Category Archives: Economic fundamentals

Marshall Auerback: IMF’s Predatory Policies Likely to Continue with New Leadership

By Marshall Auerback, a portfolio strategist and hedge fund manager. Cross posted from New Deal 2.0.

It doesn’t matter who leads the IMF when the institution is governed by ideology.

Greece and Ireland appear to have lost an important political ally with the sidelining of Dominique Strauss-Kahn as both plead for more financial assistance from European partners to avoid an early restructuring of debt. The key word is “appears,” as in truth, arsenic remains arsenic, even if it is coated in sugar by an ostensible champagne socialist like Mr. Strauss-Kahn.

On Short-Termism and the Institutionalization of Rentier Capitalism

Andrew Haldane and Richard Davies of the Bank of England have released a very useful new paper on short-termism in the investment arena. They contend that this problem real and getting worse. This may at first blush seem to be mere official confirmation of most people’s gut instinct. However, the authors take the critical step of developing some estimates of the severity of the phenomenon, since past efforts to do so are surprisingly scarce.

A short-term perspective is tantamount to applying an overly high discount rate to an investment project or similarly, requiring an excessively rapid payback. In corporate capital budgeting settings, the distortions are pronounced:

David Apgar: Trash Trichet’s Stockholdings to Save the Euro Zone

By David Apgar, the founder of ApgarPartners LLC, a firm that helps companies and development organizations learn by treating goals as assumptions to be tested by performance results. He blogs at www.relevancegap.blogspot.com.

The best hope for the euro zone may be to find a few bank stocks rattling around in European Central Bank (ECB) Governor Trichet’s brokerage account. There’s no chance that the long-time French civil servant would compromise his policy views to benefit himself, but it’s the kind of made-for-muddled-media factoid that, if found, could put a quick end to the farce he and the ECB perpetuate in pretending Greece is not bankrupt. Europeans tolerate this farce and the crisis it prolongs only because it will suppress the euro and block export-led recovery in the US. And if there’s one thing more attractive to the Euro-policy crowd than ending a crisis of the euro, it’s blocking US recovery.

A leader in this week’s Economist lays out the dimensions of the problem.

Marshall Auerback: Revenue Sharing for the States – How It Works, Why We Need It and Why Nixon Liked It!

By Marshall Auerback, a portfolio strategist and hedge fund manager. Cross posted from New Deal 2.0.

States are being cut off just at the time they most need federal assistance. Revenue sharing would be a winning strategy for the economy and for Obama.

Raghuram Rajan on Delineating the Role of Government

In this interview, Rajan, who famously told Greenspan at his last Jackson Hole conference that recent changes in financial services industry policy had increased risk, takes on the question of the role of government. He contends that economists have neglected this issue due to overspecialization.

On the Treasury’s Curious Denial That Geithner Blocked Deal on Irish Debt

This is getting interesting. The US Treasury has roused itself to issue a narrow denial of an op-ed in the Irish Independent by one of Ireland’s most highly respected economists (by virtue of his having predicted a very severe housing crash), Morgan Kelly. To recap briefly, Kelly said that the IMF was willing last November to haircut €30 billion of unguaranteed bonds by roughly two-thirds on average, but that Geithner’s disapproval on a conference call killed the idea:

The deal was torpedoed from an unexpected direction. At a conference call with the G7 finance ministers, the haircut was vetoed by US treasury secretary Timothy Geithner who, as his payment of $13 billion from government-owned AIG to Goldman Sachs showed, believes that bankers take priority over taxpayers. The only one to speak up for the Irish was UK chancellor George Osborne, but Geithner, as always, got his way.

The Irish Independent today reported on the Treasury’s objection:

Marshall Auerback: Obama Needs to Get Serious About Jobs

Yves here. I have no doubt that some readers will give a knee jerk negative response to the idea of aggressive measures to create more jobs, seeing it as undue government intervention in the economy.

But that horse has left the barn and is now in the next county. Like it or not, the economic damage done by the financial crisis was too severe for governments to sit on their hands. So the question is not intervention versus no intervention, but what sort of intervention is most likely to be salutary? That means the benchmark is not doing nothing, but the measures taken thus far, which consist heavily of overt and hidden subsidies to the financial sector.

By Marshall Auerback, a portfolio strategist and hedge fund manager. Cross posted from New Deal 2.0

A universal Jobs Guarantee Program could free us from the predations of politicians and foster a strong economy.

On the anniversary of the inauguration of the Works Progress Administration (WPA), it is striking to compare the unemployment record of Franklin Delano Roosevelt, and that of his modern day successor, Barack Obama. FDR’s achievements in putting Americans back to work are among the most impressive of his tenure; he took the rate from 25% to 9.6% by 1936. But so far, Obama’s policies have failed to “jump-start” unemployment in a significant way, even as Wall Street has continued a recovery utterly and totally divorced from Main Street.

Geithner Blocked IMF Deal to Haircut Irish Debt

Was the US Treasury Secretary’s deep sixing of a plan by the seldom-charitable IMF to give the Irish some debt relief Versailles redux? By that I mean the Treaty of Versailles, the agreement at the end of World War I devised by the victors to dismember the German economy. Bear with me as I tease out this conceit.

Euro Whacked by Reports that Greece May Leave the Eurozone?

The Euro has fallen from roughly 1.49 to the dollar to 1.43 in a mere two days, which is a huge move. Many pundits have argued that the ECB’s newly accommodative stance is the trigger, but there may be additional forces at work. Most experts have deemed the idea that any eurozone member would exit the currency to be simply inconceivable, that it would be too costly and disruptive. But with the hair shirt that Greece is being asked to wear, all bets may be off.

As of this juncture, this reports in Der Spiegel does not appear to have gotten traction among the Usual Suspects in the MSM. Headline: “Greece Considers Exit from Euro Zone” (hat tip readers John M and Illya F).

Commodities Tank

We’ve been sayin’ the commodities runup and the fixation on inflation looked like a rerun of spring 2008: a liquidity-fueled hunt for inflation hedges when the deflationary undertow was stronger. That observation is now looking to be accurate.

But what may prove different this time is the speed of the reversal. With investors acting as if Uncle Ben would ever and always protect their backs, markets moved into the widely discussed “risk on-risk off” trade, a degree of investment synchronization never before seen. All correlations moving to one historically was the sign of a market downdraft, not speculative froth. And as we are seeing, that means the correlation will likely be similarly high in what would normally be a reversal, and that in turn increases the odds that it can amplify quickly into something more serious.

UBS’s Magnus Warns of Risk of Chinese Minsky Moment

UBS strategist George Magnus helped popularize economist Hyman Minsky’s thinking in the runup to the financial crisis by warning of the likelihood of a “Minsky moment.” For those not familiar with Minsky’s work, a short overview from ECONNED:

Hyman Minsky, an economist at Washington University, observed [that] periods of stability actually produce instability. Economic growth and low defaults lead to greater confidence and, with it, lax lending.

In early stages of the economic cycle, thanks to fresh memories of tough times and defaults, lenders are stringent. Most borrowers can pay interest and repay the loan balance (principal) when it comes due. But even in those times, some debtors are what Minsky calls “speculative units” who cannot repay principal. They need to borrow again when their current loan matures, which makes
them hostage to market conditions when they need to roll their obligation. Minsky created a third category, “Ponzi units,” which can’t even cover the interest, but keep things going by selling assets and/or borrowing more and using the proceeds to pay the initial lender. Minsky’s observation:
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Marshall Auerback: Get Ready for a Global Growth Slowdown

By Marshall Auerback, a portfolio strategist and hedge fund manager. Cross posted from New Deal 2.0.

Governments across the globe are headed for a disaster entirely of their own making.

Though capital markets remain strong, the global economic backdrop continues to deteriorate as fiscal retrenchment takes hold. Commodity markets have rallied in tandem with the fall in the dollar even though there are signs that growth in the emerging world is slowing. Japan’s economy is in the soup, the U.S. economy has failed to pick up as many thought (with a mere 2% growth rate expected to be released for Q1 shortly), and the European economy is overdue for its own slowdown. The U.S. stock market has also rallied despite the threat of a very high gasoline price, disappointing economic growth data, and a fairly mixed earnings picture.

Guest Post: Beware of runaway headline inflation

Yves here. As much as this post makes an interesting observation, note the emphasis on reducing labor bargaining power as the solution to booms and busts, when the era of weak labor bargaining power (which started taking hold in a serious way in the Reagan/Thatcher eras) showed far more financial instability that the preceding period where productivity gains were shared with workers. As a result, consumers didn’t need to resort to debt to compensate for stagnant worker wages. As long as we keep resorting to failed remedies, there isn’t much reason to hope for better outcomes.

By Heleen Mees, Researcher, Erasmus School of Economics and Assistant Professor, University of Tilburg. Cross posted from VoxEU

The latest figures from the US show that the consumer price index rose 0.5% in March, whilst the core personal consumption expenditure price index rose only 0.1%. This column explains the roles of these competing measures and argues that US monetary policymakers should pay close attention to headline inflation. It warns that neglecting headline inflation risks feverish boom-and-bust cycles with prolonged periods of high unemployment.

Michael Pettis: Is it time for the US to disengage the world from the dollar?

By Michael Pettis, a Senior Associate at the Carnegie Endowment for International Peace and a finance professor at Peking University’s Guanghua School of Management. Cross posted from China Financial Markets

The week before last on Thursday the Financial Times published an OpEd piece I wrote arguing that Washington should take the lead in getting the world to abandon the dollar as the dominant reserve currency. My basic argument is that every twenty to thirty years – whenever, it seems, that American current account deficits surge – we hear dire warnings in the US and abroad about the end of the dollar’s dominance as the world’s reserve currency. Needless to say in the last few years these warnings have intensified to an almost feverish pitch. In fact I discuss one such warning, by Barry Eichengreen, in an entry two months ago.

But these predictions are likely to be as wrong now as they have been in the past. Reserve currency status is a global public good that comes with a cost, and people often forget that cost.