from Norbert Haering
Let’s assume that there is a financial oligarchy which exerts strong political influence due to the vast amounts of money it controls. Let’s further assume that this financial oligarchy has succeeded in having financial markets deregulated and that this has enabled the financial industry to expand their business massively. Then, in some near or far future, their artfully constructed financial edifice breaks down, because it cannot be hidden any more that the accumulated claims cannot be serviced by the real economy That might be due, for example, to millions of people having bought overly expensive houses on credit without having the income necessary to service this debt. This is the kind of situation we are interested in.
If such a situation occurs, the leading figures of that financial oligarchy might recall that there has been a financial crisis in the 1930s of similar origin, and that during and after this crisis, laws were passed which broke the power of the financial oligarchy and taxed their profits steeply. They might remember that it took their forbearers decades to reestablish the favorable state of the late 1920s, with deregulated finance and very low taxes on incomes and estates, even huge ones.
The financial oligarchy might also recollect that economics is their most important ally in shaping public opinion and policies in their favor. To prevent a loss of power as it happened hence, they might want to make sure first that economics will not challenge the notion of leaving financial markets mostly to themselves and will continue to downplay the role of money and the power of the financial oligarchy, and of power in general.
from Norbert Haering
A working paper published by the European Central Bank (ECB) shows that strong wage increases have not been the cause for the troubles of the euro zone’s crisis countries. Rather, capital flows have caused bloated house and asset prices and exaggerated construction activity and unsustainable economic activity in general, which in turn has pushed up wages. This diagnosis flies in the face of the of the story often retold by the ECB and other European policy makers that peripheral countries lost their competitiveness, because they did allow exaggerated wage increases for many years, and that declining wages are the appropriate cure for a crisis caused in this way.
Even countries not in crisis are expected to increase their competitiveness, according to the Euro Plus Pact, signed in March 2011 by 23 countries.
It is all the more embarrassing, that two members of the Competitiveness Research Network of the ECB and other central banks and international organizations have published a paper called “The Euro Plus Pact: Competitiveness and External Capital Flows in the EU Countries” in the ECB’s working paper series, which shows that the focus on labor cost is mistaken, because the diagnosis behind it has it the wrong way round. Hubert Gabrisch of the German research institute IWH and Karsten Staehr of Estonia’s central bank find in their empirical analysis for the years 1995 to 2012 that increases in the current account deficit exerted a clear positive influence on subsequent wage increases, but not the other way round.
from Dean Baker
Apparently it was in large part, according to this WSJ article. The piece tells readers that Ireland’s economy shrank by 2.3 percent from the third to the fourth quarter, meaning that it dropped at a 9.2 percent annual rate, to use the normal terminology of people in the United States when talking about growth data. However the article later tells us that the story is not as bad as it first appears, since much of this decline is due to a major drug going off patent, which has reduced the income flows recorded in Ireland.
Due to its low corporate tax rate, many multinational companies book income in Ireland even though it was actually generated elsewhere. These phantom income flows have little to do with the state of the Irish economy. To avoid this problem it is more useful to look at gross national income. If we look at the OECD data on Irish national income we find that the number for 2012 (the most recent year available) was still 8.6 percent below the 2008 level. In fact, it was 2.3 percent below the 2005 level. Obviously Ireland is yet another one of those great success stories from the economic whizzes at the European Commission.
from Norbert Haering
Outstanding credit to the private sector in the euro area has been shrinking for a while now. It is shrinking fast in several peripheral countries and the European Central Bank (ECB) seems unable or unwilling to do anything about it. Given that the economy of the euro area is barely crawling out of recession and that inflation is predicted to be significantly below the central banks’ target rate for the next two years at least, this seems troublesome. Two economists of the Bank for International Settlements (BIS) help out with a study called “Credit and Growth After Financial Crises”: The authors claim: „We find that declining bank credit to the private sector will not necessarily constrain the economic recovery after output has bottomed out following a financial crisis.” So if there should be a problem, it is not because of a credit crunch or anything like that, we learn. To obtain their result, BIS-economists Előd Takáts and Christian Upper examine data from 39 financial crises, which were preceded by credit booms. “In these crises the change in bank credit, either in real terms or relative to GDP, consistently did not correlate with growth during the first two years of the recovery”, they write.
Thus, against the consensus, deleveraging need not hold back the upswing, is their contention. By extension, this means that even if all sectors of the economy are deleveraging, government may also reduce the deficit or pay down debt, without necessarily causing trouble.
The trouble is, the BIS-economists use an entirely inadequate method for coming to their conclusion, and they even seem to do so knowingly. Read more…
From: Erwan Mahé (guest post)
21 March 2014
Today I received interesting news via the Twitter page of Lorcan Roche Kelly, who is much more of a ECB watcher than even I, so I thought it judicious to share this information straightaway. The analyst was also kind enough to provide me the link to the ECB reference text which enabled me to dig a bit deeper into the matter by comparing it with the prior text.
In a nutshell, the ECB, without the slightest bit of hoopla, has just modified certain rules governing the Eurosystem’s collateral eligibility criteria. These moves constitute an easing on two scores:
· ABS containing credit card receivables will now be eligible;
· National central banks (NCBs) will no longer be able to reject bank bonds from Irish banks guaranteed by the country.
This latter measure stems from the fact that Ireland is no longer deemed to be a country “under programme”, thus bolstering the value of the Irish government’s guarantee.
Below is a letter to the editor of the New York Times that I wrote to try to explain why BITCOIN can NOT be a money or currency in our economic system. Apparently the Editor did no like the message for he did not publish the letter. Perhaps people on this blog would like to comment on Bitcoins!
March 1, 2014
To: Letters to the Editor Department
New York Times
TO THE EDITOR:
In his article “The Bitcoin Blasphemy” [N.Y. Times, Match 1, 2014], Joe Nocera implicitly raises the issue of why Bitcoin is thought of as a virtual currency when credit cards are recognized as merely a way of making payment in some form of government money.
What those who are promoting the notion that Bitcoin is some real, if virtual, money fail to comprehend is that all market transactions involving production and sales in any developed nation are organized through the use of that nation’s money denominated legal contracts.
Money (or currency), whether fiat or backed by gold or silver, is therefore defined as that thing that by delivery discharges all legal contractual obligations. Only the government, as the enforcer of contractual obligations, can determine that thing that is legally MONEY, i.e., what thing(s) will discharge contracts under that nation’s civil law of contracts. As Keynes once noted, in a money using, market economy, only the government can write the dictionary as to what is money. Government money has value as long as all residents are law abiding.
Credit cards can facilitate payments but are not money. They can be used for transactions where the buyer promises to pay in terms of government defined money to the credit card company while simultaneously the credit card company pays government defined money to the seller.
Unless the government asserts that the tending of Bitcoins will discharge all legal obligations, Bitcoins cannot be money. Bitcoins are merely something that someone created and has claimed to be “as good as cash” by implying that a well organized and orderly market exists where every Bitcoin can be sold for the currency of a nation in which the holder of the Bitcoin wants to buy something via a legal contract. We require dollars and not Bitcoins to settle legal contracts in the USA. Financial assets such as General Motors stocks are also valued in terms of dollars every day on the Stock Market – but GM stock cannot be directly used to settle a legal contract. Instead GM stock must be sold for dollars when the holder of the GM stock wants to legally pay for the purchase of a good or service. [Stamp collectors also deal in stamps that can be bought and sold on an organized market – but the stamps themselves are not money. These collector stamps have value only because community of users [collectors] have decided to give them value.]
People should have learned a lesson from the crash of the so called “derivatives” financial assets that were sold to the public by investment bankers as being as “good as cash” . These derivatives were never virtual money, though they were created by the investment bankers. When the market for selling these derivatives collapsed in 2007-8, these derivatives became worthless pieces of paper, as even financial writers of the media recognized. The result was a financial panic globally as holders of these virtually assets suddenly realized they were not as good as MONEY.
With the collapse of the Mt. Gox market for buying and selling Bitcoins, when will editorial page writers warn their readers that Bitcoins cannot be money?
Some links, 2 graphs. EZ wage ‘increases’, the rise of the self-employed in the UK and ‘Markets and Morality’ (in Spain)
A) Are wage increases in the Eurozone too low? Deflation is especially vicious when debts are high, and low wages contribute to deflation, as the Japanese example shows (check the footnotes and remember that Unit Labour Costs are not a competitivety metric but gauge the contribution of wages to in- or deflation). Wage increases in the Eurozone are still not low enough to be consistent with a situation of self-perpetuating deflation but the data suggest that the ECB will continue to undershoot its inflation target, people will continue to struggle with their debt load, banks will, as a result, continue to be feeble and unemployment will continue to be high.
B) What the **** happened with the self-employed in the UK?! Carefully reading the ONS spreadsheets it turns out that: Royal Mail plc is included in the private sector from December 2013 but in the public sector for earlier time periods. Need I say more…
C) Two very good short clips about Spain (Spanish, Dutch subtitles)
* In Spain, banks go to great lengths to impose their idea of creditor centered market morality upon the population while under water unemployed home owners which run the risk to be evicted (while there are 60.000 unoccupied dwellings in Barcelona alone, at the moment) advocate a right to sell and lease back.
* Almost all doors produced during the Spanish housing boom were made in the same city – a testimony of the efficiency, dynamism and effectivity of markets. This city has, of course, become a totally desolated place – an example of what’s called ‘backward linkages’ in input-ouptut models. The pension of granny has to sustain entire families.
Great background music.
Around 1900 John Bates Clark introduced the mythical ‘representative consumer’, the idea that you can model the sector households as if it is one person, as well as the idea that the ‘social utility’ (his phrase) experienced by this entity is the ultimate standard of social welfare (emphasis added):
>”If each man could measure the usefulness of an article by the effort that it costs him to get it, and if he could attain a fixed unit of effort, he could state the utility of a number of different articles in a sum total. Similarly, if all society acts in reality as one man, it makes such measurements of all commodities, and the trouble arising from the fact that there are many measurers disappear. A market secures this result, for society acts as a unit—like an individual buyer (chapter XXIV.14).
Interestingly, the economist Charles E. Persons, citing the last sentence of the quote above and explicitly attacking Clark, rebutted this view of the world already in 1913, among other things using data on inequality in the UK which in all probability are, recently, also used by Piketty (didn’t check this, though):
“The ultimate standard of value, then, for modern society, does not exist as a positive measure. That it does not is due to the presence of a large degree of inequality. In such a society, either the utility standard or the disutility standard must include incommensurable quantities, or (perhaps better stated) qualities. The problem is insoluble …. One cannot equate and unify either the pains or the pleasures of rich, well-to-do, and poor. We cannot find a positive measure of value in a society with such classes. The ultimate word declares only that with a given concentration of wealth, the society discounts the pains of the poor in a certain degree. Likewise in such a society there is a corresponding over-estimate of the sacrifices of the rich. Again, in such society the utilities enjoyed by the various classes are measured by various standards. Great pleasures for the poor count little; slight pleasures for the rich count much. We must add to the formula: “value depends on scarcity and utility,” the statement “each of these is conditioned by the existence of more or less of inequality.”
At first sight, this sounds depressing: a neoclassical economist invoking a mythical entity and a critic who points out the obvious flaws and inconsistencies – one hundred years ago. We seem to be running around in circles.
At second sight, however, we did move on. Clark as well as Persons was searching for an ultimate standard of value. Neoclassical economists did since not really progress beyond the ideas of Clark and still assume that the sector households acts as an individual buyer and still assume social welfare (the Euler equations and Samuelsonian shorthand they nowadays use do not make a fundamental difference, in my view). The critics, however, developed a whole array of methods to conceptualize and measure social welfare. Look here for 41 ‘headline well being’ metrics for the UK which, however, still exclude estimates of inequality (there is a poverty metric which might be used as a very crude inequality index). But look here for Eurostat data, published today, on ‘quality of life’ indicators which do contain data on inequality. In the end, ‘social welfare’ turns out to be a multi-dimensional thing which is not captured by relative market prices and which is difficult to optimize. Persons was right: Clark was wrong.
Thanks to Marko for providing links.
from Lars Syll
Inequality continues to grow all over the world — so don’t even for a second think that this is only an American problem! Read more…
Macro-economics is a science of totals – not of averages. One of these ‘totals’ is the ‘price level’. Beate Reszat reminds us of the complicated nature of this aggregate: a fuzzy maze of a myriad of individual prices wich are interrelated via as well the demand as the supply side of the economy but which also change because of technological and product changes. Which leads among other things to the question if inflation, as we measure it, is the right metric to investigate if the total cloud of interconnected prices goes up or down.
I’m less concerned (not: ‘unconcerned’) than Beate is about the measurement of individual prices. Tough I do think that, for instance, the people of the Dutch Centraal Bureau voor de Statistiek should publish a kind of manual about this it does seem that they are doing a good job when it comes to dealing with, for instance, changes in the ‘quality’ of products. A whole array of formal and tacit methods are used to do this (phoned them about this some time ago). But Beate is totally right that we should not just look at the change of the ‘average’ (i.e. headline inflation, a ‘measure of centre’ in statistical phraseology) but also at individual prices, with some kind of ‘measure of spread’. Eurostat data enable us to do this in a crude way. See graph 1 and 2.
from Lars Syll
Given that a normative theory is defined as a theory prescribing how a rational agent should act, neoclassical economic theory certainly has to be considered a normative theory. The problem is — besides that it standardly assumes not only rationality and selfishness, but also e. g. common knowledge of people’s utility functions — that loads of research show that people almost never act in accordance with the theory:
There is a tendency among economists to think of themselves, and the agents in their models, as having hard hearts … Homo economicus is usually assumed to care about wealth more than such issues as fairness and justice. In contrast, many economists think of other social scientists (and the agents in their models) as “softies.” The research on ultimatum games belies such easy characterisations. There is a “soft” tendency among the Allocators to choose 50-50 allocations, even when the risk of rejection is eliminated. Yet the behavior of Recipients, while inconsistent with economic models, is remarkably hard-nosed. They say, in effect, “Take your offer of epsilon and shove it!” Read more…
A question: does anybody know who Charles E. Persons was? Was he just another scribbling economist or is he a forgotten Veblen? Can’t find much on the internet! In 1930 he published an article titled ‘Credit Expansion, 1920 to 1929, and its Lessons‘ in the Quarterly Journal of Economics which is making a sudden come back (Google scholar). He also published, in the same journal, ‘Labor Problems as Treated by American Economists’ (1927), ‘recent textbooks’(1920), ‘Teaching the introductory course in economics’ (1916), ‘Womens work and wages in the United States’ (1915) and ‘Marginal Utility and Marginal Disutility as Ultimate Standards of Value’ (1913). It’s all behind a pay wall but the abstracts suggests that he was ahead of his , as shown by the rather post-modern sounding abstract of the 1913 article:
The current theory of value fails to take account of inequality, 547. — Value as a “ratio in exchange” to be qualified, 549. — Utility as the ultimate standard of value, 552. — Disutility as the ultimate standard; labor, 557. — The sacrifices of capitalists, 560. — The valuation of services, 462. — Non-competing groups, 569. — time Conclusion: The ultimate standard of value does not exist in a modern society, 575.
I. Changes in wòmen’s work, 1900–1910. Trade and transportation, 203. — Manufactures; the continuance of the industrial revolution, 204. — Domestic and personal service workers, 206. — II. Wages of Women in the United States, 207. — Minimum wage means a living wage, 208. — Various investigations of actual wages, 209. — Effect of lost time and seasonal occupation, 210. — III. Causes of Low Wages, Lack of mobility, 212. — Youth, 213. — Race and immigration, 217. — Woman as a member of a family group, 222. — IV. Minimum wage legislation and the potential labor supply, 228. — Possible prolongation of the working years, 229. — Probable attraction of more women into industry, 230. — Part time workers may be transformed into full time, 230. — V. Conclusion, 232. — Needed measures of support for the minimum wage legislation, 234.
Does anybody know anything about him? Is it worthwhile to write a blogpost or a Wikipedia page or even an article about Persons and his work?
from David Ruccio
The Bank of England has published a paper which states that 97% of all money is created by private banks, institutions which, when it comes to money creation, to an extent can go their own way. But Nick Rowe argues that this is theory: banks will actually have to go down the road laid out by the central bank as market forces will prevent the banks to create more ‘official’ money than the GDP economy needs at any level of the central bank interest rate. Nick Rowe is not entirely right. During the last two or three decades the larger part of money was not created because of GDP-transactions related lending but by mortgage lending. As house related lending and borrowing have increasingly become activities on a kind of asset market, speculative and Ponzi borrowing has become increasingly important on this market which means that the GDP-interest rate is not that important when it comes to restraining lending.
Suppose we have the next situation:
A) The central banks states, again and again, that it targets consumer price inflation with, in the medium run, a 2% target.
B) The main instrument the bank uses is the interest rate, which is used to cool down the economy when inflation gets to high (or to fire up the economy when inflation is too low). If people anticipate this, there might be also be a (largely hypothetical) ‘expectations channel’, i.e. people already ask for lower pay rises and companies start to borrow less when the bank increases the interest rate even before the higher rate of interest actually cools down the economy. Read more…
from Lars Syll
For your edification, I offer this link to an elegant explanation of why neoclassical economics presents itself as purely scientific and denies any ideological commitments, and strangles pluralism.
In brief: Arnsperger and Varoufakis define “neoclassical” economics in terms of three “meta-axioms.” First, neoclassicism assumes “methodological individualism,” i.e. that economists must ultimately posit individuals’ behaviors as the root cause of broad economic phenomena. Second, it assumes “methodological instrumentalism,” i.e. that these actors are somehow or other acting instrumentally in pursuit of goals, are “irreversibly ends-driven.” Third, it assumes “methodological equilibration,” i.e. rather than asking whether or under what conditions shall a state of affairs continue unchanged, it seeks to show that if equilibrium occurs, then it will endure. Read more…
Abstract: The Euro Plus Pact was approved by 23 EU countries in March 2011 and came into force shortly afterwards. The Pact stipulates a range of quantitative targets meant to strengthen cost competitiveness with the aim of preventing the accumulation of external financial imbalances. This paper uses Granger causality tests and vector autoregressive models to assess the short-term linkages between changes in the relative unit labour cost and changes in the current account balance. The sample consists of annual data for 27 EU countries for the period 1995-2012. The main finding is that changes in the current account balance precedes changes in relative unit labour costs, while there is no discernable effect in the opposite direction. The divergence in unit labour costs between the countries in Northern Europe and the countries in Southern and Eastern Europe may thus partly be the result of capital flows from the core of Europe to the periphery prior to the global financial crisis. The results also suggest that the measures in the Euro Plus Pact to restrain the growth of uni labour costs may not affect the current account balance in the short term.
from Lars Syll
This article has discussed how money is created in the modern economy. Most of the money in circulation is created, not by the printing presses of the Bank of England, but by the commercial banks themselves: banks create money whenever they lend to someone in the economy or buy an asset from consumers. And in contrast to descriptions found in some textbooks, the Bank of England does not directly control the quantity of either base or broad money. The Bank of England is nevertheless still able to influence the amount of money in the economy. It does so in normal times by setting monetary policy — through the interest rate that it pays on reserves held by commercial banks with the Bank of England. More recently, though, with Bank Rate constrained by the effective lower bound, the Bank of England’s asset purchase programme has sought to raise the quantity of broad money in circulation. This in turn affects the prices and quantities of a range of assets in the economy, including money.
“It’s time, Old Captain, lift anchor, sink!
The land rots; we shall sail into the night;
if now the sky and sea are black as ink
our hearts, as you must know, are filled with light.
Only when we drink poison are we well —
we want, this fire so burns our brain tissue,
to drown in the abyss — heaven or hell,
who cares? Through the unknown, we’ll find the new“.
I do not care too much about deflation. I do care, however, very much about falling nominal wages. We’re in what’s called a balance sheet recession: the private debts are to damned high. When nominal disposable (i.e. after tax) wages fall these debt problems get worse, surely in a situation when unemployment rises, employment declines and house prices go down. Which is bad enough for the banks but also, and more important, a total disaster for many families. A number of Eurozone countries however seem to be stuck in some kind of race to the bottom: who decreases wages the most. And lower wages of course translate, after a not so long and not so variable lag, into lower inflation or even deflation. Deflation is a consequence, not a cause (but can start to feed on itself).
from Dean Baker
The collapse of the housing bubble and the subsequent devastation to the economy caught almost the entire economics profession by surprise. Federal Reserve chair Alan Greenspan, along with other people in top policy positions, were left dumbfounded. They didn’t think a prolonged downturn was possible. They were wrong in a really big way.
The current group of central bank chairs and other top policymakers would like us to believe that they’ve learned their lesson and now everything is under control. They want us to think they actually have a clue about how the economy operates. There is good reason to believe otherwise. The European Central Bank (ECB) recognizes that inflation has been running below its 2% inflation target and is likely to stay below that target for several years to come. But the ECB has reassured the public that’s prepared to act, making sure that the eurozone doesn’t see deflation. That the bank cares about the inflation rate crossing zero and turning negative is a sign that it has no clue about how the economy works.
The point here is incredibly simple Read more…
from Dean Baker
Washington politicians like to hyperventilate about the budget deficit. However changes in the budget deficit are overwhelmingly a response to economic conditions rather than the result of deliberate policy. In other words, politicians didn’t have much to do with the changes. Furthermore, since the budget is responding to economic changes, it is not giving us new information about the economy.
On the other hand the trade deficit is a direct measure of the amount of demand that is going overseas rather than being spent here. This represents income generated in the United States that is not creating demand in the United States. By definition, this lost demand must be made up by other borrowing, either by the public sector (i.e. budget deficits) or the private sector. Currently the trade deficit is running at an annual rate of around $480 billion (@ 3.0 percent of GDP), which means that the sum of net borrowing in the public and private sector must be equal to $480 billion. Read more…