Showing posts from February, 2014

Deflation is not benign

In an economy where the money supply depends on the production of debt, deflation can never be a good thing. In fact as any cyclist can tell you, deflation means you aren't going anywhere. More on this  here .

An attempt to explain Europe

Europe is like a Russian doll. Really. But that doesn't mean Russia is part of Europe. And what about its former satellites? The Baltics are part of the European Union, so they are now firmly "in Europe" - but the future of Ukraine is not so clear. Here is my attempt to explain how Europe, the European Union and the Euro differ from each other but are all related to each other. And all are subject to change. Related reading (suggested by Twitter followers): The Tragedy of Central Europe - Kundera  Does Central Europe exist? - Timothy Garton Ash The puzzle of Central Europe - Timothy Garton Ash At stake in Ukaine's drama is the future of Putin, Russia and Europe - Timothy Garton Ash (Guardian) Centre of Europe is possibly Lithuania - Wikipedia Europe: A History - Norman Davies (book) Europe Europe - Enzensberger (book) Also Patrick Leigh Fermoy's books.

The long decline of the Great British Pound

This chart caught my eye: It's the GBP/USD exchange rate from 1915 to the present day. Accompanying this chart on Twitter was the comment " quite shocking though how much the pound has been devalued since 1945". This is a fine example of the way in which economic indicators can be misinterpreted when the historical narrative underlying them is ignored. What this chart shows is indeed shocking, but not because the value of the pound has fallen. It is shocking because it graphically depicts the decline of British global influence. And it charts the desperate attempts of British politicians to maintain global dominance by propping up the value of the currency.  The start point of this graph - 1915 - was during the First World War and immediately after the failure of the classical gold standard in 1914. Britain borrowed heavily and suffered high inflation during the First World War, and was forced to devalue the pound considerably towards the end of the war. You c

Explaining the US labour force participation problem

Please note that throughout this post I take "labour force" to mean people aged 15-64, which is consistent with OECD definitions. I exclude over-65s and children under 15.  Patrick Artus at Natixis notes that there is something “odd” about the US’s economic recovery. The labour force participation rate (or rather "activity" rate, as I am using OECD definitions) is falling for both men and women.  The male activity rate has been falling for a long time. But until about 2000, the female activity rate was rising sharply. It levelled off during the 2000s and is now falling. Falling activity rates are often blamed on the long-term unemployed giving up the quest for work. And indeed the US does have a long-term unemployment problem at the moment: But of course, measures of the long-term unemployed tell us nothing at all about discouraged demand: if they are reported as “unemployed”, then they are counted IN the active labour force.

The subprime education crisis

The NY Federal Reserve’s  Household Debt & Credit Report  shows that student debt is rising fast and is now at an all-time high: Household Debt and Credit Developments as of Q4 2013: Category Quarterly Change* Annual Change** Total as of Q4 2013 Mortgage Debt (+) $152 billion (+) $16 billion $8.05 trillion Student Loan Debt (+) $53 billion (+) $114 billion $1.08 trillion Auto Loan Debt (+) $18 billion (+) $80 billion $863 billion Credit Card Debt (+) $11 billion (+) $4 billion $683 billion HELOC (-) $6 billion (-) $34 billion $529 billion Total Debt (+) $241 billion (+) $180 billion $11.52 trillion That’s a good thing, isn’t it? It shows that lots of young people are signing up for college instead of sitting around at home doing nothing or doing dead-end jobs. But all is not well....... Read on here .


My post about Scotland and the banks attracted an outbreak of criticism from fervent Scottish Nationalists. I found this rather bizarre, as throughout the post I assumed there would be a "Yes" vote in the September referendum. How this translates to " Coppola despises #indyref " is a mystery. But it raised a question. What opinion, if any, do I - a British citizen living in the south of England - have a right to express? The events of the last week have made it very clear that Scottish independence would affect all of the UK. I have no vote in this referendum, but I definitely have an interest in its outcome. It is therefore wrong to suggest (as some do) that I have no right to comment AT ALL on Scottish independence and its effects. Scottish independence would affect me. Therefore I have a right to express an opinion on it. I am no constitutional lawyer, but it is clear to me, at any rate, that the UK must continue in some way after Scottish independence. I am

Scotland and the banks

The UK government this week ruled out any question of agreeing to a currency union with an independent Scotland. Joseph Cotterill of FT Alphaville explains why the UK unquestionably has the power to do this and there is little the Scottish government can do about it: " From the date of the Treasury’s promise on gilts, the Scottish government effectively conceded its maximal demand already. Furthermore it couldn’t use market volatility to revive the issue: any share of the debt it paid would be to the UK government. The market itself would trade on the UK’s gilt guarantee.... "   In other words, because the UK Treasury has guaranteed to honour all existing UK debt issuance, the SNP's threat to repudiate Scotland's share of UK debt if it doesn't get currency union has no market impact. It is therefore hollow. The lesson for the SNP is - never, ever underestimate the deviousness of Treasury mandarins.  Wily though he is, it seems Alex Salmond is no match for Sir

It's the Euro, stupid

A few days ago the German constitutional court  referred the question  of the legality of the ECB’s Outright Monetary Transactions (OMT) to the European Court of Justice (ECJ), claiming that the ECB was straying into fiscal policy that was beyond its mandate and that OMT breached EU treaty directives outlawing monetary financing of governments. The question of the legality of OMT has been a running sore ever since it was first mooted  in August 2012. The ECB has clearly stated that it regards OMT, or rather the threat of OMT, to be part of its monetary policy toolkit. It has nothing whatsoever to do with bailing out Eurozone sovereigns, although that may be an incidental effect. It’s all about the Euro..... Read on here .

Is America working?

My latest post at Pieria looks at labour market trends in the United States. Male employment is declining, and has been for half a century. But does that justify the claim that there is something fundamentally unhealthy in the American labour market? Is it really true to say "America isn't working"? Read the article  here .

Incentives matter

"Rule number one in economics: incentives matter". So says Tim Worstall, in this post criticising me for claiming that state investment is not necessarily any less efficient than private sector investment. And he goes on to say that politicians and bureaucrats have different motivations from "profit-mad capitalist bastards" like him. I don't disagree in the slightest. But that doesn't invalidate my argument.  Tim's argument essentially is that the profit motive always results in better investments than philanthropic or public service motives. The idea is that people who want to make as much money as possible for themselves will make more efficient use of resources than people who want to help others. But why should the motivation to serve others necessarily make one less concerned about efficient use of resources than the motivation to make money? In short, why should selfishness necessarily ensure better outcomes FOR OTHERS than altruism?  On

The day after tomorrow, redux

An updated version of my post from September 2012, "The Day after Tomorrow", is now up at Pieria. Read it here . The original is still up on Coppola Comment, too.

Capital controls or cooperation?

My latest at Pieria considers the use of capital controls to mitigate the damaging effect of sudden large capital flows such as those we are currently seeing out of emerging market countries due to the Fed's QE taper. "Since the 2007/8 financial crisis, there has been considerable discussion about the role of capital flows in the formation of asset bubbles and their subsequent collapse, and about strategies for managing the movements of "hot money" from country to country in search of yield and/or safety. It is fair to say that there is far from a consensus: government policies around the world currently range from the extremely controlling to the totally laissez-faire. "The outflows of capital from emerging markets arising from the Fed’s tapering of QE have raised again the question of whether capital controls would be appropriate as a short-term measure to calm markets and prevent currency collapse. So far, no count

Laffer and the Loch Ness Monster

Comments on my post " Laffer and the Yeti " forced me to look again at the way in which the Laffer curve is used to argue both for and against raising taxes for the rich. It seems it is widely - and perhaps deliberately - misused. The Laffer curve illustrates the relationship between elasticity of taxable income and tax revenues. The peak of the Laffer curve is the rate of tax at which tax revenue from all sectors is maximised, because the cost of avoiding tax outweighs the cost of paying it. But it is an AGGREGATE measure. It says absolutely nothing about the distribution of tax rates or tax income elasticities across the population. Yet it is widely used to talk about tax rates for the rich, as if the tax rate of the rich is the same as the tax rate for the entire population. It is not. The average tax rate is much lower. Therefore it is possible for the Laffer curve to be well below its peak even when there are high tax rates for the very rich. Laffer curves can, of co