Tuesday, April 30, 2013

British Stagnation Not Due (in the Main) to « Austerity »

That’s the conclusion arrived at by Scott Sumner (The Money Illusion).
It “appears that the recent British stagnation is 75% to 80% supply-side and 20% to 25% demand-side.
In other words, when Keynesians blame the slow British RGDP growth on the mythical “austerity” they are talking nonsense.  This is partly because the unemployment numbers suggest that the British economy does not have a particularly large output gap, when compared to other developed economies, which means their massive budget deficit (trailing only Egypt and Japan) really does indicate a fairly expansionary fiscal stance.  And second, because even if fiscal policy is quite austere, the slow RGDP growth is mostly due to supply-side factors such as declining North Sea oil output, less froth in high finance, and perhaps other factors such as labor shifting out of home-building.  (I’m open to suggestions.)”

Here is the post.

Germany’s Mittelstand Turns Eurosceptic

A new survey of small and medium-sized companies in Germany, the Mittelstand that make up the backbone of the German economy, finds that they are losing interest in the euro zone. Instead, they are placing their bets on countries even further afield, especially fast-growing emerging economies.

The surveyed companies seem determined to place their bets on global trade as the way out of the crisis -- and this despite the fact that a growing number of companies are expecting more trade barriers, currency risks and problems with protecting intellectual property rights abroad.

Read more.

Thursday, April 11, 2013

From Mexico, Lessons for Europe

Mexico in the 1980s looked a lot like most Southern European countries today writes Eduardo Porter in the New York Times (April 9, 2013). Excess debt threatened to bankrupt the country. In the end enforced austerity was not enough. Countries that cannot grow will not repay their debts. Today, the economies of Ireland, Portugal, Spain and Italy are smaller than they were five years ago, but their debt burden is heavier. And still, European leaders insist that more of the same (more debts and more austerity) must be the solution.

In Mexico, finally, Nicholas Bready, the US Treasury secretary, had to prepare a plan for banks to reduce Mexico’s debts on a “voluntary” basis: strong-armed by the US, banks had to swap old Mexican debt for “Brady bonds” that offered a reduction in principal and below-market interest rates.

Debt reduction was a key for a return to growth and the economy expanded by 4 percent the following year. But Mexico had a further recipe for growth that present day Southern European economies have not: it devalued its currency to gain export competitiveness.

Couldn’t politicians in Berlin and Paris get the lesson right? “Northern” banks must accept a partial Southern debt default while the single European currency  should be allowed to depreciate (see the current Japanese experience), paving the way for an easier exit from the euro for some (my recent book on Euro Exit).  

The article is well worth reading here.

Debt Overhang and Coming Expropriations of Savers

Carmen Reinhart (co-author with Kenneth Rogoff  of  “This Time is Different: Eight Centuries of Financial Follies”, Princeton University Press, 2009, translated into French by Michel le Séac’h, Pearson, 2010) explains why the current crisis is not over in the US or Europe and why it bodes ill for savers. Money is transferred from savers to borrowers via the current negative interest rates. And more is to come via explicit “haircuts” on debt and/or inflation, both meaning a substantial financial repression of savings.

The best one page analysis of the current financial and governmental crisis I have read to date. Read the Spiegel Online interview here.

Tuesday, April 2, 2013

The Collapse of the Eurozone Money Supply

I missed a very important post by David Beckworth (Macro and Other Market Musings, February 1st). It is a bit technical but the figures say it all. The Eurozone is being strangled by a dead wrong policy of ultra conservative money supply.

Read more.