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.
Berlin slashes growth forecasts (Deutsche Welle) The GDP growth for the current year has been slashed from 1.8% to 1.2%. For 2015 the previous projection of 2% has been cut by a third to 1.3%. The government continues to deny that a recession is likely. And Reuters is reporting that the Andrea Merkel government will still push for a balanced German budget next year.
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Interest Rates and Gross Profit Margins in the Recent Experience of Advance Capitalism (Massimo Pivetti, October 2014) Pivetti suggests that the behavior of wages (stagnant) during the last three decades of falling interest rates, with only profits rising in response to lower cost of capital and rising productivity, is a behavior inconsistent with the fundamentals of Sraffa's theories. (See graph below.) Pivetti ascribes the cause of what has happened to "cheap money itself, dictated to themonetary authority by objectives and constraints of a non-distributional character". Not specifically stated by Pivetti, Econintersect thinks this is at least an oblique criticism of the obsession of central banks with inflation control and an exclusion of distributional characteristics of policy, which have been isolated in fiscal actions. An interesting statement appears in the conclusion of this paper concerning the efficacy of independent central banks:
... an important implication of the theoretical vision defended in this article concerns precisely the status of the central bank: if interest-rate decisions, owing to their significance for the behavior of the real economy, are a crucial component of general economic policy, then endowing the central bank with a politically independent power of decision on interest rates will be an ill course of policy action, no less than any deliberate step towards losing national control of the level of the domestic rate of interest.
An Unofficial Synopsis of Sraffa (Steve Keen, Fuck Yeah, Piero Sraffa!) Steve Keen has contributed to GEI. This is an piece rich with arithmetic and simple algebra which outlines the work that Piero Sraffa did in the early 20th century demonstrating that Marx's labor theory of value (LTV) was logically inconsistent. Keen points out that this was also evident in the later work that Marx did at the end of the 19th century, but in Marx's case (and also for his followers) the effort was made to argue a way around the dilemma "rather than meeting it head on". Sraffa (Production of Commodities) and Ian Steedman (Marx After Sraffa) have documented the head on confrontation. Sraffa established the model of production that was based on the costs of inputs ("raw" commodities, wages and cost of capital,ie interest).
Multi-Trillion Dollar Question: How Much of Our Debt Is “Odious”? (Don Quijones, Raging Bull-Shit) Article begins with a historical quote: "Debt, n. An ingenious substitute for the chain and whip of the slavedriver." - Ambrose Bierce, U.S. journalist and satirist. The article discusses the legal term "odious debt", attributed to Alexander Sack (1927). In short the legal theory is that debts incurred by a state for purposes not in the best interests of the state should not be enforced. Throughout history government debts have been declared invalid quite a number of times and the author reviews some of those cases. His proposal is that the crushing enforcement of debt, in most cases forced onto the governments by banks on the verge of insolvency, should be reviewed for the "odious" qualification. He writes of the financial repression of the peripheral populace in Europe:
Put simply, it is economic madness on a scale never before seen. Not only is it morally perverse, with the poorest and most vulnerable in society subsidising the reckless greed of the richest and most powerful, but it is also totally socially destructive. After all, the only way for a country to honor such elevated levels of debt - at least in the short to medium term - is to dismantle its public health-care, education and transport systems, confiscate pensions (as just happened in Poland) and unleash a system of internal devaluation that is as painful as it is ultimately futile.
More perverse still is the fact that most of this debt, with its ever-growing compound interest, will never get paid. I challenge any two-bit Ph.D.-holding economist to explain how Greece will pay its 321 billion euros of external debt; or Italy, its 2.5 trillion dollars; or for that matter, how each citizen of Ireland - babies, children and senior citizens included - will be able to raise the 500,000 dollars necessary to pay off their nation's external creditors.
Perhaps it is time we took a leaf out of Ecuadorian President Rafael Correa's book and set up an audit panel to examine whence our nations' debts came. As in Ecuador, there would be intense opposition from the civil service, mainstream political parties and, of course, the financial sector - after all, it is they who have gorged the most at the trough of debt.
But unless we determine who it is we owe, and for what, and draw a big fat red line through all the debt that has served absolutely no public good, this super cycle of debt deflation will continue to spin faster and faster out of our control.
Michael Hudson's mantra that "Debts that can't be repaid, won't be repaid" is the perfect summation of the economic dilemma of our times. And as the Australian economist Steve Keen says, the only sane and effective response to this dilemma is to ask ourselves "not whether we should or should not repay this debt, but how we are going to go about not repaying it."
Disinflation spreads to the UK (Walter Kurtz, Sober Look) Consumer inflation has been declining steadily for about three years with the most recent CPI report at 1.2% year-over-year. Even with the rapidly falling energy component removed (along with food), the core CPI is still at a five year low. And the beat goes on - China just reported the lowest CPI change in almost five years and a continuation of producer price deflation for the 30th month. See GEI News, just posted.
Exclusive: Fed's Williams unmoved by global risks, eyes U.S. inflation (Ann Saphir and Jonathan Spicer, Reuters) San Francisco Federal Reserve Bank President John Williams, widely viewed as closely aligned with the views of Fed Chair Janet Yellen (he was her advisor for a number of years), outlined conditions that would cause the Fed not to start rate hikes mid 2015:
"If inflation isn't moving above 1.5 (percent) and we get stuck into that gear, that would argue for a later liftoff. If we don't see any improvement in wages, that would be a sign that we still have a lot of slack in the economy and we are not getting any inflationary pressure to move inflation back to 2 percent."
Could there be more QE?
"If we really get a sustained, disinflationary forecast ... then I think moving back to additional asset purchases in a situation like that should be something we should seriously consider."
Williams expressed some concern about Europe: "Will their policy response be as timely and aggressive as needed?"
Do Central Counterparty Clearing Houses (CCPs) have enough capital? A closer look at the CME. (Jasper Tamespeke, Sober Look) Forget the exposure of TBTF banks to derivatives. The weakest link may be the derivatives clearing houses themselves. Tamespeke examines the balance sheet of the CME Group, one of the two major parties on the planet responsible for clearing derivatives trades, he finds that their balance sheet is filled with lots of intangible assets (which are not applicable in a financial crisis for lack of liquidity) and finds the real tangible assets of the CME Group are -$6 billion. Don't overlook the minus sign. The new global financial system has defined the CME Group as central in clearing derivatives in the future and in a future time of stress for the financial system they will be insolvent!
OPEC Split as Oil Prices Fall Sharply (Clifford Kraus, The New York Times) A fairly long article before getting to the bottom line: Prices will continue to fall until crude production is cut and that will probably happen in the 60s when profitability of some production schemes will start to get pressured. Oil is still above $80 today. See also article two previous above.
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