Economische aanraders 03-01-2021
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 Result of “Too Much Money”: Asset Price Inflation and Inequality – Pascal Hügli
In the eyes of many, covid-19 has truly accelerated things. Tech aficionados have been rejoicing as virtual meetings, Zoom calls, and overall digitization within companies have seen a serious boost. At the same time, the corona crisis has intensified another contemporary development that people generally don’t really care about: today’s ongoing expansion of the money supply.
Although monetary policy had been ultraexpansionary even well before the virus hit the world, central bankers are currently upping the ante once again. While it took the Federal Reserve almost six years to create 3.5 trillion in new US dollar liquidity, this time around it took only ten months to unleash a monetary tsunami of $3 trillion with the projection of at least another $1.8 trillion next year.
Why M1 Money Supply (Cash) is Skyrocketing Like No Time in History – David Haggith
Plane made of burning dollar bills symbolizes price inflation and the Fed moving to digital currency
In my last Patron Post, which I eventually made available to everyone, I revealed a little-known (at the time) fact that M1 money supply (the most liquid forms of cash — bills, checks and basic savings accounts) had grown faster than any time in history. I showed that using a graph like the following, which is now brought up to the most current data:
With part of December now in the picture, you can see the faintest hint at the top of the steep late-November climb that shows the climb may be rounding off.
That is a massive amount of new cash money — historically massive — done almost covertly in the quickest burst ever — and yet it did not even cause the stock market to blink!… The graphs … make it clear why inflation under the new regime could become a much more serious problem than the limp moves seen over all the years of the Great Recovery, the difference being how fast the Fed’s QE is now converting into cash
… and I asked,
This Time Is Not Different. More Debt, Less Growth – Daniel Lacalle
I remember that in 2009 three messages were constantly repeated: “In this crisis measures are different, because governments are investing in the recovery by increasing public spending,” “the funds from stimulus plans will strengthen the recovery “and “central banks help a stronger recovery by lowering rates and increasing liquidity”. Then, 2010 arrived and the Eurozone entered a deeper crisis. In many aspects, this recession is similar. Many governments are doing the same as they did in 2009. Extend and pretend. Extend structural imbalances and pretend this time will be different.
It is worrying to see the same level of excessive optimism of 2009 these days, and we must prepare for a complex environment and a difficult recovery if we are to emerge from this crisis stronger.
Adopting A Gold Standard Would Promote Fiscal Discipline – James Caton
Many are surprised to learn that famed central banker Alan Greenspan has been a longtime supporter of the gold standard. But the record is clear. Greenspan published an essay in support of a gold standard with unregulated banking titled “Gold and Economic Freedom” in July 1966. He remained an advocate of the gold standard at the time of his appointment as Chairman of the Federal Reserve in 1987. And he has continued to wax about the gold standard in the time since leaving the Fed.
Among other things, Greenspan recognizes that the gold standard constrains government spending – and borrowing.
Central Bank Digital Currency: A Primer – Kristoffer Mousten Hansen
There has been a lot of talk about central bank digital currency (CBDC) recently, as central bankers around the world are discussing the possibility of launching their own CBDCs. Some of the problems of CBDCs have been pointed out already (see, e.g., here and here), and I will not discuss them too much here. The purpose of the present article is to answer the simple question: What exactly is a CBDC? How is it different from physical cash, demand deposits, and cryptocurrencies?
Let us begin with what CBDCs definitely are not: they are not a new kind of cryptocurrency akin to bitcoin. While central banks have discussed issuing CBDC in the form of a token and using distributed ledger technology (DLT), this does not mean that central banks intend to let people trade and hold it without oversight, let alone that they will not centrally control the overall supply of it. The purpose of DLT and tokenization is purely a question of which technology to use in the imposition and distribution of the digital currency; it does not mean that central banks have adopted any of the ideas behind the rise of bitcoin.
Ten Remarkable Financial Events Of 2020 – Peter Earle
The past year has been one full of superlatives: from the most votes ever cast in a presidential election to the worst unemployment claims the United States has ever seen. There have been unbelievable highs, such as the record-breaking increase in new businesses launching, and there have been crushing lows, like the largest surge in poverty in US history. Perhaps no field highlights those highs and lows better than the financial sector.
The volatile financial landscape has become an indispensable component of ongoing pandemic coverage. Much like 2020 as a whole, events in global financial markets over the past year have ranged from shocking to devastating to mind-boggling. The sheer concentration of so many unlikely events taking place in the span of a year can, at least partially, be explained by economic logic, but that answer alone would paint an incomplete picture. Widespread fear and panic stemming from the ongoing Covid-19 pandemic and government-imposed lockdowns and business closures have played massive roles in rattling the financial sector.
***US Stimulus & Shifts in Consumer Spending Hit Trade Deficit – Wolf Richter
The one-way street of Globalization by Corporate America.
So that was inevitable, after the US stimulus efforts: The US trade deficit in goods – exports minus imports of goods – hit a record in November of $84.8 billion, blowing by the prior record established in August, according to the advance estimate of US International Trade in Goods by the Commerce Department. This advance estimate will likely be adjusted one way or the other with the more complete batch of trade data early next year.
During the Financial Crisis, the trade deficit narrowed drastically as imports fell because US consumers cut back on buying goods, imported goods, though they continued buying services, which are mostly not imported. Now the opposite is happening: Consumers bought record amounts of durable goods, but curtailed their spending on services.
The ECB’s Latest Big Mistake – Daniel Lacalle
One of the great mistakes among economists is to receive the measures of central banks as if they were the revealed truth. It is surprising and concerning that it is considered mandatory to defend each one of the actions of central banks. That, of course, in public. In private, many colleagues shake their heads in disbelief at the accumulation of bubbles and imbalances. And, as on so many occasions, the lack of constructive criticism leads to institution complacency and a chain of errors that all citizens later regret.
Monetary policy in Europe has gone from being a tool to help states make structural reforms, to an excuse not to carry them out.
Financial market sensitivity to announcements by the ECB – Jan Willem van den End, Anna Samarina
Policy announcements by a central bank policy can have a significant impact on financial markets. This column examines the sensitivity of various asset prices and other metrics to the ECB’s monetary policy announcements. Bond spreads, stock prices, and the euro-dollar exchange rate became more sensitive to policy announcements over time. But volatility of market ‘surprises’ was significantly higher after easing compared to after tightening decisions. This suggests that the ECB’s monetary policy communication has become an increasingly important market-moving event.
Will The Fed Lose Control In 2021? – Alasdair Macleod
The most important event in the new year is likely to be the Fed losing control of its iron grip on markets. The dollar’s declining trend is already well established against other currencies and commodities, leading to this outcome.
Events in 2021 will be the consequence of a developing hyperinflation of the dollar. Foreign holders of dollars and dollar assets – currently totalling $27.7 trillion – are sure to increase the pace of reducing their exposure. This is a primal threat to the Fed’s policy of using QE to continually inflate assets in the name of promoting a wealth effect and continuing to finance a rapidly increasing federal government deficit by suppressing interest rates.
Bubbles will then pop, leaving establishment investors exposed to a combined collapse of fiat currencies, bonds and equity markets, which could turn out to be very rapid. The question remaining is what will replace collapsing fiat currencies: limited issue distributed ledger cryptos, such as bitcoin, or precious metals, such as gold?
US Dollar as “Global Reserve Currency” amid Fed’s QE and US Government Deficits: Dollar Hegemony in Decline – Wolf Richter
Other options also shaky. Central banks leery of Chinese RMB, its share still irrelevant. Euro’s share is stuck. But the yen’s share has been rising.
The US dollar’s position as the dominant global reserve currency is an immensely important factor in supporting the ballooning US government debt, the Fed’s drunken money-printing, and Corporate America’s ambition to offshore production to cheap countries, thereby creating huge and ever-growing trade deficits. They all have become dependent on the willingness of other central banks to hold large amounts of dollar-denominated paper. But from the looks of things, those central banks might be getting a little nervous.
***Interregional contact and national identity – Manuel Bagues, Chris Roth
Countries across Europe have struggled in recent decades to prevent secessionist movements, win wide support for social safety nets, and tackle problems demanding collective action. This column argues that to accomplish such goals requires a sense of shared, national identity. Exploiting a unique natural experiment – the random assignment of conscripts in Spain to serve outside their home region – it finds that intergroup contact in early adulthood can encourage interregional social cohesion. Governments looking to promote national identity should consider policies, such as mobility in higher education, that bring together people from different regions.
Unintended consequences – John Cochrane
The Dec 14 Wall Street Journal amplifies my warnings on the movement to de-fund fossil fuels by financial regulation, citing “climate risks.”
“The Senate Democrats’ Special Committee on the Climate Crisis recently issued a report detailing how the Fed and eight other regulatory agencies should penalize investment in fossil fuels and promote green energy. They claim financial institutions are underpricing the risk that carbon-intensive assets will become “stranded.”
Mind you, their worry isn’t about how climate change per se would devalue investments, which financial institutions already account for. They want a warning about the costs of government climate policies. “Because Congress has not advanced any comprehensive climate policies in the last decade, the market has not priced in the possibility of significant federal action,” the report notes.”
As reported this is at least a refreshing breath of honesty. In all I have read (not everything, it’s a mountain) of the BoE, ECB, BIS, OECD, IMF treatment of “climate risk,” there is a vague insinuation that climate itself poses a “risk,” which is utter nonsense. Beyond nonsense, it is a directive for banks to make up numbers in order to justify de-funding politically unpopular fossil fuel projects.
2021 Could Be The Opposite Of 2020: Economy Up, Equities Down – Joe Carson
2020 has proved to be a wild ride for the economy and finance. The economy posted its sharpest one-quarter decline to be followed by the largest quarterly gain. Meanwhile, the Dow Jones Index recorded the 10 largest daily percentage point declines and the 8 largest gains.
2021 could prove to be just as wild. But ending with opposite outcomes with the economy up and the equity markets down.
First, in 2020 the divergence between the economy and finance has never been this wide. When the final numbers are in, the US economy will shrink 2% to 3%, while the broad equity market will record a gain of around 15%, twice its annual average.
Paper Dollars in Circulation Globally Spike amid Hot Demand. But a Mexican Bank, after Run-ins with the US, Can No Longer Unload its Hoard of Paper Dollars – Wolf Richter
Triggering a showdown — Government of Mexico v. Central Bank — over paper dollars, with ramifications in the US and globally.
The amount of “currency in circulation” – the paper dollars wadded up in people’s pockets and purses, stuffed under mattresses, or packed into suitcases and safes overseas – jumped again in the week ended December 30 to a new record of $2.09 trillion, according to the Federal Reserve’s balance sheet, where currency in circulation is a liability, not an asset. This was up by 16%, or by $293 billion, from February before the Pandemic.
The joint effect of private and public environmental regulation on emissions – Mattia Di Ubaldo, Steven McGuire, Vikrant Shirodkar
The adoption of environmentally friendly production methods matters to both firms and policymakers, as both are concerned with reducing the emissions of greenhouse gases and pollutants. This column studies the effect on emissions of environmental protection provisions in EU free trade agreements, as well as that of private ISO-14001 environmental certifications. Environmental protection provisions in EU trade agreements are associated with lower levels of sulphur dioxide and nitrogen oxide emissions, while ISO-14001 certifications are associated with lower levels of greenhouse gas emissions. For carbon dioxide, ISO-14001 certifications matter only for members of trade agreements with environmental protection provisions, suggesting the existence of complementarities between private and public environmental regulation.
The EU Is At Risk Of Becoming Subservient To China – Bruce Wilds
The EU is taking the path of strengthening its ties to China in the hope it will spark an economic renaissance. The Euro-Zone was already in deep trouble before CoVid-19 hit. Argue as you may but the bout of economic weakness that started in 2017 never ended. The latest scheme cooked up by Brussels seems more of its policy to extend and pretend all is well. The EU abandoned all structural reforms in 2014 when the ECB started its quantitative easing program (QE) and expanded the balance sheet to record-levels. Playing into Europe’s problems is that in 2019, almost 22% of the Euro Zone GDP gross added value came from Travel & Leisure, a sector that will unlikely come back anytime soon.
The Great Reset, Part III: Capitalism with Chinese Characteristics – Michael Rectenwald
The title of this essay represents a play on the Chinese Communist Party’s description of its economy. Several decades ago, when China’s growing reliance on the for-profit sectors of its economy could no longer be credibly denied by the CCP, its leadership approved the slogan “socialism with Chinese characteristics” to describe the Chinese economic system.1 Formulated by Deng Xiaoping, the phrase became an essential component the CCP’s attempt to rationalize Chinese capitalist development under a socialist-communist political system.
According to the party, the growing privatization of the Chinese economy was to be a temporary phase—lasting as long as a hundred years according to some party leaders—on the way to a classless society of full socialism-communism. The party leaders claimed, and still maintain, that socialism with Chinese characteristics was necessary in China’s case because China was a “backward” agrarian country when communism was introduced—too early, it was suggested. China needed a capitalist booster shot.
The Top 10%’s Bubble Is About to Burst – Charle Hugh Smith
When the top 10%’s bubble pops in 2021, the loss of illusions/delusions of security and wealth will be shattering to all those who believed artifice and illusory “wealth” were real.
A great many people are living in bubbles that are about to pop. The largest bubble is the one inhabited by people who complacently believe in time travel, i.e. that the world of 2019 is about to replace the nightmare of 2020 and we can all go back to our carefree debt-funded consumption frenzy and illusions of ever-greater wealth forever and ever.
The greater one’s sense of security, the more durable the bubble. Those in America’s top 10% who have reaped virtually all the gains in income and wealth of the past 20 years live in a bubble that they view as unbreakable: no matter what problems arise, their personal income and wealth is secured by the government, central bank, etc.
Put another way, the top 10% are confident their position atop the wealth-power pyramid is secure no matter what happens. Any dip in stocks, bonds, real estate, bat guano futures, etc. that causes their personal wealth to decline (horrors!) will be instantly bought because the Federal Reserve will print another couple trillion dollars and funnel it into risk assets, as it has done for the past 20 years.
David Stockman on Janet Yellen’s Return and the Financial Storm Ahead… – David Stockman
In many ways, Yellen’s tenure as Fed chairman was far worse than Ben Bernanke’s. At least Bernanke’s money-printing madness was undergirded by his credentials as a misguided scholar of the Great Depression and the mistaken conclusion that the Wall Street meltdown of September 2008 was the prelude to another such occurrence.
The Great Depression of the 1930s was caused by way too much Fed-fostered foreign borrowing on Wall Street during the roaring twenties. It stimulated an unsustainable boom in US exports—soaring domestic CapEx in order to expand production capacity and a stock bubble–fueled consumer-spending boom in cars, radios and appliances. Therefore, when the Wall Street bubble burst in October 1929, foreign borrowing dried up, US exports and CapEx crashed and spending on consumer durables plummeted.
Post-Covid-19 potential output in the euro area – Ethan Ilzetzki
Global economic activity took a large hit during the Covid-19 pandemic, and the euro area was no exception. This column reveals how the majority of the CfM-CEPR panel of macroeconomic experts on the European economy predict a 2-5% decline in the level of potential euro area GDP, but no impact on the potential long-run growth rate.
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