Escaping the zero lower bound: edge share.

Having already written on this subject, I post here today another take on the issue of the current conundrums about Monetary Policy. The quest between Inflation targeting – if the target should be raised above the 2% consensus – is again brought to the front line of discussion. This Blog longandvariable defends here a position of criticism (rightly so…) about the today’s feasibility of Electronic money and its potential of resolving the issue of zero lower bound in Monetary Economics. The last paragraph is worth a recall:

What Rogoff thinks would particularly ‘baffle’ central bankers’ constituents was that they had changed their minds about the benefits of price stability.  There’s something in this.  But it should not be the overriding concern.    And:  the profession has done a lot of changing of minds recently!  We would hardly decide against tightening prudential supervisory standards on the grounds that we would baffle everyone that we had changed our minds on it.  On the contrary, it would be perplexing if the authorities had not changed their minds in the light of the evidence about what constituted good policy.  So too with inflation.  For generations, the authorities wrestled with different metallic standards for monetary policy.  Finally, we ‘changed our minds’ about this being the right thing to do.  It was probably baffling at the beginning.  But slowly people got used to the meaninglessness of the ‘promise to pay the bearer on demand the sum of’ text.”

Escaping the zero lower bound: electronic money, or higher inflation?.

via Escaping the zero lower bound: electronic money, or higher inflation?.

Lars P Syll on Picketty and ”Ricardian Equivalence”

I repost today here Lars P. Syll’s on the current interesting and important topic raised by the french Economist Thomas Piketty. I wouldn’t state completely my position here on the topic. Of interest  to further enrich the debate is the apparent dichotomy between what the structure of economic models might recommend us to follow,  on the one hand what underlying reality appers to reveal,  specifically Lars’s interpretation that representative agents models point to the true role for Public Debt as a redistributive device (Ricardian Equivalence) that seems to be clear, and on the other Lars’s own interpretation. Certainly other views on this exist and with argumentative validity…

” For far too long, economists have neglected the distribution of wealth … partly because of the profession’s undue enthusiasm for simplistic mathematical models based on so-called representative agents …


By totally avoiding the issue of inequality in the distribution of wealth and income, these models often lead to extreme and unrealistic conclusions and are therefore a source of confusion rather than clarity. In the case of public debt, representative agent models can lead to the conclusion that government debt is completely neutral, in regard not only to the total amount of national capital but also to the distribution of the fiscal burden. This radical reinterpretation of Ricardian equivalence … fails to take account of the fact that the bulk of public debt is in practice owned by a minority of the population … so that the debt is the vehicle of important internal redistributions when it is repaid as well as when it is not.”

Will China change everything ?

My edge today will focus in the issue of China and its relevance in the Economic world stage. It is known in the current influential circles the imbalances to the Global economy of the chinese currency peg to the US Dollar, or its massive size of Foreign Exchange reserves or the way that the uncertainty about its role in the Global aggregate demand distorts expectations and the stability of Financial Markets.

But less is said about the details of its Economy. We maybe could get a good glimpse by an analysis of its renminbi (RMB) Exchange rate Policy like this piece of FT’s Gavyn Davies blog post. In it we see how the current Global Financial Markets, specially the funding for the massive credit markets search for profits that in part is supported by Chinese capital investment obsession of the last two decades :

China’s exchange rate policy has, of course, always been a controversial matter. After a decade of deliberate undervaluation, intended to promote export led growth, China finally succumbed to international pressure in 2005, and allowed the real value of the renminbi (RMB) to start rising. Since then, it has risen by about 30 per cent, with only one interruption in the aftermath of the great financial crash.

The new prices data suggest that the renminbi is now approximately fairly valued. Arvind Subramanian and Martin Kessler have already crunched the numbers, and have concluded that the average level of prices in China is almost exactly where it should be compared to the US, allowing for the economy’s relative level of development. Other methods produce slightly different results, but the conclusion that the currency is no longer substantially undervalued seems robust.

In this respect, China has been a good global citizen in recent years, no doubt in part because a rising exchange rate helped with its domestic objectives by boosting consumption. The rising RMB has helped to reduce the huge trade imbalance between the US and China, and taken some of the pressure off other emerging economies whose competitiveness was under threat.

The inexorable rise in the RMB has also led to burgeoning “carry trades”, involving a surge in short-term capital flows into the onshore market in mainland China. This has been a two-edged sword. It has provided a source of funding for the financial system, at a time when more credit was needed to disguise the stresses in the highly indebted local government and corporate sectors. But it also extended the internal credit bubble even further into unsustainable territory, and forced China to intervene even more heavily in the foreign exchange markets to keep the currency down.

But as Martin Wolf and David Piling point out in another FT’s article, the game will most probably change, not least in part due to internal pressures by the chinese economy to adapt to new realities but also because there’s a real need to address the international pressures to Growth in the economies of the Western Countries. In the real world economy, nothing is really created new, everything is transformed to bring about balance and change…. If there are imbalances that probably means that something will need to change to restore Balance.

This is further underscored by the debate about the rise of China as the World’s largest economy on a GDP measure only ( adjusted for Purchasing Power Parity the chinese economy is still a relatively poor Country): ”Nevertheless, China is still a poor country: the purchasing power of its GDP per head was 99th in the world. Since China also invests close to half its output, relative consumption per head was lower still.” says Wolf in the article. And on such measures as Technological intensity of its economy, productivity of services sectors, quality of its Political and Academic institutions, China like most emerging countries still lags behind the advanced economies by a significant amount. Correctly pointed here by David Piling:

China is a middle-income country at best, with per capita income somewhat below that of Peru. Its technological capabilities are far behind the US and other western economies, including historic adversary Japan. Militarily it has nothing like the global clout of the US. Its powers of persuasion are also lacking. China does not have a sufficiently attractive political system to influence global opinion. Its closest allies are the likes of North Korea and Pakistan. Mao Yushi, the 85-year-old economist who is considered one of the intellectual authors of China’s economic modernisation, takes a studiously realistic view of the new numbers. He accepts that China is the world’s biggest economy but considers this to be nothing more than a reflection of the fact that it is home to 1.36bn people, more than any other nation.

With all this good judgment, there’s no way to escape an important reality. The rise of China to the World economic stage changed the Global Economy signficantly and promises to continue to do so. To say the least, any informed and responsible Economist or analyst must not ignore the news about developments in the Chinese economy for many years to come, whether in the short-term or in the medium to long-term.

How not to do Macroeconomics – with an Edge

Following the spirit d’état in the Edge in the past couple of weeks about Economic theory and applications (… and maybe implications…) I post today a link to the Blog Unlearning Economics. It is about the current deeply interesting and important debates surrounding issues in Macroeconomics like: the proper modeling framework for macro, the Rational Expectations literature and its critics, Monetary Economics and zero-bound constraints on interest rates, and so on. Deep issues highlighting an era which is demanding for Economic Sciences.  Excellent for the many links it provides to other Blogs and articles of academic preeminence and quality. There is also a sequel that is certainly worth the read as well.

How Not to Do Macroeconomics.

Manufacturing in America

This week’s first Post of the Edge is dedicated to an untold important issue in Economics or Macroeconomics: the Labour Market. Specifically the Manufacturing sector of the US economy. It is maybe unnecessary to stress the importance of this for the Economic performance, not only of the US economy but also of the so-called Western economies wich comprises the European Union and the Euro zone in particular.


As FT’s Alphaville US correspondent Cardiff Garcia tells us in this video the dynamics of Manufacturing labour market are complex. But they might play a significant role in the present, and future economic recovery specially the promotion of jobs in the Construction sector. Then Garcia rightly point the raging debate about income inequality due to declining productivity and jobs prospects both for the Manufacturing and Construction sectors.

The take away: difficult compromise between economic recovery and just and equal Labour Markets.

The brave new World of Money creation….

Today’s Izabella Kaminska post on FT’s Alphaville is interesting, important and rightly pointing deep questions about modern monetary systems and the economic theories underpinning it. It starts by referring Martin Wolf’s article about the way modern money is created, with the excellent FT’s commentator and columnist defense of endogenous theory of money.

But Izabella displays nicely her criticism of that defense. I found quite interesting the notion that money is a kind of credit today of which the backing isn’t necessarily today’s collateral but future returns on investment, and that is what makes possible that deposits in the Banking system act as part of the money supply and is simultaneously a liability and a form of Equity to banks’ Balance Sheet.

Here the main part:

”If Wolf is right, then financial instability is very likely a product of the system’s tendency to take the private money issuance power of banks for granted. In reality, this power is thrust upon banks by system participants and can be easily compromised if these institutions prove unreliable at matching trusted liabilities with projected assets which don’t exist yet.

A great deal of the instability is so related to public misunderstanding about what bank money really is, namely imitation electronic cash which does a good job of mimicking state cash, the only safe source of purchasing power in a developed economy with a competent central bank. As FT Alphaville has stated before, that means unproven private liabilities get entangled with sovereign liabilities, making them impossible to differentiate or to value on individual terms, a fact which ultimately leaves the state on the hook for guaranteeing them even though it was not the state which was responsible for creating them.

The problem for financial stability comes about if, when the private issuance power of banks fails, there isn’t a more trusted authority that can step in to guarantee those liabilities directly — and equally so, if there is such an authority but they are unwilling to take on those private liabilities due to price stability fears. ”

All of this is after justified and put in the perspective that Central Banks are at the same time today with huge power in the System, for theirs is main job of guaranteeing stability, but also to assure that the main functions of Money are well established, like for example as a medium of exchange in a world of Fiat Money, but also with huge responsibility of getting the proper understanding the fundamentals of the Economy right, if they are to accomplish their mandates and goals. For the sake of us all and the credibility of the system.

We then expect further on this, for all the good reasons and not least for forming our own mature position as regards the ”who’s in the right” challenge posed by Kaminska, along the way witnessing her doubts and double Mind on Wolf’s pessimistic stance being definitely cleared…:

” In Wolf’s opinion towards the argument for eliminating of private money outright:

Our financial system is so unstable because the state first allowed it to create almost all the money in the economy and was then forced to insure it when performing that function. This is a giant hole at the heart of our market economies. It could be closed by separating the provision of money, rightly a function of the state, from the provision of finance, a function of the private sector.

This, as it happens, is where we respectfully agree but disagree at the same time with our esteemed colleague. But we’ll expand more on why that is in our next post.”