Category: Economy

It Appears that the Stagflation of the 1970s Never Happened

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Oil Shock, Not Stagglation

We all know the story, how the “Stagflation” of the 1970s, a prolonged period of high inflation and low growth, broke our economy, and how Keynsian economics failed us, so we turned to Snake Oil Monetarist and Supply Side Economics.

It turns out that it never happened:

In a conversation with Dean Baker recently, I learned something interesting. This won’t be new to anyone deeply familiar with inflation statistics, but it was new to me. Maybe it will be new to you too.

The general subject is the stagflation of the 70s, which ushered in supply-side economics and the Reagan era. More specifically, the issue is the measurement of inflation during part of this era. Housing costs are incorporated into the CPI by measuring rents, but prior to 1982 it was done by directly measuring the price of buying a house. In an era when interest rates were steady, this didn’t matter much, but when interest rates went crazy in the mid-70s it made a big difference, overstating inflation by about two percentage points. If you correct for this, and also take a look at exactly when the worst periods of stagflation occurred, you get this:

(See picture)

If you correct the inflation figures and account for the two oil shocks of the 70s, the period from 1970-85 looks remarkably steady. Inflation and GDP growth are both running at about 4 percent for nearly the entire time.

So the sequence is:

  • Oil shock depresses economy and drives up prices.
  • Fed panics, and tightening pre-1982 erroneously drives up inflation statistics.
  • Fed continues to freak.
  • Rinse, lather, repeat.

Keynes was, and remains, right.

I Hate it When the Donald Says Something Sane

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He just continued low interest rates and a weak dollar.

Presumptive Republican presidential nominee Donald Trump on Thursday positioned himself on the far left of the political spectrum on fiscal issues, coming out for low interest rates, against a strong dollar and a more aggressive managing of U.S. debt.

 ………
 “She [Fed Chair Yellen] is a low interest rate person, she’s always been a low-interest-rate person, and let’s be honest, I’m a low-interest-rate person,” Trump added.

 Trump shifted to a discussion of the impact that higher rates has on the dollar, and on the impact a rising dollar has on U.S. business.

 “If we raise interest rates and if the dollar starts getting too strong, we’ll have some very major problems.”

 “I love the concept of a strong dollar, but when you look at the havoc that a strong dollar causes … it sounds better to have a strong dollar than it actually is.”

 ………

 One thing Trump advocated that the U.S. Treasury has resisted is a more active management of the debt. The U.S. Treasury hasn’t taken advantage of current low interest rates to issue more longer-term debt.

“I think there are times for us to refinance debt with longer term, we owe so much money,” Trump said.

While at times Trump seemed to link a conversation of refinancing with a situation where “the bubble popped” — at one point even suggesting a buyback of U.S. debt — he also made clear that he wanted to refinance now, to rebuild infrastructure.

This is a coherent and thoughtful, if someone iconoclastic, view of the economy, budget, and monetary policy.

It is also a refreshing departure from the conventional fetish about deficits that tends to promulgate austerity.

The economy remains depressed, interest rates are at historical lows, and it’s time borrow cheap and long term and spend on decaying infrastructure and create jobs.

I’ve said before that Donald Trump was the best Republican in the race,* and this reinforces my initial impression.

*Apart from that Mrs. Lincoln, how was the play.

Here Is the Latest Scare Story about a Brexit

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It appears that a French economist with close ties to the government is makign dire predictions about what would happen if the UK votes to leave the euro:

Eurozone economies would gain at the expense of Britain if the UK voted to leave the EU, a leading French economist has predicted, with a relocation of financial activity out of London causing sterling to plummet.

Mathilde Lemoine, a prominent member of the French government’s budgetary watchdog and chief economist of the Edmond de Rothschild private bank, said sterling could rapidly fall 34 per cent against the euro.

The report by the private bank demonstrated how European finance houses could profit from Brexit if the Leave campaign wins the referendum on June 23.

Ms Lemoine, also a former adviser to the French prime minister, wrote that the rapid relocation of financial activity would add to the “brutal drop” in sterling she expects after a vote for Brexit.

Such a vote, she said, would “immediately” reopen the question of the location of clearing houses for eurozone business, which are mostly in London after the UK government won a case last year in the European Court of Justice. It ruled against the European Central Bank’s requirement that clearing houses of euro-denominated business between European banks had to be based in the eurozone and regulated by the ECB.

After a Brexit vote, “it is certain that the grounds for the European Court of Justice’s decision would no longer exist,” Ms Lemoine wrote. “As a result, the European Council could immediately require clearing houses handling euro transactions to be located in the eurozone. On our calculations, sterling would fall 34 per cent against the euro in the space of three months”.

It’s enough to make one want to invoke the proverbial briar patch.

If  Lemoine’s predictions are true, this win for the UK:

  • Finance moves out
    • Should reduce insane real estate prices in and around London.
    • Restructuring of the economy from finance is better for 99+% of the people with less inequality, and more productive industry.
    • The corruption influence of finance and other rent seeking industries on the political system is reduced.
    • Intellectual capital that is otherwise wasted on finance and banking returns to productive pursuits.
  • Pound falls.
    • Trade balance improves, because imports are more expensive, and exports are cheaper.
    • Inflation increases, which solves the UK’s current disinflation, which will make recovery better, because people are less inclined to hoard money, and inflation devalues debts.

This horror story really isn’t particularly horrible.

    It Appears That There Never Was a Barter Society

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    One of the historical tropes that we we are taught is that money developed after barter societies became unmanagable.

    It turns out that there there is no evidence that suggests that a barter society ever existed:

    In the beginning, there was barter. Then, and forever after, there was money

    That’s the myth every student of economics learns, that money grows out of barter. The idea is that monetary exchange solves the problem of the double coincidence of wants—that a person who is interested in trading needs to find someone who wants what they have and has what they want. Money makes trade much easier, so the story goes, and thus becomes a remarkable example of both human ingenuity and economic progress. The fact is, as Ilana E. Strauss [ht: ja] explains, the story is false. Human beings did not invent money to solve the difficulties of barter exchange. Barter turns out to be a historical myth.

    various anthropologists have pointed out that this barter economy has never been witnessed as researchers have traveled to undeveloped parts of the globe. “No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money,” wrote the Cambridge anthropology professor Caroline Humphrey in a 1985 paper. “All available ethnography suggests that there never has been such a thing.”

     Humphrey isn’t alone. Other academics, including the French sociologist Marcel Mauss, and the Cambridge political economist Geoffrey Ingham have long espoused similar arguments.

     When barter has appeared, it wasn’t as part of a purely barter economy, and money didn’t emerge from it—rather, it emerged from money. After Rome fell, for instance, Europeans used barter as a substitute for the Roman currency people had gotten used to. “In most of the cases we know about, [barter] takes place between people who are familiar with the use of money, but for one reason or another, don’t have a lot of it around,” explains David Graeber, an anthropology professor at the London School of Economics.


     ………

     And there are many other examples in the historical and anthropological record of forms of exchange that precluded money—centralization and redistribution, gifts, potlatch, trade at the edges of and between non-monetary societies, and so on. But there was no original barter economy, which was then surpassed by the use of money.And there are many other examples in the historical and anthropological record of forms of exchange that precluded money—centralization and redistribution, gifts, potlatch, trade at the edges of and between non-monetary societies, and so on. But there was no original barter economy, which was then surpassed by the use of money.

     ………

    Instead, what mainstream economics offers starting with Smith, and continues to offer studies today, is a story about the mythical—not real, historical—origins of capitalism.

    It does put the entire academic endeavor of economics in a different light.

    Not a Surprise

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    Japan has started engaging in a policy of negative interest rates, where you pay the bank for the privilege of storing your money.

    It’s supposed to encourage people to spend money, because it creates a kind of a doppelganger of inflation to encourage consumption.

    It appears that the only spending that this is encouraging is for safes to store cash in:

    The Japanese are spending—but not in a way that is likely to strengthen the country’s economy.

    Following the Bank of Japan’s decision to lower interest rates below zero in January, many consumers have reportedly rushed to hardwares store in search of one thing: safes.

    Negative interest rates mean customers effectively pay a fee for parking cash in banks, so Japanese citizens are beginning to hoard yen, according to the Wall Street Journal, and they need somewhere to put it.

    Sales of safes have doubled from the same period a year earlier at chain hardware store, Shimachu, according to the Journal. The chain has already sold out of one model worth $700. Others savers are considering more unconventional storage spaces.

    “In response to negative interest rates, there are elderly people who’re thinking of keeping their money under a mattress,” Mariko Shimokawa, a Shimachu saleswoman told the Journal.

    But hoarding cash is exactly what the Japanese central bank wants to avoid.

    Bank of Japan Gov. Haruhiko Kuroda lowered rates to -0.1% for certain deposits on Jan. 29. The idea was to prop up the economy and increase inflation by encouraging consumers to spend and borrow while discouraging banks from keeping large reserves.

    Officials have already noticed the increase in safe sales. The issue of cash hoarding was brought up in a parliamentary hearing Monday, with opposition lawmaker Katsumasa Suzuki saying that the increase in safe sales suggested a “vague sense of unease,” the Journal reported.

    Central banks have been using quantitative easing, essentially printing money, and it hasn’t worked, because the newly printed money has been handed to the banks, who either use it to shore up dodgy loans, or park it in the deposit accounts of those central banks so that they can make money on the spread between their interest payments and their interest income.

    Here’s an idea:  Print the money and give it to ordinary people, or drop it from a helicopter, as Ben Bernanke has suggested.

    Once people pay off their loans, they will spend the money, and the banks will have to find new business to replace their usurious consumer loans.

    What a Surprise: Privatizing London’s Rail System Failed

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    After decades of poor and inconsistent service, incomprehensible fares, higher costs, and a lack of investment in essential infrastructure, London is moving to re-privatize its commuter rail lines:

    So, last week, the Centre for London think tank published a report called “Turning South London Orange”, which argued that Transport for London (TfL) should take over all suburban rail services in the south of the capital.

     This morning, the mayor of London Boris Johnson and the British government’s transport secretary, Patrick McLoughlin, released a joint statement, saying, basically: Okay.

     Wow, that happened fast.

     Actually the statement goes rather further than that, mentioning services into six different rail terminals. They’re only proposals at this stage – “views are being sought”. Even if it does happen, TfL will only take control of different routes once the various franchise come up for renewal, so the change will take five years or more to take effect.

     But this is nonetheless a remarkable statement of intent that the capital’s rail network should be run by the capital’s transport authorities. It’s a big deal.

    ………

    When a private rail franchise controls a route, its ultimate goal is to make money for its shareholders: running trains is the means, not the end.

    By contrast, when TfL controls a route, its ultimate mission is to run lots of trains to help the city run smoothly. That’s true even when TfL’s role is contract management, and the actual trains are run by a private firm, as happens with the London Overground.

    Some London train franchises have a history of cancelling train services at the drop of a hat, just because it’s easier and cheaper than letting them run late. Maybe we’re being utopian, but it’s hard to imagine a TfL-run network doing the same. Even without investment, this would be a big change.

    The author notes that this is odd, given that Boris Johnson only has a few more months in office, and explains why they are moving now:

    The message here is the Conservatives can be trusted to back Londoners against any big businesses that might be making their lives hell. It’s almost as if there’s an election coming up.

    It’s true. Privatized rail is so sidely loathed that the even the bloody Adam Smith Institute, which describes itself as working to, “Promote libertarian and free market ideas through research, publishing, media commentary, and educational programmes,” is cheering the return of publicly owned and operated rail:

    You know the trains are utterly terrible when the entire @ASI office cheers at hearing that TfL is taking over the London commuter railways.

    — Sam Bowman (@s8mb) January 21, 2016

    Unleashing the private sector frequently does not deliver the promised results.

    H/t Atrios.

    Jimmy McMillan Was Right

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    The divergance becomes


    A convergence when rent is removed

    Over at the Wall Steet Journal, they note that reason for the divergence between the CPI and PCE when juxtaposed wit the PPI is that the PPI does not include rent:

    Prices in the U.S. are either rising or falling, depending on how you measure them.

    The best-known measure of consumer inflation, the Labor Department’s consumer-price index, rose 0.5% from a year earlier in November. The Federal Reserve prefers to use the Commerce Department’s personal-consumption expenditures price index, which rose 0.4% on the year in November.

    So why did another Labor Department inflation yardstick, the producer-price index, decline 1.1% on the year in November? The answer may be simple: Housing costs are rising faster than pretty much anything else, and they’re not part of the PPI.

    A little background first. The PPI tracks price changes at the business level, and it was overhauled two years ago to cover a broader base of goods and services. In some cases, it can reveal inflationary pressures in the pipeline before they show up in consumer prices.

    It also happens to be first broad inflation gauge released each month, earning it extra attention from economists and investors. The December PPI report will be released Friday morning, while the CPI won’t be out until next Wednesday and the PCE price index won’t be available until Feb. 1.

    The PPI has generally moved in tandem with the two consumer-facing price gauges, but it has diverged from both measures over the past year. All three inflation gauges fell toward zero after oil prices began to tumble in mid-2014. The PPI kept going, dropping into negative annual territory and staying there, while the CPI and PCE measures have stabilized at low levels.

    The likely culprit: rising rents. The cost of shelter, as measured by the CPI, rose 3.2% in November from a year earlier for the third consecutive month—the fastest growth in eight years. But while rent (and its equivalent for homeowners) makes up nearly a third of the CPI basket and a smaller but still substantial share of the PCE index, it’s absent from the PPI. That may explain why the path for PPI looks a lot like the path of CPI if you exclude shelter costs from the latter index.

    There are a number of take aways here.

    First, and most obvious is (of course) that the rent is too damn high.

    The second is that an increasing proportion of our economy is going to rents of various forms rather than productive activities, which does nto indicate an economy that is progressing.

    The third, and most important take away is that we are actually in a deflationary economy, like the Great Depression of the 1930s.

    The reason that our economic recovery doesn’t feel like an economic recovery is because it really isn’t one.

    We are in a deflationary spiral.

    Bad Day at the Big Casino

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    In China, they had to halt trading on the exchanges following a massive selloff, with oil hitting a 7 year low and the Dow dropping by almost 1½%:

    China accelerated the devaluation of the yuan on Thursday, sending currencies across the region reeling and domestic stock markets tumbling, as investors feared the Asian giant was kicking off a virtual trade war against its competitors.

     Trading on China’s stock markets were suspended for the rest of the day, for the second time this week, as a new circuit-breaking mechanism was tripped less than half an hour after the open.

     The People’s Bank of China again surprised markets by setting the official midpoint rate on the currency at 6.5646 yuan per dollar, the lowest since March 2011.

     That was 0.5 percent weaker than the day before and the biggest daily drop since last August, when an abrupt near 2 percent devaluation of the currency also roiled markets.

    And:

    Wall Street experienced another mini panic attack on Wednesday after North Korea claimed to successfully test a hydrogen bomb. The markets were already being spooked by the financial and economic turbulence out of China and the latest plunge in oil prices below $34 a barrel.

    The Dow dropped 252 points, closing below 17,000 for the first time since mid-October. The S&P 500 fell 1.3% and the Nasdaq lost 1.1%.

    It marks the Dow’s worst start to a trading year through three days since 2008. The index also fell 276 points on Monday due to worries about China.

    If the economy and the markets continue in this direction, get used to saying President Trump.

    Talk About Failing Upwards

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    Neel Kashkeri, one of the mismanagers appointed by Hank Paulson to bail out the banksters, has been named to the presidency of the Minneapolis Federal Reserve:

    Neel T. Kashkari, who oversaw the government’s bailout of the banking industry as a Treasury official in the George W. Bush and Obama administrations, was named the next president of the Federal Reserve Bank of Minneapolis on Tuesday.

    Mr. Kashkari, 42, will succeed Narayana R. Kocherlakota in that post in January. He will also take Mr. Kocherlakota’s place as the youngest of the 17 members of the Fed’s policy-making committee, the Federal Open Market Committee.

    “Mr. Kashkari is an influential leader whose combined experience in the public and private sectors makes him the ideal candidate to head the Minneapolis Fed,” MayKao Hang, a Minneapolis Fed board member who was co-chairwoman of the search committee, said in a statement.

    Mr. Kashkari is the third person this year appointed to lead a regional reserve bank, and all three of the new presidents previously worked at Goldman Sachs. The Philadelphia Fed in March appointed Patrick Harker, a former Goldman trustee, as its new president. The Dallas Fed in August selected Robert S. Kaplan, a former Goldman vice chairman.

    Mr. Kashkari will join a minority of Fed officials who do not have advanced degrees in economics, but he has expressed strong views on monetary policy.

    In 2012, Mr. Kashkari criticized the Fed’s decision to start a second round of bond-buying.

    “At the end of the day, this is not going to lead to real economic growth,” he told CNBC at the time. “Unfortunately, it likely leads to an inflationary outcome.”

    He also has compared bond-buying to dosing the economy with morphine — “Makes u feel better but doesn’t cure,” he posted on Twitter in 2013 — and suggested that financial markets would resist weaning.

    Those views suggest Mr. Kashkari will break with his predecessor. Mr. Kocherlakota began his term at the Minneapolis Fed as a vocal skeptic of the Fed’s ability to improve economic conditions but underwent a battlefield conversion and became a leading proponent of the Fed’s efforts. He is now the only Fed official pushing to expand its stimulus campaign.

    So, he’s been wrong on everything, he f%$#ed up the bank bailout, and now he is President of the Minneapolis Fed.

    And another Vampire Squid alumni gets to decide the winners and losers in our economy.

    Paul Krugman also observes that Neel is supremely unqualified for anything resembling banking regulation or monetary policy as well:

    So, if the Minneapolis Fed felt the need to maintain conservation of NK, they could have chosen to replace Narayana Kocherlakota with a New Keynesian. Instead, they chose Neel Kashkari. Brad DeLong isn’t happy, and this Twitter exchange suggests that he has good reason to worry.

    I’ve written before about the all-too-common fallacy of confusing demand with supply, of arguing that because we had a bubble — so that some component of aggregate demand was unsustainable — the economy as a whole was somehow producing more than its potential. Let me just repeat what I said then:

    ………

    In the words of Charlie Brown, AAUGH!

    That word “artificially” is the real telltale, as is Kashkari’s description of Japanese monetary stimulus as “morphine.” It’s straight out of the liquidationist playbook, e.g. Hayek denouncing the use of “artificial stimulants” to fight the Great Depression.

    So, great: we now have a liquidationist in a senior position in the Fed system.

    Not just a liquidationist, a crony capitalist incompetent liquidationist.
    I’m feeling so much better about our monetary policy now.

    Crap, the Fed is Going to Go all Neanderthal Now

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    You see, we have pretty good news for October on the job front, which means that the Federal Reserve is now much more likely to raise rates:

    Hiring at American companies shifted into higher gear in October, helping to lift wages and clearing the path for the Federal Reserve to raise interest rates next month.

    The 271,000 jump in payrolls reported by the Labor Department on Friday was much more robust than expected and suggested that economic growth had enough momentum to allow the central bank to begin its move away from the ultralow, crisis-level interest-rate policy it has been following for seven years.

    Along with altering the landscape for policy makers in Washington and traders on Wall Street, the strength in the labor market, if it persists, is expected to shift the political debate as the 2016 presidential campaign heats up.

    While there is still a possibility the Fed could hold back, the underlying solidity evident in the latest jobs report will strengthen the hand of monetary policy hawks who have long favored an increase in short-term rates. At the same time, it should reassure Janet L. Yellen, the chairwoman of the Federal Reserve, and a majority of her colleagues at the central bank that the economy can handle modestly higher borrowing costs without stress.

    “It was pretty much everything you could ask for in a jobs report,” said Michelle Meyer, deputy head of United States economics at Bank of America Merrill Lynch. “Not only was the headline number strong, but there were upward revisions for prior months, the unemployment rate fell and wage growth accelerated.”

    I don’t know when the Fed will raise rate, but I am almost certain that when they do, it will be too soon.

    The cultural imperative of central banks, including the Fed are such that they always err on the side of mindless inflation concerns.

    I Can Understand How a Nobel Prize for Corruption Might Appear to Contradict the Organization’s Goals

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    OK, it’s isn’t technically a Nobel for Corruption, it’s the Nobel Prize for Economics, and I agree with Bo Rothstein, who has concluded that the “Nobel Prize for Economics” is completely at odds with the vision of Alfred Nobel:

    Bo Rothstein, an important member of the Royal Swedish Academy of Sciences, has today in Sweden’s most widely read newspaper called for an immediate declaration of a moratorium on the awarding of Sveriges Riksbank Prize for Economics in the name of Nobel and the Nobel Foundation.

     Rothstein’s article argues that today with increasing success, economics as commonly taught in universities and endorsed by most winners of the economics prize promotes corruption in societies around the world. Therefore he concludes that the Nobel Foundation’s awarding the economics prize is “in direct conflict with what Alfred Nobel decreed in his will.”

     “I will,” writes Rothstein, “therefore now take the initiative in this matter.”

    It’s actually more than that.

    There is evidence that the study economics are actually results in corrupt behavior, and that this applies to politicians who have left academe as well.

    It’s not surprising: Whatever you think of the study of law, it clearly buys into a system of morality which is presented as being independent of personal benefit.

    Modern “Free Market Mousketeer” economics, by contrast sees personal interest as the alpha and omega of morality. Their world view is mirrored by the William Edward Hickman quote, “What is good for me is right.”

    It may not be fair to say this, but it behooves us to note that Mr. Hickman, who was described by Ayn Rand as having, “The best and strongest expression of a real man’s psychology I have heard,,” was a psychopath who kidnapped and dismembered a 12 year old girl.

    The cult of the market, and shareholder value, is by definition sociopathic, and as such, it is a corrupting field as study.

    Of course, my view does not apply to all economists, just generally to what one would call Neoclassical Economics*

    Basically, they favor gross oversimplification of the human condition so as to allow for the creation elegant economic models made, and these simplifications give us a worldview that is both inaccurate and amoral.

    At most universities, Econ 101, even as it notes that the models are over-simplified, provides no alternative means beyond neoclassical models.

    It’s a petri dish for corruption.

    *Krugman uses the term “Freshwater Economics” because the schools that most lionize the idea of the rational and fully informed actor in the market place come from schools located inland, particularly in Chicago.

    In Addition to Scoring a Remarkable Electoral Triumph, It Appears That Jeremy Corbyn Has the Power of Prophecy

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    In 1993, he predicted that the Maastricht Treaty, which converted the European Community into the European Union, would lead to an institution run by and for bankers, to the detriment of the most vulnerable of society:

    Jeremy Corbyn predicted that the formation Euro would lead to the imposition of a “bankers’ Europe” on its members, according to parliamentary records.

    Ahead of the 1993 adoption of the EU’s founding Maastricht Treaty Mr Corbyn warned that the creation of the currency’s European Central Bank would undermine European countries’ ability to set their own policy.

    “The whole basis of the Maastricht treaty is the establishment of a European Central Bank, which is staffed by bankers, independent of national governments and national economic policies, and whose sole policy is the maintenance of price stability,” he said.

    “That will undermine any social objective that any Labour Government in the United Kingdom—or any other Government—would wish to carry out.”

    (emphasis mine)

    Credit where credit is due.  Corbyn nailed this.

    This Is All F%$#Ed up and Sh%$

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    After many years of complaints by the US that China should let its currency float according to market forces, the Bank of China has broadened the range that it will allow the Yuan to float, having the effect of devaluing the currency:

    As China contends with an economic slowdown and a stock market slump, the authorities on Tuesday sharply devalued the country’s currency, the renminbi, a move that could raise geopolitical tensions and weigh on growth elsewhere.

    The central bank set the official value of the renminbi nearly 2 percent weaker against the dollar. The devaluation is the largest since China’s modern exchange-rate system was introduced at the start of 1994.

    ………

    China’s devaluation represents a difficult dilemma for the Obama administration. The United States Treasury has tried to use quiet diplomacy in recent years to encourage China to free up its currency policies, while blocking efforts in Congress to punish China for major intervention in currency markets over the past decade to slow the rise of the renminbi. Many in Congress have long accused China of unfairly building up its manufacturing sector at the expense of American jobs by undervaluing the renminbi, and the Chinese devaluation could fan those criticisms.

    In a seeming nod to such concerns, the central bank said that it would begin to use the market closing, not the previous morning’s official setting, to calculate the renminbi’s official daily fixing against the dollar. But China’s economic weakness now means that further opening up of the currency to market forces could mean a weaker renminbi, not a stronger one. That, in turn, would make Chinese goods even more competitive in the United States and Europe.

    China’s central bank “has finally thrown in the towel on supporting the renminbi,” said Eswar S. Prasad, a professor of economics at Cornell University. At the same time, he added, easing its grip on the currency’s value “has blunted criticism by combining the currency devaluation with a more market-determined exchange rate.” The United States and institutions such as the International Monetary Fund have called on China to be more hands-off in managing the renminbi.

    Obviously there is irony here, but this is real news.

    To quote Joe Biden, “This is a big F%$#ing deal.”

    This is the last best effort by Chinese economists to try to keep the economy moving.

    I don’t know where this is going, but it is not going to be pretty.

    Today’s Must Read, from Paul Krugman

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    Paul Krugman makes an interesting observation in the case of the lion killing dentist from Minnesota, and it has nothing to do with the ethics of killing things for your personal amusement, and everything to do with the fact that “Skin in the Game” does not work to control healthcare costs:

    Wonkblog has a post inspired by the dentist who paid a lot of money to shoot Cecil the lion, asking why he — and dentists in general — make so much money. Interesting stuff; I’ve never really thought about the economics of dental care.

    But once you do focus on that issue, it turns out to have an important implication — namely, that the ruling theory behind conservative notions of health reform is completely wrong.

    For many years conservatives have insisted that the problem with health costs is that we don’t treat health care like an ordinary consumer good; people have insurance, which means that they don’t have “skin in the game” that gives them an incentive to watch costs. So what we need is “consumer-driven” health care, in which insurers no longer pay for routine expenses like visits to the doctor’s office, and in which everyone shops around for the best deals.

    ………

    But what if even the underlying premise, that individual choice will hold down costs, is all wrong?

    As it turns out, many fewer people have dental insurance than have general medical insurance; even where there is insurance, it typically leaves a lot of skin in the game. But dental costs have risen just as fast as overall health spending, and it may be that the reduced role of insurers actually raises those costs. According to the post,

    In the rest of medicine, insurers have an important function in limiting costs and promoting quality. The market power of Medicare and major national insurance companies allows them to insist on better rates for their customers when they negotiate with doctors and hospitals.

    “There’s been less presence from all kinds of insurance payers in the dental sector,” explained Andy Snyder, who is in charge of oral health at the nonpartisan National Academy for State Health Policy. “Medicare does not cover routine dental services, and private dental coverage is far less common than private medical coverage. So, the dental industry has faced less of the cost containment and quality improvement pressures that the rest of the health care sector’s experienced over the last couple of decades.”

    So more skin in the game is not just useless but actually counterproductive.

    Bazinga!

    Today’s Must Read

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    Joschka Fischer, the former Foreign Minister for Germany has an OP/ED titled, “The Return of the Ugly German,” and it has to be read.

    I will give you 2 paragraphs, and tell you to go read:

    Germany has been the big winner of European unification, both economically and politically. Just compare Germany’s history in the first and second halves of the twentieth century. Bismarck’s unification of Germany in the nineteenth century occurred at the high-water mark of European nationalism. Militarism became intimately associated with German power. Indeed, Germany’s public philosophy, unlike that of France, Great Britain, or the United States, never incorporated a civilizing ideal to justify the use of military power.

     The foundation of the second, unified German nation-state in 1989 was based on Germany’s irrevocable Western orientation and Europeanization. And the Europeanization of Germany’s politics filled – and still fills – the civilization gap embodied in German statehood. To allow this pillar to erode – or, worse, to tear it down – is a folly of the highest order. That is why, in the EU that emerged on the morning of July 13, Germany and Europe both stand to lose.

    H/t Naked Capitalism.

    Why the Germans Shouldn’t Run the EU

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    It turns out that the economy of North Korea grew faster than the EU’s economy last year:

    North Korea’s economy expanded by 1.0% to $29.85 billion (£19 billion) in 2014, according to Reuters citing analysis from South Korea’s central bank.

    That’s just better than the 0.9% growth recorded in the Eurozone last year.

    The Bank of Korea (BoK) report that “the increase in economic activity was attributed mainly to growth in services and building while farming, mining and manufacturing saw slower growth.”

    Growth in services, making up around 31.3% of total economic output, accelerated to 1.3%, up from 0.3% in 2013, with retail sales, food, and accommodation, logistics and communications all expanding from a year earlier.

    ………

    North Korea does not release official economic data, hence the reliance on the BoK analysis to estimate economic output.

    EU growth is pathetic.

    What’s more the EU’s hegemon and chief predatory exporter, Germany, experienced a GDP growth roughly double that of the EU as a whole.

    German policies with regard to the EU, and particularly with regard to the Euro zone, are about benefiting the nation at the expense of its neighbors.

    German domination was a bad idea in 1935, and it’s a bad idea in 2015.

    There are Lies, Damned Lies, Statistics, and Official Chinese Government Statistics

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    Is there anyone with two braincells to rub together who believes that China actually hit a 7% growth rate in the last quarter? I don’t,

    Not only are the Chinese stats suspect at the top levels, but every regional and local government is feeding them data that is driven by what they think their higher-ups want to hear:

    China’s economy grew an annual 7 percent in the second quarter, steady with the previous quarter and slightly better than analysts’ forecasts, though further stimulus is still expected after the quarter ended with a stock market crash.

    It has been a difficult year for the world’s second-largest economy. Slowing growth in trade, investment and domestic demand has been compounded by a cooling property sector, deflationary pressure, and most recently a stock market crash, so the recent sequence of data releases showing signs of improvement may help buttress faltering confidence in the effectiveness of prior policy support measures.

    Analysts polled by Reuters had forecast gross domestic product (GDP) in the world’s second-largest economy would grow 6.9 percent in April-June from a year earlier, compared with 7.0 percent in the March quarter.

    On a quarterly basis, the economy grew 1.7 percent compared with 1.4 percent in the March quarter, the National Bureau of Statistics said on Wednesday.

    Monthly activity data, released alongside the GDP report, also beat expectations across the board to show signs of a rebound, with factory output hitting a five-month high.

    Yeah, right.  And the Chinese stock market is not melting down right now.

    This Is an Interesting Analysis of the Social Dynamics among the EU Leadership

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    I just came across an interesting analysis of attitudes in the EU, which the author suggests that that something akin to tribalism is poisoning EU-Greece negotiations:

    Against all odds, Tsipras obtained a decisive victory in yesterday’s referendum. I agree that the referendum’s question was confusing (but have you ever seen the ones asked in Italian referenda?). I agree that the No was strategically positioned before the Yes (but why should have been the other way around?). I agree that Tsipras continued insisting that a No vote would not mean an exit from the euro, when it might mean exactly that. Yet, the Greek people in spite of the extreme situation – banks closed, massive campaign of the EU leaders in favor of the yes, not-too-vailed threats of what would have happened had the No won – overwhelmingly supported Tsipras.

     Does it mean that now the EU needs to accept all Tsipras’s requests? Of course, not. In an agreement, like in a marriage, it takes two. Unlike in a marriage, however, in an international agreement there is a question of legitimacy of the negotiating delegates. From day one, the EU challenged the legitimacy of Tsipras’s mandate. The kind interpretation is that the EU rejected it because of the ambiguity underlying Tsipras’s mandate: no to the Troika’s conditions, but yes to the euro. The unkind one is that the EU rejected it because Tsipras was not part of the Brussels’ elite (he did not even wear a tie). Even worse, he was challenging the legitimacy of the Brussels’ elite. You can be a crook, you can be an unelected leader and – if you are one of them – your legitimacy will never be questioned in Brussels or Frankfurt. But if you are not, not only your credentials will be challenged, you will be openly undermined even if you had democratically won a clear mandate.

     As a result, from day one – everybody from Junker to the Eurogroup – was trying to make this government fall, flirting with a new coalition between the “moderate” part of Syriza and the more centrist To Potami party and making clear that the conditions offered by the Institutions (ex Troika) would be much better, if Tsipras’s government fell. This was extremely antidemocratic and underhanded. Now it cannot continue any more. Tsipras has a clear mandate. Furthermore, Tsipras’s bargaining position had been boosted by a recently released IMF paper, which confirms that Greece’s debt is not sustainable.

     Now the Institutions do not need to accept Tsipras’s conditions, but they have to negotiate with him in good faith. The no vote does not necessarily mean Grexit, unless the Institutions want so. What it is different now is that the European leaders will have to take responsibility for kicking a country out (something against all the treaties). They cannot hope anymore that Tsipras will do the dirty job for them.

    (emphasis original)

    I’m not sure if his analysis over ties and the like make sense except as a metaphor, for what is an excess of group thing that permeates the EU leadership, but in that context, it does appear to explain a lot.

    Much of what passes for “common knowledge” in the EU, is in fact a mishmash of economic theories that were discredited well before the 2nd World War, and much like the gold standard economics that exacerbated the depression and led to the rise of fascism, it appears that a similar path is being taken.

    H/T Brad DeLong

    Greece Just Caved

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    As Paul Krugman notes, Argentina’s dropping the dollar peg, equivalent to a Grexit,and did not cause widespread economic devastation, it was the flailing around and uncertainty before making the break

    Greece has presented a new proposal to the Troika, and it appears to be a complete capitulation to delusional German economics:

    Only a day after grim predictions of financial and social collapse in Greece, a scramble appeared underway to work out the details of a new bailout package to bring the country back from the brink of falling out of the euro.

    As details of the new offer emerged, it appeared that Prime Minister Alexis Tsipras was capitulating to demands on harsh austerity terms that he urged his countrymen to reject in the referendum last Sunday, like tax increases and various measures to cut the costs of pensions.

    But Mr. Tsipras sought a three-year bailout loan totaling 53.5 billion euros (about $59 billion) and asked creditors to commit to discussing restructuring the nation’s massive debt. The amount was more than it would have been without a nationwide banking shutdown that has pummeled the economy. If granted, it would come on top of 240 billion euros in bailout loans Greece has received since 2010. Mr. Tsipras seemed to have gained ground on debt relief, his one bedrock demand. Germany’s finance minister, Wolfgang Schäuble, finally gave a little on that Thursday, admitting that “debt sustainability is not feasible without a haircut,” or write-down of debt, even if he then appeared to backtrack.

    Greece’s debt has been unsustainable, and when /the previous government doing what was demanded of it by the Troika, it caused the economy to implode, driving debt higher, both on an absolute basis, and on a debt to GDP basis.

    This is a f%$#ing disaster, not just for Greece, but for the Euro Zone.

    It’s clear that Greece is going to leave the Euro under these terms, and when the Greek new Drachma era shows the kind of explosive growth that Argentina did post dollar peg, there will be a clamor among the southern tier of the Euro Zone to reestablish their own currency.

    Óχι!*

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    Not only did the no vote win the referendum vote on further austerity for Greece, it absolutely crushed:

    Greek voters gave their government a desperately needed victory Sunday in its showdown with European creditors as the country decisively rejected a bailout proposal that officials here had scorned as “blackmail.”

     With nearly all of the votes counted, “no” had won a landslide 61 percent — a bigger figure than nearly anyone had predicted. The result sent thousands of government supporters streaming into central Athens’s Syntagma Square to wave blue-and-white Greek flags, dance to traditional folk songs, and revel in their collective defiance of dire European warnings.

     But even as they celebrated, an angry reaction from European officials suggested that Greece’s profound economic struggles may be only beginning. With Greek banks on the verge of in­solvency, analysts immediately raised the odds that Greece will be ejected from the euro zone. Government opponents despaired that the country may have taken a dark turn.

     ………

     Several top European officials suggested that there would be no new leeway for Greece, and that in fact the vote had made a deal less likely.

     Germany’s deputy chancellor, Sigmar Gabriel, said Greece had “destroyed the last bridges across which Europe and Greece could have moved toward a compromise.”

     “Tsipras and his government are leading the Greek people onto a path of bitter sacrifice and hopelessness,” he told the Berlin daily Der Tagesspiegel.

     Julia Klöckner, deputy chairwoman of Germany’s ruling party, tweeted: “The E.U. is not a make-a-wish club in which a single member sets the rules and the others pay the bill.”

    Nice words from the Krauts, but it is also a bald faced and pernicious lie, as the latest IMF report has revealed that the Troika has been negotiating in bad faith:

    On July 2, the IMF released its analysis of whether Greek debt was sustainable or not. The report said that Greek debt was not sustainable and deep debt relief along with substantial new financing were needed to stabilize Greece. In reaching this new assessment, the IMF stated it had learned many lessons. Among them: Greeks would not take adequate structural reforms to spur growth, they would not sell enough of their assets to repay their debt, and they were unable to undertake sufficient fiscal austerity. That left no choice but to grant Greece greater debt relief and to provide new financing to tide Greece over till it could stand on its own feet. The relief, the IMF, says must be provided by European creditors while the IMF is repaid in whole.

    The IMF’s report is important because it reveals that the creditors negotiated with Greece in bad faith. For months, a haze was allowed to settle over the question of Greek debt sustainability. The timing of the report’s release—on the eve of a historic Greek referendum, well after the technical negotiations have broken down—suggests that there was no intention to allow a sober analysis of the Greek debt burden. Paul Taylor of Reuters tells us that the European authorities worked hard to suppress it and Landon Thomas of the New York Times reports that, until a few days ago, the IMF had played along.

    As a result, the entire burden of adjustment was to fall on the Greeks before any debt reduction could even be contemplated. This conclusion was based on indefensible economic logic and the absence of the IMF’s debt sustainability analysis intentionally biased the negotiations.

    As an international organization responsible for global financial stability, it is the IMF’s role to explain clearly and honestly the economic parameters of a bailout negotiation. The Greeks, many said, benefited from low interest rates and repayments stretched out over many years. Therefore, no debt relief was needed. But, of course, as the IMF now makes clear, if a country has to repay about 4 percent of its income each year over the next 40 years and that country has poor growth prospects precisely because repaying that debt will lower growth, then debt is not sustainable. If this report had been made public earlier, the tone of the public debate and the media’s boorish stereotyping of Greeks and its government would have been balanced by greater clarity on the Greek position.

    ………

    The creditors’ serial errors are well documented, including by the staff of the IMF. Continuing deliberately to suppress past errors is an act of bad faith but continuing to repeat those errors in making future projections of the Greek debt burden is a willful abuse of the trust that the international community has placed in an organization set up to serve the best interests of all nations. If the IMF’s latest numbers are properly reconstructed, the Greek debt burden is much greater than portrayed—and the policy measures proposed to reduce that burden will make matters worse.

    ………

    Here is how this principle applies today to Greece. Recall that prices in Greece have been falling for about two years now. Since debt repayment obligations do not change when businesses sell at lower prices or when wages fall, businesses and households struggle to repay their debt in that deflationary environment. Investment and consumption are held back, the government receives less revenue, making its debt repayment harder. If fiscal austerity is imposed in such a deflationary setting, prices and wages are forced down faster, making debt repayment even harder. This is Fisher’s debt-deflation cycle. Greece is in a debt-deflation cycle. It is the medical equivalent of a trauma patient: the blood flow does not stop on its own and, in such a condition, austerity is like asking the patient to run around the block to demonstrate good faith.

    The IMF’s latest numbers bear out this diagnosis. In November 2012, the IMF tentatively concluded that Greek debt was borderline sustainable if it would undertake austerity to reduce its debt burden and structural reforms to spur growth. The primary surplus (the budget surplus without interest payments) was to rise from -1½ percent in 2012 to 4½ by 2016—an extraordinary additional austerity on top of the extraordinary austerity that had already been undertaken since 2010. The Greek government actually delivered on the austerity through 2014, bringing the primary budget in balance, as per the proposed timeline.

    But look what happened along the way—and this is the debt deflation cycle. In 2012, prices were expected to be broadly stable over the coming years. Instead, prices fell by over 5 percent just in 2013 and 2014. True, it is important for Greek wages and prices to eventually fall. But because of the Irving Fisher theorem, when prices fall, the debt burden increases. To reduce the debt burden, Fisher says, not only must austerity stop, but the economy must be “reflated.” He emphasizes that it was President Franklin D. Roosevelt’s policy of reflation that ultimately stopped the Great Depression. In an analogy similar to the trauma patient, Fisher says that when tipped beyond a point, the boat continues to tilt further until it has capsized. In a deflationary economy, the bankruptcies and distress can go on in a vicious spiral for years.

    ………

    We may not like the conclusion, but it is quite simple. Greece has not grown and prices have fallen because that was to be expected when persistent austerity is laid on top of an unsustainable debt. The debt-deflation spiral always outpaces the returns from structural reforms. As certainly as these things can be predicted, on the path set out by the creditors, the stakes will continue to be escalated: the debt-to-GDP ratio will continue to rise, the calls for more austerity will grow, and, as the pattern repeats, more debt relief will needed.

    The IMF report is very specific, it says that Greece needs billions in debt forgiveness or the debt will remain unsustainable: (See also here)

    The International Monetary Fund, a big Greek creditor, conceded a point on Thursday that the Athens government has long been making: Without some reduction in the country’s staggering debt load, Greece has little hope of a sustained economic recovery.

     It was a significant acknowledgment, and an indication that if or when bailout negotiations resume, Greece might win some relief from its debt of 300 billion euros, or about $330 billion. It just might not be relief granted to the leftist government of Prime Minister Alexis Tsipras.

    It should be noted that the EU bureaucracy aggressively tried to suppress this report:

    Euro zone countries tried in vain to stop the IMF publishing a gloomy analysis of Greece’s debt burden which the leftist government says vindicates its call to voters to reject bailout terms, sources familiar with the situation said on Friday.

     The document released in Washington on Thursday said Greece’s public finances will not be sustainable without substantial debt relief, possibly including write-offs by European partners of loans guaranteed by taxpayers.

     It also said Greece will need at least 50 billion euros in additional aid over the next three years to keep itself afloat.

     Publication of the draft Debt Sustainability Analysis laid bare a dispute between Brussels and the Washington-based global lender that has been simmering behind closed doors for months.

    This may be the reason for the lopsided vote: Any Greek voter who understood these dynamics could help but conclude that the Troika have no interest in Greece beyond making an example of the country.

    My guess is that Germany, with the acquiescence of the EU bureaucracy, will attempt to expel Greece from the Euro Zone, since the alternative is to rip the mask off their attempt at regime change, but Greece could tie this up in legal proceedings for months, if not years:

    “The Greek government will make use of all our legal rights,” proclaimed the finance minister, Yanis Varoufakis, according to The Daily Telegraph.

    We are taking advice and will certainly consider an injunction at the European Court of Justice. The EU treaties make no provision for euro exit and we refuse to accept it. Our membership is not negotiable.

    But, can a hypothetical Grexit decision adopted by the EU institutions be legally challenged?

    ………

    So, what decision would Greece be challenging? It would be a decision adopted by the EU institutions and the Eurogroup finance ministers to force a Greek exit of the eurozone due to its default on fulfilling the obligations attached to its participation in the monetary union (criteria laid down in Article 140.1 of the Treaty of the Function of the European Union) and the conditions attached to Greece’s bailout program.

    Greece would then still be an EU member state but it will have to revert to the drachma or adopt a new currency. Nevertheless, as mentioned, there is no explicit legal basis for such a decision. One can argue that the failure to fulfil the eurozone commitments would amount to a serious violation of the founding treaties, and that it is possible to adopt the decision based on the principles embodied in the treaties. But the fact is that the treaties would need to be amended in order to provide for this.

    I would note that throughout all of this, someone is spreading a rumor that the Greek government is working on a program of depositor bail-ins, where depositor accounts would be raided to pay off the EU lenders, as happened in Cyprus.  (My money is that these rumors are coming from Brussels)

    One hopes that the confluence of all these events will result in something other than the moral and economic bankruptcy that we have seen from the EU, IMF, and Germany, but I doubt it.

    *Greek for no.