Economische aanraders 24-05-2020
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.
***An “L”-Shaped Recovery Is Not An Anomaly, It Is The Norm – Daniel Lacalle
Many analysts and economists are trying to predict the shape of the economic recovery post-Covid 19. To understand how the recovery may look like, we need to look at past recoveries and at the history of pandemics.
Starting with the pandemic, we know a few things. First, there has never been a vaccine for any of the previous 18 Covid types. Second, there has never been a pandemic without a second wave before a treatment existed. Taking both things into account, the idea that many investors have that the worst is discounted may be overoptimistic.
Tracking The Recovery: What Real-Time Data Says About The State Of The Global Economy – Tyler Durden
Where we are in a nutshell: in the past 8 weeks there has been a 38 million rise in US unemployment coupled with a $10 trillion forecast loss in global GDP through 2021; this however has been offset by $4 trillion of asset purchases by central banks resulting in a $15 trillion surge in global equity market cap.
But now that with every passing day more of the global economy is reopening as the coronavirus crisis fades away (at least until a second wave emerges), what investors and ordinary people care about is not where we are but where we are going. To answer that question, here is an detailed overview of the impact of Covid-19 on the global economy through various real-time, high frequency data compiled by JPM as it appears right now, weeks if not months before it makes it into official “adjusted” economic reports.
Designing central bank digital currencies – Itai Agur, Anil Ari, Giovanni Dell’Ariccia
Various central banks are currently weighing up the introduction of central bank digital currency. This column proposes a framework that captures the key features and studies the implications of such a payment system. Central bank digital currency can be designed with attributes similar to cash or deposits. Currency that closely competes with deposits would likely depress bank credit, while cash-like currency could lead to the disappearance of cash. The optimal central bank digital currency design hence trades off bank intermediation against the social value of maintaining diverse payment instruments. The currency could be interest-bearing, which may help alleviate this trade-off.
Central Banks Are Destroying What Was Left of Free Markets – Alasdair Macleod
President Reagan memorably said that the nine words you don’t want to hear are “I’m from the government, and I’m here to help.” Governments in all the major jurisdictions are now making good on that unwanted promise and are taking responsibility for everything from our shoulders.
Those receiving subsidies and loan guarantees are no doubt grateful, though they probably see it as the government’s duty and their right. But someone has to pay for it. In the past, the redistribution of wealth through taxes meant that the haves were taxed to give financial support to the have-nots, at least that was the story. Today, through monetary debasement nearly everyone benefits from monetary redistribution.
The ECB Has Been Hiding Risk. They Won’t Be Able to Do It Much Longer – Daniel Lacalle
Despite the unprecedented increase in the European Central Bank’s asset purchase program, the spread of southern European sovereign bonds versus German ones is rising.
The ECB balance sheet has soared to more than 42 percent of the eurozone’s GDP, compared to the Fed 27 percent of US GDP. However, at the same time, excess liquidity has ballooned to more than €2.1 trillion.
The ECB has been implementing aggressive asset purchases as well as negative rates for years, and the reality is that the eurozone economy has remained weak and close to stagnation already in the fourth quarter of 2019.
The eurozone’s main problem is that most governments have abandoned all structural reforms and bet all the recovery on monetary policy. The excessive government spending, high tax wedge, and burdens to growth remain, while an increasing percentage of growth is coming from travel and leisure (around 22 percent of gross added value in 2019).
Third Mega-Crisis in 12 Years: Eurozone Economy Plunges at Fastest Rate on Record – Nick Corbishley
First the Global Financial Crisis, then the Euro Debt Crisis, now the Big One.
In its 21 years of official existence, the Eurozone has already been through two brutal crises — the Global Financial Crisis and one of its own doing, the Euro Debt Crisis — that nearly tore the bloc apart. Now, it is in the grip of another one that is already exacting a larger toll than the first two, despite having barely begun.
The preliminary GDP in the first quarter for the Eurozone fell by 3.8%, according to Eurostat’s flash estimates (for the entire EU, it fell by 3.5%), “the sharpest declines observed since the time series started in 1995,” Eurostat said.
***Consumer Spending Will Not Rebound–Here’s Why – Charles Hugh Smith
Any economy that concentrates its wealth and income in the top tier is a fragile economy.
There are two structural reasons why consumer spending will not rebound, no matter how “open” the economy may be. Virtually everyone who glances at headlines knows the global economy is lurching into either a deep recession or a full-blown depression, depending on the definitions one is using. Everyone also knows the stock market has roared back as if nothing has happened.
While most financial pundits have accepted that a V-shaped recovery is not possible, few (if any) observers have discussed two factors that will cause consumer spending to crash harder than generally expected:
1. The top 10% of households account for about half of all consumer spending, and these are the households that will be most affected by the sharp drop in assets, small business income and the shrinking of heretofore “safe” white-collar jobs in higher education, healthcare, finance, etc.
Gauging the impact of COVID-19 on market-based inflation expectations – Dirk Broeders, Gavin Goy, Annelie Petersen, Nander de Vette
Inflation-linked financial instruments are widely used to infer market-based inflation expectations and inflation risk. Following the outbreak of COVID-19 and an unprecedented oil price shock, the euro five-year, five-year inflation-linked swap is currently hovering around an all-time low of just below 1%. This column shows that around 60% of the drop the swap rate since 2015 can be attributed to the inflation risk premium, while the inflation expectations component explains the remaining 40%. In addition, inflation option prices reveal that the distribution surrounding inflation expectations has shifted to the left since January 2020, suggesting that markets expect the outbreak of COVID-19 to be a persistent disinflationary shock.
Why Official Inflation Measures Don’t Work – Karl-Friedrich Israel
Modern macroeconomics has made price stability the primary objective of monetary policy. It is assumed that central banks can ensure price stability by skillfully managing the money supply, thereby creating the conditions for economic growth and prosperity.
In order to provide a safety buffer against the dreaded price deflation, central banks around the world try to generate a positive but moderate rate of price inflation. Price stability thus means a stable rate of inflation. The prices of goods and services should on average rise slowly at a constant rate over the medium and long term. In the eurozone, the aim is to achieve a price inflation rate close to but below 2 percent.
Credit during a crisis: The bond lending channel of monetary policy – Olivier Darmouni, Oliver Giesecke, Alexander Rodnyansky
The share of firms’ borrowing from bond markets has been rising globally. This column argues that euro area companies with more bond debt are disproportionately affected by surprise monetary shocks, compared to firms with mostly bank debt. This finding stands in contrast to the predictions of a standard bank lending channel and points toward frictions in bond financing. This provides lessons for the conduct of monetary policy in times of hardship such as COVID-19, when the corporate sector suffers from liquidity shortages.
The Japanese Love of Keynesian Economics Might Finally Be Coming to an End – Jason Morgan
Even those fortunate enough to have escaped infection by the Wuhan coronavirus will by now have noticed one of the virus’ many secondary effects: the disruption of the supply chain. Sick workers at meat plants, closed restaurants, hoarding, and the sudden spike in demand for things like ventilators, masks, and comestibles with long shelf lives have thrown the global flow of goods and services into disarray. Shelves are empty, crops are rotting in the fields—supply and demand are no longer matched, and the global economy is tying up in knots.
Green-Energy Zombie Abengoa Threatens to Default 3rd Time Since Enron-Style Collapse, Blames Covid, Begs for Fresh Bailout – Nick Corbishley
In the forlorn hope the world’s biggest green-energy zombie will somehow survive the oncoming storm.
When it comes to amassing and defaulting on insurmountable debt loads and then having the debt restructured to live another day, few companies can hold a candle to Abengoa, the global green energy giant, headquartered in Spain, famed for cooking its books with Enron-esque aplomb before collapsing in 2015. Reverberations were felt the world over, including in the U.S. where its unit filed for bankruptcy with $10 billion in debt. The company then rose from the ashes of its monstrous debt pile, only to reenter default in 2019. Once again, the debt was restructured.
Why The Gold/Silver Ratio Is A Useful Indicator – John Rubino
There’s a debate in gold bug circles over whether the price difference between gold and silver – the gold/silver ratio – tells us anything useful.
Some skeptics, for instance, view the original gold/silver ratio of 15 – from America’s 18th century bi-metallic system – as just a political number pulled more-or-less out of thin air by Alexander Hamilton and therefore useless today. Others note that gold is a purely monetary metal and silver is part industrial, part monetary, and conclude that it’s apples to oranges – and therefore not an indicator of future prices.
Both points are factually defensible, sort of. But they’re also irrelevant. The real reason the gold/silver ratio has tended to fluctuate within a broad but well-defined range is that humans have a vivid visual imagination.
Post-COVID: Dealing with the emerging market debt overhang – Kevin Daly, Tadas Gedminas, Clemens Grafe
Although the COVID-19 crisis is a global phenomenon, emerging market economies are in a weaker position than developed economies to absorb its fiscal costs. This column assesses the impact of the crisis on government deficits and debt levels in emerging markets, and the fiscal adjustments that are likely to be required in the aftermath of the crisis. The findings suggest that median government debt will rise by around ten percentage points of GDP and that most emerging economies will face painful post-crisis adjustments. The results also imply a strikingly wide range of outcomes across emerging economies around the world.
Why an Economy Can’t Work without Market Prices – Per Bylund
It has been a full century since Mises dropped the economic calculation bomb, but the argument apparently still haunts socialists. It should, since Mises managed to show that a socialist economy is not an economy at all but calculational chaos. Yet it is curious that it does, since most have (incorrectly) concluded that Mises’s argument, after decades of debate, was debunked.
Why does a presumably debunked argument still, drive even non-Austrian critics to pen new responses and deliberate on apparent flaws?
This Sucker’s Going Down: The Destruction of Demand – Charles Hugh Smith
Demand based on debt, unfulfilled promises and unaffordable habits is burning down.
The first-order effect of the lockdown was demand destruction as shelter-in-place orders and business closures restricted consumers’ ability to spend.
The second-order effect will be the permanent destruction of demand because people will realize they’re better off reducing their consumption of high-cost, questionable-value goods and services. Let’s start with the resurgence of savings, the most basic form of security you actually control and the most basic form of hedging against promises of a return to wonderfulness failing to arrive in the real world.
Comically, security you actually control, i.e. savings, are viewed by the status quo as a mortal threat to the economy: how dare you keep some of your own money rather than squander all of it! Notice how this bit of twisted CNN humor labels savings “hoarding,” as if retaining a bit of your hard-earned wages is evil “hoarding” rather than prudent self-sufficiency.
Corporate sector vulnerabilities during the COVID-19 outbreak: Assessment and policy responses – Lilas Demmou, Guido Franco, Sara Calligaris, Dennis Dlugosch
There is widespread concern that the COVID-19 induced liquidity shortages may cause firm bankruptcies on a large scale. This column examines the financial vulnerability of firms associated with confinement measures, and discusses the immediate steps that governments can take to reduce the risks of such crisis. Without policy actions, around 30% of European firms would face liquidity shortages after two months of confinement measures. A decisive public intervention, and especially the support to wage payments, is found to be crucial in order to avoid the temporary shock implied by the COVID-19 crisis permanently scarring the corporate landscape.
Let’s Hope Deflation Is Headed Our Way – Frank Shostak
The yearly growth rate of the US consumer price index (CPI) fell to 0.4 percent in April from 2 percent in April last year while the annual growth of the producer price index (PPI) plunged to –1.2 percent last month against 2.4 percent in April 2019.
Furthermore, the yearly growth rate of the import price index fell to –6.8 percent in April from –0.2 percent in April last year.
A general decline in the prices of goods and services is regarded as bad news since it is associated with major economic slumps such as the Great Depression of the 1930s.
COVID-19’s reality shock for emerging economies: Solutions to deal with dependence on external funding – Alicia García-Herrero, Elina Ribakova
The spread of COVID-19 and its associated impacts have again brought into focus the dependence of emerging market economies on external financing. This column analyses the factors that put emerging economies at an increased risk of a sudden reduction in dollar liquidity as a consequence of the COVID-19 outbreak. Based on this analysis, it reviews the key tools at the disposal of emerging economies, the Fed, and the IMF to address this problem. It concludes by offering some policy recommendations on the pecking order that could be followed to potentially shield the emerging economies from the dollar shortage problems related to COVID-19.
***How Government Intervention Triggers Depressions – Rob Price
Although painful, the solution to the 2020 economic recession is simple—uncover our problems, let prices adjust, and reallocate capital toward productive usages. The quicker we adjust, the shorter the recession and the sooner we create a sustainable economic foundation for future prosperity. This approach is the polar opposite to the current interventionist and inflationist orthodoxy. Murray Rothbard’s America’s Great Depression highlights the folly of government intervention during the 1930s and the economic malaise followed. The similarities to today are a warning sign. It’s time to push back against the stimulatory and interventionist status quo or prepare for the recession to turn into a depression.
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