Oxi thoughts


So the Greeks voted Oxi (No) in the referendum on austerity. It was an interesting vote. The citizens were asked to vote on a set of proposals that were no longer on the table (indeed they were a draft not even approved by the eurogroup). It was a way for the greeks to express anger. Ok, so be it.

What happens now?

First, the ECB will have to decide if it wants to continue funding Greek banks. With bonds trading at around a third of face value, prudence suggests the haircut on Greek debt should be increased. That alone will cause many banks to go bankrupt. ECB cannot lend to insolvent counterparties. You get the point.

Next, assuming the status quo on ECB, banks will run out of currency in a matter of days. The fiscal math has gotten terrible recently and the primary surplus has vanished. The government will probably have to resort to issuing IOUs as a stop gap till a new currency can be printed. In the next 3-6 months a new drachma has to be introduced. It will probably trade at a big discount to the euro.

If that is the path taken, Greece will have exited Euro membership. Technically membership of the EU is contingent on euro membership, so they could exit the EU as well. This has the additional implication that they need to start having border controls, new visa system (that could have a big impact on tourism), etc.

The geopolitical implications of EU-exit can be very large:

Turkey could be a big beneficiary and be able to join the EU.

Russia could get a foothold as it could be seen as a savior, lending money when no one else would.

Lastly Greece has an oversized defense budget relative to the rest of Europe. It is a recent democracy and civil institutions are badly developed (note the poor tax collection as an example). In a very bad outcome scenario a military coup cannot be ruled out, especially one backed by Russia.

This will be interesting to watch from outside. Very bad for the greeks themselves.

Some links. I’ll try and keep adding more here.


nairu in 2014

What to read: monetary policy


Two quick links on monetary policy:

1. Tim Duy has the best lead in to the Fed’s decision today. Charts, charts and charts.

2. Arvind Subramanian, Chief Eco Advisor to Govt of India, writes on real interest rates in India.


indians in the USA CF_4B4NUoAA8_FK

What you should read: May 27



Why is that no European country dared to take on FIFA? Why was it left to the Americans to get involved?

NY Times story

Business Insider on the guy who “turned”

Quote of the day from Swiss criminal proceedings: “it is suspected that irregularities occurred in the allocation of the FIFA World Cups of 2018 and 2022.” You think?

Gloom and doom from Ambrose Evans-Pritchard over at the Telegraph.

Cullen Roche has some important points to make regarding the Efficient Markets Hypothesis.

A professor failed an entire class. This seems to be a fictional story but it serves to illustrate the failure of socialism well:

An economics professor at a local college made a statement that he had never failed a single student before but had recently failed an entire class. That class had insisted that Obama’s socialism worked and that no one would be poor and no one would be rich, a great equalizer.

The professor then said, “OK, we will have an experiment in this class on Obama’s plan”. All grades will be averaged and everyone will receive the same grade so no one will fail and no one will receive an “A”…. (substituting grades for dollars – something closer to home and more readily understood by all).

After the first test, the grades were averaged and everyone got a “B”. The students who studied hard were upset and the students who studied little were happy.

As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little. The second test average was a “D”! No one was happy.

When the 3rd test rolled around, the new average was an “F”.

As the tests proceeded, the scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else.

To their great surprise, ALL FAILED and the professor told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great, but when government takes all the reward away, no one will try or want to succeed.

Human nature will always cause socialism’s style of government to fail because the world has producers and non-producers (makers and takers).

It could not be any simpler than that.

Indian origin kids have dominated the Scripps Spelling Bee winning the last 7 years in a row and 11 of the last 15.

The Economist writes on how Indian immigrants to the United States really stand out relative to other nationalities when it comes to education and income levels.

indians in the USA CF_4B4NUoAA8_FK


What you should read: May 26


Bloomberg carries a great story in charts of China’s spectacular stock market performance. The Schenzen index has doubled this year alone.

Did China launch yet another massive fiscal stimulus?

Shamelessly copied from Marginial Revolution’s Tyler Cowen:

Given that non-financial total corporate debt is estimated by McKinsey to amount to $12.5tn, Chinese companies are paying on a nominal basis some $812bn in interest payments each year. In real terms, this amounts to $1.35tn. This is not only significantly more than China’s projected total industrial profits this year; it is slightly bigger than the size of a large emerging economy such as Mexico.

Tyler also writes about the success that Bihar had in increasing enrollment of girls in school by giving each schoolgirl a bicycle.

How to travel in style? Answered by Real Men Real Style.

Why are written and spoken French so different? Andrew McKenzie takes a crack at answering this question on Quora.


What to read today: May 19


One and done. Bruegel has done the job for me by summarizing all the recent economic debates on whether the economy is self correcting.



What you should read today


Heard in the Hutong: The Chinese View of India

Benedict Evans on Apps versus the Web and why the future is mobile, except it isn’t.

Sanjeev Sanyal says the world population will top earlier and at a lower level than the World Bank believes.

And if you are in for an economics paper read, Roger Farmer’s Animal Spirits, Persistent Unemployment and the Belief Function is worth a good time slot (warning: pdf).

The European Centre for Medium Range Weather Forecasts is forecasting a super El Nino this year. Here is Bob Tisdale talking about it.




Unfair bond ruling


I wanted to link to this news article about a judge ruling that a municipality can choose to put pensioners ahead of bondholders in bankruptcy. The judge herself says that the ruling may be “unfair.”

California’s public retirement fund holds so much power over local officials that pension-bond investors can’t expect equal treatment when a city goes bankrupt, a judge said in a ruling that she acknowledged seems “unfair.”

U.S. Bankruptcy Judge Meredith Jury on Monday threw out a lawsuit in which investors had claimed their pension bonds must be paid off at the same rate as the California Public Employees’ Retirement System in the San Bernardino bankruptcy. The $304 billion fund is the biggest in the U.S.

Normally this has no impact on my life, but what an aptronym. I mean a Judge whose name is Jury!!!!

Ok. Bye.


US GDP reported

US GDP growth – not as weak as it seems


The headline is that US GDP growth in the first quarter of 2015 slowed to a 0.2% annualized rate down from the 2.2% rate in the December quarter. I believe that this hides the real growth in the economy. To be sure non residential investment would have fallen (thanks in large part due to oil related investments), but real incomes and consumption actually benefited from the fall in inflation. See also FT Alphaville – Another Winter of Discontent (registration required).

The problem with looking at quarter on quarter data is that we are dependent on the seasonal adjustment factor used. Using a year/year measure removes this “adjustment” but has issues with being dated, i.e. not representing current growth. Nevertheless when we look at the year-on-year numbers, the growth in Q1 was 3.0% compared to 2.4% y/y growth in December. In fact Q1 2015 has been one of the fastest growing quarters post-recession as shown in the chart:

US GDP Reported

Note the big divergence between the quarterly and annual rates of growth. Sharp eyed readers will note that the quarterly numbers for the March quarter in previous years too seem depressed (notably in 2014 and 2011). This should not be the case if we use seasonally adjusted numbers. The point of using seasonal adjustment is that this sort of seasonality is removed. Looking at the post recession period (2010 onwards), we see an interesting trend in the average for each quarter:

US GDP Average Quarterly

Consistently the Q1 number is low, while the variation in other quarters is limited. Note that the variation in y/y numbers is also small. Clearly there is a problem with the seasonal adjustment methodology used by the US commerce department. So I did a quick readjustment and calculated my own seasonally adjusted GDP series using the data in the post recession period and this is how it looks:

US GDP Revised

The number for Q1 2015 is a growth rate of 2.0%, and the y/y rate is (no change here) 3.0%. This is certainly a slowdown relative to the 4% growth that was seen in June and Sept 2014. The slowdown in December and March quarters in this series are also consistent with the strength in dollar leading to weak net export performance.

And the average growth rates for each quarter now:

US GDP Average Revised

The Q1 anomaly has disappeared in the new series as it should.

Bottom line:

Growth in the US is slower than before but a 2% growth rate is pretty decent. The Fed is right in dismissing the weak GDP print, but for the wrong reason. It is not transitory factors, but rather the seasonal adjustment methodology. By the time Q2 numbers roll out, we could be in for an upside surprise in growth. Note that the GDP series is also due for revision in July. Perhaps we may see some recalculation of the Q1 numbers.


Big disclaimer: This is just a rough and ready calculation. Please do not use this to make investment decisions. Also note this is a personal blog and a personal view. This does not necessarily represent the view of my employer.



This is why I follow Arnold Kling


From his post this weekend:

I take an outlier point of view, which is that the Fed is not important for the macro economy. Walrasian economists needed something to pin down the nominal price level, so they nominated the money supply. I instead take the view that money and inflation are largely social conventions. Extreme measures by the government can change these social conventions. Otherwise, in my view, the belief in the power of the Fed is a superstition. This superstition is best maintained if the Fed’s actions are mysterious. If the Fed were to follow a transparent rule, I think that the superstition would be exposed for what it is.

This is at the bottom of his take on the Neo-Fisherite (keeping rates low encourages low inflation) & market monetarist (target nominal market levels) thinking.


Hard a starboard?


Is the Indian electorate swinging right? I mean this economically not from a social/political point of view.

In 2009, there was a swing in favour of the Congress-led UPA government. Within the many narratives as to why I think there were a particular couple of factors at play:

1. Economically, the Congress/UPA had delivered a strong 5-year growth track record. Yes, inflation had risen, but it hadn’t reached the levels of the next five years. Real incomes rose sharply. The Rupee was on the rise (except during the financial crisis period). India was truly shining. Fiscal deficits ceased being a worry. We had survived the crisis intact. Government shrank, free markets prospered.

2. Politically, a big event in 2008 was the signing of the nuclear deal with the US and the Nuclear Suppliers’ Group. This led to a break between the UPA and the Left parties. The Left withdrew support and the government would have fallen except for the support extended from the outside by the Samajwadi Party.

The 2009 victory though was attributed to the success of the social programmes of the Congress, most notably the rural employment guarantee programme. Other commentators (such as Swaminathan Aiyar) have noted that the Congress did not win more seats in rural areas in 2009, rather it was the urban/semi-urban swing that it won. (See for example this article where he says:”In 2009, Sonia’s sycophants claimed that MNREGA had won her the election. In fact she swept the cities while the poorest states most in need of MNREGA voted for Opposition parties.”)

The mis-attribution resulted in a sharp left-ward swing in the next few years: large and expanding fiscal deficits, subsidies and handouts. Rising inflation, three periods of ever larger currency depreciation reaching near crisis levels in 2013.

The voters had not delivered a socialist mandate. Thus the electorate revolted. And handed the mandate to the only right-wing (economically speaking) party available. That this party was also right-wing politically (nationalist) was probably not what swung the result. Mr Modi was wise to use the development agenda as the mood of the nation was to punish the left-wingers.

As an additional point in support of this, I will note that 2004 was the peak for the Left movement with 53 seats between the CPI and CPI(M). That fell to 20 in 2009 and 10 in the current general election. If that is not a rejection of the left, I don’t know what is.

P Chidambaram – who understood this – said in a recent interview that they misread the 2009 mandate:

“While we got the largest chunk of seats from prosperous parts of the country, from urban India, we did not read the signs,” the FM said. While he suggested a pro-growth strategy as opposed to a more pro-distributive one was the way the party should have gone after 2009, power minister Jyotiraditya Scindia disagreed, saying rural India had given the Congress an equally powerful mandate.
Chidambaram pointed out that while the India of old was a ‘petitioner’ society, the current India was an ‘aspirational’ one. India’s political parties, he said, failed to understand the changes that were taking place in the mood of the country in 2010 and 2011 and that the government failed to anticipate the extent of anger that was building up.

Of course, he said this on 29 April after he had decided not to contest this election. So he had not much to lose in speaking the truth.

One can only hope the message gets across clear to the new government. The country is ready for free markets. This is a generation that has grown into adulthood after the economy was opened up. We like competition, we like globalization, we are ready to be counted in the assembly of nations.

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