Secular Stagnation Part III – The Expectations Fairy

“So what’s going on here? Well, it might sound like a hokey religion, but central banking is really a Jedi mind trick. Just saying something can be enough to make it happen. That’s because the power of the printing press gives their words a distinct power. Well, that and the fact that the economy is already one big self-fulfilling prophecy.” – Matt O’brien,  “Abenomics has only worked because foreigners think it willContinue reading

What Is The Risk The Euro Crisis Will Reignite?

The euro zone crisis is not back — at least not yet.

Recent movements in global markets following concerns about Portugal’s Banco Espirito Santo really had as much to do with market nerves after a long spell of repressed volatility as it did with the state of the bank’s balance sheet. Despite the current calm, everyone knows that volatility will return one day, and no one wants to be caught on the back foot when it does arrive. So the initial response is to hit the “sell” button and then ask questions.

Beyond this context, there is a lack of certainty in the market about which way bond yields for the so-called “peripheral” euro zone countries are heading in the near term — and what exactly the risks associated with holding them really are. Riding the yield compression, in the case of the Portuguese 10-year bond from over 7 percent to under 3.5 percent was a one-way-bet no-brainer once the impact of Draghi’s July 2012 speech became crystal clear. Continue reading

The Italian Runaway Train

There has been lot’s of debate in the press and in academic circles over the last week or so about whether Italy’s latest contraction constitutes a triple dip recession or simply a continuation of what’s been going on over many many years. This is an interesting theoretical nicety, but in fact what is happening in Italy at the moment goes a lot further than problems faced by a recession dating committee. The real issue that arises in the context of the Euro Area at the moment is a far more specific one. Will the ECB do QE? And if it does when will it push the button? And what could happen if it doesn’t. Perhaps a case study of the Italian case is worth the effort here. What is likely to happen to Italian debt if there is no ECB intervention soon? Let’s take a look at the dynamics. Continue reading

Abenomics – What Could Possibly Go Wrong?

If this week’s economics news is positive then that is good.  But if it’s bad then that’s even better, since there is more potential for it to improve next week, and if it doesn’t, well that’s doubly better since there will be  even more reason for central banks to step in and push up asset prices. Maybe all this sounds peculiar, even perverse, but it would seem to be how many people working in financial markets are reasoning these days.

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Spain and the IMF: Round the Bend or Out of the Woods?

“Spain has turned the corner”. With this stark statement the IMF opened it’s annual Article IV consultation report for 2014. Naturally the statement rankled, with this author among others, because at first sight it seems to be saying something which on closer reading of the report you find it isn’t. At best it’s misleading, possibly from a PR point of view intentionally so, but then Article IV reports are supposed to be more sober, measured assessments. One Spanish journalist summed up the surprise many felt in the following tweet.

Dear IMF,
You can’t say “Spain has turned the corner” and “the unemployment remains unacceptably high” in the same paper
It’s silly

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Multipliers and adding up

Bank for International Settlements 84th Annual Report, page 11 –

Second, as growing evidence suggests, balance sheet recessions are less responsive to traditional demand management measures (Chapter V). One reason is that banks need to repair their balance sheets. As long as asset quality is poor and capital meagre, banks will tend to restrict overall credit supply and, more importantly, misallocate it. As they lick their wounds, they will naturally retrench. But they will keep on lending to derelict borrowers (to avoid recognising losses) while cutting back on credit or making it dearer for those in better shape. A second, even more important, reason is that overly indebted agents will wish to pay down debt and save more. Give them an additional unit of income, as fiscal policy would do, and they will save it, not spend it. Encourage them to borrow more by reducing interest rates, as monetary policy would do, and they will refuse to oblige.

Note the contradictory logic of the two reasons. The first says that banks will only lend to bad borrowers and willing good borrowers can’t get credit. The second says people getting extra income from fiscal or monetary stimulus will only use it to  pay down debt, reducing demand. But what about those good borrowers who can’t get credit due to the first reason? And what about those people who are paying down debt, thus helping banks get into better shape and thus, er, lend?

What starts out as an argument for weak multipliers doesn’t add up, and it’s not made any easier to follow by the apparent decision not to directly address their main critic on this point, Paul Krugman.

You still don’t have to have Juncker.

Stefan Kornelius in the Süddeutsche Zeitung says that it’s a myth that the EU has always managed to bring off major reforms, once it really came under pressure. Instead, whenever it came under pressure, it managed to do something dramatic – but it was usually wrong.

Es gehört zu den Mythen europäischer Politik, dass die Gemeinschaft immer dann zu großen Reformen in der Lage war, wenn sie unter enormem Druck stand. Dieser Mythos wurde zumindest in den vergangenen Jahren gründlich widerlegt. Richtig ist indes, dass es die Gemeinschaft immer wieder schaffte, an den großen Wegmarken ihrer Geschichte die falsche Richtung einzuschlagen…

Kornelius makes the excellent point that any fool can announce they want “more Europe”, and most of them have done. But, as he says, the longer this goes on, the more people vote against it. The great unasked question is what “more Europe” would do. This has been true for years, indeed decades. What would its leaders do with the new powers granted them? Isn’t the content of politics interesting, especially to the citizens who are likely to be its targets?

Instead of any meaningful discussion about what this Europe is going to do, though, we get an intense fight over nominations. The emotional energy of politics is assigned to the struggle between the institutions and the competition between individuals. This leaves nothing for the struggle between ideas or the competition between interests as expressed by the popular vote. But it’s always the way – at the crude level, any dispute in the EU is reduced to virtuous Franco-Germans versus bad Europeans/Eurosceptics, while at a finer level of resolution, any dispute is expressed as a conflict among the institutions.

In fact, it is a necessary condition of the fight between the institutions that it must change nothing in terms of policy. And, in the end, perhaps it will also change nothing in terms of personnel. We seem bound to get austerity and Juncker, even if the Bild Zeitung has noticed his Blair-like speaker’s earnings. We are offered the choice between getting them by virtue of the Council or by virtue of the Parliament. This is, I think, insufficient.

You voted for it, in short.

So this is a thing. It must be – it’s in the New York Times Magazine and the Süddeutsche Zeitung on the same weekend.

Dean Baker is rough on It’s Official: the Boomerang Kids Won’t Leave. To be fair, the NYT article actually does make the point that flat-to-falling wages, the invention of student debt, and crazy-high house prices have been pushing back the age of economic independence. It’s not just some sort of moral degeneracy that makes them live at home.

And it makes the important point that this has been going on for some time. We’re not living through the hangover after the party; for the majority, there was no party, as recovering Lib Dem economic advisor Giles Wilkes points out.

Of course, Baker could point at tens to hundreds of articles of pure whining and moralising about why today’s kids just won’t get on their bikes. He would be right, too. Very importantly, he could point to many of them that long predated the crash. I certainly remember this as a subject of intensely tiresome and self satisfied public whining for my parents’ generation, and as a subject of real trouble for my contemporaries. Hey, Euromoney Institutional Investor offered me a job on £14k in central London in 2005. And Baker has the great advantage that he names the guilty men.

But there is no real dispute between Baker and the NYT writer, I think. Contrast this effort from the SZ, in which we are told that this is a phenomenon well known and laughed at in Italy (!), and that it has gone up in Europe since 2007. Well, gee, how could it happen? Perhaps the policies that led to this have something in common with the casual contempt the crack at Italians betrays.

Further, this is special:

Manchen Kindern sind Zusatzkosten, die sie verursachen, nicht bewusst – und das in einer Phase, in der Eltern für ihre Altersvorsorge arbeiten.

Ah, the problem is that if the economic order you voted for means your kids move back in with you, that might cost you money you’re putting into your HSH Nordbank ship-rental fund because of the pension reform you voted for them to have and the tax cut you voted for you to have. Clearly the debate, even at this level, is a notch more honest in the US than in Germany.