Tuesday, November 22, 2011

Today's links

1--The Wages of Economic Ignorance, Robert Skidelsky, Project Syndicate

Excerpt:  That policy was destined to produce a financial crisis, because it was bound to leave governments and banks with depleted assets and larger debts. Despite austerity, the forecast of this year’s UK structural deficit has increased from 6.5% to 8% – requiring an extra £22 billion ($34.6 billion) in cuts a year. Prime Minister David Cameron and Chancellor George Osborne blame the eurozone crisis; in fact, their own economic illiteracy is to blame.

Unfortunately for all of us, the explanation bears repeating nowadays. Depressions, recessions, contractions – call them what you will – occur because the private-sector spends less than it did previously. This means that its income falls, because spending by one firm or household is income for another.

In this situation, government deficits rise naturally, as tax revenues decline and spending on unemployment insurance and other benefits rises. These “automatic stabilizers” plug part of the private-sector spending gap.

But if the government starts reducing its own deficit before private-sector spending recovers, the net result will be a further decline in total spending, and hence in total income, causing the government’s deficit to widen, rather than narrow. True, if governments stop spending altogether, deficits will eventually fall to zero. People will starve to death in the interim, but the budget will be balanced....

the best option of all is for the government to spend the money itself. Governments can do this consistently with a medium-term deficit-reduction plan by making a crucial distinction between their budgets’ current and capital accounts. The current account covers spending on services and perishable goods that produce no assets. The capital account is for buying or building durable assets that give a prospective future return. The first is a charge on taxation; the second is not

2--The Serpent’s Egg-- A brief history of the racist/fascist/neonazi penetration of Greece’s new ‘technocratic’ government, Yanis Varoufakis

Excerpt: It will prove George Papandreou’s ugliest legacy: that his last-minute childish maneuvering to maximise his waning hold on power (while negotiating his eviction from the PM’s job), has brought into the new ‘national unity’ government four self-declared racists (some of whom are neo-Fascists and one a neo-Nazi of some renown). It is also wildly ironic: for Mr Papandreou’s best quality has traditionally been his ardent cosmopolitanism, his demonstrated anti-nationalism, a genuine commitment to minorities and a deep seated intolerance of racism. Alas, such is the lure of power, it seems, that the entry into the new government of one minister and three junior ministers representing LAOS (a small ultra-right wing party) was cynically judged as a smaller price to pay than handing more control of the new regime to Mr Papandreou’s political opponents in the two major parties – his own PASOK and New Democracy, the conservative opposition.

To non-Greeks watching breathlessly the swearing into government of the serpent’s egg latest hatchlings, these news from Greece will surely resonate terribly. As they should! For yet again a Great Depression has given fascism another twirl. And while Greece is small and ought to be irrelevant, its past has spawned great perils for the world at large. Lest we forget, the Cold War did not begin in the streets of Berlin but in the alleys of Athens back in December 1944. Greece was also one of the first countries to have established a fully fledged fascist regime after the Crash of 1929: the Metaxas dictatorship in 1936. More recently, a CIA-backed coup brought Greek fascists in power six years before General Pinochet rolled his tanks against the Presidential palace in Santiago, quite obviously inspired by the ‘success’ of his Greek brethren. Nowadays, with Greece leading the chorus of Europe’s headlong dive into a new recession, and a renewed disintegration complete with racial overtones (Germans loathing the Greeks and vice versa), it is time for the world to take note. Feeling the irony of Papandreou’s tragic end will simply not do. Progressives around the world must remain vigilant.

3--Stocks Slump as Treasuries Rise on U.S. Budget, Bloomberg

Excerpt: Stocks sank, extending last week’s drop, and Treasuries rose amid concern the U.S. government will be forced to submit to $1.2 trillion in automatic spending cuts. Commodities fell, while the euro trimmed its earlier decline versus the dollar....

The U.S. deficit-cutting congressional supercommittee said today that it failed to reach an agreement, setting the stage for automatic cuts in 2013 and fueling concern that economic- stimulus measures that are set to expire will not be renewed. Germany’s Finance Ministry said the country’s expansion has gotten “noticeably slower,” while Moody’s Investors Service said France’s rising financing costs are increasing the nation’s fiscal challenges.

“The global selloff in risk assets reflects concerns about the inability of policymakers to catch up with unsettling economic and financial realities, particularly in Europe and America,” Mohamed A. El-Erian, the chief executive officer at Pacific Investment Management Co. in Newport Beach, California, said in an e-mail. His firm runs the biggest bond fund.

4--Global economic outlook grim, China tells U.S. trade, Reuters

Excerpt: Chinese Vice-Premier Wang Qishan warned on Monday the global economy is in a grim state and the visiting U.S. commerce secretary said China would spend $1.7 trillion on strategic sectors as Beijing seeks to bolster waning growth.

Wang said an "unbalanced recovery" may be the best option to deal with what he had described on Saturday as a certain chronic global recession, suggesting Beijing would bolster its own economy before it worries about global imbalances at the heart of trade tensions with Washington.

"An unbalanced recovery would be better than a balanced recession," he said at the annual U.S.-China Joint Commission on Commerce and Trade, or JCCT, in the southwest Chinese city of Chengdu....

U.S. Commerce Secretary John Bryson told reporters that China had confirmed to U.S. officials that it planned to spend $1.7 trillion on strategic sectors in the next five years.

Beijing has previously said these sectors include alternative energy, biotechnology and advanced equipment manufacturing, underlining its aim to shift the growth engine of the world's No.2 economy to cleaner and high-tech sectors.

The investment amount of 10 trillion yuan ($1.7 trillion) is more than two times bigger than the eye-popping 4 trillion yuan stimulus package launched during the global financial crisis, plans first reported by Reuters a year ago.

5--Belgian government collapses, credit writedowns

Excerpt: This comes from the French Daily L’Express:

And the crisis continues in Belgium … The acting Belgian Prime Minister Elio Di Rupo officially resigned on Monday night. He has been trying to form a government. But after a serious step forward in October, stalled negotiations have led him to go to King Albert II this afternoon.

Belgian media have quickly relayed the information, "Di Rupo goes to the king to resign," said the daily Le Soir in the afternoon. According to the RTBF, the Belgian "formateur" should "hand his resignation in to Albert II." So it’s a done deal.

This can’t be good.

6--Aznar: Spain will show fiscal discipline but we may need the ECB to avoid a “disaster”, credit writedowns

Excerpt: While Spanish Prime Minister-elect Mariano Rajoy was preparing for continued austerity in Spain, his Popular Party colleague, Former Spanish Prime Minister Jose Maria Aznar, was talking to Bloomberg Television about the outlook for his country’s economy and the mandate of the European Central Bank.

Aznar spoke to Bloomberg’s Emma Ross-Thomas in Madrid, saying near the end of the clip that the ECB may need to act as a lender of last resort to avoid a “disaster”. But he emphasised throughout his interview that Spain was prepared to take the initiative so that such assistance was not necessary. He pointed paradoxically to restoring fiscal discipline and economic flexibility at the same time by cutting budgets and increasing labor market flexibility. Aznar also pointed to the high level of unemployment that his party inherited last when he took the reins, which came down under his leadership, suggesting it can be done again under his party.

In his view, the whole problem was in bailing out Greece in the first place. And he believes returning to fiscal discipline is the only way forward.

7--Foreign Banks Double Deposits at Fed, Bloomberg

Excerpt: Foreign bank deposits at the Federal Reserve have more than doubled to $715 billion from $350 billion since the end of 2010 amid Europe’s debt turmoil, buttressing the dollar’s status as the world’s reserve currency.

Forty-seven non-U.S. banks held balances of more than $1 billion at the New York Fed as of Sept. 30, up from 22 at the end of 2010, according to a survey of 80 financial institutions by ICAP Plc, the world’s largest inter-dealer broker. The dollar has appreciated 7.2 percent since Standard & Poor’s cut the nation’s AAA credit rating Aug. 5, the second-best performance after the yen among developed-nation peers, according to Bloomberg Correlation-Weighted Currency Indexes.

A budget deficit of more than $1 trillion, a deadlock among Congressional supercommittee members on spending cuts and 9 percent unemployment haven’t deterred investors from seeking safety in the world’s biggest economy. The euro has been undermined by the region’s sovereign debt crisis, while the Swiss franc and yen have fallen as their governments buy billions of dollars to weaken them.

“There’s not anything close to a substitute and part of it is the deepness of the market, the liquidity,” Jack McIntyre, a fund manager who oversees $23 billion in debt at Brandywine Global Investment Management, a unit of Legg Mason Inc., said Nov. 15 in a telephone interview from Philadelphia. “There’s a perception, right or wrong, that we’re going to make good on all of our assets.”

8--Thought Of The Day, Paul Krugman, NY Times

Excerpt: From David Rosenberg’s Breakfast with Dave (no link):

“Is Italy another Lehman event? It’s not the same but it sure is similar … The difference is Lehman had $150 billion in bonds outstanding, while Italy has $2.5 trillion.”

In fairness, Lehman’s bust called everything into question; everyone wondered whether there were 10, 20 Lehmans out there. We sort of know how many Italys there are.

Also, until a few months ago I would have said that policy makers had learned a lesson, and would not repeat the pig-headedness that allowed Lehman to do so much damage. But at this point …

9--Will the Euro be Destroyed?, Dean Baker, Counterpunch

Excerpt: We could be living through the last days of the euro. That is not a happy thought. While there were many negative aspects to the rules governing the European Central Bank and the eurozone economies, no one can want to see the economic chaos that will almost certainly follow the collapse of the euro.

There will likely be a wave of bank collapses as banks are forced to write down much of the debt they hold in Italy, Ireland and other heavily indebted countries. This would bring about another Lehman-type situation where finance freezes up. Banks would stop lending to each other and even healthy businesses would find it difficult to obtain credit.

That is the story of a severe double-dip in the eurozone, with the spillover effect almost certainly pushing the United States and most of the rest of the world into recession. It could easily be over a decade until these economies recover from the damage.

The absurdity of this story is that such a collapse could be easily prevented. The recipe is simple. The European Central Bank (ECB) must agree to backdrop the debt of Italy and most of the other heavily indebted countries, after a write-down of Greek debt. It should also have an expansionary policy that allows somewhat higher inflation in Germany so that the peripheral countries can regain competitiveness by having lower positive inflation rates....

We have known how to generate demand since Keynes wrote his masterpiece in the 30s. However rather than pursue the simple steps needed to restore the eurozone’s economy to stable growth, the ECB is adhering to an ideological agenda that will destroy the euro and throw the economy into an even more severe recession than the last one. This is an extraordinary tragedy unraveling in slow motion in front of the world.

10---Large scale ECB intervention is necessary but insufficient, re-define

Excerpt: what if the ECB intervened in the manner that the Bank of England has been supporting the UK through quantitative easing. Where would that get us? It's instructive to look at the British situation here. The UK is enjoying record low yields with the UK government now being able to borrow for 10 years at close to just 2%, even as inflation rates remain stubbornly much higher so real interest rates are negative at many maturities. It also benefits from having a flexible exchange rate which has stood it in good stead in this crisis. But is the UK economy sound? Is it growing? The answer to both questions is NO. While it is true that the UK is not tethering on the brink of complete disaster, its situation is hardly enviable. Yet the best case scenario for Spain and Italy is to get into the UK’s economic situation in the medium term. How bad is that?

Very bad, considering that in actual fact Italy and Spain will continue to face additional problems over and above what the UK does. Even under a best case 'massive ECB' intervention scenario, Spanish and Italian borrowing costs would not be brought down to UK level. Nor would they have access to economic adjustments through flexible exchange rates. Equally important, additional ECB intervention is likely to be conditional on much stricter austerity in the short term which will almost surely put a recessionary squeeze on the countries that are bailed out.

Just to put things in perspective, as a percentage of GDP, the ECB’s intervention in sovereign bond markets is less than a tenth of what the Bank of England has done for the UK. All additional ECB intervention can do is to stem the immediate panic and buy 1-3 years for troubled sovereigns. The EU desperately needs growth and a growth strategy which ECB intervention can provide the economic and political space to implement. In addition it needs to credibly map out an end-game which addressed the biggest structural and institutional gaps in the construction of the Eurozone.

11----"By Any Objective Measure, The Euro is a Failure"--Nigel Farage, Mish

Excerpt: (you tube)

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