ECB back at its futile game

My former student alerted me to the European Central Bank going back to monetary easing. Such was the power of its previous spell of sustained monetary easing and ‘whatever it takes’ efforts that, in less than a year, after ending its asset purchases, it had to go back to the tried-tested-and-failed policy. Here is the press release.

ECB’s deposit facility rate has been ‘cut’ further to -0.5%. Now, this announcement says ECB will buy even private sector bonds with yields below the deposit facility rate! Oh, yes, that means that bond purchases have resumed at EUR20.0bn rate per month until such time that interest rates begin to rise. QE Infinity!

Additional monetary easing measures can be found here and here. Banks will not have to pay the deposit facility rate to the European Central Bank for keeping excess reserves with it! How considerate of bank profitability!

In the meantime, the same former student forwarded these remarks by the Vice-President of the European Central Bank in a speech made in Rome in June 2019:

In this context (favourable macro conditions), it is important to recall that the overall effect of our monetary policy on bank profitability has so far been broadly neutral. Nevertheless, the overall effects of negative rates on the banking sector need to be carefully monitored, particularly because the balance of their effects will depend on how long rates remain in negative territory [Link]

Good luck to European banks!

Should S&P bring back ‘core earnings’?

This chart shows how S&P 500 Companies’ Operating Earnings has now reached a high share of the overall National Income measure of corporate profits. The last time it did so was in 1999-2000!


I remember that, in 1999-2000, Standard & Poor’s had introduced a concept called ‘core earnings’ because companies had begun to state whatever they wished under ‘Operating Earnings’. Perhaps, it is time to bring it back.

In another sign of market craziness, the 5-year Greek bond yield (1.27%) is lower than the 5-year US Government bond yield (1.5%). Does the prospect of Euro appreciation over US dollar dominate the credit risk of Greece (in comparison to the USA) or is it that the market is very confident of the European Central Bank and the European Commission rescuing Greece in the light of any default risk? Both stretch credulity, in my view. (ht: tweet by David Rosenberg).

Call Centres or Casinos and why Hastie was not hasty

Philippines is discouraging the emergence of more call centres in Manila in the name of helping other regions grow. A great public policy study on how to come in the way of a good story.

Iceland is staring at the prospect of running out of ice. [Link]

Russia finetunes its tax collection mechanism. Some would pray that Indian Income Tax does not get wind of this. [Link]

Andy Xie’s thoughtful piece on what Hong Kong didn’t get right. Commentators take snapshots. Historians observe the flow of events over time.

Revisiting Chris Balding’s twitter handle becomes essential now. He points to this interesting thread.

Chris Balding’s twitter thread on why US and China are not engaged in a trade war but something else much bigger. Clarity.

Australian politician Hastie sounds the alarm not about China but about Australians themselves. It can apply to several other nations:

Right now our greatest vulnerability lies not in our infrastructure, but in our thinking. That intellectual failure makes us institutionally weak. If we don’t understand the challenge ahead for our civil society, in our parliaments, in our universities, in our private enterprises, in our charities — our little platoons — then choices will be made for us. Our sovereignty, our freedoms, will be diminished. [Link]

This is a good perspective on how and why Hastie wrote what he wrote.

Rather shallow stuff from Yasheng Huang on Huawei. Just wondering why.

Big, big rumour. Must remember to follow this.

Two good pieces from South China Morning Post’s Karen Yeung – one on China’s dollar shortage and the other on China’s social ills reaching a tipping point.

More on why China cannot afford to let the yuan slide too much:

According to analysts at Nomura, the amount of offshore dollar bonds issued by Chinese corporations has more than tripled since the end of 2014, rising to $841.6 billion at the end of June. [Link]

We rent digital books and don’t buy them

Katharina Pistor rightly raises the alarm on Facebook’s cryptocurrency. Central bankers’ silence is, one hopes, a sign that they are studying it deeply.

Yanis Varoufakis (May 2019) writes that the stellar returns achieved by Greece’ stocks and bonds since 2012 are part of the problem. He is right. There is a gap between economic reality and financial returns. Greece is not the only place it is happening. But, it could be one of the more extreme examples. He forgot to zero in on the principal source of the problem: reckless monetary policy pursued by the developed world.

Wall Street Journal comment on the appointment of Christine Lagarde is a very good read. It is politicisation of the European Central Bank. Not that Draghi was much different. The comment notes that markets are cheering her appointment but that markets would regret it. Well said. The cheer is because it means continuation of reckless monetary policies.

Adam Tooze’ review of the book, ‘1931’ by Tobias Straumann made for very interesting reading. My friend Ajit Ranade suggested that I read a blog post by his friend on the book. I did so. It is well written. The post makes a good point about how Jews were made the scapegoats by the Nazi party when they were actually in the forefront of defending Germany’s interests in the peace conference and that the German foreign minister was Jewish, etc.

As to the take-aways from the book, I am not sure that there are neat answers to avoid a certain march of history, except in hindsight. Colour me sceptical on humans’ ability to solve the problems they create. They are good at creating problems but not that good at solving them. Most of the time they solve themselves or plain luck and humans take credit.

It is hard to quarrel with the motherhood statement made by the blogger here:

Economic orthodoxy must always take second place to the need to make sure individuals, communities and businesses are able to work and earn a decent return on their investment (labour in the case of individuals, capital in the case of businesses).  [Link]

One important take-away from Adam Tooze’ review is that democratic politics (local politics) can come in the way of doing the right thing in terms of global obligations. This is but a variant of Dani Rodrik’s ‘Inescapable Trilemma’. The review also reminded me of what I had not read yet: John Kenneth Galbraith’s account of the Great Depression.

This FT Edit made for very disturbing reading, especially for someone like me who has gotten used to reading stuff on the Kindle App in my iPad. I did not know that I am renting books and not buying them outright. As the Edit says, this is duplicitous. The Edit says that, in this regard, the revival of paper-based books is a good thing. I have to agree.

Sucheta Dalal in Moneylife has a good article on the corporate cleanup underway in India. She thinks it has been overdue. I hope she is right that it is being pursued with earnestness.

The toxic strawman

Is a case for ‘social cohesion’ racism? If comments by some of the readers are anything to go by, then the answer seems to be ‘yes’. But, this blogger is not clear that it is. It should be possible to have constructive debates in families, in societies and in nations on limits to charity.

Nations created out of communities which, in turn, were created out of tribes or groups have their own character. It is natural to want to preserve that. Within that framework, one can be generous and accommodate strangers, the persecuted, the able, the skilled and the rest. But, when the latter threatens to overwhelm the former or when the former feels threatened, it is time to have a discussion on limits.

In short, there has been and there has to be a core for each society or nation. Otherwise, societies and countries will become the equivalent of ‘travellers’ bungalows’. That will be an existential crisis for societies.

The article in FT on the tough stance adopted by the Centre-Left Social Democrats in Denmark is an important read. Indeed, one can have a seminar for a day or two on that. The Centre-Left immigration spokesperson is the son of an immigrant himself – Ethiopian father and Danish mother.

These remarks of his are central to the entire article:

The areas where the migrants are moving to are classically Social Democrat areas. So typically it will be Social Democrat voters who will have kids in schools that will have problems, typically skilled and unskilled workers who will have new colleagues. This is challenging the social cohesion in the welfare state,” he said [Link]

The conflicts and the challenges faced by open-ended immigration are borne by the poor and the marginalised in those nations that have had a history of being open to immigration and asylum seekers.

That these nations too have their poor and marginalised- even if only in relative terms – is, in turn, a problem of the model of economic organisations that countries have adopted or have been forced to adopt – capitalism without social characteristics.

One can discuss the multiple strands of implications that the article throws up. It is not just about Denmark. That is the ‘beauty’ of the article/story.

Finally, one commentator captured the problem in public debates on these issues:

So, unless you’re an open-borders fanatic, you’re a Nazi? No wonder the votes are migrating to so-called populists.

This is the mistake that the so-called ‘do-gooders’ are making. Their readiness to paint all those who do not agree with their positions as dangerous demagogues or right-wing populists shuts out adult-like discussion on important matters. That is the toxic strawman that the so-called Liberals set up to shut all necessary discussions on the topic.

In doing so, they give rise to the ‘populism-nationalism’ that they claim to abhor or detest. That seems rather daft to me.

It is important to recognise that these are not just issues of budgets or economic viability alone. These are legitimate existential questions for ordinary people.

Postscript: Over the weekend, my friend Srinivas Thiruvadanthai had shared an article by Reihan Salam of the Manhattan Institute on India, written for ‘The Atlantic’. Mr. Salam has an interesting book, ‘Melting pot or Civil War’. Sounds interesting. I have just ordered it.

Cash, community and branches

This long article in Quartz on the closure of branches in rural Scotland by the Royal Bank of Scotland is well worth a read. It is an interesting case study on many things related to business, economics and society.

One of the important take-aways in this is credibiity, trust and integrity. RBS promised that it would not close a branch if theirs was the last branch left standing in a community and proceeded to do exactly the opposite.

This is not how one wins back trust for capitalism.

Incidentally, the article has many useful links.

Is it a Japan tragedy?

Early on Tuesday morning, read this interesting (and sad, to an extent) piece in the Nikkei Asia Review on Japan’s scenic golf courses in rural parts. But, the story is interspersed with narratives of dwindling populations and innovation.

Sample this:

The town of Nemuro lost its only obstetrician last year since its birthrate had fallen so low. Its fishing industry may be strong — global tennis star Naomi Osaka’s grandfather once served as chairman of the cooperative — but nobody new is moving there.

The lament is not particularly constructive but I doubt if any reconstruction is possible:

Somehow Japan has lost its will to innovate, to develop new technologies and to compete with the rest of the world. A pervasive conservatism has infected much of working and social life, leaving regional Japan a museum-like landscape of rural beauty and Asian culture. Buddhist temples of astonishing grace, Shinto shrines of perfect simplicity, small fields of rice or vegetables, and orchards of flawless fruit decorate the countryside. Yet behind it all are dying towns, shuttered shops, and unending road projects or concrete barriers piled up along island shores to protect against typhoons.

Abenomics works to preserve the tranquil beauty of rural Japan and sustain its culture. but what is going to save rural Japan from the hollowing out that you can see, hear and feel? The digital economy is barely discernible here, stunted by too many large corporations whose overweening presence in national policymaking makes the startup sector a minor sideshow instead of a pathway to the future.

Demographics are long-term and slow-moving trends in motion. They have impact on innovation and investments, etc.

Somehow, I feel that Buddhist Japan will and is handling its aging better than the Christian West would do or is doing. The swing towards relative and growing intolerance of strangers amidst dwindling economic prospects could be traced not just to a financial crisis but also due to demographic transition towards a greying population in the West.

The crisis pulled the economic rug from under the feet of millennials. More debt in America and youth unemployment in Europe. The older generation is reacting to the economic loss (networth wiped out by the decline in asset prices and having to work into old age) and the social aspects of globalisation.

Each and everyone of us who have crossed 50 can reflect on how their own attitudes towards many things have shifted and are shifting with age, slowly, imperceptibly but surely.

At a policy level, to counter this with even more forced immigration is a policy disaster which is what ‘liberals’ would want governments to do. One has to accept the costs of the economic crisis and demographic trends and work with them rather than seek to overturn the consequences forcefully. That ends up feeding the resentment.