Flashman Letters

'Where the World Is Headed' - Click to link for an hour long panel discussion

This panel brings together prominent economists to debate a range of issues with global scope: from inequality and emerging markets to austerity policies and the impact of technology on employment. This will be a free-ranging discussion focused on where the world is headed and what can be done to improve economies and people's lives everywhere.

• Speakers: Ken Rogoff, Professor of Economics, Harvard University; Former Chief Economist, International Monetary Fund
• Nouriel Roubini, Chairman, Roubini Global Economics; Professor of Economics, Stern School of Business, New York University
• John Taylor, Mary and Robert Raymond Professor of Economics, Stanford University; George P. Schultz Senior Fellow in Economics, Hoover Institution
• Moderator: Gerard Baker, Managing Editor, The Wall Street Journal; Editor-in-Chief, Dow Jones & Company

via economistsview.typepad.com

Elliott's Paul Singer On How It All Will End: "Badly, We Guess"

This nonlinearity of leverage is a function of similar positioning and contagion. We do not believe that the system today is any safer than it was when it failed in 2007 and 2008. Global leverage is up, not down, contrary to the popular misconception. Private debt is unchanged from 2007 levels, but public debt has risen globally from $70 trillion to $100 trillion. It appears that a number of major American financial institutions have de-risked  themselves somewhat, although this is impossible to discern from publicly available filings (which is why rumor and conjecture will govern the way markets perceive large financial institutions in the next market crisis). European financial institutions still maintain more leverage and bigger derivatives books than their American counterparts, as well as large holdings of sovereign debt that they were coerced into buying as part of the “save-the-euro” panic.

In fact, the global financial system is arguably less safe than it was in 2008. The unquestioned creditworthiness of the Developed World governments ended the most intense phase of the 2008 crisis, as the financial system was ultimately all but guaranteed by governments. A catalyzing force for the next crisis might be a failure of confidence in one or more of those major governments or in China. Such a failure alone could cause major stress in markets, as either currencies or bond markets could experience sudden collapses. Also potentially impactful is one of the major lessons of 2008: It is wise to move assets and sell claims and securities immediately if a debtor or counterparty is perceived to be in trouble. This maxim could make the next market crisis play out on a hair-trigger, with a stressful lead-in and then a simultaneous rush to the exits.

Those who think the scenario above is an exaggeration should ask themselves the following question: After decades of advancements in human knowledge and purported innovations in the global financial system, why did 2008 turn into the worst financial crisis since the Great Depression? The answer is that the system was unsound, largely due to excessive leverage and the complexity of financial instruments. In the 80-plus years since the 1929 crash and the subsequent Depression, there clearly have been a large number of geopolitical and financial events, yet none of them caused financial collapse until 2008. Of course, we understand that a combination of public and private errors and misconceptions led to the financial crisis, but it was the unfettered use of leverage that made the episode pass over the line into systemic collapse.

We do not think policymakers have learned anything much from the financial crisis, but that fact can truly be demonstrated only as time passes. In our view, monetary policy extremism has papered over (no pun intended) the lack of fundamental reforms that would enable the Developed World to grow faster and more sustainably with financial institutions that are solid and robust enough to withstand the next periods of economic and financial stress. We believe the world’s financial institutions are still essentially dependent on governments, but the Developed World governments themselves are hopelessly insolvent. The insolvency may not be manifested in a market reaction tomorrow or even next year, but the numbers are obvious and compelling, not conjectural or  fanciful. Markets focus on something when they want to, not when “visionaries” think they should.

via www.zerohedge.com

Interesting.... and not the party line. Spain has not become more competetive

http://economistasfrentealacrisis.wordpress.com/2014/04/22/sector-exterior-no-hay-milagro-espanol/

Translation by Google...

As can be seen in the following chart, the trendline long-term Spanish exports identified in the chart as current-account revenues have followed an upward trend since the early 2000s, with little significant changes, with the exception of the 2009 crisis and the collapse of international trade suffered. However, the time path of imports has undergone a major deceleration subjected to sluggish domestic demand.

These trends have a twofold explanation: while imports depend on domestic disposable income, and frankly this has been reduced over the years of the crisis and macroeconomic adjustment, exports depend not only on the supply and competitiveness policies internationally but especially in foreign demand. Ie: the growth of international trade and global demand "pull" of the Spanish exports, and make the same rate as it did before the crisis practically. The policies of "supply" related to greater competitiveness are actually based policies in global demand, and not have accelerated in the last stage of adjustment, but, as can be seen in the trend line remains almost the same levels of growth that kept prior to the international crisis.

The actual situation of our external sector is confirmed by assessing the weight of Spanish exports relative to world trade in goods. If Spain had "earned competitiveness", its weight in world trade in goods would have increased accordingly. However, it has not happened.In fact, Spain has lost weight in world trade in goods, reaching to below 2000 levels.'s Hard to conclude that the year 2013 represents a real shift in a country whose productive base can not change in just two or three years, and whose improvement in current account balance is almost entirely due to the reduction in imports linked to lower disposable income.

Meanwhile, the development of imports confirms this intuition: from stagnation crisis is not so much a process of import substitution for the domestic competitiveness gain, as demand repression. Thus, despite its steep decline in 2008 and 2009, the weight of imports has not stopped growing in overall demand.

A subtle point - intereting Exports are growing because companies are redeploying resources to exporting sectors - because domestic demand sucks. Obvious, but hadn't heard that before

The idea that Spain’s export growth in the past three years is due to competitiveness improvements due to reductions in unit labour costs is debunked by El País, which surveys the opinion of the BBVA economic analysis unit, think-tank Funcas, the IMF and the Bank of Spain. While salaries have dropped relative to the eurozone average and labour productivity has improved mainly due to reductions in employment, producer and export prices have not been reduced, and profit margins have grown above the eurozone average. According to María Jesús Fernández of Funcas, Spain’s export growth is explained by the reinvestment of profit margins into the exporting sectors rather than by price competitiveness, as Spanish exporters tend to be price-takers in their markets rather than price-setters. In fact, figures from the Bank of Spain indicate that unit export prices have grown by 2.2% more than in other developed countries. 

Hans-Werner Sinn is not happy....

Likewise, Spain’s debt ratio should have fallen from 71% to 69%, but will probably increase to 99%. Greece’s debt ratio will rise from 170% to 177% (despite a 58-percentage-point debt-relief scheme in 2012), Portugal’s will surge from 108% to 127%, and France’s will rise from 86% to 96%. But, instead of ruefully admitting their failures, the governments in question are now going on the offensive by rejecting austerity categorically.

Italy’s new prime minister, Matteo Renzi, came to power on that platform. Greek Prime Minister Antonis Samaras is trying to counter his leftist rival Alexis Tsipras in the same way. Portugal’s Constitutional Court has thwarted the country’s fiscal-consolidation efforts. And France’s new prime minister, Manuel Valls, is also moving against austerity. Supposedly, everyone just wants more growth; unfortunately, when politicians talk about growth, what they usually mean is that they should be permitted to incur more public debt.

An increase in public debt causes a short-term surge in demand, helping to increase the degree of capacity utilization and keep unemployment in check. However, new debt is nothing but a form of dope, reducing pressure to take painful measures that would improve competitiveness and capacity growth.

This renewed decline in debt discipline reflects the socialization of potential bankruptcy costs among all eurozone countries by way of establishing joint-liability mechanisms. It is this de facto debt mutualization that has prompted creditors to accept lower interest rates, and it is only lower interest rates that have permitted Renzi, Samaras, Valls, and the others to distance themselves from austerity policies.

There is nothing surprising about this: When a decision-maker can claim full credit for a policy’s benefits and collectivize the costs, he will pursue the policy sooner, more quickly, and to a larger extent than he would if he had to bear the costs alone. What is remarkable is how matter-of-factly Europe’s transgressors succee

Read more at http://www.project-syndicate.org/commentary/hans-werner-sinn-laments-the-renewed-run-up-in-public-debt-in-key-eurozone-economies#Fm6pobrmtXGOvAUt.99

An optimistic look at Spain....

 

The path to recovery, though difficult and lengthy, has been relatively clear and specific. First, unit labor costs needed to decline toward productivity levels to restore competitiveness – a painful process without the exchange-rate mechanism. In fact, there has been substantial post-crisis re-convergence toward German levels.

Second, both capital and labor needed to flow to the tradable sector, where demand constraints can be relaxed as relative productivity converges. Like many other southern European countries, however, labor-market and other rigidities dramatically reduced the speed and increased the costs of structural economic adjustment, resulting in lower levels of growth and employment, especially for young people and first-time job-seekers.

But Spanish policymakers and business leaders appeared to grasp the nature of the pre-crisis economic imbalances – and the importance of the tradable sector as a recovery engine. Recognizing that the economy could not benefit from a partial restoration of competitiveness without structural shifts, the government passed a significant labor-market reform in the spring of 2013. It was controversial, because, like all such measures, it rescinded certain kinds of protections for workers. But the ultimate protection is growing employment. With a lag, the reform now appears to be bearing fruit.

Indeed, though domestic investment is constrained by credit availability, major European and Latin American multinationals have begun investing in the Spanish economy, attracted partly by its enhanced competitive posture and structural flexibility, and, on a slightly longer time horizon, by a recovery in domestic demand. Private equity is flowing in as well, not only because the valuations are attractive, but also because potential growth in Spain now seems within reach.

Read more at http://www.project-syndicate.org/commentary/michael-spence-explains-why-the-spanish-economy-is-beginning-to-attract-investors--attention#qHYvKMV51xv566vy.99

Video: Piketty, Krugman, Stiglitz, and Durlauf on 'Capital in the Twenty-First Century' - Click for 1.5 hour long video - Probably much better than reading the damned thing

"The French economist Thomas Piketty discussed his new book, Capital in the Twenty-First Century at the Graduate Center. In this landmark work, Piketty argues that the main driver of inequality—the tendency of returns on capital to exceed the rate of economic growth—threatens to generate extreme inequalities that stir discontent and undermine democratic values. He calls for political action and policy intervention. Joseph Stiglitz, Paul Krugman, and Steven Durlauf participated in a panel moderated by Branko Milanovic."

via economistsview.typepad.com

Progress Report On BOJ’s Experiment In Bond Market Destruction—Working Perfectly

In spectacular fashion, markets did say “enough” in Japan last week. Yet, interest rates did not move. Recall “important qualification coming” in the paragraph above. On Monday, April 14, 2014, and, into Tuesday, April 15, 2014, there was not a single bid for the Japanese 10-year bond. John Rubino, at DollarCollapse.com, in “Amazing Story from Japan,” quotes Reuters: “The Bank of Japan’s massive purchases of government debt hit a milestone this week, sucking liquidity out of the market to such an extent that the benchmark 10-year bond went untraded for more than a day….” Rates did not move because, for every 10-year Japanese government bond seeking a purchaser, the Bank of Japan created electronic yen (it “printed money”) and paid exactly the price necessary to hold the 10-year rate at 0.6%. The looming question is how long the Bank of Japan (or, in an entirely imaginable similar situation, the Federal Reserve) will continue printing (electronically crediting yen or dollars to the seller) when the market decides: “I’m outta’ here!”

via davidstockmanscontracorner.com

Private debt in the US - a bunch if interesting links

Private sector leverage and the risk of a credit bubble

FiveThirtyEight reports that a recent speech by Jeremy Stein, with the wonky title “Incorporating Financial Stability Considerations into a Monetary Policy Framework,” garnered attention for its bold argument that the Fed should withdraw stimulus or raise interest rates to prevent the growth of a bubble — this time in the bond market, rather than in real estate or stocks. What are the signs of a bubble in the bond market? Stein points to three things: first, the rising level of private-sector debt as a percentage of the U.S. economy; second, narrowing spreads between risk-free Treasuries and corporate bonds; and third, the growing proportion of corporate debt going to riskier companies, i.e. companies that have a greater likelihood of defaulting on their loans.

Atif Mian and Amir Sufi writes that the financial stability concerns of Governor Stein and others are based on something more than just instinct. Stein, for example, cites the work of two Harvard Business School professors, Robin Greenwood and Samuel Hanson whose research argues that a good indicator of credit market overheating is the share of all new corporate debt issues coming from low-grade issuers. The high yield issue share peaks about two years before major meltdowns we’ve seen in credit markets. The high yield share in 2012 and 2013 indicates elevated risk, but not an impending disaster. For example, the 2013 high yield share is still below the peaks seen prior to other credit crashes. This may be driven in part by the fact that investment grade firms are also issuing a ton of debt. So in some sense the denominator is rising so fast that the high yield bond issues cannot keep up with it.

via www.bruegel.org

Ashoka Mody says that recent German calls for EU treaty changes are little more than empty rhetorical finery. - Project Syndicate

Of course, when a country has run out of options, it will play along to gain access to official bailout funds. But, as Greece’s experience has demonstrated, this does not always work out as planned. Indeed, the Greek bailout – jointly funded by the EU and the International Monetary Fund – began disastrously as it delayed a much-needed debt-restructuring and demanded strict austerity. As a result, the influence of extremist political forces has grown, and a public-health tragedy is brewing. Yet Schäuble, in a seemingly interminable quest for more austerity, views Greece as a model for an even more hapless Ukraine.

Europe is in a muddle. With debt restructuring essentially ruled out and without a sizeable, politically-sanctioned central budget to relieve countries in distress, Europeans have anointed Germany as their presumptive hegemon. Germany relishes that role, but is not able to play the part.

Simply put, Germany is unwilling to spend its taxpayers’ euros to bolster Europe. The robust German economy is little more than a memory at this point. Annual GDP grew by more than 3% in 2010 and 2011, because a still-booming Chinese economy was sustaining high demand for German machines and cars; but, as China’s GDP growth has slowed, so has Germany’s, to an annual rate of less than 1%. This is likely to improve slightly, but Germany’s aging population means that its economy faces low potential growth in the long term.

With Germany lacking the economic dynamism to support Europe financially, its leaders have been unwilling to take political risks. The country’s two major political parties – the Christian Democrats and the Social Democrats – sidestepped a public dialogue on Europe in the September 2013 election that produced their governing coalition.

More revealing is Schäuble’s defense of the European Central Bank’s “outright monetary transactions” scheme (which would permit the ECB to purchase unlimited amounts of weaker eurozone countries’ government bonds). Even as Germany’s Bundesbank fiercely (and rightly) opposed the OMT program for its focus on countries’ solvency, rather than liquidity risk – thus creating a backdoor fiscal union – the government was relieved that the German Constitutional Court, assessing the scheme’s legality, ultimately passed the buck to the European Court of Justice. After all, establishing a genuine fiscal union would require strong political commitment – and considerable legwork.

The EU is an inspiring political structure that seeks to break the mold of the nineteenth-century nation-state. But progress toward that idealistic vision cannot continue to depend on shopworn symbolism.

via www.project-syndicate.org