Tuesday, 31 August 2010

ECB, inflation, debasement, or...

I have just read a very interesting article from the ECB, which I recommend to read. It somehow clarifies the strategy foreseen by the ECB to get out the current crisis. Inflation and rolling debt is not an option - reassuring. I have highlighted below interesting parts and also made some references to the Finnish Economy through the usual charts.

"Household indebtedness rose substantially – in some cases, doubling relative to the 1980s – reaching historically unprecedented levels and exceeding 100% of disposable income in many advanced economies. Increased indebtedness meant that households were increasingly stretched to cover their commitments and therefore less resilient to adverse shocks."
"Leverage also increased for non-financial corporations leading to an overall expansion of balance sheets and a change in their structure. As a result, debt-to-GDP ratios for non-financial corporations in the euro area and the US increased in the past ten years from roughly 65% to 75-80%."
"The crisis suddenly brought to a halt the progressive accumulation of private debt. Partly as a result of large-scale stimulus measures, but also reflecting the impact of the automatic stabilizers and, to a more limited extent, the cost of supporting the financial system and the implicit liabilities of guarantees to the banking sector, leverage has started increasing in the public sector."

"The key challenge for stability and growth over the coming decade is to ensure a progressive reduction in the debt overhang and strengthening of the balance sheets of banks, households, firms, governments and central banks."

B- Options for reducing the debt overhang

1. Inflation? Nope
2. Living with the debt? Nope
3. Growing out of the debt? Yep

1. Why not Inflation?

"A recurrent suggestion for solving a debt overhang is the creation of surprise inflation. Again, let me clearly dismiss this type of action. The history of the debasement of money through hyperinflation has been disastrous everywhere.

Even before reaching extremely high levels, surprise inflation produces an arbitrary redistribution of wealth and creates a burden for the unprepared, especially the weakest."
2. Why not living with the debt?

"What about the option of “living with the debt”? Some have suggested to ignore existing financial imbalances “for the time being” and focus only on the short term. Rather than pressing on with the deleveraging process, more spending could be encouraged to sustain growth in the short term."

"I believe that adopting this view would be very dangerous for our economies. There is a very clear example of the consequences of choosing to live with the debt: Japan in the 1990s. The “lost decade” in that country was the result of allowing the banking system to remain fragile over many years. "

Please have a look also to FinnVera, a framework to support "Zombie" company

"So the option of ‘living with the debt’ indefinitely is not a solution to the challenges currently facing policy-makers, nor is it a means to ensure sustainable economic recovery. We must focus on policies to address the debt overhang.

3. Growing out of debt

The most appealing solution to the debt overhang is clearly to achieve strong economic growth. Strong growth produces higher income and wealth, thus increasing the net worth of households and firms and reducing their leverage.

... Robust economic growth also boosts government revenues and reduces expenditure, especially when large automatic stabilizers are in place, thus leading to a rapid reduction of the government debt-to-GDP ratio."

Monday, 30 August 2010

Nordea: Ooops I did it Again

"Nordea predicted that economic growth this year would reach 3.5 percent. Despite forecasting a drop to 2.7 per cent growth for next year, the bank expects growth to return to previous rates in 2012."
"In the land of the blind, the one-eyed man is king." ... or in (Fin)land of this kind, Nordea is blind as Astyanax fasciatus mexicanus.

When the GDP fall by somewhat 8% the previous year, and trumpet a 3.5% growth for this year, I think we are not any more dealing with economist but instead mathematician clowns or fools. It is also worth noting, that their timing is always at the perfect moment for making disastrous investment.

- that was a short breaking news - more to come... not on Nordea - just ignore them :-) - but instead on the ECB vision...

Thursday, 19 August 2010

1990, 2010 - It's Different This Time...

It amazing the euphoria that is currently being embedded by the media and the politics in Finland. I am pretty sure, had I live 1990, the same atmosphere would have been in the air. The media, politicians and bankers slowly but surely closing a trap on the one having mostly a "naive" view of the current situation.

Of course, the peak of optimism could go higher, time where you could see people tatooing themselves Katainen or Tarja Halonen face on their arm or belly. Housing or "Home sweet home" (in japanese character) tattoed in the euphoric fashionable hair free skull.

So Euphoria, somehow, can be measured by the consumer confidence chart as shown below:

This government has been excelling in the art of deceiving as it was demonstrated by this blog (post in late 2007-08)that post-crisis in 2008 where they were anouncing miraculous growth that failed to materialize instead we had an historic slump.

This time is not different and they reiterate that by providing misleading guidance such as :

The government estimated gross domestic product to grow by almost 3 per cent next year, while the inflation level was expected to be at 2.5 per cent.
The market has a different view on where inflation will be in year time:

Let's look at some other facts.

The monk
and me
Once I was told by an old chinese monk, while meditating in a small montain in the himalayas, that "trees do not grow to the sky". I asked, immediately, can the politicians managed this achievement ("master")? He told me close your eyes and what do you see? I told him UPM, YLE, YIT and Corrupt politicians achieveing the un-achievable - making believe or feel in a sublimal way that trees can go very high - maybe to the clouds.

Almost desperate, the monk pointed toward a frog, and told me give it a kiss... I asked where? well, I so did. he asked me "so what had happened". I told him "nothing". Well you see "one may think that a frog can change itself into a charming prince (or principessa), the reality is that the force of nature will always win- the equilibrum is essential - the yin and the yang of the universe. what goes up go down"- I was highlighted ...and cold too on the top of the smallest mountain, on top of the himalayas.

The Keynesian failure

So, subsidies are still applying to housing even after multiple warnings (since 2004) from the OECD economical review studies. The government has set, ill designed and ill targeted measures toward housing where some will expire at the end of the year or pretty soon. This was engineered to put a break to the unemployment growth, however this has put more oil onthe fire. With unlimited government guaranty to banks, and with the combination of low interest rates associated with world wide fiscal and monetary stimulus which have artificially boosted export, it has given the sensation of a sustainable recovery- glorifying moral hazard as the way to go.

The Overheating

That is the thing that was missing in 2008 to make the bubble burst. As highlighted above, thanks to the government programs, fiscal and monetary stimulus they succeeded. They created the missing impulse that is necessary to create the conditions for a housing "fast" collapse.

From a construction perspective, we are in unchartered territory in term of new housing construction, this has just bursted - like a politician coming out of the bushes - in a very un-surprising manner. This construction burst was most probably concentrated in the uusima (capital) region :

Household debt are at record synchronizing with multigenerational housing price high. I wish not deflation but god if it happens that is going to be historic and i am not sure of the subsequent consequence. Politicians will all long live the boat, maybe migrate to the second best place, switzerland? (damn they miss the podium for 0.03 point, almost a rounding error.)

... and the last thing, a snow crystal ball based prediction then I stop here before I scare some readers...

Your servant,