tag:blogger.com,1999:blog-52542918850617145312024-03-13T15:20:19.588-04:00Economic MeltdownCommentary on issues related to the global economic recession and its recoveryAnonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.comBlogger105125tag:blogger.com,1999:blog-5254291885061714531.post-91582102118789288022016-06-29T02:27:00.005-04:002016-06-29T02:31:59.164-04:00Future of Europe is not more control but lessIn a wide ranging and insightful opinion in the <a href="http://on.wsj.com/29afL5N">Wall Street Journal</a>, the always lucid Henry Kissinger makes the point that the EU is first and foremost an idea. It's an inspiring vision expressed as an economic and political union, critically marred by structural weaknesses and political incompetence among member states.<br />
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The correct response to Brexit is for EU members to rethink the degree of legislative overhead that Brussels has imposed. Not throw temper tantrums. Many of these <a href="http://www.express.co.uk/news/world/586742/European-Union-barmy-decisions-rules-regulations-Britain-EU">rules </a>are needlessly overwhelming and incomprehensible, especially in a technologically connected globalized world. <br />
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Brussels and its satellites in members' capitals should begin to undertake a serious effort to unravel the crippling rules that cause so much pain in the lives of ordinary EU citizens. The point of integration is to unleash creativity, remove the barriers to trade, and create economic welfare for all. Let Brexit be the start of such a process. <br />
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<br />Anonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.com3tag:blogger.com,1999:blog-5254291885061714531.post-44482018932911748492016-06-24T02:01:00.001-04:002016-06-24T02:01:08.340-04:00BrexitGiven my earlier posts from 2 years ago, an EU breakup is inevitable. The only surprise is that Britain, and not Germany, took the first step. Germany is Europe's ATM machine and if any country should have left first, it would have been her. Britain was less exposed by not being part of the currency union and less constrained by Brussels' rules and regulations. I won't rehash the arguments but the basic condition for a successful economic and currency union is fiscal discipline among its members. When Greece was included in the union, the seeds for breakup were already sown. The immigration and cultural drivers for Brexit only became salient because of economic flaws in the system. Germany is next, in which case, we are back to multilateral treaties and smaller, more economically homogeneous blocs, like the Schengen. The impact may not be very severe given that global trade and freedom of movement is largely facilitated by technologies not available at the creation of the EU.Anonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.com0tag:blogger.com,1999:blog-5254291885061714531.post-41090444799970008342015-02-25T14:03:00.000-05:002015-02-25T14:03:20.054-05:00Continuing saga of the European 'recovery'Today, the Wall Street Journal reports that the European Central Bank, after announcing the largest quantitative easing program in its history, has problems purchasing the annual $60 billion of public assets it needs to fulfill the terms of the program (see <span class="scrim-email-link copy"><a href="http://on.wsj.com/1A66n2Z">http://on.wsj.com/1A66n2Z</a>). </span><br />
<span class="scrim-email-link copy"></span><br />
<span class="scrim-email-link copy">German bonds, which will form the largest share of total purchases (the QE program requires the ECB to purchase assets by share of European GDP) are hard to come by precisely because they are valuable and no one will part with them on the resale market. There is not enough on the primary market because Germany, being prudent and economically sound, does not need to raise additional money to run an already efficient public sector. </span><br />
<span class="scrim-email-link copy"></span><br />
<span class="scrim-email-link copy">We are left with an ironic situation that only a government (in this case a meta-government) can invent. First, countries that don't need the money are the ones being pressured to take it while those that need the money are too small or risky to be offered enough. Sounds familiar? Second, quantitative easing is designed to re-inflate an economy on a deflationary spiral. But unlike the U.S., the EU is not a country. Economic stability is vastly different between countries in the EU. Hence, the countries mostly likely to heighten consumption from QE, Greece and Spain, are those that created the meltdown through runaway consumption, while those countries most likely to benefit from more consumption (Germany) are unlikely to do so. In part, the German economy is near full employment, so unmet needs are relatively small. As well, the German cultural ethos is biased toward constrained consumption and savings. Hence, the net effect of QE on the strong economies is to swell household and national savings, while that on the weak economies is more risky household and national balance sheets. </span><br />
<span class="scrim-email-link copy"></span><br />
<span class="scrim-email-link copy">Historically, the only way countries have been able to massively inflate spending in a hurry has been a time of war. That's just about as good a case as any for the EU and NATO to escalate its involvement in the Middle East and the Ukraine.</span><span class="scrim-email-link copy"> </span>Anonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.com0tag:blogger.com,1999:blog-5254291885061714531.post-33933527864563471262013-11-19T00:30:00.000-05:002013-11-19T00:30:51.506-05:00The Lost GenerationThe following New York Times article, <a href="http://www.nytimes.com/2013/11/16/world/europe/youth-unemployement-in-europe.html?smid=pl-share">http://www.nytimes.com/2013/11/16/world/europe/youth-unemployement-in-europe.html?smid=pl-share</a>, reports that between 28% (Ireland) to 56% (Spain) of youths remain unemployed. We know that long term youth unemployment can lead to a chronic underclass that threatens to undermine societal stability, constrain economic productivity, erode household savings, and extend the working life of the aged. The impact on public health can be severe as spending on health care declines; as do all government programs designed to preserve societal security. The traditional fix of pump priming, which the Europeans have tried in this recession, has not worked. When consumers are pessimistic, no amount of encouragement will get them back into the shops. Witness Japan in the 1990s. The most worrying outcome from this sad state of affairs is the rich fishing ground for organized crime, terrorists, and anarchists. <br />
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<span class="summary">Table 1: Change in youth unemployment from the year ended June 2008 to the year ended June 2013.</span><!--close .storySummary --><br />
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<img class="nytg-aiAbs" height="973" id="nytg-ai0" src="http://graphics8.nytimes.com/packages/images/newsgraphics/2013/1115-euro-youth/1115-for-web-YOUTH-1115-1709.png" width="600" /><div class="nytg-layer_5 nytg-aiAbs" id="nytg-ai1" style="left: 37px; top: 6px;">
<div class="nytg-aiPstyle0">
INCREASE OF 15+ PERCENTAGE POINTS </div>
<div class="nytg-aiPstyle0">
INCREASE OF 5 TO 15</div>
<div class="nytg-aiPstyle0">
INCREASE OF 0 to 5</div>
<div class="nytg-aiPstyle0">
DECREASE</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai2" style="left: 233px; top: 66px;">
<div class="nytg-aiPstyle1">
Greece</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai3" style="right: 373px; top: 66px;">
<div class="nytg-aiPstyle2">
58</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai4" style="left: 233px; top: 115px;">
<div class="nytg-aiPstyle1">
Spain</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai5" style="left: 10px; top: 115px;">
<div class="nytg-aiPstyle3">
Unemployment rate,</div>
<div class="nytg-aiPstyle3">
ages 15−24</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai6" style="right: 373px; top: 115px;">
<div class="nytg-aiPstyle2">
55</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai7" style="left: 11px; top: 185px;">
<div class="nytg-aiPstyle1">
50%</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai8" style="left: 340px; top: 238px;">
<div class="nytg-aiPstyle3">
Unemployment rate,</div>
<div class="nytg-aiPstyle3">
ages 25−29</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai9" style="left: 534px; top: 329px;">
<div class="nytg-aiPstyle1">
Greece</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai10" style="right: 73px; top: 329px;">
<div class="nytg-aiPstyle2">
41</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai11" style="left: 11px; top: 333px;">
<div class="nytg-aiPstyle1">
40</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai12" style="left: 233px; top: 343px;">
<div class="nytg-aiPstyle1">
Portugal</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai13" style="right: 373px; top: 343px;">
<div class="nytg-aiPstyle4">
40</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai14" style="left: 233px; top: 375px;">
<div class="nytg-aiPstyle1">
Italy</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai15" style="right: 373px; top: 375px;">
<div class="nytg-aiPstyle2">
38</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai16" style="left: 534px; top: 425px;">
<div class="nytg-aiPstyle1">
Spain</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai17" style="right: 73px; top: 425px;">
<div class="nytg-aiPstyle2">
34</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai18" style="left: 11px; top: 481px;">
<div class="nytg-aiPstyle1">
30</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai19" style="left: 233px; top: 504px;">
<div class="nytg-aiPstyle1">
Ireland</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai20" style="right: 373px; top: 504px;">
<div class="nytg-aiPstyle2">
29</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai21" style="left: 233px; top: 569px;">
<div class="nytg-aiPstyle1">
France</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai22" style="right: 373px; top: 569px;">
<div class="nytg-aiPstyle2">
25</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai23" style="left: 534px; top: 599px;">
<div class="nytg-aiPstyle1">
Portugal</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai24" style="right: 73px; top: 599px;">
<div class="nytg-aiPstyle5">
22</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai25" style="left: 233px; top: 605px;">
<div class="nytg-aiPstyle1">
Belgium</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai26" style="right: 373px; top: 605px;">
<div class="nytg-aiPstyle2">
22</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai27" style="left: 233px; top: 628px;">
<div class="nytg-aiPstyle1">
Britain</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai28" style="right: 373px; top: 628px;">
<div class="nytg-aiPstyle2">
21</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai29" style="left: 11px; top: 629px;">
<div class="nytg-aiPstyle1">
20</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai30" style="left: 534px; top: 642px;">
<div class="nytg-aiPstyle1">
Italy</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai31" style="right: 73px; top: 642px;">
<div class="nytg-aiPstyle2">
20</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai32" style="left: 233px; top: 695px;">
<div class="nytg-aiPstyle1">
U.S.*</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai33" style="right: 373px; top: 695px;">
<div class="nytg-aiPstyle2">
16</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai34" style="left: 534px; top: 696px;">
<div class="nytg-aiPstyle1">
Ireland</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai35" style="right: 73px; top: 696px;">
<div class="nytg-aiPstyle2">
16</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai36" style="left: 534px; top: 739px;">
<div class="nytg-aiPstyle1">
France</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai37" style="right: 73px; top: 739px;">
<div class="nytg-aiPstyle2">
13</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai38" style="left: 158px; top: 761px;">
<div class="nytg-aiPstyle1">
10 The Netherlands</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai39" style="left: 534px; top: 766px;">
<div class="nytg-aiPstyle1">
Belgium</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai40" style="right: 73px; top: 766px;">
<div class="nytg-aiPstyle2">
11</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai41" style="left: 11px; top: 777px;">
<div class="nytg-aiPstyle1">
10</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai42" style="left: 233px; top: 804px;">
<div class="nytg-aiPstyle1">
Austria</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai43" style="right: 373px; top: 804px;">
<div class="nytg-aiPstyle6">
9</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai44" style="left: 534px; top: 808px;">
<div class="nytg-aiPstyle1">
Britain</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai45" style="right: 73px; top: 808px;">
<div class="nytg-aiPstyle2">
8</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai46" style="left: 233px; top: 823px;">
<div class="nytg-aiPstyle1">
Germany</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai47" style="right: 373px; top: 823px;">
<div class="nytg-aiPstyle2">
8</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai48" style="left: 534px; top: 827px;">
<div class="nytg-aiPstyle1">
Germany</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai49" style="right: 73px; top: 827px;">
<div class="nytg-aiPstyle2">
7</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai50" style="right: 269px; top: 828px;">
<div class="nytg-aiPstyle7">
9</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai51" style="left: 336px; top: 828px;">
<div class="nytg-aiPstyle1">
U.S.</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai52" style="left: 534px; top: 845px;">
<div class="nytg-aiPstyle1">
Austria</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai53" style="right: 73px; top: 845px;">
<div class="nytg-aiPstyle6">
6</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai54" style="left: 389px; top: 906px;">
<div class="nytg-aiPstyle1">
7 The Netherlands</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai55" style="left: 29px; top: 955px; width: 37px;">
<div class="nytg-aiPstyle8">
’08</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai56" style="right: 393px; top: 955px;">
<div class="nytg-aiPstyle7">
’13</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai57" style="left: 339px; top: 955px;">
<div class="nytg-aiPstyle1">
’08</div>
</div>
<div class="nytg-text nytg-aiAbs" id="nytg-ai58" style="right: 92px; top: 955px;">
<div class="nytg-aiPstyle7">
’13</div>
</div>
</div>
</div>
</div>
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*Ages 16-24 only.<br /><br />Figures are rounded to the nearest whole number and reflect data for the most recent quarter available. Monthly data is available for some countries showing further increases for ages 15-24.</div>
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<div class="credit">
Source: Eurostat; U.S. Bureau of Labor Statistics </div>
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Anonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.com0tag:blogger.com,1999:blog-5254291885061714531.post-65419380750193956652013-04-08T17:36:00.000-04:002013-04-08T17:36:37.305-04:00Passing of an EraThe death of Margaret Thatcher, after that of Ronald Reagan, marks the passing of an era that saw free markets and capitalism foster a global economic renaissance led by entrepreneurship and innovation. Her fierce opposition to the Euro, which partially cost her the party leadership that led to her resignation as PM, proved prescient and may have protected Britain from the worse effects of the current crisis in Europe. The withdrawal from the principles of free markets, individual responsibility, and reward for risk taking in today's political rhetoric is less a repudiation of her ideas and more the lack of conviction driven by popular politics and the relentless need to be 'liked'.Anonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.com2tag:blogger.com,1999:blog-5254291885061714531.post-22596241158813659372013-03-28T17:44:00.000-04:002013-03-28T23:42:36.528-04:00What's Going On?Many observers have commented on the strange constellation of facts pitting the record breaking stock market (S&P 500 at its highest today, DJIA closing in on 15000) against the gnawingly high unemployment rate (8% but closer to 13% if you count those that just gave up looking for a job), and the record use of food stamps in the U.S. What's going on?<br />
<br />
U.S. transnational companies are sitting on over $1 Trillion in cash, much of it in off-shore operations. They can't move it back into this country because they will be hit with a 35% tax bill (to feed the great sucking sound that is Washington). Paying such a bill when they don't have to would violate the companies' fiduciary to their (mostly, U.S.) shareholders.<br />
<br />
If it were possible to repatriate this money, it would have gone into building factories, supporting infrastructure, training and educating workers, philanthropy, and the pockets of investors and pensioners. Instead, the money is kept prisoner overseas because this Administration and the Congress is more concerned about the optics of fairness than they are about what really creates economic wealth and social welfare - free choice and free markets. <br />
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If the corporate tax rate was zero, the acceleration in wealth creation accompanied by the advancement of the middle class would be unprecedented.Anonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.com1tag:blogger.com,1999:blog-5254291885061714531.post-22713010874274126942013-02-20T10:05:00.000-05:002013-02-20T10:07:39.282-05:00Sequestration is Good for Economic RenewalThis may sound a little cold but sequestration is not a bad thing if it focuses attention on the problem of government growth and over-reach. Given that the economy has not grown very much over the last decade, the acceleration in government size effectively crowds out private enterprise. For example, the very idea of government 'supporting' entrepreneurship makes no sense. In the classic definition, entrepreneurship is opportunity identification and risk taking. Government 'support' distorts the supply and demand relationship and thus obscures those opportunities that represent real demand for goods and services. This, in turn, distorts the risk/return calculus, so that bad ideas are kept alive while good ideas are starved for capital. Sequestration is a good thing if the net effect is to pry the sclerotic hands of government off from private initiative, innovation, and economic renewal. Anonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.com0tag:blogger.com,1999:blog-5254291885061714531.post-40151181110631414352012-09-17T14:52:00.002-04:002012-09-17T14:52:29.996-04:00China's EconomyChina's economy is a derivation of the demand driven economies in Europe and the U.S. As these economies have experienced declines, pressure on China to maintain a high growth rate has increased. At the same time, it has been worried about the steep growth in real property prices and a general trend toward inflation, direct results of the 2 decade export boom. These price increases have landed squarely at the middle and lower classes, creating an explosive political situation. The Economist reports that for the first time, China is not acting as aggressively to pump prime its economy, prefering instead to exploit the global slowdown as a way to cool expectations. Additionally, it has moved quietly to reduce its exposure to global currency risk by increasing the share of reserves in renmingbi, effectively using its large trade surplus as a hedge. In a year of messy political transitions, this is a pretty saavy two-step. Anonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.com0tag:blogger.com,1999:blog-5254291885061714531.post-65149683955295055552012-09-07T09:39:00.001-04:002012-09-07T09:41:09.343-04:00ECB Prints MoneyYesterday, the European Central Bank announced that it will purchase all 1 to 3 year bonds issued by troubled EU governments in order to recapitalize those economies. In exchange, issuing governments commit to a path of public austerity. Given the heavy reliance on government handouts in Europe, this is probably not enforceable (at least without a lot of violence in the streets). To save the Euro, the ECB and Brussels have no choice but to do this. While this step averts the risk of default, it could be extremely inflationary. The immediate impact would be to inflate the cost of exports for such counties like Germany and Finland that count on their strong export oriented economies to stave of recession. A second impact would be to deflate the value of household savings in high saver countries like Germany. This deal of a lifetime may be the deal with the devil. Anonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.com0tag:blogger.com,1999:blog-5254291885061714531.post-6349840779043316692012-05-25T10:29:00.000-04:002012-05-25T10:29:19.475-04:00Dollarization of Greece?We now know that the Euro is based on a flawed design. The region has no centralized fiscal policy with vastly different political philosophies and social institutions, and no way to credibly sanction wayward countries. Therefore, there is no reason why the types of upheavals we now see will end. The lack of fiscal discipline is core to the problems of the Euro. <br />
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In the late 1990s, Ecuador was facing a similar situation. The country dollarized the economy, removing fiscal and monetary discretion from the politicians. After a short period of intense economic hardship, the country has been on a steady path of growth. Even with the recent loss of fiscal discipline, as seen by the actions of the current U.S. administration, the size of the U.S. economy provides the stability that individual small countries cannot do for themselves. Greece and the other at-risk EU economies should consider dollarization. It's radical, somewhat old fashioned but it can work.Anonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.com2tag:blogger.com,1999:blog-5254291885061714531.post-56082420680170598372012-05-11T13:21:00.001-04:002012-05-11T13:21:57.637-04:00Spain. The Next Greece?Spain's private debt is now at 200% of GDP. Unlike Greece, the country's structural deficit is anticipated to be around 3% of GDP, providing some short term flexibility to the government. The way to think of this problem is to do so in two parts. In the long term, high levels of public spending will reduce private sector growth, lower creditworthiness, and increase the cost of funding the public account. In the short term, cuts in public spending attenuates the multiplier from consumption, increases the burden on social welfare (at least in Europe), which further depresses growth. The trick is to re-inflate short term growth without the cost becoming a drag on the long term creditworthiness of the public account. This means moving, in the short term, more private wealth to the public, but with an unbreachable agreement of a 'payback' when Europe gets over the economic hump. Whether this can be done in the political climate (re: elections in France and Greece), is not certain.Anonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.com0tag:blogger.com,1999:blog-5254291885061714531.post-5224811638210968972012-02-23T15:54:00.000-05:002012-02-23T15:54:55.617-05:00New Normal in EuropeThe last attempt to cut another Greek rescue deal falls short on two counts. One, while it proposes a schedule of payments tied to performance benchmarks on deficit reduction and public sector restructuring, there is no way to properly audit the measures taken. The speed at which new funds will be injected into the Greek public sector will forestall any attempt to properly develop governance mechanisms as these take time. Second, the payments are front loaded, which reduces the pressure to implement the reforms as time progresses. <br />
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More fundamentally, this rescue attempt, as have others in the past, ignores a fundamental problem. That natural endowments, institutions, traditional sources of wealth creation, and standards of living vary greatly across the Continent. There is no natural geographic or cultural entity called Europe. Therefore, the rate at which economic development can expect to progress will greatly vary across the region. For example, Greece is predominantly an agricultural economy. Joining the EU shifted its trajectory of capital accumulation toward non-agricultural assets. <br />
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The rationale for the EU is that integration will improve trade and lift the standards of living for everyone. But the initial public relations to get buy-in set up the expectations that this will happen quickly. If the heady post-Berlin Wall period of East/West German integration was any indication, such expectations are wildly optimistic. This was not helped by the initial integration funding provided to help the less developed members 'catch up' to their richer neighbors. Rather than investments in enhancing the sources of wealth creation and fostering entreprenuership to exploit these assets, the sudden injections of cash merely fueled private spending to unsustainable levels. <br />
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The EU also made it possible for the flow of unrestricted speculative capital to those countries without the capacity to properly absorb it productively. Recall the real estate bubble that led to the current recession in the U.S. Imagine similar dynamics occuring in less financially sophisticated and accountable economies. Capital ended up in real estate and large government projects that trickled down into unrestrained private and public consumption.<br />
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This is the new normal. Until such countries as Greece decouple from the union, the haves will subsidize the havenots for the foreseeable future, and the havenots, feeding on the largess of their richer neighbors, will have little incentive for fundamental change. The haves might feel self-righteous about all this but the havenots are the ones that really suffer because their trajectory toward economic wellbeing has been hijacked by well meaning 'do-gooders'. It's a turbocharged version of European socialism, but across countries...Anonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.com3tag:blogger.com,1999:blog-5254291885061714531.post-90786519769903941122012-01-09T07:46:00.000-05:002012-01-09T09:23:57.763-05:00Negative Yield on German DebtThis week, Germany sold €3.9 billion of six-month Federal T-bills at an average yield of -0.0122%%. This has good and bad implications. It reinforces the fact that Germany continues to be a safe haven for investors and a bulwark economy against the effects of the Euro Crisis. Germany's conservative approach to monetary and fiscal policy in recent years is paying off. The bad news is that investors' safekeeping money under the pillow suggests a general bleakness in expectations. Such beliefs quickly translate into the real economy because when risk capital drys up, so does entreprenuerial opportunity and the possibility of new job creation. A similar phenomenon occurred in Japan in the 1990s. Record high household savings rates, reflected in negative yields on Japanese Federal bonds exacerbated years of zero job creation.Anonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.com0tag:blogger.com,1999:blog-5254291885061714531.post-1020283411245387542011-11-30T20:23:00.000-05:002011-12-02T22:40:53.936-05:00Central Banks' Efforts to Cheapen US$ SwapsToday's move by central banks around the world to increase the liquidity of the US$, by reducing the transactions costs of currency swaps, effectively lowers the 'price' of the US$ to European banks that are now under pressure to serve as lenders of last resort to the public purse. It is not quite a debasement of the US$, but the move can potentially wiped out billions of dollar denominated public debt. It's akin to printing a lot of money to pay the bills. It does not address any of the structural problems caused by runaway government spending. But it is a clever move with the potential long term consequence of domestic U.S. price inflation. It's payback for the European worker's funding of the U.S. consumer's spending habit. Merry Christmas!Anonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.com1tag:blogger.com,1999:blog-5254291885061714531.post-11666908145211825402011-11-28T12:00:00.000-05:002011-11-28T12:00:14.894-05:00Fiscal Union in the EurozoneToday, Eurozone leaders took a major step to bolster the union by agreeing to negotiate a legally binding package of rules to reduce sovereign control over domestic fiscal policies. This 'doubling down' will either strengthen the EU or take it down faster. It might strengthen the EU because Brussels will now have the right to intervene directly in national fiscal policies to enforce austerity measures. It might work in the opposite direction because strong ties in a networked organization, of which the EU is, work to propogate shocks across the system with greater fidelity and speed. <br />
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In order to mitigate the impact of these shocks, a networked organization will require more slack resources (e.g., national reserve requirements will have to go up) and higher barriers against exogenous sources of uncertainty (e.g., limits on currency movement in and out of the zone). <br />
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What appears to be a desperate attempt to stave off the break up of the EU may reduce global trade by slowing down the movement of capital across regions. In order to protect themselves, one can imagine similar measures by ASEAN, APEC, NAFTA, and so on.Anonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.com0tag:blogger.com,1999:blog-5254291885061714531.post-13681074526953147202011-11-21T12:59:00.000-05:002011-11-21T17:04:32.173-05:00Technology Driven Jobless RecoveryThrough the previous century and into the last decade, GDP per capita has grown an average 2.5% compounded a year. This has largely resulted from the increased use of technologies to boost productivity. But the relationship between productivity and real wages has weakened. On an inflation-adjusted basis, median income today is about the same as that in 1999, at the beginning of the Internet boom. Put another way, if wages had kept up with the rate of GDP growth in the last decade, median household income would be $30k higher than they are currently.<br />
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The history of technological change can be described as an evolutionary process punctuated by discontinuous leaps in innovation. Traditionally, firms invest in innovation to increase production capacity. These investments are staged so that an organization can adapt to the introduction of new methods. The controlled rate of adoption allowed horse carriage makers to become automobile manufacturers, and retail banks to become integrated financial service providers. <br />
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Skilled jobs based on routines that can be deconstructed into discrete steps were most suited to technological augmentation. Even those jobs that involve complex routines requiring the adroit manipulation of instruments can be augmented by the combination of fine motor robotics and intelligent visual recognition systems. We see this in the development of minimally invasive surgical techniques that was largely technology (rather than practice) driven. However, the increasing complexity of innovation is outstripping the human and organizational capacity to learn on the fly. These shifts create winners and losers overnight so that the technology augmentation of work has become the technology displacement of workers. <br />
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This jobless recovery is not a temporary phenomenon. It is embedded in the type of innovation we are experiencing. Platform technologies that can compute, analyze, recognize patterns and perform increasingly complex routines with greater accuracy and speed is being introduced at an increasing rate. Moore’s Law exacerbates the scale effects, creating even more powerful incentives to speed up the invention and deployment of such technologies. They have globalized the market for services such as radiology, chronic disease consultation, psychological counseling, and college and technical instruction. In addition to companies, entire classes of work are being displaced by technology. <br />
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The prognosis of this situation is not good for social or political stability. One commonly proposed solution, wealth redistribution, is not because it does not fix the fundamental problem of a workforce unable to exploit the latest technologies or whose value added is being displaced by the same technologies they relied on. Instead, solutions should focus on the technology and work relationship.<br />
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In the short term, organizations should be encouraged to accelerate the pace of innovation, not decelerate it. Why? Job loss results from the exit of companies and the technological displacement of entire classes of work. In terms of the first, U.S. companies compete on the global stage where innovation in emerging markets mean that if they do not keep up the impact of job losses will be more severe in the relatively higher wage U.S.<br />
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In the long term, the most resilient economies are those that display high levels of entrepreneurial bias. Fostering an entrepreneurial economy requires policies that reward risk taking while buffering the community from the inevitable shocks of failure. Closing the knowledge gap can aid a culture of risk taking. We can teach individuals how to assess risk and identify business opportunities. Business and engineering programs that emphasize opportunity recognition and creation, design-centric thinking, and the commercialization of discoveries can fireproof the next generation of workers from the economic vicissitudes of technological change.Anonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.com0tag:blogger.com,1999:blog-5254291885061714531.post-36320326655417178612011-11-09T22:16:00.000-05:002011-11-09T22:30:16.994-05:00Italy is not Greece. But...The financial shockwave caused by Italian government bond yields hitting 7.48% is causing speculation of a pan-European meltdown and the possible end of the Euro single currency union. Italy is the 4th largest sovereign borrower after the U.S., Japan and Germany, with debt exceeding those of Portugal, Ireland, Greece and Spain, combined.<br />
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By all accounts, Greece's troubles, already the cause of a low grade migraine for the European Central Bank and the governments of Germany and France, is child's play, compared to the possibility of a run on Italian debt obligations. Credit Default Swaps, the cost of insuring Italian debt, is at a record high. Already, sovereign debt yields across Europe are rising in tandem with the situation in Italy.<br />
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However, Italy's debt level, though high at 2 trillion Euro or 120% of GDP, is still manageable due to a much smaller operating budget deficit. Therefore, unlike Greece, where even structural reforms are unlikely to create investor confidence, Italy can still extricate itself by embracing serious fiscal reform. She should take a page from New Zealand's bold reforms in the mid-2000s, which led to a resurgence of the latter's economy.<br />
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Italy still boasts robust manufacturing and agriculture export based industries. Her service industries related to tourism continue to garner healthy inflows of foreign exchange. By defanging the unions, reducing public expenditures, lowering taxes on investments, reducing the distortions caused by undue business influene on public affairs, taking visible and concrete steps to collect what is owed to the public purse, Italy can restore investor confidence and halt the run on its debt. <br />
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What it should <em>not</em> do is follow Greece's example of financial re-engineering, such as calling for an ECB bailout before domestic reforms are taken, forcing holders of her debt to take haircuts, and blaming outsiders for its financial troubles. Such strategies serve to reduce confidence, not increase it, as they externalize problems caused by the country's political class. <br />
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The crash of Italian debt quality is a global referendum on the current Italian government, not its core economy. Prime Minister Berlusconi's offer to resign at some later date, only to annoint a successor, does nothing to instill investor confidence. Instead, he should dissolve Parliament, and call for elections without endorsing any candidate. Unfortunately, like Greece, self-interest will likely trump patriotism. I'm selling Euros, for now.Anonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.com0tag:blogger.com,1999:blog-5254291885061714531.post-53928588817709730932011-09-28T15:31:00.001-04:002011-09-28T15:32:46.438-04:00Fed Involvement in EconomyOn September 22, the Fed announced that it will re-weight its $2.65 trillion securities portfolio to favor long term debt holdings and mortgages. This will have the effect of lowering short term borrowing rates while increasing the government's exposure to (and backstopping) housing market risks. It is hoped that lower interest rates will encourage more borrowing while simultaneously sending a signal of the Fed's confidence in the future of the country.<br />
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The activism of the central bank, using monetary policy to influence consumption, rather than to simply regulate capital flows in the economic system, is breathtaking. More critically, these moves ignore a basic problem. That depressed capital investments is not the result of low interest rates or the lack of cash (both are at historic lows and highs, respectively), nor because of a lack of long term optimism (corporations have maintained or increased R&D). It is that entrepreneurs and corporations have lost confidence in the ability of the government (right <em>and</em> left) to protect the conditions for wealth creation. The mounting weight of new regulations, uncertainty over taxes, anti-capitalism rhetoric, and takeover of the free market demonstrate an arrogance that belies the ineptitude on display in D.C.Anonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.com0tag:blogger.com,1999:blog-5254291885061714531.post-38981838559855612922011-08-22T15:48:00.002-04:002011-08-23T11:34:18.009-04:00The Fed's Interest Rate PolicyTwo weeks ago, in an attempt to engineer the country's way out of the current debt crisis, the Fed announced a low (almost zero) interest rate policy for the next two years. This did not stablize the stock market. Worse, it had the effect of announcing a weak dollar policy, which pre-empts the monetary policies of foreign trade partners. This is an unprecedented move away from the free trade and capital market principles that have kept the economic engine of this country robust. <br />
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The debt problem in America is not the result of expensive money but cheap money leading to over-consumption. Therefore, keeping interest rates artificially low discounts the cost of consumption and exacerbates the debt problem in the long run. Over the last 2 decades, U.S. households and governments at all levels have financed their over-consumption by selling debt obligations to such countries as China, Brazil, Russia, Germany, and Japan.<br />
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Whether we realize it or not, U.S. consumers have been paid by Chinese and German workers to keep their jobs in the factory. When the U.S. deflates its currency by keeping interest rates low for an extended period of time, regardless of future economic conditions, this implied deal is broken.<br />
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It's anybody's guess where all this will lead. Rumblings from sovereigns about moving away from the U.S. dollar as a reserve currency to a basket suggests that the outcome is not likely to be pretty for us.Anonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.com0tag:blogger.com,1999:blog-5254291885061714531.post-80254325318263126802011-07-26T10:16:00.002-04:002011-08-23T11:35:12.047-04:00Financial Stability and the Healthcare SystemThis post is a little off the beaten track for me. But it is important because in the debate over financial responsibility, we must remember the social obligations that we owe each other as members of the same community..<br />
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On Sunday, my wife was warded to critical care in a Baltimore hospital where I met some of the most wonderful doctors and nurses. These individuals, especially the nurses, perform their very difficult duties in the midst of human devastation, maintaining a composure with a compassion that is very difficult to comprehend (I was a total wreck). I also witnessed similar things in the ER, where she was first admitted. <br />
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Throughout this experience, I have come to see the incredible technological and human capital resident in the U.S. healthcare system. It is no exaggeration that it is the best in the world. In part, I believe it is the high value that Americans place on human life, hence the willingness to spare no expense, even at personal sacrifice, to preserve it.<br />
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I believe that in the long term continuing technological innovation, business process re-engineering, and increases in medical knowledge will allow the U.S. healthcare system to continue being the best in the world without the predicted financial burden that many have suggested (forecasts of future states almost always do not consider future innovation).<br />
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In the short term, however, given limited resources, trade-offs are inevitable. This is a very difficult thing to discuss because I wanted, and in fact did receive, the very best care for my wife, regardless of expense.<br />
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While the trade-offs should always be honestly recognized and discussed by our lawmakers, I believe that citizens should have direct voice in the making of such tradeoffs within their communities. For Americans, healthcare is too personal for decisions to be made only at the top. For example, the healthcare reform package passed by Congress was not the result of an exhaustive national conversation but the product of special interests and sales pitches by politicians and lobbyists. If there ever was a time for a national referendum on an issue affecting future generations, it is now.Anonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.com2tag:blogger.com,1999:blog-5254291885061714531.post-90878951942825315232011-07-24T12:19:00.001-04:002011-07-24T12:19:59.932-04:00The Debt ProblemThe current fiasco surrounding the debt crisis is more than just a clash of ideologies. There is a real possibility that tax rates will become so high (by some estimates, top marginal rates will hit 70%) in order for the U.S. to service the interest that capital flight (disinvestment in the country's wealth producing assets) will occur. Consider the U.K. in the 1950s and 60s. <br />
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More critically, the lost of credit worthiness will damage the country's geopolitical influence, which depends on moral suasion. It will become difficult to rally allies to global health, environment, and security causes. Hence, the drive to reduce the size of government and future entitlement is more than just a fight over how household wealth is allocated but has to do with the sustainability of the U.S. as a world leader.<br />
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Yet, America and Americans are known for compassion, pragmatism and generosity. Such qualities are also the basis for her moral authority in world affairs. Therefore, in cutting entitlements, we must be sensitive to how we are seen to treat the less fortunate, the less able, and the less well endowed. The cure would be worse than the disease if we ignore this defining American quality. In short, a middle ground needs to be carefully navigated. To do so will require a depth of humility never seen in politics and personal sacrifice experienced only twice or thrice in this country's short history.<br />
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The good news is that America has shown time and again that it is capable of innovating its way to a brighter future, as long as it remains an open country and able to attract the most talented to her shores.Anonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.com0tag:blogger.com,1999:blog-5254291885061714531.post-13813723414161972722011-07-10T21:32:00.002-04:002011-07-10T21:37:47.941-04:00Unemployment Not DecliningThe latest jobs report puts unemployment at 9.2%, up from the last quarter. This is not surprising given anaemic consumer spending and hence, perceptions of revenue uncertainty by companies. We may be entering an era of structural higher unemployment as companies permanently adapt to doing more with less by down scaling, outsourcing, and employing more technology. The long term solution is to foster more entreprenuership. To do so, the tax burden has to decrease in order to support those who are willing to take the risks of starting businesses. Instead, talk by leaders in Congress and the White House to raise taxes on the 'wealthy (read entreprenuers)' does nothing to inspire risk taking.Anonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.com0tag:blogger.com,1999:blog-5254291885061714531.post-55453020811871113092011-07-05T16:25:00.002-04:002011-07-06T16:28:21.766-04:00Portugal's Debt at Junk StatusToday, Moody's downgrades Portugal's national debt to junk status. This means a number things, foremost of which is that it closes large sectors of the debt market to Portugal, including pension funds, sovereign funds, value funds, and those investors that cannot, by virtue of their rules or strategies take on the types of risks implied by junk status. More critically, this means that it will now be very costly for Portugal to restructure its public debt either by assets sales or the rewriting of covenants.<br />
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In some ways, the downgrade is not surprising. Portugal, Ireland, Greece and Spain are struggling to realign public spending entitlement, existing debt obligations, and tax revenue with the realities of slower consumption, lower productivity, and international competition from the emerging economies.<br />
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The U.S. has many of the structural problems (both private debt and public entitlements) currently experienced by the PIGS. Its still large domestic economy has allowed a delay of the critical fixes. It's not a good idea, however, to hope that the problems will go away if the economy re-inflates since the causes of the problems are not going to disappear.Anonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.com0tag:blogger.com,1999:blog-5254291885061714531.post-62832901083196313332011-05-21T18:42:00.003-04:002011-05-21T18:47:45.124-04:00The U.S. DollarI've been going on about about the dangers of Greece's and Ireland's (now Spain's) debt problems to the stability of the Euro . A more immediate concern is the impact of the ever spiralling U.S. debt on the value of the dollar. We are seeing historic lows in the exchange rates of the greenback against the Euro, Pound, Yen, and even the Canadian Dollar (!) Gone are the days when one could take for granted the stability of the U.S. dollar because of the domesticity of its national debt and consumption economy. The U.S. consumption economy is now globally exposed (imports, excluding energy, far exceed exports) and foreign governments such as China, Britain, Russia, and Japan hold an ever larger share of U.S. Treasuries, relative to domestic holders. The lack of confidence in Washington's resolve to cut entitlement spending (the <a href="http://www.nytimes.com/2011/05/18/us/18coburn.html">'Gang of 6' on Capital Hill has failed</a>) has given foreign holders of Treasuries more reason to hedge against the dollar. The weak dollar will lead to inflation, which, when triggered, will be very difficult to tame because there is already no appetite for austerity measures. Inflation will further attenuate domestic consumption, employment will remain anemic, and the threat of stagflation will become a reality.Anonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.com1tag:blogger.com,1999:blog-5254291885061714531.post-38472699415409956342011-05-10T17:40:00.001-04:002011-05-10T17:52:10.459-04:00Obama on ImmigrationToday the President made a case for revamping the approach to immigration in this country. By all accounts, it may be too late in the political season to matter. However, on this issue, he is absolutely right. The creative future of this country depends on a continual freshening of the gene pool through immigration. Job creation rests on those who are hungry, entreprenuerial, and unafraid to take risks by founding new companies and growing existing ones. The history of this country is replete with immigrants that have contributed their talents, effort, and resources to build the economic powerhouse that is the USA. Unfortunately, the short sightedness of party leaders on both sides will slow our recovery from this most recent economic disaster.Anonymoushttp://www.blogger.com/profile/09655461522830261605noreply@blogger.com0