Economische aanraders 10-04-2022
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.
Is the Fed new-Keynesian? – John H. Cochrane
I realize that the title of my last post, Is the Fed Fisherian? was not as clear as it could be. The model I used to understand the Fed’s forecast was, in fact, completely standard new-Keyenesian. The new-Keynesian model has the Fisherian property — a permanent interest rate rise raises inflation, at least eventually — but that is not its core feature. A clearer description is, is the Fed new-Keynesian — and thereby, only incidentally, Fisherian.
Beyond clearing that up, today I want to add unemployment. In part, I am motivated by a new working paper by Alex Domash and Larry Summers, warning that the Fed will have to raise interest rates to stop this inflation, and doing so will cause a recession. They also point out that scenario in the past, most notably 1980.
The Fed Can’t Fix the Economy, but It Can Break It – Jon Wolfenbarger
The Federal Reserve states that it “conducts the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy.” However, let’s look at how well the Fed has done that job since its founding in 1913.
Economy and Long-Term Interest Rates
Since 1913, the US unemployment rate has ranged from 2.5 percent in the early 1950s to 25.0 percent during the Great Depression. Inflation has ranged from positive 24 percent to negative 16 percent. Inflation is currently 7.9 percent, well above the Fed’s 2 percent target. While the Fed has some influence over money supply, they have no control over money demand or how money is spent, which has a significant impact on employment and inflation.
The Fed’s goal to “moderate long-term interest rates” below free market levels is a form of price fixing. Since price fixing never works for long, it is no wonder the Fed has been unsuccessful in this goal. Since 1913, ten-year Treasury rates have ranged from 0.5 percent in 2020 to 16 percent in 1981. Interest rates have been much more volatile than before the Fed, as shown below.
Sanctions and the international monetary system – Markus K Brunnermeier, Harold James, Jean-Pierre Landau
The freezing of Russian foreign exchange reserves will have long-term and systemic consequences. This column argues, however, that the dominant role of the dollar as a reserve currency will be unaffected. No other country can provide the world with a large, liquid government bond market and a fully open capital account. Sanctions may have significant long-term effects on the demand for reserves. Countries may reduce their dependence on reserves by limiting their exposure to financial shocks and partially restricting capital movements. The international monetary system may evolve towards to a new architecture, where cross-border financial integration is reduced.
***For Freak’s Sake, People, Even the Crash Test Dummies Are Nervous – CHarles Hugh Smith
Those trusting the Fed to be visibly weak, corrupt and incompetent forever might be in for an unwelcome surprise.
When even the crash test dummies are nervous, it pays to pay attention. Being in a mild crash isn’t too bad if all the protective devices inflate as intended. But in a horrific crash where nothing goes as planned, it’s like speeding in a ready-to-explode Pinto and being side-swiped by a semi on Dead Man’s Curve.
The stock market is in the Pinto, and the smell of gasoline is so strong it’s overpowering the smell of old Cheetos and stale beer. The Federal Reserve is driving, and it’s got a crazy glint in its eyes that everyone dismisses– to their immense regret when the Pinto goes off the cliff and flames envelop the wreckage.
We’re talking metaphorically here. The pain of catastrophic financial losses isn’t physical. But that doesn’t mean it won’t hurt for years or even decades.
Here’s a brief recap: The Fed says inflation is under control, will soon subside, and is no biggie.
In other words, the Fed believed it wielded Jedi Mind Tricks (to convince the masses that there was nothing to worry about as “this isn’t the inflation you’re looking for”) and that it was living in a Wizard of Oz world in which it possessed supernatural powers: if we say inflation is declining, it will decline.
Do “Inflationary Expectations” Cause Inflation? Contra Krugman, the Answer Is No – Frank Shostak
In the New York Times article “How High Inflation Will Come Down,” Paul Krugman suggests that the key for future inflation is inflation expectations. Krugman does not think that currently inflation expectations are comparable to the 1980s. According to him:
Forty years ago, as many economists will tell you, inflation was “entrenched” in the economy. That is, businesses, workers and consumers were making decisions based on the belief that high inflation would continue for many years to come. One way to see this entrenchment is to look at the wage contracts—typically for three years—that unions were negotiating with employers. Even then, most workers weren’t unionized, but these deals are a useful indicator of what was probably happening to wage- and price-setting more generally.
So, what did those wage deals look like? In 1979, union settlements with large companies that didn’t include a cost-of-living adjustment specified an average wage increase of 10.2 percent in the first year and an annual average of 8.2 percent over the life of the contract. As late as 1981, the United Mine Workers negotiated a contract that would raise wages 11 percent annually over the next several years…. Why were workers demanding, and employers willing to grant, such big pay hikes? Because everyone expected high inflation to persist for a long time. In 1980 the Blue Chip Survey of professional forecasters predicted 8 percent annual inflation over the next decade. Consumers surveyed by the University of Michigan expected prices to rise by about 9 percent annually over the next five to 10 years. With everyone expecting inflation to continue, workers wanted raises that would keep up with rising prices, and employers were willing to grant those raises because they expected their competitors’ costs to be rising as fast as their own. What this did, in turn, was make inflation self-perpetuating: Everyone was raising prices in anticipation of everyone else raising prices. Ending this cycle required a huge shock—an economy so depressed both that inflation fell and that workers were compelled to accept major concessions.
This time around, Krugman holds, things are different:
***The Global Order Has Cracked – Charles Hugh Smith
Nations that fail to adapt to the end of financialization and globalization will unravel.
We all sense the global order has cracked. The existing order is breaking down on multiple fronts. Those who have benefited from this arrangement are doing everything in their power to patch the cracks, while those who chafed under the old order’s chains seek a new order that suits their interests.
The task now is to make sense of this complex inflection point in history.
Two statements summarize the transition from the existing global order to the next iteration:
1. Finance dominated resources in the old order. Now the roles will reverse and real-world resources will dominate finance. We can’t “print our way” out of scarcities.
2. Reshuffling currencies and credit will not stop the breakdown of the global order’s “waste is growth” Landfill Economy Model.
Playing financial tricks has extended the life of an unsustainable economic model that glorified “growth” from wasting resources. By expanding credit “money,” the current global order fueled unsustainable consumption driven by unsustainable speculation.
Stop expanding “money” and credit and the global order of “growth” implodes.
Unfortunately for all those who benefited from soaring wealth and income inequality, the trick of expanding “money” and credit has reached systemic limits. The dam holding all the toxic debt, leverage and fraud is finally cracking.
Hazlitt, Hayek and How the Fed Made Itself into the World’s Biggest Savings & Loan – Alex J. Pollock
The Henry Hazlitt Memorial Lecture, March 18, 20221
Many thanks to the Mises Institute and to sponsor Yousif Almoayyed for this opportunity to be with you all today as we consider one of the truly remarkable developments in the history of American central banking, money printing, and credit inflation.
On a personal note, “the pursuit of clarity” has long been a goal of mine, and it’s a particular pleasure to present a lecture in honor of Henry Hazlitt, whose work is marked by such clarity of style, meaning, and logic.
Taking up our topic, “Hazlitt, Hayek and How the Fed Made Itself into the World’s Biggest Savings and Loan,” we begin with Hazlitt’s Economics in One Lesson. Central to this book is the key problem of government policies which “benefit one group only at the expense of all other groups.”
The Federal Reserve’s huge investment in, and monetization of, residential real estate mortgages is a striking example of this eternal political propensity.
Bank of Japan’s Mind Game: Massive Bond Buys to Cap 10-Year Yield? Didn’t Happen. Bond Holdings Actually Fell. But it Worked – Wolf Richter
Maybe the BoJ doesn’t want to totally crush the yen?
The Bank of Japan vigorously asserted all March that it would buy unlimited amounts of Japanese Government Bonds (JGBs) to keep the 10-year yield under 0.25% (it’s 0.23% now), amid wild rumors in the financial media about massive buys by the BoJ as it was trying to defend the yield peg against the markets that were selling JGBs hand over fist.
But amazingly, despite all the rumors of massive buys and market interventions, the BoJ’s holdings of Japanese government securities actually fell in March, as the BOJ disclosed on April 7, via the release of its balance sheet through March 31, and are now down by 2.6%, or by the equivalent of $113 billion, from the peak in February 2021.
Traction lost: Monetary policy at very low rates – Rashad Ahmed, Claudio Borio, Piti Disyatat, Boris Hofmann
Nominal interest rates in many advanced economies have been low for more than a decade. This column presents evidence that monetary transmission to economic activity is substantially weaker when nominal interest rates fall to very low levels, and that the strength of transmission tends to wane the longer interest rates stay low. This suggests that the observed flattening of the Phillips curve has gone hand in hand with a corresponding steepening of the IS curve. If so, monetary policy trade-offs have become more challenging.
What Causes Exceptionally Low Inflation in Japan and Switzerland? – Taiki MuraiGunther Schnabl
Recently, many industrialized countries such as the United States and the euro area have experienced high and further rising inflation, whereas in Japan and Switzerland inflation has remained low. While inflation reached 5.9 percent in the eurozone and 7.9 percent in the US in February 2022, Japan and Switzerland reported 1.0 percent and 2.2 percent, respectively. Since the turn of the millennium, the average year-over-year inflation has been 0.1 percent in Japan and 0.4 percent in Switzerland, compared to 1.7 percent in the eurozone and 2.2 percent in the US. What causes the exceptionally low inflation rates in these two low-inflation islands? There are three reasons.
First, as US interest rates have gradually declined since the early 1980s, Japan and Switzerland have kept their interest rates below the US’s interest rates. Since 1980, the average yield on ten-year Japanese government bonds has been about 2.8 percentage points lower than the yield on ten-year US government bonds (see figure 1, left panel). The situation is similar in Switzerland (see figure 1, right panel), which is widely regarded as a safe haven for international capital. The increasingly expansionary monetary policies in both countries anticipated high inflation; however, it has not happened, as the drastic expansion of domestic money supply has only partially been absorbed by the domestic economy.
China’s overseas lending and the war in Ukraine – Sebastian Horn, Carmen Reinhart, Christoph Trebesch
China and Russia have built close financial ties over the past ten years, with Russia becoming the largest recipient of Belt and Road lending. Given the sums at stake, the war in Ukraine is putting China’s overseas lending portfolio at higher risk than ever before. This column argues that this is likely to make Chinese state-owned banks more cautious in extending fresh international loans and in rolling over old ones. Because China is a common lender to many developing countries, they now face the added risk of a ‘sudden stop’ in foreign lending.
Homebuyer “Pessimism” Hits Bleak Record on Sky-High Prices, Spiking Mortgage Rates. Great Time to Sell, Though. Just Do It – Wolf Richter
If it continues, “we expect to see an even greater cooling of the housing market than previously forecast”: Fannie Mae.
We just knew this would be coming, given the sky-high home prices and the spike in mortgage rates: Homebuyer sentiment deteriorated further to a new low.
The percentage of people who said that now is a “bad time to buy” a home jumped to 73%, another record-worst in the data going back to 2010, according to Fannie Mae’s National Housing Survey for March, released today. Sentiment started to deteriorate sharply in February 2021.
“If consumer pessimism toward homebuying conditions continues and the recent mortgage rate increases are sustained, then we expect to see an even greater cooling of the housing market than previously forecast,” Fannie Mae said in the report.
A welcome evolution: The IMF’s thinking on capital controls and next steps – Anton Korinek, Prakash Loungani, Jonathan D. Ostry
The large capital outflows from China since the onset of the war in Ukraine serve as a reminder of the volatility of capital flows. This column argues that the IMF’s recent acceptance of the occasional need for pre-emptive use of capital controls to increase resilience against volatile capital flows continues the welcome evolution of the international financial institution’s policies. The framework should continue to evolve to provide countries with policy space when capital flows impinge on domestic objectives (e.g. reducing inequality) or generate international spillovers.
Inflation Isn’t What the “Experts” Say It Is. The Confusion in Terms Is Deliberate – Manuel Tacanho
Inflation, monetary inflation specifically, is as desired and necessary by the state as food is necessary for human nourishment. Inflation, more so than taxation, is the main nourishment that enables the state to, slowly but surely, grow into a large and far-reaching bureaucratic apparatus that intervenes across almost all aspects of social and economic affairs.
Without inflation, the state finds itself shackled within the confines of what it can confiscate via taxes. A limited and noninterventionist government is, as sound economics shows and history proves, vital for freedom, prosperity and peace.
Given that the state is an inherently coercive institution, holding the power to legislate and enforce legislation, it is therefore inevitable that the government will, through political trickery and economic lies, undermine a sound money system in favor of the inflation facilitating fiat money system. This is why the state’s most preferred monetary system is one based on fiat currency protected from competition by legal tender laws as opposed to sound money by monetary freedom.
The Great Upgrade: Website technologies in the pandemic – Alexandros Ragoussis, Jonathan Timmis
Digital technologies have played a crucial role in helping firms weather the worst of the COVID shock. This column uses a dataset containing information on 150 million active websites around the world to measure the impact of COVID-19 on technology adoption. The authors find that the timing of lockdowns strongly predicts increased use of e-commerce and online payment technologies. The shock appears to have resulted more in a trend shift than a shift in levels, suggesting that COVID-19 may have transformed the trajectory of online market growth.
***The Demographics of Financial Doom – Charles Hugh Smith
Whether we admit it or not, collapse is the default “solution.” That destiny has already been written by demographics.
The saying “demographics is destiny” encapsulates the reality that demographics–rising or falling trends of births and deaths–energize or constrain economies and societies regardless of other conditions.
Demographics are long-term trends, but the trends can change relatively rapidly while policies remain fixed in the distant past. This disconnect between demographic reality and policies has momentous future consequences. An appropriate analogy is the meteor wiping out the dinosaurs; in the case of demographics, this equates to the complete financial collapse of the retirement and healthcare systems.
As this article below mentions, extrapolating the high birth rates and falling death rates of the 1960s led to predictions of global famine.
As death rates declined and women’s educational and economics prospects brightened, birth rates fell, a trend that now encompasses most of the world.
As a result of the Green Revolution (hybrid seeds and hydrocarbon-based fertilizers), the Earth supports more than twice as many humans as were alive in the 1960s (3.5 billion then, 7.9 billion now).
Now the problem is a shrinking working-age population that will be unable to support the financial and healthcare promises made to the retired generations.
What we know about the wage inflationary channel – Elena Bobeica, Matteo Ciccarelli, Isabel Vansteenkiste
The recent inflation increase across advanced economies has rekindled a debate about the risk of wage–price spirals. This column looks at pass-through from labour cost to price inflation for the US and euro area countries, and finds that the risk is state dependent. Wage–price spirals are less likely with low inflation and anchored expectations. The pass-through is also shock-dependent, being larger with demand shocks. Finally, the degree of pass-through is linked to secular trends mostly outside the control of central banks.
Why It’s Looking More like the 1970s than the 1950s.- Joseph Solis-Mullen
Last July when a team of White House economists issued their analysis of the predicament the US economy was mired in, the historical parallel they landed on was the immediate years following the Second World War. In their telling, it was similar supply shortages and pent-up demand that was causing all the inflation. Once resolved, a golden age of 1950s good growth and low inflation awaited. Alas, with the Russian invasion of Ukraine, a decade more analogous to the 1970s is likelier than ever before us.
Then as now, much of the damage has been self-imposed.
In short order: Congress spent profligately, putting unnecessary wars and expansive welfare schemes on the national credit card; the Fed mismanaged the money supply, keeping interest rates too low for too long; and shocks to global food and energy markets, in large part as a response to US foreign policy, combined to produce the most miserable economic decade experienced in the United States since the 1930s.
Central bank digital currencies, community currencies, and the reinvention of money – Susana Martín Belmonte, Christian Gelleri, James Stodder
Some countries have issued their own central bank digital currencies, and many European economists favour such a currency too. This column shows that when properly designed, central bank digital currencies can help stabilise the financial and monetary system. Furthermore, a complementary currency backed by a central bank digital currency can not only compensate for the demise of commercial bank money, but it can also democratise money creation. The authors also show that complementary currencies can have higher multiplier effects on local expenditure, allow central banks to control circulation velocity, and help countries in currency crises.
Used Vehicle Prices Finally Drop but Won’t Plunge All the Way Back to Earth in this Crazy Environment. Here’s Why – Wolf Richter
Despite the jump in tax refunds, crucial for down payments, used car & truck retail sales fell, and auction prices dipped as price resistance set in.
The number of used vehicles sold retail by dealers in March fell by 15% from March last year, according to estimates by Cox Automotive, based on its Dealertrack data. Blame slow tax refunds? Blame the unsustainable crazy price spike? So let’s see.
Tax refunds are crucial to the used car business this time of the year. They make great down payments. And the whole industry counts on them and parses them.
Based on IRS data through April 1, the IRS issued $204 billion in refunds, up by 13.4% from the same period last year, with 98% being direct-deposited into the taxpayers’ bank account, and so they already got this money.
The number of refunds issued rose 1.7% from a year ago, to 63.36 million refunds through April 1. The average refund amount jumped by 11.5%, to $3,226, a great down payment for a car.
And Now for a Really Bad Response to Political Calamity: Autarky – Daniel Lacalle
The invasion of Ukraine, the spike in inflation and the risks of supply shortages have made some politicians dust off some of the worst economic ideas in history: autarky and protectionism.
Some believe that if our nation produced everything we needed we would all be better off because we would not depend on others. The idea comes from a deep lack of understanding of economics. There is no such thing as autarky. There is no such thing as covering all the needs of a population based on the limit of a politically defined border. It makes no sense. If I told you that I want to make my city self-sufficient you would laugh about it understanding that it is impossible and that the reason why my city thrives is because of the interaction and commerce with other cities. However, when a group of politicians define a nation’s border, we are immediately led to believe that those limits contain every resource that citizens may need and that everything else is irrelevant.
High-frequency macroeconomic risk measures in the wake of the war in Ukraine – Laurent Ferrara, Matteo Mogliani, Jean-Guillaume Sahuc
Following the Russian invasion of Ukraine on 24 February 2022, financial stress indicators suddenly increased. Using this high-frequency daily information conveyed by financial markets, this column presents a newly developed mixed-frequency quantile regression model in order to quantify macro risks in the euro area for the first quarter of 2022. The authors show that macro downside risks perceived by financial markets in the euro area are about three times higher than those for the US economy.
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