Shame offensive

Neville Maxwell makes no attempt to hide his distaste for India. But, what is amusing is that he does not take into account contextual evidence of China’s behaviour towards other countries in the region, in the last several years.

See this brief from Singapore-based Institute of Southeast Asian Studies on the exclusion of the Thailand Prime Minister from the Belt and Road summit.

This story suggests that the standoff between India and China near the tri-border with Bhutan is more a pressure on India to accept changing realities. That is realistic, compared to the Maxwell story above. But, are the realities really changing?

Frankly, China’s economy is far from healthy. It is brittle and vulnerable. Big time. It is overestimating its strength and underestimating American resilience, in my view.

Same old, same old

From Gavyn Davies’ blog on July 9:

The main impetus for the sudden rise in the growth rate in the AEs [Advanced Economies] in the past 18 months has probably come from the demand side of the global economy. Both fiscal and monetary policy have been accommodative in 2016-17, and financial conditions have been very supportive of demand, even in the US where the Federal Reserve has been raising short term interest rates. [Link]

After six years of pulling on a string, some reaction from the demand side coming from financial conditions turning looser. This does not presage a sustained supply-side response.  It is unsustainable and unbalanced.  Needless to add, unhealthy, too. Policymakers do not appear to have absorbed the lessons of the pre-2008 boom. What about analysts and economists?

Not much to show, I am afraid. The inability of Martin Sandbu to learn from history – recent or distant – and his extraordinarily consistent record of ignoring empirical evidence, marks him out as a quintessential modern economist.

Apparently, Claudio Borio of BIS and the latest BIS annual report (released on June 25, 2017) talk of an extended financial cycle that central banks must respond to. I am yet to read the BIS Annual Report. But, not surprising, coming from BIS. This blogger is aligned with that. But, the Federal Reserve and the European Central Bank are ignoring that warning. As before. Yellen’s testimony on July 12 was inexplicable, to this blogger. My column in MINT tomorrow has a slightly more detailed take on that.

Same old, same old stuff from central banks but the next crisis may not be same old, same old.


448 million social media comments and other STCMA – 24 June 2017

The retreat of the Renminbi. Quite. The image of the Global Payment Currency rankings is telling. Danish Krone has a bigger share than Renminbi. Strategically sound advice from Shyam Saran not to assume that Renminbi’s onward international march is dead but factually incorrect. Article behind paywall.

Anjana Trivedi of WSJ calls it a ‘The Onion’ Headline. I have to agree.

A very good tweet:

Until China willing allow failures and losses, deleveraging campaign should be taken as seriously as any Democratic congressional campaign [Link]

James Mackintosh tweeted this:

Lovely Deutsche Bank chart of over-optimistic economists’ predictions for 10-year bond yield. Average 12-month forecast error: 60 basis points too high. [Link]

Two great tweets by James Kynge of FT

MSCI’s China A-share choice was between relevance and governance. Like many seduced by China dream, they chose former…. [Link]

…. And will come to regret the lack of the latter [Link]

His articles on the MSCI including China A shares in its index on the China Banking Regulatory Commission asking Chinese banks to reduce their exposure to China’s corporate cowboys (ambitious overseas acquirers) are worth reading. Could be behind paywalls, though.

Chris Balding’s blog post on the both these topics is worth a read too.

It is all about free cashflows in these Chinese corporate cowboys or, more precisely, the lack of it.

Chris Balding tweeted, while commenting on this blog post at PIIE.

“How brutally misleading and worthless a blog post by @PIIE. Look at all the products that aren’t even allowed in so don’t have a tariff rate​” [Link]

I guess we all know where PIIE stands with respect to China.

From the abstract of the forthcoming paper by Gary King of the Harvard University and co-authors:

We estimate that the (Chinese) government fabricates and posts about 448 million social media comments a year. [Link]

After Moody’s, now S&P also threatens a downgrade of China’s sovereign credit rating. Currently, it stands at AA- with a negative outlook.

China’s capital controls put real estate developments in Johor at risk, as most of them bet on the Chinese buyer.

A great article in ‘Australian Financial Review’ on Malcolm Turnbull becoming a China hawk from being a Panda hugger. You must be lucky to catch it. A question that came up in the head is why these leaders have to learn this all by themselves, all over again, when there is so much history and evidence?

The answer, my dear mind, is “They are not stupid. Their incentives are differently aligned and the cost benefit calculus of pursuing those incentives keeps shifting all the time.”

Chinese loans may put Bangladesh in a debt trap.

The economists who wrongly predicted a decline in healthcare costs for American families under Affordable Health Care are still at it, with dire predictions and interpretations of the Republican new Senate Bill. Here is an article from 2013 on how their predictions of declining health care costs turned out.

Avik Roy explains here how the Senate version improves up on the House version of the Health Care bill while keeping health care afforable.

Greg Ip gives the thumbs up to the Trump team banking proposals.

According to Zerohedge,  Israel deployed fighter jets to help prevent a coup in Saudi Arabia on the announcement of succession that replaced the present crown prince with the King’s son. Strange world.

Interesting article on how Jokowi in Indonesia is rebooting his Presidency before the 2019 elections after his ally and ex-Jakarta Governor had been sent to jail for blasphemy against the Koran.

Technology, jobs and societies are my favourite and anxious topics. These two links make me wonder whether we can ever become sensitised to the dangers of what we consider progress and development.

This is a review of Dan Drezner’s book, ‘The Ideas Factory’ by Edward Luce in FT.  These lines explain the problem of jobs and technology linked above:

The optimal talk, particularly for Ted, which serves as an advertising platform for paid speaking, is to focus on what Evgeny Morozov, a critic of Silicon Valley, describes as the “cyber-whig” view of history: the belief that technology is carrying us upwards.

“Find some peculiar global trend — the more arcane, the better,” Drezner quotes Morozov saying. “Draw a straight line connecting it to the world of apps, electric cars and Bay area venture capital . . . Mention robots, Japan and cyber war. Stir well. Serve on multiple platforms.”

STCMA – 20th June 2017

Consistent with this blog’s tagline, Niall Ferguson raises an important question but does not provide an answer – he cannot – on whether political polarisation can induce more violence in America.

Public protests force HK Government to drop the arrest of a 75-year old woman who was hawking cardboard boxes without a hawker’s license.

Australian housing mess is about a decade later (or longer) than that of US housing. But, it is big or bigger? Two important articles from Bloomberg with useful charts. Here is the press release from Moody’s downgrading Australian banks. Key sentence:

The household sector’s resilience to weaker employment levels and/or rising interest rates has materially reduced.

MINT has some good charts on India’s declining computer services exports. Of course, that is not the same as IT Enabled Services.

A ‘European Central Bank’ working paper gives the ‘thumbs up’ to its Asset Purchase Programme. While one thought sclerosis was a European problem, in recent months, it has given way to hubris.

In an article purportedly about the effect of demonetisation on inequality, the author makes the breathtaking claim that unconventional monetary policies of advanced nations have reduced inequality. He cites no evidence. He cannot, because there isn’t any. Bank of England discussion paper, Andrew Haldane’s speeches, John Kay’s articles argue the opposite case and present evidence.

Sundeep Khanna offers a bizarre logic to resume cricket matches in Pakistan:

Terrorism looks constantly for the next soft target and if we keep on declaring every new target as out of bounds for normal life, very soon, we will be left with only the playing fields of Siberia. [Link]

Did ICC stop awarding cricket matches for Pakistan to host because it was a target of terrorism or because it was a hotbed of terrorism? In any case, what connection does it have with Pakistan’s victory in the Champion’s Trophy? Read my take on the Pakistan’s victory here.

Former HSBC Economist Stephen King has a new book out called, ‘Grave new world’. Interesting title. His conversation with BBC’s ‘Hard Talk’ is here. This book title has been used, it seems, before. I do not know if anyone would sue him for the title.

Who pulled the plug on Lehman Brothers?

We must thank Professor Laurence Ball at the Johns Hopkins University for filling a very important information hole on the demise of Lehman Brothers. He has done a wonderful service although, for reasons beyond your control, there are unanswered questions. The decision was taken by Hank Paulson, the then Treasury Secretary, although he had no locus standi to take that call.

Several questions cropped up in my head on reading his 218-page long paper published last year on the bankruptcy of Lehman Brothers:

(1) Is there no consequence for Bernanke not responding to the FCIC request for information on Lehman Collateral and his refusal to provide the information?

(2) When Prof. Ball made the FoIA request for details on the collateral from AIG against which the Federal Reserve lent, it was already 2012. By then, the collateral had been liquidated. Why was it still not feasible for the Federal Reserve to comply with Prof. Ball’s Freedom of Information Act (FoIA) request? It would not have jeopardised price discovery of AIG collateral since they had been liquidated, by then. Pity that the courts too did not agree with him.

(3) I can understand, to a degree, why Hank Paulson did not want to commit public money after the backlash he received for Bear Stearns bailout. But, did it involve taxpayer money? Lending against collateral is the job of a central bank and it is a call that it should take.

To be sure, I agree that if the collateral were of dubious value, then eventually the burden becomes fiscal. But, that is a judgement that the Federal Reserve had to make and the risk of that judgement is part of the job.

In other words, no taxpayer funded bailout should not have meant that Lehman Brothers should be barred from the Fed Primary Dealer Credit Facility (PDCF).

[I learnt from Professor Ball’s interview (see below) that, after Dodd-Frank, the Treasury Secretary has to authorise Fed lending to a stricken institution.]

(4) Why has Hank Paulson not been questioned/tried/fined/ imprisoned for overstepping his authority vs. the Federal Reserve, not to mention yelling at Cox of SEC?

(5) Why has there been no follow-up action to the Financial Crisis Inquiry Commission (FCIC) report in terms of holding public officials accountable for their decisions? The Federal Reserve had dodged information requests from FCIC on the extent of collateral available from Lehman Brothers, on the Fed’s assessment, etc., They were not given that information. Is there no consequence for that?

(6) There is some escape avenue for Paulson because he had tried to arrange a private sector solution. He had spoken to Dick Fuld on fifty occasions between July and September. The paper mentions that. He spoke to Alastair Darling to waive the Financial Services Authority (FSA) insistence on Barclays’ shareholder approval, etc.

But, he could have easily allowed the Fed to fund Lehman for sixty days for Barclays to obtain shareholder approval and let the firm fail, after that, if it did not materialise. That could have also given the system to prepare better?

(7) In an interview for the ‘Promarket’ blog at the Stigler Center at the University of Chicago Booth School of Business, Prof. Laurence Ball specifically rules out ulterior motives for the then Treasury Secretary:

Q: In the aftermath of the crisis, there were rumblings that the reason Lehman was allowed to fail while other institutions were bailed out had something to do with the fact that the government was filled with former competitors of Lehman, and they were the ones calling the shots.

A: I read that. I don’t think that’s really true. There were also stories about Henry Paulson who had been in charge of Goldman Sachs and supposedly didn’t like Richard Fuld, who was head of Lehman Brothers—that may be true, I don’t know, but I think it’s pretty clear that Henry Paulson did not want Lehman Brothers to fail and did not think this was a good thing or tried to get back at his rival on Wall Street. Paulson knew that at best he was taking a very big risk, and he did work very hard to try to arrange for some kind of private sector rescue of Lehman. The last big hope being the Barclays acquisition that didn’t work out, and he was very unhappy. In the end he did everything he could to prevent Lehman’s bankruptcy, whether he liked or didn’t like Richard Fuld. Except he wasn’t willing that the Fed put in money because of the political consequences of that. [Link]

(8) It is funny to see the slant of the interview from the ‘pro-market’ blog. They were trying to argue that the whole crisis was probably much ado about nothing because, had Lehman Brothers been bailed out, it might not have become so serious as it did and therefore what was the fuss really about?!

Never mind that there was a global real estate crisis, bank failures in a few countries in Europe, etc. The interviewers for the blog were trying to argue that the Federal Reserve made a miscalculation and did not rescue Lehman Brothers. They did not want to acknowledge that investment banks were leveraged 40:1 or that Countrywide engaged in predatory lending and that subprime mortgages had grown too much too quickly and that they were securitised multiple times over. None of these constituted a problem. This kind of market fundamentalism is actually repulsive and distasteful.

There is one explanation in their favour. Possibly, they were merely being provocative. That cannot be ruled out.

Those who do not wish to read the 218-page long paper might wish to read this short NYT Deal book article and this 18-page summary paper by Prof. Ball himself.

A response to Kashkari’s dissent at FOMC

The Federal Reserve Open Market Committee (FOMC) increased the Federal Funds rate by 25 basis points in June and still kept room for gradual increases. It made light of the fact that the inflation rate has been rather slow to rise. Nor have wages picked up. That is an amazing battle between the factors of production in which a central bank takes sides!

When wages rise, central banks tighten. Wages are costs and they feed through to prices. Therefore, it must be stopped. But, when asset prices rise, capitalists benefits and no rate increases! Why interfere? Of course, there is all about enterprise risk whereas labour can relocate if the enterprise fails. But, perhaps, it made sense in a world of unlimited partnerships and sole proprietors. In a world of limited liability, should labour and capital be treated differently, especially by a central bank?

In any case, Neel Kashkari, President of the Federal Reserve Bank of Minneapolis dissented against the rate increase and explained his stance in a lengthy post in My friend Praveen sent it to me.

We had some email exchanges. The emails I sent him formed the basis of my response to Neel Kashkari’s dissent. I have explained why I think he was wrong to dissent. You can read it here.

STCMA – 17th June 2017

A good piece on why the State cannot be dispensed with even as one clings to the Constitution. My friend Niranjan had tweeted that the point needed to be made. TCA Srinvasa Raghavan had retweeted it. That is how I located the article. The point below has been my favourite too:

But our urban elite and liberal class, whose entire existence is made possible only because of the relative stability and security provided by the existence of the Indian state, somehow manages to delude itself in believing that it can do away with it! [Link]

Thanks to the twitter handle of Ravi Velloor, I saw this article. It makes a point that needs to be made, as in the above case. The West has acquiesced in the rise of China and its current geopolitical ambitions. Even now, American elites are chasing the wrong target: Russia – and in the process driving it into the embrace of China, making the latter stronger, leaving countries like India, Singapore, Japan and Australia in a quandary. Trump has not turned out to be the ‘swamp drainer’ that he claimed he was.

The three-part series of articles from ‘The Age’ on the rising political influence of China in Australia are a MUST READ. See here, here and here.

James Dorsey’s piece for RSIS in NTU Singapore on the conflict in the Persian Gulf is a good and quick read.

Mohamed El-Erian is bang on target on the well-timed remarks by Bullard of the Federal Reserve Bank of St. Louis that assuaged the stock market. He is right. The Federal Reserve has been BFF for the stock market.

The woes of the once high-flying Anbang Insurance are multiplying or deepening or both and it is interconnected. Possible that someone somewhere has bitten off more than the country could chew.

This Chinafile conversation on how America respond to the ‘world’ deserting Taiwan is an important read. All the panelists call for supporting Taiwan, but in different ways. Will America be up to it? With President Trump, one is never sure.

In case, we had forgotten, the famous Document 9 of the China Communist Party – a communiqué circulated within the Party by its General Office in April, and, because they constituted the ninth such paper issued this year, have come to be known as “Document 9. The preface claims that whether Document 9 was the expression of one faction or that of the central Chinese leadership itself was uncertain. I wonder why. The document says the following:

This notice “A Communiqué on the Current State of the Ideological Sphere” has been approved by the central leadership, and is herewith distributed to you. Please thoroughly implement its suggestions. [Link]

The last paragraph is important:

Conscientiously implement the “Decision of the Standing Committee of the National People’s Congress on Strengthening Information Protection on Networks,” strengthen guidance of public opinion on the Internet, purify the environment of public opinion on the Internet. Improve and innovate our management strategies and methods to achieve our goals in a legal, scientific, and effective way. [Link]

The highlighted portions are gems. The link to ‘Document 9’ came out of the Chinafile conversation on Australia’s debates on China’s influence.

India’s May trade figures are concerning. Gold imports are again surging. Merchandise trade deficit has an annual run rate of close to 7.5% of GDP.

For students (and teachers) of economics, this blog post by Brad Setser on why exchange rates matter will be both interesting and useful.

China’s foreign exchange reserves swelled by USD24.0bn in May, according to official data. But, Goldman Sachs economists wrote that foreign exchange outflows were USD21.0bn in May on top of USD13.0bn in April. See here. I verified it by checking the Goldman research.

Lee Camp’s take-down of New York Times and its shameful attempt to portray him as a lackey of Russia is a MUST READ. He is the creator, host, and head writer of the comedy news show “Redacted Tonight with Lee Camp” that airs every Friday on RT America and at He’s a former comedy writer for the Onion and the Huffington Post and has been a touring stand-up comedian for 18 years. The implications are scary.

Quite a few friends have sent me the link to the YouTube video of Jim Rogers. He warns of a coming crash that could be ‘the worst in life time’. If you are interested in this sort of stuff, you must read what I published in

Peggy Noonan’s piece on rage being the rage in America is a MUST READ. Could be behind a paywall, though. Frankly, the place is a live fuse.

Read Scott Greer on the shootings at the Congressional Baseball practice session.