Germany is the problem

I Do Not Think That Number Means What You Think It Means by Krugman

"What we see is that Italy is somewhat out of line — but the real standout is Germany, which has had much too little wage growth. And this in turn suggests that if we’re looking for the key to European problems, it lies in Germany’s beggar-they-neighbor relative wage deflation — which is indeed a point made by economists like Francesco Saraceno."

Labour Costs: Who is the Outlier? by Francesco Saraceno

Democrats, Rattner and financiers

I Do Not Think That Number Means What You Think It Means by Krugman

What we see is that Italy is somewhat out of line — but the real standout is Germany, which has had much too little wage growth. And this in turn suggests that if we’re looking for the key to European problems, it lies in Germany’s beggar-they-neighbor relative wage deflation — which is indeed a point made by economists like Francesco Saraceno.

Arithmetic Is Very Simple, But It's Still True by Dean Baker

Greece and Rosser

I disagree with Rosser's prediction.

from the NYTimes:

""Creditors are demanding that Greece run a primary surplus of 4.5 percent of gross domestic product. Mr. Varoufakis, however, said Athens would propose to hold the level to 1 percent to 1.5 percent of G.D.P.""

Greece

Europe’s Greek Test by Krugman

Greece’s Feisty Finance Minister Tries a More Moderate Message by Liz Alderman

D-Squared gets trolley on Syriza

Greek games and scenarios by Dan Davies

my response to D-squared and stevejohnson

Wolf Hall

Wolf Hall on Masterpiece Theater starts on April 5th, a week before Game of Thrones.

Tony® Award-winning actor Mark Rylance (Twelfth Night) and Emmy® and Golden Globe® Award-winner Damian Lewis (Homeland) star in the six-hour television miniseries adapted from Hilary Mantel’s best-selling Booker Prize-winning novels: Wolf Hall and its sequel, Bring Up the Bodies. The television event presents an intimate and provocative portrait of Thomas Cromwell, the brilliant and enigmatic consigliere to King Henry VIII, as he maneuvers the corridors of power at the Tudor court. MASTERPIECE brings both of these works to life in Wolf Hall, airing on Sundays, April 5-May 10, 2015 at the special time of 9:55pm on PBS. 

Mark Rylance is Thomas Cromwell, a brutal blacksmith’s son who rises from the ashes of personal disaster, and deftly picks his way through a court where ‘man is wolf to man.’ Damian Lewis is King Henry VIII, haunted by his brother’s premature death and obsessed with protecting the Tudor dynasty by securing his succession with a male heir to the throne. 

Told from Cromwell’s perspective, Wolf Hall follows the complex machinations and back room dealings of this pragmatic and accomplished power broker – from humble beginnings and with an enigmatic past – who must serve king and country while dealing with deadly political intrigue, Henry VIII’s tempestuous relationship with Anne Boleyn and the religious upheavals of the Protestant reformation. 

A historical drama for a modern audience, this unromanticized re-telling lifts the veil on the Tudor middle class and the internal struggles England faced on the brink of Reformation. At the center of it all is Cromwell, navigating the moral complexities that accompany the exercise of power, trapped between his desire to do what is right and his instinct to survive. 

The cast also includes Claire Foy (Little Dorrit) as the future queen Anne Boleyn, Bernard Hill (Five Days) as the king's military commander the Duke of Norfolk, Anton Lesser (Endeavour) as Thomas More, Mark Gatiss (Sherlock) as Cromwell’s rival advisor Stephen Gardiner, Joanne Whalley (The Borgias) as Henry’s spurned first wife, Katherine of Aragon, and Jonathan Pryce (Cranford) as Cardinal Wolsey, the powerful Lord Chancellor who recognized Cromwell’s potential.

Kevin Kline in Dave calls for full employment

Kyle Kinane

A ‘Scumbag’ Story: Kyle Kinane is the cult hero of stand-up comedy by JUSTIN HECKERT ON JANUARY 22, 2015

From my neck of the woods, western suburbs of Chicago then Chicago. Then he moved to Los Angeles eleven years ago when he was twenty-six.

Green Lanterns

If what they say is true, then the 1950s, 1960s and 1970s in the U.S., Europe and Japan wasn't possible. But it did happen so they are wrong.

O'Brien on ECB QE

The ECB takes out the bazooka: It’ll buy over 1 trillion euros of bonds to save Europe’s economy by Matt O'Brien

And finally, QE is a little bit of a bailout, but not in the way that Germany's afraid of. Think about it like this: When a country buys its own bonds with newly printed money, it doesn't have to pay interest on that debt anymore. Now it still does, but this is just an accounting fiction. It's moving money from your right hand to your left hand, and then back again to your right. That's because the government pays the central bank the interest that's owed on the bonds, but the central bank turns around and gives the government all the money it just got paid. 

As economist Paul De Grauwe points out, this wipes out each country's interest payments, so it's not as if Germany is bailing out everyone else. They're all bailing themselves out in equal measure. And this matters a lot for a country such as Italy, which would be running a surplus if not for all the interest it owes on its debt. Those payments, together with its still-shrinking economy, are why Italy's debt burden has actually increased despite all its austerity. QE will help this. 

But it might be too little too late. Or maybe too late too little. It's hard to tell in Europe.

Glanser on Nick Rowe, Friedman and Meade

Nick Rowe Goes Bonkers over Milton Friedman by David Glasner

In his 1977 Nobel Lecture, as Marcus Nunes informed us a few days ago, Meade explicitly advocated targeting nominal GDP writing as follows: 

I have told this particular story simply to make the point that the choice between fiscal action and monetary action must often depend upon basic policy issues which should certainly be the responsibility of the government rather than of any independent monetary authority. Perhaps the best compromise is an independent monetary authority charged so to manage the money supply and the market rate of interest as to maintain the growth of total money income on its 5-per-cent-per-annum target path, after taking into account whatever fiscal policies the government may adopt. 

So let me ask Nick the following: Was Meade right or left? And was he on the winning side or the losing side?

James E. Meade

"monetary socialism"

My new banner. I welcome the Green Lanterns' hatred.

Via Tony Yates

The best that is to be said for EZ QE is that will probably do no harm, and is worth a shot. Unless its labelling as ‘monetary socialism’ [Tweeted extract from German press, HT Mark Shieritz/Christian Odendahl] leads Northern politicians to redouble their opposition to good old fiscal ‘socialism’, which would, in fact, be a much better bet right now.

We prioritize fiscal policy but understand it's a fiscal-monetary mix. NGDP path level targeting will highlight the failures of Kaleckian Central Banks who are in no rush to tighten labor markets.

We don't view it as giving money to the financial sector. We consider it to be the euthanasia of the rentier. They ration credit as to keep labor markets loose and wages stagnant.

DeLong and QE

Morning Must-Read: Paul de Grauwe: Quantitative Easing and the Euro Zone: The Sad Consequences of the Fear of QE by DeLong

Over at Equitable Growth: From my perspective, QE has always seemed to me to be likely to be:

1. Very effective if it changes expectations of the future price level--that shakes rates rates of return significantly, and gives real people powerful incentives to spend their cash now.
2. But setting up QE in such a way that it changes expectations of the future price level is difficult: the problem is that QE transactions are easily undone in the future, and there is every reason to think that an inflation-targeting central bank will undo them in the future.
3. And if QE does not change expectations of the future price level its effects on real rates of return are minimal. READ MOAR

Think of it: for the ECB to buy €1 trillion of ten-year EU government bonds which have a term premium of 0.1%-point per year of duration means that the ECB takes duration risk off of private-sector balance sheets that the private market currently charges €10 billion/year to bear. It frees-up that risk-bearing capacity to be deployed elsewhere. In a €20 trillion/year Eurozone economy that is 0.05%. You can blather about financial accelerators and credit multipliers all you want, but it is a very uphill task to convince me that that is a big deal.

So why do it?

1. It is a small plus.
2. It might become part of a process that moves expectations and turns into a big plus.
3. There is nothing else politically practical on the agenda that might be done that QE takes attention away from.

The very sharp Paul de Grauwe:

Paul de Grauwe: Quantitative Easing and the Euro Zone: The Sad Consequences of the Fear of QE: "I see two reasons why the case for [Eurozone] QE is overwhelming...

...First, QE is merely a correction for... the last two years... [when] the ECB withdrew about €1 trillion out of the euro-zone economy.... Second, the euro-zone economy is not getting off the ground.... Since Milton Friedman we have all become monetarists. In order to raise inflation it will be necessary to increase the growth rate of the money stock. This requires that the ECB increase the money base. And to achieve the latter there is only one practical instrument, ie, an open-market purchase of government bonds.... But... QE... is necessary but not sufficient. The fact that it is not sufficient, however, should not lead to the conclusion that it can be dispensed with....

There is much misunderstanding and fear regarding QE, especially in Germany. There is the fear that... German taxpayers risk having to foot the bill.... [But] if... say the Italian government were to default... [it] would stop paying interest but at the same time (applying the 'juste retour') it would not get any interest refund... no fiscal transfers.... [Any] write down ]of] the Italian bonds... [would be] purely an accounting operation.... A central bank... does not need equity.... This confusion between accounting losses and real losses... has led to long hesitation to act... leads to bad ideas and wrong proposals...

Krugman on Swiss peg

Switzerland: QE Too
by Krugman

OK, arrived in Hong Kong, and IT is working a lot better. So let me weigh in a bit more on the Swiss miss. Basically, my take is the same as Brad DeLong’s: what we have here is a central bank that let itself be bullied by the balance sheet bugaboo brigade. 

The way to think about the franc peg, I’d argue, is to view currency intervention as essentially a form of quantitative easing. What we mean by QE is open-market operations in which the central bank buys stuff other than the usual purchases of short-term government debt. This could be long-term assets, it could be private-sector debt, or it could be foreign securities. Obviously the channels of influence depend to some extent on which route you choose, although remember that the Fed was accused of waging currency war when it was only purchasing domestic assets, and the main clear effect of Abenomics so far has run through the exchange rate. But the main point is to think of any kind of non-Treasury-bill open market operation as a form of QE. 

This in turn helps us put the explicit exchange rate target into the right slot: it was about making QE effective through commitment, so that you got the maximum impact on expectations. Actually, the success of the currency program suggests that other central banks might want to try things like setting a ceiling on some long-term interest rate. 

But back to Switzerland: they had a policy that was working, so why did they stop? And the answer, Brad and I both suspect, is that the SNB, like the Fed, faced constant pressure from finance types saying “Your balance sheet is too big! Debasement! Inflation! Unnatural monetary acts! Francisco d’Anconia!” But unlike the Fed, the SNB lacked the intellectual self-confidence (and perhaps the institutional strength, seeing as how it’s partially privately owned) to stand up to that pressure. 

The irony is that having been bullied into worrying about its own profitability, which is not what central banks should do, the SNB ended up imposing huge losses on itself. But that’s neither here nor there for Swiss national interests. The main thing is that the credibility essential to getting traction at the zero lower bound has been dissipated for Switzerland, and damaged for everyone else.

Expenditure changing versus expenditure switching

Expenditure Changing and Expenditure Switching policies

In an open economy setting, policymakers need to achieve two goals of macroeconomic stability, viz. internal and external balances. Internal balance is a state in which the economy is at its potential level of output, i.e., it maintains the full employment of a country’s resources and domestic price levels are stable.

External balance is attained when a country is running neither excessive current account deficit nor surplus (i.e., net exports are equal or close to zero). Attaining  internal and external balances requires two independent policy tools (also see Swan diagram). One is expenditure changing policy and the other is expenditure switching policy.

Expenditure changing policy aims to affect income and employment with the goal of equating domestic expenditure or absorption and production and takes  the form of fiscal or monetary policy. Expenditure switching is a macroeconomic policy that affects the composition of a country’s expenditure on foreign and domestic goods. More specifically it is a policy to balance a country’s current account by altering the composition of expenditures on foreign and domestic goods (see Balance of payments account). Not only does it affect current account balances, but it can influence total demand, and thereby the equilibrium output level.

more on the Swiss Peg

Switzerland drops its currency peg by James Hamilton

Reply to Tyler Cowen by Scott Sumner

Chaos in the Currency Markets by John Cassidy

Switzerland ends its peg fest

Sokrates and Friends in Davos, or, the SNB and the Berne Whale: The Honest Broker for the Week of January 18, 2014 by DeLong

If you do it they will believe by Scott Sumner

Felicia "Snoop" Pearson on The Wire

video of Snoop

Obama said his favorite character was Omar Little. Snoop and Bodie were good too. So many.

Robert Wisdom and The Wire coincidence

Yesterday I had this post about The Wire and Colvin's Hamsterdam.

Tonight, Robert Wisdom the actor who played Colvin was on SyFy's show 12 Monkeys. His character mentions a "Senator Royce" who of course shares a name with The Wire's Baltimore Mayor Royce.

Swiss, Baker versus Krugman

I think Dean Baker is wrong.

Paul Krugman and the Swiss Movement

Friday, 16 January 2015 06:01

It isn't often that I think Paul Krugman gets one wrong, but I think he wrongly attacks those chocolate loving cuckoo clock making Swiss in his column today. His complaint is that the Swiss central bank abandoned its commitment to keep down the value of the Swiss franc against the euro. Krugman sees this a failure of will, with the central bank giving up a commitment to pursue an inflationary policy. This is part of a larger saga of feckless central banks that continue to obsess about inflation when the real problem facing world economies is an inflation rate that is too low.

While the general point is right, it is hard to see how this story applies to Switzerland. Switzerland did not see the same sort of downturn as the rest of the OECD in 2008. Furthermore, it has fully recovered from its downturn with a GDP that is 8 percent above its pre-recession level and an unemployment rate of 3.5 percent.

In this context, it is actually doing what we should want Switzerland to do as a good world citizen. By allowing its currency to rise, it will make its goods and services less competitive internationally. This means it will import more from its trading partners and export less, effectively providing them with an economic boost. This is what we should want to see. The countries that are at or near full employment should be running larger trade deficits or smaller surpluses.

So give the Swiss a gold star. They called this one right. (Now if we can get them to talk to China ....)