Thank you George Washington!

 Say whatever bad stuff you like about the Bernank. At least he doesn't go around dressed like this:

That is a photo of Meryvn King, the Governor of the Bank of England.

Yikes!!

Alternatives to Austerity

European austerity is not causing renewed growth and it may not even be lowering debt ratios. Other than that, I guess it's going pretty well.

It's fun to rail against the dummies who thought austerity would work, but really, what else could the affected countries do? They can't use monetary policy because they don't have a currency and further fiscal expansion would cause the bond vigilantes to draw and quarter them.

Paul Krugman presents a complicated scenario where the ECB creates higher inflation and Germany runs a budget deficit to compensate for the austerity in Spain and Italy.

But Spain and Italy do NOT run the ECB or the German finance ministry!

The only alternative to austerity that the PIIGS have, that they can actually implement is to exit the Euro, devalue like crazy and hope for the best.  They are choosing austerity over this step.  I truly don't understand why, unemployment in Spain is well over 20% and climbing. It's hard to see how a Euro exit could make things worse.

In the West, we have spent decades getting conservative central bankers to be seen as the only proper type of central bankers, taking the Rogoff solution to the "inflation bias" problem highlighted by Barro & Gordon. But now we pretend to be shocked when these conservative bankers won't produce higher inflation.

Of course they won't, that's why they got the jobs to begin with!! If there was any chance they'd run higher inflation they'd never have been appointed.

Promises, promises

As we know, the Fed has announced an inflation ceiling of 2% AND that it will keep short term rates close to zero at least until the later part of 2014.

I believe these two commitments are contradictory if we manage to achieve a decent economic recovery, and it is looking more and more like we are finally getting exactly that.

Here is a chart of the implied 2 year ahead level of inflation expectations derived using yields on inflation protected securities (TIPS):

The red line is the Fed's 2% ceiling.

People, can I get a YIKES?

The source for this chart is here, the hat tip goes to LeBron, and the source also argues that markets are strongly pricing in a Fed rate increase in 2013.

At this point, unless the recovery falters, I don't think the Fed will keep EITHER of its two promises

Be careful what you wish for

In my survey of international economics class today we had an excellent discussion of possible end-games for the current Euro crisis.

One point that really struck home with me was when a student asked "Why did Greece even want to be in a monetary union with Germany in the first place"?

Indeed.

Greece was a serial defaulting, non-tax collecting, relatively corrupt, but seemingly happy country. They were never going to be Germany, and I can't understand why they wanted to be Germany. Yet they moved heaven and earth to meet the Mastricht criteria and get into the Euro. They hired Goldman to swap around their future revenues, and maybe they fibbed a little bit too. At the time, many people were surprised that they made it in.

Short term, they got a ton of cheap (for them) credit and enjoyed a spending binge. But their economy grew ever less competitive and their external position ever weaker. Now they are down and out, humiliated, wracked by social unrest, and pretty much flat broke.

Yet they still want to stay in! People, Greece is never going to be Germany. I don't say that as a negative about Greece but as a statement of history/culture. The values are different, the comparative advantages are different. Thus, German monetary policy is not really ever going to be right for Greece. Unless Germany is willing to adopt them and put them on a perpetual allowance, the Euro is not going to work out for Greece.

It's time for Greece to pull the full Argentina, or as Hillary likes to say, press the reset button.

BitCoin

BitCoin

Some analysis on demand, and then on supply.

A more positive view.

Wow, nothing

Can anyone explain this? Zip, nada, bupkes.

This trial is actually a pretty big deal. Regardless of what you think of the Liberty Dollar (you might be a fan, or you might not), there should be SOME coverage.

Not What Metal, But What Factors

US Mint is soliciting public comment...sort of.

What new metals should we use in minting coins?

Except that they don't really want to know about metals. They want to know what factors we should use in deciding what metals.

The United States Mint is not soliciting suggestions or recommendations on specific metallic coinage materials, and any such suggestions or recommendations will not be considered at this time. The United States Mint seeks public comment only on the factors to be considered in the research and evaluation of potential new metallic coinage materials.

Nemo to world: Greece WILL default

"The only questions are (a) when and (b) who will be left holding the bag."

In a great post on the blog "Self Evident", Nemo breaks down Greece and their crisis. 

Highly recommended.

Here is the ending:

"On the bright side, this is just entertainment; the entire Greek economy is a rounding error. The real show begins in a few years when major countries face the same problem."

Yikes!

  

Cheeky Greekys

This is so great in so many ways. Thank you Mr. Reuters!

Greek opposition lawmakers said on Thursday that Germans should pay reparations for their World War Two occupation of Greece before criticising the country over its yawning fiscal deficits.

"How does Germany have the cheek to denounce us over our finances when it has still not paid compensation for Greece's war victims?" Margaritis Tzimas, of the main opposition New Democracy party, told parliament. "There are still Greeks weeping for their lost brothers".

So, I am sure you don't need any help in breaking this down, but seriously, WTF???

Greek public finances are shot because of the lost interest on German reparations? 

When caught with both hands in the cookie jar, the first thing that occurs to you is to try and play the Nazi card? 

In 2010?

But the very best part of all this is that Germany HAS ALREADY PAID REPARATIONS to Greece!

OMFG!

From the same article:

In 1960, Germany paid Greece about 115 million deutschemarks to compensate victims of Nazi persecution.

Oh, Greece, is there anything you won't stoop to?

Hat tip to RSP

 

Econ Karma gonna get you.

Wow, talk about bad timing. People could the entire Euro sovereign debt crisis be the universe's way of sticking up for its most favored sons and daughters (economists)?

Have you seen this? Stupid economists, how could you have kept saying and saying the euro was far from optimal on economic grounds? 

..............

Oh, never mind.

Anybody wanna help start up Econ Journal Watch Watch?  

Bad Day on TV

I have blogged before about television. It's a bad gig. Don't like it, and clearly not good at it.

But, got the call from FOX: come on the show, and talk about Greece. So I gave my thoughts on the situation in Greece. (Okay, these are likely Angus's thoughts, but I may have gotten them right. I tried to listen carefully.)

1. People are fleeing the Euro, which makes the fall self-perpetuating. But Euro seemed stable just last summer, as recently as September, in fact rose against dollar all summer. Does instability matter, within such a large area? After all, within EU everything is in Euros. That's the advantage of a currency union. (Answer: Yes, it matters. EU depends on imports of most raw materials, especially petroleum. If the Euro falls, it will actually help German economy, and France to lesser extent. But the problem is not a decline in the Euro, but rather break-up of the currency union. The main problem is POLITICAL, not ECONOMIC. The only way to save the PIGS (Portugal, Ireland, Greece, Spain) is to take actual money away from the larger nations and prop up the financial systems. Technically possible, but what is in it for the big players, France, Germany, not clear why they would pay for bad policies in PIGS. Greece is small, and could be propped up. A welfare state to pay for poor folks is one thing. But paying for the lies and fake accounting of the Greek government, in the aftermath of the Olympic fiasco, is quite another.)

2. Could this kind of meltdown happen in US? (Answer: Strangely, less likely now, though US is sucking pretty hard. The only main rivals for international currency of choice are the dollar and euro. Dollar is in trouble, because of huge deficits, accumulated debt. US may lose its credit rating, as threat of default becomes real. Problem is that the debt, denominated in dollars, can really only be exchanged for euros, or euro-denominated assets of some kind, if you want to sell dollars, or dollar-denominated assets, on secondary markets. Amazingly, it is STILL better to park your funds in dollars, and US government bonds, than in most other places, especially (post-Greece) in Euros. Problem is that there are huge, truly huge, amounts of cash on the sidelines. People are looking for a safe haven, and also for some kind of return. US rates are so low that investors are getting no return. But the Euro collapse on markets, and political instability in Europe, actually mean that US is somewhat protected in the short run. BUT IT WON'T LAST. Level of US debt is not a problem, but the rate of increase IS a problem. If Asian countries sitting on cash mountain get out of dollars, the effects would be catastrophic. We could see large inflation, and high real interest rates, within three years. In the best case scenario, by 2020 80% of US federal budget will be spent on entitlements and debt service. We have given up all our room for maneuver. One more crisis, and the US might default on its debt. Combined with EU problems, could actually cause worldwide financial meltdown. We are looking at 1932, not 2009, as the worst case scenario.)

Anyway, I hear back from the producer. Neil Cavuto, host at FOX, is interested in hearing how the US might turn out like Greece, not how Greece going down saves the US bacon in the short run. (Here's Neil, in action on Fox)
Sure, I can do that. There are parallels, absolutely, and the fact that US has an independent monetary authority could make things more dangerous. After all, Greece can't devalue the drachma, because they use euros. Their "sovereign" (as if you can call the Greek government anything but a kleptocracy) debt would normally be devalued by one of the two big economic oxidizers, currency devaluation or inflation (one is an exchange rate change, the other is increase in money supply, but their effects are identical). Greece can't do either, and so the pressure builds.... Anyway, the parallel is an easy story to tell.

1. US is on path to fundamental change in the size and role of government. It has ALREADY HAPPENED. By 2020, under the best circumstances, 80% of federal budget will be service on debt and entitlement payments. We have built a fiscal straitjacket. Let me emphasize: it's true NOW, already. (This is more or less straight Angus, plagiarized, or as we say when we look at my c.v., "coauthored.")

2. There are two options available to the US that is not available to PIGS: Monetary inflation, and currency devaluation. PIGS are members of EU, and so have no independent monetary policy. Problem is that if US inflates, that is de facto default on debt. Catastrophic for world economy. We could bankrupt ourselves, ending ability to borrow, by inflating. Result would be double digit interest rates for years, with real rates on the order of three percent, in order to service new debt. We can't inflate our way out of all of it. But given that our annual deficits are now 10% of GDP, inflation may start to seem attractive.

3. Alternative: Look at Greece, because that is our future. Explosion in euro-denominated debt, strikes, high unemployment, and government increasingly controlling financial and investment decisions of private firms. We think it can't happen, but we are on the steep part of a slippery slope. US debt/GDP ratio will approach 1. Our bonds have shaky ratings. And our taxes are going to go mostly to finance pensions, bailouts, and deficits. Instead of investing in the young, and the talented, we are going to invest in the old, and the bankrupt. Don't be smug, because not only could the Greek nightmare happen here--unless something changes, it will, within the next decade. Look at it this way: The EU limit for annual deficit as a percent of GDP? 3%, no more. Current level in Greece, so large that people are going nuts? 11% What about the US? Last year 9%, this year and for the next five years: 10%+.

Anyway, I do the interview. We go in order: Donald Trump, John Sununu, Mike Munger (one of these things is not like the other song) Neil is kind enough to let me answer the question, at length, drawing out the parallels between Greece and US deficits, and consequences. I do get to use my one prepared zinger: We used to make cars, and other things people wanted to buy. But right now, the only export keeping the US alive is.... debt! Our number one export is debt. If people stop buying that, we are hammered.

So, Neil asks, "But isn't the fact that Greece is pulling down the Euro actually HELPING the US? I mean, the only choices for currencies are euros or dollars, right?"

Since this had been my original claim, the one the producer had said not to make, I was somewhat stumped. Neil went on to ask about where to put money, where to invest, if my claims were true. The one thing I know for certain is that I am not qualified to give investment advice. So I filibustered, Neil got pissed, interrupted, and repeated his question: "Professor, professor, you didn't understand my question. I said, where should we invest? If you know so much, what is the solution?" That's pretty much where things ended.

I am going to go hide in the bathtub. I hate television.

beware the PIGS

The sovereign debt crisis is heating up in Europe. The so-called PIGS (Portugal, Italy, Greece and Spain) have weak economies, very large deficits, and no national monetary policies to ease their sufferings. Many are skeptical of whether or not they can internally resolve this problem and if they can't whether the EU can or will bail them out.

It is not impossible that we are looking at the end of the Euro as we know it, as one or more of these countries may have to drop out and inflate a new national currency to get out from under their fiscal situation. I would put this probability at something like 37%.

The situation appears to be getting worse rather than better as Greek workers have started striking and Portuguese legislators appear to be thinking about increasing spending and raising rather than lowering their deficit. The Spanish stock market fell 6% today, Portugal's 5% and Greece's 3.5 %

And to think that last year I finally stopped telling my students that, despite its apparent success, it was from from obvious that the Euro would really last as it had yet to weather a major crisis.