Economische aanraders 26-09-2021
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.
Before a Bust, There Is Always a Boom (and Malinvestment) – Frank Shostak
For most commentators lending is associated with money. However, is this the case? When a saver lends money, what he/she in fact lends to a borrower is final consumer goods that he/she did not consume. Therefore, what a lender lends to a borrower is savings and not money as such.
Take farmer Joe, who produced two kilograms of potatoes. For his own consumption, he requires one kilogram, and the rest he agrees to lend for one year to farmer Bob. The unconsumed kilogram of potatoes that Joe agrees to lend is his savings.
By lending one kilogram of potatoes to Bob, Joe has agreed to give up for one year ownership over these potatoes. In return, Bob provides Joe with a written promise that after one year he will repay 1.1 kilograms of potatoes. The 0.1 kilogram constitutes interest. Note that the existence of savings is the precondition for lending. There must be savings to fully back the lending.
When green meets green: Evidence on environmental risk-pricing by banks – Hans Degryse, Roman Goncharenko, Carola Theunisz, Tamas Vadasz
The transition to a carbon-neutral economy requires firms and banks to have environmental consciousness, raising the question of how bank financing can contribute to global climate objectives. This column examines whether and how the environmental consciousness (or ‘greenness’) of firms and banks is reflected in the pricing of bank credit. The evidence suggests that firms are indeed rewarded for being green: green firms can get cheaper loans – although only when borrowing from green banks and only since the 2015 ratification of the Paris Agreement.
China Is Responsible For More Than A Third Of World GDP Growth – This Is A Problem – Tyler Durden
As Deutsche Bank’s FX strategist George Saravelos writes in a recent research report he has been “on the pessimistic side of the reflation narrative for some time now.”
In the note titled “three charts for pessimists”, he admits that there are many more things happening to the global economy than easy fiscal and monetary policy, including a large negative supply-shock, in turn leading to sizeable demand destruction; stronger than expected precautionary saving behavior from consumers pushing down r*; and massive structural economic change on the back of COVID-led digitization across multiple sectors. And now we have to add China to the mix.
His first chart below highlights a simple observation: China has been acting as a massive global growth turbocharge since the start of the century, and is responsible for more than a third of world GDP growth. As Saravelos gloomily notes, “systemic risks of the unfolding property developer crisis aside, if the last few months experience are signaling a regime break in Chinese tolerance for what authorities have termed “low quality” growth, the world should take notice.”
***What’s Really Going On In China – Charles Hugh Smith
Losses will be taken and sacrifices enforced on those who don’t understand the Chinese state will no longer absorb the losses of speculative excess.
Let’s start by stipulating that no one outside President Xi’s inner circle really knows what’s going on in China, and so my comments here are systemic observations, not claims of insider knowledge.
Many western observers have noted the centrality of Marxist-Leninist-Maoist doctrine in President Xi’s writings. This is somewhat akin to invoking America’s Founding Fathers to support one’s current policies: if you’re trying to modify state policy in China, you have to explain it in the context of the Chinese Communist Party’s history and doctrines. Never mind if the ideals were not met; what’s important is establishing continuity and resonance with the history of China, the core doctrines of Chinese Communism and the CCP’s leadership based on those doctrines.
That said, we should be careful not to read too much into doctrinal evocations such as common prosperity, which are useful conceptual anchors and slogans but not the full story.
Worldwide Energy Shortage Shows Up In Surging Coal, Gas And Oil Prices – John Kemp
Record gas and electricity prices in Europe, record coal prices in China, multiyear-high gas prices in the United States and oil prices well above their real long-term average are all manifestations of the same global energy shortage.
In the aftermath of the coronavirus recession, energy production has failed to keep up with rapid growth in consumption, as energy producers struggle to raise output while demand has bounced back quickly.
Evergrande Isn’t China’s “Lehman Moment.” It Could Be Worse than That – Daniel Lacalle
The bankruptcy of the Chinese real estate company Evergrande is much more than a “Chinese Lehman.” Lehman Brothers was much more diversified than Evergrande and better capitalized. In fact, the total assets of Evergrande that are on the brink of bankruptcy outnumber the entire subprime bubble of the United States.
The problem with Evergrande is that it is not an anecdote, but a symptom of a model based on leveraged growth and seeking to inflate GDP at any cost with ghost cities, unused infrastructure, and wild construction. The indebtedness chain model of Evergrande is not uncommon in China. Many Chinese companies follow the “running to stand still” strategy of piling on ever-increasing debt to compensate for poor cash flow generation and weak margins. Many promoters get into massive debt to build a promotion that either is not sold or is left with many unsold units, then efinance that debt by adding more credit for new projects using unsaleable or already leveraged assets as collateral.
Quantitative easing and conventional monetary policy have similar side effects – Martin Weale, Tomasz Wieladek
Quantitative easing is often criticised due to side effects on asset price valuation and risk taking. This column compares the financial side effects of conventional monetary policy to those of quantitative easing, based on the amount of inflation generated by each policy. A systematic comparison of multiple measures of financial side effects for the euro area, the UK, and the US suggests that the side effects of quantitative easing and conventional monetary policy are roughly the same.
Top 10 Share-Buyback Queens – Big Tech except Intel, Big Banks except Wells Fargo, Buffett – Incinerate Most Cash Ever in Q2. The Rest Lags – Wolf Richter
Funded by Debt: Since 2012, share buybacks totaled $5.5 trillion, corporate debt soared by $4.7 trillion.
They’re back big time. Three of the big four banks are back – while Wells Fargo keeps getting slapped on the wrist – after all four were out of it last year due to pandemic-rated financial restrictions. Intel fell out of it. But the rest of Big Tech is in, and Apple bigger than ever. Warren Buffett’s Berkshire Hathaway, after rightfully dissing share buybacks for years, has become one of the largest share buyback queens. And Charter Communications has jumped into it massively.
The top 10 companies – ranked by their cumulative buybacks over the past five years – bought back more of their shares than ever in Q2: $85 billion, according to S&P Dow Jones Indices this week, accounting for 43% of the total share buybacks by all S&P 500 companies. Since 2014, these 10 companies bought back $1.13 trillion of their own shares.
A Global Fiat Currency: “One Ring to Rule Them All” – Thorsten Polleit
Human history can be viewed from many angles. One of them is to see it as a struggle for power and domination, as a struggle for freedom and against oppression, as a struggle of good against evil.
That is how Karl Marx (1818–83) saw it, and Ludwig von Mises (1881–1973) judged similarly. Mises wrote:
The history of the West, from the age of the Greek Polis down to the present-day resistance to socialism, is essentially the history of the fight for liberty against the encroachments of the officeholders.
But unlike Marx, Mises recognized that human history does not follow predetermined laws of societal development but ultimately depends on ideas that drive human action.
From Mises’s point of view, human history can be understood as a battle of good ideas against bad ideas.
The lasting impact of the Covid crisis on economic potential – Luke Bartholomew, Paul Diggle
As the global economy recovers from the immediate economic impact of the Covid crisis, attention is increasingly turning to the long-run impact of the shock on productivity. This column identifies several channels – including labour market hysteresis, impaired skill acquisition, belief scarring, an increase in zombie companies, and policy errors – through which the lasting harm will outweigh any positive supply shocks caused by the pandemic. The authors estimate long-term output losses in the order of 3% of global GDP. Scarring will be greater in some economies than others, pointing to the importance of policy in mediating and offsetting these channels.
***Now That the American Dream Is Reserved for the Wealthy, The Smart Crowd Is Opting Out – CHarles Hugh Smith
The already-wealthy and their minions are unprepared for the Smart Crowd opting out.
Clueless economists are wringing their hands about the labor shortage without looking at the underlying causes, one of which is painfully obvious: the American economy now only works for the top 10%; the American Dream of turning labor into capital is now reserved for the already-wealthy.
As a result the Smart Crowd is opting out of the conventional workforce’s debt-overwork-deadend-treadmill. What clueless economists, pundits and politicos don’t dare acknowledge is that credentials and hard work are not a ticket to middle-class security; they’re a ticket to impossible workloads demanded by global corporations and high-cost lifestyles anchored by student-loan debt, high rents and out-of-reach real estate.
In other words, credentials and hard work are a deadend. Costs rise faster than your income no matter how hard you work, and corporations are ruthlessly extractive despite the bogus PR of “we value our employees”: just as government only values its tax-donkeys after they’re gone, corporations only value their employees after they burn out and leave the Corporate America treadmill for good.
Europe Faces a Fragile Economy as the Merkel Era Ends – Brendan Brown
As Angela Merkel prepares her exit from the chancellery in Berlin, a false alarm is ringing in Europe about an imminent danger of “stagflation.” This phenomenon, like dragons, belongs to mythology rather than real historical or present circumstances.
The noise will prevent any faint alarm being heard about the true danger of post-Merkel monetary deluge in Europe—a French and Italian debt crisis culminating in euro collapse.
The stagflation myth originates from the 1970s experience in the US. Data averages collected over the period as a whole (1973–80)—including a virulent monetary inflation and economic boom (1976–78) sandwiched between two recessions featuring energy supply shocks—show high Consumer Price Index (CPI) inflation accompanying real economic sluggishness.
Are We Really So “Rich”? A New Way of Defining Wealth – CHarles Hugh Smith
What if our commoditized, financialized definition of wealth reflects a staggering poverty of culture, spirit, wisdom, practicality and common sense?
The conventional definition of wealth is solely financial: ownership of money and assets. The assumption is that money can buy anything the owner desires: power, access, land, shelter, energy, transport and if not love, then a facsimile of caring.
The flaw in this reductionist definition is obvious: not everything of value can be purchased at any price–for example, health, once lost, cannot be purchased for $1 million, $10 million or even $100 million. A facsimile of friendship can be purchased (i.e. companions willing to trade fake friendliness for money), but true friendship cannot be bought at any price: its very nature renders friendship a non-commodity.
This explains the abundance of wealthy people who are miserable, lonely and phony to the core. Only commoditized goods and services can be bought with money or assets.
Given the limits of the conventional model of wealth, the question naturally arises: what if we defined wealth more by what cannot be bought rather than by what can be bought? Another way of making the distinction is to ask: what has been commoditized/globalized such that any person with money anywhere on the planet can buy it? What cannot be commoditized because it is intrinsically inaccessible to commodification?
We can start our inquiry with a series of questions:
Can China’s outsized real estate sector amplify a Delta-induced slowdown? – Kenneth Rogoff
The Chinese economy was able to sharply rebound from the Covid pandemic, helping to sustain a housing boom. The country faces a multitude of challenges over the medium term, however, on top of the much more virulent Delta variant. This column argues that the footprint of China’s real estate sector has become so large – with real estate production and property services accounting for 29% of the country’s GDP – that absorbing a significant housing slowdown would significantly impact overall growth, even absent a financial crisis.
Is an Educated Population Really Necessary for Innovation and Growth? – Lipton Matthews
Lamentations that the waves of innovation are receding have engulfed policy circles. Distinguished economist Robert Gordon avers that the days of transformative innovations are over. Like Peter Thiel, he is disappointed at the incremental nature of modern-day inventions. The declinist thesis is predicated on the assumption that groundbreaking innovations like the steam engine, electricity, and the telephone are becoming exceedingly rare. Educing evidence to prove this observation has been quite easy, but we are less astute at understanding why innovation is declining.
In his 2012 paper titled “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds,” Gordon submits that dwindling rates of educational attainment complemented by reductions in labor force participation portends doom for the future of US innovation. Educational attainment supplements economic growth and innovative activities, so Gordon is right to express concern. Yet researchers find that during the Industrial Revolution, literacy and schooling failed to exert a significant impact on economic growth.
***Why The West Can’t Ban Bitcoin The Way China Did – Mark Jeftovic
Only a complete “dictatorship of the proletariat” can kill Bitcoin
Evergrande is being called China’s “Lehman moment” and overnight the PBC closed the loop on their clampdown on crypto with a total ban on virtual currency transactions.
For those paying attention, however, China isn’t just moving against crypto, they’ve been bringing their entire technology sector to heel. They also stated that it is time to redistribute wealth from the top tier of the nations wealth holders to the rest of the peasant class.
This isn’t a return to their Communist roots as much as it is a move of self-preservation against rising internal powers. In the words of my friend Charles Hugh Smith via some correspondence we’ve been having this week “Xi has set out to crush the Network State”.
I said in my earlier Network State Primer about the coming tension between Nation States and Network States: the former will go down swinging.
Unfinished Houses for Sale Pile Up, Total Inventory Highest since 2008, amid Material Shortages & Worst Spike in Construction Costs since 1979 – Wolf Richter
Sales of new single-family houses fall 24% from a year ago. The lower end has died.
Sales of new single-family houses in August were down by 24.3% from August last year, to a seasonally adjusted annual rate of 740,000 houses, according to the Census Bureau this morning.
Why Bureaucrats Are Sitting on So Much Money-Losing Real Estate – Doug French
The very size and scope of the United States federal government is likely something that Ludwig von Mises could not have imagined, despite writing the book which foretold the results of such a behemoth, Bureaucracy. Early on Mises wrote, “Congress has in many instances surrendered the function of legislation to government agencies and commissions, and it has relaxed its budgetary control through the allocation of large appropriations for expenditures, which the Administration has to determine in detail.” That was in 1944.
For instance, the federal government makes the simple process of disposing of government properties into a kafkaesque nightmare. “The federal government has long owned more real estate than it knows what to do with—buildings that sit empty and sites that are underdeveloped—but it must jump through hoops before it can sell its holdings,” writes Jane Margolies for the New York Times. “So surplus properties languish while taxpayers foot the bill for maintenance.”
In 2016 legislation was passed so the government would get a move on in liquidating its vast decaying real estate portfolio. The Public Buildings Reform Board was created to oversee this task. Moving at the speed of government, it took three years for five board members to be sworn in, while two seats remain vacant.
Debt ceiling modest proposal — perpetuities – John H. Cochrane
The debt ceiling dance has started again. Read Treasury Secretary Janet Yellen in the Wall Street Journal.
A modest proposal: Issue perpetuities.
The Treasury computes the total amount of debt by its face or principal value, not its market value*. If the Treasury issues a bond that pays $1 coupons each year for 10 years and then pays $100 at maturity, the treasury counts this as $100 additional debt. The Treasury ignores the coupon payments, and how much the bond actually sells for, i.e. how much the Treasury actually borrows, when the bond is auctioned.
Now you see my answer: Perpetuities have coupons, but no principal. A perpetuity pays $1 forever. In reality, it pays $1 until the Treasury buys it back.
From Diseases to Recessions, Government Failure Is Endemic – Mihai Macovei
Massive government intervention in the aftermath of the global financial crisis has not prevented the Great Recession, but had actually deepened and prolonged it until the covid-19 pandemic and government lockdowns sent the economy into a tailspin in 2020. Larger monetary and fiscal growth stimuli followed, exacerbating previous economic distortions. In the same way that countercyclical macroeconomic policies have turned the financial crisis into depression, the authorities’ health response has been good at crippling markets but never seems to deliver what is promised.
A Counterintuitive and Risky Health Response
Early on, governments embraced an overambitious paradigm of reaching herd immunity via hard lockdowns and vaccination. The famous “flatten the curve” slogan promoting lockdowns as the only solution to avoid a collapse of the health infrastructure quickly morphed into “lockdown until vaccine.” Convincing arguments that hard lockdowns are not producing better health results, but unduly restrict civil liberties, create economic havoc and cause severe social and health long-term problems were largely ignored. Most governments in the West kept the lockdowns into place until late spring 2021, when the mass vaccination campaign was well underway.
Does Anyone Honestly Believe That Inflation Is “Transitory” Anymore? – Simon Black
In the early summer of 1514, Spanish conquistador Ponce de Leon returned home to the court of King Ferdinand as a hero.
De Leon was among the first of Spain’s conquistadors to discover gold– right here in Puerto Rico. And that was enough for him to be knighted and bestowed all sorts of royal honors.
By that time, Europe had been suffering a shortage of gold and silver for nearly a century; mines and mints had closed down all across the continent, triggering what economic historians call ‘The Great Bullion Famine’ in the mid 1400s.
So the supply of money, i.e. gold and silver, was essentially stagnant. Technically European money supply was falling, because most European kingdoms ran a trade deficit with Asia and the Middle East.
Economic integration, democratic capital, and the ‘export’ of democracy – Giacomo Magistretti, Marco Tabellini
Can democracy be exported? This column uses a large cross-country dataset from 1960 to 2015 to show that, while the ‘top-down’ imposition of political institutions is not desirable and rarely successful, democracy can indeed be ‘exported’ – from more democratic to less democratic countries – through repeated trade interactions. The finding suggests that economic integration might be advantageous to less democratic countries not only directly by fostering GDP growth, but also indirectly by favouring the transition to democracy and the socioeconomic and political benefits associated with it.
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