Wolf and Rogoff

Ken Rogoff reviews Martin Wolf's The Shifts and Shocks


Darryl FKA Ron's history:

[BIG TIME!

The end of Bretton-Woods is generally considered to have been the end of US dollar convertibility (into precious metals) and the establishment of the US dollar as the global reserve currency upon which to anchor exchange rates, trade reserves, and trading prices. Even OPEC nationalization tipped its hat to the US dollar as the global price tag.]

http://en.wikipedia.org/wiki/Bretton_Woods_system

...On 15 August 1971, the United States unilaterally terminated convertibility of the US dollar to gold, effectively bringing the Bretton Woods system to an end and rendering the dollar a fiat currency.[1] This action, referred to as the Nixon shock, created the situation in which the United States dollar became a reserve currency used by many states. At the same time, many fixed currencies (such as the pound sterling, for example), also became free-floating...

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[Meantime you had commercial banks going inter-state which broke up some of the relationships between local banks and traditional constituents in agriculture and small business when those local banks were bought. MOstly though it just positioned commercial banking for the post Glass-Steagal world of the current century, a lamb being fattened for later slaughter.

My story of the new finger on the scale of capital gains preference in 1954 is one of corporate and private equity leverage upon which investment banks grew their more speculative bond markets for buyouts and takeover financing. Schumpeter's argument against competition won the day for firm consolidation AND investment banks. Fast forwards to the end of first Bretton Woods and then the Cold War and the hegemony of multi-national corporations allied with major investment banks all resting on the shoulders of Uncle Sam's imperial dollar is a feat of global conquest that would have made Ghenghis Khan blush.]

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http://en.wikipedia.org/wiki/Nationalization_of_oil_supplies

Early nationalizations

Prior to 1970, there were ten countries that nationalized oil production: the Soviet Union in 1918, Bolivia in 1937 and 1969, Mexico in 1938, Iran in 1951, Iraq in 1961, Burma and Egypt in 1962, Argentina in 1963, Indonesia in 1963, and Peru in 1968. Although these countries were nationalized by 1971, all of the “important” industries that existed in developing countries were still held by foreign firms. In addition, only Mexico and Iran were significant exporters at the time of nationalization...

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[And then all hell broke loose. Oil shortages got us rising oil prices and by the time it all settled out global finance had its claws deep into crude. What Reagan and Thatcher did is make a narrative of all this or maybe just the backup band to Milton Fridman's narrative of all this that blame it on public spending and deficits instead of an imperialistic dollar in the hands of multinational corporations and investment banks taking advantage of financialization and globalization. Autos and steel were among the first to fall in the US because their managements were the most over-confident and unprepared to deal with change. BOth failed modernize, both in production and in marktet focus.]

The reason it is so difficult to accept that our problems originate from Ike and Nixon instead of Ronnie Rayguns is that such a narrative would not give our feeling of intellectual superiority and moral self-righteous a leg to stand on.

Rayguns was so blatantly contemptuous of liberalism that it must have been his fault. THat is like thinking that a psychopath has no guile and can easily be picked out of a crowd. It is not the guy that spits in your face that catches you unawares, but the one that puts the knife in your back while patting you on the shoulder.

Clinton probably did more to roll back the New Deal than Reagan did what with Welfare "reform" (or was that deform) and financial deregulation. Reagan screwed unions, but he was not their first time, and his recession ushered in the Great Moderation, which fathered contemporary secular stagnation. Mergers accelerated under Reagan era anti-trust "enforcement." But Reagans foulest contribution and legacy was less about legislation or administration than it was the Alfred E. Newman "Whot, me worry" attitude of the people regarding their own economic affairs. THe tonic he sold to ward off the nanny state was the individualistic patriarchal state. The public bought it and ate it up. "I got mine and screw everyone else" became the new pledge of disallegiance. Ronnie's start was as a PR man and a pitch man and he had gotten pretty good at it.

macro

The entirely predictable recession by Simon Wren-Lewis

How did America's austerity beginning in 2011 compare? How did QE compenstate?

The Dismal Science 'Seven Bad Ideas,' by Jeff Madrick reviewed by Paul Krugman

Kondratiev wave

Kondratiev wave

History rhymes.

http://www.youtube.com/watch?v=3_XswHm514w

economic history

MARX, ROSTOW, KUZNETS, GERSHENKRON: SEPTEMBER 9, 2007 by DeLong

WAS THE WORLD ECONOMY A LOW-SHOCK SYSTEM FROM 1984-2007?: MY CONFUSED THOUGHTS AS OF 2003: NOT-LIVE FROM THE JACKSON LAKE, WY, LODGE CXIX: MARCH 14, 2014 by DeLong

The founding of the Federal Reserve brought the possibility of an elastic currency, and of avoiding the great liquidity catastrophes that afflicted the U.S. in the late nineteenth century. The silver-agitation crises of the 1890s, the great crash of 1873 when British investors grew nervous about the "crony capitalism" of America (a crisis with remarkable similarities to the 1997-1998 East Asian crisis), the Panic of 1907 (mitigated by J.P. Morgan's getting the New York Clearing House to expand the effective money supply via printing Clearing House Loan Certificates, and then cramming them down the throats by telling banks that they would incur his permanent displeasure if they did not accept them as valid and liquid instruments). 

...

Second, let me underscore Antonio Fraga's point. Any interpretation of recent events that points to a smaller magnitude of shocks to the world economy has to explain why things have looked so different from a developing-country standpoint. Looking back at my career, I see many local analytical low points. But my personal global analytical nadir came in early 1994, when I wrote a memo for my Treasury boss saying that yes, the Bank of Mexico's policy was inappropriate and overstimulative, but that the magnitude of the policy mistake was small and there was no reason to expect it to generate a serious problem.

economic history

266 And All That by Krugman

Ah, some of the comments on my post about cynical lack of realism happen to illustrate a favorite observation of mine: the extent to which people who demand that we learn the lessons of history tend to rely on historical episodes in which we have very little idea of what really happened.

Thus, they’ll tell us to ignore the extensive evidence from the past century that fiat currencies needn’t lead to runaway inflation — instead, look at how currency debasement led to the fall of Rome!

Or, maybe, how the fall of Rome led to currency debasement?

The thing is, we have no data and not even that much informal evidence on the economy of ancient Rome. We do have informed speculation: Peter Temin had a lovely paper in the JEP (and a book I haven’t read yet) on the prosperity of the Augustan empire, which he estimates was comparable to late 17th-century Europe. All of that fell apart in the third century:

Around the start of the third century CE, the early Roman Empire came to an end under the pressure of a number of problems: several emperors who were exceptionally autocratic and excessive and a series of revolts by the army which in turn led to Rome being ruled by a series of short-term emperors.14 The disruption manifested itself in many ways, including increased inflation in the third century CE that is visible to us through debased coinage and occasional price quotations.Inflation was less than 1 percent in the first and second centuries CE, but prices doubled after the Antonine plague of the late second century and doubled again soon thereafter. The denarius began to be progressively debased at this same time.

So currency debasement can ruin your whole day — as long as it’s accompanied by civil war and plague. This is actually the same pattern as modern hyperinflations, which have always followed major political disruptions, like the collapse of the Central Powers at the end of World War II or the breakup of the Soviet Union.

But isn’t it odd that people prefer the largely undocumented distant past to the far better documented recent past? Why? My guess is that it’s precisely the vagueness that attracts them, because it’s so much easier to project your prejudices onto the scattered information available.

Inflation Lessons From Syria's Civil War—Hyperinflation is Never a Monetary Phenomenon by Yglesias

Mark Thoma’s classic crack — “I’ve learned that new economic thinking means reading old books”

We don't need new ideas, we need "old" ideas.

New Thinking and Old Books Revisited by Krugman

I learn from Francesco Saraceno that some people are attacking me for, as they see it, defending an economic orthodoxy that has failed. It’s kind of an odd place to find myself, given how critical I’ve been of the way the economics profession has dealt with the crisis. But it’s not entirely unfair: I am quite skeptical of people whose response to the sorry state of affairs is to declare that what we need is a whole new field.

Why my skepticism? I’m all for new ideas that add to our understanding. But ideas like that aren’t easy to come by! Mark Thoma’s classic crack — “I’ve learned that new economic thinking means reading old books” — has a serious point to it. We’ve had a couple of centuries of economic thought at this point, and quite a few smart people doing the thinking. It’s possible to come up with truly new concepts and approaches, but it takes a lot more than good intentions and casual observation to get there.

So, for example, what do I say when I read something like this from someone who apparently considers himself a bold rebel against orthodoxy?

“Rational thinking is an important aspect of human nature, but we have imagination, we have ambition, we have irrational fear, we are swayed by other people, we get indoctrinated and we get influenced by advertising,” he says. “Even if we are actually rational, leaving it to the market may produce collectively irrational outcomes. So when a bubble develops it is rational for individuals to keep inflating the bubble, thinking that they can pull out at the last minute and make a lot of money. But collectively speaking . . . ”

My answer, to put it in technical terms, is “Well, duh.” Maybe grad students at some departments, who are several generations into the law of diminishing disciples, really don’t know that rational behavior is at best a useful fiction, that markets aren’t perfect, etc, etc. But does this come as news to Robert Shiller? To Ben Bernanke? To Janet Yellen? To Larry Summers? Would it have come as news to Irving Fisher or Walter Bagehot?

The question is what you do with this insight.

There is definitely a faction within economics that considers it taboo to introduce anything into its analysis that isn’t grounded in rational behavior and market equilibrium. But what I do, and what everyone I’ve just named plus many others does, is a more modest, more eclectic form of analysis. You use maximization and equilibrium where it seems reasonably consistent with reality, because of its clarifying power, but you introduce ad hoc deviations where experience seems to demand them — downward rigidity of wages, balance-sheet constraints, bubbles (which are hard to predict, but you can say a lot about their consequences).

You may say that what we need is reconstruction from the ground up — an economics with no vestige of equilibrium analysis. Well, show me some results. As it happens, the hybrid, eclectic approach I’ve just described has done pretty well in this crisis, so you had better show me some really superior results before it gets thrown out the window.

Oh, and if you think you’ve found a fundamental logical flaw in one of our workhorse economic models, the odds are very strong that you’ve just made a mistake.

Does this mean that nothing should change in the way we teach economics? By no means — it’s quite clear that the teaching of macroeconomics has gone seriously astray. As Saraceno says, the simple models that have proved so useful since 2008 are by and large taught only at the undergrad level — they’re treated as too simple, too ad hoc, whatever, to make it into the grad courses even at places that aren’t very ideological.

Furthermore, to temper your modeling with a sense of realism you need to know something about reality — and not just the statistical properties of U.S. time series since 1947. Economic history — global economic history — should be a core part of the curriculum. Nobody should be making pronouncements on macro without knowing a fair bit about the collapse of the gold standard in the 1930s, what actually happened in the stagflation of the 1970s, the Asian financial crisis of the 90s, and, looking forward, the euro crisis.

I’d put my oar in for history of thought, too. Watching highly trained economists reinvent old economic fallacies suggests to me that there would be real payoff to requiring that students have some idea how the current leading doctrines got to where they are.

But must we reconstruct all of economics? No. Most of what we need, at least for now, is in those old books.

textbook economics

Colleges are teaching economics backwards by Mike Konczal

It used to be different. The preeminent economist Robert Samuelson once said "I don't care who writes a nation's laws, or crafts its treatises, if I can write its economics textbooks." And he was the one writing its textbooks for a long while. In the first version of his blockbuster textbook Economics (1948), the study of macroeconomics came first. And institutions were emphasized before the more abstract microeconomics that start off the education now. One of the central ideas was the “fallacy of composition,” or how things true of individual people or markets were not true of the aggregate behavior of the economic system.

That should be Paul not Robert, as a commenter notes.

mainstream macro

Attacks on mainstream economics and reforming economics teaching by Simon Wren-Lewis

The Trouble With Economics Is Economists by Krugman

Shiller wins Nobel Prize

Inefficient Markets: A Nobel for Shiller (and Fama) by John Cassidy

Nobody could say Chicago School economists aren’t resourceful, especially when it comes to defending their world view against attack. The Nobel committee, in recognizing yet another one of them at the same time it was honoring one of their most effective critics, was perhaps enjoying an inside joke. Or maybe it was displaying a newfound and welcome willingness to countenance rival and mutually contradictory views. Or, possibly, its members are suffering from cognitive dissonance. Whatever the explanation, the 2013 prize represents progress, of a sort.

Economic History

Panics of 1792, 1796-97, 1813, 1819, 1825

Panic of 1837

Panics of 1847, 1857, 1866

Free-Banking Era (1837-1862)

The Long Depression (1873-1896)

Starting with the adoption of the gold standard in Britain and the United States, the Long Depression (1873–1896) was indeed longer than what is now referred to as the Great Depression, but shallower. However, it was known as "the Great Depression" until the 1930s.

...Many argue that most of the stagnation was caused by a monetary contraction caused by abandonment of the bimetallic standard, for a new fiat gold standard, starting with the Coinage Act of 1873.

The Great Deflation (1870-1890)

Panics of 1884, 1890, 1893, 1896, 1901

1884 - a panic within the context of the Long Depression and Great Deflation. Fun. (By the way, did you notice that the Great Deflation is dated as beginning 3 years earlier than the Long Depression and ending six years earlier?)

Panic of 1907

Such is his power that JP Morgan single-handedly organizes a private sector bailout, rescuing the American economy. In 1910, America's leading financiers decide to create a National Reserve Bank to prevent future panics from getting out of hand. The "most interesting man in the world" won't always be around to save the day, they reason.

The British Empire maintained the gold standard until Franz Ferdinand's assassination and the onset of World War I.

By the end of 1913, the classical gold standard was at its peak but with the advent of World War I in August 1914, many countries suspended or abandoned the gold standard. According to Lawrence Officer the main cause of the gold standard’s failure to resume its previous position after World War 1 was “the Bank of England's precarious liquidity position and the gold-exchange standard.” A run on sterling caused Britain to impose exchange controls that essentially neutered the international gold standard; convertibility was not legally suspended, but gold prices no longer played the roles that they did under the Classical Gold Standard.

David Glasner argues

According to the Hawtrey-Cassel explanation, the source of the crisis was a deflation caused by the joint decisions of the various central banks — most importantly the Federal Reserve and the insane Bank of France — that were managing the restoration of the gold standard after World War I.

The earlier countries left the gold standard, the earlier they exited the Great Depression. There was also the fiscal government stimulus of arming for World War II.

The Bretton Woods system (1944-1971)

Triffin's Dilemma

In 1960 Robert Triffin, Belgian American economist, noticed that holding dollars was more valuable than gold because constant U.S. balance of payments deficits helped to keep the system liquid and fuel economic growth. What would later come to be known as Triffin's Dilemma was predicted when Triffin noted that if the U.S. failed to keep running deficits the system would lose its liquidity, not be able to keep up with the world's economic growth, and, thus, bring the system to a halt. But incurring such payment deficits also meant that, over time, the deficits would erode confidence in the dollar as the reserve currency created instability.

The rise of Japan and Europe.

In the late 1960s, the dollar was overvalued with its current trading position, while the Deutsche Mark and the yen were undervalued; and, naturally, the Germans and the Japanese had no desire to revalue and thereby make their exports more expensive, whereas the U.S. sought to maintain its international credibility by avoiding devaluation.[21] Meanwhile, the pressure on government reserves was intensified by the new international currency markets, with their vast pools of speculative capital moving around in search of quick profits.[20] 

In contrast, upon the creation of Bretton Woods, with the U.S. producing half of the world's manufactured goods and holding half its reserves, the twin burdens of international management and the Cold War were possible to meet at first. Throughout the 1950s Washington sustained a balance of payments deficit to finance loans, aid, and troops for allied regimes. But during the 1960s the costs of doing so became less tolerable. By 1970 the U.S. held under 16% of international reserves. Adjustment to these changed realities was impeded by the U.S. commitment to fixed exchange rates and by the U.S. obligation to convert dollars into gold on demand.

Nixon cancels the dollar's direct convertibility into gold.

Stagflation

Misery Index

Okun found by adding the unemployment rate to the inflation rate.

1 percent inflation better than 4 percent inflation? Really? Deflation reduces misery? Really?

Misery Index (band) - a deathgrind band from Baltimore, Maryland

Jimmy Carter and Ronnie Raygun deregulate as a means to promote growth (or what their wealthy campaign contributors want). Carter's deregulation and inflation czar was Alfred E. Kahn. Reagan signals war on organized labor by breaking PATCO. Income redistributes upwards. Volcker breaks inflation and tosses many people out of work.

Kahn's strong advocacy of deregulation stemmed largely from his understanding as an economist of marginal-cost theory. In his time at the New York Public Service Commission he was instrumental in using marginal costs to help price electricity and telecommunications services; this was novel at the time but is routinely performed today.

Deregulation (privatization)

LBJ privatizes Fannie Mae (housing)

Jimmy Carter's Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) phased out a number of restrictions on banks' financial practices, broadened their lending powers, allowed credit unions and savings and loans to offer checkable deposits, and raised the deposit insurance limit from $40,000 to $100,000 (thereby potentially lessening depositor scrutiny of lenders' risk management policies). 

In October 1982, U.S. President Ronald Reagan signed into law the Garn–St. Germain Depository Institutions Act, which provided for adjustable-rate mortgage loans, began the process of banking deregulation, and contributed to the savings and loan crisis of the late 1980s/early 1990s. 

In November 1999, U.S. President Bill Clinton signed into law the Gramm–Leach–Bliley Act, which repealed part of the Glass–Steagall Act of 1933.

W. Bush attempts to privatize Social Security but fails.

Obama makes noises about "reforming" Social Security (via price index) and Medicare but hasn't yet. 

Obamacare incomplete (far from it) step in right direction towards single-payer.

Creation of Consumer Finance Protection Bureau 

Krugman says real interest rates were above historic norms during the 80s and 90s.

Savings and loan crisis (1980s)

Black Monday (1987)

Early 1990s jobless recovery Unlike Volcker's recovery, similar to subsequent recoveries after the dot-com and housing bubbles.

Japanese asset price bubble (1980s)

Lost Decade (Japan, 1990s-)

Abenomics

End of the Soviet Empire. West Germany absorbs East Germany. China abandons Marxism, embraces Capitalism. TINA.

European common currency (1 January, 1999)

Swedish banking crisis (early 1990s)

Latin American debt crisis (late 1970s and 80s)

1994 crisis in Mexico Improvised bailout of U.S. banks works.

1997 Asian financial crisis Harsh IMF-imposed structural adjustment programs (courting "investor sentiment") don't work well. China resolves to build up reserves even as its capital controls helped it avoid currency run.

1998 Russian financial crisis

Dot-com bubble followed by jobless recovery in 2000s

Argentine crisis of 2001-2002

US housing bubble (2002-2006)

Global financial crisis of 2007-2012

European Feedback Cycle of Doom

Republicans in Congress push sequestration and fiscal austerity while the Fed maintains ZIRP and quantitative easing.

Juicy Juice: Growth and Inequality

Growth and Inequality: Thinking About the Middle-Out Hypothesis by Jared Bernstein

Interesting to think of this in terms of Krugman's objections.

From Obama's Galesburg speech:

In the period after World War II, a growing middle class was the engine of our prosperity. Whether you owned a company, swept its floors, or worked anywhere in between, this country offered you a basic bargain – a sense that your hard work would be rewarded with fair wages and benefits, the chance to buy a home, to save for retirement, and, above all, to hand down a better life for your kids. 

But over time, that engine began to stall. That bargain began to fray. Technology made some jobs obsolete. Global competition sent others overseas. It became harder for unions to fight for the middle class. Washington doled out bigger tax cuts to the rich and smaller minimum wage increases for the working poor. The link between higher productivity and people’s wages and salaries was severed – the income of the top 1% nearly quadrupled from 1979 to 2007, while the typical family’s barely budged. 

Towards the end of those three decades, a housing bubble, credit cards, and a churning financial sector kept the economy artificially juiced up. But by the time I took office in 2009, the bubble had burst, costing millions of Americans their jobs, their homes, and their savings. The decades-long erosion of middle-class security was laid bare for all to see and feel.

What happened? The bargain begin to fray? Impersonal forces like technology, globalization and the decline of unions? Washington policy skewed in favor of the rich. "The link between higher productivity and people’s wages and salaries was severed." After 3 decades the economy was growing as much as it was because of an "artificial juicing." 

Obama's economic history

Andy Harless comments on DeLong's blogpost

You can call it neo-Austrian if you want, but I think the "bubble level of aggregate demand was unsustainable" view is quite consistent with standard Keynesian (actually neo-Wicksellian) macro theory. The Fed is and was targeting the inflation rate at 2%. Given the existence of a risk premium, it's quite possible (and, in my opinion, was the case in 2005) that the natural risk-free real interest rate is less than -2%. If that's the case, there is no full employment equilibrium that is consistent with the Fed's target. The only way to hit the inflation target while maintaining full employment is by creating a disequilibrium, which is by its nature unsustainable. In particular, in this case, the Fed did it by allowing people to be convinced that certain unsafe assets were in fact safe and thus, in effect, temporarily reducing the risk premium and allowing a positive nominal risk-free interest rate to support full employment.