Beckworth talks to Hetzel

David Beckworth has a great interview with my friend and great hero Robert Hetzel. Listen here.

German 10-year yields just dropped below zero

Here we go…10-year government bond yields just dropped below zero.

Negative yields in Germany

Does that mean that euro monetary policy conditions are “ultra easy”? Nope certainly not – it is rather the opposite.

Lets once again quote from Milton Friedman’s 1998-article about Japan Reviving Japan:

Initially, higher monetary growth would reduce short-term interest rates even further. As the economy revives, however, interest rates would start to rise. That is the standard pattern and explains why it is so misleading to judge monetary policy by interest rates. Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

The story is the same – monetary policy is TIGHT and is becoming tighter as the demand for money increases faster than the supply of money.

My talk with David Beckworth

I have had a good talk to David Beckworth. Listen to the podcast here.

F. A. Hayek on Brexit

I am in Munich today to do a presentation on Brexit at the European Institute COO-CFO Roundtable.

As I was leaving home this morning I brought along Hayek’s classic The Road to Serfdom. I realized it was at least two decades since I had read it (all) last time so I thought it could be interesting to read it again.

And since I am speaking about Brexit today I started with chapter 15 “The Prospects if International Order” and lo and behold I found this very interesting quote that seems highly relevant to the discussion of Brexit:

“The English people, for instance, perhaps even more than others, begin to realize what such schemes (LC: an international federation) mean only when it is presented to them that they might be a minority in the planning authority and that the main lines of the future economic development of Great Britain might be determined by a non-British majority. How many people in England would be prepared to submit to the decision of an international authority, however democratically constituted, which had power to decree that the development of the Spanish iron industry must have precedence over similar development in South Wales, that the optical industry had better be concentrated in Germany to the exclusion of Great Britain, or that only fully refined gasoline should be imported to Great Britain and all the industries connected with refining reserved for the producer countries?”

I think this pretty well captures the sentiment among the Brexit campaigners today, which is pretty incredible given Hayek wrote this in 1944. That said, that does not mean that Hayek would have favored Brexit. In fact in the same chapter Hayek makes the following statement:

It is worth recalling that the idea of the world at last finding peace through the absorption of the the separate states in large federated groups and ultimately perhaps in one single federation, far from being new, was indeed the ideal of almost all the liberal thinkers of the nineteenth century. From Tennyson, whose much-quoted vision of the “battle of the air” is followed by a vision of the federation of the people which will follow their last great fight, right down to the end of the century that final achievement of a federal organization remained the ever recurring hope of the next great step in the advance of civilization.

In fact in his 1938-article “The Economic Conditions of Inter-State Federalism” Hayekmakes an argument for Federalism (even arguing for some kind of monetary union !), which surely could give some ammunition for the “remain” campaign.

And this pretty well sums up the dilemma for the classical liberal in the discussion over Brexit. There are classical liberal arguments both in favour and in against Brexit.

PS Listen to Tyler Cowen talk about “The Economic Conditions of Inter-State Federalism” here.

PPS The example of a Hayekian “remainer” in my view is the Dalibor Rohac, who in his new book “Towards An Imperfect Union – A Conservative Case for the EU” makes a strong Hayekian case for the EU.

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 myself at lc@mamoadvisory.

Why the US labour market is softening – the one graph version

Friday’s US labour market report was a huge disappointment. This graph explains why.

Muscial Chairs model

This is of course Scott Sumner’s Musical Chairs model of the US labour markets. Simply said the model predicts unemployment to rise if demand growth (nominal GDP) slows relative to the growth of labour costs (average hourly earnings).

With monetary conditions tightening (NGDP growth slowing) and minimum wage hikes helping push up wage growth it should hardly be surprising that we are now seeing a softening of US labour market conditions.

It is not dramatic, but there can be little doubt about the trend and it is essentially the same kind of policy mistakes that we saw in the 1930s – too tight monetary policy combined with labour regulation that push up wage growth. Scott of course documents this very well in his new book the Midas Paradox

Larry White will visit Copenhagen soon (Hurray!)

One of the greatest living monetary historians professor Larry White will be visiting Copenhagen in less than two weeks.

I am personally a huge fan of Larry and his work – particularly his work on the history of Free Banking, but for those of my readers who for some odd reason do not know Larry then here is his bio (stolen from Cato Institute):

Lawrence H. White is a senior fellow at the Cato Institute, and professor of economics at George Mason University since 2009. An expert on banking and monetary policy, he is the author of The Clash of Economic Ideas (Cambridge University Press, 2012), The Theory of Monetary Institutions (Basil Blackwell, 1999), Free Banking in Britain (2nd ed., Institute of Economic Affairs, 1995), and Competition and Currency (NYU Press, 1989). He is co-editor of Renewing the Search for a Monetary Constitution (Cato Institute, forthcoming), and editor of The History of Gold and Silver (3 vols., Pickering and Chatto, 2000), Free Banking (3 vols., Edward Elgar, 1993), and The Crisis in American Banking (NYU Press, 1993). His articles on monetary theory and banking history have appeared in the American Economic Review,Journal of Money, Credit, and Banking, and other leading professional journals.

White received the 2008 Distinguished Scholar Award of the Association for Private Enterprise Education. He has been a visiting research fellow at the American Institute for Economic Research, a visiting lecturer at the Swiss National Bank, and a visiting scholar at the Federal Reserve Bank of Atlanta.  He is a co-editor of the online journal Econ Journal Watch, and hosts bimonthly podcasts for EJW Audio. He is and a member of the Financial Markets Working Group of the Mercatus Center at George Mason University.  He currently blogs at

White holds a BA in economics from Harvard College and a PhD in economics from UCLA.

Other than his work on Free Banking Larry has written a fantastic book on the history of economic thinking. The Clash of Economic Ideas ,which was published in 2012 is one of the best books on economics I have read in the last couple of years and is highly recommend.

So I am very happy that we are getting Larry to Copenhagen very soon. He will be speaking at two events in Copenhagen. One at the CEPOS think tank (see here) and one event at the University of Copenhagen (See here).

I am personally particularly looking forward to his lecture at the University of Copenhagen on June 14.

The title of the lecture is “The History of Free Banking and the Gold Standard, and their Relevance for the Future”. I highly recommend any with interest in monetary theory, policy and history to participate in this seminar.

For more information regarding the seminars please contact Head of Research at CEPOS Otto Brøns-Petersen or me (lc@mamoadvisory).


When effort and outcome is not the same thing – the case of Greece

Greece has made yet another other deal with the EU and IMF on its debt situation. Or rather as one EU official described it to the Financial Times “If it looks like we are kicking the can down the road that is because we are”.

Said in another way, this is not really a deal to solve the fundamental problem, but rather a deal to avoid dealing with the fundamental problem.

So what is the fundamental problem? Well, at the core of this is that the Greek government simply is insolvent and can’t pay its debts, but at the same time the EU is refusing to accept this fact.

The IMF seems to understand this and probably so do the eurocrats, but politically it seems impossible to accept because that would mean the EU would have to accept that the strategy to deal with Greece’s problems has been wrong and it would mean accepting a major debt write-down on Greece sovereign debt something with likely would not be popular with voters in for example Germany or the Netherlands.

Some are arguing that Greece haven’t done enough to solve its own problems and that letting Greece off the hook with a major debt write-down would just encourage even more bad habits and that is probably right, but it does change the fact that it is very hard to see how Greece will be able to pay of the debt.

Furthermore, it is wrong when some are arguing that Greece hasn’t done anything. In fact, Greece has done more fiscal austerity than any other nation in Europe. So if we for example look at the accumulative tightening of fiscal policy in Greece since 2009 then we will see that Greece in this period has tightened by 18-20% of GDP (measured as the accumulative change in IMF’s measure of Greece’s structural budget deficit). By any measure, this a massive fiscal tightening.

However, one thing is the effort another thing is the outcome and here the story is quite different. Hence, since 2009 Greek public debt has grown from 108% of GDP in 2008 to more 180% of GDP this year. Hence, despite of massive fiscal austerity public debt has continued to grow every single year since 2008.

Greece debt and fiscal policy

The reason for this depressing development is the fact that Greece has seen a massive collapse in economic activity. Hence, since 2008 nominal GDP in Greece has dropped by nearly 30%. A true economic disaster. No matter how fiscally conservative a country is it is impossible to stabilize the debt ratios with such an economic contraction.

Therefore, to fundamentally solve Greece’s debt problem it is needed to solve Greece’s growth problem and that is not easy. Fiscal stimulus could of course be a solution, but Greece don’t have the money for that and the markets will not be willing to finance a fiscal stimulus package.

Another solution is massive structural reforms and that is somewhat more promising that fiscal stimulus, but given the depth of the crisis even the most comprehensive reform package is not likely to be enough and that leaves on one solution – monetary easing.

But since Greece is not in control of its own monetary policy because the country is a member of the euro zone that is not really possible either. Or rather it is – if Greece decides to leave the euro area. That seems like a very risky strategy, but it is blatantly obvious that this is really the only solution that would work.

Therefore, it is not a question whether we will get a ‘Grexit’, but rather when it will happen. The German taxpayers will not forever be willing to pay the price for kicking the can down the road.

PS Marcus Nunes also comments on Greece.

PPS The IMF has a new paper, which once again shows that Greece is insolvent and urgently needs a debt write-down.


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:




The continued unraveling of the ‘dollar bloc’

Over the past year I again, again and again have argued that the tightening of US monetary conditions will cause the ‘dollar bloc’ to fall apart – meaning that more and more countries will give up their de facto pegged exchange rate policy against the US dollar.

The process is well underway and is likely to continue – especially because the Federal Reserve is overly eager to hike interest rates.

The most important member of the dollar bloc other than of course the US has been China, but we all know that China has started the process of de-coupling from the dollar. This is from Bloomberg today:

China’s central bank weakened its currency fixing to the lowest since March 2011 as the dollar strengthened.

The reference rate was lowered by 0.3 percent to 6.5693 per dollar. A gauge of the dollar’s strength rose to a two-month high Tuesday as traders boosted wagers that U.S. interest rates will rise. The yuan weakened 0.1 percent to 6.5636 in a third day of losses as of 10:27 a.m. in Hong Kong.

A resurgent greenback is shaking up a strategy that the People’s Bank of China pursued over the past three months — a steady rate against the dollar, combined with depreciation against other major currencies. Traders are now pricing in a better-than-even chance of the Federal Reserve boosting borrowing costs by its July meeting, with officials lining up to indicate their willingness to support such a move, should the current strength in the economy be sustained.

And this will continue and more contries will follow. The dollar bloc is falling apart and that is great news for the global economy.

The verdict from G20 Money Base growth: Money is TIGHT

We hear it all the time – central banks are printing money like no time before and it is not working and now there is nothing more central banks around the world can do to fight deflation.

However, this is all a myth and this is what I will demonstrate in this post by looking at global money base growth.

We start by looking at the level of total money base of the G20 countries measured in US dollars.

G20 money base gap.jpg

The graph is clear – since early 2014 the G20 money base (denominated in US dollars) has flatlined.

Contrary to the popular perception there is not massive global money creation. Rather it is hardly surprising that we continue to see strong deflationary tendencies many places in the world as there essentially is no global money creation.

Now lets look at the same data now just in yearly growth rates instead of in levels.

G20 money base growth.jpg

Again the same picture emerges – G20 money base growth has come to a grinding halt particularly from early 2014, but in fact since early 2012 G20 money base growth has been below the pre-crisis growth rate of 15½% y/y.

Hence, it is very clear that judging from the G20 money base global monetary conditions have been tightening at least since early 2014. This of course coincide with when Janet Yellen became Federal Reserve Chair in February 2014 and US quantitative easing was coming to an end.

Ending quantitative easing in the US might or might not have been the right thing for the US economy, but it is clear that the impact on global money base growth has been significantly negative.

Tremendously stable global money base-velocity

Obviously one can question whether the money base is a good measure of monetary conditions. For this to be the case we would need to have a fairly stable development in global money demand and hence in global money base-velocity.

G20 base velocity

The graph above shows that G20 money base velocity in fact has followed tremendously stable development for the past 15 years.

Hence, over the past 15 years G20 money base-velocity has closely followed a downward trend declining on average 2,75% every quarter.

That said, since 2000 we of course have seen one major negative shock to G20 money base velocity in relationship to the onset of the Great Recession in October 2008 as the graph below  shows.

G20 velocity quarterly growth

However, from 2009 G20 money base-velocity developments more or less has been in line with the pre-crisis trend and as long as this continues to be the case I think it is fair to consider G20 money base growth as a reliable indicator of global monetary conditions. Not the only indicator, but certainly a very important indicator.

Money base slowdown at the core of the EM crisis and the drop in commodity prices

Having the sharp slowdown in G20 money base growth in mind it is hard to ignore that this more or less have coincided with a sharp drop in global commodity prices and considerable turmoil in Emerging Markets around the world.

Just have a look at the graph below.

CRB and G20 money base growth

There is far from a perfect correlation between commodity prices – he measured by Reuters CRB index – and G20 money base growth, but it is nonetheless notable that as G20 money base starts to slow down in early 2014 commodity prices fall of a cliff.

For the same reason I also think that it is wrong to attribute the drop in global commodity prices only to supply factors – such as Saudi Arabia’s oil policy or the return of Iran to the global oil markets. In fact I think the tightening of global monetary condition is the main cause of the drop in commodity prices since early 2014.

In the last couple of months we have seen a bit of a rebound in global commodity prices. This to some extent reflects supply side factors – such as increased tensions between Saudi Arabia and Iran – but again it is hard to ignore the fact that the outlook for G20 money base growth has changed in a slightly more positive direction as the Fed has softens its hawkish stance a bit.

That said, we haven’t seen a pick up in actual money base growth yet and unless we see that it is hard to see a more sustained recovery in commodity prices.

The question, however, remains whether we will actually see a pick-up in G20 money base growth going forward.

Three ways to higher G20 money base growth

Essentially there are three ways to higher G20 money base growth.

First, the Federal Reserve could re-start quantitative easing. That obviously would increase global money base growth, but right now it seems rather unlikely that the Fed is about to increase money base growth and the Fed still is overly hawkish.

Second, a sharp drop in the US dollar would by definition increase G20 money base growth denominated in US dollars, but again unless the Fed softens its rhetoric further we are unlikely to see any major correction in the dollar in the near-term.

Third, the other major central banks of the world could move into action and here I believe that it will be of particularly importance what the People’s Bank of China (PBoC) does with monetary policy. Here it is particularly notable that the PBoC has started to de-link the renminbi from the dollar and as such is gaining a larger degree of monetary sovereignty.

These three ways to increase money base growth also illustrate why the ‘dollar bloc’ is falling apart and more and more countries are likely to give up their close link to the dollar.

China has already started the process and a number of commodity exporters such as Kazakhstan, Azerbaijan and Angola have devalued their currencies substantially again the US dollar and other ‘dollar peggers’ are very likely to give up their close link to the dollar in the coming year – particularly if we do not see an increase in G20 money base growth either as a result of high US money base growth and/or a sharp drop in the value of the dollar.

Conclusion: Global monetary conditions have tightened considerably

So the conclusion is that global monetary conditions have been tightening significantly over the past two years and it is therefore hardly surprising that we have seen turmoil in Emerging Markets, collapsing commodity prices and continued global deflationary pressures.

We can see this by observing global financial markets, but as I have shown in this blog post the signal from G20 money base growth is also very clear and unless the major central banks of the world do not move into action to spur money base growth the global economy will continue be in a state of deflation.

It is about time for central banks around the world to acknowledge that they are far from helpless and take responsibility for ensuring nominal stability. Today central banks around the world unfortunately are failing to do so.

And no, negative interest rates will not do this – only more money creation will curb global deflationary pressures.

HT Jens Pedersen.

Update: the good thing about writing a blog is that you don’t have to worry about formalities, but on this one I would have put a source on the data. The source is IMF, local central banks, MacroBond and own calculations.


Ambrose: “Eurozone recovery wilts as sugar rush fades, deflation lurks”

The Telegraph’s Ambrose Evans-Pritchard has a good article on the risk of renewed troubles for the euro zone. See here.

Ambrose qoutes me:

“The recovery is not gaining any traction. I am really quite worried about another spasm of the debt crisis over the summer,” said Lars Christensen from Markets and Money Advisory.

“Markets are beginning to lose faith that the European Central Bank can deliver stimulus, and we are seeing the return of problems in public finances in Portugal, Spain, and Italy. That is becoming a key story,” he said.


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