Winding down and wound up

Back after a two-week holiday in Chennai to attend the South Indian Classical Music Festival. It is an annual event that takes place in December. Lately, weather has been playing havoc. It was major rains in 2015 and a big windy cyclone this year. Thousands of trees had been felled by the wind. Yet, the show went on. More on that in my other blog,

Kept in touch only superficially with events around the world. As I approached the end of my holidays, these headlines caught my attention:

Russia calls U.S. move to better arm Syrian rebels a ‘hostile act. [Link]

Chinese carrier docks after drill amid new tension over Taiwan [Link]

Two-state solution in jeopardy in Israel: Kerry. Check out Brett Stephens in WSJ here and what a drama here as Britain rebukes Kerry over his rebuke of Israel, despite voting for the U.N. Resolution.

Obama leaves the North Atlantic Alliance and the Western alliance more divided than when he took office. Indeed, he has done more in the last weeks of his Presidency to reset and reshape the Western alliance than in the eight years of his Presidency. I think he has vindicated Trump and made it easier to jettison and junk Obama’s legacy.

Quoting Mao, China says Taiwan, HK independence supporters will fail ‘like flies. [Link]

Xi’s Power Play Foreshadows Historic Transformation of How China Is Ruled – Party insiders say president wants to remain in office after his second term, breaking succession conventions.[Link]


Money, Mongols and Mao

FT’s James Kynge (author of ‘China shakes the world’ – a great book), has a good article (nearly two weeks old) on China’s liquidity flood. Few lines from the article (behind a paywall, probably):

Ousmène Jacques Mandeng, formerly with the International Monetary Fund, has calculated that between 2007 and 2015 China created 63 per cent, or $16.1tn, of the growth in the world’s supply of money.

China now has more money coursing through the arteries of its economy than the eurozone and Japan combined — and almost as much as the US and the eurozone combined. Since the financial crisis, commentators have focused on the efforts of US, European and Japanese central banks to print money through “quantitative easing”, but China’s output has eclipsed them all.

Marco Polo would have been impressed. He noted with awe China’s capacity to print off as much money as it needed: “It may certainly be affirmed that the grand khan has a more extensive command of treasure than any other sovereign in the universe”. [Link]

Financial globalisation – just about right now

It is the fourth—bank lending—that has collapsed. In 2015, net cross-border lending was actually negative, as banks called in more international loans than they extended. Taking these figures together, McKinsey calculates that the evaporation of cross-border bank lending explains three-quarters of the overall fall in cross-border finance since 2007. To some extent—indeed, probably to quite a large extent—the retreat from cross-border lending represents a healthy correction.

Cross-border capital flows peaking at 21 percent of global output reflected a toxic mix of ambition and credulity, notably among European banks. But if 2005–07 was an aberration, what is the appropriate benchmark for global integration?

One way to answer this question is to consider the period from 2002 to 2004, a relatively calm interlude between the early 2000s crash of internet-based companies (the so-called dot-com collapse) and the U.S. subprime borrowing and euro area bank lending mania later in the decade. In those three years, cross-border capital flows averaged 9.9 percent of global GDP.

Although there is no denying that finance is less international than it used to be, it is debatable whether this retrenchment is best described as “deglobalization,” with its connotations of retreat, or as something more positive—“sounder global management.” After all, the new regulatory restrictions are at least partly a response to the risks of cross-border financing, which suggests a desirable level of flows considerably lower than the 9.9 percent of global output during 2002–04. If the optimal ratio were, say, around 5 percent, today’s degree of financial globalization might be just about right.

These are select extracts from the article by Sebastian Mallaby in FINANCE & DEVELOPMENT, December 2016, Vol. 53, No. 4 [Link – ht: Gulzar Natarajan]

If cross-border bank lending were down and if, post-2008, global leverage has increased rather than reduced, it follows that bulk of the lending is domestic or through capital market borrowings. I think it is more the former because cross-border bond flows have only slightly decreased, according to Mallaby, in the same article:

Two types of flows—bond purchases and foreign direct investment—have fallen, but not dramatically.

The risks have shifted from the banking sector. Arguably, that is a good thing.

Next, in that article, he deals with international trade flows. He makes distinction between trade flows in volume and trade flows measured in US dollars. Then, he points to the US dollar strength of recent years as another reason why measured US dollar trade flows might overstate the decline in global trade. Fair points, all.

Article well worth a read. Good to have hypotheses on economic and financial trends but better to cross-check with data. Sebastian Mallaby’s work is a necessary corrective on the collective breast-beating on de-globalisation.

Yellen’s Freudian slip?

The Federal Open Market Committee raised the target for the Federal funds rate for the first and only time in 2016. It now stands at 0.5% to 0.75%. The Fed Open Market Committee Members have – through their summary of economic projections – indicated that there could be three more rate hikes next year. I doubt if the U.S. economy can take more than two. We will see. These are all futuristic statements.

According to Goldman Sachs commentary on the decision, Ms. Yellen compared the current situation to 2007. This is what Goldman wrote:

Chair Yellen went further in the press conference, saying: “we are roughly comparable to 2007 levels when we thought there was a normal amount of slack in the labor market. The labor market was in the vicinity of maximum employment”.

If it truly reflects the FOMC’s views, this is a telling statement. In 2007, the unemployment rate averaged 4.6%, three tenths below the Board staff’s real-time estimate of the structural unemployment rate or NAIRU of 4.9%. Measures of the output gap for that year offer a similar message: the Board’s real-time output gap series as well as the current estimate from the Congressional Budget Office (CBO) are both +0.4% (implying output above long-run potential). Chair Yellen mentioned that broader measures of utilization point to some remaining slack, and she pushed back against suggestions that policy was “behind the curve”. But she did appear to say that the economy was, in effect, at full employment.

That is interesting. Then, the Federal Reserve was too late. They did not tighten but maintained a hawkish tone (bias to tighten). Unbeknownst to them, the economy was weakening and was inching towards the edge of the cliff. They had to cut rates drastically in July – September 2007.

Much a similar story can repeat itself in 2017 too.

Perhaps, that was a Freudian slip on her part yesterday!

Cohn on Franc

At the start of 2015 there were three countries in the world that were willing to have a strong currency. The Swiss, the Chinese, and the U.S. The Swiss pulled the rip cord overnight. They just ripped it off and said, ‘We are done. We are done having a strong currency. It is too expensive to defend this.

Thus spake Gary Cohn, the man Trump had picked as Director for his National Economic Council.

That is factually wrong. The Swiss ended their peg to the Euro, not to weaken their currency but the opposite! They effectively admitted that they were done trying to keep it down, artificially! He is saying something diametrically opposite!

On China wanting a strong currency, that too is highly debatable. Well, wrong. They want a weak currency provided someone can guarantee them that America would not retaliate and capital outflows would not turn into a Tsunami. Then, they would happily devalue/depreciate.

Indeed, that is what he said earlier in the interview:

You know, look, so I believe that they’re going to end up devaluing the currency? I do believe they will end up devaluing the currency.

Of course, on this one, he can wriggle out by saying that that that was then and this is now. But, his observation on Swiss franc is plainly wrong.

Globalised warming in Singapore

(1) Singapore is a very globalised city. We know it. We have one more proof now.

Its weather is like that of Asia in April to June; like that of North America in July-August and like Australia in December to February.

Oh, well. It was ‘feels like’ 42 degrees celsius today on 14th of December!

(2) Spare a thought for the Indian government struggling with currency exchange.

Singapore changed its parking fees and issued new parking coupons. The old coupons were demonetised or could be exchanged for new coupons. You could only do at select petrol stations. Those that could exchange old coupons had run out of new coupons. The only petrol pump that accepted cash for new coupons had them!

Today, I went to a petrol station to exchange my old coupons. They are allowed only between 10 AM and 5 PM!

Rogoff rounds up hypocrites

Ken Rogoff has a piece in ‘Project Syndicate’ on whether Trump’s fiscal policy would work. He appears open-minded, despite the obligatory caustic references to the President-elect. That is par for the course. But, he pulls no punches on his fellow academic travellers on the Left who thought that Obama should engage in fiscal stimulus but thinks that it would be a disaster under President Trump!:

Many left-wing economics commentators, having insisted for eight years under Obama that there is never any risk to US borrowing, now warn that greater borrowing by the Trump administration will pave the road to financial Armageddon. Their hypocrisy is breathtaking, even if they are now closer to being right….

…But beware of pundits who are certain that Trump will bring economic catastrophe. On election eve, New York Times columnist Paul Krugman unequivocally insisted that a Trump victory would lead to a stock-market collapse, with no recovery in sight. Investors who relied on his insights lost a lot of money. [Link]

Ken Rogoff gives it nicely back to Paul Krugman who hounded him, few years ago, on his calculation of the optimal Public Debt/GDP ratio and hinted that Rogoff was both sloppy and malevolent.  Well, it could not have happened to nicer guy!