Where are the white swans?

By now, everyone knows that the Federal Reserve (or, FOMC) dropped the use of words, ‘considerable period’ from its press releases. Also, most people know that ‘patient’ means that the FOMC will not hike rates for the next two meetings. So, the earliest possible opportunity for raising rates is June 2015. At the same time, FOMC said that it was watching international developments. That is a change to its press release from the statement issued after the December meeting. Further, it changed some adjectives – from solid to strong, when it referred to employment growth. Hence, on balance, one must conclude that the FOMC statement after its January meeting tilts towards the so-called hawkish side, if only marginally.

Therefore, I must concede that the direction of change in FOMC’ intent –as revealed in the statement – is in the opposite direction to my views. Nonetheless, I hold on to the view that the FOMC would not be hiking interest rates in June but come up with reasons as to why it would not do so. I could be wrong. As Bill Gross had written recently, the FOMC might hike the Federal Funds rate to 0.5% by the end of the year, to save capitalism. Let us see.

As for Black Swan events, most commentators see a Fed tightening as one. But, many Black Swan events have happened. QE policies are themselves Black Swan events. Negative interest rates are Black Swan events. Look at the website of the National Bank of Denmark. The interest rate on Certificate of Deposits is -0.5%!

One does not have to associate the ‘Black Swan’ tag only with negative developments. Any development that catches us unaware or unprepared is a ‘Black Swan’ event. Central banks trying to underpin asset markets over the last quarter century are doing ‘Black Swan’. Central banks never targeted asset prices. Even now, they do not say that they do so. But, they do. What it has done is to make us forget our learning about investing – it is both return and risk. Investors being focused only on returns and savers being forced to take on risk that they do not understand or cannot bear are ‘Black Swan’ events.

If anything, there are only Black swans all over the place. The worlds of central banking and investing have been turned upside down. The question to ask is this: ‘Where are the white swans?’

But, if we still insist on associating the ‘Black Swan’ tag with negative developments, let us remember that it is not just about the US Federal Reserve raising the Federal Funds rate by 0.5% to 1.0% this year because of, say, wage inflation. It could be a big devaluation of the Chinese yuan. It could be about events in Ukraine spiralling out of control, despite the best efforts of both sides (NATO + Ukraine and the Russians) to keep it just simmering. We understand that Greeks are now on the side of Russians. It could be that financial markets are roiled by some risky bets made by investors gone horribly wrong — a replay of LTCM?.

Now, if investors wake up from their reverie or induced slumber and start to appreciate that they have been taken for a ride all along – in the last quarter century and, more so, in the last five+ years, that would be a ‘White Swan’ event.

Economic history lessons – 1

Voitländer and Voth argue that the scarcity of labor after the Black Death led to a change in agricultural technology. Moving along the wage-rental isoproductivity line, farmers changed from growing crops to tending animals, from arable farming to husbandry….

……… The result of this adaptation of agricultural technology changed the role of women in Medieval society. Switching from crops to husbandry reduced the demand for strength to push plows and expanded the scope of work that women could do. The result was a change in the status of women in society that Alesina, Giulano and Nunn (2013) observed at other times and places as well. The reduction in plowing reduced the demand for men’s labor and increased it for women’s labor. Women’s wages rose and their opportunity for work expanded. They delayed marriage, entered service and became more independent….

………. The opportunities open to women delayed their marriage and reduced the rate of population growth. The result was the birth of the high-wage economies of England and a few neighboring countries. Voitländer and Voth test this theory in two ways. They use unpublished data from Broadberry, Campbell and van Leeuwen (2011) to estimate that the share of pastoral production in English agricultural output rose dramatically from 47 to 70 percent between 1270 and 1450….

……… They conclude that the extensive use of pastoral production increased the age of female marriage by more than four years.

….. The rise in wages as a result of the Black Death was sustained by a shift in marriage patterns that increased the age of women’s marriage and reduced the rate of population increase. The adaptation to the initial shock led to a durable rise in people’s income. This in turn led to a demand for more meat in their diet, which of course was accommodated by more husbandry. The whole pattern fit together with the Black Death as a shock that shifted households and the economy from one equilibrium to another…..

……… This all fits in with Allen’s view of the Industrial Revolution being the result of a high wage economy………….

……… The story that links the Black Death to the Industrial Revolution therefore is also a story why Europe has industrialized most easily in the past two centuries.

These are select extracts (posted here with permission) from a very insightful paper by Prof. Peter Temin of MIT on Economic History and Economic Development. It is available for download from many sources. For example, here. This paper is forthcoming in the Journal of Economic Literature.

We should not be surprised that reams and reams of text on Growth accounting do not provided us any clue on what makes countries grow or fail to grow. Economists or for that matter, human beings in general, are incapable of connecting the dots in this fashion, except in hindsight and with a long lag. Black death – with dreadful consequences – could not have been imagined to be the progenitor of the Industrial Revolution that transformed much of the global economy for the better (that depends on your horizon, of course).

Add one more to the list of the unfathomable operation of the ‘Law of Unintended Consequence’. In my view, this has deep spiritual connotations too but this blog is not the forum to dwell upon those.



(2) Voitländer Nico, and Hans-Joachim Voth, “How the West ‘Invented’ Fertility Restriction,” American Economic Review, 103 (2013), 2227-64.

Switzerland restores sanity



Switzerland restores sanity

(V. Anantha Nageswaran)

As I was driving to my class on Thursday evening here in Singapore, I got two short messages from a broker about EURCHF dropping to 0.85 and then recovering to around parity. I was convinced that both were wrong messages or typos. I casually mentioned it to my students who confirmed that they were not mistakes but that the Swiss National Bank (SNB) had removed the cap it had set on the Swiss franc against the euro some three years ago.

As I write this, the EURCHF exchange rate is trading around parity. I was in Zurich for four days after four years in the week before the SNB pulled the plug on their policy of capping the Swiss franc against the euro. I was rather shocked to note that the central bank’s balance sheet was around 80% of gross domestic product (GDP) and that property prices in Zurich were outrageously high. It was regrettable that the guardians of the once mighty and “hard” Swiss franc did not hesitate to make it yet another paper currency—currencies whose managers routinely spawn asset bubbles and crashes.

I am glad that the SNB “heard” my lament and moved to “fix” the problem. Of all the breast-beating, hand wringing and waving that followed the move, unsurprisingly, the comment by Nobel Laureate Paul Krugman takes the cake: “So, let us learn from the Swiss. They’ve been careful; they have maintained sound money for generations. And now they are paying the price.”. Krugman does not mind leaving his readers with the impression that the Swiss have finally met with their comeuppance for having followed a “sound money” policy. Bizarre. Economists should not be surprised if their standing with the rest of the world continues to diminish.

The second prize for the most egregious reaction to the SNB-move came from Christine Lagarde, the managing director of the International Monetary Fund (IMF). She was not happy that the Swiss did not either consult or inform IMF of its decision. I do not know if SNB consulted with IMF before instituting a cap and, if not, whether the Fund minded it. In other words, we would like to know if consultation is insisted upon only if countries deviated from the Fund’s book of policy prescriptions. Actually, IMF should be grateful to SNB. By removing the cap on the Swiss franc against the euro, SNB has allowed the euro to depreciate. A weak euro may or may not help the sclerotic European economy. But, it is worth a try.

The fact that the euro fell significantly after the move is a clear sign that, all these years, SNB had prevented the euro from finding its natural floor with its intervention. Lagarde and euro zone leaders should be grateful to SNB for having given a higher chance for the world’s largest economic area to grow again. For Swiss exporters too, no amount of price discounting will help them sell their wares or ski slopes to Europeans, if they have no income. It is better to have a recovering Europe and a strong Swiss franc than a weak Swiss franc and a stagnant euro zone economy.

For investors, the SNB decision expands the choice of currencies to diversify into. Investors are tired of looking for a currency whose central bank is not actively debasing it. There are not many around, these days. One should not count the dollar in the list of sound currencies. The impending monetary normalization in the US will turn out to be all sound and fury, signifying nothing. Consensus opinion on the US economic expansion is as excessively optimistic as it is excessively sanguine about the economic slowdown in China.

The comment by one major Swiss wealth manager that it expected its clients to abandon the Swiss franc and diversify into dollars after the SNB decision was comical as it stood economic logic on its head. For the financial market types who are howling and growling that SNB sprang a surprise on them, this columnist has no words of consolation. Policy surprise is a legitimate tool in a central bank’s tool-kit. Policy transparency helped none but speculators and trading desks in financial institutions. It is a cleverly disguised (pun intended) subsidy for the financial sector. It is good that a central bank has asserted its independence, not just with respect to politicians but with respect to financial institutions and financial market participants. Arguably, the latter had been more successful than politicians in keeping central banking in chains.

Finally, for those who argue that Switzerland has been made worse off in every possible way by this decision, here is a question: how would SNB ever make good on its holding of euro-denominated, overpriced euro zone sovereign bonds if the euro zone broke up?

We have just learnt that India’s Raghuram Rajan has been voted the best central banker for the year 2014. The award for 2015 should go to Thomas Jordan of the Swiss National Bank for reminding central bankers around the world that their core obligation is to preserve sound money and not write Put options on stock markets.

More reading

A very insightful and practically useful Brookings blog post on Climate Change and India. The authors use the Indo-US nuclear deal modus operandi as the template, although it is not stated. They argue that an ‘India exception’ makes sense. They argue their case well. They also bring to bear geo-political arguments on their case for an ‘India exception’. Hope someone in the US was reading it.

This Bloomberg news-story on India – US negotiations on climate change confirms the importance of that Brookings piece.

Wolfgang Streeck’s piece in the New Left Review published in May/June 2014 on ‘How Capitalism will end?’ is a great read. Paul Marshall of Marshall-Wace (a hedge fund!) closely tracks him here. The absence of a countervailing force makes any individual, institution, idea degenerate and decay over time. That is what has happened to capitalism since the 1980s.

Jamil Anderlini of the FT has a good piece on China’s unemployment problem (poor statistics on the unemployed is a problem too!). A guest post at FT’s ‘Beyondbrics’ blog (from the American Enterprise Institute) on China’s GDP statistics is well argued and rigorous. ‘Healthy’ GDP growth and falling M1 growth rate do not go together as is a flat unemployment rate and relatively more volatile GDP growth. These are great graphics from both articles.

Ricardo Hausmann’s piece on FT on how Chinese loans to Venezuela were given and handled is an abject lesson for countries living beyond their means and that too on opaque bilateral loans.

On a related note, India’s Ministry of Statistics and Programme Implementation is set to release Quarterly Employment Surveys. That is indeed very good news.

The Hyderabad campus of BITS is offering more seats to foreign students. That too is good news.

The United States is pushing for a bilateral investment treaty with India. Indian antennas should go up. Has India done any study on the two BIT model texts that the US has put up?

Online nuggets (links)

From the Nobel Laureate Paul Krugman (what else can you expect, of course?)

“So, let us learn from the Swiss. They ‘ve been careful; they have maintained sound money for generations. And now they are paying the price.” [Link].

I have been writing for months that the US – post-2008 has been generating only low-wage and long hour jobs. Glad that this Forbes article reaffirms that. I am glad that the article also takes a shot at the non-sense of shareholder value maximisation. U.S. executive compensation is prime suspect for the state of affairs (including inequality) and second on the list must be the US Federal Reserve’s monetary policy.

Raghuram Rajan’s article for ‘Project Syndicate’ on ‘Bracing for Stagnation’ is appropriately sombre.

Andrew Smithers has a withering (and very well justified) take on the myth of the persistence of balance-sheet recession. Important read.

Quartz has some very fine charts on China’s new loans (including Total Social Financing) data for December.

Robert Shiller defends economists well and refers to two interesting titles while doing so.


It’s ‘cool’

Bloomberg has an interesting animation chart on global warming. It is ‘cool’. The fact that there are more frequent record setting temperatures post-1980 is no coincidence. It is the period when the global economy tried to get on a growth high through leverage, financial innovation and globalisation and many developing countries joined the global growth wagon. It has also been the era of globalisation and rapid rise in personal consumption. Global climate and environment will be big beneficiaries if global economic growth slowed down for the next half century. That is what a good doctor would order for the global climate and environment.

This is only January – normally a cool and pleasant month. Yes, nights are breezy and pleasant (sort of) in Singapore but the days are very hot. It does not feel like January at all.

Questions for Lagarde

Ms. Christine Lagarde of IMF does not appear amused at the move of the Swiss National Bank last night, to end the Swiss franc cap vs. Euro. That the IMF does not seem to approve of it makes it abundantly clear to me that it was a good decision.

Also, we would like to know whether the Swiss National Bank (or, for that matter, any other central bank) consulted with the IMF before they embarked on monetary easing measures. In that case, did the IMF object on procedural grounds that it was not consulted?

Or, are consultations/approvals required only for decisions that the IMF does not agree with? IF so, we would like to know the track record of IMF advices in the past and their effectiveness.