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." 

15 Apr 2016

Fuck Neoliberalism

The academic world experienced a minor stir last week with the publication of the text of a paper given at an AAG meeting in San Francisco, by Dr Simon Springer of the University of Victoria, Canada. Published on the academic website academia.edu, the paper entitled, Fuck Neoliberalism, has been viewed more than 14,000 times which has put Dr Springer in the top 0.1% of scholars using the website.

The author is a serious academic with a long history of publishing on the subject of Neoliberalism, viewing it as an inherently violent ideology. The paper is unrepentantly vernacular in tone while still being rooted in the discipline. This quote gives a flavour of the former:
"Fuck the hold that it has on our political imaginations. Fuck the violence it engenders. Fuck the inequality it extols as a virtue. Fuck the way it has ravaged the environment. Fuck the endless cycle of accumulation and the cult of growth. Fuck the Mont Pelerin society and all the think tanks that continue to prop it up and promote it. Fuck Friedrich Hayek and Milton Friedman for saddling us with their ideas. Fuck the Thatchers, the Reagans, and all the cowardly, self-interested politicians who seek only to scratch the back of avarice. Fuck the fear-mongering exclusion that sees "others" as worthy of cleaning our toilets and mopping our floors, but not as members of our communities. Fuck the ever-intensifying move towards metrics and the failure to appreciate that not everything that counts can be counted. Fuck the desire for profit over the needs of community. Fuck absolutely everything neoliberalism stands for, and fuck the Trojan horse that it rode in on!"


Dr Springer sums up, in both his words and his attitude, so much of what I think and feel about the current situation in the world. I'm grateful for his articulation of the problem in this manner. It is calculated to offend a system which routinely offends those it feeds off. Neoliberalism itself is offensive, it is violent, and ultimately Dr Springer believes that it necessary to act against it, to resist Neoliberalism:
We must start to become enactive in our politics and begin embracing a more relational sense of solidarity that recognizes that the subjugation and suffering of one is in fact indicative of the oppression of all (Shannon and Rouge 2009; Springer 2014). 

He also suggested using the hashtag #fuckneoliberalism though this has not really taken off. I'm using it however.

There is a video of the talk on YouTube. The sound quality is not very good, but it is interesting to hear the author of the paper speaking the words in this context.


14 Apr 2016

How Broken is the World's Tax System?

A recent Oxfam report, Broken at the Top: How America’s dysfunctional tax system costs billions in
corporate tax dodginguses the top 50 US companies to expose just how broken the tax systems of the world are.
"US corporate giants such as Apple, Walmart, and General Electric have stashed $1.4 trillion in tax havens... The sum, larger than the economic output of Russia, South Korea and Spain, is held in an “opaque and secretive network” of 1,608 subsidiaries based offshore." - Guardian
The $1.4 trillion held offshore contrasts with the $1 trillion paid in tax by the top 50 US firms between 2008 and 2014. However, the same companies had also enjoyed a combined $11.2 trillion in federal loans, bailouts, and loan guarantees during the same period. This meant the firms had reduced their effective tax rate from the US headline rate of 35% to an average of 26.5%.

And some of the saving was spent on lobbying the US government for great tax-payer funded handouts. The top 50 US firms spent $2.6 billion between 2008 and 2014 on lobbying the US government, and they get massive bang for their buck!
“For every $1 spent on lobbying, these 50 companies collectively received $130 in tax breaks and more than $4,000 in federal loans, loan guarantees and bailouts.”
So not only do they not pay tax on their profits, and keep vast reserves in tax havens, they get enormous handouts from the government, and have massive influence over govt policy in their own favour. A company with vast reserves of cash should not get government subsidies.

You think America is a democracy? It clearly is not a democracy, it's an oligarchy with an entertainment wing. While everyone is distracted by Trump & Co. the corporations are stealing all the money.

#fuckneoliberalism

2 Apr 2016

Cameron Defends


David Cameron defended Britain’s decision to reject higher EU tariffs on Chinese steel on Friday as the business secretary faced the anger of Port Talbot workers whose livelihoods have been undermined by cut-price imports. - Guardian
So Cameron thinks that destroying the UK steel industry was the right thing to do. And nationalisation is the wrong thing to do.

And so we're looking at 40,000 people on the dole?

Meanwhile China slaps a 46% tariff on  ‘grain-oriented electrical steel’ produced in UK. They claim we are dumping it, while they are selling their steel in Europe at well below the cost of making it.

I think we have to say that Sajid Javid wins the prize for the best April Fools prank of the century.