Does Capitalism Have a PR Problem? — Erika Fry

Still clueless. Caught in the bubble and out of touch.

“For every one positive article about capitalism, there are 11 negative ones,” said Nathan Rosenberg, founding partner of Insigniam, a management consulting firm. “CEOs should seize their job. Capitalism has created more elevation of [the] human condition than any religion or government ever has. We don’t tell our story. We don’t talk about the benefits. We have to get out and tell our story.”...

Fortune
Does Capitalism Have a PR Problem?

Erika Fry

Hélène Rey — The Global Financial System, the Real Rate of Interest and a Long History of Boom-Bust Cycles

Brad DeLong directs attention to:

Abstract

Financial cycles strongly determine real short-term interest rates. Wealth increases rapidly during financial booms, faster than consumption itself. As a consequence, the consumption to wealth ratio declines, as happened in the “Roaring 20s” and the “Exuberant 2000s”. In the subsequent busts, savings increase and keep real interest rates low. The related global financial cycle constrains monetary policy independence, even for countries with flexible exchange rates, transforming the Mundellian trilemma into a dilemma. Tackling these issues calls for combina- tions of monetary and fiscal policy coordination, macro-prudential policies, and possibly capital controls. It also means considering the role of the US as a provider of safe assets, and asking whether a multipolar system would be advantageous.

Andrew Crockett Memorial Lecture: The Global Financial System, the Real Rate of Interest and a Long History of Boom-Bust Cycles. ∗
Hélène Rey, London Business School, NBER and CEPR
July 3, 2017

Andrew Lainton — Getting Sober on Wicksell’s Wine Lake – The Financial Instability Hypothesis and the Pool of Funding

A very simple proposition.

The financial instability hypothesis as set out by Minsky and elaborated by Kindelberger, Keen and others is by far the best economic framework to explain business cycles, and especially the major instabilities that come about in ‘balance sheet recessions’ (Koo) and debt deflationary spirals (Fisher/Hoyt).

However the hypothesis is purely monetary. It depends on Ponzi investors speculating on assets beyond their fundamental value.

This is unsatisfactory as it leaves unexplained the ‘fundamental value’ of goods and assets, and so is a partial rather than a general theory and so not yet up to the wholesale replacement of lame-stream DGSE/NK models.

Let us focus on one moment a potential ‘tipping point’ at the top of the business cycle.
Consider one flawed theory of what causes that tipping, very wrong but in a very interesting way.

That being the ‘subsistence fund/pool of funding’ explanation deriving from classical economics (the Wages Fund) and developed by Bohm-Bawerk, Wicksell and Strigl. This became one strand in Austrian business cycle theory but by the late 30s had become completely taken over by the even more flawed monetary Austrian explanation whereby central banks create the business cycle...

Decisions, Decisions, Decisions
Getting Sober on Wicksell’s Wine Lake – The Financial Instability Hypothesis and the Pool of Funding
Andrew Lainton

Ray Dalio — Back to the future

The coming demise of neoliberalism as the present order owing to ideological resistance to using fiscal policy. Dalio expects this to result in financial and economic conditions reminiscent of the 1930's. Recall what happened after that.

MMT to the rescue with functional finance. If only.

The World in 2017

Back to the future

Ray Dalio, founder, Bridgewater Associates
ht Yves Smith at Naked Capitalism

The Arthurian — Hey Jude. Hey Noah.

"It's the private debt level, stupid."

The New Arthurian Economics

Hey Jude. Hey Noah.
The Arthurian

Paul McCulley and Zoltan Pozsar — Helicopter Money: Or How I Stopped Worrying and Love Fiscal-Monetary Cooperation

ABSTRACT 

During private deleveraging cycles monetary policy will largely be ineffective if it is aimed at stimulating private credit demand. What matters is not monetary stimulus per se, but whether monetary stimulus is paired with fiscal stimulus (otherwise known as helicopter money) and whether monetary policy is communicated in a way that helps the fiscal authority maintain stimulus for as long as private deleveraging continues. Fiscal dominance and central bank independence come in secular cycles and mirror secular private leveraging and deleveraging cycles, respectively. As long as there will be secular debt cycles, central bank independence will be a station, not a final destination.

Global Society of Fellows
Helicopter Money: Or How I Stopped Worrying and Love Fiscal-Monetary Cooperation
Paul McCulley, Chair, GIC Global Society of Fellows and Zoltan Pozsar, Visiting Scholar, GIC Global Society of Fellows
(h/t Anders in a comment at 3spoken)

Lars Syll — Leverage cycles (wonkish) [video]

John Geanakoplos has a great lecture at Yale University on why central banks should pay much more attention to leverage cycles.He is forcefully arguing that one of the missing ingredients in the macro models used by central banks today are endogenous default and endogenous lending terms distinct from the interest rate. Focussing to much on interest rates have made them unable to recognise that changes in the perception of potential defaults can have serious repercussions on economic activities. It has also made central banks unable to detect the financial bubbles and to a faulty understanding of the nature of debt and leverage. In short – central banks have to a large degree based their policies on the wrong models.

Lars P. Syll's Blog
Leverage cycles (wonkish) (video)
Lars P. Syll | Professor, Malmo University

Steve Roth — Deep and Long: Private Debt and Financial Recessions

And it’s worth remembering who that devastation is visited upon: the middle class and the poor.The rich do just fine.

Recessions are nature’s (and neoclassicals’) way…of keeping the little guy down.

Aymptosis
Deep and Long: Private Debt and Financial Recessions
Steve Roth

Think of business and financial cycles in terms of the alternation of expansion and consolidation phases that chiefly benefit owners, with workers chiefly bearing the brunt of the consolidation — by design. Which is a reason I call neoclassicism and neoliberalism advocacy rather than economic science.

Stephen Roach— Macro Malpractice

The wrong medicine is being applied to America’s economy. Having misdiagnosed the ailment, policymakers have prescribed untested experimental medicine with potentially grave side effects.

Project Syndicate
Macro Malpractice
Stephen S. Roach | former Chairman of Morgan Stanley Asia and the firm's Chief Economist, and currently a senior fellow at Yale University’s Jackson Institute of Global Affairs and a senior lecturer at Yale’s School of Management

Kelly Evans — Why the State of the US Economy Defies Description

Certain events would put me into a position in which I could not go on with the old language games any further. In which I was torn away from the sureness of the game.
—Wittgenstein, “On Certainty”

CNBC NetNet
Why the State of the US Economy Defies Description
Kelly Evans | CNBC Reporter

This is should generate some interesting comments.

Incidentally, I wrote my PhD dissertation on Wittgenstein's On Certainty.

Paul B. Farrell summarizes Gary Shilling

In short, expect a very rough decade for the economy, the market, and the taxpaying public. Here’s Shilling’s history of past cycles that run 15- to 20-year log bull and bear cycles the past 60 years:

•1949-1968: 19-year secular bull market

The great Post-WWII expansion: “The 1949-1968 secular bull market was driven by postwar economic growth, fading deflation fears, low inflation, the institutionalization of equity and the resulting leap in P/Es.” For me a great time: high school, Marines, Korea, plus a great education on the GI Bill.

•1968-1982: 14-year secular bear market

Shilling says “inflation caused by huge Vietnam and Great Society spending dominated the 1968-1982 secular bear market as it pushed interest rates up and P/Es and productivity down.” Remember the oil crisis, recession and a long sideways stock market for over a decade. I was on Wall Street with Morgan Stanley working on troubled banks, corporate and developer restructurings. Evaluated the collapse of the Federal New Towns Development Program for HUD. Long recession. No fun for most investors

•1982-2000: 18-year secular bull market

With Reaganomics: “The unwinding of inflation generated the 1982-2000 secular bull market, aided by the consumer spending spree and, finally, dot-com speculation,” says Shilling. And oh how we loved stocks with 30%-plus returns, some even posting 300% annual returns. We went crazy. “This time it was different.” Barbers offered investment advice and neighborhood barbecues were abuzz with early retirement plans.

•2000-2020: Yes, a 20-year secular bear market till 2020

Shilling says “the speculative investment climate spawned by the dot-com nonsense survived. It simply shifted from stocks.” Our retirement, “pension and endowment funds have been increasing their exposure to alternative investments such as commodities, foreign currencies, hedge funds, private equity, emerging-market equity and debt and real estate” in recent years. Yes, the ‘90s insanity did survive, like Frankenstein, transplanted in a new body by the White House, Treasury, the Fed, Wall Street, and our dogmatic, self-destructive conservative politicians obsessed about tax-cuts-for-the-very-rich.

Shilling sees “a secular bear market really started in 2000 and may persist for a decade as a result of slower GDP growth,” yes, persist till 2020 “with 2% to 3% deflation.”

Read the whole post at MarketWatch
Very slow growth 2012 then long bear to 2020

by Paul B. Farrell

Occupy the SEC

A handful of protesters at Occupy Wall Street are doing what the authors of a complex piece of financial legislation may have hoped no one would do. They are reading it.

The legislation is a draft of the so-called Volcker rule, a 298-page regulatory document that came out of last year's Dodd-Frank financial reform act. As originally proposed by Paul Volcker, then chairman of the President's Economic Recovery Advisory Board, the rule was aimed in part at preventing federally backed banks from making risky trades that could ultimately cost taxpayers. But in its current form, the Volcker rule is long, dense and -- critics fear -- full of language that affords banks a lot of wiggle room.

"It's a daunting document to look at," said Alexis Goldstein, a former financial sector employee who joined the Occupy protests a few weeks ago.

Yet Goldstein, 30, and a small party of fellow Occupiers are doing just that. The group, known asOccupy the SEC, has been reading through the Volcker rule line by line, flagging passages that seem to enable banks to skirt around regulatory intentions....

Read the rest at The Huffington Post
'Occupy The SEC' Scrutinizes The Volcker Rule For Loopholes

by Alexander Eichler

Hitting 'em where it hurts. Expect this to be a knowledge-based revolution as much as a physical one.

Financial Cycles

Three members of the Research Department of the International Monetary Fund have posted

Understanding financial cycles

at VOX.eu. They cite useful data about credit, house price, and equity price and trace correlations among cycles. May not be not Minsky, but it's a step in the right direction.

What are the main lessons and policy implications?

Our study takes a first step in exploring financial cycles and documents two major features of these episodes:

• Financial cycles can be long and deep, especially those in housing and equity markets.

• Financial cycles accentuate each other and become magnified, especially during coincident cyclical episodes in credit and housing markets.

Our analysis suggests that it is important to account for the interactions among cycles in different financial market segments when designing regulatory policies aimed at ensuring the overall health of the financial system, especially in terms of the design of macroprudential rules. For example, our results indicate that, as cycles in credit and housing markets tend to enhance each other, if both credit and house prices are growing rapidly, then it might be necessary to employ stricter rules and standards for mortgage lending as well as larger countercyclical buffers to moderate fluctuations in banks’ capital positions.