Flashman Letters

Argentina and Greece – credible analogy or not?

The Government also sought to take advantage of the massive shift in relative prices (terms of trade) by providing incentives for import substitution. The tourism industry also grew rapidly as a result of the currency depreciation.

Before too long, the peso started appreciating again but by then the economy was on a solid growth footing with strong social welfare spending to maintain domestically-sourced growth and a booming export sector.

In the mid-2000s the Government actually had to take measures to stop the peso appreciating further given the size of its trade surplus. The central bank acquired huge stockpiles of foreign reserves (USDs mainly) by selling pesos in the foreign exchange market. The exchange rate is now relative stable at the higher value.

The foreign exchange intervention of the central bank (selling pesos) is sterilised by issuing government debt which is a quite different operation to the current ECB claims that it is sterilising its SMP. But that is another issue again.

So is any of that applicable to Greece? Of-course it is. Greece would suffer the same short-term collapse in its currency. But in Argentina’s case it is clear that people still wanted to buy the currency on foreign exchange markets even with the massive default and the plunging value.

In this report from the Banco Central de la Republica Argentina (BCRA) – Report on the foreign exchange market performance. First quarter of 2007 – you see that international buyers of the depreciating currency were many.

Here is a sequence of graphs taken from that Report that highlight the massive changes that occured once the peg was abandoned and the exchange rate liberated.

The first shows the swing in the Current Account. I know there are readers of my blog who vehemently deny that exchange rate depreciation improves competitiveness and claim that it is a neo-classical position to take to suggest such a thing. Neither is true.

Here are the facts for Argentina between 1995 to 2007:

So no-one would want a currency in free fall? The second graph shows the movement in USD reserves held by the BCRA between 1999 and 2007. They nearly ran out in 2002. The question you need to ask yourselves: where did they get these dollars from?

The final graph in this sequence shows the volumes of foreign exchange transactions for Argentina between 2003 to 2007. It is hardly descriptive of a necrotic foreign exchange sector.

It is true that the Greeks do not have large quantities of natural resources like Argentina did when it defaulted and floated in 2001-02 but it is equally untrue to say it has no desirable assets that are exchange rate sensitive. I noted its tourism capacity

via bilbo.economicoutlook.net

Monetising the… ECB: The latest insult to be added to Greece’s multiplying injuries | Yanis Varoufakis

Still, during that yearlong folly, the ECB accumulated a large number of peripheral government bonds, which it purchased at so-called ‘distressed’ prices; i.e. at a large discount. In the case of the Greek bonds that were thus purchased (and which matured last week), even though the ECB does not tell us how much it paid for them, my information is that it paid less than 64 cents to the euro. In other words, the Greek government bonds that matured last week, owned by the ECB, had a face value of €5.6 billion but cost the ECB only €3.6 billion. Which means that, last week, the Greek government handed over to the ECB €2 billion plus 55.6% interest for two years in addition to the monies that the ECB spent in order to purchase these bonds. If this is not usury, I know not what is.

ECB defenders may say that these ‘profits’ will eventually be returned to Greece, assuming that the Central Banks of the surplus states agree. Perhaps they will. What they forget, however, is that had the ECB not purchased these Greek bonds, they would have been haircut last year, with the so-called PSI of early 2012, and then again last December with the so-called ‘debt buyback’. In short, the bonds until recently held by the ECB of €5.6 billion face value would have shrunk to less than €1 billion (the rest constituting the haircut). Noting that the ECB’s purchase of these bonds did nothing whatsoever to help Greece, the end effect of the ECB’s action was to put the Athens government in the situation it found itself last week: of having to borrow €4.2 billion from the ESM and to add to this pure blood money (i.e. the savings it made by cutting savagely on health, education, pensions, disabled people’s benefits etc.) equal to €1.4 billion in order to redeem the ECB owned Greek government bonds to the full, thus creating the aforementioned €2 billion profit for the ECB. In total, the cost to the Greek state of the ECB’s intervention (taking into consideration the extent to which this debt would have been haircut without the ECB’s intervention) comes to a staggering €4.6 billion. Money that is now being taken out of the Greek economy in ways that crush Greece’s society.

In short, had the ECB not tried to ‘help’ Greece during 2010/11 (by buying these bonds secondhand), the Greek government would now be able either to avoid borrowing the last tranche of €4.2 billion from the ESM or to borrow it in order to invest in our suffering people and/or economy.

Many lament that the Eurozone is a perverse economy in that it has a Central Bank without a state to direct it and states without a Central Bank to back them up. In fact, the situation is worse, as the above tale demonstrates: The Eurozone has a Central Bank that, even when it tries to help its weakest members in the midst of a vicious crisis, it ends up weakening them further; operating unwittingly as a giant squid on the face of their societies.

via yanisvaroufakis.eu

Why Is Europe So Messed Up? An Illuminating History : The New Yorker

Membership of the common currency prevented individual countries from printing money and devaluing their currencies, which is what the United States had done. Blyth notes:

If states cannot inflate their way out of trouble (no printing press) or devalue to do the same (non-sovereign currency), they can only default (which will blow up the banking system, so it’s not an option), which leaves internal deflation through prices and wages—austerity.

Theoretically, there is another option: fiscal stimulus in the form of tax cuts and more government spending. But that, too, is effectively ruled out. Under the terms of the euro zone’s comically misnamed Stability and Growth Pact, countries like France and Italy, which have budget deficits larger than three per cent of G.D.P., are legally obliged to cut spending, even though doing so is sure to depress the economy further, leading to lower tax revenues and bigger deficits. Meanwhile, member countries that have a budget surplus, particularly Germany, refuse to help their neighbors by introducing a stimulus.

It’s all quite mad, but that doesn’t mean it will end anytime soon. Indeed, about the only things that seem likely to change the situation are another blow up in the bond markets or a political revolution in a member state. So far, Mario Draghi, the Italian financier who took over as the chairman of the E.C.B. in 2011, has managed to prevent the first of these things from happening. And despite mass protests from Athens to Madrid, the pro-euro political establishment has held onto power.

via www.newyorker.com

Guest Post: Centralization And Sociopathology | Zero Hedge

As C.D. observes, once sociopaths rule an organization or nation, they create a zombie army of secondary sociopaths beneath them as those who resist are undermined, banished, fired or exterminated. If there is any lesson to be drawn from Iraq, it is how a single sociopath can completely undermine and destroy civil society by empowering secondary sociopaths and eliminating or marginalizing anyone who dares to cling to their humanity, conscience and independence.

 

"Going along to get along" breeds passive acceptance of sociopathology as "the new normal" and mimicry of the values and techniques of sociopathology as the ambitious and fearful (i.e. almost everyone) scramble to emulate the "successful" leadership.

 

Organizations can be perverted into institutionalizing sociopathology via sociopathological goals and rules of conduct. Make the metric of success in war a body count of dead "enemy combatants" and you'll soon have dead civilians stacked like cordwood as proof of every units' outstanding success.

 

Make lowering unemployment the acme of policy success and soon every agency will be gaming and manipulating data to reach that metric of success. Make higher grades the metric of academic success and soon every kid is getting a gold star and an A or B.

 

Centralization has another dark side: those ensconced in highly concentrated centers of power (for example, The White House) are in another world, and they find it increasingly easy to become isolated from the larger context and to slip into reliance on sycophants, toadies (i.e. budding secondary sociopaths) and "experts" (i.e. apparatchiks and factotums) who are equally influenced by the intense "high" of concentrated power/wealth.

 

Increasingly out of touch with those outside the circle of power, those within the circle slide into a belief in the superiority of their knowledge, skills and awareness--the very definition of sociopathology.

 

Even worse (if that is possible), the incestuous nature of the tight circle of power breeds a uniformity of opinion and ideology that creates a feedback loop that marginalizes dissenters and those with open minds. Dissenters are soon dismissed--"not a team player"-- or trotted out for PR purposes, i.e. as evidence the administration maintains ties to the outside world.

 

Those few dissenters who resist the siren song of power soon face a choice: either quietly quit "to pursue other opportunities" (the e

via www.zerohedge.com

Washington gets explicit: its 'war on terror' is permanent | Glenn Greenwald | Comment is free | guardian.co.uk

On Thursday, the Senate Armed Services Committee held a hearing on whether the statutory basis for this "war" - the 2001 Authorization to Use Military Force (AUMF) - should be revised (meaning: expanded). This is how Wired's Spencer Ackerman (soon to be the Guardian US's national security editor) described the most significant exchange:

"Asked at a Senate hearing today how long the war on terrorism will last, Michael Sheehan, the assistant secretary of defense for special operations and low-intensity conflict, answered, 'At least 10 to 20 years.' . . . A spokeswoman, Army Col. Anne Edgecomb, clarified that Sheehan meant the conflict is likely to last 10 to 20 more years from today - atop the 12 years that the conflict has already lasted. Welcome to America's Thirty Years War."

That the Obama administration is now repeatedly declaring that the "war on terror" will last at least another decade (or two) is vastly more significant than all three of this week's big media controversies (Benghazi, IRS, and AP/DOJ) combined. The military historian Andrew Bacevich has spent years warning that US policy planners have adopted an explicit doctrine of "endless war". Obama officials, despite repeatedly boasting that they have delivered permanently crippling blows to al-Qaida, are now, as clearly as the English language permits, openly declaring this to be so.

It is hard to resist the conclusion that this war has no purpose other than its own eternal perpetuation. This war is not a means to any end but rather is the end in itself. Not only is it the end itself, but it is also its own fuel: it is precisely this endless war - justified in the name of stopping the threat of terrorism - that is the single greatest cause of that threat.

In January, former Pentagon general counsel Jeh Johnson delivered a highly-touted speech suggesting that the war on terror will eventually end; he advocated that outcome, arguing:

'War' must be regarded as a finite, extraordinary and unnatural state of affairs. We must not accept the current conflict, and all that it entails, as the 'new normal.'"

In response, I wrote that the "war on terror" cannot and will not end on its own for two reasons: (1) it is designed by its very terms to be permanent, incapable of ending, since the war itself ironically ensures that there will never come a time when people stop wanting to bring violence back to the US (the operational definition of "terrorism"), and (2) the nation's most powerful political and economic factions reap a bonanza of benefits from its continuation. Whatever else is true, it is now beyond doubt that ending this war is the last thing on the mind of the 2009 Nobel Peace Prize winner and those who work at the highest levels of his administration. Is there any way they can make that clearer beyond declaring that it will continue for "at least" another 10-20 years?

The genius of America's endless war machine is that, learning from the unplesantness of the Vietnam war protests, it has rendered the costs of war largely invisible. That is accomplished by heaping all of the fighting burden on a tiny and mostly economically marginalized faction of the population, by using sterile, mechanized instruments to deliver the violenc

via www.guardian.co.uk

Pettis: Excess German Savings, not Thrift, Caused the European Crisis « naked capitalism

Not surprisingly, given the enormous optimism that accompanied the creation of the euro, the latter happened. As German money poured into Spain, helping ignite a stock and real estate boom, ordinary Spaniards began to feel wealthier than they ever had before, especially those who owned their own homes. Thanks to this apparent increase in wealth, they reduced the amount they saved out of current income, as households around the world always do when they feel wealthier. Together the reduction in Spanish savings and the increase in Spanish investment (in infrastructure and real estate) was enough to absorb the full extent of Germany’s export of excess savings.

But at what cost? The imbalance created within Europe by German policies to constrain consumption forced Spain into increasing consumption and boosting investment, much of the latter in wasted real estate projects (as happened in every one of the deficit countries that faced massive capital inflows). There are of course no shortage of moralizers who insist that greed was the driving factor and that Spain wasn’t forced into a consumption boom. “No one put a gun to their heads and forced them to buy flat-screen TVs”, they will say,

But this completely misses the point. Because Germany had to export its excess savings, Spain had no choice except to increase investment or to allow its savings to collapse, with the latter either in the form of a consumption boom or a surge in unemployment. No other option was possible.

To insist that the Spanish crisis is the consequence of venality, stupidity, greed, moral obtuseness and/or political short-sightedness, which has become the preferred explanation of moralizers across Europe begs the question as to why these unflattering qualities only manifested themselves after Spain joined the euro. Were the Spanish people notably more virtuous in the 20^th century than in the 21^st? It also begs the question as to why vice suddenly trumped virtue in every one of the countries that entered the euro with a history of relatively higher inflation, while those eastern European countries with a history of relatively higher inflation that did not join the euro managed to remain virtuous.

The European crisis, in other words, had almost nothing to do with thrifty Germans and spendthrift Spaniards. It had to do with policies aimed at boosting German employment, the secondary impact of which was to force up German national savings rates excessively. These excess savings had to be absorbed within Europe, and the subsequent imbalances were so large (because German’s savings imbalance was so large) that they led almost inevitably to the circumstances in which we are today.

For this reason the European crisis cannot be resolved except by forcing down the German savings rate. And not only must German savings rates drop, they must drop substantially, enough to give Germany a large current account deficit. This is the only way the rest of Europe can unwind the imbalances forced upon the region in a way that is least damaging to Europe as a whole. Only in this way can countries like Spain stay within the euro while bringing down unemployment.

But lower German savings don’t mean that German families should become less thrifty, only that the average German household should be allowed to retain a much larger share of what Germany produces. If Berlin were to cut consumption taxes, or cut income taxes for the lower and middle classes, or force up wages, total German consumption would rise relative to GDP and so national savings would fall – without requiring any change in the prudent behavior of German households.

To ask Spanish households to be more “German” by saving more is not only impractical in an economy with 25 percent unemployment (it is hard for unemployed workers to increase their savings), it is counterproductive. Lower Spanish consumption can

via www.nakedcapitalism.com

The Ugly Truth Behind Spain's First Trade Surplus In Over 40 Years | Zero Hedge

Earlier today, Spain reported its first trade surplus since 1971, with exports of €20.3 billion finally surpassing imports of €19.7 billion and ending over four decades of constant trade deficits. Congratulations. That was the good news. The bad news is how this number came about. Because while the country will mark a GDP benefit as a result of the net trade number, the reality is that it was not due to a jump in exports, which rose by a lethargic €400MM Y/Y - hardly the stuff to write home about as can be seen on the chart below.

It is the second chart, however, that tells the true story of Spain's economy: that of imports, which in a stable or growing economy would be, well, stable or growing. Instead, Spanish imports collapsed by €3.5 billion Y/Y: the biggest such downside annual drop since the start of the depression in 2008.

via www.zerohedge.com

Blind on purpose: equilibrium as a conceptual filter in economics

One of the earliest insights of economics—it certainly goes back to Smith—is that aggregate patterns [in the economy] form from individual behavior, and individual behavior in turn responds to these aggregate patterns: there is a recursive loop. It is this recursive loop that connects with complexity. Complexity is not a theory but a movement in the sciences that studies how the interacting elements in a system create overall patterns, and how these overall patterns in turn cause the interacting elements to change or adapt. It might study how individual cars together act to form patterns in traffic, and how these patterns in turn cause the cars to alter their position. Complexity is about formation—the formation of structures—and how this formation affects the objects causing it.

To look at the economy, or areas within the economy, from a complexity viewpoint then would mean asking how it evolves, and this means examining in detail how individual agents’ behaviors together form some outcome and how this might in turn alter their behavior as a result. Complexity in other words asks how individual behaviors might react to the pattern they together create, and how that pattern would alter itself as a result. This is often a difficult question; we are asking how a process is created from the purposed actions of multiple agents. And so economics early in its history took a simpler approach, one more amenable to mathematical analysis. It asked not how agents’ behaviors would react to the aggregate patterns these created, but what behaviors (actions, strategies, expectations) would be upheld by—would be consistent with—the aggregate patterns these caused. It asked in other words what patterns would call for no changes in micro-behavior, and would therefore be in stasis, or equilibrium. (General equilibrium theory thus asked what prices and quantities of goods produced and consumed would be consistent with—would pose no incentives for change to—the overall pattern of prices and quantities in the economy’s markets. Classical game theory asked what strategies, moves, or allocations would be consistent with—would be the best course of action for an agent (under some criterion)—given the strategies, moves, allocations his rivals might choose. And rational expectations economics asked what expectations would be consistent with—would on average be validated by—the outcomes these expectations together created.)

This equilibrium shortcut was a natural way to examine patterns in the economy and render them open to mathematical analysis. It was an understandable—even proper—way to push economics forward. And it achieved a great deal. ...  But there has been a price for this equilibrium finesse. Economists have objected to it—to the neoclassical construction it has brought about—on the grounds that it posits an idealized, rationalized world that distorts reality, one whose underlying assumptions are often chosen for analytical convenience. I share these objections. Like many economists I admire the beauty of the neoclassical economy; but for me the construct is too pure, too brittle—too bled of reality. It lives in a Platonic world of order, stasis, knowableness, and perfection. Absent from it is the ambiguous, the messy, the real.

via physicsoffinance.blogspot.com.es

Prices are being bid up today to give us a low return world tomorrow - The myth of liquidity and bubbles in financial markets

And this basic fact: that it is the balance between real flows that is mostly behind the abnormal behavior in financial markets is wildly misunderstood. Here is a quote from the Financial Times piece:

"(Quantitative easing) has lowered interest rates on government bonds, forcing investors to search elsewhere for yield. But what has intensified the crunch is that, while central banks have been gobbling up bonds, the supply of assets has declined."

Why is the supply of assets declining? There must be a reason why companies or individuals do not borrow (or borrow less). Equilibrium is about demand and supply. Why is it that companies are not borrowing in what seems to be extremely favorable financial conditions? When asset prices are too high and the cost of capital is below its fundamental value we should observe an excessive amount of (real) investment. But we do not see it. Isn't it more natural to think about an equilibrium where relative high saving and low investment are resulting in low returns and yields across all assets? It is, but it is probably less interesting to write an article about it.

The final confusion is about how low interest rates (or equilibrium returns) should be reflected in asset prices. If markets suddenly learn that the fundamentals of the world economy are pushing the real rate on safe assets down, we expect asset prices to increase to adjust to this new equilibrium. What we should NOT expect is that stock market returns are higher going forward. In fact, stock prices should go up so that equilibrium returns are lower across all asset classes. And this is the biggest source of confusion in the commentary we often read about the stock market rally. The question is always: "How long will the rally last?" as opposed to "Are current stock prices supported by fundamentals?" Bubbles occur when markets think in terms of arrows and not in terms of levels. Some of the rally in the stock market now, as well as in 2003-2007, is associated with the fact that the market is learning that interest rates and equilibrium returns are going to be lower for longer than what they though (this is what some call the search for yield). Asset prices increase to reflect this new equilibrium. But this increase, this "rally", leads to a reading in terms of the high short-term returns that it has generated. And then investors extrapolate and assume that they have finally found a place where yields are high! This is a bubble. When asset prices are not consistent with fundamentals.

The current value of the stock market is consistent with a world where returns are likely to remain low (by historical standards) across all assets, and this is why stock prices are high. But this story is inconsistent with a world where stock prices keep going up and generate an excessive return in the future. If we keep looking at the stock market in terms of arrows we will end up once again in a very unstable world. And it will not be the liquidity of central banks who caused it but the lack of understanding about some basic principles of asset pricing.

via fatasmihov.blogspot.com.es

Just in case there was any doubt: Feces Contaminates More Than Half of U.S. Public Pools

Human feces taint more than half of public swimming pools, a finding U.S. health officials are using to urge better personal hygiene as the summer months approach.

via www.bloomberg.com