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Showing posts from November, 2013

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

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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

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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…

City-states and empires

My latest post at Pieria looks at the future of the nation state:
 "At the recent conference on The Future of Cities hosted by The Economist, Benjamin Barber of City University argued that nation states would become redundant, replaced by a global network of co-operating (and competing) cities. "Even under good leadership, states will become increasingly dysfunctional", he declared. And he explained that that this was because "we live in an interdependent world of global cross-border challenges":global warming and climate changeterrorism and war - increasingly cross-borderglobal pandemics - public health is becoming a global concernimmigrationtechnology For Barber, the problem is that nation states are not capable of tackling these global cross-border challenges. This is not caused by poor leadership, but the "inherent limitations"of territorial sovereignty. Barber sees a return of the "city-states" of medieval times, reinvented in 21st-cen…

Smart cities, smart people

My latest post at Pieria considers the impact of "smart" technology in city development, and warns that although technology brings considerable benefits, there are also significant dangers.
I recently had the pleasure of attending The Economist's conference on the future of cities. At the heart of the conference was a thoughtful presentation by Richard Sennett of the LSE on "smart cities". "Smart cities" are a much-hyped phenomenon. Technology providers have promoted "smart" solutions to urban challenges, with varying degrees of success. All too often, their ideas have foundered on political and bureaucratic obstacles, or have proved unworkable because of conflict between the vision of clean technological solutions and what Sennett describes as the "messiness" of people's lives.... Read on here.

Demographics and dependency

This is probably a pretty rubbish post, but then it was a rubbish debate, and I'm not proud of my own contribution to it. I did get things slightly wrong. But not as wrong as others.

Once again Fraser Nelson has tweeted graphs he doesn't really understand and drawn the wrong conclusions from them. Here's the first graph he tweeted, with his comment:

One day, nonsense graphs like this will stop being made in recognition of fact that the over-65s also work & pay tax. pic.twitter.com/0xnHwrfSYw
— Fraser Nelson (@FraserNelson) November 9, 2013
It's from this article by The Economist. The source matters, as will become apparent shortly.

And he then went on to say this:

This shows heroic contribution the over-65s making to UK economic recovery. Graph the @economist should have printed. pic.twitter.com/WVuXphvvs0
— Fraser Nelson (@FraserNelson) November 9, 2013
The first chart is the dependency ratio - the ratio of working to non-working people in the population. And the …

About that ECB interest rate cut

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Consumer price inflation in the Eurozone has been below the target of 2% and falling for quite some time. But until now, the ECB has been sitting on its hands. Inflation some distance below target didn't appear to bother it - most likely because the (unbelievable) forecasts for Eurozone recovery created inflation expectations in the 1.5 - 2% range, so it saw no need to act on what was assumed to be a temporary problem.

So why did the ECB, in a complete reversal of its previous stance, suddenly cut the refi rate to 0.25%? Well, Eurozone consumer price inflation has touched a record low of 0.7%, driven by falling energy prices and stagnant prices in other sectors. But inflation expectations are still where they were before, based on expectation of a strong Eurozone recovery.
Here is a Eurostat chart showing Eurozone inflation rates by country as of September 2013:


And Reuters reports that German inflation has unexpectedly fallen to 1.2% in October. Well, well. German inflation is be…

Inflation, deflation and QE, redux

I've suggested previously that QE could actually be deflationary. I looked at it from several perspectives - collateral effects, the monetary transmission mechanism, distributive effects, even Peter Stella's "deadwood" inhibiting bank lending. But I have to admit that the evidence in support of my deflationary hypothesis was thin and the case not proven. All I could demonstrate was that QE is not directly inflationary and whatever stimulative effect it has is weak at best.

Until now, that is. Soc Gen have looked at QE.....and they have concluded that its effects may indeed be deflationary. Their reasoning is somewhat different from mine. Here's their argument in full (their emphasis):
IS QE DEFLATIONARY?QE is by design set to be inflationary, yet we were asked several times last week whether the opposite could hold true; i.e. that QE is in fact proving deflationary.* No credit = no recoveryIn theory, a permanent increase in money supply results in a proportional …

In defence of big banks

Yes, I know.....big banks are bad things. They are widely believed to be systemically dangerous and a serious threat to the economy. "Break them up!" is the cry. But the facts say otherwise. My new post on Pieria gives a bit of a history lesson on financial crises and concludes that the most systemically-dangerous banks are not the most obvious ones.....
"My comment on the BBC's Newsnight programme that failures of big banks are very rare and that RBS was an "aberration" caused something of a storm. Some people said that they were "shocked and horrified" that I was "defending TBTF". Others complained about the behaviour of big banks in recent years. But I did not defend TBTF, and I did not defend the behaviour of banks. My comment was simply a statement of fact. Big banks fail very rarely. RBS's failure was the first failure of a big bank in the UK for over 100 years." Read on here.

Regulation, regulation, regulation

My latest post at Pieria is the second article from the ICAEW's recent conference on the Future of Banking. It reviews the scope and extent of regulatory change since the 2008 financial crisis, and asks whether we are maybe overdoing it?

Bad behaviour by banks was the primary cause of the 2008 financial crisis. Victoria Saporta of the PRA describes the pre-crisis period as the “partying phase”. Banks increased their leverage, in some cases to more than 60%, which left them very vulnerable to even small shocks to asset value. And they reduced their liquid assets, which combined with their high leverage made them highly exposed to damaging runs. But banks were not the only partygoers: household debt/income ratio grew to over 160%, concealed by low mortgage spreads that did not reflect the true risk of the lending.In contrast, the aftermath of the crisis is a time of “healing” - repairing damaged banks and fixing the vulnerabilities that existed pre-crisis. Since the crisis, banks ha…