In the RGE Monitor (July 16), Chairman Nouriel Roubini (also Professor, New York University, Stern School of Business) a leading and acute observer and forecaster of the economy explains why a “double-dip W–shaped” recession is a real risk toward the end of 2010, even though he expects – as he consistently did – the end of 2009 to mark a pause in the current contraction. This great recession would then have lasted 24 months and thus “been three times longer than the previous two and five times deeper –in terms of cumulative GDP contraction – than the previous two.”
Here is the 2010 dilemma:
“I see a shallow, below-par and below-trend recovery where growth will average about 1% in the next couple of years (…) the recovery will be weak given the debt overhang in the household sector, the financial system and the corporate sector, and now there is also a massive re-leveraging of the public sector with unsustainable fiscal deficits and public debt accumulation. (…)
on one side, early exit from monetary and fiscal easing would tip the economy into a new recession as the recovery is anemic and deflationary pressures are dominant. On the other side, maintaining large budget deficits and continued monetization of such deficits would eventually increase long term interest rates (because of concerns about medium term fiscal sustainability and because of an increase in expected inflation) and thus would lead to a crowding out of private demand.”
Thus “the exit strategy for monetary and fiscal policy easing will be daunting.”
The task will prove even more difficult in Europe, where the eurozone currency has been consistently overvalued while national activity trends are markedly diverse.
vendredi 17 juillet 2009
mardi 14 juillet 2009
Crisis not over
According to Tim Lee, the founder of financial economic consultancy pi Economics, (in yesterday’s Financial Times) national savings rates remain too low in most countries that had real estate bubbles, including the US, Eastern Europe, Spain and Turkey. The recourse to external finance (the current account deficit) has been reduced but not because of any increased savings: it results from investment collapse.
While “one can argue that real estate prices have fallen enough, particularly in the US (…) the total market value of US residential property remains high relative to disposable incomes (and) the total of outstanding mortgages has barely declined. It does not seem possible for the housing market crisis to be resolved without a significant decline in mortgages outstanding, which means substantial further credit losses.”
There are then three possibilities: one is that governments and central banks could be creating a new bubble, but this appears unlikely with negative savings rates and poor economic background. A second possibility is inflation that would reduce global indebtedness, but across most of the world, bank credit and money supply have been growing only slowly.
Then if we do not yet have inflation and we cannot have a new bubble there must be more deleveraging and unwinding of the past global credit bubble. This means a very weak global economy with falling stock markets and commodity prices, and falling government bond yields, weak carry trade recipient currencies (e.g. the Australian dollar) and strong funding currencies (mainly the yen and US dollar).
“In short, a troubling return to the markets that we suffered for most of last year.”
This dismal prospect is compatible with the forecast of a “W” recession suggested by many economists, and also with the Michael Mandel hypothesis (in Business Week) about the end of the information technology boom that I referred to in a previous post (“Is the innovation wave ‘passé’?” this blog, June 7, 2009) . With a slower trend of growth, recessions tend to last longer and be more severe, as was well known to the “classical” students of business cycles of the mid-XXth century such as Burns or Schumpeter.
While “one can argue that real estate prices have fallen enough, particularly in the US (…) the total market value of US residential property remains high relative to disposable incomes (and) the total of outstanding mortgages has barely declined. It does not seem possible for the housing market crisis to be resolved without a significant decline in mortgages outstanding, which means substantial further credit losses.”
There are then three possibilities: one is that governments and central banks could be creating a new bubble, but this appears unlikely with negative savings rates and poor economic background. A second possibility is inflation that would reduce global indebtedness, but across most of the world, bank credit and money supply have been growing only slowly.
Then if we do not yet have inflation and we cannot have a new bubble there must be more deleveraging and unwinding of the past global credit bubble. This means a very weak global economy with falling stock markets and commodity prices, and falling government bond yields, weak carry trade recipient currencies (e.g. the Australian dollar) and strong funding currencies (mainly the yen and US dollar).
“In short, a troubling return to the markets that we suffered for most of last year.”
This dismal prospect is compatible with the forecast of a “W” recession suggested by many economists, and also with the Michael Mandel hypothesis (in Business Week) about the end of the information technology boom that I referred to in a previous post (“Is the innovation wave ‘passé’?” this blog, June 7, 2009) . With a slower trend of growth, recessions tend to last longer and be more severe, as was well known to the “classical” students of business cycles of the mid-XXth century such as Burns or Schumpeter.
US Government spending spike and falling receipts
The complete analysis is on the blog Econompicdata (http://econompicdata.blogspot.com). Courtesy Rebecca (News N Economics).
dimanche 12 juillet 2009
China and Iran
Do the upheaval and fighting of Uighurs in the Chinese province of Xinjiang have something to do with the contested polls in Iran? The answer is definitely yes. It is the same deep decentralizing momentum which is at work in both popular demands: Regional and maybe ethnic autonomy against internal colonization rule in one case, and democratic control of the theocratic and military power in the other case.
China’s leaders have brilliantly succeeded in opening their economy to market rules and decentralized initiatives, keeping for themselves the whole of political power control. However, when information is more openly diffused (despite all the attempts at internet rationing),there is no reason why the demand for civil and political rights should not develop at the same time. For an analysis of this demand for rights – both economic and political -- and its link with the abundance of information, see my Second XXth Century (Hoover Press) and the paper co-authored with Xavier de Vanssay, “The Global Freedom Boom”, available both on my homepage and on SSRN (http://ssrn.com/author=471576).
The increasing per capita income just makes things “worse” in the sense that rights – or “freedom” in general – are more likely “superior” goods, and their demand will thus increase with economic growth. That’s why, as Mancur Olson once observed, growth in general is socially and politically destabilizing.
It follows that one should expect more difficult times to come both in Iran and in China and more destabilization of their centralized power governments.
China’s leaders have brilliantly succeeded in opening their economy to market rules and decentralized initiatives, keeping for themselves the whole of political power control. However, when information is more openly diffused (despite all the attempts at internet rationing),there is no reason why the demand for civil and political rights should not develop at the same time. For an analysis of this demand for rights – both economic and political -- and its link with the abundance of information, see my Second XXth Century (Hoover Press) and the paper co-authored with Xavier de Vanssay, “The Global Freedom Boom”, available both on my homepage and on SSRN (http://ssrn.com/author=471576).
The increasing per capita income just makes things “worse” in the sense that rights – or “freedom” in general – are more likely “superior” goods, and their demand will thus increase with economic growth. That’s why, as Mancur Olson once observed, growth in general is socially and politically destabilizing.
It follows that one should expect more difficult times to come both in Iran and in China and more destabilization of their centralized power governments.
mercredi 8 juillet 2009
Narrow Banking and John Kay
In the July 7 issue of the Financial Times, John Kay provides an easy excuse for bank managers. They are the best and the brightest he says:
“The bank executives pilloried by the UK’s Treasury select committee of MPs were all exceptional people. (…) Our banks were not run by idiots. They were run by able men who were out of their depth. If their aspirations were beyond their capacity it is because they were probably beyond anyone’s capacity.”
Thus we should not search for Supermen or Superwomen to run our banks but we “would be wiser to look for a simpler world, more resilient to human error and the inevitable misjudgments.”
Agreed. But the “best and the brightest” should have helped on the way by putting into place better control mechanisms of the agency problem in the large organizations that they were supposed to manage responsibly. Instead of that, they paid themselves huge sums of money to take absurd risks that they pretended to understand and to master.
The enormous losses that they inflicted upon unsuspecting shareholders constitute another obvious example of the “pretence of knowledge” that Hayek denounced among other hubris driven managers of other very large hierarchies, the politicians in charge of governments in our corporatist economies.
John Kay is right, however, to state the problem in terms of structures: since even the best managers will probably make mistakes in pursuing their self-interest, we should limit the magnitude of the probable losses that will be inflicted on society by limiting the size of their businesses and by making their activities more transparent. Just like individual portfolio holders diversify their risks and avoid investing massively in concentrated assets, societies at large should avoid that just one corporation, or a few of them, can mismanage amounts of a magnitude that may jeopardize the whole economy. Large banks should be broken into smaller and more specialized ones.
Curtailing the personal financial power of the best and the brightest who ran the oversized institutions that they build, and still manage them to that day, is the least that we can do as a way of insuring ourselves against a similar future disaster.
“The bank executives pilloried by the UK’s Treasury select committee of MPs were all exceptional people. (…) Our banks were not run by idiots. They were run by able men who were out of their depth. If their aspirations were beyond their capacity it is because they were probably beyond anyone’s capacity.”
Thus we should not search for Supermen or Superwomen to run our banks but we “would be wiser to look for a simpler world, more resilient to human error and the inevitable misjudgments.”
Agreed. But the “best and the brightest” should have helped on the way by putting into place better control mechanisms of the agency problem in the large organizations that they were supposed to manage responsibly. Instead of that, they paid themselves huge sums of money to take absurd risks that they pretended to understand and to master.
The enormous losses that they inflicted upon unsuspecting shareholders constitute another obvious example of the “pretence of knowledge” that Hayek denounced among other hubris driven managers of other very large hierarchies, the politicians in charge of governments in our corporatist economies.
John Kay is right, however, to state the problem in terms of structures: since even the best managers will probably make mistakes in pursuing their self-interest, we should limit the magnitude of the probable losses that will be inflicted on society by limiting the size of their businesses and by making their activities more transparent. Just like individual portfolio holders diversify their risks and avoid investing massively in concentrated assets, societies at large should avoid that just one corporation, or a few of them, can mismanage amounts of a magnitude that may jeopardize the whole economy. Large banks should be broken into smaller and more specialized ones.
Curtailing the personal financial power of the best and the brightest who ran the oversized institutions that they build, and still manage them to that day, is the least that we can do as a way of insuring ourselves against a similar future disaster.
MPDRAAI ! (Malkiel)
“MPDRAAI” stands for “Market Prices Do Reflect All Available Information”. Burton Malkiel, the famous author of A Random Walk Down Wall Street (1973) is an unreconstructed efficient market hypothesis aficionado.
In an interview published on July 7 in BARRON’S, here , he explains that market efficiency means that there is no easy arbitrage opportunity (what others define as “the no easy money condition”) in the real economy. If you find one, pick it up fast because those opportunities aren’t going to be there for long. There are just too many smart people out there looking for arbitrage opportunities.
Many people believe, especially today, that stock markets fail to reflect all the available information and are ruled by fads and mistakes, neglecting the fact that the available information is changing all the time and reveals itself in precisely those large movements in prices that many observers believe "irrational". It’s easy to make such a claim. But if true you should be able to profit from such a situation. Can you?
Says Malkiel:
“If you think that the market doesn’t reflect important information, that means that you ought to know the information, you ought to be able to trade on that information, and you ought to be able to beat a simple index.”
Otherwise, I would add, you just believe that some important information has been neglected, but you don’t know that it has been, really. So your claim is not proven, unverifiable, most probably unfounded.
And Malkiel goes on:
“What I come down again and again is OK, if you think that, why do you persistently underperform the index? Look, stock prices are not always right, and there are a lot of people who say, “Well, I knew it.” Well, if you knew that in advance, you ought to be able to beat the index. The only market that I fond is inefficient is the local A-share market in China. In a market dominated by individual gamblers, it turns out that professionals can and do outperform. But I believe the stocks of Chinese companies traded in Hong Kong and New York are efficiently priced.”
Thanks to Greg Mankiw for signaling the interview on his blog today.
In an interview published on July 7 in BARRON’S, here , he explains that market efficiency means that there is no easy arbitrage opportunity (what others define as “the no easy money condition”) in the real economy. If you find one, pick it up fast because those opportunities aren’t going to be there for long. There are just too many smart people out there looking for arbitrage opportunities.
Many people believe, especially today, that stock markets fail to reflect all the available information and are ruled by fads and mistakes, neglecting the fact that the available information is changing all the time and reveals itself in precisely those large movements in prices that many observers believe "irrational". It’s easy to make such a claim. But if true you should be able to profit from such a situation. Can you?
Says Malkiel:
“If you think that the market doesn’t reflect important information, that means that you ought to know the information, you ought to be able to trade on that information, and you ought to be able to beat a simple index.”
Otherwise, I would add, you just believe that some important information has been neglected, but you don’t know that it has been, really. So your claim is not proven, unverifiable, most probably unfounded.
And Malkiel goes on:
“What I come down again and again is OK, if you think that, why do you persistently underperform the index? Look, stock prices are not always right, and there are a lot of people who say, “Well, I knew it.” Well, if you knew that in advance, you ought to be able to beat the index. The only market that I fond is inefficient is the local A-share market in China. In a market dominated by individual gamblers, it turns out that professionals can and do outperform. But I believe the stocks of Chinese companies traded in Hong Kong and New York are efficiently priced.”
Thanks to Greg Mankiw for signaling the interview on his blog today.
Recolonization vs. State Sovereignty ?
The Boston Review (July/August 2009 issue) includes a forum on global poverty and intervention: Development in dangerous places , centered on the Paul Collier’s thesis.
In The Bottom Billion and in his new book Wars, Guns, and Votes he claims that about a billion human beings, living in a group of about 60 small, impoverished, post-colonial countries that “came unnatural into the world” but were created artificially by colonial rulers – and mostly in Africa - have no chance of getting out of the poverty trap if internationally unaided.
“With neither the social unity needed for cooperation, nor the size to reap the benefits of larger scale, they are structurally unable to provide the public goods – such as security – that are critical for decent quality of life and imperative for economic development. (…) unless the international community, at least for a time, supplies basic public goods that go beyond the typical aid agenda.”
“It is a troubling thesis. I have come to it reluctantly, and the international community has shied away from it, as have the societies of the bottom billion themselves”, he adds.
These countries are too large, and heterogeneous, to be nations and too small to be efficient states. Indeed these small “unnatural” states that were created by departing colonial powers fail to provide security and accountability. Where sub-national identities predominate, it is more difficult for people to cooperate in providing public goods.
In medieval Europe, local rulers who ran such tiny proto-states competed over time in a Darwinian struggle that led to the building of larger and more efficient states, but the process took several centuries of incessant external and civil wars.
These “bottom billion” countries are mostly too small to be viable states and are rife with civil wars, the costs of which are enormous. And given the reluctance of these countries to pool sovereignty within neighborhoods, the only alternative is a phase of international assistance in the provision of vital public goods, security and accountability.
Read the complete article here, and the criticisms of William Easterly Easterly here .
Interesting comments by Larry Diamond, Stephen D. Krasner and others are published in the same forum.
In The Bottom Billion and in his new book Wars, Guns, and Votes he claims that about a billion human beings, living in a group of about 60 small, impoverished, post-colonial countries that “came unnatural into the world” but were created artificially by colonial rulers – and mostly in Africa - have no chance of getting out of the poverty trap if internationally unaided.
“With neither the social unity needed for cooperation, nor the size to reap the benefits of larger scale, they are structurally unable to provide the public goods – such as security – that are critical for decent quality of life and imperative for economic development. (…) unless the international community, at least for a time, supplies basic public goods that go beyond the typical aid agenda.”
“It is a troubling thesis. I have come to it reluctantly, and the international community has shied away from it, as have the societies of the bottom billion themselves”, he adds.
These countries are too large, and heterogeneous, to be nations and too small to be efficient states. Indeed these small “unnatural” states that were created by departing colonial powers fail to provide security and accountability. Where sub-national identities predominate, it is more difficult for people to cooperate in providing public goods.
In medieval Europe, local rulers who ran such tiny proto-states competed over time in a Darwinian struggle that led to the building of larger and more efficient states, but the process took several centuries of incessant external and civil wars.
These “bottom billion” countries are mostly too small to be viable states and are rife with civil wars, the costs of which are enormous. And given the reluctance of these countries to pool sovereignty within neighborhoods, the only alternative is a phase of international assistance in the provision of vital public goods, security and accountability.
Read the complete article here, and the criticisms of William Easterly Easterly here .
Interesting comments by Larry Diamond, Stephen D. Krasner and others are published in the same forum.
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