Saturday, 27 November 2010

On broken promises

In 1990, before presidential election, Lech Wałęsa promised to turn Poland into “second Japan”. In 2007, before parliamentary election, Donald Tusk promised Poland would follow the path of Irish economic miracle and would become “second Ireland”. Both politicians have gone back on their promises and Poland has not taken a leaf from Japanese, nor Irish book. Now do not grumble, we should be grateful they have failed to put those economic miracles into practice.

What do those two countries have in common? The lie on different continents, both experienced periods of long lasting economic growth, both were held up as examples of excellent economic performance, both made quantum leaps, both have been going through severe crises and even despite being hit by them are now far higher developed then the moment they were in “square ones” of their growth path.

Japan got up of its knees over ten years after WW2. Thanks to easy borrowing terms, support from the government and protectionist measures Japan’s industry began to grow rapidly. Japan corporations relied on cutting-edge technologies and were highly efficient what helped the country boost its exports and flood markets of developed countries with high-quality and reasonably-priced products. In 1960s annual GDP-growth rate was running at above 10%, in 1970 it slowed down due to oil crisis, but Japanese economy soon adjusted to rising demand on energy-saving technologies and not only rode out the crisis, but even emerged from it stronger. The period when interest rates were low, pace of economic growth remained high and inflation low lasted until 1990. The last five years of boom were marked by surging stock and property prices – both tripled between 1985 and 1990. Companies and individuals eagerly borrowed money from banks to buy assets, since interest rates on loans were far lower than returns on stocks or properties. The bubble burst in 1990 and the economy of Japan slipped into a period of sluggish growth for a decade. Banks were hardly hit by write-offs on non-performing loans, individuals and companies struggled to repay the debts they had run up in the times of speculative frenzy. Customers were reluctant to spend, what caused the domestic demand to decline. Firms instead of investing in capital stock were paying back its debts. Interest rates were slashed to near zero to stimulate the economy, but neither banks could grant new loans, nor were the enterprises keen to take them out. GDP growth rate averaged out 1% in the 1990s. Adverse effects of bursting of sizeable economic bubble are felt until now.

Ireland in a relatively short period of time turned from backward agricultural country into one a modern, fast-growing economy. The economic miracle is often put down to Social Partnership under which government, employers and trade unions settled on taking a concerted effort move the country forward. They did bring it off, inflation was on decline, growth rate was on the rise, the country attracted outward direct investments owing to corporate tax cuts. For many years Ireland ran budget surpluses and consequently its public debt was decreasing. Good economic performance was fostered by low interest rates and deregulated financial industry, which caused the property bubble to arise. Banks were lending recklessly and bubble grew splendid before it burst. From then Irish banks reported huge numbers of defaults among borrowers, their capitals shrunk as a result of losses on non-performing loans, the government had to bail out most banks and the bail-out programme has caused the public debt to mount. Now not only Irish banks but also the Irish state is on the verge of insolvency.

So what do they have in common? Economies of both countries have been hurt by bursting bubbles. In both countries interest rates were abnormally low for an extended period of time (there was no need to raised them as there was no threat of rising inflation), banks loosened their lending criteria and foisted loans upon almost everyone. In both countries prosperity was brought to a halt by bursting bubbles.

But brush aside economic aspects of economic bubbles, take a look at them from psychological perspective. Bubble (as any other misfortune) inflates when people take for granted nothing bad can happen. Japanese and Irish banks took for granted the property prices would only go up, so even if a borrower failed to repay their debt, they would foreclose a property and recover the money. Individuals and firms also took for granted asset prices would only go up. When an economic bubble is robust almost everyone believes the boom will last forever. Voices of sceptics who claim the disaster is imminent are drowned out.

It is very hard to crack down on the bubble, because as long as it swells, it is convenient to everyone. Government gets higher proceeds from property taxes, property developers count up sky-high profits, banks make lots of money on mortgage loans, property owners are happy because their wealth is increasing, flat broke non-owners are over the moon because banks are leaning over backwards to give them 40-year mortgage for a tiny, dilapidated 30-square-metre flat. And the unemployment is falling, because construction sector needs more workers, who do not get paid worse than qualified workforce. And bear in mind efficiency in construction sector is low, so economic growth generated by it is in a way delusive.

Lessons to be learnt? Do not let property bubbles happen. In the long term they always do more harm than good. Imbalance in an economy will sooner or later cause a turmoil and those to pay for any possible bailouts will be taxpayers. Interest rates on mortgages should not be low (cheap corporate loans have positive impact on the economy in the long run)! Lending for housing purposes should be under supervision! Poland escaped the scenario of bursting property bubble. Property prices did double in some cities between late 2005 and late 2007, but the boom was not followed by bust. Interest rates were never too low, Polish financial supervision did its best to curb lending, particularly in foreign currencies. Banks’ profits in boom period were not as high as they could be, some applicants had their mortgage applications rejected, but Poland averted a much worse scenario. May we never try to repeat any country’s path to economic miracle. Mr Wałęsa and Mr Tusk did not know what they were saying. Their promises were made just before bubbles in Japan and Ireland burst.

Funnily enough, Poland was going through a property boom when Prawo i Sprawiedliwość was in power…

More on economic bubbles in 2011, after I graduate (in my MA thesis I explore the topic, some excerpts to be translated into English and published here after I “defend” it).

Saturday, 20 November 2010

So when can you say you speak a language – part 3

I’ve drawn inspiration for writing this post from another post, dated 5 November 2010, which had come out on The Economist’s Johnson blog. The author touches up on an issue that I’ve pondered upon many times – describing one’s command of a foreign language. Any assessment of someone’s linguistic competencies is a very difficult task and the outcome will probably never be objective. Definitions vary, depending on who you ask. Some people say you speak a language if you can communicate in basic everyday situations, others point out you can claim to speak a language if you’re (almost) as fluent as a native speaker.

This discrepancy is emphasised in Johnson’s short article, the author leaves room for coining a definition to the commentators and puts forward his own definition. In his view, he can say he speaks a language, if he can go to a country and work there as a journalist. In Johnson’s definition it means a person who declares they speak a language should be able to communicate without awkwardness in typical situations in understands most of what they are told. However, when I first read the post I wondered what his work in the capacity of journalist meant. After all I’ve inferred it meant he had to garner information in a foreign language and then to write an article in English, so he didn’t have in mind mastery which would allow him to write an article in a foreign language, to a foreign newspaper.

I, in turn, distinguish between “knowing a language” and “speaking a language”. Knowing is about passive command – if you know a language you understand written word, can read newspapers and books in a foreign language and can understand what is being said, so it doesn’t make a problem for you to listen to radio broadcasts or watch films in a foreign language. Speaking involves active use of a language – speaking it in everyday situations and using a language at work, writing e-mails, reports, letters, and even a blog. Hardly ever can a learner afford just to know a language, this competency may prove sufficient only to translators who translate into their native language and probably to no one else. The rest have to speak a language to be able to express their ideas in a foreign language.

The problem of describing linguistic competencies has been solved quite effectually by the Europe Council. Its officials have worked out a framework which sets out six levels of linguistic competencies, which has become a standardised and widely-accepted method of measuring one’s command of a language. It may solve the problem, but you have to be aware such a grid exists. Most people are still oblivious of it.

Actually I can’t tell the difference between myself and someone who struggles to string together a sentence in English, but somehow gets by. They know English and I know English, consequently “know” appears to be a very imprecise word. The most frequent occurrence when the sentence on(a) zna angielski is when a Polish company needs to have its website translated into English and an employee who knows English best is assigned this task. If you happen to read some drivel consisting of manifold English words put together without rhyme or reason and can’t make head nor tail of it, such situation has probably happened.

I’m a sluggish blogger, so before I set about compiling this bunch of reflections on learning languages, another blogger, whose attainments usually pass unnoticed, has come up with another theory. His concept is a brilliant combination of complexity and simplicity – in his view you can say you speak a language if you have command of a language comparable to a command represented by a five-year-old native speaker of a language. I read this a few times and was deeply enchanted by the theory. Read between the lines and you’ll grasp what it takes – spontaneity. You speak a language and it doesn’t seem it’s rehearsed, your feel comfortable using it, you express your thoughts at ease and with pleasure, you switch smoothly to that language without discomfort (even when being woken up in the middle of a night), you can hold conversations on all topics you are familiar with in your mother tongue. I could add that you should also think in a foreign language.

In Polish there’s a vexing phenomenon that makes my hackles rise. Take any ten CVs of job applicants and I bet you’ll fish out at least one in which an applicant would describe their command of English angielski – biegle; sometimes to prove it they add information about a certificate they hold (if they claim to be proficient, it’s usually FCE or CAE, neither confirms proficiency). Being very critical towards Polish nation’s linguistic skills, I find it hard to suppress my displeasure with this complacency. Do those “masters in English” realise that proficiency means mastery comparable to an educated native speaker of a language? Do they realise among Poles born and bred in Poland, who still live here, there are few are far between who are really proficient in English?

I don’t claim to be proficient in English (funnily enough nor in Polish), I describe my command of English as “fluency”. This involves some inaccuracy, but leaves far less room for a possible letdown. I rarely have problems understanding written word (I still encounter some new words but I usually can make out their meanings out of context), for some time I haven’t had any problems understanding English speakers in face-to-face conversations, regardless of their accent, but watching films in English is not always easy for me. I’ve been developing my writing skills as a blogger, but I surely need more opportunities to speak…

As Johnson points out it takes immersion to become proficient, for this reason you can’t expect to master a foreign language without working on four key competencies (reading, listening, speaking, writing) and you won’t be considered a master if you make grammatical errors a native speaker wouldn’t make. And there’s another aspect – it takes long to master a language, but much, much shorter to forget it (at least in the active aspect), maintaining high linguistic is a challenge comparable to acquiring them. So let’s face it – use it or lose it (faster than you think)!

Over. Off to brush up on my English!

Saturday, 13 November 2010

Turn on your printing machines

This post may be treated as a follow-up to my short essay on monetary policy from December 2009. On 3 November Mr Bernanke, the governor of Federal Reserve Bank, announced the launch of QE2 programme under which the central bank of USA will buy up government securities in the total amount of 600 billion dollars to kick-start US ailing economy.

Almost two years after Fed’s discount rate was slashed to 0.00% – 0.25% range US economy is still in the doldrums. Unemployment rate fluctuates around 10%, figures of economic growth are positive mainly thanks to large-scale stimulus programmes which slowly peter out (the two factors above combined give a new buzz-phrase “jobless recovery”), consumer prices also levelled off, but central bankers say despite extremely loose monetary policy deflation is still a much bigger threat than inflation.

The recent crisis has changed American consumers’ habits. Before the meltdown an average American household had negative savings and consumers generally tended to consume more than could afford, thus propelling world economy. This was easy to attain, as banks were eager to provide them with lending and turned a blind eye on creditworthiness criteria many borrowers didn’t meet. Much has changed since then. Consumers are now reluctant to part with cash they have, their propensity for spending and borrowing has declined. The tough lesson of crisis they have learnt will probably bring about a gradual shift from spending and borrowing towards saving.

Also banks, severely hit by write-offs on bad loans have modified their credit policies. Gone are the times when credits were foisted upon not creditworthy borrowers, these days bankers think twice before the grant a loan. Just think what happens when a loan goes bad. Can it be prevented? Can financial standing of a debtor be monitored effectually? Probably not. How long does it take to recover money? Sometimes years. What the recovery ratio will be? No one knows – a bank can recover principal and interest, a principal only or nothing, and costs have to be borne to wrangle with bad loans. Is there any alternative? Is something less risky?

Regular readers of this blog surely remember the story of 1,000 PLN lent to an ex-classmate. I still didn’t get that money back. For a comparison, on my worst speculation on stock market I lost 23%, so out of 1,000 PLN put in I still could put out 770 PLN (minus transaction costs), so it’s much more than zero. Stock markets look like an alternative. Stock indices reached their many-year lows in late winter 2009, bottomed out and since then have risen by 50% - 100%. The bull run was spurred on by loose monetary policy. Ample liquidity provided by central banks was not directed at lending activities, but at stock and commodity markets. Yes, the capital markets are said to anticipate changes in real economy, but this time market valuations discounted a rapid recovery owing to a flow of newly printed money. Just look at it from the perspective of a bank. A central bank gives you an unlimited credit facility, you begin to buy fundamentally undervalued stocks. If you don’t have power to drive the market up, you just pull back. Such a scenario is unlikely, so the prices do go up and because you are obliged to comply with mark-to-market accounting rules, your profits also rise. You report profits to shareholders and get a generous bonus from them. This is how it works… And there’s no need to grapple with bad debts, positions can be closed as quickly as they were opened and after all at the end of the day stocks will be distributed to some nitwits who will believe the prices will be rising forever and eventually will be end up duped. Stocks seem riskier assets than loans, but for the reasons I delineated above I think this is where the money from QE2 will go.

I forgot to mention the mechanics of the programme. Fed will not be buying up securities from individual holders but from financial intermediaries, i.e. banks, with a view to provide them with extra liquidity that should buoy up the economy through bank credit channel. However, the Fed is not in the authority to tell banks to turn the new money into corporate loans. Bank are free to do with that money whatever they won’t and this money in the long term will cause lots of bubbles on asset markets (excluding real estate market) to arise. The beneficiaries of the programme will be mostly financial institutions and other speculators who might strike it rich on increasing market prices. The programme might result even in hampering recovery, mostly if prices of commodities (crude oil, copper, even food) shoot up. Finally, it will cause US dollar to depreciate against other currencies and make US exports more competitive. And in the long run the rising money supply will result in higher inflation. I surmise Fed in liaison with US government were absolutely aware of long-term implications of this decision, mostly because it will allow US government to pay off its whopping debts, at the expense of its creditors, at the expense of the rest of the world actually.

Markets have witnessed a substantial rally from the beginning of August as speculators have anticipated the move of Fed, they could only bet how big the scale of the programme would be. Fed met their expectations, but hopes for a continued rally in the coming months might be dashed. Markets have priced the programme before, another price surge will ensue soon as the new money has to be allocated somewhere, but a significant correction should not come as a surprise. How long can stock prices rise if the economy is on its knees and even near-zero interest rates and printing money fail to bolster it up?

The experts tear Mr Bernanke’s move into pieces. One of the most eminent investors, Jim Rogers said the governor of US central bank “doesn’t understand economics (…) all he understands is printing money”. I would like to remind you mustn’t turn on your printers and print as much money as you want because you or your friends are hard up for cash. It is a crime! But Mr Bernanke can do it and he is not dubbed a criminal.

For the past few days I’ve been mulling over a concept of economic crime. Is there anything like this? In Poland we have police departments that deal with przestępczość gospodarcza those are economic crimes, but I’d prefer “business crimes” term. In Polish public discourse there is an insult szkodnik gospodarczy (economic pest), used by Andrzej Lepper and his fellows to describe Leszek Balcerowicz and his fellows, or conversely, by liberal intellectuals to name statist populists. But I don’t recall hearing about zbrodnia ekonomiczna.

General Wojciech Jaruzelski chose the lesser of two evils and declared martial law, many Poles have forgiven him. Current prime minister failed to carry out painful, but necessary reforms, but if he had had more courage, many Poles with hindsight would forgive him. Will the world forgive Mr Greenspan and Mr Bernanke their thoughtless decisions?

I believe one day we’ll bear the brunt of what is getting under way now. The next financial meltdown will be much more severe because indebted government will not be able to step in and bail out financial institutions on the verge of bankruptcy. I don’t claim to have come up with this scenario. Many far wiser people have spoken about such scenarios much earlier, it is estimated to come to a pass in 2014 or 2015. Before it happens we will witness era of super bubbles, so take advantage of it before the whole machinery goes under :)

Saturday, 6 November 2010

Forecasters got it wrong, again

If my memory serves me right it was around the middle of September when first warnings of extraordinarily harsh winter appeared in the media. According to some long-term forecasts (based of mathematical models) published round about two months ago, the coming winter would be extremely frosty and snowy in Europe.

Predictions of met offices across the world, all heralding severe cold in the coming winter were picked up by sensation-chasing media in Poland and abroad which launched out into scaremongering campaign. The fear of imminent harsh winter led to many misrepresentations, including the most widespread one, which credits Polish meteorologists with predicting the coldest winter in 1000 years on the assumption that the Gulf Stream has weakened… This shows how gossips are put about. One Polish meteorologist said the Gulf Stream held up well and did not seem to abate at all and somebody mistranslated it and sent out into the uncritical rest of the world.

Articles heralding the harsh winter give two reasons why such scenario is conceivable. Firstly, the alleged demise of the Gulf Stream, caused by the oil spill in Mexico Gulf. Not confirmed officially piece of information, disseminated by conspiracy theorists. The other cause is far more plausible, as we already experienced it last winter when most of the Europe was in the fetters of winter and during this summer’s heat wave. Those are disruptions in air circulation that may prevent the masses of warm air from getting into Europe and may draw in arctic and continental air from north and east.

I don’t remember much from the forecasts for the last summer, but according to meteorologists this September would have been cold (partly right) and rainy (right), October would have been chilly (right) and wet (wrong). The last decade of October was said to bring first snowfalls. And here forecasters parted with their luck. The last days of October brought beautiful sunshine and warmth blown in from over Sahara. Hot spell continued on the first day of November, when temperature in the afternoon hit +17C. The consecutive days were balmy – in the evenings on last weekdays temperature still hovered above +10C, yesterday day-time high hit +15C and even despite gusty wind one could feel pleasant warmth (no wind chill!). Today the weather was rather inclement, next days will probably bring gloomy and grey Polish autumn, but no winter on the horizon. But according to long-term forecasts, November would bring typical winter with snowfalls and sub-zero temperatures (at the present wide of mark). Well, those forecasts are fallible. Now let’s look at what Polish long-term predictions say about the weather in the coming months…

December – winter in overdrive, sub-zero temperatures will cause snow to linger, to boot Poland will be plagued by gales.

January – some thaws and hot spells will give us some occasional breaks between attacks of winters

February – dry and frosty, I surmise this means inflow of chilly continental air

And spring will come later than usual, will be cold and dry.

Funnily enough, German long-term forecasts predict early winter followed by… early and warm spring. I believe my western neighbours :)

According to predictions I’ve read this winter will resemble the last, 2009/2010, one, which went down in history as snowy and cool. Do two harsh winters in a row happen that often? Data for Poland do not bear out absolutely any correlation. How about past winters?

2009/2010 was remembered as cold (actually temperatures in December and Febauary were normal, January was very frosty) and snowy (not because of high precipitations, but because the snow didn’t melt).
2008/2009 was normal in terms of temperature of snowfalls.
2007/2008 was warmer than average with almost no snowfalls at all
2006/2007 was one of the warmest in the history and lasted from the third decade of January until the end of February
2005/2006 was cooler than the last winter and kept Poland in its grip until late March
2004/2005 saw a brief cold snap in late November and then proper winter hit around 20 January and refused to let up until mid-March.

First snowfalls in Warsaw were respectively on: 14 November 2007, 22 November 2008 and 14 October 2009. Winter has failed to turn up as early as in the previous year, but it seems unlikely that we’ll see Warsaw brought to a standstill by a layer of white flakes earlier than in 2007 and 2008. Time will tell. I want white Christmas and then winter may go away.

How about short-term predictions. If there are any prophets (of doom) among the readers, please mark your presence somehow. I have two questions.

1. On 9 November stocks of Warsaw Stock Exchange will be floated on… Warsaw Stock Exchange. They were offered for 43 PLN per share and after reading “The Intelligent Investor” and having done a brief research, I deemed them to be overvalued and settled on not subscribing for them. Then it turned out the demand from institutional investors had surpassed 25 times supply. What will the open price on Tuesday be? Will it fetch profits to subscribers?

Update, 10 November. Open price was 50.75 PLN (I do not regret not subscribing for GPW stocks. I still think they are much overvalued, but I'm glad the Polish treasury made a good deal on taxpayers' behalf, in the meantime I struck another, more profitable deal with use of money I would have had to freeze), close price was 54.00 PLN (ever-time high till now).

2. Bulgarian clairvoyant Baba Vanga is said to have predicted the outbreak of Third World War for 10 November 2010. Finally a prophecy that can fulfil quickly, I don’t have to wait until December 2012 :)

Update, 10 November. Not a WW3 in sight. But conspiracy theorist claim the puzzling California missile case might indicate the prophecy is fulfilling.