Economische aanraders 27-12-2020

Economische Aanraders

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.

***Our Phantom Middle Class – Charles Hugh Smith
23 December

What happens when America finally admits its middle class is a phantom of feel-good fantasy? We may well find out in the next four years.
Of the many things we cannot bring ourselves to admit, one of the most consequential is that our vaunted middle class is illusory, a phantom of our imagination rather than a reality. The reality is the vast majority of the nation’s wealth and income has been diverted from the middle class to those at the pinnacle of the wealth-power pyramid and the technocrat / financier insider class (the top 10%) that serves the interests of those at the pinnacle.
This transfer has accelerated rapidly in the 21st century as virtually all the real income gains of the past 20 years have flowed to the top 0.1%. This RAND study found that America’s elites siphoned $50 trillion into their own pockets in the past two generations: Trends in Income From 1975 to 2018. (Please look at the “Fruits of Financialization” chart below.)
The earnings of the top 0.1% grew 15 times faster than the earnings of the bottom 90% (See chart below) as wages’ share of the economy continues its 50-year decline.
CBDC in EU – John H. Cochrane
22 december

I wrote an oped for Il Sole 24 Ore on central bank digital currency, as part of a series they are doing. It’s here in their premium edition (gated) here on their blog, in Italian on top and English below. Thanks much to Luciano Somoza and Tammaro Terracciano for translation and inspiring the project.
A central bank digital currency (CBDC) is in principle a very good idea. It offers the possibility of very low-cost transactions to households and businesses, especially in securities and international transactions. More excitingly, CBDC offers us a foundation for an efficient and nimble financial system that is completely insulated from recurrent crises.
But CBDC poses a puzzle, as it undercuts many of governments’ and central banks other questionable objectives. Central banks want to prop up conventional banks, who benefit from taking deposits. And governments are unlikely to want to allow the anonymity that is the great attribute of physical cash.
Why Are Mainstream Economic Forecasts So Often Wrong? – Daniel Lacalle
20 december

Every end of the year, by the end of the year, we receive numerous estimates of global GDP growth and inflation for the following year. Historically, almost in all cases, expectations of inflation and growth are too optimistic in December for the following year.
If we look at the track record of central banks, it is particularly poor in predicting inflation while large supranational entities tend to err on the side of optimism in GDP estimates. The IMF or the OECD, for example, have been particularly poor at estimating recessions, but mostly accurate at making long-term trend estimates. Contrary to popular belief, it seems that most forecasts are better at identifying long-term economic dynamics than short term ones.
Government Sedating The Economy With Stimulus – Peter Schiff
23 december

President Trump threw a wrench into coronavirus stimulus relief, calling the massive spending bill “a disgrace” and threatening to veto the legislation if Congress doesn’t go back and up the individual checks from $600 to $2,000.
It remains unclear how the politics will play out. House Speaker Nancy Pelosi tweeted “Let’s do it!” putting pressure on Sen. President Mitch McConnel to go along with the increased stimulus. What is pretty certain is stimulus is coming down the pike – whether sooner or later. Before Trump made his surprise remarks, Peter Schiff talked about the stimulus bill on his podcast.
Mises Explains the Santa Claus Principle – Ludwig von Mises
21 december

[From “The Exhaustion of the Reserve Fund” in Human Action, chap. 36.]
The idea underlying all interventionist policies is that the higher income and wealth of the more affluent part of the population is a fund which can be freely used for the improvement of the conditions of the less prosperous. The essence of the interventionist policy is to take from one group to give to another. It is confiscation and distribution. Every measure is ultimately justified by declaring that it is fair to curb the rich for the benefit of the poor.
In the field of public finance progressive taxation of incomes and estates is the most characteristic manifestation of this doctrine. Tax the rich and spend the revenue for the improvement of the condition of the poor, is the principle of contemporary budgets. In the field of industrial relations shortening the hours of work, raising wages, and a thousand other measures are recommended under the assumption that they favor the employee and burden the employer. Every issue of government and community affairs is dealt with exclusively from the point of view of this principle.
Give Yourself a Gift Next Year: Agency – Charles Hugh Smith
25 December

We think we’re powerless because we don’t have wealth and power over others, but nothing could be further from the truth.
To have agency is to have power over your own life and control of your assets, options and resources. There are a great many things that influence our lives that we do not control, but there are also many things we could influence in our lives but do not.
The conventional view puts great weight on the agency created by money, as an abundance of money enables people to do a number of things that people with little money cannot do: live comfortably in costly locales, buy a larger home, buy a second home, buy a boat, pay for college with cash, pay for expensive medications not covered by insurance, take extended vacations and start enterprises without ceding power to outside investors, to name a few.
Where Analysts Are Most Optimistic And Pessimistic On Company Ratings For 2021 – Tyler Durden
25 december

With the end of the year just days away, Factset looked at where sellside analysts are most optimistic and pessimistic in their ratings for S&P 500 stocks for 2021, and also how have their views changed since the start of the COVID-19 pandemic?
As Factset’s John Butters summarizes, there are a total of 10,361 ratings on stocks in the S&P 500. Of these 10,361 ratings, 53.6% are Buy ratings, 39.6% are Hold ratings, and 6.8% are Sell ratings.
Curiously, at the sector level, analysts are most optimistic on the one sector that has been most beaten down in 2020 – Energy (62%) – followed by Health Care (60%), and Information Technology (59%) as these three sectors have highest percentages of Buy ratings. On the other hand, analysts are most pessimistic about the Real Estate (46%), Consumer Staples (47%), and Financials (48%) sectors, as these three sectors have the lowest percentages of Buy ratings. The Real Estate (46%) and Financials (46%) sectors also have the highest percentages of Hold ratings, while the Consumer Staples (10%) sector also have the highest percentage of Sell ratings.
The long shadow of monetary policy – Phurichai Rungcharoenkitkul, Claudio Borio, Piti Disyatat
22 December

In recent years, a key challenge for central banks has been the shrinking room for policy manoeuvre as interest rates have declined to historical lows in many countries. The Covid-19 pandemic has inevitably exacerbated the problem. Once the worst is over, rebuilding policy space will be critical. This column presents a theoretical model in which the impact of monetary policy on financial vulnerabilities can complicate that challenge by constraining policy choices down the road. The model includes two realistic features typically excluded from standard setups: banks create money, and lending behaviour generates endogenous booms and busts. As it turns out, in such a framework the very notion of a natural rate of interest driven by saving and investment comes into question.
The Problem with Mandatory “Socially Responsible Investing” – Mary Malone

The term environmental social governance (ESG) investing is relatively new. As described in Forbes,
[An] approach that is slowly on the rise is ESG activism, where an activist fund will take a position in the security of a company with the aim of campaigning to make its business better in terms of governance, less environmentally unfriendly and more socially responsible.
But the concept of morally selective investing is not totally new, as it gained a good deal of traction in the 1950s, particularly among labor unions. Trade unions recognized that their shared capital could be focused on investments that would ideally provide returns beneficial (or so they perceived) in areas such as affordable housing or education.
Unions and the concept of ESG remain connected today. An ESG-centric investment selection, if made compulsory, could become, to provide a loose comparison, the fund lineup equivalent of a labor union.
Here’s why:
Currently, companies have the ability—and in fact the obligation—to fire poorly performing fund managers within their retirement plans. In fact, federal legislation requires fund managers to manage funds with an eye toward maximizing return. When it comes to managing pensions, fund managers are not permitted to pursue political goals, but must maximize returns for employees’ pensions in terms of dollars.
The End Game – Kevin Smith
26 december

Dear Investors:
Markets are cyclical. Today, stocks trade at record high valuations while commodities are historically undervalued in relation. The setup is in place for a macro pivot in the relative performance of these two asset classes. Comparable conditions were present with the 1972 Nifty Fifty and 2000 Dotcom bubbles as we show in the chart below.
As capital seeks to redeploy towards the highest growth and lowest valuation opportunities, we expect analytically minded investors will soon be rotating, if not stampeding, out of expensive deflation-era growth equities and fixed income securities and into cheap hard assets, creating a reversal in the 30-year declining trend of money velocity.
Pressured By Negative Rates, European Banks Are Bludgeoning Customers With New Fees – Tyler Durden
26 december

Just because the financial system is being flooded with free money by various Central Banks, led by the Federal Reserve, doesn’t mean that banks and lenders have to stop squeezing extra cash from their depositors and borrowers.
And that’s exactly what they’re doing, according to Bloomberg.
New charges and increased fees are going to be a reality during sub-zero rates, Bloomberg noted while profiling banks like Banco Santander and ING Groep.
“If you only have a current account with me, I lose money. Banks need to be a clearer about the costs that they assume,” Angel Corcostegui, former Santander CEO and founder of private equity firm Magnum Capital Industrial Partners, said.
Another Piece of the Puzzle of Plunging Credit Card Balances – Wolf Richter
21 december

Consumers cut back on applying for credit cards, and the Fed is not amused.
Consumers in aggregate backpedaled massively on credit card applications since the Pandemic; and they also backpedaled on asking for a higher credit limit on credit cards they already had. And a larger percentage of those that did apply for a credit card or for a higher credit limit were rejected. These are some of the findings of the New York Fed’s Survey of Consumer Expectations “Credit Access Survey,” released today. The Credit Access Survey is undertaken three times a year (also in February and June).
The notion that consumers are cutting back on credit-card borrowing frazzles the Fed; the sky-high interest rates, in many cases over 20%, in a near-zero interest rate environment, is where banks make extraordinary profits. And consumers, those who can least afford it, are paying out of their nose for these bank profits.
Where globalisation was hiding, and how far it might go – James Anderson, Yoto Yotov
20 December

The gravity equation of international trade raises several empirical puzzles relating to the decreasing impact of distance, the declining trade-related costs of bilateral trade, and the estimation of trade elasticities. This column introduces a new, ‘short-run gravity’ model which simultaneously resolves all three of the above-mentioned puzzles. The model estimates a 14% decline in the distance elasticity and shows that capacity reallocation raised world manufacturing trade by 75% between 1998 and 2006. Finally, an estimated structural parameter implies that the short-tun trade elasticity is about one-fourth of its long-run counterpart.
***Wheels Come Off For Bus Companies, Closing Down Travel Options For Poor Americans – Tyler Durden
26 december

The wheels on the nation’s buses aren’t going round and round very much these days according to MPRnews, which notes that demand for bus travel has fallen by more than 80 percent during the pandemic, as public health authorities urge people to avoid travel where possible. That is raising concerns about the potential long-term damage to an essential transport method for millions of lower-income Americans even as air travel has shown signs of picking up since the Thanksgiving holiday period.
And those who have to take the bus, for whatever reason, are finding fewer options, and often higher prices as a result.
Feeling the pinch most are people like Andrew Sarkis. He paid $97 for a one-way bus ticket from Hampton, Va., to New York City, a 12-hour journey that required two transfers.
Today’s Negative Rates Are the Path to Poverty – Doug French
25 december

Almost Daily Grant’s (ADG) made the pronouncement on December 14th that a “new benchmark in financial repression” had been set: ”a record $18.4 trillion in global debt is priced to yield less than zero, up from less than $8 trillion in March and a five-year average of $10.3 trillion.”
ADG consulted interest rate historians Sidney Homer and Richard Sylla, who opined, “nominal negative yielding debt had never been seen in material size in the 4,000 years of interest rate history prior to the current cycle.”
Economist Ludwig von Mises never imagined such a thing, writing in Human Action,
There cannot be any question of abolishing interest by any institutions, laws, or devices of bank manipulation. He who wants to “abolish” interest will have to induce people to value an apple available in a hundred years no less than a present apple. What can be abolished by laws and decrees is merely the right of the capitalist to receive interest. But such decrees would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty.
Avoiding zombification after the COVID-19 consumption game-changer – Alexander Hodbod, Cars Hommes, Stefanie J. Huber, Isabelle Salle
21 December

The profound and protracted experience of the COVID-19 crisis may fundamentally change consumer preferences. This column reveals how a representative consumer survey in five EU countries indicates that many consumers do not miss certain goods and services they have cut down on since the COVID-19 outbreak. It concludes that fiscal policy must recognise that some firms will become obsolete in the altered post-COVID-19 environment. To achieve a swift recovery, these obsolete firms must be allowed to fail fast so that resources can be reallocated to more efficient uses.
Yes, Privatization Makes Us Better Off – Roberto Ledezma

“Private property creates for the individual a sphere in which he is free of the state. It sets limits to the operation of the authoritarian will. It allows other forces to arise side by side with and in opposition to political power.” –Ludwig von Mises
In Latin America, it is rare for an academic or public intellectual to argue in favor of privatization as an economic policy. Some have even claimed that the failure of “neoliberal” policies, especially privatizations, was the cause of the violent demonstrations in Chile last year. Is there any kind of evidence that supports this series of claims? Has privatization always failed?
Although it is not possible to definitively prove with data a causal relationship between the private and public sectors’ differences in incentives and their differences in profitability or efficiency, the academic literature shows that in many countries and sectors this type of economic policy has had successful results.
Privatization around the World
In Privatization in Mexico, Alberto Chong and Florencio López-de-Silanes show that in the Mexican case, privatization generated a 24 percent increase in the companies’ profitability. Although they explain that a small percentage of this increase was due to price increases (approximately 5 percent), these authors also point out that 64 percent was the result of an increase in productivity. Furthermore, in “The Effects of Privatization and Competitive Pressure on Firms’ Price-Cost Margins: Micro Evidence from Emerging Economies,” Jozef Konings, Patrick Van Cayseele, and Frederic Warzynski indicate that in Romania and Bulgaria hundreds of privatized companies experienced increases in their price-cost margins without a rise in the prices of their products.
***Vernacularisation and linguistic democratisation – Christine Binzel, Andreas Link, Rajesh Ramachandran
24 December

The use of a language in written and formal contexts that is distinct from the languages used in everyday communication – such as Latin in early modern Europe and Standard Arabic in the Arabic-speaking world, both past and present – comes with benefits, but also with costs. Drawing on publishing data from early modern Europe, this column shows that the Protestant Reformation led to a sudden and sharp rise in vernacular printing, such that by the end of the 16th century, the majority of works were printed in spoken tongues rather than in Latin. This transformation allowed broader segments of society to access knowledge. It also diversified the composition of authors and book content and had long-term consequences for economic development.
What an Ugly Year for Manhattan Luxury Condos & Co-ops, But the Market Came Unglued in 2016 – Wolf Richter
25 december

“It was more drama than any market could withstand as Manhattan sellers started slashing prices.”
The luxury housing market in Manhattan didn’t quite descent to the levels seen after the Lehman Brothers blowup, but close, and it totally wiped out the euphoria that had reigned from 2013 into 2015 when some of the most glorious mind-bending global-headline-grabbing deals were signed and touted.
Sales of Manhattan condos, co-ops, and townhouses, in terms of signed contracts, with prices of $4 million or more plunged by 31% in 2020, from 2019, to just 645 contracts signed, according to data by Olshan Realty. This was the lowest number of contracts signed since 2011, after having already dropped by 16% in 2019, by 5% in 2018, and by 18% in 2016 – with a 6% false-hope uptick in between in 2017.
Why the Marketplace Is Not a Zero-Sum Game – Gary Galles
22 December

Twenty-twenty marks the twenty-fifth anniversary of a book that has had an expanding influence on the public conversation about market competition. Robert Frank and Philip Cook’s 1995 The Winner-Take-All Society argued that there are an increasing number of markets in which small differences in performance give rise to enormous differences in rewards. As John Kenneth Galbraith described it in a review of that book, the consequence is that “the one who wins gets it all.”
Since then, I have seen multiple articles that reflected the winner-take-all, “a few win at the expense of others” rhetoric as an accurate description of competitive markets, sometimes even accepting that its core claim was so well-established that it could be used as a scapegoat for an ever-expanding host of social problems.
The Psychology Of Money – Alasdair Macleod
23 december

The world stands on the threshold of monetary hyperinflation with the US dollar leading the way. The final months of fiat money are coming into view.
What will replace them – bitcoin or gold?
This article argues that the final solution is bound to be with central banks and government treasury departments retaining their control as issuers of money by the only means at their disposal: deploying their gold reserves to back their currencies, not as fiat, but as credible gold substitutes.
Central banks own no bitcoin, which effectively rules it out. They may try their own equivalents, central bank digital currencies, but they are simply another form of fiat money and will also fail — assuming there is enough time for them to be introduced. In any event, the eventual replacement for fiat money needs to be beyond government control (other than the state acting as a monetary trustee, ensuring gold coins are always available for exchange) and flexible enough for its users to collectively set the quantity that acts as money. A formulaic medium such as bitcoin does not provide this flexibility, but gold clearly does and has proved its suitability in the past.
Thriving in a post-pandemic economy – Debora Revoltella, Pedro J. F. de Lima
21 December

The Covid-19 pandemic poses severe risks for Europe’s economy, but it also presents opportunities. The sharp short-term shock will be followed by large structural changes to the global economy in the long term. This column sheds light on the challenges ahead using data from the European Investment Bank Investment Survey. Large sectors of Europe’s economy, particularly SMEs, need to innovate and adopt digital technologies to avoid falling behind. Policy support needs to evolve from liquidity provision to a more targeted push for structural transformation.

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