Economische aanraders 20-03-2022
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.
Understanding How Balance of Payments and Exchange Rates Work – Frank Shostak
Most economic commentators believe balance of trade is a key factor in a currency’s exchange rate. All other things being equal, an increase in imports, which leads to a trade deficit, gives rise to an increase in the demand for foreign currency.
To obtain foreign currency, importers sell their domestic currency for it. This strengthens the exchange rate of the foreign currency against the domestic currency—i.e., there is more domestic money per unit of a foreign money.
Conversely, all other things being equal, an increase in exports leads to a trade surplus. When exporters exchange their foreign currency earnings for their domestic money, this strengthens the domestic money’s exchange rate against the foreign money (there is less domestic money per unit of a foreign money).
Again, if a country exports more than it imports, there is a strengthening in the demand for the country’s goods, and thus for its currency. Consequently, the price of the domestic money in terms of foreign money is likely to increase.
Will Saudi Arabia Ditch The US Dollar? – Daniel Lacalle
There are numerous articles mentioning that Saudi Arabia may use the Yuan, China’s domestic currency, for its oil exports.
How much does Saudi Arabia export to China? According to the OEC, the kingdom’s main exports are to China ($45.8B), India ($25.1B), Japan ($24.5B), South Korea ($19.5B), and the United States ($12.2B). Exports of crude oil reached $145 billion in total.
Saudi Arabia is the world’s largest oil exporter at $145 billion, and China the largest buyer at $204 billion, with 2019 figures.
Saudi Arabia’s public accounts are exemplary. From a 4.8% deficit, the kingdom expects a surplus in 2022 and its public debt to GDP is 30.8%, one of the lowest in the world.
Does Saudi Arabia need to use the yuan at all? No. Its foreign currency reserves including gold stood at $472.8 billion in 2020 despite the pandemic-led slump in exports and oil demand. Is it in any pressure to change currency? Even less so. Its reserves comfortably cover its external debt, giving an enviable level of stability compared to other OPEC nations that have large trade and fiscal deficits.
Public finances and climate change in the post-pandemic era – Niels Thygesen, Roel Beetsma, Massimo Bordignon, Xavier Debrun, Mateusz Szczurek, Martin Larch, Matthias Busse, Mateja Gabrijelcic, Laszlo Jankovics, Janis Malzubris
One of the key challenges for the next decade is how to facilitate the green transition. Governments are expected to scale up public investment, buffer the costs of more severe weather-related shocks, and deploy other fiscal tools in a way that facilitates a smooth private sector transition, as well as handle the unavoidable distributive effects of a higher carbon price. This column discusses this year’s conference of the European Fiscal Board, at which a prominent line-up of speakers had an open and inspiring exchange on how the greening challenge could be addressed in the future of the EU fiscal framework.
The West’s Russia Sanctions Could Lead to Many Unpredictable and Unpleasant Outcomes – Brendan Brown
Global supply shocks are historically rare events. All the more extraordinary to have two such shocks in quick succession—the second arriving even before the first has entirely faded away. That is what the world now experiences in the form of the Great Pandemic followed by the Great West-Russia economic war. The most visible symptom of the supply disruption is the sky-high price of energy and a range of other commodities.
What Is the Effect of Sanctions?
The waging of a long and all-out military war usually, if not always, exerts a toll in terms of surging prices. But what about economic war waged through Western sanctions by states not simultaneously engaged in direct military conflict? The laboratory of history for such warfare is small. Indeed, there is no experience with which usefully to compare the West’s economic war against Russia in the present. There are grounds to think that there will be serious long-term price-inflation-fueled damage on the perpetrators. (The consequences of price increases for the country on the receiving end of sanctions is a subject for another day).
Let’s take one step back to consider what is new about the nature of this economic war.
First, it started as a clear threat by the USA and its main European allies. Spelled out in all its menacing detail, albeit with some ambiguity at the start, aimed at deterring a Russian invasion of Ukraine. It failed in that first objective. Both the economic war and the military war are now in a “dig-in” phase. A snapshot of the dominant view at present in the marketplace is that the Russia’s military campaign will reach a “permanent ceasefire stage” long before the effective end of the economic war.
But Whose Money Evaporated when JP Morgan, BlackRock, Pimco, Calpers, Others Report Huge Losses on Russian Assets? – Wolf Richter
OPM = Other People’s Money — namely from American and European retail investors and pension beneficiaries.
Russia’s Central Bank, which had closed the Moscow Stock Exchange on February 25, said over the weekend that the stock exchange would remain closed through March 18 for sure, and that in terms of trading in the following week, the Central Bank would make an announcement “later.”
Stocks of Russian companies that traded in London collapsed before trading was halted, such as Gazprom, which had collapsed by 93% by the time trading was halted on March 2.
Corporate bonds issued by Russian companies in USD, EUR, GBP, etc. are now facing default as these companies are having difficulties making interest payments to bondholders in foreign currency, or may be blocked by the Russian government to do so and may have to make payments in rubles. What companies will do with maturing bonds that need to be paid off in hard currency remains a question mark.
Corporate legacy debt, inflation, and the efficacy of monetary policy – Charles Goodhart, Udara Peiris, Dimitri Tsomocos, Xuan Wang
The COVID-19 pandemic has coincided with a further rapid increase in corporate indebtedness. This column argues that high levels of corporate debt may distort the transmission of monetary policy and make contractionary monetary policy less effective in controlling inflation. Consequently, the trade-off between inflation stabilisation and output stabilisation becomes more problematic when there is a large volume of corporate debt in the economy.
How Healthcare Became Sickcare – Charles Hugh Smith
The financialization of healthcare started two generations ago and is now in a run-to-fail feedback loop of insolvency.
Long-time readers know I have been critical of U.S. healthcare for over a decade. When I use the term sickcare this is not a reflection on the hard work of frontline caregivers–it is a reflection of the financialization incentives that have distorted the system’s priorities and put it on a path to insolvency.
To describe how Healthcare became Sickcare, I’m sharing the perspective of an Insider. The financialization of healthcare started two generations ago and is now in a run-to-fail feedback loop of insolvency. As I have often said, Sickcare will bankrupt the nation all by itself. Here is the Insider’s essay:
As your readers try to make sense of the American health system and its response to COVID, they may benefit from a brief summary of the system’s current business model from someone on the inside.
It’s my hope that it will help them make sense of what is going on around them.
I read, see, and hear others inside the system scared for their livelihoods if they speak out and I’m ashamed of myself, as my livelihood no longer depends on my silence.
So I’m sharing this to speak for those who can’t.
For reasons beyond the scope of this study, and aside from a (very) few service lines, the delivery of healthcare is a low margin affair. Unless one keeps their overhead very low, profit is difficult to achieve.
Yet, the consolidated health systems which increasingly dominate the landscape are clearly high-overhead concerns, what with their staggering management bandwidth, gleaming palaces of healing, and obscene executive compensation.
How does one square this?
There Is No Winner in This Trade War – Joseph Solis-Mullen
While the US had already been reversing course on trade liberalization for a decade prior, the election of Donald Trump brought with it a programmatic protectionist approach. As President, Joe Biden has largely followed Trump’s lead, with polls showing broad support among respondents of both parties for “Buy American” initiatives and other protectionist measures. Even though the massive disruption to the global economy precipitated by the response to covid makes saying anything too definite difficult, enough data is available to pass an educated judgment as to whether or not these policies should be continued.
The answer: no.
First, the US is losing its trade war of choice with China. Under Trump, the US ran a larger balance-of-trade deficit with China than in either of Barack Obama’s and George W. Bush’s two terms. Supporters of Trump’s, and now Biden’s, chosen policies might object that by the time Trump left office the deficit was smaller than the one he had inherited. Appearances can be deceptive, however, for, in the words of Mark Twain, there are three kinds of lies: “Lies, damned lies, and statistics.”
The ascent of crypto assets: Evolution and macro-financial drivers – Erik Feyen, Yusaku Kawashima, Raunak Mittal
Crypto-asset holdings and transaction volumes have grown rapidly around the world, and crypto assets are increasingly regarded as an emerging asset class. This column finds that transaction volumes across countries appear to be driven by globally relevant factors such as US longer-term inflation expectations, US real Treasury yields, and gold and crypto-asset prices, rather than recent country-level macroeconomic developments. Volumes also tend to be higher in countries with higher information and communications technology penetration and greater reliance on remittances.
Gazillion Miles Behind the Curve, the Fed Gets Hawkish: More Rate Hikes, “Faster and Much Sooner” Quantitative Tightening – Wolf Richter
The strong economy and labor market can “handle tighter monetary policy.”
Folks kept saying for many months that the Fed is “trapped,” that it can never raise interest rates, that it can never end QE, that it can never-ever shrink its balance sheet. And now the Fed has ended QE, and it has hiked its key policy rates by 25 basis points today, and it indicated that rate hikes are on the table at every meeting this year – seven more – and that there’s “certainly a possibility” that this might include 50-basis-point hikes, Powell said, and that the details of the balance sheet shrinkage (Quantitative Tightening) could be announced “as soon as” at the next FOMC meeting in May, Powell said, and that the balance-sheet shrinkage will be “faster and much sooner” than last time.
The Fed – the most reckless Fed ever – is a gazillion miles behind the curve. CPI inflation is raging at 7.9%, not including the effects of the recent spike in energy prices. But the Fed did move today, and it moved with hawkish twists, in terms of how many rate hikes this year and next year, and how soon QT would start.
Carbon pricing and cross-border carbon leakage with international transport – Keisaku Higashida, Jota Ishikawa, Nori Tarui
Existing studies of the impact of carbon pricing on carbon emissions typically ignore the role played by international transportation. This column provides a framework to assess the importance of this sector for carbon leakage across borders and across sectors. The authors identify the importance of asymmetric trade volumes on shipping routes, and the interplay between transportation costs and foreign direct investment choices, in determining the amount of carbon leakage. This shows the need to understand the market environment when designing carbon pricing policies.
Producer Price Inflation Gets Entrenched at 10%, Worst Level in the Data – Wolf Richter
Businesses are confident they can pass on higher prices, plus some, to consumers.
The Producer Price Index for Final Demand tracks the input prices for consumer-facing industries whose output prices are then tracked by the Consumer Price Index which, WHOOSH, hit 7.9% in February, the worst since 1981. Today, the Bureau of Labor Statistics released the PPI Final Demand for February, which jumped by 0.8% in February from January, and by 10.0% from a year ago.
This marks the fourth month in a row that producer price inflation clocked in at around 10%, and all four months were by far the worst in the data going back to 2010 (red line). And it does not yet include the spike in fuel prices following Russia’s invasion of the Ukraine. That’s still to come.
War in Ukraine: The financial defence – Yevhenii Skok, Oliver de Groot
The war in Ukraine is a humanitarian catastrophe, but how has the Ukrainian economy held up? This column examines the policies by the National Bank of Ukraine and the international financial community to maintain liquidity and financial stability in the country. It provides a brief monetary history of Ukraine, documents the policy actions of the past few weeks, and explores the challenges ahead.
***Risk Accumulates Where No One Is Looking For It – Charles Hugh Smith
All this decay is so incremental that nobody thinks it possible that it could ever accumulate into a risk that threatens the entire system.
The funny thing about risk is the risk that everyone sees isn’t the risk that blows up the system. The mere fact that everyone is paying attention to the risk tends to defang it as everyone rushes to hedge or reduce the risk.
It’s the risk that accumulates under everyone’s radar that takes down the system. There are several dynamics driving this paradox but for now let’s look at the paradox of optimization.
The paradox of optimization is that to optimize efficiency and output (i.e. profit) resilience must be sacrificed. This leaves the system vulnerable to collapse when the system veers beyond the parameters set in stone by optimization.
Resilience is the result of a number of costly-to-maintain features. For example, redundancy: to optimize the supply chain, get rid of the higher cost suppliers and depend entirely on the lowest-cost supplier. This sole-source optimization works great until the sole-source supplier encounters a spot of bother, or one of the sole-source supplier’s component manufacturer encounters a spot of bother. By the time the entire supply chain has collapsed, it’s too late to reconfigure a factory or increase the production of marginal suppliers.
The classic example of optimization and redundancy is a spacecraft. Oops, the oxygen valve just blew out. Install the replacement valve before we all expire. Oops, the spare valve was eliminated in the push to reduce weight.
Collapse of the Clean Development Mechanism scheme under the Kyoto Protocol and its spillover: Consequences of ‘carbon panic’ – Kazunari Kainou
The Clean Development Mechanism under the Kyoto Protocol is the world’s first international carbon finance scheme. Companies can acquire tradeable certified emission reduction credits by investing in energy conservation and new energy projects in developing countries. Despite its early success, the scheme collapsed following a ‘carbon panic’ in 2012. This column reviews the collapse of the mechanism and its spillovers on Paris Agreement negotiations. While the scheme was unexpectedly revived thanks to interest from the US and developing countries, carbon financing remains structurally prone to panic.
***How the Vehicle Production Nightmare Upended Everything and Why Automakers & Dealers Don’t Want the Old Ways Back – Wolf Richter
But There’s No Shortage of Used Vehicles.
Despite the ridiculous price spikes for used vehicles – the CPI for used vehicle retail prices spiked 41% year-over-year in February, and Manheim’s wholesale price index for used vehicles spiked by 38% – there’s no shortage of used vehicles on dealer lots. There is plenty of supply. But new vehicles have been in a historic shortage due to the semiconductor shortages and the ensuing production cuts. And this has changed how the industry operates.
The number of used vehicles on lots of franchised and independent dealers in February (purple line in the chart below) rose to 2.62 million vehicles, the highest since December 2020, according to data from Cox Automotive. This was down by 9% from the average inventory in 2019 (2.88 million vehicles).
Robots for economic development – Massimiliano Calì, Giorgio Presidente
Do automation technologies constitute an opportunity or a threat for developing countries? This column uses data on Indonesian manufacturing firms to document a positive impact on employment of adopting robots. This finding contrasts with the existing evidence of negative impacts in economies at relatively advanced stages of automation, and could be explained by diminishing returns to robots, given the relatively low robot adoption in Indonesia.
The Progressives’ Liberal Democracy Has Failed. Radical Decentralization Is the Answer. – José Niño
So-called liberal democracies have characterized the West for the past century and are viewed as the pinnacle of political development. So much so that Western elites are firmly convinced that this system of governance should be spread far and wide—be it indirectly (color revolutions) or directly (economic sanctions, kinetic military actions, or nation-building expeditions).
Liberal democracies are political systems in which people entrust political power to a political class that, at least on paper, is constitutionally limited when it comes to exercising political power. Further, liberal democracies are supposed to protect civil liberties and nominally respect private property rights.
What appears good to many on paper does not necessarily operate smoothly in real time. Upon further analysis of the past century of politics in the West, one quickly realizes that the previous laissez-faire classical liberal order of the nineteenth century has become an afterthought to the progressive liberals of today. Moreover, modern liberal democracy has become little more than a flimsy façade for soft authoritarianism. The illusion of liberal democracy has been completely shattered by the way Western governments have responded to the covid-19 pandemic.
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