Flashman Letters

Japan Inflation At A 32 Year High? | A Fistful Of Euros

http://fistfulofeuros.net/afoe/japan-inflation-at-a-32-year-high/

As James notes, rising inflation and falling bond yields don’t mix well in the longer term, and don’t offer much prospect of a serious market beyond BoJ purchases, unless of course the inflation is not sustainable. The black line in the following chart shows an index of inflation-linked JGB real yields, while the other two show the 7- and 10-year yields minus inflation.

Really there isn’t that much mystery about what is going on in Japan. Falling working age population is steadily reducing the country’s potential growth rate (as the chart below from the Bank of Japan illustrates), and while structural reforms may help raise productivity and offset the decline on the supply side to some extent, they won’t address the underlying structural demand shortage problem. So it could be that at the end of the day the only lasting legacy of the Abenomics experiment will be a seriously distorted economy and a pile of sovereign debt which will be hard to ever pay down and will make raising interest rates in the longer term really problematic.

84th BIS Annual Report, 2013/2014

http://www.bis.org/publ/arpdf/ar2014e.htm

A new policy compass is needed to help the global economy step out of the shadow of the Great Financial Crisis. This will involve adjustments to the current policy mix and to policy frameworks with the aim of restoring sustainable and balanced economic growth.

The global economy has shown encouraging signs over the past year but it has not shaken off its post-crisis malaise (Chapter III). Despite an aggressive and broad-based search for yield, with volatility and credit spreads sinking towards historical lows (Chapter II), and unusually accommodative monetary conditions (Chapter V), investment remains weak. Debt, both private and public, continues to rise while productivity growth has extended further its long-term downward trend (Chapters III and IV). There is even talk of secular stagnation. Some banks have rebuilt capital and adjusted their business models, while others have more work to do (Chapter VI).

To return to sustainable and balanced growth, policies need to go beyond their traditional focus on the business cycle and take a longer-term perspective - one in which the financial cycle takes centre stage (Chapter I). They need to address head-on the structural deficiencies and resource misallocations masked by strong financial booms and revealed only in the subsequent busts. The only source of lasting prosperity is a stronger supply side. It is essential to move away from debt as the main engine of growth.

This could be a very big deal

http://www.businessinsider.com/apples-plan-for-the-future-of-payments-is-coming-into-focus-2014-6

Does politics dominate economics in Eurozone crisis management?

“During the crisis, key decision makers exhibited neither political leadership nor political courage. Rather than work towards containing total losses, politics led governments to focus on shifting losses to others. The result was massive destruction in some member states and a considerably higher total cost for Europe as a whole. European institutions could have been the last line of defense against this destructive dynamic but instead served to facilitate and enable the destruction.”

His complaint will resonate with many from the smaller Eurozone economies. The text of the paper suggests that the way decisions are made in the Eurozone allows large countries to screw smaller countries, for short term economic gain, even if this damages the Eurozone as a whole.

He focuses on two ‘blunders’. The first was the meeting between French President Sarkozy and German Chancellor Merkel in Deauville in 2010, where these leaders suggested that a haircut should be imposed on private sector lenders to solvent governments that got in to funding difficulties. Ireland lost market access for its debt within weeks. However Orphanides notes that German debt became less costly as a result.

The second was in 2013, when the Eurogroup decided to impose a haircut on deposits of Cypriot banks, insured and uninsured. Although the decision was almost immediately recognised as a blunder, Orphanides justifiably asks how such a blunder could have been made. He suggests that it can be explained by the forthcoming German elections, and a need for the government to appear tough. The result was the destruction of Cypriot banks, which in turn gave Germany leverage to end the low Cypriot corporate tax rate.

It has not escaped at least one reader of this paper that such decisions invariably favour Germany. This is not the message Orphanides highlights. The abstract says that the paper is about how politics has dominated economics in crisis management. But what exactly does that mean? And is it really the case that economics is blameless here?

Take the Deauville decision. It is true that this hardly helped calm market nerves at the time, although Ashoka Mody argues that its impact on spreads was not that great. However it does seem to stretch credibility that this was a deliberate ploy by Germany to reduce its own borrowing costs. If it was, did Sarkozy also think it would reduce interest rates on French debt? A much more plausible explanation for this blunder is that Germany wanted to reintroduce some form of no bailout regime into the Eurozone. This may indeed have been a clumsy attempt to do so, but the real culprit was the absence of any clear economic mechanism that would allow the Eurozone to distinguish between sovereign debt crises where default was u

via mainlymacro.blogspot.com.es

A Tale of Two Scandals - The Thuggishness Continues

Because the Obama administration is experiencing what appears to be its own Eighteen-and-a-Half Minute moment. In a truly stunning development in the Internal Revenue Service scandal, the agency last week informed Congress that more than two years’ of Lois Lerner’s email communications with those outside that agency—from 2009 to 2011, meaning the key years at the heart of the targeting-of-conservatives scandal—have gone missing. Quite strangely. The IRS says it cannot locate them. The reason is that Lerner’s computer crashed.

What are the implications of this claim? It means no one can see any emails Lerner sent to or received from other agencies and individuals, including the White House and members of Congress.

And what is amazing—not surprising, but amazing—is that if my experience of normal human conversation the past few days is any guide, very few people are talking about it and almost no one cares.

The IRS scandal as a news story carries a stigma, and the stigma is in part due to the fact that when it broke, when Lois Lerner last year made her admission, with a planted question at an American Bar Association gathering, that the IRS had made some mistakes with conservative groups, and disingenuously suggested the blame lay with incompetents in a field office far from the Beltway, conservatives and partisans jumped. The mainstream press was inclined to believe Lerner, or believe at least that a series of mistakes had produced a small if embarrassing so-called scandal. Some conservatives, activists and partisans, not all of them sincere and not all of them serious, viewed the story primarily as another cudgel to use against the president and his party. Some no doubt viewed it as a fundraising opportunity.

The press viewed it not as a story but as a partisan political drama. And in partisan political dramas they are very rarely on the Republican side.

I haven’t ever met a reporter or producer who wasn’t a conservative who didn’t believe the IRS scandal was the result of the bureaucratic confusion and incompetence of some office workers in Cincinnati who made a mistake.

But the IRS scandal is a scandal, and if you can’t see the relation between a strangely destroyed key piece of evidence in an ongoing scandal and what happened 41 years ago with a strangely destroyed key piece of evidence in an ongoing scandal, something is wrong not with the story but with your news judgment. (We won’t even go into the second story last week, that the IRS sent a big database full of confidential taxpayer information to the FBI.)

It would be very good to see the mainstream press call for a special prosecutor, fully armed with the powers to get to the bottom of the case.

via blogs.wsj.com

Eurozone mired in recession pause

The judgement of the Committee is that, although the Eurozone’s GDP has not been shrinking since 2013Q1, the growth rate and the improvement in the labour market have been so anaemic that if output were to start contracting in the next few quarters this would not constitute a separate, triple-dip recession but rather the resumption – after a brief ‘recession pause’ – of the second post-financial crisis recession that began after 2011Q3. If the current weak recovery endures, 2013Q1 might well end up being labelled a business cycle trough. This would not be good news, as this is not the kind of expansion anyone wishes for. Economic times in the Eurozone are bad. They are bad if we are still in a recession, but they might be worse than we feared if this is what expansion looks like in the Eurozone.

via www.voxeu.org

The next twenty years are going to make this last twenty years just pale - Jet packs ?

http://cdixon.org/2014/06/15/the-next-twenty-years-are-going-to-make-this-last-twenty-years-just-pale/

If we were sent back with a time machine, even 20 years, and reported to people what we have right now and describe what we were going to get in this device in our pocket—we’d have this free encyclopedia, and we’d have street maps to most of the cities of the world, and we’d have box scores in real time and stock quotes and weather reports, PDFs for every manual in the world—we’d make this very, very, very long list of things that we would say we would have and we get on this device in our pocket, and then we would tell them that most of this content was free. You would simply be declared insane. They would say there is no economic model to make this. What is the economics of this? It doesn’t make any sense, and it seems far-fetched and nearly impossible.

Productivity driven deflation plus a huge debt overhang is a very tricky mix

http://blog.pmarca.com/2014/06/13/this-is-probably-a-good-time-to-say-that-i-dont-believe-robots-will-eat-all-the-jobs/

Progressive and smart economist Jared Bernstein has explored the productivity puzzle of robots eating all the jobs (or not). He points out that productivity growth was up 1% last year, and has averaged 0.8% since 2011. But what he really focuses on is the smooth trend that tracks through the numbers.

The trend suggests that the pace of productivity growth has decelerated since the first half of the 2000s. That begs an important question that the robots-are-coming advocates need to answer: Why a phenomenon that should be associated with accelerating productivity is allegedly occurring over a fairly protracted period where the [productivity] trend in output per hour is going the other way?

My own take. We’re still coming out of a severe macroeconomic down cycle, the credit crisis, deleveraging, and the liquidity trap. The prevailing pessimistic economic theories — the death of innovation, the crisis of inequality and yes, robots eating all the jobs — will fade with recovery.

(For bonus points, identify the other tech-driven economic force that could explain low productivity at a time of great tech advancement. My nomination — tech-driven price deflation lowers prices, reduces measured GDP and productivity, while boosting consumer welfare.)

House of debt European edition

http://www.bruegel.org/nc/blog/detail/article/1361-blogs-review-house-of-debt/

Wolfgang Münchau writes that one of the more important insights about the state of the European economy right now comes from postcode data in the US. Atif Mian and Amir Sufi find that what is outwardly disguised as a credit crunch is in reality a fall in demand for loans. Moritz Kraemer came up with corroborating evidence last week, when he did the maths on private sector debt in Europe. His analysis reads like a European version of House of Debt.

The Europeans have barely begun to deleverage. In Spain and Ireland the process has at least started. But it will take years, maybe decades, until it is completed. Atif Mian and Amir Sufi write that the pattern between debt accumulation and subsequent contraction in consumption for Europe is remarkably similar to what we document for the United States. One can simply replace European countries with states or cities within the United States and get the same picture. Adair Turner writes that the prevailing view has usually stressed supply constraints and the policies needed to fix them.

The policy focus remains on fixing the credit-supply problem, through the AQR and stress tests, and through the ECB’s own version of a funding for lending scheme, announced on June 5. An impaired banking system, it is argued, starves businesses, particularly small and medium-size enterprises (SMEs), of the funds they need to expand. But for SMEs, a shortage of customers, not a shortage of credit, constrained borrowing, employment, and output. And the customers were absent because the pre-crisis credit boom had left them over-leveraged.

Turn Detroit into Drone Valley

http://www.politico.com/magazine/story/2014/06/turn-detroit-into-drone-valley-107853.html#ixzz34lLQGpNo

But policymakers shouldn’t be trying to copy Silicon Valley. Instead, they should be figuring out what domain is (or could be) specific to their region—and then removing the regulatory hurdles for that particular domain. Because we don’t want 50 Silicon Valleys; we want 50 different variations of Silicon Valley, all unique from each other and all focusing on different domains.

Imagine a Bitcoin Valley, for instance, where some country fully legalizes cryptocurrencies for all financial functions. Or a Drone Valley, where a particular region removes all legal barriers to flying unmanned aerial vehicles locally. A Driverless Car Valley in a city that allows experimentation with different autonomous car designs, redesigned roadways and safety laws. A Stem Cell Valley. And so on.

There’s a key difference from the if-you-build-it-they-will-come argument of yore. Here, the focus is more on driving regulatory competition between city, state and national governments. There are many new categories of innovation out there and entrepreneurs eager to go after opportunities within each of them. Rethinking the regulatory barriers in specific industries would better draw the startups, researchers and divisions of big companies that want to innovate in the vanguard of a particular domain—while also exploring and addressing many of the difficult regulatory issues along the way.

Why this approach? Compared with previous innovation-cluster efforts where governments contrived to do something unnatural, this proposal flows from what governments naturally do best: create, or rather, relax laws

Read more: http://www.politico.com/magazine/story/2014/06/turn-detroit-into-drone-valley-107853.html#ixzz34metfEOI

Richard O'Connell
+34 666 24 1104
+1 646 206 4620