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7.12.2010

The World Cup 2010 - Political fallouts

So the suspense is over, SPAIN won, the NETHERLANDS lost and it all happened at the very tail end of the game - the 116th minute to be precise. Spain won with just one goal. Big deal! I'm no expert in soccer, but it seems to me that a game that has to drag fully 16 minutes beyond the "normal" 90 minutes had to be pretty close to a draw. I bet people who watched wondered whether anybody would ever score!

But what really drew my attention was not the game in itself - and I'll readily admit soccer watching is a lot of fun, it's a spectacular game - no, what drew my attention were the comments made by everybody, CNN, BBC, France 24, the big papers like the New York Times and Herald Tribune etc. You'd think this was all about sport and nothing else, but no, it's serious stuff, it's about POLITICS and NATION-BUILDING!

There is an enduring notion that Sport can bring Good to the world. Mandela 15 years ago, during the African Nations Cup soccer event, said "sport has the power to change the world...It speaks to youth in a language they understand. Sport can create hope where once there was only despair." That of course echoes the philosophy of Pierre de Coubertin, founder of the Olympic Games.

Bringing The World Cup to South Africa was seen by FIFA's president, Sepp Blatter as a special mission. "Football for hope", he called it and the South African President, Jacob Zuma, called business leaders for "billions of dollars to these shores for investment". At the opening, "we are all Africans!" screamed Tutu. While the South African team lost right away, Ghana saved the honour of African soccer and sowed the promise of future victories for Africans. But above all, South Africa came out as the political winner: now always invited to G8 meetings, it belongs to the restricted club of BIG Emergers ( the original BRICs plus a dozen others). South Africa is the Next Big Country and the hope is that sport will help heal the rift between the poor and the rich.

I have my doubts but then who's got a crystal ball? I don't and I'd be more than willing to hope that such an event - terribly expensive for the home country who has to foot the bill - does go towards something more useful than just kicking a ball around. The last Olympic Games certainly didn't help Greece and indeed, contributed to making its debt crisis well-nigh intractable...But let's keep our fingers crossed and hope that South Africa will not run into the same kind of problems.

But the hype doesn't stop there. Yesterday we were awash on all TV channels with the spectacle of hundreds of thousands Spaniards chanting in the streets of Madrid all night long, waving the red and yellow Spanish flag like a trophy. Their happiness was a Tsunami. While the Dutch sadly walked home in silence - it was nothing less than a national funeral.

Doesn't that strike you as extraordinary in this day and age? We are all Europeans, aren't we? Spain and the Netherlands both belong to the European Union - yet, when one scores a victory against the other in a GAME, for goodness'sake, people in the street turn it into a national victory as if a war had been won.

Can you imagine the same spectacle in America? Suppose a Florida team (that's a little like Spain, the Sunshine State) beats Rhode Island (a little like the Netherlands with its maritime past) , what do you think would happen?

Nothing? Yes, nothing.

Ah, poor Europeans - when will they ever grow up?

7.09.2010

The Great Recession: How Long Will It Last?

Time to move away from fiction to a little bit of non-fiction.

Have you noticed that the on-going economic crisis has lately acquired a name? It's no longer a financial collapse, a credit crunch, a real estate bubble gone bust, it's the Great Recession. Sounds good, a little depressing but definitely impressive. You can count on economists to come up with nice names even if they can't predict anything about the next turn, whether up or down. They can't tell us after two years of Great Recession and tons of analyses, how long it will last..Even weather predictions are better!

And don't expect me to come up with an answer because I won't! I studied Economics at Columbia University a long time ago and I was lucky to have courses with the likes of Milton Friedman and Baghwati. But at the time I came away with a strong sense that economists are great as long as they confine themselves to their theories and models, and they're very poor when it comes to grappling with reality. The long and short of it is that I didn't learn much that was useful in real life.

It's become increasingly clear to everyone (and not just me) that the direction economics has taken over the past fifty years - towards more and more modelling and mathematics - hasn't delivered the expected goods, i.e. improved predictions, the way it has done for, say, the weather science. Why?

Well...because, bottomline, economics isn't really a science. Economists would like us to believe they're better than historians because they go beyond specific facts to the fundamentals. In their opinion, historians get lost in the trees, and they are the ones who see the whole forest...Well, it isn't so. I'm afraid the truth is that they are quite myopic, stuck on their pet theories, and generally fail to see reality for what it is. With a few notable exceptions of course, like Roubini or Rogoff and Reinhart - the latter two have come up with a remarkable historical reconstruction of crises in 66 countries over 800 years, title: "This Time Is Different". I haven't read it yet, but I've put it into (my ever-growing) must-read list.

Lately, one of the more amusing things to watch is the incredible number of theories economists have come up with to try and explain why the British economy seems to be headed towards a dangerous slow down in economic growth coupled with a rise in inflation. It's too early to use the terrible word "stagflation", but the British economy definitely seems to be going in the opposite direction from most others in the developed world. Why this is happening, no one knows.

Less amusing is the spectacle of the political class in Europe - and now in America too - embarking on a supposedly "virtuous" campaign of cutting fiscal deficits, balancing government budgets and engaging in austerity programmes at precisely the wrong time. I've blogged about this before, and this type of reaction in the political class is probably explained by (1) fear (politicians are always afraid to lose votes) (2) ignorance (economics is difficult to understand and economists can't agree between themselves); and (3) a need to follow the pack. The herding instinct is very strong in Man and explains most social behaviour, from fashions to wars.

Perhaps what is most surprising is the unconditional support of central bankers. They are supposed to be professionals and should know better. In particular, Trichet, the head of the European Central Bank. A few days ago, he once again reiterated the need for austerity, that it was all about "restoring confidence". Confidence? It's not a magic potion, and it won't work when governments, because their austerity programmes have throttled their economy, find they are no longer getting the needed revenues to service their debt. We still haven't come out of the Great Recession - some countries are barely climbing out - but everybody will fall back in the hole if governments everywhere pull up their oars (if I may be allowed to mix my metaphors).

In this mess, the French Finance Minister Ms. Lagarde, who is undoubtedly a very clever lady, is the exception. She has followed the rest of the pack up to a point - agreeing to launch an austerity programme (financial "rigueur", she calls it). At the same time, and that's the interesting point, government policies should also aim at accelerating economic growth ("relance"). Combining the two words, rigueur and relance, she has even coined a term for her programme: "rilance". But she hasn't unveiled her programme yet.

In short, we're into an absolute mess when it comes to predicting where the economy is going and what should be done about it. So far, some interesting analysis has been done on the onset of the crisis. and I don't think there's much to add to what for instance Stiglitz says about it in his thoughtful and well-written book, "Freefall" - a great title with a telling subtitle: "America, Free Markets and the Sinking of the World Economy" (Norton&Co, New York, 2010). One of the lessons of this crisis, as he puts it, is the "need for collective action - there is a role for government...But there are others: we allowed markets to blindly shape our economy, and in doing so, they also helped shape ourselves and our society." (p.276)

Markets have shaped our society? Indeed, they've caused a highly worrying change in our cultural ethics. As Stiglitz explains it (see p.278 & ff.), financial markets have not only misallocated capital but have also led to the misallocation of one of our scarcest resources: human talent. "I saw too many of our best students going into finance", he writes, "they couldn't resist the megabucks." How true! Markets have altered our values, and the Great Recession is also a Great Moral Crisis. Other telling phrases of his: " The crisis has exposed fissures in our society, between Wall Street and Main Street, between America's rich and the rest of society...The country as a whole has been living beyond its means. There will have to be some adjustment. And someone will have to pick up the tab for the bank bailouts...The failures in our financial system are emblematic of broader failures in our economic system, and the failures of our economic system reflect deeper problems in our society" (p. 295).

Deeper problems in our society? Yes, and a pity that Stiglitz ends his book there. One would have liked to see an analysis of the "failures of our economic system" and which comes first, a failure in finance or a failure in the real economy, or both together? The latter probably.

I have a feeling that so far we've been paying too much attention to strictly financial issues and not enough attention to the woes of "main street". Recently released unemployment data in the United States is extremely worrisome: it points to long-term problems and maladjustment in the labour market.

It is clear that the American manufacturing sector is going through a massive restructuring under the pressure of technological innovation. Let me explain that.
Two years ago, American manufacturers, with the onset of the crisis, laid off their least skilled personnel and started to replace them with advanced technology solutions. Now, as we (may be) coming out of the crisis, many businesses are ready to hire again, but their needs have changed. They have become more technologically advanced, hence two things: (1) they need fewer hands to do the same work; (2) they need better skilled personnel (who can read and have some maths) to run the machines. The trouble is that kind of person is hard to find among the currently unemployed.

In practice, what's happened is this: we have, as Schumpeter (a famous Austrian economist) would have it, a case of innovation driving the business cycle. Now if markets were functioning perfectly as argued by Hayek, another famous economist, they would clear and everything would work itself out - no imbalance left. But markets are not perfect, so things don't wortk out as they should. And it's not just a matter of lack of information that renders them imperfect. In particular, there's no assurance that jobs lost to innovation will be compensated elsewhere. Ok, those who can read and write will end up in the services sector, but that's not a solution for everybody. Furthermore, as a result of this rush to the services sector, it has become bloated: jobs may have multiplied to accomodate new entrants but they tend to be badly-paid, next-to-useless, highly volatile jobs.

The upshot? Unemployment persists and becomes a long-term structural problem. What governments ought to do on both sides of the Atlantic - because that structural weakness in the labour market also exists in Europe - is to invest into massive retraining programmes. Recycle, refresh, teach new skills - anything that will give people a job. Forget about academia and old-style universities, none of that fancy education has ever guaranteed anyone a job. Indeed,the unemployment rate among young people, and that includes lots of recent graduates, is always and everywhere higher than in the rest of the labour force. It says something about our education system, doesn't it? True, governments have tried to do something and some practical training programmes do exist, but not enough, by a long shot...

But wait a minute. Wasn't this kind of structural imbalance in the labour market - I mean a mismatch between skills and jobs - a long standing problem predating the Great Recession? You bet it was - in America and in Europe and possibly in Japan too.

So we've had a number of long-standing social problems brewing in the background, while bankers and financiers gaily romped in Wall Street. Yes, gambling with more and more sophisticated financial instruments that are little more than gambling chips. The trouble is that all this gambling diverts savings away from the real economy - the investment function is sterilized and banks don't do the work they're supposed to do (ie lend to entrepreneurs and sustain economic growth).

OK, I admit this is a very broad - perhaps even superficial - view of relations between Wall Street and Main Street. It would be worth a whole book - not by me but someone like Stiglitz (I'm just a blogger...albeit an informed one).

But there are several things I can see already.

We're probably heading towards a double dip recession - or, if not, a prolonged recession, very flat, hard-to-come out of. Because what we're facing is really a double whammy: there's an imbalance in the financial sector that everyone is focussed on and there's an imbalance in the real economy as it struggles to go "post-modern" into the IT age. Actually there are many persisting, long-term and difficult to control global imbalances: in international trade with the Chinese Renmimbi that continues to be undervalued (not to mention other BRIC currencies); the problem of outsourcing work to cheap labour markets in developing countries; the problem of corruption and misallocation of government revenues; the looming sovereign debts and risk of default; skewed income distribution with a growing class of ultra-rich that prefers the gambling games of Wall Street to productive investment in Main Street etc etc Not a pretty picture, nor a comforting one.

All this is bound to make recovery far more difficult and of course far more time consuming. And the middle classes are the ones that are going to suffer.

What is your opinion? Will China and India save the situation? Is a boom in trade the answer?

In my reading, the imbalance in the fundamentals goes beyond whatever good a recovery in trade could achieve. We need to address those fundamentals, and that's where Ms. Lagarde may be right with her idea of "rilance". A very clever term, but I wonder how she'll manage it. It'll be worth watching...

6.26.2010

Why Austerity Programmes across Europe will Bring Disaster...

The fashion for budget cutting has now run all over Europe - including the French. And the English have gotten into the act too. So far, the biggest cutters are still the Germans, with a proposed €80 billion austerity programme over the next four years. The European Central Banker, Jean-Claude Trichet, raves about it and so does Ms. Merkel, the German Chancellor.

I wonder why. These are presumably savvy, educated people with a head on their shoulders, or are they? Haven't they read Keynes? Haven't they heard about the Great Depression and how Roosevelt didn't manage to get out of it? In 1937, he reversed his Keynesian-inspired expansion policies because they cost too much to the budget. To get out of the Great Depression, America had to wait for World War II and the extraordinary level of government war expenses.

Before the Great Recession came along - I mean before 2008 - I can understand that Keynes might have been considered passé. Those were the days of the real estate bubble and financial hubris. Those were the days of the so-called "Washington Consensus" which had put centre stage the free market ideology and pushed under the carpet - seemingly forever - any role the State might have in the economy. The Soviet Union had collapsed and with it the Communist, centrally planned vision of the world. All that was left were wildly liberal monetarists à la Milton Friedman - no other kind of economist allowed. The Market had become a New Idol, one that was never wrong. Just let it act in total freedom, and any recession would automatically correct itself. And, of course, a depression was impossible.

But now? We've seen to what excesses the Market Idol can take us. Governments have had to move in, they've devised stimulus packages and saved the banking system from collapse. That has cost money, of course. And when the stimulus stops, it is often too soon, as we've recently seen with the American real estate market that has taken another plunge. And much work still remains to be done to force banks back into banking, i.e. as keepers of our savings and lenders to business. That is their role in the economy. But of course they much prefer to play around with derivatives and other new-fangled financial products rather than focus on their traditional role. No doubt gambling is far more fun than serious work. Still, with luck, Congress might soon pass some responsible legislation (including the Volcker rule) that will help curb the financial hubris that has hurt everybody (except the bankers, of course).

Yet European politicians are strangely impervious to this. All they see are the rising public debt - a natural outcome of their earlier interventions to sustain the economy - and they feel they must do something about it. Immediately. And they've brought their Weltauschauung to the G-20 in Toronto - with the odd result that every country agrees that cuts are in order but everyone is left to do as it pleases...

Cut, cut, cut! That is what the financial markets demand, says Trichet. That is what will restore confidence to the German consumer, says Merkel. She knows Germany is accused of not consuming enough and focussing only on its export industry (which in fact is now roaring along, thanks to the weakened Euro).

Do German consumers really need to see a government austerity programme in place to spend their money? Have you ever met anybody who worried about Government debt when contemplating the purchase of, say, a car? And an austerity programme, by cutting down on government posts and pensions etc and sending people home with less money, is bound to cut back on personal income and cause a further drop in German consumption...

But why should a Central Banker ever bow down to a speculative attack on his currency? What is the problem with the European Central Bank? Normally any Central Banker worth his salt would defend his national currency with all means available, including purchasing treasury bonds to control undue rises in interest rates. So why should the European Central Bank not act as any other Central Bank would ? Why should it feel apologetic when it does? Trichet a couple of days after buying Greek bonds immediately announced to the press in Frankfurt that he would "sterilize" the purchases - meaning reverse them.

The answer? He means to please the Germans - everybody in Europe is following in German footsteps. When the Greeks confessed their sins and proceeded to reign in their budget deficit, there was an uproar in Germany and much indignation. That, as we have seen,after much huffing and puffing, set the stage for the next round of budget cuts, including the Germans.

But these are indiscriminate cuts and they come at a very, very bad time, when the Euro-zone economy still hasn't recovered from the recession. Unemployment is still high and, in many places, still rising. Consumption is flagging. Only exports have recovered - mainly German exports, and among them, most remarkably, big luxury cars produced by Audi, Mercedes and BMW. They're reportedly doing particularly well in China and the USA. Why? Because there's a market for them again: the rich are back to being as rich as before the Big Recession (there are some 10 million billionaires across the world, and their combined wealth has increased). And the Euro has lost some 15 percent since the start of the Greek budget crisis.

So far, this weakening of the Euro does not seem to have helped Greek tourism (presumably would-be tourists fear to get enmeshed in strikes). Because that's the real problem with austerity programmes: the social unrest they are bound to cause. The cuts hit the low and middle classes first and foremost. So it is natural to expect everybody to descend in the streets and scream to high hell. The French Finance Minister, Ms. Lagarde, had called for austerity programmes that would cut the budget yes, but at the same time "preserve growth". The Italian Finance Minister, Mr. Tremonti, has also tried to limit the damage, although he now reckons that his package of cuts will cost a half percentage point in future GNP growth (and he's probably being optimistic - it is likely to be much more of a brake than that).

The result of this social unrest? My bet is that the eventual austerity programmes that will be passed by parliaments across Europe will be less severe than those first announced. Ms. Merkel could still lose political support because of her programme - and she already has lost a lot.

So is all this a great deal of noise about nothing? Not quite. Budget cuts, even modest ones, will inevitably cause a loss in revenues and consumption - precisely at the wrong time in what is still a very fragile recovery. So one can expect, without being unduly pessimistic, that the Great Recession is bound to last a little longer - even much longer than necessary.

If only European politicians had remembered Keynes' lesson about using the weight of the State in the economy as a counterbalancing power: when there is an economic slowdown in the private sector, you accelerate the public sector. You spend money, you run deficits and you worry about balancing the budget only once the economy has fully recovered. That's when improved tax revenues fill government coffers, and that's when you start acting virtuous about budget deficits. Indeed, with the increased tax revenues, it will be that much easier to balance the budget!

What really makes me angry is the way this budget deficit saga has unfolded.

It would have been a wonderful political opportunity for REFORM, in particular to CUT back on UNNECESSARY government expenses. True, much was done on that score - but not enough: for example, there are still invalidity pensions and early so-called "baby pensions" that are a scandal in most Southern European countries.

It would have been a wonderful opportunity to tighten fiscal systems and MAKE people PAY their TAXES. Again, and especially in Southern Europe, too many people get away with paying no taxes at all - and I don't just mean income tax but also the sales (VAT) taxes. In Italy alone , the "economia sommersa", the "submerged economy" as the Italians call it, is some 20 percent of GNP. That's the segment of the economy that's not counted in national statistics, it simply "disappears" - meaning no one is paying any taxes at all.

Why is everybody in Europe - and especially in Southern Europe - so keen on avoiding their taxes?

Two reasons: one, the State especially in Southern Europe, is "weak". It hasn't the structures needed to collect taxes efficiently. Two, the tax rates are too HIGH. Again, in Italy (this is where I live so I know), the rates are way too high - much higher than in most of Europe and definitely higher than in the States - . People are inevitably tempted to avoid paying taxes. If the rates were brought down to a more reasonable level, people would be more willing to pay. Lighten the tax burden for everyone - and thus gain political consensus for your reforms - but make sure that everyone pays exactly what they should pay and right on the dot! No tax evasion allowed in return for lower tax rates...How does that sound to you?

Then, of course, it wouldn't hurt, would it, if the State really did deliver the public services it is supposed to...Why pay taxes if you get nothing - or very little - in return?

6.18.2010

A medieval chicken soup

No, it's not another comment on the Euro crisis, the Middle East situation or the mess in Belgium (though it could be!). It's just a plain, simple recipe, far away from Nouvelle Cuisine and inspired from an older time than Escoffier and classical cuisine - much older, the Middle Ages actually.

Two years ago, as we spent a couple of weeks in Touraine going around all the various Renaissance castles and gardens, I came across some neat restaurants serving medieval cuisine (or so they pretended!). I was so intrigued that I picked up a couple of cookbooks about medieval cuisine to study it.

Fascinating! Not everything our forefathers ate six hundred years ago is good or in line with contemporary tastes but it's worth digging into.

It would seem that much of medieval cuisine was characterized by a lavish use of meat broths variously done and lots and lots of herbs. And for making sauces, medieval cooks tended to use bread as a thickener rather than wheat flour as we do now. Chinese cuisine of course uses corn flour to thicken gravies - possibly rice flour in older-style recipes - and it would seem natural that Europeans should have used bread, the classic food of Western civilization. Some of them still do, for example the Spaniards when they make Gazpacho which, as everyone knows, is thickened with bread.

By the way, if you try to use bread as a thickener, I've noticed through trial and error that the traditional method for thickening Gazpacho - slices of stale bread soaked in water and then squeezed dry before adding to the vegetable mix - is by far the best. Any short cut you might be tempted to use, such as throwing slices of bread directly in the mix and then reduce everything to a pulp,doesn't give a satisfactory result: your soup or sauce might present itself as thick as you might want it to be, but you'll find it hard to digest. I don't know why, but the step of soaking bread in water and squeezing it dry is somehow essential. Maybe with the water running off, it gets rid of some indigestible elements in the bread (perhaps yeast?), but whatever it is, it makes quite a difference for your internal hydraulics!

Now to my recipe. I use no oil of any kind to cook it - only add a little olive oil at the end when it's done. As to the ingredients, they're very simple: a chicken in pieces (I use only the breast, whole, but you can put in legs or whatever you like) and every fresh vegetable you can find...

It's a little like the Irish Stew in Three Men in a Boat where the dog adds a rat he found floating in the Thames (and that's when you realize half-way through the book that the protagonists are not four but really three men in a boat as in the title - the fourth voice belonging to the dog!). Well, I'm not suggesting you add a rat to it, but it's important to use vegetables that are in season. It's a medieval recipe after all, and they didn't transport exotic produce from abroad. Speaking of exotic produce, that's why potatoes or tomatoes are optionals: medieval cooks probably didn't use them but I do simply because I love them and I am no purist: I'll tweak any recipe to make it better tasting!

Here is the way I did it yesterday (for 3 to 4 persons). I served it lukewarm and it was just the right thing for a summer evening. But it would work equally well in winter if you served it piping hot.

Ingredients:
250 g or half-a-pound of chicken meat or more if desired in big pieces (I used breast and cut it in 4 chunks)
1 big onion chopped plus 3 or 4 spring onions whole
1 leek in chunks
1 big carrot scraped and cut in thick slices
1 or 2 large potatoes peeled and cubed
2 celery stems in chunks
4 or 5 big pieces of cauliflower (that's an important medieval type veggie - can be replaced by any sort of cabbage)
1 large tomato peeled and cut in 4 pieces or use a handful of cherry tomatoes whole (they're very tasty when cooked and to make it easy to peel, throw them in together with the other veggies without peeling them; let them boil a couple of minutes then fish them out with a slotted spoon; run cold water over them to cool them down and peel off the skin: it comes off very easily; at that point slice them in half and return to the soup)
1 zucchini in big chunks
Some green beans cut in pieces, fresh peas, watercress or spinach leaves or whatever greens you may have at hand (you need a green touch for your eyes...and taste!)
salt and pepper (instead of salt I use a Knorr cube or you can add consommé or ready-made chicken broth - whatever broth works best for you but not too much of it: remember you've got chicken meat in your soup, and you don't want to smother your chicken!)

To thicken and finish the soup:
Parsley, lots of it (a handful!)
2 Bread slices soaked in water and squeezed dry
1 spoonful of wine vinegar (to taste)
1 spoonful olive oil (to taste)


Method

This is the big difference with the way one makes Italian Minestrone (where you start off by frying onion in olive oil and then add the vegetables): here, you put all the vegetables together in your pot and you barely cover with cold water. Flavour it with either salt and pepper or broth, but always remember to grind pepper from your pepper mill (the industrial ground variety has little flavour).

Bring to a boil and at that point add the chicken meat making sure it is immediately covered in the boiling liquid and turns white (this prevents the meat juice from escaping and turning the meat dry). Let everything simmer with a lid half on. It will cook very quickly - in about 20 minutes (I like my veggies slightly crisp and in any case chicken meat cooks fast - you don't want to overcook or everything will get stringy and sad-looking).

When it's done, you'll notice you have a soup with little liquid - that's the way it should be and DON'T ADD water! This isn't really a soup - more like a stew and now you need to thicken that liquid. Ladle some of it into your osterizer where you've placed the bread and parsley and switch the machine on, pouring from the top a little vinegar and oil. Taste and see if you like it. It has to have a fresh taste, the way Gazpacho does (it's the vinegar that does it) but not too much.

Then put it back in your pot and swirl it. And don't cook it anymore or you'll lose the fresh flavour of the parsley. Serve it in a deep earthenware dish if you've got one (that makes it look more medieval), taking care to place the pieces of chicken in the middle so people can see them and easily help themselves.

Ad I said before, if it's summer, don't heat it up: it's very nice at room temperature. And it certainly makes the life of a hostess easier when she's got guests to look after!

P.S. You can experiment with additional herbs other than parsley (for example tarragon). Let me know how it comes out!

P.P.S. Since it's a cross between a soup and a stew, I think a new word should be made up for it: a chicken "stoup" or "stoop"...How does that strike you?
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