More on the damage austerity can do when it can’t be offset my monetary policy because of ZLB

Demand creates its own supply and lack of demand reduces future supply. As reported here

Using E=mc2 to determine if you can lose weight at the gym

Below, we ignore the fact that muscle weighs more than fat because fat loss is what people want when they talk of weight loss.

Einstein derived his equation relating mass to energy E=mc2 (Energy=mass multiplied by the square of the speed of light) as a by-product of his Special Theory of Relativity.

We can re-write E=mc2 as m=E/c2  – ie mass (or weight, as we know it here on earth) equals energy divided by the square of the speed of light.

The units are normally expressed in Joules (for energy E), kilograms (for mass m) and meters-per-second (for the speed of light c).
1 kilocalorie – better known as food calories – or simply Calories as measured roughly by our gym cardio-equipment = 4184 Joules
The speed of light in vacuum is a constant 299,792,458 meters per second. Let’s call that 300,000,000 meters per second for easier arithmetic. And if we square that it is going to be a big number. In fact it is 90,000,000,000,000,000.

OK, so we are at the gym and we have just expended 100 Calories (100 KCal) in about 9 minutes over two different cardio machines. We are now exhausted because, while reasonably fit, we are 73 years old – so give us a break.

So how much mass have we lost from our body in our first 10 minutes at the gym before we move on to the weights for more punishment? Answer: we have expended 100 Calories multiplied by 4184 to get 418400 Joules. And we need to divide that by 90,000,000,000,000,000 to get mass equivalent in kilograms. Which turns out to be approximately zero mass annihilated. And, in fact, even if we had expended 1000 calories in the gym (phew, indeed) – the weight loss in kilograms would still be approximately zero. Suppose we choose grams instead of kilograms? Now we are getting somewhere. According to Einstein’s equation by expending 1000 gym-machine Calories we will have lost 0.000000005gm. Suppose you expended 1000 Calories at the gym every day for a year – that would be 365×0.000000005gm. Less than 0.000002gm over a whole year of gym-induced very high energy expenditure.


And… rewarding yourself for going to the gym by an extra bar of chocolate (you deserve it for expending all that effort and energy, don’t you?) is going to give you far, far (ahem, far) more extra weight than what you lost in the gym. In that respect, regarding just weight, going to the gym could even be counterproductive.

So by all means go to the gym to get fit or build or strengthen muscle – but do not expect it to lose you any measurable weight at all.

(Must be errors in this – mathematical or conceptual. Be interested if someone could point them out and amazed if anyone apart from a bot actually read this.)

On lack of business investment, fiscal stimulus and austerity

This very clear exposition of the reasons for poor levels of business investment from Paul Krugman in his NY Times blog

Jason Furman of the Council of Economic Advisers gave an illuminating talk on the sources of weak business investment, largely aimed at refuting the “Ma! He’s looking at me funny!” school, which attributes US economic weakness to the way the Obama administration has created uncertainty, or hurt businessmen’s feelings, or something. As Furman shows, it’s a global slowdown, very much consistent with the “accelerator” model in which the level of investment demand depends on the rate of growth of overall demand.

It seems worth pointing out, or actually reiterating, several implications of this analysis that go beyond Obama-bashing and its discontents.

First, if weak demand leads to lower investment, which it does, and if fiscal austerity is contractionary, which it is, then in a depressed economy deficit spending doesn’t crowd investment out — it crowds investment in. Or to be more explicit, austerity policies don’t release resources for private investment — they lead to lower private investment, and reduce future capacity in addition to causing present pain. Conversely, stimulus in times of depression supports, not hinders, long-run growth.

Second, secular stagnation — persistent difficulties in achieving full employment — is a real concern if potential growth is slowing due to a combination of demography and weak technological progress, which seems to be happening. Lower growth means lower investment demand, so getting the private sector to spend enough gets harder.

Finally, an extreme case of this arises in China, where the exhaustion of the reserve of underemployed peasants plus, perhaps, a slowdown in the rate of technological catchup means that the very high investment rates of the past can’t be sustained. Look out below.

On Central Bank Interest Rates Panic (UK Edition)

The Bank of England (BoE) pays 0.5% interest to commercial banks on their deposits and it has remained that way for a long time now.

During this period quantitative easing (QE) has been used by the BoE. It does this by purchasing open-market gilts from existing holders of previously issued gilts – pension funds, insurance companies, high net worth individuals, etc, – who sell them indirectly to the BoE via banks, since the BoE doesn’t deal directly with other kinds of institution. This increased demand for ‘second hand’ gilts is what increases their price on the open market thus reducing the amount of interest they pay (since the original interest amount paid is fixed at the ‘coupon’ the government put on them when it initially sold them, so that as the price of gilts goes up or down on the open market the actual market interest rate relatively decreases or increases). The money the BoE pays the banks for these gilts then goes back into to the accounts of the people or organisations who sold them back to the BoE via said banks. Less the banking commission charged.

All this is done in an attempt to stimulate the economy by getting the gilts-sellers to do other stuff with their money. There has been similar behaviour from the US Federal Reserve (Fed) where interest rates have been set at 0.25% for a long time.

‘Normally’ it wouldn’t be necessary to do such a convoluted thing as QE because the economy could be stimulated through monetary policy by simply lowering a central bank’s interest rate to encourage spending, borrowing and investing. But you can’t do that when the official interest rate is already so low – at or near what is called the ‘zero lower bound’ (ZLB).

But in more ‘normal’ times there are actually two ways an economy can be stimulated – one is via central bank ‘monetary easing’ (reducing interest rates) – while the other is via government ‘fiscal policy’ (the government puts more money into the economy by lowering taxes and/or spending more itself). If the government can’t or won’t do it via its fiscal policy then the central bank has to try to do it via its ‘monetary policy’. This is the current situation because the UK government considers it essential to be as frugal as possible in its spending. As do governments in the USA and Europe. The answer to this conundrum since the Great Recession has been the ‘unconventional’ policy of QE. The Jury is said to be out about how well this has actually worked.

Now the UK economy has officially ‘recovered’, for whatever reason, albeit in a somewhat fragile manner: with GDP per head hardly at all, low levels of corporate investment, appalling level of business productivity, poor balance of payment figures – but, on the upside, with significantly lower unemployment figures and real wage/salary increases helped by an exceptionally low inflation level.  Therefore there has been increasing pressure on the BoE to start raising interest rates again in order to regain ‘normal’ levels of interest. The pressure of late has been somewhat noisy.

But the rationale for returning to ‘normal’ bank rate now is not at all clear. There are irrational arguments (about the evils of ‘printing money’, ‘unnatural interest rates’ etc) and some apparently rational arguments for increasing rates. One potentially rational argument for increasing the central bank rate is that continuing to stimulate an economy which is already growing under its own steam risks inflation. Another argument is that if the economy does tank again (China? House price bubble bursting?) then, at the ZLB, there will be no room for monetary easing to stimulate. Though the government cold still use fiscal policy to do so. However government action via borrowing (issuing fresh gilts) or otherwise printing money would be politically very difficult because of the emphasis the government, press and even the Labour opposition have been putting on eliminating the deficit. This would therefore be considered the mother of all U-Turns, causing the government to lose credibility.

However there is a funny thing about the inflation argument. It is generally agreed that there is a desirable amount of inflation to have. The official target set by governments in most advanced countries is 2%. In the UK the Governor of the BoE, who is charged with keeping inflation at that government-set level, has traditionally been required to write a letter of explanation to the Chancellor of The Exchequer for any up or down divergence from that level. But for quite a while now inflation has been below 2%.  Indeed, ‘core inflation’ (that is, excluding more volatile goods like oil and food, normally included in the official inflation measure) is currently only 1%, while the main official inflation figure (CPI) is about 0%. There is, therefore, some significant risk of deflation, not of inflation.

As far as the wriggle-room argument is concerned – that is all very well, but if you fear the economy may to go back into recession, the last thing you want to do is raise interest rates, thus possibly precipitating what you fear.

One further argument sometimes used for increasing rates now is that the official inflation figure (CPI) is misleading as it takes no account of the cost of housing. For the UK, while CPI is currently near 0%, an unofficial measure (proposed) which does take housing into account is CPIH, which gives a current annual figure for inflation of 0.3% (ONS to March 2015). So this argument is poor because even if we do try to take housing costs into account (in terms of average weighted ‘rental’ costs – which includes estimates based on cost of housing as well as actual rents) we still have very, very low inflation. A home is an asset which most people purchase relatively rarely, and some not at all – so raw house-price inflation cannot be included in the inflation figures.

It is a wide-spread assumption that ‘printing-money-causes-inflation’. It is clear that it can do so (Weimar, Zimbabwe) if an economy is already working to capacity and the money just goes to increase wages instead of producing more investment and goods. But it can be seen that over the last 6 years or so there has been very little inflation and the bigger risk now is that of deflation. The risk is worse because once deflation takes hold things can get very fraught. Deflation leads to a downward spiral of lower and lower spending by ordinary people and lower investment by companies: why buy now when the prices will be lower next month/year? Hence demand slackens and this feeds back again into lower spending and lower investment. This can even lead to complete economic collapse (as in Bruning’s Germany, after Weimar, which brought Hitler to power).

It is now well-understood by most advanced economy governments how to control inflation: usually just take the heat out of the economy by central banks increasing interest rates, which may go very high indeed if the inflationary problem looks like getting serious. But it is not at all well understood how to control deflation. As the Japanese may currently testify. And most especially if increased government spending is ruled out. Traditionally this problem is finally solved by governmental fiscal policy of investing and stimulating production via A-Good-War. Not so Good. Russia is probably spending a fortune on armaments. China?

So, given the small upside risk of keeping interest rates very low (excessive inflation which can be controlled by a reversal of policy) but the dire downside risk of raising interest rates prematurely: crashing the economy and increasing the deflationary spiral (need for a Good War), why are some people – meaning the press, bankers, retired people and allied pressure groups – demanding that the BoE must increase interest rates now?

The answer is easy to see as far as the banks are concerned. They make their money largely by the spread between what they have to pay for it and what they can get by lending it out. And this spread is very squeezed when official interest rates are near zero. So banks (read bank executives) are definitely losing out.  And woe betide a bank economist who breaks ranks. Obviously people who depend on the interest on their savings to live are also losing out, most especially the very wealthy who perceive themselves to be losing big as they just don’t know where to put their money to get a good return. As well, unfortunately, as pensioners. Property may seem like a good bet. But as its price goes up it gets more and more difficult to rent it out at a level which gives a ‘decent’ return. So the buy-to-let bubble, at least, may certainly burst.

You do not have to be much of a conspiracy theorist to believe that the press and many politicians are on the side of wealthy bankers, property investors and (good-heartedly… why not, if it suits?) pensioners.

You also do not have to be much of a conspiracy theorist to work out that a less than well-hidden motive for deficit reduction at-all-costs and as-quickly-as-possible is less a matter of economics than an ideological desire to ‘shrink the state’. Ultimately to the short-to-medium term benefit of the most wealthy via concomitantly reduced taxation. Unfortunately this has, indeed become what has been termed ‘deficit fetishism’. Deficit-Reduction and The-Debt-Must-Be-Reduced now-now-now have become memes with a life of their own.

Hence the pressure on the BoE to increase interest rates as soon as possible despite the fact that the official government-set remit of central banks is to maintain inflation at the level of 2%, which it is nowhere near, by any measure, while, anyway, inflation is quite easy to control by increasing interest rates if and when it occurs. And despite the fact that to increase the bank rate prematurely does risk tanking a still fragile recovery and bringing on full-bloodied deflation.

As it happens many economists have argued that 2% is too low an inflation level to set because, as has recently been well-demonstrated, it leaves little room to bring rates down before hitting the ZLB. The consensus among these economists is that 4% might be a more sensible target.


In its latest Global Financial Stability Report the IMF has warned that a global rise in central bank interest rates now would risk a series of defaults and a financial crisis in emerging markets as debts of non-financial firms in emerging market economies quadrupled, from $4tn (£2.6tn) in 2004 to well over $18tn in 2014. Thus liquidity in financial markets could dry up again, as Andy Haldane – Chief Economist at the BoE – has also warned.

Thus, we are again entitled to ask, as with the severe austerity policies of heterodox macroeconomics (but the so-called ‘conventional’ and ‘commonsense’ economics of the ‘right thinking’ mainstream political and business class) – Cui bono? – to whose benefit?

David Deutsch – The Beginning of Infinity

David Deutsch is an Oxford University Physicist who specialises in quantum computation and wrote a totally brilliant book in the late 90s called The Fabric of Reality.

I’ve just started to re-read a recent book of his which was given to me as a present and which I absolutely hated, hated, hated first time round. And so I only got about a third of the way through it before I gave up. This time, however, I decided to start from the back. I’ve now done three chapters from the back and I’ve decided that while his style is, as ever, difficult (too many repetitions/verbal-illustrations, making the same point in slightly different ways – but you have to be careful because sometimes he slips something new into one of the apparent repetitions…) he actually has a very interesting take on human development – particularly the development of thought and creativity – which culminated in ‘The Enlightenment’ and its aftermath and which he believes is going (in some form or another…) to infinity.

But at the back of the book is a paean to Jacob Bronowski’s The Ascent of Man.  Deutsch uses this as a jumping off point to contrast ‘static’ societies – which inevitably disintegrate – with ‘dynamic’ ones which have a chance to survive and grow and develop further. Both types of society inevitably display the ‘creativity’ with which evolution has endowed the species, but the creativity of static societies is mainly aimed at finding more creative ways of remaining static – not rocking the boat. You can think of the creativity that goes into the way people find ways of not being different from each other, or hiding their differences, especially of ideas.

I, personally, used to think in terms of ‘culture bound’ versus ‘free thinking’. And it is clear that even in our relatively dynamic allegedly ‘post-enlightenment’ societies, many, and maybe even the majority, of individual people are ‘culture bound’ and frown on differences. Try not to stand out – except maybe as holier than the Pope. This is so obvious in recent American Tea-Party and now mainstream Republicanism – but you find it everywhere – including among good friends. And any religion tends that way.

David Deutsch is an avowed libertarian, as well as a brilliant Oxford theoretical quantum physicist. And it shows. Particularly over the issue of climate change, which he does not deny is happening and which human beings are causing. Simple school-level physics, he points out, clearly demonstrates that carbon gases gases like CO2 (and methane, etc) must exert a powerful greenhouse effect. But he believes that we should be making no efforts which would lead to a cessation of ‘growth’ and general (energy-dependent) development. He feels that avoiding the use of fossil fuels is not the way to go. (And, anyway, I think he thinks what I think – that it is just not going to happen… so…).  He says that irrespective of the causes of climate change and global warming, what we have urgently to do is deal with its reality.  By which he means find ways to ameliorate the effects (eg on agriculture, sea level rise, oceanic acidification (carbonic acid) extinction of sea creatures, etc, etc,) and mainly, but mainly, find ways to survive it.

He points out that humankind spends hardly any money and research efforts into doing those things which will help us survive climate change – and that is where we should be concentrating our money and effort, rather than aiming to do things (but not actually doing them) that would lead us back to pre-industrial-type living and a (much smaller – come back Malthus, all is forgiven) static society. Actually he didn’t quite say all of that.  I’ve embellished.

So I’m going to continue reading this recent second book of David Deutsch. From the back. I know from my initial attempts at reading it from the front that this quirky book is not at all about climate change. It goes well beyond that. It is called The Beginning of Infinity. It is now available as a cheapish paperback. One of the difficulties I have had in reading it is due to my own copy being a bloody hardback. Less easy in bed. It is also available in Kindle – but I wouldn’t recommend that for this as you may need to go backwards and forwards.


I gave up again…

Taming Government Debt via Austerity – Ignorance and Conspiracy

A very great deal has been written by economists and others recently about the wisdom of the UK government’s plunge into austerity mode in 2010. The consensus among economists, by far the most common view, is that during a recession, and especially when a country is sovereign in relation to its own currency (ie – it is not tied to gold, or the euro) a policy of government fiscal austerity is contractionary: it reduces GDP in the short-term, tending to prolong the recession.

One might be forgiven, however, having listened to the political and ‘corporate’ class, for believing otherwise. Why politicians and why many business people would wish to promote the opposite view can be argued. Certainly, text-book academic macroeconomics does not support this view. And what little published academic work there is which has been used to support the ‘austerian’ view has been discredited again and again. The reasoning of the ‘austerian’ politicians and business people seems therefore to be based either on ignorance (eg a belief that a whole economy must work like that of a firm or household) or else is based on the ideological view that ‘the state must be shrunk’ and any excuse for shrinking the state is good enough. The text-book macroeconomic academic consensus says that in a recession and when government debt is higher than it ‘should’ be, a sovereign government, like the UK’s, should definitely have a ‘credible’ proposal for getting the debt down in the medium to long term – but not aim to do so in the short term: because of the damage such a policy would cause and its hysteresis effect. One of many very recent blog posts covering this issue by a respected UK economist – Simon Wren-Lewis – is here.

In this post Simon Wren-Lewis politely and cogently argues with one of the few contrarian economists – Ken Rogoff – and takes him to task for forgetting the fact that the UK has its own currency and can thus ignore the risk of ‘market panic’ caused by high debt because it has the means to deal effectively with such a panic.

But more significantly a paper was recently published by the IMF which looks at how, and under what circumstances, government debt may be reduced by means of a policy of fiscal contraction. Basically, it shows that only 26% of fiscal consolidation efforts (defined as a large adjustment in fiscal balances ignoring interest rate payments) were successful when growth is below a country’s historical average. In contrast, when growth is above average, the success rate increases to 41%. I, personally, would not have said that even a 41% success rate was good – but that is another issue. Essentially, the paper says that in the relatively few instances where fiscal contraction worked when growth was below a country’s long term average a few very special conditions existed: a critical one of these conditions was ‘a lift from a depreciating exchange rate and solid export growth—channels that are largely blocked for many countries in the current environment of near-zero central bank interest rates and slow global trade’. The UK has certainly had a depreciating exchange rate – but there has been no ‘solid export growth’, nor could there have been, for pretty obvious reasons.

The fact that we now seem to be very slowly coming out of our recession in the UK is quite irrelevant. The point is that we still have a poor export performance, productivity is one of the lowest of the developed countries, and business investment has still not taken off. Indeed latest ONS data shows that UK business investment was 8.5% lower in the third quarter of this year than in the second quarter. No wonder productivity is low. But even if things were better than that, it would certainly not prove that the government’s policy has been successful. Eventually most recessions do end, no matter how badly managed – so the fact that it may have ended (or may not… if we are having a ‘dead cat bounce’) means nothing: the point is, it has been unnecessarily prolonged by ignorant mismanagement or, worse, a conspiracy to ‘shrink the state’. Being a lifelong believer in the cockup theory of history I do not use the word ‘conspiracy’ lightly.

No ideology in an advanced country should have been sneakily allowed to cause the misery of declining incomes (for the majority, natch), unemployment, under-employment and the cuts in social welfare for the least privileged that this one has. It will have long term effects which are very nasty – the polite term for this being hysteresis.

Edit 18 Nov 2013: Mr Carney says ‘glass half full’ – but with no increase of GDP *per capita* since 2010, still declining business investment and still no export growth, despite a heavily depreciated pound – this does not look like any kind of sustainable recovery to me… Just ordinary people digging into their savings and borrowing more. The game will be well up before the next election I think

Score Inflation in Restaurant Reviews

Ever since the demise of The Egon Ronay guide we’ve used a number of guides to help us choose restaurants: Michelin, Gault Millau (with its delightful French turn of phrase), Time Out – depending on where we are geographically.

As we used to travel abroad a fair amount for work we used Zagat quite a lot. Zagat depends wholly on the reviews of the punters. So obviously you have to believe in crowdsourcing etc at least a little bit. We used to find it reasonably reliable albeit not perfect. But we did notice that restaurants in New York, San Francisco, etc seemed to get higher ratings for ‘Food’ than the equivalent quality in London. It seemed easier for a New York restaurant to get a high score, of, say 28 out of 30. OK – that’s no big deal.

Recently, however, I’ve noticed two interesting discrepancies in London. There is a great little Tapas place in Camden Town, inner North London. It’s little more than a ‘caif’, really. But the food is honest and tasty, rustic and not ‘refined’. It’s well-priced. It gets a Food rating of 25 out of 30 in Zagat, which seems perfectly reasonable to me. However, we recently discovered a really nice Tapas place in Westbourne Grove, near Notting Hill, inner(ish) West London. There, the food is both tasty and refined and adventurous. Both places seem equally very busy. And we shall continue to go to both places although Westbourne Grove is further from home. But here’s the thing. The somewhat posher and also better Westbourne Grove place gets a measly 22. I have no idea how to begin calculating whether there is any statistically significant difference between any scores in Zagat. For a start you have no idea how many people are rating the restaurants. So we have to take them at face value or not take them at all. And Zagat has, in the past at least, definitely been useful to us. But it struck us as an odd difference. It should, to our way of thinking, have had a better score than the Camden Town place, not a poorer score. I kind of hypothesised that the possibly better-heeled Notting Hill crowd had higher expectations than the Camden Town crowd. And maybe foodie Londoners have higher expectations than foodie Washingtonians (DC). So Zagat scores are geographically sensitive.

So far so good. I can live with that – within limits.

But the limit was breached a couple of nights ago when we explored a restaurant in Highbury/Islington area of slightly grungy inner North London which had been given a 28 Food score. We thought – that should be interesting.  The important thing to note is that the highest score for Food in the London Zagat appears to be 29. That’s for The Waterside Inn – (way out of London). Some really, really posh and also truly excellent and well known places get 28 in Central London. So, what about this place? Folks, it was… err… OK. But is was certainly nowhere near the quality of a Central London 28.  In fact, by comparison I would only have given it a 20 or 21 – perhaps because of possible food sourcing policies – and, err, not sure –  a bit higher than the estimable Cote chain – restaurants within which tend to be given a Food score of 18, and which I’m very happy to eat in, thank you. To be fair, this place was priced quite reasonably – ‘decent’ local eatery prices.

But there you have it. Punters’ scores are as heavily influenced by who they are and where they live as the actual quality and sophistication of the food itself. I should not be in the least bit surprised by this. It’s in all the psychology textbooks in one context (aha! Context! Framing! etc, etc) or another. It’s just that a food guide punter ‘score’, especially that which is an average of those given by a large (?) number of people, has an aura of objectivity to it – which is totally unwarranted in reality.

Or maybe we were just there on a bad night? Perhaps Chef was on holiday? Dunno.

Bring back Egon Ronay?

My lady wife points out to me that we should expect to see many more discrepancies in Zagat – since it was taken over by Google and has become free. Before, you needed to be some kind of committed foodie to write a review for Zagat – as you needed to pay for the guide. Now, however, anyone, committed foodie or not, can and, at the behest of the owner (or, indeed, an aggrieved diner), may write a review, whether or not they know or care anything about restaurant food quality. Expect many more reviews of poorer quality…


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