from Bloomberg News - Dec 5, 2013 10:25 AM GMT
China’s central bank barred financial institutions from handling Bitcoin transactions, moving to regulate the virtual currency after an 89-fold jump in its value sparked a surge of investor interest in the country.
Bitcoin plunged more than 20 percent to below $1,000 on the BitStamp Internet exchange after the People’s Bank of China said it isn’t a currency with “real meaning” and doesn’t have the same legal status. The public is free to participate in Internet transactions provided they take on the risk themselves, it said. Read more…
from Lars Syll
Paul Krugman writes on his blog today re economic models:
Look, economics is about how people (the word “agents” is itself a kind of tribal marker) are motivated to take actions, and how those actions interact. Equilibrium is often a very convenient way to think through all of that, and all of us sometimes use wording about what the economy “needs” or “requires” as shorthand …
The trouble is that we have a lot of economists who apparently don’t understand why they’re doing what they’re doing; they solve their equations without even trying to picture what those equations are supposed to be saying about the actual behavior of consumers and firms.
It’s a very sad state of affairs.
Whoever is interested in life in the nineteenth century European city does well to read the first part of Crime and Punishment (1866, fiction, situated in St Petersburg) by Fyodor Dostoyevsky or the entirety of The Condition of the Working Class in England by Friedrich Engels (1845, investigative journalism, cities like Liverpool and Birmingham). Planet Money has a very good video-epic, Planet Money makes a T-shirt (2013, mainly Bangladesh, Colombia and the USA) about comparable situations in the twenty-first century. It follows the production process of a T-shirt and shows how the economies of scale of global production chains, technology and the modern city intertwine with human endeavour, ambition and hope. The most surprising aspects:
(A) the amount of historical continuity between the situation Engels described and the present situation. Read more…
Tyler Cowen is rather upbeat about the British economy. I’m not.
The ONS title of the next graph: Business investment increased by 1.4% between Q2 2013 and Q3 2013. Right.
Investments are of course a lagging variable. And British employment is doing surprisingly well, which leads me to suspect that the British production estimates are on the low side. The expenditure data above are however independent from the production estimates and consistent with a rather dull economic situation. A complicating factor: ONS data on British goods exports are out of tune with the much more positive Eurostat data, which means that the estimates of one of the main components of aggregate demand are quite shaky which of course influences the reliability of judgements of the macro situation. It seems anyway that net non-oil exports did quite well, after the British devaluation in 2008 which up to know however did not result in a meaningfull recovery of measured manufacturing output – I still do not exclude a large upswing of production of arms, which might be left out of at least part of the ONS statistics (or it might be included in the post ‘erratics’ of the UK trade balance, which is left out of the official data).
Look here for some thoughts about the British (and the Spanish) productivity conundrum.
from Dean Baker
Last month at an International Monetary Fund conference, former Obama economic advisor Lawrence Summers harshly criticized outgoing Federal Reserve Board Chairman Ben Bernanke for comments he made this summer. Bernanke had raised the possibility of tapering the Fed’s purchase of treasury bonds, which would cause interest rates to rise. With the economy facing a prolonged slump, Summers argued, Bernanke should not even have talked about raising interest rates.
While Summers is correct that the economy remains far below its capacity, and therefore policy should be focused on boosting employment for the foreseeable future, there was actually a real problem that may have sparked Bernanke’s taper talk. The housing market was again approaching the price levels seen during the housing bubble, whose collapse six years ago precipitated the downturn and the financial crisis.
At the end of the second quarter of this year, the inflation-adjusted value of the Case-Shiller national home price index was more than 20 percent above its pre-bubble level. It was only 8 percent below its 2002 level, the point at which economists first began warning of a housing bubble.
More important than the current level of prices was the rate of change. House prices nationwide were up 10.1 percent from their level a year ago. In several markets prices were rising considerably more rapidly, with rates of price increase of more than 30 percent. Even if house prices were not yet out of line with fundamentals by the time of Bernanke’s taper talk, they soon would be in the markets showing rapid double digit price increases. Read more…
from David Ruccio
The other day, I posted a few paragraphs from the new Roman Catholic Pope Francis’s apostolic exhortation Evangelii Gaudium (which translates as “The Joy of the Gospel”).
I’ve now had a chance to read the entire text (available here), which seems to have gotten some notice around the world (although, best I can tell, there’s still no comment from the likes of Paul Ryan, who would steal bread from the mouths of the poor in the name of saving them from anything but the market).
The document as a whole is a call to a new kind of evangelization on the part of Catholics, both clerical and lay. (On Michael Sean Winters’s interpretation, “The Pope is calling the Church to be a missionary Church, an evangelizing Church, and the privileged path of fidelity to the Gospel is service to the poor.”) The main sections on economics are located in chapter 2 (“Amid the Crisis of Communal Commitment”) and chapter 4 (“The Social Dimension of Evangelization”).
The paragraphs I posted before are from chapter 2, in which Francis identifies the nature of the world in which he is making his call for a new missionary church. Permit me to repeat them here: Read more…
from the WEA Pedagogy Blog
As emphasized in the previous posts by Mady, one of the key problems with current economics (both theory & practice) is the lack of ethical bases. I believe there is no solution except by re-introducing ethics into the study of economics. Justice and equity are crucial to any study of economic systems. In contrast, the unfettered pursuit of profits lies at the heart of capitalism, as Max Weber clarified.
The goal of this blog is the same as the demand of the Manchester students: radical reforms in conventional economic syllabi. Since the dissent to orthodoxy remains a minority position, spreading the message requires development of self-contained texts/lectures.. . . read more
from Lars Syll
“Sorta-kinda New Keynesian” economist Paul Krugman now has learned from Francesco Saraceno — who links to yours truly — that “some people are attacking” him for “defending an economic orthodoxy that has failed.” Krugman writes:
It’s kind of an odd place to find myself, given how critical I’ve been of the way the economics profession has dealt with the crisis. But it’s not entirely unfair: I am quite skeptical of people whose response to the sorry state of affairs is to declare that what we need is a whole new field …
My answer, to put it in technical terms, is “Well, duh.” Maybe grad students at some departments, who are several generations into the law of diminishing disciples, really don’t know that rational behavior is at best a useful fiction, that markets aren’t perfect, etc, etc …
The question is what you do with this insight. Read more…
from Lars Syll
The other day yours truly was interviewed by a public radio journalist working on a series on Great Economic Thinkers. We were discussing the monumental failures of the predictions-and-forecasts-business. But — the journalist asked — if these cocksure economists with their “rigorous” and “precise” mathematical-statistical-econometric models are so wrong again and again — why do they persist wasting time on it?
In a discussion on uncertainty and the hopelessness of accurately modeling what will happen in the real world – in M. Szenberg’s Eminent Economists: Their Life Philosophies – Nobel laureate Kenneth Arrow comes up with what is probably the right answer:
It is my view that most individuals underestimate the uncertainty of the world. Read more…
We are living in a dark age of macro-economics indeed.
The empirical record of the last 300 years: (ultra-)unemployment in combination with wage cuts will lead to (much) lower incomes of households which leads to (much) lower expenditure of households. Recently, this has been happening for three or four or five years in a stretch, in countries like the Baltics and Ireland and Greece and Italy and Portugal and Spain and which is happening increasingly in the Netherlands and which will happen soon in Finland, too. Higher unemployemt in combination with lower incomes causes people to tighten their belts, which leads to a further decline of expenditure and a positive multiplier.
But on Voxeu, Petra Gerlach-Kirsten, Rosanna Merola and Connor O’Toole discover that lower household income leads to lower household expenditures. Which is puzzling to them as non-monetary rational consumer general equilibrium models had led them to believe that lower incomes do not lead to lower expenditure. Because rational households in an ergodic world know their future incomes and smooth consumption, taking their future incomes, future interest rates and future ideas and preferences into account when spending today, while they are also not cash constrained:
“We find that consumption growth is lower during financial crises, particularly during banking crises, and that a drop in income reduces consumption in the short run.”
Arghhh… we are not talking about lower growth here, we are talking about unimaginable drops of 30 to 40% in some countries. A single look at the national accounts will show their second point and would have shown that five, ten, fifteen and twenty years ago. And they do not even mention unemployment.
This line of reasoning is of course influenced by the ideas of people like Milton Friedman who mixed up non-monetary consumption (i.e. the use of consumer goods) and ‘utility’ with monetary consumption (i.e. the purchase of consumer goods) and production, to argue that consumption was non-cyclical, signifying that all kinds of counter-cyclical government policies were not necessary. But monetary consumption is cyclical and contrary to the statements of Gerlach-Kirsten, Merola and O’Toole it has been quite cyclical all along, especially expenditure on consumer durables. In the real world, the smoothing of the use of these durables leads to more cyclical purchases!
Dear friends, if post war consumption did not show the large cyclical developments of the past this was because incomes were smoothed by automatic stabilizers, minimum, wages, whatever, and not because households smoothed expenditures. However – governments have given up on this, at least in the EU, and ultra-unemployment (oops, ultra-unemployment is not even mentioned in their article…) and volatile expenditure are back, together with highly volatile consumer expenditures.
I agree, however, with their point that household heterogeneity should be taken into account – there is a difference between wealthy and poor households.
Austeristians love to point out that their expenditure and wage cutting policies promote long term development and prosperity. But the opposite is happening in Spain. Instead of boosting private investment, the cuts dampen private investment and especially future oriented investments like R@D which have declined with 8 to 9% a year for three years in a stretch
Which means that the accelerator effect, which ties investments to a high level of capacity utilization in combination with a high level of expected demand, is alive and kicking. And which means that the modernization of the Spanish economy is lagging, instead of speeding up, because of austerity policies. Not just because these cuts to business expenditure decrease aggregate demand even more. But also and especially because they signify a lower rate of technological progress.
from Dean Baker
A widely held view in elite circles is that the rapid rise in inequality in the United States over the last three decades is an unfortunate side-effect of technological progress. In this story, technology has had the effect of eliminating tens of millions of middle wage jobs for factor workers, bookkeepers, and similar occupations.
These were jobs where people with limited education used to be able to raise a family with a middle class standard of living. However computers, and now robots and other technological innovations are rapidly reducing the need for such work. As a result, the remaining jobs in these sectors are likely to pay less and many people who would have otherwise worked at middle wage jobs must instead crowd into the lower paying sector of the labor market.
This story is comforting to elites because it means that inequality is something that happened, not something they did. They won out because they had the skills and intelligence to succeed in a dynamic economy, whereas the huge mass of workers that are falling behind did not. In this story the best we can do for the left behinds is empathy and education. We can increase their opportunities to upgrade their skills in the hope that more of them may be able to join the winners.
That’s a nice story, but the evidence doesn’t support it. Read more…
Today, the Bank for International Settlements (BIS) published a new and improved edition of their international house and land prices database. That’s a great thing and shows the progress of the science of economics! We need those prices to describe as well as to analyse our economies:
1) By far the larger part of household debt consists of mortgage debt, which means that house prices are indispensable for the analysis of as well net wealth of households as well as household behaviour. And, as mortgage debt is the single most important kind of ‘real economy’ asset on the balance sheets of banks the same holds for banks.
2) As (a) house prices have (at least up to 2008) increased in many countries while (b)at least up to 2008 house ownership also increased in many countries, the importance of the value of houses has increased. Read more…
from Lars Syll
As is well-known, Keynes used to criticize the more traditional economics for making the fallacy of composition, which basically consists of the false belief that the whole is nothing but the sum of its parts. Keynes argued that in the society and in the economy this was not the case, and that a fortiori an adequate analysis of society and economy couldn’t proceed by just adding up the acts and decisions of individuals. The whole is more than a sum of parts. This fact shows up already when orthodox – neoclassical – economics tries to argue for the existence of The Law of Demand – when the price of a commodity falls, the demand for it will increase – on the aggregate. Although it may be said that one succeeds in establishing The Law for single individuals it soon turned out – in the Sonnenschein-Mantel-Debreu theorem firmly established already in 1976 – that it wasn’t possible to extend The Law of Demand to apply on the market level, unless one made ridiculously unrealistic assumptions such as individuals all having homothetic preferences – which actually implies that all individuals have identical preferences. Read more…
What should central banks do? Do they have to control inflation by targeting the amount of money? Should they ‘lean against the wind’ when it comes to bubbles? Or is ‘inflation targeting’ the silver bullet of central bank policies? A case can be made that central banks should ‘lean against the wind’ when it comes to credit: they should discourage ‘unproductive’ lending (i.e. lending to buy assets, including existing houses), though ‘macro prudential’ tax policies might be a better tool to do this and. And, surely in case of a severe crisis, they should encourage productive lending by banks to households, companies and yes, also the government. Any way, ‘credit to the private sector’ seems to be a much better indicator of the state of the business cycle than the supply of money or inflation. The dot.com bubble and the housing bubble were not characterized by high consumer price inflatin (the target variable of the ECB) or, in the case of the dot com bubble, by high money growth. They were both characterized by high credit growth (the difference between M-3 money and credit to the private sector is, at the moment, especially caused by lending to non-Eurozone companies). Oh, and this is the time to be resolute and credible, when it comes to this, as Kocherlakota understands. Via @cigolo.
from Paul Davidson
What is Bitcoin? According to Modern Money Theory, bitcoin can not be money since it is not accepted in payment of taxes by any government — nor is it issued by any government via the governed purchase of goods and/or services from the private sector. So what is bitcoin in terms of MMT? I do not know what MMT proponents would respond to this query?
For Post Keynesian liquidity theory of money, the answer is clear.
In Post Keynesian monetary theory money is anything that will settle a legal contractual obligation.
And by the civil law of contracts, the government determines what settles a legal monetary contractual obligation.
Thus not only legal tender but also checks drawn on a bank account (but not financial securities such as stocks) can legally settle any legal contractual obligation (since the government regulates banks to assure that bank deposit liabilities are a “tap” issue that is immediately transferable into legal tender). And the government is the enforcer of legal contractual obligations.
Individuals can make all sorts of production and exchange (purchase) agreements among themselves — but only it calls for a money transfer to discharge the obligation, these contracts are not legal contracts. Thus I can agree to cut my neighbors lawn and he can agree to wash my car in exchange — but this agreement is not legally enforceable.
Bitcoin will not remain a liquid asset unless there is an institution [ a market maker] who will maintain orderliness. Read more…
In an interesting and important recent Voxeu article Pınar Yeşin states, about lending in a foreign currency (emphasis added),
While foreign currency loans offer some advantages to borrowers – such as lower interest rates and longer maturities compared to domestic currency loans – they also carry a significant exchange rate risk. A sharp depreciation of the domestic currency can prevent unhedged borrowers from being able to service their foreign currency loans. As a result, these loans could create a substantial systemic risk to the European banking sector. Banks could fail jointly as a result of their exposure to unhedged households and non-financial firms which default on their loans when the domestic currency depreciates sharply.
Policymakers and international institutions have recognised the systemic risk that foreign currency loans pose to the European banking sector. For example, the European Systemic Risk Board (ESRB), an independent institution monitoring financial stability within the EU, made an official recommendation on lending in foreign currency on November 22, 2011. In particular, the ESRB stated that “Excessive foreign currency lending may produce significant systemic risks for those member states and may create conditions for negative cross-border spillover effects.”
But the real problem is not lending in a foreign currency. The real problem is borrowing a foreign currency.
One of the problems with economics (as well as economists) is an undue focus on the financial sector (including pension funds) and financial assets. And the larger problem of a monetary crisis is not the systemic risk to the banking sectors and an increase in non-performing assets (which are problems in their own right, to be sure) but households and non-financial companies which have to default. It´s not about banks. It´s about families and households. As Stiglitz, Sen and Fitoussi argue, economic statistics have to become more household oriented to enable a shift of economic thinking towards the important questions. Which, according to Mahé, Schrijvers and me, is entirely possible when it comes to monetary statistics. Even when it is, as in this case, about the original sin in economics – borrowing in a currency which your country does not control. Which in this case also means that it´s not about protecting the value of the assets of the financial sector (i.e. protecting wealth and creditors) but about guaranteeing the circular flow of money and income (i.e. protecting the income of households and companies which, by the way, is better for the banks too).
1) According to Keynes,
“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”
Book 3, Chapter 10, Section 6 pg.129 “The General Theory..”
2) According to the Guardian,
Missing: hard drive containing Bitcoins worth £4m in Newport landfill siteA digital ‘wallet’ containing 7,500 Bitcoins that James Howells generated on his laptop is buried under four feet of rubbish
Buried somewhere under four feet of mud and rubbish, in the Docksway landfill site near Newport, Wales, in a space about the size of a football pitch is a computer hard drive worth more than £4m.
It belonged to James Howells, who threw it out when he was clearing up his desk in mid-summer and discovered the part, rescued from a defunct Dell laptop. He found it in a drawer and put it in a bin.
And then last Friday he realised that it held a digital wallet with 7,500 Bitcoins created for almost nothing in 2009 – and then worth about the same.
Today, the Irish statistical institute published data on employment growth in Ireland: a solid +3%, year on year. This news is about as good as it can be.
It is puzzling. Very puzzling. Such rates of employment growth are normally consistent with economic growth of 4 to 5% and, during a recovery, even with rates of 5 to 6% as companies at first can use existing ´slack´ to cater to additional demand.
And there isn´t even a recovery, in Ireland. Read more…