Economische aanraders 05-12-2021
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.
Reflections on the Pure Theory of Money of Mr. J.M. Keynes – Friedrich A. Hayek
Introduction by Joseph T. Salerno
Friedrich A. Hayek was only thirty-two years old when he published this two-part article in Economica, at the time, the world’s leading English-language economics journal. The article is a review essay of John Maynard Keynes’s two-volume book, A Treatise on Money, published the previous year. Keynes, a generation senior to Hayek, was at the time the leading economist of the British Cambridge School and had already achieved world renown as a public intellectual. Keynes worked hard and long on his treatise, having written the first page six years before it was published. Keynes clearly intended the work to be his magnum opus, a dazzling leap forward in the theory of money based on “a novel means of approach to the fundamental problems of monetary theory.”
But Keynes’s reach was much, much longer than his grasp given his parochial and stunted training in economic theory—one course in economics and the study of Alfred Marshall’s clunky and disjointed textbook. Keynes’s Treatise never stood a chance. For the brilliant and courageous young Hayek was waiting, having already fully absorbed and integrated in his own work Mises’s monetary and business cycle theories, Böhm-Bawerkian-Wicksellian capital theory, and the general analytical approach of the broad Austrian school from Menger onward that maintained an unwavering focus on the interrelationship among all economic phenomena.
Inflation speculation – John H. Cochrane
I’m working madly to finish The Fiscal Theory of the Price Level. This is a draft of Chapter 21, on how to think about today’s emerging inflation and what lies ahead, through the lens of fiscal theory. (Also available as pdf). I post it here as it may be interesting, but also to solicit input on a very speculative chapter. Help me not to say silly things, in a book that hopefully will last longer than a blog post! Feel free to send comments by email too.
Chapter 21. The Covid inflation
As I finish this book’s manuscript in Fall 2021, inflation has suddenly revived. You will know more about this event by the time you read this book, in particular whether inflation turned out to be “transitory,” as the Fed and Administration currently insist, or longer lasting. This section must be speculative, and I hope rigorous analysis will follow once the facts are known. Still, fiscal theory is supposed to be a framework for thinking about monetary policy, so I would be remiss not to try.
Figure 1 presents the CPI through the covid recession. Everything looks normal until February 2021. From that point to October 2021 the CPI rose 5.15% (263.161 to 276.724), a 7.8% annual rate.
What happened, at least through the lens of the simple fiscal theory models in this book? Well, from March 2020 through early 2021, the U.S. government — Treasury and Fed acting together — created about $3 trillion new money and sent people checks. The Treasury borrowed an additional $2 trillion, and sent people more checks. M2, including checking and savings accounts, went up $5.5 trillion dollars. $5 trillion is a nearly 30% increase in the $17 trillion of debt outstanding at the beginning of the Covid recession. Table 21.1 and Figure 2 summarize. ($3 trillion is the amount of Treasury debt purchased by the Fed, and also the sum of larger reserves and currency. Federal debt held by the public includes debt held by the Federal Reserve.)
When Fiat Currency Stops Being Money – Daniel Lacalle
Most emerging and developed market currencies have devalued significantly relative to the United States dollar in 2021 despite the Federal Reserve’s aggressive monetary policy. Furthermore, emerging economies that have benefitted from rising commodity prices have also seen their currencies weaken despite strong exports. As such, inflation in developing economies is much higher than the already elevated figures posted in the United States and the eurozone.
The main reason behind this is a global currency debasement problem that is making citizens poorer.
Most central banks globally are implementing the same expansionary policies of the European Central Bank and the Federal Reserve System but the results are disproportionately hurting the poor as inflation rises, particularly in essential goods and services, while fiscal and monetary imbalances are increasing.
Many emerging economies have implemented a very dangerous policy of boosting twin deficits—fiscal and trade deficits—under the misguided idea that it will accelerate growth. Now growth and recovery estimates are coming down but monetary imbalances remain.
Best Buy Shares Plunge on Margin Pressures, “Organized Retail Crime”: A Look at Organized Retail Crime in the US and How Ecommerce Turned it into a Big Business – Wolf Richter
Stolen goods get sold to law-abiding Americans by third-party vendors on big ecommerce sites that profit from it. Legislation to control it struggles.
It’s a big profitable business across the US because the cost of the merchandise is zero: Organize a bunch of people via the social media, raid a store and and run out, arms-full of merchandise, and then sell this stuff into specialized distribution channels from where it gets sold by third-party vendors on some of the best-known ecommerce platforms in the US, such as eBay and Amazon and many others.
Shares of Best Buy [BBY] plunged 12.4% today after the company’s earnings call, during which it discussed a laundry list of headwinds and pressures on its gross profit margins, which, for US sales, fell 60 basis points to 23.4%, “primarily driven,” as CFO Matt Bilunas put it, by product damages and returns compared to last year, lower margins of services, and the infamous “inventory shrink.”
Bank leverage constraints and bond market illiquidity during the COVID-19 crisis – Johannes Breckenfelder, Victoria Ivashina
The onset of COVID-19 led to heightened uncertainty and a ‘dash-for-cash’, particularly in the mutual fund sector which faced fire sale pressure. Typically, banks trading securities absorb such pressure and support market liquidity, but regulation may limit their ability to do so. This column analyses the role of bank leverage constraints as an amplifier of bond market illiquidity. It concludes that leverage ratio regulation can have negative side effects by increasing bond market illiquidity in times of economic distress, suggesting that the optimal leverage ratio is procyclical.
***Africa’s Long History of Trade and Markets – Lipton Matthews
Market reforms in Africa can be thwarted because of propaganda asserting that markets are a Western import. Notwithstanding the currency of this belief, it is patently absurd. Markets flourished in Africa prior to colonialism, and wherever they are repressed, the result is social immiseration, as economist William Hutt points out in his pathbreaking study, The Economics of the Colour Bar. Merchants in precolonial Africa organized large-scale trading networks that spanned several regions.
According to Alberta O. Akrong (2019), the diversity of African trade transacted on land and waterways enhanced the continent’s accessibility to strategic resources. Like elsewhere, in precolonial Africa, Africans designed mechanisms to enable commerce. Gareth Austin in his research documents a litany of such institutions, including rotating credit facilities and secret societies. Chronicling the primacy of markets in precolonial West Africa, he offers a captivating account of trading networks:
The 2021 surge in inflation: A look at sticky prices – Javier G. Gómez-Pineda, Juan Manuel Julio, Julián Roa-Rozo
There is disagreement over whether the current inflation is here to stay. This column argues that sticky-price inflation, which focuses on components of the consumer price index with infrequent price changes, is particularly useful at the moment as it can help control for ongoing changes in the relative prices of goods and provides hints about future CPI inflation. In October 2021, monthly sticky-price inflation, partially corrected for base effects, was 5.3%. In turn, the CPI inflation forecast for October 2022 is 5.6% and highly uncertain.
***Why Inflation Is a Runaway Freight Train – Charles Hugh Smith
The value of these super-abundant follies will trend rapidly to zero once margin calls and other bits of reality drastically reduce demand.
Inflation, deflation, stagflation–they’ve all got proponents. But who’s going to be right? The difficulty here is that supply and demand are dynamic and so there are always things going up in price that haven’t changed materially (and are therefore not worth the higher cost) and other things dropping in price even though they haven’t changed materially.
So proponents of inflation and deflation can always offer examples supporting their case. The stagflationist camp is delighted to offer a compromise case: yes, there are both deflationary and inflationary dynamics, and what we have is the worst of both worlds: stagnant growth and declining purchasing power.
What’s missing in most of these debates is a comparison of scale: deflationists point to things like big-screen TV prices dropping. OK, fine: we save $300 on a TV that we might buy once every two or three years. So we save $100 a year thanks to this deflation.
Meanwhile, on the inflationary side, healthcare insurance went up $3,000 a year, childcare went up $3,000 a year, rent (or property taxes) went up $3,000 a year and care for an elderly parent went up $3,000 a year: that’s $12,000. Now how many big-screen TVs, shoddy jeans, etc. that dropped a bit in price will we have to buy to offset $12,000 in higher costs?
Poland’s Beef with the EU Shows the Dangers of Political Centralization – José Niño
Across the pond, Poland and the European Union find themselves deadlocked over a question about judicial primacy. In early October, Poland’s Constitutional Tribunal sparked controversy when it ruled that EU law does not supersede national legislation.
At stake in the EU-Poland legal dispute, was Poland’s decision in 2018 to rein in its judiciary and establish a disciplinary chamber to remove judges. Before these reforms were undertaken, the Polish judiciary was largely viewed as corrupt and inefficient, possessing vestigial features of the previous Communist order, when Poland was a member of the Warsaw Pact. What initially started out as a mundane domestic reform soon transformed into an international controversy.
The European Court of Justice (ECJ) took exception to Poland’s reforms and ruled that EU law takes precedence over Polish law. The ECJ’s ruling did not deter Poland, though. Back in March, Polish prime minister Mateusz Morawiecki brought the case before the Polish Constitutional Tribunal, subsequently leading to the Polish tribunal’s controversial ruling in October. Following the October ruling, the EU commission had choice words for Poland’s superior court and reaffirmed its EU-law-über-alles stance.
When Will Consumers Balk at Surging Prices? – Wolf Richter
That’s the big question. Looking for signs of widespread push-back but not finding much. Consumers pay whatever.
One of the bizarre factors that has driven the current surge in inflation – the worst in 30 years per CPI-U, the worst in 40 years per CPI-W – has been the sudden and radical change in the inflationary mindset among consumers and businesses.
We saw that in late 2020 and all year in 2021, when prices of new and used vehicles spiked in practically ridiculous ways. People are paying more for a one-year-old used vehicle than what a new vehicle would cost, if they could get it, and they’re paying many thousands of dollars over sticker for new vehicles.
Out the window is the ancient American custom of hunting for a deal. And yet, new and used vehicles are the ultimate discretionary purchase for the vast majority of buyers that can easily drive what they already have for a few more years. But they’re jostling for position to pay these ridiculous astounding prices. And there has been enough demand to keep inventories bare and prices soaring.
The US Misery Index Shows How Weak This Recovery Is – Daniel Lacalle
United States consumer confidence has plummeted to a decade-low in November. The University of Michigan’s consumer sentiment index fell to 66.8 in November, down sharply from the October figure of 71.7 and well below consensus forecasts of 72.4. Inflation is hurting consumers and the impact on daily purchases is more severe than what the Federal Reserve and consensus estimates may want to believe.
The Misery Index, which adds inflation and unemployment, is at 10.80 percent, the highest reading in a decade if we exclude the peak of covid-19 lockdowns, when the Misery Index reached 15.13 percent. These are Carter-era levels for the Misery Index and stagflation alert signs.
The so-called recovery has exchanged unemployment for inflation, leaving consumers fighting to make ends meet despite job growth.
Central banks on social media: The reception of ECB communication among experts and non-experts on Twitter – Michael Ehrmann, Alena Wabitsch
Monetary policy issues are discussed on social media by experts and also increasingly by non-experts, presenting a challenge to central banks using social media to communicate with their target audiences. This column analyses ECB-related tweets and finds that more subjective views and tweets expressed in stronger language are more likely to get retweeted, thereby shaping the tone of the virtual discussions. Both experts and non-experts are responsive to ECB communication – in most cases, information is simply relayed on Twitter, but there are also instances of controversial discussions being triggered.
***The Long Cycles Have All Turned: Look Out Below – Charles Hugh Smith
But alas, humans do not possess god-like powers, they only possess hubris, and so all bubbles pop: the more extreme the bubble, the more devastating the pop.
Long cycles operate at such a glacial pace they’re easily dismissed as either figments of fevered imagination or this time it’s different.
But since Nature and human nature remain stubbornly grounded by the same old dynamics, cycles eventually turn and the world changes dramatically. Nobody thinks the cyclical turn is possible until it’s already well underway.
Multiple long cycles are turning in unison:
1. The cycle of interest rates: down for 40+ years (last turn, 1981), now up for an unknown but consequential period of time.
2. The cycle of inflation / deflation: the 40-year period of low real-world inflation and rip-roaring speculative debt-asset inflation has ended and now an era of scarcity, real-world inflation and speculative debt-asset deflation begins.
DocuSign, Worth $46 billion at 4 p.m., Plunges 30% Afterhours as “the Environment Shifted More Quickly than We Anticipated” – Wolf Richter
At the tippy top of the greatest bubble ever, all kinds of stuff can happen.
Shares of DocuSign [DOCU], purveyor of eSignature services, collapsed by 30% in afterhours trading, from $233.82 a share to $164.50 a share in no time, taking its $46 billion in market capitalization down by about $14 billion. Since their peak in August, shares have plunged by 47%:
But shares didn’t collapse because the company had strung together a perfect score of annual losses during its four years as public company on top of the years before it went public. With today’s earnings report for Q3 – another loss – it is on track to perpetuate its perfect record of losses for the current year.
We’re All Talking about Inflation, but Deflation May Also Be on the Way – Frank Shostak
Most recent data continue to show a visible acceleration in “price inflation,” with the yearly growth rate of the US Consumer Price Index (CPI) rising to 6.2 percent in October from 5.4 percent in September and 1.2 percent in October of last year—its highest level since December 1990.
Most experts seem to be surprised by the massive increase in the momentum of the CPI in October. Based on the definition of inflation as increases in the money supply and not increases in prices, the sharp increase in the yearly growth rate of the CPI is predominantly on account of past massive increases in money supply.
Propagation and amplification of local productivity spillovers – Xavier Giroud, Simone Lenzu, Quinn Maingi, Holger Mueller
It is widely believed that the productivity gains from place-based policies are geographically highly localised. This column argues instead that productivity spillovers from local place-based policies may propagate far beyond the initial target region to the entire economy, through the plant-level networks of multi-region firms. But while these productivity spillovers amplify the aggregate welfare gains from local place-based policies, they widen economic disparities between individual workers and regions in the economy.
The Bank of Canada’s Failed Mission to “Preserve the Value of Money” – Lee Friday
In Canada, inflation hit 4.7 percent in October, and is expected to go even higher. According to a recent survey, 46 percent of Canadians are struggling to feed their families because of the rising cost of living. Perhaps they are also struggling to understand the logic of the Bank of Canada’s (BOC) mission statement: “We work to preserve the value of money by keeping inflation low and stable.”
That’s the BOC’s objective, but it’s impossible to achieve. Preserve means to maintain something in its original state, and the only way to preserve the value of money is to keep inflation at 0 percent, not low and stable, as the BOC illogically claims. According to the BOC’s own inflation calculator, the Canadian dollar has lost 22 percent of its value since 2010, and 81 percent of its value since 1990. Given its perpetual failure to achieve its stated goal, why does the BOC continue to exist?
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