Now Here's a Very Interesting Idea

Who knows if this will be a killer app or not, but it certainly deserves to be. With all the centralised information gathering that has been going on post 09/11 our societies really seem to lack some effective counterbalancing institutions. Of course, there will be no shortage of complaints about the dangers of libelous material, or about the intrusion of privacy. On the later I think there is an assymetry here, since no one actually forces public figures to come forward. It is a voluntary act, and when you decide to enter the public zone you should know and accept that your normal rights to privacy are modified. After all, the days are long gone when we could naively imagine that people took public or corporate office 'to serve their country' or 'simply to do some good'. So like income tax, unsought publicity is one of the negative points that goes with the job. The dangers associated with setting the 'risk bias' on the other side of the privacy frontier are far greater. On the dangers of ill-founded information, it seems to me that a slash-dot type filtering system might do the job, and even if it didn't, wouldn't the genuine cases have plenty of willing supporters waiting out there to jump on any 'errors'. As they say on the site: is this legal?..........It should be.

Annoyed by the prospect of a massive new federal surveillance system, two researchers at the Massachusetts Institute of Technology are celebrating the Fourth of July with a new Internet service that will let citizens create dossiers on government officials. The system will start by offering standard background information on politicians, but then go one bold step further, by asking Internet users to submit their own intelligence reports on government officials -- reports that will be published with no effort to verify their accuracy. "It's sort of a citizen's intelligence agency," said Chris Csikszentmihalyi, assistant professor at the MIT Media Lab.

He and graduate student Ryan McKinley created the Government Information Awareness (GIA) project as a response to the US government's Total Information Awareness program (TIA). Revealed last year, TIA seeks to track possible terrorist activity by analyzing vast amounts of information stored in government and private databases, such as credit card data. The system would use this information to analyze the actions of millions of people, in an effort to spot patterns that could indicate a terrorist threat. News of the plan outraged civil libertarians and prompted Congress to set limits on the scope of such activity. The Defense Department then renamed the program Terrorist Information Awareness, to ease public concern.

But the controversy gave McKinley the idea for the GIA project. "If total information exists," he said, "really the same effort should be spent to make the same information at the leadership level at least as transparent -- in my opinion, more transparent." McKinley worked with Csikszentmihalyi to design the GIA system. It's partly based on technology used to create Internet indexes such as Google. Software crawls around Internet sites that store large amounts of information about politicians. These include independent political sites like opensecrets.org, as well as sites run by government agencies. McKinley created software that ferrets out the useful data from these sites, and loads it into the GIA database. The result is a one-stop research site for basic information on key officials.

The site also takes advantage of round-the-clock political coverage provided by cable TV's C-Span networks. McKinley and Csikszentmihalyi use video cameras to capture images of people appearing on C-Span, which generally includes the names of people shown on screen. A computer program "reads" each name, and links it to any information about that person stored in the database. By clicking on the picture, a GIA user instantly gets a complete rundown on all available data about that person. The GIA site constantly displays snapshots of the people appearing on C-Span at that moment. If there's a dossier on a particular person, clicking on the picture brings it up. A C-Span viewer watching a live government hearing could learn which companies have contributed to a member of Congress's reelection campaign, before the politician had even finished speaking.

All of the information currently on the site is available from public sources. But GIA will go one step further. Starting today, the site will allow the public to submit information about government officials, and this information will be made available to anyone visiting the site. No effort will be made to verify the accuracy of the data. This approach to Internet publishing isn't new. It resembles a method known as Wiki, in which a website is constantly amended by visitors who contribute new information. The best known Wiki site, www.wikipedia.org, is an online encyclopedia created entirely by visitors who have voluntarily written nearly 140,000 articles, on subjects ranging from astronomy to Roman mythology. Any Wikipedia user who thinks he has spotted an error or wants to add information can modify the article. Unlike at a standard encyclopedia operation, there is no central authority to edit or reject articles.

The GIA approach, though, raises the possibility that people could post libelous information, or data that unreasonably compromises a person's privacy. That troubles Barry Steinhardt, director of the Technology & Liberty Program of the American Civil Liberties Union. "We think that there should be some restrictions on the publishing of personally identifiable information, whether it involves government officials or not," he said. But he noted that the public has a right to know some things about a politician that would be properly kept private about an ordinary citizen. For instance, voters have a right to know where a politician sends his children to school, if that politician has taken a strong stand on school vouchers.

"Do they have the right to publish every piece of data they're going to publish?" Steinhardt asked. "It's going to depend on what they publish." In any case, Steinhardt said, McKinley and Csikszentmihalyi have a First Amendment right to set up the GIA project. And he said that it's a valuable response to the government's TIA surveillance. "I assume the point of this is, turnabout is fair play." On a page of the GIA website, at opengov.media.mit.edu, McKinley and Csikszentmihalyi give their answer to questions about the legitimacy of their actions. "Is it legal?" the site reads. "It should be."
Source: Boston Globe
LINK

Economic and Financial Market Consequences of Ageing

I'd missed this. It is, of course, extremely interesting for the wealth of detail it provides. (Sunday morning: I've now had time to read this in a bit more depth. In the end it is a paper which promises much, but finally disappoints. In particular they take as their starting point the political impossibility of an immigration driven approach to the problem. They see FDI as an explicit substitute for immigration without examining the various kinds of economic activity involved: ie questions like who is going to care for all the old people. In addition the following don't even seem to get a single mention: deflation, Japan's continuing economic crisis, China.....Even TFP and human capital, which is touched on, is not explored. As a result it is a little difficult to place a great deal of confidence in the, ultimately, rather optimistic findings).

Focus of Paper

The implications of ageing populations over the coming decades at the global level will be significant in terms of not only a slowdown in the growth rate of output and living standards but also with regard to fiscal and financial market trends. Given the backdrop of the downward trend in worldwide potential growth rates over the past number of decades, driven by falling rates of capital accumulation and a slowdown in productivity growth, the additional negative impact of relative declines in the growth rate of working age populations over the coming decades bodes ominously for future worldwide economic developments. The focus of the present paper will be to quantify and analyse the nature, extent and geographical reach of the “real” economy and budgetary aspects of ageing populations as well as providing an initial assessment of the financial market implications of this phenomenon. Particular attention will be devoted to the impact of ageing for labour supply trends; for expenditure pressures on the public finances; for savings, investment and productivity developments; as well as interest rate, exchange rate and current account effects. Finally, an initial assessment will also be provided regarding its effects on globalisation trends in general but more specifically international financial flows and pension fund investments....................


Recent Revisions to the Demographic Outlook for the US :


Compared with the demographic analysis included in Mc Morrow and Roger (1999 >>on my website demography page<< edward), the one big change which has occurred in the intervening period has been the revised population projections for the US. On the basis of the evidence from the 2000 US census, the US is now facing a very different short and long run demographic outlook compared with the EU. While life expectancy developments and projections are still very similar in both areas, fertility rate trends and forecasts differ substantially, due to the recent recovery in US birth rates to 2.0 per woman (compared with 1.5 in the EU) and the expected further improvement to 2.2 over the coming decades (compared with a recovery to 1.7 in the EU). Differences in terms of fertility rates are further reinforced by migration trends, with the central projection of the US Census Bureau suggesting that 45-50 million of the nearly 130 million increase in the total US population over the period 2000-2050 will come from international migration flows, i.e. 35-40% of the total. This compares with a predicted 30 million increase in EU migration over the same period. Finally, in terms of total population numbers, it is interesting to note that the US has moved from having a total population of just half that of the EU in 1950 to an expected population in 2050 which, at 400 million, would be 40 million higher than in the EU. This outcome seems inevitable unless there is a radical shift in the relative fertility and migration trends described above.
Source: EU Commission: Economic and financial market consequences of ageing populations
LINK

China the Main Beneficiary of the Fed Stimulus?

Andy Xie has a curious argument which amounts to saying that the principal beneficiary of any Greenspan monetary easing will be..........China. This is a result of the fact that its large surplus labour pool means that global labour prices will be increasingly set in China (think Joerg's labour-buffer) and that its position as part of the dollar-bloc will leave it far better placed than others to benefit from any expansionary stimulus.

I believe that structural factors are playing far more important roles than exchange rates at sustaining the superior economic performance of the dollar block.

1. Exchange rates. The euro-dollar rate has rallied by 10% from the beginning of 2003 and by 20% from the average value in 2002. The strong euro has curtailed the benefits of any US recovery to Europe. The euro zone grew its exports by 18% in dollar terms between 1997 and 2002, while Japan and the US did not grow their exports at all. The euro zone was essentially competing against East Asia ex-Japan for market share through competitive devaluation. The euro revaluation, however, has taken the euro zone out of competition for market share.

Japan’s exports have stagnated since 1994. The US recovery may increase Asian demand for Japan’s capital goods. It would not, however, compete against other Asian economies for export market share. Japan gave up on the market share game when it did not devalue its currency during the Asian Financial Crisis.

2. Europe outsourcing. In addition to exchange rates, two structural factors are helping the dollar block. First, Europe is moving toward outsourcing. Relocation of production capacity from Europe to China has been massive in the past few years. Both pull and push factors are at play. China’s improvements in infrastructure and human capital, its growing domestic market and availability of cheap local financing have been major pull factors. Disillusionment with the pace of structural reform and stagnant local markets at home have been the push factors. In this regard, Europe’s corporate sector is following Japan’s for similar reasons.

China is attracting growth from Europe and Japan, which is helping the US indirectly. The US policy makers should think hard about this. China is the most important force in sustaining US living standard today, in my view. The renminbi peg to the dollar guarantees the US financial stability, even as its balance sheet deteriorates. If one only looks at the bilateral trade balance, it would create a highly distorted picture.

Europe and Japan would certainly experience stagnation in this new world. However, both are experiencing population decline. Their focus is quality of life rather than growth. Their pensioner populations are growing rapidly, requiring cheap imports to sustain living standards. The distribution of growth in the world today is far more logical than what most policy makers believe. Growth is not and should not be the game for Europe and Japan.

3. Spreading China industrialization. Second, China’s industrialization is spreading. Geographically, the Yangtze River delta has come of age. Its contribution to China’s export growth has increased from 27% between 1993 and 1998 to 41% since. Its total exports should exceed Pearl River delta’s exports for the first time this year. This region has a population of about 137 million, about double that of the Pearl River delta.

Domestic private enterprises are prominent in the Yangtze River delta’s development. China’s exports were dominated by enterprises that migrated into China from Hong Kong and Taiwan and, later, by multinational corporations. Chinese private enterprises are joining the picture for the first time. Their exports have more than doubled this year. I believe that this is the most important development in China’s competitiveness. This force would eventually broaden China’s exports to most products in the global economy, in my view.


China’s competitiveness does not result from its currency. Rather, it is due to a combination of rapid productivity growth and massive surplus labor. The latter turns the former into a permanent relative price change. For example, when China reduces the production of motorcycles by 50%, it would lead to a permanent reduction in motor cycle prices relative to, say, oil.

China’s productivity increase represents a permanent relative price change between labor and scarce resources. I believe that this point is widely misunderstood. When one company can make motorcycles in China, thousands would follow. Thus, the value of a motorcycle relative to oil would shift from Japan’s labor cost to China’s. Exchange rate adjustments would not be able to push back this force. As China learns to make more products, it will eventually devalue labor relative to scarce resources in general. This is not an exchange rate issue. If China appreciates its currency, it would lead to reduction in nominal wages, which are determined by global demand for Chinese exports.

The China-US axis is not just due to China pegging its currency to the dollar. It is due to (1) China determining marginal production costs and (2) the US determining selling prices due to its large and open market. The renminbi peg links production cost to selling price. It makes perfect sense. If China floats its currency, the renminbi would still track the dollar, in my view.

The China-US axis causes the Fed monetary stimulus to stay within the dollar block. Commercial banks have cut back cross-border lending. Money now flows around the world via FDI and trade. Because China accounts for most of the marginal increase in global trade and FDI, when the Fed increases money supply, it flows to China and quickly comes back into the US treasury market.

Because the China-US axis is determining both production cost and selling price, the rest of the world is also under pressure to peg its currencies to the dollar. Otherwise, no one would want to accumulate capital in its markets -- the risk would just be too high. When the ECB starts to manipulate the euro-dollar rate, I believe the world will finally complete its transition toward the dollar standard.

The hole in the dollar standard is the US’s vast current-account deficit. The level that the rest of the world pegs to the dollar may experience sudden changes from time to time to address this imbalance. The dollar standard, however, should survive for a long time to come, in my view.
Source: Morgan Stanley Global Economic Forum

European 'Restructuring' Underway

Interesting detail in MS's pan-European equity analysts’ macro survey:

Our main takeaways from this first survey are, first, that Corporate Europe is undergoing heavy restructuring and, second, that deflation is already widespread for large corporations. Let’s get into the details and add some sectoral colour to the picture.

As for business conditions, the balance of opinion -- that is, the net percentage of observations pointing to an improvement versus a worsening -- came out clearly negative at minus 40%. Half of our sample considered that they were unchanged, compared to the previous quarter. Within the other half, only one sector, media/entertainment/publishing, indicated some improvement. For capex plans, a majority of companies are reported to intend to cut them, the balance of opinion standing at minus 30%. Stability was more pronounced than for business conditions (60%). Only the retail sector indicated an upgrade of its capex plans.

For headcounts, an overwhelming 70% majority mentioned intentions to cut payrolls further, the balance of opinion standing at minus 68%. Only the healthcare products sector appeared ready to hire employees. Interestingly, the technology sector seems to have already undergone the bulk of its restructuring.
Source: Morgan Stanley Global Economic Forum
LINK

The Use and Abuse of Foul Language

Strange piece from Eurosavant about attitudes to what used to be called foul language in the Netherlands:

It's Sunday, so let me take break...........and consider what's in the Dutch press. Ironically, the Dutch press doesn't publish on Sunday. While in the US Sunday is the day for the often-massive Sunday newspaper editions (the New York Times tops the scales, probably at several kilograms, but many others are almost as big), and even Germany has its special Sunday papers (e.g. Welt am Sonntag), in Holland there's still that strong Dutch Reformed Church/Calvinist tradition of no work on Sunday. When it came to Dutch topics treated in the Dutch press, what particularly struck me this Sunday were reports about the resurgence of that ages-old threat to public order here: that's right, swearing (i.e. uttering naughty words, in public).

Although there may not (yet) be any government watch-dog agency to keep such (mentally) unhygienic practices in check (like the public health authorities stand guard against communicable diseases), there does at least exist the Bond tegen het Vloeken ("League against Swearing"), a non-governmental organization that attends to these things.

Recently this Bond tegen het Vloeken struck again! It hired the research bureau TNS NIPO ("the market leader in the Netherlands" according to its website) to get together a bunch of TVs, tune in to all the various TV channels broadcast in the Netherlands (over the ether and over cable), and count "the amount of maledictions, curses, terms of abuse, and dirty words [that's my translation of "het aantal vloeken, verwensingen en scheld- en schuttingwoorden"] that were uttered on TV between 8:00 AM and midnight," according to the Algemeen Dagblad.

That a mainstream newspaper like the AD would take up this report shows that it is a mainstream news topic in the Netherlands. Naturally, for their part the religious newspapers have already been all over this story, even though the full TNS NIPO report isn't due to be published until later on this week. The Nederlands Dagblad has all the available details: The public (state-supported) TV channel BNN ("Bart News Network" - please don't ask where that comes from) tops the swearing league, with 6,4 occasions per hour. The NPS (Nederlandse Programma Stichting), also a public station, comes in second, with 3,2 per hour. Veronica, a private, commercial station is third with 2,9 per hour. What's more, ten percent of the swearing caught by TNS NIPO occurred during cartoons broadcast in the middle of the day; our friends at the Bond tegen het Vloeken call that opvallend ("striking").

I wrote on EuroSavant a while back (here) along the lines of "happy be the land whose greatest threats to public order are swearing, rheumatism, and the worm-like proliferation of underground cables." Luckily, this unbridled wave of foul-mouthedness that threatens the Dutch commonweal doesn't bother me directly, since I don't own and therefore don't watch TV. (I had to do a little Internet research just to be able to knowledgeably mention - or fake it, as the case may be - the Dutch TV stations listed above. Frankly, what I would like to see is a whole lot less spitting in public here!) In the US, you have your "Seven Dirty Words" prohibited by the Supreme Court (with the result that everyone knows them), and then that's it. But here we have the conscientious guardians of the public morals in the Bond tegen het Vloeken. I really think I'm living in a very special place.
Source: Eurosavant

Meantime a piece up on Margy's Page gives a rather different angle on the social role of swearing in a Balkan context:

A train somewhere between .id and Belgrade. Six of us travellers are sitting in the cabin. Six strangers. But when a young man who is just finishing police academy finds out that I am from Slovenia, the cabin comes alive. A hapless guardsman, an unemployed hulk of a man, a geography teacher, a retired railroad man and an elderly grandmother

all begin asking questions, chatting and enjoying the foreigner's presence.



Since 1990, not a single one of them has gone any further than the first town across the Hungarian border. "What do you think of us? What do you do? How did you end up here?" The grandmother cannot believe her ears when I tell her that I am going to an international conference about Serbian swear words in Novi Sad. "Uuu, tell us why there is such swearing here?" It is true, swear words are special words which we use sometimes as an attacking sword, other times as a

shield to defend ourselves from the enemies around us, I say as I try to explain this sociolinguistic phenomenon in popular speech..................
LINK

Springing the Trap?

There's a book on the market from liquidity trap solutions inc. (GFC Economics). Graham Turner thinks he has the solution, Doctor V is not impressed:

Graham Turner makes a seemingly compelling case for the Federal Reserve to have gone in for quantitative easing in its meeting last week ("The Fed has not avoided danger", June 30). However, he fails to persuade.

First, there is no empirical record in favour of quantitative easing. It is hard to make a case based on precedence. Second, the need for it in the US seems dubious, at best. In Japan, the rise in base money growth did not translate into a rise in bank credit because the credit transmission mechanism was (and is) impaired. In the US, banks have thrown money at consumers for housing and corporations have raised more than $96bn in the first half of the year in junk bonds - more than the full sum raised last year. Is credit availability a problem? Does it indicate an economy that is exactly demand-deficient?

Lack of demand deficiency is also indicated in the sizeable and rising current account deficits. In the case of Asia, post-crisis, imports collapsed and countries quickly posted large current account surpluses indicating pervasive weak demand. Such is not the case with the US.

Its current account deficit has continued to grow throughout the past three years. Fiscal policy has swung from a surplus of 1.5 per cent of gross domestic product to a deficit of more than 4.5 per cent of GDP. Short-term interest rates are down by 550 basis points. At one level, the surprise should be not that bond yields have gone up in the past fortnight but that it took so long for them to do so.

Given this backdrop, the putative advantages of quantitative easing should be seen against its costs. It may not work, given that the Fed stopped reporting targets for money supply growth in 2000 citing their weak links to real economic activity.

In that case, excess liquidity would find its way into financial assets creating another bubble within three years of the last one. It would keep alive companies that should have folded, through the availability of easy credit. Advice of "tough love" is easy to dole out to others but hard to practise at home.

If it works too well on the real side, the bond yields have a lot of ground to cover. Consumers would be adding to their debt even as bond yields begin to rise, setting the stage for a real debt implosion and deflation when the next economic shock along. Foreigners hold nearly a third of all outstanding Treasuries at the end of Q1 2003 (nearly $1,300bn). If they are scared by rising yields and begin to dump, the US dollar will not experience an orderly correction that the Federal Reserve and the Treasury have implicitly sanctioned. It will be chaotic. Other countries would be forced to cheapen their currencies to resist importing deflation from the US.
Source: V. Anantha-Nageswaran, Financial Times
LINK

On Frogs and Horseshoes

It's 4th July, and Margy is thinking about the future of her country: Bulgaria. (BTW, courtesy of yours truly she now has a Homepage . My brother - in the mailbox - comments: "I have noted that you are going for the Free University structure of Joseph Beuys! It is a pity that we did not hold-on-to one of father's hats for you but perhaps you could lay your hands on a white overall and a piece of string." Don't worry (tranquilo), there is more to come). But what is worrying Margy today is the news that for an investment of 300,000 euros you will now be able to buy Bulgarian citizenship. And her point, I take it, is not that people shouldn't be able to buy houses in Bulgaria, but what sort of people with 300,000 euros to spend might need Bulgarian citizenship!! The horseshoe will get nailed to the ox. OTOH it is interesting the way virtually every country round the south of Europe sees its future in selling property to rich pensioners from abroad. This is happening down in Torre Vieja in Alicante, Spain, and guess who's working on the buildings: Bulgarian construction workers. I may well find my way down there in a burst of ethnographic enthusiasm. It is also about to happen in the Rhodope Mountains in the South of Bulgaria, where the plan is (no don't laugh) to attract Japanese pensioners (remember many Japanese now have to work to 75) to enjoy the cheaper land values and cheaper life-style that modern Bulgaria can offer. Don't they know anything about Japanese culture? It seems after the South Sea Bubble we can now safely get back to selling tulips, or should that be bonzai.

Some strange news I have from the newspaper - do not even dare to look for information at official pages of governement or Parliament. To start - I am trying to translate an old Bulgarian Proverbe - it's a pity - I do not know yours well enough. This proverb says: When The frog has seen, they nail the horseshoe to the ox, she was next to raise her feet. Difficult to understand - the same thing for me is yours proverb: Go to a Goat for wool - my Grandma was the last one in the family to produce rugs from Goat wool/hairs - love them.

Different cultures - difficult translation. So - let me try to translate my proverbe again: As they wrote in yesterday's newspaper SEGA we are trying to do some reanimation of the Bulgarian economy by offering Citizenship to rich foreigners. If you do want to become a Bulgarian citizen - you need about 300 000 EURO to invest here and you are kindly welcome.

Buy One - get one or more for Free


The Ministry of Justise had prepared this proposal - in violation of Bulgarian Constitution, which says: No foreign citizen can buy property /land or building/ in Bulgaria. At the new proposal to buy land or building counts as an Investment. So - seems our fellow countrymen plan to change our legislation in Canadian or USA way, but much more liberal /this is for Frog and Ox/. One official said: "The rich japonaise and rich Greecs will build their rich houses here to assure good time when retired "

As I know from my researches on US immigration policy - every Immigration Act has shown that the legislators count wrong. Just one example: after the World war II they took some steps to assure representation of western europeans there. The result : double and more Latin American and Chinese immigrants, low rate of West Europeans - because of improvement of situation in that part of Europe. So Guess Who and why will come in my beloved country after changing the law. Who will have citizenship? ...........and what is our Constitution for..... today is 4th of July

As Margy notes, today is 4th July, and traditionally (although I am not a traditional person) this is a sad day for the British. The day we lost North America. But perhaps now it may become a time for uncorking the bubbly once more. If all those gloom-and-doom predictions about Asian growth and US indebtedness turn out to be right, maybe we got a financial liability off our hands, just in the nick of time!

ZIRP and Moral Hazard

Morgan Stanley's Takehiro Sato muses over possible dilemnas which may be facing the US monetary authorities in a non too distant future. His points follow closely on my post about the Greenspan put. Nothing here is easy, and timing is everything. Greenspan has avoided for now the ZIRP zone, but only at the cost of a surge in long rates which could in turn choke off growth and send him back towards ZIRP. No free lunches here, and I am not optimistic. Like Sato, my feeling is deflation will hit the US one day or another.

Restricting its rate cut to 25 basis points at its June 24-25 FOMC meeting, the Fed seems to have avoided an early entry into a zero-interest-rate (ZIRP) environment. ..............


Rather, the basic situation is becoming similar to that in March 1995, when the BoJ was confronted with a severe backlash to its smaller-than-expected rate cut, in the form of extreme yen appreciation and a sharp decline in equity prices. Similarly, the Fed recently received its own baptism by fire in the form of the sharp rise in Treasury yields. The Fed seems to have avoided an entry into a ZIRP environment based on its knowledge of Japan’s economy and financial markets. However, raising long-term interest rates carries the risk of reversing the positive recent shift from housing investment to personal consumption, which has effectively been holding up the US economy, something which the Fed cannot afford to ignore. In my view, US monetary policy looks set to slide toward long-term interest rate-targeting via verbal intervention. Looking further ahead, since much of the efficacy of monetary policy is nullified by deflation, and deflation looks to hit the US sooner or later, I personally still see a sizable risk that the central bank will slip into ZIRP in order to combat deflation.

ZIRP, however, is a very unconventional policy, with many negative side-effects. In Japan, ZIRP has not only failed to achieve its original goals, but may have even contributed to deflationary concerns. For example, Japan’s experience with ZIRP demonstrates that central bank influence becomes limited after easing short-term rates to zero in a deflationary environment. Furthermore, the outcome of ZIRP in Japan called into question the effectiveness of unconventional easing in general. While the BoJ’s unconventional easing initiative succeeded in containing systemic risk initially, its policies have since preserved excess supply without thought for the effectiveness or purpose of such excess capacity. Such a policy has drawn domestic banks into an inescapable predicament.
Source: Morgan Stanley Global Economic Forum
LINK

The Greenspan Put

The Greenspan Put

For some reason I missed this one when it was published, but its still highly relevant today:

Call it the Alan Greenspan rally. One brief speech by the Federal Reserve Board chairman warning of the dangers of deflation, and both the stock and bond markets capped a three-month rally with a sharp burst last week. Since March 11, the Standard & Poor's 500 index has risen 23 percent, and the Nasdaq composite index is up 28 percent. Is this a new bull market? Be careful.



A growing number of professional investors and traders are warning that this current rally may have risen too far, too fast. Not only are too many investors suddenly bullish, but a spate of insiders sold large amounts of stock in May. Stock prices remain expensive compared with current earnings, one of the lingering legacies of the bubble three years ago. "I'd say it's a bubble within a bear market,'' says Joe Corona, executive vice president of the Dynamic Hedge fund who is watching for signs of a decline. ``It's a bear with indigestion.'' Some attribute the rally since March to the new tax cut on dividends and capital gains, the hopes for an economic rebound soon and on the expectation that the Fed could lower interest rates again when it meets June 24 and 25.

In his speech last week, Greenspan pointed out the national economy weakened in March and April but believes it showed signs of a ``fairly marked turnaround'' since then. The danger is that a weak economy might add pressure on prices leading to deflation, a widespread decline in price levels. The process of deflation can sap an economy because it feeds on itself. Weak economic demand can lead to declining prices that translates into declining profits, more layoffs and plant closings. And as employees are laid off, that hurts wages and further undercuts demand. To avoid such a spiral, Greenspan told international central bankers last week that the Fed would take out some unspecified ``insurance.'' Most analysts thought he was considering further interest-rate cuts, which immediately drove bond prices up and bond yields down in anticipation.

In trading parlance, this has been called the ``Greenspan put.''

During the 1990s, Greenspan took action to protect the market from some of its worst excesses, such as orchestrating the bailout of failed hedge fund Long Term Capital Management. By protecting the market against its worst declines, he was giving investors the same kind of protection against sudden losses that put options can serve.

An investor buys puts to protect a stock portfolio from losses during a temporary market decline. The option costs a fraction of the price of the stock but can make sizable gains if the price of the stock drops, offsetting some of the loss.

Now, as the danger of deflation rises, Greenspan is concerned a weak economy and stock market could drag each other down.

``The Greenspan put has been issued,'' Corona says. ``Greenspan and the Fed have made it clear that they are going to protect investors.''

With this assurance, investors and speculators have begun to bid up prices. However, some warn that there's too much optimism. One widely watched indicator from the American Association of Investors Intelligence shows 57 percent of the investors are bullish and only 21 percent bears. In March, before the rally began, the sentiment was much different: 39 percent were bullish and 38 percent were bearish.

Another widely watched indicator is the so-called ``fear indicator'' of the Volatility Index of the S&P options, which is now at very low levels of 23, a sign of too much complacency. During a sharp market decline, this figure can shoot up to anywhere from 30 to 50.

But stock prices can keep climbing in spite of such warnings. As economist John Maynard Keynes once warned, the stock market can remain irrational longer than an investor can remain solvent. "You're setting up the conditions for a decline,'' says David Rahn, president of Avalon Capital in Port of Redwood City. "It doesn't mean it's going to happen.'' During the bubble in 2000, investors kept pouring money into the stock market even though it showed signs of becoming overvalued. Today, the Standard & Poor's 500 index is selling for 31 times the earnings per share over the last four quarters of its companies -- exactly the same as the peak of the bubble in March 2000, according to Bloomberg News. This measure's historical average is about 17 and can drop below 10 during major bear markets.

Joe Sunderman, director of trading at Schaeffer's Investment Research, believes enough investors still have cash in money-market funds to keep buying stock. ``As long as people are talking about the bear market, there's money on the sidelines that can move back into the market and move it higher,'' he says. At some point, this will change. Signs of a coming decline would include seeing some leading stocks begin to weaken, and some leading industries, such as semiconductors and brokerage firms, beginning to show slumping prices. George Muzea, president of his consulting firm specializing in insider transactions, says rising insider selling indicates trouble for the coming weeks. He is issuing an advisory to his 60 institutional clients to prepare for a market decline. Among the insider transactions he follows, there were 205 insider sales of stock for every 100 purchases in May. In March, when the current rally began, there were only 77 insider sales per 100 purchases, he says. "There's no question in my mind that we're at a top,'' says Muzea, author of a book on insider selling, ``The Vital Few vs. the Trivial Many.''
Source: SiliconValley.com
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Bond Market Fears

As we have been saying here all week, in matters economic timing is all important. After the collapse in the equity markets money fled, partly to property and partly to the bond markets. Now both the property and the bond markets are under pressure. Fears of public finance problems are undermining the bond markets, driving up longer term interest rates which may have some importance for investment plans, which could in turn put a break on the recovery. The real question here is how to break out of the circle.

Investors shunned British and German government bond market auctions on Wednesday, fuelling fears that the three-year old bond "bubble" has passed its peak. The poor response coincided with a further fall in the price of US Treasury bonds, which hit a seven-week low during the day before recovering by the close. Demand for bonds is being hit by concern about deteriorating public finances in most large economies and by renewed interest in equities as hopes of economic recovery rise and fears of deflation fade.

But a fall in bond prices could threaten to choke off the stock market revival and undermine recovery. Yields on benchmark US and German 10-year bonds are already up almost half a percentage point from their lows in the middle of last month. In Britain, Wednesday's £2.25bn ($3.8bn) gilt auction was covered only one and a half times, lower than would typically be expected. In Germany, the sale of less than €6bn ($7bn) of new 10-year government bonds - known as Bunds - was only 1.4 times subscribed, the second-lowest level of interest in a bond auction this year.

Ciaran O'Hagan, fixed-income strategist at Lehman Brothers, said the German government bond auction was "the worst I have ever seen in my 12 years of following the market". Since the end of the share price bubble in 2000, a flight away from equities and into bonds has driven bond prices up - an ascent many analysts have seen as another bubble waiting to burst. In the past few months, equities have recovered strongly: the S&P 500 is up 29 per cent from its trough last October. But a drop in bond prices could upset the recovery in share prices. "The biggest prop to the stock market has been low bond yields," said Eric Lonergan of Cazenove. "We have just had a very strong quarter for equities, and now one of the supports for that is being taken away."

Falling bond prices - which mean rising long-term interest rates - also threaten to undo efforts by governments to establish a robust global recovery. Rising bond prices have cut the cost of fixed-rate mortgages in many countries and fuelled consumer spending, particularly in the US. Companies have also been able to refinance debts more cheaply. These supports for growth would be undermined if bond prices continued to fall. Sentiment has been undermined by deteriorating public finances. The German government has announced that it expects to have to borrow €35bn this year, nearly twice the €18.9bn announced in its draft 2004 budget. The US faces a $300bn budget deficit - its largest ever - in the year ending September 2003. Germany is widely expected to exceed the EU's 3 per cent limit for deficits as a share of gross domestic product for three years in succession. An auction of Japanese government bonds planned for Thursday could also suffer after panic selling by the country's leading banks on Monday prompted a sharp fall in the price of the 10-year benchmark bond.
Source: Financial Times
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This is No Solution

The UK government is rumoured to be preparing laws to combat 'ageism'. It is pretty easy to understand why this kind of law could come forward at this time. And of course I am against any kind of discrimination against old people. But in the context of employment law, this would seem to me to be a minefield. In a market economy there is no way you can effectively compel an employer to accept older workers. To give an example, my wife works for a large German multinational. In general the salaries and social conditions have been good, far better than those offered by local Spanish companies. But two or three years ago everything started to change, little by little the working conditions are deteriorating. I keep explaining to her, this is what flexibilisation and restructuring mean, your firm will never again 'improve' conditions. She is a sentimental person and has been loyal to her company and dedicated to her work. But every day she is now more detached, more indifferent. This is the other side of the 'flexibilisation' coin. She sees irregular and unjust treatment of the younger workers on the 'new' contracts, and she doesn't like what she sees. Now her case is different, since, having heard so much about all this at home, she is starting a new career, she is studying alternative medicine, and one day will be a kind of 'doctor' (this means that I, who try never to go to a doctor, am effectively trapped: remember my son is a conventional medic). So she would welcome some 'downsizing'. But her case is not typical in Spain.

And what is the latest proposal on the table of her local management? Recycling all those employees with more than 25 years of service. What does 'recycling' mean here? Easing them out. Now all of this is fine and normal in one sense. We do need more dynamic labour markets. 25 years in one company is too much for anyone. People should begin second careers mid-life. I agree. But the reality of carrying out such a transformation in a rapidly ageing society seems less clear. And here there is certainly a mismatch between the collective social interest that we all work to 70 (or is that 75), and the specific interest at firm and company level, which is to have a young and 'flexible' workforce.

How the circle will be squared (or even if it can be) I don't know. What I do know is that legislation to oblige companies to retain older workers won't work: in a globalised world they can just change country. In addition, if you don't allow younger workers good opportunities to enter then they will change country (remember the point about rising emmigration among young, educated Germans). Bottom line: we may have to accept second 'downwardly mobile' careers in the 50 - 75 age group, with lower salaries, and worse conditions. This seems to be the Japanese experience. Big question: what does this do to the life cycle theory of consumption, and what will be the macro implications?

Proposals to end age discrimination at work prompted warnings of an explosion of legal claims on Wednesday and of a likely increase in the pension age to 70 for many workers. And consultations on whether employers should be allowed to set a retirement age produced differing views from business, professional bodies, lawyers and pressure groups for the elderly. In the biggest change to employment law in a generation, age discrimination will be outlawed by October 2006. But ministers are divided about whether to outlaw mandatory retirement ages or to allow employers to retire employees at 70. The legislation is aimed at ending a situation "where hundreds of thousands of people are forced out of employment against their will in their fifties or late forties and find they cannot get another job", Patricia Hewitt, the trade and industry secretary, said. But John Cridland, deputy-director general of the Confederation of British Industry, said: "Employers will fear an explosion of employment tribunal cases because age discrimination is more difficult to define than other discrimination legislation." James Davies, employment lawyer at the law firm Lewis Silkin, said there would be "a rash of claims". Awards could run into the hundreds of thousands of pounds. Trades unions welcomed the legislation. But they warned that employees should not be forced to work longer for their pensions. Deborah Cooper, senior actuary at the pension specialists Mercer, said it was "almost a certainty" that employers "will at least consider raising pension age for future service" - particularly if 70 becomes the default age.
Source: Financial Times
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Well, It Didn't Take Very Long, Now Did It?

Now we're only into the second day of the presidency, and he's already making waves. What is being reflected here is the fact that Europe is not only a 'fushion' of economies with differing characteristics, it is also an uneasy and unstable cocktail of different political cultures. I suspect that these are not just 'gaffes', I suspect that this kind of thing is quite normal in Italian political life. So the man doesn't understand what the problem is. Here in Spain Aznar also uses the epithet of 'nazi' for every political idea he doesn't seem to be happy with. The PSOE of course were accused of 'behaving like nazi's' in opposing the war. This is a bit ironic when you look at the tradition of the extreme right in these countries. However all this comes at a very difficult time for the EU project, so it is difficult to foresee what the consequences might be. Especially if all the rhetoric about the death of the stability pact turns serious.

Italy's two-day-old presidency of the European Union on Wednesday descended into acrimony after Silvio Berlusconi compared a German member of the European parliament to a Nazi concentration camp guard. The Italian prime minister's "ironic" remark caused outrage in Berlin and alienated many MEPs with whom he will have to work during his six months at the helm of the EU. The remarks fuelled widely held concerns over Mr Berlusconi's ability to provide leadership at a time when the EU faces unprecedented challenges, from healing the transatlantic rift to securing agreement for a European constitutional treaty.

By insulting Germany and the European parliament, which decides most legislation, Mr Berlusconi's task will be that much harder. He has previously upset France and European Commission president Romano Prodi. Mr Berlusconi was reported to have partially apologised in a private meeting, but only for offence caused to the German people, not to the target of his comments Martin Schulz, the Germany social democrat MEP. His comments came after Mr Schulz criticised the prime minister's conflicts of interest, the anti-immigration rhetoric of one of his ministers and poked fun at his ability to avoid prosecution. Mr Berlusconi calmly waited for his turn to speak, then said: "Mr Schulz, I know there is a producer in Italy making a film on the Nazi concentration camps. I would suggest you as the role of the guard. You would be perfect." The chamber erupted, but Mr Berlusconi later said: "My joke was not meant to be offensive. It was ironic. I have no intention to apologise. He attacked me and was offensive about me and my country."
Source: Financial Times
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How to Get Started in Patenting

Joerg just mailed me with a diagram of the business model used by Netflix to back up their (successful) patent application. What is striking is the range of things that it now seems possible to patent. I can still remember all the fuss that was caused by Amazon's shopping cart. That seems so, so long ago. Perhaps that is the real casualty of the dot.com bust: in the urge to return to profitability patenting standards may be dropping, bigtime.

Meanwhile, over at slashdot Cmdr Taco has started off a thread on the topic:

A few folks noted a new patent showing up from netflix. They apparently now have a patent on their model of subscribing to rentals- where instead of being charged per disc, you are charged a monthly fee and can keep the rentals indefinitely without late fees. You can patent anything! Get on the bus!
Source: Slashdot
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Now Lets Have a Big Hand For the Next European President

Well with Berlusconi finally up and running as EU president, those whose exclusive preoccupation has become Bush-bashing should have some food for thought. Finally there's a yardstick to measure him by. Meanwhile this is probably as good a moment as any to give a welcome to another member of the European blogging community (even if this is a case of an American-eye view of Europe). Eurosavant may, or may not, be as learned as his name suggests, but he certainly can read a lot of languages. (More languages in fact than I have blogs). And his idea is an interesting one: to review the European press coverage of a given topic. You see we lack a common language, so we need someone to come and put it in plain English for us (don't worry, I'm only being ironic)! Especially promising is his contact with and knowledge of the three 'key' East European candidate members: Czech Republic, Poland and Hungary. Since we on either side of the old 'iron curtain' know relatively little about one another this could be very interesting. Now if there was someone out there blogging something in English about Greece...........

The "Godfather" Takes Up the EU Presidency


It's July 1, so the half-yearly presidency of the European Union changes hands again (for possibly the second-to-the-last time, if the EU Constitution, which changes this system, is ratified within the first half of 2004 as planned). Good-bye to Greece; ciao to Italy, specifically to Silvio Berlusconi, the Italian prime minster.

Except that there may be a problem. Berlusconi has been having continuing trouble with the Italian courts - right, that sort of trouble, when they think you did something nasty and want to send you off to the slammer for a while. Indeed, he has already been convicted three times for various acts of corruption (perpetrated in his pre-prime minister days, when he was busy accumulating his fortune), but all of these are either under appeal or past the statute of limitations. Then there is his ongoing case in Milan, where he is accused of bribing judges back in the 1980s; one of the judges presiding in that case has come to the end of his term in office and so needs to be replaced, but under normal circumstances that would only give rise to a minor delay.

But these are anything but normal circumstances, when you're talking about criminal charges against the current head of government. In fact, there may not be a problem anymore, since the Italian parliament passed on June 18 a law making the holders of the top five political posts in Italy - thus including Berlusconi - immune from prosecution while in office. So it seems that he will still have to face up to pending charges once he leaves office - although by then more statute-of-limitation considerations may come into play - but he is free from the hassle until then, including during the imminent Italian EU presidency.


Other European observers see a problem nonetheless. Today EuroSavant returns to Germany for comment - among other reasons, because it's from there that the most heartfelt cry of dismay at the Italian premier's new responsibilities has been issued. In fact, it comes from Michael Müller, who is deputy head of the of the SPD faction in the Bundestag. (American readers: Think deputy majority leader in the House of Representatives.) "Berlusconi harms Italy and now also Europe," Müller wrote yesterday, reports Der Spiegel. "Italy's head of government undermines the independence of the judiciary, tailors the laws to fit his preferences, makes the state's interests identical to his own, and subjugates the media. Berlusconi is Corruption personified." (That last sentence in the original German was Berlusconi ist der Filz in Person. Thanks to my friend Jonas, from Berlin, for help with the translation.) Müller also termed Berlusconi der Raufbold aus Mailand - "the ruffian from Milan." (Il teppista da Milano, for all you Italians out there; always happy to do my bit for German-Italian relations!) Der Spiegel topped this off by putting Berlusconi on this week's cover, seated on what looks like a throne, with the words Der Pater - "The Godfather" - superimposed. And there is a raft of other articles about the Italian prime minister in that issue, none particularly complimentary - one details the lack of success Berlusconi has so far had with his business dealings in Germany (with a sigh of relief?). ................


An article in today's Die Welt takes the baton from Der Spiegel in the Berlusconi-bashing stakes. Forget his problems in the courts; reporter Andreas Middel is more worried about the effect of the Italian premier's idiosyncrasies on Italy's six-month EU presidency. This was the man who, shortly after the September 11 attacks, trumpeted "the superiority of Western culture" over Islam (so much for diplomatic ties with Arab states); who advocates that Turkey, Israel, and - yes - Russia be admitted as EU members as soon as possible (doesn't have the Union have enough on its plate as it is with the ten states joining next year?); who acted like an attack-dog at a past EU summit to grab the newly-established European Food Safety Authority for Parma over Helsinki ("the Finns don't even know how one eats ham" he remarked at the time). And it seems he has a serious running feud with the president of the European Commission, Romano Prodi. And his agenda for EU affairs for the next six months, writes Middel, is disturbingly murky.
Source: EuroSavant
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Just one small point. Towards the end of the piece Eurosavant says that "it's Italy that is in fine fiscal shape", now this isn't entirely correct. Italy has in fact avoided the threat of stability pact procedures only by taking a series of one-off measures, and it's not clear how long this can continue. They may go over the 3% this fiscal year. In any event they have a gynormous outstanding government debt, over 100% of GDP, and face one of the most vulnerable public finance dynamics in the EU. That being said, I still agree with the tenor of the point about north-south prejudices.

Central Bankers to the Rescue?

A heartfelt welcome for Mervyn King, and some reflections from the Economist:

Will the new men make a difference?


Mervyn King took over as governor of the Bank of England this week; sometime later this year a new head of the European Central Bank will be appointed; and Alan Greenspan’s current term as Fed chairman ends in 2004. Does any of this matter in the real world?

IT IS hard not to be impressed by the hushed air of grandeur at the Bank of England. Pink-coated footmen still attend the governor and other senior officials in the quaintly named parlour (offices to you and me). Mervyn King has long wanted the top job, and on Tuesday July 1st he at last joined the select group of men who have ruled that historic institution.

With inflation low, and Mr King’s predecessor, Sir Edward George, unusually well-known and generally popular, the new governor has taken over at a time when the bank is well-regarded. But Mr King has already said that he thinks the next few years will be a more difficult time, as the government caps the growth of personal consumption in order to finance public spending. The new governor is prepared to endure more criticism in a period of greater austerity. But if belts do have to be tightened, how far will the bank be to blame? Do central banks really have that much impact on people’s lives?

The question is worth asking, because Mr King has taken over in London at a time of turbulence—both for the world economy and for central bankers............
In part, the contribution that central bankers make depends on the powers they have. One reason for the Bank of England’s current popularity is that a period of unusual stability—by the standards of the British economy—coincided with the decision of the incoming Labour government to give the bank control over setting interest rates in 1997. The government gives the bank an inflation target; it is then up to the Monetary Policy Committee (MPC), comprising Bank insiders and some external appointees, to deliver inflation as near that target as possible.

With some modest tinkering with interest rates, the MPC has been remarkably successful at meeting the objective set for it. Some economists, though, reckon that this is more a reflection of the underlying stability of inflation in the British economy than anything the Bank of England has done. They note, for instance, that inflation has been reasonably close to 2.5%—the current target—for the best part of ten years, long pre-dating the establishment of the MPC.........


In spite of questions about the Fed’s handling of the boom years of the late 1990s, Mr Greenspan is still generally regarded as having done a good job. That view might change if the economy fails to regain momentum this year or, worse, if deflation becomes more of a worry. Doubts persist, though, about the extent to which monetary policy in a large economy should be dominated by one man. Pressure in America for a more detailed framework is likely to grow. Meanwhile, if Mr King is right about a bumpier ride for the Bank of England in the coming years, he will be grateful that the MPC is there to share the blame.
Source: The Economist
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I think Mervyn King is right about the bumpy ride, and I think he understands only too well the principal pre-occupation: the housing boom. This really seems to be given such importance that it figured as one of the principal arguments as to why this was not the right time for UK euro entry. My feeling also is that he is probably the most economically intelligent of the new generation of central bankers. A quick google around the topic "Mervyn King Debt Deflation" will among other things turn up this paper . Whether this intelligence will serve for anything depends on the answer you give to the question at the head of the Economist article. I had the nerve to write to him once saying I thought his watch at the BoE might turn out to be the most difficult one since the time of Montagu Norman. I hope I'm wrong, but that is still my opinion. Welcome aboard Mervyn.

Inverted Populism?

More news from Frans :

Non-commercial Dutch television reported on the Bulgarian (illegal) workers here but also showed the Bulgarian side. In the Dutch newspaper NRC I saw a very small item on Moldavia: it’s Bulgaria squared. One third of the population has left the country already. The emigrants provided the country last year with more than 400 million euro.

Another small but very interesting item was on the critics of a US-committee on the IMF and more specifically the reaction from the IMF. The committee had found that predictions of the IMF on the economic performance of many countries had been no better than would have been a simple copying of the performances of the year before! The IMF reacted stating that the predictions were “already” going to be improved but also referred to the serious problem of self-fulfilling prophecies they encounter: a negative forecast from the IMF results in performance going down!

The disturbing observations of your son on “successful leadership” remind me of the need to write on indirect elections in English too: in the end it’s the problem of populism. Berlusconi can get away with it. With a near-monopoly on the media. Bush can get away with it, - with the distortion of the facts about wmd in Iraq -, for the same reason. Weapons of mass deceiving.

Recently in the Netherlands we met a very curious version of the populism phenomenon. Independence (from politics) of the National Bank and ECB, like the stability pact, have been established with reason: because of short-term populist-inspired considerations politicians could thrive for economically unwanted policies. The Dutch minister of social affairs has now presented an inversion of these relations. Confronted with the fact that a majority of top-economists , including economists who adhere to his party (Christian democrats), publicly state that the policy of retrenchment influences the economy in a negative way he reacted laconically: “Is that what they say? Well, the voters decided different by choosing the parties that now form the government. The voters decide.” So now it is the other way around: the determination itself to cut government spending can be a way to acquire votes! His colleague Zalm (now again in the finance department) in December last year asked for Prodi’s resignation because Prodi said that strictly holding on to the 3% agreement of the stability pact was stupid.

Actually, I think Eddie had it about right, in this process timing is everything. I find entirely comprehensible the frustration expressed by finance ministers in the Netherlands and other smaller EU member states at the way the bigger members get to break the rules with apparent ease, and I understood Solbes fury with Prodi for seeking votes in Italy by making what seemed to me to be cheap pro-growth arguments. Both parties are in fact right, the problem is the when. Solbes is absolutely right in indicating the parlous state of many EU state finances, medium term. But Eichel is also right (in part), right now, since the important thing is to stop Germany's slide. So it's a question of preparing public opinion, not being driven by it. The European public needs to be brought in on the problem. There are no free lunches here, and loosening of the fiscal reins now, will have to be paid for later. The play would be to try - by turning the magneto - and have more to pay with. But for that future to be realised Germany needs to do far more than open the fiscal tap. And if an exception is to be made for Germany, then it needs to be clear that this is an exception, and it is for Germany, and only for Germany. What else could European solidarity mean?

Chaos in the European Finance Ministries?

The only thing which surprises me in all this is other people's capacity to be surprised. Wherever have they been for the last twelve months? Now, of course, that the reality is dawning, panic may well set in. The only comment I have to add to the DIW institute forecast is that even this prediction of 1.3 per cent growth for 2004 may well be subject to significant downside risk. One last detail: if price indicators are falling in Germany next year, then any expansion there may be may well still be associated with falling nominal GDP numbers, and it is not clear to me, at least, what impact this may have on the rest of the eurozone. Remember there are a lot of historic 'firsts' here, and no-one really knows how they are going to pan out. Incidentally, when Pedro Solbes denies Germany is in a 'straightjacket', is this a direct rebuttal of Eddie's recent piece?

Germany is in an economic crisis, one the country's leading institutes warned on Tuesday, forecasting a shallow recession this year in the eurozone's biggest economy and disappointing growth rates in 2004. The prediction from the respected Berlin-based DIW institute came as Gerhard Schr?der, Germany's chancellor, repeated calls for the European Central Bank to cut interest rates next week and boost his government's plans to jump-start the economy. He said the ECB should consider "whether they have done enough to stimulate growth".

The DIW forecast that after a 0.1 per cent decline this year, the German economy would expand by 1.3 per cent in 2004 - markedly short of Mr Schr?der's claim of 2 per cent growth. The institute warned that the "biggest danger" now facing Germany was deflation, a sustained fall in price levels that hits demand and depresses growth. But Mr Schr?der's implicit criticism of the ECB, which cut rates by 50 basis points to 2 per cent last month, did little to deflect attention from the increasing strains on the German budget. Mr Schr?der on Tuesday told Pedro Solbes, the EU monetary affairs commissioner, that Germany would respect the deficit ceiling of 3 per cent of GDP set out in the eurozone's stability and growth pact - but few people believe he can honour that pledge. A third successive German breach of the ceiling in 2004 could destroy the pact's credibility and the issue is expected to dominate the next Brussels meeting of EU finance ministers on July 15. "There's chaos in the finance ministries of Europe today," said one senior EU finance treasury official, referring to fears about the effects of Mr Schr?der's budget plans on the stability pact.

Some officials say Italy, the new holder of the EU presidency, will use the German economic crisis as a chance to press for some kind of suspension of the pact until growth returns. Silvio Berlusconi, Italian prime minister, last month called for "an elastic interpretation" of the pact and France has made similar demands. A spokesman for Mr Solbes rejected the idea, saying such a suspension was impossible under EU law. "It's either alive or dead," he said.

Speaking in Berlin on Tuesday, Mr Solbes tried to hold the line on the stability pact, rejecting claims that it was "a straitjacket which keeps member states from doing what is reasonable". He accepted Germany's assurance that Mr Schr?der's recently-agreed plan for €15.5bn of accelerated tax cuts would be funded by savings in the budget but warned he expected Berlin to comply with the pact in 2004. Meanwhile, in a further sign of the EU's sluggish recovery, the Reuters/NTC Research purchasing managers' index for euro-zone manufacturing sank to 46.4 in June - its lowest level since January 2002 - from 46.8 in May. The 50 mark divides growth from contraction.
Source: Financial Times
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Rinban Rising?

Hooray! For the first time in nearly three weeks I'm back in the world of connectivity, and at home. Of course, there is no sign of any explanation, or apology. Now, returning briefly to the last post, one of the clearer forcasts coming from the Malmberg model is the rapidly rising strategic economic importance of South and South East Asia. I couldn't agree more. (Malmberg seems to think that around 2015 could be an important watershed, I would even bring this number forward a bit, on the grounds that things are getting faster faster, but the difference may come down to a quibble). One of the mid-term consequences of this will be a relative currency revaluation, but I still think it is a little early to give a lot of importance to this. Clearly when the major Asian ex-Japan currencies are able to appreciate to a significant extent, and when their economies are able to support this appreciation due to the changing real worth of their economic activity, this will have especially important consequences for the US twin deficit. In fact, at present the only important currency 'correction' I see in the pipline is a reverse downward movement in the euro. This is not going to happen yet, but it is difficult to see how a low, or negative, growth eurozone can sustain and support, mid-term, the currency at its present value.

Meantime, pressure on the Chinese Rinban continues to mount, in particular due to the inward dollar flow. Changes in Chinese policy are undoubtedly in the pipeline, but I would be surprised if the cumulative effect were especially earth shattering. Chinese policy is unlikely to move far from the current dollar peg, and my feeling is that the Chinese, unlike some who it may be diplomatic not to mention, are in a position to try and get their way.

China is looking at ways to relieve pressure for the revaluation of the renminbi, as a prelude to adjusting the 10-year-old system that effectively pegs the currency to the US dollar, according to officials and academics. Such considerations have become more urgent recently as a rapid inflow of "hot money" has strained the central bank's ability to dictate monetary policy. Officials said the central bank had recently been forced to buy an average of $600m dollars a day to steady the exchange rate. The intervention helped to drive China's foreign currency reserves above $340bn by the end of June, up from $316bn at the end of March. This figure - which has not been officially announced - may reinforce the view that the renminbi is undervalued.

The renminbi's future is important in Asian countries, partly because any revaluation would be seen as a possible trigger for a round of currency appreciations throughout the region. The increase in reserves is due less to export competitiveness than to expectations by Chinese companies that the renminbi will appreciate. "They are bringing their funds back to China and changing them into renminbi in expectation of a revaluation," one official said.

Given such strains, the People's Bank of China (PBoC), the central bank, is considering ways of limiting the growth in foreign currency reserves - a policy departure for a government that has seen its large reserves as a symbol of national pride. One option under consideration would be to allow companies to keep a larger portion of their foreign-currency earnings, either within China or offshore. All but a fraction of such earnings must now be sold to the PBoC, adding to the reserves and boosting domestic money supply. Another option would be gradually to relax restrictions on Chinese people and companies wishing to buy foreign currency.

There are strict limits on how many - and for what purpose - US dollars can be bought by Chinese in exchange for renminbi. In addition, Chinese companies are to be encouraged to invest abroad, both directly and in financial markets. Domestic companies will be allowed to buy bonds in overseas markets and the authorities are considering allowing selected institutional investors to trade stocks in Hong Kong. There is no timetable for the adoption of any of the options under consideration, officials said, and timing may depend on whether revaluation pressure abates or intensifies. Only when the PBoC is comfortable that demand for renminbi and dollars is more closely aligned will it allow market forces greater play in determining the renminbi's value against the US dollar, the officials added.
Source: Financial Times
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Four Phase Demographic Transition?

Returning to the suggestion from Mattias yesterday I've been doing a bit more investigating. I've located the full paper on the Four Phases of the Demographic Transition (and to think I only had it down to two stages) and it seems to be really to the point. Bo Malmberg seems to hang out in a quite interesting looking Institute for Future Studies in Stockholm.

In recent years, students of demography have focused mainly on gross population growth, while the problem of long-term changes in the age structure has attracted less attention. In consequence, the demographic transition model has been formulated in terms of (gross) death and birth rates. The analysis has focussed on the impact of the transition on the rate of population growth. According to this classic analysis, the rate of population growth is low as long as both birth and death rates are on a high level. When the death rate begins to fall, without any corresponding decline in the birth rate, the population starts to grow. Eventually, as the birth rate falls to the low levels typical of modern, industrialised societies, the rate of population growth is once again reduced. The impact of the demographic transition on population growth is important indeed. However, if we turn our attention away from general population growth towards age structure, we will soon observe that the impact of the demographic transition on age structure is equally strong as its impact on population growth. Furthermore, the effects on age structure are more extended in time. In the wake of the demographic transition, an age transition follows. This age transition consists of four distinctive phases, marked by the increase of one specific age group. First comes a child phase, then a young adult phase, thereafter a phase of population maturity, and finally a phase of ageing........

When fertility rates start to decline, this picture changes dramatically. Most countries that undergo a demographic transition do in fact not only experience a fall in the rate of fertility, but also a reduction in the total number of children born. This reduction creates a bulge in the age structure; a bulge built up by the cohorts that were born just before the absolute birth rate started to fall. The classic population pyramid gradually changes its appearance: the base gets narrower and the pyramid attains an increasingly convex shape.

In the traditional model, this fall in the birth rate is the last phase of the demographic transition. However, the age transition is far from completed at this stage. The reason is simple. A population that has developed a bulge in its age composition will be continuously transformed for as long as it takes for the bulge to pass through the entire age structure. The second stage in the age transition, the young adult phase, is attained when the bulge passes through the young adult ages. Later the bulge will pass through the Middle Ages, which marks the third phase, the phase of maturity. Still later, more than 60 years after the onset of the fertility decline, the bulge will enter the older age groups. All in all, a society that experiences an age transition goes through remarkably predictable demographic phases, from the initial challenge of high child dependency rates up to the closing phase of maturing and finally ageing..........

....the regular pattern of the age transition points to similarities in historical experience, across time and space. Regions in the world have experienced the demographic transition at different points in time, and with varying intensity, but once the demographic transition is under way, different regions tend to pass through the four phases of the age transition in roughly the same way............


The theoretical reason to expect that age structure matters to economic development is the existence of an economic life cycle that strongly influences the behaviour of people as they go from childhood to adulthood and old age. From this follows that a population might create very different economic conditions, depending on which age group that predominates population growth: children,adults or the old aged.

Most important, from a life cycle perspective, is the indisputable fact that an individual's productive capacity varies over the life cycle. Newborn humans are unable to survive without the support of older, more able-bodied custodians. Many years of care, education and training are needed before children have acquired the productive potential of an average adult. Similarly, when people grow older, their individual productive capacity tends to decrease, until it finally falls short of what they need for survival. Towards the end of life, we are often as helpless as we were as newborn babies. By contrast, most adults have a capacity to produce more than they need for their own immediate survival. They are not only able to support themselves, but they also typically act as providers. Moreover, in the course of the life cycle, people acquire experience, and they also tend to build up savings. In consequence, middle aged people are often richer in resources that younger adults. All in all, the youngest and the oldest members of a society constitute an economic burden, while working adults – and in particular the middle aged – produce the surplus on which economic growth and development depend.
Source: Bo Malmberg and Lena Sommestad: Four Phases in the Demographic Transition
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Initial response. I really like the categorisation of modern societies into four 'ages' - from child via mature adult to old age - as this once more seems to me to put the question of history and evolution back into economic theory. It also provides a nice angle from which to begin to reconsider all the long-wave stuff which seems to have plagued much of business cycle studies. One of the early problems I would identify is that it doesn't extrapolate very far about the fourth, and 'final' phase. Clearly this ageing stage produces a demographic structure which is then, in theory, perpetuating, ad infinitum. This raises all kinds of interesting and difficult question. After senility, what next? Not that I have anything special to offer here, I'm not trying to get into futuristic speculation - I'll leave that to Kurtzweil - but the existence of the problem needs noting, at least as a horizon. Of course, if it were given to us to know what lay out there, just over the horizon.....

But then again, life in the age of science might become devoid of interest. Maybe it's the very uncertainty of the thing that motivates us.

On a more mundane level, I can't help feeling that the recent debates we've been having about credit and the expansion of monetary aggregates may have something to add to the Malmberg story. It may not surprise you to know that I think credit and growth expectations need to be introduced, among other things. Also technological change and human capital. But what I'm saying, I think, is that we seem to have here a very interesting platform, which can be enormously helpful in getting to grips with things we've previously found it difficult to get to grips with, and which may help to structure our thoughts, but we're not there yet. Einstein held that any good theory should be kept simple, but no more simple than the reality itself required.

No Holidays Yet For Euroland Producers

At least this is the conclusion of MS's AnnaMaria Grimaldi and Eric Chaney as the look through the latest batch of business surveys:

You might be getting excited about the summer holidays and bright, sunny shores, but this is not the case for Euroland producers. Indeed, the evidence we gathered over this past week with the release of the June business surveys seems to fully support our recently revised macro call: No significant pick-up is expected in Europe before the autumn, in the best case............

Wrapping up the information from the June surveys, our manufacturing production indicator is pointing to a decline of 0.9%Q in Q2, one-tenth lower than in May and consistent with a flat GDP reading. The first look at 3Q Euroland production is rather gloomy: The indicator is forecasting a contraction of 0.6%Q, which our GDP model turns into a modest rebound for the Euroland economy (0.2%Q). These estimates cast little doubt for now that the Euroland economy remains in dangerous waters and that we are unlikely to see a rebound before the late this year or only in 2004.
Source: Morgan Stanley Global Economic Forum
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Google and Deification

Interesting post from Eamonn on Google and the potential of the internet. I haven't read the Burman book, but from Eamonn's description he possibly even undeplays the importance it has. I would say that the comparisons with the car and electric light miss the central point: the internet needs to be understood as the latest in a line of communications revolutions: speech, writing, printing etc. It changes the way we organise our thinking and it changes the way we think. (I must write a more extensive post on this some day, communication, technology and thought was in fact the area of my doctoral research!!). In this sense it is the latest in a line of 'disruptive' technologies, and here Burman is surely right: it has had such an impact that we are still unable to see where we are going with it. Incidentally, those of us who were able to idle away part of our youth reading too much Sartre will already know: the idea of an omnipotent and omniscient deity is a contradiction in terms. You can get to be all-knowing, or you can get to be all-powerful, but you can never be both. Bad luck Google. And meanwhile, just as a counterbalance to my brother's excessive cynicism in the last post:

When commenting here Sunday on Thomas Friedman's "Is Google God?" think-piece in the New York Times, I overlooked this highly significant quote by Google CEO Eric Schmidt: "The rate of the adoption of the Internet in all its forms is increasing, not decreasing. The fact that many [Internet companies] are in a terrible state does not correlate with users not using their products."

This disconnect between the (mis)fortunes of the dot coms and the growing societal role of the net is a phenomenon that's been exercising a number of minds of late. One person who had devoted considerable time to the issue is Edward Burman, a truly remarkable Englishman. After living and working in Iran for five years, he moved to Italy, where he has spent 20 years. He is now a Senior Partner of Ambrosetti, a leading Italian consulting company, and is responsible for its services in China. THAT SHOULD be enough to keep most people occupied, but Edward Burman is a man of many talents and enormous energy. Along with his "day job" at Ambrosetti, he teaches in the Faculty of Economics at the University of Bologna and has managed to write eleven (!) books on European historical and cultural issues. Last year he brought two works to the printing presses: a study of the impact of the net on regional growth and productivity in Tuscany and, the object of this posting, a book that appeared in Italian as Internet nuovo Leviatano: verso un nuovo paradigma di pensiero e di business and libri, and in English as
Shift: The Unfolding Internet, Hype, Hope and History .
Source: Eamonn's Rainy Day
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Brotherly Advice

Paul K is on holiday in France, and my brother writes with reflections on this and other interesting topics (including my obsessive indulgence of 'idees fixee').

Has K gone into Courbet-like exile in the Jura, the destruction of Friedman being like the destruction of the Vendome Column for which like the Anaximander fragment says he must pay penance due to the ordinance of time?.........

What sort of feedback do you need by the way? Remember the Internet is not the most effective sort of feedback. It is too time consuming.

What qualities do you need? For instance one of your great strengths may also be a weakness. You have the ability to follow an idea relentlessly to its logical conclusion. Yet sometimes this becomes an idee fixee with you, whereas thinking a bit outside the box at the beginning may point you in a more fruitful direction to help you with the PROJECT. This is why a social environment in addition to the Internet is very good, since you can bounce ideas in a more informal way.........

In short, you are due your vacation I think shortly. You have come a long way and done wonders in a short space of time. Just take a breather and do some Blue Skies thinking as we used to say in the trade (rough trade at that). A bit of PROJECT management.

Bottom line: less obsessions and more holidays.

Eating Duisenberg's Hat

Following on from my last two posts, a piece on Germany which Eddie has in the Straits Times last week, but which I somehow overlooked. Perhaps I am just too coy!!

Germany caught in euro straitjacket


By Eddie Lee

EUROPEAN Central Bank (ECB) president Wim Duisenberg should be eating his hat. But the Germans won't find that funny. And Asia had better take notice, for Germany is the world's third-largest economy and is heading the way of Japan, the world's second-largest economy. When the ECB made its decision to hold its main refinancing (refi) rate steady at 2.5 per cent last month, the central bank said 'a gradual strengthening of growth is expected later in 2003 and to gather pace next year'.'Factors supporting this outlook are the expected recovery of global demand and the low level of interest rates,' it declared.A month later, the ECB hastily cut its refi interest rate by 50 basis points to 2 per cent. In its latest twice-yearly projections for the euro zone economy, growth forecasts for both this year and next were slashed.

This year's growth is put at just 0.7 per cent against December's estimate of 1.6 per cent. Next year, growth is expected to pick up to 1.6 per cent, but still well below the euro zone's long-term trend rate of 2 to 2.5 per cent.Mr Duisenberg urged governments to reduce pension costs and unemployment instead of calling for further interest rate cuts.If he got it so wrong on monetary policy, what confidence would you place on his assessment of the efficacy of pension reforms to solve the problem?Germany is in a bind.

The ECB uses average inflation and growth rates to base its monetary policy. While the euro zone's economy is still growing, the German economy has already contracted in the past two quarters.As former Bundesbank director Wilhelm Nolling told the London Telegraph this month: 'The truth is that the ECB is trying to carry out an impossible task. You cannot set one interest rate for 12 very different nations - that's a problem which won't go away.'He added: 'Deflation has already arrived, in that our economic dynamism has disappeared. There is no willingness among the private sector to invest, and euro zone rules have cut back public investment to an extent we haven't seen since the war.'

German Chancellor Gerhard Schroder's Agenda 2010 plans to tackle Germany's problem with structural reforms that Mr Duisenberg would approve. The key elements are to change the system of unemployment and pension benefits, and to alter the employment law allowing greater contractual flexibility.The patient, however, may not be in a condition to take this medicine.Germany's rigid labour market and its generous welfare state are well known.

There is growing awareness of the problems of Germany's ageing population. If you discount immigration and children born to parents of non-naturalised immigrants, the German population is shrinking.In less than 40 years, there will be just one working-age German supporting one retiree, compared to almost three to one today. But reality is worse than the statistics. There are many working-age Germans who are unemployed, and the situation looks like it is worsening.

The most direct impact of ageing will be the staggering fiscal cost. Washington's Center for Strategic and International Studies estimates that the cost will be equivalent to an extra 25 per cent of payroll in old-age benefits. This comes on top of payroll tax rates that already exceed 40 per cent.The pension system is in need of reform. But there are serious complications. And it would be simplistic to say the cause of Germany's problems lies in the intransigence of its unions.Both pension and labour reforms essentially relate to reducing the cost to the company of 'retiring' workers.

Downsizing, or rightsizing, the labour market amounts to a reduction in the value of the worker. Arguably, it is market driven.But as economist Edward Hugh from the University of Barcelona explains, pension reforms will devalue workers' life savings, and is no different from money lost in a bank account.He said: 'For many years, there has been an implicit contract between company and worker that the worker remained with the company, and gave his accumulated experience, in return for job security and anticipated compensation when the time for retirement came.'Then, suddenly, workers are to receive less financial compensation when they leave. The market value of life savings just changed. This devaluation is as important for the economic structure as asset price deflation, but receives much less attention.'German labour and pension reforms are important. But it is surely mistaken to tout them as the economy's elixir.

As Mr Hugh argues, 'sending a lot of middle-aged people out onto the street, with reduced pension expectations and limited job expectancy' does not sound like the way to jump-start an economy.Germany's path to recovery is fraught with danger. But its starting point must surely be to unchain itself from the straitjacket of the euro. It needs to take charge of its macro arsenal and decide the appropriate fiscal and monetary policies for its economy.

The clear and present danger is shrinking demand. Yet the complications of an ageing population mean that German society must also change its mindset and accept immigration as a solution. For how else can it avert the looming pension crisis without seriously deflating its economy?Mr Duisenberg may finally be right about one thing: 'Monetary policy cannot by itself solve the problems underlying the weak growth and employment performance.'
Source: Straits Times
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The Storm Over Germany's Tax Plan Continues

And now some more reaction to Hans Eichel's plan to bring forward tax cuts: the growth and stability pact is effectively suspended.

Europe's budget rules were facing their biggest challenge on Monday, in the face of Gerhard Schröder's plan to press ahead with tax cuts despite Germany's yawning budget deficit.The European Commission warned that Mr Schröder's strategy was risky and economists claimed the EU's stability and growth pact had in effect been suspended.....

But there is a growing sense among EU policymakers that the risks of deflation are more significant than the dangers of violating a pact that Germany helped to design. Pedro Solbes, EU monetary affairs commissioner, travels to Berlin on Tuesday for talks with Hans Eichel, German finance minister, to discuss the decision to cut income taxes by an extra €15.5bn next year. Mr Solbes's spokesman said Brussels acknowledged Mr Eichel's promise to find savings to fund the cuts, but added: "There are risks to this scenario."

Germany's support for tax cuts as a means of relaunching economic growth was welcomed in France. A senior member of the French government said the move would make it easier to pursue President Jacques Chirac's year-old electoral pledge to cut taxes despite France's own widening deficit. But many smaller countries that have cut spending to comply with the pact are alarmed by the apparent ability of Germany and France to breach it. José Manuel Dura~o Barroso, Portuguese prime minister, said recently: "When we sign a pact, we have to respect it."

"If anything, these latest developments act as a signal that the pact, as it stands now, will not last long. It is likely to be substantially revamped in due course," said Jacques Delpla of Barclays Capital. Officially, Berlin and Brussels say Germany will bring its deficit below 3 per cent of GDP next year, thus averting a crisis in the stability pact. But that forecast is based on GDP growth of 2 per cent in 2004 - way above consensus forecasts of 1.5 per cent.
Source: Financial Times
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Eurozone Manufacturing Continues to Contract

More bad news from Germany and the euozone generally, just to get the day started:

The eurozone manufacturing sector contracted at a faster pace in June, hit by the recent strength of the euro, a survey indicated on Tuesday.The Reuters eurozone purchasing managers' index slipped from 46.8 in May to 46.4 in June, worse than analysts had expected and the strongest rate of decline in seventeen months. A score of 50 distinguishes expansion from contraction.

The survey said the result reflected a faster rate of decline in manufacturing output and new orders, as well as a "marked reduction" in staffing levels. "The strength of the euro against the US dollar was again reported to have hit exports, but helped to push down input costs via cheaper imported raw materials," the survey said.

The output index fell from 48.6 in May to 48.1 in June, the third month in a row that production has fallen. Hardest hit were Ireland, the Netherlands and Germany, although the latter saw the pace of contraction ease slightly. In contrast, output continued to grow in Spain, Austria and Greece. Order books fell again in June at the fastest pace since December 2001, primarily because exports were hit by the strength of the euro. Worst-affected was Germany, although all eurozone countries bar Greece and Austria say order books decline.

Employment in the manufacturing sector also fell for the 25th consecutive month, although the pace of contraction slowed slightly: the index rose from 45.2 in May to 45.6 in June. Input cost inflation was dampened by excess capacity in manufacturers' supply chains. Average input prices fell, partly because of lower oil prices, but also because the strong euro had led to cheaper imported raw materials.
Source: Financial Times
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