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by Felipe Rezende In previous posts (see here and here), I discussed Standard & Poor’s (S&P) downgrade of Brazil’s long-term foreign currency sovereign credit rating to junk status, that is, to ‘BB+’ from ‘BBB-‘, and its decision to downgrade Brazil’s local currency debt to a single notch above “junk” status. S&P hosted a conference call on Monday morning to explain its downgrade of Brazil’s credit rating (you can view the video webcast replay here). During the conference call I had the opportunity to ask a couple of questions.  My first question, to S&P analyst Lisa Schineller, at around the 41:53 minute mark, was the following: Question: “Are there solvency risks associated with Brazil’s local currency debt? Brazil issues its own currency.” [Lisa Schineller]: “We would not say there are solvency risks, we rate, for both local currency and foreign currency, our ratings are continuum. Yes, we lowered both ratings, we are by no means thinking about a solvency issue here and risks there. There is less policy flexibility at hand, these ratings for the local currency BBB- is still in the investment grade category and the foreign currency is at the high end of the speculative grade category. I think this is an important point to highlight. There is this increase in the stress in the economy, in the policy… Read More

by Felipe Rezende So S&P has downgraded Brazil’s rating on long-term foreign currency debt to junk and lowered its long-term local currency sovereign credit rating to ‘BBB-‘ from ‘BBB+’. First, what are sovereign debt ratings? Standard & Poor’s sovereign rating is defined as follows: A current opinion of the creditworthiness of a sovereign government, where creditworthiness encompasses likelihood of default and credit stability (and in some cases recovery). So the ratings are related to “a sovereign’s ability and willingness to service financial obligations to nonofficial (commercial) creditors.” What does this tell us? To begin with, credit rating agencies have repeatedly been wrong. The same agencies that rated Enron investment grade just weeks before it went bust, the same people that assigned triple-A rating to toxic subprime mortgage-backed securities are now downgrading Brazil’s sovereign debt. As the FCIC report pointed out, “The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval.” (FCIC 2011) After all, should you take the credit rating agencies seriously? The answer is no. Brazil is a net external creditor, that is, though the federal government has debt denominated in foreign currency, it holds more foreign currency assets (figure 1) than it owes in foreign… Read More

The Levy Economics Institute Master of Science in Economic Theory and Policy is a two-year degree program that emphasizes theoretical and empirical aspects of economic policy analysis through specialization in one of five key research areas: macroeconomic theory, policy, and modeling; monetary policy and financial structure; distribution of income, wealth, and well-being; gender equality and time poverty; and employment and labor markets. Headed by Levy Institute Research Director Jan Kregel, the MS program draws on the expertise of Institute scholars as well as selected Bard faculty. Application deadlines for Fall 2016 are November 15 for Early Decision and January 15 for Regular Decision. Scholarships are available. For more information, visit the Levy MS website; to apply, go to connect.bard.edu/apply. The Levy Institute welcomes two new senior scholars, both of whom have also joined the faculty of the Levy MS program: Senior Scholar Fernando J. Cardim de Carvalho is emeritus professor of economics at the Federal University of Rio de Janeiro. He has worked as a consultant to the Central Bank of Brazil and the Brazilian National Bank for Economic and Social Development, among other institutions, and is the author, most recently, of Liquidity Preference and Monetary Economies. Senior Scholar John F. Henry is professor emeritus, California State University, Sacramento, where he taught economics from 1970 to 2004. He also lectures at… Read More

The Binzagr Institute for Sustainable Prosperity is holding its inaugural conference — Provisioning and Prosperity: Sustainable Full Employment and Transformational Technologies  — October 2nd-3rd at Denison University. For those who cannot attend, the event will be livestreamed (and questions can be posed via Facebook and Twitter @BinzagrInfo). More information on registration and conference themes can be found here. See below for the list of speakers: Jan Kregel*, Advisory Board Member, Binzagr Institute William A. Darity, Jr.*, Professor of Economics, Duke University Stephanie Kelton*, Chief Economist, U.S. Senate Budget Committee Julianne Malveaux*, Advisory Board Member, Binzagr Institute L. Randall Wray, Professor of Economics, University of Missouri – Kansas City Mathew Forstater, Research Director, Binzagr Institute Fadhel Kaboub, President, Binzagr Institute Ahmed Soliman, Research Scholar, Binzagr Institute Scott Fullwiler, Research Scholar, Binzagr Institute Pavlina Tcherneva, Research Scholar, Binzagr Institute Ellen Brown, Research Scholar, Binzagr Institute R. Paul Herman, Founder and CEO, HIP Investor Robert W. Parenteau, Research Fellow, Binzagr Institute Elsadig Elsheikh, Director, Global Justice Program: Haas Institute (UC-Berkeley) Marco Vangelisti, Research Fellow, Binzagr Institute Raúl Carrillo, Research Fellow, Binzagr Institute Shama Azad, Research Fellow, Binzagr Institute Natalie Brown, Research Assistant, Binzagr Institute Aqdas Afzal, Research Assistant, Binzagr Institute * invited (to be confirmed)

At last, the eurozone economy appears to be experiencing some kind of recovery. GDP started growing again in the spring of 2013, following seven quarters of decline, with domestic demand shrinking for even nine consecutive quarters between 2011 and 2013. Today, it is conceivable that within a year or so the eurozone might recoup its pre-crisis level of GDP, perhaps marking the end of a “lost decade.” But it is too soon to declare victory and become complacent. The eurozone remains fragile and the recovery uneven. Having primarily relied on export demand for its meagre growth since 2010, developments in China and elsewhere in the emerging world are posing an acute threat. More recently home-grown demand benefited from peculiar tailwinds that are temporary in nature. It is unclear at this point whether these forces will merge into a stronger self-sustaining recovery, while the likelihood of renewed and spreading political instability along the way keeps rising. It seems unwise, in fact hazardous, not to have a plan B ready at hand should growth falter once again. Figure 1 shows index values for GDP, gross capital formation, final consumption, exports, and imports, all relative to their respective levels in the first quarter of 2008. Remarkably, only exports have seen some real recovery. Gross capital formation, on the other hand, remains stuck at… Read More

The second edition of L. Randall Wray’s Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, an updated and expanded version with new chapters on tax policy and inflation, is now available for order and will be released September 23rd: “This book synthesizes the key principles of Modern Money Theory, exploring macro accounting, monetary and fiscal policy, currency regimes and exchange rates in developed and developing nations. Randall Wray addresses the pressing issue of how misunderstandings about the nature of money have caused the current global financial meltdown, and provides fresh ideas about how policymakers around the world should address the continued weaknesses in their economies.”

Harry Frankfurt, whose formal concept of “bullshit” is indispensable to both professional and everyday life, recently published an article for Bloomberg View arguing that (1) economic (income and wealth) inequality is, in and of itself, morally insignificant and (2) “egalitarianism” (being concerned about economic inequality in and of itself) is harmful. The article is an excerpt from a book he has coming out at the end of the month. According to Frankfurt, egalitarianism is loosely based on the belief that “the possession by some of more money than others is morally offensive.” This belief is false, he says, and it leads us astray. Frankfurt suspects that what most of us are really — and justifiably, in his view — reacting to when we express moral reservations about inequality is the potentially abject condition of those lower down the income distribution; not simply because there are others who have more, but rather if those in the lower income or wealth percentiles do not have enough resources to achieve some substantive standard of well-being (“not a relative quantitative discrepancy but an absolute qualitative deficiency”). In other words, it is poverty, or, more broadly, the condition of not having “enough,” that is morally significant, rather than monetary inequality per se: “Mere differences in the amounts of money people have are not in themselves distressing. We tend to be quite unmoved, after all, by inequalities between those who are very… Read More

Nancy Folbre, who recently joined the Levy Institute roster as senior scholar, was interviewed by Dollars & Sense on the topic of how conventional economics and policymaking deal with (or rather, fail to deal with) household and caring labor: D&S: What is the practical consequence of not measuring household labor and production? Are economic policies and institutions different, especially in their impact on women, than what they would be if household labor were fully reflected in statistics on total employment or output? NF: One macroeconomic consequence is a tendency to overstate economic growth when activities shift from an arena in which they are unpaid to one in which they are paid  (all else equal). When mothers of young children enter paid employment, for instance, they reduce the amount of time they engage in unpaid work, but that reduction goes unmeasured. All that is counted is the increase in earnings that results, along with the increase in expenditures on services such as paid childcare. As a result, rapid increases in women’s labor force participation, such as those typical in the United States between about 1960 and the mid-1990s, tend to boost the rate of growth of GDP. When women’s labor force participation levels out, as it has in the United States since the mid 1990s, the rate of growth of GDP slows… Read More

A Nonbehavioral Theory of Saving Michalis Nikiforos “We present a model where the saving rate of the household sector, especially households at the bottom of the income distribution, becomes the endogenous variable that adjusts in order for full employment to be maintained over time. An increase in income inequality and the current account deficit and a consolidation of the government budget lead to a decrease in the saving rate of the household sector. Such a process is unsustainable because it leads to an increase in the household debt-to-income ratio, and maintaining it depends on some sort of asset bubble. This framework allows us to better understand the factors that led to the Great Recession and the dilemma of a repeat of this kind of unsustainable process or secular stagnation. Sustainable growth requires a decrease in income inequality, an improvement in the external position, and a relaxation of the fiscal stance of the government.” Is a Very High Public Debt a Problem? Pedro Leão “we propose a policy architecture that differs from [Abba] Lerner’s in two aspects: it envisions a different way of preventing a very high public debt from ending in default, and it eliminates the burden associated with levying taxes to meet the interest payments on the debt (in one word, it eliminates the debt burden altogether). Our architecture… Read More

by Felipe Rezende S&P has issued a negative outlook regarding Brazilian sovereign debt. The S&P’s announcement stated that Over the coming year, failure to advance with (on- and off-budget) fiscal and other policy adjustments could result in a greater-than-expected erosion of Brazil’s financial profile and further erosion of confidence and growth prospects, which could lead to a downgrade. The ratings could stabilize if Brazil’s political certainties and conditions for consistent policy execution–across branches of government to staunch fiscal deterioration–improved. It is our view that these improvements would support a quicker turnaround and could help Brazil exit from the current recession, facilitating improved fiscal out-turn and provide more room to maneuver in the face of economic shocks consistent with a low-investment-grade rating. This warning has been echoed by other credit rating agencies threatening to downgrade Brazilian sovereign debt to junk. But, should anyone trust credit rating agencies? Once more, credit rating agencies are clueless in their assessments. They have specialized in making the wrong assessments regarding sovereign governments’ capacity to pay local-currency debts. They have downgraded sovereign governments like the US, UK, Japan, and now Brazil. Paradoxically, credit rating agencies, which have a track record ranging from arbitrary and imprecise to clueless (here, here, here, here), can still dictate the outcomes of the fiscal policies of sovereign governments. Recent downgrade warnings… Read More

An article from Bloomberg listed nine people who saw the Greek crisis coming years ago. The list may be narrowly confined to Anglo-Saxon economists, but I am quite happy that most of the people listed worked at, or were/are affiliated with, the Levy Institute.   Wynne Godley is the first on the list, given his prescient words in the London Review of Books in October 1992. I am happy I contributed to spreading his thoughts in Italy.   Mat Forstater is a friend I regularly meet at the annual Minsky Summer Seminar at Levy.   Stephanie Kelton, now chief economist on the U.S. Senate Budget Committee, was often at the Minsky Seminar, before her latest appointment.   Stephanie worked with Randy Wray, who is among the most prolific and influential economists at Levy. If so many economists doing research together got it right on Greece (as well as on the 2007 recession) maybe it is not by the power of crystal balls, but because of robust, consistent economic thinking?

The “negotiations” that surrounded the latest Greek deal do not reflect well on the system (such as it is) of EMU governance. And there are no silver linings to be found in the outcome of this process. It is a testament to how far we are from “normal” that even the best-case scenario would have left little room for optimism. Even if Greece had received a sensible package — one involving debt restructuring and a pause in austerity — this would still have meant an intolerably long period of high unemployment. (“Even if the Greek economy were to miraculously bounce back to its precrisis growth rate, it would take almost a decade and a half to return to precrisis employment levels.” p. 3 [pdf]) Moreover, the particulars of the Greek situation aside, it is important to recall how far we are from a resolution of the broader eurozone crisis, which will arguably not end until the fundamentally flawed euro setup — of which the Greek crisis is a symptom — is addressed. In this vein, Pavlina Tcherneva recently spoke to Richard Aldous of The American Interest about the latest Greek deal and the “stateless currency” that is the euro (listen to the podcast here). Tcherneva also touched on an aspect of this broader theme in her recent RT interview. In the clip below she links the “deflationary environment” in the eurozone to the absence of a central fiscal authority:   [iframe width=”427″ height=”255″… Read More