Economische aanraders 19-09-2021
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.
Using the “Natural Interest Rate” In Setting Monetary Policy Is an Impossible Dream – Frank Shostak
“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”
–John M. Keynes1
It is held by many commentators that the Fed’s monetary policy, which is aimed at achieving price stability, is the key factor for attaining stable economic growth.
It is also held that what prevents the attainment of price stability is the fluctuations of the federal funds rate around the neutral interest rate, also known as the natural interest rate.
The natural interest rate, it is held, is one that is consistent with stable prices and a balanced economy. What is required, then, is that the Fed successfully steer the federal funds rate toward the natural interest rate.
It is held that once the Fed brings the federal funds rate in line with the natural interest rate, price stability and economic stability are likely to emerge.
Ripple effects of monetary policy – Emilia Garcia-Appendini, Steven Ongena
Firms may face bottlenecks forcing them to cut activity and adjust prices when monetary tightening financially constrains their business partners. This column focuses on firms producing intermediate goods in the US to show how monetary policy can have ‘ripple effects’ along supply chains through input-output linkages involving financially constrained firms. These transmission channels of monetary policy may be especially relevant in the post-Covid context of higher corporate leverage, significant supply chain disruptions, and inflationary pressures.
The Eurozone Is Going down the Same Stagnating Road as Japan – Daniel Lacalle
The European Central Bank announced a tapering of the repurchase program on September 9. One would imagine that this is a sensible idea given the recent rise in inflation in the eurozone to the highest level in a decade and the allegedly strong recovery of the economy. However, there is a big problem. The announcement is not really tapering, but simply adjusting to a lower net supply of bonds from sovereign issuers. In fact, considering the pace announced by the central bank, the ECB will continue to purchase 100 percent of all net issuance from sovereigns.
There are several problems in this strategy. The first one is that the ECB is unwillingly acknowledging that there is no real secondary market demand for eurozone countries’ sovereign debt at these yields. One would have to think of twice or three times the current yield for investors to accept many eurozone bonds if the ECB does not repurchase them. This is obviously a dangerous bubble.
Ministry of Manipulation: No Wonder Trust and Credibility Have Been Lost – Charles Hugh Smith
Now that every financial game in America has been rigged to benefit the few at the expense of the many, trust and credibility has evaporated like an ice cube on a summer day in Death Valley.
Here is America in a nutshell: we no longer solve problems, we manipulate the narrative and then declare the problem has been solved. Actually solving problems is difficult and generally requires sacrifices that are proportionate to one’s wealth and power. But since America’s elite are no longer willing to sacrifice any of their vast power for the common good, sacrifice is out in America unless it can be dumped on wage earners. But unfortunately for America’s elite, four decades of hidden-by-manipulation sacrifices have stripmined average wage earners, and so they no longer have anything left to sacrifice.
Enter the Ministry of Manipulation, which adjusts the visible bits to align with the narrative that the problem has been fixed and the status quo is godlike in its technocratic powers. All this manipulation doesn’t actually solve the problems, it simply hides the decay behind gamed statistics, financial trickery and glossy PR. The problems fester until they break through the manipulated gloss and the public witnesses the breakdown of all the systems that were presented as rock-solid and forever.
Inflation, debt, politics, and insurance at Project Syndicate – John H. Cochrane
Inflation in the Shadow of Debt
Today’s inflation is transitory, our central bankers assure us. It will go away on its own. But what if it does not? Central banks will have “the tools” to deal with inflation, they tell us. But just what are those tools? Do central banks have the will to use them, and will governments allow them to do so?
Should inflation continue to surge, central banks’ main tool is to raise interest rates sharply, and keep them high for several years, even if that causes a painful recession, as it did in the early 1980s. How much pain, and how deep of a dip, would it take? The well-respected Taylor rule (named after my Hoover Institution colleague John B. Taylor) recommends that interest rates rise one and a half times as much as inflation. So, if inflation rises from 2% to 5%, interest rates should rise by 4.5 percentage points. Add a baseline of 2% for the inflation target and 1% for the long-run real rate of interest, and the rule recommends a central-bank rate of 7.5%. If inflation accelerates further before central banks act, reining it in could require the 15% interest rates of the early 1980s.
Would central banks do that? If they did, would high interest rates control inflation in today’s economy? There are many reasons for worry.
How Bitcoin Fixes The Money, Saves The World – Bruce Fenton
Two things are undeniable: We are living in times of massive change, and Bitcoin is a part of it.
We are living in times of massive change, a “fourth turning.” The book “The Fourth Turning” by Strauss and Howe covers centuries of history and shows that demographics and other factors lead to massive change in societies every 100 years or so.
Generations change distinctly: the ’60s were different from the ’50s and the ’80s. But a fourth turning is a different level of change. If history is any indication, in this fourth turning we will see changes in maps, society, religion, belief systems and we may see the very nature of economics and money itself change.
Bitcoin came into the world at the right time.
Any earlier, and Bitcoin could not have practically been used due to internet usage rates. It is interesting that Bitcoin is here just as the global economy faces such massive change to the old-school fiat system that has been running for the last half century and driving our world into the ground. The old fiat system is unsustainable. Bitcoin presents the ultimate hedge against the failed monetary policies of central banks.
Fostering FinTech for financial transformation – Thorsten Beck, Yung Chul Park
The recent wave of financial innovation related to digitalisation has the potential to change the landscape of financial service providers quite dramatically, creating the need for a flexible regulatory framework that can accommodate these changes while safeguarding stability. This column introduces a new eBook that takes stock of financial digitalisation over the past decade and applies global lessons to the regulatory debates in Korea.
Goldman: “This Needs To Change Before A Larger Correction Can Occur” – Tyler Durden
Last week, we published one Goldman trader’s top ten reasons why investors are especially bearish for the last two weeks of September, which he then countered with a list of his own reasons why there is little to be worried about. Judging by last week’s market moves which saw the S&P swoon lower and slide sharply on Friday’s opex, it appears that once again Goldman was wrong. So, one week later, Goldman flow trader Scott Rubner has doubled down with a thread focusing on market technicals, in which he lays out what in his view – “given new market structure dynamics” – needs to change “before a larger correction can occur.”
So without further ado, here is Rubner’s latest Tactical Flow of Funds market summary, which he summarizes as “Consensus is Bearish! But the market is currently positioned for it”, which however is news to Wall Street because as the latest Fund Manager Survey found, equity protection is at the lowest level since Jan’18, a far cry from the financial media – and Goldman’s – repeated erronous claims that everyone is hedged for a crash.
Financial innovation today and tomorrow – Josh Lerner, Amit Seru
Financial innovation is intensely controversial, yet we know little about where or by whom these new products and services are developed. This column looks at over 24,000 financial US patents applied for between 2000 and 2018 to analyse the nature of financial patents. A surge in financial patenting was driven by IT firms and firms in industries outside of finance. Financial regulatory actions seem to have adversely affected innovation by financial firms, while regions with the highest technological opportunities attracted financial innovation by IT and non-financial firms.
Americans Expect their Earnings to Get Whacked by Red-Hot Inflation, Blow Off Fed’s Sermons about “Temporary” – Wolf Richter
And those who experienced the 1970s & 1980s inflation as adults expect 6.0% inflation a year from now.
The Fed keeps discussing consumer inflation expectations as one of the key metrics in assessing the path of inflation in the coming years. Inflation expectations suggest to what extent consumers might be willing to accept price increases, thereby enabling inflation. Consumer price inflation is thought to be in part a psychological phenomenon, similar to market prices. When the inflationary mindset takes over, consumers accept higher prices instead of going on buyers’ strike as they infamously did with new cars in 2008 through 2013, when demand collapsed and stayed down for years.
Consumers’ median inflation expectations for one year from now jumped to 5.2% in August (red line), the highest in the survey data going back to 2013, and the 10th monthly increase in a row, according to the New York Fed’s Survey of Consumer Expectations today. The survey also tracks consumers’ expectations of their earnings growth. And that combo became a hoot (more on that in a moment).
The Funny-Money Game – Alasdair Macleod
The sense of general unease that I detect among those I meet and discuss economics and financial matters with is increasing – with good reason.
Clearly, what everyone calls inflation, rising prices or more accurately currency debasement, will lead to higher interest rates, threatening markets which are unmistakably in bubble territory.
The consequences of rising prices and interest rates are still being badly underestimated.
In this article I get to the source of the inflation problem, which is the monetary debasement of the dollar and other major currencies. An important part of the problem is that mathematical economists have lost sight of what their beloved statistics represent —none more so than with GDP.
I explain why GDP is simply the total of accumulating currency and credit which is wrongly taken reflect economic progress – there being no such thing as economic growth. Once that point is grasped, the significance of this basic error becomes clear, and the fiat currency paradigm is revealed for what it is: a funny-money game that will go horribly wrong.
***The U.S. Economy In a Nutshell: When Critical Parts Are On “Indefinite Back Order,” the Machine Grinds to a Halt – Charles Hugh Snmith
A great many essential components in America are on ‘indefinite back order’, including the lifestyle of endless globally sourced goodies at low, low prices.
Setting aside the “transitory inflation” parlor game for a moment, let’s look at what happens when critical parts are unavailable for whatever reason, for example, they’re on back order or indefinite back order, i.e. the supplier has no visibility on when the parts will be available.
If the part that blew out is 0.1% of the entire machine, and the other 99.9% still works perfectly, the entire machine is still dead in the water without that critical component. That is a pretty good definition of systemic vulnerability and fragility, a fragility that becomes much, much worse if there are two or three components which are on indefinite back order.
This is the problem with shipping much of your supply chain overseas: you create extreme systemic vulnerability and fragility even as you rake in big profits from reducing costs. Speaking of costs, let’s look at the costs of having a large, costly, complex mechanism sitting idle in a non-functioning state due to some broken element for which there is no substitute available. Whatever productive capacity the mechanism, process, etc. had is now stuck at zero.
Can Economic Data Explain the Timing and Causes of Recessions? – Frank Shostak
Most economists are of the view that through the inspection of economic data it is possible to identify early warning signs regarding boom bust cycles. What is the rationale behind this way of thinking?
During the 1930s the National Bureau of Economic Research (NBER) introduced the economic indicators approach to ascertain business cycles. A research team led by W.C. Mitchell and Arthur F. Burns studied about 487 economic data points in order to establish what business cycles are all about. Mitchell and Burns had concluded that
[b]usiness cycles are a type of fluctuation found in the aggregate economic activity of nations…. a cycle consists of expansion occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle; this sequence of changes is recurrent but not periodic.1
In this way of thinking, business cycles are seen as broad swings in overall economic activity. The NBER research team concluded that because the causes of business cycles are complex and not properly understood it is much better to focus on the outcome of these causes as manifested through the economic data.
What Comes After Mind-Blowing Free-Money Blow-Off Spike in Retail Sales? A Spike Doesn’t Spike Forever – Wolf Richter
Powered by price increases.
Total retail sales – not adjusted for inflation, now a big factor – inched up 0.7% in August from July, to $619 billion (seasonally adjusted), up a stunning 18% from two years ago and 15.1% from a year ago. The insert in the chart shows that this wasn’t a proper “rebound,” as it has been widely called in the media today, but an uptick in a four-month down-trend from the mind-blowing superlative historic free-money blow-off spike in April. August retail sales were down 1.6% from that April stimmie-craziness:
A spike doesn’t spike forever. But Americans are still making a heroic effort to spend the pile of free money they got … the last two stimmies totaling $2,000 per person, the $800 billion in forgivable PPP loans that just about everyone with a little or big business got, extra unemployment benefits, massive gains on asset prices, all of it fueled by the Fed’s $4-trillion money-printing binge and the government’s $5-trillion deficit-spending binge in 18 months, which created the most monstrously overstimulated economy and markets ever.
Teams become more productive when their hours are shorter – Ruo Shangguan, Jed DeVaro, Hideo Owan
It has been argued that when workers are already working long weeks, adding more hours can reduce productivity. This column tests this argument using evidence from Japan. The authors find that long working hours of key team members harm team productivity. In contrast, shorter hours cause the opposite effect, perhaps because workers recover from fatigue and arrive for work with increased energy and focus.
Critical Race Theory Is a Direct Attack on Market Freedom – Clark Patterson
Critical race theory (CRT) has become the cultural wedge issue of 2021. An important question is what will be CRT’s effect on the future of freedom.
Because CRT assumes a finite economic pie and posits all economic interactions as zero-sum, the continuing adoption of CRT in American society will necessarily lead the US away from free markets and further down the road to serfdom.
Critical race theory is a subset of critical theory. Critical theory is the world view which holds that oppression along race, class, and gender lines is the distinguishing attribute of Western civilization, both currently and historically.
As a variant of critical theory, critical race theory emphasizes racism in the “intersectionality” of race, class, and gender exploitation.
***The Illusion of Getting Rich While Producing Nothing – Charles Hugh Smith
By incentivizing speculation and corruption, reducing the rewards for productive work and sucking wages dry with inflation, America has greased the skids to collapse.
Of all the mass delusions running rampant in the culture, none is more spectacularly delusional than the conviction that we can all get fabulously rich from speculation while producing nothing. The key characteristic of speculation is that it produces nothing: it doesn’t generate any new goods or services, boost productivity or increase the functionality of real-world essentials.
Like all mass delusions, the greater the disconnect from reality, the greater the appeal. Mass delusions gain their escape velocity by leaving any ties to real-world limitations behind, and by igniting the most powerful booster to human euphoric confidence known, greed.
Lost in the mania of easy wealth from speculative trading is the absence of any value creation in the rotation-churn of moving bets from one table to the latest hot game: in flipping houses sight unseen, no functionality was added to the house. In transferring bets on one cryptocurrency to another or from one meme stock to another, no value to the economy or society was created.
The Political Alchemy Called Modern Monetary Theory – Per Bylund
The new kid on the economics block is something called modern monetary theory. The name is new, but the “theory” is not.
Proponents adamantly claim that it is both new and a theory of economics. To make it appear this way, they dress the ideas in unusual-sounding jargon and use rhetorical tricks. For example, instead of presenting actual arguments or responding to direct questions, they present a circular flow of deepities. To top it off, they, at least in my humble experience, usually lack fundamental economic literacy. This can make rebutting their nonsensical claims a challenge and, as a result, debates with this crowd typically go nowhere.
In order to figure out what exactly they are claiming—beyond the deepities—I decided to acquaint myself with the prominent proponents. I read “founder” Warren Mosler’s so-called white paper on MMT, but it’s not very helpful: there is little by way of theoretical explanation, other than redefining if not obscuring the meaning of common concepts in economics. Mosler also seems overly eager to move from explanation to instead argue for his preferred policies.
What drives house prices: Lessons from the literature – John Duca, John Muellbauer, Anthony Murphy
Research on house price cycles and their interactions with the economy has burgeoned since the Global Financial Crisis. This column draws five lessons from a recent comprehensive survey. It argues that conventional theories of house price dynamics are misleading. Shifts in credit conditions, together with differences in housing supply response across cities, regions and countries, account for much of the heterogeneity of house price outcomes. Finally, increased demand for space and unprecedented policy interventions together explain the very different house price experience in the pandemic compared with the Global Financial Crisis.
A Mess: Retail Inventory Shortages in Charts, Just in Time for Holiday Selling Season – Wolf Richter
Stimulus-fueled blow-off demand spike meets messed-up supply and transportation chaos.
Retailers are trying to stock up for the holiday selling season. But they’re facing all kinds of shortages, supply snags, transportation chaos, and surging prices. And overall and supply has remained at record lows for four months in a row.
Stimulus-fueled retail sales started spiking last year, culminating in a mind-blowing free-money blow-off top in April. In the months since then, retail sales have tapered off a wee bit but remained close to the tippy-top of this free-money blow-off spike.
The inventory-sales ratio (inventories divided by sales, a standard metric of supply, which cancels out the impact of inflation) started collapsing last year. In May this year, it hit an all-time low in the data going back to 1992. In July, according to the Commerce Department on Thursday, the inventory-sales ratio ticked up a tiny bit, as a result of a small decline in retail sales in July from the free-money blow-off spike, but remained near the lowest levels in the data.
In Defense of the Speculator – Walter Block
In the view of most economic illiterates, speculators do not bake bread; they do not supply medicines; they are AWOL when it comes to working on the shop floor; they don’t teach math or the cello. They are thus parasites on others who do supply such needed everyday goods and services.
Here’s a real-life quote from someone who really ought to know better about this matter. “These high-frequency traders … make enormous amounts of money, billions and billions of dollars, and do nothing of any social value for the economy,” said Len Burman, co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution. “They’re just kind of the modern-day equivalent of skimming pennies out of the till.”
In the view of John Kemp, a market analyst from Reuters, “[c]ommodity producers and consumers have long blamed ‘speculators for distorting prices that should be set by physical supply and demand.'”
Restaurants Remove Crab From Menus Due To Skyrocketing Prices – Tyler Durden
Restaurants have suffered throughout the virus pandemic, and the shortage of everything doesn’t seem to be waning anytime soon. We told readers in June about a worsening crabmeat shortage that sent prices soaring. Heading into September, crabmeat prices soared to record highs forcing restaurants to either pass along the costs to consumers or remove crab products from menus.
One of the top crab restaurants in Baltimore, Maryland, called Jimmy’s Famous Seafood, serves customers Maryland crab cakes, steamed crabs, crab soup, and other types of seafood. The restaurant ships crab cakes to customers all over the country and recently warned about “menu prices have recently increased due to the international crabmeat shortage which has decimated our industry.”
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