Word has it that Mario Draghi is busily working up a new version of his “whatever it takes” methodology. This time the objective is not saving the Eurozone, but maintaining the region’s inflation at or near the ECBs official 2% inflation objective. The first time round the President of the Euro Area’s central bank had it easy, since market participants took him at his word and he effectively needed to do nothing to comply. This time though, as they say, it will be different.
According to wikipedia, “overdetermination is a phenomenon whereby a single observed effect is determined by multiple causes at once, any one of which alone might be enough to account for (“determine”) the effect.That is, there are more causes present than are necessary to generate the effect”. In this strictly technical sense Japan’s deflation problem is overdetermined – there are multiple causes at work, any one of which could account for the observed phenomenon. Those who have been following the debate can simply choose their favourite – balance sheet recession, liquidity trap, fertility trap – each one, taken alone, could be sufficient as a cause. The problem this situation presents is simply epistemological – in a scientific environment the conundrum could be resolved by devising the requisite, consensually grounded, tests. Continue reading
What a convoluted title! Still, the lack of formal elegance might just be compensated for by its communicative efficacy. The aim of the above header is to link two names in people’s minds, both of them Italian: Mario Draghi and Matteo Renzi. Naturally the idea is not original, the FT’s Peter Spiegel recently published an entire blog post ( Does Renzi owe his job to Draghi?) trying to establish some sort of connection between the arrival in office of Italy’s Matteo Renzi and the recent German Constitutional Court ruling – in the process casting the central bank President in the role of midwife. Indeed, according to the FT, Italy itself is currently rife with rumours about what might actually lie behind Renzi’s meteoric rise, and again the role alloted to Mr Draghi seems to be rather more than an incidental one. Continue reading
The Czech republic has been making the news recently. On the one hand the country has been on the receiving end of massive, devastating floods, while on the other the country’s government was brought to the brink of collapse (and beyond) by the resignation of Prime Minister Petr Necas following the arrest of one of his most trusted aides on corruption charges. After the deluge I suppose.
According to legend and some historians, by making a stand in the Thermopylae pass 300 brave Spartans valiantly saved the day for the entire Greek army in the face of a Persian force of overwhelming strength and manpower. More than 2,000 years later some 11 million Greeks might be considered to have carried out a rather similar operation by single handedly facing-off a massed horde of frantic global speculators on behalf of the entire Euro Area population – at no mean cost to themselves in terms of wealth, employment and general well-being. Or at least that is the conclusion which could be drawn from reading through the latest self-critical review issued by the IMF dedicated to the lessons which can be learned from the to-date handling of the country’s deep economic and social crisis. Continue reading
The future never resembles the past – as we well know. But, generally speaking, our imagination and our knowledge are too weak to tell us what particular changes to expect. We do not know what the future holds. Nevertheless, as living and moving beings, we are forced to act. – John Maynard Keynes
Discussions of the population problem have always had the capacity to stir up public sentiment much more than most other problems.
- Gunnar Myrdal
Last Thursday the yen broke through the psychological threshold of 100 to the US dollar. On Friday the slide continued (see chart), even dropping very close to 102 to the USD at one point before strengthening slightly on the run in to the G7 finance ministers meeting. Continue reading
And the world said “Let Shinzo Abe be”, and all was light.
A new craze is sweeping the planet. Known by the title “Abenomics” over the last couple of years it has been steadily gathering adepts in financial markets across the globe. Despite the fact Abe’s move fits comfortably within the austerity vs growth policy axis, at the heart of the new approach lies not a strategy to directly create growth per se, but rather one to try to induce inflation. For those who have not been following the Japan saga as it has developed over the last twenty odd years this whole debate may seem like a strange way of thinking about things. After all isn’t inflation supposed to be a bad thing, one central banks are supposed to combat? And how can a country possibly become more ever more competitive by force-feeding itself inflation?
Of course, falling prices are not necessarily in-and-of themselves a bad thing – as any old consumer will tell you – since products get cheaper and cheaper with each passing day. So the run of the mill consumer might find life in Japan quite a pleasing and desirable thing, especially if that particular consumer happens to be retired and living on a fixed income derived from savings as indeed many contemporary Japanese actually are. Falling prices only really become a problem in a more general macroeconomic sense if they lead people to postpone consumption, and if this postponement becomes self-perpetuating in a way which leads prices to continually fall, as the combination of constant productivity increases and stagnant demand serve to produce perpetual oversupply. Falling prices also represent a nasty headache for policymakers since while prices go down the value of accumulated debt doesn’t, and herein lies the rub. So additional “stimulus” which doesn’t lead to increasing nominal GDP simply pushes the sovereign debt even farther along an unsustainable trajectory.
As everyone now recognizes and accepts Japan has a rapidly ageing population and an ageing and contracting workforce. This is the end result of several decades of very low fertility. The number of children in Japan fell to a new low in 2013, while the amount of people over 65 has reached a record high as the population ages and shrinks. This demographic background, which has really been obvious to demographers for years, has only lately come to be regarded as a significant factor in the “Japan problem” by economists. This neglect has most probably been due to the influence of a deep seated predisposition among adherents of neoclassical growth theory to think that population dynamics don’t fundamentally influence economic performance in the long run. For many years the Japan phenomenon was simply seen as a classic example of what Richard Koo terms a “balance sheet recession” wherein the need for the private sector to deleverage from excessive indebtedness leads to a form of structural under-consumption.
Perhaps the most important thing which the whole Abenomics episode has brought to light is the urgent need to bring the existing corpus of economic theory somehow up to date with our modern realities. Despite all the talk of policies for “growth, growth, growth” a simple look at the population outlook in OECD countries and especially the potential work force numbers suggests that, at some point or another, economic growth will turn broadly negative. So the real point is there is an experiment being conducted in Japan, but the experiment isn’t Abenomics (which I suspect won’t work, and could end badly). No, the experiment is about learning to grow old with dignity, not as individuals, but as societies. It is about managing debt in a time of deflation, about giving opportunities to the young, even while the force of the ballot box rides with the old, and about finding ways to ease that rate of work force decline to give some additional room to allow productivity to help, which means both immigration and helping the young – at they are the ones who start families.
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It’s amazing what you can achieve these days just by promising to do something. It’s also fascinating to watch just what a storm you can stir up.
Last July Mario Draghi surprised markets when he vowed to do anything – whatever it would take – to save the Euro. He didn’t go into details, he didn’t really need to. He simply informed his audience that whatever he did it would be enough. What I suppose no one – not even Mr Draghi himself - imagined at the time was that doing precisely nothing would turn out to be sufficient. Yet since that time that is just what has happened, he has done nothing, nothing whatsoever – no bonds have been purchased and no country has even asked for aid. So to date this verbal style intervention has been exactly what he said it would be, enough. Continue reading
A surprising moment of consensus: Der Spiegel and the Taz both rip into Peer Steinbruck, former German finance minister and leading the race for the SPD’s candidacy as chancellor. Not only that, they do so for substantially the same reasons.
First, they agree that Steinbruck denied in the autumn of 2008 that the financial crisis was a problem, claiming that it was the Americans’ fault and nothing to do with Germany, and even said that there was no need to bail out the banks. Secondly, they agree that he argued vehemently that a response to the crisis would be national-but-coordinated, rather than European, thus leaving Ireland and Spain to cope on their own, and he refused to lead an IMF working group on the issue. These days, he supports euro-bonds. Thirdly, despite all his bluster, he then reversed course and bailed out the banks, setting a precedent.
It’s fascinating that the green-left Taz and Der Spiegel, which might as well be the Bundesbank’s house journal, manage to agree on so much. Taz is predictably more radical, pointing out that WestLB swelled up with dodgy asset-backed securities and eventually burst while Steinbruck was its regulator and that he even got a light-touch regulatory policy for derivatives written into the 2005 coalition agreement, and that he also denied that there was any need for stimulus in the autumn of 2008 before changing his mind. (Who now remembers crass Keynesianism?)
Meanwhile, Guy Verhofstadt and Danny Cohn-Bendit have a manifesto. What can those two possibly agree on? Inevitably, it’s more federalism. As with everyone who uses the phrase “more Europe”, what they want to do with it isn’t clear.
British economist Jonathan Portes remembers the UK’s exit from the Exchange Rate Mechanism:
We argued that the fundamental problem was that we’d joined the ERM at the wrong rate; sterling was overvalued, meaning that we were stuck with a structural current account deficit. The only way to maintain the peg would be through what is now, in the eurozone context, referred to as “internal devaluation”; that is, real interest rates at a higher rate than dictated by internal conditions, and a long and grinding squeeze on wages and prices.
Our solution? We didn’t dare suggest complete abandonment of the ERM. One possibility was for sterling to “realign”, that is devalue, to a considerably lower rate, boosting exports and allowing interest rates to fall. Even better, politically and perhaps economically, would have been if the Germans could have been persuaded to realign upwards, so avoiding the perception that sterling was being singled out; but the French were resolutely opposed to any devaluation of the franc.
The fascinating thing here is, of course, that nothing has changed. In many ways, this is because the issues haven’t changed. Keynes said that the whole complex problem of European currencies and trade in the 1920s could be reduced to one question: how much of France’s war debts would be paid by workers and how much by savers, whether through taxation or through inflation. The answer would set the price level and hence the exchange rate, and how much of a trade surplus Germany could run, and therefore how much of Germany’s war debts could possibly be paid.
Similarly, in 1992 the questions was how the costs of German reunification would be split. Taxation was chosen over inflation, capital was privileged over income. Now, arguably, the question is how the cost of the Great Bubble will be split, and you guessed it. Portes is damning on the reasoning behind this:
The UK had long suffered from periodic cycles of boom and bust, most recently exemplified by the deep recession of the early 1980s and the unsustainable boom of the late 1980s. Monetarism – targeting various measures of the money supply – had failed miserably. The alternative was to “import” credibility from a country with a demonstrated record of maintaining low inflation while avoiding boom and bust – Germany, and we could do exactly that by tying our exchange rate and monetary policy to theirs…
But for me, the most important lesson was a more general one about “credibility”- a concept often used and abused by both politicians and economists. As with the ERM, the argument made by the current government and its supporters for sticking to its fiscal consolidation plan, despite its evident failure, is that the strategy has established “credibility”, especially with financial markets, which can only be preserved by sticking with it.
But of course this is not a justification, economic or otherwise, for the policy. Instead it is an argument for never changing policy at all…
The real hit to credibility comes from sticking to unsustainable policies; and economic success comes from abandoning them and doing something sensible instead. That is one lesson from Black Wednesday we could usefully remember.