Gold’s swoon has triggered a good deal of schadenfreude, some subtle, some less so.
It’s hardly a surprise after eleven years of gains and often tiresome crowing from its more partisan supporters. Question is, apart from the emotional satisfaction of putting the boot in, are these critics justified?
Their complaints seem to revolve around four principal themes: Continue reading “Ah! Gold.”
In the wake of the crisis, the question of whether financial markets are capable of effective self-regulation took centre stage. The near unanimous verdict was that they are not. The crisis itself, following on as it did from a period of extended deregulation, seemed to provide a definitive QED. So much so that surprisingly little attention has been devoted to working out why this might be so.
It has, in short, become an article of received wisdom, rarely questioned other than at sites like The Cobden Centre.
Andrew Haldane[1] of the Bank of England did so in a recent speech. Although I’m not convinced he always followed the logic of his analysis to its natural conclusion, he clearly outlined the structural developments that led to the current debacle and offered several sensible policy suggestions.
It was a long speech: the transcript runs to eighteen closely typed pages with a further eleven of references, charts and tables. It would make no sense for me to try to cover the whole thing in any detail: for those sufficiently interested in the topic, do read the original.
What I want to do is bring forward enough of the material to enable a closer focus on some of the more critical issues, and to highlight a few areas where I think Mr. Haldane may be in error.
Martin Wolf has usually managed to moderate his inner interventionist. No longer, it seems. In his most recent column, he casts caution aside:
“The time has come to employ this nuclear option [the printing press] on a grand scale.”
Not doing so, he says, would ensure a renewed recession with increased unemployment, falling house prices, reduced real business investment and so on. I think he’s right that these unhappy events are on the way. Question is, would employing his nuclear option make things any better?
To answer that we need to understand why we’re beset by all these difficulties. Wolf sees the root problem as feeble demand. Again, I think he’s right, but only in the sense that it’s the most visible, proximate cause. There’s a deeper question he doesn’t address; why is demand so weak? If the reasons are structural, throwing money at the problem is unlikely to help. Indeed, it could just as easily make matters worse by impeding the necessary adjustments.
The key question, then, is whether pre-GFC growth was sustainable. If instead it was a hothouse flower, then trying to revive it outside of the conditions that allowed it to flourish is not only impossible but foolish. Continue reading “What to do, what to do”
Markets, indeed economies as a whole, are complex adaptive systems. Like biological ecosystems, they continuously and spontaneously order themselves in response to unfolding influences, large and small, internal and external.
When it comes to nature, we’re both part of it and a profound external influence. We shape the world around us for ill and sometimes for good, not only through deliberate actions but also, of course, merely by being here. Some of our activities and their consequences in the natural world, were we only willing to listen, could teach us much about how to better manage man-made systems such as the markets and the economy.
Forestry management provides a striking example. Our natural inclination is to put fires out wherever we can, not only to safeguard valuable property but also to protect the forests themselves and their many wild occupants.
In pursuing this practice, however, subtle changes take place over time. Dead trees and fallen branches accumulate and the undergrowth becomes thicker and much more widespread. Finally a fire occurs that we’re unable to stop, one that feeds on all the detritus to produce firestorms so powerful they can at times fundamentally change a whole ecosystem.[1]
The analogy to our economic management in recent decades is obvious, particularly when it comes to the financial system. There too, fires were continuously put out, all with the laudable goal of sidestepping the pain and distress of downturns. Continue reading “Macroeconomic Resilience”
I don’t doubt Krugman’s right to suggest we’re in the early stages of a Third Depression. The last few years have been a first instalment in what will prove to be a drawnout, volatile and painful downturn. I also agree it’s “primarily [about] a failure of policy”. Where we differ is on the nature of these failures.
First though, some points of agreement.
Krugman was vocally unhappy about much of what took place during the boom years. He railed against the excesses of the financial system, and the deregulatory zeal that allowed it to run so completely out of control. He expected it all to end badly, although perhaps not quite to the degree it has. He’s also consistently argued that deflation, not inflation, is the greatest danger for the foreseeable future.
No argument, from me at least, on any of this. Nor do I really want to argue with his critique of the simplistic view put forward by those he terms “the apostles of austerity”; namely, that cutting spending and/or raising taxes won’t bring on further short-term pain. It will. To pretend otherwise is disingenuous at best.
The real question is whether there’s any way to avoid this pain that doesn’t bring even more disastrous consequences in its wake. Continue reading “The Perils of Partisan Commentary”
Credit booms generate economic and financial imbalances. The longer a boom lasts, and the more extreme the expansion, the greater these will be.
The results show up in balance sheets and income statements. Whether it’s an individual household, economic sector or the external position of a country, that entity’s financial statements tell the tale.
In Australia’s case, sectoral debt figures show remarkably divergent trends in credit growth.[1]
At 73.1%, non-financial business debt as a percentage of GDP is only 7% higher than in 1988. The high point in the intervening years was 85.6% in Sept 2007. General government debt (federal and state combined) actually declined, from 42.1% in 1988 to 22.7% now. Prior to the crisis, it hit a low of 13.4%.
The real action was in the household sector, where debt to GDP started at 42% in 1988 and is now 109.7%.
In international terms, Australia’s non-financial business debt is middle-of-the-pack, our government debt perhaps the lowest in the developed world but our households rank near the top. There are countries with higher levels (Switzerland, for example, at 118% in 2007), but there aren’t many of them. Continue reading “Australia’s Mixed Diagnosis”
Spending ain’t spending, to paraphrase the old Castrol ad about oils.
Where government stimulus spending ends up, and how, are quite as vital as the spending itself. In the end, it’s no more immune to the logic of productivity than private investment, even though the primary goal will often be something quite different.
Unfortunately, discussions about the merits of stimulus spending often skate around this issue.
There’s another complication that also too rarely sees the light of day. Each credit induced boom generates its own combination of imbalances and unless government policy takes these into account, efforts to cope with the ensuing crisis will be kneecapped.
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Credit ain’t just credit, either.
By their very nature, booms generated by a fractional reserve banking system don’t result from the lending of genuine savings. Much of the credit produced is in effect ex-nihilo, literally “out of nothing”. Loans are made, recycled back into the banking system when spent and then for the most part lent out again in an endless cycle.[1] Out of it comes a rapidly expanding and intricately interlocked set of IOUs. The only constraints are the reserve requirements (if any) imposed on the system together with a need for continued loan demand.
In a non-fractional reserve system, money lent is no longer available to the lender until it’s paid back. The act of lending is literally the transfer of the use of those funds for the duration of the loan. Not so under our system. As depositors, we all retain access to most of our funds while they are at the same time lent out in the continuous process described above.
As a result, for as long as the credit expansion lasts we’re collectively misled into acting as if there were more resources available than in fact exist. Certain structural consequences must follow and these are common to every credit induced boom.
Money, Credit & Financial Systems 