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Issing and Sinn: ‘Wenn the situation changes, we alter our conclusions!’?

November 21, 2014 Leave a comment

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…

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Further evidence on the crappyfication of the UK labour market (graph)

November 20, 2014 2 comments

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

 

Crappyfication

 

Categories: Uncategorized

Total hours and hours per worker in Germany (2 graphs)

November 18, 2014 Leave a comment

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…

Categories: Uncategorized

Number of unemployed per vacancy, UK (WOW edition) (graph)

November 17, 2014 2 comments

For my view on the British labour market look here (nice long-term productivity graph), here (where I predict that the decline of productivity will end quite soon, I totally stick to this prediction), here (some historical comparative data on unemployment which show how terrible the Eurozone is doing while the UK experience is much more in line with post WW II developments and the post WW II implicit social contract.Yes, that was betrayed in the UK, too, but that does not compare to what happened in the Eurozone with regard to Spain, Italy, Ireland, Portugal and Greece Update: Krugman hits the nail on the head today, deconstructing some remarks of the increasingly extreme Weidmann, boss of the BuBa, who wants to inflict even more pain on these countries. 45% unemployment?) and here (where I indicate that UK broad unemployment is not doing as well as normal unemployment, to say the least). Mind also that government expenditure increased quite a bit, in 2014. Despite all caveats, the British labour market keeps beating my expectations. The very good thing about this is that this gives people the chance to exit crappy jobs and ´self-underemployment´. One large risk: the continued Eurozone crisis might lead to lower British exports, causing a rapidly increasing current account deficit forcing the UK into austerity and the further betrayal of the post WW II social contract.  Read more…

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US corporations holding $2.1 trillion in cash overseas

November 17, 2014 2 comments

from David Ruccio

According to NBC news [ht: db], U.S. corporations are for the first time holding more than $2 trillion overseas, a sixfold increase over the past 12 years.

That total is now greater than the amount held within the United States, which totals just under $1.9 trillion.

fredgraph

Read more…

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Links. Monetary policy in India, inflation metrics and the importance of a steady job

November 16, 2014 Leave a comment

1) In India, the government and, well, another part of the government (the central bank) are bickering about who is allowed to set an inflation target (should a rather narrow variable like consumer price inflation be targeted anyway? In India, this will mainly be about very volatile food prices!):

Finance Minister Arun Jaitley has given the go-ahead for a major overhaul of the current monetary policy framework wherein the Centre will specify ‘inflation targets’ for the Reserve Bank of India (RBI) to achieve. Under the proposed new regime, the RBI will set inflation as its top priority in its policy statements. The decision departs from the recommendation of an expert committee of the RBI, appointed to examine monetary policy. Headed by Reserve Bank Deputy Governor Urjit R. Patel, the committee had recommended that the monetary policy decision-making should be vested with a monetary policy committee, chaired by the RBI Governor. Other recommendations were that the apex bank adopt the new Consumer Price Index (CPI) as the measure of the nominal anchor for monetary policy. And that the RBI set the target CPI inflation level at 4 per cent (+/- 2 per cent) to be achieved through its monetary policy tools. A senior Ministry official told The Hindu that the Modi government decided that the RBI “cannot set for itself an inflation target level of 4 per cent for all times to come…the Centre will set this target.” Another Ministry source said: “It is best that inflation targets are set by the governments elected by the people and not a bunch of bureaucrats and economists sitting in the Reserve Bank.”

Read more…

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‘Always november, always raining’

November 16, 2014 4 comments

from J.C. Bloem (Dutch poet, 1887-1966). Translation: John Irons

NOVEMBER

It’s raining and it is November:
Autumn lays siege now to the heart
That sadly, though more wont than ever,
Endures its secret pains apart.

And in the room, where resignation
Sees daily life pass as it may,
From streets that speak of desolation
A bleak light falls at close of day.

The years pass by but never alter,
The difference will soon be gone
Between dim memories that falter
And what is lived and is to come.

Lost are the ways I knew of gaining
Release from time in earlier days;
Always November, always raining,
Always this empty heart, always. Read more…

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Italy’s stagnation: the need to share the pain

November 15, 2014 6 comments

from Dean Baker

According to the plan designed for Italy by the European Commission, Italy must regain competitiveness with Germany by forcing down wages. A prolonged period of high unemployment is an essential part of this process.

There can be little doubt that the main problem with Italy’s economy is a lack of demand. When the housing bubbles that were driving the euro zone economies burst in 2008, there was nothing to replace this source of demand. Italy joined other countries in the euro zone and around the world in using fiscal stimulus to boost demand, but then was forced to revert to austerity in 2010.

Its economy has been shrinking ever since, as would be predicted by textbook Keynesian economics. GDP in 2014 is projected to be almost 9.0 percent less than the 2007 peak. According to the I.M.F.’s projections, which have consistently been overly optimistic, Italy’s GDP will still be 3.5 percent below the 2007 level in 2019. This would imply twelve years with cumulative negative growth, a performance far worse than any major country saw in the Great Depression.

The shrinkage of the economy has been disastrous for Italy’s workers. The employment rate for prime age workers is down by almost six full percentage points. The employment rate for young people is down by ten percentage points, translating into youth unemployment rates of close to 40 percent.

Of course the pain for workers is the strategy. The plan designed for Italy by the European Commission is have Italy regain competitiveness with Germany by forcing down wages. A prolonged period of high unemployment is an essential part of this process. Read more…

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Abraham Lincoln and the road to despotism

November 14, 2014 2 comments

from David Ruccio

Wall Quotes - Abraham Lincoln - Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed

It is a glaring omission in his otherwise remarkable discussion of the relationship between Karl Marx and Abraham Lincoln, An Unfinished Revolution, that Robin Blackburn neither discusses nor does he include the text of Lincoln’s First Annual Message to Congress(the equivalent of what we refer to today as the president’s State of the Union) , of 3 December 1861.

Composed at least in part as an answer to Jefferson Davis’s President’s Message of 18 November, in which Davis decries the actions of a president turned despot and celebrates the slave South’s “unconquerable will to be free,” Lincoln responds as follows: Read more…

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East Germany – not an economic succes story (2 graphs)

November 9, 2014 3 comments

Update: @Twundit, who was there in 1989, is a kind of ‘life-twittering’ the pictures he made in Berlin.

Twenty five years ago the Berlin Wall came down. Which was and is a good thing: East Germany was a stagnating bureaucratic dictatorship. After ‘Die Wende’, West-Germany kind of adopted East-Germany and the West-Germans paid trainloads of money to enable a ‘one system’ reunification. I read somewhere that the costs must have been around 2 trillion or between 30.000 and 40.000 Euro per West-German. That’s a lot. In an economic sense, however, reunification was less than a total success. Unemployment (unknown in East-Germany, at least in its open variant, hidden unemployment may have been considerable) not only became sky-high (15% in 1994, i.e. four years after reunification) but even increased to an unheard of maximum of 18,7% in 2005 (graph 1).  Read more…

Categories: Uncategorized

A money is as sounds as its debtors – Detroit edition.

November 9, 2014 1 comment

Via Detroit news (ht: @AMvanRijsbergen) And yes – I do know that this might, indirectly, via a global banking/hedge fund/investment/securitization channel, affect my Dutch pension rights in a negative way. In the short run. So?

In a bankruptcy case about numbers — $18 billion in debt, 32,000 pensioners, 35,000 broken streetlights — a judge needed 75 seconds Friday to approve a plan to undo decades of financial decline.

U.S. Bankruptcy Judge Steven Rhodes went on to deliver a nearly two-hour speech sprinkled with sympathy for residents of the insolvent city and praise for a plan to shed $7 billion in debt, shield the city’s art collection and minimize cuts to retiree pensions.

Rhodes read from a 50-page script that laid out the legal reasons why Detroit’s bankruptcy plan was feasible, fair and in the best interest of creditors, and spoke directly to residents angry about losing money and elected representation. Read more…

Categories: Uncategorized

Links. Ricardo is right. Sinn used to be right. Trichet was wrong.

November 7, 2014 2 comments

1) Kudo’s for the ECB: the bank published the infamous letter which supposedly bullied Ireland into submission to the Troika. And bullying it was. My takes:
(A) an unelected official like Trichet should never use this kind of bullying tone (see especially the letter of October 15) whenever he or she writes to the head of a democratic state. This alone should have been enough to return the letters – whatever the consequences. Trichet was acting far outside his mandate.
(B) the bullying, triumphant tone should have warned the Irish of a hidden agenda and a certain amount of bluff
(C) the ‘Troika’ (cc’s of the Trichet letters were sent to Olli Rehn, EU commissioner for economic and monetary affairs and Joaquin Almunia, EU commissioner for competition…) was, in hindsight, more than a little wrong about the economics. And at the time they could and should have known better

2) Via Marginal Revolution: one more reason why neoliberal policies, based upon hyperindividualism, are a total disaster for family life. Read more…

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Graph of the day. Austerity (not!) kept the UK together

November 4, 2014 3 comments

In the first quarter of 2014 the UK government deficit was 0,5% of GDP larger than in the fist quarter of 2013. Somewhat trivial, but it’s hard to call this ‘austerity’. In the second quarter, however, the deficit was a non-trivial 1,5% of GDP larger than one year earlier, despite a 4 to 5% growth rate of nominal GDP: austerity (not!). This sure does explain part of the economic upswing of the UK. This was, I guess, connected to the ardent wish to keep Scotland in the UK – can you imagine any British government which would not have pushed the expansionary pedal to the metal to keep the country together?

Nausterity

 

 

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Links, this time is different edition

November 3, 2014 Leave a comment

1) Horrifying Portuguese demographics

2) A Shari’a economic festival, in Indonesia and hosted by the Indonesian central bank

3) Shari’a government bonds look a lot like sixteenth century European pre-reformation land backed private bonds (when Greece had issued such bonds bondholders would, after the default, have owned quite some Greek property).

4) German retail sales are increasing and Germany is investing in its future

5) This is so different… Germany is the only 2008 Euro member where 2013 GDP per capita is higher than before the crisis (but remember: it took till 1953 until Dutch GDP per capita surpassed the 1929 level)

Thatcrisis

6) This year, Halloween costumes (which are increasingly popular in Europe) were scarier than ever

Categories: Uncategorized

Should central banks target ‘Minsky price levels’?

November 1, 2014 5 comments

Most inflation targeting central banks target consumer prices. I have no idea why, I can’t find anywhere anything which explains why they do not target a broader set of prices. And just targeting consumer prices might lead central banks astray: when the ECB twice increased the interest rate in 2011 consumer prices where showing an increase slightly above the ECB target – but the price level changes of government consumption (primary education etcetera) and investment in fixed assets were at a historical low! Small wonder that the ECB had to lower interest rates later that year.

RATE HIKES

But there is more to this. Read more…

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The Swedish central bank: honest about the origin of its target

October 31, 2014 Leave a comment

Almost all inflation targeting central banks target the consumer price index – remarkable, as consumer spending is only about 50-60% of total spending. And western central banks generally have a 2% inflation target while the central banks of countries like Indonesia and India have targets of 4-5%. Are these policies based upon carefull deliberation, deep thinking and elaborate economic models? The Central Bank of Sweden (an early inflation targeter and an example for many other banks) is surprisingly honest: it was decided on the fly. They had to do something, the consumer price index was available and inflation was about 2% at the time. Also, the Zeitgeist made them forget about more realistic useful policies aimed at a much broader concept of financial stability, policies which at this moment are being re-discovered (see also this slack wire blogpost): Read more…

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Stress testing households and companies

October 30, 2014 Leave a comment

Last sunday, the ECB published the results of its stress test. Via Janis Varoufakis, the view of Klaus Kastner, a former banker: bankers did take it seriously but it’s not stringent enough. But too much has already been written about banks. Fortunately, central banks do not just publish data on banks but also on households and companies. What kind of financial stress do these data show?

1) The exemplary Irish financial statistics summary chart pack shows that the amount of non-performing mortgages is, though slowly declining, still very high.

2) Italian data show non performing loans, especially of non-financial companies, which despite an already high level are still rapidly increasing. Bad household loans are also increasing, though at a lower rate (look here, p. 30).

3) Spanish data (look here, especially p. 26-28) show a very considerable drop in credit advanced to non-financial companies while there seems to be quite a bit of debt restructuring. Despite this, the amount of non-performing loans is still increasing for all sectors of the economy (data: end of 2013) and the rate of growth of non-performing loans has been 20 to 40% for years in a stretch. interestingly, loans to Portuguese companies and households are much more ‘doubtful’ than loans to South-American countries.

Summary: financial stress for households and non-financial companies in Ireland is still high, in Italy and Spain it’s still increasing.

Categories: Uncategorized

Housing market fundamentals

October 30, 2014 2 comments

The Great Financial Crisis taught most of us that private credit matters. Nowadays, for instance Tyler Cowen uses Steve Keen kind of explanations in stead of general equilibrium ideas: there is no great Pareto optimal intertemporal general equilibrium. The crisis also  taught most of us a (to quote Paul Krugman) ‘dirty little secret‘: monetary policy works via the housing market (hmmm… where do these bubbles come from?). Which makes sense: houses are our most important asset. And mortgages are our most important kind of credit.

Anthony B. Sanders has a nice graph which binds private credit and the housing market in the US of A together, using so called ‘deep’ parameters like the employment to population rate, home ownership rates, the rapidly rising share of 20-34 year olds living with their parents (not in this graph but already at 25% in the US of A) and comparable variables. Note that he does not need house prices or volumes of credit to show the housing bubble, which has origins dating back to 1995-1999. Fred Foldvary, who used to be a regular commentor on this blog and who repeatedly emphasized the ‘Georgist’ 18 year USA credit/housing cycle, would not be surprised. In a very real sense, QE served to mitigate the consequences of the debt build up followed by house price decreases caused by the housing cycle. Instead of QE the US of A government could, as  Rogoff argues, have written down more debt but Larry Summers does not agree (about debt in the Euro Area later today some links).

Houses

Aside: note the tight ‘Phillips curve’ co-movement between wage increases and the employment rate which seems to be stronger as well as more stable than the ‘unemployment-wage increase’ Phillips curces.

Categories: Uncategorized

Links. Debt. And shrimps. And Mario Draghi.

October 28, 2014 Leave a comment

1) Carmen Reinhart and Christoph Trebesch argue that, looking at the record (which they established), redeeming government debt overhangs generally (no: often) increases prosperity.  Learn their Box 1 by heart! It’s another addition to our rapidly increasing knowledge about the history of ‘really existing capitalism’ (for the young ones: the phrase ‘really existing socialism‘ was used to describe communist systems and served to drive down the difference between rosy communist ideals and the often bland and harsh reality – the rosy ideal in this case being ‘general equilibrium’).

2) On Voxeu, S. M. Ali Abbas, Laura Blattner, Mark De Broeck, Asmaa El-Ganainy andMalin Hu show a decomposition of 100 years of government debt in 13 advanced economies. Who owned the debt, what kinds of debts were issued? Less and less of the debt is held by commercial banks and more and more by institutional investors (pension funds and the like) which leads to internationalization of the debt (though governments owe less debt denominated in foreign currencies – which in the Eurozone however does not matter as the Euro can, in a sense, be considered to be a foreign currency). The amount of debt on the balance sheets of central banks is nowaday way lower (as a % of total debt) than in the 1950-1980 period. Part of these debts were (and are) currency, the authors do not show the amount of this kind of ‘debt’.  Read more…

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Links, the Levy Institute was right edition

October 27, 2014 1 comment

The Levy institute is a Post-Keynesian think tank. What did these economists, before 2007, write about financial stability and the role of the central bank? Should we have listened to the economist their warnings?

1) In 2006, Dimitri Papadimitriou, Edward Chilcote and Genarro Zezza warned about the detrimental macro-economic consequences effects of the unavoidable end of the (credit driven) US of A housing bubble. In hindsight: things turned out better than they expected because in the autumn of 2008 the current account deficit of the US of A declined, almost overnight, from -6% of GDP to -2% of GDP (a combination of lower oil prices and lower imports).

2) Also in 2006, Eric Tymoigne argued that central banks should watch asset prices more closely and should concentrate on their core business, i.e. financial stability, instead of focusing solely on low and stable consumer price inflation. In hindsight: this is exactly what the ECB is increasingly doing.

3) In 2003 L. Randall Wray and Dimitri Papadimitriou argued that deflation is not just about consumer prices or even the GDP price level (which also includes investments in new fixed assets, government consumption like expenditures on primary education and export prices)  but also and especially about prices of existing assets. We should however understand deflation as a (toxic) symptom – if we want to remedy the consequences of deflation we should look at its origins, i.e. severe and chronic lack of demand which can’t be easily cured by just flooding the economy with money. Profound social, political and economic changes may be necessary (like the post 1937 variant of the New Deal). In hindsight: read the whole thing.   Read more…

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