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What We Read Today 02 January 2015

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.

France’s rock star economist Thomas Piketty turns down Legion of Honour (Anne Penketh, The Guardian)  The bestselling author spurns country’s highest distinction on grounds that government should not decide who is honorable.  He further said:  “They’d be better off concentrating on boosting growth in France and Europe.”


Seven shocking events of 2014 (Ugo Bardi, Resource Crisis)  Hat tip to Doomstead Diner.  Ugo Bardi has contributed to GEI.  The most important events of humankind for 2014 in 666 words.  A very quick and worthwhile read.


Are some diets “mass murder”? (Richard Smith, the bmj)  Smith reviews research which indicates that removing saturated fat for our diets and restricting just about anything else in our diets (except for sugar) is a contributor to obesity and disease.  Start the year right.  Read this and research the references.  We feel a lot less guilty about out bacon and eggs for breakfast once or twice a week.  That loss of guilt alone will make us healthier.


Articles about events, conflicts and disease around the world

AirAsia Flight 8501

Middle East

Iran

Ukraine

Russia

Singapore

Afghanistan

Wall Street Heathens: How Their Greed And Gambling Became The Axe Of Statist Policy (David Stockman, Contra Corner)  Good documentation of the recent history of credit expansion outside of the U.S.  We are familiar with the credit expansion in the U.S. which preceded the Great Financial Crisis (GFC) of 2008.  Household and non-profit credit increased by 60% over the 7 years from 1994 to 2001.  The next 7 years (2001-2008) it doubled.  That was more than tripling in 14 years.  Stockman has specifics for Russia, China and Brazil.  For comparison to the U.S. numbers above he provides data for loans to the private sector:  Russia is up almost 6x in the last 7 years; China has doubled in 5 years; and Brazil is up 6x in the last 11 years.  By comparison the pre-financial crisis bubble in the U.S. looks rather mild.  What is the difference between an economic miracle and a credit bubble?  I'll leave that for your consideration.

russia-loans-private-sector-stockman-2014-dec-31


Japan suffers lowest number of births on record as population shrinks (Agence France-Presse, The Guardian)  Japan’s estimated number of newborn babies last year fell to 1.001 million, the lowest figure on record.  It was the fourth year in a row that a new low record was set.  The demographic profile for the country is such that continued decline of the birthrate is expected to continue.  Reinforcing the shrinking population trend, 1.269 million people died in Japan last year, rising for the fifth straight year.  Econintersect calls this "peak people".  It is the fate awaiting China and Europe in the coming decades, but not the U.S.  Other parts of the world, India, Southeast Asia and especially Africa will have burgeoning increases in population throughout the 21st century.


What We Know About Inequality (in 14 Charts) (Josh Zumbrun, The Wall Street Journal)  The charts are all very good, but none beat this one for dramatic effect:

income-inequality2000-2014-zumbrun-wsj-2015-jan-01


What The Total U.S. Debt Really Looks Like and What It All Means (James Butler, ivn.us)  Butler's comprehensive review of debt in the U.S. is somewhat unusual in that it is somewhat dismissive of the federal government's national debt (around $17 trillion) and focuses on private sector debt which is around $42 trillion.  For more discussion of debt, cerdit and money, see the next two articles.  However, in the first graphic below he plots the total debt and GDP from 1951 to 2014.  The graph would have been less dramatic but more meaningful if he had made two plots for debt, one public (federal) and the other private.  That graph would have shown the national debt growing much in lockstep with GDP and the private debt rising much more rapidly with time.

debt-gdp-james-butler-1951-2014-jun-11

There is a second graphic which shows a unique perspective for the data in the graph above.  In this graphic we see that since the 1950s debt has always grown more rapidly than GDP, but there are two distinct periods:  1950-1979 and 1980-2009.  A third period has started with 2010.  In the first period debt was growing between about 1.1x (1960s) and 1.6x (1970s) GDP growth (the 1950s are not clear on the graph).  But the next three decades show ratios greater than 2x, growing progressively to a ratio about 6X for the 2000s.  Again this graph would be more instructive if the debt growth bars had been split into ywo sections:   federal debt and all other debt.

debt-gdp-james-butler-1951-2014-jun-11-bar


The Money Problem (Christopher T. Mahoney, Project Syndicate)  Mahoney discusses how U.S. credit can be sliced and diced for analysis.  First he discusses the connections of bank credit (FRB H.8) - Fred Series TOTBKCR) to monetary growth and the connection of total credit (FRB Z.1 - Fred Series TCMDO) to growth of the economy.  (See next article for further characterization of the composition of bank credit.)  Then Mahoney separates bank credit into its four components:  Households, Business, Government and Finance.  Key points about this separation of bank credit:  (1) Government credit has two components, regional and federal, which have completely different characteristics within the monetary system*; and (2) Finance credit is double counted in some areas because the financial system creates the other three classifications.**

*Federal debt can exist as perpetual debt (never to be repaid) because of monetary sovereignty.

**The double accounting should be removed and only financial debt created for other financial sector parties retained for analysis purposes.  Then total bank credit would be an identity with the sum of the four types of credit.  We presume this can be done and are looking into it.


Principles for the Management of Credit Risk (bis.org)  Bank credit consists of more than just loans (which is the largest part, typically up to 70%-80% of assets for "commercial" banks, but under Glass-Steagall much larger, closer to but less than 100%).  In the broadest sense, bank credit is comprised of loans and investments.  This paper specifies some of the items that fall into the very broadly defined category "investments":

...various financial instruments other than loans, including acceptances, interbank transactions, trade financing, foreign exchange transactions, financial futures, swaps, bonds, equities, options, and in the extension of commitments and guarantees, and the settlement of transactions.

After the passage of Gramm-Leach-Bliley Act (1999) the "firewall" between investment activities and lending in banks was removed.  Some banks that have relatively minor traditional commercial banking activities (i.e. they are primarily investment banks) are grouped into the same "regulatory package" as banks which have the traditional lending functions as a large portion of their business.  We have put quotes around "regulatory package" because our opinion is there is insufficient regulation.  The "package" is largely wrapping paper and ribbons with little inside.  To use the metaphor of Christmas, we feel that when Christmas arrives and the package is opened for use, there will not be something of high function inside but likely a small lump of coal.


Trouble in Brazil (Walter Kurtz, The Daily Shot email, no url)  Not only does Brazil have a huge debt overhang (discussed previously above) but the money needed to deal with it is fleeing the country, especially in December.

brazil-foreig-exchange-flows-daily-shot-2015-jan-01

As the money flees the country the national fiscal surplus has evaporated into deficit:

Brazil-fiscal-surplus-daily-shot-2015-jan-01

And the depreciation of the real has accelerated, now down more than 35% vs the US dollar since March 2013, more than half in the past four months.

usdbrl-daily-shot-2013-2014-2015-jan-01


Other Economics and Business Items of Note and Miscellanea

Twin Peaks Planet (Paul Krugman, The New York Times)  Prof. K in one of his more lucid moments.

The World Economy’s Shifting Challenges (George Soros, Project Syndcate)  Hat tip to Rob Carter.  One year old outlook reads like it was written today.

One Hundred Years of 'No Respect' for Keynesian Economics (The Christian Post)

2015 forecast: What's in store for Europe (Reuters, Arabian Business)

x#dnaEdit: 2015: Good economics (India.com)  ‘Nearer we are to an epoch, the less we understand it. Our own, we understand the least.’  (Joseph Schumpeter)

Philadelphia Fed’s Plosser Warns Delay for Rate Increases Carries Risk (The Wall Street Journal)

Why are prime numbers important in real life? What practical use are prime numbers?  (Quora)

Five Reasons for Slow Growth (Michael Spence, Project Syndicate)

Yellen's Inflation Compensation And GLD (Seeking Alpha)


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