The Growing Mess Which Will Be Left Behind By The Abenomics Experiment

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

Can demography explain Portugal’s growth slump before the crash?

The above still comes from a recent Financial Times video entitled “Portugal’s Brain Drain”, which can be found here, and which I encourage everyone to watch. The issue being raised revolves around the current acceleration of emigration from countries on the EU periphery, largely towards the EU core. Typically the emigrants are young educated people who can’t find work. There is nothing especially surprising in this, since the tendency has long existed for people to move from more depressed areas to economically more dynamic ones. The exodus from Detroit in the United States immediately comes to mind. Or Scottish people getting on the bus to make the fateful journey from Edinburgh or Glasgow to London. The Schengen accord simply extends this process which used to take place within nation states to single market zones, or currency unions. But does this extension have consequences for the participating states which were not anticipated at the outset, and are these consequences all benign?

In addition, this time round in an important sense something is different since these movements are occurring in the context of a long and difficult economic adjustment, indeed one could almost argue that the people leaving form part of that adjustment. What’s more it is hard to accept that this is the kind of adjustment that countries like Spain and Portugal really need. Renovation in these countries implies these people and their talent are injected into the local economy to dynamise it, and not shot out the side like water from a high pressure hose with holes in it. So the big question I want to ask here is whether the economic programs which are being implemented in these countries take sufficient account of the demographic impacts they are inducing, and of the fact that the population loss involved – which most likely will become permanent – is going to cast a long shadow over the history of the countries concerned. Continue reading

As Good As It Gets In Latvia?

For Maurice Pialat, champion of the marginal centre.

“This raises a final question, which, while not central to the issues of this paper, is nevertheless intriguing: How can a country with a low minimum wage, weak unions, limited unemployment insurance and employment protection, have such a high natural rate [of unemployment]?”

“To summarize, the actual unemployment rate is still probably higher than, but close to the natural rate of unemployment. Latvia may well want to take measures to reduce its natural rate, but the recovery from the slump is largely complete.”
Boom, Bust, Recovery Forensics of the Latvia Crisis, Olivier Blanchard, Mark Griffiths and Bertrand Gruss

With these words three IMF economists (hereafter BGG) effectively signed off on their study of “what just happened on Latvia” and, they hoped, drew to a close a debate which has been going on now for some 6 years. In fact, far from closing the debate, what they may have done is effectively extend it into new terrain, since these apparently harmlesss words – “the recovery from the slump is largely complete” – have far reaching implications, as does the methodology they use for reaching it. These implications reach well beyond Latvia, and even far beyond the Baltics and the CEE in general, despite the conclusion that everyone seems to be reaching that Latvia was just a “one off”. Possibly without intending to do so, they have drawn onto the clinical investigation table issues which have been mounting  up in the theoretical lumber rooms of neoclassical growth theory for some time now, issues which begin to assume a paramount practical importance in the context of our rapidly ageing societies. What, for example, do we understand by the term “convergence” these days? And if “steady state” growth can no longer be understood as implying a constant growth rate (trend growth in developed economies is now systematically falling) should we be considering the possibility that headline GDP growth will at some point turn negative, even if GDP per capita may continue to rise, due to the fact that populations are steadily starting to shrink. And if the answer to the former question is “yes”, then what are the implications of this for the financial system, for the system of saving and borrowing, and for the sustainability of legacy debt? Not little questions these, but ones which will need to find answers and responses in countries like Latvia over the next couple of decades. Continue reading

The Czech Economy That Didn’t Bounce?

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.

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The Real Experiment That Is Being Carried Out In Japan

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

Does Portugal Have Its Own “Shortage Of Japanese” Problem?

In a number of posts recently I have highlighted the impact of declining workforces on economic growth (here, for example, or here, or here) and the way the policies persued to address the Euro debt crisis are having the impact of  accelerating the movement of young people away from the periphery and towards the core (here, or here) thus accelerating the decline in their working populations and exacerbating their growth problem. This issue has been already highlighted strongly in Japan’s ongoing crisis, and has to some extent come to be known as the “shortage of Japanese” problem following Paul Krugman’s memorable use of this expression to explain  why Japan’s economic performance seemed so poor to so many. Continue reading

The A-b-e Of Economics

And the world said “Let Shinzo Abe be”, and all was light.

“The point is not that I have an uncanny ability to be right; it’s that the other guys have an intense desire to be wrong. And they’ve achieved their goal.” Paul Krugman

A new craze is sweeping the planet. The image I have in mind isn’t exactly that of the community of central bankers all dancing the Harlem Shake in unison, but for all the economic sense it has it might as well be. In fact the craze is called “Abenomics” and it is gathering adepts in financial markets across the globe. A precursor in Japanese history has already been found for the movement, Korekiyo Takahashi, who was the country’s finance minister during the key years of the 1930s depression. Even a book has been written to extol his virtues entitled “From Foot Soldier to FinanceMinister: Takahashi Korekiyo, Japan’s Keynes.” Unsurprisingly it was an immediate hit with Japanese academics when it came out in 2010.

While the creation of the Takahashi lineage may be important for home consumption in order to make the Japanese themselves more comfortable with the adoption of a set of radical and even unprecedented measures – Japan isn’t exactly the country you would expect to be in the vanguard of a major economic experiment with extensive global implications – the resonance of Abenomics outside the country among those with little knowledge of economics and even less of the specificities of the Japan problem is perhaps rather more surprising. Mariano Rajoy, for example, told journalists recently that the recent BoJ decision represented a “very important change in its monetary policies.” The Spanish PM argued in a clear reference to what is going on in Japan that Europe needed to decide which kind of powers its central bank should have, those it has now or “the ones other central banks across the globe have”. “We are in a decisive moment,” he said. Continue reading

Beyond Their Ken?

Spain’s economic problems now form part of such a complex web of cause and effect, action and reaction, that it is getting increasingly difficult for laymen, journalists and politicians alike to get to the core of what is actually happening.

To a herd of rams, the ram the herdsman drives each evening into a special enclosure to feed and that becomes twice as fat as the others must seem to be a genius. And it must appear an astonishing conjunction of genius with a whole series of extraordinary chances that this ram, who instead of getting into the general fold every evening goes into a special enclosure where there are oats- that this very ram, swelling with fat, is killed for meat”. – Tolstoy, ‘War and Peace’.

After so many false dawns, the recent announcement by Spain’s Prime Minister Mariano Rajoy that the government was revising down its 2013 economic forecast hardly caused a blink among a citizenry that is now completely inured to deception and ready to believe the worst about the intentions of any politician willing to come forward with either good or bad news. The long announced recovery has once more been delayed, and will now be noted not in the last three months of this year, but during the first six of 2014. Naturally, a public which is now totally accustomed to such postponements will not be surprised if this one is far from being the last. Continue reading

City slicker

UK Chancellor of the Exchequer George Osborne statement to IMF governing meeting in Washington DC –

The deficit is forecast to be the highest in Europe in 2013 and gross debt is set to reach 100 percent of GDP in the coming years. The UK also has a large and systemically important financial sector, which the IMF described as a “global public good” in the 2011 UK Spillover Report. A strong and credible consolidation plan is therefore essential for global, as well as domestic, financial stability.

That referenced IMF’s 2011 UK Spillover Report –

The size and interconnectedness of the U.K. financial sector make it a powerful
originator, transmitter, and potential dampener of global shocks. The U.K.
agglomerates core international financial functions making it a key node in “funding”
liquidity and balance sheet hedging, providing buoyancy to global markets and
acting as a key channel transmitting shocks or stabilizing measures.

The stability and efficiency of the U.K. financial sector is therefore a global
public good, requiring the highest quality supervision and regulation. Significant
efforts to strengthen supervision will help contain the risks to global stability posed
by the sector’s size and complexity. Stronger liquidity, capital and leverage rules
should dampen credit cycles and lower systemic risk, as can the U.K.’s
macroprudential policies. 

Thus, the IMF did not say that the UK financial sector was a global public good. It said that it performs various functions (for which, by the way, it is handsomely remunerated) but in doing so it is potentially destabilizing to the global economy. Furthermore, it said that this property motivated various policies regarding regulation and supervision — not contractionary fiscal policy, as Osborne implied.

George Osborne went to a Washington IMF meeting and put on the record a willfully and egregiously misconstrued version of IMF analysis of the UK. But more column inches will be expended tomorrow on Luis Suarez’s teeth than on Osborne’s sleight of hand. Something ain’t right.

Endnote: the use of the term “global public good” specifically in connection with the financial system seems to have gotten its most careful articulation from Alberto Giovannini. It’s clear that not what Osborne meant.

Also, you’d think Osborne might have been wary of complicating his IMF visit given the austerity backdrop to it.