Posts Tagged ‘mario draghi’


The IMF is a critic. It reckons the US has hit the brakes too fast, and wants to see more stimulus measures. As for the UK, it wants to see more short term borrowing to fund investment into infrastructure. The Bank of International Settlements (BIS), often called the world’s central bank, is a critic too, but for almost the opposite reasons.

Time to stop doing whatever it takes.

In a report out today, the BIS began by referring to Mario Draghi’s famous words when he said: “We will do whatever it takes to save the euro.” The BIS said: “But we are past the height of the crisis, and the goal of policy today is to return to strong and sustainable growth. Authorities need to hasten structural reforms so that economic resources can more easily be used in the most productive manner. Households and firms have to complete the repair of their balance sheets.

Governments must redouble their efforts to ensure the sustainability of their finances. And regulators have to adapt the rules to an increasingly interconnected and complex financial system and ensure that banks set aside sufficient capital to match the associated risks. Only forceful efforts at such repair and reform can return economies to strong and sustainable real growth.”

This is pure austerity economics, right out of the Austrian school of economics.

Then the BIS laid into what are often called the zombies.

It said: “Productivity gains and employment in the major advanced economies have sagged in recent years, especially where pre-crisis growth was severely unbalanced. Before they can return to sustainable growth, these countries will need to reallocate labour and capital across sectors. Structural rigidities that hamper this process are likely to hold back the economy’s productive potential. Both productivity and employment tend to be weaker in economies with rigid product markets than in ones with more flexible ones.

Similarly, employment rates tend to be lower where labour markets are more rigid.Conversely, countries with flexible labour markets recover more quickly from severely imbalanced downturns. They also create more jobs. Reforms that enhance the flexibility of labour and product markets could be swiftly rewarded with improved growth and employment.”

So what is it really saying?

Firstly, that QE has run its course, and monetary policy needs to return to normal. Secondly, that we need to see more creative destruction; let businesses fail, because the vacuum that is created can be filled by more efficient firms, and productivity will start to improve.

But is that really right? The BIS might be saying that QE has done its job, and now it is time to go back to normal, but frankly it never was a fan of QE in the first place. It may say that now is the time for governments to pay back debts, but then it also said that last year and the year before.

It is suggesting that as the economy changes, now is the time to implement the changes that it wanted to see implemented even before the economy had changed.

Do we really need to see create destruction? Take one sector, as an example, the UK High Street. This has seen rather a lot of destruction to date, precious little creativity has followed.

Then again, the recovery does appear to be starting in the US, and say one thing for the US, it does have an extraordinary ability to reinvent itself.

Being a cynic is fun. It is a good laugh, finding the flaws in any hint of optimism. And many have had a ball of a time laughing at the argument that it is good news on the US economy that lies behind the Fed announcing plans to ease back on QE.

But actually, there really has been good news coming out of the US of late. And with signs that US manufacturing is finding new opportunities, even that 3D printing may create new jobs, we could even be at the early stages of seeing something of a reversal of what we have seen in recent years of the trend of growing inequality.

The BIS might be right to say we are approaching the time when the US needs to see monetary policy return to normal – but that is happening anyway.

But the euro needs is own version of QE, proper QE that is, not Draghi playing with words. Japan’s experiment in Abeonomics needs to be given more time, and QE needs to be used more imaginatively to directly fund investment in the UK.

History tells us, that monetary policy has often been reversed too soon while an economy recovered from a depression recession/depression. Right now, there is a real danger that monetary policy will be tightened too soon. And the BIS seems to be oblivious to this risk.

© Investment & Business News 2013

“I guess I should warn you,” once said Alan Greenspan, chairman of the US Federal Reserve before Ben Bernanke held that position, “If you think I am making myself clear, that probably means you have misunderstood me.” Ben Bernanke doesn’t say things like that. When he took over at the Fed he vowed to say it straight, tell it like it is, and avoid launching into jargonese whenever possible. And that is how it has panned out. Take monetary policy, for example.

Ben had spelt it out in terms a child could understand, (well at least a child that had studied economics): monetary policy would be tightened under certain circumstances. He then defined what those circumstances were and they now appear to be emerging. This is not new; the data had already been set before us in the full light of media scrutiny. Mr Bernanke has reacted the way in which he always said he would, and the markets react as if the Fed chairman has grown two heads, or taken on an alter ego.

As has been pointed out here many times, the news out of the US has been good of late. Notwithstanding the fact that in Q2 the US is likely to see less growth than in Q1, signs are afoot that the US economy is slowly returning to normal: to pre 2007, or even pre 2004 type conditions.

This is not bad news. It is good news. The US consumer, so long the central hub in the global economy, looks set to be moving back to the centre stage. Companies that export their wares to the US, and US companies that sell their wares to the US consumer can celebrate. There may be a knock on effect too, as companies benefit from a resurgent US themselves see growth rise, giving their suppliers reason for hope.

What do the markets do? They panic.

They panicked because when Ben Bernanke announced that the Fed will be forking out $85 billion a month purchasing bonds – otherwise known as QE – (QE3, or maybe 4, depending on how you define these things), he said that once the economy improves, and unemployment falls to a certain level, the QE campaign will be cut down, and eventually stopped.

They panicked because Mr Bernanke confirmed that he hasn’t changed his mind and that if things carry on improving, QE will be reduced later this year (September being the expected month).

He also confirmed that if things carry on improving next year and the year after that interest rates may rise in 2015.

Certain things in life are predictable, Mr Bernanke’s comments yesterday, or at least their inference, falls in this category.

But the markets are nervous. They fear that in a world where interest rates are higher and US consumers have less debt, more jobs and spend more, certain assets – propped up as they are by bubble-like money flows – may fall or even crash.

The obvious candidates for such falls are US and UK bonds; equities too, but to a lesser extent. The markets themselves are worried about emerging market debt.
Why they are worrying now, over something that was always inevitable is a puzzle. It just goes to show that the markets are as wise as a wise man who has had a lobotomy.

And talking about wise, the latest wisdom out of the Eurozone is that the crisis is nearly over.

Certainly the latest PMI, produced by Markit, suggests the region is now merely in recession, as opposed to being in deep recession.

But here is a tip to the wise; maybe as bond yields rise, as QE comes to an end, it will be indebted Europe that suffers the real woe.

Of course if the ECB launches QE when the Fed stops, that may just be enough to allow the euro area to follow the US into recovery (two years or so behind, but follow nonetheless).

But the ECB is far too wise to do that. Remember Mario Draghi once said the ECB will do whatever it takes to save the euro. But just in case you think Mr Draghi was making himself clear, just remember that he actually said: “Within our mandate, the ECB will do whatever it takes to save the euro.” The markets probably misunderstood what that meant.

© Investment & Business News 2013

The EU’s financiers responsible for the Greek rescue scheme in 2008 have reacted strongly to accusations from the IMF that serious errors were made in the initial bail-out of Greece. Maybe it is time that these deniers started being a little more honest with themselves and us.

Haircuts can be good things. Sampson may not have agreed with such a sentiment, but, on the other hand, we tend to feel better afterwards. It can be like that with sovereign debt too, but in 2010, the so-called TROIKA – that’s the organisation made up of the IMF, EU commission and ECB – thought the very idea of a haircut of Greek debt was about as sensible as turning the Acropolis into a new apartment block.

Plenty of people warned that it was dangerous, and over and over again we were told that the harsh terms imposed on Greece were not necessary. Now the IMF is saying it was all a terrible mistake.

In a report published yesterday the IMF said: “Not tackling the public debt problem decisively at the outset or early in the programme created uncertainty about the euro area’s capacity to resolve the crisis and likely aggravated the contraction in output.”

Of course this is the IMF. It is not going to wear a hair shirt, or be too vocal in slating its partners for that matter.

It said that after the initial bail-out Greek public debt “remained too high and eventually had to be restructured, with collateral damage for bank balance sheets that were also weakened by the recession. Competitiveness improved somewhat on the back of falling wages, but structural reforms stalled and productivity gains proved elusive.”

And, it continued: “There are…political economy lessons to be learned. Greece’s recent experience demonstrates the importance of spreading the burden of adjustment across different strata of society in order to build support for a program. The obstacles encountered in implementing reforms also illustrate the critical importance of ownership of a program, a lesson that is common to the findings of many previous EPEs. To read the report, go to Greece: Ex Post Evaluation of Exceptional Access under the 2010 Stand-By Arrangement 

A spokesman for the EU commission said: “We fundamentally disagree… With hindsight we can go back and say in an ideal world what should have been done differently. The circumstances were what they were. I think the commission did its best in an unprecedented situation.”

ECB President Mario Draghi has entered the debate too, saying: “We tend to judge things that happened yesterday with today’s eyes. We tend to forget that when the discussions were taking place the situation was much, much worse.”

Hindsight bias is indeed a real phenomenon, and maybe we are all too keen to claim wisdom after an event. Psychologists can even cite studies to show that we have a distorted view of our own history, claiming, or even believing we predicted certain events when in fact we did no such thing.

But on this occasion citing hindsight bias as an excuse is not good enough.

Plenty of media, including, but not only, this publication warned at the time that the TROIKA was failing to see reality, that it was punishing Greece unnecessarily and that debt has to be cut via write-downs.

The TROIKA ignored what was obvious to outsiders. To now claim it had no way of knowing; that we are applying hindsight bias shows it has not learned anything. It is, frankly, arrogantly ignoring what is happening around it, stuck as it is in an ivory tower, or wherever it is that these financiers live.

There is a lesson today. Still the TROIKA, EU Commission and grandees of the Eurozone claim that the worst is over; that the troubled economies of indebted Europe are on the road to recovery, and by doing so they continue to make fatal mistakes.

What will happen in two years’ time, when the IMF says that too much austerity in 2013 led to unnecessary human hardship? Will the TROIKA accuse the IMF of hindsight bias, and say it had no way of knowing this at the time?

Rather than denying errors, perhaps the TROIKA et al, should tuck into some humble pie, and then, just maybe they will notice they are repeating this mistake.

© Investment & Business News 2013

Last year Mario Draghi, president at the ECB, said the Eurozone central bank was ready to do “Whatever it takes to save the euro.” The markets loved it, and have been loving it ever since, but they forgot about the prefix, because Mr Draghi also said a few things at the beginning of the “whatever it takes statement.” In fact, he said: “Within our mandate.” That was a pretty important proviso. It is like celebrating because someone says you have done something that is good, but ignoring the fact that it was prefixed by not.

That was last summer. Now it seems that at last Super Mario Draghi has done something other than talk with prefixes that get ignored.

Yesterday the ECB voted to cut interest rates to half a per cent. So at last they are at the same level as the UK – not so long ago they were 1 per cent.

Mr Draghi said the “ECB was ready to act,” and those words got the markets all excited again.

But why has it taken so long? Inflation in the Eurozone was just 1.2 per cent in April. Across the region, and for the time being, inflation is as about as threatening as a puppy wearing a muzzle.

Well, there is an answer to the question. One ECB member voted to keep rates on hold. Jörg Asmussen, a German economist, who is normally thought of as a Draghi supporter, voted to keep rates on hold. He felt the rate cut would have little impact. Jens Weidmann, President of the German Bundesbank, held similar doubts but voted with the rest of the pack on this occasion.

So what’s next? Will the ECB really announce quantitative easing (QE)? Just remember last year Mr Weidmann likened QE to a Faustian pact. See: Quantitative Easing 

It hardly seems likely that when the topic of creating money comes up at the ECB Mr Weidmann will vote in the affirmative.

© Investment & Business News 2013


It was another record breaking week for markets in the US, with the Dow and S&P 500 hitting all-time highs and finishing the week down by a fraction from the peak. In fact, the Dow did end last week at 14865, up 2 per cent on the week, and up 13 per cent this year.

The FTSE 100 finished last week at 6348, also up 2 per cent on the week and by 8 per cent this year.

In Germany the DAX has seen more modest gains, up 1 per cent last week, and by 2 per cent this year.

In Japan, in contrast, the Nikkei 225 rose by 5 per cent last week and is up 30 per cent this year.

Markets in Hong Kong and China fell last week, and are down so far this year.

You can see why markets in China and Germany have not done quite so well. But why so much exuberance in the US, the UK and Japan?

The markets seem convinced that Abeonomics is going to work; that at last Japan is going to implement QE big time, which is seen as being the policy the economy has really needed over the last two decades. But don’t forget that Japan’s savings ratio has fallen sharply in recent years anyway. This fact alone may have far more impact on Japan’s economy over the next decade than QE.

And why has Japan’s savings ratio fallen? Surely it is because much of its population are now retired and have no choice but to draw down savings. I’m not sure that is a good thing.

As for the US, the economic data is not so good. There has to be a big question mark over the sustainability of recent rises in US markets.

Ditto, but even more so for the UK.

Others have justified market rises by pointing to good news out of China. But that run of good news may be over, see: China sees growth disappoint as India sees some promise

But the single biggest reason used to justify rises in the markets during the first few months of this year was that the Eurozone was past its worse. Mario Draghi’s promise to do whatever it takes to save the euro impressed the markets.

Right now as the Cypriot debacle rolls on, and unemployment across much of Europe hits terrifying levels, it looks very hard to justify such optimism.

Given this, why haven’t markets fallen back?

©2013 Investment and Business News.

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The first two months of this year saw euphoria. A sense of relief so strong you felt you could touch it ran through the air. The Dow hit a new all-time high, passing the previous record set in 2007. The S&P 500 followed suit. In the UK, the FTSE 100 began to approach its all-time high set back on the second from last day of the last century. In fact on March 14, the index of the UK’s 100 leading companies closed at 6529, just 192 points shy of the millennium high set in 2007, and 401 points off the all-time high, set on December 30 1999.

The surge in the indices was a puzzle. The UK economy was stuck in the mire, in the midst of its longest downturn ever recorded. The Eurozone was in recession. Even the BRICs seemed to be struggling and certainly India has lost much of its lustre of late.

The markets, however, took a look at corporate profits and smiled. They studied the words of ECB president Mario Draghi, who threatened to do whatever it takes to save the euro, and the smile became a big grin. They heard the words of Abe Shinzo, Japan’s new prime minister, and Haruhiko Kuroda, the new governor of Japan’s central banks, and the markets chortled.

Since then the mood has changed. The Cypriot banking debacle started it all. Fears that Slovenia may follow Cyprus in needing a bail-out compounded market anxiety. In the background Hungary’s difficulties persisted, and there was talk that democracy was dying in the country.

Then on Friday the latest report on US jobs was out. This time it was disappointing.
March saw an 88,000 increase in the number of US non-farm payrolls. You might respond by saying, but it was still an improvement. That, however, is not the point.

In the US there is a kind of tacit pact between employers and workers. The jobs market is highly flexible, labour laws are much less stringent in Europe, but unemployment is supposed to be lower. In short, in the US the philosophy is that employers create jobs: ‘Let’s make life easy for employers, and unemployment will be low’. This pact seems to be broken.

Sure US unemployment is much lower than in the troubled parts of the Eurozone, but it is at a similar level to that of the UK (US unemployment 7.6 per cent March, but 7.9 per cent in January, UK unemployment 7.8 per cent in January), and it is much higher than in Germany (5.4 per cent in February).

But the unemployment data does not tell the full story. The employment to population ratio is even more telling. The ratio of employed to the population of people aged between 16 and 64 is around 5 percentage points higher in Germany than in the US. Unemployment is higher in the US than in Germany, but Germany has the stricter labour laws, the less flexible labour market. See: Reducing unemployment: Lessons from Germany 

Returning to the US jobs data, March was in fact the worse month for job creation since June last year. To put the 88,000 number in context, February saw a 268,000 increase in US non-farm payrolls. Oddly, despite the drop in job creation, the US unemployment rate fell to 7.6 per cent, which is the lowest level since before Obama became President.

More worryingly, however, March saw a 496,000 fall in the size of the US labour force. So sure, US percentage unemployment dropped, but only because of the substantial reduction in the size of the work force. Why this reduction? To an extent, many US workers are just giving up looking for work. They are falling out of the jobs stats.

Looking beyond the US to Europe, the job data is pretty scary. The average unemployment rate in the Eurozone in February was 12 per cent. It was 26.4 per cent in Greece (December figures), and 26.3 per cent in Spain, It was 10.8 per cent in France, 11.6 per cent in Italy.

The markets may have been celebrating all year, and waited until last week to become more cautious. But the jobs data has been awful for some time. Without a rise in employment, we cannot have a sustainable rise in aggregate demand, and until that happens, there is the danger that apparent corporate strength may prove an illusion, and worse than that, it’s an illusion the markets have bought.

For the latest data on Eurozone unemployment, see this link  

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

Did you know that Diego Maradona, most famous as for his prowess as a football player, was also a top economist?

Maybe we can go further than that and say he was an economist first, but used football merely to illustrate his theories.

Take the world cup match with England in 1986. First of all there was that goal; the one in which Maradona rose above the rest of the players on the pitch, his hand held aloft and deftly patted the ball into the net. That had the effect, as it were, of putting the fear of God up the England players.

Such was this fear that later in the match, Maradona was able to sort of dribble past five or so England players, and score one of the most memorable goals in the history of the World Cup. It is just that if you were to plot the trajectory of his run you will find that the Argentinean footballing legend actually ran pretty much in a straight line. The England players, in anticipation of Madonna’s magic, sort of fell away. If instead the English defence had not moved and stayed put, Maradona may not have got past his first marker.

It all boils down to expectations. If you are expected to act in a certain way,  others change their behaviour accordingly. The result is that by doing nothing, but creating the impression of doing something, you can affect behaviour.

So let’s apply the Maradona model to the markets. For the markets, expectation is crucial. So let’s say you are a central banker, and – for the sake of picking a name out of thin air – let’s say you are called Mario Draghi, and you are the President of the European Central Bank.

You want to see confidence return to the markets, you want investors to buy Italian and Spanish bonds, and you are worried about the strength of the euro. But you have a problem. Some of your colleagues within the ECB, some very powerful colleagues at that, are what you might call hawks. They don’t like quantitative easing, and like to see a strong currency. So what do you do?  Answer: absolutely nothing, other than talk. You say things such as: “I will do what it takes.”  And hope that simply saying you will do that is enough.

Somehow, the strategy appears to be working. Last week the ECB voted to do nothing again. There would be no change in monetary policy for another month, but the feeling that Mario is there, pulling strings, and orchestrating recovery was enough to get the markets buying bonds and selling euros.

And that is where Maradona comes into it. Back in 2005, Mervyn King came up with what he called ‘The Maradona theory of interest rates.’ He said that the markets are a little like those England players in the match with Argentina. He said: “Market interest rates react to what the central bank is expected to do.  In recent years the Bank of England and other central banks have experienced periods in which they have been able to influence the path of the economy without making large moves in official interest rates.  They headed in a straight line for their goals. How was that possible?  Because financial markets did not expect interest rates to remain constant.  They expected that rates would move either up or down.  Those expectations were sufficient – at times – to stabilise private spending while official interest rates in fact moved very little.”

What has that got to do with the here and now? Last week Jonathan Loynes at Capital Economics said: “The ECB president appears to have become the undisputed champion of the ’Maradona theory’ of monetary policy, in which market expectations of policy changes relieve the need for those changes to be implemented.”

So there you have it: Maradona economics.

But of course this begs the question: in today’s times do we need a new theory, perhaps a Lionel Messi theory of fiscal policy.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here