[phil_20686]

mike777, on 2012-May-11, 17:40, said:

Robert Barro: Stimulus Spending Keeps Failing

If austerity is so terrible, how come Germany and Sweden have done so well?

kenberg, on 2012-May-11, 18:55, said:

This has occurred to me as well. I imagine that part of the answer, for both austerity and spending, is that it depends on how it is done. It's hard to believe that squandering money is a good idea. Spending it may well be a good idea, if carefully done, and then it may look a bit like austerity.

Its a mistake to think of fiscal policy separate from monetary policy. The reason austerity is working ok for Germany and Sweden is that they are running large export surpluses with the rest of the currency zone. This means, essentially, that they are soaking up currency. Look at



from krugman's blog. So, in practice Germany, and the other exporting nations in the eurozone are undergoing expansionary monetary policy. This is exporting deflationary pressure to the periphery:








The key thing to notice about these charts is not the amount of inflation, but the direction since Jan 11 ish. The exporting nations will have rising inflation and the debtor nations are experiencing deflation(ary pressure). Without ECB action, the continuing imbalance will drive the periphery into outright deflation, and if that happens its the end. No country can avoid default if the real value of its debt is increasing.

Now you might ask, why did this not happen before? Well the anser essentially was that the core was happy to return the `money' they were accumulating to the periphery via investment. Look at the balance of trade chart for spain:



This balance of trade was largely driven by foreign investment, and look how it collapsed following the crisis in 08-09. This was a structural problem, but as long as the core were prepared to invest it would be ok, eventually, as investment would lead to rising productivity and eventually you would expect productivity to somewhat equalise. Then came the financial crisis and investment has basically come to a halt. Since then the structural pressure has been building.

There really is only one (or two) solutions. The ECB absolutely must provide enough inflationary pressure in the periphery to prevent deflation. It is clear that the periphery cannot manage this through fiscal expansion. Possibly the EU could manage this by redistributing its massive CAP budget into infrastructure projects in the periphery. There is enough money in the CAP to make a sizeable difference in the Balance of Trade, but I don't think that it is politically feasible.

If it seems easier, reflect that this is pretty much exactly the same mechanism that leads to price inflation in New York or London, compared to the rest of the local region. They are exporting services and goods to the rest of the country, so they accumulate lots of dollars (get richer), but part of this leads to price inflation, since the accumulation of dollars is not accompanied by a comparable increase in production. Thus, inflation occurs, and housing, food etc become more expensive. At the local level tax brackets limit this, as new yorkers will end up paying more in tax than surrounding regions, and a lot of this will be redistributed, until a local equilibrium is reached. Unfortunately, the EU has no comparable institutions that can redistribute wealth as effectively as the state and federal governments. Thus, the only real chance is for the ECB to come to the party. Inflation will redistribute wealth from those countries with a larger monetary base to those with a smaller i.e. from germany to the core. Say 5% ish inflation in the EU will lead to large wealth redistribution from germany, and the other exporters, to the periphery.

[y66]

awm, on 2012-May-12, 01:12, said:

Austerity isn't "always bad" -- the claim is that its a bad response to a recession caused primarily by lack of demand.

Countries like Germany and Sweden are in good budgetary shape because they were more fiscally disciplined in the relatively stronger economic times of the 90s and early 2000s. Neither was hit too hard by the current crisis (relative to the rest of Europe) and neither has responded with massive cuts to government services.

A better comparison might be Iceland vs. Ireland.

Iceland vs Ireland is the textbook example of the usefulness of exchange rate flexibility and haircuts for foreign investors as alternatives to massive unemployment for resolving massive balance of payments problems.

I don't get the fiscal discipline explanation for Germany's having steered clear of the current crisis. Perhaps the German export machine is a better explanation.



Source: IMF World Economic Outlook Database via Krugman. Similar data are available from Eurostat via Google Public Data.

[phil_20686]

Winstonm, on 2012-May-12, 06:46, said:

That still doesn't explain why de facto insurance products (credit default swaps) are not regulated as insurance, thus eliminating the need for capital reserve requirements, and why they are not regulated as a commodity, eliminating all transparancy.

When trades can cause movements in a $2T market but no one outside the firm is allowed to know the parties involved or the bets, and there is no reserve requirement to cover possible losses, how can anything possible go wrong?

I don't really understand this attitude. Banks invest money on behalf of their savers. They make money out of the maturity mismatch: there are plenty of profitable long term investments that individual savers would not take because they need ready access to their money, but by grouping people together you can always make sure there is enough of someone's money to finance.

However, there is not such thing as a risk free investment. Sometimes banks lose money on investments. 2bn is not a lot of money for a bank with an asset base of two trillion dollars. They made an investment of 0.1% of their net asset base, and it lost. Hopefully they will make money on the other 99.9% of their asset base, and life will be rosy. I mean, according to their shareholder report they have 250bn dollars of cash on hand. Hence the `Fortress balance sheet' moniker. This is money they keep just for a rainy day. When you invest, sometimes you lose, big deal?

[Winstonm]

phil_20686, on 2012-May-12, 08:57, said:

I don't really understand this attitude. Banks invest money on behalf of their savers. They make money out of the maturity mismatch: there are plenty of profitable long term investments that individual savers would not take because they need ready access to their money, but by grouping people together you can always make sure there is enough of someone's money to finance.

However, there is not such thing as a risk free investment. Sometimes banks lose money on investments. 2bn is not a lot of money for a bank with an asset base of two trillion dollars. They made an investment of 0.1% of their net asset base, and it lost. Hopefully they will make money on the other 99.9% of their asset base, and life will be rosy. I mean, according to their shareholder report they have 250bn dollars of cash on hand. Hence the `Fortress balance sheet' moniker. This is money they keep just for a rainy day. When you invest, sometimes you lose, big deal?

You don't lose if the losses are socialized but the profits are privatized.

[mike777]

Winstonm, on 2012-May-12, 13:22, said:

You don't lose if the losses are socialized but the profits are privatized.

so again the issue is over and over again too much regulation and govt.....

they pass stuff and rest ignore.l

[jdeegan]

Pissy, pissy pissy. It is just the Goldilocks problem. Is the porridge too hot or too cold. You cannot have any sort of market in financial claims that deals with ordinary consumers without some sort of uber mensch (eg. government and THE LAW) standing behind and vouching for the deal. We have health regulations that make restaurant dining not a health issue. How is the market in financial claims any different?

[mike777]

jdeegan, on 2012-May-13, 02:06, said:

Pissy, pissy pissy. It is just the Goldilocks problem. Is the porridge too hot or too cold. You cannot have any sort of market in financial claims that deals with ordinary consumers without some sort of uber mensch (eg. government and THE LAW) standing behind and vouching for the deal. We have health regulations that make restaurant dining not a health issue. How is the market in financial claims any different?

wht is your question?

is a health question diff from a fin. question?

Is one mkt diff from another mkt?


YES but alot of basic stuff is the same so?

[kenberg]

phil_20686, on 2012-May-12, 08:49, said:

It's a mistake to think of fiscal policy separate from monetary policy. The reason austerity is working ok for Germany and Sweden is that they are running large export surpluses with the rest of the currency zone. This means, essentially, that they are soaking up currency

No doubt I need to do some hard work if I really want to grasp all that you said. This first sentence though is easy enough for me to buy into. The second sentence I want to focus on. Why are they having this success with exports? And I assume we cannot arrange things so that everyone has an export surplus? That would be like everyone having an income that is above the average income.

Observation 1.
When I was young and before you were born, I once owned a BSA motorcycle. At the time, some people rode Honda 50 cc cycles. These were considered "cute". They were not allowed on serious highways. Now I drive a Honda Accord, and Hondas and Toyotas account for a sizable percentage of the cars on American roads.

Observation 2:
I just finished teaching a course in which, as always, some students did better than others. Why? Some worked harder, and some are smarter.

Where am I going with this? Back to the question:

Why is it true that Germany and Sweden are running an export surplus?


I do understand that economic policies make a difference, even if I have trouble grasping exactly how it works. But at some point, someone actually has to build something that someone wants to buy if export surpluses are to happen, no? I have long been worried about what I see as a pervasive view in the U.S. that the key to success is learning how to make a financial deal. Moving money around is important, no doubt about it, but for a country to prosper, that may not be enough.

[phil_20686]

kenberg, on 2012-May-13, 08:28, said:

The second sentence I want to focus on. Why are they having this success with exports? And I assume we cannot arrange things so that everyone has an export surplus? That would be like everyone having an income that is above the average income.

Observation 1.
When I was young and before you were born, I once owned a BSA motorcycle. At the time, some people rode Honda 50 cc cycles. These were considered "cute". They were not allowed on serious highways. Now I drive a Honda Accord, and Hondas and Toyotas account for a sizable percentage of the cars on American roads.

Observation 2:
I just finished teaching a course in which, as always, some students did better than others. Why? Some worked harder, and some are smarter.

Where am I going with this? Back to the question:

Why is it true that Germany and Sweden are running an export surplus?


I do understand that economic policies make a difference, even if I have trouble grasping exactly how it works. But at some point, someone actually has to build something that someone wants to buy if export surpluses are to happen, no? I have long been worried about what I see as a pervasive view in the U.S. that the key to success is learning how to make a financial deal. Moving money around is important, no doubt about it, but for a country to prosper, that may not be enough.

So the point about free floating currencies, is that they should always move move to choke of current account deficits. That is to say, if you export something to another country, the buyer must first buy your currency, and then use that currency to buy your stuff. Thus an export surplus will move to strengthen a currency, and a deficit will weaken it. Since a strengthening currency makes labour in your country more expensive, it will make it cheaper for the buyer to buy from elsewhere, and you move towards an equilibrium where every currency has a trade balance of zero.

In practice, through innovation and development and changing regulations and circumstances, the currency is always playing catch up to the Balance of trade. Its a dynamical process moving to wards a constantly changing equilibrium. But still, large trade imbalances between regions are impossible in the long run unless you have currency manipulation of some description.

However, this analysis only applies between currency regions, not within one. Within one the exchange rate is fixed so there is no break on imbalances within a zone except if they are applied fiscally by the government. Hence we have this terrible situation where the trade imbalances between regions in the euro zone are bigger than the trade deficit of the eurozone as a whole:
consier this graph


so we can see that the eurozone has approximately an imbalance of +-10bn euros (per month). For germany,



so germany's trade imbalance is larger than that for the whole EU despite being only a fraction the size. Also notice how the imbalance grew substantially post euro. (1999). This is because following the introduction of the euro, the currency became, effectively, the weighted average of all of the eurozone's individual currencies. Thus the poor performance of the periphery has been holding down the price of labour in germany, which otherwise would have tended to increase as the DM appreciated.

It is this effect that has made germany the biggest beneficiary of the eurozone, while the periphery is lumbered with an exchange rate much too high to make their economies competitive. If this was to happen in a single country, the normal answer is to create a tax differential, which makes it cheaper to invest in the poorer areas. This will generally happen automatically if your income tax is bracketed, since the more expensive places pay more in the top bracket.

Of course, you are right that government policy, regulation, quality of education etc all make a difference, but these differences would normally be priced in through the exchange rate mechanism. The result would be a worse exchange rate, and it would be more difficult to import stuff, so you would be poorer on a world stage, but your exchange rate would adjust to make your economy competitive anyway. Moreover, there is pretty good evidence that the trend line for economic growth depends mostly on technological innovation which is easily imported, and so all industrial economies are basically on the same trendline, policies and stuff normally just mean that better regulation is a one time event, and does not compound. E.g. Germany might be 20% better than britian, then it will be 20% richer, but this difference will not grow, unlike technological innovation which compounds, and we get exponential growth in economies.

Finally, within a currency zone, there is a competitive advantage to clustering. Car firms in a country tend to locate their manufacturing bases close to each other, either because they have similar requirements or because then suppliers move together or whatever, so for example, detroit became well known for its cars, las vegas for gambling etc. It could well be that the end state for a euro-state is an industrial north and a goods and service dominated south. That would be ok if there were large fiscal transfers, and it works ok in the US, where levels of industry vary widely between states, but it is not ok if each country sees itself in a competitive zero-sum game with the others. In fact, the balance of trade issue is self defeating, the north cannot keep making stuff for the south, as eventually there just will not be enough euros left in the south to pay for anything .

SO in summary:
(1) The eurozone story is one of balance of trade issues.
(2) If the desired endstate is homogeneous, with every country doing roughly the same, then there must be large scale wealth transfers to negate the effects of clustering.
(3) On current pathways the endstate will be an industrial north and a south so impoverished that they cannot purchase any goods from the north. This will eventually fix the balance of trade, but it will not be a healthy end.

PS: A random aside. Given the analysis I provided above, you might wonder how the US has had such a massive balance of trade deficit for so long without its currency weakening enough to choke it off. I think I have hit upon the answer to this: OPEC sells oil in dollars. Thus, if the EU wants to buy oil from OPEC, first we must buy dollar, and that supports the strength of the US. Essentially the US does not make up the whole of the dollar currency zone. So if OPEC exports 30 million barrels a day, at $100 a barrel, then that is a dollar export of 30*30,000,000*100 = 90bn per month, or around twice the US trade deficit. Of course, we should only count barrels sold to non-dollar countries, I.e. not the US, so if half of OPEC production goes to non dollar currencies, then that exactly supports the US trade deficit, and prevents the dollar weakening.






Also, just look how correlated the US BOT is with the price of oil. Pretty convincing IMO.

[Cthulhu D]

phil_20686, on 2012-May-12, 08:57, said:

I don't really understand this attitude. Banks invest money on behalf of their savers. They make money out of the maturity mismatch: there are plenty of profitable long term investments that individual savers would not take because they need ready access to their money, but by grouping people together you can always make sure there is enough of someone's money to finance.

That's true for a deposit taking institution, but not for an investment bank. The two behave very differently.

Quote

Germany's free ride

Yeah, while Germany and Sweden both have better governments, more effective regulations etc, the Germans currently benefit from the Greeks etc artificially holding down the value of their currency. Basically German goods are substantially cheaper because the Greeks don't know how to run a country (tip: like the Swedes). This is why the Germans want to perpetuate the status quo - it's hugely beneficial to them. They basically get the same benefits of currency manipulation that the Chinese do, except it happens automatially.

The greeks on the other hand either need massive inflation or to default on their loans or both or, altenatively, leave the euro zone enabling them to tank their currency - then they will become much more competitive overnight.

[mike777]

ruining your currency will not help the Greeks in the long run. It will not make them more productive.

It might help them for a few nights.

[Cthulhu D]

mike777, on 2012-May-13, 19:27, said:

ruining your currency will not help the Greeks in the long run. It will not make them more productive.

It might help them for a few nights.

It's a massive advantage. If I can sell my olive oil for 10 US dollars and it costs 10 Euro to make, and I can swap 1 US dollar for 1 Euro, I don't make any money. If suddenly people will give me 10 Euros for 1 US dollars, instantly I am making a huge pile more money. Now I can slash the price of my olive oil and still make a decent profit.

Now consumers are much more likely to buy my olive oil than Croatian or whatever. I can increase my volumes, employ more people domestically etc.

This is overly simplified of course, but this is what you get. I have to pay way more for anything I import, but this makes my domestic economy stronger! It's now more economical for the locals to buy domestic rather than overseas. It's why the Chinese are screwing the US - they artificially prop up the US dollar which damages the US manufacturing industry.

[y66]

In the news...

Quote

BERLIN — Chancellor Angela Merkel’s party suffered a stinging defeat in elections in Germany’s most populous state on Sunday, one likely to embolden her political opponents both at home and abroad as the European debt crisis enters a critical new phase.

One week after Socialists seized the French presidency, the Social Democrats won the parliamentary election in North Rhine-Westphalia, early results and exit polls released Sunday showed. Norbert Röttgen, the lead candidate for Ms. Merkel’s Christian Democrats in the state, conceded defeat and announced that he would step down as the party head there.

Exit polls for German public television showed the Social Democrats winning 39.1 percent of the vote, an increase of 4.6 percentage points compared with the election two years earlier. While the results were not official, the party was likely to achieve a double-digit margin of victory. The Christian Democrats won just 26.3 percent of the vote, 8.3 percentage points less than in the previous election.

“This is a bitter day for us,” Mr. Röttgen told supporters. “We have suffered a clear and decisive defeat.”

In his concession speech, he took responsibility for the defeat, calling it “my loss” as a result of “my campaign, my themes,” but the ramifications went far beyond the borders of the state.

With the Green Party’s 11.4 percent of the vote, analysts say the state premier, Hannelore Kraft, of the Social Democrats, will be able to easily form a left-wing coalition to govern the state. For the past two years, Ms. Kraft had ruled with a minority government, forced to draw votes from the left or the right to pass each piece of legislation.

Mr. Röttgen ran against the debt-financed spending supported by Ms. Kraft, and even described the vote as a referendum on Ms. Merkel’s Europe policies.

Ms. Merkel and her party had hoped to sway the electorate with their hard line on Europe, painting Ms. Kraft almost as a domestic version of the spendthrifts the Germans complain about in Greece, Portugal and other economically struggling nations in Europe.

Instead, the voters handed Ms. Kraft, who pushed the state deeper into debt but hired more police officers and teachers and abolished fees for higher education, a significant victory. “We made people the central focus again,” Ms. Kraft told supporters on Sunday evening.

The German news media described the vote as a “debacle” and a “disaster” for the conservatives, one that also sends a clear signal that Ms. Merkel could face a difficult road to re-election. Peter Altmaier, the parliamentary leader of the Christian Democratic Union, called it “an extremely difficult day” for the party “as a whole,” a defeat that “surpasses our worst fears.”

With nearly 18 million inhabitants, North Rhine-Westphalia is home to more than one-fifth of the German population. A major loss here for the Social Democrats in 2005 helped pave the way for the defeat of Chancellor Gerhard Schröder, and Ms. Merkel’s own rise to that position.

Quote

"The Sunday vote will be an election of personalities," Wolfgang Muno, a professor of German politics at the University of Erfurt, told SPIEGEL ONLINE. "It is the Americanization of politics … and it could very well be indicative of a new model and a new political culture in the country."

Germany's political power structures are changing rapidly. Whereas the CDU and the center-left Social Democrats used to dominate elections both regional and national -- with the business-friendly Free Democrats (FDP) often serving as kingmaker -- the party landscape is now crowded, with the Greens and the Left Party vying for attention on the left. More importantly, the up-and-coming Pirate Party has recently injected a significant degree of unpredictability into regional elections, making two-party coalition governments increasingly difficult to assemble. Surveys suggest that North Rhine-Westphalia, Germany's most populous state, could provide yet the latest proof of that trend.

[phil_20686]

mike777 said:

1336958853[/url]' post='638067']
ruining your currency will not help the Greeks in the long run. It will not make them more productive.

It might help them for a few nights.

I think this is dead wrong. A lot of productivity increases come from investment in capital formation. A weaker currency makes it more attractive for multinational firms to invest in your country. If I am Toyota and wand to take advantage oaf cheap labour, am still quoting to have to build my productivity enhancing factory.
This is just the flip side of off shoring. Over the last thirty years a huge amount of investment has gone to countries with cheap labour. A lot of it in productive heavy industry. There is no reason a the Greeks could not benefit from this just as much as Asian and African countries have.
Also, not what you meant, but productivity is basically cost. Moving to a cheaper country raises your productivity in the same way that cutting wages and firing people does - you are making the same stuff for less. Even apart from this, I think you are wrong.

[phil_20686]

Winstonm said:

1336850523[/url]' post='637886']
You don't lose if the losses are socialized but the profits are privatized.

True. Irrelevant, but true.
But then that isn't really true is it. I mean a lot of share holders and bond holders were wiped out. Ultimately letting a major bank go under just leads to confuse until a new bank steps in. Probably expanding by reappointing most of the people who bust lost their jobs.
I am also not sure what losses have been socialised. It looks likely to me that the fed will make a profit or small loss on the assets that they bought from the troubled banks. Even a large loss by a central bank is close to irrelevant, they can cover it at zero cost. All they have to do is hit their inflation target by printing money rather than playing with interest rates and in no time at all they have covered their loss.
Even if they don't want to do that, they still create five to ten bn dollars a month in hard currency just too keep up in demand. This is literally free money. For a central bank mot actually lose money and have to sell reserves, the loss needs to be comparable to the total size of the monetary base. That is basically impossible.

[jdeegan]

America has a currency union that is almost 200 years old. It has been based on a common language and freedom for labor to relocate within the union. The Euro is sort of coming apart. I gotta go back to Larry Lindsay who said that the real motive for the Euro was to evermore prevent Germany and France from going to war again. All of this is now old news. Let's let the DmarkEuro find it's proper place, and get on with it.

[Zelandakh]

I think the main reason Germany is doing so well is that the currency is artificially deflated because of the problems in other Eurozone countries. That, in combination with the fact that German businesses are traditionally resilient to depression, has given them a huge competitve boost with most other countries. If Germany had still been using DMs the currency would have been so high (the DM was the traditional "safe haven" for investors when America had economic difficulties) that exports would have been hit.

There is a very good reason why Frau Merkel is willing to spend vast amounts of German cash to support the Euro. Not only does it provide a huge amount to the German economy in the good times, it is also acting as a buffer for Germany to avoid the worst of the problems now things have turned down. It is quite sad that the people cannot see this, thinking only that she is giving "good" German money to "bad" Greeks (et al). I think the truth is that she is a damned shrewd political operator and doing an extremely good job in a tough climate.

[Cthulhu D]

jdeegan, on 2012-May-14, 03:56, said:

America has a currency union that is almost 200 years old. It has been based on a common language and freedom for labor to relocate within the union. The Euro is sort of coming apart. I gotta go back to Larry Lindsay who said that the real motive for the Euro was to evermore prevent Germany and France from going to war again. All of this is now old news. Let's let the DmarkEuro find it's proper place, and get on with it.

Err, no. America has a fiscal union that is almost 200 years old. (well, IMHO it's actually about 156, but you know, whatever). The South is basically Spain/Italy/Greece etc and it's supported by transfer payments from the north.

[y66]

phil_20686, on 2012-May-14, 02:20, said:

True. Irrelevant, but true.
But then that isn't really true is it. I mean a lot of share holders and bond holders were wiped out. Ultimately letting a major bank go under just leads to confuse until a new bank steps in. Probably expanding by reappointing most of the people who bust lost their jobs.
I am also not sure what losses have been socialised. It looks likely to me that the fed will make a profit or small loss on the assets that they bought from the troubled banks. Even a large loss by a central bank is close to irrelevant, they can cover it at zero cost. All they have to do is hit their inflation target by printing money rather than playing with interest rates and in no time at all they have covered their loss.
Even if they don't want to do that, they still create five to ten bn dollars a month in hard currency just too keep up in demand. This is literally free money. For a central bank mot actually lose money and have to sell reserves, the loss needs to be comparable to the total size of the monetary base. That is basically impossible.

Really true and really relevant. Socialized losses refers to banks making risky bets with government insured deposits. If non banks want to make risky bets with their own money, that's fine. That's called capitalism.

[mike777]

phil_20686, on 2012-May-14, 02:05, said:

I think this is dead wrong. A lot of productivity increases come from investment in capital formation. A weaker currency makes it more attractive for multinational firms to invest in your country. If I am Toyota and wand to take advantage oaf cheap labour, am still quoting to have to build my productivity enhancing factory.
This is just the flip side of off shoring. Over the last thirty years a huge amount of investment has gone to countries with cheap labour. A lot of it in productive heavy industry. There is no reason a the Greeks could not benefit from this just as much as Asian and African countries have.
Also, not what you meant, but productivity is basically cost. Moving to a cheaper country raises your productivity in the same way that cutting wages and firing people does - you are making the same stuff for less. Even apart from this, I think you are wrong.

but again that is not the main problem for Greeks.


They have work rules that make free movement of labor too expensive still
They have property rules that make buying things like land almost impossible, one reason is lack of clear title.

If you still make it too hard to invest in Labor or hard assets you dont solve the real issues.

Also you dont want pull your profits out if you get paid in worthless greek dollars.

To use your Toyota example, if I cant buy land, or have expensive work rules that make building cars there just not worth the hassle, forget it I will build somewhere else. If I cant pull my money out in Euros or Yen, that again makes it less attractive.


In fact in the places you discuss, they made it easy to move capital, labor and assets. These are the real problems that the Greeks are still unwilling to fix. Starting a company takes 5 minutes in Hong Kong. In Greece it takes endless paperwork and bribes.


Bottom line destroying your currency may help for a few nights but does not solve any of the real issues here per my previous posts.