Posts

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…

Despair deaths and regional inequality

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I can't stop looking at this table. Mortality rates in England rose between 2011-16 for teenagers and most working-age adults under 50:


That's bad enough. But what should give all of us pause is the reason that Public Health England (PHE) gives for rising mortality among young and middle-aged adults:
Among people aged 20-44, an increase in mortality rates from accidental poisoning had a negative effect on life expectancy between 2011 and 2016 of -0.06 years in males and -0.11 years in females....  Data from ONS indicate that in this age group, over the whole period from 2011 to 2016, 70% of accidental poisonings were due to drug misuse and 10% were to alcohol. PHE also notes a slight increase in male mortality rates due to cirrhosis, which is in the top 10 causes of death for men. Among women, suicide is playing a slightly larger role:
An increase in the female suicide rate in the 20-44 age group also had a small negative effect on life expectancy between 2011 and 2016 (-0.02 …

Why targeting productivity is a bad idea

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Last week I attended a workshop entitled "Enhancing the Bank of England Toolkit," hosted by the Progressive Economy Forum. Presented at the workshop, and underpinning most of the debate, was this report from GFC Economics and Clearpoint Advisers, which was written for the Labour Party and first issued last June. The report was widely criticised at the time, as one of its authors ruefully observed in the introduction to the presentation. Nonetheless, the authors presented it unamended.

The report recommends setting a productivity target for the Bank of England in addition to its existing inflation target:
An additional target will be introduced: productivity growth of 3% per annum. The Bank of England will be required to explain how its policies are impacting upon productivity and, therefore, the potential growth path of the economy. This target is extremely challenging. A footnote in the report notes that labour productivity growth since 1950 has averaged 2.4%, and describe…

An Experiment with Basic Income

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In 1795, the parish of Speen, in Berkshire, England, embarked on a radical new system of poor relief. Due to the ruinous French wars and a series of poor harvests, grain prices were rising sharply. As bread was the staple food of the poor, rising grain prices increased poverty and caused unrest. Concerned by the possibility of riots, the parish decided to provide subsistence-level income support to the working poor. The amounts paid were anchored to the price of bread. Each member of a family qualified for a payment, so the larger the family, the more they received. In effect, it was a system of in-work benefits.

Subsistence-level income support already existed for the non-working poor. The Poor Laws, first introduced in Elizabethan times, distinguished between different categories of “poor” and treated them differently. At the time that the Speenhamland system was introduced, the old, inflrm and children were placed in poorhouses, where they were cared for and were not expected to …

The Eurozone's Long Depression

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Sectoral balances can tell us so much about what is going on in an economy. Especially when they are expressed as a time series, as in this remarkable chart from the ECB:


Although it is a time series, this is not a rate-of-change chart. The y axis is in billions of Euros, not in percentage growth rates. But the chart nevertheless shows that Eurozone net saving has risen steadily since the financial crisis, except during the Eurozone crisis of 2011-12 when it dipped slightly.

What do we mean by "net saving"? The legend appears to conflate saving with investment, and the brief explanation at the bottom of the chart doesn't really help. So here's some simple algebra to sort it out.

In national accounting, "saving" is the excess of income over desired consumption. For the private sector, it looks like this:

Sp = Y - T - C

where Y is the net income of the private sector from all sources, T is tax payments, and C is all other consumption.

Thus, "net savin…