Guest post by Erwan Mahé
Free summary (by M.K.): Erwan Mahé has a very important question.
Central Banks are, de facto, a branch of government (forget about the legal details). The employees, including the head of the bank, are civil servants. Like other branches of government the central bank has to deliver: among other things monetary (prices) and financial (debts) stability. The European Central Bank (ECB) defines monetary stability as consumer price inflation of nearly 2% (moins de 2% mais proche de 2%). But what if the ECB does not deliver? Do these civil servants still have the moral and legal right (if it ever had it, anyway) to prescribe economic policy to Euro member countries,? Are these member countries able to stick to the Maastricht debt and deficit agreements anyway, in the present lowflation surrounding? Are they even bound to try this, when deflation looms (deflation in this case not defined as a decline of the consumer price level but as a decline of the GDP price level. Don’t want deflation? Increase GDP spending, use the money).
No, don’t worry, I am not going to talk today about whether or not the ECB will launch a QE in January. Although all the “experts” agree that Mr Coeuré’s comments a couple days ago, in the WSJ interview, go in that direction. All the information available to us since the last ECB press conference on December 4th point to such a move as early as January 22nd, like the mediocre demand for the second TLTRO of December 11th and the collapse of inflation expectations (negative on two years and 0.50% on five years!), made worse by the steep plunge in oil prices. I am interested in a precise comment by Mr Coeuré, that reveals quite a bit about the monetarist bias of certain ECB members which could, ironically, present a perfect way for the eurozone to pull out of the economic morass in which it has been trapped since 2008. Here is the excerpt Read more…
The ECB is going to publish its minutes 1556 weeks faster!
On September 19, 2012, I wrote on this blog:
* The Bank of England does it after two weeks
* And the ECB does it after 1560 weeks…
At this moment there is, suddenly, a discussion going on about the question if the ECB should publish the minutes of the meetings of the Governing Council a little bit faster. Should we even talk about this?”
The good news, straight from the ECB website: “ECB to publish regular accounts of monetary policy discussions from January 2015 … The accounts will be released four weeks after each meeting.”
Long story short: democracy is under siege, at the moment, but this is a big boost to transparant, accountable government in the European Union.
On January 23, 2014, on this blog a Mark Weisbrot post was published titled: “Greece will likely begin recovery this year: Is austerity working?“. He was right and not just about the recovery, but also about its cause, increased aggregate demand:
Now the IMF is projecting economic growth for 2014. But this time they are probably, finally, going to be right. It is vitally important that we understand why. Last month the Greek parliament approved a stimulus program involving highway construction that is quite large. According to the Ministry of Infrastructure, Transport, and Networks, total spending on this project will be 7.5 billion euros over the next year and a half.
What does Elstat teach us about the results of this stimulus:
The Production Index in Construction (IPC) for the 3rd quarter 2014 compared with the 3rd
quarter 2013 recorded an increase of 61.3%. A year ago, the year-on-year growth rate of
the index was –4.7% (Table 1). The aforementioned increase is due exclusively to the
execution of civil engineering works.
Will this last? Read more…
A) A gentleman called Hume argued, back in 1752, that it’s not just about household consumption prices – differences in government consumption price levels are important, too.
B) Hume’s take on prices was actually more balanced than present day central bank ideas about ‘inflation targeting‘ which invariably but for no good reason target consumer prices only.
C) An no, the DSGE-modelling strategy which assumes that there is only a single final good and one ‘representative’ household in the entire economy is not a very good reason to do this (albeit consistent with new-classical thinking)
D) Recent data from the British ONS for instance show that in the UK inflation for poor households was 1% a year higher for eleven years in a stretch than for rich households (as they buy other goods and services, especially ‘housing’ is important). The ‘repreentative consumer’might not be that representative. By the way – consumer price inflation in the UK saw a sizeable 0,3%-point decline in October – the lowest rate of inflation in 12 years. Producer output prices even declined with 0,1% – but that’s not a problem as input prices (excluding wages) declined with a massive 8,8%. An oh, the country is still infected with wealth illusion: house prices increased with more than 10% (+17% in London: sell and emigrate!).
E) Which underscores the point that central bank strategy of average ‘consumer price inflation only’ targeting is, well, daft.
F) German inflation differences between income groups were somewhat smaller than in the UK, albeit still sizeable
G) Tyler Cowen argues, rightly, that inflation is about the purchasing power of income (i.e.: not about the purchasing power of money) and even when estimated inflation is equal for all income classes higher incomes do have the advantage.
QE for the Eurozone people instead of the Eurozone banks is perfectly possible (as well as necessary) – just give people some money. Preferably tradeable vouchers which can be used to pay back mortgage debt. It’s that simple.
Central bankers in the Eurozone are contemplating quantitative easing (QE) for the Eurozone. Basically QE consists of a central bank which creates money, or bank reserves (a kind of alt-money for transactions between banks) which it uses to buy bonds (especially government bonds). In the USA, normal money was created to buy bonds from pension funds and comparable institutions (the Wikipedia entry does not mention that buying bonds from pension funds will not increase bank reserves but will increase the amount of plain, normal, every day dollars), while reserves were created to buy bonds from banks. The idea is that this will decrease the long-term interest rate, which might lead to additional lending and borrowing in the real economy.
But do we really need to buy bonds, Read more…
International price differences of ‘machinery and equipment’ are remarkably small within the EU. International price differences of another kind of fixed assets, residential building and civil engineering works, are remarkably large (see graphs).
Investments in ‘machinery and equipment’ as well as new ‘residential buildings and civil engineering works’ (i.e. construction) are both future oriented. The flow of expenditure on both kinds of investments can be compared, using the GDP-grid. Both kinds of investment boost our stock of ‘fixed assets’ and both are in a sense a ‘sunk cost’ transfer of the present generation to future generations. But can we arithmetically compare the stock of total ‘machinery’-capital with the stock of total ‘construction’-capital? In an economic sense, the stock of ‘machinery and equipment’ is a quite different item than ‘Residential buildings en engineering works': Read more…
The very first sentences of the Financial Stability Review of the ECB (December 2012) define financial stability as:
The Polish central bank is concerned about deflation. It should not be. Prices of goods and services are going down. But employment is increasing at a rate of 1,5% a year, unemployment is going down (from 10 to 8,3% in one year) and productivity increases. At the same time, wages are increasing at a rate of about 4% a year. This 4% may, due to rapidly increasing productivity, be not enough to enable positive domestic demand inflation. But that’s not a problem. Rising nominal and real income means that there is no sign of any kind of debt deflation, i.e. people and companies who, due to declining nominal incomes, are not able to pay their bills and other debts.
On this blog I’ve repeatedly argued that tourism is one of the main forces driving recoveries (Ireland, UK, Baltics). Here, some data about the magnitude of this effect in the UK. Mind that one pound spend in the tourism business leads to about two times as much work as one buck spend in the financial sector.
Classical and neoclassical economists liked and like to talk about the ‘purchasing power of money’. Which is as apt as talking about the power of a wrench. A wrench has a (sometimes adjustable) size – but no power. The man or woman who uses it has the power. Purchasing power is not about money, it is about income (as every manual on how to calculate price indices shows). We use money to spend our income.
A nice example of the dramatic differences of the amount of nominal capital, expressed as a a % of nominal GDP, and the amount of real capital, expressed as a % of real GDP (relative prices change all the time…). This is related to the Cambridge controversies.
Economic historian Claudio Borio about ‘inflation targeting’ (and the Gold Standard and Bretton Woods and all that): “no policy regime in history has simultaneously achieved sustained monetary and financial stability”
Time to mark my believes to market. And I was wrong. I was not critical enough of the idea that a demand problem can be cured with supply side solutions. Three years ago, I criticized this article (see the comments) which more or less lauded Danish labour market ‘flexicurity’. And indeed: this supply side solution did not solve a demand side problem – Danish unemployment did not go down as intended. Flexible firing rules in combination with high but short unemployment benefit did lead to an unusual fast increase of Danish unemployment – but it did not lead to a subsequent fast decline of unemployment (graph 1). And the slight decline which can be witnessed at the end of the series is not caused by people getting jobs – but, unlike the situation in Sweden and the Netherlands, by people leaving the labor market (graph 2 and 3), a process which started right after the start of the Great Financial Crisis and which continuous until the present day. I did not expect that to happen. Flexicurity backfired. The Dutch example shows that supply side policies matter – when the macro economic surrounding is favorable. The Swedish example shows how long it can take before the consequences of a severe financial crisis, which leads to an unfavourable macro situation, are overcome. And the Danes teach us that demand side problems have to be tackled with demand side solutions. Read more…
From: Erwan Mahé (guest post)
In light of the fairly wide divergence of views as to what the ECB will decide to do (or not to do) at its monthly meeting this Thursday 4 December, I thought this would be a good time to examine the latest comments by the leading members of this institution. Their comments are more than a little surprising in that they seem to reflect a certain lack of understanding about the nature of a modern currency, such as the euro. They also show obvious confusion between monetary policy and credit policy. In reality, the most hawkish ECB members seem to have orchestrated a real warning shot across the bow of Mario Draghi, just in case he thinks of moving forward with a real sovereign debt-based quantitative easing in December.
This might be a good time for me to repeat my position that such a programme would have little impact on the eurozone’s inflation outlook, because only fiscal policy can hope to pull us out of the lowflation trap, especially when monetary policy remains stuck in zero lower bound interest rates. Read more…
Links. Latvia and the future of Europe. And a lot about the price level of consumer expenditure and central banks.
A. Latvia: a glimpse into the future of Europe? The Latvian employment rate is up (good!). But: “Due to the decrease in the number of population, also the number of employed persons declined“. Good? Bad? Soon, a bit more about the Baltics and Ireland. By the way – the slight decline in the EA-18 number of unemployed is stalling.
B. The intertemporal Big Mac Index.
C. Once, many central banks were occupied with maintaining fixed exchange rates. Nowadays, ‘inflation targeting’ is in vogue. A change for the better? Hmmm…:
C1. A new article from the International Journal of Central Banking.
“Only the objective of currency stability exhibits a significant relation with non-performing loan levels in the run-up to the crisis [According to the authors: possibly because a fixed exchange rate regime limits the possibility to credit-fund bubbles. (Is this related to limits to the possibilities to mitigate the associated deteriorating of the current account in the case of fixed exchange rates? M.K.)]. This effect is amplified for those countries with most frequent exposure to IMF missions in the pasy. Our results suggest that the current policy discussion on whether to centralize prudential supervision under the central bank and the ensuing institutional changes some countries are enacting may not produce the improvements authorities are aiming at. Whether other potential improvements in prudential supervision due to, for example, external disciplinary devices, such as IMF conditional lending schemes, are better suited to increase financial stability requires further research.” Read more…
Tyler Cowen and Paul Krugman are musing about the direction of macro-economics: is Keynes the new Keynes or isn’t he? In reality, macro-economics wich takes debt and money serious is winning – and didn’t the real Keynes take debts and money quite serious? A non-exhaustive list of examples:
Here, Dirk Bezemer with: ‘Debt: the good, the bad and the ugly’, good debts boosting demand and production and bad debts boosting asset prices and wealth illusion.
Here, Richard Werner with a very recent article about good and bad debts good debts boosting demand and production and bad debts boosting asset prices and wealth illusion.
Here, an article by Òscar Jordà, Moritz Schularick and Alan M. Taylor which states, based on carefull historical research, “Housing finance has come to play a central role in the modern macroeconomy.” Bezemer and Werner would consider a large part of housing finance related debts to be bad and even ugly debts. Read more…
Portugal, Spain, Italy, Greece and Turkey all indulge in channeling cash welfare benefits to the rich. France, too. Is there a (northern-)mediterranean pattern here? Maybe, as six of the seven countries on the left of the graph are also part of a geographical cluster (while Australia clearly is a UK offshoot): geography and culture seem to matter. Might reforms consist of less child support for the rich and more for the poor?
A) The 1992 Bundesbank ‘Geschäftsbericht 1992′ shows that the Bundesbank did not use to have any problem with buying government bonds. It even provided credit to non-general government companies.
B) In this 1981 piece (Stopping moderate inflations) Thomas Sargent is unusually clear about his opinion of central banking and Margaret Thatcher. He was wrong that disinflation could be easy.
C) Tourism in the EU is far above pre-crisis levels.
D) Robert Vienneau has an interesting input-output study about income distribution and price levels (which I still have to digest a little): ” an empirical exploration, with data from countries worldwide, of Sraffian, Marxian, and classical political economy… Labor values predict market prices better than prices of production do. Labor values also predict market prices better than they predict prices of production. In short, a simple labor theory of value is a surprisingly accurate price theory for economies around the world”. Which is, by the way, in line with Eurozone ‘Troika’ policies. Mind, however, that contrary to another assumption of these policies low wages do not exclude large current account deficits or slow export growth.
E) Non-EU citizens twice as likely to be at risk of poverty or social exclusion as nationals in 2013. Differences are increasing. And there are large differences between countries which implies that this difference is (also) policy sensitive.
Deirdre McCloskey has written a lengthy Piketty criticism – and she totally agrees with Piketty. It’s Friedmanian in spirit: a self-concious, eloquent (even more eloquent than Friedman!) defense of the market based upon clever arguments and our experience with markets, though also more literate and less US centered than the typical Friedman piece. But it’s a somewhat weird piece. She states that she totally disagrees with Piketty. But she doesn’t. In fact she totally shares his vision: it’s all about g. She defines ‘g’ as ‘The great enrichment’. And states, just like Piketty, that g, or the high growth rate of our economy, saved us from becoming a rentier economy. And just like Piketty she does not seem to understand balance sheets. More on that below.
I agree with many points and surely with the first three of its main arguments: Read more…
Two leading conservative German economists, Hans-Werner Sinn and Otmar Issing, once agreed with Mario Draghi: Eurozone inflation should not become too low. Do they still agree?
Today, the ECB published a Mario Draghi speech on is website. From the summary:
He added the ECB would continue to meet its responsibility: “We will do what we must to raise inflation and inflation expectations as fast as possible, as our price stability mandate requires of us. If on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialise, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases,” Mr Draghi said.
This is totally in line with a 2003 Otmar Issing speech. In this speech this former ECB banker (1998-2006) states that Eurozone inflation should not become too low, among other reasons to prevent outright deflation in any of the member countries. And in 2000 another leading conservative German economist, Hans-Werner Sinn, stated (with Michael Reutter) in a 100% Krugman proof paper that inflation should not become too low to prevent interest policies from becoming ineffective as well as to enable individual countries to become more competitive (i.e. obtain a lower relative price level compared with other countries) without outright deflation. Again, prevention of deflation in individual member countries is stressed. In those days, Germany was on the brink of deflation and Sinn argued for higher inflation (4%?) in the periphery. Today, Spain and Italy and Greece are beyond the brink of inflation but I do not hear Sinn or Issing arguing for 4% inflation in Germany (they do want some countries to leave the Eurozone). Read more…
The UK is supposed to have a flexible labour market. Flexible labour markets are supposed to end rigid ‘dual’ structures of labour markets by improving the position of marginal workers and the unemployed as workers with jobs can be fired more easily. Does this work? Hmmm… (source: the new ONS earnings report).
Figure 2: Annual percentage change in median full-time gross weekly earnings for all employees and those in continuous employment, UK, April 2005 to 2014
The unemployment rate in Germany is, though surley not low, one of the lowest of the European Union – and declining. Also, at this moment employment as well as hours worked per employed person are increasing. This combination is pretty special for Germany. Between 1991 and 2005 the total number of hours worked declined with almost 10% (graph 1) which did not lead to even higher unemployment because the number of hours worked per person declined with about the same amount (graph 2). After 2005 the number of hours first increased in the boom period 2006-2008 but stagnated afterwards which, as the number of hours per worker kept declining, led to an increase of unemployment. At this moment, however, employment as well as the number of hours is increasing, despite a stagnating economy. The continuous decline of the number of hours indicates that, if need be, at least part of the problems of the rapidly ageing German society can be solved by increasing the number of hours per person instead of only increasing the ‘Rentenalter’ (I’m not against such increases – but I’m getting a bit fed up with the ‘ageing society’ panic). And, as I already indicated, unemployment can still go down a few notches, too. Read more…