Many thanks to all of you for making this last 8.5 months such a success and education for me.  CentreForum is starting a new blog at centreforumblog.wordpress.com – I hope that gets off the ground like this one did.

For the curious, these were the final stats

Total views: 76,220

Busiest day: 1,848 — Wednesday, May 12, 2010

Posts: 502

Comments: 3,319

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UPDATE: Thanks to you all below.   You’ve all made this much more fun than it had a right to be.  And I’ve learned an awful lot – this has been a thinking aloud tool, after all.

those North European powerhouses have been running up huge trade surpluses, while the Southern Europeans have run bigger and bigger trade deficits. Whenever Germany tells you how much the Greeks are costing them, remember this: German exports to Greece have risen by 133% since the single currency started. Greek exports to Germany have risen by 13%. The resulting trade gap between the two countries is one reason why German banks are now sitting on so much Greek debt

Which is why even Jeremy Warner doesn’t like the sound of the bailout:

By requiring that others become like Germany, the eurozone has condemned itself to fiscal consolidation so extreme that it threatens not just to kill the recovery but to induce a depression

The FT shows Osborne learning off the Irish.

As part of the battle for hearts and minds, Ireland’s centre right government also felt it was necessary to set the outer limits of what might be needed – rather like a doctor might caution a patient before a tricky operation. “We were really road-testing the cuts, so the public could understand the kind of options available,” says Colm McCarthy, the academic economist asked to conduct the study. “Our report came up with a multiple of what was actually needed for the 2010 budget, but that was deliberate.”

Colm will be featuring in soon-to-be-published essay for CentreForum.

Mark Thoma loses his temper on behalf of Krugman, and says some things that Policy Exchange would wince at (see bold):

So let’s get something absolutely clear. The fiscal policy intervention that Krugman, DeLong, and others have been advocating can be analyzed and supported using the New Keynesian model. See Woodford and Eggertsson’s work in particular, or see this work by my colleague George Evans along with his coauthors. For the most part, these models support the types of policies the administration has put into place. (Generally, demand side policies are the solution when the economy is stuck at the zero bound. Supply side polices such as a capital gains tax cut actually make things worse. The reason is that an increase in supply when demand as already insufficient causes prices to fall, and the fall in the price level raises the real interest rate. At the zero bound, the rise in the real interest rate cannot be offset by the Fed. Away from the zero bound, the Fed can stabilize the real rate and the policy has positive effects, but it depends critically on the Fed’s ability to offset increases in the real rate and the nature of the reaction).

Krugman had elsewhere accused his critics of throwing history down the Memory Hole:

Basically, US postwar economic history falls into two parts: an era of high taxes on the rich and extensive regulation, during which living standards experienced extraordinary growth; and an era of low taxes on the rich and deregulation, during which living standards for most Americans rose fitfully at best.

But Sumner has a Why Krugman is Wrong post:

But I will show that the performance of every single country on the list is consistent with my view that the neoliberal reforms after 1980 helped growth, and inconsistent with Krugman’s view that they did not. Krugman makes the basic mistake of just looking at time series evidence, and only two data points:  US growth before and after 1980.

And now I’ll sign off.

1. Can you remember when it first hit 10,000

2.  On how many separate days has it traded THROUGH 10,000 – that is, had a High above that level and a Low below that level

3. Given (1) how do you feel about investing in equities for the long run

4. Given (3) how confident do you feel that the equity markets will provide lots of capital for the future?

Answers ‘below the fold’

1.  It was March 1999

2.  165 times!  Look at this chart

3. Conned.  Particularly if you bought this book. Brad DL beautifully rips it up here.

4.  Uneasy.  We need people to feel good about taking risks if we want economic growth.  though some may reason that this diverts money from ‘pointless’ speculation to real investment, actually you need both – you want people to see a big market to sell their ‘real’ investments into later.  Having no happy secondary market undermines the primary stuff.

would provide more accessibility to the markets, help stabilise the continent’s economies and, most importantly, lower the cost of funding, which in turn would ease the burden on taxpayers.Such a bond would create the scope for much larger debt issues, attract more international investors and challenge US Treasuries as the most liquid bond instruments in the world. It could even help to advance the euro’s case as a reserve currency as opposed to the dollar, although this would be in the very long term.

John Springford wrote about it 9 months ago (pdf), suggesting it as a means of sharpening the fiscal incentives to remain on the straight and narrow.   For ‘fiscal, straight and narrow, how not to’, google Greece. If more Eurozone countries were more disciplined in the GOOD times, then their ability to absorb shocks in the bad times would be enhanced, and the euro at less risk to disorderly outcomes.

The idea was that having access to centralised forms of borrowing – cheaper and more liquid as the quote above suggests – would be contingent on good fiscal behaviour.  Hence an extra incentive towards that behaviour – without the sharp and politically impossible system of fines that the Stability and Growth Pact had required.

However, the problems were also clear, and our suggestions correspondingly modest.  To engage in this when debt levels are rising precipitately would seem like a suggestion that Germany should just ride in and use its credit rating to help out the weak and profligate.   Futhermore (see Samuel Brittan today) fiscal deteriorations are often externally driven and forcing countries to change their financing arrangements in response to, say, a collapse in global demand may be difficult during the actual circumstances.

What I could never get my head around was the degree of fiscal control that a new entity would need.   If a new Eurozone Bond is to be a competitor with the US T-Bond, then surely it needs all of Europe’s credit standing behind it.   In which case, if Country A borrows from it, the name on the bit of paper is not A, it is EUROPE.  And in which case, how does EUROPE get the money back? Surely this involves a degree of central fiscal control of the EU over national fiscal powers – in which case, isn’t all the magic somehow within those arrangements?

Romano Prodi today writes of ‘a big step towards fiscal federalism in Europe‘ that “The only alternative to greater co-ordination of economic policies is dissolution of the euro”. To my ears he sounds rather keen on this:

the realisation that the Greek crisis presented an opportunity to take the inevitable steps towards economic governance that were not possible when the euro was created. This implies new institutions or bodies to monitor the budgets of member states, enforce fiscal discipline and impose punishments for repeat offenders of budget discipline rules.

A new eurozone bond sounds like a financial invention, but underneath it is a profound political shift, which I cannot see Germans swallowing.  Not everyone in Europe would agree with Prodi that “the ship of the European Union is sailing in the right direction”.  As Martin Wolf ceasely writes, a collapse in Eurozone Demand (which is now troubling markets across the world, including Asia) means inflating some economies while deflating others (as this letter reiterates).  But so far we are only getting the deflationary bit – the Germans insisting everyone be Germanic.

If anyone gets the chance to read the analysis from Afme, and can answer any questions about it, I’d be in their debt.  Pun intended.

Here is the world’s top blogger Cowen hoisting an excellent quote about Benthamism:

Bentham is a total mess. One commentator said that Benthamite utilitarianism is a philosophy that tells you what to do when you have the data that you cannot obtain. This is it in a nutshell.

Here is the gloomiest post for an Irishman that I have ever read:

For most nations, gross national product and G.D.P. are near-identical, but in Ireland they are not. When we adjust Ireland’s figures accordingly, the situation is dire. The budget deficit was about 17.9 percent of G.N.P. in 2009, and based on European Commission projections (and assuming the G.N.P.-G.D.P. gap remains the same) it will be roughly 14.6 percent in 2010 and 15.1 percent in 2011, while the debt-to-G.N.P. ratio at the end of this year is expected – by our calculation – to be 97 percent, and 109 percent at the end of 2011. These numbers make Ireland look similarly troubled to Greece, with a much higher budget deficit but lower levels of public debt.

The reason, they say, is: “that roughly 20 percent of Irish gross domestic product (G.D.P.) is actually “profit transfers” that raise little tax for Ireland and are owned by foreign companies.”

Brad DeLong – the Jekyll and Hyde of blogging – unveils Jekyll in this beautifully balanced discussion (mostly with himself) of whether Naked CDS’s should be banned.

More assaults on Red Toryism in this essay. Tipping the hat at the League of Ordinary Gents.    The author writes

[liberalism] doesn’t require a re-education program hostile to family, as Deneen fallaciously accuses. It is silent on the role of family–whether that bond be an obstacle or a nurturing spring. What it says is that it is for you to decide these things. The State may be modeled on “preference neutrality,” but you as an individual are not. The authority of that moral judgement ultimately resides in you. It’s called thinking for yourself.

Have fun.

Look at the Coalition agreement:

The Royal Mail agreement – keeping Post Offices as they are, allowing the Royal Mail itself to have private investment – is rather similar to what Vince called for in his chapter (p168).  So too is the idea of sunset clauses on regulation.

More recently, following Professor Alison Wolf’s paper for us published in February, you have this (see FT link):

One of the most striking agreements is over the need to break teachers’ national pay scales, a commitment that sets the coalition on course to clash with unions. The document pledges to “reform the existing rigid national pay and conditions rules to give schools greater freedoms to pay good teachers more and deal with poor performance”. While sympathetic to such reform, Tory and Lib Dem politicians have shied away from an explicit commitment to take on union bargaining power. Alison Wolf, professor at King’s College London, said the pledge was a “clear statement of intent” that the unions “will hate”. “The two parties . . . are going to find it easier to move forward than they would have on their own,” she said.

You can hear examples of the union antagonism in a Radio 5 interview a few weeks back.

As this story indicates, yields are now at a very low level.

Good news?  Well, no.  A naive, political interpretation of this would be: the Conservative government has impressed the market that it has borrowing under control.  Control = less debt issued = less supply = higher price.   But as Tyler and others on this blog would rush to point out, that it not the story today.  For if this were the cause, we would also expect higher equity prices, which all things being equal benefit from such circumstances.  Instead, the FTSE is down 2% or more. Instead, there has been a rush – again – from ‘risk’ assets to those regarded as unrisky.

The missing word – as ever – is demand.  The demand we are talking about is the demand expected in the economy, that rewards money put at risk in things like equity.  All the signals from the markets are that -despite yesterday’s ‘dreadful’ figures – the market as a whole is happy receiving just 3.7% for its money for a long period.   And the only interpretation of that is that the market is expecting fewer great opportunities to earn its money the honest way – out there in the world of enterprise – than it was before.

Read the Economist’s blog, if the UK is getting high inflation, it may be the only major currency bloc to achieve this.  (See their account of the US trends and also Krugman.)  And given what problems deflation may cause, you may want to ask whether or not our policy – even if unintentional – is in fact better.  Indeed, if targeting high nominal growth is what we need – as I called for in Credit Where It’s Due – then maybe Merv is doing it, just by mistake. …

Rather than trying you with my amateurish interpretations, Scott Sumner has done a fantastic, educational and counterintuitive job here.  Has the euro got weaker in the last few days?  If only – it has got stronger – just the dollar has got stronger still. With commodities and equities falling, and ‘money-ish’ things like gilts rising, what we are seeing is money itself gaining in value.  Money demand up means money is tight, which in Sumner’s system is what causes recessions …. Read it!

One quick observation: the prediction was based on 125bn of QE.  We have had 75bn more than that, which must have had some effect on inflation (though as I droned on in Credit Where It’s Due, the mechanisms are rather wobbly and demand-dependent).

Another is: how on earth did they make such a prediction when they knew VAT would be returning? Did they simply miss it out? the April CPIY index stands at 112.8, which is 2.1 points above the April 09 level of 110.7, or almost exactly 2 per cent higher.   This would put the forecast error down to 1 per cent.  But if it WAS CPI without tax which they were forecasting, they didn’t tell us.  I see a straight mistake.

A third observation is that Britain’s inflation is a bit of an exception within Europe.  See the charts from Wolf’s (rather boilerplate) post today:

A final observation (coz I have to go to lunch) is this: if the Bank has made a mistake, I would rather it made this one than the other one.  Reading Chris Giles today about what this means for you and me, it comes down to this: it makes living standards go down, but it may help make the budget deficit lower.   And so far households are not expecting it to last.  In other words, a one off transfer, lightening the biggest problem (government debt) and making all of us fairly evenly contribute to the problem.

This crisis needs measures OF THAT SORT to get the country back in balance: lower government debt, lower living standards.   (We could also do with being more competitive, which this doesn’t help, but weak sterling manages that).  Though I look like a hubristic fool to some (even though I stand by my points about Base Effects), actual deflation to such an indebted country suffering from insufficient demand may have been worse.

Lunchtime!

“Whereas all of the parties ought to have been disappointed with their showings in the general election, the eventual shape of government has – for now, at least – pleasingly marginalised the worst people in all of them.”

Furthermore, this missed opportunity has allowed Anglo-Saxon hedge funds to speculate on Greek debt, and could lead eventually to the end of the Euro.

Anyone?

To be charitable, I think the author is calling for creditors (the ‘markets’) to take some of the pain in the Greek situation.  I sort of agree.  It takes two to tango.  Remembering what Megan said – “The fact that some moron is willing to lend you money is not a good reason to borrow it” – means that both moron and borrower deserve to learn some manners.  If creditors are NEVER punished, then the market never exercises discipline ex ante – and ‘ex ante’ is when you want the discipline to be exercised – when you can still make a difference.

But as Krugman and many others have pointed out for many posts, it is no good just funding the liquidity crisis if you can’t do something about the deeper problems – the pachyderm in the chamber being uncompetitiveness:

What makes Greek problems so intractable is the fact that there’s little hope for growth for years to come, because Greek costs and prices are out of line and will need years of painful deflation to get back in line. Spain wouldn’t be in trouble at all if it weren’t for the fact that the bubble years left its costs too high, again requiring years of painful deflation.

Some shocking examples of this are in recent FT’s.   From Munchau a couple of days ago:

A reader wrote from Madrid last week that, in his estimation, the price level in his city was about 30 to 40 per cent higher than in Germany – as a result of which he orders all his durable goods from abroad. It is not surprising therefore that we are starting to see core price deflation as Spain cannot maintain a large price differential with Germany forever

And Michael Skapinker today:

A more recent OECD document outlines how much Greece’s pensions weigh on its economic life. In Germany, a typical retired person receives a public pension equivalent to 40.5 per cent of average earnings. In the UK, the figure is 28.9 per cent. In Greece, it is 93.6 per cent

None of these are solved by either (a) bailing out the creditors or (b) whaling on the creditors.   See this graph from the IMF document about the source of the increases in debt: note to all the Spending Splurge Fanatics, only 10% is because of fiscal stimulus (taken from Ryan Avent at the Economist)

Note, again (yes, I am repeating myself): it is a loss of revenues.  But what that revenue loss means is: you need to cut spending at some point.  It is not happening (just) because the market is telling us.

All in all, people take the markets too seriously as some sort of person, or worse a deity. But as Aditya reminds us:

Rather than being one all-knowing entity, financial markets are a convenient term we apply to the hundreds of thousands of daily deals between buyers and sellers and middlemen. When the FTSE goes up, the price of government bonds normally goes down, and what the Swiss do with their interest rates can cause all sorts of mischief for the pound

The markets do exactly the job they should do – intermediate the givers and the takers of money.  They don’t always do it right, but there is no crisis of illegitimacy – as Stelzer writes:

The so-called bond vigilantes – investors who discipline borrowers by dumping their IOUs – are in control, as well they should be: it’s their money that is at risk.

Yup. Aditya is right – the market is not some knowing mind, like a deity. There is no ‘the market thinks this’ or ‘the market demands that’.  This is why setting it up in some sort of opposition to democracy is neither right nor wrong: it’s meaningless.  It’s like complaining about the right of the volcano to disrupt our traffic, or of the right that people have to prefer Eastenders to Shakespeare.