12 Oct 2016

Business Debt in China

This speaks for itself really. Corporate debt in China is now 165% of GDP. Every time I see a figure like this my question is, "What interest rate are the paying on that?" Say it's 10% APR. That would mean that 16.5% of the GDP of China is being spent on interest payments. The next question is "Who are they borrowing from?". That is, where is 16.5% of China's GDP going? We know it must be going to banks, but Chinese banks, American, European...?


7 Oct 2016

Rent Seeking

@AnnPettifor tweeted a picture the other day. It was a cutting from the 2012 Financial Times. It turns out the article is available online.

The monumental folly of rent-seeking.
The success of market economies is not achieved by policies that encourage greed. John Kay.
"The activities of Shah Jahan epitomise rent-seeking – the accumulation of a fortune not by creating wealth through serving customers better but by the appropriation of such wealth after it has already been created by other people. Both are routes to personal enrichment and the tension between them has been a dominant theme of economic history. Whenever the balance shifts too far in favour of appropriation over creation, we see entrepreneurial talent diverted to unproductive activity, an accelerating cycle in which political power and economic power reinforce each other – until others become envious of the proceeds of appropriation, and the resentment of the oppressed undermines the legitimacy of the regime. Political and economic instability are an inevitable consequence."

Extracting and paraphrasing the definition
Rent seeking is the accumulation of wealth by appropriating wealth that has been created by other people rather than by producing something. Both rent seeking and production are routes to creating wealth. 
When the balance of wealth accumulation shifts towards appropriation over creation, i.e. when rent seeking over takes production, entrepreneurial talent is diverted into unproductive activities (such as the finance industry) and away from more beneficial activities.
I'm not sure how the last part follows from the first. I think the author skipped a few steps. But we can see that if people's effort is going into accumulating wealth created by other people without contributing anything that that is a problem. And we can see that for the last 40 years or so successive governments around the world have been facilitating rent seeking at the expense of producing things. Britain, which used to be a major producer of steel and manufacturer of steel products, is now more focussed on providing services, especially financial services. The banking and finance sector has expanded rapidly as manufacturing has shrunk.

In Britain, people with spare cash do not invest it in business, they buy a house and rent it out. This is the most basic form of rent seeking. It creates a divisive situation in which most housing is primarily a source of income for the wealthy rather than a home for anyone. It leads to the situation where too many people benefit too much from high house prices and therefore high rents and this distorts the market. In Britain too over at least two decades few houses have been built to meet the demand for housing, especially in the low-cost portion of the market.

This is exacerbated by drug lords, kleptocrats, and other world-scale criminals are using the London property market to launder their money. This tends to force prices up in central London and that has a ripple effect. The housing market has inflated at between 500%-1000% of the consumer price index.

Most people can now never dream of owning their own home. A lot of us can never dream of even renting our own home and must find lodgings or live communally. Rent money, wealth created through labour, goes to landlords who produce nothing but simply accumulate wealth created by others. It might be forgiveable if there were investing in housing so that there were enough houses for everyone, but they are not. And it would be very interesting to see how much tax large scale landlords are paying.

Another form of rent seeking is lending money and charging interest on it. But that is another story.

2 Oct 2016

The Warning

I don't usually cross post blog posts, but in this case I'm making an exception

I've just watched an excellent documentary which provides another important angle on the 2008 financial crisis. It actually first aired on PBS in the USA in Oct 2009. The Warning.

Hat tip to Ann Pettifor of Prime Economics for tweeting about this.

Asked about the financial crisis of 2007/8 and the subsequent recession/depression, the mainstream - including those still in charge of the economy - often reply that we could not have seen this coming. But this was only ever true because the mainstream were just not looking. Instead, they had their heads buried in troughs of money.

Brooksley Born
In American a woman called Brooksley Born did see it coming and was in a position to do something about it. She tried, but was shut down by Bill Clinton's financial advisors: Robert Rubin, Larry Summers, Tim Geithner and the Fed Chief,  Alan Greenspan.

Born warned that the market in derivatives--bets and insurance on the future price of assets and bets on those bets--was huge, completely unregulated, open to fraud, and likely to cause huge damage to the USA and world economies if they failed. Evidence that they certainly would fail was already evident in 1994 because of law suits brought by Proctor & Gamble and others against the hedge fund that lost their money in risky investments in derivatives. Banks were massively invested in the derivatives market. In 2008 this market was worth USD500 trillion. For perspective the UK's annual GDP is about USD2 trillion.

Greenspan was an disciple and acolyte of Ayn Rand. He did not believe in the necessity of pursuing fraud prosecution because "the market would sort it out". The others were like-minded. They shut Born down and made it impossible for her to continue in her role. The argued vociferously and repeatedly against any regulation of financial markets.

Greenspan retired in 2006. Then in 2007, Lehman Brothers went bankrupt. In 2008 the Great Financial Crash happened. Later, Greenspan recanted his free market ideology during a senate hearing. But does not seem to have been help culpable for this costly errors.

Rubin took over City Bank in time for it to be bailed out by the US tax payers because of it's reckless gambling in derivatives.

Obama's financial advisors are... Larry Summers and Tim Geitner. So we know that Summers and Geitner basically facilitated the financial crisis and they are the economic advisors to the President.

One of the problems for Hillary Clinton is that she is associated with this crowd of losers who wrecked the economy and walked away from it unscathed, like drunks who walk away unharmed from the multiple car pile they caused.

Brooksley Born is a name that ought to go down in history.


Further Reading

The Great American Bubble Machine (2010). Rolling Stone Magazine. "From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression -- and they're about to do it again."

 The Woman Greenspan, Rubin & Summers Silenced (2009) The Nation.

27 Sep 2016

Emerging Market Debt

via @IIF [Institute of International Finance] on Twitter today
"[Emerging Market] non-financial corporate indebtedness rose more than $1.6 trillion in H1 2016, surpassing $26 trillion"

The report this comes from is available to members only.

Note that corporate Saudi Arabia is currently accruing large amounts of debt. Not sure what is going on there!

A brief recap on what happens when the private sector gets over indebted. Business changes its behaviour from maximising profit to minimising debt. Rather than investing in growth, business seeks to minimise their interest payments. It's really the only rational thing to do. But it results in an economic slow down. Richard Koo calls this a balance sheet recession. He explains it well in this short video.


25 Sep 2016

Private Debt

A chap called Richard Vague seems to know what he is talking about when it comes to private debt. His essay in Democracy, A Journal of Ideas is called The Private Debt Crisis and comes with the strapline: "China is drowning in it. The whole world has too much of it. History suggests: This won’t end well." The essay is reprinted in Evonomics where it is called How to Suffocate Your Economy: Drown it in Massive Private Debt.

The essay looks mainly at USA private debt, but the remarks are salient to any economy. When your consumers have large aggregate debts the interest payments become a significant proportion of income and they become reluctant to spend. We get slowdown in demand, which ripples through the economy and undermines growth.
"a growing body of research suggests that when private debt enters the range of 100 to 150 percent of GDP, it impedes economic growth."
Vague points out that high levels of private debt also makes consumers and businesses unwilling to borrow more. Borrowing for investment is a fundamental principle of the capitalist economy. I would point out that, until the modern era, this is how banks made their money. Now of course, banks make 90% of their money by speculating on asset and commodity prices and derivatives.

The essay also looks at the situation in China where private debt has been growing rapidly and seems likely to be the next flash point in the global economy. That much private debt accumulated that quickly, cannot help but cause problems.

The essay finishes with some ideas on how to alleviate the problems caused by private debt. This blog is inspired by Steve Keen's idea of the modern debt jubilee (government gives money to consumers instead of banks, with the proviso that they must pay down debt before spending).

What the essay does not do is address the fundamental problem that leads to very high levels of private debt and repeated economic crisis. The actions of governments in the 1970s and 1980s who stripped away of regulation designed to prevent exactly this ought to come under scrutiny. We know how to prevent this happening.

2 Sep 2016

General Equilibrium Theory - Still Dead.

Ackerman, Frank. (2002). Still dead after all these years: interpreting the failure of general equilibrium theory. Journal of Economic Methodology 9:2, 119-139.
http://www.ase.tufts.edu/gdae/Pubs/rp/StillDead02.pdf


Abstract

More than 25 years after the discovery that the equilibrium point of a general equilibrium model is not necessarily either unique or stable, there is still a need for an intuitively comprehensible explanation of the reasons for this discovery. Recent accounts identify two causes of the ending of instability: the inherent difficulties of aggregation, and the individualistic model of consumer behaviour. The mathematical dead end reached by general equilibrium analysis is not due to obscure or esoteric aspects of the model, but rather arises from intentional design features, present in neoclassical theory since its beginnings. Modification of economic theory to overcome these underlying problems will require a new model of consumer choice, non-linear analyses of social interactions, and recognition of the central role of institutional and social constraints.

Via General equilibrium theory — still dead after all these years, blog post by Lars P Syll.

18 May 2016

New Zealand history relevant to Brexit Debate.

The following observations from the Encyclopedia of New Zealand are relevant to the debate over whether the UK should leave or remain in the UK.
"In 1961 Britain announced that it was seeking to join the European Economic Community (EEC)... If Britain joined the EEC it would have to sign up to the [common agricultural policy], and that would mean an end to New Zealand being able to export agricultural products to Britain."
With UKs help and based on NZ support for Allies during WWII, NZ managed to negotiate access to the British markets with quotas that reduced over time. But...
"In the late 1930s Britain took more than 80% of New Zealand exports. By 1960 it took 53%, which reduced to 36% in 1970, and 5% in 2007."
Britain is not even a major trading partner of NZ any more. What the British don't seem to realise is how protectionist the EU is. It routinely erects trade barriers for those outside the EU to protect the industries within. Farming, for example, is heavily subsidised throughout the EU, while tariffs and quotas prevent other countries from outselling heavily subsidised produce. Something that cost New Zealand most of it's existing export market in the 1960s and 1970s.

The idea that if Britain leaves the EU it will automatically retain the right to free trade with Europe is idiotic. At the very least there will be protracted negotiations during which Britain will not have access to the EU markets. Of course UK is a major trading partner of the EU so trade agreements will definitely be put in place. But the EU is in a position to demand major concessions of the smaller entity.

For this we can use the model of Norway, which remains outside the EU mainly because of the issue of fishing quotas, but has to pass all the laws made by the EU and pay into the various funds. It is in almost every respect a fully paid-up member of the EU, except that it has no voice in policy making. This would not be a favourable situation for Britain.

Leaving the EU at this point would be disastrous for Britain. There is no doubt the need to reform the EU and in particular the Euro, but being outside will leave us powerless to demand or effect change.


26 Apr 2016

New Article on German Cities That Began to Provide Public Goods in 1500s.

This is very interesting:

Origins of growth: How state institutions forged during the Protestant Reformation drove development.

Jeremiah Dittmar, Ralf R Meisenzahl. Vox 26 April 2016.
Throughout history, most states have functioned as kleptocracies and not as providers of public goods. This column analyses the diffusion of legal institutions that established Europe’s first large-scale experiments in mass public education. These institutions originated in Germany during the Protestant Reformation due to popular political mobilisation, but only in around half of Protestant cities. Cities that formalised these institutions grew faster over the next 200 years, both by attracting and by producing more highly skilled residents.

21 Apr 2016

House Prices vs Average Earnings




"The relationship between earnings and house prices began to break down in the 1980s, after sweeping financial deregulation began in the 1970s."