EU finance ministers have reached a deal on how future bank rescues will be handled. The operative term is now "bail-in" rather than bailout: creditors and shareholders get hit first, and then depositors with holdings of more than the insured limit of 100,000 euros. That's right -- the recent rescue deal for Cyprus, which was absolutely positively not going to be a template for other countries, is turning out to be exactly that.
It can't be long before other countries adopt similar policies. Canada, for example, included provisions for a bail-in arrangement in its budget earlier this year, though details supposedly remain to be negotiated.
As I've written before, I don't have a big problem with this. The logic of setting limits on depositor protection insurance is surely that amounts above the insured limit are at risk in the event of a bank running into trouble. However, it was very clear at the time of the Cyprus deal that a lot of people were, or at least affected to be, unaware that holding deposits in a bank made them creditors. As and when the EU deal moves toward implementation -- which could take a very long time, as national governments now have to negotiate with the European Parliament -- expect a rising level of public indignation.
Thursday, 27 June 2013
Wednesday, 26 June 2013
Proving a point
A couple of posts ago ("Central bank-speak, north and south", June 20) I wrote: If markets sell off when the central bank forecasts higher economic activity, it's reasonable to infer that the gains posted by the US equity market in the first half of 2013 have been driven not by investor perceptions of underlying economic strength, but by the tsunami of cheap money that the Fed and other central banks have seen fit to unleash.
Well, this morning it was revealed that the US economy grew more slowly than previously thought in the first quarter of the year. Not good news, you'd think -- unless you're an equity investor, that is. Stocks on the big board jumped almost 1% at the open in New York, as investors interpreted the data as an indication that the Fed might not be able to ease up on its QE program as quickly as some had feared.
It's going to be interesting indeed to see whether Ben Bernanke and his pals at the Fed hold their nerve if the evidence continues to suggest that most of the "strength" in equity markets is a direct result of money printing.
Well, this morning it was revealed that the US economy grew more slowly than previously thought in the first quarter of the year. Not good news, you'd think -- unless you're an equity investor, that is. Stocks on the big board jumped almost 1% at the open in New York, as investors interpreted the data as an indication that the Fed might not be able to ease up on its QE program as quickly as some had feared.
It's going to be interesting indeed to see whether Ben Bernanke and his pals at the Fed hold their nerve if the evidence continues to suggest that most of the "strength" in equity markets is a direct result of money printing.
Tuesday, 25 June 2013
Floods of misinformation
The floodwaters are still high in southern Alberta, and the power is still out in half of downtown Calgary, Canada's fourth most-populous city. Still, it's apparently not too soon to start the entirely pointless game of estimating how much the disaster will affect Canada's economy. This is the inverse of trying to estimate how much events like the Royal Jubilee or the London Olympics would affect UK GDP last year. Because almost all economic activity can be shifted in time or place, it's virtually an impossible exercise. It's one of those things that economists opine on because they're asked, rather than because they know the answer.
According to this story in the Toronto Star, economists at Bank of Montreal have come up with a very rough estimate that the flooding will knock 0.1% off Canada's GDP for June. That doesn't sound like much, so the Star ups the ante by noting that "On an annualized basis, that's worth about $ 2 billion", a statement that makes absolutely no sense to me at all. Let's think about some of the issues here.
* It's true that Calgary's downtown, home to many large corporate offices, has been closed for a couple of days. However, many of the activities that would have taken place there have presumably been carried out temporarily elsewhere, and most of the rest will be caught up through overtime once the city is back to normal. It's hard to believe there will be any permanent loss of output.
* Despite promises that the Calgary Stampede will go ahead on schedule, there's bound to be an impact on tourism in the areas worst affected. However, if you think that will affect overall GDP growth, you have to believe that people who had booked vacations in southern Alberta for this summer will simply decide to stay at home and keep their money in the bank. That's not likely: people will go someplace else instead, so any loss to the tourism sector in Alberta will be offset by a better outcome in another part of Canada.
* Then there's the reconstruction activity. The Province of Alberta has already pledged $1 billion to get the ball rolling on that, and Premier Alison Redford is warning that total reconstruction could take up to ten years. A lot of plumbers and concrete pourers and roofers are going to make out like bandits through the summer months. Now of course, that may not be net new activity -- Alberta's economy is in decent shape, and those folks may well have been working someplace else anyway. Still, the rebuilding efforts should ensure that, even if BMO's economist is right about the impact on June GDP, that loss will be quickly recouped in the succeeding months.
One interesting sideline on the reconstruction is that both the Federal and Provincial governments have been quick to promise emergency funding. As noted above, Alberta is putting up an initial $1 billion. These are both governments that espouse spending restraint and like to warn of the dire consequences of living beyond one's means. It's entirely right that such concerns are relegated to second place at a time like this, but as the public money starts to get Calgary, Medicine Hat and the smaller communities back on their feet, you wonder whether the implications for longer-term policy might work their way through a few thick skulls. Probably not, alas.
Let's go back to Bank of Montreal, whose analysts have certainly been busy. One of their insurance experts has estimated that the property damage from the floods will be in a range of $3-5 billion (CAD). But alas, no more than 75% of that will be met by insurers, because as a matter of routine "overland flooding" (water coming through doors and windows) is excluded. That certainly helps explain why the taxpayer is facing such a large bill for the cleanup. Time to check the sump pump, and maybe stick a few pins in a juju doll for your insurance broker.
According to this story in the Toronto Star, economists at Bank of Montreal have come up with a very rough estimate that the flooding will knock 0.1% off Canada's GDP for June. That doesn't sound like much, so the Star ups the ante by noting that "On an annualized basis, that's worth about $ 2 billion", a statement that makes absolutely no sense to me at all. Let's think about some of the issues here.
* It's true that Calgary's downtown, home to many large corporate offices, has been closed for a couple of days. However, many of the activities that would have taken place there have presumably been carried out temporarily elsewhere, and most of the rest will be caught up through overtime once the city is back to normal. It's hard to believe there will be any permanent loss of output.
* Despite promises that the Calgary Stampede will go ahead on schedule, there's bound to be an impact on tourism in the areas worst affected. However, if you think that will affect overall GDP growth, you have to believe that people who had booked vacations in southern Alberta for this summer will simply decide to stay at home and keep their money in the bank. That's not likely: people will go someplace else instead, so any loss to the tourism sector in Alberta will be offset by a better outcome in another part of Canada.
* Then there's the reconstruction activity. The Province of Alberta has already pledged $1 billion to get the ball rolling on that, and Premier Alison Redford is warning that total reconstruction could take up to ten years. A lot of plumbers and concrete pourers and roofers are going to make out like bandits through the summer months. Now of course, that may not be net new activity -- Alberta's economy is in decent shape, and those folks may well have been working someplace else anyway. Still, the rebuilding efforts should ensure that, even if BMO's economist is right about the impact on June GDP, that loss will be quickly recouped in the succeeding months.
One interesting sideline on the reconstruction is that both the Federal and Provincial governments have been quick to promise emergency funding. As noted above, Alberta is putting up an initial $1 billion. These are both governments that espouse spending restraint and like to warn of the dire consequences of living beyond one's means. It's entirely right that such concerns are relegated to second place at a time like this, but as the public money starts to get Calgary, Medicine Hat and the smaller communities back on their feet, you wonder whether the implications for longer-term policy might work their way through a few thick skulls. Probably not, alas.
Let's go back to Bank of Montreal, whose analysts have certainly been busy. One of their insurance experts has estimated that the property damage from the floods will be in a range of $3-5 billion (CAD). But alas, no more than 75% of that will be met by insurers, because as a matter of routine "overland flooding" (water coming through doors and windows) is excluded. That certainly helps explain why the taxpayer is facing such a large bill for the cleanup. Time to check the sump pump, and maybe stick a few pins in a juju doll for your insurance broker.
Thursday, 20 June 2013
Central bank-speak, north and south
"Things should start getting interesting right about now." -- Bob Dylan, "Mississippi".
It looks as though the interesting economic times suggested in my last posting may be upon us very soon. The Federal Reserve's press release after the latest 2-day FOMC meeting is far from hawkish. There is to be no immediate reduction in the $85 billion per month pace of asset purchases (the so-called quantitative easing program), and the statement stresses that even when QE does come to an end, an accommodative monetary policy is likely to remain appropriate for some time to come.
Even with that emollient tone, however, the Fed's suggestion that it saw both lower downside risks to the economy and signs of declining unemployment was sufficient to put the wind up global equity markets. And this, of course, is very significant. If markets sell off when the central bank forecasts higher economic activity, it's reasonable to infer that the gains posted by the US equity market in the first half of 2013 have been driven not by investor perceptions of underlying economic strength, but by the tsunami of cheap money that the Fed and other central banks have seen fit to unleash.
This, then, is where things get challenging for the Fed. Under previous management (Maestro Greenspan, that is), the very fact that equity markets sold off would have been sufficient to prompt the Fed to keep the spigots wide open. That's what we used to refer to as the Greenspan Put. It remains to be seen whether Chairman Ben Bernanke will prove more stoic if investors take fright for more than a few days. If he backs away, it may be time to start strapping on the inflation hedges again. There's also the further complication that Bernanke's term as Chairman ends early in 2014, and he has already indicated (smart man!) that he wants to return to academe. The new Chairman (or, very possibly, Chairwoman) is going to face some serious challenges.
North of the border, meanwhile, new Bank of Canada Governor Stephen Poloz has set out his stall, making his first public speech at a fairly low-profile event just outside Toronto. There's a link to the speech on the Bank's website here. When Governor Poloz was appointed, it was widely expected that he would continue the general policy stance of his predecessor, Mark Carney. Poloz's first speech confirmed this: the Bank's 2% inflation target will continue to be at the centre of its policy decisions, as the Bank sees the target as a crucial tool in creating greater certainty for businesses' and households' economic decisions.
In other respects, however, there were signs that Poloz will be less abrasive than Carney. There was no talk of firms hoarding "dead money", and Poloz was at pains to use his own experiences as a native of the car-making town of Oshawa to indicate that he understands how the global economic slowdown (and a strong exchange rate) have hammered Canada's manufacturing sector. (Illustration: in the city of St Catharines, just up the road from here, GM used to employ 15,000 skilled workers in its drivetrain plant. It now employs fewer than 2,000).
Perhaps most interestingly, Poloz seemed to acknowledge the need to choose his words carefully, because they can influence how people behave:
It looks as though the interesting economic times suggested in my last posting may be upon us very soon. The Federal Reserve's press release after the latest 2-day FOMC meeting is far from hawkish. There is to be no immediate reduction in the $85 billion per month pace of asset purchases (the so-called quantitative easing program), and the statement stresses that even when QE does come to an end, an accommodative monetary policy is likely to remain appropriate for some time to come.
Even with that emollient tone, however, the Fed's suggestion that it saw both lower downside risks to the economy and signs of declining unemployment was sufficient to put the wind up global equity markets. And this, of course, is very significant. If markets sell off when the central bank forecasts higher economic activity, it's reasonable to infer that the gains posted by the US equity market in the first half of 2013 have been driven not by investor perceptions of underlying economic strength, but by the tsunami of cheap money that the Fed and other central banks have seen fit to unleash.
This, then, is where things get challenging for the Fed. Under previous management (Maestro Greenspan, that is), the very fact that equity markets sold off would have been sufficient to prompt the Fed to keep the spigots wide open. That's what we used to refer to as the Greenspan Put. It remains to be seen whether Chairman Ben Bernanke will prove more stoic if investors take fright for more than a few days. If he backs away, it may be time to start strapping on the inflation hedges again. There's also the further complication that Bernanke's term as Chairman ends early in 2014, and he has already indicated (smart man!) that he wants to return to academe. The new Chairman (or, very possibly, Chairwoman) is going to face some serious challenges.
North of the border, meanwhile, new Bank of Canada Governor Stephen Poloz has set out his stall, making his first public speech at a fairly low-profile event just outside Toronto. There's a link to the speech on the Bank's website here. When Governor Poloz was appointed, it was widely expected that he would continue the general policy stance of his predecessor, Mark Carney. Poloz's first speech confirmed this: the Bank's 2% inflation target will continue to be at the centre of its policy decisions, as the Bank sees the target as a crucial tool in creating greater certainty for businesses' and households' economic decisions.
In other respects, however, there were signs that Poloz will be less abrasive than Carney. There was no talk of firms hoarding "dead money", and Poloz was at pains to use his own experiences as a native of the car-making town of Oshawa to indicate that he understands how the global economic slowdown (and a strong exchange rate) have hammered Canada's manufacturing sector. (Illustration: in the city of St Catharines, just up the road from here, GM used to employ 15,000 skilled workers in its drivetrain plant. It now employs fewer than 2,000).
Perhaps most interestingly, Poloz seemed to acknowledge the need to choose his words carefully, because they can influence how people behave:
By explaining the cross-currents at work in our economy, our projections for what’s ahead, and our monetary policy response, we can help to heal business confidence. And in order to expand our understanding of what’s happening in the real economy, we listen to businesses, to labour groups and to industry associations.
Beneath our economic and financial statistics and analysis are real people, making real decisions. Those decisions are hard to make at any time, but when uncertainty is high and confidence low, they can be even more difficult.
I am optimistic that the signs are there that the process is under way. Right now, what we need most is stability and patience.
To help nurture confidence, an active engagement with Canadians must remain a cornerstone of the policy of the Bank of Canada.
Governor Carney often seemed close to anger at the unwillingness of companies to put their surplus cash to work. Poloz seems to be trying to show that he realises that it's hard for firms to be confident when policymakers are floundering. It's a good start. Now we await Carney's first broadside from his new perch in Threadneedle Street.Friday, 14 June 2013
Hang on to your hats
Quantitative easing, and all the other facets of the extraordinarily loose monetary policy that's been in place globally for the past half decade or so, can only be described as a success if you posit the counterfactual: if central banks hadn't done all these things, the situation would now be much worse. You can never prove a counterfactual, of course, but what you can say is that "QE and all that" has not had the impact that either its proponents or its opponents expected.
Proponents of extreme monetary ease believed that it represented the only way of getting economic growth moving after the crisis, particularly given that many governments were determined to pursue fiscal austerity. Its opponents, on the other hand, feared that inflationary forces would be unleashed, reversing all of the central banks' good works over the past couple of decades. Neither has proven true. Because so much of the new money pumped into the system by central banks has simply found its way onto corporate balance sheets -- there to be termed "dead money" by newly-departed Bank of Canada Governor Mark Carney -- growth has remained sluggish, and as a result inflationary pressures are nowhere to be seen.
Against this background, the strong performance of major world stock markets in the first half of 2013 bears close scrutiny. One positive factor has, of course, been the early success of the"Abenomics" stimulus program in Japan, even though prospects for self-sustaining growth there still hang in the balance. And there have certainly been signs of improvement elsewhere -- steady employment growth, strong auto sales and a bounce in house prices in the US, broad-based signs of recovery in the UK, solid progress across the board in Canada*, and so on.
However, investors are clearly concerned that at some point in the near future, central banks may conclude that the evidence of recovery taking hold is sufficient to allow them to start unwinding QE. A gentle warning to this effect from the Fed in late May caused shudders in the market, and since then, stocks have had trouble building on their previous gains even as the flow of data has been mainly positive.
Markets are right to be worried. Dallas Fed President Richard Fisher warned as long ago as last September that "no central bank anywhere on the planet...has the experience of successfully navigating a return home from the place in which we now find ourselves. No central bank — not, at least, the Federal Reserve — has ever been on this cruise before." And of course, if central bankers really were as smart as some people once believed them to be, we wouldn't all have gotten into this mess in the first place.
Once the reversal in policy starts, probably around the end of this year, we'll see if they've become any smarter as a result of the crisis. Soon after that we should be able to opine on the success of QE without using a counterfactual: the measure of success will be how well the global economy fares without it.
* One complication for policymakers in Canada is the overheated condominium market in the Toronto area. It's not so much that too many are being built -- the area's population is growing strongly -- but that too many are being bought and rented out by get-rich-quick investors. It remains to be seen how many of those investors will be able to bear even a small rise in interest rates. Paul Krugman has some thoughts on this here.
Proponents of extreme monetary ease believed that it represented the only way of getting economic growth moving after the crisis, particularly given that many governments were determined to pursue fiscal austerity. Its opponents, on the other hand, feared that inflationary forces would be unleashed, reversing all of the central banks' good works over the past couple of decades. Neither has proven true. Because so much of the new money pumped into the system by central banks has simply found its way onto corporate balance sheets -- there to be termed "dead money" by newly-departed Bank of Canada Governor Mark Carney -- growth has remained sluggish, and as a result inflationary pressures are nowhere to be seen.
Against this background, the strong performance of major world stock markets in the first half of 2013 bears close scrutiny. One positive factor has, of course, been the early success of the"Abenomics" stimulus program in Japan, even though prospects for self-sustaining growth there still hang in the balance. And there have certainly been signs of improvement elsewhere -- steady employment growth, strong auto sales and a bounce in house prices in the US, broad-based signs of recovery in the UK, solid progress across the board in Canada*, and so on.
However, investors are clearly concerned that at some point in the near future, central banks may conclude that the evidence of recovery taking hold is sufficient to allow them to start unwinding QE. A gentle warning to this effect from the Fed in late May caused shudders in the market, and since then, stocks have had trouble building on their previous gains even as the flow of data has been mainly positive.
Markets are right to be worried. Dallas Fed President Richard Fisher warned as long ago as last September that "no central bank anywhere on the planet...has the experience of successfully navigating a return home from the place in which we now find ourselves. No central bank — not, at least, the Federal Reserve — has ever been on this cruise before." And of course, if central bankers really were as smart as some people once believed them to be, we wouldn't all have gotten into this mess in the first place.
Once the reversal in policy starts, probably around the end of this year, we'll see if they've become any smarter as a result of the crisis. Soon after that we should be able to opine on the success of QE without using a counterfactual: the measure of success will be how well the global economy fares without it.
* One complication for policymakers in Canada is the overheated condominium market in the Toronto area. It's not so much that too many are being built -- the area's population is growing strongly -- but that too many are being bought and rented out by get-rich-quick investors. It remains to be seen how many of those investors will be able to bear even a small rise in interest rates. Paul Krugman has some thoughts on this here.
Sunday, 9 June 2013
PRISM of interest
One of the hits of the 2011 TV season in the US was "Person of Interest". It's a thriller serial that starts from the paranoid premise that after 9/11, the US government ordered the development of a system, known in the show as "The Machine", to record all e-mail messages, CCTV camera footage and such in the hope of identifying potential terrorist threats and nipping them in the bud.
Turns out that art was imitating life there, because we now know that after 9/11, the Bush administration did indeed set up the basics of such a system, at least the e-mail part. The Machine, formally known as PRISM, has only expanded in the intervening years, under Presidents Bush and Obama alike.
The existence of PRISM has now become known to the general public, thanks to the journalistic efforts of the Washington Post and The Guardian (of London). Civil rights and privacy activists are getting themselves into a fine old lather about it, but I have to admit I find it difficult to take the righteous anger too seriously. We live in an age where a large proportion of the population seems obsessed with chronicling its every waking moment and plastering everything, no matter how mundane, all over the social media. If the citizenry doesn't seem to care about privacy and propriety any more, why should the government think any differently?
I mean, if you take to walking around the streets in the nude, you can't really take offence if people try to sneak a peek at your belongings.
Turns out that art was imitating life there, because we now know that after 9/11, the Bush administration did indeed set up the basics of such a system, at least the e-mail part. The Machine, formally known as PRISM, has only expanded in the intervening years, under Presidents Bush and Obama alike.
The existence of PRISM has now become known to the general public, thanks to the journalistic efforts of the Washington Post and The Guardian (of London). Civil rights and privacy activists are getting themselves into a fine old lather about it, but I have to admit I find it difficult to take the righteous anger too seriously. We live in an age where a large proportion of the population seems obsessed with chronicling its every waking moment and plastering everything, no matter how mundane, all over the social media. If the citizenry doesn't seem to care about privacy and propriety any more, why should the government think any differently?
I mean, if you take to walking around the streets in the nude, you can't really take offence if people try to sneak a peek at your belongings.
Saturday, 8 June 2013
Population explosion
Time, once again, to visit the ball of confusion that is the mind of Toronto Star business columnist David Olive. In today's paper he has a column arguing that predictions of the demise of the US as the world's economic superpower are likely to be very wrong.
He's right about that, but as is almost always the case with Olive, there are so many levels of poor writing and worse analysis for the connoisseur of his work to enjoy. Try, for example to squeeze any meaning out of this sentence: "An empire can inflict upon itself only so much hubris before the way is made clear for the Visigoths". Or try to pronounce the word "futilely", an adverb which I'm sure I've never seen in print before today.
These are minor quibbles, however, compared to a great big howler in the middle of the article. Here are the offending sentences:
"By mid-century, it’s estimated by demographers that the U.S. will have added a stunning 40 million people to its population, while most of the industrialized world shrinks or, at best, stagnates in population growth. Canada will eke out a modest 2 per cent annual gain over that period...."
This is an example of what I used to call "Cuban economic statistics". For years the Castro regime used to publish elaborate economic data books that contained absolutely no usable information. You'd be told that sugar production was above the five-year average. or that it had grown 10%, but there would never be any actual numbers, so the comparisons were never helpful. And by reporting US population projections as a number (40 million) and Canada's as a percentage (2% per year), Olive has made a "stunning" (to use his adjective) mistake.
There are 37 years left until the middle of the century. If Canada's population grows at a compound* annual rate of 2% for that length of time, which I assume is what Olive means, the by the "rule of 72" we know that it will have slightly more than doubled by 2050. According to Statistics Canada, the country's population in January 2013 was 35,056.064. Using Olive's projection, it looks as though the Great White North will "eke out" a population growth of about 36,000,000 by 2050. Using the conventional "rule of 10" that gets used in Canada/US comparisons, an equivalent population rise for the US would be 360,000,000. Now that really would be stunning.
* It doesn't make much difference to the argument if you don't compound the rate. 2 per cent per year for 37 years is still 74% growth, or a Canadian population increase of almost 26 million by mid century.
He's right about that, but as is almost always the case with Olive, there are so many levels of poor writing and worse analysis for the connoisseur of his work to enjoy. Try, for example to squeeze any meaning out of this sentence: "An empire can inflict upon itself only so much hubris before the way is made clear for the Visigoths". Or try to pronounce the word "futilely", an adverb which I'm sure I've never seen in print before today.
These are minor quibbles, however, compared to a great big howler in the middle of the article. Here are the offending sentences:
"By mid-century, it’s estimated by demographers that the U.S. will have added a stunning 40 million people to its population, while most of the industrialized world shrinks or, at best, stagnates in population growth. Canada will eke out a modest 2 per cent annual gain over that period...."
This is an example of what I used to call "Cuban economic statistics". For years the Castro regime used to publish elaborate economic data books that contained absolutely no usable information. You'd be told that sugar production was above the five-year average. or that it had grown 10%, but there would never be any actual numbers, so the comparisons were never helpful. And by reporting US population projections as a number (40 million) and Canada's as a percentage (2% per year), Olive has made a "stunning" (to use his adjective) mistake.
There are 37 years left until the middle of the century. If Canada's population grows at a compound* annual rate of 2% for that length of time, which I assume is what Olive means, the by the "rule of 72" we know that it will have slightly more than doubled by 2050. According to Statistics Canada, the country's population in January 2013 was 35,056.064. Using Olive's projection, it looks as though the Great White North will "eke out" a population growth of about 36,000,000 by 2050. Using the conventional "rule of 10" that gets used in Canada/US comparisons, an equivalent population rise for the US would be 360,000,000. Now that really would be stunning.
* It doesn't make much difference to the argument if you don't compound the rate. 2 per cent per year for 37 years is still 74% growth, or a Canadian population increase of almost 26 million by mid century.
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