Friday, May 29, 2015

29/5/15: Margin Debt: Another Zombie Hits Town Hall...

So you've seen this evidence of how global real economic debt is now greater than it was before the crisis... and you have by now learned this on how debt levels and debt growth rates are distributed globally. And now, a new instalment in the Debt Zombies Portraits Gallery:


Now, do keep in mind that just this week, ECB ostriches have declared that things are fine in the European financial system because 'leverage is low'.

Yes, Irish Financial Regulator of the Celtic Garfield Era, Pat Neary, would have made the Frankfurt stars-studded team with his knowledge...

Note: hare's China's rising contenders for the above distinction: h/t to @TofGovaerts

29/5/15: When the Chickens Come Home to Roost: EU 'Constitution'

Daniel Hannan on the 10th anniversary of French and Dutch referenda on EU Constitution:

This is a must-read, and it is short, but the best summary of the entire piece is the following passage: "As Jean-Claude Juncker put it the other day, “There can be no democratic choice against the European Treaties”. Which puts the coming British renegotiation into perspective. Whatever deal is notionally agreed, as long as the legal supremacy of the EU institutions remains, it will be interpreted by people whose commitment to deeper integration overrides whatever belief they have in freedom, democracy or the rule of law."

On the money, there, @DanHannanMEP ! 

29/5/15: Large Fiscal Policy Multipliers & Private Debt Overhang

"Private Debt Overhang and the Government Spending Multiplier: Evidence for the United States" by Marco Bernardini, Gert Peersman (March 31, 2015, CESifo Working Paper Series No. 5284) uses "state-dependent local projection methods and historical U.S. data" to show  that government spending multipliers are "considerably larger in periods of private debt overhang."

In low-debt state: there is a "significant crowding-out of personal consumption and investment" in response to fiscal spending stimulus, "resulting in multipliers that are significantly below one."

However, "conversely, in periods of private debt overhang, there is a strong crowding-in effect, while multipliers are much larger than one. In high-debt states, more (less) government purchases also reduce (increase) the government debt-to-GDP ratio." 

These results are robust to controls for the business cycle, government debt overhang and the zero lower bound on the nominal interest rate. Which lead authors to a conclusion that fiscal "spending multipliers were likely much larger than average during the Great Recession."

As a note of caution, the authors posit that "it is not clear what the exact reason is for the different behavior of the private sector in periods of debt overhang. Can it be explained by borrowing constraints or rule-of-thumb behavior of households?.. Is it driven by a much higher marginal propensity to consume of highly-leveraged households?.. Or are there alternative explanations?"

To add to this list, one needs to consider the sovereign capacity to actually undertake fiscal stimulus. In the current crisis, for many states (unlike the U.S.) room for stimulus is severely curtailed by already present public debt overhang. In addition, one has to be careful translating the U.S. results to other, smaller and more open economies, such as euro area states. Finally, the findings need confirmation in a setting with fixed exchange rates.

"Another relevant extension of our analysis is the question whether also tax multipliers are different across private debt states. Our findings also have some relevant policy implications. In particular, the state of private debt seems to be an important indicator for the consequences of fiscal consolidations and stimulus programs. In periods of debt overhang and deleveraging in the private sector, it is probably not a good idea to conduct austerity policies, because it could have dramatic effects on economic activity. In contrast, deficit-financed government purchases policies could significantly stimulate and stabilize the economy in periods when households are deleveraging and depressing aggregate demand. On the other hand, once private debt levels are again below trend, the timing is perfect to conduct fiscal consolidations, having little consequences for economic activity."

Fascinatingly, this evidence lends credence to the latest theory of financial imbalances, known as the "excess financial elasticity" theory, formulated by Borio: on which I have just submitted an article to a U.S. publication (stay tuned for the unedited version to be posted here later next month). I covered Borio's research recently here:

29/5/15: That U.S. Engine of Growth Is Going 'Old Fiat' Way

Folks, what on earth is going on in the U.S. economy? Almost 2 months ago I warned that the U.S. is heading for a growth hick-up ( Now, the data is pouring in.

1Q 2015 GDP growth came in at a revised -0.7%. And that's ugly. So ugly, White House had to issue a statement, basically saying 'damn foreigners stopped buying our stuff and weather was cold' for an excuse: Rest is fine, apparently, though U.S. consumers seem to be indifferent to Obamanomics charms and U.S. investors (in real stuff, not financial markets) are indifferent to the charms of ZIRP.

For the gas, the WH added that "The President is committed to further strengthening these positive trends by opening our exports to new markets with new high-standards free trade agreements that create opportunities for the middle class, expanding investments in infrastructure, and ensuring the sequester does not return in the next fiscal year as outlined in thePresident’s FY2016 Budget." Now, be fearful…

Source: @M_McDonough 

Truth is, this is the third at- or sub-zero quarterly reading in GDP growth over the current 'expansion cycle' - which is bad. Bad enough not to have happened since the 1950s and bad enough to push down 4 out of 6 key national accounts lines:

Source: @zerohedge

Good news, 1Q 2014 was even worse than 1Q 2015. Bad news is, 1Q 2015 weakness was followed by April-May mixed bag data.

Un-phased by the White House exhortations, the Institute for Supply Management-Chicago Inc.’s business barometer fell to 46.2 in May from 52.3 in April. Readings lower than 50 indicate contraction. Per Bloomberg: "The median forecast of 45 economists surveyed by Bloomberg called for the measure to rise to 53, with estimates ranging from 51 to 55. The report showed factory employment contracted this month."

Yep, that is a swing of massive 6.8 points on expectations.

Source: @ReutersJamie

Worse news, for the overheating markets that is, "Profits from current production (corporate profits with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)) decreased $125.5 billion in the first quarter, compared with a decrease of $30.4 billion in the fourth. …Profits of domestic non-financial corporations decreased $100.4 billion, in contrast to an increase of $18.1 billion. The rest-of-the-world component of profits decreased $22.4 billion, compared with a decrease of $36.1 billion."

Source: @ReutersJamie

Gazing into the future, the doom is getting doomed.

Source: @GallupNews

The above is via The economic confidence index fell two points from the previous weekly score, Economic outlook component at -11, and Current conditions score of -6 higher than outlook. The index has been in negative territory for all but one of the past 14 weekly readings.

Source: @GallupNews 

Yes, the engine of global growth is spewing oil and smoke like the old 'Fix it up, Tony' Fiat... and the White House is just not having any new ideas on sorting it out.

Bad weather… Bad Double-Bad foreigners… Bad Triple-Bad Consumers/Savers…

Thursday, May 28, 2015

28/5/15: ECB does a "Funny Me, Tearful You" Macro Risks Assessment

You have to love ECB analysts… if not for the depth of their insights, then for their humour.

Here are two charts, posted back to back in the latest (May edition) of the ECB's Financial Stability Review.

The above says what it says: risks are low in financial markets, in fiscal policy and in the banks.

Now, Chart 2:

The above says risk-taking is high in financial markets, sovereign debt markets (fiscal side), and the economy's real investment is weak (to which the banks are exposed just as much as to the Government bonds).

So which one is the true chart? Or is there even a concept of coherent analysis in any of this?

"The sharp increases in asset prices relative to the fundamentals have pushed valuations up, particularly in the fixed income market, but increasingly also in markets for other financial assets. Nonetheless, a broad-based stretch in euro area asset valuations is not evident. Moreover, the recent increases in asset prices have been accompanied neither by growing leverage in the banking sector nor by rapid private sector credit expansion."

Now we have it: things are fine, because there is little leverage. And they are even extra-specially-fine in fixed income (aka bonds) markets. Because there is little leverage. The ECB won't tell us that this 'fine' is down to ECB itself buying bonds, pushing valuations of debt up, and incentivising risk-taking in the financial markets by its own policies. Oh no… all is just down to relatively sound fundamentals. But, guess what: even though things are fine, there is a "rise in financial risk-taking". But bad news is that there is no corresponding rise in "economic risk-taking".

"Financial system vulnerabilities continue to stem not only from the financial markets, but also from financial institutions, spanning banks, insurers and – increasingly – the shadow banking sector." But, wait… there is little leverage in the system. So how can financial institutions be responsible for the rise in financial system 'vulnerabilities' (which are at any rate negligible, based on Chart 1 'evidence'). Ah, of course they can, because the whole pyramid of debt valuations in the secondary markets is down to the ECB-own QE buying up of sovereign debt and years of Central Banks' printing of easy money for the financial institutions, including via LTROs and TLTROs and the rest of the ECB's alphabet soup of 'measures'.

Stay tuned for more analysis of the ECB's latest 'stability' missive...

Wednesday, May 27, 2015

27/5/15: No ELA Increase amidst Deposits Flight: Greece

Three quick updates to my earlier post on things getting crunch-time(y) in Greece:

Firstly, the U.S. is stepping up its pressure on the European 'leadership' to take Greek risks more seriously: U.S. Treasury Secretary Jack Lew : "My concern is not the good will of the parties -- I don't think anyone wants this to blow up -- but ... a miscalculation could lead to a crisis that would be potentially very damaging". Talks are going to be toasty at G7 summit and this time around not down to Vladimir Putin.

Secondly, as I said in the earlier post, we have EUR3 billion cushion left when it comes to Greek banks ELA and increases in ELA approvals by the ECB are getting smaller by week. So here's the bad news: "Greek banks have seen deposit outflows accelerate over the past week as fears rise that the euro zone country will default on debt, two banking sources said on Wednesday." This is via Reuters. Remember, last hike in ELA was EUR200 million. And today, ECB decided not to increase ELA limit - a sign that Frankfurt is getting edgy. Guess what: "The past week in May was more challenging compared to the previous ones in the month, with daily outflows of 200 to 300 million euros in the last few days," a senior Greek banker said. This might be mild after outflows of EUR12.5 billion in January and EUR7.57 billion in February, but the latest increase in outflows is coming on foot of already weak deposits and signals renewed increase in pressures. Outflows are up in April to ca EUR5 billion from EUR1.91 billion in March.

Thirdly, we now have rumours of real capital controls coming in: Athens introduced a 'small charge' on ATM withdrawals. Despite this glaringly 'capital control'-like measure, Athens subsequently said it has ruled out capital controls. But, two days ago, Greek opposition lawmaker Dora Bakoyianni said "the country could be forced into capital controls to stem deposit outflows if it did not reach a deal for aid with the government this week". And on May 20, Moody's issued a statement saying that capital controls in Greece are now "highly likely".

and CDS markets are not impressed, again...

Though the bond markets are actually pricing in continued ECB 'cooperation' - across all of the euro area peripherals:

The Euro Saga continues…

27/5/15: CCTB is Baaaack...

It's Happy Hour again in Brussels, as the EU is reviving its plans for tax harmonisation across the continent.

At stake, the EU proposal for CCCTB, or Common Consolidated Corporate Tax Base, which would set the first precedent for tax harmonisation, outside Vat. As reported in the media, the plans appears to have support from the EU Commission (predictably), France (predictably) and Germany 9again, predictably). UK (predictably) is opposed:

Today, the EU officials are discussing how to tackle tax avoidance and create a system of “fair, transparent and growth friendly” corporation taxation with discussion expected to “feed into” an announcement on corporation tax in June.

Key article on this is here:

27/5/15: Crunch Time Timeline for Greece

Crunch time continues for Greece. Here is the schedule of the upcoming 'pressure points':

Source: Citi

And an update to the Greek ELA increases: +EUR200 million on May 21st, to EUR80.2 billion with remaining available cushion of just EUR3 billion. Note: earlier ELA extensions are summarised here:

27/5/15: Creative Destruction vs Subjective Individual Wellbeing

There is one persistent question in economics relating to the issues of aggregate income attained in the economies: the connection between that income and happiness. In other words, does higher per capita GDP or GDP growth increase happiness?

A new paper by Aghion, Philippe, Akcigit, Ufuk, Deaton, Angus and Roulet, Alexandra M., titled "Creative Destruction and Subjective Wellbeing" (April 2015, NBER Working Paper No. w21069 looks at this matter. The authors "…analyze the relationship between turnover-driven growth and subjective wellbeing, using cross-sectional MSA level US data. We find that the effect of creative destruction on wellbeing is

  1. unambiguously positive if we control for MSA-level unemployment, less so if we do not; 
  2. more positive on future wellbeing than on current well-being; (
  3. more positive in MSAs with faster growing industries or with industries that are less prone to outsourcing; 
  4. more positive in MSAs within states with more generous unemployment insurance policies."

A bit more colour.

Existent literature

As noted by the authors, "…the existing empirical literature on happiness and income looks at how various measures of subjective wellbeing relate to income or income growth, but without going into further details of what drives the growth process. In his 1974 seminal work, Richard Easterlin provides evidence to the effect that, within a given country, happiness is positively correlated with income across individuals but this correlation no
longer holds within a given country over time."

This is known as the Easterlin paradox and there are several strands of explanations advanced: "…the idea that, at least past a certain income threshold, additional income enters life satisfaction only in a relative way… Recent work has found little evidence of thresholds and a good deal of evidence linking higher incomes to higher life satisfaction, both across countries and over time. Thus in his cross-country analysis of the Gallup World Poll, Deaton (2008) finds a relationship between log of per capita GDP and life satisfaction which is positive and close to linear, i.e. with a similar slope for poor and rich countries, and if anything steeper for rich countries. Stevenson and Wolfers (2013) provide both cross-country and within-country evidence of a log-linear relationship between per capita GDP and wellbeing and they also fail to find a critical "satiation" income threshold.3 Yet these issues remain far from settled…"

One common problem with all of the literature on links between income and wellbeing is that "…none of these contributions looks into the determinants of growth and at how these determinants affect wellbeing. In this paper, we provide a first attempt at filling this gap."


To address this problem, the authors "look at how an important engine of growth, namely Schumpeterian creative destruction with its resulting flow of entry and exit of firms and jobs, affects subjective wellbeing differently for different types of individuals and in different types of labor markets."

The authors "develop a simple Schumpeterian model of growth and unemployment to …generate predictions on the potential effects of turnover on life satisfaction. In this model growth results from quality-improving innovations. Each time a new innovator enters a sector, the worker currently employed in that sector loses her job and the firm posts a new vacancy. Production in the sector resumes with the new technology only when the firm has found a new suitable worker. …In the model a higher rate of turnover has both direct and indirect effects on life satisfaction. The direct effects are that, everything else equal, more turnover translates into both, a higher probability of becoming unemployed for the employed which reduces life satisfaction, and a higher probability for the unemployed to find a new job, which increases life satisfaction. The indirect effect is that a higher rate of turnover implies a higher growth externality and therefore a higher net present value of future earnings: this enhances life satisfaction."

Four theoretical model predictions are:

  1. "Overall, a first prediction of the model is that a higher turnover rate increases wellbeing more when controlling for aggregate unemployment, than when not controlling for aggregate unemployment."
  2. "…higher turnover increases wellbeing more, the more turnover is associated with growth-enhancing activities. 
  3. "…higher turnover increases wellbeing more for more forward-looking individuals." 
  4. "…higher turnover increases wellbeing more, the more generous are unemployment benefits".


The authors test theoretical predictions based on actual US data.

"Our main finding is that the effect of the turnover rate on wellbeing is unambiguously positive when we control for unemployment. This result is …remarkably robust. In particular it holds: (i) whether looking at wellbeing at MSA-level or at individual level; (ii) whether looking at the life satisfaction measure from the BRFSS or at the …Gallup survey; (iii) whether using the BDS or the LEHD data to construct our proxy for creative destruction."

"We also find that the positive effect of turnover is stronger on anticipated wellbeing than on current wellbeing. On the other hand, creative destruction increases individuals' worry - which reflects the fact that more creative destruction is associated with higher perceived risk by individuals."

"…When interacting creative destruction with MSA-level industry characteristics; we find that the positive effect of turnover on wellbeing is stronger in MSAs with above median productivity growth or with below median outsourcing trends."

"Finally, we find that higher turnover increases wellbeing more in states with unemployment
insurance policies that are more generous than the median."

Monday, May 25, 2015

25/5/15: Immigration and Entrepreneurship: Major Unknowns

A recent CESIfo study looked at the role of immigrants in driving entrepreneurship.

Per authors: "Immigrants are widely perceived as being highly entrepreneurial and important for economic growth and innovation. This is reflected in immigration policies and many developed countries have created special visas and entry requirements in an attempt to attract immigrant entrepreneurs. Not surprisingly, a large body of research on immigrant entrepreneurship has developed over the years."

Couple of interesting statistical summaries:

 Striking feature of the above data is low level of entrepreneurship within Indian and Philippines diasporas.

Key conclusions are: "Overall, much of the existing research points towards positive net contributions by immigrant entrepreneurs. The emerging literature on these contributions as measured by innovations represents the most convincing evidence so far."

Interestingly, distribution of entrepreneurship across educational categories, as exemplified above, is rather uniform, although this does not adjust for quality of entrepreneurship.

Caveats are: "First, there is little evidence in the literature on how much immigrant-owned businesses contribute to job growth. Although data exists on employment among immigrant-owned businesses no data are available showing the dynamics of employment among these firms."

Second, "...immigrant business owners are more likely to export, but we know little about how much they export in total dollars and how many jobs are created by these expanded markets for selling goods and services."

Lastly, there is indeterminacy as to the "....the contribution of immigrant businesses to diversity. Although the contribution of immigrant firms to diverse restaurants, merchandise and services is apparent in any visit to a major U.S. city, we know less about the contribution to diversity in manufacturing and design of innovative products."

Full paper can be read here: Fairlie, Robert W. and Lofstrom, Magnus, Immigration and Entrepreneurship (April 23, 2015). CESifo Working Paper Series No. 5298:

Sunday, May 24, 2015

24/5/15: Markets, Patterns and Catalysts: Irish Growth Story

Some of my slides from last week's presentation at the All-Ireland Business Summit, covering three key themes:

The Current State of the Irish Economy "The Market Section"

The New Normal of rising global risk "The Pattern"

A Policy Path to Growth "The Catalysts"