The Good News Economy

By John Mauldin

In my business, there is a fine line between standing by your conclusions and being unwisely stubborn. But no matter what I say, people will still label me a perma-bear or perma-bull—often at the same time. It’s an occupational hazard to which I am accustomed.

It’s really a lot more fair to characterize me as the “Muddle Through” guy. There are always reasons to be bullish or bearish. Admittedly, my letter tends to dwell more on the reasons to worry, but I think that’s a sign of the times. We have more to worry about today than in the past (see the 80s and 90s).

Last week, I tried to clarify what some of you perceive as inconsistencies in my outlook. I am long-term very bullish, medium-term very bearish, and short-term uncertain to slightly negative.

If you read social media or the mainstream financial news, you don’t need me to tell you the bearish case. Skepticism abounds in the punditry. Positive outlooks are harder to find, even though they have been largely correct recently. That’s no accident. They’re correct in part because they are out of favor.

I see some major problems coming in the 2020s (and perhaps a bit sooner), but I also see a lot of good things happening right now. The economic recovery, while still weak by historic standards, is gaining some momentum that ought to carry it forward for another year or two, assuming (as I perhaps naïvely do) that we can put this trade war thing to rest. That’s good news because it buys us time to prepare for worse times, but it’s also just plain good news.

We can get so busy worrying about the future that we ignore positive things happening right here and now. That’s not healthy and can make us overlook opportunities. So today, I’ll look at some good economic news that has been lost in the din lately.

Economic activity is the collective result of human decisions. We all make choices about what to buy and sell and at what prices we will do so, thereby creating either growth or contraction. These decisions might prove wrong, but they still matter. So do the attitudes and beliefs that lead us to make them.

If, for instance, you’re a business owner and you see new conditions that will make growth easier, you will be more likely to hire, expand, and make capital investments. Get enough businesses thinking that way at the same time and you have the makings of an economic boom… which is what the leading survey of small business owners says is happening.

The National Federation of Independent Business has been surveying its small business members since 1973, overseen by my very good friend Dr. Bill Dunkelberg (Dunk to his friends). The NFIB data is a rich, long-term history of small business owner sentiment, both positive and negative. It has varied over time, as you might expect. Presently, their index is near its most optimistic level ever—0.1% below the 1983 all-time high. Considering where we were a few years ago, that is amazing.

Source: NFIB

As you can see, NFIB member optimism had two prior peaks near the current level. One was in 2004, when the housing boom was starting to take off. It would end badly a few years later, but those were good times while they lasted.

The other peak was in 1983. The Volcker Fed had mostly stamped out inflation while Reagan’s tax cuts and deregulation were beginning to bear fruit. This marked a boom period that would last even longer; the next recession would not strike until mid-1990.

As I like to say, history doesn’t repeat itself, but it often rhymes. This time, the Fed has been working to stamp out deflation, not inflation, and appears to have made some progress. We also have a new, business-oriented administration, similar in some respects to the shift from Carter to Reagan.
This encouraged early 1980s business owners, and the Trump administration is doing the same now.

See that big late-2016 leap in the NFIB index? That happened immediately after the election. If you recall, almost everyone expected a Hillary Clinton win, and business owners had resigned themselves to continued high taxes and evermore intrusive regulation. The Trump win was thus a pleasant surprise to many business owners, immediately visible in the data. (Contrary to some, I don’t think most business owners were thrilled with Trump. They were more thrilled not to have Clinton.)

Now, why does this matter? It matters because NFIB members create jobs, spend money on capital investments that create even more jobs, and develop innovative products that raise living standards. They are more likely to do all those things when they feel confident... which they have since November 2016.

Notably, this confidence has actually grown since then despite all the assorted scandals and criticism surrounding the Trump administration, not to mention the Federal Reserve’s tightening policy. This would not have persisted for almost two years now if they didn’t see reasons for optimism in their own numbers. It is more than blind faith.

In the past, we’ve seen this index decline gradually over 2–3 years as the economy edged toward recession. We see no such thing now. We see the opposite as the index moves up. That suggests, as I heard at Camp Kotok, the present expansion will continue into 2019 and beyond.

Could something change the small business outlook? Yes, of course, but no such event is on the radar right now.

One of the NFIB indicators is the difficulty small business owners have in filling job positions. Right now, it’s at a record high, with many owners reporting qualified worker shortages as their single greatest business challenge.

Source: Daily Shot

This is a consequence of another “good news” item: historically low unemployment. It took way too long after the last recession, but employers are finally willing to expand payrolls. They can do so only because they expect sales to grow beyond their present capacity to deliver, which is why business sentiment is so important.

Moreover, the hardest-to-employ groups (unskilled workers, people with criminal records, those with disabilities) are finally re-entering the labor force. Workers see opportunity to make more money than they can from government benefits or whatever other means of support that have relied on.

Who gets credit for this? It’s true that the job gains simply continue trends begun under the Obama administration. Whether Obama policies did it is a different question. The economy was recovering regardless. Trump could certainly have done things to interrupt the recovery, so give him credit for not doing them. And the business confidence he inspired by being “not Hillary Clinton” helped, too.

My friend—and sometimes debate opponent—Brian Wesbury, who is chief economist at First Trust, has been consistently right about the employment trends in recent years while many of us were skeptical. I’m starting to pay more attention to his outlook. Here is Wesbury’s analysis of the July jobs report, with some key points bolded by me.

The July employment report was sneaky strong.  The big headline was that non-farm payrolls rose 157,000 in July, which was less than the forecast of any economics group.  However, payroll growth was revised up 59,000 for May and June, meaning the net gain for the July report was 216,000, which beat the consensus expected gain of 193,000.  Meanwhile, civilian employment, an alternative measure of jobs that includes small-business start-ups, rose 389,000.

In the past year, non-farm payrolls are up 200,000 per month while civilian employment is up 179,000 per month, both strong numbers.  The gain in civilian employment in July helped push the unemployment rate down to 3.9%, despite an increase in the labor force, which is up 1.5 million in the past year.  Moreover, the U-6 unemployment rate, which includes discouraged and marginally-attached workers, as well as those working part-time who say they want full-time jobs, fell to 7.5%, the lowest level since 2001. The participation rate remained at 62.9% in July, near the higher end of its past 4+ year range (62.3% and 63.1%).  Meanwhile, the share of the age 16+ population that's working hit 60.5%, the highest since 2009.

As always, we like to measure growth in workers' total cash earnings.  Average hourly earnings rose 0.3% in July and are up 2.7% in the past year.  Total hours worked are up 2.2% in the past year.  As a result, total cash earnings—which exclude extra earnings from irregular bonuses and commissions, like those paid out after the tax cut was passed—are up 5.0% in the past year, more than enough to keep pushing consumer spending higher.

We see this in another chart from the NFIB data, showing small businesses’ plans to increase compensation. The expectations line is moved forward six months, showing where the trend is going.

Source: Daily Shot

We also see record numbers quitting their jobs, which is actually quite bullish. You generally only leave a job if you get a better one or at least think one is out there. As Brian said, wages are beginning to grow, too. That is the last piece of the puzzle. We need people to have more disposable income so they can buy the goods and services businesses produce. It finally seems to be happening.

And the simple fact of the matter is that sometimes you have to pay people more in order to attract them. I have been a small businessman for about 45 years and lived through several cycles. Right now, every business owner I’m talking to says they’re having to pay higher wages.

Earlier this summer, my associate Patrick Watson wrote about Overheated Highways clogged with trucks. I see the same in private transportation newsletters I get. US railroads and seaports are bustling, to the point that shipping costs and logistical snarls are now major challenges for many businesses. That’s not great… but it’s also not consistent with economic slowdown forecasts.

To be blunt, businesses are spending enormous amounts of money to transport enormous quantities of raw materials and finished goods across the country. They are not doing it for fun, or because they enjoy paying truck drivers relatively high wages. They believe someone will buy those goods at profitable prices despite the transport cost. Maybe they’re wrong, but that is what they think.

Patrick pointed out in his article, “Slow and unpredictable shipping has a domino effect in our optimized, just-in-time economy. One key part that’s stuck in a traffic jam can shut down an entire assembly line, idling hundreds of workers. Then whoever is expecting those goods doesn’t get them on time.”

This is indeed happening. Last weekend, the Wall Street Journal reported Parts Shortages Crimp US Factories.

American factories are running short of parts. Suppliers of everything from engines to electronic components aren’t keeping up with a boom in US manufacturing, which has lifted demand in markets such as energy, mining, and construction. As a result, some manufacturers are idling production lines and digesting higher costs.

As business problems go, this is a relatively good one to have.
Transportation bottlenecks are often much easier to fix than lagging sales.
And some of the “lost” revenue eventually comes in as companies figure out how to deliver.

To me, the bigger questions are why, given all this activity, GDP isn’t growing even faster than the 4.1% initial 2Q number, and why rising transport costs aren’t yet more evident in core inflation. Yes, inflation is picking up, but not enough to make the Fed change course. Jerome Powell and crew seem content to let the economy run a tad “hot” as compensation for years of not-so-hot conditions. We are beginning to see what “hot” looks like. I think much more is posible.

I am well aware of the many less-optimistic signs in the economic data. I also know personally some people for whom the 3.9% unemployment rate is not at all encouraging. They are still digging out of very deep holes, at significantly lower pay than they earned a decade ago.

Likewise, I know inflation is higher than the averages reflect in many places, particularly for housing, health care, and other necessities. Everything isn’t great everywhere… but everything isn’t terrible everywhere, either. Good things are happening. We should not ignore them.

Eventually, something will derail this recovery and we will enter that Great Reset period I have described. It could be a credit event, liquidity shortages, currency crisis, war, political turmoil, business scandal—the possibilities are endless.

When? I now think we have another at least 1–2 years. Between now and then we could (and I hope we do!) see an economic boom that will knock your socks off. That is how economic cycles typically end. It’s been so long since we saw such a boom that even many old enough to have lived through one have forgotten what it’s like. I remember, and I don’t think we are there yet.

That means we still have potentially profitable business and investment opportunities. Of course, you want to be cautious and thoughtful about seizing them. You should prepare for worse times, yes, but don’t head for the hills just yet.

The above is just some of the economic and financial good news in the US.
If you want really good news, look at what’s happening inside many companies and industries. The cost of solar panels is plunging, as is the cost of pulling a barrel of oil out of the ground. The energy business is now a technology business.

Massive leaps are being made in 3D printing, robotics, and artificial intelligence. And not just sporadically, but in literally hundreds of businesses and universities all over the world.

I know Elon Musk is a bit of a lightning rod right now, but he was visionary enough to somehow put a rocket into space, launch a satellite, and then bring that same rocket back to earth. He promises to eventually cut the cost of putting something into space by 90%.

Richard Branson, Jeff Bezos, and Paul Allen are in the same race. Notice a pattern? It is not governments but committed multi-billionaires moving the human race forward. And they are doing it with the bottom line in mind. I know asteroid mining sounds like science-fiction, but there is literally a limitless amount of materials available near Earth. They are visionary enough to see it.

Another billionaire, Bill Gates, has done a masterful job of focusing the world on malaria. Malaria deaths are down by 60% since the turn-of-the-century. There is still much to be done, but it’s major progress.

I can cite scores of statistics (and will in my book) about how things are getting better. And they will continue to get better even as we go into The Great Reset’s financial turmoil. There are going to be so many new investment opportunities that you will almost feel like you’re being whipsawed. And because of the financial turmoil, raising capital will be more difficult, which means you will get better deals for your investment dollars.

And I haven’t even begun to touch on biotechnology and the fight against aging. I truly believe cancer will be a nuisance in less than 10 years, as opposed to what is sometimes a death sentence today. There are so many new therapies coming online. I am on the board of a company whose main purpose is to eventually turn back the aging clock and allow us to live much longer and exciting lives.

Cautious optimism has always been the best way to invest and is certainly the best way to live. Someday in the future, I am going to make a list of all the websites and newsletters that I get that focus on new technology. Reading a few of those a week will help lighten your mood.

If you properly construct your portfolio today, you will be able to enjoy this phenomenal future. It’s going to be fun if you make the proper plans.

Shane and I have a few more days in Beaver Creek relaxing and playing tourist, and Saturday we will return to Dallas to begin making some changes in my own portfolio and businesses—eating my own cooking so to speak.

I have no flights actually booked, but I know at least six or seven trips are coming in the next few months. And I’m beginning to crank on my book, work on the next SIC conference in May, and many other things.

I actually got out on the golf course yesterday for the first time in what seems-like-forever. While what I was doing didn’t look much like “golf” should appear, I did walk off the course without needing major pain medicine. It convinced me I might like to play golf a little more, but first I need to seriously take up yoga, spend more time in the gym stretching, and take care of myself.

And with that, I will hit the send button and wish you a great week!

Your really upbeat about the future analyst,


John Mauldin
Chairman, Mauldin Economics

 Here’s How “External Dollar Debt” Produces An “Emerging Market Crisis”

Emerging market currencies are collapsing pretty much everywhere these days. But it’s safe to assume that most people don’t understand exactly what’s causing this outbreak, why it’s happening now, or what “external dollar debt” has to do with it. So here’s a quick primer followed by the obligatory apocalyptic prediction:

Prelude: cheap dollar financing

Pretend for a second that you’re Brazil. Your economy is in pretty good shape and your currency – the real – is getting stronger. Because of this, people are willing to lend you money.

Your internal interest rates – that is, what you’d have to pay to borrow real – are around 6%.

But when you look overseas you notice that US dollars – which have been trending down for a while – can be borrowed for around 2%. So you run some numbers and conclude that if you borrow dollars and assume that the real continues to rise against the dollar, you’ll make out two ways, on the spread between what you pay for those dollars and what you earn by investing them, and when you pay back the loans with depreciated dollars. So you borrow dollars, not just a little but a lot because with a lot you make a fortune.

So far so good. For a while the dollar keeps falling versus the real and you earn a nice spread.

You feel smart, like you’ve figured out international finance and henceforth will will have a seat at the big table.
US dollar index external dollar debt

The turn

 But then the unexpected (for you at least) happens. The dollar stops falling and starts rising.

US dollar index external dollar debt

And suddenly the spread you’re making on your external dollar debt no longer offsets the cost of paying back those ever-more-expensive dollars. That’s bad but manageable as long as the trend (dollar rising versus the real) doesn’t get too extreme. But the financial markets don’t like what they’re seeing and traders start selling real, forcing its value down further. Now you’re looking at massively negative cash flow and a possible death spiral as the markets sell your currency, which makes your dollar loans even more unmanageable and so on, with no end in sight.

Brazil real external dollar debt

Your only consolation at this point is that other countries have made the same mistake on an even bigger scale. Turkey, for instance, has a much higher external dollar debt relative to GDP than you do, and is therefore reaping a bigger whirlwind.

Turkish lira external dollar debt

But this is not really that comforting because in a suddenly-spooked world, a problem in one developing country sends the markets into a frenzy of “who’s next???” speculation, which which produces a very long list that, alas, includes you. So Turkey’s chart is a potential glimpse of your future.

Emerging market bonds external dollar debt

Systemic Issues

So far the story has been about the problems of emerging markets which, while interesting and maybe disturbing, aren’t really a big deal for fat and happy Europeans or Americans. But this is the age of globalization when everything is interconnected. Which is a fancy way of saying that someone lent all those dollars to Turkey et al, and is therefore on the hook for whatever isn’t repaid. Busted emerging market currencies are everyone’s problem. Here’s the bank exposure data for Turkey:

Bank exposure to Turkey external dollar debt

Note that Spanish banks for some reason really, really liked Turkey back in the day, and are now on the hook for an astounding 5% of Spanish GDP. For other developing countries the exposure varies among banks and nations, but in the aggregate the risk reaches well into “systemic” territory. That is, if allowed to default, the emerging markets could take down some major developed world banks and threaten the fiat currencies of those countries. Now it’s serious.

History rhymes

We’ve been here before, of course. Emerging markets seem to implode about once a decade, and each and every time since Alan Greenspan’s tenure as Fed chair in the 1990s, the developed world’s governments and central banks have responded exactly as they should in a capitalist system, allowing the offending banks to fail, thus sending the message that risky behavior carries a downside as well as an upside.

Just kidding. They bailed out everyone in sight every time, convincing the major banks that no risk is too great in pursuit of outsized profits because once an institution achieves “too big to fail” status it has the government permanently at its back. And so here we are, with yet another set of systemically-threatening crises bubbling up and another round of massive bail-outs soon to follow.

Urban-rural splits have become the great global divider

A political phenomenon is pitting metropolitan elites against small-town populists

Gideon Rachman

© Efi Chalikopoulou

The struggle to understand the Trump phenomenon has created a small library of books about Middle America. But it might be just as useful to look at Thailand or Turkey. For the rise of the US president is part of a political phenomenon — visible all over the world — that is pitting “metropolitan elites” against pitchfork-wielding populists based in small towns and the countryside.

In the 2016 election, Donald Trump lost in all of America’s largest cities — often by huge margins — but was carried to the White House by the rest of the country. This flame-out in big-city America replicated the pattern of Britain’s Brexit referendum earlier that year, when the Leave campaign won despite losing in almost all big cities. The urban-rural split was also an educational divide. In the UK, voters who had left school without educational qualifications voted 73 per cent for Leave, while those with postgraduate degrees voted 75 per cent Remain.

There was a similar pattern in the US, leading Mr Trump to exult, on the campaign trail: “We love the poorly educated.”

The split between a metropolitan elite and a populist hinterland is clear in western politics. Less often noticed is that the same divide increasingly defines politics outside the west — spanning places with very different cultures and levels of development, such as Turkey, Thailand, Brazil, Egypt and Israel.

In Turkey, the residents of upscale urban areas such as Besiktas in Istanbul are just as appalled by their president, Recep Tayyip Erdogan, as Brooklynites are by Mr Trump. But Turkey’s traditional secular elite has been consistently out-voted by pious small-town voters, mobilised by Mr Erdogan. In Israel, while the country as a whole has moved towards the nationalist right, Tel Aviv, its most globalised city, has remained a bastion of secular liberalism with a leftwing mayor.

The same division runs through south-east Asia. In the Philippines, Rodrigo Duterte, a Trump-style populist, won power after running against the liberal elite of “imperial Manila”. In Thailand, politics over the past decade has been defined by a bitter and sometimes violent split between Bangkok, the capital, and the rural north. Even the terms used to describe the divides are similar. In Turkey, they talk of “white” and “black” Turks; in Thailand it is rural reds versus urban yellows; in the US, it is the red states and blue states.

Move into Europe, and the divide is even more obvious. As Italy swung towards populist parties in the recent election, Milan, the country’s richest city, resisted the trend — and largely stuck with the defeated centrists. In France, wealthy central Paris has rallied behind the reforms of President Emmanuel Macron, while populists thrive in the country’s left-behind regions. As Hungary and Poland have slid towards authoritarianism there have been huge anti-government demonstrations in the capital cities of Budapest and Warsaw, while the ruling parties, led by Viktor Orban and Jaroslaw Kaczynski, rely on small-town support.

So what is it that sets urbanites against the rest? The anti-Trump, anti-Brexit, anti-Erdogan, anti-Orban city dwellers tend to be richer and better educated than their political opponents.

By contrast, the rallying cry that unites fans of Mr Trump, Brexit, Mr Erdogan or Mr Orban is some version of a promise to make their countries “great again”. Urbanites are also more likely to have travelled or studied abroad, or to be recent immigrants. More than one-third of the populations of New York and London, for example, were born overseas.

It is tempting to describe cities as bastions of liberalism and the hinterlands as reactionary.

While that might be true when it comes to social values, there is also an incipient tendency for outvoted urbanites to sour on democracy.

In Egypt, many of the urban middle classes, who had campaigned for democracy in 2011, ended up supporting a military coup two years later because they feared the elected Muslim Brotherhood government was turning the country into a theocracy. In Thailand in 2014, a military coup that ended red shirt rule seemed to enjoy considerable support from Bangkok’s middle classes. In Brazil, at the moment, the professional classes of Sao Paulo and Rio de Janeiro tend to be in favour of the imprisonment on corruption charges of the leftist, former president Luiz Inácio Lula da Silva, even though he might well win the presidency again, if he were allowed to run later this year.

The west’s metropolitan elites have not yet turned against democracy. But some may harbour doubts. In Britain, many ardent Remainers are eager to overturn Britain’s vote to leave the EU. In the US, as the political scientists Yascha Mounk and Roberto Foa point out, “the trend toward openness to nondemocratic alternatives is especially strong among citizens who are both young and rich . . . In 1995 only 6 per cent of rich young Americans believed that it would be a ‘good’ thing for the army to take over; today, this view is held by 35 per cent of rich young Americans.”

If some big-city voters are ambivalent about democracy, small-town voters are increasingly drawn to the nationalism expressed by the likes of presidents Trump and Erdogan. Resurgent nationalism can raise international tension, but the widening urban-rural divide suggests that the most explosive political pressures may now lie within countries — rather than between them.

The US is at Risk of Losing a Trade War with China

Joseph E. Stiglitz

NEW YORK – What was at first a trade skirmish – with US President Donald Trump imposing tariffs on steel and aluminum – appears to be quickly morphing into a full-scale trade war with China. If the truce agreed by Europe and the US holds, the US will be doing battle mainly with China, rather than the world (of course, the trade conflict with Canada and Mexico will continue to simmer, given US demands that neither country can or should accept).

Beyond the true, but by now platitudinous, assertion that everyone will lose, what can we say about the possible outcomes of Trump’s trade war? First, macroeconomics always prevails: if the United States’ domestic investment continues to exceed its savings, it will have to import capital and have a large trade deficit. Worse, because of the tax cuts enacted at the end of last year, the US fiscal deficit is reaching new records – recently projected to exceed $1 trillion by 2020 – which means that the trade deficit almost surely will increase, whatever the outcome of the trade war. The only way that won’t happen is if Trump leads the US into a recession, with incomes declining so much that investment and imports plummet.

The “best” outcome of Trump’s narrow focus on the trade deficit with China would be improvement in the bilateral balance, matched by an increase of an equal amount in the deficit with some other country (or countries). The US might sell more natural gas to China and buy fewer washing machines; but it will sell less natural gas to other countries and buy washing machines or something else from Thailand or another country that has avoided the irascible Trump’s wrath. But, because the US interfered with the market, it will be paying more for its imports and getting less for its exports than otherwise would have been the case. In short, the best outcome means that the US will be worse off than it is today.9

The US has a problem, but it’s not with China. It’s at home: America has been saving too little. Trump, like so many of his compatriots, is immensely shortsighted. If he had a whit of understanding of economics and a long-term vision, he would have done what he could to increase national savings. That would have reduced the multilateral trade deficit.

There are obvious quick fixes: China could buy more American oil and then sell it on to others. This would not make an iota of difference, beyond perhaps a slight increase in transaction costs. But Trump could trumpet that he had eliminated the bilateral trade deficit.

In fact, significantly reducing the bilateral trade deficit in a meaningful way will prove difficult. As demand for Chinese goods decreases, the renminbi’s exchange rate will weaken – even without any government intervention. This will partly offset the effect of US tariffs; at the same time, it will increase China’s competitiveness with other countries—and this will be true even if China doesn’t use other instruments in its possession, like wage and price controls, or push strongly for productivity increases. China’s overall trade balance, like that of the US, is determined by its macroeconomics.

If China intervenes more actively and retaliates more aggressively, the change in the US-China trade balance could be even smaller. The relative pain each will inflict on the other is difficult to ascertain. China has more control of its economy, and has wanted to shift toward a growth model based on domestic demand rather than investment and exports. The US is simply helping China do what it has already been trying to do. On the other hand, US actions come at a time when China is trying to manage excess leverage and excess capacity; at least in some sectors, the US will make these tasks all the more difficult.

This much is clear: if Trump’s objective is to stop China from pursuing its “Made in China 2025” policy – adopted in 2015 to further its 40-year goal of narrowing the income gap between China and the advanced countries – he will almost surely fail. On the contrary, Trump’s actions will only strengthen Chinese leaders’ resolve to boost innovation and achieve technological supremacy, as they realize that they can’t rely on others, and that the US is actively hostile.

If a country enters a war, trade or otherwise, it should be sure that good generals – with clearly defined objectives, a viable strategy, and popular support – are in charge. It is here that the differences between China and the US appear so great. No country could have a more unqualified economic team than Trump’s, and a majority of Americans are not behind the trade war.

Public support will wane even further as Americans realize that they lose doubly from this war: jobs will disappear, not only because of China’s retaliatory measures, but also because US tariffs increase the price of US exports and make them less competitive; and the prices of the goods they buy will rise. This may force the dollar’s exchange rate to fall, increasing inflation in the US even more – giving rise to still more opposition. The Fed is likely then to raise interest rates, leading to weaker investment and growth and more unemployment.

Trump has shown how he responds when his lies are exposed or his policies are failing: he doubles down. China has repeatedly offered face-saving ways for Trump to leave the battlefield and declare victory. But he refuses to take them up. Perhaps hope can be found in three of his other traits: his focus on appearance over substance, his unpredictability, and his love of “big man” politics. Perhaps in a grand meeting with President Xi Jinping, he can declare the problem solved, with some minor adjustments of tariffs here and there, and some new gesture toward market opening that China had already planned to announce, and everyone can go home happy.

In this scenario, Trump will have “solved,” imperfectly, a problem that he created. But the world following his foolish trade war will still be different: more uncertain, less confident in the international rule of law, and with harder borders. Trump has changed the world, permanently, for the worse. Even with the best possible outcomes, the only winner is Trump – with his outsize ego pumped up just a little more.

Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University and Chief Economist at the Roosevelt Institute. His most recent book is Globalization and Its Discontents Revisited: Anti-Globalization in the Era of Trump.

Trump’s Narrow Window for Trade Wins in China

U.S. leverage in its trade dispute with China may be close to its peak  

By Nathaniel Taplin

Right now U.S. leverage over China on trade looks strong, but the advantage may not last long.

U.S. PresidentDonald Trumpis considering much higher tariffs on Chinese imports than previously outlined—25% on the next $200 billion tranche of goods, rather than 10%. This reflects confidence in the U.S. negotiating position following news that the local economy is growing briskly while China’s is weakening. Mr. Trump also reached a detente with Europe in last week’s meeting with European Union PresidentJean-Claude Juncker,isolating China. 
This could be as good as it gets for the White House. Chinese policy makers are moving more aggressively than expected to stimulate borrowing and spending. Given the usual two to three quarter lag before that shows up in growth numbers, any breakthroughs that could favor U.S. companies—such as a more open environment for foreign investment and tighter protection of intellectual property—may skitter away if they aren’t nailed down in the next nine months.

To see how quickly the policy picture is evolving in China, look at money-market rates. Weaning small banks off their dangerous dependence on short-term interbank borrowing was a key goal of China’s recent push to deleverage the economy. From mid-2016 to mid-2017, overnight borrowing rates rose by nearly a percentage point.

Now those rates are dropping fast, as policy makers worry that expensive bank funding is crimping small business lending, which smaller banks dominate. Weighted average bond-backed one-day borrowing rates, which were averaging 2.5% in June, closed below 2% on Wednesday. One-day bond repo volumes have skyrocketed, notching a new monthly high in July following steep falls in late 2016 and early 2017 during the height of the deleveraging push.

Jars of traditional fermented soy sauce and pickles in Chongqing. The next tranche of threatened tariffs will hit industries where China dominates. Photo: Zhou Zhiyong/Zuma Press 

Banks are also receiving informal guidance from the People’s Bank of China to step up corporate lending. The central bank has reportedly eased capital-adequacy requirements for certain banks, which will make it easier to boost loan growth.

On the U.S. side, salad days of 4% growth and 2% inflation look hard to sustain. The Labor Department’s quarterly survey showed that civilian workers got their biggest pay increase in close to a decade over the year through June. Consumer price inflation, already hovering around the Federal Reserve’s target of 2%, may not be far behind. And the next tranche of threatened tariffs will hit industries that China dominates, meaning finding alternative suppliers to alleviate an upward squeeze on prices will be tougher. China supplies over 50% of U.S. imports across the affected sectors, according to Capital Economics.

President Trump’s window for a favorable deal with China is a narrow one. Investors should look for breakthroughs by early 2019—or not at all.

Measuring Progress in Growth-Obsessed China

Lower growth rates can actually be a sign of progress in today’s China.

By Phillip Orchard

Last fall, at the epochal 19th Party Congress, Chinese President Xi Jinping called out China’s obsession with the pace of economic growth. It seems that some in the country have taken notice. On Sunday, 28 of China’s 31 province-level administrative divisions (including autonomous regions and large cities that answer solely to Beijing) released economic figures for the first half of the year. Nearly half of them posted growth rates equal to or lower than the national average, released two weeks ago, of 6.8 percent. That this can be read as progress in a country obsessed with sustaining robust growth amid an array of mounting economic pressures may seem counterintuitive. But it speaks to several deep-rooted problems that have long bedeviled central governments in China.  


One is the dubious nature of official growth numbers routinely posted in China. In recent years, for example, it’s become common practice for all 31 provinces to post growth figures higher than the national average. According to Reuters calculations, the discrepancy between the provinces’ total gross domestic product and the national figure was 2.76 trillion yuan ($415.1 billion) in 2017, or roughly 3.3 percent of China’s official GDP for the year – and this was considered an improvement. To a degree, technical factors can explain this apparent contradiction. In 1985, for example, provincial and national statistics bureaus were separated, leading to some differences in data collection and calculation methods. Moreover, some cross-province shipments could be included in the figures posted by each province involved, and this sort of double counting presumably wouldn’t show up in national figures. But the size and consistency of the disparity between provincial and national data, along with the wide disparities between China’s richest and poorest provinces, means technical problems can’t be the full explanation.

Indeed, Beijing has effectively confirmed that the discrepancy stems largely from either fraudulent or faulty accounting. Last year, for example, the government announced that the National Bureau of Statistics would take over data collection at the regional level beginning in 2019. Meanwhile, Beijing has been bringing the hammer down on suspected book cookers, dispatching teams of auditors, along with investigators from China’s much-feared anti-graft agency, the Central Commission for Discipline Inspection. In early 2017, the government in Liaoning, located in China’s northeastern rust belt, publicly admitted that it had inflated its annual GDP figures from 2011 to 2014. The former Liaoning party chief went to jail over the issue in 2015. (It’s likely no coincidence that in 2016, the province officially fell into recession.) Officials in Heilongjiang and Jilin provinces have also admitted to falsifying GDP data. It’s not just GDP, either. In Jiangxi and Henan provinces, officials were recently punished for using large mist cannons near monitoring stations to improve air quality readings. Moreover, with other targets such as tax revenue tied to growth data, provincial officials who fake GDP stats often end up having to inflate other figures as well, understating the fiscal risks weighing on their province.

Xi has evidently made the problem a priority, denouncing it in speeches and directing one of his famed “central leading groups” – his government’s foremost policymaking bodies – to tackle the problem with extreme prejudice. Of course, the central government is likely guilty of suspect accounting practices itself. Over the past few decades, at least according to Beijing, the Chinese economy has grown with, well, a statistically improbable lack of variance, rarely changing from one quarter to the next by more than a few decimal points, if at all. This dings Beijing’s credibility abroad, but it is presumably done intentionally to support the government’s narrative at home that everything is under control.

But Beijing has good reason to be alarmed when the provinces follow suit because fabricated provincial data is a real problem for Beijing’s ability to govern the country. China needs a strong central government to keep from splitting at the seams, hence Beijing’s broad embrace of Xi’s revival of a strongman leadership model. But strong central governments in China tend to struggle with blindness to problems bubbling up across their vast realm. Most famously, Mao’s belief in faulty statistics on steel and food production provided by lower-level sycophants helped turn the Great Leap Forward into a disaster, fueling a famine that killed tens of millions. China is a massive, unwieldy country ill-suited for micromanagement.

The risk of getting blindsided is particularly acute for Beijing today. Xi is trying to implement an ambitious slate of reforms to put the Chinese economy on stable footing as it heads into a prolonged period of slowing growth. Every reform has tradeoffs, and unintended consequences are inevitable. A crackdown on shadow lending, for example, risks drying up liquidity. Efforts to reduce pollution, industrial overcapacity and real estate pressure all risk exacerbating China’s local government debt crisis. It’s a high-wire act – one taking place amid an intensifying trade war – and to keep balance, Beijing needs accurate data to be able to make minor adjustments in real time.

Still, even if Beijing succeeds in bringing its most flagrant data manipulators in line, it would solve only part of the problem. Just as problematic is the government's fixation on sustaining breakneck growth for the sake of posting sparkling headline figures. Growth targets have been sacrosanct in the Chinese system, until recently at least. And surpassing the annual targets approved by Beijing has been the key to climbing the ladder in the Communist Party, incentivizing local officials to move hell or high water to make their marks. Outright data faking isn’t the only problem this creates. It also compels provinces to take on unsustainable debt loads, lean too much on fixed asset investment (often backed by harebrained financing schemes) and find ways to keep “zombie firms” afloat long past the point of profitability. These issues are, in large part, why Xi is having to push such painful reforms in the first place.

At the 2018 party congress, Xi called for a shift to “quality-oriented” growth instead. At the Central Economic Work Conference that followed the congress, officials pledged to roll out more qualitative metrics for promotion, such as environmental and poverty reduction targets. And during March’s sweeping government reorganization, Beijing launched a new National Audit Office. In January, 17 provinces lowered their growth targets for the year – signaling a growing belief that Xi’s exhortations had given the provinces cover to take a more realistic approach to growth. Yet, China hasn’t abandoned the practice of setting growth targets entirely, for reasons that are not all that clear. And even if it did, the socio-economic risks in China mean its leaders – whether in Beijing or the provinces – cannot yet tolerate slowdowns on the scale that more advanced economies in the West and Japan regularly manage. So the relentless quest for growth must proceed, along with the high-wire act to contain its risks. Beijing would just rather not do it blindfolded.