Question: History reveals that every international crisis leaves a lasting mark on the world, once the crisis is over and the difficulties it brought have been encountered, things tend to change. Similarly, do you think that the current global economic crisis must lead to a fundamental reassessment of how power and influence is expressed through the world?

I belive that the current financial crisis have accentuated what we already knew and what has been present in the data and the discourse for some time. Specifically I am talking about the idea that big emerging markets such as India, Brazil, China, Indonesia, Chile, Turkey etc have slowly but steadily taken over as the global powerhouses in terms of economic growth and thus it is also natural that they are gunning for more political and institutional power. When it comes to financial crises in particular the latest batch of proposals from the Obama administration to regulate the financial industry is another and more micro oriented theme which is a recurring event in the context of economic crises. Crises are often, in this way, catalysts for abrupt discrete changes in the economic and political environment.

Ultimately then I think that this fundamental reassessment of power and influence in the world (both politically and economically) have not been initiated by this crisis but it may be reinforced.

Question: As the Great Depression paved the way to World War II and to a new world order, how far the present crisis produce grave repercussions on the global economic order?

This intimately depends on how you define world order naturally. If I have to point towards the most enduring change which appears to have come on the back on this crisis it is the attitude to debt and long term sustainability of public finances. Those of us who have been interested in demographics and its effect on macroeconomic processes have long been waiting for (and predicting) the inflection point where the mismatch between expensive welfare systems and the increasingly broken demographic structure as as result of persistently below replacement fertility. In this way, the ability to take on debt today as a liability for the future and despite the theatricals on sovereign spreads and CDS on Greek and Spanish government debt, are in fact fundamentally driven by long term liability problems. For an excellent excursion into this topic in the context of Australia/New Zealand and beyond I warmly recommend this one by John Hempton.

Extrapolating to the idea of a new economic order this brings us into a fundamental dilemma. With every part of the national identity overlevered [1] and in need to rebuild their balance sheet most economies are looking to the last part of the identity to make up for the shortfall of savings; the external balance. The problem is that not everyone can export excess savings (i.e. run a current account surplus) at the same time. In my opinion this is where the big new emerging economies come in and despite by personal skepticism towards China pulling the world anywhere it remains obvious that those who can reasonably be expected to run sustainable net external borrowing positions (i.e. current account deficits) are exactly those economies mentioned above who are about to ascend as the new drivers of economic growth. If they don't, it is not easy to see where the growth is going to come from.

Question: The world financial crisis has been a defining moment in the ascension of emerging economies onto the international economic stage. Please comment.

Not really. In my opinion this goes back to the idea of decoupling from the US economy and how, before the crisis, many observers had their hopes pinned on the Eurozone (and the Euro) as well as Japan (and the JPY) to take over the baton from the US economy in steering forward global demand. In the context of Bretton Woods II this seemed a turkey shoot of an argument. Just de-peg from the US dollar and re-peg to the Euro and it is all engines go. Obviously, this was always going to be a mirage and essentially a smoke screen puffed up by those who have a fundamental desire to see the US economy fail and cave in on itself. So, why this detour in answering the question above?

Well, quite simply, the world "decoupled" for the US and indeed the advanced (G7) economies a long time ago.

From 1980 to 2008 the share of total world GDP made up by G7 economies declined from 51.33% to 42% and the corresponding figure for newly industrialised Asian economies rose from 7.17% to 21% and according to IMF this trend is set to continue. This is the real decoupling and it represents a major structural change in the global economy which goes far beyond the current financial and economic turmoil. Whether there will be anything particularly defining about the role of emerging economies as a result of the financial crisis is too early to say. A sovereing default in Greece or elsewhere in the Eurozone should increasingly make investors aware that global risk is not primarily present in emerging markets but actually right at the heart of the G7 and OECD edifice. Perhaps this will be a definining moment, but the general ascend of big emerging economies to the center of the world stage is not a product of the current turmoil.

Question: To what extent will emerging economies remain the drivers of global economic growth in 2010?

To a very large extent I would argue. In 2010 the IMF estimates (in their October 2009 Outlook) that the world economy will resume growing at an annual rate of 3.1% after having contracted by -1.06% in 2009. Breaking this up on the major advanced economies (G7) and developing and emerging economies the IMF estimates that the former will grow by 1.7% and the latter by 5.1% in 2010. Yet this difference does not tell the whole story. Consider then the fact that measured in US dollars (current prices) the share of world GDP made up by the G7 as well as the emerging and developing economies was 53.8% and 30.7% respectively. Yet still, and out of a total estimated value of 2010 world GDP growth at trn 3.267 USD the G7 is expected to contribute to this with only trn 1135 USD while emerging and developing economies are expected to contribute with trn 1674 USD.

More generally, this is a tendency we should expect to continue. Consequently and while global GDP forecasts into 2014 are quite fickle, forecasts by the IMF has the current price value of total world output (in USD) rising from trn 60.429 USD in 2010 to trn 74.660 USD in 2014. Out of these trn 14.165 USD, the G7 and the emerging and developed world are expected to contribute with trn 4886 USD and trn 7871 USD respectively.

In this way and I hope that my readers will forgive me the excessive arithemetic; if we take the IMF's forecast to heart, emerging markets are definitely going to be the main drivers of global headline GDP growth in 2010 and beyond.

Question: As the evolving international order is going to be Asia centered and polycentric for a variety of reasons. Do you think that India is ready to play a larger role to ensure stability, security and peace in the world?

I sure hope so. A lot of the future stake of the global economy is pinned on India, China, Brazil, etc to develop and evolve both politically and economically. India already plays a very big role in the global economy, but is somewhat dwarfed (in terms of attention at least) by China. However, I believe this will change. Despite some well described and severe issues with a growing gender gap (which is also an issue in China) India is set to enjoy a much more stable and slow demographic transition into old age than China who will age very quickly due to its one child policy.

In this sense I forsee that India will slowly but surely take over from China as the big global emerging economy powerhouse. However, and beyond the obvious political responsibility this entails it also comes with an economic ditto. Thus, one of the biggest problems with China is that she will never be able to run a respectable external deficit that would resolve and alleviate global macroeconomic imbalances. A deliberate mercantilist policy and the effects of the one child policy which strips the economy of the capacity to suck up its own (let alone foreign) savings are two crucial factors here. In my opinion we have one shot to correct these global imbalance and much will hinge upon India (and the rest of the emerging pack) here. Specifically, India must ensure that the demographic transition is kept in check from below as well as, currently, from above. By this I mean that Indian must ensure that it does not fall into a fertility trap with total fertility rates lingering below 1.5 children per woman. Secondly, India should shy away from mercantilist policy. Standard economic theory tells us that external borrowing is not an ill if matched by a sound and long term oriented investment policy as well as capacity in the economy proxied by a large share of young to mature workers out of the total population.

Especially the argument on preventing fertility to fall too far and too rapidly is quite politically incorret at the current juncture with climate and overpopulation (still) dominating the discourse. However, it is crucial in my opinion that we are able to differentiate the debate to look at both sides of this coin. Otherwise, India and the rest of us will regre it.

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[1] - (investments, consumption and the government)

Rallying Risky Assets no More?

The first interesting piece that got my attention was the coverage by FT Alphaville's Tracy Alloway of this week's musings by JPMorgan and UBS about whether the recent dip in risky assets (and subsequent rally of the buck) is a decisive turning point or merely a blip à la Dubai.

In terms of a change in discourse there is not much in the way of one as e.g. JPMorgan's equity team concludes;

We advise adding to positions on weakness and would revisit this view if jobless claims were to move back towards 500k, if Greek default becomes a reality or if manufacturing leading indicators roll over.

Now, this appears as full out frontal bid on equities to me since if jobless claims were to move into the 500ks it would not, I presume, happen overnight as well as a de-facto Greek default would constitute, an ex-post, post mortem on an equity market in shambles as it would surely wreck havoc even in the initial stages. As for the leading indicators they are of course, by nature leading and thus this may be the figue leave JPMorgan can cling on to if and when they decide to back pedal on this bullish strategy. More generally, UBS is quoted of pointing to three sources for the recent dip in risky assets and thus immediate source of a sudden correction. The first is the growing worry by part of Chinese policy makers of the bubblicious state of the economy and thus the incipient signs of monetary tightening. The second relates to the recent barrage from Obama against the financial sector and especially, I assume, the declared war against proprietary trading which has been the source of fat profits for the likes of Goldman, illuminati, Sach, Morgan Stanley and other of their ilk. Finally, there is of course the growing unease in the market place with the unfolding mess in the Eurozone where Greece is still taking center stage teetering on the brink of a bailout in the form of either and IMF led representation or an internal agreement with the EU.

While I certainly agree that those factors represent sand in the otherwise smoothly running machine of excess liquidity driving the rally in risky assets I tend towards a more straightforward source of a potential correction. Consequently, and for all the stimulus and inventory driven growth we are currently observing I think that final demand at the end consumer as well as the willingness and capabilities of companies to ramp up investment will disappoint thoroughly to the downside. The need to rebuild balance sheets and deleverage across all sectors of the real economy will trump the current positive discourse. It is ironic in this sense that the current flurry on government deficits (especially in the Eurozone) represents exactly the inflection point reached by many OECD governments with respect to the need to decisively rein deficit spending in order to put in a reasonable effort at covering future age related liabilities (as the principal although not only reason). In short; it is really difficult to see from which sector in the real economy we are likely to see a recovery to confound the current expectations in the market.

Yet, as is clear from the latest equity research from the good equity analysts at JPMorgan and UBS the discourse is still fixed on recovery. My bet though is that it will change at some point in 2010 in line with the lack of response from the real economy in taking over from stimulus driven growth, but of course; when it comes to the movements of stocks ... I am not the right one to as. Really, I am not! 

Speaking Truth on Japan

Meanwhile in Japan it was interesting to note the comments by economist at the BOJ Kazuo Momma who managed to pinpoint with surgical precision what exactly Japan's current woes are in terms of macroeconomic dynamics;

(Quote Bloomberg)

Japan’s economy is far from achieving self-sustained growth as the export-led recovery fails to spur spending at home, according to Kazuo Momma, the Bank of Japan’s top economist. “The risk that the Japanese economy will fall off from a cliff is small, but there is still a long way to go,” before the expansion becomes sustainable, Momma said in Tokyo today. “Even if the global economy continues to recover, the spread of that to capital spending and the labor market will be limited.”

The key thing to notice above and beyond the real economic effects in the form of entrenched deflation and low growth is the failure of the momentum from external demand to reach the domestic economy. Perhaps more than anything this is the defining characteristic of the Japanese economy and, I would argue, export dependent economies in general. Consider also that the discourse on Japan to large extent has been solidly anchored in the expectation that  the strong momentum of the export related activities would eventually lead into a positive feedback loop with domestic activity. This has so far closely resembled the well known perennial wait à la Beckett and it is worth I think to ask what exactly underlies this disconnect in the economy. In this sense, I thought it interesting that Mr. Momma and thus the BOJ moved in with such a decisive recognition that something seems thoroughly broken in terms of the ability of the domestic Japanese economy to gain traction. 

Elsewhere on Japan I also took note of the veritable tableau d'horreur in the context of the estimated fiscal outlay in the coming years. Consequently, recent numbers from the ministry of finance suggest that Japan will up the its bond issuance by as much as 16% moving towards 2013. Concretely, the butcher's bill is estimated to total 51.3 trillion yen in the year starting April 2011, 52.2 trillion yen in the fiscal year of 2012 and 55.3 trillion yen in the fiscal year of 2013. Naturally, former minister and now opposition member Yoshimasa Hayashi was quick to slam on the critique simply noting that it was unclear whether the new DPJ led government was worried at all about the fiscal conditions of Japan's economy. Specifically Mr. Hayashi worries about 10 year yields which I reckon is the right time horizon for when this could really turn out sour for Japan; (quote Bloomberg) ... 

The deteriorating fiscal position has raised concern that bond investors may start to demand higher yields for holding Japan’s debt. The yield on the 10-year government bond rose half a basis point to 1.31 percent at 2:28 p.m. in Tokyo. It hasn’t exceeded 2 percent in more than a decade.

Finance Minister Naoto Kan said yesterday that the government’s mid-term fiscal strategy to be released by June will help to maintain investors’ confidence. “We need to keep yields around the current level by maintaining markets’ trust in our fiscal health,” he told parliament. S&P’s downgrade of the outlook for Japan’s debt to “negative” indicates it may cut the local-currency rating for the first time since 2002. National Strategy Minister Yoshito Sengoku called the warning a “wake-up call.”

Before we start comparing Japan with Greece et al though there is little doubt that demand will be there for the securities since we can be pretty sure that the BOJ will be provide the bid through quantitative easing. However, in a longer term perspective and with largest debt to GDP ratio as well as the oldest population in the world one does not have to be a macroeconomic literate to see how this cannot go on forever. However, as long as Japan remains a net external lender the problem is one of accounting really and with its own independent central bank the show can go on for quite a while. Moreover, the likely side effect on the JPY makes it an almost attractive route to follow by Japan in the sense that a long waited depreciation of the JPY (if it comes) will not only strengthen the export sector but also provide some welcome inflation to the economy.

Wither the Euro (as a "reserve" currency)?

Perhaps the most interesting headline coming in on the wires in the beginning of the week was this Bloomberg piece running under the header that the Euro is losing its allure as a reserve asset.

Investors are pulling cash out of Europe at a record pace as central banks slow euro purchases, jeopardizing its status as a substitute to the dollar as the world’s reserve currency.

Last year, policy makers loaded up on euros, while analysts at Barclays Plc in London and Aletti Gestielle SGR SpA in Milan predicted central bankers would make good on threats to reduce the greenback’s dominance. Now the euro is down 8.4 percent since Nov. 25 in its fastest slide in 10 months amid concern that cash-strapped countries like Greece won’t pay their debts. Billionaire investor George Soros said Jan. 28 that there’s “no attractive alternative” to the dollar.

Well well, what a difference a couple of jitters in Southern Europe makes. Now, before we get ahead of ourselves in terms of the long term significance of the Euro's recent slip I think this abrupt change in discourse on the Euro is a good testament to the difficulty many have in understanding exactly what these so-called global imbalances are. This may sound arrogant as I imply here that I do actually understand, but I find it extremely difficult to see how people who hitherto believed in the Euro as a the new dominant global currency can suddenly shift position on the back of trouble in Greece, Spain et al. I mean, surely and if you had cared to look and listen the structural difficulties of the Eurozone and the obvious inability of the EUR/USD to move about in the 1.50s/1.60s and thus act as the main vessel of rebalancing were there for anyone to see. Well not quite and while the coup de grace from George Soros is significant in itself I think it worthwhile to think back to the heaty days when Bernanke lowered rates as an initial response to the subprime fallout (and the ECB momentarily raised) and thus where the Eurozone was hailed as the new engine of the global economy to take over from an ailing US economy. Some of us tried to dimiss this nonsense but it appears that it takes near default along the periphery, before it really hit the main wires. So let me be quite clear here. The Euro is not an alternative to the Dollar in so far as goes rebalancing of the global economy which would entail the Eurozone being a relatively large and sustained net external borrower. In fact, given the troubles in Spain and Greece the real challenge is how the Eurozone can become a net surplus region and thus reduce the borrowing of key member countries.

Bubble Trouble in China

This one is hardly news and neither has there been much of a change in discourse as it has been some weeks now that Chinese authorities little by little have started to voice concerns over the growing tendencies of overheating in the Chinese economy and property sector in particular.

China’s “real worry” is asset bubbles as capital flows into an economy awash with money and the nation emerges from the crisis into a “boom time,” central bank adviser Fan Gang said. Moves by the central bank this year to curb liquidity were “timely and necessary,” Fan told a forum in Beijing today. “Although globally we’re still talking about the crisis, China and some developing countries now are facing another boom time.”

Stocks fell in Asia and Europe today on speculation that Chinese policy makers will do more to cool the world’s fastest- growing major economy after two reports showed a sustained rebound in manufacturing and rising prices. Excess liquidity is a “problem” as low interest rates and slower growth in the U.S. and Europe encourage money to flow into China, said Fan, the academic member of the monetary policy committee.

One economist and long time China observer, Andy Xie, that I tend to lean on is much more out spoken on the current risks in China as well as a recent report by BNP Paribas sees  decisive turning point already in 2010 as tighter liquidity conditions begin to bite;

China’s property market “bubble” is set to burst as the government curbs credit growth and clamps down on speculation, according to independent economist Andy Xie As bank lending slows, “it’s very difficult to see this demand continuing,” Xie, formerly Morgan Stanley’s chief Asian economist, told Bloomberg Television in Hong Kong today. Tougher property policies may lower 2010 sales volumes 10 percent, compared with an earlier forecast for growth of as much as 5 percent, BNP Paribas said in a report today.

I agree in the main. The key however is timing and just how far China may run here. It may be longer than many imagine, but I agree with the fundamentals of the argument. Xie apparently thinks that 2010 will see a significant correction. I have no reason to disagree, but a bubble in China (in general) may run a long time before she runs out of steam. Having said this though, recent bits and pieces of information that I have been fed from the ground in China by my "contacts" strongly suggest that a breaking point is near. One key ingredient here according to a property insider in China is that almost all of the stimulus money currently being poured into the Chinese economy (which is a lot) is going into property and needless to say, this cannot run forever.

More generally, a full blow out of the Chinese property sector in e.g. some of the most bubbilicious parts of the real estate sector would constitute a severe dent in the expectations of a global recovery driven from Asia. Perhaps this more than anything suggests why it is important to keep a weary eye on port side property in Shanghai and elsewhere even if you are not in the market for a condo.

A Change in Discourse?

Whether there has really been a change in discourse in some parts of the market as per reference to the points mentioned above or whether I am just preying on a well worn narrative to take some random shots I will leave it for the reader to decide. In general, the ball is still rolling on the recovery discourse but with events in the Eurozone and a Chinese economy looking set to fall short of the promises to pull forward the global economy things might change sooner rather than later. To this I would add the fundamental and lingering trend of deleveraging in all real sectors of the economy which ultimately means that self sustained growth will disappoint thoroughly to the downside and this I hold to be quite certain and not just a random shot.

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[1] - Which I will present here in due course.

(quote Bloomberg)

The Bank of Japan held interest rates near zero and said it remains committed to fighting deflation as gains in the yen risk stunting the recovery from the country’s worst postwar recession. “I hope that price declines will be overcome as soon as possible,” Governor Masaaki Shirakawa told reporters in Tokyo after his board kept the overnight lending rate at 0.1 percent. “It will take time before we can see prices rising to favorable levels,” he said, adding that the central bank will maintain an “extremely accommodative financial environment.”

Japan’s credit rating outlook was lowered by Standard and Poor’s today, highlighting concern that the world’s biggest public debt will lead to higher borrowing costs in a country already facing falling prices and a strengthening yen. Finance Minister Naoto Kan said today that the BOJ can do more to battle deflation, and people with knowledge of the matter have said it may consider expanding an emergency loan program or increasing purchases of government bonds. “It’s highly probable the central bank will come under pressure to ease policy further as the economy loses steam,” said Teizo Taya, a former central bank board member and now adviser to the Daiwa Institute of Research in Tokyo. “The bank will likely consider expanding the lending facility, while it will try to avoid increasing bond buying as much as possible.”

The statement by the governor Shirakawa really tells it all and one can only second his hope that price declines will soon hit the shores of Japan. Yet, this seems more and more unlikely which is also why the BOJ seems to be moving straight back into full out QE mode at the same time as its peers are set to try, albeit with great difficulty, to restore some kind of normal monetary conditions over the course of 2010. 

The BOJ consequently seems to be silently conceding that it will have to cooperate tightly with the MOF in trying to bring some kind of momentum back to Japanese soil. In this concrete case it will mean keeping open the taps to create a bid for the steady flow of Japanese government bonds.

(click on graphs for better viewing)

The core-of-core index has now fallen since January 2008 with the total accumulated decline in the core nominal price level of 6.8%. Now, I don't need, I think, to spell out what this implies for debt and growth dynamics in Japan which just seem to perennially stuck at the moment.

The problem for Japan is really that it is fighting a losing battle on two fronts. Firstly, and quite as most observers would expect Japan is having great difficulty in terms of building up domestic demand (see graph here). Secondly however and much worse; conventional wisdom would have that as the risky assets began to fly back in March 2009 and as the global economy showed the first tepid signs of emerging from the death bed so should the JPY weaken and Japan ride, through the carry trade effect, the global upturn on exports. Yet, this has not been the story so far and while Japan indeed is exporting a lot to service the runaway train China, the new found reluctance of the JPY to react to global risk sentiment is preoccupying.

Measured against the Euro and using the period 2004 to 2009 (more or less) as the base average value the JPY is now 10% and 17% stronger against the Euro and the Buck respectively.

Finally, to add injury to insult S&P moved in Monday with a nudge as it threathened to downgrade Japan's sovereign debt rating less it gets its fiscal book on the mend. As a mitigating factor S&P mentions Japan's strong net external position which acts as an important dam towards the rising flood of public sector debt. Yet, unless Japan succedes in pushing the JPY down on a sustainble basis against its main competitors this dam will break sooner rather than later. Needless to say that if the BOJ decides to abide completely from the implied domestic pressure to continue funding deficit spending, S&Ps hands will be effectively forced. One thing is for sure as Societe Generale's chief Japan economist Takuji Okubo is quoted by Bloomberg;

"The market should be braced for the BOJ keeping its current rate unchanged for a very, very long time".

Indeed, and thus as the big talking point in the rest of the world remain fixed on exit strategies and the need (and peril) of fiscal consolidation Japan continues to be stuck in the mire. My own personal feeling is that it might very well be the BOJ leading the pack of global central banks rather than the other way around, but for now the fact that there is no news from Japan is exactly what makes it news.

In short, if the world economy is to get through this crisis in reasonable shape, credit worthy surplus countries must expand domestic demand relative to potential output. How they achieve this outcome is up to them. But only in this way can the deficit countries realistically hope to avoid spending themselves into bankruptcy. 

Martin Wolf (2008)

It is not the first time that I am using this quote by the FT's chief economics commentator and I don't suspect that it will be the last. Of all the attempts by pundits and analysts to pinpoint the crux of the current crisis the observation above is the most important aspect in my opinion and I have argued as such several times (see also Rogoff and Obstfeld (2009) and Baldwin and Daria (2009)). However, I disagree with Mr. Wolf in one critical aspect. Specifically, I don't think that this is simply a question of it being up to them, as it were, in terms of how export dependent/oriented economies may succeed in pushing their growth path onto one increasingly driven by domestic demand. In this way, I believe that the export dependency of Germany and Japan (and a whole batch of economies which will now join them) are ultimately rooted in their demographic profiles where decades of below replacement fertility and rising life expectancy have now condemned them to an economic structure where the growth generated by domestic demand is virtually zero leaving external demand as the only meaningful way to create growth.

This does not mean that the combined external surpluses of these economies do not represent an important and potentially negative externality to the global economic system, but it does crucially mean that we cannot expect Japan, Germany et al to simply revert, through e.g. structural reforms, to a growth path driven by domestic demand that would allow them to suck up excess global capacity through an external deficit.

In order to focus the attention in this ongoing debate I will home in on Japan and concretely, a recent piece in which Martin Wolf actually fleshes out a specific way in which Japan would potentially be able to raise domestic demand to benefit of herself and the global economy. Martin Wolf's piece is worth pondering in its entirety, but in this context I am going to focus on the notion of high corporate savings and whether its release from corporate balance sheets holds the potential for spurring domestic demand in Japan. 

My own view is that the underlying structural problem has been the combination of excessive corporate savings (retained earnings) and diminished investment opportunities, once catch-up growth was over. As Andrew Smithers of London-based Smithers & Co notes, Japan’s private non-residential fixed investment was 20 per cent of GDP in 1990, close to double the US share. This has fallen to 13 per cent after a modest resurgence in the 2000s. But no comparable decline has occurred in corporate retained earnings. In the 1980s, the challenge of absorbing these savings was met by monetary policy, which drove the cost of borrowing to zero and sustained wasteful investment. In the 2000s, the challenge was met by an export and investment boom, driven largely by trade with China (see chart).

(...)

Japan’s aim now must be to achieve domestically driven growth. The most important requirement is a big reduction in corporate saving. Mr Smithers argues that this will happen naturally, since savings are largely capital consumption, itself the product of the history of excessive investment. I would add that if ever an economy needed a market in corporate control, to shift cash out of the hands of sleepy managements, Japan is it. Not being beholden to Japan’s corporate establishment, the new government should adopt policies that would change corporate behaviour, at last.

What follows is my take on this argument seen through the lens of a detailed look at the savings behavior of households and corporates in Japan.

Household Savings - (Dis)saving in Japan?

Standard life cycle theory states that consumers run down their assets into old age (dissave) and thus that a rapidly ageing society at some point should move into a state of perpetual dissaving with the consequence in an open economy context being an external deficit (eventually). However, both in theory and in practice this is not so simple and Japan is a good example here. In this way and while the household savings rate (out of labour income) has indeed plummeted in Japan, the economy still has a large and persistent external surplus. Since we know that the government is mired in both current and future debt this has, by definition, to reflect a high level of corporate savings.  Thus and with a low savings rate in the household sector the reduction in corporate savings holds perhaps the biggest potential for releasing domestic demand in Japan or so at least is the crux of Martin Wolf' argument as I see it [1].

Most analyses on household saving rates in Japan do not move beyond the representation above which plots net savings as a share of net income. And indeed, this paints an unequivocal picture.  The quarterly figure is highly volatile and subject to notable seasonality, but smoothed through a 12 quarter moving average shows us that since 2000 the savings rate of Japanese households have not exceeded 5%. More interestingly is of course is relentless downward trend which shows, more than anything, that the real economic conditions for Japanese households have changed significantly. This perspective which looks at the flow of savings is strongly underpinned by many empirical studies on the savings behavior of Japanese households. The most recent study is Horioka (2009) who presents a timely overview of the literature on the dissaving of the eldery in Japan. The evidence strongly suggests that Japanese consumers dissave into old age and as Mr Horioka ends his article, this is likely to have important ramifications on global imbalances assuming, I guess, that as Japanese consumers steadily move into a state of negative saving the economy will move into a current account deficit. I assume further that this is what Martin Wolf expect would happen if corporate savings were released to the benefit of Japanese households since otherwise Japan would not do much to correct global imbalances.

Now, I cannot refute the amount of evidence presented by Horioka and thus the conclusion in the main. What I can do however is to respectfully take Mr. Horioka to task on the definition of savings and thus what is defined here as dissavings. In this way, Horioka notes that the main source of dissaving by elderly take the form of declining social security benefits, increase in taxes and social insurance premiums, and increasing consumption expenditures. Let us quickly dispense with the last one and agree that Japan has not experienced any meaningful consumption boom in a long time which suggest that dissaving is not likely to take the form of a surge in consumption in any meaningful way (I don't suspect this is what Horioka wants to argue, but it is important for me to point this out).

Since 1997 the growth rate in GDP and private consumption expenditures have languished at a depressing mean reverting trend around the zero percentage annual growth mark. This indicates quite clearly that whatever the extent to which ageing households in Japan have dissaved through increasing consumption expenditures it has not been any meaningful driving force of consumption.

But what about the other two (increase in taxes and social insurance premiums). Are these really dissaving? I don't think so. Rather, these represent a transfer of saving from households to the government and thus an attempt by part of the government to reduce the future cost of age related liabilities and thus to compensate for a strongly negative net asset position by part of the government both in a current but more importantly, in a future perspective. In an ageing economy this is exactly why we would expect the dissaving hypothesis to be in need of significant adjustment since there will be forced savings through the inevitable attempt by the government to stabilize the deteriorating fiscal situation.

As such, the representation above does not paint an adequate picture of household savings in Japan and while this initially may be explained in light of the fact that we should look at the savings of the entire Japananese consumer base and not only the elderly (retired) consumers the rapid and ongoing process of ageing in Japan means that these two argument will inevitably converge over time, a point Horioka (2009) also makes. 

Specifically, the account of dissaving above fail to take into account, at least, two important missing links. The first is the simple fact that the rate of savings out of total income is closely related to the annual growth in income which, in Japan's case, has exactly declined significantly in the same period in part because of the deflationary environment but also, I would argue, to reflect the changing productivity structure of the Japanese labour market with an ageing work force.

Between 1998 and 2005 the change in the annual income flow to Japanese households was persistently negative and suddenly; a consistent savings rate in the same period of about 3-5% does not exactly come off as rapid dissaving. In fact, at no point in the graph above has the savings rate been below the annual growth in income which provides a very important qualifying perspective to the idea that the release of corporate savings either as a lump sum transfer or through a steady trickle of dividends would immediately be channeled into discretionary spending. I find this very difficult to believe, but in effect this will be subject to easy falsification if and when corporate savings in Japan became an important policy variable in terms of stimulating domestic demand. 

The second missing link relates to the idea that savings may be defined in two overall ways, the first which is a flow perspective is described above and the second is a stock perspective. The best example of the latter is the asset meltdown hypothesis that envisions a sharp decline in asset prices as aged households grind down their stock of assets by selling them to a smaller and shrinking base of working age households who will not be numerous or wealthy enough to support asset prices at the given level.

In the context of Japan, I have argued before how there is no meaningful destocking of assets even if the growth of households' total assets have stalled significantly.

Despite the obvious drawback of only having data from 1997 and onwards the picture is quite clear. Between 1997 and 2009 the overall household balance sheet in Japan has remained pretty "stable" rising from trn 1285 JPY in 1997 to about trn 1440 in 2009 JPY (current prices). I choose to put stable in quotations mark here since the real thing to notice is the lack of expansion (i.e. debt driven asset expansions) by part of Japanese households to reflect the fact that there was no housing bubble let alone any other kind of bubble in Japan in the period in question. The main point is of course that despite a continuing decline in the rate of savings from a flow perspective, Japanese households are not (yet!) engaged in any meaningful de-stocking towards what ever end point the economy would reach if ageing households and indeed the society as a whole began to run down its stock of savings.

In terms of composition, we find evidence of the often cited fact that Japanse households are quite risk averse Nakagawa and Shimizu (2000) holding between 50% and 55% of their total assets in either deposits or currency. In comparison, and while direct holdings of shares and investment trusts have indeed risen over the period, this entry still makes up only about 11% of the total balance sheet in 2009. Naturally, there is some cyclical effect here as the total share (value) of risky assets held directly in portfolio of Japanse households peaked in the years 2005 to 2007 at about 16-17%. Moreover, it is safe to conclude that if we include indirect holdings of risky assets through pension and insurance holdings, the picture becomes more balanced.

Looking at direct evidence of dissaving, we find none in the aggregate. Over the period in question the stock value of time, savings, and transferable deposits have gone up by 11% (i.e. a net addition of savings by the Japanese household) from some bn 665 JPY in 1997 to bn 742 JPY in 2009. Moreover, it is remarkable to see that the amount of currency held by Japanese households have increased by 40% in the same period. This suggests, more than anything, the risk aversion of Japanese households. Finally, I think it is worth to mention that although the amount of bonds held directly by Japanese households is next to none, Japanese households are naturally doing a substantial part of the heavy lifting in terms of financing the ongoing and almost perpetual deficit spending by part of Japan's governments. In this way, the large bulk of deposits as well as insurance and pension funds are very likely to be substantially invested (de-facto) in Japanese government bonds.

As an interim conclusion ans while a first glance suggests that Japan indeed is dissaving through its household sector it is an argument which does not hold entirely up to scrutiny. It is important for me to emphasize two things. Firstly, I don't dispute the analysis in Horioka (2009) and thus the wide range of previous studies that have shown how the life cycle model of savings is well calibrated to a Japanese context. However, I do think it is important to differentiate it with the points above and particularly the notion that Japanese households, as a whole, do not seem to be rapidly dissaving to the extent that many claim. Secondly, I want to reiterate the point that I am not arguing that dissaving will never occur in the aggregate. What I am saying however is that looking at the dissaving of the elderly and concluding that this will lead Japan towards an external current account deficit misses the current and real effect from ageing in Japan. Consequently, the picture of Japan at the present time running an almost perpetual external surplus is one of an economy fighting like hell to avoid obvious end point that would occur in the event of rapid de-stocking/dissaving.

Corporate Savings - Restraining Consumption through Retained Earnings?

Traditionally, economic models such as e.g. an OLG model set in an open economy context does not discriminate between the savings of corporates and households Rogoff and Obstfeld (1996) and Mason (1988) which is often because our economic models are set-up in a representative agent framework where the representative consumer is the sole shareholder of the representative firm and thus must be the sole beneficiary of whatever earnings (retained or otherwise) the company has. In a widely cited study Friend (1985) concludes that there is a moderate degree of substitutability between household and corporate savings which sounds about right to me.

In practice though and although principal agent problems and a thick corporate veil may make the direct link very sluggish, once foreign ownership of the domestic market cap is accounted for (about 20% in Japan's case I would say) there should no problem substituting corporate for private savings. In any case and to the extent that there is indeed a very long way from the dividends  of Japanese corporates  to the pockets of households it is, I assume, exactly here that Martin Wolf inserts his main argument.

As should be immediately clear here, it is not as if Martin Wolf is shooting blanks here although I don't suspect anyone really suspected that. Consequently, both the nominal value of retained earnings (manufacturers and non-manufacturers excl finance and insurance) as well as its share of total company assets have increased markedly since the mid 1970s. Since the second quarter of 1975 the nominal value of the stock of retained earnings has increased by a little over 270% while the corresponding figure for total assets is 163%. In terms of the share of total assets, the graph above does not tell the whole story as retained earnings as a share of total assets actually reached its low in the mid 1970s at around 5% declining from the mid 20s% in the 1950s. The average quarterly share of retained earnings relative to total assets in a post 1990 context is 14.14% with a steady upward trend throughout the 1990s and 2000s.

So far so good then. 

However, as with the case of household saving above, once we dig a bit deeper in the analysis it is not certain that retained earnings constitute the magic bullet. First of all, the representation above is one of stocks and not flows and thus if we express it as flows we get the same picture as above with household savings; namely, that while the stock of savings (in the aggregate) is not being drawn down the flow of savings is steadily declining even if the flow of corporate savings is quite volatile.

Still, the flow of corporate savings have been impressive even in a post 1990 context where the average quarterly growth rate (yoy) has been 4.5% (with a correspondingly high SD of 6.7%). Moreovern, the relationship between the total amount of gross fixed invesment on a quarterly basis and the stock of retained earnings is further indicative here. Between 2000 and 2008, Japanese corporates consequently kept an average of 183% worth of retained earnings on their balance sheet relative to the average value of quarterly gross fixed capital formation. As Martin Wolf evidently points out, this is ultimately a question of a secular decline in investment demand to which Japanese corporations only can do two things; dissave to match the decline in investment demand or let those savings flow out in the form of an external surplus. In the context of Japan and in strict sense of national accounting it is the latter route which has been chosen.

The more interesting question in terms of what those retained earnings are financing (i.e. on the asset side) is almost implicitly answered above although it is not as simple as it looks.

Consequently, conventional wisdom has it that the retained earnings of Japanese corporates are merely sitting on the asset side in the form cash and deposits and thus would be readily and easily available for distribution to shareholders. The more I look at the data however, the more this seems to me to be a myth.

The total amount of cash and deposits as a share of total assets held by Japanese corporates peaked in the first quarter of 1990 at 15.5% and has since declined to about 10% in the 2000s. Now, I might be missing an important liquid asset entry here, but it should serve to differentiate the picture somewhat of Japanese companies as cash hoarders.

Yet, the main picture remains in the sense that even if retained earnings have then gone to finance land acquisitions or the build-up of fixed assets the GDP entry of GFC shows with all certainty that investment activities in Japan have been in secular decline for the past 20 years as the nominal value of GFC peaked in the first quarter of 1991.

It is worthwhile to note however that of the main balance sheet entries on the asset side, "investment securities" is the one that has exhibited the strongest growth rate in a post 1990 perspective. This suggests that a large part of the incremental change in retained earnings in this period has been parked in yield bearing instruments be it government bonds or more importantly foreign securities which have helped Japan gain a substantial boost (far bigger than from goods and services exports) from a positive income balance. Since 2005, the stock of investment securities held by Japanese corporates has been approximately equal to 68% of the stock of retained earnings.

More generally, the flow of investment securities onto corporate balance sheets rose steadily until about 1999-2000 after which we observe a discrete bounce and a much more rapid (and volatile) increase hereafter. From Q1-00 to Q1-01 the stock of investment securities rose 25% and has since increased steadily to about trn 181 in 2008.

This last point in particular serves to differentiate the argument by Martin Wolf even if it is unquestionably true that the share of retained earnings used to finance the asset side appears extraordinarily large in the context of Japanese corporates. Moreover, I cannot of course say for certain what would happen in the event that those retained earnings became the subject of political attention as a tool to muster domestic demand.

Is it Optimal to Dissave?

The standard life cycle model tells us that it clearly is, and especially so when set in the context of a representative agent model aggregated to the macroeconomic level. Sure, we may incorporate bequest motives or uncertainty, but in the limit; dissaving on a microeconomic level will transfer itself to the macroeconomic level. Implicitly, this is the argument advanced when it is held that the retained earnings of Japanese companies can meaningfully be deployed to boost domestic demand in Japan and, most importantly, lead Japan towards an external deficit which would go some way to rebalance the global economy. 

Let me be clear. I don't dispute the dissaving argument in itself; especially in a context where fertility  "never" recovers (which may well be the practical case in Japan). However, and while dissaving certainly would be the fate for a closed economy, it need not be for an open one. In fact, it should take us very little time to agree that dissaving as a function of old age perhaps even to the extent that the economy moves into an external deficit is utterly undesirable from the point of view of the economy as a whole. Thus, it is my contention that ageing societies are not, in the main, characterised by aggregate dissaving but rather by the fight against it. In Japan's case the high level of private savings reflected primarily in the level of corporate savings becomes a vital shield towards spinning further into negative trend growth and deflation.

Apart from this which is really my main observation on a theoretical level I have two additional points.

Even if we assumed that the retained earnings of Japanese corporates could be effectively channeled to the purses of households, would these same households increase spending? Put differently, what is the underlying demand here? Needless to say, I am quite sceptical here and moreover, it is important to remember that the rate of savings closely follow the growth rate in income. Thus, if suddenly income rose either through a lump sum payment or a steady trickle would the savings rate follow?

Finally, the extent to which Japan may become a global provider of spare capacity not only hinges on the trend of dissaving but also, by definition, on investment demand. This makes the whole issue much more complicated since what we are really looking for is a net effect and since both savings and domestic investment demand can be expected to decline with the transition into old age and it is the mutual pace between the two that determines the external balance. Consequently, empirical as well as theoretical studies have spent considerable time to pin down what this net effect is supposed to be. I will not go into the conclusions from this literature (my upcoming thesis will have much more on this), but merely note that we can observe how countries such as Germany, Japan, Finland etc are running external surpluses, why this surplus is critical for their growth prospects and thus why the salient features of an ageing economy is not dissaving but rather the fight against it.

Once you get this point and extrapolate it to the issue of global imbalances and the convergence of the global age transition towards a, so far, unknown end point you should realize the tremendous mess we have to sort out. In fact, why don't I come full circle and finish off with a most recent quote from none other than Martin Wolf writing in his latest column;

Meanwhile, the eurozone as a whole, having lost its erstwhile internal demand engines, must now hope for faster growth of net exports. So do countries hit by the financial shock, such as the UK and US. So, too, does recession-hit Japan. So, not least, does China. Either the rest of the world has a spending binge, or these countries – which make up 70 per cent of the world economy – are going to be disappointed.

This seems self-defeating to me since there is no way that 70% of the world economy can rely on export driven recoveries let alone export driven growth strategies no matter what kind of binge came upon the rest of the world. Still, I completely agree with Martin that this is indeed the issue. And once you overlay this argument with some basic intuition of how demographics affect savings, consumption and investment you end up with the fundamental challenge for the global economy in terms of staging a comeback from the economic crisis.

So yes Virginia, demographics do matter!

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[1] - Click on pictures for better viewing

List of References

Data for this piece can be obtained by mailing me and I will ship over my excel sheets. However, for those of you who want to check it out yourself here is the database on the corporate balance sheet data and in terms of household data you can get it from the website of the Bank of Japan (search for "household" and you should be able to dig out the relevant files). 

Baldwin, Richard & Taglioni, Daria (2009) – The Illusion of Improving Global Imbalances, VoxEU research article (14.11.09) http://www.voxeu.org/index.php?q=node/4209

Friend, Andrew (1985) - The Policy Options for Stimulating National Savings, Conference on Saving and Capital Formation: The Policy Options Philadelphia (May 1985)

Obstfeld, Maurice & Rogoff, Kenneth (2009) – Global Imbalances and the Financial Crisis: Product of Common Causes, Paper prepared for the Federal Reserve Bank of San Francisco Asia Economic Policy Conference, Santa Barbara, CA, October 18-20, 2009

Horioka Yuji, Charles (2009) - The (Dis)saving Behavior of the Aged in Japan, Discussion Paper no. 763 The institute of Social and Economic Research Osaka University

Mason, Andrew (1988) - Saving, Economic Growth and Demographic Change, Population and Development Review, vol. 14 no 1 pp. 113-114

Nakagawa, Shinobu and Shimizu, Tomoko (2000) - Portfolio Selection of Financial Assets by Japan’s Households, Why Are Japan’s Households Reluctant to Invest in Risky Assets? BOJ Research Paperfff

Nakagawa, Shinobu and Yasui, Yosuke (2009) - A note on Japanese household debt: International comparisons and implications for financial stability, BIS Paper no. 46

Obstfeld, Maurice & Rogoff, Kenneth (1996) – Foundations of International Macroeconomics, MIT Press

Wolf, Martin (2009) - The Greek tragedy deserves a global audience, FT column January 19 2010

Wolf, Martin (2009) - What we can learn from Japan’s decades of trouble, FT column January 12 2010

Yet, this reservation notwithstanding, the rating agencies do seem to be some of the only big ticket private market actosr who are able to state the obvious. Specifically in this context, the obvious is directing our attention to the the ongoing travails of some economies in terms of figthting the current crisis with fiscal stimuli while the yoke of population ageing and its effect on public finances steadily pushes the economy's long term prospects into the sinkhole.

In this way, I don't think people should be, or indeed that they have a right to be outraged by the continuing comments (and inevitable) downgrades. How could they possible act otherwise given that they are here and do what they do?

In this sense, the recent messages from Moodys on Japan as well as Greece and Portugal respectively sounds extraordinarily timely to me even if it is stating the obvious;

(Quotes Bloomberg, first Japan and then Portugal/Greece (Eurozone))

The replacement of Japan’s finance minister four months into the government’s term increases concern about the commitment to contain the world’s largest public debt burden, Moody’s Investors Service said. “Japan’s fiscal strategy unknowns deepen” with the appointment of Naoto Kan last week, Thomas Byrne, senior vice president of Moody’s in Singapore, wrote in a note yesterday.

Byrne’s stance contrasts with analysts at Goldman Sachs Group Inc. and Morgan Stanley, who said Kan has indicated a willingness to repair Japan’s finances. The 63-year-old deputy prime minister last week replaced Hirohisa Fujii to become the country’s sixth finance chief in 18 months, tasked with preventing a relapse into a recession while containing the debt. “The revolving door for leadership at the Ministry of Finance does not engender confidence that Japan will put together a credible fiscal strategy to reduce deficits and stabilize the massive government debt overhang in the medium term,” Byrne said.

Kan said on Jan. 7 that it will be a “challenge” to maintain fiscal discipline this year and he will try to secure funds to fulfill the ruling Democratic Party of Japan’s pledges without exacerbating the debt burden. The role change also “raises doubts” over the administration’s commitment to a 44 trillion yen ($480 billion) cap on new Japanese government bond sales for next fiscal year, Byrne said. Kan may “seek to further boost fiscal stimulus to an economy hamstrung by renewed and stubborn deflationary pressures,” he said.

(...)

The Portuguese and Greece economies may face a “slow death” as they dedicate a higher proportion of wealth to paying off debt and investors demand a premium to hold their bonds, Moody’s Investors Service said.

While the two countries can still avoid such a scenario, their window of opportunity ”will not be open indefinitely,” Moody’s said in a report today from London. Portugal, with a negative outlook on its Aa2 rating, has more time “to reverse this trend” while Greece “has significantly less time.” Moody’s cut Greece’s rating to A2 from A1 on Dec. 22.

The premium that investors demand to hold Greek debt instead of German equivalents is six times more than it was two years ago, and the spread has doubled since 2008 in the case of Portugal. Greece had the largest budget deficit in the euro region last year, more than four times the European Union limit of 3 percent of gross domestic product. Portugal’s debt load will account for 85 percent of GDP this year, according to the European Commission.

Naturally, the case of Japan and the Eurozone periphery diverges in a number of notable ways. For starters Japan has its own central bank which will be duly deployed to provide funding for the issuance of government bonds to the extent that private (or foreign) savings are not enough to satisfy demand. Moreover, and as Moody's point 94% of Japanese debt is held by the country's own residents. I find this point less convincing as a mitigating factor since a country may very well go bankrupt with the majority of debt owned by domestic actors. Think about this as simply marking Japan to market given the demographic outlook and thus scything the face value of all those bonds they issue domestically. I.e.e Japan would move from the third/second biggest economy in the world to the "..th". However, since this would ultimately occur internationally through a sharp depreciation of the JPY, it would also boost Japan's competitiveness considerably. More importantly Japan has a large external surplus which means that she is building up claims on the rest of the world in stead of the other way around.

This is not the case for the Eurozone periphery and apart from the obvious fact that Greece, Portugal, Spain etc do not benefit from their own central bank which they could collaborate with in the context of quantitative easing or a prolonged commitment to ZIRP, they are also net external borrowers. According to the data from the IMF, the average annual current account deficit as percentage of GDP between 1999 and 2008 in Greece, Portugal, and Spain was -8.6%, -9.1% and -5.9% respectively.

On this point I agree with Moodys and others that the risk of a sudden balance of payment crisis leading into short term default is not relevant at this point. Rather, the main issue lies in how to make headway on the public debt/fiscal front at the same time as correcting the external deficit which has to correct since these economies are now effectively export dependent. It is very important to understand the very dangerous and decidedly unattractive cocktail that these economies must now swallow and why it is exactly so because of the inability to use nominal exchange rate depreciation as a tool to correct the external deficit. In this sense, what these economies now have to do is to travel the ill-wanted route of an internal devaluation in which domestic price and wage deflation are deployed in order to restore competitiveness. But this is not all. They are consequently also now effectively forced, vis-à-vis the nudge and pressure from Moodys et al, to take serious steps to rein in public deficits and put long term finances back on track. Now, the dilemma should be clear at this point since, as we know, deflation increases the real value of debt and thus it is difficult to see how these economies are exactly to pull this off. We could say, that the Eurozone does not allow them the leisure of inflation to ease their path to recovery.

Now at this point, the Austrian police aka haters of Fiat et al will probably be flashing their badges and tell me to pull over. And so, as I pull over I will tell them that anyone seriously arguing that the inability of Greece et al. to use nominal exchange depreciation to correct is not an aggravating factor simply do not have the faintest idea of what export dependency means modern growth dynamics of ageing economies stuck in a fertility trap about to become a liquidity trap. Really, it is as simple as that and while not everyone can devalue at the same time to become dependent on the same exports (i.e. the real underlying problem as we move forward) we are about to find out what happens when the entire weight of adjustment has to fall on the domestic economy.

Having said this however, I would like to emphasize that while the Eurozone, for reasons just mentioned, may be far from perfect we cannot let it fall apart and thus an internal devaluation in Greece, Spain etc it is. As with the Eurozone itself, it will be a great experiment to see how and whether it will work to salvage these economies.

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Old Maid is a card game where the simple task is to avoid holding a given card (often the queen of spades) at the end. Even in the company of good friends however, holding Old Maid at the end is not fun. Often, you have to buy the drinks, drop a piece of clothes, or endure other travails. And as it turns out, the global FX market is not unlike this good old game of cards where the Old Maid is proxied by having a strong currency on whose shoulders the correction of global macroeconomic imbalances must invariably fall. In this way, and although one sometimes get the feeling that everyone believes that everybody may actually export their way out of their current misery, buying one country’s currency means selling another and thus, someone (be it an individual economy or a group/basket of economies) must end up holding Old Maid.

The discussion on global imbalances has many faces, but in the context of currency fluctuations and FX markets the focus tends, one way or the other, to gravitate towards the need for the US dollar to fall. This was evident before the crisis and still is. However, if this seems obvious to the most ardent dollar bears as well as to those who still see a structurally important role for the buck going forward, it has been far less evident who should pick up the slack if the dollar is to correct to the new global fundamentals. In this way, key emerging economies are still pegging their currency to the green back and in general; while most claim to see the benefit of a strong currency they just don’t want it to be their currency.

Now, Fujii has stepped down due to health reasons and perhaps in an attempt to enter the office with a bang instead of a whimper, his replacement Naoto Kan kicked off his first public appearance by noting that he, for one, would like the Yen to be a little bit weaker and that he believed the MOF and the BOJ should cooperate to make it so. Having not forgot the last time in 2002 that Japan intervened by selling Yen, markets reacted swiftly by giving the Yen a nice jolt downwards (against the USD).

Yet, that position lasted only one day;

[Update 2: Ok, I am happier with it now]

[Update 3: Well, like one commenter said, "if it aint broke, don't fix it". Perhaps I should have heeded that call, but I wanted to move to the new SQP edition and that meant choosing a new design. After some hours of playing around I have realised that anything other than white background with black text does not really work for me, so I have kept it ultra simple. I hope you like it.]

Well, it is a new decade and I felt like redoing the design on the site in part because I wanted something else, but also because I could get considerably added flexibility by shifting the layout-theme on to the new SQP template versions (internal lingo, but just believe me). I am not sure I like the colors yet, and I have not decided on the final navigation layout cut. Other than that a couple of general notes ...

Meanwhile, Danske Bank had a very interesting research note out today by economists Gustav Smidth and Frank Øland Hansen on the sovereign situation in the Eurozone and the potential for correcting not only in the immediate short term (i.e. preventing a collapse), but more importantly how to get debt to GDP ratios back on a solid footing within, let us say, a decade or so. As it turns out this is very difficult.