The very unpleasant echo from the 1930s

I am trying very hard not to become alarmist, but I must admit that I see very little positive news at the moment and I continue to see three elements – monetary policy failure/weak growth, the rise of extremist politics (Trump, Orban, Erdogan, Putin, ISIS etc) and sharply rising geopolitical tensions coming together to a very unpleasant cocktail that brings back memories of the 1930s and the run up to the second World War.

It has long been my hypothesis that the contraction in the global economy on the back of the Great Recession – which in my view mostly is a result of monetary policy failure – is causing a rise in political extremism both in Europe (Syriza, Golden Dawn, Orban etc) and the US (Trump) and also to a fractionalization and polarization of politics in normally democratic nations.

That is leading to the appeal of right-wing populists like Donald Trump, but equally to the appeal of islamist groups like ISIS among immigrant youth in for example France and Belgium. Once the democratic alternative loses its appeal extremists and populists will gain ground.

The geopolitical version of this is Ukraine and Syria (and to some extent the South China Sea). With no growth the appeal of protectionism and ultimately of war increases.

Unfortunately the parallels to the 1930s are very clear – without overstating it try to look at this:

  • Syrian war vs Spanish civil war: Direct and indirect involvement of authoritarian foreign regimes (Stalin/Hitler vs Erdogan/Putin)
  • Euro  zone vs the gold standard
  • The rise of populists and extremists: Communists, Nazis and Fascists vs Syriza, Golden Dawn, Jobbik, Orban, regional separatism in Europe, anti-immigrant sentiment, Trump and ISIS (in Europe) etc.
  • The weakening (failure?) of democratic institution: Weimar Republic vs the total polarization of politics across Europe – weak and unpopular minority governments with no “political muscle” for true economic reforms across Europe.

Maybe this is too alarmist, but you would have to be blind to the lessons from history not to see this. However, that does not mean that history will repeat itself – I certain hope not – but if we ignore the similarities to the 1930s things will only get worse from here.

PS if you are looking for more empirical evidence on these issues then have a look at Manuel Funke, Moritz Schularick and Christoph Trebesch’s recent very good post on on The political aftermath of financial crises: Going to extremes.

HT Otto Brøns-Petersen.


If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: or

My speaking engagements in Q1 – do you want to see me?

I have been lucky to be very busy since I resigned from Danske Bank back in May – both with my advisory business (Markets & Money Advisory), my commentary and my speaking engagements and all indications are that I will continue to be busy for the rest of the year, but there is still a bit of space in the calendar in Q1 2016 – so if you need me to speak at a seminar or at a conference you might still be able to book me.

Everybody who knows me knows that I am happy to talk about everything to do with economics, but here is a few ideas:

  • Why China will never be the largest economy in the world
  • The end of the ‘dollar bloc’
  • The euro as a monetary strangulation mechanism
  • What is monetary policy and central banking – an introduction
  • Russia’s continued economic crisis
  • How will Africa weather the China long-term slowdown?
  • More Open Borders, Much Less Aid
  • The US economy in 2016 – what is most important: The Fed or the presidential elections?
  • Should commodity exporters ‘target’ the export price?
  • Oil prices, monetary policy and the crisis in the Gulf States economies
  • Long-term challenges to global Emerging Markets
  • 1930s style politics: Monetary policy failure and the emergence of Trump, Sanders, Orban, Syriza and Golden Dawn
  • “When goods don’t cross borders, Soldiers will”
  • Long live for the ‘currency war’ – how the global competition to print money will pull us out of the crisis
  • Prediction markets – why governments and central banks should stop making forecasts and instead leave it to the market

Do you have ideas for other topics you want me to talk about? Please let me know!

Also please check out my speaker profile at Specialist Speakers.

If you are interested in booking me please write my agent Roz Hanna ( or me ( directly.

For an example of my “shows” see my recent lecture at Columbia University.

Please SHARE and recommend.

My continued love affair with Iceland and my column in Fréttablaðið

I have since September been writing a weekly column in the Icelandic daily Fréttablaðið. Obviously most of my regular readers of this blog do not read Icelandic (neither do I), but I am sure Google Translate will do a decent job translating Icelandic into English.

So have a look at my columns here:

Africa is hard hit by China’s slowdown

China will never be the world’s largest economy

Less foreign aid, more open borders

We need a mechanism for sovereign debt crisis resolution

Monetary tightening is warranted in Iceland

The ’dollar bloc’ is falling apart

I must say it gives me great joy to write for an Icelandic audience. After all since 2006 – when I co-authored the somewhat alarmist report The Geyser Crisis on the Icelandic economy – Iceland has had a very special role in my professional and personal life and I am happy to say I that I ever since 2006 have been a regular visitor to this great and very special country. After a hard start I think I safely can say that this has turned into a love affair.

Please visit and share!

St. Louis Fed: “0% probability that inflation will average more than 2.5% over the next 12 months”

Laura E. Jackson, Kevin L. Kliesen, and Michael T. Owyang of the St. Louis Federal Reserve have constructed a new measure they call the price pressures measure (PPM).

According the authors the “PPM measures the probability that the expected inflation rate (12-month percent changes) over the next 12 months will exceed 2.5 percent”…the PPM is constructed “for both the consumer price index (CPI) and personal consumption expenditures price index (PCEPI).”

This is how the PPM is constructed:

In technical terms, the PPM index is constructed from an ordered probit model that is augmented with nine “factors.” A factor-augmented model is a common method of incorporating a large amount of data in a parsimonious fashion. The nine factors, comprising 104 separate data series, are grouped in the following categories: (1) consumer price indexes, (2) producer price indexes, (3) commodity prices, (4) housing and commercial property prices, (5) labor market indicators, (6) financial variables, (7) inflation expectations, (8) business and consumer survey data, and (9) foreign price variables.

The ordered probit model provides probabilities that inflation will exceed 2.5 percent, on average, over the next 12 months. But the model also allows us to assess the probability that inflation will average something different. In our original article we structured the model to assess the probability that inflation will fall within one of four bins: less than zero (deflation); 0 percent to 1.5 percent; 1.5 percent to 2.5 percent; and more than 2.5 percent. We could also assess probabilities for other outcomes. For example, we could condense the second and third bins into one, leaving three sets of probabilities: Inflation will be less than zero (deflation) over the next 12 months, inflation will average between 0 percent and 2.5 percent, and inflation will be greater than 2.5 percent.

So what is the measure saying now?

Well, the message is very clear – this is what the authors say: “As of October 2015, the PPM predicts a zero percent probability that PCEPI inflation will average more than 2.5 percent over the next 12 months.”

This is obviously wrong – we can never say that there is a zero percent probability of anything, but ok this is the kind of result you sometimes get from probit models. That however, is not the important thing, but rather the key message here is that there is very little likelihood that Fed will overshoot it’s inflation target in the coming next 12 months. In fact it is very clear that the likelihood of deflation is higher than inflation being above 2.5% in 12 months.

Therefore you gotta ask yourself why does St. Louis Fed president James Bullard continue to argue for the Fed to hike rates? After all the research done by his own research department tells him that he rather should worry about deflationary risks.


PS See the original paper on the Price Pressure Measure here.

PPS Scott Sumner should be delighted that Laura E. Jackson recently became an assistant professor at Bentley University.

My lecture at Columbia University on the euro crisis

As the followers of my blog would know I recently did a 11 day speaking tour in the US. I want to share a bit of that with my readers.

Here you can watch my lecture at Columbia University on the euro crisis.

And this is the Powerpoint presentation from the lecture.

I want to thank my big hero Adam Tooze who is head of the Europe Institute of Columbia University for the invitation to speak at Columbia.


If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: or

A sharp drop in Nominal GDP will cause a drop in Economic Freedom

Last week I visited and gave two lectures at Southern Methodist University in Dallas. Among other things I had the great pleasure of spending time with Ryan Murphy who is a Research Assistant Professor at the O’Neil Center for Global Markets and Freedom at SMU and I had the opportunity to talk to Ryan about a new paper that has just been published.

The hypothesis in the paper Aggregate Demand Shortfalls and Economic Institutions essentially is that a sharp drop in aggregate demand over a period will cause a change in political climate and sentiment, which in turn will cause policy makers to implement policies, which undermines economic freedom.

This of course is very close to what I often have been arguing namely that a failure on part of central banks to keep nominal spending growth (aggregate demand) “on track” can cause an increase in populist sentiment, which in turns leds to bad policies, which likely will have negative supply side consequences.

Ryan has co-authored the paper with Taylor Leland Smith of Texas Tech University. Here is the abstract:

Political instability is often exacerbated in periods of aggregate demand shortfall, with both short and long-term implications for economic institutions. It has been conjectured that inadequate policy responses to recessions may be inimical to free economic institutions. This paper uses the Economic Freedom of the World index as its measure of economic institutions, and finds that the change in economic freedom in the following five, ten, and fifteen years is negatively impacted by an aggregate demand shortfall as measured by negative NGDP growth. The result is (largely) robust upon the exclusion of the monetary policy variables from Economic Freedom of the World, but is not robust if economic institutions are measured as trade openness

I think the paper is great and very innovative in its approach to analyzing the connection between monetary policy failure and Economic Freedom.

I have suggested to Ryan that he should expand the study to cover the 1930s as I think that he will be able to show that exactly the same kind of mechanisms where in place during that period. The only problem of course is that we don’t have an Index for Economic Freedom of World in the 1930s…

Did Bill Gross get some insight from this blog? Maybe but it might (unfortunately) be outdated

The legendary Bill Gross – formerly of PIMCO and these days Janus Capital – does not believe in a hike from the Federal Reserve this year. This is what he has to say about the issue according to a Tweet from Janus Capital:

Fed really tracks Nominal GDP, which since 2012 and last 12 mos avg 3.6%. Unless it moves higher fugetabout a hike. 4th Qtr? 3.0.

I of course to a very large extent agree. In fact I have long been making exactly the argument that the Fed since the second half of 2009 effectively has been targeting 4% NGDP growth.

The first time I argued that was in the blog post The Fed’s un-announced 4% NGDP target was introduced already in July 2009 back in September last year.

I would course love the Fed to in fact target 4% NGDP growth (level targeting), but I am afraid that the Fed has been moving away from this un-announced target in recent months since Janet Yellen took over as Fed chair.

Hence, back in August in my blog post Yellen should re-read Friedman’s “The Role of Monetary Policy” and lay the Phillips curve to rest I argued that Yellen’s had caused the Fed (or rather the FOMC) to shift focus from monetary/nominal factors and towards the labour market and more specifically towards a focus on a rather old-school style Phillips curve.

Yellen’s argument essentially is that inflation is not a monetary phenomena, but rather a result of lower unemployment, which causes wage growth to accelerate, which in turn push up inflation. This is what presently – due the the “low” level of unemployment – seems to be the driving force behind Yellen’s hawkishness.

As a consequence, I am not sure that Bill Gross is right. I would love him to be right, but I am afraid that Bernanke’s de facto 4% NGDP target might not be as rock solid anymore.

Another factor that is pushing the Fed in a more-than-good hawkish direction seems to be the influence of Fed vice-chair Stanley Fischer who has the responsibility for “macroprudential” analysis at the Fed. With a focus on macropru Fischer seems to increasingly thinking the Fed should worry about bubbles and imbalances in the US economy (I by the way see no signs of bubbles – see here what I wrote back in June on the issue.)

Any monetarist would of course be deeply skeptical about the Fed’s ability to spot bubbles and even more skeptical about its ability to do anything about them. However, Fischer does not share that view and it seems to me that he is causing the Fed to become overly worried about these issues.

I am not in the business of making forecasts on this blog, but I can only say that I am less certain about the Fed’s policy rule today than I was a year ago.

A year ago I would without hesitation have said that the Fed of course was targeting 4% NGDP growth and since NGDP expectations (according to prediction markets such as Hypermind) presently are falling somewhat short of this “target” there would be no reason to believe the Fed would hike. However, with Yellen’s Phillips curve focus and Fischer’s macroprudential focus I am beginning to worry that we might be getting “off track” from the 4% NGDP.

I certainly hope I am wrong and I would very much hope that the Fed would clearly articulate that it was targeting 4% NGDP growth for the medium-term and that it will set monetary parametres to hit this target.



If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: or

Scott Sumners’ new book: The Midas Paradox – Buy it now!

For years my friend Scott Sumner has been working on his book on the Great Depression. It has taken some time to get it out,  but now it will soon be available (December).

The book The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression published by the Independent Institute can be preorder from Amazon now. See here (US) and here (Europe/UK). Needless to say I have already ordered the book.

This is the official book description:

Economic historians have made great progress in unraveling the causes of the Great Depression, but not until Scott Sumner came along has anyone explained the multitude of twists and turns the economy took. In The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression, Sumner offers his magnum opus-the first book to comprehensively explain both monetary and non-monetary causes of that cataclysm.

Drawing on financial market data and contemporaneous news stories, Sumner shows that the Great Depression is ultimately a story of incredibly bad policymaking-by central bankers, legislators, and two presidents-especially mistakes related to monetary policy and wage rates. He also shows that macroeconomic thought has long been captive to a false narrative that continues to misguide policymakers in their quixotic quest to promote robust and sustainable economic growth.

The Midas Paradox is a landmark treatise that solves mysteries that have long perplexed economic historians, and corrects misconceptions about the true causes, consequences, and cures of macroeconomic instability. Like Milton Friedman and Anna J. Schwartz’s A Monetary History of the United States, 1867-1960, it is one of those rare books destined to shape all future research on the subject.

What I particularly like about the book – yes, I have read it – is that it re-tells the story of the Great Depression by combining financial market data and news stories from the time of the Great Depression. I very much think of this as the Market Monetarist method of analyzing economic, financial and monetary events.

By studying the signals from the markets we can essentially decompose if the economy has been hit by nominal/monetary or real shocks and if we combine this with information from the media about different events we can find the source of these shocks. It takes Christina (and David) Romer’s method of analyzing monetary shocks to a new level so to speak. This is exactly what Scott skillfully does in The Midas Paradox.

So I strongly recommend to buy Scott Sumners’ The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression.

The alarming drop in Chinese nominal GDP will force the PBoC to devalue again

I am in the US on a speaking tour at the moment so I have not had a lot of time for blogging, but I thought that I just wanted to share one alarming macroeconomic number with my readers – the sharp drop in Chinese nominal GDP growth.


Yesterday we got the the Q3 numbers and as the graph shows the sharp slowdown in Chinese NGDP, which started in early 2013 continues. A similar trend by the way is visible in Chinese money supply data.

This is of course very clearly shows just how much Chinese monetary conditions have tightened over the past 2 years and this is of course also the main reason for the sell-off global commodity prices and in the Emerging Markets in the same period.

One thing in the number, which is interesting is that Chinese real GDP growth is now outpacing nominal GDP growth. As a consequence the Chinese GDP deflator has turned negative. Said in another way – China has deflation and in fact the pace of deflation is accelerating.

PBoC – it is time to let the Renminbi float

Even though the People’s Bank of China (PBoC) has devalued the Renminbi slightly against the dollar the PBoC still manages the Chinese currency tightly against the US dollar. As a consequence the PBoC continues to import the tightening of monetary condition from the US on the back of the sharp appreciation of the dollar over the past year or so.

However, China does not need monetary tightening. The sharp decline NGDP growth rather shows that China need monetary easing!

So unless Fed Chair Janet Yellen changes her mind and ease US monetary policy the PBoC will have to devalue the Renminbi again and potentially completely decouple from the dollar and letting the Renminbi float freely.

To me it is only a matter of time before we get another Chinese devaluation and that very well could spell the end to the ‘dollar bloc’ as we know and that certainly should be welcome. On the other hand if the PBoC does not realize the need to de-couple the Renminbi from the dollar then it is very likely that Chinese growth will slump further and it will then only be an question of time before Chinese goes into recession.

This topic will be central to my lecture at the Dallas Fed on Thursday. See here.

PS My US trip so far has been very inspiring and I hope in the coming weeks to share some of my impressions.


If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: or

How to help developing countries: Less aid, more open borders

A lot have been said and written about Angus Deaton who today has been awarded the Nobel Prize in Economics and I don’t have much to add to that other than just saying that I came across a great quote from his latest book “The Great Escape: Health, Wealth, and the Origins of Inequality” that perfectly well sums up my view on economic development and what policies developed nations should pursue to help the populations in developing nations:

“The effects of migration on poverty reduction dwarf those of free trade. Migrants who succeed in moving from poor countries to rich countries become better off than they were at home, and their remittances help their families to do better at home. Remittances have very different effects than aid, and they can empower recipients to demand more from their government, improving governance rather than undermining it.”

These are issues I have been thinking and talking about a lot lately – unfortunately for most of my readers here – in Danish.

Hence, in this “Video blog” I argue the case for Open Borders quoting works by among other Michael Clemens and in this oped from the Danish business daily Børsen I argue that Danish government sponsored foreign aid should be cut in half and give mostly in the form of unconditional cash transfers to the people who are extremely poor.

For half of the Danish government’s foreign aid budget you could give nearly 3 million people 1.25 US dollars a day and thereby ensure that they would get an income above the World Bank’s definition of “extremely poor”.

This is what Angus Deaton has to say about direct cash transfers:

What about bypassing governments and giving aid directly to the poor? Certainly, the immediate effects are likely to be better, especially in countries where little government-to-government aid actually reaches the poor. And it would take an astonishingly small sum of money – about 15 US cents a day from each adult in the rich world – to bring everyone up to at least the destitution line of a dollar a day.

I hope that with Deaton’s well-deserved Nobel Prize some of his ideas will gain more influence on global policy debate over development, immigration and foreign aid.


Get every new post delivered to your Inbox.

Join 6,090 other followers

%d bloggers like this: