Economische aanraders 08-09-2019
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 to Know if Government Is Too Big – Gary Galles
At least since the time of Socrates, teachers have asked questions of students to elicit critical thought, evoke ideas and expose presuppositions. That has been part of my professor toolkit as well. But with the current political environment, particularly the Democratic nomination follies, reminding me of Will Rogers’s quip that “If we got one-tenth of what was promised to us … there wouldn’t be any inducement to go to heaven,” I have found that asking one of my favorite public finance (economics of government) questions has become even more important.
The question, posed after about of week of introductory material, is “How is a government that is too large be too small?” On the surface, it appears self-contradictory. But it can draw out an important conclusion about a problem infesting our politics.
The first point of the question is to get students to recognize that, to say anything useful, you must first ask, “What is the role of government?”
Puzzling exchange rate dynamics and delayed portfolio adjustment – Philippe Bacchetta, Eric van Wincoop
The forward premium puzzle is one of many ways in which exchange rate behaviour can contradict economic theory. This column introduces a model in which delayed portfolio adjustment by investors can address six such puzzles of exchange rate movements. The findings show that slowness in the reactions of investors has the potential to influence asset prices.
Inverted Yield Curves, Recessions, and You – Paul F. Cwik
If one reads the headlines you might think that since the yield curve has inverted, the economy is in a recession, Trump will be swept from office and then the Progressives’ goals are right around the corner. Not so fast! While much of that may still happen, we are not there yet.
While some on the Left (see Bill Maher) may be openly hoping for the economy to slip into a recession, we are not currently in a recession and whether we are heading for one requires some serious economic analysis. To understand what an inverted yield curve means, we first need to understand what the yield curve is.
Fed Sheds $20 Billion in Assets in August, Relentlessly Sloughs Off MBS, Adds Some Treasuries, Starts Shift to Short-Term T-Bills – Wolf Richter
QE Unwind continues via the sharp drop in MBS.
In August, the Fed shed Mortgage Backed Securities (MBS) at a rate that exceeded its self-imposed “cap” of $20 billion for the fourth month in a row, but added some Treasury securities, with a new emphasis on short-term Treasury bills.
Total assets on the Fed’s balance sheet fell by $20 billion, to $3.76 trillion, as of the balance sheet for the week ended September 4, released this afternoon. This brought the balance sheet to the lowest level since September 2013. So far this year, the Fed has shed $314 billion in assets. Since the beginning of the “balance sheet normalization” process, the Fed has shed $700 billion.
Libra: The known unknowns and unknown unknowns – Barry Eichengreen
The repercussions and regulatory impact of Facebook’s proposed Libra currency are still unclear. This column, part of the VoxEU debate on the future of digital money, assesses the information as yet made available about Libra, including the implications for its exchangeability, scalability, privacy, and security. It is clear the design of the currency is yet to be finished, and many questions remain about its governance and structure.
China: A Paper Tiger in a Fragile Economy – Andrew Moran
We typically imagine the Chinese entrepreneur crunching numbers, working around the clock to boost the economy, and repeating Communist propaganda about the West being the supreme devil. But we might have it wrong. Considering that the major source of funding for tens of thousands of companies in China originates from the central bank’s printing press, the reality could be businessmen and employees getting plastered on baijiu and beating each other to death with Pokémon cards during office hours. Think of it as the Eastern version of The Wolf of Wall Street.
The People’s Bank of China (PBOC) recently announced that it would inject $126.35 billion into the financial system by cutting the reserve requirement ratio – the number of reserves that financial institutions are mandated to hold. This represents the seventh reduction to the RRR in the last 18 months, totaling $510 billion in net liquidity.
Contagion from Liquidity Crunch at Junk-Bond Funds to Trigger “Material Second Round Effects”: EU Securities Regulator – Nick Corbishley
The costs of dodging negative interest rates.
In the event of a market shock, 40% of European funds focused on junk-rated bonds — ironically named “high-yield” funds — would not have enough liquid assets on hand to meet investor withdrawals, even if the withdrawals in one week amount to only 10% of the fund’s net asset value, the European Securities and Markets Authority (ESMA) warned this week, raising yet more concerns about the risks associated with the liquidity mismatch at funds that offer daily redemptions while holding illiquid assets that can take much longer to sell at survivable prices.
Government investment and fiscal stimulus – Christoph Boehm
Fiscal stimulus packages typically feature large investment in infrastructure. The column argues that the fiscal multiplier associated with government investment during the Great Recession was near zero. Meanwhile, the government consumption multiplier was around 0.8. Estimates of the multiplier for total government purchases do not distinguish these two effects, which may affect their validity.
Keynesian Economists Ignore Say’s Law. We’re Paying the Price – Alasdair Macleod
Keynes did not refute Say’s Law. He rejected it emotionally, but he did not advance a single tenable argument to invalidate its rationale.
– Ludwig von Mises, Planning for Freedom
Of the many obstacles to Keynes’s new economics, the most significant was what is commonly termed Say’s law. He overcame it by playing a blinder, recasting it into a barely comprehensible aside which vaguely approximated to something that could have related to the principal elements of something described as a law. But it is properly understood only in expanded form as an explanation of how and why free markets work. Today, if you ask economists about Say’s law, they will most often revert to a variation of Keynes’s misdirection.
Keynes’s single reference to Say’s law in the General Theory is early on page 26, dismissing it so that his book can then proceed on the basis it doesn’t even exist.
Implications of the permanent-transitory confusion for New-Keynesian modelling, inflation forecasts, and the post-Global Crisis era – Alex Cukierman
Individuals are never fully certain whether economic developments are persistent or temporary. This column shows that this permanent-transitory confusion has pervasive implications. It argues that the confusion injects the past into even purely forward-looking New-Keynesian frameworks, and shows empirically that inflationary forecasts indeed rely on past inflation.
The Financialization of the US Economy – Wolf Richter
Services are Hopping. The #1 Biggie is Hopping the Fastest. It all adds to GDP!
Service-producing industries dominate the US economy, accounting for over 70% of GDP. And this sector is hopping. Revenues in the major services categories rose 5.3% in the second quarter of 2019, compared to the same quarter a year earlier, to $4.05 trillion, not seasonally adjusted, according to the Commerce Department’s Quarterly Selected Services Estimates released today. For the first two quarters of 2019, service revenues rose 5.5% to $8.0 trillion. The pace of growth so far this year is slightly lower than the hot 6.0% growth for the year 2018.
How Anti-Trust Policy Hurts the Little Guy – Mary Lucia Darst
Investigative journalist Ida Tarbell published her book The History of the Standard Oil Company in 1904. In it she claimed that John D. Rockefeller’s business model of owning the entire line of production, thereby cutting out contractors and eliminating inefficiency, was essentially unfair and allowed “predatory pricing.” Since then, the US has suffered from a pathological fear of “big business.” The US’ anti-monopoly regulation, called “anti-trust” and rooted in the legislative reaction to Tarbell’s book, purportedly promotes healthy competition in a free society. In general, though, it has the opposite effect. Further, whenever the anti-monopoly laws are exercised against private companies, those hurt are often the poorest and most vulnerable in society.——————————————————————————————————
Will Everything Change in 2020-2025 or Will Nothing Change? – CHarles Hugh Smith
Any domino-like expanding crisis will unfold in a status quo lacking any coherent response.
Longtime readers know I’ve often referenced The Fourth Turning, the book that makes the case for an 80-year cycle of existential crisis in U.S. history.
The first crisis was the constitutional process (1781) following the end of the Revolutionary War, whether the states could agree on a federal structure; the 2nd crisis was the Civil War (1861) and the 3rd crisis was global war– World War II (1941).
According to this proposition, we’re fast approaching an existential crisis that could upend the status quo in a fundamental fashion.
While there is a great deal of historical evidence for cycles, predicting a major transition based on previous cycles is obviously a guess rather than a certainty.
***Entrepreneurial personalities – Margaret Dalton, Sari Pekkala Kerr, William Kerr
Attempts to discover and describe an entrepreneurial personality – a ‘homo entreprenaurus’ – have run aground on the shoals of heterogeneity. This column makes use of a collaborative US workspace founded in 2001 to survey four groups: entrepreneurs, non-founding CEOs/leaders, inventor employees, and other employees of innovative firms. It finds that entrepreneurs display the greatest tolerance for risk as well as the strongest self-efficacy, internal locus of control, and need for achievement. The findings appear to confirm that entrepreneurs do indeed have distinct personalities.
***The High Price of a “Free Lunch” – Frank Hollenbeck
One of the Ten Commandments is “thou shalt not steal,” and theft is generally condemned in most religions, yet our religious leaders and followers have essentially turned a blind eye to government theft.
Based on a policy of envy, Bernie Sanders, for example, has bluntly stated he intends to tax the rich to fund his programs, as though the word rich itself justifies theft. The current crop of other democratic candidates is offering a beehive of free programs without any real discussion on how to pay for them.
Three Ways to Pay for the State
Governments can finance these programs in only three ways: (1) direct taxation of its citizens, (2) borrowing money, and/or (3) printing money. Few citizens understand the nefarious effects these methods can have on their own well-being. None of them provide “free” money.
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