Will Japan Re-enter Deflation in April 2015?

Reading the most recent statements from Bank of Japan Governor Haruhiko Kuroda or Finance Minister Taro Aso you would get the impression that the days of deflation are now well and truly numbered in Japan. Martin Schulz, economist at Fujitsu Research Institute in Tokyo, goes even further. “Deflation is over in Japan,” he told Bloomberg Television First Up’s Angie Lau . Even Japan’s industrial leaders now believe inflation is here to stay: the country’s inflation rate will be 1.5 percent in the spring of 2015, and 1.7 percent in 2017, according to average forecasts in a Bank of Japan survey conducted in March this year. Continue reading

Secular Stagnation Part II – On Bubble Business Bound

“I now suspect that the kind of moderate economic policy regime…… that by and large lets markets work, but in which the government is ready both to rein in excesses and fight slumps – is inherently unstable.”
Paul Krugman – The Instability of Moderation

“Conventional macreconomic theory leaves us in a very serious problem, because we all seem to agree that whereas you can keep the federal funds rate at a low level forever it’s much harder to do extraordinary measures that go beyond that forever. But the underlying problem may be there forever. It’s much more difficult to say, well we only needed deficits during the short period of the crisis if equilibrium interest rates can’t be achieved given the prevailing rate of inflation.”
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The “Hot Labour” Phenomenon

Strong growth. Rising real estate prices. Rapid job creation. Surging immigration. This list sums up the Switzerland of 2014 down to a tee. However, it also sounds like a description of what things were like in Spain in 2007 – shortly before the country’s economy fell off a cliff. What follows is a conversation between financial journalist Detlef Gürtler and economist and crisis expert Edward Hugh about possible parallels and differences between the two booms, and the role of a new phenomenon which Hugh describes as “Hot Labour“.

Hugh argues that this is a new phenomenon, and on the increase as a result of central bank bubble inducing activity. While immigration is a vital tool aiding economies to manage the population ageing process, it is important that economic activities be balanced. Immigration fueling boom/bust cycles is far from innocuous, and harm a country just as much as a sudden stop in capital flows if the immigration is followed by emigration.   
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You can learn a lot from reading the newspaper…closely.

Make your mind up on Europe, Mr Cameron, we are told by a member of Der Spiegel‘s editorial board. If Merkel picks Juncker it will be living democracy, against the stubborn blockers, says Der Spiegel. Elsewhere, we discover that it’s Great Britain against democracy, according to Jean Quatremer. It’s a moral obligation that the Eurogroup chairman and defender of Luxembourg as a tax haven should be boss, says Alexis Tsipras.

The point is apparently that not everyone wants Jean-Claude Juncker for Commission President, and among this group is the British prime minister. The ur-text here is this Der Spiegel story, which claims that Cameron threatened Angela Merkel with a UK withdrawal from the EU if Juncker gets it.

Well, the headline claims that, and the strap more so. The headline says he “warned” her; the strap uses the German verb “to threaten”. The first paragraph, though, already walks the story back more than a bit. It says in the first sentence that Cameron is meant to have “put Merkel under pressure with the warning that he might not be able to guarantee that the UK would stay in the EU” if Juncker is picked. In the German, the subjunctive form is used.

In the second sentence, things get a bit more specific. According to “the participants’ circle, speaking to Der Spiegel“, which I think means something along the lines of “Sources close to some politician’s camp…” in British newspaper code, “Cameron made it clear on the fringes of the meeting”, i.e. he didn’t actually say it and he didn’t say it to Merkel, “that such a vote [or veto] might [subjunctive] destabilise his government to the extent that a referendum would have to be brought forward, which might lead to a probable British exit”. The last clause there is, I think, in the subjunctive mood, the passive voice, the future tense, and the conditional all at once, although I may have missed a syntactical subtlety at some point.

You’ll notice, though, that the anonymous source, who may not have been actually there (“circles”), doesn’t mention a direct threat and doesn’t quote Cameron. But you have to try hard to notice this, because there is a Cameron quote: A face from the 1980s can’t solve the problems of the next five years. I can imagine Cameron saying that. But it’s nothing like a threat to leave the EU, or even a longwinded observation on what might potentially happen given various scenarios. So what is it doing here?

Oddly enough, the eurosceptic prime minister with a notoriously difficult eurosceptic wing in his party, who’s fighting a massive UKIP insurgency to his right, hasn’t managed to brief this out to the friendly eurosceptic papers. Surely the Daily Mail, the Daily Telegraph, and the Sun are busy depicting heroic Spitfire pilot Cameron defying the Huns. Well, no, they’re not. Perhaps they don’t read German. More to the point, perhaps they don’t get those convenient anonymous briefings after the Bundespressekonferenz.

Because the style of this story is so typically Spiegel. The headline is a screamer. So vielversprechend or maybe just verhängnisvoll. You get into the story, and you find some kind of quote from a Big Important Guy (always a guy), which doesn’t actually say that. In between the two, there’s a lot of stuff about sources close to and friends, protected with exquisitely lawyered prose to eliminate any trace of responsibility. Typically, they’re close to the most pro-American and pro-ECB bits of the German establishment, which is why it was astonishing that they became a tier-one partner as it were of Ed Snowden. It’s very often the worst kind of establishment journalism, the sort of thing you get from David Brooks or Patrick Wintour or fill in your country’s version of it.

After all, if Cameron’s supposed démarche was so outrageous, why isn’t anyone and indeed Der Spiegel furious with Angela Merkel, who according to the Springer paper Berliner Morgenpost wouldn’t support Juncker on the night, who according to the Financial Times threw the race wide open, and who threatened to veto Juncker herself…according to Der Spiegel.

Merkel has her reasons. Here’s a post of mine from a few months back, about the way the choice of the commission president was becoming a question of power between the Parliament and the heads of government. You’ll notice that a key source back then was Jean Quatremer, who thought Merkel was behaving outrageously in trying to influence it. Now he doesn’t. It’s the Brits.

So let’s have a look at this really outstanding post from Thomas Mayer of Austrian paper Der Standard. If it’s information you want, this is pretty close to what you need – a detailed ticktock of election night. Mayer argues that as the results came in, Martin Schulz didn’t feel he should give in, because after all, it’s not as if Juncker has a majority. Juncker tried to bounce everyone into accepting him as boss, getting the outgoing head of the EP socialists, the Austrian Hannes Swoboda, to back him and offering Schulz the slot as vice-chief of the commission.

But Merkel wouldn’t wear it, because Schulz being a commissioner would take up a slot that a German conservative would otherwise get. And they told me it was all about principles. Looking at Mayer’s story and my old one, they fit quite well. Merkel might well have wanted to place Juncker as Council President, creating a vacancy among the Spitzenkandidaten and an opportunity to assert the Council’s power. But Juncker’s party did better than it was polling at the time this plan was hatched, and perhaps he thinks there’s more power in the Commission. I know I do. So he ignored any offer from that quarter and went for the main chance. This is bad news if you had that plan in mind, and a Schulz coalition is not acceptable for party political reasons. With targeted briefing, this could all be blamed on the Eurobogeyman.

Saying this, though, implies accepting that they do politics in the European Union. Politics. Where it’s possible to be wrong. Bogeyman stories are easier, in the same way that hoovering up unattributable government briefings is easier than journalism.

Before the Euro, there was the EMS

IE_CSO_unemploymentPaul Krugman, reacting to what appears to be a somewhat self-serving discussion by EU elites at the ECB Forum in Portugal –

Sorry, but depression-level slumps didn’t happen in Europe before the coming of the euro. 

The chart is unemployment in Ireland since 1983; we’ve used the longest span of consistent series produced by the Central Statistics Office. And the mid-1980s was no picnic for other high-debt EEC (as it then was) countries either. Granted, the Euro probably locked in some of the forces that could be quarantined back then through devaluations. But you don’t have be that old in Ireland to have been around for the second macroeconomic destruction of your economy in your lifetime.

The central bankers are in Sintra, Portugal discussing how banking supervision and monetary policy should evolve in the aftermath of the global financial crisis. They might want to discuss instead whether anything fundamental about the politics of boom and bust has changed in the last 6 years.

Mario Draghi’s Ongoing Faustian Pact

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.

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Greek Re-entry (or Grentry) Not The Game Changer Many Think It Is

There is no doubt that Greece’s recent bond sale was an exciting and even invigorating moment for many people. The WSJ’s Simon Nixon, for example, called it “a symbolically important moment for the euro crisis”. Reuters’ Marius Zaharia suggested the speed of the come back could even be a game-changer for the heavily indebted southern European country. Certainly there can be little doubt that, as Nixon puts it, the turn round in market fortunes was a remarkable achievement, illustrative of just “how far market sentiment toward Southern Europe has changed”. 
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On The Trail Of Italian Debt

Looking for trends and correlations in that landslide of economic data which arrives, day in and day out, on our desks is normally something akin to trying to find a needle in a very large and raggedy haystack. From time to time, however, some things are just to obvious not to be noticed, like the ever rising levels of debt on the EU periphery and the growing demand from political leaders there for some kind of QE type initiative from the European central bank, for example. Sure, there is no obvious causal connecting here – the missing “middle term” linking the two would probably be all that ongoing deflation risk – but the inability of governments to contain their debt levels is a consequence of having low growth and low inflation, as is the wish being ever more insistently expressed by Southern Europe’s political leaders that the ECB were more like the Bank of Japan. Continue reading