MacroScope

Some good econ reads from the Blogosphere

From the econ blogosphere:

UK BUDGET
– The libertarian Adam Smith Institute says here that the UK government should look at every government job, programme and department, and ask whether they are really needed. “Do we really need new school buildings….? Should taxpayers really stump up for free bus passes, or winter fuel and Chistmas bonuses for wealthy pensioners?”

CHINESE FX
– VOX publishes this post from senior research fellow Willem Thorbecke of the Asian Development Bank on China’s latest move on the dollar peg. “China’s action may facilitate a concerted appreciation in Factory Asia, helping the region redirect production away from western markets and towards domestic consumers.”

U.S. JOBS
– Karen Dynan, vice president for economics studies at Brookings, looks here at the latest U.S. jobs data and argues that Congress needs to extend unemployment benefits. “Reinstating the benefits would … help the broader public by contributing to overall demand in goods and services and thereby mitigating the risks of a double dip in the economy.”

BIG SPORTING EVENTS
–  And while the World Cup is still going on, here’s a look by The Sports Economist at the economic impact of big sporting events on a community. “Research of (independent) economists looking at the historical record find, time and again, that the claims made by the (paid) consultants in the impact statements are overblown.”

Watch price of booze for inflation tips, says Cleveland Fed

What do the price of infants’ clothing and alcohol have in common? They are “sticky prices” that rarely change.

Federal Reserve researchers Michael Bryan and Brent Meyer say these sticky prices may be a better indicator for where inflation is heading.

“While a sticky price may not be as responsive to economic conditions as a flexible price, it may do a better job of incorporating inflation expectations. Since price setters understand that it will be costly to change prices, they will want their price decisions to account for inflation over the periods between their infrequent price changes,” the researchers wrote in a study published on the Cleveland Fed’s website.

Inflation expectations: It depends on how you ask

How high or low are the public’s expectations for future inflation? It depends on how you ask the question, according to New York Fed research.
The closely-watched Michigan Survey of Consumers asks questions about “prices in general” to measure expected and perceived inflation.
But New York Fed researchers found survey questions that use the word ‘prices’ instead of ‘inflation rate’  “may bias expectations upwards.”
Responses to questions about “prices in general,” were significantly higher than responses for “the rate of inflation” when asking for expectations of the next 12 months, they found.
Why?  Questions that used the word ‘prices’  “focused respondents relatively more on personal price experiences and elicited expectations that were more strongly correlate to the expected price increases for food and transportation,” the researchers wrote.
The Federal Reserve keeps a close eye on inflation expectations, as they can become a self-fulfilling prophecy.
Read the full report here

Confidence vs. reality on Europe’s fiscal front

What do Poland, the European Union’s brightest economic light, and Greece, its dimmest, have in common? Both have plans to cut their budget deficits to the Union’s  prescribed 3 percent level by 2012, and both of those plans depend on a lot of ifs.

I can already hear cries of protest from Poland, the only EU member to show any growth at all last year. It that has taken great pains to distance itself from more troubled EU states and is extremely proud of its growth results, with Prime Minister Donald Tusk recently telling the Financial Times: “Who would have thought we would see the day when the Polish economy is talked about with greater respect than the German economy?”

But the comparison still works, not only because Poland and Greece have promised to shrink their deficits so quickly — Greece from an expected 12.7 and Poland from around 7 percent this year — but also because they are depending on growth forecasts that may Protesters march during a rally against the government's austerity  plans in Athensnot materialise. Both stories are also emblematic of a theme sweeping across Europe — an effort by governments to build confidence over fiscal consolidation plans in an uncertain recovery.

Mission not accomplished at central banks

U.S.  and Japanese monetary policy does not always move hand in glove, but meetings of  the countries’ respective central banks in the next few days are likely to spell out the same thing — that the job of economic recovery is by no means over.

It is almost a dead cert that the Federal Reserve will keep interest rates where they are and a high probability that it will renew its view that we can expect an “extended period” of  ”exceptionally low” rates. It is likely to stick to its plan to end purchases of around $1.7 trillion in assets. But it could well leave the door open for a renewal of purchases at a later date should economic expansion fall back.

The message: Mission not yet accomplished.

The Bank of Japan may prove even more dovish. It is under pressure to get even looser than it already is, most likely by increasing funds offered under its lending operation.  This is partly because of weakening price trends and worse fourth quarter growth than expected.

Unleashing the forces of Hellas

IMG_4640

Greece is a country that has always punched above its weight. Its population, after all, is barely more than Chad’s. But it has rarely grabbed as much attention as now with a debt crisis that has gone as far as having some people predict the downfall of the whole house of euro.

With this in mind, MacroScope has noted two thoughtful new posts on Greece and the underlying issues facing the euro zone.

 First, Willliam De Vijlder, chief investment officer at Fortis Investments,  is taking an economist’s joy at all the various conflicts surrounding the issue — from worries about moral hazard (setting bad precedent for others with a bailout) to income transfers versus economic incentives (German retirement has been raised to 67, Greeks can head for the beach from 55).

Are CDS markets the euro zone’s iceberg?

icebergIn an unfortunate turn of phrase at the height of his country’s current debt crisis, Greek Finance Minister George Papaconstantinou on Monday compared his government’s Herculean task in slashing deficits and debts as akin to changing the course of the Titanic. Sadly, we all know where the great “unsinkable” ended up almost a century ago and I’m sure,  given the chance, Mr Papaconstantinou would have chosen another metaphor. But if the Greek economy (or perhaps the euro zone at large?) is to be cast as the Titanic, then what is its potential iceberg?

For some euro politicians, look no further than the sovereign Credit Default Swaps market. France’s finance chief Christine Lagarde said as much last week when she questioned “the validity, solidity of CDSs on sovereign risk” and warned speculators to be careful as regulators took a “second look” at the market and European governments closed ranks. Lagarde, of course, is not alone.  You can be sure CDS are being examined long and hard by Spanish intelligence services investigating the “murky manoeuvres” in the debt markets.  But what is the exact charge against CDS?

CDS are ways to buy or sell insurance on the risk of debt defaults without needing to own the underlying bonds in the first place. It’s a way of hedging your debts, if you like, without having to go through the often more complicated game of selling securities short (or selling borrowed paper). In essence, it allows you to take a bet on default without having to go to the trouble of owning the bonds you’re insuring against.  Some critics, not unreasonably, would view this as the epitome of the casino capitalism that has elicited so much public outrage over the past three years . The fear is this market has become the tail wagging the dog.

Political economy and the euro

The reality of  ‘political economy’  is something that irritates many economists – the ”purists”, if you like. The political element is impossible to model;  it often flies in the face of  textbook economics;  and democratic decision-making and backroom horse trading can be notoriously difficult to predict and painfully slow.  And political economy is all pervasive in 2010 – Barack Obama’s proposals to rein in the banks is rooted in public outrage; reading China’s monetary and currency policies is like Kremlinology; capital curbs being introduced in Brazil and elsewhere aim to prevent market overshoot; and British budgetary policies are becoming the political football ahead of this spring’s UK election. The list is long, the outcomes uncertain, the market risk high.

But nowhere is this more apparent than in well-worn arguments over the validity and future of Europe’s single currency — the new milennium’s posterchild for political economy.

For many, the euro simply should never have happened –  it thumbed a nose at the belief that all things good come from free financial markets; it removed monetary safety valves for member countries out of sync with their bigger neighbours and put the cart before the horse with monetary union ahead of fiscal policy integration. But the sheer political determination to finish the European’s single market project, stop beggar-thy-neighbour currency devaluations and face down erratic currency trading meant the  currency was born and has thrived for 11 years.

Rapping with Hayek and Keynes

Gettin’ down with the dismal science

Step aside capitalism, how about leverageism

Our recent post on the End of Capitalism triggered much interest and comment.  There were plenty of diverse views, as one would expect. But one thread that came out was that what we are now seeing is not true capitalism (nor, of course, is it old-style communism). Ok, but what is it?

Anthony Conforti suggested in a comment that we need a name for what is happening,:

The first step in defining a new economic paradigm is coming up with the proper terms…new words to define a new economic environment. As words, “capitalism”, “communism”, “socialism” may now be inadequate to describe the emerging economic reality. We need new nomenclature. Any thoughts?