The Balcony Box

Commentary on global economic theatre

Greek Bailout Coming Tonight?

Julius, 28 February 2010

It appears that the European Union, led by Germany, are about to pony 30 billion Euros to bail out troubled Greece.  The cost for Greece?  Austerity.

Don’t make me laugh.  Given the widespread strikes seen these past two weeks, I very much doubt that the Greek government has enough power to enforce austerity measures.  So does this mean there will be no bailout?  I highly doubt it: what emerges from this weekend will likely be worded as conditional, but privately known to be unconditional.

In my opinion, what will ultimately happen will be broad unrest in Germany as unemployment benefits are cut at the same time as the Greeks are partying as usual.  Think riots can’t happen in Germany?

Toyoduh

Julius, 21 February 2010

David, what’s going on with Toyota?  Is this just an instance of bad luck blown out of proportion?  It seems clear to me that at the very least, Toyota is getting bad press advice, at least as regards the sensibilities of American customers.

I do find it hard to believe that all of the ex-post narratives in the press regarding Toyota’s terrible “culture of centralization” have even a grain of truth in them.  What do you think?

Subprime sovereigns

David, 9 February 2010

According to Spiegel Online, Greece has been getting liar loans from everyone’s favorite subprime lender.  In this case, the lying was about the exchange rate (the loans were structured as currency swaps with “fictional exchange rates”) and the national balance sheet (the “credit disguised as a swap didn’t show up in the Greek debt statistics”). As with many subprime loans, these are designed to explode in the “long term” (i.e., after the insiders have gotten the hell out).  Of course, the insiders got out quickly: “Goldman Sachs charged a hefty commission for the deal and sold the swaps on to a Greek bank in 2005″ (one would expect nothing less!).

So how big are Greek debts? “In 2002 the Greek deficit amounted to 1.2 percent of GDP. After Eurostat reviewed the data in September 2004, the ratio had to be revised up to 3.7 percent. According to today’s records, it stands at 5.2 percent.” Hey, what’s a few percent of GDP between friends?

Whatever credibility Greece may have had, it’s gone now.  And does anyone think that their able bankers didn’t sell similar products to other greedy piigs?

Michael Pettis takes down Thomas Friedman

David, 2 February 2010

Michael Pettis calls out Thomas Friedman on his careless economic analysis–a very entertaining read.  The punchline? China, with its $2-3T in reserves, has striking similarities with the USA before the Great Depression and Japan before the Bubble Economy burst. Pettis concludes:

We must be careful how we read history. The fact that the US and Japan had terrible decades following periods during which they had amassed levels of reserves that China has subsequently matched, and under conditions similar to those of China, does not necessarily mean that China too must have a lost decade or two.  Chanos is not being crazy when he worries, but it is still an open question as to whether or not he will turn out to be right.

But the history does indicate that facile statements about central bank reserves should, at the very least, be measured against the obvious historical precedents. Chanos might still lose this debate, but Friedman has already proven himself to be hopelessly wrong.

Watching and waiting

Julius, 30 January 2010

Is it just me, or does the world economy seemed to be in suspended animation–a butterfly pinned to the corkboard?  Or perhaps a weightless astronaut at the apex of a parabolic rocket shot?

The much-ballyhooed restocking effect finally showed up in the Q4 GDP report, but all was not well in other areas: notably consumption, whose growth delined on a quarterly basis.  Where is the final demand coming from?  Build it and they will come?

An then there is Greece and Spain and Japan and Ireland and the UK and…how will any of them avoid outright default or the printing press?  The overly subscribed Greek debt issue was completely underwater in the span of two days, as spreads continued to widen.  Buyers’ remorse indeed.  How long until catastrophe?

And then Obama’s call for doubling exports in five years.  How will that be possible without a dramatic weakening of the dollar against the people’s currency?

Big changes are brewing.  Don’t look down.

How long until China pops?

David, 28 January 2010

Given its centrally administered economy, who knows.  But the latest real estate market statistics suggest a bust cannot be too far off.  According to NPR:

  • Chinese property sales rose 75% in 2009
  • The price of a new apartment in Shanghai is up 68% year on year
  • 85% of Chinese cannot afford to buy properties

Of course, “not everyone is convinced there is a property bubble”.

2010 and Beyond

Julius, 3 January 2010

The next ten years will be perilous.  As much as it did the Aughts, one word will define the Teens: volatility.  In my opinion there are three large risks to the world economy over the next ten years:

  1. Cascading currency crises
  2. Cascading sovereign defaults
  3. Geopolitical conflict

These risks are all interrelated, so the likelihood that one occurs and the others do not is slim.  The sad fact of the matter is that as we enter the Teens, we have no comprehensive way to deal with the debt overhang that is now plaguing the public sector.  Of course, a private sector that wasn’t overleveraged could conceivably shoulder the load and grow the economy by leveraging up and relieving the strain on the public sector.  Alas, we are all tapped out.

I personally expect that quantitative easing will continue intermittently (causing great volatility in the process) until some currency or government blows sky high.  Then the real fun begins.

Why be productive when you can speculate?

David, 22 December 2009

According to the Telegraph, hedge fund David Tepper’s compensation this year will be about $2.5B.  Of course, Tepper’s fund creates nothing useful for anyone, it simply expropriates value from the rest of society.  This is inequitable, wasteful, and, at a time when many Americans are struggling to put food on the table, morally reprehensible. Yet there appears to be absolutely no political will to get speculation and speculative profits under control (admittedly, it’s probably not surprising given the influence of the financial oligarchs in Washington).

Whither California?

David, 19 November 2009

According to today’s Mercury News, California’s budget deficit will far surpass preliminary estimates.  The Legislative Analyst’s Office is predicting a deficit of $6.3B in FY2009-10, followed by deficits of about $20B for the next five years.  Through FY2014-15, the predicted deficits total $109.7B.  (Note: that’s almost as much money as six major U.S. banks put aside for bonuses in the first nine months of 2009.)

At least the state is investing in education!  Oh, wait…
UC regents recommend 32 percent fee hike

This cannot go on much longer.

Minsky’s employment strategy

David, 18 November 2009

In his post below, Julius argues that the government should reflate by providing guaranteed employment rather than by using quantitative easing to sustain inflated asset prices.  I couldn’t agree more, and Paul Krugman has also suggested that the government consider programs that create jobs directly:

You can make a pretty good case that just employing a lot of people directly would be a lot more cost-effective; the WPA and CCC cost surprisingly little given the number of people put to work. Think of it as the stimulus equivalent of getting the middlemen out of the student loan program.

Given how many people have been turning to Hyman Minsky’s magnum opus Stabilizing an Unstable Economy for insight about the financial crisis, it’s surprising that government job-creation programs haven’t been part of the policy discussion (at least as far as I can tell).  Such programs are actually a central component of Minsky’s policy recommendations.  Of course, the recommendations start on page 319 of an admittedly turgid volume, so perhaps most readers had given up by that point.  I think it’s unfortunate that Minsky’s ideas haven’t been given more attention, since they could be exactly what we need.

Minsky’s employment strategy seeks to “achieve a close approximation to full employment” without causing “instability, inflation, and unemployment” (p. 343).  He proposes that the government act as the employer of last resort by creating an unlimited supply of jobs at a low, non-inflationary wage.  These jobs could be created within the New Deal framework of the Civilian Conservation Corps (CCC), the National Youth Administration (NYA), and the Works Progress Administration (WPA); Minsky offers detailed proposals on pages 345-6.

The beauty of Minsky’s approach is that, by setting wages at a low level, the programs neither create inflationary pressure nor crowd out the private sector.  When private sector demand for labor rises, workers will happily leave the government programs to take better-paying private sector jobs.  The approach also promises to develop human capital and prevent the skill loss and suffering associated with prolonged unemployment.  Minsky summarizes the approach as follows:

It is envisioned that WPA, NYA, and CCC when fully developed will, together with normal government activity and private employment, provide income through jobs for all who are willing and able to work.  These permanent programs will provide outputs–public services, environmental improvements, etc. that a transfer-payment government does not yield, as well as the creation and improvement of human resources.  In our urban centers, where there are concentrations of unemployed and welfare recipients, the improvement of the public environment should be marked.  WPA, CCC, and NYA will succeed precisely because they are job programs that perform useful tasks and yield visible outputs. (347)

Why not set these programs up as entrepreneurial ventures, owned and administered by the government, that compete for resources (new employees), thereby creating performance incentives and developing entrepreneurial skills?  Call them the Works Progress Entrepreneurs.  Perhaps some public-spirited, newly minted MBAs would be willing to help get the program up and running before moving on to lucrative careers on Wall Street.

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