Tag: economics

Banking is bad for the economy

It’s amazing that people are talking about how excessive finance and credit money warp the economy to its detriment without ever managing to mention the vital Austrian concept of “malinvestment”. But at least they are starting to talk about it, as it will lead them there eventually.

A new study from the Bank for International Settlements (the central bankers’ central bank, as it is dubbed) shows exactly why rapid finance sector growth is bad for the rest of the economy.

The study, by Stephen Cecchetti and Enisse Kharroubi, is a follow-up to a 2012 paper which outlined the negative link between the finance sector and growth, after a certain point. When an economy is immature and the financial sector is small, then growth of the sector is helpful. Enterprising businessmen can get the capital they need to expand their companies; savers have a secure home for their money, making them more willing to provide finance to the business sector; and so on.

But you can have too much of a good thing. The 2012 paper suggests that when private sector debt passes 100% of GDP, that point is reached. Another way of looking at the same topic is the proportion of workers employed by the finance sector. Once that proportion passes 3.9%, the effect on productivity growth turns negative. Ireland and Spain are cases in point. During the five years beginning 2005, Irish and Spanish financial sector employment grew at an average annual rate of 4.1% and 1.4% respectively; output per worker fell by 2.7% and 1.4% a year over the same period.

The new paper examines why this might be. One part of the thesis is a familiar complaint, neatly summarised in the 2012 paper

people who might have become scientists, who in another age dreamt of curing cancer or flying to Mars, today dream of becoming hedge fund managers

In short, the finance sector lures away high-skilled workers from other industries. The finance sector then lends the money to businesses, but tends to favour those firms that have collateral they can pledge against the loan. This usually means builders and property developers. Businessmen are lured into this sector rather than into riskier projects that require high R&D spending and have less collateral to pledge.

I’m reading the paper now, and will review it once I’ve finished digesting it.

Detonating the EU

Greek has their finger on a bigger trigger than most people realize:

The political detonating pin for Greek contagion in Europe is an obscure mechanism used by the eurozone’s nexus of central banks to settle accounts. If Greece is forced out of the euro in acrimonious circumstances – a 50/50 risk given the continued refusal of the creditor core to acknowledge their own guilt and strategic errors – the country will not only default on its EMU rescue packages, but also on its “Target2” liabilities to the European Central Bank.

In normal times, Target2 adjustments are routine and self-correcting. They occur automatically as money is shifted around the currency bloc. The US Federal Reserve has a similar internal system to square books across regions. They turn nuclear if monetary union breaks up.

The Target2 “debts” owed by Greece’s central bank to the ECB jumped to €49bn in December as capital flight accelerated on fears of a Syriza victory. They may have reached €65bn or €70bn by now….

The Eurogroup insists that the primary budget surplus be raised from 1.5pc of
GDP in 2014, to 3pc this year and 4.5pc next year. As Nobel economist Paul
Krugman says, they want to force a country that is already reeling from six
years of depression – with the jobless rate still near 50pc – to triple its
surplus for no other purpose than paying off foreign creditors for decades
to come. They are doing to Greece what the Western allies did to a defeated
Germany at Versailles in 1919: imposing unpayable and mutually-destructive
reparations on a prostrate nation.

Combined with the fact that ISIS is planning to flood southern Italy with “immigrant” invaders, it becomes readily apparent that the EU may not last another eight years. The difference between 1933 and 2023 is that the enemy is no longer defined as other Europeans, but Islamic and African invaders.

Italians are already demanding that the Italian navy start sinking boats coming across the Mediterranean and attacking refugee holding centers. The Spanish are looking at the Greek situation and wondering why they should not do the same. The Front National is rising quickly in France; the rise of PEGIDA has been arrested but it will resume soon enough, along with support for AfD once the news of Germany being on the hook for up to €515 billion penetrates the electorate.

No wonder Juncker, the unelected Head of the European Commission has turned openly anti-democratic. But he is as delusional as Hitler in the bunker. Gunnar Beck from London University makes an equally apt comparison: “Germany’s leaders can’t let Greece leave the euro, and the Greeks know
it. They will die in a ditch to defend the euro. This is our Eastern Front,
our Battle of Kursk, and I’m afraid to say that it will end in unconditional
surrender by Germany,” he said. 

Like gravity, economics always wins in the end.

Mailvox: Marxism and the Shoe Event Horizon

DB asks about a past SmartPop essay:

I am an Italian university student, and at the moment I am writing my thesis, which is about Douglas Adams and The Hitchhiker’s Guide to the Galaxy. While gathering some material to work on, I found The Rough Guide to the Hitchhiker’s Guide to the Galaxy by Marcus O’Dair, in which he maintains that you stated that “the Shoe Event Horizon [is] a dig not at capitalism, but rather at the Marxist notion of capitalist crisis, which is pretty much its antithesis” (page 71).

I have been trying to find the original source of this idea, but I am not sure whether it is this one:

With this letter, I would ask you if you could briefly explain how the “Shoe Event Horizon theory” is to be considered a critique to Marxism rather than to capitalism itself (I am not an expert in the fields of philosophy and economics).

My essay in THE ANTHOLOGY AT THE END OF THE UNIVERSE was indeed the original source of the idea,  which I mentioned in a one-off line without explaining it. Neglecting to explain things is a time-honored personal tradition. I’m not usually doing it to be difficult, it’s just that I tend to have a very hard time grasping what is, and is not, obvious to other people.

Adams manages to mine this unlikely field, economics, for some of his most scathing barbs. The dismal science does not often figure into fictional plot lines and still less is it played for laughs, but nevertheless, it has an integral role in both the overall story and Adams’ underlying theme. Indeed, Adams betrays a remarkably sophisticated understanding of economics when he pokes fun at the Marxian concept of capitalist crisis in the Shoe Event Horizon that ruins the world of Frogstar World B.

Before I can explain why the Shoe Event Horizon is poking fun at the idea of a crisis in capitalism, I should probably cite the relevant event as recounted by Pizpot Gargravarr.

From The Restaurant at the End of the Universe:

Many years ago this was a thriving, happy planet—people, cities, shops, a normal world. Except that on the high streets of these cities there were slightly more shoe shops than one might have thought necessary. And slowly, insidiously, the numbers of these shoe shops were increasing. It’s a well-known economic phenomenon but tragic to see it in operation, for the more shoe shops there were, the more shoes they had to make and the worse and more unwearable they became. And the worse they were to wear, the more people had to buy to keep themselves shod, and the more the shops proliferated, until the whole economy of the place passed what I believe is termed the Shoe Event Horizon, and it became no longer economically possible to build anything other than shoe shops. Result—collapse, ruin and famine. Most of the population died out. Those few who had the right kind of genetic instability mutated into birds—you’ve seen one of them—who cursed their feet, cursed the ground and vowed that none should walk on it again.

There is no singular coherent theory of capitalist crisis, there are, in fact, several, but they are summarized more or less accurately on Wikipedia.

In Marxist terms, the economic crises are crises of overproduction and immiseration of the workers who, were it not for the capitalist control of the society, would be the determiners of both demand and production in the first place.

These systemic factors include:

  • Full employment profit squeeze. Capital accumulation can pull up the demand for labor power, raising wages. If wages rise “too high,” it hurts the rate of profit, causing a recession.
  • The tendency of the rate of profit to fall. The accumulation of capital, the general advancement of techniques and scale of production, and the inexorable trend to oligopoly by the victors of capitalist market competition, all involve a general tendency for the degree of capital intensity, i.e., the “organic composition of capital” of production to rise. All else constant, this is claimed to lead to a fall in the rate of profit, which would slow down accumulation.
  • Overproduction. If the capitalists win the class struggle to push wages down and labor effort up, raising the rate of surplus value, then a capitalist economy faces regular problems of excess producer supply and thus inadequate aggregate demand.

All such factors resolve to the synthetic viewpoint that all such crises are crises of over and/or misappropriated production relative to the ability and/or willingness of the workers who generate the bulk of demand to consume.

As he later does with the concept of Keynesian monetary policy still being pushed by the likes of Krugman and Abe today, Adams takes the concept of capitalist crisis stemming from overproduction to absurd and hilarious extremes. In the tragic case of the world of Frogstar B, the people actually reduced their aggregate demand by evolving into flying beings in order to escape the terrible results of the crisis caused by the overproduction of shoes.

The connection between the Shoe Event Horizon and capitalist crisis struck me as so obvious as to need no explanation, but then, it belatedly occurs to me that perhaps not everyone recognizes the implicit connection between capitalist crisis, overproduction, and inadequate aggregate demand, which in the case of Frogstar B, eventually plummeted all the way to zero.

A failure to grasp price elasticity

To say nothing of the psychopathic nature of trolls. I cannot imagine this policy of charging for comments will work very well.

As a number of news sites eliminate their comments sections altogether, Tablet, a daily online magazine of Jewish news and culture, is introducing a new policy charging its readers to comment on articles.

As of today, a reader visiting the nonprofit site that is otherwise paywall-free will have to pay at least $2 to leave a comment at the foot of any story. The move is not part of a plan to generate any significant revenue, but rather to try and change the tone of its comments section.

Tablet has set up commenting charges of $2 a day, $18 a month and $180 a year, because “the Internet, for all of its wonders, poses challenges to civilized and constructive discussion, allowing vocal—and, often, anonymous—minorities to drag it down with invective (and worse),” editor in chief Alana Newhouse wrote in a post published today.

Charging for comments might work at a truly elite site like the New York Times. The level of exposure and the ability to associate one’s opinion right underneath a Paul Krugman column would be valuable to certain parties; I would have paid for such a comment-ad back when RGD came out myself.

But even at a site of modest popularity such as this one, the proposal would make no sense except as a roundabout way of banning comments without being seen to do so. This is one of the more prolifically commented sites in the blogosphere, but how many people here would pay $180 per year to comment here? I’d guess around ten or 20 people; Nate might pay that just to eliminate all the commenters from AG.

The problem is that the discourse would then be strictly limited to the same small group of people, it would become an insulated and repetitious conversation with an audience; it would become a form of conspicuous performance art. And does anyone doubt that trolls like Andrew Marston would even hesitate to cough up whatever it cost in order to buy a captive audience for his delusional meanderings?

As is the case with writers who calculate their lost sales by counting pirated copies, Tablet clearly fails to realize that someone who is willing to comment for free is not synonymous with someone who is willing to pay to comment. The latter tend to be a very small subset of the former.

The end of monetarism

Keynesian economics is a failure. So, too, is the Keynesian heresy known as Friedmanite monetarism:

The entire theory of monetarism is coming undone in spectacular and empirical fashion, which leaves the entire status quo exposed. All that is left in defense is the same old refrain of “it wasn’t big enough.” That’s great for those in the ivory towers blinding themselves to the reality of a lost generation of Italians, Spaniards, French and now even Germans; a listing to which even the FOMC is worried may yet add Americans.

Why anyone ever expected a different outcome is due solely to unrepentant ideology, since these central banks are following almost exactly the Japanese “model.” The global economy is just following along as money dies. Though Greece will be blamed as contagion, it will ultimately be proved as Japanification by monetary proxy.

For those who don’t understand the significance of the graph, both Germany and Italy are subject to the same monetary policy of the European Central Bank. The chart clearly shows that the very low interest rate policy presently being maintained by the ECB is not capable of producing full employment in Italy, contra monetarist theory, thereby indicating that other factors are, as it happens, more significant than the supposedly all-important interest rate.

As I’ve mentioned in the past, the ironic thing about the economist Milton Friedman is that he was much more sensible with regards to politics than economics.

Greco-German chicken

I have the impression that the Greeks are not bluffing here:

As Deutsche Bank’s George Saravelos politely puts it, “Developments since the Greek election on Sunday have moved very fast.” And indeed, so far the new Tsipras cabinet, and here we focus on the words and deeds of the new finance minister Yanis Varoufakis, has shown that the market’s greatest hope – that the status quo in Greece will continue – has been crushed into a pulp (and so have Greek stock and bond prices) especially following yesterday’s most recent comments by the finmin in which he said that Greece “does not want the $7 billion” from the Troika agreement and that it wants to “rethink the whole program”, culminating with an epic exchange with Eurogroup chief Jeroen Dijsselbloem in which Greece made it clear that the “constructive talks” are over.

And suddenly the Eurozone is stunned, because what had until now been its greatest carrot when it comes to dealing with Greece, has become completely useless when the impoverished, insolvent nation itself says it no longer needs a bailout, seemingly blissfully unaware of the consequences.

So earlier today the ECB’s Erikki Liikanen, tired of pleasantries and dealing with what to Europe is a completely incomprehensible and illogical stance, one which is essentially a massive defection by Greece in the European “prisoner’s dilemma”, and which while leading to a Greek financial collapse and Grexit – both prerequisites to a subsequent Greek economic recovery unburdened by the shackles of the Euro – would also unleash a European depression, came out and directly threatened Greece that it now has 1 month until the end of February to reach a deal with the Troika, or else the ECB would cut off lending to Greek banks, in the process destroying the otherwise insolvent Greek banking sector.

And since only the ECB backstop has prevented a banking sector panic, the ECB is essentially betting the house, and the sanctity of the Eurozone (because after a Grexit all bets are off which peripheral leaves next) that the threat, and soon reality, of a bank run (at last check Greece had about €145 billion in deposits still left in its bank after JPM’s latest estimate of €15 billion in outflows in January) will finally force Varoufakis and Tsipras to sit at the negotiating table with the understanding that not they but the Troika has all the leverage.

 Meanwhile, Germany has already ruled out any debt cancellation: “German Chancellor Angela Merkel ruled out any cancellation of Greece’s debt and said the country has already received substantial cuts from banks and creditors.”

The challenge that the EU faces is that they have nothing. Their only argument is that of a coven of vampires arguing with their victim: “you need to keep letting us bleed you, because if we die, you die.” But that argument means nothing to a dying man.


Once it’s clear that they can’t get any more out of the EU, it costs Greece nothing to allow the entire Euro edifice to collapse. They are already bankrupt, and it is no longer in their interest to permit the EU to continue concealing that simple fact.

The real fear of the Eurocrats

Daniel Hannan observes that it isn’t a Greek bankruptcy that would be the real catastrophe as far as the EU is concerned:

A default and devaluation would offer a fresh start. Although the economy has been pummelled by six years of Euro-austerity, some of the fundamentals have improved. The bureaucracy has been slimmed, taxes are now collected and, if debt repayments were taken out of it, the budget would be in balance. In truth, this is what EU leaders fear. Not that Greece will leave the euro and collapse, but that Greece will leave the euro and prosper.

A competitive Greek economy, exporting its way back to growth, might inspire Spaniards and Italians, who have also been paying the price of the euro, to follow. For those Eurocrats who see the single currency as a component of political integration, that prospect is too horrible to contemplate.

We’ve been here before. Two years ago, when it looked as if Cyprus might leave the euro, Brussels went so far as to lift money directly out of private bank accounts to pay off the country’s creditors.

The extreme measure was necessary, the European Central Bank admitted, ‘to prevent worries over the reversibility of the euro resurfacing’.

I observe that Iceland, which rejected the EU’s bank-first dictates, is doing considerably better than Italy, Ireland, Spain, and Portugal, which obediently followed the EU’s instructions. I tend to doubt this observation has escaped the new Greek government.

Strangling the golden goose

The US economy will continue to decline even after the credit bust because it is actively disincentivizing entrepreneurs and driving them out of the country:

The U.S. now ranks not first, not second, not third, but 12th among developed nations in terms of business startup activity. Countries such as Hungary, Denmark, Finland, New Zealand, Sweden, Israel and Italy all have higher startup rates than America does.

We are behind in starting new firms per capita, and this is our single most serious economic problem. Yet it seems like a secret. You never see it mentioned in the media, nor hear from a politician that, for the first time in 35 years, American business deaths now outnumber business births.

Just look at my family. The USA has already have lost over 50 jobs, and based on past taxes paid, more than $100 million in state and federal taxes after jailing my father for 11 years for his failure to pay around $2 million in taxes it claimed he owed. It also lost the benefit of any new businesses he would have started in the last ten years. And it has lost whatever benefit it would have gained from several opportunities in the USA I would have pursued in the past, but instead elected to leave fallow because the regulatory and compliance headaches were too high when piled on top of the usual risks and time commitments involved. I was never as successful as my father, of course, but my business did reach a respectable size and employed a dozen people.

It’s so bad these days that the USA is not only disincentivizing both its resident and expatriate entrepreneurs, but is even causing the latter to give up their citizenships in record numbers. Eduardo Saverin, one of the Facebook co-founders, is far from the only U.S. citizen to renounce his citizenship over tax-related business matters. For years, the American instinct has been to say “good riddance” to such renunciates, but the country is past the point where it can afford to do so, especially when most other countries are very actively courting the small minority of people who are capable of creating new businesses that will provide new job opportunities for their citizens. At this point, foreign entrepreneurs would have to be either stupid or very short-sighted to pursue a green card that will serve as a financial anchor for the rest of their lives.

The tragic thing is that the USA is no longer the land of opportunity for entrepreneurs. It was only 20 years ago that the young guys who started id Software moved from Wisconsin to Texas because the opportunities were better there. But the ids of tomorrow are now leaving the USA for other countries, and are increasingly starting them in places like Eastern Europe, the Nordic countries, and Israel. The last five big game startups have come out of Russia, Finland and Sweden; one of the biggest mobile game successes is in Serbia. This means that even aside from its macroeconomic problems, the USA is very unlikely to possess the long-term potential for growth it once took for granted anymore.

The effects of these negative developments concerning entrepreneurial activity are somewhat obscured by the fact that New York is still the financial capital of the world; four of the six game companies mentioned either went public in the USA or were acquired by US companies. But it doesn’t change the fact that innovation is increasingly taking place outside the USA.

Boom!

The Euro dropped from 1.20 to .85 against the Swiss Franc last night. That was nearly a 30 percent move overnight! It’s now down to 1.16 against the US Dollar. This is the result of the Swiss central bank giving up its attempt to peg the Franc at 1.20.

These wild currency swings are great if you can time them correctly, but it’s also a good way to lose your shirt. As usual, I was too early and missed out on the big move. Be careful out there.

This kind of monetary volatility is a strong indicator that deflation is defeating the central banks. They simply can’t print enough borrowers.

Negative interest rates

One more check in the ICE box. Zerohedge cites Goldman Sachs concerning the surprise announcement of NIRP from the Swiss:

The Governing Board of the SNB surprisingly announced this morning that it will introduce a negative rate of -0.25% on sight deposit account balances at the SNB. The SNB’s target range for the three-month Libor was also widened from 0.0% – +0.25% to -0.75% – +0.25%. In our view, today’s rate decision simply underlines the determination of the SNB to enforce the minimum exchange rate target for the CHF against the Euro.

1. This morning, the SNB surprisingly announced that, on January 22, it will introduce a negative interest rate of -25bp on reserve holdings from banks at the SNB, above a threshold of 20 times the minimum reserve requirement. The SNB’s target range for the three-month Libor was also widened from 0.0% – +0.25% to -0.75% – +0.25%. Over the last couple of days, the CHF has traded very close to the 1.20 level on the back of rising market volatility. The subsequent demand for safe investments attracted large capital inflows into Switzerland, eventually prompting the SNB to react.

2. According to the SNB, the measure is aimed at making investments into CHF less attractive. Although it is only banks that will have to pay the negative deposit rate, banks will pass on, to some extent at least, the negative rates to customers. It is noteworthy in that respect that some German banks – in response to the ECB’s negative rates – have also started charging some clients negative deposit rates.

3. It remains to be seen how effective this measure will be and the SNB will continue to rely on FX interventions to defend the minimum exchange rate. But the measure in any case shows the determination of the SNB to maintain the lower bound for the CHF against the Euro.

When currencies are getting too strong and interest rates are going negative, this is a sign that the central banks are fighting against deflationary pressures. To fight inflation, you raise the interest rate, thereby encouraging people to save. To fight deflation, you lower it, thereby encouraging people to borrow and spend. Or, in this case, since the negative interest rate is only being applied to banks, it is to encourage them to lend. That points to the fundamental difference between fiat money and credit money. You can print paper, but you can’t print borrowers.

The Swiss are trying to weaken their currency, which is strong against the Euro and the dollar, so they are trying to make it less attractive to investors in order to protect their domestic exporters. Russia, on the other hand, isn’t trying to export, but is instead attempting to bring in capital that is frustrated at earning so little interest in the low-interest Western economies.

Widespread NIRP will dictate the eventual end of the credit money system as well as the banks. If you’re being charged to save your credit money, you might as well pay someone to securely hold something more tangible.