Category: Equitablog

Must-Read: The very sharp Michael Burda gets it, I think, completely wrong here.

German failure to make it better for Greece (and Italy, and Spain, and Portugal) to stay in the eurozone and undertake structural adjustment than it would have been for them to have exited the eurozone in 2010 and undertaken the standard IMF-recipe depreciation-plus-structural-reform-and-adjustment recipe is already doing incalculable long-run damage to German’s position within Europe, and indeed to the concept of a European Germany. And Germany desperately needs, for its own sake as well as everybody else’s, to be a European Germany:

Michael Burda: Dispelling Three Myths on Economics in Germany: “The Anglo-American world has been ganging up on Germany long before the financial crisis…

…but the since the onset of the Greek standoff it has gotten notably worse…. Myth #1: Economists in Germany fundamentally reject Keynesian ideas This is nonsense…. Myth #2: German economists feed at the trough of ‘Ordoliberalism’ and worship at the altar of supply side policies…. Germans… have less patience for short-term views of the world that tend to think in terms of chains of Keynesian short runs which at some level need to be consistent with what policy wants to do in the long run. This may be hard to deal with, but it is not voodoo economics…. Myth #3: Economists in Germany obsess on moral hazard and austerity…. It’s hardly surprising that Germany is more interested in sustainable solutions to southern European problems… [than] kicking the can down the road…. In principle, governments should practice austerity in good times, not bad. After seeing the consequences of its failure (with France) to impose the stability rules and sanctions on themselves in 2003… Germany is now wedded to austerity or risks losing all credibility on fiscal discipline in the monetary union….

It is not ordoliberal religion, but a mixture of national self-interest and healthy mistrust informed by experience that guides German economic policy today…. A monetary union imposes a one-size-fits-all monetary policy but is silent on the right substitutes for it…. German economists will tend to peddle economics that serve Germany’s own self-interests, just as we’d expect of the British if and when they decide to leave the EU, or of the US when interest rates are finally raised. If it is to succeed, the European monetary union needs to synchronize national and union interests, or faced being be dashed on the rocks of shocks to come.

Must-Read: Matthew Klein: Some Fed thoughts: QE4 and All That: “For months, the mid-September meeting of the Federal Open Market Committee was being telegraphed as the most likely start date of the ‘normalisation’ process…

…the day when short-term interest rates would begin ‘liftoff’ from the current range of zero to 25 basis points…. [But] when you have bond yields plunging, corporate spreads widening (even excluding energy and mining), stock prices falling, and commodities (except gold) collapsing, it’s possible there is useful information for central bankers to consider… [plus] the changes in asset prices amounted to a tightening….

Which brings us to Ray Dalio’s latest missive…. Dalio’s actual position doesn’t strike us as obviously unreasonable… that the dynamics affecting the transmission of monetary policy… are different… [and] the future path of short-term interest rates will be shallower than the dots…. This view isn’t necessarily that different from what’s implied by market prices…. It’s pretty easy to justify the current yield on the 10-year note (a little more than 2 per cent) by imagining a world where 1-year rates top out around 5 per cent by 2019, stay there until 2020, and then plunge back toward zero by 2022…. 1) recessions always happen sooner or later, 2) not having a downturn for a total of 16 years would be basically unprecedented in the American experience, and 3) cutting rates from a peak probably no higher than 4 per cent almost certainly means bumping up against the zero bound relatively quickly….

The pessimistic interpretation, which we believe is consistent with what Dalio wrote and what is implied by market prices, is that most of the rich world just doesn’t grow that much unless households and businesses are boosting their debt and eating into their savings…. Unless we get a 1940s-style reflation that wipes away private debt burdens and makes future releveraging possible… any significant cutback in monetary stimulus will quickly cause the economy to sink from steady but mediocre growth into stagnation and then outright recession…. We have no strong view on who’s right, although if forced to choose, we’d side with market prices over central bankers…. Better, though, to avoid the entire argument by having a responsible fiscal policy that lets the private sector deleverage, as in the 1940s…

Must- and Should-Reads:

• Huailu Li, Kevin Lang, and Kaiwen Leong: Competition alone will not eliminate discrimination
• Tim Duy: The Right And Wrong Arguments For September
• Federal Reserve: Federal Reserve Act: Section 4

Over at Project Syndicate: A Cautionary History of US Monetary Tightening: BERKELEY JACKSON HOLE – The US Federal Reserve has embarked on an effort to tighten monetary policy four times in the past four decades. On every one of these occasions, the effort triggered processes that reduced employment and output far more than the Fed’s staff had anticipated. As the Fed prepares to tighten monetary policy once again, an examination of this history – and of the current state of the economy – suggests that the United States is about to enter dangerous territory. READ MOAR

Over at WorldPost: China’s Market Crash Means Chinese Supergrowth Could Have Only 5 More Years to Run: Ever since I became an adult in 1980, I have been a stopped clock with respect to the Chinese economy. I have said — always — that at most, Chinese supergrowth likely has five more years to run.

Then there will come a crash…. After the crash, China will revert to the standard pattern of an emerging market economy without successful institutions that duplicate or somehow mimic those of the North Atlantic… convergence to the North Atlantic growth-path norm will be slow… and political risks… [cause] the most likely surprises. I have been wrong for 25 years straight — and the jury is still out on the period since 2005. Thus, I’m very hesitant to count out China and its supergrowth miracle. But now ‘a’ crash — even if, perhaps, not ‘the’ crash I was predicting — is at hand. [READ MOAR]

Must-Read: I cannot help but note strong divergence between the near-consensus views of Fed Chair Janet’s and Fed Vice-Chair Stan’s still-academic colleagues and students that tightening now is grossly premature, financial markets’ agreement with the hippies as evidenced by the ten-year breakeven, commercial-banker and wingnut demands for immediate tightening, the extraordinarily awful performance since 2007 of not all but the average regional Fed president as revealed in the transcripts, and the Federal Reserve’s strong predisposition to an interest-rate liftoff soon. That divergence plus the apparent focus of what is a global hegemon on its domestic situation make me think that this is not a well-functioning institution we have here:

Gavyn Davies: China’s Policy Failings Challenge the Fed: “There is something… important… doubts about the competence and credibility of Chinese economic policy…

…and the appropriateness of the US Federal Reserve’s monetary strategy…. While overall Chinese activity was not disastrous, the sectors of the economy that were most important for commodities–real estate, construction and manufacturing–were clearly weaker than the expanding services sectors. China pessimists… claimed that the “inevitable” Chinese hard landing was at hand…. Martin Wolf and David Pilling have rightly suggested in the FT that China’s economic problems are deep seated, stemming from an unbalanced economy that is far too dependent on investment, and on inherent contradictions between the need to introduce market forces in the long term, and the need to retain state control to deflate the leverage bubble in the short term. Perhaps the regime of President Xi Jinping and Premier Li Keqiang needed to be super-human to navigate all this. But the policy errors of mid 2015 suggested instead that they were split, indecisive and confused….

Shorn of any reassurance from a credible economic framework in China, western investors have turned their attention to their ultimate security blanket, the Federal Reserve. But the Fed seemed to have embarked on a pre-determined course to raise US interest rates before year end…. But as Lawrence Summers argued this week:

A reasonable assessment of current conditions suggests that raising rates in the near future would be a serious error that would threaten all three of… price stability, full employment and financial stability….

Financial markets… act… as if they are experiencing an adverse monetary policy shock from the Fed… rather similar to… 2013…. Markets have refused to believe that the Fed would raise interest rates as early, or as fast, as the Federal Open Market Committee has shown in its “dots”…. [recently] increased their belief that a rise in US rates would be inappropriate this year. Yet… the Fed has shown little sign of wobble…. Some investors are beginning to agree with Mr Summers that another dose of quantitative easing may be necessary…. The Fed’s… path for tighter policy is no longer consistent with stable financial markets. Something will have to give.

Must- and Should-Reads:

• Must-Read: Kris James Mitchener and Marc D. Weidenmier: Was the Classical Gold Standard Credible on the Periphery? Evidence from Currency Risk
• Cherrie Buckner: Young Black America Part Four: The Wrong Way to Close the Gender Wage Gap
• Tim Duy: Dudley Puts the Kibosh on September
• Andrew Haldane: Stuck
• Gillian Tett: The Silo Effect

Might Like to Be Aware of:

• Hiroko Tabucchi: Walmart to End Sales of Assault Rifles in U.S. Stores

Must-Read: Kris James Mitchener and Marc D. Weidenmier: Was the Classical Gold Standard Credible on the Periphery? Evidence from Currency Risk: “We use a standard metric from international finance…

…the currency risk premium, to assess the credibility of fixed exchange rates during the classical gold standard era. Theory suggests that a completely credible and permanent commitment to join the gold standard would have zero currency risk or no expectation of devaluation. We find that, even five years after a typical emerging-market country joined the gold standard, the currency risk premium averaged at least 220 basis points. Fixed-effects, panel-regression estimates that control for a variety of borrower-specific factors also show large and positive currency risk premia. In contrast to core gold standard countries, such as France and Germany, the persistence of large premia, long after gold standard adoption, suggest that financial markets did not view the pegs in emerging markets as credible and expected that they devaluation.

Live from Jackson Hole 2015 Weblogging: Must-Read: I think Miles Kimball is dead-on here: unless the advocates of interest-rate smoothing can come up with an argument for interest rate smoothing better than any they have so far, the right level of the Federal Reserve’s short-term federal funds control rate is (if it is away from its zero lower bound) the level at which the Fed is uncertain whether its move at the next meeting will be up, down, or zero:

Miles Kimball: Larry Summers: The Fed Looks Set to Make a Mistake: “Let me address one myth…

…that Mike Woodford has shown that interest-rate smoothing makes sense. I would be glad to be corrected, but I think this myth arises because Mike talked about the Fed carrying about affecting… expectations of future rates. Just as backward-looking state variables have forward-looking costate variables, bond market expectations are like a forward-looking state variable for the Fed; those bond market expectations have a corresponding backward-looking costate variable…. Such backward-looking costate variables giving guidance about doing the right thing in relation to bond-market expectations contribute additional drift terms to the optimal policy rate, but it still seems to me that over a six-week span of time between FOMC meetings, the variance of news is sufficient that the effect of news should typically be substantially larger than the sum of all drift terms on the policy rate. Hence the metaphor of a muddy random walk.  

Must- and Should-Reads:

• Mark Thoma: The Politics of Income Inequality
• Must-Read: Rich Gilbert: E-Books: A Tale of Digital Disruption
• Must-Read: Robert Lucas (2001): Bald Peak
• Oliver Bush, Katie Farrant and Michelle Wright: Reform of the International Monetary and Financial System
• Robin Wigglesworth: Larry Summers and Ray Dalio Flag Return of Quantitative Easing
• Justin Fox: It’s Often a Curse to Be Blessed With Commodities
• George Akerlof, Andrew Rose, and Janet Yellen (1998): Job Switching and Job Satisfaction in the U.S. Labor Market
• Must-Read: David Blanchflower, Mariana Mazzucato: Jeremy Corbyn’s Opposition to Austerity Is Actually Mainstream Economics
• Must-Read: Paul Krugman (2013): Secular Stagnation, Coalmines, Bubbles, and Larry Summers
• Must-Read: Stephen Roach: China’s Complexity Problem
• Must-Read: Paul Krugman: Fairy Tales

Might Like to Be Aware of:

• Keith Candido: Star Trek The Original Series Rewatch: “Space Seed”
• Daniel Larison: “Scowcroft is once again almost alone among prominent Republicans in taking a pro-deal position. His caution and warnings from 2002 were thoroughly vindicated, but instead of causing Republicans to pay more attention to his advice his opposition to the war effectively made him persona non grata in his own party…”
• Charles Seife and Paul Thacker: Why it’s OK for taxpayers to ‘snoop’ on scientists
• Following criticism, PLOS removes blog defending scrutiny of science