Posts filed under ‘Macroeconomy’
The average Joe in Spain is now living worse off than in boom times. Anyone can tell you that. While some, many, citizens, scape the crisis altogether. Apart from the platitude as obvioulsy societies live better in Boom times than in Recession times, anyone can warn you of growing inequalities, and he will be right.
The same feeling you may have if you look at the landscape in Mumbai, India. As skycrapers grow in number and height and slums grow and invade previously green spaces, you may have the feeling of growing inequality, and you may be right.
Same feeling you may have in China, when you compare Shangai with some backward province. They would have the biggest slum on Earth if people had the chance to build it. But since they don’t, you cannot see it. But as cities expand, inequality is growing. Signs of danger in forthcoming times.
But if you think of great times, regardless of your point of view, you can think of the Mughal Empire, the Roman Empire, or even of Chairman Mao’s China, and think that the good times are behind.
But don’t make a mistake. In those glorious times, 99% of the population were at the limit of starving. Marie Antoinette may have lived as a Queen, but she ended beheaded for a reason, a reason that she could not understand when she suggested to give cookies to the mob if they were hungry. Any bad harvest could kill a sizeable chunk of the population, and if there was hunger and disease at the same time, half of the population dying was a possible scenario.
Since the industrial revolution in the Nederlands, UK, and some European locations, the things have changed. As it has been spreading all over the world, inequality is less than ever. And if some folks live worse off, is specially because they compare themselves to their richer cousins.
No one starves in Spain. Many people have made bad investment decisions and they will pay a price for it. Some will not be able to afford the holidays in Mexico this year so they will decide to stay at home. Some people I know have had to cut on Saturday restaurants. And some have real trouble to get to the end of the month, yes, but not hungry.
Many people in India and China are still starving. Many more are hungry. Obviously, too many, I may add. But less than ever. Mao’s China was probably the poorest in centuries, but Deng Xiaoping opened the capitalist way that is slowly (yes, if you think of all of China, not of the booming part only) reversing the trend. The same happens in India (and sooner it would happened if the current government was as brave as some that preceded them, instead of wasting India’s time).
Of course, if you look locally, there are some losers and some winners, but humanity wins. And if you look at the greatest foes of this 2012, you will here about debt affecting many people, but you will here a lot about public debt. Don’t blame that one on the capitalist system, blame it on bad governments.
The world overall is more equal in opportunities. More than ever. Capitalism, with its flaws, has started a globalisation trend that is only benefiting humans.
It’s amazing how we tend to forget. Not so long ago some people were still being blamed, bankers mostly, the beheaded god Alan Greenspan, some professional confidence man (aka con) Bernie Madoff, and a few more, but except for the latter that has even seen the disgrace in its own family, the former have gone back to their oversized bonuses and Mr. Greenspan is enjoying a deserved retirement, maybe with less conferences than what he had hoped for.
We’ll end up believing that the crisis is more a natural catastrophe, like those earthquakes in Japan, than a punishment. Isn’t it always easier not to blame yourself? God, with infinite power and without any need for an explanation, has just decided to punish you. And that’s all. Why think? Why blame? Why even change?
A system that privatises gains and socialises losses can’t be good. And that’s what we are seeing all over the world. All citizens end up sharing the burden. The “too big to fail” has been finally accepted by the whole humanity, the final enshrinement of the “moral hazard”.
Maybe we have finally reached our destination. We are capitalists when it’s time to reap benefits, but socialists with losses. Be aware, that only applies to big corporations. Finally, the richer 5% has some way to outgrow us all, to keep concentrating more and more power in their hands and make sure that when they fail they won’t have to answer for it.
I read today in the news that this year General Electric, in spite of a huge profit figure (true, it could have been better but it’s still huge) is only paying 7.4% of their profit in taxes. Congratulations to their accounting department, finding every possible trick, every crack in the fiscal legislation, every opportunity not to pay… But, at the end of the day, do you feel like they are making the same effort as citizens are? How much do you personally pay?
And another example, this time from Spain, from the likely next president in another year, a sentence in a conference in Germany: “If Spain is having a bad time it’s not the Spaniard’s fault”. Whose fault is it then? The hidden external enemy? God’s?
Beware, things that do not work can’t last for long…
Basic macroeconomics again: government savings, private deficits and the Ricardian debt equivalence theorem
If you brush up your basic macroeconomics you will remember this: in an open economy, if national saving is insufficient to finance national spending, an influx of foreign capital will be needed to balance the accounts. That’s the story of the US -or Spain-. Where we invest (spend) more than we save (earn).
In times of high leveraging, where the private sector has grown too indebted, a deleveraging process is mandatory. Whether it takes ten or five years, it doesn’t really matter. It has to happen. It will happen.
But what if it’s the private sector that has gone too indebted? How can the public sector help?
Well, it’s not only that, as I said, the national balance must equal the foreign financial balance. The fact is that the national balance is necessarily made of two balances that add to each other: the public sector balance and the private sector balance.
That means that the fiscal balance plus the private sector balance must be compensated by the external balance. In other words: money goes out of one sector only to enter another, whether outside or inside the country. But it’s a zero-sum game.
If the government is saving, the only way that the private sector can save is by means of exporting, suddenly, a lot more.
Otherwise, more saving by the government, means more private sector deficit thus more leveraging.
Hmmm, sounds ingenious, but makes sense too.
Can we expect all the countries to suddenly double their exports? No way that’s going to happen as exports are also a zero-sum game. What someone exports, someone else is importing. So, what’s the alternative?
Let me say it again in plain words: if the governments reduce their debts is because part of the taxes that are being paid by the private sectors will be committed to paying creditors, that is, they will go out of the cycle. More taxes, less returns in services or infrastructures. Yes, that is, hurting the private sector.
What can a government do to reduce the debt burden? Obviously, inflate prices, which in times close to deflation is no simple task to do. But again reducing the savings of their citizens, whether people or companies.
But it has to be sudden, unexpected. As creditors wouldn’t accept low interest yields if they were expecting inflation. Credibility is important and we don’t want to lose our reputation as a country.
Let’s say that you can only lose your reputation once, just like your virginity. Next time you won’t be able to make this move or to get credit at such low rates.
So, what’s the alternative to increasingly indebting the private sector? Because if you do for a long time, the increasing frailty will become evident, more than evident, obvious.
Let’s increase debt to reduce deficits? Bonds maybe? Some safe heaven for governments?
Maybe they are for governments but, in the end, they must be paid off sometime. The contested Ricardian debt equivalence theorem states that government expenditure on the private sector is equivalent whether it’s financed by taxes or bonds.
Okay, there’s a lot of restrictions to that Ricardian debt equivalence, or Ricardo-Barro equivalence proposition. We may not care about our descendants so we may not care to indebt them either. But one thing is clear: a debt is a debt and, along the road, it must be paid. The equivalence says that, somehow, the private sector will get ready to pay that and the ultimate effect will be the same.
The lesson? Damned if you do, damned if you don’t. Maybe getting government deficits under control right now is going to make the economy even worse. Believe me or not, it doesn’t matter. Just do something for me…
Stop seeing the government deficits and debts in isolation. They are part of a bigger system.
At the end of the day, there’s the need for more competitive if countries are to scape the leverage trap. And productivity adjustments come with a high price, be it devaluations where they are still possible (beware your reputation, U.S.) or by means of drastic reduction of labor factor costs… yes… wages (beware Spain).
Okay, that was tough. Sorry. Not the usual me. Lots of theoretical threads I needed to spit out. Oh, is it going to be the first post without a picture?
No way! Here it is. Commonsensical:
More than two years ago I was writing about Conspicuous consumption: from Thornstein Veblen to Jumeirah Palm. The reference to Dubai was almost mandatory of course. I’ve been to Dubai and I like the place. We all know that recently it has run into some trouble financing its debt. They are expecting a bailout from the United Arab Emirates which are playing hard to get.
My personal view is that they will get this bailout. Actually, I have little doubt of it. They must be now in the midst of a power struggle about how to manage all that. We have to remember that many western nations rushed to finance banks only to discover that they had forgotten to write down a few conditions in the contract about the remunerations to top managers and suddenly the public opinion cared more about those millions’ destination than for the rest of thousands of millions.
Leaving that aside, Dubai is similar to a long-term investing fund. In the long run you get your returns, not before. To manage it you need to be very cold, and not let the circumstances blind you.
But everything in Dubai is so shiny that it blinds you. That’s good for the brand, of course. So we have this dilemma: building shiny things maybe is not that good for the long run but, what else do you have to sustain your brand that very very shiny things?
No matter what happens now, the shiny brand is not so appetising anymore. And investors will think twice before risking again. I don’t want to compare Dubai to a Ponzi scheme, it is not, but to achieve the desired returns it needs to be able to sustain the investments arrival for a long-term period. Is it going to?
Since I’m not the Delphos’ Oracle I leave the reflection here. A small hint: it’s all about fundamentals. In the long run, an investment will survive and flourish if its a sound business. If we are dependent on a brand that requires too high a burning money rate, probably it won’t.
Having investors is a thing, when you lose them you can resource to forced investors (also called taxpayers) or stakeholders that have other interests (power in exchange for money, for instance) but, having a big enough profit for the expected yield, that’s another thing…
Being these days in Barcelona I’m amazed how several publications, I’m thinking of Forbes and their “Spanish banks in top form” article, can be so blind and misleading. If Spanish banks are in top form, buckle up Dorothy, as the ride is going to be very rough all over the world, you ain’t seen nothing!
And the ride is going to be long and rough for Spain. How else could a developed country withstand more than 20% unemployment in a deflationary context, with a plunging internal demand. Sounds contradictory with Forbes’ article? Just keep reading.
- The real state bubble was worse than people predicted. And the worst was in Spain where we constructed, and have yet to sell, at least as many new houses than in the US alone with around six times more inhabitants, and around one third of the European Union with ten times more inhabitants… does that make sense?
- That had to be financed, obviously. Huge inflows of capital made sure of that. And the banks were the ones financing the developers to an amount roughly the size of half the GDP. Banks had been selling their interests in real state at the peak, getting rid of that business in the best moment. The capital markets bought them all.
- Once the developers failed, as they necessary had to, their assets and debts reverted to the banks. Now the banks are again on the business of real state in Spain, in fact leading it. The part of that business that was in the capital markets has obviously slumped (more than 80%), but of course that’s just one part of the financing they had. Those losses are mostly latent.
- In short that means that Spain may have bad debts roughly the size of 25% of its GDP. And that part is in the hands of the banks. But as they have been forced to absorb those, they are the first interested not to write off any of those debts, but to convert them to overpriced assets. In fact they bought the whole failed developments for the price of the mortgage. But that price was not right anymore. Which incentive do these banks have to lower the asset prices thus assuming losses and revealing the truth? None at all.
- Search for the balance sheets! The truth is still there, albeit hidden somehow. And they know, obviously. Why else would small Spanish banks be frantically merging with each other? There is a reason for that.
Spanish banks are simply hiding their losses. The real state market has not found its equilibrium yet. While they can, the main owners of the real state will try to contain the offer, placing things selectively in the market trying not to overwhelm the current tiny demand and betting for a better future where they will be able to reign on the real state business again.
In the meantime, Spanish banks are trying to con their customers with preferred shares. Issuing them and selling at nominal prices while re-buying those at the capital markets at real prices (half the price?). So, how is that for responsibility? What will their customers think of them in the future when they discover they actually have made an illiquid investment that they will not fully recover?
And yes, they have been more prudent in some aspects than their European counterparts. But that’s not enough. What would happen if they started marking loans to market? or assets to market? That would definitely be an eye opener, and a disaster.
It’s always nice to hear that Japan has grown a 3.7%. It makes eye-catchy headlines. But if you go deeper you see that the figure is just the annualisation of a mere 0.9% between April and June, and that in the first quarter the slump was around 11%. What does that tell us about statistical significance? After all, interpreting the figures will always be mediated by our wishful thinking.
A quarter may take us out of a formal recession but won’t make a new trend. I am the first whose wishful thinking would like this to be over, but it doesn’t seem likely to me. Still a lot of pain to endure to reverse the trend. Many things are pending to be able to grow healthily, albeit I admit that growth doesn’t need to be healthy to be growth.
And when growth gets here again, there will be more pain to endure. Companies have made put themselves in protection mode, rightsized…sorry, I meant downsized; they may have made extraordinary things to get their products moving, to appease their customers and investors. Everything to get to the end of the tunnel. But that won’t be enough.
I hate to seem gloomy. I am not. My message here is quite simple. Even if we find the right path for recovery, we won’t be at the same place we’d left. Things will have changed. When the scared company opens its shell again, it may find itself in a very different place. Some currents will have dried out. Fortunately, and that’s where my optimism lies, new wells will start flowing, somewhere. But they won’t be at the same place we took for granted long ago.
Also we will have proven our customers there are other ways, that we can do more with less. That we can remove that slack, streamlined our operations, adjusted our overheads and given better quotes. Hopefully, they will have based their recovery on that, they won’t let us go back again to the previous business conditions. And we will have to adapt to that: more pain. The leakage of jobs will go on after the recovery is here. And no sense of urgency can last forever. Sometimes it’s easy to retrench than to transform oneself.
A silly example from my daily life. Calling from India to Spain five minutes costs 10€ with my Spanish cell. Driven by the necessity not to waste resources, the experiment is to do the same with my Indian cell: 54 rupees, which are approximately 0.85€. Do you think I’m going to use my Spanish cell here again?
Although this might seem irrelevant, it’s a sign that we customers are not that stupid after all.
Did you know that the Hilton Group is about to become extinct? Blackstone bought it for $26 billion in 2007, right now they owe $21 billion in debt. Refinancing that debt won’t cost that much right now, that’s not the problem. The problem is somewhere else: executive customers have massively forgot their loyalty to the firm seeking cheaper alternatives.
Did you know that the huge amount of money that Air India is losing just required its intervention? Probably you did. Same happens with other main Indian Airlines. The interesting part is that the low cost carriers that operate here are not losing money.
And when we are out of the crisis, if Air India and Hilton make it, surely by reducing prices and streamlining operations, the customers they will face will get accustomed to the new conditions and will keep asking more for less. After all their own streamlining depends on that. What used to be exceptional will become somehow the norm and the companies not aware of that change will suddenly open their shells in a dry desert.
I’m increasingly growing wary, or even tiresome, of anyone that talks about green shoots. Yes, put a lot of fertiliser over a bed of rocks and something will grow on that. Mostly weeds. After all, weeds are green, but they don’t make nice flowers.
After pouring so many fertiliser taken from the forced lenders throughout the world (yes, we and our descendants are the forced lenders, and the fertilisers are the billions of dollars irresponsibly poured everywhere) what else is there to expect than a few green shoots?
But one thing is to have green shoots, and another one is to have a sound recovery. That needs to be sustained on healthy fundamentals, which we don’t have now.
Okay, maybe we are not falling that fast… so what? Even the most bullish markets have relevant corrections, why shouldn’t the bearish? That is some hope in midst of despair, true, but the despair still has a sound reason to be.
Hiding things in the balance sheet, having assets that don’t reflect real prices, is not the way to recovery either. First we need that atonement, that reconciliation with reality, that would be a real stress test, after a previous sanity check: let’s value things for what they’re really worth.
And in the meantime the GDP of the Euro countries has contracted more than 10%. Germany is contracting more than Spain, with an unemployment growth rate 1000% bigger. We, who were the main sinners, are weathering the storm better? Something tells me that the methodology that we are using to calculate our GDP, given the fact that we have to remove seasonal effects being a touristic country, is delaying the changes to the real data. But something also tells me that the most inflexible labour markets are exhibiting those same troubles that don’t let them flexibly grow, only applied to contraction. There’s plenty for all of us.
Hmm, I’m so sorry to be negative but… let’s prepare and get ready, because those shoots are bound to whither and the worst is yet to come.
Lately I’ve been hearing some musings about how the economic situation is improving. Yes, optimists are always necessary, though they can also be a bit annoying sometimes.
In any case it’s good to reflect for a while on where are we now. Have the fundamentals of the current crisis changed so much that we can say things are changing? Maybe is it that people are sensing that we have already touched the floor thus the situation is about to rebound? If it is the second one, let me tell you, we spent so many years skyrocketing ceiling after ceiling, why should the bear animal spirits be less powerful than the bulls?
Crisis, at least most crisis, aren’t the results of sudden disasters or fulminant downturns. Although everyone can recall tipping points, such as certain interventions or lack thereof, they are the consequences of deeply undergoing currents, things that have been happening for a long time.
And what has been happening for a long time? Things like the excess of liquidity, thus the excess of leverage. Piles and piles of debt. Unsound financial constructs acting like dark boxes trying to hide the risk inside, just like a giant Pandora’s jar (incorrectly translated from the ancient greek as a box instead of a jar).
Ephimetheus had been warned not to accept any gifts from Zeus, and Pandora had been warned not to ever open her box. But you know mankind, the former couldn’t resist marrying her, and the latter couldn’t resist her curiosity to know what was inside the box… Otherwise mankind would have lived tranquil and blissful (for another while).
So, has this man been able to close the jar (or box) that brings all the evils to mankind? I know it’s ugly to personalise but, has quantitative easing helped? It probably has, somehow, albeit many doubt so. I think it has bought us some more time, but we still haven’t taken care of that atonement I’ve written about a few times.
Because putting still more money into the system doesn’t address the fundamental problem we are facing. It’s more like trying to remedy a symptom than a disease. It’s true the pendulum has swung to the other side, and injecting liquidity, the swing won’t be that strong anyway, but that still doesn’t solve our problem.
Yes, banks are paralised. But that’s not because they have forgotten how to be banks, but because nobody really knows how much their assets are worth now. We are permitting them to alter their book to market ratio thanks to the backing of the ultimate lenders (yes, you know who they are, those forced lenders), and they are not lending because they are holding to those promises that permits them not to face reality.
Any reconstruction must begin by assessing the losses, instead of counting on a white (forced) knight that will save them all. This thought paralyses them, makes them look to the future with unrealistic expectations.
In the meantime, the forced lenders have to back and even buy bad assets. But they can’t sell them, as they don’t know how or whether they are worth anything. Just like another Pandora’s jar that trades hands without anybody actually looking what’s inside. And it won’t be a bad thing to look inside this jar, as at least we’ll know what we are able to recover. Bad assets are bad because they are worth much less than what’s in the books, it’s time to know how much.
So what then? Is this all? Even when we reach this point we will still have to face the biggest problem: the excess of debt. Right now we are still indebting us more and more as the quantitative easing still needs to be financed, as each and every infrastructure we may be trying to build, or every single measure taken to protect the weakest.
An interesting article from the New York Times wrote last month that the debt in the hands of the consumers had begun to recede from 98% of the Gross Domestic Product to 97%. Those were the good news. The bad news were that the debt in the hands of banks had not. And, according to the article, that debt stood at $17.2 trillion, or 121 percent of the size of the GDP of the United States, compared to 6% of the GDP half a century earlier. Yes, that’s a problem.
Still two final reflection in this already too long post: if households are saving more, that will have a long lasting impact on the economy as well, an impact that will last for sure much longer that the present recession. No more exuberant lending to households.
The other reflection is like this, what if we added to the debt held by households the debt that the governments are generating? They are the forced lenders after all. And if you look at the whole picture this way, the debt is still growing and growing… and the end is still further away.
If you’ve been reading in the news on how Banco Santander is covering its customers over Madoff’s losses, and how it’s been cherry picking some banks in distress, as well as not using the Spanish’s government toxic assets relief measures you’ll be thinking that they are a rising star. And they are, I won’t be the one to deny that, but maybe they are not rising as much as it might look like. In any case, in comparative terms, their are enjoying a privilleged position, especially because the rest of competitors are worse off. The star ain’t that bright.
Santander, a beautiful port city in the north of Spain
Let’s focus on the bank’s last announcement where they claim to be covering their customer’s losses. Let’s go deeper into the figures for some interesting hints.
The bank is including in its 2008 books an extraordinary expense of €500 million with that purpose. Wait! Weren’t they €1,680 million?
Okay. Here’s the trick. Santander is emitting new preferential shares, creatures born half-debt half-shares. Those, in 10 years will be worth €1,680 million less any increment of the initial fund deposit and the earnings to the present date of those funds (whatever that figure might be). What is insured is the initial investment, nothing else. It will be recovered not now, but in ten years. And with no actualisation at all.
For any investor that means bearing a couple of huge opportunity costs: the one already borne and the one that lays ahead. That’s how €1,680 million transform into 500€. The preferential shares will be liquid in ten year’s time. In the meantime yielding a mere 2% per year.
So, what should an investor do? Some will think about it, if its true that, when they invested, Santander was selling these funds as their own trademark, not referring to the real custodian behind. It’s great to sell something that works well solely under your name, as long as it keeps working well! And that entails a responsibility.
But many will simply sign this rebate deal and forget about it. And with the deal the compulsory renounce of any legal claims against Santander, and the curious obligation to keep working with them for the next decade. Not too bad for many considering the alternative of entering a judicial quagmire that will carry expenses for sure as uncertain the outcome may be.
And here comes the final reflection that, from my point of view, explains many things about the Spanish banks. People in Spain, unlike in the US, take their time to assume their losses. At the moment there’s not property market in Spain as people are not selling, waiting for hint of hope to recover what they paid for it. And, as long as there are no transactions, there are no prices.
With raising unemployment covered by benefits that won’t last forever, eventually, many people will have to face reality. So will the Spanish banks. If Santander is betting that, when this moment comes, the worst will be over and the economy will be going upwards, I’m really sorry to bet in the opposite direction.
It’s easy to talk about something when it has already happened. The crisis seems so predictable now (it was predictable before as well if you browse to older posts). Now the trick is about spotting the tipping point. Have we already seen the worst or are we going into a depression this time?
If we all saw it coming, why didn’t we do anything about it? Why sometimes prospects seem so grim and then, suddenly, hope seems to be around the corner?
I’ve got a theory about the tipping point, or how we are going to turn this around. It’s related to what Keynes called the animal spirits, not those of the American natives, but of John Maynard Keynes. Those that sharpen the edges of the market, turning optimism into euphory sometimes, and dismaying in despair sometimes. They are moody and impulsive, and sometimes the distance between hope and fright is as thin as a hair for them.
But the animal spirits couldn’t do anything without bodies. Inadvertently, we lend them our bodies, energies and enthusiasm. They act through us, so we should know something about them. We should feel them about to act.
Let’s read around. Who are we blaming for the crisis? The govermnents mainly, some obscure financiers, some not so obscure cons, other countries, departing leaders, distant wars… in short, we look around and find somewhere else to look at.
But this couldn’t have happened without our acquiescence. This wouldn’t be here if we all had avoided some things that, looking backwards, feel like common sense to all of us now. We didn’t have a say, yes, but we all could have had.
And how is all this going to change? How are we going to turn it around?
I can’t answer that. I am writing about when. And the when is not here yet. Only when we look inward, think of what we should be doing to change it all, when we finish the blame game and we act on responsibility instead, only then, we will have touched the bottom.
Until then, our animal spirits will keep dragging us down…