BoJ rescinds war on deflation: Part II

Friday, January 29, 2010

Marshall Auerback will be featured from time to time here on News N Economics. He is a dedicated author at the New Deal 2.0 (see his biography here). Take some time to read his postings at the New Deal 2.0 – he gives interesting perspective on the European Union, Emerging Europe, Chinese and U.S. policy/politics, and more.

Marshall has some comments about my previous post, Japan rescinds war on deflation.

By Marshall Auerback (posted by Rebecca)

But Japan is also starting to be far more aggressive on the fiscal front.

The Times article on Japan from last December – 'Debt-laden Japan shocked by £630bn spree to save lives’ reports that:
Yukio Hatoyama, the new Japanese Prime Minister, has stunned a nation already mired in huge public debt by unveiling the country’s biggest ever postwar budget: a 92.3 trillion yen (£630 billion) spending spree aimed at “saving people’s lives”.

The unprecedented budget, which supposedly shifts Japan’s fiscal spending focus “from concrete to lives”, comes amid rising concern about the solidity of sovereign debt in the world’s second-largest economy.

The new budget will require additional debt issuance of Y44.3 trillion — within the Government’s expected band, but still at a level that will raise Japan’s debt-to-GDP ratio to nearly 195 per cent.
It's quite a significant amount of spending. The fact that new debt exceeds tax revenue is irrelevant from the solvency perspective; it's only interesting insofar as it illustrates how depressed aggregate demand remains in Japan. As you rightly note, there is no risk of sovereign debt default in Japan because Japan can always issue as much debt as it wants in its own freely floating non-convertible currency. As Bill Mitchell has noted
"the interesting part of the story is that there is now a discrete policy shift going on as a result of the political changes in Japan that arose from the last election – that is, the ascendency of the Democratic Party of Japan (DPJ). The shift will see the government reduce its obsession with public infrastructure development as a vehicle for huge fiscal injections and instead put the spending power into poor households. " This is very supportive of aggregate demand and income growth.
The BOJ's actions, by contrast, are nothing more than moving numbers around on a spreadsheet. Arguably, the 0% interest rate policy in Japan has exacerbated the deflationary pressures in the economy. Virtually all of the debt held by the Japanese non-government sector is public, rather than private, so the loss of the so-called "fiscal channel" via sharply lower interest rates, has been very significant. Additionally, low rates impart a deflationary bias because they reduce the holding costs of inventory and reduce the required returns of capital. These are wonderful from a supply side perspective, but disastrous from the demand side.

The important point as Bill Mitchell, Warren Mosler, Richard Koo and I have argued previously is that it recognizes its on-going role to plug the spending gap left by non-government saving (and the export collapse) and it recognises it has the capacity as a sovereign issuer of its own currency to run large deficits. In this sense, the Japanese government is placing a premium on keeping unemployment low and is resisting pressures from the deficit hawks, the neo-liberals, and the horribly incompetent ratings agencies (all of which should be abolished).


Unemployment rates: U.S. versus the rest of the world

Thursday, January 28, 2010

Today Gerald F. Seib wrote an interesting article at the WSJ, Obama Invites GOP to Share Burden of Fixing U.S. In it, he says the following:

Thus, Mr. Obama, after reeling off a veritable litany of proposals focused on how to create jobs (a word that appeared 29 times in the speech), came to the heart of the political matter: Democrats' stunning loss of a Massachusetts U.S. Senate seat means he tackles this daunting agenda one vote short of the 60 needed to stop Republicans from mounting filibusters to stop his initiatives.
Wow, "jobs" was repeated 29 times during the 70 minutes that Pres. Obama was in the spotlight. Below I illustrate trends in unemployment rates across different parts of the world; and it's obvious that the American working population is struggling relative to many other economies.

A comparative analysis of unemployment rates in Asia (where monthly data is available),


Latin America,


Emerging Europe,


And the G7.


The charts illustrates each country's unemployment rate relative to its 2006 average organized by region; I present the data in this manner due to the structural disparities in unemployment rates across economies. Except for Emerging Europe, the scale of the Y-axis is the same across each region for comparability of labor distress. Latvia’s off the charts; it’s unemployment rate is almost 3.5 times its 2006 average.

Across all regions, labor markets weakened dramatically in 2009. Ostensibly, the labor recovery in Asia and Latin America is fully underway. Alternatively, the U.S. labor market has stabilized, but the unemployment rate is hovering about 2.2 times over its 2006 average. And there’s no coming down from here until economic growth sticks at a 3.5% pace, or so.

Rebecca Wilder


Japan rescinds war on deflation

Tuesday, January 26, 2010

At least that is the way I read today’s monetary policy release. According to the statement released today: “The Bank of Japan will encourage the uncollateralized overnight call rate to remain at around 0.1 percent.” However, the statement curiously omits the following from item 6. of the previous release:

The Policy Board has concluded that it is appropriate to further disseminate the Bank's thinking on price stability, by stating more clearly that the Policy Board does not tolerate a year-on-year rate of change in the CPI equal to or below 0 percent and that the midpoints of most Policy Board members' "understanding" are around 1 percent.
I don’t know why the Bank of Japan would rescind their commitment to 0 percent, when the median inflation projection is negative through 2011, although improved from its latest forecast in June 2009 (at the end of the January 2010 policy statement). That’s bad – rising real debt, further hits to consumer spending, the works. Admittedly, there’s debate over the actual benefit of quantitative easing and zero-interest rate policy (see this paper at the FRSB).

But another policy-relevant bit of news hit the wire today: S&P put Japan’s credit rating on negative watch. From the NY Times:
“The outlook change reflects our view that the Japanese government’s diminishing economic policy flexibility may lead to a downgrade unless measures can be taken to stem fiscal and deflationary pressures,” S.&P. said. “The policies of the new Democratic Party of Japan government point to a slower pace of fiscal consolidation than we had previously expected.” Prime Minister Yukio Hatoyama has some lofty spending plans in its budget, funded by an expected 44.3 tn yen bond issuance.
Diminishing policy flexibility? Given the central bank’s propensity to move away from the ZIRP, and the government debt running stock at 183% of GDP (and rising), I’d say that diminishing policy flexibility is a euphemism.


Notice how Japan's government debt rose while the nonfinancial sector's obligations fell - that's the deleveraging story.

Japan is not “insolvent”, at least that is what the external debt metrics say. But the only real policy flexibility is held by the central bank. And the Bank of Japan, ostensibly at least, doesn’t seem to be providing adequate liquidity.

If left unchecked, this could happen to the U.S.: policy mistakes. Raising taxes and hiking rates too early can turn into persistent economic problems.

Rebecca Wilder


Bond markets soaking up Greece

Monday, January 25, 2010

Greece announced a 5-yr 8 billion euro deal today (as expected) – yesterday I called this a Hail Mary. Well, the Hail Mary worked! Books are closed, and the deal is well over subscribed (i.e., strong demand for the deal). Evidently, the talk is that there is natural demand for this product, via the rest of Europe, to shore up the value of the bonds over the near term.

But that’s it, because credit default swaps haven’t moved, remaining elevated well-above the Q4 2008 crisis point.

The credit-default swap (CDS) strips out the interest rate risk, leaving a measure of credit risk. Across the remaining PIIGS countries, CDS spreads in Ireland and Italy are relatively stable, while those of Portugal and Spain are seeing pressure in the wake of recent Greece developments.

Yesterday’s post highlighted the saving problem in parts of Europe (including the PIIGS above).We’ll see how this goes – but it appears that Greece has dodged the bullet for now.

Rebecca Wilder


National saving rates across Europe: diverse

Saturday, January 23, 2010

Greece – it’s the Eurozone’s black sheep. If this isn’t a Hail Mary, I don’t know what is: Greece Plans Bond Issue Soon. From the Wall Street Journal:

Greece said Friday that it plans to syndicate a five-year benchmark bond next week to address renewed market jitters over its ability to finance its giant budget deficit, even as yields on Greek debt hit a new high. The bond, long awaited by market participants and seen as a key test of Greece's ability to attract investors, will raise between€3 billion and €5 billion, the head of the country's debt agency said.
But Greece is in good company – the so-called PIIGS (Portugal, Italy, Ireland, Greece, and Spain). In fact, the low saving is broad-based, with net national saving – net national saving is an aggregate measure of saving, including private and public sectors – being the lowest in Portugal, –6.9% of gross disposable income on average spanning 2007-2008, and highest in Switzerland, +13.9% over the same period.


This differential of saving patterns across Europe, i.e., Germany saves and Portugal does not, stalls any sort of bailout talk - technically, the Maastricht Treaty prohibits inter-government bailouts. However, if Greece’s Hail Mary bond issuance doesn’t work, something’s got to give. Marshall Auerback offers an interesting solution.

Greece is simply the first in a long line of European (worldwide, actually) countries that face fiscal consolidation (see two FT articles by Martin Wolf, here and here).

So we wait and see.

Rebecca Wilder


The frequency of economic statistics matters at turning points

Wednesday, January 20, 2010

How are the data presented? At an annual, quarterly, monthly, or weekly frequency? At the onset of the New Year, you will undoubtedly see many charts illustrating records broken in 2009 using annual measures. This is always fun (from a data junkie's point of view), but it only tells the reader where we were, on average in many cases, rather than where we are now! Quarterly data are the same story - often presented well after the culmination of the period.

Alternatively, monthly data are a little more telling but still lagged by at least one month. For example, the employment report is the first major economic release of the month, which sets the stage for many subsequent releases. However, by the release date, generally the first Friday of the month, the survey information is already one month old.

This leaves weekly, or even daily, data. High-frequency data can tell us "where we are now", but are subject to substantial volatility. Nevertheless, high-frequency data are quite informative at economic turning points. So where are we?

Here are three high-frequency indicators that show an improving labor market, as illustrated by initial claims and daily tax receipts. However, the money multipliers remain at historically low levels, signaling that consumer spending and credit growth continues to elude monetary policymakers.

The weekly initial claimant count is dropping off quickly. So far, the 4-week moving average is 33% off its peak, a definite positive. And comparing to previous recoveries, the claimant count does suggest that this recovery will look more like a job-plus, rather than a job-less recovery.
However, don't get too excited - an awful lot of jobs need to be created each month just to drop the unemployment rate.

The stabilization of the labor market is likewise seen in the Treasury's daily tax receipts. Daily receipts have stabilized, and are now growing, off of their lows.

High-frequency monetary aggregate indicators show that traditional Fed policy - increasing bank reserves through open market operations - is not flowing into the economy as new money for spending on goods and services. Money multipliers of all types are half of what they were just two years ago (dropping even lower in recent months).

This is the bane of the Fed's policy existence during and in the aftermath of the banking crisis. Inflation is not going to be a problem until this money clog frees up.

There is widespread stabilization, and even improvements, as shown by the high-frequency economic data. Perhaps I will follow up this post on the remaining weekly data, like on credit extension and housing.

Rebecca Wilder


Government payroll across U.S. Presidencies

Monday, January 18, 2010

The term of Brazil's President, Luiz InĂ¡cio Lula da Silva, concludes this year. During President Lula's tenure, Brazil enjoyed stable monetary policy and strong economic growth. However, President Lula is likewise known for growing the size of Brazil's government, for example, by adding over 300k government jobs. This translates into a 4.8% increase in the government payroll when adjusted for working-age population growth.

This is a criticism of Lula's administration - growing the size of the government (here, as measured by its payroll), and stifling some prospects for long-run economic growth.

Accordingly, let's see how previous U.S. Presidents grew the U.S. government payroll: is there a party trend? The general idea is, that the Democratic Party seeks a larger role for government as a mechanism to increase economic welfare than does the Republican Party (generally). A priori, I expect to see more robust government payroll growth during Democratic administrations.

The chart illustrates the level change in the total government payroll by Presidency since 1953 (the data are not seasonally adjusted and reported here). There is no noticeable correlation between party and the government payroll, although LBJ and Clinton, Democrats, did grow government jobs by the widest margin, 2.6m and 2.3m, respectively.

State and local government jobs are included in the measure of "government", while a better link to party affiliation is the federal payroll. Furthermore, the population - and thus total payroll - grew as well. So, in focusing solely on the federal payroll in percentage gains (in order to remove effects of term length), and adjusting for population growth, there appears to be a stronger correlation between the current administration's party affiliation and government jobs growth.

The top 3 federal job-creators were LBJ, JFK, and Obama, Democrats, while 4 out of the top 5 top federal job-slashers were Nixon, Bush, Bush, and Ford, Republicans. Interestingly, Clinton ranks first in cutting the federal payroll; it fell by almost 10% when the population grew by roughly the same amount - in adjusted terms, that's -18% fewer federal jobs.

This analysis, of course, does not account for recessions, budgets, or external factors that would differentiate payroll growth across periods. However, there is a correlation, as in Brazil, between party affiliation and the growth of the federal payroll.

Rebecca Wilder


China's trade balance points to inflation

Sunday, January 10, 2010

The Customs Administration announced record trade flows in and out of China in December. Specifically, exports grew at a 17.7% annual pace, while imports surged 55.9% over the year. This is a remarkable one-month rebound; reported export growth beat consensus expectations by a factor of 3.5 (+ 5% export growth and + 32.5% import growth, according to Bloomberg).

China is experiencing robust domestic demand growth, as illustrated by the surge in imports. Furthermore, there is likely significant price pressure built into this report since the data are measured in nominal $USD. The December trade report suggests that inflation pressures are underway in China's economy; expect a big jump in coming inflation reports.

I wouldn't be surprised if the government allows the yuan to appreciate sooner, rather than later, in light of this report.

Rebecca Wilder


Two BRICs: India vs. Brazil

Thursday, January 7, 2010

I started research on India to further explore economic prospects after reading and (excellent) FT article on necessary labor reform. In doing so, I now see a (possibly) much flatter economic growth trajectory for Brazil. Here is an excerpt from the article (last paragraph):

Over the years, numerous academic studies and official reports, including the Second National Labour Commission Report (2002), have recommended major reforms of India’s labour laws. The problem is absence of political will. Until that will can be mustered, the expansion of decent non-agricultural jobs will continue to fall far short of burgeoning supply (the “demographic dividend”), condemning many millions to insecure and ill-paid, informal urban employment (or even unemployment) and mounting underemployment and distress in rural India.
The data on the Indian labor market is patchy at best; that is, if you want something a little more descriptive than an annual unemployment rate. But how does India compare to its peers? The BRICs, for example (Brazil, Russia, India, and China). What I found is, that India is setting itself up pretty well to grow quickly - a finding that is consistent with the India-part of the overall BRIC theme (link to Goldman Sachs paper):
The results are startling. If things go right, in less than 40 years, the BRICs economies together could be larger than theG6inUSdollar terms.By2025 they could account for over half the size of the G6. Currently they are worth less than 15%. Of the current G6, only the US and Japan may be among the six largest economies in US dollar terms in 2050.
In fact, the BRIC data, side-by-side, paints a darker picture for Brazil's growth trajectory than that for India. Let's see why.

India, China, and Russia increased their respective investment shares of GDP over the latest decade- Brazil, too, but at a much slower rate. India (as I discussed in a previous post) has done this mostly through reducing barriers to inward foreign-direct investment.

However, more domestic saving is likely needed in India despite the falling of its consumption share (right graph) over the same 10-year period. India gets a bigger bang for each investment buck spent, so save more and supplement the inward FDI.

In stark contrast is Brazil, an economy that is clearly saving at a much lower rate than its peers. The consumption is a large 63.1% of GDP, essentially unchanged over the latest decade. And for a developing economy, the investment share is remarkably low in levels, 16.4% of GDP in 2008 (compared to India's 32.2% share).

In all, the saving and investment story adds up to a level of productive capital stock. Without investment, there is no capital stock growth. And without capital stock growth, there is little productive GDP growth.

Note: the capital stock is constructed as investment plus non-depreciated capital.

The chart above illustrates the capital stock per worker (CW) for Brazil, India, and China. Clearly, Brazil's productive capacity per worker is the lowest - with CW being quickly outpaced by India, and especially, China. India's CW is on a respectable trajectory, but even an incremental increase in the rate of investment (i.e., the capital stock) could have profound effects on productivity and growth. Here is what the FT says:
Why is China the “workshop of the world” when Indian labour is even cheaper and her entrepreneurs admired worldwide? There are many reasons, including (until recently) the anti-foreign-trade policies and small-scale industry reservation policies, noted earlier, as well as poor infrastructure in power, roads, water and ports. Perhaps even more important are the restrictive labour laws and certain other regulations, which encourage Indian manufacturing units to “stay small”, thereby forgoing the classic industrial economies of scale and scope.
With labor reform and ongoing policy focused on domestic investment, India's economy is on a path that should turn up quickly. This is Solow's premise: low income countries invest in productive capacity, and the growth rates can be quite startling given the base effects (i.e., starting from a relatively low production level).

To be sure, there are risks. Currently India's average income is low compared to its peers, based on years of questionable policy. Among the BRIC countries, India's welfare measure (per-capita income) is the lowest, and that ranking is not expected to change by 2014 (see chart from a previous post, using data from the IMF World Economic Outlook in October 2009).

Brazil, on the other hand, is not setting itself up for sustained growth. The country is now enjoying the economic benefits of policy reform and open capital markets, an economic adolescent if you will. The next step in Brazil's development is clearly to adopt policies that grow saving and investment.

Rebecca Wilder


World income distribution: not normal

Tuesday, January 5, 2010

Angry Bear blog is running a theme today on income distributions. I wanted to add my input about global income imbalances here on News N Economics.

On Angry Bear, Tom Bozzo authored The Rich *Are* Different, focusing on the makeup of earnings across US tax payer brackets. And Cactus authors Poverty and the Real Median Income, where he comments on the poverty share and median income across U.S. Presidencies.

So here is where I chime in on a global scale. Using the IMF's World Economic Outlook database (October 2009), one sees how very skewed is average income around the world. And worse, the IMF forecast does not show the disparity improving much (if at all).

The charts above illustrate the frequency distributions for global per-capita income (income divided by population) across 182 countries (you can download my country-level data here, or get all sorts of data from the IMF here). The data are measured in PPP international dollars, which is intended to normalize for currency effects in a period.

Well, it's pretty clear that the distributions are strongly positively skewed, i.e., with relatively few high income values. And furthermore, the non-normality of the global income distribution does not improve during the forecast, 2005-2014 (the IMF forecast ends in 2014).

The table below lists some simple descriptive statistics of the sample.

Admittedly, there are some "slight" improvements: the tails become less "fat", and the distance from the top to the bottom narrows (if one can call dropping from 27,149% to 20,162% a meaningful change).

Income distribution is a serious welfare concern from the country level all the way up to the world - one that apparently is not expected to change anytime soon.

Rebecca Wilder


Unemployment in Europe: it's not just Spain

Saturday, January 2, 2010

The New York Times published an article about Spain's "soaring" unemployment rate among those aged 15-24. Across Europe and in the US, the unemployment rate for young workers surged in 2009.

Labor reform is needed in Spain, which is the overall theme of the NY Times article; but the article confuses slightly the long-run phenomenon that is Spain's growing structural unemployment versus the cyclical surge in unemployment across Europe:

But the sharp increase among young people is particularly problematic. It has jumped from 17.5 percent three years ago at the height of the boom to the current 42.9 percent.
A three year rise in unemployment is a structural issue in Spain, rather than surging unemployment rates in 2009, which is a cyclical trend.

The chart illustrates the unemployment rate for those aged 15-24 across the European Union when available and for the US (for comparison). The data are sorted by largest % YTD (year to date) rise in the unemployment rate from Ireland (largest gain) to Belgium (smallest gain). Sorting the data this way focuses on the cyclical unemployment rate rather than the structural rate, i.e., the unemployment rate in Spain is starting from a very high base, 32.5% in January 2009.

The rise in Spain's unemployment rate for young workers 15-24 is great, +32.0% since January; but that in Ireland (52.7%), the Czech Republic (47.1%), Denmark (37.9%), Bulgaria (32.8%), and Slovakia (32.2%) are larger in magnitude. Across Europe, younger workers are being forced into unemployment - or schooling, which is common for this cohort.

The data indicate that Spain's unemployment rate is the highest. However, this is an incomplete picture since just 21 out of the 30 (27 EU member plus 3 candidate) countries listed unemployment rates for workers aged 15-24 (you can see the Eurostat labour - labor in American English - market survey data here) in the latest month, October 2009.

Including those countries not listing monthly 15-24 unemployment data, and focusing on the total unemployment rate, Spain's surge is not the strongest nor is its level the highest.

According to the OECD (in the 2009 Economic Outlook No. 86), Spain's labor market problems have likely peaked, while those in other parts of Europe are only getting started (like that in Germany, which could rise significantly in 2010):
the largest part of the total expected increase in unemployment in Spain has already taken place, while in other European countries significant further increase in unemployment is expected going forward.
The Baltic States are taking a beating, Latvia's unemployment rate was already 20.9% in October. And since the Baltic economies are expected to drop (see the European Commission's autumn forecast) the most in 2009 and 2010, a lagged indicator like the unemployment rate is bound to rise further.



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