Bob Carlson

August 20, 2015

Did QE Help the Economy

Filed under: Economy,Financial crisis — Bob @ 12:20 pm

There’s a lot of debate around that question. It certainly helped the stock market. The official theory from the Fed and others is that boosting asset prices makes people more confident. They spend and invest more. It’s called the wealth effect. But one Fed official recently questioned the theory. He says the three main arguments in favor of zero interest rates and QE aren’t supported by the data. He’s especially critical of the zero interest rate policy, saying it might have the opposite of its intended effect.

But as for spurring inflation, reducing employment or otherwise generating sustained economic activity, the results, particularly for QE, are “at best best mixed.” In addition to muted inflation, gross domestic product has yet to eclipse 2.5 percent for any calendar year during the recovery, while wage gains, and consequently living standards, have been mired around 2 percent or less.

“There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed—inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation,” Williamson wrote.

August 18, 2015

The Weakness of Europe

Filed under: Economy,Financial crisis — Bob @ 12:33 pm

Europe has a long way to go to climb out of the hole of the financial crisis. While Americans complain about our slow growth in this recovery, things are much worse in Europe. Even countries that are considered to be doing well, aren’t in good shape, such as Germany and many of the Scandinavian countries. Take a look at the quick data in this post.

And that is with a lot of QE (more than a trillion), a weaker euro, and a favorable oil price shock.

Overall the eurozone economies are one percent smaller than they were in 2008.

July 29, 2015

Inside the Greek Crisis

Filed under: Emerging stock markets,Financial crisis — Bob @ 8:20 am

The former Finance Minister of Greece allowed a writer from The New Yorker to spend time with him in the months preceding the historic July referendum in which a majority of Greeks voted to reject the terms offered by European authorities regarding their debt. The article has interesting insights, including that the minister expected the Greeks to buckle under pressure and vote to approve the debt terms.

When the crisis hit Greece, Varoufakis began his blog, and, with Stuart Holland, a British academic and former politician, published an essay, “A Modest Proposal.” It suggested ways in which the E.C.B. and the E.U. could press the banks holding bonds of struggling eurozone countries to forgive much of this debt, and envisaged a Europe that could issue its own bonds and fund stimulus investments—effectively putting German savings to work in Ireland and Greece. Varoufakis, who had argued against Greece’s decision, in 2001, to adopt the euro, wrote that if there was going to be a currency union then it should not be half-baked, and should function more like the one that joins California and Alabama.

Varoufakis recognized the many frailties in Greece’s economy, but he preferred to talk of a banking crisis rather than a debt crisis, and of a European crisis rather than a Greek one. If Greece had over-borrowed, the real villains were the lenders standing in line for bailout funds. The euro had created a delusion: banks had lent to Greece as if it were a student backed by wealthy parental guarantors. But there were no such guarantees, and when the lending stopped Greece was trapped by the currency that had indulged it. The country couldn’t painfully devalue its currency, like, say, Argentina at the start of the century. (A devaluation makes your people poor but your goods enticingly cheap.) And the euro lacked a body like the Federal Reserve, or the Bank of England, that could feed newly minted cash into the Greek economy; to Varoufakis’s frustration, the E.C.B. wasn’t that kind of bank.

July 18, 2015

Germany vs. Greece

Filed under: Financial crisis — Bob @ 8:45 am

George Friedman of gives us perspective on the recent negotiation concerning Greece’s debts. He views the situation as Germany vs. Greece, with the rest of Europe not having much influence on either side. Friedman also says that the issues aren’t resolved. It’s interesting reading, whether you agree with it or not.

There were two sides of the Greek position that frightened the Germans. The first was that Athens was trying to use its national sovereignty to compel the European Union to allow Greece to avoid the pain of austerity. This would, in effect, shift the burden of the Greek debt from the Greeks to the European Union, which meant Germany. For the Germans, the bloc was an instrument of economic growth. If Germany accepted the principle that it had to assume responsibility for national financial problems, the European Union — which has more than a few countries with national financial problems — could drain German resources and undermine a core reason for the bloc, at least from the German point of view. If Greece demonstrated it could compel Germany to assume responsibility for the debt in the long term, it is not clear where it would have ended — and that is precisely what the Greek vote intended.

On the other hand, if the Greeks left the European Union, it would have created a precedent that would in the end shatter the bloc. If the European Union was an elective affinity, in Goethe’s words, something you could enter and then leave, then the long-term viability of the bloc was in serious doubt.

July 2, 2015

Perspective on the Greece Situation

Filed under: Financial crisis — Bob @ 8:20 am

George Friedman of has some unique thoughts and comments on what he calls the Greek situation. He says both sides have made all the compromises they can and it is time to end the games of pretend and extend, as it is called in the U.S. His focus is on Germany’s role in the situation and especially its goals in the eventual resolution. The way Friedman paints the situation, there isn’t a good resolution left, especially if other financially troubled members of the European Union decide to follow the Greek example.

A Greek withdrawal from the eurozone would make sense. It would create havoc in Greece for a while, but it would allow the Greeks to negotiate with Europe on equal terms. They would pay Europe back in drachmas priced at what the Greek Central Bank determines, and they could unilaterally determine the payments. The financial markets would be closed to them, but the Greeks would have the power to enact currency controls as well as trade regulations, turning their attention from selling to Europe, for example, to buying from and selling to Russia or the Middle East. This is not a promising future, but neither is the one Greece is heading toward now.

Many have made a claim that a Greek exit could lead the euro to collapse. This claim seems baffling at first. After all, Greece is a small country, and there is no reason why its actions would have such far-reaching effects on the shared currency. But then we remember Germany’s primordial fear: that Greece could set a precedent for the rest of Europe.

June 12, 2015

Household Net Worth Hits New High

Filed under: Economy,Financial crisis — Bob @ 5:20 pm

American households continue to recover from the financial crisis, helped by rising stock and real estate prices. The latest Flow of Funds report from the Federal Reserve shows that in the first quarter household net worth rose to almost $85 trillion.

The Fed estimated that the value of household real estate increased to $21.1 trillion in Q1 2015. The value of household real estate is still $1.4 trillion below the peak in early 2006 (not adjusted for inflation).

April 27, 2015

End of the Debt Supercycle

Filed under: Economy,Financial crisis — Bob @ 8:20 am

Economic growth has been slow since the bottom in 2009. The debate among economists is whether this is due to something that’s been dubbed “secular stagnation” or something else. The secular stagnation crowd has several arguments but generally believes that the various drivers of growth in the last century are played out. The drivers include higher productivity, an expanding work force, and the transition from a rural to an industrial society. I’m more partial to those who argue that there’s a long-term debt cycle, or supercycle, that has mini booms and busts but over the long term produces a high rate of growth. But once debt levels reach a certain point, the debt supercycle reverses. Debt levels began a peak around 2007 and likely have to decline for a while. Shrinking debt levels will reduce growth rates. Here’s a good explanation from Kenneth Rogoff.

Modern macroeconomics has been slow to get to grips with the analytics of how to incorporate debt supercycles into canonical models, but there has been much progress in recent years (see Geanokoplos 2014 for a survey) and the broad contours help explain the now well-documented empirical regularities. As credit booms, asset prices rise, raising their value as collateral, thereby helping to expand credit and raise asset prices even more. When the bubble ultimately bursts, often catalysed by an underlying adverse shock to the real economy, the whole process spins into a harsh and precipitous reverse.

Of course, policy played an important role. However, there has been far too much focus on orthodox policy responses and not enough on heterodox responses that might have been better suited to a crisis greatly amplified by financial market breakdown. In particular, policymakers should have more vigorously pursued debt write-downs (e.g. subprime debt in the US and periphery-country debt in Europe), accompanied by bank restructuring and recapitalisation.

March 30, 2015

A Dose of Global Alarmism

Filed under: Financial crisis — Bob @ 5:20 pm

It’s easy to find people who are worried about the global financial situation. Here’s a sample. It’s an article about efforts at the U.N. and other global organizations to create a permanent procedure for handling debts of countries who borrow too much. Some of them argue that borrowers and lenders haven’t learned anything from the last borrowing binge and that we’re on the edge of significant problems. The evidence presented indicates that some countries are going to have problems and some lenders are likely to lose money, but it doesn’t make the case for a global crisis.

As the recriminations fly between Europe’s capitals, campaigners are warning that the global community has failed to learn the lessons of the Greek debt crisis – or even of Argentina’s default in 2001, the consequences of which are still being contested furiously in courts on both sides of the Atlantic.

As Janet Yellen’s Federal Reserve prepares to raise interest rates, boosting the value of the dollar, while the plunging price of crude puts intense pressure on the finances of oil-exporting countries, there are growing fears of a new debt crisis in the making.

Ann Pettifor of Prime Economics, who foreshadowed the credit crunch in her 2003 book The Coming First World Debt Crisis, says: “We’re going to have another financial crisis. Brazil’s already in great trouble with the strength of the dollar; I dread to think what’s happening in South Africa; then there’s Malaysia. We’re back to where we were, and that for me is really frightening.”

PIMCO Says EuroZone has to Change

Filed under: Economy,Financial crisis — Bob @ 12:24 pm

In an interview with the Telegraph of London, two PIMCO managing directors said that the Eurozone is untenable in its current structure. Ultimately, they say, Europe has to change its structure so that the countries move closer together. Monetary policy can’t be centralized while fiscal policy is decentralized. In their discussion on PIMCO’s web site about the firm’s outlook for the next six to 12 months, the managing directors talking with others weren’t as negative over the short term, expecting a solution to be found to Greece’s current problems.

Persistently weak growth in the eurozone had led to voter unrest and the rise of populist parties such as Podemos in Spain, Syriza in Greece, and Front National in France, said PIMCO managing directors Andrew Bosomworth and Mike Amey.

“The lesson from history is that the status quo we have now is not a tenable structure,” said Mr Bosomworth. “There’s no historical precedent that this sort of structure, which is centralised monetary policy, decentralised fiscal policy, can last over multiple decades.”

March 3, 2015

An Alternative View on Greece

Filed under: Economy,Financial crisis — Bob @ 6:20 pm

The general view is that Greece has too much debt to repay and the lenders at some point will have to forgive or generously renegotiate some of it. This post disagrees. He presents data to show that there wasn’t austerity in Greece of any note and that Greece’s borrowing boom resulted in a spending boom and not, as in other countries, a boom in housing or other investments. It’s interesting reading throughout.

Sudden stops are always painful: economics has not discovered a hangover cure. But the way to minimize the pain is to cut spending without cutting output, which requires selling to others what residents can no longer afford. In other words, unless Greece boosts exports, spending cuts will amplify the output loss in the same way that Keynesian multipliers amplified the output gain from borrowing.

The problem is that Greece produces very little of what the world wants to consume. Its exports of goods comprise mainly fruits, olive oil, raw cotton, tobacco, and some refined petroleum products. Germany, which many argue should spend more, imports just 0.2% of its goods from Greece. Tourism is a mature industry with plenty of regional competitors. The country produces no machines, electronics, or chemicals. Of every $10 of world trade in information technology, Greece accounts for $0.01.

Greece never had the productive structure to be as rich as it was: its income was inflated by massive amounts of borrowed money that was not used to upgrade its productive capacity. According to the Atlas of Economic Complexity, which I co-authored, in 2008 the gap between Greece’s income and the knowledge content of its exports was the largest among a sample of 128 countries.

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