Options for Europe – Part 2

The title is my current working title for a book I am finalising over the next few months on the Eurozone. If all goes well (and it should) it will be published in both Italian and English by very well-known publishers. The publication date for the Italian edition is tentatively late April to early May 2014. The book will be about 180 pages long. Given the time constraints I plan to devote most of my blog time over the next 3 months to the production of the book. I will of-course break that pattern when there is a major data release and/or some influential person says something stupid or something sensible. I hope the daily additions will be of interest to you all. A lot has to be done! Because the drafting has to be tighter than the normal stream of consciousness that forms my usual blogs, the daily quotient is likely to be shorter.

Read more

Options for Europe – Part 1

The title is my current working title for a book I am finalising over the next few months on the Eurozone. If all goes well (and it should) it will be published in both Italian and English by very well-known publishers. The publication date for the Italian edition is tentatively late April to early May 2014. The book will be about 180 pages long. Given the time constraints I plan to devote most of my blog time over the next 3 months to the production of the book. I will of-course break that pattern when there is a major data release and/or some influential person says something stupid or something sensible. I hope the daily additions will be of interest to you all. A lot has to be done! Because the drafting has to be tighter than the normal stream of consciousness that forms my usual blogs, the daily quotient is likely to be shorter. I also have some happy new year comments at the end today! But if you get bored before then – Happy New Year!

Read more

The fiscal role of the KfW – Part 1

This is the first part in what might be several blogs. I will see where my curiosity takes me. Today I want to invoke that well-known piece of inductive reasoning the – Duck Test. We all should know how that goes. But consider this reasoning. We have an institution that is 100 per cent government owned. It borrows millions and its liabilities are 100 per cent guaranteed by the federal government. It spends, I mean lends millions each year at very low rates to all manner of firms, organisations and even builds infrastructure. It also takes equity positions (provides capital) to a range of enterprises. It pays no tax having the same status as the central bank. It is not a duck but looks very much like a government fiscal entity. Welcome to the Kreditanstalt für Wiederaufbau (Reconstruction Credit Institute) or as it is now known the – KfW. This bank was created in 1948 as a German vehicle to faciliate the infrastructure rebuilding under the Marshall Plan. It has since grown (and diversified) into one of the largest banks in Germany (taken its main business units into account) and pumps millions of Euros in the domestic economy and the export sector (via IPEX, its 100 per cent owned subsidiary). It is a major reason why the public debt ratio in Germany is 80 per cent rather than close to 100 per cent. It is a major reason why the federal deficit has been reduced without scorching the German economy. It is a story about smoke-and-mirrors accounting, German-style.

Read more

OMF – paranoia for many but a solution for all

When the Committee on Economic and Monetary Affairs (ECON) of European Parliament considered the 2012 Report from the European Central Bank, the Rapporteur of the Committee and Deputy President of the EP, Gianni Pittela tendered the – Draft Report – on June 11, 2013. The ECB presented its – Annual Report 2012 to the Committee on April 24, 2013. The ECB is accountable to the EP and this Committee was exercising its political functions under that relationship. Under the heading Monetary Policy, the draft report contained two interesting items (9 and 10). By the time the amendments were finalised you learned a lot about politics in Europe and why the current system is unworkable.

Read more

More worn out ideological prattle from R&R

There are seven graphs in the paper. An Excel spreadsheet was involved. Shonky stuff alert! R&R are back with another attention-seeking effort after they were disgraced when their Excel manipulation that just happened to generate ideologically-convenient results was discovered to be shonky (in the extreme). This time is not different though. As in all their so-called historical insights the pair conflate monetary regimes across time and at points of time, which means most of their conclusions are erroneous. While their insolvency threshold has zero credibility now they also still hang on it, if only by implication. And they claim that repression is when residents of free nations enjoy parking their savings in risk-free, interest-bearing government bonds, instead of taking risks with commercial paper. Sounds like free choice to me. Is suggest R&R take some R&R and let governments get on with expanding their deficits and reducing unemployment. The public debt ratios will take care of themselves.

Read more

Nothing to sing about in Europe

The Euro crisis is over! The Euro crisis is over! I suppose if one says it loudly enough and often enough it might drown out what the data tells us. The most recent data – inflation slowing, real GDP growth slowing, no movement on unemployment – tells us that while the politicians have an incentive to talk up the situation and proclaim the crisis is over, the reality is different. The fact that the bureaucrats are now realising that Eurozone budgets in many nations are not going to come close to meeting the harsh (revised) Stability and Growth Pact requirements tells us that the policy structures in place are not delivering on their promise. When a 0.1 per cent growth rate is celebrated you know something is amiss – that is how far standards have dropped in a region that cannot deliver sustained prosperity to its citizens as long as it ties a massive anchor round its feet! The industrialists and elites talk continually of structural reform – which is code for cutting workers pay and rights and retrenching welfare systems for the disadvantaged, the major structural weakness stares them in the face – unnoticed. That structural weakness is the flawed design of the monetary union. Until that is addressed the situation will limp along, perhaps get a surge of growth here and there, until the next major negative demand shock hits from somewhere (like the US, or China) and then the whole drama begins again.

Read more

Japan will (yet) run out of money. Never!

A regular occurrence is the prediction of doom for Japan. Some minor upturn in Japanese government bond yields or a movement in some other irrelevant financial statistic relating to the Japanese public sector sends the financial press into apoplexy. The latest signal of impending bankruptcy being bandied about relates to the rising trend in foreign holdings of short- and longer-term Japanese government debt. This trend is explained by financial markets moving into less risky assets (in this case, Japanese government bonds) as uncertainty in other markets, for example the Eurozone, remains. However, the narrative then goes that eventually these purchasers will refrain from buying Japanese government debt and with the funding from the savings of the ageing domestic population drying up, the Japanese government will run out of money. Policy response? Cut fiscal deficits immediately through a combination of tax rises and spending cuts. All of which is nonsense and if the Japanese government follows the advice – there will be a 1997-style recession and public debt ratios will just rise faster than they are at present. It is better that we now all turn to the sport’s section of whatever news you read and relax.

Read more

Eurozone – what do they propose as an encore?

During the late 1980s and into the 90s when the Monetarists (mostly holed up in Britain) were boasting that the widespread privatisation and labour market deregulation strategies they had instigated were containing inflation and setting up their economies for sustained growth with reductions in unemployment my response was “what do they do they do for an encore”. It was obvious that if you scorched domestic demand and pushed up unemployment that the inflation rate would drop and the reduced imports would flatter the external balance. The question then was – what do you do next? Once growth returns in domestic demand rises on the back of increased income growth, imports start catching up and workers start demanding wage rises to make up for lost real income during the deflation and you end up with nothing much being achieved except for a extended period of lost real income, and rising inequality given the lower income groups carry the burden of the recession. The conservatives became slightly more astute in more recent years arguing that the recession provided the opportunity for nations to undergo radical restructuring so that growth could be driven by exports as a result of increased competitiveness. That’s the European model at the moment. Is it working? The IMF doesn’t think so.

Read more

Currency sovereignty is what matters

There is a literature emerging that suggests that a Eurozone nation would be no better off with its own currency then and is within the monetary union. The claim is that these nations have not performed any worse than nations outside the Eurozone during the current crisis. A recent paper by an American economist (Andrew Rose) – Surprising Similarities: Recent Monetary Regimes of Small Economies – is being used as the authority to support this claim. The intent is clear – to deny that the Eurozone as a monetary system is inferior to systems where the nation issues its own currency and sets its own interest rates. However, these studies skate over the currency sovereignty issue and cast the differences between nations in terms of exchange rate arrangements or whether their central bank targets inflation or not. The real issue is whether the monetary system is characterised by the government facing a financial constraint or not in its spending – that is, whether it issues its own currency, sets its own interest rates and resists issuing debt in a foreign currency. Once you consider those basic aspects of the monetary system then it becomes obvious that the Eurozone nations as a whole have performed worse than other advanced Non-Eurozone nations which have enjoyed more fiscal flexibility.

Read more

Saturday Quiz – September 28, 2013 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of modern monetary theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

Read more

Disingenuous at best

In light of the – An Open Letter from Howard Schultz, ceo of Starbucks Coffee Company – which contains “a respectful request that customers no longer bring firearms into our stores or outdoor seating areas”, I felt it necessary to request that all readers of my blog leave all weapons (guns, rocket launchers and any other armaments that you carry on a regular basis) away from their side when they read my blog. Otherwise, violence might erupt as the arrogance of the neo-liberals scales new heights – five years into the crisis. To get your ire up several notches, you might read the latest article (September 16, 2013) by Greg Palast – Larry Summers: Goldman Sacked (thanks Gustavo). Remember keep your weapons out of reach! Then you might reflect (keeping as calm as you can) on the latest offering from the German Finance Minister, Wolfgang Schäuble in the Financial Times (September 16, 2013) – Ignore the doomsayers: Europe is being fixed. The triumphalism throughout the article demonstrates to me that Mr Schäuble has standards of excellence that lie well below what is conventionally considered to be (barely) reasonable. What he uses as the benchmark for defining mediocrity is beyond imagination. These are crazy times – when these economic criminals walk the streets at large, puffed up by their own arrogance and delusion, slapping themselves and their mates on the back, demanding credit for the human wreckage that their actions created, made worse and ensured will span generations. While we see youth unemployment rates of 62.5 per cent and rising suicide rates, these characters see glory and fulfillment. A most strange period of history and future generations will reflect on these apes poorly.

Read more

Eurozone nowhere near creating a truly federal structure

I have been trawling through the AMECO database for part of today as a means to learn more about what is happening in Europe as austerity continues into its fourth year for most nations. One of the neo-liberal mantras has been that the enduring crisis has been the result of major imbalances in current accounts (trade in goods and services and associated income flows) between the European nations. This reasoning implicates excessive wages growth in highly regulated labour markets, which also undermines the incentives for productivity growth (hence competitiveness declines and export markets shrink and imports become attractive). Alleged fiscal laxity is also implicated – excessive public employment growth, which apparently is less productive and encourages excess wages growth (stronger trade unions, better job protection). Taken together these claims are made about the peripheral Euro nations, which are in such trouble at present. This discussion has underpinned the policy push for austerity and largely denies the alternative view (which I largely adhere to) that the monetary union was ill conceived from day one and its design was incapable of resisting the major negative aggregate demand shock that arose in 2008. There was no federal fiscal capacity and no uniform banking rules. Any way, I am looking into some of the components of the first story – and examining what has been happening to unit labour costs. This blog reports the early stages of that work.

Read more

Eurozone production and employment still going backwards

There are many pro-austerity commentators who have been pronouncing that the worst of the Eurozone crisis is over. Of-course, they follow these pronouncements with claims that improvement was all down to the austerity. I must live in another universe because my reading of the data tells me that austerity continues to weigh down growth and prosperity in the Eurozone as industrial production and employment fall. I have been updating my Eurozone databases today to reflect recent Eurostat data releases and this blog provides some insights into what the data is currently telling us. The message is consistent with my interpretation that recovery is still not occurring and a major policy reversal in favour of stimulus is desperately warranted. The data tells us that Eurozone production and employment still going backwards = 5 years after the crisis began.

Read more

Saturday Quiz – September 14, 2013 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of modern monetary theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

Read more

The stupidity of the German ideology will come back to haunt them

There was an interesting article in the Financial Times last week (August 29, 2013) – The German miracle is now running out of road – about the myopia of policy settings in Germany. The FT author was Sebastian Dullien, who has been consistently presenting the case that Germany is not a role model for the rest of Europe to follow. For example, see – A German model for Europe?. He notes that by targetting a budget surplus in a period of fiscal austerity, the Germans are undermining the very factors which made their manufacturing sector some strong. Their public investment in education and infrastructure is now lagging so much that the costs of business are rising in Germany and the long-term consequences of this are likely to be very damaging. The stupidity of the German ideology will come back to haunt them.

Read more

Fiscal deficits in Europe help to support growth

I read this article yesterday (published August 12, 2013) – The euro area needs a German miracle – among a group of articles that are concluding that things are on the improve in Europe. I expect a wave of articles which will be arguing that the harsh fiscal austerity has worked. I beg to differ. This article agrees that it is too early to “declare victory” because the austerity has to go further yet. My interpretation of that claim is that the author doesn’t think the ideological agenda to shift the balance of power away from workers has been completed yet. But the substantive point is that the fiscal austerity failed to promote growth and growth has only really shown its face again as the fiscal drag has been relaxed. This relaxation is much less than is required to underpin a sustained recovery at this stage but it is a step in the right direction. Governments, with ECB support, should now expand their deficits further and start eating into their massive pools of unemployment.

Read more

If you think you know what ‘debt’ is, read on

The title is stolen from the UK Guardian article (July 29, 2013) – If you think you know what ‘debt’ is, read on – by one Alex Andreou. The title suggests he knows the real issues regarding public and private debt. We will see if he does. This is Part 10 in the theme – When you’ve got friends like this. Which should tell you that the article is full of misinformation even though the motivation is sound. This article is another example of progressive macroeconomic discourse which is essentially trapped in mainstream macroeconomics. The simple point is that a truly progressive social agenda has to be grounded in solid macroeconomic principles. Trying to carve out a progressive agenda within a mainstream macroeconomic framework undermines the credibility of the former and plays straight into the hands of the conservatives. So “If you think you know what ‘debt’ is, read on”.

Read more

There is nothing new under the sun

The debates that are played out in the parliaments around the world at present about the state of public finances are not new. The debates, which are amplified by the media who typically do not understand the issues involved yet mostly take a conservative position because they can sell more products (papers, on-line access etc) that way, appear to be pressing and all sorts of emergency language is used. The characters who write these doomsday scenarios mustn’t ever reflect on what they say from one day to another relative to the historical record. Their arguments against the use of budget deficits and invoking doomsday scenarios regarding public debt reduction are not new. Given many of these conservatives are also into the bible (pushing evangelical diatribe) they might have reflected on – Ecclesiastes 1:9 – which noted that “What has been will be again, what has been done will be done again; there is nothing new under the sun”. Indeed not. One character in history with a penchant for religion (Mormonism) however had some insights in the operations of government budgets and public debt. He was also a long-time former Chairman of the Board of Governors of the US Federal Reserve System.

Read more

Austerity fails – its in the numbers

The latest Eurostat public finance data for Europe on July 22, 2013 – Euro area government debt up to 92.2% of GDP demonstrates the failure of the Euro policy agenda on its own terms. It is clear the indecency of the policy elites is reflected in the way they use nomenclature. Massive rises in unemployment and poverty is called modernisation or labour market reform. The argument bifurcates at that point. How can you argue with someone who thinks like that? But we all know what a financial ratio is. They are without nuance. A public debt ratio is what it is. And when the leaders say they are doing everything they can to reduce them and the cost all this “modernisation” is a price worth paying to reduce the public debt ratios we can conclude that they are failing if the debt ratios continually rise as they impose harsher austerity (sorry, increase the degree of modernisation). That is what the hard numbers are shouting. And that means that someone in Europe should just blow the whistle and call time is up and get rid of the whole swathe of policy leaders.

Read more

Madness continues – macro conditionalities on regional transfers in Europe

When 17 countries together have failed to grow for the last 12 months and each successive quarter has seen the growth rate fall increasingly (-0.1 per cent June 2012, -0.7 per cent September 2012, -1.0 per cent December 2012 and -1.1 per cent March-quarter 2013) and the same 17 countries have seen the collective unemployment rate rise (or remain static) for the last 24 months from 9.9 per cent (May 2011) to 12.2 per cent (May 2013) when is it appropriate to conclude that the macroeconomic policy mix is wrong and substantial changes need to be implemented. Answer: Yesterday! Further, why would those same countries decide to implement further policy changes, which will not only make it harder to grow but go against the whole idea of the collective in the first place? Answer: Besotted by destructive neo-liberalism. Welcome to Europe and macroeconomic conditionality on regional funding.

Read more
Back To Top