Economische aanraders 13-03-2022
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.
Quantitative Methods Are Incomplete When Used for Economic Analysis – Frank Shostak
Most economists today regard the use of mathematical and statistical methods as the key towards understanding the complexities of economics. They believe that in order to be scientific, economics should follow in the footsteps of natural sciences and primarily use mathematical and statistical methods, by which an economist establishes relationships between various variables. For example, personal consumer outlays are related to personal disposable income and interest rates. Economists presenting this relation as
C= a*Yd – b*i
where C is personal consumer outlays, Yd is personal disposable income, i stands for interest rate, a and b are parameters. For example, if a is 0.5, b is 0.1, Yd is 1000, and i, the interest rate, is 2 percent, then C will be 0.5*1000 – 0.1*2 =499.8.
Note that the parameters a, b are established by means of statistical method called the regression analysis. By means of another mathematical formulation some economists have established that the personal consumer outlays can be depicted as:
C= a*Yd + a1*C(–1) + a2*C(–2) +a3*(Money/CPI)
where C(–1) stands for consumer outlays lagged by one month, C(–2) consumer outlays lagged by 2 months. Money stands for the stock of money and the CPI stands for the consumer price index a, a1, a2 and a3 are parameters.
***The Upside of a Crushing Recession – Charles Hugh Smith
Unbeknownst to those trembling in fear of a crushing recession, the crushing recession they fear is the only curative for a fatally distorted system which has lost touch with reality.
Everyone looking at the inevitability of recession with alarm is forgetting the many upsides of recession, especially one that crushes all attempts to reverse it with the usual tricks. Let’s not forget the simple joys of lighter traffic, faster commutes and the relative ease of getting a table at your favorite bistro–if it survives the bust.
Graveyard levity aside, there really is no equivalent to the positive force of crushing recessions. Only recessions which defy the usual tricks of monetary easing (create trillions of new dollars) and fiscal stimulus (give away a few of those new trillions) have the power to cleanse a system clogged with dysfunction, waste, fraud, corruption and financial zombies that soak of resources while doing little more than enriching the few at the expense of the many.
The problem with free money is that there’s no mechanism to distinguish between waste and productive investment or fraud and productive utilization. All uses of free money are equally beneficial because if this free money is squandered, there’s always more to spend tomorrow. In other words, in a system in which free money is the solution to all problems, there’s no motivation to limit waste, friction or fraud because there’s always enough free money for both waste, friction and fraud and needed spending and investment.
Sanctions, war, and systemic risk in 1914 and 2022 – Jon Danielsson, Charles Goodhart, Robert Macrae
The Western countries have sanctioned Russia in a way not applied to any globally integrated major power in over a century, ever since 1914. This column argues that there are lessons to be learned from the 1914 systemic crisis and that high inflation and government debt will make it difficult to contain a crisis today if one emerges.
Russia’s invasion of Ukraine and the sanctions applied to it by the Western world sharply raises systemic financial risk, and we have to look back to the build-up to WWI to find a precedent.
Systemic risk does not capture the most likely, or even the plausible. Instead, a systemic crisis is an unlikely and highly destructive event where the forces of instability come together to create a major financial crisis – one whose cost is a meaningful fraction of GDP.
Inflation: Who or What Is the Culprit? – Mark Hendrickson
Inflation—defined herein as a widespread increase in the prices of widely purchased consumer goods—has gotten worse since I commented on it last spring. According to the official Consumer Price Index (CPI), inflation is currently running at 7.5 percent year over year—the highest since 1982.
What triggered the last year’s explosion in prices? President Joe Biden has tried to blame inflation on greedy corporations and supply-chain disruptions. The former is laughable—there is no rational explanation for why corporations supposedly turned greedy when Biden became president. The latter is partly true—delays in bringing supplies to market have exacerbated price hikes for some goods. The fundamental reason, though, is that when prices are rising almost everywhere, the amount of money bidding for goods has soared while the supply of goods has not.
WHOOSH, Dollar’s Purchasing Power Plunges in February as Inflation Spreads Across Services, Fed Still Pours Fuel on It – Wolf Richter
This doesn’t even include the spike in food and energy prices over the past few weeks. They’ll show up later.
It would be hilarious, if it weren’t so serious, how the Fed spent a year trying to pull a bag over everyone’s head about inflation being “transitory” even as it was spiraling higher and higher, and as everyone knew that something changed fundamentally in the inflationary mindset among businesses and consumers, after $4.7 trillion in reckless money printing in two years, all-out interest rate repression, and $5 trillion in deficit stimulus spending.
It’s a horror show, the inflation data released today. But it doesn’t yet include the bulk of the crazy price spikes we’ve seen in commodities over the past few weeks, including wheat and fuel; and it doesn’t yet include the bulk of raging housing inflation that the CPI will only gradually pick up. So this is going to get worse.
No, Inflation Is Not “Transitory,” and It Is Worse than the Government Admits – André Marques
The inflation rates reported by governments are generally, at the very least, a little lower than they actually are. And the US government is not an exception. It makes the CPI (Consumer Price Index) artificially lower (by making changes in the methodology) and benefits from it in several ways (increasing its revenues while the voters don’t realize they are being lied to and losing their purchasing power).
How the Government Lies about Inflation.
The official CPI in the US was 7.5 percent in January 2022 (to know more about this huge increase, click here). However, if measured by 1980s methodology (as is done by Shadow Government Statistics), the CPI was above 15 percent in January 2022. This huge difference can be explained by the several changes made in the methodology of calculating the CPI since the 1990’s:
Interest rate expectations shape the Federal Reserve’s path of lift-off – Enrique Martínez García, Rachel Doehr
Since 2021, the Federal Reserve has been signalling an earlier lift-off and a steepened federal funds rate path to rein in inflation. This column assesses evidence from the US of the signalling and uncertainty effects of forward guidance announcements. At the zero lower bound, forward guidance news shocks can have significant and asymmetric impacts, and historical evidence suggests the importance of clear communication to effectively restrain inflation. The Fed’s evolving guidance on lift-off and the removal of accommodation therefore pose more difficult trade-offs than were previously understood.
Forward guidance is an integral part of the Federal Reserve’s monetary policy toolkit, and aims to manage expectations about the future path of the federal funds rate. Forward guidance is understood to affect the economy by signalling the stance of future monetary policy and reducing interest rate uncertainty (Borio and Filardo 2018).
By May 1999, the Federal Open Market Committee (FOMC) policy statements, first introduced in February 1994, became a regular occurrence following each scheduled meeting (Board of Governors 2022a). The FOMC began to actively use them to signal shifts in the future path of the federal funds rate – often referred to as ‘Odyssean forward guidance’ (Campbell et al. 2012). For example, in October 1999, the FOMC stated it was “biased toward a possible firming of policy going forward.” In August 2003, the FOMC indicated that “policy accommodation can be maintained for a considerable period.”
Modern Portfolio Theory: Economics without Praxeology – Frank Shostak
A popular idea in finance theory is that the prices of financial assets fully reflect all available and relevant information and that adjustment to new information is virtually instantaneous. Modern portfolio theory (MPT) postulates that market participants are at least as good at price forecasting as any model that a financial market scholar can come up with, given the available information.
In this way of thinking, asset prices respond only to the unexpected part of any information, since the expected part is already embedded in prices, so changes in asset prices occur because of news that cannot be predicted in a systematic manner. The proponents of the MPT argue that if past data contains no information for the prediction of future prices, then it follows that there is no point in paying attention to fundamental analysis. A simple policy of random buying and holding will suffice, as asserted by one of the pioneers of the MPT, Burton G. Malkiel, in his famous book A Random Walk Down Wall Street.
Malkiel also suggests that “a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by the expert.
Why This is the Most Reckless Fed Ever, and What I Think the Fed Should Do to Reverse and Mitigate the Effects of its Policy Errors – Wolf Richter
The Fed’s credibility shifted from Inflation Fighter under Volcker to Wealth Disparity Creator and Inflation Arsonist under Powell. And everyone knows it.
As stunningly and mindbogglingly bizarre as this sounds, it’s reality: Inflation has been spiking for over a year, getting worse and worse and worse, while the Fed denied it by saying, well, the economy is recovering, and then it denied it by saying, well, it’s just the “base effect.” And when inflation blew out after the base effect was over, the Fed said it was a “transitory” blip due to some supply chain snags. And when even the Fed acknowledged last fall that inflation had spread into services and rents, which don’t have supply chains all over China, it conceded that in fact there was an inflation problem – the infamous pivot.
By which time it was too late. The “inflationary mindset,” as I called it since early 2021, had been solidly established.
I’ve been screaming about it for over a year. By January 2021, I screamed that inflation was spreading broadly into the economy. By February 2021, I screamed that inflation was spreading into the service sector. And I screamed about inflation in the transportation sector. By March 2021, it was obvious, even to me, that “something big has changed,” based on the fact that consumers were suddenly willing to pay totally crazy prices for used cars, when many of them could have just driven what they already had for a while longer, which would have brought the market down, and with it prices.
***The Only Non-Totalitarian Solution to Resource Scarcity: Decentralized Degrowth – Charles Hugh Smith
Totalitarian imposed inequality is the only possible path of centralized Degrowth: 10,000 for me, one for you, unless you disobey, and then you get zero.
The fantasy is that everything will soon be super-abundant and cheap again because creating money out of thin air creates demand out of thin air and supply will always magically appear if there is demand. The reality is super-abundant and cheap is gone for good. Demand doesn’t create new supply by magic; if the supply is gone, then demand has no magical power to conjure supply out of thin air.
The other fantasy is that there will always be a cheap substitute for whatever’s been depleted. If the oil is depleted in one place, there’s still plenty to extract in Timbukthree. Or we’ll replace oil with electricity generated by high-tech paint on our roofs, and we’ll replace all those thousands of giant airliners using jet fuel with little, slow electric aircraft–nothing will change except we’ll continue to have more of everything.
The reality is the current global economy is a Landfill Economy that glorifies waste as growth. The faster shoddy goods fail and are taken to the Landfill and replaced with a new one, the higher our “growth.” The greater the waste, friction and fraud, the greater the “growth.”
There is an sane alternative to this insanity. It’s called Degrowth. Degrowth is the English translation of decroissance, a French word coined in 1976 to describe a philosophy that has expanded into a global movement from 1977 to the present. The root meaning is decline, which refers to both the economy and the state. The core thesis of my new book and the degrowth movement is the global economy based on permanent expansion of consumption is unsustainable due to physical and cost limits: infinite growth on a finite planet is not possible.
***Urban Supremacy and the Dismantling of Rural Communities – Mark Metz
Probably the worst of the multitude of villainous covid restrictions came at the expense of churches, the forced closure of their doors. Coupled with this tragedy was the fact that while churches were empty, liquor stores remained open for business. And while this wasn’t true everywhere, in many areas, bars were allowed to open for inside business before churches had been given the green light for pews to be filled. It is not my intention here to speak to the morality of these measures; they speak for themselves. Instead, I would like to paint a picture of how rural socialization in its present condition varies from its past and why this dynamic speaks to our current reality of urban supremacy.
The impact of digital credit in low-income countries – Valentina Brailovskaya, Pascaline Dupas, Jonathan Robinson
High-interest consumer digital credit has exploded in popularity in low-income countries. However, many fear that it is exploitative and a potential debt trap. This column analyses the welfare effects of access to digital credit in Malawi and reviews similar studies in Kenya and Nigeria. Digital credit does not appear to systematically improve lives, while the lack of transparency raises serious concerns about predatory lending.
Cantillon Effects: Why Inflation Helps Some and Hurts Others – Mark Thornton
We now turn our attention to what happens with an increase in the money supply, rather than an increase in savings. This is critically important. The mercantilist idea that increasing the money supply increases prosperity was exposed as an error centuries ago by Richard Cantillon.1 However, modern mainstream economists, including the monetarists, Keynesians of various sorts, and the now-fashionable market monetarists, fully embrace the idea that printing money is necessary for prosperity.
In fact, the major central banks of the world have embarked on an unprecedented policy of monetary expansion both before and after the financial crisis of 2008. These central banks are led by people with advanced degrees in “economics,” and they have large research staffs of people with PhDs in mainstream economics. The result is a world currency war whereby each currency is printed in an effort to implement an economic expansion by a beggar-thy-neighbor policy, another widely discredited idea.
The beggar-thy-neighbor policy involves printing money to reduce the value of your domestic currency vs. foreign currencies. Reducing the value of your currency reduces the relative price of your exports and makes foreign products relatively more expensive so that you increase exports and domestically produced goods and reduce imports. The problem is that you also increase the price of imports and decrease efficiency. Ultimately this policy does not work: in the end you are worse off.
How Much Russian Crude Oil & Petroleum Product Does the US Import? Where Does it Go? How Much Impact Will the Russian Oil Ban Have? – Wolf Richter
One more complication in the vast global oil trade, even for the US, one of the largest producers in the world and a big exporter.
The US is a huge producer of crude oil and petroleum products, with huge refining capacity, huge consumption, a huge petrochemical industry, huge imports, and even bigger exports. The global oil trade is complex and vast, and it solves specific issues in the US, such as the lack of oil pipelines across the Rockies between the producing regions and the West Coast. A wide variety of products are based on crude oil, from transportation fuels to plastics, building materials, and fiber for clothing. So, if oil supplies are tight and oil gets expensive, it impacts everything.
***The Roman Empire Wasn’t “Civilization.” It Was Violence – Jason Morgan
Review of Michael Kulikowski, Imperial Triumph: The Roman World from Hadrian to Constantine (London: Profile Books, 2016) and Imperial Tragedy: From Constantine’s Empire to the Destruction of Roman Italy (London: Profile Books, 2019)
When English historian Edward Gibbon wrote his history of “the decline and fall of the Roman Empire” in the late eighteenth century, he was using the story of the decline of Christian Rome as a way to critique the Christian civilization of his own day. Gibbon’s prose lives on, but his timing was off. Despite setbacks in North America, the British Empire in Gibbon’s day, far from declining and falling, was just entering onto a steady climb to world supremacy.
Reading Roman history through the pages of the daily news is a time-honored tradition in the West. At the peak of American power, during the George W. Bush years, Americans also took up the “Are we Rome?” worry rock and rubbed it hard, fretting about the inevitable decline of imperial fortunes. “Every other empire in history has fallen,” many Americans fretted once America had established itself as the lone superpower. “Will ours, too?”
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