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Showing posts from March, 2014

The Chancellor's "full employment" ambition is not quite what it seems

"The UK’s Chancellor of the Exchequer, George Osborne, has announced that his priority is jobs. In his words (from his Twitter account): This week sees biggest personal & business tax cuts for 2 decades. Part of our plan to build an economy that supports full employment
— George Osborne (@George_Osborne) March 31, 2014 Today have set an ambition for the UK to have the highest employment rate in G7- best place to create a job and to get a job
— George Osborne (@George_Osborne) March 31, 2014
"This is more than slightly confused."

Read on here. (Pieria)


The UK's Real Problem

The UK's current account deficit is a matter for some concern, as is its fiscal deficit, because both make it vulnerable to sudden reversal of capital flows. But these aren't its real problem....

More here (Forbes).

Spain, the ECB and the power of talk

Over at Forbes, more on why the ECB won't do QE despite Spanish inflation having turned negative:
Spain is in a mess. Over a quarter of its adult workforce is unemployed, and according to CIB Natixis it has lost 25% of its production, even more than Greece. Spain’s inflation rate has been falling steadily and has now turned negative: the most recent retail sales figures show a fall of 0.2%. Various people anticipate ECB easing monetary policy because of the growing threat of deflation in Spain.But this is to misunderstand the role of monetary policy in a currency union. The ECB sets monetary policy for the union as a single unit, not for its individual components. Deflation in Spain is a driver of ECB decisions only to the extent that it depresses Euro zone CPI. And I’m sorry if this sounds brutal, but Spanish unemployment is of no consequence, since the ECB does not have a mandate to target unemployment even at the Euro zone level, let alone in an individual country. The ECB can n…

Rediscovering IS-LM

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At Pieria, I attempt to show how Paul Krugman's favourite economic model can give important insights in an endogenous money framework:
"This post was sparked by recent conversations with people who have opposing views of how money creation works. Some people think that classical models such as IS-LM don't work with endogenous money theory, therefore the models need to be discarded: others think that there's nothing wrong with the model and the problem is endogenous money theory. Personally I think that simple models like IS-LM can be powerful tools to explain aspects of the working of a market economy, and it behooves us therefore to find ways of adapting them to work with an endogenous fiat money system.So this is my attempt..... " Read on here.



Why the ECB won't do QE

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Or anything else, for that matter. (But they might talk about it.)



With forecasts like these, who needs action?

H/t Frederick Ducrozet (@fwred on Twitter)

Interest rates and deflation

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Scott Sumner argues thatwhen the monetary base is fixed, low interest rates are deflationary. I've emphasised the fixed monetary base because it is an important condition. If the monetary base is NOT fixed then the relationship between low interest rates and deflation is much less clear.

Logically, this makes sense. If the supply of base money is fixed, then falling interest rates indicate* rising demand for base money, increasing its value and therefore causing prices to fall. Aficionados of a classical gold standard will recognise this as "benign" deflation. Falling interest rates when the monetary base is fixed can be an indicator of healthy growth.

Unfortunately the period that Sumner chooses as his example of falling interest rates and a fixed monetary base was anything but healthy. It was August 2007 to May 2008, which was the height of the subprime crisis and encompassed the failure of Bear Sterns.

Strictly speaking, the monetary base was not "fixed" at …

Three dangerous economic ideas

My latest post at Forbes considers what happens when policy makers persist with policies whose underlying economic theory has been shown to be wrong*:
This post by Alex Marsh got me thinking. If economic ideas influence policy makers, what happens when the economic ideas turn out to be wrong?This is not an idle question. Recently there have been three examples of economic ideas that have had huge impact on policy – and that have subsequently been shown to be false.Read on here.

* Of course some people will argue that the three economic ideas I have identified are not wrong - it is the research debunking them that is wrong.

Mr Micawber's lessons for George

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My latest post at Pieria looks at the Chancellor's budget and finds it long on tax-cutting promises, short on realistic revenue estimates. What does this mean for his hopes of achieving deficit-reduction happiness? And will something turn up?


Children are not a lifestyle choice

Chris Dillow complains that the Government's proposal to subsidise childcare for households with incomes up to £300,000 is "inegalitarian and economically illiterate". Much of his argument makes sense. His observation that subsidising childcare will benefit employers as much as parents is particularly important: childcare subsidies are in effect wage subsidies, and wage subsidies are known to depress wages. And his waspish remark that the Government would rather give "yummy mummies an extra bottle of Chardonnay" than fund early years education properly rings all too true. This looks very like the latest iteration of "Help to Buy Votes" - yet more pre-election bribery of middle-class couples. 

But I have to take issue with him on this (my emphasis):
Let's start from the fact that this subsidy must be paid for by other tax-payers. It's therefore not just a subsidy to parents, but a tax on singletons.
This is inegalitarian not just because it means …

Corporate versus Co-operative: a boardroom battle

Nowadays, whenever there is a report of trouble at t'Co-Op, everyone assumes the problem is the bank (again). So it is perhaps not surprising that people are once again asking whether their money is safe, and people like the BBC's Paul Lewis (and me) are reminding them about the FSCS compensation scheme. Let me deal with this now. The FSCS compensation scheme insures 100% of all bank deposits up to a limit of £85,000 per person (not per account). That is more than enough to cover the vast majority of Co-Op Bank retail depositors. If anyone has more than that in Britannia, Smile and Co-Op Bank accounts combined, they know what to do.

But the current mess isn't about the Co-Op Bank. That is in no worse shape than it was last week, or last month, or even last year. This is about the governance of the Co-Op Group - the sprawling conglomerate that encompasses supermarkets, farms, pharmacies, funeral parlours and health care as well as financial services. Managing such a diverse…

The Eurozone credit crunch

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As I noted in my previous post, business lending in the Eurozone is very poor - flat in the major core countries and falling in the periphery. The ECB's report on MFI lending to businesses and households for January 2014 confirms the fall in business lending volumes both on a monthly and a yearly basis:
















(For some reason the ECB doesn't include loans of 0.25 - 1 million euros in this table, but volumes of these loans are also falling. The full list can be found at the end of the ECB's document.)

The ECB also reports that interest rates are rising for smaller loans and falling for larger ones.

But as usual (I'm getting slightly tired of saying this), Eurozone aggregates don't tell the whole story. This chart shows the path of SME interest rates since the start of the Euro:



(H/t @fwred)

According to this, EMU average interest rates are now falling on SME loans (see circled area). But the ECB says that average interest rates on new lending to non-financial corporations …

Deflation and the ECB

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The ECB continues to argue that there is no deflation risk in the Eurozone though many peopledispute this. Headline CPI has been steady at 0.8% for the last three months, and core inflation (which excludes volatile things such as energy prices, which have been falling) is inching upwards. And January's M3 lending figures for the Eurozone as a whole, though horrible, do show a slight improvement over December.

But as is often the case, looking at Eurozone aggregates doesn't tell the full story. These charts from Natixis show the collapse of bank lending not only in periphery countries, but in Germany:



(h/t @okonomia)

In an economy where the money supply depends principally upon bank lending, a credit crunch will become deflation unless the money supply is expanded by other means. For the last year, the ECB has allowed monetary conditions to tighten as banks repaid LTROs. It has justified its inaction on the grounds that the credit crunch (and associated deflation risk) only appl…

The ECB is irrelevant and the Euro is a failure

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My post at Pieria looking at the ECB's alternatives for monetary easing. 

The latest money supply figures from the Euro area are awful:



But there's very little the ECB can - or will - do about it. The problem is the combination of a common currency with national politics.....

Read the full article here.