Thursday, April 17, 2008


From FT (link):

"Germany’s economic growth will “lose momentum” this year because of high oil and food prices, the strong euro and the turmoil in the global financial markets, according to a projection by leading economic think-tanks. Europe’s largest economy grew by 2.5 per cent in 2007, a rate set to fall this year to only 1.8 per cent, says the joint forecast prepared for the German government by eight economic institutes, presented on Thursday in Berlin. The institutes had previously predicted growth of 2.2 per cent in 2008, but revised this downwards in the face of the “large number of negative shocks” in recent months. Their six-monthly forecast – one of the key barometers of Germany’s economic fortunes – predicts even lower growth next year of 1.4 per cent. “The negative international economic influences will become increasingly apparent [in 2008] and the economy’s expansion will lose momentum”, says the 80-page report, obtained by the Financial Times. Despite the economists’ cautious tone, their projection for 2008 is still higher than the government’s own forecast of 1.7 per cent. The report is also positive on the economy’s resilience to the fall-out from the financial markets crisis and the slowing US economy. “The German economy has become more robust in recent years, so the danger of a recession is lower,” the report says. Unemployment will continue to fall – although at a slower rate than in previous months – and in 2009 the average jobless figure will be 2.98m, below the symbolically important 3m mark for the first time since the early 1990s. In a reversal of the recent pattern, Germany’s exports are expected to weaken while domestic consumption – long the economy’s Achilles’ heel – will expand, the economists predict. Causes are, on the one hand, the strong euro and the unstable international economy, while on the other the rises in domestic employment and wage settlements. The high oil and food prices will lead to relatively high inflation, of 2.6 per cent this year and 1.8 per cent next year, the think-tanks predict. Inflation remains a concern throughout the eurozone, according to separate figures released on Wednesday. Price growth in the 15-country region grew by 3.6 per cent in March, according to revised figures released by the European Union’s statistics office on Wednesday, the highest annual inflation rate since measurements for the eurozone began in 1997."



Professor Gary Becker offers an opinion on why export restrictions on food and other prevailing measures of intervention and policy failures are having inequitable and negative outcome effects (link):

"Some analysts have justified these export restrictions as a way to combat the effect of rising food prices on poverty. However, poverty is much more prevalent among rural than urban families in developing countries like China, Egypt, India and Vietnam. So restrictions on food exports in developing nations not only lower the efficiency of their food production, but also usually raise inequality and overall poverty. The greater political clout of urban households in developing nations is the pressure behind the support for these inefficient and inequitable export restrictions, just as the greater political clout of farmers in developed nations maintains the inefficient, and probably energy-wasteful, ethanol subsidies in the United States and other rich countries."


Here's my current reading list of economics books:

Paul Krugman, Maurice Obstfeld, International Economics, Theory and Policy, Addison-Wesley, 1997
Dominick Salvatore, International Economics, 8th Edition, Wiley, 2004
Simon Kuznets, Economic Growth of Nations, Harvard University Press, 1971
Alan Walters, Britain's Economic Renaissance, Oxford University Press, 1986
Christian Montet, Daniel Serra, Game Theory & Economics, Palgrave Macmillan, 2003
Paul Krugman, Pop Internationalism, MIT Press, 1996
Paul Krugman, Peddling Prosperity, W.W. Norton & Company, 1994

Thursday, April 10, 2008


From today's edition of Financial Times (link):

"Iceland has the highest interest rates in Europe after the central bank raised rates by 50 basis points to a record 15.5 per cent yesterday as it strove to restore confidence in its struggling currency and quench fears of a banking crisis. The move puts the tiny North Atlantic nation above Turkey’s rate of 15.25 per cent and comes just two weeks after it imposed an emergency 1.25 percentage point rise to 15 per cent, underscoring the depth of its problems. On top of the aggressive action taken by the central bank, the authorities are also considering further moves to ease investors’ fears, such as co-ordinated action by Nordic central banks to provide additional liquidity, if needed. There was disappointment that this proposed action plan was not unveiled yesterday. “A sluggish reaction will hurt the financial system, financial stability and the authorities’ credibility,” said Glitnir Research, the research arm of the Icelandic bank, in a report. “Moreover, non-action will also play a large role in the credit rating of Iceland’s sovereign debt, which is on negative outlook at all three major rating agencies, Moody’s, Fitch and S&P.” But the central bank did make clear it was prepared to bolster Iceland’s foreign exchange reserves in the near future. A policy rate increase in and of itself does not solve the problems that have developed in the FX swap market,” it said. “Increased issuance of risk-free bonds that are accessible to foreign investors should open up other channels for currency inflow.” Confidence in the krona, Iceland’s currency, has been damaged this year because of economic imbalances in the economy and fears over the viability of the banking sector. The krona has weakened by some 25 per cent against the euro this year. The inflation rate was 8.7 per cent in March, well above the government’s target of 2.5 per cent, and the central bank said yesterday it expected inflation to peak at 11 per cent by the third quarter of this year, pushing interest rates up further. “Persistent inflation will be most damaging to indebted businesses and households and can undermine financial stability for the long term,” it said. “It is therefore of paramount importance that inflation be brought under control.” Iceland’s economic weaknesses have been exacerbated by the deterioration in global financial markets, which have led to a drastic reassessment of risk and undermined confidence in its highly leveraged banks. On top of these macro-economic pressures, the authorities in Iceland also believe the country’s financial markets may have been weakened via a speculative attack by international hedge funds."


Wall Street Journal recently reviewed (link) the part of the economic agenda proposed by Democratic presidential candidates compared to Herbert Hoover's destructive statist policies that played a central part in searching the origins of the Great Depression. In fact, nearly every economic history textbook chapterizes Great Depression as a consequence of market failures that turned into the economic crash of the 1930s. Going back to the factual side of analysis, Hoover's economic policies were far from being passive and resilent. In 1930, he signed the notorious Smooth-Hawley Act, raising tariffs and other barriers to international trade. In 1932, he outlawed Coolidge-Mellon tax cuts, raising top marginal income tax rate from 25 percent to 63 percent. The combination of an uncompelling macroeconomic policy prolonged the recession into economic depression.

The Democratic presidential candidates seem to emulate Hoovernomics considerably. Both, Obama and Clinton, proposed trade restrictions, claiming that NAFTA is the ground reason for an anemic job growth. Hillary Clinton proposed a significant tax increase on dividends while Barack Obama would eliminate the income cap and raise capital gains tax, getting closer to the point where he'd beat-up Hoover's disastrous statist economic policy.

Tuesday, April 01, 2008


Allan H. Meltzer wrote an article (link) on regulation published in Wall Street Journal:

"The first principle of regulation is: Lawyers and politicians write rules; and markets develop ways to circumvent these rules without violating them... The financial markets offer many examples. In the 1970s, Federal Reserve Regulation Q restricted the interest rate that banks and thrifts could pay depositors. In response, the market developed money market funds that circumvented the regulation. In the late 1980s, the government set up the Resolution Trust Corporation to buy the mortgages held by failed thrifts. The result: Most of the thrift industry was eliminated and the taxpayers ended up taking a loss of about $150 billion in the early '90s ... The perennial argument of regulators is: "If only I had more power. . ." Not so. Regulators did not see the chicanery at Enron. Nor did they prevent the dot-com bubble or the Latin American debt problems in the 1980s. A main reason is "capture" -- when the interests of the regulated dominate the interests of the public."