Economische aanraders 22-03-2020
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.
No, Technology Shocks Aren’t Behind Recurring Business Cycles – Frank Shostak
Economic fluctuations, also known as business cycles, are seen as being driven by mysterious forces that are difficult to identify. Finn Kydland and Edward C. Prescott (KP), the 2004 Nobel laureates in economics, decided to attempt to find out what these forces were.1 They hypothesized that technology shocks are a major factor behind economic fluctuations and demonstrated that a technology-induced shock can explain 70 percent of the fluctuations in the postwar US data.
Kydland and Prescott’s Methodology: Calibrated Fixed Parameters (with a Layman’s Primer)
To do this, KP employed the Solow growth model (named after the 1987 Nobel laureate), which is based on the Cobb-Douglas production function of the following type:
Here Y is real output, A is a technology factor, K is the capital stock, and N the number of workers employed. The a (alpha) is a parameter, a constant that depicts the relationship that mainstream economists believe to exist between various economic variables.
***Anticipating the financial crisis: Evidence from insider trading in banks – Ozlem Akin, José M. Marín, José-Luis Peydró
There is a broad discussion surrounding the excessive risk-taking by banks and whether this constitutes a reliable early warning signal for future banking problems. This column presents evidence that many top executives of US banks sold their own shares in the buildup to the Global Crisis. This trends appears to be stronger for banks with higher real estate exposure, and weaker for independent directors or middle officers. Although the top bankers in riskier banks sold more shares, thus furthering their own interests, they did not reduce bank risk exposure.
Fed’s Balance Sheet Spikes as “Everything Bubble” Morphs into Financial Crisis 2 – Wolf Richter
Drags out bailout creature from Financial Crisis 1: “Loans” to Primary Dealers.
Total assets on the Fed’s weekly balance sheet, released Thursday afternoon, spiked to a record $4.67 trillion, up by $508 billion since the balance sheet of February 26, by which time all heck at already broken loose in the financial markets. Since the beginning of the repo market blowout in mid-September, total assets have ballooned by $900 billion – a result of a series of efforts to bail out first the repo market, and since the end of February, the Everything Bubble that had started imploding.
Global GDP Growth Estimates Are Plummeting – Daniel Lacalle
In February, the general consensus between large investment banks and supranational entities was that there would be a one-time hit on GDP in the first quarter from the coronavirus impact, followed by a stronger, V-shaped recovery. IMF expected a modest correction of global GDP of 0.1%, and the largest cut on estimates for 2020 growth was 0.4%.
Those days are gone.
Japanization: 30 Years of Failed Economic “Stimulus” – Taiki Murai, Gunther Schnabl
In Europe, the danger of “Japanization”—a long-lasting economic stagnation accompanied by expansionary monetary and fiscal policies (Schnabl 2015)—is now discussed more intensively, as the stagnation in southern Europe continues and the ultraloose monetary policy of the European Central Bank (ECB) is widely expected to persist. Concerns about Japanization have been countered by the argument that after thirty years of stagnation the growth in Japan is high when calculated in the appropriate manner (Krugman 2015). This implies that Europe will have nothing to fear if the ECB continues its ultraloose monetary policy, something that is widely expected.
First US Economic Data of the COVID-19 Era Emerges. It’s Ugly – Wolf Richter
This is just the beginning. There will be more of the same and worse.
Nearly all economic data as reported on a monthly or quarterly basis have so far reflected the era in the US before the economy reacted to the coronavirus. These reactions – from panic-buying of toilet paper to airlines shutting down much of their international and now even domestic routes – were phased into the economy beginning in later February and have now risen to a crescendo. But they’re slow in making their way into the economic data.
We get company by company warnings, and we get the government’s and the Fed’s reaction to the events, but we haven’t seen the impact in the official data yet. The first data to seriously reflect this are the surveys of company executives such as the Purchasing Manager’s Indices for March, out later this month, or the New York Fed’s Empire State Manufacturing index, which was released this morning,
Fail: Quantitative Methods Presume That Human Action Is Reflexive – Frank Shostak
Most economists consider the use of sophisticated mathematical and statistical methods key to understanding the complexities of economics.
By means of mathematical and statistical methods, an economist establishes relationships between variables. For example, personal consumer outlays are related to personal disposable income and interest rates. Most economists would present this relation as a mathematical function:
C=a*Yd – b*i
C represents personal consumer outlays, Yd is personal disposable income, i stands for interest rate, a and b are parameters.
If a is 0.5, b is –0.1, Yd is 1000 and i the interest rate is 2%, then C will be 0.5*1000 – 0.1*2 = 499.8.
Parameters a and b are obtained using a sophisticated statistical method called the regression analysis.
Off the radar: The rise of shadow banking in Europe – Martin Hodula
The shadow banking system has become an important source of funding worldwide for the real economy over the last two decades. Europe is no exception, though research on shadow banking there has been relative scarce. This column shows that European shadow banking is highly procyclical, intertwined with insurance corporations and pension funds, and a terminal station for regulatory arbitrage. It also discusses the existence of two main motives that explain the growth of shadow banking, both prior and post-Global Crisis: a funding-cost motive and a search-for-yield motive.
After Epic “Run on the Funds,” 10 More Real Estate Mutual Funds Shuttered as COVID-19 Batters UK Property Values – Nick Corbishley
Triggered by the belated realization of the risks in mutual funds that offer daily liquidity but invest in illiquid assets.
Over the past two days, 10 open-end property funds in the UK have slammed their doors shut on investors, citing concerns about asset valuation. The funds’ two property valuers, CBRE and Knight Frank, say that it is currently impossible to accurately value the funds’ real estate assets amid the market chaos being caused by the response to Covid-19.
The Global Repricing of Assets Can’t Be Stopped – Charles Hugh Smith
All bubbles pop, period.
The financial elites are pushing a narrative that asset prices, sales and profits will all return to January 2020 levels as soon as the Covid-19 pandemic fades. Get real, baby. Nothing is going back to January 2020 levels. Rather than the “V-shaped recovery” expected by Goldman Sachs et al., the crash in asset prices will eventually gather momentum.
Why? It’s simple: for 20 years we’ve over-invested in speculative bubbles and squandered borrowed money on consumption and under-invested in productivity-increasing assets. To understand why the market value of assets will relentlessly reprice lower–a process sure to be interrupted with manic rallies and false dawns of hope that a return to speculative good times is just around the corner–let’s start with the basics: the only sustainable way to increase broad-based wealth is to boost productivity across the entire economy.
The Fed’s Massive Injection of “Liquidity” Also Benefits Uncle Sam – Robert P. Murphy
There’s a lot to be said regarding the Fed’s surprise announcements—including its Sunday surprise of $700 billion in renewed QE and the complete elimination of all reserve requirements for banks—but here let me just focus on one element: the tendency for Fed officials and all the pundits to treat injections of “liquidity” as if they don’t count as much when distorting the economy. I’ve seen some analysts literally call the Fed’s repo operations “free” as opposed to fiscal policy, which they agree actually costs something.
Corporate debt burdens threaten economic recovery after COVID-19: Planning for debt restructuring should start now – Bo Becker, Ulrich Hege, Pierre Mella-Barral
The coronavirus pandemic is likely to lead to a steep, and potentially protracted, economic downturn. In response, many countries have implemented ambitious packages to support households and businesses. This column argues that in light of already elevated debt burdens, provisions for future debt restructuring should be made as soon as possible. These include carefully designed bailout packages, speedier in-court insolvency proceedings, and a stronger role of the state in dealing with renegotiations. Failure to plan and prepare for these cases could lead to a much slower economic recovery.
The Fed Has Sufficient Tools—to Wreck the Economy – Joseph T. Salerno
In its emergency announcement on Sunday evening, the Fed assured us that it “is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals.” The Fed put its (fiat) money where its mouth is by announcing a host of programs. It cut its target interest rate by 1 percent to zero and reinstituted quantitative easing, pledging to purchase $700 billion worth of Treasury securities and agency mortgage-backed securities over the coming months. This is in addition to $1.5 trillion in temporary overnight and term repurchase operations that it announced two days ago. Separately, the Fed issued a coordinated announcement with a number of other central banks, including the Bank of England, Bank of Japan, and the ECB that the interest rate on dollar swap arrangements would be cut by 0.25 percent and 84-day maturity swap lines would be added to the current seven-day dollar swap lines. In yet another announcement, the Fed slashed the rate at its discount window by 1.5 percent to 0.25 percent and its reserve requirements for all banks and other depository institutions to 0 percent.
***The Covid-19 Dominoes Fall: The World Is Insolvent – Charles Hugh Smith
Subtract their immense debts and they have negative net worth, and therefore the market value of their stock is zero.
To understand why the financial dominoes toppled by the Covid-19 pandemic lead to global insolvency, let’s start with a household example. The point of this exercise is to distinguish between the market value of assets and net worth, which is what’s left after debts are subtracted from the market value of assets.
Let’s say the household has done very well for itself and owns assets worth $1 million: a home, a family business, 401K retirement accounts and a portfolio of stocks and other investments.
The household also has $500,000 in debts: home mortgage, auto loans, student loans and credit card balances.
The household net worth is thus $1,000,000 minus $500,000 = $500,000.
Covid-19 has exposed our financial fragility – Jonathan Tepper
Financial markets have experienced the fastest ever crash over the past few weeks. Even during the dotcom bust and the Lehman crisis, stocks did not fall this quickly. In less than a month, we have seen major indices fall almost 30%, and stocks in sectors such as oil and travel down by 80%. We are experiencing terrifying daily declines not seen since the 1929 stock market crash that preceded the Great Depression.
We are at a watershed moment: the coronavirus Covid-19 is a catalyst fast bringing many long simmering problems to the boil. It is exposing the creaking financial systems around us and it will change the way economies function. Economic and financial pundits, however, have been focusing almost exclusively on the short-term effects of coronavirus and so are missing the much bigger themes at play.
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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