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Risks to the Global Economy in 2019

January 12, 2019

Risks to the Global Economy in 2019

Over the course of this year and next, the biggest economic risks will emerge in those areas where investors think recent patterns are unlikely to change. They will include a growth recession in China, a rise in global long-term real interest rates, and a crescendo of populist economic policies.

CAMBRIDGE – As Mark Twain never said, “It ain’t what you don’t know that gets you into trouble. It’s what you think you know for sure that just ain’t so.” Over the course of this year and next, the biggest economic risks will emerge in those areas where investors think recent patterns are unlikely to change. They will include a growth recession in China, a rise in global long-term real interest rates, and a crescendo of populist economic policies that undermine the credibility of central bank independence, resulting in higher interest rates on “safe” advanced-country government bonds.1

A significant Chinese slowdown may already be unfolding. US President Donald Trump’s trade war has shaken confidence, but this is only a downward shove to an economy that was already slowing as it makes the transition from export- and investment-led growth to more sustainable domestic consumption-led growth. How much the Chinese economy will slow is an open question; but, given the inherent contradiction between an ever-more centralized Party-led political system and the need for a more decentralized consumer-led economic system, long-term growth could fall quite dramatically.1

Unfortunately, the option of avoiding the transition to consumer-led growth and continuing to promote exports and real-estate investment is not very attractive, either. China is already a dominant global exporter, and there is neither market space nor political tolerance to allow it to maintain its previous pace of export expansion. Bolstering growth through investment, particularly in residential real estate (which accounts for the lion’s share of Chinese construction output) – is also ever more challenging.1

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Central Bankers’ Fiscal Constraints

January 6, 2019

Central Bankers’ Fiscal Constraints

With policy interest rates near zero in most advanced economies (and just above 2% even in the fast-growing US), there is little room for monetary policy to maneuver in a recession without considerable creativity. But those who think fiscal policy alone will save the day are stupefyingly naive.

CAMBRIDGE – If you ask most central bankers around the world what their plan is for dealing with the next normal-size recession, you would be surprised how many (at least in advanced economies) say “fiscal policy.” Given the high odds of a recession over the next two years – around 40% in the United States, for example – monetary policymakers who think fiscal policy alone will save the day are setting themselves up for a rude awakening.

Yes, it is true that with policy interest rates near zero in most advanced economies (and just above 2% even in the fast-growing US), there is little room for monetary policy to maneuver in a recession without considerable creativity. The best idea is to create an environment in which negative interest-rate policiescan be used more fully and effectively. This will eventually happen, but in the meantime, today’s overdependence on countercyclical fiscal policy is dangerously naïve.

There are vast institutional differences between technocratic central banks and the politically volatile legislatures that control spending and tax policy. Let’s bear in mind that a typical advanced-economy recession lasts only a year or so, whereas fiscal policy, even in the best of circumstances, invariably takes at least a few months just to be enacted.

In some small economies – for example, Denmark (with 5.8 million people) – there is a broad social consensus to raise fiscal spending as a share of GDP. Some of this spending could easily be brought forward in a recession.

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The War Against Cash

December 14, 2018

The War Against Cash

Where every keystroke becomes part of one’s permanent record, where e-devices track one’s every move, the ability to pay physical cash for a financial transaction may have become the only off-the-record action one can execute, unless, of course, it’s recorded on one of the ubiquitous security cams. But signs are everywhere that this last freedom is slated for oblivion. Many paths appear aimed toward a global monetary system in which every buy/sell exchange, from castle to candy bar, is recorded onto the accumulating history of each human unit. The trick has been to prepare the public in step-wise, frog-in-gradually-heated-water fashion.

“There is nothing, however, in standard theories of money that requires transactions to be anonymous from tax- or law-enforcement authorities.” —Kenneth Rogoff, 2014

In 2014, Harvard economist Kenneth Rogoff (winner of the 2011 Deutsche Bank Prize and a former chief economist for the IMF) authored “Costs and Benefits to Phasing Out Paper Currency” in which he wrote “Paper currency facilitates making transactions anonymous, helping conceal activities from the government in a way that might help agents avoid laws, regulations and taxes…. [E]lectronic money, in principle, can be traced by the government.” 78% of U.S. currency in circulation is in $100 bills, and similar high/low denomination ratios are seen in Japan and the EU. That large denomination bills are the preferred currency for much of crime — drug running, money laundering, tax-evasion — has become the prime argument for doing away with them in favor of electronic money. In 2017, Rogoff published a book on his theories, The Curse of Cash. Other prominent economists, e.g. former Treasury Secretary Lawrence Summers, have, likewise, advocated dropping currency. The discussions have generally focused on large denomination bills only, $100, $50, perhaps $20. Still, Rogoff has written flatly that “Currency should be becoming technologically obsolete”.

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A Chinese recession is inevitable – don’t think it won’t affect you

November 9, 2018

A Chinese recession is inevitable – don’t think it won’t affect you

A man sits on a rock near demolished in Xiancun, an urban village in Guangzhou, southern China. Photograph: Anadolu Agency/Getty Images

When China finally has its inevitable growth recession – which will almost surely be amplified by a financial crisis, given the economy’s massive leverage – how will the rest of world be affected? With US President Donald Trump’s trade war hitting China just as growth was already slowing, this is no idle question.

Typical estimates, for example those embodied in the International Monetary Fund’s assessments of country risk, suggest an economic slowdown in China will hurt everyone. But the acute pain, according to the IMF, will be more regionally concentrated and confined than would be the case for a deep recession in the United States. Unfortunately, this might be wishful thinking.

First, the effect on international capital markets could be vastly greater than Chinese capital market linkages would suggest. However jittery global investors may be about prospects for profit growth, a hit to Chinese growth would make things a lot worse. Although it is true that the US is still by far the biggest importer of final consumption goods (a large share of Chinese manufacturing imports are intermediate goods that end up being embodied in exports to the US and Europe), foreign firms nonetheless still enjoy huge profits on sales in China.

Investors today are also concerned about rising interest rates, which not only put a damper on consumption and investment, but also reduce the market value of companies (particularly tech firms) whose valuations depend heavily on profit growth far in the future. A Chinese recession could again make the situation worse.

I appreciate the usual Keynesian thinking that if any economy anywhere slows, this lowers world aggregate demand, and therefore puts downward pressure on global interest rates.

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Will China Really Supplant US Economic Hegemony?

April 2, 2018

Thousands of Chinese travellers rush to buy their train tickets at the railway station in Beijing

Will China Really Supplant US Economic Hegemony?

As artificial intelligence reshapes the global economy, economists who once argued that China’s massive population would propel it to superpower status should rethink that assumption. In fact, as the global economy reaches higher stages of development, China’s labor advantage today could become a handicap tomorrow.

CAMBRIDGE – As China and the United States engage in their latest trade tussle, most economists take it as given that China will achieve global economic supremacy in the long run, no matter what happens now. After all, with four times as many people as the US, and a determined program to catch up after centuries of technological stagnation, isn’t it inevitable that China will decisively take over the mantle of economic hegemon?

I am not so sure. Many economists, including many of the same experts who see China’s huge labor force as a decisive advantage, also worry that robots and artificial intelligence will eventually take away most jobs, leaving most humans to while away their time engaged in leisure activities.

Which is it? Over the next 100 years, who takes over, Chinese workers or the robots? If robots and AI are the dominant drivers of production in the coming century, perhaps having too large a population to care for – especially one that needs to be controlled through limits on Internet and information access – will turn out to be more of a hindrance for China. The rapid aging of China’s population exacerbates the challenge.

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Economists vs. Scientists on Long-Term Growth

March 3, 2018

Economists vs. Scientists on Long-Term Growth

Artificial intelligence researchers and conventional economists may have very different views about the impact of new technologies. But right now, and forgetting the possibility of an existential battle between man and machine, it seems quite plausible to expect a significant pickup in productivity growth over the next five years.

CAMBRIDGE – Most economic forecasters have largely shrugged off recent advances in artificial intelligence (for example, the quantum leap demonstrated by DeepMind’s self-learning chess program last December), seeing little impact on longer-term trend growth. Such pessimism is surely one of the reasons why real (inflation-adjusted) interest rates remain extremely low, even if the bellwether US ten-year bond rate has ticked up half a percentage point in the last few months. If supply-side pessimism is appropriate, the recent massive tax and spending packages in the United States will likely do much more to raise inflation than to boost investment.

There are plenty of reasons to object to recent US fiscal policy, even if lowering the corporate-tax rate made sense (albeit not by the amount enacted). Above all, we live in an era of rising inequality and falling income shares for labor relative to capital. Governments need to do more, not less, to redistribute income and wealth.

It is hard to know what US President Donald Trump is thinking when he boasts that his policies will deliver up to 6% growth (unless he is talking about prices, not output!). But if inflationary pressures do indeed materialize, current growth might last significantly longer than forecasters and markets believe.

In any case, the focus of economists’ pessimism is long-term growth. Their stance is underpinned by the belief that advanced economies cannot hope to repeat the dynamism that the US enjoyed from 1995-2005 (and other advanced economies a bit later), much less the salad days of the 1950s and 1960s.

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The $200 Trillion Question

November 5, 2017

The $200 Trillion Question

Perhaps the most remarkable trend in global macroeconomics over the past two decades has been the stunning drop in the volatility of economic growth. In the United States, for example, quarterly output volatility has fallen by more than half since the mid-1980’s. Obviously, moderation in output movements did not occur everywhere simultaneously. Volatility in Asia began to fall only after the financial crisis of the late 1990’s. In Japan and Latin America, volatility dropped in a meaningful way only in the current decade. But by now, the decline has become nearly universal, with huge implications for global asset markets.

Investors, especially, need to recognize that even if broader positive trends in globalization and technological progress continue, a rise in macroeconomic volatility could still produce a massive fall in asset prices. Indeed, the massive equity and housing price increases of the past dozen or so years probably owe as much to greater macroeconomic stability as to any other factor. As output and consumption become more stable, investors do not demand as large a risk premium. The lower the price of risk, the higher the price of risky assets.

Consider this. If you agree with the many pundits who say stock prices have gone too high, and are much more likely to fall than to rise further, you may be right—but not if macroeconomic risk continues to drain from the system.

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For God’s Sake, Stop!

November 3, 2017

FOR GOD’S SAKE, STOP!

“Most economists, it seems, believe strongly in their own superior intelligence and take themselves far too seriously. In his open letter of 22 July 2001 to Joseph Stiglitz, Kenneth Rogoff identified this problem. ‘One of my favourite stories from that era is a lunch with you and our former colleague, Carl Shapiro, at which the two of you started discussing whether Paul Volcker merited your vote for a tenured appointment at Princeton. At one point, you turned to me and said, “Ken, you used to work for Volcker at the Fed. Tell me, is he really smart ?” I responded something to the effect of, “Well, he was arguably the greatest Federal Reserve chairman of the twentieth century.” To which you replied, “But is he smart like us ?”

Satyajit Das.

“..Every time a report lands on their desks, central bankers must stop to think about the economic, social and political havoc their policies have caused over the past 10 years.

“The desperate attempt to avoid deflation via quantitative easing and record-low interest rates has had horrible side effects, and this observation is hardly controversial. The rich have become much richer; corporate wealth has become more concentrated; soaring house prices have created intergenerational strife; low yields have made all but the super-rich paranoid that they will be entirely unable to finance their futures. Most markets have ended up overvalued (this will really matter one day), while pension fund deficits and a constant sense of crisis have discouraged capital investment — and have possibly held down wages in the UK.

“Set a target, get a distortion. This is standard stuff. But the fact that extreme monetary policy has been going on for so long means that central bankers do not just have macro problems to feel bad about.

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Deaf blind

September 12, 2017

DEAFBLIND

“Most economists, it seems, believe strongly in their own superior intelligence and take themselves far too seriously. In his open letter of 22 July 2001 to Joseph Stiglitz, Kenneth Rogoff identified this problem. ‘One of my favourite stories from that era is a lunch with you and our former colleague Carl Shapiro, at which the two of you started discussing whether Paul Volcker merited your vote for a tenured appointment at Princeton. At one point, you turned to me and said, “Ken, you used to work for Volcker at the Fed. Tell me, is he really smart ?” I responded something to the effect of, “Well, he was arguably the greatest Federal Reserve Chairman of the twentieth century.”

To which you replied, “But is he smart like us ?””

Few things have the capacity to trigger an intense emotional response more effectively than this video of a 29-year-old deaf person hearing for the first time. For the able bodied, trying to imagine the life of someone missing one or more of the core senses feels pretty much impossible. In the UK, the Oily Cart theatre company specialise in providing entertainment for young people with profound disabilities. Their current show, an adaptation of Samuel Taylor Coleridge’s Kubla Khan, endeavours to create a theatrical spectacle for children who are both deaf and blind – which at first seems like an insurmountable challenge. But if you cannot engage with two senses, make the most of appeals to the rest. So for the participants in Kubla Khan, the seating revolves; the smell of incense wafts across the stage; the audience dip their hands into water, into which the stage crew blow bubbles through straws to conjure up a swirling River Alph. There are times when human ingenuity can be inspiring.

…click on the above link to read the rest of the article…

Rogoff Tells Central Banks More Negative Interest Rates Will Be Needed

August 19, 2017

Rogoff Tells Central Banks More Negative Interest Rates Will Be Needed

Kenneth Rogoff, the Professor of Economics at Harvard University, is stuck in a time warp where he cannot think out of the box even once. He is telling the central banks that the next recession they will have to resort to negative interest rates and they should prepare now. Despite the fact that negative rates have failed to work in Europe or Japan, seems to be nothing to really consider. So what after almost 10 years of failed policies at the European Central Bank, it will eventually work maybe in 12 or 13 years? It just requires patience? Well even a broken watch is correct twice a day for a brief moment in time.

This is the problem with academics. They don’t get the calls for help. A friend in the central bank of Canada referred a major Canadian company to us. The guy called and said let me say up front, I do not respect academics. I only called because they told me to do so. When I said I am not an academic, the cloud was lifted. The academics never get called into real world problems. They have zero experience. Government calls upon them because the politicians also have no experience.

These policies of negative interest rates have created a Pension Crisis on the horizon and wiped out so many states, provinces, cities, and municipalities. This policy is one-dimensional and only looks at demand and how to force people to spend. There is no consideration of pensions or that if interest rates go negative, people withdraw from banks and hoard.

Keynes himself argued that there were times to lower taxes to stimulate. That is just never considered even once. You cannot figure out how the world economy truly functions from your home office and never stepping out into the light of the real world.

Ken Rogoff’s Government Debt Default Plan

September 17, 2016

Ken Rogoff’s Government Debt Default Plan

Ken Rogoff is by all accounts a brilliant man. The Harvard professor and former IMF chief economist is a chess grandmaster. His thesis committee included current Fed vice-chair Stanley Fischer. But like many survivors of Ivy League hoop jumping, the poor fellow appears to have emerged punch drunk.

That’s the only conclusion to be drawn from Rogoff’s new book, The Curse of Cash , which, in effect, proposes a ban on paper currency.

It’s terrifying piece of work, for several reasons.

First, the cashless society, which Rogoff proposes in order to make it easier for the US government to confiscate private wealth, in effect, amounts to an admission that Washington can’t pay back its debts.

Second, the fact that Rogoff uses the fight against “terrorism” and “crime” arguments in selling his proposals to the public – justifications which he as a mathematician should know are farcical – suggest that his arguments hide another agenda.

Third, and most important, is the fact that not only would banning cash not achieve Rogoff’s objectives – it could cause irreparable harm to the dollar’s role in the American economy and as a reserve currency.

Let’s look at these arguments one at a time.

Enforced negative rates ARE debt defaults

Rogoff’s “cashless society” is an elegant solution to a key problem bedeviling the Federal Reserve: with interest rates at the zero bound, the US central bank has no ammunition left to fight the next recession – because if cuts rates below zero, savers will withdraw their cash and put it under their mattresses.

“In principle, cutting interest rates below zero ought to stimulate consumption and investment in the same way as normal monetary policy,” Rogoff writes. “Unfortunately, the existence of cash gums up the works.”

That argument is spurious at best.

…click on the above link to read the rest of the article…

Cash Bans and the Next Crisis

September 17, 2016

Cash Bans and the Next Crisis

Criminalizing Cash

Money sometimes goes “full politics”. Take poor Kenneth Rogoff at Harvard. He wants a dollar with a voter registration card, a U.S. flag on its windshield, and a handgun in its belt – the kind of money that supports the Establishment and votes for Hillary.

Kenneth Rogoff, professor of economics at Harvard University, participates in a session on the third day of the World Economic Forum (WEF) Annual Meeting 2011 in Davos, Switzerland, on Friday, Jan. 28, 2011. The World Economic Forum in Davos will be attended by a record number of chief executive officers, with a total of 2,500 delegates attending the five-day meeting. Etatiste tool Kenneth Rogoff, whose authoritarian jeremiads against cash currency we have first discussed and criticized in 2014 in “Meet Kenneth Rogoff, Unreconstructed Statist”. As Hans-Hermann Hoppe once noted: “[I]ntellectuals are now typically public employees, even if they work for nominally private institutions or foundations. Almost completely protected from the vagaries of consumer demand (“tenured”), their number has dramatically increased and their compensation is on average far above their genuine market value. At the same time the quality of their intellectual output has constantly fallen. What you will discover is mostly irrelevance and incomprehensibility. Worse, insofar as today’s intellectual output is at all relevant and comprehensible, it is viciously statist.”

Photo credit: Andrew Harrer / Bloomberg

Writing last month in the Wall Street Journal under the headline “The Sinister Side of Cash”, he noted that:

“Paper currency, especially large notes such as the U.S. $100 bill, facilitate crime: racketeering, extortion, money laundering, drug and human trafficking, the corruption of public officials, not to mention terrorism.”

Of course, large notes do make it easier for criminals to operate. Like cellphones. And sunglasses. And automobiles with air-conditioning. But that’s what money is supposed to do: make it easier for an economy to function. You use it as you please.

Yes, dear reader, we are back to our regular beat. Money. But what’s this? Finally, we’re beginning to see some action. You’ll recall that the markets have been eerily quiet – with less movement in stocks than we’ve seen in the last 100 years. What gives?

…click on the above link to read the rest of the article…

Why the oil price slump hasn’t kickstarted the global economy

December 27, 2015

Why the oil price slump hasn’t kickstarted the global economy

There has only been a modest boost to global growth despite the oil price plummeting to as low as $35 a barrel. But as prices fall so the risks to producers rise

An oil pump at sunset in the desert oilfields of Sakhir, Bahrain. As the low oil price endures, so the risks rise for producers. Photograph: Hasan Jamali/AP

One of the biggest economic surprises of 2015 is that the stunning drop in global oil prices did not deliver a bigger boost to global growth. Despite the collapse in prices, from over $115 a barrel in June 2014 to $45 at the end of November 2015, most macroeconomic models suggest that the impact on global growth has been less than expected – perhaps 0.5% of global GDP.

The good news is that this welcome but modest effect on growth probably will not die out in 2016. The bad news is that low prices will place even greater strains on the main oil-exporting countries.

The recent decline in oil prices is on par with the supply-driven drop in 1985-1986, when Opec members (read: Saudi Arabia) decided to reverse supply cuts to regain market share. It is also comparable to the demand-driven collapse in 2008-2009, following the global financial crisis. To the extent that demand factors drive an oil-price drop, one would not expect a major positive impact; the oil price is more of an automatic stabilizer than an exogenous force driving the global economy. Supply shocks, on the other hand, ought to have a significant positive impact.

Although parsing the 2014-2015 oil-price shock is not as straightforward as in the two previous episodes, the driving forces seem to be roughly evenly split between demand and supply factors. Certainly, a slowing China that is rebalancing toward domestic consumption has put a damper on all global commodity prices, with metal indices also falling sharply in 2015.

…click on the above link to read the rest of the article…

Draghi’s Dangerous Bet: The Perils of a Weak Euro

January 31, 2015

Draghi’s Dangerous Bet: The Perils of a Weak Euro

The recent decision by the European Central Bank to open the monetary floodgates has weakened the euro and is boosting the German economy. But the move increases the threat of turbulence on the financial markets and could trigger a currency war.

The concern could be felt everywhere at this year’s World Economic Forum in Davos, the annual meeting of the rich and powerful. Would the major central banks in the United States, Europe and Asia succeed in stabilizing the wobbling global economy? Or have the central bankers long since become risk factors themselves? The question was everywhere at the forum, being addressed by experts at the lecturns and by participants in the hallways.

Central banks, said Harvard University economics professor Kenneth Rogoff, are surely the greatest source of uncertainty in the eyes of the financial markets, a statement that was not disputed by others on the panel. The fact that monetary policies at central banks in the US, Europe, Japan and elsewhere are drifting apart poses a major risk for the stability of financial markets, he said.

“It’s important for the international community to work together to avoid currency wars which no one can win,” Min Zhu, deputy managing director of the IMF, told the conference.

…click on the above link to read the rest of the article…

Keynesian Hit Men On The Road—–Krugman And Rogoff Peddling Toxic Advice | David Stockman’s Contra Corner

November 30, 2014

Keynesian Hit Men On The Road—–Krugman And Rogoff Peddling Toxic Advice | David Stockman’s Contra Corner.

Here are a couple of reasons why Keynesian economists are truly a menace in today’s bubble ridden and debt-impaled world. It seems that both Harvard’s Kenneth Rogoff and Princeton’s Paul Krugman are on the global advice circuit, peddling what amounts to sheer snake oil to desperate politicians and policy-makers who have already buried themselves—-so far to no avail—-in unprecedented waves of fiscal and monetary “stimulus”.

But never mind. The professors have a three part solution, and its more, more……and moar! To make room for more monetary stimulus after six-years at the zero bound, therefore, Professor Rogoff has a truly juvenile solution. Namely, to abolish cash. That’s right, this Harvard windbag proposes to confiscate your kids’ piggy bank and any green stuff that may be left in your wallet.

Meanwhile, Krugman has made a quick circuit through Tokyo, where he apparently was instrumental in convincing Japan’s prime minister to cancel the next installment of the consumption tax increase—a move that was utterly necessary in order to stem the nation’s massive flow of red ink. But why not spend a few more years adding to Japan’s staggering debt burden, which is already at 230% of GDP and rising inexorably in a nation that is fast becoming the world’s foremost retirement colony? After all, Professor Rogoff has now perfected a scheme which will allow central banks to monetize all the debt that even the most profligate government can possibly issue.

So start with Professor Rogoff ‘s incredible assault on the peoples’ cash and coins—a necessary prelude to even more fantastic rates of central bank monetary expansion. Here is exactly what he recently advocated at a “prestigious” international policy forum:

…click on the above link to read the rest of the article…

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