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Showing posts from September, 2015

Investment is needed everywhere

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And particularly in Europe, as this chart shows:


The ratings agency Standard & Poors has called for governments everywhere to increase investment spending. It also says they need to improve the efficiency of the spending they are already doing.  Private sector investment spending all over the world fell after the 2008 financial crisis. In Europe, where the crisis started earlier, it started falling in 2007. And it has not recovered. Private sector investors remain risk-averse and fearful of losses, chasing safe havens and unwilling to invest long-term in infrastructure, skills and R&D.

When the private sector will not invest, the job falls to government. And immediately after the financial crisis, governments did step up, increasing investment spending as private sector investment fell. Some governments have continued to invest ever since, notably China, which still spends about 8.5% of GDP every year (much of it outside its borders), and India, which is spending about 4.7%. …

The Great Yield Divergence

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When a former Bank of England deputy governor gives a presentation entitled "Are Low Interest Rates Natural?" to a extraordinarily high-powered audience of academics and monetary policymakers, you can bet he will come up with some great charts. Charlie Bean's historical analysis of long-term real and nominal yields in the UK is amazing:


It is very evident that for most of the last 200 years, nominal and real consol yields have been pretty much pinned together. Charlie said that the gold standard prevented rates deviating by keeping the price level under control. But I am unconvinced by this.

Firstly, let's look at the historical record. In 1717, Isaac Newton, then Master of the Mint, changed from defining the value of the pound in silver as had traditionally been the case to defining it in gold. At that time, most banknotes were issued by commercial banks: the Bank of England issued notes in return for deposits, but for high denominations only and the amounts were va…

Oh dear, Volkswagen.....

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That cliff edge feeling.....

Yes, that's Volkswagen's share price. I was amused by the UBS advert. And just to rub salt in the wound, here is Carole King:


Anyway, Volkswagen is in deep, deep brown stuff. Here are links to my posts so far on this. I will add more as I write them.

1. The Car Manufacturers' Libor Scandal. Rigging emission tests will prove extremely expensive for Volkswagen. But I doubt if VW is the only vehicle manufacturer guilty of nefarious practices. I reckon it's an industry-wide disease not unlike the benchmark rate rigging scandals in banking.

2. Volkswagen's CEO has resigned, but that doesn't solve its problems. Volkswagen is too big too manage. Actually most global corporations are. And their CEOs are far too keen on avoiding blame. Not many do the decent thing and resign promptly, as VW's Winterkorn did. But was he told to by the Executive Committee?


GDP transactions in secondary markets

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There is a widespread view that much bank lending is unproductive, i.e. does not raise GDP – or if it does, it does so in an unsustainable way by inflating asset prices or increasing inflation, rather than by increasing production.  Many proposals for bank reform therefore envisage restricting banks to “productive” lending, by which usually seems to be meant business finance and short-term consumer credit. Financial transactions on secondary markets, and the purchase of second-hand property, are regarded as unproductive.

This appears attractive. Banks do indeed lend far more for property purchase than they do for business finance, and most of the properties purchased are second-hand. So, the thinking goes, if we could eliminate unproductive housing finance, banks would lend more to businesses, and that would mean higher GDP in the longer term.

But I’m afraid there is a serious fallacy here. Lending for secondary market purchases does contribute to GDP, and not just in unhealthy asse…

The Car Manufacturers' Libor Scandal

We have become used to tales of banks breaking rules, evading regulation, rigging rates and being fined eye-watering amounts of money when caught. But now their ranks have been joined by an automobile manufacturer. The German giant Volkswagen has been caught rigging the results of emission tests on diesel automobiles.  The emission tests are designed to ensure that new automobiles meet stringent anti-pollution requirements. America’s love affair with automobiles means that air quality can be a problem, particularly in cities. The Environmental Protection Agency therefore places limits on the toxic emissions of automobiles to prevent air quality deteriorating to the point where it threatens human health and the environment.  But this depends on automobile manufacturers cooperating. And Volkswagen, the largest seller of diesel automobiles in the US, decided that emissions regulations could be optional for its products..... Read on here (Forbes).

Polemic Paine came to similar conclusion…

An unjustified rating

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Anti-austerity demonstrators in Helsinki, Finland
The ratings agency Fitch has affirmed the AAA rating on Finland's sovereign debt. But on reading Fitch's analysis, the justification for this is very hard to see.

Finland's economic situation is, to say the least, dire.  This is what Fitch has to say about it:
The Finnish economy is adjusting to sector-specific shocks in key industries (electronics, communications and forestry), is already experiencing the impact of an ageing population through a declining labour force, and is exposed to the weakness of Russia's economy (Russia is Finland's second-largest export market). The structural decline of key industries and a shrinking labour force have led to a sharp decline in productivity growth and in estimates of potential growth. So, a serious fall in productive capacity due to supply-side shocks, unfavourable demographics and a Russian problem. This has significantly weakened Finland's external position:
The loss …

The Fed's IOER policy is not "paying banks not to lend"

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Mainstream media get this wrong all the time. The latest to go down the "paying banks not to lend" rabbit hole is Binyamin Appelbaum in the New York Times. Because he didn't understand how IOER works, he didn't understand the Fed's strategy, and wrote a post that gets it quite seriously wrong. So I've written a Forbes post attempting to set things straight. Here's a taster:
The FOMC has decided not to raise interest rates – for now. But it’s still widely expected that rate rises will come soon, possibly by the end of the year. Some people think that QE should be unwound first, but the Fed’s plan is to raise rates first. The Fed will unwind QE gradually as the securities it has purchased mature.  This creates a problem. Because of QE, the banking system is awash with reserves. Banks have more cash on deposit at the Fed than they need to settle customer deposit withdrawals (payments), and they therefore don’t need to borrow funds from each other as they wo…

All QE is ""people's QE" - just not the right people

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There is a widespread belief that the Bank of England’s QE only benefited banks. Promoters of Jeremy Corbyn’s “People’s QE” use the strapline “QE for the people, not for banks”, and describe conventional QE as “bankers’ QE”. So is this true? Did QE primarily benefit banks? The Bank of England’s QE programme did not purchase gilts directly from banks, but from non-banks – pension funds, insurance companies, asset managers, high net worth individuals. However, because the Bank of England does not deal directly with non-banks, banks intermediated QE purchases. Banks bought gilts from investors, and sold those gilts to the Bank of England. Customer deposits increased as a consequence of the banks’ gilt purchases: bank reserves increased as a consequence of the banks’ gilt sales. The end result was a vast increase in both base money M0 (bank reserves) and broad money M1 (customer deposits). Because QE has vastly increased bank reserves, many people are angry that banks have cut back lending s…

The insane Eurocrats

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In July 2008, the European Commission decided that the UK had an "excessive deficit" under the terms  of Article 104 of the Maastricht Treaty. Estimating that Government budgetary plans for 2008-9 would result in a deficit of 3.5% of GDP, the Commission said
The excess over the 3 % of GDP reference value is not exceptional in the sense of Article 104(2) of the Treaty. In particular, it does not result from an unusual event outside the control of the United Kingdom authorities, nor is it the result of a severe economic downturn. The Commission services' spring 2008 forecast projects UK growth to slow in 2008 and 2009 to annual rates below potential. Nevertheless, GDP growth is expected to reach 1,7 % in 2008 and 1,6 % in 2009. The excess over the 3 % of GDP reference value is also considered not temporary, with the Commission services forecasting, on the basis of unchanged policies, a deficit ratio in 2009/10 still higher than 3 % (at 3,3 %). This indicates that the Treat…

Everything's under control, China edition

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Daiwa Securities has forecast Armageddon. They say that over-investment in China in recent years has created a debt bubble so great that Chinese authorities would not able to manage its collapse, resulting in a debt deflationary spiral which would make 2008 look like a walk in the park. Such a meltdown would, in their words, "send the global economy into a tailspin".

But they also outline another scenario, in which China's economy undergoes a nasty, possibly prolonged recession, from which it will emerge with lower growth.

Which of these scenarios will play out? Well, as I discuss in my latest Forbes post, it really depends what Chinese authorities do. They insist that "everything is under control". But are they actually in the wrong trousers?

Read my analysis and conclusions here.

Related reading:

Never mind Greece, look at China
Lessons for China from Japan
China's economy: no collapse, but it's serious and so are the politics - George Magnus
If we don…

Rethinking government debt

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There is a huge amount of hysteria about government debt and deficits, not just in the UK but throughout much of the world. As I write, Brazil has been downgraded by Standard & Poors because of concerns about rising government debt and weakening commitment to primary fiscal surpluses in a context of political uncertainty and deepening recession. It is the latest in a long line of downgrades and investor flight over the last few years. The global economy is a very stormy place.

The UK, which has halved its fiscal deficit in relation to gdp in the last five years, is embarking on another round of fiscal tightening, with the aim not only of completely eliminating the deficit but running an absolute surplus by 2020 in order to, in the words of the Chancellor, "bear down on debt". The Chancellor's plan enjoys considerable popular support due to a widespread belief that if we do not eliminate the deficit and start paying down debt, we will end up like Greece. "Dealin…

"Quantitative Tightening" is a myth

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(But that doesn't mean we don't have a problem).

Deutsche Bank has frightened everyone by warning that if China sold substantial quantities of US Treasuries (USTs) to support the yuan, this would amount to a substantial tightening of US monetary policy.

The reason why China accumulated USTs in the first place was because of its trade surplus:


The excess of exports over import sucked dollars into China, where the People’s Bank of China (PBoC) exchanged them for domestic currency (yuan). The PBoC therefore acquired large amounts of dollars, which it stored in the form of USTs. By doing so, it took USTs out of circulation and returned to the world economy the dollars that had been sucked into China. This can be regarded as a form of dollar quantitative easing (QE). Therefore, Deutsche Bank argues, if PBoC sells its USTs, this amounts to undoing QE.

But it’s not that simple.....

To read the rest of this Forbes post, click here.

The real purpose of central banks

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One of the things that has emerged from the PQE debate is a suggestion that it is time to consider ending the Bank of England's inflation-targeting mandate. Unfortunately this got mixed up with calls for ending the operational independence of the Bank of England (Richard Murphy), or abolishing central banks (Bill Mitchell, stated in response to a question at Reframing the Progressive Agenda).

What we might call the "twin peaks" approach to macroeconomic policy-setting has been adopted the world over. Separation of fiscal and monetary policy, and independence of the central bank, have become the hallmarks of good practice. Many countries have also adopted inflation targeting, though not all have: a good many developing countries still target exchange rates, and are currently learning (painfully) that exchange-rate targeting doesn't work when everyone's currencies are depreciating madly due to commodity price falls.

But the status of the central bank and the prim…