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.

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Lesson of the S-Curve: Doing More of What’s Failed Will Fail Spectacularly – Charles Hugh Smith
20 mei
That nothing is truly “free” will be another lesson of the S-Curve.
I often refer to the S-Curve because Nature so often tracks this curve of ignition, rapid expansion, stagnation and decline.
One lesson of the S-Curve is that the human bias to keep doing more of what worked so well in the past leads to doing more of what failed even as results turn negative.
The dynamic in play is diminishing returns: the yield on the policy that worked so splendidly at first diminishes with time.
Credit offers a cogent real-world example. When credit becomes available in a credit-starved economy, it generates a rapid, sustained expansion as credit-worthy borrowers borrow and spend on new productive capacity, consumer goods, housing, etc., all of which further drives expansion.
But once credit has saturated the entire economy, the only pool of borrowers left are uncreditworthy (i.e. at risk of default), and the only projects left unfunded by credit are laden with risk.
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The Real Meaning of Deflation – Frank Shostak
25 mei
For most experts, deflation is bad news since it generates expectations for a decline in prices. Because of this, it is held, consumers postpone their buying of goods at present since they expect to buy these goods at lower prices in the future. Consequently, this weakens the overall flow of current spending and this in turn weakens the economy.
In this way of thinking, economic activity is presented in terms of the circular flow of money. Spending by one individual becomes the earnings of another individual, and spending by another individual becomes a part of the previous individual’s earnings.
So if for some reason people have become less confident about the future and decide to reduce their spending, this is going to weaken the circular flow of money. Once an individual spends less, this worsens the situation of some other individual, who in turn also cuts his/her spending.
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The procyclicality of banking in the euro area – Harry Huizinga, Luc Laeven
29 mei
A high procyclicality of banks’ loan loss provisioning is undesirable from a financial stability perspective, as it implies that bank capitalisations are more negatively affected at the trough of the business cycle, exactly when capital market conditions for banks are at their weakest. This column finds that provisioning procyclicality in the euro area is about twice as high as in other countries. This has important implications for the supervision of euro area banks going forward.
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OK, I Get it, Markets Have Gone Nuts: Junk-Bonds Are in Party Mood, Treasuries Clamor for Doom & Rate Cuts – Wolf Richter
30 mei
One of them is wrong. Watch out for it to snap in an ugly manner.
When the economy goes into a downturn, even a plain-vanilla recession or near-recession and not a crisis, junk bonds behave badly. This is because over-indebted companies with iffy cash flows – those are the ones that are junk rated – begin to buckle.
In a downturn, they have no wiggle room; some default on their debts and file for bankruptcy, stockholders get shafted, and bondholders take big losses. Everyone knows the drill. Fear of this happening spreads throughout the junk-bond market. Junk-bond prices fall and yields surge.
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Trade Wars Will Be The New Subprime – Jeffrey P. Snider
31 mei
Trade wars are rapidly turning into subprime mortgages. A few billion in tariffs will have wrecked the entire global economy, they’ll claim. Just like all that toxic waste subprime mortgage fiasco led inevitably to the Great “Recession” and global panic. Neither will be true, except insofar as both were symptoms of the far greater cause. The other thing actually responsible for messes.
Both of them.
For one of the few times, I have to agree with what Ben Bernanke said when he told the Financial Crisis Inquiry Commission (FICC) an inconvenient fact about specifically high risk housing loans.
Prospective subprime losses were clearly not large enough on their own to account for the magnitude of the crisis.
Though the Commission heard this testimony, that’s not quite the conclusion they reached. Either of them. There were actually two final reports: one written and published by the majority Democrats, the other written and published by the minority Republicans. The Panic of 2008 all-too-predictably became tainted with partisan politics at the expense of the truth.
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Two Reasons Why Socialism Repeatedly Fails – Jorge Besada
29 mei
Socialism will always encounter two big problems when regimes attempt to implement it: 1) the impossibility of economic calculation without true market prices, and 2) the lack of an incentive to produce only what consumers actually want.
The following simple example helps to illustrate the impossibility of economic calculation without market prices: a Cuban restaurant in Miami Beach sells a picadillo dish (ground beef, plantains, rice) for $8. Prices in general and thus the $8 price provide vital information. Perhaps $1, might be profit, and $7 will be spent in costs, in other words, in the necessary consumption of wealth needed to produce the meal/wealth, things like equipment/electricity/food/supplies, and everything employees and their families will consume at home (food, energy) thanks to their paychecks that came from the $7/meal. The businessman discovered two things that are impossible for a central planning body to discover regardless of the good intentions of its members or their intelligence, 1) that there are enough customers nearby willing to patronize the restaurant at the $8/meal price thus making their lives better, and 2) how to reorder $7 worth of stuff(labor/supplies/etc.) to profitably produce the meal.
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Slowing Economy, Plunging Stocks Are Forcing The Fed’s Hand – John Rubino
31 mei
A few short weeks ago, the economy seemed to be growing, the trade war looked winnable and the Mueller Report appeared to take presidential impeachment off the table. And then…
The economy hit a rough patch. Auto sales are down and home sales are way down. This morning:
Pending home sales fall, marking the 16th-straight month of annual declines
(MarketWatch) – Pending home sales fell a seasonally adjusted 1.5% in April and were 2% lower than a year ago, the National Association of Realtors said Thursday. The consensus Econoday forecast was for a 0.5% increase.
NAR’s index, which tracks home-contract signings, has been volatile, but the trend is solidly downward. April marked the 16th-straight month of annual declines.
Contract signings precede closings by about 45-60 days, so the pending home-sales index is a leading indicator for upcoming existing-home sales reports.
Only the Midwest saw an increase in April, with a 1.3% uptick. Pending sales were down 1.8% in the Northeast, 2.5% in the South, and 1.8% in the West.
On Tuesday, the widely-followed Case-Shiller index showed home prices had risen at the slowest pace since mid-2012 in March.
Interest rates cratered, inverting the yield curve. Check out the US 10-year Treasury yield in May:
From 2.5% to 2.15% in a single month implies massive changes within the credit markets that signal an economic slowdown and/or a flight to safety because of external risks.
The trade war went parabolic. China refused to budge and Trump upped the ante with more tariffs, to which China responded by threatening to end rare earth exports, a terrifying prospect for US tech companies that rely on those elements. Then last night Trump shocked pretty much everyone by slapping tariffs on Mexico in retaliation for the recent surge of illegal immigration. Meanwhile, global trade flows are collapsing.
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How to design the European Deposit Insurance Scheme – Esa Jokivuolle, George G. Pennacch
31 mei
Much of financial regulation has been focusing on adequately pricing risk taking by lenders. This column argues that a multinational deposit insurance system such as the proposed European Deposit Insurance Scheme has important advantages, but can also create conflicts among its member nations due to potential deposit insurance subsidies that differ across nations. The authors suggest alternative design features that could minimise these subsidies and make a multinational deposit insurance system more mutually agreeable.
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American Consumers Prop Up the Economy. Wall Street Clamors for Multiple Rate Cuts. Fed Blows Off Wall Street – Wolf Richter
31 mei
The economy is in a “very good place,” says Trump’s man at the Fed. And the Fed’s favorite inflation measure ticks up.
The Fed’s message has been that it may consider cutting rates if the economy deteriorates, or if inflation falls further, but the economy is currently in a “very good place,” it says. And consumer spending, 70% of the economy, is growing nicely instead of deteriorating, and the Fed’s favorite measure of inflation has just ticked up. But don’t tell Wall Street.
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Export-led growth in Central and Eastern Europe – Jan Hagemejer, Jakub Mućk
29 mei
Fragmentation of production has made it difficult to assess the contribution of exports to economic growth. This column decomposes growth into value added absorbed at home and that exported. Empirical results show that economic growth in Central and East European countries after 1995 was mainly driven by exports. The pace of convergence in Europe for exported value added was around four times faster than for domestic value added.
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Will China Reverse Its Trade Surplus with the United States? – Diego Santizo
30 mei
The increasingly erratic trade tensions between the United States and China does not appear to be ending anytime soon. The US president affirms that the deficit in the current-account between the two countries will soon come to an end and attributes the deficit to the Chinese competing unfairly.
Along these lines, supposedly private conversations that have been leaked in recent months suggest that Xi Jinping’s government has a plan, consistent with Trump’s rhetoric, to reallocate the composition and flow of transactions of goods, services, and other components that make up the trade balance between the two countries by the year 2024.
The trade war sent global equities to the steepest losses of the year and just got a lot bigger after both sides announced more tariffs. This exchange of “fire” wiped out more than $1 trillion from stock values this week1.
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An Apocalyptic View of Central Banks – John HCochrane
30 mei
In the department of genuinely terrible, and terrifying, ideas, I just got the a request from Simon Youel, the Media and Policy Officer at Positive Money, regarding the appointment of Mark Carney’s successor as Governor of the Bank of England. Positive money is organizing a “joint letter to the Financial Times, calling on the Chancellor to appoint someone who’ll foster a pluralistic policy-making culture at the central bank.”
The proposed letter:
Applicants to be the next Governor of the Bank of England are asked to commit to an eight year term lasting until 2028. By then the world will be a very different place.
Three key trends will shape their time in post. Firstly, environmental breakdown is the biggest threat facing the planet. The next Governor must build on Mark Carney’s legacy, and go even further to act on the Bank’s warnings by accelerating the transition of finance away from risky fossil fuels.
Secondly, rising inequality, fuelled to a significant extent by monetary policy, has contributed to a crisis of trust in our institutions. The next Governor must be open and honest about the trade-offs the Bank is forced to make, and take a critical view of how its policies impact on wider society.
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The Engines of Large Airliners and the Costly Challenges Manufacturers Face – MC01
1 juni
Rolls-Royce’s debacle for the Boeing 787 Dreamliner. And China is learning it the hard way.
During a scheduled engine inspection in April 2016, an All Nippon Airways (ANA) maintenance crew discovered early corrosion and fatigue cracks on several turbine blades of a Rolls-Royce Trent 1000 “Package C” installed on one of the company’s Boeing 787 Dreamliners. Despite Rolls-Royce’s spending over £30 million in 2017 to design and manufacture new and supposedly improved turbine blades for the affected engines, by April 2018 it was apparent the “Pack C,” as the engine is affectionately nicknamed, was in serious troubles.
Engine inspection intervals were reduced from 200 to 80 flights, and a while later the US FAA (Federal Aviation Administration) and the EASA (European Aircraft Safety Agency) jointly decided to cut ETOPS for Boeing 787 equipped with the Pack C engine from 330 to a crummy 140 minutes (Trent 1000 at the factory, image via Rolls-Royce).
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Digital Cash: Another Dangerous New Idea in Monetary Policy – Kristoffer Mousten Hansen
30 mei
While modern monetary theory has provided some distraction for public and commentators alike, the war on cash goes on. In the latest issue of the Cato Journal, the distinguished economic historian Michael Bordo and his co-author Andrew Levin lament the failure of the experiments in unconventional monetary policies of the last decade to stimulate aggregate demand. While they detail these failures at length, they do not draw the conclusion that there is something fundamentally wrong with the dominant approach to monetary policy – rather, the problem is that the effective lower bound (ELB) on nominal interest rates has prevented central banks from providing “sufficient” monetary stimulus. After all, cash is interest-free, so zero or negative interest rates cannot be imposed on the economy, as people will simply shift their savings from bank accounts into cash holdings.
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The cost of complexity in the Medicare Part D market – Michael Keane
26 mei
Launched in 2006, Medicare Part D allows beneficiaries to enrol in subsidised drug coverage plans sold by private insurers, but navigating the different plans can be complex and lead to sub-optimal choices. This column uses Medicare administrative data for 2006-2010 to understand the quality of consumer decision-making in the Part D marketplace. It finds that the vast majority of elderly place too much weight on premiums relative to out-of-pocket costs, care a great deal about the particular combination of plan features, and are highly likely to choose the same plan every year regardless of changes in prices and alternatives.
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***The EU, Not Brexit, Killed British Steel – Justin Murray
29 mei
On 22 May 2019, British Steel announced that they had become insolvent and the company entered receivership with the UK. The explanation provided for this failure is that British Steel is a victim of the UK’s decision to exit the European Union’s bureaucratic fold . On the surface, this appears to be true, as the company stated that orders from the continent have declined due to uncertainty over the exit process that the UK Parliament has dragged out over the past three years. However, if we dig deeper, we find that it was the EU, not the Brexit decision, which killed the company.
If we look at the company’s latest annual report, we find that the company went from a profit of £92 million in FY ending 2017 to a £19 million loss in FY ending 2018. To douse water on the Brexit claims, the company’s revenues actually increased 11% year-over-year. The real problem was the company’s expenses bloated by a tremendous 25% over the same period. The steel production process is energy intensive, so a significant portion of this price increase is related to a sharp spike in energy prices in the UK over late 2017 to early 2018. The second major cost driver is British Steel was no longer able to delay paying for the EU’s mandatory cap-and-trade policy. Under the cap-and-trade system, companies were able to pull forward future credits to pay for current years. British Steel’s future credits ran out in 2018 and were facing a £100 million bill to cover their 2018 charges. This amount represents a full 10% of the company’s annual revenue base and was so large that the company requested the British Government to provide a loan to cover the costs as the company only has around £5 million in cash to make such a payment. A good deal of the aforementioned energy price spike is also related to the EU’s cap-and-trade regime becoming more aggressive as it moves into the 2021-2030 phase of the program .
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