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Showing posts from June, 2013

Return to Gold Standard?

Throughout much of history, money has either been a precious commodity (gold or silver) or convertible into a precious commodity. However, in the second half of the twentieth century the link to gold was broken and we now live in a world of fiat money i.e., the paper money printed by government has been declared to be legal tender by mandate or government fiat. Our fiat money system has been responsible for high and volatile inflation and it may even have contributed to the huge and deleterious expansion of credit over the past few decades. As a result, there has been a call from some economists and politicians for commodity money, such as a gold standard, to be reintroduced. Many economists have major objections to the idea of a gold standard. Larry White has just had a piece published by the Cato Institute where he tackles 13 objections to a gold standard - click here for his paper. What most economists overlook is that Larry and other free bankers don't just want a gold s

Innovation and Incentives

The Queen's University Centre for Economic History is hosting a workshop tomorrow entitled Innovation and Incentives in Business and Economic History - the workshop's programme is here .  Some economists, such as Robert Gordon , believe that future innovation and invention is going to be incremental at best, leading to a slowing of economic growth (Gordon's paper is here ). Gordon argues that before 1750, there was little innovation and consequently hardly any economic growth. The Industrial Revolution and later technological revolutions made society highly productive, with the result that there has been huge economic growth since 1750. However, where is the next technological revolution coming from? All of the productivity benefits of the ICT revolution have already occurred and subsequent ICT innovations have been about entertainment rather than changing labour productivity. The QUCEH workshop hopes to shed light on the effects of innovation on the economy in th

Education and the Crisis

A new OECD report finds that the value of education during the financial crisis has gone up, but that investment in it has fallen. It also finds that those with poor education and no qualifications have been particularly hardest hit by the crisis.  A short video clip where the report's author talks about the main findings is here .

Credit Crunch in China

China's stock market has plunged in recent days as the People's Bank of China has tightened credit in an attempt to constrain lending and excessive credit growth in China. As a result of this credit tightening, the inter-bank rate in China (the SHIBOR) has increased substantially ( story here ).  After the 2008 crisis, the Chinese monetary authorities stimulated the expansion of credit. This credit expansion has been accompanied by a 'bubble' in the Chinese property market. Is China about to experience a financial crisis akin to that experienced in the West five years ago?  You can read more about China's credit crunch at Bloomberg ,  Linda Yueh's BBC blog  and the  Marginal Revolution  blog.    

Markets and QE

Following on from Friday's post , here is a piece at Project Syndicate which argues that the markets don't really understand QE and that stocks are actually cheap! The fallacy in this article is that as QE hasn't affected monetary growth, its ending will be a non-event. However, QE has affected asset markets as central banks have bought huge amounts of government bonds, which distorts yields on bonds and the real rate of interest. The ending of QE will drive bond yields and the real interest rate up. Increasing bond yields makes the bond market more attractive and, as a result, money flows out of the equity market. An increase in the real interest rate reduces the present value of future cash firms generated by companies, which can only lead to falling stock prices.  

What Moves Markets?

The Fed had recently signaled that it intends to bring its quantitative easing (QE) scheme (where the Fed creates money to buy US Treasury bonds) gradually to an end. Over the past month this has affected emerging-market currencies and caused the yield on 10-year US government bonds to increase from 1.6% to 2.2%. It has also caused stock markets and commodity prices to fall - the FTSE 100 has fallen by nearly 10% over the past month. Following Bernanke's statement on Wednesday, which reiterated the Fed's intention to taper off QE, stock markets around the globe fell sharply.  QE has distorted asset markets around the world. The unwinding of QE in the US will not be painless for investors or foreign central banks. Investors in emerging markets can expect a particularly bumpy ride over the next few years - click here .  

Financial History and Public Policy

Following on from yesterday's post , the Report of the Parliamentary Commission on Banking Standards contains another novel recommendation. The report recommends that an additional external member be appointed to the Bank of England's Financial Policy Committee , "with particular responsibility for taking a historical view of financial stability and systemic risk, and drawing the attention of the FPC colleagues and the wider public through speeches and articles, to historical and international parallels to contemporary concerns". 

Jailing Bankers: A View From History

The final report from the Parliamentary Commission on Banking Standards has just been published. A summary of the report and its main recommendations is available here  and the full report is available here . One of the recommendations in the report is that bankers should face prison for their reckless mismanagement of banks - click here for the BBC's coverage of this story. But should bankers be jailed for reckless risk-taking? A lesson from financial history proves helpful here. The last major UK bank to be allowed to fail was the City of Glasgow Bank in October 1878. This bank was one of the largest in the UK at the time. Shortly after its collapse, the bank's manager, secretary and directors were arrested. At their trial , Robert Stronach, the bank’s general manager, and Lewis Potter, one of the bank’s directors, were found guilty of falsifying the bank’s balance-sheets; they were given an 18-month prison sentence. Five other directors were found guilty of publishing

Inflation is Always and Everywhere.........................

The latest ONS inflation figures for the UK show a rise from 2.4% to 2.7% (annualised). This rise doesn't surprise most consumers. One thing which my wife (who is not an economist) has pointed out to me is that the marked price of many products is not going up, but the quantity of product being sold has been reduced. For example, Twix bars are getting smaller, there are 8 slices of cheese instead of 10 in many cheese-slice packets, and Shloer bottles have gone from being 1 litre to 750ml. These changes may fool some consumers into thinking that there is no inflation, but in reality there is. What about the price of services or other more complex products? Could firms be reducing quality rather than increasing price? It is hard for CPI measures to pick up a deterioration in quality, which means that inflation can be underestimated.       


The G8 summit starts today at the Lough Erne Resort in County Fermanagh.  The Northern Ireland summit website is here  and the British's government's is here .

Defending the 1%

Greg Mankiw , professor of economics at Harvard, has written a paper which seeks to defend the top one percent of income earners ( click here ). He starts his paper by showing how an entrepreneur (e.g., Steve Jobs) can become super wealthy whilst benefiting society. However, many of the one percent have become wealthy through rent seeking (think financiers and overpaid CEOs) and at other people's expense rather than through creating products or services which benefit society as a whole.    

Robert Fogel

Robert Fogel died two days ago. Obits are available  here  and  here . Fogel won the Nobel for Economics in 1993, along with Douglas North , for his contribution to cliometrics i.e., the application of economic theory and methods to economic history.  In Greek mythology, Clio  is the muse of history.  Fogel was most famous for his controversial work Time on the Cross , which he co-authored with Stanley Engerman . In this book, Fogel and Engerman gathered copious amounts of data on a Southern slavery plantation and found that (a) slaves were better treated by slave owners than had previously been assumed; (b) slaves in the American south lived better than many industrial workers in the north; and (c) slavery was a profitable institution and would not have disappeared without the Civil War.  

Falling Pay in the UK

The Institute for Fiscal Studies released an interesting study today looking at wages, employment and productivity in the UK. The economic downturn in the UK since the financial crisis has been marked by relatively low unemployment figures compared to past recessions as well as a fall in productivity. The explanation seems to be that in this recession wages have fallen quite substantially in nominal and real terms. According to a TUC study , in some parts of the UK, average real wages have fallen by 10% since 2007. According to the IFS, the average private-sector worker earned £15.10 per hour in real terms in 2009, and this had fallen to £13.60 in 2011. The IFS study is available here and the BBC's coverage is here .

Currency Wars?

The G8 summit is taking place in County Fermanagh on 17th and 18th June. The summit website is here . According to Jeffrey Frankel , Japan's monetary stimulus and the associated sharp fall in the value of the yen will be one of the main items on the summit's agenda. However, he argues that there is not a currency war going on - Japan is simply engaging in expansionary monetary policy in order to stimulate its economy ( article here ).      

Why Is Inflation Low?

After the huge monetary stimulus by the Federal Reserve and other central banks, many economists were predicting high inflation. Based on historical experiences, I was also expecting higher inflation. This hasn't happened. Why? Click here to read a post by Gerald O'Driscoll Jr  of the Cato Institute. He argues that (a) the velocity of  money (i.e., how many times a single £1 is spent in a year) is at historically low levels, which acts as a brake on runaway inflation; (b) CPI does not capture all goods and services in an economy and is therefore an inadequate measure of inflation, and it cannot pick up monetary-stimulated inflation; (c) there has been inflation of or a 'bubble' in long-lived assets such as houses, bonds, and maybe even equity, which are not picked up by CPI data; (d) inflation is popping its head up in countries which peg to or track the dollar e.g., China, Hong Kong, and Brazil. In conclusion, O'Driscoll warns that the West can expect higher con


Daron Acemoglu , the famous economist, has a unique insight into the current civil unrest in Turkey. He is originally from Turkey ('oglu' is the Turkish equivalent of 'Mc' or 'son')  and he is an expert on the rise of democracy. Click here to get his views on the Turkish civil unrest.    

What Makes People Happy?

In a previous post , I looked at the ONS well-being (or happiness) survey which found that Northern Ireland was the happiest region in the UK. The statisticians at the ONS have done further analysis on their survey by looking at the correlations between an individual's well-being or happiness and various other personal circumstances and characteristics. The study is available here   and the Daily Telegraph's coverage is here . Many of their findings are not surprising. Health, employment status, and relationship status all matter for our happiness. Interestingly, given the ongoing debate about redefining marriage, being married has a large effect on well-being / happiness, but having children makes a small contribution to well-being / happiness. Large salaries make a very small contribution to well-being (see the Economist for some evidence which may contradict this).  You can learn more about "happiness economics" from a paper on the topic by Richard Easterli

Top Incomes

The Paris School of Economics is hosting a really nice website on top incomes across 22 economies. The top incomes data stretches from the early twentieth century to the present day. For example, the share of total annual income going to the top 1% of earners in the UK has risen from  6% in the 1970s to close to 14% today.  In other words, the income share of top earners in the UK is back to pre-WWII levels.  A similar pattern exists for Ireland.  You can access the database here . 

Swedish Inequality

Sweden and other Nordic countries are frequently held up as economies to emulate - they manage to combine a substantial social safety net with a dynamic economy. The stereotype is that Sweden can combine economic growth with fairness. However, the recent riots in Stockholm seem to suggest that this is a myth.   Research by Jesper Roine and Daniel Waldenstrom reveals that Sweden's wealth and income inequality is on a par with that of the US and UK. Surprisingly, they also find that the concentration of wealth in Sweden is due much more to inherited wealth than in other economies ( click here ).