Commentary

I recently had the great fortune to listen to a speech delivered by Mr Yves Mersch, Member of the Executive Board of the European Central Bank. This was in Athens on November 8 at the first Minsky Conference in Greece organized by the Levy Economics Institute. The title of the conference was “The Eurozone crisis, Greece, and the Austerity Experience.” The conference was well attended by the interested public. As is typical of Minsky conferences, annually held in the United States, it brought together academic scholars, financial market practitioners, journalists, as well as policymakers, including Mr. Mersch, whose speech was titled “Intergenerational justice in times of sovereign debt crises” (see here). Mr Mersch played part in the negotiations of the Maastricht Treaty and has served as the Governor of the Central Bank of Luxembourg since its formation in 1998, before joining the ECB’s Executive Board last year. Apart from lauding Greece’s pension reforms as measures that were necessary in view of demographic trends, Mr Mersch hailed Greece’s achievements in closing its fiscal deficit as “remarkable,” describing the Greek austerity experience as a “fiscal adjustment of historic proportions.” That it truly was, and Mr Mersch was keen to emphasize that the “extraordinary efforts” undertaken by the Greek people refuted the naysayers and proved wrong prophetic claims heard in May 2010 that…more

Is the U.S. economy heading towards another bubble? Since last week, the number of commentators on this subject has been growing, from Robert Shiller to Nouriel Roubini (on housing markets). In our first chart we report the Standard & Poor’s 500 stock market index, normalized by a consumer price index to remove the common trend in prices. Our measure has increased by 105.6 percent from its most recent bottom in March 2009. In the previous rally, which started from a bottom value in February 2003, the index increased by only 63 percent before the start of a rapid descent in July 2007. Is a buoyant stock market justified by expected profitability? In the next chart, we report gross saving of non-financial corporations – that is, undistributed profits gross of capital consumption – scaled by GDP, along with gross investment (which includes changes in inventories). All figures are computed from the Integrated Macroeconomic Accounts published by the B.E.A. The chart clearly shows that profits have reached an all-time high at 11.5 percent of GDP, compared to an average of 9 percent over the 1960-2007 period. If current profits are the basis for expected future profitability, our data suggest that the stock market rally is justified. But is this trend stable and sustainable? The chart also shows what we may call an…more

In a recent speech at the Levy Institute conference on “The Eurozone Crisis, Greece, and the Experience of Austerity” held in Athens, Mr. Yves Mersch, a member of the Executive Board and General Council at the ECB, made it clear that the success of the troika plan for the Greek economy requires the current account balance to improve as the public deficit is reduced. In his own words, To facilitate an export-led recovery, this trend [decreasing competitiveness] has to be corrected and there is no way this can be achieved in the short run other than by adjusting prices and costs. I know the difficulties that such adjustment creates and the criticisms that are leveled against it. But we are in a monetary union and this is how adjustment works. Sharing a currency brings considerable microeconomic benefits but it requires that relative prices can adjust to offset shocks. The troika requests for a reduction in costs have been met by Greeks, as our first chart shows. Indeed, nominal wages(1) have fallen by 23 percent from their peak in the first quarter of 2010, and real wages(2) have fallen by 27.8 percent over the same period. While it is true that prices started to fall later than wages, and therefore the improvement in competitiveness has been limited, its impact on exports…more

Dimitri Papadimitriou, in Reuters’ “Great Debate” series: The U.S. needs an export strategy led by research and development, and it needs it now. A serious federal commitment to R&D would help arrest the long-term decline in manufacturing, and return America to its preeminent and competitive positions in high tech. At the same time, increasing sales of these once-key exports abroad would improve our also-declining balance of trade. It’s the best shot the U.S. has to energize its weak economic recovery. R&D investment in products sold in foreign markets would yield a greater contribution to economic growth than any other feasible approach today. It would raise GDP, lower unemployment, and rehabilitate production operations in ways that would reverberate worldwide. … For our R&D/export model, we posited a modest infusion of $160 billion per year — about 1 percent of GDP — until 2016. We saw unemployment fall to less than 5 percent by 2016, compared with CBO forecasts that unemployment will remain over 7 percent. Real GDP growth — instead of hovering around 3.5 percent, by CBO estimates, on the current path — gradually rose to near 5.5 percent by the end of the period. Read it here. The research underlying these proposals and projections can be found in the Levy Institute’s most recent US macroeconomic analysis: “Rescuing the Recovery: Prospects…more

With support from the Ford Foundation, the Levy Institute is accepting applications for the 2014 Hyman P. Minsky Summer Seminar: Levy Institute Blithewood Annandale-on-Hudson, New York June 13–21, 2014 The Levy Institute’s Summer Seminar provides a rigorous discussion of both the theoretical and the applied aspects of Minsky’s economics, with an examination of meaningful prescriptive policies relevant to the current economic and financial crisis. Organized by Jan Kregel, Dimitri B. Papadimitriou, and L. Randall Wray, the Seminar program is geared toward graduate students and those at the beginning of their academic or professional careers. The teaching staff includes well-known economists concentrating on and expanding Minsky’s work. Applications to the Summer Seminar may be made to Susan Howard at the Levy Institute ([email protected]) and should include a current curriculum vitae. Admission to the Seminar includes provision of room and board on the Bard College campus. A limited number of small travel reimbursements of $100 for US fellows and $300 for foreign fellows, respectively, are available to participants. Due to limited space availability, the deadline for applications is March 1, 2014. To get a sense of the range of topics and speakers, here is a look at last year’s schedule, which included a closing lecture by Paul McCulley.

In “America’s misplaced lecture to Germany,” Gideon Rachman ends up offering a singularly misplaced defense of Germany. Quite similar to the typical stories one hears on this matter in Germany itself, Rachman appears to be unaware of how self-contradictory his arguments really are. To begin with, after describing the Federal Reserve’s QE policies as both a vital support to the world economy and an addictive drug, he goes on to identify the markets’ reaction to tapering by the Fed as the “biggest threat to the global economy in the coming year.” Does he suggest here that, once adopted, QE policies can never be reversed without causing market turbulences and that QE policies, therefore, should never have been adopted in the first place? That would beg the question as to what else would have provided that vital support to the world economy which Rachman himself attributes to these very policies. The real issue here is why such overburdening responsibility for supporting the global economy has come to rest on the Federal Reserve’s shoulders. Apparently without seeing the connection, Rachman supplies one reason himself: the “particularly mindless game” of toying with defaulting on the national debt on the part of the US Congress that has accompanied harsh fiscal contraction in the US this year. Another reason is to be seen in the…more

In advance of this week’s Ford–Levy Institute conference in Athens, Greece (Nov. 8–9), Jörg Bibow gave an interview with George Papageorgiou, senior editor of newmoney.gr, on the role German policy has played (and still plays) in generating and exacerbating many of the problems plaguing the eurozone periphery — something Bibow was warning about back in 2005 (see here, for instance). He also addressed where the eurozone needs to go from here, touching on a plan for a Euro Treasury he’ll be discussing at the Athens conference. The English text of the interview follows (Greek version here): You have been critical of German policy. How does it really affect the rest of Europe? In what ways does it cause harm to the peripheral economies? Yes, indeed, German policy bears foremost responsibility for the euro crises and German policy is key to Europe’s future. Germany is Europe’s largest economy. For that reason alone whatever happens in Germany inevitably significantly impacts the eurozone economy. For instance, when Germany prescribed itself an extra dose of wage repression and fiscal austerity in the early 2000s, this had rather fateful consequences for the currency union. For one thing, stagnant domestic demand in Germany constrained its euro partners’ exports to Germany. For another, stagnation in Germany provoked some degree of monetary easing from the ECB, monetary easing…more

A new issue of Accounting, Economics and Law has published a series of articles (open access) on Minsky and banking. In addition to my contribution, you can find some nice pieces by Thorvald Moe, Yuri Bondi, and Robert Boyer. According to Minsky, “A capitalist economy can be described by a set of interrelated balance sheets and income statements”. The assets on a balance sheet are either financial or real, held to yield income or to be sold or pledged. The liabilities represent a prior commitment to make payments on demand, on a specified date, or when some contingency occurs. Assets and liabilities are denominated in the money of account, and the excess of the value of assets over the value of liabilities is counted as nominal net worth. All economic units – households, firms, financial institutions, governments – take positions in assets by issuing liabilities, with margins of safety maintained for protection. One margin of safety is the excess of income expected to be generated by ownership of assets over the payment commitments entailed in the liabilities. Another is net worth – for a given expected income stream, the greater the value of assets relative to liabilities, the greater the margin of safety. And still another is the liquidity of the position: if assets can be sold quickly or pledged…more

Randall Wray and Éric Tymoigne just released a new working paper that rounds up and responds to various critiques of Modern Money Theory (MMT); critiques they organize into five categories: One of the main contributions of Modern Money Theory (MMT) has been to explain why monetarily sovereign governments have a very flexible policy space that is unencumbered by hard financial constraints. Through a detailed analysis of the institutions and practices surrounding the fiscal and monetary operations of the treasury and central bank of many nations, MMT has provided institutional and theoretical insights about the inner workings of economies with monetarily sovereign and nonsovereign governments. MMT has also provided policy insights with respect to financial stability, price stability, and full employment. As one may expect, several authors have been quite critical of MMT. Critiques of MMT can be grouped into five categories: views about the origins of money and the role of taxes in the acceptance of government currency, views about fiscal policy, views about monetary policy, the relevance of MMT conclusions for developing economies, and the validity of the policy recommendations of MMT. This paper addresses the critiques raised using the circuit approach and national accounting identities, and by progressively adding additional economic sectors. You occasionally see MMT loosely described as being “pro-deficit,” but Tymoigne and Wray explain that their…more

The next Minsky conference in the Levy Institute’s international series is taking place in Athens next week, November 8-9. The central theme, as you can probably guess from the location, is the ongoing eurozone crisis. This conference is organized as part of the Levy Institute’s international research agenda and in conjunction with the Ford Foundation Project on Financial Instability, which draws on Hyman Minsky’s extensive work on the structure of financial systems to ensure stability and the role of government in achieving a growing and equitable economy. Among the key topics the conference will address are: the challenges to global growth and employment posed by the continuing eurozone debt crisis; the impact of austerity on output and employment; the ramifications of the credit crunch for economic and financial markets; the larger implications of government deficits and debt crises for US and European economic policies; and central bank independence and financial reform. Keynote speakers will include Már Gudmundsson, governor of the Central Bank of Iceland (“Iceland’s Crisis and Recovery: Are There Lessons for the Eurozone and Its Member Countries?”), Yves Mersch, member of the ECB’s Executive Board and General Council (“Intergenerational Justice in Times of Sovereign Debt Crises”), and Lord Robert Skidelsky, Emeritus Professor of Political Economy at the University of Warwick (“The Experience of Austerity: The UK”). You can find…more

Here’s a piece I wrote with Yolanda Fernandez for the Asian Development Bank: Monetary and Fiscal Operations in the People’s Republic of China: An Alternative View of the Options Available You’ve no doubt read various analyses predicting the impending collapse of the Chinese financial sector, and arguments that China cannot continue to grow at a rapid pace. While we do think that China faces some challenges, we part company with the gloom and doom crowd. What most of them do not understand is that China is a sovereign country that issues its own currency. Affordability is not an issue. China has the fiscal capacity to resolve any financial crisis, and it can “afford” to grow fast if it chooses to do so. Our paper examines the fiscal and monetary policy options available to the PRC as a sovereign currency-issuing nation operating in a dollar standard world. The paper first summarizes a number of issues facing the PRC, including the possibility of slower growth and a number of domestic imbalances. Then, it analyzes current monetary and fiscal policy formation and examines some policy recommendations that have been advanced to deal with current areas of concern. The paper outlines the sovereign currency approach and uses it to analyze those concerns. Against this background, it is recommended that the central government’s fiscal stance…more