Tag: economics

Goldman Sachs opposes UK independence

In related news, Rapey McRaperson announced that he is opposed to women carrying handguns and pepper spray, saying that it would be a “loss/loss scenario”:

Kevin Daly, part of the investment bank’s economic team, has concluded that a
British departure from the EU would result in a “loss/loss scenario” in
which both the UK and the rest of the bloc would be damaged.
But in a note to investors, Mr Daly added that Goldman does not expect an
in/out referendum because the Tories first need to win an outright majority
and, the bank reckons, “at this stage, this doesn’t appear likely”.
Mr Daly said a UK exit would “come with a significant economic cost to the UK”
because it is “highly integrated” with the EU. The economist noted that
trade with the other 26 members of the EU accounts for 16pc of UK GDP.

He dismissed those who argue that Britain could negotiate a trade deal with
the EU once it had left. “Given the size and importance of the UK economy,
it is unlikely that the UK could negotiate the same access to the EU single
market that Switzerland and Norway have achieved,” he said.

Goldman isn’t even trying to make sense of its pro-EU position here.  Britain not only sends billions of pounds into the Brussels sinkhole every year, but has nonsensical and tremendously wasteful regulatory regimes imposed upon it, to say nothing of millions of unwanted economic migrants.  And when has being bigger and more important ever made it HARDER for a nation to pursue what it wants in negotiation?

Spain is the next deposit theft

Or, if you prefer the more genteel term, “bail-in”. Jeremy Warner warns: “Spain is officially insolvent: get your money out while you still can”

I’d not noticed this until someone drew my attention to it, but the latest IMF Fiscal Monitor,
published last month, comes about as close to declaring Spain insolvent
as you are ever likely to see in official analysis of this sort. Of
course, it doesn’t actually say this outright. The IMF is far too
diplomatic for such language. But that’s the plain meaning of its latest
forecasts, which at last have an air of realism about them, rather than
being the usual dose of wishful thinking….

All this leads to the conclusion that a big Spanish debt restructuring is inevitable. Spanish sovereign bond yields have fallen sharply since announcement of the European Central Bank’s “outright monetary transactions” programme. The ECB has promised to print money without limit to counter the speculators. But in the end, no amount of liquidity can cover up for an underlying problem with solvency.

Europe said that Greece was the first and last such restructuring, but then there was Cyprus. Spain is holding off further recapitalisation of its banks in anticipation of the arrival of Europe’s banking union, which it hopes will do the job instead. But if the Cypriot precedent is anything to go by, a heavy price will be demanded by way of recompense. Bank creditors will be widely bailed in. Confiscation of deposits looks all too possible.

I don’t advise getting your money out lightly. Indeed, such advise is generally thought grossly irresponsible, for it risks inducing a self reinforcing panic. Yet looking at the IMF projections, it’s the only rational thing to do.

The amazing thing about this isn’t that there are more deposit thefts in the works, or that a specific country has been identified.  No, the amazing thing is that this isn’t from Zerohedge, Max Keiser, or some other economic contrarian site, it’s the “assistant editor of The Daily Telegraph” and “one of Britain’s leading business and economics commentators”.

If you’ve got money in a Spanish bank, you can’t say you weren’t warned very clearly and specifically.  And if you’ve got your money in a bank in another country, such as the UK or the USA, be aware that your time is likely coming, sooner or later.  In the case of the latter, the Fed is already beginning to send signals that it is not going to “print” forever.

Reinhart and Roghoff respond

I have been following the mini-scandal of sorts in economics ever since the revelation that debt stars Carmen Reinhart and Kenneth Roghoff committed a basic Excel error in their famous paper that served as the basis for their very good 2009 book, This Time It’s Different.  I refrained from jumping into it right away because I think it is usually best to hear what both sides have to say before attempting to reach any kind of judgment on the matter.

Also, from my neo-Austrian perspective, the basic idea that economic statistics can provide legitimate and meaningful guidelines for policy actions is a dubious one at best. The recent artificial boost to GDP by means of counting R&D expenditures twice, (to put it very, very crudely), is only one of many examples of the futility of attempting to derive economic principles from analyzing government-produced statistics.

Even so, I tended to suspect that the Neo-Keynesians were exaggerating the significance of the error, since the idea that beyond a certain amount, the addition of more debt will tend to reduce one’s ability to spend is not exactly logically controversial.  The fact that Krugman and others immediately attempted to turn the matter into a policy debate was also suspicious, since the Reinhart and Roghoff paper was hardly the only one published on the subject. And, as it happens, Reinhart and Roghoff’s response indicates that their admitted mistake was considerably less significant than the Keynesians and the inflationistas would like to pretend it is.

LAST week, we were sent a sharply worded paper by three researchers from the University of Massachusetts, Amherst, at the same time it was sent to journalists. It asserted serious errors in our article “Growth in a Time of Debt,” published in May 2010 in the Papers and Proceedings of the American Economic Review. In an Op-Ed essay for The New York Times, we have tried to defend our research and refute the distorted policy positions that have been attributed to us. In this appendix, we address the technical issues raised by our critics.

These critics, Thomas Herndon, Michael Ash and Robert Pollin, identified a spreadsheet calculation error, but also accused us of two “serious errors”: “selective exclusion of available data” and “unconventional weighting of summary statistics.”

We acknowledged the calculation error in an online statement posted the night we received the article, but we adamantly deny the other accusations.

They neglected to report that we included both median and average estimates for growth, at various levels of debt in relation to economic output, going back to 1800. Our paper gave significant weight to the median estimates, precisely because they reduce the problem posed by data outliers, a constant source of concern when doing archival research that reaches far back into economic history spanning several periods of war and economic crises.

When you look at our median estimates, they are actually quite similar to those of the University of Massachusetts researchers. (See the attached table.)

Moreover, our critics omitted mention of our paper “Public Debt Overhangs: Advanced-Economy Episodes Since 1800,” with Vincent R. Reinhart, published last summer, in The Journal of Economic Perspectives. That paper, which is more thorough than the 2010 paper under attack, gives an average estimate for growth when a country’s debt-to-G.D.P. ratio exceeds 90 percent of 2.3 percent — compared to our critics’ figure of 2.2 percent. (Also see the comparisons posted by the blogger known as F. F. Wiley, including his chart, a copy of which accompanies this essay.)

Despite the very small actual differences between our critics’ results and ours, some commenters have trumpeted the new paper as a fundamental reassessment of the literature on debt and growth. Our critics have done little to argue otherwise; Mr. Pollin and Mr. Ash made the same claim in an April 17 essay in The Financial Times, where they also ignore our strong exception to the claim by Mr. Herndon, Mr. Ash and Mr. Pollin that we use a “nonconventional weighting procedure.” It is the accusation that our weighting procedure is nonconventional that is itself nonconventional. A leading expert in time series econometrics, James D. Hamilton of the University of California, San Diego, wrote (without consulting us) that “to suggest that there is some deep flaw in the method used by RR or obvious advantage to the alternative favored by HAP is in my opinion quite unjustified.” (He was using the initials for the last names of the economists involved in this matter.)

Above all, our work hardly amounts to the whole literature on the relationship between debt and growth, which has grown rapidly even since our 2010 paper was published. A number of careful empirical studies have found broadly similar results to ours. But this is not the definitive word, as a smaller number of just as scholarly papers have not found a robust relationship between debt and growth. (Our paper in The Journal of Economic Perspectives included a review of that literature.)

Researchers at the Bank of International Settlements and the International Monetary Fund have weighed in with their own independent work. The World Economic Outlook published last October by the International Monetary Fund devoted an entire chapter to debt and growth. The most recent update to that outlook, released in April, states: “Much of the empirical work on debt overhangs seeks to identify the ‘overhang threshold’ beyond which the correlation between debt and growth becomes negative. The results are broadly similar: above a threshold of about 95 percent of G.D.P., a 10 percent increase in the ratio of debt to G.D.P. is identified with a decline in annual growth of about 0.15 to 0.20 percent per year.”

It’s important to understand how deep we are into uncharted waters here, as only 8 percent of the postwar observations in advanced economies exceeded 90 percent of GDP and levels over 120 percent are almost unheard of.  But regardless, as Reinhart and Roghoff point out, there are only four options: slow growth and austerity for a
very long time, elevated inflation, financial repression and debt
restructuring.  And the only one that offers any possibility of success without massive social disruption and violence is the last one.

More importantly, as we’ll be discussing in the next round of the Inflation/Deflation debate, policy makers may not have anywhere nearly as much choice in the matter as they believe they have.

As Zerohedge notes, US Government Debt/GDP presently stands at 104.8 percent, up from 103 percent three months ago.

Of Peter, Paul, and Peng

Fortunately, as all we good Keynesians know, there is no problem with large quantities of government debt because when interest on the debt is paid out of taxation, there is no direct loss of disposable income.  It’s literally textbook economics!

“The interest on an internal debt is paid by Americans to Americans;
there is no direct loss of goods and services. When interest on the debt
is paid out of taxation, there is no direct loss of disposable income;
Paul receives what Peter loses, and sometimes – but only sometimes –
Paul and Peter are one and the same person…. In the future, some of
our grandchildren will be giving up goods and services to other
grandchildren. That is the nub of the matter. The only way we can impose
a direct burden on the future nation as a whole is by incurring an
external debt or by passing along less capital equipment to posterity.”
– Paul Samuelson, Economics, 1948

So, the USA is in good shape despite Debt/GDP passing 100 percent earlier this year. Or is it?

Foreign demand for
U.S. Treasury securities rose to a record level in February, indicating
that international investors remain confident in U.S. debt despite
budget wrangling in Washington. The Treasury
Department said Monday that foreign holdings of U.S. Treasury securities
increased 0.3 percent in February from January to a record $5.66
trillion. It was the 14th straight monthly increase.

Stolen gold in Cyprus

They took the credit money.  Now the EU is going after the real money as well:

First they purloin the savings and bank deposits in Laiki and the Bank of Cyprus, including the working funds of the University of Cyprus, and thousands of small firms hanging on by their fingertips.

Then they seize three quarters of the country’s gold reserves, making it ever harder for Cyprus to extricate itself from EMU at a later date.

The people of Cyprus first learned about this from a Reuters leak of the working documents for the Eurogroup meeting on Friday.

It is tucked away in clause 29. “Sale of excess gold reserves: The Cypriot authorities have committed to sell the excess amount of gold reserves owned by the Republic. This is estimated to generate one-off revenues to the state of €400m via an extraordinary payout of central bank profits.”

This seemed to catch the central bank by surprise. Officials said they knew nothing about it. So who in fact made this decision?

Pay no mind to the crashing gold prices, down more than $200 in less than a week. Look at what the elite financial institutions are doing, which is to say, getting their hands on as much of the so-called “barbarous relic” as they can manage.  At this point, Portugal, Italy, and any other EU member state has to be thinking about exiting the Euro before the Eurofascists can attempt to seize their gold.

UPDATE: At Goldman Sachs, a vice-president calls his clients: “Panic! Sell! Sell! Run to the safety of cash! Sell now! Sell it all!”  (hangs up, calls gold desk)  “Yeah, pick up another 10,000 ounces.”

Inflation vs Deflation X

Nate posts his latest entry in the Great Debate:

I know I said I would finally be explaining Hyper Inflation here, and I will be.  But there are a couple of points that Vox has made that I simply cannot let stand.  So as much as I loathe the call and response style of written debate, it appears I must resort to it.  I beg your indulgence….

Given that Vox acknowledges that there was a period of time when credit was contracting… and prices were going up, the actual timing of that period, be it July of 08 or Q1 09 is irrelevant.  He acknowledges that it happened.   The rest of this is elaborate hand waving.  Vox here is suggesting that the fact that the federal government is spending the new money, and that it somehow doesn’t count as inflation.   I am beginning to see the problem here.   Vox has literally just said, “Yeah but it doesn’t matter because its government spending.”  If we were arguing about the health of an economy… yes… we could certainly point to the distinction and say, “Its not real growth.”   But we’re not debating that.  We’re debating inflation vs deflation.  Inflation is never real growth.  That’s the point.  Of course its government spending.  Unless Vox wants to claim that inflation isn’t possible in a communist regime, then he must acknowledge for the purposes of this debate, the sector the increase is happening in doesn’t matter.  That just tells you who got to spend the money that was stolen from you.

Read the rest at his place.  My response, as usual, will be within one week.  At this point, all I will say is that in addition to the economics, the astute reader may also detect an aspect of the socio-sexual hierarchy in action.  I must certainly confess to an amount of wry appreciation for the irrational confidence of the alpha.

Captain Capitalism reviews RGD

It is nice to see that people are still reading RGD, even if its timelines are obviously outdated, to say nothing of incorrect.  I simply did not expect the Federal Reserve and the European Central Bank would fail to learn the lesson of the Bank of Japan and prove so stupidly unwilling to force the banks to take their medicine, thereby risking not only their banking systems, but their currencies as well as the very existence of their political unions.  But even so, the underlying principles outlined in the book remain operative, as Captain Capitalism, the author of Enjoy the Decline, points out in his review of The Return of the Great Depression:

First, the book is an outstanding, thorough, but succinct analysis and comparison of the various economic philosophies that are duking it out today.  He compares and contrasts Austrian, Keynesian, the Chicago School and Marxism in ways that shows he’s actually read vastly more books on economics and philosophy than I have and can use words like “praxeology” in a sentence.  This makes him “one of those guys” who while would be considered a Buzz Killington at a party, is the guy you’d probably defer to when it came to matters of economic history and technicality.  Second, like reading other economists, you always pick up a trick or two you weren’t aware of or observe mistakes you may have made (for example his explaining what the GDP deflator is NOT the same as the CPI may not help you pick up chicks at a bar, but will provide for some interesting adjustments to modern day RGDP).  This has not only further advanced my understanding of economics, but plugged some minor holes in my own economic theories and philosophies I’ve procrastinated plugging.  Third he writes very well and very dense, efficiently packing as much information into the fewest and optimal amount of words.  The introduction alone is a perfect synopsis that would benefit everybody in terms of “what economics is.”

I haven’t changed my mind about the eventual outcome or that we are now in the Great Depression 2.0.  I still don’t think we’re facing Fallout IV, and as the Great Debate should suffice to indicate, I remain utterly unconvinced about the inevitability of Whiskey Zulu India.

Speaking of Buzz Killington, what I find interesting is that whereas absolutely no one was interested in hearing about my book when it was first published, now people who have heard of it will seek me out in order to help them understand one facet or another of the ongoing crisis.  That is, I suspect, another negative economic indicator: the desire of people to talk about economics on social occasions.

The perpetual motion money machine

As she is one-half of the Reinhart-Roghoff team that has done some excellent work concerning why what Alan Greenspan once called the New Economy was not, in fact, anything new or different, I’m always interested in what Carmen Reinhart has to say.  I don’t necessarily agree with her on policy prescriptions, but her diagnostic take is usually insightful. She was interviewed by Der Spiegel last week:

SPIEGEL: Ms. Reinhart, central banks around the world are
flooding the markets with cheap money in order to spur economies and
support governments. Are these institutions losing their independence?
Reinhart: No central bank will admit it is keeping rates low to
help governments out of their debt crises. But in fact they are bending
over backwards to help governments to finance their deficits. This is
nothing new in history. After World War II, there was a long phase in
which central banks were subservient to governments. It has only been
since the 1970s that they have become politically more independent. The
pendulum seems to be swinging back as a result of the financial crisis.
SPIEGEL: Is that true of the European Central Bank as well?
Reinhart: Less than for other central banks, but yes. And the crisis isn’t over yet — not in the United States and not in Europe.
SPIEGEL: But the danger of such a central bank policy is already well known: It can lead to high inflation.
Reinhart: True. But it is certainly more difficult for a central
banker to raise interest rates with a debt to gross domestic product
ratio of over 100 percent than it is when this ratio stands at 39
percent. Therefore, I believe the shift towards less independence of
monetary policy is not just a temporary change.
SPIEGEL: As a historian who knows the potential long-term
consequences very well, doesn’t such short-sighted decision-making
frighten you?
Reinhart: I am not opposing this change, I am just stating it.
You have to deal with the debt overhang one way or the other because the
high debt levels are an impediment to growth, they paralyze the
financial system and the credit process. One way to cope with this is to
write off part of the debt.
SPIEGEL: You mean some kind of haircut?
Reinhart: Yes. But we are in an environment where politicians are very reluctant to do write-offs. So what happens is that money is transferred from savers to borrowers via negative interest rates.
SPIEGEL: In other words: When the inflation rate is higher than
the interest rates paid on the markets, the debts shrink as if by magic.
The downside, though, is that this applies to the savings of normal
people.
Reinhart: The technical term for this is financial repression.
After World War II, all countries that had a big debt overhang relied on
financial repression to avoid an explicit default. After the war,
governments imposed interest rate ceilings for government bonds.
Nowadays they have more sophisticated means.

The dangerous phase of the crisis that we have now entered is that even mainstream economists who understand the debt-related nature of the problem – and recall that back in 2008-2009, the only people who recognized that it was based on debt were outsiders like Steve Keen and me – are still supporting, however unenthusiastically, the attempt of the central banks to inflate their way out of the problem, even though some of them know it isn’t going to work.

Why? Because they are desperate.  They know that the alternative is either default and a short but savage depression that will absolutely ruin most of the world’s wealthy and powerful or the collapse of the global financial system and quite likely a fair amount of the various political structures as well. So, they are hoping against hope that the central banks will be successful in inflating their way out, but if one looks at the debt statistics, it is perfectly clear that the strategy is failing because debt/GDP is still growing.

“In the EU-27 the government debt-to-GDP ratio increased from 80.0 % at
the end of 2010 to 82.5 % at the end of 2011, and in the euro area from
85.4 % to 87.3 %…. In the EU-27, total government revenue in 2011 amounted to 44.7 % of GDP
(up from 44.1 % of GDP in 2010), and expenditure to 49.1 % of GDP (down
from 50.6 % in 2010).”

That’s the savage austerity of which the European Keynesians are complaining. Tax revenues are up 0.6 percent and government spending is down 1.5 percent, but the debt/GDP went up 2.5 percent anyhow.  This is why default, and the concomitant deflation, is inevitable, no matter how much the financial powers-that-be are desperately fighting it off.

The situation is even worse in the USA and Japan, where the government debt/GDP ratios have risen to 103 percent and 230 percent.  And while we don’t know when the financial engine, increasingly clogged with debt, is going to seize up, we can be certain that sooner or later it will.  It is very unlikely that either Europe or the USA are going to be given more than 20 years to muddle along and continue piling on the debt in the manner that Japan has.

The gold drain

Does something very nasty this way come?

Over the last 90 days without any announcement, stocks of gold held at Comex warehouses plunged by the largest figure ever on record during a single quarter since eligible record keeping began in 2001 (roughly the beginning of the bull market)….

JP Morgan Chase’s reported gold stockpile dropped by over 1.2 million oz.’s, or rather, a staggering $1.8 billion dollars worth of physical gold was removed from it’s vaults during the last 120 days.  Scotia Mocatta’s gold stockpile removals were nominal in size when compared to JPM’s, but registered in at over 650k oz’s of gold, or over $1 billion dollars worth of physical gold was removed from its vaults over the last 90 days.

I don’t know precisely what this signifies, but it would appear to indicate a certain lack of confidence in the system among the wealthy global elite.

More minorities, more unemployment

It has always seemed more than a little strange to me that so many Americans blithely assume that browns, blacks, and yellows who relocate to the United States are going to take on all the characteristics of white Americans by the sole virtue of their geographic relocation:

Black Entertainment Television (BET) founder Bob Johnson said Tuesday
that the nation would “never tolerate white unemployment at 14 or 15
percent” and yet unemployment for the black community has been double
that of white Americans for over 50 years….

Johnson said the challenge was to figure out why the unemployment
rate for blacks has been so high, “and if that doesn’t change,
somebody’s going to have to pay— 34 million African-Americans are not
going to leave this country, millions of African-Americans who don’t
have jobs.”

“Somebody’s going to have to pay for them. Somebody’s going to have
to take care of them, and if somebody’s going to have to take care of
them, that money’s got to come from somebody. And whoever’s paying for
it is going to be upset about it, and they’re going to start looking for
somebody to blame,” Johnson said.

It has been understood for decades that the lesser cultural differences between white Protestants and white Catholics have been sufficient to create very different outcomes in various European countries. Hence the phrase “Protestant work ethic”.

In light of this, is it not worth considering the possibility that the “new normal” of higher unemployment rates and lower labor force participation rates is at least in part the inevitable result of the 1965 and 1986 immigration acts, which have resulted in the massive influx of people with different cultures, and observably different work ethics, than white Protestant Americans?

In 1991, the Employment-Population Ratio in the USA was four points higher than in Mexico, 61-57.  It was 53 in Nigeria, 50 in France, and 45 in Italy.  This is usually blamed on lack of economic development and capital, but it seems to me that since economic development and capital are consequences of human action, not causes, it is more likely that one reason for the previously advantaged state of the US economy was the result of the unique composition of its predominantly Protestant European labor force.

Now, there are obviously a wide variety of other factors involved, but all things being equal, does it really make sense to imagine that importing workers from countries that are less productive and less inclined to work is going to increase productivity and decrease unemployment in the long run?  We already know that women are less inclined to work, and work fewer hours when they do, than men.  So, ogic suggests that the more the labor force moves away from being male, white, and Protestant, the more unemployment there will be and the lower the employment-population ratio is likely to fall.

The “New Normal” of eight percent unemployment and sub-60 percent EPR isn’t necessarily the result of the financial shenanigans or even free trade, it is also partly the result of immigration from countries where the population is less inclined to work hard. Johnson’s comments also lead to the obvious conundrum: if there are fewer people working less hard, how are they going to be able to pay for the increasing number of people not working at all?