Excel Spreadsheets, Krugman, and a Question of Logic

In 2010 paper Growth in a Time of Debt and again in a book entitled This Time is Different, Harvard economists Ken Rogoff and Carmen Reinhart presented the idea that when a country’s ratio of debt to gross domestic product reaches 90% lower economic growth is on the horizon.

However, Rogoff and Reinhart made an Excel Spreadsheet Error in their work that has the economic world in a tizzy.

A new study by three researchers at the University of Massachusetts finds that Rogoff and Reinhart made several mistakes that invalidate their thesis. They made a spreadsheet error that resulted in their leaving five countries out of an all-important average of countries with higher than 90% debt-to-GDP ratios. By restoring the full average, the UMass authors say, the growth rate for countries in that range becomes 2.2%, not the -0.1% cited by Rogoff and Reinhart. That makes the average growth rate at that ratio “not dramatically different than when debt/GDP ratios are lower.”

One irony of the finding stems from the fact that the debt-to-GDP ratio always was something of a heffalump. As economist Robert Shiller pointed out in 2011, yoking the two statistics together doesn’t necessarily tell you anything useful. Debt is measured in currency, he observed; GDP is measured in currency units per year. But there’s “nothing special about using a year…. A year is the time that it takes for the Earth to orbit the sun, which, except for seasonal industries like agriculture, has no particular economic significance.”

Error Austerity Debate

CNBC picked up the story in Reinhart-Rogoff Error Sparks Austerity Debate.

Adding fuel to to an already contentious debate over whether tough austerity measures are helpful or harmful to an economy, is a new revelation that there was a mathematical error in an influential economic research study, often cited as having paved the way for fiscal policies pursued by the U.S. and Europe.

The charge was raised in a paper, released Tuesday, by an economics doctoral student and two professors at the University of Massachusetts that called into question the findings of Harvard economists Carmen Reinhart and Kenneth Rogoff’s 2010 paper “Growth in a Time of Debt,” which concluded debt over a certain level was dangerous for countries.

Reinhart and Rogoff said they made a bad calculation within an influential economic research paper in 2010, but rebut claims that the errors were made intentionally. They also stand behind the central theme of the paper that too much public debt will slow economic growth.

Krugman Chimes In

Paul Krugman chimed in with his response Reinhart-Rogoff, Continued.

I was going to post something sort of kind of defending Reinhart-Rogoff in the wake of the new revelations — not their results, which I never believed, nor their failure to carefully test their results for robustness, but rather their motives. But their response to the new critique is really, really bad. ….

The Obvious

Let’s step back from the politics of the debate to focus on the obvious. My friend Pater Tenebrarum on the Acting Man Blog sent this common sense analysis of the setup in an email.

Empirical studies cannot be used to settle points about economic theory. It should be obvious that deficit spending is nothing but deferred taxation. And obviously, since government spending has no concept of the categories of profit and loss, such spending is typically a mindless waste of scarce resources. No bureaucracy has any inkling of opportunity costs or consumer wishes. The spenders are saying: government bureaucrats know better how to allocate resources than the private sector. Perhaps, but certainly not in this universe.

GDP Definition

I remind readers that by definition, government spending adds to GDP.  The government can pay people to spit at the moon or dig ditches and fill them back up again and those activities will add to GDP.

Does such economic stupidity matter at 90%, 95%, or 130% of GDP?
Is it even relevant?

What does matter is the obvious. And it should be obvious that wasting money to stimulate the economy is just that: waste.

The trigger point as to when such waste matters most likely varies country to country based on factors that no excel spreadsheet can properly discern in advance.

Rogoff and Reinhart made an error. So did Krugman. At least Rogoff and Reinhart have the general idea correct: economic stupidity matters at some point, something Krugman cannot seem to grasp.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Mish’s Global Economic Trend Analysis

Excel Spreadsheets, Krugman, and a Question of Logic

Rick Santelli Asks The $14 Trillion Dollar Question

Two minutes into a somewhat boring pre-close wrap-up, the CNBC guests bring up the glaring revelation that perhaps, just perhaps, the Fed’s $ 85 billion per month (plus the BoJ’s exuberance) is not enough. But at three minutes, Rick Santelli dares to ask the question that no one wants to hear the answer to. Addressing questions over what bonds and commodities are telling us, Santelli notes the bubble-blowing tendencies of “re-applying [economic] medicines that don’t work and don’t take hold,” and that the current weakness is deflationary. “Just look at 20-year lows in European car sales… or 13-year lows in China GDP growth,” he explains, “you have to delever down to some sort of reality – that’s the healing process;” but instead, due to “economic semantics,” we “keep doing [building bigger bubbles].” With $ 14 trillion of central bank balance sheet reflation in place, Rick asks, what if its the “wrong medicine?”

 

Forward to 3:00… and enjoy an uncomfortable truth grenade…

German Reader Tackles Question "What Percentage of the Vote will Anti-Euro Party AfD Receive in Upcoming Election?"

Polls show the support for the anti-euro Alternatives for Germany AfD party as high as 17% according to the Financial Times.

However that 17% is the number of voters who would “consider” voting for an anti-euro party, not the number of people committed to that outcome.

Specifically, the FT article states “AfD is a late entrant for the election on September 22 and might not be radical enough to attract protest voters it needs in order to make it over the five per cent vote threshold for seats in the Bundestag.“

The AfD, led by economics professor Bernd Lucke, is dominated by former CDU members who became disillusioned with the chancellor’s European policy that is broadly supported by a majority of the public.”

Underestimating the Vote

In contrast to the possibility AfD receives less than 5% of the vote as mentioned by the Financial Times, reader Bern who lives in Germany believes AfD is going to receive substantially more than 10% of the vote.

Bern writes ….

Hello Mish,

I just returned from the foundation congregation of AfD party in Berlin.

About 1500 party members from all parts of Germany came to Berlin to form the federal part of the party as per legal requirement in order to participate in the coming federal elections. The party is now legally formed, it has a legal party statute and an election program.

This means that about 50% of all legal requirements are now met. We have another 100 days to meet the other 50% (establish a State arm of the party in each federal State (16) and to collect 2000 signatures in each State). We do not expect any problems arising from these two obstacles.

It can now safely be assumed that AfD is “open for business” for the coming federal elections.

This party is something entirely new in Germany. It does no longer follow traditional “dividing lines” between left and right or conservative and liberal. Our members are clearly from the heart of the “bourgeois” society of Germany. Small entrepreneurs, self-employed people, teachers and professors, doctors and lawyers, skilled workers, craftsmen,…. in short, a wide variety of the so called “better educated” part of society, who naturally have a rather diverse ideological background.

The common theme uniting this varied crowd is the desire to get rid of the shackles of the Euro and to return to democratic values, both in Europe as well as in Germany.

With about 10,000 members and growing rapidly, I would be surprised if the party received less than 10% of the votes in the coming German federal elections. I am prepared to stick my neck out and predict a figure substantially higher.

AfD will have a considerable influence on German politics in the coming months. It is now no longer possible for the other parties to ignore this new movement.

CDU, SPD, FDP and the Green Party can no longer avoid the Euro as the dominant and overriding theme of the coming German elections.

Chancellor Merkel had wanted to do a “sleeping pill” campaign on such peculiar subjects as “fairness”, “family values” and the like. SPD and Green Party were happy to follow. FDP added some “lowering taxes” issues to the mix.

As of today, Merkel can kiss that objective goodbye.

The Euro and democracy will be the overriding themes of the coming elections. This will catapult AfD into the minds of the people here.

As the Euro comes under attack from all sides. I wonder if an orderly dissolution is still possible or if the result is a disorderly collapse. I still believe the latter is more likely.

Best wishes
Bernd

Given that the nannycrats have underestimated the backlash of every policy decision and every important vote, especially in Italy, I am a firm believer that reader Bern is correct.

In a followup post, we will discuss what this means for chancellor Merkel. Here’s a hint. If you are a Merkel supporter, the result won’t be pretty.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Mish’s Global Economic Trend Analysis

German Reader Tackles Question "What Percentage of the Vote will Anti-Euro Party AfD Receive in Upcoming Election?"

Ask Mario Draghi A Question

It is hardly the world’s best kept secret that it will be a rather chilly day in a very exothermic Hades before a member of Zero Hedge is invited to a central bank press conference to ask a legitimate question. Which is why we are delighted that Scott Solano with the German news agency DPA, who will be at the Oracular Draghi’s public appearance tomorrow, has been kind enough to solicit Zero Hedge readers’ questions for the former Goldmanite tasked with inflating away Europe’s ~$ 10 trillion debt overhang problem, which he would then ask by proxy (assuming he is not bound and gagged once it leaks to the Frankfurt funding fortress that what he asks may be… provocative).

Scott’s contact info is in the clip below.

The Axe is in Position, Only the Timing of the Swing is in Question

It has been amusing listening to the hypocrisy from Brussels regarding the leverage in Cyprus.

Jeroen Dijsselbloem, president of the eurogroup led the charge that Cyprus had an unsustainable problem with deposits over 700% of GDP.

Here is a little perspective courtesy of the Financial Times.

European Bank Assets as Multiple of GDP

Somehow we are supposed to believe that 7-1 ratio of deposits to GDP is a problem but the 22-1 ratio in Luxembourg is not. And what about the 4-1 ratios in France and the Netherlands?

What sunk Cyprus now rather than later was Cyprus was dumb enough to be in Greek bonds.

So why did Cyprus stay in Greek bonds so long? The answer is Cypiot banks were foolish enough to believe ECB president Jean Claude Trichet when he insisted there would be no haircuts on Greek bonds.

Trichet Hails Success of Cyprus

Those looking for an amusing flashback should consider this glowing speech by Jean-Claude Trichet on the successful entry of Cyprus into the euro area, in January of 2008.

Today’s euro celebrations are the result of the successful macroeconomic policies that the Cypriot authorities have pursued in recent years. Cyprus has made significant progress in both nominal and real convergence, owing to successful policies – namely, well-managed monetary and exchange rate policies combined with a range of structural reforms. … The ECB and the Central Bank of Cyprus, together with the National Changeover Board, the European Commission and national and international authorities cooperated closely in many ways to prepare the introduction of the euro.  …  It included public opinion polls, advertising and direct marketing. Over 900,000 copies of different publications were distributed by the Central Bank of Cyprus – this is more than one copy per Cypriot! … As a result of these efforts, today we can celebrate a successful cash changeover.  … intimate cooperation between the members of the team, the national central banks of the Eurosystem, and the ECB is the key for the success of the single monetary policy in the euro area.

Somehow, distributing over one pamphlet per Cypriot on the benefits of the euro was an insufficient formula for success. Shocking.

Four years and two Greek bond restructurings later, Cyprus was ruined but did not realize it yet. The second Greek bond haircut did Cyprus in, but the axe was yet to fall.

The ECB waited until the Cypriot election a month ago when their communist president was ousted by the pro-euro Nicos Anastasiades. The ECB then dropped a bomb on the new president.

For those of you who think Cyprus is “one off” and this will never happen again, please let me point out a few recent things.

1. Dijsselbloem brags Cyprus to be model for future bailouts.


2. A German Bank Economist Proposes “One Time” Cyprus-Like 15% Wealth Tax on Italians


3. By a 526 to 86 vote, the nannycrats in Brussels passed a regulation in March that will require a country to accept a bailout if offered. It’s An Offer You Cannot Refuse.


4. Laying it on thick, the Bundesbank claims Spaniards are 33% richer than Germans.


5. The “men in black” seek answers in Spain. Troika to Return to Spain in May Asking “What Happened to €42 Billion in ESM Bank Recapitalization Tranches?”

Timing the Axe on Spain and Italy

Cypriot banks may be the first to suffer a forced bail-in but they will not be the last.

Recall the “success” of Mario Draghi’s LTRO program? Yes, it brought down yields on Italian and Spanish bonds, I believe temporarily.

The LTRO program was also an open invite for German banks to dump Spanish and Italian bonds and for Spanish and Italian banks to snap them up.

Was LTRO really a “success”? For who? The answer is Germany, not Spain or Italy.

Economists hailed Draghi a genius. Yet, LTRO further concentrated bond risk. Spanish banks are now more leveraged to Spanish bonds and Italian banks more leveraged to Italian bonds. It was concentrated risk that brought down Cyprus.

Groundwork Laid for Additional Forced Bail-Ins

Groundwork for further forced bail-ins has been laid: A model is in place, regulations are in place, and German sentiment is in place. Spaniards are supposedly more wealthy than Germans, and the “men in black” demand an audience in May.

Solidarity, be damned. It’s every country for itself. Arguably, that is the way it should be, but that certainly wasn’t the promise.

It’s too late now for Spain, Portugal, and Italy. The axe is in position. Only the timing of the swing is in question.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Wine Country Conference

I am hosting an economic conference on April 5 in Sonoma, California. Proceeds go to the Les Turner ALS Foundation (Lou Gehrig’s Disease).

Please see My Wife Joanne Has Passed Away; Stop and Smell the Lilacs for my association with the disease.

To learn about the economic conference with world-class speakers including John Hussman, Michael Pettis, Jim Chanos, John Mauldin, Mike “Mish” Shedlock, Chris Martenson with guest moderator Lauren Lyster and other Special Guests, please visit Wine Country Conference April 5, 2013

Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Mish’s Global Economic Trend Analysis

The Axe is in Position, Only the Timing of the Swing is in Question