Who will ‘burn the house down’?

My friend and co-author Gulzar Natarajan has a lengthy and detailed post on few very important and thoughtful articles and reports that have been doing the rounds in the last week or so. His post is  very comprehensive.

I have the following comments on his blog post. It is a slightly expanded version of the comment I left on his post.

I am pleased to see that you had linked to the perceptive essay by Jonathan Rothwell in NYT on the elite interests that have gamed the system and the rules in their favour. Rothwell may be making one mistake, however.

In his long essay and in his tweets, he is dismissing the role of technology and globalisation in the extremely distorted income distribution. But, they were the pursuits and priorities of elites who gamed the regulations (as per his own analysis) to pursue technological upgradation and globalisation that delivered profits. So, they did contribute to the problem of inequality because they were ‘elite’ projects. Some of the domestic factors he lists could be more important but it would be hard to dismiss technological progress and globalisation as inconsequential for in-country rise in inequality in the developed world. In this regard, the review of the book, ‘Captured Economy’ is worth a read. It is well written.

As we discussed bilaterally, to a degree, the recommendation of the Mckinsey Global Institute (MGI) on more digitisation and more technology to restore the ‘glory’ of U.S. manufacturing (mind you, the ostensible problem they were dealing with was the declining labour share of income) vindicates Rothwell above!

MGI report notes that the labour share of income in the U.S. had dropped from 59.8% in 1970 to 55.6% in 2015 and that manufacturing contributed 68% to this decline. But, the solutions they propose, even if they restore the glory of U.S. manufacturing somewhat, might actually further erode labour income share if machines and robots replace workers while only requiring and paying some highly skilled workers and fewer of them. On paper, that might boost labour share of income but the median worker pay will not have improved. Even now, the decline in the U.S. labour share of income will be far pronounced if financial services workers are excluded.

One does not identify the decline of the manufacturing as a principal contributor to the decline of labour share of income and proceed to give solutions that might worsen the situation further. At the very least, there should be a debate/discussion in the report on the consequences of their proposals for the labour share of income. But, I had not read the full MGI report but only the Executive Summary. May be, the full report has such a discussion. The full report and the Executive Summary can be found here.

Further, although Tony Rothman in ‘Project Syndicate’ focuses more on customer convenience and the ‘ends’ of technological upgrades being lost (motion is not progress) in the welter of mindless ‘improvements’ and ‘enhancements’, that too is part of the problem.

As you conclude, the solution is to ‘burn the house down’ completely. But, that leads us to a cul-de-sac. In the Seventies, the pendulum swung (the house was brought down, as it existed then) due to a combination of factors:

  • Excessive abuse of labour power;
  • Economic misery – stagflation
  • The turning of the intellectual tide in favour of rules over discretion, Disgust with politics as usual (Nixon’s impeachment, Ford’s pardon and Carter’s perceived or real ineffectiveness)
  • Rise of alternative leaders who were not exactly perceived ‘extreme’ like in the case of Donald Trump

May be, I am missing out some.

But, if we try to develop a comparable checklist now, we do have

  • Excessive abuse of the power of capital by capitalists
  • Instead of stagflation, we have extreme inequality
  • There was disgust with politics as usual – it is demonstrated in the multiple political election and referendum results across Europe and the United States

But, what is missing are these two,

– There is intellectual resistance to changing the status quo – many would lose out on their personal perks and influence. Notice how many are writing as boldly as Dani Rodrik is writing. Very few. Those who do are not deemed ‘mainstream’. For example, the monetary policy establishment has managed to brand even the BIS and folks like William White and Claudio Borio, et al, as ‘extreme’ or ‘fringes’.

The ‘99%’ is unable to mobilise and have a sane leadership with clarity of purpose and goals as capitalists on either side of the Atlantic were able to achieve in the Seventies.

Usually, crises help overcome all these drawbacks and throw up policy and personnel (leadership) alternatives. One thought that the 2008 crisis would do that. To a degree, it has. It has cracked open the door. But, the door is still being manned and protected well, despite cracks in the door and in the castle.

Perhaps, it needs another crisis to ‘burn the house down’ as you put it. Or, may be, somewhat less dramatically, as Mark Klieman had written (tweeted by Jonathan Rothwell),

a political strategy capable of mobilizing forces proportionate to the massive task at hand. [Link]


Nothing monetary about inflation

That was the provocative title of my piece in MINT for this week. So, when I saw stories in Bloomberg and Reuters with headlines that Federal Reserve officials urged a radical rethink of monetary policy framework, my heart jumped and even skipped a beat. When I read the stories in full, my heart sank. They do not seem to have learnt their lessons well.

The monetary policy framework rethink should focus on the following in my view:

(1) The usefulness of policy transparency, predictability, forward guidance, etc., for the real economy as opposed to financial market or the financial sector.

(2) Whether loose monetary policies, in the guise of helping the real economy, are only causing a divergence between asset markets and the real economy with the former soaring and the latter meandering along at best.

(3) Whether central banks have really any control over the inflation dynamics in the light of technological developments and the continued imbalance between labour and capital.

(4) Do central bankers have better success rate with causing asset price inflation rather than good and services price inflation?

After all, the monetary theory of inflation is a theory and not THE theory. Was it ever valid or, like all economic theories, it is valid under a given context or contexts?

Central bankers owe it to themselves, to their intellectual training and to future generations to ponder over the above and more rather than think of raising the inflation target or target nominal GDP or negative interest rates.

Not only should they remember that the road to hell is paved with good intentions and that the law of unintended consequences is an ever-present law in public policy but that many of us would be legitimate in questioning their intentions and their constituencies if they walk down such paths.

Dani Rodrik speaks from my heart

Finally, someone from the ‘mainstream’ dares to speak the truth about how and why populists arise. I put ‘mainstream’ in quotes as a tribute to Dani Rodrik because he had always dared to differ from the ‘mainstream’ and yet is able to speak from the hallowed mainstream portals. A great art, that is.

IN calling attention to the hypocrisy of the so-called mainstream politicians and technocrats, Dani Rodrik is speaking from my heart. I have always maintained in my weekly columns in India’s MINT and in this blog that the real reason for the emergence of Trump or for the manner in which the Brits (outside of London and Scotland) voted for Brexit has to lie in the extremely self-centred behaviour of the elites cloaked in lofty rhetoric of free trade, free movement of labour, etc. The Panama and Paradise papers are proofs of that. In the process, they lost touch with their own people. We seem to have already forgotten that mainstream parties were badly mauled both in France and in Germany.

It is the breathtaking hypocrisy and the ‘holier than thou’ attitude of the so-called Liberals that awaken the contrarian in me, with respect to the so-called populists-nationalists.

Recently in Poland, even ordinary people felt compelled to join the rally of ‘Poland for Poles’. Read the story in Wall Street Journal carefully. Not all who joined the rally were white supremacists.

Rubbishing and dismissing those who do not serve our interests are supposed to be traits of intolerant demagogue-populist leaders?!

Professor Rodrik wants mainstream politicians to walk a fine path between eschewing/r rolling back

the free rein given to financial institutions, the bias toward austerity policies, the jaundiced view of government’s role in the economy, the unhindered movement of capital around the world, and the fetishization of international trade” and sticking to the inclusive path while keeping their politics “squarely within liberal democratic norms.”

The latter is do-able and should be pursued. But, there is plenty of room for debate on quite what an ‘inclusive’ path means as opposed to the conception of national identity.

Despite how far Professor Dani Rodrik has stuck his neck out in calling a spade a spade, even he is still stopping short of smashing all the holy policy cows that have either failed or been misdirected or have been abused. I will leave it at that. You can have your own guesses as to what that is. The hint is there in this post itself.

There is a second omission in his piece. He has not called out the central bankers and their role as policymakers in giving rise to inequality and alienation and hence the rise of populist-nationalists.

The third omission is about how central bankers and ex-Presidents continue to remain cosy or become cosier with Wall Street with their speaking engagements and fees. It is more than about the money they receive. It is a symptom of a malady – the complete capture of the political and policy decision-making arms of the government by a special interest group – the financial sector.

However, I must admit that he has partially addressed this by suggesting, for example, that Hillary Clinton could have signalled something like “I shall never again take a dime from Wall Street.” That is the right advice for Presidential contestants but what about ex-Presidents and ex-Central Bank Chairpersons, Governors and voting members?

Indeed, along with the things that he has called upon to be put on the table, even the pejorative tone with which the phrase, ‘populist-nationalists’ is used should be on the table for such an expression only further serves to alienate.

Since the U.S. Presidential elections, ‘the other side’ has done nothing like what Rodrik has advocated: ‘putting everything on the table’. Instead, they have doubled down further on their failed policies and rhetoric – both economic and social policies included. In doing so, they are doing the best possible service for the popularity of the causes espoused by the populists and for the appeal of the populists too.

That is why, Professor Rodrik’s piece is a much needed op.-ed. in calling out the hypocrites and that is where the solutions must start.

Trump in Vietnam on India

India is celebrating the 70th anniversary of its independence. It is a sovereign democracy, as well as — think of this — over 1 billion people. It’s the largest democracy in the world. (Applause.) Since India opened its economy, it has achieved astounding growth and a new world of opportunity for its expanding middle class. And Prime Minister Modi has been working to bring that vast country, and all of its people, together as one. And he is working at it very, very successfully, indeed. [Link]

In this context, two tweets by Chris Balding deserve mention.

First tweet:

What do you think China’s model is if not “nationalism, protectionism, unilateralism & xenophobia”?

Caroline Freund @CarolineFreund

If Trump’s retreat into nationalism, protectionism, unilateralism & xenophobia continues, China’s model could win.

This is the second tweet:

I’m not about to say yet that Trump got Beijing to open up bank ownership, but if it comes out Trump admin played a role, will everyone who said he was played please step forward? No one? Anyone at all? [Link]

You have to believe this story because it appeared in ‘South China Morning Post’:

Chinese officials pay homage to tree planted by Xi Jinping as Communist Party chiefs get in touch with their roots.

Let me close with Ely Ratner’s tweet:

I’d like to see more reporting on the absurdity of Xi’s major speeches, contrasting his rhetoric about openness and globalization with the actual situation in China.


Irrational exuberance revisited

Most people had heard of these sentences and even repeated it scores of times:

But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy?

But, we have rarely heard this sentence quoted:

We should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy.

They were both part of the same speech that Alan Greenspan delivered at the American Enterprise Institute in 1996. I saw these in a good blog post at the Institutional Risk Analyst website.

Indeed, one should look at Christopher Whalen’s post on ‘Loss Given Default’ as a possible metric of market overvaluation.

My colleagues at Lumen Capital in Singapore sent me this very thought-provoking table:

US market valuation

Source: https://twitter.com/spomboy/status/925839733523173376

Steph Pomboy has this chart too:

Domestic stock market cap as percentage of pvt. sector GDP

Source: https://twitter.com/spomboy/status/924376083595538432

We are still debating if there is a uniform asset bubble or not! Even if we do not have a uniform (or, universal or global) asset bubble, when the U.S. stock market crashes (not IF), all asset classes will be correlated.

Bloomberg overcompensates for this good and important story with this one – a horribly bad headline. I felt that it was a rather strange headline to offer to readers and I am pleased to note that someone else concurs.

Trump’s first annniversary

As of the start of October, federal red tape scorekeeper Wayne Crews found that Mr. Trump was off to an historic beginning. Mr. Crews measures the number of pages of new and proposed rules spewing forth from Washington. Last month he reported:

The Federal Register stands at 45,678 pages. Last year at this time, Barack Obama’s Federal Register stood at 67,900 pages. (Obama’s 2016 Federal Register set an all- time-record: 97,110 pages). Compared to Obama at this time last year, Trump’s page count is down 32 percent so far in his first year.

It took a few years for Ronald Reagan to achieve his ultimate, one-third reduction in Federal Register pages following Jimmy Carter’s then-record Federal Register. So by this metric, Trump is moving much faster.

By many measures, including graciousness and dignity, Mr. Trump is no Ronald Reagan. But this is the first time since Reagan left Washington nearly 29 years ago that a U.S. President has mounted a vigorous effort to tame the federal bureaucracy. The Trump campaign for expanded economic liberty should give all Americans reason to be hopeful. [Link]

We are unlikely to read this in any commentary on the first anniversary of Trump Presidency. Hence, posting it here.

Lewis on Thaler and other links

Been on the road since last Friday. Too much of travel and hence less time to think but made time to read, though.

Thanks to Tracy Alloway’s Twitter handle, saw this Michael Lewis piece on Richard Thlaer, written first in May 2015, republished early in October.

Google/Alphabet’s urban cities project is fascinating, mind-boggling or scary or something to be welcomed? I have no idea.

HSBC might have helped Guptas in South Africa to launder money.  Could be behind a paywall.

A comprehensive interview with CEO of UBS. Parts of it have a wider relevance than only to financial types.

Countries around Asia are banning sale of sand and Singapore’s land expansion is threatened.

Americans are ‘freaking out’ but, as consumers, they are feeling confident more than ever in the last seventeen years.

The scariest chart is the last one – Halloween special.

This – a similar set of scary charts – is from the bond market perspective. The information below boggles the mind:

ECB QE is currently 7 times bigger than net issuance. So is it any wonder why yields have fallen, and what happens when the ECB tries to turn off the easy money tap?