Flashman Letters

Question of the day: How many greek civil Servants have been fired since 2010?

Whereas more than 1,000 Greeks were losing their jobs in the private sector every day in August, the government was assuring civil servants with lifetime tenure that their job privileges were not in danger and the so-called reserve pool was not intended for them but only for employees in the greater public sector.

Moreover, more and more people who are in work are not getting paid in what seems to be a unique case by Western European standards as companies face a drop in sales along with a liquidity squeeze as the credit crunch engulfs more and more companies.

In the meantime, many Greeks were surprised to hear the government had hired between 15,000 and 20,000 people in the public sector in various forms since the start of 2010.

via www.ekathimerini.com

Why do we listen to these clowns?

Over the weekend, the IMF held its annual meetings and a range of high profile contributors turned up to give their assessment of the state of the world economy at present.

The IMF is constantly trying to assert its dominance in the debate although its qualifications to take on this role are poor.

Just trip back to July 2007 – as the crisis was manifesting. In that month, the IMF offered an Update to its April World Economic Outlook and said:

The overall balance of risks to the global growth outlook remains tilted modestly to the downside, as it was at the time of the April 2007 World Economic Outlook. Nevertheless, there have been some changes in the IMF staff’s assessment of individual risk factors. With sustained strong growth, supply constraints are tightening and inflation risks have edged up since the April 2007 World Economic Outlook, increasing the likelihood that central banks will need to further tighten monetary policy. The risk of an oil price spike remains a concern. As discussed in the accompanying Financial Market Update, financial market risks have also increased as credit quality has deteriorated in some sectors and market volatility has increased.

A number of other risks, however, look more balanced. In particular, while the correction in the housing sector is continuing, overall downside risks related to U.S. domestic demand have diminished somewhat. Upside risks to growth in the euro area and emerging market countries discussed in the April 2007 World Economic Outlook have partially materialized and have been built into the baseline projections. Further, some progress has been made toward reducing risks of a disorderly unwinding of global imbalances, although protectionist pressures are a continuing concern.

From which you conclude they were still obsessed with inflation and had no inkling whatsoever about what was to occur in the coming year – although the portents were already clear a decade earlier as economies operating under the yoke of neo-liberalism systematically redistributed real income to profits (away from wages) and deregulated financial and labour markets.

A year later and despite the US economy slowing significantly due to the sub-prime meltdown, the IMF wrote in their World Economic Outlook Update (July 17, 2008) that:

Risks to the global growth outlook are seen as balanced around the revised baseline.

via bilbo.economicoutlook.net

Garett Jones on Stimulus - Interesting - click to link

Garett Jones of George Mason University talks with EconTalk host Russ Roberts about the workers who were hired with money from the 2009 American Recovery and Re-investment Act--the stimulus package. Jones (with co-author Daniel Rothschild) recently completed two studies based on surveys and interviews with firms who received stimulus funds and workers who work at those firms. They found that 42% of workers hired had been unemployed. The remainder came from other jobs or from outside the labor force such as retirement or school. Is 42% a big number or a small number? Jones argues it is small and defends his conclusion. The conversation also includes a discussion of the labor market generally and why the stimulus spending may not have been effective.

via www.econtalk.org

Are Psychiatric Medications Making Us Sicker? My other pet interest

Over the past half-century, the rate of schizophrenia-related disability has grown by a factor of four, and schizophrenia has come to be seen as a largely chronic, degenerative disease. A decades-long study by the World Health Organization found that schizophrenic patients fared better in poor nations, such as Nigeria and India, where antipsychotics are sparingly prescribed, than in wealthier regions such as the United States and Europe.

A long-term study by Martin Harrow, a psychologist at the University of Illinois College of Medicine, found an inverse correlation between medication for schizophrenia and positive, long-term outcomes. Beginning in the 1970s, Harrow tracked a group of 64 newly diagnosed schizophrenics. Forty percent of the nonmedicated patients recovered—meaning that they could become self-supporting—versus 5 percent of those who were medicated. Harrow theorized that those who were heavily medicated were sicker to begin with, but Whitaker suggests that the medications may be making some patients sicker.

via chronicle.com

Revisiting the Eurodebate

Here it comes: the key European politicians, especially the French and the Germans and the European Commission officials, who designed the Euro and the Eurosystem. They created a system that had a structural deflationary bias in an era of deflation, one that delivered rock-bottom interest rates to countries in the grip of land fever, and one that couldn’t cope with a banking crisis although it included the biggest banking system in the world. And then they kept putting up interest rates. What’s worse is that they now have the gall to give lectures about virtuous savers – even when they are the same individuals, like Wolfgang Schäuble, who were in power in the 1990s.

via fistfulofeuros.net

China Financial Markets » The euro once again

Europe’s travails in particular can’t be good for exports.  What’s worse, it’s now pretty much official that the euro will fail soon enough.  We have this on no less an authority than Angela Merkel.  Here is what Thursday’s Financial Times says:

Angela Merkel, German chancellor, declared on Wednesday that “the euro will not fail” after the country’s powerful constitutional court rejected a series of challenges to the multibillion-euro rescue packages agreed last year for Greece and other debt-strapped members of the eurozone.

In a passionate restatement of Germany’s determination to defend the common currency, the chancellor welcomed the court’s judgment as “absolutely confirming” her government’s policy of “solidarity with individual responsibility”.

No, I didn’t misread the article.  I just have a very different understanding of the logistics of a denial.  Last year, for example, I wrote on my blog about ferocious denials by both Spain and Portugal that they would need any official help in funding themselves.  But according to one of my favorite British television comedies, Yes, Minister, an official denial means something very different from what is intended.  “The first rule of politics,” Sir Humphrey, the wily civil servant in the show, insists is: “never believe anything until it is officially denied.”

That’s why, citing Sir Humphrey, I was pretty sure that both Spain and Portugal would need to be bailed out.  As long as they remained within the euro, I was convinced that there was no politically acceptable adjustment mechanism that would allow them to continue funding their debt in an orderly way.  One way or the other they would have to be bailed out or default, and probably both, with the first happening a few times before the second.  In the end the denial confirmed the bail out.  Sir Humphrey usually knows how such things actually work.

So of course Merkel’s denial struck me as especially interesting.  I don’t want to sound too glib or too jokey, but I wonder if there has ever been a forced devaluation that wasn’t preceded by ringing assertions from presidents and central bank governors that under no circumstance would the currency ever devalue. 

via mpettis.com

The Total Private Market's Debt Decline Is A Glaring Warning Sign

The decline in debt/GDP from this level is a signal that we are headed for another period of apprehension about investing, apprehension about borrowing, apprehension about the markets and apprehension about the direction of the country. Extended periods of apprehension, disinvestment and caution lead to deflation and deflation is much worse than inflation or disinflation because the economy, if history is our guide, will enter a severe recession or depression. Prices going down and the consumers waiting to buy is treacherous for the economy.

As you can see, the debt/GDP rose to 260% in the Great Depression, before eventually declining to 130% 15 years later. We believe we entered a secular bear market in 2000 when the dot com bubble burst. The debt-to-GDP rose to 380% as we entered the financial crisis in 2008 and, so far, that has been the peak as private debt has dropped more sharply than public debt rose, and the debt to GDP ratio rolled over to 350% currently. Why wouldn't that be a glaring warning sign that the deflation that we continually warn our readers about is right in front of us?

We think that another cause of concern should be the way the stock market has rolled over with the latest three significant rallies of the S&P 500 filled with "froth" as described below. As you can see from the second chart attached, created exclusively for Comstock by Ned Davis Research, each major component of the economy is retrenching except the Government. But the Government, traditionally the "investor of last resort," is tapped out. Not just tapped out, but the country is trapped in an ideological struggle regarding how to move forward. Can you say "impasse"?

We see a vicious downward spiral operating here. The commercial private sector is not investing, or borrowing, because it does do not see increasing demand for goods and services, broadly speaking. Quite the reverse; in fact, they fear declining demand and, as a result, are sitting on record levels of cash. So why are we surprised that they are not hiring!! The consumer sector sees a stagnant or declining job market and is retrenching and repairing its balance sheets. State and local governments will have to continue to retrench (read: lay off additional staff) and that will add to the unemployed. This leaves the Federal government in a major dilemma.

via www.businessinsider.com

The End of Sound Money and the Triumph of Crony Capitalism - David Stockman - Mises Daily

Viewed more broadly, the carnage on Wall Street in September 2008 was the inevitable crash of a 40-year financial bubble spawned by the Fed after Nixon closed the gold window in August 1971. As time passed, the Fed's market-rigging and money-printing actions had become increasingly destructive — leaving the banking system ever more unstable and populated with a growing bevy of Too Big to Fail institutions.

The 1984 rescue of Continental Illinois; the 1994 Mexican peso crisis bailouts; the Fed's 1998 life-support operation for LTCM — were all just steps along the way to the fall of 2008.

Then, faced with the collapse of their own handiwork, Washington panicked and joined the Fed in unleashing an indiscriminate bailout capitalism that has now thoroughly corrupted the halls of government, even as it has become a debilitating blight on the free market.

In this context, the linkage between printing-press money and fiscal profligacy merits special attention. In the post-TARP world, there remain no fiscal rules at all, and already we have had cash for clunkers, cash for caulkers, and under the homebuyer's credit, cash for convicts.

Indeed, my belief is that the subprime meltdown was only a warm-up. The real financial widow-maker of the present era is likely to be US government debt itself.

The sheer budgetary facts are bracing enough. It needs be recalled that fiscal year 2011, now underway, will encompass not a recession bottom but the sixth-through-ninth quarter of recovery. During this interval of purported rebound, however, the White House now projects red ink of $1.645 trillion. This means that 43 cents on every dollar spent will be borrowed, thereby generating a financing requirement just shy of 11 percent of national income.

These elephantine figures mark a big lurch southward — since deficits only half this size were expected for the current year as recently as last spring. Notwithstanding a full year of green shoots and booming stocks, however, Washington embraced a monumental round of new fiscal stimulus in December.

via mises.org

Spain Producer Price Inflation Slows - Here on Planet Spain: Things are Different PPI 7.1%

Spain’s producer-price inflation rate slowed in August on cheaper commodity prices including metals and energy after accelerating to a four-month high in July.

Prices of goods leaving Spain’s factories, mines and refineries rose 7.1 percent from a year earlier, compared with a revised 7.5 percent a month earlier, the National Statistics Institute in Madrid said today. Prices fell 0.3 percent from July.

Crude-oil prices have declined by 29 percent from a peak on April 29, though they remain up 7 percent from a year ago. Spain is more sensitive to changes in the cost of oil than other euro- area countries and inflation should fall below the euro-region average early next year, Bank of Spain Governor Miguel Angel Fernandez Ordonez said on May 23.

Spanish inflation slowed in August to the lowest rate in nine months. Consumer prices rose 2.7 percent from a year earlier down from 3 percent in July as the highest unemployment rate in Europe reined in spending.

The statistics institute originally reported annual producer price inflation of 7.4 percent in July.

via www.bloomberg.com

Currency wars

In our recent report (Dadush and Eidelman 2011) we argue that the international monetary system has performed well during an extraordinarily tumultuous time and does not need a major overhaul. The real cause of currency tensions lies in misguided domestic policies and the disequilibrium caused by the crisis in the reserve currency countries. One very important contributing factor is Chinese exceptionalism. China, the world’s largest exporter, is the only major trading nation to maintain a pegged and nonconvertible currency, and also remains almost entirely insulated from global financial markets. This situation requires reforms in China.

The implication is that reformers should focus on putting the reserve currency countries back on an even keel and on making China less exceptional. But, in fact, only incremental changes are needed in the international monetary system. In short, the rules of the game do not need a big change; rather, the big players need to raise their game. Until they do, no conceivable reform of the rules can provide stability.

via www.voxeu.org