Thursday, June 30, 2011

‪Rockwell Collins's Jones Expects Explosive Global Growth‬‏

YouTube - ‪Rockwell Collins's Jones Expects Explosive Global Growth‬‏

Greece Passes Second Austerity Plan

Greece Passes Second Austerity Plan -

NewsOnABC: Calm has returned to the streets of Athens after the parliament approved a second austerity package to secure a payout from the European Union.

NY Times Poll: 89% of Americans view homeownership as important part of the American dream

Calculated Risk: NY Times Poll: 89% of Americans view homeownership as important part of the American dream

Canada's Reserve Bank Adopts Novel Approach to Housing Boom

By Grant de Graf

Mark Carney, the Governor of the Canada's Reserve Bank has adopted a novel approach in dealing with his country's rising housing prices. Cognizant of the impact that a housing bubble can have on an economy, many practitioners have opted to use the traditional monetary policy instruments, effectively interest rates and quantitative easing, to curb high demand and spiraling home prices.

However, these powerful tools have side-effects and are typically non-discriminatory in application. The impact that they have are broad reaching and while a central banker may be focused on addressing a single aspect of the economy, such as rising home prices, invariably the consequence of higher interest rates extends to other areas of the economic equation, such as consumer demand, currency, manufacturing and exports.

Therefore, Canada's Mark Carney's approach to dealing with rising home prices through increased mortgage bank and home-buyer regulation, should be welcomed. While increased regulation is usually a constraint to economic growth, Carney's action should be praised for being able to focus on a concern within the economy, which has the ability to foster a level-headed approach to pricing, with laser precision.

In a country such as Israel, home prices have enjoyed run-away levels of appreciation. As its central bank has responded by increasing interest rates to constrain the demand for homes and place a cap on prices, currencies in some instances have also strengthened, placing economic growth and exports at risk.

Many argue that increasing interest rates runs contrary to the classical free market policies advocated by economist Adam Smith, and that government intervention is precisely the action that could facilitate a recession. In any event, regulation in Mark Carney's sense of application, is closer aligned to free market thinking, than that of interest rate adjustment.

Lloyds Banking to Cut 15,000 Jobs

Lloyds Banking to Cut 15,000 Jobs

U.K Public Sector Stages Walkout

YouTube - ‪Public sector workers walk out, in summer of discontent


Tens of thousands of public sector workers, including teachers and UK Border Agency officers, are striking for 24 hours over pensions.

Euro May Rise to to $1.50: SocGen

Euro to $1.50: SocGen

Wednesday, June 29, 2011

Greece Secures Austerity Vote

Greece Secures Austerity Vote

ECB Kicking Can on Greece Challenge

YouTube - Jones Says Greece Contagion Possible, Growth Not being Addressed, Austerity Likely to Protect Status Quo

Greece: Trojans and Spartans Return to Battle

By Grant de Graf

On June 22, 2011, I posted an article on "Why Greece Needs to Vote Against Austerity to Survive." In essence, I articulated a number of issues that would destroy Greece, if it chose to remain part of the Euro Zone and embrace the Euro. That message is no more clearer today, epitomized by the violent clashes that erupted on the cobble streets of Athens, in protest to the Government's austerity program. This is the same venue where Trojans and Spartans might have battled for freedom, in a era that was lost to time. Therefore, it is ironical that a similar struggle is being waged today.

This time the enemy is the European Central Bank, who chooses to impose its values and discriminating predisposed remedies, on a country and people that are gasping for survival. Its message is gift-wrapped with delicate tissue, proposing a manifesto that will provide the county with prosperity and economic recovery. The contents of the endowment is curried with a poison that tastes enchanting at first bite, but that will leave Greece with a legacy, handicapped and embattled for generations to come.

The biggest failure of the ECB has been its inability to implement fiscal and monetary policy simultaneously, from the same hand. The needs of local governments are so different to those of central government's and the discrepancies between the two, have in Greece's case, been irreconcilable. How can central government dictate to Greece a spending package that is largely a right that belongs to its citizens? How can central government deny it's members, participation in their own local affairs? How can central government actively restrain growth of a member's economy (which could potentially be activated through the development of its export industry) by forcefully compelling it to function with the Euro, as the official currency? Instead, Greece is being held to ransom, to be part of the Euro zone and retain the Euro.

In the end, both the Euro zone and Greece will suffer, as they grapple to fight the tide and reconcile a situation, the conclusion of which is inevitable.

Monday, June 20, 2011

Trying to Weigh the Implications if Greece Defaults

Sovereign defaults and GDP: To default, or not to default? How did other countries in similar predicaments to Greece, weather the storm

Greece Deal on Hold

Greece and the euro: No deal for Greece

A Breakdown of the Government Debt of 12 Eurozone Nations

An Itemized Breakdown of the Government Debt of 12 Eurozone Nations, with Probability Stat of Default | Economy Watch

EU gives Greece ultimatum: austerity for loans

EU gives Greece ultimatum: austerity for loans

IMF Ditches Prospects of Additional Funding for Greece

Lipsky Says IMF Not Negotiating Another Greek Bailout Program Amid Crisis

Euro-Zone Wage Growth Picks Up

Euro-Zone May be Caught in Inflationary Trap: Wages rise, but high unemployment remains

Eurozone Divorce Imminent: Nouriel Roubini | Economy Watch

Nouriel Roubini predicts an imminent breakup of the Euro Zone backtracking from his approach at Davos 2011, when he indicated that the Euro had a future  (See Factors Affecting the Future of Euro at Davos 2011)

Friday, June 17, 2011

Spain's Bad Loans Hit 16-Year High

Spain's Bad Loans Hit 16-Year High - Is this the bottom?

Sarkozy Develops New Fetish

By Grant de Graf

It's official and now slated as a new trend that may permeate French society. It's called regulation. At an EU conference on raw materials and commodities this week, French President Nicolas Sarkozy ramped up calls for tough financial-market regulation on commodities such as oil, wheat and copper. (Sarkozy Prods Regulators)

In the week previous to the President's latest call for the regulation of commodities, he announced at an Internet fair that there should be tighter regulation of the Internet. (Sarkozy Seeks Global Net Rules)

Market concern was clearly ruffled, as Sarkozy's new spate of public speeches is showing a worrying trend, that if there's a problem or concern that develops, the solution is to to "regulate".

The French are scratching their heads, together with other pundits in the market. Jean-Paul Genet, an artist who resides in Paris, questions Sarkozy's line of attack or defense, depending on which way you look at it. "Next thing is that Sarkozy will be sending in regulators to mend broken marriages," he argues rhetorically. 

Regulation has a strategic value to society if it can achieve its purpose of eliminating trade or operational violations in the market. The danger is that over-regulation can crimp an entrepreneurial spirit that is crucial for any economy to grow. Secondly, it can result in regulatory arbitrage, which is a move of capital towards regions that are "regulatory friendly". For example during the period that followed 9/11, subsequent to the implementation of Sarbanes-Oxley in the U.S., London rallied a strong challenge to New York, for the title of the financial capital of the world, as many preferred to operate outside the boundaries of burdensome regulation.

Currency Strategist Says Euro May Rise to $1.50 Later in 2011

Video - CBA's Capurso Says Euro May Rise to $1.50 Later in 2011

Finance Minister Wong Expects Australia Economic Rebound

Video - Finance Minister Wong Expects Softness in Australia Economy to be Temporary

Sunday, June 12, 2011

Austerity vs. Stimulus: Who is Winning the Race?

By Grant de Graf

It was George Bernard Shaw who said, "England and America are two countries separated by a common language." Today, one might describe these two financial empires as "two nations divided by a common crisis." The credit crunch brought with it a wake of independent strategies from central governments, designed to catapult economies out of the dungeons of financial doom. Remarkably, their individual approaches to resolving the crisis have been patently distinguishable and almost opposite in application. While the U.S. has adopted the classical Keynesian post-crisis approach of fiscal stimulation, Europe has chosen a course of fiscal austerity.

Keynes would have argued that it was precisely the government's policy of austerity that led to protracting the Great Depression. Only after the outbreak of World War II, which required significant levels of government spending, did the economy experience any meaningful growth. Conversely, the pro-austerity lobby argues that increasing a deficit for the burden of future generations, is financially unhealthy and undermines investment confidence. The debate over these two different approaches was initially inked in 1932, by letters published in the Times of London from John Maynard Keynes and Friedrich A. Hayek. See "Keynes vs Hayek: The Great Debate Continues"

Although Europe's embrace of austerity, may be more consistent with Adam Smith's approach to economics and his opposition to government's interference in the economy, its application to monetary policy is not. European central governments have acted aggressively in hiking interest rates in their effort to curb rising prices, a policy that is imperiled with failure. Using interest rates to control "inflation", when the "inflation" is in essence a consequence of a shortage of goods or the expectations thereof, is equivalent to using a bomb to break down an open door. See "Fool's Trap: Measuring Inflation."

Consequently, Europe has opted for the worst of both worlds, in selecting a hands-off approach to fiscal policy, where in fact the economy need's a crutch; and for active participation in interest rate manipulation, to ultimately distort the level of new investment in the economy. This will only further exacerbate an already crippled economy . The consequence of interest rate adjustment as a measure for first aid to the economy, is that it is broad-reaching and not confined to the target area requiring repair, especially when that area does not require remedy.

Secondly, the pro-austerity lobby's argument that increasing a deficit for the burden of future generations, is financially unhealthy and undermines investment confidence, is not substantiated. Everyone wants to see a reduced deficit at the end of the day. However, a crippled and devastated economy, even with a bus load of investors who are itching to participate in a promising initiative, is like scouring the horizon for buried treasure with a broken telescope.

I agree that increasing a budget deficit in times of a recession is more risky. But so is open heart surgery. In certain circumstances, there simply are no other alternatives. The real argument is whether reducing a budget deficit on its own merit, can contribute towards growth or whether the perception that it creates, will attract more investment. Even the pro-austerity lobby do not argue that there is any fundamental advantage that austerity can provide to stimulate growth, other than the positive impact that it can have on expectations; expectations that may be as consequential as sipping from a Pina Colado on a beach in Hawaii.

World Bank Global Outlook

Global Conditions
World Trade Volume (GNFS)-
Consumer Prices
G-7 Countries 1,2-
United States-
Commodity Prices (USD terms)
Non-oil commodities-24.127.620.7-12.0-9.4
Oil Price (US$ per barrel) 361.879.0107.2102.198.7
Oil price (percent change)-36.328.035.6-4.8-3.3
Manufactures unit export value 4-
Interest Rates
$, 6-month (percent)
€, 6-month (percent)
International capital flows to developing countries (% of GDP)
Developing countries
Net private and official inflows3.94.8
Net private inflows (equity + debt)
East Asia and Pacific3.
Europe and Central Asia2.
Latin America and Caribbean3.
Middle East and N. Africa2.
South Asia4.
Sub-Saharan Africa3.
Real GDP growth 5
Memo item: World (PPP weights) 6-
High income-
OECD Countries-
Euro Area-
United States-
Non-OECD countries-
Developing countries1.
East Asia and Pacific7.
Europe and Central Asia-
Latin America and Caribbean-
Middle East and N. Africa2.
South Asia6.
India 7,
Sub-Saharan Africa2.
South Africa-
Memorandum items
Developing countries
excluding transition countries3.
excluding China and India-
Source:  World Bank.
Notes: PPP = purchasing power parity; e = estimate; f = forecast.
1. Canada, France, Germany, Italy, Japan, the UK, and the United States.
2. In local currency, aggregated using 2005 GDP Weights.
3. Simple average of Dubai, Brent and West Texas Intermediate.
4. Unit value index of manufactured exports from major economies, expressed in USD.
5. Aggregate growth rates calculated using constant 2005 dollars GDP weights.
6. Calculated using 2005 PPP weights.


The World Bank reports percentage GDP growth forecast for the U.S. for 2011, 2012 and 2013 as 2.6%, 2.9% and 2.7% respectively. This is matched with a GDP growth forecast for Europe of 1.7%, 1.8% and 1.9% respectively.  Although the U.S. still remains a significant contributor to nominal global GDP (see chart below), the European Union continues to lag the U.S. in its growth and contribution towards GDP, as a percentage. Europe's application of monetary and fiscal policy together with the consequence of slower growth, is no coincidence. As long as it continues to apply austerity as a measure to resolve slow growth, together with hikes in interest rates in an attempt to combat high commodity prices, it will continue to lag other economies in its contribution to GDP as a percentage.

The ten largest economies in the world in 2010, measured in nominal GDP (millions of USD), according to the International Monetary Fund.