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A Mess 30 Years in the Making

“We have assembled a best-in-class team of policy advisors to drive President Trump’s bold plan for job creation and economic growth.”

– Gary Cohn, Chief Economic Advisor to President Trump

The art and science of spending other people’s money is not an occupation suited to just anyone.  Rather, it’s a skill reserved for the professional world-improver.  To be successful, one must act with a zealous devotion to uplifting the down and out, no matter the cost.

Donald Trump’s chief economic advisor Gary Cohn – as some observers have noted, he represents one of the factions in the wider circle of economic advisors (there are many advisors who are not members of an official body such as the Council of Economic Advisors, but reportedly have the president’s ear). This is considered problematic, or rather confusing, on the grounds that in some cases the views of these advisors appear to be diametrically opposed. The question is whose views will eventually prevail.     Photo credit: Kena Betancur / AFP / APA

Lawyers, bankers, economists, and government philosophers with fancy resumes, who attended fancy schools.  These are the devoted fellows who comprise President Trump’s team of economic policy advisors.  Moreover, these are the chosen associates who are charged with bringing Trump’s economic vision to fruition.  Are they up to the task?

Only time will tell.  But, already, it is quite evident that Trump’s economic policy advisors have their work cut out for them.  During Trump’s speech to Congress on Tuesday night, he called for more jobs, more education, more military, and more affordable health insurance.

By all accounts the speech sounded delightful.  Promises were made to spread the government’s slop far and wide.  Trump pledged offerings that just about anyone and everyone – with the exception of grumpy face Bernie Sanders – could stand behind and applaud.

 

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Policy Makers, like Generals, Are Busy Fighting The Last War

Policy Makers, like Generals, Are Busy Fighting The Last War

The Maginot Line formed France’s main line of defense on its German facing border from Belgium in the North to Switzerland in the South.  It was constructed during the 1930s, with the trench-based warfare of World War One still firmly in the minds of the French generals.  The Maginot Line was an absolute success…as the Germans never seriously attempted to attack it’s interconnected series of underground fortresses.  But the days of static warfare were over – in 1940, the Germans simply drove around the line through Holland and then Belgium.  Had the Germans replayed WWI and made a direct attack, the Maginot Line likely would have done its job.  But Hitler wasn’t interested in a WWI re-do, so the fortifications were quickly rendered moot.  France, Europe, and the world would pay the price for generals fighting the last war rather than adjusting to the contemporary risks they faced.
In 2008, the economic generals at the various central banks likewise pulled out the playbook to refight the great depression…not realizing, this time was an entirely different opponent.  Federal governments and central bankers presumed doing what they had always done would again win the day.  Cut interest rates (this time to zero) to incent both public and private entities to refinance existing debt loads and undertake new, greater leverage.  This nearly free money would reduce debt service levels and the new loans would ignite a new wave of economic activity in the form of capital expenditures and small business creation.  Economic multipliers and velocity would ensure general prosperity with job and wage growth.  Instead, it’s the “Maginot Line” all over again for our economic generals as economic activity grinds to a stall absent the  illusory asset bubbles.  
BTW – if you are not a fan of charts or visual representations…this is not the article for you and likely best to stop here.

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Private Capital Allocation Matching Only the Great Depression for Inefficiency

Private Capital Allocation Matching Only the Great Depression for Inefficiency

  1. Economic policy objectives (monetary and fiscal) are meant to incentivize domestic private business investment, which drives incomes and the money multiplier effect, i.e. the engine of the economy.
  2. Economic policy objectives have failed because CEO’s, the private capital allocators, simply cannot accommodate business investment when the demand function is as weak as we currently find it, no matter how available and how cheap the capital.
  3. The demand function is weak because we misunderstood and ignored the side effects of trade policies and their reliance on new world economies that naturally have a lower money multiplier effect than old world economies.
  4. A materially damaged demand function leads to a misallocation of resources; for the past 15 years capital has been and continues at an accelerating rate to be allocated to cash distribution (the most economically inefficient use of capital) rather than investment, further deteriorating the demand function (economic death spiral).
  5. The only question that matters now then is;  How do we get private sector capital allocators to allocate capital more efficiently?  I’ll give you a hint, it requires indications of sustainable demand improvement and neither monetary nor fiscal policy have the capacity to generate sustainable demand improvement when the demand function is damaged to the point that CEO’s refuse to invest productively.  This then requires a new economic policy framework, one that CAN generate sustainable demand improvement, which will allow capital allocators to invest productively.

We can understand the problem without villainizing any particular stakeholders by focusing on where we are today and delivering a viable solution.  Mistakes were made and judging whether they were honest or malicious in nature is irrelevant to finding the solution.  Our focus here is a solution.

The Proof:

What is the objective of Monetary and Fiscal policy expansion?

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Some Thoughts on Systems Change

There is an ongoing litany of alarming and depressing news regarding climate change and the growing gap between our aspirations for addressing it and reality (and climate change is only one of the nine planetary boundaries). There is similarly grim news about exponentially increasing levels of inequality, conflict — including in what Naomi Klein calls fossil fuel sacrifice zones — and the emergence of a nation of refugees.

Pondering appropriate responses to our increasingly chaotic and unstable global context has led me to identify a few central issues. First is the high degree of interconnection between the problems that we face. I would argue that proportionate reactions to climate change, for example, demand exploration of how energy is used — which in turn demands not just an understanding of the role of energy in our economies, but a preparedness to move away from relying on economic growth as the primary aim of economic policy. Generally we shy away from questioning the fundamentals of our economic system: if they come into conflict with the major issues we face, we somehow manage simply to ignore such conflict. See, by way of example, the EU’s (secret, internal) position during COP21 that nothing could be agreed which might jeopardise TTIP and similar agreements.

Continuing on the theme of connection, or the lack of it, I’m also struck by how little connection there is, generally, between top down responses to global issues and the bottom up movements also seeking to act on those issues.  Again using climate change as example, the chair of IPCC working group 2, Debra Roberts, commented on the general lack of access to high level processes and agreements:

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Too Little, Too Late

Too Little, Too Late

Last week, after a great deal of debate, the passengers aboard the Titanic voted to impose modest limits sometime soon on the rate at which water is pouring into the doomed ship’s hull. Despite the torrents of self-congratulatory rhetoric currently flooding into the media from the White House and an assortment of groups on the domesticated end of the environmental movement, that’s the sum of what happened at the COP-21 conference in Paris. It’s a spectacle worth observing, and not only for those of us who are connoisseurs of irony; the factors that drove COP-21 to the latest round of nonsolutions are among the most potent forces shoving industrial civilization on its one-way trip to history’s compost bin.

The core issues up for debate at the Paris meeting were the same that have been rehashed endlessly at previous climate conferences. The consequences of continuing to treat the atmosphere as a gaseous sewer for humanity’s pollutants are becoming increasingly hard to ignore, but nearly everything that defines a modern industrial economy as “modern” and “industrial” produces greenhouse gases, and the continued growth of the world’s modern industrial economies remains the keystone of economic policy around the world. The goal pursued by negotiators at this and previous climate conferences, then, is to find some way to do something about anthropogenic global warming that won’t place any kind of restrictions on economic growth.

What that means in practice is that the world’s nations have more or less committed themselves to limit the rate at which the dumping of greenhouse gases will increase over the next fifteen years. I’d encourage those of my readers who think anything important was accomplished at the Paris conference to read that sentence again, and think about what it implies.

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A Hard Look at a Soft Global Economy

A Hard Look at a Soft Global Economy

MILAN – The global economy is settling into a slow-growth rut, steered there by policymakers’ inability or unwillingness to address major impediments at a global level. Indeed, even the current anemic pace of growth is probably unsustainable. The question is whether an honest assessment of the impediments to economic performance worldwide will spur policymakers into action.

Since 2008, real (inflation-adjusted) cumulative growth in the developed economies has amounted to a mere 5-6%. While China’s GDP has risen by about 70%, making it the largest contributor to global growth, this was aided substantially by debt-fueled investment. And, indeed, as that stimulus wanes, the impact of inadequate advanced-country demand on Chinese growth is becoming increasingly apparent.

Growth is being undermined from all sides. Leverage is increasing, with some $57 trillion having piled up worldwide since the global financial crisis began. And that leverage – much of it the result of monetary expansion in most of the world’s advanced economies – is not even serving the goal of boosting long-term aggregate demand. After all, accommodative monetary policies can, at best, merely buy time for more durable sources of demand to emerge.

Moreover, a protracted period of low interest rates has pushed up asset prices, causing them to diverge from underlying economic performance. But while interest rates are likely to remain low, their impact on asset prices probably will not persist. As a result, returns on assets are likely to decline compared to the recent past; with prices already widely believed to be in bubble territory, a downward correction seems likely. Whatever positive impact wealth effects have had on consumption and deleveraging cannot be expected to continue.

The world also faces a serious investment problem, which the low cost of capital has done virtually nothing to overcome. Public-sector investment is now below the level needed to sustain robust growth, owing to its insufficient contribution to aggregate demand and productivity gains.

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Is GDP Over?

Is GDP Over?

(Photo: World Bank Photo Collection / Flickr)

Organizers of October’s fifth OECD World Forum on Statistics, Knowledge, and Policy could barely contain their sense of satisfaction when the three-day event opened in Guadalajara, Mexico.

Why all the good cheer? Officials at the OECD, the official economic research agency of the developed world, feel they haven’t just been organizing gabfests since the first of these triennial forums in 2004. They believe they’ve been helping change how the world — or at least the global public policy community — thinks about inequality.

And that belief, prominent independent observers believe, reflects a healthy dose of reality.

“We now have a broad consensus that more equal societies perform better,” as Nobel Prize-winning economist Joseph Stiglitz put it in his World Forum keynote address to the over 1,000 government statisticians, academics, and civil society analysts on hand in Guadalajara.

The OECD, Stiglitz observed, deserves much of the credit for this new consensus. The agency’s efforts have helped shift the global analytical mainstream off a mindless fixation on GDP — an economy’s total output of goods and services — and onto the importance of developing a sustainable “prosperity for all.”

In the United States today, pundits and politicians still regularly dismiss worries about our contemporary global prosperity for just a few as little more than do-gooder posturing. But at the World Forum in Guadalajara, no one treated inequality as anything less than a dangerous social pathology.

“Inequality is becoming unbearable,” former Inter-American Development Bank president Enrique Yglesias pronounced. Our economic chasms have reached “obscene proportions.”

Deeply unequal nations like Britain, lamented Catrina Williams of the UK Social Mobility and Child Poverty Commission, stand “on the brink of being permanently divided” as the offspring of the most affluent increasingly occupy most of the key levers of power in everything from the judiciary to the media.

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Kurt Cobb: Money Cannot Manufacture Resources

Kurt Cobb: Money Cannot Manufacture Resources

Disproving the fatal assumption central planners make

Author Kurt Cobb writes frequently on energy and the environment and warns that our current economic policy suffers from a fatal degree of magical thinking: sufficient new resources will emerge if the price is high enough.

As any fourth grader will tell you, a finite system will not yield unlimited resources. But that perspective is not shared by those controlling the printing presses. And so they print and print and print, yet remain flummoxed when supply (and increasingly, demand for that matter) does not increase the way they expect.

Is this any way to run an economy? Or a finite planet for that matter?

Of course, a lot of people have been hearing the hype about the growth in production in the United States for crude oil. That has been happening, but it has been happening with very high cost oil. Now the prices are down and the industry is on its back. They are looking for ways to increase the amount of money they can get for that crude oil. One of those would be to sell this light tight oil, which is oversupplied in the United States to foreign refineries. They cannot do it because of the export ban. I am not sure that is going to help them much because the price of oil has gone down so low as compared to what their costs are.

We have already seen a decline in U.S. output. The prognostication that we were going to be energy independent in oil, and that we were going to become the largest provider of oil to the world, I do not think are going to work out. It shows us that high priced oil leads to low priced oil, which also leads to economic slowdown.

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Study Finds Local Taxes Hit Lower Wage Earners Harder

Study Finds Local Taxes Hit Lower Wage Earners Harder

When it comes to the taxes closest to home, the less you earn, the harder you’re hit.

That is the conclusion of an analysis by the Institute on Taxation and Economic Policy that evaluates the local tax burden in every state, from Washington, labeled the most regressive, to Delaware, ranked as the fairest of them all.

According to the study, in 2015 the poorest fifth of Americans will pay on average 10.9 percent of their income in state and local taxes, the middle fifth will pay 9.4 percent and the top 1 percent will average 5.4 percent.

“Virtually every state’s tax system is fundamentally unfair,” the report concludes. “Unfair tax systems not only exacerbate widening income inequality in the short term, but they also will leave states struggling to raise enough revenue to meet their basic needs in the long term.”

The trend is growing worse, said Meg Wiehe, state policy director at the institute, a nonpartisan research organization based in the nation’s capital. Several states have adopted or are considering policy changes that further lighten the tax load on their wealthiest residents, she said.

States and localities have regressive systems because they tend to rely more on sales and excise taxes (fees tacked onto items like gas, liquor and cigarettes), which are the same rate for rich and poor alike. Even property taxes, which account for much of local tax revenue, hit working- and middle-class families harder than the wealthy because their homes often represent their largest asset.

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Hugh Hendry and the “Blue Pill” |

Hugh Hendry and the “Blue Pill” |.

Distorted Markets

We have always liked Eclectica fund manager Hugh Hendry for his sound views and outspoken manner. Below is a somewhat dated video compilation showing several moments in which he stunned his opponents in television debates by voicing uncomfortable and politically incorrect truths. Included in the video is a defense of speculators, entrepreneurs and other risk takers in the marketplace against statist interventionists and “champagne socialists”, which we wholeheartedly agree with. Speculators have a bad name, mainly because they always serve as a convenient scapegoat for politicians (in fact, speculators and merchants have served as scapegoats whenever economic policy failures became apparent since at least the time of the Roman empire). However, they fulfill an extremely important function, as Mr. Hendry points out to his debate opponents.

Mr. Hendry runs the Eclectica Fund and in recent quarters has frequently stressed that being contrarian has been a losing bet over the past few years (there are a few notable exceptions to this, see further below), while investors and fund managers relying blindly on the “money illusion” provided by central bank interventions have done quite well.

This is undeniably true. A prime example of what absurdities have become possible is shown below. The chart shows the 10-year JGB yield; Japan’s monthly annualized CPI rate of change over the past year is also shown, as an inset in the chart. The red rectangle outlines the time period over which these CPI readings were reported. At no point over the past year was Japan’s CPI not at least more than twice as high as the 10-year JGB yield. Even if one disregards the fact that CPI has been boosted due to a sales tax hike in April, current JGB yields make no sense. Prior to the sales tax hike, CPI fluctuated between 1.4% to 1.6% annualized, or 1.5% on average. This would still be almost five times the current 10-year yield of 0.31%.

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China’s Vicious Growth Circle by Keyu Jin – Project Syndicate

China’s Vicious Growth Circle by Keyu Jin – Project Syndicate.

LONDON – Most economists have a reason to be worried about China’s economy – whether it be low consumption and large external surpluses, industrial overcapacity, environmental degradation, or government interventions like capital controls or financial repression. What many fail to recognize is that these are merely the symptoms of a single underlying problem: China’s skewed growth model.

That model is, to some extent, a policy-induced construct, the result of a deep-rooted bias toward construction and manufacturing as the leading drivers of economic development. This predilection harkens back to the Great Leap Forward of the 1950s, when scrap metal was melted to meet wildly optimistic steel-production targets, thereby advancing Mao’s dream of rapid industrialization.

Today, China’s proclivity for industrial production is manifested in large-scale manufacturing and infrastructure projects, encouraged by direct and indirect government subsidies. By boosting investment and generating tax revenue for local governments, this approach has a more immediate positive impact on GDP than efforts to develop the service sector.

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Olduvai IV: Courage
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Olduvai II: Exodus
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