eXpress Headlines
I am sure many of my readers will have caught this Bloomberg piece earlier this week, but if you haven't it is a brillian piece of journalism by Bloomberg reporters Sharon Smyth, Neil Callanan and Dara Doyle. The story takes us to Spain and Ireland and the former's denial with regards its housing market.
Quote Bloomberg
In the stages of death of a real estate boom, Spain is still in denial. In Ireland, they’re moving toward acceptance. The first auction of one of 2,000 unfinished housing estates takes place tomorrow at the Shelbourne Hotel in central Dublin, with sales expected to fetch cents on the euro, showing the Irish may be closer to the end than the beginning. “Ireland faced up to its problems faster than others and we expect growth there rather soon,” said Cinzia Alcidi, an analyst at the Centre for European Policy Studies in Brussels. “In Spain, there was kind of a denial of the scale of the problem and it may be faced with many years of significant challenges before full recovery takes place.” Spain, Europe’s fifth-largest economy, is the current focus of attempts to contain the region’s sovereign debt crisis, as Prime Minister Mariano Rajoy struggles to quell speculation it will need a bailout. Developers are showing similar optimism. They continue to build even with 2 million homes vacant around the country, new airports that never saw a single flight being mothballed, and property appraisers and banks reporting values have fallen only about 22 percent, said Encinar, who estimates the real decline is probably at least twice that.
In the stages of death of a real estate boom, Spain is still in denial. In Ireland, they’re moving toward acceptance. The first auction of one of 2,000 unfinished housing estates takes place tomorrow at the Shelbourne Hotel in central Dublin, with sales expected to fetch cents on the euro, showing the Irish may be closer to the end than the beginning.
“Ireland faced up to its problems faster than others and we expect growth there rather soon,” said Cinzia Alcidi, an analyst at the Centre for European Policy Studies in Brussels. “In Spain, there was kind of a denial of the scale of the problem and it may be faced with many years of significant challenges before full recovery takes place.”
Spain, Europe’s fifth-largest economy, is the current focus of attempts to contain the region’s sovereign debt crisis, as Prime Minister Mariano Rajoy struggles to quell speculation it will need a bailout. Developers are showing similar optimism. They continue to build even with 2 million homes vacant around the country, new airports that never saw a single flight being mothballed, and property appraisers and banks reporting values have fallen only about 22 percent, said Encinar, who estimates the real decline is probably at least twice that.
Another passage that was staggering to my mind was the comments by Miguel Angel Garcia Nieto, mayor of Avila (a town showcased in the article) that this is just an interim soft spot as a result of the crisis and that oversupply and overcapacity will eventually be absorbed.
“When we approved the first urban plan back in 1998 there was an unprecedented demand for homes,” Nieto said in a telephone interview on April 19. “Yes, there is oversupply at the moment because of the financial crisis and everyone’s gone back home to live with their parents, but it’s not because there is lack of demand. When the economy gets back on track I am confident the supply will be absorbed.”
Hope as they say, springs eternal.
The debate is on! Are we in a liquidity trap and if so what should we do? Why is the financial system depleted of collateral and what does this mean? Should policy makers and central banks be even more "irresponsible" [1] and conduct more monitised deficit spending? What does a lack of triple A rated/safe haven securities mean and is it real?
All these questions and more have recently gotten a fascinating treatment in the economics debate courtesy, mainly, of this piece by Credit Suisse. FT Alphaville has been given the question extensive and brilliant coverage and now even the IMF has pitched in. I think the issues raised are not only important, but likely to form a substantial part of the framework for the next decade's research on macroeconomics, monetary policy and financial markets.
So yes my dear reader. This is no time to shy back. Dig in, and dig in hard! In this first post of a series of 3-5 posts, I try to present the building blocks of the argument as I see them and answer the question of why the traditional view on the liquidity trap does not apply in the current situation.
Let me begin with the following key premises for my argument and the state of the global economy and financial system post 2008/09. I will try to develop each of these statements in the posts that follows.
The Liquidity Trap Revisited
In order to start somewhere, I will begin with Izabella's exposé on this paper by Paul McCulley and Zoltan Pozsar. The main points from Monsieurs McCulley and Pozsar's paper, with some slicing and dicing of quotes, are as follows.
At the macro level, deleveraging must be a managed process: for the private sector to deleverage without causing a depression, the public sector has to move in the opposite direction and re-lever by effectively viewing the balance sheets of the monetary and fiscal authorities as a consolidated whole. (...) ... the operational mandate of a central bank operating in a liquidity trap environment should be changed materially.Rather than “policing the government to keep it from borrowing too much” the central bank should help it “to borrow and invest by targeting to keep long-term interest rates low by monetizing debt, with the aim of killing the fat tail risks of deflation and depression. ”The interests of the fiscal authority and the monetary authority rightfully become entwined. What’s more, the loss of the central bank’s independence should not be seen as a concern. (...) Critics invoke the orthodoxy that printing money is inflationary. But in a liquidity trap it is not. Money is as money does, and judging from the trillions in excess reserves on banks’ balance sheets, money isn’t doing anything. Printed money is unlikely to become inflationary until after the private sector has finished deleveraging and is bidding for funds again.
At the macro level, deleveraging must be a managed process: for the private sector to deleverage without causing a depression, the public sector has to move in the opposite direction and re-lever by effectively viewing the balance sheets of the monetary and fiscal authorities as a consolidated whole.
(...)
... the operational mandate of a central bank operating in a liquidity trap environment should be changed materially.Rather than “policing the government to keep it from borrowing too much” the central bank should help it “to borrow and invest by targeting to keep long-term interest rates low by monetizing debt, with the aim of killing the fat tail risks of deflation and depression. ”The interests of the fiscal authority and the monetary authority rightfully become entwined. What’s more, the loss of the central bank’s independence should not be seen as a concern.
Critics invoke the orthodoxy that printing money is inflationary. But in a liquidity trap it is not. Money is as money does, and judging from the trillions in excess reserves on banks’ balance sheets, money isn’t doing anything. Printed money is unlikely to become inflationary until after the private sector has finished deleveraging and is bidding for funds again.
Generally, I find it difficult to see what new McCulley and Pozsar brings to the table here. This is liquidity trap and deleveraging economics 1.0, but I feel that we need a version 2.0 to understand what is really going on. The liquidity trap argument of old rightly emphasize that government should weigh against a necessary private deleveraging by running large and perhaps even, on the face of it, irresponsible deficits. This line of argument was, in part, inspired by the Japanese experience and the widely held perception that the BOJ was too timid in the initial phases of the Japanese bust.
I largely agree with this line of argumentation, but if the sovereign is an intrinsic part of the problem the argument breaks down. The problem today consequently runs a step deeper than the original liquidity trap argument.
While the initial symptoms of the financial crisis were rightly identified as too much private debt and reckless credit expansion in a key sector (housing and construction) the subsequent crisis in the euro zone has exposed two additional and critical aspects of the crisis.
Firstly, we have seen how governments will ultimately end up assuming private liabilities onto their balance sheet. Secondly, issues of fiscal sustainability in the OECD have been known for ages, but now time has run out. In my opinion, the crisis has provided a catalyst for the unravelling of the obvious mismatch between governments' pension and health care promises to their populations and the inability to meet such promises due to ageing population and low growth environments.
If you accept my premise that sovereign debt sustainability is now a systemic part of global financial markets, you will also see that they role they are supposed to fulfill according to the original views on the liquidity trap becomes very difficult.
Arguing that sovereigns should ramp up the supply of government debt and that central banks should add to the demand for such debt by creating money represents a misinterpretation of the problem. While it may surely mask the underlying issues for a while it cannot hide the fact that we are now at a crucial inflection point in the developed world. OECD governments' business model is broken due to population ageing and future liabilities which they will not be able to pay off.
The financial system's ability to create highly liquid and safe fixed income securities depends on current and future income to service such liabilities and traditional suppliers of such safe assets are simply out of time. Asking governments to act as counterweights against private deleveraging by creating even larger quantities of unserviceable debt cannot work. We see this most forcefully in Europe where sovereigns are being brutally cut out of the market, but there is, in principal, not much difference across the entire OECD spectrum.
It is my view then that for such highly liquid and risk free securities to survive and be continuingly issued, in the current environment, central banks must become permanent supporters of their issuance. We may certainly come to the conclusion that this is a warranted use of central banks' power, but we should be under no illusion that their involvement on this will be, on any plausible definition, temporary. I think this part of the equation has been given far too little credence in the debate so far.
In conclusion, while I agree that LTROs and central bank bank monitisation of sovereign debt liabilities may certainly be warranted from the point of view of battling a severe crisis the way out of this one cannot be mapped exclusively through the lense of ongoing central bank liquidity provision and reserve creation.
Once you accept this part of the argument, we are ready to move on to the issue of what such substantial central bank involvement in our economy means and and also why the collateral crunch is likely to continue and what it means.
Stay tuned ...
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[1] - My readers who are well versed in the research on deleveraging, liquidity traps etc will understand the reference here. In the original literature and thinking about zero nominal interest rate bounds and liquidity traps, the central bank's ability to act irresponsibly is seen as a key prerequisite for turning the corner on debt deflation.
Despite comparisons with Greece, Portugal is not in entirely the same situation, at least not yet it isn't. Crucially, Portugal is currently under no obligation to deal with international or national creditors to increasing government debt issuance courtesy of joint aid programme administered by the EU and the IMF.
The aid programme which aims to allow Portugal to return to normal market funding in mid 2013 stands at 78 billion euros of which 56 billion euros is provided by the EU and the remaining 26 billion euros by the IMF under the Extended Fund Facility. The recent mission statement concluded at the end of February found little to protest against and it appears the next installment of aid financing for Portugal (14 billion euros in total) will be delievered in April according to plan.
So far so good.
On the time scale currently employed by the market to assess the progress on the eurozone debt crisis mid 2013 is far away in the distant future. In other words, Portugal has time and while I am as certain as an economist can be that the country will need debt restructuring, the time between here and there may still prove crucial.
Recent comments by European Central Bank’s Vice President Vitor Constancio suggest that while the headlines from the ongoing mission reiterate that progress is ongoing and according to plan the actual ability of Portugal to re-enter the market in 2013 is still not clear cut.
The question of whether Portugal can sell debt or needs additional aid from international creditors “only poses itself in September next year,” Constancio, who is Portuguese, told reporters in Copenhagen today after a meeting of European finance ministers. “Until then, we have to see if this progress consolidates, allowing the return to the markets without a new program.” Meanwhile, “fortunately” market conditions have improved for the country, he said. Portugal’s aid plan assumes the country will regain access to medium and long-term sovereign debt markets in 2013, with the program’s last disbursement to be made in June 2014, the International Monetary Fund said in December. European leaders declared then that Greece’s situation is “exceptional and unique” and said they don’t foresee bondholder losses in other nations that seek assistance.
The question of whether Portugal can sell debt or needs additional aid from international creditors “only poses itself in September next year,” Constancio, who is Portuguese, told reporters in Copenhagen today after a meeting of European finance ministers. “Until then, we have to see if this progress consolidates, allowing the return to the markets without a new program.” Meanwhile, “fortunately” market conditions have improved for the country, he said.
Portugal’s aid plan assumes the country will regain access to medium and long-term sovereign debt markets in 2013, with the program’s last disbursement to be made in June 2014, the International Monetary Fund said in December. European leaders declared then that Greece’s situation is “exceptional and unique” and said they don’t foresee bondholder losses in other nations that seek assistance.
No country that has been subjected to debt relief/aid programmes by the IMF and EU has so far been able to access debt markets on normal market conditions. Indeed, it appears that the only thing we can say for certain is the prospect of returning to normal declines proportionally with the time spent under IMF/EU custody.
In the 3-4 years since the crisis broke out the bold statement by any country that it was now fully funded until a given date has, in all cases, been the coup de grace (remember Ireland?). Either the end result has been more debt aid by the IMF and EU through the effective rollover of existing aid arrangements or, in the case of Greece, a debt restructuring.
The problem is that the time frame politicians and EU/IMF economists consider to be reasonable for recovery and a return to normal have persistently been proven too optimistic. The obvious effect of this is that aid and bailout programmes have so far been extended. Kicking the can down the road can be a powerful remedy, but the condition is that the time is well spent and that the structural mechanisms for a recovery are there in the first place. In most cases, both has so far been missing.
Whether Greece represents a roadmap for Portugal remains to be seen. I believe it is, but there is an alternative. All across Eastern Europe the IMF is in many cases nearings its third debt rollover deadline. Being under IMF stewardship is truly like Hotel California where you be able to enter but where leaving is difficult if not impossible.
In this context, the 1 trillion firewall recently being served up is important. On the face of it, it appears inadequate not because of its size, but because the end effect may not be a viable way out for struggling European economies. However, it will give the EU and the IMF a drastically enhanced ability to continue rolling external debt/aid obligations. However, if the underlying mechanisms that should lead to economic recovery are not there even 1 trillion euros will eventually fall short of the task. This is especially the case if Italy and Spain were to enter the bailout equation.
If Portugal represents the next eurozone country to face crunch time the problem with a debt restructuring are all too well known from the Greek case. As country after country spends longer under IMF/EU wardship (and perhaps even also sells bonds to the ECB) external liabilities become increasingly tilted towards official holdings. As we know, from the Greek case, this means a small pie for debt restructuring and thus a higher haircut for the private sector holding. Indeed, this process in itself is a critical determinant for why these economies will never be able to return to normal funding conditions.
No private entity will want, let alone be allowed to by its regulator, to buy debt from a non-domestic sovereign where you are essentially subordinate to 40-50 percent of the existing debt outstanding.
Nomura’s Dimitris Drakopoulos and Lefteris Farmakis have done the hard work on Portugal (courtesy of FT Alphaville) and their analysis is, in my opinion, crystal clear. The key is the following (my emphasis);
Total Portuguese state debt outstanding in 2011 of €174.8bn consisted of:
a) €104bn local law PGBs (the most easily restructurable portion of debt, if investors have taken lessons from Greece‟s local law restructuring techniques), b) €4.7bn in foreign law bonds, c) €17.4bn in Saving and Treasury certificates, d) €12.6bn in T-bills, and e) €35.9bn in official loans. Note that this concept differs from the general government headline debt figure as reported to Eurostat, which was €183.bn in 2011 or 107% of GDP.Of those categories, only (a) and (b) are straightforwardly restructurable, making for a total of just under €110bn. Category (c) refers to securities held by retail investors, who are generally exempt from debt restructurings, while T-bills and official loans (especially IMF loans) would probably fall outside any PSI exercise. In effect, only 62% of total Portuguese debt is immediately restructurable as things stand (vs. 72% in Greece at the end of 2011).
a) €104bn local law PGBs (the most easily restructurable portion of debt, if investors have taken lessons from Greece‟s local law restructuring techniques),
b) €4.7bn in foreign law bonds,
c) €17.4bn in Saving and Treasury certificates,
d) €12.6bn in T-bills, and
e) €35.9bn in official loans.
Note that this concept differs from the general government headline debt figure as reported to Eurostat, which was €183.bn in 2011 or 107% of GDP.Of those categories, only (a) and (b) are straightforwardly restructurable, making for a total of just under €110bn. Category (c) refers to securities held by retail investors, who are generally exempt from debt restructurings, while T-bills and official loans (especially IMF loans) would probably fall outside any PSI exercise. In effect, only 62% of total Portuguese debt is immediately restructurable as things stand (vs. 72% in Greece at the end of 2011).
FT Alphaville's Joseph Cotterill furthermore adds;
That’s a very useful list, by the way. It’s not easy to extract debt stats about Portugal from the sources available… But Nomura don’t break out ECB holdings of Portuguese bonds in the above! We all know now that these holdings are senior, so they get subtracted as well. It leaves just under half – 49 per cent – of Portuguese debt that can be restructured.
That’s a very useful list, by the way. It’s not
easy to extract debt stats about Portugal from the sources available…
But Nomura don’t break out ECB holdings of Portuguese bonds in the above! We all know now that these holdings are senior, so they get subtracted as well. It leaves just under half – 49 per cent – of Portuguese debt that can be restructured.
The math here is very clear. With only about 50 to 62 percent of the debt outstanding liable to restructuring the idea that Portugal may return to the market under "normal" conditions is ridiculous, especially if we assume that this includes the prospect of international creditors doing the bid.
However, there is an important difference between Portugal and Greece. Where Greece had a substantial part of its debt outstanding held by foreign creditors the restructurable debt in Portugal is mainly held by domestic corporates and banks. This is due to the increasing re-nationalisation of sovereign risk on the back of the crisis and specifically the ECB's LTROs which have incited banks to buy their respective sovereign's debt. This adds another layer to the Portuguese case in the sense that if the private sector gets hosed, it will mean domestic banking and corporate defaults. The ensuing re-capitalisation would be impossible for Portugal to deal with without EU/IMF help.
This points towards kicking the can down the road as long as possible and thus the Eastern European outcome where the IMF/EU simply rolls liabilities. However, just as was the case with Greece, Portugal is likely to find it impossible to lower its debt level without a lump sum reduction in its debt level through restructuring. For now though, it appears that time, while not a healer, is still on the politicians' and IMF economists' side.
Update: Here comes the confirmation with a poor flash PMI for March. From Markit;
“Weakening domestic demand continued to weigh ongrowth, as indicated by a slowdown in new orders whichcame in at a four-month low. External demand remainedin contraction territory, but the decline was at a slowerpace, implying that there are no improvements in thedemand outlook. More worryingly, employment recordeda new low since March 2009, suggesting slowingmanufacturing production was hindering enterprises'hiring desire. The soft-patch in manufacturing was in linewith the recent downside surprise in industrialproduction growth. Growth momentum could slow downfurther amid a combination of sluggish export neworders and softening domestic demand. This calls forfurther easing steps from the Beijing authority.”
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This may be a targeted and essentially pinpointed move, but looking at the data coming on China in the first quarter of 2012, I think there is plenty more to come as China tries to come to grips with a rapidly slowing economy.
China boosted rural credit by cutting reserve requirements for an additional 379 branches of Agricultural Bank of China Ltd. (601288), the nation’s third-biggest lender by market value.Effective March 25, the ratio falls by 2 percentage points for the branches in the provinces of Heilongjiang, Henan, Hebei and Anhui, the People’s Bank of China said in a statement on its website yesterday. The move expands a trial that previously lowered requirements for 563 branches in eight provinces. The latest move means a total of 23 billion yuan ($3.6 billion) has been freed up, the PBOC said.
Money supply growth has effectively stalled in China and with the recent statement by BHP Billiton that Chinese steel output had flattened what they really meant was that they are now seriously concerned about a severe and lingering slowdown in China. Of course, there are considerable details that must be taken into account here. However, one thing that we must understand is that production capacity (supply) of hard commodities may turn out to have structurally overshot demand even in mighty China.
So far, we must give Chinese authorities the benefit of the doubt and it is almost certain that they will now turn from a focus on inflation to a focus on growth. This is particularly the case as inflation has come down significantly in China and while base effects will be an important part of this story, the sharp retrenchment of liquidity will also have mattered.
In my view, markets are likely to turn to growth in the next months where disappointing data out of China and the US are likely to put a dent in an otherwise strong rally.
1. Variant Perception's blog is up and running and while I realise there has been little or no macroeconomic analysis here for a while, there is plenty of top notch analysis over at VP's blog. The three latest entries take a look at inflation in the UK, the divergence between Spain and Italy in sticking to the path of austerity and how money keeps trickling out of the eurozone periphery. If you think I have been running lean on analysis and commentary here, the VP blog is a good way to get a take on what me and my colleagues are looking at.
2. The debate on macroeconomics and microfoundations keeps in chugging along and there has been a lot of interesting contributions lately beyond the ones I pointed to in my latest discussion of the subject. Simon Wren-Lewis has posted two additional pieces after the first one. PhD student Jérémie Cohen-Setton has a very nice summary of the flurry up on the Bruegel Blog and I would also emphasize Noah Smith's comment. I realise that all this is terribly wonkish, but it is at the heart of developing modern macroeconomics into something that can tackle the important problems and issues ahead. As such, it won't be work wasted to take a dive into the deep end here and have a look.
3. Morgan Stanley's global central bank team takes a look at the outlook for QE3 in the US.
We see a three-out-of-four chance that the Fed acts as the data on growth soften and the rally in the equity market fades. If the Fed is in a hurry or feels no need to push up inflation expectations, the action likely takes the form of sterilized asset purchases, i.e., the one-in-four chance of Operation Twist 2. Recent public comments by Fed officials, along with press comments, make it more likely we are underestimating, not overestimating, their willingness to execute OT2. If the Fed needs to see some slowing in the economic expansion either to get internal agreement or external insurance, the policy initiative waits until the April or May meeting and more likely entails asset purchases that are funded with reserve creation. This policy, Quantitative Easing 3, which we peg at a one-in-two chance, would also be favored if the Fed desired more significant currency depreciation.
The view above squares well in my view of a slight change in the consensus expectation of the Fed's next move. As the US data has improved and as it has continued to come in with upside surprises in key areas such as the labour market and auto sales the expectations of outright QE3 have been paired. Instead, the consensus has moved towards the expectation of an extension of Operation Twist. Such a move would however has its limits. It OT II were to happen in an environment of an improving economy yield curve flattening could move into inversion if short term yields became unhinged. This would obviously be unacceptable and therefore an outright expansion of the balance sheet specifically aimed at MBS would probably be the least risky alternative for the Fed.
4. Elsewhere in CB land it was absolutely amazing to hear the ECB actually worry about inflation just days after having completed the largest balance sheet expansion in the ECB's history.
European Central Bank President Mario Draghi signaled he’s done enough to battle the sovereign debt crisis, laying the groundwork for an eventual exit from record-low interest rates and emergency lending measures.Declaring that the environment “has improved enormously” and there are “many signs of returning confidence in the euro,” Draghi yesterday turned the spotlight on “upside risks” to inflation, which is now forecast to remain above the ECB’s 2 percent limit this year. That suggests policy makers don’t plan to cut rates further or add to their 1 trillion euros ($1.32 trillion) of long-term loans to banks, economists said.
So, let me get this straight. The ECB has just effectively backstopped the entire European banking system for 3 years effectively becoming a clearing house for the reshuffling of lending risk onto the ECB's balance sheet in exchange of 3y loans over to now worrying about the inflationary effects of its policies?
What planet are they on?
Obviously, the single interest rate policy does not work and perhaps such statements are exactly a reflection of this, but if the market was looking for transparency and foresight from the ECB they are going to look a bit harder it seems. The sovereign debt crisis is merely a few 100 basis points short of reflaring and Portugal and Spain are about to re-enter the limelight. Not a time it seems to me to assure markets that everything is about to move back to normal.
5. Portugal seems to be the next in line as yields stay in double digit territory, but who can really claim to be surprised? Edward certainly isn't.
So why would people think that Portugal might be the next to need a second bailout? Well, what the Greek historian Thucydides would have called the efficient cause would be the fact that it has a 9.3 billion euro bond redemption due in September next year and the despite initial Troika hopes, the markets remain closed tighter than the lips of Angela Merkel were to the supposedly amorous advances of Silvio Berlusconi. But the final (or underlying) cause which will send Portugal into a second bailout is the fact that the country has a high level of debt (both public and private) and a chronic growth problem which won’t simply be turned around by a bit of good will and a few “magic wand” structural reforms. So essentially the numbers just don’t add up.
6. It was a beautiful weekend in London this week and on Sunday I picked up the Independent and while I was not surprised, I thought their piece on cheating at UK universities disturbing.
Over the past three years, more than 45,000 students at 80 institutions have been hauled before college authorities and found guilty of "academic misconduct" ranging from bringing crib-sheets or mobile phones into exams to paying private firms to write essays for them.Some 16,000 cases were recorded in the past year alone, as university chiefs spent millions on software to identify work reproduced from published material, or simply cut and pasted from the internet. But officials last night warned they were fighting a losing battle against hi-tech advances – which means it is becoming increasingly difficult to detect the cheats.
Cheating in academia is as old as academic itself and even tenured professors have been known to fudge their results or even plagiarise their colleagues' work. But what does it tell us when the problem is particularly severe among entry level students? Surely, the article's rationale based on university leaders' comments that higher tuition fees and pressure to do well mean that more students are pushed into wrongdoing is sound. However, there is an underlying problem, or an elephant in the room if you will, that is not being mentioned in particular detail. Specifically, I am talking about the chasm between the level of academic standards applied by UK (and European universities) and the academic standards brought into universities by the foreign students largely financing the UK education industry.
I have seen this with own eyes and I have been amazed. Yet, the way Western universities produce (and set standards for) knowledge is simply so foreign for many who come from abroad that they are compelled to cross corners. When these students are then exposed they often do not realise why they are being summoned to a disciplinary body.
Another and more disturbing trend however is the implied argument that some students cheat because they can. Take for example the industry which has emerged to furnish students in a tight spot with a tailor made essay on any topic they might wish for a fee. This seems to be absolutely mad to me and any student resorting to this must either be desperate or stupid (or both) since anyone would be able to tell you that the quality of such essays is likely to be poor, at best.
Simon Wren Lewis who is a professor of economics at Oxford University has an interesting piece (hat tip: Mark Thoma) on the distinction and choice between micro founded macroeconomic models and top-down models such as the IS/LM (Keynesian) or other variants such as Modern Monetary Theory (MMT).
I think this is an interesting discussion and I have penned my own thoughts on microfoundations in macroeconomics here. Mr Lewis is balanced but seems to be on Paul Krugman's side (by and large) who has been devastating in his critique of modern macroeconomics especially in the wake of the financial crisis.
For good order, my own views are summarized in the following snippet.
Two obvious questions impose themselves at this point. One is whether the use of representative agents in macroeconomics has something, in general, to do with the recent soul searching among macroeconomists and the critique against the profession. And the second is whether the study of macroeconomics and demographics in particular calls for the non-use of representative agent modelling. On the first I don't necessarily think that it exists to the detriment of macroeconomics as a discipline, but I do think that a couple of points need mention. First of all I will echo the point made in Hartley (1997) that given the widespread use of representative agent modelling in almost all corners of macroeconomics and the almost religious devotion to it in graduate and PhD economics I think it is highly problematic that we have not had a more serious debate of its methodological merits. I would emphasize this in particular in the context of the fact that the use of representative agents leads to very inflexible (although rigorous) mathematical models and the blind faith in these models tend to steer macroeconomics onto a very narrow methodological path. During my research and initial ground work for the thesis I actually did write my own representative agent model to suit my specific agenda, but found in the end that I was paying more tribute to the laws of calculus than the connection between ageing and capital flows/open economy dynamics and as I set up the problem I ended up very close to the original benchmark problem.
Two obvious questions impose themselves at this point. One is whether the use of representative agents in macroeconomics has something, in general, to do with the recent soul searching among macroeconomists and the critique against the profession. And the second is whether the study of macroeconomics and demographics in particular calls for the non-use of representative agent modelling.
On the first I don't necessarily think that it exists to the detriment of macroeconomics as a discipline, but I do think that a couple of points need mention. First of all I will echo the point made in Hartley (1997) that given the widespread use of representative agent modelling in almost all corners of macroeconomics and the almost religious devotion to it in graduate and PhD economics I think it is highly problematic that we have not had a more serious debate of its methodological merits. I would emphasize this in particular in the context of the fact that the use of representative agents leads to very inflexible (although rigorous) mathematical models and the blind faith in these models tend to steer macroeconomics onto a very narrow methodological path. During my research and initial ground work for the thesis I actually did write my own representative agent model to suit my specific agenda, but found in the end that I was paying more tribute to the laws of calculus than the connection between ageing and capital flows/open economy dynamics and as I set up the problem I ended up very close to the original benchmark problem.
It is interesting in this respect that Mr. Lewis spends quite a bit of time to come up with a name for what he calls the alternative to traditionally micro founded general equilibrium models (in either dynamic or static form). It seems that despite the fact that such "ad-hoc" models have been around for a long time, we have been able to come up with a name for them. Here is Mr Lewis.
The issue I want to discuss now is very specific. What is the role of the ‘useful models’ that Blanchard and Fischer discuss in chapter 10? Can Krugman’s claim that they can be more useful than micro founded models ever be true? I will try to suggest that it could be, even if we accept the proposition (which I would not) that the micro foundations approach is the only valid way of doing macroeconomics. If you think this sounds like a contradiction in terms, read on. The justification I propose for useful models is not the only (and may not be the best) justification for them, but it is perhaps the one that is most easily seen from a micro foundations perspective.
For those un-initiated in the taxonomy of modern economic teaching this will seem odd. But it isn't.
I would venture the claim then that the general Keynesian framework of IS/LM (or "curve shifting" models in general) is still seen as an undergraduate tool or a tool for business students with little or no foundation in mathematics. If this is the informed view of the economics profession as a whole (which I think it is) then there is certainly no need to elevate such models to the honour of being alternatives to conducting real and serious micro founded macroeconomics. At this point, the sarcasm is obvious I hope.
The general equilibrium framework in its dynamic form with dynamic programming problems and sophisticated econometric methodology to estimate the optimized equations is largely outside the scope for most people. As a result, the ivory tower in which many (if not most) academic economists do their research serves as an incubator for skepticism (even pity) towards those who might have the audacity to argue that what they are doing is wrong. Indeed, I would argue that despite signs that a genuine critique towards micro- and pure mathematical founded economics has emerged, the general trend is still one of "physics envy" in economics.
Hence, the debate for and against micro founded models very quickly turns into a discussion between those who do not understand the language of modern macroeconomics and those who do. Obviously, in Mr Lewis' case this is not the case. Indeed, the financial crisis seems to have given birth to a growing critique from within the macroeconomic research community towards blind reliance on the micro founded framework. Krugman's piece from 2009 (linked above) is already a classic example of the anti-thesis, but there have been others.
Buiter had a go in relation to monetary economics back in 2009;
Charles Goodhart, who was fortunate enough not to encounter complete markets macroeconomics and monetary economics during his impressionable, formative years, but only after he had acquired some intellectual immunity, once said of the Dynamic Stochastic General Equilibrium approach which for a while was the staple of central banks’ internal modelling: “It excludes everything I am interested in”. He was right.; It excludes everything relevant to the pursuit of financial stability.
Menzie Chinn from Econbrowser did a useful overview of the initial flurry (see also the Economist) as well and ended up arguing that the "modern macroeconomic apparatus" should not be jettisoned. Indeed, Mr Chinn points out (using his own experience) that his own PhD experience was not doctrinate. I believe him of course, but I would still argue that right from the early steps as an undergraduate those who do not devote considerable time and effort into making their research proposals on the basis mathematically rigorous micro founded models may find their chance of proceeding as academics diminished.
In my own work as an economist which centers on demographics and economics the issue on micro foundations is acute. The life cycle framework (or even the Permanent Income Hypothesis) are both micro founded models which have been widely used to form aggregate models. But we also know that many of the most obvious conclusions from such exercises are untrue (e.g. the extent of dissaving as a population ages). Perhaps these inconsistencies with economic realities can be explained on the micro level (and I certainly think we should try to address them there), but there is also a need for a pure macroeconomic theory of how population dynamics affect complex macroeconomic processes.
On the state of macroeconomics itself, an colleague once told me that economics was fine mainly because it stuck to doing what it did best. I only conditionally agree. Learning economics is a brilliant way to cultivate a sharp mind and it is also offers a reasonably good framework to make sense of the processes which govern society and human behavior. However, the way economics is often narrated as sub-discipline of math and physics is unfortunate. I am all for quantitative analysis and use it every day in my own work (mainly empirical work), but I would think that the reason Mr Lewis finds it difficult to come up with a name of the alternative to mainstream macroeconomics is precisely because such an alternative does not currently exist. That is a pity.
You may have already noticed that this one has been going the rounds. The piece is mainly driven by my colleague Jonathan Tepper's work on the history of currency union breakups and how they work (or don't).
It is a big piece in its entirety but the different sections can be read as standalone arguments. The summary is pasted below.
Many economists expect catastrophic consequences if any country exits the euro. However,during the past century sixty-nine countries have exited currency areas with little downward economic volatility. The mechanics of currency breakups are complicated but feasible, and historical examples provide a roadmap for exit. The real problem in Europe is that EU peripheral countries face severe, unsustainable imbalances in real effective exchange rates and external debt levels that are higher than most previous emerging market crises. Orderly defaults and debt rescheduling coupled with devaluations are inevitable and even desirable. Exiting from the euro and devaluation would accelerate insolvencies, but would provide a powerful policy tool via flexible exchange rates. The European periphery could then grow again quickly with deleveraged balance sheets and more competitive exchange rates, much like many emerging markets after recent defaults and devaluations (Asia 1997, Russia 1998, and Argentina 2002).
Whether it would be as easy as earlier episodes of currency breakups to dismantle the euro zone is a highly contentious issue. I am not sure that I believe it would be as easy is implied in the piece. But this is not the most important point. We are now in a situation where a breakup or a division of the euro zone into two is no longer a remote theoretical discussion. To this end I think the piece takes up (and describes the mechanics of) some very important processes and issues. Go read!
The ECB and BOE have shown their intent with their recent aggressive balance sheet expansions and the Fed is trying hard to keep the door open for more QE even as the data in the US continues to defy the general global slowdown.
In Asia however sticky inflation in India, a desire to nail property developers to the wall in China and a belief in a post earthquake recovery in Japan have kept the big Asian central banks from providing additional easing. Even in Australia where the economy has been teetering on the brink of a recession for 6 months, the central bank has refrained from any decisive moves.
In three out of the four cases above however things may slowly be about to change.
In India, the central bank recently opened the door for considerable easing in 2012 as headline inflation comes in. The market has already heavily discounted such a move with Indian equities up about 25% since mid December 2011 and some big ticket single names such as Tata Motors up more than 50%.
Reserve Bank of India Deputy Governor Subir Gokarn said the monetary authority will cut interest rates once it’s confident inflation will keep slowing.“The stance now is that we have reached the peak and any further action will be toward easing,” Gokarn, 52, said in an interview at his office while discussing the rupee, the government’s budget deficit and bond repurchases. The central bank isn’t concerned about the currency’s record monthly advance in January “because in a sense it’s a correction,” following last year’s 16 percent decline, he said. Emerging-markets have stepped up efforts to shield growth from the impact of Europe’s debt crisis, with Brazil, Russia and the Philippines cutting rates in recent months.
The road is not entirely clear for easing by the RBI where two issues may still derail the central bank's intention to start an easing cycle.
Firstly, the government's budget deficit continues to increase and while borrowing to invest in infrastructure etc in India is certainly worthwhile, monetary policy may still have to lean against excessively and essentially structural deficit spending by the government. This is particularly the case as supply side constraints may mean that such deficit spending adds substantially to inflation.
Secondly, the INR may be subject to substantial weakening on a resurgence in global volatility. The Fed's USD swap lines as well as the the ECB's efforts to backstop the European banking system have so far calmed things down. Nevertheless, should another period of strong and sudden INR weakness ensue, it means the RBI would not be able to reduce the yield difference to the rest of the world in any meaningful way.
In China, the economy is now visibly slowing. Foreign exchange reserve accumulation have ground to a halt and M1 growth is negative on the year. Even if the desire to cool down excessive credit growth and nailing property developers to the wall might still constitute top priorties, the balance is shifting towards easing.
China is seen making more cuts to banks’ reserve requirements to fuel lending and sustain economic growth as the housing market cools and Europe’s sovereign-debt crisis weighs on exports.The proportion of cash that lenders must set aside will fall half a percentage point from Feb. 24, the central bank said Feb. 18 on its website. Standard Chartered Plc forecasts at least three more reductions this year, while HSBC Holdings Plc (HSBA) sees a minimum of two.
So far, Chinese authorities seem content to use the reserve requirement ratio (RRR) as the main tool to provide easing. This makes sense in a command market economy where the government can be fairly sure to control the supply side of credit through loan quotas. I think however that the calls for no interest rate cuts until mid 2012 may turn out to be wrong if China is about to slow to the extent that our leading indicators show. Property prices have fallen (or failed to rise) for some time now in China and as growth slows further, the authorities may rightfully begin to argue that their near term objectives have been achieved.
Perhaps the most interesting development this week however came in Japan where the BOJ apparently got my memo as they restarted QE.
Japan’s central bank unexpectedly added 10 trillion yen ($128 billion) to an asset-purchase program and set an inflation goal after an economic slide fueled criticism it has been slower to act than counterparts.An asset fund increased to 30 trillion yen, with a credit lending program staying at 35 trillion yen, the Bank of Japan said in Tokyo today. The BOJ also said that it will target 1 percent inflation “for the time being.”
This decision appears to have gone completely under the radar, but I think it is very significant. Two points are particularly important to emphasize. Firstly, the entire 10 trillion yen added to the asset purchase program has been earmarked to JGBs which signals the BOJ's willingness (or the MOF's orders) that budget deficits in Japan are now to be directly monetised to a much higher degree than has earlier been the case. Secondly, the BOJ has now committed itself to an inflation target (1%) and will use balance sheet expansion to reach this goal.
This is textbook QE and should be bearish for the Yen and bullish for the Nikkei, but things may not be so simple of course. Chris Wood adds to the discussion in the latest version of Greed and Fear [1].
The second point is whether the latest news is a signal to short the yen. On the face of it, it should be. But the issue is whether the BoJ Governor Masaaki Shirakawa is going to follow the previous examples of his conduct of unorthodox monetary policy; whereby he raises thequantity of the so-called asset purchase programme but does not exactly accelerate the pace ofthe buying to fulfil the programme. Thus, the Bank of Japan has so far purchased ¥10.3tn of assets since the latest programme was first announced on 28 October 2010, amounting to only 52% of the previous target of ¥20tn set in October 2011.
In other words, how serious is this inflation target and over what horizon does the BOJ intend to reach it? Only time will tell, but given the persistence of deflation in Japan I would argue that any semi-serious adherence to this inflation target would require substantial balance sheet expansion by the BOJ.
As Chris Wood aptly puts it, the move by the BOJ is merely the latest evidence of the bull market in central bank balance sheet expansion and more importantly, relative central bank balance sheet. In a world where export driven growth is seen as everyone as the way out of debt purgatory you need expand and print more than your peers. On this, I also slightly disagree with Chris that Japan does not need a weaker JPY. My own analysis suggest that corporate margins in Japan are very sensitive to changes in the Yen. But that is a discussion for another time. For now, I will agree with Chris that we have seen the beginning of a sea change in Japan, but we need to see the BOJ backing up intentions.
Ultimately though, the most significant piece of news from Asia last week was the indication from both Japan and China that they would stand ready to offer their full support for the euro zone. The idea is simple; China and Japan would use the IMF as conduit to create the only real bazooka (apart from ECB monitisation).
Quote Bloomberg (my emphasis)
Japanese Finance Minister Jun Azumi said his nation and China will work together to help Europe solve its debt crisis through the International Monetary Fund.Europe needs a bigger so-called firewall of added funding to contain the crisis, even as Greece shows some improvement in solving its financial woes, Azumi told reporters in Beijing yesterday after meeting Chinese Vice Premier Wang Qishan. Azumi, who met Chinese Finance Minister Xiu Xuren during his visit, also said he asked China to make its currency more flexible.“We shared the view that Europe needs to make more efforts to create a bigger firewall,” Azumi said. “We also agreed to act together as the IMF will probably ask the U.S., Japan and China” to help boost its lending capacity.
This would indeed be global monetary relief from Asia.
[1] - I cannot reproduce the whole piece, only select quotes.
I have been enjoying myself in the Austrian Alpes last week and hence the lower output. Here is my look though, of a number of notable news stories and contributions.
Global Liquidity
Benoît Cœuré, Member of the Executive Board of the ECB has penned a speech (and argument) on global (excess) liquidity. Izabella likes it and I agree with her that it is a good piece. I am not sure though that it is that much different than the Savings Glut argument put forward by Bernanke, but I may be missing the fine print (i.e. need to read it more carefully). The biggest problem I have is that he assumes that the lack of safe government (i.e. AAA rated assets) is cyclical and due to market failure or other "temporary" factors. Izabella interprets it as follows,
What’s the solution to this vicious liquidity circle? Simple, says Cœuré. The euro area needs to regain its role as a global supplier of safe assets. Something which could be achieved by a) ensuring that Eurozone countries have become fiscally sound and b) diverting excess liquidity from other zones back into “programme countries” by way of the IMF.
I disagree. The failure of euro zone economies and indeed large parts of the OECD edifice in general to provide "safe haven" assets is deeply structural and tied to population ageing. Unfortunately, there is little prospect that the euro zone economies will be able to supply AAA rated securities for a long time and herin lies the rub. Of course, if we are talking euro bonds, but then again. I will believe it when I see it.
Japan and the currency wars
A recent Bloomberg article suggested that Japan has been "secretly" selling JPY to try to stem the tide and force through depreciation of the Yen.
Japan used so-called stealth intervention in November as the government sought to stem yen gains that hammered earnings at makers of exports ranging from cars to electronics.Finance Ministry data released today showed Japan conducted 1.02 trillion yen ($13.3 billion) worth of unannounced intervention during the first four days of November, after selling a record 8.07 trillion yen on Oct. 31, when the yen climbed to a post World War II high of 75.35 against the dollar. The currency’s strength has eroded profits at exporters such as Sharp Corp. and Honda Motor Co., just as faltering global growth undermines demand.
Open market operations to sell domestic currency are so old school. Didn't they get the memo in Japan? In a world where all major central banks are either at or very close to the zero bound, it is central bank balance sheet expansion (quantitative easing) that matters. On this note, both Japan and the Fed are being left decisively behind by the ECB and BOE (at least in the past six months). Of course, even the usage of "standard" measures in Japan is being contested and as long as this is the case, the Yen will continue to strengthen.
Don't bet on deflation with the current team of global central bankers
Elsewhere, I am wondering where all the deflation, let alone disinflation, is. I am a sworn deflationist and I believe in the main thesis of the deleveraging/depression/deflation crowd. However, I have the utmost respect for the inflationist bias of global central banks and with the current batch of policy makers at the helm, deflation is a very remote risk.
The latest data show that inflation in China recently quickened as well as producer prices in the UK increased in the week that the BOE announced another round of QE. Of course, this is not all clear cut. Chinese real M1 (YoY) recently moved into negative territory for the first time since 1996 and in the UK, it is noteworthy that core inflation (ex food, beverages, tobacco and petroleum) came in noticeably lower in January.
I will change my views on the basis of changing data, but I am beginning to think that the bout of global headline disinflation we are expecting as a result of the global slowdown will reverse itself much, much quicker than many (including me) have expected. Arguably, we still need decisive easing in emerging markets and QE3 from the Fed, but it is more a matter of when and not if this happens and as such, global central bankers remain fully committed to creating inflation.
The main problem so far for those arguing for strong central bank action (including me) is the absence of nominal growth in output in excess of consistently rising headline inflation. Could this be a result of doing too little, perhaps, but at the moment stagflation remains the best way to describe our current economic situation and thus inflation in all forms is a drag on growth. Should the genie finally come out of the bottle in the form of consistent wage increases central bankers may find that they got more than they bargained for even if the alternative is equally painful.
The Greek experiment is about to end
Greece remains the main talking point and also the only thing that appears to prevent equity markets ripping to new highs. Greece is bankrupt and while I understand that the patience of the rescue committee will run out at some point, I am astounded that anyone expects this hideous experiment to end well. Greece will see its fifth year of contraction this year and for what? A membership of a currency union that does not work anyway?
We are told by the Troika, the EU and the IMF that failure to reach a deal would be catastrophic and thus that Greece has no way out but to take the medicine. However, Greece has a real choice and the stronger she is pushed the more obvious the end result is. Internal devaluation and decades of austerity don't work; not in Greece and not elsewhere. This remains the KEY issue that the euro area politicians and the ECB have not understood. The social fabrics of society won't stand the pressure and strain. Textbooks tell us that the cure is simple when you can't devalue, but practical experience have now shown otherwise.
I am neither on the Greeks' nor the IMF/Troika's side, but I simply point out the obvious destiny of current events; failure! Even if Greece manages to appease its creditors with austerity, the end result in terms of Greek macroeconomic balances is still unsustainable and thus the underlying problems will not have been solved.
The ECB and the IMF will likely face significant drawdowns on their Greek bondholdings regardless of whether they use such drawdowns as "carrot" for Greece to push through austerity measures. This is what the establishment has not yet understood.
MF Global investigation fails to uncover illegal activity?
Megan McArdle has an amazing article suggesting that the investigation on the failure of MF Global is finding it difficult to uncover anything illegal.
Megan quotes a piece from Reuters (no link available)
Lawyers and people familiar with the MF Global investigation of the firm that was run by former Goldman Sachs head Jon Corzine say that even though the hunt is still on to find out whether or not officials at MF Global intended to pilfer customer money in a desperate bid to keep the brokerage from failing, the trail at this point is growing cold.
This seems very odd to me even if I have not followed the aftermath in detail. I completely agree with the sentiment expressed by Megan.
I don't understand how this could be true. To be clear, I am not saying that it couldn't be true-only that I don't understand how such a thing could have happened. There is more than a billion dollars missing from supposedly segregated client accounts. I understand that it was chaotic, but what kind of chaos causes you to accidentally move money out of money that any moderately sophisticated compliance system should have automatically flagged for approval?
While my professional responsibilities are confined to the smooth running of a macro research product I sit in an office, and work, with asset managers and ever since the failure of MF global I would imagine that their general level of concern has increased. This is understandable. If your main counterparty as an asset manager (i.e. your prime broker) essentially decides to steal your deposits and/or allocate them to losing trades against the principle of segregated accounts, it really does not matter what you do. No matter the tightness of the shop run on the asset managers' end, he will face significant and perhaps even fatal losses.
Obviously counterparty risk is as old as finance itself and any decent asset manager today will deal with more than one broker and even have a strategy on how to manage counterparty risk. Ultimately though, mutual trust between asset managers and their prime brokers is a commodity which has been severely impaired by the MF Global failure and this is an issue for all players in financial markets.
Dealing with vintage data in economic forecasts using instrument variables (wonkish!)
A recent note from the George Washington University points to an interesting study from Warwick University on the forecasting of data vintages in the context of US output and inflation forecasts. The problem is as follows;
Consider a simple benchmark autoregressive model that a forecaster might use to forecast an economic variable yt. In order to estimate the parameters to be used for the forecast, typically the forecaster will obtain the most recently updated data on yt (i.e. the vintage of yt available at that time) and estimate the model using those data. However, the data in this single time series may in fact be coming from different data generating processes. The data some time back in the series have gone through monthly revisions, annual revisions, and perhaps several benchmark revisions. The most recent data, however, have been only “lightly revised,” as Clements and Galvão term it. Therefore, Clements and Galvão argue that the data in a single vintage are of“different maturities.” Forecasters may want to forecast future revisions to data as well as exploit any forecast ability of data revisions to improve forecasts of future observations. In their article, Clements and Galvão suggest that a multiple-vintage vector autoregressive model (VAR) is a useful approach for forecasters working with data subject torevisions. This comment discusses the importance of taking revisions into consideration and compares the multiple-vintage VAR approach of Clements and Galvão to a state-space approach.
This is a significant issue but remember; if the following holds, we need not worry too much about it.
If the revisions are unpredictable and the early data are efficient estimates of future data, then we may not need to be concerned about the different vintages.
Most economists assume that the statement above is true and simply force through their model. Being a great believer in practical usability when it comes to empirical economics, I would argue that in most cases this will not cause too many problems in most cases. However, a growing body of evidence suggest two important issues to consider. Firstly, revisions are predictable and thus provide important ex-ante information which should be incorporated into the the forecast. Secondly, even if revisions are unpredictable, the manner in which data is revised may itself provide important information on future data readings.
I agree, but the problem is potentially much more severe. Another issue then concerns that situation where you try to forecast Y(t) as a function of X(t) where both variables may be subject to revisions. Normally, we would solve this issue by restricting X(t) to variables where revisions are minimal (or absent alltogether). One way to do this is to use market based data (market prices, closing values of securities etc) which are, by definition, not revised. However, in the context of the e.g the classical leading indicators framework pioneered by Geoffrey H Moore, this issue re-emerges X(t) is cast in the form of real economic variables (themselves potentially subject to revision).
We have replicated and refined many of the LEIs described by Moore et al and applied it to various economic data series with specific fitting of a time series regression in each case. However, such an approach may still suffer from vintage data issues (as described above. One solution that I been thinking about is to imagine two forms of right hand variables. X(t, economic) and X(t, market based); if the latter is unrevised it might be possible to find an instrument for X(t, economic) (final revision!) using a variation of X(t, market based). This would, in my opinion, constitute an elegant way to solve the issue of data revisions in your explanatory variables.
In practice, you could also try to replace Y(t, economic) with Y(t, market based), but this is probably too a-theoretical and ad-hoc.
Imagine two ways of framing a financial trading choice. The first way is in the pseudo scientific language of finance. “An optimal trading strategy will be to go short on Greek and Spanish government bonds to exploit a high likelihood of sell off and debt restructuring which will keep portfolio returns well above inflation going forward.” Or consider the same thing expressed this way: “If we sell off Greek and Spanish government bonds it will push Greek pensioners into poverty, cause deep harm to the social fabric, lead to destabilising political unrest and threaten the stability of the world financial system.” The first way of framing the choice is treating the financial strategy as a way of dealing with a machine; the language has nothing to do with people. The second way of framing it is moral: starting with the effects on people.
By Delusional Economics, who is horrified at the state of economic commentary in Australia and is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from http://www.macrobusiness.com.au/2012/05/europes-problems-multiply/">MacroBusiness.
Welcome to the weekly roundup of great articles, facts and figures. These are the weekly finds that made our eyes pop.
Large multinationals literally park 60% of their cash offshore. Don't let these facts argue for a corporate tax holiday. Cash would just be distributed to shareholders, not used to hire American workers or invest in America.
Large U.S. companies are holding at least 60% of their cash overseas with some keeping nearly all of their cash balances offshore, according to a study from J.P.Morgan accounting analysts published Wednesday. In a review of disclosures, the bank’s analysts found that out of the $974 billion in cash on the balance sheets of 602 U.S. multinationals, at least $588 billion, or 60%, is sitting in foreign accounts. “Foreign subsidiaries are becoming much more important in a lot of businesses, especially with companies that have substantial amounts of intellectual property,” JP Morgan accounting analyst Dane Mott told CFO Journal, noting that many of the companies with significant overseas cash stockpiles were in the technology and pharmaceutical industries. J.P. Morgan found that Apple had the highest offshore corporate cash balance, with $74 billion held overseas, representing 67% of its total cash holdings. But as a percentage of total cash, J.P. Morgan said the company had a smaller amount sitting offshore than many of its tech rivals, including Microsoft, Cisco, and Hewlett-Packard, which had 89% or more of their cash overseas.
Large U.S. companies are holding at least 60% of their cash overseas with some keeping nearly all of their cash balances offshore, according to a study from J.P.Morgan accounting analysts published Wednesday.
In a review of disclosures, the bank’s analysts found that out of the $974 billion in cash on the balance sheets of 602 U.S. multinationals, at least $588 billion, or 60%, is sitting in foreign accounts.
“Foreign subsidiaries are becoming much more important in a lot of businesses, especially with companies that have substantial amounts of intellectual property,” JP Morgan accounting analyst Dane Mott told CFO Journal, noting that many of the companies with significant overseas cash stockpiles were in the technology and pharmaceutical industries.
J.P. Morgan found that Apple had the highest offshore corporate cash balance, with $74 billion held overseas, representing 67% of its total cash holdings. But as a percentage of total cash, J.P. Morgan said the company had a smaller amount sitting offshore than many of its tech rivals, including Microsoft, Cisco, and Hewlett-Packard, which had 89% or more of their cash overseas.
read more
If you're looking for a job, it plain sucks to live on the West coast. The April 2012 State Employment statistics show the average unemployment rate for the entire Pacific region is 10.1%.
The below Bloomberg Law interview, or shall we say cage match, is just amusing. First, Chris Whalen tries to claim the reason JPMorgan Chase placed a bet that will lose $2 billion or greater is due to JPMorgan Chase being distracted by those pesky regulators. Yes, you will laugh out loud at this. You might notice, if you get past laughing, Whalen also amplifies that these types of derivatives trades, should be outright banned. That no amount of capital requirements can stop-gap potential losses. We agree.
The Federal Reserve's Industrial Production & Capacity Utilization report, G.17, shows 1.1% increase in industrial production for April 2012. Manufacturing increased 0.6%, mining 1.6% and utilities increased their production a whopping 4.5% in a course of a month. The April jump in utilities shows just how unusual the January to March warm weather was. Within manufacturing, motor vehicles & parts alone also increased an astounding 3.9% for April. March industrial production was revised down, from no change to -0.6% and February was revised to now show a monthly increase of +0.4%. This report is also known as output for factories and mines.
This is the largest monthly percentage industrial production increase since December 2010.
The April Consumer Price Index, which measures inflation, had no increase or decrease from March. The reason was gasoline prices, which declined -2.6% from last month Below is the graph for CPI's monthly percentage change.
Energy overall decreased -1.7%. The energy index separates out all energy costs and puts them together. Energy is also mixed in with other indexes, such as heating oil for the housing index and gas for the transportation index. The energy index is up 0.9% for the last 12 months.
Gas alone decreased -2.6% for April, but is up 3.2% from this time last year. Fuel oil, not seasonally adjusted, decreased -1.1% for the month. Below is the CPI gas index. If you're wondering why you're not seeing a dramatic decline in gas prices, this index is seasonally adjusted. Not seasonally adjusted gas increased 1.8%. So much for seasonal adjustments!
April 2012 Retail Sales increased 0.1%. Minus autos & parts, retail sales also increased 0.1%. March retail sales were revised down from 0.8% to 0.7%. Retail sales are up 6.4% from the same time last year. Retail sales are reported by dollars, not by volume, so dropping prices often reports as a decline in sales.
For the quarter, January to March, retail sales increased 6.6% from the February to April time period one year ago. Nonstore retail sales, which includes online shopping are up 11% from a year ago.
Total retail sales are $408 billion for April. Below is the monthly percentage change of retail sales categories. These numbers are seasonally adjusted. Department stores, part of general merchandise, declined -1.4% from March.
Your pedal extremities are colossal To me you look just like a fossil. – Fats Waller
Business executives like to talk about their “footprint”. When JP Morgan Chase and Bank of America were racing all around the United States to see which could be the first to have a full national presence in every important market, they would talk about how their footprint was expanding state by state. Then it was on to establish a full global footprint, including in all key emerging markets, which supposedly are going to provide double-digit earnings growth for these banks during the next twenty years.
Did you know, beyond closed doors, there is a massive trade agreement being crafted? It's called TPP or Trans Pacific Partnership and this one makes NAFTA look like the stepping stone that it is. This is one bad mother.
This is a trade agreement between Chile, Australia, Brunei, Chile, New Zealand, Peru, Singapore, Malaysia and Vietnam and the United States. Japan as well as China may also join. The countries involved isn't the problem. What's being negotiated is.
For those who think they won the SOPA/PIPA battle, think again. The below video clip does a good job explaining how SOPA/PIPA are being reintroduced via TPP negotiations.
Bloomberg did an in depth report on Romney's economic advisers and policy positions. Surprise, he's back....like poltergeist, it's Gregory Mankiw, Bush's economic adviser.
Among the financial and business experts advising Romney’s campaign are Columbia University’s R. Glenn Hubbard and Harvard University’s N. Gregory Mankiw, both economists who headed the Council of Economic Advisers under President George W. Bush. Rounding out the team are former Missouri Senator Jim Talent and onetime Minnesota Congressman Vin Weber, now Republican lobbyists at Washington-based firms.
Hubbard, who helped craft the 2001 Bush tax cuts, played a key role in drafting Romney’s tax initiatives. He, and later Mankiw, chaired the Council of Economic Advisers amid the slowest job growth for any prior president since World War II.