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Submitted by F.F. Wiley of Cyniconomics

Bad News For Keynesians: Data Shows The Austerians Are Right

Anders Aslund of the Peterson Institute recently made an interesting argument about Europe’s winners and losers. In a critique of Paul Krugman’s advice to Europe’s political leaders, he compares economic performance of the southern European laggards to the northern countries and, in particular, the Baltic states.

Aslund concludes that:

Today, the record is clear. The countries that have followed [Krugman’s] advice and increased their deficits (the South European crisis countries), have done far worse in terms of economic growth and employment than the North Europeans and particularly the Baltic countries that honored fiscal responsibility.

He also links fiscal adjustments to structural reforms:

Thanks to greater structural adjustment, the growth trajectory is likely to be higher in countries that quickly and enthusiastically embrace these reforms than elsewhere. Accordingly, the three Baltic countries that suffered the largest output falls at the outset of the crisis because of a severe liquidity freeze returned to growth within two years and have, over the same period, enjoyed the highest growth in the EU. By contrast, Greece, with its back-loaded fiscal adjustment, as recommended by Krugman, has suffered from six years of recession.

By comparing past reforms to recent growth, Aslund takes a sensible approach. But he focuses mostly on the tiny Baltics and secondly on continental Europe, which begs the question:  What about larger countries everywhere?

Let’s have a look.

We start with every country that has both a global GDP share of greater than 0.25% in 2007 (pre-global financial crisis) and sufficient data on fiscal balances and growth. This is 47 countries. We then divide the group into a European sub-group (23 countries) and a non-European sub-group (24 countries). For each sub-group, we compare real GDP growth for 2010 to 2012 (post-GFC) to the average structural budget balance for 2008 and 2009 (during the GFC).

Here are the results:

Not only is there a positive relationship between stronger public finances during the crisis and faster post-GFC growth, but the relationship holds both within and outside Europe. (For those who like statistics, the F-stat for the European regression is significant at 99.9%, while the other regression is significant at 90% but not 95%.)

Conclusions

We have two observations. First, the results may help explain why Keynesian pundits resort to nonsensical arguments. They often claim that poor performance in countries attempting to contain public debt proves austerity doesn’t work, which is like deciding your months in rehab stunk, and therefore, rehab is bad and heroin is good. A more honest approach is to compare fiscal actions in one time period with results in later periods, after the obvious short-term effects have played out (as in the charts). But if Keynesians did that, they would reveal that their own advice has failed.

Second, the effects discussed by Aslund don’t receive enough attention. As Tyler Cowen (who gets credit for the pointer) wrote, Aslund’s perspective “is underrepresented in the economics blogosphere.”

And that includes our wee blog.

Regular readers know that we’ve presented research on long-term fiscal policy effects. (For example, see our historical study of 63 high government debt episodes, or our Fonzie-Ponzi theory.) We’ve also argued that the short-term consequences of fiscal tightening, often said to support Keynesian policies as noted above, actually do just the opposite. (Consider that fiscal tightening is motivated by today’s massive debt burdens, and these happen to be explained best by Keynesianism – the deficit spending policies of the past that hooked economies on unsustainable finances in the first place.)

But until now, we haven’t offered research on intermediate-term effects – horizons of 2-5 years as in the charts above. And this evidence supports Aslund’s conclusions. Policymakers should heed his argument that “front-loaded fiscal adjustment quickly restores confidence, brings down interest rates, and leads to an early return to growth.”

(Click here for the country-by-country data that was used in the charts.)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/KIqxw3mZwSE/story01.htm Tyler Durden

When Tim Geithner announced his departure from the US Treasury in January, the only question was how long would it take the former NY Fed head to get a job with the only industry that he cared about as either a Fed or Treasury official: Wall Street. Tim did his best to diffuse such speculation with amusing stories about writing books, which were accentuated by his refusal to join the Fed chairmanship race. Why not? After all there was nobody that Wall Street would benefit more from as the head of the Fed than TurboTax Tim. Today, less than a year after his exit from public service, the answer has presented itself – Tim Geithner is joining private equity titan Warburg Pincus, his first private sector job in decades since working for Henry Kissinger early in his career.

The WSJ broke the story:

Former U.S. Treasury Secretary Timothy Geithner, one of the architects of the federal government’s rescue of the financial system, is joining private-equity firm Warburg Pincus LLC.

 

Mr. Geithner, who has spent most of his career outside the private sector, said in an interview he plans to start in March at the New York-based firm, known for its role in buyouts of companies including eye-care firm Bausch & Lomb Inc., luxury retailer Neiman Marcus Group Inc. and stadium concessionaire Aramark Corp.

 

At Warburg, he will serve as president and managing director, not the kind of figurehead or advisory positions that public-sector figures often land after government stints. Mr. Geithner, 52 years old, is expected to work on mapping the firm’s strategy and management, investor relations and on matters related to the firm’s investments.

 

“When they approached me, they clearly wanted me to play a substantive role in helping them manage the firm,” he said. Citing the firm’s global reach and “low-key” nature, he said Warburg is “culturally very compatible with what I was looking for.”

 

Warburg Co-Chief Executive Charles Kaye said Mr. Geithner will be “absolutely a full-time member of the partnership. He will very much be here every day.” Mr. Geithner will report directly to the co-CEOs.

The revolving door into private equity is a staple for former government workers, who have worked on behalf of Wall Street, if not Main Street, for the entire careers, and upon their “reitrement” comes the time to get paid. “Earlier this year, KKR & Co. tapped David Petraeus, the former general and Central Intelligence Agency chief, to lead an internal team focused on macroeconomic forecasting and public policy. Former Vice President Dan Quayle and former Treasury Secretary John Snow work for Cerberus Capital Management LP. Carlyle Group LP has enlisted many officials from the Bush and Clinton administrations, including former Secretary of State James Baker III, in advisory roles.”

How much would Tim Geithner get paid? It is not immediately unclear: “Warburg Pincus declined to discuss Mr. Geithner’s compensation, but it said he would be a partner and invest in its funds.” What is clear is that his all in comp would be order of magnitude greater than the paltry $190,000 he was getting when providing trillions in taxpayer funds to bailout the Wall Street oligarchy, among which firms like Warburg Pincus.

In the end, the narrative goes, it was a choice between a book and a job paying millions.

Mr. Geithner has long considered a career in investing once his days in Washington ended. He has been reluctant to take a job with any banks, which he once regulated, and views private-equity firms and other investment managers as different from the institutions he oversaw as New York Fed chief.

 

Mr. Geithner had been weighing job options while writing an account of the financial crisis, due out next year.

 

In August, Mr. Kaye and Joseph Landy, Warburg’s other co-chief executive, reached out to Mr. Geithner through a mutual acquaintance. A series of meetings at Warburg’s Lexington Avenue headquarters and Manhattan restaurants followed, Mr. Landy said.

In conclusion we extend our sincerest congratulations to Mr. Geithner. After all, injustice once again prevails, and the man who now documentedly leaked Fed secrets to Wall Street has finally gotten his comeuppance.

Recall from “Did Tim Geithner Leak Every Fed Announcement To The Banks“

On August 17, 2007, the Fed’s Board of Governors announced a key change to primary credit lending terms, whereby the discount rate was cut by 50 bp — to 5.75% from 6.25% — and the term of loans was extended from overnight to up to thirty days. This reduced the spread of the primary credit rate over the fed funds rate from 100 basis points to 50 basis points. News of the emergency measure was supposed to be kept secret from market participants as it was substantially market moving. It wasn’t. And just when we thought our opinion of the outgoing Treasury Secretary and former NY Fed head Tim Geithner, whose TurboTax incompetence is now legendary, couldn’t get lower, it got lower. Much lower.

From the August 16, 2007 transcript (page 13 of 37) of the conference call preceding this announcement.

MR. LACKER. If I could just follow up on that, Mr. Chairman.

 

CHAIRMAN BERNANKE. Yes, go ahead.

 

MR. LACKER. Vice Chairman Geithner, did you say that [the banks] are unaware of what we’re considering or what we might be doing with the discount rate?

 

VICE CHAIRMAN GEITHNER. Yes.

 

MR. LACKER. Vice Chairman Geithner, I spoke with Ken Lewis, President and CEO of Bank of America, this afternoon, and he said that he appreciated what Tim Geithner was arranging by way of changes in the discount facility. So my information is different from that.

 

CHAIRMAN BERNANKE. Okay. Thank you. Go ahead, Vice Chairman Geithner.

 

VICE CHAIRMAN GEITHNER. Well, I cannot speak for Ken Lewis, but I think they have sought to see whether they could understand a little more clearly the scope of their rights and our current policy with respect to the window. The only thing I’ve done is to try to help them understand—and I’m sure that’s been true across the System—what the scope of that is because these people generally don’t use the window and they don’t really understand in some sense what it’s about.

At least we now know who the bankers’ mole on the FOMC was before, as gratitude for his services, he was promoted to Treasury Secretary of the US. Because if he leaked one, he leaked them all.

* * *

And now that he is no longer beholden to the “American People” it’s truly time to get paid.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/XXv8GLJhTh8/story01.htm Tyler Durden

Former Treasury Secretary Tim Geithner’s rotation from government to wall street is complete. Bloomberg announced this morning that Timmah will be headed to Private Equity firm Warburg Pincus… 

 

 

more on ZH shortly…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/fMVT9SSGweE/story01.htm CrownThomas

Former Treasury Secretary Tim Geithner’s rotation from government to wall street is complete. Bloomberg announced this morning that Timmah will be headed to Private Equity firm Warburg Pincus… 

 

 

more on ZH shortly…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/fMVT9SSGweE/story01.htm CrownThomas

The US dollar looks vulnerable to additional losses next week.  While we had correctly anticipated the greenback’s losses last week, we had expected it to begin recovering ahead of the weekend.   This did not materialize and, leaving aside the yen, the dollar finished the week near its lows.   Generally speaking, the technical outlook for the greenback has soured and, in fact, warn of some risk accelerated losses in the period ahead.  

 

Nor can participants count on the economic calendar to stem the dollar’s rout.  The US has an actively slate of economic reports next week as the government catches up with the delay from the shutdown, but nothing to put the tapering back into December.   

 

At the same time, while there is some expectation the ECB may do something more in a few weeks, following up on the recent repo rate cut, it is still far too early to expect the ECB to adopt what we have dubbed  as “nuclear options”, such as a negative deposit rate or quantitative easing. Since it just adjusted the price of money (theoretically), the next step will likely seek to influence the quantity, perhaps a change in collateral rules or a reduction in reserve requirements.  

 

The euro’s resilience in the face of the repo rate cut is demonstrated by its 1% rise on a trade-weighted basis, which is the key metric of its potential economic impact.  EONIA is essentially unchanged (about half of a basis point lower) since the rate cut (which is one should have expected, as EONIA trades closer to the zero deposit rate than the repo rate).  

 

The euro has recorded higher lows for six consecutive sessions  It tested the $1.35 in the second half of last week, but did not manage to close about it.  This corresponds to a retracement objective of the nearly 5.5 cent decline  beginning Oct 25. Assuming this level is convincingly breached, we see scope for the euro to rise 1% next week toward $1.3630.   A move below $1.34 would weaken the outlook, but it probably requires a close below the 100-day moving average, which held on this basis, despite some intra-day penetration recently.  It is near $1.3365 now.  

 

Sterling made new highs for the month ahead of the weekend and now seems poised to re-challenge what appeared to have been a double top made in Oct near $1.6260.  Sterling had gone through the neckline (~$1.5890) early in the week, though not on a closing basis and the quickly rebounded, thanks to a favorable employment report and more optimistic BOE.  Its resilience was reflected in the speed at which the market shrugged off the weak retail sales report (-0.7% rather than flat as the consensus expected).  

 

The dollar did rise to two month highs against the yen and finished the last week with two consecutive closes (of the North American session) above the JPY100 for the first time in four months.  Contrary to the general assertion, it cannot be simply attributed to Fed tapering ideas.   The yen’s 1.1% loss against the dollar occurred as the US premium over Japan (10-year interest rate differential) actually fell roughly 9 bp last week, slipping lower in three consecutive sessions before the weekend.  

 

The key test for the dollar is awaiting closer to the JPY100.60, the September high, which is just below the high from the second half of July set near JPY100.85.  A break of this would bring into view the early July high near JPY101.55, which is the high posted since the decline from the year’s high set in May (~JPY03.75) to the early June low (just below JPY94).    Support has been established around JPY99 and it may require a break of that to signal a high is in place.  

 

Yen weakness is more pronounced on the crosses than against the dollar.  Indeed, the yen’s weakness appears to be, at least in part, not a dollar story.  It has fallen nearly 2% on a trade-weighted basis so far this month. Sterling is trading a multi-year highs against the yen and euro is testing the year’s high.  The New Zealand dollar is testing the JPY84 level that held in both Sept and Oct.  The Canadian dollar is at two-month highs against the yen.   

 

With the third arrow of Abenomics still apparently a work in progress, any appearance of relying on currency depreciation may face criticism by the US and Europe.  Chinese official silence on the issue is noteworthy.   Perhaps, its refrains from criticizing so as not to encourage criticism of its exchange rate policy, though that doesn’t stop the PBOC from time to time of being critical of the US (market determined) exchange rate stance.  

 

Turning to the dollar-bloc, from a technical perspective the US dollar is set to fall further.  The head and shoulders topping pattern we discussed last week proved for naught.  Even though the $0.8200 neckline was violated on Nov 12, there was no follow through selling and the Kiwi rebounded smartly (almost 2%) to vie with the euro as the strongest of the major currencies on the week.  It seems that the rule here, and in sterling, is play the range until convincingly violated.   If applied to the yen, it would seem to warn against playing the break out.  

 

The Australian dollar was largely range bound for most of last week, but this is increasingly looking like a base, rather than a pause before the next leg lower.  The key may be the downtrend line drawn off the Oct 23 high near $0.9760 and Nov 6 high near $0.9545.  It comes in near $0.9400 on Monday, though falls toward $0.9325 by the end of the week.    Technically, a move above $0.9400 could spur another 1.0-1.5 cent advance.  

 

The move above CAD1.05 on Nov14 appeared to have exhausted the USD bulls.  A break now of CAD1.0430 (where a retracement objective and 20 day moving average lay) would confirm a near-term greenback high), and ideally CAD1.04, would suggest a move toward at least the lower end of the 5-month trading range (~CAD1.0250-CAD1.03).  

 

The Mexican peso’s 1.75% rise last week edged out the South African rand as the strongest of the emerging market currencies.  The US dollar’s decline brought it within a spitting distance of the uptrend line drawn off the Sept and mid- and late-Oct lows.  It comes in near MXN12.91 on Monday.  A break may signal another 1% decline in the dollar.  

 

Observations from the speculative positioning in the CME currency futures:  

 

1.  As was the case during the last reporting period, the two significant adjustments to speculative position were cut of gross long euro positions (by 17.2k contracts) and the jump in gross short yen positions (23.6k contracts).  Gross long euro positions were cut by 50k contracts over the past two week and as of Nov 12, were the lowest since mid-September (86.1k).   The gross short yen positions have increased by 37k contracts over the same period (to 116.1k).  

 

2.  The gross long Swiss franc positions have been cut by a third in the past two weeks (to 14.1k contracts).  At  43.9k contracts, the gross long sterling position was the smallest in two months.  The Australian dollar saw the largest jump in gross shorts (8.9k contracts) since May and at 56.3k contracts is the most in two months.  

 

3.  The net long euro position has been cut by 80% since late October (now stands at 16.8k contracts).  The net short yen position is the largest since May (to 95.1k contracts).  

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/8OFaa0Pyn58/story01.htm Marc To Market