The Most Bizarre Monetary Policy DecisionOf Recent Times?

This was Wolfgang Munchau writing in the Financial Times a week ago:

The pre-announced interest rate rise that the European Central Bank is due to agree this Thursday must rank as one of the most bizarre monetary policy decisions of recent times. The economic recovery in the eurozone remains fragile, as last week’s German confidence indicators have shown. Even the ECB’s own forecast for headline inflation is relatively optimistic, while core inflation remained unchanged at 1.5 per cent in October.”

and he issued a warning:

“It is still not too late to propose ECB reform as part of the next treaty revision. For as long as EU leaders maintain the status quo, they have the central bank they deserve.

Central bank independence seems to be once more ‘a l’ordre du jour’, and the ECB may well live to find to its cost that there is one thing worse than actually playing the game, it’s playing the game and losing. Now why?
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Turnering The Screw

The Turner Report is about to appear. The Turner in question is the UK peer Lord Adair Turner, and the subject of the report the future of the UK pensions system. Although the final report is not due till the end of the month, the FT has been ‘ leaking’ some of the possible contents.

The commission will apparently suggest that the age at which workers can claim their full state pension should, over time, rise from 65 to 67. The increase is intended to come in stages, starting after 2020 when the UK’s women’s state pension age is set to be aligned with men’s at 65. Thereafter, state pension age should rise in line with increasing longevity, the commission will say. Now this idea seems to me to be a very important one, and I’d just like to take the time out to explain why I think this.
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Between A Rock And A Hard Place

US Economist Arnold Harberger once asked what Thailand, the Dominican Republic, Zimbabwe, Greece, and Bolivia had in common that merited their being placed in the same growth regression analysis. I can’t help having the same feeling about Germany, France, Italy and Spain. As I indicated in a post on A Few Euros More yesterday, its sometimes hard to see the common thread.

Be that as it may, this post is only about one of the ‘big four’: Italy. As I say in the Afem post, Italy is bucking the trend. Unfortunately it is bucking it in the wrong direction.
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Rational Markets?

The general impact of the French riots is, I feel, being ably covered by others here, what I am curious about is how financial markets reach their opinions. According to headlines in many newspapers, the euro is falling aginst the dollar as a result of what is happening in France (or see here). This may or may not be a good reading of why the euro is dropping, but if it was the explanation, I would say it was a far from rational response.
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Lovely Rita?

Well with all due apologies to the beatles Rita isn’t exactly as lovely as she seemed. Now she’s past her prime the insurance companies amongst others are busily counting the cost.

And on top of the obvious comes news that Rita really is number one: according to the FT she “has caused more damage to oil rigs than any other storm in history and will force companies to delay drilling for oil in the US and as far away as the Middle East, initial damage assessments show”.

So just to get things straight: the temporary supply bottleneck just got a little longer (this time my apologies to Ry Cooder) and finding more oil to raise output capacity just got a little harder. I haven’t got an envelope handy, but I don’t think I need to do too many complicated calculations to work out that if this is for real then oil prices can stay higher for longer and global growth will, as a consequence, be just a touch lower.

Meantime Econbrowser James Hamiliton explains why you shouldn’t be counting on getting too much relief from oil shale.

The French Differential

As I keep indicating the French economy – although not a spectacular success – continues to outperform the German one. This is interesting, since the French political system has been much more laggard than the German one in implementing reforms. That is why I place emphasis on the demographic differential.
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Eurozone More Exposed?

Chief OECD economist Jean Philippe Cotis wasn’t only proferring recommendations to the Federal reserve yesterday. He was also not backward in coming forward with his opinions about future growth in the eurozone. Even if Cotis isn’t exactly my favourite economist I feel here he may be a little nearer the truth.

The occasion for M. Cotis’ observations was the official press briefing for an interim OECD assessment of the economic situation in Europe, the United States and Japan.
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Close Call

The reference here isn’t to the actual hurricane (which was far from that if you were black, poor, and lived in downtown New Orleans) but to the economic ‘near miss’ I think we are watching, and to the difficult decision Alan Greenspan and his team will now have to take on 20 September next.

The blogs are of course rife with speculation.

Update: Dave at MacroBlog just came up with one more reason the Fed might steadfastly remain on course: poor productivity readings.
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This Is Fascinating

While the debate rages about who are what has been ultimately responsible for the plight of all those poor, largely black, people who got left behind when New Orleans went ‘under water’, this reuters article raises some fascinating points.

If refugees end up building new lives away from New Orleans, Hurricane Katrina may prompt the largest U.S. black resettlement since the 20th century’s Great Migration lured southern blacks to the North in a search for jobs and better lives.

Interviews with refugees in Houston, which is expecting many thousands of evacuees to remain, suggest that thousands of blacks who lost everything and had no insurance will end up living in Texas or other U.S. states.”

Officials say it will take many months and maybe even years before the birthplace of jazz is rebuilt.

Dynamic systems, steady state stable bad equilibria and shocks. Fascinating.

New Orleans did not always follow the trend. Historically, far fewer residents have moved from New Orleans than from most American cities, despite its high poverty and crime rates.”

In other words many people had become simply ‘stuck’ there. Actually, maybe the writer should have said because of the “high poverty and crime rates”, in chaos theory terms that’s precisely how things like ‘strange attractors’ and ‘sinks’ operate.

The possibility of this outcome had in fact been going through my mind. Obviously I’m in Europe, so I don’t really know at first hand, but I have the impression that this would be the best thing that could happen.

Mind you, I agree with Nicholas Lemann, author of “The Promised Land: The Great Black Migration and How it Changed America,” who is quoted as saying it is too early to tell. Quite. But here I think is one area where policy really could make a difference. Get these people into stable temporary housing, get them into jobs, get their children into schools. Then they won’t be going back.

Mathew Lynn Has It Right

Bloomberg’s Mathew Lynn has the German enigma more or less right: it’s a toss up.

Flip the coin one way, and Germany may be about to enter a sustained period of growth, after some painful structural change, which would boost exports further and give consumers more confidence. It would be a re-run of the “Wirtschaftswunder,” or economic miracle, of the 1950s.

Flip it another way, and costly welfare, an overvalued euro and a demographic imbalance will combine to pitch Germany into permanent decline“.

Well I think I’ve clearly placed my bet, so come on ladies and gentlemen, there is just a little time before they call Les Jeux Sont Faits.