Economische aanraders 17-10-2021
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 search for a congruent euro area policy mix: Vertical coordination matters – Marco Buti, Marcello Messori
The way European policymakers solve the policy mix trilemma of asymmetric fiscal rules, no central fiscal capacity and constrained monetary policy in the post-pandemic economy will define the resilience of the euro area in the face of future shocks and the transition to a more sustainable growth model. In a new CEPR Policy Insight, the authors argue that moving to a structured vertical coordination between national and EU budgets would help ensure an adequate fiscal stance and avoid the overburdening of the single monetary policy.
Weak Jobs Report Shows Failed Keynesian Policies – Daniel Lacalle
In the economy, real economic return on investment is not just an important metric. It is crucial. That is why I find it so intellectually dishonest when some economists look at the GDP and employment growth without putting it in the context of the massive increase in debt, spending and money supply.
A stimulus plan is supposed to generate higher and faster growth than the normal trend would dictate. Furthermore, the definition of a stimulus plan is that it should improve the long-term trend.
***Are We Really Crazy Enough to Believe This Is Going to Work? – Charles Hugh Smith
Unbeknownst to the giddy participants, they’re not just betting on the omnipotence of the Fed Politburo, they’re also making a max-leverage bet that “the madness of crowds” will never end.
Imagine an economy so dominated by its central bank that all markets hang on every word of its priesthood as life or death. You know, like the Federal Reserve and the American economy.
Now imagine this central bank issues enormous sums of new money which supercharges speculative activity such as hundreds of billions of dollars in stock buybacks, special purpose acquisition casinos, oops, I mean companies, and so on. You know, like the Federal Reserve’s trillions in nearly free money for financiers.
Next, imagine that the central bank makes barely concealed promises that should any big gambler lose money in the casino, the bank will flood the financial system with even more nearly free money for financiers and bail out the loser.
US Coal “Roars Back” Under Biden Unlike Trump – Tyler Durden
One of the biggest ironies to start this decade is the transition from fossil fuel generation to green energy has created a global energy crisis that is forcing the U.S., among many other countries, to restart coal-fired power plants monumentally ahead of the winter season in the Northern Hemisphere to prevent electricity shortages.
The virtue-signaling assault by the green lobby spearheaded by hapless puppet Greta Thunberg must beside herself as U.S. power plants are on course to burn 23% more coal this year, the first increase since 2013, despite President Biden’s ambitious plan for a national grid to run on 100% clean energy by 2035.
A global energy crunch is rippling through the world amid a huge rebound for power. Natural gas has soared to record highs as supplies remain tight, and countries are finding out that renewable energy sources aren’t as reliable as previously thought. This has created a massive worldwide scramble by power companies for fossil fuels, especially coal.
Redistributive effects of a monetary easing across generations: It’s not only what you own, but when you own – Marcin Bielecki, Michał Brzoza-Brzezina, Marcin Kolasa
By boosting labor incomes and asset prices, a monetary easing is often believed to benefit the vast majority of households. This column argues that this intuition is misleading, because the effect of asset price changes for households depends not just on asset holdings, but on their maturity structure, which is largely driven by life-cycle motives. A typical monetary policy easing redistributes welfare from older to younger generations. Moreover, the resulting asset price appreciation is harmful for households that accumulate housing and save for retirement.
Why a Bear Market in Bonds Points to a Weakening Economy – Frank Shostak
After closing at 0.53 percent in July 2020 the yield on the ten-year US T-bond moved relentlessly higher, closing on Tuesday, September 28, 2021, at 1.55 percent. There is a growing likelihood that the July 2020 figure of 0.53 percent might have been the lowest point.
10-year T-bond yields
How should we view this in the context of historical trends in bond yields?
First, it is important to consider the behavioral foundations of bond buying.
As a rule, people assign a higher valuation to present goods versus future goods. This means that present goods are valued at a premium to future goods. This stems from the fact that a lender or investor gives up some benefits at present. Hence, the essence of the phenomenon of interest is the cost that a lender or an investor endures.
An individual who has just enough resources to keep him alive is unlikely to lend or invest his paltry means. The cost of lending or investing to him is likely to be very high—it might even cost him his life if he were to consider lending part of his means. Therefore, he is unlikely to lend or invest even if offered a very high interest rate. Once his wealth starts to expand, the cost of lending or investing starts to diminish. Allocating some of his wealth toward lending or investment is going to undermine to a lesser extent our individual’s life and well-being at present.
Just How Big Is China’s Property Sector, And Two Key Questions On Policy And Tail Risks – Tyler Durden
While the broader US stock market was giddily melting up in the past week, things in China were going from bad to worse with Evergrande set to officially be in default on Oct 23 when the grace period on its first nonpayment ends, and with contagion rocking the local property market – which as we explained last week just saw the most “catastrophic” property sales numbers since the global financial crisis – sending dollar-denominated Chinese junk bonds to all time high yields.
So even though it is now conventional wisdom that China’s property crisis is contained (just as its concurrent energy crisis is also somehow contained), we beg to differ, and suggest that the crisis hitting the world’s largest asset class is only just starting and is about to drag China into a “hard landing”, with the world set to follow.
And yes, with a total asset value of $62 trillion representing 62% of household wealth, the Chinese real estate sector is not only 30 times bigger than the market cap of all cryptos and also bigger than both the US bond and stock market, but is the key “asset” that backstops China’s entire financial system whose deposits at last check were more than double those of the US. In other words, if China’s property sector wobbles, the world is facing a guaranteed depression.
Global evidence on profit shifting: The role of intangible assets – Fotios Delis, Manthos Delis, Luc Laeven, Steven Ongena
Profit shifting has come to the fore with the recently released Pandora Papers. This column uses a new global profit-shifting database covering 95 countries to show that profit shifting on average has gradually declined since 2011 following efforts from governments and international organisations to contain the practice, most notably the OECD’s Base Erosion and Profit Shifting initiative. But firms across industries with high shares of intangible assets display an increase in profit shifting.
We’re Living in a Chaos Economy. Here’s How to End It. – Mark Thornton
The Federal Reserve has been increasing the money supply at an explosive rate. The federal budget, deficits, and the trade deficit are record levels. Governments, both foreign and domestic, have locked down people, restricting production and consumption. How should this be viewed by an economist?
There is clearly chaos in the economy, and hardly a day goes by when I don’t find unusual if not unprecedented situations in day-to-day economic life. However, many people and economists are either oblivious to the problems or in denial. Things are normal for them. Politicians are mostly in this camp. For economists and investment promotors, inflation is “transitory.” They don’t know how the economy works and they expect near perfection from the economy and entrepreneurs. This view is wrong.
ECB monetary policy and catch-up inflation – Lucile Crumpton, Ethan Ilzetzki
In July, the ECB issued its first Strategic Review since 2003. The latest CfM-CEPR survey investigates one component of the announced policy shift: the new definition of price stability. Most members of the panel of experts on the European economy support the ECB explicitly allowing inflation to exceed its target for extended periods to make up for below-target inflation in the past. This 60% majority has divided views on the optimal alternative policies, with the largest share supporting average inflation targeting and some members supporting nominal GDP targeting or hybrid policies. 40% of the panel would prefer to maintain the current policy of traditional inflation targeting.
What the New Nobel Winners Get Wrong about Economics – Frank Shostak
This year’s Nobel Prize in economics was awarded to David Card of the University of California, Berkeley, Joshua Angrist of Massachusetts Institute of Technology, and Guido Imbens of Stanford University. The laureates, according to the Nobel Committee have made an important contribution as to how to ascertain cause and effect from observational data.
For instance, how does the imposition of a minimum wage affect employment? In answering these types of questions, economists rely on observational data, but with observational data a fundamental identification problem arises: the underlying cause of any correlation remains unclear.
On the economic geography of climate change – Giovanni Peri, Frédéric Robert-Nicoud
Climate change is a defining challenge of our times. This column introduces a special issue of the Journal of Economic Geography on climate change, which provides foundations for well-informed policymaking by addressing two main themes of the economic geography of climate change. First, climate change yields heterogeneous effects across space. Second, a crucial aspect of human adaptation to climate change is geographic mobility. As a consequence, limitations to mobility will worsen the socioeconomic costs of climate change. Other margins of adjustment covered in the issue include fertility, specialisation, and trade.
How the Fed’s Easy Money Spurred Today’s Financial Frenzies – Joseph Solis-Mullen
Though the effective federal funds rate remains less than 0.1 percent, the reaction of the markets and financial press as the ten-year Treasury yield crossed the 1.5 percent threshold near the start of the month reminds us just how fragile our economy’s underlying monetary framework has become over the past two decades. Regularly at a minimum of at least 4 percent in the postwar period, ten-year Treasury yields haven’t crossed that threshold in over a decade and were in steady decline from 1992 onward.
This persistently loose monetary policy forces even the most risk-averse portfolio managers to take on equity premiums previously outside their comfort zone—see J.P. Morgan’s 2021 Long-Term Capital Market Assumptions report. This is because beyond the speculation cheap money facilitates among the most risk tolerant of asset managers, persistently low effective federal funds rates and Treasury yields cause yield compression. That is, long stretches of low interest on supposedly “safe” US Treasury securities force investors to “reach for yield,” a euphemism for taking on a higher risk premium by investing in less certain financial instruments or equities because of the lowered rate of return on safer investments. When the majority of market participants do so, however, this diminishes the returns of those exact assets.
Natural experiments in labour economics and beyond: The 2021 Nobel laureates David Card, Joshua Angrist, and Guido Imbens – Jörn-Steffen Pischke
The 2021 Nobel Prize in Economic Sciences has been awarded to David Card of the University of California, Berkeley, “for his empirical contributions to labour economics”, and to Joshua Angrist of MIT and Guido Imbens of Stanford University “for their methodological contributions to the analysis of causal relationships”. This column explains how the use of natural experiments in empirical economics has ushered in much progress in the analysis of causal relationships. The ensuing ‘credibility revolution’ over the past three decades has been transformational for the study of key policy challenges, including education, immigration and the minimum wage.
Legalized Plunder Has Been Supercharged in America – Gary Galles
As someone who has written about public policies for three and a half decades, I have often struggled with the slipperiness of how words are used, because many people become confused by using words without thought. That gives power to those who can manipulate word meanings to mislead others. In turn, it incentivizes equivocation (when the meaning of a key term or phrase is changed in the course of an argument) in public policy discussions, because that logical fallacy can be used to create a cornucopia of ways to rob Peter to benefit Paul using the coercive power of government.
Leonard Read, creator of the Foundation for Economic Education and who wrote about public policies for about a decade longer than I have, also had to combat the distortions created by the 24/7 linguistic confusion factories that feed off government growth beyond its justified role of defending our rights, which allows the creation of uncountable possible Peter-to-Paul redistributions. Read’s reflections on this issue in “Loot,” chapter 3 of his 1978 book Vision, are worth bringing back to light, as current politics revolves around more looting than ever before.
Antidumping duties, prices, and China: Free trade to the rescue! – Gabriel Felbermayr, Alexander Sandkamp
The recent combination of resurging demand and continuing disruptions in supply chains has led to a worrying return of inflation. In the EU, industry producer prices increased by 12.2% year-on-year in July 2021. This column argues that removing EU antidumping duties would at least partially ease the pressure on input and consumer prices. In contrast, the recent abandonment of China’s differential treatment in the EU’s antidumping legislation might even have contributed to increasing import prices.
***Polygamy Is a Problem for Economic Development – Lipton Matthews
Though a rarity in most places, polygamy is pervasive in a batch of countries situated in West and Central Africa, including Burkino Faso (36 percent), Mali (34 percent), and Nigeria (38 percent). Economist James Fenske in a 2011 paper discussing polygamy in Africa provides some shocking statistics: “Of the nearly half a million women included in the data for this study, roughly 40% who first married in 1970 share their husband today, while for women who married in 2005, that number is closer to 15%.” A crucial observation is that the percentage of women in polygamous relationships has declined; however, at 15 percent this figure is still relatively high.
As such the persistence of polygamy in Africa has attracted the attention of economists who argue that polygamy is negatively associated with development. Michèle Tertilt (2003) observes that sub-Saharan African countries where polygyny is widespread are the poorest countries in the world, with their per capita gross domestic product (GDP) being 25 percent lower than those of other countries in the region and a mere 40 percent of the GDP of other monogamous countries located in the same latitude range. The explanation is that in such societies purchasing wives is indicative of high status and moreover the families of women gain financially when their suitors pay the bride-price. Hence reliance on the bride-price as a business strategy crowds out investment.
Because under monogamous arrangements men are unlikely to pursue multiple women, they can divert more resources to productive investments, thereby boosting capital formation and economic growth. The findings of Tertilt confirm this observation: “Enforcing monogamy reduces fertility by 40%, increases savings by 35%, and raises output per person by 140%. This suggests that although the practice of polygyny is certainly not the sole cause of poverty it might be an important contributing factor for the continuing underdevelopment of Sub-Saharan Africa.”
Everything Solid Melts into Air – Charles Hugh Smith
That the neofeudal lords and their lackeys offer the debt-serfs “choices” of forced labor would be comic if the results weren’t so tragic.
We know we’re close to the moment when Everything Solid Melts into Air when extraordinary breakdowns are treated as ordinary and the “news” quickly reverts to gossip. So over 4 million American workers up and quit every month, month after month after month, and the reaction is ho-hum, labor shortage, blah, blah, blah, toy shortage for Christmas, oh, the horror, blah, blah, blah.
These are large numbers. Over 10 million job openings and 6 million hires and 6 million “separations,” i.e. layoffs and the 4.3 million voluntary quits.
The happy story promoted by the corporate media is that this enormous churn is the result of shiny, happy people moving up the work food chain to better paying jobs. We know we’re close to the moment when Everything Solid Melts into Air when every breakdown is instantly reworked into a happy story in which everything is getting better every day, in every way.
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