11/7/15: Harder Default for Greece, Less Democracy for All

My article on the Greek crisis for Irish Independent: impossible mathematics of debt and the political trilemma of sacrificed democracies: http://www.independent.ie/opinion/comment/expect-a-harder-default-for-greeks-and-less-democracy-for-the-rest-of-us-31368677.html

11/7/15: For Nama, Karma's a generous bitch...

Refusing to go away... Nama story of Stg7 million 'set-aside' and Stg15 million fees demand off Pimco (notified by the fund to Nama and seemingly ignored by Nama, except to the point of not involving Pimco in subsequent sale) is now rolling into investigation stages in the UK and, potentially, the U.S. http://www.independent.ie/irish-news/news/nama-debtors-helped-uncover-7m-payment-31368628.html.

Just because, as someone pointed out to me in poignant terms: Karma is a bitch... Well, it may be so, but so far, Nama is sitting pretty, with average salary for an employee in excess of EUR100,000 and golden handshakes for the departing employees averaging EUR34,000 and lavish pensions entitlements... Karma might be a bitch, but when it comes to Nama, it is a generous bitch at our expense...

You can follow back a list of my posts on Nama most recent controversies starting from here: http://trueeconomics.blogspot.ie/2015/07/6715-more-nama-and-ibrc-headlines.html.

Update: FT covering the Nama story: http://www.ft.com/intl/cms/s/0/11109080-26f2-11e5-bd83-71cb60e8f08c.html#axzz3faW3h8ag. Because Irish reputational capital yields have been too low of late...

10/7/15: Irish Quarterly PMIs: Manufacturing, Services & Construction

Irish PMI for June, released earlier this month by Markit (co-branded by Investec) give us a chance to look at quarterly activity. Given volatility in both Manufacturing and Services activity in the monthly data, this provides a slightly better potential insight into what is going on in the economy (see caveat at the bottom of the post).

Q2 2015 average PMI for Manufacturing sector reads 55.8 - the lowest for any quarter since Q2 2014, but still solidly in an expansion range. Q2 2015 marks second consecutive quarter of declining manufacturing PMI readings. However, on a positive side, Q2 2015 was the 8th consecutive quarter of readings above 50. Year on year, growth in the sector remained largely unchanged and growth de-accelerated on a quarterly basis.

Q2 2015 average PMI for Services rose marginally to 61.8 from 61.6 in 1Q 2015 and is below 62.1 average for Q2 2014. Q2 2015 marks 18th consecutive quarterly reading above 50 for the Services sector. Year on year, growth slowed down in the Services sector and quarter on quarter it remained largely static.

Construction sector PMI (co-branded with Ulster Bank) posted quarterly average of 60.3 in Q2 2015, well above 54.0 average for Q1 2015, but below 61.2 average for Q2 2014. Thus, year on year growth fell in the Construction sector, but there was a significant acceleration in quarter on quarter growth. Q2 2015 marks 8th consecutive quarter with average PMI above 50.0.

Composite PMI (subject to future revisions due to sectoral weights changes once we have Q1 and Q2 national accounts) posted a reading of 60.4 in Q2 2015, up on 59.0 in Q1 2015 and marginally higher than 60.2 reading in Q2 2014. Year on year, composite PMI signalled basically static performance, while quarterly growth improved somewhat in Q2 2015.


Caveat: Irish PMI readings have very low direct correlation to actual growth in the economy, measured by either GDP or GNP. Historically, PMIs levels and changes explain at most ca 10.6 percent of variations in GNP and at most 8.8 percent of variations in GDP. In other words, booming PMIs, on average, do not translate into booming economy. 

10/7/15: New Greek Proposals: Can + Foot ≠ Real Solution

Greek Government proposal to the EU on Bailout package 3.0 have been published here: http://www.naftemporiki.gr/finance/story/976680/the-greek-reform-proposals.

Quick read through suggests the following:

• These proposals are pretty much in line with June 26th proposals that were subsequently rejected by the 'No' vote in the Greek referendum;
• The 'new' proposals appear to be a complete climb down from the Greek Government counter-proposals on key areas of VAT, pensions and islands measures;
• One key strategic point is that the new proposal accepts fully 'prior actions' principle of putting in place legislative backing for key early measures ahead of any bailout funds disbursal;
• The 'new' proposals submitted to Institutions contain no reference to debt sustainability and debt relief, although it appears that a preamble to the document in Greek version does mention debt relief.  There are reports also that Greek proposals sent to the Parliament contain reference to the EU commitment to 'negotiate with Greece on the issue of debt sustainability post-2022'. Which, if true, is a dead giveaway, as no one will honour any commitments on such a time scale and absent any specific conditions on debt sustainability. 2022 is the year chosen because it is when EFSF repayments start. Most expensive debt to carry for Greece - IMF and ECB - is off limits for any restructuring under this timeline;
• Crucially, the new proposal does not address in full how Greek banks ELA will be covered, and how the arrears to IMF will be covered. Neither does it explain how July 2015 debt repayments will be financed. This, jointly, means that the EUR53.5 billion request for new loans is not sufficient. The Institutions, most likely, will ask for a deposits bail-in. 
• The only differences to the 'old' Institutions' proposals include: smaller cut in defence budget (EUR200mln instead of EUR400mln), slower phasing out of the islands reduced VAT rates (throughout 2016) and slower phasing out of the EKAS supplement on pensions.
• Greek proposals contain a sub-clause of defined actions that will kick in automatically if fiscal targets are not met in the future. These include hikes on income tax for those earning EUR12,000 (2 percentage points to 35%).
• Materially, the new 'proposal' involves EUR53.5 billion in new loans via ESM (ex-IMF): http://bigstory.ap.org/article/0743c14d12d34ea38d1043b5dbcdfba5/latest-eu-economics-chief-says-greece-deal-possible. IMF porgramme runs through April 2016 and, presumably, Bailout 3.0 is going to happen via ESM alone. Which is a net negative for Greece, since it will lose its only support on debt writedown side.

These are the details so far.

My view is that this proposal will probably be acceptable to the EU, which will close its eyes on two glaringly obvious things:

1. The proposal from the EU on which this current Greek counter proposal is based was based on assumptions and estimates that are at least 3 weeks old, and for some figures - older. Economic and fiscal losses since then have been significant and most likely remain un-covered by the current Greek proposal. These losses will not be terminated immediately post-agreement, so the Greeks have a much more serious problem on their hands.

2. Most importantly, the Greek proposal does nothing to address the existent debt overhang - the one that the IMF believes cannot be addressed via enhanced 'reforms' and increased 'austerity' and requires debt haircuts. 

However, I suspect that since avoiding Grexit is now clearly Greek Government priority, and since doing the same always was and remains the EU priority, both sides will ignore the discomforts of reality. In this case, under the Bailout 3.0, Greek debt will rise (once again), Greek economy will get a negative shock of higher taxation (corporate, personal and indirect), and a large number of Greek voters will get a strong sense of having been cheated out of their 'No' votes. And then there is the risk of looming deposits bail-ins...

This can kicking will not last long...

9/7/15: BRIC Composite PMIs: June 2015 & 2Q 2015

In the previous post covering Manufacturing & Services PMIs for BRIC economies, I promised to provide a separate summary of composite PMI-signalled activity.

Here is the summary of both Services and Manufacturing PMIs moves in June:

On a simple cumulative basis (unweighted by sector weights, not to be confused with Markit's Composite PMI):

• Brazil composite activity stood at 86.4 in June, down from 88.4 in May. 2Q 2015 average was 88.5 against 98.4 for 1Q 2015 and down from 99.7 for 2Q 2014. In short - we have ongoing and worsening slowdown in activity across both sectors combined, with the fourth consecutive month of the combined reading below expansion line (100).
• Russia composite activity stood at 98.2 in June, down from 100.4 in May. 2Q 2015 average was 99.4 - an improvement on 92.2 for 1Q 2015 and better than 96.4 recorded for 2Q 2014. The ongoing slowdown is moderating, with activity across both sectors combined showing slower rates of contraction in 2Q 2015. That said, combined activity has been posting contractionary signals in 8 out the last 9 months.
• India composite activity fell to 99.0 in June, posting the first month of sub-100 reading since April 2014, down from 102.2 in May. 2Q 2015 average was 101.6 against 105.4 for 1Q 2015 and down from 102.4 for 2Q 2014. This implies that Indian economic activity growth was posting a significant slowdown q/q and y/y in 2Q 2015.
• China composite activity stood at 101.2 in June, down from 102.7 in May. 2Q 2015 average was 101.9 virtually unchanged against 102.0 for 1Q 2015 and up slightly on 101.1 for 2Q 2014.  China's economy was the only economy in the BRIC group that remained above the 100 line in June.

Charts below illustrate the latest trends:

In summary, things are getting worse, progressively across the BRIC economies, with Russia, surprisingly, presenting an upside momentum to the overall group growth dynamics. That said, the trends are yet to be fully established for Russia. Overall, BRICs have now running along the negative growth trend for some time and BRIC combined (weighted by each economy share of total group GDP) momentum is at 99.0 in June, marking the first sub-100 reading since May 2014. 3mo average through 2Q 2015 is at 100.3, down on 1Q 2015 average of 101.4 and down on 2Q 2014 average of 100.8.

9/7/15: BRIC Manufacturing & Services PMIs: June 2015 & 2Q 2015

With BRICS summit on its way, an updated post on BRIC PMIs (data from Markit):

Brazil:

Manufacturing PMI stood at 46.5 in June, singling sharp rate of contraction that was somewhat slower than the decline in May (45.9). Per Markit, "new orders and output both drop at sharp rates; inflationary pressures ease." June PMI was the highest in four months and marks the fifth consecutive month of sub-50 readings. 3mo average is now at 46.1 against 3mo average through March at 48.8 and 3mo average through June 2014 at 48.9.

Services PMI also came in at disappointing levels, falling to an abysmally low 39.9 in June from already low 42.5 in May. This marks the lowest reading in Services PMI since March 2009 and the second lowest reading in Services PMI in history.

As noted by Markit, "Private sector jobs cut at quickest pace for over six years; Steep, but slower, contraction in new orders received by private sector firms."

With 4th consecutive month of sub-50 readings, services PMI averaged 42.3 in 3mo period through June 2015, compared to 49.5 average for the 3mo period through March 2015 and 50.8 for the 3mo average through June 2014.

Overall, "Brazil’s private sector economy registered its sharpest retreat since March 2009. Down from 42.9 in May to 41.0 in June, the Composite Output Index was indicative of a steep drop in activity, with sharp falls seen at both service providers and manufacturers."

Russia:

Russian PMIs are covered in detail here: http://trueeconomics.blogspot.com/2015/07/4715-russia-services-and-manufacturing.html?spref=tw and summarised below in the table.

India:

India's Manufacturing PMI came in at 51.3, signalling weak-to-moderate expansion of manufacturing output and down from 53.5 in May. On a 3mo average basis, June 2015 PMI was at 51.7 - marginally slower than 3mo average of 52.1 for the period January-March 2015 and slightly ahead of 51.4 3mo average registered through June 2014. Markit noted that June figures presented the "slowest rise in new work since September 2014; Negligible increases in input costs and output charges."

On Services PMI side, June reading of 47.7 marks second consecutive month of sub-50 readings and a sharpening in the downturn from 49.6 in May 2015. 3mo average through June 2015 is now at 49.9 against 3mo average through March 2015 of 53.1 and 3mo average through June 2014 at 51.0. Services PMI is now sitting at the lowest level since March 2014.

Per Markit: "Falling to 49.2, from 51.2 In May, the seasonally adjusted Nikkei India Composite PMI Output Index recorded below the crucial 50.0 threshold for the first time since April 2014. Reductions in activity were centred at service providers, as manufacturing production rose during the month."

China:

HSBC Purchasing Managers’ Index for manufacturing posted at 49.4 in June. This was the fourth successive, marginally up on 49.2 in May. This marks 4th consecutive month of Chinese manufacturing PMI readings below 50. Per Markit release, "Output contracts at slower pace as new orders show signs of revival" but "Staff numbers are cut at sharpest rate since February 2009." 3mo average through June 2015 was 49.2 down from 3mo average for 1Q 2015 AT 50.0 and lower than 49.4 3mo average through 2Q 2014.

On services side, PMI posted a significant "moderation in the rate of service sector activity growth. Moreover, it was the slowest expansion in services business activity since January, as signalled by the HSBC China Services Business Activity Index posting 51.8, down from May’s eight-month high of 53.5." However, 3mo average for services was at 52.7 in June 2015, compared to 52.0 in 3mo period through March 2015 and 51.7 for the 3mo average through June 2014.

"HSBC China Composite PMI™ data (which covers both manufacturing and services) pointed to a further rise in total business activity in China during June. However, the rate of expansion eased to a marginal pace that was the slowest recorded since May 2014. This was signalled by the HSBC Composite Index posting only slightly above the neutral 50.0 mark at 50.6 in June, down from 51.2 in May."

CHARTS

As shown in the charts above, growth conditions remain negative in 3 out of 4 BRIC economies in Manufacturing and Services. No single BRIC economy is posting broad cross-sectoral growth in June and on quarterly averages basis, 

• Brazil is running negative growth signals in both Services and Manufacturing;
• Russia and China are running negative growth in both Manufacturing;
• India is running negative growth in Services.

This contrasts with 1Q 2015 when Brazil and Russia were posting negative growth across both Services and Manufacturing, while India and China were posting positive growth across both sectors.

Things are getting tougher in the BRICs...

Stay tuned for composite analysis and summary next.

8/7/15: ECB QE: Strong Monetary, Weak Real Impacts

My presentation on QE for today's hearing at the Joint Committee on Finance, Public Expenditure and Reform, the Houses of the Oireachtas.

8/7/15: Latest Round of Greece Talks: Smoke, Fire, Grexit

Summit / Eurogroup takeaways:

1. No progress of any variety beyond the usual agreement to have more talks
2. Short term deal 'weighing in' for Sunday is rumoured - effectively a bridge loan based on Greek acceptance of pre-referendum proposals. One of proposals involved a 3-4 months long bridge financing deal (Bailout 2.1) followed by 3-4 year deal (Bailout 3.0). This was rejected by Finland.
3. Any 'possible' new deal being discussed is 2-3 years in duration - a can kicking of weak variety, in other words.
4. No haircuts on debt will be allowed.
5. Sunday - full EU heads summit (not euro alone), which indicates something serious brewing - at least in terms of applying pressure on Tsipras. Also, possible Grexit push. Summit can be 'avoided' if Greece presents an acceptable plan on Thursday. Decision to be finalised on Saturday.
6. Overall, Bailout 3.0 package of measures is now being pushed out to tougher conditionality for Greece than in previous talks.
7. Juncker stated that the EU Commission has prepared a detailed Grexit plan, inclusive of humanitarian aid. Juncker plan also includes balance of payments support scheme for non-euro states with big exposures to Greek banks: Bulgaria, Romania. Big questions are also about Macedonia and Serbia.
8. At least in theory (detailed theory per Juncker) we have the end of 'irreversibility' of the euro (for now - at single state level).
9. IMF is back in the Troika 'Institutions' pairing.
10. No parallel currency discussions - left to Finance Ministers discussions.

My take: Overall, Greek position is now nearly toast. Contrary to many expectations, a No vote did not produce a stronger playing hand for Greece. Possibly because Tsipras failed to deliver any new proposals. Sunday EU Council would be required for a treaty change. This implies two possibilities: haircuts (ruled out) or Grexit. We are leaning toward Grexit, heavily.

The acceleration in Eurogroup and council demands on Greece suggests that prior to the Referendum there was already a strong consensus that Grexit is the preferred direction for further talks.


Serious sidelines:

Italy position is optimistic on the deal, but no debt relief in sight. Still remains hard-line on Greece.

Merkel takes harder stance than anyone else: strikes down bridge agreement: "Bridge financing didn't play any role in our talks tonight." Stance on conditions: "The proposals we are expecting now encompass what we put forward for second programme plus more for third programme." Haircuts: "A haircut is not up for debate. That is a bailout under the treaties and that will not happen." Merkel isn't even keen on discussing ESM programme resumption. Tougher thing still: "The situation has become much worse. I have to take 3rd programme proposals to Bundestag - hence need detail." Which means serious hurdles to cover here.

France is the lead in Greek side support and Hollande is not impressed: "It is true that if there were no agreement, the situation would be serious. Other options would have to be sought."

Spain's Rajoy "New Greek programme will have conditions attached. Will have to be approved by institutions, then Eurogroup, then leaders". Meaningless, surprisingly.

Donald Tusk: "Our inability to find an agreement may lead to the insolvency of Greece and the bankruptcy of its banking system". Says the Greek government is to present its proposals by Thursday, July 9. Juncker put deadline at 8:30 am Friday, July 10. So lots of confusion.

Finland: ruled out Bailout 3.0 for Greece on any terms.

Belgium: Finance Minister Van Overtveldt: "very disappointed" by today's Eurogroup meeting. New Greek Finance Minister made "very good explanation" of situation, but "had no new proposals to show us". "I had the strong impression that everybody really feels the sense of urgency, except the Greek government." His boss: Belgian PM Michel: has “more and more difficulty to understand the logic of Tsipras. On the one hand he says 'we want to stay in the eurozone'. On the other hand, he's not taking any initiative, zero, nothing, to stay in the eurozone.”

Lastly - a link worth reading: http://www.capx.co/the-eurocrats-are-punishing-greece-to-scare-other-countries/

7/6/15: Secular Stagnation: A Double-Threat

Recent evidence on long term growth dynamics and drivers decomposition across the advanced economies presents a striking paradox relating to the post-recessionary experience around the world. In a traditional business cycle, recovery period growth exhibits certain historical regularities, that are no longer present in the current cycle. These regularities involve the following stylised facts:

1) Following a recessionary contraction in aggregate output, advanced economies enter a stage of recovery associated with strong growth in investment and domestic demand;

2) Gains in factors' productivity, especially in labour productivity, are amplified in the early stages of post-recessionary recovery compared to their pre-crisis trend levels; and

3) Rates of growth in the recovery cycle are in excess of pre-recessionary growth.

These facts are patently absent from the data for the major advanced economies today, some four to five years into the recovery. This realization has prompted some economic and financial analysts to speculate about the potential structural decline in long term growth rates, the thesis commonly termed "secular stagnation".

Currently, there are two prevailing theses of secular stagnation, linked to two long-term cycles gaining prominence in the global economy: the demand side and the supply side theses.

Investment-Savings Mismatch

The first theory suggests that secular stagnation is linked to a structural decline in aggregate demand, manifesting itself though a decades-long mismatch between aggregate savings and investment and more broadly related to the demographic effects of ageing.

This theory traces back to the 1930s suggestion by Alvin Hansen that the U.S. Great Depression aftermath was coinciding with decreasing birth rates, resulting in oversupply of savings and a fall off in demand for investment. The thesis was salient throughout the 1930s and the first half of the 1940s, but was overrun by the war and subsequently forgotten in the years of the post-WW2 baby boom and investment uplift. Large scale increase in public investment, linked to rebuilding destroyed (in Europe and Japan) or neglected (in the war years in the U.S.) public infrastructure, helped to push Hansen's forecasts of a structural growth slowdown aside.

The thesis of demand-driven secular stagnation made its first return to the forefront of macroeconomic thinking back in the 1990s, in the context of Japan. As in Hansen's 1930s U.S., by the early 1990s, Japan was suffering from a demographics-linked glut of savings, and a structural drop off in investment. Suppressed domestic demand has led to a massive contraction in labour productivity. During the 1980-1989 period, Japan's real GDP per worker averaged 3.2 percent per annum. In the following decade, the rate of growth was just over 0.82 percent and over the period of 2000-2009 it fell below 0.81 percent. Meanwhile, Japan's investment as a percentage of GDP fell from approximately 29-30 percent in the 1980s and the 1990s to under 23 percent in the 2000s and to just over 20 percent in 2010-2015.

Following Japan's experience and the shock of the Great Recession, the theory that the entire developed world is set for a structural growth slowdown has gained traction. Between 1980 and 2014, the gap between savings and investment as percentage of GDP has widened in Canada, Japan, and the Euro area. Controlling for debt accumulation in the real economy, the widening of savings surplus over investment over each decade since the 1980s is now present in all major advanced economies, including the U.S.

In line with this, labour productivity also fell precipitously across all major advanced economies. As shown in the chart below, even a period of unprecedented rise in unemployment in the U.S. and the euro area over the recent Great Recession did not shift the trend for declining labour productivity growth.

CHART: Five-year Cumulated Growth in Real GDP per Employee

Percentage Points

Source: Author own calculations based on data from the IMF

Worse, current zero rates monetary policy environment is reinforcing the savings-investment mismatch, rendering the monetary policy impotent, if not damaging, in stimulating the return to higher long term growth.

Traditionally, low interest rates create incentives for investment and reduced saving by lowering the cost of the former and increasing the opportunity cost of the latter.

However, today's ageing demographics and rising dependency ratios offset these 'normal' effects. This means that for the older generations, retirement pressures work through both insufficient reserves built in pensions portfolios, and also through lower yields on retirement portfolios, incentivising more aggressive savings.

For the working age population, the pressures are more complex. On the one hand, middle age workers today face severe pressures to deleverage their balance sheets, aggressively reducing liabilities accumulated before the crisis. On the other hand, growing proportions of middle-age adults are facing twin financial pressures from the rising demand for support for ageing parents and, simultaneously, for increasing number of satay-at-home younger adults who continue to rely on family networks for financial and housing subsidies. A recent Pew Research study found that 64 percent of Italian middle-aged generations find themselves sandwiched between ageing parents and children. In the U.S. this proportion is 47 percent and in Germany 41 percent. All along, the same households are under pressure to build up their pensions, as retirement security and social provision of pensions are now highly uncertain.

In his speech to the NABE Policy Conference in February 2014, Lawrence H. Summers (http://larrysummers.com/wp-content/uploads/2014/06/NABEspeech-

Lawrence-H.-Summers1.pdf) outlined six  core sources of this demand side-driven slowdown:

1) Existent legacy of the private debt overhang;

2) Demographics of ageing;

3) Rising income inequality that induces greater financial insecurity today and into the future, thus creating incentives for increased ordinary and precautionary savings;

4) Access to low cost capital;

5) Positive real interest rates that continue to prevail despite historically low policy rates; and

6) Large scale holdings of banks' reserves on central banks balance sheets.

All of these factors are currently at play in the U.S., UK and the euro area, as well as Japan. With a lag of about 3-5 years, they are also starting to manifest themselves in other advanced economies.

Tech Investment: Value-Added  Miss

The supply side of secular stagnation thesis is a relatively new idea coming from the cyclical view of historical development of physical and ICT-linked technologies. First formulated by Robert Gordon some years ago it is summarised in his August 2012 NBER paper, titled "Is the US Economic Growth Over? Faltering Innovation Confronts the Six Headwinds" (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2133145).

Gordon looks at long-term - very long-term - trends in growth from the point of challenging the traditional view of macroeconomists that perpetual economic progress is subject to no time constraints. In Gordon's view, U.S. economy over the period through the 2050s is likely to face an uphill battle. Per Gordon, "The frontier established by the U.S. for output per capita, and the U. K. before it, gradually began to grow more rapidly after 1750, reached its fastest growth rate in the middle of the 20th century, and has slowed down since.  It is in the process of slowing down further."

The reason for this, according to the author, is the exhaustion of economic returns to the most recent technological / industrial 'revolution'.  "A useful organizing principle to understand the pace of growth since 1750 is the sequence of three industrial revolutions. The first with its main inventions between 1750 and 1830 created steam engines, cotton spinning, and railroads. The second was the most important, with its three central inventions of electricity, the internal combustion engine, and running water with indoor plumbing, in the relatively short interval of 1870 to 1900.  Both the first two revolutions required about 100 years for their full effects to percolate through the economy. …After 1970 productivity growth slowed markedly, most plausibly because the main ideas of [the second revolution] had by and large been implemented by then. The computer and Internet revolution began around 1960 and reached its climax in the dot.com era of the late 1990s, but its main impact on productivity has withered away in the past eight years. …Invention since 2000 has centered on entertainment and communication devices that are smaller, smarter, and more capable, but do not fundamentally change labor productivity or the standard of living in the way that electric light, motor cars, or indoor plumbing changed it."

Gordon’s argument is not about the levels of activity generated by the new technologies, but about the rate of growth in value added arising form them. In basic terms, ongoing slowdown in the U.S. (and global) economy is a function of six headwinds, including the end of the baby boom generation-linked demographic dividend; rising income and wealth inequality; factor price equalisation; lower net of cost returns to higher education; the impact of environmental regulations and taxes; and real economic debt overhangs across public and non-financial private sectors.

Gordon estimates that future growth in consumption per capita for the bottom 99 percent of the income distribution is likely to fall below 0.5 percent per annum over the period of some five decades.

The supply-side thesis, implying persistently falling returns to technological innovation and resulting reduced rates of productive investment in technological capital, is supported by some top thinkers in the tech sector, notably the U.S. entrepreneur and investor Peter Thiel (see http://www.ft.com/intl/cms/s/0/8adeca00-2996-11e2-a5ca-00144feabdc0.html).

A recent study from IBM, titled "Insatiable Innovation: From sporadic to systemic", attempted to debate the thesis, but ended up confirming Gordon’s assertion that incremental and atomistic innovation is the driver for today's technological progress. In other words, the third technological revolution is delivering marginal returns on investment: significant and non-negligible from the point of individual enterprises, but hardly capable of sustaining rapid rates of growth in economic value added over time.

Disruptive Change Required

The problem is that both theses of secular stagnation are finding support not only in the past historical data, but also in the more recent trends. Even the most recent World Economic Outlook update by the IMF (April 2015) shows that the ongoing economic slowdown is structural in nature and traces back to the period prior to the onset of the Great Recession.

As both, the demand and supply side theses of secular stagnation allege, the core drivers identified by the IMF as the force behind this trend are adverse demographics, decline in investment, a pronounced fall off in total factor productivity growth (the tech factor), as well as the associated decline in labour and human capital contributions to productivity. IMF evidence strongly suggests that during the pre-crisis spike in global growth, much of new economic activity was driven not by expansion on intensive margin (technological progress and labour productivity expansion), but by extensive margin (increased supply of physical capital and emergence of asset bubbles).

Like it or not, to deliver the growth momentum necessary for sustaining the quality of life and improvements in social and economic environment expected by the ageing and currently productive generations will require some serious and radical solutions. The thrust of these changes will need to focus on attempting to reverse the decline in returns to human capital investment and on generating radically higher economic value added growth from technological innovation. The former implies dramatic restructuring of modern systems of taxation and public services provision to increase incentives for human capital investments. The latter implies an equally disruptive reform of the traditional institutions of entrepreneurship and enterprise formation and development.

Absent these highly disruptive policy reforms, we will find ourselves at the tail end of technological growth frontier, with low rates of return to technology and innovation and, as the result, permanently lower growth in the advanced economies.

7/6/15: Greece Needs a Structured Euro Exit: Sinn

As the saying goes... can't have a Greece drama without Target 2 drama... Hans Werner Sinn on Greek referendum results:

In simple terms: make Grexit. As this stage int the game, I agree - facilitated (using European financial and investment supports) exit by Greece from the euro area is the optimal resolution path to the crisis.

The arguments about new costs are irrelevant: Greek debts are currently unrepayable and will not be made good by any structural reforms. In fact, the debts are holding back the effectiveness of such reforms and will likely wipe out all and any benefits of devaluation that can be gained from conversion into drachma. Whether Greece remains in the euro area or exits, either path will require a write-down of more than 30% of Greek Government debt (my estimate - at least EUR125 billion, in line with recent IMF estimate, although my estimation is higher, since the IMF assessment was prepared prior to the Greek economy deteriorating further and the country fiscal position weakening beyond April 2015 assessments) and some additional assistance (in form of investment funds from the EU) to the tune of EUR20-30 billion over 3 years.

The write-downs should be carried out via ECB and monetised as a part of the ECB QE (wiping out the losses) so the only new call on EU funds will be investment funding. Drachma return will have to be used to carry out immediate fiscal adjustment (so there will be plenty of pain and reforms on that front).

Chart below (source: Open Europe) shows the breakdown of Greek debt by holding:

Ex-IMF official sector holdings are at 68%. IMF should, by all possible metrics, take a bath too, but it won't, so the 9% of the total liabilities held by the IMF is not at play. Banks can take a haircut, but that will require recaps (Greek banks) and/or is utterly immaterial in quantum of debt held (1% for Foreign Banks). Other bonds above are predominantly short-term stuff that can be haircut. No matter how you spin the numbers - Eurozone holdings will have to be cut by more than a half.

6/7/15: More Nama and IBRC headlines

More interesting 'stuff' is seeping into the public domain from Nama and IBRC:

1. Irish Times on PIMCO reporting to Nama an un-solicited approach http://www.irishnews.com/news/2015/07/04/news/-unsolicited-approach-to-pimco-to-buy-nama-loans-161616/ "...at least one informal meeting took place at Stormont in late 2013 - thought to have involved Ian Coulter, Frank Cushnahan and a senior politician - with a view to Pimco acquiring Nama’s northern portfolio in its entirety". 
2. A report in the Indo on John Flynn's letter concerning IBRC overcharging: http://www.independent.ie/business/irish/banking-inquiry/bank-inquiry-refuses-to-probe-anglo-overcharging-31352266.html

On the first topic above, see the following links: http://trueeconomics.blogspot.ie/2015/07/4715-another-nama-story-that-wont-go.html

On the second story above, see the letter and the links posted here: http://trueeconomics.blogspot.ie/2015/06/1762015-mr-john-flynns-letter-to.html and BankCheck report reprinted here: http://trueeconomics.blogspot.ie/2015/06/21615-bankcheck-report-into-anglo-ibrc.html

5/7/15: Votes are in... What's next for Greece?

With over 75% of votes counted in the Greek referendum, 61.6% of the votes counted are in favour of 'No'.

So what's next? Or rather, what can [we speculate] the 'next' might be?

Possible outcome: Grexit

• This can take place either as a part of an agreement between Greece and Institutions (unlikely, but structurally less painful, and accompanied by debt writedowns, a default or both), or
• It can take place 'uncooperatively' - with Greece simply monetising itself using new currency (more likely than cooperative Grexit, highly disruptive to all parties involved and accompanied, most likely, by a unilateral/disorderly default on ECB debt, IMF debt, EFSF debt and Samurai debt. Short term default on T-bills also possible).

Either form of Grexit will be painful, disruptive and nasty, with any positive outcome heavily conditional on post-Grexit policies (in other words, major reforms). The latter is highly unlikely with present Government in place and in general, given Greek modern history.

Grexit - especially disorderly - would likely follow a collapse of the early efforts to get the EU and Greece back to the negotiating table. Such a collapse would take place, most likely, under the strain of political pressures on EU players to play intransigence in the wake of what is clearly a very defiant Greek stance toward the EU 'Institutions' of Troika. 

Key to avoiding a disorderly / unilateral Grexit will be the IMF's ability to get European members of the Troika to re-engage. This will be tricky, as IMF very clearly staked its own negotiating corner last week by publicly identifying its red-line position in favour of debt relief and massive loans package restructuring. The EU 'Institutions' are clearly in the different camp here.

EU Institutions will most likely offer the same deal as pre-referendum. Greece will be 'compelled' to accept it by a threat of ELA withdrawal, but, given the size of the Syriza post-referendum mandate, such position will not be acceptable to Greece.  In the short run, ECB can allow ELA lift to facilitate transition to new currency, but such a move would be difficult to structure (ELA mandate is restrictive) and will result in more debt being accumulated by the Greek government that - at the very least - will have to guarantee this increase.

Problem with Grexit, however, is that we have no legal mechanism for this, implying that we might need a host of new measures to be prepared and passed across the EU to effect this.

Which brings us to another scenario: Status Quo

In this scenario - no player moves. We have a temporary stalemate. Greece will be cut off from ELA and within a week will need to monetise itself with new currency. 

Why? Because July 10th there is a T-bill maturing, default on which would trigger a cascade of defaults. Then on July 13th there is another IMF tranche maturing (EUR451 million with interest). Non-payment of either will likely force EFSF to trigger a default clause. Day after, Samurai bonds mature (Yen 20bn) - default here would trigger private sector default. More T-bills come up at July 17th and following that interest on private bonds also comes up on July 19th (EUR225 million). And then we have July 20th - ECB's EUR3.9 billion due, with additional EUR25mln on EIB bonds. Non-payment here will nearly certainly trigger EFSF cross-default.

Most likely scenario here would be parallel currency to cover internal bills due, while using euro reserves and receipts to fund external liabilities. Problem is - as parallel currency enters circulation, receipts in euro will fall off precipitously, leading inevitably to a full Grexit and a massive bail-in of depositors prior to that. Political fallout will be nasty.

Most likely outcome is, therefore, a New Deal

This will suit all parties concerned, but would have been more likely if Greece voted 'Yes' and then crashed the current Government. This is clearly not happening and the mandate for Syriza is now huge. Massive, in fact. 

So there will have to be a climb-down for the EU sides of the Troika. Most likely climb-down will be a short-term bridge loan to Greece (release of IMF tranche is currently impossible) and allowing use of EFSF funds for general debt redemptions purposes. 

The New Deal will also involve climb-down by the Greek government, which will, in my view, be forthcoming shortly after Tuesday, especially if ECB does not loosen ELA noose. 

Bad news is that even if EU side of Troika wants to engage with Greece, such an engagement will probably require approval of German (and others') parliament. Which will require time and can risk breaking up already fragile consensus within the EU. In fact, only consensus building tendency in the wake of today's vote is for a hard stand against Greece. Even in an emergency, EU is very slow to act on developing new 'bailouts' - in Cypriot case it took almost a year to get a deal going. For Portugal - almost 1.5 months. Urgency is on Greek side right now, not EU's, so anyone's guess is as good as mine as to how long it will take for a new deal to emerge.

That said, short-term approach under the status quo scenario above might work, as long as:

1. Greece engages actively, signalling willingness to deal;
2. Greece does not monetise directly via new currency (IOUs will do in the short run); 
3. IMF puts serious pressure on Europe (unlikely); 
4. ECB plays the required tune and keeps ELA going (somewhat likely); and
5. There is no fracturing of the EU consensus (if there is, all bets are off).

In a rather possible scenario, EU does opt for a new deal with Greece, which will likely involve pretty much the same conditions as before, but will rely on removing IMF out of the equation altogether. In this case, EUR28.7 billion odd of Greek debt held by the IMF gets transferred to ESM. The same will apply to ECB's EUR19 billion of Greek debt. The result will be to cut Greek interest costs (carrot), and involve stricter conditionality and cross-default clauses (stick). Euro area 'Institutions' therefore will end up holding ca 73% of all Greek debt in that case. Terms restructuring (maturities extension) can further bring down Greek costs in the short run. 

The negative side of this is that such a restructuring & transfer will be challenged in Germany and Finland, and also possibly in the Netherlands. 

It is. perhaps, feasible, that a new deal can involve conversion of some liabilities held by the euro area institutions into growth-linked bonds (I am surprised this was refused to start with) and/or a direct conditional commitment (written into a new deal) to future writedowns of debt subject to targets on fiscal performance and reforms being met (again, same surprise here). Still, both measures will be opposed by Germany and other 'core' economies. 

Either way, two things are certain: One: there will be pain for Greece and Europe; and Two: there will be lots of uncertainty in coming weeks.

As a reminder of where that pain will fall (outside Greece):
Source: @Schuldensuehner