Bill Black and the theoclassical economists ]

Bill Black is the author of “The Best way to Rob a Bank is to Own One”. He has taken to the term “theoclassical" when referring to laissez-faire "economists. Below he talks about "Mankiw morality" and Bastiat.

Mankiw Morality” is the term I coined to describe the mindset of theoclassical economists who think that wealth maximization is either inherently moral or transcends morality because it is “rational.”

When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that glorifies it (Frederic Bastiat)


Olive Oil futures are spiking ]

By Ed Dolan

futures prices have risen 75 percent since mid-2012. Observers expect the increase to show up in retail prices soon. So what’s behind the spike in olive oil prices?


There is little doubt about what is happening on the supply side of the market: The weather in Spain, the world’s largest producer, was unusually bad last year. In the spring, an unexpected frost damaged the trees just as they were blossoming. Summer brought a prolonged drought. By December, which should be the height of the 2012/13 harvest, the Spanish crop was coming in at just 44 percent of the year before.

The harvest has been better elsewhere, but as the next chart shows, Spain so dominates the world market that no one else can really make up the loss


Why Are Corporations Holding So Much Cash? ]

There are two main reasons why firms find it beneficial to hold cash: precautionary motive and repatriation taxes.

All the results on cash holdings presented here are obtained using Compustat, a data set that contains balance-sheet information on publicly traded firms.  The variable of interest for the purposes of this article is “cash and short-term investments,” which include all securities transferable to cash.  Figure 1 displays the sum of cash holdings of all firms.  In 2011, cash holdings amounted to nearly $5 trillion, more than for any other year in the series, which starts in 1980.


Recent studies of this trend have found it useful to split firms into financial and nonfinancial corporations because these two types of firms likely hold cash for different reasons.  Thus, to keep the analysis comparable with the studies discussed below, in the rest of this article the focus will be on publicly traded non-financial non-utility corporations.This segment of the market held about $1.6 trillion at the end of 2011, as shown in Figure 2.


Weekly Update, 1 Feb 2013 ]

Equities advanced, yet again. The Dow Jones Industrial Index reached an intraday high at 14,019 which is 1.3% from its historic high at 14,198 reached on Thursday 11 October 2007. Likewise the S&P 500 index advanced to an intraday high at 1514 (historic high at 1576). The market capitalization of the S&P 500 stood at $13,381 trillion as of 31 Jan 2013. This amount is 84.5% of its $15,8 trillion economy.

(The market capitalization of all the listed companies of the Athens exchange is at 0,036 trillion, or 18.8% of Greece’s 0,194 trillion economy)

In the currency markets the dollar was weak vs euro (weekly high at 1.3715) and strong vs the yen (high at 92.74)


Finally, the Netherlands nationalized yet another bank. Is this the way of the future? NBG closed the week at 1.13 euros. Happy February!


Shares of NBG closed at 1.13 (weekly high at 1.23 and low at 1.11)

Weekend Reading

Why Are Corporations Holding So Much Cash? (St. Louis Fed)

The perpetualisation of debt

Netherlands nationalises SNS Reaal

1st February 2013

Financial Times, Feb 1, 2013
By Matt Steinglass in London

The Netherlands has nationalised SNS Reaal, the fourth-largest systemically important bank in the Netherlands, at a cost to Dutch taxpayers of €3.7bn.

The bank had spent the past several weeks in a desperate search for private capital to compensate for heavy losses in its real estate holdings, particularly in Spanish assets.

Jeroen Dijsselbloem, the Netherlands’ finance minister, said in a statement he had “looked at every alternative involving private parties”, but found none that could guarantee the stability of the Dutch banking system.

With ABN Amro still in government hands after it was nationalised in 2009, the nationalisation of SNS Reaal means two of the Netherlands’ four systemically important banks are state-owned.

The nationalisation, carried out under the Netherlands’ 2012 law on bank intervention, will mean shareholders of the bank and subordinated debt holders will see their stakes wiped out. There will be a write down of the subordinated creditors to the tune of €1bn.

The state will inject €2.2bn in new capital, while forgiving €800m the bank still owed from its earlier bailout during the financial crisis. It will also write off €700m in the value of the bank’s real estate assets.

In a blogpost on on Thursday, economist Heleen Mees noted that rating agency Fitch has warned it may downgrade the debt of other Dutch and European banks if a government rescue of SNS Reaal wipes out ordinary bondholders.

Europe’s robust financial-transactions tax ]

By Felix Salmon

The details of Europe’s new financial transactions tax won’t be made public for a few weeks, but the FT’s Alex Barker has seen a draft, and it looks impressively robust. The tax is being implemented by 11 countries, including most importantly Germany and France, and it’s going to be levied at two levels: 0.1% on securities trades, and 0.01% on derivatives trades. It’s also going to be very difficult to dodge: any trader whose institutional headquarters is in one of the 11 countries will have to pay the tax, as will all transactions taking place in those countries, and all transactions involving securities issued in those countries.

The tax will have two main purposes. The first is to raise substantial tax revenues on the order of $45 billion per year; the second is to discourage financial speculation. I’m hopeful on the former, but less so on the latter.

Employment Situation in the U.S and Greece

28th January 2013

On Friday, at 15:30 local time the Bureau of Labor Statistics will announce the Employment situation in the U.S in January 2013. 150,000 people are expected to have found a job during January. In all, since December of 2010, when the unemployed were 14.4 million people, 2.2 million are estimated to have found a job during the past 2 years.

Compare and contrast this number to the 1.345 million unemployed in Greece in October 2012. Since Dec 2010 when the unemployed were 694 thousand, 651 thousand more have lost their jobs, in less than 2 years.

The IMF (whose transactions with Greece date from 2010) have recently admitted “growth forecast errors

Growth Forecast Errors and Fiscal Multipliers

28th January 2013

3 Jan 2013, IMF Researh Department, by Olivier Blanchard and Daniel Leigh

Summary: This paper investigates the relation between growth forecast errors and planned fiscal consolidation during the crisis. We find that, in advanced economies, stronger planned fiscal consolidation has been associated with lower growth than expected, with the relation being particularly strong, both statistically and economically, early in the crisis. A natural interpretation is that fiscal multipliers were substantially higher than implicitly assumed by forecasters. The weaker relation in more recent years may reflect in part learning by forecasters and in part smaller multipliers than in the early years of the crisis.

Click here for Greece’s transactions with the IMF, including the interest paid in SDR. The Exchange rate on Jan 25, 2013 was 1 SDR= 1.14 euro)

The noted international macroeconomist Jeff Frankel in a recent article titled “Monetary Alchemy, Fiscal Science" has this to say on the "multiplier effect":

That monetary policy is less effective than fiscal policy under conditions of high unemployment and zero interest rates should not be a novel position.  But many economists have forgotten much of what they knew and politicians may not have even heard the proposition. 
                Introductory economics textbooks have long talked about the Keynesian multiplier effect:  the recipients of federal spending (or of consumer spending stimulated by tax cuts or transfers) respond to the increase in their incomes by spending more as well, as do the recipients of that spending, and so on.  Again, the multiplier is much more relevant under current conditions than in the normal situation where the expansion goes partly into inflation and interest rates and thus crowds out private spending.  By the time of the 2008-09 global recession even those who believed that fiscal stimulus works had marked down their estimates of the fiscal multiplier — intimidated, perhaps, by newer theories of policy ineffectiveness.  The subsequent continuing severity of recessions in the United Kingdom and other countries pursuing contractionary fiscal policies, apparently to the surprise of the politicians enacting them, suggested that multipliers are not just positive, but greater than one, as the old wisdom had it.   The IMF Research Department has now reacted to this recent evidence and bravely confessed that official forecasts, including even its own, had been operating with under-estimates of multiplier magnitudes.
          A new wave of econometric research estimates fiscal multipliers using methods that allow them to be higher in some circumstances than others.   Baum, Poplawski-Riberio and Weber (2012) allow the estimate to change when crossing a threshold measure of the output gap.  Batini, Callegari and Melina(2012) allow regime-switching, across recessions versus booms.  Others that similarly distinguish between multipliers in periods of excess capacity versus normal times include Auerbach and Gorodnichenko (2012a2012b), Baum and Koester (2011), and Fazzari, Morley and Panovska (2012).  Most of this research finds high multipliers under conditions of excess capacity and low interest rates.  (Few of them have the courage to mention that this is what one would have expected from the elementary textbooks of 50 years ago, perhaps due to fear of sounding old-fashioned.)   Related studies confirm other conditions that matter for the size of the fiscal multiplier in precisely the way the traditional textbooks say, for example that they are lower in small open economies because of crowding out of net exports.

Junker says his remarks were taken out of context ]


On Tuesday Jan 15, 2013 the euro went from 1.3340 to as low as 1.3270 (70 pips) in the space of an hour. In media such as Bloomberg and Reuters it was reported that Junker said the euro was “dangerously high”.

On Monday, 21 Jan 2013, MNI, a wholly owned subsidiary of Deutsche Boerse Group, reported that Junker’s comments were a misunderstanding. At a meeting in Luxembourg, 

 What he had in fact remarked was the fact that a year ago there were “everyone was saying that Greece was about to leave the Eurozone,” now, “Greece is still here and we are complaining that the euro exchange rate is ‘dangerously too high,” he explained.

"We do not pursue a policy on exchange rates," he said. (Source)


Load More