Stefan Karlsson

Bank of Cyprus customers use the ATM as the bank remains closed for the second day in central Athens on Wednesday. There is simply no option for Cyprus apart from a deal which wouldn't result in losses for depositors that would be multiple times larger than the one negatotiated, Karlsson writes. (Thanassis Stavrakis/AP)

Cyprus is running out of options

By Stefan Karlsson, Guest blogger / 03.20.13

Two things in combination have, barring extreme altruism or stupidity from other countries, made losses for depositors in Cyprus of some kind almost inevitable (apart from maybe the Russian solution discussed in the end of this post).

First, Cyprus created an extremely oversized banking sector, with balance sheets multiple times its annual GDP, by becoming a haven for Russian oligarchs and other foreigners. This was made possible in part because it had low tax rates, but more importantly because it didn't ask any.questions of how their depositors got their money, enabling so-called "money-laundering".

Second, EU leaders thought that it would be a good idea to "solve" the fiscal problems of Greece by making private bond-holders "agree" to a "voluntary" write-down of the value of its debt- The problem is that one institution's debt is another's asset, and with Cypriotic banks heavily invested in Greek debt due to Cyprus' close ties to Greece, this meant that Cypriotic banks made heavy losses. In short, the "solution" to the Greek problem caused the Cypriot problem we're now discussing.

As a result, Cyprus' banks lost sums of money  that were enormous relative to the small size of Cyprus' economy. It seems in fact that the losses were nearly as large as the size of Cyprus' annual GDP. It's as if America's bank required a capital injection of $15 trillion.  ( Continue… )

Protesters hold up their hands as they protest outside the parliament in capital Nicosia, Cyprus, Monday. The only way to make a bailout politically acceptable was to make sure that the oligarchs would pay, Karlsson writes. (Petros Karadjias/AP)

Cyprus tax opponents get an unlikely ally: Vladimir Putin

By Stefan Karlsson, Guest blogger / 03.19.13

The key reason why Cyprus, unlike other bailed out countries, has been ordered to impose a steep one time tax on deposit holdings is of course because Cyprus has a reputation for being a bank center for Russian oligarchs of considerable wealth, and considerable crookedness. And so, bailing out the banks of these Russian oligarchs would be interpreted as bailing out the oligarchs. And to say that it would be a "tough sell" to get support for what is perceived as the bailout of oligarchs in the countries bailing out Cyprus is the understatement of the year.

The only way to make a bailout politically acceptable then was to make sure that the oligarchs would pay. Of course, the way this is designed, regular Cypriotic savers become collateral damage in the quest to punish the oligarchs.

Anyway though, the point is that the more this is perceived as punishing Cypriot savers the more opposition will there be against the tax, and the more this is perceived as punishing Russian oligarchs the more support will there be for it. And so the last thing opponents of the tax needs is anything that creates the perception that opposition to the tax is based on a desire to protect the oligarchs.

And so what does, Vladimir Putin, patron of the oligarchs (those who support him that is, those that didn't have been disposed of) do? Express outrage over the tax! Not what those fighting against it needed....

Latvia's lats and euro banknotes are seen in this illustration picture in Riga, Latvia. Since Latvia has for a long time pegged its currency, the Lat, to the Euro, joining the Euro wouldn't mean any loss in monetary policy independence, Karlsson writes. (Ints Kalnins/Reuters/File)

Will Latvia join the Euro?

By Stefan Karlsson, Guest blogger / 03.13.13

While there is talk in some euro area countries, most notably Italy, about exiting the euro, Latvia remains determined to join in 2014. Since Latvia has for a long time pegged its currency, the lat, to the euro this wouldn't mean any loss in monetary policy independence, only that the transaction costs associated with a separate unit would disappear.

However, unlike those who have already joined, Latvia is forced to meet certain criteria. It has no problem meeting the criteria of exchange rate stability, or the fiscal criterias, but it does face the potential problem of having too high inflation. Since it can't have inflation more than 1.5 percentage points above the average of the lowest three EU-countries (including those with independent floating currencies) and since Latvia has the fastest growth in the EU (more than 5% at a time when most other countries have negative growth), and since given a fixed exchange rate higher growth tends to be associated with higher inflation (because of for example the Balassa-Samuelsson effect), this raises a potential obstacle to euro entry.

However, it would seem that there is in fact no problem. Latvia's inflation was only 0.3% in February, the second lowest (after Greece). But how could inflation have fallen so much even as growth was high? Simple, they decided to do the opposite of what the Southern European countries have done and lowered taxes, especially the VAT. A lower VAT will provide a positive supply shock and lower prices while also boosting real income.

That the purpose of this VAT cut was to lower price inflation just in time for when it will be decided if Latvia meets the criteria is evident by the fact that it was implemented in July 2012, just in time for the annual average inflation rate to be lowered when the meeting about Latvia's entry will be held during the early summer. And indeed, Latvian officials are admitting that a key purpose of the VAT cut was to qualify Latvia for the euro.

A customer counts his cash at the register while purchasing an item at a Best Buy store in Flushing, New York. The US savings rate fell dramatically in January 2013, but it may be in relation to December 2012, when savings were boosted in anticipation of higher tax rates. (Jessica Rinaldi/AP/File)

US savings rate falls to housing bubble lows

By Stefan Karlsson, Guest blogger / 03.01.13

The U.S. savings rate fell dramatically in January, from 6.4% to 2.4%. This mostly reflected the fact that income and savings was temporarily boosted in December by advance salary and dividend payments in anticipation of higher tax rates, but it also seems that for January, Ricardian equivalence was mostly confirmed.

Indeed, one could argue that it was entirely confirmed as spending didn't fall at all, while the savings rate fell sharply not only from the December level but also from the levels earlier in 2012. However, as some of the salary and dividend payments that were made in advance in December would have normally been made in January, it would seem that underlying income (and therefore also savings) was probably somewhat higher than formal income. We will have to wait a few more months to see if the savings rate recovers.

If it doesn't, then it is at a ominously low level, as the household savings rate was 2-2.5% during the housing bubble, the same level as in January.

Kaylee Feight talks about the impact of a minimum wage increase on her job at Quiznos in Helena, Mont., in December, right before an automatic cost-of-living increase takes effect in the state. Raising the federal minimum wage under President Obama's proposal would raise wages for some and cut jobs for others. (Matt Gouras/AP/File)

Would raising the minimum wage destroy jobs?

By Stefan Karlsson, Guest blogger / 02.18.13

Since President Obama proposed an increase in the federal minimum wage in the U.S., from $7.25 per hour to $9 per hour and then index it to inflation, the debate has been raging about whether or not this would make low wage workers better paid or not paid at all (or in other words if they would get unemployed).

The short answer is that it would be a little bit of both, but with emphasis on little. To understand why we must first examine the issue theoretically and then look at current U.S. conditions.

Starting with theory, when a worker's pay is set on the free market, it will be no higher than the worker's (expected) marginal productivity and no lower than what the worker could get paid elsewhere or what the worker would feel is so low that not having any job is better (the latter is of course influenced by the extent to which the workers could live on for example unemployment benefits or welfare). The latter could be referred to as a worker's personal minimum wage.

For unemployed workers their personal minimum wage is higher than the marginal productivity employers think they might have for them, while for employed workers, the marginal productivity is equal to or higher. ( Continue… )

A worker counts US dollar bills at a money changer in Manila. Dividend income jumped an annualized $268 billion in December compared to November, Karlsson writes, and by $302 billion compared to October (Romeo Ranoco/Reuters/File)

Incentives matter

By Stefan Karlsson, Guest blogger / 01.31.13

According to the first preliminary U.S. GDP report, nominal GDP increased at an annualized rate of just 0.5%-yet nominal disposable personal income rose at an annualized rate of 8.1%.
How is that possible? Well, in part it probably reflects so-called statistical discrepancy. Production- and income numbers are based on different data sources and this quarter, unlike previous quarters, the production numbers are probably weaker than the income numbers.
The second, and likely far more important, explanation is that companies made large advance payments of salaries and dividends because they expected a big increase in tax rates. The fact that dividend income jumped an annualized $268 billion in December compared to November, and by $302 billion compared to October illustrates the importance of this factor.

This will with near certainty be more or less entirely reversed during this quarter.

One of the lessons of this is that people do respond to incentives. If they hadn't, we wouldn't have seen these large advance payments of salaries to high income earners, and above all, dividends.

The word "Yen" is pictured on a Japanese bank note on top of a US dollar bill at Interbank Inc. Money exchange in Tokyo in this September 2010 file picture illustration. (Yuriko Nakao/Reuters/File)

Currency exchange rates: How did the dollar do in 2012?

By Stefan Karlsson, Guest blogger / 01.10.13

It has become an annual tradition here to summarize yearly exchange rate movements for some selected major currencies. 

In 2012, the U.S. dollar fell against most other currencies, with only the Indian rupee, the Brazilian real and the Japanese yen falling in value against it. The yen's big drop was the by far most dramatic change, followed interestingly by the big increase for the South Korean won. Since Japan's and South Korea's economies are specialiced on very similar things, like electronics, ships, and cars, and because they therefore are direct competitors to each other, this will create some problems for South Korean companies.

It should however be noted that the won's big increase in value relative to the yen comes after several years of big drops, and compared to a few years ago, the won is despite the big rebound in 2012, significantly weaker compared to the yen.  ( Continue… )

The National Debt Clock hangs from a building near Times Square in New York in this February 2011 file photo. If President Obama thinks the $1 trillion coin option is too unorthodox, he will be forced to agree to spending cuts, Karlsson writes. (Joshua Lott/Reuters/File)

Is a $1 trillion coin the solution to the debt crisis?

By Stefan Karlsson, Guest blogger / 01.08.13

Now that the U.S. debt limit has been reached again depite being raised by $2.1 trillion (to $16.4 trillion) less than 1½ years ago, the limit and possible ways for Obama to evade it if House Republicans refuse to raise it have been debated, so I will offer some thoughts on the issue here.
On the one hand, I sort of agree with those liberal critics who argue that it makes no sense for Congress to on the hand make certain taxation and spending decisions and then to make a decision about debt unrelated to that. Since the change in debt is an arithmetic result of the difference between spending and revenue, making two decisions could be seen as a denial of the laws of arithmetic.
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However, this doesn't necessarily mean that the debt limit is illegitimate, it could just as well imply that the decisions authorizing unlimited deficit spending are illegitimate. After all, most people have actual or potential debt limits in terms of how much creditors are willing to lend them. This means that one has to try to increase one's incomes or reduce spending once one comes near the limit. Regardless of whether one thinks that would be a good policy for the government or not, it is certainly consistent with the laws of arithmetic to adjust revenue and spending policies instead of doing away with the debt limit.

And as it happens, the debt limit represents the best chance of achieving what the talks of the "fiscal cliff" utterly failed to achieve (indeed, they in fact quite to the contrary resulted in higher spending): namely lower spending in exchange for a higher debt limit. That was in fact what happened at the latest drama over the debt limit in 2011, though none of the cuts have actually been implemented yet.  ( Continue… )

French actor Gerard Depardieu, seen here entering his home in Paris earlier this month, says he is leaving France because 'success' is being punished with a 75 percent income tax on the rich. A French court has struck down the tax, but the ruling suggests it's only temporary. (Benoit Tessier/Reuters/File)

French court strikes down tax on rich, but it won't save France

By Stefan Karlsson, Guest blogger / 12.31.12

Apparently, a French court has struck down Socialist President Francois Hollande's new 75% tax rate on income above €1 million, something that some think means that there won't be punitive taxation of the richest in France. However, what the court actually objects to isn't the high tax rate, but that it will be applied to individuals, instead of households as has been the rule in France. By applying it to individuals while continuing to otherwise tax households, two households with the same total income could end up paying different rates depending on how incomes are divided among members of those households, something that the court finds violates the equal treatment rule in the French constitution.

This means that the Socialists are free to come up with a new tax proposal that applies a 75% tax on household income above €1 million, and the government has indeed already that it plans to quickly introduce a new proposal that doesn't violate the equal treatment rule.

It is a shame for France that the court in fact didn't strike down the punitive taxation, and only objected to some technical details in the enacted proposal. Even using unrealistic static analysis, where behavior isn't affected, the tax would have only brought in €210 million, a neglible sum (about 0.01% of GDP) in France's €2 trillion economy And considering how it has driven away hundreds of rich Frenchman, including famous actor Gerard Depardieu to Belgium and other countries, and created negative PR for the French business climate, the tax is in fact a lot more likely to lower tax revenue rather than increase it.