By Philip Pilkington
Article of the Week from Fixing the Economists
Sympathetic Post-Keynesian types often ask me what I think of the whole ‘asymmetric information’ paradigm. They’re often struck when I say that I think that its vacuous. After all doesn’t this paradigm undermine the dreaded General Equilibrium theory? Well yes it does but that doesn’t mean that it is in any way substantive. You can’t just lend a paradigm credence because it produces results that overlap with your own.

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In his book Minding the Markets — about which I will be writing more posts the future — David Tuckett provides a very nice summary of George Akerlof’s famous ‘market for lemons’ paper. I actually

By John Mauldin, Thoughts from the Frontline
If you travel as much as I do, you come to value nonstop flights. Connections introduce uncertainty and potential delays, not to mention what often feels like wasted time; but sometimes connections are just unavoidable. But you don’t want them to be too tight. Those five-minute sprints from one concourse to another are never fun. Better to have some breathing room.

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So it is with economic cycles. Rarely do we move directly from boom to bust; but when the shift comes, it can develop quite quickly, even though the transition isn’t usually obvious in real time. As I look at the data and talk to my contacts, I’m beginning to conclude that

By Philip Pilkington
In my previous post I laid out why the Phillips Curve theory of inflation is wrong and why it was misguided to try to rebuild it. The key point I made in that regard was that inflation is a complex, multifaceted historical process and any attempt to reduce it to some abstract timeless law would always end in failure and confusion.

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In this post I hope to address how the problem of inflation should be approached. In doing so I will draw on the excellent and under-read 1983 book by Wynne Godley and Francis Cripps Macroeconomics. This book led to the stock-flow consistent models that were put forward in Godley and Lavoie’s book Monetary Economics. I actually think

By John Mauldin, Thoughts from the Frontline
Fictitious Wall Street villain Gordon Gekko famously declared, “Greed is good.” I think actual Wall Street titans would mostly disagree. They would change one word. Instead of “greed,” they would say, “Growth is good.” That is Wall Street’s real mantra. Growth is the magic elixir we all need.

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The question, if we define growth as good, is how do we measure it? Presently we use gross domestic product, or GDP. But GDP is showing its age in the 21st century. The measure was actually invented in the late 1930s when President Roosevelt needed some way to prove that his policies were working. And at 85 years old, the old formula may be nearing

By Rick Davis, Consumer Metrics Institute
January 26, 2018 – BEA Estimates 4th Quarter 2017 GDP Growth to be 2.54%:
In their first (and preliminary) estimate of the US GDP for the fourth quarter of 2017, the Bureau of Economic Analysis (BEA) reported that the US economy was growing at a +2.54% annual rate, down -0.62% from the prior quarter.

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This is a report of sharp contrasts. Although the headline number is down relative to the prior quarter, this report actually contains the strongest consumer spending growth (+2.58%) since the 2nd quarter of 2016. But offsetting that good news is the worst import contribution (-1.96%) since the 3rd quarter of 2010. And inventories

By Philip Pilkington
Article of the Week by Fixing the Economists
Tom Palley has written a blog post politely requesting that Paul Krugman might give a bit of recognition to non-mainstream contributors to economics. It would be nice to see this happen but I doubt that it will (although Palley is getting a bit of blog play out of it which is nice). Anyway, I note that in the post he links to a discussion he and Krugman had regarding the Phillips Curve.  Before I get to the arguments put forward here let us examine the Phillips Curve in some detail.

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The curve was an empirical relationship that the economist William Phillips found in 1958. Phillips noted that movements in wages and

By John Mauldin, Thoughts from the Frontline
The holidays are fading from memory, and 2018 is off to a good start, economically speaking. Most of the forecasts I’ve read expect a good year – not a blockbuster year or a horrendous one, but a mild pickup that ought to satisfy investors. Even the bears seem less confident than usual.

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The stock market is off to a rip-roaring start. For the first time ever, the Dow Jones Industrial Average has spent an entire quarter above its upper Bollinger band. That is, it’s more than two standard deviations above its 21-day moving average. You can click on the link for more detail. This might be a little technical for some of you, but it does

By Philip Pilkington
Yesterday when I published my post on Krugman and the vulgar Keynesians not understanding the meaning to the term ‘liquidity trap’ I came to realise that many readers — both sympathetic and hostile — do not really understand the Keynesian theory of financial markets. I then realised that this was actually quite understandable given that it is not much discussed today (with some notable exceptions such as Jan Kregel and Minskyians like Randall Wray).

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Some years ago the financial markets were very much so discussed and understood. Key references in this regard are the works of Keynes himself (particularly the Treatise on Money), GLS Shackle, Roy Harrod’s book Money and Joan Robinson’s essay ‘The Rate of Interest’. There are also some more minor works but

By John Mauldin, Thoughts from the Frontline
Only two weeks in and 2018 is already breaking records – mostly in a good way. But that leaves 50 potentially less enjoyable weeks to go. So rather than focus on promising current events, I think I’d better dip back into my annual forecast bag and share a few more highlights with you.

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First, let me mention that you have just two days left to accept your Alpha Society invitation. After January 15, society membership will be closed for at least another year. So if “stop procrastinating” is one of your New Year’s resolutions, here’s your chance to get off to a good start. (Plus, you can try Alpha Society out for 30 days and get a refund if you don’t think it’s a good fit.)
Looking down the road, I think this is going to be Alpha

By Timothy Taylor, Conversable Economist
The digital economy provides a number of services for which the marginal price (given an internet connection) is zero: games like Candy Crush, email, web searches, access to information and entertainment, and many more.

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Because users are not paying an additional price for using these services, this form of economic output doesn’t seem to be captured by conventional economic statistics. Leonard Nakamura, Jon Samuels , and Rachel Soloveichik offer some ways of thinking about the question in in "Measuring the `Free’ Digital Economy within the GDP and Productivity Accounts, written for the Economic Statistics Centre of Excellence, an

By Philip Pilkington
Fixing the Economists Article of the Week
I came across a very amusing piece from Krugman in 2010. The piece is entitled ‘Nobody Understands the Liquidity Trap‘. Actually, Krugman might have a point — if we include him in the ‘everybody’ that does not understand the liquidity trap and thus conclude that he, and all those that listen to him, do not understand the liquidity trap.

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You see Krugman confuses the zero-lower bound for the liquidity trap. But in doing so he completely scrambles the meaning of the term ‘liquidity trap’. Let us first get a feel for meaning of the term ‘liquidity trap’. Here is Keynes in the original. In the General Theory he writes:

By John Mauldin, Thoughts from the Frontline
Greetings from Hong Kong, where the locals are preparing to welcome the new year on February 16. While 2018 is the Year of the Dog on the traditional Chinese calendar, on the nontraditional Mauldin calendar we call it the Year of the Octopus. I don’t know exactly what’s coming, but I’m pretty sure it has more than four limbs.

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In last week’s letter, “Economy on a Roll,” I gave you my own fairly upbeat 2018 forecast. I think the US economy and markets will probably hold up well, thanks to tax cuts and deregulation – assuming the Federal Reserve gets no more hawkish than it already has. That assumption may be a stretch, given the Fed’s

By Philip Pilkington
Fixing the Economists Article of the Week
This is the second part of my criticism of Glasner and Zimmerman’s paper. The first part can be found here and should be read and understood before proceeding with the second part. Glasner and Zimmerman note that Ludwig Lachmann tried to rescue Hayek’s theory by introducing market arbitrage.

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They quote Lachmann thusly:

If there is a multiple of commodity rates, it is evidently possible for the money rate of interest to be lower than some but higher than others. What, then, becomes of monetary equilibrium? . . . It is not difficult, however, to close this particular breach in the Austrian rampart. In a barter economy

By John Mauldin, Thoughts from the Frontline
In addition to popping champagne corks and black-eyed peas (at least in the South) on New Year’s Day, year-end brings something else for economists and portfolio managers: annual forecasts. People want to know what the coming year will bring. I would like to know, too. But since I’m on the other side of your monitor, I must give you my own forecast. Caveat emptor applies.

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I don’t really think of myself as a forecaster. I talk about the future all the time, of course, and I tell you what I think is coming – but whether it will arrive next month, next year, or five years from now is a different question. Timing is hard.
So, when I write

By Richard M. Ebeling, mises.org
When Murray Rothbard’s America’s Great Depression first appeared in print in 1963, the economics profession was still completely dominated by the Keynesian Revolution that began in the 1930s. Rothbard, instead, employed the “Austrian” approach to money and the business cycle to explain the causes for the Great Depression, and to analyze the misguided and counterproductive policies that were followed in the early 1930s, which, in fact, only intensified and prolonged the economic downturn.

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To many of the economists in the early 1960s, Rothbard’s “Austrian” approach seemed out-of-step with the then generally accepted textbook, macroeconomic approach

By Philip Pilkington
Fixing the Economists Article of the Week
David Glasner from over at the blog Uneasy Money has co-written an interesting paper on Sraffa and his critique of the natural rate of interest as it was put forward in Hayek’s business cycle theory. There is a lot that might be written about this paper as I believe that the debate has much contemporary relevance.

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Here, however, I will focus purely on the topic of the paper at hand. Namely, whether Sraffa’s critique of the natural rate of interest was coherent. I will also assume familiarity with the debate as, frankly, I’m too lazy to summarise it and interested people can read the paper which provides a fantastic

By Andres RodrA-guez-Pose and Viola von Berlepsch, Voxeu.org.
 Appeared originally at Voxeu.org 10 November 2017
Research on the economic impact of migration on hosts and the migrants themselves has tended to focus on the short term. This column traces the economic impact of population diversity in the US resulting from the Age of Mass Migration of the late 19th and early 20th centuries. High levels of population fractionalisation have had a strong, positive influence on economic development, while high levels of polarisation have undermined development. Despite a stronger effect on income levels in the first 30 years following the initial migration shock, the relationships are found to be extremely long-lasting.

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By Philip Pilkington
Artice of the Week from Fixing the Econmists
Too often discussions of the relationship between Keynes’ General Theory and the ISLM model focus on John Hicks’ 1937 paper ‘Mr. Keynes and the Classics‘.

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That paper appeared in the April edition of Econometrica, Volume 5, Issue 2. But Roy Harrod had already formulated the ISLM — in half-mathematical, half-verbal form — in the January edition of the same journal, Volume 5, Issue 1. I think that an appraisal of the relationship between the General Theory and the ISLM is far better done taking leave from Harrod’s paper ‘Mr. Keynes and Traditional Theory’ as it will allow us to clearly highlight the differences and

By Rick Davis, Consumer Metrics Institute
December 21, 2017 – BEA Revises 3rd Quarter 2017 GDP Growth Downward Slightly to 3.16% In their third and final estimate of the US GDP for the third quarter of 2017, the Bureau of Economic Analysis (BEA) reported that the US economy was growing at a +3.16% annual rate, down -0.14% from the previous estimate and up +0.10% from the prior quarter.

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All of the revisions to the data could arguably be characterized as merely statistical noise. Certainly none of them are material. The changes from the prior estimate reflect higher consumer goods spending, less spending on consumer services, offsetting minor adjustments to commercial fixed

By John Mauldin, Thoughts from the Frontline
The holidays always prompt us to look both forward and back. Soon you’ll start seeing 2018 forecasts. I’ll review some of them for you and give you my own in the coming weeks. But first, I want to take a look back at 2017 – and do it a little differently.

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In certain circles I’ve been pigeonholed as a “permabear.” That is not correct. I’m probably one of the most optimistic people you will ever meet. I’m confident in the future of humanity, but I also recognize that we must overcome many challenges to get to the future we ultimately want. I am not all that enthusiastic about the future of government. In other words, I try to stay

By Philip Pilkington
A recent post by Lord Keynes inspired me to write up some very general thoughts on the state of mainstream economics. Today, I believe, mainstream economics is completely incoherent. What do I mean by that? Well, basically if you are in the mainstream you can pretty much believe in whatever you want these days.

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Mainstream economics today can be made to say anything. But in being able to do this it says nothing. All the new gimmicks that have been introduced into the mainstream — from asymmetric information to rational expectations — have rendered it a total free-for-all. So, some of the mainstream will tell you that fiscal stimulus will have zero effect on the

By John Mauldin, Thoughts from the Frontline
Almost every weekday, some arm of the US government issues some sort of economic statistic. News media and financial analysts review and report it. Then 99.9% of the adult population, and probably 90% of the financial industry, forget all about it. And they’re probably right to do so.

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The monthly jobs report isn’t like that. Yes, any single month doesn’t tell us much. Yes, the Labor Department’s methodology has some flaws, both major and minor. But imperfect as it is, the jobs report is our best look at the economy’s pulse. Jobs matter in a visceral way to almost all of us, as you know well if you’ve ever lost one. Almost any survey

By Philip Pilkington
Marginalist economic theory tells us that when there is unemployment of capital resources prices should fall. Some marginalists like the New Keynesians and the neo-Keynesians will supplement this by saying that prices can tend to be ‘sticky’. Let us ignore these for a moment and come back to them in a moment. Let us first take the idea that prices should fall when there is unemployed plant and equipment.

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First of all, some theory. The argument is extremely simple: if plant and equipment are unemployed then there is inadequate demand for the goods and services being produced. In marginalist theory firms should respond to this shortfall of demand by cutting

By John Mauldin, Thoughts from the Frontline

Earnings don’t move the overall market; it’s the Federal Reserve Board…. Focus on the central banks and focus on the movement of liquidity…. Most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.– Stan Druckenmiller (hat tip Steve Blumenthal)

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The Federal Reserve will soon have a new chair, assuming the Senate confirms Jerome Powell as Janet Yellen’s successor. Yellen’s departure will reduce the nominally seven-member Board of Governors to only three. That may or may not be a good thing, depending on some other events.
In fact, in talking with some of my Fed-watching friends, it

By Philip Pilkington
With the Rethinking Economics student movement in full swing the topic of curriculum reform is once again on the table. For those of you who read this aericle and are uncomfortable with this: sorry, you’ve already lost that debate, you just haven’t realised it yet. The question is now which direction this curriculum reform will take.

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The Institute for New Economic Thinking (INET) looks set to be the organisation that will build the platforms and generate the content which will be made available to those who are self-interested enough to notice that they will rapidly slip into obscurity if they don’t change with the times. The debate within INET on this topic,

By John Mauldin, Thoughts from the Frontline

“Life invests itself with inevitable conditions, which the unwise seek to dodge, which one and another brags that he does not know, that they do not touch him; but the brag is on his lips, the conditions are in his soul. If he escapes them in one part they attack him in another more vital part. If he has escaped them in form and in the appearance, it is because he has resisted his life and fled from himself, and the retribution is so much death.”– Ralph Waldo Emerson, “Compensation”

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Bonfires are fun to watch, but they eventually burn out. Human folly apparently doesn’t, so we just keep adding to the absurdities. The volume of daily

By Philip Pilkington
Article of the Week from Fixing the Economists
Endogenous money advocates often think that a central bank is required in order to offset increases in government borrowing. The story goes: the central bank targets the overnight interest rate by buying up government securities; if the government issues more debt in the form of securities to increase spending the central bank will soak this debt up to maintain the target interest rate. Thus government spending cannot cause higher interest rates. Rather the interest rate is set by the central bank.

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This is a nice story. I tell it myself sometimes. It is easy to communicate and it usually causes anyone arguing

By John Mauldin, Thoughts from the Frontline

“Vanity of vanities, saith the Preacher, vanity of vanities; all is vanity.”– Ecclesiastes 1:2, King James Version (attributed to King Solomon in his old age)

This week’s article takes a look at the growing number of ridiculous, inane, and otherwise nonsensical absurdities that fill the daily economic headlines. I have gone from the occasional smile to scratching my head now and then to “WTF” moments several times a week.

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Wondering if it was just me, I recently sent an appeal to a what became a large number of my friends and fellow writers and analysts, asking for their graphic examples of this paranormal economic activity. Suffice

From Voxeu.org
— this post authored by Stefania Albanesi, Giacomo De Giorgi and Jaromir Nosal
The Global Crisis narrative has suggested that an expansion of subprime credit was the reason for rising mortgage defaults, leading to the large-scale recession in 2007-09. Taking a closer look at the characteristics of subprime credit holders over the period, this column argues that the growth in mortgage defaults did not occur predominantly amongst subprime credit holders. Instead, it was real estate investors that played a critical role in the rise in mortgage debt, specifically among the middle and the top of the credit score distribution.

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Understanding the fundamental factors behind

by Philip Pilkington
Article of the Week from Fixing the Economists

Confusion of thought and feeling leads to confusion of speech. — John Maynard Keynes

Readers will note that I very rarely discuss DSGE modelling on here. Frankly, I’m not enormously interested. The fad is one in which economists — or, we should rather say: mathematicians with some loose economic training — have come to mistake analogy for literal explanation.

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What do I mean by that? Simply that they have taken certain contingent theoretical statements made by previous generations of economists as Iron-Clad laws and then used these as building blocks to construct ever more Byzantine towers that tell us nothing