Economische aanraders 18-09-2016
Veren of Lood biedt u op zondag wekelijks een inkijkje in (minstens) 10 belangrijke of informatieve artikelen en interviews die 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.
Sinds begin december 2015 nemen we 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.
“Crazy Things” Happen with Bond Math at ZIRP & NIRP – Alex M.
We’re investing in some truly interesting times. Check out the index below from Credit Suisse depicting contagion risk across global markets and asset classes. It’s now showing the highest global correlation since the index was created:
It’s interesting because normally correlations rise during a bear market. But right now we’re hitting record highs while many global markets are still in an old cyclical bull.
These high linkages are why, on Friday’s sell-off, there was hardly a drop of green in any market around the world.
***Why the EU Is Doomed – Alasdair Macleod
We are accustomed to looking at Europe’s woes in a purely financial context. This is a mistake, because it misses the real reasons why the EU will fail and not survive the next financial crisis. We normally survive financial crises, thanks to the successful actions of central banks as lenders of last resort. However, the origins and construction of both the the euro and the EU itself could ensure the next financial crisis commences in the coming months, and will exceed the capabilities of the ECB to save the system.
It should be remembered that the European Union was originally a creation of US post-war foreign policy.
Estimating currency misalignment using the Penn effect: It’s not as simple as it looks – Yin-Wong Cheung, Menzie Chinn, Xin Nong
15 September 2016
As long as countries strive to reallocate aggregate demand in their own favour, disputes will arise regarding the degree to which currency values are ‘fair’. This column argues that the Penn effect – the observation that the price level is higher in countries with higher per capita income – may not be a reliable method to discern the fair value of a currency. Different specifications and different datasets lead to different estimates of the degree of misalignment, for example for the Chinese renminbi.
Deutsche Bank’s CoCo Bonds Speak of Fear of the Worst – Wolf Richter
Deutsche Bank investors just can’t catch a break. They keep thinking that shares have dropped so low that it’s time to grab them. Herd instinct sets in, and this buying perks up the shares. Then the bank’s sins once again come to the foreground. And what investors had grabbed was a falling knife, and fingers are now getting sliced off.
Early morning on Friday in Frankfurt – in the US, Thursday after the markets had closed, a strategic time for bad news – Deutsche Bank announced that the US Justice Department was trying to wring $14 billion out it. The fine is based on the investigation into mortgage backed securities that the bank had rolled into complex toxic products and sold to unsuspecting investors between 2005 and 2007, just before the Financial Crisis.
Deutsche Defies DoJ, Says It Won’t Pay Anything Near $14 Billion in Mortgage Settlement – Yves Smith
Wowsers. Jamie Dimon had a bit of a hissy fit back in the day over the proposed settlement of JP Morgan’s mortgage liabilities. And while the settlement did come in lower, it wasn’t ginormously lower. By contrast, Deutsche Bank has gone out aggressively after the Wall Street Journal reported that the Department of Justice was seeking a $14 billion settlement for crisis-related mortgage liabilities versus the German bank’s position that $3 billion was a reasonable figure. Note that Deutsche Bank has €5.5 billion set aside in litigation reserves and seems to think it can hold the damage to this level.
As we’ve pointed out, the gap between the headline figure for these mortgage settlements and the actual economic value has always been large. So it would not appear to be wise to defy the DoJ by engaging in a media war, particularly since Deutsche is widely seen to be a garbage barge and its CEO is not Obama’s favorite banker. But the bank’s stock has taken a drubbing in the wake of the Wall Street Journal story and desperation may be overruling prudence.
“We had a lot of Drama in the Markets this Week,” Thanks to the Bank of Japan – Wolf Richter
Japan has invented QE and zero-interest-rate policies. It conducted umpteen iterations of them over the past two decades. Throughout, it has demonstrated and documented with ample evidence that QE and ZIRP do not stimulate demand in the economy, though they can have all sorts of other effects. Now once again, Japan is out on front.
This week, something interesting happened, even by the standards of the NIRP-absurdity currently in vogue. The 10-year yield of Japanese Government Bonds (JGBs) rose sharply. It had been negative ever since the BOJ announced its negative interest rate policy in February and had dropped as low as -0.30% by late July.
Report: Why We Need to Tax Corporations Now, More Than Ever – Yves Smith
For a fiat currency issuer like the US federal government, taxes do not fund spending but serves other important purposes, like regulating economic activity. For instance, deficits are generally necessary to make up for systematic private sector underinvestment. Taxes serve to provide incentives (depreciation tax shields to encourage investment) and disincentives (“sin” taxes). This article debunks many of the arguments used to claim that taxing companies at a lower rate is desirable.
The Fed Plans for the Next Crisis – Ron Paul
In her recent address at the Jackson Hole monetary policy conference, Federal Reserve Chair Janet Yellen suggested that the Federal Reserve would raise interest rates by the end of the year. Markets reacted favorably to Yellen’s suggested rate increase. This is surprising, as, except for one small increase last year, the Federal Reserve has not followed through on the numerous suggestions of rate increases that Yellen and other Fed officials have made over the past several years.
***MERCOSUR is not really a free trade agreement, let alone a customs union – Chad Bown, Patricia Tovar
17 September 2016
Argentina and Brazil began to open their markets to the world significantly – but only partially – in the 1990s. Yet these countries’ efforts to liberalise beyond their Latin American trading partners have stalled since 1995. This column re-examines the 1990s MERCOSUR experience and raises questions over just how much trade policy cooperation these two countries have undertaken. This lack of coordination also has implications for the ‘building blocks’ versus ‘stumbling blocks’ debate in trade policy.
The Fed’s Misguided Approach to Tightening – Thomas Palley
The William Gibson observation, “The future is already here — it’s just not very evenly distributed,” apples to America’s so-called recovery. The Fed has clearly been eager for some time to “normalize,” and has been eagerly seizing on shreds of data that confirm that stories it wants to tell, namely that its policies have been a great success and that it can now start rolling them back.
However, some experts have said that members of the central bank for the most part recognize that its QE and ZIRP experiments haven’t worked out as expected. Banks, who are suffering from a collapse in net income margins, the lifeblood of their profits, have been pressing the Fed to back out of its policy experiments and has been looking for any sign of improvement in the labor markets as an excuse to start raising rates.
Infrastructure Spending Does not “Grow the Economy” – Patrick Trombly
In a new twist, the presidential nominees from both major political parties have fallen for (or hope that the voters have fallen for) a time-worn fallacy, and have proposed government spending on infrastructure “to grow the economy and create jobs.” As David Stockman has shown, infrastructure in the United States is not “crumbling,” nor is spending on infrastructure disappearing.
What is equally important to our analysis, though, is the fallacy that government spending, on infrastructure or anything else, creates jobs or economic growth in the aggregate. This fallacy and related myths need to be dispensed with before anyone begins to take them seriously. Murray Rothbard addressed the issue in great detail in his article “The Fallacy of the ‘Public Sector.’” Below I seek to summarize, in simple terms that even Donald Trump and Paul Krugman can understand: there is no such thing as the Infrastructure Fairy that takes government spending and magically turns it into economic growth.
What’s the Real Unemployment Rate? That’s the Wrong Question – Charles Hugh Smith
Numbers like gross domestic product (GDP) and the unemployment rate no longer provide insight into how our economy works.
As the status quo narratives and metrics lose their explanatory value, defenders of the status quo frantically leap into attack mode, declaring any skeptical inquiry as a “conspiracy” or “hoax.” A recent example can be found in that high-brow defender of the privileged status quo, The New Yorker.
Reinhard Selten: Pioneering analyst of rationality and human behaviour – Benny Moldovanu, Axel Ockenfels
14 September 2016
Reinhard Selten, co-recipient of the 1994 Nobel Memorial Prize in Economic Sciences, passed away in August. This column outlines the intellectual life and career of a pioneering analyst of strategic interaction of both fully rational players (game theory) and real human beings with ‘bounded rationality’ (experimental economics). Selten called himself a ‘methodological dualist’, making a sharp distinction between normative game theory and descriptive theories of social and economic interaction. Nobody else has made such substantial and important contributions to both lines of research.
The Charade That Deters the Use of “Direct Spending” to Fund Federal Operations – J.D. Alt
My last essay, “A Perfect Example,” elicited six thoughtful and compelling questions from a reader with the moniker “MadcapMongoose.” They deserve an equally thoughtful response, which I’ve been trying to formulate, off and on, these past many weeks. Each formulation I come up with, however, seems to be missing a larger and deeper issue that I keep getting glimpses of. So, with apologizes to Mongoose, instead of answering him (or her) directly, I’m going to try to mine the topic obliquely to see if I can get at that deeper vein.
The essay in question dealt with a specific proposition for “direct sovereign spending,”—that is to say, spending by the federal government which is paid for by the issue of fiat dollars “out of thin air” rather than by the collection of “tax dollars.” Mongoose’s questions outlined a multitude of difficulties and issues that arise with the idea of doing that, and he (or she) wondered why MMT always seems to ignore or avoid them. I can only speak for myself here, but I believe the communicators of MMT, while they’re aware of these kinds of issues and difficulties, have been focused on a different task: trying to instill a larger awareness of the fact that “direct sovereign spending” is something that is practically and rationally even POSSIBLE.
Disclaimer: De VoL-redactie selecteert deze artikelen op interessante inzichten, of naar wij denken nuttige informatie. Wij kunnen echter geen enkele aansprakelijkheid aanvaarden voor de gevolgen van beslissingen die op grond hiervan door lezers zijn genomen, zakelijk zomin als privé.