Haldane’s stuck

My friend Gulzar Natarajan suggested that I read Andrew Haldane’s paper, ‘Stuck’ – a speech that he delivered in June of last year.

How does Mr. Haldane propose to reconcile Chart 17 and Table 2 WITH Chart 9? Chart 9 shows tear-way equity markets. Table 2 shows cash balances piled up in corporations. Chart 17 shows very modest real investment revival in the developed world. Any policy that seeks to address Table 2 (get firms to spend cash on real investments) is only ending up sending equity prices higher, creating more divergence between the real economy and financial markets.
Why are financial markets, especially in the U.S., on a tear when global real rates are negative, when liquidity/investment ratio is so high suggesting subdued path for future profitability of investments?
How does one explain the US real stock market performance in Chart 9, without recourse to the monetary easing that has been pursued since 2008? That also explains the sentence above and the ‘half-empty’ mindset among the public (economic agents, to be more formal).
Zerohedge captured it well here. What central banks have done will have real consequences for a long time to come:
 Asset prices remain primarily supported by excess monetary abundance across the world:
  1. There have been 667 interest rate cuts by global central banks since Lehman;
  2. G7 central bank governors Yellen, Kuroda, Draghi, Carney & Poloz have been in their current posts for a collective 17 years, yet only one (Yellen in Dec’15) has actually hiked interest rates during this time;
  3. Central banks own $25tn of financial assets (a sum larger than GDP of US + Japan, and up $12tn since Lehman);
  4. There are currently $12.3tn of negative yielding global bonds (28% of total);
  5. There is currently $8tn of negative yielding sovereign debt (54% of total). [Link]
The reason that monetary tightening had had to be reversed in the past (his Table 3) might probably have to do with the fact that they were kept too loose for too longer – longer than necessary – without allowing forces of creative destruction to play their role.
Indeed, his concluding paragraph could so easily be used against all the monetary policy adventurism, post-2008. The kite (economic growth in advanced economies) might well have come unstuck without monetary policy getting stuck into zero, negative territories and in the skies with helicopters.
It is very surprising – to put it mildly – that Andy Haldane is woefully insufficiently critical of the policies pursued by his institution. The surprise is all the greater since the person who led it has expressed so much scepticism in his book (Mervyn King).
Also, if one perused John Williams’ piece on the low R* world, he refers at least twice to the need for cost-benefit analysis of any new policy move – having a higher inflation target or the pursuit of nominal GDP targeting, etc.
That openness to reckoning with costs is missing from the recent perspectives of Andrew Haldane. That is sadder than surprising.

India’s GDP estimation issues

I had been writing about India’s GDP estimation issues. Athena Infonomics, based in Chennai (I am part of their advisory board), published my work as a two-part analysis of the issues surrounding India’s GDP estimation. You can find them here and here. I was pleased to note that a recent working paper from NIPFP echoes some of the recommendations I had made, especially in Part II, for the cloud of suspicion over CSO estimates to lift.

Corporate tax collections in the US

The ‘Wall Street Journal’ reported that the Congressional Budget Office expects lower collection from corporate taxes in the year ending September 2016:

Most of the drag stems from falling corporate profits. Individual income taxes are expected to rise around 1% this year and payroll tax receipts are up around 5%. Corporate income tax payments, on the other hand, are down 13%, due partly to the extension of a series of tax breaks approved by Congress last December.

Well, another part of the drag on corporate tax collection is due to lower corporate profits themselves. Something you would not realise if you were focused on the S&P 500 index.

Offshore Renminbi

Mansoor Mohi-uddin has written an important piece in FT on the continued decline in offshore Renminbi deposits.

The persistent decline in offshore deposits — down by nearly a third to $180bn over the past year — thus shows confidence in the currency remains fragile….

…. shrinking offshore renminbi holdings — having closely tracked the decline in companies’ foreign borrowing over the past 12 months — indicate how capital continues to flow out of China’s economy despite the current calm in the exchange rate….

…This year’s declines in renminbi deposits held abroad show retail investors continue to shun the currency….

…Exporters appear unwilling to convert foreign earnings into renminbi deposits outside the mainland, reflecting concern the exchange rate will depreciate again in future….

….this year’s simultaneous declines in both foreign banks’ claims on onshore banks and in the amount of renminbi held offshore show confidence is low in the currency’s future prospects….

… The renminbi’s outsize falls over the past year — and the decline in the PBoC’s reserves from a peak of $4tn in 2014 to $3.2tn now — have been spurred by just one US rate rise. The fear that a series of Fed rate hikes in future will lead to greater capital outflows underpins the ongoing contraction in offshore renminbi deposits…. [Link]

The internationalisation of the Chinese currency is wholly incompatible with the renewed centralisation of power and concentration of economic decision-making authority with the President and his coterie. Nor does it go along with the heavy handed and interventionist approach to managing declines in the stock market and centrally directed flow of credit to public-sector investments this year. China is not only not progressing towards being a market economy but it is regressing.

Not too many international analysts and institutions are prepared to call it as they see it but they couch it in diplomatic terms such as ‘partial rebalancing’, ‘incomplete rebalancing’ and ‘rebalancing is work in progress’, etc. That is hogwash.

The compulsions and the pressure are evident in Mansoor Mohi-uddin’s last paragraph which pays statutory respect to the future international acceptability of the Chinese currency.

It is worth recalling what John Williams, the President of the Federal Reserve Bank of San Francisco said about ten months ago:

As long as they have the threat and reasonable expectation that in a moment of panic or crisis that they would clamp down on the movement of capital so it doesn’t disrupt their economy, there is no way that anyone would view the RMB as a reserve currency,” San Francisco Fed President John Williams told reporters on Thursday. [Link]

He might just as well have said the following:

As long as they have the threat and reasonable expectation that in a moment of panic or crisis that they would clamp down on the movement of capital so it doesn’t disrupt their economy, there is no way that RMB would become an international currency.

Central distortionists

When I read the story that two companies had placed bonds privately with the European Central Bank, I just leaned back on my chair to grasp the message. Is this what market economy or capitalism all about? A central bank buying corporate bonds in a private placement?! Everything that we have been told or taught has been turned on its head here. It is so wrong in many respects. Yet, these folks are still being listened to and respected. No one dares call the emperor naked because their own nudity would be exposed.

I also learnt to my utter surprise and shock that the Swiss National Bank (SNB) is a big investor in global stocks, particularly US stocks. I really fail to fathom the logic behind it. See here and here.

In 1997, Swiss GDP was CHF415.6bn. The balance sheet of SNB was CHF68.3bn. SNB balance sheet was 16.4% of GDP. In 2015, Swiss GDP was CHF639.63bn. SNB balance sheet in June 2016 was CHF689.59bn. That works out to 107.8% of GDP. If not in Switzerland, SNB is busy fanning and inflating bubbles around the world. Do they ever reckon with the costs of what they are doing, let alone evaluating them?

Urjit Patel on SLR and Indian monetary policy

While TCA Srinivasa Raghavan tweeted on Sunday on a 2012 paper by Dr. Urjit Patel, I saw in my in-tray (electronic) that I had downloaded a working paper co-authored by him with Amartya Lahiri. This was the first working paper of the year from RBI.

It is titled, ‘Challenges of Effective Monetary Policy in Emerging Economies ‘. (Ref: WPS (DEPR): 01 / 2016)

Their main conclusion:

In the presence of a binding SLR, he and his co-author argue that a reduction in interest rates reduces rates on deposits and, to the extent, deposit outflows happen (or inflows slow), credit to the private sector actually drops (SLR is binding and hence, loans to the government do not shrink) and that leads to higher interest rates! In other words, policy easing is contractionary!

Secondary conclusion:

The authors say that when there are distortions like binding SLRs, conventional monetary policy results are obtained by changing the SLR itself rather than interest rates!

Lower SLR = monetary expansion
Higher SLR = monetary tightening (page 34)

Policy distortions:

The authors are critical of loan targets given for the agricultural sector between 2004 and 2007 and how they distorted allocation of credit, along with the interest rate subvention for loans to agricultural sector (topped up by State governments) and capped by loan waiver of 2008! In effect, the UPA government did all the wrong things – interfered with quantity, price and then topped it up with moral hazard! (Page 11)

Fiscal dominance is always more likely than monetary dominance since central banks are in the business of brinkmanship (quote from Bernanke) due to the likely fallout on the banking sector. (page 9)

The authors do not hesitate to point to administered interest rates as another policy distortion that undermines monetary policy. (Page 10-11).

Their model is not that easy to understand in one casual reading. Plus, some amount of tightening of notations to ensure consistency and avoid confusion is, perhaps, needed.

One interesting/disturbing fact of PSU bank behaviour:

Between 2009 and 2014, public sector banks tended to hold government bonds well in excess of SLR requirements. Some amount of excess is reasonable given the access it gives them to funds under MSF (at 1% above the repo rate). But, their holdings were higher, even after adjusting for it.

The authors are very clear on the consequence of this:

This, of course, is costly to the tax payer as the banks are potentially losing profits that they could make while they are also contributing to a liquidity squeeze in the economy. A third deleterious e¤ect of this banking strategy is that the lower return on bank assets tends to get passed on to bank depositors as lower deposit rates and consequently tends to lower saving rates as well. In a developing economy that is starved for investable funds, this is very damaging. (page 32).

This underscores the urgency of addressing the Banking Sector (esp. PSU banks) NPA problem in India. It is causing so many other distortions in the economy.

Their conclusions as to the implications of their paper for central banks are interesting:

For the central bank, the tasks ahead are two-fold. First, perhaps re-balance the reform agenda from high pro…le subjects such as legislative amendments, like a monetary policy framework and associated institutional changes, to addressing policy-induced distortions that undermine monetary policy e¢ cacy and transmission.

Second, address the challenge of multiple roles/objectives and limited instruments.

Here are our questions:

Where does this leave RBI under him on interest rate changes? No cut at all?

What levers does the RBI have on fiscal policy, if any, at all?

Is the new monetary policy framework redundant in the light of the binding SLR? Does it really matter that India has such a framework now?

How to present this paper to the government (and national and regional political parties) in a non-technical manner such that they understand the situation in which policy is being made and rendered ineffective?

Does the Federal Reserve ‘support’ Trump?

Justin Pierce (Federal Reserve Board) and Peter Schott (Yale School of Management) have come up with research that shows that US manufacturing employment declined after the United States conferred Permanent Normal Trade Relations status on China at the turn of the millennium. They account for other factors. The same thing did not happen in Europe. But, Europe had conferred PNTR in the 1980s itself. It would have given their conclusions a huge boost if they had data that showed that Europe too witnessed a swift decline in manufacturing employment after the conferment of PNTR on China in the  1980s. They have an updated version of their paper here.

As one visited the research page of Justin Pierce, one came across couple of other interesting titles: ‘Does Trade Liberalisation with China influence U.S. elections?’ and ‘Trade liberalisation and mortality: evidence from U.S. counties’. The abstracts are, sure, interesting. In fact, their conclusions do logically lead to the conclusion that Donald Trump has got it right.

Sample this from the paper on mortality and trade liberalisation (August 2016):

We investigate the impact of a large economic shock on mortality. We find
that counties more exposed to a plausibly exogenous trade liberalization exhibit
higher rates of suicide and related causes of death, particularly among whites.
These trends are consistent with our finding that more-exposed counties experi-
ence relative decreases in manufacturing employment a sector in which whites
are disproportionately employed and relative increases in the unemployment

Or, this from their paper on trade liberalisation and U.S. elections (April 2016):

This paper examines the impact of trade liberalization on U.S. Congressional
elections. We find that U.S. counties subject to greater competition from China
via a change in U.S. trade policy exhibit relative increases in turnout, the share
of votes cast for Democrats and the probability that the county is represented by
a Democrat. We find that these changes are consistent with Democrats in office
during the period examined being more likely than Republicans to support legis-
lation limiting import competition or favoring economic assistance.

I had also stumbled upon another research paper (again from the Federal Reserve Board published in 2009 (or, 2010?) on the impact of immigration on youth employment in the United States:

Aggregating these counterfactual employment rates in 2005 up to the national
level implies that the fraction of teens employed in the previous week would have been about 6.5 (males) and 7.1 (females) percentage points higher in 2005 had immigration remained at its 1990 levels. Of course, this calculation is derived from average immigration effects estimated over 5-to-10 year intervals, so it’s possible that the true contribution of immigration to declining youth employment between 1990 and 2005 may be somewhat larger or smaller.

Growth in immigration appears to have reduced youth employment-population
ratios over the past few decades. Though the slight increase in enrollment rates in
response to immigration suggests that some youth are induced to substitute their time from work to schooling, I find little support for the hypothesis that an
immigration‐induced decline in employment has large positive effects on employment 10 years later. As a whole, these findings constitute suggestive evidence that the recent decline in youth employment is not entirely driven by an increased emphasis on educational and extracurricular activities and that at least part of the decline reflects increased labor market competition from substitutable labor. More work is needed to fully account for the recent employment trends and to explore the welfare consequences of employment declines for which immigration is not directly responsible.

This paper also highlights variation in the effects of immigration by age, echoing
recent papers in the immigration literature which characterize the heterogeneity of
immigration effects throughout the native population. By focusing only on adults,
earlier research may have ignored the subset of the population that appears to be most affected by recent immigration growth. Future immigration studies may wish to take into account the effects on younger individuals as well.