Economische aanraders 06-06-2021
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 Abuse of Public Debt—and How It Sets the Stage for Economic Disaster – Daniel Fernández Méndez
The 2020–21 recession has been devastating for the global economy. It has been ninety years since the global economy last suffered through a recession of this magnitude (in the Great Depression). Nonetheless, it seems that the social effects of the current recession have not yet come about. The reason for this disparity between cold macroeconomic data and popular sentiment can be found in the enormous public spending by practically all of the countries in the world.1
In a previous article, we explored the enormous expansion of public debt in the world that resulted from the Great Lockdown of 2020
This article argues that exorbitant increases in public debt, such as those seen in 2020, are not free. It examines the potential economic effects of accumulating vast quantities of public debt.
The emerging fiscal union needs a solid foundation – Päivi Leino-Sandberg, Vesa Vihriälä
The EU’s response to the COVID-19-induced economic crisis has been aggressive, but not without criticism. This column, part of the Vox debate on euro area reform, summarises some of the shortcomings of the way in which the EU’s Next Generation programme may play out, and suggests short- and longer-term considerations that need to be made in order to ensure that the programme strengthens the Union in the long run.
Entrepreneurs Are Motivated by Profit, Not Risk – Frank Shostak
According to modern portfolio theory (MPT), financial asset prices fully reflect all available and relevant information, and any adjustment to new information is virtually instantaneous.
For instance, if the central bank raises interest rates by 0.5 percent, and if market participants anticipated this action, asset prices will reflect this expected increase prior to the central bank raising interest rates. Note that once the central bank lifts the interest rate by 0.5 percent, this increase will have no effect on asset prices, since it is already embedded in asset prices.
Should, however, the central bank raise interest rates by 1 percent, rather than the 0.5 percent expected by market participants, then the prices of financial assets will react to this additional increase.
“Cash Has Been Trash for Years, But Soon it May Be the Only Haven for Investors”: Bill Gross is at it Again – Wolf Richter
“Inflationary pressures pose increasing price risks to Treasuries & stocks” as the Fed will react.
Bill Gross is at it again, now retired from Janus Henderson Investors which he joined after having left Pimco, which he co-founded. But some of the things he said in his editorial in the Financial Times nailed it, and they’d be funny, if they weren’t so serious.
The long-ago deposed bond king starts out that way: “The only bond kings and queens over the past half-century since credit was unleashed from its gold standard in the early 1970s have been the US Federal Reserve chairs.”
Understanding how central banks use their balance sheets: A critical categorisation – Stephen Cecchetti, Paul Tucker
Since the Global Crisis, the size of central bank balance sheets has grown significantly. Traditional goals of price and financial stability are insufficient for assessing the success of modern central banking operations. This column introduces a new framework for categorising and understanding central bank balance sheet operations. Monetary policy decisions are separated from facilities for lender of last resort, market maker of last resort, providing selective credit, and ensuring emergency government financing. To maintain legitimacy and accountability, central banks should formally distinguish these operations by clearly setting out their purposes, objectives, and constraints.
***A Couple Things About Inflation – Charles Hugh Smith
The higher they push phantom “assets” based on exponential increases in leverage, the greater the air gap between essential tangibles and fantasy.
Inflation is in the news, but there are a couple of things about inflation that don’t get much coverage. Let’s start with the trope that inflation is always a monetary phenomenon. Actually, no.
When nutrient-rich soil and fresh water reserves are depleted, crop yields decline and as human population and appetites for animal protein soar, food becomes scarce. When food becomes scarce, prices rise accordingly. It doesn’t matter what you do with money supply, prices will rise in relation to everything used as “money:” gold, shells, paper with colorful pictures printed on it, giant stone disks, quatloos, cryptocurrencies, etc.
You could eliminate “money” entirely and the relative cost of food would rise even in a barter-only system.
What few seem to grasp is that there is a hierarchy of needs that ruthlessly separates “needs” from “wants,” and the value of “wants” quickly drops to zero in real scarcities. When you’re hungry, I mean really hungry, the value of your yacht, collectible muscle car, NFT, etc. falls to zero if those with food have zero interest in your “valuables.” An ounce of gold for an egg? It all depends on what’s actually a need.
***It is Hard to Resist the Dopamine of Collective Euphoria in the Housing Market – Kara Cox
Individual investor results may vary.
Having lived both in the Bay Area during the dotcom explosion and NYC during the MBS explosion, I know a thing or two about financial bubbles. Or at least how they feel in the moment: akin to being at a frat party at 2 am. Everyone is spewing garbage but thinks they are a genius, and the only way to make sense of it all is to drink up or take yourself home.
It is hard to resist the dopamine of collective euphoria. It is only in retrospect in which everyone saw it coming, knew it couldn’t last, etc. We didn’t, for the most part. It is easy to look back with derision about the Dutch and their bout with overpriced tulips, but is that so much different than what happened with Pets.com? Or when folks rushed to own homes in 2005?
Data presented on the major realty sites tends to focus on the gains of the last ten years, more or less. This is handy to their purpose…making a home seem like a great investment, on top of providing other practical and emotional benefits. The last ten years have been great!
FDI is in big trouble: Insights from the 27th Global Trade Alert report – Simon Evenett, Johannes Fritz
Properly guided, foreign direct investment has transformed the prospects of certain firms, sectors, regions, and even economies. This column introduces the 27th Global Trade Alert report, which looks back over the past quarter of a century to put current FDI dynamics in perspective, assesses the degree to which governments continue to favour FDI, and points the spotlight on the limited contribution of FDI to advancing sustainable development in emerging markets.
Modular Construction: “Not there yet” – John McNellis
“There is only one way for a modular project to go right, and a million ways to go wrong.”
Watch enough construction and it may occur to you that things have scarcely changed since Ramses II’s building spree. Yes, we have cranes, forklifts, and electric saws, but so much of building still comes down to backbreaking labor: guys digging ditches, pushing wheelbarrows or swinging hammers. Wed this commonplace observation with our apparent need to disrupt and revolutionize every industry and your offspring is modular construction.
What is modular construction? It’s a method of construction, not a building type. It’s a matter of where rather than what. Instead of erecting a building on-site, most of a modular structure is built off-site. One assembles everything but a project’s foundation, exterior siding and roof in a factory a thousand miles away. It’s constructing an apartment building in individual modules—imagine freight containers—in, say, Boise, trucking them to your site, easing them onto your foundation and then screwing them in, side-by-side, and then stacking them floor-by-floor like a child’s building blocks.
Old risks in new clothes: The changing nature of capital flows – Cathérine Casanova, Beatrice Scheubel, Livio Stracca
Since the Global Crisis, the channels of capital flows have changed significantly. This column analyses key trends and underlying drivers of capital flows since the Global Crisis, including the policy trade-offs. It documents the increasing importance of market-based funding, a growing reliance on domestic currency liabilities, and a less stable foreign direct investment environment, particularly for emerging market economies. Although these changes create risks which should be managed, capital flows also present clear benefits for stimulating economic performance and efficiency.
***The Economics of the Extended Family: From Risk Management to Human Capital – Gor Mkrtchian
When we think of analyzing economic organizations, we generally think of firms and corporations.
But there is another organization that is just as critical to economic development: the extended family. Indeed, the advantages offered by this institution are numerous and include risk sharing, mutual aid, human capital building, social capital building, and resource complementarity and coordination.
Risk Sharing and Mutual Aid
One of the most important roles of the extended family is to act as a risk-sharing organization. Life is unpredictable. In a nuclear family separated from the extended family, the parents only have one another to rely upon. A single accident, sudden illness, job loss, etc. reduces half of the productive capacity of this unit and can spell disaster for both spouses and their dependent children.
Lower for longer – macroprudential policy issues arising from the low interest rate environment – John Fell, Tuomas Peltonen, Richard Portes
At the end of 2019 the European Systemic Risk Board General Board mandated a Task Force on Low Interest Rates to revisit the ESRB’s 2016 report on “Macroprudential policy issues arising from low interest rates and structural changes in the EU financial system”, assess subsequent developments, compare these to the risks identified in the report, and assess whether new sources of systemic risk have emerged. Furthermore, the Task Force was mandated to review progress in relation to the policy proposals in the earlier report, as well as propose possible new policy actions aimed at mitigating potential systemic risks. As this column discusses, the new report finds that the low interest rate environment continues to pose risks for financial stability. For instance, since 2016, search-for-yield behaviour has intensified in the banking and investment fund sectors, and some business models are proving unsustainable. To address these sources of risk and vulnerabilities, the report puts forward a wide range of policy options.
Re-evaluating the sources of the recent productivity slowdown – Ian Goldin, Pantelis Koutroumpis, François Lafond, Julian Winkler
Labour productivity is a key determinant in improving living standards. But in recent years, productivity has stagnated, if not declined, in many countries around the world. This column re-evaluates the various reasons as to why this might be, applying three criteria to the existing explanations for the slowdown. It finds that the slowdown in productivity can be attributed to numerous factors, ranging from mismeasurement to changes in trade patterns.
The Weird Phenomenon of “Labor Shortages” as Millions of People Who Could Work Are Not Working – Wolf Richter
A sign of how messed up the moving parts of the economy have become, amid massive excesses and distortions connected by malfunctioning gearing.
In an interview a few days ago that aired locally, the owner of an Italian restaurant in San Francisco – the restaurant scene is now vibrant in a different way than before – put her struggles with hiring on the table. The kitchen staff had come back, she said, but she had trouble hiring back the staff for the front of the restaurant, the wait staff, who are normally fairly well paid via tips.
She said that many of these people have other dreams. They were artists or writers or students or entrepreneurs, or whatever, and waiting tables wasn’t their career, it was just a way to make ends meet. And many of them had moved on during the pandemic or were using their unemployment benefits to push their dreams forward, rather than returning to restaurant work.
Global Steel Production: China Blows the Socks off the Rest of the World, US Production Plunges – Wolf Richter
China produced 57% of global crude steel, turned nearly all into finished steel products that it exported or used in domestic manufacturing and construction. The annual steel report is out.
Global production of crude steel – ingots, semi-finished products (billets, blooms, slabs), and liquid steel for castings – ticked up just 0.5% in the year 2020, to 1,878 million metric tonnes (Mt), according to the World Steel Association’s 2021 World Steel report today. The 0.5% gain came in two slices: China boosted production and gained a chunk of market share; the rest of the world lost production and market share.
The Origins of Keynesian Economics: How Did It Get So Popular? – Robert Blumen
The British Austrian economist W.H. Hutt was a great critic of Keynes’s economic theories. However, his speculations on why the New Economics revolution happened are even more fascinating. Hutt shows it to be a fundamentally dishonest undertaking. Keynes held a long-standing belief in inflation and public spending. His General Theory was the culmination of his search for an intellectual foundation on which to support his belief. Yet it was an unstable foundation. Had he stated his thesis in clear terms, it would have been seen as noncontroversial in some parts and in the rest untrue. The staggering complexity, deliberate obscurantism and “dialectical tricks” of The General Theory were part of a necessary stratagem of disguise.
At the time of publication of Keynes’s General Theory, the economy of the United Kingdom was in deep stagnation. Britain had been suffering from chronic levels of mass unemployment. Hutt diagnosed the situation as a pricing problem. Many wages were fixed above market-clearing levels. This came about because a deliberate monetary deflation had been instituted to compensate for the wartime inflation. This was done in order to maintain gold convertibility of the British pound at the prewar gold backing. However, some segments of the labor market had fixed wages at higher nominal levels which perhaps were above market clearance before and were surely much more so after the rollback. Wage rigidity was primarily the doing of labor unions through strike threats and organized coercion. Generous welfare incentive payments, which encouraged the idle to remain unemployed, were a contributing factor.
Fiscal austerity intensifies the increase in inequality after pandemics – Davide Furceri, Prakash Loungani, Jonathan D. Ostry, Pietro Pizzuto
In the aftermath of past pandemics, fiscal policy played an important role in reducing or amplifying income inequality. This column predicts the likely distributional effects of Covid-19 by analysing evidence from five previous outbreaks (SARS, H1N1, MERS, Ebola, and Zika). It finds that severe austerity measures were associated with inequality increases three times greater than expansive fiscal policy following a pandemic. Premature austerity is self-defeating from both a macro and an equity standpoint.
It Begins: The Fed Will Outright Sell its Corporate Bonds & ETFs – Wolf Richter
Another market support gets pulled away and turned upside down.
The Fed announced late Wednesday that it will unwind one of the most iconic bailout facilities of the Pandemic era, namely its holdings of corporate bonds, junk bonds, bond ETFs, and junk bond ETFs that it had purchased last year. The Fed said it will outright sell them.
The Fed’s tersely worded statement said that the bond and ETF sales “will be gradual and orderly, and will aim to minimize the potential for any adverse impact on market functioning by taking into account daily liquidity and trading conditions for exchange traded funds and corporate bonds.”
The facility, set up in a Special Purpose Vehicle (SPV) that the Fed calls Secondary Market Corporate Credit Facility (SMCCF), was iconic not because of its size, which was endlessly hyped in the media at the time as a $750-billion bond-buying giant though it never got close; but because of its previously forbidden nature.
The differing effects of globalisation on trade versus migration – Rebecca Freeman, John Lewis
Better communications, enhanced transport links, integration agreements between governments, and other factors have all helped increase global economic interconnectedness over the past few decades. This column compares a state-of-the-art gravity model for trade versus migration to reveal that there are in fact important differences in the evolution of globalisation over time on flows of goods versus people. For trade, the boost from free trade agreements declines the farther apart signatories are, but for migration the boost increases with distance between signatories. Further, while both border and distance frictions have declined for trade over time, this is not the case for migration flows.
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