"We're going to make a change..."

"I'm going to make a change

For once in my life

It's gonna feel real good

Gonna make a difference, gonna make it right"   

- Michael Jackson

...to DJ:ing Economics!

From now on our homepage is www.djingeconomics.com!

So bookmark this address, because this is where you will find us from now on. No more blogspot. Word to Michael Jackson, This Is It!

A real and new (non blog-based) website is also on its way! (until then the url redirects here).

But there is more! We are designing a logo and setting up a Facebook page and a Twitter page (they already exist but we do not want to call them active just yet).

Until the real website is up and running we will update this current site with different sections such as an "About Us" section where we will explain more about who we are and what we do and stand for.

For those of you wondering where we get the quotes in the beginning of the articles from there will be a "Music of DJ:ing Economics" section, where you will find the songs and videos (where available) that the quotes are taken from.

You are also going to find a "Resources" section where you will be able to find material used in the articles and other useful information.

There is also going to be more information about how to contact us but you can already email us @ djingeconomics@gmail.com

Stay tuned for more! The next couple of articles are going to be about promises made by the political parties leading up to the elections and about the situation in Afghanistan.

Until then, get inspired by the King!

China's one-child policy and growth

"Have a baby by me baby, be a millionaire

I write the check before the baby comes, who the f*ck cares" - 50 Cent

Maybe it should be "do not have a baby, be a millionaire"? Or at least, maybe one should "care" about the effect on society of another baby and especially in countries with high fertility rate and the quality of life of that child. And I am not just talking in monetary terms but in more general ones like development and growth.

Let us compare two countries that has taken two different paths; China and India. Let us as well present some well known facts. It is a well known fact that China is the country with the world's largest population (1.33 bn according to CIA) and India is the one with the second largest population (1.17 bn according to CIA). Another commonly known fact is that China has implemented a one-child policy while India has not taken such action to control their rising population.

Now listen, here it is perhaps worth pointing out that this subject is in many ways a sensitive one. To decide how many children you want is a very basic human right and trying to control something as fundamental (for every living spieces) as reproduction will always be difficult and often painful. On the other hand if we take a bigger perspective it is easy to see that an uncontrolled birthrate can have negative effects on society which then translates to negative effects for individuals which "may also indicate difficulties for families, in some situations, to feed and educate their children and for woman to enter the labor force"(www.cia.gov). The reason for this article is not to advocate for the one-child policy, it is obviously an extreme measure to an extreme problem. Family planning is not needed in an ideal world, but as we already know, we are not living in an ideal world.


Let us rewind the tape a bit though. The reason for this post was a graph (which can be seen below) I did in a growth theory class where the aim was to compare GDP growth between two countries, China and India, one with a strict family planning policy and one without respectively. I had expected to see some kind of difference between the two but not such a distinct one that I found. The graph shows the difference (here measured in the natural logarithm of the standard deviance) between the two countries' GDP, GPD/capita and population between 1950-2009. As you can see the two countries follow each other, more or less, until 1979-1980 where there is a sharp break followed by a continuous increase in the standard deviance of both GDP and GDP/capita and a gradual decrease in population. As it turns out 1979 is the exact year when China implemented their one-child policy. But can this divergence be all because of a strict family planning system and can it happen so fast? Probably not, but something most certainly happened.

Well, if you take a look at China's fertility rate (in the graph below) over the years you can see that largest decrease in China's population growth happened ten years before the one-child policy but that the policy has lowered it further from almost 3/1000 to 1.7/1000. This is also pointed out by Hesketh who says that the voluntary and more campaign-like "late, long, few" (later childbearing, longer time between children and fewer children) was the reason that the fertility rate dropped from almost 6/1000 to 3/1000. She points out that the further decrease maybe would have happened without the one-child policy. As you can see India has had a perhaps more "natural" but still decreasing trend. This would indicate that the one-child policy did not have such a sudden effect on the fertility rate and that a much larger decrease had happened before and without any big change in differences between the two countries' GDP.

Even though the effectiveness can be questioned and perhaps voluntary methods would have had better and quicker results Hesketh also says that according to Chinese authorities the one-child policy has prevented 250 to 300 million births (!). The social cost of 250 million more citizens for a developing country may be hard to calculate, and for a person from a country like Sweden with a population of barely 10 million even hard to fathom.

According to Rosenzweig & Zhang the one-child policy has had only a modest effect on human capital in China contributing to schooling attainment by 4%, college attainment by 9% and grades by 1 %. It may not seem much but at least to me 9% more in college for a country of China's size sounds as a whole lot more college students right?

Another factor to take a look at is population growth. The graph below shows just that for China and India plus Germany and Sweden. As you can see this looks a lot like the fertility rate graph, but here the difference is even more clear. India has a population growth about 175% higher than China while China actually has had a lower growth than Sweden for a couple of years.

The problem China is facing today is rather a problem of an aging population just like Sweden and Germany and many european countries. Hesketh (2005) calls this problem the 4:2:1, meaning that a couple has to care for one child but four parents since they are the only child themselves.

So, how does this relate to the first graph and the huge difference that began showing in 1979-80? Well, apparently all the change cannot be attributed to the one-child policy, although having 250 million people less to feed and care for has to free up a lot of resources to raise the standard of living for the rest. The answer is probably that the one-child policy was part of a bigger reform program initiated at the same time after the cultural revolution and it is this reform to a kind-of-market economy that has produced the differences shown in the graph.

The question that follows is: Is China's model the best one for developing countries?

I do not know but perhaps it is time for the western world to stop believing that their way is the only one to go?
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Update 8/23/10, 08:37 am

I just now saw that The Economist had also published an article about the one-child policy. Why did they not ask us to do it?

The Greens and the allaince: A forced marriage

The speculations concerning the left-right belongings of miljöpartiet has been vast; not at least in election times where they have been, and still is, in a position where they hold the balance of power and a fortiori the final say on who is to govern the next four years.

In an article in Dagens nyheter not only Folkpartiet (FP) but also Moderaterna (M) opens up for a coalition that includes the greens. The position of the green party is somewhat different this time then earlier elections when talks about joining the right wing coalition has occured. This difference is the emergence of Sverigedemokraterna (SD) and the possibility of them entering the parliament. According to a recent poll SD have a relatively good chance of getting the 4% required to get seats in the parliament.

According to their own sayings none of the present parties occupying the parliament is willing to be in coalition with SD. These statements is most certainly honest ones as SD is another kind of party with more direct extreme right connections then the former populistic Ny Demokrati which was in coalition with the right wing block in the 1994 government. This means not only that their politics is somewhat far of from the other right wing parties, but aloso that the political climate in Sweden is such that a coalition with SD may be perceived as a major political risk for any party – hopefully.

The big question then is, will the green party be willing to join coalition with the right wing block? There are more or less two ways to answer this question - and none of them will of course be able to predict what will happen. First you can look at the politics of the green party. According to Björklund, the leader of FP, MP is a party that has the most affinity with the alliance of the right wing block; a part from their view on nuclear power that is. This is very true but maybe to a simplistic view of Björklund, underestimating the differences in other core areas such as the EMU and the much debated health insurance issues. Even setting these things aside the “free year” policy enacted by the green party was one of the first things abolished by the alliance as they formed government four years ago.

There are of course possibilities to build bridges between the greens and the alliance that isn’t overwhelmingly long. But even though the greens will be a relativily small party even after the election in September it will be in the size of other parties in the alliance. In this sense having the green party joining the alliance it will most certainly have a saying in many issues. Thus, having the greens in a coalition will not only mean letting one more party join in, but most certainly change the way the government will govern in the forthcoming four years.

How many demands the greens will be able to have in a hypothetical agreement with the alliance touches on the other way in which you can answer the question whether or not there will be a coalition of this type. If SD will have such a big impact on the outcome of the election that the green party is in a situation where they need to cooperate, they may relinquish some of the demands they might be able to pull up if they are in a more favourable position. On the other hand, the situation might become so difficult to handle that their will be a cooperation between the blocks locking SD out of action.

To sell a Waterfall

"Don't go chasing waterfalls, please stick to the rivers

and the lakes that you're used to

I know you're gonna have it your way or nothing at all" - TLC

The leader of Centerpartiet, Maud Olofsson said in an article in Dagens Nyheter on August 1 that she wants the government to sell a minority share of the partly state owned energy company Vattenfall. She wants to use the money, SEK 10 billion, to start a new state-owned high technology energy company called Framtidsenergi AB (Future Energy Ltd.) which would have one clear goal to; "together with the private sector invest in future energy solutions and new green jobs in Sweden" She points out that some important areas of investments would be "electric cars (see DJ:ing Economics' post below), the next generations biofuel, new super efficient energy technology, wave energy, intelligent electric grids and more efficient usage of energy in construction, housing and industries"

I have to say that this is a really great idea coming from Centerpartiet. Why is not this idea coming from Peter Eriksson or Maria Wetterstrand of the Green Party? Peter Eriksson did mention selling parts of Vattenfall earlier however.


Why is this such a great idea then?

Firstly, as I wrote in the post about electric cars I truly believe that future growth will depend on new highly technological and environmentally friendly inventions and solutions. Why? Because I believe this is what is going to be demanded more and more and the one being first to supply the demand will have a huge advantage over other countries.

Secondly, this is exactly the role that a government is supposed to take in my opinion. A government is supposed to help create a demand for this type of technology when the markets do not (the ghost of Keynes ones again) because of profits being to far away or because of risk aversion. The horizon for a government is and should be far greater then for a company and that is why it is the role of the government to support new inventions and solutions way before the market do so to help speed up the process.

Thirdly, this needs to happen now, not tomorrow.

This is why I think it is a good idea to sell a minority share in Vattenfall, because not only does government seem to do a pretty bad job as owners, but the influence that the Swedish government is able to have on Vattenfall's operations outside of Sweden seems very small, considering the company's investment in coal and gas energy in Germany for example.

At least we got good commercials in cinemas right?
http://www.youtube.com/watch?v=ZxrlXio4NRM


On a another note; Lars Ohly is of course against this as well. As he is so many other things. What is his problem? He claims that the current government is privatizing out of pure principle. Well he seems to not want to privatize anything just out principle as well. Principles you refuse to change are bad principles and only make you blind and inflexible. I do not really know which kind of world he wants to live in, but it does not seem to be a very modern one. I would rather see the red-green alliance without the Left Party and I suspect so would the Socialists and The Green Party as well, if it was possible.

A $6.3 billion question: Is the IMF or Anders Borg wrong?

On July 5th Anders Borg presented his revised (from the budget proposition in April) forecast for Swedish economic growth for the years 2010-2014. He presented it at Almedalen, the biggest political event of the year and with just about three months left until elections in September.

The new revised forecast states that "The recovery in the Swedish economy is becoming clearer with improved prospects for growth and a stronger labor market. This strengthens public finances and Sweden's ability to meet increasing economic concerns that comes with the uncertain fiscal situation in the world" (author's translation from http://regeringen.se/sb/d/13357/a/149354).

In the Table 1 below you can see that Borg revises GDP growth for 2010 up from 2,5 % to 3,3 % since the proposition in April. The changes in the forecast for the coming years are not as drastic. Unemployment rate however gets revised across the board. The new forecast predicts the unemployment to be on an average 0,5 % lower (than the April forecast) every year until 2014 where it will stay on 6 %, also notice that the GDP gap is predicted to be close to zero in 2014.

Table 1 (Yellow highlighting by the author) download here

Were this to be true this would all be very good news indeed, the economy does seem to be recovering and you are always inclined to accept good news easier than the bad.
 

However, on July 14th the IMF released their annual Staff Report for Sweden. Their predictions for 2010-2014 can be seen in Table 2 below. The interesting and maybe also disconcerting fact about it is that it, especially for the years 2010-2011 and for the unemployment forecasts, predicts drastically different numbers from that of minister Borg. The biggest different is the GDP forecast for 2011 and the forecast for the unemployment rate for the years 2010-2014. Instead of the 3.8 % growth for 2011 that Borg's new forecast predicts the IMF believes that GDP growth for 2011 will only be 1,9%, that is 1,9 percent lower! The predictions for the unemployment are also considerably gloomier than that of Borg. According to the IMF the unemployment in Sweden will not come down below 9 % this year and will stay well above 7 % until 2014. This is in stark contrast with Anders Borg's statement saying that: "The trend in the labor market is a sign of strength for the Swedish model and a development that needs to be protected" (author's translation from http://regeringen.se/sb/d/13357/a/149354). Anders Borg further claims that the stronger labor market will help to further improve the public finances and make them show a surplus in 2012. Well, you do not need to be very good at math to see that seems very unlikely if it turns out that the IMF are right and not Anders Borg.

IMF, 2010. Country Report 10/220

Now, certainly it is perfectly normal that different organizations and persons have different opinions about something as uncertain as future GDP growth. But a 1,9 % difference is too much to just be a coming from different ways of measuring. Either both the IMF and Anders Borg are mistaken or one of them is really wrong. 1,9 % may not sound like very much, but when you are talking about GDP 1.9% translates to enourmous amounts. A quick calculation gives a good idea of how much we are talking about. The CIA world factbook puts the estimated Swedish GDP for 2009 to 333,5 billion. 1,9 % x $333,5 bn = $6.3 bn. Multiplying that with the current SEK/$ gives you: 6.3 bn * 7.33 =  SEK 46 179 000 000. Now that is a lot of value that would not be created would the IMF's forecast come true!

The big question is of course who is right and who is wrong?

I cannot help to think about who has an election to win in September and who is part of a government whose most important political question is the "Job line" and who has lately been giving them self credit for the soundness of public finances?

I'm just sayin' now.

I owe U, U owe me, We owe the future

I stumbled over a new very pedagogic interactive graphic of world debt, divided on households, government, financial and non financial companies, from the Economist and saw that usdebtclock.org had been updated to include real time numbers on external and public debt for a couple of countries.

They can be found here:
usdebtclock.org 
World debt 


















Ones again it worth the while to point out the importance between the implications of external and internal debt (if you owe other countries money or if you owe your own citizens).

If you are not 100 % sure about these terms here are two good definitions and explanations from wikipedia:

External debt
Internal debt

Electric cars & sustainable growth

The much troubled carmaker GM's new electric car Opel Ampera (Chevrolet Volt in the US and Vauxhall Ampera in the UK) will probably be available somtimes in 2011. This is some of best news I have heard in a long while and apperantly this was one of the reasons that convinced the Obama administration to save the giant company last year. Good job.

I think that the transition from fuel driven vehicles to electric ones is one of the most important if not the most important change that has to happen for real sustainabe growth to be possible.

To begin with, the car industry is one that drives new technology and innovation. Secondly cars is one of the most important consumer good, one that drives economies worldwide both from a real economic aspect and as an indicator of the current economic situation, and since it seems virtually impossible to get something to replace the C in Y=C+I+G+NX a change in the car industry will change future growth, for better or for worse. Last but least a new orientation towards electric cars will mean a huge increase in energy demand and in that industry there exist two roads to take. One possible scenario is that this will mean a surge in cheap fossil fuel or nuclear based electricity or it will help push renewable energy forward. Well, the first scenario would probably add up to almost nothing, because if the electricity does not come from renewable sources electric cars will make little or no difference. The second scenario on the other hand would constitute a real revolution and it would do so by still letting people live their lives the way they want to. Cars mean freedom, and people value their freedom more than ever. The transistion from fuel driven to electric cars will mean that a lot new cars will be bought, a lot of new investments will be made and a lot of demand will be created. People will save to buy cars and governments will hopefully invest in new infrastructure and create incentives for people to make the change and also, countries will trade different models with each other just as they do today. Let us see, consumption, demand, saving, private and public investment and trade; this should equal Y. Growth. And it would be a consumption and a growth we all could live with and which in the best of worlds could spread to more parts of the economy.

I believe (a bit cynical, I know) that the best and most effective way to obtain sustainable growth is not to force people to change their way they live their lives but to make their way of living more sustainable. That should be the goal for technology and innovation. It may sound as a gamble but considering how negotiations in Copenhagen ended last year I think its pretty safe to say that people will not change until they are standing with both their feet on the precipice.

This means that a lot is depending on how governments will act to help people make this vital transistion. And let us just be clear. This, like everything else will always be an economic question and a question of making it easy for people. If people view it as something difficult and time consuming, nothing, or too little to have an impact, will happen.

It is election year in Sweden and I think it is pretty clear that there is one side who seems more commited to this transistion than the other. Still, I do not hear anyone talking about electric cars or the infrastructure needed. There is talk about trains, which is great, but cars affect almost everybody's everyday living in a much bigger way than trains do. If we really want change, we need to help people live better not make them. That never works. Like Keynes pointed out, governments should be there to create and help demand when there is none.

And yes, it is possible.






Pictures taken from: http://ampera.opel.info/photography.html

More info: www.opel-ampera.com

Images of debt

"Paint a perfect picture

Bring to life, a vision in one's mind

The beautiful ones

Always smash the picture

Always, every time" - Prince

The NY Times has published a couple of interesting article accompanied by some very illustrative graphics on Europe's debt situation. The first one is pentagram-looking map showing the PIIGS-countries web of debt and to whom they owe the most. You can see that Greece has a realtively small debt if you compare it to Italy and Spain. The shear size of Italy's and Spain's debt is almost difficult to grasp and when you consider that Italy owes France a sum equivalent to 20 % of french GDP you start to understand the danger of unstable economies with debts of these sizes.

Just imagine how much the U.S owes China.

The other disturbing thing which the map points out is that almost a third of Portugal's debt is owed to Spain, a very strong connection, which would make contagion alot worse if Portugal starts to experience something to similar to Greece. And if Spain's $1,1 trillion (!) starts to be questioned?

Source: Bill Marsh/NYTimes

The second graphic I recommend everybody to take a look at is this interactive debt map. It shows the development of national debt in the EU and also the EU-countries' relative size according to their GDP and finally the different interest rate spreads from Germany, where Sweden is the only one being able to borrow to the same cost as the germans. The most striking thing is that you clearly see that in 2000, before Greece was allowed to enter the Euro, it already had the same debt to GDP ratio it has today. Almost all the other countries held it under the limits set by the Growth and Stability Pact. The start to today's problems maybe?

Once again, the EU's lack of control and monitoring is really disconcerting.

Paul Krugman is right/wrong

"Whatever which way they go (right/wrong)
Whatever which way they go (right/wrong)
Whatever which way they go
They know they gonna owe
They soul to the road they choose
It don't matter if you win or loose
You still gotta pay them dues" -DMX

Greece certainly got to pay them dues.

I just read the article in El País that Paul Krugman wrote in the NY Times april 29th. In this article (which goes under the headline “The Euro Trap”) he is ones again bashing the “euro-mess”. Now, I am not saying that I know better than a Nobel Prize winner, I am just saying he is wrong. And when I say he is wrong I mean that he is wrong to keep blaming the euro as a currency for Europe’s current problems.

Krugman’s argument lies in that by entering the monetary, and by doing so giving up the monetary weapon of being able to adjust the exchange rate, the countries entered a trap. Well, by putting that way it sounds as if Krugman thinks countries was lured into entering the monetary union and then suddenly when crisis hit went like “Oh god, we can’t devalue our currency?!”.

To me the problem does not lie in having a common currency and giving up the ability to adjust the exchange rate. The problem is rather that the countries now being questioned by the markets, the best example of course being Greece, but also Portugal, Spain and in a lesser extent Ireland and Italy have not behaved according to what you could expect and the EU has not monitored sufficiently the development of its member countries.
   

Let us be honest, this would not have happened had Greece not lied and covered up their real deficit. Greece would not even have been allowed to enter the euro had their real statistics been known. The EU did the stupid thing to be ingenuous enough not to let Eurostat do a back up check on Greece’s statistics. In the best of worlds you would be able to trust Greece, but we all know this is not the best of worlds.

And now there are riots in Greece and their unions are protesting against the conditions that EU and the IMF has put on the 110 billion euros they are making available? Please, if you have a corrupt system that tinkers with official national accounts, you let people retire at 63 and give them very generous pensions (with borrowed money), you enter the Euro and take advantage of the good terms in the bond market it gives you and then you do nothing to reform your economy, to battle corruption or to raise productivity and then you are surprised that when the markets discover this they do NOT want to keep lending to you?
    

Equally surprising is that Spain seems surprised that their construction boom did not last and that basing almost all your growth on cheap and un qualified labor will lead to a fall in productivity.

I have a hard time seeing that this is happening because the Euro is a trap. It is happening because of european governments being populist and not making the decisions and chages that their respective countries really needs. The monetary union is not a federal state, it does not share a common fiscal system and I think that, although that is what you keep hearing the euro needs these days, it never will. The member states are too different and a common fiscal system would not be able to be that common anyway.

What the euro needs is more control and monitoring and governments willing to swallow their pride and do the hard work.
   

Will the euro last? Yes. Or to sound more like an economist; it depends (on the above).

Time keeps ticking

"Refuse to give up, your mistakes don't define you

They don't dictate where you're heading, they remind you

That time keeps ticking"

I think T.I. was talking more about personal growth than GDP growth, but you will soon see the importance of the last sentence "Time keeps ticking" for GDP.

Take for example two countries such as Sweden and Spain. In 1950 Sweden had a GDP/capita of $11316 and Spain's GDP/capita was $4012. That's a relation of 4012/11316 = 0,35, in other words, Spain's GDP back in 1950 was only 35 % of Sweden's. Now let us look at the GDP in 2009 of both countries. Sweden's GDP is $39488 and Spain's is $34769, that gives us a relation of 34769/39488 = 0,88 = 88%. From being 1/3 the size of Sweden's economy Spain's GDP is now 9/10 of Sweden's.

The interesting thing is what is behind this development. Let us look at the growth of GDP for both countries during this period. Using this equation and solving for g or by using the rate function of an excel spreadsheet this gives you a anual growth of 2,14% for Sweden and 3,73% for Spain between 1950 and 2009. Comparing the two economies' GDP in 1950 with 2009 shows that 1,5% more growth makes Spain's economy almost nine times larger in 50 year when 1,5% less growth makes Sweden's economy only about three times larger. That is the power of the time that keeps ticking.

I'm going to take advantage of some work from my Growth Theory class here and first show some very interesting but sad facts and then some equally interesting but a bit more positive facts.

First. Let us look at this graph that shows how world GDP/capita has converged over time the last 50 years.

This graph shows that during the last 50 years the GDP/capita for Western Europe, North America and Oceania has indeed converged, that is the standard deviance between these countries' GDP has become smaller. The graph also shows however that GPD/capita, if we count all countries, has not converged but rather, the standard deviance, which is the measure used here, has become larger with time. This sadly means that measured in GDP/capita the world is a more inequal place today than 60 years ago and that it has  gotten a lot worse in only the last 30 years.

Now the positive facts. If you look closer at the graph you can see that the standard deviance has become smaller in last couple of years, let us hope that is just not something tendency but that it will keep on falling.

If, by using the same formula as above, you compare World GDP/capita growth the between 1950-2009 with growth the last ten years, between 1999-2009, you can see that between 1950-2009 it was 1,59% and that in the last ten years it has been 2,37%. Add to that the fact that most rich countries has had slower average growth the last ten years than they had the last 60 years this must mean that there are other economies growing more than before.

This second graph shows GDP/capita growth of some countries the last ten years and there you can see that fortunately growth is now occuring in other places than the rich part of the world. You can also  see, a bit surprisingly, that some of the VISTA-countries have not had very high growth in the last ten years.

 

Hopefully this will mean that the blue line in the first graph will take a dive towards the red on in the coming decades.

Although. Keep in mind that even if Angola in future can keep the same incredible growth as the last ten years it would still take them more than 20 years to reach the same GDP/capita as Sweden has today!

Source: Groeningen Growth and Development Centre, The Conference Board: Total Economy Database

DJ:ing Economics' VISTA-series

”I know that we have to take it to the goal 'cause everyone's depending on we
See we ain't got nowhere to go but up, it's our destiny”

The financial crisis started in the USA, a country considered to be world’s most developed economy. We got pulled out of the crisis partly by China, a country with a dubious leadership, limited freedom of speech and a weak democracy. China’s economic growth on the other hand barely slowed down and instead it is getting closer to something looking like overheating. The chinese stimulus package was huge, but very efficient and in contrast to the western world where it is questionable how many bridges you really need to build just to keep the economy going, China is still in great need of infrastructure, which means that the stimulus package will give great ROI and a more efficient economy in the future and lead to even more growth.

So, where am I going with this and what does it has to do with the title of the post. Well, in the footsteps of China and the other BRIC-countries (Brazil, Russia and India) several other economies are on the rise, all with great growth potential. These economies are often named the VISTA-countries. VISTA is an acronym for Vietnam, Indonesia, South Africa, Turkey and Argentina. They are economies with all the natural requirements you need to be a rich and developed country, for example an abundance of relatively cheap labor and plenty of natural resources, but where corruption and decades of politic and economic instability has hampered their development. With the situation now getting better, so is their economic growth.

That is why DJ:ing Economics will begin a series with posts about the five VISTA-countries, their possibilities, pros and cons and their macroeconomic and political situation. We are going to follow the order of acronym, which means that the first post will be about Vietnam.

The comparison with the US and China is to show that you should never underestimate nor overestimate any country and to me it is clear that the VISTA-countries so far are underestimated, something we soon may have to reconsider.



So, don’t sleep on these countries.



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The VISTA countries also offers great investments oportunities for those who are interested. If you look at the development of the BRIC-countries in the last years you get an idea of the enormous potential of the VISTA-countries. You can read an interesting article by Claes Hemberg about investing in the VISTA-countries here.

An assessment of a 7-year old speech. Part 1

Like Ma$e in 1999 we Double Up!
This post is divided in two parts.

”The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

These are the words of Ben Bernanke from a speech he gave before the National Economists Club, Washington, D.C. November 21, 2002, long before he was elected Chairman of the Federal Reserve. What he did not know back then was that only six years later he would find himself and the world thrown into the worst economic crisis since WWII and that he would indeed keep the presses running. Recently the Fed decided to continue its QE-program and to expand it. That means another $ 1.4 trillion from the presses!

What is interesting is that Bernanke in his speech presented a theoretical base for how the Fed would be able to stimulate the economy with interest rates at zero and that today interest rates in the U.S. and many other countries are precisely zero or near zero.

To see the relevance of this today and to see why it can be interesting to look closer at what Bernanke said in his speech let us take a closer look at what deflation and its effects really are. To use Bernanke's own words from 2002:

"Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers…/…/the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending--namely, recession, rising unemployment, and financial stress."

So, a sharp decline in demand which leads to deflation which then leads to recession, rising unemployment and financial troubles. Sounds familiar anyone?

Surely, the present crisis did not start because of deflation that was caused by a decline in aggregate demand, it happened because of bad loans in the financial sector. These loans have however led to a colapse in worldwide demand and that has in turn led to inflation turning negative in many parts of the world including Sweden, where inflation was -0,7 % in november, in other words; deflation. It has also led to rising unemployment, the worst recession since the WWII and global financial markets in crisis and interest rates close to or at zero. Although these current low interest rates are not a result of deflation but rather conscious decisions by central banks, they have however put many central banks including the Fed in the situation that Bernanke was discussing in his speech 2002, leaving them without their traditional weapon to stimulate the economy.

(This post is continued in the post below)

An assessment of a 7-year old speech. Part 2

(Continued from the post above)

So, let us look at what Bernanke in 2002 said could be done in a situation as the one we have today when interest rates are at zero and then look at what has been done until today during the crisis.
(Worth considering is that deflation during current condtitions is rather something positive, since it cushions the otherwise inflationary measures that goverments and central banks has been taking. That is however a subject for another post.)

• "To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities."

Yes. Done. The Fed has expanded its purchases and the type of assests through its QE-program and continue doing so (see the $ 1,4 trillion above). It has cooperated with fiscal authorities in the T.A.R.P-program and banks has been able to borrow from the Fed at essentially no cost.

• "One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities…/…/…One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period."

Yes. Done. The promises by the Fed and other central banks to keep the interests rates low for a long period of time has been vital to keep the economy going and perhaps the most debated subject today is when they will begin to rise again.

• "A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields." 
  

Yes. Done. First the Fed announced that it would buy long term debt which brought down interests rates and then began to buy them to keep them down. It does however not seem to have helped. Right now 10-year or longer treasury bonds all have rates above 3 %. Maybe all the billions have not been unlimited enough to calm the markets.
 

• ".../…/…the Fed has the authority to buy foreign government debt, as well as domestic government debt"

No. Has not been done and will probably not happen. Probably because the Fed does not want to intervene in the foreign exchange markets.

So to end this post, Bernanke has done almost everything he talked about seven years ago, something I do not think you can say that about alot of people in the politic or economic realm. What is more interesting is seeing that theories can work in the real world as well. Although it is too early to say anything about the final result, most people seem to agree that the actions taken by the Fed and other central banks has helped avoiding the recession getting alot worse.

Bernanke himself back in 2002 also expressed the uncertainty surrounding the measures he then only discussed.

"I should emphasize that my comments on this topic are necessarily speculative, as the modern Federal Reserve has never faced this situation nor has it pre-committed itself formally to any specific course of action should deflation arise…/…/…One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies."

More Money More Problems/More Problems More Money

"B.I.G said it first More Money More Problems,
the way I see it; More Problems More Money"

Below: The US debt clock in NY, September 15, 2009

If the above statement is true or not something that is worth discussing. Most agree, however, that too much debt leads to major problems.

To qoute Göran Persson: "He who is in debt is not free" (Den som är satt i skuld är icke fri)

I found this very interesting website www.usdebtclock.org, where you can follow the U.S. debt in real time. It also contains information on other important economic factors, for example GDP composition, tax revenues, defense spending, unemployment, oil imports, the budget deficit and how much money the government has spent on stimulus and bailouts.

The numbers are enormous, but it if you take minute to look them over is is easy to get a grip of how things are connected and very easy to see that revenues do not cover expenses.

What surprises you is the speed at which all numbers constantly increase. While I was writing this short post for example (about 20 minutes), spending on defense (including the wars in Iraq and Afghanistan) increased with about $ 15 000 000 (!!!) I guess More Problems does mean More Money after all.

Now, where is the swedish debt clock? It would be really interesting to see something similar for the swedish economy.

You can find the swedish debt on www.riksgalden.se, and a UK debt clock can be found at www.debtbombshell.com

Australia: www.debtclock.com.au
Germany: www.steuerzahler.de/

Let the dollar circulate

"Unemployment on the rise, rent being paid late,
please, let the dollar circulate"

No, Young Jeezy is not qouting Keynes. He is however saying the same things many economists are.


In The Economist from November 5th there is a very interesting article from their Buttonwood column that covers the financial markets. It also ties in with my previous remarks on the crisis. In addition, the author behind the column writes interesting, smaller posts in her/his blog.

There the author writes repeatedly that governments may have saved the financial markets but they have done a worse job with the real economy. Stimulus packages and the takeover of banks probably rescued the financial markets, but it has not got the engine of our economy, consumption and investment, going again. What looks like a recovery by many companies is the result of downsizing, cost reduction and higher efficiency, not increased sales. The latest round of quarterly reports in Sweden looked better than expected, but there may be a good idea to see what lies behind the results. There is a limit to how much you can cut costs and pressure your workers. Sooner or later the turnover has to increase, otherwise we will see increased losses again.

In the previous post I wrote that people do not consume more despite the stimulus package and lower interest rates. The multiplier effect that governments and central banks are looking for has largely been absent. Some people told me that retail sales in Sweden have been persistent. So may be, but Sweden is a very export-dependent country, and exports fell by 17.2% in September compared to 2008 and the trade surplus was 44.4% (!) lower than September 2008.

Does this mean that the propensity to consume (c1) has fallen in John Maynard Keynes demand function C = c1 + c0(Y-T)? I think so. If that is the case it means that incentives to increase income (Y) or tax relieves to reduce T do not have the desired effect. The Economist writes that many believe this is due to people’s fear for future budget deficits that sooner or later must lead to higher taxes in the future (exactly what is happening in Spain right now). This phenomenon is also called Ricardian equivalence. John Maynard Keynes believed that higher public spending was the way out of a crisis when there was no normal demand. Ricardian equivalence contradicts this and says that the more increased public spending affects state finances, the less effect it will have. This might be interesting to keep in mind when you look at the U.S. TARP of 700 billion since they also have a national debt of 12 trillion dollars.

For Ricardian equivalence to be valid though, it requires that people are rational and have all the information needed. So are people rational? I discussed my previous post with a friend during dinner last week. My friend’s response to what I wrote concerning everybody not being affected by the crisis was:
"But, everybody knows that!"

I would say: No, everybody does not. Some are not informed, and some do not care and simply relies on what is said by politicians and the media. If people are not quite as rational as many theories imply, Ricardian equivalence does not apply in the same way, i.e. its impact on the economy is not the same. For those responsible for the public finances it does however, of course, hold. Either they raise taxes now to pay for spending today, or they borrow to pay for spending today and raise taxes later to pay off the debt. The question is how does this affect consumption today? Since people are irrational a tax increase today has greater negative effect on consumption than to raise debt, which does mean higher costs for future generations. A large cost today simply feels worse than an even larger cost in the future.

That is unfortunately how we are. For even if we feel solidarity with our next generations, it seems like the solidarity usually ends at the grandchildren. It is perhaps not surprising that we do not feel as much solidarity with family members that we will never see in life than those who are close to us. I do think however, it is one of humanity's biggest problems. It makes it extremely difficult for all policies and measures that could improve the lives of all people in the future but which currently affect us negatively, to get approved. Politicians who have such ambitions cannot exercise them because they know that they will not be either elected or re-elected. Projects with enormous potential in the future do not get funding. Companies will not invest in products, which can make a huge difference for the world if it does not pay back tomorrow.

Back to the Ricardian equivalence. There must be however a limit to how much a state can get into debt before the people start to react the same way as to a sharp tax increase. The Economist writes that this may depend on the size of the ratio of debt to GDP. I think this sounds very logical. Even a person without the slightest interest in economics will understand that 12 trillion dollar is an extremely large sum that someone (the people) at some point have to start paying back.

So, is Keynes correct that increased public spending is the best option even if it increases the debt burden in the future? Since people are not rational, it seems that way, especially in times of crisis. People believe that the state is helping them and do not think about the fact that it is actually themselves or probably their children or grandchildren who are footing the bill later. There must however be a limit on how big to the debt can become before people start seeing it as a threat. The mountains of debt that some countries have accumulated are likely to be a problem in the future. The U.S. and UK also fund some parts of the debt by QE. They therefore increase the debt by simply printing new money and buying treasury bills, at the same time also keeping interest rates low. Countries with large government debt tend otherwise to be punished with high interest rates. The question is, what will happen to these countries after the crisis is over, that is, when the real economy starts to recover?

A milli, a milli, a milli, a milli

"A million here, a million there"

Maybe Lil' Wayne was predicting the future in June 2008 three months before Lehman Brothers filed for bankruptcy? Probably not. But at least it would have been another way of looking at the crisis.

We live in times of crisis, the worst crisis since the Great Depression in the 30's. It is this information we have become accustomed to during the last twelve months. The information has often come from the media, but it has also been the contents of a wide array of statements from all of chairmen of central banks and chairmen of various institutions to prime ministers and presidents. Lately though, it seems like the wind has turned, and then turned again. Not so long ago it seemed like the crisis was over but in the very recent past, it seems that the risk exists that the crisis will be protracted. Even Reinfeldt had some good points about the risk of a protracted crisis recently in his speech at the opening of the European Developement Days in Stockholm.

What may be worth considering is that even though the world may be in a Depression-like crisis, such statements can be made considerably more nuanced. Everybody is not living through a crisis and many still have a long way to go before they get out of it.

In some parts of the world, people always live in a "recession". It's really that which is and always has been our world's real problem. It's easy to find the current situation a bit ironic when it is only when the prosperous part of the world are losing huge sums of capital that forces are joined, politically and economically, to fight for a common cause. Unfortunately, this is an entirely different discussion.

However, there are those, including this myself, who fortunately still has never experienced a recession. There are even those who gain from it. Those with investments in the Swedish stock market has seen its assets grow by up to 50% since March, may well be that many of them also saw assets decline by much more than that, if they did not, for once, do right selling in panic after Lehman Brothers was allowed to go bankrupt in September 2008. Althogh with today's interest rates dividend yield on a stock is still significantly higher than the interest on a bank account, so perhaps it is not surprising that the stock market has rocketed without any fundamental change?

In the real economy however, things look different. Unemployment in the United States is the highest in 26 years and here, where I currently find myself, in Spain, 80 367 persons lost their job in September and it does not seem like October will offer any happier statistics. An unemployment rate of over 20% is no longer an unthinkable scenario. Adding to this there is a large deficit in the public finances which has now forced the decision on tax increases in the midst of the crisis.

As I mentioned earlier are, however, the point is that not too long ago we learned that the crisis was over. It was reported that key indicators pointed in the right direction, which was immediately interpreted as the end of the crisis. The problem is that the economy right now is on steroids so it would be rather strange if the economy did not show signs of some form of recovery. All the billions of various currencies that have been pumped into the economies in terms of stimulus and support packages and the QE (quantative easing) that the U.S. and Britain have been engaged in, ought to have some sort of effect on the financial system and perhaps it is just that which we have seen recently. QE is very briefly a way for a central bank to stimulate the economy with interest rates near or at zero. This is done through the purchase of securities with short maturity, for example, domestic debt and corporate bonds. These are paid for by the central bank by simply creating money from nothing. In this way the central bank increases the monetary base (M0) and through the money multiplier wishes to increase the amount of money in the economy. The idea is that the banks, thereby will increase its lending business and companies in turn their investments. However, this requires that banks and businesses use the money for lending and investment and do not keep them as security. The effect is otherwise very small and the risk is that there is too much money in the economy if conditions get better, which can lead to high inflation. Britain went right into its sixth quarter of declining GDP, so the question is if that is not exactly what is happening and how much effect QE really have right now and for how long it can continue.

I believe a lot depends on the expectations that exist about the economy. World leaders have perhaps unwillingly been contraproductive by using all these doomsday prophesies since the beginning of the crisis. The extremely low federal funds rate, highly concessional loans to banks and QE are all intended to stimulate the economy, which it has also done to a certain extent. What however, has not happened, and that is the big problem, is that it has not stimulated any real demand from businesses and individuals in the way that would usually be the case. For although people now have much lower interest costs and maybe even borrow more, (it may seem bizarre, but with today's interest rates many people probably have too few or small loans) they do not consume more. Business investment has in turn almost completely stalled. It is here the doomsday prophesies come into play and here I would like to support what I said earlier that not all are in a recession and a bit more nuanced statements are needed. The people who actually has gotten better off during the crisis do not spend their money, which is what normally tends to happen. It is precisely this which would be best for the economy, if all of us who are not affected by the crisis just continued as usual, and maybe even took the opportunity to exploit that we actually have gotten better off. Then why don't we? Why are the purchases of cars, white goods and other similar goods postponed? I believe that ordinary people's expectations have been strongly influenced by all these doomsday sermons during the financial crisis. A decade of continuous growth and low inflation has led to a very great confidence in central banks and therefore we believe them even when they say that the world as we know it, is collapsing. As many probably know, it is precisely people's expectations which largely govern today's global economy. Negative expectations may force a devaluation, make interest rates shoot through the roof and lead to uncontrolled inflation. Positive expectations on the other hand can lead to increased consumption, increased investment and increased lending. The last one ironically being precisely what caused the crisis.

The central banks of course know this. Perhaps therefore they hope that we will believe Ben Bernanke when he says that the crisis is over and begin to consume as before? Otherwise, there may be a risk that the crisis will be long and drawn out? It is possible that the financial crisis is over and that the financial system is saved. Although, I doubt strongly that the crisis in the real economy is over.

This however, is not to say that everyone is in a crisis. Australia, for example, has already raised its interest rates again, and they were never particularly low. Again, everybody is not in a crisis and with a bit more nuanced and flexible statements from the people who actually enjoys great trust, perhaps all these measures in the economy would have a greater impact and those actually affected by the crisis could recover faster.