Martin Wolf: The Shifts and the Shocks

Martin Wolf’s new book is reviewed here by The Economist;  here by Ken Rogoff; and here by Joe Stiglitz.

45 replies on “Martin Wolf: The Shifts and the Shocks”

Ken Rogoff notes in his review, a point too infrequently made, that currently-fashionable calls for public investment in ‘infrastructure’ can be a signal for money-wasters of all stripes to roll out schemes for loss-making boondoggle bridges-to-nowhere (not his precise words).

An increased current deficit can be preferable to a capital programme stimulus if the project selection is bad enough. In the most recent chatter, the EU Commission would be doing the project selection.

DOCM: The EU Commission’s wish-list has already been revealed (several different versions) and does not mention roads in Ireland.

The odd pork barrel project is not where the real risk is

“There are three difficulties. First, there is no sound basis for deciding how much capital is enough. Second, as the Bank of England’s Andy Haldane notes , “tail risk within the financial system is not determined by God but by man”. It is profitable to take risks whose upside accrues to oneself and whose downside accrues to others. So the safer regulators try to make the system, the more risk it can take on. Finally, it is easy to create the desired risk via regulatory arbitrage. That is precisely what the “shadow banking system” did.

This discussion makes two fundamental points. The first is that to make anything close to the present system less unsafe requires radical changes in the rules. Tighter supervision is not enough. Incentives must change fundamentally. The second is that a financial system in which intermediaries assume risks on their own books is inherently unstable. It is too likely that they will make the same mistakes together, thereby creating a panic and threatening the system, with devastating economic consequences. This is the Achilles heel of market economies. We have been warned. For battered high-income countries, it will be the flood next time.”

@ CMcC

No surprises there, given that the centre of gravity of the EU has shifted!

However, the Commission proposes. It does not decide. It is up to each country to fight its corner. The shambolic approach to road planning hitherto in Ireland does not help. There are, nevertheless, easily identifiable gaps in the motorway network (not, relatively speaking, that costly to fill).

Martin Wolf’s concise description of contemporary banking:

‘The business model of contemporary banking has been this: employ as much implicitly or explicitly guaranteed debt as possible; employ as little equity as one can; promise a high return on equity; link bonuses to the achievement of this return target in the short term; ensure that as few as possible of those rewards are clawed back in the event of catastrophe; and become rich. This was a wonderful model for banks. For everybody else, it was a disaster.’

@ TL


The fundamental problem for Draghi and other central bankers is that they are trying to carry out a major refit on a system which must continue to operate while they are doing it. If banks could find profitable SME investments, they would undoubtedly lend. But these will not materialise until there is a general restoration of mutual confidence across the board; government, banks and business.

Of course one could also open more pubs ….

As for the pubs which closed in Charleville yesterday …


Hibernian serfs of the financial system … the most screwed in the western universe but we still find time to dump on our own … Seven_of_9 has gone home! Hard to blame her …

Ken Rogoff provides a comprehensive analysis and certainly Germany could have been more pro-active in the early period of the crisis, but given the engrained attitudes illustrated by the hostility of the two German members of the ECB’s governing council to limited sovereign bond-buying in the secondary markets, it’s unlikely that Angela Merkel would have changed the dynamic if she had moved ahead of the national consensus.

Prof Rogoff’s analysis is interesting as he looks at the microeconomics of issues rather than accepting the macroeconomic mantras on imbalances and as I have said myself, Italy in particular was hit by Chinese competition in areas such as footwear while the euro area as a whole gains from German demand in China.

In July, German exports hit a record high – did it take markets from countries like France and Italy who would have otherwise won? It does also have a high euro area import bill.

79% of Germany’s trade surplus in 2013 was with 5 non-euro countries + France and Austria

Times change and an economy like Finland with strong public finances and among the best small economies in the world in which to do business – it is tops in competitiveness and innovation – is going to shrink for a third straight year in 2014.

The Internet has resulted in a fall in demand for newsprint while Nokia was destroyed by the smartphone.

It will have to retool – who else would do what it can only do itself?

Last week John FitzGerald raised the issue of Ireland’s dependency on FDI and my own estimate is that about 40 American companies are responsible for 75% of headline exports.

We may achieve the highest growth in the euro area this year but the microeconomics suggest that we will be among the poorest in the single currency area.

The idiot/ eejit’s guide to distorted Irish national economic data

@Colm McCarthy

“An increased current deficit can be preferable to a capital programme stimulus if the project selection is bad enough. In the most recent chatter, the EU Commission would be doing the project selection.”

There is no shortage of a requirement for much needed investment, about 30,000 houses badly needed. Despite unemployed building workers, lots of land, ultra cheap money and demand why is it that we cannot get ‘our’ act together?

Why must the ‘developers’ borrow the capital from banks unwilling to lend. Why not simply have the State (OPW) contract out the building of private dwellings at tendered prices, providing tranches of finance based on architects sign off, as is the case with major contractors.

We don’t need to build roads to nowhere. We need to build housing in the right places, but even that seems to be beyond our competence.

Alan Aherne opened in his interview on Morning Ireland last week with the opinion ‘one has to conclude that something has gone horribly wrong with the housing market in Ireland’ !!!! This statement a full six years, (maybe 12 years?) after something went ‘horribly, horribly’ wrong with the housing market in Ireland.

We need a Minister for Housing to being some level of coordination and planning to national housing planning and development.
[ And if for no other reason than to put a name and a face on the incompetence of successful administrations.]

@ Michael

Re the internet

“The computer and other digital-age innovations have certainly changed how we communicate, work, and shop. However as new businesses have evolved based on these technologies, they tend not to hire huge numbers of people, in comparison to previous transformative technologies (such as the automobile). As Tyler Cowen wrote in The Great Stagnation:
Most Web activities do not generate jobs and revenue at the rate of past technological breakthroughs. When Ford and General Motors were growing in the early part of the twentieth century, they created millions of jobs and helped build Detroit into a top-tier U.S. city. Today Facebook creates a lot of voyeuristic pleasure, but the company does not employ many people and has not done much for Palo Alto; a lot of “work” is performed more or less automatically by the software and the servers. You could say that the real work is done by its users, in their spare time and as a form of leisure.40
In 2013 Apple had about 80,000 employees worldwide, Google (in its own standalone business, not including Motorola and other subsidiaries) around 40,000, and Facebook about 4,600.41 In early 2014, Facebook purchased WhatsApp, a mobile-messaging company that has fifty-five employees, for $19 billion. In fact, the computer, smart phone, and advanced robotics appear to destroy plenty of jobs (by replacing people directly or by assisting the offshoring of businesses) and many of the jobs directly created by their production are in other countries. Mass electronic retailers are also exhibiting a strong potential to generate a net loss of jobs. “According to a recent study of U.S. Census data by the Institute for Local Self-Reliance, in Washington, brick-and-mortar retailers employ forty-seven people for every ten million dollars in revenue earned; Amazon employs fourteen.”42 A University of Oxford study has estimated that, with the combination of advances in artificial intelligence and mobile robots, approximately half of all U.S. jobs could be at risk over the next few decades”


Isn’t the main point that if a state can borrow for free and the multiplier is high enough (as in a balance sheet recession), that it is difficult to waste investment or to make a “loss”. As long as the project provides plentiful employment it will achieves its goal of fiscal stimulus. Long term usefulness is an added benefit.

And does the risk of poor project selection occur with any form of investment, in any period of time? If we were always so concerned about poor project selection, we would never invest in anything or never undertake any form of long term planning. Aqueducts or railways would never have been built and publicly funded, long-term, scientific research would never get off the ground.

The Economist and Prospect reviews both pick holes in Wolf’s argument but seem to assume economic growth can revert to the mean at some stage. What’s going to drive that ? Debt isn’t.

@ seafóid

General Motors had about 620,000 employed in the US in 1979 – in well-paid jobs; today, General Electric employs 134,000 and Apple 50,000.

GM employs about 80,000 today in US.

The majority of Apple’s US staff who work in the retail stores and support are poorly paid.

Average pay in the stores is $25,000.

@ bwt

Even if debt is free, in a low inflation period, it has to be paid back while the jobs are temporary.

There is no point in funding public research for the short-term.

The US traditionally has long-term research goals such as defense and health – blue sky research is rare.


the text in your first FT link

“Germany’s growth threatened by creaking transport network”

starts with

“Chris Scott, director of Claridon, a British international logistics company with an office in Düsseldorf, rates Germany’s roads the best in Europe.
“I wish we had their network in the UK,” Mr Scott said. “It’s very well connected.”

Since that is the results of that “huge investment gap” of 40% GDP, according to this Peterson institute Fratzscher, temporarily residing in the DIW.

I say, we cut it further, since that produces so obviously so magnificient results : – )

In about 95% of cases (gut feeling) I look at, why are some guys best in something, do we understand it, can we copy something,

the best are NOT the guys who throw the most money at a particular issue.

European PISA scores Finland

German PISA scores Saxony, even after accounting for each and every other excuse (foreigner fraction, shoe size of the school minister)


railroads were privately funded initially.

What do we know, how the water from the aquaeducts was sold in Rome?
Does anybody have a cost-benefit calculation ?

Sooo, how can you claim “would have never been built?

In Germany public water and sewer systems were and are run profitably.

And the low interest rates in Japan, long before their bubble peak in 1990, was what did them in.

Because you forget the maintenance costs for typically more public invest like roads, channels (Rhein-Main-Donau as the last of that kind in Germany comes to mind)

and that machines age and especially become less competitive every year.

Queisser 1985 Kristallene Krisen, BMW Kuenheim ” I awake every morning feeling the hot breath of the asians in my neck”

There was real fear, that Japan would just out-invest, out-research, out compete us.

Aaaand, where are we now?

In hindsight, that we had to pinch the penny after reunification, was good, because it made us also ask in every corner, why do we pay so much, can’t get this cheaper AND better.

Sooo, I hope JohnTheOptimist fulfils his dream of Scottish independence and then even gains energy for his next struggle ……

Irish Reunification


The German and the French finance ministers are in agreement! And have agreed a joint document to record the fact!

Now, that is real news!

I was unable to access the Stiglitz review, but I managed (just about) to wade through Rogoff – jeeze the man is awfully wordy, and the Economist piece. Now are we all on the same hymn sheet here? This crisis has its origins way, way back. Right? Not according to those two reviews I read.

I would have put the genesis of this crisis back as far as 1800 – sort of like a slow-burning fuse, which gently gathered speed, igniting a few intermediate charges along the way, before exploding beneath us in 2007/8. Like, its a bit more complex than a bunch of crazy bankers, loopy regulators and potty politicians running amok, and all. Right?

Now, I fancy that the thing is somewhat political. Might not the nature and workings of elective politics in different countries (US, UK and IRL), and their respective civil administrations, have contributed significantly to the rise and rise of financialization and “barge economics: like, for example the steady erosion of financial regulations, off-shoring and out-sourcing to low-cost locations? Now I always though Land was an immobile factor of production. But “barge economics” changed all that. Now its Labour what is immobile. Well, immobile enough to to actually matter. I blame the InterNet 🙂

I think we need to nail this crisis tail where it rightly belongs: on the arses of our elected politicians. Perhaps some useful idiot economists were also involved. But it was (and is) politicians who make, and implement the policies.

The principle causal process of this (and all previous financial crashes, both big and small) is our economic paradigm. We insist that our economies must ‘grow’ and ‘grow’ and ‘grow’. All economies – irrespective of their political or social structures shall be McDonaldized. Differences be damned. It shall be the same pap wherever you go.

Now all economic activity takes place in a closed system mind. And the principle motive power of our economic paradigm are carbonaceous fuels – which are allegedly finite. I hear a lot of chatter about ‘Green technologies’ and ‘Renewables’. But, on close inspection they do not pass the Feynman Sniff Test. Some other time.

The alternate term for economic growth is of course, consumption. We have to consume, consume and consume. We are the new Demanders! That’s terrific, that is. But we do need some disposable income to do that. Right? So, the story goes (or went) as follows.

Chapt. 1: Demanders (aka. consumers), demanded little and used surplus cash to satisfy demands.

Chapt. 2: Demanders were ‘encouraged’ to demand more and were offered some credit (on strict terms, you understand) to supplement their surplus cash.

Chapt. 3: Demanders were ‘brainwashed’ to demand even more and more and were offered credit by the truckload: but someone mentioned something about stagnating wages – whatever that means.

Chapt. 4: Demanders reported being somewhat ‘tuckered out’ on credit. They were getting severe indigestion from debt: masticating credit causes it to ferment into debt. Forms solid curdles in the intestine. Rennies were prescribed but have proved quite ineffectual. Enemas would be effective, but have been ruled out on religious grounds.

Chapt. 5 Things go kinda pear-shaped. The ‘growth’ train has slowed down. Lots of steam all over the place. Visibility very poor.

… to be continued.

Rumour had it, that more credit will be available shortly.

Nighty, night!

Mariana Mazzucato, Sectoral Economist, interviewed by Steve Paikin of TVO. One bright and articulate woman.

About the video:
It’s a familiar trope: the private sector’s risk-loving venture capitalist stands in contrast to the public sector’s risk avoiding bureaucrat. Author and economist Mariana Mazzucato says this isn’t always the case. She says the public sector often provides funding for high risk and uncertain investments, while the private sector merely takes a back seat and reaps the benefits. She joins Steve Paikin for more.
Published on: September 08, 2014 | Length: 23:10 | Views: 291
| This video is available


“The problem is that modern interlocked economies do not do dramatic pirouettes.”

That is why tail risk is such a bitch


Rogoff was disappointing. Didn’t talk about the weaknesses of the system.
The Economist was quite fluffy, really.

Financial incentives are hugely problematic. Heads I win tails you lose.
And regulators are moving from a light touch approach to trying to understand how the system actually works without p***ing anyone off

That means changing the way they think about finance pro- from solid citizens to this when TSHTF

“Officials in the Federal Reserve and elsewhere are working on additional regulatory levers that could help trim risks in financial markets – by controlling margin requirements on transactions or introducing exit fees to reduce the danger of stampedes from bond funds – but their thinking remains in its infancy. “This is very much frontier territory,” says Mr Nier”


It looks very fragile even if you value climate change at 0 and think there is a growth driver out there.

A poll conducted by Ipsos and published in Corriere della Sera on Sunday, found that almost two thirds of Italians supported Matteo Renzi, Italy’s prime minister – a 3% increase since July.

However, just 42% said they supported Renzi’s plans to boost economic growth, with 46% expressing negative views. The poll found that 42% supported his reform of public administration and 48% expressed positive views about his school reform.

Mario Monti, former prime minister, said in an interview at an economics forum last weekend that Italy is still embroiled in a financial crisis – but one that is insufficiently severe to convince the public that reforms are urgently needed.

“The acute emergency that we now have in the real economy, and in the employment situation, is there. It bites deeply into society,” Monti told CNBC.

@ Brian Woods Snr.

The modern economy has some similarities with a Ponzi scheme but with no growth, those with sharp elbows get the biggest slices of the pie.

As for starting your grim tale in 1800, we had some discussion in the past on Rev Thomas Malthus and I guess he was familiar with the fable of Jesus multiplying loaves and fishes – but that was a once-off event.

A saviour of more recent vintage was named Norman Borlaug (1914-2009), an American who developed successive generations of wheat varieties with broad and stable disease resistance, broad adaptation to growing conditions across many degrees of latitude, and with exceedingly high yield potential.

According to an Indian academic, in 1964-68 Indian farmers increased wheat production in four years by an order greater than that achieved during the preceding 4,000 years, thanks to Borlaug.

A miracle surely 😯

@ MH-ff: “A miracle surely.” Yes, Nature is indeed like that. You just have to be real careful not to ‘push-your-luck’ though. Now, if we could be as innovatively innovative in creating new sources of fresh water – ex nihilo, you understand: I’d be genuinely impressed.

Its a common mistake that the Rev. M was mistaken: he was not, and will not be. Unfortunate fellow was just a bit previous. We won’t be around to witness it. Nature is never fooled by PR propaganda. But folk surely are.


@ Micky Hickey: Madam can really put the words together. Curiously, she does not ref. Monica Prasad’s 2006 work in the PDF version of the book. No matter. Oliver Twist keeps coming back to me. That rich kid going up with his bowl to beg for more. He was promptly told where to stuff it. Very ironic that. Observant fellow our Charlie.

Perhaps some future historian of Political Economy will read and analyze all the books that have been/are being/will be, written about our Great Financial Crisis and will solemnly conclude (its always solemn) – that the majority, whilst displaying an ostensible diversity, simply conceal an arid, imitative uniformity – whilst a few (usually neglected) did manage to drill down beneath the overburdening dross and brought up pay-dirt.

“Stand Ye therefore, steadfastly beneath the Light; though the Truth be hidden Beyond in the Darkness.”

@ Michael

“According to an Indian academic, in 1964-68 Indian farmers increased wheat production in four years by an order greater than that achieved during the preceding 4,000 years, thanks to Borlaug.”

There is, of course, no such thing as a free thali.

“Today some 18 countries, containing half the world’s people, are overpumping their aquifers. Among these are the big three grain producers – China, India and the US – and several other populous countries, including Iran, Pakistan and Mexico.

In India, whose population is growing by 15 million per year, irrigation depends heavily on underground water. And since there are no restrictions on well drilling, farmers have drilled more than 21 million irrigation wells and are pumping vast amounts of underground water.
In this global epicenter of well drilling, pumps powered by heavily subsidised electricity are dropping water tables at an alarming rate. Among the states most affected are Punjab, Haryana, Rajasthan, and Gujarat in the north and Tamil Nadu in the south. In North Gujarat the water table is falling by 20 feet per year. In Tamil Nadu, a state of 72 million people, water tables are falling everywhere. Kuppannan Palanisami of Tamil Nadu Agricultural University noted in 2004 that 95% of the wells owned by small farmers have dried up, reducing the irrigated area in the state by half over the preceding decade.
India’s grain harvest has been expanding rapidly in recent years, but in part for the wrong reason, namely massive overpumping. A World Bank study estimates that 15% of India’s food supply is produced by mining groundwater. Stated otherwise, 175 million Indians are now fed with grain produced with the unsustainable use of water. As early as 2004, Fred Pearce reported in New Scientist that “half of India’s traditional hand-dug wells and millions of shallower tube wells have already dried up, bringing a spate of suicides among those who rely on them. Electricity blackouts are reaching epidemic proportions in states where half of the electricity is used to pump water from depths of up to a kilometer.”
As India’s water tables fall, larger farmers are using modified oil-drilling technology to reach water, going as deep as 1,000 feet in some locations. In communities where underground water sources have dried up entirely, all agriculture is now rain-fed and drinking water must be trucked in. Tushaar Shah of the International Water Management Institute says of India’s water situation: “When the balloon bursts, untold anarchy will be the lot of rural India.””


“risk-free” assets

military intelligence
Fianna Fail’s economic competence
contractionary expansion
business ethics

I just wonder how the land would lie if volatility on the VIX went back to say 40

Re: this piece PR rubbish from yesterday. ““Government has ‘broken boom bust cycle’, Howlin says”

Perhaps the full statement should properly read; “[This] government has ‘broken boom bust cycle’,” – and we know, ‘cus its on Twitter. So, there!”

How about this instead – or perhaps its just too far above their pay grades;

“The business cycle exists only as a tendency which in conjunction with what we call more or less vaguely ‘secular trend’, ‘structural changes’, etc., creates the extremely complex dynamic process we observe in the real world.”

[Michal Kalecki: ‘A Theory of the Business Cycle’, in ‘Essays in the Theory of Economic Fluctuations’, p116; 1938]

“Sound man, Brendan!”

Interesting viewpoint.

Dr Karin Kneissl is Austrian.

Financial journalist Lars Schall talks with energy expert Dr. Karin Kneissl about the crisis in the Ukraine, and more specifically, inter alia, about the economic sanctions put in play, the overestimated energy market in Europe, the future of the South Stream pipeline, the geopolitics in Eurasia, and the pricing of energy products in currencies other than the US dollar.

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