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Sunday, February 17

17th Feb - Weekender: Economics & Markets

Economists are still debating the central banks’ role in the world: what to target and how? After the previous inflation- and unemployment goals and the latest NGDP-targeting, now directly targeting asset prices is the hot topic. Minimum wage is another topic after US shows signs of raising it (would help to raise the inflation as well). But the most important issue will be the global currency wars. Fiscal and monetary policies have met limits, and I believe 2013 will be remembered as the year when the wars started.

In markets, stock market valuations are debated and the old hand Mr. Soros has enriched himself by a cool 1bn shorting the yen.

Previous "Economics & Markets" here.

Previously on MoreLiver’s:

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Is the business cycle a cycle?noahpinion
In modern macro models, business "cycles" are nothing like waves. A boom does not make a bust more likely, nor vice versa. Modern macro models assume that what looks like a "cycle" is actually something called a "trend-stationary stochastic process"

The conundrum for the world’s central bankers The A-List / FT

Blogs review: Asset prices and monetary policy reduxbruegel
Federal Reserve Governor Jeremy Stein gave serious consideration to the idea that monetary policy has a role to play in managing financial stability (read asset prices) in a speech titled “Overheating in Credit Markets: Origins, Measurement, and Policy Responses” given last week at a conference hosted by the St. Louis Fed. Governor Stein provided evidence that risk was building in certain segments of financial markets and discussed policy tools that go beyond countercyclical macroprudential regulation or the simple use of the Federal Funds rate to address these risks.

Scott Sumner is wrong Free exchange / The Economist
Central bankers, like the Fed’s Jeremy Stein, are finally starting to reconsider some of the profession’s long-held assumptions about their policy mandates and the ways in which they affect the real economy. This is a welcome development. They should not be dissuaded by those who are unfamiliar with the latest research.

A monetary policy target can only be defeated by a better monetary policy targetWorthwhile
A monetary policy is not just the central bank doing something right now. A monetary policy is some sort of rule that tells the central bank the different things it should be doing under all sorts of different circumstances in the past, present, and future.

Monetary Policy: From There to Here to Where?The Big Picture
Drawing from his long experience participating in the policymaking process at the Federal Reserve, chief policy officer Mark Sniderman shares his views on how the Federal Reserve’s framework for conducting monetary policy has evolved over the past decade. He explains how changes in economic theory have helped shaped this new framework and how lessons learned from the Great Depression and Japan’s recent struggle with deflation have contributed.

Hot potatoes and hot yamsWorthwhile
Money (the medium of exchange) is an asset. But the demand for money is different from the demand for any other asset… Perhaps we should abolish "the demand for money", and speak about "desired velocity" instead. Or, better still, talk about the desired degree of synchronisation between payments and receipts.

Economists disagree on whether the minimum wage kills jobs. Why?Wonkblog / WP

This graph is the best argument for raising the minimum wageWonkblog / WP

Raising the minimum wage: Trickle-up economicsThe Economist

Minimum human wagesFree exchange / The Economist

Food and FinanceMagic, Maths and Money
In the past, investors did the equivalent of buying tomatoes, onions, meat and pasta.  Today financial engineers sell investors ready made lasagne.  Risk managers make sure it is correctly labelled (the traffic lights/no horsemeat instead of beef) while financial mathematicians put a price on the lasagne. This got me thinking about the failures of food regulation and financial regulation.

Global financial assets, there are lotsalphaville / FT

Tax havens: The missing $20 trillionThe Economist

Since November, one of the major (G4) currencies, Japan, has dramatically changed policy.  Furthermore, Japan has directed its change in a way that causes another G4 currency, the euro, to strengthen.  This action and ensuing reaction has triggered energetic discussion of a possible currency war. Will we see one?  Maybe.  Are the currency moves we are seeing volatile and abrupt enough to ignite one?  Yes.

Root causes of currency
Simon J Evenett: Discussion of currency wars has broken out again in the run-up to this week’s G20 finance ministers' meeting in Moscow. This column points to the underlying policy choices responsible for the recurring currency disputes and the feeble ex-post rationalisations for them.

With the world watching, Bernanke gives a go-ahead to the currency warSober Look

Currency War ConfusionsKrugman / NYT

FX Manipulating G-20 "Glass House" Unable To Cast Stone At FX Manipulating-JapanZH

The global economy: Phoney currency warsThe Economist

Euro Will Be Dragged Slowly Into Currency WarWSJ

Another Entry on The Currency WarsTim Duy’s Fed Watch

Positive-sum currency warsFree exchange / The Economist

How Overpriced Were Stocks in 1929?Crossing Wall Street

Q4 Earnings and Revenue Beat RatesBespoke

Earnings Roundup: Surprise Rate Remains Impressively HighAlpha Now / Thomson Reuters

During uncertain times dividends drive returnsSober Look

Stock and Bond Drawdowns – Historical PerspectivePragCap

Chart of the Week: High Yield Default RatesThe View from the Blue Ridge

Going with the flowButtonwood / The Economist
The big theme of the market this year, as already mentioned in this blog, has been the "great rotation" out of bonds and into equities.

Average hedge fund fee significantly lower than reported All About Alpha

Falling in Love With Global Macro All Over Again?Pension Pulse

Soros, other hedge funds score billions betting on falling yenMarketWatch
Soros Aide Wins Kudos for Japan BetsWSJ
Investing $24 billion of George Soros's money is no easy job. So far, Scott Bessent has managed to keep his boss happy.

What We're Reading ~ Hedge Fund Linksmarket folly

Thorp and Buffett on beating the market, from Quantitative ValueAbnormal Returns
Q&A with Wesley Gray, co-author of Quantitative ValueAbnormal Returns

How A Rookie Excel Error Led JPMorgan To Misreport Its VaR For YearsZH