Great Paper on the New Keynesian model

As I was scourging through interesting papers, I found a very interesting paper written by Cohen-Setton, Hausman and Wieland on the New Keynesian model. Within the contents of the paper, they discuss the New Keynesian model and it's effect on supply-side shocks in depressed economies. They utilized a very interesting example in France and its economy after a special measure where they had lifted the gold standard and set interesting economic measures. The results are quite fascinating and the paper goes into quite detail utilizing time series and a fantastic model to describe what had happened in detail. I'm still reading the paper, but it looks like they have found the key to the current debate over structural reforms within both the United States and the European Union. By utilizing these structural reform measures that were recommended before, the example shows that it doesn't particularly work very well in times of rare financial crises. A good read for anyone who is interested in these pressing matters, along with observing the model that they had utilized.

Justin Wolfers' Interesting Article on Bernie Sanders' Economic Plan

There has been considerable conversations over Bernie Sanders' economic plan over the internet and among several top macroeconomists in the United States. Among the economists that are talking about Professor Gerald Friedman's plan that has estimated a Sanders Presidency would greatly improve the economy of the United States with its plan of completely transforming the country into one that more or less resembles that of the Nordic social democratic societies. As my father is on the faculty at one of the University of Massachusetts schools, it's interesting to consider Professor Friedman's analysis of the Sanders economic plan. I personally think that the universal healthcare program that he has promoted is while valid, it might not be the plan of action. The Nordic welfare states (Norway, Sweden, Finland and Denmark) were created earlier on in the century and had promoted a decent foundation for their societies as a whole to function on a very high level. They were created when these states did not have any nationalized program of any sort or extremely complex healthcare systems. They were relatively small and homogeneous at that period of time. My main problem with Sanders' plan is that it does not go into detail about how and where the healthcare system will change. Also, there seems to somewhat of a disagreement between how mainstream economists and how Professor Friedman sees the topic of macroeconomics as a whole. We will explore this later on this blog post, but let's first talk about Wolfers' point of view.

Let's first look at what Wolfers and the Romers have to offer for the conversation over Sanders' economic plan. The Wolfers article goes into a recent short article of what Professor David and Christina Romer have written and explains that Friedman's plan is out of whack based on their point of view. I must admit that it is completely feasible for a bunch of center-left Democratic star economists, which include Paul Krugman, to fully denounce what someone from a (more-or-less) a Post-Keynesian perspective would have. They all focused on the demand-induced part of Sanders' plan. They find it incredulous that the plan would be in Wolfers' words, "an economic nirvana". I have read and looked over Professor Friedman's plan and it does not look incredibly implausible, especially when you look at the CBO estimates or in its calculations. Maybe it is somewhat different than what most center-left macroeconomists such as Wolfers would consider to be credible. If you read towards the end of his short article, Justin Wolfers pointed out that Gerald Friedman's long and careful analysis as one that is more or less the perspective of the Post-Keynesian macroeconomists from the tradition of Joan Robinson. Let's look into this historical phenomenon where generally liberal economists divulge tremendously.

If you look back into history, John Maynard Keynes truly changed the way many in the economics arena had seen economics. He argued that the mainstream neo-classical models mostly in the field of macroeconomics to be mostly wrong and his particular analysis of how the world of economics works to be right. Of course this does not come with its controversy in the world of economics as many traditional neoclassical economists did not view his completely "heretical views" very well. Then fast-forward 10 years, two top MIT economists, Paul Samuelson and Robert Solow, created a somewhat combination of Keynes' works with the earlier neoclassical economists into somewhat of a paradigm shift between the two competing schools of economic thought into the neo-classical synthesis. This is when Joan Robinson and others at the Department of Economics in Cambridge, of which Keynes last taught before his death, argued in the Cambridge capital controversy about certain components of their competing ideologies especially about the unrealistic assumptions component to their mathematical models. The Post-Keynesian school, of which Joan Robinson is famous for, argued based primarily on the Keynesian tradition, while the other somewhat Keynesian argued based on a moderate fusion of the two competing schools. This led to a long ideological battle that has also included an entire generation of economists in the "new classical tradition" that in Robert Lucas wanted to "bury Keynesianism" and also attacked the earlier mentioned unrealistic assumptions part in their math modeling. The Wolfers' article and Krugman's numerous articles explain this battle, but it is generally between the dominant faction of Keynesians and those like Friedman, which are in the more left-leaning Robinson faction of the Keynesians.

While I don't necessarily agree completely with Friedman's observations on Sanders' economic plan for the country, Professor Gerald Friedman and Bernie Sanders' economic plan is especially important in that it's exposing the general public to more of Keynes' economic thoughts. While Keynesianism might not be the solution to some of problems in the models that some in the New Classical school of thought ran into during the Great Recession, it should form the basis in any academic and policy discussion to correcting the country's trajectory towards an entrenched oligarchy and a mass of working poor.

An Interesting Article by A British Economist on Creativity And Other Thoughts on Economists and Creativity

This probably goes to many conversations that I've had with some of my friends lately. What makes the outside world work? Here's a very short and brief blog post on that same need entitled "Why Creativity Needs Economists and Economists Need Creativity". In his short blog post, it goes through what is necessary for graduates in Economics to apply creativity to whatever they do. I think this is perhaps more relevant to those who are involved in Econ Research as well. What do I mean by this? I refer it to how Paul Samuelson deeply embedded rigorous mathematical principles into his honorable introduction of Keynesian Economics into the deeply flawed neoclassical framework of which economists in the past had operated.

By reading both the Bernanke interpretations of the Great Depression and Paul Samuelson's landmark dissertation, we can observe that the field itself need to be constantly changed if it will be effective in its prediction of financial crises. I have read several papers that mentioned that these uncommon and misplaced financial crises could be predicted, but I beg to differ. Maybe researchers can deviate from the established framework that was proven wrong during the latest Great Recession of 2008 and try to think creatively of new models and new solutions. I believe that these words could be applied to economic theory on economic and financial crises as a whole. This is a mystery that I'm constantly thinking of ways to resolve this as I've explored all corners of current economic publications. I've certainly found some interesting arguments, but I think a concrete answer has to yet to be fully found on the most important theoretical questions. Do we need to throw out many of the current foundations of macroeconomics in order to found something new and fresh? Or can we browse through the explanations of many theorists such as Keynes, Samuelson, Lucas, Barro, etc? I think there needs to be something new and original to be introduced into this equation and hopefully something will come into fruition in the coming years.

October-November Reading List and Some Updates

I've been very busy in the last month, so I haven't had a time to work on the blog post here. In this particular blog post, I will give you my October and November reading list along with some updates which includes my predictions about the big Nobel announcement on Monday.

Reading List for October and November of 2015:

Econ Books:
1. Hyman Minsky - Stabilizing An Unstable Economy
2. Dan Ariely - Predictably Irrational (re-read)
3. Robert J Shiller - Irrational Exuberance 3rd Edition
Non-Econ Books:
1. David M. Broussard - A Radical Approach to Real Analysis (Already finished)

There are other articles and probably more books I'll probably read, but primarily these are the ones I will read. The backlog is enormous as I haven't finished all of the books I was meant to read throughout these times.

As for several updates, I will definitely be writing up the material promised in my last blog post in the coming weeks as I will have some extra time to do so.

My predictions for the 2015 edition of the Nobel Prize in Economics:

Here are my picks for favorites, middle level chances and potential "dark horses":

Favorites:
1. Paul Romer (New York University) - A top macroeconomist known for his work in economic growth. He has one of my favorite papers that I have been reading and re-reading for my working paper.
2. Robert Barro (Harvard University) - A top macroeconomist who is mostly known for his work in growth theory, business cycle theory and a prominent new classical macroeconomist, which is the direct competitor to the top New Keynesian school. Probably I'd put him as my top pick for this year's Nobel Prize
3. John List (The University of Chicago) - He's the Department Chair at the University of Chicago, who specializes in field experiments in economics, which is what landed this University of Wyoming PHD graduate at one of the world's most famous economics departments.
4. Stephen Ross (Massachusetts Institute of Technology) - One of the top guns in the field of finance. I rate him as one of the sharpest minds in all of economics and he should be winning a Nobel Prize for his work in finance.
5. Charles Manski (Northwestern University) - Has an outstanding papers on rational choice theory, but his work also focuses on social policy analysis.
Middle Level Chances:
1. William Nordhaus (Environmental economics)
2. Richard Thaler (Behavioral economics)
3. Michael Woodford (Monetary economics)
4. Nobuhiro Kiyotaki (Macroeconomics)
5. Paul Milgrom (Game Theory/Auction Theory)
6. Alan Krueger (Labor Economics)
7. David Kreps (Game Theory/Corporate Economics)
Potential "Dark Horses"
1. Ben Bernanke (This would be the biggest shocker since Paul Krugman won the Nobel Prize by himself)
2. Richard Blundell (Many people have him as their favorite, but I have it here based on the other notable economists who have not won the Nobel Prize yet)

We will wait and see who wins the Nobel Prize and I will be diligently working on trying to get a couple of blog posts out before the end of this month!

Thoughts on the Austrian business cycle theory

As announced in a blog post couple of weeks ago, I will be undertaking a series of posts on certain business cycle viewpoints and I will try to make my first blog post as concise as possible. As described in the previous post, this specific post will be my thoughts on the Austrian Business Cycle Theory, which will involve a short discussion on Hayek and Mises. Despite the particular lengths of which I could go about this particular theory, I will talk specifically about the basics of the Austrian Business Cycle with an objective point of view.

The Austrian business cycle theory, posited by Carl Menger, Ludwig Von Mises and Friedrich Hayek, has been analyzed and refuted many times. Almost all of the mainstream Neo-Classical and Keynesian economists have rejected all components of the Austrian business cycle theory, which Paul Krugman has previously started a particularly interesting edit war on Wikipedia about. Many prominent economists from several different perspectives, like Paul Krugman and others, believe that the Austrian business cycle theory is seriously flawed in all of its various components. While there are various enormous flaws in the details that the theory postulates, I believe it is wise to ruminate about at how the current policy of low interest rates that various central banks are pursuing is effecting the bigger macro-economic picture and to predict possible future crises by utilizing the Austrian business cycle theory.

To those who are not familiar with the Austrian business cycle theory, it was formulated by three prominent economists, Carl Menger, Ludwig Von Mises and Friedrich Hayek, as a possible explanation of how business cycle works. In the theory postulated by these two well-known gentlemen, it regards business cycles as the unfounded result of improper interests rates set up by central banks, which consequently results in a boom and a bust from this malinvestment of excessive business lending by banks. The theory favors an almost completely laissez-faire approach to the resolution of financial crises caused by what they see as a malinvestment of assets. The favored resolution to the crises could momentarily cause abrupt bank failures, but the resolution that the Austrians prefer is a proper liquidation of all debt and assets. This is a cause for consternation among mainstream economists and they see the Austrian business cycle theory as nonsensical, especially its recommendation for a completely laissez-faire economy. By looking at certain components of the Austrian business cycle theory such as interest rates, empirical research and successful predictions of downturns, we could not completely discount its role in the world of economics.

(For those that are interested in more extensive explanations of the Austrian business cycle theory, here are two links: One by Professor Roger Garrison of Auburn University and another by the Better Living Through Liberty blog. Here is a a more simplistic video explanation by Tyler Cowen, Professor at George Mason University.)

The Austrian business cycle has the most peculiar way of utilizing interest rates to explain the mechanisms of business cycles. This approach combines an unique approach of analyzing interest rates in how they interfere with certain market forces, especially since it predicts that most of the booms and busts created by the fractional banking system comes from tinkering with interest rates. The ABCT believes that by tinkering with certain interest rates, the central banks create the impetus for the crises with the setting of interest rates, usually one that is too low compared to the actual interest rate. The Austrians have mentioned that the last financial crisis was caused by the central bank's insistence on keeping the interest rates lower than what is particularly possible, which might be a feasible analysis of the situation.

Despite the numerous other factors that might discount the ABCT, the theory has proven accurate at utilizing the analysis of interest rates in determining the coming financial crisis. There are obvious pitfalls to the Austrian business cycle theory due to the sheer fact that the theory does not come up with an exact interest rate that is required to not cause a catastrophic recession that happened in 2007-2008. The Austrian business cycle also mentions that interest rates should be decided entirely by the market and it could potentially mitigate long recessions such as the one we just witnessed. There are obvious pitfalls in letting the markets decide the "natural" interest rates and permitting a natural market recovery without central bank intervention. Natural interest rates could potentially cause large fluctuations within the market and could also possibly price out certain people out of the market. (such as low income families, small businesses, etc.) Permitting a natural market recovery could have massive fluctuations in employment and could put a potential strain on the workforce, which could cause acute social problems in society. Despite all of these problems that the ABCT faces, I believe it is wise to look at both the ABCT's record in looking at interest rates and also correct predictions of future economic recessions.

Empirical research conducted by prominent mainstream economists have indicated that the Austrian business cycle theory is not entirely feasible. Let's just compare the opinions of the prominent economists versus the Austrian economists in terms of the conclusions of their empirical research. Let's start with a couple of economists who are rated as libertarian by the mainstream economic community:

Milton Friedman - The late Milton Friedman is considered by everyone as one of the top economists of the last 100 years, with many considering him to be the one of the top two libertarian economists of the last 100 years, along with the Austrian economist, Friedrich von Hayek. Friedman's brand of libertarian economics was not too different than Friedrich von Hayek's theories, but they maintained a lot of the Keynesian semblances that Friedman had been influenced by in his younger economist days, especially in the expansionary benefits of money-financed debt spending.

In Studies in the Quantity Theory of Money, the late Professor Friedman promoted the approach that the monetarists at the Chicago School of Economics had developed and rejected the approach that Hayek theorized in his works denouncing Keynes. From an interview excerpt with Professor Friedman, we can conjecture that Friedman felt that the ABCT was incompatible and has done "a lot of harm to the world". From the observations in his book and from the conversations with the late Professor Friedman, we can accurately conclude that Milton Friedman does not agree with the ABCT in its basic tenets of a completely laissez faire approach and the simplicity that it offers. Despite Milton Friedman's promotion of laissez-faire capitalism, he stops short of endorsing of it as intervention could have potentially saved the banking system during the first Great Depression. I might agree with Professor Friedman's conclusions in requiring some sort of intervention in times of crises, but it's interesting that someone who is one of the mainstream proponents of laissez-faire capitalism would be so overtly critical of market corrections in terms of theory and systemic banking failures.

Tyler Cowen - A more recent and less well-known mainstream economist that has been listed as libertarian by both economists and by the media is Tyler Cowen. Tyler Cowen is the Chair of economics at George Mason University in Fairfax, Virginia. Along with Professor Alex Tabarrok of George Mason University, both of them write in  a very popular blog called the Marginal Revolution, which happens to one of the quick links on the right hand side of my blog. In a blog post, he condemned the Austrian Business Cycle Theory and even gave a pretty interesting logical response to the basic tenets of the ABCT. I found the analogy particularly interesting and I have posted in his blog without the official sanction of Professor Cowen!:

"Let’s say that the government subsidized the price of bananas, you bought so many bananas, put them on your roof, and then the roof collapsed.  Is that government failure or market failure?  The price was distorted, but I still say this is mostly market failure.  No one made you put so many bananas on your roof."

I must say that this is a quite interesting observation of Mises and Hayek's business cycle theory and I must presume that I agree with most of statement, with the presumption that government is sometimes and not always the problem.

Many Austrian economists (including the original Austrian economists) have presented their particular economic theories in great detail about the great mysteries that have stumped economists from time to time about the booms and busts in the business cycles that nobody has ever managed fully figure out. We will give two separate examples where Austrian economists have published the empirical evidence that supports the final observations of those that adhere to the Austrian School of Economics.

The first example is an article entitled An Empirical Examination of Austrian Business Cycle Theory, published in the Quarterly Journal of Austrian Economics, written by Professor Robert F. Mulligan, goes through an thorough examination of the Austrian Business Cycle Theory by exploring the basic tenets of Hayek's capital theory, which has to deal with the unsustainable expansion of credit. This expansion of credit is characterized by quantitative easing (QE) and other monetary tools that are available to both policymakers in the US Federal Reserve and other similar central banks. He utilized interesting pieces of data to explore Professor Hayek's theories in how a distorted non-market price for interest rates, often lower than sustainable market-determined interest rates, will eventually create an unsustainable bubble in short-term economic outputs. There is an interesting graph in the article on the major differences between the Austrian and more mainstream (Monetarist and Keynesian approaches), which is located in the middle of the article that I will post in this blog post:

Here we can see the main differences listed between the approaches in monetary policy, but what has the evidence gathered in this article relevant for my particular thoughts on the Austrian Business Cycle Theory developed by Professor Hayek and Mises?

In the empirical data gathered from the Federal Reserve Bank of St. Louis, we see a potential hypothesis answered based on the author's particular biases in the model that he utilized. He concluded from his mathematical model, which was a simple statistical T-test, that the Austrian Business Cycle Theory did indeed exist. What is particular about the results is that it does not offer much hope of any policy or monetary prescriptions beyond the basic Austrian catch-phrases, which are both stated throughout the document and in its conclusion. We have arrived at an interesting
The second example of the Austrian Business Cycle Theory is an article entitled Empirical Evidence of the Austrian Business Cycle Theory, published in the Review of Austrian Economics, written by Professor James P. Keeler. In this particular article, Professor Keeler goes into similar lengths that the previous article fails to cover. I find his particular empirical evidence quite interesting and I'll point them out here:

1. This article goes into very much the basics of the Austrian Business Cycle Theory, which was also stipulated in the section on the previous article. The difference here is that Keeler provides more statistical evidence than Mulligan in how the data is presented. Keeler talked about how the theory contains such a strong adjustment of market to natural rates of interest and how this was implemented and how it offers an interesting perspective on monetary shocks.

2. Keeler strongly covers analysis of stationary measures of interest rates, with the result similar to that of the previous article. However, Keeler mentions Wicksell's notion of the "correct interest rate" that is often torn between market and the nature rates of interest. For those that are are interested in reading Knut Wicksell's "correct interest rate" theory, whom was also one of the economic giants of the late 19th and early 20th century, here is a brief introductory article on the Economist website that introduces the idea to those who are not familiar.

3. As with the previous article, Keeler shows a strong correlation between the empirical data and evidence that the Austrian Business Cycle Theory does indeed exist, which is quite interesting, because there are various ways to collate the data to suggest otherwise. What's fascinating is that the Austrian Business Cycle Theory will continue to be rejected mostly as a matter of its reliance on monetary inaction, rather than the aggressive monetary policy that people from diverse point of views such as Friedman and Stiglitz would recommend. Even though, an interesting development has surrounded Stiglitz's most recent view of the economic situation that we are facing as he has come out and very much validated what some Austrian economists have said for a long time! While curtailing the influence of supply-side economics might be beneficial if supply siders were really in mainstream these days, it's interesting to see how Dr. Stiglitz has similar views towards certain issues as his "ideological opposites".

Ludwig Von Mises in 1929 before Great Depression And the Great Recession

The last interesting part of the Austrian Business Cycle Theory is how two of the landmark Austrian economists, Ludwig Von Mises and Friedrich Hayek, predicted the coming of the economic crisis against some mainstream neoclassical economists who had simply missed predicting last two serious recessions (The Great Depression of 1929-1939 and the Great Recession of 2007-2008). Ludwig von Mises and Friedrich von Hayek had constituted the Austrian Business Cycle Theory with the influence and application of Carl Menger's ideas, which is stipulated in many of his works but most notably in his literary masterpiece, Principles of Economics. This seminal work had a huge influence on the intellectual thought of both of these gentlemen and prompted the start of the marginal revolution, which happens to be the name of a popular economics blog. Here is an article by Victor Aguilar on what the reactions of the prominent Austrian economists would have been to the Great Recession and to the Great Depression (This is because at that time, Mises and especially Hayek were extremely prominent in the economics community). In a quote from the article is that the Austrian economists had predicted the subsequent crash and the depression that followed. Despite the relative accuracy of their predictions, there is much to be desired from their responses. What good does it come when you have correctly predicted the Great Depression, but not offer any ways to counterbalance the negative effects of the boom and bust cycles. The idea of central banking is a nadir to the economic point of view of Austrian economists and Von Mises famously accused many of his classically-liberal minded colleagues at the famous classical liberal society, Mont Pelerin Society, as big government socialists. As listed by the interesting article, Aguilar talked about Austrians' disdain for the full utilization of mathematics, because they associated heavy usage of mathematics as perhaps another tantamount to socialism. While there is nothing wrong with ridiculing most tenets of socialism, it is ridiculous to consider those who don't come up with the same conclusions as Von Mises to be a heretical Keynesian or a "socialist" New Classical.

From the evidence presented here, we should take a look at the textbook definition of the Austrian Business Cycle Theory to analyze what exactly went wrong with the theory as it comes to the mainstream audience in economics. The web link to the definition posted online, but is located in the Business Cycles and Depressions encyclopedic guide that I have been browsing for my series on business cycles. (Of course this just scratches the surface on the related literature that I have been browsing concerning this particular subject and this particular blog post series on business cycles.) For those who are interested in exploring more about the Austrian Business Cycle Theory, there is a tremendous amount of literature out there that covers all kinds of perspectives, but I hope I had covered some of the introductory material in this particular article.

While there is much about the field of Austrian economics that are not particularly relevant due to the rigidity of many of its various policy prescriptions, but I believe it is worthwhile to take a look at the evidence presented by the various Austrian economists such as Hayek and Mises, especially when it pertains to the analysis that surrounds finding the correct interest rate. The presentation of the evidence that they have given to us has been great in predicting the part in interest rates where there is real change in the economy, whether conducted in a partial or a nominal way. As we look at particular ways and methods in studying the booms and busts of the business cycle, we should look at examples such as the Austrian business cycle theory, not because of the unestablished axioms of their origins, but as an addition to the base of knowledge that we have accumulated concerning the study of the nature of the business cycle. As we try to find the perfect linear model to this particular dissimilar equation of solving the mysterious nature of how the markets work, we need to return to the question of linearity within the spectrum of economic models. There are many mysteries to finding the right model in figuring out the various theoretical components of how a business cycle works and based on the record that Austrian economics have set, it should be hard to cross off this particular heterodox approach as completely wrong. As shown by Eugene Fama's much scrutinized efficient-market hypothesis to Ben Bernanke's profound confidence in the financial markets before the Great Recession has shown that various mainstream approaches could sometimes be on the wrong footing with reality as well. From the evidence that we have here and despite the obvious flaws of the theory itself that I had abundantly pointed out here, it would be wrong to completely write off the Austrian business cycle theory.

(For those that did not see the newest update on my particular blog, I will now be writing a blog post on Fischer Black's book, Business Cycles and Equilibrium. This particular book has brought a lot of attention to me based on both his views in this book, but also of his legendary status in the academic discipline of monetary economics and of business cycles. In my next two sequential posts, I will talk about the Real Business Cycle Theory, which is quite popular among those adhering to new classical macroeconomics. They are also blamed by many adherents to the other varying competing schools, for various different and contradictory reasons, for failing to have anticipated the Great Recession of 2008-2009.

Couple Interesting Blog Posts/Articles

Before I log my first blog post in my series of posts on business cycles, here is a couple of blog posts and articles that I found interesting:

1. Greg Mankiw's blog post on the controversial TPP (Trans Pacific Partnership) free trade deal and the CEA President, Jason Furman's Brookings explanation: What's not heard by the critics is the mathematical and numerical explanations for the TPP. Other interesting articles on this topic include this Financial Times article, a Brookings article on the geopolitical importance of the TPP and another Brookings article on the updates to the TPP. Very interesting as the controversial TPP deal unfolds with the stagnating economic powerhouse of Japan and with the strong opposition here in the States (Progressive groups, Conservative groups, Labor Unions and your usual Protectionist suspects)

2. Article on Asset Pricing and "Misspecified Recovery": A very interesting article by Lars Peter Hansen, 2011 Nobelist and the Rockefeller Professor at the University of Chicago, Jaroslav Borovicka (New York University) and Jose A. Scheinkman (Columbia University, Princeton University) on Asset Pricing. They nickname this phenomenon "Misspecified Recovery", which are misspecified effects on the long-term effects of information on asset pricing. Very interesting article with a particular interesting twist in that the model makes an interesting utilization of the Perron-Frobenius theory in arriving at interesting information about asset pricing.

3. A Journal of Economic perspectives article from Winter 2009 about the liquidity and credit crunch by Markus K. Brunnermeier by utilizing interesting principles of behavioral economics to explore how a possible financial regulatory framework could put together. I have been reading a bunch of articles on related topics to business cycles and this classic article has helped me on determining how the 2007-2008 crisis has effected our possible perceptions and predictions of how the business cycle works.

4. iM's Business Cycle Index: Interesting calculations that this business cycle index makes. A good basic business cycle index for traders.

5. An article in the latest issue of the Journal of Monetary Economics by Hyun Song Shin: It talks about monetary policy and how the US dollar plays a role in global liquidity transmissions. It goes back to an earlier article of mine on the role of the US dollar in being the global reserve currency and the currency that is most commonly transacted role across financial channels.

Different Approaches to Interpreting Business Cycles and Macroeconomics

As mentioned in my previous posts, I am writing a series of blog posts on the study of business cycles. In this particular blog post, I will illustrate what I will be writing in the series and what to expect from each of the blog posts.

For those not familiar with the study of business cycles, they are downward and upward movement in the aggregate activity levels of Gross Domestic Product, Gross National Income or anything that measures levels of economic wealth. The movements and changes in momentum are often characterized as economic booms or expansions and economic recessions (sometimes depressions). There are many nicknames that could potentially characterize business cycles with the most common one: the boom-bust cycle (The boom being the economic expansion and the bust being the economic recession.) A good, but rather drastic example of a business cycle would be the massive economic boom after the First World War during the Harding and Coolidge administrations and then the massive Great Depression that followed it. There have been many comparable theories explored, argued and disseminated within the study of business cycles and it will be hard to summarize the entire field in just several blog posts. In these series of blog posts, I will mostly discuss certain academic, both mainstream neoclassical and heterodox or non-mainstream approaches to interpreting them. Through the course of the next couple of months, I will be discussing these as listed in this table of contents blog post:

1. Thoughts on the Austrian Business Cycle Theory - In this blog post, I will mostly talk about Mises, Hayek and thoughts by certain mainstream economists. Here's a decent video explanation of the Austrian Business Cycle by Thomas E. Woods, a proponent of the Austrian School of Economics and fellow at the Mises Institute. This is a heterodox approach, but is one of the few heterodox approaches that I used to find extremely compelling as a college undergraduate.

2. Real Business Cycle Theory, Part 1 and Part 2 - In this blog post, I will be exploring the controversial, but interesting Real Business Cycle Theory that was first theorized by Edward C. Prescott. It is generally affiliated with the Chicago School of Economics and the New Classical macro-economists, with it being at the far-right spectrum of mainstream economics. I have found this the basic, introductory explanation of the Real Business Cycle Theory by Tyler Cowen, a writer on the Marginal Revolution website and a professor at the George Mason University.

3. Game Theory, Macroeconomics and Business Cycles - In this blog post, I will be exploring one of the many more detailed thought-bubbles I've had throughout the year. I will be looking at various approaches covered over the next couple of months and trying to synthesize something out of nothing.

4. Milton Friedman, Monetarism and Money Matters - In this blog post, I will be exploring one of the most popular approaches to interpreting the Business Cycle. While I consider the late Professor Friedman to be one of the economists that I have studied the most, I have serious contentious thoughts concerning monetarism and here, I will give several examples that proves him wrong otherwise.

5. New Keynesian Approaches to the Business Cycle - In this blog post, I will be exploring the more recent changes on the old Keynesian approaches in this left-leaning approach to business cycle theory.

6. Thoughts on Fischer Black's Business Cycles and Equilibrium - In this blog post, I will dissect a very interesting book on Fischer Black's thoughts on the causes of business cycles and market equilibrium. I will point out both strong points and weak points of his book in this rather long but concise post.

6. Post-Keynesian and Post-Marxian Approaches - In this blog post, I will be discussing the most popular left-leaning heterodox approaches to the study. Here I will explore the famous adherents to this non-mainstreamschool of economics, including Michael Kalecki, Joan Robinson, John Roemer and Steven Keen. I will also provide excerpts about some current work that I have been reading lately.

7. Other Schools, Questions on Heterodoxy, Final Thoughts on Business Cycles - Here I will be accessing the other macroeconomic approaches, but I will also give some thoughts and questions on the nature of heterodoxy in interpreting challenges to economics and some final thoughts on business cycles.

I will be posting these posts sporadically as soon as I finish completing them. Some of them will be extremely informative and in depth, so keep an eye on my posts as they are completed. I will also be posting several unrelated blog posts throughout the next month, but I will try to tag business cycle series onto the related blog posts.

Edit: I have also included in this series a rebuttal of some of the key points that are detailed in Fischer Black's book, Business Cycles and Equilibrium. Even though the book is relatively dated, the late Fischer Black's ideas still have strong resonance in the eyes of many economists/financial economists. I just wanted to dissect his particular approach described in his book as an exercise in analyzing peoples' arguments and breaking them down. I also found that his book was an extremely read

Ben Bernanke's Blog

It has been a while since I've written a substantial post, but I'll write one towards the end of this week. I'll also post a short reading list for this month as well. As for interesting reading, please take a look at the blog of Ben Bernanke, who is most well known for being the Former Chair of the Federal Reserve and former Chairman of the Department of Economics at Princeton University. It has been news around the Economics and Business blogosphere and I find it interesting reading. The most interesting article that he talks about is about Lawrence Summers' secular stagnation discussion. Quite an informative article with a couple of links, along with Professor Summers' rebuttal. I'll be posting more here as soon as I have some free time!

The Greek Debt Situation, the Troika, Syriza and Few Thoughts

As eyes of the world has turned towards the recent developments in Greece, I can admit that this will be an interesting period of time for Greece and the other member states of the European Union. Following the election of Syriza in the latest election, the leader of the Syriza party, Alex Tsipras, has promised the Greeks an end to the crippling austerity that the Greeks have faced ever since the start of the European debt crisis in 2009. The party aims to boost economic growth through stimulating the depressed Greek economy through Keynesian policies that will the new Syriza government promises to generate economic growth and to promote "social solidarity". What has really shocked the markets lately is Syriza's promise to stop negotiating with the Troika that consists the IMF, the European Central Bank and the European Union. The government has promised to return to the government-heavy policies of the past and to negotiate a write-off in Greek government debt. The decisive action in the economic and the political policies of the Marxists and the Keynesians that make up the intellectual leadership for the now ruling Syriza government has ran into a lot of controversy with the mainstream economic institutions that has been bailing out the Greek government and the Greek economy. In this particular blog post, I can hopefully explain the Greek situation in more details, but also impart my opinion on the state of this interesting situation that has been developing in Greece and the European Union.

Debt Situation Background and the Economic Crisis
The debt crisis in Greece had started even before the 2007-2008 Global Financial Crisis with the entrance of Greece into the Eurozone and the overspending that occurred during the Olympics was blamed for the current debt crisis that had its seeds all the way back in 2004. While the Olympic Games was one of the many financial debacles that the Greek government has had in the last two decades, I would say it compares nowhere to the other pressing problems that led up to their debt implosion that occurred after the Global Financial Crisis.

A combination of a corrupt government bureaucracy that struck shady back room deals, a culture of endemic tax evasion and a burdensome public sector led to one of the most serious debt crises that any country has faced. It has been said that the corruption of Greek officialdom led Greece into the Eurozone by utilizing the services of Goldman Sachs to make their debt situation comfortable enough for the not as corrupt European bureaucrats to let Greece into the European Union. The mistake of letting one of the most corrupt nations in Europe to enter the Eurozone was compounded by the fact that much of this debt could have avoided if Greece undertook an immense political restructuring program that changed the way politics in Greece had been operating. From the bribes that the officials had extracted from the Greek taxpayers in order to bribe corrupt European Union officials to the bribes that Greek political parties had handed out in public sector jobs led to one of the worst possible economic environments in all of Europe. The public also engaged in one of the most institutionalized tax evasion schemes in the world. Here are two articles that explain the tax evasion problem that had plagued Greece: One published by the Economist and another by the New Yorker. The Greeks had also simply been living way beyond their means for a long time with the government deficit financed growth and when the financial crisis had hit the country, the entire corrupt Greek political and economic system fell apart.

The US economic crisis caused a huge breakdown in the global debt pyramid that had partially relied on the US mortgage-backed securities for further growth. With the entire debt pyramid collapse, there it unleashed an onslaught of bad debt and bad loans. It triggered a tidal wave of debt crises around in Europe and the worst basket case example in the Hellenic country of Greece. Countries like Greece that had largely been living beyond their means through cheap interest rates that the Eurozone had brought. Through years of unnatural interest rates and a horribly mismanaged national economy, Greece paid the ultimate price for being in the same economic zone with countries like Germany. The Greeks had to be bailed out several times and here's an article from 2012 that described the situation in Greece 3 years ago.

The International Lenders and Greece
The 'Troika' of the International Monetary Fund, the European Union and the European Central Bank had to bailout certain failed European economies, but they also wanted these economies to restructure their economies based on the rules and the regulations of the IMF's "Washington Consensus". Here's an article by the English economist, Dr. John Williamson, which had coined that term as a way to disapprove of the policies that the IMF had implemented in many countries. In Greece, the Troika have demanded the exact same policies as John Williamson had lambasted in his article, especially when it comes to privatization of state industries. This leads to an interesting situation in Greece, where the bloated public sector has been connected to previous political election campaigns of both the major Greek parties as a way of institutionalizing corruption through vote purchasing. The anger of the crowds could be linked to these new policies which should have goals of liberating the Greek economy from the malaise of having an extremely unproductive and corrupt public sector. This has not really worked in Greece as it is very difficult to get rid of the old culture, plus the downward spiral of the Greek economy, which has been exacerbated by the cuts in benefits for ordinary citizens.

The crisis has caused tremendous hardship for many of the normal members of Greece with sharp increases in unemployment, cuts in state spending on welfare and on healthcare, reduction in the state infrastructure and a massive program of privatization. This has not just led to a breakdown in the Greek economy, but also numerous other social problems. Over 25% of Greeks are unemployed, with youth unemployment at 50% of above and many talented Greeks are moving out of Greece to find a more high-paying and desirable job within the Eurozone and in countries such as the United States. There has also been a tremendous breakdown in the normal social order, with countless people living on the streets, rummaging through trash cans to find out and the official poverty rate has increased to 45% by some estimates. Here's an extremely glaring chart that I found on Zero Hedge categorizing the tremendous poverty that has been accelerated acutely by the austerity that has been imposed on the Greece by the Troika:

From this chart, we can talk about the very sharp and very acute increase in poverty that Greece has suffered ever since the start of the financial crisis. There has been reports of a huge resurgence of crime and lawlessness in Greece, which radical political groups such as the anarchists, the fascist Golden Dawn and some say, the current government, Syriza, have all seized the opportunity to increase their following. There have been countless numerous riots and incidents where there have been clashes between the different political elements in Greece. By browsing the internet and YouTube, you will be able to see these many incidents that has happened in a very unsettled and impoverished country. The radical leftists of the Syriza party have seized upon this crisis and by promoting an anti-austerity, pro-stimulus policy program, they have made the rest of the world look at that with a wary eye.

The Recent Election of Syriza and Current Situation
With the rather explosive situation in Greece, the radical leftists of the Syriza party was able to defeat the Troika's favored political party, the mainstream conservative party of the New Democracy. With this election of the Syriza, there has been a tremendous amount of both media coverage in what Alexis Tsipras and the radical Syriza might offer for the country. Here are two articles on Syriza: one that talks about the Syriza intellectuals that were educated in British universities and another on the roots of Alexis Tsipras. What's interesting from this particular situation is the clash between the leftist ideologues within the Syriza party, such as the Finance Minister, and the European finance and banking bureaucrats. Ever since the situation, Syriza has overturned many of the Troika's economic policies, such as the reduction of public sector workforce, the privatization of key publicly held companies and most importantly, they want to overturn the Troika's loan and debt policies. Alexis Tsipras has declared the end of the crippling austerity that the reforms have caused in Greece, but will face a tough battle and an intense clash with the authorities that have been dictating the terms of the Greek economy for the last 5-6 years.

Within the election of Syriza, financial markets at first reacted negatively to the possibility that Syriza would do great harm to the reform process that the Troika had implemented on the Greek economy, but now it has emerged that the European Central Bank will most likely dictate the terms to the Greek government. The Greek government had hoped to renegotiate the terms of the bailout package and the other economic terms that the Troika had implemented on Greece, but it looks like Alexis Tsipras and the Syriza have not completely backtracked from their strong anti-austerity rhetoric. Despite the fact that the European monetary authorities have a strong stranglehold on the Greek government's ability to operate as they had originally promised, they have found little common ground between them and the monetary authorities of countries like Germany. According to a recent article, Greece has been isolated in a previous meeting of finance ministers just before the Eurogroup meeting that will take place on Feb. 11th, which will be an important meeting in which the new Greek authorities will put forth a proposal that they want to be implemented in order to save their country from actually going bankrupt. With this meeting, Alexis Tsipras has just set up a clash with these ministers after laying out concrete plans to end the reforms that the Troika had implemented, especially the crippling austerity that has trapped millions of Greeks into long-term poverty. It will be a very interesting next couple of months for those who will be following how this interferes with the financial markets.

Possible Results and Possible Macroeconomic Effects
I believe that a Greek default and a Grexit of the euro are both entirely impossible. A more realistic solution to this confrontation is a negotiated write-offs of small amounts of Greek debt, while still not solving the problems in the structure of the economic institutions within Greece. Greece will still be continued to be saddled with massive public debt, institutional corruption and an extremely inefficient public sector. To improve the situation in Greece, there must be a change in how Greece functions as a democratic country. There needs to be more transparency in how the bureaucracy is managed, as debts could be potentially saved without resorting to drastic privatization or the massive public sector layoffs. I still don't believe that the institutional corruption or the entrenched political interests within Greece could be fixed overnight, since the new Syriza government wants a return to the statist government that promotes 'social justice' versus an economic model that promotes business growth. I believe that they will be able to get some debt concessions, but it does not address the long-term debt issues that Greece will have to face. The new Syriza government and the European monetary authorities will most likely end up kicking the can down the road.

There are many possible solutions and results that could come from this particular and interesting situation that Greece is facing, not just against its creditors, the Troika and the financial markets, but also against the underlying principles of liberal economics that has been prevalent throughout the world since the 1980s. There has been a resurgence of a previous dominant Keynesian thought in economic thought that has expanded beyond the confines of the New Keynesians and the followers of Paul Samuelson's neoclassical synthesis. I believe the election of Syriza in Greece will continue to trigger the resurgence of left Keynesian economic thought throughout the world, but also other left wing alternatives that might spurn the IMF's Washington Consensus and the general Monetarist and New Keynesian approaches to economic policy. I also believe we could potentially see the development of new economic models to explain the problems that countries such as Greece went through. Maybe there are possible solutions that could be utilized without the pitched ideological battles that has raged within the European community and beyond. I think there are a tremendous sets of new data that could be extrapolated from this particular situation and that data could be analyzed from the resulting resolution to the Greek crisis.

Interesting article on the Chinese money supply and first day of the annual Davos World Economic Forum

I was just scrolling through the several blogs that I read every single day, which include the Marginal Revolution. I have found a very interesting article on the Chinese money supply that Tyler Cowen had posted as a blog earlier in the wee mornings on the first day of the annual World Economic Forum in Davos. The article was quite striking for two reasons:

1. The first reason was the point about the Chinese M2 money supply being 70% higher than the "rather tight" US money supply despite the much "smaller" size of the real Chinese economy versus the US economy. This is particularly interesting as it just shows how the much maligned Federal Reserve is actually more fiscally tight and conservative than their much more activist Chinese Central Bank counterparts. From what I gather, this might also be a false indicator of what the actual GDP growth in China is.

2. This is where my second reason for writing this thought bubble that I had about reading this particular blog that Tyler had written. From the Financial Times article that Tyler had posted in this blog entry, written by Derek Scissors from the American Enterprise Institute, we can conjecture that the Chinese economy will face an extremely rocky road in the coming years. It's a pretty cool article to check out, especially with his particularly interesting views. The Chinese economy might be in trouble in the short term, but I think it might still go pretty smoothly in the longer term.

It is also the first day of the annual Davos World Economic Forum! For those who are not familiar: The Davos meeting is the annual gathering of some of the world's most powerful economic elites, where they gather to discuss some of the pressing challenges that our world faces. It has been around for 40 something years and here are two articles that are worth reading about the contents of the meeting.
2012 New Yorker article 
2015 The Guardian Opinion article

Interesting topics that these powerful people will discuss over the course of the meeting include increasing political instability, global income inequality, climate change, oil and their most pressing topic: financial instability! As many of us know about the rocky world economy and they will be discussing the financial instability that the world is currently/going to face in the coming years. The videos on the earlier World Economic Forum link that I had posted will hopefully interest those that might be interested in the World Economic Forum!

It's been a while since I've posted a blog entry, mainly because of other more urgent tasks that I had to handle this week. I will be posting lots of entries the next couple of days, as it is the exciting week of the World Economic Forum! I will be watching/following the events that unfold in the lovely Swiss resort city of Davos, Switzerland, but also I will be posting another blog post on thoughts about a rather marginal economic theory that I think has some relevance in the current economic turmoil.

Russia Bankrupt and Will Collapse? Not so fast!

As many of you guys have been following the latest stories in the Western media about the great collapse of the Russian economy and Putin's tyrannical regime ending. I think these sensationalist remarks on how Russia is doomed to repeat the financial crisis of 1998 are just ridiculous. I mentioned in an earlier blog article about the dive in the value of the ruble is currently linked to the price of oil, but this doesn't mean Russia will always be like that. Since I'm a huge fan of graphical presentation of statistical data, here is the Bloomberg chart of the current situation here:

This chart is Bloomberg's interactive RUBUSD (Russian Ruble to US dollar) interactive exchange rate chart and I have transposed the price of Brent Crude oil onto it. From the looks of this particular chart, it shows you how interconnected the Russian ruble US dollar exchange rates are with the price of crude oil on international energy markets.This illustration has been put on the Western news media and interpreted as a way to prove that the Russian economy is going to collapse. I believe that the Russian economy will definitely be hurt in the short term as they do not have fully diversified their economy beyond the natural resources as they are currently a rentier economy. A rentier economy is an economy of a state that mostly seeks to sell its natural resources to external economies. In Russia's case, they are not quite a rentier state due to the sheer size of the country's economy and its economic potential.

The Russian economy has a relatively developed economic infrastructure, a highly skilled economy and one of the largest natural resource bases of any country in the world. Articles like this illustrate the sheer potential of the Russian economy, so I think it's too early to say that the Russian economy will not recover in the medium to long term, much to the dismay of Western policymakers. As with every single set of information that is available out there, I believe it's important to take a holistic view of every single economic situation, especially this one.

Another Financial Crisis Coming Down the Road? Maybe? Maybe not? I think it will come from the emerging market economies.

I think there will be another financial crisis in the coming years, regardless of what the Federal Reserve chairman and vice-chairman say in their calm jargon-laden public addresses. There are many articles out there on the internet that are trying to anticipate where the next financial crisis will come from. I believe this next up and coming economic crisis will not originate in the developed world, as the economic lull has finally been somewhat mitigated by the Fed's scrumptiously stimulating quantitative easing. I believe a financial crisis will most likely come with the appreciation of the US dollar and the depreciation in commodity prices. This will impact the financial stability and health of these developing emerging market economies, which will be the impetus for the next global economic crisis. After careful consideration, I have found a couple of articles that are really worth reading, with a couple of them by the famous Korean macro-economist, Hyun-Song Shin, who is famous for his work on global games.

The presentation by the famous economic theorist, Hyun-Song Shin, who also happens to work on the field of global games, concerns financial stability risks. (For those who are unfamiliar with global games, the Wikipedia article gives a bit of insight on it, even though I don't think Wikipedia is the best place for it. A better place to learn about global games is to directly read Dr. Shin's published article, even though it's a challenging read.) Two important points in the presentation that Dr. Shin's gave at the Brookings Institution:

1. Based on his perspective, a stronger US dollar could result in negative consequences for the global economy, which could ultimately impact the global economy.
2. Financial markets' problems could shift to other arenas (such as emerging economies)

This particular article helps to loop this presentation by Dr. Shin with concrete conclusions. The two points I had brought up previously is expanded upon in this brief article. I believe that a stronger dollar will lead to significantly problems for some emerging markets' central banks, such that of the BRICs. This could be mitigated by their new plan to decouple themselves from their surmised disinclination of the dominant position of the US dollar. I think their plan might come too late and the next crisis will occur before their transition, which might cause them to put off their plans to decouple from the current denominated world system.

(To those interested in following Dr. Shin's presentation, the link also provides audio recording of Dr. Shin's presentation)

Another article to be considered is the latest BIS article, whom Dr. Shin co-authored with two others. The article explores the emergence of non-financial corporations from the emerging market economies (EMEs), such as from China, who are partaking in a substantial increase in cross-border capital flows. I think this increase will not just be significantly impacted by a stronger US dollar, but it might lead to an increase in this particular activity. This will have a significant impact on the EMEs' financial stability, which I think will prove to be troubling to the long-term financial health of these EMEs. This should be a deep worry for both economists and financial policymakers in the coming years.

Swiss Referendum on Gold and its wider macro ramifications

An interesting development is coming out of Switzerland, home of pretty mountains and secretive banking. 100,000 Swiss voters have signed a referendum calling for the government to maintain what many call a "partial gold standard". This move requires the Switzerland National Bank to hold 20% of its monetary reserves in the shiny gold bullion. This is big news to anyone following money and government monetary policies, since the gold standard has been used many years in the past. The world financial system has not been actively connected to gold since a couple of years after the Nixon Shock with references to gold removed by a 1976 government decree.

There are several reasons why this referendum is also big news:

1. The recent huge surge in gold reserve purchases by Russia, by India and by China
2. Long term of gold and other currencies that challenge the supremacy of the US dollar as the future reserve currency

The question is if Russia and China are buying up a lot of gold, what are their central banks going to do? Are they diversifying away from using the dollar as a fiat backer of their reserves or are they trying to establish a partial gold standard? There has been speculation for years that the Chinese government working in tandem with the Chinese Central bank has been planning for a Gold-Backed Yuan. Alan Greenspan, who is no stranger to central banking and monetary policy, said recently in an Foreign Affairs article published last month seemed to hint at China's resurgent gold reserve policies that were of huge importance to that of the United States. What's interesting is that Alan Greenspan has come out recently and mentioned that he's worried about the future of monetary policy, but also that gold should be a "good place to put your money these days given its value as a currency outside of the policies conducted by the governments. These statements don't surprise any of us that have been following Alan Greenspan. This goes back to his earlier associations with Ayn Rand and her Objectivist collective that he had participated in, with him penning Gold and Economic Freedom in Ayn Rand's book, Capitalism, the Unknown Ideal. He must think of the massive quantitative easing that the Federal Reserve has undertaken and the impending currency crisis that the Federal Reserve will eventually face.

Where does this lead us to with the Swiss referendum? If the policies on the referendum pass the voters, it would have to go through the many cantons within the Swiss Confederation. If this vote can pass, it would have huge ramifications on the gold markets, the financial markets and the world fiat currency system. If countries that are much larger in scope and in size, like China or Russia, also adopted similar currency laws for their Central Bank, it would create enormous demand for gold, driving up gold prices, while decreasing worldwide demand for the current reserve, which is the US dollar. This vote could have significant macroeconomic ramifications for the world.