9 Feb

Greece, money printing, immigration and inequality

Posted by freethinkingeconomist in Economics. Tagged: , , , , , , , .

Back to prose economics. . . particularly after a colleague devastatingly mentioned the Peter Lilley precedent . . . it is a slippery slope.  And those kind people mentioning this blog in the same sentences as Dillow probably want more economics.  If I was as good or diligent as Dillow, I would try somehow to link all the items in this title together.

Greece. First: how interesting what Barroso has said about the consequences of sending money to the PIGS:

Mr Barroso points to the anomaly that countries such as Greece, Ireland and Portugal, which have benefited in the past 20 years from tens of billions of euros in EU regional aid, are in a worse situation than ever in terms of relative competitiveness.

It seems similar to a theme explored in the discussion about Alison Wolf’s excellent paper.  Read that paper and you might not be so confused.  Sending a lot of money can help, but it can also just boost demand pressures and make a place within the same currency area less competitive in its private sector activities, so that it finds it HARDER to stand on its own two feet.

Charles Wyplosz has listed many facts and myths about the Greece situation.  I particularly noted this:

Myth No.5: Contagion, already under way, would be destructive. . . Fact No.5: The real worry is the banking system. Some European banks hold part of the Greek debt and, if still saddled with unrecognized losses from the subprime crisis, some might become bankrupt

and

Fact No.8: Greece, along with Spain, Portugal and Ireland suffer from a loss of competitiveness due to continuing higher inflation. This partly explains their widening current account deficits until the crisis. Yet, the budget deficits are unrelated to this evolution.

Not all Tories are deniers.  Paul Sagar praises Hague, and boils it down nicely:

Outrageous as it sounds, forget about the economy. The most important thing David Cameron must do over the next 5 years is defy his own grass roots and continue to stick to the science. If the Tories plunge into climate denialism, then we really are in trouble.

The Economist argues for not worrying about inflation:

This is a dangerous time for the global economy. Policymakers seem to be overestimating the return to stability. I’d say the argument for forgetting about inflation entirely until we see two quarters of core inflation at or above a 3% annual rate is quite strong.

I agree; the risk I have in mind is that politicians call “mission accomplished” too soon.  Against the context of deflationary risk, this extraordinary suggestion for the printing of a permanent Etrillion does not seem so daft.

Get your social statistics here.  Hat tip Chris Cook.

I continue to rate John Redwood, despite his use of a totally misleading analogy in dismissing AV.  IF AV is so daft, why do Conservatives use it for selecting their candidates, eh?

First gilt auction since the end of QE.  FT Alphaville detect some signs of slightly higher yields.  But they blame some of this on Labour’s latest recovery in the polls.

Demos are pushing hard for wealth taxes.  I have not read the rest … apparently it argues for how important inequality is.

Good to see the Spectator taking aim at the consistent myth of the numbers bandied around for Iraq War deaths.  As the ClimateHate discussions show us, you don’t strengthen your argument by exaggerating beyond reason: you merely end up having your integrity doubted.  As one of the commenters puts it:

The independent (well left wing anti war, actually) Iraq Body Count puts the deaths at 100,000.
This is bad enough, so it beats me my people have to lie about it.

9 Feb

If you read anything today, read this by Tom Freeman

Posted by freethinkingeconomist in Uncategorized. Tagged: , , .

particularly as it actually scans along to Sing a Song of (twenty trillion) Pence.  Here is a taster:

And so he set off to create two hundred billion nicker,
Enough to buy the whole wide world a bathtub full of liquor
Though rather than buy fripperies he thought that he would pick a
Duller option: public debt. But now here’s the real kicker:

“The printing press – a minting mess – will debauch our fair pound,”
Said monetarist sceptics who were swarming all around.
“The value of dear sterling will collapse beneath the ground
And an explosion of inflation will astonish and astound.”

I think it deserves the prize if only for being able to include an accurate statement of movements in the value of the pound since March (!).

I would also urge the poetically minded to head towards ThoughCowardsFlinch where some impressive haiku are being created; and I like CS Clark’s personal touch:

He didn’t give my money away
From helping the nation I wouldn’t shrink
But I was already in debt anyway

My effort has clearly sucked productive effort away from the real economy; good.   There are surely more people out there who like rhyme, meter and political economy – step on up.   Extra marks to anyone who explains how stock and flow interact, as described on Ed Conway’s blog.

8 Feb

Why I love economics blogs . . .

Posted by freethinkingeconomist in Economics. Tagged: , , , .

20 years ago – no, 10 – you couldn’t eavesdrop upon learned discussions like this one, between Austrians, Keynesians (and no doubt monetarists, somewhere). You would have to have invaded some university common room.  Which I intend never to do.

Check out the responses to ‘Ben’s‘ point about grandchildren paying for our mistakes, and also Greg and Pretzel Dude* arguing about the origin of the massive financial bubbles. Not every Keynesian will be as uncompromising as Billy Blog, defending Australian policy – but I think he makes a convincing case that making GDP higher now enables tax revenue in the future to pay off debts incurred today.

Finally, I love this sort of bitchiness:

nate said in reply to Peter K.…

Yes, and your position is so much more “liberal” and “progressive”. Who needs moral standards. Steal.

OhNoNotAgain said in reply to nate..

Hey Nate, if you’re trying to come off sounding like a crazy 75-year old guy that yells at the neighborhood kids all the time – well, it’s working.

* To me, it seems cruel for the Dude’s to have call their third child Pretzel, though his elder siblings Bagel and Doughnut no doubt find it fair.  Pretzel is an Austrian.

8 Feb

QE in 462 words: the ballad of Mervyn’s shovel

Posted by freethinkingeconomist in Economics, Politics, Uncategorized. Tagged: , , , , .

Look, it was really quite dull waiting to be called into the jury room two weeks ago. So forgive me for this. When the big document comes out, please read that instead; it has graphs too.

The ballad of Mervyn's shovel
A year ago the credit crunch had reached its grim nadir
The economy in freefall, money markets gripped by fear
The FTSE tumbled every day, banks tottered left and right
Making factories stand silent, and our currency take fright.
The only shop with customers was called JobCentre Plus
And the truly self deluded begged Beijing to rescue us

Loud sobs were heard in Downing Street:  "There's no more cash to spend
Without the government buying things, this surely is the end -
- we've shot our final bolt, and interest rates can fall no more" ...
when knocked the Bank of England Governor, with a shovel, on the door.
Behind him, spewing green stuff, steamed a money printing press
and he smirked "I've got the very thing to save us from this mess"

Both the Chancellor's mighty eyebrows took a leap towards the ceiling
The money flooding out gave him that 'Denis Healey' feeling.
"Infla..." he checked himself. "Guv'nor, I'm rather disappointed"
"To inflate away our troubles wasn't why you were annointed"
But the Guv'nor mollified with words like "money multiply"
till the Chancellor signed the letter with a wary, weary sigh. 

All year the money flooded out.  At first you couldn't tell
Though the Chancellor's many IOU's have never sold so well
Then the City caught a handful of this newly-printed stuff
so that bonds, shares and derivatives, and such financial fluff,
began to rocket skywards, making City spivs seem clever
And they paid themselves as if it came just from their own endeavour.

But despite the Govnor's shovel, money doesn't multiply
Because it's being shovelled far from where the problems lie.
You see, the Lady of Threadneedle Street's a curious kind of prude
Who'll debauch herself on public debt, but think it beastly crude
to grant her money favours in the world of private credit
Even though a loss is still a loss, not matter what risk bred it. 

And so this money flood, that sometimes seemed to be unending
Stayed trapped within the City world. The banks were still not lending:
To businessman or householder, this 'quantitiative easing'
- that's meant to fill the world with cash - is monetary teasing.
You read about it, see it, but like smoke upon the air
you say "Well I'd like some of that", reach out - but it's not there. 

It's great if you have art to sell. Or some fine London pad.
But if you're poor and need the cash, there's nothing to be had.
It's great if you've a bunch of shares - for those already wealthy,
the year since what they call 'QE' has been quite nice and healthy.
But surely this was not the point. Why do this money printing
just to help those lucky sorts that hardly need such extra minting?

UPDATE:  Paul Cotterill has formalised the poetry competition on QE here. And extra points will be awarded for anyone including a discussion of the pound sterling, as mentioned on John Redwood’s blog, and how it has in fact risen by 10% against the dollar since  QE began . . .

5 Feb

What broken society?

Posted by freethinkingeconomist in Politics, Theoretical musings. Tagged: , , .

I always find the miserabilist claim that Britain has a broken society rather insulting to those millions of people who make up this society.  So all praise the Economist for giving this idea a thorough kicking.

I feel nervous about raising this issue with the good people of The Skeptical Doctor; for those of you new to this site, we have had a gentlemanly discussion since October when I reported back on the reaction of a left-leaning crowd at the Conservative conference to the miserabilist claims of Theodore Dalrymple, the striking, eloquent but overly-depressing-about-Britain writer and doctor. Look up any post with the word “miserabilist/ism” in it, or tagged that way.

Much of the stuff covered in the article – such as declining crime stats – was no doubt covered in previous posts.  In brief, when confronted with falling Crime stats, the dissenters say they are made up, in some way or another, and in such a way that they are more made up now, so that we have had a decline.  I doubt we will ever agree.  If anything, the Right seem to be doing more manipulating of stats, including my own MP.

Interestingly, the New Statesman has tried to do some forward thinking miserabilism of their own – premised on the ideas: “Cameron will get in – he will cut public spending – all the good things in life like a strong BBC and unpotholed roads stem from high public spending – we’re doomed”.   I object to this just as much.  Fiscal consolidations can be good times – witness the mid 1990s creation of the Internet.  Perhaps, people are willing to see the worst in the world – be miserabilist – so long as they have a political oppponent in charge to blame for it.

Oh, how sophisticated our political writers are.

4 Feb

Changing your mind about QE

Posted by freethinkingeconomist in Economics. Tagged: , , , , .

Chris Giles’ excellent blog has highlighted the ‘rationalisation after the fact’ of QE – changing your mind about how it works.    Taking the MPC minutes, they demonstrate how the emphasis has changed over time, using an amusing colour coded pair of tables.  Their conclusions:

it is obvious the Bank has flipped and flopped over the intermediate objectives for QE last year. It was all about expanding the money supply and the price of corporate bonds until it wasn’t; it had little to do with lowering gilt yields and then that is what the public should focus on

This is annoying: I have been doing the very same thing, except getting more personal.  This is from my upcoming publication:

Massive changes of mind, and outright disagreements.  At the beginning: it will work through bank lending.  Mervyn sticking for the ‘it’s about money innit’ line when Adam and David expclicitly deny it.

The end of QE happened today.  Much righthandwringinging over this.  But this is hardly a gilt ‘plunge’, Guido, and you know it.   What a shocking removal of context from a graph.  Here is a better timescale:

Like I said earlier, why do people think they can beat the market on the basis of a widely anticipated event? Fidelity still see reason to buy gilts.  One reason the Bank has ended the programme may be because it thinks the stock not the flow of QE is what counts (see Ed Conway).  I am with Ed: they make a much bigger difference as they are happening, than through just sitting there.  Reserves created are fairly inert at these levels of rates and activity, IMHO.

4 Feb

Nonsense non-sequitur of the day

Posted by freethinkingeconomist in Economics. Tagged: , , .

Well done, John Redwood:

Someone today on the radio said he could not see how QE led to inflation. He should try looking at how the government overpays for all too many things and how it also slaps extra taxes on which drives prices up further.

Um, what? I am sure there is a mechanism linking QE to inflation, but is this it?  Redwood should read brilliant young monetarist Jamie Dannhauser who is rather more downbeat:

Stagnation in the UK’s broad money supply presents a clear danger to risky assets – and suggests there is a growing chance that the Bank of England will expand its asset purchase facility tomorrow, says Jamie Dannhauser at Lombard Street Research. He says the £200bn of quantitative easing so far has almost certainly prevented a sharp drop in the stock of broad money, and left private sector liquidity conditions far better than they otherwise would have been – though not yet consistent with a sustained recovery.

I don’t agree with everything monetarists say.   People thinking higher gilt prices and more money in investment funds leads to inflation DO need to specify how, in the face of a shattered financial system. And (for the confused commenters below the Redwood column) I have already explained how recent inflation is about base effects.  Calm down, dears.

4 Feb

Problems with Greens

Posted by freethinkingeconomist in Economics, Politics. Tagged: , , , , .

My adaptation of ClimateHate is online at Comment is Free. It is substantially different from the first post, though the theme is broadly the same: the debate is all ad hominem,  and this makes a risk for the greens.

A point I had NOT made was to go on about how much disrepute the Greens can bring upon their own case, by packaging it up with all sorts of other causes.  Nef seem to exist to prove the existence of this problem, as their latest report shows.  It is not as dreadful as the previous one – but then, it couldn’t be, because it was arguably the worst think tank report ever written, amateurish, attention seeking and brazenly biased.

I don’t have the space in this cramped cafe to launch a full critique.  Much of the report is unobjectionable, setting out the parameters of global warming – how many ppm of CO2 we can afford to have -which is no doubt useful.   Where it fails, for me, is in its analysis of how GDP cannot rise without busting those C02 limits.  It gives almost no space to the idea that lifestyles, preferences and the shape of GDP will alter as prices alter.   If $300 oil happened, the preference for certain activities shifts to other directions.  There is no decent exploration of the elasticities of human behaviour in the face of different trade offs – which is clearly central to the debate.

As economies mature, the mix of their production and consumption changes.  Oil intensity per unit of GDP gets lower, and could get drastically lower.  For example, I bought a Wattson a few days ago.   This will be recorded as GDP, and also lower Co2.  If petrol doubled, I might drive to the theatre less, and pay more for home entertainment more.  And so on.  As economies mature, they shift from manufacture to services, and this can mean lower consumption of environmentally-limited items. Tim Worstall puts it well:

Economic growth is defined as the adding of value. No, really, it is. GDP measures the value added in an economy. It does not measure the resources required to produce that added value. It’s entirely possible to add more value while using fewer resources.

The other part of Nef’s report attempts to list a bunch of alternative energy ideas and prove, from here in 2010, that in 2030 they can’t deliver what they need to.  OFten with just a couple of citations.  This is socialist-planner-thinking gone mad.  Imagine if you had sat in say 1990 and tried to work out the potential of the internet in 2010 . ..

So, why do they do it?  Because nef have a broader, anti-consumption agenda.  As this programme makes clear, some greens want more than just the end of CO2 threatening our environment – they want to specify how this should happen. Read the transcript about this.  The point is made in this paragraph:

TOWNSEND: I was making a speech to nearly 200
really hard core, deep environmentalists and I played
a little thought game on them. I said imagine I am the
carbon fairy and I wave a magic wand. We can get rid
of all the carbon in the atmosphere, take it down to
two hundred fifty parts per million and I will ensure
with my little magic wand that we do not go above
two degrees of global warming. However, by waving
my magic wand I will be interfering with the laws of
physics not with people – they will be as selfish, they
will be as desiring of status. The cars will get bigger,
the houses will get bigger, the planes will fly all over
the place but there will be no climate change. And I
asked them, would you ask the fairy to wave its
magic wand? And about 2 people of the 200 raised
their hands

Now, I don’t know how typical this is.  I am certainly suspicious of nef, and of people who categorically rule out nuclear power, despite acknowledging the huge threat of global warming to billions of people.  But I think it is quite fair for the BBC to investigate this idea, which is why I was somewhat dismayed to read Sunny’s furious denouncement.  I am deeply impressed by what Sunny has done at LibCon.  But this sort of fury is the sort of thing my column today is expressing concern about.

UPDATE: Ca1eb writes a brilliant comment:

Can you imagine how dull it would be if everyone reasoned it out like adults:

Sceptic: “Well I’m just not convinced the warming is man made.”

Warmist: “Well even if it’s not, reducing carbon emissions is a good policy for the future.”

Sceptic: “Agreed”

But instead what happens is nut jobs from either side wade it using the same kind of reasoning that they must have used during the crusades:

Denier: “There is no global warming! It’s been made up by the loony left to tax the rich! In fact the planet’s getting colder and we need more pollution to stop it.”

Alarmist: “You’re killing the planet! All you care about is globalisation and living off the poor! We need to abandon cities now and all live in teepees!”

Guess whom the Guardian then employs to write articles on the subject?

Tim Worstall’s other comment is also well worth reading through; it’s about 20 times as long as his typical blogpost . . .

3 Feb

So. Post Green Budget, what am I most worried about?

Posted by freethinkingeconomist in Economics. Tagged: , , , .

Since the economic debate is all about being scared or depressed by something, and the IFS Green Budget is by far the most comprehensive combined-economic-and-fiscal event of the year, what does it leave me worrying about the most?  In no particular order, blog-style:

A sterling crisis and/or downgrade

Not at all, and the consequences if it does happen does not bother me.  I agree with Chris Dillow that it is silly to make a fetish of this rating; what matters is the cost of our debt.  He writes:

Spain and Japan have credit ratings of AA, a notch below the UK, but 10 year Spanish government bonds yield just 4.1%, only 0.1 percentage points more than UK gilts, whilst 10 year Japanese government bonds yield only 1.4%.

On top of this, the maturity schedule matters (as yesterday’s post pointed out.  Sorry for not putting the figures around this, yet – how much matures at which point.  I will, some day).    The consequences of a downgrade and higher cost on the incremental debt are made clear by the IFS.  Look at slide 21 from Carl Emmerson’s bit:

It shows how, if the gilt market gradually started demanding an extra 100bps for fresh borrowing, the result would be . . . . debt interest rising from 3.3% to 4% of GDP.  In other words, less than the revenue raised by a 2% rise in VAT.    It is not a risk to keep you awake at night, in my view (though it seems to bother Ed Conway more).   Because if the market repudiated gitls in that way, it would have to be because it has better sterling assets to invest in, IMHO, and that means a general economic recovery above current expectations.  All IMHO.

And (see the Times) people still want gilts: ‘yesterday’s gilt auction, the first since the quantitative easing programme ended last week, drew the highest bid-to-cover ratio in eight years.’

Inflation?

Personally, no.  But Simon Hayes of Barclays pointed out that the UK is the only economy to have had inflation surprises on the upside (see this presentation, slide 6).  Then again, it is the only one with such a steep devaluation.   Furthermore, given how weak household consumption growth is (slide 8), it is hard to see the demand side of the inflation.  Look how high the graph goes during the real high inflationary periods:

Perhaps there will be some means by which the created money goes into prices, without first passing through higher consumption of some sort.   But personally I think it would have to be driven by higher cash output first.   I don’t think we are in some world in which the economy marks up prices without having the customers walking through the door, because of some sort of extraordinary ‘rational expectation’ that the so-far-unimpressive QE will do this for us.

A double dip

I do fear this, and the IFS went out of its way to advise policy makers to consider possibilities far from the central case.  One of the main reasons is that, contrary to the prevailing political rhetoric, we are already set to have a significant fiscal squeeze THIS YEAR. See Carl’s slides again, slide 14:

The government is going from adding23 billion of demand to the economy, to taking some out.   If that 23bn is not replaced in terms of demand by the private sector in some way, then we get a second dip into recession. In which case, scrap all these projections, add several negative percentages to them. Simon Hayes’ slides (see e.g. number 17) highlight this possibility.  And, as I had already highlighted in Slash and Grow, there is a real risk that weak sterling will not lead to exporters rebuilding output – just margins.  Hayes mentioned this at length.

The already steep fiscal retrenchment – no other country is already doing this – is one excellent reason the perpetually confused Conservatives (see Jonathan Freedland) are wrong to argue for even steeper earlier cuts.  The NIESR, no socialists, clearly agree:

“There is no reason for tightening fiscal policy now. People are worrying about long-term debt problems when they should be worried about short-term output problems.”

They also back a recommendation of mine: less QE, more credit easing.

Separately, Mr Barrell noted the “credit easing” undertaken by the US Federal Reserve and the Bank of Canada, in which the central banks bought private sector assets, appeared to have done more to boost demand in those nations than the Bank of England’s quantitative easing programme, under which it purchased almost entirely gilts

A permanent hit to our output potential

This, the subject of the first presentation, is easily what bothers me most.  We have an economy currently unable to provide the employment and government revenues necessary for general happiness and contentment.  If we are also at our supply limit, then that is what we are stuck with.  Extra demand will just lead to inflation.  We have a need to negotiate, as a society, a 10% cut in our living standards, somehow.

I have always personally thought that (a) the UK was not doing all the ‘wrong’ things before the recession and (b) there are plenty of ‘right’ things that give us growth – like housebuilding – that are under utilised.  I also think that recessions can help boost productivity by throwing out some marginal activities.  You cut the fat first, etc etc.   But the longer the recession goes on, the more capital is wasted, the more human beings become discouraged, the more skills are lost.

My big worry: fear that we are doing enough stops the policy makers from pursuing growth with sufficient vigour, and the “Barclays Gloomy We Need Another 50bn of Cuts” situation (see Stephanomics) actually comes true.  Then it will get really nasty.

3 Feb

Finally, the world’s largest nation notices me . . .

Posted by freethinkingeconomist in Economics. Tagged: , , .

A few weeks back I wrote a fairly run-of-the-mill post summarising two views on whether China will go the same way as Japan.  I have to admit I have not initiated this idea – it is fairly unoriginal.

Today, my China correspondent, one James Callender, a man who has recommended many fine musical tracks to me, informed me that www.freethinkingeconomist.com is now blocked in China.

You know you are finally someone, when you disappear from sight like that.

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