Archive for January 2013


The long saga ends. The Vikings defeat Britain . . . again.

A few years back I got a lot of grief from commenters who contested my claim that it was not clear whether Iceland was obligated to cover the deposits losses of Icesave in Britain and the Netherlands.  Now the EFTA has ruled in Iceland’s favor:

Iceland unexpectedly won its legal battle to avoid being forced to pay back the British and Dutch governments for not honouring deposit guarantees for savers in Icesave.

The EFTA (European Free Trade Association) court on Monday dismissed all claims against Iceland, ruling that it had not breached the deposit guarantee directive because Iceland’s financial crisis was so big. It also held that Iceland had not discriminated between depositors in its own country and those in the UK or Netherlands.

Iceland reacted with relief after government officials had long been prepared for a defeat. “It is a considerable satisfaction that Iceland’s defence has won the day in the Icesave case; the EFTA Court ruling brings to a close an important stage in a long saga,” the government said.

The case arose after Landsbanki, the now collapsed Icelandic bank, attracted thousands of savers in the UK and Netherlands by offering high-interest accounts in Icesave.

Iceland had a bank deposit scheme in place at the time of its crisis, but the scheme did not have sufficient funds to pay out to depositors. After Landsbanki’s demise the British and Dutch governments paid the deposits of the savers themselves, and then demanded the money back from Iceland.

The Icelandic public twice rejected those demands in referendums, in part due to popular anger at how the UK in particular had behaved by using antiterrorist legislation in the dispute.

Iceland has nonetheless been repaying the British and Dutch governments. Officials in Reykjavik said Iceland has paid IKr585bn ($4.55bn) of the IKr1,166bn claims from Icesave, equivalent to more than 90 per cent of the minimum deposit guarantee the two governments were obliged to pay.

“It is expected that the Icesave claims will be paid out in full by the actual debtor, the estate of the failed Landsbanki,” the Icelandic government confirmed on Monday.

The game of musical chairs, continued.

You don’t need DSGE models to understand business cycles, it’s basically just a game of musical chairs.  Nominal wages are very sticky and NGDP is very volatile. So when NGDP falls there is less money to pay workers, and rather than taking nominal wage cuts you get lots of workers sitting on the floor—unemployment. Britmouse has a couple graphs that show this pattern for Britain. (Read his post for a full explanation.)  He used NGDP at basic prices net of taxes, which is the funds available to pay workers. Notice that when NGDP plunged in 2008-09, the real wage defined as W/NGDP per capita soared, and so did unemployment. BTW, British hourly nominal wages have been rising at a 2.2% rate in recent years, so inflation is not a problem.  If the CPI number shows high inflation, the problem is supply side, not excessively easy monetary policy.  (Thanks to W. Peden and John Hall who also sent me wage data.)UK Hourly Wages to Nominal GDP

UK Unemployment Rate.

UK Unemployment Rate. Source: ONS Series MGSX

As I expected

Here is Ambrose-Evans Pritchard:

Company taxes will fall by €20bn a year equal to 1pc of GDP, to be phased in gradually by 2015 under a convoluted system of rebates.

Premier Jean-Marc Ayrault said it amounted to a 6pc cut in unit labour costs, enough to close the gap with eurozone rivals. “France is not condemned to a spiral of decline, but we need a national jolt to regain control of our destiny,” he said.

The mid-rate of VAT for restaurants and services will jump from 7pc to 10pc. The top rate will rise slightly to 20pc. Spending cuts will plug the revenue gap in order to meet the EU’s 3pc deficit target.

Critics call it the most humiliating U-turn in French politics since François Mitterrand abandoned his disastrous experiment of “Socialism in one country” under a D-Mark currency peg in 1983.

Mr Hollande came to office vowing lower VAT rates to protect the buying power of workers, and called business tax cuts a “gift to the rich”. He imposed €10bn of fresh taxes on firms just weeks ago in his 2013 budget, a move that set off a revolt by business leaders.

.  .  .

Pressure is mounting from all sides. The International Monetary Fund warned this week that France risked being left behind by Italy and Spain as they embrace root-and-branch reforms.

.  .  .

Jean-François Copé, the Gaulliste leader, said the Hollande package was “hyper-complex, bureaucratic, and wholly inadaquate”. Business leaders said it helps but comes too late reverse a collapse in profit margins as recession looms.

The tax reform aims to switch the burden from wealth creation to consumption, a trick used by Germany to carry out its “internal devaluation” within EMU. The policy was pioneered by Margaret Thatcher, a detail that France’s socialists prefer to keep quiet.

For Mr Hollande, it has been a painful wake-up from the utopian reverie of his first months in office. “Exercising power today is very hard. You don’t get any breaks, of any kind,” he confessed.

Yes, reality kinda sucks.  On monetary issues a large share of the right is out of touch with reality.  On fiscal issues it’s the left.  But to their credit, they learn more quickly than those on the right.

PS.  Can anyone find me average hourly nominal wages in Britain over the past 10 years or so.  That’s the best test of whether tight money is the problem, or whether inflation is becoming a problem.

I’d rather be compared to Dylan or the Stones…

. . . but if it’s a one hit wonder like the Arctic Monkeys—I’ll take it. Claire Jones of the Financial Times did an article about my role in the NGDP targeting movement:

In 2006, rock band the Arctic Monkeys smashed the record for the fastest-selling debut album in the UK without the help of any of the main record labels that dominate the music industry.

The band’s achievement can be compared to Bank of England governor designate Mark Carney floating the possibility of dropping inflation targeting – a cornerstone of economic policy making in many of the big economies – in favour of nominal GDP targeting.

Like the Arctic Monkeys, the growing popularity of this policy was down to the internet’s ability to turn a niche idea into a mainstream success. Monetary policy’s main record label equivalents are the Ivy League universities. Many of the ideas that develop into policy frameworks begin life here, and it is also the place where many of the top-ranking central bankers begin their careers.

However, the revival of interest in nominal GDP targeting owes more to an academic based at the relatively little-known institution of Bentley University in Waltham, a commuter suburb west of Boston.

In 2009, Scott Sumner, a professor at Bentley, set up a blog, the Money Illusion, in frustration at the state of the debate on how monetary policy could be used to cure the US economy’s ills.

“In late 2008, there was a dramatic plunge in demand, the textbook solution to which is monetary stimulus. But people forgot about unconventional techniques,” Mr Sumner told the Financial Times. “I’m not really that well known and so if I’d tried to use the conventional channels, I wouldn’t have had much luck.”

Seriously, I greatly appreciate Ms. Jones’s piece, which gives me more credit that than I deserve.  Lots of other bloggers are also working tirelessly on this project.

Jail for thee, but not for me.

Here’s an article from Reason magazine:

Some 18 states permit medical use of marijuana, and in November, Colorado and Washington voted to allow recreational use. Nationally, support for legalization is steadily rising. A decade ago, one of every three Americans favored the idea. Today, nearly half do””and among those under 50, a large majority does.

These trends have diehard drug warriors screaming bloody murder. Former Rep. Patrick Kennedy, D-R.I., has formed a new organization to stop what he imagines to be the “300-miles-per-hour freight train to legalization.” He says that such a change would be especially harmful to teenagers.

Does the name Patrick Kennedy sound familiar?  Maybe this is why:

Rep. Patrick J. Kennedy, who lost control of his car near the Capitol last month in what he says was a drug-induced stupor, pleaded guilty yesterday to driving under the influence of prescription medication and could face 10 days in jail if he fails to comply with a long list of court-imposed conditions.

Placed on probation for a year, Kennedy (D-R.I.) must meet monthly with the psychiatrist overseeing his after-care treatment and attend weekly meetings of a recovery group and Alcoholics Anonymous. Kennedy also must submit to random drug screening and meet regularly with a psychiatrist to monitor his mood and anxiety and use of mental health medications.

“I’ve always said that I wanted to take full responsibility for my actions,” Kennedy said in a brief statement outside the D.C. courthouse. “Today in court, I did just that. I accepted the consequences of my actions.”

The plea agreement, which was in the works when Kennedy returned from a month-long stay at the Mayo Clinic in Minnesota, was presented yesterday afternoon in D.C. Superior Court. Earlier in the day, Kennedy was charged with driving under the influence, reckless driving, and driving without a permit. The latter two charges were dropped in return for the guilty plea.

So he didn’t take “full responsibility.”  He weaseled out of two very serious charges.  But then Kennedy is not a young black male.

U.S. Capitol Police officers suspected that Kennedy was intoxicated when he staggered out of his Ford Mustang shortly before 3 a.m. after he nearly hit a police car and then crashed into a security barrier. But the six-term congressman — who said he was trying to reach the Capitol for a vote — was not given a sobriety test. Instead, Capitol Police commanders ordered that Kennedy be driven to his nearby home, touching off complaints that the son of Sen. Edward M. Kennedy (D-Mass.) received special treatment.

Appearing yesterday before Magistrate Judge Aida L. Melendez in a courtroom filled with reporters and curious courthouse employees, Kennedy looked calm and attentive as the events of that night were recounted.

Deputy D.C. Attorney General David M. Rubenstein said that after emerging from his green 1997 Ford Mustang, Kennedy was slurring his words and nearly fell over at one point. Kennedy was not carrying his driver’s license or his congressional identification, and his eyes were red and watery, Rubenstein said.

When officers brought him home, Kennedy spent several minutes trying to open a gate before realizing that his house was next door, Rubenstein said.

A day later, Kennedy left for the Mayo Clinic to be treated for an addiction to prescription medicines. It was his second trip to the clinic in less than a year, he said.

And it’s not just the Kennedys.  Much of the American press corp is just as corrupt, just as hypocritical as the Kennedys.  Consider what happened to Anthony Weiner.  He sent out a few dirty emails.  And almost our entire press corp got on their high horse and demanded he resign from Congress.  The Very Serious People.  Meanwhile the Kennedys go around driving into police cars while drunk, and in one case killing someone, and then get off scot-free.  And then they have the nerve to demand drug laws that cause 100,000s of minorities to be put in prison.

And the press plays right along with this absurd Puritan hypocrisy.  Imagine what future generations will think of our morality.

It almost makes me want to move to France.