Author Archive

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

Everyone can create money

September 8, 2017 6 comments

from  Merijn Knibbe

Everyone can create money; the problem is to get it accepted.“ Hyman Minsky

Summary. Central banks the world over publish sophisticated Flow of Funds data which shows who and how and, to an extent, why all kinds of money are created and used and if stocks and flows of debt and money are becoming a threat to stability. Institutional analysis of these data, which looks at different kinds of credit as well as at different kinds of money and using a grid which enables the economist to distinguish between different kinds of economic sectors shows that they can be used to gauge the (in)stability of an economy. Macro-economists have too often however only looked at crude aggregates of total money or even purged money from their models while analysis of credit is, in 2017, still wanting as the connection between all kinds of money and all kinds of credit is still absent from the models, even if a monetary sector is increasingly added to these models.

This piece benefitted from helpful remarks by Josh Mason and Diane Coyle.

  1. Introduction: the measurement of monies  

Money is measured by statisticians working at central banks. Or rather, some kinds of money are recorded by these statisticians. Others aren’t. Stamps can be a work of art (picture 1, super model Doutzen Kroes photographed by super photographer Anton ‘Joshua tree’ Corbijn).1

But stamps are not only tokens of art. They are money, too. Even when we use the restricted functional definition of money which can be found in most textbooks, which defines money as a store of value, a means of exchange and a unit of account, it is clear that stamps are money – including, nowadays, their own unit of account. But the question why it’s a means of exchange etc. is of course more interesting: we trust ‘the post’ to deliver our letters (dwindling market) and packages (increasing market). And to honor this implicit contract. And rightly so. Dutch stamps have for some years been their own unit of account but I can still use my Euro dominated ones which occasionally surface from the occasional drawer.  read more

‘Adults in the Room’ by Varoufakis. Good, necessary and very frightening.

August 16, 2017 35 comments

Yanis Varoufakis has written a book which shows that the European Union is, at present, disfunctional and does not live up to the treaties.

The EU treaties are clear:

“The Union shall establish an internal market. It shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment. It shall promote scientific and technological advance. It shall combat social exclusion and discrimination, and shall promote social justice and protection, equality between women and men, solidarity between generations and protection of the rights of the child. It shall promote economic, social and territorial cohesion, and solidarity among Member States. It shall respect its rich cultural and linguistic diversity, and shall ensure that Europe’s cultural heritage is safeguarded and enhanced”.

But the Union doesn’t even try. As is shown by  ‘Adults in the Room’ by Yanis Varoufakis, the minister of finance of Greece who, for five months, defied the ‘Troika’ (the combination of the ECB, the IMF and the European Commission who, with the Eurogroup, the regular meeting of the ministers of finance of the Eurozone, in the background).   Read more…

We need doughnut economics. But we also need GDP growth. Lots of it.

August 3, 2017 21 comments

Recently, some ‘alternative economics’ have been published: we are moving from criticism to alternatives. Which is a good thing: Kate Raworth broke ground with Doughnut economics. Jamie Morgan et all recently published ‘Quest for a new paradigm in economics. A synthesis of views of the New Economics working group’. We can also mention the people publishing in the Journal of Industrial Ecology, who do not look at the circular monetary economy but at the circularity (or not) of flows of materials and energy. And we can look at the seventeen sustainable development goals of the UN.

Will it make a difference? I do not know. Things like this have been around for at least forty years, though especially measurements have become much better. And I do think that the reaction against monetary measures of the economy is somewhat myopic. We do not have to move beyond the monetary economy. Neoclassical economics tried that and utterly failed. Hey, the very definition of poverty is: ‘not having enough money’. And we really have to look into that. But we have to look at other economies and circularities, too.  What we need for a new economy is a number of statistics is:

  • Monetary measures like the Flow of funds which track flows and stocks of debts and credits and changes in the amount of income and the like. Money is important.
  • This includes ‘real’ estimates of flows of production and spending, like  real GDP. Mind that ‘real’ GDP is not measured but estimated. Nominal GDP is measured, statisticians use scores of methods to take prices out of the nominal measures and to recalculate these nominal measures into ‘real’ estimates, like the purchasing power of wages or the volume of retail spending. Aside from problems like changes in quality (surely not always improvements in quality – take anti-biotics!) this is problematic as relative prices change. We should, however, not only see this as problems but also as exciting events which require economic explanation.
  • And we need a set of statistics which maps labor, paid as well as unpaid and idle as well as occupied
  • And  set of statistics which map flows of materials and energy (inputs as well as outputs like CO2)
  • And statistics about (risk of ) poverty, health and well-being
  • And environmental statistics

Read more…

(Modified) Irish national income Q1, 2017.

Update 18-7-2017: see also, much more extensive and in depth but along the same lines, the Financial Times.

To circumvent the internationally approved rules of national accounting, irish economists developed new national income indicators: Modified Gross National Income and Modified Total Domestic Demand. They were right to do this. And these are not minor changes. Modified Income is almost a third (a third!) lower than ‘normal’ income. AlsoIn today’s quarterly results, the modified Total Domestic Demand indicator decreased by 2.7% in Quarter 1 2017, while the traditional indicator decreased by 17.3%’. Wow.

What are the differences between the indicators and why did the Irish statisticians do this? First, a quote from the press release of Irish National Income in Q1, 2017:

Modified GNI (or GNI*) is defined as GNI less the effects of the profits of re-domiciled companies and the depreciation of intellectual property products and aircraft leasing companies.  This new indicator of the level of the Irish economy will be a useful additional input to debt ratio analysis.

Modified Total Domestic Demand is defined as Total Domestic Demand less the effects of the trade in aircraft by aircraft leasing companies and the imports of intellectual property.  This modified indicator gives insight into the activity within the domestic economy and is designed to be more closely related to employment growth as it is focuses on the physical capital used to produce domestic output

Read more…

‘Money as electricity’ – redux

July 17, 2017 4 comments

Morris_A__CopelandThe heterodox heritage of economic statistics is underestimated. Too often I encounter the idea that heterodox economics does not provide an alternative to mainstream economics, let alone economic measurement. Ahem. Instead of ignoring (data on) unemployment (Robert Lucas!) or ignoring (data on) money and the monetary system (more on this below), it were heterodox economists who set out to measure it. To quite an extent, economic statistics are the heterodox alternative people want to see, surely when it comes to macro-economics . If alone because unlike mainstream macro it does carefully define variables – modern science! The mainstream equivalent of the tedious statistical manuals which economic statistics use to do this is entirely absent! One example of such data are the Flow of Funds. Read more…

The deadweight economy

July 16, 2017 4 comments

Is there a decoupling of economic growth and use of materials? On the national scale: sometimes. On the global scale: absolutely not. From The Journal of Industrial Ecology:

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 global material extraction and trade covering 40 years of global economic activity and natural resource use. This new data set is becoming the standard information source for decision making at the UN in the context of the post-2015 development agenda, which acknowledges the strong links between sustainable natural resource management, economic prosperity, and human well-being. 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. In this paper, we summarize the key findings of the assessment study to make the IE research community aware of this new global research resource. 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. This acceleration has occurred at a time when global population growth has slowed and global economic growth has stalled. The global surge in material extraction has been driven by growing wealth and consumption and accelerating trade. A material footprint perspective shows that demand for materials has grown even in the wealthiest parts of the world. Low-income countries have benefited least from growing global resource availability and have continued to deliver primary materials to high-income countries while experiencing few improvements in their domestic material living standards. Material efficiency, the amount of primary materials required per unit of economic activity, has declined since around 2000 because of a shift of global production from very material-efficient economies to less-efficient ones. This global trend of recoupling economic activity with material use, driven by industrialization and urbanization in the global South, most notably Asia, has negative impacts on a suite of environmental and social issues, including natural resource depletion, climate change, loss of biodiversity, and uneven economic development.

Is there a housing bubble in the EU? Not everywhere.

July 13, 2017 1 comment


House price developments in the EU show large differences in development – which makes the task for monetary and fiscal policy even more difficult.

One of the beneficial consequences of the Great Financial Crisis is that economic statisticians at for instance Eurostat or the Bank for International Settlements spend more effort on assembling house prices , though The Economist deserves praise as it led the way about 15 years ago. What do these data tell us? Low interest rates are criticized by some economists as these should encourage asset price bubbles. Houses are our most important asset. Are house prices in the EU at this moment increasing too fast?

Not yet in Southern Europe. Spanish prices show a considerable increase but the level in Spain is still low. And prices in France and Italy do not show any meaningful increase, while Italian levels are low.

However… Swedish prices are of the chart. Dutch prices are rapidly increasing (and continued to do so during the first six months of 2017). German prices have, by now, increased with a third (house ownership in Germany is less common than in many other countries but the increase means that there will, quite soon, be a push to sell houses to renters – who of course have to borrow from the big banks). yes, there is a northern European bubble. And it is rapidly inflating: during the last six months (not in the graph) prices have continued to increase.

The house price bubble has not exactly the same characteristics as the previous one. The previous bubble was financed by credit and money creation. The money created was to a considerable extent stacked away by the sellers (who often inherited these houses) in long-term deposits and is now used again to finance new house purchases. In selected cities, like Amsterdam, house prices are exploding (+21% in one year, I read somewhere) which is to an extent influenced by Airbnb. Nevertheless – house prices show continued increases which are way higher than the increases of nominal income of households, even including Airbnb income. Actions have to be taken: a gradual increase (with clear forward guidance) of land value taxes (the money raised has to be used to lower VAT on labor), a gradual decrease of Loan to Value ratio’s (with clear forward guidance) and a gradual banishment of tax deductions of interest paid (with clear forward guidance).

It won’t happen.

The nature of growth: three visions

July 12, 2017 6 comments

Do we need growth? Do we need technology? Is technology ‘neutral’ in the sense that its appearance and use can be understood without historical context? The Journal of Industrial Ecology has a special issue about such ideas. I love the kind of calculations they do about flows of stuff. But Vincent Moreau, Marlyne Sahakian, Pascal van Griethuysen and Francois Vuille have an apt observation.

In light of the environmental consequences of linear production and consumption processes, the circular economy (CE) is gaining momentum … promoting closed material cycles by focusing on multiple strategies from material recycling to product reuse, as well as rethinking production and consumption chains toward increased resource efficiency. Yet, by considering mainly cost-effective opportunities within the realm of economic competitiveness, it stops short of grappling with the institutional and social predispositions necessary for societal transitions to a CE. The distinction of noncompetitive and not-for-profit activities remains to be addressed, along with other societal questions relating to labor conditions, wealth distribution, and governance systems. … We examine the CE from a biophysical and social perspective to show that the concept lacks the social and institutional dimensions to address the current material and energy throughput in the economy. We show that reconsidering labor is essential .

See also Branko Milanovic about the”Need and inevitability of growth”: Read more…

What Macron should know about the win-win-win-win-win consequences of the new German minimum wage

July 12, 2017 3 comments

Recently, Germany introduced an economy wide minimum wage. This led to better jobs, better incomes, an increase in productivity, no upsurge in inflation and no decline of employment growth:

“Higher wages, shorter hours The comparison of both worker groups shows that the minimum wage has worked. As intended, the hourly wage of the interviewed minimum wage workers rose from €6.70 to €8.20, an impressive 22 percent. This is a multiple of the wage increase in the control group, which amounted to 4 percent. However, this also shows that the average hourly wage had not yet reached the minimum wage of €8.50, which is not due to exemptions from the minimum wage (we excluded these from the data). At the same time, weekly working hours of minimum wage workers fell by 90 minutes, whereas working time in the control group increased somewhat. In particular, the share of employees with very long working hours of more than 45 fell markedly. This also runs counter to the trend of the control group. Finally, despite lower average working hours, the monthly gross wage climbed from roughly €840 to €990. This is important, since it is the gross wage more than the hourly wage that matters for being able to meet living expenses.

Happier despite higher workload

These results paint the minimum wage in glowing colours for affected workers. However, how did companies react? Manager interviews conducted in another IAB survey showed that firms focused more on raising worker productivity than on layoffs. Our results confirm this from a worker perspective.”

Involuntary unemployment in the Eurozone, the rest of the EU and the USA: elevated and high

July 11, 2017 4 comments

SaveIn the USA and the EU, employment is up and unemployment is down. But unemployment is not yet low. Unemployment rates have to decline more (a bit in the USA, a lot in the EU) and participation rates have to recover (a lot in the USA, a bit in the EU). In the EU, there are large differences between countries (compare Spain with Germany). But on the macro level, there is still a large reservoir of involuntary unemployment and, looking at the participation rates, people who have given up altogether.

For practical reasons (it always takes time and effort to find a job), unemployment will never be zero. But we can account for this and look at “involuntary unemployment” only. In a statistical sense, we might define involuntary unemployment as the number of unemployed which, after a reasonable time, still have not yet found a new job. Available data led me to set this ‘reasonable time’ to one quarter for the EU and to 15 weeks for the USA, the data are shown in graph 1 (German data not available!). In the USA, there are still over 2 million people who were unemployed for 15 weeks or more. Which is way lower than in 2009 – but still 2 million. The comparable figure for the Euro zone is, ahem, 9,7 million and for the non-Euro zone EU about 1,7 million. And though the employment to population ratio in the USA is finally rising in a serious way, it is still way below the per 2008 level (let alone the much higher level of the end of the twentieth century). Aside – the nefarious consequences of the combination of monetary tightening and government austerity in the Euro zone after 2010 clearly show.

Meta: John Maynard Keynes once invented, or at least popularized, the word: “involuntary unemployment”. This means something as: “even when the unemployed are willing to accept a wage cut to find work – they won’t find it”. To restate this in the language of modern data on labor market flows: “even when, during a slump, the wage rate is cut this won’t increase the net outflow (gross outflow minus gross inflow) from the reservoir of unemployed”. One of the reasons for this is the non-existence of individual wages. A wage cut is not a wage cut for an individual worker – but a cut to the ‘market rate’, a ‘wages cut’. That’s the way labor markets work. And worked: historical data on wages very clearly show the existence of very stable market wide wage rates for carpenters, agricultural labor, masons and whatever even in a time when government interference with wage rates was much less than today.

Update: more meta. The way the unemployment data used above are measured ensures that it shows that on the individual level ‘measured unemployment’ is involuntary too, as the unemployed are asked if they are actively trying to change their situation. This is related to but not the same kind as the ‘involuntary unemployment’ referred to above which is probably best explained by the fact that the people in the unemployment reservoir might, in one year, be very different people than in the preceding or the next year. A not entirely satisfying aspect of the definition of involuntary unemployment used above is that even when people get new jobs quite fast they still might encounter many short spells of unemployment, leading to high average unemployment.