Economische aanraders 30-06-2019


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.

The EU’s insolvency reform: Right direction, not enough, and important issues left unaddressed – Bo Becker
27 Juni

A new EU directive proposes important reforms to member countries’ corporate insolvency processes. This column argues that the directive is a step in the right direction but that it has crucial flaws in the way it envisions restructuring and priority of creditors. It also proposes a system – comparable to the US approach – in which restructuring and liquidation are alternative options triggered by insolvency, and that respects the absolute priority of creditors.
New Study Finds a Modest Carbon Tax Would Hurt All Humanity for Two Generations – Robert P. Murphy

One of the main themes of my writings on climate change at IER has been warning the public that the “consensus science” they are hearing from the media, pundits, and certain political figures is utterly divorced from the actual published literature, especially when it comes to the economic analysis of government policy. A new, cutting edge working paper from some big-name economists — including Laurence Kotlikoff and Jeffrey Sachs — confirms my point.
Could a Cryptocurrency Become a Global Reserve Currency? – Charles Hugh Smith
27 juni

Will bitcoin appear on this chart of global reserve currencies in the future?
Could a non-state cryptocurrency like bitcoin become a global reserve currency? I first proposed the idea back in November 2013, long before bitcoin’s rise to $19,000, decline to $3,200, recent ascent to $13,000 and current retrace.
The idea is intriguing on a number of levels. In terms of retaining value though thick and thin, the ultimate reserve currency cannot be printed (and thus devalued) with abandon by a government. Gold and silver have served as the ultimate reserve currency, as precious metals can be traded for commodities and services, provide collateral for debt and serve as reliable stores of value.
While many observers believe gold is still the only reliable reserve currency (or if you prefer, the only reliable backing for government-issued paper money), it’s a worthy thought experiment to ask if a digital currency could also act as a reserve currency.
Negative Rates Have Damaged Banks, But That Is Not The Worst Effect – Daniel Lacalle
25 juni

Different members of the ECB state that effects of monetary policy on banks’ profitability have been “broadly neutral”. Many also refer to papers defending that banks lend more under a negative rate scenario.
Here is a paper they use frequently trying to say that negative rates are good, do not hurt banks and makes them lend more: Why Have Negative Nominal Interest Rates Had Such a Small Effect on Bank Performance? (Lopez et al).
The paper ignores the collapse in net income margin and ROE and even dismisses ROTE (return on tangible equity) to try to defend the idea that banks earnings have not suffered from negative rates.
Monetary policy and money market funds – Giovanna Bua, Peter G Dunne
26 juni

Money market funds are important from a monetary policy perspective because they provide bank-like services and they are active in short-term funding markets. This column examines how recent extreme monetary policies have affected their performance and behaviour. Extreme monetary policy puts money market funds, which do not have access to the ECB’s deposit facility, under pressure by depressing the yields available on the assets they typically hold, leaving them at a competitive disadvantage relative to banks. This could cause outflows of investment and unintended intermediation between banks and funds.
The ECB’s Renewed Attack on Free Markets – Thorsten Polleit

Since March 2016, the main refinancing interest rate of European Central Bank (EZB) is zero, and since June 2014 the ECB’s deposit interest rate is in negative territory; it currently stands at –0.40 percent. This means that euro area banks get zero funding from the ECB, and that they are charged a fee on excess reserves they hold with the central bank. The ECB’s unprecedented lowering of interest rates flowing the crisis 2008/2009 was accompanied by a huge bond purchasing program (through which the base money supply was ramped up by close to 2.8 trillion euro), and euro area banks were also offered additional term-credit at most favorable interest rates.
The rent is too damn high – John H. Cochrane
23 juni

NPR covered the Democratic candidates’ plans to address housing issues:
[Julian] Castro would provide housing vouchers to all families who need help. Right now, only 1 in 4 families eligible for housing assistance gets it. He would also increase government spending on new affordable housing by tens of billions of dollars a year and provide a refundable tax credit to the millions of low- and moderate-income renters who have to spend more than 30% of their incomes on housing.
I’m actually surprised it’s as much as a fourth. Most government programs outside medicare and social security attract tiny fractions of the eligible people. Watch out budget if people catch on.
Local Government Is an Engine of Inflation – Charles Hugh Smith
26 juni

Insolvency isn’t restricted to private enterprise; governments go broke, too.
One reason the economy is so much more precarious than advertised is inflation has pushed households and small businesses to the edge–and one engine of that inflation is local government. This is not to dump on local government, which is facing essentially unlimited demands from the public for more services while mandated cost increases in government union employee wages and benefits ratchet higher.
Since personnel costs are 70+% of city and county budgets, those ever-increasing payroll, pension and benefits costs are the key driver of budgets expanding.
Japan’s Lasting Stagnation Is Hidden Behind Government Statistics – Taiki Murai, Gunther Schnabl

The European Central Bank’s recent move away from the exit from ultra-loose monetary policy has revived the debate on Europe’s potential “Japanification.” The Japanese scenario is gloomy. Since the bursting of the Japanese bubble in the early 1990s, growth has been stagnating, wage levels have been falling, and an increasing number of people has been forced into precarious employment. The so-called Abenomics, an immense Keynesian spending program financed by the central bank, has failed so far to jumpstart the ailing economy. Instead, statistics are interpreted and designed creatively.
Pension “Death Spiral” Crisis Reaching Fever-Pitch In The US – Tyler Durden
29 juni

Pensions across the U.S. are falling deeper into a crisis, as the gap between their assets and liabilities widens at the same time that investment returns are falling, according to Bloomberg.
Chief Investment Officer Ben Meng told the board of the California Public Employees’ Retirement System last week: “For the next 10 years, our expected returns are 6.1%, not 7%.”
And if you think you’ve seen panic now, just wait until he finds out that Calpers’ target of 7% – lowered in 2016 – is still a pipe dream.
Put simply: the record, decade long bull market hasn’t been enough to save pensions. The average U.S. plan has only 72.5% of its future obligations in 2018, compared to more than 100% in 2001. The Center for Retirement Research at Boston College attributes the deficit to “recessions, insufficient government contributions and generous benefit guarantees.”
Price and wage setting when accurate decisions are costly: Implications for monetary policy transmission – James Costain, Anton Nakov
28 juni

Recent low inflation is motivating new research to better characterise how individual firms and workers set prices and wages. This column describes a new approach which emphasises that the costs of decision making may limit the precision of price and wage changes. As well as making better sense of price and wage changes in microeconomic data, this new approach also strikes a middle ground between two leading models of monetary policy transmission, improving our quantitative understanding of the short-run effects of monetary policy on output and the short-run trade-off between inflation and unemployment.
***CNN Admits There Are Serious Problems with Central Banks’ Low-Interest-Rate Policy – Ryan McMaken
27 juni

On Monday, CNN reported on how, in spite of all the talk about job growth in recent years, wealth accumulation and incomes have been significantly and negatively impacted for many groups in the United States.
Much of what the article explored has been emphasized ever since the Great Recession started. The impact on younger earners, for example, has long been noted: “people entering the labor market during recessions have lower lifetime earnings.”
What was most interesting about the CNN article, however, was its admission that a persistent low-interest rate policy — one pursued by the central bank since the 2008 financial crisis — brings with it a serious downside. In a section titled “The mixed blessing of low interest rates” author Lydia DePillis discusses how low-interest rates have reduced the standard of living for those on mixed incomes, and has destabilized pension funds. Low rates have also made big firms even bigger at the expense of smaller firms:
Inflation and exchange rate targeting challenges under fiscal dominance since the Global Crisis – Rashad Ahmed, Joshua Aizenman, Yothin Jinjarak
28 Juni

Countries have significantly increased their public-sector borrowing since the Global Crisis. This column documents several potential fiscal dominance effects during 2000-17 under inflation targeting and non-inflation-targeting regimes. A higher ratio of public debt to GDP is associated with lower policy interest rates in advanced economies. In emerging economies under non-inflation-targeting regimes, composed mostly of exchange-rate targeters, the interest rate effect of higher public debt is non-linear and depends both on the ratio of foreign currency to local currency debt, and on the ratio of hard currency debt to GDP.
***Black Markets Show How Socialists Can’t Overturn Economic Laws – Allen Gindler
24 juni

If we consider economics to be an objective science, its rules should also have universal significance and use, despite differences in societal order. However, socialists of the materialist camp are committed to the idea that common ownership of the means of production would change the way economic laws unfold under socialism. Basically, they reject the notion of the universality and objectivity of economic rules by suggesting that the laws would change along with a change to the social formation.
The Most Splendid Housing Bubbles in America: First Year-Over-Year Drops Since Housing Bust 1 – Wolf Richter
25 juni

New York, San Francisco condo prices fall year-over-year. Seattle house prices flat year-over-year. After earlier declines, Denver, Boston hit new highs. Miami, Phoenix, Las Vegas try to regain nutty peaks of Housing Bubble 1.
Seasonal price spikes are cropping up in many of the most splendid housing bubbles in America, but in some metros they were not nearly large enough and prices fell compared to the same month last year, the first such declines since Housing Bust 1, and in others, they produced new all-time highs, and in others got them closer to the crazy highs of Housing Bubble 1.
It’s No Bitcoin: Facebook’s Libra Currency Is Tied to Government Currencies – Ralph Fucetola

Nobel laureate F.A. Hayek was, as he says in the 1990 introduction to his Denationalization of Money: The Argument Refined, one of the chief “gold bugs” of the 20th century. And he reminded us, so long as politicians want to control money, gold-backed currency is essential to protect our liberty from the politics of inflation.
But his concern for money and market reached back to his earlier work, as noted in a number of articles posted in recent years at As noted by Nikolay Gertchev:
In a series of five lectures delivered in 1937, and published under the title Monetary Nationalism and International Stability, Hayek offers an in-depth analysis of the main deficiencies of the present-day monetary system. In a nutshell, he identifies two factors that disrupt international economic relations: the fractional reserve commercial banks and the national central banks. The former are the primary source for the international transmission of the business cycles, while the attempts of the latter to correct the imbalances de facto amplify the resulting instability.
From Less-Splendid Housing Bubbles to Crushed Markets in America, June Update – Wolf Richter
26 juni

Dallas-Fort Worth ekes out new high, Chicago struggles, Atlanta, Minneapolis, Charlotte, Detroit, and Cleveland in charts.
US housing markets are intensely local, each following its own dynamics, and with mind-boggling differences, both in prices and price movements. This is amply illustrated by the CoreLogic Case-Shiller Home Price Index for 20 metros, released on Tuesday. I detailed the markets that are deep into Housing Bubble 2 – though some have now hit a ceiling – in The Most Splendid Housing Bubbles in America: First Year-Over-Year Drops Since Housing Bust 1. And here is the other batch of metros, those that range from still crushed markets to budding bubbles that haven’t quite yet qualified for the list of the Most Splendid Housing Bubbles.
***Is There a Limit to How Big a Corporation Can Get? – Per Bylund
27 juni

It is commonly believed that market competition leads to monopoly. Industries start out small with startup firms trying to out-innovate each other. But, in time, this competition gives way to economies of scale as competitors merge or take over each other. Competition thus leads to imperfect competition and oligopoly, and eventually to monopoly. The remaining firm, if unregulated, can then jack up prices to exploit consumers.
Even great economists have held this view. For example, Joseph A. Schumpeter argued the resources available in larger firms means they can afford large R&D investments and will therefore out-maneuver smaller firms. (Yet, at the same time, Schumpeter observed that disruptive innovations often take place in new, small firms.) This, to Schumpeter, means capitalism leads to the end of capitalism.

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