Posts

Showing posts from 2013

Banks, bubbles and Bitcoin

"I don’t think that the -coins we are seeing now are the last word in digital currency. They are experiments. And I do think there is a bubble in the making, which will burst noisily at some point. But unlike others, I don’t regard this as a bad thing. Just as the dot-com bubble and bust was an essential part of the evolution of the Internet, so the bursting of the -coin bubble, when it comes, will enable a new digitized financial architecture to emerge. "So bring on the -coin bubble and bust. I want to see what grows in its place."
Me, at Forbes.

The death of John Galt

Image
I've been meaning to write this post for ages. It's about the democracy of ideas. We can only profit from our ideas when we share them with others, freely and without expectation of reward. By depriving the world of his ideas, John Galt chose his own death.

Oh, and there are guest appearances by Old Holborn, Bitcoin and Robert Louis Stevenson.

Read on here.



Forward non-guidance

My new Forbes post is on the limitations of central bank forward guidance, in the light of the US's taper decision and the UK's rising gilt yields. Markets will only be guided in the direction in which they were going anyway.....

Read on here.

Interest rates, growth and the primary balance

Image
Nick Edmonds objects to my assertion that real interest rates should be at or below the real growth rate of the economy (my emphasis):
"Interest payments are just transfer payments, so their impact on stability has to be seen in the context of other transfer payments (principally taxes and benefits). Depending on the structure of these other transfers, there is no reason per se why the interest rate on safe assets has to be below the growth rate. (See for example http://www.levyinstitute.org/pubs/wp_494.pdf ) There is no public sector in Samuelson, so you don't get these transfer flows, but by the same token his assets aren't actually claims on anybody, so they can't really be thought of as safe assets.  "Of course, it may be that excessive interest rates entail tax and transfer rates that are unpalatable, but that's a different issue."
I don't think it's a different issue at all. It's the whole point. Not just "unpalatable", but unsus…

Weird is Normal

My latest post at Pieria:

"Three years ago, Nick Rowe produced this post describing a “weird world” – a world in which the equilibrium interest rate is at or below the long-term growth rate of the economy, rather than above it as we are used to. In such a world, bubbles are inevitably created as investors search for positive yield. This is also the world recently described by Larry Summers. "But I don’t think this world is weird. I think it is actually normal, and we have been living in a weird world of unstable Ponzi schemes that eventually crash and reset." 
Read on here.

Germany and interest rates

Image
This comment from Mysjkin on my previous post about Germany has made me think about the effect of free movement of capital and harmonised interest rates in a currency union:
"Imagine a German company going to a German bank, asking for a loan. The German bank answers: no we are not going to lend money to you because we can lend it for a higher interest rate to a company in Spain, but we will lend the money to you if you will also pay this higher rate. If the investment, at that interest rate, is still profitable for the company, it will borrow the money at the higher rate, problem solved. If the company (read: German corporations) does not want to borrow at this higher interest rate, it seems to me that monetary policy is not too loose, but too tight for German domestic conditions." The argument is that ECB interest rate policy prior to the Eurozone crisis resulted in interest rates that were too high for Germany and too low for the periphery. And indeed, a look at Germany'…

Germany's investment problem

Image
We all know that Euro membership has been of doubtful benefit to periphery countries such as Greece and Portugal. But Germany has been a net beneficiary of the Euro, hasn't it?

Not according to these charts from Albert Edwards (h/t Edward Harrison).



(larger image here)

Note the point on both charts where the trend changed sharply. Yes, it's 2000 - when the Euro was introduced. Admittedly, Germany's gross fixed investment was already declining, but after 2000 it fell off a cliff. And the current account decomposition chart shows us why. Note the collapse in borrowing by non-financial corporations from 2000 onwards. That is disappearing domestic private sector investment. In fact in 2009-10 NFCs were net saving. This is distinctly unhelpful in an economy which has seen gross fixed investment falling for the last twenty years.

To start with, it appears that government borrowing replaced private sector net borrowing. But even that declined from 2004 onwards, replaced by income…

A simply appalling scheme

Image
Lloyds Banking Group has been fined £28m by the Financial Conduct Authority for simply awful management of staff. From the FCA's press release:
"The Financial Conduct Authority (FCA) has fined Lloyds TSB Bank plc and Bank of Scotland plc, both part of Lloyds Banking Group (LBG), £28,038,800 for serious failings in their controls over sales incentive schemes. The failings affected branches of Lloyds TSB, Bank of Scotland and Halifax (which is part of Bank of Scotland). This is the largest ever fine imposed by the FCA, or its predecessor the Financial Services Authority (FSA), for retail conduct failings.The incentive schemes led to a serious risk that sales staff were put under pressure to hit targets to get a bonus or avoid being demoted, rather than focus on what consumers may need or want". And according to the FCA's Tracy McDermott, the FCA's findings "make unpleasant reading". Indeed they do. I've read them, and I have to say that they describe o…

Big banks versus small banks: size doesn't matter

In my very first Forbes post I've sidestepped the argument about whether big banks or small banks are best. Both can behave badly and cause systemic crises. It's not about size of banks, though how they behave does matter. It's about the fact that the entire banking system is "too big to fail", and by restricting public support and applying regulation inconsistently we place the entire financial system at risk.

You can read the whole post here.


Making the Desert of Plenty bloom

Image
My latest post at Pieria delves back into the history of the Long Depression in the 19th Century to find lessons for today's "secular stagnation". Persistent excess of supply over demand is anything but benign and surprisingly difficult to deal with.

"In my post “The desert of plenty”, I describe a world in which goods and services are so cheap to produce that less and less capital is required for investment , and so easy to produce that less and less labour is required to produce them. Prices therefore go into freefall and there is a glut of both capital and labour. This is deflation. There are two kinds of deflation. There is the “bad” kind, where asset prices go into a tailspin and banks and businesses fail in droves, bankrupting households and governments and resulting in massive unemployment, poverty and social collapse. We have seen this in the past, in the Great Depression; we narrowly avoided it in the Great Recession; and there are currently places in Euro…

Zombie alert!

What evidence is there for the "plague of zombie companies" that is supposedly strangling the life out of the UK economy? My latest at Pieria:
There is a prevalent view that part of the reason for the UK’s slow recovery and poor productivity is the existence of large numbers of companies that should have died in the recession. “Zombie firms in danger of strangling the economy”, screams one newspaper headline. And another warns of the “Zombie businesses spreading like a virus”. It’s not always clear what people mean by a “zombie company”. The usual definition of “zombie” is one that generates enough cash flow to service its debt but not enough to repay principal, or alternatively one that generates enough cash flow to survive but not enough to grow. But lots of businesses don’t grow. Indeed, the majority of microbusinesses – sole traders and firms with fewer than 9 employees – not only don’t grow but have no desire to do so. Are they zombies? No. They are active economic agen…

Malinvestment and the endogeneity of money

Image
So much has been written about the endogeneity of money that I thought it was now widely accepted. But recent exchanges have shown me that people STILL aren't getting it. Most recently, there have been two themes doing the rounds that bother me:

- malinvestment is caused by a growing money supply
- the presence of excess reserves in the system indicates a growing money supply (and therefore malinvestment)

Both are wrong. They are wrong for slightly different reasons, but they both boil down to the same thing - that money exists independently of the actions of banks. It does not. If there is malinvestment in the system, it is caused by an excess of bank lending, not by a growth in the money supply: very fast broad money growth is a consequence (or better, an indicator) of excessive bank lending. And if there are excess reserves in the system, they are caused by the desperate attempts of central banks to stop the money supply falling as banks deleverage. You could say they are cause…

The desert of plenty

My latest post at Pieria is my belated contribution to the secular stagnation debate. I think it's caused by the growing trend to abundance. But do we really want abundance?
Throughout history, humans have dreamed of plenty. They have longed for there to be abundant supplies not only of essentials, but of luxuries. The promise made to the Israelites wandering in the desert was that they would eventually come to a land “flowing with milk and honey”. And the vision of the New Jerusalem in Revelation is of riches beyond imagination. Recent forecasts of forthcoming abundance, too, have focused on the benefits. Imagine a world in which everything was so plentiful that not only the essentials of life but the luxuries, too, were free. There would be no need for money, because nothing could be bought or sold; and there would be no need to work, because there would be no need for income. And if everyone believed that such “superabundance” would last forever, then there would be no need to …

FLS and the Bank of England's independence

The UK's Funding for Lending scheme is being changed. The Bank of England and HM Treasury have announced that in future, funding obtained through the FLS may only be used to support business lending, not residential mortgages. And to encourage bank lending to businesses even more, the fees for FLS collateral enhancement are being cut.

There has been much talk of a housing bubble in the UK. Personally I am unconvinced, but there is no doubt that the residential property market is stronger than it was. And more broadly, consumer credit is increasing. Up till now the FLS has not distinguished between categories of lending: it could be used to support any lending, although it was hoped that it would particularly be used for business lending. The Governor of the Bank of England argues that broad support for consumer credit is no longer needed, and that the FLS should now be restricted to business lending. I don't disagree. In fact I think the FLS should have been restricted to busi…

Who should run banks?

My latest at Pieria considers who should run banks, in the light of the recent Co-Op Bank disaster:
"The hapless Paul Flowers, former chairman of the Co-Op Bank, has been arrested and charged with possession of Class A drugs. The Flowers problem comes at the end of a simply horrible year for the Co-Op, in which it was forced to withdraw its bid to take on the TSB part of Lloyds TSB, its credit rating was downgraded to junk by Moody's and the PRA imposed capital requirements on it that it was unable to meet. It admitted in its half-year accounts that it was bust and proposed a recapitalisation plan that would have stiffed 15,000 grannies, only to see it trumped by two hedge funds who made the grannies a better offer - thereby presenting the world with the extraordinary spectacle of a group of vulturesappearing considerably friendlier than the supposedly cuddly teddy bear that is the Co-Operative Group.   "I don't intend to comment on Mr. Flowers's behaviour. The n…

The other side of trade

Following on from my discussion of trade surpluses and their effects (which lots of people didn't get, sadly), I thought I would talk about the other side of trade - which is capital investment.

This speech by the ECB's Asmussen contained the following intriguing line:

"If more German savings were invested at home, the current account surplus would fall by definition".

Now I can hear you all scratching your heads. What on earth has the behaviour of German savers got to do with the current account surplus?

Nothing, actually. This isn't about German savers. It is about German national savings - the proportion of national income that is not spent or invested at home. Essentially, what Asmussen is saying is that the German national savings rate is too high.

A nation's current account reflects its net foreign income, and its capital account reflects the change in ownership of foreign assets. A nation that is running a trade surplus has an equivalent capital deficit…

Value is in the eye of the beholder

Image
This post is written in reply to Tim Worstall's criticism of this paragraph in my post "The intergalactic trade frontier":
"It is true that export success depends on comparative advantage and international competitiveness, but these are relative terms: international competitiveness is bought at the expense of the competitiveness of others, and comparative advantage implies a near-monopoly position in the provision of some good or service." Tim correctly pointed out that comparative advantage is not relative to others, but relative to oneself:
"Comparative advantage is not about what you are better at compared to other people. That is absolute advantage. Comparative advantage is what you are better at doing relative to the other things that you could be doing. And as such it greatly strengthens the case for trade." I take issue with two points here. The first is, as I shall explain shortly, that what I am "better at doing" may not be what I am…

Trade confusion

My last post sparked a critical post from Tim Worstall and extensive comments both on his post and mine. Tim's criticism was over my use of the term comparative advantage, and I shall not address that in this post. But the discussion on both posts was fascinating. Nearly all of it missed the point.

Basically, people confused international trade with national trade policy. They are not remotely related. National trade policy that aims to achieve a sustained trade surplus does not increase trade. Indeed it may actually reduce it.

Firstly, let me address the (partly justified) criticism that I had incorrectly described international trade as zero-sum. Clearly, from the point of view of individual agents trading with each other, this is not true. One business's exports are not bought at the price of another's: people that fail to compete in one market will look for other markets where they can be more successful, so overall, competition tends to increase global trade.

But fro…

The intergalactic trade frontier

Image
International trade is a zero-sum game. Across the globe as a whole, exports = imports. You export something, someone somewhere has to buy it. It is true that export success depends on comparative advantage and international competitiveness, but these are relative terms: international competitiveness is bought at the expense of the competitiveness of others, and comparative advantage implies a near-monopoly position in the provision of some good or service. But exports depend on the willingness of others to import. If one large trading area such as the Eurozone runs a trade surplus, therefore, somewhere else there must be a trade deficit. This is not rocket science.

But trade balances have become part of the same economic morality play that has already seen countries with high debt castigated for "profligacy" (even when high debt is a consequence of economic collapse, not over-spending) and countries with large fiscal surpluses praised for "prudence" (even though a…