Democracies need renewal if they are to survive

They can be modernised and restored, though never to permanent, perfect health

Tony Barber

© James Ferguson

Like cars, personal computers and the human body, democracies must be fixed from time to time to work well. Today, millions of US and European citizens feel powerless and unrepresented in political and economic systems that respond inadequately to their needs.

Mistrust of once deeply respected institutions is widespread. It is becoming fashionable to speak of a “democratic recession”, or worse, in western societies.

Every generation is tempted to think that its challenges are unique. History teaches otherwise.

The first half of the 20th century encompassed the US Progressive Era, the New Deal and the British Liberal and Labour governments of 1906-14 and 1945-51. In each case, the motivating spirit of reform was the conviction that, to fight off crisis and build a better society, old forms of political representation and economic management must adapt to far-reaching social and industrial change.

Democracies can die — of that there should be no doubt. But they can also be modernised and restored to good working order, though never to permanent, perfect health. Much depends on the diagnosis and proposed remedies. In today’s conditions, although the two sets of problems overlap, it helps to distinguish between the need to improve democratic representation on the one hand, and the need to advance social cohesion and prosperity on the other.

The focus on Russian interference in the 2016 US presidential election, and in various EU votes including the UK’s Brexit referendum, has distracted attention from the fundamentally homegrown nature of the flaws in western democracy. In the US, suppressing voters’ rights, gerrymandering congressional districts and the failure to reform campaign finance rules have nothing to do with Russia. The same is true for corruption and bad governance in individual European countries, and for the insufficient accountability of EU institutions.

Undeniably, the west’s adversaries and competitors have learnt how to stir up trouble. Russia’s tactics involve identifying a divisive issue, such as race in the US or migration in Europe, and whipping up anger on both sides of the argument in order to obstruct reasoned debate and paralyse government. Fake news, spread through social media, is part of the Russian armoury.

But fake news is also something at which unscrupulous US and European politicians shamelessly connive. It is not exactly new. The forged Zinoviev letter, which emerged just before the 1924 UK general election and was connected to British secret service, Conservative party and media intrigues rather than to Moscow, is as good an example of fake news as you will find in the past century.

Of course, strengthening formal democratic processes against foreign meddling is essential. Emmanuel Macron, France’s president, proposes a “European agency for the protection of democracies” to protect against cyber attacks and other manipulation. But the risk with this initiative is that it might add nothing more than another layer of ineffective EU bureaucracy.

Under a more ambitious approach, every European country would pass laws stipulating total transparency about the financing of political parties and candidates, including who pays for online advertising. Banks, businesses, lobbying groups, media and others could likewise be obliged to declare any foreign financial support. However, even to shine a light on the dark financial corners of modern western politics would not fully address the problem of political representation.

During the 2008 financial crisis and its aftermath, a sense of extreme inequality and unfairness has gripped millions of citizens, coupled with the feeling that their political institutions offered too little scope for doing much about it.

As governments bailed out banks, recouping the money by raising taxes and cutting the welfare state, citizens felt they were carrying the can for unaccountable elites who captured the state and business world. Slow-burning frustration was intensified by the feeling that politics is now the preserve of special interests.

For some reform-minded politicians and civic activists, the renewal of democracy means expanding participation in public life, creating new forums to operate alongside traditional parliaments and parties. “Deliberative democracy”, or citizens’ assemblies, have brought promising results in Australia, Canada and Ireland.

By contrast, the EU’s most important tool for participatory democracy, known as the European Citizens’ Initiative, has been a bit of a flop. Even mass petitions with more than 1m signatures have failed to persuade the European Commission to prepare legislation on the issues raised by campaigners. Mr Macron’s “Great Debate”, an effort to reinvigorate French democracy after his presidency fell into trouble last year amid the gilets jaunes protests, has had mixed results. Despite 2m online contributions and 10,000 local meetings, most participants were older, wealthier, well-educated and urban.

Any attempt at reviving democracy must include a sustained effort to protect living standards and improve economic opportunities for citizens pushed to the margins — all the more necessary in the age of artificial intelligence. Cleaning up politics and broadening democratic participation are important, but no less so is reform of the western capitalist model itself.

Investors May Regret Believing Hong Kong’s Crisis Is Over

The extradition bill that sparked the protests wasn’t the underlying cause of the protests, and its withdrawal isn’t guaranteed to end them

By Mike Bird

Students in Hong Kong boycotted the first day of classes Monday. Photo: Kin Cheung/Associated Press

Hong Kong Chief ExecutiveCarrie Lam ’s unpopular extradition bill is a symptom of the city’s political problem, not a cause. Investors are in for a shock if protesters aren’t satisfied with its long-awaited withdrawal.

Mrs. Lam has finally resolved to retire the bill that has sparked months of protests in the special administrative region of China. Stocks surged in response to the news, with the Hang Seng Index up nearly 4%, led by property developers. Wharf Real Estate Investment 1997 12.11%▲ rose nearly 12%.

Hong Kong’s financial markets now seem priced for mild disruption, at worst—even amid the clearest signs yet that the political crisis is spilling over into the local economy.

A survey of private businesses published Wednesday suggested that the beginnings of a serious recession were under way in August. The IHS Markit Hong Kong PMI survey came in at 40.8, far below the neutral 50 level. The result is consistent with a roughly 4% to 4.5% contraction in gross domestic product. Purchasing activity was at its lowest level in the 21-year history of the series.

Even before Wednesday’s rally, Hong Kong’s markets weren’t priced for anything like a 4% drop in GDP. The FTSE Local Hong Kong, which comprises stocks that make at least 70% of their sales in the city, has yet to even reach a one-year low.

The 12-month forward price-to-book ratio for Hong Kong’s mammoth real-estate developers is 0.68, barely below the 0.72 average the sector has recorded since 2012. Property prices aren’t showing signs of stress, with values in July within a fraction of their historical highs.

The PMI series requires caution, having sent exaggerated signals before. Notably, the series logged its worst reading during the 2003 SARS epidemic. GDP ended up falling by 0.6% in the second quarter of that year, compared with the same quarter of 2002—nothing like the crash the PMI number suggested.

But the miserable economic sentiment should make investors more cautious, particularly since there is no guarantee Mrs. Lam’s climbdown will resolve the crisis.

The withdrawal of the bill is no longer the sole demand of the protesters, nor perhaps even their primary focus. It is one of five demands that also include the withdrawal of the “riot” designation given to the June 12 protest, an independent commission into police handling of the protests and universal suffrage. Every additional weekend of disruption, escalation and the souring of trust in public institutions has made the situation more difficult to repair.

Of course, Mrs. Lam doesn’t need to convince the protesters she has given them everything they want. Dimming their enthusiasm to the point where the city can function on a day-to-day basis would be enough to revive the local economy.

Investors are behaving as if she has already done that. Their relief may prove premature.

Another Recession Sign to Ignore at Your Peril

A worrying signal from the ISM Manufacturing Survey follows an inversion of the yield curve, and it no longer makes sense to keep explaining such signs away

By Aaron Back

Work at a solar-panel factory in Oregon. A new indicator Tuesday suggested an August contraction in manufacturing activity. Photo: natalie behring/Reuters

Signs of a possible recession keep stacking up. At some point it no longer makes sense to keep explaining them away.

The latest grim omen came Tuesday as the Institute for Supply Management’s manufacturing index fell to 49.1 in August from 51.2 in July, signaling a likely contraction in manufacturing activity.

Market bulls will be quick to point out that an ISM reading in contractionary territory doesn’t necessarily signal an impending recession. The index did fall below 50 before each of the past three recessions, but it also did so in 1998, 2003 and early 2016. All three reflected genuine stress in the global economy that nonetheless failed to trigger a U.S. recession.

An inverted yield curve, on the other hand, has a much stronger track record as a predictor of recession. The yield on 10-year Treasurys has dipped below that of two-year Treasurys before each of the past three recessions and at no other time over the past 30 years, aside from a couple very brief episodes. The argument for this being a false signal now is that central banks in Europe and Japan have distorted the curve with negative rates and aggressive bond buying, indirectly suppressing long-term U.S. rates.

This isn’t dissimilar to an argument heard prior to the last recession in 2007, though. Back then, optimists argued that a glut of savings in China and other countries with large current account surpluses was driving down long-term rates. Needless to say, anyone buying this story got burned badly.

Both the so-called global savings glut of last decade and the negative interest rates of recent years weren’t just random phenomena but signals of real economic problems. In the 2000s, it was an unsustainable savings and trade imbalance between the U.S. and China. In this decade it is anemic global growth stubbornly resistant to traditional stimulus.

Market bulls are resting their hopes on a strong U.S. consumer, yet key consumer variables such as unemployment and wages are lagging indicators—well known for trailing developments in the broader economy. If U.S. business activity buckles under the weight of trade tensions and a global downturn, consumers will follow.

With both the yield curve and manufacturing surveys flashing red at the same time, it would be foolish to dismiss them both. No wonder investors are spooked.

Hong Kong’s ‘water revolution’ spins out of control

If Beijing maintains its hard line against protesters, the violence could intensify

Jamil Anderlini

© James Ferguson

Every revolution needs a name. The pro-democracy demonstrations that have roiled Hong Kong for three months will be known as the “water revolution”.

Since massive protests erupted in June, demonstrators have adhered to what they call a “be water” strategy. This pays tribute to Hong Kong’s most famous son and has utterly confounded the police, the government and the politburo in Beijing. “Be formless, shapeless, like water,” said Bruce Lee, the kung-fu movie star and most influential martial artist in history, in a rare TV interview in 1971. “Water can flow, or it can crash — be water, my friend.”

In Hong Kong’s humid summer of revolt, the protests have at times been placid and calm, with millions of citizens flowing peacefully through the streets and then melting away. At other times, including this past weekend, they have been whipped into a frenzy as clashes break out between riot police and demonstrators armed with petrol bombs, slingshots and spears.

The protesters have extended the metaphor to describe their tactics. “Be strong like ice” when confronted by police or violent vigilante groups; “be fluid like water” in order to disrupt many parts of the city at once and stretch police resources; “gather like dew” for “flash-mob” protests that are hard to prepare for; “scatter like mist” to avoid arrest and fight another day.

This philosophy has added to the peculiar and possibly unique nature of the rebellion. The hardcore demonstrators are organised in small cells with no formal hierarchy. Through social media they operate a highly dispersed and democratic market of ideas to crowdsource their tactics and slogans. There are tens of thousands of them and they add new recruits all the time.

In this way, the movement has stayed two steps ahead of the authorities.

The demonstrators have learnt lessons from the peaceful “umbrella revolution” of 2014, when idealistic youth occupied parts of central Hong Kong for 79 days calling for universal suffrage in the territory. Most of the leaders of that movement were later charged and imprisoned, and all of the protesters’ demands were ignored.

Many on the street today are veterans of 2014, but they view the conveners of the umbrella movement as spiritual leaders rather than commanders. This is why the arrest of several high-profile umbrella movement leaders on Friday only provoked a larger turnout over the weekend.

Much of the analysis of the Hong Kong unrest has focused on economics. While unaffordable housing and extreme inequality contribute to popular anger, it is condescending and misleading to blame these factors entirely. Many of the radicals are wealthy and highly educated. When they scatter to avoid police they often escape in luxury cars. Polling among protesters consistently shows that economic factors are less important to them than ideas.

They have uniforms — gas masks, construction helmets, umbrellas and black clothing — and they have martyrs, including a young woman who lost an eye from a police projectile. The movement is also cool and deeply romantic for young people who believe they are fighting for the future of their city. Many young couples in full battle gear can be seen hand in hand on the barricades.

This idealism has been fuelled by constant references to historical liberation movements. Just over a week ago, tens of thousands joined hands across the territory on the 30th anniversary of the “Baltic Way” — a human chain formed by 2m people across Lithuania, Estonia and Latvia to oppose Soviet rule.

In one powerful image, the “Goddess of Democracy” statue erected in Tiananmen Square during the Chinese pro-democracy protests of 1989 has been recreated, but this time with a yellow umbrella, as well as a gas mask and hard-hat.

The graffitied slogan “give me democracy or give me death” evokes the American Revolution. Even the Chinese Communist party’s own pedigree has been turned against it with posters of Mao Zedong and his quotations, including “a revolution is not a dinner party”. The dreary authoritarian propaganda pumped out by Beijing-controlled media, including cringe-inducing nationalist rap videos, just cannot compete.

The romance of this revolution and the depth of support it enjoys cannot be fully appreciated until you have spoken to young people who attend each protest with their last will and testament in their pockets or left on laptops in their parents’ home. It is very hard to imagine they will quietly return to class any time soon and it is equally easy to imagine the movement morphing into a genuine armed insurgency. Police already claim to have found large amounts of deadly explosives in a bomb factory allegedly run by an anti-government protest group and the city has seen bombing campaigns before, in the Communist-instigated riots of the late 1960s.

If Beijing continues with its ultra-hardline approach, it is possible Hong Kong will descend into a situation resembling the Northern Irish “Troubles” of the 1970s and 1980s. That would mark the end of the city as a global financial centre. But it would not end the water revolution, which could easily spill across the border into mainland China, as IRA attacks did in the UK. As another popular slogan of the rebellion says: “you can’t shoot water”.

The Trouble With Rate Cuts in China

The People’s Bank of China doesn’t want easier monetary policy to flood the housing market with fresh credit, as happened in 2015

By Mike Bird

Like President Trump, China’s leaders want lower interest rates. The constraint they face isn’t an independent central bank but a bubble-prone property market.

This week, the People’s Bank of China revealed a long-anticipated change to how commercial bank interest rates will be calculated. Revealingly, PBOC officials were at pains to stress that while the move might lower interest rates for corporate lending, mortgage interest rates wouldn’t fall.

Eighteen banks now have to show the PBOC the best interest rates they offer to their clients, based on rates set by the central bank’s medium-term lending facility, a source of credit for the banks themselves.

The change has two objectives. One is to lower rates, at least for some loans. Previously, the banks had to base their lending rates not on the MLF but on China’s benchmark rate, which is roughly a percentage point higher for one-year loans. The other is to improve the transmission mechanism for monetary policy: The PBOC wants banks to do a better job of passing changes in policy on to their customers.

The reform is described widely as a market-oriented liberalization, but it isn’t entirely clear why. The PBOC is making banks calculate their lending rates based on one interest rate it administers, rather than another interest rate it administers. Rates for the one-year MLF have barely changed in the past three years.

The most interesting aspect of the PBOC’s new approach to interest rates is the deliberate exclusion of real estate. Photo: wang zhao/Agence France-Presse/Getty Images 

The most interesting aspect of the new approach is the deliberate exclusion of real estate. This is likely because Chinese households went on a borrowing spree after the PBOC’s 2015 round of benchmark rate cuts. In 2016, household debt rose by 6.2 trillion yuan ($878.11 billion)—compared with an increase of around 3 trillion yuan a year on average for the previous five years—and only accelerated subsequently.

Beijing is also aware of the other lesson from its last round of interest-rate cuts: They helped send the yuan sharply lower, in turn triggering capital outflows. The PBOC may be comfortable with the yuan trading past 7 to the dollar, but a much weaker currency isn’t its ambition. The fact that the new lending guideline was set at 4.25% on Tuesday, just fractionally below the 4.31% under the old system, suggests hesitancy on the part of policy makers.

This week’s announcements are more a reflection of China’s limited monetary options than a grand effort to liberalize how credit is dished out. The PBOC’s existing tools can’t be deployed without generating the same worrying imbalances as last time.

jueves, septiembre 05, 2019



Trump’s War on Evidence

US President Donald Trump has made no secret of his disdain for experts and evidence-based policymaking. Yet by attempting to gut the US Census Bureau and two key agencies within the Department of Agriculture, he is undercutting the data-gathering institutions upon which broad sectors of the US economy rely.

Anne O. Krueger


WASHINGTON, DC – Decision-making based on evidence rather than superstition was a driving force behind the Industrial Revolution, and the collection of statistics has, accordingly, become a hallmark of the modern age. In the twenty-first century, businesses and governments alike are finding that data are more valuable than ever.

There are cases where data should be – and, indeed, are – collected by the private sector. But given their broad applications, many data sets are public goods, and thus should be gathered by governments. One of the factors behind America’s economic dominance is that the US government has long collected statistics that are universally regarded as trustworthy and impartial. These data have played an indispensable role in driving innovations in technology, medicine, social policy, and many other fields.

US President Donald Trump’s administration, however, seems to believe that experts and evidence are irrelevant. For example, it has starved the US Census Bureau of funds, precisely when the agency is in the process of conducting the decennial census, as mandated by the US Constitution. An internationally respected institution, the Census Bureau usually benefits from a sharp funding increase in the years leading up to the census (followed by a decrease in the years immediately thereafter). But under Trump, the agency’s budget has been held relatively flat, leaving it without the means to test different survey questions or various cost-saving techniques.

The census is far too valuable to receive such short shrift. US businesses rely on the data collected by the Census Bureau to make decisions about future output, hiring, and investments.

The government itself needs accurate and comprehensive census data to forecast future revenues and the costs of major programs such as Social Security, Medicaid, and Medicare.

And independent researchers and academics use census data to improve our understanding of political, economic, and social behavior.

Sadly, the Census Bureau is not the only victim of the Trump administration’s war on evidence.

Others include two highly respected agencies within the Department of Agriculture (USDA): the Economic Research Service and the National Institute of Food and Agriculture. In June, Secretary of Agriculture Sonny Perdue announced that both the ERS and NIFA will lose their independent status within the department and be relocated from Washington, DC, to Kansas City.

The administration’s attack on these agencies will have far-reaching implications for the US economy. Farmers rely on ERS data to assess crop prospects, international market conditions, weather patterns, and problems stemming from pollution, soil runoff, and other factors. And NIFA is a major funder of agricultural and environmental research at US land-grant universities. Taken together, these two agencies – along with competition between states – are a major reason why US farmers are among the most productive in the world. And given the ongoing disruptions to agricultural exports as a result of Trump’s trade war, the analyses these agencies provide are needed even more now.

Make no mistake: by relocating the ERS and NIFA, the Trump administration is effectively gutting both agencies. Around 500 staffers have been told that their jobs are moving to the Midwest this year. The administration’s rationale for this decision – that the relocation will bring ERS and NIFA staff closer to their clients – beggars belief. Agriculture and research are nationwide activities, and ERS/NIFA staffers must interact closely with others at the USDA and abroad to furnish the reliable data upon which so many American farmers rely.

Most of the ERS/NIFA staffers who have been told to relocate are career civil servants, scientists, and researchers with roots in the Washington, DC, area. Although they have mortgages, working spouses, children in schools, and friends there, they were given just 33 days to decide whether they would move or quit. So far, about two-thirds have chosen the latter option. And those who have said they will move still do not know exactly where the new offices will be located.

Obviously, this is no way to treat employees, let alone run a government. But, as with so much else the Trump administration does, mis-governance seems to be the point. No private company would even contemplate a move of such magnitude without having more concrete plans in place, for fear of mass attrition and inflicting lasting damage on the firm’s ability to function. One cannot help but suspect that the Trump administration’s intent is simply to destroy the two agencies.

According to a recent report by the USDA’s Inspector General, the administration’s plans violate the 2018 Consolidated Appropriations Act, because it has not obtained congressional budget approval to relocate the ERS and NIFA offices. Such legal questions will need to be resolved. But one hopes that, in the meantime, Trump will rethink and rescind a decision that will hurt American farmers even more than his trade war already has.

Anne O. Krueger, a former World Bank chief economist and former first deputy managing director of the International Monetary Fund, is Senior Research Professor of International Economics at the School of Advanced International Studies, Johns Hopkins University, and Senior Fellow at the Center for International Development, Stanford University.

Here’s why the bond market isn’t as worried about a recession as you think

JPMorgan estimates that less than half of August’s bond market rally was driven by economic concerns

By Sunny Oh


The sharp swoon in U.S. Treasury yields this month may not point to a looming economic slowdown after all.

Less than half of the bond market’s rally in August can be explained by a deterioration in the economic growth outlook and expectations for further monetary easing from the Federal Reserve, according to Marko Kolanovic, JPMorgan’s global head of quantitative and derivatives strategy, in a Tuesday research note.

The rest of the bond market move was driven by noneconomic factors that nonetheless have spurred demand for long-term government debt.

Market participants have complained that the speed of the bond market’s rally this month appeared overdone given the resilience of the U.S. economy. Recent data including strong retail sales and continued growth in jobs underscore the strength of U.S. households that have weathered the worsening global economic growth trajectory.
Given this backdrop, investors have been asking “how much of the move can be attributed to increased recession risk versus technical flows in an environment of poor liquidity,” said Kolanovic.

The 10-year Treasury note yield TMUBMUSD10Y, -3.47% has shed as much as 50 basis points this month, contributing to close to half of its year-to-date decline. The benchmark bond yield is down around a single percentage point since the start of 2019.

Falling long-term yields have pushed the 10-year yield below the 2-year note yield to invert the yield curve briefly last week. An inversion of the curve has preceded each of the last seven recessions.

Worries that the bond market was portending an economic downturn sparked the biggest one-day slump for the Dow Jones Industrial Average DJIA, -0.66% this year on Aug. 14.
But Kolanovic says the value of long-term bond yields as an economic signal has been somewhat distorted by technical drivers such as so-called convexity hedging, a powerful driver of the bond market’s rally this year.

Such technical flows were highlighted earlier in March after investors rushed to refinance home loans to take advantage of the slide in long-term mortgage rates, which were pegged to long-term Treasury yields. This resulted in a wave of prepayments from homeowners rolling over their loans at lower rates.

To hedge against the risk of diminished incomes from home loans, investors of mortgage-backed securities bought Treasurys with extended maturities, pushing yields lower in a vicious circle of bond buying.

JPMorgan estimates that inflows into long-term government bonds from convexity hedging this year amounted to around $400 billion.

Thin liquidity conditions over the summer have also helped supercharge the bond market rally.

The lack of trading was exacerbated by the sudden retreat of high-frequency traders spooked by the spike in bond-market volatility this month. Analysts say high frequency traders have become increasingly important market makers for Treasurys over the last decade.

The one-month Merrill Lynch MOVE index, which tracks the implied volatility of the 10-year Treasury yield over 30 days, spiked to a reading of nearly 90 on Aug. 16, its highest levels since early 2016.