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.

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Who Will Inflate Faster? Europe or the Fed? – Frank Shostak
18 december
The price of the euro in terms of the US dollar closed at 1.135 in November, against 1.156 in October and 1.193 in November last year. The yearly growth rate of the price of the euro in US dollar terms fell to –4.8 percent in November from –0.7 percent in October. Some commentators are of the view that the US dollar is likely to weaken against the euro (i.e., the price of the euro in US dollar terms is likely to increase). The reason for this is the massive US trade balance deficit.
In September 2021 the US trade balance stood at a deficit of $80.9 billion, against a deficit of $62.6 billion in September last year (see chart). Again, some commentators regard a widening in the trade deficit as an ominous sign for the exchange rate of the US dollar against major currencies in the times ahead.
For most economic commentators, a key factor in determining the currency rate of exchange is the trade account balance. In this way of thinking, a trade deficit weakens the price of the domestic money in terms of foreign money while the trade surplus works toward the strengthening of the price.
By this logic, if a country exports more than it imports, there is a strengthening in the relative demand for its goods, and thus for its currency, so the price of the local money in terms of foreign money is likely to increase. Conversely, when there are more imports than exports, there is relatively less demand for a country’s currency, so the price of domestic money in terms of foreign monies should decline.
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The ECB’s dilemma – John H. Cochrane
12 december
I have been emphasizing the Fed’s dilemma: If it raises interest rates, that raises the U.S. debt-service costs. 100% debt to GDP means that 5% interest rates translate to 5% of GDP extra deficit, $1 trillion for every year of high interest rates. If the government does not tighten by that amount, either immediately or credibly in the future, then the higher interest rates must ultimately raise, rather than lower, inflation.
Jesper Rangvid points out that the problem is worse for the ECB. Recall there was a euro crisis in which Italy appeared that it might not be able to roll over its debt and default. Mario Draghi pledged to do “whatever it takes” including buying Italian debt to stop it and did so. But Italian debt is now 160% of GDP, and the ECB is still buying Italian bonds. What happens if the ECB raises interest rates to try to slow down inflation? Well, Italian debt service skyrockets. 5% interest rates mean 8% of GDP to debt service.
Central banks first stop bond buying and then raise interest rates. Whether U.S. bond buying programs actually lower treasury yields is debatable. But there is no question that the ECB’s bond buying keeps down Italy’s interest rate, by keeping down the risk/default premium in that rate. If the ECB stops buying, or removes the commitment to “whatever it takes” purchases, debt service costs will rise again precipitating the doom loop.
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The Search for Yield Now Extends to Imaginary Land in the Metaverse – Doug French
14 december
Charlie Munger defines old school. The ninety-seven-year old is partners with Warren Buffett at Berkshire Hathaway. He’s lived and invested through a few booms and busts in his nearly a century on earth.
Speaking to the Sohn conference in Sydney, Australia, Munger said “I consider this era an even crazier era than the dotcom era.” Speaking of cryptocurrencies, ““I wish they’d never been invented,” he said.
Munger is a man who has made billions investing in a capitalist economy. Yet, he said, “I admire the Chinese, I think they made the correct decision, which was to simply ban them.”
Joseph A. Schumpeter saw capitalism as a “gale of creative destruction,” describing the “process of industrial mutation that continuously revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Munger, believing the communists have the answer, said, “I just can’t stand participating in these insane booms, one way or another.”
No mention was made of the Federal Reserve’s monetary policy.
At the moment, Munger and his partner are fans of the US dollar, with Berkshire sitting on a cash hoard of $149.2 billion.
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Wholesale Price Inflation in Germany Totally Blows Out, Highest in the Data Going Back to 1962 – Wolf Richter
13 december
The ECB is still recklessly delusional.
Wholesale prices in Germany – an indicator of what is further up in the pricing pipeline for consumers and businesses – spiked by 16.6% in November, from a year ago, the worst increase in the data going back to 1962, and up from 15.2% in October, and from 13.2% in September, the German statistical office Destatis reported today:
Given the decline in wholesale prices last year, and to eliminate the resulting “base effects” that everyone has been dragging out to brush off this bout of red-hot inflation, it’s helpful to look at the month-to-month increases over the past six months: Annualized June through November, wholesale inflation spiked by 13.6%.
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***Get in Crash Positions – Charles Hugh Smith
13 december
When the market goes bidless, it’s too late to preserve capital, never mind all those life-changing gains.
Everyone with some gray in their ponytails knows the stock market has ticked every box for a bubble top, so everybody get in crash positions:
Let’s run through the requirements for a bubble top:
1. Retail investors (i.e. dumb money) are all in and buying the dip with absolute confidence. As the gray-ponytail traders know, there are many moving parts to the retail dumb money going all in:
— The pain of the last bubble bursting has finally faded and been replaced by greed as retail punters watch everyone else mint fortunes by buying the dip and gambling with abandon at the casino’s trendy tables: crypto, NFTs, Mega-Tech, EVs, uranium, etc.
— Prudence and caution (i.e. holding cash in low-risk accounts) are thrown to the wind as the more money you put into the bet, the bigger the rewards.
— Punters realize the key to the really big gains is maxing out margin and leverage, preferably by foregoing owning the underlying equity in favor of options and futures contracts.
— Confidence in the Federal Reserve’s god-like powers and determination to never let stocks decline more than a few percentage points over a few hours or days is off the charts.
— Confidence that this is a new era and so old rules no longer apply is in the stratosphere. Retail punters believe that cryptos, NFTs and blockchain are can’t-lose bets as these are A) unstoppable and B) revolutionizing finance and the economy. As for stocks, retail traders have discovered the power of the herd: if the herd all buys call options by the thousands, this forces market makers to buy the underlying stocks, pushing the price higher in a self-reinforcing feedback loop that is guaranteed to succeed.
— Retail investors view all these bets as extremely low risk and so there’s no financial sense in hedging bets or limiting margin debt, leverage or risk, because risk has been abolished by the Fed Put.
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Benefits of macroprudential policy in low interest rate environments – Alejandro Van der Ghote
15 december
Short-term interest rates, particularly the natural rate, have been in steady decline in the euro area and the US. This column argues that in economies with low natural rates, such as the euro area today, macroprudential policy can have benefits for the effectiveness of conventional monetary policy, in addition to safeguarding financial stability. Notably, macroprudential policies that curb leverage of financial intermediaries during upturns can also help stimulate aggregate demand during downturns, by containing systemic risk in financial markets.
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Why “Macro” Thinking in Economics Is Such a Problem – Gary Galles
18 december
As someone who teaches public finance (better termed the economics of government), I can’t count how many times I have heard politicians promise “comprehensive” reforms to some major problem. But what such efforts actually produce is always different from what is promised, because such achievements are beyond government’s competence. The more comprehensive the “reforms” (say, measured by the number of pages in a bill), the more adverse incentives undermining social cooperation are created and the less freedom survives. Of course, when the political goal is the “unity” of 50 percent + 1 in reallocating the minority’s rights and resources, that reality makes a great deal of sense.
Leonard Read confronted this problem in his “The Macro Malady,” chapter 8 in his 1967 Deeper than You Think, in terms of individuals who are micros, dealing with the scale of problem they have sufficient knowledge and power to alter for the better, versus government actors, less competent than we are for our micro problems, and even more so when trying to achieve comprehensive, systemic macro solutions.
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Stocks Don’t Need More Alarm Bells, They’re Already Clanging and Jangling All Over the Place. But Here we Are: Leverage – Wolf Richter
17 december
Stock market leverage, the big accelerator on the way up, and on the way down.
Increasing leverage – borrowing money to buy stocks – puts buying pressure on the stock market up. Declining leverage – selling stocks to reduce leverage – puts selling pressure on the market. Stock market leverage has ballooned over the past 20 months by historic proportions, which has contributed to the historic surge in stock prices. So we’ll keep an eye on leverage.
The tip of the iceberg of stock-market leverage that we can actually see is margin debt, which is reported on a monthly basis by FINRA, based on data reported by its member brokers.
Other forms of stock-market leverage occur in the shadows, such as Securities Based Lending (SBA) that isn’t tracked and reported in a centralized manner, though some banks choose to disclose it quarterly or annually.
There is leverage associated with options and other equities-based derivatives. Then there is leverage at the institutional level such as with hedge funds, which doesn’t show up until a fund implodes, such as Archegos, and everyone gets to pick through the debris.
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The real effects of banking the poor: Evidence from Brazil – Julia Fonseca, Adrien Matray
14 december
Access to finance is a crucial component of economic development. This column studies the effects of Brazil’s ‘Banks for All’ programme, which targeted underbanked cities not served by government-owned banks. It finds a strong positive effect of the policy on the number of bank branches and on the overall amount of credit and deposits, particularly for cities located in banking ‘deserts’. Additionally, treated cities experienced increases in the number of firms, higher demand for labour, and higher wages, confirming the link between financial and economic development.
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***Smart Enough to Get Rich, Not Smart Enough to Keep It – Charles Hugh Smith
14 december
Are we smart enough to keep our oh-so-easily conjured riches? If we continue to believe that doing more of what’s failed spectacularly will deliver permanently expanding riches, then the answer is no.
Near the end of his monumental 400+-page analysis of the notion that alternative energy sources can replace hydrocarbon fuels, (Energy and Human Ambitions on a Finite Planet), Thomas Murphy discusses the really big picture: mass extinction events and species’ role in mass extinctions.
So here’s the thing. The first species smart enough to exploit fossil fuels will do so with reckless abandon. Evolution did not skip steps and create a wise being — despite the fact that the sapiens in our species means wise. (Self-assigned flattery) A wise being would recognize early on the damage inherent in profligate use of fossil fuels and would have refrained from unfettered exploitation.
Not only is climate change a problem, but building an entire civilization dependent on a finite energy resource and also enabling a widespread degradation of natural ecosystems seems like an amateur blunder.
In other words, humanity was smart enough to exploit the natural riches of hydrocarbons but not smart enough to figure out what to do after we’ve consumed all the easy-to-extract wealth or how to deal with the consequences of the profligate use of all the riches.
I think the same can be said of the immense financial (i.e. phantom) wealth that’s been generated in the past 20 years: we were smart enough to generate all these hundreds of trillions of dollars of “wealth” but we aren’t smart enough to keep it or manage the consequences of our profligate use of the magic of money-creation.
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***Autocratic AI dystopias: From science fiction to social science fact – Martin Beraja, Andrew Kao, David Yang, Noam Yuchtman
17 december
The growth of artificial intelligence technology brings the potential of a ‘fourth industrial revolution’, but also poses challenges for democratic institutions. This column analyses the mutually reinforcing relationship between AI innovation and the political control objectives of autocrats. In the context of facial recognition AI in China, it shows that episodes of local political unrest lead to higher public procurement of AI technologies. Furthermore, these technologies are shown to mitigate the potential for exogenous shocks to trigger unrest, while also boosting broader software innovation in affected regions.
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Powell: Everything’s Moving Much Faster, incl. End of QE, Balance Sheet Reduction, Rate Hikes – Wolf Richter
15 december
Inflation now a “big threat.” After downplaying inflation all year, the Fed is starting to get serious.
“There is a real risk now that inflation may be more persistent,” Fed Chair Jerome Powell said today at the press conference, after downplaying it all year. “The risk of higher inflation becoming entrenched has certainly increased,” he said. “Part of the reason behind our move today is to put ourselves into the position to be able to deal with that risk. And I think we are in a position to deal with that risk.”
The most important thing to come out of the Fed meeting and Powell’s press conference afterwards is that everything is moving much faster than last time, that it’s moving much faster than the Fed said it would move just a few months ago: Inflation, wage increases, ending QE, hiking rates, and shrinking the balance sheet.
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The Fed’s Dovish “Tapering” And The ECB – Daniel Lacalle
16 December
This week, the Federal Reserve gave the most dovish “hawkish” statement ever. An apparent aggressive tapering that, in reality, means maintaining very low rates and massive repurchases for longer.
The Fed’s Dovish “Tapering” And The ECB
Inflation has skyrocketed and aggressive monetary policy is the key factor in understanding it. I already explained it in my article “The Myth of Cost-Push Inflation”. The Federal Reserve has finally recognized this and has made a U-turn in its policy of maintaining stimulus despite inflationary pressures.
The Federal Reserve now expects core inflation to remain above 2.7% in 2022 (previously it expected 2.3%) and that it will be above 2% in 2023 and 2024. That means the CPI (Consumer Price Index) will probably remain above 3-4% in that period. Taking into account that it will close the year above 6%, we are talking about an accumulated inflation of more than 14% in three years, a great risk for the recovery, real wages, family savings and investment.
The Federal Reserve has at least acted, and will reduce its monthly sovereign bond purchases to $20 billion and $10 billion a month of mortgage-backed securities. In addition, it will accelerate the rate increases to three hikes in 2022, three in 2023 and two in 2024 to reach a 2.1% reference rate in 2024.
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Gold Technicals: Yet Another Battle At $1800 – SchiffGold
19 december
Gold looked very strong through mid-November. Recent trends in September and October had been pointing to a breakout. The market delivered sending gold up through $1870. Unfortunately, hard resistance kept the bulls in check, despite repeated attempts to breakthrough. The previous price analysis presumed that a Brainard nomination at the Fed would be the catalyst needed to break through $1880. It also assumed that a Powell nomination, though expected, would bring gold back down some.
Unfortunately, the gold market took the Powell news harder than expected. It dropped like a rock. The announcement occurred prior to market open which is when liquidity is lighter. This caused the price to fall quickly. Newly formed and fragile support was shattered and by the time the market opened, gold was falling quickly. Eventually, it settled back into the $1750-$1800 range where it has been trapped for months.
Late this week, gold made another attempt to break through but failed to hold gains in the face of a rising dollar and closed the week just a shade under $1800 at $1798 (note: official Comex close was $1804). Will gold regain its footing and finally put $1800 in the rearview mirror or will it stay range-bound in the near term?
Current charts are fairly neutral. This could be the quiet before the storm really hits in 2022!
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***City autonomy reduced the incidence of the Black Death – Han Wang, Andrés Rodríguez-Pose
16 december
Variation in the incidence of pandemics among cities has often been attributed to luck, rather than to institutional factors. This column examines how the Black Death – the deadliest of pandemics – differently impacted European cities in the 14th century. City autonomy, which allowed the independent introduction of counter-measures, reduced the plague’s death toll, on average, by almost 10%. Being a capital city, hosting a parliament, or having a bishop or an archbishop did not produce similar benefits. Improving the quality of local institutions can be an efficient mechanism to fight pandemics, even today.
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One Chart Traders Might Want to Ponder – Charles Hugh Smith
17 december
But when the Fed’s fundamental powerlessness is revealed and the buy-the-dippers have been forced to liquidate, the true meaning of “mild” contagion will become apparent.
Since I’d rather not be renditioned to a rat-infested, freezing cell in an unnamed ‘stan, I’m circumspect about viruses in general. (The WiFi signal is probably weak due to all the masonry walls and metallic torture devices, and as for the food–grilled rat, anyone?)
My essay Virus Z: A Thought Experiment (July 1, 2021) encapsulates my thoughts on viruses (reading between the lines recommended).
But as a punter–oops, I mean investor–I’m free to discuss risk and consequence in markets. Yes, yes, I know there’s there’s no risk “because the Fed,” but last I checked the Fed’s god-like powers didn’t extend to the natural world, and so the chart below of how viral contagiousness can affect the consequences as measured in hospitalizations and deaths may be worth a glance.
Note that the chart explicitly states that the data is a simplified, hypothetical scenario that isn’t based on any specific viral variant. It is a generalized depiction of the consequences of big numbers: a virus that is terrifically contagious but not terribly lethal (i.e. “mild”) still ends up killing far more people than the more severe but less contagious variants because the number of infected people becomes consequentially large very quickly.
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The Myth Of Cost-Push Inflation – Daniel Lacalle
12 December
Senator Elizabeth Warren recently stated that rising prices were due to corporations increasing their profits. “This isn’t about inflation, this is about price gouging for these guys”. It is simply incorrect.
The Myth Of Cost-Push Inflation
No, corporations have not doubled their profits, and rising prices are not due to the evil doings of businesses. If evil corporations are to blame for rising prices in 2021, as Elizabeth Warren says, I imagine that they were magnanimous and generous corporations when there was low or no inflation, right?
Inflation is the tax of the poor. It destroys the purchasing power of wages and engulfs the little savings that workers accumulate. The rich can protect themselves by investing in real assets, real estate and financial, the poor cannot.
Inflation is not a coincidence, it is a policy.
The middle class and the salaried workers not only do not see the advantages of inflation, but they also lose in real wages and also in their future prospects. Robert J. Barro’s study in more than 100 countries shows that an average 10% increase in inflation during one year reduces growth by 0.2-0.3% and investment from 0.4% to 0.6 % in the next year. The problem is that the damage is entrenched. Even if the impact on GDP is apparently small, the negative effect on both growth and investment remains for several years.
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***Alone and lonely: The economic cost of solitude – Chiara Burlina, Andrés Rodríguez-Pose
19 december
Western countries are facing an ‘epidemic of solitude’. Though its impact on mental health has attracted considerable attention, little is known about its economic effects. This column distinguishes between two forms of solitude – loneliness and living alone – and studies their influence on the economic performance of European regions at the local level. Greater shares of people living alone drive economic growth, whereas an increase in loneliness has damaging economic consequences. Though the relationship is complex and non-linear, a region with more lonely people will experience lower aggregate economic growth.
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