Living in a Free-Lunch World

By John Mauldin
Mar 28, 2015

“Everyone is a prisoner of his own experiences. No one can eliminate prejudices – just recognize them.”

– Edward R. Murrow, US broadcast journalist & newscaster (1908 – 1965), television broadcast, December 31, 1955

“High debt levels, whether in the public or private sector, have historically placed a drag on growth and raised the risk of financial crises that spark deep economic recessions.”

– The McKinsey Institute, “Debt and (not much) Deleveraging

The world has been on a debt binge, increasing total global debt more in the last seven years following the financial crisis than in the remarkable global boom of the previous seven years (2000-2007)! This explosion of debt has occurred in all 22 “advanced” economies, often increasing the debt level by more than 50% of GDP.
Consumer debt has increased in all but four countries: the US, the UK, Spain, and Ireland (what these four have in common: housing bubbles). Alarmingly, China’s debt has quadrupled since 2007. The recent report from the McKinsey Institute, cited above, says that six countries have reached levels of unsustainable debt that will require nonconventional methods to reduce it (methods otherwise known as defaulting, monetization; whatever you want to call those measures, they amount to real pain for the debtors, who are in many cases those least able to bear that pain).
It’s not just Greece anymore. Quoting from the report:

Seven years after the bursting of a global credit bubble resulted in the worst financial crisis since the Great Depression, debt continues to grow. In fact, rather than reducing indebtedness, or deleveraging, all major economies today have higher levels of borrowing relative to GDP than they did in 2007. Global debt in these years has grown by $57 trillion, raising the ratio of debt to GDP by 17 percentage points (see chart below). That poses new risks to financial stability and may undermine global economic growth.

This report was underscored by a rather alarming, academically oriented paper from the Bank for International Settlements (BIS), “Global dollar credit: links to US monetary policy and leverage.” Long story short, emerging markets have borrowed $9 trillion in dollar-denominated debt, up from $2 trillion a mere 14 years ago.
Ambrose Evans-Pritchard did an excellent and thoroughly readable review of the paper a few weeks ago for the Telegraph, summing up its import:

Sitting on the desks of central bank governors and regulators across the world is a scholarly report that spells out the vertiginous scale of global debt in US dollars, and gently hints at the horrors in store as the US Federal Reserve turns off the liquidity spigot….

“It shows how the Fed's zero rates and quantitative easing flooded the emerging world with dollar liquidity in the boom years, overwhelming all defences. This abundance enticed Asian and Latin American companies to borrow like never before in dollars – at real rates near 1pc – storing up a reckoning for the day when the US monetary cycle should turn, as it is now doing with a vengeance.”

Ambrose’s parting takeaway?

[T]he message from a string of Fed governors over recent days is that rate rises cannot be put off much longer, the Atlanta Fed's own Dennis Lockhart among them. ‘All meetings from June onwards should be on the table,’ he said. [This is from a regional president whose own research suggests GDP growth in the first quarter of 1%! – JM]

The most recent Fed minutes cited worries that the flood of capital coming into the US on the back of the stronger dollar is holding down long-term borrowing rates in the US and effectively loosening monetary policy. This makes Fed tightening even more urgent, in their view, implying a ‘higher path’ for coming rate rises.

Nobody should count on a Fed reprieve this time. The world must take its punishment.

Ouch! Please sir, may I have another? Punishment indeed. Ask the Greeks. Or the Spanish. Or… perhaps there is punishment coming soon to a country near you!

I began a series on debt a few weeks ago, and we return to that topic today. I believe the fundamental imbalances we are seeing in the world (highlighted in the two papers mentioned above) are the result of the massive increases in global debt and misunderstandings about the use and consequences of debt. Too much of the wrong kind of debt is going to be the central cause of the next investment crisis. As I highlighted in my February 24 letter, the right type of debt can be beneficial. However, as the McKinsey Report emphasizes,

High debt levels, whether in the public or private sector, have historically placed a drag on growth and raised the risk of financial crises that spark deep economic recessions.

Read that again. This isn’t the Mises Institute. This is #$%%*# McKinsey. As establishment as it gets. And they are clearly echoed by the BIS, the central banker’s central bank. Unless this time is different, they are saying, the high levels of debt are the reason for slowed growth in the developed world, a point we have highlighted for years in our research. There is a point at which too much debt simply sucks the life out of an economy.

Nobody Understands Debt

A useful starting point for today’s letter is Paul Krugman’s lament that “Nobody understands debt.” But to borrow a phrase from Bill Clinton, it really depends on what your definition of “debt” is.

Paul Krugman has actually written two New York Times columns entitled “Nobody Understands Debt.” The first, and more nuanced, one was published on January 1, 2012; and the second one appeared last month (on February 9). It is a constant theme for him. If you want a short take on what at an uber-Keynesian believes on debt, these columns are a good place to start. (Paul [may I call him Paul?] is as good a representative of the neo-Keynesian species – Homo neo-keynesianis – as there is, an interesting subset of the human genus.) In our musings on debt, we are going to look at these two essays in the effort to understand the differences b etween those who want more government spending and increases in debt and those who favor what is now disparagingly referred to as austerity.

I choose Krugman not because of any need to disparage him (he does write some rather good essays) but because he writes remarkably clearly for an economist, he has an extensive body of public work to choose from, and he says many things about debt that I think everyone can agree with. The differences between his positions and mine can, however, be pronounced; and I have spent some time trying to discern why reasonably intelligent people can have such significant disagreements. My goal here is to be respectful and gentlemanly while trying to expose the foundations (there is a pun here, soon to be revealed) of our disagreement.

To do this, we are now going to step out of the economic realm and move a little farther afield. Some readers may wonder at the journey I am am about to take you on, but this diversion will be helpful in explaining Paul’s and my different approaches to debt. We’ll return to our central theme by and by. Stick with me.

Foundational Presuppositions

One of the things I learned in my religious studies (yes, I did attend – and graduate from – seminary as penance for what must have been multiple heinous sins in my past lives) is that disagreements are often driven not by the “logic path” of an individual’s thoughts but instead by their core presuppositions. Presuppositions are often more akin to tenets of faith and insight than they are to actual, provable observations or facts. They are things assumed to be true beforehand, ideas taken for granted. Sometimes our presuppositions are rooted in prejudice, but more often than not they just arise from normal human behavior. Often, presuppositions are formed because of beliefs stemming from other areas of our lives or imposed by society. Your basic presuppositions, what “everyone” knows to be true, can lead to absurd conclusions. If you believe, as people did in Galileo’s day believed, that the Bible teaches the earth is fl at and that the Bible is the authoritative source for understanding physical geography along with everything else, then it is logical to believe you can sail off the end of the Earth.

We are, as the great journalist Edward R. Murrow said, “prisoners of our own experiences.”

Presuppositions (we all have them) are at the heart of all sorts of irrational behavior that we are learning about from the growing understanding of behavioral economics. Not only can we demonstrate that humans are irrational, we are predictably irrational. That irrationality was actually bred into us when we were a young species, dodging lions and chasing antelopes on the African savanna. But what were useful survival traits two million years ago can now be problematic in modern society. Our presuppositions can lead us to errors in investing and cause all sorts of societal problems. Bluntly put, presuppositions can come seemingly out of nowhere and bite you on the ass.

Presumably, if two people start with the same presuppositions, then logic and reasoning should allow them to come to agreement about their conclusions. (Yes, I know, it’s not quite that simple, but I don’t want to write a book on presuppositionalism here. Van Til did that, and it is unreadable. So work with me.)

Long-time readers know that I also send out a weekly letter called Outside the Box. It features the work of other writers I find interesting. I often send out material that I don’t necessarily agree with but that makes us think. If you can’t read something you disagree with and know why you logically disagree, then maybe you need to examine your own presuppositions and possibly arrive at different conclusions.

I think the difference that Mr. Krugman and I have on debt basically comes down to our presuppositions. I suspect they impact other aspects of our lives similarly. Like me, Mr. Krugman grew up on science fiction and still keeps up. He credits reading science fiction as a youth with his ultimate choice of economics as a career. In a very real sense, so do I. But I was more influenced by Lazarus Long (a recurring character in the books of Robert Heinlein) than Hari Selden (the genius who saves the galaxy in Isaac Asimov’s brilliant Foundation series.) The former is distrustful of government, while the latter assumes that humanity is better off with a few brilliant people running the show, if behind the scenes. (I say “people,” but after following the exploits of Hari Selden for a few decades, we learn that the real masters are technocratic robots.)

While I agree with Krugman that the Foundation trilogy may be the finest science fiction books ever written (and still highly recommend them to anyone wanting to jump into science fiction), they are a poor manual for the organization of government.

Two years ago Krugman wrote this about Asimov’s trilogy: “My Book – the one that has stayed with me for four-and-a-half decades – is Isaac Asimov's Foundation Trilogy, written when Asimov was barely out of his teens himself. I didn't grow up wanting to be a square-jawed individualist or join a heroic quest; I grew up wanting to be Hari Seldon, using my understanding of the mathematics of human behaviour to save civilisation.” (This is an excellent review, by the way, and I encourage those who are interested to read it.)

Am I cooking up a simplistic analogy? Perhaps not, since our presuppositions actually show up in our views on economics. It is Hayek versus Keynes (though admittedly you get better writing and plot lines when you read Asimov and Heinlein than you do when you peruse our economic giants). Asimov, as my friend (and Science Fiction Hall of Fame writer) David Brin wrote,

… was quite liberal and progressive. His Robots universe, however, kept toying with notions of technocracy – a concept of his youth – in which the best and brightest over-rule the hot-tempered and irrational masses…. [H]is fiction cycled around an ambivalence about humans’ ability to govern themselves with foresight and wisdom.

Heinlein, on the other hand, would be called a libertarian in today’s world. He was committed to absolute freedom and individual responsibility mixed in with patriotism, mixed in with some personal eccentricity.

(David Brin is one of the world’s true experts on Heinlein and Asimov and knew them both well. He told me in a recent conversation that they each recognized the weaknesses in the philosophies that underpinned their created worlds, if those worlds are taken to their logical conclusion. Ironically, in their novels, both authors end up espousing a sort of neofeudalism. Asimov, however, became very uncomfortable later in life with the technocratic, omnipresent government that dominated the Foundation Trilogy.)

The fundamental difference in Asimov’s and Heinlein’s views, and in the views of Keynes and Hayek, is the power of individuals and markets versus the power and influence of government. So let’s take a look at some of Mr. Krugman’s views on debt; and then you can see whether you agree with his assumptions and in general with Keynes and much of academic economics today, or with Hayek. This topic may take a few weeks to cover fully, but it’s important. Your assumptions about how the world works will translate into investment decisions. Ideas have consequences, and nothing is more fundamental to the way you interface with the world of macroeconomics today than your views on debt.

Debt Is Money We Owe to Ourselves – Sort of

“High debt levels, whether in the public or private sector, have historically placed a drag on growth and raised the risk of financial crises that spark deep economic recessions.”

– The McKinsey Institute, “Debt and (not much) deleveraging

I rather suspect that Paul Krugman would take issue with the statement above, given his column of February 6, 2015, entitled “Debt Is Money We Owe To Ourselves.” Let’s look at his first couple of paragraphs:

Antonio Fatas, commenting on recent work on deleveraging or the lack thereof, emphasizes one of my favorite points: no, debt does not mean that we’re stealing from future generations. Globally, and for the most part even within countries, a rise in debt isn’t an indication that we’re living beyond our means, because as Fatas puts it, one person’s debt is another person’s asset; or as I equivalently put it, debt is money we owe to ourselves – an obviously true statement that, I have discovered, has the power to induce blinding rage in many people.

Think about the history shown in the chart above. Britain did not emerge impoverished from the Napoleonic Wars; the government ended up with a lot of debt, but the counterpart of this debt was that the British propertied classes owned a lot of consols.

Consols are a type of British government bond that are perpetual in nature, in that they are interest-only bonds. They were first issued in 1751 and eventually financed the Napoleonic wars. There are multiple other instances where governments amassed large amounts of debt to finance wars and were able to pay the debt down over time. Think the US after the Civil War and World War II. Proponents of such massive government debt issuance will point out that growth was not constrained in 19th century Britain or after the Civil War or World War II in the US.

Krugman contends that “the problems with public debt are also mainly about possible instability rather than ‘borrowing from our children’.” He completely dismisses this latter idea as nonsensical rhetoric (his words).

So, do historically high levels of debt drag down growth, as McKinsey and the Bank of International Settlements assert, or do they not? In general, I think they do, but I would agree that sometimes it depends on the type of debt and the situation. Certainly you can find examples where nations took on huge debts and there was still adequate growth in the wake of doing so. But in the overwhelming preponderance of cases, when governments and/or the private sector have taken on too much debt, there has not only been a drag on growth, there have  also been devastating financial crises and deep recessions or depressions.

As I tried to make clear in the last letter, not all debt is bad. There are times when debt can be actually quite productive, whether it is personal or governmental debt. But the issue hinges on the difference between good debt and bad debt and on who owes debt to whom.

Very simply, “bad debt” is debt, whether private or public, that cannot be repaid from current cash flows. All debt is “good” until the moment it is defaulted upon (both legally and realistically).

Further, it is intuitively obvious that if a country or company is using current cash flows to repay debt that was incurred for nonproductive purposes, that limits its ability to use that cash for other purposes. Assuming the other purposes are important to further growth, then growth is constrained, and options are reduced.

 If taxes must be increased to pay off the debt, that limits the cash available to finance further private-sector growth, which is far and away the largest source of growth for the economy. Only if you contend that government spending per se and in general is an engine of growth can you argue that it makes no difference whether spending is public or private.

While certain types of government spending are conducive to growth (think infrastructure development, education, scientific research, and law enforcement as examples), only a small portion of US federal government spending falls into those categories; so the preponderance of federal spending does not enhance productivity. I think the bulk of academic research supports that conclusion. That is not to say that some government expenditures for nonproductive uses are not proper or necessary, but that’s a different argument for a different day. (A social safety net comes to mind.)

You can’t contend that there is not a cost, in terms of private-sector productivity, incurred by taxes. That is not saying that a particular tax expenditure may not be worth the cost. Some government expenses are vital to public well-being and to a stable, properly functioning economy. Just be clear that there is always a cost. The negative slope of the curve when growth is plotted against taxation rates is quite clear. At some point, high overall taxes and high debt become a drag on growth (in terms of GDP, not effects on individuals, although you can make that argument). Think Europe. And Japan.

Most periods of high government debt that were not a drag on growth followed wars, when previously massive defense spending was radically decreased and the resulting extra income was then used to reduce the debt. Further, wars are the epitome of nonproductive spending, even when they are necessary for survival. A cessation of hostilities and the returning of soldiers to productive activities will in and of itself increase productivity and GDP, and that growth in turn increases the ability of an economy to pay back debt! That scenario is significantly different from a period where government debt, incurred to fund current consumption, is allowed to increase beyond the ability of cash flows to pay off the debt.

Greece is now in the latter situation. Rogoff and Reinhart detail over 260 other such episodes in history, where countries incurred insupportable debt and were forced to default in one manner or another. Default can take several different forms: deferral, restructuring of the terms to the detriment of the creditor, outright refusal or the inability to pay, etc.
Monetization is a form of default that we will deal with shortly. From the point of view of the creditor, if you have to change the terms in such a way that you get less than you originally bargained for, even if that is the best outcome under the current circumstances, you will now have less money than you expected to have. You can call it what you like, give it all sorts of pretty names, but it means that a debtor did not live up to the terms originally agreed upon.

Mrs. Watanabe’s Bonds

It is time to take up the question of whether government debt is just money we owe to ourselves. Let’s take a real-world example of a nation that has incurred a very large debt that it increasingly struggles to make payments on and yet essentially owes the money to itself. I refer to Japan.

Japan has amassed a debt that is roughly 250% of GDP, far higher than that of any other country. The government has been able to grow such an outsized debt precisely because its citizens have, either directly or indirectly through their pension funds, been willing to purchase that debt. It is estimated that up to 95% of Japanese bonds are owned by the Japanese themselves (directly or through institutions). The rest is primarily in the steady hands of other central banks and a few funds with position mandates.

There is no country anywhere that can truly be said to owe more “to themselves” than Japan does. To sort out whether debt that we owe to ourselves is truly not a problem, let’s drop in at the home of the proverbial Mrs. Watanabe, who, it just so happens, is being paid a courtesy visit by Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda. Let’s listen in:

Kuroda [bowing]: Mrs. Watanabe, we are here today because we have a national crisis. Previous Japanese governments have run up a rather large debt, and we find ourselves in the unfortunate position of not being able to repay that debt unless we monetize it. But since we owe that money to ourselves, and since you are us, we thought we might ask if you, along with all your neighbors and friends, would be willing to forgo payment so that we can reduce the national debt. We realize this will make things more difficult for you in your remaining years, but it really is for the good of the nation.

Abe: Can we count on your support? And of course we would like you to vote for us in the next election.

Mrs. Watanabe: Honorable Prime Minister, my husband and I have worked very hard all our lives. We have done exactly as good Japanese citizens should do. We saved our money, invested in government bonds, and now we’re depending on them for our retirement. We need those bonds to be paid in full in order to have enough to buy our rice and miso soup and sake. In fact, listening to what you say, I think I need a cup of sake to calm me down. Pardon me for a moment.

[Mrs. Watanabe serves sake to her esteemed guests, takes a stiff gulp herself, then stands and draws a deep breath, bows, and looks the Prime Minister in the eye.] Let me be very clear. I fully expect to be able to cash in my bonds when I need the money. Further, I expect my pension to be paid in full in exactly the manner I was promised. If your administration cannot fulfill those promises without endangering my life, then I and my many friends will make sure that you are not allowed to continue in public office. Good day, gentlemen.

Now I know that is not the way the conversation would actually go. Mrs. Watanabe is a very polite Japanese lady who would never speak so directly to her Prime Minister. Nevertheless, I suspect my version of the conversation has captured the gist of what she was actually thinking.

And of course Abe-sama and Kuroda-sama know better than to ever have that conversation, because that is essentially the reaction they would expect to get from their citizens. In fact, a survey conducted a few years ago confirmed that less than 13% of Japanese citizens would be willing to sacrifice for the good of the nation when it came to their government bonds. So much for Japanese solidarity.

So Abe has had to choose between Disaster A and Disaster B. Rather than suffer a deflationary collapse, Disaster A, he has chosen Disaster B, the monetization of his debt. Which is precisely what Professors Krugman and Bernanke have suggested that Japan should do, although under the guise of quantitative easing, with the aim of creating inflation. So now Japan is experimenting with the most monumental quantitative easing ever undertaken by any developed country in the history of the world.

So how’s that quantitative easing thingy working out for Japan? Inflation should be going through the roof by now, right? Well, not so much.

Japan's annual core consumer inflation ground to a halt in February, the first time it has stopped rising in nearly two years, keeping the central bank under pressure to expand monetary stimulus later this year. Other data published on Friday didn't offer much solace with household spending slumping [2.9% y-o-y, for 11 straight months of decline] even as job markets improved, underscoring the challenges premier Shinzo Abe faces in steering the economy toward a solid recovery.

While the Bank of Japan has stressed it will look through the effect of slumping oil prices, the soft data will keep it under pressure to expand stimulus to jump-start inflation toward its 2 percent target.” (Reuters, March 27)

Aside from not being able to generate inflation, the Japanese economy is doing as well as can be expected and better than it has in most of the past 25 years. But the Japanese government desperately needs 2% inflation and 2% real growth in order to be able to deal with its debt, if it is not to be forced into outright monetization.

So the economy is doing kind of all right, and Japanese quantitative easing has been a roaring success, right? Perhaps from the perspective of the Japanese elite, its politicians, and of course its economists, but not, perhaps, from the perspective of Mrs. Watanabe.

She has seen the purchasing power of her currency drop by 33% in the past few years. That massive hit on her spending power affects her directly when she goes to buy imported goods, and it affects her indirectly through the high cost of all the energy Japan must import. When your buying power is reduced in retirement – and Japan has a rapidly aging population – I don’t think you can call that a roaring success.

The truth is, the Japanese government is passing on the pain of 25 years of running up too much debt to Japanese savers and retirees. I think the value of the yen is likely to drop another 50% (at least) before Japan can allow the market to set interest rates. They are going to print more money than any of us can possibly imagine. (I have documented on numerous occasions why Japan cannot allow interest rates to rise. Higher rates would be an utter disaster for the country.)

Quantitative easing seems like a Free Lunch World to many politicians and even to many economists, who should know better. But it is not a free lunch for Mrs. Watanabe. It is her lunch, scarfed from her table. And it will not be a free lunch that’s served in Europe as Mario Draghi eases and European savers watch the yield of their bonds and the value of their currency erode.

There Ain’t No Such Thing as a Free Lunch

There ain’t no such thing as a free lunch (TANSTAAFL). Quantitative easing comes with a price. The question is, who will pay it? The unprecedented financial repression that we are seeing in the world has been foisting the cost of bailing out bankers and stock market investors onto the aching, sagging backs of savers and retirees. Some might consider that an acceptable outcome, given that the global financial system has recovered, after a fashion, from the Great Recession.

But Paul Krugman and his neo-Keynesian colleagues, including most central bankers, seem to think they’re living in a free-lunch world. They are either not aware or do not care who is picking up the check.

No matter how debt is reconciled, whether through the normal means of it being paid back or through some type of default, workout, or monetization, someone ends up paying. Oftentimes, there is simply no choice but to resort to some type of debt reconciliation. You can’t squeeze blood from a turnip, especially a Greek turnip. (Another pithy economic lesson I learned from my dad.)

Which leads us to a topic we will take up in a future letter if not next week: how much debt is too much, and how do we avoid getting to that point? Stay tuned.

(Trivia: The maxim “There ain’t no such thing as a free lunch” dates back to the 1930s. The phrase and its acronym are central to Robert Heinlein's 1966 science fiction novel The Moon Is a Harsh Mistress, which helped to popularize it. The free-market economist Milton Friedman also used the phrase as the title of a 1975 book, and it shows up in economics literature to describe opportunity cost.)

Home Gearing Up for SIC

Surprisingly, other than a few personal day trips here and there, I am home for the next month until I leave for San Diego for my Strategic Investment Conference. You really should consider coming, as this is the single best macroeconomic conference in the country. I say that without reservation. Find me a conference lineup that it is better at any price. If I listed just the people we have lined up to moderate the question-and-answer sessions, they would constitute a fabulous conference in their own right. I am simply thrilled by the massive intellectual firepower that is going to be in the room. Plus, we just finalized Peter Diamandis to speak Thursday night. My friends and Hall of Fame science fiction writers David Brin and Vernor Vinge, two of the best futurists on the planet, will be there to ask Peter questions and to push back, and they will all min gle with you before dinner. You really don’t want to miss it. The conference is April 29 through May 2. There are just a few places left.

It’s time to hit the send button. I am truly interested in your comments, positive or negative, on this letter in particular, as I hope to develop it into a longer piece on debt. I always read the comments you post beneath the letter on our website. Have a great week!

Your admittedly eccentric analyst,

John Mauldin

miércoles, abril 01, 2015




Top of the class

Competition among universities has become intense and international

Mar 28th 2015

AS JAMIL SALMI leaves the stage at a Times Higher Education conference in Qatar, he is mobbed by people pressing their cards on him. As a former co-ordinator of the World Bank’s tertiary-education programme and author of a book entitled “The Challenge of Establishing World-Class Universities”, he is the white-haired sage of the world-class university contest. And he is greatly in demand, for the competition to climb the international rankings has become intense.

Higher education in America has long been a strongly competitive business. Students and university presidents alike keenly watch the rankings produced by the US News and World Report. Such rankings encourage stratification. One of the metrics is the proportion of students a university turns away, which encourages selectivity. That in turn encourages differentiation between better and worse universities. The American model is thus quite different from the continental European one, which (aside from France’s grandes écoles) is a lot less selective and more homogeneous.

Now competition and stratification are spreading. According to Ellen Hazelkorn, author of “Rankings and the Reshaping of Higher Education”, there are around 150 national rankings around the world. But thanks to globalisation and the growth in international student flows, attention has shifted from national to international rankings.

Governments want top-class universities because the modern economy is driven by human capital.

The goal is to nurture people who will create intellectual property and clusters of high-tech companies similar to those around Stanford and Cambridge. A great research university is not a sufficient condition for creating such a cluster, says Jean-Lou Chameau, former president of Caltech and now president of Saudi Arabia’s King Abdullah University of Science and Technology (KAUST); but “you can’t do it without having more than one great university around.”

Increasing reliance on tuition fees is another reason for more competition. Students “want to be sure that they have got a big global brand on their certificate that’s going to be a passport to their future”, says Phil Baty, editor-at-large of Times Higher Education. America’s state universities, he says, used to show little interest in the international market. Now that their budgets have been cut, he sees a lot more of their presidents.

The qualities that matter
Nian Cai Liu of Shanghai Jiao Tong University started the international race in 2003. “My university was one of the first that the government picked to become a world-class university. I decided to benchmark us against those in the West,” he says. He came up with six indicators of research excellence, used them to rank the world’s top universities and published the result. It caused uproar in countries that did badly—particularly Germany, birthplace of the research university. Times Higher Education and another company, QS, followed with their own rankings. Shanghai focuses purely on research; THE and QS also look at things like staff-student ratios and reputation.

American institutions take the top slots in the Shanghai rankings (see chart 3), with Britain as the runner-up. Private universities dominate, though some state universities (such as California’s) are also excellent. But in relation to their population size, the Nordic countries, Switzerland and the Netherlands do best, and there is movement in the rankings. Emerging markets are on the rise; America’s state universities and Britain’s second tier are slipping.

The rankings matter because of their impact not just on the amour propre of politicians and university presidents, but also on how universities are run. “Rankings force institutions and governments to question their standards. They are a driver of behaviour and of change,” says Professor Hazelkorn.

One way of improving your rankings is to set up a top-class research outfit from scratch and hire a former head of Caltech to run it, as Saudi Arabia has done with KAUST. But not many countries can afford the $20 billion endowment that KAUST is said to have received from the late King Abdullah.

An alternative luxury model is to get a top-class foreign university to set up on your soil. The United Arab Emirates has got NYU, which has also set up a campus in Shanghai, while Yale has a partnership with the National University of Singapore.

Qatar is doing something different again. Education City is a collection of eight foreign universities in grand new buildings on the outskirts of Doha, each of which teaches a subject the government considers useful to the country. Texas A&M does engineering (for the gas industry); Northwestern does journalism (for Al Jazeera, Qatar’s news outfit); Georgetown does foreign studies (for Qatar’s regional foreign policy); and so on. Nazarbayev University in Kazakhstan and Songdo University in Incheon, South Korea, have adopted the same model.

Competition has intensified not just for excellent academics but also for excellent students
Most countries, though, work with the universities they have got and try to improve the quality of their top institutions. China has a project called “985”, launched in May 1998, to which the Shanghai rankings were a response. Germany launched its Exzellenzinitiative in 2005. In 2011 Nicolas Sarkozy, then France’s president, announced a programme to create a “Sorbonne league’’—clusters of universities and organisations affiliated to its Centre National de la Recherche Scientifique—to compete with America’s Ivy League. Russia has started a project called “5-100” to get five universities into the Times Higher Education top 100. Japan, under its Super Global Universities Programme, will give selected universities extra funds, with the bulk going to 13 research universities. Britain has tweaked its system to hand more research money to the top tier and less to the middle-rankers (the bottom layer never got any anyway).

Excellent universities need excellent faculty, so competition for them has increased. Among the big markets, Australia, America and Canada universities are (on average) the best payers, but some of the new Gulf employers offer twice as much.

Pay for the best is rising in China, too. The country’s universities were destroyed during the Cultural Revolution. As part of Deng Xiaoping’s modernisation programme, Chinese students were sent abroad to study, and many did not return. In 2008 the country launched a programme, “Thousand Talents”, to entice more of them back. Scholars get a 1m yuan ($160,000) “resettlement grant”, and universities use research funds from the government and industry to raise salaries. One of its successes is Shi Yigong, a former Princeton professor who is now professor of life sciences at Tsinghua University. He has (somewhat) narrowed the gap between salaries in his department and those in Western universities. When he returned in 2008, a full professor earned around 100,000 yuan ($14,400) a year; now the figure is more like 300,000-500,000 ($50,000-80,000) a year. Professor Shi is particularly proud of having recruited a scientist who had a job offer from Cambridge, though he says that he still has difficulty attracting talented young scientists with faculty positions from Harvard, Stanford or Princeton.

Competition has intensified not just for excellent academics but also for excellent students. Singapore’s “global schoolhouse” strategy, launched in 2002, set a target of attracting 150,000 students by 2015. International students pay more than locals, but the scheme was not designed to make money out of them. Singaporean talent scouts roam the region, generous scholarships are offered to the brightest, and tuition fees are cut for those who stay to work when they have finished their degrees—in sharp contrast to Britain, which chucks out most international students the moment they have graduated. The idea, according to Lee Hsien Loong, Singapore’s prime minister, was to “attract talent from all over the world to add sparkle to our diamond”.

Germany, too, is keen to welcome foreign students. Again, this is not to make money, since the universities do not charge tuition fees. Chinese students are prominent, as they are everywhere else. “Our demographics mean we are in need of foreign talent,” says Georg Krücken, director of the international centre for higher-education research at Kassel university. “These students are nodes in a global network of talent.”

There are plenty of worries about the effects of rankings. Bahram Bekhradnia, president of Britain’s Higher Education Policy Institute, reckons that “they’re worse than useless. They’re positively dangerous. I’ve heard presidents say this all over the world: I’ll do anything to increase my ranking, and nothing to harm it.” That is hardly surprising, since universities’ boards commonly use rankings as a performance indicator for determining presidents’ bonuses.

One concern is that these metrics measure inputs rather than outputs. “The indicators are resource-intensive. They’re about wealth,” says Professor Hazelkorn. Some are also unreliable.

A staff-student ratio is easily manipulated and says nothing about the quality of the teaching.

But the main objection is that most of the metrics, directly or indirectly, concern research. There are no good internationally comparable measures of teaching quality. So one of Mr Salmi’s favourite universities, the Franklin W. Olin College of Engineering in Massachusetts, which he says “provides a superb learning experience to its students”, does not feature in international rankings because it does no research.

Justin Lin, a former chief economist at the World Bank and currently director of the China Centre for Economic Research at Peking University, has a habit of swimming against the tide.

In 1979 he defected from the Taiwanese army to China, swimming across the narrow strait from Taiwanese-administered Kinmen to the mainland. These days his contrarian nature has tamer outlets: he doubts that China should be in the race to create world-class universities if the concept is defined by the number of its faculty’s publications in journals dominated by the West’s research agenda. “Who cares about world-class research if it doesn’t apply to the conditions that you are in?” he asks.

The tallest poppies
Higher salaries for academics returning home are causing rancour. When Professor Shi circulated a proposal for offering generous salaries and ample research funds to top-flight scientists from abroad, he was criticised. “Some people said that they contributed to China’s past development while these recent returnees stayed away in the West, but now these guys want luxury.” In Singapore the shortage of places for locals has caused anger. Incentives for clever foreign students have been cut back.

In Germany the idea of promoting a few universities above the rest has met with resistance. “The myth of the German university is that all universities are equal. There has been a lot of criticism of [the excellence initiative],” says Professor Krücken. The government has responded by setting up a new initiative, focused on teaching, not research, and covering more universities.

Europeans, cross that they did so badly in rankings designed by the Chinese and the Anglo-Saxons, have started their own systems. France’s Ecole des Mines has produced the “Professional Ranking of World Universities”—the number of graduates from an institution who are running Fortune 500 companies—in which the French do nearly as well as the Americans and better than the British. The European Union has created the U-Multirank, a ratings system which gives different answers depending on the search criteria, to get away from the zero-sum competition of rankings. There is a virtue in that: a single indicator is rarely a good measure of quality.

But since the U-Multirank offers students little information on British or American universities, it is of limited use to those with global horizons. Anyway, politicians and university presidents, like the rest of humanity, are competitive creatures: nothing will stop them measuring themselves against each other. The main constraint on the race is not aversion to competition but the scarcity of funds. That is one reason why higher education is, increasingly, turning to the private sector for money.

Max Keiser: Financial Rock ‘N’ Roll

By John Smithies, Epoch Times

March 17, 2015 | Last Updated: March 18, 2015 2:32 am

Outspoken financial commentator Max Keiser (RT)Max Keiser is outspoken to say the least.

He hosts the Keiser Report, his show for Russian English-language channel RT, alongside his wife and producer Stacy Herbert, and is known for his angry outbursts against those he calls the “banksters”.

He was a Wall Street stockbroker in the 1980s, an experience he often draws on to guide viewers through the otherwise impenetrable jargon of global finance.

Now, though, he is based in the heart of London, which he says is the centre of the world when it comes to financial misconduct.

He is entertaining and funny – a difficult thing to pull off with what’s essentially a show about money.

In the past Keiser has encouraged viewers to take direct action to crash JP Morgan by buying silver.

More recently he coined the acronym GIABO, or Global Insurrection Against Bankster Occupation, to describe protests such as Occupy that express frustration with corruption in politics and finance.

He is a staunch advocate of moving money from fiat currencies, which are not backed by a physical commodity, into gold, silver, and, more recently, bitcoin.

Epoch Times: Your show is on RT, formerly known as Russia Today, but in the past you’ve done shows for the BBC, Press TV and Al Jazeera. Is there something about RT that particularly appealed to you?

Max Keiser: I like their rock ‘n’ roll attitude. The people who hate RT are the same people who hated Elvis Presley and Little Richard. It’s challenging the established narrative. There’s a global consensus, it’s called a Washington Consensus, and it’s challenging it, making people quite nervous.
Epoch Times: The show is often accused of being negative about America. Is that because there is nothing positive to report about the US?

Mr. Keiser: I report on the nexus of the global banking scandals and that would be the US and the UK. As a matter of fact I’m harder on the United Kingdom than the US. I’m much harder on George Osborne than Janet Yellen, for example.

The global kleptocracy is headquartered in the City of London. That’s why we moved to London, we’re war reporters. We’re covering the carnage that is the City of London as they destroy the global economy.
Epoch Times: Does RT have a pro-Russian editorial bias?

Mr. Keiser: The editorial bias of the Keiser Report is my own editorial bias towards gold! Since we started doing this show the Russian government has increased their gold purchases by hundreds and hundreds of tonnes, so I think the bias and influence goes from the Keiser Report to Russia not the other way round.

I know for a fact that I have an influence on their economic decisions. I also know that they have zero influence on my content.

Max Keiser in New York (Stacy Herbert)
Max Keiser in New York (Stacy Herbert)

Epoch Times: You often promote gold, silver, and bitcoin as ways for people to escape the fiat money system, but these assets can go down in value as well as up. Do you feel responsibility for the people who have invested based on your advice?

Mr. Keiser: The case for buying gold, silver, and bitcoin is still as strong as it ever was.

We started talking about gold at $400, silver at $6, and bitcoin at $3, so they’re up substantially from those levels. If you had been buying every year for the past five, six, seven years and averaging your position you’d still be up overall, and they’re still the place to be if you want economic sovereignty or a place to weather the storm of this continued crisis in the banking sector.

You’re going to have more big banks collapsing and more wealth confiscation. What we saw in Cyprus with the confiscation of bank deposits, that’s going to be rolled out all over Europe.

They’ve already laid the groundwork, Brussels has passed laws making that possible.

If you want to preserve wealth there’s really only gold, silver, and bitcoin and other cryptocurrencies.

The day-to-day price is meaningless because the alternative is losing 100 per cent of your fiat versus having some wealth preservation in precious metals and crypto.

We’re going to have a world where the dollar is no longer the dominant world reserve currency.
Epoch Times: When do you think this collapse might come?

Mr. Keiser: The timing depends on how much more quantitative easing we’ll see from the global central banks.

In my view, the last major shoe to drop was the European Central Bank announcing that they’re going to print more than a trillion euros to keep the zombie banks alive. So after they get through with that and it doesn’t work, there will be no banks left of any major size to do quantitative easing.

This will become obvious by the fourth quarter of this year or the first quarter of next year. It’ll become obvious that they’ve run out of runway and that’s when we’ll see, as economists euphemistically say, a reversion to the mean. So the bubble pops and we’re back to prices that would be more reflective of the actual reality of the economy.
Epoch Times: What happens after the collapse?

Mr. Keiser: The dollar loses its place as world reserve currency. Right now we’re seeing a huge rally in the dollar as its death rattle. Once this is over China, Russia, Iran, and the other countries are going to be trading outside of the dollar. They’re setting up the SWIFT programme outside of the dollar, they’re doing rating agencies that are not based on the three big rating agencies that are very much in bed with the same group of banksters. So we’re going to have a world where the dollar is no longer the dominant world reserve currency, it’ll be a multi-polar currency world.

On the other hand the collapse of the dollar does not automatically mean China becomes the dominant currency. I don’t think we’re going to hand the baton from America’s domination to China’s domination, except whatever country is the first to introduce a gold-backed currency.

If China introduced a gold-backed renminbi they would be the dominant country in the world and then that would be a question: do we want China to be the dominant country in the world?

If Russia introduced a gold-backed ruble they would dominate the world. If Iran was suddenly able to price their energy assets in something other than the US dollar they would have a completely different political situation in the world. So it gets back to gold.

Max Keiser (Stacy Herbert)
Max Keiser (Stacy Herbert)

Epoch Times: Do you think it’s possible to predict the market?

Mr. Keiser: On the one hand, you don’t want to be able to predict outcomes because the economy is lubricated by the money that flows into it from the losers. If everybody is making perfect predictions and prices were accordingly moving in that direction there would be stagnation in the economy. There would be no excess liquidity whatsoever. The excess liquidity in the system is based on the losers.

It’s pretty well known that to get the timing right is borderline impossible. You can get a trend correct but to get the absolute date right is hardly ever the case.

The only way you can guarantee the outcome of a prediction in the financial markets is if the market is completely broken. For example, I can predict to you right now that the price of gold will continue to have difficulty over the next six months because that market is completely broken, it’s rigged 100 per cent. But so many other markets are also rigged.

The fourth point I’ll make repudiates everything I just said, but it is an interesting point. With so-called big data, the ability to gather enormous quantities of data, to analyse it, and to tap into the collective zeitgeist, you can now begin to make predictions. But the access to that information is being monopolised by the NSA, the CIA, and Wall Street.

It’s no coincidence that hedge funds can now legally hire CIA analysts with access to big data to give them stock tips, essentially. They know that a certain percentage of the population might suddenly be interested in a certain toy that’s manufactured by a certain company. They can do the analysis and come up with a winning trade that has extraordinary upside with almost no downside whatsoever.

It would be great if it were publicly available, but it’s not. It’s being hoarded just like all this free money, by the same people that are printing all the free money.
Epoch Times: Could some of what you talk about be regarded as conspiracy theories?

Mr. Keiser: Every conspiracy starts as a theory. What happens is that all investigative journalism is being painted with a brush called “conspiracy theory”. In the old days before the media was completely dominated by shysters and kleptocrats they used to call this investigative journalism.
Epoch Times: You’ve long talked about bitcoin while most mainstream financial commentators ignore it. What’s the future for the digital currency?

Mr. Keiser: The bitcoin adoption rate is the key number to look at, how many people are using bitcoin, which is driven by bank failure.

The ancillary start-up market of new businesses and venture funding is extremely high – you can make the comparison to the Internet during its early days. Big venture capital guys are all over it.

The price obviously got way ahead of itself and my feeling is that this was driven almost entirely by the Mt Gox episode. From my professional experience as a guy who has three patents in the virtual currency industry, I will tell you that there was an enormous amount of price rigging over there at Mt Gox.

So when they went offline the price of the coin has reverted back to what would be a normalised trend line had there not been this price rigging.

Most people reading this will say, “Well that sounds to me like bitcoin itself is not safe” but that’s not what I’m saying. The bitcoin protocol itself is still as indestructible as it ever was. It attracted a bad actor in the form of Mt Gox and it went on this rollercoaster ride.

But they’re gone and I think all the bad news is gone. What I mean by that is that bitcoin is now suffering from bad news fatigue! No bad news is hurting it, it’s like people are sick of the bad news and they’re not selling. The people who own it now are holding it and we’ve got new buyers, so I think for 2015, especially with banks back on the radar as in trouble, adoption rates will continue to go higher and the price will do well this year.

It will be an alternative asset. A lot of hedge funds who are jumping ship out of their securities that are not doing well, they’re going to start looking at bitcoin.

War in Yemen

Riyadh enters the fray

Saudi Arabia starts bombing its southern neighbour

Mar 28th 2015

SAUDI ARABIA was only going to tolerate the advances of the Iranian-backed Houthi rebels for so long. Early on the morning of March 26th the kingdom said it had started a military operation in neighbouring Yemen to push back the Houthis and reinstate the “legitimate government” of President Abd Rabbo Mansour Hadi. 
The first air strikes hit Houthi positions in Sana’a, the Yemeni capital, including the airport and the group’s political headquarters. They also targeted military bases controlled by loyalists of Ali Abdullah Saleh, Yemen’s former president, who was ousted in 2011 and has been backing the Houthis, a Shia militia that occupied Sana’a in September and has rapidly taken over swathes of the country.

Adel al-Jubeir, the Saudi ambassador to America, says the strikes are the opening salvo in a campaign involving ten countries—mainly Gulf states as well as Jordan and Egypt. America said it was providing logistical and intelligence support.

The Saudi-led intervention comes after an advance by forces loyal to Houthis and Mr Saleh towards Aden, a strategic southern port to which Mr Hadi had fled earlier this year after the fall of the capital. The Houthi advance worries Saudi Arabia because the militiamen are backed by Iran, its main strategic rival for influence in the region. As the Houthis have moved south, so Iran’s support for them has increased. Tehran recently announced twice-daily flights to Sana’a and said it will supply Yemen with oil.

When the Houthis advanced, taking an important military installation 60km (35 miles) northwest of Aden, Mr Hadi was rumoured to have fled again, this time to Riyadh, the capital of Saudi Arabia. He called for military intervention before he left. Yemenis fear that the Saudi action will catalyse the country’s long-predicted collapse into what Jamal Benomar, the UN envoy to Yemen, has described as an “Iraq-Libya-Syria” scenario.

The air strikes have laid bare the divisions caused by the Houthis’ rise. In the south of the country and in northern tribal areas populated by Sunnis, who fear dominance by the Houthi’s Zaydi sect (a subset of Shia Islam), people are cheering the Saudi-led campaign.

But in Sana’a even the Houthis’ sternest critics are dismayed by the foreign bombardment. Many Yemenis believe it will only lead to more fighting. “Saudi Arabia is fucking our country,” says a Sunni tribesman who spent the night cowering with his family in Sana’a as blasts echoed through the capital.

The anti-Houthi groups’ wish is not to bring back Mr Hadi—a man who ceded control of the capital without a fight six months ago; it is that the Houthi menace be brought to heel.

Yet Saudi Arabia’s attempt to bring this about risks leading to an expansion of sectarian violence between Sunni and Shia. That is because Yemen will inevitably become a proxy battleground for Saudi Arabia, a Sunni bulwark, and Iran, the main Shia power.

Extremist Sunni groups are already active. Yemen is home to al-Qaeda in the Arabian Peninsula (AQAP), al-Qaeda’s deadliest branch, and an affiliate of Islamic State, which claimed responsibility for the suicide bombings of two Zaydi mosques in Sana’a on March 20th, leaving at least 137 people dead.

Before he left the country, Mr Hadi was in the process of forming a 20,000 strong Saudi-backed militia. His opponents accuse him of arming and funding some Sunni extremist groups.

For the Houthis, the Saudi-led operation is a public-relations coup. In a vitriolic and paranoid speech on March 20th, their leader, Abdelmalek al-Houthi, accused the Gulf Arab states and America of plotting to destabilise the country in order to reinstall Mr Hadi as a puppet leader.

The Houthis have evolved into a highly effective guerrilla force after a decade of war against Mr Saleh and Saudi Arabia. With the backing of Saleh loyalists they are likely to prove a tough enemy.

“They control the skies and we control the ground,” says a Houthi man in Sana’a. “This will be just like the sixth war in Saada when the Saudis lost Saudi territory,” he says, referring to an earlier bombing campaign by the kingdom in 2009. Houthis responded to that by crossing the border and humiliating the Saudi army by seizing dozens of towns and villages. On March 26th, after threatening revenge against the “Zionist Saudi regime”, they said that they had fired rockets across the border into Saudi territory. As so often in the Middle East, the Saudis may find that joining a war is easier than winning one.

miércoles, abril 01, 2015



A Window on China’s New Normal
Martin Feldstein
MAR 27, 2015

CAMBRIDGE – Every year at this time, China’s government organizes a major conference – sponsored by the Development Research Center, the official think tank of the State Council – that brings together senior Chinese officials, CEOs from major Chinese and Western firms, and a small group of international officials and academics. The China Development Forum (CDF) occurs just after the annual National People’s Congress.
At the forum, speakers, including the finance minister and the head of the central bank, summarize the Chinese leadership’s current thinking. Officials then listen to comments and suggestions from Western business and academic participants, including a question and answer session with Premier Li Keqiang.
Although I have been attending the CDF’s meetings for more than a decade, I found this year’s conference substantially different from any in the past. The key difference was the official Chinese recognition that annual real GDP growth has declined permanently from the past three decades’ average rate of nearly 10%. The official estimate is that real GDP grew 7.4% in 2014, and that the rate will probably slow further, to 7%, this year. The Development Research Center presented detailed estimates showing that the growth rate will continue to decline, reaching about 6% by the end of the decade.
Virtually every Chinese official referred to this slowdown as their country’s “new normal.” They all seemed reconciled to slower growth, which was initially surprising, because officials previously argued that China needed rapid growth to maintain employment and avoid political unrest. They now appear to understand that the declining growth rate will not lead to unemployment, because the slowdown reflects China’s structural shift from export-oriented heavy industrial production to increased production of consumer services, which require more employment to create the same amount of value.
Stronger growth nevertheless remains necessary, because China is still a relatively low-income country with substantial poverty. Although China’s total real GDP is second only to that of the United States (and might be larger when measured in terms of purchasing power), its per capita income is only about $7,000, or roughly 15% of the US level. And consumption remains low – only about 50% of GDP when government spending is included, and just 35% when limited to household consumer spending. So China has a long way to go to reach its leaders’ goal of achieving a “modern prosperous society.”
The Chinese see that the “new normal” requires a shift in their growth strategy from factor-driven growth to innovation-driven growth. But it is not clear how that increase in innovation will be achieved. While officials stress reliance on the market, China does not have the venture capital and “angel financing” that facilitates innovation in the US. The authorities may hope that their plan to insure bank deposits will shift deposits from the three largest banks to many smaller banks around the country, facilitating local startups’ access to financing.
Many other economic problems loom. Officials acknowledged at the CDF that the biggest risks lie in the financial sector, particularly owing to local governments’ very large liabilities. In the past, the government dealt with the problems that these liabilities caused for the banking system by injecting funds into the banks.
Environmental problems are another powerful drag on China’s current standard of living. But they also represent a potential way to increase GDP should overall demand decline significantly. China acknowledges that high levels of air and water pollution create discomfort and harm the public’s health. Government spending on remedying environmental damage could absorb substantial funds if demand-side weakness exacerbates the expected supply-side slowdown.
Moreover, the very weak performance of state-owned enterprises, which continue to play a large role in heavy industry and in some service sectors, represents a powerful brake on growth. Although official policy aims to reduce these firms’ role so that “the market can play the decisive role in resource allocation,” shrinking these firms has proved to be difficult, owing to their strong political backing within the Chinese Communist Party.
At the same time, China maintains restrictions on direct investment by foreigners, limiting both the kinds of firms and the share of joint ventures that they can own. The official policy is to reduce the barriers to foreign corporate investment, especially in high tech and the service sector.
There were, of course, a number of subjects that remained just below the surface and were not discussed at this year’s CDF. There was no indication of a slowdown in President Xi Jinping’s anti-corruption campaign, though some private conversations suggested that the campaign has resulted in decision-making delays that are hurting productivity and growth.
There was also no discussion of Chinese cyber theft of Western technology. When that subject was raised in 2014, Li denied that the Chinese do such a thing, but noted that Chinese firms are hacked by domestic sources. And, with the CDF’s emphasis on cooperation, there was no discussion of possible military action by the Chinese to stake their disputed territorial claims in the East and South China Seas.
Meetings like the CDF provide a useful window into a country whose importance for the global economy will continue to grow. The current slowdown to a new normal makes such windows even more important.