The End of Growth?

This is just a really good read. Professor Gordon from Northwestern makes his case that the rapid rise in per capita (in the advanced economies), might well have been a two-century blip in the really really long term. 

He lays out the three revolutions (steam engines/rail roads - electicity/water - computers/internet) and then argues against further increases at such historical rates. The abridged/intro version is available on voxeu. 

The Abe of the Orient

Amidst a relatively quiet calm in the occident, fiscal slope/cliff/bungee notwithstanding, it's safe to say that the story of the week and of the new year is very much the story of the East's 'Abe'. Questions have arisen, currency and equity markets have reacted (look what happened to the Yen) and as forecasters dare to look forward, the concept of monetization has arisen once again. Floyd Norris captures this well in a column barely over a week ago where he tries to delve deep into the heart of the Japanese economy. 

The Japanese economy has been stagnant for a really really long time. In a long-term low interest-rate environment, it has suffered (?) from chronic deflation again and again. Theoretically of course, as interest rates approach the ZLB, one would think a central bank could do very little more but of course the past few years have shown otherwise. Here's a longgg history of Japanese price levels:

It's common knowledge that Bernanke the scholar was named "Helicopter Ben" for his inflation-fighting endorsement of printing cash (helicopter drop). And Abe has a renewed aggressiveness after the landslide. He's put immense pressure on the central bank and called for specific inflationary targets to rid the economy of this deflationary malaise. 

One would assume that Japan should have, could have and would have tried this in the past but such a path is fraught with danger. With an extraordinarily high stock of government debt, a mis-crafted move could wreak havoc on bond prices and send the central bank balance sheet out of control. For credibility to be established, as Norris suggests, minute attention would have to be paid to a faster pace of credit growth and some sort of band or target for the yen (currency wars anyone?). 

Of course, changing inflationary expectations could yield wonders for the country's debt. After all, in a deflationary environment with stagnant growth, the debt-to-GDP ratio worsens even without additional borrowing. Furthermore, a global recovery, renewed demand would improve the deteriorating current account etc. Then there's the problem of demography, the country's declining and aging working population coupled with a relatively hostile attitude to immigration. 

There seem to be too many structural problems over the long-term but that's no argument against change. For too long, Japan has gone down a path with no change - a relatively safe path if you will. Abe's mandate makes things exciting and and perhaps gives his country something to look forward to, one way or another. 

A Subprime CEO

Here's how to blatantly lie and run away from accountability, according to a June 2011 deposition (the documents were filed this week). Courtesy this Bloomberg report.

The crisis was “not caused by an act of Countrywide,” said M, 73, according to a transcript of the deposition. “This is all about an unprecedented, cataclysmic situation, unprecedented in the history of this country. Values in this country dropped by 50 percent.”

M was responding to questions from an MBIA attorney who asked if he regretted how Calabasas, California-based Countrywide was run after “all the foreclosures and ruined lives and lawsuits.” Mozilo called the lawyer’s question “nonsensical and insulting.”

“I have no regrets about how Countrywide was run,” M said. “We were a world-class company in every respect.”

The firm only made loans that it was confident would be repaid, M said. Countrywide was the third-largest subprime lender in 2006, with about $40.6 billion in the mortgages, compared with $44.6 billion in 2005, according to data from Inside Mortgage Finance.

“We never made a loan knowingly -- and it would be stupid to do so -- that we knew the borrower could not pay. Never,” M said. “All our loans had that one standard from 1968 to the end of my reign at C.”

“It had nothing to do with anything that I did at Countrywide or anything I did in my personal life,” M said. Relatives “were being harassed in school. My name was in the paper every day nationally and internationally, accusing me of things that were absolutely untrue. I could not have my family go through it anymore, and that’s why I settled.”

M “remains really proud of his company and this institution he built,” said his attorney, DS. “It would be unfair to say he doesn’t feel a great deal of empathy for the honest, hard-working Americans who suffered in the financial crisis.”

In the 2011 deposition, M also denied that there was a program called “Friends of A” to reward high-profile customers, including elected officials, with below-market rates for home loans. Instead, he said that he gave people including taxi drivers, stewardesses, and gardeners his business card.

“Almost everybody I come in contact with, that was my job, was to originate loans,” M said. “That’s who I was. That’s why I started the company.”

A perfect example of a man in denial, sitting pretty on millions but also desperate for a clear conscience. There are some things that money can't buy and reputation definitely is one of them in this case. No one would be ludicrous enough to assign full responsibility towards Countrywide but you could bet your last dollar that they certainly didn't do much good. And that's an enormous understatement. 

Dimon on jiving with the junta

Thanks to Joe Weisenthal for this one from the Dealbook conference hosted by Andrew Sorkin:

DIMON: Why don't you stand up so they know where you are.

SORKIN: Please introduce yourself if you could.

AUDIENCE MEMBER: ...With Secretary of State Hilary Clinton going to Burma and Barack Obama visiting Burma as well, there's a rumor about you shadow banking with the Burmese Junta and I'd like to second follow up with that on....

DIMON: There's a rumor about what?

AUDIENCE MEMBER: Shadow banking with the Burmese Junta.

DIMON: I have no idea what you're talking about.

[audience laughs]

AUDIENCE MEMBER: Also, with the recent insider trading scandal at SAC, I was wondering what kind of exposure JPMorgan would have to that?

DIMON: Hopefully none.  I don't know exactly what the facts about what's going on around there so I don't want to comment, but hopefully none.

SORKIN: Okay. Thank you for that. 

Here's Dimon's look of...incredulity? 

The IMF on Capital Controls

The IMF, that has been praised from some corners for its willingness to change and adjust its stance as the situation demands, had an institutional paper out recently on the use of capital controls. While history tells a different story, this time is different and Blanchard/Ostry, the Director and Deputy of the research department, have a brief, explanatory follow-up note out at voxeu. 

What the essentially elaborate upon is the main tenet of the paper - i.e: the acknowledgement that complete capital account liberalisation, depending on the macro and financial environment (among others), may not be the right goal for a particular country. 

Harry Dexter White and Keynes, during the Bretton-Woods era, essentially laid out a fairly obvious but crucial point that holds enormous relevance even today - that  CFM (capital flow management) as a toolkit is severely limited when initiated unilaterally. The restriction of movements of capital would be most effective when "controlled at both ends". This is akin to asking for cooperation among different countries. 

This emphasis on multilateral actions is backed by four instances according to the authors. Basically:

1) If an economy is in a state where an adjustment in the external balance is warranted, it could look to capital controls as means of bypass. Essentially, this is a beggar-thy-neighbour attitude of using controls to sustain an under-valued currency. In the note, Blanchard and Ostry state outrightly, "This is why one normally thinks that capital controls whose purpose is to frustrate external adjustment are multilaterally aberrant". Strong words with room for a benefit-of-doubt in the sense that the reason for controls could also be directly linked to the stability of the financial system in an economy (think foreign borrowing reliance etc.)

2) A more insidious case of controls would be related to an indrect attempt at manipulation of the intertemporal TOT for an economy. This is essentially the same as using tarriffs and subsidies to tinker with terms-of-trade but would rarely be something seen in practice blatantly. The authors have a charming way of putting this point across - "it is not beyond credulity to think that some policies that affect capital flows can materially move world interest rates in a direction that benefits the country. To see this, ask yourself whether there are any large creditor countries that maintain restrictions on capital outflows; or whether any large debtor countries pursue policies that push down world interest rates." Ahem!

3) Controls that are put in place to deal with externalities (production-side) in the export sector. This goes back, in a way, to parts of the first instance, i.e: production taxes/subsidies could be a response to externalities but are more difficult to put into practice due to budgetary constraints etc. Theoretically, a situation such as this could be alternatively dealt with by a control-supported currency devaluation which would have negative consequences (distorting the consumption/production effects and decisions), As one can see, there's asymmetry due to the impact on consumption.

4) This goes back to the latter half of the first instance where measures are undertaken for the purpose of financial stability. Think foreign borrowing risks if not internalized by the borrower - in such a case, capital controls can act as a Pigouvian tax (tax on an activity that generates externalities) and internalize these external effects.

What capital controls come down to in a multilateral scenario is the existence of spill-overs and subsequent financial stability issues. What the authors try to emphasize is that if capital controls had no costs for a country, there would exist a Nash equilibrium where any country chose controls at a certain level to check its own financial stability risks. 

And that's the problem. Because imposing controls creates costs and this is where coordination is required (risk of capital control wars, excessive flows etc.) between both the source and the recipient. In such a case, naturally, the equilibrium ceases to be efficient because each country still has one instrument but now two targets (the externality domestically and the cost of the measure). 

The note concludes by admitting the difficulty of this possible paradox. In certain cases, some countries might have no interest whatsoever in bearing the cost of financial stability in another country. Coordination however, should not be thought of as a pursuit of interests contrary to domestic policy but rather, to ensure that domestic objectives are met while the spill-over damage done is minimized. 

Light in the Euro-tunnel

Olli Rehn, the EC-VP had a comment in the FT on how there was light at the end of the euro tunnel and that persistence during these lean times would take the euro home. A few issues:

"Ireland has returned to the debt markets. In September more private capital moved into Spain than out for the first time in 15 months. And Italy recently sold 10-year debt at the lowest yield since 2010. That was clear recognition of the resolve shown by Mario Monti’s government to boost competitiveness and pursue sound public finances. With Italian bond yields on the rise again after Mr Monti’s decision to stand down, it is also a reminder of the need to maintain resolve in the future."

The last line is, in a sense, true. One could pick holes in the Full Monti's agenda but there's a reason why you don't know what you've got till it's gone. What Italy certainly doesn't need is more Berlusconi - the markets will tell you that. 

Basically, Rehn makes the case on the premise of the trajectory we've seen in borrowing costs over the past few months and in doing so he might be underestimating how sensitive an issue perceived credibility is. It seems a bit naive to see capital flowing back into Spain as a portender for better times ahead rather than a broad indicator boosted by short-term conditions. 

But he also admits that reductions in certain current account balances (namely the deficit countries) need not necessarily be a positive indicator of a rebalance. After all, there is no compulsion on a creditor to adjust. Furthermore, he agrees that a stimulation of domestic demand in Germany, for example might not have a significant impact on countries not closely enough linked with German trade channels (Central European economies). Hence, the issue turns back to competitiveness and in turn to Germany being willing to uncheck a rise in wages in line with productivity gains. 

Given Rehn's mandate and position, it's apparent what the call is for. What he can't do, of course, is tell you how long the tunnel is.

Relief?

Q: WOO-HOO?
A: Naah

An opinion on a PBJ opinion

I always knew where the Louisiana governor stood on most social issues but then I understand, not accept (yet understand) that these stem largely from perceptively faith-based dogma. What I don't understand is his opinion recently published in Politico - it has some atrocious statements, some blatant misrepresentation, and calls for solutions that perhaps you may have heard before but are put forth in a way that is befuddling to anyone with common sense and basic economic concepts. Oh, it's clever alright. It's crafty with allusions and dramatized with metaphors but it panders to the base - a base (might I add) that just got hammered by a supposedly weak incumbent. 

"Today it’s the fiscal cliff, but that surely will not be the end of it; next year it will be the fiscal mountain, after that the fiscal black hole, and after that fiscal Armageddon. But the truth is Washington already drove us off the fiscal cliff while no one was looking. A nation that has a $16.3 trillion debt, a debt that is larger than our entire economy, has already driven through the guard rail and is in free fall with the cliff somewhere in the rear view mirror."

No B, I'm not aware and don't particularly care to know how the cliff terminology was so popularly accepted and used but I'm convinced that the last thing people need is more of these doomsday terms. The US has NOT been driven over the cliff and if it was hypothetically, it definitely wouldn't be with no one looking. To imply that the national debt has pushed the economy into a perpetual state of existing freefall is beyond absurd. But that's not the end of it because here are some 'solutions':

"A federal balanced budget amendment. States have balanced budget laws, small businesses have to balance their budgets, and families have to do the same. This is an idea that is supported by virtually every American who does not live in the 202 area code. It’s common sense. It is also laughed at in Washington. When you mention the BBA as a solution, they roll their eyes and write you off as a non-serious person. But the American public is dead serious about it, and they should be."

No B, the fact that states have balanced budget laws is exactly why it is almost scary to claim that the Federal government should have a balanced budget amendment. One would expect you, (a highly educated scholar), to at some point in Oxford or Brown or McKinsey to have grasped the ludicrousness of equating household budgets with a government budget. Essentially what you admit to is having never accepted the basic government accounting equation. Either that, or more likely, it just sounds better to the public when you pit them against government - patting them on the back for paying off debt while castigating the government as if it were part of the equation. 

"Place a cap on discretionary and mandatory federal spending by fixing a limit on it tied to a percentage of GDP. Eighteen percent is a reasonable number in my book, but almost any number would be a victory at this point. Require a super majority vote to over-ride this limit, which would allow for recourse in a time of war or other national emergency. Again, this solution makes far too much sense to be taken seriously in Washington, a sure sign that it’s a good idea."

No B, have you conveniently forgotten that we're barely a few years removed from a HUGE financial crisis and that the after-effects and consequences play out in a negative way till today? The US economy has been suffering from anemic growth, a severely-tested Fed with an unconventional arsenal, and a major balance sheet imbalance where corporations are flush with cash, interest rates are at their lower bound and the paying of household debt has been on a major spree. And during a time like this, you want an 18% cap on spending? Really? 

"A super majority to increase taxes. Make it harder for the politicians in Washington to simply take more from Americans, thereby forcing them to stop growing government. Yes, Washington hates this idea, so it should be pursued with vigor."

No B, I knew the party-old anti-tax sentiment would finally filter through your op-ed. No one advocates tax increases on the average domestic consumer. Trying to reason through this by saying it should be pursued because Washington displays a lack of ability to reason logically. Honestly, one should expect at least that much from you. 

"Now that I’ve offended everyone in Washington, a few final thoughts – our debt is strangling us. It seems to be a given that we will once again raise the debt ceiling. So the one thing that all involved agree must happen, may in fact be the single worst thing we can do – unless it is one-time, limited, and accompanied by structural reform to make sure we don’t repeat this nightmare.

Additionally, amidst all the talk of increasing taxes and cutting entitlements, something more important than either of these has been lost – economic growth. America is forever young because America is forever growing, leading the world and showing the way forward. All actions taken by Washington should be seen through this simple prism – will this help grow our economy? If not, maybe we shouldn’t do it."

No B, now that you've offended everyone in possession of at least an ounce of common sense, the least you can do is to stop providing the public with dramatic and graphic visuals of the debt strangling them like some sort of a python. I'm not even going to dig up data and reason with you unless you quit this fiscal crisis drama that you continue to espouse.

Lastly, as to your two flowery statements:

A. America is forever young

B. America is forever growing, leading the world and showing the way forward

I really don't understand how you connected these two with logical causality but that's just my personal opinion I had to insert. Do forgive me.