Economische aanraders 30-01-2022

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.

Can State Power Cancel Economic Law? – Eugen von Böhm-Bawerk
27 jaanuari

[In this introduction to his essay “Control or Economic Law,” Böhm-Bawerk examines how the reality of the “mixed economy” means we must be able to understand the interplay between market action and the countless efforts to distort the market through state legislation and social action. Ultimately, we find it is folly to think that economic laws can be overcome by government “control.”]
The Scientific Foundation of a Rational Economic Policy
Economic theory, from its very beginnings, has endeavored to discover and formulate the laws governing economic behavior. In the early period, which was under the influence of Rousseau and his doctrines of the laws of nature, it was customary to apply to these economic laws the name and character of physical laws. In a literal sense, this characterization was, of course, open to objection, but possibly the term “physical” or “natural” laws was intended merely to give expression to the fact that, just as natural phenomena are governed by immutable eternal laws, quite independent of human will and human laws, so in the sphere of economics there exist certain laws against which the will of man, and even the powerful will of the state, remain impotent; and that the flow of economic forces cannot, by artificial interference of societal control, be driven out of certain channels into which it is inevitably pressed by the force of economic laws.
Such a law, among others, was considered to be that of supply and demand, which again and again had been observed to triumph over the attempts of powerful governments to render bread cheap in lean years by means of “unnatural” price regulations, or to confer upon bad money the purchasing power of good money. And inasmuch as in the last analysis, the remuneration of the great factors of production—land, labor, and capital—in other words, the distribution of wealth among the various classes of society, represents merely one case, although the most important practical case of the general laws of price, the entire all-important problem of distribution of wealth became dependent upon the question of whether it was regulated and dominated by natural economic laws, or by the arbitrary influence of social control.
Looking under the hood: The two faces of inflation – Claudio Borio, Piti Disyatat, Dora Xia, Egon Zakrajšek
25 januari

High and low inflation are two very different animals. This column argues that after remaining low and stable for a prolonged period, what we measure as inflation is in fact largely an average of idiosyncratic (relative) price changes and not inflation in the theoretical sense of a generalised increase in prices. What’s more, these idiosyncratic price changes tend to be transitory or stable, so that there is a certain tendency for measured inflation to remain range-bound at a low level. The evidence also indicates that, in such an environment, monetary policy operates through a remarkably narrow set of prices. These findings suggest that, under those conditions, it may be difficult and undesirable to follow very tightly defined inflation targets. Having done the hard job of bringing inflation down, central banks can enjoy the fruits of their labours, although at the same time they need to make sure that those fruits are not ephemeral.
Will the Fed Pop the Everything Bubble? – Daniel Lacalle
26 januari

The history of economic development cannot be understood without the importance of recession periods. Recessions are often the result of the excess accumulated in previous years. Creative destruction after a period of excess used to drive a stronger recovery and continued economic development. That was until risky assets became the biggest concern for policymakers.
From the late seventies and early eighties US housing slump and automobile industry crisis to the technology and housing bubble burst there is a clear process of causation created by interest rate policy. Constant decreases in interest rates lead to excessive risk-taking, complacency and accumulation of exposure to increasingly expensive assets under the perception that there is no risk. Bubbles become larger and more dangerous because interest rates are kept abnormally low for a prolonged period and it disguises risk, clouding citizens’ and investors’ perception of danger in elevated valuations. Cheap money leads to generalized and dangerous risk exposure.
Could Blockchain Technology Help End Fractional Reserve Banking? – Sammy Cartagena
29 januari

Fractional reserve banking has existed throughout history, long before the creation of government currencies or central banks. Once monetary custodians realized that not all depositors would demand repayment simultaneously, the practice of lending out deposits in excess of reserves became commonplace. This raises the question of how a system of full reserves would operate in practice. Although authors have laid out plans for establishing a full-reserve banking system using gold or fiat currencies, the decentralized and digital nature of blockchain technology provides some inherent advantages in implementing a full-reserve system.
When Nixon officially ended the convertibility of the United States dollar into gold in October 1971, the dollar lost its last remaining tie to a commodity money. This ushered in the power of the central bank to create a near-unlimited amount of currency, since the dollar no longer faced redeemability into a scarce good. The danger of bank runs thus became virtually nonexistent, since more dollars could always be printed to meet outstanding withdrawals.
Interest-rate surveys – John H. Cochrane
29 januari

Torsten Slok, chief economist at Apollo Global Management, passes along the above gorgeous graph. Fed forecasts of interest rates behave similarly. So does the “market forecast” embedded in the yield curve, which usually slopes upward.
Torsten’s conclusion:
The forecasting track record of the economics profession when it comes to 10-year interest rates is not particularly impressive, see chart [above]. Since the Philadelphia Fed started their Survey of Professional Forecasters twenty years ago, the economists and strategists participating have been systematically wrong, predicting that long rates would move higher. Their latest release has the same prediction.
Well. Like the famous broken clock that is right twice a day, note the forecasts are “right” in times of higher rates. So don’t necessarily run out and buy bonds today.
Can it possibly be true that professional forecasters are simply behaviorally dumb, refuse to learn, and the institutions that hire them refuse to hire more rational ones?
My favorite alternative (which, I admit, I’ve advanced a few times on this blog): When a survey asks people “what do you ‘expect’?” people do not answer with the true-measure conditional mean. By giving an answer pretty close to the actual yield curve, these forecasters are reporting a number close to the risk-neutral conditional mean, i.e. not
but . The risk-neutral mean is a better sufficient statistic for decisions. Pay attention not only to how likely events are but how painful it is to lose money in those events. Don’t be wrong on the day the firm loses a lot of money. The weather service also tends to overstate wind forecasts. I interpret the forecast of 30 mph winds as “if you go out and capsize your boat in a 30 mph gust, don’t blame us.” “If you buy bonds and they tank, don’t blame us” surely has to be part of a finance industry “forecast.”
Why Price Deflation Is Always Good News – Frank Shostak
27 januari

Most commentators are currently preoccupied with large increases in the Consumer Price Index (CPI), which is labeled as inflation. The yearly growth rate of the CPI stood at 7.0 percent in December against 6.8 percent in November and 1.4 percent in December 2020.
Pundits have been blaming the strong increase in the momentum of the CPI on the supply disruptions because of covid-19, but the key behind this strong increase in the momentum of the CPI is reckless monetary pumping by the Fed. Observe that in January 2000 the Fed’s balance sheet stood at $0.6 trillion. By the end of 2021, it had climbed to $8.8 trillion.
As a result of this pumping, the yearly growth rate of the Austrian money supply metric increased by a massive 79 percent in February 2021 from 4.8 percent in January 2020. (Note that some of the increases in money supply are the result of the monetization of large government outlays).
On account of the sharp decline in the yearly growth rate of the Austrian money supply measure, from 79 percent in February 2021 to 15.4 percent in November 2021, the momentum of the CPI is likely to peak toward the end of 2022. Afterwards a strong decline in the momentum is likely to emerge.
A possible decline in the yearly growth rate of prices coupled with a likely decline in economic activity could ignite expectations of a general decline in the prices of goods and services, i.e., deflation.
Most Commentators Fear Deflation
For most economic commentators, a general decline in prices is considered as bad news. According to these observers, a general decline in prices generates expectations for further declines in prices and slows down individuals’ propensity to spend. This in turn undermines the aggregate demand. A decline in the aggregate demand because of the decline in consumer expenditure leads to a decline in the aggregate supply and thus to a decline in economic growth.
***No Wonder the Market Is Skittish – Charles Hugh Smith
28 januari

The equity, real estate and bond markets all rode the coattails of the Fed’s ZIRP and easy-money liqudiity tsunami for the past 13 years. As those subside, what’s left to drive assets higher?
No wonder the market is skittish:
1. Every time the Federal Reserve began to taper quantitative easing / open spigot of liquidity over the past decade, reduce its balance sheet or raise rates from near-zero, the market plummeted (“taper tantrum”) and the Fed stopped tightening and returned to easy-money expansion.
2. Now the Fed is boxed in by inflation–it can’t continue the bubblicious easy-money policies, nor does it have any room left to lower rates due to its pinning interest rates to near-zero for years.
3. So market participants (a.k.a. punters) are nervously wondering: can the U.S. economy and the Fed’s asset bubbles survive higher rates and the spigot of liquidity being turned off?
4. The market is also wondering if the economy can survive the pricking of the “everything” asset bubbles in stocks, bonds, real estate, etc. as interest rates rise and liquidity is withdrawn. What’s left of “growth” once the top 10% no longer see their wealth expand every month like clockwork?
5. The unprecedented expansion of asset valuations driven by expansions of credit and liquidity (i.e. low-cost credit chasing scarce assets) has greatly increased the wealth of the top 10% (especially the wealth of the top 0.1% and top 1%). Since the top 10% collect about half of all income and account for roughly half of all consumer spending, the “wealth effect” generated by ever-rising asset valuations has underpinned “growth” in both asset purchases and consumption.
If assets actually decline in value and the wealth effect reverses (i.e. punters feel poorer), then what will drive expansion of capital and spending going forward?
Year of Distortions, Shortages, Massive Inflation, Worst Trade Deficits Ever, and Hyper-Stimulated Growth Ends with a Bang – Wolf Richter
27 januari

But companies were finally able to rebuild some woefully low inventories in Q4.
GDP is adjusted for inflation to get “real” GDP by expressing everything in “chained 2012 dollars.” In this manner, real GDP in all of 2021 jumped to $19.43 trillion, up by 5.7% from a year earlier, the fastest annual growth since 1984, according the Bureau of Economic Analysis today.
This was a historic year, in terms of inflation, hyper-stimulated economic growth, trade deficits, and distortions, such as the labor and materials shortages. In the decade from 2010 through 2019, annual real GDP growth averaged 1.9% and never quite reached 3% in any single year. A range between 2% and 3% growth is now considered good and sustainable for the US economy – without running into the distortions now bedeviling the economy, where business are hobbled by not being able to get what they need, and consumers are confronted with some empty shelves, nearly empty lots at new vehicle dealers, and soaring prices.
Why Fighting Inflation Is Not a Priority for the Fed – Liam Cosgrove
28 januari

On Wednesday, the Federal Open Market Committee (FOMC) held true to its monetary-tightening timeline despite last week’s 10 percent drawdown in most major indices, effectively saying, “10 percent is not enough.” With retail sales numbers that will surely return to trend without more stimulus (see chart), a gridlocked Senate, and the prospect of higher interest rates surely to discount equity valuations, why aren’t more people selling?
Don’t get me wrong, the Fed will cave eventually, but they just sent a clear message that they need to see more selling. Will they ever make it to “lift off”? This handy chart, courtesy of the Macro Tourist newsletter, can shed some light:
As you can see, there has been just one rate hike post-1988 during which the S&P 500 was more than 10 percent off its fifty-two-week high. This rate hike was enacted by Jerome Powell and set off the infamous Taper Tantrum episode. So, we have two months before he is faced with this decision again. Suppose the market remains relatively flat or even increases between now and March. Given yesterday’s tolerance and historical precedence, I’d bet on lift off proceeding, which would hurt valuations. Alternatively, if the market continues to decline before the March meeting, historical precedence and Powell’s taper trauma tell us there will likely not be a rate hike in March, which is where things will get interesting. Long story short, markets are going down before they go up. I ask again, Why isn’t everyone selling?
Why Intellectual Property Isn’t Necessary to Reward Innovation – Bernardo Decoster
29 januari

The concept of a pioneer’s advantage is based on a single, intuitive pillar: it takes time for knowledge to spread throughout society. When an entrepreneur mixes his existing knowledge and creates a new idea—in other words, innovates—he is the one who knows best about this idea he just invented. When materializing this idea, it is a fact that not everyone in society immediately knows about this innovation nor how it works. This gives the innovating entrepreneur a temporal head start before his competitors (1) learn about the existence of this innovation, (2) decide to reverse engineer it, and (3) learn how to replicate it and operate it as effectively as him.
In this way, we can indeed say that a pioneer advantage is some sort of “knowledge Cantillon effect.” The Cantillon effect states that money is nonneutral, that not all society is affected simultaneously by the injection of new paper currency. Thus, when new currency is minted, it follows a certain path in the economy, benefitting the early receivers more than the late ones. The early receiver benefit because they have a head start—a temporal benefit—of spending their money at a moment when the prices have not been altered by inflation. Thus, the earlier receivers become wealthier compared to late receivers.
The Marxist Myth of the “Treadmill of Production” – Baker Elkins
24 januari

In recent years, Marxist theories of environmentalism have plagued online discourse and seeped their way into the public policy realm. Politicians then utilize these theories when formulating new legislation. While sometimes intimidating, these theories suffer significant flaws. Eco-Marxist theory, such as the “Treadmill of Production,” generally states two main criticisms of capitalism.
First, withdrawals from the environment. According to the eco-Marxists, production under modern capitalism requires a vast amount of material inputs. The energy/raw materials required to produce mass amounts of consumer goods leads to extreme resource depletion and waste; this is an insufficient criticism.
This is, at its core, an issue of scarcity. To the capitalist, it’s no surprise that using a resource diminishes its quantity supplied, but recognition of scarcity is a new concept for the Marxists. Scarcity is an obvious issue, but less obvious is how scarcity would be managed in a Marxist utopia absent of prices. The answer for a market economy is simple, the price system.
COP26 assessment and challenges – Jun Arima
26 januari

The 26th UN Climate Change Conference of the Parties (COP26) concluded ‘successfully’ with the adoption of the Glasgow Climate Pact. The agreement was the first to target specific energy sources. This column reviews the COP26 landscape and the challenges going forward. Developing countries are expected to continue pressuring industrialised ones to achieve net zero sooner and raise nationally determined contributions. The lack of space for realistic international discussions on energy security may limit the effectiveness of pushing the COP26 standards.
The cost of crying wolf – John H. Cochrane
27 januari

Why do so many Americans believe crazy things? Maybe not “crazy,” but beliefs that wildly get wrong factual costs and benefits, such as those of vaccines?
It does not help that they have been lied to, over and over again. Why should they believe anything now? Our elites, and in particular our public health bureaucrats, though invoking the holy name of “science,” have been trying to massage public psychology via deliberate obfuscation for a few years now. There is little science of managing public psychology, and if there is, epidemiologists don’t have it. There is some good ancient wisdom, as codified in the story of the boy who cried wolf. We do know that when lies are exposed, when elites are shown to be disparaging and trying to manipulate average people, trust erodes.
This thought is boosted by Marty Makary’s WSJ Oped “The High Cost of Disparaging Natural Immunity to Covid.”
For most of last year, many of us called for the Centers for Disease Control and Prevention to release its data on reinfection rates, but the agency refused. Finally last week, the CDC released data from New York and California, which demonstrated natural immunity was 2.8 times as effective in preventing hospitalization and 3.3 to 4.7 times as effective in preventing Covid infection compared with vaccination.
Yet the CDC spun the report to fit its narrative, bannering the conclusion “vaccination remains the safest strategy.”
Why? Well, both facts can be true. It can be true that immunity from previous exposure is very powerful, and even more powerful than vaccination, but that vaccination rather than let-it-rip, lockdowns, or masks, remains the safest public health strategy. Why not say so? Because the CDC thinks we’re morons and can’t understand that, so it must suppress evidence of natural immunity to scare people into vaccination. Then the word gets out, and people trust the CDC even less. (The rest of the article is great on facts of natural immunity.)
It’s worse.
Fiscal is local: EU standards for national fiscal frameworks – Xavier Debrun, Wolf Heinrich Reuter
24 januari

The European fiscal governance framework has grown into an arcane machinery. Yet, experts’ convergence on the need for a more effective and simpler system falls on political deaf ears. Greater reliance on national fiscal frameworks could significantly strengthen European fiscal governance while passing political hurdles. The authors of this column see value in further strengthening national ownership of fiscal responsibility while keeping central safeguards against risky fiscal behaviour.
WHOOSH Goes the Fed’s Lowest Lowball Inflation Measure. And Eats Up All Income Gains Plus Some – Wolf Richter
28 januari

Powell should pay attention here so he’s better prepared at the next press conference when asked about the impact of inflation on regular Americans.
Fed chair Jerome Powell’s reaction today after he saw the consequences of his reckless monetary policies. Imagined by cartoonist Marco Ricolli for WOLF STREET.
The “core PCE” price index, which excludes food and energy and which understates inflation by the most of all of the government’s inflation measures and which is therefore wisely used by the Fed for its inflation target, spiked by 0.50% in December from November, and by 4.9% year-over-year, the worst inflation reading since 1983, according to the Bureau of Economic Analysis today. As measured by this lowest lowball inflation measure, inflation, is well over double the Fed’s inflation target:
The overall PCE inflation index, which includes food and energy, spiked by 0.45% in December from November, and by 5.8% year-over-year, the worst reading since 1982.
Inflation Winners and Losers – Charles Hugh Smith
26 januari

The clear winners in inflation are those who require little from global supply chains, the frugal, and those who own their own labor, skills and enterprises.
As the case for systemic inflation builds, the question arises: who wins and who loses in an up-cycle of inflation? The general view is that inflation is bad for almost everyone, but this ignores the big winners in an inflationary cycle.
As I’ve explained here and in my new book Global Crisis, National Renewal, the two primary dynamics globally are 1) scarcity of essentials and 2) extremes of wealth/power inequality.
Scarcities drive prices higher simply as a result of supply-demand. Conventional economics holds that there are always cheaper substitutes for everything and hence there can never be scarcities enduring long enough to drive inflation: if steak gets costly, then consumers can buy cheaper chicken, etc.
But the conventional view overlooks essentials for which there is no substitute. Salt water may be cheap but it’s no substitute for fresh water. There are no scalable substitutes for oil and natural gas. There are no scalable substitutes for hydrocarbon-derived fertilizers or plastics. As energy becomes more expensive due to the mass depletion of the cheap-to-extract resources, the costs of everything from fertilizer to plastics to steel to jet fuel rise.
This price pressure generates a number of effect. Rising costs embed a self-reinforcing feedback as prices are pushed higher in expectation of higher costs ahead, and these price increases generate the very inflation that sparked the pre-emptive price increase.
Stock market fall and long-term investors – John H. Cochrane
24 januari

Having just plugged “portfolios for long-term investors” again, I really should opine on its message about the recent stock market decline. If you didn’t see this coming and get out ahead of time, or if it was perfectly obvious to you that this was coming but you didn’t get off your butt and do anything about it, preferring to pontificate at the dinner table, just how bad should you feel about it?
Not as bad as you might think.
For once, one can make a plausible case what drove the market down: Investors figured out that the Fed is going to finally raise interest rates to do something about inflation. Prices being somewhat sticky, higher nominal interest rates will mean a higher real interest rate, a higher real discount factor, and, with no change in the risk premium for stocks, a higher expected return for stocks. So, the lower price today is matched by higher returns going forward, just as a bond price decline is matched by higher yields. The lower price does not, in this argument, signal lower earnings or dividends.
If that is the case, then a long-term investor really has not suffered any decline in long-run purchasing power. If your plan was to hold stocks for a long time, and effectively live off the dividends (including all cash flows), then nothing has changed. Sure, it would be better if you had gotten off your butt and sold ahead of the decline. But effectively market timing is difficult as a consistent strategy. Maybe inflation was all “transitory” “supply shocks” and the Fed would not have to do anything.
Younger generations and the lost dream of homeownership – Gonzalo Paz-Pardo
26 januari

Homeownership among younger households has been decreasing in several major advanced economies. This column shows that increases in labour income inequality and uncertainty are key drivers of this trend. Confronted with high house prices and low, risky incomes, many young households cannot or do not want to risk making such a big, illiquid investment. As a result, they accumulate less wealth.
***Shares of Online Used-Car Dealers Vroom & Carvana Collapsed as Market Turned its Back on Money-Losing “Disruptors” – Wolf Richter
29 januari

That they lost gobs of money every year didn’t matter until suddenly it did. But now there’s a new challenge heading for them.
On its first day of trading after its IPO in June 2020, shares of Vroom [VRM], an online-only used-vehicle dealer that has lost piles of money every year, more than doubled from its IPO price of $22 a share, amid enormous hype on Wall Street. It then proceeded to skyrocket to $73.87 by September 1, 2020. And then the hype started to leech out, and on Friday, shares closed at $7.06, down 90.4% from the closing high (price data via YCharts):
Looking at a chart like this gives me the willies because it proves that there is something seriously wrong with how money-losing companies in well-established profitable industries, such as selling used vehicles, are hyped to retail investors and even asset managers as disruptors that are going to change the world, and these disrupters don’t need profits because who cares about profits when you’re changing the world.
And then the Big S hits the fan, after Wall Street banks and the insiders made huge amounts of money. That’s when other folks get cleaned out, having bought into the hype, and some unknowingly by having invested in funds that held these shares. This is now happening with hundreds of companies.
***African history through the lens of economics – Nathan Nunn, Stelios Michalopoulos, Elias Papaioannou, Léonard Wantchékon
27 januari

Since the 2000s, a vibrant stream of research on African political economy and economic history has emerged that has produced a plethora of insights and has uncovered the shadow that Africa’s past casts on contemporary economic, social, and political development. This column introduces a free online course on “African History through the Lens of Economics”, which will bring together the considerable volume of work in the economics literature of the past decades. The course is open to students with a background and interest in economics, political science, history, cultural anthropology, and psychology.
Why Bear Markets Are Tough – Charles Hugh Smith
24 januari

The number of traders who beat the indices soundly over both Bull and Bear markets are very few in number.
The Bear’s broken clock is finally right. Those clock hands stuck at midnight–well, it’s finally midnight.
Bear markets are tough, not just for Bulls but for Bears, too. Bear markets are treacherous because they are famously punctuated with rip-your-face-off rallies (RYFOR) that shred Bears’ lavish profits and handsomely reward buy-the-dip Bulls.
Then the markets suddenly roll over to new lows and the anguished cries of margin-call-impaled Bulls rises eerily from the depths. Newly enriched Bears–the few who weren’t thrown off the Bear Bus by the repeated RYFORs–rejoice, only to be ejected from the Happy Seat by the next rip-your-face-off counter-rally.
Those playing both sides are wrung out by the churn, and while a few make fortunes, the majority are whipsawed off the Bear Bus and the Bull Bus by the volatility and the soul-crushing anxiety of being wrong yet again.
Bear markets excel at sucking in Bulls at the peaks and Bears at the lows. When the move you’ve been praying for finally manifests, the temptation to go all in and reap the gains for being right is irresistible.
Services, jobs, and economic development in Africa – Leonardo Baccini, Matteo Fiorini, Bernard Hoekman, Marco Sanfilippo
25 januari

The servicification of economic activity occurring across Africa has implications for the continent’s future. Using per capita nightlight luminosity as a proxy for economic development, this column finds a strong positive association between higher-skill services and economic growth that varies according to geography, institutions, technology, and market conditions. Data on the structure of employment in African economies reveal significant shifts in the composition of employment towards services across and within countries, and towards growth in service-related occupations across all sectors of the economy.

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