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Archive for the ‘Global Economics’ Category

I COMPLETELY agree with the points made by Bill Gross in this article.  Here is an excerpt and the link:

“Faced with these two decidedly different routes to “level the playing field” it seems obvious that the United States is opting for “Easy Street” as opposed to “Buckle Down Road.” Granted, “The Ben Bernank” as a YouTube cartoon rather hilariously labeled him, has for several months importuned Congress and the Executive Branch to institute substantive reforms, while he attempts to keep the patient alive via non-conventional monetary policy. But very few others are willing to extract their heads from the sand. The President’s debt commission with its insistence on low personal and corporate income tax rates and a mere 15 cent increase in the gasoline tax was one example. The Republicans’ reluctance to advance detailed ideas for budget balancing is another. And the Democrats’ two-year focus on the biggest entitlement program since Social Security – healthcare – as opposed to fundamental reforms to counter our lack of global competitiveness – is perhaps the most grievous example of lost opportunity. Unlike the United Kingdom, where Prime Minister Cameron has championed fiscal conservatism, or even Euroland, which is being forced in the direction of Angela Merkel’s Germanic work ethic, the United States seems to acknowledge no bounds to what it can spend to bolster consumption or how much it can print to support its asset markets. We will more than likely continue to “level the playing field” via currency devaluation and an increasing emphasis on trade barriers and immigration, as opposed to constructive policies to make this country more competitive in the global marketplace.”

http://www.pimco.com/Pages/AllentownDecember2010.aspx

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I thought this Economist article contained an interesting combination of ideas.  First, it’s astonishing to note that although the level of our trade deficit with China has decreased, over the same period, our trade with China has grown to represent a greater portion of our total trade deficit.  The article presents several plausible explanations of why China’s share of global exports is rising but I am left wondering why the US/China trade relationship has changed so dramatically.

Even more interesting to me is Paul Krugman’s endorsement of currency-adjusting tarriffs as an appropriate response to Beijing’s stubbornly pegged Yuan.  Although I strongly believe China’s subsidized currency has created massive damaging distortions in world trade and capital flows, which are disturbingly ignored in Washington as senators seemingly prefer berating Wall Street “barons” to seeking actual cause,  it is ironic to me that Krugman, the borrow and stimulate Keynesian, doesn’t seem to realize that trade is a two way street.  America has completely lost touch with the reality that wealth is created through parsimony and hard work.  As much as I agree with Krugman’s diagnosis, Greenspan is also on board in spirit (see Greenspan’s March 2009 WSJ piece), I wish Krugman would recognize his part in the problem.

‘China takes an even bigger slice of America’s market. In the first ten months of 2009 America imported 15% less from China than in the same period of 2008, but its imports from the rest of the world fell by 33%, lifting China’s market share to a record 19%. So although America’s trade deficit with China narrowed, China now accounts for almost half of America’s total deficit, up from less than one-third in 2008.

Foreign hostility to China’s export dominance is growing. Paul Krugman, the winner of the 2008 Nobel economics prize, wrote recently in the New York Times that by holding down its currency to support exports, China “drains much-needed demand away from a depressed world economy”. He argued that countries that are victims of Chinese mercantilism may be right to take protectionist action.

Some forecasters, such as the IMF, expect China’s trade surplus to start widening again this year unless the government makes bold policy changes, such as revaluing the yuan. However, Chris Wood, an analyst at CLSA, a brokerage, argues that China is doing more for global rebalancing than America. Rebalancing requires that China spends more and America saves more. Mr Wood argues that China is doing more to boost domestic consumption (for example, through incentives to stimulate purchases of cars and consumer durables, and increased health-care spending) than America is doing to boost its saving. America’s total saving rate fell in the third quarter of last year to only 10% of GDP, barely half its level a decade ago. Households saved more, but this was more than offset by increased government “dissaving”.’

http://www.economist.com/businessfinance/displaystory.cfm?story_id=15213305&fsrc=rss

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More interviews with Soros on the FT’s website:

http://www.ft.com/cms/668e074a-bf24-11de-a696-00144feab49a.html?_i_referralObject=10928404&fromSearch=n

Also in today’s headlines, Soros ‘has pledged $50m to back a new think-tank with the mission of reconceiving the field of economics, which he describes as “a dogma whose time has passed”.

The group, to be called the Institute of New Economic Thinking, will gather luminaries in the field of economics to reflect on the ideas that allowed the latest economic crisis to transpire and to bring new ideas to a profession that some argue has become too deeply entrenched in free-market ideology.

The group’s advisory board will be studded with economists such as Jeffrey Sachs, George Akerlof, Kenneth Rogoff and Joseph Stiglitz as well as public commentators such as Anatole Kaletsky and John Kay, a Financial Times columnist. Mr Soros is pledging $5m a year for 10 years.

Mr Soros, who has long been a critic of economic “fundamentalism”, blames the unwavering belief in unchecked free markets, which remains pervasive in universities, for allowing financial markets and asset prices to melt down. Through INET, he will be indirectly funding his philosophy of“reflexivity” – that markets tend to influence perceptions of reality, which in turn feed back into markets.

“The ideologists in the free markets are still in command and I think they’ll be very difficult to remove because they have tenure,” Mr Soros said in an interview with the Financial Times.

A side-effect of the crisis has been a deep bout of self-doubt in the economics profession, which largely failed to predict the downturn. Even Alan Greenspan, one of the most faithful believers in the efficiency of markets, said he had found a “flaw” in the free-market model that defined his world view.

“The financial crisis has caused a moment of deep reflection in the economics profession, for it has put many long-standing ideas to the test,” Mr Stiglitz, winner of the 2001 Nobel prize in economics, said in a statement. “If science is defined by its ability to forecast the future, the failure of much of the economics profession to see the crisis coming should be a cause of great concern.”

Mr Soros, who has called for limits on risk, leverage and compensation at big banks, said he realises it will be difficult to uproot the predominant strain of economic thinking. He hopes, however, to inspire a groundswell of support from students that will “shift demand” at universities to include economic ideas that are more reality based and less focused on rigid mathematical models.

“I think that the financial crisis has proven that is unrealistic,” Mr Soros said of the prevailing economics literature, which assumes that people behave rationally. “The dogma has lost touch with reality.”

INET will fund research, fellowships and workshops aimed at explaining the flaws in the current financial system.’

http://www.ft.com/cms/s/0/e45b353a-c2f3-11de-8eca-00144feab49a.html?ftcamp=rss

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Soros in an interview with the FT:

“Those earnings are not the achievement of risk-takers,” Mr Soros said. “These are gifts, hidden gifts, from the government, so I don’t think that those monies should be used to pay bonuses. There’s a resentment which I think is justified.”

“With the too-big-to-fail concept comes a need to regulate the payments that employees receive,” said Mr Soros, who will elaborate on his views in lectures in Budapest next week.

Some bankers have argued that limits on pay would make it difficult for them to retain their most talented risk-takers. Mr Soros agreed and said this would be a good thing.

“That would push the risk-takers who are good at taking risks out of Goldman Sachs into hedge funds, where they actually belong, because hedge funds take risks with their own capital, not with deposits and not with government guarantees,” he said.

http://www.ft.com/cms/s/0/79edee04-c00a-11de-aed2-00144feab49a.html?ftcamp=rss&nclick_check=1

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I have read many articles recently focused on executive pay and our “bloated” financial sector with a tone similar to that taken by Stiglitz in the excerpt below.  While I agree that our economy hardly awards pay in line with productivity, this allocation of blame forgets that many many of this country’s citizens leveraged themselves to hilt with loans from credit cards and multiple mortgages.  The national savings rate was briefly negative.  I’ve heard the stories of deceptive subprime mortgage salesman with disgusting incentives, but it still takes two to tango.  I place at least as much responsibility on the “less informed” for their poor choices as I do the misinformation of snake oil salesmen.  That said, our banks need to take a long pause to consider their longterm role in society and act appropriately.  Goldman would be very foolish to declare even near record bonuses this year.

Without any other compass, the incentive structures they adopted did motivate them – not to introduce new products to improve ordinary people’ lives or to help them manage the risks they faced, but to put the global economy at risk by engaging in short-sighted and greedy behavior. Their innovations focused on circumventing accounting and financial regulations designed to ensure transparency, efficiency, and stability, and to prevent the exploitation of the less informed.

There is also a deeper point in this contrast: our societies tolerate inequalities because they are viewed to be socially useful; it is the price we pay for having incentives that motivate people to act in ways that promote societal well-being. Neoclassical economic theory, which has dominated in the West for a century, holds that each individual’s compensation reflects his marginal social contribution – what he adds to society. By doing well, it is argued, people do good.

But Borlaug and our bankers refute that theory. If neoclassical theory were correct, Borlaug would have been among the wealthiest men in the world, while our bankers would have been lining up at soup kitchens.

Of course, there is a grain of truth in neoclassical theory; if there weren’t, it probably wouldn’t have survived as long as it has (though bad ideas often survive in economics remarkably well). Nevertheless, the simplistic economics of the eighteenth and nineteenth centuries, when neoclassical theories arose, are wholly unsuited to twenty-first-century economies. In large corporations, it is often difficult to ascertain the contribution of any individual. Such corporations are rife with “agency” problems: while decision-makers (CEO’s) are supposed to act on behalf of their shareholders, they have enormous discretion to advance their own interests – and they often do.

Bank officers may have walked away with hundreds of millions of dollars, but everyone else in our society – shareholders, bondholders, taxpayers, homeowners, workers – suffered. Their investors are too often pension funds, which also face an agency problem, because their executives make decisions on behalf of others. In such a world, private and social interests often diverge, as we have seen so dramatically in this crisis.

Does anyone really believe that America’s bank officers suddenly became so much more productive, relative to everyone else in society, that they deserve the huge compensation increases they have received in recent years? Does anyone really believe that America’s CEO’s are that much more productive than those in other countries, where compensation is more modest?

Worse, in America stock options became a preferred form of compensation – often worth more than an executive’s base pay. Stock options reward executives generously even when shares rise because of a price bubble – and even when comparable firms’ shares are performing better. Not surprisingly, stock options create strong incentives for short-sighted and excessively risky behavior, as well as for “creative accounting,” which executives throughout the economy perfected with off-balance-sheet shenanigans.”

On the other hand, I am very happy to see that political powers have begun  to acknowledge the continuing threat of global trade imbalances to the economy and, to a lesser extent, their role in the crisis we are exiting.

“U.S. Federal Reserve Chairman Ben Bernanke warned on Monday that Asian export-promotion policies and large U.S. budget deficits could refuel global economic imbalances and put efforts to achieve more durable growth at risk if not curbed.” http://www.nytimes.com/reuters/2009/10/19/business/business-us-usa-fed-bernanke.html

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Interesting summary by PIMCO’s director:

“Well, the surprise is that there’s been a significant break in that growth pattern, because of delevering, deglobalization, and reregulation. All of those three in combination, to us at PIMCO, means that if you are a child of the bull market, it’s time to grow up and become a chastened adult; it’s time to recognize that things have changed and that they will continue to change for the next – yes, the next 10 years and maybe even the next 20 years. We are heading into what we call the New Normal, which is a period of time in which economies grow very slowly as opposed to growing like weeds, the way children do; in which profits are relatively static; in which the government plays a significant role in terms of deficits and reregulation and control of the economy; in which the consumer stops shopping until he drops and begins, as they do in Japan (to be a little ghoulish), starts saving to the grave.

This focus on the DDRs – delevering, deglobalization, and reregulation – may be conceptually understandable, but nevertheless still a little hard to get one’s arms around. Why would they necessarily lead to a new, slower growth normal? A little easier to grasp might be the following approach, which feeds off the same concept, but which extends it a little further by suggesting that DD and R lead to a number of broken business or economic models that may forever change the world we once knew and make even Barton Biggs a chastened adult. They are as follows:

  1. American-style capitalism and the making of paper instead of things. Inherent in the “great moderation” of the past 25 years was the acceptance of a sort of reverse mercantilism. America would consume, then print paper assets and debt in order to pay for it. Developing (and many developed) countries would make things, and accept America’s securities in return. This game is over, and unless developing countries (China, Brazil) step up and generate a consumer ethic of their own, the world will grow at a slower pace.
  2. Private vs. public-driven growth. The invisible hand of free enterprise is being replaced by the visible fist of government, a temporarily necessary, but (if permanent) damnable condition itself in terms of future growth and profits. The once successful “shadow banking system” is being regulated and delevered. Perhaps a fabled “110-pound weakling” may be an exaggeration of where our financial system is headed, but rest assured it will not be looking like Charles Atlas anytime soon. Prepare to have sand kicked in your face, if you believe you are a “child of the bull market!”
  3. Global economic leadership. It’s premature to award the 21st century to the Chinese as opposed to the United States, but if the last six months have been any example, China is sort of lookin’ like Muhammad Ali standing over Sonny Liston in 1964 yelling, “Get up, you big ugly bear!” Not only has China spent three times the amount of money (relative to GDP) to revive its economy, but it has managed to grow at a “near normal” 8% pace vs. our “big R” recessionary numbers. Its equity market, while volatile and lightly regulated, has almost doubled in twelve months, making ours look like that ugly bear instead of a raging bull.
  4. United States housing and employment. Old normal housing models in the U.S. encouraged home ownership, eventually peaking at 69% of households as shown in Chart 1. Subsidized and tax-deductible mortgage interest rates as well as a “see no evil – speak no evil” regulatory response to government Agencies FNMA and FHLMC promoted a long-term housing boom and now a significant housing bust. Housing cannot lead us out of this big R recession no matter what the recent Case-Shiller home price numbers may suggest. The model has been broken if only because homeownership is declining, not rising, sinking to perhaps a New Normal level of 65% as opposed to 69% of American households.Similarly, the financialization of assets via the shadow banking system led to an American era of consumerism because debt was available, interest rates were low, and the livin’ became easy. Savings rates plunged from 10% to -1%, as many (if not most) assumed there was no reason to save – the second mortgage would pay for everything. Now things have perhaps irreversibly changed. Savings rates are headed up, consumer spending growth rates moving down. Get ready for the New Normal.

I could go on, reintroducing the negatives of an aging boomer society not just in the U.S., but worldwide. Increased health care may be GDP positive, but it’s only a plus from a “broken window” point of view. Far better to have a younger, healthier society than to spend trillions fixing up an aging, increasingly overweight and diabetic one. Same thing goes for energy. Far easier and more profitable to pump oil out of the Yates Field in Texas or even Prudhoe Bay than to spend trillions on a new “green” society. Our world, and the world’s world, is changing significantly, leading to slower growth accompanied by a redefined public/private partnership.

The investment implications of this New Normal evolution cannot easily be modeled econometrically, quantitatively, or statistically. The applicable word in New Normal is, of course, “new.” The successful investor during this transition will be one with common sense and importantly the powers of intuition, observation, and the willingness to accept uncertain outcomes. As of now, PIMCO observes that the highest probabilities favor the following strategic conclusions:

  1. Global policy rates will remain low for extended periods of time.
  2. The extent and duration of quantitative easing, term financing and fiscal stimulation efforts are keys to future investment returns across a multitude of asset categories, both domestically and globally.
  3. Investors should continue to anticipate and, if necessary, shake hands with government policies, utilizing leverage and/or guarantees to their benefit.
  4. Asia and Asian-connected economies (Australia, Brazil) will dominate future global growth.
  5. The dollar is vulnerable on a long-term basis.”

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2009/Gross+Sept+On+the+Course+to+a+New+Normal.htm

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