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The main reason why the ECB quantitative easing program has failed is that it started from a wrong diagnosis of the eurozone’s problem. That the European problem was a demand and liquidity issue, not due to years of excess.

The ECB had been receiving tremendous pressure from banks and governments to implement a similar program to the US’ quantitative easing, forgetting that the eurozone had been under a chain of government stimuli since 2009 and that the problem of the euro-zone was not liquidity, but an interventionist model.

The day that the ECB launched its quantitative easing program, excess liquidity stood at 125 billion euro. Since then it has ballooned to 1.8 trillion euro.

“Only” after 2.6 trillion euro purchase program and ultra-low rates.

Eurozone PMIs are atrocious. The euro-zone index falls from 52.7 in November to 51.3 in December, well below the consensus forecast of 52.8. More importantly, France’s PMI plummeted from 54.2 in November to a 34-month low of 49.3.

Unemployment in the euro-zone, at 8%, is double that of the US and comparable economies. Youth unemployment rate remains at 15%.

Economic surprise has plummeted as the ECB balance sheet reached 41% of GDP (vs 21% of the Fed).

More than 900 billion euro of non-performing loans remain in the banking system, which keeps a trillion euro timebomb in its balance sheets (read). A figure that represents 5.1% of total loans compared to 1.5% in the US or Japan.

Deficit spending is rising. Government debt to GDP has risen to 86.8%.

The number of zombie companies -those that cannot pay interest expenses with operating profits- has soared to more than 9% of all large quoted firms, according to the BIS.

…click on the above link to read the rest of the article…

Is an Increase in Demand Key for Economic Growth?

January 11, 2019

IS AN INCREASE IN DEMAND KEY FOR ECONOMIC GROWTH?

Whenever the so-called economy shows signs of weakness most experts are of the view that what is required to prevent the economy sliding into recession is to boost the overall demand for goods and services.

If the private sector fails to increase its demand then it is the role of the government to fill this void.

Following the ideas of Keynes and Friedman, most experts associate economic growth with increases in the demand for goods and services.

Both Keynes and Friedman felt that the great depression of the 1930’s was due to an insufficiency in aggregate demand and thus the way to fix the problem was to boost aggregate demand.

For Keynes, this could be achieved by having the federal government borrow more money and spend it when the private sector would not. Friedman on the other hand advocated that the Federal Reserve pump more money to revive demand.

There is however never such a thing as insufficient demand as such. We suggest that an individual’s demand is constrained by their ability to produce goods. The more goods that an individual can produce the more goods he can demand i.e. acquire.

Note that the production of one individual enables him to pay for the production of another individual. (The more goods an individual produces the more of other goods he can secure for himself. An individual’s demand therefore is constrained by his production of goods).

Observe that demand cannot stand by itself and be independent – it is limited by production. Hence, what drives the economy is not demand as such but the production of goods and services.

In this sense, producers and not consumers are the engine of economic growth. Obviously, if he wants to succeed then a producer must produce goods and services in line with what other producers require ie. consume.

…click on the above link to read the rest of the article…

Time is Money, Money is Time

January 9, 2019

TIME IS MONEY, MONEY IS TIME

Life’s but a walking shadow, a poor player who struts and frets his hour upon the stage and then is heard no more.
-Macbeth

Our limited time, our brief candle as Shakespeare’s Macbeth had it earlier in the soliloquy quoted from above, may count for very little in the grand scheme of things, but is of the utmost importance to each of us personally. Unlike the other dimensions, height, breadth and depth, the fourth is almost infinite, but individuals enjoy only a small part of it, our three-score years and ten. Time moves on. What really matters is not wasting it.

We may appear to others to be wasting time. But it is not wasting it when we take a break, recharge our batteries, or stop to think. Pleasure-seeking, pursuing happiness, removing uneasiness is making good use of time. We are all different and enjoy different things, so wasting time is not time wasted so long as it our personal choice. No one can allocate time as effectively as the individual. It is intensely personal.

While using time effectively is a private pleasure, wasting it can be very frustrating. Wasting time is the denial of personal ambition, whether it is as trivial as in a game of cards or as momentous as changing one’s circumstances. Avoiding time-wasting requires positive personal action, but we live in a world where that decision is progressively being subsumed by the state. But the state has little concept of the importance of time, replacing it with indecision and deferment. Time offers change and progress, except to the state. The evolution of events that go with time undermines the state’s certainties. The state believes it has all the time in the world to get things right by consulting, reporting, debating and eventually acting, while everyone affected has to wait.

…click on the above link to read the rest of the article…

Beyond GDP to a New Road to Serfdom

December 14, 2018

BEYOND GDP TO A NEW ROAD TO SERFDOM

It is a commonplace that there is more to life than money and the material benefits that it may provide someone. We often make trade-offs between income-earning work opportunities and more time with family or friends, or between risky but well-paying employment and a calmer and less stressful job that does not pay as well. We might decide whether it is worth forgoing some amount of personal material wealth for a more pleasant and healthy environment. The question is, Should government be trying to measure and manage these and other things like them, instead of each of us finding the right balance and values for ourselves?

Columbia University professor and Nobel Prize winner in economics Joseph E. Stiglitz thinks that it is more the government’s role to sort these things out, and, by implication, less each of ours as individuals. In a recent article titled “Beyond GDP,” Stiglitz points out that the usual measurements of economy-wide economic well-being fall short and leave out a lot of important things that make up a happy, fulfilling, and better life. Correct and recalibrate the measurements, and government can be trusted to take care of a lot of the rest.

The Meddler Wanting to Manage Society

It is an interesting sociological phenomenon how there seems to be an inexhaustible urge and drive among some people to constantly look for ways and means to remake society into their own preferred image. The idea that it is not the business or the right of such people to tell other people how to live, what values they should prefer, and in what manners they should interact with others never seems to enter their heads, particularly when they wish to use the coercive powers of government to make everyone conform to their vision of how to live. In the past, they sometimes have been called busybodies or meddlers.

…click on the above link to read the rest of the article…

The Neutral Interest Rate Myth

December 13, 2018

THE NEUTRAL INTEREST RATE MYTH

In his speech to the Economic Club of New York on November 28 2018, the Federal Reserve Board Chairman Jerome Powell said that the US central bank’s policy interest rate is just below the neutral rate. This prompted many commentators to suggest that a tighter interest rate stance of the Fed is likely coming to an end. At the end of October the fed funds rate target stood at 2.25%.

It is widely held that by means of suitable monetary policies the US central bank can navigate the economy towards a growth path of economic stability and prosperity. The key ingredient in achieving this is price stability. Most experts are of the view that what prevents the attainment of price stability are the fluctuations of the federal funds rate around the neutral rate of interest.

The neutral rate, it is held, is one that is consistent with stable prices and a balanced economy. What is required is Fed policy makers successfully targeting the federal funds rate towards the neutral interest rate.

The Swedish economist Knut Wicksell articulated this framework of thinking in late 19^th century, which has its origins in the 18^th century writings of British economist Henry Thornton.

The Neutral Interest Rate Framework

According to Wicksell, there is a certain rate of interest on loans, which is neutral in respect to commodity prices, and tend neither to raise nor to lower them.

According to this view, the main source of economic instability is the variance between the money market interest rate and the neutral rate.

If the money market rate falls below the neutral rate, investment will exceed saving implying that aggregate demand will be greater than aggregate supply.

…click on the above link to read the rest of the article…

The Imperial Presidency Embodies Political and Economic Hubris

December 3, 2018

THE IMPERIAL PRESIDENCY EMBODIES POLITICAL AND ECONOMIC HUBRIS

Historian Arthur M. Schlesinger coined the term “imperial presidency” in the 1960s. It was meant to indicate that the role of the president of the United States had dramatically grown in the 20th century from being an important but fairly limited position of implementing the laws of the land as specified in the Constitution and congressional legislation to being the national chief executive wielding wide discretionary powers over both domestic and foreign affairs.

Most presidents from Woodrow Wilson to Barack Obama have relished having and extending such powers. Wilson believed the traditional Constitution, with its division of powers not only between the three branches of the federal government but between Washington, D.C,. and the individual states, was out of date, an anachronism of an earlier time that needed to be superseded by a concentration of authority and control in the central government.

Franklin D. Roosevelt presided over a new and vast growth in federal power with the New Deal agenda during the Great Depression of the 1930s and then during the war years of the 1940s. An alphabet soup of government agencies, bureaus, and departments swarmed over the country, extending the tentacles of Washington’s control over nearly every facet of social and economic life, including in the early years of the New Deal a comprehensive fascist-like central planning over industry and agriculture. Government spending and taxing also had never been so large, coming along with a new era of budget deficits creating a massive (for that time) national debt.

Presidential Powers at Home and Abroad

In the post–World War II era, another dimension to presidential power was added in the form of foreign wars and major military actions without congressional approval through official declarations of war. President Harry Truman initiated America’s participation in the Korean War through declaring it a “police action” approved by the Security Council of the United Nations.

…click on the above link to read the rest of the article…

Coffee Sellers Are Not Fundamentally Different From Banks

November 22, 2018

COFFEE SELLERS ARE NOT FUNDAMENTALLY DIFFERENT FROM BANKS

With the 2007-8 financial crisis came a splendid alphabetical soup of central bank interventions to stimulate financial markets, lower interest rates, provide astonishing amounts of liquidity to banks and, allegedly, prevent another Great Depression. Likening the failure of big banks to falling elephants crushing even the smallest grass, former Fed Chairman Bernanke argued that consequences from bank failures would have caused much more havoc to the economy than the liquidity provision and bailouts his Fed oversaw.

Now, do banks really deserve special consideration in this sense? Let me illustrate by comparing the fates of two imaginary entrepreneurs:

Our first entrepreneur — let’s call him John — sees an opportunity in the beverage business. Specifically, he’s convinced that he can source high-quality Brazilian coffee beans, roast and serve impeccably aromatic coffee in downtown Manhattan. He draws up the business plan, estimates what he believes coffee-craving New Yorkers would be willing to pay for his coffee and assesses how many customers he could reasonably serve per day.

Setting his plan in action, he borrows some money from friends and family, rents an appropriate space, hires a construction team and interior designers to create the coffee-scented heaven he imagines, finds some competent baristas to staff it and finally opens his doors to hesitantly curious customers. From here, as in all entrepreneurial ventures, there are two paths John’s business may take:

If customers love his coffee and willingly part with their dollars , enough so that John can cover costs as well as offer some return to his shareholders/creditors, we consider John’s venture successful. The profits describe the added value for consumers, regardless of whether you see John as a Misesian uncertainty-carrying and future-appreciating speculator or a Kirznerian arbitrageur, alert to discrepancies between prices of higher and lower-order goods.

…click on the above link to read the rest of the article…

The Psychology of Systemic Consensus

November 20, 2018

THE PSYCHOLOGY OF SYSTEMIC CONSENSUS

We are all too familiar with established views rejecting change. It has nothing to do with the facts. Officialdom’s mind is often firmly closed to all reason on the big issues. To appreciate why we must understand the crowd psychology behind the systemic consensus. It is the distant engine that drives the generator that provides the electricity that drives us into repetitive disasters despite prior evidence they are avoidable, and even fuels the madness of political correctness.

Forget the argument, look at the psychology

A human prejudice which is little examined is why establishments frequently stick to conviction while denying reasonable debate. Anyone who addresses the unreason of the establishment risks their motives being personally vilified and attacked. There are many fields of government where this is demonstrably true.

Leadership is too often based on prevailing beliefs, with minds firmly closed to any evidence they might be wrong. Even Galileo was forced by the Inquisition in 1633 to recant his scientific evidence that the earth revolved around the sun – a thoroughly reasonable and logical though novel proposition to the independent mind. But it wasn’t until 1992 that the religious establishment at the Vatican forgave him for being right.

That was 359 years later and long after it mattered to Galileo. Fortunately, when the establishment view departs from the facts it rarely survives as long. Socialism, economics, climate change and Brexit show the same static opinions insulated from inconvenient contradictions. This is not to say the establishment need be judgemental. Democratic government at its best tries to remain neutral and reflect a balance of opinion. But there are times when it loses sight of firm ground and becomes subverted by the psychology of its own established but unfounded beliefs.

…click on the above link to read the rest of the article…

What is the Relation Between Supply and Demand for Money?

November 14, 2018

WHAT IS THE RELATION BETWEEN SUPPLY AND DEMAND FOR MONEY?

For most economists there is the need to keep the so-called economy along the path of a stable economic growth and a stable price inflation. One of the reasons for the possible deviation of the economy from the stable growth path is a change in the demand for money. If the authorities failing to make sure that an increase in the demand for money is accommodated by the corresponding increase in the supply of money this could result in the economy deviating from the path of stable economic growth and stable inflation. Hence, it is imperative for the central bank to make sure that the growth in the supply of money is in tandem with the growth rate of the demand for money in order to maintain economic stability.

Note that on this way of thinking, a growing economy requires a growing money stock, because economic growth gives rise to a greater demand for money. Failing to accommodate a strengthening in the demand for money could lead to a decline in the prices of goods and services, which in turn will destabilize the economy and lead to an economic recession.

Since growth in money supply is of such importance, it is not surprising that economists are continuously searching for the right, or the optimum, growth rate of the money supply.

Some economists who are the followers of Milton Friedman – also known as monetarists – want the central bank to target the money supply growth rate to a fixed percentage. They hold that if this percentage maintained over a prolonged period it will usher in an era of economic stability.

The idea that money must grow in order to sustain economic growth gives the impression that money somehow sustains economic activity.

…click on the above link to read the rest of the article…

How Are Chinese Stocks Responding to Tariffs With the US and a Slowdown in Asian Growth?

November 9, 2018

HOW ARE CHINESE STOCKS RESPONDING TO TARIFFS WITH THE US AND A SLOWDOWN IN ASIAN GROWTH?

Despite US tariffs, China’s September trade balance with the US reached a record high
A number of China’s Asian neighbours have seen a deceleration in growth
The Shanghai Composite has fallen more than 50% since 2015, the PE ratio is 7.2
Government bond yields have eased and the currency is lower against a rising US$

During 2018 Chinese financial markets have been on the move. 10yr bond yields rose from all-time lows throughout 2017 but have since declined: –

China bonds 2006-2018

Source: Trading Economics, PRC Ministry of Finance

Despite this easing of monetary conditions the negative impact US tariffs, continues to weigh on the Chinese stock market: –

China shanghai index 1990-2018

Source: Trading Economics, OTC, CFD

Despite being a leader in frontier technologies such as e-commerce (China has 733mln internet users compared with 391mln in India, 413mln in the EU and a mere 246mln in the US) the recent decline in tech giants Alibaba (BABA) and Tencent (TCEHY) have added to financial market woes. However, as the chart above shows, Chinese stocks have been in a bear-market since 2015. Some of its Asian neighbours have followed a similar trajectory as their economies have slowed in response to a US$ strength and US trade policy.

The notionally pegged Chinese currency has also weakened against the US$, testing it lowest levels in almost a decade: –

China currency 2008-2018

Source: Trading Economics

Meanwhile, President Xi has now announced plans to rebalance China’s economy towards consumption, turning it into an importing superpower. Surely something has to give.

The IMF expects Chinese GDP to grow at 6.6% in 2018. They continue to point to signs of economic progress: –

…click on the above link to read the rest of the article…

Liberal Capitalism as the Ideology of Freedom and Moderation

November 7, 2018

LIBERAL CAPITALISM AS THE IDEOLOGY OF FREEDOM AND MODERATION

Nowadays, many along the political spectrum seem to agree that America increasingly has become a polarized society. Ideological and public policy discourse has been gravitating more toward the extremes: progressives and the Democratic Party with a more explicitly socialist rhetoric and proposed government agenda, and conservatives and Republicans who increasingly appear to be moving in the direction of populist, and especially economic, nationalism under the presidency of Donald Trump.

If such ideological extremism is politically tearing the country apart in the eyes of many, then what could and should be a “non-ideology” of compromise and moderation? This is a question that Jerry Taylor, president of the William Niskanen Center, asks and answers in a recent article, “The Alternative to Ideology,” in which he directly challenges the premises and policy perspective of many libertarians.

Mr. Taylor insists that those who espouse a political philosophy of individualism, free markets, and strictly limited constitutional government are out of touch with reality and make themselves irrelevant in contemporary political discourse. Having long been a proponent of libertarianism himself, Mr. Taylor believes that he understands its asserted weaknesses from the inside.

Doubting Market Solutions to Global Problems

His first doubts, he explains, emerged with his conclusion that libertarians have little or nothing to contribute to the leading problem of our time: global warming. In Mr. Taylor’s view, this demonstrated to him that there needed to be answers outside the mantra of individual liberty and free markets. How else could this threat to humanity be tackled other than through extensive and combined governmental intervention, regulation, taxation, and possibly organized planning?

…click on the above link to read the rest of the article…

Risky Business

November 2, 2018

RISKY BUSINESS

“In 1961, at the height of the Cold War, a B-52 bomber carrying two Mark 39 thermonuclear bombs accidentally crashed in rural North Carolina. A low technology voltage switch was the only thing that prevented a 4-megaton nuclear bomb with 250 times the yield of the bomb dropped on Hiroshima from detonating on American soil. In addition to killing everyone within the vicinity of the blast, the winds would have carried radioactive fallout over Washington D.C., Baltimore, Philadelphia, and New York City. It is not inconceivable to imagine that, at the height of cold war, a weapon of that magnitude exploding randomly on the eastern seaboard would have triggered immediate accidental retaliation against the Soviets resulting in full scale Armageddon and the end of humankind as we know it. This is just one of many nuclear accidents during the cold war. Peace has a dark side.”

From Volatility and the Allegory of the Prisoner’s Dilemma by Chris Cole of Artemis Capital Management, October 2015.

Say what ? Here are more details:

The date was 24 January 1961. The plane was a United States B-52 Stratofortress carrying two nuclear bombs, which lost altitude over Goldsboro, in rural North Carolina. With the plane having sustained a fuel leak in its right wing, the crew were advised to maintain a holding pattern along the coast while they burnt off as much fuel as possible. On reaching their assigned position it transpired that the leak had worsened and they were now running out of fuel. The crew were advised to return immediately to Seymour Johnson Air Force Base.

They never made it. They lost control of the plane at 10,000 feet as they began their descent. Five of the crew ejected and landed safely. One crew member ejected but was killed on landing. Two crew members died in the crash.

…click on the above link to read the rest of the article…

Not Waving But Drowning–Stocks, Debt and Inflation?

October 30, 2018

NOT WAVING BUT DROWNING – STOCKS, DEBT AND INFLATION?

The US stock market is close to being in a corrective phase -10% off its highs
Global debt has passed $63trln – well above the levels on 2007
Interest rates are still historically low, especially given the point in the economic cycle
Predictions of a bear-market may be premature, but the headwinds are building

The recent decline in the US stock market, after the longest bull-market in history, has prompted many commentators to focus on the negative factors which could sow the seeds of the next recession. Among the main concerns is the inexorable rise in debt since the great financial recession (GFR) of 2008. According to May 2018 data from the IMF, global debt now stands at $63trln, with emerging economy debt expansion, over the last decade, more than offsetting the marking time among developed nations. The IMF – Global Debt Database: Methodology and Sources WP/18/111 – looks at the topic in more detail.

The title of this week’s Macro letter comes from the poet Stevie Smith: –

I was much further out than you thought

And not waving but drowning.

It seems an appropriate metaphor for valuation and leverage in asset markets. In 2013 Thomas Pickety published ‘Capital in the 21^st Century’ in which he observed that income inequality was rising due to the higher return on unearned income relative to labour. He and his co-authors gathering together one of the longest historical data-set on interest rates and wages – an incredible achievement. Their conclusion was that the average return on capital had been roughly 5% over the very long run.

This is not the place to argue about the pros and cons of Pickety’s conclusions, suffice to say that, during the last 50 years, inflation indices have tended to understate what most of us regard as our own personal inflation rate, whilst the yield offered by government bonds has been insufficient to match the increase in our cost of living.

…click on the above link to read the rest of the article…

Statistical Analyses and Facts of Reality

October 24, 2018

STATISTICAL ANALYSES AND FACTS OF REALITY

According to modern economics, various ideas that we have established about the world of economics emanates from historical data. By inspecting the data, an economist forms a view regarding its behavior. As long as the theory seems to explain the data, it continues to be regarded as valid. Once it fails to adequately explain the data it is replaced by a new theory. Note that on this way of thinking a theory is derived from the data.

According to most experts, the sharp increase in the living standards in the western world in the past few hundred years could be attributed to the accumulation of technical knowledge.

This conclusion was reached by observing that for the thousands of years most people lived in great poverty, but since the 18^th century there was a massive increase in prosperity, which economists attribute to the sharp increase in technical knowledge. (See McCloskey https://www.youtube.com/watch?v=1bmXI_pt9fQ)

Given this way of thinking it is not surprising that Paul Romer, this year’s Nobel Laureate in economics has concluded that the heart of economic growth is the result of an expansion in technical knowledge.

According to Mises,

Experience of economic history is always the experience of complex phenomena. It can never convey knowledge of the kind the experimenter abstracts from a laboratory experiment.^[1]

To make sense of the data an economist must have a theory, which stands on its own feet, and did not originate from the data. By means of a theory, an economist could scrutinise the data and could try to make sense of it.

The key ingredient of such a theory is that it must originate from something real that cannot be refuted. A theory that rests on the foundation that human beings are acting consciously and purposefully fulfils this.

…click on the above link to read the rest of the article…

The Credit Cycle is on the Turn

October 16, 2018

THE CREDIT CYCLE IS ON THE TURN

We are on the verge of moving into an era of high interest rates, so markets will behave differently from any time since the early-1980s. There are enough similarities with the post-Bretton Woods era of the 1970s to give us some guidance as to how markets are likely to evolve in the foreseeable future.

The chart above says much. Last week, the yield on the 10-year US Treasury bond broke new high ground for this credit cycle. The evolution of key moving averages in bullish sequence (for higher yields, but sharply lower bond prices) is a model example out of the chartist’s textbook. The underlying momentum looks so powerful that a quick rise to 3.5% and beyond appears to be a racing certainty. The credit cycle, transiting from a period of cheap finance into higher borrowing costs is clearly on the turn.

In the fiat-money world, everything takes its valuation cue from US Treasury bonds. For equities it is theoretically the long bond, which is also racing towards higher yields. Having ignored rising yields for the long bond so far, the S&P500 only recently hit new highs. It has been a fantasy-land for equities from which a rude awakening appears increasingly certain. It is likely that the current downturn in equity prices is the start of a new downtrend in all financial assets that have been badly caught on the hop by the ending of cheap credit.

At some stage, and this is why the bond-yield break-out is important, we will face a disruption in valuations that undermines the relationship between assets and debt. This has been a periodic event, with central banks taking whatever action was needed to rescue the commercial banks. When the crisis happens, they reduce interest rates to support asset valuations, propping up government bond markets and ultimately equities.

…click on the above link to read the rest of the article…

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