Archive for the ‘Reflection’ Category
… the pain of Stagnation in the West (incl Japan) [via de-leveraging, balance-sheet recession, deep structural change, re-balancing of the global economy, surplus labor, ...]
Today, fears are growing that China and India are about to be the next victims of the ongoing global economic carnage. This would have enormous consequences. Asia’s developing and newly industrialized economies grew at an 8.5% average annual rate over 2010-11 – nearly triple the 3% growth elsewhere in the world. If China and India are next to fall, Asia would be at risk, and it would be hard to avoid a global recession.
In one important sense, these concerns are understandable: both economies depend heavily on the broader global climate. China is sensitive to downside risks to external demand – more relevant than ever since crisis-torn Europe and the United States collectively accounted for 38% of total exports in 2010. But India, with its large current-account deficit and external funding needs, is more exposed to tough conditions in global financial markets.
Yet fears of hard landings for both economies are overblown, especially regarding China.
While China is in better shape than India, neither economy is likely to implode on its own. It would take another shock to trigger a hard landing in Asia.
One obvious possibility today would be a disruptive breakup of the European Monetary Union. In that case, both China and India, like most of the world’s economies, could find themselves in serious difficulty – with an outright contraction of Chinese exports, as in late 2008 and early 2009, and heightened external funding pressures for India.
While I remain a euro-skeptic, I believe that the political will to advance European integration will prevail. Consequently, I attach a low probability to the currency union’s disintegration. Barring such a worst-case outcome for Europe, the odds of a hard landing in either India or China should remain low.
Seduced by the political economy of false prosperity, the West has squandered its might. Driven by strategy and stability, Asia has built on its newfound strength. But now it must reinvent itself. Japanese-like stagnation in the developed world is challenging externally dependent Asia to shift its focus to internal demand. Downside pressures currently squeezing China and India underscore that challenge. Asia’s defining moment could be hand.
A person dearest to their heart has left the Czechs & Slovaks.
Thousands of Czechs braved the freezing cold Monday in Prague to pay their respects to former President Vaclav Havel, who died Sunday at age 75. Judy Woodruff discusses the extraordinary life of the writer, dissident and president with former Secretary of State Madeleine Albright.
When the System is afraid of you, they put you away. Déjà vu Julian Assange, Bradley Manning, …
Some original words of wisdom from Václav Havel:
“Of course, in politics, just as anywhere else in life, it is impossible and it would not be sensible always to say everything bluntly. Yet that does not mean one has to lie. What is needed here are tact, instinct and good taste.” (Václav Havel, International Herald Tribune (29 October 1991))
There are no exact directions. There are probably no directions at all. The only things that I am able to recommend at this moment are: a sense of humour; an ability to see the ridiculous and the absurd dimensions of things; an ability to laugh about others as well as about ourselves; a sense of irony; and, of everything that invites parody in this world. In other words: rising above things, or looking at them from a distance; sensibility to the hidden presence of all the more dangerous types of conceit in others, as well as in ourselves; good cheer; an unostentatious certainty of the meaning of things; gratitude for the gift of life and courage to assume responsibility for it; and, a vigilant mind.
Those who have not lost the ability to recognize that which is laughable in themselves, or their own nothingness, are not arrogant, nor are they enemies of an Open Society. Its enemy is a person with a fiercely serious countenance and burning eyes. (Address upon receiving the Open Society Prize awarded by Central European University (24 June 1999))
Without any commentary. A collection of accounts and descriptions of the situation WE are in.
Jul 29th 2011, 8:45 by Buttonwood
PERHAPS the oddest thing about the debt ceiling debate to an observer from the east side of the Atlantic is the process itself. In Britain (and in the rest of Europe, as far as I am aware), the government proposes a Budget, the opposition votes against it and that is it. If the government is defeated on a key issue of financing (which the debt ceiling surely represents), then the administration resigns, an election is held and a new government comes to power. Finance is so essential to the nature of government that the idea of separating the budgeting power from the executive branch seems no way to run a country. Yesterday’s shenanigans, where the House spent all day trying and failing to pass a bill that faced automatic rejection in the Senate, resemble a Dickensian satire featuring the Circumlocution Office, a body designed to ensure that nothing gets done.
Anyway, it seems that US may soon have a problem that featured in a column a few weeks ago, running out of money. In the modern world, debt is money and money is debt; the ability to issue debt is essential to the state.
From a historian’s point of view, what is fascinating is that these problems are re-emerging after 40 years of a shift to fiat money, a change that seemed to remove all constraints on money creation. I have argued before that this shift drove most of the developments of the last 40 years from the rise of the finance sector to asset bubbles, and that the 2007/2008 crisis was a watershed moment (like the 1930s and 1970s) from which a new system will emerge. I assumed it would take a decade or so for the ramifications to work through, but the US Congress seems determined to accelerate the process.
Finance and Economics. Jul 30th 2011 | from the print edition
ECONOMIC policy in the developed world over the past 25 years has followed one overriding principle: the avoidance of recession at all costs. For much of this period monetary policy was the weapon of choice. When markets wobbled, central banks slashed interest rates. A by-product of this policy was a series of debt-financed asset bubbles. When the last of those bubbles burst in 2007 and 2008, the authorities had to add fiscal stimulus and quantitative easing (QE) to the policy mix.
The subsequent huge rise in budget deficits was largely the result of a collapse in tax revenues that had been artificially inflated by the debt-financed boom. Britain and America ended up with deficits of more than 10% of GDP, shortfalls that were unprecedented in peacetime.
Those deficits may have been necessary to avoid a repeat of the Depression. Economists will probably still be debating this issue in 75 years’ time, just as they still discuss whether Franklin Roosevelt’s New Deal programme was effective in the 1930s. But the “shock and awe” approach to Keynesian stimulus has an unfortunate consequence. Any decline in the deficit, even to a still whopping 8% of GDP, acts as a contractionary force on the economy: either the government is spending less or taxing more.
As a result governments are reluctant to cut the deficit too quickly for fear of sending their economies back into recession. But unless there is a rapid recovery, the debt will keep piling on, making the ultimate problem harder to solve.
Turning to monetary policy, interest rates are 1.5% or below in most of the developed world and are negative in real terms (the Bank of England kept rates at 2% or more for the first 300 years of its existence). In a normal recovery central banks would be looking to increase rates from crisis levels by now. But high debt ratios (particularly in the household sector) make central banks very uneasy about raising interest rates for fear of ushering in another round of the credit crunch. With the big exception of the European Central Bank, most have repeatedly postponed the moment at which monetary policy is tightened. The parallels with Japan, where interest rates have been at rock-bottom for a decade, are striking.
As for QE, it is hard to tell how successful it has been as a strategy in reviving the economy although it certainly seems to have helped to prop up equity markets. Central banks seem reluctant to push it much further at the moment. But there is no suggestion that the economy is strong enough for them actively to unwind the policy by selling assets back to the markets.
In all three cases the story is the same. Governments and central banks have thrown a lot of stimulus at the economy and the result has been a fairly sluggish recovery. They have painted themselves into a corner. They cannot go forward, in the sense that there is little political or market appetite for more stimulus. But it is also hard for them to go back.
Withdrawing stimulus is not just risky economically, but hard politically, too. In Britain a sluggish second-quarter growth rate of 0.2% has led to talk that the coalition government needs to slow the pace of its austerity programme. But if you actually look at the data, the government has barely begun its deficit-cutting work. In the first three months of the fiscal year public spending is £5.2 billion ($8.5 billion) higher than in the same period of 2010-11, or £3.6 billion higher if interest payments are excluded. An increase in joblessness, leading to higher benefit payments, is not the cause: the unemployment rate is lower than it was a year ago. A rise in value-added tax may have eaten into consumer demand (tax revenues are £5.3 billion higher than in the same period of 2010-11) but VAT also rose in January 2010 and GDP jumped by 1.1% in the second quarter of that year.
The danger for Britain is not just that its deficit-cutting strategy may have an adverse effect on growth. It is also that sluggish growth may prevent it from cutting its deficit significantly. Tim Morgan of Tullett Prebon, a broker, calculates that if the British economy grows at 1.4% annually, half the expected rate, the budget deficit will still be more than 8% of GDP in 2015.
In a sense, the bill has come due for the past 25 years. A policy of avoiding small recessions has resulted in the biggest downturn since the 1930s. Public finances turned out to be weaker than politicians thought. As a result, they have used up all their ammunition tackling the current crisis. Governments in the rich world will have very few options left if the economy weakens again.
Non-independent investment research (Saxo Bank)
STEEN’S CHRONICLE – Another step towards Crisis 2.0? by Steen Jakobsen
The Keynesian endpoint
Since the crisis hit in 2008, world policy makers have basically operated on the idea that creating more debt could create more growth – the basic tenet of classic Keynesian policy. I am increasingly convinced that we are reaching what some have dubbed the “Keynesian endpoint”, where the failure of this Keynesian approach to turn the economic ship yields to a more balanced approach to monetary- and fiscal policies (rather than bail everything out all the time). This turn will occur not because it makes sense, but because circumstances simply leave no alternative.
Time is up
The second point is the increased likelihood that “time is up”. This idea came from my friend and hedge fund manager Dan Arbess of Xerion Capital : “Here’s the thing. Every politician likes to spend, that’s how they get elected. Republicans don’t like taxes, but boy can they borrow. That game is ending so now, there are no more options for spending without taxing. It’s going to get interesting with two totally different worldviews: Democrats tax and spend, Republicans cut taxes and spend…Democrats tend to think government is the solution, Republicans think it’s the problem”. Well put and time is up for the US spending juggernaut, regardless of how it will be stopped.
If we look at key indicators for the EU and the US there is increasingly clear evidence, to which the market has been paying insufficient attention , that time is indeed up and the alarm bells are ringing:
The real risk to Italy, Belgium, Spain, Denmark and other countries remains their internal domestic economic- and political agenda: zero growth means by definition that the debt burden will increase when you are running a budget deficit. This you can live with in transition periods, but we are well into the 10th year of below long-term trend growth and in many countries barely even making it to positive growth. There is a price for this: downgrades, increased yields to finance the debt and a desperate need to keep a primary balance at zero or positive (the budget deficit before interest expenses = primary deficit).
The next few days are important as political events, but the most likely long-term impact is…surprise, surprise: more of the same:
The US dollar will continue to weaken 3-5% per year, the politicians will buy some time into the next election cycle, yields will creep higher and higher for non-core countries, equities will be over-bid relative to bonds as investors are losing faith in governments, and the disparity between the rich and poor will only yawn wider as the latter suffer on the inevitable standard of living declines that are forced upon them by wages that fail to keep pace with cost of living increases.
We have dealt with bigger crises than this before – you only need to go back to your own grandparents – they lived through wars, booms and a depression, and still created wealth beyond anyone’s dream. The big difference? They grew up respecting and expecting hard times, hard work and each other. Today we all want to believe that the last thirty years will be extended by another five to ten years before we start the rebuilding. We are now definitely in Crisis 2.0 early stages, I constantly meet clients and investors who keep complaining I’m too negative – but am I really negative, or am I merely trying to make you aware that the light at the end of the tunnel is not the exit but an approaching freight train? I hope I am wrong. I really do (and I often am) but a touch more reality would help us all.
currencythoughts.com – by Larry Greenberg
Debt Problems and the Currencies July 29, 2011
The U.S. debt crisis has been framed by analysts and investors around the political stalemate that is real and in everyone’s face day after day. The markets wonder how close to the August 2 deadline will officials delay making a deal, and the possibility of no deal until closer to mid-August emerged this week. Expectations have been lowered regarding the composition of an agreement and how much time it will buy before the next fabricated crisis surfaces as has occurred time and again in the euro area.
But a less discussed dimension of the problem is now pushing its way into the spotlight, and this concerns the tolerance of the advanced economies against fiscal and monetary restraint. Sufficient deficit reduction might not be possible under either an all-partisan Democrat plan or an all-partisan Tea Party plan. These strategies need adequate economic growth to succeed, but the U.S. economy is more crippled than generally realized.
- Real GDP expanded just 0.8% annualized in the first half of 2011 when the bulk of QE2 was provided. A year ago, the FOMC was forecasting a real GDP growth range in 2011 of 3.5-4.2%, and private-sector projections were centered somewhat above 3.0%. The optimism of these estimates highlights that the economy’s usual resilience isn’t as strong as such was.
- U.S. real GDP expanded only 1.6% in the year between 2Q10 and 2Q11 and managed only a 0.2% annualized pace during the four years between the second quarter of 2007 (just before the financial crisis began) and the second quarter of this year.
- Anemic U.S. growth is part of a fairly universal phenomenon among advanced economies. Japan’s “lost decade” between 1Q91 and 1Q01 saw real GDP there climb at a 1.1% annualized rate. In the ensuing decade between 1Q01 and 1Q11, real GDP rose even more slowly, 0.5% per annum. The 20-year growth rate between 1Q91 and 1Q11 was 0.8% per annum. In Britain where a Conservative-led government has begun massive fiscal restraint, real GDP rose less than 1.5% annualized in the first half of 2011 and 0.7% over the four quarters between 2Q10 and 2Q11. Growth since the onset of the global financial crisis four years ago has averaged negative 0.4% per year in Britain. Euroland GDP rose by a decent 2.5% over the latest four reported quarters to 1Q11, but the distribution of results among members was highly diverse and included a drop in Greek output of 4.8%. Moreover, euro area GDP during the past four years averaged just 0.1% per year.
I take away three lessons from Japan’s experience. First, the hangover from a financial system can endure more than a generation. Second, the bigger one is, the harder one can fall, and third, reining in public debt requires more than a will to act. One needs an economy that is sufficiently repaired to tolerate austerity. Otherwise, macroeconomic restraint just digs a deeper hole. The Bank of Japan has wanted to normalize rates for fifteen years but is still stymied against doing so, and Finance Ministry officials were looking for an exit strategy when debt was approaching 100% of GDP and are still waiting for the right opportunity as debt hovers near 200% of GDP now.
The U.K. experience offers more warnings to be heeded. British July purchasing manager survey results will be published next week, but recent trends through June portray a difficult time coping with fiscal austerity. The manufacturing PMI fell from 61.5 in January to 51.3 in May, while the service-sector reading declined from 57.1 at the end of the first quarter to 53.9 in June. Slow growth hampers public-sector revenues, and Britain’s budget deficit was no smaller in the first quarter of the current fiscal year than it had been in the first quarter of the previous financial year.
Economic circumstances in the euro area’s peripheral nations have been very difficult as well. Market players love to mock the “clowns” who decide policy in Europe and America but fail to fully comprehend that in representative democracies, policymakers tend to be sounding boards of viewpoints found in the rank and file citizenry, only they hold such positions more extremely. Excessive household and corporate debt tend to be a pre-existing condition for excessive government debt, and Keynesian economic theory suggests that it’s best that balance sheet reductions not be undertaken on a massive scale simultaneously in all three areas.
Another lesson for the United States from Europe is that whatever is done to cauterize the debt problem proves insufficient in the eyes of market players, who pass judgement with their money. To be sure, euro zone leaders have offered up a series of packages that treat symptoms rather than causes of the region’s fiscal mess. It has been said that if half of the concessions made eventually had been taken early in the crisis, market order would have been restored, meaning reduced peripheral bond yield spreads. I suspect not and believe also that nothing the Congress and Obama Administration undertake in the next week or two will manage to correct America’s structural problems or satisfy investors for more than a transitory while.
Italy and Spain are the two elephants in the room of PIIGS. And in light of problems surrounding the non-economical – political-agenda-only debate to raise a “Debt Ceiling” in America, market participants see no good in all that …
Liam Halligan: The West is in for a rude awakening after years of abusing ‘risk-free’ debt
The global economy faces a unique double threat. The eurozone, of course, remains on the brink of a major, perhaps terminal, crisis. Then there’s the small matter of the US Congress possibly “closing down” the government of the largest economy on Earth.
A sudden and massive re-pricing of Western sovereign risk will happen much sooner than is widely expected. For now, global investors are in denial, assessing that default risks in many of the big emerging markets are much greater than in the West.
This is nonsense – particularly when you consider that the governments of the “advanced” countries are tacitly reliant on debasing and depreciating their currencies in order to lower their liabilities, so imposing on their creditors a form of “soft default”.
At some point soon, and it brings me no pleasure to write this, private sector Western investors, together with our emerging market creditors, will drastically cut their exposure to Western sovereign debt. This will come as a rude awakening to the US and the big European sovereigns, who for years now have abused their “risk-free” status. (via)
Market participants know the facts, their problem is timing.
[On a downhill slope since 2007, actually.]
[T]he breadth of dysfunctioning systems, severity of the needed adjustments, and polarization of politics point compellingly to an unhappy ending. Investors are unnerved not because the future is uncertain but because it is bleak.
Over the weekend we were reminded again that Paul Krugman was right as he “warned from the beginning that tax cuts would be ineffective and that the proposed spending [+$700bn stimulus] was woefully inadequate. And so it proved.” Paul DeLong is sorry and explains for us the liquidity trap (for those who don’t feel it yet). Which leaves me only to mention Richard Koo and his balance sheet recession theory at the end of this … bleak … entry.
[C]ourtesy of the WSJ blog, we learn that, for the first time in history, a spokesman for Jean Claude Juncker, the PM of Luxembourg, and the head of the Eurogroup council of eurozone finance ministers, admits openly to having lied to media outlets.
“There was a very good reason to deny that the meeting was taking place.” It was, he said, “self-preservation.””
“When it becomes serious, you have to lie.” – Luxembourg PM Jean-Claude Juncker
It is a tragedy that politicians have mistaken Economics and Finance with … Politics. But only in latter occupation do you still have a pension even when you were full of c*** during your term-time.
John McCain is sponsoring a bill, S3081, which would allow for the indefinite detention of just about anyone without Mirandizing them or even charging them with a crime, period.
Patriot Act on Steroids
A bill to provide for the interrogation and detention of enemy belligerents who commit hostile acts against the United States, to establish certain limitations on the prosecution of such belligerents for such acts, and for other purposes [...]
Defines “unprivileged enemy belligerent” as an individual who:
(1) has engaged in hostilities against the United States or its coalition partners;
(2) has purposely and materially supported hostilities against the United States or its coalition partners; or
(3) was a part of al Qaeda at the time of capture.
Prohibits the use of Department of Justice (DOJ) appropriated funds to prosecute an unprivileged enemy belligerent in an Article III court. Allows the detention of an unprivileged enemy belligerent without criminal charges or trial[.]
You’ve either started a company or you haven’t.
I don’t care if you succeed or fail, if you are Bill Gates or an unknown entrepreneur who gave everything to make it work but didn’t manage to pull through. The important distinction is whether you risked everything, put your life on the line, made commitments to investors, employees, customers and friends, and tried – against all the forces in the world that try to keep new ideas down – to make something new. (via)
Kotlikoff Forecasts `Bond Market Crash’ on Federal Debt
Laurence Kotlikoff, a professor of economics at Boston University and a Bloomberg columnist, talks about the U.S. budget deficit and federal debt, and the likelihood of a “bond market crash” as a result.
We are really engaged in a long-term ponzi scheme; taking money from young people and giving to old people. [...] And the fight between Republicans and Democrats is really just a side show of what is really going on.
Any indicator shows that we are heading into a crisis. [...] It’s time to get out of US Bonds.
[US] had economic growth over 40 years. And the [debt] situation gotten worse and worse.
Kotlikoff wrote about THIS coming storm since the 90′s, see a search on Amazon and his very first account with “Generational Accounting”
‘It is the Weimar Republic; print your money to coverer your expenses.’
Had a good laugh, …
Saturday Night Live (18/04/2011), Opening Sketch;
I kinda agreed with the Republican’s idea of trickle-down economics. That’s why to me the tax cuts for the wealthy aren’t a big problem. They are the best part of the bill. You’ll watch. I predict the rich will use that extra money to go out and create jobs. Millions and millions of jobs.
It’s like Rush [Limbaugh] said on his show the other day.
I never got hired by a poor person.
After watching this analysis, you have to ask what America can afford and what not. Americas tax policy is progressive, and as far as I remember the last numbers right; the top 5% earners of America bring in +50% of aggregate tax revenue on a federal level. If I remember right. Still, Americas top tax rate is lower for the individual than in many other developed countries, ie. United Kingdom. Which hiked their highest income tax rate to 50% in a move of austerity. Because they can’t afford a lower tax rate currently during these time. Though, estimates of how much revenues the UK Treasury can expect from the hike does diverge.
America will have to re-evaluate EVERYTHING, WHEN no creditor turns up. Making a decision between soft- and hard landing for MY generation in the YEARS of stagflation to come.
On a tangent, I might want to point my reader to this;
[T]he rich are getting much, much richer, while regular people (in the developed world, which is what we’re talking about here) are at best treading water. I think that wealth brings power, and the fact that the rich are getting much, much richer relative to everyone else means that the rich also exert increasing influence over the economy, government and society. I think income mobility and equality of opportunity have declined in America over the past 40 years, to the point where America is now more segregated by class divisions than many European countries. I think a major reason for these shifts has been the increasing dominance, since the Reagan era, of an ideology that is indifferent to or actively celebrates inequality of income. I think this ideology is bad: bad for the economy, bad for society, bad for art and culture, bad for the moral character of those who subscribe to it. [And people hoping and are confident] that inequality will eventually lead to a vociferous political reaction against wealthy financial elites in America is misplaced.
[I]f we don’t agree that rich people have more political power than poor people and that they use that power to pursue their economic interests, then we’ve really got a communications problem.
Hope is a dangerous word. And elections have nothing to do with final policy and results.
I walked out of “Limitless” (Movie) and was really disappointed about how it ended, or how the screen writers decided to let it end.
Without going into too much detail; it reflects the generalised thinking of a nation on Adderall, Ritalin, Provigil and other “cognitive enhancers.” I know that is a broad brush, but after walking out of the movie, the end gave me this impression.
Somehow the screen writers must have been on some medication too while writing the script because the end of the script clearly advocates it – the use. Surely, Eddie Morra goes into politics and threatens the billionaire tycoon to go after him legally. But that is the worst lame duck excuse, to portray Eddie Morra (a user) as upright standing citizen, politician, the good cop. That is a short-cut that doesn’t work. Clearly Lindy, his girl friend, has got no clue that he is still using (the very last scene in the restaurant) – principally lying to her because he promised to get off during a scene in a hotel room. How can that be right in a relationship!?
I had hoped that he would pick himself up, get off the stuff, and be a ‘normal writer’. Living a normal life with his normal girl friend. But Hollywood doesn’t really care to advocate living within your means (which incidentally is no feat of many Americans and America itself).
I want my money back!