Category Archives: Economic fundamentals

How Much Has the IMF Changed in Response to the Global Crisis?

Yves here. For US readers, the posture of the IMF may not seem like a terribly important topic. But most countries in the world face decent prospects of being subject at some point to its tender ministrations. And even those that would seem to be exempt, like Germany, nevertheless also are subject to its impact through how IMF programs affect its export markets and Eurozone arrangements.

The IMF’s policies received a great deal of attention last year as its chief economist, Olivier Blanchard, effectively admitted that austerity did not work. The formulation was that in most cases, fiscal multipliers are greater than one. That means that cutting government deficits, in an effort to lower government debt, is ultimately counterproductive because the economy shrinks even more than the reduction in spending. The result is that the debt to GDP ratio actually gets worse. This outcome is no surprise to anyone who has been paying attention, since the neoliberal experiment has produced the same bad results when administered in Greece, Latvia, Ireland, and Portugal, to name a few.

But what did this rare bout of empiricism mean for the IMF? This post gives that question a hard look.

Exclusive: How Private Debt Strangles Growth, Stokes Financial Crises, and Increases Inequality

Yves here. Richard Vague has been kind enough to allow us to feature an extract from his recent book, The Next Economic Disaster: Why It’s Coming and How to Avoid It. I first met Richard several years ago at the Atlantic Economy Summit. If my memory serves me correctly, he was then taken with the conventional view that debt was a dampener to growth…meaning government debt. The issue of what caused our economic malaise and what to do about it troubled him enough to lead him to make his own study, and he has come to reject the neoliberal view that government debt is problem and must therefore be contained.

This view implies, as many readers have pointed out, that the great lost opportunity of the crisis was restructuring mortgage debt. That would also have allowed housing prices to reset to levels in line with consumer incomes. Vague also mentions a less-widely-commeneted on debt explosion prior to the crisis, that of business debt. One big contributor was an explosion in takeover debt for private equity transactions. Indeed, a lot of experts were concerned about a blowup due to the difficulty of refinancing these deals in the 2012-2014 time horizon. But ZIRP and QE produced enormous hunger among investors for any type of asset with non-trivial yield, so the Fed enabled the deal barons to refinance on the cheap.

Iceland: Bankers Convicted, Unemployment Down

Iceland demonstrates that prosecuting banksters does not hurt, and likely aids in real economy recovery from a financial crisis. But since when has the US been run as if making the real economy work was of paramount concern?

Don Quijones: “Slimlandia,” The Land of Mexican Oligarchs

Yves here. As Don Quijones explains, “In many ways, Mexico is the poster child of neoliberalism.” So take this as a cautionary tale of what rule by our modern oligarchs will look like.

G20 Finance Ministers Reveal Impotence in the Face of Rising Stresses

Yves here. It’s hardly uncommon for big international pow-wows like the G20 to produce grand-sounding statements that when read carefully call for unthreatening, which usually means inconsequential, next steps. But this G20 just past was revealing, in a bad way, about the state of international political economy.

Is Rising Inequality Inevitable?

Yves here. In the wake of increased debates over rising inequality, particularly income inequality, many economists take the point of view that high levels of disparity are a state of nature. But that’s a terribly uninformed way to look at the question. Economies of any complexity are not natural; even modern capitalism comes in many forms. This post looks at developing economies that have done a better job of dampening inequality to see what they have in common.

Wolf Richter: After Mucking up Housing Market, Investors Flee

The housing market is looking wobbly now that big money investors are pulling back. But anyone who was paying attention should not be surprised.

Media Giving Corporate Executives a Free Pass on Their Value Extraction

Executive rentiers and their media lackeys are invoking the canard that they can’t find decent investment opportunities. The truth is that they’ve exhausted the first and second lines of value extraction, that of labor-squeezing and disinvestment, and aren’t prepared to accept the lower but still attractive returns of taking real economy risks.

Ilargi: The Fed Kills Emerging Markets For Profit

The Fed-induced emerging markets party is bound to come to an end. How bad will the hangover be?

Wolf Richter: Fed – Forget “Escape Velocity,” Not Gonna Happen, Ever

As Wolf points out, despite stock touts’ talk of “escape velocity” and other confidence-fairy boosterism, the Fed has been quietly making more and more negative assessments of the economic outlook.

Bill Black: The New York Times’ Coverage of EU Austerity Remains Pathetic

Yves here. Bill Black shellacks a New York Times article that gives a big dose of unadulterated neoliberal propaganda supporting austerity. To give you a sense of the intellectual integrity of this piece, it including citing a Peterson Institute staffer without cluing readers in to the fact that the Institute has what is left of the middle class in its crosshairs.

Black stresses that one of the major lies behind the continuing for more, better hairshirts for long-suffereing Europeans is that the explosion in debt levels in Europe was the result of overly-generous social safety nets. In fact, as in the US, the tremendous rise in government debt levels was the direct result of the crisis. Tax revenues collapsed due to GDP whackage (and the costs continue as GDP is well below potential). And any economist worth their salt will also say that social safety nets ameliorated the severity of the damage, that those automatic stabilizers increased government spending when it was needed most, at the depth of the implosion, and prevented a spiral into a much deeper downturn.

The Deficit Disaster That Never Was

Some older readers might recall that during 2010-2013 politicians and the media manifested great anxiety over the unmanageable level of the deficit and a disastrously high public debt. So how has that movie ended?

Ilargi: Subprime is Back With a Vengeance

Yves here. While it remains an open question as to whether frenzied efforts to push investors even further out on the risk limb will come to fruition, the fact that so many measures are underway looks like an officially-endorsed rerun of early 2007. If the Fed indeed raises rates in the not-insanely-distant future, getting into subprime and other speculative credits is a quick path to losses. But even if the Fed and other central banks remain super-dovish, risky borrowers can and will go tits up independent of interest rates. Credit risk is not the same as interest rate risk, but the inability to get any return for the latter is producing an extreme underpricing of the former.

Matt Stoller: The Solution to ISIS Is the First Amendment

Yves here. This post focuses on ISIS as a symptom of what is wrong with US policy-making. One way of reading it is as an introduction to the role of Saudi Prince Bandar and the sway that the Saudis have had over US policy for decades. This obvious fact is curiously airbushed out of most […]

US Corporate Executives to Workers: Drop Dead

The Washington Post has a story that blandly supports the continued strip mining of the American economy. Of course, in Versailles that the nation’s capitol has become, this lobbyist-and-big-ticket-political-donor supporting point of view no doubt seems entirely logical. The guts of the article: Three years ago, Harvard Business School asked thousands of its graduates, many […]