Some new economic research argues America’s slow recovery since the financial crisis had nothing to do with household deleveraging or unusually weak business spending. Instead, it can be entirely attributed to changes in demographics, weakness abroad, and fiscal austerity. But does it make sense?
This is a guest post from Richard Koo, chief economist of the Nomura Research Institute and, amongst many other things, author of “The Holy Grail of Macroeconomics, Lessons from Japan’s Great Recession”, which lays out his balance sheet recession thesis in detail. The post is an updated extract from his most recent note for Nomura and reproduced here, with his permission, for your arguing pleasure… The US, the UK, Japan, and Europe all implemented quantitative easing (QE) policies, but the understanding of how those policies work apparently differs greatly from country to country, leading to very different outcomes. With the US economy doing better than the rest, there has been some debate in Europe as to why that is the case.
- Our chat with Sebastian Mallaby on Alan Greenspan
- Our long chat with Paul Volcker (plus transcript and highlights)
- Brad DeLong on Hamiltonian economics and US economic history
- Inside the Washington Post: a chat with Marty Baron and Shailesh Prakash (plus transcript)
- Clay Shirky and Emily Parker on Xiaomi, technology and information flows in China (updated with transcript)
- Simon Kuper’s panel on the cultural forces of football
- Claudia Goldin on the history of women in the workplace (updated with transcript)
- Our podcast chat with Reihan Salam
- Our chat with Esther Duflo — now with transcript
- Our chat with Esther Duflo
- Our podcast chat with Angus Deaton (updated with transcript)
- Our chat with Angus Deaton
- A chat with Greg Ip about “Foolproof” (and the transcript)
- A wonky chat with Martin Wolf (plus the transcript)
Alphachatterbox is available on Acast, iTunes, and Stitcher.
To analogise the ongoing diplomatic maneuvering between the US and Cuba to a scenario of mutual hostage-taking doesn’t sound charitable, but it might be the best framework for understanding a relationship long defined by its baffling surrealism. And it’s a useful lens through which to see not only President Obama’s visit to the island, the first by a sitting US president in almost nine decades, but also the specific actions taken by each side in the time since the intent to normalise relations was first announced on 17 December 2014.
Stocks and corporate bonds haven’t been doing so well lately, while the market-implied probability of four Fed rate hikes by the end of this year — the median expectation of policymakers as of December — has plunged below 1 per cent (according to Bloomberg’s WIRP function, anyway). Reasonable people are now starting to wonder whether another downturn is imminent. Changes in prices could be signalling weakness yet to be captured by the official statistics on employment, output, and incomes. Even if you don’t believe asset prices contain useful information, it’s possible the hit to net wealth could encourage households and businesses to cut spending, thereby leading to recession and job losses.
We hosted our New York Pub Quiz on Wednesday night. Congrats to the winning team, Lower Expectations, who defended their title from last year’s event by answering 53 out of 70 questions correctly, eking out a win over the team Paul Volcker Rules, William Miller Drools by just a single answer. We had a blast producing the event and were honoured to have been joined by former Fed chair Paul Volcker, who co-hosted the economics and history section of the quiz and even submitted a few questions of his own. For more on the night’s activity, you can scroll down through the #FTPubQuiz hashtag on Twitter, and be sure to listen to the vox-pop segment of this week’s Alphachat, in which producer Aimee Keane asked attendees for their views on the Fed and the likelihood of a China crash. First up are the questions alone (for those who want to test themselves), and halfway down begins the same set of questions with the answers provided. ROUND 1 NAME THAT FINANCE MINISTER
FirstFT – Asia bourses follow Wall Street higher, glitch rocks fund world and mobile phone addiction
Major markets across the Asia-Pacific region were broadly positive this morning, taking their cue from a strong overnight session on Wall Street. In China, both the benchmark Shanghai Composite and the tech-heavy Shenzhen Composite were up about 2 per cent, offering respite to investorsafter the wild gyrations of previous days. On Wednesday, US stocks snapped a six-day losing streak in a volatile and tense session that saw the S&P 500 post its biggest one-day gain since November 2011. (FT)
Stagecoach shareholders are riding in comfort with a 10.5 per cent dividend rise, Ahold and Delhaize are combining shopping trolleys to create the fifth largest supermarket retailer in the US and there are more Greek crisis talks ahead. FT Opening Quote is your early City briefing. You can Asian marketsNikkei 225 up +58.61 (+0.28%) at 20,868Topix up +3.49 (+0.21%) at 1,680Hang Seng up +58.05 (+0.21%) at 27,392
Jeb Bush, a presidential candidate who won’t be at this year’s Camp Alphaville, wants the US economy to grow at 4 per cent per year. Lots of people are sceptical this is possible. After all, the last time the US economy grew so rapidly was in the 1990s — and that was mostly due to a massive equity bubble that encouraged excessive business investment and excessive consumer spending. As if that weren’t enough, productivity and population growth have both slowed down, although it’s unclear by how much.
Some more sentences about China, this time from BNP Paribas’ Richard Iley: It has been a near unshakeable axiom that China’s economy is on a pre-determined flight path to overtake the US and quite quickly become the world’s biggest economy. But China’s rapid nominal compression combined with the end of RMB appreciation vs. the USD and the solid c.4% nominal GDP growth in the US economy mean that, for the first time in a decade, China’s catch up with the US has stalled. Q1 GDP data is not yet available for the US economy but, assuming a cautious 2.5% annualised increase, helpful base effects would still leave nominal GDP at c.4.5% y/y. The US has therefore almost certainly grown faster than China’s in USD terms over the last year for the first time in well over a decade (Chart 5 & 6).
The number of Spaniards with a job fell by more than 18 per cent between mid-2007 and the beginning of 2014. That is a staggering sum, and it helps explain why Podemos, the anti-establishment party, is expected to win a large share of the vote in Spain’s elections later this year. The literalist explanation is that Spain’s real GDP fell about 6 per cent lower at the same time as Spanish labour productivity rose around 12 per cent. You could blame the euro crisis, the overhang of private debt, fiscal austerity, an undercapitalised banking system, and the strictures of the single currency for the former, and perhaps attribute the latter to the Spanish government’s reform programmes. While we don’t want to dismiss the importance of policy errors and unsuitable exchange rate regimes, much of Spain’s suffering in the bust can be explained by the structure of its economy in the long boom that preceded it. On the eve of the downturn, Spain had the misfortune of looking like a Mediterranean hybrid of Nevada and Michigan. Compared to those US states, which ostensibly benefit from their membership in a functional monetary union, Spain has actually done quite well.
In one of our previous post about petrodollars, we cited BoAML on how nobody really knows how the petrodollar shadow liquidity flows through the global economy, apart from the fact that eventually they end up being repatriated to the US via investments in domestic stocks or bonds (both public and corporate). It’s a point worth bearing in mind in the context of this working paper from the BIS’s Robert McCauley, Patrick McGuire and Vladyslav Sushko, from January, previously covered by Matt.
You can sign up to receive the email here. Stocks in Shanghai and Hong Kong fell on growth concerns after weekend data showed that China’s manufacturing sector shrank in January for the first time in more than two years. The Nikkei also slipped, tracking the fall in US stocks after weak GDP figures on Friday. (FT, WSJ$)
For some reason, a lot of people outside the US like to borrow from and lend to each other in dollars. A new paper from the Bank of International Settlements, which has consistently been producing some of the best research on these flows, describes how the action has shifted from banks to bond investors since 2008.
Our pal Josh Brown has a hilarious post highlighting the pessimism bias in how the fall of oil prices has been discussed in the US: This past June, crude oil prices were hitting highs above $110 a barrel and the narrative was that this was why stocks were selling off. The S&P 500 had a weekly correlation of .55 with oil, meanwhile, and had actually spent most of the year rising with it. So not only was the “story” of why stocks were dropping false, the data was as well.
European stocks are enjoying solid gains, with Germany’s Dax hitting a record high, helped by a rebound for resources groups as commodities slip but the recent extreme volatility in the sector abates. The calmer mood is reducing demand for some fixed-income havens, though many sovereign yields, which move inversely to bond prices, remain close to record lows. (FT) A 40 per cent drop in oil prices since June has brought huge losses to exporters such as Russia and a shot in the arm for the US and Europe. But western oil companies are also among the losers. Oil services behemoth Halliburton has lost 44 per cent of its value since July; Continental Resources, a huge shale oil producer in North Dakota’s Bakken region, has lost half its value since August; and even BP, a big, integrated group, has lost a quarter of its value in just the past few months. (WaPo)
It’s no secret that spending cuts (and tax hikes) have retarded America’s growth for the past four years. But data from the Bureau of Economic Analysis suggests that the era of austerity may finally have ended. The following chart shows the contribution of government and private spending to annual GDP growth, since the start of 2005:
Jens Nordvig of Nomura reports a frequent question from clients: can the recent dollar rally turn into a big change in the currency’s value, similar to those that occurred in the 1980s and 1990s? Answer: maybe, but it is worth remembering just how big those dollar moves were. See if you can spot them in the long term dollar index chart:
The Federal Reserve has just released its Survey of Consumer Finances for the year 2013. These surveys occur every three years, so this is the first comprehensive update we have gotten about the distribution of income and wealth in the US since the economy hit bottom four years ago. The most striking finding is that the median American family earned 5 per cent less in 2013 than in 2010 after inflation even though the average American family took home 4 per cent more.
Can just one product deliver a 1 per cent boost to Chinese export growth? If that product is Apple’s iPhone 6, then potentially yes. So says BoAML’s China Economist Ting Lu, who presents the iPhone 6 case for Chinese exports as follows (our emphasis): Though iPhone is an American product, it’s assembled in Mainland China (henceforth China) and all iPhones, except those sold in China, and are counted as China’s exports. The iPhone 6 is also important for Taiwan because the economy provides a significant amount of iPhone components including producing processors.
We had feared that one of most famous of Chinese statistical quirks might have abandoned us forever. The reported combined GDP of China’s provinces came in only slightly above its national GDP in the first quarter, amid reports that more than 70 smaller Chinese cities were dropping GDP as a performance metric. Perhaps as China stopped evaluating its local government officials on a narrow GDP basis, the officials would stop doing the obvious and fiddling their GDP numbers. That would in turn stop the sum of China’s regional GDPs always coming in ahead of the national figure… as well as helping with things like unequal income distribution, problems with the social welfare system and environmental costs.
Credit Suisse’s global demographics research team came out with a new note on Friday featuring some enlightening charts about the US economy. It provides a handy way of evaluating the country’s lackluster performance since 2000, as well as a few longer-term trends. As the CS team notes, GDP growth can be decomposed into three distinct forces: growth in the population of working-age people, growth in the number of hours worked by each working-aged person, and productivity growth.