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Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth by Michael Jacobs, Mariana Mazzucato
3D printing, balance sheet recession, banking crisis, Bernie Sanders, Bretton Woods, business climate, Carmen Reinhart, central bank independence, collaborative economy, complexity theory, conceptual framework, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, decarbonisation, deindustrialization, dematerialisation, Detroit bankruptcy, double entry bookkeeping, Elon Musk, energy security, eurozone crisis, factory automation, facts on the ground, fiat currency, Financial Instability Hypothesis, financial intermediation, forward guidance, full employment, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, Internet of things, investor state dispute settlement, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, low skilled workers, Martin Wolf, Mont Pelerin Society, neoliberal agenda, Network effects, new economy, non-tariff barriers, paradox of thrift, price stability, private sector deleveraging, quantitative easing, QWERTY keyboard, railway mania, rent-seeking, road to serfdom, savings glut, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Steve Jobs, the built environment, The Great Moderation, The Spirit Level, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, trickle-down economics, universal basic income, very high income
Krugman, ‘Deficits saved the world’, New York Times, 15 July 2009, http://krugman.blogs.nytimes.com/2009/07/15/deficits-saved-the-world/ (accessed 4 May 2016). 11 See W. Godley, Money, Finance and National Income Determination: An Integrated Approach, Levy Economic Institute Working Paper No. 167, June 1996. 12 See for example H. Minsky, The Financial Instability Hypothesis, Levy Economics Institute Working Paper No. 74. 13 Richard Koo of Nomura Research has popularised this dynamic as a ‘balance sheet recession’. See R. Koo, ‘The world in balance sheet recession: causes, cure, and politics’, Economic Review, issue 58, http://www.paecon.net/PAEReview/issue58/Koo58.pdf (accessed 4 May 2016). 14 J. M. Keynes, The General Theory of Employment, Interest and Money, London, Macmillan, 1965 . 15 Krugman, ‘Deficits saved the world’. 16 State and local government budgets also moved sharply into deficit, accounting for the additional rise seen in Figure 2.
Historical data on the federal budget is available at http://www.whitehouse.gov/omb/budget/historicals (accessed 4 May 2016). 17 Jan Hatzius of Goldman Sachs and Paul McCulley of PIMCO, the world’s largest bond fund, both relied on Wynne Godley’s sector financial balances framework to help them see the positive role of government deficits in facilitating the deleveraging process. See for example Hatzius’ 2012 interview with the Business Insider: http://www.businessinsider.com/goldmans-jan-hatzius-on-sectoral-balances-2012-12?IR=T (accessed 4 May 2016). 18 M. Wolf, ‘The balance sheet recession in the US’, Financial Times, 19 July 2012, http://blogs.ft.com/martin-wolf-exchange/2012/07/19/the-balance-sheet-recession-in-the-us/ (accessed 4 May 2016). 19 P. McCulley, Global Central Bank Focus: Facts on the Ground, Policy Note 2010/2, Levy Economics Institute of Bard College, 2010, p. 3, http://www.levyinstitute.org/pubs/pn_10_02.pdf (accessed 4 May 2016). 20 L. R. Wray, Understanding Modern Money: The Key to Full Employment and Price Stability, London, Edward Elgar Publishing, 1998. 21 S.
Kelton, ‘Yes, deficit spending adds to private sector assets even with bond sales’, New Economic Perspectives, 2010, http://neweconomicperspectives.org/2010/11/yes-deficit-spending-adds-to-private.html (accessed 4 May 2016). 22 Figures 2 and 3 also depict the foreign sector (grey dashed line), which is part of the non-government sector. The foreign sector may also accumulate net financial assets (NFAs) as a consequence of government deficit spending; however, the point here is to focus on private sector balance sheets. For a full treatment, see W. Mitchell and L. R. Wray, ‘Introduction to monetary and fiscal policy operations’, Chapter 9. 23 As Wolf (‘The balance sheet recession in the US’) notes, ‘the financial balance of the private sector shifted towards surplus by the almost unbelievable cumulative total of 11.2 percent of gross domestic product between the third quarter of 2007 and the second quarter of 2009’. 24 Even those who took a more dove-ish position often emphasised the need to adopt policies aimed at balancing the budget in the medium or longer term, prompting opposition from post-Keynesians.
Andrei Shleifer, asset-backed security, balance sheet recession, bank run, banking crisis, Ben Bernanke: helicopter money, Carmen Reinhart, collapse of Lehman Brothers, debt deflation, Edward Glaeser, en.wikipedia.org, financial innovation, full employment, high net worth, Home mortgage interest deduction, housing crisis, Joseph Schumpeter, Kenneth Rogoff, liquidity trap, Long Term Capital Management, market bubble, Martin Wolf, moral hazard, mortgage debt, paradox of thrift, quantitative easing, Robert Shiller, Robert Shiller, school choice, shareholder value, the payments system, the scientific method, tulip mania, young professional
See Richard Koo, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession (Singapore: John Wiley & Sons [Asia], 2009). 6. See Peter Temin, Did Monetary Forces Cause the Great Depression? (New York: Norton, 1976); and Paul Krugman, “It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap,” Brookings Papers on Economic Activity 2 (1998): 137–205. 7. Richard Koo, “The World in Balance Sheet Recession: What Post-2008 West Can Learn from Japan 1990–2005” (presentation, “Paradigm Lost: Rethinking Economics and Politics” conference, Berlin, April 15, 2012), http://ineteconomics.org/conference/berlin/world-balance-sheet-recession-what-post-2008-west-can-learn-japan-1990-2005. 8. The most cited reference to such helicopter drops of money is Milton Friedman, “The Optimum Quantity of Money,” in The Optimum Quantity of Money and Other Essays (Chicago: Aldine, 1969), 1–50. 9. Ben Bernanke, “Japanese Monetary Policy: A Case of Self-Induced Paralysis” (paper, Princeton University, 1999). 10.
A closely related reason for a pullback in spending after a wealth shock is precautionary savings, as in Christopher Carroll and Miles Kimball, “On the Concavity of the Consumption Function,” Econometrica 64 (1996): 981–92. Christopher Carroll has done a large amount of work exploring how wealth distribution matters for the pullback in spending during recessions. Related here is also the work of Richard Koo on what he calls the “balance sheet recession” in Japan, where indebted firms pull back on investment to deleverage. See Richard Koo, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession (Singapore: John Wiley & Sons [Asia], 2009). 6. See Paul Krugman, “It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap,” Brookings Papers on Economic Activity 2 (1998): 137–205. 7. In theory, cash could have a negative return if the government, or Federal Reserve, taxed it.
Index Admati, Anat, 185 Agarwal, Sumit, 139 AIG, 32–33 Allen, Franklin, 94 American Housing Rescue and Foreclosure Prevention Act, 135–36 American Recovery and Reinvestment Act of 2009, 163 Amromin, Gene, 139 Anenberg, Elliot, 193n7 animal spirits view, 10, 80–81, 83, 113, 196n8 Appelbaum, Binyamin, 147 asset price bubbles, 107–8, 111–13, 149, 164–65. See also housing boom of 2000–2007 asset price collapses, 42–45, 70 austerity measures, 163 auto industry: sales rates in, 5–6; unemployment in, 61–62, 64–65 Bagehot Rule, 124 balance sheet recession, 194n5 bank bailouts, 121–34, 142, 151; FDIC loans in, 124; Federal Reserve programs in, 124–26, 154–57; protection of deposits in, 123–26, 129; protection of stakeholders in, 126–27, 131–34; Troubled Asset Relief Program (TARP) as, 136 bank crises, 7–9, 192n20; bank runs in, 123–26; current-account deficits in, 7–8; government protections in, 92–93, 119–29; household debt in, 8–9; IMF loans in, 92–95; real estate prices in, 7; short-term financing instruments in, 125; Spanish bankruptcy law and, 119–21, 184–85; stakeholders in, 121–23; stress in, 129, 130f.
air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, Bretton Woods, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy
The overall impact of such a crisis, therefore, is some weakening of supply, relative to its pre-crisis trend, but, even more, a weakening of demand relative to the weakened supply. The danger is a prolonged period of what Richard Koo of Nomura Research calls ‘balance-sheet recession’, in which the debt-encumbered private sector either tries, or is forced, to lower its debts – or, at the least, is unwilling or unable to increase them.65 What happened after the crisis to US sectoral balances – the balance between income and spending of households, corporations, the government and foreigners – offers a classic picture of an economy going into such a balance-sheet recession. Foreigners have run a surplus with the US for a long time and continued to do so, on a slightly smaller scale, following the crisis. US households ran a growing financial deficit (or excess of spending over income) up to 2005, as they borrowed ever more against the rising value of their houses.
Germany’s rise was just 0.9 percentage points in the early months of the crisis, but unemployment then fell to well below the pre-crisis rate. Even if the post-crisis performance of these economies was not dreadful by previous standards, the crisis proved painful and enfeebling. Why do financial crises do that? And why did the recovery stall or even go into reverse, in some cases? To answer those questions, we need to understand balance-sheet recessions. THE ECONOMICS OF POST-CRISIS DE-LEVERAGING Big financial crises cause painful recessions. Big financial crises that follow huge credit booms cause particularly painful recessions and long periods of weak growth. Professor Alan Taylor of the University of Virginia, a well-known economic historian, notes that ‘a credit boom and a financial crisis together appear to be a very potent mix that correlates with abnormally severe downward pressures on growth, inflation, credit and investment for long periods’.58 At bottom, there are five things going on in post-crisis economies.
It could have been still bigger. However, what was done halted the immediate panic and then reversed the downswing that was well under way in late 2008 and early 2009. It succeeded in doing so even though the recession was initially as bad as it had been in 1930. Unfortunately, policymakers failed to sustain the policies required to support private-sector de-leveraging and so avoid a prolonged balance-sheet recession. Largely as a result, the recovery proved weak or even withered away altogether in 2011 and 2012. For this unhappy outcome, the Eurozone crisis was partly responsible. It turned out to be the second act of the global financial crisis. It is, accordingly, the subject of the next chapter. 2 The Crisis in the Eurozone Whatever role the markets have played in catalysing the sovereign debt crisis, it is an indisputable fact that excessive state spending has led to unsustainable levels of debt and deficits that now threaten our economic welfare.
Austerity: The History of a Dangerous Idea by Mark Blyth
accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, Black Swan, Bretton Woods, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, deindustrialization, disintermediation, diversification, en.wikipedia.org, ending welfare as we know it, Eugene Fama: efficient market hypothesis, eurozone crisis, financial repression, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, Gini coefficient, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, interest rate swap, invisible hand, Irish property bubble, Joseph Schumpeter, Kenneth Rogoff, liquidationism / Banker’s doctrine / the Treasury view, Long Term Capital Management, market bubble, market clearing, Martin Wolf, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, price stability, quantitative easing, rent-seeking, reserve currency, road to serfdom, savings glut, short selling, structural adjustment programs, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, unorthodox policies, value at risk, Washington Consensus
In such a situation, however, consumers who have taken on a fair amount of debt in the expectation of capital gains in stocks and real estate, and who suddenly find themselves underwater, might not spend all that much—even if they receive a tax cut. To explain this, there is no need to invoke the specter of Swedish consumers watching unlikely bond spreads while fretting about the national debt of one of the most solvent countries in the world. This is hyperbolic neoliberal fantasy looking for a set of supporting econometrics. Simply paying back debt when the economy is tanking, a classic “Balance Sheet Recession” a la Richard Koo, would suffice to explain what’s going on.129 That consumption didn’t rise is not a surprise unless you frame the problem in this absurdly counterintuitive way. That it stayed constant is the evidence for a common or garden stimulus effect—it didn’t fall despite the bust. It should have fallen further, but didn’t, because the tax cuts worked.130 In sum, none of the commonly referred to cases in this literature support the contentions made about them, especially the role of expectations in producing expansions by cutting.
NBER working paper 5322, Cambridge, MA, November 1995. 119. Ibid., 3. 120. Ibid., 19. 121. Ibid., 20. 122. Ibid., 21. 123. Ibid., 21–22. 124. Ibid., 23. 125. Ibid., 24. 126. Ibid., 29. The word “laxitude” is theirs. 127. Peter Englund, “The Swedish Banking Crisis: Roots and Consequences” Oxford Review of Economic Policy 15, 3 (1999): 89. 128. Ibid., 94. 129. Richard Koo, “The World in Balance Sheet Recession,” Real-World Economics Review 58 (2011): 19–37. 130. Roberto Perotti’s discussion of Sweden in “The ‘Austerity Myth’” is a vastly superior account of the Swedish experience that concludes that what made the difference wasn’t expectations—it was exports. See especially, 37–41. 131. Arjun Jayadev and Mike Konczal, “The Boom Not the Slump: The Right Time for Austerity.” The Roosevelt Institute, August 23, 2010.
., 144 Kaupthing, 237 Keynes, John Maynard, 117, 119, 225 and Germany in 1940, 196 “Can Lloyd George Do It?”, 123, 124 General Theory, 126, 127, 145 in Germany, 195 in Ireland, 208 Keynesian economics, ix, 16, 39, 54–56, 122, 137, 140–141, 149 See also Phillips curve on austerity, 97–98, 101, 125–131 “paradox of thrift”, 8 rediscovery of, 221 Kinsella, Stephen, 61, 208 Kirkman, Geoffrey, ix Kirshner, Jonathan, 202 Koo, Richard “Balance Sheet Recession”, 211 Konczal, Mike, 212, 213 Krugman, Paul, 11, 55, 165, 207 and the euro, 78 Krups, 132 Kuronuma, Yuji, 197 Kwak, James, 11 Kydland, Finn, 157 Lagarde, Christine, 218 Landsbanki, 237 “Large Changes in Fiscal Policy: Taxes versus Spending” (Alesina and Ardagna), 173, 212 Latvia austerity in, 18, 103, 179, 216–226, 217 fig. 6.1, 221 Laval, Pierre, 202 Law, John and the national debt of France, 114 Lehman Brothers, 25, 29 leverage, 32 and banking, 25, 26, 32 of European banks, 89 ratios of, 48 liberalism, 98–101 See also neoliberalism liquidationism, 101, 119–122, 204 liquidity support, 45 List, Friedrich, 134 Lithuania austerity in, 18, 103, 179, 216–226, 217 fig. 6.1 Lloyd George, David “We Can Conquer Unemployment”, 123, 124 Lo, Andrew, 22 Locke, John, 17, 100–101 and austerity, 114–115 and the creation of the market, 105–106 as an economic revolutionary, 104–105 on taxes, 106 relationship between the market and the state, 115–122 Second Treatise of Government, 104 Long Term Capital Management.
accounting loophole / creative accounting, anti-communist, Asian financial crisis, asset-backed security, Atahualpa, balance sheet recession, bank run, banking crisis, Big bang: deregulation of the City of London, Bretton Woods, British Empire, California gold rush, capital controls, Carmen Reinhart, central bank independence, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, Deng Xiaoping, discovery of the americas, Etonian, eurozone crisis, fiat currency, financial innovation, floating exchange rates, Francisco Pizarro, full employment, German hyperinflation, hiring and firing, income inequality, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, market bubble, money: store of value / unit of account / medium of exchange, moral hazard, new economy, oil shock, Plutocrats, plutocrats, Ponzi scheme, price mechanism, quantitative easing, rolodex, Ronald Reagan, South Sea Bubble, the market place, The Wealth of Nations by Adam Smith, too big to fail, War on Poverty, Yom Kippur War
He accurately identified and described the phenomenon which they explained in terms of the contraction of the money supply. The ‘catastrophic fall in the money value not only of commodities but of practically every kind of asset’ had been an ‘obvious’ immediate cause of the financial panic. In the modern jargon beloved of today’s economists and journalists, Keynes initially identified the Great Depression as a phenomenon akin to a ‘balance sheet recession’. He continued his assessment that the ‘assets of banks in very many countries – perhaps in all countries with the probable exception of Great Britain – are no longer equal, conservatively valued, to their liabilities to their depositors’. This indebtedness, in Keynes’s analysis, was widespread in the economy, involving both individuals and governments in the whirlpool of insolvency: ‘Debtors of all kinds no longer have assets equal in value to their debts.
Index accountancy, 87 Acheson, Dean, 139 Ackley, Gardner, 204–5 Adams, Brooks, 61 Adams, John, 41 Addison, Lord, 150 Adenauer, Konrad, 182, 186–7 Afghanistan Soviet invasion, 227, 237 US invasion, 310, 321, 350 Aislabie, John, 35, 37 Akins, James, 224 Alsace-Lorraine, 120 Amato, Giuliano, 270 American Civil War, 50, 70–6, 80, 109, 135, 190, 214, 219, 333 American colonies and paper money, 5, 41–3, 46 and taxation, 39–40, 103 American Declaration of Independence, 41 American Revolution, 3, 6, 40–2, 50 ‘American System’, 70 American War of Independence, 40–3, 45, 66–7 ‘American Way of Life’, 153, 166 Amsterdam, 25, 28, 36 Andreotti, Giulio, 275 Anglo-American loan, 155–8, 160, 174, 179 Anglo-Egyptian Bank, 89 Anglo-Mexican Mining Association, 56 Annan, Lord, 172 Antwerp, 20, 22 ‘Spanish fury’, 12 Archivo General de Indias, 19 Argentina, 84–5 army, payments to, 26 Asian financial crisis, 289–93, 296 ‘assignats’, 5, 45–8, 50 Atahualpa, 15–17 atomic bombs, 153, 192 Attlee, Clement, 175 Attwood, Thomas, 54 austerity, 342–3, 356 auto manufacturers, 315 autobahns, 133 Aztecs, 13, 22 Bagehot, Walter, 62–5, 79, 99, 127, 164, 170 ‘bailouts’, 329 Baker, Howard, 250 ‘balance sheet recessions’, 129 balanced budgets, commitment to, 6–7, 234, 245, 296, 358 Japan and, 193–4 US and, 162–3, 168–70, 202–4, 207, 209, 333 Bancor, 140, 142 Bank Act, 59, 61, 64 bank bailouts, 331–3 bank failures, 56, 62–5, 127 Bank of Amsterdam, 28, 30 Bank of England Bagehot and, 64–5 bankruptcy of serving Governors, 57–8, 65 and Barings crisis, 85 compared with Bank of Japan, 195–6 conversion of dollar holdings, 217–18 conversion of government debt, 34 and devaluation, 178–81 election of directors, 64–5 and ERM departure, 270–2 establishment of, 3, 24–5, 28 and Gold Pool, 212 gold reserves, 85, 90, 92 as lender of last resort, 49 nationalization of, 171, 178 and outbreak of First World War, 92, 144 quantitative easing, 342–3 resumption of gold payments, 50–4 sole issuer of paper money, 59–60 and South Sea Bubble, 35 suspension of gold payments, 3, 48–50, 53, 61, 144 Bank of France, 48, 85, 272 Bank of Japan, 195–7, 199–200 Bank of Japan, 289 bank runs, 290 Bankers Trust, 121 banking regulation, 351 ‘Banking School’, 64 banking union, proposed European, 351 banks, Japanese, 195–6, 199–200 Banque Générale, 30, 33 Barclays Bank, 82 Baring, Sir Francis, 49–50, 79 Barings Bank, 49, 83–5, 91 Barnes, Fred, 311–12 Bear Stearns, 328 Beck, Sir Justus, 37 Belgium, 174, 280 Bell, Clive, 91 Berlin, Isaiah, 233 Berlin, post-war, 184–6 Berlin stock market, 122 Bernanke, Ben, 126–7, 327, 343 Bernstein, Edward, 139 Bethlehem Steel Corporation, 106–7 Bevin, Ernest, 183 Biddle, Nicholas, 68 ‘big government conservatism’, 311–12, 321 Bild, 275 ‘bimetallism’, 77 Birmingham manufactures, 50 Bischoffsheim and Goldschmidt, 89 Bizet, Georges, 19 ‘Black Friday’, 76, 259 Blackburn, Robin, 325 Blinder, Alan S., 304 Blodgett, Ralph, 160–1 Bodin, Jean, 20–1 Boehner, John, 349 Bolles, Albert, 42 Bonar Law, Andrew, 109 bond market, growth of, 317 bondholders, 52–3, 71–2, 172 Boothby, Robert, 141–2, 149 Bovard, James, 310 Bowie Bonds, 324–5 Bracegirdle, Anne, 27 ‘Bradburies’, 92 Brady, Nick, 269 Brand, Robert, 109 Brandon, Henry, 219–20 Brazil, 350 Bretton Woods Agreement, 2, 4, 138–5, 149–50, 155–6, 158–60, 216, 351 collapse of, 217, 219, 226, 234, 299, 356, 359 and dollar link to gold, 140–4, 149–50, 167–70, 208–12, 250–1 and European monetary union, 263, 273 and exchange rates, 140–4, 149–50 and ‘fundamental disequilibrium’, 140, 144 and Japan, 197, 200–1 Bridges, Sir Edward, 145, 174–5, 179 Bright, John, 246 Britain bubble of 1825, 54–7, 61 decline in world status, 145, 147, 176, 181 deflation, 54–5, 115 departure from gold standard, 129, 131–2, 206 Edwardian complacency, 82–3 ERM entry and departure, 266–72 and European monetary union, 263–4 First World War finance, 102–5, 108–9 food rationing, 182 gold reserves, 167, 227 move to paper money, 48–51, 53–4, 135 national debt, 6, 84, 93, 105, 108–9, 147–8, 295, 341–2, 352, 355 overseas investments, 101, 109, 171 overseas loans, 105, 107–8 PSBR, 244 quantitative easing, 342–3 return to gold standard, 109, 111–15, 118–19, 123, 142–3, 181 suspension of gold standard, 92–3, 98, 107–8, 144 war debt, 144–5 British Commonwealth, 156, 176 Brown, Gordon, 331–3, 351 Bryan, William Jennings, 77, 107 Buchanan, Patrick, 285–6 Buenos Ayres Water Works Company, 85 Bundesbank, 187, 264, 266–7, 270, 272–3 Burke, Edmund, 5, 45, 48–9 Burns, Arthur F., 215–16, 218, 233, 235, 239–41 Burns, Terry, 271 Bush, George H.
The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse by Mohamed A. El-Erian
Airbnb, balance sheet recession, bank run, barriers to entry, Bretton Woods, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, collapse of Lehman Brothers, corporate governance, currency peg, Erik Brynjolfsson, eurozone crisis, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, Flash crash, forward guidance, friendly fire, full employment, future of work, Hyman Minsky, If something cannot go on forever, it will stop, income inequality, inflation targeting, Jeff Bezos, Kenneth Rogoff, Khan Academy, liquidity trap, Martin Wolf, megacity, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, oil shale / tar sands, price stability, principal–agent problem, quantitative easing, risk tolerance, risk-adjusted returns, risk/return, Second Machine Age, secular stagnation, sharing economy, sovereign wealth fund, The Great Moderation, The Wisdom of Crowds, too big to fail, University of East Anglia, yield curve
Six months earlier, Christine Lagarde, the head of the International Monetary Fund and former French finance minister, decided to use a more down-to-earth label. During presentations to the annual meetings of the IMF and World Bank in Washington, D.C., she referred to the new-normal phenomenon as the “new mediocre.”10 However one labels it, various explanations have been put forward for this unusual and worrisome phenomenon—from the difficulties of escaping a liquidity trap and the challenging aspects of balance sheet recessions to a change in productivity trends, lack of infrastructure investment, the effects of debt overhangs, demography, and “the race against the machines.” These are all factors that, first, hold actual growth below the potential of the economy, and second, act to pull down future potential growth. There have also been attempts to formalize some of these drivers via comprehensive analytical models of secular stagnation, including by Gauti Eggertsson and Neil Mehrota, who have proposed an insightful New Keynesian overlapping-generations model.11 Drawing on the insights of Alvin Hansen, the distinguished American economist, these two economists illustrate why conventional self-correcting mechanisms can fail in driving a proper recovery.12 It essentially has to do with an oversupply of savings that results from a permanent deleveraging shock, slower population, and an increase in inequality.
Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen
Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, Bernie Madoff, Black Swan, Bretton Woods, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, George Akerlof, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, interest rate swap, invisible hand, Kenneth Rogoff, laissez-faire capitalism, law of one price, Long Term Capital Management, loss aversion, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, New Journalism, oil shock, p-value, passive investing, performance metric, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, purchasing power parity, quantitative easing, quantitative trading / quantitative ﬁnance, random walk, reserve currency, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, Robert Shiller, savings glut, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, systematic trading, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond
The signal worked again with the 1989 and 2000 inversions and even with the inversion in the fourth quarter of 2005 and the first quarter of 2006; however, the lag from the last inversion to the beginning of the recession in December 2007 was abnormally long. This empirical relation may be stronger when Fed tightening causes recessions and Fed easing leads the recovery, typical features of postwar business cycles. The story may be different in balance sheet recessions caused by financial de-leveraging, as in the 1930s and 2008, where the Fed has less power to affect the economy. Not surprisingly, many firms have developed composite financial conditions indices that go beyond the monetary policy stance. Such indices have been superior predictors of real activity during the past decade. I should also add that the zero interest rate boundary (nominal rates cannot fall below zero or investors prefer their mattresses to banks) complicates yield curve analysis, including the relation between curve steepness and economic growth prospects.
One exception is that postwar inflation rates have been higher in contractions than in expansions (see Figure 17.3). Expected inflation and ex ante real bond yield have not exhibited much cyclicality. 26.2 TYPICAL BEHAVIOR OF REALIZED RETURNS AND EX ANTE INDICATORS ACROSS DIFFERENT ECONOMIC REGIMES Business cycles differ in their depth and duration. The most important contrast is between typical post-World War II recessions, arguably caused by Fed tightening, and balance sheet recessions, caused by de-leveraging after financial excesses (as in the 1930s and 2000s); the latter are more severe. It is also interesting to observe how the cyclical growth environment intersects with other key drivers of asset returns, such as inflation and volatility. I create three composite dummy series—real growth, inflation, and volatility—and document average realized asset returns and proxies for ex ante returns in relevant data subsets.
back-to-the-land, balance sheet recession, bank run, banking crisis, Berlin Wall, capital controls, centre right, citizen journalism, collapse of Lehman Brothers, collective bargaining, credit crunch, Credit Default Swap, currency manipulation / currency intervention, currency peg, eurozone crisis, Fall of the Berlin Wall, floating exchange rates, Francis Fukuyama: the end of history, full employment, ghettoisation, illegal immigration, informal economy, land tenure, low skilled workers, means of production, megacity, Mohammed Bouazizi, Naomi Klein, Network effects, New Journalism, Occupy movement, price stability, quantitative easing, race to the bottom, rising living standards, short selling, Slavoj Žižek, Stewart Brand, strikebreaker, union organizing, We are the 99%, Whole Earth Catalog, WikiLeaks, Winter of Discontent, women in the workforce, working poor, working-age population, young professional
Pessimism of the intellect leads you to expect them to be episodes of reaction: a police-led coup in Greece, where democracy is already constrained; a suppression of the secular, liberal and leftist forces in Egypt; an intelligence-led bust up of the Occupy movement in America; and for good measure a war—probably with Iran. But, as I argued in the first edition of this book, there is one powerful factor militating against a return to stability and order: the economy. Europe’s great slide backwards, beginning in October 2011, as the G20 summit at Cannes ended in paralysis, has dragged the world economy backwards. In a balance-sheet recession, where recovery is impaired by overhanging debts, all policy can do is to keep the patient alive. Sustained recovery can only begin when the debt mountains are diminished—either by inflation, currency wars or aggressive defaults. In turn, each of these shatters the basis of the old economic order: inflation wipes out the savings of the salaried workforce and the middle class; currency wars trigger the break-up of globalization; default—by states, banks and individuals—reduces parts of the finance system to rubble.
Paper Promises by Philip Coggan
accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, joint-stock company, Kenneth Rogoff, labour market flexibility, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, Plutocrats, plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce
As Richard Koo points out in his book, The Holy Grail of Macro Economics: Lessons From Japan’s Great Recession,11 economists had previously thought that if you cut interest rates low enough, people would always borrow. With rates at 0.5 per cent, businesses would surely be able to find profitable projects that earned more. But Japan showed that was not necessarily the case. In Koo’s view, Japan suffered a balance-sheet recession, in which companies found that their assets were worth less than their debts. The last thing they wanted was to borrow any more. Instead, low interest rates simply made it easier for them to service, and eventually reduce, their debts. Japan is also an example of an ageing society, one where the retired cohort is growing faster than the working population, and where the overall population is starting to shrink.
Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, British Empire, capital controls, carbon footprint, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, ghettoisation, global rebalancing, global reserve currency, hiring and firing, inflation targeting, Irish property bubble, Just-in-time delivery, labour market flexibility, London Whale, Long Term Capital Management, margin call, market clearing, megacity, Mikhail Gorbachev, mini-job, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative ﬁnance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, rising living standards, Ronald Reagan, savings glut, shareholder value, sovereign wealth fund, The Chicago School, the payments system, too big to fail, trade route, transaction costs, two tier labour market, unorthodox policies, uranium enrichment, urban planning, value at risk, working-age population
Those who say Britain should ease off on dealing with its debt, I think, are now on the margins of the debate.’ Mr Osborne made this remark at a time when his party had slumped in the polls after the disastrous 2012 Budget following the scrapping of the 50p tax rate. The poor performance of the economy, he said, was all down to the overhang of debt in the private sector, and the drawn-out ‘balance sheet recession’ that followed. So why did he follow the advice of his forecasters that the economy would be enjoying strong growth through this time? Britain was enduring the worst recovery in GDP terms on record. All of its main economic counterparts had regained the ground lost in the recession with ‘V-shaped’ recoveries. Britain’s recovery was not quite a sluggish ‘L-shape’, but had been a sunlounger-shape with a flattening footrest since 2010.