Author Archives: Edward Hugh

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

The Clock Is Ticking Away Under Latvia

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As the European Commision and the IMF toil tirelessly away, testing out their latest post-Keynesian “social and economic experiment” in Latvia – in an attempt to see whether it is possible to revive an economy which is contracting under the weight of massive debt deflation at an annual rate of 18 percent (Q1 2009) by relying almost exclusively on a process of drastic fiscal cuts (a process which today is glorified with the name of “internal devaluation” but which in the 1930s was simply called what it is: wage and price deflation) – a new problem now starts to looms its head before us. What, we might like to ask ourselves will be the long run consequence for Latvia’s already fragile demographic dynamic if we don’t get a most-optimistic-scenario-best-case outcome here? That is, if instead of a devaluation-driven “V” shaped recovery, we get not a “U” shaped one (the optimistic scenario), but rather “L” shaped stagnation (a distinct possibility on my view, if wages and prices simply take too long correcting to competitive rates) what will be the implications for the longer term future of the country?

The question I want ask here is simply whether or not short term decision taking on the part of the Latvian government (the crisis “exit strategy”) may not produce knock-on effects on the short term decision process of potential Latvian parents leading them to postpone decisions on parenthood, such that the impact of the crisis is a further deterioration in long run population dynamics, and hence, ironically, in potential economic performance? What I am asking is whether or not there may be a kind of “vicious circularity”, whereby one negative feedback process influences another in a way which produces a very unfortunate outcome. Not for nothing do we say that social systems are complex ones!

But before we go into the nitty gritty of all this, I would like to just take a quick look at two charts.

Structurally, they look quite similar don’t they? They are both output charts, showing year-on-year changes in production. The second is a chart for industrial products, and the first is a chart for children. Strange they should look so similar, isn’t it? Or is it? Below I will go into some recent work by economists and demographers which providing a theoretical background within which we may be better able to understand the sort of complex processes we can see operating in Latvia. At the end of the post we will then breifly take a brief look at some of the conclusions it might be possible to draw from what is happening. Continue reading →

Lost In The Latvian Translation?

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According to reports in the Baltic Course newspaper, Latvian Finance Minister Einars Repse (of the New Era party) is not against the strikes and rallies that are being organised in response to the proposed state budget cuts, he is, however, opposed to any violent protests and subsequent civil unrest.

Rallies and strikes are a good thing, but disturbances will not solve anything,” Repse pointed out after a meeting with Latvian Free Trade Unions Association representatives today. As the finance minister explains, he realizes that “people are really concerned and desperate”, however, damaging government buildings will not contribute to improving the situation in any way as repairing the buildings would have to be paid for with state budget money anyway.

I’m sure he can’t have quite put it like this – if he did then a Finance Minister actually supporting strikes against his own measures would be a first, I think (what is happening in Latvia is surreal, but not this surreal, surely) – and that the question is a translation one, but still. It does illustrate the difficult position local politicians are being put in when it comes to defending the EU Commission and IMF inspired measures in the face of their own voters – as I already forecast it would be in my post The Long And Difficult Road To Wage Cuts As An Alternative To Devaluation back in January. More to the point is this, which is real enough:

Working pensioners’ pensions will be slashed 70%, all other pensioners will see their pensions shrink by 10%. Also maternity and child care benefits will be cut by 10%.

Now, I know the aim is to bring prices down, but how can a country which is effectively dying for lack of children (post coming on this later) be actually cutting child allowances. Frankly I find this even harder to believe than the idea of a Finance Minister supporting strikes against his own policies. It is nevertheless true. Everything, I see, is possibile in Latvia, except, of course, devaluation.

Brad Setser Need Be Curious No Longer

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Earlier this week Brad Setser was opining on his blog:

“Like everyone else, I am curious to see what China’s May trade data tells us. If China truly is going to lead the global recovery, China needs to import more – and not just import more commodities for its (growing) strategic stockpiles.”

Well Brad need restrain his curiosity no longer, since just this very morning we have learnt that:

China’s exports fell by a record in May as the global recession cut demand for goods produced by the world’s third-largest economy. Overseas sales dropped 26.4 percent in May from a year earlier. That compares with the median estimate for a decline of 23 percent in a Bloomberg News survey of 15 economists, and a 22.6 percent contraction in April.

Continue reading →

These Guys Don’t Miss A Trick

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This morning Bloomberg are reporting that:

Russia’s central bank may switch some of its reserves from U.S. Treasuries to International Monetary Fund bonds, the bank’s first deputy chairman, Alexei Ulyukayev, said in Moscow today. His comments were confirmed by a bank official who declined to be named, citing bank policy. Finance Minister Alexei Kudrin said last month that Russia planned to buy $10 billion of IMF bonds using money from its foreign reserves.

And then I recalled about a week ago reading this:

Russian Agricultural Bank, the state- owned lender to the farming industry, plans to sell dollar bonds in the first offering by a Russian lender to foreign investors this year. The issue by Rosselkhozbank, as the Moscow-based lender is also known, follows OAO Gazprom’s $2.25 billion sale in April, Russia’s only other dollar bond deal of 2009, according to data compiled by Bloomberg. Rosselkhozbank hasn’t set the maturity of its notes, according to a banker involved in the transaction, who declined to be identified before the deal is completed.

Rosselkhozbank hired Barclays Capital and Citigroup Inc. to organize the sale, said the banker. The lender is rated Baa1 by Moody’s Investors Service, the third-lowest investment-grade ranking, and one level lower at BBB by Fitch Ratings. Vnesheconombank, the nation’s state development bank, is planning a $2 billion sale of one-year notes tomorrow that will be privately placed with Russian commercial lenders and the central bank. The sale of 10-year notes by Gazprom, Russia’s gas export monopoly, was the country’s biggest-ever corporate bond offering and the first in dollars since July, Bloomberg data show.

So, if I understand things aright, you first borrow a lot of money in a given currency, and then you wind up a discourse which forces the currency you have borrowed the mony in on an ever downward path. I guess this is what they call “win-win” in Moscow.

Treasuries fell, pushing 10-year yields to the highest level since November, as the government prepared to sell $19 billion in the securities and Russia said it may switch some of its reserves from U.S. debt. Ten-year notes extended earlier losses after the first deputy chairman of Russia’s central bank said the nation may buy International Monetary Fund bonds. Today’s auction is the second of three sales this week that will raise $65 billion as part of the government’s record borrowing program.

More “Green Shoots” – Latvian Exports, German and Japanese Capital Goods Output

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Well today there was plenty of fresh news for collectors of “green shoot” negatives. Starting in Latvia, where the Statistics Office announced that exports were down by 30.9% year on year in April (the fastest rate of decline to date), while imports dropped a massive 45.6%. It looks like the Latvian Parliament is set to pass another round of budget cuts today, in the hope that these will bring back growth (how is not clear). All I can say is “these poor people”, I do wish those who were advising them had a better idea what they were doing.

Continue reading →

Green Shoots In Germany and Estonia?

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Well, I am busying myself this morning scratching around looking for green shoots in Turkey. But even as I was digging for these I couldn’t help notice this coming in over the radar from Germany, courtesy of Bloomberg:

German exports fell more than economists forecast in April as the global crisis restrained demand, keeping Europe’s largest economy mired in a recession. Sales abroad, adjusted for working days and seasonal changes, fell 4.8 percent from March, when they rose a revised 0.3 percent, the Federal Statistics Office in Wiesbaden said today. Economists expected a 0.1 percent decline in April, according to the median of 10 estimates in a Bloomberg News survey.

So German exports have not touched bottom yet – they are still falling. Since the German economy is export dependent, then this implies the obvious, the German economy is still contracting. I don’t think anyone ever doubted this, but looking at the way some of the material has been presented recently, it wasn’t always clear.

Continue reading →

David Takes On Goliath and Loses: The Ferguson – Krugman Exchange

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“As long as excessive debt is not digested, both monetary and fiscal policies are inefficient. There is not much of an alternative. Either to let the economy collapse, in order to reduce debts, and then use fiscal policy to revive it, or inundate the insolvent economy with public credit, to avoid the collapse, and loose the ability of fiscal policy to pull it out of a prolonged lethargy. Either a horrible end or an endless horror.”
After the Crisis: Macro Imbalance, Credibility and Reserve-Currency: André Lara Resende

Well, I think the title to this post makes my view on the high-profile shenanigans we are currently witnessing on the part of two widely respected contemporary intellectuals clear enough, even if Paul would probably respond that he is perfectly well able to take care of himself, thank you very much. Nonetheless, looking at the way the tone of his most recent and most public debate with Niall Ferguson has deteriorated (yes, it is Niall I’m talking about here, and not Sir Bobby, although sometimes even I have my doubts), let me confess, I am not entirely convinced on this point (Niall Ferguson’s argument can be found summarised in his Financial Times Op-Ed here, and in his rejoinder letter to Martin Wolf reproduced by the FT Alphaville’s ever interesting Izabella Kaminska here, while Paul Krugman’s “input” to the debate can be found here, here, and here).

So, since the thunder and lightening that such high profile exchanges generate tends to obscure more than it reveals, let me be so bold as to add my own 2 centimes worth – even if, apologies in advance, the whole affair ends up being most terribly “wonkish”. If you want to save yourself a good deal of trouble, and heart searching, the central point is a simple one: are long term US interest rates rising because investors are worrying about having to buy so much public debt (as K would point out, what else were they thinking of doing with the money – which isn’t really “money” at all, but, oh, never mind), or are they rising because investors expect the time path of US short term interest rates to move steadily upwards? It’s as easy, or as hard, as that. So now, you decide! Continue reading →

Latvia – Devalue Now or Devalue Later?

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The Latvian economy is certaily stuck in a hard and not especially pleasent place at the moment, and really one chart tells it all, since as we see above the local interbank overnight interest rates have been storming upwards and through the roof over the last two weeks. As a result of this unfortunate state of affairs the country has attained a higher profile in the international news media than most Latvians would ever have dreamt possible, or even, probably, considered desirable. Ever since Claus Vistesen’s last post, my inbox hasn’t stopped filling up with reports, analyses, forecasts etc. (apart from Claus, FT Alphaville’s Izabella Kaminska has had a steady stream of posts – here, here, here and here – while RGE analyst Mary Stokes is a regular follower of the issues – and see again here for some thoughts on the contagion question). Continue reading →

May Manufacturing Improves Again According To The JPMorgan Global PMI Report

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Global factory activity continued to improve in May amid growing optimism that the worst of the recession may be over. Output contracted at a much less ferociously than at the start of the year in one economy after another, and this month three countries actually registered output growth – India, China and Turkey. The JP Morgan global manufacturing index (PMI) rose to 45.3 in May from 41.8 in April, the highest level in nine months, although still a long way below the 50.0 mark dividing growth from contraction. The component indexes for output and new orders were both running at much higher levels than in April.

However, the headline PMI is still at a very low level by historic standards, and well below one which would be consistent with outright recovery. On the other hand, it is clear that the easing of the worldwide manufacturing recession which we have been seeing over the past two months has continued and has been substantial. The month-on-month gains in the PMI, output and new orders indexes in April and May are the greatest in the series history (which is not that surprising follow a series of record falls). All of the national indexes for these variables rose during the latest survey period.

Among the countries surveyed (see foot of post for details) only India, China and Turkey reported increased production. Japan (slowest for 13 months), the United States (weakest fall in current nine-month downturn) and the United Kingdom (slowest drop in a year) saw substantial easings in their respective rates of contraction. Although the Eurozone vastly underperformed relative to the global average, its output index rose to the greatest extent in survey history and to an eight-month high.

New orders contracted for the 14th month running in May, the longest period of contraction in the survey history. However, the Global Manufacturing New Orders Index climbed to 48.6, its highest level in a year. The rate of decline in global trade slowed sharply to its weakest since last September. China and India reported increases in total new orders for the second successive months in May. The U.S. and Turkey were the only other nations covered by the global survey to report gains, with new business rising for the first time in one-and-a-half years in the U.S. and for 17 months in Turkey.

Although May data pointed to substantial jobs losses, the rate of decline eased to a six-month low. Employment has now fallen for 14 successive months. Almost all of the nations covered reported lower staffing levels, the exceptions being India (slight gain) and China (no change). Among the other countries, only the U.S. and Austria failed to report slower rates of decline. The pace of job cutting eased to five, six and seven-month lows in the Eurozone, Japan and the U.K., respectively.

At 40.8 in May, the Global Manufacturing Input Prices Index posted its highest reading since October 2008 but remained below the neutral 50.0 mark for the eighth month running. Only India and Russia saw increases in costs. The rate of decline eased sharply in the U.S.

What follows is a very extensive country-by-country, blow-by-blow account assembled from across the national reports. It is probably too dense to read at one sitting, but you can simply pick and tick the regions and the countries that interest you, as I do think the monthly manufacturing PMIs give a reasonable picture of what is actually going on, as opposed to what some would like to believe is going on. Continue reading →

Seeing is Believing, But Stabilising is NOT Recovering

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This is one of the key points I have been hammering here on this blog for some weeks now. There is clear evidence of most economies globally “stabilising” at this point, you could even stretch it to say that the “worst is over” – since I doubt we will go back to the dreadful days of December and January (see German manufacturing PMI chart below) – when it was like someone had given a very sharp knock to the whole industrial sector with a large sledgehammer, and of course ultimately the vibrations settle down even if the damage remains.

Continue reading →