Tag Archives: Currency

Hard truths about the eurozone crisis

There has been little honest reflection within the European Commission about the eurozone crisis. Until now.
By Adam Tooze – It is not often one finds European officials quoting significant moments from pop culture, let alone an outgoing director-general for economic and financial affairs—the European Commission’s most senior economics official—quoting Ridley Scott’s Blade Runner. But that is how Marco Buti introduces a recent piece summing up his period in office between 2008 and 2019.

Buti’s contribution is significant as personal reflection but also because it raises the more general question of how the EU and its institutions will commemorate the tenth anniversary of the eurozone crisis.

When it came to revisiting the global financial crisis, Brussels did not hold back. In August 2017, to mark the tenth anniversary of its onset, the commission issued a statement blaming the spillover to Europe on the United States and giving itself credit for prompt action to stave off the worst. The press release was however issued on August 9th—anniversary of the failure of the French bank Paribas’ US property funds.

Subprime and Lehman could be safely blamed on the US. What, however, will the European institutions make of the ten-year anniversary of the eurozone crisis and its various phases between 2010 and 2015?

Last year, addressing the European Parliament on the 20th anniversary of the introduction of the euro, the then commission president, Jean-Claude Juncker, admitted there had been a lack of solidarity with Greece. He acknowledged there had been ‘reckless austerity’ (l’austérité irréfléchie). But he had the gall to suggest that the commission had succumbed to the influence of the International Monetary Fund, as though the agenda of austerity and ‘structural reform’ had been imposed from outside.

The traumatic history of the last ten years deserves better. more>

The approaching debt wave

By Kaushik Basu – Over the last decade, the world economy has experienced a steady build-up of debt, now amounting to 230 percent of global GDP. The last three waves of debt caused massive downturns in economies across the world.

The first of these happened in the early 1980s. After a decade of low borrowing costs, which enabled governments to expand their balance sheets considerably, interest rates began to rise, making debt-service increasingly unsustainable. Mexico fell first, informing the United States government and the International Monetary Fund in 1982 that it could no longer repay. This had a domino effect, with 16 Latin American countries and 11 least-developed countries outside the region ultimately rescheduling their debts.

In the 1990s, interest rates were again low, and global debt surged once more. The crash came in 1997, when fast-growing but financially vulnerable East Asian economies—including Indonesia, Malaysia, South Korea, and Thailand—experienced sharp growth slowdowns and plummeting exchange rates. The effects reverberated worldwide.

But it is not only emerging economies that are vulnerable to such crashes, as America’s 2008 subprime mortgage crisis proved. By the time people figured out what “subprime” meant, the U.S. investment bank Lehman Brothers had collapsed, triggering the most severe crisis and recession since the Great Depression.

The World Bank has just warned us that a fourth debt wave could dwarf the first three. Emerging economies, which have amassed a record debt-to-GDP ratio of 170 percent, are particularly vulnerable. As in the previous cases, the debt wave has been facilitated by low interest rates. There is reason for alarm once interest rates begin to rise and premia inevitably spike.

Among emerging economies, India is especially vulnerable. In the 1980s, India’s economy was fairly sheltered, so the debt wave back then had little impact.

Today, India’s economy is facing one of its deepest crises in the last 30 years, with growth slowing sharply, unemployment at a 45-year high, close to zero export growth over the last six years, and per capita consumption in the agricultural sector decreasing over the last five years. Add to this a deeply polarized political environment and it is little wonder that investor confidence is rapidly declining. more>

The Finnish Basic Income Experiment – Correcting The Narrative

By Jurgen De Wispelaere, Antti Halmetoja and Ville-Veikko Pulkka – The Finnish government’s refusal to extend or expand the experiment may not come as much of a surprise once the budgetary implications are taken into account but it nevertheless amounts to one more disappointment amongst those closely watching how the experiment is progressing. And disappointments have been plentiful with this project.

After a promising start, the first blow came when the Sipilä government ignored most of the suggestions and recommendations of the research consortium led by Kela (the Social Insurance Institution of Finland) and charged with preparing the experimental design — incidentally, appointed by the very same Juha Sipilä.

The design now being rolled out is much more limited than many had hoped for. Repeated requests for additional budget or postponing the starting date were ignored. Much-needed coordination between the different ministries involved was not forthcoming. The government also delayed appointing the team charged with evaluating the result until the experiment was well into its second year – with detrimental effects for any attempt to gain a more comprehensive insight into the experiment’s wellbeing effects. more>

Fiscal Policy Remains In The Stone Age

By Simon Wren-Lewis – Or maybe the middle ages, but certainly not anything more recent than the 1920s. Keynes advocated using fiscal expansion in what he called a liquidity trap in the 1930s. Nowadays we use a different terminology, and talk about the need for fiscal expansion when nominal interest rates are stuck at the Zero Lower Bound or Effective Lower Bound.

When monetary policy loses its reliable and effective instrument to manage the economy, you need to bring in the next best reliable and effective instrument: fiscal policy.

The Eurozone as a whole is currently at the effective lower bound. Rates are just below zero and the ECB is creating money for large scale purchases of assets: a monetary policy instrument whose impact is much more uncertain than interest rate changes or fiscal policy changes (but certainly better than nothing). The reason monetary policy is at maximum stimulus setting is that Eurozone core inflation seems stuck at 1% or below. Time, clearly, for fiscal policy to start lending a hand with some fiscal stimulus.

You would think that causing a second recession after the one following the GFC would have been a wake up call for European finance ministers to learn some macroeconomics. Yet what little learning there has been is not to make huge mistakes but only large ones: we should balance the budget when there is no crisis. more>

How Bitcoin Ends

By Douglas Rushkoff – Bitcoin was a clever idea. Idealistic, even. But it isn’t working out quite as its developers imagined. In fact, once all the coin has been mined, bitcoin will simply reinforce the very banking system it was invented to disrupt.

Watching the bitcoin phenomenon is a bit like watching the three-decade decline of the internet from a playspace for the counterculture to one for venture capitalists. We thought the net would break the monopoly of top-down, corporate media. But as business interests took over it has become primarily a delivery system for streaming television to consumers, and consumer data to advertisers.

Likewise, bitcoin was intended to break the monopoly of the banking system over central currency and credit. But, in the end, it will turn into just another platform for the big banks to do the same old extraction they always have. Here’s how.

Central currency is not the only kind of money that ever existed. For many centuries, gold and other precious metals served as money.

In essence, bitcoin is money built and maintained by nerds, based on the premise that good nerds will outnumber the bad nerds. Sure, bad actors can dedicate all of their processing power to fake transactions, but they will be outnumbered by those who want the token to work properly.

What is the incentive for people to spend millions of dollars on computers and power once there’s no more kickback of coin? more>

‘No Cash’ Signs Everywhere Has Sweden Worried It’s Gone Too Far

By Amanda Billner – “No cash accepted” signs are becoming an increasingly common sight in shops and eateries across Sweden as payments go digital and mobile.

But the pace at which cash is vanishing has authorities worried.

“If this development with cash disappearing happens too fast, it can be difficult to maintain the infrastructure” for handling cash, said Mats Dillen, the head of the parliamentary review.

Sweden is widely regarded as the most cashless society on the planet. Most of the country’s bank branches have stopped handling cash; many shops, museums and restaurants now only accept plastic or mobile payments. But there’s a downside, since many people, in particular the elderly, don’t have access to the digital society.

In response, the central bank is considering whether there’s a need for an official form of digital currency, an e-krona. A final proposal isn’t expected until late next year, but the idea is that the e-krona would work as a complement to cash, not replace it completely. more>

Bitcoin Energy Consumption Index

Digiconomist – Ever since its inception Bitcoin’s trust-minimizing consensus has been enabled by its proof-of-work algorithm. The machines performing the “work” are consuming huge amounts of energy while doing so. The Bitcoin Energy Consumption Index was created to provide insight into this amount, and raise awareness on the unsustainability of the proof-of-work algorithm.

Note that the Index contains the aggregate of Bitcoin and Bitcoin Cash (other forks of the Bitcoin network are not included). A separate index was created for Ethereum, which can be found here.

To put the energy consumed by the Bitcoin network into perspective we can compare it to another payment system like VISA for example. According to VISA, the company consumed a total amount of 674,922 Gigajoules of energy (from various sources) globally for all its operations. This means that VISA has an energy need equal to that of around 17,000 U.S. households. We also know VISA processed 111.2 billion transactions in 2017.

With the help of these numbers, it is possible to compare both networks and show that Bitcoin is extremely more energy intensive per transaction than VISA. more>

Would Free Trade Be OK If The U.S. Had A Trade Surplus?

By Nathan Lewis – There are a lot of issues surrounding trade – for example, the tendency of trade agreements to come attached with globalist institutions that erode national sovereignty. The European Coal and Steel Community (1951) not only allowed trade in coal and steel, it introduced a whole new supranational government structure, including three branches of government and a parliamentary body, that later grew into the European Union. This sort of thing should be avoided with extreme prejudice.

Today’s environment of floating fiat currencies introduces new problems. The devaluation of the Mexican peso in 1995, shortly after the passage of the North American Free Trade Agreement in 1994, caused all sorts of hardship for U.S. competitors that cannot be attributed to any meaningful “comparative advantage.”

At present, gross exports of goods and services are about 80% of gross imports. The 20% difference is the “trade deficit.” Today, gross exports of goods and services are greater than at any time before 2007 – around 12% of GDP. We don’t seem to have any trouble selling our wares to foreigners. We are selling more to foreigners than ever. In the 1960s, when the U.S. had a trade surplus, total exports were about 5% of GDP. Imports, of course, were less than this.

If the amount we sell to foreigners has been steadily rising, why can’t we manage to run a trade surplus? more> https://goo.gl/oiM9eC

Deficits In Trade And Deficits In Understanding

By Omar Al-Ubaydli – To see why the current trade deficit is benign, we need to understand the relationship between trade and the dollar’s value. Greenbacks are like any commodity in that the more people want to possess them, the higher their price. People acquire dollars primarily for two reasons: buying American goods and investing within the United States.

If the United States is importing more than it exports, then American consumers are exchanging dollars for foreign currencies to buy foreign goods more than foreigners are doing the reverse, meaning that foreigners are accumulating lots of dollars that they’re not using to buy American goods.

So why has America been recording a large, persistent trade deficit, and why isn’t the dollar devaluing? It’s due to the second major difference (from 1970s): The investment-based demand for foreign currencies—which we momentarily set aside—has ballooned. People no longer exchange currencies just to buy foreign goods.

Consequently, the dollar no longer corrects trade imbalances. more> https://goo.gl/L1VHHr

The Curse of Cash

BOOK REVIEW

The Curse of Cash, Author: Kenneth S. Rogoff.

By Kenneth S. Rogoff – The world is drowning in cash—and it’s making us poorer and less safe.

Even as people in advanced economies are using less paper money, there is more cash in circulation—a record $1.4 trillion in U.S. dollars alone, or $4,200 for every American, mostly in $100 bills. And the United States is hardly exceptional. So what is all that cash being used for?

The answer is simple: a large part is feeding tax evasion, corruption, terrorism, the drug trade, human trafficking, and the rest of a massive global underground economy.

The Curse of Cash offers a plan for phasing out most paper money—while leaving small-denomination bills and coins in circulation indefinitely—and addresses the issues the transition will pose, ranging from fears about privacy and price stability to the need to provide subsidized debit cards for the poor. more> https://goo.gl/QRtRgz

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