Tuesday, November 29, 2011

The Simple Logic of Fiscal Discipline

One of the main arguments used against fiscal discipline during a crisis is that it would make the fiscal situation worse. You don't need to think too hard to know that this is the leftist equivalent of the rightist Laffer curve argument for growth. Daniel Gros kills cartoonish-Keynesian dreams with a shot of cold logic:

So what should governments do? Abandon austerity because financial markets might be shortsighted? This would only delay the day of reckoning as debt ratios would increase in the long run.

  • A country which enters a period of heightened risk aversion with a large debt overhang faces only bad choices.
  • Implementing credible austerity plans constitutes the lesser evil, even if this aggravates the cyclical downturn in the short.

All in all, the conclusion is that it difficult to argue that the peripheral countries in the Eurozone should abandon attempts to reduce their deficits because the results will arrive only in the long run.

Tuesday, November 22, 2011

Overstating the Financial Sector Contribution to the Economy

Haldane and Madoures summarize their research in this VoxEU.org post. As expected, it's not only the real estate industry that was artificially inflating the potential output of many countries, the financial sector was overstating the real size of the economy too. As they conclude:
If risk-making were a value-adding activity, Russian roulette players would contribute disproportionately to global welfare. And if government subsidies were the route to improved well-being, today’s growth problems could be solved at a stroke. Typically, this is not the way societies keep score. But it was those very misconceptions which caused the measured contribution of the financial sector to be over-estimated ahead of the crisis.

Friday, November 18, 2011

The Link Between Monetary Policy and Fiscal Transfers in the Eurozone

This VoxEU.org article by Hans-Werner Sinn presents an interesting perspective on the role of the ECB throughout the crisis, and how fiscal transfers have in fact been taking place through the monetary channel:
Because the printing presses in the periphery are still running at full speed, the Bundesbank has had to turn its own presses into shredding machines in order to destroy the money that has flooded in from the South. Since September, the Bundesbank has given no net credit to the German banking system; it instead borrows from it. After deducting the deposit facility, the net refinancing of credit the Bundesbank gave to German banks is now negative.

The Carnival of the Inconsequential

The carnival of the inconsequential: they know what's wrong with society, but what they know about society is wrong. Jeffrey Sachs however likes it...

US National Debt About to Cross the 100% of GDP Mark

According to the U.S. National Debt Clock it's at 99.9% and rising right now. Last time was during World War II. Meanwhile, the Super Committee discusses the sex of the angels.

Wednesday, November 16, 2011

The Last Bastion of Central Bank Independence

What you won't read on the WSJ, the FT and The Economist: investors are awaking for the fact that sovereign debt isn't as risk free as they thought it is. The fact that it's showing up in the weaker and more indebted economies in Europe is solely related to the fact that these countries cannot manipulate their currency, because they abide by the only independent central bank remaining in the world. This transforms them in the earliest victims of the trend.

So much better for them, at least they are being forced to do their homework before it's not too late, and they may be the first to get out of the next wave of troubles: the slow but inevitable worldwide rise of sovereign debt nominal rates.

At the core of the current mess is the fact that countries shouldn't have ever got used to the idea that financing their excessive spending at nominal rates of 3% or less is sustainable. The carnival will end for all at some point, through financial constraints (as it's happening in Europe) or through inflationary revenues (as it will surely happen in most of the rest of the world).

I hope that in the process the last bastion of central bank independence, the European Central Bank, doesn't fall. The world will sorely need a benchmark when the tide changes.

Monday, November 14, 2011

Laibson's Sensible Financial Tips

Economist David Laibson from Harvard gives sensible financial tips that go against conventional wisdom in this CNN Money article. Here's one that markets appear to be ignoring: obsess about dangers ahead, not about past dangers:

Q: The overseas markets have been hammered by the potential collapse of European debt and accounting scandals in Asia. Why put more money in these markets?

A: It is true that as we get further away from well-regulated markets, international investing becomes a problem. I recommend buying publicly traded securities only in well-regulated markets. And the bad news about Europe is already priced into securities.

Have Piracy and Digital Distribution Reduced Music Quality?

According to research by economist Joel Waldfogel, the answer is "no":
While the traditional purveyors of recorded music – the major record labels – have suffered since Napster, good music has continued to make its way to market. Independent labels account for a growing share of successful music, measured both by critical acclaim and sales. While many producers of recorded music have been made worse off by changes in technology, there is no evidence that the volume of high-quality music, or consumers, have suffered.

Sunday, November 13, 2011

How Urban Infrastructure in France Allowed me to Make Economically Efficient Lifestyle Changes

After a rough transition settling down in France, I find myself finally able to enjoy again some fine HBO productions. And the process of accessing them involved significant technological and lifestyle changes. First, following the same parsimonious principles that led us to get rid of car ownership in our household (we rent when needed, and this is proving to be a highly profitable move), we chose to not have a large TV set and instead to use movie theaters and computers for video entertainment. This was another winning strategy: we've been enjoying more time out, and the reduction of personal clutter and waste at home is really significant.

What is more interesting however is how French urban infrastructure allowed me to engage in these lifestyle changes very efficiently. Not just because of generally good mass transportation systems, but also because of the way digital content is distributed in the country. My entire digital subscription comes from Orange, an obvious choice since it broadcasts most HBO series in France, besides offering an even better lineup of movies than HBO does. It offers me high-speed urban ADSL (much faster than the ADSL service that I had in the rural-like conditions of Minnesota), and in some buildings the system is being upgraded to jaw-dropping fast optical fiber.

Through the ADSL line I get three services together: high-speed Internet, unlimited domestic and international phone calls, and digital video subscription (live and on demand based on the Netflix unlimited downloads model). The three services together, including content from HBO and other English and Portuguese language channels, cost me only about US$79. I'm paying less than half the value that I was paying for lower service in the US, and don't forget that the euro is overappreciated despite the "euro crisis" chattering.

But the most important benefit is the flexibility that the service offers me. The on-demand content is excellent and we can watch it in our computers and Android phones (Apple devices not allowed - Apple policy is to enslave its users to the iTunes Shop). It means that I can for example watch the latest episode of "Boardwalk Empire" on my high-def Android screen using high-quality in-ear headphones while I ride the subway back home. By the way, I'll later post on "Boardwalk Empire" and "Game of Thrones." For now I'll just say that HBO did it again with both series.

Friday, November 11, 2011

The Pervasiveness of Agency Problems in Financial Markets

A WSJ article by Mike Mayo gives some interesting personal insights on the pervasiveness of agency problems in financial markets. Here's an example:
Other companies limited my access to senior executives. An analyst without access to executives—and the one-on-one insights that investors often pay for—can be perceived to be at a disadvantage compared to his or her peers. Goldman Sachs was fairly up front about it, a rarity in the industry. I had recently initiated coverage on the firm, so I had few established relationships I could leverage. When I told one point of contact at the company that I'd like to have more meetings with management, he told me that the firm wasn't singling me out—they treated everyone that way. When I pushed a little harder for a meeting, I received a message that we needed to "have a conversation."

Feeling like a student being reprimanded by a teacher, I was told that the most efficient use of management's time was for the executives to generate money for the firm instead of talking to the 20 or so analysts covering the company. An analyst like me would simply have to be patient. While I could live with this—to a degree—the gatekeeper added one more point: A consideration in granting analysts meetings with management of Goldman Sachs was the analyst's standing, influence and knowledge. "In other words," the gatekeeper added, "we evaluate you."
What is obvious is that there is no simple solution to these agency problems, as long as there is excessive concentration of financial power in financial markets. Regulation and central banks have typically reinforced concentration. I always believed that financial markets needed regulatory frameworks that promote above all competition, regional and political decentralization, and smaller scales, but since Alexander Hamilton (or maybe the Medici?) the world has taken the opposite direction. And nothing that has been done by current governments has changed this trend.

Wednesday, November 9, 2011

John Taylor on America's Decline as a Hegemon

John Taylor, sharp as usual:
"As the U.S. has moved away from the principles of economic freedom—instead promoting short-term fiscal and monetary interventionism with more federal government regulations—its leadership has declined. Some, even in the U.S., may cheer the decline, but it is not good for the world or for the U.S."

Tuesday, November 8, 2011