Friday, August 26, 2011

The Sex Ratio, Gender Bias in Slave Trade, and Differential Polygyny in West vs East Africa

A neat resource-abundance explanation by John Dalton and Tin Cheuk Leung, here.

Hat tip: Tyler Cowen.

Wednesday, August 24, 2011

Why Eurobonds Are the Wrong Solution

Common sense (at last!) by an economist, Daniel Gros, ,here.

Monday, August 22, 2011

A Balanced Assessment of the Current Situation

By Ambrose Evans-Pritchard in The Telegraph  hereClosely reasoned as usual and thought provoking.

Friday, August 19, 2011

Are the 1930s Back?

A frightening parallel in, hereespecially regarding a comparison of the return to the gold standard (then) and the creation of the euro (now).

It is time to remember a forgotten lesson of the Great Depression. How to get out of it: (a) drop out of the gold standard, and (b) devaluate your currency by an adequate monetary policy.

The Economics of British Riots

Read Posner and Becker on the topic here . The reasons for seemingly irrational behavior.

Wednesday, August 17, 2011

The Euro Endgame

Mohamed A. El-Erian develops and analysis quite similar to mine (see for example my post of yesterday) for Project-Syndicateeven though his title is misleading, reflecting an ECB-centered preoccupation with its independence and future rather than expressing a concern for global welfare in Europe.


“Whichever way you look at it, the ECB … is being forced into an endgame with three once-improbable outcomes. That endgame will play out in week and months, not quarters and years. (see my comments on the durability of cartels, JJR).  …

The first is a disorderly breakup of the eurozone. …

The second is the one preferred by political scientists and European visionaries (he means “the politicians of the zone”, JJR): greater fiscal union … or, in blunt terms, German willingness to do for the eurozone what it did for Eastern Germany – namely, write large checks for years to come. (most unlikely, despite the "eurobonds" babble, JJR).

The third alternative is the one embraced by several economists. It involves creating a smaller and more economically coherent eurozone which would consist of core and near-core countries within a tighter fiscal union. … In the process, 2-3 peripheral economies would take a sabbatical from the euro. (See again my post on that. It is not a preference, but the logical consequence of the fundamentals of optimal currency areas theory, supplemented by politicians' preference for centralization, JJR). 

Although the endgame is close, it is impossible to predict which alternative will prevail.    … My sense is that politicians will opt for a weak variant of greater fiscal union, but that, ultimately they will fail to execute it for the eurozone as we know it today.   …  the coming endgame will be neither simple, nor orderly. (That’s precisely what I explained in my book, and in yesterday’s post, JJR).”

Additional comment:

El-Erian didn’t, however, mention a fourth alternative that we develop with two colleagues in today’s French daily Les Echos (for those of you who can read French look here: a major devaluation of the euro following a drastic cut of the ECB interest rates, that would stimulate all the economies of the eurozone, including the German one. It would buy some more time for politicians before they resolve to adopt the most likely shrinking of the eurozone into a DM-zone.

Tuesday, August 16, 2011

How Long Will the Euro Monetary Cartel Survive?

A paper by Margaret C. Levenstein and Valerie Y. Suslow, “What Determines Cartel Success?” ( Journal of Economic Literature, March 2006 ), potentially provides  elements of information that lead to an answer.

First, remember my analysis in a recent book, “L’euro: comment s’en d√©barrasser” (Grasset, 2011), of the euro as a cartel of currencies intended to maintain a high price of the jointly created substitute currency (the euro, which replaced the DM, Franc, Lira and other national currencies), in order for the big borrowers – banks, governments, and firms -- to lower the cost of the funds they borrow.

Second, read the abstract of the Levenstein/Suslow paper:

… “We conclude that many cartels do survive, and that the distribution of duration is bimodal. While the average duration of cartels across a range of studies is about five years, many cartels break up very quickly (i.e. in less than a year). But there are many others that last between five and ten years, and some that last decades.     Cartels break up occasionally because of cheating or lack of effective monitoring, but the biggest challenges cartels face are entry and adjustment of the collusive agreement in response to changing economic conditions. Cartels that develop organizational structures that allow them the flexibility to respond to these changing conditions are more likely to survive.”

Now the euro was born more than ten years ago, in 1999. It has obviously been submitted to cheating by many if not all of its member states, via the repeal of the “stability pact” and overborrowing by several governments that breached the quota limitations that are essential for a cartel to survive. It has faced entry by new members and its collusive agreement is confronted to severe and changing economic conditions.

But on the other hand it clearly developed an “organizational structure” in the guise of the European Central Bank, which, like all other central banks is an instrument of collusion and defense of the interest of financial institutions.

My guess is that this cartel is going to disintegrate, maybe to be replaced by a smaller, more homogenous one. Its life span is already respectable but it has an important comparative advantage over other cartels: the compulsory collusion organizer that is the ECB. So I would be surprised if it disappeared right now. I rather expect a protracted process of progressive disintegration (that could suddenly accelerate) by the exit of one country after another.

However, as I wrote in the book, the game with 17 players is too complex to allow a precise forecast, either regarding the scenario, or its timing. But right now the ECB has been compelled to renege also on its charter by bailing out a few overleveraged governments of the South. A policy which was strictly forbidden by the initial agreement. So watch out.

The Globalization … of Development

Project Syndicate undertakes the publication of new, weekly series The New Global Economy in which senior officials from various countries, international business leaders, and economists will comment on a world in mutation.

Excerpt from the presentation:

“Ten years ago, rich countries dominated the world economy, accounting for two-thirds of global GDP. Since then, their share has fallen to just over half. In ten years, it could decline to a mere 40%, with emerging markets producing most global output.
The pace of this shift in economic power is unprecedented, and raises as many questions as it does hopes.”

Indeed, much has been said and written about the financial aspect of globalization, but the real aspects of the world economies’ rebalancing may be more important in the medium run.  

Monday, August 15, 2011

Krugman on the ECB

Europe needs more inflation, whereas the current ECB monetary policy is of the "one-size-fits-one" (i.e. Germany) category.
Read his short note here .

Thursday, August 11, 2011

Europe (and Especially the Eurozone) Much Worse Off than the U.S.

Have a look at Felix Salmon’s “Chart of the day” (Reuters). Both the chart and the comments are extremely clear, here.

Monday, August 8, 2011

Soros on Euro Exit

“The authorities are actually engaged in buying time. And yet time is working against them” he said in Vienna yesterday, according to Bloomberg.

“There’s no arrangement for any countries leaving the euro, which in current circumstances is probably inevitable,” he added.

Readers of this blog have been knowing that for a long time …

Friday, August 5, 2011

Great Recession or Great Contraction?

Kenneth Rogoff claims in Project Syndicate that governments pursue the wrong policy recipe in trying to revive economic growth by fiscal policy or massive bailouts, which usually terminate recessions within a year, returning the economy to its long-run trend.

The current problem “is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation.” It is a typical deep financial crisis, not a typical deep recession. In the former, it typically takes an economy more than four years just to reach the same per capita income level that it had attained at its pre-crisis peak.

“Many commentators have argued that fiscal stimulus has largely failed not because it was misguided, but because it was not large enough to fight a “Great Recession”. But, in a “Great Contraction,” problem number one is too much debt. If governments that retained strong credit ratings are to spend scarce resources effectively, the most effective approach is to catalyze debt workouts and reductions. (…) the only practical way to shorten  the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4-6 % for several years.”

My comment: I think Rogoff is completely right. But in the case of Southern European members of the euro zone the amount of cumulated debt and the deterioration of competitiveness are such that at least partial defaults and a return to flexible exchange rates are required. And anyway, an independent monetary and exchange rate policy would be necessary to increase inflation from 2% to the 4-6 % range, given the price trend and inflation aversion of Germany.

Explaining the Crash

Many plausible causes have already been invoked for the current spectacular worldwide market crash: anticipation of a US double-dip recession, the Obama consent to a debt ceiling having the effect of cutting the macroeconomic stimulus too early, -- mostly in the US -- evidence that the European policy of helping Greece, Ireland and Portugal with more and longer term loans to alleviate the burden of their austerity programs did not produce the expected positive results, fear of contagion in sovereign bond markets engulfing Spain and Italy, lack of political leadership in Europe, and the excessively conservative policy at the ECB, -- mostly in Europe.

But all of these, and some others too, belong to the “guessing in the dark” category.

As “Buttonwood” writes in The Economist, the cause or causes may be what he defines as “non-economic”, but I think he means “non-macroeconomic”.

“Some of the biggest falls of the last 25 years have been down (sic, but maybe he meant “due”?) to market dynamics, from program trading in 1987 to the LTCM crisis through August 2007’s quant blow-up to May 2010’s flash crash. We will find in a few days or weeks that someone was a forced seller.” (My emphasis).

Because, in the end, more sellers than buyers is the explanation to give whenever the markets fall. And that’s the only explanation that counts.

Let’s add that the reasons for selling should have been (a) global (because the Thursday crash was global), and (b) due to some unexpected news that led some large global investors to sell large quantities of stocks (including emerging economies’ stocks) and buy “safe” government bonds. Let’s wait for more evidence about who the sellers were, and why they felt compelled to sell.

Read the post here .

Wednesday, August 3, 2011

The Euromess as of August 3

Paul Krugman sees “the whole eurozone … coming apart at the seams” (here) as investors fly from Italian and Spanish bonds, while Italy and Spain are too big to be “saved”, the Greek, Portuguese and Irish way, that is by North European taxpayers. 

According to the Financial Times, yields on benchmark 10-year Spanish and Italian bonds reach 6.45 and 6.25 respectively. The premiums paid to borrow over Germany reach euro-era highs of 404 and 384 basis points (391 points in the latter case according to Bloomberg today). These yields and premiums are close to levels that pushed Greece, Ireland and Portugal into bail-outs. The premium on France’s bonds also reaches a euro-era high of 75 basis points.

Meanwhile the Swiss Franc approaches parity with the Euro and also gains vis-à-vis the US dollar, a clear sign of global financial worry. Today's interest rate cut by the Swiss monetary authorities is intended to check (efficiently) that rise but does not suppress the underlying cause.

The mounting crisis reflects the basic impossibility for southern European economies to avoid default on their debts with an overvalued euro while at the same time their governments aggravate the already severe recessions by deflationary macroeconomic policies (“austerity”) that stifle growth even more and thus further deteriorate public finances and increase (not decrease) the debt/GDP ratio. There is no way out in this direction. Partial default and currency depreciations – either of the euro and/or of newly re-created national currencies - are prerequisites for a return to growth.