Thursday, 22 December 2011

What Great Depression? Greece is suffering the greatest economic recession in its history.

One of the reasons I have been so upset with the powers that be in Europe is the fact that publicly there is great emphasis that they are trying to prevent a great depression, while their actions seem to mathematically send us into that direction. A crisis needs flexibility, and yet all the EU 26 (- UK) are proposing is more and more rigidity and bureaucratisation.

Greece can be seen as a test bed for their proposals since it has been under supervision since 2010. While new bureaucrats appointed with the Blessings of Brussels, such as the new head of ELSTAT, Mr. Andreas Georgiou, is being prosecuted for correctly calculating the Greek sovereign debt, it good to see what the IMF/EU measures did to the Greek Economy.

Below are comparisons with the Great Depression, which led to the downfall of the Venizellos government and the erosion of democracy in Greece. In that case Greece defaulted on its debts and left the gold standard, the global fixed exchange rate mechanism that was in its final death rows then. In yellow are the years for which the indicators are negative.




The Great Depression did not destroy Industrial output as convincingly as the current economic situation in Greece. This is tragic as manufacturing is a high productivity business, and a reduction of manufacturing usually leads to a focus on services which need high human capital and long hours of work. This is very bad news for manufacturing workers who might not have the human capital to find work in any service sector, and especially for those manufacturing cities that are far away from Athens and Thessaloniki.

In terms of GDP the recession is now the longest on record for Greece. In 1932 such a cumulative fall of income of 6.5% led to massive strikes, agricultural uprisings, and revolts, leading to the dissolution of order and democracy. Yet in this decade, a cumulative fall of income of -12.5% does not seem to lead to dangerous calls for revolution. The striking difference is how in the modern case the recession is both deep but also very prolonged, which morale sapping effects both for the business climate (acting as a stop to domestic and foreign investment inflows) and to the skilled section of the Greek workforce, who is seeking for better employment within the European market as things are not picking up.



Why was there a recovery in 1932-1933? Greece left the fixed exchange rate that existed between it and the major advanced states of Europe. This created chaos in the finances of the Greek state, forcing it to default on its loans and to look inward for development. This greatly aided the budding domestic industry which now had a captive market  the Greek people who now had no option but to buy domestic products as foreign products disappeared form themselves due to Balance of payments issues. Now exiting the Euro is not very simple; it is far more integrated and hence distributive than just a fixed exchange mechanism and you cannot exclude people from the outside economy in order to initiate a domestic recovery driven through industrialisation.

What happened to inflation when Greece exited the then gold standard? Inflation very quickly eroded part of the benefits of the recovery. In fact many of the big family names in Greece made their money in this period, as there was a redistribution of income away from wage earners and towards the owners of means of production.


The lessons from the Great depression are not simple, and more detailed analysis is needed before one can suggest concrete policy suggestions. But two things stand out:
1) This is the greatest economic recession modern Greece has ever seen with no recovery in sight.
2) An exit from the Euro will create problems such as inflation and a reduction of choice of local consumers, and though a reduction of the consumer surplus, there will be a redistribution of wealth from the wage earners to those who own and sell products.

A pdf version with cleaner tables can be found here.


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Wednesday, 7 December 2011

How to reduce the chances of a betting loss.

We all know that Apoel Nicosia defies all odds and statistics, but having some insider understanding of statistics can really help on betting. Although betting is still seem as a non illegitimate investment for portfolio management (mainly because hard to insure or hedge for the losses).

However more and more data is becoming even freely available, and significant data is behind paid walls. Deloitte has a great annual summary, but now SAP is showcasing its powerful analytic tools.

Based on the results I would bet Manchester city to win and 70% possession. Still no hedging but i am sure the next on-line betting sensation will be a insurance to betting losses.
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Monday, 5 December 2011

An article in The Economist about the Cypriot Oil and Gas exploration

I am very pessimistic about the hoopla over the oil and gas purported to lie just outside our reach in the Economic Exclusion zone of Cyprus. We still:
1) Do not know how much is down there
2) Do not have a way to take it out
3) Do not have a way to make it exportable (LPG or pipeline)
4) I have yet to see research that such a venture will actually promote economic growth (although the Euro does help against the Dutch disease --> where a increase in the exchange rate destroys all other industries but the oil and gas fields.

As a practical man I would like to see the steps taken to perhaps capitalize on the future boon of Cyprus such as developing the infrastructure, setting up the institutional basis, removing the topic out of the real of politics ect. Yet it seems that we are taking a different direction (secrecy, squabbling and promise of unearned riches ). Meanwhile the subject is getting an ever increasing interest from abroad as this article in the Economist shows.

I just wish some tells it straight: there is no such think as a free lunch, investments should go to developing a local exploration industry capable to compete globally, and we should copy the Norwegian example of taking gas decisions out of the real of politicians.
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Friday, 2 December 2011

Why do we listen to the market? Sound Macroeconomic policy means much more.

I have been discussing with students recently in how odd the reporting of the financial crisis has been since 2007. Most news publications that claim to have some authority / influence in the global economy seemed to change their stories going through three stages during the last 4 years:
1) 2007 - 2008: The problem was how to save the banks. Governments Should step in and help banks because they are "too big to fail". This is intensified after the collapse of Lehman Brothers in 2008, since media reported that even a smallish banking collapse created panic in the markets.
2) 2009 - 2010: The focus was on the rallying stock markets and how governments are endangering such growth through excessive borrowing. They are removing liquidity from the market and destabilising currencies --> the Euro. The answer was very strict budget retrenchments.
3) 2010-2011: Unsurprisingly the reigning in of government budgets made the possibility of a "Double dip" recession very real as output growth faltered. Stock markets that were rising due to the injected liquidity by governments in 2007/8 ignoring that the real economy underperformed re-adjusted downward very rapidly when government sponsored liquidity dried up and the real economy felt the effect of reduced government expenditure. This caused another scare and placing the emphasis on the printed press to the need of governments to focus on economic growth as the only way out of the economic crisis.

[I am aware that the above is an oversimplification, but I think the emphasis on the three different strands is fair if one looks at the aggregate picture]

What disturbs me with this is that such analysis has proven not only short sighted, but also ruinous as it assumes that the financial markets always know what is best for their long run future.

Now I am not against the existence of global financial markets, far from it, but I do think that sound Macroeconomic policy means that market considerations is only one of the many factors that need to be taken into account. In short, the real economy is always more important than the market!

Back in 2007 growth should have been the only consideration: when you have growth you can fix all the other issues brought up by this crisis (excessive deficits, borrowing, financial weakness of banks, competitiveness)much easier than when you are in recession and all the above issues create vicious pro-cyclical loops that make solving any of them very difficult. I owe this understanding to an MSc class with Dr. Tim Leunig, who thankfully now he seems to be able to be the voice of reason in the UK through his work with the Centreforum.

When one assumes that the financial markets know best, they forget that the profit motive might lead to results that are sub-optimal to the society. It has been recently been discovered that the Federal reserve of US has pledged 7.7$ Trillion dollars, with very little of that being injected in the real economy, with the possibility of some even being re-invested in treasury bonds rather then invested in the real economy in order to increase income and hence promote growth.

Its is clear that what was best globally, including for the global financial markets, would be a return to growth in the US economy through the investment of part of such injections to the real world, but the safe bet won out in the period where bears (conservative investors) as more than the bulls (risk takers) by investing them instead in treasury bonds. Hence market decisions can lead to below optimal results .

If the Fed gave support only on the condition that a share of the liquidity would be given to the real economy as loans, then growth would have enabled the global economy to tackle the issues of excessive government debt much more simply, thus calming the markets and enabling government to support any banks that were still in trouble.

Sadly we once again seems to have forgot our goal, which has to be growth. The press and financial markets seems to be caught in the dream of austerity again, but only a long term goal of growth (followed by reform) will make make the US and EU economies healthy again.


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