The silent loser

UK agrees to ‘print’ more money. The title of this blog refers to this nation.

HSBC Flash PMI for China in June underscores the implausibility of China external trade data for May that showed exports jumping sharply in the month to the US and Europe. In the meantime, my friends in ‘Forensic Asia’ continue to pick rather big holes in Chinese corporate balance-sheets.

Three ‘poignant’ or ‘interesting’ charts on Spain in ‘Washington Post’. Courtesy, link from Reuters.

The latest US FOMC decision conveys the impression that the Federal Reserve Open Market Committee is both divided and confused.

Of course, stock markets practice ‘Hear, speak and see no evil’ rather well. Or, if we believe that they are still genuine stock markets in the conventiona lsense.

Half way through ‘Margin Call’ on the flight from Singapore to London. Not bad. One of the characters has a striking physical resemblance to Jamie Dimon 🙂 Kevin Spacey looks slightly heavy but is classy, as usual.

‘Reform-minded’ UPA

On the 17th, even as I was posting my blog on India, I had failed to take into account the crassly populist and counter-productive increase in the Minimum Support Prices (MSP) for agricultural crops by the UPA Government few days before that. The 170 Rupees per quintal (100 kgs.) increase in the MSP for paddy is a strong signal to farmers to continue to produce the water-guzzling paddy while the granaries are already overflowing with sacks of paddy, providing a ready and eternal supply of fodder for rodents. Business Standard has a good edit on the hike in MSP.

In my weekly column in MINT today, I had lauded the RBI for holding rates on Monday. It was the right thing to do under the circumstances. A rate cut would have been an attempted bailout of the Indian government with as much chance of it succeeding as bailouts in Europe are likely to. I had failed to list the hike in MSP as one of the reasons for RBI restraint. It surely must have played a role in their decision.

The clamour for a rate cut and the disappointment over the failure of the central bank to deliver it are as disappointing as they are not well thought through. The origin of India’s growth slowdown and inflation persistence clearly lies elsewhere.

One thing for sure: Surjit Bhalla now knows what to write this coming Saturday in his column for IE.

Baseline scenario

Professor Dani Rodrik has a lovely (?!) piece in ‘Project Syndicate’ on ‘The end of the world as we know it’. I only have two quibbles with it:

(1) He gives the benefit of doubt to India and Brazil because they are two countries with low public debt, have democratic institutions and limited dependence on exports and capital flows. The last point is debatable, esp. for India. But, we shall let that pass.

The main objection to his giving a relatively free pass to India comes from this: he vastly underestimates India’s ability to score self-goals. Second, if some one thought India had better prospects than China, India would make sure that they are proven wrong.

(2) The other quibble I have with his column is that he thinks that his scenario is remote. For me, it comes close to being a baseline scenario.

Whether you agree with him or not, do not miss it.

Some country this is

In its June 9th print edition, ‘Economist’ wrote a ‘farewell’ leader article to ‘Incredible India’. Even the most die-hard Indian patriot had to agree with it and not quibble with the substantive message.

For an even more forthright depiction of the Indian reality, it would be hard to surpass this blog post of Mr. Bibek Debroy.

Just a sample:

When the history of the Indian economy is written twenty years down the line, we will look back at the 2004 to 2014 decade as one that was just as damaging as mid-1960s to mid-1970s, if not worse, because the world has changed.  As was the case during that earlier decade, contrary views are not encouraged and are marginalized.  Advisers, bureaucrats and economists flow along with the tide.  That’s partly because views of many people are malleable.  That’s a requisite trait for survival.

In the ‘Banyan’ blog in the magazine that deals with Asia, I came across this blog post. It comes across as a ‘sympathetic’ blog post from the Indian perspective:

As a member of the jackass media, I left the meeting with the feeling that one part of the state machine, the politicians, was still not working. However another part, the bureaucracy, was trying to raise its game.

“At the top level the leadership understands these principles very well,” said Mr Basu. If so, what a shame the top politicians are so terrified of saying the same thing aloud. The failure of India’s leaders to advocate reform before its citizens is one reason why there is so little consensus in favour of it among the public today.

Now, this is what is frustrating about this country. So, the bureaucracy is trying to raise the game. The leadership understands issues very well. But, in reality, none of the sensible things will get done but counter-productive initiatives will, somehow, see the light of the day. The list is long: retrospective tax law amendments, meaningless and extortionist tax raids, more government handouts, rollback of sensible decisions, deferment of needed reforms. Political parties will oppose the same thing that they tried to do when they were in office.

It is hard to understand the dynamics of public policy-making in India, let alone make sense of it.

(p.s: I tried to compliment Mr. Surjit Bhalla – it is not too often that I find myself in agreement with him, esp. when it comes to his Op.-Eds. on Indian monetary policy – for this Op.-Ed. of his but I got a strong pushback from my friends. Mr. Bhalla wanted to visualise a situation where the UPA rebuffing Ms. Mamata Banerjee on the Presidential candidate proved to be a political and economic turning point for India, for the better. One of my friends wrote that it was, perhaps, possible for Mr. Bhalla to dream with eyes open.

Even the usually positive Swaminathan Aiyar had a different take on the Presidential candidate nomination drama. Nothing is ever straight in this country.)

Greece and other links

This article in New York Times makes for sad reading. It is the leaders’ (or, the so-called elites’) karma that visits all those who had no part to play in it, directly. I can understand the depression, confusion and anger. Some weeks ago, Arvind Subramanian wrote in FT that Greece might be better off exiting. Perhaps, he is not so sure now. Whichever way Greece turns, it looks like a very hard grind. Medium term might look a lot better with a Drachma and policy autonomy, but how to get THERE from HERE is a big question.  Or, will they get THERE from HERE?

I wrote in MINT two weeks ago that Germany would be brought, kicking and screaming, around to issuing common Eurozone bonds, agreeing to a fiscal and banking union, etc. I have to acknowledge that evidence since that piece appeared in MINT points in the opposite direction. But, I am not backing off from that stance, yet.

A former colleague sent me links to translated articles that suggested that Germany might wish to see Greeks exit and suffer and that such suffering would serve as a warning to the rest of the crisis-ridden countries to ‘behave’ themselves with austerity.

Here is the translation:

Angela Merkel, according to Italian newspaper Il Messaggero and  Belgian newspaper De Standaard, is delaying the adoption of a comprehensive plan to address the Eurozone crisis until Greece leaves the Euro.

The “sacrifice” of Greece came to light when Barack Obama had a telephone conversation with Angela Merkel and Italian Prime Minister Mario Monti yesterday, asking them to do more to address the crisis.

Italian Prime Minister Mario Monti repeated his established position that “Greece must remain in the euro area.” But Berlin expects Brussels (the EU) and Frankfurt (the ECB) to compel Athens to abandon the euro immediately after the Greek elections of June 17.

It would be a lesson to the other Eurozone countries to be disciplined, and would be a catalyst to accelerate a closer fiscal union.

Apparently, it is a Google translation. Does not appear bad at all. The original source is here.

There is another translated article that my former colleague had sent in the same email:

The problem in Spain is that the banks have a bunch of worthless mortgages and so huge losses. A massive capital injection is needed. And Spanish banks have a lot of Spanish bonds that they recently bought a significant portion of fresh money from the European Central Bank. A growing number of Spanish savers are aware of the situation and are leaving Spanish banks.

A European form of collectivization of public debt could be called Eurobonds, but could also be called the less controversial name of “debt service fund”. And a system is needed from a European fund to recapitalize banks. This is the minimal a fiscal union needed for the short-term survival of the Euro.

But Merkel does not want to pay for the “mistakes” of other countries. She will only help other countries if they are far-reaching reforms in labor markets along the German model, and willing to cede economic and financial sovereignty.

Here is a scenario some see as a way out of this impasse. The Greeks again cast the “wrong” vote on 17 June. The money flow to Greece closes, it leaves the Eurozone. This causes chaos in Greece and (one hopes) manageable losses in the rest of the Eurozone. The Southern European countries are brought to heel by the Greek example, experience bank runs, and a fiscal union is created from the chaos. [Original here]

As a negotiating stance, it makes sense. Of course, it goes against what I wrote in MINT. My hypothesis was that Germany and its allies would not want any country to leave the Eurozone for (a) fear of triggering a contagion and (b) for fearing of showing a path for others to follows in a year or two, should Greece eventually recover (as per Arvind Subramanian).

Juncker’s warning to Greeks not to leave the Eurozone, carried by Reuters, is consistent with my hypothesis. Further, this ‘Charlemagne’ blog post in ‘The Economist’ based on ‘deep background’ conversations in Germany also bolsters my hypothesis that there would be no deliberate attempt to push Greece out of the Eurozone.

All this confirm the preference for ‘buying time’, hoping for miracles but getting, in the end, slow death that could be substantially more painful.

One casualty of keeping our eyes on Greece and Europe is that it blinds us to what is happening elsewhere. This story in FT that Iran and Iraq might be forming an alliance inside OPEC has interesting implications for OPEC unity and for oil prices.

Thanks to ‘Marginal Revolution’ for the link to a thoughtful post at ‘Economist’ blogs. This one deals with an interview by Prof. Ben Friedman who wrote the book, ‘Moral Consequences of Economic Growth’. The post is long but well worth a read. It talks about voter attitude (negative) towards an incumbent in times of slow and low growth, towards immigration (negative) and in general, towards a civil attitude (declining) towards fellow civilians.

A rather curious article in the front page of FT in Asia on Thursday. Headlined, ‘Bankers bow to Europe over bonus limits’, the report mentions the following:

Critics, including bank lobbyists, say banks will circumvent the spirit of the changes by increasing fixed salaries or finding other methods of remunerating staff that avoid the specific wording of the new rules. “You don’t have to call everything a bonus,” said one lobbyist.

Tightening regulation has already driven up bankers’ base salaries, increasing the fixed costs of businesses even as they struggle with volatile markets.

I am still trying to make sense of this. I admit to failure. I can only conclude that bankers are on a ‘Mutually Assured Destruction’ mission to finish off their institutions, their shareholders and finally themselves. Otherwise, they would not be so self-centered and daft simultaneously.

This Belgian Green MP has identified the issue well – State collusion with or State capture by bankers:

Philippe Lamberts, the Belgian Green MEP who led calls for the bonus cap, told the Financial Times that EU member states were “getting away with acting as a trade union for top bankers without paying the political price”.

China loans – (2)

Just few days ago, TGS blogged on the news item that, by the middle of May, the four big China banks had barely lent 34 billion yuan in new loans as of May 20th. Now, we hear that total new loans in May almost touched 800 billion yuan and that the four big banks might have lent around 250 billion yuan. Go figure. Or, is it worth trying to make sense of Chinese data, EU summits, Eurozone bailouts, G20 meetings, etc.?

Sensible Rachman

Gideon Rachman makes a lot of sense when he cautions against isolating Germany. The law of unintended consequences will very much be at work, for all the wrong reasons:

As a senior Dutch politician who shares the German view, puts it: “We cannot push through a banking union when the French have just cut their retirement age to 60 and we have raised ours to 67.”

Check out the links that Tyler Cowen provides us here. To make it easy for you, here is one and here is another.

Of course, it does not prevent ‘Economist’ from writing a leader article that is marked for its intellectual laziness/sloppiness.

It is not easy to bring about fiscal, banking and political unions in Europe. Probably, Germany should choose to ‘isolate’ itself.