EcoBusinesSpace

Oil Prices, Exhaustible Resources, and Economic Growth

2011-10-22T22:58:00.001+02:00

Oil Prices, Exhaustible Resources, and Economic Growth

By James D. Hamilton Department of Economics University of California, San Diego

Abstract

This chapter explores details behind the phenomenal increase in global crude oil production over the last century and a half and the implications if that trend should be reversed.
I document that a key feature of the growth in production has been exploitation of new
geographic areas rather than application of better technology to existing sources, and suggest that the end of that era could come soon. The economic dislocations that historically
followed temporary oil supply disruptions are reviewed, and the possible implications of that
experience for what the transition era could look like are explored.

How's life in Venezuela?

2011-10-04T17:31:00.004+02:00

This interview is about how habitants see the situation in Venezuela. ( thank you to my dear friend Carla S. García)

First that must be emphasized is the huge level of inflation which causes everything that we are buying increments the cost every month,the infrastructure like the Sambil Mall totally invaded by homeless and many homes invaded without any right and respect by the owners. Streets are in bad conditions.

The health system is affected by 100% because they never send the lso(it is a money direct to the hospitals and medical institutes, such as a tax:the salary from the doctors,nursers and the rest came from the lso), the only way to treat a disease is to go to private clinics and pay for the service,and the bad bad services from the cuban medics who are not prepare to treat a person!! one of these centers almost kill my mom!! this causes the 50% of the medics from venezuela lives in other country like ee.uu.

Aall we ask where goes the money to came from the oil? we'll never know!

The insecurity probably is the most trouble we can deal,cause every day about 24 deaths u can see it in the news and newspapers ,cause kills stealing things of little value like cellphones ,money and blackberrys for example.

Other is the expropiations to the companies and for that no one wants to make franchises in the country.

Because of all this people don´t respect the laws and rules, and the all we can keep eyes in work to get money to buy only food,wich increments prices all day.

I have to say that food disappears: it can be milk or sugar one month, the next month could be meet.

Chavez says that our salary helps to all of us, but is not true! all salary goes to in food and public services like light, telephone etc and after u pay all this u are without money, so if u can go out to movies or eat out of the house, or anything, u need to save it to do that month after month.
Food it´s so expensive that every month auments the price so we must buy just the necessary (here I think she wants to say that they can buy just the "basic food").

He makes a service like a supermarket but "economic" called "Mercal" and that is so improper: people don´t have any education and eats the food there without pay.

Entertaiment it´s like a privilegy,and the list of troubles go on.

That's it. Of course this is just a point of view of an ordinary girl. If there is some Venezuelan reader who wants reply, you can leave a comment!

"omg u don´t have any idea how lucky u are to live in your country i just love it to walk until 10 o'clock. Here u have to stay in your home at 6pm cause after u can still or kill u in fact u can say thanks to live like that"

(ps: She told me many other things but I prefer do not public them because of...well I think you should know why).

An example about why Communism and Socialism don't work

2011-09-30T19:36:00.003+02:00

HAVANA (AP) — "Cuba legalized the sale and purchase of automobiles for all citizens on Wednesday, another major step in the communist run island's economic transformation and one that the public has been clamoring for during decades. Under the law, which takes effect Oct. 1, buyers and sellers must each pay a 4 percent tax, and buyers must make a sworn declaration that the money used for the purchase was obtained legally.

Unrestricted sales had previously been limited to cars built before the 1959 revolution, one of the reasons Cuba's streets are about the only place on the planet one routinely finds a multitude of finned American classics from the 1950s such as Chevrolets Bel Airs and Chrysler Imperials, all in various states of disrepair (see photo above)."

Cuban blogger Yoani Sanchez offers these comments:

"Even with this new legal reform, however, the great majority of citizens are only allowed to buy a used car, which in Cuba means vehicles more than 15 years old, and in particular Russian Ladas or Moskvitches, or Polish Fiats, which were previously marketed through a meritocracy. Some modern cars in State service will be sold to those who meet the strict requirements of belonging to an institution and demonstrating their fidelity to the Government. And those impeccably new ones, recent imports, are destined for a Revolutionary elite that has in their pockets money sanctified through official channels. To drive a shiny Citroen or a late model Peugeot will continue to be a sign of being a member of the powers-that-be."

Source: Carpe Diem

Ending the Global War on Drugs

2011-09-30T16:40:00.000+02:00

From the CATO INSTITUTE

NAHB Auditorium
1201 15th Street, N.W., Washington D.C.
(Corner of 15th St. and M St., N.W.)

About the Conference | Conference Schedule | Registration

Although the global prohibition of drugs has manifestly failed to stem the use of narcotics, it has generated enormous costs and perverse outcomes. In the United States, the war on drugs is generating alarming violations of civil liberties, weakening the rule of law, and compromising law enforcement efforts. The U.S.-led drug war is also undermining legitimate foreign policy goals around the world, including the spread of liberal democracy and an effective war on terror. This conference will bring together prominent scholars and international leaders to analyze current policy and propose practical alternatives such as legalization.

Speakers will discuss:

The impact of the drug war in Mexico, on the U.S. border, and in Central America
How prohibition helps fund terrorist groups in Afghanistan, Pakistan, and beyond
How Washington's anti-narcotics campaign violates the Constitution
The effects of criminalization on minorities in the United States
Lessons from South America
The evolution of drug policy in the United States and what decriminalization or legalization would look like in practice

This conference is supported in part by a generous grant from the Open Society Foundations. Additional funding was provided by Mr. Peter Lewis.

Featuring


Fernando Henrique Cardoso Former President, Brazil	Jorge Castañeda Former Minister of Foreign Affairs, Mexico	Mary Anastasia O'Grady Member of the Editorial Board,Wall Street Journal	Luis Alberto Lacalle Pou Speaker of the House of Deputies, Uruguay


Glenn Greenwald Columnist and Blogger, Salon	Leigh Maddox Board Member, Law Enforcement Against Prohibition Professor, University of Maryland Francis Carey School of Law	Ethan Nadelmann Executive Director, Drug Policy Alliance	Tucker Carlson Editor-in-Chief,Daily Caller

Special video messages from Vicente Fox, Former President of Mexico and George Shultz, Former U.S. Secretary of State

About the Conference | Conference Schedule | Registration

Why extension of unemployment benefits is not good

2011-09-28T11:32:00.002+02:00

Here a post by David C. Rose on csmonitor that explains why another extension of unemployment benefits is not good for the economy and its effect to the wages.

Why Congress should not extend unemployment benefits

The president is calling for yet another extension of unemployment benefits. For members of Congress, such extensions have evolved into a new “third rail” of politics – so they don’t dare oppose them.

But in reality, extending unemployment benefits again will interfere with an important mechanism by which the economy recovers on its own. Congress should say no.

John Maynard Keynes argued that recessions are prolonged by wages falling much more slowly than assumed in the models of classical economics. Virtually all economists agree with this point. Like most economists, then and now, Keynes believed that if wages could fall very rapidly, labor markets would clear quickly and therefore unemployment would be short-lived.

Rapidly falling wages produce jobs

For this reason, Keynesian and nonKeynesian economists alike view the speed at which wages fall in a recession to be important for rapid economic recovery. Falling wages increase the profitability of production, and this induces firms to produce more. This in turn leads to more hiring, faster economic growth, and a lower unemployment rate.

Virtually no economist disputes the claim that the faster that wages fall in a recession, the more quickly an economy will recover. Keynes certainly believed this. Keynes’ caveat was simply that this process takes too long, so we should use expansionary fiscal policy to hasten recovery by stimulating demand.

The most obvious way for wages to fall is for individuals to be paid less in the jobs they already have. Although some companies have introduced pay cuts, there are strong institutional impediments to doing so, and therefore most have not. But another way the economy can produce the same effect is if individuals, after losing a job, take new jobs at lower wages than the jobs they originally had.

What does this have to do with extending unemployment benefits?

Someone who is unemployed as a mechanical engineer might nevertheless be able to find a job as a production line worker. Extending unemployment benefits induces such an individual to keep looking for another engineering job. But if that individual took a job as a production line worker because unemployment benefits ran out, productivity in the new position would almost certainly increase – even though the wage associated with it did not rise.

Extending jobless benefits makes wages rigid

Because extending unemployment benefits makes many individuals less willing to take new jobs at lower pay, it adds to wage rigidity, which Keynes (correctly) argued prolongs recessions.

There is abundant empirical evidence that unemployment benefits induce workers to keep looking for a job like the one they lost (see previous work by Alan Krueger, the president’s new top economic advisor). So extending unemployment benefits yet again will interrupt a potentially important mechanism by which the economy self-corrects by effectively reducing real wages.

Why is this so hard to see? Most economists and federal government officials are acting as if the current bad economy follows the standard Keynesian scenario: consumption and investment spending fall for no good reason, causing output and employment to fall below a sustainable trend. Since it takes needlessly long to return to the trend, it is sensible to stimulate the economy to hasten the recovery.
But what if the original problem was excessive monetary and fiscal stimulus that led to a credit boom, an asset bubble, and therefore a level of consumption that was above the sustainable trend? This well describes the recession we are still struggling to fully put behind us. In this case, stimulating the economy to return to an unsustainable trend is not a viable long-run solution.

The ultimate answer is consuming less and/or working more as a nation. This is precisely what an actual or de facto decrease in wages does. Once the economy returns to a sustainable production and consumption trend, uncertainty will diminish as markets stabilize. This will induce entrepreneurs to get back to work on inventing new products and production methods. The increases in genuine productivity that result from this process are the real source of increasing prosperity over time.

The politics of rejecting an extension in jobless benefits

There is simply no evidence to support the claim that extending unemployment benefits hastens recovery by propping up consumer spending. The unemployment rate is still 9.1 percent, and the economy is growing much more slowly at this stage of the recovery than is typical of business cycles. Why continue down the same path when there is a good theoretical explanation for why that path will fail?

What about showing compassion for those who can’t find a job? This certainly makes the politics of rejecting extended jobless benefits that much tougher – especially amid reports of America’s increasing wealth gap and poverty rate.

But allowing real wages to fall is compassionate.

RELATED: Obama deficit plan: Is there ever a good time for a tax increase?

There is abundant evidence that when unemployment benefits run out, people do find jobs – just not the jobs they had before. Conversely, extending unemployment benefits subsidizes longer searches to find jobs like the ones that were lost. Meanwhile, such individuals are not working with others to make new goods, so the amount of goods produced is lower. This prolongs the unemployment of others.

We need to stop focusing on the suffering of those whose unemployment benefits run out, and start focusing on people who will become unemployed or be unemployed longer because of the unwillingness of those who are able to find lower paying jobs, to take those jobs.

Paul Krugman about the earthquake

2011-08-24T16:01:00.003+02:00

"People on Twitter might be joking, but in all seriousness, we would see a bigger boost in spending and hence economic growth if the earthquake had done more damage."

Paul Krugman, 2008 nobel prize in economics

Or is it a fake?

The G7 recovery leader? The Canada

2011-08-19T16:40:00.002+02:00

The Q2 real GDP data across the G7 are now in, except for Canada who is always the last to release their statistics. We now know that the G7 expansion has been nothing short of pathetic. Why? Because among the G7, ONLY Canada - the G7 consists of the US, UK, Germany, France, Canada, Italy, and Japan - has fully regained its GDP lost during the recession (it had by Q3 2010 no less). Canada's in an expansion league of its own.

From the blog of Rebecca Wilder.

Eurobonds are not the solution

2011-08-19T15:32:00.004+02:00

I read in many places people talking about Eurobonds and their miracle effects on the EU problematic economy.

For example, Andres Velasco ( former Minister of Finance of Chile) writes:

Eurobonds would cut borrowing costs for the European Union’s two large troubled members. And it would spare German and other taxpayers from the EU’s solvent northern countries from having to fund yet another bailout of a southern member state

That's correct, but could the solution of a debt crisis be...more debt? I hardly think so.

I must remember that the Euro cut borrowing costs of states (such as Italy), and we know how it goes.

The only result of the Eurobonds will be that the "party states" (Italy, Greece, Spain etc) will continue to have parties, and labor states (first of all Germany) will work to pay those parties.

7th Annual Economics Teaching Conference: october 27th and 28th, New orleans

2011-08-18T11:42:00.002+02:00

Cengage Learning, along with the Gulf Coast Economics Association, is proud to announce the 7th year of what has become the premier economics teaching conference in the nation!
This two day conference brings together keynote talks by some of the top economists in the world along with papers and presentations by some of the best economic instructors in the country.

For more info visit the website.

Just to know, Greg Mankiw will be there.

Does a big one-day drop in the stockmarket presage recession?

2011-08-17T00:21:00.002+02:00

Apparently it doesn't, as The Economist shows:

But things here are differents: we are facing the worse crisis after the '29 and USA is not anymore the great locomotive growth that it was in the past. We have to say even that it is facing a huge debt crisis (both in USA and EU) and we don't know how the world will be after it.

In the last crash, USA growth (and not only) dropped. A new drop is not so impossible.

A DEBT LIMIT INCREASE WITHOUT SIGNIFICANT SPENDING CUTS & BUDGET REFORMS WILL DESTROY AMERICAN JOBS

2011-08-16T09:33:00.001+02:00

An increase in the national debt limit that is not accompanied by significant spending cuts and

budget reforms to address our government’s spending addiction will harm private-sector job

creation in America. It is critical that any debt limit legislation enacted by Congress include

spending cuts and reforms that are greater than the accompanying increase in debt authority

being granted to the president. We will not succeed in balancing the federal budget and

overcoming the challenges of our debt until we succeed in committing ourselves to government

policies that allow our economy to grow. An increase in the national debt limit that is not

accompanied by significant spending cuts and budget reforms would harm private-sector job

growth and represent a tremendous setback in the effort to deal with our national debt.

Ryan C. Amacher

University of Texas at Arlington

Michael Applegate

Oklahoma State University

King Banaian

St. Cloud State University

Stacie Beck

University of Delaware

John Bethune

Barton College

Charles W. Baird

California State University, East Bay

Bruce Bender

University of Wisconsin-Milwaukee

Donald R. Booth

Chapman University

Michael Boskin

Stanford University

David A. Brat

Randolph-Macon College

David P. Brown

University of Wisconsin-Madison

Todd G. Buchholz

Two Oceans Management

Samantha Carrington

California State University

Don Chance

Louisiana State University

Candice Clark

Economic Consultant

R. Morris Coats

Nicholls State University

John F. Cogan

Hoover Institution

Scott Bradford

Brigham Young University

Phillip J. Bryson

University of Wisconsin-Madison

Oral Capps Jr.

Texas A&M University

James E. Carter

Emerson Electric Co.

Robert E. Chatfield

University of Nevada, Las Vegas

Kenneth W. Clarkson

University of Miami

John P. Cochran

Metropolitan State College of Denver

Robert Collinge

University of Texas at San Antonio

Kathleen B. Cooper

Southern Methodist University

Nicole Crain

Lafayette University

Robert Crouch

University of California, Santa Barbara

Coldwell Daniel, III

The University of Memphis

J. Ronnie Davis

University of New Orleans

Ted Day

University of Texas at Dallas

Arthur T. Denzau

Claremont Graduate University

Nasser Duella

California State University, Fullerton

Joseph W. Duncan

Private Consultant on Information Policy

Frank Egan

Trinity College

Dorla A. Evans

University of Alabama –Huntsville

Frank Falero

California State University

Layton W. Franko

Queens College

Diana Furchtgott-Roth

Hudson Institute

Dave Garthoff

The University of Akron - Akron, Ohio

Gerald Gay

Georgia State University

Cathleen J. Coolidge

California State University, Chico

Mike Cosgrove

University of Dallas

Clyde Wayne Crews, Jr.

Competitive Enterprise Institute

Robert Dammon

Carnegie Mellon University

Antony Davies

Duquesne University

Stephen J. Dempsey

University of Vermont

Phoebus J. Dhrymes

Columbia University

Floyd H. Duncan

Virginia Military Institute

John Eckalbar

California State University

John B. Egger

Towson University

Dino Falaschetti

Florida State Law

Michelle Michot Foss

University of Texas

Michele Fratianni

Indiana University

Delworth B. Gardner

Brigham Young University

James R. Garven

Baylor University

Robert Genetski

classicalprinciples.com

Micha Gisser

University of New Mexico

Joseph A. Giacalone

St. John’s University, NY

David Gillette

Truman State University

Marvin Goodfriend

Carnegie Mellon University

Richard L. Gordon

The Pennsylvania State University

Richard J. Grant

Lipscomb University

Earl L. Grinols

Baylor University

Eric A. Hanushek

Hoover Institution

Joseph H. Haslag

University of Missouri

Joel Hay

University of Southern California

David R. Henderson

Hoover Institution

Douglas Holtz-Eakin

American Action Forum

Chris Inama

Golden State University

Stephen Jackstadt

University of Alaska Anchorage

Gerald R. Jensen

Northern Illinois University

Jerry L. Jordan

Pacific Academy for Advance Studies

Alexander Katkov

Johnson & Wales University

Richard LaNear

Missouri Southern State University

Lawrence Goodman

Center for Financial Stability, Inc.

Ed Graham

University of North Carolina at Wilmington

Paul Gregory

University of Houston

Dennis Halcoussis

California State University, Northridge

Stephen Happel

Arizona State University

Kevin Hassett

American Enterprise Institute

Bob Heidt

Indiana University - Bloomington

John P. Hoehn

Michigan State University

C. Thomas Howard

University of Denver

F. Owen Irvine

Michigan State University

Joseph M. Jadlow

Oklahoma State University

Ryan S. Johnson

BYU-Idaho

June O’Neill

Baruch College, CUNY

Marek Kolar

Trine University

Corinne Krupp

Duke University

Norman Lefton

Southern Illinois University, Edwardsville

Larry Lindsey

The Lindsey Group

Jane Lillydahl

University of Colorado at Boulder

R. Ashley Lyman

University of Idaho

David Malpass

Encima Global

Henry Manne

George Mason University

Timothy Mathews

Kennesaw State University

Roger Meiners

University of Texas-Arlington

James C. Miller III

Hoover Institution

Ed Miseta

Penn State Erie, The Behrend College

Andrew P. Morriss

University of Alabama, Tuscaloosa

John E. Murray

University of Toledo

George R. Neumann

University of Iowa

Seth W. Norton

Wheaton College

James B. O’Neill

University of Delaware

Svetozar Pejovich

Texas A&M University

Ivan Pongracic, Jr.

Hillsdale College

John A. Powers

University of Cincinnati

Richard W. Rahn

Cato Institute

Glenn MacDonald

Washington University in St. Louis

Yuri N. Maltsev

Carthage College

Michael L. Marlow

California Polytechnic State University

Martin C. McGuire

University of California-Irvine

Allan Meltzer

Carnegie Mellon University

Thomas P. Miller

American Enterprise Institute

James Moncur

University of Hawaii at Manoa

Robert Mundell

Nobel Laureate in Economics, 1999

Richard F. Muth

Emory University

Robert D. Niehaus

Robert D. Niehaus, Inc.

Lee E. Ohanian

University of California, Los Angelas

Stephen T. Parente

University of Minnesota

G. Michael Phillips

California State University, Northridge

William Poole

University of Delaware

Ronald L. Promboin

University of Maryland University College

James B. Ramsey

New York University

Thomas A. Rhee

California State University, Long Beach

R. David Ranson

H.C. Wainwright & Co. Economics Inc.

Christine P. Ries

Georgia Institute of Technology

Thomas Carl Rustici

George Mason University

Thomas R. Saving

Texas A&M University

Judy Shelton

Atlas Economic Research Foundation

George P. Shultz

Hoover Institution

James F. Smith

EconForecaster, LLC

Houston H. Stokes

University of Illinois at Chicago

Avanidhar Subrahmanyam (Subra)

University of California, Los Angeles

Robert Tamura

Clemson University

Clifford F. Thies

Shenandoah University

Leo Troy

Rutgers University-Newark

George Viksnins

Georgetown University

James P. Weston

Rice University

Michael E. Williams

University of Denver

Michael Wohlgenant

North Carolina State University

Gene C. Wunder

Washburn University

Paul H. Rubin

Emory University

Gary J. Santoni

Ball State University

Robert Haney Scott

California State University, Chico

William F. Shughart II

The University of Mississippi

Timothy F. Slaper

Indiana University

Vernon Smith

Chapman University School of Law

Lawrence Southwick

University at Buffalo

Brian Strow

Western Kentucky University

Richard J. Sweeney

Georgetown University

John B. Taylor

Hoover Institution

Stephen A. Tolbert, Jr.

Montgomery County Community College (PA)

David G Tuerk

Suffolk University

Richard Vedder

Ohio University

Sherri L. Wall

University of Alaska Fairbanks

J. Gregg Whittaker

William and Jewell College

D. Mark Wilson

Applied Economic Strategies

Gary Wolfram

Hillsdale College

Benjamin Zycher

Pacific Research Institute

Joseph Zoric

Franciscan University of Steubenville

About the "Public-Sector Unions"

2011-01-29T19:48:00.002+01:00

As most of us understood time ago, Public-Sector Unions were created as a treasure of votes for the Democratic Party. Fred Siegel points out this thing in a really good post here.

The turbulent years of the 1960s and '70s are best known by the headline-grabbing civil rights and women's rights movements. But there was another "rights" movement, largely overlooked, that has also had a profound effect on American life. The looming public-pension crisis that threatens to bankrupt city, county and state governments had its origins in those same years when public employees, already protected by civil-service rules, gained the right to bargain collectively. Liberals were once skeptical of public-sector unionism. In the 1930s, New York Mayor Fiorello LaGuardia warned against it as an infringement on democratic freedoms that threatened the ability of government to represent the broad needs of the citizenry. And in a 1937 letter to the head of an organization of federal workers, FDR noted that "a strike of public employees manifests nothing less than an intent on their part to prevent or obstruct the operations of Government until their demands are satisfied. Such action, looking toward the paralysis of Government by those who have sworn to support it, is unthinkable and intolerable."

Even Schumpeter wrote about it in his blog on The Economist.

Why Obama shouldn't increase tax

2010-11-22T16:48:00.006+01:00

In USA there is the discussion about what Obama should do for reduce the growing of the public debt, that after the crisis is running up faster than ever.

I read some options by many economists (much much much better than me), and I want to say what I and some of them, like Peter Orszag, believe that it's the best thing to do for USA economy and people.

Orszag proposes to extend the Bush tax cuts for two years, for the wealthy as well as the middle class, and then end them for everybody. His proposal would continue to transfer wealth upward, then freeze everyone in place. That's a bad idea in principle, and it's based on the same sort of blue-sky assumptions about jobs that got us where we are today

I can report the Italian experience: I wrote an article on my italian blog "Lostspace: the Odyssey", where I revealed that tax increasing (you can translate it) to reduce the public debt has destroyed the Italy's growth (our PIL is kinda blocked since 1999, while the debt is still running up).

I think the best solution is try to reduce the government spending, continue with the Bush's fiscal politics (tax cuts) until 2012-2013, and then see how's Usa's economy. Increase the gov. spending (as Krugman says) is useless...or...worse...

(source photo)

Positive fiscal stimulus? No Thanks

2010-08-19T23:19:00.004+02:00

I don't agree with Krugman's last article called "Gross on Debt" in which he supports the need to act and sooner as possible, but with a positive fiscal stimulus.

He quotes these words:

“The American economy is approaching a cul-de-sac of stimulus — both monetarily and fiscally,” Gross told the crowd at the Treasury Department, “which will slow to a snail’s pace, incapable of providing sufficient job growth going forward.

“Unemployment rates will approach and remain at double digits unless positive fiscal stimulus is provided in the next six months.”

The point is the fiscal stimulus: I think that Krugman knows what is the basic cause of this 2010 countries crisis for the big public debt. No it's not the speculation; maybe it could increase it, but it's not the basic cause.

The point is that the real reason (or the biggest one) is the too much positive fiscal stimulus. I can post you the Italian situation (and you know our debt situation):

(public adms debt)

As you can see, in Italy we spent too much money for the public, and this brought us to the crysis, and unemployment as a consequence.

Positive stimulus may increase the employment in a first period, but in a middle-long period, it will bring us to a worse situation than this one.

I don't think it's the best solution at all (especially for Italy).

Why inflation could be the solution

2010-08-10T21:44:00.005+02:00

In these hard times for countries economy, economists are trying to find a way to go out from the crisis.

A solution could be the infaction: the big problem is the heavy national debt of countries that is one of the cause for the blocked growth.

Inflaction will reduce the debt, and this will help countries with the debt.

Someone says that deflaction could be a better solution for the problem: I don't think so, and Krugman wrote a good post about it (title: "Why is deflation bad?"):

So first of all: when people expect falling prices, they become less willing to spend, and in particular less willing to borrow. After all, when prices are falling, just sitting on cash becomes an investment with a positive real yield – Japanese bank deposits are a really good deal compared with those in America — and anyone considering borrowing, even for a productive investment, has to take account of the fact that the loan will have to repaid in dollars that are worth more than the dollars you borrowed. If the economy is doing well, all this can be offset by just keeping interest rates low; but if the economy isn’t doing well, even a zero rate may not be low enough to achieve full employment.

And when that happens, the economy may stay depressed because people expect deflation, and deflation may continue because the economy remains depressed. That’s the deflationary trap we keep worrying about.

A second effect: even aside from expectations of future deflation, falling prices worsen the position of debtors, by increasing the real burden of their debts. (as I said)

Inflation is, most of the time, a symbol of prosperity, rising economy and good times. Of course I won't a huge inflation, but a 3-4% is a good solution to decrease the government debt, without disadvantage the unemployeds people and low wages workers.

Let's start again

2010-08-10T18:42:00.002+02:00

After months I will restart to write on this blog. I hope my english is better than before (I'm sorry for it). Let's try to make some cool articles eheheh

Europe's Web of Debt

2010-05-09T19:21:00.006+02:00

That's why if the PIIGS will failure....the EURO will be a death value!

Americans most pessimistic they've been since January

2009-12-18T15:06:00.003+01:00

Americans most pessimistic they've been since January

This holiday season, America could use the gift of confidence. Because it's actually at the lowest level all year.

CNBC: Americans are the most pessimistic they've been since the beginning of this year, when the US was mired in a deep recession, while confidence in President Obama and Congress is at the lowest level of 2009, according to the latest NBC/Wall Street Journal poll.

Of those surveyed by telephone during the past weekend, 55 percent feel the nation is headed in the wrong direction, compared with 33 percent who felt the US was headed in the right direction. That's the worst showing since January, during the height of the economic crisis, when 59 percent felt that nation was on the wrong track and 26 percent felt it was on the right track.

President Obama's approval rating also edged to the lowest level since he took office in January. Only 47 percent approve of the job he's doing, while 46 percent disapprove. That compares with a 51 percent approval rating in October and 60 percent in February. (Keep reading...)

Thu Dec 17

Posted using ShareThis

How can I know the gold price?

2009-12-11T16:46:00.003+01:00

Gold price is one of the most important topic in money and finance world. Finance's Gurus can't really understand what is the cause of drops and rises of Gold in the market.

Market Oracle tried to analyse the situation, and maybe it found the solution: we have to to understand the relationship between gold and the dollar. Only when we have undertstood the relation, we can know the gold price, also in the future. It also analyse this relationship. I'm going to report the threat.

Long-term readers know that gold moves inversely to the dollar, meaning if the dollar drops, gold tends to rise (and vice versa). This happens with about 80% regularity. But what many gold writers haven’t acknowledged is the leveraged movement our favorite metal has demonstrated this year to the world’s reserve currency.

The U.S. dollar index, a six-currency gauge of the greenback’s value, has dropped 7.8% so far this year (as of December 3). Meanwhile, gold is up 38.7% year-to-date. In other words, for every 1% drop in the dollar index, gold has risen 4.9%. If that approximate percentage holds over time, one can begin to estimate what the gold price might be if you know what the dollar might do.

While the dollar is likely to bounce at some point, making gold correct, the long-term fate of the dollar has already dried in cement. If the dollar were simply to return to its March 2008 low of 71.30 next year – a 4.6% drop from current levels – this would imply a rise in gold of 22.5% and a price of about $1,478 an ounce.

The long-term scenario is more dramatic. If you believe the dollar will lose half its value from current levels, this would imply a gold price around $4,164. If you believe it will lose 75% of its value, gold would reach about $5,642. Doug Casey has called for a $5,000 gold price; if he’s right, guess what that implies for the dollar?

And think about this: these calculations ignore what else might “show up,” such as when price inflation shows up in the economy, the greater public shows up to buy gold, or the Chinese don’t show up at an auction. Could $5,000 gold be too low?

Unless you think the dollar’s problems are solved, its eventual demise is gold’s eventual glory. Prepare, and invest, accordingly.

And keep up on the gold and precious metals markets in Casey’s Gold and Resource Report. Each month I’ll bring you the best research and investment recommendations in the business. And until December 18, you can get a subscription for 50% off the regular price and receive a free gift worth $79

To learn more, click here.

To Copenhagen: NOAA: 2009 Global Temperatures Well Above Average; Slightly Above-Average for U.S.

2009-12-08T18:20:00.002+01:00

NOAA: 2009 Global Temperatures Well Above Average; Slightly Above-Average for U.S.
U.S. precipitation above normal for 2009
December 8, 2009
Global surface temperatures for 2009 will be well above the long-term average, while the annual temperature for the contiguous United States will likely be above the long-term average, according to a preliminary analysis by NOAA’s National Climatic Data Center in Asheville, N.C. The analysis is based on global records, which began in 1880 and U.S. records beginning in 1895. The NCDC analysis is part of the suite of climate services NOAA provides.
Global Temperature and Precipitation Highlights:
Global land and ocean annual surface temperatures through October are the fifth warmest on record, at 1.01 degrees F above the long-term average.
NOAA scientists project 2009 will be one of the 10 warmest years of the global surface temperature record, and likely finish as the fourth, fifth or sixth warmest year on record.
The 2000 – 2009 decade will be the warmest on record, with its average global surface temperature about 0.96 degree F above the 20th century average. This will easily surpass the 1990s value of 0.65 degree F.
Ocean surface temperatures (through October) were the sixth warmest on record, at 0.85 degree F above the 20th century average.
Land surface temperatures through October were the fifth warmest on record, at 1.44 degree F above the 20th century average.
Arctic sea ice extent reached its third smallest annual minimum on record behind 2007 and 2008. The past five years have produced the lowest sea ice extents on record.
U.S. Temperature and Precipitation Highlights:

High resolution (Credit: NOAA)
The average annual temperature for the contiguous United States is projected to be above normal. Precipitation across the contiguous United States in 2009 will be above the long-term average.
Winter (December-February) 2008-09 temperatures were near normal overall for the contiguous United States. Texas had its driest winter on record, while North Dakota had its wettest.
Springtime (March-May) temperatures for the nation were above normal, with only four states (Washington, North Dakota, South Dakota, and Arkansas) cooler than normal. Georgia experienced its second wettest spring and the Southeast climate region (Alabama, Florida, Georgia, North Carolina, South Carolina and Virginia) as a whole had its fifth wettest such period.
The average summer (June-August) temperature in the contiguous United States was below the long-term average for the first time since 2004. Only the Northwest averaged above normal temperature readings during the period.

High resolution (Credit: NOAA)
Autumn (September-November) was a season of extremes for the nation. Nevada and California experienced record warmth in September. October was abnormally cool for the vast majority of the nation, while November brought substantially warmer-than-normal conditions.
Other Highlights:
The Atlantic hurricane season had below average activity, with nine named storms, three of them hurricanes.
A major winter storm in late March established new 24-hour snowfall records for three states: Kansas, Oklahoma and Texas.
There were 1,110 preliminary tornado reports across the United States through November, making 2009 likely to be the sixth-quietest tornado year since 1990.
A fast start to the U.S. wildfire season slowed by mid-year. The nationwide acreage burned by wildfire declined to below average by year’s end. The annual number of fires remained slightly above average.

High resolution (Credit: NOAA)
NOAA’s preliminary reports, which assess the current state of the climate, are released soon after the end of each month. These analyses are based on preliminary data, which are subject to revision. Additional quality control is applied to the data when late reports are received several weeks after the end of the month and as increased scientific methods improve NOAA’s processing algorithms.
Scientists, researchers, and leaders in government and industry use NOAA’s monthly reports to help track trends and other changes in the world's climate. This climate service has a wide range of practical uses, from helping farmers know what and when to plant, to guiding resource managers with critical decisions about water, energy and other vital assets.
NOAA understands and predicts changes in the Earth's environment, from the depths of the ocean to the surface of the sun, and conserves and manages our coastal and marine resources.

source

Climate is changing...and Copenhagen must say stop to this....if they don't do it, doomsday can be really near for a lot of people.

According to investors, Italy is going to default

2009-12-08T15:17:00.002+01:00

Italy is not in a good situation, expecially if we talk about the economy and finance. The italian debt is one of the biggest in the world, and until the end of 2009 it will become more than 1800 billions. For this reason, according to DTCC, a firm that clears derivative trades,investors have taken out more insurance against default by Italy’s government than against any other country’s.

Here you can find what "The Economist" wrote about it.

Here the rank:

Dubai crisis: A Strong Economy Isn't Built on Sand

2009-11-28T23:05:00.003+01:00

Thi is an article about the "Dubai crisis" called: "A Strong Economy Isn't Built on Sand", from the Wall Street Journal.

Earlier this month, the Dubai International Financial Center celebrated its fifth anniversary It was launched with the ambition of creating 10,000 jobs across the banking-and-finance spectrum, and, with its promise of zero-rate tax on income and profits, it soon began to attract a mixed bag of financiers.

Marking the occasion, the governor of the DIFC, His Excellency Dr. Omar Bin Sulaiman, said: "His Highness Sheikh Mohammed Bin Rashid Al Maktoum has reshaped the world's financial map by establishing DIFC, which today has emerged as a competitor to the world's top-ranked financial centers."

Yesterday, Dubai emerged in less-flattering form, as it effectively admitted that it couldn't pay the interest on what amounts to sovereign debt. Although Dubai's economy had been fuelled by oil, Sheikh Maktoum determined that this was a limited resource and the long term future lay in financial services and tourism. The extraordinary buildings that now sit on what was sandy desert or man-made islands are testimony to the vigor with which he set about transforming the place. But Sheikh Maktoum had been pursuing his dream with borrowed money. Now, the turmoil that hit financial markets and devastated property prices in the region has made servicing that debt somewhat difficult.

Dubai may not be alone in its predicament. There is nervousness about the prospects for Greece's bonds and the ratings agencies now deem the country a greater credit risk than Colombia or Panama. Two weeks ago Jean-Claude Trichet, the president of the European Central Bank, declared that the country needed "a very serious rectification program" to cope with its ballooning budget deficit. The new government in Greece had just admitted that the country's deficit for 2009 would be double what the previous government had been forecasting. Mr. Trichet took a stern view of this, believing it showed up some grievous failings in the country's statistics. "There is a problem of credibility," he said.

But economic forecasting isn't an exact science. Britain's deficit, most recently forecast by the government to hit £175 billion this year, is now estimated to be growing at a hefty £3 billion a week, making that £175 billion figure look very optimistic.

Ratings agency Fitch has already warned that it could downgrade the country's credit rating if the printing of money, which is cloaked in the euphemism of "quantitative easing," continues.

The problem for those countries that have been propping up their economies with injections of cash they don't have is the fear of what may happen if they stop.

There is a widespread fear among business people—though it doesn't seem to reach the ears of many government ministers—that the worst of the recession may not yet be over. That fearful scenario, the double-dip recession, is seen as a threat that cannot be discarded.

Yesterday the German Bundesbank warned that the country's banks may need to write off another €90 billion before they have fully absorbed the effects of the global financial crisis and the recession.

More grim forebodings about property values came this week from credit-ratings agency Moody's, which warned about the risk to bonds issued against U.S. commercial property during the boom years.

It predicts rising default rates as the cash-flows to service the bonds have been badly hit. The bonds are the products of the boom years, when from the U.S. to Spain and from Dublin to Dubai, there was a belief that property prices could only rise, or, as hindsight now allows us to perceive, irrational exuberance was everywhere.

Now that exuberance has dimmed and property prices, always a good barometer of confidence as well as economic conditions, have plummeted. It may not just be in Germany that the banks haven't yet fully recognized the hits that they are going to have to take against the real estate that, either through choice or by default, they have accumulated. In Spain, there are concerns that the banks may not yet have fully acknowledged the scale of the property crash that has hit the country.

Within Britain's nearly nationalized Royal Bank of Scotland, for instance, there are said to be some commercial properties that not even the most enthusiastic realtor could ever have described as "prime."

The U.K. government has encouraged taxpayers to believe they will see a speedy return on their billions of pounds that have been used to buy stakes in RBS and Lloyds Banking Group, but the likelihood is that it could take several years before the government is able to exit from its positions in these banks.

Sheikh Maktoum is already effectively the owner of many of the distressed assets that now cover his state. He launched his own answer to quantitative easing, the Dubai Financial Support Fund, in the summer, but bondholders who are now facing a stalemate on their interest payments may not be the beneficiaries.

Neither will the many expatriates and optimistic investors who bought property off-the-plan in the emirate, which, until so recently, seemed as if it was the shape of the future. Its dependence on oil long gone, by 2006, less than 6% of its revenues came from energy. Instead, it had moved to a dependence on tourism and financial services.

In today's straitened economic climate, neither looks like the safest bedrock on which to build a secure future.

Financial services have a crucial role to play in the modern world. access to finance is essential if businesses are to grow. But the best insulation against downturns such as that we are now suffering is a balanced economy, not one built on sand.

The credit crunch problem: good solution or a suicide?

2009-11-18T19:52:00.006+01:00

One way to get out from the crisis is the "credit crunch":

A credit crunch (also known as a credit squeeze, finance crunch or credit crisis) is a reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from the banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates. In such situations, the relationship between credit availability and interest rates has implicitly changed, such that either credit becomes less available at any given official interest rate, or there ceases to be a clear relationship between interest rates and credit availability (i.e. credit rationing occurs). Many times, a credit crunch is accompanied by a flight to quality by lenders and investors, as they seek less risky investments (often at the expense of small to medium size enterprises).

The question is: is the credit crunch a good way even in the long period?

It's really hard to reply at this, but we can analyse the situation: a lot of industries and factories are really in a bad situation (if they are not fail): they are firing people, spending less money on production, marketing, reserch etc etc.

The credit situation is damaging even the real economy: from finance to economy..the crisis is changing its target.

If in normal times the 40% of industries don't spend money for projects because of they haven't credits; now the situation is really bad: the 80% don't spend (and won't spend) money.

The credit crunch saved the economy (because of it industries had a cash flow in the short period) until now, but now governments and banks have to thing about the long period, or a new crisis is waiting fro us.

If Murdoch will delete his newspapers from Google, he will be dead for the future

2009-11-15T00:42:00.004+01:00

"Murdoch versus Google": noo it's not a movie, but it's a fight between two giants of world. Murdoch wants delete all his newspapers and news on them from Google research and Google news; after this, they will not be free: if you want read them, you must pay them.

We don't know if he is serius or only kidding....I hope for me, he is kidding. If you are not on Google, you are dead for internet world. If you are not on Google, people cannot see you, and then visit you.

If you are not visitors (and I wanna know who can pay for news when yo ucan have them free in other websites), advertisement will not pay you, and then...you will fail.

Mr Murdoch, I don't know what is your plan, but you have to change if you really want do it.

The crisis and its lessons

2009-10-10T00:49:00.000+02:00

The crisis and its lessons
Lecture by Jean-Claude Trichet, President of the ECB
at the University of Venice
Venice, 9 October 2009

I. Introduction

Ladies and gentlemen,

It is a great pleasure for me to be at the University of Venice. Ca’ Foscari is one of the most prominent and vibrant universities in Italy. I know it is also one of the universities that is most open to international exchanges. Its blend of research excellence and cultural diversity makes it close to the ECB in spirit. The ECB is perhaps the most diverse central bank in the world in terms of its staff composition: more than 27 countries are represented in our ranks. And our economic departments constitute a relevant centre of economic analysis in Europe.

As a central bank, we are prime consumers of economic research. For this reason, we maintain very close interactions with the academic world. We import tools and ideas and are eager to employ excellent economists from centres of advanced economic studies such as Ca’ Foscari. At the same time, the ECB is an active source of cutting edge economic thinking. I was very happy to see that last year our electronic Working Papers Series – posted on our web-site – attracted some 4 million downloads. A number of those articles have made significant contributions to macroeconomic research.

I am also most delighted to be in Venice. This city talks both to the artist and to the economist. I have discovered that its name can be construed to signify its charm. As you will know, Francesco Sansovino, for example, claims that: "[i]t is held by some that this word VENETIA signifies VENI ETIAM, that is, come again, and again, for however often you come, you will always see new things, and new beauties." [1]

But, for all its beauty, Venice was never a place of idle contemplation for its citizens. My countryman and great scholar of European civilizations, Fernand Braudel, chronicles that wealthy Venetian merchants in the early 1500s used to instruct their agents to “never leave ‘ li danari mortti’, money lying dead.” “Sell quickly, even at a lower price, in order to ‘ venier presto sul danaro per un altro viaggio.’” [2] It would be nearly impossible to find a more fitting description of the inner force that moves a market economy. In a vibrant market economy, money does not rest and is used to serve the creativity and the effort of undertaking enterprises.

II. The financial crisis

Let me start my remarks by recalling the origins of the crisis as I see them.

Over past decades, our economies have greatly benefited from the effects of financial liberalisation and financial innovation. For example, the securitisation of assets has played a role in facilitating an efficient allocation of economic risks. It allowed the financial sector to offer credit for productive purposes, at more favourable conditions than was possible in the repressed credit systems of the past.

More recently, however, managing genuine economic risk gradually ceased to be the main concern of international finance. Instead, the creation and assumption of financial risk became the core activity of the financial industry. The decoupling of financial positions from the underlying flows of goods and services gradually created the conditions for a credit boom. The credit boom was reinforced by an asset price boom, which credit itself was partly sustaining. Both the credit and the asset price expansion found formidable amplifiers in the microeconomics of the financial markets and in global imbalances.

In the financial market, compensation schemes for bank loan managers weakened their incentive to conduct a prudent screening of loans. Executive pay was a function of overall volumes, which encouraged turn-over and the origination of loans. At the same time, risks could be shed – or so it seemed – by selling off the loan to other investors in the secondary market. As for these investors, increasingly complicated financial structures made it difficult for them to assess the quality of the assets that they were acquiring. They had to trust the originators. More than in the past, the viability of the financial system came to depend critically on trust and confidence.

On a global scale, a chronic shortage of savings in some industrialised economies had to be financed out of an excess of savings in other parts of the world. So, international intermediation provided a potent fuel to the expansion of finance.

In August 2007 – suddenly but not unexpectedly – trust and confidence started evaporating. The circular interactions between asset price appreciation, biased incentives, excessive complexity and global imbalances went into reverse. Market liquidity became scarce and investors extremely afraid of the risks that they had been exposing themselves to for so long. Finally, mid-September 2008, the collapse of a major financial player turned the re-pricing of risk into major financial panic. The chart of money market spreads tells this tale clearly.

[ Chart 1: Money market spreads during the turmoil]

As the collapse of confidence became evident, financial intermediaries made every possible attempt to restore liquidity buffers. Credit spreads soared. Financial market activity fell dramatically, and the global financial system came close to seizing up.

[ Chart 2: Money market spreads during the crisis]

The crisis triggered a freefall in economic activity.

Within a few months, from January to July 2009, the distribution of GDP projections for the current year shifted to the left, increasingly into negative territory. To fully appreciate the massive change in perspective that this brought for all of us, compare the range of outcomes that were considered likely in successive rounds of forecast updates.

In January, forecasters predicted on average a decline of 1.5% for this year. In March, they had become even more pessimistic, and they provided a decline of 2.5%. The uncertainty surrounding these forecasts was high, but even in March a decline of 4.5% was not seen as possible. This figure was outside the range of all forecasts and was a zero-probability event. Four months later, in July 2009, it became the central forecast. This shows the rapid and dramatic free-fall in economic activity. By now, in September, there has been a slight improvement, to a 3.9% contraction for this year.

[ Chart 3: The economic free fall]

Faced with such unprecedented challenges, central banks around the globe demonstrated a remarkable unity of purpose. Different economies, different channels of transmission called for different responses.

In the end, the action taken by the leading central banks paid off. If I can return to my first picture, money market spreads – a symptom of the lack of trust that had gripped financial transactions in the early autumn – retreated from their peaks. They are now back at levels that were prevalent before the intensification of the crisis.

[ Chart 4: Money market spreads: the decline]

III. The ECB’s response to the crisis

How did the ECB meet the challenge? The turmoil started on 9 August 2009. The ECB was in the vanguard among major central banks. It was first in identifying the severity of market distress, and the first to act on the very same day. As the financial debacle finally materialised, in the autumn 2008, the ECB’s approach to crisis management was diversified but consistent.

We activated both conventional and non-conventional instruments of policy. We cut our key policy interest rate by 325 basis points, bringing it to a level that has no historical precedent in post-World War Europe. In parallel, we adopted a wide spectrum of “non-standard” measures. They were designed to ensure that the reductions in our policy instrument were transmitted to the broader credit market and the economy at large.

These non-standard measures are part of what we collectively define as our policy of “enhanced credit support”.

[ Chart 5: Non-standard measures]

This policy comprises five building blocks:

First, full accommodation of banks’ demand for central bank liquidity at fixed interest rates in our refinancing operations.

Second, a further expansion in the list of assets eligible for use as collateral in our refinancing operations.

Third, a further extension of the range of maturities at which liquidity is made available to banks in our refinancing operations. The longest maturity is now one year.

Fourth, provision of liquidity in foreign currencies, notably US dollars.

Fifth and finally, a direct covered bank bond purchase programme aimed at reviving a segment of the financial market that is important in Europe.

Let me emphasise only a few selective aspects of this policy. First, our primary mission is to preserve price stability. It implies that the transmission of monetary policy impulses is functioning correctly and that the money market is not disrupted. In this new unexpected situation we had to tackle the paralysis of inter-bank transactions in the money market. The money market is where banks can refinance their assets as a precondition for rolling over their loans to the economy. The flow of credit is primarily channelled by banks in the euro area. A complete breakdown in the funding relationships that constitute the money market would have derailed the bank lending channel altogether. The interruption of the bank lending channel would have turned the financial crisis into a very profound depression. By granting unlimited access to central bank liquidity – the “fixed-rate full-allotment” tender procedures – we put banks in a position to maintain their crucial role in the financing of the real economy. By expanding the list of eligible collateral, we ensured that banks could refinance that large proportion of their assets that had become less liquid in the crisis. By extending the maturity of their liquidity provisions, we gave banks a more medium-term perspective in their liquidity planning. This measure greatly attenuated the maturity mismatch between assets and liabilities in banks’ books, which would otherwise have further deterred bank lending activity.

We have also been providing foreign exchange liquidity. This primarily took the form of US dollar liquidity backed by a swap facility with the US Federal Reserve System. The malfunctioning of the foreign exchange swap market had made the currency mismatch in banks’ balance sheets extremely severe. Thanks to our policy, they could count on ongoing access to foreign currency balances. This policy was made possible by the very close cooperation between central banks in the crisis.

Finally, the Governing Council’s decision to intervene directly in the financial market by purchasing covered bonds was meant to re-ignite activity in a market segment that is particularly important as a source of funding for banks.

IV. Liquidity and exit considerations

Our enhanced credit support policies have boosted market liquidity. Through that channel – as I showed a few minutes ago – the reductions in our policy instrument could be transmitted to a whole spectrum of interest rates that are used as re-setting benchmarks for adjustable-rate loan contracts. This has greatly benefited households and firms. But what is the link between liquidity and price stability? Will enhanced liquidity provision trigger inflation sometime in the less proximate future? In this respect, let me emphasise two important aspects of our exceptional policies.

The first aspect is related to the definition of liquidity. Our non-standard measures have increased central bank liquidity – cash reserves that the Eurosystem makes available to banks in refinancing operations. But this has not led to an increase in broader monetary aggregates. In fact, broad measures of money growth are decelerating in the euro area. In normal times, banks would use an increase in our liquidity provision to expand credit to households and enterprises. In current conditions, however, liquidity primarily takes the form of precautionary balances that certain banks are deliberately holding with the Eurosystem. As long as central bank liquidity serves at least in part banks’ precautionary motives, this extra liquidity will not result in higher inflation in the future.

These considerations bring me to the second aspect of our non-standard policies: the conditions for their unwinding. Exceptional times have called for exceptional measures. But we will need to phase out these measures once the rationale for their adoption fades away and the situation normalises.

The Governing Council believes that it would be premature today to think that the crisis has been overcome and conquered in a sustainable manner. So, it is not the time to exit yet. Our future decisions on the phasing-out of non-standard measures will be guided by a transparent exit strategy. This exit strategy has been designed around four cornerstones.

[ Chart 6: Cornerstones of the exit strategy]

First, it will be linked to our primary objective and thus to our monetary policy strategy. The crisis has not changed the ECB’s primary objective. This means that any non-standard measure whose continuation would compromise the maintenance of price stability at any time in the future will be undone promptly and unequivocally.

Second, the forward-looking initial design of the measures will help us wind them down when the time is ripe. The ECB’s non-standard measures were designed with exit considerations in mind. A number of measures – think of our refinancing operations – will phase out naturally by design. At the same time, the size and scope of the outright purchases have been calibrated so that they would not interfere with the implementation of appropriate liquidity conditions in a phase of interest rate increases.

Third, the ECB has the technical and institutional capability to act. The operational framework of the ECB proved very resilient at the start of the turmoil. It is also sufficiently flexible and reliable to fit all possible situations which could realistically arise in the future. On the institutional side, the Governing Council has the unfettered capacity to decide and institute appropriate policies whenever circumstances warrant this. The ECB rests on a strong institutional platform, with a clear dividing line between what pertains to the central bank and what belongs to the fiscal sphere of responsibility.

Fourth, the Governing Council can mobilise its reputation for swift and decisive action whenever that reputation will be required to support the credibility of its policies. Over the past decade, our institution has established a clear track record of steady-handedness. This is also because market participants know that we are permanently alert and that we act decisively and in a timely fashion when conditions so demand.

V. The current situation

The ECB’s “steady-handed approach” to conventional monetary policy action has not impeded, in fact it has strengthened, a swift transmission of policy changes to market rates and to credit conditions more broadly. This was possible for two reasons. First, steady-handedness makes policy changes more powerful. Private sector expectations regarding future interest rates adjust and move in a manner consistent with policy-makers’ intentions at all maturities. Second, interest rate reductions have been reinforced by our non-standard monetary policy measures. These policies have made financial intermediaries less reluctant to pass on the degree of credit easing that the ECB wanted to implement.

All in all, there are encouraging signs that the substantial stimulus introduced is gradually bearing fruit. The negative inflationary readings over the summer have been due to large declines in the price of crude oil in relation to the previous year. In this sense, the fall in inflation – by boosting the purchasing power of our citizens – has acted as an automatic stabiliser at a time in which the economic conditions were deteriorating.

Inflation expectations are a good measure of the degree to which the free fall in the economy and the dis-inflationary process could come to feed upon itself. They have remained stable around levels consistent with our definition of price stability.

[ Chart 7: Inflation expectations in the euro area]

The economy, too, is showing signs of stabilisation. After the strongly negative readings recorded earlier this year, economic activity in the second quarter is estimated to have declined by 0.2% relative to the previous quarter. In the period ahead, we expect to see a very gradual recovery. While the statistical risks to this outlook remain broadly balanced, there is no room for complacency and we are, as always, alert to any unexpected developments. On the upside, the impact of the macroeconomic stimulus packages and other policy measures may prove to be stronger than currently foreseen. On the downside, the negative feedback between the real economy and the still strained financial sector may prove more protracted than expected.

VI. Lessons to be learnt

What lessons can we learn from the financial crisis that has shaken our world so profoundly? The crisis has exposed the fundamental fragility of the international financial system. I had mentioned that the macroeconomic situation shows signs of stabilisation. We expect a very gradual recovery ahead, but substantial risks remain.

We have to consider all aspects of finance very seriously. The financial system needs to be as immunised as possible against its intrinsic tendency towards complacency, irresponsibility and self-destruction. Three intrinsic weaknesses need correction.

First, the pro-cyclicality of the financial system needs to be mitigated by mechanisms that can provide built-in stabilisers. The quality and quantity of bank capital and banks’ liquidity buffers have to be improved in good times to provide a sufficient buffer for bank equity to withstand the inevitable increase in credit risk when the cycle turns. The cyclicality of market economies is inevitable. But the financial system should not be allowed to amplify swings.

Second, the transparency of the financial structures needs to be enhanced. Financial innovation cannot be built upon – and exploit – gaps in investor information and a lack of financial literacy. Well-informed decisions by market agents are a key element of any functioning market economy. All institutions, instruments and markets that are of any relevance for systemic stability need to enhance their risk disclosure. The reach of financial regulation needs to be extended to better reflect the role of highly leveraged institutions and prevent abuse in the derivatives markets.

Third, short-termism in the design of financial contracts needs to be corrected. Market participants – traders, loan managers, risk committees and boards of directors – were given strong economic incentives to focus on short-term profits. Long-term value creation was not a concern in the pre-crisis world. Collectively, this resulted in excessive risk taking. In tune with the last G-20 pledge, a reform of the executive compensation schemes and practices is an essential part of our effort to secure financial stability.

Far from putting off the agenda for structural reforms, the crisis has made them more urgent. No segment of the market or category of players has been immune to the crisis. The list of areas that proved dysfunctional can be extended to include the risk management and credit assessment of banks, accounting standards, audit quality, supervision, and many more elements. No market segment or financial actor should escape profound rethinking. This rethinking should have the scope and ambition of a paradigm change. The new paradigm should be based on three notions.

First, medium-term and long-term sustainability in macroeconomic policies and financial strategies should replace the myopic perspective that is always a temptation. Herd behaviour in the financial markets might have two parallels in the macroeconomic sphere. These are: profligate fiscal policies in times of boom and over-accommodating monetary policy in downturns. A new medium-term perspective should concentrate policies on medium-term objectives. Like financial contracts, policies should not amplify economic fluctuations.

Second, authorities and major players in the financial scene should immunize themselves against complacency. The crisis has proved that unpredictable shocks, however unlikely, can compound in the aggregate. In these conditions, historical correlations of risks become an insufficient instrument to check the resilience of an institution or the system as a whole. A constant monitoring of resilience should become part of the new regime.

Third, the approach should be holistic. The global proportions of the crisis call for a rethinking of the links between financial behaviour and macroeconomic policies. This has two implications. The first concerns domestic governance. Major economies need to complement their micro-prudential apparatus with a new macro-prudential function. Macroeconomic resilience calls for a systemic analysis of risk. Macro-prudential supervision offers this type of analysis and can act as a countervailing force to the tendency of the financial system to amplify economic swings. A far-reaching reform in this direction is underway in the EU. A new European Systemic Risk Board (ESRB) will be created which will detect risks to the EU financial system and issue warnings and recommendations to national supervisors.

The second implication concerns international macro-governance. Over the last year, efforts to find new fora in which risks to the global economic order can be identified, discussed and addressed have intensified. Throughout the turbulent times, coordinated guidelines have been put forward at the European and international levels by the Financial Stability Forum, the Eurogroup and the European Council. They were reflected in the declarations of the G-20 summits. The G-20 itself has emerged as the premier forum for international economic dialogue.

Within the G-20, I find it encouraging that there is now a broad consensus between the emerging market economies and the industrialised countries on the principal directions of financial reform. In this field, I see a very strong consensus in the global community of central banks. As first signs of recovery can be observed and as banks are returning to profitability, it is important to keep up momentum and to proceed with the further steps that are necessary to ensure that events of such intensity do not recur in the future.

Yet, in the new economic order that will emerge these fora – and each single macroeconomic authority that is represented at the table – will share a precisely defined responsibility: the correction of global imbalances. Trade and financial imbalances were a major source of instability in the pre-crisis world. Now, it is the precise mandate of the world economic leaders to identify a pattern of growth across countries that is more sustainable and balanced. They need to evaluate whether the macroeconomic policies that are enacted domestically by the major economic players are collectively consistent with more sustainable and balanced growth worldwide.

For this process to be effective, peer pressure needs to be made more compelling than it was in the past.

Let me say a few words on Italy.

The Italian economy is undergoing an unprecedented adjustment, as are virtually all developed countries throughout the world. Many Italian enterprises, in particular small and medium-sized ones, are currently dealing with very challenging times. I am confident that they will emerge from present hardships with leaner cost structures and a more efficient organisation of production processes. In the end, the entrepreneurial spirit that is in the genes of this nation will prevail.

The financial crisis, the macroeconomic response to it and the lessons that we need to learn have been the themes of my talk today. My main message is that despite all the difficulties, the crisis is an opportunity for this continent and for this country in particular. Italy is a country that has traditionally gained confidence in the severest of circumstances. I therefore hope that reflections on the causes and lessons of the crisis can contribute to economic reform that can bring a new era of progress for Italy.

First of all, the crisis has shown the health of private finance in Italy. Italy never indulged in the financial excesses of the recent past. It remains an economy, where finance is first and foremost support for real economic production. Strong saving propensities and prudent banking represent a platform of security from which the economy can restart.

But economic reforms cannot be delayed. The crisis can be the trigger for an ambitious plan to modernise the Italian economy and to make it more dynamic. Labour market institutions need to be overhauled to make labour compensation better reflect individual effort and firm-level excellence. The pricing chain – notably in the service sector – needs to be streamlined to increase the flexibility of prices. Welfare-enhancing positions that are a drain on disposable incomes and the economic potential of the country need to be discarded.

I would like to encourage policy makers to tackle these issues.

VII. Concluding remarks

Bold efforts by central banks and governments around the world have been effective in containing the propagation of a formidable shock. But short-term steps to alleviate the crisis need to be reinforced by longer-term reforms that can inhibit the development of bubbles, stabilise financial markets and provide greater financial security to households and businesses.

A number of elements and – one might even say “totems and taboos” – of the pre-crisis economic universe have now lost most of their value. This applies to individual financial players and business models alike. Other elements, however, have maintained their worth. It is on these latter elements that we should build the future of this continent.

The euro – the single currency – and the macroeconomic framework of the Union have certainly proved their strength in the last 12 months. The countries of Europe were not left to weather the storm alone. The financial maelstrom has not turned into any national debacle. A medium-term-oriented macroeconomic framework had helped – before the crisis – to put Europe on a solid ground. Those solid foundations have enabled it to withstand the onslaught.

In the end, the strength to overcome the present hardships will come from the inside. Our openness to trade, our balanced and dynamic business structures, our talented and well-trained workforces are part of our future. We know that technological progress will continue unabated in Europe. Companies and people will continue to prove their entrepreneurial spirit in large and small organisations. Reflection and endurance will be rewarded by a sense of personal fulfilment and by collective progress. Private thrift and a sense of prudent housekeeping are Europe’s primary safeguards against the risk of developing into a bubble economy.

All this will be the engine that will steer the economy towards tomorrow’s recovery.

Thank you for your attention.

[1] Francesco Sansovino, Venetia città nobilissima et singolare, Venice, 1581.
[2] Cited in F. Braudel, “ Civilization and Capitalism, 15th-18th Century: The Wheels of Commerce” University of California Press, 1992.

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