Economische aanraders 24-09-2017
Economische aanraders: 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 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.
This Fed is on a Mission – Wolf Richter
QE Unwind starts Oct. 1. Rate hike in Dec. Low inflation, no problem.
The two-day meeting of the FOMC ended on Wednesday with a momentous announcement that has been telegraphed for months: the QE unwind begins October 1. It marks the end of an era.
The unwind will proceed at the pace and via the mechanisms announced at its June 14 meeting. The purpose is to shrink its balance sheet and undo what QE has done, thus reversing the purpose of QE.
Countless people, worried about their portfolios and real estate investments, have stated with relentless persistence that the Fed would never unwind QE – that it in fact cannot afford to unwind QE.
A paper, and publishing – John H. Cochrane
Even at my point in life, the moment of publishing an academic paper is a one to celebrate, and a moment to reflect.
The New-Keynesian Liquidity Trap is published in the Journal of Monetary Economics — online, print will be in December. Elsevier (the publisher) allows free access and free pdf downloads at the above link until November 9, and encourages authors to send links to their social media contacts. You’re my social media contacts, so enjoy the link and download freely while you can!
The paper is part of the 2012-2013 conversation on monetary and fiscal policies when interest rates are stuck at zero — the “zero bound” or “liquidity trap.” (Which reprised an earlier 2000-ish conversation about Japan.)
At the time, new-Keynesian models and modelers were turning up all sorts of fascinating results, and taking them seriously enough to recommend policy actions. The Fed can strongly stimulate the economy with promises to hold interest rates low in the future. Curiously, the further in the future the promise, the more stimulative. Fiscal policy, even totally wasted spending, can have huge multipliers. Broken windows and hurricanes are good for the economy. And though price stickiness is the central problem in the economy, lowering price stickiness makes matters worse. (See the paper for citations.)
Ideas aren’t running out, but they are getting more expensive to find – Nicholas Bloom, Chad Jones, John Van Reenen, Michael Webb
The rate of productivity growth in advanced economies has been falling. Optimists hope for a fourth industrial revolution, while pessimists lament that most potential productivity growth has already occurred. This column argues that data on the research effort across all industries shows the costs of extracting ideas have increased sharply over time. This suggests that unless research inputs are continuously raised, economic growth will continue to slow in advanced nations.
Financialization and The Destruction of the Real Economy – Charles Hugh Smith
Strip an economy of capital, productive incentives, talent and yes, ethics, and what are we left with? An economy spiraling toward an inevitable collapse.
Financialization is destroying the real economy, but few in power seem to notice or care. The reason why is painfully obvious: those in power are reaping vast fortunes from the engines of financialization–for example, former President Obama: Obama Goes From White House to Wall Street in Less Than One Year.
This is not to single out President Obama as a special case; politicos across the spectrum depend on the engines of financialization to fund their campaigns and make them multi-millionaires, and corporate managers and financiers have skimmed billions of dollars in gains not from producing new, better and more affordable goods and services but by playing financialization games such as borrowing billions to buy back stocks, leveraged buyouts, and so on–all of which have reaped the insiders gargantuan fortunes while hollowing out the real economy.
The World Is Creeping Toward De-Dollarization – Ronald-Peter Stöferle
The issue of when a global reserve currency begins or ends is not an exact science. There are no press releases announcing it, and neither are there big international conferences that end with the signing of treaties and a photo shoot. Nevertheless we can say with confidence that the reign of every world reserve currency has to come to and end at some point in time. During a changeover from one global currency to another, gold (and to a lesser extent silver) has always played a decisive role. Central banks and governments have long been aware that the dollar has a sell-by date as a reserve currency. But it has taken until now for the subject to be discussed openly. The fact that the issue has been on the radar of a powerful bank like JP Morgan for at least five years, should give one pause. Questions regarding the global reserve currency are not exactly discussed on CNBC every day. Most mainstream economists avoid the topic like the plague. The issue is too politically charged. However, that doesn’t make it any less important for investors to look for answers. On the contrary. The following questions need to be asked: What indications are there that the world is turning its back on the US dollar? And what are the clues that gold’s role could be strengthened in a new system?
The forward guidance paradox – Alex Haberis, Richard Harrison, Matt Waldron
In New Keynesian models, a promise to hold interest rates lower in the future has powerful effects on economic activity and inflation today. This result relies on a strong link between expected future policy rates and current activity, and also a belief that the policymaker will make good on the promise. This column argues that a tension between both of these creates a paradox – the stronger the expectations channel, the less likely it is that people will believe the promise in the first place. As a result, forward guidance promises are much less powerful than standard analysis suggests.
Questions Remain as the Fed Finally Begins to Reverse QE – Tho Bishop
Today the Federal Reserve announced that it will finally begin the process of reversing quantitative easing. Following the process it outlined earlier this year, the Fed will start allowing assets (Treasurys and mortgage-backed securities) to mature off its balance sheet, rather than re-investing them as had been its prior policy. The current plan is to start with a $10 billion roll off in October, and increasing quarterly until it reaches $50 billion by October of next year. Considering the Fed’s balance sheet currently stands at $4.5 trillion, the Fed is envisioning a slow, multi-year process. As Philadelphia Fed president Patrick Harker described it earlier this year, the goal is for it to be “the policy equivalent of watching paint dry.”
The Demise of the Dollar: Don’t Hold Your Breath – Charles Hugh Smith
So let’s look at currency flows, reserves and debt.
The demise of the U.S. dollar has been a staple of the financial media for decades. The latest buzzword making the rounds is de-dollarization, which describes the move away from USD in global payments.
De-dollarization is often equated with the demise of the dollar, but this reflects a fundamental misunderstanding of the currency markets.
Look, I get it: the U.S. dollar arouses emotions because it’s widely seen as one of the more potent tools of U.S. hegemony. Lots of people are hoping for the demise of the dollar, for all sorts of reasons that have nothing to do with the actual flow of currencies or the role of currencies in the global economy and foreign exchange (FX) markets.
So there is a large built-in audience for any claim that the dollar is on its deathbed.
Your export success depends on it! Chinese firms’ product scope and product quality – Kalina Manova, Zhihong Yu
Pinpointing how multi-product firms organise their operations is key for understanding the drivers of global competitiveness. This column presents a theory on the behaviour of multi-product firms when cost and quality competitiveness jointly determine export performance. Using Chinese data, it finds that firms’ production and sales activity across products and markets is governed by a product hierarchy based on quality. This phenomenon also determines how firms respond to economic shocks.
“Japan Has No Illusions That Rates Will Ever Rise”: Is This What The Endgame Looks Like – Victor Shvets
Japan Debt Mountain: does it matter?
For almost 25 years, Japan’s debt burden has been the poster child of what would happen to others if capital is misallocated, bubbles burst and then clearance and required reforms are either delayed or not implemented. Indeed, at more than 5x GDP, Japan is shouldering a greater debt burden than other key jurisdictions. It is also facing severe demographic challenges, while its labour market remains constrained and the state maintains a sway over the private sector. Since WW II, Japan has always been more statist than most other major economies, with Korea and China subsequently following Japan in developing a similar model. The conventional argument has been that Japan’s debt would ultimately crush its economy and severely crimp public sector spending, while the private sector would be unable to adjust, and hence lose competitiveness. Eventually, the private sector might lose confidence and stop repatriating cash and the country would then suffer from massive capital outflows.
Not only were these dire projections wrong for decades, but as the rest of the world joined Japan in secular stagnation and unorthodox monetary policies, it is no longer perceived as an exception but rather as a pointer to the future. Japan’s success in navigating disruption, deep financialization and permanent overcapacity is now studied and imitated. While there are local nuances, Japan shows the way forward. QEs associated with the Fed were invented in Japan more than a decade earlier. The same applies to fiscal stimuli, collapsing velocity of money and strong disinflation. Whatever are the policies, Japan has already tried them. Japan is far more advanced in fully monetizing its debt by utilizing multiple asset classes, from bonds to equities. It also accepts that normalization is not feasible, and unlike the Fed, it has no illusions that rates could ever rise or that immigration and deep labour market reforms are either possible or desirable. When the US is focusing on returning outdated factories, Japan is building for the future, when labour inputs would no longer be the key.
Stranded profits – John H, Cochrane
The tax reform discussion includes the idea that by moving to a territorial system, US companies will bring lots of money stranded offshore back to the US, unleashing a wave of investment here. While I think a territorial system makes sense, as does reducing or eliminating the corporate tax, as a pure matter of economics, I don’t think this repatriation argument makes sense.
Here’s why. (The following is a story, not a fact about Apple accounting.) Apple sells an Iphone in Spain. Apple Spain pays a huge licensing fee on software, owned by Apple Ireland, so it’s not a profit in Spain. Apple Ireland thus collects huge amounts of cash from all over the world, taxed at the low Irish corporate tax rate. Apple Ireland deposits this cash in an Irish bank. (I presume they do fancier things with the money, but I’m telling a story here). The cash is “stranded” overseas, right?
No. The Irish bank can lend the money anywhere. It can buy US mortgage backed securities, it can lend the money wholesale to US banks who lend it out to US businesses. It can even lend the money to Apple US. If Apple or any other US company wants to invest, they can borrow from the Irish bank. Conversely, if profits are repatriated to US banks, those banks can lend the money overseas.
Special Pump-and-Dump Scheme Spikes to High Heaven – Wolf Richter
But the Swiss National Bank is just an innocent bystander.
The publicly traded shares of Swiss National Bank (SNBN) rose 5.7% on Thursday and closed at a new high of 4,449 Swiss francs. They have skyrocket 133% since July 19. And that’s just the last two months of an exponential spike. Who’re the lucky ones that own the shares of the SNB?
Unfinished Business: The North Atlantic crisis and its aftermath – Tamim Bayoumi
Nine years ago, Lehman Brothers collapsed and the economic world changed. This column introduces a new book that asks how the North Atlantic economy became so unstable that the failure of a medium-sized US investment bank could topple the entire North Atlantic region into deep recession, and the Eurozone into a depression. The answer lies in serial but different regulatory mistakes in Europe and the US starting in the 1980s.
What Is the Correct Amount of Money? – Frank Shostak
Most economists believe that a growing economy requires a growing money stock, on the grounds that growth gives rise to a greater demand for money, which must be accommodated. Failing to do so, it is maintained, will lead to a decline in the prices of goods and services, which in turn will destabilize the economy and lead to an economic recession or, even worse, depression.
Since growth in money supply is of such importance, it is not surprising that economists are continuously searching for the correct — or the optimum — growth rate of the money supply.
Some economists who are the followers of Milton Friedman — also known as monetarists — want the central bank to target the money supply growth rate to a fixed percentage. They hold that if this percentage is maintained over a prolonged period of time it will usher in an era of economic stability.
***Insanely Concentrated Wealth Is Strangling Our Prosperity – Steve Roth
Remember Smaug the dragon, in The Hobbit? He hoarded up a vast pile of wealth, and then he just hung out in his cave, sitting on it (with occasional forays to further pillage and immolate the local populace).
That’s what you should think of when you consider the mind-boggling hoards of wealth that the very rich have amassed in America over the last forty years. The picture at right only shows the very tippy-top of the scale. In 1976 the richest people had $35 million each (in 2014 dollars). In 2014 they had $420 million each — a twelvefold increase. You can be sure it’s gotten even more extreme since then.
These people could spend $20 million every year and they’d still just keep getting richer, forever, even if they did absolutely nothing except choose some index funds, watch their balances grow, and shop for a new yacht for their eight-year-old.
If you’re thinking that they “deserve” all that wealth, and all that income just for owning stuff, because they’re “makers,” think again: between 50% and 70% of U.S. household wealth is “earned” the old-fashioned way (cue John Houseman voice): it’s inherited.
***Defense Contractors on Cloud 9 – Wolf Richter
The backdrop: Money. More than ever before.
The Senate is expected to pass by a wide margin a $700-billion defense bill today. When it comes to extravagant military spending, Congress is relentlessly bipartisan, and all bickering stops, as long as the bacon gets spread to every district and state.
“The 1,215-page measure defies a number of White House objections, but Trump hasn’t threatened to veto the measure,” the Washington Post mused. “The bill helps him honor a pledge to boost military spending by tens of billions of dollars.”
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