Economische aanraders 21-11-2021
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.
A convenient myth: Climate risk and the financial system – John H. Cochrane
In an October 21 press release, Janet Yellen — Treasury secretary and head of the Financial Stability Oversight Council (FSOC), the umbrella group that unites all U.S. financial regulators — eloquently summarized a vast program to implement climate policy via financial regulation:
“FSOC is recognizing that climate change is an emerging and increasing threat to U.S. financial stability. This report puts climate change squarely at the forefront of the agenda of its member agencies and is a critical first step forward in addressing the threat of climate change.”
You do not have to disagree with one iota of climate science — and I will not do so in this essay — to find this program outrageous, an affront to effective financial regulation, to effective climate policy, and to our system of government.
Of all the threats posed by a slowly warming climate, why is Ms. Yellen talking about financial stability? The answer is simple: Financial regulators are not supposed to implement each administration’s policies on non-financial matters. Financial regulators may only act if they think financial stability is at risk.
Why? Imagine that Trump returns. He declares, “Illegal immigration is an existential crisis. I can’t get Congress to do anything about it. Financial regulators: Tell banks to freeze the bank accounts of any customers who can’t prove legal status. Scour people’s accounts for payments to illegal employees. Freeze out any business that hires an illegal.” You would be shocked. The nation would be shocked. Ms. Yellen would be shocked. There is no financial risk here, we would all say. This is a vast abuse of power.
OPEC Can’t Make High Oil Prices Go Away – Daniel Lacalle
High oil prices are a symptom of economic and monetary imbalances, not just a consequence of Organization of the Petroleum Exporting Countries (OPEC) decisions. Throughout history, we have seen how OPEC cuts have done little to elevate prices when diversification and technology added to rising efficiency.
Likewise, OPEC output increases do not necessarily mean lower prices, let alone reasonable ones. Increased OPEC output helps but does not solve price issues, even if they would probably like to.
The problem in the oil market has been created by years of massive capital misallocation and underinvestment in energy created by extremely loose monetary policies directed by governments that have penalized capital expenditure on fossil fuels for ideological reasons.
Misguided activism and political nudging in the middle of massive monetary injections have created massive bottlenecks and underinvestment that hinder both security of supply and a technically feasible competitive energy transition.
From recovery to expansion, amid headwinds: The Commission’s Autumn 2021 Forecast – Maarten Verwey, Oliver Dieckmann, Przemyslaw Wozniak
The Covid-19 pandemic is not over, but due to increasing vaccination rates and an improving health situation, since spring many restrictions in the EU have been gradually eased and this ‘reopening’ has fuelled economic growth more than expected. Supported by monetary and fiscal policy, the foundations are in place for sustaining growth. However, headwinds come from supply-demand imbalances and higher energy prices. In its Autumn 2021 Forecast, the European Commission expects GDP in the EU and the euro area to grow in 2021 by 5%, in 2022 by 4¼%, and in 2023 by 2½%. The inflation forecast for all three years has been revised up with rates above 2% in 2021 and 2022, but with declines from early 2022 onwards.
“Going Cashless” Isn’t as Easy as It Seems – Frank Shostak
Many economic commentators are in favor of phasing out cash. They are of the view that cash provides support to the shadow economy and permits tax evasion. It is also held that in times of economic shocks that push the economy into a recession the rising demand for cash exacerbates the downturn—it becomes a factor of instability. Rather than spend money and boost aggregate demand, the increased demand for cash works against this. Consequently, it is argued that individuals’ access to cash should be curtailed in order to minimize the potential negatives that cash can pose to economy’s health.
Furthermore, it is held that in the modern world there is hardly any need for cash since most transactions can be settled by means of electronic money transfer.
According to mainstream economics, the correct definition of money is not something permanent but flexible. Most economists hold that since the early 1980’s, as a result of financial deregulation, the nature of financial markets has changed and consequently the past definitions of money no longer hold. The past definition of money, it is held, is also likely to be affected by the expected introduction of the cryptocurrency. Is this is however the case?
Massive Price Increases & Overstimulated Demand Fuel Historic Surge in Retail Sales – Wolf Richter
Money-printing hits home. Charts by retailer category.
Total retail sales jumped by 1.7% in October from September, by 16.3% from October a year ago, and by 22% from October 2019, to a record $638 billion (seasonally adjusted), according to the Census Bureau today, blowing by the mind-blowing free-money-blow-off-spike in March and April, driven by equally mind-blowing inflation:
Fired up by $4.5 trillion in Federal Reserve money printing and by $5.7 trillion in federal government deficit spending since March 2020, over $10 trillion in total monetary and fiscal stimulus in just 20 months, including hundreds of billions of dollars in free money handed directly to states, businesses, and consumers, and trillions of dollars handed to the markets, leading to a monstrously overstimulated economy and to even more monstrously overstimulated markets, well – you guessed it but the Fed refuses to guess it – demand for goods of all kinds has spiked in a historic manner, as you can see in the charts below.
The Fed’s Moral Hazard Monster Is About to Lay Waste to “Wealth” – Charles Hugh Smith
If the Fed set out to destroy the financial system, they’re very close to finishing the job.
If you set out to destroy markets and the financial system, your most important weapon is moral hazard, the disconnection of risk and consequence. You disconnect risk from consequence by rewarding those making the riskiest bets and bailing out gamblers whose bets went bad.
You reward those making the riskiest bets by pushing markets higher regardless of any other factors. Nothing matters except your support of ever higher markets.
This implicit guarantee that any bet on markets lofting higher will be a winning gamble rewards those making the riskiest bets. The punters who played small with cash made a few bucks, but the punters who borrowed heavily and then leveraged those bets to the hilt made a killing.
Inflation meditation – John H. Cochrane
The discussion about inflation is pretty confused. There is a lot of confusion about aggregate demand vs. individual demand, aggregate supply vs. supply, and about relative prices vs. inflation.
My theme: Inflation is entirely about “demand,” not “supply.” Fixing the ports, the chips, the pipelines, the labor disincentives, the regulations, are all great and good, and the key to economic growth. But they will not on their own do much to slow inflation. We are having inflation because the government printed up a few trillion dollars, and borrowed a few trillion more, and wrote people checks. People are spending the checks.
At a superficial level this is obvious. If people weren’t spending a lot of money, the ports would not be clogged. But it’s deeper than that.
Inflation is all prices and wages going up at the same time. Relative price changes are when one price goes up and other prices go down. Reality combines the two, but let’s use terms correctly for each element.
Leaving behind the Labor Theory of Value – Gary Galles
The labor theory of value has long undermined people’s understanding of the miracles created by markets and rationalized various incarnations of socialism which mangle those miracles. Leonard Read understood why undoing that misunderstanding by all who hold to it, as well as those who just use it as an excuse for what they want government to impose on unwilling citizens, is of immense value to each of us. And in his December 1956 Freeman article, “Unearned Riches,” he offered a very insightful look at the issues. That look is worth taking again.
Understanding the fallacy of the labor theory of value is a first step toward respect for privately owned and controlled property, without which there can be neither voluntary exchange nor freedom.
Many people sincerely believe that the value of anything is determined by the labor used in producing it…. [but] Day-to-day experiences reveal its error … the same labor could be used to make mud pies as to make mince pies, yet the value in the marketplace would differ. A service or a product of little value at one time or in one place may [also] be highly valued at another time and place.
Individuals have varying value judgments. Value in the market sense, therefore, is a subjective rather than an objective determination. Value, as beauty, cannot be objectively determined.
Why did the labor theory of value undermine understanding of market economies?
China’s new goal for income distribution: Some insights from survey data back to 1981 – Martin Ravallion, Shaohua Chen
China’s political leadership recently committed to expanding the proportion of middle-income groups to create a less polarised, and more ‘olive-shaped’, distribution of wealth. This column considers the potential trade-offs between reducing income polarisation and other goals, including poverty reduction. An obvious concern is how the process of economic growth impacts the extent of polarisation, but the country’s historical record does not point to any serious trade-offs going forward, including with economic growth, poverty reduction, and overall social welfare. However, potential trade-offs would need to be considered further in the context of specific policy efforts, such as expanding social service coverage in rural areas.
***Why Care about Inequality? – David Gordon
T.M. Scanlon, who taught philosophy for many years at Princeton and Harvard, is one of the leading moral and political philosophers of the past fifty years or so. Though far from a libertarian, he takes libertarian views with great seriousness and has endeavored to respond to them. He thinks that libertarianism gives inadequate consideration to the importance of certain kinds of equality, especially equality of income and wealth and also substantive equality of opportunity in chances to attain socially esteemed positions.
I’m going to address only these kinds of equality in what follows, though there are other senses of “equality” as well. As Scanlon recognizes, libertarians think that everyone has the same rights, and in this way accept equality; in Kantian terms, all persons have moral worth or dignity. This sense of “equality” certainly matters, and for most people isn’t controversial.
Scanlon distinguishes two sorts of concern with the kinds of equality I’m discussing here. Sometimes people favor equality because a sufficient degree of inequality can have bad effects on people, e.g., by causing them to lose self-respect; this is “equality in the broader sense.” There is also “equality in the narrower sense,” and this is what I shall mainly be talking about in this review. This concerns equality just taken as such: in this view, the fact that some people have much more than others is objectionable, even if those with less aren’t adversely affected by the difference.
The WOLF STREET F-150 XLT and Camry LE Price Index, Model Year 2022 Update: This is the Craziest Situation I’ve Ever Seen – Wolf Richter
When trucks are advertised at $10,000 over MSRP, what does MSRP even mean? Now throwing shade on my fancy-schmancy proprietary index.
Every year around this time, I update the proprietary “WOLF STREET F-150 XLT and Camry LE Price Index” with the new model-year MSRPs, base version no add-ons and without destination and delivery charges, for a view of the actual price increases of the bestselling truck and car in the US going back to 1990, and I compare that to the CPI for new vehicles, which is very amusing.
By October usually, Ford comes out with the final pricing for the F-150 XLT. Toyota normally releases final prices for the Camry LE by early November.
The 2022 Camry LE is now starting to get built with an ETA in November. But Ford’s production, which was massively hit by the semiconductor shortage, is a huge mess.
Ford is still building the 2021 model year F-150 XLT, with a very large number of models still in the order bank, due to the semiconductor shortage that crushed production during the year.
Top 1% Gains More Wealth Than the Combined GDPs of Japan, Germany, UK, France, India and Italy, Bottom 50%–You Get Nothing – Chalres Hugh Smith
Given that political power in America is a pay-to-play auction in which the highest bidder wins, how this incomprehensibly lopsided ownership of wealth plays out is an open question.
Wealth inequality easily falls into an abstraction unless we contextualize it in meaningful ways. I’ve annotated two St. Louis Federal Reserve (FRED) charts–the net worth of America’s top 1% and the net worth of America’s bottom 50% of households, roughly 66 million households–to show their net worth and their share of all household net worth, and put this in the context of inflation and GDP (gross domestic product) of the U.S. and other nations.
These charts may look complicated but the idea is actually pretty simple: I’ve noted how each group (the top 1% and the bottom 50%) did at the top and bottom of each bubble: the dot-com bubble in 2000, the stock/housing bubble that topped in 2007, and the current bubble, noting the pre-pandemic data at the end of 2019 and the most recent totals (2nd quarter 2021).
Next, I pose a simple question: if the net worth of each group had tracked the growth of America’s GDP (i.e. its real economy), where would its net worth be now? All else being equal, the assumption that net worth would rise more or less in lockstep with the expansion of the entire economy makes sense.
Antitrust Regulation Assumes Bureaucrats Know the “Correct” Amount of Competition – Nicholas Baum
After a dead period for much of the twenty-first century, a particular tool at the hands of the state has been dominating recent news cycles: antitrust law. This legal ability to fine, prevent, and “break up” different profit-maximizing tactics of economic actors is once more being favored by its wielder, the Federal Trade Commission. Last month it filed a complaint against Facebook due to its previous acquisitions and size, despite a federal court striking down a previous lawsuit a few months ago. And just this Tuesday, the Federal Trade Commission filed a complaint against the merger of biotechnology companies Illumina and GRAIL, although the value of the acquisition stands at less than 0.01 percent of Facebook’s market cap.
The Most Splendid Housing Bubbles in Canada “Pause” after Bank of Canada Ends QE, Starts Unwinding its Balance Sheet – Wolf Richter
Home prices fell in Vancouver, Ottawa, and Montreal; were flat in Toronto, other cities for the first time since 2019.
So this is something that hasn’t happened in the Canadian housing market since 2019: The Teranet-National Bank House Price Index for October, released today, failed to rise from the prior month.
The index for Vancouver, a red-hot housing market, fell for the second month in a row, something the market hasn’t seen since September 2019. The indices for Ottawa and Montreal also fell. The index for Toronto was flat for the month, as were the indices for some of the other cities.
What has changed that caused this “pause,” as it is now being called, in one of the biggest housing bubbles in the world?
Policy implications of dollar pricing – Konstantin Egorov, Dmitry Mukhin
Recent evidence shows that most international prices are set in dollars, leading to highly asymmetric spillovers between the US and other economies. This column discusses the normative implications of this fact. The authors argue that inflation targeting is optimal in non-US economies, while the use of capital controls is not. A depreciation of the dollar is unlikely to cause a currency war, but US policy does not fully internalise global spillovers. The US benefits from the dominant status of its currency.
Is Price Stability Really a Good Thing? – Frank Shostak
One of the mandates of the Federal Reserve System is to attain price stability. It is held that price stability is the key as far as economic stability is concerned. What is it all about?
The idea of price stability originates from the view that volatile changes in the price level prevent individuals from seeing market signals as conveyed by changes in the relative prices of goods and services.
For instance, because of an increase in the demand for apples, the prices of apples increase relatively to the prices of potatoes. This relative price increase gives an impetus to businesses to increase the production of apples relative to potatoes.
By being able to observe and respond to market signals as conveyed by changes in relative prices, businesses are said to be able to stay in tune with market wishes and therefore promote an efficient allocation of resources.
Negative policy rates: Expansionary effects via portfolio rebalancing – Margherita Bottero, Camelia Minoiu, José-Luis Peydró, Andrea Polo, Andrea Presbitero, Enrico Sette
Negative interest rates are a major innovation in monetary policy. This column uses data on bank-firm lending relationships and firms’ employment and investment decisions to show that after the introduction of negative interest rate policy by the ECB: (1) more exposed banks show a relatively higher increase in the supply of corporate loans; (2) this expansion of credit by more exposed banks is concentrated among low-capital banks, which rebalance their assets by increasing their share of loans to smaller and ex ante riskier firms; and (3) the increase in credit supply by more liquid banks is associated with sizeable firm-level real effects.
Since 2008, Monetary Policy Has Cost American Savers about $4 Trillion – Alex J. Pollock
After 13 years with on average negative real returns to savings, it is time to require the Fed to address its impact on savers.
With inflation running at over 6 percent and interest rates on savings near zero, the Federal Reserve is delivering a negative 6 percent real (inflation-adjusted) return on trillions of dollars in savings. This is effectively expropriating American savers’ nest eggs at the rate of 6 percent a year.
It is not only a problem in 2021, however, but an ongoing monetary policy problem of long standing. The Fed has been delivering negative real returns on savings for more than a decade. It should be discussing with the legislature what it thinks about this outcome and its impacts on savers.
The effects of central bank monetary actions pervade society and transfer wealth among various groups of people — a political action. Monetary policies can cause consumer price inflations, like we now have, and asset price inflations, like those we have in equities, bonds, houses, and cryptocurrencies. They can feed bubbles, which turn into busts. They can by negative real yields push savers into equities, junk bonds, houses, and cryptocurrencies, temporarily inflating prices further while substantially increasing risk. They can take money away from conservative savers to subsidize leveraged speculators, thus encouraging speculation. They can transfer wealth from the people to the government by the inflation tax. They can punish thrift, prudence, and self-reliance.
Dollar dominance and the international adjustment to global risk – Georgios Georgiadis, Gernot Müller, Ben Schumann
In times of heightened global risk, investors flock to the dollar as their capacity or willingness to bear risk declines. As a result, the dollar appreciates. This column examines the effects of global risk shocks and the dollar’s role in the international adjustment to such shocks, finding that appreciation of the dollar amplifies the adverse effect of global risk shocks considerably. Policies that stabilise the dollar in the face of global risk, such as the liquidity provision by the Federal Reserve in response to the COVID-19 pandemic, can help stabilise global economic activity.
Deconstruction: Using Literature to Promote Marxism – Jack Kralik
What Is Deconstruction?
Unlike the more structured curriculums of high school mathematics or science, the course load and topic choice for upper-level English classes is left largely undefined. For Advanced Placement classes, the College Board only focuses on necessary skills, leaving book choices, lesson plans, projects, and teaching methods up to the teachers.
In recent years, the process of “deconstruction” and “schools of literary criticism” have become popularized among high school English teachers as a means of enhancing and broadening the sphere of literary analysis. Deconstruction in literary analysis originated with Jacques Derrida in the 1960s as a means of seeing text not with an isolated meaning, but instead as a product of the connections between itself and all other texts and exchanges. Deconstruction doesn’t look at the intended meaning of a text but rather the relevant surrounding context.
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