Euro (6) — € Based on Humbug Models

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Find here a remarkable, very clearly written article by Bill Mitchell about an even more remarkable research paper published under the aegis of the ECB, of all institutions! 

What the findings suggest is that the generally accepted type of models used to analyse economies is humbug. Thus, the paper implies that the whole Eurozone construct is based on economically nonsensical and practically false and highly damaging reasoning.

The overall conclusions:

1. They [the authors of the paper] find “great regularities in business cycle co-movements of key macroeconomic variables across multiple economies”.

They find “one dominant source of real co-movements … business cycle dynamics of key macroeconomic data can be largely, .. explained by a single source of variation”.

Which is?

2. The one dominance source of co-movement is a “demand factor” – that is, variations in aggregate demand (spending).

3. “any structural economic or econometric model of business cycles must be able to generate the principal component structure that we present” – that is the dominance of aggregate demand.

“We argue that the recent vintage of structural economic models fails this test—these models cannot explain business cycle dynamics.”

The authors find that:

… most prominent DSGE models today are not compatible with our empirical findings on the number of factors and the nature of co-movement in the macroeconomic data.

Little wonder, considering Willem Buiter's description of the underlying models in the Financial Times (now deleted but now available here:

Most mainstream macroeconomic theoretical innovations since the 1970s (the New Classical rational expectations revolution … and the New Keynesian theorizing) … have turned out to be self-referential, inward-looking distractions at best. Research tended to be motivated by the internal logic, intellectual sunk capital and esthetic puzzles of established research programmes rather than by a powerful desire to understand how the economy works – let alone how the economy works during times of stress and financial instability. So the economics profession was caught unprepared when the crisis struck … the Dynamic Stochastic General Equilibrium approach which for a while was the staple of central banks’ internal modelling … excludes everything relevant to the pursuit of financial stability.

And the amazing thing is that the (transformed, regressive) Left (that the average German feels cool to be part of and which is spearheaded by a once Christian conservative party (CDU), now run by a GDR-propagandist strongly attached to "green" ideology) has bought into this lock, stock and barrel — a complete about-face from the convictions that the Left held until the 1980s.

In November 2017, I remarked in a public discussion about the supposedly catastrophic Brexit that the Eurozone as we knew it then might actually disintegrate before Britain's exit from the anti-democratic and economically regressive EU would be fully accomplished. I also argued that the EU was the main problem, and certainly not Britain's sensible return to sovereignty. I was laughed at.

I was shocked at the racism-like contempt of the British that my fellow Germans would betray at the time — a very European attitude, indeed, revealed time and again when Germans deign to pontificate about the sundry EU crises being due to the despicable inferiority (compared to the German race) of the Portuguese, the Spaniards, the Italians or the Greeks.

It was as politically correct to hate the Brexiters at the time as it is to publicly loath President Trump in Germany today; no one complained about luminaries like Manuel Neuer, Germany's No. 1 goal keeper, deploring the prospect of the UK leaving the EU during a football-related press conference. To the contrary.

The Euro has reawoken a remarkable propensity in Germans to look down on their fellow Europeans as sluggards, dunces, and freeloaders.