Showing posts from November, 2014

Celebrating the Spanish recovery

Lots of people have been celebrating the Spanish recovery. "From boom to bust to export-led recovery", crowed one Twitter commentator. This is the reality: Well, real GDP growth is now positive. I suppose that is a recovery, sort of. Though 0.5% growth is not exactly robust. In the UK we call 0.5% growth "stagnation", not recovery.* But look at this: Note the red at the far right. That is deflation. Consumer prices in Spain are falling by about 0.5%, according to the latest figures. To be sure, this is an annual chart: using annual GDP figures, NGDP is about 1%. I don't call that much of a recovery. And I doubt if the Spanish see it as recovery, either. This is GDP per capita: Yes, the Spanish are worse off now than they were in 2003. Ouch. So if the "recovery" is largely due to falling consumer prices flattering real GDP, what about those exports? Here's the Spanish current account: This looks like something of a success

Structural destruction

Researchers at the Federal Reserve recently produced a fascinating article in which they argued that severe recessions such as that in 2008-9 leave permanent economic scars.This set of charts shows the effect of the 2008-9 recession on real GDP trend growth for four economic areas - the US, the UK, the Euro area and Canada: This reminds me of the four-image game on the UK's satirical current affairs show " Have I Got News For You ". Spot the odd one out, and explain why.....and no, it isn't the one you think it is. Actually each chart has a claim to be the odd one out, which just goes to show how the economic effects of the financial crisis varied by country. Or perhaps more accurately, how the response to the crisis by monetary and fiscal authorities varied. These charts show a significant drop in trend RGDP for all four economic areas: Canada, which had neither a property market crash nor a banking crisis, shows the smallest fall. Interestingly - and c

Reflections on Rochester and Strood

In the post this morning: three communications from UKIP, two from the Conservatives, one from Labour. This is a pretty typical day. Every day brings more confetti through the letterbox, most of it from UKIP and the Conservatives. All of it goes straight in the bin. I also get emails from the Conservatives, phone calls from the Conservatives, visits from the Conservatives.....I told an opinion pollster who rang recently (yes, I get lots of those too) that the Conservatives look desperate to me. I'm utterly sick of their flood tactics.  But now UKIP have adopted the same tactics. Spam, spam, spam. They are nearly as bad as the PPI leeches. Spamming my letterbox, mailbox and voicemail merely annoys me. I don't need more information. I know what all of the main candidates are offering. Heaven knows, they've told me enough times. I've read Kelly Tolhurst's six-point plan, headed up by the biggest non-issue of this by-election - immigration. I've read Mark

The land of the setting sun

"So tief im Abendrot, wie sind wir wandermü das etwa der Tod?" - R. Strauss, Four Last Songs, no. 4 " Im Abendrot " Japan  is in recession. Will it ever escape from its deflationary trap? Indeed, should it even try to? Or would it be better for it simply to accept that its future is gentle decline into a comfortable (and highly automated) old age? Is it becoming the land of the setting sun? My thoughts on this are at Pieria .

The central bank of Russia is regaining control - but for how long?

At Forbes, more on Russia's currency problems: After the Central Bank of Russia (CBR) established free float with the condition that it would intervene to protect domestic financial stability, the ruble immediately rallied , but then fell again. Many people forecast dire consequences . I admit I was a little worried, but I thought the ruble would stabilize once markets became used to the lack of routine intervention from the CBR. After all, the whole point of allowing a free float is to enable the currency to find its own level – and more importantly, restore control of monetary policy to the central bank. When a country operates a fixed exchange rate system, it de facto adopts the monetary policy of whichever country issues the currency to which it pegs its own currency. In the case of the ruble, that is the United States. And as I have noted before , because China has large US$ reserves and a currency peg to the US$, the Fed’s policy is to a degree determi

The foolishness of the old

  Older people tend to want their pensions and benefits protected and the burden of cuts to be borne by the young. Of course, this is only natural: Most people want government to spend more money on them than on anyone else. This applies regardless of their tax contributions (those who don’t pay tax often demand more than those who do). And it is completely understandable. After all, charity begins (and when times are hard, ends) at home. But it is also foolish. In my latest post at Pieria , I explain why older people should be demanding that governments invest in the young. 

A Strange Memorial

Poppies, at the Tower of London, turning the moat blood-red. A wonderful memorial to the British and Commonwealth servicemen who died in the First World War.  One of them was my great-uncle, Henry Dodson Noon. We've always referred to him as "Uncle Dodson", so Dodson is the name I shall use in this post. Dodson was born in 1894 in Eastwood, Nottinghamshire, the son of George Henry Noon and his wife Mary Catherine Noon, my great-grandparents, who were farmers. In 1911, at the age of 17, he emigrated to Australia. My mother always said it was "because there was no money in farming in Britain". Indeed, farming was at that time in long-term decline: Dodson was not the only farmer's son to emigrate. Nonetheless, he doesn't seem to have become a farmer in Australia either. His Australian Army papers show his occupation as "butcher". In 1914 he joined the 16th Battalion AIF . After training near Perth and Melbourne, he embarked with t

A tangled web of fraud

Bulgaria's Corporate Commercial Bank. Again. Oh dear. There is some good news: The Bulgaria National Bank (BNB) has now – belatedly – revoked the banking license of the failed Corporate Commercial Bank (KTB) and commenced bankruptcy proceedings. This will come as a huge relief to insured depositors, who will get their money back in time for Christmas. It also means that the attempt by a consortium of investors to rescue the bank has failed. But what a mess has been left behind: The BNB’s disclosures about KTB reveal the desperate measures that were taken to preserve the illusion of solvency in the months before its failure. This statement from the BNB’s website explains how the bank self-funded its own Tier2 capital with a complex web of circular lending transactions involving an investment company called TC-IME and a host of smaller intermediary companies. The ownership of the components of this tangled web requires some explanation. Indeed it does. Read

Russia's desperate defence of the ruble

Two pieces (so far) at Forbes on the Russian central bank's desperate defence of the ruble. Well, it appears desperate, anyway. But is it, really? Firstly, I explain why the Russian central bank can't defend the ruble and shouldn't try to: When a currency is rising in value due to capital inflows, the central bank can cap its rise by buying assets and foreign currency. This is what the Swiss central bank has been doing for a few years now. Its purchases of Euros amount to possibly the largest QE program in the world relative to the size of its economy. Since it can create infinite amounts of Swiss francs, it is unquestionably the most powerful player in the Swiss franc market, and no market participant will oppose it. Instead, market participants will happily co-operate with it by selling Euros at the price that it sets. Similarly, when a currency is falling sharply in value, the central bank can support it by selling assets, including foreign currencies. But

Has the Bank of Japan started another round of central bank wargames?

Never pick a fight with a central bank. The only one who gets hurt is you. Unless, of course, you are another central bank. Central banks routinely intervene in the markets to influence the prices of assets, commodities and currencies. That’s the way monetary policy is conducted. It’s the principle behind QE. Generally, everyone co-operates..... Have you ever wondered why they do? In this piece at Forbes I use a game theory explanation for the ability of central banks to manipulate markets, and apply it specifically to the Bank of Japan's exorbitant QE commitments. 

A terrible stability

My Pieria post on EU unemployment and inflation: One of the things that struck me about the EU's stress tests was the high levels of unemployment in the baseline conditions for the tests. Levels were elevated across not only the Eurozone, but the entire EU: the aggregate baseline unemployment level for the Eurozone was 12%, largely because of very high unemployment in some Eurozone periphery countries, but that for the entire EU was not far behind at 10.7%. The baseline conditions did assume that unemployment would reduce. But the forecast was for a drop of less than one percentage point in three years: in the Eurozone it would drop to 11.3% and in the EU to 10.4%. If these baselines are at all realistic, then unemployment is a HUGE problem in the EU. But inflation, or rather disinflation, is also a problem. In fact the two combine to create a terrible stability. Read about it here . 

Lessons for China from Japan

The Economist has an interesting graphic. Here are the world's 10 biggest banks year by year since 2004, apparently: Umm, not quite. This graphic actually shows the banks with the largest amount of shareholders' equity (Tier1 capital) in US$. It says nothing at all about the absolute size of these banks in assets, and since the Tier1 capital is expressed in dollars rather than as a percentage of assets, it says absolutely nothing about the safety of these banks either. Cross-checking the figures for 2013 against other metrics gives interesting results. Relbank reports that by assets, Britain's HSBC is the second largest bank in the world , but The Economist's list has HSBC in fifth place by Tier 1 capital. So it appears that its capital is deficient relative to China Construction Bank, JP Morgan and Bank of America. But the accounting treatment affects the definition of assets. In particular, there are significant differences between US GAAP and IFRS regarding t