Yesterday I was interviewed for TRT World about the Greek economy and possible Grexit. Have a look here.
The economic suffering of the Greek people is horrendous and it has to stop – interview on TRT World
Posted by Lars Christensen on February 21, 2017
Greece is once again back on the agenda in the European financial markets and we are once again talking about Greek default and even about Grexit. There seems to be no end to the suffering of the Greek economy and the Greek population.
I must say that I have a lot of sympathy with the Greeks – they have terrible policy makers and no matter how many austerity measures are implemented there is no signs of any visible improvement either in public finances or in the overall economic performance.
Hence, the Greek economy has essentially been in decline for nearly nine years and there seems to be no signs of it changing.
To me there is no doubt what the main reason it – it is the monetary strangulation of the Greek economy due to the countries membership of the euro area.
I don’t like to see the euro area fall apart and I believe it can be avoided, but on the other hand I have a very hard time seeing Greece getting out of this crisis without either receiving a more or less complete debt write-off or leaving the euro area (or both).
ECB can’t do much more
Since 2008 there has been two dimensions to the monetary strangulation of the Greek economy.
First of all for much of the period since 2008 the ECB has kept overall euro zone monetary conditions far too tight to achieve its own 2% inflation target as illustrated by our – Markets & Money Advisory’s – composite indicator for monetary conditions in the euro zone, which shows that monetary conditions in the euro zone essentially were too tight from 2008 until early 2015 and only has been broadly neutral (indicator close to zero) over the past 20 months or so.
Second, the euro zone is not an optimal currency area and it is very clear that Greece today needs significantly easier monetary conditions than for example Germany, which might need tighter monetary conditions.
Looking at these to factors it is clear that the ECB indeed has moved in the right direction in the last two years and overall we believe that monetary conditions right now are about right for the euro zone as a whole. However, the problem is that monetary conditions still is far too tight for Greece.
As long as overall euro zone monetary conditions were too tight there was a good argument that the ECB should ease monetary policy to ensure that it would hit its 2% inflation target over the medium-term and that would help Greece. However, that is not really the case now. While there is no reason for the ECB to tighten monetary conditions it is today much harder to argue for new measures to ease euro zone monetary conditions.
That makes Greece’s problem even more acute and makes the argument for Greek euro exit even stronger.
The problem of course is that Greece is damned no matter what. If Greece stays in the euro area then the hardship continues for the Greek people and there is no reason to believe that more austerity fundamentally will improve public finances and while there have been some signs of growth beginning to pick over the past year any minor tightening of monetary policy from the ECB will likely send Greece directly back to recession.
On the other hand if Greece where to leave the euro area it is unlikely it would happen in an orderly fashion. Rather it is likely to happen in a chaotic fashion and lot of things could go badly wrongly – also for the rest of the euro zone. Just think about what speculation it would create regarding possible Italian or even French euro exit. And will euro exit also mean EU exit and what will be the geopolitical ramifications of this?
So it is not an easy choice. However, I continue to believe that it would be both in the interest of Greece and of the rest of euro area as a whole that Greece leaves the euro area.
The suffering will have to end. However, Greece should not be kicked out of the euro. Rather Greece should be helped out of the euro. Unfortunately there is little will within the EU or the ECB to make this happen and populists around Europe are eager to use this debacle to further sabotage European reforms.
See also my earlier posts on Greece her:
Posted by Lars Christensen on February 10, 2017
We will soon be launching our new monthly publication Global Monetary Conditions Monitor (GMCM), which will be available from our new ‘research shop’ when we soon launch Markets & Money Advisory’s new website.
GMCM will be covering 25-30 countries and overall we will differentiate between what we term the Global Monetary Superpowers (Fed, PBoC, ECB, Bank of Japan, Bank of England and SNB) and other central banks.
At the core of the publication will be a composite indicator for monetary conditions in each of the countries in the Monitor.
The indicator is constructed as an weighted average of four sub-indicators – broad money supply growth, nominal GDP growth, exchange rate developments and the key policy rate. Each of these four indicators are compared to what we call a policy-consistent growth rate or level for each indicator.
Russian money supply growth nearly on track
If we for example look at broad money supply (M2) growth for Russia (which has a monetary policy decision today) we find the policy consistent growth rate for M2 based on the equation of exchange.
We can write the equation of exchange in growth terms like this:
(1) m + v = p + y
Where m is broad money supply growth, v is the growth rate of money-velocity, p is inflation (GDP deflator) and y is real GDP growth.
We can now insert the inflation target for Russia (4%) as well as the trend growth in real GDP (y*) and the trend money-velocity growth (v*) and by re-arranging (1) we get a policy consistent growth rate for M2 (m-target):
(2) m-target = 4% + y* – v*
We find y* and v* by applying a so-called HP-filter to real GDP and money-velocity.
The graph below shows the historical development in M2 growth and the policy consistent growth rate for M2 (based on an assumption of an 4% inflation target).
It should of course be noted that historically the Russian inflation target has been higher than 4% and there Russian central bank has only in recent years introduced an implicit inflation target.
However, we can nonetheless compare the present actual M2 growth with and the policy consistent growth rate and construct what we call a M2 growth gap.
The M2 growth gap is a three-year weighted average of the difference between actual M2 growth and the policy consistent growth rate for M2. If the M2 growth gap is positive then M2 growth is too fast to ensure that the 4% inflation target will be hit in the medium-term (2-3 years).
We use the M2 growth gap as the one of the four sub-indicators in our composite indicator for monetary conditions.
The three other sub-indicators are also mostly “on track”
Similarly we calculate gaps and sub-indicators for nominal GDP growth, exchange rate growth and the level of the key policy rate.
Overall we use the same logic as when calculating the M2 growth gap when we are calculating the three other sub-indicators.
For example when we calculate the policy consistent growth rate for the exchange rate we find the rate of appreciate or depreciation of the nominal effective ruble rate, which will ensure 4% inflation in the medium-term given the underlying trend in the real effective exchange rate (reflecting for example productive and terms-of-trade trends) and given the trend in foreign prices.
Hence, we essentially in the same way as we used the equation of exchange to calculate the M2 growth gap we for the exchange rate use the Purchasing Power Parity (corrected for trends in the real effective exchange rate) to calculate the exchange rate growth gap and hence the sub-indicator for the ruble rate.
The graph below graph below shows exchange rate gap.
The graph shows that over the past 6-9 months the ruble has appreciated faster than the policy consistent appreciation (actually depreciation) rate and as a result we have seen a negative exchange rate gap develop indicating the development in the forex markets is contributing to a tightening of Russian monetary conditions.
In terms of the overall composite indicator for Russian monetary conditions the too fast board money growth is more or less offset by the too fast appreciation of the ruble, while nominal GDP and the key policy rate are close to policy consistent levels as shown below.
Russian monetary conditions nearly on track
Based on these four sub-indicators we construct our composite indictor for Russian monetary conditions as seen in the graph below.
We see that the indicator remains slightly above zero, which indicates that inflation risks still remains slightly on the upside compared to the Russian central bank’s (CBR) 4% inflation target for 2017. That said, overall monetary conditions in Russia should be considered broadly neutral and overall our indicator lead us to expect Russian inflation between 4% and 5% in the coming 1-3 years (disregarding possible supply side shocks).
As a consequence, it is not surprising that some analysts expect the CBR to cut its key policy interest rate later today or announce intervention in the FX market to curb the appreciation of the ruble.
We would think that would be slightly premature to ease monetary conditions as inflation risks still are slightly to the upside compared to the 4% inflation target, but a minor rate cut of 25 or 50bp should certainly not be seen as irresponsible particularly given the continued appreciation trend in the ruble. Furthermore, we should stress that the purpose of our monetary conditions indicator is not to forecast monetary policy decision, but rather to evaluate whether monetary policy is on track or to easy or tight given the central bank’s inflation target.
If you think that our composite indicator for monetary conditions could be of interest to you as a financial markets partipant or as a policy makers don’t hesitate to contact us regarding more information about how to subscribe to Global Monetary Condition Monitor (GMCM). A 12 month subscription for GMCM will be priced at EUR 2,000. For more information please email LC@mamoadvisory.com or LR@mamoadvisory.com.
Posted by Lars Christensen on February 3, 2017
This is from the Financial Times today:
“Germany is using a “grossly undervalued” euro to exploit the US and its EU partners, Donald Trump’s top trade adviser has said in comments that are likely to trigger alarm in Europe’s largest economy.
Peter Navarro, the head of Mr Trump’s new National Trade Council, told the Financial Times the euro was like an “implicit Deutsche Mark” whose low valuation gave Germany an advantage over its main partners. His views suggest the new administration is focusing on currency as part of its hard-charging approach on trade ties.
In a departure from past US policy, Mr Navarro also called Germany one of the main hurdles to a US trade deal with the EU and declared talks with the bloc over a Transatlantic Trade and Investment Partnership dead.”
I must say that I find Navarro’s comments completely ludicrous and uninformed and I have little respect for this mercantilist “analysis”.
Adam Smith taught us back in 1776 that we should not judge the Wealth of Nations on the size of its trade surplus. Apparently Navarro never read the The Wealth of Nations or understood the insights of David Ricardo about comparative advantages.
Trade is not a zero sum game. Trade is a positive sum game, where both sides of the trade gains – otherwise the trade would never happen. Free trade makes us all more prosperous.
Furthermore, having an undervalued currency does not take anything away from other nations. In fact, an undervalued currency means that you are selling you goods to other nations at a too low price, which means that you effectively are subsidizing the consumers of other nations.
Hence, the if German cars are 20% “too cheap” because the “German euro” is undervalue then it means that Americans can save 20% on cars by importing them from Germany, which effectively is increasing their purchasing power. This increase in their purchasing power makes it possible for American consumers to buy more of other goods for example US produced Big Macs or books from Amazon. But Peter Navarro obvious does not understand this.
In addition to that it is rather bizarre to talk about Germany as being a “currency manipulator” as Germany does not have its own currency – Germany as is a member of the euro currency area.
To talk about Germany as a currency manipulator is as meaningful as to talk about Texas as a currency manipulator. Furthermore, the euro is a freely floating currency exactly as the US dollar and the inflation target of the European Central Bank is 2% – exactly the same as is the case for Federal Reserve. So if Germany is a currency manipulator then the US is as well. And finally, the German Bundesbank and key German policy makers have been extremely critical about the ECB’s efforts to see monetary policy over the past two years so if anything the Germans have been pushing for a stronger euro! Peter Navarro could rightly criticize the Germans for that but that would of course go completely counter to his “arguments”.
But of course this is not the “analysis” Peter Navarro is doing. He is instead (wrongly!) is focusing on the trade and current account surplus and he is observing that Germany has a large current account surplus and the US has a current account deficit and therefore Navarro wrongly concludes that Germany is stealing jobs from the US.
Denmark – Navarro next target?
Navarro’s deeply flawed analysis makes me nervous as the direct consequence of it is that the US through the use of aggressive trade policies should force all nations, which are running sizable account surpluses to “revalue” there currencies. This effective means that the US would forces nations around the world to tighten monetary policy.
The consequence of this could be devastating. Just imagine that the Trump was able to threaten the ECB to “engineer” for example a 20% appreciation of the euro. This would effectively be a massively deflationary shock to the euro zone economy, which would without a doubt would cause the euro crisis to flare up again with the real risk of causing euro area to disintegrate.
This in itself would have extremely negative consequence for the global financial system and the global economy. I am no fan of the euro as an idea, but I certainly do not want to see it blow up as a consequence of ‘madman policies’.
Closer to home I have another concern. Hence, if Navarro claims that Germany is a “currency manipulator” based on the size of the Germany current account surplus what would he say about my native Denmark?
The graph below shows the Danish and the Germany currency account surplus.
As the graph shows the Danish current account surplus is very large – close to 7% of GDP – and only slightly smaller than the German current account surplus. The Danish current account surplus against the US alone is around 3% of GDP.
And contrary Germany Denmark is not a member of the euro area. Rather the Danish krone is pegged to the euro and in principle Denmark could either float the krone or revalue against the euro.
Both scenarios seem unlikely for now and the Danish government and central bank is strongly committed to the present monetary arrangement, but a real fear – given Navarro’s attack on Germany – could be that the Trump administration will accuse other Europe nations – within and outside of the euro area including Denmark of “currency manipulation”.
And it seems only a matter of time before the Trump administration will start to talk about the need to a Plaza Accord version 2. That would certainly be bad news for the world and could force unwarranted tightening of monetary conditions on nations around the world – including my native Denmark.
PS Peter Navarro today again demonstrated that he is utterly clueless about what VAT is. Apparently he thinks VAT is some kind of import tax. However, VAT is applied equally to imported and domestically produced goods in all countries like Denmark and Germany, which have a VAT.
Posted by Lars Christensen on January 31, 2017
While the Federal Reserve – rightly or wrongly – has initiated a rate hiking cycle it is not given the the central bank in neighboring Canada should follow suit. In fact, according to our our composited indicator for Canada monetary conditions monetary policy is too tight for the the Bank of Canada to hit its 2% inflation over the medium-term.
The Bank of Canada will announce its rate decision on Wednesday and we should stress that our indicator does not say what the BoC will do, but rather what it ought to do to ensure it will hit its 2% inflation over the medium-term (2-3 years).
Four key monetary indicators
In February we – Markets & Money Advisory – will start to publish our Global Monetary Conditions Indicator covering monetary conditions in around 30 countries around the globe. Canada is one of that those countries.
In the Monitor we will publish a composite indicator for monetary conditions in each of these 30 countries and indicator will be based on four sub-indicators – broad money supply growth (typically M2 or M3), nominal GDP growth, exchange rate developments and the level of the key policy rate.
For these four sub-indicators we define what we call a policy-consistent growth rate, which mean that this would be the needed growth rate of for example M2 or nominal GDP to ensure that a given central bank hits its inflation target over the medium-term given the development in factors outside of the direct control of the central bank – for example money velocity, trend real GDP or foreign price developments.
The composite indicator is then an weighted average of these four sub-indicators and the indicator is calibrated so that a zero score in the indicator indicates that it is likely that inflation will be in line with the inflation target (in the case of Canada 2%) within the next 2-3 years.
Below you see the four sub-indicators for Canadian monetary conditions.
Overall, we see that while broad money supply growth (M3) is broadly in line with the policy-consistent growth path the three other indicators have been on the “tight side” for the past 1-2 years.
At the root of this excessive tightening of monetary conditions likely is the fact that the drop in global oil prices, which started in 2014 caused the Bank of Canada to essentially hit the Zero Lower Bound on interest rates and as the BoC (so far) has refused to implement monetary easy though the use of other instruments – for example intervention in the FX market – monetary conditions have more less “automatically” become too tight since early 2015.
This is very similar to the development in other countries with otherwise successful monetary policy – Norway and Australia – where monetary conditions also have been tightening excessively over the past 1-2 years.
BoC likely to undershoot its inflation target in the medium-term
The graph below shows our composite indicator for Canadian monetary conditions.
We see that the indicator has been trending downwards since early 2014 – indicating a tightening of monetary conditions and since early 2015 the indicator has been below zero indicating downward risks relative to BoC’s inflation target and recently the indicator has dropped below -0.5.
We overall define the range from -0.5 to +0.5 to be ‘broadly neutral’ monetary conditions. Hence, presently monetary conditions are excessively tight.
Concluding, it might be that the Federal Reserve will hike interest rates further in 2017, but the Bank of Canada certainly should not be in a hurry to hike rates given the fact that monetary conditions presently are too tight to ensure that the BoC will hit its inflation target in the medium-term.
In fact, the most important issue for the BoC seems to much more clearly articulate how it plans to conduct monetary policy at the Zero Lower Bound. A possibility would be to use the exchange rate as a intermediate target/instrument to implement an easing of monetary condition at the Zero Lower Bound. See more on this here and here.
However, one thing is what that BoC ought to do another thing is what the BoC will do and we should stress that the purpose of our Global Monetary Conditions Monitor is not to forecast monetary policy action, but rather to evaluate in a consistent and objective way the monetary stance of a given country such as Canada.
Finally, stay tuned for the publication of our Global Monetary Conditions Monitor in February. For inquiries please drop us a mail (LC@mamoadvisory or LR@mamoadvisory.com).
Posted by Lars Christensen on January 17, 2017
We – Markets & Money Advisory – will soon be launching a new website. As part of that the blog format will also be “updated” so that not only will it be possible to read blog posts, but we will also put out movies etc.
This will all be available on the website, but we will also be launching a Youtube channel from, which to stream these videos etc.
You can already now go in and check out this Youtube channel. See here and please subscribe.
On the Youtube channel you will already now find old interviews with me and presentations I have done. These kind of things will also be added in the future. Furthermore, it is the plan to do a lot more “real-time commentary”, which will be small videos with me commenting on particular monetary policy events and major market action. We might also in the future produce small tutorials and “learners”.
If there is something particularly you would like to see on our Youtube channel please comment in the comment section below or on the Youtube channel.
Posted by Lars Christensen on January 15, 2017
2016 was a busy year for me. It was the second year as my “own man”. I am very happy about how things have developed.
I set out to do three things when I started Markets & Money Advisory back in the summer of 2015.
First, of all I wanted to do a lot of public speaking. I have continued to do that in 2016 and will certainly continue to do that in 2017. So if you want to book me for a speaking engagement anywhere in the world drop me a mail (LC@mamoadvisory.com) or my speaking agent Daniel Rix at Specialist Speakers (Daniel@specialistspeakers.com). In 2016 I spoke a lot about Trump and Brexit – and of course monetary policy and global markets. In 2017 I guess focus will turn to European political uncertainties with elections in France and Germany and surely I will also talk about my favour topics – monetary policy, global financial markets and I certainly hope to be back in Africa speaking on the prospects for this continent.
Second, I wanted to do more commentary and I have certainly done a lot of that. I writing regularly for four European newspapers – Børsen in Denmark, Frettabladid in Iceland, Gazeta Prawna in Poland and finally Il Foglio in Italy. Furthermore, I have also regularly contributing Geopolitical Intelligence Services. I enjoy my regularly commentary a lot, but the consequence of writing for other media than my blog has also meant that I have blogged less on The Market Monetarist than I have done in previous years. Hence, in 2016 I only wrote 77 posts on this blog. My ambition clearly is to do more blog posts in 2017 than in 2016, but the format will also change a bit. More on that below.
Third, when I started Markets & Money Advisory the ultimate goal was to do advisory particularly on monetary policy issues. I am very happy that the advisory business has continued to grow in 2016. Most of our business has been in North Africa and the Middle East and I certainly expect that to be the case in 2017 as well, but I certainly expect the advisory business to grow more in 2017.
The positive development in the business has meant that I had to change the business from being a one-man army and move from the home office to new offices in Copenhagen. During 2016 I also brought on two assistant analyst to help me – Laurids Rising and Christian Schoubye. Laurids is primary do research assistances, while Christian will be helping on communication and social media.
So all in all 2016 was a busy and interesting year for me and for Markets & Money Advisory.
Plans for 2017
2017 hopefully will be equally busy and interesting. A lot of people have noticed that Markets & Money Advisory still does not have its own website. The Market Montarist so far has functioned as company website, but that will soon change. Hence, in January or February we will launch a new website for Markets & Money Advisory.
I should stress that that does not mean that the blog will disappear. Rather the blog will be incorporated into the new website.
On the new website it will be possible not only to read the blog, but also be able to book speaking engagements and hear about our advisory services.
Furthermore, we will start a “research shop” on the website where we will be offering our new research products. The first research product we will launch will be a monthly publication on global monetary conditions – The Global Monetary Conditions Monitor. The Monitor will cover monetary conditions in around 30 countries around the world. We are very optimistic about the prospects for this publication. I have earlier written about our plans for the Monitor here and here. If you are interested in this product please drop me a mail (LC@mamoadvisory.com).
We hope also to launch other research products in 2017 – we have not yet decided on what specific publications to launch, but given our advisory work in the Middle East and Northern Africa I would certainly not be not surprised if we for example would launch a quarterly publication on the MENA economies and markets at some time during 2017. If you have suggestions and requests for other research product please let us know.
Another concept we are presently working on is white-label research. This means that we will be offering for example smaller financial institutions to do research for them, which they can share with their clients using their own logo and name. I am happy to talk to potential clients about this so feel free to drop me a mail.
I have had this blog since 2011 and I continue to enjoy blogging and that will continue in 2017. However, I can also see that the world of blogging is changing. Therefore, in 2017 we will try to add other forms of communication. That could for example be webcasts, conference calls, small movies, tutorials etc. Do you have other ideas? Let us know!
Furthermore, we will try be more focused on sharing my commentary, which I write for example different newspapers on the blog as well. Obviously a lot of it is not in English, but at least we will try to a weekly wrap-up of both the commentary as well as links to media appearances and presentations etc. We will also share some of my powerpoint presentations from different presentations I do around the world to the extent that is possible. All in all the blog will develop in lot more dynamic direction when we launch the new website.
I or we?
Writing a blog is a very personal thing and the format means that you will use “I” rather than “us” or “we”. Another thing is a company website, which means that you will see a lot more “we” than “I” going forward. That does not mean that the focus on money and markets will change and the “method” will very much continue to be market monetarist. That is after all the comparative advantage of Markets & Money Advisory, but it also means that in the future there might be more contributors to the company website – primarily of course Laurids and Christian to begin with.
Looking for international partners and new ideas
As the advisory business has been growing it from time to time has been necessary to bring in external economists for our advisory projects and I certainly expect that that will be the case going forward. Therefore, if you are an independent economist in any country in the world and you think that you could be able to contribute on projects in the future then we are happy to hear from you. You might even have an advisory project that you think that we could contribute to.
Finally, I want to thank my readers for the loyal support in 2016 and I look forward to share a lot more thoughts on monetary matters – and the markets – in 2017. And if there is anything that you are looking for please let me know. What would you particularly like to see from Markets & Money Advisory and myself in terms of blogging, commentary, research products etc.?
Posted by Lars Christensen on January 1, 2017
I generally don’t think I can beat the market, however, right now there is something, which worries me and that is that the “Trump rally” in the US stock market could be about to end.
It seems to me that what US stock market investors are really focusing on is the potential for deregulation and tax cuts (and infrastructure investments). And we might of course get that and deregulation and tax cuts and certainly should be welcomed news both for the US economy and the US stock markets.
But if you get supply side reforms then it will be because of the Republican majority in the House and the Senate (might) want this – not because of Trump. Trump continues to pay lip service to these ideas, but he has certainly not be consistent. There is nothing in Trump’s past that tell us that he is a “free market guy”.
Where he has been consistent – even very consistent – is on his protectionist message and his China bashing. Presently the markets are ignoring this and that might not be the wrong thing to do, but I must say Trump’s 35% tariff talk scares scares me a lot and so does his persistent attempt to “pick a fight” with China.
Another factor, which could spell the end of the “Trump rally” is that not only will the Federal Reserve hike interest rates next week, but the FOMC could also send a more hawkish signal than presently being priced by the market.
In this regard I would particularly focus on inflation expectations, which essentially have stopped rising since 5-year/5-year breakeven inflation expectations broke above 2% a couple of weeks ago. Meanwhile the US stock markets generally has continued to trade (moderately) higher. To me that there seems to be a bit of a disconnect.
Hence, investors expected some Trumpflation as long as (medium-term) inflation expectation, where below 2%, but from here on investors are likely to increasingly think that there will be full monetary offset of any “fiscal stimulus” from the Trump administration.
So did I just say that the “Trump rally” might soon come to an end? I don’t know and I am not giving investment advice here, but…
Posted by Lars Christensen on December 6, 2016
On Monday Donald Trump met with John Allison the former CEO of the BB&T and former CEO of the libertarian think tank The Cato Institute.
It has been suggested that Allison might be in the running to become new US Treasury Secretary.
Allison is widely known to be an staunch advocate of deregulation of the banking sector and in favour of a rule-based monetary policy. Many had taken his support for a rule-based monetary policy to mean that he favours a gold standard.
However, Allison ultimately would like to see a Free Banking system in the US, but also acknowledges that that is not realistic anytime soon. Instead watch what he says on this interview on Fox & Friends.
“We need discipline, we need somekind of rule, I like the Taylor rule, I like some kind of GDP indexing rule…”
Posted by Lars Christensen on November 29, 2016
At Markets & Money Advisory we have tried to think a bit about different themes and scenarios for the global economy and markets in 2017. What is more likely? We don’t know and this is not investment advice, but it might help investors and policy makers to think about risks and opportunities.
I you want to know more about Markets & Money Advisory’s research agenda and research products please contact me Lars Christensen (LC@mamoadvisory.com).
Posted by Lars Christensen on November 29, 2016