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The Eurozone’s financial disintegration

The Eurozone’s financial disintegration

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Introduction

The Euro Crisis Monitor (above) shows the increasing imbalances in the TARGET2 settlement system between all its members: the ECB (itself with a €145bn deficit) and the national central banks in the Eurozone. Other than minor differences reflecting net cross-border trade not matched by investment flows going the other way, these imbalances should not exist. But following the Lehman crisis and as the Eurozone developed its own series of crises, imbalances arose. Commentators have grown used to them, so have more or less given up pointing them out. But in the last few months, the apparent flight into the Bundesbank (€995,083m surplus) has gathered pace, as have the deficits for Italy (€536,722m) and Spain (€451,798m). It is time to take these rising imbalances seriously again.

Target2 — the ECB’s flexible friend

Target2 is the settlement system for transfers between the national central banks. The way it works, in theory, is as follows. A German manufacturer sells goods to an Italian business. The Italian business pays by bank transfer drawn on its Italian bank via the Italian central bank through the Target2 system, crediting the German manufacturer’s German bank through Germany’s central bank.

But since the Lehman crisis, and more noticeably the last eurozone crisis, capital flows appear to have gravitated from Portugal, Italy, Greece and Spain (the PIGS — remember them?) to principally Germany, Luxembourg, Netherlands and Finland in that order. Before 2008, the balance was maintained by trade deficits in Greece, for example, being offset by capital inflows as residents elsewhere in the eurozone bought Greek bonds, other investments in Greece and the tourist trade collected net cash revenues.

In this sense, it would be wrong to suggest that trade imbalances have led to Target2 imbalances. But part of the problem must be put down to the failure of private sector investment flows to recycle.

…click on the above link to read the rest of the article…

The biggest of big pictures

The biggest of big pictures

I have had a request from Mrs Macleod to write down in simple terms what on earth is going on in the world, and why is it that I think gold is so important in this context. She-who-must-be-obeyed does not fully share my interest in the subject. An explanation of the big picture is also likely to be useful to many of my readers and their spouses, who do not share an enduring interest in geopolitics either.

That is the purpose of this article. It can be bewildering when a casual observer tries to follow global events, something made more difficult by editorial policies at news outlets, and the commentary from most analysts, who are, frankly, ill-informed. Accordingly, this article addresses the topic that dominates our future. The most important players in the great game of geopolitics are America and China. But before launching into an update, I shall lay down the disciplines required for an informed analysis.

Do try to look at issues from all sides in order to understand both strategic considerations and prospective outcomes. Understand that characteristics which may apply to one side do not necessarily apply to the other. For example, financial analysis that applies to the US economy does not necessarily apply to China’s. Do try to remain neutral and objective, analytical and unbiased. Remember the old stockbroker’s adage: where there’s a tip, there’s a tap, meaning that the dissemination of information is usually designed to promote vested interests.

The list of don’ts is somewhat longer. Don’t believe what governments say, because they will tell you what they want you to believe. Don’t believe anything coming out of intelligence services: if the information is good it is highly unlikely to come your way, and if good information does come your way, it will be indistinguishable from conspiracy theories.

…click on the above link to read the rest of the article…

How Gibson’s paradox has been buried

How Gibson’s paradox has been buried

Until the 1970s, all recorded history showed that bond yields were tied to the general price level, not the rate of price inflation as commonly believed. However, since then, the statistics say this is no longer the case, and bond yields are increasingly influenced by the rate of price inflation. This article explains why this has happened, and why it is important today.

This paper is a follow-up on my white paper of October 2015.[i] In that paper I explained why, based on over two-hundred years of statistics, long-term interest rates correlated with the general price level, and not with the rate of inflation. I now take the analysis further, explaining why the paradox appears to no longer apply.

The two charts which illustrate the pre-seventies position are Chart 1 and Chart 2 reproduced below.

paradox 1

The charts take the yield on the UK Government’s undated Consolidated Loan Stock (Consols) as proxy for the long-term interest rate, and the price index and its rate of change (the rate of price inflation) as recorded in the UK. The reasons for using UK statistics are that Consols and the loan stocks that were originally consolidated into it are the longest running price series on any form of term debt, and during these years Britain emerged to be the world’s leading commercial nation. Furthermore, for the bulk of the period covered by Gibson’s paradox, London was the world’s financial centre, and sterling the reserve basis for the majority of non-independent foreign currencies.

The evidence from the charts is clear. Gibson’s paradox showed that the general price level correlated with long-term interest rates, which equate to the borrowing costs faced by entrepreneurial businessmen. 

…click on the above link to read the rest of the article…

Macroeconomics Has Lost Its Way

Macroeconomics Has Lost Its Way

The father of modern macroeconomics was Keynes. Before Keynes there were macro considerations, which were firmly grounded in human action, the personal preferences and choices exercised by individuals in the context of their own earnings and profits. In order to give a role to the state, Keynes had to get away from human action and devise a positive management role for central planners. This was the unstated purpose behind his General Theory of Employment, Interest and Money.

To this day, his followers argue that macroeconomics is different from individual actions, and the factors that determine the behaviour of individuals are not the same as those that determine the wider economy. This article explains why it cannot be true, why modern macroeconomic beliefs are fundamentally flawed, and why interventionism has not only failed to produce overall benefits for the wider public, but has been at an unnecessary economic cost.

The basic fallacy

Last week, Martin Wolf (the FT’s chief associate editor and chief economic commentator) presented a programme entitled Economics 101 on BBC Radio 4, in which he raised the question as to whether a democracy can function when voters have little idea of how the economy works and why there has been so little effort to teach economics in schools.[i] The independent economists interviewed, Larry Summers and Joseph Stiglitz, and Wolf himself are strongly pro-Keynesian, and the programme made no mention of the fact that there are different schools of economic thought. The question as to what information should be given to the public and crammed into the minds of schoolchildren was never addressed, and it was clearly to be the Keynesian view.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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