Economische aanraders 15-09-2019

Economische aanraders

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.

The ECB Just Cut Interest Rates, Here Is Why They Should Have Raised Them – Daniel Lacalle
13 september

Editors Note: On Thursday, the ECB announced a new stimulus plan including:
Cut one of its key interest rates, the one charged on bank deposits at the ECB, to -0.5% to encourage lending
Left its headline borrowing rate at zero, but pledged to leave them alone indefinitely, until inflation has robustly risen
Agreed to restart its quantitative easing program in November, with €20 bn of bond purchases each month
Negative rates are likely one of the reasons behind the lackluster European growth. Negative rates have worked as a tool to transfer wealth from savers to the indebted governments that have abandoned all structural reforms, while these extremely low rates have also perpetuated overcapacity, incentivised the refinancing of zombie companies and effectively worked as a disguised subsidy on low productivity. Not only those measures have damaged banks, but they have also created very dangerous collateral impacts.
In recent weeks we have heard of a likely new stimulus plan that would include a new repurchase program and further rate cuts. A new asset purchase program is completely unnecessary and unlikely to spur growth when all eurozone countries already have sovereign debt with negative yields in 2-year maturities and the vast majority have negative real or nominal yields in the 10-year bonds. Why would the ECB repurchase corporate and sovereign bonds when the issuers are already financing themselves at the lowest rates in history? Furthermore, by reading some statements one would believe that the ECB has stopped supporting the economy. Far from it, when it repurchases all debt maturities in its balance sheet and has implemented another liquidity injection TLTRO in March 2019.
***The Inevitable Bursting of Our Bubble Economy – Charles Hugh Smith
11 September

All of America’s bubbles will pop, and sooner rather than later.
Financial bubbles manifest three dynamics: the one we’re most familiar with is human greed, the desire to exploit a windfall and catch a work-free ride to riches.
The second dynamic gets much less attention: financial manias arise when there is no other more productive, profitable use for capital, and these periods occur when there is an abundance of credit available to inflate the bubbles.
Humans respond to the incentives the system presents: if dealing illegal drugs can net $20,000 a month compared to $2,000 a month from a regular job, then a certain percentage of the work force is going to pursue that asymmetry.
In our current economy, corporations have sunk $2.5 trillion in buying back their own stocks because this generates the highest work-free return. This reflects two realities:
The financial origin of the euro area fiscal wound – Alberto Caruso, Lucrezia Reichlin, Giovanni Ricco
13 September

One of the most cited books written in the aftermath of the 2008 financial crisis, which documents the special characteristics of recessions associated with financial crises over time and across countries, is titled “This time is different”. This column argues that the joint behaviour of the public deficit and public debt in the euro area from 2008 to 2013 – characterised by high and persistent public debt despite a severe fiscal consolidation since 2009 – cannot be explained by the unprecedented collapse in output and the historical relationship between macroeconomic, fiscal and financial variables. Rather, it reflects specific characteristics of the crisis years and the size and nature of the public support to the financial sector.
Recessions Can Theoretically Happen in a Free Market. But Central Banks Only Make Things Worse – Justin Murray
14 september

Given the nature of the modern global economic system, it is only natural to focus on the role of government-created money and central banks when discussing recessions and the ever-expanding credit structure. However, it is important to remember that theoretically, boom-bust cycles and other downturns are not impossible in a truly free market system. Although, the length, scale, and scope of such downturns are greatly expanded under a system of fiat credit expansion.
I’ll explain the mechanisms and effects of free market versions of various downturns and why they’ll still exist even in absence of credit expansion. In addition, I’ll explain how these events are muted in relation to similar events under the modern central banking structure.
Imagine for a moment you’re living in a town that is a major lumber producer. Your town is a trade hub for logs for ship building and you also have a substantial manufacturing base creating high quality home furnishings. However, as ship building began moving toward aluminum and steel and people lost interest in wooden furniture, the town began to suffer. Since capital and labor can’t be instantly retooled, the town eventually went through hard times where, even with broad national economic prosperity, the area lagged in poverty and unemployment significantly.
Men’s “Real” Earnings Below 1973 Level: Census Bureau – Wolf Richter
10 september

Top 20% households made out like bandits, bottom 40% got crushed.
The median earnings of men working full time year-round in 2018 ticked up to $55,291. Adjusted for inflation, this was below the amount they earned in 1973, according to the annual data trove released by the Census Bureau today. In other words, there has been a “real” income decline for men over the past four-plus decades!
Women have seen a lot of progress in their real earnings, but they started out much lower, and they still haven’t caught up with men – whose earnings are sitting ducks. The median earnings of women working full-time year-round in 2018 ticked up to $45,097, a new record. Since 1973, women’s earnings adjusted for inflation have surged by 40%.
Slowing Money Supply Growth May Trigger a Recession – Frank Shostak
9 september

A slight strengthening in the momentum of consumer expenditure has prompted many commentators to suggest that as long as the US consumer continues to spend there is no risk of a recession ahead. The yearly growth rate of consumer expenditure at current prices stood at 4.1% in July against 4% in June.
Notwithstanding still buoyant consumer expenditure, commentators have expressed concern due to a fall in the consumer sentiment index as compiled by the University of Michigan. The sentiment index fell to 89.8 in August from 98.4 in July and 96.2 in August last year.
Libra paves the way for central bank digital currency – Dirk Niepelt
12 September

Plans by Facebook and its partners to launch a global digital currency have the FinTech sphere buzzing with rumours, and regulators, central banks, and ‘old finance’ worried. This column, part of the Vox debate on the future of digital money, argues that while we may be witnessing a seismic shift in the monetary system, Libra’s role in that shift will be an indirect one. By taking the status quo option off the table, Libra or its next best replica will force monetary authorities and regulators to choose between central bank-managed digital currency and riskier private digital tokens.
***From Living At Home To Forgetting About Kids: Visualizing The Economic Realities Of Young Adults In America – Tyler Durden
14 september

With nearly 40% of young adults in California living with their parents and a $1.6 trillion student debt crisis taking more than just a little bite out of disposable income (and any hope of saving for many), economist Gary Kimbrough of the University of North Carolina at Greensboro has thrown together a ton of interesting data to answer the question: “What are the economic realities for young adults, and how have they changed from prior decades?”
Negative Interest Rates and Financial Repression – Mark Thornton
11 september

We are repeatedly told that the unprecedented monetary stimulus by the Federal Reserve and other central banks is necessary to stimulate the economy, create jobs, and generate economic growth. The truth is that this scheme is designed to stealthily steal from the productive classes in order to enrich the unproductive financial class and the counterproductive political classes. It is a con game.
With politicians and central bankers seemingly gone mad with their obsession for money printing and ultra low interest rates, it is nice to know that academic economists have a term (i.e., financial repression) for the policies that have created our current economic conditions.
Palace Revolt at the ECB, Legitimacy of Policy out the Window – Wolf Richter
12 september

Draghi’s desperate shenanigans thicken.
ECB President Mario Draghi, who is on his way out, will, as we’re learning more and more, do anything to push his agenda and make it stick at the ECB long after he leaves, but whatever his agenda may be, it’s clearly unrelated to the European economy which has been buckling under the consequences of his agenda: the destructive weight of negative interest rates and QE. And in the process, he is destroying the legitimacy of the ECB’s policy.
The latest incident was on Thursday. During the press conference following the ECB’s policy meeting, he lied to reporters, claiming that the “consensus was so broad there was no need to take a vote,” when in fact he had a revolt on his hand during the meeting by the presidents of the national central banks that represented half of the economy of the Eurozone, and by members of the Executive Board.
More on low long-term interest rates – John H. Cochrane
9 september

In an environment with stable inflation, the yield curve should typically be inverted.
Long term investors care about money when they retire, not next month. Most investors are long-term.
If inflation is steady, long-term bonds are a safer way to save money for the long run. If you roll over short-term bonds, then you do better when interest rates rise, and do worse when interest rates fall, adding risk to your eventual wealth. The long-term bond has more mark-to-market gains and losses, but you don’t care about that. You care about the long term payout, which is less risky. (Throw out the statements and stop worrying.) So, in an environment with varying real rates and steady inflation, we expect long rates to be less than short rates, because short rates have to compensate investors for extra risk.
If, by contrast, inflation is volatile and real rates are steady, then long-term bonds are riskier. When inflation goes up, the short term rate will go up too, and preserve the real value of the investment, and vice versa. The long-term bond just suffers the cumulative inflation uncertainty. In that environment we expect a rising yield curve, to compensate long bond holders for the risk of inflation.
Not all PIIGS are Created Equal: A Comparison of Portugal and Ireland – Luka Nikolic
14 september

The eurozone crisis was highlighted by five countries: Portugal, Ireland, Italy, Spain, and Greece. These peripheral nations were deemed to be the culprits behind the eurozone crisis due to their overspending. Namely, they had caused excessive deficits, coupled with large debt levels. They were dubbed by the media as the “PIIGS”
However, putting all five of these countries in the same basket obscures the real culprits behind the eurozone crisis. There was group 1, Ireland and Spain, which were countries without major fiscal irresponsibility issues, however, whose debt levels ballooned as a result of bailouts and the crisis. On the other hand, there was group 2, Italy, Portugal, and Greece. These countries have had big government spending policies dating back to the 1960s and as such could not have been expected to shift around due to EU restrictions on deficit and debt levels, when the political sentiment in the countries was not in favor of free markets. Putting all five countries in the same basket obscures the question of who really had irresponsible fiscal policies.
Financial constraints and productivity growth: An inverted-U relationship – Philippe Aghion, Antonin Bergeaud, Gilbert Cette, Rémy Lecat, Helene Maghin
13 September

The impact of access to credit on productivity is not as straightforward as it seems.This column introduces a model that emphasises the coexistence of two opposing effects. Tighter access to credit makes it more difficult for entrepreneurs to invest and innovate, with detrimental long-run effects on productivity. But it also drives less efficient incumbent firms out of the market, easing the entry of new and potentially more efficient innovators. Combining these two opposite effects, the overall relationship between credit access and productivity takes the shape of an inverted-U.
Why Argentina Will Never Dollarize – Bianca Fernet
11 september

Argentina will never ever dollarize despite there being a strong economic case in favor of doing so because it is run by Argentines. If Argentina possessed the dedication to logic and collective will to do something so drastic, they would not be in this predicament in the first place. Again. Argentines are neither swayed nor convinced by strong logical cases.
To understand Argentina’s economy, you first must understand Argentines, and let’s not delude my feminist self, this means getting into the heads of Argentine men. Chalk it up to Latin passion if you want, but Argentine men make decisions based on their feelings in the moment
US Consumers At Maximum Leverage, Might Not Be Able To Save The Day – Tyler Durden
14 september

John Kemp, senior market analyst of commodities at Reuters, says in a new report that US borrowers as a whole look stable but there are signs emerging that point to trouble, especially in the farm sector as a result of the trade war, and among a robust jobs market and some wage growth, consumers are nearing maximum leverage.
Kemp first talks about the positives in the lending market. He notes the number of commercial bank loans and leases 30 days or more past due in 2Q19 is at 1985 lows.
Why Government Plans for Fixing Recessions Ultimately Fail – Ludwig von Mises
14 september

An essential element of the “unorthodox” doctrines, advanced both by all socialists and by all interventionists, is that the recurrence of depressions is a phenomenon inherent in the very operation, of the market economy. But while the socialists contend that only the substitution of socialism for capitalism can eradicate the evil, the interventionists ascribe to the government the power to correct the operation of the market economy in such a way as to bring about what they call “economic stability.” These interventionists would be right if their antidepression plans were to aim at a radical abandonment of credit expansion policies. However, they reject this idea in advance. What they want is to expand credit more and more and to prevent depressions by the adoption of special “contracyclical” measures.
In the context of these plans the government appears as a deity that stands and works outside the orbit of human affairs, that is independent of the actions of its subjects, and has the power to interfere with these actions from without. It has at its disposal means and funds that are not provided by the people and can be freely used for whatever purposes the rulers are prepared to employ them for. What is needed to make the most beneficent use of this power is merely to follow the advice given by the experts.

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