EUCOM Economic Analysis - Part I

[Firn]

Terrible economic news from Spain

En trminos anuales, el PIB ya est en terreno negativo (-0,5%). Segn los servicios de estudios privados, esa comparacin anual llegar a superar el -2% a lo largo de 2012. Es la segunda recesin que sufre la economa espaola en poco ms de tres aos, aunque en 2009, despus del colapso internacional, la cada fue ms pronunciada (-3,7%).

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Spain needs all but more austerity and is as a state completely different case from Greece as the former was always fiscally very conserative and had a very low public debt (although high private one).

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By the way, I managed to buy stock in Repsol a bit over a week ago only to open up the homepage of El Pais with dear Kirchner trumpeting out the nationalicaton of YPF. Arguably the best timing ever, even if the stock price already had in my view priced in that state robbery.

La battalla que Argentina s gan

Clearly I did not expect this man,Axel Kiciloff to have such an influence on Kirchner which ironically profited personally along with her former husband by the privatisation of YPF. Then again I should not have invested with such exposure to persons cooking the books.

Good luck with foreign investment after things like that

El documento describe con detalle los momentos de tensión que rodearon la toma de control de la compañía por parte de las autoridades argentinas, el pasado lunes. “Mientras estaba todavía hablando la presidenta [Fernández de] Kirchner, presentando la Ley de Utilidad Pública, el ministro [Julio] de Vido, el viceministro [Axel] Kicillof y otras personalidades acompañadas de agentes de seguridad armados, penetraron por la fuerza en la sede bonaerense de YPF y expulsaron, con violencia física y amenazas, a los 15 ejecutivos españoles presentes, tras concederles solamente cinco minutos para recoger sus pertenencias personales”

Antes del asalto, agrega la nota, “las fuerzas de seguridad había cortado todas las comunicaciones de la sede de YPF por teléfono, móviles o Internet. Posteriormente, algunos de los expulsados fueron buscados por las fuerzas de seguridad y duramente interrogados en el intento de encontrar argumentos contra Repsol. Los españoles y sus familias, visiblemente conmocionados y asustados, se refugiaron en la residencia del director de Repsol para Argentina hasta su repatriación”..

Not only they carry not the biggest stick, they even speak loudly and insult. This is of course not going down well in Spain but neither in the US or the EU. I just can not believe the sheer chutzpah under the personal lead of a minister and a vice-minister...

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A very interesting piece:

Fed watch

All of this is one more reason to prefer the NGDP path target promoted by Scott Sumner and his merry Market Monetarists. It might prove difficult in practice to target inflation without paying some especial attention to wage growth. But a central bank can target the path of aggregate expenditure without playing favorites about who pays what to whom. Simple neutrality by the central bank in the contest between capital and labor would be a huge improvement over the status quo.

Note that even if the central bank is no longer playing "favorites", monetary policy would still have a distributional impact. For example, reverting to the pre-recession path of nominal spending would likely entail a temporarily higher rate of inflation than currently expected. And higher than expected inflation will indeed create some winners and losers:

However, the biggest losers are creditors who are almost by definition wealthy, since people owe them money. If a creditor has lent out $100 million at 2 percent interest (e.g. buying a 10-year U.S. or German government bond) and the inflation rate rises from 2 percent to 4 percent, this creditor has lost an amount equal to 100 percent of his expected income or 2 percent of his wealth. This is a far larger loss than any worker could experience as a result of this increase in the inflation rate.

Who would be the winners?

Also, most workers are debtors to some extent. They are likely to have mortgage debt, credit care debt, student loan debt and or car debt. A higher rate of inflation means that they can repay this debt in money that is worth less than the money they borrowed.

And once again, we get to the same place - changing monetary policy at this juncture would likely have significant impacts on the distribution of income and wealth. And an unwillingness to alter this current distribution is likely another reason we would not expect the Federal Reserve to change their basic policy framework away from the current 2 percent inflation target regime.