Economische aanraders 07-07-2019
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.
How Monetary Policy Leads To Destruction Of The Middle Class And Rise Of Populism – Alexey Yeremenko,
Austrian bonds with maturity in 2017 were placed at sub 1.2% yield to maturity at the time when European swaps market started assigning a significant probability of further rate cuts by the ECB after Mario Draghi’s dovish comments at the ECB forum in Sintra. Dr. Draghi’s main argument was an absence of inflation in Eurozone.
As a consumer living in a Eurozone country, I don’t feel like that inflation is hovering around an official 1% estimate. Fair enough, my consumption basket might be different from the one, which is considered to be an average. Still, there are plenty of people living in the Eurozone that share exactly the same sentiments. Either we are all wrong, or alternatively, the Harmonized Index of Consumer Prices (HICP) reported by the ECB is not an accurate measure of inflation for consumers living in the EU. The biases in estimation of HICP have been well known for a long time. If consumer inflation is indeed not accurately estimated, that might well explain observed social phenomena in some of the larger European economies such as: the yellow vest movement in France, the five star movement in Italy , the rise of German nationalist sentiment, and the conundrum that is Brexit. These actions, which can be ascribed to a feeling of disenchantment of the European middle class, may be indicators of inaccurately estimated consumer inflation.
Why does this happen?
Forget the G20, global manufacturing recession is here – Daniel Lacalle
The G20 summit has not generated unexpected or significant headlines and, of course, is not a catalyst for a relevant change in the global economic trends. The United States and China have only agreed to postpone tariff increases, but no real trade agreement has been reached.
If we look at the last G20 meeting conclusions, nothing has really improved. Plans to introduce new tariffs are delayed, and the result is exactly what happened in the previous G20. The real news is the evidence of a manufacturing recession.
Markets have reacted strongly in a relief rally because the trade dispute did not get worse. The safest assets, such as gold, fell while the stock markets rose despite a widespread disappointment in manufacturing PMIs. And therein lies the danger. Many investors are betting again on monetary policy as the only factor to drive markets and risky asset valuations higher.
Low Price Inflation Means the Fed Will Retreat to Low Rates and Easy Money – Frank Shostak
A softer increase in the personal consumption price index (PCEPI) adjusted for food and energy has likely prompted Fed policy makers to hint about a cut in the policy interest rate in the months ahead. The yearly growth of the PCEPI adjusted for food and energy, or the core PCEPI stood at 1.6% in April against 1.9% in April last year — strongly below the 2% so-called inflation rate target that was set by the Fed in 2012.
Based on the lagged money supply (AMS) growth rate, I suggest the annual growth of the core PCE price index is likely to be subdued during this year before falling sharply in 2020-21 (see chart).
If the forecast is right, it is quite likely that the Fed will attempt to counter this strong decline in the growth rate of the price index by loosening its monetary stance.
Digital currency areas – Markus K Brunnermeier, Harold James, Jean-Pierre Landau
Thanks to digitalisation, we now can hold money on our mobile phones and transfer wealth in real time to almost every corner of the world. Currencies can be swapped within milliseconds on smart phones and people can hold many currencies simultaneously in digital wallets. This column considers how digitalisation will affect the international monetary system, arguing that a new kind of currency area will emerge, held together by digital interconnectedness. These digital currency areas will cut across borders, increase currency competition and, in the process, may redefine the international monetary system.
America’s Record-Long “Expansion” Was Just The Rich Getting Richer As The Middle Class Died – Tyler Durden
On July 1, many – us included – wrote lengthy articles, pointing out that the longest US economic expansion in history is now a fact.
Sadly, when peeling back the layers of the centrally-planned onion, the reality is far less euphoric, and as Reuters writes today, this historic expansion – mostly of asset prices – achieved just one thing: it made the rich richer while crushing the middle class, with Reuters reporting that the number of billionaires in the United States has more than doubled in the last decade, from 267 in 2008 to 607 last year.
John Mathews, Head of Private Wealth Management and Ultra High Net Worth at UBS said: “The rich have gotten richer and they’ve gotten richer faster. The drive or the desire for consumption has just gone upscale.”
What’s Left to Monetize? – Charles Hugh Smith
What’s left to monetize? It appears the answer is “very little.”
Advertising has always monetized consumers’ time and attention, what we call engagement today. Newspapers and periodicals publish advertisements, radio/TV networks and stations air adverts, movie theaters run trailers/ads, billboards occupy our mental space while driving and websites and apps post adverts. The more media you consume, the more adverts you see/hear, and the more time you spend consuming media, the greater your exposure to advertising.
Monetizing our time and attention has a long history, as does the monetizing encroachment on what was once private time / attention. Time spent on the telephone escaped monetization until the advent of telemarketing, a particularly invasive and galling conquest of what was once a private domain. Now thanks to voicemail and robo-calling, our phones are increasingly the domain of intrusive monetization. (Is anyone else getting endless voicemails pitching services in Mandarin Chinese?)
Phony Economic Growth Stats Conceal Deep Problems on Main Street – Antony P. Mueller
We live not only in a time of fake news but also in the era of fake economic growth. The performance of the economies of the industrialized countries since 2010 is a prominent case of deceptive economic growth. This economic recovery is not the result of a strengthening of the productive forces of the economy, but is due to a massive expansion of liquidity. Central banks created a monetary avalanche that has gone mainly into the financial markets and has become a source of deception for investors. In real terms, the economy has not advanced very much since the financial crisis of 2008. The valuation of financial assets has decoupled from the real economy.
And the US Dollar’s Status as Global Reserve Currency? – Wolf Richter
Renminbi gains, but in painfully slow micro-steps. Dollar & euro combined share slides.
How long can the US dollar maintain its status as the global reserve currency and as global hegemon? That’s a question that comes up a lot, particularly among people who’d like to see it knocked off its perch. So here we go.
Total global foreign exchange reserves in all currencies ticked up to $11.4 trillion in the first quarter 2019, according to the IMF’s just released COFER data. USD-denominated exchange reserves rose to $6.74 trillion, with their share of global foreign exchange reserves ticking up to 61.8%. These are USD-denominated financial assets (US Treasury securities, corporate bonds, etc.) that central banks other than the Fed are holding in their foreign exchange reserves. The Fed’s own holdings of USD-denominated assets, such as its Treasury securities and Mortgage-Backed Securities acquired as part of QE, are not included in “foreign exchange reserves.”
Distortion: The Most Deceitful Time In A Cycle Is The End – Sven Henrich
This week we entered the Sell Zone as I called it last weekend. Overnight today $ES hit nearly 3004 and is currently 23 handles lower on the news that the latest NFP report beat while unemployment ticked slightly higher. Whether the sell is now in full swing or more highs are still to come is an open question, after all it’s like arguing with drunks at the bar, you never know what they’ll do next and how far they take the binge. But note what we’re witnessing here is historic but not unprecedented.
The most deceitful time in a cycle is the end of a cycle. Unemployment is low & stock markets keep making new highs despite underlying signals showing reasons for concern which are largely ignored by investors, namely bond yields sinking, yield curves inverting, growth slowing, participation waning, internals weakening. And when that happens new highs may prove to be a great selling opportunity.
The Phillips curve is still dead – John H. Cochrane
Greg Mankiw posted a clever graph a month ago, which he titled “The Phillips Curve is Alive and Well.”
No, Greg, the Phillips curve is still as dead as Generalissimo Franco.
The lines, in case you can’t see them are the employment-population ratio 25-54, and the average hourly earnings of production and nonsupervisory employees. Wait a minute, the Phillips curve, as it appears in contemporary macroeconomics, is a relation between inflation, a coordinated rise in prices and wages, not real wages or hourly earnings, and unemployment or the output gap, not the employment-population ratio. How does the traditional Phillips curve look?
Except for one little blip in the depths of the 2009 recession. The Phillips curve is dead. (Long live the Phillips curve, the crowd sings nonetheless.) Inflation trundles along, ignoring unemployment or the output gap.
The global capital flows cycle and its drivers: Not only a US monetary policy story – Maurizio Michael Habib, Fabrizio Venditti
There is global cycle in capital flows that is intimately connected to global risk. This column argues that, contrary to common wisdom, US monetary policy is not the only factor, or even the main factor, behind global risk and this global cycle. Financial shocks matter more than US monetary policy. Domestic policies may still mitigate the cycle of global capital flows at the country level.
***America’s Concealed Crisis: Fifty Years of Economic Decline, 1969 to 2019 – Charles Hugh Smith
If we consider the long term, it’s clear America’s economy and society have been declining for the average household for 50 years.
What if the “prosperity” of the past 50 years is mostly a statistical mirage for the bottom 80% of households? What if whatever real gains (adjusted for real-world loss of purchasing power) accrued only to the top of the wealth-power pyramid, those closest to financial and political power? What if the U.S. economy and society shifted from “everybody wins” to “winner takes all” or at best, :winner take most”?
These are not “what if”, they’re reality. The working class, which as I have recently noted, now comprises the entire working populace other than the upper-middle class Misplaced Pride: Most of the “Middle Class” Is Actually Working Class (June 14, 2019), has lost ground over the past 50 years, from 1969 to the present.
The keys to understanding the concealed crisis of decline are purchasing power relative to wages/earnings–how many goods and services can wages buy? For the average American household, wages have risen modestly while the purchasing power of those wages has plummeted.
The economic geography of sovereignist Europe – Gianmarco Ottaviano
Economic geography strikes back. After a couple of decades of easy talk about the ‘death of distance’ in the age of globalisation, the promise of a world of rising living standards for all is increasingly challenged by the resilience of regional disparities within countries. As long as many people and firms are not geographically mobile – and those who are tend to be the most skilled and productive – easier distant interactions can actually strengthen rather than weaken agglomeration economies. Recent electoral trends in Europe can be understood to a surprisingly large extent from this angle.
Fed Sheds $38 Billion in Treasuries and MBS in June, Dumps MBS at Record Pace, Exceeding “Cap” for First Time – Wolf Richter
Where is the Fed’s “U-Turn” that Wall Street promised us?
In June, the Fed shed Treasury securities at the slower pace announced in its new plan for QT, but it dumped Mortgage Backed Securities (MBS) at the fastest rate since the QE unwind started, breaching its “up to” cap for the first time. And it is experimenting with the opposite of its QE-era “Operation Twist” – Operation Untwist?
Total assets at the Fed fell by $34 billion in June, as of the balance sheet for the week ended July 3, released Friday afternoon. This includes $15 billion in Treasury securities and a record $23 billion in MBS, for a total of $38 billion, less some other balance-sheet activities unrelated to the QE unwind. This trimmed its total assets to $3.813 trillion, the lowest since September 2013. Since the beginning of the “balance sheet normalization” era, the Fed has shed $648 billion.
Caution: Trade uncertainty is rising and can harm the global economy – Hites Ahir, Nicholas Bloom, Davide Furceri
Recent developments have inspired efforts to measure trade uncertainty. This column presents a new index of world trade uncertainty for 143 countries, measured on a quarterly basis from 1996 onwards, using the Economist Intelligence Unit country reports. The index shows that uncertainty in trade is rising sharply. This has important implications for global economic prospects.
***Why Modern Economics’ Fixation with “Efficiency” Is Dangerous – Per Bylund
What does an economy do?
Modern economics suggests it is about [production] efficiency, and develops models for assessing the degree to which it is achieved and predicting outcomes assuming it. This is a fundamental misunderstanding that, when scratching on the surface, clearly is as impossible as it is undesirable.
Economy is about value creation: about getting more out of less.
Efficiency is backward-looking and lacking of progress, while value creation is future-oriented and aspirational. What I mean by that is that efficiency is about tinkering with processes and mechanisms that already exist, with the goal of making them run faster, smoother, and with less waste. It is about management, about reducing costs and cutting overhead. But one cannot cut costs unless there is already an established process for which costs can be cut.
In other words, efficiency is not a matter of figuring out other things to do, but only how to do things already underway in other ways.
Untouchable firms: Market power, business dynamism, and productivity growth in the intangible economy – Maarten de Ridder
The slowdown of productivity growth, the decline of business dynamism, and the rise of market power and firm concentration are three trends that have attracted a lot of attention in academic and policy debates. This column points to the rising use of intangible inputs as a unified explanation for these trends. Firms with high intangible adoption disrupt sectors and initially boost productivity, but negatively affect the entry of new firms and suppress the effect of R&D on innovation and growth in the long run.
***Diesel Death-Spiral Drives UK Auto Sales to Five-Year Low – Nick Corbishley
“Decline in buyer confidence,” collapsing sales of diesels & plug-in hybrids. But EV sales soar.
Sales of new passenger vehicles, as measured by registrations, fell 4.9% in June from a year earlier in the UK, according to the Society of Motor Manufacturers and Traders (SMMT). The UK is the second largest auto market in the EU, behind Germany. Total sales in the first half of 2019 dropped 3.4% year-over-year, driven by the ongoing collapse in diesel sales. But sales of gasoline vehicles rose 3.5% in the first half, and sales of battery electric vehicles (BEV) soared 60%.
It is the third year in a row of declining first-half sales for the UK’s automotive sector. Since the peak in the first half of 2016, registrations have dropped 10.6%, falling below 2014 levels.
The Data Shows Socialists — Not Sanctions — Destroyed Venezuela’s Economy – Jon Aldekoa
In April 2019, the Center for Economic and Policy Research (CEPR) published a report called Economic Sanctions as Collective Punishment (Weisbrot and Sachs 2019). The report tries to evaluate the consequences of the economic sanctions the United States imposed on Venezuela in August 2017. In it, the authors conclude that said sanctions decreased the population’s daily calorie intake, increased the mortality rate, and displaced millions of Venezuelans as a consequence of the worsening economic depression and hyperinflation.
However, in May 2019, a report was published by Brookings that refutes these claims. This new report, Impact of the 2017 Sanctions on Venezuela: Revisiting the Evidence (Bahar, Bustos, Morales, and Santos 2019), finds that the methodology Weisbrot and Sachs utilized did not allow them to estimate the causal effect of the sanctions and that accordingly their conclusions are incorrect for two reasons. First, in the absence of an adequate counterfactual, the effects of the sanctions cannot be separated from the negative economic trends in Venezuela that preceded them. Second, the deterioration observed by Weisbrot and Sachs could also be explained by other, more important factors beyond the 2017 sanctions that have not been taken into account.
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