Hello and welcome to the day the UK finally votes on European Union membership or Brexit. In London the weather was on the case as we have had what Freddie Mercury called “thunder and lightning, very very frightening” overnight and more of the same is expected later. Please do not be put off by what has been a nasty campaign – the kinder campaign promised last week seemed to have a shorter life than a Mayfly – and vote whatever your leaning as it is a right people have fought and died for. The currency markets with the UK Pound £ at US $1.48 and Euro 1.30 have placed some one-way bets but of course if markets were always right life would be a lot easier than it is! Anyway let us move onto today’s subject except as you might expect there will be a song list for Brexit referendum day.
Bond yields and productivity
This is an issue raised by the former IMF Chief Economist Olivier Blanchard at the Pieterson Institute. But first we are reminded of something important which is that the rules that apply to us plebs do not apply to the establishment. Monsieur Blanchard was responsible for the policies applied to Greece on his watch as I note this from his Ten Commandments in June 2010.
Fiscal adjustment is key to high private investment and long-term growth.
Of course the fantasies about a Greek economic recovery were produced on his watch too. Then there is this.
You shall target a long-term decline in the public debt-to-GDP ratio, not just its stabilization at post-crisis levels.
As well as Greece which also needed a default ( PSI ) in 2012 we have Portugal to consider here. Of course Olivier had a mea culpa later on which is welcome but if an airplane designer had seen the results of his work crash and burn like what happened to Greece who would fly on his/her next plane? Anyway Olivier has carried on pretty much regardless.
Olivier opens with something of a strawman argument.
Long-run productivity growth appears likely to be low, and productivity growth and interest rates move largely together, so one should expect long rates to be low as well.
We have very little idea of where interest-rates as in bond yields would be without all the intervention as I note that today we have learned that the Bank of Japan now owns 34% of the Japanese Government Bond Market. Olivier is not keen on that argument for different reasons though.
Yes, measured productivity growth has decreased, and seemingly not due to measurement error (Byrne et al. 2016, Syverson 2016).
I have highlighted the bit with which I can only disagree completely. As I look ever more deeply into the UK data on the subject I realise that we know much less than we think and that we could and probably are making large mistakes. Actually Olivier behaves like a stereotypical economist here.
Expect lower productivity growth, but be ready to be surprised.
The bit that I note is like my “something wonderful” ( 2001 A Space Odyssey ) thought.
But when one listens to Silicon Valley, one cannot help but expect a substantial probability of a much larger role for robots and artificial intelligence in general, and by implication, much higher productivity gains.
That seems a likely future but missed by Olivier is the implication of that. Will it be a science fiction Star Trek style world where the benefits of capitalism are shared around? A time of leisure and ease for all. Or will it be a type of Marxist world where capitalists overlords amass great wealth paid for by their robots whilst the ordinary person sees harder times. In science fiction terms that makes me think of the Harkonnen’s in the novel Dune. It makes me shudder a bit.
We move onto an area where Olivier appears for a while to be influenced by the early work of Oasis.
that people live forever, or act as if they lived forever, and that people are willing to defer consumption if the interest rate is higher.
The latter part of that has seemed to be true in the past but we know in our new world of negative interest-rates that people are willing to defer consumption as well if the interest-rate is not only lower but pretty much zero. I have written recently about the Swedish propensity to save continuing well the Germans seem rather keen on it as well.
I am not so sure that the Germans are that peculiar as I note that the Euro area without them has not seen that much of a fall in savings once we allow for the fact that some of it has hard a very hard credit crunch. Only yesterday the Swedes took some time off from the football and cheering the last international for the Zlatan to let us know this.
Households’ net deposits were at a record level of SEK 35 billion, mainly in regular savings accounts in banks and at the Swedish Tax Agency during the first quarter of 2016.
What is the conclusion?
Well we are told this.
Forecasts of long-term growth, and the general commentary in newspapers, are gloomy. I believe that this bad news about the future largely explains the relative weakness of demand today. Put in more academic terms, bad news about the future supply side is leading to a Keynesian slowdown, or at least a weaker recovery today.
Olivier skirts over the disaster that has been official “Forward Guidance” so his first factor is an ever weakening influence as people listen less and less to people like him. However he misses important points which explain why we are where we are and again sometimes he is simply wrong.
Banks are no longer deleveraging, and credit supply is abundant and cheap.
As to banks no longer deleveraging that is not what I have been hearing and seeing. We see a regular flow of job losses on the news wires and occasional large retrenchments such as Barclays announcing plans to pull out of Africa. That is before we get to the share prices of banks around the world. If we move to credit supply it is abundant and cheap in many places for consumer borrowing but if the UK is any guide much less so for companies and businesses.
There are things to consider here and deeper issues that Olivier’s it might stay depressed or it might improve analysis. Let me remind you again of another issue he has dodged which is that one of his variables interest-rates ( I am including bond yields here) has been driven by what he might call “people like us”. This has changed the world as the idea of a market driven interest-rate seems an anachronism from a distant past and investors spend their time trying to front-run central banks. What could go wrong? Tucked in there might be an explanation of why people are saving for no apparent return at these levels of interest-rates.
Also our world has seen apparent expansionary policy have contractionary influences. The impact of QE in the UK helped reduce real wages in 2011/12 for example from which they have yet to fully recover. Also there is the issue of long-term saving and pensions how does that work in our supposedly brave new world? People may think they need to save more whilst around the world we see businesses being told they need to put more into pension funds which is another contractionary effect of our QE world. Oh and all the can-kicking has left people afraid not unreasonably in my view that it could all happen again. In fact it seems more likely and not less in more than a few places.
Songs for Brexit Day
Should I Stay or Should I Go Now by The Clash
The Final Countdown by Europe
Making Your Mind Up by Bucks Fizz
Stay by Jackson Browne
Stay by Eternal
Don’t Leave Me This Way by The Communards
Please Don’t Go by KC and the Sunshine Band
It’s The End Of The World As We Know It by REM
Come Together by The Beatles
D-I-V-O-R-C-E by Tammy Winette
Fifty Ways To Leave Your Lover by Paul Simon
Go Now by The Moody Blues
Another Brick In The Wall by Pink Floyd
Burning Down The House by Talking Heads
I Want To Break Free by Queen
Go Your Own Way by Fleetwood Mac
Should we get another vote
Coming Around Again by Carly Simon
Europe Endless by Kraftwerk
Complete Control by The Clash
Thanks for the suggestions I have already received.