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Thursday, May 01, 2003

Italy Comes Crashing Down to Earth

Mama Mia, I hope this is in no way a portent for what might happen to the Italian economy. I'd better check out my Cicero, see if he has any take on this one.

With an Italian-made satellite hours away from crashing to Earth, Italian officials said on Tuesday that it had narrowed the list of countries where the pieces could fall to 30 from an initial 39. The 3,100-pound satellite, which was deactivated last year, is expected to fall somewhere in a band straddling the equator that includes parts of Brazil, Colombia, Indonesia and Malaysia. "We are now in a position to exclude some African countries from the initial list," a spokesman for Italy's civil protection department said.He said the BeppoSAX satellite would start its uncontrolled re-entry between 4:35 p.m. EDT on Tuesday and 1:17 a.m. EDT on Wednesday. On Monday, officials had said there was a high probability the satellite could fall into an ocean. They said it should explode into some 140 pieces with only 1,540 pounds expected to remain solid and potentially posing a threat.The BeppoSAX was launched in 1996 to monitor space radiation. It is owned by the Italian Space Agency and was built by Alenia Aeronautica, a unit of state-controlled defense group Finmeccanica.
Source: Reuters News

May Day Holiday

I'm off for a long weekend in the country today, so blogging could be a bit slow - mind you looking at the stats this morning it looks like I'm not the only one. It's strange, I don't think it's often commented on, but everyone running a blog or site must know one of the world's best guarded secrets: most surfing takes place at work. The weekend numbers and visit patterns are always down and different. In fact things normally start to tail off on Friday afternoons.........Oh yeah, I got it, all that surfing makes us so open, so modern, we have to be an extra asset for any company clever enough to employ us, right.

I'm going down to an obscure part of Valencia, to stay in the village where my wife's parents came from. Very Spanish this, the family and the village (cada burro en su pueblo!). Apart from the contact with nature, they do have geat oranges, and we always bring back olive oil, which is again one of the great secrets of Spanish life. My wife's parents hail from an obscure Sierra, lost in the mountains with no running water and no electricity (sometimes this serves as my retreat in summer), but everybody who didn't emmigrate in the 50's moved down to the nearest village years ago. These days my visits have an unusual twist since a zone which once saw massive emmigration has now become home for a new wave of immigrants. This time from Eastern Europe, from Bulgaria. This is unusual in a European context, since most migration is urban (more like an earlier generation of Mexicans who went to work in the fields of California. god, this takes me back to Pete Seeger and Arloe Guthrie, I do feel old). It is also unusual since the Eastern European immigrants who are arriving in Spain are relatively well educated: teachers, dentists, lab technicians, translators, and a lot more besides. Nowadays they spent their lives in the world of agriculture. You all know what garlic is, right. Well have you ever thought how they extract the heads. Well in an economy where the Harrod-Balassa-Samuelson effect was working as predicted you would probably do this with a machine. But I am in Spain, and with the wages paid to the newcomes it's perfectly feasible (in the black economy of course, but then a big part of the Spanish boom is based on this) to have a university graduate sitting at a bench cutting them out manually. I don't know if you can imagine this, but after 10 hours of engaging in this activity they emerge covered in a white dust from head to foot. And get this, the best part is that the garlic isn't even local. It comes in in a big truck from another Spanish region, gets processed, and then leaves in another one, heading probably for the big market here in Barcelona, and then into my kitchen. This is economics at work, all you need is a space and some very cheap, very desparate labour. It may be sound economics, but it isn't very attractive.

What has attracted my attention in all this is the way the migration concentrates. The village has 5,000 inhabitants, and of these 1,000 are immigrants, of which 975 (approx) are Bulgarians, and all of this in the last 3 years. And now they are 'spilling over' into every other village in sight. It feels like Bulgaria is emptying itself out into the Spanish province of Valencia. Now those of you who know something about network theory will see where I'm going here. This concentration is unusual in such a small community, but is representative enough of a broader phenomenon. So how does this 'small world' work. This has attracted my attention, and I have put together a small group at the university to try and do some research into the topic. At the moment we're still looking for funding, but I'm confident we can do something. So, those of you who know that my respect for Cavalli Sforza stems, in part, from his ability to get out of the office when needed, won't be surprised to learn that I'm revelling in the thought of playing accidental anthropologist in the summer.

Meantime I do also plan to have a good break, I may have a very healthy respect for American economic institutions, but I am a European at heart. And we Europeans do, as is notorious, place a very high value on our leisure time........... Talking of which, Valencia is also famous for it's Paellas, and this afternoon they're preparing a monster one: yum, yum!

Wednesday, April 30, 2003

The Asian Economy Proves Itself to Be Resillient

Following my post earlier today about China on the rebound, Andy Xie comes in right as expected with another good home run:

SARS has merely interrupted East Asia's relentless gain in competitiveness, in our view. The region is widening its competitive advantage in trade through integration with China. This has added production experience to China's low cost. Multinational corporations are taking advantage of this production platform and shifting capital to China to optimize their global production distribution. These forces are widening the capability-adjusted cost gap between China and other production locations, resulting in rapid market-share gains by China.

Export companies in the region seem to have responded to the SARS crisis with resolve and creativity. Segmentation of shop-floor workforces, forward positioning of salesforces in main markets, maximum use of technology for logistics and customer interface are among the measures that appear to be keeping exports flowing. We believe this demonstration of the region’s competitiveness is deterring western buyers from considering sourcing diversification. No other region is close in terms of competitiveness, in our view.

The SARS crisis does seem to be hurting small and medium-sized exporters. Their growth depends on face-to-face interaction such as trade fairs and sales calls. As they are an important force in the region’s export sector, some export slowdown appears inevitable. Intra-regional trade is also likely to suffer significantly in the short term. China accounts for over half of export growth for other regional economies. A slowdown in China is likely to have a significant impact on the performance of other economies.Domestic demand appears less robust than exports. The severe downturn in the tourism, restaurant and entertainment businesses is causing domestic demand to underperform exports by a wide margin. Such a difference makes this shock a deflationary one...............

In the first two months of the year US imports from China rose by 42% from last year and accounted for 28% of the increase in the US’s non-oil imports. Last year, US imports from China rose by 22.4%, compared with a 2% increase for its overall imports. China’s exports to Europe in US-dollar terms rose by 20% last year, while the euro zone’s total imports rose by 6.9%. These figures suggest to us that a dominant economic force shaping the global economy today is multinational corporations’ redistribution of production to low-cost China.

Other export-oriented East Asian economies seem to be trying to complement rather than compete against China in global trade to achieve growth. Their exports are increasingly targeted at China, rather than competing against it in the US market. This adjustment process is combining the manufacturing expertise in the Tiger economies with China’s low production costs through capital redistribution to China. The region’s competitive advantage in global trade is rising as a result.

This new competitiveness benchmark is setting global tradable prices on the margin. Multinational corporations must obtain the same cost structure to compete. This, we believe, is why MNCs’ capital flow into China has been accelerating. Instead of producing in China for local sales, MNCs are increasingly optimizing their production globally on cost minimization, rather than market targeting. This is the main reason that China’s export performance increasingly reflects redistribution of global production, rather than global aggregate demand, in our view.
Source: Morgan Stanley Global Economic Forum

More Monetary Easing in Japan

The Bank of Japan is increasing its target for current accounts again. This is also known as monetary easing. This means effectively there is plenty of money in the banking system, the big question is whether risk averse bankers, whose own entities are not in-themselves that healthy will be willing to lend much of it. Past evidence suggests they won't, and that the effect of this change will be negligable. On the Industrial Rvitalisation Corporation, I suppose it all turns on how you define "weak, but salvageable".

The Bank of Japan on Wednesday surprised markets by easing monetary policy sharply, citing uncertainty in Japan's financial markets and the possible negative impact on the economy of the Sars crisis. The central bank said it would raise the target for current accounts held at the central bank to ¥22,000bn-¥27,000bn ($184bn-$225bn), from the previous level of ¥17,000bn-¥22,000bn. Under the bank's quantitative easing policy, begun in March 2001, the BoJ has flooded the market with enough liquidity to drive interest rates down to virtually zero. Because of "uncertainty regarding the economic and financial situation, the bank thought it appropriate to raise the target balance of current accounts held at the bank to maintain financial market stability, thereby strengthening support for economic recovery," the BoJ said in a statement. Analysts said the announcement showed that Toshihiko Fukui, who became BoJ governor in March, was willing to be more aggressive than his predecessor, Masaru Hayami. In his short time at the helm, Mr Fukui has called an unprecedented emergency meeting, raised the amount of shares the BoJ can buy from banks and initiated a scheme for the bank to buy asset-backed securities from small and medium companies.

Even so, Mamoru Yamazaki, chief economist at Barclays Capital, said the policy moves would have almost no effect on the real economy or on prices, which have been falling for seven years. He said the supply of more liquidity would, however, reassure the edgy financial markets, which have been battered by a sharply falling stock market...............The BoJ also signalled its intention to help in the workout of bad loans, which have paralysed the banks, by treating loans to the Industrial Revitalisation Corporation (IRC) as collateral in its money market operations. The IRC, which begins business next month, is due to buy up to ¥10,000bn of loans owed by weak, but salvageable, companies in an effort to get them off banks' books and clear them through the market.
Source: Financial Times

A Modern Diary Might Be More Interesting to Posterity Than Most Novels

Well, as a somewhat simple minded person myself, I really like Eamonn's take on my post on Distributed versus centralised networks . Also thanks to Eamonn for drawing the Vienna BlogTalk conference to our attention. Speaking of my original, he says:

He's onto something here, and the growing buzz about blogs being used in business for project management and other collaborative tasks suggests that distribution is the key concept. More about this from me at a later date. Probably after my trip to the BlogTalk conference in Vienna at the end of May.

Diarist of the day: Siegfried Sassoon, 30 April 1925

"Talking (or being talked to) by Clifford Sharp after my club dinner, I put out one of my modest antennae in search of reassurance after the art of keeping a journal. But the editor of the New Statesman pooh-poohed the idea of any modern diary being important as literature. 'Pepys is the only existing masterpiece; there are no other diaries. And Pepys is great because he was that rarest thing, a man who could write and was a the same time a simple-minded man.' This rather dashed me, though he doesn't know that I am a diarist, and is probably unaware that I am somewhat simple-minded. I'd merely suggested that a modern diary might be more interesting to posterity than most modern novels."

You Gotta Believe It's Getting Better

Yes, and every day it seems. Now the WHO announces the lifting of the Toronto travel restrictions, and the situation in China, though possibly still not past the peak, looks better. Guandong seems over the worst (lets hope). On another tack, I do feel I'm smelling of roses a bit. Last week, when all expersts and sudry were busy penciling down their growth expectations I stuck my neck out and suggested that, in the case of China itself, such downward revisions might not be necessary. I am already feeling vindicated. OK 'experts', start to get your rubbers and pencils out again.

Situation in China

A total of 202 new probable SARS cases were reported across China today, bringing the total number of cases in the country to 3303. Nine deaths were also reported today.Probable SARS cases have now been reported from 21 of China’s 31 provinces. An additional four provinces have reported suspected cases. Beijing continues to report a high number of SARS cases, with 152 new probable cases and 9 deaths reported today. China’s capital city now has a cumulative total of 1347 probable cases and 59 deaths.China’s largest number of cumulative cases remains concentrated in Guangdong Province, where the SARS outbreak began in mid-November. Only 10% of these cases are current. As 1201 patients have been discharged and 51 have died, there are less than 150 SARS cases remaining in Guangdong’s health care system. In contrast, the rapidly growing number of new cases in Beijing imposes a heavy burden on the health care system and particularly its hospital capacity. In Beijing, 86% of cases (1198 cases) are current. The situation in western China continues to be of concern. New probable cases in Shanxi (23) and Inner Mongolia (7) increase the cumulative totals to 266 and 120 respectively. WHO is working with local health authorities in Beijing to review and improve the data needed to better monitor the SARS situation and assess the success of current control strategies. The WHO team of experts also visited hospitals which will soon be opened as SARS referral hospitals to assess their level of preparedness.

Update on cases and countries

As of today, a cumulative total of 5462 probable cases with 353 deaths have been reported from 27 countries. This represents an increase of 226 new cases and 24 deaths when compared with yesterday. Of the 226 new cases, 202 were reported today from China, of which 152 occurred in Beijing. Due to difficulties of information technology, figures received from Chinese authorities yesterday were not included in yesterday’s cumulative update.The 24 deaths occurred in Canada (2), China (9), Hong Kong SAR (12), and Singapore (1).
Source: WHO SARS Update

So It's Not Just an Urban Legend

One day I will blog some stuff on fertility and reproduction since those who are following me down the demography trail deserve it. The situation is complicated, but the reasons we are not having children like we used to are many and various. Here's one more reason:

Traffic 'damages male fertility'

Fumes from cars and other vehicles may damage male fertility, a study suggests. Researchers in Italy have found evidence that traffic pollution reduces the quality of sperm in young and middle-aged men. They believe nitrogen oxide and lead in exhaust fumes may be to blame. Their findings suggest that men who are exposed to traffic pollution every day, through work for example, are most at risk.

Dr Michele De Rosa and colleagues at the University of Naples examined the sperm of 85 men employed at motorway tollgates. On average, they were exposed to traffic fumes for six hours a day. They compared their findings to results on tests on 85 men of the same age living in the same area, who were not exposed to traffic pollution in the same way. They found that the tollgate workers had poorer sperm quality and, in particular, had lower sperm motility, which means they are less likely to be able to fertilise the female egg.

"In general, the sperm of the study group was more feeble and less active so it has a lower fertility potential," Dr De Rosa said. The researchers concluded that exposure to exhaust fumes were to blame for the damage to the men's sperm. The tollgate workers, which included young and middle-aged men, were exposed to substantially higher levels of nitrogen oxides, sulphur oxides, carbon monoxide and lead. The researchers said more studies are needed to see if the sperm quality of these men improved if they were no longer exposed to traffic fumes. Dr De Rosa said: "Our study demonstrates that continuous exposure to traffic pollutants impairs sperm quality in young and middle-aged men. "Analysing the potential fertility of these workers after they have been removed from tollgate duty will add other important information." He added that the findings highlighted the need for further studies to examine whether other groups of workers were being put at similar risk. "We hope that our results will prompt clinical and epidemiological studies of male infertility in other work categories exposed to similar levels of environmental pollution," Dr De Rosa said.
Source: BBC News

Tuesday, April 29, 2003

Damien is Also Worrying About UK Property

Damien Smith takes time to chuckle at Henry Tricks musing on Roger Bootle. This last name keeps coming up, one day I must find the time to see the argument. Among other reasons my dad once worked as a chauffer to a mayor of Bootle. He was only along for the ride, but he did learn a lot about architecture, some of which he passed on to me.

My eyes normally glase over at property columns, but the FT's new Property Editor, Henry Tricks, made me laugh:

"Roger Bootle of Capital Economics, author of The Death of Inflation, believes low inflation will eventually depress all asset prices, including housing. Bootle argues that, like reckless price/earnings ratios at the peak of the equity bull market, house-price-to-income ratios in the UK housing market are at perilous highs - and will fall 20-30 per cent over the next few years to return to their long-term average. However, even he acknowledges that homeowners do not behave as rationally as economic science suggests we should. His is a case in point. As "Economics Man", he would have considered short-selling his six-bedroom Georgian house on the River Thames in Richmond if a market for such a property existed. As a family man, he realises that would be perfectly foolhardy. "It might be quite difficult to persuade mywife." "

Tricks (in the Weekend section, no less) is trying to hold out hope that the UK's housing bubble will not crash. Given the current market, he may be a little to sanguine, but you have to admire his optimism.
Source: Indiawest

Odd Things In Pitt's Libraries

An unuslual weblog from, I'm sorry I didn't catch your name, but worth checking out all the same:

The first Latin translation of Euclid's Elements commonly ascribed to Adelard of Bath: Books I-VIII and Books X.36-XV.2 edited by H.L.L. Busard, published by the Pontifical Institute of Mediaeval Studies (Toronto), 1983.The Latin translation of the Arabic version of Euclid's Elements commonly ascribed to Gerard of Cremona by H.L.L. Busard, published by The Institute of Islam-Christianity Studies; Department of History of Religions; Theological Faculty of the State University, Leiden - and E.J. Brill (Leiden, Netherlands), 1984
Source: OTIPL

Who is Sir Andrew Large?

This piece has got me worried. Does anyone up there at the BoE know what is going on. If the bubble is about to burst it will need more than a tepid rate cut to stop all heel breaking loose.

Sir Andrew Large, who has been seen as one of the Bank of England's leading "hawks", has raised hopes of an interest rate cut next week by suggesting his fears about rising household debt have abated. In his first interview since taking up the post in October, the Bank's deputy governor said recent data indicated "some slackening" in the rate of growth in consumer spending. He also flagged up concerns about the weakness of the international economic environment. Sir Andrew voted against February's interest rate cut to 3.75 per cent. He broke then with the majority of the Bank's rate-setting monetary policy committee because he was concerned about the risk of a shock to the economy which might make people feel unable to manage their debt. The "impact that the possible unwinding of those levels of indebtedness might have" would complicate the setting of interest rates, he told the FT. But he suggested his fears had since been allayed to some extent. The rate of increase in household borrowing "appears to be slackening, so my concern is somewhat less than it was," he said. He would remain "vigilant" about the potential threat of high household debt, the tone of his remarks suggesting he might be open to the case for another cut. With fighting in Iraq over, oil prices had fallen but "quite significant" uncertainties remained, he said. The UK had been helped by sterling's 5 per cent depreciation since February but recent manufacturing and retail surveys had also been disappointing, he said. The futures market has priced in another quarter percentage point reduction and many economists believe the cut could come at next week's meeting.
Source: Financial Times

China to Japan: Pass the Batton Mate

David Pilling, definitely the man to watch at the FT ( sorry Brad ) has some sound sense for us about Japan/China relations. Meanwhile I'm afraid I don't buy at all the thesis that China is good news for Latin America - my god why do I have to be so contrarian, anybody got a good astrological calendar handy, I must have been born under a bad, bad moon:

Japan's economy may still be four times bigger than China's, but some time ago it passed the baton marked "economic powerhouse" to its large northern neighbour. China's economy is ripping along at 8-10 per cent a year. Japan's is shrinking in nominal terms. China is attracting record foreign direct investment, Japan a relative trickle.

Worse, China's gain is Japan's loss. China is swamping Japan with cheap exports, fuelling its seemingly endless deflationary descent. Japanese manufacturers, unable to compete, are fleeing to China, causing the "hollowing out" of domestic industry and pushing unemployment towards post-war highs. Clearly, the future now leads to Beijing, Shanghai and the Pearl River Delta. Tokyo, Osaka and Kobe are of the past. But there's a feeling investors with this view may have jumped the gun. Abandoning Japan for China is too simplistic. Far from being a threat to Japan's economy and companies, China may be Japan's way out of a fix. The two countries, bitter rivals for years, could be highly complementary.

This is the basic thesis of a new note by Goldman Sachs - entitled Friend, not foe - the latest in a series of Japanese research that seeks to redress widespread misconceptions about the Japan-China relationship. Take trade. Quite contrary to common perception, Japan is not being swamped by Chinese exports, but is running a trade surplus with China - about $1.5bn in 2002. Many of these exports are of machinery and inputs to Japanese companies operating there, some of them bound for re-export to Japan or for shipment to third countries. But Goldman's says the pattern is shifting, with more Japanese goods being consumed within China.

China has recently overtaken the US as the largest exporter to Japan. But at about 1 per cent of gross domestic product, many think it is far-fetched to blame cheap Chinese goods for Japanese deflation. To the extent that these imports change the relative price of goods, such price falls may be a good thing. Most imports from China are of labour-intensive goods, with 60 per cent concentrated in textiles, food and basic materials. Japanese exports to China are sophisticated, capital intensive goods. In other words, both countries are producing and exporting according to their comparative advantage - something economists would say is mutually beneficial.

So how can this work for the investor? One way is to buy shares in Japanese companies with smart investments in China. Again, contrary to perception, Japanese companies have been relatively slow on to the Chinese mainland, leaving room for further moves. In 2001, Japanese foreign direct investment into China rose 64 per cent on the previous year to Y181bn; officials think it increased sharply again last year. According to a recent survey by the Japan-China Investment Promotion Organisation 82 per cent of Japanese investors in China say they are already profitable. Robert Feldman, senior economist at Morgan Stanley in Tokyo, says many Japanese companies have been successful at raising profit margins by investing intelligently in China and other low-cost producers. As tariff barriers come down, companies that export to China also stand to benefit. Japanese companies struggling as capital investment slides at home could be in for a big fillip.
Source: Financial Times

When the Going Gets Tough

Schroder is waving what he probably considers to be his trump card: he is threatening resignation. Now the difficulty with this strategy is if they decide to call your bluff. Or maybe it isn't a bluff. Maybe he really wants out. In which case......

Gerhard Schröder issued a thinly veiled threat to resign as German chancellor on Monday if his Social Democratic party blocked controversial social and economic reforms.Speaking to leading party members in Berlin, Mr Schröder insisted on the need for urgent action to boost the ailing German economy and tackle stagnant growth and rising unemployment."Whoever wants to decide or implement anything else must realise they are stripping away the fundamentals of my work and forcing me to draw the consequences," he said. The chancellor accepted that plans to ease job protection rules and curb unemployment benefits had raised hackles in the party. But he said his proposals were necessary to reduce Germany's non-wage labour costs, seen by business as cripplingly high.

Good News for Fatties

This should make good reading for Brad Delong , Daniel Dsquared and me. Maybe we should found a new school: fatty economics. I'm still dreaming of Brad's Biryani with sour cream. In later life undoubtedly we will gravitate more towards the 'fat free economics' train of thought. My difficulty, since I'm an 'increasing returns' kinda person, is that I'm inclined to eat the dounle portions twice, once today and the other part tomorrow. Oh dear!

Eating double portions one day and nothing the next delivers the same health benefits to mice as seen in animals whose lifespan has been extended by restricting their calorie intake. No one is suggesting people adopt such a diet. But the study adds to the evidence that caloric restriction works by activating some kind of protective mechanism, rather than simply being a result of eating less and thus suffering less damage as food is metabolised. If this is the case, there may be ways to switch on the protective mechanism without going on a crazy diet.

Both calorie restriction and intermittent fasting prompt cells in the body to set up defences against stress that also protect against ageing and degenerative diseases, concludes team member Mark Mattson, at the US National Institute on Aging's Gerontology Research Center in Baltimore. These might be adaptations that benefited people in the past. "A three-meals-a-day diet only occurred recently in human evolution," he says. "Often we were probably forced to go days without food." But whether such a radical diet would benefit people now is not clear. Mice that start a restricted diet late in life do not always live longer. Furthermore, while occasional one-day fasts are thought to be harmless, they are not necessarily pleasant. "People feel tired, irritable and lethargic," says Alex Johnstone of the Rowett Research Institute in Scotland.
Source: New ScientistLINK

Monday, April 28, 2003

Germany: Surprise, What Surprise?

According to the Financial Times, the slump in Germany's Ifo index was sharp and unexpected. Well if you'd been watching developments in Germany carefully it shouldn't have been (eg Germany's Difficult Road To Reform or Germany: Finally Biting the Bullet? ). The whole point is not that it confounded post-Iraq war expectations, but rather that these expectations were always overly inflated and out of touch with reality (see eg this morning's post ), based as they were on a political and not an economic analysis of the problem. My feeling is that this may mark the begining of some extremely bad data from Germany since, as I have been arguing, whatever the merits or otherwise of the proposed reforms (see links above) the short term consequences will be all negative. Only on an extremely optimistic reading of an extremely questionable version of expectations theory could you read it any other way. And the 'early' ECB rate cut, September perhaps????

A sharp and unexpected slump in Germany's keenly-watched Ifo index highlighted the fragility of Germany's growth prospects on Monday, lending urgency to chancellor Gerhard Schröder's calls for structural reforms to help lift the eurozone's largest economy out of stagnation. The fall in Germany's most important economic indicator, which confounded expectations for a post-Iraq rally, comes amid much uncertainty over Mr Schröder's ability to push through a reform programme that is seen as key to fostering the country's long-term economic revival. The proposed Agenda 2010 measures - including relaxed job protection rules and cuts in jobless benefits - have drawn opposition from a group of rebel left-wingers within the chancellor's own Social Democrat party, who argue the measures risk damaging the weakest elements of society. Mr Schröder on Monday upped pressure on the rebels to fall in line when, in a veiled threat to resign, he warned that a major dilution of the measures he outlined last month would force him to take consequences."

Analysts said the surprise fall in the Ifo index may strengthen the chancellor's hand in arguing for speedy and full implementation of the programme. The Ifo institute's business climate index for western Germany fell from 88.1 in March to 86.6, taking it to its lowest level since December 2001, when the German economy was in recession.The forward-looking component of the index, measuring expectations for the next six months, was especially weak, falling to 94.9 from 97.2 the previous month, heralding little improvement in coming months."There are still no signs of better days for German business sentiment," Hans-Werner Sinn, president of the Munich-based institute said. Contrary to analysts' expectations, the fall of Baghdad on April 9 had had little impact on Ifo's monthly survey of 7,000 companies.The fall in the index, also regarded as a barometer for eurozone growth, follows downbeat Italian and Belgian sentiment indicators last week, and boosts analysts' belief the ECB will act to cut borrowing costs soon.
Source: Financial Times

Am I Feeling Responsible or Irresponsible Today

Back to the problem of 'dynamic inconsistency' ( see post from yesterday below) and the deficit. I have been trying in recent days ( here and here ) to provoke some discussion and controversy based on the argument that you shouldn't always take things at fact value. The pretext for this argument is a paper by Gauti Eggerston ( Committing to Being Irresponsible ). Since this is exactly what the Bush administration seems to be trying to convince everyone that it is doing, I thought the arguments in the paper might bear some examination. This argument has even more interest when you consider that Eggerston did his thesis at Princeton (where Ben Bernanke among others is based), and that non other than Paul Krugman was his supervisor (which is hardly surprising as he was among the first to propose the inflation solution for Japan). The weight of the argument revolves around what to do to avoid to avoid the problem of the lower zero bound (limit) to interest rates. How do you lower interest rates more when you reach zero? The argument is complicated and essentially as it is being presented revolves around 'expectations' of future rates and prices. It seems the best strategy to effectively lower real interest rates is to provoke expectations of inflation. There is a difficulty with this due to the 'dynamic inconsistency problem'. No-one would remain convinced that a discretionary independent central bank would maintain the policy for long enough to provoke the inflation, and so the players will not react to the expectation as intended. That is, we're all unlikely to behave like good girls and boys.

Another solution is to try and tie the banks arm behind its back, by imposing a (possibly legal) commitment to maintaining a given rate of inflation for a given period of time, but then again, it seems, we could all 'front run' that one, and again it wouldn't work. So enter Eggerston. His argument is that what is needed is a temporary abandonment of the independence of the central bank, and collusion between bank and government to provoke a big fiscal deficit via a significant tax cut and thus increasing government borrowing requirements. Since no-one (with the honorable exception of Glenn Hubbard, apparently, and maybe this was why he had to go??) has the least difficulty imagining that this will lead to significant and continuing inflation because the government will have an interest in maintaining it to reduce the capital value of its debt, then presumably we all reach for our guns, or rather, our wallets. But what about the politics? Maynard, for example, is not convinced and asks me :

does one believe that the Bush team has America's interests at heart (as opposed to interests of some small fraction of America) and does one believe that the Bush team is competent in figuring out how to translate America's interests into practice?

These kind of assumptions are not necessary. The politicians will always do what they do for whatever reasons occur to them at the time.The key player here is the central bank, and the members of the US Treasury who may be working in tandem with them. In fact the bluff might be that the central bank appears to lose its independence while actually running things. The President might even go so far as to appear before the senators to warn against the inadvisability of the deficit. I mean this is like one of those interactive movies where you can change the script to fit the characters as you like it best. In the end what the reality is is anybody's guess. And I suppose that's just the point, to keep us guessing. In that way we won't be able to front run it.

In conclusion, for Maynard, I have no idea whose interests Bush has at heart, to understand my 'reading' you don't need to know this, nor do you need to make any evaluations of how competent the administration is at doing anything other than giving a tax cut, running a deficit, and then needing inflation to get out of the mess. Finally if things go well, and there's more growth than anyone else can see in their wildest dreams they can claim the credit. On the other hand, if things don't work out that way, and they run up a big bill together with an inflation bonfire they will be remembered as the administration that died saving America from deflation. Either way they can say: see, we always knew what we were doing. Of course in my book neither of these scenarios will happen, we'll get the deficit and we'll get the deflation (ie the worst of both worlds), but then I'm looking at things in an entirely different way. All I am trying to do here is to give an account of what might otherwise appear to be highly perplexing behaviour, and to suggest that if you really want to have a go at them, you look at the situation from all its various angles - simultaneously.

Starting the Week on the Wrong Foot

It's Monday morning in Tokyo, and the bourses seem bent on continuing with their long march down. This time the excuse is Sony earnings, but it might as well be SARS, or something else. The thing is people are looking for excuses to respond to, and the interesting question is why? This brings me to a topic dear to my heart, strategic or fundamental uncertainty. Now Brian Arthur , among others, raised the problem of strategic lack of visibility years ago, in the context of the increasing returns environment. Now since 09/11, or since March 2,000, or whenever, it cannot surely have escaped everyone's notice that we have been in an environment characterised by uncertainty. First it was 09/11 itself, then Iraq, now SARS, the only clear thing is that it continues, and seems to attach itself to the next new thing, rather in the way that the 90's was characterised by a euphoria which latched-on to the then 'next new thing'. On this reading the real killer app was the one which finally triggered the uncertainty wave. Remember, on one version of the story, economics is all about expectations, although it is clearly a mistake to imagine that those expectations need to have anything primordially rational at their base: Keynes wasn't simply being naieve when he spoke of 'animal spirits', he'd spent far too long with the Bloomsbury crowd for this to be true (now why hasn't ocurred to some bright young post grad to do a thesis on animal spirits in the work of DH Lawerence: probably because most economists abhor literary-based narrative analysis).

So why do I think we have this 'existential' uncertainty. This is more difficult, and I'm sure each and all of us can offer some reasons of our own. My own 'best bet' is that it has something to do with that 'acceleration principle' and the associated collective feeling of 'jet lag'. I go back to the point, using past time (say the year 1950 for eg) as a measure: how many years will we have between now and 2010: 100, 200, 300.......n? I have no idea. Which means it is impossible for me to talk about what the world might look like come 2010 (except for demographics, of course, demography is a kind of state variable, barring horrendous catastrophies the die is effectively cast here).
Personally I can only manage to bring myself to imagine as far forward as 2005, and that with difficulty. And if I can think this way, I imagine a lot of COE's and Finance Directors in large corporations can have some of the same feelings when it comes to investment decisions. What I am trying to say is that this uncertainty may be more than a passing phenomenon and may survive long after SARS (hopefully) has been brought under control. Obviously eventually we'll adapt: it's what is going to happen between now and that eventuality that is exercising my mind right now.

Japanese stocks slumped on Monday morning as Sony shares plunged almost 15 per cent after a delayed reaction to the company’s weak earnings. The Nikkei average was down 0.6 per cent at 7,652.95 by midday while the Topix index also lost 0.6 per cent to 777.02. No investors had stepped up to buy Sony shares on Friday after the company shocked investors by posting a loss in the last quarter of its financial year and missing its profit target for the full year. On Monday buyers finally emerged, but only at prices that sent Sony shares tumbling Y480 or 14.9 per cent to Y2,740. Sony was the worst performing stock of the morning session. Many of Sony’s electronics peers lost between 4 and 5 per cent of their value on Friday, and were therefore relatively steady. NEC slipped 0.3 per cent to Y348, Toshiba was down 1 per cent at Y311 and Hitachi off 2 per cent at Y385. Matsushita Electric, set to report its full year earnings after the market close, was 0.5 per cent lower at Y877. Bank stocks were lower after the Financial Services agency said on Friday its inspections had found a need for Y1,300bn in loan-loss charges at top banks. UFJ was off 3 per cent at Y86,700, MTFG fell 2.2 per cent to Y356,000, SMFG was down 3 per cent at Y165,000 and Mizuho lost 1.7 per cent to Y59,400.

Fujisawa Pharmaceutical dropped 7.4 per cent to Y1,967 after the drugmaker on Friday forecast operating profit in the current fiscal year would fall 11 per cent due to increased research and development costs. The company posted a record group net profit for the year to March. Medical mask maker Japan Vilene jumped 7.8 per cent to Y402 as fears grew about the spread of SARS in Asia. Japan Vilene shares have leapt from Y215 at the start of April.
Source: Financial Times

Sunday, April 27, 2003

Deficits and Dynamic Consistency

This topic may well be occupying me here all week (off-and-on). For now just a definition:

Definition of Dynamic Inconsistency

A possible attribute of a player's strategy in a dynamic decision-making environment (such as a game). When the best plan that a player can make for some future period will not be optimal when that future period arrives, the plan is dynamically inconsistent. In one stylized example, addicted smokers face this problem -- each day, their best plan is to smoke today, and to quit (and suffer) tomorrow in order to get health benefits subesquently. But the next day, that is once again the best plan, so they do not quit then either. (In a model this can come about if the planner values the present much more than the near future, -- that is, has a low short-run discount factor -- but has a higher discount factor between two future periods.) Monetary policy is sometimes said to suffer from a dynamic inconsistency problem. Government policymakers are best off to promise that there will be no inflation tomorrow. But once agents and firms in the economy have fixed nominal contracts, the government would get seigniorage revenues from raising the level of inflation.
Source: What You Need to Know About

On the Advantages of Distributed versus Centralised Networks

Surfing the promo site of the Chinese discovered America book, I did come up with an interesting piece of information: in the first weeks after setting up the site they received 16,000 message posts. Result: their system collapsed and they closed the message board. Obviously somewhere in all those mails there may be some interesting material, the problem will be finding it. In this sense I feel the weblog system of steady on-going message circulation represents a huge leap forward for the knowledge development and R&D process. Less 'spikes' and less collapses. Weblogging seems to be an example of what Max Weber called 'elective affinities', people with common interests finding each other. Not like the case of our stalwart naval investigator, who suddenly finds his 'surly crew' want to take over the ship. Not at all to his liking. On the mail front, I get two or three a day, and have trouble answering them seriously, but still, please keep 'em coming they really are useful.

Since ‘1421’ was published in the U.K. last November, more than 200,000 hardback copies have been sold. This has resulted in a flood of new evidence: over 16, 000 messages have been received by Gavin Menzies and his team. Most come via the website contact form. This new evidence will require the book to be expanded and corrected in time for the paperback launch in October 2003. Preparing the paperback will be very time consuming: the team will have to cut down on all extraneous activities, and sadly this includes the monitoring and recording of the message board, which has developed into a talking shop, doubtless of interest to the participants but not in the majority to the author. As a result, it is with regret that we inform you that we will be closing the message board until further notice. We do however still encourage you to please keep your comments, suggestions and in particular new evidence, coming in via the contact board. We will endeavour to answer every one of these and acknowledge the contribution.In future, after Synopsis number 10, new evidence will not be placed on the website, but e-mailed monthly on a confidential basis to those who continue to help. A message board with restricted access will also be established to function as before, but a limited and more focussed forum base will hopefully entail more relevant and productive discussion.

Busted Flat in..............Pitsburgh

Interesting piece in today's New York Times about people 'dropping out' of the labour force. The background is the drop in the participation rate - 0.9% in two years. If the 90's was all about squeezing participation, post March 2000 is , partly, about its unwinding, and I am convinced that this will eventually be seen in the productivity numbers, at least at the level of per-capita income. The US has just become a less 'productive' society. This leads to the point that 'the unemployment rate just doesn't give the same information today as it did in the 1970's. Now what we need is more, not less, information. Which brings me back to my thoughts on the need for a better metric. I have suggested participation rates, dependency ratios and age structure as the possible measure of the productive potential of an economy. Any one else got any thoughts?

Worn down by job searches that have stretched on for months, demoralized by disappointing offers or outright rejections, some unemployed people have simply stopped the search. As the nation enters a third year of difficult economic times, these unemployed — from factory workers to investment bankers — have dropped out of the labor force and entered the invisible ranks of people not counted in the unemployment rate. Some are going back to school or getting new job training. Others have chosen to stay home with young children or aging parents and to rely on their spouse's salary, at least for now. Still others are plainly waiting: living on their government benefits and hoping that the economy will get better in a while.

After working 25 years in the heat of the factory line at a steel plant here, Bill Jacobs accepted his layoff calmly last year. He thought he could find some other job working with his hands, or go back to the line once business picked up. But eight months passed, and nothing came. Not long ago, he signed up for nursing school. "There aren't any jobs, just not any," Mr. Jacobs said. "I had been waiting it out. I thought there was a strong possibility that I'd get recalled to the plant, or I'd get something else, anything that paid at least $10 an hour. But it turns out there is nothing. It's a dead-end street." Mr. Jacobs, who is 50 and raising four children on his own, said he had "absolutely never" planned to change careers. But he heard about the possibility of a government grant to pay for his schooling and decided he would prefer to spend the next two years tucked safely inside a classroom rather than continue to fight for a job in an economy he describes as "heading nowhere."

Over the last two years, the portion of Americans in the labor force — those who are either working or actively looking for work — has fallen 0.9 percentage points to 66.2 percent, the largest drop in almost 40 years. More than 74.5 million adults were considered outside of the labor force last month, up more than 4 million since March 2001, the Department of Labor says. They are people who fall outside the government's definitions of either employed or unemployed: they do not hold jobs, but they also have not gone out seeking work within the past month. This group includes retirees and parents who have been home taking care of their children for years, but the surge of dropouts suggests that the jobless rate — which was 5.8 percent last month, roughly where it has been for the past year — offers an artificially sanguine picture of the labor market, many economists say.

"People use the unemployment rate as some kind of gauge of the health of the economy," said Robert H. Topel, a professor of economics at the University of Chicago. But because of the number of people now outside of the labor force, he said, "the unemployment rate does not give you the same kind of information it did in the 1970's or 1960's." Job counselors say the trigger for the exodus is easy to see. Among those people whom the government considered unemployed, the average length of time out of work has been rising over the past two years, to 18 weeks last month from about 13 weeks two years ago. In Pittsburgh, members of one support group for unemployed people have been jobless for so long that the group recently started holding separate conversations during their regular Monday night sessions just for those who have been out of work more than six months. More than 20 people usually show up. "This is what we see today — job searches that can take 6 to 12 months," said Charlie Beck, who has directed the support group, Priority Two, for the past 20 years. "By six months, people really start to doubt themselves, and they start to doubt they're ever going to find anything. They start to doubt everything."

Uncertainty crept slowly into Mike Guido's outlook. But after the third "really good opportunity" slipped away, "it started to dawn on me," Mr. Guido said. "It just wasn't happening. It wasn't going to." By then, nine months had passed since he lost his job as an engineer developing products for a Pittsburgh company that makes industrial and safety equipment. He had held the job for nearly 20 years and made an annual salary close to $50,000. Mr. Guido asked around about academic jobs but was told his undergraduate and master's degrees would not be enough for an engineering post. At one point, a university professor told him he probably needed a doctorate. "That was kind of a pivotal moment for me," Mr. Guido said. "Right then, I started thinking, well, wait, what if I got a Ph.D?" So last fall, Mr. Guido, 48, moved his books into a study desk off the long corridors of the University of Pittsburgh's engineering building and began learning again how to pull all-nighters for classes like Advanced Elasticity.

Mr. Guido worries about money. He has a 10-year-old daughter, a mortgage in the suburbs, a shrinking retirement account and newly opened student loans for what is likely to take him three years."This is definitely not easy financially," he said. "The economy has sideswiped me." Still, Mr. Guido said he was pleased to be back in school, learning about things he cares about, and relieved to be on campus, far away from the struggle to find a job. There are others like him on campus: a soon-to-be furloughed US Airways pilot in the law school, a laid-off former sales manager seeking his M.B.A. "It's funny," Mr. Guido said, "how the moves you make because you think you have no choice can turn out to be good."

Most people dropping out of the labor force are men, the Labor Department says, and the number of black men not looking for work has risen particularly sharply. Teenagers who were drawn into the labor force in large numbers in the late 1990's have also left it recently at a rapid pace. But frustration with the economy has cut across almost every demographic group. For the first time since the 1960's, the proportion of women in the labor force has declined over an extended period. In March, 60.6 percent of women 20 and older were in the labor force, down from 61 percent in March 2001.
Source: New York Times