Global economy - Future stock market collapse..

http://www.williamwhite.ca/sites/default/files/6670612b-23d4-4aa6-8258-1bc4bf30ed3b.pdf
BS: How do you assess the European situation?

BW: There is a very large amount of non-performing loans out there, maybe something like a trillion euros, only about half of which are being provisioned for. Banks are worried about their future prospects and are thus less willing to lend. This is a problem that Europe faces, in addition to all the political problems. The ECB to some extent is the only game in town, and is thus overburdened. They are aware of this but don't see any alternative to simply carrying on. So the ECB seems committed to asset purchases for a significant period of time yet. Can they ever get out of it? I don't see any reason why not, but just as discussed before, when you’ve been doing something unusual for a long period of time and then you stop doing it, there is a degree of uncertainty associated with what happens next which will make everybody very cautious.

BS: Do you think unconventional monetary policies have contributed to recent political developments in the US, the UK and elsewhere in Europe?

BW: Growing inequality of income and wealth in all of the advanced market economies has far more to do with changes in technology and with globalization than it does with monetary policy. Central banks may have contributed to the increase in asset prices, thus making the rich people owning these assets even richer. But it is a small part I think. There is a much deeper question though on how financial crises lead to political disruption. It has been well-documentedthat such crises polarize society and that it's mostly the people on the right who come out of them ahead. Or maybe instead of using left and right, we should distinguish between inward-looking and outward-looking people. And it is the inward-looking people who seem to benefit most, the people who say, 'we have a problem, and foreigners, immigrants, globalization are to blame'. This has been very common in history and what we are seeing at the moment is not much different. Many of these financial crises had their origins in excessive credit and excessive speculation and leverage. And central banks may have failed to control, or even contributed to the situation through easy money. If so, it would have been just another unintended consequence of unconventional monetary policy. No central bankanywhere would have thought five years ago that what they were doing might lead to more rather than less political instability.

(…)

BS: In terms of the global monetary policy consensus, do you see a paradigm shift coming up, particularly regarding the 2% inflation target?

BW:I would make the argument that under certain conditions deflation ought not to be treated as a problem. If you’ve got positive productivity growth in an economy, prices will want to go down. Just think of consumer electronics, or white goods, where prices have been falling for years without causing any problems. If central banks resist these trends because they want 2% inflation then it is very likely that they will create imbalances that will lead to significant problems. Looking back of over the last 20 years or so, I think there are grounds to believe that is precisely what happened. After the fall of the Berlin wall and after we had China coming back into the global markets, the increase in labor supply drove down wages and prices. Failing to recognize thisdevelopment may have been one of the biggest mistakes that central bankers made. And all of those years of monetary pump-priming have created large debt burdens, which would grow further in a deflationary environment.
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@MTF

sadly the video is in German, but the graphic is quite interesting and is showing (part of) what I said (it should show the graphic at 32:25, but for some reason the time-stamp doesnt work properly). The relative prices in the euro-zone simply dont reflect productivity. The numbers are from Eurostat combined with a GoldmanSachs model. The last numbers (-11%, -24%, -30%, -30%, -34%, +31%) show where relative prices would need to go in each country to fix the problem, while in reality the countries deflated/inflated only marginally.
That is exactly what happens when governments intervene in markets and meddle with prices.
Ireland is the one "positive example", but they started to deflate before the Lehman-crisis started. They had to adjust, because nobody got transfer payments at the time. They followed through with their reforms and are in decent shape now.

Another interesting graph comes are 24:10 and shows the manufacturing output. The numbers are shocking for all countries but Germany. Most countries lost almost a quarter of all their production.
The rest of the speech is too depressing to summarise it. tl,dr: The Eurozone is fecked and the whole thing will have very nasty consequences in the long run.


I encourage any German speaking person to watch the whole video, because Sinn explains in very simple terms a couple of major problems with the euro. The mainstream narrative in Germany is deluded propaganda. Our government understands most of that. I talked to people high up the ministries and at least some of the more knowledgeable economists are fully aware of the calamity. German media sadly doesnt know econ101.
 
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In the interest of adding more substance as requested to the Trump debate (I was going to post it there but I guess it's more relevant here since in all likelihood Trump doesn't understand it), I wanted some opinions on the 'Border Adjustment Tax,' aka 'Destination Based Cash Flow Tax' aka the Ryan tax plan which Trump recently praised.

Basically (and we have a few economics experts on here that can describe it better than me) it would cut corporate taxes by something like 15%, add a tax on imports, nix taxes on exports. Which alone looks bad until you factor in the expected effect it would have on the strength of the US dollar. How much and how quickly it would affect the dollar is the, ahem, million dollar question...

Here's a good article from The Atlantic on it, as well as Planet Money podcasts 'The Thing about That Border Tax' and 'The Chicken Tax' which I recommend.

But either way, it’s hard to see how Trump wins. If Ryan’s proposal works as planned, the world economy’s relentless swerve toward equilibrium would make imports cheaper and erase any economic pressure to move jobs to America. And if the plan goes off the rails, the economy will likely be hit so hard that no one will be celebrating the fact that America is making stuff again.
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https://www.theatlantic.com/politic...s-paul-ryans-tax-plan-but-he-shouldnt/517653/

http://www.npr.org/podcasts/510289/planet-money
 
The Atlantic article is great.

Just to add some info: This tax reform would shift the tax base from income ("comprehensive income tax base"/"Haig–Simons income") towards consumption (a couple of examples for consumption base taxes are european VATs, national retail sales tax or something with the fancy name Hall–Rabushka flat tax).
Once you change the tax base to consumption, you have to decide whether you want an origin or a destination based consumption tax.

The Tax in the Ryan plan is a destination based tax. Usually that is seen as a positive by politicians, because it stops tax competition ("race to the bottom"). Thats one reason why progressive economists would/should like this tax.
Overall there is broad agreement between economists that shifting towards a consumption based tax base is beneficial, because it creates less distortions in the markets.

Here is another article that might help to understand this tax reform:
https://www.forbes.com/sites/jonhar...d-corporate-taxation-in-the-u-s/#5b64de124405

Here is a paper from one of the economists who is closely associated with the idea:
https://www.americanactionforum.org...der-Adjustments-in-International-Taxation.pdf

from this paper:
In addition, there might be concern under existing WTO rules regarding the combinationof border adjustments with a deduction for domestic labor costs,
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this might need to get fixed, but that would be do-able.


It is quite hard to argue, that this tax reform is bad regardless of your political position. It is a step in the right direction. Obviously not for the reasons, that Trump is talking about. He is just confused about the effects, which is probably a good thing. He just wants to have the word "border" in the name. I have doubts that the $ would adjust like explained in any of these analysis, but that is a separate issue.
 
PedroMendez said:
The Atlantic article is great.

Just to add some info: This tax reform would shift the tax base from income ("comprehensive income tax base"/"Haig–Simons income") towards consumption (a couple of examples for consumption base taxes are european VATs, national retail sales tax or something with the fancy name Hall–Rabushka flat tax).
Once you change the tax base to consumption, you have to decide whether you want an origin or a destination based consumption tax.

The Tax in the Ryan plan is a destination based tax. Usually that is seen as a positive by politicians, because it stops tax competition ("race to the bottom"). Thats one reason why progressive economists would/should like this tax.
Overall there is broad agreement between economists that shifting towards a consumption based tax base is beneficial, because it creates less distortions in the markets.

Here is another article that might help to understand this tax reform:
https://www.forbes.com/sites/jonhar...d-corporate-taxation-in-the-u-s/#5b64de124405

Here is a paper from one of the economists who is closely associated with the idea:
https://www.americanactionforum.org...der-Adjustments-in-International-Taxation.pdf

from this paper:

this might need to get fixed, but that would be do-able.


It is quite hard to argue, that this tax reform is bad regardless of your political position. It is a step in the right direction. Obviously not for the reasons, that Trump is talking about. He is just confused about the effects, which is probably a good thing. He just wants to have the word "border" in the name. I have doubts that the $ would adjust like explained in any of these analysis, but that is a separate issue.
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Consumption taxes are regressive, so of course economists would like them
 
I know it is pointless to discuss economics with people who write one line class-warfare answers, but a bit of context for anyone else.

Stuff about taxes that we know. Nothing of what I am going to say is the least bit controversial.

1) In the long run it doesn’t matter where you collect taxes (in taxation on consumer vs producer).

2) The true burden of a tax depends of elasticity of supply and demand.
a. Most supply curves of normal goods are very elastic (in the long run) => most of the burden falls on the consumer.
b. Economists struggle to evaluate income taxes and corporate tax. Nobody really understand the elasticity in this context, so we don’t know who really has to shoulder the burden of the tax.

3) Subsidies are negative taxes and work exactly this way. Taxes raise revenue but reduce quantity, while subs increase quantity but cost revenue. It doesn’t matter whether you pay the subsidies to the provider or the consumer. (vgl #1). Taxes and subsidies can offset each other.

4) Now let’s look at trade: Think of exports as the payments for imports. Taxing imports, while subsidizing export would overall have no effect. The value of the exchange rate would change and in the end nothing happens.

5) If you only tax imports or subsidies exports (so just change something on one side), trade would be distorted, because the exchange rate would not change accordingly and this would influence both sides (imports and exports). So an import tax reduces both import and export depending on elasticity, while subs raise both sides.

6) The text-book says that border adjustment tax should be completely neutral, when it comes to trade. The real world is not a text book so and there are many minor issues that might complicate things. Overall it is still a rather solid proposal, because most taxes are way worse.
 
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Organic Potatoes said:
In the interest of adding more substance as requested to the Trump debate (I was going to post it there but I guess it's more relevant here since in all likelihood Trump doesn't understand it), I wanted some opinions on the 'Border Adjustment Tax,' aka 'Destination Based Cash Flow Tax' aka the Ryan tax plan which Trump recently praised.

Basically (and we have a few economics experts on here that can describe it better than me) it would cut corporate taxes by something like 15%, add a tax on imports, nix taxes on exports. Which alone looks bad until you factor in the expected effect it would have on the strength of the US dollar. How much and how quickly it would affect the dollar is the, ahem, million dollar question...

Here's a good article from The Atlantic on it, as well as Planet Money podcasts 'The Thing about That Border Tax' and 'The Chicken Tax' which I recommend.


https://www.theatlantic.com/politic...s-paul-ryans-tax-plan-but-he-shouldnt/517653/

http://www.npr.org/podcasts/510289/planet-money
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Its great to have @PedroMendez around, so I don't have to repeat what he says :D (although I still owe him a proper read and response to his Saturday post).

It's probably unsurprising that most people actually versed in mainstream economic theory would not look at the world if it were a blank slate and say "I know! Let's tax corporate profits and personal income, whilst carving out all sorts of sub-rules and exceptions as we go". Its just too inefficient and distorting. So on a theoretical/personal level, the Border Adjustment Tax is something I approve of. I don't think it'll change the trade balance in and of itself over the long run, because those things are truly determined by domestic savings and investment rates.

The note on approving only on a theoretical level, is that on a professional level it's been wrecking a bit of havoc. Markets don't know which way the WH leans on this, because said WH keeps sending mixed signals, even within 24 hr periods (as they do with everything), and the market doesn't fully trust the currency adjustment argument either. So stocks of import based companies (especially retailers like Walmart) react negatively every time it seems more likely to pass. I understand this as a case of regular risk-aversion, that everyone would prefer to continue playing the game they know and have known for decades. Exactly because of this, and the lobbying power involved, I don't currently think its likely to pass the Senate.
 
Javi said:
Could you ELI5 why these bonds pose a huge risk of future inflation?
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I don’t think that these bonds pose the risk of future inflation. I think that line of argument follows an outdated approach to think about the situation. If the current monetary policy would create inflation, we’d already have inflation. There are also fairly well understood reasons why – especially in the USA – inflation is not getting out of control.
The commercial banks have a lot of cash lying around (“excess reserves”) and if all this money would reach the consumer, we’d get inflation. It is not reaching the consumer for various reasons. One of the reasons is, that central banks essentially pay commercial banks interest for keeping it (maybe you have read something about “Overnight reverse repurchasing operations; ON RRPs).

There are other dangers associated with this “bloated portfolio”.
First of all the central bank could just lose money (just like anyone else can lose money by owning investments). That’s a risk, but not the end of the world. The second danger is, that this could encourage bad investment and bad behavior by investors. The third danger is that the central bank would have less room to intervene if another crisis starts. There are eventually various other implications and lots of disagreement about it.

The USA is not in the same situation as pre 08; lots of details changed in the mortgage market that should make the market more solid. So the article is no reason to panic. That said, it doesn’t fill me with confidence, that some mistakes are repeated. Government sponsored enterprises (Fannie&Freddie) and government owned corporation (GinnieMae) own and insure a gigantic share of the mortgage market. That is bad and problematic policy that Obama (understandably) never definitively addressed. I think Trump wants to privatize these companies, but that is not solving the underlying problem either. It also doesn’t fill me with confidence that some of his supporters (e.g. John Paulson) have skin in the game.
 
http://www.stat.columbia.edu/~gelman/research/unpublished/p_hacking.pdf

To put it another way, we view these papers - despite their statistically significant p-values - as exploratory, and when we look at exploratory results we must be aware of their uncertainty and fragility. It does not seem to us to be good scientific practice to make strong general claims based on noisy data, and one problem with much current scientific practice is the inadvertent multiplicity of analysis that allows statistical significance to be so easy to come by, with researcher degrees of freedom hidden because researcher only sees one data set at a time.
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Very important paper about the problematic aspects of statistics in (social) science. The bad use of statistic in almost all fields of social science is really horrific and it is baffling that people don’t realize how misleading many studies are. There are Nobel laureates, who struggle with this.

Here slightly more accessible blog post about it:

http://andrewgelman.com/2016/02/12/priming-effects-replicate-just-fine-thanks/


The problem with statistical significance is just one of many problems that plagues social science - especially economics – and makes it quite unscientific. It is concerning that many “rational” academics just don’t care. They just continue to beat you with their “regression analysis” shtick against any objection.
 
PedroMendez said:
I don’t think that these bonds pose the risk of future inflation. I think that line of argument follows an outdated approach to think about the situation. If the current monetary policy would create inflation, we’d already have inflation. There are also fairly well understood reasons why – especially in the USA – inflation is not getting out of control.
The commercial banks have a lot of cash lying around (“excess reserves”) and if all this money would reach the consumer, we’d get inflation. It is not reaching the consumer for various reasons. One of the reasons is, that central banks essentially pay commercial banks interest for keeping it (maybe you have read something about “Overnight reverse repurchasing operations; ON RRPs).

There are other dangers associated with this “bloated portfolio”.
First of all the central bank could just lose money (just like anyone else can lose money by owning investments). That’s a risk, but not the end of the world. The second danger is, that this could encourage bad investment and bad behavior by investors. The third danger is that the central bank would have less room to intervene if another crisis starts. There are eventually various other implications and lots of disagreement about it.

The USA is not in the same situation as pre 08; lots of details changed in the mortgage market that should make the market more solid. So the article is no reason to panic. That said, it doesn’t fill me with confidence, that some mistakes are repeated. Government sponsored enterprises (Fannie&Freddie) and government owned corporation (GinnieMae) own and insure a gigantic share of the mortgage market. That is bad and problematic policy that Obama (understandably) never definitively addressed. I think Trump wants to privatize these companies, but that is not solving the underlying problem either. It also doesn’t fill me with confidence that some of his supporters (e.g. John Paulson) have skin in the game.
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Or maybe, as the Chinese guy said, it's too early to say? Interest rates show we are still not in normal times, I don't see how any confident assessment of where we've been and where we're going can be made until they are.
 
712 said:
Or maybe, as the Chinese guy said, it's too early to say? Interest rates show we are still not in normal times, I don't see how any confident assessment of where we've been and where we're going can be made until they are.
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that is true. It is very difficult to predict anything with high certainty. I don't expect that we go back to normal monetary policy any time soon.




this tweet is from the fed member who voted against the last rate hike. He is just saying, what many people already: The fed gave up on conducting monetary policy based on data and is just tinkering around without much plan.
 
short critical about the minimum wage literature. In the end he is just stating the obvious which people without agenda know. It is implicitly also damning critizism of modern economics. 18 pages easy to understand even without any backround in economics. Anyone who supports the minimum wage should read it.


Abstract

What do we know about the economic consequences of labor market regulations? Few economic policy questions are as contentious as labor market regulations. The effects of minimum wages, collective bargaining provisions, and hiring/ ring restrictions generate heated debates in the U.S. and other advanced economies. And yet, establishing empirical lessons about the consequences of these regulations is surprisingly difficult. In this paper, I explain some of the reasons why this is the case, and I critically review the recent ndings regarding the e ects of minimum wages on employment. Contrary to often asserted statements, the preponderance of the evidence still points toward a negative impact of permanently high minimum wages.
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Assessing the fight for $15"

The previous section illustrates how little evidence there actually is to overturn our old understanding in figure 3, reinforced by centuries of historical experience, on the effect of minimum wages. What the last two decades of research on minimum wages have taught us beyond figure 3 is very limited. As I summarized above, the short-run employment effects of temporary, modest minimum wage increases are probably negative, but small. But, in some sense, we already knew that. A small temporary treatment is likely to have, most of the time, a small effect. Despite the enormous amount of brain power and high-tech econometrics displayed by the participants in the debate, we have likely ended where we started. I do not say this is as a criticism of the different authors cited in this paper, but as a recognition of the tremendous hurdles that empirical work faces.

First, the data are limited and subject to measurement error. We would need to know many more details about the different establishments in the U.S. economy than those we can find in existing data sources.
Second, we would need long samples of data to measure both the short- and long-run e effects of changes in minimum wages.
Third, we would need accurate information about workers and consumers and how they respond to changes in wages and prices.
And, fourth, we would need good economic models to trace the aggregate effects of these changes. All this is well beyond our current capability.

But this also means that the current empirical work is next-to-useless in evaluating the employment and welfare effects of the current efforts by many cities and states to move to a $15 minimum hourly wage (indexed, also, to inflation). A candid assessment of the literature can only reach the conclusion that those politicians and activists claiming that academic research supports their fight for $15" are being disingenuous.
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Reading your quotes this stands out for me:

First, the data are limited and subject to measurement error. We would need to know many more details about the different establishments in the U.S. economy than those we can find in existing data sources.
Second, we would need long samples of data to measure both the short- and long-run e effects of changes in minimum wages.
Third, we would need accurate information about workers and consumers and how they respond to changes in wages and prices.
And, fourth, we would need good economic models to trace the aggregate effects of these changes. All this is well beyond our current capability.

So not a huge amount of evidence either way. Meanwhile I know quite a few hard-working people in the UK who have benefited a lot from minimum wage, so until there is some good evidence against, I'd say keep it.
 
That would be the wrong conclusion. The paper assesses the significance of a study from 1994, which changed the debate about the minimum wage (at least on a level of economist and politicians). There was no disagreement up to this point, because “casual evidence” and theory were fairly unambiguous. This study put this consensus into question and had significant impact on policy makers.
Its impact can be explained primarily by two reasons. Many people wanted it to be true, so they just chose to believe it. Additionally its method was often seen as new gold-standard for research in this field. But just because something looks fancy and scientific (math and statistics!), doesn’t mean that the content is particularly useful. If you give me a pre-selected noisy data set and enough time, I can find evidence for the most outlandish claim. The reality is that this form of data analysis creates usually weak and ambiguous results, yet even these studies – if you don’t cherry pick – point in the direction of the theoretical status-quo.

That is not the same as saying “the minimum wage has no effect on employment” or “the jury is still out”. That’s precisely the kind of dishonesty that the paper tries to address. Anecdotal evidence is useless, but this form of anecdotal evidence doesn’t even contradict what we currently know. Of course some people benefit from the minimum wage. That was never in doubt.
 
I just linked to a very good starting point for anyone who wants to understand the conversation without getting bogged down in the detailed literature itself.

When it comes to economic debates I frequently get reminded of Jim Inhofe (GOP Senator), who brought a snow-ball to the senate floor to disprove climate change. “It's very, very cold out. Very unseasonable.” Hmm. Okay jefe.
 
PedroMendez said:
I just linked to a very good starting point for anyone who wants to understand the conversation without getting bogged down in the detailed literature itself.
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As with tax systems though, just because a particular system might return a better economic data result doesn't mean it's necessarily the best for society. Minimum wage doesn't just affect employment, it has a striking effect on equality, acts as a protective mechanism for those in poor areas and professions where people have very little support against exploitative employers and much more. Government laws and regulations cannot simply be economics driven.
 
PedroMendez said:
short critical about the minimum wage literature. In the end he is just stating the obvious which people without agenda know. It is implicitly also damning critizism of modern economics. 18 pages easy to understand even without any backround in economics. Anyone who supports the minimum wage should read it.
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I read the whole thing and I have so many questions. The central one is that he seems to be attributing the decline in (startup+exit) rates to the minimum wage? Shouldn't he look at periods like 1949 (Fig 5) where it seems there was a very sharp increase in this wage relative to avg wages? Could it be the effect of automation? And he talks about the next Google/Amazon: oligopolies within Silicon Valley are enormous, it now hosts the worlds's biggest firms, and a startup like Uber is huge in its field due to the kind of initial investment it received. So it may simply be tougher to enter this field, with higher amounts of capital required, since the exisiting large firms are also formidable research companies and can also buy any startups.
Secondly, I'm highly skeptical that a higher minimum wage would lead to less people taking degrees - there is still a significant wage increase for graduates of every field even humanities, also, conversely (contradicting my 1st point), I'm not sure how well high school students examine their financial future when making the decision to go to college. Keeping the minimum wage at such a low percentage of college tuition is also pretty disastrous for social mobility, unless you accept a big increase in student debt.

Edit: about the Southern hosiery thing: was the substitution by capital only in the South after the legislation, or was it more general in that industry? And isn't that type of substitution more or less inevitable? I couldn't find anything in the reference he provided. That ref also seems to suggest that employment increased in northern hosiery units which are also covered by the same wage standards, simultaneously with a decline in southern employment.
 
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Two Italian banks bailed out for over 5 billion over the weekend. I'm thinking of withdrawing all my money and sticking it under the mattress.
 
barros said:
For the people who knows economics on this forum, what you guys think? Another recession but at this time in China? What the consequences for the rest of the world?
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Since most big economies are in some way interdependent on one another, there's a good chance a Chinese recession would affect the U.S. and Eurozone in a bad way. Especially when you consider we are currently nearing the end of the post-Great recession business cycle and the market is beginning to question whether the Trump trade is going to unwind in the coming months. When you throw in Oil being in the low 40s and possibly sliding well into the 30s, we are currently in pretty precarious situation.
 
It's strange that the big world recessions of the 70s were caused by increases in oil price, and now people are saying it's the decrease that's the problem. I see oil company shares falling, but that's not the same thing as recession.

For the UK we are particularly vulnerable to rising inflation and interest rates. Inflation because unless wages match there will be less consumer spending, and unfortunately the UK economy has been driven by consumer spending for years. Rising interest rates would be even nastier, because millions of people have bought houses with repayments based on all-time record low rates, which have been low for so long that many believe it's the norm. Falling house prices and widespread negative equity would be far more damaging than leaving the EU, I suspect.
 
Pretty grim comments from Draghi. Eurozone outlook worse than expected.
 
Sovereign debt and CLOs neck and neck at the moment for whats going to trigger the next crash. I forget who it was on Bloomberg but they said we're going to talk our way into a recession at this rate, probably right.
 
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