Russia has very low debt to GDP ratio. Most of its external debt is private.

As the crisis unfolds in Russia it is rather interesting to note that of the leading issuers of sovereign national debt Russia has among the lowest ratios in the world . Its debt to GDP ratio is just under 12 %. The World Bank lists its central government debt to GDP ratio based on central government debt minus equity and financial derivatives held by the government as 9.4 %. Look at this ratio in comparison with a number of other sovereigns:
Russia 9.4 %
Switzerland 24.3 %
Sweden 35.3 %
Denmark 47.2%
Finland 51%
Canada 51.9%
Germany 55.2%
Spain 65.9%
Belgium 89.4%
U.S. 96.1%
U.K. 97.2%
France 100.9 %
Italy 126 %
Japan 196 %

Source: The World Bank

Furthermore because of its oil exports its been running a trade surplus not a deficit. So with stats like this why has the ruble fallen so dramatically? Clearly falling oil prices and perhaps also sanctions can explain it. In fact, over the past two days while it has recovered from its low point and is now trading at about 61 to the dollar, still down by close to 25 % . But the currency speculators may well have oversold the currency. On the other hand we know that markets never behave totally rationally and overshooting in a panic sale is a rather common phenomenon. It may well be that too many Russian business people have speculated in overseas investments and real estate but its not clear why this alone could severely damage the Russian economy given that the total ratio of the external debt to the GDP is 9 %;external debt service compared to exports 32 %; international reserves to external debt ratio 253 % and value in $ of per capita debt $5072 . (Source : The Bank of Russia . the total debt includes the external debt of the central bank, the banks and other sectors) We shall see what develops over the coming weeks both in oil prices and exchange rates. Gas prices in Montreal are now 1.09 a litre.

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Oil in NYMEX market hits 53.60 in trading then rises to 56.05:Brent falls to 59. Russia CB raises interest rates to 17 %

The on going turmoil in the oil markets continues with the price today dropping for a time as low as $53.60 in the U.S. NYMEX market before recovering to $56 in later trading. The price for Brent oil touched $59. There is a strong possibility the price might fall a little further in the coming days. The resulting turmoil has put a lot of negative pressure on the currency exchange rate of countries that are major oil producers like Russia already hit by trade sanctions. In what appears to be a futile effort at stemming further falls in their currency exchange rate the central bank in Russia raised interest rates to 17 %. But this will increase recessionary influences there without necessarily rescuing the ruble. It would be a better idea to reduce the interest rates from this level to more reasonable levels and allow the exchange rate to fall to a sustainable level and then build an export strategy on the cheaper currency. Canada has also experienced a significant drop in our exchange rate with the American dollar falling from near parity to 86 cents with perhaps a further way to go. But because of NAFTA this fall will help our exporting firms with new markets. The drop in oil prices are being welcomed by consumers. I nearly filled my gas tank for $20 Can. yesterday in Montreal where prices have fallen from 1.40 a litre to 1.11.4 a litre. It helps that I drive a small fuel efficient car.The extra cash in consumers’ pockets will be stimulative.

However, there may be some trouble in the financial markets in the U.S. where the securitization of loans that involve some oil based assets or currencies based on them may lead to some financial turbulence. Apparently there are about $300 billion worth of Collateralized loan obligations which much like CDOs can get into rough seas when there are wide price swings in the asset markets , in this case the oil markets.The CLOs according to Fortune magazine are very similar to the ill fated CDOs of the 2008 crash. The banks who own about 70 billion $ worth might suffer significant losses if these debt securities fail. Basically high risk and low risk loans have been pooled into these securities and pieces sold to investors. Those who buy the riskier portions get a higher rate of return so long as they don’t fail. But when they do fail the burden will be increasingly borne by them. So we will see whether the banks have once again erred in taking on excessive risk.

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Oil supplies some basic information can help explain the drop in prices and the nature of the cartel

In order to make better sense out the sharp swings in the price of oil and the changing supply conditions it is very useful to have some data. I am reproducing a post from my older blog that I first posted in 2011 on precisely this. Oil prices peaked in 2008 at $147 per barrel they then fell towards the $50 mark and then recovered again to rise to about 100$ and have now fallen to $63

Monday, March 7, 2011

Oil and the global economy
Current events in the Middle East including the dramatic and tragic events in Libya have caused a spike in global petroleum prices with serious implications for the economic recovery now underway. Oil is often the key to understanding the history of the global economy. In order to understand it’s role and to make better sense of what is going on we need to know the basic data about this precious but diminishing resource. fortunately a lot of information is available , although it has the limitation that the principal source for the data are the oil companies themselves.

Let’s look at the data for production ,consumption and principal exports. All the data is assembled by the energy information agency of the U.S. Department of Energy.

Proven oil reserves by country billions of barrels

Saudi Arabia 264.3
Canada. 178.8
Iran. 132.5
Iraq. 115.0
Kuwait. 101.5
U.A.E. 97.8
Venezuela. 79.7
Russia. 60.0
Libya. 39.1
Nigeria. 35.9
U.S. 21.4
China. 18.3
Qatar. 15.2
Mexico. 12.9
Algeria. 11.4
Brazil. 11.2
Kazakhstan. 9.0
Norway. 7.7
Azerbaijan. 7.0
India. 5.8

Top 20 countries. 1224.5 (95 %)
rest of world. 68.1. (5%)
World total. 1292.6
note: Proved resources estimated with reasonable certainty to be recoverable with present technology and prices.

Oil production millions of barrels /day

1.Saudia Arabia. 10.72
2.Russia. 9.67
3.U.S. 8.37
4.Iran. 4.12
5.Mexico. 3.71
6.China. 3.64
7.Canada. 3.84
8.UA.E. 2.94
9.Venezuela. 2.81
10.Norway. 2.79
11.Kuwait. 2.67
12.Nigeria. 2.44
13.Brazil. 2.16
14. Iraq. 2.01

Libya. 1.65

Oil Consumption millions of barrels per day

1.U.S. 20.59
2. China 7.27
3. Japan 5.22
4. Russia 3.10
5. Germany 2.63
6. India 2.53
7. Canada 2.22
8. Brazil 2.12
9. South Korea 2.12
10.Saudi Arabia 2.07
11. Mexico 2.03
12.France 1.97
13. U.K. 1.82
14. Italy 1.71

Oil exporters millions barrels per day

1. Saudi Arabia 8.65
2. Russia 6.57
3. Norway 2.54
4.Iran 2.52
5. U.A.E. 2.52
6.Venezuela 2.2
7. Kuwait 2.15
8. Nigeria 2.15
9. Algeria 1.85
10. Mexico 1.68
11. Libya 1.52
12. Iraq 1.43
13. Angola 1.36
14. Kazakhstan 1.11

Oil net importers millions of barrels per day

1.U.S. 12.22
2. Japan 5.10
3. China 3.44
4. Germany 2.48
5. S. Korea 2.15
6. France 1.89
7. India 1.69
8. Italy 1.56
9. Spain 1.56
10. Taiwan 0.94

Source of U.S. Imports

Canada 11 %
Mexico 11
Saudi Arabia 9
Venezuela 8
Nigeria 7
Iraq 4
25 other countries 8

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Oil price plunge and possible Greek election: Clouds on the horizon or brighter days ahead ?

I am about to settle in for an evening devoted to grading my exams a twice yearly ritual that follows the end of an academic term. One always learns from reading exams. One also always learns from closely monitoring the news. These days both oil and Greece are at the centre of global economic concerns. The emerging glut of oil supplies and the willingness of Saudi Arabia and other members of the oil cartel to continue to supply the market coupled with worries about slowing economic growth in China, Europe and elsewhere has led to a sharp drop in the per barrel price of oil. The price has now fallen a long way from its previous 100 dollar plus peak. Today West Texas intermediate traded at the 63 dollar range way down from its June peak of $107 per barrel and the lowest price since July 2009. Brent crude oil traded today at $66.10 U.S.

We shall see how long this lasts, how far the price drops and its impact upon global prices-it can only be disinflationary. Given the already near deflationary environment in Europe this can only reinforce it. Consumers will benefit somewhat but will they buy more gas or other products with additional income or will they simply increase their savings and repay their debts more quickly. Environmentally cheaper gas at the pump cuts both ways. On the one hand it increases the likelihood that some car buyers will buy bigger more gasoline guzzling vehicles. On the other hand the cheaper oil prices will lead to possible suspension of projects that are no longer profitable thus eventually affecting supplies and carbon outputs.

On the Greek front the Greek Prime Minister Antonis Samaras has scheduled a new election in Parliament for a new President.His government controls 155 seats in the 300 seat parliament. If he is unable to win over 25 members of the opposition parties to vote for his presidential candidate( the president requires a super majority of 180 votes) he will be forced to call a general election whose likely winner will be Syriza a party which rejects the austerity that was imposed on Greece and has toyed with the idea in the past that they would exit the Euro if they did not get a better deal from their European partners on refinancing their debts. To their credit they also support Keynesian investment measures to lower unemployment. So the Europe euro Zone will be plunged into crisis if they are elected. But it would be a necessary crisis that might help Europe escape from the paralysing grip of austerity and hidebound excessive fear of inflation as opposed to obvious unemployment and stagnation.

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The crisis of 2008:A second look back at the underlying causes and potential cures

The roots of the recent crisis and the path to recovery is still an important debate. A little over four years ago I wrote a piece on this and posted it in my older blog on blogspot. I am reproducing it here for the convenience of readers and my students.

Wednesday, October 27, 2010

The current crisis:Hayekian, Keynesian or Marxian?
Jan 30, 2010

It was minus 23 celsius last night, my intake water pipe appears to have frozen and I am busy trying to unthaw it according to my city’s engineer’s instructions but it seems more appealing to spend a few minutes pondering the state of the global economy and the potential explanations for the crisis we are emerging from. The cure for the crisis so far has been rather Keynesian, a major but not massive injection of state funds into the economy designed to build infrastructure, reverse negative animal spirits and boost aggregate demand. This has been combined with action on the monetary front which most but not all monetarists support, very low interest rates and a good measure of quantitative easing , a policy which I developed in the late 1980s and early 1990s. I called it then temporary monetization of a greater portion of the public debt.
I had presented the idea and the research and articles I had published on the subject to my former L.S.E. supervisor, Meghnad Desai in 1993 in London as a plausible alternative to monetarist strictures on deficit finance but he had dismissed it at the time claiming wrongly that it was both impractical and even illegal and in any case would only spook the financial markets.As he put it to me then,” Harold the financial houses all employ Ph.D. economists who will see this as automatically inflationary and act to counteract it. It won’t work.” Well Desai turned out to be wrong about this as did a number of other economists who had listened to my presentation of the idea at a major conference of business economists in Ottawa in 1994 where I shared a panel with the Canadian associate deputy minister of finance at the time, Don Drummond and who were similarly skeptical. This non inflationary turn around and recovery which has involved significant quantitative easing shows that they were all wrong and that my policy innovation had merit.

But rather than dwell on the difficulties of overcoming conventional wisdom lets explore for a moment the roots of the current crisis. It began in the housing market bubble which rather swiftly drew in the bulk of the financial industry and the major investment banks on Wall Street. If you are a Hayekian you would quickly seize on this and argue with some justification that this is precisely what Hayek predicts. Overinvestment occurs because the interest rate is reduced below the natural rate in a Wicksellian sense. this leads to a bubble which then bursts as the expected investment return does not materialize and the burst bubble creates a depression or deep recession. So far so good.

But , the problem with Hayek’s rather intriguing theory of the cycle is that once the bubble has burst raising interest rates as Hayek appears to propose won’t cure the problem. Nor will discouraging investment or consumption accomplish what we want.Furthermore, the low interest rates were introduced because of the legitimate fear of deflation after the crisis of 9/11. Still Hayek’s ideas are worth exploring.

Hyman Minsky draws upon Keynes and his notion of uncertainty but also has Hayekian elements in his analysis of Ponzi or Madoff finance in his brilliant theorization of speculative bubbles that threaten the entire financial system.

Keynes’ work argues that declining animal spirits wracked by uncertainty and a structural tendency toward underconsumptionism and disproportionality between savings intentions and investment intentions leading to inadequate aggregate demand are responsible for slumps. He also is a sharp and hands on experienced critic of the irrational speculations of the stock markets and unregulated free for all that they tended to become whenever manias affected them.

His cure of greater regulation of the investment process, a strong dose of deficit financed intervention to push an economy out of depression and a modest redistribution of wealth and income to ensure adequate aggregate demand still seems to be the best cure.

Marx was clearly an Hegelian romantic(although he expressly denies this) but nevertheless a powerful critic of the horrors of Dickensian nineteenth century capitalism. He has an analysis of the tendency of the rate of profit to fall because of the growth in the organic composition of capital(that is the ratio of machinery, plant and embodied technology to the wage portion of output)and the need to extract a higher rate of surplus value to counter that but all bound up with the very abstract labour theory of value. The transformation problem still bedevils his analysis. Bohm Bawerk wrote a trenchant critique of Marx’s method which was first published in 1896.Marx drew his analysis of the labour theory of value directly from David Ricardo in his work the principles of Political Economy and Taxation. Ricardo ideas about free trade, the doctrine of comparative advantage and free competion came to dominate the economics profession. But his labour theory of value clearly articulated in the first chapter of his great work was eclipsed by neo classical marginal utility theory developed by Carl Menger, Alfred Marshall, Leon Walras and Stanley Jevons in the late 19th and early twentieth century. Ricardo put the matter boldly drawing from the work of Adam Smith before him:

“The real price of everything” says Adam Smith, “what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it…Labour was the first price-the original purchase money that was paid for all things….It is natural that what is usually the produce of two days’ or two hour’s labour should be worth double of what is usually the produce of one day’s or one hour’s labour.” that this is really the foundation of the exchangeable value of all things,excepting those that cannot be increased by human industry is a doctrine of the utmost importance in political economy. ..if the quantity of labour realised in commodities regulate their exchangeable value, every increase of the quantity of labour must augment the value of that commodity on which it is excercised and every diminuation must lower it.” (pp6-7 The Principles of Political Economy and Taxation London, Everyman Library, 1965.)

Ladislaus Von Bortkiewicz sought to show the errors in Marx’s treatment of the transformation problem in 1907.(See Bohm -Bawerk, Karl Marx and the close of his system and Bohm Bawerk’s criticism of Marx, by Rudolf Hilferding with an appendix by Ladislaus von Bortkiewicz, On the correction of Marx’s fundamental theoretical construction in the third volume of capital; edited by Paul Sweezy, 1975, the Merlin Press.) Bohm -Bawerk was an advocate along with Carl Menger of the then new subjective value theory based upon the concept of marginal utility. He was also Austrian finance minister in three different Austrian governments. He finished his career as a chaired professor in political economy at the University of Vienna.He was a founder of the Austrian school to which Hayek belonged.Von Bortkiewicz , on the other hand , was a statistician who spent much of his life working in Germany although he was from a Russified Polish family. He was appointed to the University of Berlin in 1901 and taught there until his death in 1931.

Thomas Sowell( ”Marx’s Capital after 100 years” Canadian Journal of Economics, vol.33, 1967,pp.50-74) and others have argued that Marx understood that capitalism functioned on the basis of exchange prices and not on the basis of value and that his intention was always to show that prices diverged from value and that in so doing periodic crises, disproportionalities and booms and busts and financial bubbles would characterize the system.As Sowell puts it:”When the inherent disproportionalities of capitalism reach sufficient magnitudes, price fluctuations become great enough to precipitate scrambles for liquidity in sectors threatened with bankruptcies; this in turn leads to general monetary contraction and depression. A growing capital:labour ratio in the economy means that the workers’ share of gross output declines over time…”
Desai (Marx’s Revenge, p.64)argues that Anwar Shaikh has demonstrated empirically that although values do not transform precisely into prices there is empirical evidence that suggests despite some discrepancies , if properly calculated for a representative list of products using an input output model there is a rough correlation between the two at least for Italy and the U.S. between 1947 and 1963. But clearly profits come not just from labour but from information technology and other innovations that greatly enhance labour productivity including managerial innovation including self -management.They may themselves have their origin in labour but they present themselves in a different identity in the contemporary production process. Still the issue is complex and subject to considerable debate.

However, Marx did fairly accurately predict globalized capitalism and as Desai points out in his work Marx’s Revenge he rather welcomed it as eventually delivering both higher productivity and material wealth and with the appropriate societal changes a better form of civilization.

If over time globalized corporations under the pressure of requiring higher rates of profit continue to outsource their production to lower wage economies outside of the core countries and thereby undermine the Keynesian prescription which is , after all, based on increased aggregate demand and fuller employment in the core then some serious thought will have to be given to the questions raised by these different theoretical approaches.At the very least the regulatory framework and the design of tax benefits and tax breaks for corporate employers will need to have some employment conditions attached to them. Otherwise , the recovery will be a hollow one.

In the meantime the debate over the causes and solutions to the crisis will continue. It is a debate worth having.

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More positive news from U.S.economy. Payroll employment rises 321,000;Canadian economy slips.

The monthly US Bureau of Labor statistics are out and they reflect good news. US payroll employment grew in november by 321,000 and there were significant upward revisions in the same numbers for September and October. The US unemployment rate remained stable at 5.8 %. It rose in Canada to 6.6 %. Unemployment among adult men in the U.S. was 5.4% among adult women 5.3% among blacks 11.1% and among teenagers 17.6 %. The broadly defined measure of unemployment including discouraged workers and those working part-time when they would rather work full time fell slightly to 11.4 %.Average hourly earnings also rose slightly in the U.S.by 9 cents. Over the past year unemployment fell by 1.2 % points and 1.7 million workers in the U.S. So the results are positive in the U.S. and if they continue to gain momentum we should see U.S. unemployment fall further toward 5 %. The poor report in Canada probably reflects the turn toward austerity in Québec and a slowdown in Ontario as well as possibly the early impact of falling oil prices.

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Europe moves closer to Quantitative Easing:Inflation falls to 0.3% Carlo Bastasin suggests a useful policy tool

The latest inflation data for the Eurozone shows inflation at only 0.3 %. Many analysts are beginning to worry that prolonged low inflation will reinforce economic stagnation (See the analysis of Gavin Davies in the Financial times on this.) An Italian scholar Carlo Bastasin of the School of European Political Economy in Rome has made a very sensible proposal for the establishment of a new debt instrument that incorporates debt from balanced regional components of the Eurozone which he calls EQUIP.EQUIP stands for European quantitative easing intermediated program . A new Asset Backed Sovereign debt instrument would be created by securitizing the different underlying public securities drawn from the existing Eurozone public securities “composed according to a pre-defined key representing each of the states’ contribution to ECB capital.”

The Brookings Institute has published a short paper by him recommending this course of action. The idea is one that I and some other economists including Gavin Davies have argued for in the past and it would help Europe escape from stagnation by using the central bank to buy some government debt thereby ensuring adequate liquidity and sustainable low interest rates to promote recovery . Stimulative fiscal policy would also be needed at the same time. If the policy were implemented and the sovereign debt European debt instrument created Europe would be potentially a lot better off because their central bank would be much closer to a real central bank like the Fed than it is now.

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