This video has the initial segment of my presentation at the April 28th fiscal sustainability conference, followed by an interview that I was told aired in Russia. It includes my euro zone proposals and proposals for the US Economy.
Category Archives: ECB
Spanish banking issues
The end game is unfortunately unfolding as Spanish bank losses become Spanish govt losses.
Deposit insurance is only credible at the ‘Federal’ level, not the ‘State’ level.
If the ECB had to write the check the issue would be inflation, but not solvency.
The euro govts can no more fund bank losses than the US States could cover bank losses.
And the euro zone response of spending cuts and tax increases only makes matters worse.
From inception, the euro system has been exactly this kind of accident waiting to happen.
CajaSur Seizure Marks Change for Spain’s Ailing Banks
Germany Seeks ‘Orderly’ Insolvency Option for Euro Members
Germany Seeks ‘Orderly’ Insolvency Option for Euro Members
(Bloomberg) Germany is proposing that the European Union create the option of an “orderly state insolvency” for countries using the euro, according to a Finance Ministry document. That would set incentives for governments to follow “solid” fiscal policies and for “responsible” behavior by investors, the document said.
This is a very critical issue. Germany doesn’t want to have to write the check for other euro member’s debt.
An ‘orderly state insolvency’ would mean the lenders would lose their investment rather than get bailed out.
The main problem with this is that by making insolvency a viable option, euro members become subject to increased liquidity risk. And, in the case of actual insolvency and legal debt write downs, euro bank assets are written down as well, subjecting them to increased liquidity risk as well.
EU Daily | Trichet remains confident in ECB plan
The euro zone is standing on the deflation pedal hard enough to turn the euro northward when the portfolio adjustments have run their course, which could be relatively soon.
And the indications of growing exports are more evidence the currency could bottom and start to appreciate.
Like Japan, when relative prices get to where exports pick up it causes the foreign sector to get short (net borrowed) in that currency, which tends to cause the currency to appreciate to the point exports fall off.
The ‘answer’ is to buy dollars as Japan did for many years, and China continues to do. And note how strong the yen got after Japan stopped buying dollars- strong enough to keep a lid on exports. But the euro zone ideology won’t allow the ECB to buy dollars should the euro start to appreciate, as that would give the appearance of the euro backing the dollar.
So right now a euro strong enough to slow exports would be highly problematic for a continent already in the midst of a deflationary spiral with its fiscal authority, the ECB, forbidden to offer the needed fundamental support.
The price of gold in euro could be the indicator of this turn of events. The portfolio shifting has driven up that gold price, and a downturn could be the indication that the portfolio shifting is getting played out.
But for you traders out there- I wouldn’t be early or try to call the precise bottom of the euro.
There’s no telling how much more portfolio shifting lies ahead.
Trichet remains confident in ECB plan
Trichet Says Greek Situation Resembled Lehman Collapse
Trichet: economy in deepest crisis since WWII
Stark Says ECB Measures ‘Only Bought Time’
Weber Says Crisis Response Must ‘Respect’ Policy Divisions
Stark Shares Weber’s View on ECB Bond Purchases, FAS Reports
ECB’s Nowotny Says Euro’s Drop of ‘No Specific Concern’
Lagarde Says Greek Debt Restructuring Isn’t an Option, FAZ Says
Berlin calls for eurozone budget laws
Schaeuble Has Plan to Stabilize Euro
Papandreou Says Greece Is a Good Investment, Handelsblatt Says
Spain puts labour reform on agenda
Italy to Make Extraordinaray Spending Cuts, Minister Says
April EU car sales fall as cash-for-clunkers fades
Krugman: We’re Not Greece
We’re Not Greece
By Paul Krugman
It’s an ill wind that blows nobody good, and the crisis in Greece is making some people — people who opposed health care reform and are itching for an excuse to dismantle Social Security — very, very happy. Everywhere you look there are editorials and commentaries, some posing as objective reporting, asserting that Greece today will be America tomorrow unless we abandon all that nonsense about taking care of those in need.
True. I just finished a week in dc fighting back against the bipartisan move to cut social security.
The truth, however, is that America isn’t Greece — and, in any case, the message from Greece isn’t what these people would have you believe.
So, how do America and Greece compare?
Both nations have lately been running large budget deficits, roughly comparable as a percentage of G.D.P. Markets, however, treat them very differently: The interest rate on Greek government bonds is more than twice the rate on U.S. bonds, because investors see a high risk that Greece will eventually default on its debt, while seeing virtually no risk that America will do the same. Why?
One answer is that we have a much lower level of debt — the amount we already owe, as opposed to new borrowing — relative to G.D.P.
That has nothing to do with it. Japan’s debt is near triple ours, and their 10 year rates are about 1.3% for example.
True, our debt should have been even lower. We’d be better positioned to deal with the current emergency if so much money hadn’t been squandered on tax cuts for the rich and an unfunded war.
Not true. With us govt spending not operational revenue constrained the way greece is, we are always able to spend (or cut taxes) however much we want to. It’s a political decision without external constraints.
But we still entered the crisis in much better shape than the Greeks.
Yes, because we are the issuer of the dollar and greece is not the issuer of the euro. Greece is like a us state in that regard.
Even more important, however, is the fact that we have a clear path to economic recovery, while Greece doesn’t.
For the same reason. We can manage our aggregate demand because our fiscal policy is not operationally constrained by revenue the way Greece is.
The U.S. economy has been growing since last summer, thanks to fiscal stimulus
Yes, mostly the automatic stabilizers with some help from the proactive measures congress has taken, however misguided.
and expansionary policies by the Federal Reserve.
I don’t agree with this but that’s another story.
I wish that growth were faster; still, it’s finally producing job gains — and it’s also showing up in revenues.
True, however the output gap is finally stable at best as it remains tragically wide.
Right now we’re on track to match Congressional Budget Office projections of a substantial rise in tax receipts. Put those projections together with the Obama administration’s policies, and they imply a sharp fall in the budget deficit over the next few years.
Yes, with our only hope for lower unemployment being an increase in private sector debt that exceeds that. Not my first choice in mending what ails us.
Greece, on the other hand, is caught in a trap. During the good years, when capital was flooding in, Greek costs and prices got far out of line with the rest of Europe. If Greece still had its own currency, it could restore competitiveness through devaluation.
Should have been said this way-
‘If Greece had its own currency and was running its deficits in local currency market forces would have caused the currency to depreciate.’
But since it doesn’t, and since leaving the euro is still considered unthinkable, Greece faces years of grinding deflation and low or zero economic growth. So the only way to reduce deficits is through savage budget cuts, and investors are skeptical about whether those cuts will actually happen.
True. And worse. The proactive cuts and tax hikes can slow the economy to the point the deficit doesn’t come down, and might even increase, making matters even worse.
It’s worth noting, by the way, that Britain — which is in worse fiscal shape than we are, but which, unlike Greece, hasn’t adopted the euro — remains able to borrow at fairly low interest rates. Having your own currency, it seems, makes a big difference.
It is all the difference.
Hard to see why that isn’t obvious. US, UK, Japan, etc. Etc. With one’s own non convertible currency and floating exchange rates, interest rates are necessarily set by the central bank, not by markets.
And govt securities function to support interest rates and not to fund expenditures
And note the uk economy is on the mend. Even housing has found a bid, with the main risk being a govt that doesn’t get it and tries to balance the budget.
In short, we’re not Greece. We may currently be running deficits of comparable size, but our economic position — and, as a result, our fiscal outlook — is vastly better.
Wrong reason- we are the issuer of our own currency, the dollar, while Greece is the user of the euro and not the issuer.
That said, we do have a long-run budget problem. But what’s the root of that problem? “We demand more than we’re willing to pay for,” is the usual line. Yet that line is deeply misleading
First of all, who is this “we” of whom people speak? Bear in mind that the drive to cut taxes largely benefited a small minority of Americans: 39 percent of the benefits of making the Bush tax cuts permanent would go to the richest 1 percent of the population.
Wasn’t my first choice of which tax to cut to support the private sector. I’d have cut fica taxes and i continue to propose that.
And bear in mind, also, that taxes have lagged behind spending partly thanks to a deliberate political strategy, that of “starve the beast”: conservatives have deliberately deprived the government of revenue in an attempt to force the spending cuts they now insist are necessary.
And liberals have artificially constrained themselves with the misguided notion that spending is operationally constrained by revenues, and fail to understand the ‘right sized’ deficit is the one that coincides with full employment and desired price stability.
Meanwhile, when you look under the hood of those troubling long-run budget projections, you discover that they’re not driven by some generalized problem of overspending. Instead, they largely reflect just one thing:
An understanding of national income account and monetary operations shows deficits are driven by ‘savings desires’ and any proactive attempt to increase deficits beyond savings desires results in inflation.
the assumption that health care costs will rise in the future as they have in the past. This tells us that the key to our fiscal future is improving the efficiency of our health care system — which is, you may recall, something the Obama administration has been trying to do, even as many of the same people now warning about the evils of deficits cried “Death panels!”
Wrong causation. What he calls our ‘fiscal future’ is the size of future deficits and they will always reflect future ‘savings desires.’ if we proactively get them smaller than that the evidence will always be unemployment.
So while cutting health care costs may be a ‘good thing,’ when the time comes, future deficits need to reflect future savings desires to keep us fully employed.
So here’s the reality:
The mistaken, political reality.
America’s fiscal outlook over the next few years isn’t bad. We do have a serious long-run budget problem,
Unfortunately, this kind of talk makes him part of the problem, not part of the answer.
which will have to be resolved with a combination of health care reform and other measures, probably including a moderate rise in taxes.
Wonderful, with screaming shortfall in aggregate demand as evidenced by tragic levels of unemployment, the celebrity voice from the left is calling for spending cuts and tax hikes not to cool an over heating economy, but to reduce non govt savings of financial assets.
(govt deficit = non govt savings of financial assets to the penny as a matter of national income accounting, etc)
But we should ignore those who pretend to be concerned with fiscal responsibility, but whose real goal is to dismantle the welfare state — and are trying to use crises elsewhere to frighten us into giving them what they want.
This is one of the current iteration of the ‘deficit dove’ position.
It does not cut it.
It is part of the problem, not part of the answer.
Doing the best i can to get the word out.
Please distribute to the max!
re: Trichet statement
The old german model was tight fiscal to keep domestic demand down, costs down, to help exporters. this made the mark strong so they sold marks vs dollars to keep it weak at the expense of the macro economy but to the benefit of the exporters.
The euro zone is trying same but can’t buy dollars for ideological reasons- it would look like the dollar is backing the euro as a reserve currency, etc.
So the euro gets strong to the point where the export strategy is thwarted. Hence it went up to 160 to the dollar before it all broke down and ‘automatic’ counter cyclical deficits kicked in which weakened the euro, which they are now trying to reverse with austerity. But going broke trying, etc.
From Pragmatic Capitalist:
Trichet statement
Trichet rejected the notion that fiscal discipline would hamper growth in the Eurozone.
He’s wrong for the macro economy.
“It is a complete fallacy to say that fiscal soundness dampens growth. It is exactly the contrary. It is the absence of fiscal credibility which dampens growth,” he said.
He’s right at the micro level of the national govts given the eu’s current institutional structure.
They need fiscal expansion to come from the ECB level rather than the nat gov level.
But he probably wouldn’t agree with that either.
With current policy, the eurozone institutional structure can only survive with an impossibly large surge in exports.
A cartoon with a fencer stabbing a figure labeled the euro zone and exclaiming ‘Trichet’ as he stabs it?
Marshall’s latest
REPEAT AFTER ME: THE USA DOES NOT HAVE A ‘GREECE PROBLEM’
By Marshall Auerback
To paraphrase Shakespeare, things are indeed rotten in the State of Denmark (and Germany, France, Italy, Greece, Spain, Portugal, and almost everywhere else in the euro zone). An entire continent appears determined to commit collective hara kiri (link), whilst the rest of the world is encouraged to draw precisely the wrong kinds of lessons from Europe’s self-imposed economic meltdown. So-called respectable policy makers continue to legitimize the continent’s fully-fledged embrace of austerity on the allegedly respectable grounds of “fiscal sustainability”.
The latest to pronounce on this matter is the Governor of the Bank of England, Mervyn King. This is a particularly sad, as the BOE – the Old Lady of Threadneedle Street – has actually played a uniquely constructive role amongst central banks in the area of financial services reform proposals. King, and his associate, Andrew Haldane, Executive Director for Financial Stability at the Bank of England, have been outspoken critics of “too big to fail” banks (link), and the asymmetric nature of banker compensation (“heads I win, tails the taxpayer loses”). This stands in marked contrast to America’s feckless triumvirate of Tim Geithner, Lawrence Summers, and Ben Bernanke, none of whom appears to have encountered a banker’s bonus that they didn’t like.
But when it comes to matters of “fiscal sustainability” King sounds no better than a court jester (or, at the very least, a member of President Obama’s National Commission on Fiscal Responsibility and Reform). In an interview with The Telegraph (link), the Bank of England Governor suggests that the US and UK – both sovereign issuers of their own currency – must deal with the challenges posed by their own fiscal deficits, lest a Greece scenario be far behind:
“It is absolutely vital, absolutely vital, for governments to get on top of this problem. We cannot afford to allow concerns about sovereign debt to spread into a wider crisis dealing with sovereign debt. Dealing with a banking crisis was bad enough. This would be worse.”
“A wider crisis dealing with sovereign debt”? Anybody’s internal BS detector ought to be flashing red when a policy maker makes sweeping statements like this. The Bank of England Governor substantially undermines his own credibility by failing to make 3 key distinctions:
1. There is a fundamental difference between debt held by the government and debt held in the non-government sector. All debt is not created equal. Private debt has to be serviced using the currency that the state issues.
2. Likewise, deficit critics, such as King, obfuscate reality when they fail to highlight the differences between the monetary arrangements of sovereign and non-sovereign nations, the latter facing a constraint comparable to private debt.
3. Related to point 2, there is a fundamental difference between public debt held in the currency of the sovereign government holding the debt and public debt held in a foreign currency. A government can never go insolvent in its own currency. If it is insolvent as a consequence of holdings of foreign debt then it should default and renegotiate the debt in its own currency. In those cases, the debtor has the power not the creditor.
Functionally, the euro dilemma is somewhat akin to the Latin American dilemma, such as countries like Argentina regularly experienced. The nations of the European Monetary Union have given up their monetary sovereignty by giving up their national currencies, and adopting a supranational one. By divorcing fiscal and monetary authorities, they have relinquished their public sector’s capacity to provide high levels of employment and output. Non-sovereign countries are limited in their ability to spend by taxation and bond revenues and this applies perfectly well to Greece, Portugal and even countries like Germany and France. Deficit spending in effect requires borrowing in a “foreign currency”, according to the dictates of private markets and the nation states are externally constrained.
King implicitly recognizes this fact, as he acknowledges the central design flaw at the heart of the European Monetary Union – “within the Euro Area it’s become very clear that there is a need for a fiscal union to make the Monetary Union work.”
This is undoubtedly correct: To eliminate this structural problem, the countries of the EMU must either leave the euro zone, or establish a supranational fiscal entity which can fulfill the role of a sovereign government to deficit spend and fill a declining private sector output gap. Otherwise, the euro zone nations remain trapped – forced to forgo spending to repay debt and service their interest payments via a market based system of finance.
But King then inexplicably extrapolates the problems of the euro zone which stem from this uniquely Euro design flaw and exploits it to support a neo-liberal philosophy fundamentally antithetical to fiscal freedom and full employment.
The Bank of England Governor – and others of his ilk – are misguided and disingenuous when they seek to draw broader conclusions from this uniquely euro zone related crisis. Think about Japan – they have had years of deflationary environments with rising public debt obligations and relatively large deficits to GDP. Have they defaulted? Have they even once struggled to pay the interest and settlement on maturity? Of course not, even when they experienced debt downgrades from the major ratings agencies throughout the 1990s.
Retaining the current bifurcated monetary/fiscal structure of the euro zone does leave the individual countries within the EMU in the death throes of debt deflation, barring a relaxation of the self-imposed fiscal constraints, or a substantial fall in the value of the euro (which will facilitate growth via the export sector, at the cost of significantly damaging America’s own export sector). This week’s €750bn rescue package will buy time, but will not address the insolvency at the core of the problem, and may well exacerbate it, given that the funding is predicated on the maintenance of a harsh austerity regime.
José Luis Rodríguez Zapatero, Spain’s Socialist prime minister, angered his trade union allies but cheered financial markets on Wednesday when he announced a surprise 5 per cent cut in civil service pay to accelerate cuts to the budget deficit.
The austerity drive – echoing moves by Ireland and Greece – followed intense pressure from Spain’s European neighbors, the International Monetary Fund on the spurious grounds that such cuts would establish “credibility” with the markets. Well, that wasn’t exactly a winning formula for success when tried before in East Asia during the 1997/98 financial crisis, and it is unlikely to be so again this time.
Indeed, in the current context, the European authorities are simply trying to localize the income deflation in the “PIIGS” through strong orchestrated IMF-style fiscal austerity, while seeking to prevent a strong downward spiral of the euro. But the contradiction in this policy is that a deflation in the “PIIGS” will simply spread to the other members of the euro zone with an effect essentially analogous to that of a competitive devaluation internationally.
The European Union is the largest economic bloc in the world right now. This is why it is so critical that Europeans get out of the EMU straightjacket and allow government deficit spending to do its job. Anything else will entail a deflationary trap, no matter how the euro zone’s policy makers initially try to localize the deflation. And the deflation is almost certain to spread outward, if sovereign states such as the US or UK absorb the wrong lessons from Greece, as Mr., King and his fellow deficit-phobes in the US are aggressively advocating.
There are two direct contagion vectors off the fiscal retrenchment being imposed on the periphery countries of the euro zone.
First, to the banking systems of the periphery and the core nations, as private loan defaults spread on domestic private income deflation induced by the fiscal retrenchment. Second, to the core nations that export to the PIIGS and run export led growth strategies. So 30-40% of Germany’s exports go to Greece, Italy, Ireland, Portugal and Spain directly, another 30% to the rest of Europe.
These are far from trivial feedback loops, and of course, the third contagion vector is to rest of world growth as domestic private income deflation combined with a maxi euro devaluation means exporters to the euro zone, and competitors with euro zone firms in global tradable product markets, are going to see top line revenue growth dry up before year end.
Let’s repeat this for the 100th time: the US government, the Japanese Government, or the UK government, amongst others, do NOT face a Greek style constraint – they can just credit bank accounts for interest and repayment in the same fashion as if they were buying some helmets for the military or some pencils for a government school. True, individual American states do face a fiscal crisis (much like the EMU nations) as users of the dollar, which is why some 48 out of 50 now face fiscal crises (a problem that could easily be alleviated were the US Federal Government to undertake a comprehensive system of revenue sharing on a per capita basis with the various individual states). But, if any “lesson” is to be learned from Greece, Ireland, or any other euro zone nation, it is not the one that Mr. King is seeking to impart. Rather, it is the futility of imposing arbitrary limits on fiscal policy devoid of economic context. Unfortunately, few are recognizing the latter point. The prevailing “lesson” being drawn from the Greek experience, therefore, will almost certainly lead the US, and the UK, to the same miserable economic outcome along with higher deficits in the process. As they say in Europe, “Finanzkapital uber alles”.
ECB policy and its banks
>
> (email exchange)
>
> On Tue, May 11, 2010 at 6:05 PM, Bernar wrote:
>
> Warren ecb is hardly punishing speculators . They’re removing bad collateral
> from the banks portfolios under the guise of protecting the sovereigns.
>
Who would have thought?
Glad the banks aren’t letting their insiders get their funds out before declaring insolvency and turning it over to their national govt.
That would be very bad form…
>
> The actions are scary the associated rhetoric is comical at best.
>
Euro Erases Gains as Bailout Optimism Ebbs; Chinese Stocks Fall
Looks like the trillion didn’t even buy the EU the day and a half I suggested.
While not much has actually changed some cross currents can start to surface.
Decent US economic news, especially the through the rear view mirror, should continue to be reported.
The euro austerity measures are deflationary, and they are being attempted, so they can firm up the currency once the portfolio shifts have run their course, though that can be a ways off.
China’s policies could prove deflationary as well.
In fact, it looks like the entire world is going the route of ‘fiscal responsibility’ at the same time.
Euro Erases Gains as Bailout Optimism Ebbs; Chinese Stocks Fall
By Justin Carrigan
May 11 (Bloomberg) — The euro lost all of yesterday’s gains on concern the $1 trillion bailout will hurt European economic growth. Stocks fell, paring the MSCI World Index’s biggest advance in a year. Chinese shares entered a bear market.