Matt Nolan

Globally contracting money stocks

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In a chart on the Rates Blog today they point out that the money stock (note not really the money supply, depending on how you define it) in the Euro Zone is declining.  The indication then is that “Europe looks bad”.

However, the money stock is also dropping in Australia and New Zealand.  If there were figures for the US, I suspect we would see some contraction there as well.

Does this mean economic activity is taking a sharp turn downwards?  Not necessarily – we may be seeing a sharp uptick in the velocity of money or a movement in reserves as global interest rates tick up.  Furthermore, remember that growth in the money stock in many countries ACCELERATED in the middle of the great financial crisis – so to be honest, it is hard to tell exactly what is going on with these figures.

Overall, falling money stock (in conjunction with an easing in borrowing statistics) suggests we should be cautious – it looks like deleveraging is happening.  However, it is not a clear indicator of where the economy is directly going – if relative prices in the economy are adjusting then activity could still be rolling along nicely.

Matt Nolan

Refusing bailouts: Sweden

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The raging capitalist nation of Sweden has stated that they are against government bailouts for manufacturers (ht Econlog):

“Voters picked me because they wanted nursery schools, police and nurses, and not to buy loss-making car factories,” Enterprise and Energy Minister Maud Olofsson told Swedish public radio.

Very cool.

In other news I caught wind of a World Bank paper that said New Zealand was more protectionist than Europe – these are crazy times we live in 😛

Matt Nolan

And we thought New Zealand’s building slowdown was bad …

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Check out Spain (ht Calculated Risk):

Just 135 new housing starts in the last quarter of 2008, and not a single one in December: That was the combined output in terms of housing starts for the G-14 group of Spain’s biggest developers

Yikes.  We are just under about 3,500 – and it looks like we could slump under 3,000 over the first quarter of the year.  But 135 housing starts is madness!

One major difference – Spain has a large over-supply of property (like the US), NZ doesn’t.  However, we definitely have pretty restrictive lending conditions for builders at the moment …

Matt Nolan

Fiscal stimulus and leakage

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On this fine Waitangi day, Marginal Revolution mentions that Ireland is actually cutting spending in the face of a deteriorating economic climate.

Tyler Cowen gives a few reasons why this may be the way to go for Ireland:

A few things are worth noting.  First, a small open economy has a harder time making fiscal stimulus work.  Second, a small open economy often has to worry more about its credit rating.  Third, a small open economy offers a tougher testing ground for macroeconomic “field experiments” because there are more confounding external factors

Looking solely at the first point, it is “harder to get the stimulus to work” because of “leakage”. Fundamentally, some of the stimulus will lead to an increase in production overseas (through rising imports) rather than greater production at home.

This matters because the purpose of the stimulus is to increase “domestic production” to increase employment to its natural rate.  If all the stimulus does is increase imports then it doesn’t do this.  (Although I would note that if it did solely increase imports, the exchange rate would depreciate, which should lead to some substitution from imports to domestic production)

For small open economies the idea of a fiscal stimulus may become a “prisoner’s dilemma” where all the countries are best off if everyone stimulates but there is the potential for an individual country to “free-ride” by taking the stimulus from overseas and not stimulating themselves.  In this case, each country will individually choose not to stimulate – and they will all end up in a situation where output is stuck below potential (this has been mentioned before by Paul Krugman etc – does anyone have the links, I can’t find them 🙁 )

Matt Nolan

Is New Zealand fighting a wave of protectionism?

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Protectionism is a scary thing during a global downturn. A bunch of nations trying to “protect” their own interests can turn a bad situation into a worse one.

New Zealand wants to fight off what it sees as protectionism – namely subsidies for dairy farmers in Europe. However, although there is too much protectionism out there I’m not sure our argument against this set of policies is watertight.

If we think that the current shock to dairy prices is temporary, and that dairy prices will come back when the current massive increase in supply works through the system, then it makes sense for Europe to temporarily subsidise farmers in the face of a MASSIVE CREDIT CONSTRAINT.

Industries all around the world are struggling to sort out their cash flow because of a freeze up in lending. If the firms are still profitable given the expectations of future prices, then it makes sense for domestic government to prevent the industries from failing.

Do you think this type of intervention is defendable – discuss 😉

Matt Nolan

British reject “smart stimulus”: Should we?

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I noticed that the British government rejected the idea of a “wage subsidy” that was put forward by unions (who would have guessed 😉 ). Now, whenever a government outright rejects an idea I usually ask myself the question “how could that idea have worked” followed by “would that idea have worked”. In this case there is definitely a how, and it might even work in the current situation.

Just before I began writing my ideas I saw this post on Econlog on a “smart stimulus”. In the post they support the idea that cutting the employers share of payroll tax would solely give money to employers (as wages are sticky). This money would both support employment by lowering the relative price of labour (which is too high given the shock to productivity), and it would incentivise “business activity” by increasing profits.

Ok, well I agree with the possibility of the idea that has been discussed at Econlog – but I need to look at it in more detail before I can say whether I would support it “in the current situation”. Lets try that:

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