Stumbling Into the Eurozone Solvency Crisis

In fall 1991, the Soviet Union collapsed. In fall 2008, the laissez-faire capitalism of the advanced economies imploded. Several nations – especially in the Eurozone, the United States, and Japan – have been stumbling through crises.

This crisis mode has often been portrayed as a moderate, incremental and piecemeal solution to the European turmoil. In reality, it has the potential to make the crisis far more painful, disruptive and pervasive.


Record debt levels in peacetime

Rising FDI in Latin America

The UN Economic Commission for Latin America and the Caribbean (ECLAC) released its report on foreign direct investment (FDI), with generally good news for Latin America. While 2010 investment worldwide was fairly flat (and fell in developed economies), it soared forty percent in the region – reaching nearly $113 billion. Of the just over a trillion in worldwide flows, Latin America captured a tenth of the total (and over twenty percent of that invested in emerging economies).

Commodity Prices and Paradigm Shifts

Jeremy Grantham put out a great quarterly letter about the scarcity of commodities and the marked rise of commodity prices, calling this “the mother of all paradigm shifts”.

Two interesting points in his letter are:

  1. China consumes between 25% and 50% of many important commodities.
  2. Prices for nearly all commodities are two or more standard deviations above their long-term mean; four standard deviations for iron ore, coal, copper and silver.

China Losing Competitiveness

Here’s an interesting note from UBS’ Andy Lees this morning:

Mexican steel maker Altos Hornos de Mexico (AHMSA) may return from a 12 year bankruptcy due to rising steel demand and prices. The 11 7/8% dollar notes jumped 21 cents in the last 5 months to 46.5 cents. “There’s an initial agreement, an initial understanding with creditors and they’re working this off”. It made USD34.1m in Q1 by cutting costs and buying iron ore from its own mines. “There’s no question that this company has the ability to service debt. The question is when they’ll do it” according to Barclays. AHMSA defaulted on USD1.9bnof debt back in 1999 so how come after 12 years the company is possibly on the verge of coming out of receivership?

According to the attached economics note on Mexico “labour costs differentials have compressed sharply in recent years vis-à-vis key competitors: Mexican manufacturing wages in dollar terms were three-and-a half times those of China only 10 years ago; they are now only marginally higher.”

US: Just How Out of Line Are House Prices?

In Wednesday’s post, I referenced commentary from several bloggers regarding the sizeable decline in housing prices reported by Zillow earlier this week. As I discussed yesterday, the rat-through-the-snake process of working down existing and prospective distressed properties is likely far from over, and how that process plays out will no doubt have an impact on how much prices will ultimately adjust.

Slower Growth vs. Slow Growth

Manufacturing activity in the state of New York “improved in May, but at a slower pace than in April,” according to this morning’s update of the Empire State Manufacturing Survey from the New York Fed. Meanwhile, the outlook for U.S. economic growth softened a bit according to economists surveyed by the National Association for Business Economics. “NABE panelists revised their projections for economic growth in 2011 downward compared with their February projections,” says Richard Wobbekind, NABE president in a statement. “Real GDP is expected to grow at a moderate pace of roughly 3 percent in the current year and only slightly faster in 2012.”

Consumers Leave Britain in the Slow Lane

Nobody was surprised that the Bank of England revised down its growth forecasts last week; the gross domestic product figures for the last two quarters guaranteed that. Its economists expect the GDP numbers to be revised up but not enough to remove the soft patch for the economy around the turn of the year.

The Original QE Program: A Smashing Success

I made the case in an exchange last year with Paul Krugman that QE2 was not the first time quantitative easing had been tried in the United States.  Moreover, I noted that the original QE was a smashing success with nominal spending experiencing a robust recovery despite the zero bound problem.  So when was this original QE program? The answer is from 1933-1936.  

Irrationally Rational

It is interesting to talk to colleagues and find them scratching their heads on why commodities fell so sharply last week and why the rumour on Greece exiting the Eurozone was floated. I used to do that too and perhaps, still do on some maters. On these two, I have come to the conclusion that searching for rational clues is irrational. Commodity collapse was engineered just to slow down the pace of appreciation. It is a substitute for meaningful action to end the commodities boom and that is to raise interest rates. The Fed won’t do that. Check out my piece in MINT. 

Identifying Vulnerabilities in Systemically-Important Financial Institutions in a Macro-Financial Linkages Framework

During the subprime crisis, governments intervened to stabilize the financial condition of some troubled systemically important financial institutions. Two questions naturally arise: Why do some institutions receive intervention while others not? What are the macro-financial driving forces of the vulnerabilities in the systemically important SIFIs? This column summarizes the results of some recent studies about identifying vulnerabilities in SIFIs. Overall, the existing research suggests that leverage is the most reliable indicator, while several widely used indicators are not very useful in identifying the differences in SIFIs.

China: Rebalancing Through Wage Increases

Is China currently rebalancing?  The currency has been appreciating, the PBoC has hiked interest rates four times, and wages have been surging.  Because of all of this I am often asked if China has finally begun the long-waited rebalancing process and whether we have yet seen an improvement in the underlying economy caused by a rising consumption share.  

Those who were hoping the answer was yes will have been disappointed by the release Thursday of the World Bank’s China Quarterly Update – April 2011. Here is their summary:

China’s economic growth has remained resilient as the macro stance moved towards normalization. Both fiscal and monetary policy contributed to the normalization. Consumption growth slowed in early 2011. But overall domestic demand held up well, supported by still strong investment growth. Real estate investment has so far remained robust to measures to contain housing prices—a policy focus. Reducing inflation is the other policy priority, after inflation rose to 5.4%, largely on higher food prices.

Pakistan’s Obsession

Pakistan is in an uproar over U.S. violations of Pakistani sovereignty. They are furious over the flight of the SEALs to Abbotabad for the Bin Laden raid and the continued U.S. missile attacks against militants in North Waziristan with inevitable civilian casualties. The U.S. is in an uproar over Pakistan’s shielding Bin Laden and other militants. U.S. Pakistan relations are at their lowest level ever. The U.S. has threatened to end more than $3 billion per year of military aid. The Pakistanis have threatened to end U.S. transit routes from Karachi through Pakistan to supply international forces in Afghanistan.

What Would Really Bring About a Dollar Dive?

One of the things about reading the op-eds and various articles in the blogosphere is the tendency to hype the possibility of the collapse in this, or the collapse in that. The most recent “bubble” in this type of writing involved hyper-inflation, commodities (silver, anyone?) and the dollar. Now I read things like QEIII would bring about a collapse in the dollar [1] (as if anybody really thought QEIII was politically likely, even if it were advisable on economic grounds); or easy monetary policy would be the culprit. Here’s a choice quote from Jim Rogers:

“I would expect to see some serious problems in the foreseeable future…. By 2011, 2012, 2013, 2013, I don’t know when, we’re going to have an economic slowdown again,” he said. “This time it’s going to be a real disaster because the US cannot quadruple its debt again. Dr Bernanke cannot print staggering amounts of money again.”

“How much more can they print without a serious collapse of the US dollar?” he said.

To Owe or Be Owned—Depends on How You Tax It

In February, President Obama said “Companies are taxed heavily for making investments with equity; yet the tax code actually pays companies to invest using leverage”. And he is right: the corporate tax code in the United States creates a significant bias toward debt finance over equity.

Of course, the U.S. is not unique. In most of Europe, Asia and elsewhere in the world, the tax advantages of debt finance are even bigger than in the U.S.

Oil Prices and Trading Mechanics

A report from Reuters (hat tip: Felix Salmon) attributes the wild commodity price moves last week to algorithmic stop-loss trading.

Jim Brown offered these details on the oil trading:

Those funds interviewed said the massive amount of stop losses that were triggered was beyond comprehension…. When the crash finally came the number of positions liquidated was staggering. As each technical level was broken it triggered more stop losses and more short selling to capture the drop….

Credit Suisse analysts said the high frequency and algorithmic trading accounted for about half of all the volume in the oil markets.

The ECB’s Three Mistakes in the Greek Debt Crisis

By now just about everybody agrees that the European bailout of Greece has failed:  The debt will have to be restructured.    As has been evident for well over a year, it is not possible to think of a plausible combination of Greek budget balance, sovereign risk premium, and economic growth rates that imply anything other than an explosive path for the future ratio of debt to GDP.

Not Pre-Ordained

I like Arvind Subramanian’s piece because it does not pretend that economics offers solutions to all problems in the world. He is also right to worry that corruption could stop India’s onward march. Part of the explanation for the seemingly big rise in corruption in India is that those who are engaging in it seem to think that the monies they steal would be mere drops in the ocean as the ocean itself would keep growing for the next 40 years! 

Europe’s Economic Crisis, Euro Nations’ Political Backlash: The Fin(n)ish Line of the Euro Zone?

After great uncertainty and volatility, Finland has agreed to support participation in the Portugal rescue. How did Finland, the “EU model student”, turn into a euro-skeptic?

“The National Coalition party and the Social Democratic party have agreed to support participation in the Portugal rescue,” Jyrki Katainen, finance minister and leaders of the Conservatives (KOK), told reporters on Wednesday. With the agreement between Finland’s two biggest political parties to support the EU bailout for Portugal, the way is paved for EU finance ministers to authorize the €78bn ($110bn) bailout in Brussels next week – even if Finnish support is conditional.

Asia’s Supply Chain and Global Rebalancing

Much of the debate over global rebalancing has focused on the U.S.-China trade imbalance. But that’s missing the bigger picture.

With the growth of cross-border supply chains—a signature feature of Asia’s trade in recent decades—it would be misleading to focus on bilateral imbalances and exchange rates.

South-South Trade Is the Answer

Istanbul is now at the center of the development action. In this splendorous city—where West and East converge—leaders from all over the globe have gotten together this week to assess the development results and challenges of the world’s poorest countries.

One of the goals of the 4th United Nations Conference on Least Developed Countries is to reduce the number of these nations from the current 48 to 24 over the next decade. And one of the things we can do to ensure this is to increase trade, and South-South trade in particular.

Berlusconi and the Bureaucracy: An Analytical Approach

On May 5, the Berlusconi government approved the “Plan for Development” which implements the guidelines of the recently approved Document on the Economy and Finance, the economic policy program for the next three years. The document introduces changes in matters as diverse as tax and accounting rules, public-work tenders, research-funding for universities, employment incentives in southern Italy, tourism districts, the concession regime of  coastal lands (the concessions’ length time was raised to 90 years!) and a new plan for home renovation and building permits. The latter is quite interesting, since it is representative of the government’s approach on a serious matter: how to cope with the notoriously inefficient Italian public administration. In short, the Plan has (re) introduced the principle of “tacit consent” for building permits. If the administration is unable to comment (yes/no/under what conditions) on the permit-request within the time limit of 90-100 days (180-200 for cities with more than 100 thousand inhabitants), the permit is considered granted and the (eventual) violation of local building regulations is remitted (there are exceptions when the new buildings infringe environmental and landscape legislations). It would seem a provision of common sense: “why should the honest citizen always be victimized by a slow and inefficient bureaucracy?”  Well, a little economic thinking shows that there is very little common sense here. Below, I sketch a simple model that describes the behavior of a (potentially) unlawful real-estate builder and looks at the effects of the “silent-consent” rule. For those willing to skip the algebra, I summarize here the main conclusions. The “tacit-consent”:

Learning About Long Term Unemployment (II)

Politics and Policy

Last Monday, I discussed some of the findings from the conference on causes and consequences of, and policy responses to, long term unemployment, which brought to UW Madison Prakash Loungani, an Advisor in IMF’s Research Department, Kenneth Scheve, Professor of Political Science at Yale, Phillip Swagel, Professor of Public Policy at the University of Maryland, and a former Assistant Secretary of Treasury for Economic Policy, Rob Valletta, Research Advisor at the Federal Reserve Bank of San Francisco, and Kenneth Troske, Professor of Economics from the University of Kentucky.

Subsidies—Love Them or Hate Them, It’s Better to Target Them

For decades, countries in the Middle East and North Africa have relied heavily on food and fuel price subsidies as a form of social protection. And, understandably, governments have recently raised subsidies in response to hikes in global commodity prices and regional political developments.

Like many things, there may be a time and a place for using subsidies. But, they need to be better targeted. And, often, there will be better alternatives. Alternatives that do a better job of protecting the poor.

High-cost endeavor

Managing a Fragile Eurozone

Why does the Spanish government pay significantly more to borrow than the UK government – despite having a smaller deficit and lower overall debt? This column argues that the reason lies in the Eurozone’s fragility. Its members lose their ability to issue debt in a currency over which they have full control. The column discusses ways to deal with this weakness.  

A monetary union is more than just a single currency and a single central bank. Countries that join a monetary union lose more than one instrument of economic policy. They lose their capacity to issue debt in a currency over which they have full control.

The Battle for the Soul of the GOP

The real battle for the soul of the GOP started today with a speech on Wall Street by Speaker of the House John Boehner. 

Wall Street and big business fear Tea Partiers won’t allow House Republicans to raise the debt ceiling without major spending cuts – and without tax increases on the wealthy. Wall Street and big business know this would be unacceptable to the White House and congressional Democrats.

Readings on the Financial Crisis

The two best treatments of the financial crisis are both free for the reading, courtesy of the U.S. government.

The first to hit the press, the 600-page Financial Crisis Inquiry Report, is the product of a year and a half of work, seven hundred interviews, over a dozen hearings, and millions of pages of documents. The report is not as tome-like as it appears. It is a 400 page book (albeit one with small print) followed by 200 pages of references, appendices and dissents. Don’t let the dissents bother you — they are dealing with second-order issues.

Weighing the Week Ahead: Another Soft Patch?

When stocks have had a big rally, it can lead to nervous longs.  How much of the ownership is in “weak hands” or with short-term traders, people ready to sell at the first sign of bad news?

So far, any selling has been limited — evidence of waiting buyers.  Will this change?

The Myth of the Natural Economy

“The general equilibirum view tends to lend support to those who want to make the economy more efficient in the sense of having fewer ‘distortions’—you know, all of these neutral economic words—from taxes, from labor unions, from minimum wages, and so on. Now, what has happened in the last thirty years—and this is what Hacker and Pearson note in their book [Winner-Take-All Politics]—is we have gotten ourselves into a feedback situation. As people have gotten richer, conservative people have funded organizations which generate economic research promoting their political views.”

Bernanke Bats for Banks and Reading Links

I fail to get the point of this piece by Kenneth Rogoff on Bernanke’s press conference. What is the need for this homage to Bernanke? Intellectual Capture? Also, Ken Rogoff’s piece reminded me of this piece in Huffington Post. 

This blog post by Barry Ritholtz on why Shiller was defending fellow economists is definitely worth a read as are some of the older posts that he offers you, on the same topic. I guess, in the end, answers to the question of why Shiller was defending fellow economists has to be found in institutional tyranny, the need to belong to the herd, etc.

What? Greece Has to Raise Capital in 2012 and Meet a 7.5% Deficit Target this Year?

Over the last couple of months, a string of events made policy makers and investors alike say, what? Greece must raise capital next year and meet a 7.5% deficit target this year? Yes, they do, unless circumstances change. It’s near impossible to bet successfully on what Euro area policy makers are going to do, so let’s just review the facts here.

Greece missed its 2010 budget deficit target by near 1%, 9.6% of GDP projected (see .pdf page 45) vs. 10.5% actual (see Eurostat release, .pdf). The 2011 target is 7.5% of GDP.

Lower Oil Prices

Like a roller coaster ride, 2011 saw oil prices climb gradually, only to fall dramatically this last week. Here I offer my thoughts on some of the key contributing factors.

Let’s begin with the relation between oil prices and the exchange rate. If the dollar depreciates by 1%, the dollar price of oil would have to go up 1% to keep the price paid outside the United States constant. This is a bit simplistic, one reason being that there is usually some third factor, such as a rise in incomes outside the United States, that is causing a change in both real oil prices and the exchange rate. Different factors affect the two series differently, so one might see a 1% depreciation correspond to an increase in dollar oil prices of more or less than 1%, or sometimes even an oil price decline. Between September 2009 and September 2010, a 1% depreciation of the exchange rate was associated on average with a 1.3% increase in the dollar price of commodities like oil or copper. The dollar rose about 3.5% against the euro between Wednesday and Friday, and the 4.5% decline in the price of copper could be pretty well explained by the exchange rate alone based on the recent correlations (3.5 x 1.3 = 4.5). But something more is involved in the 11% drop in the dollar price of crude oil observed those same two days.  

The Warsaw Initiative

Through its forthcoming European Union presidency Poland should inspire an offer for technical assistance to other regions of the world that seek their own development path. By no means do current upheavals and crisis disturbances shatter the need for European integration. Just the opposite; they make it stronger. European integration works and will get through […]

Wild Week Leaves Fed Policy Intact

Last week was quite the rollercoaster – one I suspect Fed policymakers will find consistent with their general outlook.  The better than expected gains in nonfarm payrolls supports their claim that first quarter weakness will prove to be temporary, while the commodity price rout will give them the breathing room on inflation they felt they needed.  This combination should keep the Fed locked on their current policy trajectory. 

To Find the Answers, Look Beyond Economics . . .

“AFTER more than a quarter-century as a professional economist, I have a confession to make: There is a lot I don’t know about the economy. Indeed, the area of economics where I have devoted most of my energy and attention — the ups and downs of the business cycle — is where I find myself most often confronting important questions without obvious answers…”

-Greg Mankiw

This week’s Sunday NYT Business section has an interesting column from Greg Mankiw: If You Have The Answers, Tell Me.

Capitalism 4.0

I attended the talk on the above subject by Anatole Kaletsky, co-founder of GaveKal Research and Economics Correspondent (Editor?) of the London TIMES newspapear. The speech was based on his book with the above title. GaveKal research was rather positive on the US model of outsourcing manufacturing and pitching its tent in the services sector (dark matter and all that), prior to the crisis. Thus, the crisis drilled holes into their worldview. His Capitalism 4.0 was less dogmatic. 

Greek Crisis

I’m afraid that while considering the Greek public finance crisis “The Economist” (A question of maturity, April 20th)  is right while suggesting that “the economics point to a harsher solution: a steep write-down as part of a broader package of reforms.” I’m afraid that such an obvious argument will hardly be understood nor supported for some time. And the elapsing time makes the whole unavoidable adjustment only more costly for both, the Greek taxpayers and the domestic and international creditors.

The ECB Wakes Up to Reality, Sort of

The ECB decided yesterday to hold back from another interest rate hike. It seems the ECB has finally figured out that the series of interest rate hikes it intended to do this year probably would have caused the Eurozone some harm. Specifically, the ECB’s proposed tightening would have required more painful deflation in the Eurozone periphery to bring about the real depreciation that part of the currency union sorely needs. That much the ECB seems to understand.  What they don’t seem to understand or don’t want to understand is that the periphery’s real depreciation could also occur through higher inflation in the core.  That, however, would require the ECB to ease and allow more inflation in Germany, an unlikely event. 

Seven Pillars of Prosperity—Diversifying Economic Growth in the Caucasus and Central Asia

Medium-term economic growth prospects in the Caucasus and Central Asia region are strong. But, to secure ongoing prosperity, the eight countries of the region—Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan—will need to look beyond traditional sources of growth.

The challenge for policymakers will be to foster new and more diverse growth drivers, outside mining, oil, and gas.

The End of Financial Vandalism – Moving Forward to the Real Economy

“You’re entitled to your own opinion, but not your own facts.” – Author Unknown

History shows that the pace of change is generally slow but accelerates due to either a technological breakthrough or a major crisis. The invention of the steam engine resulted in a major rise in productivity while the Second World War led to the Bretton Woods monetary system. What change has the recent financial crisis brought? A few months later we made our peace by blaming it all on sub-prime debt, greedy bankers and the decision to let Lehman Brothers fail. However, a lot of questions still remain unanswered.

At Auvest, we believe that asking the right questions is as important as finding the answers and this is what we have attempted to do in this report. The challenge we faced was to condense an internal research project that was much bigger in size and scope into something that would be concise and yet do justice to the subject. We hope that this report will raise a few questions while providing a perspective on the past drivers of global growth, an analysis of the current crisis and its implications and an overview of the opportunities and challenges in the coming years.

About the Strategic Significance of Bin Laden’s Execution, and the Road Not Taken

Summary:  The capture and execution of bin Laden was a powerful act of grand strategy.  Did it advance or damage our national interests?  There was an alternative to his execution, another of the roads not taken by America since 9-11.  Bin Laden borrowed from the ending of Tom Clancy’s “Debt of Honor”. We could have borrowed the ending from “The Sum of All Fears”.  This is a follow-up to A brief note about the death of bin Laden.

The Lonesome Death of Han Jin

For many of those following economic news from China, the suicide of Han Jin, a vegetable farmer from the Shandong province, was somewhat hard to wrap your head around. Han didn’t kill himself because his land was being taken by the government, a common reason for protest suicide. He didn’t kill himself because food prices were too high, or rains were too bad, and he couldn’t feed his family.

Does Foreign Exchange Intervention Slow the Pace of Currency Appreciation?

Abundant global liquidity and high exposure to capital movements have put foreign exchange intervention at center stage of the policy debate in Latin America. Although intervention is widely used, there is limited evidence about its effects on the exchange rate, and particularly in terms of slowing the pace of currency appreciation.

The Day After Tomorrow: A Different Kind of Trade

Over the past three decades, global trade grew almost twice as fast as global gross domestic product (GDP). The massive process of commercial integration was made possible by technological revolutions in transport (like containerized shipping) and communications technologies, and by a dramatic decline in import tariffs. This allowed many developing countries to implement export-led growth strategies that lifted hundreds of millions of people out of poverty. Some succeeded in sought-after manufacture markets and, more recently, even in services.

Is it Time for the U.S. to Disengage the World from the Dollar?

The week before last on Thursday the Financial Times published an OpEd piece I wrote arguing that Washington should take the lead in getting the world to abandon the dollar as the dominant reserve currency.  My basic argument is that every twenty to thirty years – whenever, it seems, that American current account deficits surge – we hear dire warnings in the US and abroad about the end of the dollar’s dominance as the world’s reserve currency.  Needless to say in the last few years these warnings have intensified to an almost feverish pitch.  In fact I discuss one such warning, by Barry Eichengreen, in an entry two months ago.

UK: Punch and Judy Show Ignores Fiscal Reality

For those looking for guidance on whether the government is doing the right thing by cutting the budget deficit they get, instead, a Punch and Judy show.

Larry Summers, former US treasury secretary, has become the darling of the “don’t cut” school with remarks he made last month at a George Soros-sponsored event at Bretton Woods, New Hampshire.

Can Sterilized Foreign Exchange Purchases Be Expansionary?

In Brazil, the purchase of foreign exchange reserves through sterilized interventions has been the object of several criticisms, including my own. The fiscal cost of maintaining reserves amounting to US$ 320 billion is more than R$ 50 billion, exceeding total budget savings promised by the government for this year.  Moreover, under current circumstances, sterilized interventions have the merely temporary effect of depreciating the nominal exchange rate.  In order to have a permanent effect, the Brazilian Central Bank (BCB) must continue its purchases, further increasing the reserves’ already extremely high cost.

Cost of Capital in China

I received the following article from Macquarie Securities. This article originally appeared in Chinese in China Times daily. It has been translated. Worth reading in full. 


Wenzhou’s Case of the Runaway Boss: Numerous Banks Involved

by Wang Xiaohui

As monetary policy has gradually tightened, entrepreneurs in Wenzhou feel like autumn leaves shivering in the wind of tight funding supplies.

Capitalist Evolution?

M&A activity is showing signs of life, activity reaching its highest levels since 2007. What more appropriate symbol of the renewal of the economy, of the emerging spring-time of our business cycle, than the merger of two firms, their culture, management style and business as the genes, and the result of the union a manifestation of the process of economic evolution.

Death of Osama Bin Laden

Bin Laden’s death presents a serious opportunity to end the war in Afghanistan, especially if the U.S. troops succeed in blunting the coming Taliban ‘spring offensive.’

Perhaps it’s only my sense of irony. But I love the thought that Bin Laden had lived in Abbottabad since 2005. The town is only 35 miles from the Pakistani capital, Islamabad.  The suffix “abad” means “developed by” or, better, “made fertile by.” So Islamabad, the capital built from scratch, means made fertile by Islam. Abbottabad means made fertile by Abbott. That’s Major James Abbott, a British colonial officer who founded the town in the nineteenth century.

Poverty Economics

I have read the ‘Foreign Policy’ article that contained excerpts from the book by Abhijit Banerjee and Esther Duflo. It would not be fair to comment on their work without reading the book. But, one could be excused for walking away with the impression, on reading the above article, that the poor remain poor because they could not care less. 

Bin Laden’s (Long Overdue) Day of Reckoning

Today’s news of Osama bin Laden being brought to justice was long overdue. It brought up bittersweet feelings of closure regarding that fateful day a decade ago. 

For those unfamiliar, my office was headquartered on the 29th floor of 2 WTC. (I was in the Long Island office).  On 9/11, I managed to get my head trader on the phone, who gave me a running narrative of what he witnessed from the street. He and I published that on September 12th, 2001 (A Personal Recollection From a Day of Horror).

A Brief Note on the Death of Bin Laden

Summary:  It’s not a big event.  It might not even be good news for the US, from a long-term perspective. Contents It’s not a big event Killing bin Laden might make al Qaeda more potent The weirdness of President Obama’s speech about the news For more information (1)  It’s not a big event We don’t […]

Uh-Oh: Is Shiller Defending the Failures of Economists?

Was it the hammers or the carpenters? 

That is the question alluded to this morning by Yale Professor Robert Shiller in the NYT. Shiller is one of my favorite academics working in the field of finance. He tries to (diplomatically) argue we can prevent future crises if only we had better econometric tools. I would counter that future crises could be avoided if only we had less economists who were fools.

A Top Businessman and Banker Explains Our Political and Economic Challenges

Summary:  We can fight what Paul Krugman calls the great forgetting, dearly bought knowledge about economics going down the memory hole.  This note from the past reminds us why everybody went off the gold standard during the Great Depression, and that the tendency to plutocracy is endemic in free-market republics. 

When trumpets were mellow And every gal only had one fellow No need to remember when ‘Cause everything old is new again

And don’t throw the past away You might need it some rainy day Dreams can come true again When ev’ry thing old is new again

— “Everything Old is New Again” by Peter Allen

Legitimate Complaint

Professor Deepak Lal’s piece in ‘Business Standard’ on April 16th has the following blurb: ‘A more open financial sector is necessary for global financial recovery’. Unfortunately, history has provided ample evidence to the contrary and the Professor himself does not offer any evidence in support of his blurb. 

My Class, Right or Wrong: The Powell Memorandum’s 40th Anniversary

August 23, 2011 will bring the 40th anniversary of one of the most successful efforts to transform America. Forty years ago the most influential representatives of our largest corporations despaired. They saw themselves on the losing side of history. They did not, however, give in to that despair, but rather sought advice from the man they viewed as their best and brightest about how to reverse their losses. That man advanced a comprehensive, sophisticated strategy, but it was also a strategy that embraced a consistent tactic – attack the critics and valorize corporations! He issued a clarion call for corporations to mobilize their economic power to further their economic interests by ensuring that corporations dominated every influential and powerful American institution. Lewis Powell’s call was answered by the CEOs who funded the creation of Cato, Heritage, and hundreds of other movement centers.

The Next Phase of Asia’s Economic Growth

As the economic recovery has matured across much of Asia, the region has continued to be a driving force in the strengthening global recovery. Yet, recent tragic events—around the globe, and the earthquake and tsunami in Japan—are an all too poignant reminder of the fragility of our economic circumstances and, indeed, life.

Much of this weighs on my mind as I am here in Hong Kong to launch our April 2011 Regional Economic Outlook: Asia and Pacific. While the outlook is by no means gloomy, it is an opportune time to consider how Asia should manage the next phase of growth.

Deficit Compromise

The Washington Post reported last week on a discouraging poll. Americans supposedly want to reduce the deficit, but not if it means changing Medicare, cutting programs like defense or Medicaid, or raising taxes on anybody but the very richest Americans. Democrats and Republicans seem farther than ever from finding agreement. It’s times like this that I’m glad there are some optimists around who still see some basis for making progress with America’s daunting fiscal challenge.

Diane Lim Rogers sees the issue this way: 

Stories about [the Washington Post-ABC] poll have tended to emphasize the majority who are opposed to each item in a “pick one” menu of tough choices: 78 percent opposed to cutting Medicare, 69 percent opposed to cutting Medicaid, 56 percent opposed to cutting defense spending. The only “pick one” option that a majority (72 percent) supported: “raising taxes on incomes over $250,000.” And even that is not as agreeable as it sounds, considering that households with incomes over $250,000 make up only about 2 percent of the population– i.e., you’d think we could get a little closer to 98 percent support on that one.

But that majority opposition to each of the “tough choices” is because respondents were asked to take or leave each of those tough choices as the single strategy for deficit reduction. No one wants to agree to give up something if they think others in society aren’t going to give up something, too. None of those “pick one” choices conveyed a notion of shared sacrifice or a “balanced” approach.

Latin America 2030

With the number of governments and companies issuing debentures with longer maturities, investors are wondering what Latin America will look like in 20 years? The average GDP growth rate for the past six years was 4% y/y. Assuming that the pace of GDP growth declines to 3.5%, the size of the Latin American aggregate economy will be $8.9 trillion by 2030. At the same time, U.S. GDP growth will remain anaemic, given its need to digest the enormous debt overhang that was accumulated during the past decade. Therefore, the U.S. GDP growth rate will probably average between 1.5% and 2%, meaning that the aggregate Latin American economy will be about half the size of the U.S. in less than 20 years. Currently, it is only a third. Of course, these assumptions are on the pessimistic side for Latin America and on the optimistic side for the U.S. Given the recent warnings issued by S&P, the dynamics for the U.S. economy could be much worse. An ugly budget row could lead to further depreciation of the dollar, which would further depress the relative size of the U.S. economy. At the same time, population growth in Latin America is on the decline. Less than a decade ago, the region had a population growth of 2%. However, the improved prosperity reduced the population growth rate to 1.09%. This suggests that Latin America’s per capita income should reach $14,000 by 2030—almost 50% more than current levels. The change in economic conditions will create regional and political opportunities and challenges.

China: The Triple Trillionaire

This tongue-in-cheek commentary in ‘Economist’ on the size of China’s FX Reserves gets its message across eventually. It is a delightful irony (not-so-delightful, depending on the eye of the beholder) that even as China is trying to internationalize the use of yuan and also make its currency one of the global reserve currencies, its interests lie in preserving the value of its main and status-quo rival: US dollar! 

Promises, Promises. Better Measuring the Effect of Pension Reform

We all hope to retire one day. Our pensions hold the promise of that.

But when that promise is a public pension, it’s also a lot like debt the government has to pay at some point in the future.

Good fiscal policy means thinking about how policy decisions—especially ones that involve long-term promises, such as pensions—affect government finances both today and in the future.

Restructure Ireland’s Debt

What next for Ireland? This column by CEPR President Richard Portes makes the case that the country should restructure its debt. 

Economic policy is difficult enough. Economists must be especially careful in offering opinions on policy issues for other countries. But the Irish debt problem is a European problem in its causes and implications (Hesse and González-Hermosillo 2011), and we would like to think that a European identity is some qualification.

The Global Village Idiot

In 1964, Herbert Marshall McLuhan, a Canadian academic, developed the concept of the Global Village, whereby the advances in electronic communications would create the equivalence of a central nervous system that would allow the planet to become interconnected and act as if it was a single unit. The concept of the global village became prominent with the development of the internet. Advances in transportation and communications allowed goods and services to be cheaply transported to the four corners of the planet, thus erasing regional differences in products and practices. The concept was fully embraced by multinationals during the 1980s and 1990s, as they used their market clout to impose a global system of branding and product domination. This led to greater integration of the global economy and the synchronization of the business cycle. This is not to say that all regional differences disappeared. On the contrary, just as in a village where there is a division of labor, between butcher, baker and candlestick maker, the globe was segmented into areas of specialization, such as high tech design, commodity production and mass manufacturing. By raising the division of labor to a higher level, society was able to extract more efficiency and productivity, which in turn allowed for an improvement in social welfare. Although poverty still abounds, globalization led to more prosperity (for some). However, there was always a problem with the leadership issue. Each village has a leader, but at times it seems like the global village is managed by the local fool.

The Lessons About Ourselves We Can Learn From the “Three Cups of Tea” Affair (Part Two)

Summary:   The Three Cups of Tea fable is symptomatic of a deeper flaw in the way we conduct foreign policy.  To believe in fairies makes for a fun children’s story, but wars require tight grip on an often harsh reality.  We’ve made this mistake in the past and will gain — unless we learn and reform. Part two of two.

“Greg Mortenson did not go to the Pentagon to con them.  The Pentagon went to him like a sinner to Elmer Gantry.” — Paul Avallone (Special Forces, retired; in Nangarhar, Afghanistan 2002-2003, as a photo-journalist in 2006 and 2008), email to Diana West posted here.  Also see his essay “Flirting with Afghanistan – Dispatches from the frontline“, August 2008.

We Can Learn an Important Lesson About Ourselves From the ‘Three Cups of Tea’ Affair

Like all cons, the “Three Cups of Tea” affair reveals more about us than its author. Like all marks, we seek simple sure-fire solutions, no matter how implausible. And we prefer the fables of conmen to the complex and often discouraging advice from experts. As any cop on the bunko squad knows, no matter if or how we punish the author, we’ll be just as eager for the next fraud. Unless we learn from our mistakes.

New Pragmatism Versus Failing Neoliberalism

The source of the current global economic crisis lies deeply in U.S.-style neoliberal capitalism, or contemporary laissez faire. It could not have been triggered in countries with a social market economy, but only in the conditions of the neoliberal Anglo-American model. The intense shock the world experienced could take place only as a result of the coincidence of numerous political, social and economic circumstances (as well as technological ones, since it would not have been possible without the Internet). The overlapping of these conditions in a specific way, which accumulated the crisis-related phenomena and processes, was possible only under a special combination of values, institutions and policies—typical of U.S.-style neoliberalism.

Why Cuba and Spain Need Each Other Again

Cuba obtained independence from Spain in the aftermath of the Spanish American War which came to an end in December of 1898. The loss of Cuba, Puerto Rico, Guam and the Philippines is known in Spanish contemporary history as El Desastre (The Disaster), the event which concluded Spain’s era as a colonial power and inaugurated a time of pessimism and despair personalized by the generations of 1898 and 1914, two generations of Spanish intellectuals who anticipated the clash of social classes, which led to the Spanish Civil War between 1936 and 1939. The Spanish American War was the easiest of the wars ever fought by the United States. The event marked the decadency of a country that never experienced a revolution and experienced a 19th century of civil confrontations and wars, a period of decadency that perhaps took off with the independence of a majority of Latin American nations in 1812.

Spain and Cuba need each other because of their common history, language, culture and tremendous synergies. Spain and Cuba could inaugurate bilateral partnerships between developed and developing nations in the 21st century that go well beyond trade and foreign aid.

Increasing Taxes on the Wealthy Is Unfair???

Matthew Yglesias via Brad DeLong: 

Have We Won the Empirical Debate About Economic Policy, by Brad DeLong: Matthew Yglesias:

Yglesias » Pity For The Rich: You can tell something’s happening in the economic policy debate when you start reading more things like AEI’s Arthur Brooks explaining that it would simply be unfair to raise taxes on the rich. Harvard economics professor and former Council of Economics Advisor chairman Greg Mankiw has said the same thing. And of course Representative Paul Ryan is both a fan of Books and a fan of the works of Ayn Rand. Which is just to say that we used to have a debate in which the left said redistributive taxation might be a good idea and then the right replied that it might sound good, but actually the consequences would be bad. Lower taxes on the rich would lead to more growth and faster increase in incomes.

Now that idea seems to be so unsupportable that the talking point is switched. It’s not that higher taxes on our Galtian Overlords would backfire and make us worse off. It’s just that it would be immoral of us to ask them to pay more taxes even if doing so would, in fact, improve overall human welfare.

If that sounds remotely plausible to you, you might have a lucrative career ahead of you working as an apologist for said Galtian Overlords. If not, then congratulations for possessing a modicum of common sense.

Reading Links

While reading the Krugman blog post on how people on the Right and Left could be bonkers, I came across a link to this article on ‘How the Federal Reserve bought the Economics Profession’. Read the whole thing. It is time well spent. Even if there is no official gag order on contrarian views, it […]

Tax Matters for Developing Countries

You hear a lot these days—not least from me—about the fiscal problems of advanced economies. But let’s not forget the fiscal problems that low-income countries face, though they are of a different kind.

For all too many low-income countries, government tax revenues are far from enough to meet the needs of their people. Some have made good progress, and this helped them weather the crisis better than many advanced economies—but there is an underlying, quiet crisis of inadequately resourced governments.

In Timo’s Hands (0.19 * 0.016 = 0.0031)

Imagine you lived in a 27-flat condo whose regulation stated that in the case of a fire or a gas leak in anyone’s apartment, all flat-owners had to first agree (by voting in favor or abstaining) before the gas company/fire brigade could be called in (NB: all, including those who would rather tear down the condo and replace it with a parking lot).

Connecting the Dots Between Global Risks

Finance ministers and central bank governors from around the world, gathering at the Spring Meetings of the IMF and World Bank in Washington last week, identified a slew of continued and emerging risks to the global economy, including higher food and fuel prices, the disaster in Japan, unrest in the Middle East, lingering unemployment in parts of the world, and the risk of overheating in some dynamic emerging markets.


With the recovery solidifying but still fragile, ministers put the spotlight on how to strengthen the IMF’s surveillance—its economic assessment and analysis—to help countries take the action needed to address risks and avoid future crises.

Old Dilemmas, New Challenges: Monetary Policy and Capital Flows into Emerging Economies

For all the talk today about capital flows into emerging economies, the topic has actually been debated for many years within the IMF. For a decade or more, we have grappled with the idea that very large capital flows into successful emerging market countries were almost inevitable and would prove extremely difficult to manage. And […]

Musings on Plutocracy

I trust readers don’t mind that we are a bit heavier than usual on the political-related postings tonight, since this is a slow news week. But that may be useful, given that the big new subtexts at the INET Conference were the importance of “political economy” (three years ago, that expression was seen as having a decidedly Marxist color to it) and the rising wealth and power of the top 1%.

Gresham’s Law in the Eurozone, Again

Tyler Cowen brought up Gresham’s Law in his NY Times column this past weekend:
IS a euro held in an Irish bank in Dublin, or in a Portuguese bank in Lisbon, as sound and secure as a euro in a German bank in Berlin? That apparently simple question holds the key to understanding why the euro zone may splinter and bring a new financial crisis. 
In Ireland, there has been a “silent bank run” on financial institutions for much of the last year. In February, for instance, Irish private sector deposits dropped at an annual rate of 9.8 percent. That’s largely because some depositors doubt the commitment of the Irish government to the euro. They fear that they will wake up one morning to frozen bank accounts, followed by the conversion of their euro deposits into a lesser-valued new Irish currency. Pre-emptively, the depositors send their money outside Ireland, where it still represents safe euros or perhaps sterling, accessible by bank transfers and A.T.M. cards.  This flight of capital reflects a centuries-old economic principle known as Gresham’s Law, sometimes expressed casually as “bad money drives out good money.” In this context, if two assets — euros inside and outside Ireland — are not equal in value in the eyes of the marketplace, sooner or later the legally fixed price parity will fall apart.

Heritage Breaks Internet Silence on Its Ryan Plan Simulations (w/o a Single Number!)

Or, a “Forensic Analysis for the Heritage CDA results”

The Heritage Foundation Center for Data Analysis (CDA) simulation of the Ryan plan, on behalf of the House Committee, has come in for some criticism. Commentary has been provided by Paul Krugman, and perhaps most comprehensively by Macroeconomic Advisers. (My comments are here: [1] [2] [3]). Yesterday, the Heritage Foundation CDA’s director, William Beach, posted a rebuttal to Krugman’s critique. While Big Picture posted an excellent rejoinder, I want to deal with one particular aspect of Mr. Beach’s open letter.

European Pushback Against Bailouts

While the US markets are rockin’ and rollin’, I wanted to follow up a small NYTimes piece that might have slipped by unnoticed: Populist Advance in Finland Could Endanger Bailouts

This seems to be the pattern. In nations where bankers and their creditors were allowed to go belly up, the populace seems to be more satisfied with the outcome, and the politicians are mostly managing to retain their jobs. Tiny Iceland seems to be the only country that got this right.

Money Never Sleeps…

During my recent cross country lecture tour in the USA, I heard opinions that the themes of the films “Wall Street: Money Never Sleeps,” directed by Oliver Stone and “Inside Job” perfectly coincided with my new book “Truth, Errors, and Lies: Politics and Economics in a Volatile World.” Several people said the films are a quasi-postscript to the book, in particular my comments on the cynical stage of contemporary laissez faire. I have been also told that some people—everyone knows who—are afraid of the book and the films. Well, it is a universal truth that nothing hurts like the truth and it is not enough to present the truth in an academic, theoretical way. Artistic fiction has value too and fighting for the truth is never too much.

Nature and Politics: Global Consequences of Japanese and Arab Tremors

The scale of the Japanese cataclysm is so immense that if such an earthquake and the following tsunami and fires had struck the archipelago of Philippines or Indonesia the countries would have collapsed. But Japan—which has experienced similar, bitter disasters previously, although on a considerably smaller scale—a wealthy country and its brave people, will cope with the situation.

UK: Better News Allows the Bank to Take a Breather

We used to think of the chancellor’s task as meeting four objectives: a good rate of growth, stable prices, rough balance between exports and imports and low unemployment.

New growth figures are awaited – they will be published on April 27 – but on the other three the news has been much better than expected. At the same time the Office for National Statistics announced a surprise fall in inflation, it also revealed that Britain’s overall trade gap narrowed sharply.

Chinese Recycling and U.S. Interest Rates

I mentioned in last week’s blog entry that during my trips to New York, Washington and Hangzhou in the past two weeks one of the common themes was concern about rising debt levels and weaknesses in the banking sector.  Another theme – one which I want to discuss in this entry – was the possible impact of China’s rebalancing on US and global interest rates.  A lot of people were very concerned that if China does indeed rebalance, US interest rates will soar.

Rethinking (Macro)Economics

Bashing economists has become a fashionable sport today. Healthily, self-criticism and rethinking also come from inside the profession. RGE has recently posted three authoritative reflections, by Olivier Blanchard, Joe Stiglitz and Michael Spence, about the state of the discipline taking stock of the hard lesson imparted by the crisis in the face of the policy challenges ahead. This welcomed attitude should not remain a moment’s penance in the wait for the next upswing in the business cycle that will push the sorrow days of the crisis far back in the memory. A wide-ranging and long-lasting correction is needed of major faults in the way in which economics has been thought, taught and practiced for some decades.

And Now We Go to Morocco…

Is the Moroccan King Mohammed, a member of the Alaouite dynasty ruling the country already for three and a half centuries, indeed a direct line descendant of the Prophet Muhammad? Even if it is so, now the people of Morocco are on the streets and squares from Marrakesh to Casablanca. And we’ll see more of them in the coming days, protesting against the way the country is governed. Yet one must acknowledge that in case of this Maghreb nation of 32 million people (as many as Canada) over the last two decades certain political and economic reforms have been carried forward, going much farther than in other Arab country to the East. They have introduced a system of a parliamentary monarchy and enabled the government to exercise more sound policies than, say, in Egypt or in Saudi Arabia. But there is still long way to go.

Deflating Inflation / Inflating Deflation

Quantitative easing (“QE”), the currently fashionable form of voodoo economics favoured by policymakers in the US, is primarily directed at boosting asset values and creating inflation. By essentially creating money artificially, central bankers are seeking to return the world to stability, growth and prosperity.

The Spring of Nations

Seven generations ago – in 1848 – Europe was swept up by the revolutionary wave of the Spring of Nations. One generation ago the year 1989 was written in bold letters into the book of History. And now, in 2011, we have again a Spring of Nations, this time first in North Africa and Mid-East, and possibly soon elsewhere, in sub-Saharan Africa, Central Asia…

Why Do Rep. Ryan and the Republicans Want to Gut America’s Military Defenses?

Summary:  Ryan’s proposal means drastic reductions in spending on national defense.  Like most of the plan’s key details, it’s hidden in the shadows.  Like a magician, he distracts us with the right hand while left does the dirty work.

From The Path to Prosperity: Restoring America’s Promise, by the Republican members of the House Budget Committee (Chairman Paul D. Ryan, R-WI), April 2011 — Note this plan calls for higher spending as a per cent of GDP than their 2010 “A Roadmap for America’s Future“.  Perhaps by version #12 they’ll have a realistic forecast.

Current Account Deficits and Safe Assets

Current Account Deficits and Safe Assets

The International Monetary Fund has issued its External Sector Report for 2017, and among its key findings: “Global current account imbalances were broadly unchanged in 2016…” The U,S. continues to record the largest deficit, $451.7 billion, which is equal in value to 2.4% of U.S. GDP. The continuing deficits contribute to the increase in the […]

Why Lebanon’s New Government Needs a New Economic Model

Why Lebanon’s New Government Needs a New Economic Model

After a two and a half year political impasse, Lebanon now has a new government. And after 12 years without a budget Lebanon’s government led by new Prime Minister Saad also has a $15.8 billion budget What is not clear is whether or not the new government will at least try to create a new […]

A New Banking Crisis?

A New Banking Crisis?

Bad Numbers Today, there are over $3 trillion in stressed loan assets, compared to around $1 trillion of US sub-prime loans which was the catalyst for the 2008/2009 crisis. The World Bank estimates the ratio of non-performing loans (“NPLs”) to total gross loans is comparable the 2009 levels of 4.2% in 2009. Several loci of […]

Can Uganda Step Up to New Economic Challenges?

Can Uganda Step Up to New Economic Challenges?

photo: Mark Nelson Leif Rosenberger: Former Professor of Economics, US Army War College & Former Chief Economist at CENTCOM and PACOM Back in the 1970s, Uganda was one of the worst run economies in the world. Uganda suffered through a lost decade when Idi Amin was in power in the 1970s. Thankfully, Uganda’s economic performance dramatically […]

New Pragmatism: Economics and Economic Policy for the Future

New Pragmatism: Economics and Economic Policy for the Future

  New pragmatism is an original, paradigmatic and heterodox theoretical concept within the field of economic science, which attempts to address current civilizational challenges and factors that will determine the future functioning of economic systems. It strives to advance economic theory in a direction that allows a more in-depth and accurate cognition of the economic […]

Transformative Changes in World Energy Production and Trade

Transformative Changes in World Energy Production and Trade

Major changes in oil production have transformed the US from a major importer to a major producer and sometime exporter of oil. The market power of OPEC and its non-member collaborators has been weakened (Libya and Nigeria have been exempted from current quotas). In addition to new sources of oil production, we are now hearing […]

Matchmaking Finance and Infrastructure

Matchmaking Finance and Infrastructure

The world economy – and emerging market and developing economies in particular – display a gap between infrastructure needs and its finance (Canuto, 2014). On the one hand, infrastructure investment has fallen far short of what would be necessary to support potential growth. On the other hand, abundant financial resources in world markets have been facing […]

Turkey: Lower Reserves and Higher Rates, but Market Turmoil Is Unlikely

Turkey: Lower Reserves and Higher Rates, but Market Turmoil Is Unlikely

Key takeaway – Despite declining reserves and increased interest rates, Turkey is unlikely to suffer a market-crash over the next 12 months. What happened? Since the July 2016 coup attempt, the reserves of the Central Bank of Turkey’s (CBRT) declined. Gross international reserves declined by 14 percent (by USD 14.5 bn, from USD 104.7bn to […]

European Union Recovery – Surprise Economic Story of 2017

European Union Recovery – Surprise Economic Story of 2017

  Against all odds, and contrarily to a generalized gloomy scenario of the past years about the destiny of the European Union, the Euro area has surprisingly recorded a stronger than expected economic growth in the first semester of 2017 and a rather optimistic and reinvigorated political turnaround in favour of the EU. During this […]

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