[Review] Heiner Flassbeck - Fundamentals of Relevant Economics - International Capital- and Finance Markets

Siehe auch:
[Rezension] Heiner Flassbeck - Grundlagen einer relevanten Ökonomik - Internationale Kapital- und Finanzmärkte

Heiner Flassbeck is an economist from Germany. The economist born on December 12, 1950 was among other things State Secretary in the Federal Ministry of Finance under Oskar Lafontaine (SPD) from 1998 to 1999. And from January 2003 to the end of 2012 he was Chief Economist (Chief of Macroeconomics and Development) at the United Nations Conference on Trade and Development (UNCTAD). Flassbeck publishes among other things on Makroskop and Relevante Ökonomik in German and on Flassbeck Economic in English.

The book "Fundamentals of Relevant Economics (Grundlagen einer relevanten Ökonomik)" was written together with co-authors Friederike Spiecker, Patrick Kaczmarczyk and Alexander Mosca Spatz. The book is clearly specialist literature in nature but not a pure textbook. Although connections are discussed in detail at the level of specialist articles no absolute fundamentals are conveyed. The quality of the derivations is very high as the arguments are based on empiricism and logic rather than made in a vacuum. This sets the author apart from any ideology despite the topic. The book gains additional importance due to the current recession.

The Market does not Fix it

The efficient market hypothesis according to Eugene F. Fama is a logical conclusion. According to it market prices already reflect all available information. Consequently in supposedly efficient markets such as financial markets excess returns due to information advantages are not possible. And no market participant can be superior in the long run except through luck or the use of non-public informations. The efficient market hypothesis therefore assumes that all available informations are used at all times and to everyone.

However the supposed wisdom of markets is limited. Admittedly many independent actors at the micro level in the form of buyers and sellers possess more knowledge than a central planner for supply and demand. And this is certainly true for markets for goods and services that have multiple levels that extend in width and depth. But capital and financial markets in particular are markets that extends in width rather than in depth. There is no unpredictable macroeconomic picture or value chain here. Instead market participants can obtain information from the same sources. And yet different interpretations of the same data such as business reports occur.

While a poor annual report for one public company means a falling share price another comparable public company with the same annual report can obtain hope. Consequently herding occurs instead of rational decision-making. Rising prices are confirmed and driven further by further purchases and falling prices are confirmed and driven further by further sales. Thus these markets function in exactly the opposite way to traditional market dynamics. [1, p.370-373]

Just as herding can lead to distortions in capital and financial markets the same can happen with speculation on commodities. Buyers and sellers can protect themselves against excessive price movements to their detriment through hedging. Here commodity buyers buy futures contracts that offer them protection against potentially rising prices. Commodity sellers in turn sell futures contracts that offer them protection against potentially falling prices. Thus both sides simultaneously run the risk of missing out on excessive profits if prices develop to their advantage beyond their hedged prices.

Yet if demand for futures contracts increases too much and investors sell at higher prices this is clearly commodity speculation. In such phases one can be wrong and make profits from speculation at the same time. Speculators simply need to find others willing to buy the contract at a higher price. However this ultimately leads to rising prices which benefits the speculators' profits. [1, p.373-376]

Carry-Trade instead of Emerging-Markets

Flassbeck criticizes the exploitation of imbalances between exchange rates and key interest rates. This involves borrowing money in a low-interest currency and then investing it in a high-interest currency to earn the difference. Carry-Traders can make a profit as long as the interest rate differential exceeds the currency's depreciation. Internationally this is often referred to as emerging markets since money flows into the high-interest country. But then investments are confused with speculation. In addition Carry-Trades drive up the exchange rate of the currency of the high-interest country because demand for that currency has increased. There is therefore no market mechanism that prevents Carry-Traders and their disastrous consequences.

In addition a currency overvalued by carry trade harms the competitiveness of the economy. Exported goods and services are then more expensive and lose demand. And imported goods and services are then cheaper and displace domestic goods and services.

In addition the exchange rate of a currency falls as soon as the carry trade phase or bubble ends. This increase in the exchange value is likely due to a reduction in the key interest rate below the threshold for carry trade to be worthwhile and is therefore disproportionately large. This disproportionately large increase in value inevitably leads to a price shock for the local economy. [1, p.358-369] [6]

No International Monetary Policy without National Wage Policy

With n currencies (countries or monetary unions) there are n-1 currency relations or exchange rates. Therefore there is no national exchange rate but only an exchange rate between two currency areas. The inflation rate determines the development of the exchange rate for a balanced foreign trade balance since rising export prices lead to devaluation and falling export prices lead to appreciation. And overall wage developments determine the development of the inflation rate. [1, p.377-380]

As a first approximation freely traded currencies should therefore always have the correct exchange rate and lead to balanced current accounts or at least to balanced foreign trade balances. A real appreciation caused by excessive wage growth must be offset by a depreciation of the currency. And a real depreciation caused by insufficient wage growth must be offset by an appreciation of the currency. In reality however financial markets do not determine the correct exchange rates as currencies are also used for speculation. Consequently without an exchange rate regime international monetary policy without national wage policy is not possible if relatively free trade and relatively free capital flows are to be ensured. [1, p.381-389]

In the Eurozone in particular foreign trade imbalances arose. The countries in the Eurozone with export surpluses/import deficits therefore lived below their means because they produced more goods than they consumed. And in the Eurozone this essentially applies to Germany. And the countries in the Eurozone with import surpluses/export deficits therefore lived above their means because they consumed more goods than they produced. Overall the dependence of the countries with export surpluses/import deficits on exports increased. And at the same time the countries with import surpluses/export deficits lost production of goods and consequently jobs. [1, p.389-396]

[5, UVGD] [5, UXGS] [5, UMGS]

The reason for these foreign trade imbalances is the far-reaching divergence in wage and productivity trends combined with monetary union and thus the abolition of exchange rates between countries. The quotient of wages divided by productivity is unit labor costs, which describes the costs per standardized unit of labor. Germany in particular stands out as a country with low unit labor costs due to low wages. [1, p.389-396]

[5, PLCD]

This is the result of a conscious policy of wage restraint. The premise is that demand for labor increases when the price of labor and thus wages decrease. However this led to foreign trade imbalances and the stagnation of the domestic economy in Germany. This was made possible by the common currency union and the resulting abolition of exchange rates between countries. This dynamic is successful for the same reason it has grown. "Whoever is successful can't have done anything wrong" or "the strong partner is not to blame if the others are weak". [1, p.389-396]

Interactions between National and International Currencies

Currencies and the inflation rates in their economies do not exist in a vacuum. Consequently the inflation rate of imported goods can influence the local economy. And the inflation rate in turn is influenced by wage policy, whether the golden wage rule applies and monetary policy, whether full employment is even being tried to achieve. Accordingly the inflation rate in an economy with import surpluses/export deficits and a still overvalued currency can decrease if the inflation rate of imported goods is lower because companies are pressured not to raise prices. An exchange rate regime is therefore a prerequisite for a functioning monetary system. For multiple functioning economies however cooperation in wage policy and monetary policy is necessary. [1, p.396-402]

Src:
[1] Heiner Flassbeck - Grundlagen einer relevanten Ökonomik - ISBN 978-3-86489-414-5
[2] Makroskop
https://makroskop.eu/
[3] Relevante Ökonomik
https://www.relevante-oekonomik.com/
[4] Flassbeck Economics
https://www.flassbeck-economics.com/
[5] AMECO - annual macroeconomic database / jährliche makroökonomische Datenbank
https://economy-finance.ec.europa.eu/economic-research-and-databases/economic-databases/ameco-database_en
[6] Carry Trade – Der Devisenmarkt führt die Ökonomie ad absurdum und die Ökonomen schweigen 2007-02-08
www.flassbeck.de/pdf/2007/28.2.07/Carry Trade.pdf

Einfache Standards

Dieses Blog durchsuchen