Turkey's ticking debt time-bomb

The Numbers Tell the Story

by Spengler 

Turkey's economy came to a dead stop during the first quarter, but the country's credit bubble continues to grow. 
Under the headline "Ankara's Economic Miracle Collapses'', I argued a year ago in the Middle East Quarterly that Turkey's economic prowess had more hype than substance. The government of Prime Minister Recep Tayyip Erdogan had financed a consumer bubble with a huge trade deficit financed by short-term interbank loans. The consumer boom is gone, but the credit bubble continues, with bank lending still expanding by 30% a year despite the stalled economy. Turkey's current account deficit remains in the red-alert region of nearly 10% of GDP, and it continues to finance the deficit with short-term interbank borrowings. Bubbles like this eventually blow up.
Turkey cannot blame global economic conditions, because emerging market economies are growing at 5.5% this year in the International Monetary Fund's estimate while Turkey is not growing at all. Turkey's government debt remains quite low at just 36% of GDP, but private-sector debt - especially short-term foreign debt - has tripled in the past four years. 
Most of the US$80 billion in short-term money that Turkey has borrowed since 2010 probably came from the Gulf states, which have a strategic interest in preserving a Sunni power with an army larger than Iran's. This largesse cannot continue indefinitely, though. Turkey's central bank promised to reduce its foreign deficit by reducing growth. Now the growth is gone, but not the deficit. The galloping increase in bank debt indicates that Turkish banks are lending their customers just enough to pay the interest on past loans. 
This puts Erdogan's political future in question. His Justice and Development Party (AKP) won the past two national elections on the strength of its economic record. Many Turks are caught in a consumer debt spiral, borrowing to pay a 32% interest rate on credit card obligations. Consumer spending has already started to fall. A few months more of this and Erdogan's mandate will start to crumble. 
The numbers tell the story.  
Exhibit 1: Industrial Production YOY Change Falls to Zero 

Source: Central Bank of Turkey 

Legal Plunder Run Amock

Bank secrecy not an evil

By Martin Hutchinson 

A brief history of secrecy laws - from Mickey Mouse and the honest wealthy to terrorist groups. 

The wolves are closing in on the world's bank secrecy laws. Former bank employees in Switzerland and Liechtenstein have handed lists of depositors to the United States and European Union authorities. 

Following the Cyprus debacle, the EU is seeking to end bank secrecy in the well-run banking systems of its members Luxembourg and Austria. Luxembourg appears to have "compromised" but Austria, bless it, is still holding out (as a former Abteilungsdirektor of the Austrian bank Creditanstalt-Bankverein I declare an interest here). Nevertheless I hope a number of strong-minded but respectable states with few avenues for blackmail keep bank secrecy, for one very good reason: in a modern social-democratic world, it is a key civil liberty. 

The first bank secrecy law was written by Switzerland in 1934 and played a vital role in enabling at least some German Jewish people to preserve both their lives and their assets during the horrors of World War II. The "key civil liberty" aspect of bank secrecy laws thus cannot be dismissed. While we will hopefully never again have a regime as evil as the Nazis, there are plenty of regimes around the world that oppress their subjects, and those subjects need an asset bolt-hole where they can preserve their wealth while they emigrate or simply decide to wait for better times. 

It's not surprising that there were no bank secrecy laws before 1934. The London merchant banks and private banks of the 19th century would have binned immediately a demand from any government other than Britain's for their customers' records. Numerous dissidents such as Louis Napoleon (the future Napoleon III) and Lajos Kossuth, the Hungarian revolutionary, could keep their money in London entirely without fear of expropriation for that reason. As for Britain itself, with income tax at less than 5% for most of the 19th century there was no great incentive for tax evasion, although accounts were occasionally seized in fraud cases.

UKIP: monster raving loonies?

The political and media classes' pathologisation of the UK Independence Party exposes their own cowardice

by Patrick Hayes 

Nutters. Nutcases. Loonies. Morons. Crackpots. Cuckoos. Oddballs. Fruitflies. Fruitloops. Fruitcakes. When it comes to slang used to suggest that members of the right-wing libertarian UK Independence Party (UKIP) are mentally ill, mainstream politicians and the media have lobbed the entire urban dictionary at them.

UKIP’s latest diagnosis came at the weekend from polo-necked Conservative minister Ken Clarke. In light of the upcoming local elections, Clarke dismissed UKIP as a ‘collection of clowns’, full of ‘waifs and strays’ not sufficiently ‘sensible’ to become local councillors. His comments echoed UK prime minister David Cameron’s oft-quoted remarks from 2006 when he dismissed UKIP as a bunch of ‘fruit cakes and loonies and closet racists’. Cameron has refused to retract these comments, adding earlier this year that he still thought UKIP was full of ‘pretty odd people’.

Almost since its launch in 1993, politicians have chosen to paint UKIP as the successor to the Monster Raving Loony Party, full of – as Michael Howard, Cameron’s predecessor as Tory leader, put it – ‘cranks, gadflies and extremists’. The message is clear: on no account should UKIP be taken seriously as a political force. It deserves only ridicule. After all, how could any party that calls for the abolition of the smoking ban, or for the UK to leave the EU, be considered to be of sound mind? If you support UKIP, you need your head examined.

The volley of insults against UKIP has been ramped up in anticipation of this week’s local council elections, where UKIP looks set to gain its largest number of seats ever. One recent article in The Times suggested that UKIP could gain 40 seats, taking its UK-wide total to 90. But while this is a substantial percentage increase, UKIP would still be represented by just 0.5 per cent of the total number of councillors in the UK. While UKIP often soars above the Liberal Democrats in the polls, it makes little actual headway in elections.

The bitcoin bubble and Birmingham tokens

Private innovation in currencies is a good thing

by Matt Ridley

Bitcoins — a form of digital private money — shot up in value from $90 to $260 each after Cypriot bank accounts were raided by the State, then plunged last week before recovering some of their value. These gyrations are symptoms of a bubble. Just as with tulip bulbs or dotcom shares, there will probably be a bursting. All markets in assets that can be hoarded and resold — as opposed to those in goods for consumption — suffer from bubbles. Money is no different; and a new currency is rather like a new tulip breed.

Yet it would be a mistake to write off Bitcoins as just another bubble. People are clearly keen on new forms of money safe from the confiscation and inflation that looks increasingly inevitable as governments try to escape their debts. Bitcoins pose a fundamental question: will some form of private money replace the kind minted and printed by governments?

It has happened before. Pennies and halfpennies were effectively privatised by industrialists in Birmingham in the 1790s. New industrial employers had to pay workers in cash rather than kind, as farmers had done. But there was a chronic shortage of small coins. The Royal Mint had given up making silver coins because people melted them down when their value as metal exceeded their face value and had stopped striking copper halfpennies, which were too easily counterfeited.

So Thomas Williams, the owner of an Anglesey copper mine, and Matthew Boulton, keen to put steam engines to work, offered to make pennies for the government. Rebuffed, Williams made coins anyway. Called druids, they were harder to fake or clip (because they had raised rims) and cheaper to strike than state coins. Being convertible into guineas and pounds at a fixed price of one penny, they were soon accepted all over Birmingham and even in London.

By 1797 there were 600 tons of such tokens in circulation and the counterfeiters were put out of business. The coiners started making silver tokens too but a jealous Royal Mint lobbied Parliament to outlaw the competition. It succeeded in 1818, three years before it could produce new copper coins to match the high standards of the private ones, so the coin famine resumed.

More recent private currencies — from Green Shield stamps and air miles to Lewes “pounds” (designed to encourage spending in the East Sussex town) — have been less ambitious than the Birmingham tokens, whose story is told in an outstanding book Good Money. Its author, the economist George Selgin, has now turned his attention to Bitcoins, which he thinks come close to having the characteristics of an ideal currency.

Generation jobless

The number of young people out of work globally is nearly as big as the population of the United States

The Economist

“YOUNG people ought not to be idle. It is very bad for them,” said Margaret Thatcher in 1984. She was right: there are few worse things that society can do to its young than to leave them in limbo. Those who start their careers on the dole are more likely to have lower wages and more spells of joblessness later in life, because they lose out on the chance to acquire skills and self-confidence in their formative years.

Yet more young people are idle than ever (see article). OECD figures suggest that 26m 15- to 24-year-olds in developed countries are not in employment, education or training; the number of young people without a job has risen by 30% since 2007. The International Labour Organisation reports that 75m young people globally are looking for a job. World Bank surveys suggest that 262m young people in emerging markets are economically inactive. Depending on how you measure them, the number of young people without a job is nearly as large as the population of America (311m).

Two factors play a big part. First, the long slowdown in the West has reduced demand for labour, and it is easier to put off hiring young people than it is to fire older workers. Second, in emerging economies population growth is fastest in countries with dysfunctional labour markets, such as India and Egypt.

The result is an “arc of unemployment”, from southern Europe through north Africa and the Middle East to South Asia, where the rich world’s recession meets the poor world’s youthquake. The anger of the young jobless has already burst onto the streets in the Middle East. Violent crime, generally in decline in the rich world, is rising in Spain, Italy and Portugal—countries with startlingly high youth unemployment.

Will growth give them a job?

The most obvious way to tackle this problem is to reignite growth. That is easier said than done in a world plagued by debt, and is anyway only a partial answer. The countries where the problem is worst (such as Spain and Egypt) suffered from high youth unemployment even when their economies were growing. Throughout the recession companies have continued to complain that they cannot find young people with the right skills. This underlines the importance of two other solutions: reforming labour markets and improving education. These are familiar prescriptions, but ones that need to be delivered with both a new vigour and a new twist.

Youth unemployment is often at its worst in countries with rigid labour markets. Cartelised industries, high taxes on hiring, strict rules about firing, high minimum wages: all these help condemn young people to the street corner. South Africa has some of the highest unemployment south of the Sahara, in part because it has powerful trade unions and rigid rules about hiring and firing. Many countries in the arc of youth unemployment have high minimum wages and heavy taxes on labour. India has around 200 laws on work and pay.

Korematsu and the dangers of waiving constitutional rights

The Korematsu case is a reminder that waiving constitutional rights is rarely necessary and rarely ends well

By George F. Will

Two of the three most infamous Supreme Court decisions were erased by events. The Civil War and postwar constitutional amendments effectively overturned Dred Scott v. Sandford (1857), which held that blacks could never have rights that whites must respect. Plessy v. Ferguson (1896), which upheld legally enforced segregation, was undone by court decisions and legislation.

The third, Korematsu v. United States (1944), which affirmed the president’s wartime power to sweep Americans of disfavored racial groups into concentration camps, elicited a 1988 congressional apology. Now Peter Irons, founder of the Earl Warren Bill of Rights Project at the University of California at San Diego, is campaigning for a Supreme Court “repudiation” of the Korematsu decision and other Japanese internment rulings. Such repudiation, if it occurred, would be unprecedented.

An essay Irons is circulating among constitutional law professors whose support he seeks is timely reading in today’s context of anti-constitutional presidencies, particularly regarding war powers.

On Feb. 19, 1942, President Franklin Roosevelt authorized the military to “prescribe military areas . . . from which any or all persons may be excluded.” So some 110,000 Americans of Japanese ancestry, two-thirds of them born here, were sent to camps in desolate Western locations. Supposedly, this was a precaution against espionage and sabotage. Actually, it rested entirely on the racial animus of Gen. John DeWitt, head of the Western Defense Command.

Using government records, Irons has demonstrated that because senior officials, including Solicitor General Charles Fahy, committed “numerous and knowing acts of governmental misconduct,” the Supreme Court based its decision on “records and arguments that were fabricated and fraudulent.” Officials altered and destroyed evidence that would have revealed the racist motives for the internments. And to preserve the pretext of a “military necessity” for the concentration camps, officials suppressed reports on the lack of evidence of disloyalty or espionage by Japanese Americans.

Five Lessons for Economists From the Financial Crisis

What did the worst financial crisis in 75 years teach academic economists and policymakers?

By Olivier Blanchard

#1: Humility is in order.

The Great Moderation [the economically tranquil period from 1987 to 2007] convinced too many of us that the large-economy crisis -­ a financial crisis, a banking crisis ­- was a thing of the past. It wasn’t going to happen again, except maybe in emerging markets. History was marching on.

My generation, which was born after World War II, lived with the notion that the world was getting to be a better and better place. We knew how to do things better, not only in economics but in other fields as well. What we have learned is that¹s not true. History repeats itself. We should have known.

#2: The financial system matters — a lot.

It’s not the first time that we¹re confronted with [former U.S. Defense Secretary Donald] Rumsfeld called “unknown unknowns,” things that happened that we hadn’t thought about. There is another example in macro-economics:

The oil shocks of the 1970s during which we were students and we hadn’t thought about it. It took a few years, more than a few years, for economists to understand what was going on. After a few years, we concluded that we could think of the oil shock as yet another macroeconomic shock. We did not need to understand the plumbing. We didn’t need to understand the details of the oil market. When there’s an increase in the price of energy or materials, we can just integrate it into our macro models -­ the implications of energy prices on inflation and so on.

This is different. What we have learned about the financial system is that the problem is in the plumbing and that we have to understand the plumbing. Before I came to the Fund, I thought of the financial system as a set of arbitrage equations. Basically the Federal Reserve would chose one interest rate, and then the expectations hypothesis would give all the rates everywhere else with premia which might vary, but not very much. It was really easy. I thought of people on Wall Street as basically doing this for me so I didn¹t have to think about it.

What we have learned is that that’s not the case. In the financial system, a myriad of distortions or small shocks build on each other. When there are enough small shocks, enough distortions, things can go very bad. This has fundamental implications for macro-economics. We do macro on the assumption that we can look at aggregates in some way and then just have them interact in simple models. I still think that¹s the way to go, but this shows the limits of that approach. When it comes to the financial system, it¹s very clear that the details of the plumbing matter.

A transatlantic tipping-point

An historic trade pact between America and Europe needs saving

The Economist

IN AN age of small-bore politics, America and the European Union have a chance to achieve something large: a transatlantic pact that would, at a stroke, liberalise a third of global trade. At a time when emerging powers are closing fast on a fretful West, a free-trade area covering America and the EU would offer something more. Done right, it could anchor a transatlantic economic model favouring openness, free markets, free peoples and the rule of law over the closed, managed visions of state capitalism.

Right now, the pact is in trouble, beset by small-mindedness and mutual suspicion. This is madness. A free-trade pact has never had such support in the chancelleries of Europe, as well as in the West Wing of the White House. It is backed by compelling logic. Yet supporters also know that time is desperately short: this political window may close in just 18 months, says a European official at the heart of the process. This must be done swiftly, on “one tank of gas”, says a senior American.

The risks all involve thinking small. European governments recently sent trade officials to Brussels to a first meeting on their offer to America. Led by the French, envoys from southern and eastern Europe called for a long list of red lines. These covered the usual stuff: agriculture, public services and “audio-visual” content (eg, bungs for French cinéastes, airtime quotas to keep Flemish hip-hop on the radio). That appals Team Obama, though not because Americans are blameless. From financial services to air passenger services, America maintains lots of barriers to trade. The real fear is that if Europe starts setting out red lines, trade sceptics in America will draw their own. What’s more, American trade bureaucrats are “Eeyoreish” and petty, says an insider: a trade pact with Colombia is the summit of their ambition. Then there is Congress to worry about.

Members of the Senate Finance Committee last month quizzed the acting US trade representative, Demetrios Marantis, about EU access for ethanol, biodiesel, beef, pork and poultry from their respective states (for every person in my state, noted a senator from Delaware sternly, “there are 300 chickens”). The chairman, Senator Max Baucus of Montana, grumbled about Europe’s “non science-based regulations”. That glanced at an old philosophical dispute, with American regulations weighing costs and benefits and punishing lapses through market forces and litigation, while the European “precautionary principle” distrusts products or new technologies until they are proved safe.

How to Make Austerity Work

A Question of Spending Discipline and Reform

by Pater Tenebrarum

The Baltic States are unique in Europe in that they went through an austerity crash program a while ago already (beginning right after the 2008 crisis) and have in the meantime recovered strongly. Der Spiegel has an interesting interview with Lithuanian president Dalia Grybauskaite, in which she explains her views on the topic. It can obviously be done successfully.

Just to get this out of the way up front: we are aware that every case is unique. The problems are not the same in every country, and due to cultural norms and traditions, it may be easier to enact reform in certain countries than others. Nevertheless, no matter how many times Paul Krugman insists that no Baltic nation can possibly be held up as an example, the fact remains that they have imposed fiscal austerity and implemented wide-ranging reform measures and have succeeded.

Here are a few notable excerpts from the interview:

“SPIEGEL ONLINE: In spite of the ongoing crisis, Lithuania wants to join the euro zone in January 2015. Why? 

Grybauskaite:This is not a crisis of the euro zone, but a debt crisis. Some states, inside and outside the euro zone, have difficulties because of their irresponsible economic and fiscal policies. […]

The Twilight of Entitlement

We blurred the distinction between progress and perfection

By Robert Samuelson 

We are passing through something more than a period of disappointing economic growth and increasing political polarization. What's happening is more powerful: the collapse of "entitlement." By this, I do not mean primarily cuts in specific government benefits, most prominently Social Security, but the demise of a broader mindset -- attitudes and beliefs -- that, in one form or another, has gripped Americans since the 1960s. The breakdown of these ideas has rattled us psychologically as well as politically and economically.

In my 1995 book, "The Good Life and Its Discontents," I defined entitlement as our expectations "about the kind of nation we were creating and what that meant for all of us individually":

We had a grand vision. We didn't merely expect things to get better. We expected all social problems to be solved. We expected business cycles, economic insecurity, poverty, and racism to end. We expected almost limitless personal freedom and self-fulfillment. For those who couldn't live life to its fullest (as a result of old age, disability, or bad luck), we expected a generous social safety net to guarantee decent lives. We blurred the distinction between progress and perfection.

Bill Clinton has a pithier formulation: "If you work hard and play by the rules, you'll have the freedom and opportunity to pursue your own dreams." That's entitlement. "Responsible" Americans should be able to attain realistic ambitions.

No more. Millions of Americans who have "played by the rules" are in distress or fear that they might be. In a new Allstate/National Journal survey, 65 percent of respondents said today's middle class has less "job and financial security" than their parents' generation; 52 percent asserted there is less "opportunity to get ahead." The middle class is "more anxious than aspirational," concluded the poll's sponsors. Similarly, the Employee Benefit Research Institute found that only 51 percent of workers are confident they'll have enough money to retire comfortably, down from 70 percent in 2007.

Popular national goals remain elusive. Poverty is stubborn. Many schools seem inadequate. The "safety net," private and public, is besieged. Our expansive notion of entitlement rested on optimistic and, ultimately, unrealistic assumptions:

First, that economists knew enough to moderate the business cycle, guaranteeing jobs for most people who wanted them. This seemed true for many years; from 1980 to 2007, the economy created 47 million non-farm jobs. The Great Recession revealed the limits of economic management. The faith in a crude stability vanished.

Second, that large corporations (think: General Motors, AT&T) were so dominant that they could provide secure jobs and generous benefits -- health insurance, pensions -- for much of the labor force. Deregulation, foreign competition and new technologies changed all this. Companies became more cost-conscious, cutting jobs and squeezing fringe benefits. The private "safety net" has shrunk.

The British Evasion

Cameron raised taxes and strangled the economy

BY NICOLE GELINAS

When the financial hurricane struck in 2008, Britain found itself in a crisis very much like the American one. A giant credit bubble had fueled an unsustainable rise in the price of real estate. British homeowners, feeling rich, had spent and spent, pushing up their household debt to a staggering 106 percent of GDP, up from 61 percent just eight years earlier. When the bubble burst, hitting house prices and making people feel poorer and afraid, British consumers went on strike; employers promptly imitated them, and the United Kingdom lost 1.6 percent of its jobs between 2008 and 2009. (America, with its easier hire-and-fire culture, lost 5 percent.) With bubble-era tax revenues gone, a British government deficit that had seemed manageable became cavernous, expanding from 3.5 percent of GDP over the 2004–08 period to 11.5 percent in 2009.

In the spring of 2010, David Cameron ran for Britain’s prime ministership, promising to tell the truth about the country’s fiscal mess and to take the unpopular steps needed to clean it up. Britain was laboring under “the biggest budget deficit of any developed country in the world,” Cameron warned in a televised debate. “If we think that the future is just spending more and more money, we’re profoundly wrong.” British voters, terrified that investors would cut their nation off from global bond markets, ditched the incumbent Labour Party, which had been in power for a decade, and gave Cameron’s Conservative Party a plurality in Parliament. Another party, the Liberal Democrats, joined the Conservatives as the junior partner in a coalition that came to power that May. Rather than bicker and stall, the Conservatives and the Lib Dems—which, like America’s two major parties, hailed from opposite sides of the ideological spectrum—had agreed to get along in order to shrink the enormous deficit.

These seemingly functional politics, however, have produced an economy marked by nonexistent growth. Britain hasn’t fixed the fisc: the Moody’s credit-rating service cut Britain’s triple-A rating a notch in February, something that Cameron had said that his budget would prevent. And public services are deteriorating at an alarming rate. For the many American pundits who insist that Republicans and Democrats should make compromises and moderate their own stances on deficit reduction—lower spending and higher taxes, respectively—the British experience should serve as a warning.

In June 2010, Cameron sent his chancellor of the exchequer, George Osborne, to Parliament to present an emergency midyear budget. Osborne wanted to slash annual spending by £40 billion (about $60 billion) to get Britain off the “road to ruin,” he said. Echoing Cameron in slightly different terms, Osborne told lawmakers that the government had inherited “the largest deficit of any economy in Europe” except Ireland—“this at the very moment when fear about the sustainability of sovereign debt is the greatest risk to the recovery of European economies.” To avoid the investor flight that would precipitate a public debt crisis, as was happening in Greece, an austerity budget was “unavoidable.”

It Just Gets More and More Dismal

Caution: economists at work

By Andrew Ferguson

We moralize with numbers these days, under the guise of disinterested science. The only institution we trust any longer to discover the truth—excuse me, the “truth”—is science, even “social sciences” like economics and psychology and sociology that are sciences in name only. This is what happens when a nation’s intellectual class—excuse me, its “thought leaders”—no longer feel comfortable discussing questions with reference to traditional ethics or moral intuition, much less natural law or, God help us, God. 

Consider the fate suffered in recent weeks by a pair of well-known economists, poor Carmen Reinhart and Kenneth Rogoff, both of Harvard. They are the authors of several scholarly papers, slightly fewer newspaper op-eds, and one big-selling book, This Time Is Different, which aim to prove scientifically that too much debt is bad for you. More precisely—and how could they be scientists if they weren’t precise?—they claim to have discovered that when a government’s debt rises to 90 percent of its country’s gross domestic product, the country’s economy contracts by (on average) one-tenth of one percent per year. This is what masses of historical data from 44 countries around the world show. Really. You could look it up. “Our approach here is decidedly empirical,” they wrote.

Reinhart and Rogoff (RR, as they have come to be known) called this 90 percent figure a threshold—not necessarily a point of no return, but a point beyond which GDP dropped like a plumb. A few too many years at or past the threshold and a government’s appetite for debt would do lasting damage. As it happens, the United States’ debt-GDP ratio is more than 100 percent. Gulp.

RR published their finding in a scholarly paper in 2010, and the 90 percent threshold became a kind of cultural artifact. It captured the post-financial-crisis zeitgeist the way a pop song or a movie or a bestelling novel can summarize the mood of a particular place or time. The financial crisis, which almost no economist foresaw, and the weak economic recovery, which nearly every economist expected to be stronger than it is, have given policymakers a bad case of the jumps, so for an explanation of our present parlous position they have turned to—who else?—economists. By focusing everyone’s attention on a government’s debt load, RR helped inspire the austerity measures that have been enacted throughout the eurozone. Paul Ryan, the chairman of the House Budget Committee, cited them in making the case for the budget cuts outlined in his booklet “Path to Prosperity.” A presentation by RR serves as the dramatic centerpiece ofDebt Bomb, a book by Tom Coburn, one of the Senate’s most insistent budget scolds. The Washington Post editorial page, which occasionally affects the cut-the-crap severity of a true budget hawk, has taken the RR threshold as a proven fact, airily referring here and there to “the 90 percent mark that economists regard as a threat to sustainable economic growth.”

That’s a treacherous phrase, economists regard. Economists do not speak with a single voice; indeed, their tedious and endless disputations are one way they convince themselves they’re practicing science. The green-eyeshades of the World Bank and the International Monetary Fund gazed with horror at RR’s finding, but more partisan liberal economists dismissed RR’s obsession with debt as a magic key to our economic fortunes, obsessing instead over their own magic keys—higher government spending, higher government borrowing, and higher taxes on rich people. Few challenged RR on methodological grounds until this April, when three economists—informally called HAP, an acronym of their last names—released a paper debunking the idea of a threshold. Fondling the same sets of figures that RR had used, HAP found that RR had neglected to include some important historical data in their calculations. When those figures were factored in, the threshold vanished. On the graphs, GDP no longer dropped like a plumb after the debt-to-GDP ratio reached 90 percent. 

Of Monetary Cranks, Bureaucratic Meddlers, And The Reinhart-Rogoff Faux Pas

The reason for the crisis lies in too great an accumulation of debt during the boom years

by Sean Corrigan

In what has been a banner weak for the many serial inflationists and fans of Big Government out there, equity markets have largely reversed the declines of the previous period on the hope for – what else? – yet more pump priming....

On the fiscal front, much heart has been taken at EU Commission President Barroso’s assertion that the time has come to move beyond an exclusive reliance on ‘austerity’ and to begin to focus on encouraging growth....

Needless to say [Barroso's actual words, were] far less radical than anything whipped up by the journalists – the crux being that it was mainly matter of paying lip service to the ongoing need to trim debts and deficits, while calling for a range of largely unspecified microeconomic reforms and, as such, representing more of an exercise in expectations management than the signal of a clear break with the line being toed across the Rhine.

In the circumstances, however, the wilful desire to over interpret (if not actively misinterpret) the message was far too powerful to resist, especially in the wake of the academic catfight going on over the state of Reinhart and Rogoff’s Excel skills.

For those who have real lives to lead, the briefest of synopses of this spat will suffice and, indeed, it is only introduced here to illustrate the heedless Flucht nach Vorne mentality of the Krugmanites, ever eager as they are to peddle the line that the only reason stimulus has ‘failed’ is because there has been nowhere near enough of it, that the violation of both the principles of accounting and the tenets of good housekeeping on the part of the Provider State has somehow been too timid.

Danes as Most-Indebted in World Resist Credit and Mortgages

Mortgage borrowing slowing down is not necessarily a bad thing

Pedestrians look at residential apartments and houses displayed for sale in the window display of an estate agent in Copenhagen. Danes’ personal debt is 267.31 percent of income, according to Eurostat data compiled by Bloomberg.

By Frances Schwartzkopff

Danes, the most indebted people in the world, are losing their appetite for credit.

After amassing personal debt equal to almost three times income, mortgage borrowing grew at the slowest pace last quarter since 2000, the Association of Danish Mortgage Banks said this month. Bank lending at Nordea Bank Denmark A/S, the country’s second-largest lender, fell to its lowest in more than a year.

From a risk perspective, it’s good that consumers are deleveraging,” Anders Jensen, chief executive officer of Nordea Bank Danmark A/S, said in an interview. “From an income perspective, we won’t make any money from lending.”

Denmark is the Scandinavian economy hardest hit by the global financial crisis. Households have watched their personal wealth drop by 400,000 kroner ($69,900) on average since theproperty market peaked in 2007, according to Danske Bank A/S. (DANSKE) After the real estate bubble burst in 2008, house prices plunged more than 20 percent, wiping out more than 12 banks and driving the economy into a recession that lasted into 2009.

Gross domestic product contracted 0.5 percent in 2012, the country’s worst economic performance in three years. Consumer spending, which makes up half the $300 billion economy, dropped 0.1 percent in the fourth quarter, declining for a third consecutive period,Statistics Denmark said April 4.

Denmark’s government estimates the economy will grow 0.5 percent to 1 percent this year, less than both Sweden and Norway. While Denmark’s krone peg to the euro has protected exporters from currency gains, the nation’s housing crisis has undermined consumer confidence.

Spending Declines

Against that backdrop, consumers don’t dare borrow more, said Las Olsen, a senior economist at Danske Bank. Danes are taking advantage of lower interest rates to make bigger principal repayments on their mortgages, central bank data showed today.

In the first quarter, homeowners amortized 7.5 billion kroner, compared with 6.7 billion kroner a year earlier, the central bank estimates.

“When rates are low, the principal payment makes up a larger portion of a debt instalment,” Ane Arnth Jensen, head of the Association of Danish Mortgage Banks, said today in a note. “That’s what we’re seeing now, with an average effective rate on mortgages at an historic low of 2.9 percent.”

Time to end UK art’s dependency culture

State funding suffocates the arts with policy making imperatives

by Denis Joe 

Maria Miller took up her post as secretary of state for culture, media and sport last September. After the distraction of the Leveson Inquiry, she has finally got round to discussing the ‘culture‘ bit of her brief.

Her speech, ‘Testing times: fighting culture’s corner in an age of austerity’, delivered at the British Museum last week, was brimful with ministerial cliche: the arts are ‘educational’, ‘socially beneficial’, ‘good for trade’, and so on. But the central tenet of Miller’s speech was that art can be profitable. Miller went on to list recent success stories such as the Olympics and Liverpool’s year as Capital of Culture in 2008, highlighting how much money those events brought into the cities.

But here’s the thing: pouring money into the arts has little impact on broader society. It does, however, have a negative impact on the arts themselves.

In the case of Liverpool, there was a spectacular increase in revenue during 2008, but five years on very little has changed. As a report from Liverpool Hope University noted recently, ‘since being announced as the 2008 Capital of Culture, the urban-regeneration focus has… shifted toward the city centre and away from the city’s marginalised communities… Liverpool still contains some of the most disadvantaged areas in the UK and is the UK’s most deprived local authority.’

The people of Liverpool do not seem to have been any more inspired by Capital of Culture year either. The Royal Court Theatre continues with its endless cycle of ‘taking the piss out of Scousers’ shows. Operas at the Empire still play to a third of the venue’s capacity, unless it’s Puccini or Verdi’s better-known works. Audiences for poetry events continue to attract only poets. The only people who still talk about 2008 are councillors.

The development of the Mersey Docks and the Liverpool-Manchester canal are the sorts of projects that have a real economic value: they provide jobs and they improve transport infrastructure. Art is useless. The only value it has is that which we impose on it.

The Great Society needs to be replaced by the Free Society

America on Welfare

By Doug Bandow 

Living the good life on welfare. Even the Europeans recognize that they pay a high price for creating an increasingly dependent society. 

Denmark has been transfixed by the revelation of a 36-year-old single mother who collects more in benefits than many Danes earn at work, and has done so for two decades. Worried Karen Haekkerup, Minister of Social Affairs and Integration, people “think of these benefits as their rights. The rights have just expanded and expanded.”

But it’s really not that much different in the U.S., the nominal home of the free. Nearly two decades ago welfare reform briefly captured political attention and won bipartisan support. The effort was a great success. But most welfare programs remained untouched and the gains have been steadily eroded. 

Today nearly 48 million people, almost one out of every six Americans, receive Food Stamps. Outlays on this program alone have quadrupled in just a decade. Indeed, the government actively promotes the program, encouraging people to sign up. Other welfare programs also are growing in reach and cost. The Congressional Budget Office recently pointed to “increases in the number of people participating in those programs and increases in spending per participant.” The U.S. isn’t that far behind Europe.

Indeed, America, like Europe, has a veritable welfare industry. A forthcoming report from the Carleson Center for Public Policy, named after Reagan administration welfare chief Robert Carleson, charges that “The federal government has spawned a vast array of redundant, overlapping and poorly targeted assistance programs.” Authors Susan Carleson and John Mashburn count 157 means-tested programs intended to alleviate poverty. There were more than two score housing programs, more than a score of nutrition programs, almost as many employment/training and health programs, and lesser numbers of cash assistance, community development, and disability programs. More expansive definitions count even more programs — 185 total, according to Peter Ferrara.

No surprise, the welfare industry is expensive. Social Security is the single most costly program, but more goes collectively to welfare. Today government at all levels spends around $1 trillion a year on means tested anti-poverty programs. And that amount is just going up and up. 

Total federal and state welfare spending rose from $431 billion in 2000 to $927 billion in 2011. Both parties are responsible, but President Obama bears particular responsibility. Last year, explained my Cato Institute colleague Michael Tanner: “Welfare spending increased significantly under President George W. Bush and has exploded under President Barack Obama. In fact, since President Obama took office, federal welfare spending has increased by 41 percent, more than $193 billion per year.”

And this is just the start. From 2009 to 2018, figured Heritage Foundation scholars Robert Rector, Katherine Bradley, and Rachel Sheffield, at current rates the federal government will spend $7.5 trillion and states will spend $2.8 trillion on welfare, for a total of $10.3 trillion.

Germany's Perspective

Southern Europe's Shadow Economies

by Christopher Sultan

Much has been said about the relative disparity of wealth between Germany and the rest of Europe, with the conventional wisdom being that Germans are rich and everyone else poor. This assumption has been challenged to the core recently, with some studies even suggesting that median household wealth in places like Cyprus is far, far greater than that of Germany, contrary to previous assumptions. In turn, this helps to explain the lack of "eagerness" of the Germans to constantly "assist" with the bailouts of peripheral countries by directly funding or assuming debt guarantees, or otherwise be loaded with the primary burden of future inflation if and when the ECB's creeping monetization of European debt, both directly and indirectly via PIIG bank collateral, unleashes the Weimar flashback tsunami. In this context, it is easy why it was the Germans who were intent on demolishing not only Russian billionaire savings (which as the Spiegel article below demonstrates, Germans are convinced are largely ill-gotten and hidden), but also why the punishment should stretch to uninsured depositors.

After reading the Spiegel article below, which reveals so much about German thinking, it becomes very clear that not only is Cyprus the "benchmark", but that the second some other PIIG country runs into trouble again, and its soaring non-performing loans inevitably demand a liability "resolution" a la Cyprus, it will be Germany once again at the helm, demanding more of the same equity, unsecured debt and ultimately depositor impairment. As the following punchline from Spiegel summarizes, "It would be more sensible -- and fairer -- for the crisis-ridden countries to exercise their own power to reduce their debts, namely by reaching for the assets of their citizens more than they have so far. As the most recent ECB study shows, there is certainly enough money available to do this." And that is the crux of the wealth-disparity demand of the European Disunion.

From Spiegel, by its staff

The Poverty Lie: How Europe's Crisis Countries Hide their Wealth

How fair is the effort to save the euro if the people living in the countries that receive aid are wealthier than the citizens of donor countries like Germany? A debate over a redistribution of the burdens is long overdue.

The images we see from the capitals of Europe's crisis-ridden countries are confusing to say the least. In the Cypriot capital Nicosia, for example, thousands protested against the levy on bank deposits, carrying images of Hitler and anti-Merkel signs, one of which read: "Merkel, your Nazi money is bloodier than any laundered money."

UK Austerity?

Sluggish growth shows Big Government still holding back economy

By Rory Meakin

Five years on from the start of the recession, with GDP still 2.5 per cent lower than it was then, it speaks volumes about the feebleness of the economy that today’s announcement of meagre growth last quarter was greeted with relief. But it’s not just the overall level of growth which is worrying, the dominance of Government growth is also a major concern.

GDP was up a paltry 0.3 per cent compared to the previous quarter, and up 0.6 per cent on the same quarter last year. Compared to 2008, it was down 0.5 per cent. But Government was up 0.5 per cent on last quarter, up 1.2 per cent on the same quarter last year and up 6.9 per cent on 2008. Our bloated and still growing Government might give the economy some short term relief from adjusting to new circumstances. But five years on, we’re not in the short term anymore.