The Sunday Times shadow MPC is voting for a rate hike in the UK. It won't make a blind bit of difference, what we will get instead is a bit of tinkering with the forward guidance the MPC use, to lower the rate unemployment needs to fall below before they will contemplate rate hikes.
The UK rate debate is echoed in the US, though it seems more vociferous here, and centres around the question of whether it is interest rate changes that matter, or the level of interest rates. If you ever play with monetary policy rules, like the Taylor Rule, they will suggest appropriate rate levels, rather than moves and will definitely suggest that rates should be raised even when inflation is low. Their starting point is that there is a 'neutral interest rate' from which actual rates should differ as a function of how much slack there is in the economy and how far inflation is from target.
A standard Taylor rule estimate would put UK interest rates around 2% at the moment, on the basis of a 6 1/2% NAIRU and a 2% inflation rate target. Core CPI inflation is just below target and unemployment is not that far above target, so a real interest rate a little above zero would seem to make sense. You need to get NAIRU under 4% to justify current policy rates. That's even lower than the US (NAIRU at 4.3%) and of course far lower than the level of NAIRU which justifies current rates in Europe (around10%).
The Taylor rule isn't the holy grail of policy making, and it's certainly being ignored by central banks at the moment; but should rates to be kept at current (extraordinarily low) levels just because there is slack in the economy? On that basis, rates would be far below 'neutral' until there was no slack in the economy, or until growth was consistently above trend, and then they would have to rise very fast. It's the equivalent of keeping your foot hard down on the accelerator of a car until it's time to brake equally hard - more like how you might drive an F1 car round Monaco than a Ford Fiesta round Islington.
Setting rates too far from 'neutral', however that's measured, causes mis-allocation of capital. By keeping rates too low for too long a decade ago, the Fed provided the fertiliser that allowed the credit bubble to blossom so disastrously. There are times when extraordinary monetary policy makes sense, but I'd like to see a return to rate levels that are higher, but still very low relative measures of 'neutral', as soon as it is safe to do so. So the question now, is whether it's 'safe' to take baby steps in the direction of nomalising policy, not whether it's time for policy to be 'tightened'?
For now, the debate (in the UK and the US) is about whether rates should be raised or not, rather than whether they are at appropriate levels for economies with falling unemployment and above-trend growth rates. That's a mindset which is friendly for asset prices and even if there is little risk that we see any significant upward pressure on either wage growth or inflation, it will continue to cause capital to be misallocated.
Sunday, 5 January 2014
Sunday, 29 December 2013
Short-term thinking
I was wandering over a rather damp golf course yesterday, thinking about the rapidly-growing consensus that QE isn't inflationary because inflation is lower now in the US than when QE started. The golf course where I torture animals by sending balls into the undergrowth at regularly intervals responded to talk of global warming and a couple of dry summers almost twenty years ago, by digging a great big lake to increase irrigation. It now seems that global warming makes for wet summers.
I'm not an expert on global warming. But it does strike me as odd that a sample of one, and a period of just a few years, can be seen seen as proof of anything - either the effect of global warming on the weather, or the effect of QE on inflation.
We don't really know what the long-term effects of massive expansion of central bank balance sheets will be. Personally, I reckon the effect of QE is mostly on the price of the assets that the central banks buy and everything else follows from that. The amount of money in the economy is determined by demand for loans, and banks' willingness to expand their balance sheets, more than by central banks' own balance sheets, but the effect on asset prices is simpler. A central bank buys bonds, drives prices up and forces other bondholders to buy something else. That is bad for the currency if there are a lot of foreign holders of the bonds and good for equities supposing they compete with bonds for investors' cash. And as long as there is a global excess of goods and labour and the currency effect is small, why should it send up CPI inflation?
But if the QE doesn't send up consumer price inflation, that doesn't mean it has no effect or that it isn't dangerous. Rising bond prices may be 'good' for borrowers but go shopping for an annuity and you could feel differently. Sit and decide what to put your pension savings into and the high level of the equity market won't be so attractive, either. But hey, pensions are not in the CPI index, any more than house prices are, so there's nothing to worry about, right?
Away from QE though, I still think the disparity between the cost of money and the growth rate of the US and global economies is simply causing mis-allocation of capital. The gap between Fed Funds and US GDP growth is heading back towards 4%. It's a recipe for asset price inflation, and a recipe for excessive valuation of assets, somewhere. I've plotted the GDP/Fed Funds relationship below, in both nominal and real terms. There are four cases of rates being far too low relative to GDP growth and they have all had a different impact. Ignoring the present, in 2004/6 easy money caused a credit bubble. In 92/95 easy Fed policy caused a credit and asset bubble in Asia, and only the easy policy in 75/78 showed up in higher CPI inflation.
My point is a simple one - if rates are too low, we should expect there to be an impact, but should not assume automatically that the impact will be felt in CPI inflation. And the same is true of QE. We should expect over-easy money to cause distortions that will come home to roost in the real economy - just not necessarily on the 1-2-year time horizon that suits most observers.
p.s.... if rates are too low for too long, of course someone becomes addicted to cheap money. The same would be true of what cheap beer prices do to alcohol addiction. The turkeys come home to root when rates have to go up, and we find out who the addicts are. In 2008, it was the banks. In 2006 it was the Asian banks and property developers. So, who is over-leveraged this time?
I'm not an expert on global warming. But it does strike me as odd that a sample of one, and a period of just a few years, can be seen seen as proof of anything - either the effect of global warming on the weather, or the effect of QE on inflation.
We don't really know what the long-term effects of massive expansion of central bank balance sheets will be. Personally, I reckon the effect of QE is mostly on the price of the assets that the central banks buy and everything else follows from that. The amount of money in the economy is determined by demand for loans, and banks' willingness to expand their balance sheets, more than by central banks' own balance sheets, but the effect on asset prices is simpler. A central bank buys bonds, drives prices up and forces other bondholders to buy something else. That is bad for the currency if there are a lot of foreign holders of the bonds and good for equities supposing they compete with bonds for investors' cash. And as long as there is a global excess of goods and labour and the currency effect is small, why should it send up CPI inflation?
But if the QE doesn't send up consumer price inflation, that doesn't mean it has no effect or that it isn't dangerous. Rising bond prices may be 'good' for borrowers but go shopping for an annuity and you could feel differently. Sit and decide what to put your pension savings into and the high level of the equity market won't be so attractive, either. But hey, pensions are not in the CPI index, any more than house prices are, so there's nothing to worry about, right?
Away from QE though, I still think the disparity between the cost of money and the growth rate of the US and global economies is simply causing mis-allocation of capital. The gap between Fed Funds and US GDP growth is heading back towards 4%. It's a recipe for asset price inflation, and a recipe for excessive valuation of assets, somewhere. I've plotted the GDP/Fed Funds relationship below, in both nominal and real terms. There are four cases of rates being far too low relative to GDP growth and they have all had a different impact. Ignoring the present, in 2004/6 easy money caused a credit bubble. In 92/95 easy Fed policy caused a credit and asset bubble in Asia, and only the easy policy in 75/78 showed up in higher CPI inflation.
My point is a simple one - if rates are too low, we should expect there to be an impact, but should not assume automatically that the impact will be felt in CPI inflation. And the same is true of QE. We should expect over-easy money to cause distortions that will come home to roost in the real economy - just not necessarily on the 1-2-year time horizon that suits most observers.
p.s.... if rates are too low for too long, of course someone becomes addicted to cheap money. The same would be true of what cheap beer prices do to alcohol addiction. The turkeys come home to root when rates have to go up, and we find out who the addicts are. In 2008, it was the banks. In 2006 it was the Asian banks and property developers. So, who is over-leveraged this time?
Friday, 6 December 2013
The good, the bad and the ugly of the US labour market report.
I'm not sure whether the economics profession has ever spent quite so much time arguing about whether the monthly US labour market data are good or bad, as they do now. We used to debate whether the figures meant very much, given that they are subject to big revisions, but we did at least agree whether they were good, boring, or awful.
So, two charts below to provide a very short interpretation of the issues with the data. The top chart shows the unemployment rate (in yellow, inverted, since 1980), and the employment rate. Unemployment is the percentage of people in the labour force that have not got a job. The employment ratio is the number of people with jobs, divided by the total population. From 1983 until 2004, the two moved together, falling unemployment seeing the employment rate rise, since then, things have got tougher. And since 2010, they tell very different stories. The unemployment rate has fallen steadily. Employment is growing at a rate of 1.7% per annum and payroll growth has been averaging about 170,000 per month for 5 years. The labour force has been growing much more slowly, so the unemployment rate has fallen. And you can draw a straight line through the data and conclude that a 3% fall in 4 years will get the unemployment rate under 6% in 2015. But while growth in the labour force is very weak, the population IS still growing and the employment rate is going nowhere. This is why so many people will tell you today that the fall in unemployment is the 'wrong sort of fall.
The second chart shows the two employment surveys, the household survey which asks people if they have a job and the establishment survey which asks companies how many people they employ. The headline non-farm payroll figure comes form the establishment survey, which is a larger sample. The unemployment rate comes from the household survey. The October data for the household survey were distorted by the Federal shutdown, and that caused the unemployment rate to rise, while employment fell. That is the white line. The Two lines mostly move together, though you can see they have crossed over since 2008. You can also see, I hope, that the household measure of employment has bounced in November, but has not recovered all the ground lost in October. So, if you take the household survey and look at the September-November outcome, jobs were not added. And in both surveys, you can see that employment is merely approaching the levels it was at in late 2007.
Overall, 1.7% employment growth is in line with the average of the last 50 years. That would be fine if we were not trying to recover from the worst recession of the last 50 years. The US economy is growing, but is not catching up lost ground. The unemployment rate is one measure which suggests that some, even much of the output lost in the recession has been lost for ever, and the future will simply see a normal growth path from a low level. Some US economists, including Larry Summers very publicly but also Janet Yellen, simply don't accept this. There is a belief that if the central bank maintains accommodative policy settings for long enough, they can recover some of this 'lost' output. Put it another way - if they ignore the falling unemployment rate maybe some of the people who have become disillusioned and left the labour market will go back to work. If they are wrong, US wage growth and then US inflation will go up if the economic recovery continues.
Personally, I admire the willingness of US policy-makers to throw away textbooks, re-write theories and refuse to accept that a 'new normal' economy is simply not as vibrant as the old one. The contrast with the lack of policy reaction to 0.1% GDP growth and 12% unemployment, is incredible. Refusing to accept the status quo is a bit like Oliver Twist asking for more gruel... it shakes things up.
So, two charts below to provide a very short interpretation of the issues with the data. The top chart shows the unemployment rate (in yellow, inverted, since 1980), and the employment rate. Unemployment is the percentage of people in the labour force that have not got a job. The employment ratio is the number of people with jobs, divided by the total population. From 1983 until 2004, the two moved together, falling unemployment seeing the employment rate rise, since then, things have got tougher. And since 2010, they tell very different stories. The unemployment rate has fallen steadily. Employment is growing at a rate of 1.7% per annum and payroll growth has been averaging about 170,000 per month for 5 years. The labour force has been growing much more slowly, so the unemployment rate has fallen. And you can draw a straight line through the data and conclude that a 3% fall in 4 years will get the unemployment rate under 6% in 2015. But while growth in the labour force is very weak, the population IS still growing and the employment rate is going nowhere. This is why so many people will tell you today that the fall in unemployment is the 'wrong sort of fall.
The second chart shows the two employment surveys, the household survey which asks people if they have a job and the establishment survey which asks companies how many people they employ. The headline non-farm payroll figure comes form the establishment survey, which is a larger sample. The unemployment rate comes from the household survey. The October data for the household survey were distorted by the Federal shutdown, and that caused the unemployment rate to rise, while employment fell. That is the white line. The Two lines mostly move together, though you can see they have crossed over since 2008. You can also see, I hope, that the household measure of employment has bounced in November, but has not recovered all the ground lost in October. So, if you take the household survey and look at the September-November outcome, jobs were not added. And in both surveys, you can see that employment is merely approaching the levels it was at in late 2007.
Overall, 1.7% employment growth is in line with the average of the last 50 years. That would be fine if we were not trying to recover from the worst recession of the last 50 years. The US economy is growing, but is not catching up lost ground. The unemployment rate is one measure which suggests that some, even much of the output lost in the recession has been lost for ever, and the future will simply see a normal growth path from a low level. Some US economists, including Larry Summers very publicly but also Janet Yellen, simply don't accept this. There is a belief that if the central bank maintains accommodative policy settings for long enough, they can recover some of this 'lost' output. Put it another way - if they ignore the falling unemployment rate maybe some of the people who have become disillusioned and left the labour market will go back to work. If they are wrong, US wage growth and then US inflation will go up if the economic recovery continues.
Personally, I admire the willingness of US policy-makers to throw away textbooks, re-write theories and refuse to accept that a 'new normal' economy is simply not as vibrant as the old one. The contrast with the lack of policy reaction to 0.1% GDP growth and 12% unemployment, is incredible. Refusing to accept the status quo is a bit like Oliver Twist asking for more gruel... it shakes things up.
Saturday, 16 November 2013
We don't work too much but we spend too much time at work
I've just posted a short piece about UK GDP, GDP per capita and what constitutes an economic recovery. A lot of people think that if GDP is going up but average real wages are falling and the overall financial position of many people is worse today than it was a year ago, then there is no economic recovery. It's hard to argue with that position.
But that's only part of the issue. 'GDP' is a measure of the total output of a country in monetary terms, but increasing total quantifiable output definitely isn't the only thing we should be trying to do.
Harry Eyres wrote a column for today's FT called Why work so hard? He quotes John Maynard Keynes' prediction that by 2030 we would all be much better off and would work far fewer hours. Keynes was right on the first, wrong on the second and Mr Eyres wants to understand why.
When I read the article I wondered whether Mr Eyres considers that writing articles for the FT is 'work' and would rather spend less time doing that and more time doing 'leisure' which is by definition more fun. Because if that's the case, he's doing a good job of kidding us, as his writing style suggests that travelling, reading, thinking and writing about the world as he sees it, is how he would spend his leisure time even if he did less 'work'. Journalists, especially ones who write columns like the 'The Slow Lane' aren't typical, but the line between 'work' and 'leisure' is being blurred and many of those who say they would rather spend less time 'working' often really mean 'less time at work, in this job'.
There are, I think, three issues. The first is money, the second is how we choose to spend our time and the third is our jobs.
When Keynes said he thought we would work fewer hours, 'work' meant leaving home to earn money in a farm, factory, mine, docks or army (for the vast majority of people, at any rate). The difference between work and leisure was very clear and that is why we have measures such as GDP which count the output from 'work' and ignore everything else (most obviously housework). This also gave rise to a fixation with productivity, a measure of how much we can produce per hour. Give me a better machine and better training and I can produce more, faster. More, faster, means more money and that's good. And so Keynes believed that we would reach a point where we could earn enough money to have fun while working fewer hours.
We still go to 'work' for money, but quite a lot of people would do the same thing in their leisure time as they do at work. One of the tragedies of our society is that so many old people suffer from loneliness and that's one reason why people work. You go to work to get paid, but it becomes a centre of your social life. I've seen too many men retire and then age 5 years in a few months and slowly vegetate because they have no idea what to do with their time, to believe that a life of enforced 'leisure' is so appealing that it should be the dominant goal of my working life.
I choose economics as a way to spend time, for work or in leisure. It would have been nice to have played golf this morning but frost having intervened, I've spent a couple of enjoyable hours reading. Was that work or leisure? The answer is that today, it's leisure because I'm not being paid. And that's a good thing because otherwise, I'd have to count all the hours I spend thinking about financial markets as 'work' and that would immediately make me less productive.
But here the difference between 'work' and 'job' becomes more important. How many teachers, doctors, nurses, or policemen for that matter went into the profession for love, but became disillusioned because of how they spend their time. If I could work from home whenever it was convenient; and surf the web, chat with friends and socialise when I was at 'work' that would not make less productive, it would just make me happier. Firms create insane levels of bureaucracy, of measurement and of time-wasting, partly in order to justify 'work'.
I'll give an example from financial market research. Almost every fund manager or other investor I have ever asked, has told me that what he or she wants from investment bank research teams are short, timely, thought-provoking ideas. They haven't got time to read long pieces, unless every single word is necessary to help them make money (and even then they want a one-page precis). They don't much like multi-authored 'house view' pieces because these tend to group-think consensus. They prefer high-conviction, spur of the moment pieces, or research that was the product of incredibly detailed analysis but summed up in a few words or even better, a single chart. And I know more and more who think 140 characters is about right for a research note.
So how do the world's investment banks react to this plea for brevity and strong opinion? By doing the exact opposite, of course. 'Less is more' is a great philosophy but persuading an employer that it would be a better idea to write less and go and spend four hours thinking on the golf course on a Monday morning, isn't easy.
So, Mr Eyres, I don't want to work fewer hours, but I don't want to waste time doing the wrong kind of work in the wrong place, either. I just need to persuade my employer to pay for my work, irrespective of where I do it.
Which takes me to another FT story, written by Izabella Kaminska on the Alphaville Blog. It considers The rise of the non-monetised economy but is worth a read on many levels. Ms Kaminska is paid to write pieces about foraging for mushrooms and wondering what to give her godchildren as presents, but as I pointed out earlier, maybe journalists aren't typical when we consider what is work and what is leisure.
But that's only part of the issue. 'GDP' is a measure of the total output of a country in monetary terms, but increasing total quantifiable output definitely isn't the only thing we should be trying to do.
Harry Eyres wrote a column for today's FT called Why work so hard? He quotes John Maynard Keynes' prediction that by 2030 we would all be much better off and would work far fewer hours. Keynes was right on the first, wrong on the second and Mr Eyres wants to understand why.
When I read the article I wondered whether Mr Eyres considers that writing articles for the FT is 'work' and would rather spend less time doing that and more time doing 'leisure' which is by definition more fun. Because if that's the case, he's doing a good job of kidding us, as his writing style suggests that travelling, reading, thinking and writing about the world as he sees it, is how he would spend his leisure time even if he did less 'work'. Journalists, especially ones who write columns like the 'The Slow Lane' aren't typical, but the line between 'work' and 'leisure' is being blurred and many of those who say they would rather spend less time 'working' often really mean 'less time at work, in this job'.
There are, I think, three issues. The first is money, the second is how we choose to spend our time and the third is our jobs.
When Keynes said he thought we would work fewer hours, 'work' meant leaving home to earn money in a farm, factory, mine, docks or army (for the vast majority of people, at any rate). The difference between work and leisure was very clear and that is why we have measures such as GDP which count the output from 'work' and ignore everything else (most obviously housework). This also gave rise to a fixation with productivity, a measure of how much we can produce per hour. Give me a better machine and better training and I can produce more, faster. More, faster, means more money and that's good. And so Keynes believed that we would reach a point where we could earn enough money to have fun while working fewer hours.
We still go to 'work' for money, but quite a lot of people would do the same thing in their leisure time as they do at work. One of the tragedies of our society is that so many old people suffer from loneliness and that's one reason why people work. You go to work to get paid, but it becomes a centre of your social life. I've seen too many men retire and then age 5 years in a few months and slowly vegetate because they have no idea what to do with their time, to believe that a life of enforced 'leisure' is so appealing that it should be the dominant goal of my working life.
I choose economics as a way to spend time, for work or in leisure. It would have been nice to have played golf this morning but frost having intervened, I've spent a couple of enjoyable hours reading. Was that work or leisure? The answer is that today, it's leisure because I'm not being paid. And that's a good thing because otherwise, I'd have to count all the hours I spend thinking about financial markets as 'work' and that would immediately make me less productive.
But here the difference between 'work' and 'job' becomes more important. How many teachers, doctors, nurses, or policemen for that matter went into the profession for love, but became disillusioned because of how they spend their time. If I could work from home whenever it was convenient; and surf the web, chat with friends and socialise when I was at 'work' that would not make less productive, it would just make me happier. Firms create insane levels of bureaucracy, of measurement and of time-wasting, partly in order to justify 'work'.
I'll give an example from financial market research. Almost every fund manager or other investor I have ever asked, has told me that what he or she wants from investment bank research teams are short, timely, thought-provoking ideas. They haven't got time to read long pieces, unless every single word is necessary to help them make money (and even then they want a one-page precis). They don't much like multi-authored 'house view' pieces because these tend to group-think consensus. They prefer high-conviction, spur of the moment pieces, or research that was the product of incredibly detailed analysis but summed up in a few words or even better, a single chart. And I know more and more who think 140 characters is about right for a research note.
So how do the world's investment banks react to this plea for brevity and strong opinion? By doing the exact opposite, of course. 'Less is more' is a great philosophy but persuading an employer that it would be a better idea to write less and go and spend four hours thinking on the golf course on a Monday morning, isn't easy.
So, Mr Eyres, I don't want to work fewer hours, but I don't want to waste time doing the wrong kind of work in the wrong place, either. I just need to persuade my employer to pay for my work, irrespective of where I do it.
Which takes me to another FT story, written by Izabella Kaminska on the Alphaville Blog. It considers The rise of the non-monetised economy but is worth a read on many levels. Ms Kaminska is paid to write pieces about foraging for mushrooms and wondering what to give her godchildren as presents, but as I pointed out earlier, maybe journalists aren't typical when we consider what is work and what is leisure.
When rising GDP isn't a 'recovery'. Part 1
There's a debate on LBC radio this morning about the prospects for and the nature of, the economic recovery currently underway in the UK. Here are a few facts, as I see them. Firstly, the UK's current recovery is the most pathetically weak of any in the last hundred years, including the period after the Great Depression. Secondly, real GDP is now growing and most forward-looking indicators suggest that it will continue to do so. And thirdly, so far real GDP per capita has not recovered noticeably, with the GDP recovery itself mostly due to an increase in the population.
I wrote about the economic implications of population growth a couple of weeks ago. An influx of people looking for work in the UK is keeping wages down, boosting demand and will in due course help boost output. But it is also placing huge demands on antiquated infrastructure (transport, utilities, education and the health system) which is a factor behind the UK's inflation rate being higher than it is in a lot of other countries. This is not the only reason the UK has higher inflation but it plays a large part. And so, wage growth is depressed,as new workers compete for jobs and real wages fall. Overall demand is boosted as new arrivals find somewhere to live and spend money; Housing costs go up in the South East as supply fails to keep up with demand. And that leads to a debate about whether there really is a recovery at all. I think there's a completely separate debate to be had about GDP as a measure of economic success. I'll get more coffee as I swap a frosted golf course for sun shining through the living room window, and then get into that but first I'll finish up on the UK 'recovery'.
Stronger growth and above-target inflation are beginning to put pressure on the Bank of England Governor and his MPC colleagues to increase interest rates. They are resisting this pressure, preferring to delay any policy tightening until the unemployment rate has fallen a good bit further. The pressure won't go away and with ex-MPC members debating the economic outlook and policy implications, I suspect that the MPC will struggle to maintain a united front through 2014. Low rates will go on supporting house prices in the capital and South East (which is increasingly not seen as a good thing by the majority of people). Meanwhile, the pound is recovering some of the fall which followed the 2008 crisis. This is a good thing. The weak pound pushed up import prices and hurt consumer demand, more than it boosted exports (largely because the UK's main export markets in Europe were and remain very weak). A de facto policy of using sterling weakness to help re-balance the economy towards manufacturing was in my opinion both a mistake and a failure.
I suspect the difference between a recovery in 'GDP' and a recovery in real per capital disposable incomes will be a major source of political debate in the next couple of years. As, inevitably, will the social consequences of immigration. I am optimistic that the economy will benefit over time from being the go-to place for anyone in Europe who wants a job, but I do wish that this would trigger a response in terms of investment in the education, transport and regional development that would allow recovery to be shared across the UK and across economic sectors. Apart from anything else, if the UK doesn't do that, we'll have a truly terrifying trade deficit in about 5 years' time.
I wrote about the economic implications of population growth a couple of weeks ago. An influx of people looking for work in the UK is keeping wages down, boosting demand and will in due course help boost output. But it is also placing huge demands on antiquated infrastructure (transport, utilities, education and the health system) which is a factor behind the UK's inflation rate being higher than it is in a lot of other countries. This is not the only reason the UK has higher inflation but it plays a large part. And so, wage growth is depressed,as new workers compete for jobs and real wages fall. Overall demand is boosted as new arrivals find somewhere to live and spend money; Housing costs go up in the South East as supply fails to keep up with demand. And that leads to a debate about whether there really is a recovery at all. I think there's a completely separate debate to be had about GDP as a measure of economic success. I'll get more coffee as I swap a frosted golf course for sun shining through the living room window, and then get into that but first I'll finish up on the UK 'recovery'.
Stronger growth and above-target inflation are beginning to put pressure on the Bank of England Governor and his MPC colleagues to increase interest rates. They are resisting this pressure, preferring to delay any policy tightening until the unemployment rate has fallen a good bit further. The pressure won't go away and with ex-MPC members debating the economic outlook and policy implications, I suspect that the MPC will struggle to maintain a united front through 2014. Low rates will go on supporting house prices in the capital and South East (which is increasingly not seen as a good thing by the majority of people). Meanwhile, the pound is recovering some of the fall which followed the 2008 crisis. This is a good thing. The weak pound pushed up import prices and hurt consumer demand, more than it boosted exports (largely because the UK's main export markets in Europe were and remain very weak). A de facto policy of using sterling weakness to help re-balance the economy towards manufacturing was in my opinion both a mistake and a failure.
I suspect the difference between a recovery in 'GDP' and a recovery in real per capital disposable incomes will be a major source of political debate in the next couple of years. As, inevitably, will the social consequences of immigration. I am optimistic that the economy will benefit over time from being the go-to place for anyone in Europe who wants a job, but I do wish that this would trigger a response in terms of investment in the education, transport and regional development that would allow recovery to be shared across the UK and across economic sectors. Apart from anything else, if the UK doesn't do that, we'll have a truly terrifying trade deficit in about 5 years' time.
Sunday, 10 November 2013
Twitter and Starbucks
One of the most tweeted articles this week was This one, which purports to tell any tweeter how much money Twitter 'owes' him or her. That's a tongue in cheek way of saying that we can value Twitter on the basis of the number of tweets that have been sent. And anyone who sends them, adds to the value of the company.
This misses the 'point' of Twitter (and social media in general) in the same way as thinking that Starbucks is a coffee shop misses the point. I'll start with the latter. A few weeks ago, when the weather was still warm, I was wandering merrily from one fund manager to another in Boston, updating on views about the world and the relationship between our employers. When I wasn't sure how to get to the next appointment, I darted into the nearest coffee shop. The salesman who was with me (and doesn't know his way around Boston nearly well enough) pointed out that Starbucks charges a lot for coffee. I sent him to buy me a tall latte and told him I wasn't here for the coffee. I use Starbucks because I know I can get quick access to wifi and make sure I know the way to my next meeting, while enjoying some air conditioning in a relatively clean and comfortable environment. The coffee's OK, but incidental. The price of the coffee is high, if that's all you go there for, but it's cheap if you want to arrive, cooler and on time, at your next meeting.
Others have different uses for Starbucks but the common factor is that few if any are there for the coffee alone. And so it is with Twitter. I tweet because I want dialogue. I want dialogue because I want to know what other people think. If you don't know what people think, how can you expect to know how they will react to economic data, policy decisions or any other news that comes over the wires? Anticipating how markets will react to news is more important than knowing what the news will be, most of the time. I also read tweets because they are an incredibly efficient way of filtering the daily news. I follow people who will tell me, while I'm still in bed in the morning, what the important stories of the day are in the Wall Street Journal, FT, Economist, New York Times, Reuters, Bloomberg, Le Monde, Die Welt, Spiegel, Guardian, Telegraph, Nouvel Observateur, and more. I've got people who I've never met scouring the web for me to find blog posts, central bank research papers and snippets of information I might find useful.
I don't suppose for a second that the majority of Twitter fans like it for the same reasons as me, any more than other people think air conditioning and wifi are Starbucks' key selling point in Boston. My only question for twitter of course, is how it plans to make enough money to justify the fancy market capitalisation. Starbucks, at least, sells those over-priced cappuccinos
This misses the 'point' of Twitter (and social media in general) in the same way as thinking that Starbucks is a coffee shop misses the point. I'll start with the latter. A few weeks ago, when the weather was still warm, I was wandering merrily from one fund manager to another in Boston, updating on views about the world and the relationship between our employers. When I wasn't sure how to get to the next appointment, I darted into the nearest coffee shop. The salesman who was with me (and doesn't know his way around Boston nearly well enough) pointed out that Starbucks charges a lot for coffee. I sent him to buy me a tall latte and told him I wasn't here for the coffee. I use Starbucks because I know I can get quick access to wifi and make sure I know the way to my next meeting, while enjoying some air conditioning in a relatively clean and comfortable environment. The coffee's OK, but incidental. The price of the coffee is high, if that's all you go there for, but it's cheap if you want to arrive, cooler and on time, at your next meeting.
Others have different uses for Starbucks but the common factor is that few if any are there for the coffee alone. And so it is with Twitter. I tweet because I want dialogue. I want dialogue because I want to know what other people think. If you don't know what people think, how can you expect to know how they will react to economic data, policy decisions or any other news that comes over the wires? Anticipating how markets will react to news is more important than knowing what the news will be, most of the time. I also read tweets because they are an incredibly efficient way of filtering the daily news. I follow people who will tell me, while I'm still in bed in the morning, what the important stories of the day are in the Wall Street Journal, FT, Economist, New York Times, Reuters, Bloomberg, Le Monde, Die Welt, Spiegel, Guardian, Telegraph, Nouvel Observateur, and more. I've got people who I've never met scouring the web for me to find blog posts, central bank research papers and snippets of information I might find useful.
I don't suppose for a second that the majority of Twitter fans like it for the same reasons as me, any more than other people think air conditioning and wifi are Starbucks' key selling point in Boston. My only question for twitter of course, is how it plans to make enough money to justify the fancy market capitalisation. Starbucks, at least, sells those over-priced cappuccinos
Why 'QE' needed in Europe and unnecessary in the US
Two Fed papers last week argue, effectively, that US monetary policy needs to be even looser for even longer. The ECB cut interest rates. The press tell us that the Bank of England is more optimistic on growth, and on falling unemployment but the MPC will re-emphasise its commitment to keep rates low. I think the Federal Reserve in the US should be cutting back its bond purchases, while the ECB should be buying in size. That doesn't mean either is very likely. Far from it, sadly.
The US has high (but falling) unemployment and even higher under-employment. It is also an economy with rising real wages and substantial deficits on both the trade and current account balances. It has low consumer price inflation, however we choose to measure it, and a fair degree of asset price inflation by most measures. The economy is growing, but not fast enough to satisfy the desires of those who want to see unemployment fall faster. Two additional observations: the post-crisis environment has seen historically weak growth in output per worker/hour; and this anaemic recovery is associated with growing inequality that is likely to be the single biggest factor is US politics in the coming years.
US consumption growth remains strong relative to output (those pesky deficits) but investment remains weak (hence the weak employment and low productivity). Inflation isn't a problem, in either direction (this is not deflation, and real wages are rising). Under-investment should be the focus for policy-makers. John Maynard Keynes might point out that it is not written in law for total aggregate demand to be at a level which ensures the economy is on a path to full employment, and the public sector should step in. There are obvious problems associated with that, of course - starting with the level of the national debt and moving on the toxicity of the politics around both the debt level and how to ease fiscal policy.
One thing the doctor might well order, is a policy of currency softness. Grabbing jobs back from overseas, helping domestic products compete better with imports, these are desirable in an economy with a manufacturing base and a need of investment.But QE? Not really. QE has boosted asset prices, but that hasn't done anything to hep investment. . QE has done much to make owners of Picassos and Greenwich mansions happier, but while it has helped direct some investment flows towards corporate bonds (good) it has pushed more towards equities and EM assets and it still isn't clear how that helps US companies raise money for productive investment. TARP did more to help banks lend than QE has done. And a small rise in short-term rates might even help money flow round the SME sector of the US economy more productively.
QE seems the wrong policy when what is needed is to encourage private sector entrepreneurs and companies to invest in plant, equipment and people in order to boost output, and therefore employment and wages. And that in turn, is what is needed to reverse the widening inequality that unchecked, will become an ever bigger social blight.
Contrast all this with the Eurozone. In many European countries wages and prices are now falling in tandem. The current account surplus is huge, and growing fast. Bank lending continues to contract. Consumption is weak and unemployment terrifyingly high. Youth unemployment should be the single biggest issue in the political debate as an entire generation of voters will at some point realise they have been abandoned by their leaders. The Euro Area problem is that investment is weak but consumption even weaker - overall aggregate demand needs a huge boost.
And then there is the debt... public sector debt levels are too high everywhere and private sector debt levels are too high in several countries. With weak nominal GDP growth, these debt levels will go on growing relative to GDP unless one of three things happen - default reduces the debt, austerity creates a downward spiral of increased savings and falling demand that might at some point find an equilibrium debt/GDP level, albeit at a level of unemployment, real incomes and overall GDP that is too awful to contemplate, or policy-makers breathe some inflation back into the system.
In the Euro Area, QE (buying bonds in substantial quantities through a series of auctions, as the Fed does), would encourage the banking sector to lend more and hold fewer government bonds. That would be a good thing. It might weaken the Euro, which would be a very good thing indeed. It might send asset prices and increase inequality but the Euro Area, unlike the US, has a political system and social structure that can counter this. And if it boosted consumption through wealth effects, then that would be a god thing. A weaker currency, a reduced current account surplus, and a boost to bank lending? Bring it on. With banks encouraged to 'cut assets' (i.e, shrink their balance sheets) it makes sense for the central bank to boost its own balance sheet (at least temporarily) to plug the gap they leave behind. I don't think that's the same thing, at all, as 1920s money printing in Germany.
The US has high (but falling) unemployment and even higher under-employment. It is also an economy with rising real wages and substantial deficits on both the trade and current account balances. It has low consumer price inflation, however we choose to measure it, and a fair degree of asset price inflation by most measures. The economy is growing, but not fast enough to satisfy the desires of those who want to see unemployment fall faster. Two additional observations: the post-crisis environment has seen historically weak growth in output per worker/hour; and this anaemic recovery is associated with growing inequality that is likely to be the single biggest factor is US politics in the coming years.
US consumption growth remains strong relative to output (those pesky deficits) but investment remains weak (hence the weak employment and low productivity). Inflation isn't a problem, in either direction (this is not deflation, and real wages are rising). Under-investment should be the focus for policy-makers. John Maynard Keynes might point out that it is not written in law for total aggregate demand to be at a level which ensures the economy is on a path to full employment, and the public sector should step in. There are obvious problems associated with that, of course - starting with the level of the national debt and moving on the toxicity of the politics around both the debt level and how to ease fiscal policy.
One thing the doctor might well order, is a policy of currency softness. Grabbing jobs back from overseas, helping domestic products compete better with imports, these are desirable in an economy with a manufacturing base and a need of investment.But QE? Not really. QE has boosted asset prices, but that hasn't done anything to hep investment. . QE has done much to make owners of Picassos and Greenwich mansions happier, but while it has helped direct some investment flows towards corporate bonds (good) it has pushed more towards equities and EM assets and it still isn't clear how that helps US companies raise money for productive investment. TARP did more to help banks lend than QE has done. And a small rise in short-term rates might even help money flow round the SME sector of the US economy more productively.
QE seems the wrong policy when what is needed is to encourage private sector entrepreneurs and companies to invest in plant, equipment and people in order to boost output, and therefore employment and wages. And that in turn, is what is needed to reverse the widening inequality that unchecked, will become an ever bigger social blight.
Contrast all this with the Eurozone. In many European countries wages and prices are now falling in tandem. The current account surplus is huge, and growing fast. Bank lending continues to contract. Consumption is weak and unemployment terrifyingly high. Youth unemployment should be the single biggest issue in the political debate as an entire generation of voters will at some point realise they have been abandoned by their leaders. The Euro Area problem is that investment is weak but consumption even weaker - overall aggregate demand needs a huge boost.
And then there is the debt... public sector debt levels are too high everywhere and private sector debt levels are too high in several countries. With weak nominal GDP growth, these debt levels will go on growing relative to GDP unless one of three things happen - default reduces the debt, austerity creates a downward spiral of increased savings and falling demand that might at some point find an equilibrium debt/GDP level, albeit at a level of unemployment, real incomes and overall GDP that is too awful to contemplate, or policy-makers breathe some inflation back into the system.
In the Euro Area, QE (buying bonds in substantial quantities through a series of auctions, as the Fed does), would encourage the banking sector to lend more and hold fewer government bonds. That would be a good thing. It might weaken the Euro, which would be a very good thing indeed. It might send asset prices and increase inequality but the Euro Area, unlike the US, has a political system and social structure that can counter this. And if it boosted consumption through wealth effects, then that would be a god thing. A weaker currency, a reduced current account surplus, and a boost to bank lending? Bring it on. With banks encouraged to 'cut assets' (i.e, shrink their balance sheets) it makes sense for the central bank to boost its own balance sheet (at least temporarily) to plug the gap they leave behind. I don't think that's the same thing, at all, as 1920s money printing in Germany.
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