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What We Read Today 24October 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.

  • Housing is waking up to a new hangover (Diana Olick, CNBC) After three years of double digit price increases for U.S. houses the increases have slipped back to single digits nationally and some markets are not increasing at all. Zillow is quoted in this article as saying house prices should continue to be steady and rising slowly. But not all agree. See next two articles.

  • Home prices headed for a triple dip (Diana Olick, CNBC) The western U.S. will lead the national average prices lower as soon as the end of this year or early 2015, according to some analysts.
  • The jingle that sounds the road to economic recovery (Gillian Tett, Financial Times) One reason that the U.S. banking system seems to be healthier that that in Europe is the use of non-recourse mortgage loans where repossession (foreclosure) is the process that removes the debt from the ledger. There is no recourse to any other borrower assets. Tett says: "It sometimes pays to wipe the debt slate clean rather than sweep problems under the rug." Some Irish lenders have started to issue non-recourse mortgages and Tett says the rest of Europe should follow that lead. Unencumbered balance sheets are needed for growth, in her opinion, and she presents some macro observations to support. The quickest way to clean balance sheets is to keep the dirt from under the carpet and close out (by writing down) bad debts.
  • Articles about conflicts and disease around the world

Ebola

Waiting on hold: Ebola and Big Data (The Economist)

Ebola’s impact on the West African economy (The Conversation)

Ebola in New York: Five Things to Watch (Bloomberg Businessweek)

U.S. stock futures tumble on reports of Ebola case in NY (Reuters)

Yen rallies on safe-haven bids after New York Ebola case reports (Reuters)

Want to feel better about Ebola? This (massive) chart should do the trick. (The Washington Post)

Turkey

Turkey's U.S. relations show strain as Washington's patience wears thin (Reuters)

Syria

Syria's Kobani less at risk but could still fall: U.S. officials (Reuters)

Iraq

In Iraq, Relief After News of Blackwater Convictions (The New York Times)

Islamic State militants seize Iraq village, press assault on Yazidis (Reuters, Yahoo! News)

ISIS

With their feet and a tweet, Europe’s Muslims stand up to IS (The Frontier Post) Hat tip to Sig Silber.

Iran

Iran will be seen as responsible if nuclear talks fail: U.S. (Reuters)

Ukraine

Exclusive: Charred tanks in Ukraine point to Russian involvement (Reuters)

Russia

LEAKED: What Happens to Germany if Russia Turns off the Gas (Wolf Street)

Oil slump leaves Russia even weaker than decaying Soviet Union (The Telegraph)

Hong Kong

China’s Hong Kong Follies (Project Syndicate)

Mexico

Mexican mayor accused of masterminding disappearance of 43 students (The Washington Post)


There are 12 articles discussed today 'behind the wall'.

Today's discussions start with an assessment of how falling oil prices will affect the global economy. That extends naturally into discussions of inflation, deflation and the quantity theory of money. Along the way some neoclassical modeling "habits" are hoisted on their own petards.

Do not miss "Other Economics and Business Items of Note", the final section every day.

Please support all that we do at Global Economic Intersection with a subscription to our premium content 'behind the wall'.

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  • Winners and losers (The Economist) At the highest level overview America and its friends (including China) benefit from the decline in oil prices. America's enemies are hurting. Overall, the global economy is a beneficiary. If prices averaged $80 for a year global GDP would be about 0.7% higher than for oil at $115. Econintersect: But that assumes there are no recessions; if there were a global recession over that 12 month period the lowered oil prices would have little impact on global GDP because the windfall of lower oil prices would be largely saved instead of spent. And GDP counts how much is spent. On top of that, a lower (recession) GDP would depress oil prices further, more money would be saved and the recession would deepen. This scenario is one of debt deflation as the bulk of savings in this environment would likely go to debt reduction and not be available for investment. See also the next four articles which get into the weeds of how inflation is analyzed and how it should be analyzed.

oil-winners-losers-the-economist-2014-oct-23

  • The Debt-Deflation Theory of Great Depressions (Irving Fisher, Econometrica, Digitized by St. Louis Fed) This 1933 paper is arguably the leading analytical study of the Great Depression and possibly somewhat less arguably the most ignored economics paper of great value from the 1930s, although it is essentially a summary of his 1932 book "Booms and Depressions" out of print but also digitized by the St. Louis Fed. Some "sound bite" gems include:

fisher-sound-bite-1

fisher-sound-bite-2

fisher-sound-bite-3

fisher-sound-bite-4

  • Debt-deflation: concepts and a stylised model (Goetz von Peter, BIS Working Paper) This paper from April 2005 was a wine before its time, but it shouldn't have been ignored. The stylized model has shortcomings because it deals with economic equilibrium conditions and ISLM formalism. See second article below by Egmont Kakarot-Handtke What is most valuable in the von Peter article is the process flow of the various developments of the theory of deflation. There is nothing in these defined flows that requires an assumption of equilibrium (which was involved in the Goetz von Peter analysis) - they can be analyzed through dynamic time-variant treatments such as the formalism developed by Steve Keen's Minsky formalism.

debt-deflation-channels

  • The pendulum swings to the pit (The Economist) Currently the world is largely in a state of disinflation, the condition of slumping inflation. In most cases inflation is below official targets. The situation of falling inflation already below government and central bank targets is particularly dangerous because it only takes nudges here and there to actually slide down into deflation. Once there (in deflation), a downward spiral can become entrenched as the expectation becomes endemic that the dollar you have today will buy more tomorrow, depressing consumption and investment. That is the pit The Economist references in the title.

Econintersect: The graphic supplied by The Economist has an error; the inflation numbers for Japan include the added costs imposed by the raising of the consumption tax from 5% to 8% 01 April. This is a nominal add of 3% to costs if underlying prices are unchanged (but with lower energy costs they may actually decline). GEI has determined that, because the consumption tax functions as a value added tax, applied at every level of the production chain, the effective price increase may actually be 4% or higher at the retail level.

disinflation-global0the-economist-2014-oct-23

  • The Purchasing Power of Money (Irving Fisher, Library of Economics and Liberty) This 1911 book (second edition in 1922) is considered to be the first formal presentation of the quantity theory of money equation MV = PT. The equation, more generally associated with Milton Friedman (who credited Fisher as the originator), was not widely used in economics analysis until Friedman's time because the Keynes theories of aggregate demand as the determinate of monetary value were predominant during the 1930s and up to the 1970s. (Econintersect: At the root of all this, the argument is silly because aggregate demand theory and quantity theory of money are not incompatible and can co-exist with the exception of the existence of narrow intellectual egos which are anchored on the encumbering assumptions of economic equilibrium.) It is interesting that Fisher himself attributed the conceptual formulation of the now famous equation to 19th century physical scientist and astrophysicist Simon Newcombe, to whom Fisher dedicated the 1911 book. Austrians will attribute the quantity theory of money (at least in part) to Ludwig von Mises, a contemporary of Fisher, but the von Mises formulation of the value of money was couched more in logical philosophical terms and not represented as the now famous equation. The 1912 book Theory of Money & Credit was von Mises' expostulation of the quantity theory of money.
  • Other Economics and Business Items of Note and Miscellanea

10 Hottest American Politicians Ever (Rant Political)

Made in the U.S.A., but Banked Overseas (The New York Times)

House prices falling? Don’t bet the bank on it (The Conversation)

Eastern Cherokee Band Forbids Fracking on Its Sovereign Lands (Indian Country) Hat tip to @Doomstead Diner.

Early Troubles Have Brokers Predicting Another Bumpy Road for 2015 Federal HIX Enrollment (Health Insurance Exchange)

Inheritance and Inequality (Project Syndicate)


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