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Top 5 Papers October 12 to 19, 2020

Published by Anonymous (not verified) on Tue, 20/10/2020 - 7:34am in


Economy, finance

Top 5 Papers, based on downloads from 10/12/2020 to 10/19/2020

Abstract Title

Economic Effects of Coronavirus Outbreak (COVID-19) on the World Economy
Nuno Fernandes
University of Navarra, IESE Business School

Analysis of the Dot-Com Bubble of the 1990s
John J. Morris, Pervaiz Alam
Kansas State University Kent State University

“Normalized” Risk-Free rate: fiction or science fiction?
Pablo Fernandez
IESE Business School

Glenn Harlan Reynolds
University of Tennessee College of Law

Has the Stock Market Become Less Representative of the Economy?
Frederik P. Schlingemann, René M. Stulz
University of Pittsburgh – Finance Group Ohio State University (OSU) – Department of Finance


Can We Trust Monopolies to Play Fair?

Published by Anonymous (not verified) on Mon, 19/10/2020 - 10:00pm in

Photo credit: CaseyMartin / For the anti-monopoly movement, the past three months have been exciting but sobering. In late...

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Money and Cryptocurrencies

Published by Anonymous (not verified) on Sat, 17/10/2020 - 2:00am in

(This is an edited and expanded version of a talk I gave in Trento, Italy in June 2018, on a panel with Sheila Dow.)

The topic today is “Digital currencies: threat or opportunity?”

I’d like to offer a third alternative: New digital currencies like bitcoin are neither a threat or an opportunity. They do not raise any interesting economic questions and do not pose any significant policy problems. They do not represent any kind of technological advance on existing payment systems, which are of course already digital. They are just another asset bubble, based on the usual mix of fraud and fantasy. By historical standards, they are not a very large or threatening bubble. There is nothing important about them at all.

Why might you conclude that the new digital currencies don’t matter?

– Aggregate size – the total value of all bitcoin is on the order of $200 billion, other digital currencies are much smaller. On the scale of modern financial markets that’s not much more than a rounding error.

– No articulation with the rest of the financial system. No banks or other important institutions rely on cryptocurrencies to settle transactions, or have substantial holdings on their balance sheets. They’re not used as collateral for loans.

– Not used to structure real activity. No significant part of collective productive or reproductive activity is organized by making payments or taking positions in cryptocurrencies.

Besides that, these currencies don’t even do what they claim to do. In practice, digital currencies do depend on intermediaries. Payment is inconvenient and expensive — as much as $14 per transaction, and accepted by only 3 of top 500 online retailers. And markets in these currencies are not decentralized, but dominated by a few big players. All this is documented in Mike Beggs’ wonderful Jacobin article on cryptocurrencies, which I highly recommend.

Compare this to the mortgage market. Total residential mortgages in the US are over $13 trillion, not far short of GDP. The scale is similar in many other countries. Mortgages are a key asset for the financial system, even when not securitized. And of course they play a central role in organizing the provision of housing (and commercial space), an absolutely essential function to social reproduction.

And yet here we are talking about cryptocurrencies. Why?

Partly it’s just hard money crankery and libertarianism, which have a outsized voice in economics discussions. And partly it’s testimony to the success of their marketing machine. One might say that the only thing that stands behind that $200 billion value, is the existence of conversations like this one.

But it’s not just cranks and libertarians who care about cryptocurrencies. Central bank research departments are earnestly exploring the development of digital currencies. This disproportionate attention reflects, I think, some deeper problems with how we think of money and central banking. The divide over whether crypto-currencies represent anything new or important reflects a larger divide over how we conceive of the monetary system.

In the language of Schumpeter — whose discussion in his History of Economic Thought remains perhaps the best starting point for thinking about these things — it comes down to whether we “start from the coin.” If we start from the coin, if we think of money as a distinct tangible thing, a special kind of asset, then bitcoin may look important. We could call this the quantity view of money. But if we follow Schumpeter — and in different ways Hyman Minsky, Perry Mehrling and David Graeber — and start from balance sheets, then it won’t. Call this the ledger view of money.

In the quantity view, “money” is something special. The legal monopoly of governments on printing currency is very important, because that is money in a way that other assets aren’t. Credit created by banks is something different. Digital currencies are a threat or opportunity, as the case may be, because they seem to also go in this exclusive “outside money” box.

But from the Minsky-Mehrling-Graeber point of view, there’s nothing special about outside money. It’s just another set of tokens for recording changes in the social ledger. What matters isn’t the way that changes are recorded, but the accounts themselves. From this perspective, “money” isn’t an asset, a thing, it is simply the arbitrary units in which ledgers are kept and contracts denominated.

The starting point, from this point of view, is a network of money payments and commitments. Some of these commitments structure real activity (I show up for work because I expect to receive a wage). Others are free-standing. (I pay you interest because I owe you a debt.) In either case money is simply a unit of account. I have made a promise to you, you have a made a promise to someone else; these promises are in some cases commitments to specific concrete activities (to show up for work and do what you’re told), but in other cases they are quantitative, measured as a certain quantity of “money.”

What does money mean here? Simply whatever will be accepted as fulfilment of the promise, as specified in whatever legal or quasi-legal provisions govern it. It is entirely possible for the unit of account to have no concrete existence at all. And in any case the concrete assets that will be accepted are never identical; their equivalence is to some extent a fiction enshrined in the terms of the contract, and to some extent the result of active interventions by whatever authorities are responsible for the payments system.

In short, the fact that some particular asset that serves as money in this or that case is not very interesting. What matters is the balance sheets. Money is just a means of recording changes on balance sheets, of making transfers between ledgers. If we take the ledger view, then there’s no difference between physical currency and an instrument like a check. In either case the social ledger maintained by the banking system has a certain credit to you. You want to transfer a part of that to someone else, for whatever reason. So you give that person a piece of paper with the amount written on it, and they take it to their bank, which adjusts the social ledger accordingly. It makes no difference whether the piece of paper is a dollar or euro bill or a check or a money order, any more than it matters what its physical dimensions are or whether it is one sheet of paper or two.

And of course the majority of transactions are made, the majority of obligations, are settled without using pieces of paper at all. In fact the range of transactions you can carry out using the pieces of paper we call “money” is rather limited.

To put it another way: At the train station there are various machines, which will give you a piece of paper while debiting your bank account. Some of those pieces of paper can be used in exchange for a train ride, others for various other purposes. We call one a ticket machine and one an ATM. But conceptually we should think of them as the same kind of machine. Both debit your social ledger and then give you a claim on something concrete — a paper from the newsstand, say, or a train ride, as the case may be.

In the quantity view of money, there is some special asset called money which the rest of the payments system builds off. So the fact that something else could “be” money seems important. It matters that the government has a legal monopoly on printing currency, so it also matters that something like cryptocurrency seems to evade that monopoly. In the ledger view, on the other hand, that legal monopoly doesn’t matter at all. There are lots of systems for making transfers between bank accounts, including many purely electronic ones. And there are social ledgers maintained by institutions that we don’t officially recognize as banks. New digital currencies introduce a few more of each. So what?

In the quantity view, money and credit are two distinct things. We start with money, which might then be lent. This is how we learn it as children. In the ledger view, money is just anything that settles an obligation. And that is constantly done by promises or IOUs. The fact that “banks create money” in our modern economy isn’t some kind of innovation out of an original situation of cash-on-the-barrelhead exchange. Rather, it is a restriction of money-creation from the historical situation where third-party IOUs of all kinds circulated as payment.

Related to this are two different views of central banks. In the quantity view, the fundamental role of the central bank is in some sense setting or managing the money supply. In the ledger view, where money is just an arbitrary subset of payments media, which is constantly being created and destroyed in the course of making payments, “the money supply” is a nonsense term. What central banks are doing in this view is controlling the elasticity of the credit system. In other words, they are managing the willingness and ability of economic units to make promises to each other.

There are a variety of objectives in this; two important ones today are to control the pace of real activity via the elasticity of money commitments (e.g. to keep the wage share within certain bounds by controlling the level of aggregate employment) and to maintain the integrity of the payments system in a crisis where a wave of self-perpetuating defaults is possible.

In either case the thing which the central bank seeks to make more scarce or abundant is not the quantity of some asset labeled as “money”, but the capacity to make promises. To reduce the level of real activity, for example, the central bank needs to make it more difficult for economic units to make claims on real resources on the basis of promises of future payments. To avoid or resolve a crisis the central bank needs to increase the trustworthiness of units so they can settle outstanding obligations by making new promises; alternatively it can substitute its own commitments for those of units unable to fulfill their own.

Now obviously I think the ledger view is the correct one. But many intelligent people continue to work with a quantity view, some explicitly and some implicitly. Why? I think one reason is the historical fact that during the 20th century, the regulatory system was set up to create a superficial resemblance to the quantity theory. The basic tool of monetary policy was restrictions on the volume of credit creation by banks, plus limits on ability of other institutions to perform bank function. But for various reasons these restrictions were formalized as reserve requirements , and policy was described as changing quantity of reserves. This created the illusion we were living in world of outside money where things like seignorage are important.

Axel Leijonhufvud has given a brilliant description of how regulation created this pseudo quantity of money world in several essays, such as “So Far from Ricardo, So Close to Wicksell.”

Now this structure has been obsolete for several decades but our textbooks and our thinking have not caught up. We still have an idea of the money multiplier in our head, where bank deposits are somehow claims on money or backed by money. Whereas in reality they simply are money.

The fact that money as an analytic category is obsolete and irrelevant, doesn’t mean that central banks don’t face challenges in achieving their goals. They certainly do. But they have nothing to do with any particular settlement asset.

I would frame them the problems like this:

First, the central bank’s established instruments don’t reliably affect even the financial markets most directly linked to them. This weak articulation between the policy rates and other rates has existed for a while. If you look back to 2000-2001, in those two years the Federal Reserve reduced the overnight rate by 5 points. But corporate bond rates fell only one point, and not until two years later. Then in 2003-2006, when the Fed raised its rate by 4 points, the bond rates did not rise at all.

Second, neither real economic behavior nor financial markets respond reliably to interest rate changes. It’s a fiction of the last 25 years — though no longer than that — that this one instrument is sufficient. The smugness about the sufficiency of this tool is really amazing in retrospect. But it’s obvious today — or it should be — that even large changes in interest rates don’t reliably affect either the sclae of concrete activity or the prices of other assets.

Third, there is no single right amount of elasticity. A credit system elastic enough to allow the real economy to grow may be too elastic for stable asset prices. Enough elasticity to ensure that contracts are fulfilled, may be too much to avoid bidding up price of real goods/factors.

People who acknowledge these tensions tend to assume that one goal has to be prioritized over the others. People at the Bank for International Settlements are constantly telling us that financial stability may require accepting persistent semi-depression in real activity. Larry Summers made a splash a few years ago by claiming that an acceptable level of real activity might require accepting asset bubbles. From where I am sitting, there are just competing goals, which means this is a political question.

Fourth, the direction as well as volume of credit matters. In discussion like this, we often hear invocations of “stability” as if that were only goal of policy. But it’s not, or even the most important. The importance of crises, in my opinion, is greatly overrated. A few assets lose their values, a few financial institutions go bust, a few bankers may go to jail or leap out of windows — and this time we didn’t even get that. The real problems of inequality, alienation, ecology exist whether there is a financial crisis or not. The real problem with the financial system is not that it sometimes blows up but that, in good times and bad, it fails to direct our collective capabilities in the direction that would meet human needs. Which today is an urgent problem of survival, if we can’t finance transition away from carbon fast enough.

For none of these problems does some new digital currency offer any kind solution. The existing system of bank deposits is already fully digital. If you want set up a postal banking system — and there’s a lot to recommend it — or to recreate the old system of narrow commercial banking, great. But blockchain technology is entirely irrelevant.

The real solution, as I have argued elsewhere (and as many people have argued, back to Keynes at least) is for central banks to intervene at many more points in financial system. They have to set prices of many assets, not just one overnight interest rate, and they have to direct credit to specific classes of borrowers. They have to accept their role as central planner. It is the need for much more conscious planning of finance, and not crypto currencies, that, I think, is the great challenge and opportunity for central banks today.

How A New Supreme Court Could Forever Change America

Published by Anonymous (not verified) on Thu, 24/09/2020 - 4:32am in

David Sirota speaks with UCLA law professor Adam Winkler, the author of the book We the Corporations: How American Businesses Won Their Civil Rights. He has also written a series of articles for The Atlantic about corporations’ winning streak at the high court. Continue reading

The post How A New Supreme Court Could Forever Change America appeared first on

At Last: Buffett Validates Abe’s Legacy

Published by Anonymous (not verified) on Sun, 06/09/2020 - 12:52pm in


articles, finance

Published in Money Week 3/9/2020

As Japanese prime minister Shinzo Abe leaves office, his term cut short by illness, his policies have received an unexpected endorsement. Warren Buffett, the most successful investor in history, has just disclosed stakes in all five of Japan’s major trading houses.

The total amount invested, $6 billion, is slightly more than he put into gold-miner Barrick, also a recent surprise move for the Sage of Omaha.

Buffett is no stranger to Japan. Indirectly he owns the unlisted Tungaloy, which is a subsidiary of Iscar, an Israeli tool-maker. Veterans of the Japanese stock market will remember Tungaloy as Toshiba Tungaloy, Japan’s premier manufacturer of carbide cutting tools. Founded in 1929, the company is one year older than Warren Buffett. Iscar, now wholly owned by Buffett’s Berkshire Hathaway, bought Tungaloy in 2008.

In November 2011, Buffett made a highly publicized visit to Tungaloy’s Fukushima factory, which had been badly damaged by the devastating earthquake and tsunami. At a press conference, he had sympathetic and encouraging words for the Japanese people and noted the quality of Tungaloy’s operations.

Buffett at Fukushima in 2011 Buffett at Fukushima in 2011

One thing he did not do, however, was make any investments in Japanese stocks. Unsurprisingly, in fact. At the time, corporate Japan had a poor record of sustained profitability, as the economy had experienced two “lost decades” of deflationary stagnation after the bursting of the bubble economy.

Buffett is nicknamed “Snowball” – also the title of a fascinating biography of the man – because he believes in the importance of compounding, one of the foundational concepts of value investing. Just as a small snowball can grow larger and larger as it rolls down a hill, so constant good returns can accrete into a huge sum over time, if you buy at the right price.

As of 2011, there were no large companies with track records solid enough and stock prices cheap enough to match Buffett’s criteria. Nonetheless, he continued to follow Japanese companies closely.

In this 2014 photo of his office, a Japanese company handbook is clearly visible in the centre of his desk. Buffett is famous for studying companies for a lengthy period before he makes an investment –  over 50 years, in the case of IBM.  In the case of the Japanese trading houses, several years sufficed, it seems.

BuffettJapanHandbook_LI_Moment (3)BuffettJapanHandbook_LI_Moment (3)

In his statement, Buffett was unusually effusive, declaring himself “delighted to have Berkshire Hathaway participate in Japan’s future,” and hinted at exploring co-investment opportunities and increasing his stakes in the companies later. He also made it clear that this was his personal call, not a decision by one of his portfolio managers.

Outgoing Prime Minister Shinzo Abe must have been happy to hear the news.  Back in September 2013, he rang the bell for the start of trading at the New York Stock Exchange and exhorted investors to “buy my Abenomics,” referring to the package of reflationary measures that he had introduced at the start of that year.

It was a bold calculated bet, establishing that the performance of the Japanese stock market would be a crucial measure of Abe’s success. No previous Japanese leader had elevated the stock market in such terms. Indeed, politicians in most countries are leery of commenting on stock markets because their gyrations are so unpredictable.

In normal circumstances such caution is sensible. But when the Abenomics bull market started in November 2012, economic conditions in Japan were anything but normal. After the two lost decades, Japan’s nominal GDP was no higher than it had been twenty years previously and the Topix Index of stock prices was languishing at roughly the same level as in 1983.  As far as international investors were concerned, Japan had dropped off the radar screen.

Abe at the NYSE Abe at the NYSE

Put simply, Abe’s project of resurrecting Japan as a confident, independent geopolitical player would never succeed without economic revival – and that could not happen without a decisive end to the long drawn-out bear market in stocks.

So now that the Abe era has come to an end, how does his track record stack up? Between December 2012 and September 2020,  Topix  produced an annualized total return (including dividends) of 8.6% in dollar terms. That is a far cry from  the 14.7% generated by America’s S&P Index, which has been in one of the longest and strongest bull markets in history. However, if we compare Japan’s performance with the 5.9% generated by the rest of the world – as measured by the MSCI World ex USA Index –  it looks highly creditable.

Furthermore, the rise in Japan’s stock market has been driven by improved corporate fundamentals, not any inflation of valuations. From 1954 to 2012, Japanese profit margins moved in a 1-4% range, which is exceptionally low by international standards, but as of 2019, margins had soared to 6%. The biggest improvement was in not in the export sector, but amongst the overwhelmingly domestic non-manufacturers, as sectors like construction stopped taking on low-margin work.

The valuations speak for themselves. Until Covid-19 burst upon the scene, Topix’s price-to-earnings ratio was at fifty year lows. The current price-to-book-value ratio of 1.17% tells a similar story. And Japanese book value is mainly backed by tangible assets, including a vast stockpile of cash, rather than the “goodwill” from M&A activity and other intangibles that make up 70% of US book value.

Likewise, for the first time in living memory, Japanese stocks are offering a solid real dividend yield of 2.4%. Pre-Covid, this was enhanced by share buybacks amounting to 1-2% of market capitalization. Japanese pay-out ratios are still low by European, let alone American standards, so more progress is likely if and when corporate confidence recovers from the Covid shock.

Abe was not directly responsible for all these changes in corporate behaviour, but his espousal of governance reforms changed the weather in terms of the relationship between company managements and investors. Japan’s stewardship code and governance code are not compulsory, but peer pressure is a powerful force.

Today nearly all listed companies have Investor Relations departments and most are willing to answer in-depth questions about company operations – which was far from the case in the early years of this century. In a poacher-turned-gamekeeper move, some companies have recruited ex-investment bank personnel to staff their IR departments. A few are foreigners, which, again, would have been unthinkable in former times.

Abe also converted the Government Pension Investment Fund from a sleepy backwater whose main function was hoovering up Japanese government bonds into a sophisticated multi-strategy  asset manager. The G.P.I.F., usually reckoned the world’s largest pension fund, is now a trail-blazer for governance reform and the adoption of ESG principles in Japan and a role model for other domestic pension funds.

Abe’s record is by no means flawless. Two unnecessary hikes in the consumption tax, the last enacted just as the Covid virus was emerging in China, crushed the economy’s reflationary momentum. Inflationary expectations – as measured by 5-year inflation swaps – have round-tripped from sub-zero to 1.4% and back again. All the monetary policy innovations of Bank of Japan Governor Haruhiko Kuroda were for naught without expansionary fiscal policy working in tandem.

Overall, though, Abe leaves Japan’s investment scene in far better shape than he found it. If his successor continues in the same vein – hopefully adding fiscal policy to the mix –  investors should be well pleased, Warren Buffett included.

Star Casino To Roll Out Financial Education Program In NSW Schools

Published by Anonymous (not verified) on Wed, 19/08/2020 - 8:17am in

Star Casino

NSW Premier Gladys “Baccarat” Berejiklian has contracted the Star Casino to develop and deploy a financial education program for NSW schools. The move comes after reports surfaced of the Star Casino allowing underage people in to gamble.

“It’s a no-brainer for this government,” stated Gladys after losing the NSW Health budget on a face card double down. “The Star has proven how effective they are at educating our young Australians.”

It’s believed that the recent spate of under-age patrons at the state’s iconic gambling institution lead the government to green-light the Star as a preferred provider.

In a statement issued by the casino, they mentioned that young people were an “important target market” of theirs and they were keen to help shape the financial decisions of tomorrow’s gambler.

Last month the NSW Government announced a fine for the venue after they breached covid restrictions. It’s believed that Gladys personally visited the Pyrmont location to retrieve the sum, which she promptly “let ride” on roulette.

GK Kidd


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Contextualising the assault on universities

Published by Anonymous (not verified) on Wed, 05/08/2020 - 9:51pm in

At the turn of the millennium, the UK was an unambiguous ‘world-leader’ in two principle sectors, both of which had been closely associated with the promise of the ‘knowledge economy’ and ‘post-industrial society’, on which so many policy hopes had hung since the deindustrialisation of the 1970s and early 1980s. Both were dedicated to esoteric language processing and translation, overseen by the expert ‘symbolic analysts’ who scholars such as Robert Reich and Saskia Sassen declared would be the driving forces of the new economy. The Blair government celebrated these sectors with gusto, encouraging their expansion, and looking to them as contributors to macroeconomic growth.

Within a decade, one of these sectors had become dependent on the state to the tune of almost a trillion pounds (at peak), and triggered such a deep recession that the national debt doubled as a proportion of GDP, and wages experienced their longest period of stagnation since the industrial revolution. But within another decade, the government and much of the press were engaged in a sustained cultural assault on the other of these two sectors, painting it as divisive, a threat to liberty and offering ‘poor value’ to its customers. The sectors are, of course, banking and higher education, and it’s important to understand how these respective crises are entangled.

But first of all, take stock of how extraordinary the current cultural campaign against higher education is. It has become clear that The Times in particular will now grant the maximum profile possible to any opinion or news item that casts universities as censorious, ‘low value’, ‘biased’ and – the watch-word of this agenda – woke. The prominent coverage this week of a methodologically abysmal Policy Exchange report, claiming academics (and not just visiting speakers or student societies) are censored and dismissed for their political opinions, was only the latest in a long vendetta against a sector that is simultaneously awaiting a financial hurricane, caused by the pandemic.

The idea that universities are opposed to ‘free speech’ is now a common sense in the pages of the right-wing press and, latterly, the Johnson government. I explored the reasons for this line of attack in this Guardian essay, including the fear that younger people – half of whom have attended university – hold values and political preferences which are at odds with those of newspaper readers and the Conservative Party, including on issues such as Brexit.

The economic charge that certain degrees are ‘low value’ (in the sense that graduates do not earn enough to pay off their student debt, which now incurs a market rate of interest) developed in parallel to this cultural front, but has now joined up with it thanks to the exceptional circumstances of the pandemic. Gavin Williamson, the Education Secretary, recently announced that financial rescue packages would be on-hand for universities struggling with the fall in student numbers over the next year or so, but that it would come with conditions surrounding ‘free speech’ and the closure of certain degrees – to be decided not by one of the fiendishly complex, but nevertheless transparent, audit instruments (REF, TEF and OfS) created over recent decades, but by some mysterious new Higher Education Restructuring Regime Board, “composed of external experts”. Meanwhile, Michelle Donelan, the Universities Minister, has accused universities of “taking advantage of” students with “dumbed down” courses, and signaled that the government now wants to see fewer people go to university.

Another hint of the government’s plans emerged when Boris Johnson gave an interview to the Sunday Telegraph in July, in which he praised the recent Australian policy of raising the price of humanities degrees, as a way of deterring students from taking them. The notional justification for this is that these degrees are ‘low value’ in the sense that they don’t pay a graduate premium (though neither does nursing), and should be used to subsidise allegedly ‘high value’ degrees in STEM subjects. The policy therefore addresses the ‘low value’ of humanities degrees by making them even worse value, while papering over the inconvenient fact these degrees are already being used by universities to cross-subsidise STEM teaching.

As the economic justifications for policy reforms rapidly disintegrate, the government is left with little more than the cultural prejudices against certain scholarly and critical traditions – prejudices which are stoked on a daily basis with by newspapers attacks on ‘wokeness’, and deepened by the more concerning conspiracy theories regarding inter-sectionality (advanced by Douglas Murray) and critical theory (a longstanding, if ill-understood, scapegoat of the far-right). The current government’s inability to forge a coherent analysis of the place of universities in the economy and society is the fall-out of a decade of policy reforms, which repeatedly claim to be driving efficiency and student satisfaction, only to discover that they cost the tax-payer more money and lead to the ‘consumers’ of higher education being the victims of ‘market forces’.


Re-valuing and de-valuing knowledge

To understand this mess, we therefore need to return to the crisis triggered by that other ‘world-leading’ sector, with its disastrous aftermath that was deepened and prolonged by the dogma of George Osborne. So much of the current hysteria that surrounds higher education today centres on undergraduates and tuition (although Policy Exchange are clearly intent on opening up a new front in the domain of research and academic appointments), and it is no coincidence that it was these issues that provoked many of the most furious political clashes of the Coalition government of 2010-15, helping to forge the youth wing of Corbynism and trash the reputation of Liberal Democrats.

‘Top-up fees’ for university tuition were introduced by the Blair government in 1998, with the justification that many of the economic benefits of a degree return to its holder. They were tripled in 2006 to around £3,000 a year. The announcement that mobilised mass protests in 2010 was of a further tripling to £9,000 a year. The withdrawal of government support for tuition only saved the government just over £3bn a year, a tiny sum given the distress to students and the upheaval unleashed, but justified on the basis that the government deficit (which approached 10% of GDP at the time the policy was announced) had become unsustainable in the aftermath of the banking crisis, though this was later re-framed as the consequence of Labour spending prior to the banking crisis.

That period of 2009-12 was therefore the crucible for a new common sense, barely hinted at by the policy of ‘top-up’ fees, in which the value of university tuition is reflected in the graduate labour market. That saving of £3bn a year was the wedge with which to unleash a whole neoliberal orthodoxy, in which education is an investment in human capital,  whose returns are private and calculable. From here it was almost inevitable that a ‘market regulator’ (the Office for Students) would be created, new government audits of graduate employment would be established (the TEF) and economists (led by the IFS) would start to drill down into data on whether individual degrees were ‘worth’ their ‘price’. The Augar Review of May 2019 took as read something that a decade earlier would have been viewed as philistinism: that a university degree is only worth what its holders go on to earn.

Yet not only did the financial crisis facilitate a new common sense of the value of knowledge, it also created the material conditions in which knowledge was de-valued economically. As Keir Milburn and others have highlighted, the labour market impact of the ‘great recession’ that followed the banking crisis fell most heavily on those in early adulthood, at the same time as the cost of housing continued to rise, aided by the expansionary monetary policies that had been introduced to try and offset Osborne’s deflationary fiscal ones. Just at the historical moment when the ‘value’ of, say, a degree in English literature was being publicly re-framed in monetary terms, so the labour market value of that ‘asset’ was falling. The fact that policy-makers, politicians, economists and journalists now routinely use the term ‘low value degrees’ (an insult to teachers and students) is a simple offshoot of this pincer movement of Chicago School ideology and macroeconomic stagnation.


The invention of ‘woke’

Judged in both economic and educational terms, the reforms of the past decade look like a disaster, and policy-makers are now scrabbling around trying to deal with their consequences. As ever, market competition and consumer information (which combine in the form of league tables) are viewed as the tonic for everything, but universities and students are then blamed for their outcomes. See, for example, how lecturers and students are perennially incentivised to work harder and deliver better ‘outcomes’, but then accused of ‘grade inflation’ when this transpires. Without any apparent irony, one of the charges that the Education Secretary leveled against universities in July is that they spend too much time focusing on “administration”, though he made no mention of the fact that the last REF cost a quarter of a billion pounds to administer.

The more one looks inside the workings of universities, the more one sees evidence of perverse incentives and failed reforms that originate with central government. This is where the notion of ‘wokeness’ comes in: a catch-all pejorative term, that condemns an entire sector, while refusing all knowledge of what’s actually taking place. Central to this bogey-ethos is the place of some very marginal traditions of cultural studies, critical theory, post-colonial studies and literary theory, that (despite having zero or scant influence on the vast majority of disciplines) have now become a preoccupation for certain corners of the Right, especially in the pages of The Telegraph and The Spectator, and in online outlets such as Unherd and Spiked. Echoing the antisemitic theories regarding ‘cultural Marxism’, this conservative alliance is rapidly painting universities as ‘enemies within’ who sow ideological mischief, an agenda that suits Johnson’s new Brexit-based electoral strategy of collecting votes from over-50s and non-graduates.

As Asad Haider has helpfully laid out in the US context, the underlying reading of the history of ideas is absurd. But it is far from harmless. The charges being levelled against niche humanities subjects and social sciences (many of which were struggling in the context of the REF anyway) are being ratcheted up: not only ‘low value’ and exploitative of ‘consumers’, but carrying out a kind of brain-washing that is responsible for all the discord in an otherwise harmonious society. Just as Whitehall becomes referred to as ‘the blob’, an entire sector becomes obscured by a single piece of journalese. It’s a refusal to look at what’s actually taking place, which much of the time is a prosaic story of student stress, overwork, audit, managerial struggles and the normalisation of precarity of teaching contracts. With a further irony, the Johnson administration has taken to referring to various mediocre things as ‘world-leading’, while seeking to trash one sector that could claim this obnoxious status with some validity.

If the humanities and social sciences do have any particular privileged place in these political conflicts, beyond the paranoid fantasies of certain journalists and ideologues, it is that these are the disciplines that potentially see the current crisis most clearly for what it is: a crisis in valuation, which economics has so far been powerless to resolve, and politics will be unable to either, short of Orbanist efforts to stipulate what should and shouldn’t be taught. Academia has longstanding ways of valuing knowledge, which more or less work, albeit imperfectly. Peer review, marking, funding competitions and job talks can go horribly wrong, and are fraught with injustices, but they remain commonly understood ways of distinguishing merit. If you seek to trump those conventions with market mechanism, don’t be surprised if the outcome is a kind of chaos, in which nobody can agree on value any longer.

The critics of ‘wokeness’ will be interested to know that this was exactly what Jean-Francois Lyotard was warning against in his 1979 Postmodern Condition: “Knowledge is and will be produced in order to be sold, it is and will be consumed in order to be valorised in a new production: in both cases, the goal is exchange.” Markets and economics can’t offer a resolution to an epistemological crisis that they themselves caused. Gavin Williamson’s Higher Education Restructuring Regime Board may believe it can, purely on the basis of some murky presuppositions about which degrees ‘deserve’ to exist and which one’s don’t, as may Policy Exchange’s proposed Director of Academic Freedom. But once the bounds of ‘acceptable’ teaching and research are being set by the state, it’s hard to see that any argument has been won or any freedom is being upheld.

If the problem that these critics have is that of ‘relativism’, then maybe they’re onto something. But it’s not the epistemic ‘relativism’ of Derrida or Foucault that they ought to be focusing on, or the moral ‘relativism’ of a historical mentality that highlights demonstrable facts regarding the violence of empire. If the rug has been pulled out from under our capacity for judgement, look to the financial sector – the same sector that discovered that the value of a derivative was merely a construct of collective beliefs and whichever letters are awarded by a credit-rating agency. Just imagine a world in which newspapers waged a permanent war against the abuses and exploitation enacted by Britain’s other ‘world-leading’ sector, in which Ministers complained that it had grown too big, and various new boards and directors were invented to ensure that it used its freedom correctly.

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The World Won’t Turn Japanese for Long: Inflation Is Coming

Published by Anonymous (not verified) on Tue, 30/06/2020 - 8:25pm in

Covid-19 has completed the job, already well underway in recent years, of turning the world Japanese. Almost everywhere, economies are shrinking and long-term interest rates sinking to previously unimaginable levels.

Ironically, Japan – once the poster child for deflationary stagnation – is in a good place, relatively speaking.  The IMF’s forecast of -5.2% GDP growth for Japan in 2020 looks ugly until you compare it with  -7.5% for the Eurozone, -6.5% for the UK and -5.9% for the US.

Likewise, Japan’s ten year bond yields may be a smidgeon above zero, but that’s a better return than you get these days from German, French, Danish and Swiss bonds, all of which sport deeply negative yields.


At first sight, the above seems a perfect illustration of the accelerationist view of the pandemic, as recently voiced by Jerome Powell, Chairman of the Federal Reserve Bank in recent testimony before Congress. “Existing trends have sped up a lot,” he noted, citing the surge in online shopping and tele-working.

It is a comforting hypothesis – the future has arrived a little quicker than expected, but the scenery is familiar. And in the short term at least, it has the merit of being observably true.

The giants of the internet haveindeed  gone from strength to strength; people are spending even more time on social media; Zoom is ubiquitous; restaurants and cinemas may be dying, but streaming and delivery meals companies are going gangbusters, etc. etc.

Yet shocks of historical magnitude do not tamely confirm a pre-existing consensus. They shatter it and create new realities. In the world of investment, that means new winners and losers.

Such was the case with the Japanese Century confidently predicted by highly-esteemed academics and think-tankers in the late 1980s, but cancelled by the collapse of the Tokyo stock market in the early 1990s and the ensuing “lost decades” of  stagnation. The winning investment thesis of Japan’s 1980s – “buy owners of idle real estate” – became a recipe for financial disaster in the 1990s.

The Global Financial Crisis of 2008 had similarly momentous consequences, not least discrediting globalization and technocratic rule and paving the way for the rise of populism. Across the developed world, nominal GDP growth fell to the lowest level in many decades, while the financial system was flooded by extraordinary amounts of liquidity created by the central banks.  The winners of the previous cycle – commodities, auto companies, banks, and cyclicals – plummeted and dominant internet companies became the only game in town.

None of this was easy to predict during the crisis or even in its aftermath; only in hindsight does the causality of events seems clear and inevitable. A global crisis would not be worthy of the name if it did not deliver unexpected outcomes and, ultimately, new configurations in financial markets.

The crucial point is not necessarily the trigger event itself, whether it be a financial meltdown or a pandemic, but the new beliefs it produces in policy-makers, investors and voters.

Some of these beliefs may turn out to be deeply misguided, such as the widespread view, from 2009 onwards, that the world was facing a government debt crisis, with Japan first in the firing line, and that fiscal austerity was therefore a priority. Nonetheless, that presumption proved hugely influential in forming the world we now live in. The fact it was wrong doesn’t change that.

Certain ideas can prove powerful enough to create intellectual regimes that last for many decades – such as Keynesianism, monetarism, Marxism, pacificism, environmentalism  – until they are finally tested to breaking point. At the beginning, they are minority obsessions which seem extreme and even absurd. Only when the previous regime has been discredited by a crisis do they have the space to proliferate. Then, if the analogy may be admitted, like an infectious disease they travel rapidly from host to host, with key institutions and individuals acting as vectors and “super spreaders.”

Covid-19 is on the brink of generating such an intellectual pandemic. Whether MMT  (Modern Monetary Theory)  is explicitly endorsed by political leaders is a second order question. By their actions, they have already legitimized the arguments of the MMT-ers, as recently acknowledged by President of the Dallas Fed Robert Kaplan.

The guiding principle of MMT holds that money is created by governments and they can create as much as they want, with inflation being the only constraint. This is exactly what has been tested in recent months. In order to offset the devastating economic effect of mandated lockdowns, governments have launched financial support programmes of eye-popping scale aimed at keeping companies with collapsing cashflows afloat and bolstering the finances of “furloughed” workers.

The volte-face has been too blatant to be ignored by anyone with a cursory interest in public affairs. Mainstream political parties, experts and technocratic institutions that previously trumpeted fiscal responsibility and agonized about debt-to-GDP ratios have suddenly conjured up financial resources equivalent to 20% and more of GDP. “We’ll do whatever it takes” has replaced “there is no such thing as a free lunch.”

The support programmes are labelled as temporary expedients, to be unwound as conditions normalize, but that was supposedly the case with the quantitative easing regime installed after the GFC of 2008 too. Rather than being unwound, QE has been repeated and intensified by new variations such as negative policy rates and Japan’s yield curve control, now under study elsewhere, which seeks to hold down the yields of ten year term bonds.

Even if conditions allow the stimulus to be withdrawn entirely, a crucial precedent will have been set. If vast amounts of money can be created and spent with no apparent ill-effects, why not a Green New Deal, as proposed by radical Democrats in the US, but also backed, to a greater or lesser extent, by Nobel Prizewinners Paul Krugman and Joseph Stiglitz and potential next president Joe Biden? Why not a British New Deal, with Prime Minister Boris Johnson chanelling FDR? With interest rates at the lowest levels in history, almost any project will have a positive return.

Japan was able to weather its years of crisis and shattered expectations thanks to its stock of social capital, itself the result of shared values and a high degree of homogeneity. Few other wealthy countries can boast the same resilience. The last few weeks have seen more civil disorder in the United States and the UK than Japan experienced in two “lost decades.”

In these and several other countries, the social contract – such as it is – only works when asset prices are rising and growth is positive. Decades of deflationary stagnation, accompanied by a Japan-style across-the-board declines of 75% in property values, would mean social collapse. Political leaders know this very well, which is why the post-Covid economic support measures keep on getting bigger. And unlike the Central Bank-created liquidity of the past decade, this money will not just circulate within the financial system, but will flow into the real economy.

Understandably, investors, like policy-makers, are currently fixated with the near-term deflationary effects of the lockdowns, which have destroyed jobs and consumer demand. But is also possible that supply may be destroyed too, through bankruptcies and regulation-driven constraints on the service sector, such as social distancing.

Even before Covid, there were signs that, in the midst of eye-catching deflationary signals such as evaporating bond yields, some longer-term factors were moving in the opposite direction – such as increased economic nationalism and rising minimum wages. These will intensify. Expect higher pay for key workers, slower and simpler supply chains and re-shoring of production of medical supplies and other strategically vital items.

Generally, it takes a crisis to catalyze lasting change in the intellectual zeitgeist. That was certainly the case in the 1970s, when the second oil shock overturned the post-war Keynesian consensus and prepared the ground for monetarism and several decades of disinflation. Covid could be the prompt for similar lasting change in the policy cycle and, as night follows day, stock market leadership.

In line with the biblical principle of the first becoming last and vice versa, we would expect highly rated companies with untested earnings power to fall from grace while beneficiaries of higher output prices and a steeper yield curve should see better times and more generous ratings.

The effects would be felt globally. Japan, which has experienced deflation the longest, could well be an unexpected winner from a turn in the cycle. Conversely, countries with insufficient domestic savings and fractured politics could find themselves in chronic crisis.

Green Structural Adjustment in The World Bank’s Resilient Cities

Published by Anonymous (not verified) on Tue, 16/06/2020 - 9:25am in

Cities across the world are facing a double-barreled existential problem: how to adapt to climate change and how to pay for it. Over the next thirty years, more than 570 coastal cities are poised to face frequent catastrophic flooding owing to sea level rise and more intense storms, while as many as 3.2 billion urban residents may run out of water by 2050. Other looming crises include soaring urban temperatures, the urgent need to transition away from fossil-fueled energy and transport systems, and plummeting rates of local biodiversity.

Responding to these problems will, international bodies project, require a virtually unprecedented buildout of infrastructure, from hardened municipal water and sewage systems, to urban afforestation, to renewable energy systems. This massive infrastructural program coincides with global economic conditions marked by the lingering ideological stranglehold of austerity, unprecedented levels of capital concentration, and now, myriad uncertainties produced by COVID-19.

In response to the twin problems of resilient infrastructure needs and public fiscal constraints, the World Bank and an array of partner institutions from the Rockefeller Foundation to USAID have been ramping up programs to facilitate private investment in urban resilience. From a baseline of $10 billion across 77 cities in 2016, the World Bank aims to ‘catalyze’ investment of more than $500 billion into urban resilience projects across 500 cities by 2025.

But the vast majority of this money is not being distributed in the form of grants, as would befit a just adaptation regime respecting the loss and damage that will be borne by people least responsible for climate change. Nor is it ‘vanilla’ development lending, where states borrow from the World Bank for approved projects while receiving ‘capacity building’ for administering the project. Instead, this resilience funding is targeted at reformatting municipal governments to enable them to execute urban resilience projects through private-sector oriented pathways. These initiatives are focused on cultivating cities that can plan investor-friendly infrastructure projects, then access global debt markets to finance infrastructure that is meant to achieve resilience.

We call the process through which vulnerable cities of the Global South are being rendered investable in response to climate change Green Structural Adjustment (GSA).

We use the term Green Structural Adjustment to signal connections between 20th Century Structural Adjustment and contemporary World Bank urban-climate programming. Structural Adjustment formally ended in 2002, after the Bank, along with the International Monetary Fund, administered more than 500 Structural Adjustment Programs (SAPs) in almost 100 countries in the 1980s and 1990s. While the language of structural adjustment was phased out in favor of the more gentle sounding ‘development policy lending’ in 2004, the underlying faith in the power of markets to create desirable change, a commitment to technocracy, and mistrust in Southern states to pursue the ‘right’ objectives through the ‘right’ governance mechanisms, persists. But there are important twists from the 20th Century formula: the unit of policy intervention is the city, rather than the nation-state; the aim is to create access to debt, rather than fixing sovereign balance of payments crises and overwhelming debt; and, the primary objective is climate resilience to secure development, a departure, at least rhetorically, from environmentally calamitous Structural Adjustment.

While 20th Century SAPs were often violently imposed – and successor policies administered by the IMF still are – the violence of GSA is less direct. The Bank is the herald of investors, bearing the message that if city governments are not reformed in investment-friendly ways, those cities will continue to be cut off from more than $100 trillion swirling on global capital markets. This is a modern, environmentally-inflected version of TINA; as the World Bank sees it, ““public investment alone, even when combined with [official development aid] is inadequate” to remake cities that can protect residents from environmental change; only financiers have the power to pay for resilient infrastructure at the scale necessary. So the criteria of investors, such as balanced municipal budgets, a regional or internationally recognized credit rating, and a pipeline of investable projects planned with accepted forms of environmental data must be achieved if cities are to gain access to these vast pools of capital.

The second connection between the SAPs and the GSA is causal; Structural Adjustment contributed to many of the problems that GSA aims to counter. For example, SAP-induced agricultural ‘rationalization’ contributed to rural-urban migration, driving urban growth, rates of informality, and associated vulnerability to environmental change. Trade liberalization facilitated hydrocarbon and raw material extraction and export, turbocharging rich world consumption and associated greenhouse gas emissions and degrading local environmental conditions. Meanwhile, spectacular levels of global inequality has led to unprecedented levels of wealth for the investor class.

It is precisely this concentrated wealth that GSA aims to channel into urban resilience, in line with the broader World Bank project of ‘Maximizing Finance for Development’. GSA offers a path to climate-proofed infrastructure provision operationalized in line with the ‘Wall Street Consensus’, an austerity-drenched logic of, and set of tools for, using public funds to subsidize private sector investments. In turn, these investments are to be channeled into familiar financial mechanisms, including public-private partnerships, municipal borrowing through labeled green bonds, or land-value capture, but using the World Bank balance sheet and expertise “in innovative ways to catalyze trillions”.

Our paper looks at examples from Can Tho (Vietnam), Jakarta, and Kampala, but these processes are playing out in cities in virtually every corner of the Global South. And the scope of these interventions is growing: if Bank spending gets close to the $25 billion per year it aims to leverage by 2025, GSA-aligned investments would be one of the biggest lines of ‘climate finance’ in the world.

While GSA operates at the interface of global institutions and the city, its practices have structural ramifications. Overaccumulated northern capital has been desperately seeking profitable investment in a high liquidity, low yield world. GSA, through its technical assistance and derisking activities, aims to produce a pipeline of investable frontiers. As more cities gain access to debt markets and their needs for adaptation grow, GSA offers a multi-sited spatial fix: physically fixing Northern capital in Southern infrastructure and staving off crises of overaccumulation, producing new geographies of accumulation and the ability to absorb the ravages of a changing climate.

It remains to be seen how much private investment in public infrastructure GSA ultimately will generate; to this point, GSA is still much more about beginning to restructure city governance than tracking trillions in Global North investment into Southern built environments and the (mal)adaptive impacts those infrastructures produce. As a World Bank staffer told us, ““right now less than 2% [of investable private capital] gets invested in urban infrastructure. So, these are pension funds, sovereign wealth funds, mutual funds, and they’re out there, they’re looking for reasonable returns, in a very low return market right now. So, we think there’s an opportunity to tap some of that”. This sums up GSA as it empowers technocrats and financiers to shape what kinds of infrastructure are realized and how it is financed, producing cities and infrastructure as investable enclaves while rents flow to investors.

Ultimately, we reject the reframing of ‘climate debts’ enabled by GSA from a radical claim to righting past and ongoing injustices that produce uneven climate risks into a technocratic syntax that heaps financial debt onto vulnerable cities in the Global South. There is much scope for (geographical) political economists to envision other modes for producing future-ready infrastructure, and the institutions to facilitate those futures. The move toward normalizing discourses of global green Keynesianism are welcome, but insufficient. Instead, our next steps are to figure out how the highly concentrated finance that the GSA mobilizes can be repurposed to facilitate the decommodification of climate resilience and mitigation.

Cover image: Jakarta, Indonesia (100 Resilient Cities)

The post Green Structural Adjustment in The World Bank’s Resilient Cities appeared first on Progress in Political Economy (PPE).

The Currency Market Is A Market. Act Accordingly.

Published by Anonymous (not verified) on Wed, 10/06/2020 - 11:00pm in



One recurrent line of discussion I have seen over the years are assertions or questions about currency values that follow this format: if some particular economic event happens, then the currency will rise (or fall). This seems to be the result of "all else equal" logic, but it is highly misleading. Foreign exchange markets are markets, and prices (exchange rates) should not be expected to follow simple rules. Otherwise, all foreign exchange traders would end up with above average profits, and we would have discovered a private sector magic money tree.

Interestingly enough, I think it would be a safe bet that one could find professors teaching undergraduate economics who will argue that currency values will follow simple "all else equal" rules in one lecture, and then go to another lecture and state that some version of market efficiency holds. Consistency is the hobgoblin of small minds, &c.

One could attempt to salvage "all else equal" arguments by stating that they are the sensitivities of some currency valuation model. The problem with that argument is straightforward: this model would have to do a convincing job of forecasting currency values. Someone in possession of said model would be able to generate a rather impressive track record doing directional currency trades. I do not claim to be in close contact with the forex community, but I saw little evidence of this happening.
Why are Currencies Hard to Model?A foreign exchange rate is a relative price: at what ratio will entities be willing to exchange one currency for another? At the minimum, we need to keep an eye on what is happening in those two currency areas, but we might also need to worry about events in other currency areas. For example, an emerging market crisis is often associated with a rise in the U.S. dollar,  which might rise versus the British pound -- even though the U.K. and U.S. economies might not be measurably effected by the turmoil elsewhere.

The following entities trade foreign exchange.

  • Firms and households that engage in foreign trade in goods, services, and tourism.
  • Investors with international portfolios.
  • Foreign exchange speculators.

In principle, the last group (speculators) are there to balance the flows among the previous two groups, but speculation can become the tail that wags the dog (for some time at least; speculator balance sheets and risk limits are finite). And as countries like the U.K. discovered during the Bretton Woods era, trading firms can engage in covert currency speculation just through the mechanisms of trade finance ("leads and lags").
If we assume that speculators cannot drive currency values too far away from fair value -- a staple of analysis in bond, equity, and derivatives markets -- we are stuck with the reality that there are two candidate values for fair value. The first is the level of the currency that balances trade flows. The second is the value that balances portfolio flows. The reality is that the market value of international portfolios dwarfs net trade flows -- so portfolio flows are dominant. This changes the currency valuation problem into the problem of the relative valuation of all financial assets. This is extremely complex, and so instead currency strategists do things like run carry portfolios or fool around with volatility strategies.Post-Script: Bond Valuations?The rates market (e.g., not looking at credit spreads) is much easier to deal with than the foreign exchange market. Bond valuation is driven by the cost of financing a long position, and for a government bond, that financing cost is typically close to the policy rate. Meanwhile, central bankers follow the economic cycle with a lag, in a fairly predictable fashion (e.g., the Taylor Rule).

The problem is that forecasting the economy is hard (the underlying message of Recessions: Volume I). As such, it is hard to outperform the market. Roughly speaking, the only easy money in directional rate trading is finding a critical mass of bond investors who do not believe that rate expectations matter for valuation, and take the other side of the trade. However, natural selection eventually closes that avenue for outperformance.
(c) Brian Romanchuk 2020