Smoke induced social science

You certainly would not win  a debate by stating that smoking is bad for your health. It is obvious putting fumes into your lungs which are the premier power plant to get you going or simply lying around to read a book, is not a very good idea.

But, as W. Buiter points out in a recent post, it should not be discredited and pestered by bad science.

Some of his points are:

So please, when there is a public announcement that X number of people died during 2009 as a result of smoking-related illnesses, please provide the public with two bits of information.  First, how much longer the victims of smoking would have lived if they had not smoked and, second, what they would have been expected to die of instead.

The paper is the kind of publication that gives the social sciences a bad name.  In 2006/7, UK government revenues from taxes on tobacco products (excise duties and VAT) were around £10bn.  But let’s leave that aside.  The authors of the study are apparently unaware of the fact that the concept of cost relevant from the perspective of the allocation of scarce resources is opportunity cost, not financial cost or outlays.  Even as regards the financial costs imposed by smoking on the NHS, the paper is a spectacular failure.  It strongly conveys the impression that the NHS is at least £5bn worse off because people smoke.

And how is that?

One fact everyone agrees on is that smoking causes people to die younger.  Because people die younger, they will make fewer demands on the services on the NHS.  A big human loss, but a financial gain to the NHS.

full post of WB

The ECB and its QE

W. Buiter has a good post about the ECB and its QE by buying covered bonds. 60 billion € looks quite puny and one can rest assured that the ECB will buy back some junk unknowingly. Witness that Spain is already issuing big time. Buiter asks if the ECB has sufficient capital in light of its price stability mandate.

With assets of € 1,795 bn and capital and reserves of € 73 bn, the Eurosystem has 24,6 times leverage.  A decline of just four percent in the value of its assets would wipe out its capital.  That does not look like a terribly comfortable position, as the quality of much of the assets it has accepted as collateral from Euro Area banks is likely to be uncertain at best.

Unlike the US banks and the UK banks, Eurozone banks have barely made a start on recognising the toxic and bad assets they are exposed to, on balance sheet or off-balance sheet. … We know of the dreadful state of most of the German Landesbanken, the fragility of the bailed-out Commerzbank, the opaque balance sheet of Deutsche Bank, the precarious state of the remaining large listed Benelux banks, the exposure of the Austrian banks to Central and Eastern Europe etc. etc.  If any of these banks had good collateral, they would not give it to the Eurosystem.  They would sit on it.

Even before the Eurosystem starts to buy private securities outright (as it is planning to do with high-grade covered bonds, Pfandbriefe, to the tune of € 60 bn), it is certainly within the realm of the possible (or even likely) that it would suffer losses on its assets of €73 bn or more, before this crisis and this contraction are over.

full article

German GDP -6%; 2010 positive again. Really?

So say German papers (it’s election year, mind you). Pensions will rise …

Excerpt W. Buiter:

Disguising the new damage done to the banks’ loan book by the contraction of the real economy will become harder as time passes.  By the end of the year, I expect that the combination of the stress tests and the reluctant revelation of new bad loans may bring us to the point that even the authorities can no longer shrink from restructuring the insolvent components of the banking system by forcing the unsecured creditors to swap their debt and other claims for equity.  Only then can the banking system as a whole begin to function normally again – one hopes under very different rules of the regulatory game.

The inventory cycle

The inventory cycle is short and sharp.  Statistically, inventory accumulation and decumulation often account for more than 100 percent of the business cycle.  This is unlikely to be the case in the current cycle.  Final demand (private consumption, private fixed investment, exports and government spending on goods and services) is contributing to the downturn and will have to turn around to achieve a sustained recovery.

and here’s old Europe

The rest of Western Europe is dead in the water.  The ECB is paralysed, partly by fear of the zero lower bound on interest rates among some of its Governing Council, partly because of the absence of a ‘fiscal Europe’, capable of recapitalising the ECB/Eurosystem should it suffer a serious capital loss as a result of private sector credit exposure incurred as a result of its monetary, liquidity enhancing and credit enhancing operations.  Countries that have fiscal credibility and could do more as regards Keynesian fiscal stimuli, like Germany and France, refuse to do so.  The recession in Western Europe started about a year after that in the US.  It will last at least as much longer.  The banking system of Western Europe (ex-UK) has been even more reluctant than that of the US and the UK in owning up to the disastrous state of its balance sheet.  At least €500bn additional capital will be required to keep the continental West-European banking system on its feet.  More will be required if it is to actually start lending in earnest again.

and this about the modern Borat countries

Eastern Europe (including the CIS) is the most dramatic victim of the made-in-Wall-Street/City-of-London/Zurich crisis.  Virtually all countries in the region were heavily dependent on external financing and on foreign trade.  Some, especially in the CIS, are major commodity exporters.  Western banks are often the parent banks of the local branches and subsidiaries.  As the barbarians threatened Rome, headquarters withdrew the Legions from the provinces.  Parent banks are ruthlessly cutting the access to funds of their subsidiaries and branches in CEE.  No help will come anytime soon, with the members of the old EU barely capable of keeping their own trousers up.

full post here: Green shoots: grounds for cautious pessimism

Wirtschaftliche Hoffnungsschimmer-Illusion

Bärenfallen, helle Punkte am Horizont, erste Lichtblicke …

W. Buiter bringt Klarheit in diese drogeninduzierten Wunschvorstellungen. Ebenso zum Oster-vorgezogenen G20 Windei.

The Great Contraction will last a while longer

This financial crisis will end.  The Great Contraction of the Noughties also will come to an end. But neither the financial crisis nor the contraction of the global real economy are over yet.  As regards the financial sector, we are not too far – probably less than a year – from the beginning of the end.  The impact of the collapse of real economic activity and of the associated dramatic increase in defaults and insolvencies by non-financial enterprises and households on the loan book of what is left of the banking sector will begin to show up in the banks’ financial reports at the end of the summer and in the autumn.  By the end of the year – early 2010 at the latest – we will know which banks will survive and which ones are headed for the scrap heap.  With the resolution of the current pervasive uncertainty about the true state of the banks’ balance sheets and about their off-balance-sheet exposures, normal financial intermediation will be able to resume later in 2010.

Vor allen Dingen nicht den Regierungsverlautbarungen trauen …:

Governments everywhere are doing the best they can to delay or prevent the lifting of the veil of uncertainty and disinformation that most banks have cast over their battered balance sheets. 

Denn wir möchten nicht so ganz raus mit der Wahrheit:

I used to believe this state capture took the form of cognitive capture, rather thanfinancial capture.  I still believe this to be the case for many, perhaps even most of the policy makers and officials involved, but it is becoming increasingly hard to deny the possibility that the extraordinary reluctance of our governments to force the unsecured creditors (and any remaining non-government shareholders) of the zombie banks to absorb the losses made by these banks, may be due to rather more primal forms of state capture.

Und die jüngsten G20 Vereinbarung, eh Erklärungen?

Indeed, the G20 delivered nothing in this regard.  It would have been preferable to maintain the overall size of the planned (or rather, expected) global fiscal stimulus but to redistribute the aggregate (about $5 trillion over 2 years, as measured by the aggregated changes in the national fiscal deficits) in accordance with national fiscal spare capacity (I believe the World Bank calls this ‘fiscal space’).   This would mean a smaller fiscal stimulus for countries with weak fiscal fundamentals, including the US, Japan and the UK, and a larger fiscal stimulus for countries with strong fiscal fundamentals, including China, Germany, Brazil and, to a lesser degree, France.

Der folgende Absatz geht ein wenig in die Eier, lies erhöhte Steuern:

Furthermore, a likely consequence of the fiscal stimuli we have already seen or are about to experience is a negative impact on the medium- and long-term growth potential of the global economy.  The reason is that, if fiscal solvency is to be maintained, there will have to be some combination of an increase in the tax burden and a reduction in non-interest public spending in most countries when this contraction is over.  The inevitable effect of the crisis and the contraction is a higher public debt burden and therefore a larger future required primary government surplus (as a share of GDP).  Almost any increase in the tax burden will hurt potential output – just the level of the path of potential output if you are a classical growth groupie, both the level and the growth rate of the path of potential output if you are an adept of the endogenous growth school.

… und zu Steuererhöhungen wird Inflation kommen:

For both countries there is a material risk that the mind-boggling general government deficits (14% of GDP or over for the US and 12 % of GDP or over for the UK for the coming year) will either have to be monetised permanently, implying high inflation as soon as the real economy recovers, the output gap closes and the extraordinary fear-induced liquidity preference of the past year subsides, or lead to sovereign default.

Das G20 Windei !!

The global stimulus associated with the increase in IMF resources agreed at the G20 meeting earlier this month will be negligible unless and until these resources actually materialise.  The statements, declarations and communiqués of the G20, including the most recent ones highlight the gaps between dreams and deeds.

Even the promise of an immediate increase in bilateral financing from members of $250 bn is not funded yet. Only $200 have been promised firmly – $100 bn by Japan and $100 bn by the EU.  Prime Minister Brown announced that the PRC had committed another $40 bn, but apparently he had forgotten to clear this with the Chinese.

As regards the plan to incorporate in the near term, the immediate financing from members into an expanded and more flexible New Arrangements to Borrow would be increased by up to $500 billion (that is by another $250 bn).  Unfortunately, nobody has volunteered any money yet.  It therefore has no more substance than past commitments by the international community to fund the achievement of the Millenium Development Goals.

Then there is the promise that the G20 will consider market borrowing by the IMF to be used if necessary in conjunction with other sources of financing, to raise resources to the level needed to meet demands.  That is classic official prittle-prattle – suggesting the IMF borrow without providing it with the resources (capital) to engage in such borrowing.

There is also $6 bn for the poorest countries, to be paid for by IMF gold sales and profits.  Nice, but chicken feed.

voller Artikel

Seien Sie nicht so anal-retentiv, Herr Trichet.

Jean Claude, der Donnerstag steht vor der Tür. Gib dir einen Ruck und senk die Zinsen DRASTISCH. Denn schliesslich:

„The (formerly) advanced industrial countries are all in or headed for the liquidity trap ‘lite’.  This is the situation where the short-term risk-free nominal interest rate cannot fall any further.  A ‘heavy’ or ‘deep’ liquidity trap occurs when nominal risk-free rates at all maturities are at their lower bound(s)…

If zero is the floor, there is no reason not to go there immediately.  The recession in the US, the UK, the Eurozone, Japan and the rest of Europe is, with probability verging on certainty, going to be so deep and so prolonged, that the zero lower bound will be reached even by the most anal-retentive gradualist central bank before the middle of 2009.  So why not get it over with in December 2008 and possibly do some good in the mean time? …

Cutting nominal rates to zero and quantitative easing will not be inflationary as long as the virtually unbounded liquidity preference  of the private sector persists.  These measures will become inflationary as soon as normalcy returns and liquidity is, once again, just viewed as food for the faint-hearted.  At that point, there has to be a swift reversal of the quantitative easing and an increase in short nominal interest rates, sufficient to reduce the real demand for base money to a level consistent with the remaining outstanding nominal stock at the prevailing price level.  That will be a fun exercise….

The ECB is behind the curve and in denial about the absence of a liquidity crunch in the Euro Area.  The Euro Area economy is, however, less vulnerable than the UK, because of the uniquely high indebtedness of the UK household sector and the huge size of the UK banking sector’s dodgy balance sheet relative to the size of the UK economy.  I would recommend a 125 basis points cut by the ECB next Thursday, but anticipate a mere 75.

Who said central banking was boring?“