September 2, 2013 4:23 pm

China has a choice – short-term growth or sustainability
The elimination of a subsidy that encourages feckless borrowing is overdue, says Michael Pettis
Years of artificially low interest rates have been key both to China’s rapid growth and to its notorious domestic imbalances. The role of financial repressionmanipulating the financial system to divert money from savers to producers – in the Chinese growth model is widely recognised. But the improvement in the country’s interest rate structure is not.
As a rule when nominal lending rates are broadly in line with nominal gross domestic product growth rates, the rewards of expansion are efficiently distributed between savers and users of capital. When they are substantially lower, however, as they have been in China for the past 30 years, net lendersmainly household depositors – in effect pay a hidden subsidy to net borrowers. In China these include state entities, manufacturers, state-owned enterprises and real estate developers.

This subsidy – an astonishing 5-8 per cent of GDPencourages irresponsible borrowing and forces down household income. This is why its elimination is crucially important both for rebalancing the economy towards greater household consumption and for reducing the amount of wasteful investment.

There is good news on that front. The hidden subsidy has declined dramatically since 2011. In the five years from 2006 to 2011, nominal GDP growth averaged about 18 per cent or more, while the official lending rate averaged around 7 per cent. In the past two years the nominal GDP growth rate has fallen to below 10 per cent while the lending rate rose to 7.5 per cent, bringing the gap down by an impressive three-quarters.

Interest rates are still artificially low, but with much of the economy addicted to cheap capital, any further narrowing of the gap is likely to be opposed by borrowers. In fact the combination of slowing growth and the recent low inflation numbers has already sparked urgent calls for interest rate cuts.

On the surface these calls seem justified. China’s economy is slowing partly because borrowers are struggling to repay debt. 
Usually this would argue for rate cuts – but not in China. It is still overly reliant on investment for growth. Because so much investment in the past has been in nonproductive projects, debt has risen faster than debt-servicing capacity for many years, to the point where it has reached alarming levels.
Here is where the problem lies. The faster Beijing reduces the gap between the nominal growth rate and the nominal lending rate, the more painful it will be for existing borrowers, especially the most irresponsible, who have depended on the subsidy. But the slower Beijing does so, the more debt will be added to the country’s overstretched balance sheets, especially among the least efficient borrowers, and the more painful the adjustment will be.
So far Beijing has shown tremendous restraint. In 2012 there were rumours that Li Keqiang, now prime minister, strongly opposed reducing lending rates even as inflation all but collapsed. It is also impressive that China has continued to resist interest rate cuts as growth drops and inflation fears subside further. The longer Beijing resists calls to cut interest rates, the harder it will be to maintain 7 per cent growth rates, and it is almost certain that GDP growth will drop further. However, by resisting the temptation Beijing will force swifter rebalancing and will reduce the overall debt and wasted investment that it will eventually have to confront.

Just as importantly, by eliminating the hidden transfer from household depositors to borrowers it can boost growth in household income even as output growth slows. This will allow China to move more quickly towards developing a healthy balance between consumption and investment while preventing slower growth from undermining the income of ordinary households. Cutting interest rates, in other words, will hurt households and increase bad debt, while not doing so will hurt the elite and cause the economy to slow in the short term.

Beijing faces a difficult choice. It must choose between preventing growth from slowing further in the short term and speeding up the transition to a healthier economy over the medium term. How China responds to interest rate pressures over the next year will be an important indication of the political difficulties Premier Li faces.

The writer is a finance professor at Peking University and a senior associate at the Carnegie Endowment

Copyright The Financial Times Limited 2013.

miércoles, septiembre 04, 2013



Are Emerging Markets Submerging?

Kenneth Rogoff

02 September 2013

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CAMBRIDGEWith economic growth slowing significantly in many major middle-income countries and asset prices falling sharply across the board, is the inevitableecho crisis” in emerging markets already upon us? After years of solid – and sometimes strongoutput gains since the 2008 financial crisis, the combined effect of decelerating long-term growth in China and a potential end to ultra-easy monetary policies in advanced countries is exposing significant fragilities.
The fact that relatively moderate shocks have caused such profound trauma in emerging markets makes one wonder what problems a more dramatic shift would trigger. Do emerging countries have the capacity to react, and what kind of policies would a new round of lending by the International Monetary Fund bring? Has the eurozone crisis finally taught the IMF that public and private debt overhangs are significant impediments to growth, and that it should place much greater emphasis on debt write-downs and restructuring than it has in the past?
The market has been particularly brutal to countries that need to finance significant ongoing current-account deficits, such as Brazil, India, South Africa, and Indonesia. Fortunately, a combination of flexible exchange rates, strong international reserves, better monetary regimes, and a shift away from foreign-currency debt provides some measure of protection.
Nonetheless, years of political paralysis and postponed structural reforms have created vulnerabilities. Of course, countries like Argentina and Venezuela were extreme in their dependence on favorable commodity prices and easy international financial conditions to generate growth. But the good times obscured weaknesses in many other countries as well.
The growth slowdown is a much greater concern than the recent asset-price volatility, even if the latter grabs more headlines. Equity and bond markets in the developing world remain relatively illiquid, even after the long boom. Thus, even modest portfolio shifts can still lead to big price swings, perhaps even more so when traders are off on their August vacations.
Until recently, international investors believed that expanding their portfolios in emerging markets was a no-brainer. The developing world was growing nicely, while the advanced countries were virtually stagnant.

Businesses began to see a growing middle class that could potentially underpin not only economic growth but also political stability. Even countries ranked toward the bottom of global corruption indices – for example, Russia and Nigeriaboasted soaring middle-class populations and rising consumer demand.
This basic storyline has not changed. But a narrowing of growth differentials has made emerging markets a bit less of a no-brainer for investors, and this is naturally producing sizable effects on these countries’ asset prices.
A step toward normalization of interest-rate spreads – which quantitative easing has made exaggeratedly low – should not be cause for panic. The fallback in bond prices does not yet portend a repeat of the Latin American debt crisis of the 1980’s or the Asian financial crisis of the late 1990’s.
Indeed, some emerging markets – for example, Colombia – had been issuing public debt at record-low interest-rate spreads over US treasuries. Their finance ministers, while euphoric at their countries’ record-low borrowing costs, must have understood that it might not last.
Yes, there is ample reason for concern. For one thing, it is folly to think that more local-currency debt eliminates the possibility of a financial crisis.

The fact that countries can resort to double-digit inflation rates and print their way out of a debt crisis is hardly reassuring. Decades of financial-market deepening would be undone, banks would fail, the poor would suffer disproportionately, and growth would falter.
Alternatively, countries could impose stricter capital controls and financial-market regulations to lock in savers, as the advanced countries did after World War II. But financial repression is hardly painless and almost certainly reduces the allocative efficiency of credit markets, thereby impacting long-term growth.
If the emerging-market slowdown were to turn into something worse, now or in a few years, is the world prepared? Here, too, there is serious cause for concern.
The global banking system is still weak in general, and particularly so in Europe. There is considerable uncertainty about how the IMF would approach an emerging-market crisis after its experience in Europe, where it has had to balance policies aimed at promoting badly needed structural change in the eurozone and those aimed at short-run economic preservation. That is a topic for another day, but the European experience has raised tough questions about whether the IMF has a double standard for European countries (even those, like Greece, that are really emerging markets).
It is to be hoped, of course, that things will not come to that. It seems unlikely that international investors will give up on emerging markets just yet, not when their long-term prospects still look much better than those of the advanced economies.
Besides, the current sentiment that the eurozone has gotten past the worst seems exceedingly optimistic. There has been only very modest structural reform in countries like Italy and France. Fundamental questions, including how to operate a banking union in Europe, remain contentious. Spain’s huge risk premium has almost disappeared, but its debt problems have not.
Meanwhile, across the Atlantic, the political polarization in Washington is distressing, with another debt ceiling debacle looming. Today’s retreat to advanced-country asset markets could quickly revert to retreat from them.
The emerging-market slowdown ought to be a warning shot that something much worse could happen. One can only hope that if that day should ever arrive, the world will be better prepared than it is right now.
Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. His most recent book, co-authored with Carmen M. Reinhart, is This Time is Different: Eight Centuries of Financial Folly.

Last updated: September 2, 2013 8:25 pm
The world would miss the American policeman
The US’s ‘red lines’ underpin global security from the Pacific to eastern Europe
In 1899 Rudyard Kipling, the pre-eminent poet of British imperialism, addressed some stanzas to America. Take up the white man’s burden,” he urged, “The savage wars of peace/ Fill full the mouth of famine/ And bid the sickness cease.” These days America has a black president and no public intellectual would dare to use the imperialist language of a Kipling. But the idea that the US bears a special burden in policing the world is very much alive. The notion was there in Barack Obama’s call for military action over Syria: “We are the United States,” declared the president outlining his nation’s special role in creating and defending the post-1945 global order.
But is America still prepared to play the role of world policeman and to wage the “savage wars of peace”? That question will hang over Congress’s debate on intervention in Syria. Mr Obama’s own hesitancy and opinion polls in the US underline that many Americans have grave doubts. They are likely to be reinforced by Britain’s decision to stay out of any military intervention in Syria. Almost 80 years after Kipling’s death, many in the UK have interpreted parliament’s decision as a signal that Britain has finally sloughed off the post-imperial instinct to police the worldeven as deputy sheriff to the US.
Since the UK is the world’s fourth- largest military power, and a member of the UN Security Council, such a decision would have global ramifications. But if America were to take a similar path, it would be truly world-shaking. And yet the possibility is clearly there. The US is war-weary after Iraq and Afghanistan and its economy has been weakened by recession. The shale gas revolution has made the country much less reliant on the Middle East. Americans, from Mr Obama down, no longer harbour the illusion that their troops will be greeted with flowers in foreign countries. Instead, as Kipling warned, they have learnt to expect “the blame of those ye better/ The hate of those ye guard.”

As in Britain, a gap seems to have opened up in the US between a foreign policy establishment that still takes it for granted that their nation should police the world – and a more sceptical public. Opinion polls show almost three-quarters of the British public approved of parliament’s decision on Syria. Meanwhile, the congressional debate will take place against a background of opinion polls that show Americans evenly divided on the cruise missile strikes the president is planning.
These anxieties about Syria are entirely comprehensible. While Mr Obama has triple-underlined his intention that he is contemplating only a limited strike, there are some questions that he cannot really answer. What will happen if Bashar al-Assad, the Syrian leader, is undeterred and uses chemical weapons again? Are we prepared to ignore all other forms of human rights violation in Syria? Does the US have any viable political vision for the future of Syria? Firing a few cruise missiles into Damascus, and hoping that this will somehow improve matters, does not seem like a very sophisticated strategy.
There are broader questions. America has seen itself as the guarantor of global security since 1945, but that has never meant intervening in every conflict or stopping every human rights abuse. The US did not intervene in the Iran-Iraq war of the 1980s – which, like the Syrian conflict, was waged between two sides that America distrusted and also involved the use of chemical weapons.
The notion that the US’s role now involves intervening in particularly bloody civil conflicts – or enforcing a ban on particular weapons – has gained ground only since the 1990s. Its sources lie in the Rwandan genocide, the Bosnian war and the development of a new doctrine on “weapons of mass destruction” as part of a war on terror.

In a speech in 2009 Tony Blair, former UK prime minister, who did a lot to develop this doctrine of liberal interventionism, asked rhetorically: “Should we now revert to a more traditional foreign policy, less bold, more cautious: less idealistic, more pragmatic, more willing to tolerate the intolerable because of fear of the unpredictable consequences that interventions can bring?” The House of Commons has clearly answered that question in the affirmative, repudiating the Blairite legacy.

A Congressional rejection of involvement in Syria would signal that the US, too, is reverting to a more traditional and restricted view of what actions by a foreign power would justify the deployment of American military might. In theory, therefore, refusing to act over Syria need not involve a complete US retirement from the role of global policeman. The trouble is that as well as encouraging further atrocities by the Assad regime America’s decision would inevitably be interpreted as sending a much wider message. That is because the belief that America’s red linesmean something underpins much of the world’s security architecture – from the Pacific Ocean to the Gulf to the Russian-Polish relationship.

For better or worse, Mr Obama drew such a red line over Syria. As he suggested over the weekend, America’s adversaries will draw conclusions if the US fails to act over Syria, and the same would be true of its allies. The governments of Japan, Israel and Poland – to name just a few – will all feel less secure if Congress votes against military action in Syria. The world relies on the American policeman more than it realices.

Copyright The Financial Times Limited 2013.

miércoles, septiembre 04, 2013



The Class-Backed Dollar

Editorial of The New York Sun

September 1, 2013

After disclosing somegender undertones” in the maneuvering over the next chairman of the Federal Reserve, the New York Times is out with a new scoopthis one over the issue of class. “The most obvious topic for a Democratic Fed leader to emphasize is the sharp growth in income inequality, which many scholars think has destabilized the economy,” writes the paper’s Washington correspondent, David Leonhardt. He goes on to quote one contender for the job, Lawrence Summers, as saying he thinks “the defining issue of our time is: Does the economic, social and political system work for the middle class?”

Mr. Summers, a former treasury secretary, is important in part because, according to the earlier dispatch in the Times, Mr. Summers is the individual who is being advanced for the job by the faction that favors a man. The reporters who broke that story, Binyamin Appelbaum and Anne Lowrey, disclosed that the individual favored by the faction that wants the next Fed chairman to be woman is the vice chairman of the Fed, Janet Yellen. At a time when the monetary debate is in a state of flux, the idea that the dollar should be based not on gender but on class is a scoop.

Call it the third mandate. The first mandate would be your basic price stability, which mandate has obtained since the founding of the Fed a century ago. The second mandate would be your full employment, which was legislated by the Congress in 1978 in a law called Humphrey Hawkins, after two Democrats, Hubert Humphrey and Augustus Hawkins, both men. The measure was signed by another Democrat and man, President Carter. The combination of the price stability and the full employment is your dual mandate. The third mandate would be to manage the dollar in a way calculated to help the middle class.

Why it’s the middle class that the dollar should be managed to help isn’t dwelled on by the Times. But the thinking of the Times must be that your poor people don’t have many dollars to worry about, so the question of whether their dollars hold their value doesn’t affect them as much. The rich people have so many dollars that they, too, don’t care whether the dollar holds its value. So one can start to see the outlines of how Messrs. Summers and Leonhardt are thinking. It prompted us to type into the New York Times’s search engine the phraserise of the American middle class.”

One of the first cables it turned up, if sorted by relevance, is a post by Paul Krugman, introducing his Web log in September 2007. In it the columnist offers a paean to the middle class, which the future Nobel laureate says he grew up in and was created by the New Deal.

He offers a chart that traces the “share of the richest 10 percent of the American population in total income,” which Mr. Krugman callsan indicator that closely tracks many other measures of economic inequality.” It illuminates four periods in our recent history. Mr. Krugman focuses on one, which he labels Middle Class America.

The span labeled middle class America were years when society was “without extremes of wealth or poverty, a society of broadly shared prosperity, partly because strong unions, a high minimum wage, and a progressive tax system helped limit inequality.” But the odd thing about itabout Mr. Krugman’s column — is that he fails to mention one other feature of the period. The dollar was defined as a matter of law through most of the period as being a 35th of an ounce of gold. Mr. Krugman’s chart shows the American middle class period running from the 1930s right up until the early 1970s.

What brought that era to an end? Well stub our toe if it wasn’t the beginning of the period of fiat money. This is the period in which Congress stopped defining the dollar in terms of gold and turned to the concept of fiat money, when the dollar was whatever the Federal Reserve said it was and was, in any event, convertible into but another piece of government issued scrip. Mr. Krugman calls the period “the great divergence.” We call it the fiat years, when the value dollar has collapsed to, at last check, less than a 1,385th of an ounce of gold. So here's the real scoop: If the Times wants to recapture the era when the middle class soared, history suggests the thing to do is to define the dollar not in terms of employment or gender or class but in terms of gold.

September 1, 2013

Chasing JPMorgan Chase


In the past month alone, JPMorgan paid $410 million to settle accusations by federal regulators that it had manipulated energy markets in California and Michigan. Federal prosecutors are pursuing criminal and civil investigations into mortgage securities that JPMorgan sold to investors before the housing bust.
Meanwhile, two JPMorgan employees have been criminally charged in the London Whale fiasco. The Securities and Exchange Commission is investigating whether the bank’s hiring practices in China violated federal bribery laws.

California is investigating the bank’s mortgage business; New York is investigating JPMorgan’s retail banking practices; and two federal agencies are reportedly on the verge of seeking damages for the bank’s alleged abuses of its credit card customers. All this and more comes on top of earlier settlements over allegations of abusive foreclosures and tainted tactics in a municipal bond deal.
The question now is whether federal officials can be persuaded by evidence that the government is gathering to make fundamental changes to America’s banking landscape. Even Mr. Dimon must know that the underlying problem is not only this or that violation, but the fact that the sheer size and scope and complexity of the banking behemoths defy controls, encouraging speculation and bad behavior.
Administration officials, lawmakers and regulators know this, too. But they remain at odds over the Volcker Rule and other reforms that, done properly, would curb the size and complexity of banks. For their part, prosecutors have consistently balked at seeking criminal prosecutions of big banks and their senior executives, or even at extracting admissions of wrongdoing in civil settlements, even though deterrence and accountability are impossible without prosecutions and admissions.
For the investigations of JPMorgan and other banks to make a real difference, the federal authorities would have to show a willingness that has thus far been lacking to get tougher with banks and bankers and move from there to carry out broader reforms of the nation’s financial system.