Paul Krugman had a short post recently drawing attention to a rather foolish and ill-thought-outstatement originating in the mouth of German Finance Minister Peer Steinbrueck.

Germany’s finance minister told AFP in an interview that cutting interest rates too low in an effort to counter the global recession could create what he called a dangerous “growth bubble.” – “On the one hand we need to boost the economy, on the other hand we must make sure that a policy of cheap money does not lead to a new growth bubble founded on credit, as happened after September 11, 2001,” Steinbrueck said.”It is therefore important that the focus, at least in Germany, be on sustainable investments in infrastructure and less on consumer spending financed by debt,”

Apart from the point Krugman wants to implicitly make about interest rates, the point about consumer debt in a current account surplus economy like Germany is extraordinarily misplaced. You have about as much chance of fuelling up a property boom in Germany as you have of setting up a ski slope in hell (that is, there is a “ski slope in hells” chance of getting this outcome – or put another way the likelihood is infinitely small). In Spain on the other hand, even while the possibilities of fuelling a further property boom right now are about as close to zero as you can get, the country’s leaders waste not a moment in trying to convince people to go out, borrow and buy, even though with a 10% current account deficit to correct, and corporate and household debts which run to over 220% of GDP, what they need to do is start saving, and not borrow more. This very ineptness (and basically I would argue lack of understanding of what monetary policy is all about) was also highlighed recently by statements from the European Union’s Economic and Monetary Affairs Commissioner Joaquin Almunia, who said (in an online chat for the Spanish newspaper El Pais) that whille getting financing costs down was necessary and important, interest rates should not be allowed to fall to negative levels in real terms.

“At this moment, it would be good for the cost of financing to go down……..We shouldn’t go back to a situation in which real interest rates are negative, as we know from experience that this leads to excess indebtedness, low perception of risk and new bubbles which always end by blowing up in our faces.”

Essentially two things are being confused here. Negative interest rates (such as those Spain had between 2002 and 2006 – you know, the ones that lead to the current Spanish crisis, see chart below) are highly undesireable during the upswing in a business cycle, when an economy is “overheating”, since you are simply giving more stimulus to economies which are already stretched to capacity – and negative rates may thus produce “bubbles”, as they obviously did in both Ireland and Spain – but these very same negative rates are obviously highly desireable during a downturn, and especially during recessions of the kind we are seeing at the moment, since they are one of the tools policymakers can use to stimulate slumping economies – all basic Econ 101 really. And of course, we are all currently heading into one of the most important recessions since WWII, or hadn’t our “machine-reader” commissioner noticed?

While I’m on this sort of topic, Krugman has a lot of useful and interesting material on the proposed US stimulus plans. The numbers are truly impressive and awe inspiring, with the fiscal deficit set to rise to close to (or even over) 10 per cent of GDP in 2009 according to initial estimates from the Congressional Budget Office.

But even this kind of aggressive fiscal assault may, as Krugman indicates, fall woefully short of what could be needed to stop the US labour market turning really sour, at least in the short term.

The new CBO budget and economic outlook is out. Above is its forecast for the GDP gap — the hole stimulus has to fill. I’d guess that the CBO estimate, which has unemployment averaging 8.3 percent in 2009 and 9 percent in 2010, is actually too optimistic (see 3, below), but even so it puts the Obama plan in perspective: a 3% of GDP plan, with a significant share going to ineffective tax cuts, to fill an 8% or more gap.

A comment which set me thinking about what is actually happening in Spain right now. Unemployment went over the 3 million mark in December, and is now running at something over 13.5% of the economically active population (according to Eurostat estimates). During 2009 this figure is certain to rise further, possibly to 4.5 million, or 20% of the economically active population (my guess, though it is a guess, since there are so many “unknowns” at this point – but we will surely be over the 4 million mark come next December).

Yet Spain’s Labour Minister Celestino Corbacho proudly points to a 10 billion euro public works and infrastructure programme which is intended to create 300,000 jobs during 2009 – 300,000 new jobs in an economy losing jobs at the rate over over a million a year, again is like trying to light a damp match during Noah’s flood. And obviously Spain’s resources are seriously limited in terms of fiscal resources to fight a problem on this scale. My back of the envelope calculations suggest that a capital injection – Japan style – of between 40% and 50% of GDP may be needed to sort out the accumulating pile of non performing corporate loans and grossly over-valued mortgage backed securities. Evidently Spain cannot handle a problem of this magnitude alone. So would those whose monetary policy helped light this bonfire, now like to step forward with the fiscal policy hose to try to help extinguish it? Are you listening Joaquin Almunia?

The fact that Hungary’s National Bank did not decide to make an unexpected interest rate cut at its meeting earlier this week seems to have surprised some, but it really should not have done. According to James Morsink, head of the IMF delegation to Budapest, Hungary only has room to cut its benchmark interest rate at a “gradual and cautious” pace. The reasoning behind this view is simple, any more rapid reduction in the bank’s benchmark rate risks being accompanied by a devaluation of the forint, and and any such devaluation would inevitably lead to a rise in mortgage defaults and problems for the banking system as holders of Swiss Franc forex loans find themselves unable to maintain their payments as unemployment rises and wages and salaries fall.

Thus it is that even though the Hungarian economy is now in its worst recession in over a decade the IMF representative finds the decision to cut the key policy rate for the second time in two weeks just before Christmas (by 50 basis points to 10.00%) “appropriate”. Such “snails pace reductions mean that over the last two months the central bank has now clawed-back only half of the 3% hike made back in October, a hike which was rapidly put in place in an attempt to mount a firewall defence around a Hungarian banking system faced with the imminent threat of financial meltdown at the end of October. The problem is, having put the firewall in place it is proving very hard to remove it, and Hungarian monetary is now well and truly trapped between the proverbial rock and a hard place.

The difficulty of this situation is implicitly recognised by András Simor, Governor of Hungary’s central bank, who told Reuters this week that the 10.00% base rate needed to be lowered as fast as possible. Yes, indeed, but how? Continue reading →

Yesterday we learnt that German unemployment was, unfortunately, back on the rise, while today we get to see one of the principal reasons for the uptick. German exports fell back at a record rate in November – in fact seasonally and working day adjusted current-price sales exports fell back 10.6 percent from October (when they declined 0.6 percent), according to the latest data from the Federal Statistics Office. This is the biggest monthly drop since records for a reunified Germany began. November exports dropped 12 percent year on year, while imports fell 5.6 percent on the month and 0.9 percent from a year earlier. The trade surplus (which is the key consideration when it comes to GDP growth) narrowed to 9.7 billion euros from 16.4 billion euros in October, and almost half the April rate of 18.8 billion euros. The current account surplus was down to 8.6 billion euros.

And the immediate outlook seems to be even worse, with the latest data from the Technology Ministry showing new orders fell 27.2% (on aggregate) in November (as compared with November 2007) following a 17.5% annual reduction in October, while export orders fell back 30% year on year. Continue reading →

Unemployment in Germany rose last month for the first time since February 2006, thus bringing inauspiciously to an end an unprecedented 34 month labour-market recovery. Figures released by the Federal Labour Agency today show that the number of those seeking employment in Germany rose by a seasonally-adjusted 18,000 in December. The change is small, but the significance is great, since this is obviously but the first month of many when unemployment will rise in Germany, and this rising unemployment will now, in its turn, feed back into the industrial slowdown which is already underway. The seasonally adjusted unemployment rate remained unchanged (following data revisions for previous months) at 7.6 percent.

Not a surprise. But not good news.

Spain’s inflation (as measured by the EU HICP methodology) was around 1.5% (year on year) in December 2008, according to the flash estimate issued by the stats office (INE) earlier this week. This number only offers us an initial glimpse of the final HICP reading, but, if confirmed, it will mean Spain’s annual rate of inflation has dropped 0.9% (nearly one full percentage point) in the space 0f just one month – since in November the annual rate was 2.4%.

It will also mean that Spain’s inflation for 2007 dropped its the lowest rate in a decade, down sharply from the 2007 rate of 4.2 percent. This is remarkable since Spanish inflation has generally been over the EU average for more than a decade now, and 1998 was the last year in which prices for goods and services rose as slowly as they did in 2008. And the big question is, just how much more disinflation is there now in the pipeline? Where, indeed, will this process end? Continue reading →

Well as far as I can see, in this the great second depression cycling race, we now have a small breakaway “peloton” formed out there in front as we struggle to reach the Tourmalet summit, with teams from Germany, Spain, China , Russian and even Ukraine all elbowing furiously away one with another, in an attempt to snatch the yellow jersey from its current holder – Japan. But wait! A little way behind them I can now discern another, more densely packed, group, although I can scarcely make out one rider from another such is the cloud of dust thrown up by the power and fury of their effort, although from the little I can make out they do appear to be lead by “gregarios” hailing from the United States and the UK, and, no doubt about it, they do seem to be closing fast.

Yet as things stand as we go to press, one of the primary contenders for this most unusual and most meritless of awards must surely come from this years very strong Russian contingent, and it therefore shouldn’t surprise us at all to find that Russian manufacturing shrank at what was a country-specific record pace in December, with sharp drops in both foreign and domestic demand producing widespread production and job cuts, according to the latest PMI report from VTB Bank Europe.

VTB’s Purchasing Managers’ Index contracted for what is now the fifth consecutivemonth to 33.8, from 39.8 in November. This brings Russia swerving into line with Japan (30.8), Spain (28.5), Germany (32.7) and China (41.2) Russian manufacturing is, in fact, now contracting more rapidly than it did at any time during the 1998 economic collapse, when the government had to abandon its support for the ruble and ended up defaulting on $40 billion of domestic debt.

The malaise is general, and Russia’s RTS Index fell by 72% in 2008, making it the worst performing stock index among the world’s 20 biggest equity markets . The ruble has also been falling, and lost 15 percent against the central bank’s dollar-euro currency basket during 2008. The central bank has also now used 27 percent of its foreign-currency reserves, which are still the world’s third-largest, trying to prevent an overly dramatic devaluation of the ruble. Reserves were down to $438.2 billion by the end of the year, and more than $200 billion has left the country since the August invasion of Georgia, according to estimates at BNP Paribas.

So the position in Russia is bad, of that there is little doubt, but could Russia really take over the batton from Japan, and lead the global economy downwards, surely this assertion is exaggerated, I mean it wasn’t so long ago that they were growing at 7%, was it? Well exactly, the downturn in Russia is extraordinarily sharp (as it is in China), which is what makes the position so dramatic really, oil is down, manufacturing output is down, and a sharp credit crunch has consumer demand in the “throttle” position. Let’s look at some of the recent macro data. Continue reading →

Well, these are not easy times for those who are economically active in Spain, and doubly not-so when many of those with money to spend over the holiday season decide to take advantage of the cheap pound and go and spend it over in the UK (in fact in this Somerset village they are already accepting one euro for one pound sterling). But this is only the tip of the iceberg and, as we will see below, retail sales inside Spain are now steadily falling by the month, with no reversal to this trend anywhere in sight. Not this year, not next year, and probably not the one after either.

But first off, lets start with the news of the moment, Spain’s falling (or could we say disappearing?) industrial output. Continue reading →

Oh yes, there is a difference of around 15 percentage points between the cost of insuring bonds against default in the countries they are respectively responsible for. But then, even in the more favoured case investors are demanding a premium which amounts to an astonishing 31 percent of the amount of debt protected.