Economische aanraders 21-04-2019
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.
Why the New “GDP-B” Measure Doesn’t Solve the Failures of GDP – Alasdair Macleod
Gross Domestic Product-B attempts to capture the added value of things we don’t pay for, such as Facebook, WhatsApp, Google and other digital services free to the user. B stands for benefits; the benefits consumers receive from free and subsidized services. It was devised by Erik Brynjolfsson, a professor at MIT, and is a work-in-progress. He points out that according to the US Bureau of Economic Affairs, the information sector in GDP statistics has been stuck at between four and five per cent of GDP for the last twenty-five years. Yet, the importance of this mainly digital sector now dominates both work and leisure activities, benefits not recorded in GDP.
His solution is to quantify it by attempting to establish how much an average user of a free service would pay if it wasn’t free. The thinking goes that this approach allows the statistician to estimate a “consumer surplus,” defined as the difference between the consumers’ willingness to pay and the amount they actually pay. This approach obviously throws up substantial surpluses, which added to GDP would boost it significantly.
It is one thing to say how much a service is worth and another to actually pay for it. Those surveyed are told that one in two hundred will be paid the cash-value for abstaining from the digital service for a month. But surely, a reasonable person surveyed would say he is prepared to pay an artificially higher value for the service to maximize the potential payment for abstention. This potential for gaming the survey appears to be ignored.
The Eurozone Slowdown Is Worse Than The Global One – Daniel Lacalle,
One of the most repeated messages among European financial analysts this week is this: “we are in a global slowdown”.
However, the sentence hides important nuances and very relevant differences. The European Union suffers a severe slowdown. The rest of the world only a moderate reduction in the pace of growth.
Data from the United States tell us something very different from what we get from the Eurozone.
Retail sales rose 1.6% in March in the US and the implied annualized growth rate for the first quarter remains above 2.1%. If we look at the employment data, the United States only sees a slight moderation in employment growth … But we are talking about the creation of 196,000 jobs, a figure that indicates much better growth. than other similar economies. The same applies to the latest manufacturing and service indices: They remain above 50 (in expansion). The Markit service index was 56.3 compared with an expectation of 54.8 and the compound showed a figure of 54.6 compared to the previous 54.3.
The economic surprise index of emerging markets also indicates an improvement. A strong but stable dollar (DXY Index) has not damaged the macroeconomic figures of the main emerging economies. It is true that the “usual suspects”, Argentina and Turkey, have seen their currencies plummet against the dollar, as they continue to implement counterproductive monetary policies of financing public spending with direct printing of currency. However, the macro data of most emerging countries as a whole is better than expected, and that must be acknowledged. Brazil was the latest to show a marked improvement in the Economic Activity Index in February. The prices of commodities have helped, but that tailwind is not the main driver. We cannot be complacent, but the recent capital outflows seen in March are modest compared to the inflows into February.
It’s too soon for optimism about convergence – Paul Johnson, Chris Papageorgiou
The recent wave of growth in several developing economies has led to many analysts to claim that poorer countries are catching up with advanced economies. This column argues that, with the exception of a few countries in Asia which exhibited transformational growth, most of the economic achievements in developing economies have been the result of removing inefficiencies which are merely one-off level effects. While these effects are not unimportant and are necessary in the process of development, they do not imply ongoing economic growth.
Who Bought the Huge $1.26 Trillion of New US Government Debt over the Past 12 Months? – Wolf Richter
There was strong appetite. Only the Fed shed them. Here’s who bought.
Over the 12 months through February 2019, the US gross national debt ballooned by $1.26 trillion to $22.1 trillion. Someone had to buy this new pile of debt – but who? That question is getting increasingly crucial as this debt is ballooning even in good economic times, fueled by deficits that Fed chairman Jerome Powell consistently calls “unsustainable.” Today, the Treasury Department’s TIC data shed some light on that question.
This US government debt that cost a record $523 billion in interest in fiscal 2018 is an asset for investors – the creditors of the US. The US relies on them to fund its huge deficits.
China, the largest foreign creditor of the US, dumped $46 billion of its holdings of marketable Treasury securities over the 12-month period, according to the Treasury Department’s TIC data
The Making of Modern Civilization: Savings, Investment, and Economic Calculation – Ludwig von Mises
Institutionalism1 is used to ridicule the classical economists because they started with “Crusoe economics.” In the beginning a fisherman got the idea that he could catch more fish one day than he needed and then he could have some leisure time to manufacture fishing nets. These nets and saved fish are “capital goods”; I don’t call them “capital.”
Capital goods are the intermediate factors between the given natural factors of production and consumer goods. Nature—given resources and human labor are the given natural factors. But if they are to produce, they must be guided. The produced, intermediary factors of production—capital goods—are not only tools; they are also all other intermediary goods, half-finished products, and supplies of consumer goods which are used for the support of those who are producing with the aid of capital goods. The production process which we are organizing and operating today started in the early ages of history, in the remotest ages of history. If the children used up the nets and fish produced by their parents, capital accumulation would have had to start all over again. There is a continuous progress from simpler conditions to more refined conditions. It is important to realize this because we must know that, from the early beginnings on, the first step toward this system of producing with the aid of capital goods was saving, and has always been saving.
The slope of the term structure and recessions: Evidence from the UK, 1822–2016 – Terence Mills, Forrest Capie, Charles Goodhart
It is well known that the slope of the term structure of interest rates contains information for forecasting the likelihood of a recession in the US. This column examines whether the same is true for the UK. Focusing on three periods – the pre-WWI era, the inter-war years, and the post-WWII period – it finds strong support for the inverted yield curve being a predictor of UK recessions for both the pre-WWI and post-WWII periods, but the evidence is less conclusive for the inter-war years.
***No Fix for Recession: Without a Financial Crisis, There’s No Central Bank Policy Fix – Charles Hugh Smith
There are no extreme “fixes” to secular declines in sales, profits, employment, tax revenues and asset prices.
The saying “never let a crisis go to waste” embodies several truths worth pondering as the stock market nears new highs. One truth is that extreme policies that would raise objections in typical times can be swept into law in the “we have to do something” panic of a crisis.
Thus wily insiders await (or trigger) a crisis which creates an opportunity for them to rush their self-serving “fix” into law before anyone grasps the long-term consequences.
A second truth is that crises and solutions are generally symmetric: a moderate era enables moderate solutions, crisis eras demand extreme solutions. Nobody calls for interest rates to fall to zero in eras of moderate economic growth, for example; such extreme policies may well derail the moderate growth by incentivizing risk-taking and excessive leverage.
Speculative credit bubbles inevitably deflate, and this is universally viewed as a crisis, even though the bubble was inflated by easy money, fraud, embezzlement and socializing risk and thus was entirely predictable.
How Human Action and Human Values Determine Prices – Frank Shostak
Why do individuals pay much higher prices for some goods versus other goods? The common reply to this is the law of supply and demand. What is behind this law? To provide an answer to this question economists refer to the law of diminishing marginal utility.
Mainstream economics explains the law of diminishing marginal utility in terms of the satisfaction that one derives from consuming a particular good. For instance, an individual derives vast satisfaction from consuming one cone of ice cream.
The satisfaction he will derive from consuming a second cone might also be big but not as big as the satisfaction derived from the first cone. The satisfaction from the consumption of a third cone is likely to diminish further, and so on.1
From this, mainstream economics concludes that the more of any good we consume in a given period, the less satisfaction, or utility, we derive out of each additional unit.
Consequently, if the additional utility of a product declines as we consume more and more of it; the price that we are willing to pay per unit also declines.
China’s Fake Numbers And The Risk They Pose For The Rest Of The World – John Rubino
Not so long ago, London Telegraph’s Ambrose Evans-Pritchard was one of the handful of must-read financial journalists. He probably still is, but since he disappeared behind the Telegraph’s pay wall his work is invisible to non-subscribers, only emerging when a free outlet runs one of his stories.
That happened this morning when the Sydney Morning Herald carried his analysis of the financial Ponzi scheme that is China.
After taking on more debt in a single decade than any other country ever — in the process helping to pull the US and Europe out of the Great Recession — China recently shifted into an even higher gear, creating a world record amount of credit in the most recent reporting month.
And – more important for headline writers and money managers – it reported exactly the right amount of GDP growth.
This brings to mind a long-ago interview in which economist Nouriel Roubini asserted that China just makes its numbers up, frequently reporting GDP immediately after the end of the period being measured, something that even the US can’t do.
Indirect trade and direct trade: Evidence from Japanese firm transaction data – Tadashi Ito, Yukiko Saito
Small and medium-sized firms can enjoy the benefits of trade liberalisation by exporting their goods or importing inputs through intermediaries. Using firm-level data from Japan, this column finds that firms in regional areas are smaller than those in metropolitan areas and are less likely to participate in indirect or direct trade. Direct and indirect exports and imports represent a large share of regional economies, and indirect exporters in regional areas are likely to become direct exporters. In addition, both newly started direct export/import firms and newly started indirect export/import firms tend to grow faster.
Europe in the midst of China-US strategic competition: What are the European Union’s options? – Alicia García-Herrero
With the trade conflict between the United States and China bringing China-US strategic competition into the open, the European Union faces an urgent question: how to position itself in the competition.
London Home Prices Had Biggest Monthly Drop Since Lehman – Don Quijones
February was bad. Housing market weakness is now spreading out from London.
London home prices in February took their biggest one-off hit since the dark days of the last crisis, according to data published Thursday by the UK’s Office of National Statistics. The average price of a residential property in London tumbled 2% in February from January, the sharpest monthly drop since November 2008, when the City was grappling with the fallout from the Lehman Brothers bankruptcy. For the 12-month period, the average price dropped 3.8%, the sharpest year-over-year fall since August 2009, during the Global Financial Crisis. The average home in London is now worth £459,800 ($600,000), down 5.9% from the peak in July 2017:
But it’s still more than double the median UK home price (£225,000). In other words, while prices may have moderated somewhat they’re still well beyond the reach of average Londoners. Here are some more standouts from the ONS report:
The slowdown is spreading out from London.
The Economic Recessions of the Late 1970s and Early 1990s – Jesús Huerta de Soto
[Editors Note: The following article is excerpted from Huerta de Soto’s Money, Bank Credit, and Economic Cycles, originally written in 2001]
The most characteristic feature of the business cycles which have followed World War II is that they have originated in deliberately inflationary policies directed and coordinated by central banks.
During the post-war decades and well into the late sixties Keynesian theory led to the belief that an “expansive” fiscal and monetary policy could avert any crisis. Grim reality sank in with the arrival of severe recession in the 1970s, when stagflation undermined and discredited Keynesian assumptions. Moreover the 1970s and the emergence of stagflation actually marked the rebirth of interest in Austrian economics, and Hayek received the 1974 Nobel Prize in Economics precisely for his studies on the theory of the business cycle.
As a matter of fact, the crisis and stagflation of the seventies were a “trial by fire” which Keynesians did not survive, and which earned great recognition for Austrian School theorists, who had been predicting it for some time. Their only error, as Hayek admits, lay in their initial misjudgment of the duration of the inflationary process, which, unrestricted by old gold-standard requirements, was prolonged by additional doses of credit expansion and spanned two decades. The result was an unprecedented phenomenon: an acute depression accompanied by high rates of inflation and unemployment.1
The Next Financial Crisis Won’t Be Caused by Fraud: This Time Will Be Different – Charles Hugh Smith
Extreme levels of debt and overvaluation characterize the entire global economy, and are not limited to any one nation or sector.
Financial crises come in two flavors: fraud and credit-valuation over-reach. Fraud-based financial crises may differ in particulars, but they share many traits: perverse incentives are institutionalized; the perverse incentives reward figuring out how to evade oversight via fraud, embezzlement, masking risk, etc. which are soon commoditized; regulations are gutted by insider-funded lobbying; regulators fail to do their job in hopes of getting lucrative positions in the industry they’re supposed to be regulating; reports of systemic, commoditized fraud are ignored because everyone’s getting rich, and so on.
The resolution has to 1) eliminate the perverse incentives that fueled the crisis; 2) institutionalize oversight that actually functions to limit dangerous excesses and 3) all the malinvestment / bad debt must be liquidated and the losses taken / distributed.
***More Airlines Collapse: Jet Airways India, Alitalia, WOW Air – MC01
And the 217 planes that Jet Airways has ordered from Boeing?
Today, another major airline collapsed. Jet Airways, India’s largest private airline, announced “with immediate effect” that it was “compelled to cancel all its international and domestic flights.” It suspended operations on a “temporary” basis. It said: “Since no emergency funding from the lenders or any other source is forthcoming, the airline will not be able to pay for fuel or other critical services to keep the operations going.”
Last year, Jet Airways “suddenly” discovered serious financial issues, which led to a highly dramatic rescue effort by the main creditors (chiefly state-owned State Bank of India and private-sector ICICI Bank) and minority shareholder Etihad under the new Sashakt legislation introduced by the Indian government to deal with the chronic “sudden liquidity problems” of the giant Indian economy.
Austerity Works — When the Market Is Freed – Antony P. Mueller
Trying to overcome a financial crisis with more debt is ineffective and a scheme of deceit. It would be just another step closer to final bankruptcy. In order to overcome a financial crisis, policies in favor of private business are required. Austerity need not be painful when the contraction of the public sector is accompanied by the expansion of the private sector. This way, the recipe for making austerity work requires to do away with the interventionist burdens and to ignite the entrepreneurial spirit. The challenge for the policymakers is not to quarrel about spending cuts but to determine what must be done in order to make the private sector expand while the public sector shrinks.
As the Austrian-school economists explained long ago, austerity — and not more spending — is the way out of a depression. A new empirical study of 16 advanced economies has fully confirmed the thesis that austerity works. The research found that the sizable reduction of a country’s deficit and the stabilization of the public debt is the way for the economy to recover and regain economic growth.
Taking stock of the Single Resolution Board: Banking union scrutiny – Nicolas Véron
The Single Resolution Board (SRB) has had a somewhat difficult start but has been able to learn and adapt, and has gained stature following its first bank resolution decisions in 2017-18. It must continue to build up its capabilities, even as the European Union’s banking union and its policy regime for unviable banks continue to develop.
2/3 Of American CFOs Are Predicting A Recession By The Summer Of 2020 – Marc Slavo
While 2/3 of American CFOs see the storm clouds gathering of another recession within the next 18 months, almost 87% say the recession will strike by the first quarter of 2021.
Even though the timing is off, one thing is clear: American CFOs are warning the public to prepare for another recession.
According to the latest Duke CFO Global Business Outlook Survey, released Wednesday, 67% of those surveyed predicted the U.S. economy would be in recession by the third quarter of 2020, and 84% believe a recession will have begun by the first quarter of 2021. The survey generated responses from more than 1,500 chief financial officers, including 469 from North America, and additionally showed that thirty-eight percent of respondents predicted a recession by the first quarter of next year.
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