Ken, what did you smoke?

It is rare for Cliff to comment on a policy proposal so absurd that no comment is needed. But Ken Rogoff, a highly respected professor at Harvard, tends to surprise. In his article in the German Frankfurter Allgemeine Zeitung, reproduced in English here and base for his talk at INSM, a Berlin based think tank, Rogoff argues that the most efficient way to boost the euro area periphery is to forgive their debt. Interestingly, the article does not explain why Rogoff believes this is most efficient, other than his belief that sovereign debt holders will be happy to chip in a maturity extension, as discussed recently at the IMF. But with the cost of EFSF/ESM loans minimal and market funding buoyant, the timing of Rogoff's argument is just too bizarre. Financial intermediation is just picking up again, and flush liquidity allowed Portugal to forego bailout funds and Ireland...

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No interest cut, please!

The IMF's deflation "ogre" has given way to a "lowflation" lithany in a recent IMF blog, which culminates in a call for lower ECB rates. Among other arguments, the well written post points out two key problems from low inflation: The first problem is the presence of nominal rigidities, i.e. the difficulty of cutting wages and prices. The internal devaluation that countries in the euro periphery need to accomplish requires an inflation differential to Germany and the rest of the core.  Nominal rigidity in wages make this adjustment harder to achieve if inflation in the core is low. And where prices must fall but can’t, the adjustment falls on volumes: lower output, lower employment. But here are some important qualifiers: 1) The nominal rigidities are the underlying problem. The nominal rigidities are a reflection of labor market inflexibilities...

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Resolving Greece's debt overhang: swapping away

On Vox, Peter Allen, Barry Eichengreen and Gary Evans deploy acrobatic arithmetics for reducing Greece's debt through asset sales. It seems academic circles, not markets, are most hung up with Greece's debt! The Peter-Barry-Gary proposal goes as follows: "The ECB, ESM and EU should commit a portion of their holdings of Greek government loans and bonds to a swap facility. Private investors interested in purchasing government assets could then buy loans or bonds with a face value of €1,000 for, say, €500. The Greek government, for its part, could agree to accept those bonds as currency for, say, €750 when selling government property at auction." Greece's EFSF debt, at long maturities and low and deferred interest rates, is nothing to give away easily. Greece should guard its official debt like a jewel! The cash savings from reducing Greece's official...

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Consumer price and asset price inflation: Looking the wrong way

Recent readings of the harmonized index of consumer prices (HICP) suggest a nontrivial risk of dipping into deflation in the euro area. While ECB's Draghi sticks to his "subdued price pressures" line, the IMF's Madame Lagarde has already called central bankers to arms to fight the "ogre" of deflation.  This post argues that asset price inflation--in particular housing--is driving an overlooked wedge between the HICP and the cost of living, which ECB and commentators should take into account. As shown below, asset prices have risen markably throughout Europe and Germany, much more than harmonized consumer prices. Stock and bond prices...

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The $9 trillion sale: Keep dreaming!

In its current edition, The Economist calls once again for privatization to help fund the high deficits of many Western governments. At first glance, this sounds reasonable given governments own indeed a lot of  assets. But that's about it. While privatization has played a significant role in the transition of Eastern Europe, in the aftermath of the Asia crisis, and in World Bank/IMF programs generally, privatization programs in the euro crisis often lagged more ambitious plans. Most notably, Greece's privatization program of EUR50 billion by 2015 has been a complete illusion. Also, sales were canceled in Spain and Ireland. Why is that so? Key obstacles are: The price is too low. Buy low, sell high! Selling assets in a downturn is usually bad investment advice. It is when times are good that assets should be placed for sale. State companies enjoy...

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Why Germans should stop mowing their own lawn

Mowing the lawn appears to be a common pastime for Germans. Washing the car or ironing even makes it into a listing of ways to burn calories in a recent issue of the news magazine Focus. Does this make sense, economically? Home production, i.e. productive non-market activities, are not captured in the national accounts. Time use surveys, such as the one carried out in Germany in 2001/02, show that adult Germans spend 25 hours per week on "unpaid" work, more than paid work on average. Macroeconomic indicators may be reminiscent of the extent of home production in Germany. Labor participation, particularly among women, is low, possibly...

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Welfare losses for future German generations: Two interpretations

This DIW publication, which is unfortunately not available in English in full version, makes the point that Germany's foreign investments--which accumulate as flip side of the current account surplus--fared quite badly during the crisis. The report goes so far to say that "some of the net valuation losses of German firms and individuals could have been prevented if their savings had been invested in long-term assets either in Germany or abroad." Ouch! Slap in the face of the German saver!  First a word of caution. Valuation changes are calculated as the residual between year end stocks and flows, which is a fairly coarse measure. Breaking...

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