Posts Tagged ‘Deflation’

The Dark Pool of Empty Markets

Many have commented that the job market has become an enigma over the past few years. The jobless rate is low, but pay has risen slowly. Are we[1] measuring pay imperfectly? Vacancies co-exist with unemployment and the old phenomenon of under-employment and the new challenge of a zero-hours contract have emerged to colour the landscape. Many workers have had no real increase in wages in years. At Starbucks recently the Spanish barista and I chatted about job opportunities. She had an accredited certificate in the teaching of English as a foreign language. Additionally, she and her two friends were recent language graduates who had opted to move overseas to work as baristas in Ireland. They had no job opportunities as teachers in Spain. Coincidentally, a few months earlier, the vacancies page of a national paper carried notices for Spanish teachers at senior level to deliver a course on Spanish language and literature to the level prescribed by the Department of Education. The baristas applied for the vacancies and were not successful. It is not an unusual occurrence in the jobs market except that it was reported that in one of the schools Spanish was discontinued as a foreign language. French and German continued to be on the curriculum.

But why was Spanish discontinued? At one level there could have been a mismatch in the qualifications and skills required in the teaching of the Spanish course. At another level, maybe there was no demand for Spanish language at the school. Or maybe the more senior teachers, including French and German teachers, exercised a ‘hold-up’ on curriculum development until they retire. In a simple twist of fate one of the baristas had heard in the grapevine that there was a staff shortage in the school. On reflection there could be another explanation. Theoretical physicists have long believed that empty space is not empty at all[2]. The theory holds that radiation leaves energy in its wake when passing through the empty space. By analogy, in the economics of the jobs markets, Spanish baristas leave a skills set behind when they pass from one job at Starbucks to the next job at a Spanish restaurant creating an empty market of skills and talent in language provision. The transition creates an empty market of skills and talent in the provision of goods and services.

There are no actual jobs in an empty market. But with retirements and aging populations, Europe, for example, may have to rely on the dark pool of skills and talent in the empty market. It is not about the qualification per se rather it is about the misallocation of resources in an empty market that co-exists with the dark pool of skills and talent. In an efficient allocation of resources an individual with skills and talent enters an empty market at one level, (say) as a barista who is Spanish and qualified as a Spanish teacher, and exits at another level as a Spanish language teacher. It is an optimal outcome in a two-sided market of an aging European population and refugees, refugees that  qualified as doctors, engineers, teachers, nurses, writers, painters, plumbers, electricians inter alia who leave behind a skills set as they pass through an empty market as a doctor or engineer or plumber to become a refugee. Until policymakers accept the empty market phenomenon it is unlikely that baristas or refugees will have the opportunity to secure jobs that match their skills and talents. As Starbucks[3] CEO Howard Schultz commented ‘in a nation of latte makers and latte drinkers, you need more of the latter’. Europe has the demand for skills and talent; there is a dark pool of skills and talent, there is a new phenomenon of the empty market. The existence of an empty market could give rise to a misspecification in the economic analysis of labour data. In the econometrics of a wage equation, for example, the co-integration of earnings, prices and productivity will now require an effective hours’ variable[4] to accommodate hours worked in the new labour market of zero-hours contract,  underemployment and working in the grey and black markets. Otherwise a wage equation is just a re-parameterisation of a regression of the level of wages on the current and lagged levels of predicted wages and excess demand. In our view this could have implications for macroeconomic planning in an age of empty markets. The fact that there is a transitioning of skills and talent into an empty market right now should be recognised by policymakers and they should tap into and legitimise that dark pool, sooner rather than later.

[1] The question posed by Mark Glassman and Peter Coy in their vignette ‘Wages: Another Way to Look at Pay’ in Bloomberg Business Week July 22 2016.

[2] Article in The Irish Times ‘Magnetic Masters Bring Data Storage to a New Level’ by Dick Ahlstrom, July 21 2016.

[3] Cited in Time magazine July 11-18 2016 pp81

[4] Introduced in McNutt (1994): ‘Ownership and the s-firm’ in Andrew Burke [Ed] Enterprise and The Irish Economy Oak Tree Press, Dublin.

Wistful Economics

Economics of times past, of Adam Smith and Keynes alas! Has economics become an illusion? Yes. It is an accidental tourist in the political landscape. Economic policy making is[1] ‘but a walking shadow, a poor player that struts and frets his hour upon the stage’ of natural numbers, coupled with policymakers throwing[2] ‘sixes and fives in games of chance’ and ‘as wise folk know the conditions in every country’ – targets and trends, patterns and probabilities. All the policymakers are merely players; they have[3] ‘their exits and their entrances sans teeth, sans eyes, san taste, sans everything’. There are no hard lines of distinction. Deflation may be temporary if capacity is absorbed by the real economy. However, a finite measurable increase in sales (thus, output) cannot be secured by small marginal reductions in price. Some industries are depressed and household balance sheets are insolvent. Ah, there’s husbandry in heaven and ‘a heavy summons lies like lead’ upon[4] the ECB: US dollar strength against the Euro is due to deflation in Europe and deflation in Europe is driving up the US dollar. Policymakers ‘cannot sleep’; with their ‘eyes severe, and beard of formal cut, full of wise saws, and modern instances’ they are actors in a Shakespearean play of infinite length as big data, social media and the Internet of Things transform real lives.

In a deflationary period a mismatch in prices and quantities occurs as companies and consumers both fear to spoil the chance of getting a better price later. This fear in a moment in time creates a short period. Competition breaks down and imperfections – for example, short term working, poverty and inequality, exchange rate volatility, competitive devaluations and lower wages – emerge with lasting impact.

Without China’s continued growth, there is no economy in the world large enough to absorb further contraction in the EU and the US. Only those who believe that economic policy making is akin to a Shakespearean play ‘full of strange oaths’ will enjoy the summer recess. But action is required now if deflation’s short period is to be defeated, best illustrated by the life of the mayfly than that of an elephant. A menu of policies should include a return to managed global exchange rates for a period of time, fiscal stimulus in order to ease domestic debt burdens and a continuation of QE in the EU. Falling prices are little comfort for the indebted householders and unemployed. The policymakers[5] sentence all of us to the sentence: ‘there is to-morrow, and to-morrow, and to-morrow, to the last syllable of recorded time’. It is better to end austerity now than regret doing economics by numbers.

[1] Act V Scene V Macbeth spoken by Macbeth

[2] Chaucer’s Canterbury Tales The Man of Law’s Tale 1st Part 130-134

[3] Act II Scene VII As You Like It spoken by Jaques

[4] Act II Scene I Macbeth as Banquo enters.

[5] Act V Scene V Macbeth spoken by Macbeth

Whither the Euro? The Liar’s Paradox

Whither the Euro? The Liar’s Paradox

In Dickens’ Hard Times the character Mr Gradgrind can’t help but speak about Facts to his pupils: ‘Now, what I want is, Facts. Teach these boys and girls nothing but Facts. Facts alone are wanted in life. Plant nothing else, and root out everything else’. As we listen to Mr Draghi, to Mr Carney and to Ms Yellen, as we read the Financial Times or listen to business channels, isn’t it all about the Facts and the numbers? Analyst’s commentary coupled with an over-reliance on Facts and numbers has thrown economic policy making into the lion’s den of semantic incoherence. We forget that the real economy is about losing a job, going bankrupt, losing your home, personal and household debt.

Facts and Numbers:  Relevance of Godel

Sadly, economic policy making has evolved into a game of natural numbers. In addition to semantic incoherence – ‘numbers on the upside’ or  ‘targets below forecasts’ – we would argue that Gödel’s first incompleteness theorem may have a direct relevance to policy makers, warning them of the incompleteness of an economic policy, reliant on numbers alone.  Each time a new policy statement – boosting credit in Southern Europe, changing interest rates or QE – is added as an axiom, there are other true statements that still cannot be proved, even with the new axiom. If an axiom is ever added that makes the system complete, it does so at the cost of making the system inconsistent. His argument shows that any consistent effective formal system that includes enough of the theory of the natural numbers is incomplete: there are true statements expressible in the language of economic theory that still remain unprovable within the EU system of policy signalling. For example, what would happen if QE were introduced by the ECB? Thus the policy problem for ECB and for the EU is that no formal system, reliant on numbers and number predictions, satisfying the hypotheses of the theorem, exists. Instead we have noise and signals.  

Godel’s sentence

Economic policy today is transmitted as number signals into the financial markets. Any decision to change interest rates, for example, will have already been discounted by hyperopic analysts. Mr Draghi like Mr Carney will push the forward guidance to ensure a target natural number is met – an inflation level or a growth rate target. On a quarter-to-quarter comparison, EU growth averages less than 0.5%. It is but a number. The Fed sets an unemployment target number of 7%, however measured, and only when unemployment converges to that number will the Fed signal an interest rate change. However, Godel’s incompleteness continues with the austerity mess, and the game of number predictions.

Waiting for Economics

What has happened to macroeconomics in the hands of bureaucrats and politicians? Once there was a policy mantra, P: ‘low (high) inflation explains currency appreciation (depreciation)’ and ‘low (high) interest rates explain currency depreciation (appreciation)’. The US Fed added QE which contributed to a devaluing US dollar. The ECB has been anxious about the strength of the Euro v US dollar, but the Euro has depreciated against Sterling. Is the interest-rate differential between the US and EU so much greater in natural number counting than that of the EU and UK to explain a depreciating-appreciation Euro. If policy prescriptions, P, each represent examples of the Gödel sentence that each time a new policy statement is added as an axiom, there are other true statements that still cannot be proved. We have the liar’s paradox embedded in economic policy decision making: Nominate a P. ‘P is false’. But it cannot be true for then, as stated, it is false – nor can it be false, for then, it is true.

Signals and Noise

Interest rates and inflation figures are Facts, they are numbers. Natural numbers that are allowed to guide policy – it is a mess. EU faces a deflation trap defined by a long period of low inflation, below a target rate of 2%.  The Economist in its May 24th 2014 edition referred to this period as one of ‘lowflation’. Mr Draghi had signalled in early June 2014 how he intended to tackle the imminent threat of deflation – lower interest rates and a European style QE boosting credit by providing funding to banks on the condition that they lend to business.  Now we await the ECB meeting this week (September 4th). He will be reminded that the economic fundamentals are just numbers. Interest rates, exchange rates and inflation are natural numbers. The EU target inflation is 2%, ECB interest rates are now at 0.15%, falling from 0.25% and the Euro/Sterling rate of exchange fluctuates around 0.7911 and 0.8123. Natural numbers but with a potent impact on policies that directly affect everyday life.

1944-2014: Breton Woods to Brisbane

Did Mr Draghi signal at the Jackson Hole meetings last month that the Eurozone needs a relaxed fiscal and monetary policy? Will we see a signal from the ECB this week towards a purchasing of securitised assets? According to European Commission figures last month (August 2014) Eurozone inflation was at 0.3%, well below the target of 2%. In the real economy, however, bad banks dominate the landscape, unemployment continues to rise and growth remains stagnant. Yet our policy makers remain persuaded by Facts and data and numbers.

A reliance on Facts and numbers will continue to stifle policy making; it will ensure that Europe is at least a decade away from any numbered gains in productivity, any increases in real wages or any increases in growth. There is always hope. But in the reliance on Facts and data there is a great danger for policy makers sailing between the Charybdis of raising interest rates too soon and the Scylla of raising rates too late.

Analysts could be predicting a weakening Euro, strengthening US$ and Sterling as we end 2014. FX analysts will try to predict likely movements in the currencies but currency misalignment still continues. Indeed, in a world of numbers we will continue to ask: whither the Euro and Eurozone economies in an era of stagnant growth? But unless ECB engages with QE, Europe will continue to drift into debt-deflation cycle. Maybe there is hope that at the G20 in Brisbane later this year our policy makers will consider an interim regime of managed exchange rates across the world #tuncnunc to facilitate a return to economics. Earlier discussion on managed exchange rates on


Godel’s Theorem

Gödel’s theorem shows that, in theories that include a small portion of number theory a complete and consistent finite list of axioms can never be created, nor even an infinite list that can be enumerated by analyst’s computer programmes.


 € Appreciates: Low inflation and High Interest Rates

If appreciates expect lower inflation, and high real interest rates

€ Devalues: High Inflation and Low Interest Rates

Low and negative rates of interest € devalues


 € Appreciates: Low inflation and High Interest Rates

If appreciates expect lower inflation, and high real interest rates

Higher unemployment and downward pressure on wages

Internal Member State devaluation