Author Archive

Central banking: Edward Harris on why raising interest rates in an overleveraged economy is very risky

December 17, 2017 4 comments

Even more about central banking. Why so much? Partly because people are writing very good stuff about it (like the AAA piece from Edward Harris below (excerpt)). Partly because we seem to see the end of the era of ‘pure’ inflation targeting. And (part of this last trend?) partly because soon Merkel and Macron will sit together to redesign the Eurosystem. Previous posts: ideas of Willem Buiter, Richard Werner, Thomas Mayer excerpts from a recent paper by Mike Konczal and Josh Mason and ideas from the German Handelsblatt shadow council.

As the Federal Reserve meets today [last week: M.K.] to decide how to communicate its messaging on future rate hikes and balance sheet reduction, financial stability will play a key role. Yesterday, I wrote about the Bank of International Settlements new warnings on financial stability. And just this morning, I read a piece from Goldman Sachs Asset Management EMEA division head Andrew Wilson, warning that the risk of overheating was real. So let’s put some framing around this issue and ask how the Fed reacts as the data come in down the line.

In the past decade on Credit Writedowns, I have had a lot of good commentary from different writers on financial stability. And most of it is based around Hyman Minsky’s Financial Instability Hypothesis. Read more…

The ECB shadow council on the ideal ECB. Inflation targeting: out. Financial cycle: in.

December 13, 2017 1 comment

Some years ago, Cladio Borio from the BIS introduced the ‘financial cycle’. Here, a Borio/Lowe paper from 2002. What’s the financial cycle? From the twenties of the twentieth century onwards Wesley Mitchell and the NBER (National Bureau of Economic Research) perfected the (monthly) measurement of the classical business cycle (a still ongoing project). The concept of this business cycle of the ‘flow’ economy was and is the cornerstone of much macro-economic theorizing. ‘Chicago style economists’ rationalized the idea that low and stable inflation (1) could be engineered by the central bank and (2) was enough to control this business cycle. The idea of Borio (and others) is that, next to this cycle, there also is a financial cycle related to credit and assets, mainly houses which can not be tamed by low and stable inflation. This idea, while not entirely new (Minsky!), seems to have gotten traction when we look at responses of members of the Handelsblatt ‘Shadowcouncil’ of the ECB. See about this also Willem Buiter, Richard WernerThomas Mayer  and Mike Konczal and Josh Mason

Shadow ECB Council Sees Changes to ECB Mandate Shadow ECB Council favors sweeping changes to the ECB’s mandate to account for some of the mistakes in the policies of the past. Some members favor a dual mandate that includes employment, but most pushed for upgrading the importance of financial stability Read more…

Mike Konczal and Josh Mason on the Ideal Central Bank

December 10, 2017 4 comments

We’re publishing some expert ideas about the future of the ECB and monetary policy. Three days ago some ideas of Willem Buiter were published, two days ago some ideas from Richard Werner and yesterday ideas from Thomas Mayer. Today some excerpts from a recent paper by Mike Konczal and Josh Mason. They are not part of the Handelsblatt Shadowcouncil but their ideas often tally with those already published:

  • Pure ‘inflation targeting’ is (mortally?) compromised
  • Hence, central banks are overburdened and need to share responsibility for stable economic and financial development with (other parts of) the government
  • But there are serious coordination issues (this looms larger in the Eurozone than in the USA) with regard to management of monetary/fiscal policy as well as with regard to macro and micro allocation of credit
  • ‘Credit guidance’ (which the government is already doing, think for instance about the deductability of mortgage interest in many countries) has to be rebooted and aimed at long-term productive investment. Opinions differ about the exact shape of this.
  • But it does mean that increased democratic and social accountability is important

There are substantial policy questions about the ways in which the Federal Reserve stimulates the economy by hitting the gas pedal or brake, by way of increasing or decreasing the single interest rate, is consistent with larger economic goals, including ensuring financial stability, fostering productive investment and good jobs, and directing society’s resources toward urgent social problems, such as climate change. In particular, we review recent proposals for modifying the inflation target of monetary policy and for allowing the overnight interest rate to move below zero. Read more…

Thomas Mayer on the ideal European Central Bank

December 9, 2017 13 comments

We’re publishing some expert ideas about the future of the ECB (and hence Euro money). Two days ago some ideas of Willem Buiter were published, yesterday we published some ideas from Richard Werner. Today some ideas by Thomas Mayer. Beware the last sentence.

EMU is incomplete and dysfunctional The European Monetary Union (EMU) is incomplete and dysfunctional. First, it is incomplete, because the quality of book money created by banks through credit extension differs from country to country (depending on the quality of the banks’ credit portfolios and the financial capacity of the governments to support weak banks in their jurisdiction). We have a paper currency union (as euro notes are the same in all member countries), but no monetary union (as deposits differ). Second, EMU is dysfunctional, because the monetary policy of inflation targeting pursued by the ECB has broken down. Since the Phillips curve no longer works, the central banks has lost control over inflation. The ECB-“Insiders” (policy makers and their loyal “watchers”) of course deny that the emperor has no clothes and hope that the Philipps curve would come back at some point. This amounts to a denial of reality. Against this background, I propose first to complete EMU by introducing a safe bank deposit, i.e., a deposit fully backed by reserve money deposits at the central bank. The safe deposit would turn deposits (like bank notes) into complete substitutes across countries (anyone wanting to read more on this can find it here. Second, I propose that the ECB abandon the policy of inflation targeting and adopt a rule for the expansion of reserve money (which would of course translate into the expansion of the safe deposit). The rate of expansion should reflect the expected nominal growth rate of the economy. This rate could only be altered with a two thirds majority in the Governing Council on the basis of an assessment of any structural changes that are expected to change the long-term growth rate of the economy. I am aware that there would be no room for pro-active monetary policy in this regime. In my view, this is its biggest advantage.

Mit freundlichen Grüßen Dr. Thomas Mayer.

Richard Werner on the Ideal ‘European’ Central Bank

December 8, 2017 4 comments

As I stated yesterday we will publish some ideas about the future of the ECB. Yesterday some ideas of Willem Buiter were published. He wanted to abolish national central banks, to change the mandate, more transparency and an end to the prohibition of monetary financing. Today: Richard Werner. He warns us that it’s not just about the central bank but also about the ‘normal’ banks. More localism is needed. And the ‘tool’ credit guidance plus more localized banking may be more important than a mandate: let decentralized decisions rule money creation (as long as it is not for purchasing existing assets)!

The ideal central bank does not have the legal status of ECB or Reichsbank [the pre-1946 central bank of Germany, M.K.], but that of the Bundesbank

In my analysis of the ECB, published first in 2003 in my bestseller ‘Princes of the Yen: Japan’s Central Bankers and the Transformation of the Economy’ as chapter 19, and published in 2006 here, I pointed out that the ECB had not, in fact, been modelled on the Bundesbank, as had been variously claimed. Read more…

Willem Buiter on the ideal European Central Bank

December 7, 2017 4 comments

The future of Europe is at stake. Yesterday, the European commission published a Roadmap for deepening Europe’s Economic and Monetary Union. coincidentally, the German Handelsblatt ‘EZB Schattenrat’ (‘ECB shadow council’, of which I’m a member) today discussed the ideal European Central Bank. The coming days I will post some (written) remarks made by members of the shadow council as well as some stuff relating to the Roadmap. No mention will be made of individual verbal remarks. Recurring themes were however the tension between centralization and decentralization, the inadequacy of pure inflation targeting (but what has to come next?), the importance of financial stability, the wish that some kind of ECB prosperity mandate has to become more explicit and the need for accountability. Today: written remarks by Willem Buiter:

The ideal central bank of the future

1. The ECB should have financial stability as its overriding target. Subject to that it should target price stability and full employment. Read more…

The Euro Area double dip was caused by austerity (and yes: there was a double dip)

November 25, 2017 Leave a comment

MerijnKnibbe2What was the cause of the infamous Euro Area 2011-2013 double dip? Answer: a grave policy mistake. Already high ECB interest rates were increased (13 April 2011 13 July 2011) at the same time when fiscal policy was tightened (‘austerity’), unemployment was at record levels (graph 1) and use of capacity was still lowish (less important, core inflation was low, too). As a consequence, Euro Area unemployment started to increase at a time when Japanese and USA unemployment continued to decrease while UK unemployment started to decrease, despite the Eurozone dip. Brad Seltser has written a very good post about the demand side of this (second graph).


Read more…

Keynes was right about Quantitative Easing (QE)

November 13, 2017 7 comments


Did the growth of money caused by QE in the Eurozone (graph) stimulate economic activity? Not enough. According to John Maynard Keynes, in The general theory(1936),

The relation of changes in M (money) to Y (income) and r (the interest rate) depends, in the first instance, on the way in which changes in M come about.”

Put differently: credit and not money makes the world go round. Money creating lending to enable household purchases of existing homes has a quite different effect on the economy than money creating lending to exiting new companies which hire lots of labor to produce live saving medical equipment (or the latest craze, L.O.L. balls, works too). Quantitative easing by central banks is a nice albeit dismal empirical example which shows that the amount of money did grow thanks to QE – but that the wrong sectors obtained the money. Read more…

Demonetisation in India: the marketing view

November 7, 2017 Leave a comment

One of the advantages of marketeers, compared with neoclassical economists, is that they do not assume things about consumers but observe them or ask them questions. So did Nielsen India, a large marketing company, less then a month after the infamous Indian demonetisation. The report is ungated and, for one thing, contains valuable information about the female experience. An excerpt

PART B: DECODING CONSUMER SENTIMENT (Source: Nielsen India)To pick up the consumer sentiment at this point in time, where they would have startedadjusting to this new reality, we ran a consumer measurement of sentiment and reaction. We reached out to nearly 800 people* in an online survey carried out between 25th November and 1st December 2016. Findings were quite revealing (Cities covered: Mumbai, Delhi, Kolkata, Bangalore, Chennai, Ludhiana, Ahmedabad, Vijayawada; Male – 52%, Female – 48%; Age 18 – 45 years; Occupation working professional, housewife, students)

Decline in overall spending: About half the consumers have cut down their household spends significantly.

One out of five housewives has reduced spending by 50% or more. : Read more…

On Spain, Catalunya and former Yugoslavia

October 28, 2017 10 comments

Update 29-10-2017: in 2014 this important Voxeu post from Andrés Rodríguez-Pose and Marko Stermšek about the countries formerly called Yugoslavia was published. The data fully endorse the view I express: secession is economic folly but trajectories matter a lot. Their conclusions are, considering the data, imo too positive. In 2011 only one country, Slovenia, had significantly surpassed the 1985 level of production. But even Slovenia, which had a relatively very peaceful transition, experienced a 25% drop of GDP during the years of secession (others had drops of about 50% or even more). Many others in 2011 still had levels of production way below what was reached in 1985: 25 years of stagnation (and remember: economic growth is also better healthcare, better housing and more years of education).

  1. What I did not expect: In my lifetime I’ve seem countries in and around Europe disintegrate. The Soviet Union. Yugoslavia. Czechoslovakia. Iraq. Syria. And, work in progress, the UK. Spain seems to be next in line. In many fo these countries this process was accompanied by war.
  2. Vaclav Havel was the last president of Czechoslovakia and strongly opposed splitting up. Being a wise man, he resigned instead of using violence when he saw that it had become inevitable. Thanks to him we know that splitting up a country can be a relatively orderly and, especially, peaceful process.
  3. Spain and Catalunya are heading the other way.
  4. At this moment, provoking the opponent is a winning strategy for radicals at both sides which means that the radicals have all reasons to ‘cooperate’ with the other side when it comes to this.
  5. Many Catalunyan companies have already moved their headquarters out of Catalunya
  6. Soon, the despised tourists will tay away. Yes, the number of overnight stays of tourists in hotels in Barcelona quadrupled in a few decades and such increases do change cities into theme parks. Not funny. But what if they stay away? Even despite Multi year double-digit growth of tourism, unemployment in Catalunya is still high.
  7. Foreign companies will move away, too.
  8. Don’t forget that in an economic sense, Catalunya is a city-state, centered on Barcelona! Romantic ideas about small scale organic family farms and grocery shops which will save the day are wacky – these won’t buy you modern healthcare, let alone a Volkswagen and can’t sustain a city economy.
  9. Spain, backed by the EU and the USA, has every incentive to increase such economic havoc, for instance by reducing flows of government money. Catalunya may be a net contributor to the Spanish government but that does not mean that there are no gross flows which can be halted. Brussels will follow suite.
  10. Mind that as Catalunya won’t be a member of the EU its citizens will not have free rights of entree into the EU labor market.
  11. Even if Catalunya is a net contributor, it still profits from the 4,5% budget deficit of Madrid.
  12. Mind that after Yugoslavia split up its constituent parts experienced rates of inflation of 30, 40 and even almost 50% (Kosovo). Brussels did not come to the rescue (and citizens of these states are basically not allowed to work inside the EU). If companies move away, tourists stay away and money from Brussels and Madrid is halted such rates of unemployment are not inconceivable. Brussels won’t come to the rescue.
  13. Catalunya will, for a time, probably still use the Euro. But its banks will be cut short from the Target2 system which enables international payments. International payments will be, ahem, difficult. It does not have to be this way, but Rajoy does hold all the cards. All of them. Catalunya is at his mercy.

I can go on. Nothing good will come of this. Rajoy will have to ponder about the wisdom of Vaclav Havel. Catalunyans will however have to ponder about the possibilitiy of 40% unemployment. And the relative merit of being a paid guardian of a themepark instead of an unemployed citizen of Catalunya.

The ECB’s “well past”, but by how much?

October 26, 2017 1 comment

From: Erwan Mahé

26 October 2017

I had no intention of writing before the ECB meeting today or, for that matter, afterward, given the already abundance of published opinion on the event. However, in light of the varied quality of the studies undertaken so far, I could not resist the temptation to return to my favourite topic, which is the study of the reaction function of central banks, especially, given the particular context faced by the European Central Bank. The only question we need ask today is:

What does the ECB’s Governing Council want to do?

In reality, that breaks down to two goals. Read more…

The real costs of making (and using) money – the bitcoin waste

October 24, 2017 14 comments


Bitcoins are a total waste. On this blog, I’ve written some posts on ‘the real costs of making money’ (a summary here). Producing money takes resources: labor, capital, land. One of the ’land’ aspects used to be silver and gold. Digging for gold and silver a social setting: the slaves in the silver mines of Larium (Athens), the native workers which perished in the high altitude silver mines of Cerro Ricco, Peru (the Spanish empire). Or ‘apartheid’, which guaranteed a steady flow of cheap ‘free’ labor to the gold mines, in South-Africa (British empire). Fortunately, we have fiat money now – the value money does not have to be backed anymore by forced labor.

Bitcoins are a recent new kind of money (though it really seems to be more a store of wealth than a means of exchange). Unfortunately, Read more…

Whatever happened to ₹-money (and credit) in India?

October 22, 2017 2 comments

Aside: I didn’t know, but the ₹-sign is the official sign for the rupee

Why did the Indian economy not succumb under the weight of the sudden demonetization of 8 November 2016? The answer: to an extent because the government and the commercial sector kept borrowing from banks and spent this money.


There is overwhelming evidence that at the grassroots level the dearth of cash caused by the financial folly disproportionately hurt the poor and unbanked as rebuilding took time and converting old notes to new ones did led to a short but crippling decline in the amount of available cash. This despite the fact that a much larger proportion of outstanding ‘old’ cash was converted to new money than expected. In spite of this, the official economy grew. How come? Credit growth rapidly rebounded… (see below). Read more…

More about the de-digitisation of money in India

October 20, 2017 1 comment

India4 On this blog Jayati Gosh published an excellent post about the monetary folly in India where without any notice overnight large denominations of cash were abolished to force people to use digital bank money. I totally agree with this analysis but I am able to add a little. The author takes cash withdrawals from ATM machines as an indicator of the re-monetization of the economy. The Bank of India however publishes data on the composition of the stock of money in India. See also here. This information enabled me to make the graph above which shows that, as early as January 2017, the failure of this policy was clear. The Bank of India clearly facilitated a rapid re-monetization (defined as an increase of M3 money, i.e. cash plus deposit money). Economic growth has according to official estimates taken less of a hit than expected but especially the (misnamed) ‘informal’ sector seems to have had dire times. Looking at the graph, it seems that the very rapid re-monetization which started after december 2016 might explain this conundrum to an extent (there also was a considerable downward change in the growth rate of the GDP deflator though it kept increasing).

For an analysis of USA involvement in this folly this post by Norbert Häring.


Modern macro-economics and the sad truth about decoupling

October 9, 2017 1 comment

Decoupling is the idea that when societies get richer, additional units of GDP will require less physical resources and will produce less carbon dioxide. This seems true when we look at national rich country production data. But it is not true when we look at rich country consumption data – as we outsourced energy and material intensive parts of producing our consumption goods to developing countries. We really have to blame our consumption pattern… Look here for an article of Mir and Storm (2016) about this; importantly they used a new comprehensive international database to derive these results. Schandle et al (2017) derive a somewhat comparable result from another new database (and look here for the present shortage of sand):

The international industrial ecology (IE) research community and United Nations (UN) Environment have, for the first time, agreed on an authoritative and comprehensive data set for globalmaterial extraction and trade covering 40 years of global economic activity and natural resource use… Only if economic growth and human development can become substantially decoupled from accelerating material use, waste, and emissions can the tensions inherent in the Sustainable Development Goals be resolved and inclusive human development be achieved. … The global results show a massive increase in materials extraction from 22 billion tonnes (Bt) in 1970 to 70 Bt in 2010, and an acceleration in material extraction since 2000

Read more…

Sapir in May 2008 on the Great Financial Crisis

October 2, 2017 5 comments

Two days ago this blog published a blogpost by Jaques Sapir, a French economist, who stated that access to his RussEurope blog had been suspended because his posts had become to political… Interestingly, in the May 2008 issue of theReal World Economics Review, at a time when Jean-Claude Trichet, a French economists and former head of the ECB, still denied the crisis and even increased interest rates (22 July 2008: +0,25%), Sapir already had a keen insight into the nature and severity of the crisis. Silence him – at your peril!

The current financial crisis has become a major international event and can be compared to the 1997-1999 world financial crisis3. The current crisis has spread from the US mortgage market, where it exploded in the spring of 2007, to the global banking and financial system. It now, spring 2008, threatens a systemic collapse of the banking system. It has pulled the US economy into recession and already by late 2007 its consequences were being felt in the Euro-Zone. Most analysts now forecast a GDP fall of between 0.5% to 3.0% in the US economy and very slow growth in the Euro Zone. However, a major difference with the 1997-1999 crisis is that emerging markets look much less impacted than developed economies.

Cash and hurricanes

September 29, 2017 1 comment

A whole score of Caribbean Islands seem to have been wiped out by a whole series of unusually strong hurricanes. These islands (Dominica, Puerto Rico, St-Maarten, Anguilla, …) need loads of outside help. But these societies have to  be resilient, too. Which means that they need money suited to this task: cash. See below. There is however a powerful lobby which tries to get rid of cash (i.e. government money) and to replace this with electronic bank moneys. Sad. Aside – once government cash is successfully abolished this market niche will, no doubt, be rapidly filled with bank cash which will enable banks to reap even larger seigniorage profits… (Update. To avoid misunderstandings: this is not meant to criticize the banks. Filling such a niche will be a good thing. But governments should take action to prevent the very existence of this niche) Source.

NEW YORK/SAN JUAN, Puerto Rico (Reuters) – Demand for cash in hurricane-ravaged Puerto Rico is “extraordinarily high” after power outages knocked out electronic transactions and ATMs but needs were being met for now, a Federal Reserve branch said on Wednesday.

Residents and tourists were counting their dwindling banknotes in the wake of Hurricane Maria, which crippled the electrical grid and communications network, turning the Caribbean island into a largely cash-based economy.

The New York branch of the U.S. central bank, which oversees and makes funds available to Puerto Rico’s financial institutions, said it was prepared for another surge in cash demand and could rush more banknotes to the island if necessary.

Why, to the detriment of the economics profession, MiltonFriedman ignored Hyman Minsky’s advice

September 22, 2017 4 comments

kooWeird: fifty years after Schumpeter and one hundred years after John Stuart Mill they did not mention ‘credit’. Let alone ‘private credit’. Mill’s idea that private credit creation often decisively contributes to bubbles, and bursts, is absent from the whole thing. The Schumpeterian idea that credit financed investments lead to economic growth (and monetary changes) is alien to their concept. Even the Irving Fisher idea that there are different kinds of money with different kinds of velocity is not really incorporated while the sectoral approach which is part and parcel of the main system of monetary statistics, the Flow of Funds, is not even mentioned. And Minsky’s clear warning that stocks of private debts are pivotal in engendering the deep depressions central to their analysis was bluntly ignored. Read more…

Water, health and wealth

September 20, 2017 2 comments

Nava Ashraf, Edward Glaeser, Abraham Holland, Bryce Millett Steinberg  NBER Working Paper No. 23807

Providing clean water requires maintenance, as well as the initial connections that are typically measured. Frequently, the water supply fails in the developing world, especially when users don’t pay the marginal cost of water. This paper uses the timing of frequent, unexpected water service outages in Lusaka, Zambia to identify the short-term impacts of piped water access on contagious disease, economic activity and time use. We use microdata from the primary water utility in the city on the timing and location of supply complaints to identify outages, matched to extensive administrative data across the city. Conditional on fixed effects for time and water service district within Lusaka, we find that increases in outages are associated with increased incidence of diarrheal disease, upper respiratory infections, typhoid fever and measles. We match outages to geolocated microdata on financial transactions from the largest mobile money provider in Zambia, and find that outages cause a reduction in financial transactions. Outages also increase the time that young girls spend at their chores, possibly at the expense of time they spend doing schoolwork. Imperfect infrastructure appears to burden the poor in ways that go far beyond obvious health consequences.


Acid rain, health and government policy

September 20, 2017 1 comment

A recent meme of the fact free right in my country (the Netherlands) is the idea that the Acid Rain problem spontaneously disappeared. It didn’t. It was the government, stupids! And it is a really serious problem which did and does require attention. Source