Economische aanraders 20-06-2021
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 G7’s Reckless Commitment To Mounting Debt – Daniel Lacalle
Historically, meetings of the largest economies in the world have been essential to reach essential agreements that would incentivize prosperity and growth. This was not the case this time. The G7 meeting agreements were light on detailed economic decisions, except on the most damaging of them all. A minimum global corporate tax. Why not an agreement on a maximum global public spending?
Imposing a minimum global corporate tax of 15 percent without addressing all other taxes that governments impose before a business reaches a net profit is dangerous. Why would there be a minimum global corporate tax when subsidies are different, some countries have different or no VAT rates (value added tax), and the endless list of indirect taxes is completely different? The G7 “commit to reaching an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20 percent of profit exceeding a 10 percent margin for the largest and most profitable multinational enterprises.” This entire sentence makes no sense, opens the door to double taxation and penalizes the most competitive and profitable companies while it has no impact on the dinosaur loss-making or poor-margin conglomerates that most governments call “strategic sectors.”
***USA 2021: Capitalism for the Powerless, Crony-Socialism for the Powerful – Charles Hugh Smith
The only dynamic that’s even faintly “capitalist” about America’s Crony-Socialism is the price of political corruption is still a “market.”
The supposed “choice” between “capitalism” and “socialism” is a useful fabrication masking the worst of all possible worlds we inhabit: Capitalism for the powerless and Crony-Socialism for the powerful. Capitalism’s primary dynamics are reserved solely for the powerless: market price of money, capital’s exploitive potential, free-for-all competition and creative destruction.
The powerful, on the other hand, bask in the warm glow of socialism: The Federal Reserve protects them from the market cost of money–financiers and the super-wealthy get their money for virtually nothing from the Fed, in virtually unlimited quantities–and the Treasury, Congress and the Executive branch protect them from any losses: their gains are private, but their losses are transferred to the public. The Supreme Court ensures the super-rich maintain this cozy crony-socialism by ensuring they can buy political power via lobbying and campaign contributions–under the laughable excuse of free speech.
Cronies get the best political system money can buy and you–well, you get to carry a sign on the street corner, just before you’re hauled off to jail for disturbing the peace (and you’re banned by social media/search Big Tech, i.e. privatized totalitarianism, for good measure).
Wages, Prices, and the Demand for Money: Keynes Got It All Wrong – Robert Blumen
Markets clear. Or so was the accumulated wisdom in the half century before John Maynard Keynes. The British economist proposed a novel theory of economics in 1936 based on the opposite premise: markets don’t clear. While Keynesian theory is quite complex and his book widely regarded as unreadable, in his system, chronic idleness of useful resources is the rule. In Keynes’s world, the market can find a market-clearing price through decentralized adjustments for most preferences among most goods. But two particular preferences are problematic in that the price system does not balance supply and demand. The two troublemakers are time preference and the reservation demand for money. Those two bad actors cause the market process to fail for everyone else.
The British Austrian school economist William H. Hutt was an underappreciated critic of Keynes. In Hutt’s The Keynesian Episode: A Reassessment, he distilled the obscurantism of “the new economics” into a series of clear propositions. When reduced to its essence, Keynesian economics is compelling in its absurdity. In Keynes’s version of reality, there are Good Preferences and Bad Preferences. The bad ones are so troublesome that an increase in either one can cause entirely different useful resources to lose the ability to command a money price altogether. The effect is so strong that a productive worker may become idle, not due to his own lack of skill or sloth, but due to someone else’s attempt to save. When a resource is stuck in this idle state, the owner and buyers cannot find a common ground.
Fed’s Reverse Repos Spike to $756 Billion, Undoing 6 Months of QE. In Opposite Direction, Fed’s QE Pushes Assets Past $8 Trillion – Wolf Richter
Yesterday, the Fed raised its interest rate on overnight reverse repos, and this morning, a giant sucking sound of cash.
The Fed sold a record $756 billion in Treasury securities this morning in exchange for cash via overnight “reverse repos.” This was up by a stunning 45% from yesterday’s operations of $521 billion. There were 68 counterparties involved. Yesterday’s overnight reverse repos had matured and unwound this morning, to be more than replaced by today’s tsunami.
During the period starting in 2014 and then abating with the Fed’s quantitative tightening in 2018, the US financial system was also creaking under a massive amount of cash following years of QE, and the Fed drained some of that cash out via reverse repos. There too were spikes, but they came at the last day of the quarter, and particularly at the end of the year.
Thanks to Federal Megaspending, the Trade Deficit Has Only Gotten Worse – Mihai Macovei
President Trump’s protectionist trade measures against China and other external partners have not caused a reduction of the total US trade deficit. The latter actually grew further as China’s exports found indirect ways into the US and massive domestic spending schemes were expanded during the pandemic.
Almost three years after the Trump administration unleashed the trade war on China, hostilities have not ended, but only entered a truce with the Phase One trade deal signed in January 2020. The US tariff hike on more than $360 billion of Chinese goods has remained in place until today. Washington imposed four rounds of tariffs in 2018 and 2019, with the bulk of the tariffs ranging from 10 to 25 percent coming into force in September 2018 and September 2019. Beijing has gradually retaliated with tariffs ranging from 5 to 25 percent on about $110 billion of US products. The difference in the volumes of products targeted by tariffs reflects the unbalanced bilateral trade.
Migration and risk sharing in currency unions: The euro area versus the US – Wilhelm Kohler, Gernot Müller, Susanne Wellmann
Labour mobility is a key criterion for assessing optimum currency areas. To smooth country-specific shocks or business cycles in currency unions, it is key that people migrate across the countries or regions of the union. This column argues that the ongoing discussion about risk sharing in the euro area neglects the issue of labour mobility. Relative to the US, migration rates in the euro area are significantly lower and migration contributes less to overall risk sharing. It calls for a renewed focus on the principle of labour mobility in order to enhance risk sharing in the euro area.
Is Guaranteed Basic Income the Solution to Robots Taking Our Jobs? – Robert Blumen
The idea of universal basic income (UBI) is near the peak of the hype cycle. Democrat Andrew Yang made it the flagship issue of his presidential campaign. A small industry of advocates tirelessly push arguments in its favor. I will address two in this piece. The first: the claim of permanent elimination of jobs. The second: the resulting need for income to compensate for the fall in purchasing power from the lack of work. Both rely on long-discarded economic fallacies.
No one doubts that robots, software, and automation eliminate some need for human labor where adopted. But the automation doomers’ scenario assumes that when jobs are eliminated by automation in one place, that number of jobs are permanently gone. For this to be true, there would have to be no compensating growth in the need for labor elsewhere.
The purchasing power argument says that the economy will suffer from an overall loss of demand due to the reduction in income when people are out of work. Martin Ford (futurist and New York Times bestselling author of Rise of the Robots), thinks that UBI is “the answer to job automation” because it will “ensure that consumers have money to spend—because the market economy requires that there be adequate demand for products and services.”
Banking on experience – Hans Degryse, Sotirios Kokas, Raoul Minetti
The debate surrounding the drafting and implementation of the new Basel III accord has reignited the debate on the role of bank business models and lending technologies in banking activities, and the way these should be accounted for by regulators. This column explores how banks’ credit market experiences affect their decisions and moral hazards in lending. Banks’ prior experience with borrowing firms and co-lenders reinforces their monitoring incentives allowing for a smaller lead share in the lending syndicate. Banks’ sectoral experience, in contrast, appears to dilute monitoring incentives, calling for a larger lead share in the lending syndicate.
***Despite Massive Price Increases, Retail Sales Drop: Buyers’ Strike & Fading Stimmies Dent the WTF Spike – Wolf Richter
Americans are having to pay more to get less.
“Gonna Be Tough in May,” I said a month ago, when discussing the stimmie-powered retail sales in April. And that’s what it was. Retail sales in May, at $620 billion seasonally adjusted, were down 1.3% from April, and down a smidge from March too, according to the Commerce Department today. But retail sales remained very high historically, powered by left-over stimmies, and by market-mania gains, and above all, by inflation.
There have been massive price increases in the biggest segments of retail sales, including sales at auto and parts dealers (these retailers account for 22% of total retail sales), where prices have jumped into the stratosphere, including in used vehicles with an 18% price spike in the two months since March.
Why Stimulus Does Not Stimulate – Robert Blumen
Congress is hard at work on a stimulus bill. Doubtless their efforts will pay off. Does anyone stop to ask what it is about stimulus that stimulates? And what, exactly, does it stimulate? Start by spending a lot of money that the government does not have, borrow the difference, and the central bank prints the difference and buys up the debt. But does that increase the production of useful things? To answer this, we look at an unlikely friend, Keynes and his General Theory.
The British Austrian school economist William Harold Hutt penned a devastating critique of the new economics, The Keynesian Episode: A Reassessment. In this book, Hutt explained why Keynes’s views were able to gain a foothold in the Britain of 1937. The economy was stuck in an intransigent slump of many years’ duration. The cause of the problem? Many workers were priced out of the labor market by unrealistically high wage demands. A welfare system that enabled them to remain unemployed contributed to the problem. The wages that were too high had been negotiated by labor unions using the threat of strike, and the full awareness that the government would look the other way when unions employed coercive measures. Other workers were forced into underemployment, doing something less remunerative or a job they cared for less.
Say’s law is the observation that each supply of a good to the market constitutes a demand for some noncompeting good. As workers add to supply, they add to demand. In reverse, when workers withdraw their services, they cease their contributions to supply and in so doing withdraw their ability to demand to the same degree. The withdrawal of demand made conditions worse in other industries not constrained by labor union contracts, and made the more marginal workers in those industries unnecessary (or at best able to work only at a lower wage).
Is Inflation “Transitory”? Here’s Your Simple Test – Charles Hugh Smith
Is inflation “transitory” in your household budget? Really? Where?
The Federal Reserve has been bleating that inflation is “transitory”–but what about the real world that we live in, as opposed to the abstract funhouse of rigged statistics? Here’s a simple test to help you decide if inflation is “transitory” in the real world.
Let’s start with some simple stipulations: price is price, there are no tricks like hedonics or substitution. Nobody cares if the truck stereo is better than it was 40 years ago, the price of the truck is the price we pay today, and that’s all that matters.
(Funny, the funhouse statistical adjustments never consider that appliances that used to last 30 years now break down and are junked after 3 years–if we adjusted for that, the $500 washer would be tagged at $5,000 today because it has lost 90% of its durability over the past 30 years.)
Second, inflation must be weighted to “big ticket” nondiscretionary items. The funhouse statistical trickery counts a $10 drop in the price of a TV (which you buy every few years at best) as equal to a $100 rise in childcare, which you pay monthly. No, no, no: a 10% rise in rent, healthcare insurance and childcare is $400 a month or roughly $5,000 a year. A 10% decline in a TV you buy every three years is $50. Even a 50% drop in the price of a TV ($250) is $83 per year–absolutely trivial, absolutely meaningless compared to $5,000 in higher big-ticket expenses.
From gross exports to value-added exports to income exports – Timon Bohn, Steven Brakman, Erik Dietzenbacher
Global value chain analyses to examine the income gains from trade are particularly complicated by ownership relations between headquarters and subsidiaries. The consequence is that the value added generated within one country may well result in income in another country. This column presents the income perspective as a framework to deal with this complication. Trade deficits become smaller for wealthy countries and larger for developing countries. Discussions on ‘unfair’ trade should take the income perspective on board.
A Glimpse at Hidden Stock Market Leverage of “Securities-Based Lending,” as Known Stock Market Leverage Spikes to WTF High – Wolf Richter
We don’t know how much total leverage there is, but from the trends in margin debt, we know it’s huge and ballooning.
A big part of the leverage in the stock market is not tracked and no one knows what it is. Occasionally, a tidbit bubbles to the surface when something blows up, such as the Archegos fiasco.
Another part of stock-market leverage, “Securities-Based Lending” (SBL), can be found on bank balance sheets if banks choose to disclose it. But not many banks disclose it, and no one tracks this in a summary figure, and we don’t know what the totals are. But they’re big.
For example, Bank of America disclosed $45 billion in SBL in its 10-Q filing with the SEC for Q1. This was up 25% from a year earlier. The bank says that securities-based lending has “minimal credit risk” for the bank because the collateral – namely stocks and other liquid securities – has a market value that is “greater than or equal to the outstanding loan balance.”
Corporate borrowing during crises: Switches in global markets – Juan Jose Cortina Lorente, Tatiana Didier, Sergio Schmukler
The recent expansion in global corporate debt has occurred not only in one but in several debt markets, notably bonds and syndicated loans. This column argues that firms obtain financing in several debt markets and this more diversified corporate debt composition might help them mitigate the impact of supply-side shocks. Contrary to common beliefs, debt financing did not necessarily halt during crises because firms from advanced and emerging economies shifted their capital raising activity between bonds and syndicated loans as well as between domestic and international markets. These market switches, conducted mostly by large firms, impacted the amount of debt borrowed, the borrowing maturity, and the debt currency denomination, within firms and at the aggregate level. Overall, debt markets need to be analysed jointly to obtain a more complete picture of who is borrowing at different points in time and how overall corporate debt is evolving.
This Is What Could Trigger Big Growth in CPI Inflation – Brendan Brown
Many episodes of monetary inflation, some even long and virulent, do not feature a denouement in a sustained high CPI inflation over many years. Instead, these episodes have the common characteristics of asset inflation and the monetary authority levying tax in various forms – principally inflation tax or monetary repression tax. For the monetary inflation to undergo combustion into sustained high CPI inflation it must generate necessary one or two necessary conditions. First, currency collapse; or second, a credit boom which spawns a persistent tendency of demand to exceed supply at present prices across a broad range of markets in goods and services.
That combustion happened in the 1970s in the US well into the severe monetary inflation which started in the early 1960s; it did not happen in the 1920s in the US, and it has not yet happened in the great monetary inflation in the US starting early in the second decade of the twenty-first century. The combustion process did get under way in the series of monetary inflations between 1985 and 2007 but was halted each time by a severe tightening of monetary policy.
***Voice at work: The effects of worker representation on worker welfare and firm performance – Jarkko Harju, Simon Jäger, Benjamin Schoefer
Many continental European countries give workers a formal right to voice via board-level or shop-floor elected representation, but evidence on the effects of these arrangements is scarce. This column examines reforms in Finland that introduced or expanded workers’ rights to voice institutions. Overall, the reforms had non-existent or small positive effects on turnover, job quality, firm survival, productivity, and capital intensity. It may be that Finnish worker voice institutions operate through information sharing and cooperation, which do not substantially improve worker outcomes but also do not harm firm performance.
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