Hence, in  the graph of the Bank of Spain, is pictured Trichet, when in July 8, 2008 rose  rates before everything fell apart.

A great guy, Monsieur Trichet.  Sadly he don’t have any idea about economy. Do you see the “beak” seen in 2008, which raised the rate from 3.75% to 4%? Do you see? Thanks to the loyalty to truth of Statistical Department of  Bank of Spain we can see it. 


Because, if we watch to the ECB … in the second box, you can see what  it published.

The ECB seems not to accept easily  its shameful, hiding in its official page  that the 8 July 2008 the official rate was increased from3.75% to 4%.  Jumping  cleanly over the top event, and hidden to searchers the decision. Here, official web page where the outrage is confirmed.

Hmmmmm, little as in the communist regimes they were costumed, when anyone fell into disgrace, “to clear him of all the official  pictures! (after running it, of course).
A mistake repeated in their publications, I suppose. Can we trust such people? In any case, a confirmation that the decision was a huge mistake.


O.65. Employment, Investment

Lately it has been discussed in some blogs on the relationship between employment and investment.The first was John Taylor, responded by DeLong and Krugman, and counterpointed by Joao Nunes. Most of them use unemployment data, I use data on employment, which in the U.S. are different source. They would come out figures like this, where unemployment is opposed to private investment, in an obvious way.

If I use data of companies (graph below), I also reach a close relationship between  employment (blue line) andprivate investment / GDP (red line), as it is clear  no clear relation employment-consumption / GDP (green line), despite this is a much larger percentage of GDP.

FRED Graph

The employment-private investment correlation is 0.65, and employment-consumption is -0.68 (green line). For a period of 50 years, not bad. Other tests with public expenditure / GDP Investment / GDP, or with the same GDP, do not yield any results.
The sensitivity of employment to investment is, curiously, of Keynesian root. For Keynes, the job was created by the desire to invest, then consumption growth was a result of increased employment and income.
For Keynes, the investment was a function not reliable, since its theoretical dependence of profitability compared to the financial cost was not a stable function. Neoclassical economics preaches investment as a function of their marginal productivity minus the rate of interest. The interest rate would then be the variable with which “modulates” the demand for investment. But the investment would depend, according to Keynes, a series of impossible to quantify subjective factors, type decision-with-uncertainty. The investment is volatile with respect to the interest rate. Indeed, the rate of ten-year treasury (green dotted line) does not seem very influential in investment (private bond rates are but a few years ago.)

These correlations call into question many things accepted as true. At least, the simplest models of investment determined by the marginal efficiency in inverse proportion to the interest rate. It would be interesting to see what comes out in Spain. Morning.

Portugal´s rescue

Our neighbour are on  the verge of being rescued. Socrates, resigned PM , has call for it. (

The rescue of Greece and Ireland have not improved the performance of these countries nor  others in difficulties. Greece must now pay a 16% for its  10 years treasury bonds.

The rescues have been  a flawed way to protect the assets of euro banks, loaded with sovereign bonds. But this attitude has impeached to remove the bad assets of european banks, which in turn has delayed the last solution of  bank problem.

Three years ago, the solution would have been to emerge bad assets and some hair cut to the creditors. Now, the hair cut will  be much more hard, in spite of which the rescue only translate the problem to the future, and volume.

Portugal´s bail out; Spain´s, the next. It´s the politics, stupid

Portugal has fallen in a vacuüm: The government has dismissed, admitting he was incapable of negotiating an intervention of the EFSF – the European Facility that has rescued Ireland & Greece.

“Until new elections, this government has neither the legitimacy nor the power to negotiate any agreement at all,” said Fernando Teixeira do Santos, finance minister.

That means the government has ruled out the possibility of Portugal asking for a bail-out for almost three months, in spite of doubts that it will be able to meet €9.3bn ($13.2bn) in bond repayments that fall due in April and June. (FT today)

The chain of fatal events in Portugal could be replied easily in Spain. The main problem is not economic, but of government capacity. In may, there will be regional election in Spain, probably winded by the opposition; the result of which will be a more flawed government, more unveiled regional debt, awful financial conditions, and a general lack of decision of both party to face the real problems.

The main problem for Spain is the recapitalisation of flawed banks. That could be done with some difficulties, but probably it will be well-assumed by the market only  if  government has sufficient will. Spain has not so high public debt, and to put € 40 billion will not mean a huge problem. All in all, the total debt rise from 60% to 80% of GDP, more or less the media of euro zone.

But nor te government party, neither the opposition, has the intention to joint its forces to do it. Each one is not capable of facing it; but the huge distance between them, and the good perspective of the opposition to wind election next year, has awoke the wild impiety of liquidating entirely the  socialist (a reasonable target in normal times, but not today).

The probable result of all that will be a profound wear of socialist party, and a no less haunting possibility of a right party managing a  very unpleasant and useless bail out, which perversity can be observed in graph: The countries rescued has not been capable to get some credibility.

The Euro and Taylor rule

The Taylor rule (see is a formula to estimate the best interest rate for a central bank. I don´t believe very hard in it. But I think that it is useful in comparing the different cycle of economies members of a monetary union.  If we use the same parameters calculating the optimal interest rate for different countries, the  interpretation of the result can only be straightforward.

Taylor rule  says that the optimal interest rate is a function of the differences between the current growth rate ant the desired one, and between current inflation and the desired inflation.

In the figure, I suppose a optimal GDP growth of 2% for Germany and a 2,5% for Spain. For both an optimal inflation 2%. Dotted line is the actual rate of ECB.

Easy is  to see that the euro has been very pro-cyclical for both countries! but for opposed reasons, indeed: except when the crisis arrived in 2007

The ECB rate has been to high for Germany and too low for Spain before 2006. In 2006, the ECB rte is too low for both countries; after 2007, to high…

(I´m sorry not to be able to get a better image)

US economy today

We ´ve known today that the IV quarter  GDP (black line) rose a 3,2% (annualised). In the graph, some indicators that show the US economy is rising gently (Nominal GDP, Industrial Prod), but a lot of productive capacity (red dashed line) is idle.

At the same time, unemployment is falling (red solid line), and external imbalance (green line) is stable at a manageable level.

The signs of idle capacity and high unemployment talk about a certain margin before inflation pressures could appear. Similary, the controlled net imports means that the external finance are in order.

Before the crisis, the Fed did not use to look closely for external disequilibrium. If we enter the variable in the model, probably the potential output would be quite lesser than it is supposed. That is the reason to follow closely BoP: Deficit are financed by foreign capital, which has been a main factor of the crisis through MBS an other toxic products.

FRED Graph

very good post


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