What Was 'Behind the Wall' 07 June 2014?
Econintersect: We have a daily collection of interesting articles, numbering typically 15-20, which we briefly summarize and discuss (sometimes very cryptically, others more expansively). This is always done to help you be efficient in surveying worthwhile topics daily. And, of course the links are there to find out what we missed in our summary. Each day there are a number of articles in our WWRT (What We Read Today) feature - typically 4-6 but occasionally more and very seldom only 3 - available to the general public. The remainder (last Saturday it was 11 articles) are 'hidden behind the wall'. One week ago today the public view of WWRT was seen here.
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Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.
- This was the most easing Draghi could get and still achieve unanimity (Edward Harrison, Credit Writedowns) Just reviewing what the ECB has done here, we see them taking four out of the five easing measures I outlined in May. See also GEI News.
- Mexican makes surprise half-point rate cut as growth flags (Jude Webber, Financial Times) The Bank of Mexico cut its benchmark interest rate to a record low 3% in an effort to provide a spark for a slowing economy. Follow up on this and all other central bank actions early every week at GEI News with the weekly review article from Central Bank News.
- Lawrence Summers on ‘House of Debt’ (Lawrence Summers, Financial Times) Summers says House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again, by Atif Mian and Amir Sufi, University of Chicago Press, "could be the most important book to come out of the 2008 financial crisis and subsequent Great Recession". The thesis of the book is that the mistake in addressing the GFC (Great Financial Crisis) was that the debt produced insolvency of the household sector was substantially ignored while the financial system was being bailed out. This is an amazing review to read as Summers alternates between criticizing the authors' "lack of understanding of policy choices" and calling them "naive on policy" while letting "their indignation get the better of them" and praising the thoroughness of their data analysis and logic. Perhaps the most encouraging part of this excellent review is the last paragraph where Summers indicates a recognition that money ("balance sheets") is (are) a critical part of modeling any economic situation. This is a long way from the pre-2008 days when debt, credit and money were not considered macroeconomic variables by the mainstream.
The reality that the post-crisis policy challenges were more complex than they recognise detracts only slightly from Mian and Sufi's accomplishment in House of Debt. All future work on financial crises will have to reckon with the household balance sheet effects they stress. After their work, we can still believe in the necessity of financial rescues; however, we can no longer believe in their sufficiency. And after their work, we have an important new agenda of reforms to consider if future crises are to be prevented.
- An intellectual storming of the beaches is required in Europe (Bill Mitchell, billy blog) Europe is occupied by "fiscal policy bolted down by the neo-liberal ideology [and] there is no room to grow". Bill Mitchell says it is time for an economic policy D-Day, "an intellectual storming of the beaches". Mitchell revisits some of the history of the Great Depression and finds the same mistakes are being made again. He suggests a frontal assault on employment and thrusting of monetary policy attempts at managing the economy into the background. His first submission of evidence is the 6-year record of fiscal austerity on employment in Europe.
Today there are 11 articles discussed 'behind the wall'.
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- China Leads the World in Green Energy, Gaming and Gambling Markets (Frank Holmes, U.S. Global Investors) Frank Holmes has contributed to GEI. China is serious about "cleaning up its act" according to this Frank Holmes report. They are spending nearly 2/3 more than the U.S. to address pollution problems. Also of interest is a table showing both the U.S. and China well down the ranking list for internet speed.
- Why a six-hour workday is getting a test in Sweden (Aimee Picchi, Money Watch, CBS) In a controlled experiment in Gothenburg, Sweden, some municipal workers are being put on a six-hour work day while the remainder continue with eight. The city wants to test whether reducing the workday will actually improve efficiency and output, cut sick pay and ultimately save money. Some research is cited in this article to support the hypothesis being tested.
- Bubbling up (The Economist) An international gas market is developing. The Economist says that buyers will gain more than sellers as both long-distance pipelines and expanded tanker fleets will be brought into use to handle a production boom. For example, over the next four years LNG (liquified natural gas production will increase by 1/3.
- Why Medicare Advantage costs taxpayers billions more than it should (Fred Schulte, The Center for Public Integrity) The systematic rapid upward shift in "risk score" charges indicate to researchers at the Center for Public Integrity that providers are being more aggressive and not the other possibility that insurees are rapidly becoming sicker. The study concludes that $70 billion of improper charges were made to the government from 2008 through 2013.
- Growth moderates in China amid rebalancing: World Bank (Xinhua, Want China Times) Hat tip to Macro Business. China wants to reduce investment and increase consumption, where they are ranked near the top and near the bottom, respectively, globally.The BIS (Bank for International Settlements warns that a disorderly deleveraging of local government debt (which has been expanding out of control) could produce too rapid a rebalancing and create much economic distress for China (and for everyone else, as well).
- The Great Credit Mistake (Adair Turner, Project Syndicate) Great read. Fixing the financial system supply side is panned as an abject failure. The neglect of the demand side of the economy is the "great credit mistake" that Adair refers to. He mentions in passing as support the Atif Mian and Amir Sufi book, House of Debt, for which we have listed a book review by Larry Summers in the public section today. Turner points out that their are significant policy constraint differences between the Eurozone and countries organized as federal structures like the U.S. Here is the end of the article, emphasis by Econintersect:
But fiscal stimulus is constrained within the eurozone, where member countries no longer issue their own currency and "sovereign" debt therefore carries a default risk. Aggressive monetary expansion through quantitative easing is also far more complicated and politically contentious in a currency area with no federal debt for the central bank to buy. To survive and thrive, the eurozone will need to become more centralized, with some common fiscal revenues, expenditures, and debts.
Of course, this scenario implies immensely difficult political choices. But the starting point for debate must be realism about the nature and severity of the problems facing the eurozone. If eurozone policy assumes that fixing the banks will fix the economy, the next ten years in Europe could look like the 1990s in Japan.
- Has Thomas Piketty Pulled a Reinhart and Rogoff? (Philip Pilkington, Fixing the Economists) Philip Pilkington contributes regularly to GEI. Pilkington reviews the debated between Chris Giles of the Financial Times and Thomas Piketty, author of Capital in the Twenty-First Century. The graph below is by Giles incorporating the data reported by Piketty. Pilkington writes:
From Giles' reconstruction you would conclude that wealth inequality has not risen in the UK all that much since 1980. I have seen a lot of data related to this and I simply cannot believe this. It also does not really pass the 'smell test' - i.e. it does not really confirm with what we actually see day-to-day.
And he concludes:
Perhaps Piketty has mucked up some of the figures. But his is not the only study dealing with this issue. In that sense, I don't think that this is a Reinhart and Rogoff moment that discredits the underlying thesis of Piketty's book. Rather I think that it is just another lesson in data analysis for us all. Lies, lies and damned statistics, as they say.
Click for larger image at 'Fixing the Economists'.
- Gold Manipulation: What Investors Should Do Now (James A. Kostohryz, Seeking Alpha) Kostohryz says that reported manipulations of gold by banks (and possibly others?) has little lasting effect on the gold market. He says central bank activities would be another story. Bottom line, he says, stay away from gold as long as the price is higher than $850 which is , he says, the fair market price when compared to other commodities.
- Joe Friday: Gold and Sliver at Critical Support (Chris Kimble, Advisor Perspectives dshort.com) For the past 10 years gold and silver have rallied of these support lines. 2014?
- A Sustainable Monetary Framework for an Independent Scotland (Philip Pilkington, Levy Institute) Philip Pilkington contributes regularly to GEI. Pilkington finds that Scotland is a very wealthy country but that is largely dependent on there petroleum resources. See graphs below. For adequate long-term stability Pilkington finds that Scotland must transition away from its strong dependence on oil and gas revenues. He also concluded that Scotland would be better served with its own currency rather than continuing to use the British pound. The mechanics of phasing into a new monetary and macroeconomic structure is the subject of this paper.
- ECB Likely to Cause Next Sector Rotation from Energy into Consumer Discretionary (Chris Puplava, Financial Sense) Hat tip to Advisor Perspectives dshort.com. There are a number of strong correlations reviewed including the one below between the ratio of the Fed balance sheet to the ECB balance sheet and the EUR/USD currency pair.