David PeónWeb Personal

Inspired by a question retweeted by Mark Thoma, I use ECB data to compare Government debt vs. Social Expenditures from 1995 to 2012, for 26 countries of EU-27 (Malta excluded due to lack of data).

 

First, average debt vs. average social expenditures yields

 

 

which would suggest a positive but no statistically significant (R2=0.3) relationship between debt and social expenditures.

 

Second, if we compare now average social expenditures and growth in national debt since 2007 we would have

 

 

which now would suggest a negative relationship (those countries with the lowest social expenditures would have seen their national debts grow faster) but again the relationship would not be statistically significant.

 

Finally, I remove the outliers in both analyses (high debt countries Belgium Italy and Greece in the first analysis, highest increase in debt by Ireland and Latvia in the second) to get

 

 

and

 

 

which in both cases would suggest an even lower statistical significance.

 

This is how American Government spends their monies. Of course they are worried about deficits... No comments.

 

 

(Source: Larry Summers - Reuters data)

 

 

Academics and economic authorities are all shooked up by recent news from Japan: Shinzo Abe's new administration forces Bank of Japan (bye-bye, central bank independence!) to implement 'the-mother-of-all-quantitative-easing-programs': a 2% inflation target within two years time to escape from 2 decades of deflation, by:

 

• 1.- doubling the monetary base ("money market operations so that the monetary base will increase at an annual pace of about 60-70 trillion yen; Under this guideline, the monetary base -- whose amount outstanding was 138 trillion yen at end-2012 -- is expected to reach 200 trillion yen at end-2013 and 270 trillion yen at end-2014")
• 2.- increasing Japan Government Bond (JGB) purchases increasing the Bank of Japan amount outstanding at an annual pace of about 50 trillion yen, in order to further decline interest rates across the yield curve...
• 3.- ...and along the yield curve, since BoJ may buy JGBs with maturities up to 40-year bonds, with the average maturity of the Bank's JGB purchases being extended from slightly less than three years at present to about seven years

 

 

One way to see how this new strategy has shaken the foundations of Economics and political institutions is to read the (jolly) reactions by Krugman, Stiglitz, Smith and many others. Another way to see it is to understand how this strategy definitely changes the main instrument used by central banks to control the economy from interest rates to the monetary base. This is basically what defenders-of-the-liquidity-trap discurse in particular (and Keynesians, generally speaking) have been demanding from authorities to do, as we've seen last week: 'the price is wrong' because we cannot have negative interest rates, so forget fears of inflation when our problem is economic depression and deflation, expand the monetary base dramatically and help reducing interest rates all along the yield curve through market intervention.

 

With the European Central Bank and the neocons in the UE strongly against a push for reflation and an aggressive program of bond purchases, particularly in assistance of peripheral countries (here an excelent review by Simon Wren-Lewis on 'what does the ECB think is doing?'), the years to come may witness a new Cold War Economics in two instances:

 

• First, it may introduce a new currency war between the 3 currency areas (euro, dolar and yen, to be added to the old currency war with China). Will European authorities still claim a 'strong euro' is the desirable outcome? If so, we will make our friends in US, China and Japan very happy to be the currency area that 'faces the music'.
• Second, ideologically, Abenomics means on one hand "the end of Central Banking independence" and on the other it represents the largest experiment of market interventionism-keynesianism-whatever-you-may-call-it in decades.

 

 

For now it seems to be working: Japan is getting access to lower costs of financing.

 

Source: www.bloomberg.com

 

In any case it is deffinitely shocking to see Spanish liberal Prime Minister Mariano Rajoy claiming to be on the interventionist side. I bet this is a unpleasant demand in Ms. Thatcher's memory to ask for...

 

 

Probably, for years to come, macroeconomists will be talking about this 'war'. We'll see who 'wins'.

You should read this. Sad, really sad.

 

Fiscal policy in Europe: Searching for the right balance

 

Well, actually, it isn't sad. We should need to take seriously these guys from the European Commission to say it is sad but, you know what? They don't fool us any more.

 

Krugman has something to tell them, too: "it’s quite a spectacle to see officials patting themselves on the back over an economic strategy that, let’s not forget, has tipped Europe back into recession, and keeps pushing overall euro area unemployment to new highs." I can only read one sentence that could be interpreted as 'something is changing in the minds of these guys': "For vulnerable countries of the Eurozone that face a large external sustainability gap, external growth is the only sustainable way to grow out of their debts. The improved current balances in the periphery thus have to be matched by rebalancing trends also in Eurozone countries that feature large current account surpluses. Policies and reforms supporting demand in these countries have a role to play. Since fiscal consolidation-cum-deflation is likely to be self-defeating, re-establishing competitiveness across the area implies higher than average inflation in stronger countries, provided price stability in the Eurozone and inflation expectations remain well anchored."

 

This is exactly what many economists (for instance, me: Peon & Rey, 2013) recommend. And this would be good (the only, but good) news if it weren't for this they say just below: "In Germany, the fiscal stance is now broadly neutral, hence consistent with the call for a differentiated fiscal stance according to the budgetary space." Oh dear, this is what they call boosting demand?? Now I know what their 'delicate balance' self-justifying piece means: just rhetoric.