Links & comments 20 December 2011

The plight of the 1% – some good quotes here with respect to the upper echelon’s ignorance over the likely deteriorating quality of their own pies: upper echelon wealth depends on the health of the pyramid, something which many fail to understand.  In other words, the wealthy have more to lose if the supporting structures collapse.

Eurozone crisis hits US mortgage securities – Euro banks may be selling US asset backed (mortgage backed) paper causing a fall in the pricing of these assets( which incidentally may further influence Fed buying of mortgage based assets).  The dynamics of this activity can better understood by reading a recent paper by Hyun Song Shin, Global Banking Glut and Loan Risk Premium discussed in an earlier post of mine -   Light on the Euro Zone banking crisis.

Can Italy survive the financial storm? An article from Vox that suggests yes by providing a positive spin on recent developments in Europe.  I am not sure that I share these sentiments which depend on falling wage costs, stability in the banking system through the ECB longer term refinancing operations and a belief in the implementation and effectiveness of austerity measures:

“The Italian government is pushing a strong and credible fiscal adjustment through Parliament. “

“The stability of the Italian banking system now seems assured given that the ECB has made three-year funding available “

What has to start yet is to make the Italian economy competitive again by reducing labour costs……Provided the real sector of the economy can be shielded from the worst effects of the financial storm the country should have enough time for the real adjustment to bear its first fruits.”

With regard to wage costs, Germany has indeed benefitted from lower growth in wage costs, but its wage costs are still relatively high (higher than Italy’s) and a larger component of gross wages in Italy are non wage costs, which means non wage costs need to fall, itself implying in part further austerity.  Not only will wage costs and non wage costs need to fall if they are to compete with lower cost Eastern European countries, but productivity and skills will need to rise if they are to compete with the likes of Germany and the US.   It is not so much wage costs, but the wage costs relative to the added value produced by labour in the industries in which they are employed and hence a refocus and restructuring of capital employed which also depends on so many other factors.    This is a very long term outcome, and these are usually characterised by barely perceptible incremental changes along the way.  It may be hard to discern any benefit for some time and certainly not in sufficient time to assuage deflationary risks currently embedded in the economy..

As far as austerity measures, there is no guarantee that the short term impact of such measures will be negligible in economic terms, especially when combined with European, if not global austerity imperatives.   Finally, is the stability of the Italian banking system really assured, as suggested, by the new LTRO measures introduced by the ECB?  

Labour_cost_index_-_recent_trends/ Economic boom barely lifts German labor costs / EU-Comparison of labour costs and non-wage costs /LABOUR DEMAND IN GERMANY: AN ASSESSMENT OF NON-WAGE LABOUR COSTS / Problems of International Labour Cost Comparisons/ / The margins of Labour Cost adjustment./ This Is The Chart That Really Makes The Germans Furious / After the Election: Germany Will Continue to Obstruct Global Economic Rebalancing/ What Explains the German Labor Market Miracle in the Great Recession?*/ Wage setting in Germany – new empirical findings /The economy of Germany: powered by reform

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