How to Deceive Friends and Influence People

Krugman prays he is right There is an interesting opinion piece by Nobel Prize winner and Enron advisor Paul Krugman dated June 18. Krugman's approach in past articles to our economic problems is to print money.

This column says that while some countries are in trouble, it will not spread. He quotes the new head of the Bundesbank:

The current crisis is no crisis of the euro. It is a sovereign debt crisis of individual, smaller countries in the euro area, which is caused not least by the disregard of the rules.

Of course the head of a bank is going to say this. Can you imagine a banker who is the new head of a bankrupt company saying the truth? Krugman then produces this chart to justify his opinion that things are just fine in Europe. 

I must confess that this chart at first confused me. I did not have time to study it as it was a busy day for me. Then I remembered a book I had read called How to Lie with Statistics and remembered some of the tricks. First, notice that the scale does not begin at zero. The reason this is done is that it makes the contrast with the rest of the chart more pronounced. At first glance it appears that Ireland and Spain have no debt. They do. It also was quite confusing in that it showed Ireland and Spain with a budget surplus. Everything I have been reading says this is false. Then I noticed that Krugman had used data from 2006/2007. What is the more current data?

Here is the Irish Financial Times from Dec 2010

Irish Economy 2011: Budget 2011 forecasts a deficit in 2011 of €17.7bn and public debt as a ratio of GDP (gross domestic product) will rise to 99%.

As you can see this is quite different than the chart Krugman provides. The article also tells us that the deficit to GDP is projected to be 9.4% of GDP. Ireland is not running a surplus. In fact the deficit for last year was the largest in the EU:

Official EU statistics show that Ireland again recorded the biggest budget deficit in the EU last year. Ireland's deficit was 32.4% of economic output, though this was mainly because the EU figures include the cost of injecting more money into Anglo Irish Bank and Irish Nationwide

Greece had the second-biggest deficit at 10.5% of GDP, while the UK was third with 10.4%. Spain and Portugal recorded just over 9%.

As the article points out most of this was a one-time bank rescue package. But it is predicted to return to about 10%. Rather than a budget surplus and a debt to GDP ratio of 25, Ireland today is running a deficit of 9.4% of GDP, and the total debt is 99%. It is expected to peak at 111%.

What about Spain? On Krugman's chart Spain is running a surplus. What is the truth?

Spain’s deficit was 9.2% of GDP in 2010. The government aims to cut the deficit to 6% of GDP in 2011.

Other articles suggest that Spain will fail to cut this much.

Notice that Italy for some reason is not on the chart. What about other European countries? From CNN:

Topping the European debt league is Greece with 142.8% government debt to GDP ratio, followed by Italy (119.0%), Belgium (96.8%) Ireland (96.2%), Portugal (93.0%), Germany (83.2%), France (81.7%) Hungary (80.2%) and the United Kingdom (80.0%).

Krugman might be right and the problem will not spread beyond Greece and Ireland. I hope he is right. But there has to be a reason that Prime Minister Merkel of Germany is supporting bailouts when it has to cost her the next election. She realizes that if a firewall is not built the problems will spread.

Krugman's chart, to be charitable, is misleading.

Crisis Spreads

While there are a few relative bright spots around the world, the whole world is awash in debt. The Telegraph reports:

Riots in MadridStandard Chartered is understood to have withdrawn tens of billions of pounds from the eurozone inter-bank lending market in recent months and cut its overall exposure by two-thirds in the past few weeks as it has become increasingly worried about the finances of other European banks.

Barclays has also cut its exposure in recent months as senior managers have become increasingly concerned about developments among banks with large exposures to the troubled European countries Greece, Ireland, Spain, Italy and Portugal. 

CNN Reports:

Large protests outside the Catalan regional Parliament in Barcelona on Wednesday left 36 people slightly injured, including 12 regional police officers 

...

Spain is gripped by a deep economic crisis with 21% unemployment nationwide, and 42% unemployment for young people.

The Catalan Parliament protests were seen as part of the so-called May 15 movement of demonstrations that have sprung up across Spain since last May 15, including tent cities in some emblematic public squares in various Spanish cities.

While things are bad in the USA, things are actually worse elsewhere. 

Riots In Greece

There are riots all over the economically troubled areas of the Eurozone, but for some reason it is not being covered by the media. Here is Russia Today's Max Keiser's coverage:

For more videos click here. 

Because our financial system is highly leveraged with debt, a major default like Greece will hit the banks hard. If the defaults spread to other Eurozone countries like Portugal, or God forbid Spain, then most European banks will be broke. 

From Bloomberg: 

Greece could have a contagion effect,” ECB Vice President Vitor Constancio said yesterday. “That’s the reason why we are against any sort of default with haircuts and any form of private-sector event that could lead to a credit event or a rating event.”

The euro has fallen more than 2 percent in the past two days, to $1.4090 at noon in Frankfurt, and the cost of protecting corporate bonds soared to the highest level since January, with credit-default swaps anticipating about a 74 percent chance that Greece won’t pay its debts.

There is a lack of an united front on the debt issue:

Irish Finance Minister Michael Noonan said yesterday that senior bondholders should share in the losses of Anglo Irish Bank Corp. and Irish Nationwide Building Society, reversing a policy of protecting owners of senior securities. The ECB is against imposing losses on investors. President Jean-Claude Trichet said on Feb. 7 that haircuts aren’t part of a plan to reduce Ireland’s debt load.

 Will the European Central Bank be able to stop the debt crisis? 

Update on Thursday, June 16, 2011 at 5:40PM by [Positive Dennis]

There is more discussion of the riots in Canada because the Canucks lost than about the riots in Greece. 

Update on Friday, June 17, 2011 at 5:43AM by [Positive Dennis]

Looks like the news is finally talking about Greece again, after weeks of rioting. 

The Times They Are A-Changing… for the Worse

I do not want to turn this blog into a Conrad Black fan site, but he had another excellent column this week. While the column was about Republican presidential candidates, this paragraph leaped off the page:

The entire world is gape-mouthed at how, as a sorbet after its brilliant and almost bloodless victory in the Cold War, the United States has run over and off the cliff of debt, been swindled by the Chinese, been played for an idiot by OPEC, carried the European and Japanese luxury-goods industries on its back like a bipartisan donkey, outsourced 40 million jobs while admitting 15 million illegal and vocationally unskilled immigrants, created the greatest financial bonfire in history by papering itself in trillions of dollars of worthless real-estate-backed debt (certified as investment grade by Wall Street and by the rating agencies that have now put the U.S. on credit watch), and immolated itself like a disgruntled Burmese monk or Tunisian dissident.

When you have gangrene, some form of surgery is needed. So the presidential race next year is important. But if neither party realizes that surgery is needed, the patient will die. Right now, no candidate but Ron Paul or maybe Gary Johnson realizes this, and neither will be the nominee. This whole situation reminds me of the lyrics to a Bob Dylan song: 

Come gather 'round people
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You'll be drenched to the bone
If your time to you
Is worth savin'
Then you better start swimmin'
Or you'll sink like a stone
For the times they are a-changin'.

Come writers and critics
Who prophesize with your pen
And keep your eyes wide
The chance won't come again
And don't speak too soon
For the wheel's still in spin
And there's no tellin' who
That it's namin'
For the loser now
Will be later to win
For the times they are a-changin'.

...

The line it is drawn
The curse it is cast
The slow one now
Will later be fast
As the present now
Will later be past
The order is
Rapidly fadin'
And the first one now
Will later be last
For the times they are a-changin'

The Great Toilet Paper Shortage of 1973

I predict shortages ...

I remember the Great Toilet Paper Crisis of 1973. I did my normal shopping for the week and noticed that there was not a roll of toilet paper to be found. While the early 70's was a time of shortages, especially gasoline, this struck me as very odd. What I did not know is that the evening before, Johnny Carson on the Tonight Show in his monologue on December 19, 1973 had said this:

"You know what's disappearing from the supermarket shelves? Toilet paper. There's an acute shortage of toilet paper in the United States."

While there was in fact no shortage, panic buying started, and it took weeks to replenish the stock across the nation. We do not realize that we are relying on a supply chain with little depth.

But there was a more serious shortage of gas caused by government actions:

As oil supplies contracted because of the embargo, the United States held prices artificially low. Government officials, fearing a return of the previous year's frigid winter in the Northeast, then ordered refineries to produce an oversupply of heating oil instead of meeting the demand for gasoline.

If you cannot import oil and make a profit, guess what--you will not import oil.

While I do not expect an apocalyptic future like a disaster movie, as I mentioned in a previous blogpost, it just seems prudent to have a little bit of food stored back for emergencies. Just do not tell anyone you are doing it. 

If the dollar drops, and the government tries to help the poor by price controls, there will be shortages. This is already starting in the medical area as some doctors will not accept new Medicare patients. This means that those doctors that do accept Medicare will have longer waiting times to see the doctor. This can only get worse.

The best way to allocate scarce goods is to permit prices to rise.  If this is allowed to happen, then while there may be spot shortages, the market will take care of it.