Hal Varian on Googlenomics [feedly]

Hal Varian on Googlenomics
http://ritholtz.com/2018/05/hal-varian-googlenomics/

Hal Varian serves as Google's chief economist, is a professor emeritus at the University of Berkeley and a fellow at the Guggenheim Foundation, the Econometric Society. He's also the author of two economics textbooks, and the co-author of the bestselling business strategy book, Information Rules: A Strategic Guide to the Network Economy.     Source Jimmy P  …

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Eduardo Porter--Economic Scene: The Profound Social Cost of American Exceptionalism [feedly]

Economic Scene: The Profound Social Cost of American Exceptionalism
https://www.nytimes.com/2018/05/29/business/economy/social-cost-american-exceptionalism.html

The Profound Social Cost of American Exceptionalism

Image
A homeless woman and her grandchild in Atlantic City, where more than a third of the population lives in poverty. The share of Americans in poverty is more than twice that in France, Iceland or the Netherlands.CreditJohn Moore/Getty Images

By Eduardo Porter

May 29, 2018

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When I wrote my first Economic Scene column six years ago, the unemployment rate languished at 8.2 percent as the job market painfully recovered from the jolt of the Great Recession. By last month, only 3.9 percent of working-age Americans who sought a job didn't have one.

You are welcome.

I'm kidding, of course. How could anybody claim credit for the performance of something as vast and complex as the American labor market? My columns probably didn't have anything to do with the doubling of the Standard & Poor's 500-stock index, either, or even with the sixfold rise in digital-only subscriptions to The New York Times.

To the contrary, as I write what will be the last column of my tenure, I can't help but acknowledge how little purchase my writing has had on the substance of reality. In particular, it has had no discernible effect on what one might call America's fundamental paradox.

The United States is one of the richest, most technologically advanced nations in the history of humanity. And yet it accepts — proudly defends, even — a degree of social dysfunction that would be intolerable in any other rich society.

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My first column pondered why Americans didn't care more about the nation's income gap, so much starker than that of any other advanced democracy. I suggested that my compatriots might come to a consensus that inequality is harmful when they realized how vast inequities could gum up the cogs of economic and social mobility.

Well, inequality hasn't abated much. In 2015, the richest 1 percent of American taxpayers drew more than 20 percent of the nation's income, including capital gains, according to the tabulations by the French scholar Thomas Piketty and his colleague Emmanuel Saez.

You can bet it has gone higher, given the bull run in the stock market since then. And Republicans just passed another round of tax cuts to offer a helping hand to the upper crust.


Most interestingly, Americans still don't care that much. Sure, two-thirds say they are dissatisfied with the way income and wealth are distributed, according to Gallup. Still, more than three out of five — compared with just over half six years ago — are satisfied with "the opportunity for a person in this nation to get ahead by working hard."

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Republican orthodoxy is that inequality is not necessarily a problem. And if rising tides substantially lifted everybody's boat, it might matter less that the yachts parked at the North Cove Marina a stone's throw from Goldman Sachs rode a bigger swell. Tides in America don't work like that anymore, though.

As my column has aimed to highlight, too many Americans are, well, sinking. Seventeen percent of Americans are poor by international standards — living on less than half the nationwide median income. That's more than twice the share of poor people in France, Iceland or the Netherlands.

Forget about income, though. It's hard to square Americans' belief in their society's greatness with the life expectancy of its newborn girls and boys. It is shorter than in Australia, Austria, Belgium, Britain, Canada, Chile, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Israel, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Slovenia, South Korea, Spain, Sweden, Switzerland and probably a few other countries I missed.

Or let's measure our progress in terms of infant deaths. Scientists in the United States invented many of the technologies used around the world to keep vulnerable babies alive. So how come our infant mortality rate is higher than that of every nation in the Organization for Economic Cooperation and Development with the exceptions of Mexico, Chile and Turkey?

Our dismal rank, by the way, is not driven by the babies of white, affluent Americans. The impact of the nation's fundamental paradox mostly fails the nonwhite and the poor. Black males born in the United States today will probably live shorter lives than boys born in Mexico, China or Turkey.

This set of facts seems to me problematic. Your heart doesn't even have to bleed to care. The United States risks its prosperity by leaving so many Americans behind.

6

The children of poverty who survive will most likely hobble through life with mediocre educations — lagging their more affluent peers even before their first day in school and then falling farther behind, deprived of the resources that disadvantaged children in other advanced nations routinely enjoy.

It's an Unequal World. It Doesn't Have to Be.

Global inequality, after widening for decades, has stabilized. The share of the world's income captured by the top 1 percent has shrunk since its peak on the eve of the financial crisis.

Dec. 14, 2017

Unequipped to cope with the demands of a labor market in furious transformation, they will give "social mobility" a new, all-American meaning: the tendency to move in and out of prison. It's hard to believe any country could waste so many resources and prosper.

And yet for all the ink spilled by so many excellent journalists — from The Times's own Neil Irwin to Vox's Matt Yglesias, Bloomberg's Noah Smith and many others — America is doubling down on its exceptionalism. The rich got a tax break. Bankers got a break from the pesky rules written in the shadow of the financial crisis to protect the little guy. The poor and near poor were freed from their ability to afford health insurance.

As Catherine Rampell noted in The Washington Post, populism — understood as a political movement shaped around giving the working class a "fair shake" — is pretty much dead.

And yet writing is, in fact, indispensable. It is because of the writing of journalists and social scientists — economists and political scientists, historians and sociologists — that we know what we know about the workings of American society, its economy and its political system.

From Lawrence F. Katz and Alan B. Krueger, I learned that the very meaning of the word "job" is changing, as fixed employment gives way to contract, part-time, gig and temp work. David Autor, David Dorn and Gordon Hanson enlightened me about the cost to many American communities of China's rise. Michelle Alexander's writing told me about the impact of America's ruthless criminal justice system on the nation's blacks. Arlie Russell Hochschild's shed light on the politics of its struggling whites.

To my colleagues in journalism, I owe the deepest debt of gratitude. From them I have learned how important it is to shine light on power. In this peculiar political moment, as the powerful promote self-serving realities, hoping to bend perceptions to their will, my colleagues' work to communicate a reality undistorted by political ambition amounts to the last line of defense against autocracy.



I will miss writing the column. But I relish the opportunity this opens to write in another form, free of a column's weekly demands to explore the drama of American life in greater depth.

I will be devoting the next few weeks to figuring out what to focus on next — chatting with my editors, as well as with the sources I have come to rely on for sober, authoritative thinking. The important question, however, remains: What kind of society does "America" mean?

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The Danger That Italy’s Political Crisis Poses for the Global Economy [feedly]

The Danger That Italy's Political Crisis Poses for the Global Economy
https://www.nytimes.com/2018/05/30/upshot/italy-political-crisis-global-economy.html
Italian political dysfunction is nothing new. Italian political dysfunction that ripples through global financial markets and has the potential to upend Europe is something the world woke up to Tuesday morning.

What are markets really signaling, and how much danger is there for the global economy? To answer, it helps to tease apart the crosscurrents between Italian politics, European institutions, financial markets and economies worldwide.

The New Political Risk in Italy

The Italian president, Sergio Mattarella, rejected an anti-E.U. nominee for economy minister, setting the stage for elections later in the year that, if a recent pattern repeats, could put in place a parliamentary majority that is hostile to European institutions.

In effect, those events have made it more likely that there will be a showdown between authorities in Rome and officials in Brussels, Berlin and Frankfurt over deficit spending, with an unraveling of the European Union one potential outcome, even if not the most likely one.

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New Italian elections would help decide whether that is the case. In the last elections, in March, populist parties skeptical of European institutions won a comfortable majority of seats in parliament, but included both right-wing and left-wing parties that have struggled since then to form a coalition.

If the populists maintain or expand their advantages in elections, it raises the prospect of serious friction between Italian politicians looking to increase spending and a European Commission, European Central Bank and German government that insist upon fiscal austerity as a condition for, among other things, continued E.C.B. purchases of Italian bonds.

As a result, the European Union is entering yet another perilous phase, after years of crises that started in Greece nine years ago. No one would confuse the latest events with the high drama of the eurozone crisis from 2010 to 2012. But the ultimate stakes are higher. Italy is a much more populous country than Greece, more at the core of the European Union, and with much higher public debt.

What the Markets Are Telling Us

The movements Tuesday — a spike in Italian bond yields, and drops in the euro and stocks worldwide — suggest that the risk of some calamitous outcome for Europe has risen after a weekend of political drama in Rome, but that it's still an unlikely outcome.

So far, there are few signs of "contagion effects," in which developments in Italy could create a self-fulfilling crisis in other countries with similar economic challenges. But Italy is the third-largest economy in the eurozone and has one of the largest piles of public debt in the world. A crisis there could endanger banks and investment portfolios everywhere.



The Italian government's borrowing costs for two years soared from 0.94 percent to 2.42 percent Tuesday, as investors demanded greater compensation against the risk that the Italian government might repay them not with the rock-solid euro but with less valuable newly issued currency.

Meanwhile, Spanish two-year bond yields rose only slightly Tuesday — by 0.07 percentage points, not the 1.48 percentage points of Italian yields.

"The contagion has been really muted," said Megan Greene, global chief economist at Manulife Asset Management. "I think investors are correctly looking at this as an Italy-specific risk for now."

Bond investors seem pretty well persuaded that the issue here is not a broad a loss of confidence in South European nations' ability to pay their debts. Since 2012, the European Central Bank has instilled confidence that it is willing to do "whatever it takes" — to use the memorable phrase of the E.C.B. president Mario Draghi — to preserve the euro.

Europe's Dilemma

What is happening in Italy is more a political crisis than a financial one. Mr. Draghi's tools are helpful only when a country's elected leaders are trying to avoid crisis. They are of little use if a government truly wants to break away from the rest of Europe.

Other European countries, especially powerful Germany, will have little desire to subsidize what they view as fiscal profligacy in Italy. The push toward greater economic unity across Europe since the Greek crisis has included jointly guaranteeing the continent's banks and the E.C.B.'s purchase of government bonds.

If there is conflict, both sides have reason to work things out. Germany and European institutions certainly don't want a crackup of the eurozone. And within Italy, the economic consequences of peeling away from Europe — high inflation and lost savings in the near term and the long-term growth consequences from being a less appealing place for investment — are severe enough that there would be reason to strike a deal.



Roberto Perli, a partner at Cornerstone Macro, puts the chance that Italy will exit the euro at only around 10 percent to 15 percent. He argues in a research note that European institutions will probably seek to de-escalate the tensions in the coming months.

The Risks for the U.S. and the World

So far the damage to markets outside Italy is mostly limited to a sell-off in global stock markets, including a 1.2 percent drop in the Standard & Poor's 500 index Tuesday. As is often the case when the rest of the world looks risky, money flowed into Treasury bonds, lowering interest rates in the United States.

No doubt Italy has the most at risk economically, followed by the rest of Europe. But one thing that has become clear over the last decade is how effects can spread unpredictably in times of financial disruption.

For the last decade, the world has experienced a rolling series of crises, in which financial turmoil fuels economic despair which intensifies political dysfunction which — through financial markets — can spread across oceans and repeat the pattern.

No one would have thought that a crisis centered on home mortgages in the United States would prove the trigger for crises in Greece and across Europe all those years ago. If things go badly in Italy, there's no telling where the damage could end up.

Neil Irwin is a senior economics correspondent for The Upshot. He previously wrote for The Washington Post and is the author of "The Alchemists: Three Central Bankers and a World on Fire." @Neil_Irwin • Facebook

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Creating a Better Global Trade System [feedly]

Creating a Better Global Trade System
https://blogs.imf.org/2018/05/29/creating-a-better-global-trade-system/

By Christine Lagarde

May 29, 2018

Versions in عربي,  Русский    

Engineers inspect the 3D printing of a bicycle frame in California: trade in services has risen dramatically and the use of technology is changing how countries trade with each other (photo: Stephen Lam/Reuters /Newscom).

Recent news on global trade has tended to focus on protectionist measures and diplomatic tensions. These challenges have raised concerns over growth and jobs across the world.

Yet what is often lost in the current discussions is that we are entering a new era of trade—an era in which data flows are becoming more important than physical trade.

The new era

Think about it: between 1986-2008, global trade in goods and services grew at more than twice the rate of the global economy. In recent years, however, growth in this more traditional type of trade has barely exceeded global GDP growth.

At the same time, digital flows have been booming. According to Cisco, the amount of cross-border bandwidth used grew 90-fold between 2005 and 2016, and is expected to grow an additional 13-fold by 2023.

This is not just about video streaming, Skype calls, and social media posts. It is about the role of data in boosting other flows, especially by making services more tradable—from engineering, to communications, to transportation.

So in many ways, the future of trade is the future of data.

This is a huge opportunity for policymakers to build new economic bridges between countries, and to create a better global trade system.

Let me highlight 4 building blocks of better trade:

1. More trade in services

The good news is that global trade in services has been growing relatively fast. It now accounts for one-fifth of global exports. And according to some estimates, half of the global trade in services is already driven by digital technology.

But this is an area where trade barriers are still extremely high, equivalent to tariffs of some 30 to 50 percent.

I believe that by reducing these barriers and making trade more digital, services could become the main driver of global trade. Who would benefit most?

• Advanced economies, because they are globally competitive in many service sectors, especially financial, legal, and consulting.
• Developing economies such as Colombia, Ghana, and the Philippines, because they are promoting growth in tradable services, such as communications and business services.
• Millions of small businesses and individuals who can use digital tools to leverage their expertise in the global marketplace.

But that is just the beginning. I believe that we can build the Wealth of Nations in the 21^st-century on trade in services.

2. More productive

We can achieve this goal by making trade more productive. How? By encouraging a further shift in the composition of trade flows—from "physical" to more data-driven trade.

For example, increasing automation is making it easier for companies to repatriate, or "reshore", some of their operations—effectively, reversing some of the "outsourcing" of the past two decades.

This could help rejuvenate manufacturing industries in many advanced economies, holding out the promise of more domestically-based factories with higher-paying jobs.

3-D printing could also prompt companies to move production closer to their customers. One large shoe brand, for instance, is bringing bespoke shoemaking to the mass-market by printing customized soles in their high-street shops.

If these trends were to continue, many supply chains would become shorter, more productive, and less carbon-intensive.

At the same time, digitalization will intensify competition in global trade, pushing companies to boost their investment in new technologies and more efficient business practices.

New IMF analysis shows that greater competition accelerates the diffusion of technology across countries and even the rate of innovation itself.

This, in turn, helps lower prices for companies and consumers. It is estimated that the poorest 10 percent of consumers gain almost two thirds of their purchasing power from trade.

3. More inclusive

Gains like that show the enormous benefits of building economic bridges between countries. And yet, too many people have continued to live in the shadow of these bridges.

The digital revolution in trade will bring its own challenges, putting further pressure on those workers who are less well-equipped to compete.

That is why we need greater inclusiveness. Consider the benefits of scaling up investment in training and social safety nets, so that workers can upgrade their skills and transition to higher-quality jobs.

For instance, experiences in Canada and Sweden show that on-the-job training is more effective than classroom learning.

In these and many other areas, the IMF is helping countries gear up for the new era of trade.

At the global level, we analyze exchange rates and monitor global economic imbalances.

At the country-level, we work with all our 189 members on policies to help remove trade and investment barriers, encouraging more open economies where the private sector can thrive and create jobs.

In short, we believe that for trade to improve, it needs to be more services-based, more productive, and more inclusive—so that everyone can benefit.

To achieve these objectives, trade also needs to be more internationally cooperative.

4. More international cooperation

Over the past 70 years, countries have worked together to create a multilateral trade system that has lifted hundreds of millions of people out of poverty, while boosting incomes and living standards in all countries.

But this system needs improvement as it adapts to the new era of trade.

For example, many governments are struggling with major issues that do not fall squarely within WTO rules. These include various state subsidies, restrictions on data flows, and the protection of intellectual property.

To address these issues, we could use "plurilateral" trade agreements—that is, deals among like-minded countries that agree to work within the WTO framework. There is also room to negotiate new WTO agreements on e-commerce and digital services.

On these issues, one can take encouragement from the new Trans-Pacific Partnership, or TPP-11. For the first time in a broader trade agreement, TPP-11 countries will guarantee the free flow of data across borders for service suppliers and investors.

Now is the time to push for further trade reforms in a multilateral setting where rules are respected, where countries work in partnership, and where everyone is committed to fairness.

I believe that by building new economic bridges, by shaping a new era of trade, we can foster more prosperous and more peaceful communities across the world.

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Better Answers on Trade for the U.S. Economy [feedly]

Better Answers on Trade for the U.S. Economy
https://talkingunion.wordpress.com/2018/05/28/better-answers-on-trade-for-the-u-s-economy/

by STAN SORSCHER

(May 28, 2018) — In 2016, President Trump prevailed over 17 establishment opponents. He is a disrupter. In particular, he disrupted establishment trade policies that have failed millions of Americans.

Too many workers and communities have been left behind. Too much mistrust has grown regarding the way we've managed globalization. Wages have fallen far behind the growth trends of previous generations.

The neoliberal free-market free-trade trickle-down orthodoxy, which we have followed for decades, is exhausted — socially, politically, and economically.

We don't really understand Trump's tariffs, or bluster, or impulsive negotiating tactics, but we do understand that we need a change in direction.

We need new, effective public policies to deal with real problems that affect most people in America — inequality, climate change, health care, opioid addiction, student debt, and decaying infrastructure. We desperately need a manufacturing strategy that creates good new jobs, and stronger employment relationships that would raise family income.

To paraphrase Ronald Reagan, "Unregulated free market orthodoxy cannot solve these problems — free market orthodoxy IS the problem." Our big policy challenges are all market failures.

David Brooks told us that Donald Trump is the wrong answer to the right questions. Trump's disruption gives us the opportunity, right now, to find better answers the right questions. We should start by rehabilitating the role of public policy, restoring trust in public institutions and re-legitimizing the role of government in solving our problems.

China understands this. So do Japan, South Korea, Germany, and the Nordic countries. Also, they all recognize their legitimate national interests. They have various forms of mixed economies, including well-designed industrial policies to improve their living standards. We understood this when we industrialized our economy, and we understood it again in the decades after World War II.

China has a national strategy to become the leader in 10 industries of the future. South Korea built a formidable manufacturing economy and raised living standards dramatically. China, Japan, and Europe have modern high-speed rail. China is investing in billions for infrastructure to move goods to their key markets around the world. China targeted solar energy as a key industry of the future, and invested $126 billion there last year.

On the other hand, our economic and trade policies steadily moved our industrial base offshore and we tell ourselves "these jobs won't come back." We accept "D+" ratings on our neglected infrastructure, and can't pass an infrastructure bill. Our approach is ill-suited to the 21st century global economy.

China invests billions in R&D, knowing their investment will be commercialized in their domestic economy. Our billions in publicly funded R&D will be commercialized offshore, producing good jobs in Malaysia, Vietnam, India, China, Mexico, and Ireland.

Foreign students are subsidized to study at U.S. universities. Our own students pay prohibitive tuition costs, taking on debt and risk. Many graduates don't find a job in their field of study.

We have done better on each of these measures in the past.

Inequality and climate change — the defining problems of our time — are the biggest market failures in human history. Solutions will require new public policies. NAFTA and subsequent trade policies take exactly the wrong approach. They are designed to merge our economy into the global economy, blur national borders, and push aside public interests.

Economic and trade policies should balance investor interests with public interests. That's what we expect any political system to do. That will be necessary, important, and fundamentally different from the trickle-down economic policies and free-trade NAFTA approach.

President Trump fumbles with this realization. He recognizes the urgency of "doing something." His tariffs are certainly something, but Trump's instinct is to tear down social cohesion, hit back at his rivals, fan conflict, and diminish our leadership in the world.

Our first conversation should be about restoring social cohesion, and recognizing that we all do better when we all do better. Our purpose is to raise living standards and improve well-being in our communities. In a mixed economy approach, we would create policy-driven strategies to address inequality, climate change, health care, education, investment in infrastructure, restoring our industrial base, and making key social investments we have let wither for 30 years.

When President Trump says it, it sounds ominous, but every country does expect public policies to express their legitimate national interests. What we don't hear from President Trump is that the purpose of an economy is to raise living standards. That is true of our domestic economy, and equally important for the global economy. We can recognize legitimate national interests, raising living standards everywhere, without being nationalists or xenophobic.

President Trump has disrupted economic orthodoxy. We no longer expect the invisible hand of free markets to solve serious social, environmental, and economic problems. But, Donald Trump is transactional; he lacks a coherent vision. His answers look suspiciously beneficial for global corporations, the financial industry, and very wealthy donors.

We have campaign seasons in 2018 and 2020 to consider different answers to Trump's questions. Where should we be investing in people, infrastructure, innovation, industries, communities, and clean energy? In each case, we should ask, "Who gets the gains from productivity, innovation, investments, and globalization?"

President Trump has put those questions into play. We haven't had this good an opportunity for years.

Stan Sorscher is a labor representative for the Society of Professional Engineering Employees in Aerospace (SPEEA), IFPTE 2001. 

Short URL: http://www.thestand.org/?p=66964

Posted by David Groves on May 24 2018. Filed under OPINION. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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Trump’s Manchurian Trade Policy [feedly]

I can imagine its difficult to come up with a clever paradigm to frame a column or two every week for the NYT. However, I do not quite get "the national security threat" in Chinese company ZTE. Disclaimer: I use a ZTE phone. Cheap AND a solid product.

ZTE is accused of distributing phones with US  "high tech" components to "sanctioned" regimes.  I have no idea what this means, or what the national security threat is. However  I do know, from working in software for half a worklife, that if there are security features in the components, they were certainly  designed by the US to hack info in other countries, and into the communications of  its own citizens.

Everything on the Internet is hackable with sufficient effort That's not likely to ever change. 

I am unconvinced by K's memes today. And, in general, China bashing in the name of national security is most likely a cover for another Trump crime. Everything he says, I assume the opposite is more likely true

Trump's Manchurian Trade Policy
https://www.nytimes.com/2018/05/28/opinion/trump-china-trade-policy.html

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Italy’s Political Crisis….How Ugly Might It Get? [feedly]

Italy's Political Crisis….How Ugly Might It Get?
https://www.nakedcapitalism.com/2018/05/italys-political-crisis-ugly-might-get.html

Italian politics are messy even at the best of times. The battle over forming a government took a nasty turn. We'll give a short overview and then make a few observations, in the hopes of eliciting informed reader input.

The far-right Lega Nord, or League party, which won in the wealthy north, was seeking to form a coalition with 5 Star, which led the polls in the South. One of the things they agreed on is opposition to the Eurozone, so that looked likely to feature even more prominently in any joint policies than it had in their respective campaigns.

The coalition had proposed seating Paolo Savona, a very vocal critic of the Eurozone, as finance minister. The president, Sergio Mattarella, nixed the appointment, which he has the power to do. The coalition's proposed prime minister, Giuseppe Conte, abandoned his efforts to form a government.

Mattarella has proposed that Carlo Cottarelli, a former IMF official, form what amounts to a caretaker government, with his key task to get a budget passed, which would have the convenient effect of calming down Mr. Market for a while. Italian bond spreads are at their highest premium to German bunds in four years.

However, Lega Nord and 5 Star supporters are not surprisingly up in arms, so the current conventional wisdom is that there will be snap elections in the fall instead.

Mattarella was seeking to appease the bond gods. From the Financial Times:

Mr Mattarella, who has the power to approve or block cabinet appointments, considered Mr Savona a threat to Italy's position in the eurozone, at a time when Italian debt was already taking a big hit in the markets. 

"The uncertainty over our position in the euro alarmed Italian and foreign investors who invested in shares and companies," Mr Mattarella said. "The rise in the [bond] spread increases the debt and reduces the opportunity to spend on social measures. It burns companies' resources and savings and foreshadows risks for families and Italian citizens."

Unfortunately, that didn't work as planned. Mr. Market at first liked the idea, with both the Euro and Italian bond prices rising, but then went into full reverse when they saw the severity of the political backlash.

Note that despite Savona, the proposed economics minister, having a fabulously acid tongue, he had said he would uphold Eurozone rules. So was the issue that Savona was seen as such a fierce opponent to the Euro that he's renege on his promise or that he could be still be plenty disruptive while not crossing any official lines?

The flip side, as Politco snarked in its daily e-mail:

All the fuss, remember, because the president of the Republic rejected one minister (and this is not the first time that has happened) — who seems to have been so crucial to the whole project that without him, it's better not to govern at all.

Even though the caretaker Cottarelli does not on paper have the votes to secure a majority, it's premature to rule that out. Remember there are other factors that come into play….like looking responsible, particularly when Italian banks are still mighty wobbly, and not wanting to have to campaign again, particularly for any representatives who won with less than comfortable majorities.

The right is the big winner in this upset.

View image on Twitter

Alberto Nardelli

✔@AlbertoNardelli

Poll out tonight in Italy: M5S drops below 30%, Lega flying: 27.5%, Forza Italia continues its fall, everyone else flat

2:43 PM - May 28, 2018

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This is not a constitutional crisis. This is a very bitter, high stakes political crisis, but there are not yet any constitutional issues in play, despite 5 Star calling for Mattarella to be impeached.

The underlying issue is austerity and budget constraints. Italy's economic distress comes from having its GDP contract over the last decade. It needs deficit spending. Eurozone budget rules severely constrain running fiscal deficits.

The worst is the Eurocrats should know better by now. Even the chief economist of the IMF, Olivier Blanchard, said his own data showed that for weak economies, fiscal multipliers were greater than one. That is economist-speak for deficit spending results in even greater economic growth, so that the end result is that debt to GDP ratios fall.

Similarly, Yanis Varoufakis proposed a finesse during the 2015 Greek debt negotiations, a European infrastructure bank. The reason for focusing on infrastructure is it provides for even more fiscal bang for the buck, potentially $3 of GDP growth for every dollar spent. However, colleagues who believe that the Eurozone needs to relax its budget rules said the infrastructure bank idea would run afoul of them as currently constituted. Predictably, Germany nixed the idea.

A fall vote as a de facto vote on the Eurozone….or not? The press has been quick to seize on the notion of an election in the autumn as a vote on the Euro. But it isn't so clear cut, and the two leading parties may not play that up as much as one might anticipate despite that being their biggest area of common ground.

Recall that in Greece, which has suffered far more under austerity that Italy has, in 2015, the Greeks wanted relief but did not want to leave the Eurozone. It was only some time after Syriza knuckled under to the Troika, that Greek votes turned against the Eurozone.

Italian polls show majority support for staying in the Euro. Like Greece, they want to remain but to have more room to spend. So making Eurozone exit, as opposed to Eurozone reform, the campaign pitch might backfire, and Lega Nord and 5 Star pols have to know that. So until we have the government fall and see how Lega Nord and 5 Star position themselves, it's too early to say how the campaigns will address the Eurozone choke chain.

Financial time moves faster than political time and may affect outcomes. Italy has been in the throes of a slow-motion banking crisis since mid-2016. The fall in Italian bond prices will put weak institutions under even more pressure. From a Don Quijones post yesterday:

A recent study by the Bank for International Settlements shows Italian government debt represents nearly 20% of Italian banks' assets — one of the highest levels in the world. In total there are ten banks with Italian sovereign-debt holdings that represent over 100% of their tier-1 capital (which is used to measure bank solvency), according to research by Eric Dor, the director of Economic Studies at IESEG School of Management.

The list includes Italy's two largest lenders, Unicredit and Intesa Sanpaolo, whose exposure to Italian government bonds represent the equivalent of 145% of their tier-1 capital. Also listed are Italy's third largest bank, Banco BPM (327%), Monte dei Paschi di Siena (206%), BPER Banca (176%) and Banca Carige (151%).

In other words, despite years of the ECB's multi-trillion euro QE program, which is scheduled to come to an end soon, the so-called "Doom Loop" is still very much alive and kicking in Italy. The doom loop is when weakening government bonds threaten to topple the banks that own the bonds, and in turn, the banks start offloading them, which causes these bonds to fall further, thus pushing the government to the brink.

Quijones pointed out that French and Spanish banks are big holders of Italian debt too. So too much Italian political stress could morph into financial freakout. Contagion, anyone?

I suspect it did not go unnoticed that European officials were just about as unhelpful as they possibly could be when Italy was pressing for a waiver from its budget rules so it could rescue its banks. In other words, we'll see soon enough how committed the upstart parties are to their principles when following through with them could produce a banking crisis.

 -- via my feedly newsfeed