An EU super rebate would solve a lot of problems

European Union leaders agreed on a package of measures to support the economy after the damage done by Covid-19.

The summit took four days, because of tensions between member states that will be net payers and those that will be net receivers of EU funds.

However, I had a more elegant alternative, as I explained on Twitter (thread):

The EU missed an opportunity to provide macroeconomic support that matches the size of the corona shock, to increase safe assets and to avoid transfers between member states.

Government debt and inflation

Do deficits automatically lead to default or high inflation? No.

Here are some good reads:

Will deficit spending lead to inflation? There is a difference between developed and developing countries.

Who pays for this? How the United States dealt with its national debt after the Second World War.

Historical lessons from large increases in government debt. The debt was set aside in a sinking fund for repayment at a later date.

Aircraft leasing confirms all economic clichés

Cliché ideas of how the international economy works (see the work of Brad Setser and many others):

  • Companies use “financial centers” aka tax havens to minimize their tax bills.
  • Financial institutions in surplus countries invest the money abroad, but are not good at it.

Let’s have a look at how the aircraft leasing business works in reality.

Financial center? Check:
“Ireland is one of the biggest centres for airline leasing in the world. Many of the world’s biggest and best airline leasing companies are based in the Republic”, which explains why Ireland has 17,000 aircraft orders. [To be fair, financial centers also benefit from the concentration of specialized workers and firms.]

Financiers from Germany, Japan and China investing in low-margin, high risk businesses? Check:
Between 2010 and 2014, [Dublin-based aircraft leasing company] Avolon also raised US$6.1 billion in debt from the capital markets and a range of commercial and specialist aviation banks including Wells Fargo Securities, Citi, Deutsche Bank, BNP Paribas, Credit Agricole, UBS, DVB, Nord LB and KfW IPEX-Bank. In 2017, Avolon entered the public debt markets and raised a total over US$9 billion in debt finance. In November 2018, Avolon announced that Japanese financial institution, ORIX Corporation had acquired a 30% stake in the business from its shareholder Bohai Capital, part of China’s HNA Group. (source: Wikipedia)

Links: Yemeni money, IT migration screw-up, ECB response to Covid-19 and more

Some interesting articles I came across recently:

Yemen has two governments (civil war), one currency, and two monetary systems.

IT project management horror story at German Apobank (in German).

Overview of the Eurosystem response to the pandemic.

What central banks have done to help the economy survive Covid-19

Central bank responses to the pandemic. Source: Banque de France

Historical lessons from large increases in government debt

Euro area economic expansions are like Tolkien’s Elves: they don’t die of old age. The most recent one was murdered by corona.

(On a sidenote: I’ve been critical about the lack of blogging at the ECB. But it turns out that the Banque de France’s Eco Notepad is an excellent blog, as the four articles above show!)

All of the World’s Money and Markets in One Visualization

How may clicks to open a bank account? (Built for Mars on the user experience of retail banking)

The Economic Foundations of Industrial Policy: an amazing longread (very long!) on productivity, explaining why rich nations are rich

Ancient history: “In 2003, refinancing via LTROs amounts to 45 bln Euro which is about 20% of overall liquidity provided by the ECB.” (On June 18, 2020, banks borrowed 1.31 trillion euro from the ECB via TLTRO!)

Inflation is #VALUE!

What is the inflation rate during and after lockdowns?

Inflation is already hard to measure in normal times, as I discussed in Bankers are people, too (page 126-129).

But the corona crisis adds further complications. Some services are unavailable due to the corona lockdown, for example restaurant visits and air travel. To discourage hoarding, supermarkets stopped offering discounts.

The abrupt shock causes headaches for statisticians.

For more, you should read Claire Jones’ Alphaville post on the fuzzy inflation figures.

Is the Corona Crisis the beginning of the Dumb Depression?

Will millions of businesses fail due to the corona crisis? Are we doomed to years of high unemployment?

Maybe.

But let’s be very clear. A depression is a political choice.

Governments can solve the crisis in the blink of an eye. Transfer money to households and businesses that suddenly lost their income.

Problem solved.

Thinking past the sale of your financial panacea

There are plenty of financial proposals for dealing with the corona crisis.

More government debt! Eurobonds! Helicopter money! Eliminate sovereign debt held by the ECB! Create a European investment fund!

One thing that greatly annoys me is that people don’t go into the details.

So if you want to convince me of your financial panacea, show me what it means in practice. Who are the winners and losers? What are the consequences of your plan for households, companies, banks, government finances, inflation, employment?

Make me think past the sale, and I might buy your proposal!

Why I’m bullish

The coronavirus has led to a lot of economic pessimism.

I’m more bullish than most commentators. Why?

  • Stock prices have bounced back from their mid-March lows
  • Shops, schools and factories can open again thanks to workarounds
  • Government transfers have stabilized incomes
  • The corona shock has sped up the digital transformation
  • Masks and testing will bring the virus under control without lockdowns or a vaccine

The future looks bright!*

*Unless premature austerity kills the recovery.

Economists failed us yet again

Two stories dominated popular economics over the past years. Both of them turn out to be useless in the current corona crisis.

Story 1: “Robots will take our jobs!”

Fact check: people lost their jobs due to shutdowns. But no robot is taking those jobs. Partly because of the nature of the crisis. We don’t want to go to crowded restaurants right now, not even if they have robot waiters. But also because robots aren’t ready. We still rely on (badly paid) people to pick fruit and to slaughter animals.

Story 2: “Crypto will replace fiat money and banks!”

Fact check: firms need cash. They don’t want bitcoin, but dollars and euros. Central banks and governments backstop the economy. This would be impossible with a cryptocurrency with a fixed supply, as I already pointed out in Bankers are people, too.

So instead of educating voters and policy makers about money, economic influencers have wasted years of popular discourse on these two sideshows.

Thanks for nothing, economists!

Plague or famine? How Covid-19 threatens food security

The amount of household income spent on food varies greatly by country. In countries like the U.S., Singapore and Australia, less than 10% of consumers’ income goes to food. Households spend more than 40% of their income on food in countries like Nigeria, Kazakhstan and Algeria.

Of course, these are average numbers. Even in rich countries, the poorest households spend a much larger percentage of their income on food than the wealthiest.

How does the coronavirus affect food affordability? Affordability is a function of incomes and food prices.

Incomes

White collar workers can work from home during lockdowns. In countries with a strong social safety net, the government pays unemployment benefits to people who lose their jobs. The income loss of households due to lockdowns is modest.

On the other hand, lockdowns are devastating if they stop the informal economy and the state doesn’t support people’s incomes. Families who depend on remittances are in trouble if their relatives can’t earn and send money.

The corona crisis has hit certain sectors especially hard. Nations that depend on tourism or on the export of oil or garments face a severe dollar income shock.

Food prices

The coronavirus has raised retail food prices in multiple ways.

Several countries have limited or banned food exports. Travel restrictions prevent migrant farm workers from harvesting crops. Milk and vegetables go to waste at farms because of supply chain disruptions. Farmers are denied access to markets in cities. Lockdowns make food exports difficult.

Food prices are skyrocketing from West Africa to the Middle East.

Schematic effect of (the reaction to) the coronavirus on food affordability. Note that there are huge inequalities within countries.

WEIRD economists should take into account inequality before advocating lockdowns.

If you want to learn more about the impact of Covid-19 on food security, you should follow the Food Pandemic Twitter account of R. Zurayk, N. Amhaz, A.Yehya. They share a lot of news from Africa and the Arab World.