Start The Week Mulling These – March 2, 2015

Swiss-Ghana 016Noted for your Monday breakfast mulling. Here is what I came across the net over the weekend and on Monday morning. Hope you will find these useful.

  1. Janet Yellen meets with conservatives – Lonegan also said Friday that in conjunction with the Fed’s annual Jackson Hole symposium in Wyoming this year, a group of conservative economists are planning to hold a meeting of their own “directly across the street” featuring former Federal Reserve Chair Alan Greenspan as the keynote speaker. A spokeswoman for Greenspan’s firm did not immediately respond to CNN’s request for comment.
  2. The Great Recession was not so Great – The Great Recession was characterised by a drop in GDP that was unprecedented in recent history. However, the Great Recession caused an increase in unemployment that was not unprecedented. The much milder recession of the early 1980s caused a similar increase in unemployment rates. Within countries there is a strong correlation in unemployment rates. If unemployment rates are relatively high in a given country, they are relatively high for various types of workers along dimensions such as gender, age, and educational attainment.
  3. Credit supply and the housing boom – In this column, we argued that any reconstruction of the fundamental causes of the housing and credit boom that preceded the Great Recession must be consistent with four stylised facts: house prices and debt surged, the ratio of debt to house values was roughly constant, and real mortgage rates fell. From the perspective of these four facts, explanations that rely exclusively on an increase in credit demand associated with more generous credit conditions—for instance in the form of higher loan-to-value ratios—are lacking. On the contrary, a shift in credit supply associated with the emergence of securitisation and shadow banking, is qualitatively and quantitatively consistent with the four facts.
  4. The Deflation Bogeyman
    None of this might matter were it not for the fact that extremely low interest rates have fueled increased risk-taking by borrowers and yield-hungry lenders. The result has been a massive mispricing of financial assets. And that has created a growing risk of serious adverse effects on the real economy when monetary policy normalizes and asset prices correct.
  5. I Understand Where Martin Feldstein Starts: I Do Not Understand Where He Ends Up: Focus – The assets that seem to be overpriced are those that offer nominal safety in reserve currencies issued by independent central banks with low inflation targets–and those are, overwhelmingly, the liabilities of governments and not of private sector entities. Goldman Sachs and its clients simply cannot issue a AAA bond these days.
  6. Why isn’t the Fed worried about collapsing breakevens? – The cost of buying protection against the possibility that annual average CPI inflation is either less than 0 per cent or more than 2.5 has plunged since the middle of 2013. That’s arguably a victory for Fed policy, considering the hullabaloo about “money printing” and “Weimar”. In fact, in the old days, the Fed used to say that the reason it wanted to keep inflation slow was because this would lower risk premia and reduce the cost of capital.
  7. Why companies are rewarding shareholders instead of investing in the real economy – Of course, in the modern economy, it may be that investing in people — which would raise wages and boost hiring — isn’t actually the kind of smart business decision that a manager would make, even absent pressure from shareholders. Factories run with less labor now, and robots might require more cash now but save money down the line. That’s where Mason thinks societal pressure might have to be brought to bear on businesses with the power to spread their wealth.
  8. Japan is not a collectivist society – What they find, in short, is that Japan is not very collectivist. On the individualism-collectivism scale, Japan ranks about the same as the United States (which has consistently measured near the top of the individualism scale). Actually, Japan measures as slightly more individualistic than the U.S. Some of the studies also include Russia and South Korea. Russia is more collectivist than Japan or the U.S., and South Korea is the most collectivist of the four, at least when the studies were done (15-20 years ago).
  9. A Slippery New Rule for Gauging Fiscal Policy – So there are good reasons for the economists hired by Congress to pursue dynamic scoring. But there are also good reasons to be wary of the endeavor. In short: How do you open a can of worms? Very carefully.
  10. China Cuts Interest Rates to Stimulate Slowing Economy – In November, for the first time in two years, the government reduced interest rates. In February, it lowered the reserve requirement ratio, allowing banks to lend a larger share of their assets. The move on Saturday to cut rates again is an effort to reduce corporate debt burdens and financing costs for borrowers and home buyers.
  11. Walmart’s Visible Hand – What’s interesting, however, is that these pressures don’t seem all that severe, at least so far — yet Walmart is ready to raise wages anyway. And its justification for the move echoes what critics of its low-wage policy have been saying for years: Paying workers better will lead to reduced turnover, better morale and higher productivity.
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