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 .

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.

The Brokers With Hands on their Faces Blog

Here it is .

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 …

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”.

Excerpt:

“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 .

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.