Archive for August, 2013

Only in America

August 31, 2013 2 comments

from: David Ruccio


We know that, as class differences have been rising, Americans have become increasingly segregated by class within cities.

Now, it seems, we’re going to see class segregation within residential buildings [ht: sm],  with separate doors for rich and poor residents.

A luxury high-rise apartment in Manhattan’s Upper West Side is set to have a so-called “poor door” — a separate entrance for low-income residents receiving subsidized housing.

The 33-story building — 40 Riverside Boulevard – being developed by Extell Development Company will have 219 condominiums selling for more than $1 million each.

But by including 55 affordable housing units on the first few floors renting at a starting price of $845 a month, the developer could get a tax break, according to the West Side Rag.

What are going to have next in America—separate rich and poor water fountains, schools, and seating areas in movie theaters, buses, and restaurants?*

*OK, maybe not separate water fountains or seating areas in movie houses, buses, and restaurants. But, then again, think of the forms of class segregation within trains and airlines and, of course, of schools.

The Firm as an embedded alternative reality – A Note To Myself, Part One

August 30, 2013 4 comments

from: Peter Radford

I am thinking through my views on the business firm as an economic entity. My notes so far [no particular order]:

1. The modern business firm is a reaction to, and exist because of, uncertainty. Other rationales are subsidiary to this. For instance New Institutional Economics [NIE] explains firms in the tradition of Ronald Coase and focuses on transaction costs, agency issues, the potential for cheating, and asset specificity. But all these are symptoms of uncertainty. The problem with NIE is that it tries to hew close to the neoclassical line and thus avoids confronting uncertainty directly. Those symptoms are all useful to know and have to be dealt with, but are not the cause of a firm’s existence.

2. All firms have a great deal in common – structure, operations, purpose, attitude towards customers, relations with the environment etc – so can speak of each firm as being an “instance” of a general form. We are interested in that general form. Read more…

Unemployment in the Eurozone, selected countries, July 2013

August 30, 2013 4 comments

Well, I guess it’s still something like ‘One currency to rule them all, one currency to blind them, one currency to condition them all – and in austerity bind them’.


A little background information: the stabilisation in Spain is despite an ongoing contraction of the economy (-0,1%, quarter on quarter and -1,6% year on year, in the second quarter) and an ongoing fast increase of average productivity in the first two quarters of 2012 which means that there are either large amounts of people are dropping out of the labour force or emigration is picking up. The total number of jobs (full-time equivalents) was actually 3,8% smaller than one year before.

The rate of job growth in Germany is about 0,5% a year, which is not high as such things go. To compensate the job losses in the austerity countries at least to an extent it should at least be around 2% – so much (again) for the Eurozone as any kind of equilibrium economic entity. The good news: German unemployment is going down and immigration is picking up (total population growth is about 200.000 a year, without immigration it would be -200.000. Aside – West-Germany has, after the war, assimilated or at leat accepted wave after wave of immigrants and is doing so again). More good news: almost all the net job growth in Germany after 2008 has been in ‘Normalarbeitsverhältnisse‘, normal jobs, instead of the most crappy ‘mini jobs’ and temporary jobs.

I’ll check Portugal, I guess that the surprising decline of Portuguese unemployment is mainly due to emigration (just like in Ireland and (not in the graph) the Baltics) but I might be mistaken.

Money creating banks ARE special – the statisticians view

August 30, 2013 13 comments

Are money creating banks ‘special’? At this moment there is a little discussion is going on about the nature of money creating banks (look here for the interesting interfluidity ideas). But I’m still missing something in the blogs I read – a more down to earth, institutional, real world view. So let’s turn to the people who estimate this real economic world, the economic statisticians.

According to Tobin banks could de jure be called special as they can create the money ‘with a fountain pen’ but the rational consumer constricts them in this capacity. Without borrowers no lenders. And as borrowers are rational net lending will de facto be limited and banks will not be different from other financial institutions, like pension funds. End of story. But what do the statisticians tell us about this? You can’t estimate anything when it’s not properly demarcated.  And to estimate macro-economic variables, like money and debt, you need a macro-economic model, with proper demarcations. And one of these demarcations is a dividing line between money creating banks and other financial institutions. And this demarcation is totally based upon the idea that money creating banks are special and do require special regulation. what’s the idea? Why are money creating banks special?

According to Nick Rowe, banks might be special as ‘Banks are financial intermediaries whose liabilities are used as media of exchange‘. But that’s not special. Liabilities of every non-bankrupt company can be and are used as a medium of exchange. These liabilities are called ‘receivables’ on the balance sheet of the selling company and ‘payables’ on the balance sheet of the buying firm, the receivables are quite liquid (albeit at a haircut) and this stream of (admittedly: temporary) money runs into trillions and trillions a year. The ‘media of exchange’ thing is not enough to single out money creating banks as ‘special’. The reality is that money creating banks are financial intermediaries whose liabilities can be exchanged for government money at a guaranteed 1:1 exchange rate. And that’s special. This (plus a little technology) enables you to use bank credit money to pay your taxes or the hairdresser – without any kind of haircut. Read this magnificent post from Francis Coppola about a little bit of the history of this remarkable state of affairs.

And this state of affairs does require special attention. According to the European Central Bank, it does need information from exactly these money creating banks:

Balance sheet statistics for monetary financial institutions (MFIs) are some of the core statistics used by the ECB and provide information that is crucial for the conduct of euro area monetary policy.

But the sector is not just demarcated for statistical reasons, it’s not just about ‘crucial information’ – according to the statisticians. There is a reason why we need this information. The ESA 95 manual, which is the basis for European National Accounts, states (emphasis added):

The other monetary financial institutions sub-sector (i.e. credit banks excluding the central banks, M.K.) is regarded as equivalent to the other depository corporations sub-sector as defined in the 1993 SNA 4.88 – 4.94. While the definition of the other monetary financial institutions sub-sector (see paragraph 2.48.) is intended to cover those financial intermediaries through which the effects of the monetary policy of the central bank are transmitted to the other entities of the economy ... The combined sub-sectors S.121 and S.122 coincide with the monetary financial institutions for statistical purposes as defined by the EMI.

We need the information because the government wants to have a special hold on these banks, to control lending and the amount of money. Which indicates that these banks are indeed special – ‘equilibrium’ in a neo-classical sense is not guaranteed. To the contrary. They can, in stark contrast with the ‘rational consumer market discipline’ idea of Tobin and when de-holding gives them a chance, indeed turn their remarkable prerogative into a ‘widows cruse’, for instance by ‘Ponzi real estate lending’ which leads to inflated house prices and billions upon billions of seigniorage profits (in the shape of interest) for the banks. According to Tobin, an increase of house prices would have led to a decline of the rate of return of houses which would have led to less borrowing by households and therewith to the exclusion of a bubble. Hmmm….

Macroeconomics turned into ideological propaganda

August 30, 2013 4 comments

Via Lars Syll

Although I never believed it when I was young and held scholars in great respect, it does seem to be the case that ideology plays a large role in economics. How else to explain Chicago’s acceptance of not only general equilibrium but a particularly simplified version of it as ‘true’ or as a good enough approximation to the truth? Or how to explain the belief that the only correct models are linear and that the von Neuman prices are those to which actual prices converge pretty smartly? This belief unites Chicago and the Classicals; both think that the ‘long-run’ is the appropriate period in which to carry out analysis. There is no empirical or theoretical proof of the correctness of this. But both camps want to make an ideological point. To my mind that is a pity since clearly it reduces the credibility of the subject and its practitioners.


Frank Hahn

Will the Real Engineers Please Stand Up*

I’d like to share this post that I wrote for estudiosdelaeconomia/socializing finance. An invitation to, perhaps, rethink markets in society?

socializing finance

Two months ago, I had the rare opportunity to speak to an audience that is foreign to (most of) us: a room full of natural scientists. The conference that I addressed, BioBricks Foundation 6.0, met at Imperial College, London, to discuss the most recent developments in synthetic biology. The panel in which I participated provided a space to introduce ‘recent’ developments in science and technology studies to synthetic biologists. I read it as an occasion to talk about the canonical bread-and-butter of social studies of finance—that is, how economics performs the economy. (I wholeheartedly thank Pablo Schyfter and Jane Calvert for their invitation).

While the contents of my talk are nothing new for the readers of this blog, the experience was particularly stirring in other ways, not the least because of the reactions of the audience to the concept of performativity (in their questions, those who remained in the room…

View original post 1,928 more words

The poverty of mainstream development economics

August 29, 2013 9 comments

from: David Ruccio

It’s as if nothing has changed in the history of failures of mainstream development economics in the postwar period.

The latest episode is the current debate between Amartya Sen and Jagdish Bhagwati, which rehearses once again the false choice between redistribution and growth, or between government programs and free markets. The fact is, we’ve seen plenty of government programs (including spending on health and education) and plenty of experiments in free markets (including in India)—and a large portion of the world’s population (especially in India) remains in poverty.

Perhaps it’s time, then, to try something new. A new kind of analysis. And a new set of policies. Starting, as I have argued before, with a redistribution of assets. Unfortunately, that’s an option that is never even mentioned by either Sen or Bhagwati—or, for that matter, by anyone else in the mainstream debate about economic development.

Inflation in the UK – not just about consumer spending.

August 29, 2013 2 comments

I just finished reading the latest minutes of Monetary Policy Committee of the Bank of England. Their inflation metric of choice still seems to be ‘consumer price inflation’. However – prices paid by the government are prices, too. And prices of investments are prices, too. Fortunately, we do have inflation metrics which are, as an indicator of the change of the total price level of final demand, superior to the consumer price index (graph). differences can easily be as large as 2% or more (in 1980 consumer price inflation in the USA was 13,5% while the GDP deflator increased with 10%. As far as I can fathom Volcker used consumer price inflation as his metric of choice and increased the interest rate to 20%. Using the broader and better GDP deflator as a metric would probably have led to less panic, lower interest rate and a less disastrous world-wide financial crisis).

(A) Consumer price inflation is an extremely noisy estimator of total domestic demand inflation


(B) Even this very short run graph shows (and this is consistent with ECB monetarist thinking, which consistently speaks about medium run inflation developments (i.e. 5 to 8 years) though the New Classical inspired Trichet acted differently) that it’s bogus to tie any kind of forward guidance to short run developments of whatever inflation index. Somebody in the committee proposed to end ‘forward guidance’ when short run consumer price inflation became higher than 2,5%: ‘The first knockout would apply when the Committee judged it more likely than not that inflation 18 to 24 months ahead would be half a percentage point or more above the 2% target‘. Incredible. Have they ever even looked at the short run development of headline inflation and core inflation? Even the report itself states that the present 2,9% rate of inflation of consumer prices is due to higher import prices and higher ‘administered and regulated prices’ (i.e. in fact all kinds of indirect tax increases). Monetary policy does not control tuition fees! And has anybody on the committee ever mastered the Statistical Process Control concept of ‘overshooting‘? You just can’t fine-tune the economy – don’t even try. IBefore reading the minutes I believed that ‘forward guidance’ was in fact all about the impossibility of short run fine tuning – I was wrong.

By the way – it seems that the Cameron government is bend on increasing house price inflation to rates far above whatever kind of domestic demand inflation… ‘rentier economics’ at its worst. Incredible.

Malthus redux? 2. The danger is real

August 28, 2013 Leave a comment

According to the World Watch Institute, relative food prices are increasing. Big Deal? Yes. For most people: big deal. Part of the executive summary of a Unicef report (emphasis added), Escalating food prices: the threat to poor households´:


After outlining the possible causes of soaring global food prices, including weather shocks, exchange rate fluctuations and financial speculation, the paper analyzes local food price trends in 58 developing countries using data from the Food and Agriculture Organization’s (FAO) Global Information and Early Warning System (GIEWS). The paper finds local food price increases in more than two-thirds of developing countries in our sample during the latter half of 2010, closely trailing those in global food markets, at a slower but still substantial rate of increase (7.2 percent on average between May and November 2010). More importantly, on the aggregate domestic food price levels have remained alarmingly high compared to pre-2007-08 crisis levels (about 55 percent higher, on average, in November 2010 compared to May 2007), implying that poor and vulnerable populations in many developing countries have been relentlessly coping with high food costs. Since 2008, poor households have exhausted coping strategies, such as eating fewer meals, cutting health expenditures, increasing debt and working longer hours in the informal sector, and their capacity for resilience is very limited in 2011. In the recent uptick, the CEE/CIS, Latin America and South Asia regions appear to be those hardest hit.

We further propose a child lens as a guiding principle for designing policy responses to food price increases and achieving food security. Moreover, as many developing country governments are undergoing fiscal consolidation and cutting social protection services and food subsidies in the process, we call for a turn from austerity-based fiscal policies to inclusive, food security responses in developing countries that are threatened by rising food prices. The paper concludes by advocating for urgent policy actions at national and international levels to ensure a “Recovery for All” that will eradicate hunger and malnutrition among children and poor households.

Five years and counting stuck

August 28, 2013 8 comments

from Peter Radford

Depending on when you think the crisis started its fifth anniversary is either here now or about to be upon us. This is not the same, by the way, as fixing a date for the problem[s] that caused the crisis: they go way back, variously, to the election of Reagan and the victory of orthodox economics before that. Well, that’s my opinion anyway.

So here we are. About five years in. The crisis has obviously abated. The fever broke a long time ago, but the patient is still weak, and nowhere near returning to the kind of vigor we all use to recognize as “normal”.

Why not?

Reagan and orthodox economics. You didn’t expect me to say anything else did you?

Of the two I have more sympathy for Reagan. Read more…

More bad news for austerity. The revised Spanish national accounts, 2009/2012.

August 28, 2013 1 comment

Yesterday Estadistica Espana published, totally according to schedule, revised and improved Spanish national accounts data for the 2009-2012 period. What do these revised data tell us about the crisis?

1) Despite a price level which was considerably lower than previously estimated and a whopping increase of productivity (a) gross exports increased less and (b) domestic demand decreased more than previously estimated.

2) The main revisions: total growth of nominal GDP, 2009-2012 was revised downwards with about 2%. This revision was due to a downward revision of real GDP with about 0,5% (from +0,4 to +0,1% in 2011 and from -1,4 to -1,6% in 2012) as well as to a downward revision of the 2012 GDP price level (2008=100) of about 1,5%. The crisis was deeper and GDP-inflation was lower.

3) At the same time, productivity per ’employment’ increased with a whopping 10% in this period (which can be compared with -7% per hour in the UK!). That´s an epic difference in an European context!

4) What does this mean for austerity policies? Read more…

How to predict a financial crisis, BIS-edition

August 27, 2013 7 comments

The Great financial Crisis came, for a lot of economists, out of the blue. The BIS (Bank for International Settlements) has investigated a whole lot of ‘early warning indicators’. And it seems that financial crises are predictable after all. And guess what – ‘debt’ is not neutral. And neither is money (to be more precise: the shares of different kinds of money:”cross-border liabilities plus M3 minus M2 (proxy for non-core liabilities) divided by M2 (proxy for core liabilities“). Might it have been the case that some people who did predict the crisis did look at such variables? Anyway:

In the empirical part of the paper, we apply our approach to assess the performance of 10 different EWIs. We mainly look at the EWIs individually, but at the end of the paper we also consider how to combine them. Our sample consists of 26 economies, covering quarterly time series starting in 1980. The set of potential EWIs includes more established indicators such as real credit growth, the credit-to-GDP gap, growth rates and gaps of property prices and equity prices (eg Drehmann et al (2011)) as well as the non-core liability ratio proposed by Hahm et al (2012). We also test two new measures: a country’s history of financial crises and the debt service ratio (DSR). The DSR was first suggested in this context by Drehmann and Juselius (2012) and is defined as the proportion of interest payments and mandatory repayments of principal to income. An important data-related innovation of our analysis is that we use total credit to the private non-financial sector obtained from a new BIS database (Dembiermont et al (2013)). We find that the credit-to-GDP gap and the DSR are the best performing EWIs in terms of our evaluation criteria. Their forecasting abilities dominate those of the other EWIs at all policy-relevant horizons. In addition, these two variables satisfy our criteria pertaining to the stability and interpretability of the signals. As the credit-to- GDP gap reflects the build-up of leverage of private sector borrowers and the DSR captures incipient liquidity constraints, their timing is somewhat different. While the credit-to-GDP gap performs consistently well, even over horizons of up to five years ahead of crises, the DSR becomes very precise two years ahead of crises. Using and combining the information of both indicators is therefore ideal from a policy perspective. Of the remaining indicators, only the non-core liability ratio fulfils our statistical criteria. But its AUC is always statistically smaller than the AUC of either the credit-to-GDP gap or the DSR. These results are robust with respect to different aspects of the estimation, such as the particular sample or the specific crisis classification used.

Malthus redux? (1)

August 27, 2013 4 comments

We talk a lot about economists like Keynes, Minsky, Smith and the like at the moment. Maybe we should talk a little bit more about Malthus. It might well be that the decline of relative food prices which started around 1875 and which continued until about 2005 (?) has come to its end.

Sophie Wenzlau, from the World Watch Institute

Global Food Prices Continue to Rise.

As both climate change and population growth continue to increase, there is reason to believe that food commodity prices will be both higher and more volatile in the decades to come..

Continuing a decade-long increase, global food prices rose 2.7 percent in 2012, reaching levels not seen since the 1960s and 1970s but still well below the price spike of 1974. Between 2000 and 2012, the World Bank global food price index increased 104.5 percent, at an average annual rate of 6.5 percent.The price increases reverse a previous trend when real prices of food commodities declined at an average annual rate of 0.6 percent from 1960 to 1999, approaching historic lows. The sustained price decline can be attributed to farmers’ success in keeping crop yields ahead of rising worldwide food demand. Although the global population grew by 3.8 billion or 122.9 percent between 1961 and 2010, net per capita food production increased by 49 percent over this period. Advances in crop breeding and an expansion of agricultural land drove this rise in production, as farmers cultivated an additional 434 million hectares between 1961 and 2010.Food price volatility has increased dramatically since 2006. According to the United Nations Food and Agriculture Organization (FAO), the standard deviation—or measurement of variation from the average—for food prices between 1990 and 1999 was 7.7 index points, but it increased to 22.4 index points in the 2000–12 period.Although food price volatility has increased in the last decade, it is not a new phenomenon. According to World Bank data, the standard deviation for food prices in 1960–99 was 11.9 index points higher than in 2000–12. Some price volatility is inherent in agricultural commodities markets, as they are strongly influenced by weather shocks. But the recent upward trend in food prices and volatility can be traced to additional factors including climate change, policies promoting the use of biofuels, rising energy and fertilizer prices, poor harvests, national export restrictions, rising global food demand, and low food stocks.Perhaps most significant has been an increase in biofuels production in the last decade. Between 2000 and 2011, global biofuels production increased more than 500 percent, due in part to higher oil prices and the adoption of biofuel mandates in the United States and European Union (EU). According to a 2012 study by the University of Bonn’s Center for Development Research, if biofuel production continues to expand according to current plans, the price of feedstock crops (particularly maize, oilseed crops, and sugar cane) will increase more than 11 percent by 2020.Large-scale imports of agricultural commodities in 2007–08 and 2011 were important factors in the global food price spikes in those years. High Chinese imports of soybeans, for instance, contributed to the 2011 spike. National export restrictions, including taxes and bans, also drove up food prices; policies enacted in 2007–08 in response to the price spike generated panic in net-food importing countries and raised grain prices by as much as 30 percent, according to some estimates.In the last few decades, periods in which the cereals stock-to-use ratio (the level of carryover reserves of cereals as a percentage of total annual use) was near its minimum have correlated with a high price of calories from food commodities. When food stocks are high, shocks can be absorbed more easily than when stocks are low or nonexistent. The world stock-to-use ratio for calories from wheat, maize, and rice was lower in the last decade than in the two preceding decades, which may be a main reason for higher global food prices.Rising energy and fertilizer prices drove up food prices as well, by adding to production, processing, transportation, and storage costs. According to the World Bank commodity price index, the average price of energy during 2000–12 was 183.6 percent higher than the average price during 1990–99, while the average price of fertilizer increased 104.8 percent in the same period.There is reason to believe that food commodity prices will be both higher and more volatile in the decades to come. As climate change increases the incidence of extreme weather events, production shocks will become more frequent. Food prices will also likely be driven up by population growth, increasing global affluence, stronger linkages between agriculture and energy markets, and natural resource constraints. According to the FAO, although high food prices tend to aggravate poverty, food insecurity, and malnutrition, they also represent an opportunity to catalyze long-term investment in agriculture, which could boost resilience to climate change and augment global food security.Read the full report at Vital Signs Online.Sophie Wenzlau is a Food and Agriculture Staff Researcher at the Worldwatch Institute

Pinching pensions to keep Wall Street fat and happy

August 26, 2013 4 comments

From: Dean Baker

The debate over public pensions clearly shows the contempt that the elites have for ordinary workers. While elites routinely preach the sanctity of contract when it works to benefit the rich and powerful, they are happy to treat the contracts that provide workers with pensions as worthless scraps of paper.

We see this attitude on display currently in the Detroit bankruptcy proceedings. It is even more clearly on display in efforts by Chicago Mayor Rahm Emanuel to default on the city’s pension obligations.

The basic story in both cases is that the contracts that workers had labored under are being laughed at by the elites because they find it inconvenient to carry through with the terms. In the case of Detroit, public sector workers face the loss of much of their pension as a result of the city’s effort to declare bankruptcy.

These workers could be forgiven for laboring under the illusion that they would see the pensions for which they worked. These obligations were actually guaranteed under the state’s constitution. Read more…

Wage or profit led supply and demand: the local and the global perspective

August 26, 2013 Leave a comment

Lars Syll points us to this study from Marc Lavoie and Engelbert Stockhammer about the geographical scope of wage led and profit led economic regimes. A quote:

Wages have a dual function in capitalist economies. They are a cost of production as well as a source of demand. An increase in the wage share has several effects on demand and whether actual demand regimes are wage led or profit led is subject to an ongoing academic debate. Our interpretation of the available evidence is that domestic demand regimes are likely to be wage led in most economies. In open economies the net export effects may overpower the domestic effects and total demand in many individual countries may well be profit led. However larger geographical (or economic) areas are likely to be wage led. Read more…

Graph of the day: nominal Gross Domestic Product, Ireland and Greece

August 26, 2013 1 comment

Austerity works. The Irish GDP price level is still quite a bit below the 2005 GDP level, and the Greek price level is, at this moment, declining (data: Eurostat and Elstat). But does it also work for the better? Incomes and birth rates are down, unemployment and emigration are up. And there is as yet little sign of the swift increase of total nominal production in Greece and Ireland which is pivotal to the ability of these countries to pay back their debts. Debts which, by the way, were to quite some extent caused by ‘Bank aid’ (in Greece in 2012: 8 billion; in Ireland in 2011: 32 billion in 2010; 7 billion in 2011). Mind that the GDP data in the graph concern GDP per quarter, not per year.


The concept of monies – again.

August 25, 2013 5 comments

Any economic unit can emit money. The serious problem is to get it accepted
Hyman Minsky, ‘An evaluation of recent U.S. monetary policy’, Bankers Magazine, October 1972

Paul Krugman is writing about the concept of money again and links to a Tobin paper which shows Tobin’s lack of institutional knowledge, accounting skills as well as his fuzzy use of definitions. Let’s jump to Tobin’s conclusions:


This is a bad thing as it hides the truth that paying back  large chunks of present high ‘commercial banks’ debts will lead to a decline of the amount of money. In modern terminology these commercial banks are called MFI’s, Monetary financial Institutions. This are banks with the right to create money which, by government guarantee, has a 1:1 exchange rate with paper government money (check the link for what happened in Greece!). This bank money is generally known as ‘deposit money’ and comes into existence when an economic unit borrows money from an MFI. The creation of debts (for instance a mortgage debt) leads to a matter/anti matter creation of a matching amount of deposit money. Paying back these debts will lead to a matching (and sometimes disastrous) decline of the stock of deposit money. After paying back the debt – the money has vanished, ‘into thin air’, again.

In this respect, there is a difference in kind between banks and other financial institutions. And it has EVERYTHING to do with the nature of the liabilities. And the mortgage bubble shows that the banks did possess a ‘widow’s cruse’ (to use the phrase of Tobin) and could create hundreds upon hundreds of billions of Euro (in the Netherlands alone) to finance a house price bubble.

Which means that, when we want to get rid of the present high bank debts we either have, in the Eurozone, to introduce some kind of debt-jubilee or to print paper money (i.e: government money instead of bank money) to bail out for instance Cypriot and Spanish households and non-financial companies. Or governments have to borrow directly from the banks, against an ultra low-interest rate, which after the paying of the bills of the government in effect increases the amount of deposit money owned by the public (which can be used to pay down debts) and replaces private debts with (low-interest) government debt. Or the ‘MEFO’ solution: create a new kind of money.

To an extent – and that’s where Tobin comes in – savings like time deposits can be used to pay back debts. It is true that ‘Loans from MFI’s create deposits’ but it is also true what Tobin mentions, that not all these deposits count as money (though he, confusingly, never uses a proper operationalisation of money, like ‘ m-2’ or ‘m-3’ money).  Time deposits and the like (‘financial capital’, according to an old Bundesbank tradition) are not considered to be enough of a ‘means of exchange’ to be counted as ‘exchange money’ – but in due time the money on these savings accounts can be used to pay back debts. But even in this case, accounting necessity will lead to a decline of total deposits when MFI-debts are paid back.

Tobin also does not pay enough attention to ‘alternative’ money. Some examples: Recently, the Dutch postal service, PostNL, successfully emitted its own money:


Stamps always already were some kind of special purpose money, serving as a means of exchange to pay for specified exchanges (i.e. delivery of letters and parcels) as well as a store of value. But the value of stamps was still denominated in in this case) guilders and euro’s. The new Dutch stamps have however their own unit of account: 1 stamp-unit. Which buys one delivery of one letter. The point: there are many different kinds of moneys, including stamps. Or, for that matter, ‘receivables’. Just the other day some fellow outdoor guides and me went on an unplanned late night trip back from the Dutch island of Ameland with the ‘fast boat‘ (for reasons which won’t be disclosed on this blog but which were related to a grain product) and paid for this by issuing a ‘receivable’. Individuals would not have been able to do this. But this receivable was emitted by our outdoor society, which has an informal local AAA-reputation when it comes to such transactions, and was readily accepted. In the business economy, the total value of these receivables, which clearly are a means of exchange and a store of value denominated in the current official ‘unit of account’, at any given time is hundreds of billions, in the euro zone alone. Note that these receivables are a legal means of payment: when I buy a car by issuing a receivable I can sell it again before I have redeemed my debt! Aside – mr. Goldman, who founded what was to become Goldman Sachs, started his financial career by buying these receivable-bills from small companies (at a discount, of course) and selling them to the banks (at a smaller discount).

The point: many kinds of money are created by many kinds of economic units. But not all monies are created equal. And the special aspect of deposit money is it’s guaranteed 1:1 exchange rate with government money (which you experience every time you use and ATP). No haircuts or discounts there. Which is a difference in ind with other monies. However – remember Cyprus.

Aside:  read this ECB statistical manual about how economic statisticians estimate money. The view above is, unlike that of Tobin, consistent with this manual. But mind that it has only been since about three years that the ECB statisticians take proper account of securitization of mortgages, underestimating the importance of mortgages on the consolidated balance sheets of banks! The consolidated households accounts in the Eurostat national accounts however do show the right information. Nowadays – the ECB however does take account of securitization – economic statistics do progress.

Some Snippets

August 24, 2013 1 comment

1) ‘Wisdom of Age’ Snippets. Readers are advised to consult the (long and still growing) thread of the ‘Poor Adam’ post on this blog. Some quotes (different authors, the names of the authors are consciously not mentioned):

“The word ‘economics’ can be interpreted as either about “making money” or about its original, literal meaning: “household management” i.e. “feeding the kids” without “fouling the nest”. The proof of the pudding is that making money is NOT feeding the kids, so the wiser choice is to interpret it as “the management of Spaceship Earth”.”

“Science is not, cannot be a clean and pure effort to describe what is. The only way to describe is to create.”

” That is, aren’t the theories and models of scientists supposed to be testable by direct comparison to experience? Yes they are. But testability and how to do it are not as simple as they sound. As Heraclitus noted over 2500 years ago it is impossible to step in the same river twice.”

“Good science provides reliable predictions and makes things work.”

“”Smith and most of the classical and neo-classical economists who followed him framed their science in market emporium terms, in terms that fit their world. But that was not the only reality. Across the channel great-power rivalries that became chained to nationalism conjured up a different kind of economics than that of the individual operating in the complex market place of the British emporium. As soon as economics becomes a matter of nations and not individuals, the whole discussion needed to change. People who have been outside the Anglo-Saxon emporium looking in have known that for centuries. Talking about economics as a factor in the growth of state power makes the sinews of state power more important than the consumption preference of the individual and the economics that grew out of that 18th century British emporium won’t handle the analytical needs of national economic development. The outsiders: Germans, Japanese, and Chinese for three significant examples, know that and, therefore, classify the economics that provokes endless discussions about itself in Anglo-Saxonia, as a pseudo-science that serves the particular interest of its progenitors”

2) Waste-to-non-waste snippet. Eurostat estimates what happens with European garbage. Why?

Waste, defined by Directive 2008/98/EC Article 3(1) as ‘any substance or object which the holder discards or intends or is required to discard’, potentially represents an enormous loss of resources in the form of both materials and energy; in addition, the management and disposal of waste can have serious environmental impacts. Landfills, for example, take up land space and may cause air, water and soil pollution, while incineration may result in emissions of dangerous air pollutants, unless properly regulated. EU waste management policies therefore aim to reduce the environmental and health impacts of waste and improve the EU’s resource efficiency.

Does it work? There still is quite some work to do, half of the waste is still wasted:

3) Devaluation snippet. One of the alternative policies, endorsed by me, to get out of the crisis is ‘devaluation’ (I advised this on this blog for Denmark, which has the highest price level of the EU and for the Baltics, which were wrecked by international flash floods of capital). But does devaluation work? The UK devaluated with about 20%, back in 2009. But this did not lead to a sustained decrease of the deficit on the trade balance (goods, services), however, according to an ONS publication aptly called ‘Explanation beyond exchange rates: trends in UK trade since 2007’. Part of this is of course a price effect: exports became cheaper while imports became more expensive. A stronger increase of total exports might however have been expected. What happened? The volume of total exports of goods indeed did increase dramatically (Figure 4 in the document). But net oil exports decreased and turned into net imports. Also, exports of financial services took (after the spectacular increase during the 2004-2007 bubble) a big hit after 2008 and did not really recover (figure 7). Is this the end of a 94-year-old de-industrialisation trend in Britain (the Eurostat 2013 trade, January-May, data show a spectacular improvement of the UK goods trade balance)? If so, the recent UK manufacturing statistics might underestimate actual production which, if this is true, would also solve part of the productivity enigma in British manufacturing (ever declining productivity after 2008). Graph 3 is somewhat confusing as it’s not mentioned in the text that the ratio of exports to imports shown relates, unlike the series of exports and imports, to nominal exports and nominal imports which of course declines because of the devaluation while the export and import series show volumes.

By the way – the UK experience does show that external devaluation does have the advantage that domestic demand declines much less than in the case of internal devaluation as the domestic purchasing power of wages (i.e. vis-a-vis the prices of haircuts, doctors, garbage collection) does not decline, unlike the strange case of internal devaluation (see the development of domestic demand for domestic goods and services in Greece, Spain, the Baltics etcetera).

4) ECB snippet. A speech by Peter Praet, member of the board of the ECB, shows that at least some people at the top of the ECB are starting to remember what they were taught in macro-economics 101 and are starting to understand how much damage has been done, in the 2000-2013 period, by ill conceived monetary structures and policies. In a clear brak with the ECB-past he states that monetary policy is not just about money and inflation but also about demand:

As I said, inflation and the economy need to be interpreted: falling inflation in conditions of surging productivity and a booming economy is not bad news. Falling inflation when aggregate demand is persistently dragging, and credit and money are consistently unsupportive of households’ consumption and firms’ investment can be a problem for a central bank that is devoted to price stability.

Is the eurozone in a ‘zero lower bound’ situation?

August 23, 2013 2 comments

Low interest rates are supposed to save the economy. There is however a discussion going on if interest rates can be lowered enough to kick-start final expenditure again – nominal interest rates might have to become negative to do the trick. which won’t happen, of course. In the Eurozone this discussion is, however, largely academic as interest rates are, in quite a number of countries, anywhere but at the ‘zero lower bound’.  Well, for banks they are close – but for households and companies they aren’t. Some rates paid by households and non-financial companies are even higher than during the height of the bubbles (graph), though households seem to adapt to the idea that interest rates will stay low for quite some time to come and change their hedging behaviour by changing from long-term fixed interest mortgages to short-term fixed interest rate mortgages. The recent ‘forward guidance’ statements of Draghi, president of the European Central Bank, are of course aimed at fostering this kind of behaviour. This will, however, be of little to no avail when lower interest rates only lead to higher house prices instead of increased final demand.Aside – quite some politicians have tried to increase interest rates during the crisis, at least those paid by other countries, as this would ‘discipline’ these countries. Don’t scalp them – skin them.





It’s the math again

August 23, 2013 30 comments

from: David Ruccio


Every time there’s a controversy in economics, the problem of mathematics seems to be at the center of the discussion. That’s because, in economics, discussing the role of mathematics is inextricably related to issues of science, epistemology, and methodology, which are themselves rarely discussed but are implicit in pretty much all of these discussions.

In short, we’re never very far from physics-envy.

That’s certainly the starting point of Noah Smith, who compares the mathematics of physics (the supposed “language of nature”) with that of macroeconomics (in which it serves to “signal intelligence”). And then, of course, Paul Krugman rides to the rescue, arguing that mathematical models, when “used properly,. . .help you think clearly, in a way that unaided words can’t.”

Uh, OK. “Used properly” is the operative clause there. The real question is, what is the proper use of mathematics in economics? And, what is the proper way of thinking about the proper use of mathematics? That’s where all the issues of science, epistemology, and methodology come to the fore.

As it turns out, one of the first articles I ever published, “The Merchant of Venice, or Marxism in the Mathematical Mode,” was on that very subject. I had mostly ignored mathematics during my undergraduate years but then, in graduate school and especially when I began to conduct the research for my dissertation (on mathematical planning models), I realized I wanted both to learn the econmath and to learn how to think about the econmath. Ironically, I ended up teaching “Mathematics for Economists” to first-year doctoral students for over a decade (it was basically a course in linear algebra and multivariate calculus, in which students also had to write a paper on the history and/or methodology of the mathematization of economics).

The argument I made in my dissertation and later in the “Merchant of Venice” article was that economists (mainstream economists especially, but also not a small number of heterodox economists, including Marxists) treated mathematics as a special language or code. They considered it special either in the sense that it was the language of nature (and therefore overprivileged) or a neutral medium for thinking and expressing ideas (and therefore underprivileged). Either way, it was considered special.

My alternative view was that mathematics was just one language among many, and therefore one set of metaphors among many. And like all metaphors, it served at one and the same time to enable and disable particular kinds of ideas. Therefore, we need to both write mathematical models and to erase them in order to produce new ideas.*

But that’s not how most economists think about mathematical models. And when they do think and write about them, they tend to invoke one or another argument for mathematics as a special code. They also tend to forget about all the other uses of mathematics in economics—not only as a signalling device but as a hammer to bludgeon all other approaches out of existence.

It’s the tool that is often used, in economics, to separate science from non-science—which, of course, if you say it quickly, becomes nonsense.

*That argument, concerning the not-so-special status of mathematics, so incensed one of my colleagues he attempted to derail my tenure case. Fortunately, another of my colleagues forced him to back down and I ended up receiving a unanimous recommendation.