Two points:
1. Stimulus. With the 2-year bond yields falling to 0.07, how do you justify to yourself NOT doing a giant stimulus program. I don't care what it is: tax cuts, infrastructure spending, whatever. People are literally giving you money for free. Forget real yields, which have been negative for a long time, now even nominal yields are at zero. I mean, WTF??? What even remotely plausible, argument could there be for not borrowing more money? You could put the money in a sock drawer and still come out ahead in two years time. Is the German infrastructure so good that they literally can't think of anything that needs doing? Or are German taxes so low that they can't lower them any further? Or does Merkel thinks that, say, a 1000 euro tax rebate check to every german household would harm her re-election chances? The basic situation that Germany finds itself in right now is that if there is anything you can think of that the German government can do with extra money, now is the time to do it. Later won't be as good* Seize the day!
As far as the rest of Europe goes, a German stimulut would also be an unmitigated good.** If done in the form of a tax cut, people mind spend extra money vacationing in Spain, Italy or Portugal (Greece is an unlikely destination for Germans at this point). Yay! If done in the form of infrastructure spending, at least some of it will spillover in increased demand for raw materials or just plain labor from the poorer parts of Europe. In any event, given that unemployment in Germany is not that high, inflation in Germany just might pick up a tick** (again), helping the unit labor cost problem that people are trying to wrap their heads around.
2. Misc. Just an observation: how does this nation can manage to come out looking like total a**holes so often in its history is beyond me. It's like a genetic decease. Take this FT sub-heading: "Berlin deaf to pleas from IMF and OECD ahead of summit". Great, innit? Pretty sure that if Europe falls apart and shit totally hits the fan the press will lay this down at Germany's feet. And not entirely without merit.
_____________
*Unless nominal yields continue to fall into negative territory, which Citi thinks they just might. Crazy times, right?
**Unless, as per the Sumner Critique, the ECB offsets all effects of stimulus with tighter money. But I kinda doubt they will, because I don't think there is a real chance of pan-European inflation rising even a tick above 2%. It'll probably continue to go down below the 2% ceiling. Which, as history shows, doesn't make the ECB do anything. Contra Sumner, the ECB has a very assymetric response function.
Wednesday, May 23, 2012
Wednesday, May 16, 2012
When your country doesn't have enough money...
...you go and make some.
Here is a cute story about an Irish town using old Irish currency to boost demand. Now, let's be clear on what they are actually doing: they are indroducing a new medium of exchange (Irish punt just happens to be conveniently recognizable as such by most people in Ireland, but in its absence, other things would serve), a.k.a., "money."
Obviously, this is illustrative of a macro point that Europe as a whole and peripheral Euro countries in particular are suffering from an acute problem: they don't have enough Euros. When you are at a point where commerce grinds to a halt for lack of specie, what you expect to happen in the age where actual specie has been replaced by fiat currency, is that your Central Bank will go and make some more. I mean... giving people money is by far and away the most obvious solution to a problem of them having none, right?
Right...
Next up: a return to blood-letting as a cure to most ailments.
Here is a cute story about an Irish town using old Irish currency to boost demand. Now, let's be clear on what they are actually doing: they are indroducing a new medium of exchange (Irish punt just happens to be conveniently recognizable as such by most people in Ireland, but in its absence, other things would serve), a.k.a., "money."
Obviously, this is illustrative of a macro point that Europe as a whole and peripheral Euro countries in particular are suffering from an acute problem: they don't have enough Euros. When you are at a point where commerce grinds to a halt for lack of specie, what you expect to happen in the age where actual specie has been replaced by fiat currency, is that your Central Bank will go and make some more. I mean... giving people money is by far and away the most obvious solution to a problem of them having none, right?
Right...
Next up: a return to blood-letting as a cure to most ailments.
Greece: capital controls (???)
The deposit flight has begun in earnest, with 1.2 bln Euros gone on Monday and more than 5 bln since May 6. 30 more days of this and you're talking about real money. Capital controls would seem like the right remedy under the circumstances.
But here is a legal question I'm pondering: can the Greek president actually impose capital controls now, in the absence of government. Can the judge that's to lead the government until June 17 elections do it? Would he?
But here is a legal question I'm pondering: can the Greek president actually impose capital controls now, in the absence of government. Can the judge that's to lead the government until June 17 elections do it? Would he?
Thursday, May 10, 2012
Abolishing Physical Currency and Things that are Realistic.
Just because some guy at Citi has jumped on the abolish the physical currency bandwagon, doesn't mean it's suddenly the most realistic monetary policy option out there, or, indeed, that spendid of an idea. Yglesias is all excited, of course. But let's get real here. Of the three potential shifts in either the policy or conduct of that policy by monetary authorities - each of which would be an improvement over the status quo, which ones have a chance? Think of:
- Change policy to NGDP level targeting (Sumner);
- No change in policy but engage in "helicopter drops" directly to households (Bernanke circa 1998 and Buiter circa 2012);
- Change policy to NGDP level targeting and implementing the policy via helicopter drops;
- Abolish physical currency and drive rates below zero.
I dunno. To me, it seems like the last one would be a stretch politically, on both elements of it. It just won't fly. Think of the tea party. Then think of the "keep your gubmit hands off my money" slogans. It's just too easy of a propaganda target and could really spark some violent protests. And to what end?
To the same end that could be accomplished with all other options, of which: The first is far easier - you just change the statement. The second and third are also plausible - helicopter drops would make Bernanke the most widely revered central banker in history bar none. In fact, helicopter drops should be so policitally attractive and addictive, I am frankly shocked it hasn't been done yet, given that 1) the guy who proposed it some 14 years ago is the head of the Fed and 2) it would actually help a great deal and hurt not at all!
- Change policy to NGDP level targeting (Sumner);
- No change in policy but engage in "helicopter drops" directly to households (Bernanke circa 1998 and Buiter circa 2012);
- Change policy to NGDP level targeting and implementing the policy via helicopter drops;
- Abolish physical currency and drive rates below zero.
I dunno. To me, it seems like the last one would be a stretch politically, on both elements of it. It just won't fly. Think of the tea party. Then think of the "keep your gubmit hands off my money" slogans. It's just too easy of a propaganda target and could really spark some violent protests. And to what end?
To the same end that could be accomplished with all other options, of which: The first is far easier - you just change the statement. The second and third are also plausible - helicopter drops would make Bernanke the most widely revered central banker in history bar none. In fact, helicopter drops should be so policitally attractive and addictive, I am frankly shocked it hasn't been done yet, given that 1) the guy who proposed it some 14 years ago is the head of the Fed and 2) it would actually help a great deal and hurt not at all!
Tuesday, May 8, 2012
The road to hell is paved with good intentions
...probably made of the paving materials supplied by Martin Marrietta Minerals.
The Strine (there should be a trademark symbol by the name) decision is necessarily interesting for its implication on what is the in-house lawyers' most well-rehearsed document: the NDA. The collective reaction is generally along the lines of "Shit!" Followed by the dawning realization that the crap one churned out by the merry dozen in the months past is actually important, and the digging up of the as-yet-unexpired NDAs to see how they handle the language that got MLM into ... an awkward pickle.
However, let's calm the excitement on that front. From the discussion of Nye MLM's CEO approach to the NDA negotiation, his in-house lawyers did exactly what was asked of them at the time. Trouble was: neither the lawyers nor Nye thought through what should happened if the tables were turned and if Vulcan were to present itself as an attractive acquisition target to MLM and not vice versa. As a result, the NDA, negotiated with a view to forestall any unwanted acquisition did exactly that and bit MLM in the ass. Let's leave it to each respective CEO and his GC to stare at each other lovingly and figure out whose job it should be in the future to think of every contingency. My guess -- and it is only a guess -- is that whatever the "deal" is initially, the GC looses this argument every time when shit hits the fan and his (her) boss suddenly goes all 20/20 hindsight on him (her).
But let's put aside the legal bits for the moment and focus on the meat of this, the juicy stuff, which, as Matt Levine says, is in the blow by blow of the MLM-VCM negotiations. And more specifically, what this tells us about the idea that corporations act to maximize shareholder value. More specifically yet, whether it's a good idea (ha!) and whether it works in practice (ha-ha!).
In reverse order, if you think the companies' management actually acts to maximize shareholder value you're one of the guys in the Geico commercial and have been living under a rock. I mean, this is plain as is gets: Nye tells Carr (the Goldman M&A matchmaker) that "CEO=0/ 20%= Nye". Meaning that (back in the time when MLM thought it'd get a premium in a merger): "Screw my shareholders if I get to be the CEO. Yeah, it's that important - got a problem with it?" Naturally, any board of directors worth its salt that is actually looking out for the shareholders would give Nye or his equivalent at their company a minimum of a stern "tsk-tsk" and at a maximum, fire the lad on the spot for being so blasé about shareholder value. Naturally, in practice a thing like that almost never happens, even when the CEO in question is actually pretty open about his selfish motivations. Most of the time, you see, they are nothing like so honest as Ward Nye and just plain lie about their own motivations for doing the deal.
Now, you can't really expect anything else from the CEOs themselves. They are people too! But you do expect something else from the boards. You know, fiduciary duty and all that. But the reality, of course, is that most major transactions which do in fact result in a major alteration of share value (and, more often than not, in the wrong direction) get reasoned to in an ass-backward way: first the CEO conceives of a nicer corner office with a better leather chair (see, e.g., Martin Marietta Minerals v Vulcan Materials at 9) and then... synergies! Personally, I'd be on board with trying to remedy the situation via random selection of board members from the mass of the company's shareholders for rotating terms as per Yglesias.
Oh yes, synergies - let's talk about those. In MLM-VCM's case, the respective CEOs diverged in their estimation of deal synergies by some $250-300mm in the end: Nye and his CFO thought the combined company would save in the region of $300-350mm, where James (VCM's CEO) was comfortable only with $50mm. Who was right? Who the fuck knows?
You see, the savings came from two buckets: enterprise software update that Vulcan paid for and, in the event of the merger, MLM would get a free ride on and plain old cost cutting a.k.a. "let's fire a bunch of people". In the case of the former, MLM's CEO was rightly justified in calling it savings and Vulcan's CEO rightly resisted, because to him this was a sunk cost. In a stock for stock merger, the benefit to shareholders of a combined company is difficult to quantify. Similarly, the "let's fire a bunch of people" strategy is something that James, not entirely without justification, thought he could do himself. Nye, on the other hand, had an arguably (ha!) misplaced belief in his own super-duper-CEO-ishness (a.k.a., "I can fire more people than you, old sport!")
And then we get to whether maximizing shareholder value alone should be the guiding principle for the management. All those people getting fired! It sucks! When you look at things through the macro-economy it's not at all clear why higher efficiencies at the cost of labor reductions are a good idea. What's the justification here? That we want companies to make more money? To what end? Isn't it more important that everyone makes more money (growing the pie) rather than that capital makes more money than labor in this game? Why did we stack the deck just so and then feign surprise at the diminishing returns to labor as a trend?
The Strine (there should be a trademark symbol by the name) decision is necessarily interesting for its implication on what is the in-house lawyers' most well-rehearsed document: the NDA. The collective reaction is generally along the lines of "Shit!" Followed by the dawning realization that the crap one churned out by the merry dozen in the months past is actually important, and the digging up of the as-yet-unexpired NDAs to see how they handle the language that got MLM into ... an awkward pickle.
However, let's calm the excitement on that front. From the discussion of Nye MLM's CEO approach to the NDA negotiation, his in-house lawyers did exactly what was asked of them at the time. Trouble was: neither the lawyers nor Nye thought through what should happened if the tables were turned and if Vulcan were to present itself as an attractive acquisition target to MLM and not vice versa. As a result, the NDA, negotiated with a view to forestall any unwanted acquisition did exactly that and bit MLM in the ass. Let's leave it to each respective CEO and his GC to stare at each other lovingly and figure out whose job it should be in the future to think of every contingency. My guess -- and it is only a guess -- is that whatever the "deal" is initially, the GC looses this argument every time when shit hits the fan and his (her) boss suddenly goes all 20/20 hindsight on him (her).
But let's put aside the legal bits for the moment and focus on the meat of this, the juicy stuff, which, as Matt Levine says, is in the blow by blow of the MLM-VCM negotiations. And more specifically, what this tells us about the idea that corporations act to maximize shareholder value. More specifically yet, whether it's a good idea (ha!) and whether it works in practice (ha-ha!).
In reverse order, if you think the companies' management actually acts to maximize shareholder value you're one of the guys in the Geico commercial and have been living under a rock. I mean, this is plain as is gets: Nye tells Carr (the Goldman M&A matchmaker) that "CEO=0/ 20%= Nye". Meaning that (back in the time when MLM thought it'd get a premium in a merger): "Screw my shareholders if I get to be the CEO. Yeah, it's that important - got a problem with it?" Naturally, any board of directors worth its salt that is actually looking out for the shareholders would give Nye or his equivalent at their company a minimum of a stern "tsk-tsk" and at a maximum, fire the lad on the spot for being so blasé about shareholder value. Naturally, in practice a thing like that almost never happens, even when the CEO in question is actually pretty open about his selfish motivations. Most of the time, you see, they are nothing like so honest as Ward Nye and just plain lie about their own motivations for doing the deal.
Now, you can't really expect anything else from the CEOs themselves. They are people too! But you do expect something else from the boards. You know, fiduciary duty and all that. But the reality, of course, is that most major transactions which do in fact result in a major alteration of share value (and, more often than not, in the wrong direction) get reasoned to in an ass-backward way: first the CEO conceives of a nicer corner office with a better leather chair (see, e.g., Martin Marietta Minerals v Vulcan Materials at 9) and then... synergies! Personally, I'd be on board with trying to remedy the situation via random selection of board members from the mass of the company's shareholders for rotating terms as per Yglesias.
Oh yes, synergies - let's talk about those. In MLM-VCM's case, the respective CEOs diverged in their estimation of deal synergies by some $250-300mm in the end: Nye and his CFO thought the combined company would save in the region of $300-350mm, where James (VCM's CEO) was comfortable only with $50mm. Who was right? Who the fuck knows?
You see, the savings came from two buckets: enterprise software update that Vulcan paid for and, in the event of the merger, MLM would get a free ride on and plain old cost cutting a.k.a. "let's fire a bunch of people". In the case of the former, MLM's CEO was rightly justified in calling it savings and Vulcan's CEO rightly resisted, because to him this was a sunk cost. In a stock for stock merger, the benefit to shareholders of a combined company is difficult to quantify. Similarly, the "let's fire a bunch of people" strategy is something that James, not entirely without justification, thought he could do himself. Nye, on the other hand, had an arguably (ha!) misplaced belief in his own super-duper-CEO-ishness (a.k.a., "I can fire more people than you, old sport!")
And then we get to whether maximizing shareholder value alone should be the guiding principle for the management. All those people getting fired! It sucks! When you look at things through the macro-economy it's not at all clear why higher efficiencies at the cost of labor reductions are a good idea. What's the justification here? That we want companies to make more money? To what end? Isn't it more important that everyone makes more money (growing the pie) rather than that capital makes more money than labor in this game? Why did we stack the deck just so and then feign surprise at the diminishing returns to labor as a trend?
Wednesday, May 2, 2012
What's happening in the UK
People are wondering what's happening in the UK. Persistent core inflation above the BOE target alongside a stagnating-to-declining GDP point to a supply-side crunch, but, unlike the oil crises of 1970s, there is no obvious culprit.
This is a repost of what I said in the comments on Modeled Behavior.
I have a supply shock story to tell. Housing. And it’s the exact opposite of the story you have in there – which is true for Spain but not true at all for UK.
My basic intuituion is based on personal experience/anectotal evidence of a total dearth of new home building in anything that would be considered a decent area of London (i.e., excepting Canary Wharf). Housing stock here is shockingly old, shockingly poor in condition, and (double) shockingly expensive. It is really quite something to see small, old buildings or apartments going for muliple millions of dollars – the quality vs price combination here makes even this former New Yorker blanche.
In the US, the mid naughts were characterized by at least a decent sized boom in residential construction. It has since been dwarfed by the slump, but never mind. In Spain (or so I hear), the construction boom was quite a bit bigger than the US.
In the UK, by contrast, the boom NEVER HAPPENED (graph shamelessly stolen from elsewhere):
Since 2000, there’s been a total failure of the new housing build to accomodate the population growth, and housing construction has been on a downward trajectory since before 1990! (Obviously, you’d prefer to look at household formation rather than pupulation added, but basic picture still stands). Have a look also at house price statistics: there has been a dip, yes, but much less pronounced than in the US of A, and most of the losses have already been recoved in nominal terms, with London already above the 2007 nominal peak.
Now, I do not know what the cause of this is. In London, I blame historic preservation rules. This is a pet-peeve of M. Yglesias, and rightly so – for even the somewhat far flung parts of London have basically zero new development, and “conservation areas” are spead out like buboes on a corpse dying of plague. Even outside of the “conservation areas”, all buildings are about 80-120 years old, look absolutely identical, and you can’t even replace the windows without approval and without windows looking not too dissimilar to what you’re replacing.
Whatever the cause, the consequence is easy to imagine: higher and rising per square foot rents. Which, since the commercial sector also needs the space, not only subtract from disposable incomes directly, but also result in a tax through higher than necessary retail prices and/or death of so-called “high–street retail”.
To whom does the surplus go then? Obviously, landowners. And since landlors employ very few people, it never has the chance to filter down through wages. In fact, in most cases the surplus is probably never even realized – it just sits there as paper capital gains. It’s a rentier society.
Onwards to solutions then. Easy-peasy. Supply-side problems have been solved by conservative politicians years ago and these solutions are really popular in Europe now! Generally, the process involves deregulation and the cutting of red tape. In this specific instance, you just want to abolish height restrictions in most areas (especially around existing transit infrastructure) and also reduce the number of historic preservation areas. Then you sit back and watch the construction boom unfold. Ideally, you follow up with the Keynesian-stimulus in the form of additional mass transit infrastructure development.
This is a repost of what I said in the comments on Modeled Behavior.
I have a supply shock story to tell. Housing. And it’s the exact opposite of the story you have in there – which is true for Spain but not true at all for UK.
My basic intuituion is based on personal experience/anectotal evidence of a total dearth of new home building in anything that would be considered a decent area of London (i.e., excepting Canary Wharf). Housing stock here is shockingly old, shockingly poor in condition, and (double) shockingly expensive. It is really quite something to see small, old buildings or apartments going for muliple millions of dollars – the quality vs price combination here makes even this former New Yorker blanche.
In the US, the mid naughts were characterized by at least a decent sized boom in residential construction. It has since been dwarfed by the slump, but never mind. In Spain (or so I hear), the construction boom was quite a bit bigger than the US.
In the UK, by contrast, the boom NEVER HAPPENED (graph shamelessly stolen from elsewhere):
Since 2000, there’s been a total failure of the new housing build to accomodate the population growth, and housing construction has been on a downward trajectory since before 1990! (Obviously, you’d prefer to look at household formation rather than pupulation added, but basic picture still stands). Have a look also at house price statistics: there has been a dip, yes, but much less pronounced than in the US of A, and most of the losses have already been recoved in nominal terms, with London already above the 2007 nominal peak.
Now, I do not know what the cause of this is. In London, I blame historic preservation rules. This is a pet-peeve of M. Yglesias, and rightly so – for even the somewhat far flung parts of London have basically zero new development, and “conservation areas” are spead out like buboes on a corpse dying of plague. Even outside of the “conservation areas”, all buildings are about 80-120 years old, look absolutely identical, and you can’t even replace the windows without approval and without windows looking not too dissimilar to what you’re replacing.
Whatever the cause, the consequence is easy to imagine: higher and rising per square foot rents. Which, since the commercial sector also needs the space, not only subtract from disposable incomes directly, but also result in a tax through higher than necessary retail prices and/or death of so-called “high–street retail”.
To whom does the surplus go then? Obviously, landowners. And since landlors employ very few people, it never has the chance to filter down through wages. In fact, in most cases the surplus is probably never even realized – it just sits there as paper capital gains. It’s a rentier society.
Onwards to solutions then. Easy-peasy. Supply-side problems have been solved by conservative politicians years ago and these solutions are really popular in Europe now! Generally, the process involves deregulation and the cutting of red tape. In this specific instance, you just want to abolish height restrictions in most areas (especially around existing transit infrastructure) and also reduce the number of historic preservation areas. Then you sit back and watch the construction boom unfold. Ideally, you follow up with the Keynesian-stimulus in the form of additional mass transit infrastructure development.
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