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.
Kenneth Rogoff is an Even Worse Criminologist than Economist (William K. Black, New Economic Perspectives) William K. Black has contributed to GEI. Prof. Black has critical remarks about Prof. Rogoff's recent Financial Times article (see next article below). Black's criticism centers on what he says is Rogoff "ignoring the three epidemics of accounting control fraud that drove the most recent U.S. financial crisis". Black says Rogoff's omissions are "bizarre". Black says that, because Rogoff ignores control fraud, the proposed conversion to electronic currency would fail:
"... because of the powerful incentives created by the international "race to the bottom" among jurisdictions. The real nations that aid money laundering (who are not on FATF's list of purportedly non-compliant nations) and the real banks (HSBC) that aid the world's most violent drug gangs launder huge amounts of money will continue to have powerful incentives to offer anonymous currency."
Paper money is unfit for a world of high crime and low inflation (Kenneth Rogoff, Financial Times) This is a repeat from 'behind the wall' yesterday. Eliminating paper money and going to electronic money only would kill two birds with one stone, according to Rogoff. (1) Negative interest rates could be implemented. (2) Tax evasion and and illegal transactions would be impossible without detection because anonymity of money would be no more. Econintersect guesses that Rogoff will never be a libertarian.
Today there are 11 articles discussed 'behind the wall'.
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Joe Friday: Nasdaq Composite Attempting a Ten-Year Breakout (Chris Kimble, Advisor Perspectives dshort.com) If it succeeds in breaking out through the 10-year resistance level it is likely that 2014 will see a recovery of the dot.com bubble high of 2000 for the Nasdaq Composite. That's on a nominal basis, though, not adjusted for inflation.
Strengthening Europe’s Limited Power (Jean Pisani-Ferry, Project Syndicate) A professor from the Hertie School of Governance in Berlin is completely befuddled by the European parliamentary election results.
From Constantinople to Istanbul, Turkey Has Never Been Better (Frank Holmes, U.S. Global Investors) Frank Holmes has contributed to GEI. Holmes is very bullish on Turkey. The Turkey stock market had quite a tumble from May 2013 to February 2014, down a little less than 50%. It has rallied over 40% since February but still remains about 25% below its 2013 high. Holmes expects the recent rally to continue.
Have Giles and the FT gone too far in the attack on Piketty? (Jeremy Smith, Prime Policy Research in Macroeconomics) Hat tip to Ann Pettifor. The author argues that a primary challenge from Chis Giles (Financial Times) to Thomas Piketty's book Capital in the Twenty-First Century is based on use of the UK Office of National Statistics' Wealth and Assets Survey which shows much less top level wealth growth than data used by Piketty. Of course the most recent data from the ONS was released after Piketty's book was published so only older data was used by Giles (presumably) and would have been available to Piketty. Smith argues that the ONS data is likely subject to "low-ball" numbers because it is based entirely on self-reporting surveys by individuals. He also argues that use of wealth to obtain key assets and power nominally reduces wealth but may result in amplified overall financial well being. This debate may be moving away from objectivity and toward subjectivity.
Follow up on problems in ‘Capital in the 21st Century’ (Chris Giles, Financial Times) This is a follow-on article which extends the original expose by Giles in FT last week. There are a number of clarifications of the specific questions presented in the original article. Giles reiterates that he has been focused on questions of wealth inequality and most specifically for the UK and U.S. He elaborates on the question of the U.S. and presents data (new since the book was published) from Emmanuel Saez and Gabriel Zucman which, according to Giles, is different from results published by Piketty in his book. (See graph below from Saez and Zucman presented by Giles.)
This graph shows that essentially all of the increased share of wealth for the top 1% was garnered by the top 0.1%. But that cohort is part of the 1% and is included in the larger group. So what is Giles point? He says that the rise in the wealth inequality of the 1% was driven by data selection by Piketty, yet he presents as supporting his position a graph which Econintersect estimates shows top 1% share of wealth growing from about 29% in 1960 to about 40% in 2012 (totaling the components in the graph below). Piketty's data from the book (also displayed by Giles in this article) showed the same growth as being from about 30% to about 35%.
The data supplied by Giles suggests that Piketty underestimated growth in wealth inequality in the U.S. yet his repeated argument is that Piketty overestimated. There is a lot more discussion to come in this confusing debate. To get one assessment of why Giles is off base in his methods see the next article below.
Econintersect is expecting a detailed reply to the issues from Piketty within a day or two. That will be published as featured GEI Analysis article.
One final point. I'm all in favor of journalists challenging economists' claims. And I think Giles has done admirable work digging into Piketty's Excel sheets when nobody else did. But throughout this, Giles has assumed the worst without waiting for a full response. For example, he points out that, for the U.S., Piketty takes the top 1 percent's wealth share and adds two to it in 1970. But without knowing anything about why Piketty makes this adjustment, Giles tells us that the numbers "didn't seem to fit what [Piketty] wanted to show, so he just added two to it." That's over the top innuendo.
In the end, he's done what he accused Piketty of: making claims that the data don't support.
China house prices post first fall in 23 months (Channel News Asia) The average price of a new home in 100 major cities declined this month by 0.32 percent from April to 10,978 yuan ($1,758) per square metre, according to the China Index Academy (CIA), the first fall since June 2012. Prices dropped in 62 cities and were unchanged in one, according to the academy, the research unit of real estate website operator Soufun. The biggest monthly fall was in Shantou, in the southern province of Guangdong, where prices slumped 3.64 percent on April. See also China signals policy easing as economy falters.
Harnessing China’s Competitive Streak (Andrew Sheng and Xiao Geng, Project Syndicate) The healthiest competition in China today is that which exists between cities. It is important going forward to preserve this competition while enabling the market to drive resource allocation, while ensuring a level playing field for all participants. The authors suggest China needs clear competition principles and possibly a "competition commission". Econintersect: Can you imagine the "job creators" government in Washington taking on such an endeavor?
Liquidity hoarding and the end of QE (Frances Coppola, Coppola Comment) Frances Coppola has contributed to GEI. Ms. Coppola discusses reasons why interest rates rose after QE3 was announced and started - and why interest rates have been falling as the taper has proceeded. Following the graph is a lengthy comment I left with the article.
Frances, you say "excess monetary base that is believed to cause inflation". Is it possible that this "excess monetary base" has no direct relationship to the money supply which would be related to inflation?
The money supply in the economy is created only when deposits increase in the banking system and hasn't the QE liquidity been created as excess reserves, not deposits?
Those arguing that the excess reserves can be "released" into deposits are not understanding how banking works. Reserves have nothing to do with how much credit is created which is how the money supply expands. Credit is issued based on assets as security - if there are assets (free of "liens") and there is a need for more money then banks can lend against those assets without regard to central bank reserve status.
When there are excess reserves then no additional reserves are created; when there are insufficient reserves the central bank simply creates more against the asset security backing the increased credit.
This makes the argument that the excess reserves are an overhang, which can be released to fuel inflation, a defective concept. What is alarming is that so many strident voices are expressing that concept, including some central bank governors. No wonder there is so much confusion when some central bank governors don't understand the basic mechanics of money and banking.
So, with the system as I have described it, when past credit excesses still remain in the system the asset base available for new credit is diminished (think underwater mortgages for one simple example). Not only is the demand for new credit diminished but there is an excess of issued credit above and beyond the value of the asset liens. That creates a deficiency in the central bank reserve account which needs to be "made up".
This is one way to look at QE: making up reserve deficiencies. They show up as excess reserves simply because the financial system accounting is not accurately reflecting the bad debt on the books. Mark-to-market accounting (if accurately done) would create bank insolvency and that would consume all the excess reserves (and possibly more than currently exist).
Rather than a monetary overhang it is possible that the excess reserves are currently insufficient to cover what I would call proper accounting by the banks.
So in the scenario I have outlined there is little pressure for higher interest rates because there is little pressure for NET ADDITIONAL credit because credit still on the books is subject to "writedown" for still sometime in the future.
The situation we are in is debt deflation. This was described by Irving Fisher in the 1930s - possibly one of the most important macroeconomic principles ever developed - and possibly the most overlooked and least understood factor in modern finance.
With this situation there is little demand for new credit, the "market" rate of interest is very low and current rates may well be too high.
You suggest in your article that interest rates might go lower (revert to previous trend) instead of higher as almost everyone is forecasting. You mention Larry Summers which implies a reference to negative interest rates. Yes, that is a logical extension of these arguments. But wouldn't a more straightforward solution involve honest accounting, writing down bad bank assets and removing the giant hidden suction pump that is demanding excess reserves to prevent systemic collapse?
The problem with that, of course, is that "apparent wealth" (not "real wealth") is destroyed and a vast lucrative compensation scheme in finance is massively cut back. These interests are represented by powerful political agents who prevent the needed actions from happening.
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