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The Broken Contract

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So the Lord God said to the serpent, 
“Because you have done this, cursed are you above all livestock and all wild animals!
You will crawl on your belly and you will eat dust all the days of your life.
And I will put enmity between you and the woman, and between your offspring and hers; he will crush your head, and you will strike his heel.”

To the woman he said,
“I will make your pains in childbearing very severe; with painful labor you will give birth to children. Your desire will be for your husband, and he will rule over you.”

To Adam he said,
“Because you listened to your wife and ate fruit from the tree about which I commanded you, ‘You must not eat from it,’ cursed is the ground because of you; through painful toil you will eat food from it all the days of your life. It will produce thorns and thistles for you, and you will eat the plants of the field. By the sweat of your brow you will eat your food until you return to the ground,…

Yield curve weirdness

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Yield curves have gone mad. Negative yields are everywhere, from AAA-rated government bonds to corporate junk. Most developed countries have inverted yield curves, and a fair few developing countries do too:


(chart from worldgovernmentbonds.com)

Negative yields and widespread yield curve inversion, particularly though not exclusively on safe assets. To (mis)quote a famous pink blog, this is nuts, but everyone is pretending there will be no crash.

Here, for your enjoyment, is an à la carte selection of the most lunatic government yield curves. You can find lots more here.

Exhibit 1: Switzerland.

Negative yield already extends beyond 30 years, and markets are pricing in further interest rate cuts and/or QE, or indeed anything to stop the Swiss franc appreciating as scared investors pile into CHF-denominated assets. Hence the curve inversion.


Exhibit 2: Denmark.

Every Danish government bond currently circulating in the market is trading at a negative yield. And the inverted curve tells us t…

The Case for People's Quantitative Easing

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Last night, the Resolution Foundation hosted a debate to launch my book, "The Case for People's Quantitative Easing". A great panel consisting of Jagjit Chadha, Director of NIESR; Fran Boait, Executive Director of Positive Money; and James Smith, Research Director of the Resolution Foundation, debated my ideas with immense verve, ably moderated by Torsten Bell, Chief Executive of the Resolution Foundation. You can watch the debate here.

In 2008, QE did a great job of supporting asset prices and preventing the disastrous deflationary spiral of the 1930s. But since then, enormous quantities of asset purchases by central banks around the world have proved unable to raise aggregate demand and kickstart growth.

Although central banks didn't do a bad job in the last recession, many of the tools they used won't work in the next one, not least because the legacy of the tools themselves has not yet dissipated. Interest rates are on the floor, central bank balance sheets …

The Troubles of Kier

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Yesterday, the outsourcer Kier Group announced a major restructuring. The announcement makes grim reading. The company will divest or close down three of its business lines, with the loss of 1,200 full-time equivalent (FTE) jobs, half of them by the end of this month. The dividend will be suspended for two years. Kier's share price fell on the news, closing down 17.43%.

Remarkably, some analysts took the restructuring announcement as a "buy" indication, which might explain why its share price has recovered slightly today. I wouldn't, personally. Kier is in big trouble, and has been for some time. Admittedly, Andrew Davies, its new CEO, has wasted no time in getting to grips with the company's problems: the proposed restructuring is certainly drastic. But given how difficult the outsourcing market is now, I will take some convincing that it will be enough to turn the company round.

Interim results for the half-year ending December 2018 - the latest accounts availa…

European banks and the global banking glut

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In a lecture presented at the 2011 IMF Annual Research Conference, Hyun Song Shin of Princeton University argued that the driver of the 2007-8 financial crisis was not a global saving glut so much as a global banking glut. He highlighted the role of the European banks in inflating the credit bubble that abruptly burst at the height of the crisis, causing a string of failures of banks and other financial institutions, and economic distress around the globe. European banks borrowed large amounts of US dollars through the money markets and invested them in US asset-backed securities via the US's shadow banking system. In effect, they acted as if they were US banks, but in Europe and therefore beyond the reach of US bank regulation. This diagram shows how it worked (the “border” is the residency border beyond which US bank regulation has no traction):

But it is not the model itself so much as Shin's remarks about the role of European regulation after the introduction of the Euro …

Dissecting the Eurozone's (lack of) inflation

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Eurozone inflation is in the doldrums again. After perking up to 1.7% in April, it slumped back to 1.2% in May. According to Bloomberg, this was "lower than expected". But I wonder who, apart from the ECB, really expected anything else. Core inflation has been well below target for the last five years:


(chart from Bloomberg)

And although the headine HICP measure increased in 2016-18, this was mostly due to the oil price bouncing back from its 2014-15 slump:


(chart from Macrotrends)

The wild swings in the energy inflation rate can be clearly seen on this chart from Eurostat:


It's perhaps not obvious at this resolution, but the movement in headline HICP is almost entirely due to the energy price.

In fact comparing the inflation and oil price charts, it is hard to see much justification for the ECB's claim that it started QE in March 2015 because inflation expectations were becoming "unanchored". Headline HICP briefly dipped below zero in January 2015 because o…

The Abominable Laffer Curve

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It's been pretty quiet in Lafferland since the Brexit referendum. All the talk has been of trade and sovereignty, not deregulation and tax cuts. But there's nothing quite like a Tory leadership election to bring supply-siders out of hibernation. So here is Sajid Javid singing an old sweet song to attract the votes of Tory party members:

Cutting tax rates could bring in billions of extra revenue, which would mean:
More nurses 👩‍⚕️👨‍⚕️
More teachers 👩‍🏫👨‍🏫
More police 👮‍♂️👮‍♀️

"I would cut [top rate] if it brings in more revenue and gives us better public services" - @sajidjavid#TeamSajpic.twitter.com/MxVUVcI5q2 — TeamSaj (@TeamSaj) June 2, 2019
Cutting taxes for the rich in order to generate more public revenue. The Laffer curve is back.

Not that it has been absent for long, really. Seven years ago, to much applause, George Osborne cut the top rate of tax from 50% to 45%. When the cut took effect there was a large increase in tax take. At the time, Conservati…