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Showing posts from June, 2019

European banks and the global banking glut

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In a lecture presented at the 2011 IMF Annual Research Conference, Hyun Song Shin of Princeton University argued that the driver of the 2007-8 financial crisis was not a global saving glut so much as a global banking glut. He highlighted the role of the European banks in inflating the credit bubble that abruptly burst at the height of the crisis, causing a string of failures of banks and other financial institutions, and economic distress around the globe. European banks borrowed large amounts of US dollars through the money markets and invested them in US asset-backed securities via the US's shadow banking system. In effect, they acted as if they were US banks, but in Europe and therefore beyond the reach of US bank regulation. This diagram shows how it worked (the “border” is the residency border beyond which US bank regulation has no traction):

But it is not the model itself so much as Shin's remarks about the role of European regulation after the introduction of the Euro …

Dissecting the Eurozone's (lack of) inflation

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Eurozone inflation is in the doldrums again. After perking up to 1.7% in April, it slumped back to 1.2% in May. According to Bloomberg, this was "lower than expected". But I wonder who, apart from the ECB, really expected anything else. Core inflation has been well below target for the last five years:


(chart from Bloomberg)

And although the headine HICP measure increased in 2016-18, this was mostly due to the oil price bouncing back from its 2014-15 slump:


(chart from Macrotrends)

The wild swings in the energy inflation rate can be clearly seen on this chart from Eurostat:


It's perhaps not obvious at this resolution, but the movement in headline HICP is almost entirely due to the energy price.

In fact comparing the inflation and oil price charts, it is hard to see much justification for the ECB's claim that it started QE in March 2015 because inflation expectations were becoming "unanchored". Headline HICP briefly dipped below zero in January 2015 because o…

The Abominable Laffer Curve

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It's been pretty quiet in Lafferland since the Brexit referendum. All the talk has been of trade and sovereignty, not deregulation and tax cuts. But there's nothing quite like a Tory leadership election to bring supply-siders out of hibernation. So here is Sajid Javid singing an old sweet song to attract the votes of Tory party members:

Cutting tax rates could bring in billions of extra revenue, which would mean:
More nurses 👩‍⚕️👨‍⚕️
More teachers 👩‍🏫👨‍🏫
More police 👮‍♂️👮‍♀️

"I would cut [top rate] if it brings in more revenue and gives us better public services" - @sajidjavid#TeamSajpic.twitter.com/MxVUVcI5q2 — TeamSaj (@TeamSaj) June 2, 2019
Cutting taxes for the rich in order to generate more public revenue. The Laffer curve is back.

Not that it has been absent for long, really. Seven years ago, to much applause, George Osborne cut the top rate of tax from 50% to 45%. When the cut took effect there was a large increase in tax take. At the time, Conservati…