Yesterday, the paper edition of The Guardian had the following story on the front page:
Cost of Greek exit from euro put at $1tn | Business | The Guardian

The British government is making urgent preparations to cope with the fallout of a possible Greek exit from the single currency, after the governor of the Bank of England, Sir Mervyn King, warned that Europe was "tearing itself apart".

Reports from Athens that massive sums of money were being spirited out of the country intensified concern in London about the impact of a splintering of the eurozone on a UK economy that is stuck in double-dip recession. One estimate put the cost to the eurozone of Greece making a disorderly exit from the currency at $1tn, 5% of output.

Officials in the United States are also nervously watching the growing crisis: Barack Obama on Wednesday described it as a "headwind" that could threaten the fragile American recovery.

Only of course, the paper headline was just: $1,000,000,000,000

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Over at Flip Chart Fairy Tales is an interesting post. I don't know what to make of it, so I thought - diary time...

The end of the state as we knew it | Flip Chart Fairy Tales

Two reports about the cost of ageing and its fiscal impact came out last week. The IMF's Financial Stability Report concluded that the cost of longevity has been consistently underestimated. By 2050, it says, if people are living for even three years longer than current models predict, it would add 50 percent to the estimated costs of ageing. In short, then, governments and pension funds may have got their sums quite seriously wrong. The IMF calculates that, by 2050, the costs of ageing, including healthcare, welfare spending and pensions, will increase by 5.8 percent of GDP in the advanced economies.

The OECD's report on fiscal consolidation, also out last week, came up with a very similar figure. If current levels of benefits and care are to be maintained, it estimated an increase in age-related spending of 6 percent of GDP by 2050. These figures don't differ that much from the ones I pulled together from various sources last year. The consensus there was around 4 percent of GDP by 2030, so add another twenty years and 6 percent looks like a reasonable guess. It's impossible to predict so far ahead with any accuracy but the general consensus seems to be that ageing populations are going to cost a hell of a lot.

The problem, as both reports point out, is that the economies with the highest percentage of oldies are also the ones with the highest public debt levels. The increased costs of ageing, says the IMF could, by 2050, see the UK's debt rising to 130 percent of GDP, the US and Germany's to 150 percent and Japan's to 300 percent!

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Edward Hugh of AFOE submitted an essay for the Wolfson Prize.
You can access the full version here, it ranges far and wide in an attempt to address the question set by the prize, which is about how a country might leave the Euro.

For me the most interesting part was his assessment of "what did Germany gain from the Euro?" This is something I've had some thoughts about, but didn't have time to investigate. To me it's an essential topic in trying to disentangle the claims of "virtue" and "laziness" that have been bandied around in discussion of the Euro crisis.

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Over on Slashdot, some MIT fusion researchers answer some community questions. If you're interested in the technology there's some interesting bits there and I recommend it.

But there's one piece that I want to quote, because the number in it really got me thinking:

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In line with the suggestion in talos' diary The gaping abyss of neoliberal "reform" here are some thoughts on the sinister religious cult that is the Austerians.

I've been ranting in the physical world for more than a week or two about the "Learned Helplessness" of our leaders and the dominant economic consensus. Now it's finally inspired a rambling diary...

Today, it seems Krugman is channelling me:
The Defeatism of Depression - NYTimes.com

The Defeatism of Depression

A number of people have asked me to weigh in on David Brooks's piece today. Sorry, not gonna do a tit-for-tat. Let me instead just make a more general point.

All around, right now, there are people declaring that our best days are behind us, that the economy has suffered a general loss of dynamism, that it's unrealistic to expect a quick return to anything like full employment. There were people saying the same thing in the 1930s! Then came the approach of World War II, which finally induced an adequate-sized fiscal stimulus -- and suddenly there were enough jobs, and all those unneeded and useless workers turned out to be quite productive, thank you.

There is nothing -- nothing -- in what we see suggesting that this current depression is more than a problem of inadequate demand. This could be turned around in months with the right policies. Our problem isn't, ultimately, economic; it's political, brought on by an elite that would rather cling to its prejudices than turn the nation around.

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Recently, we've had lots of discussions about Eurozone imbalances, with Migeru pointing out that without investment in the productivity of workers in countries like Spain, the imbalances are destined only to return - no matter what temporary solutions are found in the next few months.

This brought my mind back to an occupation from the boom days, when I (and I think many at ET) could see the world economy heading towards some kind of finance system "iceberg" but we didn't have a good handle on the impacts.

Back then, I was looking at the patterns of migration, inside the UK and inside the reunified Germany - and wondering what it all meant. I still don't know what it "means" in some ways, but the Eurozone experience has added to the picture...

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Reading "The Swerve" - a book about how a particular text from Ancient Rome helped kickstart a cultural change around the Renaissance...

Poggio of Florence, witnessing the lack of modesty around bathing in Baden around 1420, contrasts the anxious, work-obsessed, overly-disciplined Italians, with happy-go-lucky, carefree Germans...

Post your own examples of changing stereotypes below...

When I was young and trying to get my mind around how the world works, I was told that bank loans come from deposits.

As such:

1. If you want business investment, you have to have savings - typically the savings of ordinary people.

2. It doesn't matter how rich someone gets, even if they don't spend their money, it remains in the system because their savings enable loans.

The quoted article below is about a study that tells an unpopular story about the British NHS. It's a story of relative success.

No system is perfect and there are many specific areas in which UK health services fall down. For example:

1. Mental health treatment - underfunded and really patchy quality across the country.

2. Treatment of ligament/tendon problems - there's a bias towards physiotherapy and against doing operations for these injuries in the UK. It's one of the places where the rationing may be considered to bite in comparison with other countries (esp. in Europe.)

Still, the crucial element of the study is that in lots of tangible ways, the NHS provides a good service - absolutely comparable with other developed countries around the world - and spends less than many of the them. One can question whether the metrics used in the report prove one system is better than another, but it's clear in my opinion that the claims of NHS inferiority aren't backed up by the figures.

This is not the story you'll read in UK government briefing documents, or in many of the press reports. The right wing agenda is to break up the integrated, national service and bring in marketisation and competition. Their claimed basis for this is "improved efficiency" - this report reminds us that it is more about funnelling government expenditure into private companies...

I'd encourage you to read the whole thing.

Reading a rambling and not all that coherent article on the state of the global economy, I came across this interesting snippet:

Crash Club - what happens when three economies collide | Mike Davis | Comment is free | guardian.co.uk

In effect, a shadow banking system has arisen with big banks moving loans off their balance sheets into phony trust companies and thus evading official caps on total lending. Last week, Moody's reported that the Chinese banking system was concealing one-half-trillion dollars in problematic loans, mainly for municipal vanity projects. Another rating service warned that non-performing loans could constitute as much as 30% of bank portfolios.

Real-estate speculation, meanwhile, is vacuuming up domestic savings as urban families, faced with soaring home values, rush to invest in property before they are priced out of the market. (Sound familiar?) According to Business Week, residential housing investment now accounts for 9% of the gross domestic product, up from only 3.4% in 2003.

A story of the system of healthcare in Singapore:

Singapore is not so clean, Mr Murdoch | Chee Soon Juan | Comment is free | guardian.co.uk

Letchmi (not her real name), a 40-year-old Singaporean woman, stood in the dock and pleaded guilty to pilfering $743 from the cash register where she worked as a cashier at a local supermarket. She told the judge in mitigation that she stole the money to pay for her medical expenses and that she had a 10-year-old daughter to fend for. She produced medical records to back up her plea. She had returned all the money that she had stolen. Unmoved, the prosecution pushed for a deterrent sentence. The judge imposed a fine of $2,000.

This is a scenario played out repeatedly all over Singapore. The unforgiving high cost of living in the city, coupled with low wages, has led many to commit crimes out of financial desperation. It is, of course, trite to argue that just because one is poor doesn't mean that one is entitled to commit criminal acts. There are many who face economic hardship but don't resort to crime.

I came across this story today and thought it worth recording. There are many more like it and I'll try to record them over time.

The statistics in comparative health studies are imperfect and fuzzy, but as in economics, they point fairly well in a certain direction. I've learned the hard way that those on the right have little interest in interpreting the figures fairly, they prefer to cite anecdotes. One place they often cite as a haven of "private healthcare working properly" is Singapore.

The reality is that it depends very heavily on your income level.

[The linked article moves on to other realities in Singapore - well worth a read.]

With two recent diaries, Krugman confronts the fact that the patterns that seem correlated with past enrichment of society are breaking down:

Falling Demand for Brains? - NYTimes.com

As I recall, I was the only contributor who obeyed instructions; everyone else was too concerned about loss of dignity. Anyway, I decided to write the piece around a conceit: that information technology would end up reducing, not increasing, the demand for highly educated workers, because a lot of what highly educated workers do could actually be replaced by sophisticated information processing -- indeed, replaced more easily than a lot of manual labor. Here's the piece: I still think it's a fun read.

So here's the question: is it starting to happen?

Today's Times has an interesting and, if you think about it, fairly scary report about how software is replacing the teams of lawyers who used to do document research. And then there's Watson, of course, who -- which? -- can beat almost everyone except my Congressman at Jeopardy.

...

In my mind this raises several questions. One is whether emphasizing education -- even aside from the fact that the big rise in inequality has taken place among the highly educated -- is, in effect, fighting the last war. Another is how we have a decent society if and when even highly educated workers can't command a middle-class income.

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It's hard to trim this article to be a reasonable quote - so I encourage you to read it all. It's not news, we've discussed the illusory nature of some of the financial sector profits that have been booked plenty of times, but it's good to see the Bank of England publishing research on the topic...

Banking's risky business | Larry Elliott | Comment is free | guardian.co.uk

...

Not since the Great Depression of the 1930s had the public held the financial sector in such low esteem. Yet that was not the picture of the banks painted by government data. The national accounts published by the Office for National Statistics showed that the financial sector was making its biggest contribution since the mid-1980s to the UK economy; between the third and fourth quarters there was a record increase in the value of the services provided by the banks.

Confused? Clearly, there's something not quite right about a state of affairs where banks are both contributing massively to the economy while at the same time being rescued from collapse. Fortunately, an answer to this conundrum was provided given today in a paper by Andrew Haldane, the Bank of England's director of financial stability. It also has much wider ramifications, which we'll get to later.

Haldane's paper, given at a London School of Economics' conference on the future of finance argues that the answer to the puzzle lies in the way the ONS measures the value of financial services.

...

FISIM is calculated by subtracting the interest rate on deposits from the interest rate on loans and multiplying by the number of outstanding bank balances.

What happened in the fourth quarter of 2008 was that banks assumed there would be a massive increase in defaults on loans. They responded, entirely rationally, by increasing interest rates to cover the expected losses. That meant the gap (spread) between interest rates on deposits and interest rates on loans widened, the value of the financial sector's services as measured by FISIM increased, and this showed up in the national accounts as an increase in output.

"In other words," Haldane says, "at times when risk is rising, the contribution of the financial sector to the real economy may be overestimated." If he is right, the recession during the winter of 2008-09 was probably even worse than the official statistics suggest.

But there are longer-term implications too. The waves of financial liberalisation seen in Britain from the early 1970s to 2007 were justified on the grounds that the City was booming, providing higher returns to the economy than other sectors. Indeed, as Haldane notes, finance outstripped the rest of the economy in terms of growth by around 1.5 percentage points a year.

But what if that growth was in large part the result of higher risk taking, manifested in the increased leverage of the banks and speculative trading in increasingly exotic financial instruments? Haldane wonders whether the contribution made by the financial sector these past few decades has been more mirage than miracle. Looking at how the returns to banking have reversed as some of the risks they were taking have materialised, there is only one answer: mirage

John Hagel is one of those "business gurus" whose work is very much a mix of the interesting and the ideological.

He has a new book out and a blog promoting it... one part of it touches on something that seems very interesting:

Edge Perspectives with John Hagel: Economic Recovery? Don't Count On It.

In our new book, The Power of Pull, we summarize the metrics that we developed for the Shift Index - the first attempt to quantify the longer-term trends that have been re-shaping the business landscape over the past four decades.  Of the 25 metrics in the Shift Index, one metric in particular stands out: return on assets for all public companies in the US.  Since 1965, return on assets has collapsed by 75% - it has been a sustained and substantial erosion in performance.  There is no evidence of any flattening of this trend, much less turning it around.

With the Greek member of the Euro herd under (some? imperfect?) protection by other members... the hyenas look for another stragger - Portugal?

The Next Global Problem: Portugal « The Baseline Scenario

What happened to the global economy and what we can do about it The Next Global Problem: Portugal

with 65 comments

By Peter Boone and Simon Johnson

The bailout of Greece, while still not fully consummated, has brought an eerie calm in European financial markets.  It is, for sure, a massive bailout by historical standards.  With the planned addition of IMF money, the Greeks will receive 18% of their GDP in one year at preferential interest rates.  This equals 4,000 euros per person, and will be spent in roughly 11 months. 

Despite this eye-popping sum, the bailout does nothing to resolve the many problems that persist.  Indeed, it probably makes the euro zone a much more dangerous place for the next few years. 

Next on the radar will be Portugal.  This nation has largely missed the spotlight, if only because Greece spiralled downwards.  But both are economically on the verge of bankruptcy, and they each look far more risky than Argentina did back in 2001 when it succumbed to default.

The main problem that Portugal faces, like Greece, Ireland and Spain, is that it is stuck with a highly overvalued exchange rate when it is in need of massive fiscal adjustment.  Portugal spent too much over the last several years, building its debt up to 78% of GDP at end 2009 (compared to Greece's 114% of GDP and Argentina's 62% of GDP at default).  The debt has been largely financed by foreigners, and as with Greece, the country has not paid interest outright, but instead refinances its interest payments each year by issuing new debt.  By 2012 Portugal's debt-GDP ratio should reach 108% of GDP if they meet their planned budget deficit targets.  At some point financial markets will simply refuse to finance this Ponzi game.

To resolve its problems, Portugal needs major fiscal tightening.  For example, just to keep its debt stock constant and pay annual interest on debt at an optimistic 5% interest rate, the country would need to run a 5.4% of GDP primary surplus by 2012.  With a 5.2% GDP planned primary deficit this year, they need roughly 10% of GDP in fiscal tightening.  It is nearly impossible to do this in a fixed exchange rate regime - i.e., the eurozone - without massive unemployment.  The government can only expect several years of high unemployment and tough politics, even if they are to extract themselves from this mess. 

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In yesterday's open thread, I posted this excerpt from an interesting blog by Rebecca Wilder:

The endgame for Europe: wage cutting and the battle for exports

Yesterday I argued that Latvia's cost-cutting efforts are evident compared to a cross-section of European Union countries. Latvia's efforts, while commendable, were very much a function of the emergency IMF loan in December 2008 and the ensuing recession in 2009.

After an email exchange with Marshall Auerback, and thinking more about the cross-section of Europe, I now see a very scary trend emerging across Europe: the fight for exports.

...

Latvia's model: drop wages to increase export income. Greece: drop wages to increase export income. France, Germany, Spain, Portugal, etc., etc. It's impossible that the whole of the Eurozone will drop wages to increase export income. It's especially bad for countries like Latvia or Hungary, where the lion's-share of trade occurs withing the boundaries of Europe.

And what happens when export income does not provide the impetus for aggregate demand growth? Well, there's not much left. Can't devalue the currency (via printing money), and tax revenues will fall faster than a ten-pound weight: rising deficits; rising debt; rising debt service (via surging credit spreads). Sovereign default seems like a near-certainty somewhere in the Eurozone!

Comments focussed on the hyperbole about sovereign defaults... but I think the heart of the piece asks questions about an important assumption - is export-led growth the panacea?

From:

http://www.sciencedaily.com/releases/2009/11/091123083704.htm

Is Global Warming Unstoppable?
ScienceDaily (Nov. 24, 2009) -- In a provocative new study, a University of Utah scientist argues that rising carbon dioxide emissions -- the major cause of global warming -- cannot be stabilized unless the world's economy collapses or society builds the equivalent of one new nuclear power plant each day.

Now that's a pretty hyped up opening statement. I think there are some holes in it, but that result isn't what I find interesting about the model. What caught my eye comes further down...

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From : http://yorkshire-ranter.blogspot.com/2009/11/profiles-in-wanktankery-gwpf.html

Starts out shooting fish in a barrel...

[Detail excised]

...

It's Benny Peiser, "director" of the "Global Warming Policy Foundation", still hawking the intellectually dishonest, busted on its own terms talking point about "no warming for 10 years".

Migeru has posted about the Spanish "Mileurista" - an under-employed generation, now BW notices the phenomenon elsewhere too...

The Lost Generation - BusinessWeek

Bright, eager--and unwanted. While unemployment is ravaging just about every part of the global workforce, the most enduring harm is being done to young people who can't grab onto the first rung of the career ladder.

Affected are a range of young people, from high school dropouts, to college grads, to newly minted lawyers and MBAs across the developed world from Britain to Japan. One indication: In the U.S., the unemployment rate for 16- to 24-year-olds has climbed to more than 18%, from 13% a year ago.

For people just starting their careers, the damage may be deep and long-lasting, potentially creating a kind of "lost generation." Studies suggest that an extended period of youthful joblessness can significantly depress lifetime income as people get stuck in jobs that are beneath their capabilities, or come to be seen by employers as damaged goods.

Equally important, employers are likely to suffer from the scarring of a generation. The freshness and vitality young people bring to the workplace is missing. Tomorrow's would-be star employees are on the sidelines, deprived of experience and losing motivation. In Japan, which has been down this road since the early 1990s, workers who started their careers a decade or more ago and are now in their 30s account for 6 in 10 reported cases of depression, stress, and work-related mental disabilities, according to the Japan Productivity Center for Socio-Economic Development.

When today's unemployed finally do get jobs in the recovery, many may be dissatisfied to be slotted below people who worked all along--especially if the newcomers spent their downtime getting more education, says Richard Thompson, vice-president for talent development at Adecco Group North America, which employs more than 300,000 people in temporary positions. Says Thompson: "You're going to have multiple generations fighting for the jobs that are going to come back in the recovery."