Coppola Comment

As many of you know, I have spent much of the last seven years explaining to anyone who will listen that banks do not "lend out" deposits or reserves. Rather, they create both loan assets and matching deposit liabilities "from nothing" by means of double entry accounting entries. Creating money with a stroke of the pen (or a few taps on a computer keyboard) is what banks do. But this does not mean that the money that banks create comes from nowhere. It doesn't. It is only created when they lend (or when they purchase assets, which is equivalent to lending). As Pontus Rendahl explains in a comment on my previous blogpost , what banks do is liquidity transformation - exchanging long-term illiquid assets for short-term liquid ones: How do private banks create money? They create a deposit. A deposit is a Barclays-pound/Bank of America-dollar, or what not, that is traded and accepted as a means of payment at a one-to-one exchange rate with the underlying natio...

I'm sitting in a coffee shop opposite Haymarket Station in Edinburgh. Just up the road, the Institute for New Economic Thinking (INET) is holding its conference. I'm supposed to be there, as I was yesterday and the day before. But I am not at all sure I want to go. The last two days have left a very bitter taste. This conference, grandly entitled "Reawakening", is supposed to be a showcase for the "new economic thinking" of INET's name. I hoped to hear new voices and exciting ideas. At the very least, I expected serious discussion of, inter alia , radical reform of the financial system, digital ledger technology and cryptocurrencies, universal basic income (recently cautiously endorsed by the IMF), wealth taxation (also recently endorsed by the IMF), robots and the future of work. And I looked forward to the contributions not only from the speakers, but from the young, intelligent and highly educated attendees. Not a bit of it. In the last two ...

Peter Praet's speech at the Money, Macro and Finance conference last week was a goldmine. I've already discussed the central bank credibility problem revealed by his final slide. But his presentation went far, far wider than central banks. It raised serious questions about the future of the global economy. This slide - the first in his presentation - shows that there have been three significant global shocks in the last decade, not one: The first, obviously, is the deep global recession caused by the failure of Lehman Brothers in September 2008. But what are the other two? As Toby Nangle's annotations to Peter Praet's second chart show, the second is the Eurozone crisis, and the third is the emerging market crisis triggered by the unwinding of the oil & commodities boom: Looking at these charts made me think of ripples on a pond. When you drop a pebble into a pond, it initially creates a deep hole in the water, with raised sides and splashing. The ...

In a speech in London the other day, Peter Praet discussed the ECB's unconventional policy measures. I was there, and I have to say that he deviated considerably - and rather entertainingly - from the version of the speech on the ECB website. But his core message was still the same: "Rates are expected to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases. So, no interest rate hikes for a long time to come. But that's not what his final chart says: Market expectations are that interest rates will start to rise any day now. And no, this is not expectations of rate rises due to the end of QE, which the ECB has arguably signalled for early 2018 (or at least it didn't signal that it wouldn't end then). This is the short-term rate, which is not directly affected by QE. Admittedly, future expectations of short-term rates in 2018 and beyond are close to the ECB's own predictions. But is that b...

On the evening of Friday, September 22nd, the credit ratings agency Moody's downgraded the UK's credit rating. Admittedly, it was only by one notch. But coming as it did hard on the heels of Theresa May's grand speechin Florence , it was a shattering blow.  Credit ratings agencies lost much of their lustre in the financial crisis of 2008, when they were revealed to have been complicit in the mispricing of complex financial derivatives – the “toxic waste” that brought down some of the world’s largest financial institutions. So it is tempting to dismiss Moody’s action as pointless and its analysis as economically illiterate. I confess that I have done so myself, in the past. But this time, Moody’s is on the money. It tells a story of a tragically weakened government struggling with a legacy of policy errors from previous governments as well as the growing likelihood of a chaotic and potentially disastrous Brexit. Moody’s gives two main reasons for the downgrade: ...

"We need to discuss the complete disconnect between the marginal product of labour and labour wages," said Sir Chris Pissarides, speaking on the closing panel of the Lindau Economics Meeting. I tweeted this comment. Laurie MacFarlane of the New Economics Foundation promptly responded with this chart that brilliantly illustrates Sir Chris's point: "Quite why marginal productivity theory is still taught as something which explains the real world is beyond me," commented Laurie. Marginal productivity theory says that profit-maximising firms will only employ workers who can generate at least as much additional return for the firm as they are paid. Expressed like this, it seems sensible: why would a firm employ a worker who is a net cost? But marginal productivity theory also says that the amount firms pay their workers is equal to their marginal product - in other words, that wages rise in line with productivity. This is demonstrably untrue. Wages have no...