One Step Forward in the Euro Zone?

It would have been hard to believe only a few weeks ago that the euro zone could be the source of any good news let alone news to help push the market forward. Yet, with last week’s successful bond auctions and the pledge of international superpowers such as Japan and China to buy Euro zone debt and the ECB’s sudden more hawkish tones, the obvious question is; are we out the woods yet? Continue reading

Macroeconomics, Representative Agents and Demographics (wonkish)

Upon first reading what I am, more or less, pasting below, my thesis councillor opinioned that this particular piece of text was a malignant tumor that had to be surgically removed if the patient (in this case, my master’s thesis) were to make it alive. I agreed with him back then and I still do, but I thought that the section was too interesting to be devoted entirely to the dustbin. Moreover, the debate on the state of macroeconomics has gotten new life on the back of the financial and economic crisis with a lot of interesting contributions in the past 2 years [1] and I wanted to add my own spin on, at least, part of the issues involved. Continue reading

Building Hedges Around Greece?

While Macro Man opted to present a po(p)etic styling on the ongoing hardship in Greece (or was that Grease?) today came with a couple of notable developments in the story and would seem to be honourable and real efforts to calm down markets. Obviously, it is difficult to tell whether this is a true attempt to save Greece from what increasingly looks inevitable or whether it is an attempt to make sure the debacle does not turn out to be a Eurzone rout. In any case, action it seems is entering the stage on the cost of fiddling. Continue reading

Demographics and the Anatomy of International Capital Flows

In a week where the deck of cards that make up the Eurozone got its so far largest jolt and where there is now not only an imminent danger of a total economic collapse in Greece but also, much more worryingly, signs that Germany herself is beginning to tire of a common monetary union , I thought it would be nice to take a longer term and structural perspective on the global economy. And what better way to do this than to dig into the world of academia.

As some of you may know I recently earned my degree from the Copenhagen Business School and on that occasion I also produced a thesis which I’d like to share here.

This thesis is built upon two core arguments. The first is the notion that the demographic transition should be narrated through the perspective of ageing rather than population growth and the second is that ageing on a macroeconomic level represents a strong driver of international capital flows. These two arguments are used to discuss the standard prediction in a life cycle framework that ageing leads to dissaving in the aggregate and thus how old economies should tend towards running current account deficits. Using Japan and Germany as the subjects of analysis, this thesis develops the idea that rapidly ageing societies are not, in the main, characterized by dissaving but rather by the fight against it. Finally, a small empirical exercise acts as a perspectivation on the results to suggest why ageing might lead to a reliance on exports and foreign asset income to achieve growth and what this means in a global context.

In many ways, the ideas, thoughts and arguments that have gone into this work are shaped by the discussions and the activity here at this space and my interaction with the people I have come to know through my online presence. In this way, it is only apt that I present it here I think. Continue reading

Defying Gravity In Japan

Popular myth and, allegedly, the laws of aerodynamics have it that the bumblebee should not be able to take flight. Yet still, our good bumblebee refuses to be pulled down by such nit-picking details, and year after year it takes flight as if none of this mattered. This little allegory applies, adding a little imagination, to Japans economy too. Year after year it gives us the impression of simply being able to ramp up domestic debt to cover the evident shortfall in both domestic consumption and  investment demand, since having a savvy export sector, and a strong net foreign asset position, mean that Japan does not have to rely on foreign investors to finance government debt outlays. Add to this a central bank definitively bogged down  in what appears suspiciously like perpetual Quantitative Easing  mode given the persistent deflation from which the country suffers and there we have the core of Japan’s “bumblebee moment”. Continue reading

Eurozone Q4 GDP Growth Disappoints

GDP releases are, by their very nature, lagging indicators and thus do not tell us a whole lot about the current momentum in an economy. Moreover, the immediate focus of attention in the Eurozone remains, and rightly so, the situation in Greece (and Spain), and what precise plans are likely to emerge from the busy schedule meetings which is taking place between Eurogroup and EU finance ministers and heads of states. Yet, despite all the known shortcomings, GDP data remains our basic source of information about the health and progress of our economies, and with the Q4 data out today and the 2009 GDP summary we are able to arrive at some sort of interim conclusion [1] on what was obvioiusly an absolutely abysmal 2009. More importantly we are also able to take stock of a recovery which permanently promises to arrive, but never actually seems to do so, much to the chagrin, I am sure, of the various Eurozone policy makers (click for better viewing)

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Moodys on Japan and the Eurozone – Stating the Obvious

I shall openly admit that I have always found the exact role of the rating agencies a bit odd in the global financial system. I mean, do we really need them to tell us which bonds are good and which are not? I am not sure and what is more; rating agencies sometimes, if not all the time depending on their ability to stay in front of the curve, seem to wield a tremendously amount of power relative to their role as private actors (after all) in financial markets. Continue reading

Quantifying Eurozone Imbalances and the Internal Devaluation of Greece and Spain

Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.

Winston Churchill, 1942


  • The extent, so far, of the internal devaluation process depends on the time period used for analysis. Using Q3-2007 as the beginning of the economic crisis suggest that Greece and Spain have not corrected relative to Germany as a benchmark. However, if we look entirely at the world in a post-Lehmann context the picture is different with Greece and Spain having observed excess deflation relative to Germany to the tune of -1.7% and -4.5% respectively for unit labour costs and -5.4% and -1.7% respectively for the PPI.
  • The correction observed in the context of unit labour costs appears technical as German unit labour costs have increased sharply since Q4-2008 due to a large reduction in working hours and an increase in short time work. In comparison, the relative correction in the PPI looks more solid.
  • The internal devaluation has not yet trickled down into the overall price level represented by the CPI. Both using the period Q3-07 to Q3-09 and Q4-08 to Q3-09 as the relevant time horizon reveals that there has been no meaningful internal devaluation in Greece and Spain measured on the CPI.
  • While the analysis presented here may go some way to quantify the intra-Eurozone imbalances and the course of the internal devaluation so far it is impossible to say precisely how far (and for how long) Greece and Spain (and indeed Latvia, Hungary etc) have to go here. More importantly, it is impossible to say exactly which measures that must be taken albeit that they have to be severe in the context of reigning in public spending and, ultimately, the public debt and ongoing deficit. Likewise, it is difficult to quantity just how high unemployment should drift and for how long it should stay there in order to grind down past excess.

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Is Germany Dependent on Exports to Grow?

The analysis that follows should really be taken along with Edward’s recent thoughts on the Global Imbalances situation as well as his latest economic survey of the current state of play in the German economy.

Essentially, I am going to have a look at what is, arguably, one of the more salient features of the current debate over the German economy and the Global Financial Crisis, namely her dependence on exports for economic growth. What I would like to ask here then is whether the current and evident degree of German export dependency is simply a curious oddity, or whether it has some more interesting and fundamental economic dynamic, related to the fact that Germany is one of the oldest economies in the world measured on median age (currently running at approximately 44 years)[1]. Continue reading