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What We Read Today 24 May 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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Articles about events, conflicts and disease around the world


  • OECD Sees Continued Rise in Growth-Harming Inequality (The Wall Street Journal)  Two-fifths of the population of developed countries have gained little in recent decades, according to the Organization for Economic Cooperation and Development (OECD).  The UK and the U.S. are the biggest problems.




  • What will get Europe's economy rolling again? (Associated Press)  This is a review of the European Central Bank (ECB) meeting of prominent economists last week near the town of Sintra, Portugal.  ECB president Mario Draghi called for fiscal action by EU countries, along with pro-business reforms.




  • Poland election exit polls suggest Duda beats Komorowski (BBC News)  Exit polls in Poland suggest that Andrzej Duda has beaten incumbent Bronislaw Komorowski for the presidency in a run-off vote.  Mr Duda, the Conservative challenger, had edged Mr Komorowski in the first round but did not gain the 50% needed to win outright.  Mr Komorowski had been the favorite in previous opinion polls and had been looking for a second term.



Stock Picking is Back (Chart Lab Pro)  First, it looks to us as if stock picking has always been important,certainly for the one year of data shown.  But what is significant is the high level of stocks rated at the bottom (Rating 5), currently 50% of the S&P 500 and having hit as high as 75% a couple of times over the past year.  One has to pick very carefully to avoid getting one or more of them in any portfolio with even a small number of stocks.

The Idolatry of Interest Rates Part I: Chasing Will-o’-the-Wisp (James Montier, GMO White Paper)  Hat tip to Cullen Roche.  See article later in this column (below).  Another analysis of the issue of a natural rate of interest, or better stated, the lack of such a thing as a natural rate of interest.  he concept depends on thinking in terms of the hypothetical loanable funds theory and the assumption that there is a natural relationship between prices (inflation) and interest rates.  The natural relationship is not observable empirically because interest rates are not market-determined but are set by central banks (contrary to many economic models).  A necessary relationship in these monetary models is that savings rates are influenced by interest rates:  higher interest encourages increased savings and vice versa.  Montier shows that savings in the form of investment by firms is determined by the expectation of future profits and is not affected by interest rates.  He further shows that individuals do not change savings as a function or real interest rates.  Econintersect:  We challenge you to find a line upwardly sloping to the right in the scatter plot of 60 year's of data:


Other Economics and Business Items of Note and Miscellanea

  • James Montier Rightly Dismisses the Natural Rate of Interest (Pragmatic Capitalism)  Cullen Roche has a good short essay discussion of the James Montier paper discussed above.  He mentions Paul Krugman's disagreement with Montier and criticizes Krugman as being "non-Keynesian".  Here is Roche's summary:
  • New Keynesian economics is highly influenced by Wicksellian and Monetarist thinking which means that it’s actually not so much Keynesian as it is Monetarist.
  • This leads economists to focus first on Monetary Policy and only second on Fiscal Policy.
  • The crisis should have exposed the reality that Monetary Policy is far less impactful than most economists think, but instead has been described as some sort of temporary environment referred to as the “liquidity trap” even though JM Keynes, who coined the term, would have never called this a liquidity trap.
  • SEC Commissioner Kara Stein Issues Blistering Dissent on Waivers for Bank Recidivists (Naked Capitalism)  SEC Commissioner Kara Stein has waged an uphill battle to have the agency stop giving financial firm miscreants waivers from sanctions that would otherwise take effect when they enter into settlements for bad conduct. Stein took issue with the SEC’s prior stance, that these “get out of jail” cards were issued freely to big firms by virtue of simply asking for them.

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