Southern European CA Deficits Plummeting During First Half

Here are the first half current account balance numbers for the first half of this year for the main four Southern European euro area countries, with the balance for the first half of 2011 in ( ).

Italy : -€11.6 billion (-€35.9 billion)
Spain: -€17.1 billion (-€24.6 billion)
Greece: -€5.9 billion (-€13 billion)
Portugal: -€2.9 billion (-€7.8 billion)

As you can see, Italy and Portugal had the biggest improvements with their deficits falling by about two thirds while Greece saw its deficit fall by more than half too, Spain saw the smallest improvement, with its deficit falling by only about 30%. Given the current market mistrust of those countries, even a smaller deficit is too big, but at least it is moving in the right direction.

Family Guy On Mitt Romney's Religion

Peter Griffin hears about one aspect of the Mormon religion that he finds very appealing, and decides to become a Mormon, but then he hears about a more unpleasant aspect, causing him to leave that religion.


These days, outside of smaller break away groups, Mormons have actually rejected the aspect that Peter Griffin found so appealing while keeping that negative part, making the religion unequivocally unappealing.

Damned If You Do.....

First Canada's new $100 bill was considered "racist" because it featured an Asian woman looking into an microscope, now it is considered "racist" to remove her......

British Recession Only Affect Capitalists-For Now

The second estimate of British GDP was published yesterday. More interesting than the slight upward revision was that it unlike the most preliminary report contained income estimates for different sectors. And it shows that so far only capitalists are suffering from the recession, while worker's income continues to grow-for now. While nominal GDP rose by 1.9% in the year to the second quarter, compensation of employees rose 4.7% while "gross operating surplus" of corporations fell by 5.5%. Deflating these numbers with the 2.8% gain in the gross domestic purchases price index, gives us a drop of 0.9% real drop in GDP and a 8.1% real drop on gross operating surplus-but a 1.8% real gain in worker's income. This is in the short term good news for British workers, though a continued drop in profits (Note that because gross operating surplus doesn't exclude depreciation, net profits fell by a lot more than the gross surplus) will risk causing investments to fall, something that in turn in the long term wouldn't be good for workers.

The Fairy Tale Of British Spending Cuts

As we all know, Keynesians blame Britain's double dip recession on the Cameron governments allegedly savage austerity, and argues that the recession proves that he should reverse course

 There's one big problem with that argument: those spending cuts are nowhere to be found. Below are central government spending in Britain for the first 7 months of 2012 and 2011. The number excluding interest is arguably the most interesting one since interest rates isn't something the governmment can directly decide upon.

 Central Government spending 2011 Jan-July: £356.35 billion

 Central Government spending 2012 Jan-July: £368.91 billion +3.5%

 Excluding interest 2011: £327.81 billion

Excluding interest 2012: £342.22 billion +4.4%

 I'm asking you, do these numbers look like spending cuts to you?

E-Bay Medical Licenses

Today's big political news was Missouri Republican Senate candidate Todd Akin's theory that women can't be impregnated (except very rarely) through rape.

I wonder how this is supposed to work. Does the egg somehow know that the sperms are released during a rape and then kick them out because it doesn't want to be fertilized because of that, or does a woman that are forced to have sex sends out some signal from her brain that activates some barrier that prevents sperms from reaching her eggs?

Anyway, what we do know for sure is that his theory is laughably false. He claims that he heard this from doctors. That leaves two options: either he is lying about that, or they do in fact sell medical licenses on E-bay....

Time To Subsidize Chinese Imports?

China is selling its foreign currency reserves to limit the drop in the value of the yuan. Since the previous purchases was used as "proof" that China "manipulated" its currency in a way that justified tariffs on Chinese goods, I take it that Senator Schumer and others will now call for import subsidizes now that China intervenes in the opposite direction?

Record Increase In Euro Area CA Surplus

A combination of austerity measures and a weak euro contributed to the biggest strengthening of the euro area current account balance in a long time in June , perhaps the biggest ever. Between June 2011 and June 2012, the surplus rose from just €0.3 billion to a surplus of €15.7 billion. For the second quarter as a whole, the balance went from a deficit of €18.6 billion to a surplus of €13.8 billion.

This reflected both an increase in the surplus of Germany and a swing in Italy's balance from a €2.7 billion monthly surplus in June 2011 to a surplus of €1 billion in June 2012,  a combination of changes that Paul Krugman has asserted isn't possible. Yet, it is happening....

The "Savings Glut" Again

A reader asked me to comment on this Telegraph-article where the author blames bubbles in both America and Europe on a global savings glut created in Asia, as opposed to central bank manipulation (it should be mentioned that the article acknowledges a role for central banks, but this is described as a secondary effect provoked by the savings glut). I have previously discussed the alleged role of the "savings glut" for the American bubble when advanced by Alan Greenspan, and here is what I wrote:

"This explanation really doesn't explain why the bubble started to inflate in 2001 and ended in 2006-07. Did the savings glut start in 2001 and then end in 2006? To the contrary, the external surplus of both China and oil-exporting nations fell in 2001, while they rose quickly in 2006-07. And, as explained below, given how the central bank sets interest rates, those flows will mainly affect money supply instead of interest rates. Greenspan himself makes this argument by pointing to how long-term interest rates did not rise after the rate increases in 2004-2005. This is dishonest for more than one reason. First of all, the housing bubble started already in 2001, when he pushed through rate cuts of an unprecedented magnitude, from 6.5% to 1.75% in a mere year. Secondly, because of the increased popularity of adjustable-rate mortgages, short-term interest rates were just as important as long-term interest rates. Thirdly, movements in market interest rates always tend to precede movements in the federal-funds rate as market interest rates are really the future average federal-funds rate during the duration of the bond. If really long-term interest rates were determined only by global liquidity, then were long-term interest rates about 1.5% in Japan and 6.5% in Australia until only recently? This is all the more telling given the fact that Japan has a very high budget deficit and a huge public debt, while Australia had a budget surplus and a very small public debt. And to further illustrate the point, after the Reserve Bank of Australia unexpectedly reversed its previous rate-hike policy and started to aggressively lower short-term interest rates, the 10-year yield has fallen some two percentage points, while the Japanese yield has stayed unchanged. And long-term interest rates did in fact rise from 3.3% in June 2003, when the deflation scare made everyone believe interest rates would stay low for long, to 4.7% in June 2004 when the Fed had already signaled the start of a series of rate increases. That long-term interest rates didn't rise further after that merely reflected that the series of rate increases after that was factored in by the markets."

Continued Economic Division Of Europe

Today's European growth numbers are pretty much in line with the ones I reported about last quarter. Most of northern/central Europe continues to grow with growth being highest in the Baltic countries, Slovakia and Sweden. The exception to that rule includes Britain, Hungary, Czechia and Belgium whose economies are contracting just like southern Europe whose deep slump continues (Spain's 1% yearly drop is actually comparatively well for the region). The main difference compared to last quarter's number is that Finland is doing worse while Holland is doing better.

Japanese Unemployment Isn't Increasing-It's Population Is Aging

Noah Smith has a chart showing a big decline in the employment rate in Japan:

Yet contrary to what he writes, this does not reflect an increase in unemployment, hidden or open. The reason is that this number refers to employment relative to total population older than 15. But if you look at 15-64 year olds alone, the employment rate has in fact increased, from 68.8% in 2001 to 70.2%, and increasing further to 71% in June 2012.  The unemployment rate has fallen from 5% in 2001 to 4.6% in 2011 and 4.3% in June 2012.

Unemployment is thus in fact lower than in a very long time. The reason why the ratio of workers to the total population has dropped is not that unemployment has increased -again, it has in fact dropped- but that Japan is rapidly becoming something of a nation of geezers.

Japan has, much like the other former leading World War II axis power, for decades had a very low birth rate something that together with Japan's "no gaijins allowed" immigration policy now results in a shrinking work force. Meanwhile, Japan's extremely high life expectancy means that the number of old people grows fast even as the number of young people shrinks fast.

Swiss ForEx Reserves Swell To New Records

In September lasy year, Switzerland abandoned the last remnants of its floating exchange rate policy (which was already a "dirty float" as they had intervened heavily to limit the increase in the value of its currency) for the franc and in effect implemented a fixed exchange rate of 1.2 francs per euro.

This was done in part to help exporters, which had been hurt by the previous big gain in the exchange rate value of the franc, and in part to fight price deflation, which the Swiss National Bank (the SNB) like most central banks abhor.

The policy has been successfull in the sense that the SNB has been successfull in keeping the franc firmly at 1.2 against the euro, and the Swiss economy has been doing better than most other European economies.

However, it has come at a price as the defense of the exchange rate has forced it to increase reserves from an already sky high 49% of GDP to 71% of GDP. That's as if the Fed had assets of $11 trillion denominated in foreign currencies.

In the short term, the only thing that could prevent the SNB from keeping this up would be if price inflation became a problem, but that seems like a distant concern as the consumer price index was 0.7% lower in July compared to a year earlier.

However, if and when the franc is again again allowed to rise in value this means that the SNB will make greater and greater losses the bigger its reserves of foreign currency assets are. With reserves at 71% of GDP, a 10% gain would cause them losses of 7.1% of GDP compared to 4.9% when reserves were 49%.

This fact could either hasten or delay the demise of the fixed exchange rate. It could hasten it if officials see this and decide they want to limit the future losses by reducing purchases. It could also delay because officials want to prevent the realization of those losses. However in the latter case inflation would ultimately become a problem, something that might compel them to end it.

Economic Fact Of The Day

I see on the Dutch statistics bureau home page, that Germany is the largest trading partner (trade here being defined as the sum of both exports and imports) of 17 of the 26 remaining EU-countries, while Holland is Germany's largest trading partner. This reflects both that Germany is the biggest economy in Europe and that it's geographic position is so central in Europe and that it is relatively close to so many countries.

A non-EU country, Russia, is the biggest trading partner of two EU-countries, namely Lithuania and Finland.

Other countries that are biggest trading partner for an EU country includes Britain (for Ireland), Greece (for Cyprus), Italy (for Malta), Spain (for Portugal), France (for Spain), Lithuania (for Latvia) and Finland (for Estonia).

The pattern here is clearly that there are primarily two factors that determine the volume of trade: the size of the economy and geographic proximity.

British Growth Numbers Weaker Than They Look

British population figures for 2011 were finally added to the Eurostat database, and they showed an increase  in population by about 0.8%, slightly higher than the previous year. Population growth has been remarkably resilient, as other countries with weak economies, including Iceland, Ireland and Spain has seen sharp reductions in population growth both because of a drop in birth rates and because large scale net immigration was turned into large scale net emigration. Yet in Britain the high birth rate has remained more or less unchanged while net immigration has increased somewhat.

However, the relatively high growth in population also means that development in per capita GDP has been even worse than the headline numbers suggests. In the 2008-2011 period GDP fell by a cumulative 2.5% while population increased by 3%, meaning that per capita income fell by 5.3%. By contrast Germany who saw a 3% increase in GDP and whose population dropped by 0.5% saw a 3.5% gain in per capita income.  After adjusting for population, Germany's relative gain increases from 5.6% to 9.3% in just 4 years.

Yes, Culture Is A Factor

While visiting Israel, Republican presidential nominee Mitt Romney remarked that Israel was economically  more successful  than the Palestinians and other similar Arab nations because of cultural reasons.

This was criticized by many commentators, including Steve Chapman . However, he relies heavily on the straw man argument that culture is the only factor determining economic success. If that had been the case, economic policy debate would have been irrelevant and no differences would have existed between say mainland China on the one hand and Taiwan, Hong Kong and Singapore on the other hand, or between North Korea and South Korea or previously between East Germany and West Germany. So clearly economic policy and other non-cultural factors matter

That doesn't however mean that cultural factors are irrelevant. Just because other factors like genetics and the amount of exercise are also relevant factors for weight doesn't mean that eating and drinking habits are irrelevant, and similarly just because some non-cultural issues also matter doesn't mean that cultural factors are irrelevant.

Is it really a coincidence that majority Chinese Singapore has a bigger GDP than Malaysisa  (only 24% Chinese) despite having a 5 times smaller population, while Indonesia (only 3.7% Chinese) whose population is more than 8 times bigger than Malaysia's only has a GDP that is less than 4 times bigger? Or is it really a coincidence that Israel is the only rich economy in the Middle East without significant amounts of oil in the ground, so rich that its GDP is larger than that of Egypt despite the fact that Egypt's population is 10 times bigger? Clearly some cultures, mainly Western and certain East Asian ones (Japanese, Korean, Chinese), are more succesfull in creating an advanced economy than others.

Chapman blames Israeli security based  restrictions on the Palestinians for their poverty. But while that, and the conflict in general, is no doubt bad for the Palestinian economy (the conflict is also bad for the Israeli economy as they are boycotted by the Arab world and most other Muslim countries), that is only a small part of the explanation considering how Egypt and other non-oil producing Arab countries (who doesn't face these restrictions) are also far poorer than Israel. 

Details Not So Rosy In U.S. Employment Report

Markets gained on news that employment according to the payroll survey rose by 163,000 in July. However, the other survey, the household survey, showed a drop in employment by 195,000. And while that survey is on a monthly basis more volatile and unreliable it can be an indicator that the payroll survey underestimates or overestimates labor market strength if it deviates systematically from it. And since February, household survey employment is only up by 0.1% compared to a 0.5% gain in the payroll survey, indicating that the payroll survey likely overestimates job growth in recent months.