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What We Read Today 08 January 2015

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries (and sometimes longer ones) of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

Save Ukraine to counter Russia, says Soros (Christian Oliver, Financial Times)  Billionaire investor George Soros said that the EU is grossly underestimating the importance of Ukraine.  That country is far more important for the future economy of Europe, and even for the continuing existence of the EU, than is Greece.  Soros said the EU and the U.S. need to back up sanctions against Russia with support for Ukraine which he estimates would run to $50 billion.

Soros says the sanctions and collapsing oil prices have combined to push Europe closer to recession but has produced a "financial meltdown" for Russia.  The EU needs to "wake up" and realize it is under attack by Russia.  He said:  “Assisting Ukraine should be seen as a defence measure by European countries.”   The defenses would involve "massively expanded financial firepower" to "counter Moscow’s nationalist expansionism and save Ukraine from a bankruptcy that would strengthen hardliners in Russia".

Soros speaks out a a time that the EU has struggled just to raise €1 billion for the fight against Ebola and has refused to be part of an IMF plan to provide $15 billion support for Ukraine.

Soros says the actions by the EU indicate it has not understood Russia's objective of undermining the EU.  He sees the confrontation as possibly an existential event for the EU.

Asian Stocks Rise; U.S. Futures, Ringgit Advance With Oil (Emma O’Brien and Nick Gentle, Bloomberg)  Most Asian stock exchange indexes are up 1% to 2% in Thursday trading, except for Shanghai, down 2%.  Check the latest stock data streaming live at

Articles about events, conflicts and disease around the world








Paul Krugman has got it wrong on austerity (Jeffrey Sachs, The Guardian)  Prof. Sachs chides Prof. Krugman on inconsistencies in his arguments and predictions regarding "austerity" and strength in the economy (especially about employment) in the U.S.  Sachs points out that declining U.S. fiscal deficits have occurred at the same time as GDP and employment have improved.  Sachs says he agrees with Krugman that federal spending should be increased on "education, infrastructure, low-carbon energy, research and development and benefits for low-income families".  But he disagrees that policy should be large deficit demand driven as Krugman has proposed.

Econintersect:  What Sachs did not discuss is the continued decline of the labor force participation rate which is only partly explained by demographics.  Unemployment may be improved but a substantial portion of the lowered unemployment rate has come from the 8 million workers who have disappeared from the labor market that would have been there were the participation rate 66% which was the rate in 2007 as well as the average for the 23 years preceding the Great Recession.  If the 8 million workers were still counted in the labor force the unemployment rate would be 9.2% and Prof. Sachs' argument would evaporate.  See November 2014 IDEA effective unemployment rates (Alan Harvey, Institute for Dynamic Economic Analysis).  See also next article.


Sachs v Krugman – No contest, Krugman wins (Bill Mitchell, billy blog)  Hat tip to Roger Erickson.  Prof. Mitchell details the history that Prof. Sachs compiled with austerity "Shock Therapy", both for the IMF and later as a consultant to Poland and Russia.  Mitchell has this to say about what happened to Sachs' consulting clients:

In relative terms, the economic losses alone in the post-Soviet economies that embraced the Shock Therapy path were more than twice as large as the losses in America and Western Europe during the Great Depression.

Sachs wrote a 2012 article which represents his role in a different light.  According to Sachs in the situations mentioned by Mitchell he arrived in the midst of crisis and advised on how to end them - he says his policies didn't create the crises but helped resolve them.  The article was cited by Mitchell.   What I did in Russia (Jeffrey SachsCaution:  Don't go this article until you have some time to devote to it - it is more than  11,000 words in length.

Mitchell says that Sachs has confused causality in his critique.  The Sachs argument is that the economy improved while the deficit declined.  One might think that he is suggesting the improving economy resulted in some way from contributions from the deficit becoming smaller.  This would clearly be wrong, says Mitchell because the high deficit (stimulus) came first, then the economy started to improve and then the deficits came down.  The timeline proves the falling deficit causality can not be correct.  Note:  The timeline sequence cannot by itself be taken as proof that the stimulus caused the recovery, only that it might be possible.  But a timeline sequence can provide proof that something could not have caused something that came earlier.  See frivolous comment below.

(Econintersect:  To interject a little humor here, could not a rational expectations argument be invoked:  Economic agents expected a reduced deficit so they increased economic activity in the belief that their expectation of fiscal policy would strengthen the economy.  To us this is a joke; are there any out there who would take this seriously?)

Mitchell provides the graph below with the following commentary:

Further, the next graph shows the changes in the fiscal components between 2006 and 2014 in terms of percent of GDP shifts in the total balance (green line), total spending (blue bars) and total revenue (red bars).

The sharp growth in the deficit in 2008 and 2009 was a combination of a dramatic decline in revenue (0.8 per cent of GDP in 2008 and 2.5 per cent of GDP in 2009) and the growing fiscal stimulus (mostly discretionary) in 2009 (4.1 per cent of GDP).

That shift stimulated economic growth as the earlier graph shows. then the big contraction in the fiscal balance in 2013 was driven by a significant increase in tax revenue (1.4 per cent of GDP) and a lesser reduction in spending (1.2 per cent of GDP).


Also from Mitchell:

And, finally, while Krugman was forecasting significant austerity in the US, he clearly underestimated the degree of incompetence among the Congressional players. While they talked big about austerity, the reality was very different and the US has enjoyed on-going fiscal support (though diminishing) well beyond the turning point in the cycle.

Mitchell's conclusion: "Sachs’ article is a classic example of the new historical revisionism is underway."

Added note by Econintersect:  In the graph above the timeline does not disprove contractionary fiscal policy could produce expansion for the four quarters 3Q 2012 through 2Q 2013 which are shown contractionary while GDP expansion is shown for the latter two quarters.  Mitchell addresses this with:  "The larger fiscal contractions can [drive additional growth or at least be tolerated] once overall growth was well-established."

An Economic Warning? (Menzie Chinn, Econbrowser)  Menzie Chinn has contributed to GEI.  The graph below shows how reliably yield curves flatten (term spreads go to zero) or invert (term spreads go negative) just before recessions.  Does that mean a recession is still not at all likely for the U.S. with term spreads still between 1% and 2%?  The questions to ask yourself is:  How many of the preceding recessions started with the Fed at the zero bound?  Do the previous experiences apply because now we are at the zero bound?

Here is a suggestion from Econintersect:  What is the effect of the zero bound?  Doesn't it keep very short term rates from going negative? If you agree with affirmative to the last question then isn't the risk that the short-term rates might be artificially higher than they would be without the zero bound condition?  If that is the case then the risk is that longer-term rates could go flat with short-term because the short-term is artificially high and the risk is for possible "false positives" on this recession indicator.  False negatives (yield spreads too large for economic conditions) are just not likely.


How Low Will The Euro Go? (Kathy Lien,  As this is written the EURUSD pair is trading just above 1.18 (click here for latest).  Lien says there is "very little reason to doubt that euro will test its 2005 low of 1.1639".  Beyond that she give little in the way of specific speculation.  Others are much more assertive about the prospects for the euro to go much lower.  See, for example, Plays For The Euro Heading To Parity To The Dollar (Bret Jensen, Seeking Alpha, 15 December 2014).

Crude Oil Trading Channel (Chart of the Day)  The support line for the 16-year trading channel for the U.S. benchmark WTI crude has been broken.  The line is defined by the two extreme lows of 1998 (near $10 a barrel) and 2008 ($32.80).


Other Economics and Business Items of Note and Miscellanea

What could happen in China in 2015? (McKinsey & Company)  Slower economic growth, greater volatility, rising competition, more international flights and genuine Chinese innovation.

Fed Bond Purchases Had Larger Overseas Effects Than Rates, IMF Says (The Wall Street Journal)

Top shareholders call for MSCI break-up (Financial Times)  Hedge Fund ValueAct is pushing for indexes operations and asset management to be spilt apart.

The Republican Strategy To Repeal Dodd-Frank (The Baseline Scenario)

Japan’s Vote for Bold Reform (Shinzo Abe, Project Syndicate)

Renewables take top spot in Germany power supply stakes (Financial Times) Renewables (26%) edged out dirty lignite (25.6%).

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