Eco+Nomics

Reading " Euro zone trade surplus rises more than expected in June " in  uk.reuters.com , we may feel either happy or concerned or indifferent. Since the trade surplus has, per definitionem, two branches; the imports and the exports, one has to check both of them in order to make and assessment. For that purpose, the latest relevant  Eurostat News Release (ENR) can  be found  here . In this ENR we observe that the  growth of exports (non seasonally adjusted)  was really sluggish as compared to the more vigorous rise of imports,  for the 18-membered Euro Area  over the first semester of 2014. This might be a result of the weakening Euro of the second quarter, following the deflation concerns. By checking the seasonally adjusted data we see that imports have shown some month-to-month growth signs lately ( feel free to compare it with 2013 ). If we take under consideration the dwindling Euro-zone inflation compared to the more vivid evolution of p...

There is much talking about deflation lately in both sides of the Atlantic. How probable deflation is? How did we get to worry about negative price developments while last year some economists (fortunately, not too many) were arguing for the risk of high inflation as a result of the expansionary monetary policy?  10 months ago Paul Krugman was looking for the " Missing Deflation ", and I made an attempt  (with some mistakes...) to find it. Currently, energy cost evolution is weak (Eurostat) and growth in the EMU remains feeble, while the US are getting better. I will attempt to explain the recent deflationary pressure through a Medium term Aggregate Demand - M/term Aggregate Supply (AD-AS).  In Figure 1, economy's midterm equilibrium is at point A, where AD and AS intersect over the Full Employment locus- that was back in 2007. The negative aggregate demand shock following the Great Recession of 2008 is represented by the shift of AD to AD', where the expect...

In my last post, " An Advocacy ", I pointed out two facts about modern economics and financial markets in an attempt to defend them both. The following two posts become more explicit in indentifying exactly who particularly should be blamed as opposed to generally accusing the Economists as a whole.  The first one by  Simon Wren-Lewis and the second one by Paul Krugman. Enjoy!   [1]  mainly macro: Attacks on mainstream economics and reforming  economics teaching : Mainstream (orthodox) economics is having a hard time in the pages of the Guardian. First Aditya Chakrabortty writes “ How do elites remain in charge?... [2] The Consience of a Liberal:  The Trouble With Economics Is Economists : " That’s in large part what Simon Wren-Lewis is saying in this post  defending mainstream economics. And I largely agree.  It is deeply unfair to blame textbook economics either for the crisis or for the poor response to the crisis. The mania for ...

I have been following a few MOOCs in coursera.org for the last few months, and I have observed something really bleak. Two courses by Prof. Mehrling ( here ) in Coursera examine an alternative approach to the origins of the 2007-2008 turmoil, which has been rather enlightening. A lot of ardent discussions have taken place in these courses' forum; discussions, and some comments in them, that, more or less, accuse economists and financial markets of the current state of affairs. I do not blame these critiques... Yet, I admit they leave a dismal feeling. Mistakes have been made, but economists are not gods; none of us is. I will not argue for who should be blamed, either (I have done so, already). There are only two remarks I would humbly like to make.  First of all, in addition to blaming economists one has to appreciate their contribution before the global financial crisis. Hitherto, they had conduced to successfully alleviating the effects of business cycles in our incom...

It is a real shock if you live in a parallel universe of your own... (News initially read at Naftemporiki )

There is something I need to admit... I am sick of the so called "success story" and the naive- false and deceitful, if you are as malicious as I am- declarations of the opposition. Here are the facts: During 2008, Greece produced goods and services of 240 bn euros. During the period April 2012- March 2013 GDP in current prices was 190 bn euros ( EL.STAT .). By the end of March 2013 the debt of the Central Government was 309 bn euros ( Ministry of Finance ), i.e. 161% of Greek GDP.  Additional measures need to be taken in order to make sure that the Central Government debt will be less than 110% of GDP by 2022. The most auspicious scenario is that the current taxation will remain unchanged for at least until 2015 with the hope that recession will deescalate. Anyway, I do not really believe that there is any more space left for heavier taxation. On the other hand, we are still missing the big picture: while oscillation between anemic growth and periods of recessions ten...

Many times, the private debates in which I have participated have been fueled by the debt and the banking crisis and the imminent recession. What went so uglily wrong? What should have been done? Is it too late? Can things take a turn for worse?  Firstly, it is essential to unfold the exact chain of events the way I apprehend it based on my knowledge of economic theory. Everything began in 2007-2008 when the financial sector of the US devastating losses following the collapse of both the sub prime lending and its securitization and gradually the rest of the world was infected. After Lehman Brothers everyone realized that there was nothing to end painlessly. In their effort to prevent a broader contamination, governments borrowed large sums in other to strengthen the balance sheet of the banking and financial sector and safeguard their economies. Put differently, tax payers are asked to pay for a risk they never undertake and for which they never compensated. Nations with we...

It has been a while, since  I posted " It's the animal spirits " trying to identify some reasons why the US economy is underachieving in terms of employment and growth. Unfortunately, I was unable to substantiate some of my claims one of which was: In addition, households curb their optimism for their future income and are intimidated to spend; either they cannot be confident that they will maintain their current job or the unemployed household members cannot be sure that they will be hired in the near future. David Beckworth on  Macro and Other Market Musings: The Ongoing Dereliction of Duty  fortunately provides evidence that actually expected household income plays a vital role in the future course of the US economy. Enjoy his post!

The dream of a united Europe dates back in 1951 in the form of the "European Coal and Steel Community" (ECSC). 41 years later, on February 7, the 12 members of the EU signed the Maasticht Treaty probably a treaty with the most lethal omissions, lethal for the future of EU. During all the years following the Maastricht Treaty even more mistakes were made and are currently being made and more facts were neglected. Currently, we are playing down the spill-overs of austerity policies while we are concentrated in maintaining a "lower than, but close to, 2% inflation in the mid-term", like a ship being trapped in a port without the crew knowing that they have actually been trapped... Decisions were made as if the only economic variables that could hamper economic growth and social prosperity are debt and inflation. Given that false, sometimes rather naive, perception and regardless the 5 year long inert growth of Euro area we are still focusing on "sound governmen...

I would like to point out a few thoughts of mine with respect to a speech by Mario Draghi on April 15, 2013; " The role of monetary policy in addressing the crisis in the euro area ". Firstly, it is the controversial Outright Monetary Transactions (OMT). OMT was announced by Draghi on September 6, 2012 . When I first heard the news I couldn't believe my ears and I watched the whole press conference. After that I was kind of emotionally overheated believing that Mario Draghi crossed the Rubicon and Euro area would never be the same again! A few months later my expectations dashed. What happened is that I fooled my own self by playing down the condition of ESM involvement... So far the unlimited bond buying mechanism has never been activated; bank deposits haircut is on its way instead. ECB is not allowed to finance sovereign debt; it is a matter of credibility. Indeed... But the question that needs an answer is how credible our banking system and our hard currency is n...

I have been trying to explain for a long time why stock prices in the US have been increasing regardless the troubling recovery of the economy. This morning, I was browsing the Bagliano & Bertola (2004) book (a rather comprehensive with a fascinating subject if you ask me) when I saw an equation regarding the capital gains the profits and the short term interest rate. Extending this equation can very well justify the blooming US stock exchange. Let me elaborate on that. In equilibrium state the sum of operational-profits-to-assets and the capital gains equal the short term interest rate rate of government debt securities. It makes sense: if bond rate is higher demand for these securities increases, so does their price and subsequently interest rate falls; if the returns of the government debt is lower than the sum of profits-to assets and capital gains, demand decreases, price falls and subsequently interest rate increases. The following illustrates what happens when the short t...

After DeLong's " L ESS THAN 100,000 PAYROLL JOBS, A 58.5% EMPLOYMENT-TO-ADULT-POPULATION RATIO EXACTLY WHERE IT WAS A YEAR AGO, AND LABOR FORCE PARTICIPATION DOWN BY 0.5 PERCENTAGE POINTS IN THE PAST YEAR " I once more started thinking of the Keynesian animal spirits . Keynes attributed the so called "Great 1929 Depression", back in 1933, to the low profit expectations of the business coordinators and other economic agents. As a result, investment was being gravely hindered by the adverse economic environment and by the blunted consumption (demand) resulted by the unemployment.  Bradford DeLong  is anxiously concerning for what he could reply to future "whippersnapper economic historians who will come to interview him" for the currently sluggish economic activity of the US. I do not blame him! He does not overreact, either! I have something in mind that could serve as an answer to future historical quests. It has been a while since I first started ...

Since the very beginning of the debt crisis in Europe and the subsequent government spending cuts implemented, everyone- at least from my shallow academic entourage- was arguing, if not shouting, for the vicious circle of austerity. Shortly, beginning from a high debt-to-GDP ratio, public spending cuts affect more intensively the GDP than they do to the deficit and hence more cuts are required (the decrease of the denominator is larger that the one of the numerator) but at the same time GDP has already decreased more steeply. If you wish to argue for the opposite do not even dare; I am living in the center of this vicious circle. Currently, troika is coming back to Greece and from what I read they intend to respond to government revenues shortfall by more cuts... In other words, they remove another wooden block  from the disposable income and they place it on top.  That is exactly what happens in Greece over the last 3 years!  Eventually, we will run out of wooden bloc...

This post is an attempt to use my rather inexperienced and naive instinct in economics in order to respond to the allegations of the necessity of austerity and tight monetary policy. More specifically, I post  my reply to the arguments presented in "The Live arguments of austerity right now: A bestiary" by Mr. DeLong . Please, forgive me if I am wrong. The first group stresses the importance of tight monetary policy. "The Jeremy Stein argument" : Stein ignores the other element of GDP; the consumption. With lower interest rates households can more easily substitute future for current income. Secondly, risk premium is added to the risk-free rate both when the risk-free is 0% and when it is higher, e.g. 10%, and hence risky assets yield by definition higher returns regardless the level of the risk-free rate. Therefore, bank managers will always prefer more risky assets due to the higher returns they offer anyway. Thirdly, there is always the Basel Accord tha...

Over the past few days, the Cyexite scenario has been communicated several times, either via journalists or bloggers and some other times as a leverage for negotiations... I shall  examine some implications of this undesired though improbable- if you ask me- scenario First of all, Cypriot firms, both financial and non-financial, and households have issued debt denominated in Euro, such as loans, bonds, commercial credit, cheques etc. Then, in case Cypriot pound (CP) substitutes for euro a practical question arises: the just mentioned debt will be repaid in what currency? If some of you see an obvious answer, please take some time to reconsider your thoughts. First of all, the debt holder will have to agree to be paid back in an other that the agreed currency and then he will have to negotiate the exchange rate this will happen (for now let us ignore the exchange rate related problems). On the other hand, the debt issuers, will have to find adequate funds to pay back its borrower...

A while ago, I read an article of WSJ written by  Katie Martin  concerning the market tranquillity with respect to what happens in Cyprus; the probable bank deposits haircut and the non-attainment of any agreement among EMU member countries. Among the explanations of this calmness reported by apparently successful analysts I found one, that of Mr.  Beat Siegenthaler, a UBS analyst, who more or less states that the risk of diffusion of a crunch in Cyprus is perceived to be low. I really do not know if that is indeed a general sense- although several other rather interesting interpretations are listed- but that is not the case at all and claiming the opposite is naive especially in the aftermath of Lehman Brothers collapse. The risk of contagion following a crash in the Cypriot financial system is high and most certainly non negligible. I shall elaborate. After doing some trivial digging I found an article that matches my needs; Billio et al. (2012)[1], concerning the es...