The Good News Economy
By John Mauldin
John Mauldin
Chairman, Mauldin Economics |
The Good News Economy
By John Mauldin
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.
The turn
But then the unexpected (for you at least) happens. The dollar stops falling and starts rising.
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.
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.
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.
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U.S. leverage in its trade dispute with China may be close to its peak
By Nathaniel Taplin
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Lower growth rates can actually be a sign of progress in today’s China.
By Phillip Orchard
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