Tag: news

“Historically, there is no reason to fear deflation,” Nobel Laureate Thomas Sargent explains to Germany’s Wiwo.de, “we all benefit from lower prices.” Crucially, he continues, “countries with declining prices, such as Greece, must improve the competitiveness they have lost in recent years,” requiring falling wages and rising productivity (and falling unit labor costs) which will lead to companies cutting prices, “this is not a dangerous deflation, but part of the necessary correction so that these countries are internationally competitive again.” That central banks pursue an inflation rate of around 2%, Sargent blasts, is because they consider it their job to “make bad debt good debt,” adding that inflation is “a major redistribution machine – reducing the real debt burden for the benefit of creditors and devaluing the assets of the creditors.” A return to a gold standard,he concludes, to prevent governments and central banks from limitless money-printing “would not be foolish.”

 

Thomas Sargent (via Wiwo.de) dares to go there (and is likely about to be stripped of his Nobel)…

“The countries with declining prices is troubled countries like Greece. They must make their price competitiveness, they have lost in recent years, again. This requires falling wages and rising productivity. As a result, unit labor costs go back, and the company may cut prices. This is not a dangerous deflation, but part of the necessary correction so that these countries are internationally competitive again, “Sargent said in an interview.

 

In addition, there are, according Sargent “historically no reason to fear deflation.”

 

On the contrary: “We all benefit when technological progress lowers the prices, such as computers,” said Sargent.

 

That central banks pursue an inflation rate of around two percent, according to Sargent is because they consider it their job to “make bad debt good debt”. Of an inflation governments benefited with high debt.

 

Sargent: “Inflation is a major redistribution machine, which reduces the real debt burden for the benefit of creditors and devalued the assets of the creditors.”
To prevent this, according to Sargent, the reintroduction of the gold standard would be possible, “I would not necessarily say that it would be the best solution, but it would not be foolish.”

 

Until the First World War, had the gold standard, to prevent that governments and their central banks print money limitless. During this time the prices would indeed have fluctuated, but had compensated over the years.

and specific to Europe, Thorstein Polleit adds (via Wiwo.de),

“The ECB will continue to push the rate toward zero percent and then buy government bonds,” Polleit said. Background of this development are falling consumer prices in the euro-crisis countries and the resulting fear of deflation.

 

At the same time Polleit warns against the consequences of the low interest rate policy. “You can defer the market-based adjustment of the credit boom of the past few years through lower interest rates and the printing of new money most, but not prevent,” said Polleit. In the medium term there is no way to lead a massive correction, coupled with cuts and debt deflation.

Polleit’s conclusion seems very apt givne the current melt-up:

“The longer you postpone this process, the more destructive is its effect.”

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/1Jgv4_M4iyg/story01.htm Tyler Durden

“Historically, there is no reason to fear deflation,” Nobel Laureate Thomas Sargent explains to Germany’s Wiwo.de, “we all benefit from lower prices.” Crucially, he continues, “countries with declining prices, such as Greece, must improve the competitiveness they have lost in recent years,” requiring falling wages and rising productivity (and falling unit labor costs) which will lead to companies cutting prices, “this is not a dangerous deflation, but part of the necessary correction so that these countries are internationally competitive again.” That central banks pursue an inflation rate of around 2%, Sargent blasts, is because they consider it their job to “make bad debt good debt,” adding that inflation is “a major redistribution machine – reducing the real debt burden for the benefit of creditors and devaluing the assets of the creditors.” A return to a gold standard,he concludes, to prevent governments and central banks from limitless money-printing “would not be foolish.”

 

Thomas Sargent (via Wiwo.de) dares to go there (and is likely about to be stripped of his Nobel)…

“The countries with declining prices is troubled countries like Greece. They must make their price competitiveness, they have lost in recent years, again. This requires falling wages and rising productivity. As a result, unit labor costs go back, and the company may cut prices. This is not a dangerous deflation, but part of the necessary correction so that these countries are internationally competitive again, “Sargent said in an interview.

 

In addition, there are, according Sargent “historically no reason to fear deflation.”

 

On the contrary: “We all benefit when technological progress lowers the prices, such as computers,” said Sargent.

 

That central banks pursue an inflation rate of around two percent, according to Sargent is because they consider it their job to “make bad debt good debt”. Of an inflation governments benefited with high debt.

 

Sargent: “Inflation is a major redistribution machine, which reduces the real debt burden for the benefit of creditors and devalued the assets of the creditors.”
To prevent this, according to Sargent, the reintroduction of the gold standard would be possible, “I would not necessarily say that it would be the best solution, but it would not be foolish.”

 

Until the First World War, had the gold standard, to prevent that governments and their central banks print money limitless. During this time the prices would indeed have fluctuated, but had compensated over the years.

and specific to Europe, Thorstein Polleit adds (via Wiwo.de),

“The ECB will continue to push the rate toward zero percent and then buy government bonds,” Polleit said. Background of this development are falling consumer prices in the euro-crisis countries and the resulting fear of deflation.

 

At the same time Polleit warns against the consequences of the low interest rate policy. “You can defer the market-based adjustment of the credit boom of the past few years through lower interest rates and the printing of new money most, but not prevent,” said Polleit. In the medium term there is no way to lead a massive correction, coupled with cuts and debt deflation.

Polleit’s conclusion seems very apt givne the current melt-up:

“The longer you postpone this process, the more destructive is its effect.”

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/1Jgv4_M4iyg/story01.htm Tyler Durden

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