December 13

Living with low for long. Mark Carney, BoC.

Current turbulence in Europe is a reminder that the crisis is not over, but has merely entered a new phase. In a world awash with debt, repairing the balance sheets of banks, households and countries will take years.

For the crisis economies, the easy bit of the recovery is now finished. Temporary factors supporting growth in 2010–such as the turn in the inventory cycle and the release of pent-up demand–have largely run their course. Fiscal stimulus is turning to fiscal drag and, for some countries, rapid consolidation has become urgent. Household expenditure can be expected to recover only slowly. This all implies a gradual absorption of the large excess capacity in many advanced economies.

This is not surprising. History suggests that recessions involving financial crises tend to be deeper and have recoveries that take twice as long. In the decade following severe financial crises, growth rates tend to be one percentage point lower and unemployment rates five percentage points higher.1 The current U.S. recovery is proving no exception.

In such an environment, very low policy rates in the major advanced economies could be in place for a prolonged period–a possibility underscored by the recent extensions of unconventional monetary policies in the United States, Japan and Europe.

Big numbers from the BIS. FT Alphaville.

The eurozone is in bad need of an undertaker. Ambrose Evans-Pritchard.

What the German people are being asked to do is to surrender fiscal sovereignty and pay open-ended transfers to Southern Europe, taking on a burden up to six times reunification with East Germany. "If we pool the debts of the countries in the south-west periphery of Europe, we are blighting our children’s future: the debt levels are astronomic," said Hans-Werner Sinn, head of Germany IFO institute. Any attempt to prop up the status quo will cement the current account imbalances of EMU’s North and South, to the detriment of both sides. "I doubt that the current leaders of Europe fully understand the economic implications of their decisions. They are repeating the mistakes that Germany made over reunification," he told the Handelsblatt.

Transfers to the East are still running at €60bn a year two decades after the fall of the Berlin Wall. There has been no meaningful East-West convergence for the last 15 years. To those who blithely argue that EMU is a good racket for German exporters because it locks in Germany’s competitive advantage, he retorts that a trade surplus is the flip side of a capital deficit. Germany has seen €1 trillion – or two thirds of its entire savings since 2002 – leak out to fund the EMU party, gutting investment at home. This is toxic for Germany too....

So as EU leaders flounder, the task of saving monetary union falls to the ECB. Yet it too has declined the burden, refusing to go nuclear with bond purchases. "Each country needs to be held responsible for its own debt," said Germany’s monetary avenger at the ECB, Jurgen Stark. He was joined last week by Mario Draghi, Italy’s governor and candidate for ECB chief, who said it was not the job of a central bank to carry out fiscal rescues. "We could easily cross the line and lose everything we have, lose independence, and basically violate the Treaty," he said.

Indeed. Maastricht forbids the ECB from buying the debt of eurozone states except for specific purposes of liquidity management. But this saga no longer has anything to do with liquidity. Southern Europe faces a solvency crisis.

Block those metaphors. Paul Krugman.

What we’ve been dealing with ... is a painful process of “deleveraging”: highly indebted Americans not only can’t spend the way they used to, they’re having to pay down the debts they ran up in the bubble years....

What the government should be doing in this situation is spending more while the private sector is spending less, supporting employment while those debts are paid down. And this government spending needs to be sustained:... spending that lasts long enough for households to get their debts back under control. The original Obama stimulus wasn’t just too small; it was also much too short-lived...

But wouldn’t it be expensive to have the government support the economy for years to come? Yes, it would — which is why the stimulus should be done well, getting as much bang for the buck as possible.... [but] the tax-cut deal is likely to deliver relatively small benefits in return for very large costs. ... Tax cuts for the wealthy will barely be spent at all; even middle-class tax cuts won’t add much to spending. And the business tax break will, I believe, do hardly anything to spur investment given the excess capacity businesses already have.

The actual stimulus in the plan comes from the other measures, mainly unemployment benefits and the payroll tax break. And these measures (a) won’t make more than a modest dent in unemployment and (b) will fade out quickly, with the good stuff going away at the end of 2011.

The question, then, is whether a year of modestly better performance is worth $850 billion in additional debt, plus a significantly raised probability that those tax cuts for the rich will become permanent. And I say no. The Obama team obviously disagrees. As I understand it, the administration believes that all it needs is a little more time and money, that any day now the economic engine will catch and we’ll be on the road back to prosperity.... What I expect, instead, is that we’ll be having this same conversation all over again in 2012, with unemployment still high and the economy suffering as the good parts of the current deal go away.

Reconsidering Japan and Reconsidering Paul Krugman. Truthout.

there is a commonsense aspect to this story that gets lost amid the rhetoric and the headlines. Two lessons of our times are that economic bubbles eventually burst, and that the environmental consequences of unbridled growth in this age of global warming are severe. The world needs to figure out how advanced economies can provide for their people without relying on roaring growth rates driven by asset bubbles. If consumer-driven growth was the order of the day in the post-World War II era, going forward it is going to be steady-state economic growth - growing not too fast, but not too slowly - and learning to do more with less.

Like bulls in a China shop. Bob Janjuah.

A terrible way to fix the economy: households deleveraging through defaulting on debt. rortybomb.

What to make of this? First off, I’m terrified at the idea that national wealth is roughly at the level to pay for the servicing of debt but not necessarily pay off any actual debt. Our household sector is at the point where we can make the minimum payment on our metaphoric credit card without paying any of it down, and the only other choice is to not pay it at all.

other fare:
Human extinction: not the worst case scenario. 3QD.

Civilization has bestowed our species with a distorted self-image. Many people seem to have the impression that we operate independently of nature. We are fortunate that we’ve been able to act as though we are independent for as long as we have. If we don’t adjust our way of living so that it becomes sustainable, however, nature will eventually do this for us.