Economische aanraders 21-07-2019
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.
Are India and China Booming as Much as They Claim? – Vijay Victor
One of the hot topics discussed among many economists in the last month was the anomalies found in the Indian GDP estimates. A working paper published by Arvind Subramanian, the former Chief Economic Advisor to the Government of India exposed how that the GDP estimates of India are overstated. His credentials as the former CEA in the finance ministry for four years — up until 2018 — lend additional credence to his claims.
Subramaniam’s paper points out that the change in the data sources and methodology for the estimation of real Gross Domestic Product since 2011–2012 has led to a significant overestimation of the growth estimates. The actual growth between 2011 and 2017 is estimated at around 7 percent as per the official sources. However, according to Subramanian, the actual growth may have been only around 4.5 percent. A part of this overestimation according to the paper may be attributed to a key methodological change.
Monetary policy and bank equity values in a time of low and negative interest rates – Miguel Ampudia, Skander Van den Heuvel
The effects of interest rate surprises on banks are different when nominal interest rates are very low. This column reveals how, in ‘normal’ times, policy rate announcements that are below market expectations tend to boost banks’ stock prices on average. When interest rates are very low, however, there is a reversal of this effect, with negative rate surprises reducing banks’ stock prices. This negative impact is larger for banks whose funding relies more on retail deposits than on other sources of funding.
***Economics: Vocation or Profession? – Joseph T. Salerno
Should economics be pursued as a profession or a vocation? Below I argue that this choice of subjective orientation is enormously important, and tends to dictate whether an economist will serve the cause of truth and freedom, or waste his or her talents on convenience, ephemera, and statism.
The New Shorter Oxford English Dictionary gives one definition of “vocation” as “The work or function to which a person is called; a mode of life or employment regarded as requiring dedication.” The eminent semanticist S.I. Hayakawa also emphasizes “dedication” as the distinctive feature of a vocation which differentiates it from a profession.
Not Helpful for Crushed European Bank Stocks: Stress Test a Sham, European Court of Auditors Warns – Nick Corbishley
European bank stocks continue to get hammered near multi-decade lows by a slew of problems, including the ECB’s monetary policies, particularly its negative-interest-rate policy (NIRP), festering nonperforming loans, and a well-deserved lack of confidence by investors. This was just exacerbated by a scathing new report from the European Court of Auditors (ECA) highlighting a litany of problems and shortcomings with the European Banking Authority’s latest stress test. Among other things, the test ignored some of the most common factors that cause a bank to fail, excluded many of Europe’s most fragile banks, and used simulations that were a lot more benign than the last financial crisis.
The incoming payment revolution and the future of central banking: Lessons from the history of the Banque de France – Maylis Avaro, Vincent Bignon
The payment landscape is changing. This column goes back to late 19th century France to explore the implications of this more decentralised and less banked landscape for the design of central banks’ interventions when fighting financial crises. The Banque de France operated a very wide discount window and used a variety of risk management techniques to effectively subdue risk-taking behaviours and to protect its balance sheet from taking any loss. This helped it to stabilise the economy and to overcome the consequences of negative income shocks.
The Three Ds of Doom: Debt, Default, Depression – Charles Hugh Smith
“Borrowing our way out of debt” generates the three Ds of Doom: debt leads to default which ushers in Depression.
Let’s start by defining Economic Depression: a Depression is a Recession that isn’t fixed by conventional fiscal and monetary stimulus. In other words, when a recession drags on despite massive fiscal and monetary stimulus being thrown into the economy, then the stimulus-resistant stagnation is called a Depression.
Here’s why we’re heading into a Depression: debt exhaustion. As the charts below illustrate, the U.S. (and global) economy has only “grown” in the 21st century by expanding debt roughly four times faster than GDP or earned income.
Costs for big-ticket essentials such as housing, healthcare and government services are soaring while wages stagnate or decline in purchasing power. What’s purchasing power? Rather than get caught in the endless thicket of defining inflation, ask yourself this: how much of X does one hour of labor buy now compared to 20 years ago? For example, how much healthcare does an hour of labor buy now? How many days of rent does an hour of labor buy now compared to 1999? How many hours of labor are required to pay a parking ticket now compared to 1999?
Facebook’s Fake Money – Thorsten Polleit
Starting in 2020, Facebook wants to offer its customers a global high-tech currency and infrastructure. The US IT giant says that this will provide many people around the world with easy and cost-effective access to the monetary and financial system. The new blockchain-based money is called “Libra.” Technically, it is something akin to a crypto-money-banknote covered by a basket of official fiat currencies (such as US dollars, euros, and the like). The heart of the Libra project is the “Libra Association” (LA). The non-governmental association, based in Geneva, Switzerland, is supported by founding members such as eBay, Facebook, Mastercard, PayPal, Spotify, Uber, Visa, as well as other renowned firms, and will be responsible for the operation and further development of Libra.
Modern money theory and its implementation and challenges: The case of Japan – Sayuri Shirai
Modern monetary theory (MMT) has recently gained prominence in light of doubts about the effectiveness of monetary policy in addressing economic shortfalls. This column assesses the implications of implementing the theory’s policy prescriptions, and the challenges it presents in the case of Japan – an economy that some have argued has already been subject to such policy. Japan’s labour shortages and low inflation mean modern monetary theory’s fiscal stimulus suggestions may be harder to implement than they initially seem.
An Unprecedented Market Divergence: Robots Are All In Stocks As Humans Flee – Tyler Durden
Last week, we observed that for stocks, it was once again a return to the most important question of 2019, namely “Why Do Stocks Keep Going Up”, at a time when tumbling bond yields continue to scream a recession is imminent…
… when outflows from equity funds have never been greater…
… and when inflow to bond funds are the highest on record.
The answer, as DB’s Parag Thatte explained last week, is that “buybacks have been the most important driver of S&P 500 price increases during this cycle” running at over $200bn a quarter (gross) over the last year, and while announcements remain noisy, “they do not suggest a slowing yet.” The level of corporate earnings is the primary driver of buybacks. Earnings have been flat this year and are on track to be down slightly in Q2. But absent a large decline, companies are likely to maintain the pace of buybacks, as they did in the previous earnings slowdowns in 2011-2012 and 2015-2016.
And yet, while we know the main answer to who is the biggest source of market upside in 2019, that’s not the only answer.
The Illusion of the Keynesian Multiplier – Frank Shostak
For most economists and financial commentators the heart of economic growth is the increase in the demand for goods and services. It is held that increases or decreases in demand are behind rises and declines in the economy’s production of goods and services. It is also held that the overall economy’s output increases by a multiple of the change in expenditures by governments, consumers, or businesses.
An example will illustrate how an initial spending raises the overall output by the multiple of this spending. Let us assume that out of an additional dollar received individuals spend $0.9 and save $0.1. Also, let us assume that consumers have increased their expenditures by $100 million. Because of this, retailers’ revenue rises by $100 million. Retailers in response to the increase in their income consume 90% of the $100 million, i.e., they raise expenditures on goods and services by $90 million. The recipients of these $90 million in turn spend 90% of the $90 million, i.e., $81 million. Then the recipients of the $81 million spend 90% of this sum, which is $72.9 million and so on. Note that the key in this way of thinking is that expenditures by one person becomes the income of another person.
Another UK Fund Just Slammed its Doors Shut on Investors – Nick Corbishley
This time, a fund liquidity crisis traps institutional investors, including pension funds.
Less than a week after the Bank of England issued a warning about the systemic risks posed by illiquid investment funds, news has surfaced that another run-on-the-fund caused fund managers to suspend withdrawals: This time, it’s M&G Investments, the fund management arm of UK insurance giant Prudential, that has suspended withdrawals from one of its property funds.
The move come into force last month and was apparently triggered by a rush to the exits from a number of big clients, most of whom are large pension funds.
Restrictions were also placed on certain withdrawals from the Prudential UK Property fund, which feeds into the M&G fund. According to The Daily Telegraph, around 8,000 people have money in the fund, of whom around 5,000 – those aged less than 55 – will not be able to access their funds until the restrictions are lifted.
EU policy recommendations: A stronger legal framework is not enough to foster national compliance – Konstantinos Efstathiou, Guntram Wolff
In 2011, the EU introduced stricter rules to monitor the implementation of country-specific policy recommendations. Using a new dataset, this column investigates whether these new laws have increased national compliance. There is no evidence that these stricter processes matter for implementation rates, whereas macroeconomic fundamentals and market pressure are important determinants of implementation progress. These results suggest ways to improve the effectiveness of European policy coordination that go beyond stronger legal processes.
The Burden Of Government Debt And James Buchanan’s Corrective – Donald J. Boudreaux
Who bears the burden of government indebtedness? Prior to the Keynesian revolution in the mid-20th century, most economists understood that the burden of government (or “public”) debt falls on those citizens who, in the future, must repay the debt. The funds for such repayment can come in the future from higher taxes, from reduced government expenditures on programs other than debt servicing, or from some combination of the two.
But Keynesianism destroyed this consensus. According to what my late Nobel-laureate colleague James Buchanan called the “new orthodoxy” about government debt, all such debt that is owed to fellow citizens – that is, debt that “we owe to ourselves” – is no burden at all upon the generations who must service and repay it.
What is PUBLIC DEBT? What does PUBLIC DEBT mean? PUBLIC DEBT meaning – PUBLIC DEBT definition – PUBLIC DEBT explanation
Three Prongs of the Keynesian Orthodoxy
There are three prongs to this Keynesian orthodoxy.
***You May Be Biased — But That Doesn’t Make You Wrong – Joakim Book
One contention in the world of politics and academia alike is that money can have a big affect on what people say and do. Specifically, the idea is that money buys votes, money buys influence, and that research grants similarly buy ideological bias in the academic community.
You’ve surely seen the kinds of allegations. Pro-abortion research is assumed to be biased because it’s funded by Planned Parenthood and anti-gun-control research is biased because it’s funded by the NRA. It’s assumed who funds climate science determines whether reports report impending doom or “denialism.”
Everything’s Fine Until Suddenly it Isn’t: How a “Leveraged Loan” Blows Up – Wolf Richter
Kudos to the private equity firm. These things don’t happen overnight for companies. They happen overnight only for investors.
Golden Gate Capital – the private equity firm now infamous for asset-stripping its portfolio company Payless ShoeSource into bankruptcy and liquidation – strikes again with another of its portfolio companies, Clover Technologies, whose $693-million leveraged loan has suddenly gone to heck.
Slices of that leveraged loan are traded like securities. But because leveraged loans are loans, not securities, the SEC doesn’t regulate them. No one regulates them, though the Fed wrings its hands about them periodically. And there are $1.3 trillion of them.
The market for them is very illiquid, even during good times, and before Clover disclosed some issues on July 9, the loan still traded at 97 cents on the dollar, according to Bloomberg. This was the day investors, such as leveraged loan mutual funds and institutional investors that held these slices, suddenly woke up with the foul odor of debt restructuring and bankruptcy in the air. Within just a few days, the price of the loan plunged 35% to 62.625 cents on the dollar.
We’ve Arrived At The End Of The Road – Adam Taggart
Decades of central bank intervention have left us with an unavoidable insolvency crisis
When Richard Nixon closed the gold window in August 1971, fully severing the US dollar from its gold standard, the Federal Reserve and other world central banks found themselves liberated. No longer was their ability to provide liquidity constrained by the physical limitations of the gold supply.
Investors Clash on Pound as Race to Become PM Nears Its End
The Fed started intervening more and more during times of slowing growth to goose the economy back to vigor. Cheered and further egged on by politicians happy for easy solutions and desperate to avoid having to make tough calls, central banks have been increasingly willing to provide liquidity in good times and bad.
***Willing to pay for security: Gig workers, freelancers, and the self-employed want steady jobs – Nikhil Datta
Is the rise of ‘atypical’ work arrangements – such as self-employment, freelancing, gig work and zero-hour contracts – a result of workers wanting such jobs or because they have no other choice? This column reports evidence from the UK and the US that while atypical workers may like flexibility, they would prefer a steady job. Indeed, workers would agree to earn less in order to increase their employment security.
***Why Powell Fears a Gold Standard – Mike Gleason
Chairman Powell’s testimony last week was closely scrutinized not just for its economic implications but also for its political overtones. Powell cited “trade tensions” as cause for concern about the strength of the global economy. He clearly seemed to be blaming President Trump’s tariffs.
But if the tariffs are what ultimately move the Fed to cut rates, Trump will have finally gotten what he wants out of Powell. In recent weeks, Trump has stepped up his attacks on the central bank, calling it the biggest problem facing the economy, floating the idea of firing Powell, and suggesting his administration would match China’s and Europe’s “currency manipulation game.”
***The Planetary Insanity of Eternal Economic Growth – Chalres Hugh Smith
This is the fantasy: we can rebuild our entire global industrial society every generation or two forever.
“Earthrise” is one of the most influential photographs ever published. Taken on the Apollo 8 mission in late December 1968 by astronaut Bill Anders, it captures Earth’s uniqueness, isolation and modest scale: a blue and white dot on a vast sea of lifeless darkness.
The revelation that strikes me is the insanity of pursuing eternal economic growth, not as an option but as the only possible path: there is literally no alternative to extracting ever greater quantities of the planet’s resources to enable ever greater consumption by the planet’s 7.7 billion humans.
Stripped to its essence, this mad drive is about profit and power. The necessity is sold as the only path to prosperity for humanity, but it’s really about securing wealth and power for the few.
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.
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