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]

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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.

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.

Germany, Austria and Catalonia and other links

For the last few weeks, my posts have tended to concentrate on India. But, the world does not wait for me to blog about it!

The elections in Austria, coming on top of the rather weak mandate in Germany for mainstream parties and the mood and momentum for secession in Catalonia in Spain have dealt big blows to the facade of European stability and leadership in the world.

Noah Smith has a piece on the ‘inevitable’ takeover of global leadership by China. I demur but that requires a lengthier post. Do not miss the link to a useful and interesting recent paper inside his post.

This article in the Wall Street Journal explains why the clamour for Russian connections to the American Presidential elections appears to have slowly faded away.

Google did not let me circulate the following two articles to my mailing list:

The rise of road fatalities in the US and the use of smartphones [Link]

A new game by ‘Tencents’ to applaud the Chinese President [Link]

A new poll shows that Abe’s political party would win a super-majority in Japan’s polls. Hope it turns out to be correct.

(FT and Nikkei Asia Review links might be behind paywalls. Apologies)

City-States over Nation-States?

My friend Ram forwarded me the first of the four-part lecture by Lim Siong Guan for the Institute of Policy Studies – Nathan annual lecture series. The first lecture was titled, ‘Accidental Nation’. It is worth going through. The full lecture is available here. Mr. Lim mentions a paper by Sir John Glubb: ‘Fate of empires and search for survival’. The extracts he cited were interesting. The paper is available here. I am yet to read it. I hope this is the paper he referred to.

My wife found an interesting article in the ‘Comments’ section below the newspaper report that carried his speech highlights. That article suggests that the future belongs to City-States rather than nation-States. I don’t buy that. Not that I have done much research into it. Nor do I claim myself to be an expert in such matters. I am grateful to be educated.

From the article, I learnt about the unclaimed land between Croatia and Serbia and also about Patri Friedman, the grandson of Milton Friedman.

But, I do believe that modern nation-States would last longer than the ancient Roman Empire, perhaps.

Humans need anchor these days. They have come a long way from their nomadic hunter-gatherer days. Back then, there were no identity markers such as religions and groups. Now that we have them, it is difficult to go back to that ultimate ‘libertarian’ world.

Even those who enjoy the freedoms that cities afford but nation-States don’t – the highly educated foot-loose global citizens who feel at home in all global cities rather quickly – would ache for the protection and security that nation-States afford when technology and other threats make their livelihoods and lives that much less secure.

So, it is good to have competition for today’s Nation-States. But, I am not prepared to wager on their demise. Not soon.

10th anniversary awards

On the 10th anniversary of the beginning of the Global Financial Crisis of 2008 (it began in 2007), we have a few awards to give.

The top prize for market efficiency goes to the Eurozone BB rated BofA Merrill Euro High Yield index whose yield is the same as that of the U.S. Treasury index of BofA-Merrill. [Link]. See chart below.

european high yield

Second prize goes to the Bank of Japan for becoming the market all by itself – both the buyer and the seller – in Japanese stocks and thereby enhancing the working of the market mechanism itself! [Link]

Third prize goes to the Swiss National Bank for becoming the buyer of first and last resort for FAANG stocks. 20% of its Reserves are held in U.S. stocks now! [Link]. From central planning of interest rates to public sector ownership of public markets!

Fourth place should go to investors themselves – who can still teach a trick or two to these central banks.

An $800 million subprime auto bond sale from Westlake Financial Services Inc. last week was priced at some of the highest valuations — as measured by the extra yield the notes offered compared with the benchmark rate — since 2014, the analysts wrote in a note Monday. The portion of the security rated BB, or two steps below investment grade, offered the least additional yield for a deal of its size and rating on record. Demand for the offering was strong enough to increase its size from a planned $700 million. [Link]

Asia in the fast lane?

In a piece, he wrote for ‘Project Syndicate’, Prof. Kaushik Basu, former Chief Economic Advisor to the Government of India made the following prediction:

in 50 years, I predict that the world economy is likely (though not guaranteed) to be thriving, with global GDP growing by as much as 20% per year, and income and consumption doubling every four years or so. [Link]

I am happy to take the other side of the bet, if there is one.

But more than that, what caught my eye was this:

From 1500 to 1820, according to data collected by the late Angus Maddison, the world’s annual growth rate was just 0.32%, with large sections of the world experiencing no growth at all….Industrial Revolution, which lifted average annual global growth to 2.25% from 1820 to 2003?

The Angus Maddison database at the website of Groningen Growth and Development Centre did not give me information for the year 1500. Second, it only gave me per capita GDP for individual countries and regions measured in 1990 PPP GK (Geary-Khamis) dollars. The Excel sheet I could download had information starting only from the year 1820 (see link above).

On that basis, world per capita GDP (1990 GK $) experienced a CAGR of 1.27% from 1820 to 2010. Asia’s number 1.26%. For the world, the pre-WW I (1820-1913) growth rate was 0.84% and post-WW I (1913-2010), including the war periods, the growth rate was 1.69%. Double.

For Asia, the difference is more striking. The comparable figures were 0.15% and 2.34%.

It gets even more interesting if one split the data into two periods, 1820-1950 and 1950-2010. For the world, the growth rate in per capita GDP (in 1990 GK $) for the first 130 years since 1820 was 0.84% per annum. For the next 60 years, it was 2.21%.

It is more striking for Asia. The comparable figures are 0.10% and 3.84% respectively. Amazing speed of growth and catch-up. Put it down to Japan and China, post-1950. Roughly, the first thirty years from 1950 was the story of Japan and the next thirty years, it has been the story of China. What comes next? Who comes next?