Everyday the blogosphere offers an enormous amount of in-depth analysis on any imaginable topic. The world of macroeconomics and economic forecasting is no exception. To keep themselves updated on the latest information, our in-house team of economists scan the world wide web and gather what they consider the most interesting, appealing, informative or just curious blog posts from experts in the field of global economics. Here’s the list of the Top 4 posts from this week. Check it out!
- ThinkMarkets – Mario Rizzo: ‘The Macroeconomics of Food Stamps‘
Is the Food Stamp program self sustained and the best action to deal with the crisis? The number of beneficiaries increased dramatically during the George W. Bush administration and this trend has continued during Obama’s mandate, mainly as a result of rising unemployment and a loosening of eligibility criteria. On 1 November, however, benefits linked to the American Recovery and Reinvestment Act expired, raising concerns that it could have a negative impact on aggregate demand. Against this backdrop, Mario Rizzo argues that the Food Stamp program provides a disincentive to work and that under the current situation, “continued stimulus is not self-sustaining. – Ricard Torné
- Mainly Macro – Simon Wren-Lewis: ‘Here we go again’
Simon Wren-Lewis, economics professor at Oxford University, analyzes how governments often fall into a so-called austerity trap. Wren-Lewis outlines a simple yet vicious cycle that starts when a government imposes austerity measures to maintain confidence in bond markets and uphold debt ratings. However, austerity reduces overall demand and can weigh down or even negate economic growth, which in turn makes it hard to meet established deficit targets. Consequently, the government increases austerity and growth suffers further. Weakening growth prospects leads to a ratings downgrade, confirming the government’s original fear and driving an urge to redouble debt reduction efforts. Wren-Lewis takes S&P’s downgrading of the Netherland’s credit rating in late November as the most recent example of this cycle. Moreover, he argues that countries like the Netherlands or the UK have no issue selling government debt and no real need to achieve externally mandated fiscal targets. He also believes that austerity-driven government are using fiscal policy, “in completely the wrong (pro-cyclical) direction, making everything worse.” Wren-Lewis concludes that governments face political pressure and fear being accused of irresponsibility should they abandon austerity policies and so remain stuck in the trap. – Carl Kelly
- The Grumpy Economist – John H. Cochrane: ‘A Limited Central Bank’
John H. Cochrane, professor at the University of Chicago Booth School of Business, reports on a recent speech by Charles Plosser, president of the Philadelphia Federal Reserve, on the role of the Federal Reserve and on the impacts of its action on the economy. According to Plosser, economic theory points to the fact that a Central Bank can only partially affect employment in the short run and that it cannot determine employment in the long-run. By extending its role and committing to goals for which it is ill-suited, the Federal Reserve risks losing its independence. Plosser believes that the Fed should redesign its role, focus on the long-term goal of price stability and constrain itself to operate under systematic rules. – Armando Ciccarelli
- Fixing the Economist – Philip Pilkington: ‘Hjalmar Schacht, Mefo Bills and the Restoration of the German Economy 1933-1939‘
As Germany was rearming against the terms of the Treaty of Versailles, the country-especially the government-needed a way to fund rearming without leaving a paper trail. Hjalmar Schacht, President of the Reichsbank under the Weimar Republic was the chief architect of Nazi economic policy and the creator of the Mefo bills in order to allow the government to run into a higher deficit, inflate the economy and finally rearm Germany. (Mefo for Metallurgische Forschungsgesellschaft). In a very interesting post, the Philip Pilkington, clearly explains us how Germany did to obtain financing trough the mefo bills.
As Philip mentions, it was not a terribly complex plan: “The military contractors were paid in bills of exchange issued by a shell company. These contractors would then take the bills to a private German bank which would then gladly turn over cash to the holder because they knew that they could then hand the Mefo bill to the Reichsbank which would in turn convert it into cash using their money-issuing powers.”
The resulting spending resulted in the economic boom during Hitler’s mandate. – Ricardo Aceves