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Showing posts from March, 2015

Repeat after me: sectoral balances must sum to zero

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I do like sectoral net lending charts. This one is from the OBR's latest Economic Forecast:


The thing to remember about sectoral balances is they must sum to zero. It is not possible to have a negative external balance, as the UK does, with concurrent surpluses in the public, household and corporate sectors. If the UK is a net borrower from the rest of the world because of its current account deficit, then somewhere in the domestic economy must be a balancing deficit.

It is pretty obvious where this deficit has been. In 2010, the external sector was in deficit (green line on chart) and corporates (yellow line) were net saving. The external balance had been in deficit for a long time, but corporate net saving commenced at the same time as the public sector (red line) switched from surplus to deficit. This may have been a traumatic response to the dot-com crash, but to me this looks more like a policy change around 2001 that encouraged corporate saving. I wonder what it was. Any sug…

Happy days are here again

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Here's a shocking chart from the LSE's John Van Reenen:


This chart deserves to be seen by every adult in the UK. It charts all too clearly the true cost to them of the financial crisis and its aftermath.

It is clear that the financial crisis was severe. The sharp drop in GDP per capita in 2008 is unprecedented since 1970. That was bad enough. But what is far worse is the evidence that the UK still has not recovered. Even with recent encouraging growth, GDP per capita remains far below its long-term trend. Those who argue that the financial crisis simply eradicated debt-fuelled "bubble" income are clearly wrong, unless they think the whole of the last 45 years was a bubble.

So what exactly has caused this awful fall in per capita income? Was it due to Coalition policy, as some think, or were there other causes?

In the report from which this chart comes(pdf), John offers a balanced explanation:
The failure to recover lost output shown in Figure 1 cannot be attributed …

Greece's real problem

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Professor Hausmann has responded again to my reply to his reply to my criticisms of his Project Syndicate post. It is a very gracious response.

We are substantially in agreement on the three points that I raised in my previous post: the long-standing nature of Greece's fiscal fragility, the illusory GDP growth fuelled by the pre-crisis debt bubble that obscured the deterioration in Greece's financial position, and - above all - the long-term decline of Greece's competitiveness. And oddly enough, this means that we are also in agreement about the current situation in Greece, though we frame it differently. Professor Hausmann says that austerity is not the problem. I say that Greece's fiscal finances are not the problem. We are really saying the same thing. The real problem is competitiveness.

Greece's problem has been competitiveness for a very long time. It has run a large and persistent trade deficit for the last half-century (blue dotted line):


Exactly why Greece…

Send Back The (Eurogroup) Clowns

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Latest from the Lucey/Coppola double act, with apologies to Stephen Sondheim.



The Germans give nicht;
Grexit looms quick.
Drachmas at last on the ground.
The Euro will tear!
Send back the clowns.....

The union's adrift -
an Ordoliberal split:
Podemos is gaining ground.
But the centre won't move.
Why are there clowns?
Send back the clowns!

Let them stuff T-bills
In banks,
Extend a loan, defer, then they're yours.
Another long meeting again, and wit is quite spare.
Few there are kind....
Sense is not there.

Don't you love farce?
Whose fault? It's clear:
We all colluded and winked,
Now Greeks they pay dear.
The Eurogroup clowns,
Oh, those scary clowns,
Oh bother - they're here.

The centre is rich,
Periphery blitzed,
It isn't a union, you know.
Common currency, it's clear
Designed by clowns
And run now by clowns
Well shielded, it's clear.

Dear Professor Hausmann.....

Professor Hausman has replied to my criticisms of his Project Syndicate post about Greece.

Unfortunately, Professor Hausmann has misrepresented what I said. I did not say that Greece's fiscal position only worsened from 2009 onwards. On the contrary, I said that Greece's debt/gdp remained stable from 1993-2008 DESPITE a sizeable fiscal deficit. The fiscal deficit increased considerably from 2004 onwards. I also pointed out that this was due to the worsening current account deficit. For some reason Professor Hausmann decides to ignore this and give me an economics lesson on how current account deficits drive fiscal deficits. Professor Hausmann, you should retract.

Professor Hausmann points to infrastructure in Spain as evidence of constructive investment in the boom years. Airports where  no plane lands, roads where no cars drive, houses where no-one lives: this is "productive investment", is it? I'm sorry, this is not credible.

Professor Hausmann also criticises …

Greek myths and legends

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Ricardo Hausmann argues that Greek spending was "out of control" during the years prior to the Eurozone crisis - which as far as Greece is concerned actually started in 2009 with its first debt crisis, not in 2012 when the whole bloc nearly collapsed. He says:
"Greece piled up an enormous fiscal and external debt in boom times, until markets said “enough" in 2009." Since the world was in recession in 2000-1 because of the dot.com crash, we have to assume that by "boom times" he means 2002-6 (since the financial crisis in Europe started with the failure of IKB in July 2007). So is he correct?

Here is Greece's debt/gdp from 1981 to the present day:

Nowhere in this chart is anything indicating a vast increase in debt/gdp from 2002-6. The vast increases in debt/gdp occurred prior to 1993 and from 2009 onwards. Greece's debt/gdp was high but stable from 1993 to 2009. Sixteen years of stable debt/gdp does not suggest a profligate government piling …