Friday, December 31, 2010
Happy New Year ! 2011 should be a better year.
As 2010 comes to a close allow me to wish readers everywhere in the blogosphere(readers come from over thirty countries in North and South America, Europe, Africa and Asia) best wishes for a healthy, happy and more prosperous 2011. We end the year with unemployment still far too elevated in many countries, but positive growth, some signs of recovering markets, growing but cautious optimism and reviving animal spirits and a North American stock market up substantially over what it was showing at the end of 2010. Since we are now entering the 17th month since recovery got underway in the summer of 2009, judging by previous recessions and the recoveries which followed them, this will be a critical year, particularly for employment growth. If things go well and the stimulus plan passed in Washington goes forward as planned we should see some definite slow but steady improvement on the employment front in the U.S. There is a lot of unspent cash still sitting on the sidelines in the coffers of business and in some households. Hopefully companies will start the hiring process and bring people in from the cold in the months ahead. The most recent Chicago purchasing managers' report and the latest weekly jobless claims numbers in the U.S. were positive signs of some improvement. This needs to continue to bring the unemployed numbers down.
Thursday, December 30, 2010
Michal Kalecki on quantitative easing
Michal Kalecki, the Polish Jewish economist who in many ways is a co-discoverer of the economic insights associated with John Maynard Keynes in an essay published in a collection The Economics of Full Employment in 1944 by the Oxford University Institute of Statistics published by Basil Blackwell also wrote briefly about what has come to be known as quantitative easing. Kalecki's essay was called Three ways to full employment. In his discussion of deficit financing he posed the question of where does the money come from to finance deficit spending and how do we prevent the interest rate from rising so much so as to reduce private investment by an amount which offsets the stimulating effect of government expenditures(the so called treasury view which these days is known as crowding out). with respect to where does the money come from Kalecki shows that the budget deficit plus gross private investment equals gross savings since in a closed economy national expenditure equals national income plus tax revenues.Once depreciation is deducted from both sides we have net savings equal to the budget deficit plus net investment. He concludes ''whatever the level of prices, wages or rates of interest, any level of private investment and budget deficit will always produce an equal amount of saving to finance these two items."(p.41)
He then goes on to discuss the problem of crowding out. He argues that the rate of interest can be maintained at a stable level however large the Budget deficit provided an appropriate banking policy is followed by the central bank. If the public prefer to invest their savings in bank deposits and they as well as the banks do not buy government securities in the requisite amounts to keep interest rates from increasing this could result in interest rates rising. However, if the central Bank expands the cash basis of the banks by purchasing debt instruments ''no tendency for a rise in the rate of interest will appear." (p.43) He concludes:
''provided the central bank expands the cash basis of the private banks according to the demand for bank deposits, and that the Government issues long and medium term bonds on tap, both the short term and long term rates of interest may be stabilized whatever the rate of the Budget deficit."(p.42)
Abba Lerner somewhat later also wrote about these issues in his work on functional finance. So the roots of what is now called quantitative easing lie in the Keynesian Kaleckian monetary and fiscal theory debates of the 1930s and 1940s with a special place also allocated to the Japanese finance minister Korekiyo Takahashi in the early 1930s. Kindleberger shows that Takahashi was already familiar with Keynes' work and his advocacy of deficit finance and the role of the multiplier by the early 1930s. His use of quantitative easing followed logically from this knowledge.(See C.Kindleberger, The World in depression 1929-1939, p.163) It was these discussions and debates which inspired me to write about these policy options in the 1980s and early 1990s when I presented these ideas in articles, monographs and debates about financing the deficit in Canada during that period. My colleagues the late John Hotson of Waterloo and Mario Seccareccia of the Université d'Ottawa also co-authored one of the publications.
He then goes on to discuss the problem of crowding out. He argues that the rate of interest can be maintained at a stable level however large the Budget deficit provided an appropriate banking policy is followed by the central bank. If the public prefer to invest their savings in bank deposits and they as well as the banks do not buy government securities in the requisite amounts to keep interest rates from increasing this could result in interest rates rising. However, if the central Bank expands the cash basis of the banks by purchasing debt instruments ''no tendency for a rise in the rate of interest will appear." (p.43) He concludes:
''provided the central bank expands the cash basis of the private banks according to the demand for bank deposits, and that the Government issues long and medium term bonds on tap, both the short term and long term rates of interest may be stabilized whatever the rate of the Budget deficit."(p.42)
Abba Lerner somewhat later also wrote about these issues in his work on functional finance. So the roots of what is now called quantitative easing lie in the Keynesian Kaleckian monetary and fiscal theory debates of the 1930s and 1940s with a special place also allocated to the Japanese finance minister Korekiyo Takahashi in the early 1930s. Kindleberger shows that Takahashi was already familiar with Keynes' work and his advocacy of deficit finance and the role of the multiplier by the early 1930s. His use of quantitative easing followed logically from this knowledge.(See C.Kindleberger, The World in depression 1929-1939, p.163) It was these discussions and debates which inspired me to write about these policy options in the 1980s and early 1990s when I presented these ideas in articles, monographs and debates about financing the deficit in Canada during that period. My colleagues the late John Hotson of Waterloo and Mario Seccareccia of the Université d'Ottawa also co-authored one of the publications.
Sunday, December 19, 2010
George Osborne in New York backing austerity ideology
The Financial Times is carrying a story by Gillian Tett about the recent visit of George Osborne, the British Chancellor of the Exchequer to New York during which he spoke at a breakfast in his honour sponsored by Tina Brown and at a dinner sponsored by Mayor Bloomberg. The FT article suggests that Osborne is on the right track and laments that America has not followed in the UK Tories' footsteps. It is a very good thing that Barack Obama and the Democrats have avoided following the foolish and destructive policies of the British coalition government which has already led to social unrest and risks plunging Britain into a prolonged slump and imposing severe and totally unnecessary hardship on many of Britain's poorest citizens. It never ceases to amaze me how foolishly ignorant of history and economic theory and policy fiscal conservatives can be. Celebrating Osborne's policy of deliberately cutting expenditures when an economy is struggling to recover from recession is equivalent to celebrating the medieval practice of medicine which killed many an unfortunate patient. Recrudescent woeful ignorance is nothing to celebrate. It is instead to be lamented and avoided at all costs. Thankfully Barack Obama , although far from perfect, has shown himself to be a far wiser political leader in touch at least in part with the history of the last century.
Wednesday, December 15, 2010
British unemployment rises to 2.5 million or 7.9 %
The British office of National Statistics is reporting that for the period August 2010 to October 2010 unemployment in Britain rose by 35,000 people. Almost all of the job losses occurred in the public sector where 33,000 jobs were lost.The private sector was flat with very few new jobs created as employment was stable there. Since the coalition government plans to cut thousands of public sector jobs in the coming months the data does not bode well for the British economy or the unemployed. There are now over 2.5 million unemployed workers in Britain and judging from these results and the Government's plans to slash further despite the deep recession and banking crisis it is likely that unemployment will continue to rise.
There are currently just over 6.1 million workers in the public sector and 21.5 million in the private sector in Britain. In the U.S. core inflation rose by just 0.8 % year to year in November. The global economy while recovering from the worst phase of the slump is still fragile and austerity minded deficit hysteria politicians ought to rethink their strategy and policy. Prime Minister Cameron ought to remember that the great British conservative Prime Minister Harold Macmillan was a Keynesian. It was his family's publishing house that published Keynes' General Theory.
Yesterday was my son Max's 16 th birthday. It was also the 75 th anniversary of the completion of the General Theory as Keynes penned the preface to the completed work on December 13, 1935. He would not have been pleased by British economic policy in the current circumstances.
There are currently just over 6.1 million workers in the public sector and 21.5 million in the private sector in Britain. In the U.S. core inflation rose by just 0.8 % year to year in November. The global economy while recovering from the worst phase of the slump is still fragile and austerity minded deficit hysteria politicians ought to rethink their strategy and policy. Prime Minister Cameron ought to remember that the great British conservative Prime Minister Harold Macmillan was a Keynesian. It was his family's publishing house that published Keynes' General Theory.
Yesterday was my son Max's 16 th birthday. It was also the 75 th anniversary of the completion of the General Theory as Keynes penned the preface to the completed work on December 13, 1935. He would not have been pleased by British economic policy in the current circumstances.
Saturday, December 11, 2010
Keynes on Inflation and Deflation
There is a lot of hysterical talk these days about the threat of inflation and some talk, more thoughtful in my view about the current risks of deflation. It is insightful to go back to the writing of Keynes in the 1920s and early 1930s on these issues.
A number of these writings are collected in his very accessible work Essays in Persuasion. In 1919 and 1923 he had what would be considered today the fairly conventional monetarist view of these questions. His famous line on Lenin having said ''that the best way to destroy the Capitalist system was to debauch the currency comes from a short essay in 1919 in the aftermath of the first world war and the social chaos that affected defeated Germany. By 1923 as first inflation and then deflation struck in Europe Keynes began to discuss the two processes and the injuries that they caused. He wrote that inflation was injurious because of the arbitrary effect it had on altering the distribution of wealth between different social classes. But that deflation was ''more injurious" in retarding the production of wealth. Most of the nineteenth century had seen a relative stability over the century in the value of money as expressed in its price adjusted purchasing power, although there was a long period of falling prices at the end of the century.
Prices did fluctuate but according to Keynes never more than 30 % in either direction. But the first world war changed all that and since the end of the war there had been a large inflation that eroded the value of wealth and the savings of the middle class by huge amounts in most of Western Europe with the greatest erosion occurring in Germany, Austria-Hungary and Russia.This massive erosion of values according to Keynes affected the social psychology of the investing class and indeed of all those from the middle and upper classes who in the past had saved in order to invest. Keynes concluded that it ''was not safe or fair to combine the social organization developed during the nineteenth century...with a laissez-faire policy toward the value of money". In business inflation led to windfall profits to those who had borrowed money to undertake their entrepreneurial investments. Booms which might not be sustainable in the long run got underway and these booms often led to sudden slumps and depressions.
Then the problem dramatically shifted from that of inflation to that of falling prices, unemployment and deflation.
Because deflation and falling prices increased the burden of indebtedness since the debts were contracted for in inflated currency entrepreneurs and business were forced to carry a large speculative position in order to operate. As deflation proceeded uncertainty about the future would grow and many business people would be reluctant to undertake production under the circumstances. '' the general fear of falling prices" might inhibit '' the production process altogether."
Keynes therefore counseled that the monetary authorities needed to undertake countervailing actions in order to reverse pessimistic expectations and falling prices. In a boom they needed to act against inflation. In a bust they needed to act against falling prices and slumping production. He concluded
that inflation and deflation were both problems that needed an appropriate policy response that was timely. Between the two ''perhaps deflation is , if we rule out exaggerated inflation such as that of (hyperinflation in) Germany, the worse;because it is worse in an impoverished world to provoke unemployment than to disappoint the rentier.''
Later in his essay on the Liberal economic platform of 1930 and in his the Treatise on Money(1930) he developed a more sophisticated theory of profit push, wage push, bottleneck and disproportionality between savings decisions and investment decisions, theory of inflation which he then partly included in the General Theory(1936) wherein he shows that inflation can occur well before the point of full employment due to these structural factors at work.(See ch. 21 The Theory of Prices, GT)
Those who complain and shrilly warn of inflation in the current circumstances of severely depressed aggregate demand and excessive liquidity preference ought to go back and read Keynes before the General Theory to understand that he was also a monetary economist who well understood the risks of both inflation and deflation but also understood how to diagnose which problem was the priority according to the circumstances of the day.
A number of these writings are collected in his very accessible work Essays in Persuasion. In 1919 and 1923 he had what would be considered today the fairly conventional monetarist view of these questions. His famous line on Lenin having said ''that the best way to destroy the Capitalist system was to debauch the currency comes from a short essay in 1919 in the aftermath of the first world war and the social chaos that affected defeated Germany. By 1923 as first inflation and then deflation struck in Europe Keynes began to discuss the two processes and the injuries that they caused. He wrote that inflation was injurious because of the arbitrary effect it had on altering the distribution of wealth between different social classes. But that deflation was ''more injurious" in retarding the production of wealth. Most of the nineteenth century had seen a relative stability over the century in the value of money as expressed in its price adjusted purchasing power, although there was a long period of falling prices at the end of the century.
Prices did fluctuate but according to Keynes never more than 30 % in either direction. But the first world war changed all that and since the end of the war there had been a large inflation that eroded the value of wealth and the savings of the middle class by huge amounts in most of Western Europe with the greatest erosion occurring in Germany, Austria-Hungary and Russia.This massive erosion of values according to Keynes affected the social psychology of the investing class and indeed of all those from the middle and upper classes who in the past had saved in order to invest. Keynes concluded that it ''was not safe or fair to combine the social organization developed during the nineteenth century...with a laissez-faire policy toward the value of money". In business inflation led to windfall profits to those who had borrowed money to undertake their entrepreneurial investments. Booms which might not be sustainable in the long run got underway and these booms often led to sudden slumps and depressions.
Then the problem dramatically shifted from that of inflation to that of falling prices, unemployment and deflation.
Because deflation and falling prices increased the burden of indebtedness since the debts were contracted for in inflated currency entrepreneurs and business were forced to carry a large speculative position in order to operate. As deflation proceeded uncertainty about the future would grow and many business people would be reluctant to undertake production under the circumstances. '' the general fear of falling prices" might inhibit '' the production process altogether."
Keynes therefore counseled that the monetary authorities needed to undertake countervailing actions in order to reverse pessimistic expectations and falling prices. In a boom they needed to act against inflation. In a bust they needed to act against falling prices and slumping production. He concluded
that inflation and deflation were both problems that needed an appropriate policy response that was timely. Between the two ''perhaps deflation is , if we rule out exaggerated inflation such as that of (hyperinflation in) Germany, the worse;because it is worse in an impoverished world to provoke unemployment than to disappoint the rentier.''
Later in his essay on the Liberal economic platform of 1930 and in his the Treatise on Money(1930) he developed a more sophisticated theory of profit push, wage push, bottleneck and disproportionality between savings decisions and investment decisions, theory of inflation which he then partly included in the General Theory(1936) wherein he shows that inflation can occur well before the point of full employment due to these structural factors at work.(See ch. 21 The Theory of Prices, GT)
Those who complain and shrilly warn of inflation in the current circumstances of severely depressed aggregate demand and excessive liquidity preference ought to go back and read Keynes before the General Theory to understand that he was also a monetary economist who well understood the risks of both inflation and deflation but also understood how to diagnose which problem was the priority according to the circumstances of the day.
Thursday, December 9, 2010
British Parliament passes tuition fee increase Labour and 21 Lib Dems and 6 Tories vote against.
The British House of Commons has narrowly passed legislation,(323 in favour to 302 opposed) that raises the cap on university tuition fees to £9000 per academic year. As a former graduate student at the L.S.E. from 1970 to 1972 where my scholarship paid my 85 £ a term tuition fee(the equivalent of about £ 510 a term or £ 1530 for the year in contemporary inflation adjusted terms today) I am appalled at this regressive legislation and the support it received from the bulk of Conservatives and a large number of Lib Democrats in Parliament. No matter what the generous terms of loan repayment might be it is simply inconceivable that this regressive legislation will not act as a disincentive and real barrier to less well off, otherwise qualified students from going to university.
No thoughtful person from a poor or working class or even lower middle class background would rush to indebt themselves to the tune of 36,000 £ in order to go to university when unemployment rates are as high as they are. Britain and British society will be all the poorer for it. Once again worshipping at the false altar of deficit reduction and austerity has inflicted harm on the values of a decent and enlightened society. Labour should commit itself to rolling back this legislation when they regain power. The coalition has revealed its true character and it may now not last the full five years.
No thoughtful person from a poor or working class or even lower middle class background would rush to indebt themselves to the tune of 36,000 £ in order to go to university when unemployment rates are as high as they are. Britain and British society will be all the poorer for it. Once again worshipping at the false altar of deficit reduction and austerity has inflicted harm on the values of a decent and enlightened society. Labour should commit itself to rolling back this legislation when they regain power. The coalition has revealed its true character and it may now not last the full five years.
Monday, December 6, 2010
Keynes in 1931 déjà vu
Dec.7, 2:00 a.m.
In 1931 (or 1932 see below) John Maynard Keynes delivered a lecture in Chicago sponsored by the Halley Stewart Trust on the economic depression and the financial crisis that developed in its wake. During that lecture Keynes commented on the behaviour of leading politicians throughout the west and their reluctance to embrace the correct strategy of economic stimulus. His words from then now some 79 years later bear repeating for they have in some respects a hauntingly contemporary quality and relevance. He said then:
Can we prevent an almost complete collapse of the financial structure of modern capitalism ? With no financial leadership left in the world and profound intellectual error as to causes and cures prevailing in the responsible seats of power, one begins to wonder and to doubt...the immediate causes of the world financial panic-for that is what it is- are obvious. they are to be found in a catastrophic fall in the money value not only of commodities but of practically every kind of asset...Debtors of all kinds find that their securities are no longer the equal of their debts. Few governments still have revenues sufficient to cover the fixed money -charges for which they have made themselves liable.
Moreover, a collapse of this kind feeds on itself. we are now in the phase where the risk of carrying assets with borrowed money is so great that there is a competitive panic to get liquid. and each individual who succeeds in getting more liquid forces down the price of assets in the process, with the result that the margins of other individuals are impaired and their courage undermined. and so the process continues. ..each nation, in an effort to improve its relative position, takes measures injurious to the absolute prosperity of its neighbours ; and since its example is not confined to itself, it suffers more from similar action by its neighbours than it gains from such action itself. practically all the remedies popularly advocated to-day are of this internecine character. competitive wage reductions, competitive tariffs, competitive liquidation of foreign assets, competitive currency deflations, competitive contractions of new development- all are of this beggar-my-neighbour description. The modern capitalist is a fair- weather sailor.as soon as a storm rises he abandons the duties of navigation and even sinks the boats which might carry him to safety by his haste to push his neighbours off and himself in.
I have spoken of competitive economy campaigns and competitive contractions of new development...An economy campaign, in my opinion, is a beggar my neighbour enterprise, just as much competitive tariffs or competitive wage reductions, which are perhaps more obviously of this description. for one man's expenditure is another's income. thus whenever we refrain from expenditure, whilst we undoubtedly increase our own margin , we diminish that of someone else; and if the practice is universally followed, everyone will be worse off. An individual may be forced by his private circumstances to curtail his normal expenditure, and no one can blame him. But let no one suppose that he is performing a public duty in behaving in such a way. an individual or an institution or a public body which voluntarily and unnecessarily curtails or postpones expenditures which is admittedly useful is performing an anti-social act.
Unfortunately the popular mind has been educated away from the truth, away from common sense. the average man has been taught to believe what his common sense would tell him was absurd. Even remedies of a right tendency have become discredited because of the failure of a timid and vacillating application of them at an earlier stage...through lack of foresight and constructive imagination the financial and political authorities of the world have lacked the courage or the conviction at each stage of the decline to apply the available remedies in sufficiently drastic doses;......
In the United States it is almost inconceivable what rubbish a public man has to utter to-day if he is to keep respectable. Serious and sensible bankers, who as men of common sense are trying to do what they can to stem the tide of liquidation and to stimulate the forces of expansion, have to go about assuring the world of their conviction that there is no serious risk of inflation when what they really mean is that they cannot yet see good enough grounds for daring to hope for it....What we have to fear ...is timidity and a reluctance to act boldly.
(J.M.Keynes, an excerpt from the Halley Stewart lecture 1931, the World's Economic Crisis and the Way of Escape Robert Skidelsky states that Keynes gave this talk in Feb. of 1932 but its text is printed in the book entitled Halley Stewart Lecture 1931published by George Allen and Unwin, a copy of which I have in front of me. He then cites his source as the CW vol.21 of Keynes So perhaps Keynes made his talk in Feb. 1932 but it was included in the Halley Stewart Lecture 1931 published in May of 1932 after Keynes' had delivered his address. )
In 1931 (or 1932 see below) John Maynard Keynes delivered a lecture in Chicago sponsored by the Halley Stewart Trust on the economic depression and the financial crisis that developed in its wake. During that lecture Keynes commented on the behaviour of leading politicians throughout the west and their reluctance to embrace the correct strategy of economic stimulus. His words from then now some 79 years later bear repeating for they have in some respects a hauntingly contemporary quality and relevance. He said then:
Can we prevent an almost complete collapse of the financial structure of modern capitalism ? With no financial leadership left in the world and profound intellectual error as to causes and cures prevailing in the responsible seats of power, one begins to wonder and to doubt...the immediate causes of the world financial panic-for that is what it is- are obvious. they are to be found in a catastrophic fall in the money value not only of commodities but of practically every kind of asset...Debtors of all kinds find that their securities are no longer the equal of their debts. Few governments still have revenues sufficient to cover the fixed money -charges for which they have made themselves liable.
Moreover, a collapse of this kind feeds on itself. we are now in the phase where the risk of carrying assets with borrowed money is so great that there is a competitive panic to get liquid. and each individual who succeeds in getting more liquid forces down the price of assets in the process, with the result that the margins of other individuals are impaired and their courage undermined. and so the process continues. ..each nation, in an effort to improve its relative position, takes measures injurious to the absolute prosperity of its neighbours ; and since its example is not confined to itself, it suffers more from similar action by its neighbours than it gains from such action itself. practically all the remedies popularly advocated to-day are of this internecine character. competitive wage reductions, competitive tariffs, competitive liquidation of foreign assets, competitive currency deflations, competitive contractions of new development- all are of this beggar-my-neighbour description. The modern capitalist is a fair- weather sailor.as soon as a storm rises he abandons the duties of navigation and even sinks the boats which might carry him to safety by his haste to push his neighbours off and himself in.
I have spoken of competitive economy campaigns and competitive contractions of new development...An economy campaign, in my opinion, is a beggar my neighbour enterprise, just as much competitive tariffs or competitive wage reductions, which are perhaps more obviously of this description. for one man's expenditure is another's income. thus whenever we refrain from expenditure, whilst we undoubtedly increase our own margin , we diminish that of someone else; and if the practice is universally followed, everyone will be worse off. An individual may be forced by his private circumstances to curtail his normal expenditure, and no one can blame him. But let no one suppose that he is performing a public duty in behaving in such a way. an individual or an institution or a public body which voluntarily and unnecessarily curtails or postpones expenditures which is admittedly useful is performing an anti-social act.
Unfortunately the popular mind has been educated away from the truth, away from common sense. the average man has been taught to believe what his common sense would tell him was absurd. Even remedies of a right tendency have become discredited because of the failure of a timid and vacillating application of them at an earlier stage...through lack of foresight and constructive imagination the financial and political authorities of the world have lacked the courage or the conviction at each stage of the decline to apply the available remedies in sufficiently drastic doses;......
In the United States it is almost inconceivable what rubbish a public man has to utter to-day if he is to keep respectable. Serious and sensible bankers, who as men of common sense are trying to do what they can to stem the tide of liquidation and to stimulate the forces of expansion, have to go about assuring the world of their conviction that there is no serious risk of inflation when what they really mean is that they cannot yet see good enough grounds for daring to hope for it....What we have to fear ...is timidity and a reluctance to act boldly.
(J.M.Keynes, an excerpt from the Halley Stewart lecture 1931, the World's Economic Crisis and the Way of Escape Robert Skidelsky states that Keynes gave this talk in Feb. of 1932 but its text is printed in the book entitled Halley Stewart Lecture 1931published by George Allen and Unwin, a copy of which I have in front of me. He then cites his source as the CW vol.21 of Keynes So perhaps Keynes made his talk in Feb. 1932 but it was included in the Halley Stewart Lecture 1931 published in May of 1932 after Keynes' had delivered his address. )
Germany reluctant over creation of a Eurobond
Wolgang Schauble is a man of considerable talent and courage. He has bravely overcome much personal hardship in his life . He has made a distinguished contribution to European politics.
However, with respect to the current crisis in Europe over sovereign debt his and Chancellor Merkel's opposition to the creation of a Euro sovereign debt bond to protect the European economy from bond buyers blackmail and to advance the quality and sophistication of the European monetary and fiscal institutions is a mistake. In today's Financial Times there is a very interesting video interview with Herr Schauble in which he explains his views on European monetary and fiscal policy and reiterates his deeply anti-Keynesian fiscal conservatism insisting that deficit reduction must be a top priority wherever possible.
This is an error when unemployment is as high as it is in so many key European countries. High unemployment in Europe is destabilizing and quite frankly history has shown us where it can lead.We neglect history at our peril.
At a time when bond buyers' blackmail is at work in short selling the debt of countries like Spain, Portugal, Greece and Ireland and Italy the entire Euro project is at risk. It would be much better for the Europeans to persuade the German dominated European central bank to immediately increase its acquisition of sovereign debt bonds from the countries under attack and to convene a study group to at least consider the idea of an eventual sovereign debt instrument for the Euro zone than to reject these measures out of hand.
One of the principal objections that is often stated that it would cost Germany more to finance its own debt because the euro bond would demand a higher interest rate than a German bond on its own is easily solved by giving countries the option including Germany to issue either of the two debt instruments or some combination of them. It is possible that the mere existence of the Eurobond would draw purchasers away from the German sovereign bond and thereby raise interest rates on them but I doubt that this spread would be very wide and with experience over time it could easily be managed. So long as there are some constraints structurally embedded in the system based on the relative size of the economy and the rate of unemployment that prevails no one country will be able to take undue advantage of the system and the option to issue sovereign national bonds remains.
However, with respect to the current crisis in Europe over sovereign debt his and Chancellor Merkel's opposition to the creation of a Euro sovereign debt bond to protect the European economy from bond buyers blackmail and to advance the quality and sophistication of the European monetary and fiscal institutions is a mistake. In today's Financial Times there is a very interesting video interview with Herr Schauble in which he explains his views on European monetary and fiscal policy and reiterates his deeply anti-Keynesian fiscal conservatism insisting that deficit reduction must be a top priority wherever possible.
This is an error when unemployment is as high as it is in so many key European countries. High unemployment in Europe is destabilizing and quite frankly history has shown us where it can lead.We neglect history at our peril.
At a time when bond buyers' blackmail is at work in short selling the debt of countries like Spain, Portugal, Greece and Ireland and Italy the entire Euro project is at risk. It would be much better for the Europeans to persuade the German dominated European central bank to immediately increase its acquisition of sovereign debt bonds from the countries under attack and to convene a study group to at least consider the idea of an eventual sovereign debt instrument for the Euro zone than to reject these measures out of hand.
One of the principal objections that is often stated that it would cost Germany more to finance its own debt because the euro bond would demand a higher interest rate than a German bond on its own is easily solved by giving countries the option including Germany to issue either of the two debt instruments or some combination of them. It is possible that the mere existence of the Eurobond would draw purchasers away from the German sovereign bond and thereby raise interest rates on them but I doubt that this spread would be very wide and with experience over time it could easily be managed. So long as there are some constraints structurally embedded in the system based on the relative size of the economy and the rate of unemployment that prevails no one country will be able to take undue advantage of the system and the option to issue sovereign national bonds remains.
Friday, December 3, 2010
US unemployment rises to 9.8 %
The US Bureau of Labour Statistics has released its latest report on employment and the labour market. Unfortunately only 50,000 jobs were created last month in the private sector leading to a net gain of 39,000 once job losses in the public sector were subtracted. Given that new workers seeking employment exceeds this amount substantially each month unemployment rose to 9.8 %. It takes 125,000 new additional jobs each month just to absorb new entrants to the labour force, ceteris paribus.When unemployment rises to the levels it has in the U.S. large numbers of workers who would rather be working but despair of finding jobs also leave the workforce and become discouraged workers. The headline rate of unemployment is the outcome of the addition of these inward and outward flows. As unemployment falls many of these discouraged workers rejoin the labour force and swell the ranks of those searching for work which is why sometimes a rise in the headline unemployment rate actually heralds the tendency for unemployment to be dropping. But this is not what these numbers are suggesting. At these rates of private job creation and note despite the stimulus actual job losses at the state and local level because of foolish ill timed austerity measures it will take a very long time to bring the unemployment rate down to more acceptable levels.
The elevated headline rate is definitely not a good result and further evidence of a need for greater stimulus from both monetary and fiscal policy. Discouraged workers and those working part time who preferred full time work remained elevated. The broader U6 measure of unemployment remained at 17 %. Floyd Norris in the New York Times(http://norris.blogs.nytimes.com/2010/12/03/who-ya-gonna-believe-2/) has pointed out that the current BLS report might well be revised upwards in term of private sector hiring because the survey completion rate was lower than usual because of the run up to Thanksgiving and also because it is at odds with a just reported private sector manufacturing survey, the Institute for supply management monthly survey of manufacturing that suggested more robust job hiring. We shall see if this turns out to be so.
In any case the private sector needs to spend the large cash it has accumulated and do more hiring. If it continues to refuse to do this then thought should be given to a tax on profits that would be rebatable in return for increased hires.
U-1 Persons unemployed 15 weeks or longer, as a percent of the civilian labor force | 5.6 | 5.5 | 5.5 | 5.8 | 5.7 | 5.5 | 5.5 | 5.7 | 5.8 |
|---|---|---|---|---|---|---|---|---|---|
U-2 Job losers and persons who completed temporary jobs, as a percent of the civilian labor force | 5.9 | 5.4 | 5.8 | 6.5 | 5.9 | 6.0 | 6.1 | 5.9 | 6.2 |
U-3 Total unemployed, as a percent of the civilian labor force (official unemployment rate) | 9.4 | 9.0 | 9.3 | 10.0 | 9.5 | 9.6 | 9.6 | 9.6 | 9.8 |
U-4 Total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers | 9.9 | 9.8 | 10.0 | 10.5 | 10.2 | 10.3 | 10.3 | 10.4 | 10.6 |
U-5 Total unemployed, plus discouraged workers, plus all other persons marginally attached to the labor force, as a percent of the civilian labor force plus all persons marginally attached to the labor force | 10.7 | 10.6 | 10.8 | 11.3 | 11.0 | 11.0 | 11.0 | 11.1 | 11.3 |
U-6 Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force | 16.4 | 15.9 | 16.3 | 17.2 | 16.5 | 16.7 | 17.1 | 17.0 | 17.0 |
NOTE: Persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not currently looking for work. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule. Updated population controls are introduced annually with the release of January data. | |||||||||
column 1=Nov 2009 not seasonally adjusted
col.2=Oct.2010 not seasonally adjusted; col. 3=Nov.2010 not seasonally adjusted; col.4 Nov.09 seasonally adjusted (s.a.) ;col.5=July 2010 (s.a.); col.6 Aug.2010 s.a.;col.7 Sept.2010 s.a.; col.8 Oct.2010 s.a.; col.9 Nov.2010 s.a.
courtesy of US Bureau of Labour Statistics
In Canada partly because of a declining participation rate by young workers the rate of unemployment fell to 7.6 %
Courtesy Statistics Canada
Monday, November 29, 2010
The Euro sovereign debt bond some details
Further to my earlier post on how creating a Euro sovereign debt bond linked to the relative weight of a member country's GDP and its rate of unemployment look at how this might play out with respect to the 4 countries currently experiencing difficulties. Spain, Portugal, Ireland and Greece.
Country GDP trillion euros % of euro area gdp debt bond allotment
based on gdp alone
Spain 1.051 trillion 11.3 % 802 billion euros
Greece .238 2.6% 183.6 billion
Ireland .164 1.8 % 127.1 billion
Portugal .164 1.8% 127.1 billion
All data from Eurostat as of April 2010. GDP data is for 2009.
Clearly if such a sovereign debt eurobond existed under the terms that I have proposed there would be no crisis in the euro area with respect to the sovereign debt of these four countries. Only Greece could not cover its total debt by Eurobond allotted allocated by share of euro area GDP alone, but with an adjustment for higher unemployment it would be able to do so.
Country GDP trillion euros % of euro area gdp debt bond allotment
based on gdp alone
Spain 1.051 trillion 11.3 % 802 billion euros
Greece .238 2.6% 183.6 billion
Ireland .164 1.8 % 127.1 billion
Portugal .164 1.8% 127.1 billion
All data from Eurostat as of April 2010. GDP data is for 2009.
Clearly if such a sovereign debt eurobond existed under the terms that I have proposed there would be no crisis in the euro area with respect to the sovereign debt of these four countries. Only Greece could not cover its total debt by Eurobond allotted allocated by share of euro area GDP alone, but with an adjustment for higher unemployment it would be able to do so.
A proposal for a Euro area sovereign debt bond
Harold Chorney | November 29,2:31 p.m. I have just posted this comment on the FT's very interesting article by Wolfgang Munchau on the problem of European sovereign debt and the crises involving the PIGS. My comment is drawn from the work which I did in the 1980s and 1990s on Canadian debt problems and the limits of a federal structure combining with a central bank that had not sufficiently developed its federal qualities. what applied to Canada can easily be applied to Europe.
Historical evidence ought to have permitted more flexible limits, particularly in times of high unemployment.
The idea of a common euro sovereign debt bond is a very good idea. Each member country ought to have access to issuing such bonds in proportion to its GDP as a proportion of the Euro area GDP and its rate of unemployment relative to the average unemployment rate that prevails in the leading three Euro economies in terms of low unemployment.
So if a given country were 5 % of the euro area GDP and its unemployment rate several percentage points above the the average in the three leading economies with the lowest unemployment it would be entitled to issue sovereign euro debt bonds backed by the whole union and the ECB up to 5 % of the total euro area issue plus some agreed upon extra percentage to account for the higher unemployment.
The ECB should then be authorised to buy and sell this debt to ensure appropriate interest rates and avoid sovereign debt crises. With a structure like this or some variant of it the Euro area could then have a flexible, modern, yet fairly constrained system for managing debt and the business cycle.
Friday, November 26, 2010
Europe Union euro area some facts to counter deficit hysteria
As usual, once deficit hysteria hits, as it has this past week in Europe, a great deal of irrational and non factually based opinions get tossed about as if they were gospel as opposed to hysteria.
Now that Ireland has been run down the hunt has turned to Portugal and Spain.
But remember both of these countries belong to the Eurozone which is an economic powerhouse with a population of over 329 million people.(All the data that I will be citing comes from Eurostat and the European Central Bank, the official source of statistics for the European union as well as the Spanish Ministry of the Economy.)
Unfortunately overall unemployment in Europe is still far too high . It is 10.1 %. or some 15.9 million people.
It is particularly a problem among young people under the age of 25. In 2009 the rates according to Eurostat for this age demographic were as follows: Spain 37.8 %; Portugal 20 %; Greece 25.8 %; Ireland 24.4 %; France 23.5 %; Italy 25.3 %; Sweden 25.0 %; U.K. 19.1 %; Germany 10.4 %
Clearly there is a need for special stimulus and employment programs aimed at young workers in Europe. austerity worshipping at the alter of debt reduction won't do the job.
Countries like Germany are doing relatively well but Spain, Ireland, Portugal and Greece all suffer from excessive overall unemployment well beyond 10 %. Their rates as of fall 2010 are as follows: Spain 20 %; Ireland 14.1 %; Portugal 10.6 %; Greece 12.2 %.
In comparison Germany has 7.3 % unemployment.
If we add up all the gross government debt in the Euro area and compare it to the GDP of the Euro area we find that it is 79.2 % of the GDP. An elevated figure but very far from the disaster it is made out to be.The Spanish debt to GDP ratio for 2010 is 62.5 % Its debt outstanding amounts to some 550 billion euros.
Also remember that is gross government debt. Net debt which subtracts out assets and is a more accurate measure of accounting is significantly less. A significant portion of this Euro area debt is held by non euro area residents including the British and the Swedes, some 42.4 % according to the data. The Spanish ratio of foreign debt holders of its debt is smaller than this.
The interest rate on ten year bonds is 3.3 % and the one year inter bank lending rate is 1.5 % The currency in circulation is 838.7 billion euros and the very broadly defined money stock M3 is 9474 billion euros with a euro area GDP that totals over 14 trillion U.S. dollars in purchasing power parity terms.
If the ECB simply did its job properly, it is perfectly feasible for it, in conjunction with the European financial stability facility, to temporarily support countries like Portugal and Spain and reverse bond market blackmail which is clearly not based on facts but on deficit hysteria.
Spain's total debt is far outweighed by the euro area GDP and its wealth of assets. Given the high unemployment of over 20 % in Spain,austerity is not a sensible policy option as opposed to European fiscal stimulus and quantitative easing. In the long run the results would be much better and considerable unnecessary hardship averted.
Now that Ireland has been run down the hunt has turned to Portugal and Spain.
But remember both of these countries belong to the Eurozone which is an economic powerhouse with a population of over 329 million people.(All the data that I will be citing comes from Eurostat and the European Central Bank, the official source of statistics for the European union as well as the Spanish Ministry of the Economy.)
Unfortunately overall unemployment in Europe is still far too high . It is 10.1 %. or some 15.9 million people.
It is particularly a problem among young people under the age of 25. In 2009 the rates according to Eurostat for this age demographic were as follows: Spain 37.8 %; Portugal 20 %; Greece 25.8 %; Ireland 24.4 %; France 23.5 %; Italy 25.3 %; Sweden 25.0 %; U.K. 19.1 %; Germany 10.4 %
Clearly there is a need for special stimulus and employment programs aimed at young workers in Europe. austerity worshipping at the alter of debt reduction won't do the job.
Countries like Germany are doing relatively well but Spain, Ireland, Portugal and Greece all suffer from excessive overall unemployment well beyond 10 %. Their rates as of fall 2010 are as follows: Spain 20 %; Ireland 14.1 %; Portugal 10.6 %; Greece 12.2 %.
In comparison Germany has 7.3 % unemployment.
If we add up all the gross government debt in the Euro area and compare it to the GDP of the Euro area we find that it is 79.2 % of the GDP. An elevated figure but very far from the disaster it is made out to be.The Spanish debt to GDP ratio for 2010 is 62.5 % Its debt outstanding amounts to some 550 billion euros.
Also remember that is gross government debt. Net debt which subtracts out assets and is a more accurate measure of accounting is significantly less. A significant portion of this Euro area debt is held by non euro area residents including the British and the Swedes, some 42.4 % according to the data. The Spanish ratio of foreign debt holders of its debt is smaller than this.
The interest rate on ten year bonds is 3.3 % and the one year inter bank lending rate is 1.5 % The currency in circulation is 838.7 billion euros and the very broadly defined money stock M3 is 9474 billion euros with a euro area GDP that totals over 14 trillion U.S. dollars in purchasing power parity terms.
If the ECB simply did its job properly, it is perfectly feasible for it, in conjunction with the European financial stability facility, to temporarily support countries like Portugal and Spain and reverse bond market blackmail which is clearly not based on facts but on deficit hysteria.
Spain's total debt is far outweighed by the euro area GDP and its wealth of assets. Given the high unemployment of over 20 % in Spain,austerity is not a sensible policy option as opposed to European fiscal stimulus and quantitative easing. In the long run the results would be much better and considerable unnecessary hardship averted.
Monday, November 22, 2010
Irish bank bailout causes political and economic turmoil
Ireland is a small country of 4.5 million people which in the years before the crash had been the favourite showcase of the European union for its new found prosperity, entrepreneurship and innovative banking sector. All of this has turned to dust with the global financial crisis , the collapse of the Irish financial sector after its bubble burst and the ensuing recession and high unemployment (13.9 %) The six leading Irish banks were heavily over invested in loans tied to the bubble and had expanded well beyond their safe limits. When they crashed and faced insolvency the Irish government, despite lacking the backing of its own central bank bailed them out and assumed the burden of their debt. But unfortunately this did not stop the hemorrhaging. Further runs on the banks deposit base have continued . Since the Irish banks are in turn indebted to the German , French, Belgium and British banks their total collapse would also destabilize a major chunk of European banking. So to prevent this the European leadership including Great Britain have offered a major set of loans to forestall the collapse and permit Ireland to recover over the course of time.
But very unfortunately and foolishly in my judgement these loans also come with major strings of austerity attached. The conditionality terms are so onerous that there has already been street demonstrations opposed to the bailout in the Irish capital. In addition the Green party has announced it will leave the fragile coalition government thereby precipitating an election which the Labour opposition party has a good chance to win. It claims to be opposed to the bailout and its onerous terms but it is not clear what its alternative policy is.
Given that Ireland is already in a deep recession imposing austerity will simply make things worse. The proposed austerity includes the introduction of a property tax (in itself not necessarily a bad idea); a water tax; a substantial cut in the minimum wage down to €7.65 an hour from € 8.65, the taxation of low paid workers who were previously tax exempt; public sector job cuts of 5000 and the elimination of 15,000 other public sector jobs through attrition; cuts to child benefits and other social welfare benefits. All of these cuts will come about because of the bad behaviour of the private banks, the flawed nature of the Irish government's initial bailout and the bad policies of the European union and central bank with respect to debt and banking crises. But it will be the general public and the poor in particular who will pay the price.
Given the small size of the Irish economy where the current net debt to GDP ratio is about 75 % it would have been quite feasible to have helped Ireland out of the troubles without imposing draconian austerity and imposing more of the burden on the banking financiers who are largely responsible for the mess in the first place. Some of the bondholders will be settling for a haircut down to 20 % of the value of the bonds they hold but more needs to be done.We shall see where this leads but it is really time overdue for a major rethink about how Europe is operating.
The €80 to 90 billion loan that the EU and the IMF are advancing is backed up by the €750 b. fund at their disposal( According to the F.T. there is 60 billion in the European financial stability mechanism, 440 billion in the European financial stability facility based in Luxembourg based on AAA guaranteed funds raised in the money markets backed by the 16 countries which use the euro as well as €250 b. from the I.M.F.)
But very unfortunately and foolishly in my judgement these loans also come with major strings of austerity attached. The conditionality terms are so onerous that there has already been street demonstrations opposed to the bailout in the Irish capital. In addition the Green party has announced it will leave the fragile coalition government thereby precipitating an election which the Labour opposition party has a good chance to win. It claims to be opposed to the bailout and its onerous terms but it is not clear what its alternative policy is.
Given that Ireland is already in a deep recession imposing austerity will simply make things worse. The proposed austerity includes the introduction of a property tax (in itself not necessarily a bad idea); a water tax; a substantial cut in the minimum wage down to €7.65 an hour from € 8.65, the taxation of low paid workers who were previously tax exempt; public sector job cuts of 5000 and the elimination of 15,000 other public sector jobs through attrition; cuts to child benefits and other social welfare benefits. All of these cuts will come about because of the bad behaviour of the private banks, the flawed nature of the Irish government's initial bailout and the bad policies of the European union and central bank with respect to debt and banking crises. But it will be the general public and the poor in particular who will pay the price.
Given the small size of the Irish economy where the current net debt to GDP ratio is about 75 % it would have been quite feasible to have helped Ireland out of the troubles without imposing draconian austerity and imposing more of the burden on the banking financiers who are largely responsible for the mess in the first place. Some of the bondholders will be settling for a haircut down to 20 % of the value of the bonds they hold but more needs to be done.We shall see where this leads but it is really time overdue for a major rethink about how Europe is operating.
The €80 to 90 billion loan that the EU and the IMF are advancing is backed up by the €750 b. fund at their disposal( According to the F.T. there is 60 billion in the European financial stability mechanism, 440 billion in the European financial stability facility based in Luxembourg based on AAA guaranteed funds raised in the money markets backed by the 16 countries which use the euro as well as €250 b. from the I.M.F.)
Wednesday, November 17, 2010
U.S. producer price index all time low
Yesterday in the middle of the debate over the wisdom of quantitative easing more hard evidence from the U.S. Bureau of Labour statistics arrived about the absence of the threat of inflation. Instead, as I and others have been suggesting for some time now the risk is on the downside, further disinflation and even perhaps deflation. Wholesale prices as measured by the producer price index for finished goods in the month of October rose only by 0.4 %. Once they are adjusted for volatile elements like energy prices and food prices they actually had declined by 0.6% . Clear evidence that inflation is nowhere near on the horizon and that concern about Q.E. somehow provoking inflation misguided.
Housing starts unfortunately also fell by 11.7 %, again not a sign of an overheating economy. The complete consequences of the burst bubble in real estate are still working their way through the system.
The one bright light is however the fact that restructured GM is making profits and will be issuing shares in a much touted IPO. Share prices are thought to be be around $32-33 and many observers, though not all expect the price to rise by 10 % or more in the first day. The IPO might even be oversubscribed. This means both the U.S. and Canadian governments and the UAW and CAW will be able to sell a significant portion of their shares acquired during the bailout of old GM and reduce their holdings substantially if they wish to. According to the Wall Street Journal the U.S. government hopes to sell off over 13 billion dollars worth of stock reducing their holdings substantially and recouping along side the 9.5 billion that GM has already paid back over 22 billion dollars of their bailout funding. The Canadian federal and provincial governments involved will be selling 35 million shares and recouping over a billion dollars of their investment in the bailout.
Housing starts unfortunately also fell by 11.7 %, again not a sign of an overheating economy. The complete consequences of the burst bubble in real estate are still working their way through the system.
The one bright light is however the fact that restructured GM is making profits and will be issuing shares in a much touted IPO. Share prices are thought to be be around $32-33 and many observers, though not all expect the price to rise by 10 % or more in the first day. The IPO might even be oversubscribed. This means both the U.S. and Canadian governments and the UAW and CAW will be able to sell a significant portion of their shares acquired during the bailout of old GM and reduce their holdings substantially if they wish to. According to the Wall Street Journal the U.S. government hopes to sell off over 13 billion dollars worth of stock reducing their holdings substantially and recouping along side the 9.5 billion that GM has already paid back over 22 billion dollars of their bailout funding. The Canadian federal and provincial governments involved will be selling 35 million shares and recouping over a billion dollars of their investment in the bailout.
Subscribe to:
Posts (Atom)