The Stupid Economy

Harold James  

A man does the crossword

PRINCETON – Most discussions about the march of robotics and artificial intelligence (AI) have understandably concentrated on fears of massive job losses. But the implications of these technologies are actually far more terrifying. We have been brought to the brink of an alarming evolutionary transformation, not just of human capacities, but of the individual self.

History provides only a partial guide for the uncertain future we face. What we know from the first Industrial Revolution is that new technologies can fundamentally alter humans and other species. The key to this process, according to Cambridge University’s Tony Wrigley, the great historian of the era, was the replacement of human- and animal-driven mechanical energy by more productive forms, such as coal and other fossil fuels.

To be sure, the large-scale devaluation of human and animal muscle power did not happen immediately. At first, many auxiliary tasks – including mining the coal, or creating intermediate products in workshops – still required enormous physical exertion. But, after around two centuries, physical strength was rarely in demand.

Gradually, the basic nature of work had changed. By the late twentieth century, farmers sat on tractors, and even coal mining had become largely mechanized. There were few people in developed economies still earning incomes from the sweat of their brows.

Human physiognomy also changed, especially when the Industrial Revolution’s full potential was realized. Sedentary lifestyles produced visibly different people. Waistlines expanded as previously salubrious diets, needed to fuel massive physical exertion, became increasingly unhealthy.

Some people saw these changes happening, and worried about them. A growing minority started to pursue intense physical activity not in fields or factories, but in leisure settings. The sweat of one’s brow was no longer associated with productive work, but with consumption – often conspicuous consumption. Gyms became new sources of community. And as coworkers started to exercise together, enlightened employers came to see such recreation as a valuable source of physical and mental wellbeing.

The Industrial Revolution was driven by mental activity. Another way of thinking about it, then, is as an “industrious revolution,” a term advanced by Jan De Vries of the University of California, Berkeley, Joel Mokyr of Northwestern University and the University of Tel Aviv, and other historians. In an industrious revolution, inter-connected groups of innovators compete with one another to devise new solutions to existing problems, resulting in a virtuous circle.

By putting a premium on mental endeavors and making physical routines obsolete, the transformation over the past three centuries gave people more opportunities to think. As humankind’s collective intelligence rose to new heights, the dream of human perfectibility emerged. But that, we now know, was an illusion. The level of intellectual attainment that resulted from the Industrial Revolution may turn out to have been a plateau.

The technological revolution now underway is generating a different sort of replacement. Many tasks that once required human intelligence – making connections and drawing inferences; recognizing patterns; tracing the implications of complex events – are now better handled by AI applications. Whether the job is to scan thousands of pages of legal contracts for inconsistencies, or to make radiological assessments, an algorithm can now do it more reliably and less expensively. Soon, this will also be true of driving a vehicle.

At the same time, modern behavioral economics has shown that human thought can introduce irrational elements into otherwise straightforward processes. The search is on to discover and control for characteristics of the human mind that could produce distorting, unproductive, or inefficient results. Apparently, the next stage in human perfectibility will require us to give up independent thinking and judgment altogether.

AI and automation have obvious implications for employment. But they will also affect the human mind. The jobs of the future, most of them in the services sector, will require a different set of skills, particularly interpersonal skills that robotic applications – even Siri or Alexa – cannot provide. The ability to perform complex calculations or sophisticated analyses will be far less important.

The problem is that many older activities – be it driving in difficult conditions on a mountain road or taking on a complex legal case – are a source of fulfillment for countless people, because they provide opportunities to confront difficult, intrinsically motivated challenges.

Soon, those activities, like plowing a medieval field, may be lost forever.

Worse still, ample evidence shows that people may have reason to regret retiring from mentally demanding jobs and embarking on a life of leisure. It turns out that not having to think on a regular basis is neither restful nor enjoyable. On the contrary, it tends to lead to poor mental and physical health, and a deteriorating quality of life.

The elimination of countless cognitive tasks has alarming implications for the future. Just as the Industrial Revolution made most humans physically weaker, the AI revolution will make us collectively duller. In addition to flabby waistlines, we will have flabby minds. It’s not the economy, stupid; it’s the stupid economy. Already, central banks are urgently exploring new ways to dumb down their statements for an increasingly unsophisticated public.

Mass stupidity will be driven by technology. But, as with the cult of physical fitness that took hold during the Industrial Revolution, a new industry of intelligence training will likely emerge to counter mental deterioration. Listening to someone constructing a logically articulated argument will become an exclusive source of aesthetic pleasure and distinction. “Difficult” works of literature or visual arts will become an ever more attractive form of conspicuous consumption.

And yet something about this seems deeply unpleasant. It is bad enough to listen to people boast about their physical fitness. But braggadocio about superior intellect will be far worse.

The need to prove oneself as a lasting relic of the old human supremacy will threaten not just the common good, but also our common humanity.

Harold James is Professor of History and International Affairs at Princeton University and a senior fellow at the Center for International Governance Innovation. A specialist on German economic history and on globalization, he is a co-author of the new book The Euro and The Battle of Ideas, and the author of The Creation and Destruction of Value: The Globalization Cycle, Krupp: A History of the Legendary German Firm, and Making the European Monetary Union.

Donald Trump and the many meanings of genius

The American president often wrongfoots opponents who underestimate him

Gideon Rachman

© James Ferguson

When Donald Trump described himself as a “very stable genius”, even some of his supporters sniggered. The US president is clearly not a genius in any normal sense of the word. Rex Tillerson, his own secretary of state, is reputed to have described his boss as a “f***ing moron”.

But Mr Trump has a legitimate claim to three other kinds of “genius”: political genius, instinctive genius and evil genius. Moral disgust with Mr Trump means that his opponents are reluctant to credit him with any kind of intelligence or success. But that kind of thinking, while understandable, is also dangerous. It is one reason why the president frequently wrongfoots his opponents.

As Mr Trump pointed out, when making his own immodest claim to “genius”, he achieved something unprecedented in modern American history. He was a complete political outsider who won the presidency on his first attempt. His enemies would point to the current government shutdown to suggest that the president is nonetheless completely unfit to govern. But Trump supporters will respond by pointing to a growing economy, and the passage of the first large-scale tax reform in more than 30 years.

Mr Trump campaigned on themes — protectionism, isolationism, opposition to immigration — that the political establishment was convinced were sure-fire losers, and even un-American. His political instincts told him otherwise. Steve Bannon, Mr Trump’s estranged campaign manager, was the man with the grand theories about economics and culture, larded with references to obscure and sinister European philosophers. Mr Trump was guided by an instinct that told him that he could smash taboos and not just fail to pay a price, but actually be rewarded.

The number of Mr Trump’s offences against truth and decency are too long to remember, let alone list. But they have a common theme. Time and again the mainstream media (of which I am a proud member) would proclaim that he had gone too far this time and that he was surely finished. Time and again, Mr Trump would prove them wrong and come back stronger. The things that failed to kill him politically — in particular racism and misogyny — actually made him stronger.

That is why it is also legitimate to describe Mr Trump as an “evil” genius. He has deliberately used lies and offensive language to stoke up America’s culture wars and racial tensions, confident that he will benefit politically. There is a direct connection between the current row about the president’s complaint about immigration from “shithole countries” and the campaign that launched his political career — the “birther” lie that President Barack Obama was not born in the US.

Mr Trump and many of his supporters are tacitly defending the idea of America as a “white country”. The president’s opponents are right to describe this as a racist vision. But they may be wrong in thinking that this is a decisive argument. By the 2040s, the US is predicted to be “majority-minority”. Whites will be still be the largest ethnic group in the country, but they will be less than 50 per cent of the population. By railing against Mexicans, Muslims and Haitians, and calling for more immigration from Norway, Mr Trump is appealing directly to voters who feel angry about that racial and demographic shift. The current government shutdown is also linked to these issues, since it is caused by the president’s refusal to accept an amnesty for illegal immigrants who arrived as children.

It should never be forgotten that a majority of white Americans voted for Mr Trump. Are these voters likely to turn away in disgust now because of the president’s “shithole country” comments? Or are they more likely quietly to agree? The record suggests that Mr Trump knows exactly what he is doing.

His ideas about race and immigration are nasty — but they are also widely shared, and not just in America. Japan accepted 28 refugees in the whole of 2016, and precisely three in the first half of 2017. It is virtually impossible for non-ethnic Chinese to gain citizenship in the People’s Republic of China, whose citizenship laws make explicit reference to “Chinese blood”. The EU has been split down the middle by the Polish and Hungarian governments’ refusal to accept EU-mandated quotas of refugees. The demand to “take back control” of British borders was fundamental to Britain’s Brexit vote. And the decline in Angela Merkel’s political fortunes in Germany has been closely linked to the chancellor’s decision to open her country’s borders to more than 1m refugees.

No European country has yet elected a Trump figure. But the continent’s politicians are tying themselves in knots trying to combine liberal principles with practical politics. President Emmanuel Macron speaks the language of tolerance, but is actually speeding up deportations of illegal migrants and tightening border controls. And nobody in Ms Merkel’s CDU party is campaigning for the Hungarian government to rip down the border walls that helped to stop the flow of refugees into Germany.

The fears and hatreds that the US president exploits exist well beyond his base. Liberal politicians need to find more effective policies and language to deal with those fears — or the “very stable genius” may continue to outsmart them.

The Fed 'Put' Is Dead, Long Live 'Buy-The-Dip'

by: The Heisenberg

- There was good news on Wednesday morning as investors took solace in earnings on the way to buying the mini-dip.

- I wanted to highlight two things for you today.

- First, the end of an era as the Greenspan/Bernanke/Yellen put expires.

- And second, a couple of visuals that depict another "first time since" moment, and the extent to which volatility returned in January, respectively.
Well, the dip buying commenced as expected on Wednesday morning helped along by Boeing and a handful of other positive earnings reports.
That's good news as it underscores the contention that there's still a fundamental narrative bulls can cling to in the face of the bond selloff and stretched valuations.
We'll get the Fed later today, and notably, this is Janet Yellen's final FOMC meeting. I'm writing this hours ahead of the statement, and there's more than a little speculation that she'll attempt to kind of smooth the transition for Powell by steering the statement in a "hawkish" direction, where that simply means sounding an upbeat tone.
One thing you should note here is that some of the commentary out this week is flagging the Fed as a risk factor that's going to be become more worrisome going forward. In short, today marks the end of the fabled Greenspan/Bernanke/Yellen "put". NatAlliance Securities' Andrew Brenner has been talking up this idea recently in his client notes, suggesting that a veritable sea change is afoot and Wells Fargo was out on Tuesday with some similar commentary. Here's an excerpt from a note by Wells' Christopher Harvey:
In Feb ’18, Janet Yellen, who we believe is the biggest Dove on the face of the planet, is being replaced by Jerome Powell, not the biggest Dove on the face of the planet. While many market participants don’t expect a major change in Fed policy with the handoff, we think the improving growth environment and anyone not named Janet Yellen means more Hawkishness, at the margin.
Yes, "at the margin." What's unclear is whether a "marginally" more hawkish Fed is going to be enough to meaningfully tighten financial conditions which have of course loosened continually despite multiple Fed hikes.

To be sure, there would still need to be a notable shift in the inflation backdrop to force the Fed into withdrawing transparency and severing its reflexive relationship with the market. Until we see that, volatility can probably remain anchored. Have a look at the moderation in trend inflation over time:
(Source: Goldman)
That's part and parcel of what allows central banks - the Fed in this case - to avoid tightening too quickly. There is no "motive for murder", to quote MIT economist Rudi Dornbusch.
A set of still tepid (yet not terrible) inflation data out of Europe underscored this on Wednesday morning. When you read the headline on the linked Bloomberg piece there, remember that the "battle" needs to remain just "uphill" enough to give central banks an excuse to remain gun-shy, but not "uphill" enough to signal a return to deflation.
Another piece of good-ish news on Wednesday is that bonds look to have digested the Treasury refunding report relatively well. I won't bore you with the details, but suffice to say supply is rising as expected:
But the initial selloff was quickly faded as Treaurys pared losses on what looked like a block trade in TYH8 that pushed yields back below 2.70:
In other words, that went over ok, although as I'm writing this, yields are back above 2.728 again, so we'll see.

Anyway, something else you should note is that Monday and Tuesday marked the first time the S&P has sold off 50bp+ in consecutive sessions since 2016. As Goldman notes this morning, that is the longest streak on record - and by a mile:
(Source: Goldman)
In testament to what everyone has been talking about in terms of 2018 so far being characterized as "vol. up, stocks up", January was the most volatile month since the election despite the sizable positive returns for stocks:
(Source: Goldman)
At least one persistently bullish commentator (Bloomberg's Mark Cudmore) doesn't like what he's hearing from the bears. Or, more accurately, he doesn't like what he's not hearing. I highlighted his Wednesday note in an amusing post called "The Silence Of The Bears" but for those who want the short version, here it is:

The Dow fell the most in eight months. Where are the bears? A 33% jump in the VIX across two days would normally have them very animated.
Yet they are silent.
Now that could be because, as Cudmore postulates, everyone is now on the same side of the boat; that is, there are no bears left. Or, more likely, it could be that the skeptics who aren't me have simply given up on this by now, thanks to a combination of ridicule and the fact that the dip-buying mentality has become so deeply entrenched that it's almost self-aware. One gets the feeling on some days that "buy-the-dip" is no longer a phenomenon that represents the willful actions of the people doing the buying, but rather some kind of reverse collective action problem that became aware of itself, escaped from the lab and is now running around on its own selling vol. Obviously, that's a joke, but you get the idea.

In any event, keep watching yields for clues as to whether the mini-correction has further to go or whether the early action on Wednesday marks a return to "normal" where "normal" means the post-crisis propensity to buy at the first sign of trouble.
Oh, and parse the Fed statement. Or take it to a palm reader.

Commodities trader Louis Dreyfus turns to blockchain

Company completes first agricultural deal using the digital technology

Emiko Terazono in London

China’s LDC along with some leading financing groups have trialled the blockchain based digital platform for the sale of US soyabeans © Bloomberg

Louis Dreyfus Co, a leading agricultural commodities trader, and a group of financing banks have completed the first agricultural deal using blockchain in a further sign that the digital technology is set to change the way raw materials are bought and sold.

Originally built to process bitcoin deals, blockchain is an electronic ledger which stores records of deals in digital blocks. Commodities traders are among those hoping that the technology will lead to faster, cheaper and more secure ways of settling transactions, with oil trading houses and energy groups now actively trialling platforms based on blockchain.

LDC and Shandong Bohi Industry, a Chinese agricultural processor, along with the financing groups ING, Société Générale and ABN Amro trialled the blockchain-based digital platform for the sale of 60,000 tonnes of US soyabeans to China in December.

Commodity players have been hoping that technology could ease the cumbersome process of exchanging contracts, letters of credit, inspection and other paperwork by email or fax when one company sells raw materials to another.

Robert Serpollet, global head of trade operations at LDC, said: “Our expectations were high but the results were even higher,” noting that processing time for the documents was about a fifth of a paper-based process.

Other benefits include the ability to monitor the operation’s progress in real time, data verification, and reduced risk of fraud. “The cost benefits are significant,” said ING’s global head of trade commodity finance, Anthony van Vliet, who noted that an earlier test with an oil trader saw savings of 25 to 30 per cent.

Both LDC and ING said widespread adoption by leading agricultural traders, financing banks and other players in the supply chain would be crucial for a blockchain digital-trading platform to take off.

“For the new platform to work, we will need to design an industry standard which will bring together the main players of the agricultural commodity space,” said Mr Serpollet.

The blockchain-based platform in the transaction was used early last year for an oil cargo deal involving Mercuria, the oil-trading house, and ING and Soc Gen banks. Energy groups including BP and Shell, trading houses such as Gunvor and Mercuria, and financing banks later formed a consortium to further develop the blockchain-based platform.

Elsewhere, BP has been experimenting on a blockchain-based programme alongside Eni, the Italian oil major, and Wien Energie of Austria; and Cargill is operating a pilot blockchain technology to track the provenance of its turkeys, providing consumers with information on where individual birds were raised.

In other sectors, the Australian Securities Exchange is planning to use blockchain technology to clear and settle equity transactions, leading US investment banks have been experimenting with using the technology for equity swaps, while AP Moller-Maersk, the Danish shipping group, is using it in marine insurance contracts.

For the soyabean deal, two shipping companies issuing required certificates, as well as the US Department of Agriculture offering insights on how to include phytosanitary certificates, also participated in the latest agricultural digital process.

How the European Union Became Divided on Russia

By Xander Snyder

Last week, the prime ministers of Hungary and Bulgaria criticized EU policy toward Russia for being too harsh. The European Union imposed sanctions against Russia in response to Moscow’s intervention in Ukraine, but Hungary and Bulgaria are concerned that the EU’s continued anti-Russia stance could pose a security threat and does not benefit either country.

This difference of opinion on Russia is just a symptom of a broader reality: Europe itself is becoming increasingly divided. As a result, there is no longer a European approach to Russia like there was during the Cold War, when a weak Europe, dependent on the US for its security, acted as one to maintain the US-led containment line. Today, each European country has its own interests determined by its own geographical realities.
Caught in Between

In the case of Hungary, it understands that it has to be part of the Western bloc. Hungary was under Soviet occupation and experienced the suffering that followed its short-lived revolution in 1956 against Soviet rule. Though it understands and appreciates the support that the US provided after the end of the Cold War, it knows that this support is ultimately insufficient to protect it against nearby threats. The US is too far away and, as we saw in Georgia in 2008, the US is primarily concerned with its own interests and might not come to Hungary’s defense if it were truly threatened.

Source: Geopolitical Futures (Click to enlarge)

To Hungary’s east lies Ukraine, a buffer state between the West and Russia. Hungary has generally opposed Ukraine’s developing closer ties with the West. Indeed, when diplomats speak of such integration with the West, Hungary is faced with a critical question: What does “integration” even mean? If it simply means having more diplomatic meetings, why risk rocking the boat with Russia when there is little benefit to Hungary? If integration means greater Western military presence in Ukraine, that would be even worse for Hungary. Russia would see it as a direct threat and would be more inclined to intervene militarily to recuperate its lost buffer space, potentially bringing a Russian military force closer to Hungary’s borders.

Bulgaria, unlike Hungary, has two countries separating it from Russia: Romania and Ukraine. But Bulgaria’s location in the Balkans places it on the historical battle ground between East and West. The country was under Ottoman rule for hundreds of years, though a war between Russia and the Ottoman Empire from 1877 to 1878 made Bulgaria—whose population, like that of Russia, is predominantly Orthodox Christian and Slavic—an autonomous principality.

Bulgaria remained under Ottoman rule but was not directly administered by the Ottomans. Alexander von Battenberg, who was also the nephew of Tsar Alexander II, became the new prince of Bulgaria. The country was subsequently involved in the Balkan Wars in 1912–13, which were fought both between Balkan states and the Ottoman Empire, and between individual Balkan states. During World War II, despite close ties to Russia, Bulgaria sided with the Nazis, not because of any particular cultural affinities but because Bulgaria was weak and unable to resist German power. After the war, Bulgaria became a Soviet satellite and only joined the European Union in 2007.

Bulgaria’s history tells of a place whose sovereignty cannot be taken for granted, and cannot be expected to remain unchanged in perpetuity. Despite its membership in the EU, therefore, it fears both a resurgent Turkey and a Russia that finds itself threatened enough to expand its buffer zone. Though strong ties with the West have their benefits, Bulgaria can’t assume that Europe would be willing or able to defend it from either Turkish or Russian expansion. Like Hungary, Bulgaria gains nothing from taking an adversarial stance toward Russia.
The German Factor

Lying farther west, Germany has fewer security concerns when it comes to Russia than Bulgaria and Hungary have. It does, however, have critical economic concerns. Germany receives a significant amount of oil and natural gas from Russia. In addition, German, Austrian, and French energy companies are engaged in a number of joint venture projects with Russian energy companies. At this point, Russia is too dependent on energy export revenue to be able to pull that lever too hard, but links between German and Russian energy companies mean that sanctions imposed at the United States’ insistence have financial consequences not just for Russia but for Germany as well. This was the reason for the EU's reticence regarding the most recent round of US sanctions on Moscow, which penalized not only Russian energy companies but energy companies of any nationality doing business with Russian companies.

On the other side of the debate, another group of countries, namely Poland and the Baltic states (Estonia, Latvia, and Lithuania), stands firmly in favor of extending sanctions against Russia. Unlike Hungary and Bulgaria, Poland and the Baltic countries all share borders with Russia. (Lithuania and Poland both border Russia’s Kaliningrad outpost, which is separated from the Russian mainland but contains a significant military presence.) During World War II, Poland suffered at the hands of both the Germans and the Russians. In protecting themselves from the Germans, the Russians devastated Poland. After the war, the Soviet Union created the strategic depth it needed to guard against a western invasion by occupying Poland and the Baltic states. For Poland, Estonia, Latvia, and Lithuania, the risk of a Russian invasion is not theoretical—it is living memory.

Fundamental to the Baltics’ fear is the doubt that the rest of Europe and NATO would step in if Russia threatened them. Poland’s fear stems from its location, situated as it is between Germany and Russia, a geography that has had dire consequences for the country in the past. Poland knows that for now, at least, Germany is not capable of military action. Germany is constrained by the institutions of the EU and is better served by not having a substantial military force. But Poland must consider the possibility, however unlikely, that Germany could turn on its EU partners at some point. As we’ve seen in the past, the world can change drastically in 20 years.

The idea of Europe as a single entity is imaginary. The distinct geographies of all these countries and their various business ties guarantee that their own interests will govern their relations with Russia. This will continue to challenge whatever unity remains within the EU, and Russia will take advantage of these divisions at every opportunity it gets.