Posts Tagged ‘new york times’

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All of a sudden the criticism is coming from everywhere. From George Soros to the Australian Treasurer; from the US Treasury Secretary to a former German Finance Minister, Germany’s leader Angel Merkel is being put under enormous policy to change tack. Is the great European experiment with austerity about to be ditched?

Perhaps one of the more surprising elements of the recent media coverage of the death of Lady Thatcher has been the focus on her views on the unification of Germany. Opinion seems divided on what, precisely, she believed, (whether unification should not happen at all, or should be merely delayed).

It is clear, however, that she had grave reservations. The unification of Germany probably led to acceleration in the European project; the idea being that a more closely integrated Europe, especially closer ties between France and Germany would act, as a counter weight to Germany’s new found might. Lady Thatcher, it appears, felt that not even that approach would work; that a united Germany would become virtually all powerful within such a union.

But the discussion on Lady’s Thatcher’s views on German unification is really about something else. Germany’s position within Europe is becoming increasingly unpopular and seemingly unrelated developments in the news have been sucked into the debate.

The criticisms of Germany have reached a new crescendo for two reasons. The first factor is the contrast with Japan. Its new programme of QE is not so much making the Eurozone look as if it is behind the curve, as making it look as if it is not on the curve at all. The second factor is the Cypriot debacle. The way this crisis was dealt with in Europe has left a nasty scar on the entire European project.

The US Treasury Secretary Jack Lew has been in Europe, and while he made some attempt to couch his words diplomatically, it is very hard not to interpret his comments as being hugely critical of Germany. He said at a press conference: “I was particularly interested in our European partners’ plans to strengthen sources of demand at a time of rising unemployment.” Err so what plans are those, exactly? Europe does not go for demand management. The ethos in Europe seems to be austerity and let demand take care of itself.

George Soros has been in Frankfurt, and while there he made a speech slating Germany for the way it dealt with the Cypriot crisis and said Europe’s biggest economy should do one of two things. Either it should support euro bonds, whereby bonds issued by one government are guaranteed by all members, or Germany should leave the euro.

He said: “Germany has no right to prevent the heavily indebted countries from escaping their misery by banding together and using Eurobonds.” He added: “The financial problem is that Germany is imposing the wrong policies on the Eurozone. Austerity does not work. You cannot shrink the debt burden by shrinking the deficit.”

Meanwhile former Australian Deputy Prime Minister and the country’s Treasurer Wayne Swan has praised the monetary policies of the US and Japan. “Thank God for the Fed,” he said. He could just as easily have said “Curse the Eurozone.” It would have meant much the same thing.

In Germany, the former Finance Minister and now political rival to Mrs Merkel Peer Steinbrück used an interview in ‘Spiegel’ to slam Mrs Merkel’s focus on austerity. Nobel Laureate Paul Krugman used his ‘New York Times’ column to congratulate Japan on its new bold approach to QE: “Seriously,” he said, “this is very good news.”

Austerity can work if applied in isolation, but when it is applied across a continent as important to the global economy as Europe it can become self-defeating.

©2013 Investment and Business News.

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Germany’s head central banker calls it the work of the devil. Last year, Jens Weidmann, Germany’s answer to Mervyn King, told a story from ‘Faust’. A king is running out of money, and the devil disguised as fool persuades him to solve his problem by printing new money. The result was hyperinflation. And that, says Mr Weidmann, is why QE is like the work of the devil.

It is just that QE is not really money printing at all. When the Bank of England buys government bonds it is assumed that it will sell the bonds at a future date.  So if QE looks as though it is leading to inflation, the effects can be reversed.

That’s the theory.

The reality is that that QE doesn’t seem to be doing an awful lot. Sure it may have stopped the recession from becoming  worse, but given the sheer size of this measure – £375 billion in the UK so far – it seems remarkable how low inflation is, and how tiny growth is.

The snag is that debt is the key to the banking system we have these days.  When we borrow money from a bank, we spend it and the recipient of our money pays it into a bank. So when a bank lends money, the money it lends reverberates around the economy. In this way, by their lending, banks create money.

But if we all suddenly decide to borrow less, or if banks decide they can’t afford to lend so much, the broad money supply may well contract faster than an anaconda on speed. QE has had the effect of mitigating this contraction. But it certainly has not had the effect of creating massive growth in the broad money supply.

Perhaps then it is time to really engage in money printing and hand the resulting money out across the land. Milton Friedman pretty much suggested such an idea once. He said that in times of a depression if all else fails, why not scatter money from a helicopter. Before he was chairman of the Fed, Ben Bernanke once said he thought Friedman may have been right.

But that’s where the devil comes in: wouldn’t money printing in this way just create inflation?

For that matter, this whole idea of running a large government deficit is also seen as pretty much akin to devil worship – by some.

Well, maybe. But explain why it is that in times of war – World Wars 1 and 2 for example – governments suddenly found that they could print money to fund the war effort, and could run-up huge deficits. And why is it that the post war periods were not followed by inflation, rather than economic boom, which was often the result. Sure, Germany had hyperinflation, but that was down to the Treaty of Versailles. The UK limped along in the 1920s, but that was largely because adherence to a gold standard removed the Bank of England’s ability to create money. The argument continues to say that periods in history when governments ran surpluses were invariably followed by economic depression. See: conspiracy theories, free lunches, and the theory that banks are destroying wealth .

Some go further – they say the insistence that governments run prudent fiscal policy is a conspiracy, forced upon us by banks who are trying to protect their nice little way of making money. Is the conspiracy theory right? Probably not. But the point is that there is an alternative idea to the established view. The idea suggests that instead of the money supply growing via debt created by banks, the government boosts the money supply by creating new money, and banks’ ability to create credit is then curtailed by legalisation.

The argument may or may not be right. But we may be getting an opportunity to test the theory soon.

As US politicians refuse to compromise, and Republicans and Democrats blame each other for the US’s woes, Obama may have come up with a solution.

Under US law the US government cannot print money – that job is entrusted to The Fed. Except, thanks to legislation from 12 years ago, the government is allowed to create platinum coins. The legislation was designed simply to enable the US government to create commemorative coins.

So why not make a one trillion dollar platinum coin, deposit it with the Fed, and then withdraw money against it, thereby abolishing the US government’s need to have approval from Congress before raising its fiscal debt? Friedman and Bernanke will get their money drop, and the conspiracy theorists will have their chance to put their theories to the test.

But such a measure, unlike QE, can’t be reversed. Critics say such a move really would create inflation.

Paul Krugman, the Nobel Laureate who pens a highly influential blog for the ‘New York Times’, has suggested he is in favour of the idea. But it seems he really sees this as kind of a warning shot. He doesn’t really want to see a one trillion dollar coin; rather he reckons the threat of taking such an action will be enough to ensure that the Republicans compromise with Obama.

Perhaps what we can say is that that we are seeing a very interesting development in the story of our times.

©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

As the earthquakes became worse, the ancient Minoans demanded blood. Clearly the gods weren’t happy, so it was time to make more human sacrifices. Of course, there were occasions when a blood sacrifice was followed by less seismic activity, which was cited as proof positive that the policy worked.

Except of course, from our enlightened position in the 21st century we get causation. Any fall in natural disasters following a religious ritual was a coincidence. There may have been a time when a leader of a country was also a priest, charged with appeasing angry gods, and such people were held responsible when the gods wreaked havoc, but these days we are a touch more sophisticated.

Perhaps you could, at a pinch, blame hurricane Sandy on manmade global warming, but it would be stretching credibility to blame any individual for the storms hitting the US East Coast. Some people across the pond are very anti-Barack Obama, but it seems not even they blame him for hurricane Sandy.  Although Obama they say can do his election prospects some good by looking presidential.

Yet the logic that says Obama was responsible for the poor US economic performance of the last few years is not much different from blaming a Pharaoh for lack of rain.

Two economists who have led the charges against Obama are Professor John Taylor and Glen Hubbard.

The argument runs like this. In the past the US has seen much more rapid recovery from a recession. This time recovery has been slower, ergo, Obama is to blame. Some go further, and say ergo Obama is the Devil, meaning maybe he was responsible for hurricane Sandy after all.

Martin Wolf, the ‘FT’s’ economic guru, has been crossing swords with Professor Taylor. The prof says that even in the 1930s, the US saw sharper recovery than it is now. ‘Duh’, replies Wolf, ‘that was because after 1929, when US authorities messed up, failed to support banks, and made cutbacks, the resulting contraction in the economy was enormous. Of course growth was higher in the aftermath because it had further to grow from’. See: You can’t measure an economy’s performance on recovery alone http://blogs.ft.com/martin-wolf-exchange/2012/10/29/you-cant-measure-an-economy-on-recovery-alone/#axzz2AjECcdQW

Professor Taylor then compared the US performance today with its recovery in the late 1800s. Wolf countered with the argument that surely it is more realistic to compare the US today with other economies across the world, such as Japan, the UK, the Eurozone, or even China.

It takes an extraordinary level of arrogance about the superiority of your country to think the fact that the rest of the world is suffering a very severe economic shock bears little or no relevance to your country.

Over at the ‘New York Times’, it’s been a case of daggers at dawn between Nobel Laureate Paul Krugman and Glen Hubbard.  According to Hubbard, the US recovery should have been V shaped.  In the UK – where the debate is over whether the economy will be W, An elongated L, or even a letter than hasn’t been invented yet – the idea of a V shaped recovery feels like a pipe dream. Krugman says the Romney team is ‘waving’ little things like facts away, because it is politically convenient to do so. See: More Financial Crisis Denialism http://krugman.blogs.nytimes.com/2012/10/28/more-financial-crisis-denialism/

The fact is, of course, that the US economy has been posting figures that we in the UK envy. It may well be that the US recovery has been stronger because it has had less austerity. It is certainly absurd to say that if Obama had been Austerian in his approach, the US recovery would have been stronger.

But where both Krugman and Wolf may have it wrong is not conceding that there is any benefit to creative destruction at all. Recession can correct bad habits, remove poor practice, and ensure only the very fittest companies with truly strong business models can survive.

The snag is that right now the debate between economists is black and white. Either we need to let the economy correct via allowing failure, or we have a really massive Keynesian push. There seems to be no middle group. Maybe what we really need is both, and economists are so blind to their adversaries’ opinions that they are forcing us to make a choice, when what we really need is the best of both worlds.

©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