Posts Tagged ‘policy’


Where is the global market heading?

Monday 17 November, 2014

Nouriel Roubini, a professor @ the NYU Stern School of Business presided over Keiko Tashiro, the Chairperson/CEO of Daiwa Capital Markets America Holdings, Inc. to discuss this topic @ the Japan Society in New York.

It’s been an anemic recovery, & the only change has been the decelerating growth in the emerging markets.  The question is how strong & resilient will they be?  The recovery has been so anemic because the crisis was brought on by extreme leverage.  The fiscal stimulus that was implemented to combat it has led to an accumulation of debt that will take 5-10 years to de-leverage.  Emerging markets need robust growth of 5% , not 1-2 1/2 % less their debt.

To get 1-2% stronger growth in the industrialized countries, we need:

  • fiscal consolidation, except in Japan
  • advance de-leveraging to create better balance sheets with lower debt ratios
  • lower risk probabilities by keeping the Euro together, not falling off any fiscal cliffs, avoiding conflicts, etc.
  • keep low inflation, as the velocity of money has collapsed as stocks are in search of markets.  There is still slack in the employment market, so there is no wage inflation.  Central banks can be less conventional.  The Fed won’t start tapering until 3-4 years from now.
  • Japan needs to create a virtuous cycle with structural reforms, which should be a gradual process.  There is a risk with monetary easing in asset inflation creating a bubble.  The central bank has been able to keep bubbles @ bay by keeping inflation & interest rates low for now.

Emerging markets are devaluing their currencies to spur growth.  Internally, macroeconomic policies are granting excessive credit.  State capitalism causes them to move away from free markets.  The most fragile are China, India, South Africa, & Turkey.  With elections, growth falls.  Now the risks are much lower because of less currency mismatches, debt ratios are better, & Argentina, Venezuela, & Ukraine are now the problems.  China’s hard or soft landing is fragile.  Fixed investment is too low as is consumption.  Banks have made too many bad loans.  They’re lowering risks, but it’s open to question as to whether they can implement changes quickly enough.  Growth is decelerating from 7% to 6 %.


Chairman-Morgan Stanley/Asia on “from US excess to Chinese consumption”

Tuesday 18 January, 2011

Stephen Roach, non-Executive Chairman of Morgan Stanley Asia,  Sr. Fellow @ the Jackson Institute for Global Affairs @ Yale, & author of The Next Asia, recently talked about GLOBAL IMBALANCES: MOVING FROM U.S. EXCESS TO CHINESE CONSUMPTION which was hosted by the Chicago Council on Global Affairs.  Steve believes we really are in post-crisis mode in the US, but not yet in Europe because of their sovereign debt crisis, but there is no clear demarcation @ the beginning & end of a crisis, so this is all speculation.  There are 3 very basic interrelated issues about which we need to be concerned:

  1. global demand is dictated by American demand, but after 12 years of 4% annual growth & spending beyond our means with debt to fuel that, we’ll need years to rebuild those finances.  Europe is trying to be fiscally responsible, but no 1 country can replace that void.  The world is acutely unbalanced towards American consumers & needs to be rebalanced.
  2. China has taken over the supply side with 30 years of 10+% growth, but that’s unsustainable because even in the words of Premier Wen Jiabao, it’s “unstable, unbalanced, uncoordinated, & unsustainable.” (March 16, 2007).  Despite the export boom, 20M Chinese have lost their jobs, which makes them hostage to world demand.  Their social safety net is unfunded, so they have little security.  Income inequality is a problem & getting worse, so they are supporting rural policies & committed to changing programs to create jobs in services & consumption opportunities.  Their 12th 5 year plan is pro-consumption.
  3. US fiscal, monetary, & currency policies are imbalanced.  Policymakers are doing what consumers demand-throwing money @ the problem, but our tax cuts contribute to the fiscal deficit.  We have a currency problem with China.  US companies can combat a manipulated currency, but it requires huge bipartisan support.  A New York Times columnist estimates that issue costs America 1.5M jobs.  Our current approach is dead wrong.  It’s a multilateral problem, so there is no easy fix, but it is urgent.

Q&A with Michael Moskow

  • China’s goal is simply social stability, so consumption needs to be their own choice.   Europe & the US have convinced the Chinese they need a new source of demand.
  • If the US consumer comes flying back, there is no urgency to change.  But if not, can our value proposition as a consumer society come to fruition without a change in policy?
  • inflation is a tough problem in China.  Walmart must get permission from the government to raise prices.  Cyclical inflation, particularly in food, is a problem.  The Bank of China should be aggressive in changing interest rates, but doesn’t, so they have to play catch-up.
  • Roach worries about protectionism with a new US congress because of high unemployment
  • China is more aggressive on security issues regarding North Korea.  The last thing China wants is a unified Korea, which will move US military forces closer to the Chinese border.
  • There are 2 different views on how to solve our current economic problems:  be prudent like the European Central Bank or throw money @ the problem as the US is doing.  Both can’t be right.  The US must recognize it’s temporary, but they’re not hearing it.  Injecting liquidity without lending is just adding money on deposit.
  • Fiscal policy requires a framework that gives a long-term exit strategy.
  • Bernanke is trying to recreate an asset-backed growth strategy, but Roach is no fan of it & say’s it’s been a trainwreck.
  • Deflation is a bit of a worry, but there is no cumulative downward spiral.
  • Investments in China should be based on government structures.  A disproportionate share of companies will fail, but there is enthusiasm about consumer businesses.

Open Q&A

  • China saves 54% of its GDP, but has no social safety net, so paying $400 of lifetime health care benefits to 700M people is a problem.
  • We can learn to emphasize financial (labor, economic, social) stability from China, & although we can’t eliminate bubbles, move quickly with regulatory & policy tools to solve problems.  For example, in April, 2010 China raised down payment requirements & made them all cash to combat a property speculation bubble.
  • The Chinese are raising a lot of capital in international capital markets & attracting institutional investors, but they must present their accounting more transparently.  They have no understanding of a services culture.  They need education to scale that up.

finance & manufacturing in Brazil

Monday 16 November, 2009

The Chicago Council on Global Affairs hosted this breakfast presentation Brazil’s Moment in the Spotlight? Here’s a summary of what Paulo Vieira da Cunha said:


  1. Brazil emerged from the crisis with its banking system intact & entrenched as an institution.
  2. a historical break in policy-making occurred in 1999 when a new” holy trinity” was established:  stable exchange rates, fiscal responsibility, inflation targeting.
  3. a decade of fiscal adjustment led to Brazil becoming a net creditor of foreign exchange
  4. it shed its external sin, so now can take on more external debt
  5. a stronger central bank leads to stronger financial institutions
  6. policy can be counter-cyclical-i.e. an enlarged safety net can reduce reserve requirements

negative aspects

  • Brazil is a large insulated closed economy
  • it’s difficult to increase productivity & reduce competition
  • it still has an overblown public sector-42% of GDP, (& spending is up 14% this year) making it more comparable to economies in Europe rather than in the Americas
  • the “holy trinity” was accomplished on the back of 10% higher taxes over a decade from 26%>36%

Now Brazil’s economy is recovering rapidly with increases in consumption, exports, currency appreciation.  The yield curve is steep, so there is worry about inflation kicking up in the 2nd or 3rd quarter.  Elections are coming in 2010.  There is still a need for fiscal adjustments.  The Lula legacy is:

  • the expansion of the safety net to include the new middle class
  • the transition to an economy with a large state
  • Brazil is becoming more like Europe, but doesn’t have the same efficiency yet.

Luis Mateus noted:

There have been big changes in Brazil since the 1990’s.  The middle class has emerged to fuel consumption & demand.  Automation has increased productivity & cut into the informal economy.  There are still many challenges:

  • high & complex taxes (differs by state)
  • becoming a high cost country-ex. raw materials & electricity
  • labor laws make it costly to right-size in Brazil
  • bureaucracy bogs things down.


  • Exports are growing to the US & EU, but with different composition
  • Brazil is now the world’s largest exporter of food
  • Lula has been a surprise on monetary policy, although there has been no progress in making the central bank an independent entity.
  • There is a need for better energy infrastructure-green laws exist, but enforcement is lax.
  • It’s tough to find qualified people in Brazil.  The quality of schooling is poor.  The system can’t differentiate between good & bad universities, so they spend a lot, but get back very little.
  • Physical security can still be a problem, but isn’t as bad as in Mexico City
  • Brazil is open for foreign direct investment with no foreign exchange restrictions, but there is still lots of protectionism.  Import duties are high on steel making it uncompetitive.  This is bad for the long-term because none of the inefficiencies are taken out.  Import subsistution distorts production structure.

Goolsbee named staff director of Obama’s Economic Recovery Advisory Board

Friday 19 December, 2008

As an avowed & unabashed member (leader?) of the Austan Goolsbee fan club, I was happy to come across this article in the Chicago Tribune by Michael Oneal U. of C. ‘s Goolsbee joins advisory board

I only have 1 beef:  journalists should learn more about economics, & especially international economics,  when they’re writing about it.  Oneal says.”When talking about Obama’s platform on trade, for instance, Goolsbee insists that the president-elect has a deep commitment to free markets. But he also recognizes that classic free-trade theory doesn’t account for consequences like job loss.”

Free trade theory does account for consequences like job loss, the difference simply depends on in which time frame you consider it.  Free trade theory recognizes that, of course, unemployment will displace workers as a result of free trade in the short term when markets specialize in products/services in which they have comparative/(like Michael Porter’s competitive advantages too?) advantages.  The other assumption is that there are enough resources to be allocated so that those who are unemployed in the short term are retrained & re-employed in the long term.  How long the short & long terms are is open to debate as a theoretical question, but the policy issue becomes “Are we allocating enough resources for retraining for those who are unemployed in the short term so that they don’t become long-term unemployed?”  My answer is a resounding no.  Governments in Europe do a much better job or re-educating their unemployed, but they pay more in personal income taxes & union dues for the costs of those programs.

Supposed free-trader Obama’s beefs with trade are lack of enforcement of environmental & labor standards, not job displacement.  Enforcing standards is quite different from preventing job losses, many of which are inevitable anyway.  In this case, free trader is a matter of degree.  Obama is not a total free trader because he’s imposing costs that wouldn’t exist in a totally free trade scenario.  When other countries gain unfair competitive advantages by not having to pay for the same environmental & labor standards we do, we incur costs that they don’t in enforcing these standards & consequently become more expensive.  Job losses may result here because our costs go up, but those are indirect or better said not direct results & therefore it’s difficult to link causality.  Banning imports won’t work either because then we’d have no choice but to buy more expensive locally-produced goods, & our consumer-led economy always seeks out the lowest prices of similar goods.  I don’t doubt that Barack is essentially a free-trader, & that may have its social advantages, as long as we recognize that we pay a price for enforcing those standards in either higher unemployment or higher prices.