Archive for September, 2013

Svensson on Fisher and “Debt Deflation”

September 30, 2013 2 comments

The Riksbank’s loss is the blogosphere’s gain.  If you are not following along already, Lars Svensson has a great post on Fisher and debt deflation, following an earlier VoxEU post on the effect of monetary policy on debt and income. I can’t read Swedish but Google Chrome can.  Here is the translation provided:

A dangerous thing when it comes to debt is what Irving Fisher (1933) called “debt deflation”.  It is usually described as deflation causes the real value of nominal debts are growing.Leverage and debt ratio also increases as the nominal debt is fixed while the nominal value of the assets and nominal disposable income falls. This could damage the economy in that it can lead to bankruptcy, “deleveraging” (savings to reduce debt) and “fire sales” (quick sale) of assets with consequent fall in prices.

But central to the idea of “debt deflation” is not in and of itself that it becomes deflation, i.e. negative inflation. What is important is that the price level will be lower than expected. This means that the real debt, leverage and debt ratios are higher than expected and planned. All probably have not realized that this is something that the Riksbank has caused by overriding objective of price stability and for a long time to pursue a policy that provides an inflation well below target. The Riksbank has therefore caused real household debt, leverage and debt ratios become much higher than the inflation rate remained on target.

This is great stuff.   But one problem which the UK data illustrates perfectly is that the price level can tell us the “wrong” story about real debt burdens, whereas nominal GDP (or nominal wages) lights the way perfectly.

UK Nominal GDP and CPI Level vs Trend.

UK Nominal GDP and CPI Level vs Trend. ONS YBHA , D7BT

Update: Thanks to Svante in the comments for pointing me to a proper English translation.  Lars Christensen also points me to an old post of his on Fisher

Categories: Monetary Policy

Worthwhile Canadian Exports

September 27, 2013 Leave a comment

Growth is weaker than expected?  Clearly that’s fiscal policy.  Growth is much, much stronger than expected… well, let’s not worry about the details.  Chris Giles has a carefully argued debunking of fiscalist revisionism, but I’m here to provide the silly charts.

Carney Effect.

Carney Effect. ECFIN Economic Sentiment Indicator, ONS ABMI

More seriously, the sharp turnaround in the survey indicators since June is quite remarkable, and forecasters certainly were not expecting that earlier in the year.  Supply-side adjustment plus a moderate demand-side boost from easing monetary conditions still seems like a reasonable explanation, but the long wait for the Q3 NGDP figure is going to be painful.

Categories: Data

“Housing Xenophobia” and Other Nonsense

September 26, 2013 3 comments

I’m pissed off this week, and it’s rant time.  Faisal Islam has a post and video on “exporting homes” which is totally daft.  I read a post from Matt Nolan describing “Housing Xenophobia”  in New Zealand just a few months back, and thought it was a good thing that didn’t happen here.  How naive.

Faisal makes the claim in the video that houses built in London and sold to foreigners (eek! foreigners!) are “not functionally part of Britain’s housing stock.”  Yes, yes, really, they are.  Just like the Nissan factory in Sunderland is part of the capital stock available for production in Britain, even though it’s owned by foreigners (eek! foriegners).

Increasing the supply of housing in Britain increases the supply of housing in Britain.  End of story.  This is unequivocally a Good Thing.  That should be common sense; see also Matt Yglesias.  Let us not hear silly claims about how middle-class Malaysian investors are buying London property to let it sit empty.  Give me a break.

Now rant two.  Let us not hear any rubbish about how “putting money into housing” is an “unproductive use of capital”.  If I want to deploy capital improving my own standard of living, or that of somebody else, by building a lovely house, who the hell do you think are telling me what is “productive” and what is not?  Some kind of central planner?  Seriously, screw you too.  If you think building more car factories will be a “productive use of capital” then go right ahead and build yourself a car factory, and good luck to you too.

Rant three, most important rant: It should not be an aspiration of the government to spend money building “affordable housing”.  That is as daft as proposing that the government should spend money building canned spam factories, “affordable food”, because there are lots of poor people who can’t afford to eat.  (I’m sure I stole this analogy from somebody so my apologies.)

If any politician proposed building spam factories (“Plan Spam”… “Help to Eat Spam”?) they would be hounded from office.  But apparently it’s just fine for “progressives” to ensure poor people are stuck with low living standards by building crap, low-quality – uh, sorry – “affordable” – uh, sorry – “social” houses for them.

If you want to improve the quality of the British housing stock get rid of the crazy planning laws.  To deliberately skew housebuilding towards the low end of the market will simply move the average quality of housing lower than it otherwise would be, i.e. it lowers prosperity.  And if you also want poor people to afford more or better housing (or food), then raise their incomes through the tax system, absolutely fine by me.  Confusing the means by which we achieve “better housing” and “lower inequality” is total nonsense.

Final rant: Saying that “rising house prices is bad” is reasoning from a price change.  Because Japan.  Japanese residential real estate prices collapsed by about 50% since 1991.  Was that a “good thing” for the Japanese, did it somehow raise their “real incomes”?  No.  That’s nonsense.  Rising demand for housing in Britain, which is mostly driven by rising incomes, is a another Good Thing.  If you want to say the supply-side is crap, or that demand-side subsidies are crap, just say that.  Don’t talk about changes in price being “bad” or “good”.

Alright, rants over, I feel better now.

Categories: Economics

Relative Price Changes are a Good Thing. Price Controls are Not

September 25, 2013 2 comments

The competition for “worst public policy idea of the year” is heating up.  Osborne’s entry, “Help to Buy”, was striking both for its wrong-headed selection of market (housing, which is suffering exactly because of government intervention), and magnitude (twelve-figure sums of public sector guarantees).  But Miliband’s entries this week are strong contenders; price controls and property confiscation.

Osborne’s “Help to Buy” and Miliband’s price controls are similar, and similarly bad policy, in that they implicitly reject the signals embedded in market price movements.  Osborne thinks house prices are “high” and decides that people need “Help to Buy”, a demand-side subsidy.  Miliband thinks energy prices are “high” and decides that is not “fair” for consumers (he used the phrase “fair deal” in his speech), so we need a supply-side restriction (albeit temporary) in the form of price controls.

In neither case is it possible to believe that policy is being driven by any objective analysis of the markets in question; they are both clearly populist attempts to win votes.  This seems like a worrying trend.  Price movements are part and parcel of how market economies allocate resources; relative price changes are signals to and from consumers and producers about supply and demand.  In rejecting that most basic principle politicians reject one of the most fundamental sources of our prosperity.

Categories: Economics

Paul Tucker’s Credibility Problem

September 24, 2013 2 comments

Paul Tucker is leaving the MPC later in the year.  That’s the good news.  Here’s a quote from his speech today which I cannot resist ridiculing:

It is sometimes suggested that independent central bankers are more averse to inflation than to periods of low growth and increased unemployment.

Gee whiz, Paul, really?  Why could that be?

I hope the past few years have demonstrated that, in fact, it is the credibility of the Bank of England’s commitment to price stability that enabled us to provide such exceptional monetary support to help the recovery.

Oh.  So… during a period with the worst real GDP growth on record, and high unemployment, what you’re saying… as you and your colleagues have done in speech after speech… is that what really matters is the Bank’s “commitment to price stability”?

It is unimaginable that, prior to Bank independence in 1997, any government would have been able to hold the policy rate at effectively zero and make a further monetary injection of £375bn without inflationary expectations – and government financing costs – spiralling out of control.

Inflationary expectations… hmmm… wait.  For some reason I am getting the impression that independent central bankers are more averse to inflation than to periods of low growth and increased unemployment.  But it must be the voices in my head.

(Those three sentences really are placed together in that order in his speech, I’m not making this up.  Tucker also has a delicious reference to his definition of the phrase “escape velocity”, with a footnote referencing his remarks in 2011 to the TSC.  It’s hard to know what he is getting at.)

Taking Stock

September 13, 2013 2 comments

Here’s a quick look at what has happened to the UK data over the summer.

1) Forward-looking indicators: Inflation expectations have been stable and remained relatively high over recent months.  This is good news, particularly given the rise in Sterling we’ve seen.  3% expected RPI is roughly consistent with 2% expected CPI.  (As usual the non-reform of the RPI methodology is an annoying distortion.)

UK RPI Inflation Expectations and Sterling ERI

UK Implied RPI and Sterling ERI.  Source: BoE Sterling Broad ERI, Implied RPI

2) Indicators of current real activity were strong for July and even better for August, with the aggregate PMI hitting an all-time high.  This leaves a little egg on the faces of the supply-side pessimists, in my view; arguments that we should have been raising interest rates because low real growth was the “new normal” are starting to look a bit silly.  But that argument can always turn into one about “unsustainable growth” and bubbles, and will no doubt continue.

ECFin Economic Sentiment versus Real GDP

ECFin Economic Sentiment versus Real GDP. Source: Eurostat ei_bssi_mr_2 , ABMI

3) Labour market.  Official data has only caught up to the May-July period; optimism there in that employment and total hours worked continue to hit record high levels, the latter rising 2.5% year-on-year.  On the other hand the optimism, the claimant count and unemployment rate are falling, but only very slowly.  August survey data looks very strong for the labour market too.

4) The really interesting question: is there a demand-side explanation for a real recovery?  There could be two sources for a real recovery:

a) An adjustment to very slow nominal growth.  Two pieces of supporting evidence here: firstly that nominal hourly wage growth has been pushed down to very low rates.  Secondly that the GVA deflator in Q2 suggested that whole-economy price inflation was negative q/q to Q2.  But neither of these data points are conclusive.  The wage data has been distorted by timing of bonuses against the higher rate tax cut.  And the deflator is particularly unreliable in early estimates.  Here’s the graph of the Eurostat nominal hourly wage data and the ONS estimates, anyway:

Estimates of UK Nominal Hourly Wage Growth

Estimates of UK Nominal Hourly Wage Growth. Source: ONS Table EARN08, Eurostat lc_lci_r2_q

b) An alternative explanation is a recovery in nominal demand growth.  Two main pieces of evidence again here: the rise in equities, the FTSE 250 is up 30% year on year; and the rise in inflation expectations mentioned earlier.  The fact that real activity has apparently turned so sharply around does in itself suggest a demand-side change.

The Q3 nominal GDP data will be of particular interest.

Categories: Data, UK GDP

The Special Liquidity Scheme and the Failure of Creditism

September 13, 2013 Leave a comment

I was sent a piece on bank capital written by Simon Nixon in the WSJ from earlier in the year.  This is Nixon’s description of how the “Special Liquidity Scheme” came about in 2008.

There was an almighty showdown: Mr. King found himself confronted by a powerful coalition including Chancellor of the Exchequer Alistair Darling, top Treasury officials, the Financial Services Authority led by its then-chairmen Adair Turner, and senior members of the BOE’s Court. All demanded that he do something to stem the deepening credit crunch. Much to Mr. King’s fury, Bank of England Deputy Governor Paul Tucker had circulated a paper to top officials at the BOE suggesting the central bank set up a new long-term funding facility that would allow banks to use their illiquid mortgage portfolios as collateral. A concerted effort was made to force Mr. King to agree to the plan. In a night of high drama involving a series of late phone calls, Mr. King relented and the Special Liquidity Scheme was born.

The SLS was arguably the single most successful crisis response deployed in the U.K.

Stop right there Mr. Nixon, I can’t resist this one…

UK Special Liquidity Scheme versus Nominal GDP.

UK Special Liquidity Scheme versus UK Nominal GDP.

The UK’s major foray into creditism co-incided with the worst collapse in aggregate demand on record, before or since.   If that’s success, I’d hate to see what failure looked like.

Categories: Bank of England

Honeymoon Over

September 12, 2013 2 comments

Mark Carney tried to explain Woodfordian monetary policy to some reasonably smart MPs today and he failed completely.  “Train wreck” would be a moderate description of how badly that Select Committee meeting went.

Is the 7% unemployment rate a target? Erm, well, you see…

What will happen if the 2.5% inflation knockout triggers?  Erm, well, you see…

Are higher interest rates a sign of looser or tighter monetary policy?  Erm, well, you see…

Is forward guidance a loosening or a tightening of monetary policy?  Erm, well, you see…

That was an awful public performance and painful to watch.  Carney has an impressive grasp of the UK data, but he was struggling to explain something as simple as the stance of monetary policy when forced to rely on the language of interest rates and “state-contingent guidance”, etc.  I’m sure it would be much simpler if he could stick to money and nominal incomes!

Video here, Heather Stewart has a decent write-up at the Guardian.

British Living Standards are Rising BECAUSE Real Wages are Falling

September 12, 2013 1 comment

A little poetic license there… but I think there is an important point here.

In the long run all that matters is productivity.  Yes, it would be fantastic if Britain can turn into Switzerland.  But Keynesians have a nice turn of phrase about the long run… let’s forget about the long run for a minute.

In the short run, coming out of recession, the biggest difference the government (and I mean you, Carney et al) can make to British “living standards” is to deal with the problem of unemployment and under-employment.  In that short run, the growth of real hourly wages is inversely correlated with rising employment and hours worked.  Hence I think it is reasonable to argue that falling real wages are a good sign that British living standards are rising because it will be a good sign that employment and hours are rising.

And note again that real wages are not real incomes.  Consider a part-timer who goes from 10hrs/week to 20hrs/week at the same time their real hourly wage drops 2%; their real income rises 96%.  And then consider the unemployed person who goes from the dole queue to a job.  The “real hourly wages” data does not capture a change in either person’s “standard of living”.

This inverse correlation is obviously not generally true.  Outside of recessions any supply-side issue which lowers real wages (because productivity falls) is unambiguously bad.  But recessions are special.

I couldn’t find a source for historic UK hourly wages, but I did find a couple of studies which imputed hourly wages from the compensation of employees data in the national accounts divided by total hours worked in the labour market stats.  Here is the 1990s recession; hourly wages are deflated by the GVA deflator, the best measure of whole-economy inflation:

UK Real Hourly Wages in 1990s

UK Real Hourly Wages in 1990s. Source: ONS DTWM , MGRZ, YBUS

Now where do you want to argue that British “living standards” were rising?  When real hourly wages were soaring in 1991, or when real hourly wages were stagnating in 1994/5?

Maybe this argument is uncontroversial.  But if so then why the focus on falling real hourly wages from opponents of current UK macro policy?  That is exactly the wrong focus from the perspective of macro policy.  If the (political) focus is now purely on the supply-side, on productivity, then Osborne is surely right to claim he has won the argument on macro policy, merely because his opponents have abandoned the debate at the first whiff of positive real GDP growth.  Oh, and forget about the unemployed, forget about the labour market… that is the ultimate victory of the inflation hawks.

[Inspired by, and see also: old Sumner posts on real wages in the Great Depression.]

Categories: Inflation, Wages

Real Hourly Wages in Europe

September 10, 2013 6 comments

A follow-up on a post from last month; I managed to replicate the data on House of Commons research on changes in real hourly wages across Europe.  What I wanted to check is whether the UK is an outlier in terms of hours worked.

The research commissioned by Labour looks at changes between 2010Q2 and 2012Q4, so I’ve done the same.  The Eurostat data I’m using has had one quarter of revisions since the HoC report was written, so the results have minor differences; Germany has real wages growing +2% over this period rather than the cited +2.7%.

Real hourly wages are found using nominal hourly labour costs from the Labour Cost Index series, and deflated using the all-items HICP.  This isn’t necessarily the best definition of real hourly wages; using the GDP deflator might be more interesting, but I’ve stuck with the HICP.

The table below compares the change in real hourly wages and the change in actual hours worked from the quarterly national accounts, between 2010Q2 and 2012Q4.  It is sorted by the change in real wages, and I’ve included only countries with population >1m, sorry Malta et al, you are just not that interesting.  The averages for the EU27 and Eurozone are also included.  All figures non-annualized.

Country Change in real
hourly wages
Change in total
hours worked
Portugal -15.9 -9.2
Greece -15.8 -16.8
Spain -8.1 -8.2
United Kingdom -5.5 3.1
Italy -4.3 -0.9
Slovenia -3.5 -4.7
Netherlands -3.4 0.8
European Union (27 countries) -1.9 -0.3
Euro area (17 countries) -1.5 -0.7
Denmark -1.0 -0.9
Belgium 0.3 2.0
Slovakia 0.3 0.1
Lithuania 0.4 -4.2
Finland 0.9 -1.5
France 0.9 0.1
Poland 0.9 -2.2
Romania 1.1 -2.9
Hungary 1.3 3.4
Germany 2.0 4.6
Estonia 3.0 11.8
Czech Republic 3.9 0.7
Latvia 5.2 -3.6
Bulgaria 13.3 -3.9

What does this say?  The most astonishing aspect is surely the collapse of hours worked in Greece, Portugal and Spain.  Remember this data looks at just an 18 month period, and yet hours worked fell nearly 17% in Greece.

Against all that, the UK does look like something of an outlier.  In this group, of countries with falling real hourly wages, only the UK and the Netherlands had rising hours worked.  The UK in fact has the fourth highest rise in total hours worked of the group, after Estonia, Germany and Hungary.

Categories: Data, Inflation, Wages