The General Theorist

Greece has been a clear winner in the painful game of watching the COVID-19 health emergency unfold.

Learning quickly from Italy, Greece locked down early and effectively to contain the virus. When the ECB unveiled the Pandemic Emergency Purchase Program (PEPP) on March 18, restrictions on the purchase of Greek assets by the ECB were lifted for the first time, making the small universe of GGBs available for Bank of Greece (BOG) purchases at last. And now the European Union’s (EU’s) EU Budget and Recovery fund (Next Generation EU, NGEU) looks set to make Greece one of the biggest winners in terms of access to grants and loans over the recovery period ahead. Continue reading “Greece: Macro management and COVID-19”

As Lebanon painfully approaches hyperinflation territory, what policy adjustment is needed there to attain “sustainability”? Last November, using a framework devised for assessing Argentina’s consolidated government sustainability, I undertook a “smell-check” on the situation there. And the results were sobering to say the least, making Lebanon “Argentina on steroids.” Continue reading “Lebanon and on and on”

The EU Budget and NGEU agreements this week matters for at least four reasons. 

First, for the first time the EU can borrow to support spending, raising the universe of “collective” liabilities instead of running a balanced budget. Second, transfers between members states have become an explicit policy (rather than hidden) tool. Third, loans at concessional rates (closer to France and Germany) have also been institutionalized. Fourth, while people might complain the aggregate number is not substantial (say 1.3% of GDP for 4 years) for individual countries the balance of payments support over the next few years could be many multiples of this.  Continue reading “Breaking taboos in the euroarea”

Is economics a science? 

While the scientific method might suggest itself to the hardest of soft sciences—through empirical testing, rejection or acceptance of hypotheses, the winnowing and sifting of ideas—macroeconomics falls woefully short of such enlightenment hopes.

Among the many reasons for this, here are three:

First, most obviously, there are no “givens” or the equivalent to unchanging physical or slow-moving biological backdrop; technological progress and changing financial structure means the impact of a policy action tomorrow will vary from it’s equivalent yesterday; expectations matter, the Lucas Critique and Goodhart’s Law are real, if sometimes overstated. Continue reading “On the unreasonable ineffectiveness of macroeconomics in political science”

[Below is a note written early March, updated in the third week of that month, in thrall of the emerging COVID-19 Crisis, while trying to understand the global implications, expanding on my other thoughts at that time. Some errors, of course. But was a fun exercise.]

The challenge

The impact of the Coronavirus is as if “emerging market crisis” happening simultaneously across the private sector of every major economy. Continue reading “COVID-19, saving-investment balances, and the dollar”

For posterity, having received numerous requests about Argentina, here are two presentations from before last summer I gave arguing that Argentina was a Ponzi scheme and that default was expected regardless of the election outcome. This was realised with the PASO, but was a fundamental macro call (and not political.)

May 2019.

June 2019.

With Chancellor Sunak offering new direction for the macroeconomy next week, some friends and I rose to the challenge in the March Budget that “it’s important that we update our fiscal framework to remain at the leading edge of international best practice.”

Link.

The paper is in two parts. The first recalls the traditional debt sustainability “rules” were evolved in the 1980s and 1990s in a period when theory relied on the assumption that i > g. This was reasonable then, but is unrealistic today for reasons noted recently.

Instead, we suggest the overall fiscal stance should lean on the OBR’s assessment of debt sustainability, relying on a projection of the overall interest rate paid on government debt relative to nominal growth. 

If the interest on government debt, taken from financial markets for future coupons, is below the projected nominal growth rate, then fiscal “consolidation” can be moderated. But if the average interest rate drifts higher, the primary balance would have to adjust.

Armed with this “independent” analysis, the overall fiscal envelope would therefore be determined and within which the government would function. 

The second part of the paper examines historical cases where the UK faced seemingly insurmountable debt burdens. It suggest that we have been here before, and there is no need to panic.

In other words, the fiscal rule needs to be modified to the needs to private saving, and not pre-empt some unlikely debt crisis that exists only in the minds of politicans.

There are a number of curious similarities between Nigeria’s macroeconomic challenge and Argentina’s only a few years ago—making it a subject of additional interest to those familiar with the latter’s experience.

First, the Central Bank of Nigeria (CBN) has been propping up gross international reserves by borrowing from abroad—whereas in Argentina Lebacs were sought by non-residents for their yield in 2017/18, artificially driving up reserve assets, in Nigeria of late, according to the IMF, “almost half of [international reserves] were the counterpart of short-term naira debt issued to non-residents at high rates by the Central Bank of Nigeria.” International reserves of around USD37bn is only 50% of the IMF’s reserve adequacy metric (¶2), also comparable with Argentina. But since USD14.8bn of these reserves at end-Dec owe their existence to non-resident short-term claims, reserve adequacy is further compromised—although these non-resident claims had fallen nearly in half by end-March. Continue reading “Nigeria and the IMF”

Amongst several others, Bolivia recently requested and received 100% of quota purchase—that is, “loan”—from the IMF’s Rapid Financing Instrument* (RFI) to provide budget support in the aftermath of the COVID-19 Crisis. This is about SDR240 million—USD327 million (0.8% of GDP)—due to be repurchased between 2023 and 2025. With interest payments of about USD3½ million per year (around 1% rate) this is an important source of financial support at an exceptional time.

Glancing through the Staff Report, a number of observations stand out. Continue reading “Bolivia and the IMF’s Rapid Financing Instrument”

To give President Lagarde substantial credit, since her “close the spreads” gaff on March 12^th she has acted aggressively and proactively to support euroarea asset prices while working to persuade fiscal policymakers of the urgent need to find a unified response to a common shock. The Franco-German Recovery Fund proposal initiated the hopes for an ambitious EU budget, including a borrowing instrument, reflected in the Commission’s proposal last week. And today Lagarde hit the monetary sweet spot with a policy announcement that both supported peripheral assets and—in a nod to improved euro area prospects more generally—helped push the euro higher.

The central message from today’s meeting can be found in ECB staff revised forecasts. To be precise, these were joint forecast by the Eurosystem and ECB staff, who now predict a post-COVID recovery which leaves the level of real GDP by 2022 substantially below that expected in March and still below the 2019 level. There will be a recovery, but this will be far from v shaped. Continue reading “Proportionately Lagarde”