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The very unpleasant echo from the 1930s

I am trying very hard not to become alarmist, but I must admit that I see very little positive news at the moment and I continue to see three elements – monetary policy failure/weak growth, the rise of extremist politics (Trump, Orban, Erdogan, Putin, ISIS etc) and sharply rising geopolitical tensions coming together to a very unpleasant cocktail that brings back memories of the 1930s and the run up to the second World War.

It has long been my hypothesis that the contraction in the global economy on the back of the Great Recession – which in my view mostly is a result of monetary policy failure – is causing a rise in political extremism both in Europe (Syriza, Golden Dawn, Orban etc) and the US (Trump) and also to a fractionalization and polarization of politics in normally democratic nations.

That is leading to the appeal of right-wing populists like Donald Trump, but equally to the appeal of islamist groups like ISIS among immigrant youth in for example France and Belgium. Once the democratic alternative loses its appeal extremists and populists will gain ground.

The geopolitical version of this is Ukraine and Syria (and to some extent the South China Sea). With no growth the appeal of protectionism and ultimately of war increases.

Unfortunately the parallels to the 1930s are very clear – without overstating it try to look at this:

  • Syrian war vs Spanish civil war: Direct and indirect involvement of authoritarian foreign regimes (Stalin/Hitler vs Erdogan/Putin)
  • Euro  zone vs the gold standard
  • The rise of populists and extremists: Communists, Nazis and Fascists vs Syriza, Golden Dawn, Jobbik, Orban, regional separatism in Europe, anti-immigrant sentiment, Trump and ISIS (in Europe) etc.
  • The weakening (failure?) of democratic institution: Weimar Republic vs the total polarization of politics across Europe – weak and unpopular minority governments with no “political muscle” for true economic reforms across Europe.

Maybe this is too alarmist, but you would have to be blind to the lessons from history not to see this. However, that does not mean that history will repeat itself – I certain hope not – but if we ignore the similarities to the 1930s things will only get worse from here.

PS if you are looking for more empirical evidence on these issues then have a look at Manuel Funke, Moritz Schularick and Christoph Trebesch’s recent very good post on voxeu.org on The political aftermath of financial crises: Going to extremes.

HT Otto Brøns-Petersen.

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If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: daniel@specialistspeakers.com or roz@specialistspeakers.com.

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My speaking engagements in Q1 – do you want to see me?

I have been lucky to be very busy since I resigned from Danske Bank back in May – both with my advisory business (Markets & Money Advisory), my commentary and my speaking engagements and all indications are that I will continue to be busy for the rest of the year, but there is still a bit of space in the calendar in Q1 2016 – so if you need me to speak at a seminar or at a conference you might still be able to book me.

Everybody who knows me knows that I am happy to talk about everything to do with economics, but here is a few ideas:

  • Why China will never be the largest economy in the world
  • The end of the ‘dollar bloc’
  • The euro as a monetary strangulation mechanism
  • What is monetary policy and central banking – an introduction
  • Russia’s continued economic crisis
  • How will Africa weather the China long-term slowdown?
  • More Open Borders, Much Less Aid
  • The US economy in 2016 – what is most important: The Fed or the presidential elections?
  • Should commodity exporters ‘target’ the export price?
  • Oil prices, monetary policy and the crisis in the Gulf States economies
  • Long-term challenges to global Emerging Markets
  • 1930s style politics: Monetary policy failure and the emergence of Trump, Sanders, Orban, Syriza and Golden Dawn
  • “When goods don’t cross borders, Soldiers will”
  • Long live for the ‘currency war’ – how the global competition to print money will pull us out of the crisis
  • Prediction markets – why governments and central banks should stop making forecasts and instead leave it to the market

Do you have ideas for other topics you want me to talk about? Please let me know!

Also please check out my speaker profile at Specialist Speakers.

If you are interested in booking me please write my agent Roz Hanna (Roz@specialistspeakers.com) or me (lacsen@gmail.com) directly.

For an example of my “shows” see my recent lecture at Columbia University.

Please SHARE and recommend.

My continued love affair with Iceland and my column in Fréttablaðið

I have since September been writing a weekly column in the Icelandic daily Fréttablaðið. Obviously most of my regular readers of this blog do not read Icelandic (neither do I), but I am sure Google Translate will do a decent job translating Icelandic into English.

So have a look at my columns here:

Africa is hard hit by China’s slowdown

China will never be the world’s largest economy

Less foreign aid, more open borders

We need a mechanism for sovereign debt crisis resolution

Monetary tightening is warranted in Iceland

The ’dollar bloc’ is falling apart

I must say it gives me great joy to write for an Icelandic audience. After all since 2006 – when I co-authored the somewhat alarmist report The Geyser Crisis on the Icelandic economy – Iceland has had a very special role in my professional and personal life and I am happy to say I that I ever since 2006 have been a regular visitor to this great and very special country. After a hard start I think I safely can say that this has turned into a love affair.

Please visit and share!

St. Louis Fed: “0% probability that inflation will average more than 2.5% over the next 12 months”

Laura E. Jackson, Kevin L. Kliesen, and Michael T. Owyang of the St. Louis Federal Reserve have constructed a new measure they call the price pressures measure (PPM).

According the authors the “PPM measures the probability that the expected inflation rate (12-month percent changes) over the next 12 months will exceed 2.5 percent”…the PPM is constructed “for both the consumer price index (CPI) and personal consumption expenditures price index (PCEPI).”

This is how the PPM is constructed:

In technical terms, the PPM index is constructed from an ordered probit model that is augmented with nine “factors.” A factor-augmented model is a common method of incorporating a large amount of data in a parsimonious fashion. The nine factors, comprising 104 separate data series, are grouped in the following categories: (1) consumer price indexes, (2) producer price indexes, (3) commodity prices, (4) housing and commercial property prices, (5) labor market indicators, (6) financial variables, (7) inflation expectations, (8) business and consumer survey data, and (9) foreign price variables.

The ordered probit model provides probabilities that inflation will exceed 2.5 percent, on average, over the next 12 months. But the model also allows us to assess the probability that inflation will average something different. In our original article we structured the model to assess the probability that inflation will fall within one of four bins: less than zero (deflation); 0 percent to 1.5 percent; 1.5 percent to 2.5 percent; and more than 2.5 percent. We could also assess probabilities for other outcomes. For example, we could condense the second and third bins into one, leaving three sets of probabilities: Inflation will be less than zero (deflation) over the next 12 months, inflation will average between 0 percent and 2.5 percent, and inflation will be greater than 2.5 percent.

So what is the measure saying now?

Well, the message is very clear – this is what the authors say: “As of October 2015, the PPM predicts a zero percent probability that PCEPI inflation will average more than 2.5 percent over the next 12 months.”

This is obviously wrong – we can never say that there is a zero percent probability of anything, but ok this is the kind of result you sometimes get from probit models. That however, is not the important thing, but rather the key message here is that there is very little likelihood that Fed will overshoot it’s inflation target in the coming next 12 months. In fact it is very clear that the likelihood of deflation is higher than inflation being above 2.5% in 12 months.

Therefore you gotta ask yourself why does St. Louis Fed president James Bullard continue to argue for the Fed to hike rates? After all the research done by his own research department tells him that he rather should worry about deflationary risks.

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PS See the original paper on the Price Pressure Measure here.

PPS Scott Sumner should be delighted that Laura E. Jackson recently became an assistant professor at Bentley University.

My lecture at Columbia University on the euro crisis

As the followers of my blog would know I recently did a 11 day speaking tour in the US. I want to share a bit of that with my readers.

Here you can watch my lecture at Columbia University on the euro crisis.

And this is the Powerpoint presentation from the lecture.

I want to thank my big hero Adam Tooze who is head of the Europe Institute of Columbia University for the invitation to speak at Columbia.

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If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: daniel@specialistspeakers.com or roz@specialistspeakers.com.

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