"When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals.
We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues"

( JM Keynes, "Economic Possibilities for our Granchildren" 1930 )

Thursday, December 9, 2010

On Wikileaks and Beyond

To be honest, the Wikileaks revelations are not such a big deal. Here and there you can find some interesting detail, but as far I as I´ve noticed, there are not really amazing revelations, just a lot of personal observations and a lot of gossip, although I do really hope that no one will get physically hurt from the information revealed. Thus and besides the legal aspects, why there is so much anger with the filtrations? I will try to answer that question with a small personal anecdote.

A few years ago a friend of mine gave me a valuable advice to avoid the common and quite unpleasant anxiety before any important meeting or interview:“ Remember, if you want to stay calm , try to imagine the interviewer in the rest room...” . I replied to my friend that pornography or sexual kinky preferences are not among my favorites hobbies ..... : “Hey, just imagine a human being ...alone, disarmed from all the status symbols, naked and fragile like you and me. That´s the main point of the “therapy”... ”. Since I had no choice, I made use of that advice which eventually helped me to stay calm, though the job finally went to someone with less imagination.... How this little story is related to the last weeks 250,000 documents Wikileaks filtrations?

Human beings cannot be dominated by brute and naked power alone, so any regime or command relation relies upon a “soft” power multipliers which includes myths, legends, etc. all of them normally well hidden behind the veil of ignorance. That dominance tool depends on the level of ignorance or consciousness of their subject. The humanization of the powerful guys, as I did in my job interview, isolates the genuine base of dominance relation ( interviewer vs. Job seeker) but also brings the relation to the human arena, with its constraints, needs and weaknesses.

Thus, the subversive ingredient of Wikileaks is the opportunity to watch, almost in real time how the real game of Power is played behind the veil of the Myth . The documents tell us the degree of the nakedness of the King, as the wide public becomes aware that behind the big phrases, the military parades, the closed summits, the expensive suits or PR campaigns there are just normal and rather petty human beings that apparently (!) do not deserve sooo much respect. No, they don´t...

It is not a coincidence that political power for the major part of the history was closely related to religion and Myths. Great Conquerors, Big Kings, City Founders were generally part of a Divine genealogy. The most remote version is the ruler himself as Divinity, a version somehow softened later when the rulers were nominated by the clergy or were themselves the head of the religious clergy. The myth, the close tie between the human being and the upper spheres was always there and even in Modern time we can find a softened version ( augmented by TV and the other mass media).

So, the service Wikileaks offered goes beyond the information itself , it adds to the understanding that the big fish are very human, even a bit stinking .... So we, the normal guys should develop a critic attitude toward Living Legends and their spoke persons.

Sunday, November 7, 2010

Who Cares About Growth???

Sometimes I´ve got the strange feeling that Analysts, Policy Makers or Economists have signed an unconscious agreement: Under any circumstance, no matter what they are asked about the econmy , they alwaya return to THE eternal Mantra “(Economic) Growth isn´t everything, it´s the only thing!”. The repetition has its effects , and Economic growth (the rate of change of the national product -“GDP) is quoted, analyzed and commented endlessly as if the whole world was pending on a rather weird and obscure figure. Since most of the population normally tends to listen to “experts” (especially in the field of economics), the GDP talk became a widely accepted yardstick to measure policies, and most important politicians.

Why Growth is so important? And who benefits from the “Growth” obsession? First, the GDP importance stems from its general nature and apparent neutrality, after all the figure measure the well being of the WHLOLE society. So, if GDP grows by 1%, we are “all”, on average, 1% richer. In that simplistic way it is correct though the problem lies in that the “average” citizen simply does not exists. The 1% is the growth of the overall economy, but it does not imply how the somewhat biggest pie is going to be eaten. Some might even receive less than before , even the overall pie has grown.

I would like to illustrate that point by making use of data from the American Economy. The graph describes the evolution of the GDP growth and the share if the most rich 10% of the population for the last 65 years. (Why America? The data is available and it reflects in general terms the trends in other countries).

As can be seen from the Graph, America´s GDP grew almost every year since WWII (exception in recessions) . However, the way the growing pie was distributed can be divided into two main periods. Along the first 30 years after WWII the relative share of the richest 10% citizens was stable (app.30-35%). Since the mid 70 the top 10% slice grows steadily and dramatically, and nowadays they grab almost 50% of the national income. If you want to see it in another way, 10% of the population received 60 cents of the additional wealth created during those 30 years, while the average citizen in the lower parts (the rest 90%) received 4 cents.... 60 vs. 4!.

So, if politicians and mainstream media are so obsessed with growth it must be because they care a lot about the 60% share, otherwise there is no reason why to focus mainly on that figure. As mentioned above, this is data from the American Economy, but it is possible to track the same trends in many other developed countries. Some would argue that “they deserve it “ i.e. the most top 10% are the guys that work hard, innovate, assume risks .. in effect they are the drivers of growth so they deserve a bigger share , while the bottom 90% should be thankful for getting almost 50% of the additional wealth.

Needless to say that such argument is so poor and based upon debatable hypothesis as what is growth and justice. However that argument can be easily refuted with our simple graph. If the only condition to growth is an ever increasing share for the most talented, can someone explain what happened between 1947 and 1977?? The American economy not only grew vigorously but 30% more than the following 30 whilst the “talented” share remained stable. QED

The way growth and well being is distributed should not be confined to the “moral” arena, far away from the “practical” sphere. Living together in a society implies a general, sometimes , vague, common reception of ethical values , justice and fairness . However, my point goes beyond that : The very fabric of the modern society and economy is based upon sharing the benefits of the economy : The wealth as expressed in financial assets and other depends on the capacity of the mass consumer to generate sales , profits and wealth. A polarized society with an insufficient purchasing power of the average citizen is a weak growth society which tends to rely upon external demand ( the model adopted, for example , by China ) or to engage in an endless speculation orgy of extravagances and that sort of things. In a next blog I will try to link the current trend of income and wealth accumulation and the current economic crisis.

As a finish line, I will just ask you a favor : Next time you hear a debate dealing with growth and GDP, just ask the most natural question , the basic moral imperative of an individualistic and capitalist society : What do I get out of it ??? Although I do not know you personally, I can tell you with 90% probability that you will get almost nothing….

Monday, November 1, 2010

The No Change President

The victory of the Democratic Party in 2008 seemed to be the beginning of a new era for America and the World. Forget the color skin of the President, it was all about the refreshing message of “Hope” and “Change” that inspired so many people to act and dream.

Two years later , Democrats will probably loose (tomorrow) their majority in the House and some seats in the Senate. If this was not enough, recent approval ratings polls tell us that President Obama is not very popular, or better put,less popular than before and other sources point to an emerging and growing tendency among Democrats to look for another candidate for the 2012 Presidential elections. What happened in the interim? Where the winds of Hope and Change have gone?

I am not an expert in American politics, but from the very first days of the actual Administration it became clear (for me) that Obama will probably end as a one term President. The first warning signs were his top nominations, most of them part of the reigning establishment ( and naturally committed to the past he pretended to change) :Secretary of Defense? Bush´s Gates ;Secretary of Treasure? NY Fed President ( and City´s Chairman protegee); Head of Economic Council? A controversial Economy professor with deep ties with the hedge funding industry. Even when he had the chance to change the Fed Chairman, he reappointed Bernanke for a second term . So who was supposed to lead the change? His wife? Experience cannot and should not be an explanation since sometimes experience can be from the bad type...

However, the most important deviation from the “change” was and still is his economic policy. Some commentators (including Nobel Laureates), said from the very beginning that the fiscal stimulus packages were too small and inadequate for the colossal task of reducing unemployment they were designed for. They are all partially... but deeply wrong: it is not the size of the package that matters but the philosophy behind it that deserves the deepest critiqu .

This Blog have been saying for at least two years that the economic crisis is the result of insufficient demand , the natural outcome of three decades of stagnating wages and massive wealth accumulation among too few hands . Both phenomena are two sides of the same coin that depresses consumption and encourages the formation of debt ( for more details, read previous posts). The conclusion of such an analysis is that stimulus is just a tool that should be followed by a massive redistribution of wealth and incomes in order to guarantee sustainable economic growth.

Therefore Obama sinned twice : First, by promoting a small stimulus in the name of bipartisanship and moderation . Second by not adopting a genuine redistributive policy. And if you needed another confirmation for the genuine interests behind the actual policies, just look on SP 500 last quarter earning figures ( banks included ) or the massive masking of banks´ losses to understand who are the main benefactors of the “Change” President. The results are evident: unemployment is still high, foreclosures are increasing and the general mood is that America and the world should be ready for a “New Normal” of low growth, high unemployment and most important, no hope. So, if American citizens feel disappointed and some of them join the “Tea Parties” movement as a way-out for their outrage you should not be surprised.

Some would claim Obama has a progressive agenda and the evidence is the success to pass the historical healthcare law despite a fierce opposition. Well, that is an important though limited achievement, and if placed in a wider perspective it is almost nothing. Just have a look on FDR achievements some 80 years ago, under more difficult circumstances and understand the poor score of Change Obama. After all we are talking about the most powerful man on Earth, so political constraints are just one part of the power equation he must deal with . And he got the tools.

The comparison to FDR is tempting, so let me quote a few phrases from his inauguration speech:

“Practices of the unscrupulous moneychangers stand indicted in the court of public opinion, rejected by the hearts and minds of men.True they have tried, but their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence. They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish. The moneychangers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths”.

Obama soft talk ,and more important soft actions ,does not even resemble the moral integrity and firmness of FDR. However, Obama got still time, not too much but still enough to save his legacy and his country. He should open history books and read FDR actions and words, if not as a policy guide but as an inspiring story of boldness and determination. The calculations should be self evident : Since his opponents have no intention to compromise, any moderate policy is useless .In other words, the launching of a bold and decisive progressive agenda is costless from a political perspective . Such a policy might not only give him a second term but an honorable place in the American history, on my opinion the only open alternative to pull out the economy from its dire straits. Reminder , FDR was not elected for one term , but for four.....

Sunday, October 24, 2010

Who is Afraid from Deflation??

For many decades economists and policy makers have labeled inflation as the main threat to stability and growth. Accordingly, policies were designed and applied to fight that threat, even when the Big War meant sacrificing other policy goals such as employment. However, the last recession revived the threat of deflation (Generalized decline of prices), until such a point that the “D” word has replaced the “I” word as the main enemy for the economy.

How it comes that Deflation turned to be the new economic “Ghost”? Mainstream economists and media offer various explanations for sudden shift in their attention, some of them to be exposed hereinafter.

The First of all , almost everyone point to the “Japanese Ghost”, a living example of a country that fell into a low growth trap following the bust of an immense asset bubble ( AKA “Lost decades”). That trap was accompanied with a steady decline of prices products and assets as well. Japanese Govt. tried to fight the recession with the accepted medicines ( public debts, lower interest rates) with limited success. The Ghostbuster replies: “True, Japanese ghost hit assets owners quite a bit ( Nikkei is still 35% from its peak in 1990) but unemployment rarely passed the 6% ,a figure unemployed American can only dream about. Anyhow, despite the “calamities” Japan is still one of the most advanced countries in the world . From a methodological perspective, casualty does not mean causality, so the anemic growth can be attributed to other factors such as income distribution... or job security , just to name a few, while falling prices are in classical economics the result , not the cause of the real world. So where exactly is the Ghost?”

From Japan we turn into theoretical “Spiral Ghost”. That theory claims that falling prices induce people to postpone their purchases since the consumer expects to get a better deal later. Since consumption accounts for ap. 70% of the economy, lower consumption means lower sales, less production and more unemployment, pushing prices down in an endless spiral.The Ghostbuster replies :”Unfortunately that Ghost cannot live in the same room with basic economic theory. We were told from the first day in the University that when a price of a product falls, the quantity demanded for it increases (“The Demand Curve”), so deflation ironically should augment consumption, not depress it. The focus on “timing” of that argument is another evidence for shortsightedness and misunderstanding the importance of prices as a market mechanism to calibrate between needs and capabilities. If prices are too high,it´s about time to reduce prices ( and profits.... ) so we all can enjoy prosperity. Sorry I don´t see any ghost around”.

Others mention the “Real Interest” ghost. That argument is focused on investment and consumption and their relation to interest rates and it goes like this : If prices fall, than the real interest on debts goes up. Since nominal interest must be above zero, falling prices mean (G-d Forbid!), positive interest rates. Such rates would restrict consumption and investment, eventually deepening the recession. The ghostbuster, still unemployed and a bit frustrated replies “ The very same pundits have told us that the crisis was provoked by a low interest rates policy held for too long tha fed a consumption and financial orgy which ended in the actual disaster. Now the very same experts want to apply the same poison? And we will end in worst recession nightmare later on? Are these guys serious? In addition, who will invest when 30% of the production capacity is idle?. Next , please ….”

If the Ghosts named above are not so real what is the real motive behind the implacable fight against Deflation? Nobel Laurate P. Krugman was very precise when he explained his vision in favor of inflation ( = against deflation) in an article published two years ago in the NY Times titled “ The case for Inflation”

“It goes like this: even in the long run, it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation rate would lead to lower unemployment, not just temporarily, but on a sustained basis”. (NY Times, “The case for Inflation, February 2010)

We should thank Pr. Krugman for his honesty. What he says in simple words is that since accepted ( and contractual) employment conditions of working people are too difficult to overcome, the “solution” is to bypass that obstacle by eroding their purchasing power . Applying Krugman´s logic, if instead of inflation we get a small deflation, real wages will surge . So, if low inflation is the cure which reduces real wages ( his main concern!), than the Ghost is ...high wages! . Eureka! . As a side notePr. K “forgot” to tell us that lower wages imply by definition higher profits to corporations. Well, that is just a “detail”....

Our professor is not alone, as that sort of “analysis” follows a long academic tradition of associating economic crisis to “high wages” or “low productivity” to which the “cure” is self evident :Low wages encourage employers to hire personnel, and reduce unemployment rates. Such “theory” is another sad example of how the “micro” perspective depict a twisted macro picture of the whole economy.

Let me explain. Right ,from a perspective of a small company higher wages mean more costs and probably lower sales. However, a macro economist should ask not only how the stuff will be produced but who is going to buy it .... and if the mass consumer looses purchasing power due to depressed salaries and buy less, the real gain of the capitalist is a Pyrrhic victory..

So the real ghost that bothers policy makers is not Deflation per se but another “D” word, “D”istribution , the possibility that in some point working people can enjoy a bigger share of the global prosperity. Do workers earn “too much”? Well, even Professor Krugman knows that the wage share out of national income ( i.e. the part of the national wealth that goes to the working people) is in record low in historical terms. Conclusion: Working people do not earn too much, I would say that they even earn less than the necessary to absorb the products offered at current prices, and therefore Deflation might be a good step to recalibrate that anomaly.

As any observer knows, the game of Political Economy is also a zero sum game between Capital and Labor . That implies that any worsening of the Labor conditions implies an improvement for Capital.The evidences that the concern of policy makers in favor of Capital are so evident in their last policy debates and actions, that it cannot be avoided but we will leave that for the next post that will deal with the QE2 initiative.

Thursday, October 14, 2010

Hillel´s Forgotten Lesson

That post should have written in Hebrew.

” What is hateful to thee, do not unto thy fellowman;
this is the whole Law. The rest is but commentary”.
( Hillel The Elder , 1st century )

Last week the Israeli cabinet voted through a "declaration of loyalty" a bill which would require non-Jews taking Israeli citizenship to swear loyalty to Israel as a "Jewish and Democratic State" . Although the bill that must still receive the approval of the parliament before it becomes law it is an important step toward legislation as the Government controls the majority in the Knesset.

For an outsider, such a Law might sound a fair decision but, once again, the devil is in the details : First of all , the Oath is required only from non Jews . Second it requires Loyalty to vague terms as “Democratic” “ Jewish” . Needless to say, the Law is controversial and many of its critics appeal to modern values. However, I will try to shed light on that decision from a "Jewish" perspective and show that the Law as proposed also clashes with less modern traditions.

If loyalty can be simplified by a “!” mark, Judaism can be represented by a ”?”. To illustrate that point, I will bring as an example the opening of the Babylonian Talmud ,the central pillar of Jewish tradition. That book commences (in a non typical fashion for a religious text) with a ... question ...in which a scholar raises his own doubts about a former .... question ! Lets have a look on the quote:

“MISHNAH. FROM WHAT TIME MAY ONE RECITE THE SHEMA' IN THE EVENING?....GEMARA. On what does the Tanna ( “Scholar”) base himself that he commences: FROM WHAT TIME?"
( Babylonian Talmud Soncino translation , Tractate Berakhot Page 2).

A few explanations:
Mishnah : Oral Law
Gemara: The book that gathers the debates concerning Oral and Written Law.
Shema: Literally “Hear, O Israel! Adonai is our God! Adonai is One!” The most important part of the prayer service in Judaism, recited twice a day.

I will not get into details about that fascinating discussion, but it serves as an example to the spirit of the Jewish culture. That emphasis on “debate” does not mean that Judaism is alien to loyalty. On the contrary, the above discussion deals with a sort of “Loyalty declaration” an observant Jew must recite twice a day. But even that small piece of evidence reveals many interesting aspects about the nature of loyalty.

First of all, the Shema call is a personal manifestation which does not imply necessarily a public realm ,let alone the existence of the State or clergy intermediation . The call is external , verbal but reflexive, and in public service it is recited by each and everyone of the prayers, as a sort of special and personal commitment. The main point is that loyalty is in essence a personal choice, not an issue to be imposed from the establishment and which stems from the individual.

Second: The debate above is practical by its nature ( “From what time?” “On What”How? Etc.) as are most of the debates in the Talmud. The Jewish tradition considers big declarations or profound debates as meaningless unless they are accompanied by concrete acts ( the “Mitzvot”). In our modern case, the new law does not specify what does it mean to be loyal to the “Jewish and Democratic” and what are the concrete terms for such loyalty . If the idea is to emphasize the supremacy of Law, than the “loyalty” is useless, since it would be sufficient to declare a personal commitment to obey , protect and defend the Law. If the idea is to emphasize the Jewishness of the State, we may fall into a deep trap : Israel is NOT ruled by the Jewish legal Code, so in that sense it is not a “Jewish” State . If “Jewishness” means a Jewish cultural character or symbols it is a too vague and ambiguous term to demand “loyalty” to. And how do you measure loyalty? Is it a binary term or there are various degrees of “Loyalty” ? And what is exactly Democracy? The rule of majority or also the rights of minorities ? And so on , and so on...

Third : The modern version of “Loyalty” is not only discriminatory ( only non Jews are required to declare ) but alien to the Spirit of the Shema . The obligation to recite the Shema twice a day is imposed on each and every observant, even on direct descendants of King David. From that perspective kinship is just one condition, (...not necessary, let alone sufficient), to guarantee the commitment to the Jewish World. The daily recite is a reaffirmation of the idea that loyalty must be reinforced even among the (apparently) most most loyal.

Back to the first quote to close the circle, Hillel´s comment was a response to a Gentile who asked to understand the whole Torah on one leg ( his rival, Shamai sent away the gentile...) . BTW, Hillel´s line is dominant in almost every dispute between these two scholars . Hillel would ask in our case :What would American Jews say if the US Congress approves a Law which requires non Christians to swear loyalty to a "Christian State" ??? I do not even dare to imagine.... As Hillel stated, the basic principle of the Jewish tradition is the respect for the other and the recognition that you might be some day in other´s people place.

My conclusion is that the proposed legislation is not only contrary to the spirit of a modern Democratic State but reveals a deep misunderstanding or ignorance about Judaism among Israeli rulers.

Sunday, October 10, 2010

"To Freeze or Not to Freeze,... That Is NOT The Question!.

Any impartial observer of the negotiations between Israel and the Palestinian Authority would probably conclude that the ongoing crisis concerning the extension of the temporal settlements´ building freeze is ,for the most, a bad joke. How it comes that such "no issue" has paralyzed a 20 years Peace Process as if the fate of the whole world was depends on it???. Newspapers are filled with question marks: Will Israel freeze? For how long (2 months!! 3 months? 4 and a half?? ) ? What has the US President to say about it ? And the Arab League? What are the recent political maneuvers in Israel? Will Abu Mazen renounce? A genuine Mid East circus….

A somewhat more benevolent spectator would just label all the mess as a weird sitcom. However, if it was only a question of literal tastes, Dayenu*. …. But bearing in mind that this specific Reality Show is very, very real and can easily turn into a tragic “Horror Show” for other anonymous protagonists ( i.e. average citizens) , leaders should be reminded that are playing with fire.

From the outset, the whole idea of a temporal freeze was a bad Salomonic “solution”. Lets analyze the decision by utilizing a simple "What-If" methodology.
Scenario A: If Israel eventually will evacuate the occupied territories, a PERMANENT freezing would turn to be the appropriate measure. Temporal... meaningless.
Scenario B: If Israel does not intend to evacuate the settlements, the real meaning of a temporal freezing is a few months of delay in further construction, turning the freezing into an empty gesture.
However, reality is not a binary game so the freezing should be seen as a gesture of good faith, not a must but a sort of temporal cease of fire while negotiating for peace. Fair enough?

Well, if the freezing was not restricted in time, it could be considered as a step toward reconciliation, equivalent to a cease of fire in times of war. Though, the temporality ingredient kills the remains of any possible good faith since it actually imposes a arbitral restriction for the period for negotiations, similar to saying: If Peace is not reached within XX months, we all go home and end the negotiations. What next, G-D only knows ... Whoever is familiar with the Peace Process knows that 10 months is nothing, really nothing and to get an agreement, therefore “Temporality” is a “No Freezing“ de Facto. In light of this perspective the two months extension, as President Obama is asking for, sounds as a pathetic and cynical political maneuver ( Mid Term elections) and nothing more. Furthermore, reality has its own inner watch, so the imposition of a restricted timetable is artificial.

If you needed a definitive confirmation for the meaninglessness of the “temporal freezing”, just open the last week newspapers. The disproportionate attention for a meaningless topic in the media is fed by politicians and their spokesmen. That is a classical political maneuver aimed to deviate the public debate from the core business and their failures to achieve real results from the negotiations. Reminder : Israel still maintains for more than 40 years millions of human beings under military regime without basic civil, human and political rights ( as human beings,,,, national rights is luxury under the current circumstances) . The Palestinian are still divided with a leadership that did not achieve any meaningful result from its current strategy (which is …???) , to alleviate the situation of its people, besides some economic fragile recovery in the West Bank. And finally, the US President did not achieve much of his initial goals in the process as part of a global American strategy toward the Arab world.

So we might get some extended period of freezing but the obstacles will remain in place. The real and not so temporal freezing of the Peace Process can generate a new wave of violence or a false sense of stability before the next round. What is needed is to renew the negotiations and if you wish so , do it under a permanent, genuine and unlimited freezing of any construction activity in the Occupied Territories. The alternatives are so bad that any temporal restriction is meaningless and even harmful.

That is the real deal on the table, the rest is pure hot air that will freeze soon.

*The word "Dayenu" means approximately, "it would have been enough for us", "it would have been sufficient", or "it would have sufficed" (day in Hebrew is "enough", and -enu the first person plural suffix, "to us").

Thursday, October 7, 2010

The XXX Economy

The E= Y equation should be familiar to any person who attended a basic course in Macro Economics. The equation says that the overall production of a National Economy or “Y” is consumed during the same period of time ( Year , month...), represented by the “E” or Aggregate Demand. The identity sets a sort of closed circle by equating the Economy main parameters under any circumstance (Note even non sold products are considered a sort of non voluntary demand , or unemployment so in any case the identity holds... but lets leave that interesting debate for another post ). Whoever studied economics can skiop the next two paragraphs.

The “E” , the Demand, has three main aggregates : Some products are consumed by us as Private demand (“C”), some as Public demand (“ G”overnment) and the rest remains “I” Investments ( in simple words, the products that are used to produce more in forthcoming periods). The basic equation looks like this:

E = C + G+ I = Y

If we add other countries than the picture becomes a bit more complicated as the circle is opened and the country can sell part of its production abroad ,as Export “X” or to bring products from abroad, Imports “M” . The former is added to the demand and the later is another source of products so it is subtracted from the demand. The new equation looks like this

E = C + G+ I + X – M = Y

Now, back to Planet Earth.... the ongoing recession is a classical case of a Demand crisis ,as the capacity to produce goods and services ( Potential Y) is much higher than what actually people are ready to buy. It is important to note that THE ABOVE EQUATION STILL HOLDS but with unemployment, spare capacity , piled stocks etc.

In order to increase the E and thereby the Y and employment , governments have tried to work with the equation above : First by increasing the “G” generating huge deficits in their accounts ( 800 billions in the US and so on) ended with austerity measures . Another policy applied was to encourage “I” by reducing interest rates ( only yesterday the Bank of Japan announced that it will reduce its interest rate to 0 ) and consumption “C”- ended with record balance obligations in Central Banks loaded with dubious stuff . Least and not last the explicit attempts to maintain asset prices is aimed to sustain “C” (If people feel rich , they consume more ,,, that at least what the theory says) - the end is a more poor consumer , with less employment and less wealth. .

It is natural that All these policies seem to have some influence, but very limited due to the special circumstances and because they do not address what THIS BLOG AND OTHER PEOPLE have been saying for a long time : ONLY A POLICY OF REDISTRIBUTION CAN GURARANTEE A BALANCED, JUST AND SUSTAINABLE ECONOMY. Please read previous posts in case you don´t believe....

Since the above policies are deemed to fail ( as predicted ) and the evidences are against the Green Shots illusion are piling, the last bullet in the policy makers arsenal is to try and get some demand form the outside world , i.e. encouraging Exports (X). The new paradigm is X X and More X ! Though, since it impossible to force sovereign countries to buy your stuff, you must try to convince them by lowering your prices which is equivalent to make your currency cheaper.

It is not that simple to manage currency rates since currency markets are supposed to be “floating” and “free”. Therefore Central banks make use of a serie of methods to lower their currency : Announcement of lower interest policies ( QE 2 in US ) , Lower interest rates ( Japan) , Purchasing of currency ( Japan, Switzerland, Israel) or direct control of exchange rates ( China) . That is what I call the XXX economy, since the export lead recovery is just another pathetic XXX sign , a sort of “we know what it´s there but we don´t want to know about it “ attitude. Nude reality is there after all.

These steps are part of the background for the last violent in the currency markets ( Euro Dollar from 1.6 to 1.18 and back to 1.38 in question of months... high value of the Japanese Yen despite the weakness of its economy ... etc. ) in the last months, and the best is yet to come. Anyhow, the managers of that game are conscious that their efforts are futile : If all the countries are trying to make use of export as a way out of the crisis and all of them apply the same devaluation policy, we will be soon back in the starting point and no effective devaluation will take place.

The futility of currency devaluations lead to an escalation of the attempts to generate demand, tht time by avoiding competition from abroad in stead of looking for new markets . History tells us that in the end some countries simply close their gates to foreign competition in order to maintain some internal demand for its industry. According to some economists, that “Beggar Thy Neighbor “ policy in the 30 reduced drastically the international commerce and exacerbated the impact of the financial crisis as Former US Secretary of Labor R. Reich recently said
“Smoot-Hawley here we come. Willis Hawley and Reed Smoot, you may recall, sponsored the Tariff Act of 1930 that raised tariffs to record levels on more than 20,000 imported goods. The duo said this would protect American jobs and revive the economy. It did the reverse, plunging the nation ( AND THE REST OF THE WORLD .... Blogger note ) into an even deeper depression....”

I could not find better words to end that blog. Despite the gloomy perspective we should not forget that a progressive and reasonable way-out is available. It´s only a matter of consciousness and choice.

Sunday, October 3, 2010

The Dark Side of the Yuan

The political debate in America concerning the “unfair manipulation” of the Yuan by the Chinese Authorities is intensifying . Last week (Sept. 2010) in the House of Representatives a huge bipartisan majority approved legislation that would potentially pave the way for sanctions against China over its currency policy.
Trade Wars? Not yet, to me it looks more as “Election wars” , that sort of initiatives launched a few weeks before elections aimed to appease a furious a population still bearing the burden of a false “Recovery”.

However, the pressures on China to modify its currency policy and adjust it to "market values" are more serious and persistent than a populist gesture. According to many American political and academic voices, the Chinese policy of pegging its currency to the USD has distorted the trade terms between the countries which brought about the loss of millions of American jobs and trade imbalances that helped to create the pr recession financial bubble. According to that view, the artificial low value of the Yuan turns to be an unfair competitive edge which reduces manufacturing costs in Dollar terms at China, forcing local companies to transfer production and jobs abroad. The trade loss is compensated by a flow of money back to USA , inflating the financial bubble.

From a rather simplistic perspective the above description sounds plausible, albeit its logic chain is based upon a serie of debatable hypothesis, one of them related to the concept of a “ fair value” for a currency . In order to overcome that "fairness "obstacle economists developed the denominated “Power Purchasing Parity” (PPP) parameter, a tool that establishes the value of exchange of currencies according to what they are able to really buy instead of their current market value. For example if a cup of coffee in Barcelona costs 1.2 € and the same cup of coffee in America costs 1.2 $ , the effective exchange rate should be 1 (1.2/1.2) and not 1.35.

How it is possible to calculate that figure ? PPP measurement method is applied to the overall economy by translating the production of the country from local currency ( Prices x Quantities = GDP ) to USD ( at current USD) and to PPP ( at PPP USD)as well. Since GDP is Quantities multiplied by Prices , we can subtract the quantities from both equations and remain with the ratio between PPP and current USD. A value of 1 would indicate a fair value of the currency and below that a underestimated currency.

With that question in mind I took IMF figures for 2009 and compared between GDP at current and PPP values for the Chinese economy. The result was a ratio of 0.56 , which means that a Greenback in China is able to buy almost the double of products than in US, or that the the Yuan is a “weak” currency since it can buy less products than the USD. The conclusion is that the Americans are right in that specific claims. In any case, the currency exchange value is just part of the story and if we have the whole picture it might change our perception.

First of all, the actual unfair value of the Yuan is a 16 years old , to be precise since the first mandate of President Clinton, and was maintained along recessions, buoyant years, bubbles... and somewhat eased app. 3 years ago, before the crisis emerged ( 23% devaluation). Therefore, in a wider perspective to claim that the currency "manipulation" is the reason for the actual crisis is a bit strange and dubious claim. On the top of it, the US itself was ( and is still !) interested in that mechanism since it became a central piece in maintaining a steady pressure on local prices , wages and inflation. That mechanism ( including the purchasing of Debt) is one of the explanations to the low inflation and low interest rates in the Western economies along the last 30 years, much more than the Genius of central bankers

Second Point is to analyze the wider context : Is the Chinese low value policy so singular ? According to IMF figures it looks that China low value currency policy is the rule rather than the exception, as most of the countries maintain a low currency lower than the “fair” value. ( see graph)

The third point is related to the distributional aspect of the global economy : As can be seen from the next graph, the low value of the currency is common among poor countries and less common among rich countries. It is not a coincidence : The low value of the currency is equivalent to reducing the international value of the work of the country´s citizens and increasing in relative terms the purchasing power of currencies abroad. Is like giving a subsidy to the foreigners.

This should not take us by surprise. Any tourist who traveled to developing countries has probably asked himself how it comes that the same product or service is sold for such low prices ( in comparison to her country). The same question applies when you shop in the Supermarket and can buy an African pineapple for Christmas Eve at a lower price than a cup of coffee.. The answer is partially related to currency values.

The above graph shows that for the 85% of the humanity, the trading terms of their work is lower than should be , while 15% are above that line. In a less political correct parlor, the exchange rate system seems to be just another mechanism that serves 15% of the world population to exploit the remaining 85% : The work of , for axample a Bangladeshi embedded in the exported products is sold in cheaper terms than it should be while he buys the fruit of rich country products in dearer terms than should be. Good deal, isn´t it?

That detail , that huge advantage for the American consumer will be lost if Chinese appreciate their currency. I guess that Congressmen didn´t mention that,and why should they? After all they don´t get their votes or contributions for the campaign from Shanghai , Cairo or Minsk workers and the cry for "jobs" is nowadays above all. However that is the most serious evidence for the real state of affairs.

Nevertheless, the trading terms should be accommodated to reflect a more just and fair distribution of the fruits of the human labor. I would suggest to improve the working conditions, the social security and the wages in China and everywhere in the third world . Such a policy will not only improve the competitiveness of the American worker but open new markets for the American industries .But that is for another ( or many ) post....

Monday, September 20, 2010

European Lessons ( Part II )

In a previous post http://enriquefleischmann.blogspot.com/2010/09/european-lessons-for-middle-east-part-i.html) I´ve tried to present an historical perspective for Mid East Peace Process, a lesson that the peoples and their leaders could learn from the European history while dealing with the “Peace Process” . Very briefly, the main message was that Mid East peoples should learn how try to avoid the European bloody path to Peace: Europe and its people managed to achieve a relatively calm and prosper era (since 1945) after waisting millions of human lives during hundred of years of wars and conflicts which devoured an infinite amount of economic resources. For us, the younger generations a peaceful Europe sounds a banality but remember that the last 60 years are an exceptional long period with no serious violent confrontations in the Continent . For the record, the last 300 years yielded wars in 1939-45,1914-18, 1919, 1870, 1866, 1805-1815, 1763, 1711, .. just to name a few).Middle East people should understand that the way to prosperity is 180 grades opposed to war , while the alternative is paying the expensive REBBE GUELT ( “Teacher´s Salary” in Yiddish) with their own blood.

Being conscious that the former analysis might sound discouraging ( which is not the case !!) I decided to make use of the same “Raw Material” in order to develop a somewhat more encouraging and hopeful conclusions.

The first step would be to arrange history in a more accurate perspective in three aspects : Casualties, Time and Space.

Casualties : The Mid East conflict has yielded app. 101-115 thousands casualties ( Wikipedia) , WWII 60 Millions, WWI 20 millions ….the death toll table (http://en.wikipedia.org/wiki/War) is a sad reminder of our dubious humanity . Before proceeding , I would like to stress that each and every casualty is a terrible loss, and any statistical “comparison” is misleading from a human point of view. But if the depth of hatred is highly influenced from the level of collective suffering, than a rough comparison can give a ray of hope. As I said before, the comparison is aimed to show that even after terrible bloodsheds human beings are able to understand that an ongoing and endless cycle of vengeance is useless. History teaches us that victims do not necessarily turn into the eternal combustible that feed the flame of hatred .

Time : Our high speed era can hardly cope with an historical perspective, since events are not viewed in a wider context abd so they loose their meaning within a very short period of time. Instead of eternity we became used to think in “short time eternities” . However, if we just maintain a bit longer run perspective, time becomes another dimension that should be considered in our "European" lesson : France and England maintained a 100 years war, the border line between Germany and France was a main focus of hostilities for centuries, the 30 years war was a devastating experience of Europe, let alone the long run Reconquista in Spain.... so the Mid East few dozens years struggle is undoubtedly too long but not extraordinarily long in historical terms. Our generations were condemned to spend their entire lives surrounded by the “Conflict” , an experience which brings some of us to sad conclusions of NO HOPE. History tells us that a different coexistence is possible, and history provides strong evidences that even the longest conflicts eventually end .

Space or Clash of Civilizations : The last last point is less related to Europe and more to “enmity” between Jews and Arabs/ Muslims. The Conflict is sometimes described as part of an unavoidable “Clash of Civilizations” ( Why that “clash” occurs now? Why it did not take place before? ), so as a “byproduct” of that “clash” the conflict can be solved, if at all, only as part of a wider global arrangement ( or after an Armageddon style battle) . That perspective leaves very little place for any solution : the more complicated and confused an issue becomes, its solution becomes further ( in economic parlor : additional imposed constraints just remove further an optimal solution) . However, from historical perspective Jews and Arabs got along much better than European and Jews, so the Conflict can hardly be considered as a mere product of a phenomenon that hardly existed before the foundation of Israel (Note : Zionism never saw itself as a colonization movement in a European sense). Therefore if the KISS principle ( Keep It Simple , Stupid) is applied and the conflict is confined to a strict political , national and territorial arena, expelling external “noises” both sides might be able to find a practical solution , a “second best” solution much faster .

As I said in the beginning, there is still hope that both people are able to advance with the process before it gets too late. History shows that it is possible, but we should not forget that “Time is money” especially in its special local meaning ( in Hebrew the word DAM or DAMIM means “Blood” but also “Money”).

Wednesday, September 15, 2010

The Economics of the Schnitzel*

Everyone can surely remember from his/her own past those unique moments in which a phrase, sight or a comment turned a complicated set of ideas into a simple, clear, concept (“How I did Not Think About It Before?” moment…). That personal Eureka experience may be the outcome of an individual “masterstroke” but it is more commonplace to find the origin of such experiences in our immediate environment.

I had many Eureka moments in my life, one of them dates to my early days as an Economics student. During a Micro Economics class , Prof. U.R. tried to explain what “Revealed Preference” is all about ( Note : R.P. is a method to analyze the consumers´ wants and needs from her actual behavior). A student suddenly asked the lecturer why to bother with complicated calculations as it is much easier to ask the consumer directly about her preferences. The Prof. replied with a simple example: A smart grandmother ( in my case the typical Jewish Grandmother, guess it is the same in other cultures) will never ask her grandchildren if they like the Schnitzel she bothered to prepare. She would prefer to know the “real” answer by having a look at the empty/not empty plates when the meal is over….. That is the essence of Revealed Preference, the understanding that even with kids actual behavior can be a better signal than words as people are prone to answer according to prior strategies and interests, ( in less polite words, to manipulate) That lesson remained in my head as “The Schnitzel Theory”.

Back to the present, I´ve got the feeling that the actual economic conjecture is a perfect candidate to apply the old “Schnitzel Theory”. Listen to what Governments, Central Bankers, the Media (with rare exceptions) and other interested parts have to say about the economy and you will hear an optimistic and sweet melody. Does the economic real “plate” ( i.e. actual decisions ) fit with these calm messages?

Lets have a look on the following graph (Evolution of Interest Rates and Inflation in US)

Source : Treasury Yields in Perspective Doug Short August 16, 2010

What does the graph tell us? First of all the official interest rate is being maintained at record low levels (the red line), practically zero. The market rates (Blue Line) which is heavily influenced by the monetary policy and market expectations is also very low. On real terms (the difference between inflation and interest rates) the official short term rate is in negative territory, i.e. Central Banks are running an ultra expansionary policy (app. negative 2-3%). The last time we had a similar experiment, (2001 -2005) the party eventually ended in tears including the prick of a major real estate bubble and a major economic crisis. That is not a secret, even to policy makers.

The most convincing explanation for such unorthodox and risky policy (with possible assets bubbles or inflation) is that reality is still very unpleasant and the economy requires high doses of cheap money in order to maintain asset prices and employment. In other words, the real and concrete policy measures tell us a different story from the official narrative.

To whom should we believe? My answer to that question as an adept of the "Schnitzel Theory" is that we are still far away from a real and sustainable recovery and a lot of problems lie ahead. Policy makers can say whatever they want, but as long as facts tell us a different story I prefer to believe to the later.

In that context I will ask you a favor : Please let me know when the facts fit with words or when you see a clear return to normal macroeconomic policies. That day it will be possible to say that the plate is empty and the time for the sweet dessert arrived… as Granma taught me : Dessert only for those who emptied their plates ... ( Or "The Wall" version : If you don´t eat your meat, you can´t have any pudding ....")

*Schnitzel : Typical Centre European , a thin meat cutlet (usually breaded and fried), Milanesa in Italy

Wednesday, September 8, 2010

European Lessons for the Middle East ( Part I)

The following images does not require any excessive imagination: Take 1 : An American President appears from his office surrounded by Middle East leaders. Take 2 : The President announces a new set of initiatives/steps/programs/etc aimed to revive the “Peace Process” … sounds familiar? Déjà vu? That was more or less the way the ceremony in Washington DC looked a week ago, a sort of show which became an obligatory ritual for the last 20 year. The irony is that the spectacle itself is the clearest evidence of its own futility, or better put a sad recognition that the last 20 years have yielded much more “Process” than “Peace”.

Palestinians and Israelis don´t need confirmations from Washington DC, reality talks for itself . First of all the “Process” failed to prevent the loss of thousands of human lives . Secondly the irresolution, the tactical and astute maneuvers only derived into a generalized frustration and despair that catalyzed an augmented “Entrenchment” mood at both sides : Among the Palestinians an Islamic (and radical) discourse is eclipsing the former secular dominant sector of the Palestinian national movement: The takeover of the Gaza strip , the results of last elections are the clearest evidence of that process. From the other side, Israeli secular Jews became more receptive of a “Two States Solution”, a softer talk that turned to be the ultimate perfect alibi for a rather hard line policy : The Israeli Jewish society ( 75% of the population) is nowadays more supportive of collective punishments (such as the Gaza blockade), a general indifference of collateral damages, support the inclusion of preconditions to the Palestinian , etc. . Not exactly the best recipe for a good neighborhood. On the top of it the actual government is dominated by right wing parties that are against any real concession.

The historical narratives of both sides apparently support the intransigent strategies: Arabs are sure that their ancestors´ power of will as the main motive for the expulsion of the Crusades invaders from Palestine some 800 years. And they want to repeat it. In a similar fashion, Israelis are convinced that Israel owes its existence mainly to the determination and sacrifice of its founders. Since the debate “Resistance vs. Compromise” is too wide for a modest blog I will only comment that any serious strategy, even the most intransigent must weigh the consequences of the worst case scenario. Reminder: Some 2000 years ago Jews tried to defy the Roman Empire twice ( 66 and 132 AD)and in both cases the messianic hard line strategy ended in a colossal catastrophe, 2,000 years exile included. Palestinians don’t need to go so back: The intransigent position toward Zionism combined with a lack of political astuteness brought upon them the Nakbah, the loss of Palestine and the expulsion of hundreds of thousands of people from their home.

History has plenty of human collectives that learnt the lesson of blind inflexibility on their own (literal) flesh , and generally a bit late. Take the example of Europe: The peaceful and prosperous continent was during hundred of years the stage of the cruelest wars. Even the XX Century bloodsheds of Sedan and Verdun were not more than a prelude for the 1918 vengeance, the seeds of the next disaster. “Civilized” Europe needed the “lesson” of Auschwitz, Dresden, the Blitz, Hiroshima, Stalingrad, and more than 50 millions casualties to engage in a serious alternative path in order to end with the vicious cycle of violence . The EU, the Euro,common market etc. are not economic or political enterprises but a mechanism to prevent future catastrophes. For the time being the lesson is present.

So, after wandering to Europe and XX century history, what is the punch line in relation to the “Peace Process”? Well, I guess that Bismarck´s quote says it all: “Fools learn from experience. I prefer to learn from the experience of others." Since there is more than enough experience of others, the moment for a smart attitude (and Bismarck was VERY smart) has come to the Middle East. Since everybody knows what is the merchandise, what is the price, and what is the deal , the possible gains of hard line strategies or astute tactical maneuvers are insignificant when compared to the risk of possible REALLY bad experiences . In other words, more “Peace” and less “Process” is needed , as the Middle East and its peoples don´t have another 20 years to spend in empty speeches.

Saturday, September 4, 2010

Free Markets and ( free ) Immigration

The phrase “There is no such thing as a free lunch” ( M.Friedman) is for economists an equivalent to the Law of Gravity. However, the first phase of the current economic crisis with its massive injection of public money seemed to defy Friedman´s rules. Policy makers were seduced by the idea that generous outflows are capable to relieve any social pain and even cure the economic malaises without real pain FOR NO ONE. Unluckily, as the dust sets it becomes clearer that Alchemy is unable to replace good Economics.

The prolongation of the crisis is evident or better put, it´s becoming dear experience for some of us. Let’s analyze some of the last week news : The Financial Times website admitted that “US banking sector picked up pace in the second quarter with lenders’ profits rebounding to pre-crisis levels amid falling loan losses”, whilst on Friday August unemployment figures are close to record levels ( August 2010 Jobs report announcing the loss of 54 k jobs in the US was considered as a “ good news …) . Another title from the FT says : ” Former Chancellor of the Exchequer Alistair Darling said the UK's supertax on bankers bonuses he introduced last year amid outcry over bankers' pay failed to correct the industry ….. Well as far as I know HM government is very efficient when it comes to realize deep cuts in social rights. Perhaps M. Friedman´s phrase should be modified to“ There is such a thing as a free lunch as long as you get someone to pay for it”.

As the failure of the “recovery” measures become evident, the task of maintaining the delicate balance between social pressures while maintaining the existing economic power structure becomes an even harder mission than before. It is becoming evident that someone must pay …..

The question who is going to pay is already generating a few interesting answers : One of them is the call to restore the dominance of market forces in the economy, since the only instrument capable to restore the path of sustainable growth and employment is the market . The free marketers offer a menu that includes for “Entree” delicacies as tax cuts, reduction of public expenses, flexibilization of labor markets, surplus budgets etc. True, there is some debate about the tastiness of such menu, though the question whether, how and who will manage to reach dessert is “blowing in the wind”. In any case, the burden will fall on those who benefited less from the pre crisis prosperity, the lower classes.

The second position to be noticed is the resurrection of xenophobic discourse, not as a marginal topic but as another component of mainstream policies of “respected” institutions . The xenophobia is linked to the economic crisis ( for example “to fight unemployment”) : France has already deported thousands of Romanian Gypsies, Italian authorities established anti immigration policies, Arizona´s immigration laws are still debated, Spain hardened its policy on immigration etc. In that case the bill is served to the foreign workers and immigrants (at first phase.... others will come later)

The irony is that both lines are generally held by the same people. Why irony? Because the two lines contradict each other . In the case of market fundamentalism , the economic models that justify them assume a free and unrestricted flow of ALL production factors (Capital, labor, and raw materials), products and services. If the flow of labor is constrained (as the xenophobes want) , the whole intellectual edifice of free markets becomes irrelevant or becomes not more than another ideological instrument applied in accordance to the particular interests.

A few examples should explain the last point : Under a genuine global free market it would be inconceivable that a Brazilian from Sao Paolo is “allowed” to make use (and pay ) for Telefonica´s privatized services ( held by Spanish Capital ) but not allowed to work freely in Barcelona… or an East European working at car making industry , generating profits for American funds but not allowed to offer his work in the US without a Green Card… or an Israeli government which approves generous grants to major enterprises in the name of the free markets but decides to expel Israeli kids just because they were born to illegal foreigners.

The intellectual coherence demands that whoever support free markets should also favor free and unlimited flow of people as well. If the incoherence is explained by the need to impose certain restrictions on markets ( to preserve social cohesion etc...) , than why only limit immigration? Why not to question privatization? Shouldn´t market forces be restrained when social equity or other common values are under threat ? If the challenge presented in these simple questions is accepted, than market economy will be hopefully expelled from its quasi sainthood status and exposed to social scrutiny as it should have been from the very beginning.

Monday, June 28, 2010

Panem Et Circenses XXI Century

I read the news today “ G20 nations commit to halving budget deficits by 2013” , an headline that resumes the main agreement reached at the last weekend G20 summit. Any observer understands that under the “deficit reduction”
codename lies a whole structure of more budget cuts, less social rights and toughest auterity plans.

Coincidence or not, these days the world seems to be more busy with the World Cup in South Africa . Did anybody in the South hear the above headlines “Austerity for all”???. The level of salaries and bonuses paid and or promised to the national teams and managers indicates that the distance between "Austerity " Canada (G20 meeting) and South Africa is larger than ever. The following table details the annual salary of 32 national team managers that are disputing the World Cup (the data was gathered by the Argentine newspaper OLE) (in USD)

It should be noted that these figures are outflows from public institutions and they do not include the millions of USD destined as salaries and bonuses for the players. It is evident that these salaries are much higher than the average level in their respective countries, in many cases even above the salary of the Head of the State. If you go through the list, you will find that the countries which spend millions on salaries for a few suffer from a complete spectrum of social malaises : Countries with scandalous levels of HIV, other with huge absolute poverty levels, countries that poured billions into a bankrupted finance system, countries with huge unemployment rates and some on the brink of bankruptcy.

And yes, I am aware of the "theory" that the extravagant salaries are not financed from public coffin (i.e. there is no real loss for the country ) but paid indirectly by “sponsors” ,bonuses from FIFA or whatever obscure source ( as Spanish Secretary of Sports claimed). Sorry, but that´s a poor argument: Any NATIONAL football team is a public asset and players, coaches and any professional involved are mere representatives of a nation and as such should be paid a fair salary( let alone the enormous personal publicity they gain for free during such events). And if they refuse to reprsesnt the country, it´s OK , there will always be candidates willing to play football for a decent salary. From that perspective , any extraordinary income belongs to the owner of the asset, the public, and the decision how to make use of these funds is a matter of public choice.

However, the lack of an explicit debate on the issue doesn’t mean that the salaries´ level is not another implicit de facto political decision that sets social priorities in favor of the Football Circus. A reminder from history : During the heydays of Rome, the populace enjoyed the “Bread and Circus” free Combo, a tool used by the governing Elite as a mean to appease social tensions and gain poltical power. From that perspective we are in a worst situation than the average Roman : We are not only asked to pay to enjoy the “national” spectacle (through publicity, PPV …etc) but the modern equivalent of bread (i.e. social rights) is being scarified in the name of a selective austerity. “The Times, they are a changin´”?? Not so sure.

Wednesday, June 23, 2010

Beggar Thy Neighbor OUT, Beggar Thy Roommate IN

“Beggar thy Neighbor” is a term used to describe policy measures aimed to boost the economy of a country at others countries expense . That policy is supposed to improve the competiveness of country through different means , just to mention a few : The formation of economic barriers for foreign competitors, a forced devaluation the currency and so on.

True, such “Win-Loose” strategy can generate some limited economic impact. However, history tells us that things can turn into a ugly story: "A form of this policy, notably the tariff barrier, was attempted at the beginning of the Great Depression with almost no success. A beggar-thy-neighbor policy in the United States caused other countries to follow suit, resulting in a massive decrease in international trade. This made the Depression worse.” Financial Dictionary). Retaliation became the key word in that context.

Was the lesson learnt? Up to a certain point. The calls for protectionist measures heard lately were not ( still) able to bring about a policy change and governments declare their commitment to open trade . But that´s not the whole story: Fearing from the neighbors’ response, countries turned to beggar their own poorer roommates. After all someone should pay for the party ....

The Spanish case will illustrate the last point. Spain is suffering from a combination of deep recession, current account deficit, soaring public deficit and huge unemployment rate (app.20%). Before becoming a full EU member , Spain used to overcome similar episodes by literally beggaring its trade partners, especially devaluating its currency, the Peseta ( and other policy tools as well). It had some limited impact when combined with other policy tools.

Spain membership in the EU brought about the loss of independence of its economic policy. Thus ,as many “experts” claim, the only way open to the country is an “internal devaluation”, or in a less PC parlour , lower salaries. The logic goes like that: Spain should gain competitiveness so the prices of Spanish prices must be lowered. Since such arbitrary reduction cannot be forced, (and companies might ,G-D forbid, lose money), the burden should fall on the regular cannon fodder, the wage earner ( lower salaries = lower cost = lower prices ). Moreover, that theory holds a moral argument : Spanish wages have risen “too much” in the last years, and THAT distortion explains the uncompetitive position of the economy. This position (held by the Nobel Laureate P. Krugman), could sound reasonable…. as long as you don´t analyze the data.

Lets see the data. The following graph shows the relative weight of the salaries in the Spanish economy, in other words how much of what the country goes to the pockets of the wage earners. (until 2009 real 2010 onward Forecast)

Source : Eurostat Data Compensation of Employees percentage of GDP

What is the meaning of the descending line? It means that for each Euro produced by the economy (similar to the price of a product in a private company),the workers received a smaller slice than what they used to receive a few years ago. Even if we accept the “loss of competitiveness” thesis, it is hard to see how it is related to the “growth” of salaries. If Spain suffered from a higher inflation rate than its trade partners, it was probably related to the rising prices and profits of the companies and less to the salaries . Although other European workers suffered from the same problem, in comparison to the European wage earner, the Spanish worker has suffered more .

But governments are not confused by facts. The “Socialist” Government already embraced the narrative that reduced social rights and lower salaries is the key for Spain´s recovery. Under the blessing ( or pressure) of the IMF, EU, Obama…etc…. the Government already marked the path by a 5% cut of wages in the public sector. The next step was the adoption of a set of decrees which overturn essential social rights (some of them dated from the Franco era!) including a dismissal "easy track" and a planned assault on the system of collective negotiation and pensions.

Spain is just a model though the narrative is being noticed in other countries. So from now on say "Beggar your neighbor OUT, your worker IN...." . That is the newspeak we´ll hear from now on from policy makers and the financial media. I humbly dare to foresee that the "beggar" policy is deemed to fail as it failed 70 years ago: it will pres each and every country to a lower salaries policy which will eventually depress consumption and economic activity.

I wish policy makers understand, before it gets really too late, that "beggar" cannot replace genuine and progressive economic policy. Moreover, it is more than the beggary policy is the path toward higher levels of despair and anger.

Sunday, June 13, 2010

Green Shots , At Last

The influential “Financial Times” published a week ago an article titled “Time to Plan for a Post Keynesian era“ by the famous Economist Jeffrey Sachs. So what?
Let me skip a large and obscure introduction and go directly to one of the punch lines in that article:

“.....Governments are fighting for market credibility via draconian cuts in spending. This too is the wrong approach. We should avoid a simplistic austerity to follow the simplistic stimulus of last year...... …...Here are some suggested guidelines.....
….Fifth, governments and the public should insist that the rich pay more in income and wealth taxes – indeed, a lot more. The upward re-distribution of the past 25 years has made our economies into extravagant playgrounds for the super-wealthy. Politicians of both the mainstream left and right in the US and UK have fawned over those who pay their campaign bills in return for low taxation. Even playgrounds should collect tolls – when it is billionaires in the sandpit…....

Just in case you are not familiar with the Sachs let me quote Wikipedia “.....One of the youngest economics professors in the history of Harvard University, Sachs became renowned for implementing economic shock therapy throughout the developing world and in Eastern Europe …...” So here we´ve got a mainstream, not only an Harvard Proffessor, but a “shock therapist “ in favour of “more income taxes” ? THAT is a real Green Shot!!

I do not know whether Sach is alone in his approach and what is exactly his diagnosis but Sach´s message is encouraging . I hope more economists would start to adopt a more critic perspective toward the ruling dogmas in order to provide enduring solutions.

A personal note : This blog has been asserting along the whole crisis for the last two years that the crisis should be analyzed from a distribution persepctive : In other words “bailouts” , “quantitative or “qualitative” easing are not more than a curtain of smoke that will eventually proved to be  useless.

This blog still thinks that the current economic crisis is the result of a a the skewed income and wealth distribution int he world ( you are invitd to read previous posts ) . Thus the only human and reasonable solution for the crisis is the construction of mechanism to redistribute income and wealth. Any alternative should be banned from the outset , not only on moral and social grounds, but rejected from a “pure” economic perspective. Sach´s article could be atoner sign that this persepective is being taken seriously .

For those with a bit of patience between the football games I attached the article .... .

Time to plan for post-Keynesian era
By Jeffrey Sachs
Published: June 7 2010 22:22 | Last updated: June 7 2010 22:22

Mainstream Keynesian economics is facing its last hurrah. The global fiscal stimulus championed last year by the Obama administration is coming undone, repudiated by the same Group of 20 that endorsed it last year. Now, against a backdrop of a widening sovereign debt crisis, we need to abandon short-term thinking in favour of the long-term investments needed for sustained recovery.

Keynesian stimulus was premised on four dubious propositions: that it was needed to prevent a global depression; that a short-run fiscal boost would jump-start the economy; that “shovel-ready projects” could combine short-term cyclical and long-term structural agendas; and, last, that the rapid rise of public debt occasioned by stimulus need not be a concern. That these ideas were so widely accepted was a testament to the perennial political attractiveness of tax cuts and spending increases. In fact, the ubiquitous references last year to the Great Depression were glib; the policymakers had panicked. Adroit central banking could and would prevent depression.
The hastily assembled stimulus packages were a throwback to naive Keynesianism. The relevant fact was that the US, UK, Ireland, Spain, Greece and others had over-borrowed for a decade, so a decline in consumption after 2007 was not an anomaly to be fought but an adjustment to be accepted.

Certain counter-cyclical spending is vital on social grounds. But stimulus measures such as temporary tax cuts for households or car scrappage schemes were dispiriting wastes of scarce time and money. They reflected a hope that a temporary fiscal bridge would carry us back to consumption and housing-led growth – a dubious proposition since the old “normal” had been financially unsustainable.
The talk of a green recovery, in which the fall in consumer spending would be offset by investments in sustainable energy, made sense and still does. Yet it was quickly undermined by the politicians’ insistence on “shovel-ready” Projects. The shift to sustainable energy systems is a vital but long-term task. It could never be a short-term jobs
programme. Maybe in China there are shovel-ready projects of sufficient scale, but not in. the US.
Taking office in January 2009, President Barack Obama inherited the largest peacetime budget deficit in US history. By increasing it further, he made it his rather than his predecessor’s. He and his advisers ignored one of the key insights of modern macroeconomics: that the result of fiscal policy depends not only on current taxes and spending but also on their expected trajectories in the future.  The US was not in a credible position to raise an already enormous deficit “temporarily” because the prospect for future deficit cutting was and remains extremely clouded.
America has absolutely no consensus on how to restore budget balance, as it is trapped between a federal government that provides too few public investments and services and a public that is almost maniacal in its opposition to tax rises. One cannot build a credible long-term fiscal policy by starting off in the wrong direction, with larger rather than smaller deficits. Now we face a world economy with weak aggregate demand in the US and Europe, bulging budget deficits, sovereign debt downgrading and consumers unwilling to borrow. Governments are fighting for market credibility via draconian cuts in spending. This too is the wrong approach. We should avoid a simplistic austerity to follow the simplistic stimulus of last year. 
Here are some suggested guidelines.
First, governments should work within a medium-term budget framework of five years and within a
decade-long strategy on economic transformation. Deficit cutting should start now, not later, to achieve manageable debt-to-GDP ratios before 2015.
Second, governments should explain, and the public should learn, that there is little that economic policy can do to create high-quality jobs in the short term. Good jobs result from good education, cutting-edge technology, reliable infrastructure and adequate outlays of private capital, and thus are the outcome of years of sustained public and private investments. Governments need actively to promote post-secondary education.
 Third, governments must of course also ensure social safety nets: income support for the poor, universal access to basic healthcare and education, a scaling up of job training programmes and promotion of higher education
Fourth, governments should steer their economies towards needed long-term structural transformation. External-deficit countries such as the US and UK will need to promote exports over the next few years, while all countries must promote clean energy and new transport infrastructure.
Fifth, governments and the public should insist that the rich pay more in income and wealth taxes – indeed, a lot more. The upward re-distribution of the past 25 years has made our economies into extravagant playgrounds for the super-wealthy. Politicians of both the mainstream left and right in the US and UK have fawned over those who pay their campaign bills in return for low taxation. Even playgrounds should collect tolls – when it is billionaires in the sandpit.
 We need, in sum, to reset our macroeconomic timetables. There are no short-term miracles, only the threat of more bubbles if we pursue economic illusions. To rebuild our economies, the watchword must be investment rather than stimulus.

The writer is director of The Earth Institute at Columbia University


Friday, June 11, 2010

Tell Me That It Isn´t True!

A volunteer or two are required to answer a few questions: The first one, not very serious. The second question a bit more serious. The third and last question , I do not expect any answer … we´ll leave it as food for thought.

First Question: What is the common denominator of the following items?

…Sage, Cardamom, Coriander, Ginger, Jam, Halva, Vinegar, Nutmeg, Chocolate, Fruit Preserves, Seeds And Nuts, Biscuits And Sweets, Potato Chips, Gas For Soft Drinks, Dried Fruit, Fresh Meats, Plaster, Tar, Wood, Cement, Iron, Glucose, Industrial Salt, Plastic/Glass/Metal, Containers, Industrial Margarine, Tarpaulin, Sheets, Fabric( For Clothing), Flavor And Smell Enhancers, Fishing Rods ,Fishing Nets ,Buoys, Ropes, Nylon, Netting For Greenhouses, Hatcheries And Spare Parts For Hatcheries, Spare Parts For Tractors, Dairies For Cowsheds, Irrigation Pipe Systems ,Planter,(For Saplings), Heaters, Musical Instruments ,Size A4 Paper,(Letter/Legal, Size), Writing Implements, Notebooks, Toys, Razors, Sewing Machines, Horses, Donkeys, Goats, Cattle, Chicks….

Shopping list? An annual control of inventories? Not even close ….It’s a partial list of the items Israel does not allow to enter into Gaza strip. Moreover, the list includes “just” products absolutely banned though we should bear in mind that rigorous quantitative restrictions are imposed on many other products as well (such as fuel for Energy Plants that limits the electricity supply to a few hours per day … etc). The objective of those restrictions is to prevent the rearmament of the Hamas militia ( Halva???) and a consequent possible threat on the wellbeing and security of Israeli citizens along the Southern border. Since Israel and Egypt control all the official accesses to the strip, the meaning of these restrictions is obvious (The list was prepared by Gisha organization)

Second question: Can anybody tell me that it isn’t´ true? (as far as I know the Israeli Army or Ministry of Defense did not confirm nor deny the list) . I am serious and would appreciate a elucidatory answer.

If the above list turns to be genuine, even partially, a Third question rises, a question that I don´t even dare to answer: Has someone gone mad out there in Israel?. Please tell me that it isn´t true.

For the time being I rest my case.

Wednesday, June 2, 2010

The Sea is not the same sea. The Arabs are not the same Arabs

“The sea is the same sea, the Arabs are the same Arabs “(Israel PM Y. Shamir)

The above phrase was coined by PM Shamir before leaving to the first direct negotiation between Israel and an official Palestinian delegation at Madrid (1991). That phrase elucidates one of the most important aspects of what I will call henceforward the “Shamir Doctrine “. I will try to resume what is the “Doctrine” about and how it relates ,after almost 20 years to the evolution of the last tragic episode in the Sea of Gaza ( the death of 9 and the injure of dozens). In other words, I claim that the Israeli Cabinet decisions during the last days are not casual ( altohugh the result were not intended) and are deeply rooted in the vision of its leaders.

The essence of the “Shamir Doctrine” is that the Arab hostility toward Israel is similar to “The sea” i.e. a natural phenomenon that nothing can be done to change it. The operational consequence from such vision is obvious: Whatever Israel does or says cannot modify the basic hostility toward the State, so the Jewish State should base its relationship with the Arab world from a power position. “Force”, whether public or subtle, military or demographic is a basic premise in that doctrine and .Any concession is discarded as a sign of weakness although it is permitted in certain circumstances for tactical purposes, mainly to “buy time” in order to get stronger.

It is not just a coincidence that the main Israeli decision makers owe some of their early meteoric career in the 80 to PM Shamir: App. 20 years ago young Netanyahu was promoted to the higher ranks of the Foreign Affairs Ministry while at the same time General Barak gained the appointment to IDF Head of Staff, both during Shamir´s period in office. Just for the record in the past both leaders expressed their strategic views in line with the Doctrine : Netanyahu wrote a book about Terrorism and Barak expressed his own view with the “the villa in the jungle” metaphor.

Coming back to the Fleet incidence: The decisions taken by the Cabinet along the last tragic episode in the Gaza Sea (let alone the blockade itself) perfectly fits with the “Force” perspective and its internal logic. It is reasonable to claim that the Israeli Cabinet dealt with the Fleet issue in such a manner that it was prone, from the outset, to a violent outcome (although I am sure that there was NO premeditated intention to kill civilians). However, there is no doubt that matters could be handled in other ways so the risk of a tragic bloodshed could be minimized, after all Tzahal has already demonstrated in many of occasions its ability to perform “delicate” military operations w/o human losses. Nevertheless, the Israeli Cabinet has chosen the most (eventually) risky way to deal with the Humanitarian Fleet: Direct assault. The clash between Tzahal commando (among the best in the world) and unarmed civilians yielded 9 dead people and tens of injured and a political and media disaster for Israel. So why to risk so much?

The logic behind the decision to assault the vessel fits with Shamir´s legacy. “Force” by itself is not enough if there is no a clear indication “determination” that it will be eventually utilized and demonstrated. In some cases, as in the case of the Fleet, the exhibition of force by bringing your rivals to their knees is part of the force equation and the deterrence logic. The same logic applies to the last massive attacks during the Gaza strip or Lebanon wars (“The boss has gone mad”). Thus, the decision to go for the riskier alternative should be seen as part of a wider attempt to show force for internal and external consumption. The proliferation of cameras and films among the forces are part of the game. At some point the gamble went wrong and the outcome is known.

The massive use of force does not take into account future retaliations from “Arabs” since they will make use of any real or imaginary pretext for hostilities against Israel. They are a lost case so they don´t even deserve an explanation (“Arabs understand only (the language) of power”). However, since Israel is a small country which cannot ignore completely its foreign relations, the “world” (i.e. the rest of the human race excluding Arabs or their captive supporters) is a different story which requires another treatment.

The complementary component of the “force talk” is the “Hasbarah” talk i.e. the public relation effort to explain Israel deeds against the “Arab propaganda”. Under that perspective Israel suddenly ceases to be a mighty power and a magic transformation process becomes the clumsy guy in the neighborhood constantly bullied by mean guys (with more than a clear hint to the traditional Jewish suffering). This is the moment when the camera shifts its focus from military ships, helicopters armed with guns and missiles to the image of a single soldier bullied by an angry mob. Did anybody think about Pogroms? That line is essential to maintain the internal cohesion of the Israeli secular Jewish society around the Government and its policy which implicitly accepts the Shamir Doctrine

The use of force has its own limits, a say relevant for a country that despite its military and economic might is relatively small in area and population as Israel is. It also very static in its premises since the “sea is the same sea….” i.e. there is nothing new under the sun, so the best way to deal with reality is adopting a very rigid perspective. The irony is that the very creation of the State of Israel is the best proof for the futility of the Shamir Doctrine and that history can change. History demonstrates that people change, cultures evolve and history is in constant motion as Heraclitus said “You cannot take a bath twice in the same river “. From such a perspective “the sea” is never the “same” sea and the “Arabs” have the capacity to change.

Least and not last, the most upsetting point of the Shamir Doctrine is its extremely pessimistic nature (disguised in a quasi positive “we shall overcome” mantra), which offers to the people of Israel a lasting (I would dare to say an eternal) struggle with its neighbors. Your modest servant believes that Israelis and Palestinians deserve a better horizon ahead.

Wednesday, May 26, 2010

Will 2011 turn into 1938?

" History Does Not Repeat Itself, But. It Sure Does Rhyme"(Mark Twain)

This is not an exercise in mathematics, it´s about Economics and History. Western governments have lately adopted serious measures aimed to reduce the growing deficit of their public accounts. The list is impressing: The governments of Greece, UK, Spain Italy, Portugal Germany and other countries decided to reduce costs and impose austerity measures expected to inflict a serious ( and additional ) economic stress on their ( more modest ) citizens. Just for the record, alternative or complementary measures as increasing the tax burden (which affects the more affluent classes) or improving the tax collection system are inexistent or of secondary nature.

Such measures can be justified only if that their expected benefits exceed the negative impacts of such measures on the economy. Put it in other words the hidden assumption is that economy is already on “the right track” so the demand of public sector is less crucial than before. However, the propagandist effort pointing on the imminent “recovery” (Green Shots, “We saved the world “ and so on) relies upon a not very solid ground : GDP growth figures are still fragile, interest rates extremely low and unemployment rates high. My claim is that such policies the wrong cure for the wrong disease and they could easily exacerbate the economic recession we are still suffering.

That debate resembles the situation along the mid 30 when the Great Depression was still around but growing pressures for “balanced budget” forced the US administration to cut expenses. True, history does not repeat itself, but it definitively “rhymes”, so the lesson in that case could be interesting.

From the Wikipedia
"The Recession of 1937–1938, sometimes called the Roosevelt Recession, was a temporary reversal of the pre-war 1933 to 1941 economic recovery from the Great Depression in the United States. Economists disagree about the causes of this downturn. Keynesian economists tend to assign blame to cuts in Federal spending and increases in taxes at the insistence of the US Treasury while monetarists, most notably Milton Friedman tended to assign blame to the Federal Reserve's tightening of the money supply in 1936 and 1937".
“…….. In June 1937, some of Roosevelt's advisors urged spending cuts to balance the budget. WPA rolls were drastically cut and PWA projects were slowed to a standstill.
The Results ….
"...The American economy took a sharp downturn in mid-1937, lasting for 13 months through most of 1938. Industrial production declined almost 30 per cent and production of durable goods fell even faster”. Unemployment jumped from 14.3% in 1937 to 19.0% in 1938, rising from 5 million to more than 12 million in early 1938.Manufacturing output fell by 37% from the 1937 peak and was back to 1934 levels. Producers reduced their expenditures on durable goods, and inventories declined, but personal income was only 15% lower than it had been at the peak in 1937. In most sectors, hourly earnings continued to rise throughout the recession, which partly compensated for the reduction in the number of hours worked. As unemployment rose, consumers' expenditures declined, leading to further cutbacks in production".

A few Graphs for illustration

2011 = 1938¿

As can be noticed, the 1937 brilliant cut ( it was a cut, not an increase of taxes) wiped out 2 years of unemployment reduction bringing back the figure to the 20% area. The figures beyond 1939 are irrelevant as the mobilization following the outbreak of WWII changed the rules of the game.

The risks of repeating 1937 1938 experiences are high which means social, economic and political devastating consequences. If history can teach us something, how can we explain the risk approach of policy makers? Given the timing and the nature of these measures, I cannot escape the thought that political decision makers are disproportionally prone to respond to any short term oscillations of financial markets. Personal interest? Class interest? Lack of intellectual skills? Opportunism? Just name it. An honest leadership with a longer run and civic perspective, and even with some “historic” touch would probably adopt a more human and economic measures.

Let us hope that 2011 does not turn into 1938, as the real risk is that 2012 would turn into1939.

Wednesday, May 19, 2010

60.2 Millions Silent Votes in favor of the Euro

During the last weeks we have been witnessing the spectacular collapse of the common currency: Just a month ago the Euro value was ap. 1.35 USD while today ( 19.5.2010) we are at 1.22, a devaluation of app. 10% within a very short period. Such violent movements between currencies are very unusual across the majors ( i.e. the most liquids currencies of the big economic superpowers) and have the potential to trigger financial and economic turbulences.

One of the typical outcome from huge financial movements is the sudden proliferation of real, imaginary and /or self proclaimed "experts". These people do not limit themselves to a post mortum analysis of known facts, but tend to extrapolate the current state of affairs into future doomsday scenarios. In the case of the recent Euro collapse the perceived ZeitGeist can be described as the expectation of experiencing in the near future more volatile markets and a possible collapse of the Euro as a single currency of the EU. The story does not end heresd : such developments could carry the potential to drag the whole project named “European Union” into the abyss. WOW !

These experts claim (correctly) that the EU lacks the economic and political mechanisms needed to maintain the cohesion of the Union sufering from severe economic disruptions. According to that logic, the ACTUAL self interests of the EU countries are against the EU and tge Euro , so the common currency is deemed to demise , sooner or later. The last violent shifts of the currency valuations reflect the markets´ perceptions of these difficulties , a mere reflection of the real weakness. In economic jargon, at present the cost of the Euro exceed its benefits so its future is more than questionable. Clear Cut.

As a matter of fact that line of thinking is not new at all, it´s just a modern adaptation of a 50 years old theory (“Optimal Currency Area” OCA) developed by the Noble Laureate R. Mundell. So, if both theory and common sense advocates against the formation of a common currency in European style circumstances, the natural question should be as follows : Why Europeans countries engaged in such “impossible mission?. Were European leaders so fool (or G-D forbid, corrupt), to lead their people into an economic inferno?

That question as it´s presented describes the line between abstract theories and an historical perspective of the economy. THe common economic analysis tends to be based upon abstract models which are supposed to resemble the real life. However, from a "pure" theoretic perspective, economists tend to forget that even the most accurate theoretic models respond to a specified set of assumptions. That principle applies to the OCA theory as well.

Now, it is permitted even under the most abstract models to change the assumptions as long as they are relevant and reasonable. Now, if we will modify the analysis but only incorporate a slight and sensible modification: Lets assume that an OCA tends to reduce the number and magnitude of armed conflicts ( since a common economic policy generates common interests ,,, etc.) . Wouldn´t the sensible change of the assumptions have some impact on the outcome of our respected OCA model?

Going back to the 50 , this is probably the question European leaders asked themselves when they established the first foundations for an economic (and political) union. However, this is where the historical perspective of the analysis enters and practically changes the outcome.

Let us not forget that by mid 50 the silence of more than 50 million people killed a decade ago was louder than the cries from “frenzy markets”. Although economic models were as abstract as ever, the huge economic cost of two world wars was still fresh in minds and was determinant at the moment to decide whether to maintain the old and risky European model or advance toward an economic and political mechanism that would be able to prevent a future WWIII. I guess European leaders were very conscious about the hardships of such an entrepreneurship, but they understood that the alternative for Europe and the world are much worst. One of the consequence of their decisions is the Common currency and one of the longest peace periods in Europe (more than 60 years w/o serious wars!!).

My last point is that I hope that the proper historical perspective is present in front of the European leaders when they are asked to evaluate the pros and cons of maintaining the cohesion of the Union. There is only one thing that they can count on it for sure: 60.2 millions of silent votes would probably vote in favor of the EU and the Euro despite the conjectural difficulties.