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What We Read Today 18 February 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.

This feature is published every day late afternoon New York time. For early morning review of headlines see "The Early Bird" published every day in the early am at GEI News (membership not required for access to "The Early Bird".).

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Every day most of this column ("What We Read Today") is available only to GEI members.

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Here’s What Niagara Falls Looks Like Frozen (Time)  After getting down as low as -13 degrees Fahrenheit, Niagara Falls looks something like a modern art ice sculpture.  See also ice climbing video below.

Click here for beautiful slide show at The Daily Mail. niagara.frozen

niagara.frozen.2


Ithaca, New York's Tourism Board Gives Up, Invites Visitors to Head to Florida Instead (People)  Visitors to VisitIthaca.com this week were greeted with a pop-up on the site that encouraged them to flee to warmer climates.  Econintersect checked just now and it was no longer there.  But this is what it looked like:

Click for larger image at Twitter.
ithaca.key.west


Articles about events, conflicts and disease around the world

EU

UK

Greece

Islamic State

Egypt

Ukraine

Russia

  • Putin's Staying Put (for Now) (Bloomberg View)  Ukrainian troops' orderly retreat from Debaltseve is a clear sign that Russian President Vladimir Putin wants to freeze the conflict.

Afghanistan

China

Argentina


Here's a $9 Trillion Question (Mattghew Boesler, Bloomberg Business)  Hat tip to Idea Economics via Twitter.  Matthew Bossler has contributed to GEI.  When the Fed raises interest rates it is not just the U.S. economy that is affected.  Because $9 trillion of debt is owed by non-bank parties outside the U.S., every shaky corner of the global economy is put at risk.  The Bank for International Settlements (BIS) says that the dollar denominated debt owed by non-banks outside the U.S. has increased by 50% since the Great Financial Crisis (GFC).  With the dollar strengthening over the much of the past year the stress on many of these parties with dollar denominated debt has increased greatly through adverse exchange rate changes.  If interest rates rise on top of that, the stress is multiplied.  Where are the stresses most likely to cause dislocations?  The article mentions China ($1.3 trillion) and Brazil ($300 billion), as well as Hong Kong, with its currency pegged to the dollar, facing a likely 20% real estate market decline due to a weaker retal market and in anticipation of the Fed raising rates.

us.dollar.credit.nonbanks.outside.us


Canada's millionaire migrants earn less than refugees, so why bother with wealth migration? (Ian Young, South China Morning Post)  The idea of Canada's program to encourage immigration of the wealthy was that they would be a positive addition to the Canadian economy.  But data indicates that after citizenship is acquired less than half even reside in Canada and the incomes reported on Canadian tax returns fall far below the median income for Canada.  See graph below.  These millionaire "immigrants" fall far below the incomes achieved by another class of immigrants:  refugees.  See also Canada extends millionaire migration deadline as scheme appears to flop with rich Chinese (Ian Young, South China Morning Post)

canada.investor.immigrants


The truth is out: money is just an IOU, and the banks are rolling in it (David Graeber, The Guardian)  Hat tip to Roger Erickson.  Graeber says that the Bank of England has thrown the theoretical justification for austerity out the window.  Henry Ford is reported to have once remarked:

It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.

A recent paper from the Bank of England has peeled back the veil to which Ford alluded and the operation of money and banking is now summarized in a document available to everyone.  See next article but read this one first for better understanding of what follows.


Money creation in the modern economy ( Michael McLeay, Amar Radia and Ryland Thomas, Bank of England Monetary Analysis Directorate)  From the lede:

  • This article explains how the majority of money in the modern economy is created by commercial banks making loans.
  • Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.
  • The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’.

The paper explicitly defines the two major misconceptions about banking that are so pervasive that they even exist in many university courses on Economics:

One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them. In this view deposits are typically ‘created’ by the saving decisions of households, and banks then ‘lend out’ those existing deposits to borrowers, for example to companies looking to finance investment or individuals wanting to purchase houses.

In fact, when households choose to save more money in bank accounts, those deposits come simply at the expense of deposits that would have otherwise gone to companies in payment for goods and services. Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money.

Econintersect:  What is clear from this correct definition of banking operations is that, contrary to the fairy tale perpetuated in Economic mythology, savings per se do not create a means fro economic epxansion.  Quite the opposite, savings held as deposits as money credits diminish the porential for an economy.  Only when savings are invested in something other than "cash" can it grow an economy.  And, more specifically, only when savings are removed from cash and invested in something productive, like a harvester machine or a woodworking tool, is there any economic value to the cash at all. 

Note:  Using cash savings for down payment on a house does nothing to grow the economy (unless the house is used to produce income via rent or a home office for work, for two examples).  Otherwise the down payment is simply a form of consumption (not investment) as are all future mortgage payments used to retire principal which is reducing the monetary expansion created when the mortgage was issued.

Now for the second misconception:

Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach. In that view, central banks implement monetary policy by choosing a quantity of reserves. And, because there is assumed to be a constant ratio of broad money to base money, these reserves are then ‘multiplied up’ to a much greater change in bank loans and deposits. For the theory to hold, the amount of reserves must be a binding constraint on lending, and the central bank must directly determine the amount of reserves. While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality. Rather than controlling the quantity of reserves, central banks today typically implement monetary policy by setting the price of reserves — that is, interest rates.

Let us repeat what this paper says:

  • The relationship between deposits and loans is exactly the reverse of text book "lore".  Loans create deposits, not the other way around.
  • The relationship between reserves and loans is the reverse of what is described in many text books.  Loans are created based on the creditworthiness of the borrower.  The reserves are then created by the decision of the central bank.

Econintersect:  We maintain that the definitions in this paper are representations of fact.  They are not theory.  The mechanics of money and banking operate in exactly this way.  The mythology of the loanable funds theory of banking causes much mischief in the interpretation of cause and effect in economic modeling.  It is behind much of the disagreement with Keynes General Theory and the general omission of banking and credit from neoclassical modeling, the very omission that created nearly universal blindness to the credit bubble and the advent of the financial crisis of 2008.  For an stament of the problem here see the next article.


Paradox of Thrift (Investopedia)  Spreading the mythology here.

DEFINITION OF 'PARADOX OF THRIFT '

The notion that individual savings rather than spending can worsen a recession, or that individual saving is collectively harmful. This idea is generally attributed to John Maynard Keynes, who said that consumer spending contributes to the collective good, because one person's spending is another person's income. Thus, when individuals save rather than spend, they cause collective harm because businesses don't earn as much and have to lay off employees who are then unable to save. Therefore, an increase in individual savings rates is believed to create a flattening or diminishing of the total savings rate.

INVESTOPEDIA EXPLAINS 'PARADOX OF THRIFT '

It is important to note that the paradox of thrift is a theory, not a fact, and is widely disputed by non-Keynesian economists. One of the main arguments against the paradox of thrift is that when people increase savings in a bank, the bank has more money to lend, which will generally decrease the interest rate and spur lending and spending.


UK unemployment just dropped unexpectedly and wages are finally climbing (Mike Bird, Business Insider)  Over the past 12 months UK unemployment rate has dropped from 7.2% to 5.7% and the employment rate is tied with the all-time record 73.2% of working age population.  Regular pay and total pay are both rising at the same time for the first time in years.  And CPI is declining.  A virtuous confluence?  Or a momentary coincidence?

uk.employ.cpi


Other Economics and Business Items of Note and Miscellanea

The rich own our democracy, new evidence suggests (Al Jazeera)  Hat tip to Roger Erickson).  The donor class opposes policies that favor the middle class and poor, and they have sway over our representatives.

The Hot New Statistic Oil Traders Are Eyeing Is 71 Years Old (Bloomberg Business)

The 5 Worst Large Caps (TalkMarkets)

Hurricane Sandy Lawsuit Battle: Homeowners Take On Insurers Claiming 'Secretly' Altered Engineering Reports (International Business Times)

U.S. Health-Care Spending Is on the Rise Again  (Bloomberg Business)  Years of slow growth in health-care costs may be coming to an end.

Highly Aggressive New Strain Of HIV Is Spreading Through Cuba (IFL Science)


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