tag:blogger.com,1999:blog-2546602206734889307.post1213892174231206156..comments2024-03-28T04:29:22.717+00:00Comments on mainly macro: Central bank advice on austerityMainly Macrohttp://www.blogger.com/profile/09984575852247982901noreply@blogger.comBlogger10125tag:blogger.com,1999:blog-2546602206734889307.post-55859748440129371012014-11-07T06:59:34.636+00:002014-11-07T06:59:34.636+00:00i got your message...it's very nice blog thank...i got your message...it's very nice blog thank you for sharing the information....<br /><br /><a href="http://www.fcaassist.co.uk" rel="nofollow">Consumer credit</a>Anonymoushttps://www.blogger.com/profile/17079579646679032959noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-13044709049971632132014-05-07T10:38:13.038+00:002014-05-07T10:38:13.038+00:00Because the bank of England is only really account...Because the bank of England is only really accountable to the Chancellor it does not have to be clear ro many others, unlike most of the rest of the worlds central banks who are more accountable to wider economic interests- who often appoint members of the board.Andrew Lydonnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-82268881174913609762014-05-06T15:46:11.359+00:002014-05-06T15:46:11.359+00:00To be fair to Mervyn King at least he'd stoppe...To be fair to Mervyn King at least he'd stopped fixating on low unemployment feeding thru into inflation by 2010 (only just mind you)Primula Monkeyhttps://www.blogger.com/profile/09289100326536298640noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-91913218067692348442014-05-06T09:00:35.061+00:002014-05-06T09:00:35.061+00:00King will already go down in history as helping to...King will already go down in history as helping to make the worst recovery in a hundred years; and given the decline in the newspaper industry, their peculiar views of history will not be enough to save his reputation as those in the previous generation who benefitted from their approbation during the MTFS.<br /><br /><br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-16827075310024582502014-05-06T08:48:02.721+00:002014-05-06T08:48:02.721+00:00Reading between the lines of the Telegraph article...Reading between the lines of the Telegraph article to which Simon refers, it looks to me like Mervyn King fell for the fallacious and popular argument that “the debt is higher than normal, therefor it must be reduced” (via austerity or via “consolidation” to use the fashionable jargon.)<br /><br />The argument that something is higher than normal, ergo it is too high is of course nonsense. The intelligent question to ask is: “What’s the OPTIMUM size of anything in any given set of circumstances”. <br /><br />And advocates of Modern Monetary Theory (which is largely Keynsianism write large) have an answer to the latter question, thus. The optimum size of the debt is whatever size maximises numbers employed without exacerbating inflation too much. And that “debt size” might be 200% of GDP (as in Japan) or it might be far lower. The actual size is wholly immaterial. <br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-10837603037417148492014-05-06T04:15:09.749+00:002014-05-06T04:15:09.749+00:00This is a truly excellent essay. Particularly the...This is a truly excellent essay. Particularly the point about the positive feedback effects (self-accelerating) of depression panics, vs. the negative feedback effects (self-correcting) of currency depreciation)Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-52462757004854181112014-05-05T18:57:58.038+00:002014-05-05T18:57:58.038+00:00«It talks about “concerns over the sustainability ...«It talks about “concerns over the sustainability of debt positions” leading to a “sharp depreciation in sterling and a build-up of inflationary pressures in the UK.” As a result, monetary policy is tightened and long term interest rates rise - presumably because QE stops.»<br /><br />As to this and the oil story, I'll quote again Tony Blair's interesting article from 1987 (10 years before becoming PM and doing the very same):<br /><br />http://www.lrb.co.uk/v09/n19/tony-blair/diary<br />«First, her arrival in Downing Street coincided with North Sea oil. The importance of this windfall to the Government’s political survival is incalculable. It has brought almost 70 billion pounds into the Treasury coffers since 1979, which is roughly equivalent to sevenpence on the standard rate of income tax for every year of Tory government. Without oil and asset sales, which themselves have totalled over £30 billion, Britain under the Tories could not have enjoyed tax cuts, nor could the Government have funded its commitments on public spending. More critical has been the balance-of-payments effect of oil. The economy has been growing under the impetus of a consumer boom that would have made Lord Barber blush. Bank lending has been growing at an annual rate of around 20 per cent (excluding borrowing to fund house purchases); credit-card debt has been increasing at a phenomenal rate; and these have combined to bring a retail-sales boom – which shows up dramatically in an increase in imported consumer goods. Previously such a boom and growth in imports would have produced a balance-of-payments deficit, a plunging currency and an immediate reining-back on spending, with lower rates of growth.<br /><br />Instead, oil has earned foreign exchange and also produces remittance payments from overseas investments bought with oil money.»<br />Blissexnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-43185452247567458292014-05-05T18:48:56.651+00:002014-05-05T18:48:56.651+00:00On the austerity vs. exchange rate vs. inflation t...On the austerity vs. exchange rate vs. inflation topic I think that the position of the Bank of England may be hard to understand without looking at the usual graph of UK oil exports and imports:<br /><br />http://mazamascience.com/OilExport/output_en/Exports_BP_2013_oil_bbl_GB_MZM_NONE_auto_M.png<br /><br />It is the great "misfortune" of the UK that the end of oil exports and the beginning of huge oil imports happened much at the same time as a quadrupling of oil prices and a major recession.<br /><br />The misfortune is that the fall in oil production is a massive reduction in the *real* resources available to the UK economy, and thus, on its own, to the real standard of living of the UK.<br /><br />Instead of receiving real resources from other countries in exchange for oil exports, the UK now must export real or financial (London house deeds for example) resources to buy oil.<br /><br />That is worth quite a few GDP percentage points.<br /><br />The decision of the establishment has been to cut the average standard of living of UK residents by 10-20% (depending on how to measure it), and to charge the cuts mostly to the median income and lower income residents, especially those with smaller endowments of property, because they are "improductive", while protecting and boosting the incomes of the upper income residents (the City and professions and managers) especially those with larger endowments of property, because they are "productive".<br /><br />Austerity has been the means to achieve this asymmetric repurposing of shrinking resources. Indeed median and lower standards of living have been reduced over the years by 10-20%, mostly by letting both asset and goods and services inflation rush ahead while strict fiscal policies kept median and lower incomes constant in nominal terms.<br /><br />I do agree that with the end of oil exports and the quadrupling of oil prices and the global recession the average UK standard of living had to come down; but the main impact might not have been on median and lower income residents.<br /><br />Then let's note that UK policy has been to have only half austerity: fiscal austerity, but not monetary austerity, which is is in the best "New Keynesian" tradition, the one that teaches that:<br /><br />* neoclassical microfoundations show that unregulated markets deliver the optimal real resource allocation and distribution of income;<br />* inter-temporal demand misallocations due to nominal price rigidities drive the economy to a suboptimal equilibrium below full employment;<br />* to stabilize the economy back onto the optimal equilibrium with the best distribution of income determined by unregulated markets, interest rates should be reduced to boost asset prices relative to money, so that the stronger balance sheets of the productive wealthy induce them to spend more, and that "trickles down" to the unemployed;<br />* therefore only monetary policy is needed to stabilize the economy on the optimal equilibrium, and fiscal policy only has distortionary effects that prevent the achievement of full employment.<br /><br />Some relevant quotes:<br /><br />* “fiscal conservatism and monetary activism” <br />* "What New Keynesian theory does need is that falls in real interest rates stimulate aggregate demand [ ... ] What explains cyclical unemployment is real interest rates being at the wrong level."<br /><br />:-).<br />Blissexnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-72711841740322125762014-05-05T18:19:13.545+00:002014-05-05T18:19:13.545+00:00«Once interest rates start rising because of fears...«Once interest rates start rising because of fears of default, this in itself makes default more likely. We have a clear nonlinearity, such that it may become too late to retrieve the situation once the process begins, as periphery Eurozone countries found out.»<br /><br />Our blogger is probably thinking of Michael Pettis' masterpiece on this subject, "The volatility machine" which I think is pretty much essential reading.<br /><br />Too bad that it is largely in the "institutionalist" tradition instead of the "New Keynesian" one :-).<br />Blissexnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-13393803879266563342014-05-05T18:15:00.735+00:002014-05-05T18:15:00.735+00:00«Large banks also have a direct interest in auster...«Large banks also have a direct interest in austerity, because they need low debt to make future bank bailouts credible, enabling them to carry on paying large bonuses from the implicit state subsidy that this creates.»<br /><br />There is a much better reason related to executive compensation than that, and applies to all businesses, not just to banks.<br /><br />Executive compensation is composed largely of bonuses/prizes dependent on improvements in some quantity, like sales or profits, starting from some absolute baseline.<br /><br />Resetting the baseline downwards periodically makes it much easier to show substantial improvements from a baseline that has been reset to low.<br /><br />In the financial industry for example compensation amounts to 50% of net earnings, most of that 50% going to executives and traders. what do you think is preferred by them over 10 years as a series of earnings on a capital base of say 100?<br /><br />A) 15 15 15 15 15 15 15 15 15 15 => total 150<br />B) 25 25 25 25 25 25 25 25 -40 -40 => total 120<br /><br />In the case A bonuses total 75, in the second 100... In case B the two years of huge losses almost wipe out the capital of the company, but the government stands ready to refill it and the bonus pool.<br /><br />Also in case B it is much easier in the next 10 year period so show improvements over a much reduced baseline.<br /><br />Executives and traders in financial industries or nor understand very well that their compensation is proportional to the volatility of the underlying business, and that periodic resets of the baselines make hitting targets so much easier.Blissexnoreply@blogger.com