Back to the Nineties

November 7, 2014
Draghi follows Kuroda and king dollar spurs EM contagion fears.

From the perspective of my macro Credit analytical framework, history’s greatest Credit Bubble advances almost methodically toward the worst-case scenario. After more than two decades, the Bubble has gone to the heart of contemporary “money” and perceived safe government debt. The Bubble has fully encompassed the world – economies as well as securities and asset markets. And we now have the world’s major central banks all trapped in desperate “nuclear-option” “money”-printing operations. Moreover, serious cracks at the “periphery” of the global Bubble now feed “terminal phase” Bubble excess at the “core.” Indeed, “hot money” finance exits faltering periphery markets to play Bubbling king dollar securities markets. Euphoria reigns. In many ways, the Bubble that gathered powerful momentum in the Nineties (with king dollar) has come full circle.

Alan Greenspan was interviewed by the Financial Times’ Gillian Tett at the Council on Foreign Relations, October 29, 2014:

Greenspan: “In 1775 we printed a whole bushel full of continentals. And one of the fascinating things about that period is the fact that for the first year or two there was very little evidence that they had any effect on prices. Meaning that that paper currency circulated with the same value as specie (gold and silver). There is an extraordinary lag which exits between actions of that type and consequences. Now, eventually a continental was not worth a continental. But it took a long while, and I think that we’re looking at very similar things now. This again is human propensity. One of the things that I used this book (“The Map and the Territory”) to write was to develop a concept of how do you shift from a system where everybody is acting rationally – which is what all our models basically said – to one where reality is where people are acting intuitively, various different types of forms. Irrationality is in many respects systematic – you can model it. And indeed I show in many cases why for example fear is demonstrably a much stronger force than euphoria… This is the type of thing that I think we’ve got to understand. And one of the reasons why I say, as a conclusion in this book, that the non-financial parts of our economy behave very well. They are highly capitalized, and essentially it is a financial system which is totally divorced – a different function than the type of things we do in the non-financial area. One (the financial sector) has to do with the allocation of savings into investment. That is where “animal spirits” really run wild. And we have to understand that better than we do now. This is the reason why – everybody knew there was a Bubble in 2008 but, to my knowledge, nobody - even when we knew on a Monday morning that Lehman was going to default - did we get the reactions right away. It took several days before the whole system broke down. If you can’t forecast something like that what good is forecasting.

Gillian Tett: “Do you regret not having pricked the Bubble in, say, 2005?”

Greenspan: “No. Because of by then – one of the things I conclude in the book is that pricking the Bubble – short of collapsing the economy – doesn’t do anything. We tried at the Fed, for example, in 1994. We raised the Federal Funds rate by 300 basis points –which is a huge amount in a short period of time. We went up 50 basis points, 75 basis points. And we did slow what was - we can call it an incipient rise in the Dow, for example. It stabilized. And we thought we got a previously unachieved safe landing. And so we started patting ourselves on the back, and low and behold as soon as we stopped tightening the Dow took off again. And the reason is that markets are very complex. The markets observing the fact that 300 basis points did not disrupt the economy changed the equilibrium level of the Dow Jones Industrial Average from here to there (raising his hand higher), and the markets just took off. There is no evidence of which I’m aware of where central banks have incrementally tightened. The only occasion where we actually saw something is when Paul Volcker’s Fed hit in late-1979 and early-1980 - put a clamp on the economy. And it’s only by bringing the economy down that you could burst the Bubble. And that is very bad news in a sense that – the only place where incremental tightening actually defuses Bubbles is in econometric models. And that’s because they are mis-specified.

I have a weekly chronicle of the Great Credit Bubble going back to 1999 ready to do battle against historical revisionism. I began my “blog” in 1999 in part because I had witnessed profound changes in finance, policymaking and the markets that were going completely unreported and unanalyzed. Today’s out-of-control global Bubble arose from the Nineties Bubble in U.S. Credit and asset markets. And no one played a greater role in nurturing the Bubble than Alan Greenspan.

Greenspan remains impressively sharp. Interestingly, he has become a fan of gold. He doesn’t see the euro monetary experiment succeeding. Greenspan is clearly concerned about the current stance of monetary policy and “fiat” currencies. That he would raise the issue of our nation’s terrible experience printing “Continentals” is fascinating. That he would point responsibility to “human propensity” is incredible. Greenspan has expended considerable energy absolving himself of responsibility, in the process revising history. I’ll attempt a few clarifications.

Greenspan states that “everybody knew there was a Bubble in 2008.” As someone that studied, chronicled and warned of the Bubble, I recall things quite differently. Will everybody have known it was a Bubble in 2014? And, actually, wasn’t it perfectly rational to participate in stocks, bonds and asset markets – even on a leveraged basis – during the Nineties and right up to 2008, with the Fed (and Washington policymaking) manipulating, intervening and backstopping finance and the securities markets? Is it not similarly rational to speculate in stocks, bonds, corporate Credit and derivatives today? I would strongly argue that rational responses to government-induced market distortions are instrumental to major Bubbles.

Greenspan was the father of contemporary “activist” central banking. His market assurances and “asymmetrical” policy approach were godsends to speculative markets. An aggressive rate collapse and yield curve manipulation (stealth banking system bailout) were instrumental in fostering historic expansions in both non-bank “Wall Street finance” and leveraged speculation. It’s easy these days to forget the scope of the Nineties Bubble that inflated under Greenspan’s watch.

The S&P500 returned 429% during the decade of the Nineties. The Nasdaq Composite gained almost 800%. Total system (non-financial and financial) debt doubled during the decade to $25 TN. The Asset-Backed Securities (ABS) market expanded 525% to $1.3 TN. Securities Broker/Dealers assets surged 320% to $1.2 TN. Rest of World holdings of U.S. financial assets jumped $3.7 TN, or 370%, to $5.64 TN. Corporate (non-financial) borrowings surged 141% during the decade to $9.319 TN.

If not for the spectacular Nineties Bubble I seriously doubt Bernanke would have become a leading figure. He was brought into the Fed in 2002 when the scope of the post-Nineties Bubble landscape came into clearer view. Bernanke had the academic creed the Fed would adopt as it took central bank “activism” to a whole new level of experimentation. In the name of fighting the scourge of deflation, the Greenspan/Bernanke Fed fueled a reflationary mortgage finance Bubble that left even the Nineties Bubble in the dust.

I’m compelled to amend a few of Greenspan’s comments. Yes, the Greenspan Fed did raise rates 300 basis points between February 4, 1994 and February 1, 1995. But the Fed had previously cut rates 600 basis points – from 9% in October 1989 to 3% by September 1992 (in the end slashing 300 bps in seventeen months).

I certainly concur with Greenspan’s comment that “markets are complex.” I simply don’t buy into Greenspan’s attempt to distance the markets’ propensity for destabilizing “animal spirits” from “activist” government policymaking. Government actions repeatedly throughout the decade backstopped the markets and resuscitated the Bubble. There was the extraordinary use of the U.S. Treasury’s Exchange Stabilization Fund as part of the 1995 Mexican bailout. There was the Federal Reserve orchestrated bailout of Long-term Capital Management. There were scores of (Washington-based) IMF bailouts. There was the February 1999 “Committee to Save the World,” with Greenspan on the cover of Time magazine positioned in front of Robert Rubin and Larry Summers.

In some key ways, these days it’s Back to the Nineties. King dollar is again flourishing, fueled by Federal Reserve “activism” coupled with faltering Bubbles around the globe. U.S. securities markets are once again bolstered by the perception that policymakers will guarantee marketplace liquidity and quash incipient crises. And, importantly, the Bubble is again being dangerously fueled by an underlying source of finance that is both unrecognized and unsustainable.

Back in 1999, there was absolutely no doubt in my mind that the system was in the midst of a historic Bubble. At the same time, the bull story was compelling (in contrast to today): the “technology revolution,” unprecedented productivity gains, robust growth, globalization, contained inflation and newfound confidence in astute policymaking. There was the collapse of the Soviet Union, European integration and the rise of Capitalism around the globe. But there was as well one major unappreciated problem: The underlying finance encompassing the world’s reserve “currency” was unsound.

GSE assets were up $1.27 TN, or 280%, during the nineties (to $1.72 TN). Notably, GSE holdings increased an unprecedented $150bn, or 24%, during 1994. I can state confidently that the incipient U.S. Credit, securities and speculative Bubbles would have been suppressed had the GSE’s not been there to backstop increasingly speculative markets. Without the GSEs, the 1994 bursting of the bond/derivatives Bubble would have been a major problem (and an invaluable learning experience for market participants and policymakers). Operating as quasi-central banks, GSE assets increased $112bn in 1997, $305bn in 1998 and $317bn in 1999.

To this day, there is no recognition of the profound role the GSE backstop played in distorting markets and promoting risk-taking and speculation. Including GSE MBS, total GSE securities increased about $2.7 TN during the nineties, providing the key source of system Credit underpinning the Nineties Bubble. The Technology and stock market Bubbles burst in 2000. The “miracle” U.S. economy fell into recession. Instead of running budget surpluses and paying off all federal debt (part of the bullish view at the time), deficits returned with a vengeance. By 2002, the U.S. corporate debt market was in crisis. Enter Dr. Bernanke.

There is still little appreciation for the how GSE Credit fueled the securities markets, housing prices, the real economy and government receipts throughout the Nineties. These days, there’s a similar lack of understanding for how almost $3.6 TN of Federal Reserve Credit has stoked securities markets, the real economy and Federal receipts. The view in the Nineties was that the GSEs didn’t matter – “only banks create Credit.” The view today is that QE-related Federal Reserve “money” just sits there inertly on the U.S. banking system’s balance sheet.

We’re at a critical juncture in the global Bubble. Serious cracks have developed at the periphery. The Russian ruble sank another 8.0% this week (two-week decline 10.5%). The Ukrainian Hryvnia dropped 10.5%. The week saw the Brazilian real fall 3.2%, the South Korean won 2.3%, the Colombian peso 2.0%, the Malaysian ringgit 1.7% and the Chilean peso 1.7%. The Iceland krona, Romanian leu and Hungarian forint all lost about 1%.

Last week saw the Bank of Japan’s Kuroda (after a 5 to 4 vote) shock the markets with a major boost in QE. This week, with various reports of serious dissension within the Governing Council, Mario Draghi emerged from committee policy discussions more determined than ever to push through with his Trillion euro increase in ECB holdings.

I struggle believing Kuroda and Draghi are driven by domestic considerations alone. I am not alone in discerning an element of desperation. Their aggressive measures have definitely thrown gas on the king dollar fire. And the week saw further acute pressure on commodities markets. King dollar and sinking crude helped incite crisis dynamics for Russia’s currency. The Russian central bank spoke of the ruble under attack from “speculative strategies” and “threats to the nation’s financial stability.” Putin on Thursday claimed “politics prevail in oil pricing.” By Friday, there were reports of Russian tanks again entering Ukraine.

In Back to the Nineties-type analysis, emerging markets contagion now seems to gain momentum by the week. This week’s ruble collapse certainly seemed to pull down the vulnerable Brazilian real. The sinking real then tugged at Colombian and Chilean pesos – and even the Mexican peso (trading at a 15-month low early Friday). EM bonds also showed some vulnerability. After beginning the week at 12.1%, Brazilian 10-year (real) yields traded to almost 13% Friday morning (closed the week at 12.56%). Venezuela yields jumped 232 bps to 18.50% (high since March ’09). Other EM markets were hinting at contagion vulnerability. The Turkish lira declined 1.6% this week, as Turkish 10-year yields jumped 17 bps to 8.61%. Turkey’s major equities index was hit for 3.25%. On the back of a Moody’s debt downgrade, South Africa’s currency lost 2.1%, while bond yields rose 11 bps (to 8.0%).

European equities popped somewhat on Draghi but posted another unimpressive week. Notably, Spanish stocks were down 3.4% and Italian stocks were hit for 3.5%. And with German yields down another 2.5 bps to a record low 0.815%, bond spreads widened in Spain (11bps), Italy (6bps) and Portugal (9bps). It’s worth noting that Italian CDS rose four basis points this week to 132bps, up 46 bps from September lows (only 9bps below the “panic” 10/16 close).

Meanwhile, U.S. equities bulls just love (Back to the Nineties) king dollar. Scoffing at global crisis dynamics, those seeing the U.S. as the only place to invest are further emboldened. And, no doubt about it, “hot money” flows could further inflate the U.S. Bubble. Speculative flows (underpinned by Kuroda and Draghi) have surely helped counter the removal of Federal Reserve stimulus. Yet this only increases systemic vulnerability to de-risking/de-leveraging dynamics. At the end of the day, it’s difficult for me to look ahead to 2015 and see how the household, corporate and governmental sectors generate sufficient Credit growth to keep U.S. asset prices levitated and the Bubble economy adequately financed. Perhaps this helps explain why - with stocks at record highs, the economy expanding and unemployment down to 5.8% - 10-year Treasury yields closed Friday at a lowly 2.30%.

The Biggest Threat to U.S. Jobs: The “Contestability” Nightmare

John Mauldin

Nov 07, 2014

Today’s Outside the Box comes from Sam Rines of Chilton Capital Management in Houston, TX – a promising young economics contributor to The National Interest and a rising star who I met at Worth Wray’s wedding a few weeks ago.

Worth and Sam have developed quite the friendship over the past several months, but it didn’t take much convincing from Worth to get me to share Sam’s latest article with you. Sam’s work speaks for itself and I am VERY impressed by his insights on a wide range of economic issues – from the evolution of Fed policy and growing risk of a rising US dollar, to the long-awaited industrialization of India.

In his latest piece, Sam alerts us to a breakdown in the Federal Reserve’s full-employment mandate (one leg of its dual mandate, the other being stable prices). In a normal recovery, Sam reminds us, “[W]age growth and the labor market move together in a lagged fashion – the labor market heals and tightens, followed by wage increases as labor becomes increasingly scarce. But this has not happened during the current recovery, and it has not occurred economy-wide in quite some time.”

But why the breakdown? Janet Yellen herself points to growing inequality. Here’s Yellen (as quoted by Sam): “[W]idening inequality resumed in the recovery, as the stock market rebounded, wage growth and the healing of the labor market have been slow, and the increase in home prices has not fully restored the housing wealth lost by the large majority of households for which it is their primary asset.”

But again, why – why the laggardly wage growth? Sam drills down and finds the problem rooted in what he (and others) are calling the “contestability” of many US jobs, and especially those of middle-skilled workers, whose jobs are liable to international outsourcing or antiquation by computer technology (robotic or otherwise). To make matters worse, much of the post-Great Recession job growth has come in the form of low-paying and part-time work.

Thus we have the “hollowing out of the middle class,” which is tantamount to saying that the middle is slipping down the wage ladder, even as those on the top rungs continue to climb (since their positions require high levels of education and intellectual competence and are not very susceptible to competition from outside the country or from machines – or at least not yet).

So income inequality grows, and lower- and middle-skilled workers are unable to exert any pressure for their wages to increase. This trend, as Sam points out, is “at best disinflationary and may be deflationary. With stagnant wages across the economy, the middle cannot increase consumption – one can only borrow so much.”

This is a major trend with huge implications for US economic growth – and thus for Fed policy. Sam concludes his piece by saying, “The Fed is muddling the mandate to fight a wage war, but the Fed will struggle to justify its continuous actions to counteract those forces. The middle skills squeeze is not a swiftly passing phenomenon. It may mean that extraordinary monetary policy and unconventional intervention are increasingly normal.”

A conversation today triggered a memory. I just turned 11 years old, and it was Christmas morning. I’d retrieved a few toys out from under the tree and was looking forward to going out to play with friends. But my dad said that first I had a project to do. He had just bought all the equipment to open a small printing shop in Bridgeport, Texas. This was 1959 (we had just left the Stone Age), and printing was still done with hand-set type and on letter presses. The small press that was invented in the early 1900s was now powered by an electric motor.

My dad had brought home a type case full of 12-point Franklin Gothic lead type. He turned the case upside down on the kitchen table and said, “Put all the type back and then you can go out and play.” There was nothing else to do but sit and look at each small piece of type, figuring out what each character was and putting in its respective small box. It took forever, but I eventually finished and got up to leave. My dad said “Wait a minute.”

He asked me to come over and look at another case where he hadn’t labeled all those individual little compartments with the letters that belonged in them. He pointed to one and asked me which letter belonged in there. I didn’t know. Then he asked me a second one. I didn’t know that one either. He went back over to the kitchen table and turned that type case – much like the one you see in the picture above – upside down. “Do it again.”

I’m only a little slow. When I finished and Dad started asking questions, I knew the answers. It was the start of a decades-long process love-hate affair with the printing business. I Actually made money in college going around to the print shops and offering to clean up their “hell boxes,” which were the boxes and buckets full of type that had gotten jumbled and that no senior printer wanted to take the time to put back. So what do you find in hell? You find a printer’s devil, which is the young apprentice who does all the dirty work. And it was dirty. But by the late 1960s printing with actual type was on its way out, and then there were no young apprentices. Business was good, but within a few years all that knowledge was simply arcane trivia, of no use in the real world.

I was training with yesterday, and while he was putting me through my paces, he was reading a report on his phone about the political changes. “What’s the GOP?” he asked. As I pumped away on the exercise bike I told him it stood for “Grand Old Party.” I went on to explain the term and added, “In the early days, writers would often set their own type for their newspaper columns. Republican Party had a lot more letters in it than GOP.” And then I explained setting type. You could see he was thinking I must be really old. And I thought back to all the hours I hand-set type as a young man.

And continued to pump. The Beast is pushing me harder as time goes on, and it’s helping, but leg days just kill me for the following few days. My legs feel like they’re wrapped in lead. For years I focused on upper body in my workouts, and my legs became appallingly weak. But knowing that as we get older our wheels take on ever more importance, I’m trying to get them in some kind of working order. They say no pain, no gain, so I must be gaining a lot. Surely?

Have a great week. Fall is in the air. Can Thanksgiving be far behind?

Your pretty much hurting somewhere every day analyst,

John Mauldin, Editor
Outside the Box

The Biggest Threat to U.S. Jobs: The “Contestability” Nightmare

By Samuel Rines
The National Interest, October 22, 2014

The Federal Reserve’s mandate has never been well defined, and there are no concrete definitions to adhere to. Federal Reserve Chair Janet Yellen has begun to deviate from the traditional characterization of full employment to something far more nebulous. Recognizing this shift is critical to understanding the Fed, and its new relationship with the two esoteric mandates of stable prices and full employment.

At a conference in Boston, Yellen stated that she was concerned about rising inequality. Before listing off a blistering round of statistics that show the US has become more unequal over the past few decades, Yellen succinctly articulates why the Great Recession was responsible for widening the gap further: “But widening inequality resumed in the recovery, as the stock market rebounded, wage growth and the healing of the labor market have been slow, and the increase in home prices has not fully restored the housing wealth lost by the large majority of households for which it is their primary asset.”

One piece in particular of the above statement stands out – and has broad implications for understanding the Fed mandate. A normal recovery would see wage growth and the labor market move together in a lagged fashion – the labor market heals and tightens, followed by wage increases as labor becomes increasingly scarce. But this has not happened during the current recovery, and it has not occurred economy-wide in quite some time.

The new target for the Fed may be best described as not simply “full employment” but “full wages.” At first glance, it seems unreasonable for the Chair of the Federal Reserve to be concerned with how the income of the country gets dispersed. However, in many ways, “full wages” are at the intersection of the fed mandates. In essence, Yellen is admitting that the past few decades were not kind to a significant swath of the US, and that this endangers future economic growth.

Many of the jobs US middle-skilled workers once took for granted can now easily be outsourced or contested – even some previously thought untouchable. This “contestability” is increasing as more jobs become relocateable or replaceable with computing power due to advances in communications technology. Contestability is fundamental to Yellen’s concern. If a US job is contestable internationally, then US workers are competing with cheap labor around the world. This limits the bargaining power of the US worker, and keeps a lid on wage inflation in the US. The cheap-but-educated global labor force is becoming an increasing threat to the US worker.

Yellen sees this middle-skilled squeeze phenomenon in the data, but also sees the lack of deflationary wage pressure on the top of the income ladder. The highest-paying jobs tend to have little competition from outside – requiring creativity and high levels of education. The question to ask is why this has occurred, and whether the factors underlying it are dangerous to the US economy.

And in many ways – they are dangerous. If ignored long enough, the disintermediation of the middle class is at best disinflationary and may be deflationary. With stagnant wages across the economy, the middle cannot increase consumption – one can only borrow so much. If contestability continues to erode the wages of US middle-skilled workers, wages could be pressured or even decrease toward more internationally competitive levels. This would be disastrous for consumption and inflation expectations, especially in a service oriented economy where many of the jobs could be at risk.

If the U.S. continues to see this type of wage pressure, there may be enough jobs (for people who want them), but the ability to consume at previous levels will not be there. Deflation – generally – is bad for an economy, and wage deflation might be the worst kind. Deflation puts pressure on prices, making it more difficult to consume on the aggregate as the economy previously did. The standard of living declines. Further, the potential for wage pressures, in the current recovery, is low. The jobs created during the recovery disproportionately skew towards part-time relative to previous recoveries, and part-time jobs do not yield much bargaining power. There are few reassurances about the labor market.

This puts the Fed in a particularly odd place. Its mandate is supposed to be two separate pieces of a puzzle, but Yellen appears to have identified an intersection. The Fed runs the risk of missing both its “full employment” and “stable price” mandates without pursuing – either explicitly or implicitly – a “full wage” target.

Yellen’s statement has little to do with fairness or equality. It is directly connected to ensuring the US has created enough uncontestable jobs for the Fed to step away, and these jobs are the type that will lead to – or at least allow for – future wage pressures. Prime examples are the jobs created by the current shale oil boom and housing construction during the boom through 2006. Many of the jobs created for the oil patch require the presence of the worker – and cannot be done without a significant amount of education. These characteristics make them difficult to offshore or relocate. As quantitative easing begins to roll-off, the ability of the US shale revolution to stand on its own will be tested, and the jobs engine of Texas may suffer. This would be a tremendous hit to a sector where wage pressures exist, and the contestability is low.

The Fed should be watching this closely.

Yellen’s wage war is a battle the US does not know it must win. For the Fed, it ties together both pieces of its mandate, and gives them a reasonable basis for stimulus when observers feel it unnecessary. The Fed is muddling the mandate to fight a wage war, but the Fed will struggle to justify its continuous actions to counteract those forces. The middle-skills squeeze is not a swiftly passing phenomenon. It may mean that extraordinary monetary policy and unconventional intervention are increasingly normal.

Emerging markets

The dodgiest duo in the suspect six

As emerging economies hit hard times, Brazil and Russia look particularly weak

Nov 8th 2014

INVESTORS in emerging markets know how quickly things can turn sour. In the mid 1990s fast-growing Thailand and Indonesia became known as the “Asian Tigers”. By 1997 they were suffering currency crises and had to be bailed out by the IMF. Nearly 20 years on two members of the “BRICs” (Brazil, Russia, India and China) lionised for propping up global growth in 2010, are close to recession. The mixture Brazil and Russia face—falling currencies, high inflation and slow growth—could make 2015 a very bad year.

Trouble has been brewing for a while. Over a year ago James Lord of Morgan Stanley, a bank, labelled Brazil, India, Indonesia, South Africa and Turkey the “fragile five” of the emerging markets. His concern was that the combination of high inflation and big current-account deficits meant exports were too dear; their currencies topped his list of those likely to tumble.

Four of the five have since lost ground against the dollar, but a sixth emerging-market currency, the Russian rouble, has fallen much further (see chart 1). On November 5th the central bank scaled back its expensive and futile efforts to prop the currency up, leaving it floating almost freely.

These countries have common problems, particularly high inflation. Each of the fragile five has a “twin deficit”: budget shortfalls that mean debts are piling up and current-account gaps that make them reliant on foreign capital inflows. Yet their prospects have diverged. India and Indonesia look secure. The rupee is up against the dollar since August of last year and the public-sector deficit is falling. The Indonesian rupiah has been less solid, losing 10% since end-August, but inflation has moderated and growth is strong (see chart 2).

The remaining four are faring less well. The South African rand and Turkish lira look likely to fall further since both still combine big current-account gaps with high inflation. Yet for government economists in Pretoria and Ankara there are chinks of light. Energy prices have dropped—great news for Turkey since oil and natural gas account for 60% of its energy supply, of which over 90% is imported. In South Africa, strikes which have stunted exports of minerals have abated; the economy could grow by 2.5% next year.

Brazil and Russia, by contrast, are in really bad shape. The largest emerging economies after China, together they have the heft of Germany. In both countries the currency is sliding. The real hit new lows in November after data revealed the budget deficit reached a record in September. The rouble is dropping faster, down 27% in a year and 10% in the past month. Both face stagflation: bubbly prices coupled with growth rates likely to be below 1% this year.

Some of their pain comes from abroad. Brazil’s main trading partners are slowing (China), stagnant (the euro area) or tanking (Argentina). Not only are export volumes down; the prices of things Brazil sells—iron ore, petroleum, sugar and soyabeans—are dropping as global demand falters. Russia is feeling the slowdown too, as energy prices fall. It is one of the world’s biggest producers of oil and natural gas. Its big five energy firms employ close to 1m workers. Exports worth $350 billion flowed through pipelines to Europe and Asia in 2013. As prices drop, Turkey’s gain is Russia’s loss.

But Brazil and Russia’s problems have domestic roots too. Since the 1990s Brazil has tended to aim for a primary surplus (before interest payments) of close to 3% of GDP—enough to begin reducing its debts. But Dilma Rousseff, the newly re-elected president, has played havoc with Brazil’s public finances. In 2014 spending has expanded at twice the rate of revenues despite one-off gains from the sale of Libra, an oilfield, and the 4G telecoms spectrum. Brazil’s debt-to-GDP ratio is rising fast.

Russia’s self-inflicted wounds are even more severe. Vladimir Putin’s invasion of Ukraine led to American and European sanctions that have been gradually tightened since they were imposed in July. The rules limit Russian firms’ access to American debt markets. They also ban American firms from selling kit or advice to Russia’s energy giants. This prevents Western oil firms from helping Russian ones develop oil- and gasfields. Mr Putin’s retaliation—import tariffs on Western goods—has pushed up domestic prices further.

There could be worse to come. The drop in commodity prices looks set to last. Meanwhile, in order to crimp inflation and stem the slide in their currencies the central banks in both countries raised their rates last month: they stand at 11.25% in Brazil and 9.5% in Russia. At the same time, worried finance ministries are keen to bolster their books. In Brazil, fuel-tax hikes are being mooted, and tax breaks on car purchases may be scrapped. In Russia a rule that caps the budget deficit at 1% of GDP may require austere fiscal policy.

This frugality will hurt. Banks could prove vulnerable as public-sector spending cuts hit incomes and high interest rates make loans hard to service. In Russia things are particularly bad: non-performing loans are rising, and savers are draining the banks of roubles.

Bond markets could be another flashpoint. Both have big foreign-exchange reserves: despite losing around $100 billion in the past year, Russia has close to $370 billion. But they also have big dollar debts that become harder to serve as their currencies fall. Russia faces some $90 billion of repayments in the next six months. Even optimists think the pair will be lucky to grow in 2015. Pessimists see tumbling currencies, bond-market routs and even bank runs.

martes, noviembre 11, 2014



The Economics of Inclusión

Ricardo Hausmann

NOV 7, 2014   

CAMBRIDGE – Many people find economic growth to be a morally ambiguous goal – palatable, they would argue, only if it is broadly shared and environmentally sustainable. But, as my father likes to say, “Why make something difficult if you can make it impossible?” If we do not know how to make economies grow, it follows that we do not know how to make them grow in an inclusive and sustainable way.

Economists have struggled with the tradeoff between growth and equity for centuries. What is the nature of the tradeoff? How can it be minimized? Can growth be sustained if it leads to greater inequality? Does redistribution hamper growth?
I believe that both inequality and slow growth often result from a particular form of exclusion. Adam Smith famously argued that, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” So why would growth not include people out of self-interest, rather than requiring deliberate collective action?
It is well known that levels of income are dramatically different around the world. Thanks to more than two centuries of sustained growth, average per capita income in the OECD countries is just under $40,000 – 3.3, 11.3, and 17.7 times more than in Latin America, South Asia, and Sub-Saharan Africa, respectively. Sustained growth has obviously not included the majority of humanity.
What is less well known is that huge gaps exist within countries. For example, GDP per worker in the State of Nuevo León in Mexico is eight times that of Guerrero, while output per worker in the Department of Chocó in Colombia is less than one-fifth that of Bogotá. Why would capitalists extract so little value from workers if they could get so much more out of them?
The answer is surprisingly simple: fixed costs. Modern production is based on networks of networks. A modern firm is a network of people with different expertise: production, logistics, marketing, sales, accounting, human-resource management, and so on. But the firm itself must be connected to a web of other firms – its suppliers and customers – through multi-modal transportation and telecommunication networks.
To form part of the modern economy, firms and households need access to networks that deliver water and dispose of sewage and solid waste. They need access to the grids that distribute electricity, urban transportation, goods, education, health care, security, and finance. Lack of access to any of these networks causes enormous declines in productivity. Just think of how your life would change if you had to walk two hours each day to obtain drinking water or wood for fuel.
But connecting to these networks involves fixed costs. Before anyone can consume a kilowatt-hour, a liter of water, or a bus ride, somebody has to get a copper wire, a pipe, and a road to their house. These fixed costs need to be recouped through long periods of use.
If income is expected to be low (perhaps because of other missing networks), it does not pay to connect a firm or a household to the network, because the fixed costs will not be recouped. Growth is not inclusive because fixed costs deter markets from extending the networks that underpin it.
Changes in these fixed costs have outsize effects on who is included. For example, the first telephone company started operations in 1878, while mobile phones are barely 25 years old.
One might expect that the former would have diffused more than the latter, just because of the time advantage. Yet, in Afghanistan, there are 1,300 mobile phones for every landline. In India, there are 72 cellphone lines per 100 persons, but only 2.6 landlines.

America after the mid-terms

Welcome back to Washington

Republicans have won a huge victory. Now they must learn to compromiso

Nov 8th 2014

OPINION polls before the mid-term elections on November 4th suggested Barack Obama’s party would be beaten, but this was a thrashing. Republicans captured the Senate easily and their majority in the House of Representatives is now the biggest it has been in most Americans’ lifetimes. A Republican candidate in New York was indicted for 20 counts of fraud, but won anyway.

Close-up, the results are even worse for Democrats. They thought they could bin a bunch of tax-cutting, union-bashing Republican governors, but nearly all survived. Instead, Republicans captured governorships in solidly Democratic states like Maryland and Massachusetts.

Mr Obama cannot escape the humiliating verdict on his presidency. He campaigned in his home state of Illinois, for a Democratic governor running against a Republican who belongs to a wine club that costs over $100,000 to join. The oenophile won by five points.

Yet as Republicans toast their triumph, they should be careful not to over-interpret it. Their campaign did not offer voters much of a positive agenda; rather, it consisted largely of urging them to blame Mr Obama for all the trouble in the world. That was enough to secure victory, but does not give them a mandate to pursue a wishlist of conservative policies. Although more Americans than ever hold partisan views, a larger number are weary of gridlock and would prefer their representatives to compromise to get things done. For the voters to be satisfied, America will need to find new ways to run its politics.

A mandate for moderation
Many outsiders will be baffled by the election results. Compared with other rich nations, America is in good shape, with a growing economy, booming stockmarket, falling unemployment and robust public finances, at least by European standards. Why, they wonder, is Mr Obama so disliked that Democrats in swing states asked him not to campaign for them?

The answer is that although the economic headlines look good, voters do not feel that way. Median incomes are in the doldrums and many households feel terribly insecure about the future. A staggering two-thirds of Americans expect their children to be worse off than they are. And when they look at Washington, DC, to see what their political leaders are doing about it, they see a circus of name-calling and irresponsibility. Last year a stand-off between House Republicans and Mr Obama temporarily shut the government down and nearly caused a catastrophic sovereign default.

The outgoing Congress is the least productive since 1947. The proportion of Americans who trust it is a wretched 7%. It may be harsh, but when voters think the country is on the wrong track, the president and his party get the blame.

There is a Republican faction that would like nothing more than to spend the next two years indulging in futile attempts to repeal Obamacare and conducting televised investigations of the president’s supposed abuses of power. If this faction prevails, America can expect yet more dysfunction and Republicans will deserve to lose the White House in 2016.

Optimists are sure the new Congress will be better than that. Now that Republicans are in charge, voters will expect them to govern, rather than merely obstruct. Republican leaders such as Mitch McConnell and John Boehner would probably like to get things done, albeit with a bit of partisan sparring. And that means working with Mr Obama, who will remain president until January 2017 and can veto any bill the new Congress sends him. The two sides will thus have to find common ground—starting with the president. Deals are possible in plenty of areas. Republicans favour free trade; Mr Obama wants the authority, which his own party has denied him, to negotiate trade deals.

Both parties want to fix the corporate-tax code, and to invest more in America’s shoddy infrastructure. Moderates on both sides also want to reform immigration law to unblock the flow of talent on which America depends.

With power comes responsibility
Yet, even if the optimists are right, America faces a host of ailments that seem beyond the reach of today’s politics. The personal tax code cannot be simplified without closing middle-class loopholes. Health care and pensions for an ageing population will swallow up the budget unless costs are curbed and the retirement age is raised. In each case, lasting reform will inflict pain on large groups of voters. Reforms are possible only if they have both parties’ fingerprints on them—if one side tried alone, the other would accuse it of throwing Grandma off a cliff. Cool heads in both parties know that the big entitlement programmes, which grow automatically, need fixing. Yet even in the most collaborative Congress, both sides would duck the issue, preferring instead to bicker over the mere 15% of the budget (excluding defence) that it re-authorises each year.

America has changed since the days of Ronald Reagan and Bill Clinton. Money is splurged on elections and, many argue, this corrupts lawmaking. The parties are far more polarised and suspicious of each other. America’s political architecture is part of the problem, for two reasons. First, the electoral system rewards extremists. Many members of the House represent gerrymandered districts which their party cannot lose. Their only fear is that they might lose a party primary to a challenger who accuses them of being soft on the other side. So they pander to the zealots who vote in primaries and treat opportunities for compromise like invitations to burn Old Glory.

Second, the federal government has so many checks and balances that it is all but paralysed. The Senate filibuster gives 41 out of 100 senators the ability to block anything except a budget (they could in theory represent just 11% of the population). Attempts to limit campaign spending tend to fail—and to infringe the constitution’s free-speech guarantee. The best one can hope for is that donors will have to reveal who they are. More can be accomplished with reforms that empower the centre and remove road blocks, without requiring a federal constitutional amendment. Here are three suggestions:

First, scrap the filibuster in the Senate. Second, stop gerrymandering. Four states have already handed control of redistricting to independent commissions. California did so in 2010. Between 2002 and 2010 the state’s House members held on to their seats 99.6% of the time; in 2012 a quarter of them retired or got the boot. The reforms also moderated California’s state legislature. Once dominated by doctrinaire Democrats, last year it rejected 39 out of the 40 bills that the Chamber of Commerce said would kill jobs. One day, with luck, computers will design voting districts without taking party preferences into account.

Third, other states should copy California’s open primaries. Instead of letting just registered Republicans pick a Republican candidate and Democrats pick a Democrat, the Golden State now holds primaries in which anyone can vote. The top two candidates then proceed to the general election, even if they are both of the same party. This gives candidates an incentive to pitch to the political centre from the very start.

None of these reforms will happen soon, as they all need patient agitation in the states. But if Americans want to be better governed—which is what they voted for this week—they need to change the way they elect their leaders.


Job Growth, but No Raises


NOV. 7, 2014


The employment report for October, released on Friday, reflects a steady-as-she-goes economy. And that is a problem, because for most Americans, more of the same is not good enough. Since the recovery began in mid-2009, inflation-adjusted figures show that the economy has grown by 12 percent; corporate profits, by 46 percent; and the broad stock market, by 92 percent. Median household income has contracted by 3 percent.
Against that backdrop, the economic challenge is to reshape the economy in ways that allow a fair share of economic growth to flow into worker pay. The October report offers scant evidence that this challenge is being met. Worse, the legislative agenda of the new Republican congressional majority, including corporate tax cuts and more deficit reduction, would reinforce rather than reverse the lopsided status quo.
The economy added 214,000 jobs last month, in line with its performance over the past year. Consistent growth is certainly better than backsliding, but growth is still too slow: At the current pace, it will take until March 2018 for employment to return to its pre-recession level of health.
Even then, more jobs would not necessarily mean higher pay. Updated figures by the National Employment Law Project, a labor-advocacy group, show that about 40 percent of the private-sector jobs created in the last five years have paid hourly wages of $9.50 to $13, and 25 percent have paid between $13 and $20. Those findings are underscored by the new jobs report, which shows that nearly all of the private-sector job gains were in restaurants, retail stores, temporary work, health care and other low-to-moderate-paying fields.
Wages have barely kept up with inflation for several years running, and there are no economic or political forces to push them up. Working people can make more when employers bump up hours, which in October averaged a post-recession high of 34.6 hours a week. Workers also will see their paychecks go further as gas prices fall. But they are not getting ahead in any real sense.
None of this was inevitable. When the private sector is unable or unwilling to create good jobs at good pay, government is supposed to use stimulus to spur employment. It is also the job of government to enact and enforce polices like robust minimum wages and legal protections for union organizing. But the 2009 stimulus, too small to begin with, was offset by federal spending cuts beginning in 2011, while job-enhancing policies have gone nowhere, in large part because of Republican opposition.
Other forces that undermine broad prosperity bear examination. Trade with nations that manipulate their currency, exploit workers and damage the environment to gain unfair advantages costs Americans jobs. An outsized financial sector feeds bubbles and busts that devastate employment. Republican leaders have identified new trade deals and less financial regulation as priorities, but a heedless push on those fronts ignores the negative job-related consequences.
The economy is not working for those who rely on paychecks to make a living, which is to say, almost everyone. Steady gains in the October jobs report, while welcome, do not change that basic fact. Nor will policies currently on the horizon.

Staying in Shape—For Real This Time

This Is the Time of Year When Fitness Goals Go Awry, but Not This Year

By Jason Gay

Nov. 5, 2014 7:00 p.m. ET

                             Scott Pollack  

“I had the Cookie Monster chasing me a few times in my dreams.”
—LeBron James to CNN’s Rachel Nichols, September 2014

In my dreams, it’s the frozen waffles. Delicious, wretched, perfect frozen waffles. No, no, no: It’s the pizza monster. The terrible, frightening, wonderful pizza monster, cheesy and crisp, after me like Steve McQueen in a Mustang GT. Then comes the bagel man, the everything-bagel man, and behind him, pancake guy, with his syrup pal, of course. Then there are fries instead of salad, because who is kidding whom about salad instead of fries, right? There’s always the possibility of a meet-up with the ice-cream man, who is roommates with ice-cream sandwich, who used to work with ice-cream cake…

Not this off-season, however. This is the off-season that I will get it right, from November to March. Keep sharp, remain fit, maybe even lose a few from the few I lost this summer. I am going to do as the athletes do. Isn’t this what the athletes do? There’s no off-season slack anymore. A few years ago I was having coffee with a cyclist trying to make it in professional racing. This was November—the racing season was over. Now was the time for waffles and muffins! Nope. “Now’s the time to pay attention to stuff like that,” he said.

OK, so now is the time. I am going to be good, be strict, change my mentality. November was when it always fell apart for me. Maybe you share this problem. Winters have been cruel. I’ve gone from healthy summers of cycling and running and hours of tennis to “House of Cards” and Stoned Wheat Thins marathons on the couch. The runs become jogs and the jogs become slow walks to and from the subway. The bike rides migrate from the outdoors to indoor trainers and then stop altogether. Tennis trickles to a couple of times a month, because it’s indoors and expensive. Next thing you know, you’re buying “winter jeans.”

Not this time. I am going to behave like an athlete. Let me revise: I am going to pretend to behave like an athlete. The foundation of exercise and good diet I built in the summer and fall will not collapse in the bleakness of winter.

(I am at least 50 to 59% sure I can do this.)

If LeBron James can do it, why can’t I? I know he’s the world’s best basketball player, and I’m just a dad with sleep deprivation and a lot of Paul Simon on his iPhone, but how can you not be a little inspired? James arrived in Cleveland Cavaliers camp svelte thanks to a 67-day diet in which he shunned carbohydrates and refined sugar. New York Knick Carmelo Anthony appears willowier, too. Baseball players, once swelled by pharmaceuticals, have gotten reedier in their uniforms. In tennis, gluten denier and world No. 1 Novak Djokovic looks as if he hasn’t glanced at a cupcake in three years.

This is wise, we all know. Reasonable weight means less stress on joints and more ease of movement, better energy, especially as the athlete ages. Even the amateur hack can notice the effects. Over the summer I lost 10 pounds, OK maybe five, and I could not believe how much it helped me on the tennis court. In September I almost took a set off Journal tennis czar Tom Perrotta, and I never take a set off Journal tennis czar Tom Perrotta. I am the Maria Sharapova to Perrotta’s Serena Williams . (Sharapova, the women’s world No. 2, hasn’t beaten world No. 1 Williams in 10 years, which is a great crazytown tennis stat.)
Momentum is here. This time I’m pushing through the winter. Anybody can make a New Year’s resolution—why not make it early? I’m eliminating the junk food and purchasing the gear. There are late autumn gloves and early winter gloves and the deep winter gloves, suitable for delivering the Journal at the Arctic Circle. There are the winter bike booties. Not boots. Booties. There will be no excuses. If I have to ride indoors, I will ride indoors, and if I need something to watch, I hear the new Clive Owen thing is good.

I know I need to be reasonable. I probably cannot submit to a 67-day regimen with the fortitude of LeBron James. I don’t know if I will be as dedicated as the baseball player-turned-analyst Gabe Kapler, who brings his own cabbage on an airplane. Temptations abound. The holidays are creeping up fast, Thanksgiving and then the high-calorie parade of office parties. Last week my son went trick or treating for the first time. He is very little, though, and he has forgotten where his Halloween candy bag is.

I know where his Halloween candy bag is.

No: I’m not going down that road of recklessness. I will eat smartly and run and ride in the cold. I will go to the gym even when I hate going to the gym. I know there’s going to be pizza and bagels and ice cream, gaining in the rearview, but I plan to be an athlete, even if I’m not really one. There will be no winter jeans. I will resist, turn my off-season into an in-season. I also read somewhere it helps if you write it down.