The Parallax Brief


Unrepentant Subjectivity on Economics, Politics, Defence, Foreign Policy, and Russia

The Fed’s Ten Trillion Dollar Problem

If anyone should have been prepared for the credit crunch it was Federal Reserve chairman Ben Bernanke (pictured right). Much of his academic reputation, which is immense, was built upon his work on the causes of depressions and, specifically, the Great Depression.

Although central bankers and economists assumed that advances in economic understanding — a significant portion of which came from Bernanke — had made depressions avoidable, Japan’s oft-discussed lost decade of deflation raised some uncomfortable questions.

Here was a nation not unlike the US and large Western European countries, with a powerful industrial base, sophisticated financial sector, and a modern, mature economy, which became mired in monetary quicksand, unable to exfiltrate itself from economic stagnation, despite following the playbook economists throught could avoid just such scenarios. Why?
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Boris Nemtsov: The Gift to Putin that Keeps on Giving

When Vladimir Putin’s critics craft shrill op-eds about opposition parties being ruthlessly crushed in Russia, they often miss the salient point: really, the opposition in Russia is unsuccessful and unpopular because it isn’t very good and doesn’t have many popular policies.

Of course, it is true that the Russian media and society are not as free as in the West, but more often than not, Russia’s opposition simply does Putin’s job for him. The Parallax Brief is sure that even Robert Amsterdam would agree that Putin and Medvedev are preferable to Vladimir Zhirinovky’s comedy-fascist LDPR, Gennady Zyuganov’s communists, or the array of hapless or nasty nationalists, bolsheviks or white power groups raging at Russia’s political fringes.

But beyond this gallery of unelectable extremist halfwits, even the pro-west, pro-business, supposedly democratically minded group of former Yeltsin era Young Reformers that currently call themselves Solidarity offer little.

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Filed under: Economics, Politics, Russia, , , , , , , , , , , , ,

Ask and Ye Shall Receive

The Parallax Brief argued on these e-pages a couple of days ago that simply because recent recessions have been relatively short and ‘V-shaped’, there is no guarantee that the terrible crisis we’re currently living through will follow the same pattern. Humans are far more likely to base their predictions on recent memory than to delve back far into history or consider the possibility that something new and unseen could occur.

That’s one of the reasons irrational exuberance and panic pervades the markets still.

But actually, as the Parallax Brief argued in his article, we don’t really have to invent a new and cataclysmic economic Black Swan to get an idea of just how bad this recession could get: we simply need to look back further than 1938. Hot on the heels of the Parallax Brief’s article on this matter, Matthew Yglesias argues the same point (better) on his 100% superfly blog:

“Between the end of [the Great Depression] and the beginning of our current troubles, the National Bureau of Economic Research has identified eleven additional recessions, the longest of which (in the mid-seventies and in the early-eighties) lasted 16 months each. NBER doesn’t have data for the first half of the nineteenth century, but in the second half of the nineteenth century there were eleven recessions of which fully seven were longer-lasting than any of our post-Depression recessions.”

Note in particular the so-called “Long Depression” set off by the Panic of 1873. This was a five year, two month recession followed by a 34 month expansion followed by a new 38 month contraction. In other words, we had an eleven plus year span during which the economy was contracting over 75 percent of the time. That’s no good. And in addition to the direct economic harms of that sort of thing, you can have some very nasty political consequences in these situations. But that’s the world of passivity in the face of economic calamity.

Yglesias is far smarter than the Parallax Brief (he has a magna cum laude philosophy degree from Harvard, the Parallax Brief has a certificate of membership for the GI Joe Club), and it is hoped that his argument might be more persuasive than the Parallax Brief’s for those who don’t yet grasp quite how bad this could all get.

Filed under: Economics, , , , , , , , , ,

Tempting Fate in Bad Times

No sooner had the Parallax Brief crafted an article about the paradox of thrift and its effects on Moscow, than Bloomberg illustrates the point by publishing yet another set of wrist-slashingly depressing figures for the Russian economy:

“Russia’s unemployment rate rose to 8.1 percent in January, the highest since March 2005, as collapsing demand and frozen credit markets forced businesses to cut staff.

The total number of unemployed rose by 300,000 in the month to 6.1 million people, or 8.1 percent of the working population, the Moscow-based Federal Statistics Service said in an e-mailed statement today. That was lower than the median forecast of 9 economists surveyed by Bloomberg for 8.2 percent.”

So if dropping demand and the evaporation of credit availability are leading to job losses, what affect do the job losses have? Why, they square the vicious circle, of course. According to another article on Bloomberg today, rising unemployment is having exactly the affect the paradox of thrift tells us it should:

“Russian retail sales grew at the slowest pace in more than nine years in January as the country faced its first recession in a decade because of falling commodity prices and the credit crisis.

Sales increased an annual 2.4 percent, the lowest growth rate since November 1999, down from 4.8 percent in December, the Federal Statistics Service said in an e-mailed statement today.”

Of course, the good news is that the figures exceeded the predictions of most economists, who had anticipated effectively flat growth, although how long this will last is anyone’s guess.

The Parallax Brief isn’t really so pleased that his gloomy prognoses are being backed by fresh evidence, but one thing is clear: whether you want to call it the vicious cycle or the paradox of thrift, it’s working in Russia in the same way it is working everywhere else, and it’s going to hurt.

Filed under: Economics, Russia, , , , , , ,

Why It Could All Go L-Shaped

When not writing this blog, the Parallax Brief posts on a couple of superb Russia-based forums aimed at Expats, and uses them to shamelessly promote the content of these electronic pages. However, after linking to his most recent post, on the events likeliest to precipitate a Great Depression of the Twenty Tens, the Parallax Brief took a little heat for his pessimistic views.

Of course, it can be debated ad nauseum just how bad this recession is, but the Parallax Brief’s attention was caught by one post on the forum which was strongly representative of a view held by pundits and analysts from across the political spectrum:

“It’s a recession. It shall take its course…But then the global economy will start to recover and we shall be, once again, in the “7 years of plenty” stage… until the next recession.”

There is something deeply comforting and commonsensical about this idea that the economy mirrors the waxing and waning of the seasons; the idea that no matter how miserable your life is trudging through streets of slush and treacherous ice in the Moscow winter, eventually summer will return, and those streets will be bounteously filled with Russian girls in (very little) warm weather clothing.

One reason for this is that reality has more of less mirrored this model as far back as we can remember. Recessions in the last sixty years have not reached depression levels, and have usually worked their course in relatively quick order, in the classic V-shape.

Unfortunately, just because we have grown accustomed to this kind of recession in the last sixty years, doesn’t mean this crisis will follow the pattern, and, in fact, things weren’t always as they have been since the end of the war.

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Filed under: Economics, , , , , ,

The Next Shoe to Drop on the Road to financial Armageddon?

In an enlightening speech to the American press club on December 8th, Paul Krugman was asked if there were “any more shoes to drop?” He responded that “in this kind of crisis, anything that can go wrong usually does go wrong.”

Certainly, a little over two months after the conference, the situation has worsened considerably.

But what other shoes are likeliest to drop? Well, as Krugman said, everything, but the Parallax Brief has two main contenders.

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Filed under: Economics, , , , , , , , , , ,

Barclays Beggars Belief

Barclays have officially entered ga-ga land. Desperation and efforts to bolster the balance sheet have overridden common sense.

From Willem Buiter’s Maverecon blog on the Financial Times website:

In its report today on Barclays’ Annual results for 2008, the Financial Times writes:

“The bank confirmed it had written down its exposures to complex debt instruments by £8bn in 2008, though the impact was reduced by a £1.66bn gain it booked from the reduced value of its own debt.”

My immediate thought was: surely that report cannot be true. When your market-traded debt becomes worth less because the market considers you less creditworthy than before, and prices your debt to reflect that perception of increased default risk, this does not add to your profits – it simply makes you a worse credit risk.

This is mark-to-market gone mad.

Of course, as Willem points out exasperatedly, this does have a certain basis in real life — a real life scam. A company can make a pretty packet from the bond market by issuing bonds, spending the cash, and then persuading the market that it is highly unlikely to pay back the bonds. The value of the bonds plummets and the company then buys back the (by now valued as next to worthless) bonds for a nominal sum. Hey presto! Free money.

But to imagine that one’s declining credit risk — and therefore declining value of debt — counts as a mark-to-market profit is truly absurd. Barclays still has to pay back the full amount, if it wants to maintain its good reputation and wants access to reasonably priced debt in the future — quite important for a bank, I would imagine. So when will these ‘profits’ be realized? Never. The real value of Barclays’ debt is the same as it was; only its credit worthiness has gone down.

Who does Barclays’ accounting? Arthur Anderson?

And we wonder why it went so wrong.

Filed under: Economics, , , , , , , , , , ,

World Economy at One Minute to Midnight

Over the last week, portents of doom have enveloped the Parallax Brief. Increasingly, a Great Depression of the Twenty Tens looks to be the fate of the world. Lest we forget, the economic turmoil between 1914 and 1945 led to political upheaval almost unimaginable now, and unleashed the horrors of total war on the developed world.

Why do I feel so pessimistic?

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Filed under: Economics, Politics, , , , , , , , , , , , , , , , , ,

Dr Ros Altmann is an Idiot and is Dangerous

One aspect of this terrible crisis that has consistently astonished me is how many so-called economists and financial experts can be so very wrong about even the simplest disciplines within their supposed field of expertise.

Quite apart from the terminally orthodox men of the ECB, who seem intent to fiddle while Rome burns, a gaggle of galloping morons with letters after their names have been remunerated by a variety of newspapers to peddle some of the most egregious bullshit I’ve ever read.

This would be irritating in milder climes, but in the current hellhole of an economy it becomes outright dangerous.

One such ‘economist’ and ‘financial advisor’ is Dr Ros Altmann. Upon the news that the Bank of England had reduced rates to 1%, Dr Ros penned an article offering ‘Five reasons why a rate cut is wrong’. There is nothing in monetary policy theory to suggest that easing rates is the wrong thing to do. NOTHING. In fact, most serious experts suggest that the Bank of England is dragging its feet and should have been at zero long ago.

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Filed under: Economics, , , , , , , , , , ,

Stagflation in Russia Now

The last week saw a barrage of apocalyptic news and data releases for the Russian economy. First, on January 30, Alexei Kudrin, the Russian Finance Minister, admitted that Russian budget revenue might this year tumble by an almost unimaginable 40%.

On the same day, while the rest of the G8 central banks engaged in frantic monetary easing to boost ailing economies, the Central Bank of Russia enjoyed no such luxury, and was forced to raise two of its key interest rates as part of a desperate rearguard action against capital outflows and a deteriorating ruble.

Shortly after, on February 2, news emerged that the Russian economy grew only 5.6% in 2008, the lowest since 2002, and undershooting the Bloomberg analysts’ consensus of 6%. Considering the blistering start to the year, it is clear that the fourth quarter was disastrous for Russia: Russian industrial output, for example, was savaged, plunging 10.3% in December, its worst monthly performance since at least 2003.

Further, VTB’s Manufacturing Purchasing Managers’ Index, in which a figure over 50 indicates growth and under 50 denotes contraction, was at a petrifying 34.4 for January, a touch over it’s alltime low of 33.8 – from December. Both months were lower than at any time during the ’98 crisis.

“The degree and pace of decline,” an S&P analyst told Bloomberg, “has exceeded historical precedents.” Quite. And just think of the kind of historical precedents there are in Russia.

The Russian government expects the economy contract by 0.2% this year. Most analysts fear at least 3% — the hardest of hard landings for an economy skimming along at over 6% growth for the best part of a decade. So given that CPI for January alone stood at around 2.5%, and some analysts believe the devaluation of the ruble will lead to inflation at 20% this year, could I venture to offer another piece of good news for the Russian economy? Stagflation is here.

Stagflation is one of the great nightmares of capitalist economies. The mighty pain of economic stagnation is compounded by inflation, which taxes the poor by eating into their already meager income, and prohibits the efficient allocation of capital and debt. But stagflation also lingers with the persistence of a lodging mother-in-law by putting central banks and governments between a rock and a hard place. Loosening monetary policy to boost the economy merely stokes inflation; tightening to crush inflation exasperates economic woes.

It is this test the Russian government now faces.

Stagflation has not been mentioned in relation to Russia in the media yet, but the Parallax Brief believes that the evidence strongly suggests it has already gripped Russia and that it is a word that will feature prominently before long.

You heard it here first.

Filed under: Economics, Russia, , , , , , , , , ,