chart of the day

August 16th, 2017

We are living in a period of ultra-easy monetary policy, with extremely low interest rates, yet inflation remains persistently low. What does this mean? FT columnist Martin Wolf writes that nobody knows.

The Bank of England was founded just over 323 years ago, in July 1694, at the instigation of King William III. It is the second oldest continuously-functioning central bank in the world, after Sweden’s Sveriges Riksbank, founded in 1668. ….

Prior to January 2009, the Bank had never lowered its lending rate below 2 per cent. But it was then lowered to 1.5 per cent, on its way to 0.5 per cent in March 2009 and 0.25 per cent in August 2016. ….

Throughout this prolonged recent period of ultra-easy monetary policy, the concern has never been one of runaway inflation, but rather of the opposite. This time really has been different. What does it mean for the future? Nobody knows.

Martin Wolf, “Nothing like this has happened in 323 years“, Financial Times, 16 August 2017 (gated paywall).

CEOs and Donald Trump

August 15th, 2017

Harvard economist Larry Summers has published a must-read blog on Trump’s reaction to CEOs who resign from his advisory councils, and asks why more businessmen do not follow this path of righteousness.

[C]ongratulations to Merck chief executive Ken Frazier on his resignation from the American Manufacturing Council over the president’s manifestly inadequate response to Charlottesville.

Interestingly, Mr Trump lashed out by tweet at Mr Frazier, who is African American, for resigning. He did not lash out at Disney’s Robert Iger or Tesla’s Elon Musk, who are white, when they resigned from the strategic and policy forum because of the president’s decision to pull out of the Paris climate accord. ….

Every member of Mr Trump’s advisory councils should wrestle with his or her conscience and ponder Edmund Burke’s famous warning that “All that is necessary for the triumph of evil is for good men to do nothing”.

Larry Summers, “Why don’t all CEOs quit Trump’s advisory councils?“, Financial Times blog, 15 August 2017 (probably ungated, since it is an FT blog, but free registration is required).

the danger of nuclear war

August 14th, 2017

This is my greatest fear, and always has been. But I was less fearful during the governments of Richard Nixon and G W Bush than I am now.

[T]he idea that the threat of war could lead Americans to rally around the president should sound alarm bells for anyone with a sense of history. Governments facing a domestic crisis are often more inclined to adventurism abroad. ….

Leaders under severe domestic political pressure are also more likely to behave irrationally. During the Watergate crisis, members of Richard Nixon’s cabinet told the military to double check with them before obeying a presidential order to stage a nuclear strike. Unfortunately, it is not clear that any US official — now or then — has the right to countermand the president if he decides to go nuclear.

Gideon Rachman, “America is now a dangerous nation“, Financial Times, 15 August 2017 (gated paywall).

NAFTA in a multipolar world

August 13th, 2017

Donald Trump’s slogan is “America first”. By this, he means “USA first”. Latin Americans often resent this use of the word “America” since they rightly regard themselves as Americans even if they happen to reside south of Texas. The United States has no name other than the name of a continent (actually two continents). Mexico formally is “Estados Unidos Mexicanos”. In English this is “United Mexican States”, or “United States of Mexico”. There is no equivalent to this for the United States of America.

Taking a broad definition of “America” provides us with a multipolar view of international trade, one that differs from the bilateral focus of Mr Trump. US economist Timothy Taylor has written a blog on this very subject. His blog is timely, since representatives from Canada and Mexico at this very moment are travelling to Washington to begin the first round of talks for renegotiation of the North American Free Trade Agreement (NAFTA).

Here are two excerpts from Professor Taylor’s blog. I recommend that you read the entire blog, which contains much more, in addition to links for further reading.

Discussions of globalization often seem rooted in an assumption that the main choices, either for the US or for other countries, are either nationalism or global. But there is another possibility, which is that the world economy evolves to a “multipolar” setting, which is based on primarily regional agglomerations of cross-national trade. In this situation, the issue for the US economy is whether it will be part of its geographically natural multipolar group, here in the Americas, or whether it will try view itself as a group of one, competing in the global economy with multipolar groups in Europe and in Asia. Your attitude toward the North American Free Trade Agreement, for example, may vary according to whether you see it as one of many trade deals in a globalizing economy, or whether you see it as the specific trade deal for building a US-centered trading bloc in a multipolar economy.


If one believes that the US should view its economy as part of an emerging American bloc in a multipolar world economy, the North American Trade Agreement between the US, Canada, and Mexico is the foundation for that bloc. C. Fred Bergsten and Monica de Bolle have edited an e-book titled A Path Forward for NAFTA …. They give some sense of the possibilities for cooperation and agreement, and the unlikeliness that such an agreement will address bilateral trade deficits, in the “Overview” essay.

Timothy Taylor, “NAFTA in a Multipolar World Economy“, Conversable Economist, 11 August 2017.

Professor Taylor teaches economics at Macalester College in St. Paul, Minnesota and is managing editor of the Journal of Economic Perspectives.


elder poverty and suicide in Japan

August 6th, 2017

Robin Harding, the FT Tokyo bureau chief, writes that Japan is the envy of governments of many Western countries:

Its politics are boringly stable. Its high-tech manufacturers … prosper in a global marketplace. Living standards are high, earned income inequality is relatively low and Japan’s culture retains the cohesion of near total ethnic homogeneity.

One aspect of Japanese policies, however, is not envious: the shocking level of poverty and suicide among older Japanese.

On Tuesday April 24, two women, one aged 77 and the other in her nineties, walked into Kakio station, on the outskirts of Tokyo, and sat down on a platform bench. They looked like sisters, said one witness. They were dressed in their best clothes.

At about 2.30pm, they joined hands and threw themselves in front of an express train. No suicide note was found and the identity of the older woman remains unclear. But it fits a pattern of suicides among the elderly, such as the 2015 death of 71-year-old Haruo Hayashizaki, who set himself on fire aboard a bullet train.

Mr Hayashizaki was in despair at his pension. Such suicides reveal something hidden in Japanese society: a shocking level of poverty, especially among the elderly and single parents, in a country where family is supposed to solve such problems and welfare is stigmatised. ….

More than 6.5m pension households, 27 per cent of the total, live in poverty, says Naoyoshi Karakama, a professor at Ritsumeikan University in Kyoto, as do 16 per cent of children, rising to 55 per cent of those in single-parent families. “Japan doesn’t really have a system intended to eliminate poverty,” says Mr Karakama, “just a system of public assistance for subsistence”.

State pensions pay full benefits only to those with contributions going back 40 years, so while salaried workers do well, many who were self-employed or worked irregularly get less than $1,000 a month. From that they must pay rent and healthcare costs plus some of the world’s highest food and utility bills.

The only plausible answer is means testing so wealthy pensioners pay for themselves. Such pensioners, however, are Japan’s dominant voting bloc.

Robin Harding, “Can Japan provide answers to the west’s economic problems?“, Financial Times, 3 August 2017 (gated paywall).

I disagree with Mr Harding’s last sentence. What Japan needs, in my opinion, is a universal pension (universal basic income for the older population), not means tests.

The long road to democracy

August 5th, 2017

Numerous books are appearing on the neoconservative project to export democracy to the rest of the world. A recent arrival is one by G W Bush’s Secretary of State.

[Condoleezza] Rice insists that the 2003 US-led invasion of the country had nothing to do with exporting democracy. It was solely about preventing the spread of weapons of mass destruction from Saddam Hussein’s fiefdom. This is true but it is not the whole truth. That was not how she, or her colleagues, sold it at the time. In 2005, when Iraq had long since descended into civil war, Rice uttered her famous phrase: “For 60 years, my country, the United States, pursued stability at the expense of democracy in this region — and we achieved neither,” she said. “Now we are taking a different course.”

Edward Luce, “The democracy deficit: is the US model still viable?“, Financial Times, 2 August 2017 (gated paywall).

Mr Luce is reviewing Democracy: Stories from the Long Road to Freedom, by Condoleezza Rice (Twelve, 2017) in addition to Richard Reeves’ Dream Hoarders: How the American Upper Middle Class is Leaving Everyone Else in the Dust, Why That Is a Problem, and What to Do About It (Brookings Institution, 2017) and The Once and Future Liberal: After Identity Politics, by Mark Lilla (Harper, 2017).

Edward Luce is author of The Retreat of Western Liberalism (Atlantic Monthly Press, 2017).


longevity insurance (annuities)

August 5th, 2017

Here is excellent advice from a British expert in personal finance. Longevity risk – the risk of outliving one’s savings – is underestimated or ignored by many.

[T]he most important type of risk that most people fail to buy insurance against is living too long — longevity risk. Many people are now shunning using at least some of their pension fund to buy a level or inflation protected guaranteed annuity, because they focus on the perceived poor value of annuities, compared with the rates on offer 10 years ago.

Jason Butler, “Insurance — a vital component of financial planning”, Financial Times, 3 August 2017 (gated paywall).

Donald Trump drowns out the opposition

August 2nd, 2017

It should be easy for Democrats to shine, given the incompetence of the current government of the United States. Unfortunately, Trump’s antics attract so much media attention that it is difficult for them to attract attention to proposals from the opposition.

American journalist Jacob Weisberg provides an example.

On July 24, Democratic congressional leaders travelled to small-town Virginia to unveil their “Better Deal” platform for next year’s midterm elections. Their painstakingly wrought plan was instantly drowned out by one of the president’s most sustained bouts of norm-bashing. That day, Mr Trump attacked his own attorney-general, Jeff Sessions, and delivered a boorish, inappropriate speech to an assembly of Boy Scouts. On July 25, Mr Trump called once again for a criminal investigation of Hillary Clinton. On July 26, he tweeted a ban on transgender people serving in the military. He then proceeded to defenestrate his chief of staff followed by his latest communications director.

Thus did the Better Deal give way to the Bigger Noise. That was unfortunate, because while the Democratic plan is somewhat thin on policy, it represents an important step toward what the party must do to compete effectively in 2018.

Jacob Weisberg, “Donald Trump drowns out Democrats’ populist pitch“, Financial Times, 3 August 2017 (gated paywall).

As the author notes, “the Democrats need a strong, national message that goes beyond ‘Dump Mr Trump’.” Jacob Weisberg (born 1964) is chairman of the Slate Group.


The Heritage Foundation on Health, 1989

July 31st, 2017

Every once in a while people make the point that much of what eventually became Obamacare came from, of all places, the Heritage Foundation – that is, the ACA is basically what conservatives used to advocate on health care. So I recently reread Stuart Butler’s 1989 Heritage Foundation lecture, “Assuring Affordable Health Care For All Americans” – hmm, where have I seen similar language? — to see how true that is; and the answer is, it really is pretty much true. ….

Overall, what’s striking about the Heritage plan is that it’s not notably more conservative than what Obama actually implemented: a bit less regulation, a substantial amount of additional spending. If Obamacare is an extreme leftist measure, as so many Republicans claim, the Heritage Foundation in the 1980s was a leftist institution.

Paul Krugman, “Heritage On Health, 1989“, The Conscience of a Liberal, 30 July 2017.

Professor Krugman’s blog is gated, but the lecture that he cites is freely available for anyone who would like to read it. It does seem more leftist than conservative. How times have changed since the 1980s!

robots in finance

July 31st, 2017

They are already here, and are said to be more efficient than human traders!

JPMorgan will soon be using a first-of-its-kind robot to execute trades across its global equities algorithms business, after a European trial of the bank’s new artificial intelligence (AI) programme showed it was much more efficient than traditional methods of buying and selling. ….

The [job of the] AI — known internally as LOXM — … is to execute client orders with maximum speed at the best price, by using lessons it has learnt from billions of past trades — both real and simulated — to tackle problems such as how best to offload big equity stakes without moving market prices. ….

One possible evolution of LOXM is teaching the machine how to get to know individual clients, so that it could consider their behaviour and reaction as it decides how to trade.

Laura Noonan, “JPMorgan develops robot to execute trades“, Financial Times, 31 July 2017 (gated paywall).