Category Archives: Economic fundamentals

Scott Fullwiler: Krugman’s Flashing Neon Sign

By Scott Fullwiler, Associate Professor of Economics and James A. Leach Chair in Banking and Monetary Economics at Wartburg College. Cross posted from New Economic Perspectives

The debate between Paul Krugman and my friend Steve Keen regarding how banks work (see here, here, here, and here) has caused me to revisit an old quote. Back in the 1990s I would use Krugman’s book, Peddling Prosperity (1995), in my intermediate macroeconomics courses since it provides a good overview of what were then contemporary debates in macroeconomic theory as well as Krugman’s criticisms of various popular views on macroeconomic policy issues from that era. One passage near the very end of the book has always remained in the back of my mind; in it, Krugman critiques a popular view that was and still is highly influential regarding productivity and trade policy. He writes:

So, if you hear someone say something along the lines of ‘America needs higher productivity so that it can compete in today’s global economy,’ never mind who he is or how plausible he sounds. He might as well be wearing a flashing neon sign that reads: ‘I DON’T KNOW WHAT I’M TALKING ABOUT.’ (p. 280; emphasis in original)

In his latest post in this debate (which Keen replied to here), Krugman demonstrates that he has a very good grasp of banking as it is presented in a traditional money and banking textbook. Unfortunately for him, though, there’s virtually nothing in that description of banking that is actually correct. Instead of a persuasive defense of his own views on banking, his post is in essence his own flashing neon sign where he provides undisputable evidence that “I don’t know what I’m talking about.”

Europe Moving Beyond the LTRO

By Delusional Economics, who is horrified at the state of economic commentary in Australia and is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness.

So it appears, at least in the short term, that the ECB’s LTRO effect is starting to wear off as markets finally catch up on the story of the underlying economy’s of periphery Europe:

Michael Hudson on the Federal Reserve System

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College

An interview with Michael Hudson published on the Russian website Terra America (TA).

What is the place of the Federal Reserve System in the American financial and economic structure?

Housing Bubbles, House Prices, and Interest Rates

It might surprise readers to learn that economists are still debating whether low interest rates in countries like Ireland and Spain were responsible for their housing bubbles. A new paper by Christian Hott and Terhi Jokipii at VoxEU looked at housing prices in 14 OECD countries from 1985 onward to assess the impact of protracted periods of low short term interest rates. Their conclusion was that they explained up to 50% of housing overvaluation in bubble-afflicted markets.

The interesting part of the paper is that they created a model for fundamental housing market values:

Spain Follows Greece

By Delusional Economics, who is horrified at the state of economic commentary in Australia and is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness.

Back in November last year I posted on my confusion over the jubilation shown by the citizens of Spain as they elected Mariano Rajoy as their new political leader. Mr Rajoy’s strategy during the election campaign was to say very little about what he was actually intending to do to address his country’s financial problems, preferring to simply let the incumbent party fall on its own sword so that he could take the reins. It became obvious soon after the election that, despite his party’s best efforts to dodge questions, the intention was simply to continue with even more austerity.

Philip Pilkington: Krugman Makes Accusations of Fundamentalism to Defend His Own Dogma

By Philip Pilkington, a writer and journalist based in Dublin, Ireland. You can follow him on Twitter at @pilkingtonphil

You’re at a party and you’re having a conversation. One person interrupts, giving his view without engaging with what you’re saying. It is a presumptuous act based on the assumption that he – the speaker – already know everything there is to know about the conversation and so can simply steamroll over what everyone else says.

Paul Krugman has just done the intellectual equivalent on a blog ‘contesting’ Steve Keen’s recent piece criticising his model of debt dynamics.

Europe Holds Back the Fire for Now

By Delusional Economics, who is horrified at the state of economic commentary in Australia and is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness.

Two weeks ago I wrote a post on Professor Sinn and the growing concern from the German central bank about TARGET2 liabilities. The pressure from the German camp is on-going and late last week it appears they had a win of sorts.

Daniel Alpert: Consumer Credit Growing at Highest Rate in Past Decade – Unhealthy and Unsustainable?

Alright, got your attention. But the headline above is not offered merely by way of titillation, as a former partner of mine would say—it has the added advantage of being true.

China’s Real Choices for Growth

Yves here. I particularly like this post because Michael Pettis takes some boundary conditions about China and works through their implications. One quibble I have is that he talks of “debt capacity limits.” That depends who the issuer is. The national government could in theory “print,” it has no need to issue debt to fund its activities. But the constraint on that sort of approach is inflation, and China is trying to cool off inflation without crimping growth too much. So China is pretty much in the conundrum Pettis describes, but for slightly more complicated reasons.

Cross posted from MacroBusiness

An exclusive excerpt from Michael Pettis’ most recent newsletter:

Last week’s news was dominated by the sudden but not wholly unexpected removal of Bo Xilai as mayor of Chongqing.

After the initial shock wore off, much of the speculation within China has moved on to what his ousting says about the evolution of power and, for economists, how it will affect the reform and rebalancing of the Chinese economy. More importantly, it seems to me that too many analysts over emphasize the intentions of the Chinese leadership when projecting China’s future.
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Europe’s Counterproductive Economic Policies Proceeding as Expected

By Delusional Economics, who is horrified at the state of economic commentary in Australia and is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness.

Anyone who has been following my European commentary for any length of time will know that I have been running a number of risk themes on Europe due to what I consider to be misguided and one-sided policy which will ultimately be counterproductive.

Mark Ames: The One Percent’s Plan for the Rest of Us – Livestock to be Milked for “Rent”

Yves here. Mark Ames’ post discusses the institutionalization of a regressive policy, that of trying to eke more corporate growth out of extracting more and more out of workers rather than sharing the benefits of productivity gains with them.

Wolf Richter: China, the Number One Foreign Investor in Germany

The latest success—I suppose you could call it that, at least for those involved on the financial end—was the Kiekert deal last week. The company was founded in 1857 near Düsseldorf, Germany, and became the largest manufacturer of automotive door-lock systems. Its customers are GM, Ford, VW, BMW, and other automakers around the world. But now a Chinese company bought Kiekert, the sign of a sea change.

Bill Black: (Re) Occupy Greece

Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Cross posted from New Economic Perspectives.

While the Occupy Wall Street (OWS) movement set its sights on occupying a financial center, Germany has accomplished the vastly more impressive feat of occupying an entire nation – Greece. Germany has experience at occupying Greece having done so during World War II. The art of occupying another nation is to recruit a local puppet to do the dirty work required to repress the citizens. Germany used several puppets, most notoriously the murderous Ioannis Rallis, to (nominally) rule Greece and terrify the Greek people during World War II. (After Germany’s defeat, Rallis was executed for his treason.)

This time around, Germany has been far more successful in recruiting and using a puppet to (nominally) rule Greece and terrify the Greek people before the German occupation.

Philip Pilkington: The Irish Begin to Wake Up to the Fact That They are Repaying Money That is Then Burned

By Philip Pilkington, a writer and journalist based in Dublin, Ireland. You can follow him on Twitter at @pilkingtonphil

About a year ago a couple of friends and I were sitting around drinking beer and talking. As so often happens today in day-to-day Irish conversation, the economic situation and the repayment of debts was raised. One of my friends said that, naturally, the debts had to be repaid. I pointed out to him that by repaying the debt we were just sending away money to be effectively destroyed.

Satyajit Das: “All Feasts Must Come to an End” – China’s Debt & Investment Fueled Growth (Part 1)

By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

The re-emergence of China has dominated recent economic and political discourse. The Chinese economy is forecast to expand by around 60% in the period between 2007 and 2012, compared to around 3% for developed economies. While China’s rise is important, its drivers are frequently misunderstood and poorly analysed.

China’s economic structure is deeply flawed and fragile. The Chinese growth story may be ending. As an old Chinese proverb, probably apocryphal, holds: “There is no feast that does not come to an end.”