18 February 2015

Baltic Economic Miracle in two graphs

Latvia and the Baltic economies are often cited as examples of what the virtue of pain, austerity, can do.

How was this Baltic economic miracle achieved? Depopulation

And the medicine:
Latvia’s economy fell by more than 20 percent from its peak in 2007. By doing what EU officials want, as fast as possible, it successfully reduced the ability of Latvians to make more Latvians and lost a large slice of its population. In doing so, it managed to become the best performing shrinking economy in the European Union.
The message to Greece is that austerity can work.....if it has a responsible macro-pruning government to stamp on its own population to death until they leave or stop breeding.

...unless, Schaeuble has an efficient or quicker way to reduce the population of Greece.

If you want a vision of the future, imagine a boot stamping on a human face - forever." - George Orwell (1984)

Reference: Used to hardship latvia accepts austerity and its pain 


12 February 2015

Germany is a very inefficient economy

The European Union not so long ago received a Nobel (inventor of dynamite) prize for remaining in one piece.  Before it blows up, let me take the opportunity to lob a stick of dynamic.

The Germany economy is really inefficient..... 

there... you may now click and leave

So let me begin by apologizing to German readers who are unwtting victims. It must be painful spinning around on Schäuble's treadmill. And, as the "BIld" will tell you, we having such a jolly crisis at your expense. But.... 
"The world should rejoice at the positive economic signals the eurozone is sending almost continuously these days".  Wolfgang Schäuble 
So let me call it the Schäuble economy, as many Germans are being treated unfairly by it.  Here's his success story:  
"Take Germany. In the late 1990s it was the undisputed “sick man” of Europe – seen by domestic and international commentators alike as uncompetitive and condemned to decline ...... A first wave of adjustment, starting in 2003, focused on strengthening employment incentives, streamlining the public sector, fixing social security and raising consumption taxes. Down to shop-floor level, companies and unions worked together to make labour more flexible........"  Wolfgang Schäuble 
You may well ask why Germany was the "sick man of Europe" in the late 1990s - but lets leave that other monetary union (the German Mark and German unificiation) aside for now. 

What is the primary goal of the Schäuble economy?  To chase down little pots of gold, found at the end of the rainbow, called trading surpluses.  

If it weren't for the euro or for agreements in the labour market that Schäuble mentions above, then this excess demand for "all things German" would have raised the price of German goods, increased the demand and the wages of the workers that produced these goods, and eliminated the trade surplus. 

Schäuble trade surplus means that wages are lower than what they would be (without the agreements). It also means the wages are also lower that what they would be relative to capital (so we use less machines, robots etc in the production mix). So more labour (which Schäuble economy sucks in from the periphery's pool of idle young) and less capital is being used than what would otherwise have occurred. In other words, there is less physical investment and this production mixed creates a lower or sluggish growth rate. This drags down the growth rate not only of the Schäuble economy, but the entire European continent with it.

In other words the German or the Schäuble economy is highly inefficent one in its misuse of resources and dooms the European economy, by getting investment wrong, to lag behind the rest of the world.  This inefficiency is paid by imposing austerity on taxpayers living in the periphery

So if surpluses are wasteful, Germany is Europe's most inefficient economy.

Here is the statistical data showing the current (trading) account surplus moving in the opposite direction to the levels of capital stock. 
via @LThomas12 CA Surplus and investment are highly negatively related.
"The share of investment in gross domestic product is one of the lowest among industrialised countries. It has been declining rapidly, from an average of 23%in the 1990s to less than 17 per cent today"  Fratzscher 18th Nov 2013

The 1990s was a story of the impact of German unification and the influx of cheap East German labour. The pursuit of trading surpluses within the Eurozone, by agreements to keep real wages down, re-writes the Schäuble's 1990's "Sick man of Europe" story into a massive expansion pack of 28 volumes. Everyone in the Eurozone, and beyond, becomes sick.

The frugal German's housewife's chase for surpluses may be a very cute story, but what is she going to do with those damned surpluses? 

Give them to the Greeks or hide them under her matress? They didn't go into real investment. 

This is unfair on the  taxpayers (and the frugal Athenian housewife who economises by scavenging bins) of other economies who pay for the obsession until they go broke. 

Usually one intervenes, when one's friends is caught up some habitual immoral behaviour. One is almost tempted to show solidarity and ask for the Troika to be sent in.

9 February 2015

Petering out in Never Never land

Even if the EuroZone and the Greek economy survives the present crisis, there is a madness in its arrangements (fiscal compact) that threatens the Eurozone's long term existence. Crises will reappear whenever there is a peroid of strong growth in the Eurozone. Internal trade imbalances, surpluses and deficits will build up again and creditor countries and Euro institutions will again give the entirely wrong response. This, and the damage this cycle does to investment, makes Europe a lost Continent. It is ironic that Syriza, mistakenly called anti-Euro, has something that at least looks like a plan to save the Eurozone from itself. 

Remember that Fiscal Multiplier? 
see http://www.bloomberg.com/news/articles/2013-01-04/imf-officials-we-were-wrong-about-austerity

Here is a simple school exercise in numbers that seems to be beyond some European governments.

A country has a very large budget deficit and wants to reduce it. GDP is $100 and its budget deficit is 10% of GDP and it is told to reduce it to 5%.  So it cuts government spending by $5 and overall spending, GDP, falls by $5. 

Someone's spending is someone's income, and they too are forced to spend less which in turn affects other incomes. After a small cycle of after-effects (the multiplier) overall spending falls by, for example, by 1.5 times the initial cut.  If the tax rate is 25%, then the following changes are

    -$5 the initial spending reduction
    -($5)(1.5) = $7.5 the overall fall in incomes and spending - as people loss jobs and spend less

     Old tax revenues = $25 ;
     new tax revenues = $( 100 – 7.5) x 25% = $23.125
    -$1.875 = Fall in tax revenues 

The deficit falls from $10 to $6.875 (not to $5 as the Troika hoped for).

But what percentage is $6.875 of $95?   Hmmm its 7.4% not 5%. of GDP.  Someone's cheating, lets apply more cuts.  Surprise, surprise... those nasty Greeks are missing their deficit targets again.

The IMF assumed /calculated the Fiscal Multiplier was close to one, but it was found to be a lot higher in times of distress than in normal times. Europe's austerity policies were therefore founded on faulty assumptions. They should be reviewed. This is bascially what Syriza in Greece is asking for. It has to refuse to continue with a "bailout package" that is fundamentally wrong and destroying the real economy. For many Greeks the choice has become very simple: "your home or Grexit".

So why are some Governments so persistent, even if it means throwing away their own taxpayers' money? 

Well you need to believe in euro fairies as every time you don't believe in one, then one .... kind of exits.  Now you do believe in euro fairies, don't you .... ?

Never Never Land 2015

17 January 2015

Cloud cuckoo land

Yesterday I posted a piece here on a cuckoo clock (Swiss Fanc) that chimes for Angela Merkel and Alexis Tsipras (on an election victory) to do "realpolitik".  The explanation I liked on yesterday's global spasms (and the Greek story) comes from Paul Mason's Channel 4 post .  American readers might also want to check "Welcome to the Currency Wars"

"In Switzerland, they had brotherly love, they had five hundred years of democracy and peace – and what did that produce? The cuckoo clock.” ― Orson Welles (from "the Third Man")

.....But now Switzerland is famous for something else. This week its central bank abandoned a currency peg with the Euro with all the suddenness of a film noir plot reversal.
To explain. During the euro crisis, with money flowing into Switzerland driving the value of its currency up, the Swiss National Bank announced a currency cap. It would intervene in the markets, and print money, so that the Swiss franc’s value stayed pegged to the euro.
Given the money of the global rich is stored in Swiss francs, and quite a lot of east European mortgages also, the sudden rise in value after the cap was lifted works like this:

a)   The value of people’s savings held in Swiss francs rises
b)   The value of people’s debts in Swiss francs also rises, especially people in east Europe who took out mortgages with Swiss banks
c)    The big Swiss manufacturing and export sector will get hammered
d)   The central bank itself will lose a lot of money, because some of the money it printed was used to buy assets in euros and dollars, and these are now worth less in Switzerland. And that means Swiss cantons, including Graubunden where the Davos jamboree is held, will lose money – because they lose or gain from central bank profits.......

....The SNB’s move came, simply, because it could not go on financing the cost of pegging its own currency. The central bank’s balance sheet had grown to 80 per cent of GDP.
Next week, it is probable that the European Central Bank will make an equally dramatic move, announcing between €500bn and €1tr worth of quantitative easing, in a move designed to end stagnation in the eurozone.

What we’re seeing, then, is three central banks engaged in an attempt to use monetary policy and bank regulation against a tide of deflation and low growth. You could think of it this way: there is very little growth available in this corner of the world and one way of competing for it is by stimulating your economy with QE, and letting your currency fall against others.
The ECB’s gambit next week is a kind of “join the club” move – because everyone else will do it. Switzerland’s move was really an admission that: we can’t do anymore. And the Greek situation is being driven by voters signaling – via the poll lead of the far left Syriza party – that “we can’t do anymore”..... "The cuckoo clock chimes for the Swiss franc" 
 As for the EU, and its rationalized* foolishness, here's something from Aristophanes (the Birds ): - "the perfect city in the clouds, named Νεφελοκοκκυγία, (Cloud cuckoo land)" comes crashing down. 

I didn't even mention the crows..

PS -  I was tempted to make a more respectable post with some random terms.  These are a few terms that I might have failed* to exclude:

*rationalized -- the world does not makes sense; make the world smaller until it does.

endogeneous - nothing exists outside the box

lower (and zero) bound interest rates -  we can't find the box

exogenous  -  god help us

The Impossibility Trinity 

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