gold, Meta Intelligence

Economics-Watching: Kuwait’s Banking Sector Posts Solid Credit Growth in October

[from NBK Group’s Economic Research Department, 21 November, 2024]

Kuwait: Solid credit growth in October driven by household credit. Domestic credit increased by a solid 0.4% in October, driving up YTD growth to 2.9% (3.2% y/y). The recovery in household credit continued, with growth in October at a solid 0.5%, resulting in a YTD increase of 2.4%. While y/y growth in household credit remains a limited 2.3%, annualized growth over the past four months is a stronger 4.7%. Business credit inched up by 0.2% in October, pushing YTD growth to 3.6% (2.9% y/y). Industry and trade drove business credit growth in October while construction and trade are the fastest growing YTD at 17% and 8%, respectively. In contrast, the oil/gas sector continued its downtrend, deepening the YTD decrease to 13%. Excluding the oil/gas sector, growth in business credit would increase to a relatively good 5% YTD. Looking ahead, the last couple of months of the year (especially December) are usually the weakest for business credit, likely due to increased repayments and write-offs, but it will not be surprising if the recovery in household credit is generally sustained, especially given the commencement of the interest rate-cutting cycle. Meanwhile, driven by a plunge in the volatile public-institution deposits, resident deposits decreased in October, resulting in YTD growth of 2.4% (4.2% y/y). Private-sector deposits inched up in October driving up YTD growth to 4.5% compared with 10% for government deposits while public-institution deposits are a big drag (-14%). Within private-sector KD deposits, CASA showed further signs of stabilization as there was no decrease for the third straight month while the YTD drawdown is a limited 1%.

Chart 1: Kuwait credit growth

(% y/y)

Chart 2: UK inflation

(%)

Egypt: IMF concludes mission for fourth review, sees external risks. The IMF concluded its visit to Egypt after spending close to 2 weeks, holding several in-person meetings with the Egyptian authorities, private sector, and other stakeholders. The IMF released a statement mentioning that the current ongoing geopolitical tensions in the region in addition to an increasing number of refugees have affected the external sector (Suez Canal receipts down by 70%) and put severe pressure on the fiscal front. The Fund acknowledged the Central Bank of Egypt’s commitment to unify the exchange rate, maintain the flexible exchange rate regime, and keep inflation on a firm downward trend over the medium term by substantially tightening monetary policy. It also highlighted that continued policy discipline was also a key to containing fiscal risks, especially those related to the energy sector. The Fund, as always, re-iterated the need for promoting the private sector mainly through an enhanced tax system and accelerating divestment plans of the state firms. Finally, it also said that the discussions would continue over the coming days to finalize the agreement on the remaining policies and reform plans. However, the release did not provide any clear hints about the conclusion on the government’s earlier request to push the timeline of some of the subsidy moves.

Oman: IMF completes article IV with a strong outlook for the economy in 2025. Oman’s economy continued to expand with growth reaching 1.9% in the first half of 2024 (versus 1.2% in 2023), despite being weighed down by OPEC+ mandated oil production cuts as non-oil GDP grew a stronger 3.8% y/y in H1 (versus 1.8% in 2023). The fiscal and current account balances remain in a comfortable situation evident by a decline in public sector debt and the recent rating upgrade to investment grade. The Fund expects Oman’s economic growth to see a strong rebound in 2025, supported by higher oil production. It also believes that fiscal and current account balances will remain in surplus but at lower levels. Key risks to the outlook stem from oil price volatility and intensifying geopolitical tensions. The IMF also mentioned that further efforts are needed to raise nonhydrocarbon revenues through more tax policy measures and the phasing out of untargeted subsidies which should help in freeing up resources to finance growth under the government’s diversification agenda.

UK: Inflation rises more than forecast, reinforcing BoE’s caution on rate cuts. UK CPI inflation increased to 2.3% y/y in October from 1.7% the previous month, slightly above the market and the Bank of England’s forecast of 2.2%. On a monthly basis too, inflation rose to 0.6%, a seven-month high, from September’s no change. The steep rise was mainly driven by an almost 10% rise in the household energy price cap effective from October. Core inflation also accelerated to 3.3% y/y (0.4% m/m) from 3.2% (0.1% m/m). While goods prices continued to fall (-0.3% y/y), service prices rose at a faster rate of 5% from 4.9%. Recently, the Bank of England had cautioned about inflation quickening next year (projecting a peak rate of 2.8% in Q3 2025), citing the impact of higher insurance contributions and rising minimum wages as outlined in the latest government budget. Therefore, with inflation rising above forecast, the bank will likely slow the pace of monetary easing after delivering two interest rate cuts of 25 bps earlier, with markets now seeing only two additional cuts by the end of 2025.

Eurozone: ECB warns of fiscal and growth risks in its latest Financial Stability Review [archived PDF]. In its most recent Financial Stability Review (November) [archived PDF], the European Central Bank warned that elevated debt and fiscal deficit levels and anemic long-term growth could expose sovereign debt vulnerabilities in the region, stoking concerns of a repeat of the 2011 sovereign debt crisis. Maturing debt being rolled over at much higher borrowing rates raising debt service costs poses risks to countries with little fiscal space and leaves certain governments exposed to market fluctuations. The bank also emphasized the risks of high equity valuations, low liquidity and a greater concentration of exposure among non-banks. Moreover, it sees current geopolitical uncertainties and the possibility of more trade tensions as heightening risks. The Eurozone’s current government debt-to-GDP ratio stands at 88%, but the underlying data suggest a much more precarious situation with Greece, Italy, and France’s ratios at 164%, 137% and 112%. Recently, concerns about France’s high fiscal deficit (around 5.9% of GDP) and elevated debt levels saw yields on the country’s bonds rise steeply, widening the spread gap with German bonds to the highest level in over a decade.

Stock markets	Index	Daily Change (%)	YTD Change (%)
Regional
Abu Dhabi (ADI)	9,405	-0.23	-1.80
Bahrain (ASI)	2,043	-0.37	3.62
Dubai (DFMGI)	4,761	0.61	17.26
Egypt (EGX 30)	30,588	-0.33	23.18
GCC (S&P GCC 40)	709	0.09	-0.52
Kuwait (All Share)	7,353	-0.08	7.86
KSA (TASI)	11,868	-0.07	-0.83
Oman (MSM 30)	4,609	0.00	2.10
Qatar (QE Index)	10,438	0.12	-3.62
International
CSI 300	3,986	0.22	16.17
DAX	19,005	-0.29	13.45
DJIA	43,408	0.32	15.17
Eurostoxx 50	4,730	-0.45	4.60
FTSE 100	8,085	-0.17	4.55
Nikkei 225	38,352	-0.16	14.61
S&P 500	5,917	0.00	24.05

3m interbank rates	%	Daily Change (bps)	YTD Change (bps)
Bahrain	5.86	-1.29	-66.34
Kuwait	3.94	0.00	-37.50
Qatar	6.00	0.00	-25.00
UAE	4.43	3.81	-89.96
Saudi	5.50	-4.75	-73.14
SOFR	4.52	-0.09	-81.13

Bond yields	%	Daily Change (bps)	YTD Change (bps)
Regional
Abu Dhabi 2027	4.66	5.00	33.9
Oman 2027	5.49	6.00	33.0
Qatar 2026	4.68	6.00	16.1
Kuwait 2027	4.69	3.00	35.0
Saudi 2028	4.96	1.00	43.9
International 10-year
US Treasury	4.41	1.77	55.3
German Bund	2.34	0.35	31.2
UK Gilt	4.47	2.60	93.0
Japanese Gov’t Bond	1.07	1.0	45.4

Exchange rates	Rate	Daily Change (%)	YTD Change (%)
KWD per USD	0.31	0.04	-0.05
KWD per EUR	0.32	-0.46	-1.98
USD per EUR	1.05	-0.49	-4.47
JPY per USD	155.43	0.50	10.19
USD per GBP	1.27	-0.25	-0.62
EGP per USD	49.67	0.34	61.00

Commodities	$/unit	Daily Change (%)	YTD Change (%)
Brent crude	72.81	-0.68	-5.49
KEC	73.78	0.74	-7.26
WTI	68.87	-0.75	-3.88
Gold	2,648.2	0.80	28.40

Disclaimer: While every care has been taken in preparing this publication, National Bank of Kuwait accepts no liability whatsoever for any direct or consequential losses arising from its use. Daily Economic Update is distributed on a complimentary and discretionary basis to NBK clients and associates. This report and previous issues can be found in the “News & Insight / Economic Reports” section of the National Bank of Kuwait’s web site. Please visit their web site, nbk.com, for other bank publications.

Movies as an Education in Global Looting: The Sea Hawk (1940)

Movies and the World as an Arena of Violent Domination and Global Looting

The classic Warner Brothers swashbuckler, The Sea Hawk, from 1940, within its romantic adventures and intricate swordfights (perhaps comparable to the car chases of later movies) is a partly historical, partly fictional version of a world built on imperial struggles and ransacking and despoiling. The hegemonic power in the West (and perhaps worldwide) is Spain. Phillip II the king-emperor wants to own and dominate and rule the whole world. In 1588, his Spanish Armada loses to England. (The British of course want to compare this to the Battle of Britain against the German Luftwaffe.)

Set in 1585, The Sea Hawk opens with King Philip II of Spain plotting world domination, laughing that all world maps will soon read simply “Spain” — once England is out of the way, of course.

The Spanish ambassador departs for England to escort his niece to Queen Elizabeth’s court, but in a spectacular sea battle, the Spanish galley is soundly damaged, boarded, raided and sunk by a group of pirates led by Captain Geoffrey Thorpe, a Sir Walter Raleigh stand-in played by Erroll Flynn. Thorpe rescues the galley slaves — they row the boat — and spares the crew, taking them aboard and delivering them to England. The jewels and other bounty (or a portion thereof) are a gift to the Queen.

His crew is part of a noble privateer coalition — the Sea Hawks — who justify their piracy as reclamation of English goods (and enslaved sailors) from the Spanish behemoth. The political fallout from Thorpe’s abduction of the ambassador forces Elizabeth to outlaw the Sea Hawks, including an official denial (and private approval) of his mission to Panama to steal a shipment of Aztec gold.

Inca gold is also mentioned in the movie as a target of robbing.

Sir John Hawkins (1532–1595), part of this group of global sailor-pirates and master-mariners, was one of the most notable sailors and naval commanders of the sixteenth century.

He is known for his pivotal role in the maritime history of England and the rise of the global slave trade.

John Hawkins, the son of a merchant, was born in Plymouth in 1532. He became a sea captain and in 1562 became the first Englishman to start capturing people in Sierra Leone and selling them as slaves to Spanish settlers in the Caribbean. (Notice that selling slaves does not discriminate against Spaniards even with Phillip II threatening England. Business is business.)

Stealing Aztec gold as part of colonial or imperial plundering and the slave trade were part of the dark side of history, something the standard history books “skate over” dishonestly.

A key scene between the Spanish aristocratic beauty and Captain Thorpe:

Doña María Álvarez de Córdoba: “I’m not in the habit of conversing with thieves. I thought I made that quite clear, Captain Thorpe.”

Captain Geoffrey Thorpe: “Why, yes, all except your definition. Tell me, is a thief an Englishman who steals?”

Doña María Álvarez de Córdoba: “It’s anybody who steals… whether it’s piracy or robbing women.”

Captain Geoffrey Thorpe: “Oh, I see. I’ve been admiring some of the jewels we found in your chest… particularly the wrought gold. It’s Aztec, isn’t it? I wonder just how those Indians were persuaded to part with it.”
The Sea Hawk (1940)

Donald Trump continues this tradition of looting when he says of Iraq’s oil:

“Think of it as our oil under their sand.”

Thus the whole world is an arena where the weak don’t have any property rights: not the oil or gold, not themselves (slavery) and not their country (colonialism).

This exploitative hierarchy and “world-system” is part of “the way of the world” and even a romantic adventure story like 1940’s The Sea Hawk gives you a Hollywoodized glimpse into its roots. Imperial struggles in the West spill over into colonization and ransacking and looting. History books one sees in high school are dishonest and in that sense uninformative or even disinformative.

The popular PBS travel series Rick Steves’ Europe unintentionally gives us a wonderful example of this notion of plunder and looting as a pillar of world history in the show on Venice. Rick Steves is talking about the various statues in Venice’s central St. Mark’s Square (Piazza San Marco), and comments “I’d call the style ‘Early Ransack.’”

This Rick Steves quip about ransacking and historical wealth-building is very informative.

Globalization and Its Nuances

The PBS TV program History Detectives had an episode entitled “Atocha Spanish Silver” where the wreck of the Spanish ship Atocha was described like this:

“In 1985, one of the greatest treasure discoveries was made off the Florida Keys, when the wreck of the Spanish ship Atocha was found. On board were some forty tons of silver and gold, which in 1622 had been heading from the New World to the Spanish treasury as the means to fund the Thirty Years’ War.”

Is this an obvious case of globalization? What about Marco Polo? Rome–Han dynasty China trade in silks? Silk Road and Samarkand? Colombus? Magellan? Vasco da Gama?

All of these cases constitute a kind of harmless kind of “pop globalization” based on exotic voyages and travels.

Consider another such example, perhaps more academic:

“About the middle of the sixteenth century Antwerp reached its apogee. For the first time in history there existed both a European and a world market; the economies of different parts of Europe had become interdependent and were linked through the Antwerp market, not only with each other but also with the economies of large parts of the rest of the world. Perhaps no other city has ever again played such a dominant role as did Antwerp in the second quarter of the sixteenth century.”
(Europe in the Sixteenth Century, Koenigsberger and Mosse, Holt Rinehart Publishers, 1968, page 50)

Debt repudiations in several places in the 1550s are described like this:

“This caused the first big international bank crash, for the Antwerp bankers now could not meet their own obligations.”
(Europe in the Sixteenth Century, Koenigsberger and Mosse, Holt Rinehart Publishers, 1968, page 51)

This sounds like some kind of identifiably global period.

Actually, modern historians define globalization as “price convergence” (i.e., wheat has now a unified “world price,” implying a world market). This rigorous definition is confirmed by and also shows up in the data in the 1820s and may or may not be prefigured by all the Marco Polo and Atocha silver stories, mentioned above.

These episodes in history are not there yet.

One sees wheat prices and other commodity prices converging in the 1820s and thereafter based on railroads, steamships and telegrams.

The classic in this kind of analysis is:

Globalization and History: The Evolution of a Nineteenth-Century Atlantic Economy, by Kevin O’Rourke and Jeffrey Williamson.

Kevin O’Rourke and Jeffrey Williamson present a coherent picture of In Globalization and History, Kevin O’Rourke and Jeffrey Williamson present a coherent picture of trade, migration, and international capital flows in the Atlantic economy in the century prior to 1914—the first great globalization boom, which anticipated the experience of the last fifty years. The authors estimate the extent of globalization and its impact on the participating countries, and discuss the political reactions that it provoked. The book’s originality lies in its application of the tools of open-economy economics to this critical historical period—differentiating it from most previous work, which has been based on closed-economy or single-sector models. The authors also keep a close eye on globalization debates of the 1990s, using history to inform the present and vice versa. The book brings together research conducted by the authors over the past decade—work that has profoundly influenced how economic history is now written and that has found audiences in economics and history, as well as in the popular press.
(book summary)

In everyday language, we associate the word globalization with some ever-increasing Marco Polo phenomena. While that’s not entirely wrong, globalization in the more technical sense begins to show up in the data only from the 1820s. At this point, we begin to see the convergence of worldwide wheat prices, for example. This makes the world, for the first time, a global “store” with unified prices. Here is the technical beginning of globalization. The years 1870-1914 are subsequently the first real era of modern globalization and represent a kind of “take-off” from the first stirrings of the 1820s. World Wars I & II might be seen as globalization backlash.

At this moment in world history, whether Putin’s invasion of Ukraine will constitute a new wave of deglobalization remains to be seen.

Education and the Historical Swirl: Part II

We concluded Part I on this topic with the following comments which we wish students to incorporate into their educations, irrespective of the major, field or concentration:

The gold standard itself, dominated from London led to intricate problems: Golden Fetters: The Gold Standard and the Great Depression, 1919-1939 (published in 1992) by Barry Eichengreen, the leading historian of monetary systems, shows the downstream pitfalls of the gold standard.
In other words, the de facto emergence of Britain/London as the world commercial and policy center and the relation of this emergence to empire and international tensions and rivalries, means it is very problematical for any country to steer a course other than staying in tandem with British moods and ideologies, such as free trade. Any country by itself would find it difficult to have a more independent policy. (Friedrich List of Germany, who died in 1846, wrestles with these difficulties somewhat.) The attempts to find “autonomy and autarky” in the interwar years (Germany, Japan, Italy) led to worse nightmares. The world seems like a “no exit” arena of ideologies and rivalries.
The “crazy dynamics” and the semi-anarchy of the system, which continues to this day and is even worse, means that policy-making is always seen through a “dark windshield.”
History in the globalizing capitalist centuries, the nineteenth and the twentieth, is a kind of turbulent swirl and not a rational “walk.”

Here’s a bizarre but necessary comment on this sense of turbulent and surprising swirl propelling history forwards and backwards and sidewards at the same time:

The historian, Barry Eichengreen (mentioned above), is a distinguished analyst of world monetary systems at U.C. Berkeley and perhaps the leading expert today on the evolution of such systems.

From movies such as Shoah and Last of the Unjust by the great filmmaker Claude Lanzmann, we know that Barry Eichengreen’s mother was Lucille Eichengreen, a Jew born in Hamburg, Germany (1925) and deported to the Łódź Ghetto in Poland during World War II. She survived through many miraculous accidents and contingencies, then wrote about her experiences.

We get a deeper insight into “the way of the world” by seeing that the Holocaust itself has as a backdrop the anarcho-craziness of the world. The Fascists and Nazis were jumping from the “frying pan into the fire” by imagining that world conquest and world-murdering could “stop the world.” They and their favored populations could “get off” and step into a racial dreamworld. They were taking today’s concept of “gated community” and applying it to the “racial community” (Volksgemeinschaft, in German).

This led to the phenomenon depicted in Goya’s famous aquatint: The Sleep of Reason Produces Monsters.

The perceived madness of the world and the madness of leaders that this perception leads to have never been analyzed together.

The fact that the behavior of world leaders could be “crazy like a fox” (half-insane, half-opportunistic, or Machiavellian “clever”) is a complicating factor or twist from Mussolini until today.

Education and Seeing the “Swirl” of History

The tempo and rhythm of world events and world history are not captured in the linear and bland books one reads in schools and colleges where the sense of the stormy forward turbulence of the world is not communicated. Here’s an example that does communicate this “crazy dynamics”:

The leading historian, James Joll, in his excellent Europe Since 1870: An International History talks about gold and the gold standard in this way:

“The world supply of gold was diminishing, as the effects of the gold rushes in California and Australia in the 1850s and 1860s passed. This coincided with the decision in the 1870s of many of the leading countries to follow Britain’s example to use gold rather than silver as the basis of their currency — Germany in 1871, France in 1876 for example — so that the demand for gold rose just as the supply was temporarily declining. This in turn led to some doubt about the use of a gold standard and to much discussion about ‘bi-metallism’ and about the possibility of restoring silver to its place as the metal on which the world’s currency should be based, though this movement had more success in the United States than in Europe, where gold has now established itself firmly. By the 1890s however the discovery of new gold deposits in South Africa, Western Australia and Canada put an end to these discussions and uncertainties, as far as currency was concerned, for some fifty years.”
(James Joll, Europe Since 1870: An International History, Penguin Books, 1976, page 35)

These twists and turns and accidents or contingencies don’t communicate the real semi-turmoil surrounding all the decisions, which we can infer from the comment by a German politician in 1871, “We chose gold, not because gold was gold, but because Britain was Britain.” (Ian Patrick Austin, Common Foundations of American and East Asian Modernisation: From Alexander Hamilton to Junichero Koizumi, Select Publishing, 2009, page 99.)

Professor Joll delineates the emergent primacy of England:

“The establishment of London as the most important center in the world for shipping, banking, insurance-broking and buying and selling generally, as well as the growth of British industry, had been based on a policy of free trade.”
(James Joll, Europe Since 1870: An International History, Penguin Books, 1976, page 34)

The gold standard itself, dominated from London led to intricate problems: Golden Fetters: The Gold Standard and the Great Depression, 1919-1939 (published in 1992) by Barry Eichengreen, the leading historian of monetary systems, shows the downstream pitfalls of the gold standard.

In other words, the de facto emergence of Britain/London as the world commercial and policy center and the relation of this emergence to empire and international tensions and rivalries, means it is very problematical for any country to steer a course other than staying in tandem with British moods and ideologies, such as free trade. Any country by itself would find it difficult to have a more independent policy. (Friedrich List of Germany, who died in 1846, wrestles with these difficulties somewhat.) The attempts to find “autonomy and autarky” in the interwar years (Germany, Japan, Italy) led to worse nightmares. The world seems like a “no exit” arena of ideologies and rivalries.

The “crazy dynamics” and the semi-anarchy of the system, which continues to this day and is even worse, means that policy-making is always seen through a “dark windshield.”

History in the globalizing capitalist centuries, the nineteenth and the twentieth, is a kind of turbulent swirl and not a rational “walk.”

Essay 109: Economics-Watching IMF RESMF Newsletter (November 2019)

from the IMF:

IMF Research Perspectives, volume 20, number 1

Featured Policy Work

Investigating the Impact of Global Stablecoins

The provision of financial services and products is undergoing rapid transformation, including through the development of stablecoins, which seek to stabilize the price of a digital currency by linking its value to that of a pool of assets. Stablecoins can potentially serve as a means of payment and store of value, and may contribute to the development of global payment arrangements that are faster, cheaper, and more inclusive. Yet these potential benefits can only be realized if significant risks are addressed. Stablecoin initiatives built on an existing big tech platform with a global customer base may have the potential to scale rapidly, and could pose regulatory and oversight challenges and risks related to consumer protection, fair competition, and the combating of money laundering and terrorism financing, among others, as well as have a significant impact on public policy goals such as financial stability and monetary policy transmission. This paper, written jointly by G7 members, the BIS, and the IMF, including RESMF staff, scopes the causes and implications of the adoption of global stablecoins, and the potential policy efforts to rein in the risks they can bring about.

Read the full report [Archived PDF].

Recent Research

IMF Research Perspectives, Volume 20, Number 1 [Archived PDF]

Blog

The Mobilisation Effects of Multilateral Development Banks

by Giulia Lotti & Andrea Presbitero

Filling the investment gap to achieve the sustainable development goals is one of the most important development challenges. Multilateral development banks can play an important role through a stronger engagement to attract additional resources from the private sector. This column uses data on syndicated lending to a large set of developing countries and shows that MDBs are able to crowd in bank credit to sectors to which they lend. The role of MDBs could be relevant, as they can mobilize up to seven dollars in bank credit for each dollar invested.

[Archived PDF]

Working Papers

Designing Central Bank Digital Currencies

by Itai Agur, Anil Ari & Giovanni Dell’Ariccia

We study the optimal design of a central bank digital currency (CBDC) in an environment where agents sort into cash, CBDC and bank deposits according to their preferences over anonymity and security; and where network effects make the convenience of payment instruments dependent on the number of their users. CBDC can be designed with attributes similar to cash or deposits, and can be interest-bearing: a CBDC that closely competes with deposits depresses bank credit and output, while a cash-like CBDC may lead to the disappearance of cash. Then, the optimal CBDC design trades off bank intermediation against the social value of maintaining diverse payment instruments. When network effects matter, an interest-bearing CBDC alleviates the central bank’s tradeoff.

[Archived PDF]

One Ring to Rule Them All? New Evidence on World Cycles

by Eric Monnet & Damien Puy

We estimate world cycles using a new quarterly dataset of output, credit and asset prices assembled using IMF archives and covering a large set of advanced and emerging economies since 1950. World cycles, both real and financial, exist and are generally driven by US shocks. But their impact is modest for most countries. The global financial cycle is also much weaker when looking at credit rather than asset prices. We also challenge the view that synchronization has increased over time. Although this is true for prices (goods and assets), this not true for quantities (output and credit). The world business and credit cycles were as strong during Bretton Woods (1950–1972) as during the Globalization period (1984-2006). For most countries, the way their output co-moves with the rest of the world has changed little over the last 70 years. We discuss the reasons behind these new findings and their policy implications for small open economies.

[Archived PDF]

Optimal Macroprudential Policy and Asset Price Bubbles

by Nina Biljanovska, Lucyna Gornicka & Alexandros Vardoulakis

An asset bubble relaxes collateral constraints and increases borrowing by credit-constrained agents. At the same time, as the bubble deflates when constraints start binding, it amplifies downturns. We show analytically and quantitatively that the macroprudential policy should optimally respond to building asset price bubbles non-monotonically depending on the underlying level of indebtedness. If the level of debt is moderate, policy should accommodate the bubble to reduce the incidence of a binding collateral constraint. If debt is elevated, policy should lean against the bubble more aggressively to mitigate the pecuniary externalities from a deflating bubble when constraints bind.

[Archived PDF]

Doing More for Less? New Evidence on Lobbying and Government Contracts

by Senay Agca, Deniz O Igan, Fuhong Li & Prachi Mishra

Why do firms lobby? This paper exploits the unanticipated sequestration of federal budget accounts in March 2013 that reduced the availability of government funds disbursed through procurement contracts to shed light on this question. Following this event, firms with little or no prior exposure to the federal accounts that experienced cuts reduced their lobbying spending. In contrast, firms with a high degree of exposure to the cuts maintained and even increased their lobbying spending. This suggests that, when the same number of contractors competed for a piece of a reduced pie, the more affected firms likely intensified their lobbying efforts to distinguish themselves from the others and improve their chances of procuring a larger share of the smaller overall. These findings are stronger in government-dependent sectors and when there is intense competition. The evidence is more consistent with a rent-seeking explanation for lobbying.

[Archived PDF]

The Long Shadow of the Global Financial Crisis: Public Interventions in the Financial Sector

by Deniz O Igan, Hala Moussawi, Alexander F. Tieman, Aleksandra Zdzienicka, Giovanni Dell’Ariccia, Paolo Mauro

We track direct public interventions and public holdings in 1,114 financial institutions over the period 2007–17 in 37 countries based on publicly available information. We use aggregate official data to validate this new dataset and estimate the fiscal impact of interventions, including the value of asset holdings remaining in state hands at end-2017. Direct public support to financial institutions amounted to $1.6 trillion ($3.5 trillion including guarantees), with larger amounts allocated to lower capitalized and less profitable banks. As of end-2017, only a few countries had fully divested the initial support they provided during the crisis. Public holdings were divested faster in better capitalized, more profitable, and more liquid banks, and in countries where the economy recovered faster. In countries where the government stake remained high relative to the initial intervention, private investment and credit growth were slower, financial access, depth, efficiency, and competition were worse, and financial stability improved less.

[Archived PDF]

Do Old Habits Die Hard? Central Banks and the Bretton Woods Gold Puzzle

by Eric Monnet & Damien Puy

Why did monetary authorities hold large gold reserves under Bretton Woods (1944–1971) when only the US had to? We argue that gold holdings were driven by institutional memory and persistent habits of central bankers. Countries continued to back currency in circulation with gold reserves, following rules of the pre-WWII gold standard. The longer an institution spent in the gold standard (and the older the policymakers), the stronger the correlation between gold reserves and currency. Since dollars and gold were not perfect substitutes, the Bretton Woods system never worked as expected. Even after radical institutional change, history still shapes the decisions of policymakers.

[Archived PDF]

The Price of Capital Goods: A Driver of Investment Under Threat

by Weicheng Lian, Natalija Novta, Evgenia Pugacheva, Yannick Timmer & Petia Topalova

Over the past three decades, the price of machinery and equipment fell dramatically relative to other prices in advanced and emerging market and developing economies. Using cross-country and sectoral data, we show that the decline in the relative price of tangible tradable capital goods provided a significant impetus to the capital deepening that took place during the same time period. The broad-based decline in the relative price of machinery and equipment, in turn, was driven by the faster productivity growth in the capital goods producing sectors relative to the rest of the economy, and deeper trade integration, which induced domestic producers to lower prices and increase their efficiency. Our findings suggest an additional channel through which rising trade tensions and sluggish productivity could threaten real investment growth going forward.

[Archived PDF]

Credit Supply and Productivity Growth

by Francesco Manaresi & Nicola Pierri

We study the impact of bank credit on firm productivity. We exploit a matched firm-bank database covering all the credit relationships of Italian corporations, together with a natural experiment, to measure idiosyncratic supply-side shocks to credit availability and to estimate a production model augmented with financial frictions. We find that a contraction in credit supply causes a reduction of firm TFP growth and also harms IT-adoption, innovation, exporting, and adoption of superior management practices, while a credit expansion has limited impact. Quantitatively, the credit contraction between 2007 and 2009 accounts for about a quarter of observed the decline in TFP.

[Archived PDF]

The Motives to Borrow

by Antonio Fatás, Atish R. Ghosh, Ugo Panizza & Andrea F Presbitero

Governments issue debt for good and bad reasons. While the good reasons—intertemporal tax-smoothing, fiscal stimulus, and asset management—can explain some of the increases in public debt in recent years, they cannot account for all of the observed changes. Bad reasons for borrowing are driven by political failures associated with intergenerational transfers, strategic manipulation, and common pool problems. These political failures are a major cause of overborrowing though budgetary institutions and fiscal rules can play a role in mitigating governments’ tendencies to overborrow. While it is difficult to establish a clear causal link from high public debt to low output growth, it is likely that some countries pay a price—in terms of lower growth and greater output volatility—for excessive debt accumulation.

[Archived PDF]

Discriminatory Pricing of Over-the-Counter Derivatives

by Harald Hau, Peter Hoffmann, Sam Langfield & Yannick Timmer

New regulatory data reveal extensive p r ice discrimination against non-financial clients in the FX derivatives market. The client at the 90th percentile pays an effective spread of 0.5%, while the bottom quarter incur transaction costs of less than 0.02%. Consistent with models of search frictions in over-the-counter markets, dealers charge higher spreads to less sophisticated clients. However, price discrimination is eliminated when clients trade through multi-dealer request-for-quote platforms. We also document that dealers extract rents from captive clients and market opacity, but only for contracts negotiated bilaterally with unsophisticated clients.

[Archived PDF]

Essay 79: Past and Present Thinking

History is “forever new” and we keep asking “what’s new?” but the past is “forever suggestive” and so we inquire here as to whether the past gives us interesting echoes of the more recent.

Specifically, we juxtapose the “closing of the gold window” in August 1971 (Nixon) and the British gold standard gyrations between 1925 and 1931, when England left gold (i.e., September 1931).

At the time, under Nixon, the U.S. also had an unemployment rate of 6.1% (August 1971) and an inflation rate of 5.84% (1971).

To combat these problems, President Nixon consulted Federal Reserve chairman Arthur Burns, incoming Treasury Secretary John Connally, and then Undersecretary for International Monetary Affairs and future Fed Chairman Paul Volcker.

On the afternoon of Friday, August 13, 1971, these officials along with twelve other high-ranking White House and Treasury advisors met secretly with Nixon at Camp David. There was great debate about what Nixon should do, but ultimately Nixon, relying heavily on the advice of the self-confident Connally, decided to break up Bretton Woods by announcing the following actions on August 15:

Nixon directed Treasury Secretary Connally to suspend, with certain exceptions, the convertibility of the dollar into gold or other reserve assets, ordering the gold window to be closed such that foreign governments could no longer exchange their dollars for gold.
Nixon issued Executive Order 11615 (pursuant to the Economic Stabilization Act of 1970), imposing a 90-day freeze on wages and prices in order to counter inflation. This was the first time the U.S. government had enacted wage and price controls since World War II.
An import surcharge of 10 percent was set to ensure that American products would not be at a disadvantage because of the expected fluctuation in exchange rates.

Speaking on television on Sunday, August 15, when American financial markets were closed, Nixon said the following:

“The third indispensable element in building the new prosperity is closely related to creating new jobs and halting inflation. We must protect the position of the American dollar as a pillar of monetary stability around the world.
“In the past 7 years, there has been an average of one international monetary crisis every year …
“I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.
“Now, what is this action—which is very technical—what does it mean for you?
“Let me lay to rest the bugaboo of what is called devaluation.
“If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today.
“The effect of this action, in other words, will be to stabilize the dollar.”

Britain’s own experience in the twenties is explained like this:

“In 1925, Britain had returned to the gold standard.
(editor: This Churchill decision was deeply critiqued by Keynes.)
“When Labour came to power in May 1929 this was in good time for Black Friday on Wall Street in the following October.
“After the Austrian and German crashes in May and July 1931, Britain’s financial position became critical, and on 21st September she abandoned the gold standard.
“London was still the world’s financial capital in 1931, and the British abandonment of the gold standard set off a chain of reactions throughout the world.
“Strangely enough Germany and Austria maintained the gold standard…”

(Europe of the Dictators, Elizabeth Wiskemann, Fontana/Collins, 1977, page 92-93)

Nixon’s policies gave us the demise of Bretton Woods, while the economic gyrations of 1925-1931 were part of the lead-up to World War II.

The setting is both “infinitely different” across the decades but the feeling of “flying blind” applies to both cases: U.S.A. “closing the gold window,” August 1971 and Britain’s overturning Churchill’s 1925 return to the gold standard, by 1931. One gets the sense of “concealed turmoil” and a lot of “winging it” in both cases. Policy-makers disagreed and they all saw the world of their moments “through a glass, darkly.”

Essay 39: Movies as a “Parachute” or Backdoor Into the Field of Economics

Here’s a second example of using movies to “sneak up on” a field such as economics.

Think of the movie, The Treasure of the Sierra Madre, from 1948, a Humphrey Bogart classic:

In 1925, in the Mexican oil-town of Tampico, Fred C. Dobbs (Humphrey Bogart) and Bob Curtin (Tim Holt), two unemployed American drifters, survive by bumming for spare change. They are recruited by an American labor contractor, Pat McCormick (Barton MacLane), as roughnecks to construct oil rigs for $8 a day. When the project is completed, McCormick skips out without paying the men.

Returning to Tampico, the two vagrants encounter the grizzled prospector Howard (Walter Huston) in a flophouse. The loquacious and penniless ex-miner holds forth on the virtues of gold prospecting and the perils of striking it rich. The two younger men feel the lure of gold and contemplate its risks. Dobbs and Curtin run into McCormick at a cantina, and after a desperate bar fight, they collect their back wages in cash. When Dobbs wins a small jackpot in the lottery, he pools his funds with Curtin and Howard to finance a gold prospecting journey to the Mexican interior.

The flophouse mentioned above (“Oso negro”) has a quick scene which is a marvelous “parachute” into economics: a group of men begin to reflect on why gold is so expensive while the basics of life like water or air are not. Howard (their “cracker barrel philosopher-sage,” played by Walter Huston) explains that a thousand men set out to find gold. 999 of the men fail to find any, one finds some. The price of gold has to reflect the costs of finding it (i.e., men, equipment, time, effort, opportunity costs, risks, danger, etc.) by all thousand and include the 999 failures and not just the one success. This is an example, albeit primitive, of something like the labor-theory of value explored by Ricardo and then Marx:

Labor theory of value

The labor theory of value (LTV) is a heterodox theory of value that argues that the economic value of a good or service is determined by the total amount of “socially necessary labor” required to produce it. … Marx did not refer to his own theory of value as a “labor theory of value.”

Again, using this movie as a charming or enchanting “jumping off place,” you would begin to “dive into” those pages of the textbook that are relevant, much as you’d use a dictionary to look up some words. You then read towards the front and the back of the textbook, coming at it your own way, mindful of these questions of yours which begin to give the field a “shape.” You could do the “standard slog” through the textbook, none of which you remember three days after the course because nothing was based on your own “enchanted” searching and exploring.

Lastly, the author of the original 1927 novel, on which the movie is based, B. Traven was a German anarchist and he may have analyzed the world and its prices and costs (i.e., economics) like Howard in the movie. This too is itself another “pathway” into economics, a biographical one.