply M2 fell to 1.433 by Q3 2017. Since then the ratio has bounced slightly to 1.457 in Q1 2019. Economists label this ratio as the velocity of money.
Some experts regard the steep decline in the ratio as an ominous sign for the economy in the months ahead since it raises the likelihood of a sharp decline in the growth rate of prices.
This in turn raises the likelihood of price deflation and in turn of a severe economic slump. It is also held that a fall in the ratio raises the likelihood that monetary injections by the Fed are going to become ineffective in the event that the US central bank will attempt to revive the economy once it falls into an economic slump.
What is the rationale behind this way of thinking?
***About this Biggest Plunge Since 2002 in Manufacturing in the UK – Don Quijones
It was a doozie, but it shouldn’t have come as a surprise. Here’s why.
Production output in the UK dropped by 2.7% in April from March, and GDP fell by 0.4% in just one month, according to the latest figures by the Office of National Statistics. The manufacturing sector provided the largest contribution to the downturn, with the manufacturing index plunging 3.9% in April, from March, its biggest monthly fall since June 2002. In April, after three months of sharp increases, it had almost finally reached its pre-Financial-Crisis peak. The plunge in April took the index down 0.8% for the 12-month period, and took it back to 2017 levels.
The data was seized upon by pro-remain media outlets as evidence of the crushing impact of Brexit on the UK economy. The Guardian called it a “Brexit hangover” while a headline in The Independent shrieked that a “Brexit paralysis” has set in after the economy “shrinks by four times as much as predicted.”
Misplaced Pride: Most of the “Middle Class” Is Actually Working Class – Charles Hugh Smith
If we look at these charts, it looks like only the top 10%, or perhaps the top 20% at best, might qualify as “middle class” by the metrics described below.
The conventional definition of working class is based on income and education: the working class household earns between $30,000 and $69,000 annually, and the highest education credential in the household is a two-year community college degree or trade certification.
The definition of the middle class is also based on on income and education, but adds financial security as a metric: the middle class household earns $80,000 or more, holds 4-year college diplomas or graduate degrees, owns a home, has a 401K retirement account and so on.
The detrimental effect of job protection on employment: Evidence from France – Pierre Cahuc, Franck Malherbet, Julien Prat
Standard economic models predict that employment protection legislation reduces both job destruction and job creation, with the negative impact on job creation caused by the anticipation of separation costs. This column shows that in France, this anticipation effect not only plays a key role in reducing job creation but also increases job destruction among low-skilled workers, an effect that is amplified by the presence of the minimum wage. This mechanism implies that job protection is strongly detrimental to employment in the French context.
Mises on 100-Percent Reserve Banking – Edward W. Fuller
Economists debate whether Ludwig von Mises advocated free banking or 100 percent reserve banking. This debate is significant. Mises states, “the institution of credit expansion … may be called the most important economic problem of our age.”1 Given this statement, he must have viewed the solution to the problem as an extremely serious matter. Free bankers insist that Mises’s solution was free banking. In reality, Mises advocated 100 percent reserve banking.
On June 14, 1912, Mises published his seminal work The Theory of Money and Credit. In that book, Mises shows that fractional reserve banking has four fundamental economic consequences:
1. Fractional reserve banking causes price inflation.
2. Fractional reserve banking causes wealth redistribution.
3. Fractional reserve banking is the cause of systemic banking panics.
4. Fractional reserve banking is the cause of the business cycle.
Mises advocates the legal prohibition of fractional reserve banking in The Theory of Money and Credit. Specifically, he recommends legislation that extends Peel’s Act of 1844 to bank deposits. This “legislative prohibition” would establish a rigid 100 percent reserve for all future notes and deposits.
Inspired by Deutsche Bank Death Spiral, European Banks Sink to Dec 24, 2018 Level – First Seen in 1995 – Wolf Richter
The benefit of NIRP: There’s hell to pay – even the ECB admits it.
European bank shares – which have been getting crushed and re-crushed for 12 years – are getting re-crushed again. On Friday, the Stoxx 600 Banks index, which covers major European banks, including our hero Deutsche Bank, dropped to an intraday low of 130.5 and closed at 131.2, thereby revisiting the dismal depth of December 24, 2018 (130.8).
European banks did not soar on the first trading day after Christmas, unlike other stocks. Instead they fell further and hit their multi-year low on December 27 (129). The index is down 21.5% from a year ago and 33% from January 2018:
The notable thing about European bank stocks is just how brutally they’ve gotten crushed and re-crushed since May 2007, when, after a blistering bubble run-up, the Stoxx 600 bank index topped out at 534, having quadrupled in the 12 years from October 1995, during the euro bubble when only the sky was still the limit.
The case for market-based stress tests – John Vickers
The stability of the financial system depends on the capital of banks and other financial institutions. But the measurement of bank capital depends on regulatory accounting methods, which, as events a decade ago showed dramatically, do not always reflect economic realities in a timely fashion. This column argues that market-based measures should play a greater role in regulatory assessment than is current practice, in particular in stress tests.
Why Ignoring Time-Preference is the Fundamental Mistake of Central Bankers – Alasdair Macleod
There is a widespread assumption that interest rates represent the cost of borrowing money. In the narrow sense that it is a rate paid by a borrower, this is true. Monetary policy planners enquire no further. Central bankers then posit that if you reduce the cost of borrowing, that is to say the interest rate, demand for credit increases, and the deployment of that credit in the economy naturally leads to an increase in GDP. Every central planner dreams of consistent growth in GDP and they seek to achieve it by lowering the cost of borrowing money.
The origin of this approach is mathematical. William Stanley Jevons in his The Theory of Political Economy, first published in 1871, was one of the three discoverers of the theory of marginal utility and became convinced that mathematics was the key to linking the diverse elements of political science into a unified subject. It was therefore natural for him to treat interest rates as the symptom of supply and demand for money when it passes from one hand to another with the promise of future repayment.
2.2 Million Homes In America Still Have Negative Equity, Despite Record High Prices – Tyler Durden
As the boom in mortgage applications and refinancing activity last week would suggest, the return of interest rates toward multi-year lows this year is helping to pump more froth into the already bubblicious American housing market.
But while somebody will inevitably be left holding the bag when the bubble bursts, for now, at least, the inexorable rise in American home prices has bequeathed an outsize benefit on at least one group of people: American homeowners who were stuck with underwater mortgages following the last housing bust.
However, even with average national home values back above their pre-crisis highs, CoreLogic’s most recently quarterly survey of national homeowner equity found that there are still 2.2 million homes underwater in the US – a sign of just how bad the last bubble was, and a warning for where we might be headed.
The percentage of homes with underwater mortgages in the US has shrunk between Q4 2018 and Q1 2019 by a full percentage point to just 4% of all mortgaged properties (or just 2.2 million homes). On a YoY basis, negative equity fell 11% from 2.5 million homes, or 4.7% of all mortgaged properties.
However, in terms of national aggregate value, negative equity climbed slightly to approximately $304.4 billion at the end of the first quarter of 2019, an increase of $2.5 billion, from $301.9 billion in the fourth quarter of 2018.
UK Government Blew Billions on “Help to Buy” Scheme that Enriched Home Builders and Drove Up Home Prices. Taxpayers on the Hook When Prices Sink, New Report Warns – Don Quijones
But it helped high-income people buy homes.
The UK’s government’s flagship “Help to Buy” equity loan scheme, launched ostensibly to give cash-strapped first-time buyers a leg up onto the property ladder, has dished out billions of pounds of publicly subsidized loans to relatively well heeled homeowners who were perfectly capable of buying their first property without need for outside help, asserts a new report by the National Audit Office (NAO).
The report, which used figures supplied by the Ministry of Housing, Communities and Local Government, found that only 37% of the roughly 210,000 people who have so far benefited from Help to Buy would not have been able to afford a property without it. Since the scheme is not means tested, anyone can apply and qualify for the loans, including people earning more than £100,000 a year, who reportedly account for 4% of the total borrowers.
Jaw, jaw not war, war: Prioritising WTO reform options – Simon Evenett, Johannes Fritz
The next G20 Leaders’ Summit risks being overshadowed by the Sino-US Trade War. That needn’t happen as last year G20 Leaders called for reports on options to revive the WTO and are expected to discuss them in Osaka. This column introduces the latest Global Trade Alert report, which shows that current global trade rules don’t deliver and proposes a way forward.
A Stock Market Crash Scenario – Charles Hugh Smith
Herds get spooked and run. That’s the crash scenario in a nutshell.
We have all been trained by a decade of central bank saves to expect any stock market swoon will soon be reversed by central bank sweet talk and/or rate cuts. As a result of such ever-present central bank willingness to intervene in the stock market, participants have been trained to believe a stock market crash is no longer possible: should the market drop 10%, or heaven forbid, 20% (i.e. into Bear Territory), the Federal Reserve and the other global central banks will save the day with direct purchases (The Plunge Protection Team), happy talk of future easing or, some unconventional quantitative easing measure or a rate cut–whatever it takes, in Mario Draghi’s famous words.
But irony of ironies, such complacent confidence in the efficacy of central bank interventions is actually setting up a crash scenario. Crashes and melt-ups are both manifestations of herd sentiment. Though this is often simplified into greed or fear, this might better be described as confidence in near-term prospects or the lack thereof.
Confidence in the absolute efficacy of Fed intervention breeds complacency, which is the essential backdrop of stock market crashes.
Trade War Nightmare Causes Collapse In Demand For US Industrial Space, Says Cushman & Wakefield – Tyler Durden
The latest Cushman & Wakefield commercial real estate report shows demand for US industrial space collapsed 60% on year in 1Q19, reflecting the global synchronized decline and the deepening trade war.
Cushman & Wakefield’s economists warned President Trump’s trade war is unraveling complex supply chains around the world that have led to a slump in demand for industrial space. They also said the restocking trend by importers forced by the tariffs is likely over. There is also another possibility that the slowdown could be linked to some seasonal factors, the economist said.
“It is possible that the trade dispute is causing disruptions to supply chains which are causing demand for industrial space to slow. Another possibility is companies may have overstocked before the implementation of tariffs in 2018. Seasonality, a general slowing in the global economy and lagging supply may also have been the main culprits,” economists Kevin Thorpe and Rebecca Rockey said in the report.
The report said world export volumes are expected to have no growth this year, dropping from a 5% annual expansion rate in the last two years.
To best visualize the global slowdown is YoY changes in global trade as measured by the IMF’s Direction of Trade Statistics, courtesy of BMO’s Ian Lyngern.
The 2018 trade war and the end of dispute settlement as we knew it – Chad Bown
For more than 20 years, the WTO’s dispute settlement system provided an orderly process for countries to resolve trade grievances and keep cooperation going. But in 2018, something broke down. This column, taken from a recent Vox eBook, explores why the inability to resolve underlying problems with the WTO itself deserves some of the blame and derives some potential lessons for a future system of dispute settlement.
***Inflation: The Soviet Tool for Destroying Money – Chris Calton
In March 1919, the Communist Party headed by Vladimir Lenin stated in its newly drafted program that among the party objectives was the complete abolition of money. The State Bank of Russia would be “abolished and turned into the central bookkeeping office of the Communist society.”1 In theory, the ruling party could have simply decreed money out of existence, but this would fail to eliminate the circulation of currency throughout a vast country that the Bolsheviks did not fully control in 1919.
Instead, their strategy was to resort to the printing press. The banks were among the first institutions the Bolsheviks seized, and control over the money supply allowed them to pay salaries to the recently formed secret police and Red Army that were used to consolidate Bolshevik control following the 1917 revolution. But the rapid printing of money was also part of a deliberate strategy to usher in the inevitable moneyless economy of communism.
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