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Showing posts from July, 2013

Currency wars and the fall of empires

My new post at Pieria:
"I have been reading James Rickards' book Currency Wars. In this, Rickards reviews the use of fiat currency over the course of the last century, and concludes that the present global fiat currency system is inherently unstable and on the point of collapse. He calls for return of the gold standard to stabilise firstly the US dollar and, following on from that, international trade currency.  I am no historian, but the first thing that struck me about this book was its partial view of history. Rickards does not discuss the reasons for the classical gold standard being abandoned in 1914. Indeed since he writes almost entirely from an American perspective throughout this book, the European historical dimension is seriously neglected. There are two major omissions: - the background to World War I and its consequences
- the collapse of the Soviet Union. Both of these involved catastrophic failure of fixed currency systems: admittedly only the first involved a g…

Anatomy of a bank run

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In my last post, I argued that enforced separation of investment banking and commercial banking would not eliminate the need to provide central bank support to investment banks and other non-banks in the event of another Lehman-type collapse. There followed an extensive discussion in the comments, in the course of which it became apparent that many people simply don't understand how bank runs work. So I thought I'd explain.

The classic bank run looks like this:


Queues of retail customers outside a bank, waiting to withdraw their money. But actually this sort of bank run is very rare. The run on the UK's Northern Rock in 2007 was the only retail run in the financial crisis and the first in the UK for 140 years.

What is more frequent - and far more damaging - is a wholesale run. The Northern Rock retail run was preceded by a wholesale run that forced the Rock to go to the Bank of England for emergency liquidity assistance (ELA). And the wholesale run continued for the next f…

Grieving for Glass-Steagall

Glass-Steagall is dead. Rather like Soviet-era Communist leaders, it has been officially dead since 1999, and actually dead for much longer. Though there was no state funeral, the body was not embalmed or put on display and few people mourned its passing.

Well, not at the time. But fast forward to 2008 and suddenly the Western world - not just the US - exploded in a paroxysm of grief over the demise of Glass-Steagall. "If only Glass-Steagall hadn't been repealed!" people cried. "Glass-Steagall would have prevented all these banks failing. Glass-Steagall would have stopped all these derivatives being created. Glass-Steagall would have protected everyone's money". Glass-Steagall, it seems, could have prevented the entire financial crisis. Never mind that Lehman, Bear Sterns and Merrill Lynch were pure investment banks, with no retail deposits to put at risk. Never mind that AIG was an insurance company and Fannie and Freddie were government-sponsored enterpri…

The mercantilist threat to global rebalancing

My latest at Pieria:

"Bill Mitchell has been doing a series of posts on the circumstances leading to the UK's request for aid from the IMF in 1976. They give a fascinating insight into the economics of a time when trade balance and the international exchange value of the currency were the most important drivers of national economic policy. Since the great monetarist revolution of 1979 we have largely forgotten about this: nowadays it is fiscal, not trade, balance that concerns us, and we happily devalue our currencies and force down labour costs in search of elusive export-led growth. I believe we are chasing a dream.

For the last 40 years the world has been gradually rebalancing, as the West abandoned empire and colonialism in favour of free trade. Dismantling barriers to trade and freeing up world markets has not been easy, and it is fair to say that many Western countries have been more interested in ensuring that developing countries open their markets to imports than remov…

Economic equivalence: job guarantee and basic income

Recently there has been much discussion about whether a basic income [guarantee] or a job guarantee (JG) is the better option when unemployment is high, under-employment is pervasive and wages are low. Chris Dillow, Izabella Kaminska, Paul Krugman and I have all argued for basic income on the grounds that modern capitalism either is, or will be, incapable of generating sufficient work to provide a living wage for everyone: while the Modern Money Theorist (MMT) school arguesstronglyfor a JG, claiming not only that it meets the moral objective of ensuring that everyone who wants to work can, but that the public sector providing jobs for the "reserve army of unemployed" can act as a form of automatic stabiliser.

I do not propose to discuss here the moral arguments for job guarantees versus basic income. Chris Dillow has addressed the argument that basic income encourages "mass skiving" very well in this post, while various papers from MMT theorists have identified the…

The wastefulness of automation

My latest at Pieria:
"Chris Dillow observes that "one function of the welfare state is to ensure that capital gets a big supply of labour, by making eligibity for unemployment benefit conditional upon seeking work." And despite noting that when jobs are scarce, paying some to "lie fallow" so others can work might be a good thing, he concludes that "this is certainly not in the interests of capitalists, who want a large labour supply - a desire which is buttressed by the morality of reciprocal altruism and the work ethic." (emphasis mine). Basic Income, therefore, is not going to happen because capitalist interests, claiming the moral high ground, will ensure that it never gains political traction. "But what if capitalists DON'T want a large labour supply? What if automation means that what capitalists really want is a very small, highly skilled workforce to control the robots that do all the work? What if paying people enough to live on simp…

What derailed the UK recovery?

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Here's a horrible chart:



It comes from ONS's Economic Review for July 2013.

There are a couple of key things that this shows. The first is systematic underestimation of the damage to the UK's economy. The 2008/9 recession was deeper than previously estimated and output remains lower. But the second is to my mind more interesting.

The 2008/9 recession was originally thought to be similar to the 1979 recession. We now know it was quite a bit deeper and lasted longer. But the shape of the curve was actually more like the 1990 recession, which unlike the 1979 recession involved a property market crash. Indeed the two lines parallel each other nicely - even with the revision - until the 10th quarter after the crisis. Then it all went wrong: even though the second dip shown on the original line has now turned into simply a flattening of the curve, the economy stopped recovering then and there has been little growth since.

It is all too easy to blame this on the Coalition gover…