Stuff that caught my attention (STCMA) – 23 May 2017 edition

MINT Edit on Conventional politicians and why they are useful

Philippine President says China President threatened war if Philippines explored South China Sea for oil

President Trump’s speech at the Arab-Islamic-American summit

Tulsi Gabbard not pleased with Trump speech in Saudi Arabia.  A sample here.

Spanish government debt again above 100% of GDP

Key achievement of ‘Department of Economic Affairs’: Improvement in India’s macroeconomic stability – say it again, please?

Ministry of Finance of the Government of India has discontinued the mid-year economic appraisal and the monthly economic reports too have not been updated since August 2016. Pity.

Anil Padmanabhan on the political significance of the GST Council meeting in Srinagar

Scott Greet in ‘Daily Caller’: The Predictable catastrophe of firing James Comey [Link]. I checked out his tweets last night. Seems worth following.

Populists-nationalists: their inevitability and their usefulness

After I published this piece on America tearing itself apart in this morning, a friend flagged this G-30 lecture by Raghuram Rajan last month.

I thought that the flow was somehow not there in the speech. I can understand that at one level. He is trying to understand the world. It is work in progress for him and for all of us. It is not a facile topic.

Issues he flags are very well documented, by now. For example, I had blogged extensively on the Chairman’s letter of M&T Bank. Not many could have explained the situation better.

On answers, Raghu is very thin. But, that is not his fault. Societies always figure out what not to do. But, what to do is the tricky question. That takes much longer to evolve and involves luck and extreme circumstances.

In a sense, that is what populists-nationalists offer: ‘Extreme Circumstances’. Yes, they would fail to solve the problem. One cannot redistribute without growing the pie.

Populists-nationalists will probably not grow the pie. Of course, it is a different matter that the globalists grew the pie but also grew debt much more than that. So, perhaps, one could argue that they have a worse record!

But, that said, I do agree that eventually populists-nationalists would fail. They would neither succeed in re-distributing nor in growing the pie for THREE reasons: One is what I said earlier. There are no easy answers. Second, they have to face the constant backlash from those who feel threatened and who are losing their privileges. Taking the country and the world back from them is not going to be easy at all. Status quo and incumbency have their advantages.

Third and perhaps most importantly, sometimes it is impossible to undo and ‘restore’. [Even Microsoft Windows 10 does not do that properly despite users having the theoretical option of doing so.] There is no second chance. Once something is lost, it stays lost.

However, they (populists-nationalists) do serve one useful purpose. They serve as a rallying cause. A lightning rod. Humans and nations always need the ‘other’ – an Opposition/opposing force – to survive and focus minds. The ‘others’ impart a sense of urgency to the problems that have festered for long and they help focus minds on the problem.

Once we know that their answers are not the right answers, the rest of us are compelled to come up with solutions that are better than what they offer. Of course, it would involve sacrifices – sacrifices of the privileges that elites have gotten accustomed to and grown to take for granted.  But, they will have come to the conclusion by then that they are better off making those sacrifices for the sake of preserving the chance to remain in the game and re-gaining those privileges again.

That is the very useful purpose that populists-nationalists serve.  That is why I had argued that populists-nationalists were not only inevitable but that they would well be necessary for the world to arrive at its answers, eventually. For now, we are a long way off from this seemingly happy ending.

Twilight – continued

The article by Christopher Caldwell (see my earlier post, ‘Twilight’) had set me thinking. I sent the following email to my friend Niranjan who had forwarded the article to me:

Made for a thoroughly scary, disturbing and engrossing reading!

I am really surprised that the world has not imploded. That is the good news. The bad news is that it is still to be played out. It is coming.

I really doubt if any of us have answers to stop the Doomsday Clock from moving towards midnight. The clock will strike 12. IT is a matter of time.

Another friend who read the piece concurred on my assessment of the article and engaged in an email discussion on some of the issues such as hostility to outsiders (identity as the market, as he put it) as a consequence of economic hardship faced by the locals.

This was my response to him:

Identity is part of the mix, no doubt. But, it is part of the capital over labour imbalance that started with the collapse of the Bretton Woods in 1973. Monetary ‘rules of the game’ were abandoned. ‘Growth at all costs’ became the policy goal. Central banks’ discretionary money and the liberal use of debt contributed to economic growth, relentless rise in asset prices. Those who have assets benefited. Those who did not, simply became more indebted. Then, this ‘growth at all costs’ meant globalisation.

That was the second leg – or the second pillar of ‘growth at all costs’ – of the 1970s regime change in both purpose and paths. Globalisation meant offshoring and outsourcing plus immigration. It helped countries like India and, in a far bigger way, China. Both are mostly the stories of the new millennium: Y2K and China’s WTO entry were signature launchpad of the western malaise.

The third leg is the Western hubris induced political regime change in the Middle East that has brought waves of immigration – especially that of Muslims. The fourth leg of this is Islam itself with its ‘they are with me or they are against me’ binary attitude towards the rest of the world and the various acts of terrorism committed by terrorists.

The fourth leg has been greatly amplified by the wave of political correctness that is sweeping through Western societies – I wonder if I can trace the genesis and the driving spirit of it – is it guilt or is it fear or both or is there something else?

My logic above takes me in the direction of fixing the ‘root cause’ – going back to the old monetary rules of the game that would, in turn, reverse the other legs – particularly economic inequality.  Company leaders and, more generally, businesses would go back to doing genuine product and process innovations rather than gaming stock prices and their compensation through labour retrenchment and squeezing out labour compensation. If they do, loyalty and motivation might return boosting productivity and employment. A virtuous circle could set in and, who knows, it could starve terrorist organisations of recruits. May be, I am being too optimistic.

There was one crucial difference about the post-World War II period that lasted up to the early Seventies. Economic growth was easier to come by, because it was catch-up growth, reconstruction and rebuilding and all of that. Demographics were favourable in the West. Climate change was not a factor that militated against the burning of coal and other hydrocarbons, etc.

So, will merely restoring the ‘monetary rules of the game’ help? Well, perhaps not. But, we can only change things that we can influence and change. What else can we do? That might work. After all, the law of unintended consequences can work in a virtuous way too.

The twilight

They also give an explanation for the rise of the National Front that goes beyond the usual imputation of stupidity or bigotry to its voters.

When France’s was a national economy, its median workers were well compensated and well protected from illness, age, and other vicissitudes. In a knowledge economy, these workers have largely been exiled from the places where the economy still functions. They have been replaced by immigrants.

Paris’s future seems visible in contemporary London. Between 2001 and 2011, the population of white Londoners fell by 600,000, even as the city grew by 1 million people: from 58 percent white British at the turn of the century, London is currently 45 percent white.

In Paris and other cities of Guilluy’s fortunate France, one often encounters an appearance of civility, even consensus, where once there was class conflict. But this is an illusion: one side has been driven from the field.

Never have conditions been more favorable for deluding a class of fortunate people into thinking that they owe their privilege to being nicer, or smarter, or more honest, than everyone else. Why would they think otherwise? They never meet anyone who disagrees with them. The immigrants with whom the creatives share the city are dazzlingly different, exotic, even frightening, but on the central question of our time—whether the global economic system is working or failing—they see eye to eye.

Three years after finishing their studies, three-quarters of French university graduates are living on their own; by contrast, three-quarters of their contemporaries without university degrees still live with their parents. And they’re dying early. In January 2016, the national statistical institute Insée announced that life expectancy had fallen for both sexes in France for the first time since World War II, and it’s the native French working class that is likely driving the decline. In fact, the French outsiders are looking a lot like the poor Americans Charles Murray described in Coming Apart, failing not just in income and longevity but also in family formation, mental health, and education. Their political alienation is striking. Fewer than 2 percent of legislators in France’s National Assembly today come from the working class, as opposed to 20 percent just after World War II.

The real divide is no longer between the “Right” and the “Left” but between the metropoles and the peripheries. The traditional parties thrive in the former. The National Front (FN) is the party of the outside.

Hollande government’s legalization of gay marriage, which in 2013 and 2014 brought millions of protesters opposing the measure onto the streets of Paris—the largest demonstrations in the country since World War II.

France’s antiracist Pleven law, which can punish speech, passed in 1972. In 1990, the Gayssot law criminalized denial or “minimization” of the Holocaust and repealed parts of France’s Law of July 29, 1881, on Freedom of the Press. Both laws are landmarks in Europe’s retreat from defending free speech. Suits against novelists, philosophers, and historians have proliferated.

Nobody wants to be thought a bigot if the membership board of the country club takes pride in its multiculturalism. But as the prospect of rising in the world is hampered or extinguished, the inducements to ideological conformism weaken. Dissent appears. Political correctness grows more draconian. Finally the ruling class reaches a dangerous stage, in which it begins to lose not only its legitimacy but also a sense of what its legitimacy rested on in the first place.

These are the extracts from the brilliant review-essay by Christopher Caldwell of the books by Christophe Guilluy written in French with the latest being Le crépuscule de la France d’en haut (roughly: “The Twilight of the French Elite”) – ht Niranjan Rajadhyaksha. The full essay – a MUST READ, in my view – is here.

Read Andrew Sullivan’s piece on what Macron means. He too refers to the Caldwell essay.


Political risks and stocks

I just read a Gillian Tett piece (could be behind a paywall) in FT published two months ago. She felt that investors (stock markets) should heed political risks. She had referred to the probability of a Presidential impeachment suggesting that markets have not priced that in! But, to be fair to her, the article suggested other important issues and considerations.

I had posted the following comment on her article:

It is good to see some very interesting, insightful and useful comments on the article. I loved the comment by Mr. Graham Lovell from Australia. I am reading the ‘Global Economics History: A Very short Introduction’ by Professor Robert Allen. He notes that the economic model for Western nations in the 19th century and in the early part of the 20th century before the wars and the Depression intervened was: mass education, mass banking, national markets and external protection. Colonisation helped the British to source raw materials cheaply and force their finished products on colonies, decimating the colonies’ manufacturing base. De-industrialisation.

So, free trade was not the formula or route to economic growth and prosperity. It has helped many to prosper in the developing world too, no doubt, in recent decades. But, that is a very small portion of their overall population. India is an example. China benefited in the last three decades but it practiced exactly the kind of ‘free trade’ that today’s advanced nations practiced in their early development phase.

So, Trump’s model – if it can be called that – is very consistent with international empirical evidence. Now, I certainly do not think that American stock market investors had been very perceptive enough to understand this and price it in, because the stock market was not cheap by any means when he took office.

That the stock market has not been pricing in geopolitical risk is not something unexpected. One, average holding periods have shrunk to a few months. Two, stock markets (and, financial markets more broadly) have demonstrated a singular lack of ability to price in either complex or long-term risks. Since the 1980s, global debt and debt in advanced nations, in particular, has risen in absolute terms and as a percentage of GDP to today’s unsustainable levels. What did stocks and bonds do? In the last three decades or so, bond yields have been in secular decline and stocks have also move higher, in sympathy with declining yields.

So, financial markets are myopic – both with respect to the factors that they discount and their horizons.

Third, we should not forget that the Federal Reserve monetary policy is in the process of moving away from being ‘extraordinarily reckless’ to ‘somewhat extraordinarily reckless’. The European Central Bank has not stopped its ultra-loose policies nor has the Bank of Japan and nor has the Bank of England and scores of other smaller European nations. China’s liquidity splurge in the last few months that has restored economic growth to ‘respectable’ levels too must have found its way into international assets via capital outflows, at least until very recently.

So, in a sense, the stock market rise in the last few months could very much be explained by generous liquidity and ‘still irresponsible’ monetary policies in most advanced nations and not attributed to President Trump, for the most part.

There is a small role for him and his policies in the sense that investors could have ratcheted up their earnings expectations anticipating a large corporate tax cut. But, surely, they had not reduced their expectations after his failure to get health care reform through and after many of his initiatives faced legislative and judicial roadblocks.

Real economic growth indicators – notwithstanding auto sales – had perked up quite a bit in recent months. I am referring to the Chicago Fed National Activity Index (CFNAI), Durable Goods Orders and the Labour Market Conditions index of the Federal Reserve. The index of confidence among small businesses (the sentiment index published monthly by the National Federation of Independent Businesses) had shot up in November and has held there in the last few months. They are anticipating a massive de-regulation under the new administration.

Journalists and academics had paid far too little attention to the chokehold that the regulations of Obama administration had placed on the American economy. On a per day basis, the regulations passed by his administration exceeded that of Presidents Bush and Clinton before him.

So, anticipation and delivery of de-regulation have also had a role to play in the improvement in economic optimism notwithstanding complex political noise. Perhaps, certain sections of the society are sole producers and consumers of their own dissonance with respect to Trump with little heed for any objectivity.

In sum, the stock market ascent of the last few months has something to do with the changed executive focus on regulations but a lot to do with traditional irrational and myopic considerations.

Equally, if the stock markets crash -as they will, at some point – it cannot be pinned on President Trump.

Wrong message from Financial Conditions

Goldman Sachs has come up with its new revamped G-10 Financial Conditions Index (sorry, no link is possible). The biggest problem is that it is pro-cyclical. A bit like the Credit Rating Agencies whose ratings are the best when the asset valuations are the highest and hence the risk is at the highest.

If the strength in the bond market and in the stock market is very high  – lofty valuations and tight spreads (credit spreads) – then the risk of a correction and financial conditions becoming tighter is also the highest at these levels. Therefore, as asset prices keep rising, financial conditions going forward come under increasing risk.

Financial conditions are the most favourable for growth when they are extremely tight. In other words, they cannot get any worse. They can only keep getting better. That is why 2009 was the best to invest and was also heralding the recovery (no matter how tepid it was).

This is a bit counter-intuitive. But, it needs to be grasped. Mainstream institutions have not grasped them because their incentives are not aligned to grasping this truth. Their business models would collapse, if they did so, perhaps. I do not know.

The troika on trade

Apparently, the IMF, World Bank and the WTO have issued a joint report/statement on the importance of open trading regimes. At the same time, they have called for labour compensation policies. Dani Rodrik calls it too late. He says that the rules of globalisation have to be changed completely. He offers a thumbnail sketch of the changes he wants to see, in this NYT piece published in September 2016. They are still somewhat general and vague for my taste but some specifics can be teased and tortured out of them.

I had not seen the WTO-World Bank-IMF report but saw a FT story on it. I left the following comment on the article:

It might be worthwhile for the Heads of IMF, World Bank and WTO to read Professor Robert Allen’s ‘Global Economic History: a very short introduction’. Countries liberalised internal trade and raised walls against external competition when they were trying to grow. We have no idea of what works.

If the Chiefs of multilateral institutions want to help developing countries access markets in the developed world, they must address two things: (a) They must make China fairer in trade. (b) They must make sure that unskilled and low-skilled workers in developed countries, their families and their communities are not affected by trade. If they are, they must be made whole. That means more than financial compensation or relocation, etc.

The key to sustaining global free trade is not to attack America or its President but to fix China’s trade practices.

Christopher Balding has tweeted as follows:

“You know what the probability of a foreign company getting approval to buy a $50b Chinese company? Hint: 0<p<0.00000000000000000000000000001” [Link].

Yes, I am aware that this is about investment and not about trade. But, find one respectable and objective economist or journalist who is willing to go on record that China is an open market for trade. Then, I would retract that this is not symptomatic of China’s overall openness or the lack, thereof.

Fix China trade and investment regimes and then issue statements on a open global trading regime.