Tag: economics

RGD readers will know that I’m very skeptical of the reliability of government economic statistics, mostly because they are a constantly moving target that mutate over time. However, a closer look at everything from TOTLL to today’s GDP Advance (3.2% annual) makes it appear as if the statistical shenanigans are growing exponentially:

I’m concerned with these numbers – quite concerned in fact. The Federal Government borrowed (and presumably spent) $462 billion in excess of tax receipts over the first three months of 2010. But PCE – personal consumption expenditures – was up $83 billion and federal spending was up only 3.5 billion.

Where did the other $375 billion go?

Into a black hole of covering existing obligations, it appears, and the final private demand GDP deficit covered by this is almost exactly 10% (GDP for the quarter is ~3.650 trillion, so $375 billion is roughly 10% of that.)

Karl Denninger isn’t the only one to notice anomalies with regards to today’s BEA release. Calculated Risk notices that Residential Investment isn’t behaving in its usual post-recessionary manner: “RI as a percent of GDP is at a new record low. And there is no reason to expect a sustained increase in RI until the excess housing inventory is absorbed. Notice that RI usually recovers very quickly coming out of a recession. This time RI is moving sideways – not a good sign for a robust recovery in 2010.”

First Greece. Then Portugal. Now Spain. It shouldn’t be long before Ireland’s credit rating appears in the news, as per RGD.

Spain’s credit rating was cut to AA from AA+ by Standard & Poor’s Ratings Services. The outlook is negative, S&P said.

It’s going to go lower than AA….

Another much-ballyhooed bazooka fails:

“We have gone past the point of no return,” said Jacques Cailloux, chief Europe economist at the Royal Bank of Scotland.“There is a complete loss of confidence. The bond markets are in disintegration and it is getting worse every day. “The ECB has been side-lined in the Greek crisis so far but do you allow a bond crash in your region if you are the lender-of-last resort? They may have to act as contagion spreads to larger countries such as Italy. We started to see the first glimpse of that today.”

Mr Cailloux said the ECB should resort to its “nuclear option” of intervening directly in the markets to purchase government bonds. This is prohibited in normal times under the EU Treaties but the bank can buy a wide range of assets under its “structural operations” mandate in times of systemic crisis, theoretically in unlimited quantities.

And here is a perfect example of the inherent danger – and stupidity – in centralizing any form of power. In the pre-Euro days, Greece could have devalued the drakhma and relieved the pressure on its bond market. The effects would have been negative, but limited solely to Greece. Now, thanks to the centralized structure of the EU, the bail-out expense threatens the pocketbooks of Germans and the debt contagion threatens Portuguese, Italian, Spanish, and Irish bonds.

The worst thing is that the proposed “emergency” solution involves further centralization, which involves kicking the problem down the road for a while. This means that when the debt issue resurfaces, it will threaten the ECB directly. The ECB would be wise to do what the Fed did not have the courage to do and let Greece default. Unfortunately, wisdom and central bankers appear to be mutually exclusive concepts these days.

I am amused by the continued expansion of the financial analogies, though. First the Fed had a “gun”, then the EU had a “bazooka”. Now the ECB has a “nuclear option”. But, like previous analogical armaments that were brandished so futilely, it can only be perceived as effective so long as it isn’t used. It’s an empty bluff, just like all the previous ones.

Here’s a few more details on the latest in the ongoing Euromeltodown:

ATHENS — Greece was pushed to the brink of a financial abyss and started dragging another eurozone country – Portugal – down with it Tuesday, fueling fears of a continent-wide debt meltdown. Stocks around the world tanked when ratings agency Standard & Poor’s downgraded Greek bonds to junk status and downgraded Portugese bonds two notches, showing investors that Greece’s financial contagion is spreading. Major European exchanges fell more than 2.5 percent, and on Wall Street, the Dow Jones industrial average finished down more than 200 points. The euro slid more than 1 percent to nearly an eight-month low.

“We have the makings of a market crisis here,” said Neil Mackinnon, global macro strategist at VTB Capital.

Greece is struggling with massive debt, and with prospects for economic growth weak it could end up in default. Its 15 eurozone partners and the International Monetary Fund have tried to calm the markets with a euro45 billion rescue package, but it hasn’t worked.

Standard & Poor’s warned that holders of Greek debt could take large losses in any restructuring, but a greater worry is that Greece’s debt crisis is mushrooming to other debt-laden members of the eurozone.

One bailout can be dealt with but two will be stretching it, and there are fears that other weak economies could be pulled down in the Greek spiral – including Europe’s fifth-largest, Spain. Can Germany, Europe’s effective paymaster, continue to bail out the weaker members of the eurozone?

The crisis threatens to undermine the euro and make it harder and more expensive for all eurozone governments to borrow money.

It has also disrupted cooperation between eurozone governments, with Germany resisting the idea of bailing out Greece unless strict conditions are met. Many investors think Greece will have enough money to avoid default in the coming weeks, but the future is cloudier. Both Standard & Poor’s and the Greek finance ministry insisted that the country will have enough money to make the euro8.5 billion bond payments due on May 19.

Beware the post-Ides of May….

Another Black Swan spotting!

Greece’s credit rating was cut three steps to junk by Standard and Poor’s, the first time a euro member has lost its investment grade since the currency’s 1999 debut. The euro weakened and stock markets throughout the region plunged.

Greece was lowered to BB+ from BBB+ by S&P, which also warned that bondholders could recover as little as 30 percent of their initial investment if the country restructures its debt. The move, which puts Greek debt on a par with bonds issued by Azerbaijan and Egypt, came minutes after the rating company reduced Portugal by two steps to A- from A+.

Wait a minute, hasn’t the financial media reported that Greece was saved, bailed out, etc about 20 times in the last month? Anyhow, you may recall that I suggested going long dollar a few months ago, back when the Euro was around $1.45. Needless to say, the few people who noticed at the time said I was crazy. Again.

On a tangential note, don’t you enjoy the way the ratings services always helpfully let you know that a bond is worthless well after it becomes completely freaking obvious? I don’t often agree with Paul Krugman, but I thought it was impressive that 93% of the AAA-rated mortgage securities are now downgraded to junk. Ex post facto, of course. It would appear that an AAA rating doesn’t mean what so many investors thought it meant.

Greece exemplifies the inherent unreliability of government economic statistics:

Financially-stricken Greece had an even bigger budget deficit for 2009 than previously thought, official figures showed Thursday — at a time the country is considering whether to tap a bailout facility from its 15 partners in the eurozone and the International Monetary Fund.

The European Union’s statistics office Eurostat said that Greece’s budget deficit in 2009 as a percentage of economic output was 13.6 percent — that’s up from the previous estimate of 12.9 percent and nearly double the 7.7 percent recorded in 2008.

Fictional numbers informing the deployment of fictional money by fraudulent financiers. I have a sneaking suspicion that the people of the far future are going to look back on our time as the Idiot Ages. We are the telephone sanitizers.

This doesn’t appear to harmonize well with the economic recovery tune:

A record number of U.S. homes were lost to foreclosure in the first three months of this year, a sign banks are starting to wade through the backlog of troubled home loans at a faster pace, according to a new report. RealtyTrac Inc. said Thursday that the number of U.S. homes taken over by banks jumped 35 percent in the first quarter from a year ago. In addition, households facing foreclosure grew 16 percent in the same period and 7 percent from the last three months of 2009. More homes were taken over by banks and scheduled for a foreclosure sale than in any quarter going back to at least January 2005, when RealtyTrac began reporting the data, the firm said.

“We’re right now on pace to see more than 1 million bank repossessions this year,” said Rick Sharga, a RealtyTrac senior vice president.

I imagine ONE MILLION repos will exert an amount of negative pressure on home prices in the near future. What most people don’t realize is the way in which being underwater tends to prevent a house from being put on the market. The recent rise in prices is the result of a temporary restriction in supply due to underwater homeowners being trapped in their worthless homes, not the rise in demand that would be a sign of recovery.

UPDATE: Forgive me if I’m skeptical that anything more than a handslap and a fine is meted out. “SEC charges Goldman Sachs with civil fraud in structuring and marketing of CDOs tied to subprime mortgages.”

In which SM asks me to respond to a post by Financial Times writer Martin Wolf:

I think we can say that conventional neo-classical equilibrium economics did a poor job in predicting the crisis and in suggesting what should be done in response. We can also say that neo-Keynesians pointed out some important precursors of the crisis, in particular, the destabilising role of huge private sector financial deficits in countries with large external deficits, such as the US, and the Keynesian view certainly played a big part in the post-crisis response, as did that of Milton Friedman.

Yet some would argue that economists working in the Austrian tradition were more nearly right than anybody else. In particular, they have argued that: inflation-targeting is inherently destabilising; that fractional reserve banking creates unmanageable credit booms; and that the resulting global “malinvestment” explains the subsequent financial crash. I have sympathy with this point of view. But Austrians also say – as their predecessors said in the 1930s – that the right response is to let everything rotten be liquidated, while continuing to balance the budget as the economy implodes. I find this unconvincing. Mass bankruptcy is extremely costly. Moreover, it is impossible to separate what is healthy from what is unhealthy during a general economic collapse triggered by an implosion of the financial system.

Anyway, what do readers think of the Austrian analysis? In particular, what does it imply about the future of the global monetary and global financial systems and about the right way to respond to financial crises when they occur?

1. Yes, Austrian economics does understand financial crises better than other schools of thought, even if one includes Hyman Minsky’s Financial Instability Hypothesis as a distinct economic school. The Austrian analysis is broadly correct because it a) provides a means of understanding one of the core components of modern economics that no other major economic school provides. None of the Neo-Classical, Marxian, Neo-Keynesian, or Monetarist theories of economics consider debt to be a primary aspect of economics and therefore their policy interpretations and prescriptions are all largely irrelevant with regards to modern economies with debt-based financial systems. Austrian school theory is also more robust and comprehensive, in my opinion, than the new empirical Post-Keynesianism which also attempts to account for debt and therefore is also vastly superior to the four major schools.

2. As I predicted both in 2002 and in my 2009 book, The Return of the Great Depression there is no future for the present global monetary and financial systems. The giant international banks are insolvent and the monetary systems are doomed to collapse. This means that in the interest of avoiding this collapse, the monetary systems will be unified, first on a regional and then eventually on a global basis when the regional moneys begin to break down. The correct response would be to let all of the “full faith and credit” moneys fail and be replaced by the gold standard or some other monetary standard less subject to the bank-driven inflate-and-collapse cycle that has been witnessed five times in the United States alone, but that is not going to happen at this point in time.

3. The right way to respond to financial crises is to let them play out. When a building is burning, it doesn’t matter how much damage is being inflicted by the fire, it is never the correct response to attempt extinguishing it by pouring something inflammable on it. Mass bankruptcy is certainly costly, but the only relevant point is that it is much less costly than the greater number of bankruptcies that will eventually follow combined with the immense costs of the futile atttempts to stave it off that will do little more than delay it for a time.

Moreover, it is ALWAYS impossible for a central authority to separate what is healthy from what is unhealthy, during a general economic collapse triggered by an implosion of the financial system or at any other time. Central economic planning does not work any more effectively or efficiently with regards to money and credit than it does with regards to goods and services.