EUCOM Economic Analysis - Part I

[Surferbeetle]

Lot's of excellent links to read of late here on this thread

Been thinking about the importance of inculcating 'sustainable values' regarding privilege & responsibility while reading the Joseph Rowntree Foundation piece on Regional Government in France & Spain by Andy Smith and Dr Paul Heywood. The diffusion of power, while still maintaining a hand on the reins, is one of the themes that I see in the work...1789, 1905 & 1917, 1989, and the Arab Spring are arguably examples to keep in the back of one's mind while reading. Along those lines Dr. Charles Tripp's A History of Iraq, although strictly outside of our geographic area of concern but a trading partner nonetheless, is another very interesting and adroit analysis of power.

Just 20 some pages into the well written Banca D'Italia piece Convergence among Italian Regions 1861-2011 by Giovanni Iuzzolino, Guido Pellegrini, and Gianfranco Viesti, but it brought to mind David Blackbourn's The Conquest of Nature (Water, Landscape, and the Making of Modern Germany) and the FT Article about NRW (North Rhine Westphalia) Strengths and Location Help Cope with Change, By James Wilson on September 26th 2012....which leads to the Initiative Neue Soziale MarktWirtschaft website and a report on the Bundeslander

http://www.insm.de/en/

The initiative wants to renew the social market economy of Ludwig Erhard and adjust it to globalization, demographic change and the knowledge society. The INSM stands for a social system of freedom and responsibility.

http://www.bundeslaenderranking.de

Im Auftrag von Initiative Neue Soziale Marktwirtschaft (INSM) und WirtschaftsWoche haben Wissenschaftler alle 16 Bundeslnder untersucht: Wo stehen sie, was Arbeitsmarkt, Soziales, Wirtschaft und Wohlstand angeht? Rund 100 Einzelindikatoren gehen in diese Studie ein, die in diesem Jahr zum zehnten Mal vorliegt. Das Dynamik-Ranking bildet ab, wie sich die Bundeslnder in der Zeit von 2008 bis 2011 entwickelt haben Das Bestands-Ranking vergleicht den Ist-Zustand – also das absolute Niveau. Die INSM und die WirtschaftsWoche lassen diese Studie durchfhren, weil sie damit einen Beitrag zum fderalen Wettbewerb zwischen den Bundeslndern leisten wollen. Diese Webseite ermglicht es, auch Einzelindikatoren wie Arbeitslosenquote, Bruttoinlandsprodukt, Einwohnerentwicklung und Kitabetreuungsquote anschaulich gegenberzustellen. Den wissenschaftlichen Endbericht zu dieser Studie und Informationen fr die Presse finden Sie hier.

So...how does one operationalize all of this information (and soon to be knowledge) into success in the market? Here's one of many toolkits: FT Guide, Understanding Finance (A No-Nonsense Companion to Financial Tools and Techniques) 2nd Edition by Javier Estrada

Time to fire up another cup of coffee...

______________

This article, although well written, is not as enjoyable....perhaps a datapoint to consider for later in the day.

Eine unsichtbare Mauer teilt Marseille, International Samstag, 22. September 2012, NZZ, http://www.nzz.ch/aktuell/internatio...lle-1.17634697

Von einem «Bandenkrieg» im Norden von Marseille war im Fernsehen die Rede. Der fast 70-jährige Taxifahrer, der sich «Monsieur Josi» nennt, lacht nicht auf die Frage, wo es denn zur «Front» gehe. Er schimpft über die Polizei, die nie dort sei, wo man sie brauche. Er bestätigt gern, dass es da ein paar «cités» (Hochhaussiedlungen mit Sozialwohnungen) gebe, wo er auch am Tag nicht gern und nachts «ganz sicher nicht» hinfahre. Er sei nicht der Einzige. Auch Ärzte, Sozialhelfer, die Feuerwehr und selbst die Polizei mieden diese Gegend. Merkwürdigerweise fehlen auf dem vom Fremdenverkehrsamt abgegebenen Stadtplan diese Quartiere, als wollte man ihre Existenz leugnen.

In einem Interview mit der Lokalzeitung «La Provence» hat die Senatorin darum den Einsatz der Armee angefordert und so Schlagzeilen gemacht. Die Militärs sollten die Dealer entwaffnen und den Zugang zu diesen «Supermärkten des Drogenhandels» blockieren. «Ohne Nachfrage kein Angebot», lautet Ghalis Logik zur Bekämpfung dieser Schattenwirtschaft. Zudem meint sie weiterhin, es wäre nur billig, den Kunden mit Sanktionen zu drohen.

«C'est compliqué»

«Soll ich dir etwa die zweite Panzerdivision schicken?», habe der französische Innenminister, Ghalis sozialistischer Parteikollege Manuel Valls, sie am Telefon spitz gefragt. Die Provokation sei ihr jedenfalls gelungen, und das sei natürlich auch der Zweck der Übung gewesen, gesteht sie im Nachhinein mit unverhohlener Genugtuung. Seit ihrem Aufschrei der Empörung über die eskalierende Gewalt wird die 44-jährige dunkelhaarige Frau mit ihrem feurigen Blick zu Fernseh-Talkshows eingeladen und interviewt.

[Firn]

As I have written elsewhere I have greatly increased my time spent reading textbooks - just a bit like in the old uni days - reducing the time spent online quite a bit. There are wonderful ressources out there but it is much more difficult to retain focus and to get a high return on your invested time. A slightly more capital-intensive approach goes a long way to increase your productivity. So in the end what are 30 € spent on a good textbook? Now my student self would have disagreed about that, but the older one gets the greater is the value of time. Posts like this do of course take some time but in general I think it is good to have this kind of diverse stimulation.

The graphs of Armut und Reichtum capture very important trends which have been of all the Western World most radical in the US. The great wealth and quality of living of the Western world is related with little doubt to long term inclusive economic and political institutions intertwined with technological ( in its widest economic sense) progress and free trade. Increasing economic inequality increases the potential risks for the society as a whole.

P.S: Wages of Destruction is a brilliant book about the German (war) economy which did help me to fit many strands of thought into a far more rich whole. There would be so much to say and write about this book but time is limited. However it does show just how important a free flow of ressources, capital and technology is for our modern economy.

In short the disparity of available ressources before and during the war in key areas was indeed shocking, with the British empire having better cards even in its darkest hours the most imagined. To does weaken to a great extent a good deal of the arguments of Why the allies won while lending more weight to a couple. In the end "sheer weight of material strength" is not far off the mark as the key distinguishing factor.

(If you have grown up in a market economy such books are very helpful to keep the perspective. In this specific case it did greatly support my already strong belief for free, global markets, especially in certain sectors of the economy. In the European context, as Fuchs put it, it is important to conserve and even strenghten the good sides of the EU while trying hard to lessen the negative impact of a policy like the common currency.)

P.P.S: I dislike the graphs of that Quaderno, they should have really put a bit more effort into them. The job on the text itself has been far better. To some extent poor graphics are a wide spread problem in Italy.

[Surferbeetle]

In light of the estimated €136.2 billion in EU exports to China and €292.5 billion in imports (EU Commission Trade with China, http://ec.europa.eu/trade/creating-o...untries/china/ ) I appreciated the recent recommendation here on SWJ regarding Barry Naughton's textbook The Chinese Economy, Transitions & Growth.
__________________

Eigenes Budget für die Eurozone geplant, Von HENDRIK KAFSACK, BRÜSSEL, 03.10.2012, FAZ, http://www.faz.net/aktuell/wirtschaf...-11912554.html

Mitte Oktober treffen sich die EU-Staats- und Regierungschefs in Brüssel. Nach Informationen der F.A.Z. soll der Euroraum künftig mit einem eigenen Budget ausgestattet werden. Welches Volumen er haben und aus welchen Quellen er gespeist werden soll, ist unklar.

In der Bundesregierung dürfte das Papier trotz seiner weitreichenden Vorschläge weitgehend auf positive Resonanz stoßen. Die Schaffung eines eigenen Budgets für den Euroraum sei auf jeden Fall besser als die von Deutschland abgelehnte Vergemeinschaftung der Schulden der Eurostaaten durch sogenannte Eurobonds, hieß es in Diplomatenkreisen. Mit einem eigenen Budget könne man gezielt Anreize setzen - etwa durch die Finanzierung von Arbeitslosenprogrammen - und die Staaten so zu Reformen bewegen. Das sei mit den Mitteln des EU-Haushalts nicht möglich, weil diese in der Regel an keine Bedingungen geknüpft seien. Die EU soll zwar künftig Defizitsündern Strukturhilfen streichen können, wenn sie sich nicht an die Vorgaben der Kommission halten. Das ist aber nur als Ausnahmeregelung gedacht.

Bruxelles lance le débat sur la nécessité d'un outil budgétaire pour la zone euro, Par Anne Bauer | 03/10 | 20:54, Les Echos, http://www.lesechos.fr/economie-poli...uro-368796.php

Le président du Conseil européen Herman Van Rompuy, chargé de dessiner l'avenir de l'union économique et monétaire, veut interroger les capitales sur l'éventuel lancement d'un outil budgétaire dédié à la zone euro et destiné soit à amortir les chocs conjoncturels, soit à renforcer les réformes structurelles.

C'est pourquoi, faute d'avancée à moyen terme sur les euro-obligations, le Conseil Européen demande aux Etats d'étudier la possibilité de se doter d'un outil budgétaire, qui pourrait renforcer à la fois la solidarité financière entre les Etats membres mais aussi leur intégration économique. Paris et Berlin mènent des travaux exploratoires. Mais pas dans la même direction. Pour Paris, un tel budget pourrait servir à amortir les chocs conjoncturels, notamment sur le plan social. Le ministre de l'économie Pierre Moscovici avait ainsi évoqué l'éventuel lancement d'un fonds européen d'assurance chômage lors d'une rencontre à l'Institut Bruegel. Pour Berlin, un outil budgétaire commun devrait plutôt encourager les Etats, grâce à des incitations financières limitées dans le temps, à mettre en oeuvre des réformes structurelles difficiles afin d'accroître la compétitivité des pays les plus faibles de la zone euro. Ainsi les recommandations annuelles faites par la Commission Européenne dans le cadre de la nouvelle gouvernance économique pourrait être traduite en engagements contractuels.

Faut-il créer une capacité budgétaire pour accompagner la monnaie unique ? Pour quoi faire ? Et avec quels moyens ? Voilà les questions dont il faut débattre, explique la diplomatie bruxelloise. Du côté des moyens, aucune piste n'émerge encore. Dans un contexte de crise économique, il est difficile d'imaginer les Etats abonder un budget bis de l'eurozone à côté du budget de l'Union Européenne qui représente environ 1% du PIB des Vingt-sept Etats membres. Au minimum, peut-on imaginer que le Mécanisme européen de stabilité financière (MESF), outil créé en 2010 au début de la crise grecque pour permettre à la Commission Européenne de lever de l'argent grâce à sa propre signature, soit reconduit après 2013, année de son expiration. L'actuel MESF est plafonné à 60 milliards d'euros, qu'il peut lever grâce à la garantie du budget européen, et il a servi aux plans d'aides pour l'Irlande, le Portugal et la Grèce.

[Fuchs]

@Firn:

Don't try to beat the market per se. It's too unlikely to be based on anything but chance. Most people fool themselves about their skill in investment.

I suggest to instead limit yourself to avoid stupidities (such as participating in a recognised bubble for anything but entertainment).

My experience told me that microeconomics -not the stuff taught in textbooks, but still the kind of thinking- is very useful for spotting losers in the market.


My classic example for this is a agricultural product processing company I once knew very well. It made no profit, and its owner lived off the reputation of having said company rather than of the company itself (he attracted research funds this way).
The small factory could not make profit because it was in a double loser sandwich: It had inferior market power in both its relations with suppliers (farmers who could easily grow something else, but the processing plant could only process one crop) and customers (who did use a synthetic perfect substitute and thus really didn't need his product at all).
He had only one shot at making profit; deceive both suppliers and customers about his break even, thus tricking them into better conditions. It was too late for that, though.
Ever since, I have found many other companies with a consistently poor performance that could easily be explained with the double loser sandwich explanation. Even start-ups, and rising stars with high "valuation" at the market (which inevitably folds, of course).

Other example:

Recently, I saw an advertisement by the local football club; ~"Passion pays good interest." It was for a five-year bond at a fixed interest rate.
The interest rate could be blacked, and I could still tell you this bond is a poor deal.
Reasoning: Either the management is good at financial matters and did set the interest rate "correctly" OR it is incompetent at it and not to be trusted with your money.
Furthermore, if said management did set the correct interest rat, it did so including the assumption that lots of cash owners have sympathy for the football club and are willing to buy bonds at a lower interest rate than otherwise.
As a conclusion, the management is either not to be trusted or the interest rate is too low for investment (= does not include a proper risk premium).
See? I did not even need to take the interest rate into account. It did not matter.
You can wade through 100+ page corporate reports and learn nothing of value from all its figures and graphics, or you can simply look at the company's market position and learn a lot about it.


Now feel free to assume whether I fool myself about my skill in investment.

[Firn]

@Fuchs: Actually it is good to remind other people of the base rate and just how difficult it is to beat for a long time the market. Thinking, Fast and Slow, which might the best book I have read in the last couple of years has some great chapters about Investing which fit nicely in his overall framework. It is worth to note that in he talks mostly about "helpers", as Buffet called them.

All in all the book reinforced my personal approach to the markets founded on Ben Graham and Warren Buffet. I do just a little stock picket for the lack of time but use mostly broad index fonds and try very hard to avoid serious erros and high fees. In Kahnemans sense I try to use the hard facts, like the screening tests developed by Graham as a base and anchor. This rigid and disciplined approach gets slightly modified by my personal thoughts.

Not perfect but the last seven years I did greatly outperfom the Eurozone market, with the Eurostoxx 50 as benchmark, into which I invested by far the greatest share. Recently I have payed a bit more attention to other markets.

So all in all I could fool myself a lot, however so far the facts are facts and as I seem to have science on my sight I hope there is casual link between my investing and my return. I agree in any case on bonds by football clubs.

[Surferbeetle]

IMF Won’t Disburse Greek Loan If Debt Not Sustainable, By Sandrine Rastello on October 04, 2012, Bloomberg Businessweek, http://www.businessweek.com/news/201...ot-sustainable

The International Monetary Fund won’t disburse its share of the Greek bailout if the country’s debt is not deemed sustainable or if other creditors don’t pledge to fill a financing gap in the aid package, a fund spokesman said.

IMF Managing Director Christine Lagarde last week warned that the level of Greek debt would have “to be addressed,” pushing European policy makers to consider writing off some of the aid to the country. While the fund is sticking to a target of 120 percent of gross domestic product by 2020, the Greek government forecast this week that the general government debt will climb to 179.3 percent of GDP in 2013.

While Greek Prime Minister Antonis Samaras said yesterday the ECB should consider rolling over Greek debt, the ECB has shown no desire to contribute. ECB President Mario Draghi yesterday rejected the suggestion the central bank would participate in any further restructuring of Greek government bonds.

Samaras Says Greece Like Post-World War I Weimar Republic, By Alan Crawford - Oct 5, 2012 3:21 AM MT, Bloomberg News, http://www.bloomberg.com/news/2012-1...-republic.html

“Greek democracy stands before what is perhaps its greatest challenge,” Samaras said in an interview with German newspaper Handelsblatt published today, saying that Greeks’ living standards have plunged by more than a third in five years. The cohesion of Greek society is “endangered by rising unemployment, just as it was toward the end of the Weimar Republic in Germany.”

Just as the 1919-1933 Weimar years were marked by running battles between Communists and fascists, society at large in Greece today is threatened by extreme left-wing populists and “something that’s new to this country: the rise of an extreme right, you could almost say fascist, neo-Nazi party,” he said.

Griechischer Ex-Politiker nimmt sich das Leben, 04.10.2012, 21:46 Uhr, Handelsblatt, http://www.handelsblatt.com/politik/...n/7216858.html

Die Medien stellten den Tod Tzannis' in einen Zusammenhang mit Geldwäschevorwürfen. Der Name des früheren Staatssekretärs war vor kurzem auf einer Liste von Politikern aufgetaucht, die in Geldwäscheaffären verwickelt sein sollen.

Im September hatten Medien Listen mit 36 Namen von Politikern veröffentlicht, die Steuern hinterzogen oder Geld gewaschen haben sollen. Die griechische Regierung forderte die Justiz des Landes auf, die Gerüchte über die angebliche Verwicklung von Politikern umgehend aufzuklären. Unter den Verdächtigen sind ehemalige Minister, zahlreiche Parlamentsabgeordnete und der Chef einer kleinen Partei.

Die Listen sollen aus dem Amt zur Bekämpfung von Finanzdelikten SDOE stammen und an die Presse durchgesickert sein. Die Behörde prüft zurzeit, ob diese Politiker tatsächlich Steuern hinterzogen oder sich illegal bereichert haben. Harte Fakten über diese Fälle wurden jedoch bislang nicht veröffentlicht.

Encore deux semaines de discussions entre la Grèce et la troïka, 06/10 | 18:15, Les Echos, http://www.lesechos.fr/economie-poli...ika-369741.php

Deux semaines de discussions seront encore probablement nécessaires pour parvenir à un accord entre la Grèce et la troïka de ses bailleurs de fonds internationaux sur de nouvelles mesures d'austérité, a déclaré samedi un responsable grec.

Merkel reist nach Athen, 05.10.2012, FAZ, http://www.faz.net/aktuell/wirtschaf...-11914701.html

Erstmals seit dem Ausbruch der Griechenland-Krise vor drei Jahren reist die Kanzlerin nach Athen. Sie will sich dort am Dienstag mit Griechenlands Ministerpräsident treffen.

Bassnectar - Pennywise Tribute, http://www.youtube.com/watch?v=GtrwN-Cxor8

[Surferbeetle]

One Europe, Many Tribes, By Peter Coy on September 19, 2012, Businessweek, http://www.businessweek.com/articles...many-tribes#p1

Italy, unified in 1870, is newer than Nevada. Spain was split down the middle by a civil war as recently as the 1930s. And reunited Germany, dating back only to 1990, is younger than two of the Jonas Brothers. Just a reminder that, for all their claims to antiquity, many of the nations of Europe have been nations for only the briefest of times. For most of history they were rivalrous territories, kingdoms, duchies, principalities, and city-states. They were bound by language and culture—and riven by tribalism.

As Europe’s financial crisis drags on, the tribes have returned with a vengeance. It’s not just Greece vs. Germany. Today it’s Sicily vs. Lombardy, Berlin vs. Bavaria, Andalusia vs. Catalonia. Keep this in mind as optimists point to the successes of the campaign for “more Europe,” such as the European Central Bank’s agreement on Sept. 6 to support the bonds of hard-pressed countries that comply with deficit reduction agreements. Europe is boiling over with regional grievances. Money is the issue—who gives it and who gets it. The 1999 launch of the euro has forced an unwanted intimacy on Europeans in flagrant disregard for Robert Frost’s poetic dictum: “Good fences make good neighbors.” And the euro entices separatists to strike out on their own, figuring even small nations can survive if they share a currency. (Malta, a euro-zone nation, has fewer people than Dublin or Dresden.)

Insurance, From Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/Insurance

Insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount to be charged for a certain amount of insurance coverage is called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.

Insurance involves pooling funds from many insured entities (known as exposures) to pay for the losses that some may incur. The insured entities are therefore protected from risk for a fee, with the fee being dependent upon the frequency and severity of the event occurring. In order to be insurable, the risk insured against must meet certain characteristics in order to be an insurable risk. Insurance is a commercial enterprise and a major part of the financial services industry, but individual entities can also self-insure through saving money for possible future losses.[1]

Risk management, From Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/Risk_management

Risk management is the identification, assessment, and prioritization of risks (defined in ISO 31000 as the effect of uncertainty on objectives, whether positive or negative) followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events[1] or to maximize the realization of opportunities.

[ganulv]

IMF Won’t Disburse Greek Loan If Debt Not Sustainable, By Sandrine Rastello on October 04, 2012, Bloomberg Businessweek, http://www.businessweek.com/news/201...ot-sustainable

who is actually of the belief that the Greek debt is sustainable?

[Fuchs]

who is actually of the belief that the Greek debt is sustainable?

Countries have gone through more extreme challenges. The problem isn't so much the theoretical ability as it is that paying back the debt makes no sense.
I expected for years that the Greek government merely wants to buy time to prepare Greece for a mode of operation in which the Greeks have defaulted entirely and get no new credit.

It appears that they are serious about muddling through instead.
Their problem is probably the EU. They could default, but non-Greek courts could rule against them and that would automatically be effective in Greece as well. A 100% default would probably require Greece to drop a lot of European integration. Right now, it also requires them to offend the governments who helped them.
They dug deeper and deeper...

[ganulv]

Countries have gone through more extreme challenges.

Most of the residents weren’t living off the fat the way post-Athens Games Greeks were, though. ‘Unrealistic expectations’ is just another way of saying ‘fantasies.’

[Surferbeetle]

who is actually of the belief that the Greek debt is sustainable?

Short answer seems to be extend and pretend while waiting for individual leaders to rise who are able to overcome (gravity) failed institutions and an entrenched culture of mismanagement. There are some IMF Debt Sustainability Analysis reports that are circulating on the interwebs (21 Feb 2012 and 11 March 2012) with both baseline and less favorable scenario's showing debt in excess of 100% of GDP through 2020. They are sitting on some important geography, however, that should not be discounted when 'running the numbers'

The Greatest Man That Ever Lived - Weezer & Warren Miller, http://www.youtube.com/watch?v=zLvR5NiCPb0

That Greek debt sustainability analysis in full, Kate Mackenzie, Feb 21 08:49, FT Alphaville, http://ftalphaville.ft.com/2012/02/2...lysis-in-full/

Relentless austerity will only deepen Greek woes, By Wolfgang Mnchau, October 7, 2012 8:15 pm, Financial Times, www.ft.com

Samaras vows to fight Greek corruption, By Kerin Hope in Athens, 30 September 2012, Financial Times, www.ft.com

Debate Over Whereabouts of a List Highlight Greek Political Divide, By RACHEL DONADIO, Published: October 8, 2012, IHT/NYT, http://www.nytimes.com/2012/10/09/wo...ef=global-home

Port of Piraeus, From Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/Port_of_Piraeus

Port of Thessaloniki, From Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/Port_of_Thessaloniki

Leviathan gas field, From Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/Leviathan_gas_field

[Surferbeetle]

Fresh electrons from Tokyo via the IMF

World Economic Outlook (WEO), Coping with High Debt and Sluggish Growth, October 2012, http://www.imf.org/external/pubs/ft/...2/pdf/text.pdf

A number of assumptions have been adopted for the projections presented in the World Economic Outlook. It has been assumed that real effective exchange rates remained constant at their average levels during July 30–August 27, 2012, except for the currencies participating in the European exchange rate mechanism II (ERM II), which are assumed to have remained constant in nominal terms relative to the euro; that established policies of national authorities will be maintained (for specific assumptions about fiscal and monetary policies for selected economies, see Box A1 in the Statistical Appendix); that the average price of oil will be $106.18 a barrel in 2012 and $105.10 a barrel in 2013 and will remain unchanged in real terms over the medium term; that the six-month London interbank offered rate (LIBOR) on U.S. dollar deposits will average 0.7 percent in 2012 and 0.6 percent in 2013; that the three-month euro deposit rate will average 0.6 percent in 2012 and 0.2 percent in 2013; and that the six-month Japanese yen deposit rate will yield on average 0.4 percent in 2012 and 0.3 percent in 2013. These are, of course, working hypotheses rather than forecasts, and the uncertainties surrounding them add to the margin of error that would in any event be involved in the projections. The estimates and projections are based on statistical information available through mid-September 2012.

The forces at work are, for the most part, familiar.

Those forces pulling growth down in advanced economies are fiscal consolidation and a still-weak financial system. In most countries, fiscal consolidation is proceeding according to plan. While this consolidation is needed, there is no question that it is weighing on demand, and the evidence increasingly suggests that, in the current environment, the fiscal multipliers are large. The financial system is still not functioning efficiently. In many countries, banks are still weak, and their positions are made worse by low growth. As a result, many borrowers still face tight borrowing conditions.

The main force pulling growth up is accommodative monetary policy. Central banks continue not only to maintain very low policy rates, but also to experiment with programs aimed at decreasing rates in particular markets, at helping particular categories of borrowers, or at helping financial intermediation in general.

Turning to policy action, the main focus continues to be the euro area. Here, there has been a clear change in attitudes, and a new architecture is being put in place. The lessons of the past few years are now clear. Euro area countries can be hit by strong, country-specific, adverse shocks. Weak banks can considerably amplify the adverse effects of such shocks. And, if it looks like the sovereign itself might be in trouble, sovereign-bank interactions can further worsen the outcome.

Therefore a new architecture must aim at reducing the amplitude of the shocks in the first place— at putting in place a system of transfers to soften the effects of the shocks. That architecture must aim at moving the supervision, the resolution, and the recapitalization processes for banks to the euro area level. It must decrease the probability of default by sovereigns, and were default nevertheless to occur, it must decrease the effects on creditors and on the inancial system. It is good to see these issues being seriously explored and to see some of these mechanisms being slowly put together.

In the short term, however, more immediate measures are needed. Spain and Italy must follow through with adjustment plans that reestablish competitiveness and fiscal balance and maintain growth. To do so, they must be able to recapital- ize their banks without adding to their sovereign debt. And they must be able to borrow at reason- able rates. Most of these pieces are falling into place, and if the complex puzzle can be rapidly completed, one can reasonably hope that the worst might be behind us.

[Surferbeetle]

Britain Rethinks Its Opposition to a Two-Tier Europe, By STEPHEN CASTLE, Published: October 8, 2012, NYT, http://www.nytimes.com/2012/10/09/bu...ted=1&src=recg

Despite its long ambivalence toward European integration and its refusal to adopt the euro, Britain has usually demanded a seat at Europe’s top table. And the country has resisted moves to relegate it to an outer, more detached tier as a status not befitting a global power.

But with Britain struggling to emerge from recession and Mr. Cameron under domestic political pressure to distance his country from Europe’s financial problems, he is now willing to let Britain take a back seat in the European Union.

Under plans now being discussed in Brussels, the 17 European Union nations that use the euro could have their own budget, allowing them to make big transfers of cash to help ease the type of economic pain now being felt in Greece and Spain. They might even have their own separate parliament, to make the system more accountable.

Talks on the next European Union budget are expected to culminate in November when European leaders will try to agree on a spending ceiling for the 2014-2020 period.

The European Commission, the bloc’s executive branch, has proposed a figure of up to 1.03 trillion euros, or $1.34 trillion, for all 27 nations. That compares with a ceiling of 975 billion euros for the current seven-year period. The proposed figure, though, is almost certain to be negotiated downward. With the Continent engaged in country-by-country cuts in national budgets, Britain has led calls for curbs.

Germany sees political integration as the quid pro quo for supporting weaker euro zone nations like Spain. France, since the inception of the single currency, has tried to build up separate euro zone structures, partly because, when a large country like Britain is not present, French influence is greater.

No one is sure how a euro zone-specific budget would operate. It might be financed at least in part by adopting a tax on stock trades and other financial transactions. France and Germany support such a tax. Britain, where London’s global financial hub is a big part of the national economy, opposes the idea of a transaction tax.

Britain also thinks the two-tier idea could save it money. As one of the biggest net contributors to the bloc’s budget — £7.4 billion, or $11.9 billion, last year, according to the British treasury — Britain has long complained that it does not get its money’s worth from participating in the European Union. The country has long chafed, for example, at the fact that it receives far less in farm subsidies from the bloc than France does.

To compensate for the imbalance, Britain receives a rebate on its contribution. But previous budget talks have bogged down over British demands for a big reduction in farm spending — and counterdemands from France that London surrender its rebate.

Britain hopes that, under a two-tier budget approach, the euro zone would assume much of the economic regeneration work undertaken by the current European Union budget, making life cheaper for the “outs.”

[Firn]

I took a look at the World Economic Outlook (WEO) - October 2012 thanks to the Economists view.


Antonio Fatas and Ilian Mihov on the Global Economy
have a good blog entry about a facet of the report:

Underestimating Fiscal Policy Multipliers

The October edition of the IMF World Economic Outlook is out with very strong warnings about risks to growth (full report can be found at the IMF web site). In Chapter 1 there is a nice analysis about whether in our most recent growth forecasts we have recently underestimated fiscal policy multipliers. Quoting from that chapter:

"With many economies in fiscal consolidation mode, a debate has been raging about the size of fiscal multipliers. The smaller the multipliers, the less costly the fiscal consolidation. At the same time, activity has disappointed in a number of economies undertaking fiscal consolidation. So a natural question is whether the negative short-term effects of fiscal cutbacks have been larger than expected because fiscal multipliers were underestimated."

And the answer is yes and here is my reading of what has happened. About eleven years ago there was a series of academic papers that estimated fiscal policy multipliers. The conclusion of the earlier papers is that multipliers were somewhere in the range 1-1.5. In other words, a 1% increase in government spending raised GDP by somewhere between 1% and 1.5%. This was the conclusion I reached together with my co-author back in 2001 (paper is available at my web site). This was also the conclusion of the paper written by Oliver Blanchard and Roberto Perotti written around the same time and available here.

...

This is what the IMF suggests now in their analysis, which, by the way, is also self critical. They look at their recent forecasts for global growth and they suggest that their model was implicitly using fiscal policy multipliers around 0.5 when measuring the impact of fiscal consolidation. Given that their GDP growth forecast has been overestimating growth, the IMF now wonders whether multipliers are higher than 0.5. The analysis in the current World Economic Outlook suggests that multipliers might be within the range 0.9 to 1.7. A range which happens to be very almost identical to the one produced by the early papers and confirmed by the most recent academic literature. It is also not far from what most economic models would predict given current economic conditions.

Note the vast implications of the vast differences between 0.5 and a range of 0.9 to 1.7, a multiplicator range of roughly 2x to 3x of what they used in their models. Shocking and to think that we already had the models with a more realistic factor for such circumstances, not least in my uni textbook makes it so much harder to stomach. That it was written by Gregory Mankiw, current advisor of Romney! makes the issue even more troubling.

So in this case, just like in most other ones, in the long run Keynes was right

[Surferbeetle]

Firn,

This past week has been most interesting, appreciate your comments on the high level debate regarding the advice of Keynes and Hayek (unfortunately not Salma ) and indirectly, Kant. Congratulations are in order regarding the Nobel Peace Prize for the EU, the fruits of democracy peace theory in action it would seem.

Dusted off my Macroeconomics by N. Gregory Mankiw (6th edition) and reviewed the chapter on the Mundell - Fleming Model and the two equations used to describe a 'small open economy with perfect capital mobility':

Y = C(Y-T) + I(r*) + G + NX(e) aka the IS portion of the IS-LM Model

M/P=L(r*, Y) aka the LM portion of the IS-LM Model

This helped to refresh my understanding regarding how the variable G (Government Spending) impacts the variable Y (Aggregate Income).

IMF Economists Olivier Blanchard and Daniel Leigh seem to started a bit of a firestorm with their observations regarding the observed ranges of fiscal multipliers versus what theory suggests. We will see how this shakes out...

...in the meantime I am attempting to use the IMF report to find mispriced/misvalued sectors (and equities within them) of the global economy.

By the way, as a committed political independent, is it just me or do both US candidates seem to be heavily committed to keynesian stimulus measures? (ARRA vs DoD)
_________________________

John Maynard Keynes, From Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/John_Maynard_Keynes

Salma Hayek, From Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/Salma_Hayek

Nobel Committee Gives Peace Prize to European Union, By ALAN COWELL and NICHOLAS KULISH, Published: October 12, 2012, NYT, http://www.nytimes.com/2012/10/13/wo...l?pagewanted=1

Democratic peace theory, From Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/Democratic_peace_theory

Mundell–Fleming model, From Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/Mundell–Fleming_model

IS/LM model, From Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/IS/LM_model

Fiscal multiplier, From Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/Fiscal_multiplier

Government Spending Equation, From Wikipedia the free encyclopedia
http://en.wikipedia.org/wiki/Fiscal_...nding_Equation

Olivier Blanchard, From Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/Olivier_Blanchard

Daniel Leigh, IMF Bio, http://www.imf.org/external/np/cv/Au...spx?AuthID=154

World Economic outlook october 2012, IMF, Box 1.1, Page 47 of the pdf, http://www.imf.org/external/pubs/ft/...2/pdf/text.pdf,

With many economies in fiscal consolidation mode, a debate has been raging about the size of fiscal multipliers. The smaller the multipliers, the less costly the fiscal consolidation. At the same time, activity has disappointed in a number of economies undertaking fiscal consolidation. So a natural question is whether the negative short-term effects of fiscal cutbacks have been larger than expected because fiscal multipliers were underestimated.

This box sheds light on these issues using international evidence. The main finding, based on data for 28 economies, is that the multipliers used in generat- ing growth forecasts have been systematically too low since the start of the Great Recession, by 0.4 to 1.2, depending on the forecast source and the specifics of the estimation approach. Informal evidence suggests that the multipliers implicitly used to generate these forecasts are about 0.5. So actual multipliers may be higher, in the range of 0.9 to 1.7.

Robustness of IMF data scrutinised, By Chris Giles in London, Last updated: October 12, 2012 11:00 pm, Financial Times, www.ft.com

Even though Olivier Blanchard, the fund’s chief economist, was careful not to draw strong policy conclusions from it, others seized on the IMF numbers as proof that deficit reduction efforts by governments were misguided.

An exercise by the Financial Times to replicate and evaluate the IMF’s work, however, showed that the results suggesting very large multipliers – the relationship between deficit reduction efforts and growth – do not easily stand up to a different choice of countries or time period.

The size of the multiplier was once a long-forgotten relic of Keynesian economics, deemed irrelevant in modern economic analysis. But as the economic crisis has ground into its fifth year, it is central to thinking about deficit reduction.

Lagarde calls for caution on austerity, By Claire Jones in Tokyo, Last updated: October 11, 2012 2:15 pm, Financial Times, www.ft.com

It’s (austerity) Multiplier Failure, Kate Mackenzie, Oct 09 09:42, FT Alphaville, http://ftalphaville.ft.com/2012/10/0...plier-failure/

The IMF game changer, Izabella Kaminska, Oct 11 12:19, FT Alphaville, http://ftalphaville.ft.com/2012/10/1...-game-changer/

The fact of the matter is that the IMF has played bad cop to the global economy for generations now, enforcing austerity, conditionality and accountability wherever it goes. And, for the most part, it’s the emerging world that’s suffered most.

Recanting on some of these closely held beliefs, especially now that the bitter medicine is predominantly being applied to the developed world, is awkward to say the least. Some might even say it’s as close to an admission of past wrongs as you will ever get.

American Recovery and Reinvestment Act of 2009, From Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/America...nt_Act_of_2009

Defence, Arms and the men, There is a clear distinction between the candidates on military spending: more versus less, Oct 6th 2012 | from the print edition, The Economist, http://www.economist.com/node/21563956

Taxes, spending and the deficit, Trillion-dollar questions, With the deficit at over $1 trillion for a fourth year running, taxes and government spending are critical to the campaign, Oct 6th 2012 | from the print edition, The Economist, http://www.economist.com/node/21563952

______________

The Black Keys - Gold On The Ceiling [Official Video], http://www.youtube.com/watch?v=6yCIDkFI7ew

[Firn]

@Surferbeetle: I think it helps indeed to get back to the roots or the fundamental models of the trade. I know that in 2008 I made the big mistake to try to think just myself without giving the conventional a hard enough look. In consequence I was one of the guys fearing inflation far too much - even if the liquidity trap matched the situation almost perfectly.

I have currently litle time for investment research so I kept my portafoglio steady, that is apart from living and saving.

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But enough of Macro, considering our recent Nobel price winners:

A Nobel Prize for Work that Matters in Our Everyday Lives

A few comments on yesterday's Nobel Prize in Economics (no link -- still stuck in editing at MoneyWatch link now active):

A Nobel Prize for Work that Matters in Our Everyday Lives: (MarketWatch) The Nobel Prize in Economics was awarded to Alvin Roth and Lloyd Shapley for their work on matching markets and mechanism design. What exactly do those terms mean, and why is their work important to people outside of economics?

In the textbook case when markets are perfectly competitive and prices are free to vary, the price-system produces an outcome that cannot be improved upon. But when substantial market failures are present, or when prices are restricted, missing, or otherwise prevented from responding to changes in market conditions, markets can break down.

Mark Thoma on his economists view goes on:

Macroeconomic theory has come under considerable criticism lately, much of it deserved, and economics more generally has been tainted by the performance of macroeconomists and their theories prior to and during the crisis. Some aspects of the criticism apply to both macro and micro, e.g. the validity of the assumption that agents are rational, but for the most part this has not been fair to microeconomists.

As this award shows, microeconomists have made many useful contributions to the world, and they have also had success in other real world applications such as auction theory. Hopefully this award will help those outside the profession understand that the world of economics is more than macro, and highlight the important contributions from the microeconomics side of the profession that matter in our everyday lives.

I happily confess that nothing clicked at all when I heard of Lloyd Shapley, but it is hard to keep up with all the great humans* which form that giant giant on which shoulder we can stand to get a fine sight. Of course we still have to do the looking ourselfs.


*not just intellectuals, but humankind. It was a long way out of Africa and towards our current level of development and prosperity. Of course some moved more the others.

[Fuchs]

Note the vast implications of the vast differences between 0.5 and a range of 0.9 to 1.7, a multiplicator range of roughly 2x to 3x of what they used in their models.

You need a multiplicator of about 1.7 to 2.5 to make it budget neutral in the medium term (dependinbg on the gov revenue system). Short-term deficit fanatics will not be satisfied with a range of 0.9 to 1.7 (and said range does not apply to all cases).


The real problem aren't economists or the wrong use of economic models or even mere wrong variable values from econometrics (or lack thereof).

The problem is that governments are too easily influenced by fashions/lobbyists and not really competent in macro or even only micro. They appoint people with little more competence, too.


The problem isn't that macro cannot predict the timing of a crisis outbreak.

The problem is that banks and other lenders or investors are about as competent in their jobs as a dice. We should force 70% of their workforce into unemployment now, with a higher share of management and traders.
Those people earn millions for being correct (lucky) in a mere 52% of their decisions.
Their "talent" and "skills" are style, not substance. All they need to do to get rich is to acquire customers. They're basically all in a self-marketing job, not in banking, investment or trading.

This incompetence leads to a horrible resource allocation (not unknown to governments either), the creation of financial crisis in the first place and the weakening of the real (manufacturing) economy.

I've personally seen credit withheld for great projects and credit given to the pretty blonde with no brain...

[ganulv]

Their "talent" and "skills" are style, not substance. All they need to do to get rich is to acquire customers. They're basically all in a self-marketing job, not in banking, investment or trading.

A couple of friends of mine who have taught courses in U.S.-based business schools tell me that as compared to the non-professional school student body the business school students dress better, are only very rarely tardy to class, and invariably turn in their assignments formatted to the letter. They also say that questions posed are more mechanical than substantive and that it is the rare well-formatted assignment that displays real engagement with the material. Improving one’s impression management skills seems to be the why of business school in the U.S.

[Firn]

To be honest when I was young I was a bit Warren Buffet. That is in assuming that clever people try and make the rational choice for their group and entity. Obviously I never heard of the "institutional imperative":

My most surprising discovery: the overwhelming importance in
business of an unseen force that we might call "the institutional
imperative." In business school, I was given no hint of the
imperative's existence and I did not intuitively understand it
when I entered the business world. I thought then that decent,
intelligent, and experienced managers would automatically make
rational business decisions. But I learned over time that isn't
so. Instead, rationality frequently wilts when the institutional
imperative comes into play.

For example: (1) As if governed by Newton's First Law of
Motion, an institution will resist any change in its current
direction; (2) Just as work expands to fill available time,
corporate projects or acquisitions will materialize to soak up
available funds; (3) Any business craving of the leader, however
foolish, will be quickly supported by detailed rate-of-return and
strategic studies prepared by his troops; and (4) The behavior of
peer companies, whether they are expanding, acquiring, setting
executive compensation or whatever, will be mindlessly imitated.

Institutional dynamics, not venality or stupidity, set
businesses on these courses, which are too often misguided. After
making some expensive mistakes because I ignored the power of the
imperative, I have tried to organize and manage Berkshire in ways
that minimize its influence. Furthermore, Charlie and I have
attempted to concentrate our investments in companies that appear
alert to the problem.

Chairman's Letter 1989

[Actually it is also quite relevant for many other topics of the SWJ/C]

In general as a consumer I love efficient markets as I investor I love them if they allow me to invest efficiently into a business which is sheltered from too strong a competition...

BTW: There is a nice docu "Broke" by ESPN about American sportstars going broke which greatly impressed me. The scary part is that it all makes so much sense if you have decent emphaty - and it is all so wrong.

ESPN Broke

[Firn]

Obvioulsy the game theory and the cui bono nature of rationality are also factors beside the institutional imperative. Already Jesus had some interesting stories about the owner-agent problem.

Anyway a quick look at FAZ:

The British industry drives in reverse gear

Starke Industrie in Deutschland

Ganz anders das Bild in Deutschland: Seit 1997 hat die Industrie den Anteil am Bruttoinlandsprodukt auf fast 23 Prozent ausgebaut und nach einem Rckgang in der Finanzkrise in den vergangenen Jahren wieder gesteigert. Italien kommt dagegen auf 16 Prozent, Spanien auf 13 Prozent, Frankreich liegt wie Grobritannien leicht oberhalb von 10 Prozent.

Durch seine starke Industrie sei Deutschland besonders gut durch die Krise gekommen, findet das Institut der deutschen Wirtschaft (IW) in Kln. Das liege vor allem am Export. Zudem sind die Standortbedingungen fr die Industrie hierzulande als gut bis sehr gut zu beurteilen, sagte Karl Lichtblau vom IW Kln der Frankfurter Allgemeinen Sonntagszeitung

While it is difficult to know exactly why things became how they are now the forces of free trade and the ever growing economic integration of Europe and the world do certainly play a role. The research in the last decades on the economic geography have shed quite a bit of light on it's effect and have also explained the processes behind economic clusters. As the theory predicted the increasing concentration outcomes like sock city and many, many others can be seen as fine prediction.

So in a sense the industrial cluster of Germany has more and more become the industrial heartland of Europe with a relative close integration with mostly southern and eastern neighbours and regions. I would love to see Europes regions mapped with those criterions. So to some extent the initial advantages of Germany were leveraged while in other traditional industrial powers the spiral went into the other direction. The different paths taken by Italy and Germany are especially interesting.


P.S: An older article about 13 reasons for Germanys strenght...

P.P.S: To some extent it is also no surprise why we have certain topic clusters here in the SWC - with more active French and Italian posters in the thread we would have more posts and discussion about the specific economies.

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Without much comment an article about a topic already discussed here: