Duncan’s Economic Blog

Good Economic Reads

Posted in Uncategorized by duncanseconomicblog on September 29, 2009

A few bits and pieces.

Caroline Baum’s Bloomberg article on bond market traders is a must read for anyone who blandly talks of ‘the market’ when discussing gilts/public borrowing.

Willem Buiter has a typically long, detailed and interesting discussion on why QE is failing.

Paul has a great article up on the power of ratings agencies.

Free Thinking Economist on how cutting the deficit can increase the debt.

And Left Foot Forward report Paul Krugman defending deficits and discussing the collapse in investment.

10 Responses

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  1. Paul said, on September 29, 2009 at 9:57 am

    Thanks for this. Giles was just yesterday accusing me (politely) of a certain blandness when I refer to the market, and he is right that I am not well enough up on the intricacies of it, never having worked in (or indeed been to) the City. I’ll read the Bloomberg thing.

  2. duncanseconomicblog said, on September 29, 2009 at 10:00 am

    I liked this quote:

    “Government borrowing may be soaring, but it’s being offset by reduced demand from non-financial corporations. The government can’t crowd anyone out if no one is looking to get in. “

  3. freethinkingeconomist said, on September 29, 2009 at 12:23 pm

    Thanks for the mention Duncan: and yeah, a good quote. To justify the link and illustrate that point with Japan I’ve shoved in Exhibit 15 into the post as well: showing an endless climbling Government debt, interest rates falling. I had a bunch of punters in my previous life sending their bonuses our way every quarter by selling JGB futures.

    I don’t think anyone could accuse you of blandness, Paul. But, yeah, I think it is a mistake to every approach markets asking “what is it thinking?”. It is millions of different opinions – when LastMinute.com hit £5 a share, there would millions of thoughts, most of which were “this is nuts”. But accepting this makes it much harder to construct neat theories based around the word “why”

    By the way, Duncan, I’d be interested in knowing what your view of today’s M4 numbers is. I lack the expertise . . .

    • duncanseconomicblog said, on September 29, 2009 at 1:12 pm

      Giles,

      Looking at today’s release:

      http://www.bankofengland.co.uk/statistics/fm4/2009/aug/FM4.pdf

      I’d argue what really matters is M4L (M4 Lending the asset side of the banks’ balance sheet). The twelve month growth rate of Household’s M4L has fallen to 2.1%. Private non-financials M4L is now falling at -3.1% annually. These two numbers tell us that lending to the private sector real economy is at a standstill.

      On table B, page two, show that this goes beyond bank lending. Even adding back in capital market activity, UK corporate have made a net repayment in the past 4 four months of £5bn. People get over excited by the corporate bond market being buoyant – it certainly is (e.g. £11.2bn of sterling capital raised in June by corporate) but this isn’t enough to offset the repayments to banks.

      Finally take a look at table C. M4 (i.e. money, the liability side of banks’ balance sheets) grew 12.5% in August, but M4L (the lending/asset side) only grew 7.1%. In other words the banks’ are still develeraging their balance sheets and reducing loan-to-deposit ratios. I’d say the key takeaway is not QE is not working – if the intention is defined as increasing lending in the economy.

      We have a fundamental tension here that policy makers aren’t really addressing – do we want banks to de-risk their balance sheets, lower LDRs etc and not lend much more, or not? We can’t have both.

  4. freethinkingeconomist said, on September 29, 2009 at 2:34 pm

    Very useful – thank you. Just to confirm, because of the extra NOT that slipped in there: QE is NOT working, yeah?

    As far as I can see, the Keynesians are right here. Without investment demand, money is just not doing anything. It can’t compell spending on its own.

    • duncanseconomicblog said, on September 30, 2009 at 7:20 am

      QE is not working…

  5. dannyboy said, on September 29, 2009 at 9:21 pm

    “We have a fundamental tension here that policy makers aren’t really addressing – do we want banks to de-risk their balance sheets, lower LDRs etc and not lend much more, or not? We can’t have both.”

    This is a longer term question, but presumably you are aware of tesco’s retail banknig ambitions? What if anything do you think this changes about the medium term picture for lending and banking in the UK?

    Maybe we just need some new banks.

    • duncanseconomicblog said, on September 30, 2009 at 7:21 am

      New banks would change the picture – or recapitalising the old ones to a greater extent than before.

  6. freethinkingeconomist said, on September 30, 2009 at 9:51 am

    That is exactly the view I’ve been stumbling towards in my piece – though reached in a faar more tortuous way. Japan’s example would point that way too. I think somehow:

    less QE
    more commitment to make some of it permanent to boost the programme’s credibility
    use some of it to recapitalise and therefore remove that excuse for no lending
    look more at NGDP future than CPI future, since the latter can be “on target” in a slump

    would be a better prognosis

    I may well ask you nicely to look at a draft if I ever get through this

    • duncanseconomicblog said, on September 30, 2009 at 11:53 am

      Love to have a look.

      Duncanweldon (at) yahoo.co.uk


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