Economische aanraders 06-10-2019
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 Most Dangerous Idea in Central Banking – Scott A. Burns
In a recent Vox column, Matt Yglesias offers an extensive critique of former New York Federal Reserve President William Dudley’s controversial article. Dudley has argued that the Fed should “refuse to play along” with President Trump’s trade war and conduct monetary policy to reduce the president’s odds of re-election. Yglesias rightly condemns Dudley’s proposal as venturing into “fairly outrageous territory.” But he fails to make a principled case for independent monetary policy.
Instead, Yglesias focuses on what he views as the real threat posed by the Fed both historically and today — that it sits idly by while Republicans run up huge deficits yet stonewall Democrats when they try to enact big-ticket policies. “Historically, disciplinary monetary policy has been used by central banks to constrain the left,” Yglesias argues. Throughout its history, the Fed has let “Republicans explode the deficit” with tax cuts, then “pressured Democrats to narrow it.”
Unconventional monetary policy operations: The upside for central bank balance sheet risks – Diego Caballero Orduna, Bernd Schwaab
A bank’s balance sheet lists its assets, liabilities and shareholder equity, each of which is subject to risk. This column uses the examples of the announcement of the ECB’s Outright Monetary Transactions programme and the first very-long-term refinancing operation allotment to show that, in exceptional circumstances, a central bank can remove illiquidity-related credit risk from parts of its balance sheet by extending the scale of its operations.
Understanding Why the Green New Deal Won’t Really Work – Gail Tverberg
The reasons why the Green New Deal won’t really work are fairly subtle. A person really has to look into the details to see what goes wrong. In this post, I try to explain at least a few of the issues involved.
None of the new renewables can easily be relied upon to produce enough energy in winter.
The world’s energy needs vary, depending on location. In locations near the poles, there will be a significant need for light and heat during the winter months. Energy needs will be relatively more equal throughout the year near the equator.
Solar energy is particularly a problem in winter. In northern latitudes, if utilities want to use solar energy to provide electricity in winter, they will likely need to build several times the amount of solar generation capacity required for summer to have enough electricity available for winter.
World wide currency – Pierpaolo Benigno, Linda Schilling, Harald Uhlig
The governor of the Bank of England, Mark Carney, recently argued that more thought should be given to creating a global electronic currency. This column, part of the Vox debate on the future of digital money, looks at the challenges for the world economy of adopting a ‘world wide currency’, using a two-country world in which each country has its own national currency and national central bank, but where there is also a global currency in circulation. It suggests that Carney’s wish may be granted, but sooner than expected and in a different manner.
Low & Negative Interest Rates Get Broadsided by the BIS – Nick Corbishley
They undermine banks. To dodge the fallout, banks chase yield, buying stuff like CLOs, instead of lending. When loans go bad, banks may “evergreen” them.
Prolonged low interest rates are having significant negative effects on banks’ core business and role in the economy, the Bank of International Settlements (BIS) warned in a new paper, just weeks after the ECB reduced its policy rate deeper into the negative after a tumultuous meeting where ECB president Mario Draghi steamrollered a veritable palace revolt.
According to the BIS paper, which is based on a sample of all major international banks over a 22-year period from 1994 to 2015, if the benchmark interest rate falls from 3% to 0%, the average net interest margin declines from 1.42% to 1.31% of total exposure. That’s in the short term. The long-term effect is many times larger owing to the high auto-correlation of the net interest margin. Banks’ average interest income falls from around 60% of total income to around 40%.
Will the Drive to Devalue the Dollar Lead to a Plaza Accord 2.0? – Ronald-Peter Stöferle
The Lead-Up to the Plaza Accord
To understand the Plaza Accord, one has to look back to August 15, 1971. On this day Richard Nixon closed the gold window. This step de facto ended the Bretton Woods system, which had been created in 1944 in the New Hampshire town of the same name and was formally terminated in 1973. The era of gold-backed currency was well and truly over; the era of flexible exchange rates had begun. Without a gold anchor, the exchange rate of every currency pair was supposed to be driven exclusively by supply and demand. National central banks — and indirectly governments as well — were at liberty to make their own decisions, free of the tight restrictions imposed by a gold standard, but they had to bear the costs of their decisions in the form of the devaluation or appreciation of their currencies. While a gold-backed currency aims to impose discipline on nations, a system of flexible exchange rates enables national idiosyncrasies to be preserved, with the exchange rate serving as a balancing mechanism.
The Reasons For America’s Difficult Path Ahead Remain – Bruce Wilds
In the early part of 2018, a piece appeared on this site titled; “The Three Reasons America Faces A Difficult Path Ahead.” These three major obstacles are and will most likely remain solidly carved into our path forward. Regardless of record new highs in the stock market or any positive predictions, there is no guarantee as to how long this growth trend will go. When easy money is the fare of the day leverage is generally growing at a rapid pace. While leverage tends to drive a market higher, when it is on the rise it also has exactly the opposite effect, when the market is falling only it often works faster and magnifies the fall. The three key challenges that America must confront and deal with are explored below. Our failure to deal with them will impact and bode poorly upon our ability to maintain our position in the world.
The politicization of climate: Whitewashing interventionism – Daniel Lacalle
If we want a true alternative that improves the environment, reduces emissions and strengthens global welfare, it will only come from the free market. Historical evidence and economic incentives show us that interventionism and socialism never protect the environment, they only use it as a subterfuge to increase control of the economy while subsidizing polluters under the excuse of “employment” using the term “strategic sectors.”
Interventionism, in fact, puts all obstacles to technological innovation and disruptive developments: First, because technology and competition reduce government power when it comes to price formation and economic vertebration of society, picking winners and when, where and how to spend. Second, because disruptive technology is disinflationary and does not allow governments to fill bloated companies with political jobs without content in inefficient conglomerates controlled by political power.
The fundamental reason why interventionism will never defend the environment and innovation is that it detests competition and technology and competition weaken its power.
Markets Rely on Accurate and Honest Information — But Governments Want the Opposite – Gary Galles
Have you ever worked with people you couldn’t trust to tell you the truth? It isn’t pretty. Without the ability to rely on what you’ve been told (or that you’ve been told everything relevant), effective cooperation at almost every margin of choice is reduced, because its foundation has been undermined. A new episode of To Tell the Truth must precede every decision.
That problem of effective cooperation is exponentially increased when we expand our horizons to the many margins of choice at which people in society, the vast majority of which do not even know each other, interact. In a modern economy, all of us are dependent on multitudes of strangers not just for our prospering, but our survival.
US Dollar Status as Global Reserve Currency Slides – Wolf Richter
Chinese Renminbi struggles forward in slow micro-steps.
If the US dollar loses its hegemony as a global reserve currency, it would be a sea change globally, and specifically for the US economy. Today, we got the next installment in that saga, via the IMF’s quarterly COFER data on foreign exchange reserves.
Total global foreign exchange reserves in all currencies ticked up 1.1% from the first quarter, to $11.7 trillion. US-dollar-denominated exchange reserves rose only 0.7% to $6.79 trillion, and their share of total global foreign exchange reserves fell to 61.63%, down from 61.86% in the prior quarter.
The Difference Between Regulated Markets and Free Markets – Per Bylund
Who are the worst enemies of free markets? Probably (and sadly) proponents of markets. It is as unfortunate as it is sad that market advocates tend to refer to anything that works in the economy as due to ‘free markets’ whereas anything that is not good isn’t.
That’s not quite how it works.
Market exchange happens even if markets are not free.
There was trade, both ‘legit’ and black market, in the USSR. Markets work because, in any uncoerced exchange, all parties to the trade gain. These are markets, simply put, whether or not they are regulated, taxed, restricted, or in other ways tainted and distorted. It’s always the case that exchanges that are voluntary make parties better off. But the exchanges are contingent on the institutional framework within which they take place.
Silicon Valley Is Slowing, Whether for a Quick Breather or Extended Time-Out, I Have No Idea (Guessing the Latter) – John McNellis
Strongest argument in favor of an air-walking economy is WeWork, Uber, Lyft, and other unicorns destined to never make a dime. Throwing billions of dollars at these losers is a recessionary harbinger.
It is a well-established law of cartoon physics that characters may walk on air as long they are unaware of doing so. Once Bugs Bunny realizes he’s airborne, however, gravity reasserts itself, and he plummets to earth. Is today’s economy Wile E. Coyote? Is it unconsciously aloft or, perhaps more interestingly, is it the reverse? Are we on stable ground that just feels like quicksand?
The strongest argument in favor of an air-walking economy is WeWork. Or Uber or Lyft or any of the other unicorns destined to never make a dime. Throwing billions of dollars at these losers is a recessionary harbinger, calling to mind Alan Greenspan’s “irrational exuberance” warning. (A warning the political Greenspan failed to heed himself). I decided I was finished trashing WeWork last year, but the Wall Street geniuses and the business press are at it again and once again wrong about the company.
The emergence of Big Tech in financial intermediation – Jon Frost, Leonardo Gambacorta, Yi Huang, Hyun Song Shin, Pablo Zbinden
BigTech firms are entering finance, and their access to massive amounts of information may give them an edge in areas like credit assessment and beyond. This column assesses the economic forces behind the adoption of Big Tech services in finance. It shows that BigTech lenders thrive in countries with less competitive banks and less strict regulation, and that they have an information advantage from the use of big data and machine learning.
“Corporate Social Responsibility” Only Strengthens Corporate Power over the Public – Rob Weir
“Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans’ ” was the headline of a recent statement put out by this “association of chief executive officers of America’s leading companies.” The statement went on to say:
Since 1978, Business Roundtable has periodically issued Principles of Corporate Governance. Each version of the document issued since 1997 has endorsed principles of shareholder primacy – that corporations exist principally to serve shareholders. With today’s announcement, the new Statement supersedes previous statements and outlines a modern standard for corporate responsibility.
Putting aside the fact that neither in logic, nor in law, nor in morals does an individual CEO, let alone the lobbying arm for CEOs, have the ability to “redefine the purpose of a corporation,” it does prompt the question of what the purpose and responsibilities of a corporation actually are, and who decides this.
***We cannot build our way out of inequality – Andrés Rodríguez-Pose, Michael Storper
A dominant view in urban economics suggests that the solution to the housing crisis of major cities is to relax zoning and other planning regulations. This column challenges this position, arguing that there is no clear and uncontroversial evidence that housing regulation is a principal source of differences in home availability or prices across cities and that these issues are more linked to rising inequalities in the geography of employment, wages and skills. Blanket changes in zoning are unlikely to increase affordability for lower-income households in prosperous regions, but would increase gentrification without appreciably decreasing income inequality.
Greece Never Really Recovered from Its Financial Crisis – Petropoulos Delis Fotios
Now that Greece’s bailout program has ended, what are the prospects for economic growth and development in Greece? These two definitions are different, as economic growth is the increase of income while economic development includes factors as increased schooling, life expectancy etc. However, economic growth is mandatory for economic development. There are many theories in the international literature about economic growth. The fundamental theory is Robert Solow’s that combines two variables — capital and labor — but there are many other such as the theories of Romer and Lucas which focus on human capital and innovation. I am going to examine investment, savings and labor as variables of economic growth in Greece scrutinizing data of Greece from the latest years before I reach a conclusion.
Could Pricey Urban Meccas become Crime-Ridden Ghost Towns? – Charles Hugh Smith
As the exodus gathers momentum, all the reasons people clung so rabidly to urban meccas decay.
If there is any trend that’s viewed as permanent, it’s the enduring attraction of coastal urban meccas: despite the insane rents and housing costs, that’s where the jobs, the opportunities and the desirable urban culture are.
Nice, but like many other things the status quo considers permanent, this could reverse very quickly, and all those pricey urban meccas could become crime-ridden ghost towns. How could such a reversal occur?
***Price Fixing in Ancient Rome – Robert L. Scheuttinger, Eamonn F. Butler
[This article is excerpted from the book Forty Centuries of Wage and Price Controls: How Not to Fight Inflation, chapter 2: “The Roman Republic and Empire.”]
As might be expected, the Roman Republic was not to be spared a good many ventures into control of the economy by the government. One of the most famous of the Republican statutes was the Law of the Twelve Tables (449 B.C.) which, among other things, fixed the maximum rate of interest at one uncia per libra (approximately 8 percent), but it is not known whether this was for a month or for a year. At various times after this basic law was passed, however, politicians found it popular to generously forgive debtors their agreed-upon interest payments. A Licinian law of 367 B.C., for instance, declared that interest already paid could be deducted from the principal owed, in effect setting a maximum price of zero on interest. The lex Genucia (342 B.C.) had a similar provision and we are told that violations of this “maximum” were “severely repressed under the lex Marcia.” Levy concludes that “Aside from the Law of the Twelve Tables, these ad hoc or demagogic measures soon went out of use.”
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