Of conclusions and explanations

Financial Times has a series of stories/articles (actually, these days, newspapers mostly their stories with journalists as creative authors – you can interpret it whichever way you want) on the United States announcing tariffs on Chinese goods and on China’s retaliation. A quick glance at the headlines will tell you which way FT is leaning. Well, actually, you don’t even need to cast a sideways or a quick glance. By now, we should know. Let us set that aside for a moment.

Here is an interesting header:

Header 1.png

So, what is this economic lever? You don’t have to wait too long. Another story and another header gives you the answer:

header 2

It was a fun exercise on a Sunday morning, alright.


The ‘new world order’ – not releasing anytime soon

This article in http://www.atimes.com is an interesting read. It is true that much of what is written there is not that widely reported in the Western media, if at all. Of course, the author does not hide his own bias. He wants the Western (or, US-led) order to be replaced. He gleefully cites Kishore Mahbhubani who sees the last 200-250 years of Western dominance as an aberration. Some others would see it as a regime shift that has lasted only 200-250 years as opposed to the 1800 years of Asian (China and India) dominance of global affairs. Which of these two world views will prevai is the question of and for the 21st century. It is not surprising that the comments below Escobar’s aticle too reflect this defining struggle of the 21st century.

To a large degree, the question of the balance between capital and labour is also bound up with the question of global dominance between the West and the East. Western dominance was built on the strength of capital, technology and scale. The Great Plague led to shortage of labour and excessive labour costs and hence, the West ended up with the steam engine and turbines and the industrial revolution, not to mention the rise of modern artillery, weapons and sea voyages with military and commercial goals. The Industrial Revolution facilitated much of that. Several other social changes followed too in its wake – the rise of women as key members of the labour force, smaller families, urbanisation and the demographic trends that we witness today.

In the previous eighteen centuries, labour-rich China and India dominated and technological development was not a necessity. The Great Plague did the trick for technology. Accidents of history shape history and society.

I am not sure – and I am just thinking aloud here – if the question of East or West and Capital or Labour can be resolved independently of each other.

That said, there is an interesting game afoot and it is evident in this open invitation from Russia to Europe to rise to the challenge of replacing the U.S. dollar:

Yet the clincher in terms of possible game-changing relations between Russia and Europe came from Finance Minister and first deputy Prime Minister Anton Siluanov: “As we see, restrictions imposed by the American partners are of an extraterritorial nature. The possibility of switching from the US dollar to the euro in settlements depends on Europe’s stance toward Washington’s position.”

So once again the EU was on the spot – on both crucial fronts, Iran and Russia. Siluanov left the door wide open: “If our European partners declare their position unequivocally, we could definitely see a way to use the European common currency for financial settlements, such as payments for goods and services, which today are often subject to restrictions.” [Link]

I am not sure if the Euro or the Eurozone is ready for this challenge. It has existential challenges. I do not have to remind you of that. Italy offers that reminder well enough. That said, the developments here need to be watched carefully, closely and continuously. The current unipolar position of the US dollar can be tenuous.

Equally, it is possible that Mr. Mahbhubani is guilty of hyping the end of the Western dominance. That is, he could be way too premature here. The East is not one monolithic bloc. Indeed, it may be a case of China vs. the Rest in Asia itself.

To see that, read this article that puts a different spin on the keynote speech of the Indian Prime Minister at the Annual Shangri-la Dialogue in Singapore. This is a pushback to Mr. Escobar’s thesis. Indeed, the author tries to pour cold water on the conclusion that the Indian PM Modi sided with China and cold-shouldered the United States in his speech at the Shangri-la dialogue.

By the way, in case you have some doubts as to which Mr. Escobar is taking in the West vs. East debate, you do not have to wait too long to have your doubts resolved. This article by him on India’s relationship with Iran should remove your doubts.

For me, I am a sceptic of the hypothesis that the West is done and over with; that the East is ready and that all that is required of the West is to roll over and play dead. There are far too many holes and one-sided assumptions in these multi-layered hyptheses.

Italy, Europe, Pakistan and the rest

Been six days since I blogged. Was travelling again on May 30-31. Backlog of blogging builds up. So, this one is a potpourry.

Almost done with reading ‘Final hour’ Sir Martin Rees. Recommend it.

Of course, ‘Adults in the Room’ by Yanis Varoufakis remains the highlight of the year in terms of readings completed. He has a fairly sober piece on Germany (Merkel, in particular) being at the heart of the problems confronting Europe. In his attempt to be politically correct, I think, he has finessed his lines.

Paul Krugman has three tweets on the Italian President denying the Italian election winners the right to form the government by denying them their Finance Minister nominee.

But, Yanis makes this interesting point:

Trump understands one thing well: Germany and the eurozone are at his mercy, owing to their increasing dependence on large net exports to the US and the rest of the world. And this dependence has grown inexorably as a result of the austerity policies that were first tried out in Greece and then implemented in Italy and elsewhere.

Today, I heard Raghuram Rajan in Singapore saying that, one of the reasons behind the austerity policies in the UK was (or, could be) that their banks were too big relative to their economies and that the austerity was an accommodation of the demands of such a big banking sector on the government’s fiscal resources. Same goes for Europe. He was not defending this, however. Rajan was delivering the 9th MAS lecture today in Singapore.

Nonetheless, I am not advancing this either as an explanation or justification for the ‘Troika’ to impose austerity – and that too with utter hypocrisy (I am yet to write a full review of ‘Adults in the Room’) – on Greece. Simply recording something I heard today related to the word, ‘austerity’.

Inter alia, UK Government sold some of its stake in the Royal Bank of Scotland at a hefty loss today.

The UK Chancellor of the Exchequer George Osborne has such a massive conflict of interest with what he is doing at the ‘Evening Standard’ that I do not know where to begin. Read this to figure it out yourself. Equally, I am not surprised that Google took up his offer. They should be embarrassed but will they be?

The implications of this story are staggering and overwhelm me. How is India, for example, going to find employment for its youth with or without formal education? Is technology such a holy grail that it should be pursued, no matter what? That is where I find Sir Martin Rees thoughtful and humane. See the beginning of the post.

Prof. Atif Mian at Princeton has a series of fourteen tweets on development, the vicious poverty trap and how public policy and prejudices make it more vicious. First tweet here.

Australia charges Citi and Deutsche Bank for cartel-like behaviour in their underwriting of ANZ shares a decade ago. The authorities have made a criminal charge and that is serious stuff. Banks will be banks, I suppose.

A damning verdict on American universities by Rana Foroohar. They are now hedge funds, she says. Ed Luce wishes she were not right. He concurs.

A powerful way to understand what we (humans) have wrought to the climate. Found it via the twitter handle of Atif Mian.

Gulzar shared this pithy and perceptive blog post by Tyler Cowen on how Trump’s foreign policy might outlast him in America.

This should tell us why Europe has not earned Trump’s respect.

A good summary of Pakistan’s acute ‘Balance of Payments’ situation.

More later.

Two vs. 1157

Reproducing the article that I co-wrote with Dr. Srinivas Thiruvadanthai for MINT. He blogs here.

Economists write letter to the wrong address

Economists have deservedly earned a reputation for being out of touch with reality. They are cementing it with their latest letter to Donald Trump

As of last count, 1,157 economists had sent a letter to US President Donald Trump warning him not to repeat the mistake of the Smoot-Hawley Tariff Act of the 1930s. The one-page letter was a copy-and-paste job from the letter that economists sent to the then president in 1930 because the fundamental principle, according to them, has remained unchanged since then.

No honest economist would generalize theory across space and over time, without considering the context. In the 1930s, the Great Depression had many parents. When it suits them, economists point to the gold standard as the culprit. With considerable justification, some of us would like to point to the asset bubbles, excessive bank lending and the “Great Gatsby” decade of the 1920s as more important causative factors for the Great Depression. At best, the Smoot-Hawley tariff might have been a complementary factor. The tariffs were enacted in June 1930. By that time, the US and the global economies were already in a vicious downward spiral. Industrial production was down almost 20% by June and the Dow Jones Index down close to 40%. More importantly, as Barry Eichengreen and Kevin O’Rourke have shown, world trade fell more in 2008-09 than in the Great Depression, though there was no trade war in 2008-09!

Although economists are virtually unanimous in their support of free trade, the theoretical justifications are much less sound than they make it appear. Comparative advantage, the cornerstone of the benefits of trade, assumes full employment and frictionless movement of factors of production across sectors. These conditions are generally not true in practice. It is not easy for a middle-aged, laid-off steel worker to be retrained as a lab technician, much less a software engineer. Indeed, recent work by David Autor shows that the entry of China into the World Trade Organization (WTO) had a strong, negative impact on the long-term prospects of US workers displaced by Chinese competition. Economists will be quick to point out that these negative effects reflect the failure to implement adequate compensatory policies, but how many times have you seen 1,000 top economists write to the president urging more aggressive policies to help workers displaced by free trade?

The signatories to the letter cite the 1930s precedence. However, there is no precedence for dealing with a nation of 1.3 billion people that makes commitments with the conscious intent of not honouring them—whether it is on trade or technology matters. William A. Galston, who served during president Bill Clinton’s first term in office, wrote for The Wall Street Journallast August (“Second Thoughts On Trade With China”) that when China joined the WTO in 2001, it had promised to sign the Government Procurement Agreement, which requires government purchases to be made on a non-discriminatory and transparent basis. Sixteen years later, at the time of his writing the article, China had not yet done so. China pledged not to militarize the islands it had created in the South China Sea. But, it proceeded to do exactly that. “They tell us what we want to hear and then do the opposite,” says an unnamed German government official, in a Reuters news report. German government officials note too, wryly, that trade with China is win-win. That is, China wins twice. More than half the members of the German chamber of commerce in China are not planning new investments in the country.

Bryan Riley, director of the National Taxpayers Union’s free trade initiative, which coordinated the letter, had said that the anti-free trade message was not being driven by public opinion and that it was top-down. This is inconsistent with facts. The monthly Harvard-Harris poll tells a different story. From the March 2018 edition:

—55% said America’s trade agreements cost jobs and only 45% said that they created jobs

—61% approved of the president leveraging the threat of tariffs to win more favourable terms for America from trade agreements

—More than two-thirds (67%) said that the US should punish China for forcing American companies to give up technology secrets

—72% were either concerned or very concerned about the US losing technological supremacy to China

—75% said that the US should take steps (including tariffs) to correct the $375 billion trade deficit with China

—58% supported the imposition of tariffs on Chinese goods

—68% said that the American government should buy America-made goods and hire Americans

Economists have deservedly earned a reputation for being out of touch with reality for their failure to anticipate the 2008 crisis and read the mood of the people correctly on either side of the Atlantic in the last three years. They are cementing their reputation with this letter to the US president. They should reflect on why even 1% of the number of signatories do not emerge from China to tell their president to honour international commitments, and on their own reluctance to address a similar letter to China, despite its documented breaches of trust.

In short, the inability and unwillingness of 1,000 learned men and women to call out a nation that plays either by its own rules or none at all, with no recourse to others against such unilateralism, do not provide good soil for the growth of world peace.

V. Anantha Nageswaran and Srinivas Thiruvadanthai are, respectively, a Mint columnist, and director of research at the Levy Forecasting Institute.

Comments are welcome at theirview@livemint.com

Debt, deleveraging and defaults in China

If not shadow banking, it is shadow lending, anyhow:

Insurers are allowed to allocate up to 55 percent of total invested assets in alternative investments. Those investments accounted for 40 percent of invested assets in 2017, but the number has risen sharply in recent years. In 2012, the proportion was 9 percent.

Of the 40 percent recorded in 2017, the largest proportion was in debt investments, where the funds mostly end up as loans to infrastructure and real estate projects, Reuters analysis of insurance asset management product data shows.

In the three years to the end of 2017, insurers’ investment in loans for infrastructure nearly tripled and nearly doubled for real estate. [Link]

Private sectore defaults:

Earlier this month a private Chinese manufacturer, DunAn Group, sent a letter begging the Chinese government to help it out with its $7 billion of debt.

“If a credit default happens, it will deliver a serious blow to many financial institutions in Zhejiang and may even cause systemic risks,” said DunAn’s letter, according to the Financial Times. The letter also blamed the company’s troubles on China’s tepid effort to tighten credit conditions and rein in corporate debt. [Link]

Private corporate defaults in general, up more than 30% in the first four months of 2018:

China’s private sector firms are facing a debt crisis amid falling profits and rising financing costs, with the value of bond defaults in the sector rising by more than a third in the first four months of the year, according to industry watchers.

More than 10 companies, several of them listed, from a variety of industries have defaulted on 15 bonds worth more than 12.8 billion yuan (US$2 billion), according to figures from China Central Depository and Clearing Company, which manages and promotes the sector.

The spike in defaults has unsettled regulators that have been keen to prevent systemic risks as they seek to reduce national debt levels. [Link]

Debt addiction has not really been kicked but bank lending somewhat rationalised:

Here’s a widely told yarn: Last year China successfully curtailed skyrocketing debt issuance without hurting growth…. For investors watching the Chinese economy and rates, the message is clear: China hasn’t somehow magically cracked the code on debt-free growth. If industrial profits and inflation keep heading sharply lower, expect another round of substantial stimulus before too long. [Link]

Therefore, this should not come as a surprise at all:

In a speech made in the Chinese capital, Xia Bin, who has been advising the State Council – China’s cabinet – on financial policy since 2009, painted a far less rosy picture of the country’s financial industry than the one presented by Beijing.

“Systemic risks are elusive and spread fast” in China, said the 67-year-old, who was a key figure in a clean-up campaign of non-banking financial institutions two decades ago, when he was a senior official at the People’s Bank of China.

Beijing must remain alert to the threat of a financial crisis, he said, adding that government indicators did not reflect the true dangers.

China’s official non-performing loan ratio, for instance, bore little resemblance to the true figure, he said.

“From a dynamic perspective, it should be beyond [the official figure of] 2 per cent.”

Similarly, banks’ exposure to the property market was far higher than official figures suggested, he said. Official numbers say that about a quarter of all outstanding bank loans are linked to real estate, but Xia said the real figure could be as high as 80 per cent if all loans that used property as collateral were taken into account.

The whole Chinese economy had been “hijacked” by property, and that had created an enormous threat to the country’s financial stability, he said. [Link]

More on Trump and ZTE

FT had an Edit on Trump’s mind-bending tweet on ZTE. I left the following comment there:

IF I were FT, I would wait to assess. It was a big shock to see that tweet alright. But, precisely because it was such an incomprehensible tweet, we should give ourselves time to figure it out.

Plus, FT’s Economics Commentator Martin Wolf had written that the United States has imposed humiliating conditions on China that it could not possibly accept.

Now, FT View says that Trump might have bargained away a serious national security threat for short-term  gimmicks from Xi and that he might have struck one of the worst deals he has ever struck.

So, which side is FT on? We know one thing for sure. There is only one consistency that FT follows: oppose what Trump does even if it means opposing what FT itself wrote on the same day in another page or another day.

I am ready to wager that Trump is secretly having a laugh at the fantastic twisted tangle that the so-called ‘elites’ and ‘intellectuals’ have gotten themselves into ever since he became a contender for the American Presidency.

Two things that they ought to be doing but have not: give some credit to the intelligence on the other side especially since they had no idea of what was coming, how or why and two, take time out and reflect on what they have gotten wrong and why.

Chris Balding’s tweet alerted me to this another mind-bending stuff – this time from Martin Wolf of FT:

China needs strong central rule

A noteworthy fact was the belief of our interlocutors that Chinese political stability is fragile. History suggests that they are right. The past two centuries have seen many man-made disasters, from the Taiping Rebellion of the 19th century to the Great Leap Forward and cultural revolution. [Link]

But, wait! The ‘Great Leap forward’ and ‘The Cultural Revolution’ were because of strong central rule. Oh, boy! What a mess!!

Chris Balding tweeted thus, in response:

I don’t even know where to start with this one. You argue that China NEEDS strong central rule and to make your case you cite the Great Leap Forward? Going to stop now before some four letter words words come out. [Link]

I can very well understand that.

He had another terrific tweet:

Progression of Twitter conversation on US China trade negotiations
1. Trump is too easy
2. Trump is too hard
3. Trump should ask for market opening
4. Trump should ask for hard targets
5. It’s all about Trump Tower
6. Return to #1 and repeat as needed



Prof. Rodrik is wrong

Happened to read this piece by Professor Dani Rodrik in ‘Project Syndicate’. MINT has carried it as well.

Let us start with what he gets right: The United States might have stolen IP from Britain. The problem then was that there were no international intellectual property regimes. They did not exist. Everyone stole from everyone. Germany stole from Britain too. Ask Ha-Joon Chang. That is what he documented in his book, ‘Kicking away the ladder’.

But, now, right or wrong, fair or unfair, we have international laws and countries voluntarily sign up to them, because they want the technology and hence, they sign up to complying with transfer restrictions to other nations.

Now that nations sign up to international agreements, they cannot go back and cite precedence from another period when no framework existed.

If they had no intention of complying and did not sign the agreements, then, it would have meant that they signed up to the philosophy of ‘might is right’. Then, it becomes a law of the jungle and survival of the fittest. There is no role for op.-eds. and economists. We can watch the slugfest.

Indeed, that is the conclusion that Prof. Rodrik’s arguments are leading us to. China is not claiming that it is not cheating nor is Prof. Rodrik claiming that China is not cheating. But, he is questioning the actions that the U.S. Government is taking. Where would that lead to? Only the jungle.

Prof. Rodrik has written often enough that economics rules and laws operate within the prevailing social and political contexts. Hence, to cite precedence from another era and another context must sound very unconvincing, even to him.

The context is indeed different now in another aspect too. Technology – beneficial and menacing – has advanced tremendously. There are chemical, biological and nuclear technologies that can cause tremendous damage. Hence, stealing them and propagating them to nations that do not have a record of responsible deployment (not just against the rest of the world but against their own people) is immoral and actually, they tantamount to crimes against humanity. These are not morally equivalent to and are far different from stealing technology for sewing machines during times when no intellectual property regime existed.

If one can hazard a guess as to why Prof. Rodrik wrote this piece, we get clues from his concluding lines. Prof. Rodrik writes that many liberal commentators question Trump’s methods but not his goals. He wanted to differentiate himself by criticisng both.

The other possibility – and all of us are susceptible to it at some point if not always – is that he has set up a goal for himself: “I cannot be in the same side as Trump is. So, let me see what I can do to come up with an argument to help me reach or stay in that position.

Then, one tends be a bit careless about the ‘logical landmines’ on the way. The goal is not to be where Trump is.

This piece falls well short of the analytical and logical rigour that one has come to expect of him.