Economische aanraders 23-06-2019
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.
Dear Jay Powell: It’s Still The Eurodollar, Stupid! – Jeffrey Snider
After what is all but certain to be the final “rate hike” in this cycle, Bloomberg reported that President Trump had previously explored all possible legal ramifications of demoting Federal Reserve Chairman Jay Powell. The issue has become a major one, in the media, anyway, now that Mr. Powell has indicated his error. There will be no further hikes this year, rate cuts now pretty much a done deal from here.
Given the situation, it’s at least understandable how no one is in much of a mood to talk about it publicly. The President’s Chief Economic Advisor, Larry Kudlow, said this week:
I’m not going to comment. It happened six months ago, and it’s not happening today, and therefore I have nothing to say about it. We are not taking actions to change his status.
The central bank is ostensibly independent, which has been its biggest error of all. Not because it is or isn’t attached to the government in some fashion, rather there is no accountability for anything. That’s all independence has meant; central bankers get to decide how well the central bank has performed.
Central Banks Aren’t Really In Control of Interest Rates – Frank Shostak
For most experts the central bank determines short-term interest rates by setting the target to the benchmark policy rate such as the federal funds rate in the US. Many economists are of the view that through the manipulation of short-term interest rates, the central bank by means of expectations regarding future interest rate policy can also dictate the direction of long-term interest rates. By this way of thinking, expectations regarding future short-term interest rates are instrumental in setting the long-term rates (and long-term rates are an average of short-term rates).
Given this supposedly almost absolute control over interest rates, the central bank through its manipulations of short-term interest rates can navigate the economy along the growth path of economic prosperity. Or so it is held. (In fact, this is the mandate given to many central banks, including the Fed).
But we must ask ourselves: does it makes sense to hold that the central bank is so key in the determination of interest rates?
How Can The Economy Both Be Booming And Headed For A Recession: A Quantum Explanation – Tyler Durden
At the end of March, we reported that the biggest concern for Goldman’s clients was the gaping “market jaws”, where stocks have moved sharply higher while yields have tumbled to multi-year lows, sparking investor confusion: is the bond market right in anticipating a period of acute deflation and/or recession, or is it wrong and stocks, which are less than 5% below their all-time highs, correct in their optimistic outlook.
As Goldman’s David Kostin wrote, it was this decoupling that was dominating client discussions:
Ten-year US Treasury yields have plunged to 2.4%. From an investor perspective, stable equity prices coupled with falling interest rates means a wider earnings yield gap and implies a more attractive relative value for stocks assuming the economy does not fall into recession.
And, as Kostin recounted, one client told the chief Goldman equity strategist, that it all really “depends from which direction the jaws close – through higher rates or via lower equity prices.”
The Last Thing Europe Needs Is to Further Loosen the EU’s Fiscal Rules – Pietro Bullian, Pietro Mistura
The environment of persistently low interest rates is not going to last forever. But a recent drive to change European fiscal rules assumes low rates forever, and may have dangerous and unintended consequences. So far, after years of continuous growth, many European countries have not yet tackled the issue of debt: will they be able to do better with looser and less punitive rules?
In the aftermath of the European elections, the race to describe which (different) path the European Union should undertake has started. Among those who contributed with reform proposals, we find the IMF’s Olivier Blanchard, in his column “Europe Must Fix Its Fiscal Rules,” explained how Europe could better take advantage of the current low interest rate framework.
According to French economist Blanchard, Europe must begin to fix its rules about public debt and public deficit to align them with the current low-interest framework, which is different to the one the rules were initially written for. Admittedly, the fiscal-arm of the European economic-policy is surely something that can be improved. Nevertheless, Dr. Blanchard’s proposals would work as a shield for fiscally irresponsible policies put in place by countries now most in need of reform. These countries —especially Italy — have been putting off these needed reforms for years, and that have largely taken advantage of the east-money policies of crisis periods to do so.
***How Much of Your “Wealth” Is Hostage to Bubbles and Impossible Promises?
– Charles Hugh Smith
All asset “wealth” in credit-asset bubble dependent economies is contingent and ephemeral.
A funny thing happens to “wealth” in a bubble economy: it only remains “wealth” if the owner sells at the top of the bubble and invests the proceeds in an asset which isn’t losing purchasing power.
Transferring “wealth” to another asset bubble that is also deflating doesn’t preserve the “wealth” from evaporation.
All the ironclad promises made in bubble economies ultimately depend on credit-asset bubbles never popping–but sadly, all credit-asset bubbles pop. So all the promises–which are of course politically impossible to revoke–will be broken as all the credit-asset bubbles that created the “wealth” that was to be redistributed–pensions, retirement benefits, etc.–deflate.
Consider the Case-Shiller housing index chart below. Housing is an asset that has reached the apex of a second bubble. (Stocks are reaching the apex of a third bubble.)
What option prices tell us about the ECB’s unconventional monetary policies – Stan Olijslagers, Annelie Petersen, Nander de Vette, Sweder Van Wijnbergen
The decade since the Global Crisis has seen central banks employ a range of monetary policy tools. This column draws two lessons from the unconventional monetary policy measures employed during the European sovereign debt crisis. First, central banks should communicate clearly – and with sufficient detail – in times of heightened market stress to lower tail risk perceptions in financial markets. Second, policies aimed at changing the relative supply within different asset classes have an impact on perceived crash risk, while measures aimed at easing financing costs of commercial banks do not.
What Powell Really Said about the Economy and What Would Trigger a Rate Cut – Wolf Richter
For six months now, folks said the Fed had made a “U-turn” and would cut rates at the “next” meeting, or in between meetings, and by 50 basis points, and cut, cut, cut, and would re-start QE. But none of it happened — and might not happen this year. Here’s why, in Powell’s words.
During the Q&A at the press conference following the FOMC meeting yesterday, Fed Chair Jerome Powell summarized strengths, weaknesses, and “crosscurrents” of the US economy, and the global economy, in just a few clear words and explained how the Fed is looking at these developments. Before the start of the Q&A, he concluded his opening remarks with this admonishment:
“Uncertainties surrounding the baseline outlook have clearly risen since our last meeting. It is important, however, that monetary policy not overreact to any individual data point or short-term swing in sentiment. Doing so would risk adding even more uncertainty to the outlook. Thus, my colleagues and I will be looking to see whether these uncertainties will continue to weigh on the outlook.”
The Bond Market is Not Impressed with the Fed – Bryce Coward
On Tuesday of this week we wrote about the four possible scenarios the Fed could adopt in their Wednesday policy decision. In order of most hawkish to most dovish, those scenarios were:
Fed does not cut rates and signals that a rate cut may be appropriate later in the year (read the September meeting). Balance sheet policy remains unchanged.
This is the most hawkish of the likely outcomes. The financial markets would likely read this as too hawkish, causing long bond yields and equities to fall as a further slowing of economic growth is discounted.
Fed does not cut rates, but instead signals a rate cut of 25bps is likely in the near term (read the July meeting). Balance sheet policy remains unchanged.
This too is a somewhat hawkish outcome since the first rate cut is typically the largest rate cut. The long end of the bond market is likely to rally (lower yields) as the market views the move as less than what is needed to arrest the slowdown. Impact on equities would be small.
Fed does not cut rates, but instead signals a rate cut of 50bps is likely in the near term (read the July meeting). Balance sheet policy remains unchanged.
Now we are getting somewhere, and even though this is a somewhat dovish scenario long bond yields are likely to fall in sympathy with short rates, though perhaps not as much as short rates. Equities would likely rally.
Fed does not cut rates, but instead signals a rate cut of 50bps is likely in the near term (read the July meeting). Balance sheet runoff stops tomorrow and the Fed opens up the possibility of more QE down the road.
This is the least likely outcome and also the most dovish. Short rates may fall while the long end would likely selloff, steepening the yield curve and ushering in a risk on environment. In this dovish case, equities are likely to do quite well as a reflation trade takes hold, a la QE2.
What the Number Crunchers Get Wrong about the “Velocity of Money” – Alasdair Macleod
The idea of “velocity of circulation” arose from the quantity theory of money, which links changes in the quantity of money to changes in the general level of prices. This is set out in the equation of exchange. The basic elements are money, velocity and total spending, or GDP. The following is the simplest of a number of ways it has been expressed:
Money x Velocity of Circulation = Total Spending (or GDP)
Assuming we can quantify both money and total spending, we end up with velocity. But this does not tell us why velocity might vary. All we know is that it must vary in order to balance the equation. You could equally state that two completely unrelated quantities can be put into a mathematical equation, so long as a variable is included whose only function is to always make the equation balance. In other words, the equation of exchange actually tells us nothing.
This gives analysts a problem, not resolved by the modern reliance on statistics and computer models. The dubious gift to us from statisticians is their so-called progress made in quantifying the economy, so much so that at the London School of Economics a machine called MONIAC (monetary national income analogue computer) used fluid mechanics to model the UK’s economy. This and other more recent computer models give unwarranted credence to the idea that the economy can be modelled, derivations such as velocity explained, and valid conclusions drawn.
Risk sharing plus market discipline: A new paradigm for euro area reform? A Debate – Jean Pisani-Ferry, Jeromin Zettelmeyer
The 2017 proposals for euro area reform by a group of seven French and seven German economists triggered a considerable response, much of which featured in a dedicated debate here on Vox. This column introduces an eBook that brings together a selection of these contributions, and in doing so offers a comprehensive, state-of-the art, and accessible overview of the current discussion on euro area reforms.
Bad Loans Still Too High at Eurozone Banks, ECB Warns – Don Quijones
NPLs remain dangerously to catastrophically high in Italy, Greece, Portugal, and Cyprus.
The bad-debt problem at banks in the Eurozone, an ongoing legacy of cascading loan defaults during the last financial crisis, may have grown smaller overall in recent years but it’s still a major cause for concern. That was the basic thrust of a speech delivered by Andrea Enria, Chair of the Supervisory Board of the ECB, on Friday. And these bad loans remain dangerously to catastrophically high in several countries, including Italy, Greece, Portugal, and Cyprus.
***Dear Central Bankers: Prepare to be Swept Away in the Next Wave of Populism – Charles Hugh Smith
The political moment when the “losers” connect their discontent and decline with central bankers is approaching.
The Ruling Elites’ Chattering Classes still haven’t absorbed the key lesson of the 2016 U.S. presidential election: the percentage of the populace that’s becoming wealthier and more financially secure in the bloated, corrupt, self-serving Imperial status quo is declining and the percentage of the populace that’s increasingly insecure and financially precarious is increasing, and candidates that mouth the usual platitudes in support of the bloated, corrupt, self-serving Imperial status quo lose to those who speak of the failing status quo as a travesty of a mockery of a sham, i.e. a “populist” speaking truth to power.
Donald Trump steered clear of the status quo’s favored platitudes and embraced a bit of populist cant, and so to those who understand that the majority of Americans have been abandoned by America’s hubris-soaked, self-serving managerial / ruling elites, his victory was not entirely surprising.
Low Inflation Is No Threat to the Economy – Frank Shostak
“When interest rates are low central banks don’t have much room to maneuver to deal with a crisis,” the New York Fed President John Williams said on Wednesday, June 6, 2019. In addition, according to Williams “if inflation falls, central banks will have even less room to maneuver when faced with a slowdown.” Furthermore, said Williams, “while I will always be vigilant about inflation that’s too high, inflation that’s too low is now a more pressing problem.”
Note that this way of thinking is based on the equation that links nominal and real interest rates. On this way of thinking the real interest rate can be approximated as
real interest rate = nominal interest rate – inflation rate
or we can say that,
nominal interest rate = real interest rate + Inflation rate
Crude Steel Production: China Knocks the Socks off Rest of the World – Wolf Richter
China’s share surges to 54% in April. US in fourth Place, Canada an Also-Ran.
Global production of crude steel – ingots, semi-finished products (billets, blooms, slabs), and liquid steel for castings – rose 6.4% in April compared to April last year, to 156.7 million metric tonnes (Mt), according to the World Steel Association. Over the first four months of 2019, global production rose 4.8%, to 600 Mt.
In the banner-year 2018, production rose 4.5% to a record 1,808 Mt, having doubled since 2002. Since 1996, there have been only three episodes when annual crude steel production fell: 1998, as a consequence of the Asian Financial Crisis; 2009 as a consequence of the Global Financial Crisis; and 2015, when China made a brief effort to get out-of-control overproduction under control
The Zombie (Company) Apocalypse Is Here – Joshua Konstantinos
One of the most significant economic developments since the Great Recession has been the zombification of the economy.
A zombie company is a term introduced to the lexicon by an influential paper, Zombie Lending and Depressed Restructuring in Japan, by economists Ricardo J. Caballero, Takeo Hoshi, and Anil K. Kashyap. The official definition of a zombie company according to the Bank for International Settlements (BIS) “is a publicly traded firm that’s 10 years or older with a ratio of earnings before interest and taxes (EBIT) to interest expenses of below one.” More simply put, zombie companies are companies that are unprofitable — so unprofitable they are unable to pay even the interest on their debt out of their profits. They are effectively bankrupt but kept alive by banks continuing to lend them money to pay their existing loans.
This phenomenon first began in Japan after their real estate and stock market bubble popped in the early 1990s.
Investors’ simple diversification rules are even simpler than we thought – John Gathergood, David Hirshleifer, David Leake, Hiroaki Sakaguchi, Neil Stewart
Investors who choose to build their own portfolios by stock-picking face the choice of how to diversify among stocks. The 1/N heuristic, equalising portfolio shares across stocks held, works well in practice. This column shows that investors who buy stocks often employ a different form of 1/N, dividing purchase value equally rather than maintaining a 1/N allocation. By narrowly framing their buy-day decision, these investors move their portfolios farther away from balance.
No, Rate Cuts Were Not Discussed: ECB Insiders Out Draghi as Fabricator & Schemer, and Talk to Reuters – Wolf Richter
Draghi’s shenanigans get hilarious, months before his term ends.
So here’s ECB President Mario Draghi, whose term ends in October, and he’s at the ECB Forum in Portugal, and in a speech on Tuesday titled innocuously, “Twenty Years of the ECB’s monetary policy” – so this wasn’t a press conference after an ECB policy meeting or anything, but a speech on history at an ECB Forum – he suddenly threw out a whole bunch of stuff…
How, “in the absence of improvement” of inflation, “additional stimulus will be required,” in form of “further cuts in policy interest rates” and additional bond purchases, and how “in the coming weeks, the Governing Council will deliberate how our instruments can be adapted commensurate to the severity of the risk to price stability,” and that “all these options were raised and discussed at our last meeting.”
Why It’s Important to Understand “Economic Costs” – Per Bylund
The concept of economic cost seems to confuse people. It is not the price you pay for a good, but the reason you pay it.
The cost of one action is the value you could otherwise have gained from taking another action. In other words, if you have $100 and you have the choice to buy two goods, each at a price of $100, you’ll naturally choose whichever is more important (valuable) to you. The cost of it is not the $100, which you give up to purchase it, but the value of the other good, which you can no longer purchase. That other good is the opportunity foregone by your action, the true cost of your action — the economic cost.
Why does this matter? Because our actions are intended to create value, and we always aim to maximize that (subjectively understood) value. The economic cost concept brings to our attention what we actually give up to get a value, and thus why we choose a certain course of action.
Trade wars in the global value chain era – Emily Blanchard
The nature of global commerce has changed dramatically over the past 40 years, with the meteoric rise of global value chain trade. This column, taken from a recent Vox eBook, builds on insights from recent research to identify three critical dimensions of global value chain trade that promise to make today’s trade wars more economically costly and more politically complex than previous trade wars.
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