Cynical Caption Needed!

"This is a demand curve. It is pointing down as you can see."

“They talked a little bit about some possible measures that would spur investment and increase economic growth and they also talked about some measures that could address the long-term fiscal situation in this country.”

[...]

Obama plans to give an address on the economy shortly after the U.S. Labor Day holiday, which is Sept. 5. In conjunction with actions to shrink the nation’s long-term deficit, Obama is considering steps to give a quick boost to employment, including an expanded infrastructure spending program, tax incentives for hiring workers, a cut in the payroll tax paid by employers and worker retraining programs. (via)

Osborne decided to give booze lovers a headache for their wallets.

Budget 2011/12 Key points

• Fuel duty to be cut by 1p and expected 4p rise cancelled – all paid for by a £2bn tax on oil companies,
• Further £630 increase in personal tax allowance (then at £8,105) from April 2012,
• Cut in corporation tax by 2% from April 2011, then to drop by 1% in each of the next three years to reach 23%,
• Supplementary tax on North Sea oil firms (declining business/declining revenues) to rise from 20% to 32%,
• Loss tax revenue income to be off-set with higher bank levy,
• Non-domiciled taxpayer have to pay more per annum,
• Vehicle excise duty will rise in line with inflation, except heavy goods vehicles,
• Financial help for 10,000 first-time buyers to get on property ladder,
• Council tax to be frozen or reduced this year in every English council,
• Tobacco duty rates up by 2% above inflation from 28 March, and alcohol duty rises – 4p extra on a pint, 15p on a bottle of wine and 54p on a bottle of spirits,
• 2011 growth forecast downgraded from 2.1% to 1.7% and inflation set to remain between 4% and 5% in 2011, falling to 2.5% in 2012,
• Borrowing to fall to £122bn next year, dropping to £29bn by 2015-16 and national debt forecast to be 60% of national income this year, rising to 71% in 2012 before falling to 69% by 2015.

Of Note; From April 2012, people who leave 10% or more of their estate to charity will receive a 10% reduction in their inheritance tax bill. The government estimates this will bring in an extra £300 million for charities.

And see the last two bullet points from the Budget (Government Forecast) – they get costs under control, but not able to pay down the debt burden. But we (UK) are just into year one of austerity, lets see in 3 years and discuss then.

The extra borrowing is the inevitable consequence of higher inflation and slower growth, which the OBR expects to push up the cost of benefits and debt interest” Stephanie Flanders, Economics editor, BBC News.

Everything at-a-glance, more detail on the forecast for borrowing/debt levels and growth here from the BBC. And here the material collected from the Telegraph.

I really waiting for tomorrows daily newspapers and their Op-Eds considering the budget (eg BBC Online here and here), I am certain that the habitual binge drinking nation frowns facing the higher levy on booze. Econometricians can argue; this higher levy will bring in sizeable revenues, “UK recently topped a poll as Europe’s heaviest alcohol consumers“, and might avert many cases of ‘one too much’. But it also adds to the Misery Index (see yesterday).

To be honest, Osborne can’t really be bothered. I am neither bothered or affected too. It just makes a great headline. Doesn’t it!

Update Saturday 26/03/2011

Britain’s budget – A bet on globalisation (Audio discussion from The Economist)

As George Osborne sticks firmly to Plan A, our correspondents discuss the political and economic impact of Britain’s spending proposals.

• Nothing material [...] or significant [...] small scale
• Inflation is a constraint to new budget measures and speed of austerity
• Signal to corporations to keep on jobs as he cut corporations tax [...] saying we would like to have you here – creating jobs
• 50p income tax rate to be discussed, very likely not stay for long
• Osborne and Cameron spread and honed the message well that Labour did wreck this economy and that they inherited that mess
• “THIS is not a tax-raising budget. But nor can we afford a giveaway.”

The Lights Have Officially Gone Out In the US

The last major GE factory making ordinary incandescent light bulbs in the United States is closing this month, marking a small, sad exit for a product and company that can trace their roots to Thomas Alva Edison’s innovations in the 1870s. (via Washington Post)

[I]nvented by one of America’s Greatest inventors (if not THE greatest), of which the US was the premiere manufacturer, now being manufactured ENTIRELY overseas — Asia. More via zero-hedge.

This “event” does acutally support the theory that the USofA goes down the drain with a whimper, and not with a big bang. Further analysis of Americas rhetoric & foreign affairs here (video).

“If you want to be indispensable, do something indispensable. If want to be exceptional, do something exceptional. [...] The USA has so little to offer. [...] The world is getting fed up by this oppression.”

Documentary “Overdose – The Next Financial Crisis”

I just noticed that the documentary about the next financial crisis (sovereign debt + fiscal and monetary policy) was picked-up by Journeyman Pictures and the production company removed it from YouTube (Facebook). Just wanted to let you know that you still can watch it *for free* as some people have made their copies already …

This 46-minute documentary is a fast-paced look at how we got into the financial crisis and how our way of dealing with it is setting the stage for the next crisis. It is co-written and narrated by Cato senior fellow Johan Norberg, author of In Defense of Global Capitalism and Financial Fiasco: How America’s Infatuation with Home Ownership and Easy Money Created the Economic Crisis.

History doesn’t repeat itself, but it rhymes. *Mark Twain

Official Trailer – [What happens when Countries or Currencies fail?]

ReasonTV – Overdose Director Martin Borgs on the Next Financial Disaster

A short comment to the intro (President Barack Obama and his words that ‘the worst of the storm has passed’)

The mainstream economists and analysts currently define ‘the worst time during this first global recession’ was autumn 2008 into the spring of 2009 because of the intensity (increasing speed of single failures) and short time frame. But that is short-sightedness and a fallacy. Failure was and is a reactions to the underlying problems of the system. Like organ failure after your kidneys and liver shut down. Symptoms were patched over (home buyers tax credit, cash for clunkers, bailouts, stimulus package aka pork barrel and ear marks, wars in the middle east as abstract energy and economic policy). The patient is still sick, chronically sick. And it is not only the USA any more, the disease got airborne during the 70′s.

Real Terrorists Speak the Language of Bankers and Managers

Loretta Napoleoni wrote a new book called “How the War on Terror is Bankrupting the World.” Her other best-selling works include “Rogue Economics” and “Terror Inc.”.

Economist and best-selling author Loretta Napoleoni traces the link between the finances of the war on terror and the global economic crisis, finding connections from Dubai to London to Las Vegas that politicians and the media have at best ignored.

In launching military and propaganda wars in the Middle East, America overlooked the war of economic independence waged by Al-Qaeda. The Patriot Act boosted the black market economy, and the war on terror prompted a rise in oil prices that led to food riots and distracted governments from the trillion-dollar machinations of Wall Street. Consumers and taxpayers, spurred by propaganda fears, were lured into crushing global debt. Napoleoni shows that if we do not face up to the many serious connections between our response to 9/11 and the financial crisis, we will never work our way out of the looming global recession that now threatens our way of life.

Her conclusion; while we feared that Al-Qaeda might destroy our world, Wall Street ripped it apart.

Authors@Google: Loretta Napoleoni – The Economics of Terrorism (April 2010)

Best part is where she somehow pictures Al Qaeda as a stereotype of our 21st century pop culture and product of the globalization of terrorism. Can’t beat that.

Loretta Napoleoni: The intricate economics of terrorism (July 2009)

Best part is at minute 9:10. Talking about Rouge Economics aka deregulation. Sort of. Where Politics losing control of the economy and the economy becomes a “rouge force working against the people.” Incidents she cites are the Industrial Revolution, the fall of the Roman Empire, Fall of the Berlin Wall (Iron Curtain/East Block). I am not completely with her on that part of the stories, but one could question whether or not the shadow and central banking system, the financial deregulation and lack of oversight in the past three decades in the West are part of the rouge economic force —working against us.

• Profile on Ted.com
• Q&A about her talk on Ted

In case you want more, like her opinion about Islam banking, go Google and YouTube. Or how she stitches together the fall of the Iron Curtain and the rise of the Financial World of the West and its downfall in 2008, because there was no counter force any more. Reasonable argument, and other Academics are agreeing. Or her 2008 Terror Inc. book-talk at the University of Oregon.

RE: Silicon Valley supremacy. A chicken and egg problem.

For good or for bad, China is now challenging Silicon Valley’s supremacy on two fundamentals which once made Silicon Valley the global brand for tech innovation and entrepreneurship.

CHINICT organiser Franck Nazikian

(via TechCrunch, emphasis mine)

What is everybody associating with Sillicon Valley, apart from the (always) nice weather?

1. The history of its network, the hub. Which you can’t replicate as it is unique for its many nodes aka people. With it comes the rich experience and domain knowledge — that it attracts new talent which is willing to work harder than the average guy just for the chance to tip his toes in this pool.
2. The economic and political environment of the United States of America and especially California. Un-comparable to say the least.

These are qualitative and quantitative factors that made Sillicon Valley what it is known for. Still, the question has to be, what came first? Silicon Valley or the first handful of successful technology companies? Lets settle for the latter.

What Nazikian describes, has nothing to do with fundamentals. Nobody can deny that Chinas workers are not working hard just to be better off a little bit, striving to join the league of the affluent. Or that China is a manufacturing slash technology heavy slash export orientated economy. But Chinas economic and political environment is very, … very far off what Silicon Valley is build upon on. And is still feeding of to grow each year. What he describes are the first few successes outside of the West, in China, and that these successes attract talent and creates new offsprings. That over the next 5-10 years, China will have a pool of talent which have had their fair share of success, rich experience in building a company and deep domain knowledge. The soil to walk towards new frontiers.

Still, these are draping for the window, and when you look outside the window we see one party leadership and a controlled economy with a 5-year plan. So please allow me to call you out with your BS — trying to put Chinas striving technology hubs (as they are) in the same light in that of Silicon Valley and its decades of history and fairy tales we geeks read to our kids each night.

PS: These are less than 500 word and are far from enough to describe SV. Disclosure: I have yet to visit the US/SV or China but felt I have to write this rebuttal. I am 26 and grew up in East-Germany. Take it with a grain of salt, not a first hand picture, but not biased because of that.

Planning for the worst. Eurozone bond market.

The following are excerpts from Peter Boone and Simon Johnson with general commentary of mine.

Peter Boone is chairman of the charity Effective Intervention and a research associate at the Center for Economic Performance at the London School of Economics. He is also a principal in Salute Capital Management Ltd.  Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

When Mr. Trichet (head of the European Central Bank, ECB) and Mr.  Strauss-Kahn (head of the International Monetary Fund, IMF) rushed to Berlin this week to meet Prime Minister Angela Merkel and the German parliament, the moment was eerily reminiscent of September 2008 – when Hank Paulson [and Ben Bernanke] stormed up to the US Congress, demanding for $700bn in relief for the largest US banks.  Remember the aftermath of that debacle: despite the Treasury argument that this would be enough, much more money was eventually needed, and Mr. Paulson left office a few months later under a cloud.

I hoped for Europes’ own Hank and Ben couple weeks ago, as the condition worsened. Like in my post from yesterday – it’s nice to see that others see the resemblance in the same light, while monetary and fiscal policy come together.

There are three possible scenarios.  First, the ECB may be allowed to really let loose with “liquidity” – and somehow buy up all the bonds of troubled eurozone nations.  But this is exactly the process that always and everywhere brings about high inflation.  The Germans would fight hard against such a policy, although it would prevent default.

Possible, but with a strong stance against it from other EMU (European Monetary Union) member states. What speaks against this is; (i) the problem of not being able to control where inflation spreads; (ii) the limited number of instruments to stop the program and collect excess liquidity afterwards; (iii) the outflow/flight of capital; (iv) the forming of local bubbles; (v) that PIIGS (Portugal, Italy, Ireland, Greece, Spain) governments not undertaking fiscal tightening (austerity measures) as stringent as necessary - prolonging the program of ‘creating liquidity’ and thus increasing the risk of running into unintended consequences.

Second, officials still hope that bond yields for weaker governments widen but then stabilize.  This is bad news for troubled eurozone countries, but they manage to avoid default.  The rest of the world grows by enough to pull up even the European “Club Med + Ireland”.  Call this the trickle down scenario or just a miracle.

Impossible. Spreads from UK, Portugal and Spain are already rising every trading day.

Most likely, the situation is about to turn much worse and a third scenario unfolds.  The nightmare for Europe is not at this point about Greece or Portugal – it is all about Italian and Spanish bond yields.  This week those yields are rising quickly from low levels, while German yields are falling – so this spread is widening sharply.  The yields for Spain – for example – are rising because hitherto inattentive investors, who always thought these bonds were nearly as safe as cash, suddenly realize there are reasonable scenarios where those bonds could fall sharply in value or even possibly default.  Given that Spain has 20% unemployment, an uncompetitive exchange rate, a great deal of public debt, and a reported government deficit of 11.2 percent (compared with headline numbers for Greece at 13.6 percent and Portugal at 9.4 percent), everyone now asks:  Does a 5% yield on Spain’s ten year bonds justify the risk?  The market is increasingly taking the view that the answer is no, at least for now.  So, we can anticipate Spanish (and Italian) yields will keep rising.  In turn, this causes other asset prices to fall in those nations, thus worsening their banking systems, and hence leading to credit contraction and capital flight.  It is a dismal prognosis.

Then it gets worse.  As rates rise, traditional investors in euro zone bonds, which are pension funds and commercial banks, will refuse to take more.  There will be no buyers in the market and governments will not be able to roll over debts.  We saw the first glimpse of this on Tuesday, when both Spanish and Irish short term debt auctions virtually failed.  Once this happens more broadly, the problem will be too big for even Mr. Trichet or Ms. Merkel to solve.  The euro zone will be at risk of massive collapse.

We had that already on some occasions (April 21ss):

The move in Greek bonds comes as Germany failed to sell as many bonds as it planned in an auction on Wednesday. Earlier this month, the Bundesbank said it expected to sell €3bn of 30-year Bunds on Wednesday.

It received bids totalling €2.752bn but sold only €2.458bn. German bond auction failures were rare until the credit crisis. There have been several Bund auction failures since the start of the crisis in 2007, as governments faced expected record amounts of debt to pay for fiscal stimulus packages and bank bail-outs. Before the crisis, the last German bond auction not to reach its target was in July 2000, after the dotcom crash. (via FT)

Peter Boone and Simon Johnson continue with …

If this awful but unfortunately plausible scenario comes about, there is a clear solution – unfortunately, it is also anathema to Mr. Trichet and Ms. Merkel, and thus unlikely to be discussed seriously until it is too late.  This is the standard package that comes to all emerging markets in crisis: a very sharp fall in the euro, restructuring of euro zone fiscal/monetary rules to make them compatible with financial stability, and massive external liquidity support – not because Europe has an external payments problem, but because this is the only way to provide credible budget support that softens the blow of the needed austerity programs.

The liquidity support involved would be large:  if we assume that roughly three years of sovereign debt repayments should be fully backed – and it takes that kind of commitment to break such negative sentiment – then approximately $1 trillion would be needed to backstop Greece, Portugal, Spain and Italy.  It may be that more funds are eventually needed – but in any case, the amounts would be less than the total reserves of China.  These amounts would also be reduced as the euro falls; it could be heading back to well under $1 per euro, which is where it stood one decade ago.

External financial support would only make sense if combined with key structural reforms, including an end to the repo window at the ECB.  As former UBS banker Al Breach recently argued, the ECB could instead issue bonds to all nations which would then be used subsequently for monetary operations – every central needs a way to add or subtract liquidity from the financial system.  These bonds would need to be backed by a small “euro zone” tax, thus making the ECB more like other central banks around the world.  It would no longer accept bonds of “regional governments” in the union as collateral, and instead would buy and sell “eurozone” bonds.  These new eurozone bonds would also offer a way for governments to roll over some of their existing debts.

Eurozone bond market

Sane reasoning (and lessons of 2007/2008) rules out a case by case action plan. That is what Hank and Ben will tell us. That is what they realised after Bear Stearns got picked up by JP Morgan Chase, Fannie Mae and Freddie Mac put in receivership under the helm of Hank, a shotgun marriage between Merrill Lynch and Bank of America was arranged, Lehman filed for Chapter 11 as no one wanted to pick them up from the tarmac, AIG received its first bailout billions and Washington Mutual was sold to JP Morgan Chase. Financial institutions were deeply connected to each other. As Henry Paulson famously said, “as the situation changes, you have to change too.” The PIIGS situation is not different, they are deeply intertwined with one common denominator — mounting problems, critical events, will accelerate in its occurrence until bold and unilateral action is taken.

In my post from February, titled “Europe caught the flu“, I pitched the idea of creating a TARP like program for the European Monetary Union, before the problem gets worse and spreads.

The unique situation of Europe can not be contained, in a fashionable way, when borrowing gets even more expensive in 2010 for all other European countries (whether or not part of the EMU). Or when the problems are addressed on a case by case basis. Because of that, the Commissioners in Brussel have to do everything possible (bending the legal clauses of the treaty), to stabilize Greece and the Euro. The consequences not to find a workable and pragmatic solution ahead of the problems, will be much more costly for the European Monetary Union (EMU) when the IMF is asked by EMU states to give ‘technical assistance’.

Spain reached new unemployment level highs and raised its budget-deficit forecast for 2010 this week, markets have already an eye on them for a long time as well on Portugal. Out of sight (or not in the news currently) are the East-European states which received, in parts, IMF emergency loans. But the counting of fiscal and human casualty costs the credit explosion and implosion of the West created, is not yet over.

So, how to treat these patients and possible future patients, equally well? The only thing what comes to my mind now is ‘TARP for EMU’.

I proposed that “[e]very EMU country pays an amount in the billion Euro fund, set in a formula of GDP, debt and growth forecast as variables.” Some of the bullet points for my idea back than in February are very similar to the formulation of an Eurozone bond market, Boone and Johonson outlined in their post.

Where my idea is based on creating an instrument for PIIGS and other weak peripheral countries to service their debt — Boone and Johonson remodel the whole monetary system of the EMU because there is need for structural reforms. But what is not clear is whether or not EMU member states can only draw liquidity through the Eurozone bond market (at rates the same for all EMU countries, a shared burden) or countries like Germany and France are still able to issue their own bonds.

I prefer the ‘shared burden’ scenario, although an unlikely scenario with hindsight of the history of European parliamentary unity. As Boone and Johonson imply, ”decisions over fiscal and monetary policy need to be handled in a fair and reasonable manner.” History was in parts unreasonable. Thus, pundits are right to call it the ‘make or break of Europe’ time, because the outlook is dire and doesn’t offer any other options with limited downside.

The founding of INET. Challenging the subject of economics to evolve.

Well, who knew that ‘New Economic Thinking’ will catch on so fast. George Soros founded INET, short for Institute for New Economic Thinking, some months ago. The first hub just opened is Cambridge.

Back in the summer of 2009, when I re-started this blog (michaeljung.wordpress.com) which was just about me, technology, and what was happening. I thought I need to give this blog a bit more meaning in order to challenge myself. So I came up with the title “New Economic Thought – Observing by holding everything else not constant.” In the about page I wrote something like a mission statement:

Trying to bring the field of economics back, from being purely quantitative about GDP, growth, inflation, unemployment et cetera, to being a multi-disciplinary field. Making it more versatile and appealing for others to use the ‘economic thought and analysis’ in other areas.

I thought and still think, for me personally at my level, that this is really good for a start, but now George Soros (Wikipedia entry) kicked the ball out of the park, going for the fences, and created INET. I only can applaud.

The purpose of the institute is to bring some change to this profession, ‘as the dominant paradigm has obviously not worked’, not knowing what this change will look like in two or three years. The agenda is very broad, as the subject of economics is itself. To highlight just some;

• rebuilding the reputation of the subject as guide for society,
• reopening the subject to its roots of Adam Smith and alike (YT),
• being open and considering alternatives,
• using and combining the different strengths of the branches of the subject,
• challenging the subject to evolve.

From the about page:

The Institute recognizes problems and inadequacies within our current economic system and the modes of thought used to comprehend recent and past catastrophic developments in the world economy. The Institute embraces the professional responsibility to think beyond these inadequate methods and models and will support the emergence of new paradigms in the understanding of economic processes.

The Institute firmly believes in empowering the next generation, providing the proper guidance as we challenge outdated approaches with innovative and ethical economic strategy.

[...]

The Institute was conceived during the first half of 2009 through a series of discussions that culminated at a summit in July of 2009 in Bedford, NY.

Here is the video giving a background about the beginnings of the Institute for New Economic Thinking (YT).

Reflections on George Soros

Advice to Young Economists

Still, we don’t know what makes the difference. – Joseph Stiglitz

They have uploaded some key notes of the inaugural conference which was held at Cambridge UK from the 9th to the 11th of April. Here are two snippets from Richard Koo. A note on Koo; I am still stuck with the last chapter of the 2nd Edition of ‘The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession.’ Will try to finish it soon and put up a review.

The Financial Crisis – Common Cold or Pneumonia

Richard Koo – About the Balance Sheet Recession

Follow-up:

• YouTube Channel of INET
• Homepage of INET
• Bloomberg about INET
• George Soros about his latest book (Dec 2008) via NY Review of Books

h/t [via Paul Kedrosky][via Mark Thoma]

When a Finance Minister appears on Bloomberg …

… than the fiscal state  of a country is in a really, really, … REALLY bad condition. Timothy Geithner (US Secretary of the Treasury) appeared several times on TV as well as Ben Bernanke (US Federal Reserve Chairman) during the peak of the financial crisis and afterwards.

Greek Finance Minister George Papaconstantinou talks with Bloomberg’s Rishaad Salamat about efforts to reduce the country’s debt. Papaconstantinou, speaking from Athens, also discusses the credibility of the country’s economic statistics and public sector spending cuts.

Extraordinary times call for extraordinary measures, to calm markets and assure them ‘that the situation is “dangerous”, but we have the situation under control.’

Papaconstantinou Expects Greek Debt to Peak Next Year

What is most interesting to note is, that they will tax parts of the economy not taxed before, have a new parliamentary watchdog to check the data of the finance ministry, and that they try to privatize some government entities. According to the finance minister, government debt will peak at 120% to GDP this year, declining afterwards.

Obama, You can’t do it with guns anymore!

President Barack Obama looks at a portrait hanging in the Superintendent's quarters at the U.S. Military Academy at West Point in West Point, N.Y., before delivering a speech on his new Afghanistan strategy, Dec. 1, 2009.

Barack Obama announced (without the usual magic) last week a surge of more than 30.000 troops to secure the future of Afghanistan (and its people). I have found this comment from former Chief of Staff under Colin Powell, Lawrence Wilkerson. His message is that only diplomacy is the solution to the Afghan war; there is no military solution.

One of the interesting thing to note, in his Afghanistan plan, is his timely 18 months just right to call for re-election in 2012. It will either break him, or make him a second term. Plus all the other difficulties he faces. Like a slow economic recovery (or double-dip and no room for a 2nd stimulus), health care, the state budget, a Fox news channel (hatred), possible inflation and no economic growth, unemployment, bank bonuses, companies making profits but not hiring, and, and, and. All the cons for a 2nd term, he did not create them, he tried to solve them. He has 3 years left to show some results.

And to be uber cynical, we didn’t expect such and military insurgency from a Nobel Peace Prize laureate.

• President Obama’s Afghanistan Plan in 4 Minutes (Video)
• President Obama on the Way Forward in Afghanistan and Pakistan (Video 33 minutes)