Economische aanraders 04-07-2021
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.
Inflation Is a Form of Embezzlement – Frank Shostak
Monetary inflation is just a type of embezzlement. Historically, inflation originated when a country’s ruler such as king would force his citizens to give him all their gold coins under the pretext that a new gold coin was going to replace the old one. In the process of minting new coins, the king would lower the amount of gold contained in each coin and return lighter gold coins to citizens.
Because of the reduced weight of gold coins that were returned to citizens, the ruler was able to generate extra coins that were employed to pay for his expenses. What was passing as a gold coin of a fixed weight was in fact a lighter gold coin. On this Rothbard wrote,
More characteristically, the mint melted and re-coined all the coins of the realm, giving the subjects back the same number of “pounds” or “marks”, but of a lighter weight. The leftover ounces of gold or silver were pocketed by the King and used to pay his expenses.
What we have here is an inflation of coins, i.e., an increase in the quantity of coins brought about by the ruler making the gold coins lighter. The extra gold coins that the ruler was able to generate enabled him to channel goods from citizens to himself.
While Fed Is in Denial, Hawkish Bank of Russia Sees Inflation as “Not Transitory,” Warns of Possible Shock-and-Awe Rate Hike – Wolf Richter
US Inflation is almost as hot as in Russia, but the Fed is still blowing it off.
Consumer price inflation in Russia is red-hot, having jumped 6.0% in May compared to a year ago, 2 percentage points above the Bank of Russia’s target of 4.0%. Polls in Russia show that food inflation is a top concern, currently running at 7.4%.
But inflation in the US isn’t lagging far behind: The Consumer Price Index (CPI) jumped 5.0% in May. Yet the central banks are on opposite tracks in their approach to inflation.
Federal Reserve governors keep jabbering about this red-hot inflation being “temporary” or “transitory,” and likely to disappear on its own despite huge government stimulus and the Fed’s huge and ongoing monetary stimulus, though some doubts are creeping in among a couple of them. So they’ll keep interest rates at near-zero until at least next year, and they’re still buying $120 billion a month in securities to push down long-term interest rates.
Party’s Over: Bank of America Sees Stagflationary Mess Slamming Markets In Second Half – Tyler Durden
While today’s jobs report came in a bit on the weak side despite its impressive headline beat of 850K jobs created in June (a majority of which were teachers and bartenders) with wage growth slowing and the unemployment rate rising, we expect the Fed to look at today’s jobs data and try to again kick the can although whether this month or next, the inevitable taper announcement is coming not too long ater, the first rate hike as well. The only question is when.
Meanwhile, until that happens, Bank of America’s CIO Michael Hartnett reminds us that every day for the foreseeable future, as has been the case every day for the past 6 months, central banks bought $10 billion of bonds every day, the US federal government spent $20 billion every day, global stock market cap grew $73 billlion every day, and US bond & stock issuance averaged $20 billion every day.
The Global Minimum Corporate Tax Exposes the G-7’s Hypocrisy – Robert Zumwalt
Austrian school economists have long demonstrated that monopolies only tend to form as a result of government intervention, and “natural monopolies” have virtually never actually existed. Nonetheless, we are continually told by political and academic “experts” that unregulated economies inevitably give rise to monopolies, business trusts, and cartels, all of which they assure us have disastrous consequences for ordinary people. Therefore, we are told, governments are justified in taking forceful action to prevent monopolies from developing or to break them apart.
In this debate, the interventionists frame themselves as opposing the anticompetitive forces of large corporations having too much control over the lives of ordinary people. It is noteworthy, then, that these same interventionists support similar kinds of anticompetitive practices, and the increased control over people’s lives they entail, when they are employed by governments instead.
Demand-driven growth – Marek Ignaszak, Petr Sedláček
To gauge the efficacy of policies aimed at spurring growth, we must first fully understand the sources of aggregate growth. This column argues that understanding the drivers of economic growth requires paying attention not only to productivity and R&D dynamics at the firm level, but also to changes in demand for firms’ products. The authors provide a new perspective on commonly used supply-side pro-growth policies and open the door to analysing demand-side policies such as public procurement or product market regulation, which have been present in the policy debate but have largely escaped academic circles.
The Stimulus Boom Is Already Over. Now Comes Stagnation – Daniel Lacalle
The United States retail sales and jobless claims weakness, significantly below estimates, coincides with the largest fiscal and monetary stimulus in history. Something is not right when these figures come significantly below estimates in an environment of massive upgrades to gross domestic product (GDP). Why?
The diminishing returns of stimulus plans are very evident. Artificially boosting GDP with large government spending and monetized debt generates a short-term sugar high that is rapidly followed by a sugar low. The alleged positive effects of a $1 trillion stimulus plan fade shortly after three months. I recently had a conversation with Judy Shelton where she mentioned that the recovery would be stronger without this latest massive stimulus package. The economic debacle happened due to lockdowns and the recovery comes from the reopening. We need to let the economy breathe and strengthen, not bloat it.
The diminishing returns of stimulus plans are evident. A $20 trillion fiscal and monetary boost is expected to deliver just a $4 trillion real GDP recovery followed by a rapid return to the historical trend of GDP growth this will likely lead to new record levels of debt, weaker productivity growth and slower job recovery. The pace of global recoveries since 1975, according to the OECD shows a weaker trend.
The Looming Stagflationary Debt Crisis – Nouriel Roubini
Years of ultra-loose fiscal and monetary policies have put the global economy on track for a slow-motion train wreck in the coming years. When the crash comes, the stagflation of the 1970s will be combined with the spiraling debt crises of the post-2008 era, leaving major central banks in an impossible position.
Fed’s Reverse Repos Spike to $1 Trillion. Cash Drain Undoes 8 Months of QE – Wolf Richter
Giant sucking sound of cash.
Back on June 9, when discussing the Fed’s gigantic cash-drain operation via overnight “reverse repos,” I mused in our illustrious comments: If the Fed at its June meeting doesn’t tweak its offering rate for overnight reverse repos and the interest rate on excess reserves (IOER), “my guess is that by June 30 (end of quarter), it” – the amount of overnight reverse repos – “could spike to $1 trillion.” The Fed then increased these two rates by 5 basis points. And today, that cash-drain operation shot up to nearly $1 trillion.
This morning, the Fed sold a record $992 billion in Treasury securities in exchange for cash, via overnight reverse repos (RRPs), to 74 counterparties. Yesterday’s o
The Fed’s Power over Inflation and Interest Rates Has Been Greatly Exaggerated – Frank Shostak
It is widely held that the central bank is a key factor in the determination of interest rates. By popular thinking, the Fed influences the short-term interest rates by influencing monetary liquidity in the markets. Through the injection of liquidity, the Fed pushes short-term interest rates lower. Conversely, by withdrawing liquidity, the Fed exerts an upward pressure on the short-term interest rates.
Popular thinking also suggests that long-term rates are the average of current and expected short-term interest rates. If today’s one-year rate is 4 percent and the next year’s one-year rate is expected to be 5 percent, then the two-year rate today should be 4.5 percent ((4 + 5)/2 = 4.5%). Conversely, if today’s one-year rate is 4 percent and the next year’s one-year rate is expected to be 3%, then the two-year rate today should be 3.5 percent (4 + 3)/2 = 3.5%.
Hence, it would appear that the central bank is the key in the interest rate determination process. However, is this the case?
Who’s Hiring And Who’s Firing: More Than Half Of All Job Gains Were Bartenders And Teachers – Tyler Durden
There was a glaring contradiction in today’s jobs report which on one hand indicated an impressive gain in payrolls (measured by the Establishment survey), which rose 850K in June, and well above expectations, while on the other hand, the number of employed people (measured by the Household survey) actually declined by 18K to 151.602MM. While we assume this discrepancy was due to seasonal adjustments in the Establishment survey and will be revised in coming months, we take a look at the job sectors that moved the most in the month of June.
In keeping with tradition, one of the biggest jumps was in the food service and drinking places, i.e., waiters and bartenders, which jumped by a whopping 194,300 in June. This was the 6th consecutive month of growth for the sector, and the 5th in a row with more than 100,000 job gains.
Fast grants and the economics of subsidizing science – John H. Cochrane
One of the great insights of modern growth theory — Paul Romer’s Nobel Prize — is that ideas are the foundation of economic growth. Ideas are also “nonrivial.” If you use my car, I can’t use it, but if you use our family recipe for road-oil chocolate cake (yum), we can still enjoy it as much as ever. Once an idea has been had, economics says it should be used as widely as possible as soon as possible
But coming up with ideas is expensive. And aside patent protections, I can’t charge for the benefit to you of my new ideas. So, economists naturally notice the mother of all public goods. Research — finding new ideas — has enormous benefits, and people will not naturally devote enough resources to finding, refining, implementing new ideas. So, economists conclude, the government should subsidize idea-production.
But which ideas? Now we face the conundrum. It’s just as easy to subsidize bad idea production as good idea production, and it’s even easier to waste money and produce no new ideas at all. How to subsidize actual productive ideas is a hard question of bureaucratic structure. The economics of science is, I think, vastly understudied. How can government agencies or philanthropies give away money and actually do good? This topic is especially relevant as we contemplate a big ramp-up in federal spending.
Two UK Commercial Real Estate Funds Shut Permanently, Investors Trapped, as Sector-Wide Exodus Intensifies – Nick Corbishley
The sector was already hit hard by Brexit, then by lockdowns, and now by working from home as companies plan to cut floor space.
Aegon Asset Management has closed its UK Property Income and Property Income feeder funds, after struggling to raise sufficient cash to meet redemption requests, it said on Wednesday. The Aegon Property Income fund had £380 million ($531 million) in assets under management and the feeder fund £150 million, according to Morningstar. The announcement follows a move last month by Aviva to wind up its property fund and two feeder funds due to the prevailing economic uncertainty and liquidity concerns.
Both the Aegon and Aviva funds were suspended in March 2020, alongside most other UK property mutual funds, due to the acute uncertainty over market valuations caused by the virus crisis as well as liquidity issues. Many of these funds are open-end, meaning they offer daily withdrawals to their (predominantly retail) investors, even though the funds’ core investment — offices, industrial property and retail parks — is extremely illiquid, often taking months to offload.
Since When Is a Half-Point Rate Hike (2 Years from Now) “Hawkish”? – Doug French
The Fed announced the reportedly hawkish news that the central bank may raise rates, not this year, not next year, but by fifty basis points sometime in 2023. This tapering would slow the Fed’s buying of $120 billion of debt securities a month with money created from the ether to some lesser amount.
People forget the central bank “kept its benchmark rate on hold for a 10th straight meeting after sweeping into emergency action amid the coronavirus pandemic in March of last year with a full percentage-point cut.” Yet again emergency government action has become permanent.
This news sent the dollar screaming upward, with the DXY jumping from 90.54 to 92.32 at week’s end. The price of gold was, of course, bludgeoned. The yellow metal dropped 6.5 percent over the next five days. The ten-year Treasury bond finished the week at a paltry 1.44 percent. Meanwhile, financial basket case Greece saw its ten-year rate finish at seventy-nine basis points.
Central bank independence and inflation: Weak causality at best – Philipp F. M. Baumann, Enzo Rossi, Michael Schomaker
The notion than an independent central bank reduces a country’s inflation has been embraced by academics, central bankers, and politicians all over the world. This is somehow puzzling, giving the ambiguity reported in empirical studies. This column argues that overall there is only a weak causal link from independence to inflation, if at all. Even a strong inflation-boosting impact from introducing central bank independence cannot be ruled out. These results are obtained from a statistical approach that has not yet been used in analyses of macroeconomic processes, although it exhibits properties well-suited to this end.
k causality at best
***The Systemic Risk No One Sees – Charles Hugh Smith
The unraveling of social cohesion has consequences. Once social cohesion unravels, the nation unravels.
My recent posts have focused on the systemic financial risks created by Federal Reserve policies that have elevated moral hazard (risks can be taken without consequence) and speculation to levels so extreme that they threaten the stability of the entire financial system.
These risks are well known, though largely ignored in the current speculative frenzy.
But there is another systemic risk which few if any see: the collapse of social cohesion.
President Carter was prescient in his understanding that a nation’s greatest strength is its social cohesion, a cohesion that America’s unprecedented wealth / income / power inequalities has undermined. Consider this excerpt from his 1981 Farewell Address:
“Our common vision of a free and just society is our greatest source of cohesion at home and strength abroad, greater even than the bounty of our material blessings.”
In other words, a nation’s strength flows not just from its material wealth but from its social cohesion–a term for something that is intangible but very real, something that doesn’t lend itself to quantification or tidy definitions.
Interventionism Turns Crisis into Depression – Mark Thornton
Austrian economists have a well-developed theory that explains the boom, bubble, bust, and recovery. A good introduction to the Austrian theory of the business cycle can be found in Larry Sechrest’s article “Explaining Malinvestment and Overinvestment.” Larry wrote the article to provide a pedagogical device for economics students, but academic economists will probably be able to understand it as well.
Here we examine the case of business cycles where instead of recovery, the economy enters a prolonged economic depression or recession. The types of intervention that cause business cycles are restricted to money and credit. The types of intervention that cause depressions can be of a monetary, fiscal, or regulatory nature. Even moral suasion can contribute to the making of a depression, as was the case with Herbert Hoover.
The most effective depression-producing program would include a variety of interventions. The only necessary requirement is that the interventions help to forestall the correction process and that the interventions collectively undermine the ability of the price system and the system of profit and loss to properly reallocate resources. Austrians find that the cycle is the result of monetary intervention and that depressions emerge as the result of subsequent interventions designed to forestall the corrective processes of the bust.
Regulating oligopolistic exchanges – Giovanni Cespa, Xavier Vives
Over the past two decades, governments and regulators have worked to foster competition among trading venues, leading to market fragmentation and contributing to a drastic reduction in the cost of trading. But this also led exchanges to heighten their reliance on revenue generating activities such as the sale of market data, co-location space, and fast connections to matching engines. This column argues that a connectivity fee or entry regulations could work well from a regulatory perspective, and highlights the important role of exchanges’ technological capacity decisions as a driver of liquidity.
Long Waves: Visualizing The History Of Innovation Cycles – Tyler Durden
Creative destruction plays a key role in entrepreneurship and economic development.
Coined by economist Joseph Schumpeter in 1942, the theory of “creative destruction” suggests that business cycles operate under long waves of innovation. Specifically, Visual Capitalist’s Dorothy Neufeld points out that as markets are disrupted, key clusters of industries have outsized effects on the economy.
Take the railway industry, for example. At the turn of the 19th century, railways completely reshaped urban demographics and trade. Similarly, the internet disrupted entire industries—from media to retail.
***With Home Prices Soaring, Shoppers Fear Buying at the Top of a Bubble – Doug French
Google reported in April that the search question “When is the housing market going to crash?” had spiked 2,450 percent in the past month, according to Diana Olick of CNBC. “Why is the market so hot?” searches had doubled in just a week.
Since 2008, everyone has been on bubble watch. The price of anything goes up, for any sort of reason, and it’s deemed a bubble, soon to be popped. The large number of searches implies those shopping for a new home are wondering if they are walking into a trap. Home prices have soared and no one wants to buy at the top.
Olick wrote, “And, in the most telling indication that the market may be in a bubble, ‘How much over asking price should I offer on a home 2021’ jumped 350% in that same week.”
However, home construction over the past decade has lagged behind, as many builders went belly-up in the 2008 crash and large builders have managed inventories more carefully.
How Has The Flood Of Information Changed Wall Street Since 1990 – Tyler Durden
In a world where Wall Street admits that it increasingly gets its most precious commodity – information – from social networks such as Twitter, Reddit and Facebook…
… it got us thinking about the changing nature of information flow in finance and how it may be impacting markets.
Conveniently, in a recent note from DataTrek’s Nick Colas, the former SAC portfolio manager takes a big picture look at just this topic, writing that when he started covering stocks in 1991 back at Credit Suisse, there was no Internet, no smartphones, no “Big Data”, no quarterly earnings conference calls, and no real regulation around how companies disseminated potentially market-moving information. All those things exist today, and according to Colas, the fact that the world’s financial decision-makers are flooded with instant (and constant) information may well explain part of why US stocks trade at such premiums to prior cycles. But, as Colas also notes, more information can also make investors overconfident.
***Why households with low-interest savings hold expensive debt – John Gathergood, Arna Olafsson
Households’ tendency to hold liquid savings at low interest rates and, at the same time, revolving debt at high interest rates is a long-standing puzzle in household finance. This pattern of behaviour has been observed across many countries, on a variety of revolving credit products including credit cards and overdrafts. Using increasingly available transaction-level data sourced from financial services providers, this column shows that co-holding is often short-lived, and may be best explained by consumers keeping separate ‘savings’ and ‘debt’ accounts earmarked for different forms of expenditures, a form of mental accounting.
Consumers Pay Whatever it Takes, Vehicle Prices Go Nuts, Dealers Make Record Profits, Whole Mindset Changed. Is This Inflation Temporary? – Wolf Richter
The used vehicle price spike will subside, partially, but the psychological aspects of inflation have set in.
Ford announced on Wednesday that it would cut production at eight US assembly plants in July and into August due to the semiconductor shortage. These production cuts will hit numerous vehicle lines, including the crucial F-150. Due to an “unrelated part shortage,” production of the Ranger mid-size pickup and the Bronco SUV will also be down for three weeks in July. This comes after the company said in April that it would cut its global production by about 50% in Q2, which just ended.
Other automakers have been struggling too with supply chain entanglements and the semiconductor shortage. And the supply crunch continues. Over the next few days, we’re going to see auto sales for June. Auto sales to retail customers had been strong earlier in the year, but June sales were handicapped by widespread inventory shortages of hot models.
When Expedient “Saves” Become Permanent, Ruin Is Assured – Charles Hugh Smith
The Fed’s “choice” is as illusory as the “wealth” the Fed has created with its perfection of moral hazard.
The belief that the Federal Reserve possesses god-like powers and wisdom would be comical if it wasn’t so deeply tragic, for the Fed doesn’t even have a plan, much less wisdom. All the Fed has is an incoherent jumble of expedient, panic-driven “saves” it cobbled together in the 2008-2009 Global Financial Meltdown that it had made inevitable.
The irony is the only thing that will still be rich when the whole rotten, corrupt, fragile financial system of illusory stability collapses in a heap of runaway instability. The irony is that the Fed’s leaky grab-bag of expedient “saves” was not designed to ensure systemic stability, though that was the PR cover story.
The Fed’s leaky grab-bag of expedient “saves” had only one purpose: save the fat-cats, skimmers, scammers, fraudsters and embezzlers who had gotten rich off the Fed’s cloaked transfer of wealth: the purpose of all the 2008-2009 extremes was not to impose the discipline required to truly stabilize the financial system; the purpose was to elevate moral hazard– the separation of risk from the consequences of risk–to unprecedented heights, backstopping every skimmer, scammer, fraudster and embezzler from well-deserved losses as the entire pyramid of fraud collapsed under its own enormous weight of risky bets gone bad.
New patterns of profit shifting emerge from country-by-country data – Paolo Acciari, Barbara Bratta, Vera Santomartino
G7 finance ministers recently committed to a global minimum tax rate for multinational enterprises. A key objective is to reduce profit shifting by large enterprises. This column uses new microdata to show how the profit-shifting response to tax rate changes depends on tax rate differentials. Profit shifting is significantly more sensitive to tax rate changes in countries with tax rates lower than the world average, and less sensitive in countries close to the average. As a result, policies aimed at guaranteeing a minimum level of taxation may be effective and efficient in curbing profit shifting by reducing tax rate differentials.
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