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What We Read Today 04 October 2014

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 (and sometimes longer ones) 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.

  • New York Fed Boss Hits Back (Michael S. Derby, The Wall Street Journal) New York Fed Chairman William Dudley is trying to do damage control after tapes released by a whistleblower proved that Fed supervisors tried to pressure a regulator into changing her report which criticized Goldman Sachs for having inadequate conflict of interest standards. When the regulator refused to change her report she was fired for insubordination. See GEI News.
  • Recent article about Scotland Independence and Other Movements

Scotland will refuse to accept British Bill of Rights (The Telegraph)

Catalonia Pushes Ahead With Independence Referendum Plan (The World Post)

  • Articles about conflicts elsewhere in the world:

Protest Camps in Hong Kong Come Under Assault (The New York Times)

After bloody clashes, Hong Kong students pull out of govt talks (Al Jazeera)

U.S. ramps up Ebola troop deployments, total may near 4,000 (Reuters)

Ebola outbreak upsets Exxon drilling plans (USA Today)

Turkey’s ISIS Crisis (Project Syndicate)

ISIL closes in on besieged Syrian town (Al Jazeera)

The Future of Syria (Project Syndicate)

Australians return to Iraq to confront IS militants on ground (RT)

The Intellectual Battle Against ISIS (Project Syndicate)

Ukraine crisis spells Arctic freeze in Russia-Norway ties (BBC News)

Putin Trumpets Economic Strength, but Advisers Seem Less Certain (The New York Times)


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  • 600 Million Reasons to Keep Your Eyes on India (Frank Holmes, U.S. Global Investors) Frank Holmes has contributed to GEI. Stocks are soaring (see next article) and consumer sentiment is at a 2 1/2 year high. Need more reasons? How about projected strong economic growth (second graph below).

India-consumer-confidence

India-growth-forecast

  • Indian Stocks Set a Torrid Pace (Donald Jay Korn, Financial Planning) Look what happened while you were not paying attention: India stocks are up 30% YTD and 60% over the last 12 months.
  • Time to make in India? (A.R., The Economist) A.R. says it will take more than strong leadership from Mr. Modi to build a strong manufacturing sector in India. It will take a significant reduction in bureaucracy and government corruption.

  • Depression Denial Syndrome (Paul Krugman, The New York Times) Here we go again!!! Prof. Krugman in his mission to educate the masses is spouting a weird mixture of logic and illogic. He uses the example of the bad interest rate call made in 2011 by Bill Gross for his PIMCO Real Return fund to open the discussion of lack of understanding by many economists of the nature of recent economic events. Perhaps nothing he wrote is worse than this:
Now, we normally think of deficits as a bad thing - government borrowing competes with private borrowing, driving up interest rates, hurting investment, and possibly setting the stage for higher inflation. But, since 2008, we have, to use the economics jargon, been stuck in a liquidity trap, which is basically a situation in which the economy is awash in desired saving with no place to go. In this situation, government borrowing doesn't compete with private demand because the private sector doesn't want to spend. And because they aren't competing with the private sector, deficits needn't cause interest rates to rise.

Prof. K invokes a crowding out concept based on a concept known as the discredited but widely cited loanable theory of funds. In fact the amount of deposits in a banks has no relationship to the credit extended by banks. That is determined by the credit worthiness of the borrowers and credit worthy loans are made whether the banking system has deposits to lend or not. In the case that any additional reserves are needed within the banking system when additional credit is extended the central bank simply creates them.

Consider the simple process of government borrowing. Does the government borrow money to hoard it? No, every dollar borrowed is spent into the economy. So how can government borrowing crowd out private borrowing? Government borrowing does not change the amount of money in the economy available for private investment. It only increases the amount of money in private savings (Treasury securities held by the public). The money put into those private savings is spent back into the economy by the government.

So Prof. K is spouting nonsense when he says that the problem is that everyone wants to save more and invest less. The reason that there is less investment is because there are fewer applicants considered creditworthy by the banks who provide the new money for investment. (Remember that the money in the economy remains constant absent new credit or contracts if old credit is repaid without new issuance to offset.)

What is unfortunate is that Prof. K has a valid conclusion that deficit spending by the federal government and the creation of vast excess reserves at the Fed resulting from QE has no possible inflationary affect as long as the economy remains operating well below full capacity. But this is no justification for the use of theoretical concepts so thoroughly discredited.

Note: There will be a much more complete discussion of Krugman's misunderstanding of the liquidity trap by Philip Pilkington in his weekly article at GEI Analysis tomorrow (Sunday).

  • IMF Report: Risk Taking Behaviour in Banks (Constantin Gurdgiev, Learn Signal Blog) Constantin Grudgiev has contributed to GEI. Gurdgiev reviews the latest IMF Global Financial Stability Report. Looking at risk taking by bank executives, the report shows that independent directors on boards and high institutional ownership correlates with less risk taking, as does the level of regulation imposed. Compensation levels did not correlate directly with risk taking, but longer-term performance incentives did correlate with less risk taking. There are no surprises here for Econintersect. We have argued for years that strong boards, responsible share holder activity, strong regulation and long-term performance incentives are the factors needed to rein in banksters and turn them into bankers.
  • Taxes Move People & Money (Armstrong Economics) Movement of business and people within the U.S. can be correlated with state tax codes.

house-seats-map

  • Germany’s energy model can save the world (Paul Hockenos, Al Jazeera) Germany gets 31% of it's electricity from distributed renewable sources today and some project it will be 100% by 2050 (although further progression along the renewable, decentralized path has slowed currently). As renewable energy sources have ramped up both nuclear and fossil fuel energy generation have declined. The decentralized grid has proven to be more reliable than the old central generation model and less expensive than nuclear.
  • Aboard a Cargo Colossus: Maersk’s New Container Ships (Danny Hakim, The New York Times) The capacity of container ships has been growing about 2.5 times as fast as the growth of container traffic. Obviously this is an unsustainable pattern. At what point will the 'container ship too large' be built?

gold-copper-oil-vs-stocks

  • Other Economics and Business Items of Note and Miscellanea

Exclusive: Facebook plots first steps into healthcare (Reuters)

EU Austerity as Frat House Hazing (William K. Black, New Economic Perspectives)

Economics of Cybersecurity (edX)

Abenomics: will the sun rise on Japan again? (The Telegraph)

Paying for Productivity (Laura Tyson, Project Syndicate) Hat tip to Ken Workman, GEI Discussion Group, LinkedIn.

Pimco CEO says ‘our DNA is fundamentally unchanged’ after Gross (Reuters)

Handbook of Macroeconomics, vol 1 (EconPapers)


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