Flashman Letters

Lessons Learned but Not Applied - Economix Blog - NYTimes.com

But in terms of the handling of the financial system, the Summers-Geithner-Lipton approach this time is at odds with the views and actions of a decade ago.

In the 1990s, they were opposed to unconditional bailouts — providing money to troubled financial institutions with no strings attached. At one point, according to Mr. Blustein’s account, they derided Madeleine K. Albright, Secretary of State, for proposing such an approach in South Korea. The Treasury philosophy was clear and tough: “a healthy financial system cannot be built on the expectation of bailouts,” Mr. Summers said in his American Economic Association speech in 2000.

via economix.blogs.nytimes.com

Two Decades Later: Nikkei and Lessons from the Fall — The American, A Magazine of Ideas

Nations rise and fall, and they stay in positions of strategic dominance or economic ascendance for different (and unpredictable) periods of time. Japan’s quest for an empire lasted half a century (from its first war with China from 1894 to 1895 to its defeat in August 1945). Japan’s quest for the leading role in the global economy lasted roughly 40 years (beginning with the end of the U.S. occupation in 1952 and ending with the economic unraveling of the early 1990s) and in its final phase it involved an economic confrontation with the United States that engendered a great deal of exaggerated confidence in Japan and deep concern and self-doubt about the nature of America’s resilience and the effectiveness of its response. In the span of two generations, the two nations confronted each other in two very different modes of rivalry, and both encounters had enormous consequence for them and for the world.

Americans are now besieged by deep economic problems almost entirely of their own making: but at this time, at least, they have hardly any reason to worry about Japan. As it moves into its new (and truly uncharted) demographic and economic era, Japan will not implode and turn into a dysfunctional polity. If the past two decades are any guide, it may not manage its retreat brilliantly, but I believe it will find ways to deal with its new challenges without causing any grave perturbations on the global scene, without generating more problems for the already overloaded decision makers in Washington, and without losing its deserved status as a well-functioning society. Japan’s demographic and economic retreat will remain a great and long-lasting concern for the Japanese—but it also amounts to one less worry for America.

via www.american.com

Technology Review: The Year in Energy

But there was still plenty of action outside the beltway, both in the United States and around the world. One of the most dramatic developments ("Natural Gas Changes the Energy Map") was the rush to exploit a vast new resource; new drilling technologies have made it possible to economically recover natural gas from shale deposits scattered throughout the country, including in Texas and parts of New York, Pennsylvania, and Ohio. Advances in drilling technology have increased available natural gas by 39 percent, according to an estimate released in June. The relatively clean-burning fuel could cut greenhouse gas emissions by becoming a substitute for coal. Natural gas might even provide an alternative to petroleum in transportation, especially for buses and taxis--if only policymakers could take advantage of the new opportunity.

via www.technologyreview.com

Japan's two lost decades: An end to the Japanese lesson | The Economist

So what is the Japanese lesson now? In many ways, the analogy is no longer terribly helpful. That is partly because the pupils are in a worse pickle than the teacher ever was. The most vulnerable countries, such as Greece, now face a risk that Japan never did: that markets will lose faith in their creditworthiness. Japan, for all its woes, has benefited from a huge pool of domestic savings and investors happier to keep their money at home than abroad. Meanwhile, the scale of the global upheaval makes Japan’s problems, which had little impact overseas and took place against a backdrop of global growth, look small by comparison. And with huge deficits in so many nations, the risk of a sudden loss of fiscal credibility is more acute than it ever was in Japan.

via www.economist.com

China Financial Markets

A big question for me is how China decides in the future to face the continuing trade-off between social stability and rapid change.  In the past it is pretty clear that China has experienced wrenching social change.  This change began from a widespread recognition during the 1970s that the Chinese model simply was not working, and that without a dramatic transformation, China was likely to collapse.  It took the brilliance of Deng Xiaoping to understand how to steer China forward without risking an even worse crisis, and the economic rewards for this transformation have been dramatic, even as the social cost of such rapid change has put increasing pressure on the political and social systems of the country.  How is China likely to face the continuing trade-off in the future?

via mpettis.com

Harpers Buffett

via www.scribd.com

News Analysis - The Worst May Not Be Over for Europe - NYTimes.com

Instead, it faces a longer-term challenge to restore the fiscal credibility of at least half the countries that use the euro. The true test for the world’s largest common currency zone, analysts say, will be whether it can withstand the economic, political and social strains once the European Central Bank begins to raise interest rates in response to economic improvements in Germany, France and other Northern European countries.

At that point, the laggards on the union’s fringe — Portugal, Ireland, Italy, Greece and Spain (the so-called Piigs) — will face even tougher choices to cope with what looks like several more years of stagnant economies, high unemployment and gaping budget deficits.

“If inflation picks up in France and Germany, the smaller economies will be left behind in stagnation and deflation,” said Jordi Galí, a Spanish economist recognized for his work on business cycles who heads the Center for Research in International Economics in Barcelona. “Such an asymmetric recovery is pretty likely, and if the E.C.B. raises rates, it could get very ugly.”

via www.nytimes.com

Financial Armageddon: Based on What?

The "experts" keep talking about what 2010 will be like now that the recession is over. All I can say is: Based on what? The shenanigans in the stock market? The happy talk coming out of Washington? The guestimates of clueless economists?

In truth, if you look at relatively recent data on sales tax collections, charitable giving, and immigration flows, among many other things, there seems to be little evidence that the secular downturn which began more than two years ago has run its course, let alone that an economic recovery is at hand:

via www.financialarmageddon.com

Smithers on 2010

● The world economy is picking up with sufficient strength to make a return to recession in 2010 or 2011 unlikely. The main risks now are for a rapid recovery with rising inflationary expectations and a further rise in asset prices.

● Fortunately we think that a relatively slow recovery is more likely, with demand constrained by tight credit conditions due to the continued reluctance of banks to expand their balance sheets.

● US equities are overpriced and more so than shares in other major markets. We suggest that investors should underweight the US in equity portfolios.

● US profit margins are at record levels. This is unusual for a recession and will no doubt produce claims that “this time it’s different” and that profit margins are not mean reverting but have moved to a permanently higher level.

● While almost anything is possible in economics, this seems extremely unlikely and a bad bet for investors to make.

● The record high levels of US margins are particularly exceptional in finance. This reflects unusually low interest rates, central bank subsidies via quantitative easing and monopolistic profits.

● While less exalted, non-financial margins are also high. This is probably due to recent exceptional cuts in employment, the weak dollar and low contributions to pension funds.

● US profits are therefore likely to disappoint expectations over the next few years as margins fall back. There is a strong chance that this will start in 2010.

● The sharp cuts in employment, which have been much more marked in the US than in other G5 countries, seem likely to be followed by a stronger bounce in US employment and wages.

● Productivity has improved much faster in the US than in other G5 countries and this is likely to reverse as the recovery strengthens.

● We see no reason for investors to hold bonds.

via ftalphaville.ft.com

BONOBO LAND: Why Standard and Poor's Are Right To Worry About Spanish Finances

According to Spanish Prime Minister José Luis Rodriguez Zapatero Spain's government is firmly committed to reducing its fiscal deficit, and is intent on lowering it as requested by the EU Commission by 1.5% of GDP annually, until it finally brings it within the EU 3 per cent of gross domestic product limit by 2013 at the latest. What's more he is quite explicit about how this is going to be possible: Spain is right now, and even as I write, on the verge of emerging from the long night of recession in whose grip it has been for the last several quarters. As such it will soon resume its old and normal path onwards down the highway of high speed growth. There is only one snag here: few external observers are prepared to share Mr Zapatero's optimism.

via bonoboathome.blogspot.com