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Laziness pays in the blogosphere -- if you wait long enough, someone will write exactly what you want to say, and then all you have to do is link to them.
Recent Activity
China’s total debt load has climbed to more than two and a half times the size of its economy, underscoring the difficult challenge facing Beijing as it seeks to spur growth without sowing the seeds of a financial crisis. The total debt-to-gross domestic product ratio in the world’s second-largest economy reached 251 per cent at the end of June, up from just 147 per cent at the end of 2008, according to a new estimate from Standard Chartered bank. Such a rapid build-up is far more of a concern than the absolute level of debt, since increases of that magnitude... Continue reading
Reblogged Jul 22, 2014 at Flashman Letters It seems to be yet another cycle of China taking a temporary downturn and the economy picking itself up again and resuming its upward course, albeit at lower growth rates. Why does this pattern keep repeating? What could be going on? 1. The government keeps spending from its $3 trillion reserves stash and through direct fiscal policy it keeps Chinese workers employed and thus avoids the worst of the business cycle. (NB: This is in general not a good understanding of what is going on, but it should make the list of possibilities.) 2. Worker productivity is going up... Continue reading
Posted Jul 18, 2014 at Flashman Letters
Spain and the IMF: Round the Bend or Out of the Woods? The real problem in Spain – and this issue isn’t treated in the report – is the complete collapse of civic confidence in many of Spain’s institutions, from the Bank of Spain, to market regulator CNMV (the Bankia IPO, Preference Shares), to politicians and political parties (the Barcenas affair, among many others), to the monarchy. It is this crisis of confidence which makes it so difficult to get the consensus to make more sacrifices. Many say that there can’t possibly be 25% unemployment in Spain since if... Continue reading
Posted Jul 16, 2014 at Flashman Letters My view is different. Burgeoning debt was not an unlucky accident. It is fundamental to the way the growth model works, and we have arrived at the stage, probably described most imaginatively by Hyman Minsky in his work on balance sheets, in which the system requires an acceleration in credit growth simply to maintain existing levels of economic activity. China’s debt problems, in other words, cannot be resolved administratively, by fixing the shadow banking system, by imposing discipline on borrowers, or indeed by eliminating financial repression (much of which, by the way, has already been squeezed out of the... Continue reading
Posted Jul 14, 2014 at Flashman Letters Richard O'Connell +34 666 241 104 Continue reading
Posted Jul 10, 2014 at Flashman Letters
The ECB’s Outright Monetary Transactions programme was instrumental in reducing Spanish government bond yields. This alleviated the Spanish fiscal position, but did not make it sustainable. The continuing unsustainability of the Spanish government debt has to do with two factors: First while r (the interest rate) declined, g (nominal growth) remained much lower in Spain than in the UK. The latter was due to the deflationary forces in the Eurozone – themselves a result of excessive austerity and the absence of currency depreciation (which was made possible in the UK thanks to the expansionary monetary policies of the Bank of... Continue reading
Posted Jul 7, 2014 at Flashman Letters Indeed, the ECB will soon have to confront the fact that structural reforms and fiscal austerity fall far short of being a complete solution to Europe’s debt problems. In October and November, the ECB will announce the results of its bank stress tests. Because many banks hold a large volume of eurozone government debt, the results will depend very much on how the ECB assesses sovereign risk. If the ECB grossly understates the risks, its credibility as a regulator will be badly tarnished. If it is more forthright about the risks, there is a chance that some periphery countries... Continue reading
Posted Jul 7, 2014 at Flashman Letters But gold’s track record as an inflation hedge depends greatly on your time horizon, according to Claude Erb, Harvey’s co-author on the National Bureau of Economic Research study and a former commodities and fixed-income manager at mutual-fund firm TCW Group. Over the short term, he says, gold is a very unreliable inflation hedge. It is only over the long term that it can be a decent hedge — and he emphasizes that this long term must be measured over many decades at a minimum. Based on the markets’ recent behavior, Erb is confident that if inflation and Treasury yields... Continue reading
Posted Jul 7, 2014 at Flashman Letters Ted Kaufman, a former Democratic Delaware senator who chaired Judiciary Committee hearings examining the dearth of prosecutions, says the lack of action on Wall Street corruption is likely to be “the single biggest thing” historians remember about Holder’s tenure. “The attorney general has done a lot of good things, don’t get me wrong. But this is certainly not his finest hour, not by a long shot,” Kaufman told me. “It just doesn’t pass the sniff test.” In a scathing report released in March, the Justice Department’s own inspector general found that the criminal division’s efforts to hold Wall Street... Continue reading
Posted Jul 1, 2014 at Flashman Letters As James notes, rising inflation and falling bond yields don’t mix well in the longer term, and don’t offer much prospect of a serious market beyond BoJ purchases, unless of course the inflation is not sustainable. The black line in the following chart shows an index of inflation-linked JGB real yields, while the other two show the 7- and 10-year yields minus inflation. Really there isn’t that much mystery about what is going on in Japan. Falling working age population is steadily reducing the country’s potential growth rate (as the chart below from the Bank of Japan illustrates), and... Continue reading
Posted Jun 29, 2014 at Flashman Letters A new policy compass is needed to help the global economy step out of the shadow of the Great Financial Crisis. This will involve adjustments to the current policy mix and to policy frameworks with the aim of restoring sustainable and balanced economic growth. The global economy has shown encouraging signs over the past year but it has not shaken off its post-crisis malaise (Chapter III). Despite an aggressive and broad-based search for yield, with volatility and credit spreads sinking towards historical lows (Chapter II), and unusually accommodative monetary conditions (Chapter V), investment remains weak. Debt, both private and... Continue reading
Posted Jun 29, 2014 at Flashman Letters Continue reading
Posted Jun 18, 2014 at Flashman Letters
“During the crisis, key decision makers exhibited neither political leadership nor political courage. Rather than work towards containing total losses, politics led governments to focus on shifting losses to others. The result was massive destruction in some member states and a considerably higher total cost for Europe as a whole. European institutions could have been the last line of defense against this destructive dynamic but instead served to facilitate and enable the destruction.” His complaint will resonate with many from the smaller Eurozone economies. The text of the paper suggests that the way decisions are made in the Eurozone allows... Continue reading
Reblogged Jun 18, 2014 at Flashman Letters
Because the Obama administration is experiencing what appears to be its own Eighteen-and-a-Half Minute moment. In a truly stunning development in the Internal Revenue Service scandal, the agency last week informed Congress that more than two years’ of Lois Lerner’s email communications with those outside that agency—from 2009 to 2011, meaning the key years at the heart of the targeting-of-conservatives scandal—have gone missing. Quite strangely. The IRS says it cannot locate them. The reason is that Lerner’s computer crashed. What are the implications of this claim? It means no one can see any emails Lerner sent to or received from... Continue reading
Reblogged Jun 18, 2014 at Flashman Letters
The judgement of the Committee is that, although the Eurozone’s GDP has not been shrinking since 2013Q1, the growth rate and the improvement in the labour market have been so anaemic that if output were to start contracting in the next few quarters this would not constitute a separate, triple-dip recession but rather the resumption – after a brief ‘recession pause’ – of the second post-financial crisis recession that began after 2011Q3. If the current weak recovery endures, 2013Q1 might well end up being labelled a business cycle trough. This would not be good news, as this is not the... Continue reading
Reblogged Jun 17, 2014 at Flashman Letters If we were sent back with a time machine, even 20 years, and reported to people what we have right now and describe what we were going to get in this device in our pocket—we’d have this free encyclopedia, and we’d have street maps to most of the cities of the world, and we’d have box scores in real time and stock quotes and weather reports, PDFs for every manual in the world—we’d make this very, very, very long list of things that we would say we would have and we get on this device in our pocket, and... Continue reading
Posted Jun 16, 2014 at Flashman Letters Progressive and smart economist Jared Bernstein has explored the productivity puzzle of robots eating all the jobs (or not). He points out that productivity growth was up 1% last year, and has averaged 0.8% since 2011. But what he really focuses on is the smooth trend that tracks through the numbers. The trend suggests that the pace of productivity growth has decelerated since the first half of the 2000s. That begs an important question that the robots-are-coming advocates need to answer: Why a phenomenon that should be associated with accelerating productivity is allegedly occurring over a fairly protracted period... Continue reading
Posted Jun 16, 2014 at Flashman Letters Wolfgang Münchau writes that one of the more important insights about the state of the European economy right now comes from postcode data in the US. Atif Mian and Amir Sufi find that what is outwardly disguised as a credit crunch is in reality a fall in demand for loans. Moritz Kraemer came up with corroborating evidence last week, when he did the maths on private sector debt in Europe. His analysis reads like a European version of House of Debt. The Europeans have barely begun to deleverage. In Spain and Ireland the process has at least started. But... Continue reading
Posted Jun 16, 2014 at Flashman Letters But policymakers shouldn’t be trying to copy Silicon Valley. Instead, they should be figuring out what domain is (or could be) specific to their region—and then removing the regulatory hurdles for that particular domain. Because we don’t want 50 Silicon Valleys; we want 50 different variations of Silicon Valley, all unique from each other and all focusing on different domains. Imagine a Bitcoin Valley, for instance, where some country fully legalizes cryptocurrencies for all financial functions. Or a Drone Valley, where a particular region removes all legal barriers to flying unmanned aerial vehicles locally. A Driverless Car Valley in... Continue reading
Posted Jun 16, 2014 at Flashman Letters There are many reasons for this political earthquake, but the biggest are the enduring misery of depressed living standards, double-digit unemployment rates, and diminished hopes for the future. Europe’s rolling crisis has shredded trust in the competence and motives of policymakers, who failed to prevent it, have so far failed to resolve it, and bailed out banks and their creditors while inflicting pain on voters (but not on themselves). The crisis has lasted so long that most governing parties (and technocrats) have been found wanting. In the eurozone, successive governments of all stripes have been bullied into implementing flawed... Continue reading
Posted Jun 16, 2014 at Flashman Letters An interesting report to be published this week by the OMFIF claims that because of record low interest rates, central banks have “lost” around $200-250 billion in foregone revenue in interest income on their reserves, with the shortfall being made up by directly investing into the world’s stock markets – from the FT: The report, seen by the Financial Times, identifies $29.1tn in market investments, including gold, held by 400 public sector institutions in 162 countries. China’s State Administration of Foreign Exchange has become “the world’s largest public sector holder of equities”, according to officials quoted by Omfif. “In... Continue reading
Posted Jun 16, 2014 at Flashman Letters
But here’s the thing: strong causal claims require some confidence about how history would have unfolded in the absence of the cause of interest, and those counterfactual histories are no easier to get right than observed history was to anticipate. Like all of the most interesting questions, what causality means and how we might demonstrate it will forever be matters for debate—see here on Daniel Little’s blog for an overview of that debate’s recent state—but most conceptions revolve around some idea of necessity. When we say X caused Y, we usually mean that had X not occurred, Y wouldn’t have... Continue reading
Posted Jun 15, 2014 at Flashman Letters
A concern that we highlighted in yesterday’s post is that the only way the U.S. economy can generate significant consumer spending is through aggressive lending to borrowers with low credit scores. Here is more evidence supporting that view. In the chart below, we plot retail spending on appliances, furniture, and home improvement, or “home-related spending” (blue line) and spending on new autos (red line) from 1998 through 2014. We have highlighted the two major subprime lending booms we’ve seen in that period — the subprime mortgage lending boom from 2003 to 2006, and the subprime auto loan boom from 2010... Continue reading
Reblogged Jun 13, 2014 at Flashman Letters
Would you like to take the government’s side for a yield of 6.7 per cent? That is where risk is being priced in Iraq’s US dollar bond due in 2028. This would be after the market had digested ill tidings from Mosul. Not so sure of the risk-reward there? Investors may prefer to buy into the stability of the regime of President Abdel Fattah al-Sisi, with Egyptian hard-currency bonds that mature in a quarter of a century. These yield just below 7 per cent. How about Belarus? There is a 6.5 per cent yield on bonds due in 2018. Trust... Continue reading
Reblogged Jun 13, 2014 at Flashman Letters