Lehman's Aftershocks

Peter Praet's speech at the Money, Macro and Finance conference last week was a goldmine. I've already discussed the central bank credibility problem revealed by his final slide. But his presentation went far, far wider than central banks. It raised serious questions about the future of the global economy.

This slide - the first in his presentation - shows that there have been three significant global shocks in the last decade, not one:
The first, obviously, is the deep global recession caused by the failure of Lehman Brothers in September 2008. But what are the other two?

As Toby Nangle's annotations to Peter Praet's second chart show, the second is the Eurozone crisis, and the third is the emerging market crisis triggered by the unwinding of the oil & commodities boom:

Looking at these charts made me think of ripples on a pond. When you drop a pebble into a pond, it initially creates a deep hole in the water, with raised sides and splashing. The hole closes quic…

Central banks' credibility problem

In a speech in London the other day, Peter Praet discussed the ECB's unconventional policy measures. I was there, and I have to say that he deviated considerably - and rather entertainingly - from the version of the speech on the ECB website. But his core message was still the same:
"Rates are expected to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases. So, no interest rate hikes for a long time to come.

But that's not what his final chart says:

Market expectations are that interest rates will start to rise any day now. And no, this is not expectations of rate rises due to the end of QE, which the ECB has arguably signalled for early 2018 (or at least it didn't signal that it wouldn't end then). This is the short-term rate, which is not directly affected by QE. Admittedly, future expectations of short-term rates in 2018 and beyond are close to the ECB's own predictions. But is that because mark…

The UK's political crisis

On the evening of Friday, September 22nd, the credit ratings agency Moody's downgraded the UK's credit rating. Admittedly, it was only by one notch. But coming as it did hard on the heels of Theresa May's grand speechin Florence, it was a shattering blow. 

Credit ratings agencies lost much of their lustre in the financial crisis of 2008, when they were revealed to have been complicit in the mispricing of complex financial derivatives – the “toxic waste” that brought down some of the world’s largest financial institutions. So it is tempting to dismiss Moody’s action as pointless and its analysis as economically illiterate. I confess that I have done so myself, in the past. But this time, Moody’s is on the money. It tells a story of a tragically weakened government struggling with a legacy of policy errors from previous governments as well as the growing likelihood of a chaotic and potentially disastrous Brexit.

Moody’s gives two main reasons for the downgrade:
The outlook …

We need to talk about productivity

"We need to discuss the complete disconnect between the marginal product of labour and labour wages," said Sir Chris Pissarides, speaking on the closing panel of the Lindau Economics Meeting.

I tweeted this comment. Laurie MacFarlane of the New Economics Foundation promptly responded with this chart that brilliantly illustrates Sir Chris's point:

"Quite why marginal productivity theory is still taught as something which explains the real world is beyond me," commented Laurie.

Marginal productivity theory says that profit-maximising firms will only employ workers who can generate at least as much additional return for the firm as they are paid. Expressed like this, it seems sensible: why would a firm employ a worker who is a net cost? But marginal productivity theory also says that the amount firms pay their workers is equal to their marginal product - in other words, that wages rise in line with productivity.

This is demonstrably untrue. Wages have not kept pac…

Tariffs, trade and money illusion

In the past few days, I have read three pieces from Economists for Brexit - now renamed "Economists for Free Trade" - extolling the virtues of "hard" (or "clean") Brexit and calling for the UK to drop all external tariffs to zero unilaterally after Brexit. Two are written by professors of finance (Kent Matthews and Kevin Dowd). The third is from the veteran economist Patrick Minford.

All three of these pieces wax lyrical about the benefits to GDP and welfare from unilaterally reducing external tariffs to zero. But bizarrely, not one gives adequate consideration to the currency effects of trade adjustment and the likely monetary policy response. Minford's brief discussion contains a schoolboy error (of which more shortly). The other two never mention it at all.

In today's free-floating currency regime, trade shifts and currency movements are intimately linked. Indeed, for some countries, trade shifts are driven more by capital flows and associated…

Calculus for journalists

“What do they teach them at these schools?” wondered the Professor in C.S. Lewis's The Lion, the Witch and the Wardrobe. 

The Professor, of course, was concerned about logic. But I wonder too - not about logic, but about maths. Especially among journalists writing about life expectancy and other long-term trends.

Here is the FT proclaiming "Average life expectancy falls". This is the headline for a chirpy piece about how reduced life expectancy could make things easier for pension funds facing big deficits. 

There's only one problem with this. Life expectancy isn't falling. And the report the FT cites does not say that it is.

This is how the press release from the Institute and Faculty of Actuaries summarises the findings of their report:

Recent population data has highlighted that, since 2011, the rate at which mortality is improving has been slower than in previous yearsHowever, mortality is expected to continue to improve and there is significant uncertainty…

Bitcoin and bimetallism

I wrote a piece on Forbes recently in which I described a bimetallic system of coinage and suggested how such a system might work - or rather, fail to work - for Bitcoin. These are the relevant paragraphs:
In a bimetallic system, there are effectively two currencies which are linked by a fixed exchange rate set by fiat. At the end of the 19th century - the time of Bryan's speech - Britain's copper penny was worth 1/144 of one pound. Other denominations of coin were created by multiplying up the penny: so the silver sixpence was unsurprisingly worth six copper pennies, and the silver shilling was worth twelve pennies, or 1/20 of a pound. All these relationships were fixed by fiat. So, suppose that instead of using bitcoin as the medium of exchange, we use some other coin - let's call it "satoshi". We decide that this other coin is worth 1/100m of 1 bitcoin. Of course, in the Bitcoin system, there is no government "fiat": the nearest they have to this ap…