Economics

Vox: www.voxeu.org/index.php?q=node/6553, Greece, the unbearable heaviness of debt, Paolo Manasse, May 24, 2011

For a long time analysts have been arguing about whether Greece will default on part of its debt – leaving its creditors to take a “haircut”. This column argues that this prospect is becoming more and more likely. read more on Vox

Keywords: Greek Crisis, Greek Debt Level

Two good articles - though from last year - which deal with the subject:

Harvard Magazine: After Our Bubble Prospects for American economic recovery—and cautionary lessons from Japan, July/August 2010

MSN Money: Is America the next Japan? August 2010

Keywords: Japanese Economic Problems, US' Economic Problems

May 19, 2011

Keywords: IMF, Global Economy, Global Recovery, Challenges to the World Economy

John Taylor, Senior Fellow in Economics at the Hoover Institution and Professor of Economics at Stanford University, notes that we need a link between the debt ceiling and spending cuts. Taylor explains that raising the debt limit and reducing spending will decrease the long-term risk of default.

Keywords: US Debt Limit, Spending Cuts

The Swiss Cantonal Bank of Zoug has invited the former UBS chief economist Klaus Wellershoff in April to present an economic outlook. We have lately received the slides of the insightful presentation and post here two of them:

Following slide shows the development of the sovereign debt of the US, the Eurozone and the PIGS countries over time:

Following slide shows the development of trade weighted exchange rates. The pictures shows that the Euro has not done particularly bad:

Once more we like to set a link to an article to Mohamed A. El-Erian of Pimco:

Project Syndicate: Hobble and Muddle, by Mohamed A. El-Erian, May 20, 2011

Colleagues from around the world recently gathered at PIMCO’s headquarters in California for our annual Secular Forum, when we leave behind high-frequency issues for a few days and, instead, debate what the next 3-5 years hold for the global economy. The perspective is global, informed by the insights of outside speakers, and the focus is on what is likely to happen, as opposed to what should happen. read more

Keywords: Global Economy, Emerging Markets, Advanced Economies

We following interview with globally reputed Swiss hedge fund manager Felix Zulauf on Financial Sense. The interview is dated April 30, 2011. As we are not mainly in the business of posting news but providing links to thought leadership, we decided to post the interview:

Financialsense.com: Spanning the Globe with Felix Zulauf, April 30, 2011

Keywords: Global Economy, Currencies, Monetary Policy, Felix Zulauf

Related:

Storm clouds over markets

"May 19 2011 Felix Zulauf, former head of asset management at UBS, warns that storm clouds are gathering over the markets. He discusses with John Authers, head of Lex, his grim outlook: that Europe faces a double dip, China is slowing, bonds "look awful" and an overheating commodities sector will be hurt badly. He was interviewed at the CFA Institute Annual Conference in Edinburgh."

Financial Times: Video: Interview with Felix Zulauf

Council on Foreign Relations: A Conversation with Michael Spence, May 16, 2011 (Video)

Michael Spence Bio

Keywords: Globalization, Emerging Market Growth, India, China

Voxeu: Eurozone design and management failures, Guillermo de la Dehesa, May 18, 2011

Once more a top financial experts who explains that a suboptimal design of the Eurozone has contributed heavily to the crisis.

Guillermo de la Dehesa, Chairman of CEPR and member of the Group of Thirty points to following weaknesses:

"•First, the Eurozone is not an optimum currency area, because it lacks two necessary requisites, i.e. price and wage flexibility and labour and capital mobility.
As the Eurozone does not comply fully with either of the two, it needs to have a very large common or single budget to face potential asymmetric shocks affecting some of its members, as has happened now.

•Second, a single monetary policy requires a single or common fiscal policy, because if one or several members increases its spending and debt disproportionably, it produces negative externalities on the others, who tend to buy their debt without exchange-rate risk.
Achieving such a single fiscal policy implies a progressive political union.

•Third, a single monetary policy may have perverse effects when applied to members with divergent growth and inflation rates by becoming simultaneously too strict for members with low rates of growth and inflation and too lax for members with higher rates of growth and inflation."

read the article on Vox

Domestic debt has to be put into the equation:

The Forgotten History of Domestic Debt, Carmen M. Reinhart, Kenneth S. Rogoff, The Economic Journal, Volume 121, Issue 552, pages 319–350, May 2011

"The literature on domestic debt default is sparse, as are the data. We compile a database on public debt that spans the nineteenth century to 2010. Our findings are as follows. First, domestic debt accounts for almost two-thirds of public debt. Second, the data help to explain the puzzle of why countries default on external debts at seemingly low debt thresholds. Third, domestic debt (which is often larger than the monetary base in the run-up to high inflation) has largely been ignored in the inflation literature. Last, the view that domestic residents are junior to external creditors does not find broad support."

Keywords: Domestic Debt, Debt Default, Inflation

May 18, 2011

Keywords: US Sovereign Debt, US Deficit, David Stockman

A must watch to better understand the financial news:

Keywords: Unemployment, Great Stagnation, Technology, Growth

Bloomberg: Japan Falls Into Recession After Economy Shrinks 3.7%, May 19, 2011

Japan’s economy shrank more than estimated in the first quarter after the March 11 earthquake and tsunami disrupted production and prompted consumers to cut back spending, sending the nation to its third recession in a decade.

Gross domestic product contracted an annualized 3.7 percent in the three months through March, following a revised 3 percent drop in the previous quarter, the Cabinet Office said today in Tokyo. The median forecast of 23 economists surveyed by Bloomberg News was for a 1.9 percent drop. read more

Keywords: Japanese Economy, Recession in Japan

Related:

MarketObservation: The Economist about recovery after natural disasters, March 17, 2011

Menzie Chinn about the "bubble announcement hype" in the blogosphere and elsewhere:

Econbrowser: What Would Really Bring about a Dollar Dive? May 12, 2011

Keywords: Monetary Policy, Quantitative Easing, US Dollar, Value of US Dollar

The US has officially reached its debt ceiling of US$ 14.3 trillion. The government is now discussing "extraordinary measures", such as raising the debt ceiling (proposed by the president). This has triggered heavy reactions from mostly Republican politicians and economists. Here are thoughts from two good thinkers, economists Tyler Cowen and Megan McArdle:

Marginal Revolution: A few thoughts on the debt ceiling, by Tyler Cowen, May 16, 2011

The Atlantic: Debt and Taxes, by Megan McArdle, May 16, 2011

Keywords: US Sovereign Debt, Debt Ceiling, Raising Debt Ceiling, Sovereign Default

Related:

FTD: USA reißen Schuldengrenze, May 16, 2011

Barry Ritholtz on the debt ceiling limits 1939 - 2011

"The Truth About the Debt Ceiling"

Freedom Watch with Judge Napolitano on Fox Business:

FT: How China boomed by trial and error, by Tim Harford, May 13, 2011

Keywords: Chinese Economy, Chinese Government, Chinese Planning Committees

May 13, 2011

Keywords: Japan, Tsunami, Fukushima, Cost to Recover

Vox: The troika should target the trade and the income balance deficits, Ricardo Cabral, May 15, 2011

Keywords: Greece, Portugal, Ireland, Trade Deficit, Sovereign Debt, Sovereign Debt Restructuring

They are laying out one of the major causes of the European problem: different levels of financial and fiscal integration:

Bolton, Patrick and Jeanne, Olivier, Sovereign Default Risk and Bank Fragility in Financially Integrated Economies (April 2011). NBER Working Paper No. 16899, April 2011

Abstract:

"We analyze contagious sovereign debt crises in financially integrated economies. Under financial integration banks optimally diversify their holdings of sovereign debt in an effort to minimize the costs with respect to an individual country's sovereign debt default. While diversification generates risk diversification benefits ex ante, it also generates contagion ex post. We show that financial integration without fiscal integration results in an inefficient equilibrium supply of government debt. The safest governments inefficiently restrict the amount of high quality debt that could be used as collateral in the financial system and the riskiest governments issue too much debt, as they do not take account of the costs of contagion. Those inefficiencies can be removed by various forms of fiscal integration, but fiscal integration typically reduce the welfare of the country that provides the "safe-haven" asset below the autarky level."

Keywords: Banking, European Debt Crisis, European Monetary Union, Financial Contagion, Government Debt