China for the Trade Win?
By John Mauldin
Debt in Pictures

Wargaming the Trade War

Bond markets will eventually rebel. We will have to restructure the debt and it will have a profound impact on how we meet future investment challenges.
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China for the Trade Win?
By John Mauldin
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Populism is the true legacy of the global financial crisis
The ‘hard working classes’ so beloved of politicians were the victims of the crash
Philip Stephens
‘We’re Using the Future for a Fiscal Dumping Ground.’ Beware Trillion-Dollar Deficits
By Jack Hough
Photo: New Studio
There’s no snooze button on the national debt clock, though you wouldn’t know it by the way public alarm has quieted as the situation grows worse.
October begins a new fiscal year for the U.S. government—and a faster ballooning of how much it owes. Barring a behavioral miracle in Congress, trillion dollar yearly budget shortfalls will return, perhaps as soon as the coming year. And unlike the ones brought by the financial crisis and Great Recession of 2007-09, these will start during a period of relative plenty, and won’t end.
Debt held by the public, a conservative tally of what America owes, will swell from $15.7 trillion at the end of September, or 78% of gross domestic product, to $28.7 trillion in a decade, or 96% of GDP.
Those estimates, provided by the Congressional Budget Office, are based on reasonable assumptions about economic growth, inflation, employment, and interest rates, but they leave out some important things. They assume that the nation’s need for increased infrastructure investment, estimated by the American Society of Civil Engineers at $1.4 trillion through 2025, goes unmet. They don’t account for the possibility of another financial crisis, or war, or a rise in the frequency or severity of natural disasters, and they assume that some Trump tax cuts will expire in 2025.
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The new geography of innovation
Why startups are leaving Silicon Valley
Its primacy as a technology hub is on the wane. That is cause for concern
“LIKE Florence in the Renaissance.” That is a common description of what it is like to live in Silicon Valley. America’s technology capital has an outsize influence on the world’s economy, stockmarkets and culture. This small portion of land running from San Jose to San Francisco is home to three of the world’s five most valuable companies. Giants such as Apple, Facebook, Google and Netflix all claim Silicon Valley as their birthplace and home, as do trailblazers such as Airbnb, Tesla and Uber. The Bay Area has the 19th-largest economy in the world, ranking above Switzerland and Saudi Arabia.
The Valley is not just a place. It is also an idea. Ever since Bill Hewlett and David Packard set up in a garage nearly 80 years ago, it has been a byword for innovation and ingenuity. It has been at the centre of several cycles of Schumpeterian destruction and regeneration, in silicon chips, personal computers, software and internet services. Some of its inventions have been ludicrous: internet-connected teapots, or an app that sold people coins to use at laundromats. But others are world-beaters: microprocessor chips, databases and smartphones all trace their lineage to the Valley.
Its combination of engineering expertise, thriving business networks, deep pools of capital, strong universities and a risk-taking culture have made the Valley impossible to clone, despite many attempts to do so. There is no credible rival for its position as the world’s pre-eminent innovation hub. But there are signs that the Valley’s influence is peaking. If that were simply a symptom of much greater innovation elsewhere, it would be cause for cheer. The truth is unhappier.
Silicon Plateau
First, the evidence that something is changing. Last year more Americans left the county of San Francisco than arrived. According to a recent survey, 46% of respondents say they plan to leave the Bay Area in the next few years, up from 34% in 2016. So many startups are branching out into new places that the trend has a name, “Off Silicon Valleying”. Peter Thiel, perhaps the Valley’s most high-profile venture capitalist, is among those upping sticks. Those who stay have broader horizons: in 2013 Silicon Valley investors put half their money into startups outside the Bay Area; now it is closer to two-thirds.
The reasons for this shift are manifold, but chief among them is the sheer expense of the Valley. The cost of living is among the highest in the world. One founder reckons young startups pay at least four times more to operate in the Bay Area than in most other American cities. New technologies, from quantum computing to synthetic biology, offer lower margins than internet services, making it more important for startups in these emerging fields to husband their cash. All this is before taking into account the nastier features of Bay Area life: clogged traffic, discarded syringes and shocking inequality.
Other cities are rising in relative importance as a result. The Kauffman Foundation, a non-profit group that tracks entrepreneurship, now ranks the Miami-Fort Lauderdale area first for startup activity in America, based on the density of startups and new entrepreneurs. Mr Thiel is moving to Los Angeles, which has a vibrant tech scene. Phoenix and Pittsburgh have become hubs for autonomous vehicles; New York for media startups; London for fintech; Shenzhen for hardware. None of these places can match the Valley on its own; between them, they point to a world in which innovation is more distributed.
If great ideas can bubble up in more places, that has to be welcome. There are some reasons to think the playing-field for innovation is indeed being levelled up. Capital is becoming more widely available to bright sparks everywhere: tech investors increasingly trawl the world, not just California, for hot ideas. There is less reason than ever for a single region to be the epicentre of technology. Thanks to the tools that the Valley’s own firms have produced, from smartphones to video calls to messaging apps, teams can work effectively from different offices and places. A more even distribution of wealth may be one result, greater diversity of thought another. The Valley does many things remarkably well, but it comes dangerously close to being a monoculture of white male nerds. Companies founded by women received just 2% of the funding doled out by venture capitalists last year.
Shadows of the colossi
The problem is that the wider playing-field for innovation is also being levelled down. One issue is the dominance of the tech giants. Startups, particularly those in the consumer-internet business, increasingly struggle to attract capital in the shadow of Alphabet, Apple, Facebook et al. In 2017 the number of first financing rounds in America was down by around 22% from 2012. Alphabet and Facebook pay their employees so generously that startups can struggle to attract talent (the median salary at Facebook is $240,000). When the chances of startup success are even less certain and the payoffs not so very different from a steady job at one of the giants, dynamism suffers—and not just in the Valley. It is a similar story in China, where Alibaba, Baidu and Tencent are responsible for close to half of all domestic venture-capital investment, giving the giants a big say in the future of potential rivals.
The second way in which innovation is being levelled down is by increasingly unfriendly policies in the West. Rising anti-immigrant sentiment and tighter visa regimes of the sort introduced by President Donald Trump have economy-wide effects: foreign entrepreneurs create around 25% of new companies in America. Silicon Valley first bloomed, in large part, because of government largesse. But state spending on public universities throughout America and Europe has fallen since the financial crisis of 2007-08. Funding for basic research is inadequate—America’s federal-government spending on R&D was 0.6% of GDP in 2015, a third of what it was in 1964—and heading in the wrong direction.
If Silicon Valley’s relative decline heralded the rise of a global web of thriving, rival tech hubs, that would be worth celebrating. Unfortunately, the Valley’s peak looks more like a warning that innovation everywhere is becoming harder.
E Pluribus Unum
By PAUL KRUGMAN
It’s that time of year — the long weekend when we gather with friends and family to celebrate hot dogs, potato salad and, yes, the founding of our nation. And it’s also a time for some of us to wax a bit philosophical, to wonder what, exactly, we’re celebrating. Is America in 2013, in any meaningful sense, the same country that declared independence in 1776?
The answer, I’d suggest, is yes. Despite everything, there is a thread of continuity in our national identity — reflected in institutions, ideas and, especially, in attitude — that remains unbroken. Above all, we are still, at root, a nation that believes in democracy, even if we don’t always act on that belief.
And that’s a remarkable thing when you bear in mind just how much the country has changed.
America in 1776 was a rural land, mainly composed of small farmers and, in the South, somewhat bigger farmers with slaves. And the free population consisted of, well, WASPs: almost all came from northwestern Europe, 65 percent came from Britain, and 98 percent were Protestants.
America today is nothing like that, even though some politicians — think Sarah Palin — like to talk as if the “real America” is still white, Protestant, and rural or small-town.
But the real America is, in fact, a nation of metropolitan areas, not small towns. Tellingly, even when Ms. Palin made her infamous remarks in 2008 she did so in Greensboro, N.C., which may not be in the Northeast Corridor but — with a metropolitan population of more than 700,000 — is hardly Mayberry. In fact, two-thirds of Americans live in metro areas with half-a-million or more residents.
Nor, by the way, are most of us living in leafy suburbs. America as a whole has only 87 people per square mile, but the average American, according to the Census Bureau, lives in a census tract with more than 5,000 people per square mile. For all the bashing of the Northeast Corridor as being somehow un-American, this means that the typical American lives in an environment that resembles greater Boston or greater Philadelphia more than it resembles Greensboro, let alone true small towns.
What do we do in these dense metropolitan áreas? Almost none of us are farmers; few of us hunt; by and large, we sit in cubicles on weekdays and visit shopping malls on our days off.
And ethnically we are, of course, very different from the founders. Only a minority of today’s Americans are descended from the WASPs and slaves of 1776. The rest are the descendants of successive waves of immigration: first from Ireland and Germany, then from Southern and Eastern Europe, now from Latin America and Asia. We’re no longer an Anglo-Saxon nation; we’re only around half-Protestant; and we’re increasingly nonwhite.
Yet I would maintain that we are still the same country that declared independence all those years ago.
It’s not just that we have maintained continuity of legal government, although that’s not a small thing. The current government of France is, strictly speaking, the Fifth Republic; we had our anti-monarchical revolution first, yet we’re still on Republic No. 1, which actually makes our government one of the oldest in the world.
More important, however, is the enduring hold on our nation of the democratic ideal, the notion that “all men are created equal” — all men, not just men from certain ethnic groups or from aristocratic families. And to this day — or so it seems to me, and I’ve done a lot of traveling in my time — America remains uniquely democratic in its mannerisms, in the way people from different classes interact.
Of course, our democratic ideal has always been accompanied by enormous hypocrisy, starting with the many founding fathers who espoused the rights of man, then went back to enjoying the fruits of slave labor. Today’s America is a place where everyone claims to support equality of opportunity, yet we are, objectively, the most class-ridden nation in the Western world — the country where children of the wealthy are most likely to inherit their parents’ status. It’s also a place where everyone celebrates the right to vote, yet many politicians work hard to disenfranchise the poor and nonwhite.
But that very hypocrisy is, in a way, a good sign. The wealthy may defend their privileges, but given the temper of America, they have to pretend that they’re doing no such thing. The block-the-vote people know what they’re doing, but they also know that they mustn’t say it in so many words. In effect, both groups know that the nation will view them as un-American unless they pay at least lip service to democratic ideals — and in that fact lies the hope of redemption.
So, yes, we are still, in a deep sense, the nation that declared independence and, more important, declared that all men have rights. Let’s all raise our hot dogs in salute.
Published in July 4th, 2013
Shorting Loans: A Hedge Against Financial Trouble
It won’t take much for investors in booming loan funds to wake up to the growing risks
By Paul J. Davies
The growing risks in low-quality loans are starting to attract attention from market watchers. Photo: bryan r. smith/Agence France-Presse/Getty Images
Riskier corporate debt may face a very bumpy ride this year.
One way to play this is to bet against an exchange-traded fund that buys U.S. leveraged loans, the risky debt behind takeovers and private-equity deals. The biggest of these is the Invesco Senior Loan ETF . BKLN -0.07%▲
The loan market has been flooded with inexpert money, which has worsened lending standards even compared with the debt bubble that ended in the 2008 banking crisis. There is plenty to spook investors and loans are still a relatively illiquid market, so a little selling pressure can cause a lot of trouble.
The Slavery Incentive
Ricardo Hausmann
CAMBRIDGE – Have you ever wondered why business schools do not teach the proper way to whip a worker to obtain maximum effort without damaging the asset? Had business schools existed before the American Civil War, one can conceive of at least a lecture, if not a full course, on the subject. Instead, business schools teach about corporate culture and values, on the assumption that maximum effort can be obtained from workers if they identify with the firm’s mission and goals.
So why have slavery and other forms of bonded labor declined so dramatically in so many places around the world, and what can be done to abolish them completely? It might be tempting to assume that the decline of slavery is the consequence of human moral progress. But in his masterful book The Other Slavery, Andrés Reséndez shows how inadequate this assumption is. The book addresses the history of slavery and other forms of bondage of indigenous peoples in the Americas, a topic that has received much less attention than African-American enslavement.
As the book shows, Indian slavery in the Americas was outlawed by Charles I of Spain in 1542 and abolished in Peninsular Spain even earlier. The legislation against Indian slavery was further strengthened during the regency of Mariana of Austria (1665-1675), the mother of Charles II.
The laws were based on Catholic values and pushed by an activist group that included Bartolomé de las Casas, who championed the rights of indigenous peoples as children of God and subjects of the King. But, despite legal prohibitions, slavery proved remarkably resilient, with colonists using subterfuges such as debt peonage, “just wars” (which sanctioned enslavement of captured enemies as a more moral outcome than justified slaughter), and other tricks.1
The reason for this resilience is probably best understood not as the consequence of poor law enforcement but of the profitability of slavery, which generated incentives too strong for laws to contain. The implication is that the dwindling of slavery today and its potential further reduction may depend on market rather than legal incentives.
Slavery was widespread, including in Europe, when it developed in the Americas, where – from the perspective of the Spanish settlers – acute labor shortages prevailed. Mining and plantation agriculture were labor-intensive, but the population had collapsed precipitously upon contact with Europe, owing to some combination of war, disease, oppression, and the disruption of livelihoods. Moreover, those jobs were dirty, dangerous, and demeaning. Gold mining in particular was almost a death sentence: workers seldom survived more than three years before succumbing to mercury poisoning or accidents.
Slavery did not succeed in keeping labor costs down because the slaves themselves were expensive. In the sixteenth century, slavers invaded other Caribbean islands to abduct workers and sell them to gold miners on the island of Hispaniola (today’s Dominican Republic and Haiti). In the seventeenth century, slavery was used in Bolivia to operate the silver mines in PotosÃ.
In the eighteenth century, Comanches would hunt Apaches to sell to Mexican silver miners. Even after the US Civil War, the Fourteenth Amendment did not protect Native Americans: in the 1880s, the Supreme Court ruled that it did not cover them, and they gained citizenship rights only in 1924.
After the end of the international slave trade in the 1830s, what developed in the Caribbean was not free labor but indentured labor, with East Asians making the journey in exchange for what could be thought of as fixed-term slavery, similar to debt bondage. In the US, after the end of the post-Civil War period known as Reconstruction, southern states enacted vagrancy laws, which permitted the authorities to imprison displaced former slaves and condemn them to forced labor if it could be argued that they were idle.1
How is bondage different from free labor, and why did the latter displace the former? Part of the answer may be technological: technologies that require effort that is hard to observe, or that use expensive and fragile equipment, may be inappropriate for slavery. For example, entrusting valuable assets to disgruntled slaves may be unwise. But this logic should not be exaggerated. After all, Nazis enslaved millions of gentiles from occupied countries, transported them to labor camps, mostly in Germany, and forced them to produce, inter alia, war materiel.
One fundamental difference between free labor and slavery is that slaves must be bought, meaning that the gains from exploitation do not necessarily accrue to the current slave owner, but are anticipated in the purchase price of the slave. This also means that capital would have to be expended in owning the slave, an expense not required of free labor. In a world of less-than-perfect capital markets, this expense may have had a serious opportunity cost in terms of the forgone investments in equipment and other inputs.
The fundamental difference between the two institutions is the range of options given to the worker. Bondage means that the worker cannot leave if he finds the conditions disagreeable. If the alternative to slavery is starvation or death, people may well choose slavery.
Today, migrants often face limited options. If they are undocumented, as millions are in the US, they cannot turn to the authorities to protect their labor rights, making them vulnerable to exploitation and abuse. If they are legal, they often get a visa that allows them to work only for the sponsoring firm. If they find the conditions disagreeable, they cannot just change employers: they must leave the country.
By restricting the workers’ outside options, employers may get them to accept terms that freer individuals would reject. That may be a reason why there is so little urgency in solving the problem of undocumented immigrants in the US, and why many countries protect citizens differently than foreigners. It may also be the reason why countries have refused to empower refugees, whether Syrians or Venezuelans, with rights. So long as the incentives to enslave persist, the effort to end slavery – by whatever name – will have to continue.
Ricardo Hausmann, a former minister of planning of Venezuela and former Chief Economist of the Inter-American Development Bank, is Director of the Center for International Development at Harvard University and a professor of economics at the Harvard Kennedy School.