Euobserver has an article ("Mass unemployment in the Balkans – a need to act") by Kori Udovicki and Gerald Knaus.
It compares how in former Yugoslavia the textile industry has shrunk while in neighboring Bulgaria it has exploded. The difference: Bulgaria has an - EU supported - industrial policy that promotes this kind of industry by encouraging foreign investment, providing targeted education, etc.. In contrast in former Yugoslavia the anti-communist aversion against any kind of industrial policy still dominates.
Ideology is nice, but it shouldn't cloud common sense. Copying best practices from other countries should be standard routine.
Showing posts with label economy. Show all posts
Showing posts with label economy. Show all posts
Tuesday, April 17, 2012
Thursday, February 09, 2012
Cargo culters
Cargo cults happen in primitive societies where people believe that performing some magic rites will bring in the white men with their rich resources. The term originates from Melanesia where an ancient belief that ancestors and gods could provide sudden richness combined with the modern experience of first missionaries and later - during World War II - soldiers bringing in huge resources. To seduce those ancestors and gods they performed rites, built mock airports, etc.
The term "cargo cult" has become a metaphor for symbolic not effective action. It has been used for the behavior of many Third World leaders after their independence. Someone has even described communism as a cargo cult because it copies only a few random elements - such as steel production - from economically successful countries. But as it doesn't really understand how capitalism works it is doomed to fail.
As I see it cargo culting is popular nowadays. The favorite rite at the moment is being pro-Western. I think it is no coincidence that the most pro-Western leader of Russia - Yeltsin - left the greatest mess. Similarly, the most pro-Western leader of Serbia - Djindjic - became infamous for the corruption of his regime. I see the LDP in Serbia as the most modern version of this cult. But it may not be a coincidence either that pro-Western Tadic has been criticized for having implemented very few reforms.
Of course there is nothing wrong with being on good terms with the Western World - the main power of our times. The problem is that these people think that that is the only thing they have to do. In fact developing a country is mainly humble hard work, like getting trains to run on time, providing good roads, having everyone pay his taxes, preventing special interest groups from becoming too powerful and having judges who really speak justice.
This does not mean that the cargo culters never deliver. Sometimes there is some big foreign investment or some EU subsidy is awarded. But if you have a cool look at the long term the effect is small, the result is instable (see Greece) and - given the financial problems of the EU - the money available is shrinking.
In educational psychology you have the theory of conditioning. Basically it says that now and then (unpredictable) a big reward is the most addictive form of conditioning. Lottery organizers know all about this. But is also works with our leaders.
The Chinese show how one should develop a country. Unlike Russia they don't antagonize the West. They simply go their own way developing their country. When they build a road or an airport it is ready on time and the quality is good.
In the mean time the EU and the US are sliding increasingly towards cargo cult behavior. The financial deregulation was a typical example of that. Nobody knew how it was supposed to improve the economy, but as it had been accepted as an article of faith that deregulation helped the economy grow it was supposed this would help too.
The big advantage that the Chinese have is that they are a country of engineers. They know how things work or are supposed too work and that attitude pervades into the way the country is governed. In many Western countries the power has shifted to lawyers, economists and social scientists. Many of them don't know how things work and - more problematically - they don't care very much. They prefer big theories above simply going to the shop floor and see what the workers are actually doing.
The term "cargo cult" has become a metaphor for symbolic not effective action. It has been used for the behavior of many Third World leaders after their independence. Someone has even described communism as a cargo cult because it copies only a few random elements - such as steel production - from economically successful countries. But as it doesn't really understand how capitalism works it is doomed to fail.
As I see it cargo culting is popular nowadays. The favorite rite at the moment is being pro-Western. I think it is no coincidence that the most pro-Western leader of Russia - Yeltsin - left the greatest mess. Similarly, the most pro-Western leader of Serbia - Djindjic - became infamous for the corruption of his regime. I see the LDP in Serbia as the most modern version of this cult. But it may not be a coincidence either that pro-Western Tadic has been criticized for having implemented very few reforms.
Of course there is nothing wrong with being on good terms with the Western World - the main power of our times. The problem is that these people think that that is the only thing they have to do. In fact developing a country is mainly humble hard work, like getting trains to run on time, providing good roads, having everyone pay his taxes, preventing special interest groups from becoming too powerful and having judges who really speak justice.
This does not mean that the cargo culters never deliver. Sometimes there is some big foreign investment or some EU subsidy is awarded. But if you have a cool look at the long term the effect is small, the result is instable (see Greece) and - given the financial problems of the EU - the money available is shrinking.
In educational psychology you have the theory of conditioning. Basically it says that now and then (unpredictable) a big reward is the most addictive form of conditioning. Lottery organizers know all about this. But is also works with our leaders.
The Chinese show how one should develop a country. Unlike Russia they don't antagonize the West. They simply go their own way developing their country. When they build a road or an airport it is ready on time and the quality is good.
In the mean time the EU and the US are sliding increasingly towards cargo cult behavior. The financial deregulation was a typical example of that. Nobody knew how it was supposed to improve the economy, but as it had been accepted as an article of faith that deregulation helped the economy grow it was supposed this would help too.
The big advantage that the Chinese have is that they are a country of engineers. They know how things work or are supposed too work and that attitude pervades into the way the country is governed. In many Western countries the power has shifted to lawyers, economists and social scientists. Many of them don't know how things work and - more problematically - they don't care very much. They prefer big theories above simply going to the shop floor and see what the workers are actually doing.
Thursday, May 13, 2010
Why the economic crisis continues
As I have said before I think that uneven trade balances are the greatest threat to the world economic system. China's pegged currency makes sure that it has a trade surplus while the US has a trade deficit. And inside the EU the German trade surplus is linked to the trade deficit in Greece, France and some other countries. At some point the deficit countries will run out of money and the surplus countries will have to adapt. But that is very difficult. The 1930s crisis was mainly about the fact that surplus country the US could not adapt to the fact that the world no longer could or would accept its excessive exports. Similarly Japan has never really recovered from the the Louve and Plaza agreements in 1985 when the West no longer accepted its pegged currency and the resulting trade disbalances.
But at the moment the West is still in denial that there is a problem at all. While the West is digging itself in mountains of debt Asia is running high growth figures. It looks like we still have to wait another few years before this situation meets its inevitable end. Maybe the US will roll over and let Asia rob its prosperity. But the more probable scenario is that at some point it simply will say "no".
For those who like a crisis there is already the Greek debt crisis. Europe keeps increasing the stakes: first it offered only to finance Greece until the end of the year. Then it offered to do it for three years. And now we have a 750 bln euro package that aims to take care of all the excessively endebted EU members. But still there is no policy to repair the trade disbalances inside the EU, so the problems will continue.
In the mean time the europhiles inside the EU keep saying that with a stronger Europe the Greek debt crisis would not be such a problem - just as the Californian debt problem is not considered a big problem in the US. What they often forget is that what makes the difference is not power but money. California is not a big problem because Americans pay most of their taxes to the central government who redistributes in the form of social benefits and orders for companies. To get a similar effect in Greece one would need to have the EU pay out things like unemployment benefits. But given the level of corruption at the moment with EU benefits that will only work when the EU takes also care of the distribution of those unemployment benefits. Related to that you would need European courts to handle complaints by people who think they have been treated unfair by that agency and you would need European police to enforce their verdicts. To summarize: it would be a very big step. Do we really want that?
But even if we want that it would be difficilut to implement given the differences in wealth inside the EU. Romania is much poorer than Germany. When you would give them the same level of benefits it would have a destabilizing effect in Germany - just like happened in Eastern Germany after the reunification. But when you have different levels you get the question which levels should be used. Greece is an expensive country - but mainly because it is living above its means. Should you reward that?
But at the moment the West is still in denial that there is a problem at all. While the West is digging itself in mountains of debt Asia is running high growth figures. It looks like we still have to wait another few years before this situation meets its inevitable end. Maybe the US will roll over and let Asia rob its prosperity. But the more probable scenario is that at some point it simply will say "no".
For those who like a crisis there is already the Greek debt crisis. Europe keeps increasing the stakes: first it offered only to finance Greece until the end of the year. Then it offered to do it for three years. And now we have a 750 bln euro package that aims to take care of all the excessively endebted EU members. But still there is no policy to repair the trade disbalances inside the EU, so the problems will continue.
In the mean time the europhiles inside the EU keep saying that with a stronger Europe the Greek debt crisis would not be such a problem - just as the Californian debt problem is not considered a big problem in the US. What they often forget is that what makes the difference is not power but money. California is not a big problem because Americans pay most of their taxes to the central government who redistributes in the form of social benefits and orders for companies. To get a similar effect in Greece one would need to have the EU pay out things like unemployment benefits. But given the level of corruption at the moment with EU benefits that will only work when the EU takes also care of the distribution of those unemployment benefits. Related to that you would need European courts to handle complaints by people who think they have been treated unfair by that agency and you would need European police to enforce their verdicts. To summarize: it would be a very big step. Do we really want that?
But even if we want that it would be difficilut to implement given the differences in wealth inside the EU. Romania is much poorer than Germany. When you would give them the same level of benefits it would have a destabilizing effect in Germany - just like happened in Eastern Germany after the reunification. But when you have different levels you get the question which levels should be used. Greece is an expensive country - but mainly because it is living above its means. Should you reward that?
Friday, March 19, 2010
To pension or not to pension
Some countries are very careful about saving for pensions for future generations. Other countries have a "pay-as-you-go" system where nothing is saved and persions are paid by the next generation.
Until now it was fashionable to paint the first type of countries as responsible and the last type as irresponsible. However, the recent fracas about the trade surpluses of China and Germany puts this saving in new light. It looks like the world cannot sustain it if every country would save for their pensions - it will result in too much saving and too little consumption. And with the ageing of the world population this problem is only becoming more acute.
It looks like we will soon have to tell countries that it is irresponsible when they save too much because it harms the rest of the world.
Until now it was fashionable to paint the first type of countries as responsible and the last type as irresponsible. However, the recent fracas about the trade surpluses of China and Germany puts this saving in new light. It looks like the world cannot sustain it if every country would save for their pensions - it will result in too much saving and too little consumption. And with the ageing of the world population this problem is only becoming more acute.
It looks like we will soon have to tell countries that it is irresponsible when they save too much because it harms the rest of the world.
Sunday, February 21, 2010
To stimulate or not to stimulate
Economists all over the Western world are divided: should we keep stimulating our economies or shouldn't we do so. The fans of the continuing of the easy money claim that when we stop our economies might yet fall into a crisis. They like to point to Roosevelt's effort to end stimulation in 1937 after which the crisis promptly came back. But their adversaries like to point out that the fate of Greece might also happen to the US or the UK. Some day there might be no more money to borrow and then they would face a really big crisis.
I believe it depends on the situation. Some general rules are:
- it is crucial to keep the country from becoming too endebted. So when a country is running trade deficits and has a negative balance of payments - like the US now - it should devalue its currency. Living above your means doesn't work.
- you cannot trust on export alone. China and Japan now are very similar to the US in the 1930s. They are dependent on export for growth. But you can only export so much before the rest of world runs out of money. If that happens your growth model runs into a wall.
- when there is unemployment government may inject extra money in the economy. This is basically a matter of distribution within a country. When the producers have too much money and the consumers too little the goal is to give the consumers more money. In the short term a stimulus is the best way to achieve that.
I think there are three possible situations:
- producers and consumers are rather in balance. In that case a stimulus will get the economy running again. The cost of the stimulus will soon be made up by additional tax receipts and less unemployment benefits.
- there is too much money with the consumers and too little with the producers. This is the 1970s scenario. A stimulus only leads to stagflation. The solution is to direct more money to the producers - as Thatcher and Reagan did with tax cuts.
- there is much too much money with the producers and too little with the consumers. This is the case with export dependent countries like China and Japan and the US in the 1930s. In this case a stimulus has only a temporarily and weak effect. Economists like to say that the government should just stimulate more, but there are both practical and political limits to how much a government can spend. Japan has now spent so much that its government debt is now above 200% of GDP. That is a major distortion. What is needed are more structural reforms that bring more money to the consumers. In the US it was the war economy of the 1940s that finally brought that restructuring. To accomplish a more consumption oriented economy in peace time one might consider the following measures: policies that favor the poor over the rich (the rich tend to save more), policies that aim for full employment (that leads to upwards pressure on the wages of the poor and so to less inequality) and discouraging saving for the old day (it is much better when people build a house that will serve as their old age reserve; a property bubble however will destroy this way out).
My conclusion is that we in the West need to undo what Reagan and Thatcher did. Not because what they did was wrong, but because what they did has gone too far and we need to bring the balance back towards the consumers.
I am rather pessimistic about China despite its foreign currence reserves. Its policies for fighting the crisis have resulted in bubbles. It looks like China is going the way of Japan after the Plaza Accord. The Plaza Acord forced Japan to revalue its currency. China is not yet facing such pressure but it is clear to everyone that China no longer can keep growing by increasing its exports. Its reaction to that is a very similar real estate bubble like Japan created. The one thing ibn favor of China is that its government seems prepared to make unpopular steps to puncture bubbles.
I believe it depends on the situation. Some general rules are:
- it is crucial to keep the country from becoming too endebted. So when a country is running trade deficits and has a negative balance of payments - like the US now - it should devalue its currency. Living above your means doesn't work.
- you cannot trust on export alone. China and Japan now are very similar to the US in the 1930s. They are dependent on export for growth. But you can only export so much before the rest of world runs out of money. If that happens your growth model runs into a wall.
- when there is unemployment government may inject extra money in the economy. This is basically a matter of distribution within a country. When the producers have too much money and the consumers too little the goal is to give the consumers more money. In the short term a stimulus is the best way to achieve that.
I think there are three possible situations:
- producers and consumers are rather in balance. In that case a stimulus will get the economy running again. The cost of the stimulus will soon be made up by additional tax receipts and less unemployment benefits.
- there is too much money with the consumers and too little with the producers. This is the 1970s scenario. A stimulus only leads to stagflation. The solution is to direct more money to the producers - as Thatcher and Reagan did with tax cuts.
- there is much too much money with the producers and too little with the consumers. This is the case with export dependent countries like China and Japan and the US in the 1930s. In this case a stimulus has only a temporarily and weak effect. Economists like to say that the government should just stimulate more, but there are both practical and political limits to how much a government can spend. Japan has now spent so much that its government debt is now above 200% of GDP. That is a major distortion. What is needed are more structural reforms that bring more money to the consumers. In the US it was the war economy of the 1940s that finally brought that restructuring. To accomplish a more consumption oriented economy in peace time one might consider the following measures: policies that favor the poor over the rich (the rich tend to save more), policies that aim for full employment (that leads to upwards pressure on the wages of the poor and so to less inequality) and discouraging saving for the old day (it is much better when people build a house that will serve as their old age reserve; a property bubble however will destroy this way out).
My conclusion is that we in the West need to undo what Reagan and Thatcher did. Not because what they did was wrong, but because what they did has gone too far and we need to bring the balance back towards the consumers.
I am rather pessimistic about China despite its foreign currence reserves. Its policies for fighting the crisis have resulted in bubbles. It looks like China is going the way of Japan after the Plaza Accord. The Plaza Acord forced Japan to revalue its currency. China is not yet facing such pressure but it is clear to everyone that China no longer can keep growing by increasing its exports. Its reaction to that is a very similar real estate bubble like Japan created. The one thing ibn favor of China is that its government seems prepared to make unpopular steps to puncture bubbles.
Saturday, January 23, 2010
Greece on the road to an economic meltdown
In 2002 the Argentine economy broke down. For years their coin had been pegged to the dollar, but as the inflation in Argentine was higher than in the US this let to an increasing trade deficit for Argentine. Yet the Argentine government couldn't muster the political courage for the painful reforms that were needed to correct this. And so, finally, in 2002 the country had to let its currency float. As a result the economy shrunk that year with 10%. But in the following years it regained healthy growth.
It looks like Greece is going the same road. But it is doubtful whether it will have such a speedy recovery: the problems look to serious. The budget deficit is 12%, it imports three times as much as it exports (29 vs 93 billion US$) and tourism fills only a small part of that gap.
Yet the Greek government can't be bothered with economic reform. They have promised the EU to reform their budget in 2012. But given their lacking sense of urgency they most probably will resort to new bookkeeping tricks rather than apply real reform. The inevitable conclusion has to be a serious economic meltdown.
When the credit crisis hit the Baltics demanded a speedy entry into the eurozone with the claim that that would save their economy. The example of Greece seems to indicate that it only delays the problems by a few years.
As Greece is a member of the eurozone no one knows what form such a meltdown will take. Will the Greek state go broke and stop payments? Will it exit the eurozone? The eurocrats are afraid and go out of their way to pamper the Greek government in order to delay the inevitable. However, this will only have as effect that the final crisis will be worse.
It may take a few more years before the meltdown happens. But the later it happens the worse it may be. For the Balkan countries such a meltdown will be bad news. Greece is an important investor in many countries and it employs many migrant workers from Albania.
It looks like Greece is going the same road. But it is doubtful whether it will have such a speedy recovery: the problems look to serious. The budget deficit is 12%, it imports three times as much as it exports (29 vs 93 billion US$) and tourism fills only a small part of that gap.
Yet the Greek government can't be bothered with economic reform. They have promised the EU to reform their budget in 2012. But given their lacking sense of urgency they most probably will resort to new bookkeeping tricks rather than apply real reform. The inevitable conclusion has to be a serious economic meltdown.
When the credit crisis hit the Baltics demanded a speedy entry into the eurozone with the claim that that would save their economy. The example of Greece seems to indicate that it only delays the problems by a few years.
As Greece is a member of the eurozone no one knows what form such a meltdown will take. Will the Greek state go broke and stop payments? Will it exit the eurozone? The eurocrats are afraid and go out of their way to pamper the Greek government in order to delay the inevitable. However, this will only have as effect that the final crisis will be worse.
It may take a few more years before the meltdown happens. But the later it happens the worse it may be. For the Balkan countries such a meltdown will be bad news. Greece is an important investor in many countries and it employs many migrant workers from Albania.
Thursday, December 24, 2009
Why we are heading for the next economic crisis
With a total lack of economic reforms it seems clear that we are going towards the next bubble. The next crisis may make us look back to the present as a picknick.
For reason of its central position in the economy banks have government protection. This is supposed to result in a steady supply of credit to the business sector and private people. This protection and the access to cheap money from the central bank also constitute a hidden subsidy from the government for the banking sector. For this reason this protection has traditionally been reserved for commercial banks while business banks lack this protection.
Many people think that the Glass-Steagall act that regulated this separation was primarily for the protection of the commercial banks of the greater risks of the business banks. I don't agree. Glass-Steagall was introduced at about the same time that the US government introduced guarantees for the commercial banks. Its goal was to make sure the business banks didn't enjoy the same protection. This not only safed the government money. It also prevented ensuing distortions. Risk is a less important factor as it can be huge at commercial banks too: in periods of falling house prices commercial banks tend to suffer heavily.
Of course a separation between business banks and commercial banks has a price. A company need to keep contacts with two banks to get full service and both banks need to do extensive investigations to determine that it is safe to put money into a company. For this reason there is always the pressure from commercial banks to get more leeway to provide business services to companies. From ths 1970s this pressure succeeded and finally in 1999 Glass-Steagall was repealed.
This resulted in an extended financial sector that was de facto subsidized by the government. Of course this subsidy was hidden in guarantees and Central Bank loans but that didn't make it less real. Being subsidized this channel started to attract more and more money - at the expense of other channels. It was one of the factors that contributed to an increasingly endebted business sector.
In reaction to the credit crisis the banking sector was expanding and companies like Goldman Sachs got a status as bank. This certainly helped stabilize the crisis. But for the long term it was exactly the wrong development. Instead of expanding the guaranteed sector it should have been shrinked by forbidding banks to engage in activities outside their core or at least by making such activities unattractive by demanding large reserves. In addition banks should also be equired to have large reserves against any loans they make towards other financial institutions.
Such restrictions would actually help the recovery. Now much of the easy money disappears in all kind of speculation and such restrictions would make that less attractive.
The consequence of the present policies is that the easy money is stimulating bubbles while it contributes not much to permanent recovery. Sooner or later the new bubbles will burst. That time easy money will no longer be an option - many governments are too endebted - and we may face a real crisis.
For reason of its central position in the economy banks have government protection. This is supposed to result in a steady supply of credit to the business sector and private people. This protection and the access to cheap money from the central bank also constitute a hidden subsidy from the government for the banking sector. For this reason this protection has traditionally been reserved for commercial banks while business banks lack this protection.
Many people think that the Glass-Steagall act that regulated this separation was primarily for the protection of the commercial banks of the greater risks of the business banks. I don't agree. Glass-Steagall was introduced at about the same time that the US government introduced guarantees for the commercial banks. Its goal was to make sure the business banks didn't enjoy the same protection. This not only safed the government money. It also prevented ensuing distortions. Risk is a less important factor as it can be huge at commercial banks too: in periods of falling house prices commercial banks tend to suffer heavily.
Of course a separation between business banks and commercial banks has a price. A company need to keep contacts with two banks to get full service and both banks need to do extensive investigations to determine that it is safe to put money into a company. For this reason there is always the pressure from commercial banks to get more leeway to provide business services to companies. From ths 1970s this pressure succeeded and finally in 1999 Glass-Steagall was repealed.
This resulted in an extended financial sector that was de facto subsidized by the government. Of course this subsidy was hidden in guarantees and Central Bank loans but that didn't make it less real. Being subsidized this channel started to attract more and more money - at the expense of other channels. It was one of the factors that contributed to an increasingly endebted business sector.
In reaction to the credit crisis the banking sector was expanding and companies like Goldman Sachs got a status as bank. This certainly helped stabilize the crisis. But for the long term it was exactly the wrong development. Instead of expanding the guaranteed sector it should have been shrinked by forbidding banks to engage in activities outside their core or at least by making such activities unattractive by demanding large reserves. In addition banks should also be equired to have large reserves against any loans they make towards other financial institutions.
Such restrictions would actually help the recovery. Now much of the easy money disappears in all kind of speculation and such restrictions would make that less attractive.
The consequence of the present policies is that the easy money is stimulating bubbles while it contributes not much to permanent recovery. Sooner or later the new bubbles will burst. That time easy money will no longer be an option - many governments are too endebted - and we may face a real crisis.
Thursday, August 13, 2009
Our economists are blowing bubbles again
The economic world news seems rather optimistic nowadays. In the US the Fed thinks the recession is ending.
The Fed is "more worried about unemployment than a resurgence of inflation". I think they are wrong. There are different kinds of inflation and the one we are seeing now is asset inflation. Look at the hause on the stock exchanges and the fact that house prices are starting to rise again in regions where they hadn't bottomed out to historic prices.
That is exactly how the economy was propped up during the last decade. Then too there was too much money that couldn't be invested productively and it ended up in speculation.
In the 1929 economic crisis many believe the problem was too much inequality. Rich people tend to spend a smaller percentage of their income on consumption than poorer people and so you get underconsumption. Throughout the 1930s the economy stumbled along. There seemed to be some recovery after 1933, but when government started to address its deficits in 1937 the economy dived again. In the meantime the inequality stayed essentially the same. World War II lowered the inequality very fast and after that it stayed low for decades - while the economy kept humming.
But addressing inequality is hard. The rich people have most of the power and it looks like only a real war gives them enough sense of community that they see the benefit of sacrificing some of their possessions for the community.
The Fed is "more worried about unemployment than a resurgence of inflation". I think they are wrong. There are different kinds of inflation and the one we are seeing now is asset inflation. Look at the hause on the stock exchanges and the fact that house prices are starting to rise again in regions where they hadn't bottomed out to historic prices.
That is exactly how the economy was propped up during the last decade. Then too there was too much money that couldn't be invested productively and it ended up in speculation.
In the 1929 economic crisis many believe the problem was too much inequality. Rich people tend to spend a smaller percentage of their income on consumption than poorer people and so you get underconsumption. Throughout the 1930s the economy stumbled along. There seemed to be some recovery after 1933, but when government started to address its deficits in 1937 the economy dived again. In the meantime the inequality stayed essentially the same. World War II lowered the inequality very fast and after that it stayed low for decades - while the economy kept humming.
But addressing inequality is hard. The rich people have most of the power and it looks like only a real war gives them enough sense of community that they see the benefit of sacrificing some of their possessions for the community.
Monday, February 16, 2009
Austria wants a bail-out for Eastern Europe
EUobserver brings an article with the title "Austria pleads with Europe for bail-out of east". It appears that "European banks have a financial engagement of some €1.1 trillion in the region" with Austria the most exposed. Other EU countries are less enthusiastic to give the Eastern Europeans a share in the big stimulus and rescue bonanza, but according to Austria there is no alternative because otherwise "eastern Europe will start to collapse.".
I don't give them much of a chance for the moment. We will rather see a string of local bail-outs. Crisis management means at the moment a string of ad hoc decisions. A structural approach seems far away.
The Telegraph sounds even more alarmist: "Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets.
They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data).
Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia. "
"Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans."
"If Deutsche Bank is correct, the economy will have shrunk by nearly 9pc before the end of this year. This is the sort of level that stokes popular revolt.
The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc – big change), or rescue Austria from its Habsburg adventurism. "
This sounds like a full panic and chaos in the making. The article calls for a stronger role of the European Central Bank to achieve a coordinated response.
Postscript: it seems that a consensus is growing in Europe about how to handle the mess. The price will probably be a weaker euro as a consequence of the high costs of the bailout (good for me as my income is in dollars). More problematic are the weak countries like Greece and Italy. There is some kind of tabu on letting them go from the euro zone as it might weaken the standing of the euro. However, I can't see how they want to accomplish this. The 3 percent limit was already supposed to prevent countries from going bancrupt and it obviously didn't work. I expect that a lot of money will be wasted before the inevitable is accepted: the euro doesn't work with too different economies.
I don't give them much of a chance for the moment. We will rather see a string of local bail-outs. Crisis management means at the moment a string of ad hoc decisions. A structural approach seems far away.
The Telegraph sounds even more alarmist: "Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets.
They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data).
Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia. "
"Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans."
"If Deutsche Bank is correct, the economy will have shrunk by nearly 9pc before the end of this year. This is the sort of level that stokes popular revolt.
The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc – big change), or rescue Austria from its Habsburg adventurism. "
This sounds like a full panic and chaos in the making. The article calls for a stronger role of the European Central Bank to achieve a coordinated response.
Postscript: it seems that a consensus is growing in Europe about how to handle the mess. The price will probably be a weaker euro as a consequence of the high costs of the bailout (good for me as my income is in dollars). More problematic are the weak countries like Greece and Italy. There is some kind of tabu on letting them go from the euro zone as it might weaken the standing of the euro. However, I can't see how they want to accomplish this. The 3 percent limit was already supposed to prevent countries from going bancrupt and it obviously didn't work. I expect that a lot of money will be wasted before the inevitable is accepted: the euro doesn't work with too different economies.
Saturday, February 14, 2009
Japanese crisis lessons: honesty or money?
The New York Times has an article about lessons from the Japan for the US about managing the economic crisis. After a real estable bubble in Japan collapsed in 1990 Japan had its "lost decade" of economic stagnation. Much money was spent on stimulating the economy but the economy only started to recover after the Koizumi government in 2003 forced the banks to account for all their losses.
Yet despite its accurate analysis the article draws the wrong lessons. It concludes that "more money fast" is the lesson from Japan. I think the lesson should be: make the banks (and the economy) honest again. Banking is based on trust. And that trust has been totally destroyed in the US both by the Enrons and the Madoffs, but also by those bankers who sold mortgage packages to their collegues that they knew would never be repaid. If a bank now writes off a huge sum it means that until now it lied about that sum. Worse, it suggests that this or other banks might have more hidden losses. It is this blanket of lies that has to be lifted. That may very well cost a few trillion to the US. But money is not the core of the problem.
Yet despite its accurate analysis the article draws the wrong lessons. It concludes that "more money fast" is the lesson from Japan. I think the lesson should be: make the banks (and the economy) honest again. Banking is based on trust. And that trust has been totally destroyed in the US both by the Enrons and the Madoffs, but also by those bankers who sold mortgage packages to their collegues that they knew would never be repaid. If a bank now writes off a huge sum it means that until now it lied about that sum. Worse, it suggests that this or other banks might have more hidden losses. It is this blanket of lies that has to be lifted. That may very well cost a few trillion to the US. But money is not the core of the problem.
Tuesday, January 13, 2009
Stagflation
The international reaction to the financial crisis leaves me more and more puzzled. Everyone seems to be a Keynesian now. This reminds me of the reason Keynes got out of favor.
The 1973 oil crisis (that greatly increased the oil price) led to an international economic crisis. This became even worse when the Iranian revolution led to the second oil crisis that again doubled the oil price. Western governments generously spent money in order to stimulate the economy, but it didn't lead to growth, only to inflation. This became known as stagflation. In the end it was the Reagan-Thatcher doctrine of "economic reform" that got the world out of the crisis with its emphasis on less government.
Now it seems that the Reagan-Thatcher doctrine has had its time. The present crisis had to do with not enough government and there is demand for a stronger government role. But I wonder whether the financial stimuli will really help.
The 1960s and 1970s were the time of the rise of Japan. Much manufacturing jobs had gone there. Much of the compensation had been in the government related area. The financial drain of oil crisis exposed this as untenable. It looks like we have now a similar situation: the productive jobs have gone to China. Now the financial sector was the main creator of new jobs, but they were just as unproductive.
My expectation is that the financial stimuli won't work and that instead we will have to reform the financial sector.
The 1973 oil crisis (that greatly increased the oil price) led to an international economic crisis. This became even worse when the Iranian revolution led to the second oil crisis that again doubled the oil price. Western governments generously spent money in order to stimulate the economy, but it didn't lead to growth, only to inflation. This became known as stagflation. In the end it was the Reagan-Thatcher doctrine of "economic reform" that got the world out of the crisis with its emphasis on less government.
Now it seems that the Reagan-Thatcher doctrine has had its time. The present crisis had to do with not enough government and there is demand for a stronger government role. But I wonder whether the financial stimuli will really help.
The 1960s and 1970s were the time of the rise of Japan. Much manufacturing jobs had gone there. Much of the compensation had been in the government related area. The financial drain of oil crisis exposed this as untenable. It looks like we have now a similar situation: the productive jobs have gone to China. Now the financial sector was the main creator of new jobs, but they were just as unproductive.
My expectation is that the financial stimuli won't work and that instead we will have to reform the financial sector.
Monday, January 12, 2009
Serbian dinar is falling fast
Due to the Ukrainian gas crisis and the ongoing economic crisis the dinar is falling fast - despite the central bank spending $40 mln in one day to support it.
I have already repeated pled for a more sensible currency policy. The dinar is going to fall much more as Serbia's current account, trade and government deficits are simply not sustainable in the present economic climate. The Serbian central bank can react in two ways:
- it can fight the decline because it doesn't like the effect that the Serb companies that have lent in foreign currencies will have to pay back more and may get in financial trouble. This strategy amounts to subsidizing currency speculators. In the end the currency will still end low, but Serbia will be out of money.
- it can also let the fall happen and spend the money that it saves on supporting the companies that get in trouble because of it.
Until now Serbia chooses the first option. Rather foolish in my opinion.
I have already repeated pled for a more sensible currency policy. The dinar is going to fall much more as Serbia's current account, trade and government deficits are simply not sustainable in the present economic climate. The Serbian central bank can react in two ways:
- it can fight the decline because it doesn't like the effect that the Serb companies that have lent in foreign currencies will have to pay back more and may get in financial trouble. This strategy amounts to subsidizing currency speculators. In the end the currency will still end low, but Serbia will be out of money.
- it can also let the fall happen and spend the money that it saves on supporting the companies that get in trouble because of it.
Until now Serbia chooses the first option. Rather foolish in my opinion.
Monday, October 20, 2008
The economic crisis in developing economies
The financial crisis is not restricted to the US and the EU. Developing economies suffer even more as they are often dependent on foreign finance. The NY Times notes that the Ukraine has asked the IMF for 14 billion US$ while Hungary just got 5 billion euro from the European central bank.
The Balkan will not be spared either. Business Week this week published a list of 10 countries in the danger zone. Among them are Serbia and Romania.
Reuters has some economic facts about the Serbian economy. The current account deficit is 18 percent (IMF advice: les than 10%). Foreign investment is artificially keeping the exchange rate high so that there is much more import than export. But of course this is borrowed money that one must be paid back. The Ukraine is already suffering from the hangover of foreign-investment led growth. Serbia may well follow if it doesn't take measures to decrease its trade deficit.
The Balkan will not be spared either. Business Week this week published a list of 10 countries in the danger zone. Among them are Serbia and Romania.
Reuters has some economic facts about the Serbian economy. The current account deficit is 18 percent (IMF advice: les than 10%). Foreign investment is artificially keeping the exchange rate high so that there is much more import than export. But of course this is borrowed money that one must be paid back. The Ukraine is already suffering from the hangover of foreign-investment led growth. Serbia may well follow if it doesn't take measures to decrease its trade deficit.
Wednesday, September 24, 2008
Serbia's economy in trouble
It looks like Serbia's economy is in for some trouble. With imports of 18 bln US$ and exports of only 9 bln it is things look a bit out of balance - even if you take into account that Serbia is fastly developping. Half of the hole is plugged with foreign investment, aid and transfers of emigrant, but the other half is not covered and might on the long term result in the same kind of meltdown that happened in Argentina in 1999.
The IMF has asked Serbia to "adopt a restrictive 2009 budget to prevent the widening of its current account gap". But the cutting the government budget in order to correct the balance of payments is a very indirect method that only the Friedman-style neo-liberals advocate. Unfortunately they still dominate the IMF. They hate every kind of government involvement in the economy. On the other hand they don't care if an economy crashes (like Argentina did in 1999) because it gives them the tools to pressure for more privatisations.
A more sensible approach in such circumstances is lower the exchange rate. Velimir Ilic is advocating this and I think he is totally right to say that Serbia needs a more export driven economic growth model. Unfortunately he packs his ideas in some anti-EU rethorics what may cause some people to overlook them.
The IMF has asked Serbia to "adopt a restrictive 2009 budget to prevent the widening of its current account gap". But the cutting the government budget in order to correct the balance of payments is a very indirect method that only the Friedman-style neo-liberals advocate. Unfortunately they still dominate the IMF. They hate every kind of government involvement in the economy. On the other hand they don't care if an economy crashes (like Argentina did in 1999) because it gives them the tools to pressure for more privatisations.
A more sensible approach in such circumstances is lower the exchange rate. Velimir Ilic is advocating this and I think he is totally right to say that Serbia needs a more export driven economic growth model. Unfortunately he packs his ideas in some anti-EU rethorics what may cause some people to overlook them.
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