Of Bond Yields and Productivity without forgetting Brexit day songs

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.

The Economics

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

For Remain

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

For Leave

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.





29 thoughts on “Of Bond Yields and Productivity without forgetting Brexit day songs

  1. Great post today Shaun and you correctly identify the dismay of the general public. If you can’t get a return on money then what is to be done? We kinds guess that blightly wont really look after us so you get two camps. In one, well lets just live for the day, my house is valuable why not get a new car on a contract deal and spend my disposable income at the mall. The other camp, well the financial crash was a real concern, my pension pot is barely treading water, I need to save even more…

    And to my mind that is the society we have. Whether folk attribute the return on money to central banking in Europe or the Euro in today’s referendum, well I suspect not. Folk will I think vote to protect the status quo, i.e. value of their home.

    Paul C

    • “my pension pot is barely treading water, I need to save even more…”

      and when it goes south ?

      97 p on every pound plus fees ?

      I guess the Pensions industry will collapse

      ” we’re all in it ” as the slogan goes !


    • This is of course the paradox of thrift – we should save, but that reduces current consumption demand.

      It also produces that other paradox: raise rates and savers will feel confident enough about the return on their savings to start spending. Of course, it would mean falling house prices ….

    • Hi therrawbuzzin

      You have me there is you are referring to the supposed weather control program as in London it has been dreadful since about 11pm last night. Wasn’t that supposed to favour leave?

  2. Hi Shaun,

    Olivier Blanchard had made me realise I have missed my vocation in life by becoming a forecasting expert.

    My chosen subject is the UK’s long range weather outlook over the next six months: It is showers, which will vary from between very light to very heavy showers. Now the showers might be very frequent, so frequent at times that they are concatenated to form long periods of rain or they might be occasional showers, with long dry periods between them, very occasionally there might even be weeks or more between the showers, but over the next six months I can confidently predict that our weather will be showers. Now to submit my CV to the Met Office!

    Too many institutional economists seem to think that quantity is a substitute for meaningful, well researched, deeply thought about, quality words of wisdom and forecasting.

    On the subject of #Brexit I’ve thrown away my young daughter’s bedtime fable books and I now read her the latest financial forecasts by both sides. They seem to be working, she is asleep within seconds! 🙂

    • Hi Rods

      You daughter has good taste already and you can claim at least some of the credit for good genes. As to the weather you have been right already in Battersea over the past 12 hours, job done.

      If an ordinary person had made the failures of Blanchard or my subject of a few days ago Turner their employment would have been ended. Rules for some but not all.

  3. Hi Shaun, may I add the following play list suggestions:


    Anarchy for the UK – Sex Pistols


    Atmosphere – Joy Division (again!)

    • Hi Noo2

      Thanks and in a way God Save the Queen from the Sex Pistols would have worked too. There is quite a Joy Division theme going on these days, are you also a New Order fan? One side will have regrets…

  4. Shaun, My musical contribution:


    I get nocked down but I get up again, you’re never going to keep me down! – Chumbawamba


    Promises, promises – Naked Eyes

  5. Germans like saving, this begs a question about whether the average German has greater purchasing power or lives more frugally than the average Brit.

    I haven’t worked/lived in Germany but when visiting I got the impression that Germans had better PPP.

    • Germans save for historical reasons, although the connection between Schuld (guilt) and Schulden (debt) is a bit of a myth. Their consumption could do with a gentle prod to help everyone else out though as their wealth relies on a big trade surplus.

      However, it is about productivity – as Brexit economist Ruth Lea said on Question Time, “The Germans and Dutch educate their workforces; we have to work longer hours to produce as much”. In the cheap money era, UK employers have taken on lots of labour with low productivity to produce what is required, hence the only slight movement in pay and falling productivity.

      I did warn about this in 1979, but our politicians and business leaders knew better apparently!

      “Without Britain, Europe would remain only a torso.” Second Chancellor of the Federal republic and architect of the Wirtschaftswunder, Ludwig Erhard

      • I don’t care for the whys. I was asking a technical question on PPP. 1400 euro per month rents a nice 90 or 100 m2 apartment in Berlin. That is 1000 square foot. 500 square foot apartments in London are being offered about £1500.

        This very quick internet search sample suggests London rents are 3 times more expensive. It also supports my long standing assertion that expensive accomodation hurts British consumers and reduces their purchasing power. Or to put it another way – the average Berliner has money to spare so can save easily whilst the average Londoner struggles to make ends meet.

        I recently told a recruitment agent that his Berlin nett salaries were too low – 100m2 apartments in Sofia can be rented for 400 euro. Not to mention the price of beer 🙂

  6. On the German theme, I am hoping to shove Andreas Bourani: Ein Hoch auf uns! right down Farage’s throat:

    Ein Hoch auf uns: Cheers to us all https://www.youtube.com/watch?v=MYNLQjrBVPo


    Cheers to what lies ahead of us, to that which is best for us
    Cheers to what unites us, to this time

    Some of the words:
    Freude: joy
    Teilen: share
    Vereint: united
    Bleibt: remains

    and one lyric: Im Regen stehen wir niemals allein: No-one stands out in the cold.

  7. Hi Shaun
    Thanks for another great blog.

    M83 Outro

    I’m the king of my own land
    Facing tempest’s of dust, I’ll fight till the end
    Creatures of my dreams raise up and dance with me!
    Now and forever,I’m your king!


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.