Archive for the ‘The Economy’ Category

A perverse intellectual hierarchy

February 28, 2015 3 comments

In the sense that there now exists in the economics profession an implicit and perverse intellectual hierarchy which is premised on the understanding that the less of what you do is related to the real world, the cleverer you are. So, if you are really clever, you would do mathematical modelling of a kind that has nothing to do with the real world. You would do something on the Turing machine [a theoretical computing device] or on information cascade or some such thing. If you are a little less clever, you would do econometrics, and if you are not even that clever, you would work on monetary policy or development economics. And, if you are not even that good, you would do economic history. But if you are the worst, you would go around factories interviewing managers. So, the leadership of the profession is moving towards abstraction for the sake of abstraction.

This has resulted in the shutting down of courses such as the history of economics, history of economic thought, philosophy of economics and other such fields. Basically, teaching economics has become like one of the other trades, like becoming a plumber or a bricklayer, as if it is about providing students with a set of skills which they can apply. There is no encouragement of critical thinking or teaching of real-world issues.

Ha-Joon Chang

Categories: Uncategorized

Can Greece do a ‘Münchhausen’ and pull itself out of the monetary mire?

February 28, 2015 Leave a comment

1. “Receivables” as Percentage of GDP, Non-Consolidated Data for Ireland and Spain. Source: Eurostat.

A Cyprus style money destruction ‘solution’ for Greece is still in the cards – and I’m afraid that the continued monetary inaction of the ECB brings it closer. One might cry ‘moral hazard’ about guaranteed ‘Emergency Liduidity Assitance’ (ELA, or QE which actually works) from the ‘Eurosystem’ to the Greek banks but on this blog we did warn about the dire consequences of ECB inaction in 2011 and 2012. And we were right: these consequences – increasing deflation and crisis, higher debts compared with income – materialized and the ECB has to face its responsibilities for its inaction. Mind that, at this moment, Greece has a surplus on the current account and a primary government while it leads the other austerity countries by a lap when it comes to cutting wages, employment and entitlements and reforming the labour market. It did do its austerity homework (which is of course why its economy is in tatters). Be that as it may: until the ECB comes to its economic senses the already gasping Greek economy is increasingly smothered. And Greece will have to do a ‘Münchhausen’ to pull itself out of the monetary mire. Which is not entirely impossible, though the banks won’t like it. See graph 1.

A relatively quick short- as well as long-term fix is to increase the ‘moneyness’ and liquidity of ‘receivables’. Irish companies managed, compared with Spanish companies, to mitigate the Irish liquidity crunch by increasing the amount of receivables on their balance sheets (remember, interest rates are very low, which helps). In the end these debts have to be paid but a monetary easing of 70% of GDP, as in the Irish case, would not be bad, in Greece. The Greek government can increase the moneyness of ‘receivables’ by moving them up in the bankruptcy pecking order (they will have to get preferential treatment compared with bank debts), by enabling companies to use them (with a ‘haircut’) to pay tax arrears, by using smart technology and algorithms to enable ‘clearing’ (a matching problem). This increase of moneyness will also increase the asset value of receivables, which will make Greek companies more willing to keep them on their balance sheets.In the end, Euro’s will still be needed, but that’s why ELA was invented.

Categories: Uncategorized

The inflation / deflation chart for selected economies

February 28, 2015 2 comments

from David Ruccio


As the Economist explains, Read more…

Categories: The Economy

Kicking the can up the road… Pension wealth in the Netherlands

February 27, 2015 Leave a comment

Since 2007, the increase of the wealth of Dutch pension funds has been much larger than the value of the entire government debt. The Dutch are however still cutting pensions as the ‘risk free rate’ used to discount future obligations is decreasing. Between 1992 and 2014, average return on investment was a whopping 7,9%. In the future, this will be quite a bit lower (Back of the envelope: lower inflation:-2%. Lower increase of population: -0,5% Lower economic growth: -0,5%). The ‘risk free rate’ (which is hardly risk free, as it changes all the time) is however supposed to be 1,9% – while the real rate of return in 2014 was 14,5%….The point is that many households or building corporations (who, in the Netherlands, own a lot of houses), are eager to re-finance their mortgage and loans with a 3% new loan (which is about 50% higher than the 1,9% rate). No, that’s not risk free either. But helping households to refinance might be a less risk strategy, in a macro-economic sense, than cutting pensions. Read more…

Categories: Uncategorized

Minimum wages in European austerity countries: Greece is different (but not as you are made to expect)

February 27, 2015 Leave a comment

In Januari 2015, Germany introduced a new economy wide minimum wage of Euro 1473,–, about the same level of the Irish minimum wage and slightly higher than the French level. The mimimum wage in Greece is 684,–, considerable higher than the 390,– Estonian level but clearly below the 757,– Spanish level. See these Eurostat data. The Eurostat statisticians point out that Greece was the only country to decrease its minimum wage between 2008 and 2015 (-19%). It is interesting to compare Greece with other austerity countries, which are supposed to be a shining example for Greece. Lowering the minimum wage is clearly not a  silver bullet when it comes to job growth. Read more…

Categories: Uncategorized

Greece — the perfect example of debt deflation

February 26, 2015 2 comments

from Lars Syll irving

Deflationary policies are deflationary. To a large extent the deflation is caused by tight monetary and fiscal policies pursued by ECB. With a very defensive fiscal policy and a targeted inflation rate set at a very low level, real inflation has during the last couple of years been negative. Another consequence of the austere fiscal and monetary policies is that overall unemployment is stuck at an enormously high level.

This is deeply worrying.

So here’s a suggestion for reading …

Zoltan Pozsnar and Paul McCulley have written an absolutely splendid essay on what a liquidity trap means and why mainstream neoclassical economics has nothing to offer in way of solving the problems that it brings along – and why it is so important to get hold of the insights that Fisher, Keynes, and Minsky have given us on debt-deflation processes and liquidity traps: Read more…

Categories: depression, Greece

Falling real wages in the USA 2007- 2014

February 25, 2015 2 comments

from David Ruccio


As the Economic Policy Institute explains, Read more…

The list with the Greek reform proposals

February 24, 2015 1 comment

Here, you will find the list with the Greeks government reform proposals.

Update (14:21 CET):

(A) There is no such thing as a blueprint for an effective ‘mixed’ economy. The effective functioning of markets and the government (including taxes and spending) is based upon consistency with historically contingency. What works in the West-Germany might not work in (former) East-Germany.

(B) With this in mind, the Greek proposals seem better designed than the measures in the Cypriot Memorandum of Understanding. The Greek proposals are much less bank centered – and therewith more balanced (more bluntly: the Greek plan admits that there are actually people living in Greece).They also take the crisis into account, not just as a shock to the banking system but to the entire Greek society (and therewith the eurozone…)

(C) At least to me the Greek measures seem to be more practical and to the point than the Cypriot ones which are either incredibly vague or overly precise (see points i and m on p. 46: abolishing the siësta, with a table with office times attached). But this requires a thorough point by point comparison.

(D) The Greek proposal is less depenndent on the use of phrases like ‘comprehensive reforms’, ‘sustainable improvement’, ‘relevant elements’, ‘necessary amendments’, ‘appropriate level’, ‘effective intervention’, ‘appropriately differentiated’, ‘promptly published’ (nice one!), ‘adequate and accurate information’ etcetera, etcetera. Whisfull phrasing.

(E) The Greek proposals are more revolutionary than the Cypriot MoU, surely when it comes to taxes, the efficiency of government and the broadening of the tax basis. They may, however, also be more consistent with historically contingency – and therwith with the evolutionary survival of Greek society.

And the Cypriot government of course has: “to allow for efficient seizure of property collateral”. Please, read Dean Baker on ‘right to rent‘.

Categories: Uncategorized

The largest ‘Bild’ lie ever? Factchecking Bild-zeitung

February 23, 2015 4 comments

We wanted to make sure that the … money for Greek bank recapitalisation is for that purpose, not for recapitalisation of the government,” Dijsselbloem said.

Bild-Zeitung, the largest newspaper of Europe, owned by Axel-Springer press, tells its readers that the money used to bail out Greece is used ‘for instance’ to pay pensioners and teachers. It does not tell its readers that  by far the larger part of it is used to bail out creditors and refinance debts… Inspired by a weekend during which I did not have internet but did have  Bild-Zeitung acces (and therefore learned nothing about the macro-econmics of the situation), Inspired by the multi-layered writing of Bild, I thought this might be a way to state the Bild-framing:


(Look here for Günter Walraff, who wrote a ‘reality beats satire’ book about his stint at this journal which portrays a cynical, nihilist world. This is the way Walraff ‘celebrated’ fifty years of Bild). Read more…

Categories: Uncategorized

Is the United States again driving the world economy?

February 23, 2015 5 comments

from Dean Baker

In the late 1990s, and again in the business cycle in the last decade, the United States to a large extent was the main engine of world growth. In both cases, growth in the United States, coupled with a rising dollar, led to a growing trade deficit, which provided a boost to demand elsewhere in the world.

There are many who see this pattern repeating based on a pickup of GDP growth in 2014, coupled with considerably faster job growth. This has coincided with a sharp rise in the dollar against other major currencies. However, beyond these outward similarities, there is little basis for the view that the U.S. economy will again be the engine for world growth.

The first and most important reason why this is unlikely is the pickup in growth in the United States is largely an illusion. The economy did grow at a fairly rapid 4.1 percent annual rate in the last three quarters of 2014, but this has to be understood in the context of a first quarter when it shrank at a 2.1 percent annual rate. Read more…

Categories: The Economy

Minutes of a meeting of civil servants employed by the ECB Eurosystem: some snippets.

February 20, 2015 Leave a comment


There is a meme-war going on. One of the meme’s is that the new Greek president hired 850.000 new civil servants when he was minister of the interior in a former Greek government. And though the man clearly isn’t a new broom it is sobering to look at the graph. The total amount of employees in the Eurostat ‘Mainly government’ sector at its peak hardly surpassed 900.000. Which may have been too high but to anybody stating  this: please, show me that Greek health workers and teachers are worthless leeches instead of trusted, dedicated public workers. Which is indeed something the ECB should do more carefully, as its minutes show that fuzzy memes as the statement above (not even a half-truth) do influence the discussion. Yes, the ECB is, finally, publishing its minutes. Read more…

Categories: Uncategorized

Greek retreat from game theory

February 19, 2015 3 comments

from Lars Syll

ATHENS — I am writing this piece on the margins of a crucial negotiation with my country’s creditors — a negotiation the result of which may mark a generation, and even prove a turning point for Europe’s unfolding experiment with monetary union.

Game-Theory-Paper-Matrix-Final1Game theorists analyze negotiations as if they were split-a-pie games involving selfish players. Because I spent many years during my previous life as an academic researching game theory, some commentators rushed to presume that as Greece’s new finance minister I was busily devising bluffs, stratagems and outside options, struggling to improve upon a weak hand.

Nothing could be further from the truth.

If anything, my game-theory background convinced me that it would be pure folly to think of the current deliberations between Greece and our partners as a bargaining game to be won or lost via bluffs and tactical subterfuge.

Read more…

Categories: Uncategorized

Link of the day. The ‘mark-to-market’, household and business centered plan of the Greek government

February 18, 2015 2 comments

You can trust a con man to double down on his lying and cheating whenever something – or someone – is exposing his lies. Which is exactly what Schauble, minister of finance of Germany does. And I don’t mind. He is a politician – it is what he is supposed to do. But that’s the point. Much of the press believes him, for instance when he – or somebody from his coterie around him, like mr. D. – is talking about Greece. And he will only be as honest as the press forces – forces! – him to be. At one point, even the existence of Greek ideas and plans was put into question. Well, here they are, via a part of the Greek press which, by the way, is owned by the oligarchy. The failure of the press clearly is not caused by any kind of class struggle. It’s just bad reporting. An excerpt (mind the realist ‘mark-to-market’, non-dogmatic and even bourgeois nature of the piece): Read more…

Categories: Uncategorized

Reforms in Greece. An exemplary record. But the wrong track. 3 graphs.

February 17, 2015 3 comments

Greece is champion reformer. According to austerity mythology, we did not have a financial but a ‘rigidity’ crisis, aggravated by uncompetitive price levels. Which had to be solved with structural reforms and by bringing the price level (read: wages) down. Which is what Greece did, much more than any other country. But, as we do not have a rigidity crisis but a monetary crisis this did not work, of course. Some data: via Frances Coppola we learn that Greece has been the most ardent reformer of the entire Eurozone (graph 1, OECD data). Via Paul Krugman we learn that no country cut government expenditure as much as Greece (by a long shot: graph 2, Eurostat data). And Eurostat also teaches us that no country has been as succesful as Greece in lowering relative and even absolute prices (graph 3, Eurostat data). Coppola and Krugman are, understandable, aghast about the hypocrisy of the prime ministers of Ireland and Finland, who are lecturing Greece about something which it did much more succesfully than they did. And then there is the argument: “the Irish suffered for nothing, so the Greek have to suffer too“. Sigh.

Remark: the Krugman graph jpg has a lot of white below the actual graph.

Graph 1. OECD shows that Greece did reform


Read more…

Categories: Uncategorized

Chronicle of a Grexit foretold

February 16, 2015 8 comments

Update (CET 21:00). The ‘negotiations’ have broken down. Let’s quote Varoufakis (considering the way the ‘negotiations’ broke down some people are genuinely afraid of something, maybe it is this, emphasis added):

I am often asked: What if the only way you can secure funding is to cross your red lines and accept measures that you consider to be part of the problem, rather than of its solution? Faithful to the principle that I have no right to bluff, my answer is: The lines that we have presented as red will not be crossed. Otherwise, they would not be truly red, but merely a bluff.

But what if this brings your people much pain? I am asked. Surely you must be bluffing.

The problem with this line of argument is that it presumes, along with game theory, that we live in a tyranny of consequences. That there are no circumstances when we must do what is right not as a strategy but simply because it is … right.

Against such cynicism the new Greek government will innovate. We shall desist, whatever the consequences, from deals that are wrong for Greece and wrong for Europe. The “extend and pretend” game that began after Greece’s public debt became unserviceable in 2010 will end. No more loans — not until we have a credible plan for growing the economy in order to repay those loans, help the middle class get back on its feet and address the hideous humanitarian crisis. No more “reform” programs that target poor pensioners and family-owned pharmacies while leaving large-scale corruption untouched.

Our government is not asking our partners for a way out of repaying our debts. We are asking for a few months of financial stability that will allow us to embark upon the task of reforms that the broad Greek population can own and support, so we can bring back growth and end our inability to pay our dues.”

In ‘Chronicle of a death foretold‘ Gabriel Garcia Marquez tells the story of twins who, as they have to save their face, have to kill another man. Or at least have to show in a credible way that they intend to do so. So they set up an ambush. And tell everybody that they will kill this other man, hoping – trusting, as they live in a small village – that somebody will tell this other man to change his normal ways and to avoid the place of the ambush. An unbelievable but true string of coincidences however prevents this from happening. And the other man walks, like every other day, towards the place of the ambush. Which makes the twins run out of options and they have to kill him…

The Eruozone saga increasingly reminds me of this story.  Read more…

Categories: Uncategorized

Links. Drowning job seekers, fuzzy asset prices, the trouble with real estate banking.

February 15, 2015 3 comments

1) More than 300 people searching for work and a better life drown in the Mediterranean.

“The UN’s refugee agency, UNHCR, says more migrants are dying because search and rescue efforts have been reduced. Italy’s major patrol and rescue operation ended last year. A smaller scale EU operation, Triton, took over. The UNHCR says about 3,500 migrants died trying to cross the Mediterranean Sea to Europe in 2014.”

2) The problem with NIIP (Net International Investment Position). Does running a current account surplus for decades make a country richer? Not necessarily so. For one thing, it is quite difficult to estimate the value of ‘NIIP’. For another, the net position is the result of large gross positions, which means that a limited decline of the value assets may turn a positive net position into a negative position despite positive current account flows, which is what happened in the Dutch case. For quite some time, the decline of the value of international financial assets was larger than the (whopping) current account surpluses of the Netherlands.

3) Real-estate banking crowds out productive investment: “We also find some evidence of a financial Dutch disease – the faster the growth of financial services and the larger the lending-deposit interest spread, the slower the growth of the manufacturing sector”.

4) During the housing busts the number of houses sold often declined faster and more than prices. Why? Read more…

Categories: Uncategorized

Ruling Capital: Emerging Markets and the Reregulation of Cross-Border Finance

February 15, 2015 1 comment

Kevin Gallagher’s new book on emerging markets and the re-regulation of global finance

Categories: Uncategorized

Über-unemployment in the Eurozone: a question of design

February 13, 2015 6 comments


It’s always difficult to explain the glaring obvious.  Read more…

Categories: Uncategorized

Does Germany bail out Southern Europe? Or did Southern Europe bail out the Buba

February 11, 2015 2 comments

One of the imbalances of the Euro system are the Target2 claims. These claims are a kind national, non-government American Express credit card debts owed to foreigners which were paid down using the overdraft facility of the national private banks at the national central bank. To be able to do this, the national central bank borrows from a foreign national. These imbalances are large: many hundreds of billions of Euro. Interest rates on Target2 debts are low but as the total amount of money is huge total interest still is quite a bit of money. Germany is the main ‘foreign’ national bank. And the Bundesbank did earn a huge amount of interest:

* 3,3 billion Euro in 2011
* 6,0 billion Euro in 2012
* 4,5 billion Euro in 2013
Read more…

Categories: Uncategorized

The US labor market is failing on two fronts

February 11, 2015 Leave a comment

from John Schmitt


In a new CEPR report out today, I argue that the US labor market is failing on two fronts. The first failure is the decades-long stagnation of real wages at the middle and the bottom of the wage scale –even as earnings at the top have grown rapidly. The second failure, only apparent since the early 2000s, is the sharp deterioration in job creation.  Read more…

Categories: The Economy

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