What’s Wrong With the Global Economy?
The problem goes much deeper than Trump or tariffs.
By Ruchir Sharma
Credit Nicholas Konrad
Global markets were seized by fear last week that trade wars were slowing growth in Germany, China and the United States. But the story here is bigger than President Trump and his tariffs.
The postwar miracle is over. Since the financial crisis of 2008, the world economy has been struggling against four headwinds: deglobalization of trade, depopulation as labor forces shrink, declining productivity and a debt burden as high now as it was right before the crisis.
No major economy is growing as fast as it was before 2008. Not one is growing faster than 10 percent, the rate experienced by the Asian “miracle economies” before the crisis. In almost every country, the national discussion focuses on what must be done to revive growth and ignores the fact that the slowdown is driven by forces beyond any one government’s control. Instead of dooming ourselves to serial disappointment and fruitless stimulus campaigns, we need to redefine economic success and failure.
Germany is one of at least five major economies on the verge of a recession, which is typically defined as two consecutive quarters of negative growth. But the real issue is whether that definition still makes sense in a country with a shrinking labor force like Germany’s.
Its working population has been declining for years and is expected to fall to 47 million from 54 million by 2039. And it’s not alone in this. Forty-six countries around the world — including major powers like Japan, Russia and China — now have shrinking populations.
Demographics are usually the main driver of economic growth, so it is basically inevitable that these countries will now grow at a much slower pace. And we are not talking about minor population declines. Projections for 2040 show China’s working-age population falling by 114 million, Japan’s by 14 million.
With a shrinking labor force, these economies will inevitably slow and, at times, contract. To keep calling two negative quarters in a row a “recession” implies that this outcome is somehow abnormal or unhealthy. That will no longer be the case.
To avoid overreacting, the discussion about economic health needs to shift to measures that better capture satisfaction and contentment, like per capita income growth. In countries with shrinking populations, per capita incomes can continue to grow so long as the economy is shrinking less rapidly than the population.
This helps explain why, for example, Japan isn’t facing more social unrest. Its economy has grown much more slowly than that of the United States in this decade, but because the population is shrinking its per capita income has grown just as fast as America’s — around 1.5 percent per year.
Shrinking populations also help explain why unemployment is at or near multi-decade lows, even in countries with serious growth worries, like Germany and Japan. Gainfully employed Germans and Japanese won’t really feel as if their countries are in a slump until per capita G.D.P. growth turns negative — which may prove to be a more useful way to think about recessions in this new era.
The definition of success also needs to change. Many emerging countries still aspire to the double-digit growth rates experienced by what were known as the “Asian miracle economies” from the mid-1960s to the early 1990s, when populations and trade were booming. But no economy had grown so fast before then, and as population and trade surges recede, it’s unlikely any country can repeat those feats.
As growth downshifts, even little miracles are disappearing. Before the 2010s, it was common for one in every five economies to be growing at 7 percent or more annually. Now, among the world’s 200 economies, just eight, or one in 25, are on track to grow 7 percent this year. Most of those are small economies in Africa.
When the news emerged that China’s economy had slowed to just 6 percent, a new low, many investors and analysts rang the alarm bells. But the reality is that economies rarely grow as fast as 6 percent if the population is not booming too. Not only did China’s working-age population growth turn negative in 2016, but it is one of the countries hardest hit by slumping trade, declining productivity and heavy debts. If the Chinese economy really were growing at 6 percent in this environment, it would be cause for celebration, not alarm.
The benchmark for rapid growth should come down to 5 percent for emerging countries, to between and 3 and 4 percent for middle-income countries like China, and to between 1 and 2 percent for developed economies like the United States, Germany and Japan. And that should just be the start to how economists and investors redefine economic success.
This rethink is overdue. The number of countries with shrinking populations is expected to rise to 67 from 46 by 2040, and the decline in productivity growth is in many ways reinforced by heavy debt burdens and rising trade barriers. Redefining the standard of economic success could help cure many countries of irrational anxieties about “slow” growth, and make the world a calmer place.
Ruchir Sharma, author of “The Rise and Fall of Nations: Forces of Change in the Post-Crisis World,” is the chief global strategist at Morgan Stanley Investment Management and a contributing Opinion writer.
WHAT´S WRONG WITH THE GLOBAL ECONOMY? / THE NEW YORK TIMES
Volatile Year Coming
By John Mauldin
Supply Shocks Ahead
- The US-China trade and currency war
- A slower-brewing US-China technology cold war (which could have much larger long-term implications)
- Tension with Iran that could threaten Middle East oil exports
Subnormal Growth
Bond Market Insanity

Paralyzed Business
Bumpy Ride
Florida and a Fire Drill
John Mauldin
Co-founder, Mauldin Economics |
Negative Interest Rates And Gold
by: Goldmoney
Summary
- For some time now, I have maintained the wheels are likely to fall off the global economic wagon by the year-end.
- Furthermore, for many of my interlocutors, the recent rise in the gold price is just evidence of an impending cyclical crisis, anticipating and discounting the certain inflationary response by central banks.
- In the combination of trade protectionism and an emerging credit crisis we face a problem upon which almost no formal research has been done, so it is not something that even far-thinking analysts have considered.
- We cannot know the future with certainty, but we can point to the empirical evidence following Smoot-Hawley and draw an alarming parallel with today's events.
- But our knowledge tells us there is almost certainly a large unanticipated shock ahead of us, and we should proceed in any analysis with that expectation.
To understand that relationship, and why it now appears to be reversing requires a working knowledge of time preference, the basis of interest; and more specifically the changing relationship of gold's time preference to that of dollars.
The books with sentimental value will have very little value to anyone else, other book lovers having their own favourites. Everyone's time preferences are different. In economic terms, we express these varying values in terms of the difference between a current value in possession and the value of non-possession, but the certainty of repossession at a future time. The discounted value of the future possession is normally expressed as an interest rate on the monetary value today.
The only examples that go against time preference are special cases. For example, an individual might forgo a decent salary today, in order to study so that he or she can earn more after passing a professional exam. In this case, the value of a current earnings stream is rejected in favour of potentially better prospects later. Or the philanthropist, who lends artworks for free to a public gallery so that a wider audience can appreciate them (but perhaps he does have a reward - to be thought of as a generous philanthropist and pillar of society).
But for the individual who has sacrificed the immediate satisfaction of spending the money put aside as savings, the time preference element will reflect the discounted future values of the goods and services that otherwise would have been purchased.
To summarise so far, time preference tells us, except in a few specific cases, that the underlying or originary interest rate on money, which represents the time preference in all goods and services, must always be positive and include an extra margin to ensure savings flows occur.
Furthermore, this is the basis for all pricing in financial markets for deferring delivery or settlement, which is called contango. In normal markets, backwardations are always unnatural and temporary, reflecting an excess of demand over supply for an earlier date over a later, but is never a general condition.
The reason it is vital to grasp the meaning and implications of time preference is to show that negative interest rates are unnatural, and do not accord with human action. It might not be obviously disruptive to financial markets when a central bank, whose currency is not the reserve currency, imposes a relatively minor negative rate on its commercial banks' reserves.
After all, a commercial bank will still charge its borrowers a positive rate, even though it may have to be imaginative when it comes to keeping depositors happy. But this is beginning to change, with both governments and large corporates now being able to issue bonds at negative rates. As we have seen from our discourse on time preference, this is a significant distortion from normality, indicating bond markets expect yet deeper negative rates in the currencies concerned.
The Fed's interest rate is particularly important, because international financial markets price everything in dollars. And unless the Fed is prepared to see a dollar being strengthened by deepening negative rates elsewhere, the Fed may have little option but to follow.
They were never appointed nor are they technically equipped to save the currency at the expense of widespread bankruptcies, not just in the private sector, but of their governments as well. And that is what markets will be faced with.
With all other fiat currencies referenced to the dollar, it will mark the start of a process that is likely to collapse the entire fiat currency system. Bullion banks which are too slow to recognise the change and have not shut down their gold obligations will be forced to steal their customers allocated gold, or go to the wall, adding to the disruption. All commodity derivatives will face a period of rapid contraction of open interest, in lockstep or one pace behind those of gold.
BLACKROCK HAS RATTLED THE PRIVATE EQUITY INDUSTRY / THE FINANCIAL TIMES OP EDITORIAL
BlackRock has rattled the private equity industry
The fund manager’s initiative is good for investors but comes at a strange time
Patrick Jenkins
BlackRock has entered the private equity arena when deal prices are at record highs © Bloomberg
What’s wrong with private equity? Not much, if you look at the numbers. Record dealmaking, record fund sizes, record amounts of cheap debt to juice profits. That’s made everyone a winner. Investor returns are outpacing other asset classes. Private equity firms, and their staff, are enjoying bumper pay days.
BlackRock, though, sniffs a competitive opportunity. The world’s biggest asset manager — with nearly $7tn of funds at the last count — has so far only dabbled in alternative investments. But its debut primary private equity deal last week, when its new Long Term Private Capital fund bought the bulk of the Authentic Brands marketing business for $870m, signalled a fresh departure.
Larry Fink’s business owns more listed equities than almost anyone else. But as the launch blurb for the LTPC fund makes clear, public companies are going out of fashion: the number of US groups has nearly halved in 20 years.
Moving into private equity seems logical. It should secure a slice of a higher-margin business at a time when public equity managers are suffering an ongoing squeeze on fees.
Aping his record in listed equities, Mr Fink’s plan is to take business from the incumbents by disrupting what he sees as a cosy and costly business model. LTPC will undercut their fees and derisk investments by reducing the debt levels of portfolio companies.
One rattled senior executive at a big buyout firm said: “BlackRock incinerated the fee structure in equity funds. Are they going to do the same for private equity?”
The pitch has been enough to raise nearly $3bn from five big investors, led by the Minnesota State Board of Investment, plus a small chunk of BlackRock’s own cash.
The group is coy about the exact fees it will levy but it is fair to assume they will be substantially less than the 2 per cent management fee plus 20 per cent “carry”, or performance fee, that is the private equity norm. As the LTPC fund grows towards its $12bn target, BlackRock says the management fee will fall further.
So far, so laudable. But this is not a risk-free initiative.
For one thing, valuations make this an odd time to break into private equity: deal prices are at record highs. The Authentic Brands transaction is estimated to have been done at a multiple of 16 times core earnings.
For another, the private equity bubble is widely expected to burst. The downward trend in interest rates means the pin-prick won’t come from higher debt costs, as seemed likely six to 12 months ago. But the risk of recession across much of the west now seems high, potentially dangerous for highly leveraged companies that often have little headroom if business dips. BlackRock’s plan is to cut debt levels, but that cuts potential returns.
Of potential concern, too, is another quirk of BlackRock’s model: making its fund a “perpetual capital” vehicle, rather than the traditional 10-year structure. This is not unprecedented. There has been a clutch of perpetual capital launches from established operators of late. Brookfield is poised to create a $5bn fund, with a potential open-ended structure, into which it would reverse Genworth, a Canadian mortgage insurer acquired last week.
But the open-ended nature has obvious pitfalls. Returns are designed to be lower. And there is no set time horizon for investors to be paid out.
Most seriously there are obvious, if crude, parallels with the liquidity mismatches that have haunted the likes of GAM, H2O and Woodford in recent months. If investors are not tied in for a fixed period and are allowed, in theory, to make short-term redemptions, it is easy to see the scope for stress when the underlying assets are unwieldy holdings in a small number of private companies.
Some perpetual vehicles are stock-exchange listed, boosting potential liquidity. BlackRock’s recipe for dealing with the issue is to limit investor redemptions to an annual three-month window, with an initial tie-in until 2022. Investors can sell to others in the fund or to a new investor if one can be found. Underlying holdings could also be sold. But the model is untested in a stressed market.
Investors should welcome BlackRock’s entry to the market, with its promise to cut the cost and the risk of private equity. For Mr Fink and his team, though, it is not without danger.
FINGER ON THE BUTTON: AMERICA SHOULD NOT RULE OUT USING NUCLEAR WEAPONS FIRST / THE ECONOMIST
Finger on the button
America should not rule out using nuclear weapons first
A nuclear shift would alarm allies
IN 1973 Major Harold Hering, a veteran pilot and trainee missile-squadron commander, asked his superiors a question: if told to fire his nuclear-tipped rockets, how would he know that the orders were lawful, legitimate and from a sane president? Soon after, Major Hering was pulled from duty and later kicked out of the air force for his “mental and moral reservations”.
His question hit a nerve because there was, and remains, no check on a president’s authority to launch nuclear weapons. That includes launching them first, before America has been nuked itself. The United States has refused to rule out dropping a nuclear bomb on an enemy that has used only conventional weapons, since it first did so in 1945.
Many people think this calculated ambiguity is a bad idea. It is unnecessary, because America is strong enough to repel conventional attacks with conventional arms. And it increases the risk of accidents and misunderstandings. If, when the tide of a conventional war turns, Russia or China fears that America may unexpectedly use nukes, they will put their own arsenals on high alert, to preserve them. If America calculates that its rivals could thus be tempted to strike early, it may feel under pressure to go first—and so on, nudging the world towards the brink.
Elizabeth Warren, a Democratic contender for the presidency, is one of many who want to remedy this by committing America, by law, to a policy of No First Use (NFU) (see article). India and China have already declared NFU, or something close, despite having smaller, more vulnerable arsenals.
Ms Warren’s impulse to constrain nuclear policy is right. However, her proposal could well have perverse effects that make the world less stable. Many of America’s allies, such as South Korea and the Baltic states, face large and intimidating rivals at a time when they worry about the global balance of power. They think uncertainty about America’s first use helps deter conventional attacks that might threaten their very existence, such as a Russian assault on Estonia or a Chinese invasion of Taiwan. Were America to rule out first use, some of its Asian allies might pursue nuclear weapons of their own. Any such proliferation risks being destabilising and dangerous, multiplying the risks of nuclear war.
The aim should be to maximise the deterrence from nuclear weapons while minimising the risk that they themselves become the cause of an escalation. The place to start is the question posed by Major Hering 46 years ago. No individual ought to be entrusted with the unchecked power to initiate annihilation, even if he or she has been elected to the White House. One way to check the president’s launch authority would be to allow first use, but only with collective agreement, from congressional leaders, say, or the cabinet.
There are other ways for a first-use policy to be safer. America should make clear that the survival of nations must be at stake. Alas, the Trump administration has moved in the opposite direction, warning that “significant non-nuclear strategic attack”, including cyber-strikes, might meet with a nuclear response.
America can also make its systems safer. About a third of American and Russian nuclear forces are designed to be launched within a few minutes, without the possibility of recall, merely on warning of enemy attack. Yet in recent decades, missile launches have been ambiguous enough to trigger the most serious alarms. If both sides agreed to take their weapons off this hair-trigger, their leaders could make decisions with cooler heads.
Most of all, America can put more effort into arms control. The collapse of the Intermediate-range Nuclear Forces Treaty on August 2nd and a deadly radioactive accident in Russia involving a nuclear-powered missile on August 8th were the latest reminders that nuclear risks are growing just as the world’s ability to manage them seems to be diminishing.
IN RETREAT: ARGENTINA´S BELEAGUERED GOVERNMENT IMPOSES CAPITAL CONTROLS / THE ECONOMIST
In retreat
Argentina’s beleaguered government imposes capital controls
Fear of a populist government provokes a market crash, forcing the president’s hand
WHEN MAURICIO MACRI was elected president of Argentina in 2015, one of his first acts was to abolish capital controls that restricted buying and selling of the peso. The move symbolised Argentina’s pivot back to open markets and liberal economic reforms under his rule. On September 1st, after weeks of market turmoil, Mr Macri was forced to issue a decree reimposing controls in an attempt to shore up the currency. From now on ordinary Argentines’ purchases of dollars will be capped at $10,000 a month. Companies will face restrictions on their ability to purchase dollars in the foreign-exchange market and to pay dividends to investors abroad.
Investors are habituated to financial fiascos in Argentina but even so the news has come as a rude shock: the price of Argentina’s sovereign bonds traded in Europe tumbled by about 5% the day after the announcement. It has been a torrid summer. The country flirted with default on August 30th, when it said it would try to extend the maturity of some of its external debts. Its foreign-currency sovereign bonds now trade at only about a third of their face value. The crisis probably spells the end of Mr Macri’s time in office, is a humiliation for the IMF and a disaster for the country. Yet again Argentina finds itself a financial outcast.
Mr Macri inherited an economy in disarray but initially won the confidence of Wall Street. He began his tenure not only by floating the peso but by giving the central bank a target to tame inflation (which was measured honestly again after years of book-cooking), dismantling controls on the prices of hundreds of goods, from soap to chicken, and reaching a deal with holders of defaulted debt.
Foreign financial firms lapped it up. In 2016 Jamie Dimon, the boss of JPMorgan Chase, America’s biggest bank, told its shareholders that “Argentina can be an example to the world of what can happen when a country has a good leader who adopts good policy.” Incredibly, in hindsight, Argentina managed to flog a 100-year dollar bond at an interest rate of only 8% in June 2017. (It has since lost over 60% of its value.)
Things went downhill soon after. Mr Macri was wary of stifling economic growth and, lacking a majority in congress, was reluctant to cut the budget deficit sharply. He relaxed the central bank’s inflation target, despite racing prices. Investors cooled, in part because global interest rates began to rise, drawing capital from emerging economies back to America.
In early 2018 the peso slid rapidly, losing a fifth of its value against the dollar in just over four months. Mr Macri was forced to turn to the IMF, which agreed to lend Argentina $50bn, later extended to $57bn, its largest-ever programme.
Then on August 11th Mr Macri was resoundingly defeated by Alberto Fernández, his populist opponent in the presidential election in October, in a primary poll that acts as a dress rehearsal for that election. Mr Fernández’s running mate is Mr Macri’s predecessor, Cristina Fernández de Kirchner (no relation). Formally, the primary settled nothing.
But Mr Macri’s goose looks well and truly cooked. Investors rushed to dump Argentine assets, fearing that Mr Fernández will return to the reckless policies pursued by Ms Fernández (under whom inflation soared so high that the government fiddled the data). The Merval stock market index lost 37% the day after Mr Macri’s drubbing. The peso plunged by 25%.
The currency then slid again last week after an old ghost reappeared: a default on Argentina’s foreign debt, which has happened eight times since independence in 1816. The government announced a “reprofiling”—ie, delayed repayment—of $100bn-worth of short-term borrowings and raised the prospect that some longer-term debts might be rejigged, too. That led to a new wave of capital flight and a few days later the reimposition of currency controls.
Argentines have bitter memories of the previous time their government went to the IMF, in 2001, blaming it for the austerity and devastating sovereign default that ensued. Mr Fernández has played on the fund’s unpopularity, accusing it of being responsible for Argentina’s latest troubles and promising to renegotiate the loan.
That may work out nicely for him: fear of his presidency helped bring about the peso’s crash, which in turn makes his eventual victory more likely. But if he wins it will be a poisoned chalice: a country facing default again, cut off from international markets, and a population even more beleaguered and cynical about reform.
Bienvenida
Les doy cordialmente la bienvenida a este Blog informativo con artÃculos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y polÃticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Friedrich Nietzsche
Quien conoce su ignorancia revela la mas profunda sabidurÃa. Quien ignora su ignorancia vive en la mas profunda ilusión.
Lao Tse
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
Warren Buffett
No soy alguien que sabe, sino alguien que busca.
FOZ
Only Gold is money. Everything else is debt.
J.P. Morgan
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Proverbio Chino
Quien no lo ha dado todo no ha dado nada.
Helenio Herrera
History repeats itself, first as tragedy, second as farce.
Karl Marx
If you know the other and know yourself, you need not fear the result of a hundred battles.
Sun Tzu
Paulo Coelho

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