Tuesday, December 14, 2010

EMU Ever-lasting Monetary System or not???

Europe's problems are not really about debt

‘OK’ is not necessarily ‘all-right’ - On the recent monthly numbers alone, the EMU is looking OK and maybe even like it is trying to right itself. But behind the scenes we know there are processes with long lags in operation undermining recovery. The markets are far from reassured. Ireland is a ticking time bomb. Spain and Portugal are trying to keep from being sucked into the debtors’ vortex. Some wonder about Italy-the country of the Treaty of Rome that began the move toward greater European integration. If Italy goes-all bets are off… or are they?

A brief history of which to be aware before you throw out the baby with the bathwater – The Treaty of Rome, signed in 1957, laid out a vision of a united Europe, it put the formation of the EEC in motion. The precursor to this plan had been launched in France with the initial ideas being promoted in 1950: the Iron and Steel Community. Its objectives were codified under the Treaty of Paris. Its objective was in part to keep French and German rivalry from boiling over by forming a more inclusive trading community. We see that same objective in the formation of the EU and of EMU in modern times. These plans to fuse Europe and diffuse rivalries have long-standing histories. Of course they were forged in different times with different fears in the fronts of peoples’ minds, not in the back or in some forgotten Alzheimer’s-ridden space. It is reasonable to ask if mere economic strains will break down what has been inexorable, if sometimes erratic and glacial, progress. This is a train that has been in motion for over 60-years in contrast to the relatively short life of EMU that many talk of when they speak of euro-unraveling and of a lack of commitment. Is there really a lack of commitment, or was EMU just poorly laid out? Was EMU just a bad idea that won’t work? Is it something to patched and fixed? Is it part of longer 60-year legacy with a real political will behind it that should not be short-changed despite its need to be fixed?

What are the REAL ties that bind Europe? When push comes to shove, is the geopolitical will in Europe stronger than the economic ties that bind? Is the real ‘will’ geopolitical or economic? That is the root question here. Economists that are forecasting the break-up of EMU see only the economic side and discount the political will.

The European legacy - In fact after the Iron and Steel Community was formed the Treaty of Rome’s EEC became the EC and then the EU and eventually EMU was formed out of part of the EU. Both EMU and EU stand today with the British in their familiar one-leg-in-and-one-leg-out stance. Italy is an important European and EMU nation with significant problems. But the train to European integration has been on a long ride. Will Italy, once the motivator of integration, send the Zone on a path toward disintegration? Can 60-years of progress be wrong? Is a ‘common currency’ just one ambitions step too-far for a people that 60-years ago dreamt of European integration? Is this all the farther it will go, or are they willing to go further to preserve their dream? To put another way, when Europeans dream, do they dream of being German, Italian, or French or of being European as it says on their passports? That will decide the fate of the EMU not Italy’s or Spain’s or Portugal’s debt problems.

As I said above, it’s not really about debt.

Friday, December 10, 2010

Clods and critics: Defending Bernanke

Get in with the in-crowd - More QE! really! The Fed missed. it never gets anything right! Aren't you tired of the same old criticism? I'll tell you one thing. The employment report for November was a real disappointment but bond prices FELL and STOCKs went UP after th release. markets acted as though it was good news. What that means for you is if you want to ride with a winner, it's time to get on the optimists' bandwagon and and off the pessimists bandwagon.

It is easy to be critical now. The Fed has lots of problems that it faces and few tools to attack them.

I found Bernanke's 60min performance about as good as one could expect.

It's complicated - As I am teaching Micro and Macro again at the Zicklin School of Business, I found Bernanke's comments on money quite illuminating. He is reminding us that the Fed NEVER prints money. And I'm not talking about the US mint either. The Fed provides markets with the raw material. Then banks use excess reserves to make loans; loan proceeds are deposited and the money creation process (money multiplier) is in gear. It is always in the hands of the banks. Always.

Putting the toothpaste back in the tube - Bernanke is trying to make the point that the massive injection of reserves is sitting there, just sitting there idle. When the Fed injects reserves it does TWO things (1) it pumps reserves into the banking market and (2) to accomplish that, it acquires assets. It is very complex to try and explain why the Fed is doing what it always does -and at the same time- why THIS TIME it thinks the cutting edge of policy different. This time it is the asset acquisition part of the operation not the reserve injection part. That is not the stuff for discourse on TV. Many economists do not seem to 'get' this. In any event, as long as banks sit on excess reserves, the Fed's reserve injections 'are not printing money'. They may be enabling the printing of money but since banks aren't doing it, how does enabling something that is not happening translate into doing it?

Since QE1 did not work banks have excess reserves on their books already.

Hand holding with the public- Bernanke is trying to reassure the public of two things: One, the Fed is not 'just' adding to that pile; it has another plan and, two, that all these reserves are not immediately inflationary. Until or unless they are lent they will not be an inflation factor. Banks hardly seem on the verge of doing' a 180' on lending. Hence his comment on money supply stands as correct.

Transitivity does not hold in economics or in football rankings- Michigan State University beat Wisconsin this year in football., Each team lost one game. yet it is Wisconsin is rated ahead of MSU. Because of that, Wisconsin gets to go to the Rose Bowl. How come if A>B then it is also true that A

Demand or supply? Money supply growth is picking up as the economy is picking up but that is not very well related to the enormous pile of excess reserves..Arguably the pick up is one of money demand not of supply.

Bernanke is trying to explain difficult, abstract, economic processes to a lay TV audience and I think he did a good a job with a complex subject.

Spokesperson not oracle - He is trying to bolster confidence which monetary policy needs to be effective. I think we can cut him some slack on being 'too certain'. Maybe saying that he is 100% certain that he can control this is not accurate... but can you imagine how everyone would have jumped down his throat had he used a number less than 100%.

Making policy effective - Getting support for his policies is a proper role for his public engagements. If you remember your early economics, it used to be call 'moral suasion.' Lying about policy effectiveness would not be right. But, here recognize that NY law allows businesses to 'boast' but not to engage in deceptive advertising.

Doesn't the Chairman get the same nuance?

Forget the facts it's Agenda City - I also think there is way too much negativism and that is what is hurting the economy. It is easy to be critical. There are different agendas here. Obama remained too negative far too long because he wanted to blame the Republicans for the economy and as a result he and the democrats did a worse job than they should have in promoting recovery. They paid in the polls. Wall Street wants QEII because it can make money off of it, whether it is a good idea or not. . Economists are afraid to stick their necks out on improved forecasts and bankers probably do not want a rosy outlook because they do not want to lend until the coast is clear. There are lots of agendas in the way of an 'objective' outlook.

Fearing Fear itself- All those economists fearful of the double dip did the economy a great disservice conjuring up risk when the economy did not dip again. Without all those fears don't you think the economy would have done better? I do.

Shame on all this negativism. Stop hiding under your bed.

Sunday, December 5, 2010

The markets play a new game as employment disappoints

Markets did not react as expected to the disappointing jobs report.

Markets acted as though jobs rose and unemployment fell or stayed steady. This tells us that the paradigm of a recovering economy is still locked into the market’s pricing mechanisms. Traders were not able to stampede buyers into the treasury market on a weak jobs report. The pessimists have been routed.

Even though the Fed is expected to continue its QE - especially with this report showing that the economy is still not building that long-expected head-of-steam- NO ONE seems to want to bet on lower rates even with the Fed program fully in gear.

Pretty interesting stuff, eh?

We know that the jobs report has some volatility but this week’s backtrack is really out of the blue. The ADP has been improving, jobless claims have notched down, the quit rate (a reverse indicator) has ticked up. The ISM employment gauges were good –especially for the non-MFG ISM which (fortunately) was released after the employment report or there may have been a more violent negative reaction to the actual release. The non-MFG ISM employment barometer rose to a reading of 52.7 to the 74th percentile of its rate since 1998, a very respectable position. In contrast non-MFG private sector jobs are only in their 63rd percentile over that period. The non-MFG ISM is much stronger than the jobs series it purports to track. Moreover, it was the strongest non-MFG ISM reading for jobs in this expansion –the strongest reading in 37 months, while the non-MFG job gain was the seventh strongest in 37months..

We have other instances of indicators being different from their true-data counterparts. Of course we care the most about the true-data, in this case, the jobs report and the unemployment rate, not the ISMs. But the ISMs are not alone in showing strength. Auto sales have picked up. Other consumer spending has picked up. Jobless claims, another true-data report, has been carving out new lows. Announced corporate lays offs are very low. Yet everything in the November jobs report was disappointing. Was it a massively bad seasonal adjustment problem, or were the strong reports (smaller firms) simply the late reporters and will there be a substantial upward revision next month?

In some sense it is the monthly employment report that is isolated. And we know that seasonal adjustment factors play a big role in this report. We also know the earlier months were on balance revised UP making the month’s weakness even harder to fathom at a time that most indicators other than those for housing are improving.

One additional report that improved and did not get the headlines it deserves is the NFIB employment survey. This is important since so many jobs are in small businesses. So will the monthly jobs report get revised up? We’ll see.