Archive | Economics

Public Sector Jobs Are Real Jobs

By Marshall Auerback | September 4, 2012

President Barack Obama in the White House press briefing room

In 1976 at a time when economists thought more about unemployment, the US economist Charles C. Killingsworth wrote a paper entitled “Should full employment be a major national goal”.

President Barack Obama in the White House press briefing room

He was a long-time advocate of public employment programs and understood how deficient the economics profession was when it came to caring about people. I thought about this paper recently upon reading an article in the Daily Beast by the always insightful Michael Tomasky, “The Real Obama Needs to Fight Five GOP Myths About the Imaginary Obama”. Tomasky discusses the myths that Obama needs to dispel during his party’s upcoming convention. One in particular caught my attention: the idea that the President needed to confront the myth that he allegedly believes that jobs come from government.

What’s wrong about that? In one sense, it is a myth: to the extent that jobs are an outgrowth of sales, which are a function of aggregate demand, it is wrong to say that the public sector per se creates jobs. But demand (and, by extension, sales) is more robust when employment rates are higher and, in that sense, it matters not to the restaurant owner, or the engineering firm, whether the source of that demand comes from a private or public sector job. The teacher’s cash is just as good at the cash register as the accountant’s. So why does the president even need to disparage the notion that good jobs and vocations cannot come from public employment in order to prove to American voters that he’s not some kind of radical Marxist?

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War By Other Means: Chinese Economic Espionage in the Automobile Sector

By Timothy W. Coleman and Daniel Lewis | September 3, 2012

Automobile assembly line in Ningbo, Zhejiang province. Source: Business Week

China’s continued development and geopolitical rise, though impressive and seemingly globally-minded, serve as a reminder that its dual economic and security-focused interests remain a threat undermining both competitors and trading partners.

Automobile assembly line in Ningbo, Zhejiang province. Source: Business Week

In May of this year, the US Department of Defense released its annual report on China’s military capabilities, entitled, “Military and Security Developments Involving the People’s Republic of China 2012.” The report outlines a growing and emerging Chinese military focused on obtaining Western dual-use and military technologies by any means.

The report asserts, “Chinese actors are the world’s most active and persistent perpetrators of economic espionage.” Adding, “Chinese attempts to collect U.S. technological and economic information will continue at a high level and will represent a growing and persistent threat to U.S. economic security.” Unsurprisingly, China vociferously objected to the report’s contents and being labeled a “growing and persistent” threat. Nevertheless, a more accurate depiction is not that China is a threat to the US but it is also a threat to any foreign nation state possessing technology China lacks.

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Greece is being kept alive by the ECB’s Emergency Lending Authority

By Marshall Auerback | August 10, 2012

From left to right: Mario Monti, Prime Minister of Italy; Mario Draghi, President of the European Central Bank; Angela Merkel, Federal Chancellor of Germany

Greece has moved off center stage, as Spain has become the preoccupation de jour for Europe’s increasingly embattled authorities.

From left to right: Mario Monti, Prime Minister of Italy; Mario Draghi, President of the European Central Bank; Angela Merkel, Federal Chancellor of Germany

But one has to wonder how the Greek banking system has managed to sustain itself over the past several months, given widespread deposit flight and the country’s ongoing solvency challenges. Well, we now have a better idea, courtesy of a leak to the German weekly news magazine Der Spiegel, which has published information about ECB plans to keep Greece on its feet until the next tranche of European Union-International Monetary Fund aid is paid out.

According to Der Spiegel, the ECB has chosen a detour via the Greek central bank under its so-called “Emergency Liquidity Assistance” (ELA) program: “Now, information has leaked regarding how the ECB plans to keep Greece on its feet until the next tranche of European Union-International Monetary Fund aid is paid out. The ECB has chosen a detour via the Greek central bank. It will allow it to issue additional emergency loans to the country’s banks. These in turn are supposed to use the money to buy up Greek bonds with short maturities. This will scrape together €4 billion, according to the plan.” Although the context of the Der Spiegel article suggests that the ELA has been activated here for Greece as a short-term bridging measure, it is almost certain that the program has already been used extensively by the ECB to keep Greece alive. Perhaps this is what Mr. Draghi meant when he suggested that he would do “whatever it takes” to keep the euro alive?

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Resource Nationalism: Old Threat, New Opportunities

By Joshua Wallace and Richard Hartley | August 6, 2012

Shuttered shops selling Coca-Cola in Bolivia. Photo: Agustina Triquell

Resource nationalism, like other components of economic protectionism, has receded since the institutionalization of the Washington consensus and the gradual - if unsteady - democratisation of the developing world.

Shuttered shops selling Coca-Cola in Bolivia. Photo: Agustina Triquell

The days of aggressive expropriation, the seizing of private assets by governments, are empirically in decline. Governments, as The Economist point out, are increasingly open to foreign involvement in heavy extraction industries as they seek to exploit the technical, infrastructural, employment and foreign currency advantages of foreign ownership. But rather than a wholesale liberalization, governments are exerting a competitive impulse into contracts: to drive up prices as a means of maximizing revenue while simultaneously assuaging popular nationalism from below. Companies in turn, sensing an opportunity to achieve scale, are turning to Corporate Social Responsibility projects to heighten their attractiveness to prospective countries – and specifically, the people within.

There are exceptions: Zimbabwe’s indigenization policy serves to remind us of the close correlation between authoritarianism (competitive or complete) and state sponsored, often economically destructive, nationalism. It is with this example in mind that Ernst & Young ranked resource nationalism as the number one global risk facing mining and metal companies. Resource nationalism then has not disappeared, but it has been accompanied by pragmatism on the part of governments in developing economies.

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How Far is the ECB Prepared to Go to Save the Euro?

By Marshall Auerback | July 29, 2012

European Central Bank's Mario Draghi with Ramon Tremosa. Source: European Council

Re-reading Mr Draghi’s market-moving remarks last Thursday, one gains a sense that the European Central Bank chief recognizes that the ECB has a banking run on its hand. Most market participants have understandably focused on Mr. Draghi’s pledge that the ECB was “ready to do whatever it takes” to preserve the single currency. “Believe me, it will be enough,” he told a conference in London. We prefer to focus on other aspects of the speech.

European Central Bank’s Mario Draghi with Ramon Tremosa. Source: European Council

It is particularly salient that Mr. Draghi highlights the fatal flaw of the euro zone noted by Professor Peter Garber some 14 years ago: As long as there was no perceived probability of euro exit by any euro nation, the established transfer system coupling private markets with European system of Central Bank support (Target 2, ELA, ECB repos) would function like any other monetary system in a single nation state. However, Garber recognized that if there arose the prospect of a euro exit and, therefore, a devaluation risk for holders of deposits in the banks domiciled in the country slated for exit (e.g. Greece or Spain), the European monetary system would be exposed to a bank run. Under the EU treaty capital mobility was guaranteed.

Under the common currency deposit transfers from domestically domiciled banks in countries at risk of euro exit (e.g. Greece, Spain) to banks domiciled in other euro nation states (e.g. Germany, Netherlands) was costless. Faced with any non-negligible perceived risk of a euro exit and thereby a devaluation loss, rational market participants should move all their deposit funds from the banks domiciled in the country at risk of euro exit to banks domiciled in nations at the Eurozone’s unassailable core.

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Social Blindspot: Why Risk Models Need to Change

By Joshua Wallace and Richard Hartley | July 25, 2012

The risk landscape is undoubtedly shifting. PricewaterhouseCoopers or PwC, invoking Nassim Nicholas Taleb’s recent book, posit that ‘Black Swans’ are increasingly ‘turning grey’.

Black swan. Photo: Sarah Macmillan

By this, they mean that previously catalytic and unforeseen events are becoming more regular; betraying an increased level of uncertainty faced by the global community in the face of growing connectivity and dependency. Their approach is to expand existing ERM (Enterprise Risk Management) frameworks ‘by innovating around them, adding tools and techniques such as scenario modelling, predictive indicators and ‘reverse stress-testing’.

PwC is right to identify a changing terrain, in which political developments play an increasingly important role, however traditional approaches to Political Risk themselves must adjust to remain relevant in the 21st century. So while organisations will benefit from integrating Political developments as a component into their ERM systems, more fundamentally, Political Risk as a discipline needs to be re-calibrated.

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Greece on the Brink…Again

By George Grevett | July 22, 2012

European Union and Greek flags fly near the Parthenon. Simon Dawson/Bloomberg

Just one month after the so called “make or break” election, the state coffers in Greece are running low as tax revenues continue to miss targets as the economy slows further.

European Union and Greek flags fly near the Parthenon. Simon Dawson/Bloomberg

The election outcome, dubbed by European political leaders as a victory for the euro, was supposed to ensure that the bailout programme be implemented in order to move Greece back onto a sustainable economic path. Since then the emphasis in Greece has shifted towards a renegotiation of the bailout conditions as the austerity measures hit living standards. A recent statistic published by Eurostat claimed that 27.7 percent of Greeks are now living on or below the poverty line. Such rhetoric is falling on deaf ears elsewhere in Europe as leaders in countries such as Germany, Finland and the Netherlands struggle to sell each of the bailouts to their respective electorates further highlighting the North-South divide in the Eurozone.

Recent figures released suggest that Greece is making progress towards reducing its deficit as the figure for the first six months of 2012 came in at 12.3 billion euros well ahead of the Troika target of 14.9 billion euros and down from 13.1 billion euros from the same period in 2011. However, a closer inspection reveals that, whilst spending cuts are being met, the required taxation income was 1 billion euros behind the plan during the first half of 2012. One consequence of this is that Greece will struggle to survive financially until September when the next bailout tranche is due to be made payable.

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Geithner: Europe Can’t be Left Hanging on the Edge of Abyss

By Marshall Auerback | July 18, 2012

Michael Kinsley once defined a gaffe as “when a politician tells the truth – some obvious truth he isn’t supposed to say.”

Treasury Secretary Timothy Geithner

On that basis, the recent headline that just popped up might well represent a major gaffe of the Kinsley variety by Treasury Secretary Tim Geithner. Speaking on CNBC’s “Delivering Alpha” conference, the Treasury Secretary argued, “What is very important is that [Eurozone officials] not leave the Continent hanging on the edge of the abyss as a device for getting more leverage for reform, because that leaves the rest of the world much more exposed to financial pressure and slower growth from Europe.” In essence, Geithner is letting the cat out of the bag. He is implying that Europe is hanging on the edge of the abyss. Only Germany can prevent it from falling in, and at the same time it appears that Berlin has now moved into a position where they cannot or will not prevent that disasterous scenario, either for economic or legal reasons.

The decision by Germany’s constitutional court to delay its approval of the German Parliament’s ratification of the ESM and fiscal compact may be a warning. The court could have moved to approve quickly. Instead, it will not rule on emergency appeals for an interim injunction against the parliamentary approvals until the end of this month. If the court rules in favor of an interim injunction, the final decision on the ESM and fiscal compact may not be made for several months.

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The Chinese Central Bank’s Delicate Tap Dance

By Daniel Wagner and Dee Woo | July 16, 2012

People’s Bank of China (PBOC) in Beijing. Sim Chi Yin/Bloomberg

This past week’s release of China’s second quarter GDP growth number – at 7.6 percent - was viewed as an ominous sign of the future direction of the global economy by some pundits, while others see the Chinese government’s stimulus measures as a hopeful sign that its economic growth will be higher in the second half of the year.

People’s Bank of China (PBOC) in Beijing. Sim Chi Yin/Bloomberg

It is important to understand that the root cause of the decline in China’s economic growth this year is not the trouble in Europe or funk of the global economy, but rather the unsustainable economic bubbles that have been created by the government, and the collapsing demand that has accompanied it. The central bank’s latest tap dance won’t fix that.

Central banking maneuvering can at best serve to sustain the over-leveraged economy and avoid a systematic short-circuit of debt financing for now. There won’t be much liquidity invested in lending capacity or job creating projects, since there is insufficient demand, so the economic return on credit will deteriorate. If these structural deficiencies aren’t properly addressed by the central government - and soon – the longer-term deterioration of the Chinese economy can only continue. The inevitable chain reaction will accelerate, and China will face its economic end game.

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Spain’s Growing Pains

By Marshall Auerback | July 12, 2012

Prime Minister Mariano Rajoy in Valencia. Diego Crespo/La Moncloa

Just when you think that things can get no worse in Spain, they do.

Prime Minister Mariano Rajoy in Valencia. Diego Crespo/La Moncloa

Yiagos Alexopoulos at Credit Suisse estimates that Spanish capital outflows are currently running at an annualised rate of 50 per cent of GDP. No question, the bank run is clearly accelerating, and one can easily understand why. The country is turning into a Little House of Economic Horrors. The alleged “rescue” of Madrid’s banks is a non-starter. 100 billion euros won’t begin to cover the scale of the problem on any honest accounting or “stress test” (and that’s before we get to the next phase of announced austerity measures). Chuck Davidson of Wexford Capital has completed a report where he looked at the Spanish banks, extrapolating to all of them from a close look at the big five. He haircutted their assets by 25%, which hardly seems excessive.

Moving from the big 5 to the entire banking system, he came up with 990 billion euros as the capital needed to get Spain’s banks to Basel 3 risk weighted capital standards. Madrid, we have a problem! That’s of course after these very same banks have ripped off thousands of depositors, who were strongly encouraged to buy preferred equity shares and subordinated debt, which were touted to them as higher yielding, low risk fixed income replacements instead of lower yielding deposits

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The ECB is Quickly Running out of Options

By George Grevett | July 10, 2012

European Central Bank President Mario Draghi. Photo: Pietro Naj-Oleari

When policymakers are lacking in credibility and competence, confidence in their ability to govern is likely to be in short supply. This is particularly notable in reference to the Eurozone and its steadily deteriorating economy – most acutely felt by the ‘sin states’ of the Mediterranean.

European Central Bank President Mario Draghi. Photo: Pietro Naj-Oleari

With Europe’s leaders now finally in admission of the debt fuelled malaises, the emphasis has turned to crisis and resolution management, and the markets are feeling uneasy. As the economic data releases worsen by the week investors increasingly look to the European institutions, most commonly the European Central Bank, to provide the financial stimulus to drive an economic recovery. As the crisis shifts to the business end of the cycle it is clear that a solution for the Spanish and Italian sovereigns is barely making progress as borrowing costs teeter at unsustainable levels.

Last week the European Central Bank pitched in with a seemingly last ditch attempt to contain the crisis by cutting its benchmark interest rate to 0.75% and lowering its deposit rate to 0%. With the ECB quickly running out of options, its President Mario Draghi, once again re-iterated that the ultimate remedy must be driven by Eurozone governments in the form of structural reforms and progression towards an economic and political union.

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Paul De Grauwe is Right: All Roads Lead Back to the ECB

By Marshall Auerback | July 5, 2012

Italy's Prime Minister Mario Monti with Ireland's Prime Minister Enda Kenny in Brussels. Source: European Council

We’ve always been a fan of Professor Paul De Grauwe from University of Leuven, who has consistently pointed out the structural flaws inherent in the original structures of the EU.

Italy’s Prime Minister Mario Monti with Ireland’s Prime Minister Enda Kenny in Brussels. Source: European Council

Recently, Professor de Grauwe wrote an excellent analysis explaining why the latest “rescue plan” cobbled together by the Eurozone authorities is destined to fail. The key points: ECB is not currently a ‘lender of last resort’. The ECB was set up with fundamental flaws, where “… one of the ECB’s main concerns is the defense of its balance sheet quality. That is, a concern about avoiding losses and showing positive equity- even if that leads to financial instability.”

This is a profoundly misconceived idea. As we have noted many times, a private bank needs capital – clearly because there are prudential regulations requiring that – but because it can become insolvent. It has not currency-issuing capacity in its own right. While the ECB has an elaborate formula for determining how capital is from the national member banks at an intrinsic level, it has no need for capital. It could operate forever with a balance sheet that if held by a private bank would signal insolvency. There are no comparable concepts for a currency issuer and a currency user in terms of solvency. The latter is always at risk of insolvency the former never, so the ECB’s focus on profitability is not only misguided, but leading to inadequate policy responses.

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European Debt Crisis: George Soros Exudes Optimism

By Marshall Auerback | June 28, 2012

George Soros at the World Economic Forum in Davos, Switzerland, January 27, 2010. Photo: Sebastian Derungs

George Soros probably understands the nature of the immediate problem facing the Eurozone. Namely, the accelerating bank run which, amongst other things, potentially exposes Germany to trillions of contingent euro liabilities. But even Soros reflects the prevailing – and mistaken – view that Greece might need to become the sacrificial lamb required to save the euro. He said as much in a recent interview in Der Spiegel.

George Soros at the World Economic Forum in Davos, Switzerland, January 27, 2010. Photo: Sebastian Derungs

Questioned about his proposal to rescue the European Monetary Union via a Debt Reduction Fund, Soros was asked whether this measure could also save Greece, “Unlikely. Rescuing Greece would require an enormous kind of magnanimity and generosity. The situation there has simply become too poisoned. I think that by standing firm and not compromising on Greece, Angela Merkel would be in a better position to persuade the German public to be more generous toward other nations and distinguish between the good guys and bad guys in Europe.” Policy makers, market practitioners, indeed anyone like Soros, who keeps saying, “Well, we might have to sacrifice Greece ‘pour decourager les autres” fails to recognize that this type of attitude actually exacerbates the fatal flaw in the euro’s architecture and makes its ultimate demise more likely, not less. The same issues that confront the euro zone today would intensify in the event of a Greek exit.

As Yanis Varoufakis has noted “the lack of a constitutional (or Treaty-enabled) process for exiting the Eurozone has a solid logic behind it. The whole point of creating the common currency was to impress the markets that it is a permanent union that will guarantee huge losses to anyone bold enough to bet against its solidity.” As Varoufakis argues, a single exit suffices to punch a hole through this perceived solidity. It goes back to the fundamental flaw cited by Peter Garber at the time of the euro’s inception. As long as there was no perceived probability of euro exit by any euro nation, the established transfer system coupling private markets with European system of Central Bank support (Target 2, ELA, ECB repos) would function like any other monetary system in a single nation state.

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Angela Merkel’s Nein Problem

By George Grevett | June 26, 2012

President Obama with Angela Merkel in Washington. Denzel/Bundesregierung

The pattern is becoming despairingly familiar.

President Obama with Angela Merkel in Washington. Denzel/Bundesregierung

The embattled periphery countries, led by Italy and Spain but also endorsed by France, propose more fiscal integration in the form of mutual debt pooling and shared financial liability. Such reforms are met with resounding rejections from Germany who instead point to the long run benefits of austerity in terms of promoting a sustainable economy. Similar responses are also reserved for Greece who is seeking to renegotiate elements of its bailout agreement following a recent general election which resulted in the formation of an awkward coalition government.

The focal point of this resistance is Germany’s Chancellor Angela Merkel who, supported by its Central Bank’s President Jens Wiedmann, is adamant that the focus for the Eurozone should be implementing the necessary fiscal reforms rather than loosening conditions. This position, generally supported by the ‘northern core’ countries, highlights the almost daily division between the creditor and debtor nations in the single currency bloc. The current official line from Germany is that ‘More Europe’ is the solution to the crisis however without a clear prescription as to that definition uncertainty will remain.

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