Archive for May, 2013

Cyprus: I did change my mind (to an extent)

May 31, 2013 4 comments

Some time ago, I was (to a limited extent and considering the circumstances) positive about the Cyprus actions of Jeroen Dijsselbloem. Not everybody agreed about this and I did some research, especially into the nature of the present crisis in the Eurozone and the role of the ECB. Look here and here and here and here and here and especially here. And this one, about the difference between ‘gold standard’ policies and non-gold standard policies in the thirties.

Did this change my mind, about Cyprus, Dijsselbloem and the bail-in? To an extent: yes.

(A) I still believe that the first Cyprus agreement was absolutely amateurish while the second is (slightly) better. It’s however still crippled by the almost complete absence of future, oriented policies aimed at fostering real investments and lowering debt levels of households and non-financial companies, read the Cyprus Memorandum of Understanding.

(B) And I still believe that, if necessary, shareholders (duh…) as well as junior bond holders (duh…) as well as senior bond holders/Coco’s  should be wiped out.

(C) But I’m now of the opinion that deposit money (all of it, even when owned by Corrupt Russian Crooks, CRC) should not be touched. I define ‘deposit money’ as all deposits covered by the ECB M-3 definition of money – but am increasingly inclined to also include ‘financial capital’, i.e. longer term deposits. This can be quite some money (see the graph (source @cigolo), CRC money must have been part of the yellow part of the Cyprus bar, see also this story about the ‘Olympic Sized’ corruption which plagues the Sochi winter games ).

(D) This has to be financed with the printing press (the net amount of money does not increase when you do this, as this financing prevents a decline of the amount of money). Households sell their M-3 claims on the bank after the crash to the National Central Bank for paper money which is almost instantaneously exchanged for deposit money. This is much more complicated than it seems, as it’s a good idea to use this money first to pay any bills due). Read more…

Taxes, surplus, and the top 1 percent (18 countries)

from David Ruccio

taxes-income shares

We know that U.S. economic inequality—especially the share of income going to the top 1 percent—has been increasing for about three decades. The question is, can the latest research assist us in making sense of the ways top income-earners in the United States have been managing to capture a larger and larger share of the surplus?

In a new paper, Read more…

Signs of the times (stressed debtors edition)

The amount of non-performing loans is rapidly increasing in the Eurozone. Which, of course, is a sign of increasing hardship of households and non-financial companies. These really need debt relieve. It also spells trouble for banks – as your non performing debt is their non performing asset. Especially the most troubled Eurozone countries are re-evaluating their debtor regimes, albeit in different ways:

Ireland: Pilot Scheme for Multi-Debt restructuring: ‘squeeze, squeeze, squeeze’.

Greece: the ECB “Opinion on debt arrangements for over-indebted individuals”. As far as I can fathom, the Greek rules give quite some discretionary power to the courts, especially the first cases will be of prime importance.

Spain: the ECB “Opinion on mortgagor protection“. These rules seem to promote burden sharing between the lender and the borrower.

The ECB opinions pay at least more lip service to the interests of the debtors than the Irish ‘pilot’ – and these concerns may even be genuine. Much more radical measures are needed however. Hundreds of billions of ‘funny debts’, antiquities dating from  times when house prices and real wages were higher and unemployment was lower than today, have to be written down and written off.

The great IS-LM obfuscation

May 28, 2013 29 comments

from Lars Syll

Thirty years ago – as a young research stipendiate in the U.S. – yours truly had the great pleasure and privelege of having Hyman Minsky as teacher. He was a great inspiration at the time. He still is.

The concepts which it is usual to ignore or deemphasize in interpreting Keynes – the cyclical perspective, the relations between investment and finance, and uncertainty, are the keys to an understanding of the full significance of his contribution …  Read more…

“A comparison that comes to mind”

May 27, 2013 5 comments

from Lars Syll

There is also a practical problem, if economics as a discipline is to survive. There is a huge amount of junk in the peer-reviewed economics literature–the reviewing process is no protection when the reviewers themselves are prejudiced. A comparison that comes to mind is the collapse of “scientific” eugenics. There were vast amounts of that written, and now it is only read as an object example of the capture of a social science by prejudice and authoritarianism. For economists, meantime, there is a huge task ahead: the garbage must be taken out; removed from the field’s teaching, textbooks, and policy advice. It will be a generation at least before this is set right, if indeed it can be set right at all.

Advice Unasked

Another note on Reinhart and Rogoff (and Reinhart): Great Stagnations do exist. Like great expansions.

May 27, 2013 9 comments

The discussion about the Reinhart (and Reinhart) and Rogoff (RRR) articles is flaring up again: they have finally written a coherent, systematic defence. Look here. It is important to discuss this because of the importance of their main finding:

monetary economies have been inherently unstable during (at least) the last 200 years, because of endogenous forces related to, among other things, money and debt.

This clearly shows that the ‘General Equilibrium’ characteristics of modern economies, assumed by main stream economists and a cornerstone of the main economic models, are not general at all. Debts and credit are totally endogenous to our economies and they are dangerous – surely when the main creditors and money creators, the banks, are unbridled. Alas, the whole discussion does not focus on such emergent properties of monetary economies but on the relation between growth and (public) debt. And RRR do not do a good job when it comes to this relation. Read more…

Where does all this Irish money come from? 3 graphs.

May 26, 2013 3 comments

In Ireland, something out of the monetary ordinary is going on. In March, the value of ‘overnight deposits’ money increased with 12 billion Euro (graph 1). What’s the matter? A helicopter drop? More deposit creating loans? Or something else?


Read more…

“The United States is the only advanced economy in the world that . . .”

from David Ruccio


According to the Center for Economic and Policy ResearchRead more…

Some links for today

May 24, 2013 1 comment

1. The most telling macro statistic of last weeks (source: ECB): The Euro area balance of payments (including the current account) in March. The Euro area current account surplus is increasing at an unsustainable 0,1% of GDP per month. Once the surplus surpasses 2,5% (October?) and continues to increase, big trouble with the UK and the USA lies ahead. Anyway – together with 12,1% unemployment this information shows that we are living below our means. Yes, there is a massive balance sheet recession connected output gap in the Eurozone, due to lack of demand, even when the DSGE models used by the ECB rule this possibility out by design (DSGE models: Diederik Stapel General Equilibrium models). It’s ironic that these new ECB statistics are compelling evidence for the existence of this gap.

2. Careful reading of this report, by Cosimo Pancaro (source: ECB) ECB shows that such rapid increases are invariably caused by restraining domestic demand. Read more…

Further suggestions for Krugman’s IS-LM reading list

May 23, 2013 5 comments

from Lars Syll

The determination of investment is a four-stage process in The General Theory. Money and debts determine an “interest rate”; long-term expectations determine the yield – or expected cash flows – from capital assets and current investment (i.e., the capital stock); the yield and the interest rate enter into the determination of the price of capital assets; and investment is carried to the point where the supply price of investment output equals the capitalized value of the yield. The simple IS-LM framework violates the complexity of the investment-determning process as envisaged by Keynes …  Read more…

Sweden’s 30 years of income redistribution

from David Ruccio



Sweden, which has long been the shining example for liberal economists of what we should be aiming for, seems to be losing its luster. Read more…

Graphs of the day – the investment slump in the Eurozone (3 graphs)

May 21, 2013 5 comments

We all know the fable of the ant and the cricket. Translated into the language of scientific economics: the ant was a Keynesian, not an Austerian. She did not save money and buy bonds or other second-hand financial stuff but she invested, in new inventories. And indeed: the worst thing which we can do for our children is to postpone ‘real investments’ (as opposed to financial investments, it’s really bad for the science of economics that the english language doesn’t make a distinction, like Dutch does, between ‘beleggen’ (financial investments, ‘belaying‘ or safeguarding your money, and ‘investeren’, real investments, new goods and knowledge and relations and whatever).

But alas. Postponing real investments and ‘belaying’ our money is what we do, at the moment, in the Eurozone (see the graphs, all data Eurostat). We are putting the future at stake. Just think of the consequences of rapidly increasing long-term unemployment. It’s not just that investments are low. Investments are the most volatile expenditure category and can decline at a double-digit rate during a slump. But after a slump they can also recover at the same speed. And often they do. But sometimes, once in every three generations or so, they don’t recover… and this is such a time (graphs).

Some cherries:

A. Land related investment (dwellings and the like) are more than half of total investments. As the life span of buildings is quite a bit longer than the life span of other fixed assets this means that the stock of capital consists for an even larger part of buildings and roads (in the Netherlands: over 70%). This is one of the facts which made me appreciate Georgist economics.


Read more…

FROOPP – or understanding peoples perceptions of inflation (1 graph)

May 20, 2013 1 comment

Carola Binder is somewhat puzzled that so many Europeans see rising prices as one of their two personal top problems (data from May 2012):

I was stunned that three times as many people consider inflation a top issue as consider health and social security a top issue.”

I understand. But we should not confuse macro with micro. And powerful institutions in the Eurozone want people to suffer from higher prices. Many economists (including me) do not see inflation as a pressing macroeconomic problem at the moment or in the foreseeable future. This however does not mean that it’s not an important microeconomic problem. This difference between micro and macro is also indicated by one of the commenters on the blogpost of Binder:

Perhaps you should also mention the response to the previous question, “What do you think are the two most important issues facing our country,” to which the most common answer by far is “unemployment,” followed by “economic situation,” with “rising prices/inflation” a rather distant third“.

For many people, rising prices are a personal problem. And when we look at the data per country, shown in the Blinder blogpost, we see that countries were people see rising prices as an especially large problem are often characterized by low wages and pressures to decrease these already low wages (Estonia, Lithuania, Czech Republic etcetera).   And in all European countries automatic COLA (Cost of Living Adjustment) of wages has been abolished or there are powerful forces who want to abolish it (against the pressing advise of Milton Friedman, by the way). Hard won institutional arrangements to protect people from the consequences inflation are going down the drains, a policy which is of course backed by the usual suspects like the ECB, the European Commission and the IMF (read the Cyprus Memorandum of Understanding).

And there is another reason why people see rising prices as a large problem. The data Blinder uses are from May 2012. Remember that around that time gasoline prices had increased quite a bit. And gasoline is one of the ‘Frequent out of pocket purchases’ items measured by Eurostat.


According to this institution,

“The FROOPP indicator is important for understanding people’s perceptions of inflation. Individuals often feel that inflation rate is higher than that announced by official statistics. Sometimes this is true, if their purchasing behaviour is not average, but often it is a perception they form. This is because their own judgement of inflation is governed more by everyday purchases (found in the FROOPP) than by less frequent purchases, such as electricity bills paid every three months, annual car insurance or television sets or cars bought infrequently.”

Between 2005 and 2013, this indicator increased quite a bit more than either the HICP consumer prices index and the index of core prices, which excludes volatile prices of energy and seasonal food.

The weird thing is not that people are bothered by higher prices. The really weird thing is that an institution which should know about such problems, the ECB, still mistakenly tracks a metric which is essentially a micro-metric (the HICP price index) instead of a macro-metric like the GDP deflator. And tries to make people suffer more from higher prices by explicitly pressing for a new ‘social contract’, without COLA and comparable arrangements. And don’t underestimate the resolve of the ECB – they are getting more and more explicit about their ardent wish to alter the ‘political economy’ of the Eurozone.  As Yves Mersch recently stated, the ECB is quite happy to cross the boundaries of its mandate:

Allow me to point out that over the last few years the ECB has not only been a guardian of stability and among the most interested observers of the various deficit and imbalances procedures, but we have also raised awareness of the need for profound transformations in our political economy and in our societies. We have been advocates of change. In my view, this is our most important unconventional measure…

What a hubris.

Paul Davidson at University of chicago economics department seminar

May 18, 2013 34 comments


Vital economic debate is alive and well in Chicago.

Post-Kenyesian economist Paul Davidson recently was invited to the University of Chicago to give a lecture on Keynes’s solutions to current economics crises – solutions that are very much at odds with the traditional approaches associated with Chicago School economics.

In his talk titled “The Keynes Solution: The Path to Global Economic Prosperity via a Serious Monetary Theory,” Davidson discusses the failures of orthodox economics and explores how Keynes would have addressed them. You can watch the lecture and download the video or audio here.

Davidson points to Keynes’s theory of liquidity to explain why laissez-faire financial markets cannot be efficient and do not solve the problem they claim to solve: optimally allocating capital. He also notes that traditional explanations of financial markets fail to explain unemployment or bubbles – phenomena that Keynes studied throughout his body of work. In particular, Davidson cites the failure of risk-management approaches that rely on a stable and knowable future, which is impossible according to Keynes’s idea of radical uncertainty.

Davidson also explains how orthodox theories guide economic policy such as Quantitative Easing (QE). Quoting Keynes on why QE doesn’t stimulate the economy, Davidson says, “If you want to get fat, buy a bigger belt,” before adding that “QE doesn’t help you get fat, but it may help drop your pants.”

In all, Davidson’s presence at Chicago shows that the school that shook up economics in the mid 20th century by thinking outside the box is still pushing the boundaries of economic thinking.  Chicago remains a vital center for economic debate. INET applauds both the University of Chicago and Davidson for promoting the kind of healthy economic discussion that is necessary for the economics profession – and the economy – to get back on course. Hopefully more economics departments will follow its lead.

Watch the lecture

The state of economics: Krugman is wrong

May 18, 2013 14 comments

from Peter Radford

Paul Krugman this morning hammers away at hedge fund managers who, by and large, are complaining about Fed monetary policy, and especially its so-called quantitative easing. The managers are all predicting doom and hyperinflation because of the ongoing ease of Fed policy. It might also have to do with those low interest rates making it harder to earn a living as a hedge manager, but let’s give them the benefit of the doubt. The point is that there are many folks out there who still predict doom based upon the continuance of monetary ease.

Krugman, and others, have long argued that such a view is misguided because an economy mired in the depths – like ours is – does not respond to loose monetary policy the way it would under more ‘normal’ conditions. In particular, no amount of cash whizzing around will cause an inflationary spiral while we are stuck in a liquidity trap. Thus the analysis of the hedge fund managers, which seems to ignore the existence of a liquidity trap, is just wrong and their dire predictions will never be correct.

Case in point: this week’s report that inflation is nonexistent and that consumer prices have edged up only a little over 1% during the last year. Clearly hyperinflation remains a way off. So Krugman’s analysis seems correct, and the hedge fund managers are wrong.

Where I disagree with Krugman in his blog today is his references to the economics profession. Read more…

Graph of the day. Unemployment as a 2 year leading indicator for bank’s bad loans

On Twitter, @cigolo published an interesting frightening graph on Spanish and Italian bad bank loans. The Great European debt crisis is still intensifying. After some tinkering it turns out that unemployment is a rather robust ‘leading indicator‘ for these bad loans.

The economics are of course common sense: unemployment leads to lower incomes which leads to bad loans, the lag can be explained by households receiving benefits for some time as well as draining down savings. Unemployment and lower income clearly is not just and ‘incentive’ for the unemployed, it also cripples the economy.

Differences between Italy and Spain are large. For Spain I used an (unemployment -8)/1,5 metric; for Italy I used an (unemployment – 3) metric and while the relationship is remarkably stable in Spain it shifts somewhat in Italy. The difference might be caused by relatively high ‘additional’ unemployment in Italy. Never mind – unemployment showed large increased during the past two years… (datasource: Eurostat).


Connecting the dots—or not (Stiglitz or Krugman)

from David Ruccio

Paul Krugman continues to have a hard time c Read more…

The 10 most viewed posts of the last 30 days

May 16, 2013 2 comments

Creating an Economics for the 21st Century

May 15, 2013 22 comments

guest post from Rob Johnson

In the wake of the 2008 financial crisis, many of our policy makers and top economists are still stumbling in the dark.

One needn’t look far for proof. The symptoms of their failure are everywhere. Financial markets remain too volatile and crises too common. Inequality is raging and increasing around the globe. And environmental damage continues unabated, with rising climate volatility belying claims that we can experience sustained and broad based prosperity without major changes in the global economy.

A key part of this problem – and one that hasn’t been adequately explored – is the economics profession.  Read more…

Cognitive dissonance at the ECB. High crisis unemployment exists – but it doesn’t

May 14, 2013 4 comments

I remember the first time when I saw two men kissing in public. I must have been fifteen or sixteen at the time. I did not shock me, even at that tender age – as I literally did not believe my eyes: “did I really see that?”. And after some seconds looked again (and, to be honest, was shocked after all).

Psychologists call this behaviour: ‘cognitive dissonance’. New information which is at odds with previous experience or knowledge and is either ignored, disbelieved, or rationalized. It happens all the time – also in science. A recent ECB ‘Monthly Bulletin’ article, ‘Country adjustment in the Euro area – where do we stand’ is an example.

The beginning of the article is in fact quite good. Read more…