Europe and the World Post author By Philip Lane Post date October 8, 2014 IMF WEO here Martin Wolf on the Geneva Report here Mario Monti on public investment in Europe here Categories In Uncategorized 19 Comments on Europe and the World ← Ireland → 10-year bonds issued at 1.63% 19 replies on “Europe and the World” There is just no way that the current approach is going to work. If the Germans want their cheap currency compared to the level the DM would be at (ask Switzerland) they are going to have to cop on. Put Sinn and Jens out to pasture and get some realists in instead. Very interesting to see both Renzi and Monti speaking the same truth. Italy is not going be sacrificed for nothing. Interesting that the IMF is now talking about the risk of over aggressive austerity and public financed infrastructural projects. Are we starting to see an end to era of the neo-con. Entire government economic policy based around the debtors ledger and low taxes has nowhere to go. All governments owe money to the wealthy and they use this generally so that the interest and other capital earnings can be used so that that their rentier children can live off the rest of us. When the governments start cutting back on education, infrastructural investments, social housing etc. in order to ensure the “safety” of the wealthy bond holders and the income of rentiers living in Monaco then you get short and long term damage to the economy and increased unemployment. The main problem hanging over since the Lehman crash is that they saved everyone. So as soon as Janet turned on the helicopter they went straight back to the behaviour that led to Lehman. It would have been better for the system to burn the bondholders when Ireland was “bailed out”. Not because of Ireland but because it’s stupid to pretend they all know what they are doing. There is way too much dud speculation and it’s impossible for regulators to follow it to know where the risk is. QE plays right into the hands of speculators. And it’s not generating growth. Without growth a lot of debt is #$%^ed. The IMF suggests that the decline in growth started before the onset of the financial crisis: “Increasing evidence suggests that potential growth in advanced economies had started to decline before the crisis, and total factor productivity has been increasing at modest rates across all major advanced economies.” Mario Monti puts forward a sensible proposal while in the globalised world, Martin Wolf’s point about the connection between various bubbles is plausible. Franklin Delano Roosevelt, governor of New York and the Democratic candidate for president, said in a speech in May 1932: “The country needs and, unless I mistake its temper, the country demands bold, persistent experimentation. It is common sense to take a method and try it: If it fails, admit it frankly and try another. But above all, try something. The millions who are in want will not stand by silently forever while the things to satisfy their needs are within easy reach.” It took a long time to turn things around and a devastating war. An increasingly indebted American consumer and China’s huge appetite for commodities had a powerful impact in Asia, Australia, Africa and South America before the bust. Infrastructure can help if it’s well managed – but that is not easily achieved in areas like education and work skills. Japan has had big infrastructure investment, Nobel science winners and in recent times the printing press but it’s still struggling. So QE and so on should be tried but miracles are unlikely. The reemergence of China has been unique in scale and the US consumer, absent home equity release loans, is no longer able to bolster world demand alone. At least they got this much right: – Oh! You mean the Financial Crisis was (and is) actually a ‘symptom’ of some underlying problem? It sure is. “The IMF suggests that the decline in growth started before the onset of the financial crisis: “Increasing evidence suggests that potential growth in advanced economies had started to decline before the crisis, and total factor productivity has been increasing at modest rates across all major advanced economies.” You need to get the stats on the total investments (for exploration and production) of the major oil producers. If these are positive, then in 3-5 years there will be an improvement in global output, and oil prices will stabilize. Whereas if their long-term investments are reduced (being used for share buy-backs, etc.) then future oil production will decline and prices will escalate. The ‘bottom line’ is that 65% (or near enough) of all global economic activity is directly linked to the prevailing price of crude oil. So, any shift in that price has an immediate, and direct affect on global economic activity. From 2005 – 2008 crude rose from $50 bbl (I think) to over $130 (five years earlier long-term investment fir future production had declined significantly). That steady upward trend in crude price sure made one big dent in the ability of individuals, companies and states to deal with their escalating debt burdens. And is there any sign of improvement? Nope! Things are looking good for an even worse ‘crash’. Currently ‘crude’ is sub $90 bbl. If it stays there for an extended period – that’s a probability of 1.01 of significant price rises – 2016? And economic Rates-of-Growth heading into negative territory. Can you have ‘negative’ growth? Sure can! This needs very careful watching. BundesStagnations David, and what do the “experts” blame that for? “Das Rentenpaket und die Einführung des flächendeckenden Mindestlohns wirken wachstumshemmend”, teilen die Forscher mit. Die “Rentengeschenke der Bundesregierung” verhinderten eine Senkung des Rentenbeitrags. http://www.spiegel.de/wirtschaft/unternehmen/wirtschaft-in-deutschland-forscher-geben-merkel-schuld-an-abschwung-a-996233.html Sooo, when Germany does, what the rest of the world wants, deliberately stoking internal demand, by raising the income of those, who will spent it immediately, the “old poor”, and the “working poor” with the introduction of the universal minimum wage, the same “experts” then laments those measures as “wachstumshemmend” = “hampering growth” ????7 at non-present DOCM: the interesting thing might be, that the DIW was represented by some “Fichtner”, hinting to the posssible replacement of the proven intellectual failure Fratzscher @francis ‘internal demand’ for the EZ? What a wonderful idea …. btw: http://www.irisheconomy.ie/index.php/2014/10/04/shifting-tax-burden-and-investment-is-way-forward/#comment-1373268 p.s. Rumour that DOCM is being re-programmed at IfO Institute – couple of lines of dodgy keynesian code contamination … @ francis I made the point some time ago that there would be no change in the inflexible position of Schaeuble until the downturn came knocking at his door. This moment has now arrived. It is not that I think that the overall thrust of German economic policy is wrong. Alone among the major economies, Germany has kept a cool head. However, like a reed in the wind, some flexibility is necessary when the prevailing economic wind is blowing in the wrong direction. Professor Sinn does not understand this cf. (probably a bit dated!) http://www.cesifo-group.de/ifoHome/facts/Aktuelles-Stichwort/Topical-Terms-Archive/Strukturelles-Defizit.html I would recommend the link just posted by Stephen Kinsella to the article by Michael O’Sullivan in the Dublin Review of Books, especially this extract. “Against this backdrop, the Irish economy is beginning to recover, but there is also a sense that like the early 2000s it is the crucible for the spillovers of many of the forces acting on the world economy. It is unique it in that it has probably benefited from QE in the US, the priming of the UK economy by the Bank of England and now stimulus from the ECB. The risk is that it is now over-drugged, with little will or means to control the side-effects of what the large central banks are doing. In this context we have to question whether QE works at all from an economic point of view, whether it can cure the euro zone and what path will Ireland’s economy take in the next five years?” In short, the “luck of the Irish” appears to be holding, at least for the moment! Given the dependence of Ireland on trade with the UK and the US, it never made much sense to join the euro. But broader political considerations applied (as presently in the case of the countries of the former Eastern bloc). Robert Skidelsky on the general topic. http://www.theguardian.com/commentisfree/2014/oct/09/labour-george-osborne-recovery-coalition-cuts What is rather puzzling is the failure to recognise what appears to be rather obvious i.e. Osborne has not been doing what the Conservatives maintain he has been doing in terms of actually cutting government expenditure. This is also true of Ireland, the difference being, it would seem, that the government has had to borrow the money while the UK has simply printed it. To quote Mario Monti on abiding by the Stability Pact! “France did not even ask permission but simply announced that it would not comply. Italy chimed in that the EU should not dare to consider this an infringement.” What he fails to mention is that Italy under Renzi is not following the French example. http://www.ft.com/intl/cms/s/0/70668588-4f7c-11e4-a0a4-00144feab7de.html Hollande leads with his chin; once again! http://app.handelsblatt.com/politik/international/jugendarbeitslosigkeit-merkel-versagt-frankreich-mehr-eu-mittel/10812860.html DOCM, re Schauble’s cool head. It reminds me of Downfall but then everything from Germany does these days. Deflation is at the gates but the Krauts do no realise the game is up. Still I suppose they will fight to the last Italian. @docm “Given the dependence of Ireland on trade with the UK and the US, it never made much sense to join the euro. But broader political considerations applied (as presently in the case of the countries of the former Eastern bloc).” Comedic though the suggestion of an equivalence between the USSR and the UK is, you are quite correct. It is the EU that has come to resemble the USSR not the UK. The latest news from Berlin. Nothing new to report! http://www.lefigaro.fr/conjoncture/2014/10/10/20002-20141010ARTFIG00350-relance-en-europe-schuble-dit-nein-a-moscovici.php The most interesting element is the basic political error by all involved i.e. failing to avoid posing political choices in black and white terms. If things go well, Schaeuble will be vindicated. If not, he will be associated indelibly with a political miscalculation of historical proportions, The same holds for Italy! http://www.spiegel.de/international/europe/matteo-renzi-struggling-to-solve-italian-economic-crisis-a-995558.html @ francis Schaeuble may – finally – be becoming aware of the yawning historical pit facing him which may bury his reputation (if the revelations in the unauthorised Kohl biography do not do the job). He is not unlike the proud mother watching a graduating military class and declaiming “they are all out of step except my Johnny!” There is, in fact, no contradiction between the two reports. Schaeuble is speaking of increased investment by the private sector. This is a vain hope without official encouragement through public sector investment. Not that undertaking such in Germany will make much difference in economic terms but the political impact of doing so would be enormous. Kohl would never have allowed such a dialogue of the deaf to develop. My conviction is that things will now have to get worse – notably in relations between Paris in Berlin – before they get better. On the economy that is supposedly roaring ahead! http://www.ft.com/intl/cms/s/0/199bcc08-4e29-11e4-bfda-00144feab7de.html#axzz3FfzTGq6u Comments are closed.