Ego Trip

Trump Steers into Global Economy Collision Course

By Christian Reiermann

U.S. President Donald Trump

U.S. President Donald Trump is currently steering his country into economic isolation. Bodies like the IMF, the G-7 and the G-20 fear for the future of the global financial system. They want Germany to take on a stronger role in standing up to the Americans.

David Lipton is a man of firm convictions -- particularly regarding himself and the role he plays. He consistently comes across as a man deeply pursuaded of his own importance; self-doubt is not an emotion he is overly familiar with. During past visits to Berlin, the American has demonstrated a fondness for presumptuous rhetoric and a pedantic tone when instructing his hosts about their shortcomings.

Germany's budget and trade surpluses are too high, he used to insist, and Berlin invests too little. The country should likewise show a little more generosity toward Greece, pressing less for austerity and forgiving more debt, says Lipton, who is, after Christine Lagarde, the No. 2 figure at the International Monetary Fund (IMF).

Recently, the deputy IMF head was once again in Berlin. But this time, the people he met with -- government representatives and parliamentarians -- were introduced to a whole new side of Lipton. "He was friendly, attentive and thoughtful," one participant reported after a meeting.

There is a reason for the shift. And he has a name: Donald Trump.

The world has become an unsettled place since the new American president took office -- not just for Lipton, but for the entire IMF. No, he told his hosts, rising prices for commodities aren't the greatest risk for the global economy, and neither are financial or currency crises. The true threat is that of a "geopolitical recession," the American told them. The reference is to political developments like Brexit, but even more to populist economic policies from the new U.S. government that call for the erection of trade barriers and could throw the global economy off track.

Justified Worries

Lipton's reservations transcend party lines and animosities. Sure, the deputy IMF head may have Democratic Party leanings; he was appointed to his post by the Obama administration.

And as a high-ranking employee for many years in the U.S. Treasury Department, he counts among the political elite that Republican President Trump is now waging war against.

But the worries harbored by the finance professional are in no way unjustified given that Trump and his team have placed a question mark over just about everything the IMF has stood for in its 70 years of existence: the benefits of free trade, open and liberalized markets and, not least, international solidarity when a country runs into financial difficulties.

The new American government, by contrast, is placing its emphasis on isolation, import barriers and the one-sided assertion of its own interests. During his inaugural address, Trump sang a hymn to unilateral economic policies. "Protection will lead to great prosperity and strength," he said.

The real-estate mogul appears to be alone in his analysis. If he were right, then North Korea would be an economically powerful land of plenty.

The fact is that Trump's market nationalism stands in stark contrast to the vast majority of economic theory over the past 250 years. In particualar, it clashes with the fate of similar policies put in place in the early 1930s. The retreat from free trade merely exacerbated the raging Great Depression.

Prosperity shrank dramatically and millions of workers in Western countries lined up at unemployment centers and soup kitchens.

Ego Trip

The week before last, the White House newbie and his team offered a preview of how serious they are about their economic policy ego trip. During her visit to Washington, Trump told German Chancellor Angela Merkel he wanted "fair trade" and complained that the U.S. had been taken for a ride with previous agreements.

His treasury secretary Steven Mnuchin issued the same complaints, verbatim and at the same time, during a meeting of G-20 member states in Baden-Baden, Germany. True to his mandate, he also prevented the inclusion of the pledge against protectionism that had always been part of such closing statements in past.

Trump and his team seem to be emitting an astoundingly un-American sense of self-pity, presenting the world's last remaining super power as global trade's loser. This, however, overlooks the fact that the United States itself is largely responsible for globalization and opened up markets around the world for its companies and products. Earlier administrations had few inhibitions when it came to using their influence within international organizations like the IMF or the Organization for Economic Cooperation and Development (OECD), which spent decades preaching the gospel of open markets for goods and services. The U.S. is the largest contributor to the budgets of both organizations and it can also easily block important resolutions. It is extremely difficult for other countries within the organizations to successfully challenge the will of the Americans.

Today, though, American economic expansionism has given way to whiny victimization. No one knows for how long the self-centered hegemon is prepared to continue working with international organizations, for how long the U.S. will continue to participate in bodies like the G-7 group of Western industrialized nations or even the G-20.

Pressure for Greater German Leadership

Lipton and Lagarde view Washington's new political direction as no less than an attack on global economic peace. To save what can be saved, both are now looking to Germany of all countries.

As Lipton attended appointments in German parliament and the Finance Ministry, IWF head Lagarde paid a courtesy visit to Chancellor Merkel. Both came to Berlin with the same message: The Germans need to assume a greater leadership role in Europe. They need to fill the vacuum the Americans are leaving in their wake -- at the IMF, but also within the G-7 and the G-20.

Merkel's government, it seems, is going to have to get used to the idea that it is now the leader of the free West and that the fate of the liberal world order is now in Germany's hands. In his meetings, Lipton said that other major economic powers like Britain or Japan could not be relied upon, noting caustically in the private meetings that the leaders of those countries couldn't seem to ingratiate themselves with Trump quickly enough.

Merkel was flattered, but also reserved in her response.

Just how important Germany has become to the IMF can be seen in policies relating to Greece.

Recently, after close to a year-and-a-half of dispute, the IMF surprisingly shifted its position on Greece to back the German government's demand for long-term primary budget surpluses from Athens. The question of debt relief, also an enduring bone of contention, has now apparently been delayed until next year.

The IMF leadership, in short, is loathe to create any additional difficulties for its last reliable ally. There are more important things at stake than Greece: namely the future of the international financial architecture, global trade and the role the organization plays in the global economic system.

For the Greek government, the political shift in Washington isn't making things any easier.

Athens used to be able to rely on the Obama administration to apply pressure on Europe and the IMF to reach favorable deal with Greece for the sake of the global economy. With Trump in the White House, however, Prime Minister Alexis Tsipras can no longer rely on that kind of backing. It seems likely that Trump cares as little about the fate of the small Mediterranean country as he does about the well-being of the global economy.

Guessing Game

At this stage, it remains entirely unclear what kind of relationship the new American government will develop with the IMF. Christine Lagarde telephoned twice with Mnuchin before the meeting in Baden-Baden and the two ate together once, but she and her staff are still in the guessing stages as to what the Trump administration is planning.

Publicly, the IMF has been wary of criticizing its most important donor. So far there's been nary a word of warning about the potential damage Trump administration policies could inflict on growth and prosperity. IMF sources say this is the traditional position. They say that too little is known about possible border adjustment taxes, punitive tariffs or the planned bilateral trade agreements to comment on them at this point. Such statements will only be issued once those plans become more concrete, they say.

It is odd, however, that the IMF adjusted its economic growth forecast earlier this year, issuing an upward revision for the U.S. The decision, officials said, was based on tax relief and expenditures on infrastructure that have been announced by the Trump administration.

The real test will come this summer when the IMF assesses American economic policies in the context of its Article IV consultations as it does annually with each member state. Generally, the organization is known for showing little regard to the sensitivities of the governments under review.

Uncertainty, Anxiety, Helplessness

The OECD likewise seems to be taking a cautious approach at the moment. Not a word has been heard from the organization about Trump's potentially damaging trade and tax policy proposals. With so many tax reform plans under consideration, OECD Secretary-General Angel Gurría said in Baden-Baden, it is too early to judge. He did, however, welcome the infrastructure investments that have been announced by the administration.

Yet concerns about the direction the U.S. might take have been making the rounds at OECD headquarters in Paris for some time now. In his first budget draft, Trump ordered cuts to the contributions paid by the U.S. to a number of international organizations in areas like development aid, but also economic cooperation. "We have to wait and see how it affects us, but it appears inevitable that it will," a Gurría staffer says.

Uncertainty, anxiety and helplessness: Such are the emotions being triggered by the Trump administration, even among its traditional allies. And the message coming from Washington seems clear: First, we are going to do what we want. And second, we are going to do that which benefits us.

A good example of this was the recent disconcertment unleashed by Treasury Secretary Mnuchin during his visit to Baden-Baden. His mechanical reading of his prepared statement was so rote that it was unclear if it reflected his views or whether it had been dictated by the White House. Either way, the newcomer's stubbornness also had an unexpected effect. "Seldom have I seen representatives of the EU present such a united front," said one participant, who has taken part in such negotiations for years. All EU representatives, he said, pleaded to preserve free trade and condemn protectionism.

Brazil's finance minister also issued words of warning to Mnuchin, saying that his country's own experience with protectionism has been a painful one. It doesn't help anyway, he said. On the contrary, it just makes poor people even poorer. But the Americans don't seem prepared at this point to learn from the mistakes of others.

A G-20 Summit Debacle?

The person who seemed to suffer most at the meeting was German Finance Minister Wolfgang Schäuble of Merkel's conservative Christian Democratic Union, who, as host, had to hold back his annoyance and instead assume a mediating role -- one that ultimately bore no fruit.

Chancellor Merkel will have to take on a similar role at the upcoming G-20 summit in Hamburg in July.

Indeed, rather than basking in the glow of the prestigious role during an election year, Merkel and Schäuble are faced with managing yet another crisis. If the U.S. doesn't change its political course between now and the summit, the German G-20 presidency could end in disaster.

As such, it is cold comfort that Germany has become the go-to place for the countries most troubled by Trump. Representatives of Japan and South Korea are currently seeking to close ranks with Germany.

The three countries share similarities that make them suspicious to the Americans: They all generate substantial trade surpluses with the United States because they export more products to the country than they import from it. All three countries are also dealing with the problems associated with aging societies and tend to save more than the Americans would like to see.

And, last but not least, all three spend less money on defense than Trump would like and rely too heavily on the United States for their protection. The South Koreans and Japanese have now proposed coordinating their positions with Germany in order to gird themselves from the accusations coming from Washington.

Within the G-7, confidential meetings are also now taking place at all possible levels -- and without the presence of the Americans. All sides want to know what the others are thinking about the outlandish statements and actions coming out of Washington and how best to react to them.

The IMF's spring meeting is scheduled to take place the week after Easter. Traditionally, it is also a time for the finance ministers of the G-7 and G-20 to hold talks. The main question hovering over the talks is whether the Americans will attend. And if they do, how will they behave?

Fog in Channel, Britain cut off
Nostalgia can make new realities bearable but it cannot make Brexit go away
by: Frans Timmermans

And so it is actually going to happen. The British divorce papers are in the post — “signed, sealed, delivered, I’m (no longer) yours”, as Stevie Wonder might say. The mind tells me this is our new reality, the heart aches for it just to be a bad dream. I was 12 when the UK joined, I was in an English school. So at an early age I knew full well that my kin, the Dutch, are much less like the Brits than we like to think and much closer to Germans, Belgians and Danes than we know.

And since then I have also known that Britain is different, has a different attitude towards European co-operation, and more than others feels the need to assert not just its uniqueness but also in the geographical distance of the British Isles from the continent.

There is still sometimes the illusion that the English Channel is wider than the Atlantic — so neatly encapsulated in the (apocryphal) headline “Fog In Channel, Continent Cut Off”. Similarly we Dutch like to bask in the illusion that the Brits love us as much as we do them, regardless of the three naval wars we fought. The 1688 Glorious Revolution was not so hostile. We are all children of a shared history — even if we do not share the same view of that history. The Prince of Orange was the Dutch hero at Waterloo, stopping Napoleon’s advance at Quatre Bras. Yet at my English school I was taught that ‘Slender Billy’ was a maverick who only got in Wellington’s way. Same history, different perspective.

And that is Europe. North, south, east, west: same history, different perspective. The art of working successfully in Europe is to get acquainted with all these different perspectives. Knowing that, we have to come to terms with the inevitability of our shared destiny.

Let’s just forget about history for a second and take a dispassionate look at how the world order is developing. Europe’s share of the global economy will continue to drop, not because we become smaller, but because others will become bigger. The same is true for our share of the world’s population and its security arrangements. Britain triggers Article 50

From a global perspective the EU has two kinds of member states: small ones and those who do not know yet that they are small. Even the biggest European nations will have to come to terms with the fact that their interests can no longer be imposed on others. Domination is a thing of the past; co-operation is our future.

The main actors on the world stage are the size of continents, be they nation states or voluntary groupings of nation states such as the EU. Nostalgia can help us ignore these harsh realities for a while, but it will not make them go away. Responsible politicians should never indulge in nostalgia — it is too much of a distraction at a time when a rapidly changing world throws up so many challenges, when we need to keep our wits about us.

I get it: “Brexit means Brexit.” And I will resist the urge to carry a torch for a loved one who has clearly discovered greener pastures elsewhere and who will not come back — in my generation, at least. But I believe we owe it to all those who were part of our shared history — more often than not pointing spears, swords and guns at each other — to do as little harm as possible to all involved in this divorce. For all its shortcomings, European co-operation and integration has created an understanding of shared destiny. We no longer point guns at each other; we fight it out at a conference table. And we will continue to do so when the UK is no longer a member state but, I hope, still a friend. The UK is leaving the EU, but not Europe.

I recognise that the urge to “take back control” — a strong driver of the Brexit vote in the UK referendum — is shared by many in Europe. The fundamental question is whether being together with other Europeans makes it more difficult to regain control of our destinies, or whether we need our strong partnership with fellow Europeans to jointly shape our future?

Does being together make us weaker, or does it make us stronger and more likely to remain relevant in the world of tomorrow? I will continue to believe passionately that we are better the closer we stay together. Same destiny, different perspective.

The writer is vice-president of the European Commission

President Trump’s Necessary German Lessons

Hans-Werner Sinn

Newsart for President Trump’s Necessary German Lessons

MUNICH – US President Donald Trump has criticized Germany’s enormous current-account surplus, which he considers the result of German currency manipulation. But the president is wrong.
While Germany’s external surplus, at 8% of GDP, is big – too big – it is not the result of currency manipulation by Germany. The real culprits are an inflationary credit bubble in southern Europe, the expansionary policies of the European Central Bank, and the financial products US banks sold to the world. So, instead of blaming Germany, President Trump would do well to focus on institutions in his own country.
Germany’s trade surplus is rooted in the fact that Germany sells its goods too cheaply. Here, the Trump administration is basically right. The euro is too cheap relative to the US dollar, and Germany is selling too cheaply to its trading partners within the eurozone. This undervaluation boosts demand for German goods in other countries, while making Germany reluctant to import as much as it exports.
The euro is currently priced at $1.07, whereas OECD purchasing power parity stands at $1.29. This implies a 17% undervaluation of the euro. Moreover, Germany is 19% too cheap within the eurozone if one uses as a baseline a calculation by Goldman Sachs from 2013 and subtracts the appreciation in real terms since that time. On the whole, this implies that Germany’s currency is undervalued by about a third.
So the fact that German products are undervalued is indisputable. The question is why the exchange rate has strayed so far from fundamentals.
The undervaluation within the eurozone has its roots in the inflationary credit bubble triggered by the announcement and implementation of the euro in southern Europe after the Madrid Summit of 1995, which brought with it drastic interest-rate cuts in these economies. Interest rates in Italy, Spain, and Portugal fell by about five percentage points, and in Greece by roughly 20 percentage points.
The cheap foreign credit brought about by the euro enabled these countries’ governments and construction sectors to raise wages faster than productivity increased, thereby pushing up prices and undermining the competitiveness of their manufacturing sectors. Germany, which was at that time in a deep crisis, kept inflation low, in line with the requirements of the Maastricht Treaty, so it became cheaper and cheaper in relative terms.
The undervaluation of the euro, by contrast, has two root causes. One is the European Central Bank’s ultra-loose monetary policy, particularly its program of quantitative easing (QE), under which €2.3 trillion of freshly printed money is being used to buy eurozone securities.
Part of that money is flowing abroad in search of higher returns, thus leading to euro depreciation. This is indeed a form of indirect currency manipulation. It should be noted, however, that the ECB’s governing council adopted QE and other expansionary measures, despite the fierce opposition of the German Bundesbank. So this is not a policy for which Germany can be held responsible.
The second root cause of the euro’s undervaluation lies within the country over which President Trump presides. Thanks to the dollar’s status as the world’s main reserve currency, the US financial industry has managed in recent decades to offer international investors a potpourri of alluring products. This has driven up the dollar’s value and chronically undermined export competitiveness, much like the financial products offered by the City of London did in the UK by fueling sterling appreciation in the years of undisputed EU membership.
Economists speak of “Dutch disease” in situations like this, because the emergence of the Netherlands’ gas industry in the 1960s placed upward pressure on the guilder, decimating the manufacturing sector. Whether a country sells gas or financial products to the rest of the world doesn’t matter all that much; the point is that the successful sector crowds out others by causing real exchange-rate appreciation. In lamenting the strong dollar’s effect on manufacturing employment in the US, President Trump should look to Wall Street, not Germany.
He should also consider that those alluring US financial products, which have so afflicted America’s export sector, have sometimes been pie in the sky rather than legitimate investment opportunities.
Both President Jimmy Carter and President Bill Clinton prompted brokers with their Community Reinvestment Act to help the US poor achieve home ownership by means of generous loans, even though it was clear from the outset that many of these borrowers would never be able to repay the money.
The brokers sold their claims to the banks, which in turn cunningly packaged them in opaque asset-backed securities that they then palmed off to the world with sham AAA ratings. “Stupid German money” was the term used on Wall Street for the funds that flowed in to finance America’s social policy.
That scam was exposed during the financial crisis. In 2010, Germany’s government had to support its banks with €280 billion, by establishing two bad banks to take over these problematic financial products. Viewed from this perspective, a large number of the many Porsches, Mercedes, and BMWs delivered to America have never been paid for at all. The US president should take this into consideration before threatening a trade war – or even indulging in a Twitter spat – with Germany.

Three puzzles of the financial markets’ tug of war
How the mix of bullish and bearish sentiments is muddying the picture
by: Dambisa Moyo

© Bloomberg News

There are at least three puzzles in the financial markets, each offering an opportunity for investment upside, but also creating a reason for traders to pause.

First, is there finally evidence that the global economy is exiting the risk of global deflation, or is the uptick in the Chinese producer price index (PPI) simply a rebound in commodity prices that could reverse?

More than any other inflation measure, China’s PPI reflects the state of global inflation. It feeds through to global consumer prices because China is the biggest producer of low-cost tradeable goods.

But what explains the increase in China’s PPI? It was negative for years and seen as the source of global deflation, but turned positive in the middle of the summer of 2016.

The question is whether the rebound is due to transitory effects such as commodity price increases, or if it is proof that the global economy is back in balance, with global supply more closely matched to global aggregate demand.

The latter suggests that China has been able to close down a considerable amount of capacity and that reshoring production back to the west may have begun to raise local costs, particularly if an increase in the country’s labour prices are a driver of PPI. It also indicates that, perhaps backed by greater private and public spending, China’s capital expenditure is picking up. However, if the trend in PPI merely reflects transitory effects, softer global commodity prices are likely to feed into both Chinese and globalhese indices and push inflation downwards.

Second, what is the right level of US yields?

Market commentary tends to focus on nominal rates and whether and how far, say, the US 10-year yield will increase with Federal Reserve interest rate rises expected this year (assuming these are not fully priced in already), or whether bond yields will decline if growth prospects slow. However, real bond yields better reflect the markets’ view of sustainable real growth.

Yet, there is a lack of clarity as to why real yields are depressed. Either the bond market is smarter than everyone else and (correctly) predicting slow growth, or real interest rates are being held down by three technical factors — other than that financial markets don’t believe in the economic growth prospects. Specifically, buying through quantitative easing, institutions’ asset liabilities management strategies and ageing demographics (which are placing a premium on the return of capital, not return on capital) are all capping real rates. The third factor is here to stay but the first two factors are coming to an end, which could put upward pressure on real rates.

However, while real rates remain so low, there is an arbitrage opportunity for those who believe the US economy will rebound, such as the government or private equity companies. By borrowing at the low cost of capital (US real rates are at 50 basis points) they can garner higher future real returns above this cost of capital if the economy does grow in real terms, say, above 2 per cent.

Third, how should market participants think about the divergence between equity markets — which continue to outperform, reflecting a bullish stance — and economic and political data that point to significant uncertainty and more bearish sentiments?

While it is true that consumer and business sentiment data have turned positive, and market multiples are at all-time highs, with the US S&P 500 index trading at nearly 30 times price-to-earnings, the country’s first-quarter gross domestic product is tracking anaemically at below 1 per cent. Meanwhile, market euphoria is, to a great extent, resting on a confluence of policy promises around US corporate tax cuts, a substantial fiscal stimulus aimed at infrastructure and a retrenchment in regulation. Such optimism largely discounts the structural factors that inform a bearish view of the global economy, from technology and a concomitant jobless underclass, population pressures, widening income inequality, a mounting debt burden and relatively low productivity.

The next three months will be crucial in achieving some denouement to these quandaries. In particular, a key question will be resolved: is there actually fundamental economic growth underpinning the US economy, or is what the equity markets see as a pick-up in economic activity really just positive sentiment that could peter out? In effect, either we will see a convergence between sentiment and survey data and real economic activity data — or we won’t.

There is likely to be more visibility around the path of US public policy, and oil price tensions between Opec-driven supply shut-ins (whereby oil is available but unused) and inventory build-ups will probably be resolved. But until then the winners in the tug of war between bearish structural factors and the bullish animal spirits that could drive more investment and support stronger growth remain a market mystery.

Dambisa Moyo is a global economist and the author of ‘Dead Aid, How the West Was Lost’ and ‘Winner Take All’. She serves on the boards of Barclays Bank, Barrick Gold, Chevron and Seagate Technology

The Gap Between Sentiment and Certainty Is ‘Stunning’

By Paul Vigna

      The ecnomy, as measured by sentiment. Photo: iStock Photo

The gap between “hard” and “soft” data measuring the U.S. economy has never been more disparate, according to a new report from Morgan Stanley, which means investors who have been putting too much weight on the soft data may be in for a rude awakening in a matter of weeks.

This morning offered another example of this. The Conference Board reported that its consumer-confidence index surged to 125.6 in March, its highest level since December 2000.

That was well above last month’s already elevated reading of 114.8, and even higher than the 113.8 figure that economists had been expecting. The elevated optimism “suggests the possibility of some upside to the prospects for economic growth in the coming months,” the firm said.

That’s typical of the way the soft data has been running lately: far above expectations, and pointing to an economy that should be growing sharply. The hard data, on the other hand, is coming in pretty much as expected, and pointing to an economy that is stuck in its familiar, unsatisfying rut. The following table from Morgan Stanley makes the divergence starkly obvious:

That’s a measure of the components of the Bloomberg ECO U.S. Surprise Index, which calculates how closely data match up to forecasts. The higher the reading, the bigger the margin by which data are beating expectations.

“The divergence is stunning,” wrote Morgan Stanley economist Ellen Zentner. “Upside surprises appear to be completely driven by the soft data while hard data are simply coming in about as expected.”

“Soft” data comprises various poll-driven reports, like consumer confidence and business surveys. These have been been running strong for several months now. Consumer confidence as measured by the University of Michigan, for example, hit a decade high in January. It slipped in February, but remains up strongly from a year ago. Business surveys, too, have been hitting multi-year highs.

Basically, sentiment has been surging as the surveys have more or less reflected the optimism of Trump supporters and people expecting a purportedly progrowth administration to boost the economy. The problem is that so far the hard data have not supported that optimism.

That “hard” data comprises economic reports that measure actual activity, like retail sales, durable-goods orders and the like. These have not rebounded nearly as much as the soft data. Retail sales, housing sales, business spending, these have all been running well behind the soft data.

One major issue here is that depending upon how you construct your economic model, the divergence between the two can produce wildly different projections for the U.S. economy. The Federal Reserve Bank of New York’s model, which gives more weight to the soft data, is currently projecting a 3% gross domestic product “print” in the first quarter. By contrast, the Federal Reserve Bank of Atlanta’s model, which incorporates soft data but to a lesser degree, is projecting only a 1% print. Morgan Stanley, too, expects 1% GDP when the Commerce Department releases its initial first-quarter reading on April 28.

The consensus estimate on the Street, 1.9% according to the latest WSJ survey, isn’t as bullish as the New York Fed. But that’s just the average, meaning there are plenty of people on the Street who are are bullish as the New York Fed. Some are even more so—the high estimate in the survey is 3.6%. If the soft data is overstating the actual picture in the economy, there will be plenty of disappointment to go around.

Morgan Stanley does expect the second quarter to produce a rebound, something on the order of 3%, as some “transitory” issues like inventory levels get worked through the economy.

Depending upon your point of view, Ms. Zentner said, you might read that as the hard data coming around to the soft data’s read on the economy. “But from an economist’s point of view, smoothing through the volatility simply looks like the outlook for around 2% growth remains intact,” she writes.

In other words, the hard data on the economy is still looking far too soft.