It is absurd that a professor of economics - who should know better - has no other solution to offer for the lack of growth in the world's major economy. Apart from the question whether or not eternal growth is really feasible - or desirable - he would only have to look a closer look at the relevant textbooks and he would find that pumping freshly printed dollar bills into the financial system is not the only (temporary and superficial) answer to what is in essence a question of fiscal indiscipline and wrong micro-economic measures.
Gavyn Davies provides another 'analysis' (Financial Times) that is based on observing just a few datapoints, not even close enough to the data one would need to have a reasonable basis to draw conclusions that should be the basis for policy decisions. The problem is that other factors are never equal. We all would love to have a multiplier larger than 1 on a sustained basis. Life would be easy, just let the government spend and spend. But in the case of the UK for example this simplistic view leaves out the fact that at some stage the policy would hit the buffers - when foreigners no longer support this policy. The Greeks can tell a story. A bit of deflation in the UK would be more than welcome, some factors of production would have to find better uses, people who are paid to sit at home or are surplus in certain sectors (some MP's?) would have to lower their wage demands, this would increase the buying power of the rest of the population and a virtuous circle of wealth creation would start. Less 'Macro' and more 'Micro' in policy making! Unfortunately the media, think tanks and the commentariat in the financial industry love the former and spend little or no time on the latter.
A complicit media again gives headlines to the latest insights concocted by the bureaucrats of the IMF. With the best of intentions these cannot be called original research. Any first-year economics student could put together the reports as nothing more than a diligent reading of the economic research produced by the national agencies and research institutes is required. The sad thing is that the electorates in all member states are forced to pay for generous terms of employment while the belt tightening in many countries is accelerated. We would also love to hear if any staff member ever has been fired - apart from the hapless Dominique Strauss-Kahn (who fell victim to the weakness of his flesh and the bloodhounds in the NYPD and his political enemies in France).
Given the overwhelming consensus view that Spain will have to go cap-in-hand to the ECB/EU/Troika and ask for a bailout one has to ask if there really is no alternative for EU member states that find themselves in a tight spot. Is it really necessary to impose the costs of any restructuring on the weakest members of society? Why not just impose a unilateral debt restructuring and let the creditors - domestic and foreign - carry a much larger burden of any restructuring? There is no reason why a country choosing to go down that route could not remain in the Eurozone, if anything such a radical measure would make it easier to remain in the Eurozone. Capital flight would be reduced as there would be less fear that an exit from the Eurozone would be imposed in order to solve the debt crisis.
Today's 'surprise' announcement by the figurehead of the ECB, Mario Draghi, that the Euro would be defended with another dose of a highly addictive drug, i.e. paper money in hitherto unimaginable amounts, also amounts to the end of any rational economic policy in the Eurozone. Trying to patch up a wrongly designed currency zone with more and more desperate measures may buy time, even quite a long time, before the next - and terminal - crisis erupts. Banking union, fiscal union etc may all happen - without a shred of democratic legitimacy - but in the end there is no guarantee that no member state of the Eurozone will not some day give notice of its intention to quit - and leave all its obligations behind. This Damocles's sword will from now on always hang over the heads of all investors that have a financial stake in the Eurozone. Like our warning back in 2005 when we argued that investors were deluded to buy Italian government bonds that yielded a tiny spread versus German paper this warning may also sound premature - the Commentariat will certainly pour scorn on it - but investors ignore it at their peril.
Interesting article (CityAM) but where is the 'spontaneous optimism' supposed to come from this time? And where has it sprung from in 1933?? All very well if Mr. Ormerod is "currently researching complexity, complex systems, nonlinearfeedback, the boom and bust cycle of business and economic competition" but then we would expect that he could tell us the answer to this riddle.
Most sensible observers - apart from the europhile 'Elite' behind the Brussels-Consensus - would agree that the way the Euro was constructed was - apart from being anti-democratic - deeply flawed from the onset. But we are where we are and cannot argue over spilt milk. That the governance of the Euro zone will have to be changed in a major way becomes clearer by the day.
But the discourse in the media - and above all in the blogosphere - is not really focusing at the relatively simple way the crisis can be ended. Too many commentators have a vested interest in seeing the demise of the Euro, be it for ideological reasons, be it out of a sense of 'Schadenfreude' or pure sensationalism (only bad news is news seems to be the motive, just read Zerohedge where is is difficult to find ANY constructive criticism). We do not even want to consider all those great thinkers that have positioned themselves for a collapse of the Euro or some of its member states and want to make hay out of any subsequent turmoil in the markets. Worst of all are 'investment' banks that play all sides - as speculators, doomsayers and 'advisors' to governments and banks that are victim of speculative attacks.
Because speculation is a key contributor to the growing crisis in the Euro zone. Not just in the guise of a hard-nosed hedge fund manager or prop trader but also in the shape of all major investment institutions. They may not be short-term oriented and probably have no axe to grind regarding the survival of the Euro but nevertheless they are knowingly or unknowingly contributing to the destabilisation of country after country by simply taking steps that are beneficial to their own self-interest.
Countries such as the USA and Britain have only survived with an intact (?) financial system because their Central Banks pumped money into the economy at rates that would have been called lunatic before the onset of the Credit Crisis. There is no such tool to stem bank runs on countries that are members of the Euro zone. Greece may have an economy that has been managed abysmally but no one in his right mind can expect a country to survive when speculation pushes interest rates to astronomical levels. A similar mechanism was at the heart of the credit crisis 2008-09 when speculation in relatively illiquid derivatives (mostly linked to ABS and MBS products) created a 'death spiral' in the credit markets that was largely divorced from the underlying reality in these markets.
Stopping the rot at the core of the Euro Crisis would require only the full commitment of the European Central Bank to an all-out effort to push interest rates in ALL member countries to acceptable levels and fulfil its role as lender of last resort to all banks that are threatened by a bank run.
Reading that the bureaucrats in their cushy offices in Paris are 'pushing' for an increased 'firewall' to protect the Euro from disintegrating and help the Eurozone to return to economic growth one is reminded how clueless these 'experts' really are. They refuse to realise that the introduction of the Euro currency in its present form was a catastrophic error and think that throwing money at the economy is all that needs to be done to correct the cumulative results of 40 years of creeping socialism.
Everything is still in thrall of the 'growth at any cost' philosophy. The astronomical salaries paid to 'Celebrities' and CEO's are counted as positive contributions to GDP and the qualitative aspects of Growth (better schools, better health care, better treatment of the environment) are neglected. Time to re-read Mill's prediction.
The massive gift that taxpayers and investors in many countries are forced to hand to the Greek citizens is unprecedented in recent history. While many commentators argue that the accumulated debt of the Greek state simply was too high a burden and had to be reduced we think that the origins of this crisis lie in the panic that gripped the bond markets during the past two years. For a long time the interest rate that Greece had to pay on its bond issues was artificially depressed due to carelessness by the investor and banking community. Starting in late 2009 the markets switched from overoptimism to pessimism. Increasingly a debt load that could have been restructured became unsustainable as market rates on Greek debt reached astronomical and unaffordable levels. Therefore one could say that Mister Bondmarket has made it possible for Greece to have its debt load cut by substantial amounts - with more to come in the future. Or does anyone really think that Greece would have gotten away with such a blatant renunciation of its obligations if interest rates on its bonds would have remained at, say, 4 or even 5 percent? For a more amusing take on this watch Panos the Greek
Tuesday, 20 March 2012
Population growth is number one economic issue says Paul Farrell (Marketwatch) and we fully agree.
Thanks to the weekly feature 'Lunch with the FT' we now know that Esther Duflo is 'petite' and about to become an American citizen (why is she renouncing her heritage?). God be thanked that the real 'stars' of economics never had to submit to the hagiographic treatment in a FT lunch session. The irony is that the 'star' professors that the 'elite' universities keep are beneficiaries of protectionism as they sit in a tenured position that protects them from the ravages of the economy that they purport to 'study'. Similarily, the 'elite' universities in the USA are part of the 1 per cent system where the rich donate to the same few universities that host their pampered and privileged offspring - thus aggravating and perpetuating a system that favors the few over the many. Maybe this 'star' economist should study this abuse and not wether or not the poor should pay for their mosquito nets or not.
News that 97 'Super rich' individuals have left the Swiss canton after a favourable tax treatment for rich foreigners was revoked demonstrates that unfair tax competition is alive and well. The 97 are among 201 rich foreigners that only paid an agreed amount to to canton that was far from representative of their overall global wealth. How little these individuals pay is revealed by the fact, that the departure of the 97 only led to a Swiss Franc 12.2 million diminution of the tax take. This means that each of them paid just around Sfr 100,000 a year. We do not know the aggregate wealth of these persons but we would guess that even Warren Buffett would be even more embarrassed if he could get away with the tax rate these tax fugitives paid. While the canton of Zurich is the loser, there are plenty of other Swiss cantons who still operate a tax haven on a highly selective (and discriminatory) basis. One only has to wonder what purpose the WTO or the OECD serve if they cannot stop this blatant case unfair tax competition. No wonder the Super rich 0.01 per cent are laughing all the way to the bank.
By suggesting nothing else but another 'Support Package' for Greece the establishment economists admit that they are helpless when faced with a crisis such as the one Greece (and and.....) is facing. If there is no other solution in today's economic toolkit than to throw ever-increasing amounts of taxpayer's and helicopter money at a problem we might as well bin the insights of 300 years of economic thought.
Professor Mankiw admits that he is an adviser to Mitt Romney so one should not be surprised that he expends a considerable amount of energy confusing the straightforward case against a low tax on carried interest for private equity promoters with a variety of situations faced by hypothetical property investors. But the performance fee and basic management fee charged by private equity firms that predominately buy and sell existing assets can simply not be called a capital gain as there is no capital at risk. The exception is the portion of capital that has actually be invested by the managers of the pe firm. The rest simply is reward for putting in the effort to manage the fund. One problem we have to face is that the amount of this investment can easily be manipulated. Already, the insiders of the pe firms (promoters and senior management of the companies that the firms invest in) receive founder's shares (or options) at exceptionally favourable terms (something that would need closer attention by the 'limited partners', i.e. the investors who bear most if not all the costs and risks of the funds). Subsequently it can be claimed that the proceeds arising from the eventual sale of these shares (allocated at pennies) are a 'capital gain'. Maybe it would be a good idea for Professor Mankiw to let us know how he would prevent this abuse?
The arguments of these 500 pillars of the British Economy are laughable but also symptomatic of the feeble state of entrepreneurship that has been a factor for the relative (and absolute?) decline of British Business over the past 40-50 years. Would these businessmen really work less just to spite the government? Their income would decline even more if they would do so. Would they really cut employment or refrain from expanding the business if a good opportunity presents itself? As Warren Buffett argues over and over again, the economy in the US, for example, grew pretty fast in the 1950s and 1960s when top marginal tax rates were much higher.
Learned Minds can recite catalogues full of reasons why it is very difficult, even impossible, for a member state of the Euro Zone to abandon the Euro. But all the legal niceties will count for little if the decision is made to cut the Gordian Knot. While to Euro as a practical instrument is quite useful for tourists as well as businesses the boost to the economies to the member states was at best marginal during the past ten years. These days the exchange of currencies is nearly frictionless and very cheap in the day of the Internet - for private people and even more so for business purposes. But the argument that the exit from the Euro Zone would be extremely difficult and take a long time to prepare is difficult to swallow. It should be possible to declare on any weekend that the exit has been decided and that all bank accounts, financial assets and liabilities will be frozen and converted into the new currency from that moment on. Unfortunately, this analysis makes it even more likely that the Euro Zone will lose one of its members at some point in the future because any sane investor or business manager will henceforth take this possibility into account when making decisions.
Scholastic scholars would have felt perfectly at home in the discussions about the Euro and the Euro Crisis. What ALL experts seem to be forgetting is the poor taxpayer and citizen who has no say at all in this. The major contributing factor to the current situation in Euroland has been totally wrong (one might even say foolhardy and/or idiotic) decision making by the 'fathers' of the Euro (who by now all enjoy their pampered life paid out of generous pension the bill for which is picked up by their hapless victims). Without the strainghtjacket of the Euro individual countries or banks would have gone bankrupt by now and life would go on without creating too much systemic danger for all industrial countries.