Coppola Comment

Below are the slides from my presentation at Beyond Covid on 12th June. The whole webinar can ve viewed here . The pandemic seems to me to resemble the "nuclear disaster" scenarios of my youth: hide in the bunker, then creep out when the immediate danger is over, only to find a world that is still dangerous and has fundamentally changed in unforeseeable ways.  Rabbits hiding from a hawk is perhaps a kinder image, though hawks don't usually leave devastation in their wake. And I like rabbits. So this presentation is illustrated with rabbits, not nuclear bombs.  This is where we were in March/April/May. Hiding in our homes, waiting for the danger to pass: And this is what central banks should have been doing then: To their credit, this is exactly what they did. By supporting sovereign finances and warding off a financial crisis, they enabled fiscal authorities to take the extraordinary measures needed to keep people and businesses alive in their burrows.  Some economists mi

On the evening of Friday, September 22nd, the credit ratings agency Moody's downgraded the UK's credit rating. Admittedly, it was only by one notch. But coming as it did hard on the heels of Theresa May's grand speechin Florence , it was a shattering blow.  Credit ratings agencies lost much of their lustre in the financial crisis of 2008, when they were revealed to have been complicit in the mispricing of complex financial derivatives – the “toxic waste” that brought down some of the world’s largest financial institutions. So it is tempting to dismiss Moody’s action as pointless and its analysis as economically illiterate. I confess that I have done so myself, in the past. But this time, Moody’s is on the money. It tells a story of a tragically weakened government struggling with a legacy of policy errors from previous governments as well as the growing likelihood of a chaotic and potentially disastrous Brexit. Moody’s gives two main reasons for the downgrade:

"Best diss of the Quantity Theory of Money comes from Keynes", commented Toby Nangle on Twitter, referring to this paragraph from Keynes's Open Letter to Roosevelt   (Toby's emphasis) : The other set of fallacies, of which I fear the influence, arises out of a crude economic doctrine commonly known as the Quantity Theory of Money. Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States to-day your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor. But is Keynes really dissing the Quantity Theory of Money (QTM)? Well....no. He is objecting to the way in which it

Anti-austerity demonstrators in Helsinki, Finland The ratings agency Fitch has affirmed the AAA rating on Finland's sovereign debt. But on reading Fitch's analysis , the justification for this is very hard to see. Finland's economic situation is, to say the least, dire.  This is what Fitch has to say about it: The Finnish economy is adjusting to sector-specific shocks in key industries (electronics, communications and forestry), is already experiencing the impact of an ageing population through a declining labour force, and is exposed to the weakness of Russia's economy (Russia is Finland's second-largest export market). The structural decline of key industries and a shrinking labour force have led to a sharp decline in productivity growth and in estimates of potential growth. So, a serious fall in productive capacity due to supply-side shocks, unfavourable demographics and a Russian problem. This has significantly weakened Finland's external position:

In July 2008, the European Commission decided that the UK had an "excessive deficit" under the terms  of Article 104 of the Maastricht Treaty. Estimating that Government budgetary plans for 2008-9 would result in a deficit of 3.5% of GDP, the Commission said The excess over the 3 % of GDP reference value is not exceptional in the sense of Article 104(2) of the Treaty. In particular, it does not result from an unusual event outside the control of the United Kingdom authorities, nor is it the result of a severe economic downturn. The Commission services' spring 2008 forecast projects UK growth to slow in 2008 and 2009 to annual rates below potential. Nevertheless, GDP growth is expected to reach 1,7 % in 2008 and 1,6 % in 2009. The excess over the 3 % of GDP reference value is also considered not temporary, with the Commission services forecasting, on the basis of unchanged policies, a deficit ratio in 2009/10 still higher than 3 % (at 3,3 %). This indicates that the Tre

There is a huge amount of hysteria about government debt and deficits, not just in the UK but throughout much of the world. As I write, Brazil has been downgraded by Standard & Poors because of concerns about rising government debt and weakening commitment to primary fiscal surpluses in a context of political uncertainty and deepening recession. It is the latest in a long line of downgrades and investor flight over the last few years. The global economy is a very stormy place. The UK, which has halved its fiscal deficit in relation to gdp in the last five years, is embarking on another round of fiscal tightening , with the aim not only of completely eliminating the deficit but running an absolute surplus by 2020 in order to, in the words of the Chancellor , "bear down on debt". The Chancellor's plan enjoys considerable popular support due to a widespread belief that if we do not eliminate the deficit and start paying down debt, we will end up like Greece . &qu;

Eurozone growth figures came out today. And they are horribly disappointing. Everyone undershot, apart from Spain which turned in a remarkable 1% quarter's growth, and Greece which somehow managed an even more incredible 0.8% (yes, I will write about this, but not in this post). France  didn't grow at all, Italy all but stagnated at 0.2%, and even the mighty Germany only managed 0.4%. Despite low oil prices, falling commodity prices, weak Euro and the ECB's QE programme, Eurozone quarterly growth is a miserable 0.3%. Maybe it's just me, but I can't help thinking that something just isn't working in the Eurozone. Among the most disappointing performances was Finland's. Back in May, the European Commission confidently predicted that growth would return in 2015: But what is actually happening is this (this chart includes today's figures): Finland has been in recession for most of the last three years. True, towards the end of 2014 it d

Lots of you pointed out that in my last post the monetary effect of government bond purchases was unclear. Indeed, I had rather skated over it and thereby created confusion. I gave the impression that government can always sterilise spending (broad money creation) by issuing bonds. But this isn't quite true. It all depends on who buys them and how they finance their purchases. So I thought I'd do a few scenarios to show what happens when different types of private sector actors buy and sell government bonds. Firstly, let's look at primary issues. Government issues sufficient bonds to sterilise its entire deficit spending. This is normal fiscal behaviour. Primary issue: bonds entirely bought by banks I'm going to consider the banks in aggregate here, rather than as individual entities, and I'm going to assume that the same banks also intermediate government spending. As I noted in my previous post, in the absence of pre-funding, governments will run overdra