In Surprise, Recovery in China Loses Steam

Posted on April 15, 2013 by

Those aren’t my words — they come from a NY Times story this morning: China’s growth is a bit LESS than this time last year.

The drop is, of itself, not alarming — but that it comes after a year of effort by authorities to pump up the economy for the new leadership, it suggests that we are in a slump that can’t be fixed by a simple dose of standard fiscal tools.  China is struggling as it need to import ever more energy and raw materials, while its major export markets remain weak.

China’s fate shows that it is harder and harder for global growth to be driven by any one region, or for any one region to grow vigorously while the rest of the world economy contracts.  There is just too much interdependence now for that to happen.

It is thus crucial that Europe — still the world’s largest single economy (and it is, via the Euro, a single economy) — get off its austerity bug and focus on growth.  Austerity has led to larger, not smaller, debt burdens in the UK and club Med countries, and is wiping out the opportunities for a generation of young people to establish themselves in the labor force, gain experience, and start families.  All this makes the demographic squeeze on Europe even worse.

This is no way to run a global economy!  Oops, I forget that there is no one running the global economy — just national leaders running their own national economies.  But with national economies all trying to recover on the backs of others by austerity and devaluation, they are just dragging the world economy down.

A half-century from now, economists will scratch their heads and ask how leaders of our era could have been so misguided, repeating the exact mistakes of the Great Depression even though we (unlike those of the 1930s) had the experience and the economic knowledge to avoid this.  The problem is that politics is not economics, and our global governance structure remains overly dependent on immediate post World War II structure.  I hope we can change those, and soon!

 

Posted in Uncategorized | Leave a comment

Confused about North Korea? — Think Syria

Posted on April 10, 2013 by

No, I’m not saying that Korea will descend into Civil War like Syria.  However, there ARE the ingredients for an error that will produce open conflict.

What Korea and Syria both have in common is unexpected rulers with shaky legitimacy.

In Syria, the regime of Hafez al-Assad was ruthless, but canny and supple.  Hafez knew how to wield power as well as keep it; he balanced Syria between the USSR, the US, Egypt, and Israel, always keeping control, but getting support from varied sources, and exercising a persistent influence in the region.   His regime was personal, but also had a strong party (Ba’ath) behind it.

But the regime became naked patrimonial rule when instead of picking the best qualified person, or a military or party favorite, he chose his son Bashar as his successor.  Bashar had never intended to rule; he trained as a  physician and ophthalmologist.  At age 29, when his older brother died, he was suddenly thrust into the role of dictator-in-waiting.

When Bashar took power after his father’s death, he lacked the skills to manage a complex regime alliance and deal with rebels.  He proved ruthless, to be sure, but also inflexible, over-reactive, and lacking deep support.  He has led Syria into a horribly bloody civil war, although I doubt that was his intent.  Rather, he simply did what he thought was needed to appear strong and keep power.  It is not clear whether he is being led by his military and political commanders, or is just running things poorly on his own.  But either way, the caliber of rulership declined with Bashar, and his response to the spread of the Arab Uprising into Syria has been to become a pariah to many of his people and dependent on the Hezbollah/Iran connection that wishes to keep his country as a transit lane between Tehran and Beirut.

The parallel with North Korea is strong.  Kim il-Sung was a strong leader, liberation hero, and Communist Party strongman, much like Stalin.  He moved toward personalist rule by appointing his son Kim Jong-Il as successor.  But this was no unexpected rise.  The younger Kim was groomed by 30 years of political life, and was a member of the Politburo and military commission for 14 years before taking power.  The transition was not only expected, but involved a successor with strong positions, legitimacy, and control in the Party and military taking power.  Under Kim Jong-Il North Korea remained a party state, where Kim Jong-Il’s legitimacy came as much from his role and experience in the Party as his parentage.

The same cannot be said of Kim Jong-un.  A virtual unknown, like Bashar he expected his older brother, Kim Jong-nam, to take power.  But Kim Jong-nam fell out of favor and Kim Jong-Il settled on Kim Jong-un to be his successor.   Kim Jong-un, was, however, young and inexperienced, and time was short.  It was only in 2010 that he became a general and vice-chairman of the Central Military Commission, despite having no prior political or military experience!  A major propaganda campaign was carried out to persuade N. Koreans to support their new “brilliant leader.” Two years later, Kim Jong-Il died and Kim Jong-un became leader of North Korea.

Kim Jong-un is thus also a pure patrimonial leader; he is in power solely by virtue of his parentage, not through working his way up the Party and military ladder.  That is a dangerously weak position.

It is thus not surprising that Kim Jong-un has been a saber-rattler as he attempts to shore up his position with the military and convince North Koreans that they need him as shield against mortal dangers.  He has to be a war-monger for domestic consumption.  The problem is how much he can maintain this role without stumbling into a real shooting war with the south. He has already overstepped several times by testing missiles, sinking a South Korean submarine, and firing on a South Korean island.  And we do not know how much he is being guided by military and party officials, or is just pushing himself forward in a way that manifests his deep inexperience.

Patrimonial or personalist regimes are profoundly vulnerable in times of stress, precisely because their legitimacy is weak.  They depend on patronage and personal loyalty, both of which can vanish if people perceive the ruler as weak.  Such regimes therefore often over-react to provocations, suffer defections, and fall to revolution or rebellion, as they lack the corporate strength of party-based or military-based regimes.

Even before the current troubles, the position of Kim’s government in North Korea was weakening.  Cell phones were bringing in news of the outside world, and how much more prosperous South Koreans are.  China was growing impatient with supporting an economically failing regime, prone to recurrent famines due to its insanely rigid non-market economy (although limited market openings have proved essential to avoiding more severe famines).  China has been urging N. Korea to adopt Deng Xiaoping style economic reforms, but N. Korea has resisted, knowing that if it tries to win people’s support by promising economic growth, South Korea wins that game hands down.

The one card that Kim Jong-un can play to keep himself and his party in power is fear.  We thus should not be surprised that he aims to keep his country on the edge of war, raise fears of international alliances against his country, and indulges the military in tests of ever more weapons.  What we have to watch out for is that these domestically motivated maneuvers create threats and attacks that the rest of the region cannot tolerate.  At that point, a real shooting war could arise.  On my last trip to Korea, I visited the DMZ — it is a war zone, on a war footing.  It would take very little to start a military conflict.

Still, Kim’s position is weak; if he starts a war that North Korea is certain to lose, it is likely that his own position would quickly fail and his government be overthrown.  So I do not expect he will actually act to start a war on his own.  But his inexperience is such that he may blunder into a war without intending, and like Bashar al-Assad, destroy his own country in the process.

Kim Jong-un thus lacks both experience in politics and legitimacy with the Party and military elite.

Posted in The Global Economy, The Middle East Revolts | Tagged , , | 7 Comments

Told you so

Posted on April 5, 2013 by

The job figures out of Washington today were a mixed but mostly very sad story.  There were upward revisions in the January and February hiring numbers, and construction employment remained strong (houses being built on unfounded optimism of a major housing turnaround).  But job creation in March was lousy — the worst in almost a year, and just half of what was expected to sustain our so-called anemic “recovery.”  Remember, with Europe contracting and China slowing down, US growth is supposed to lead the world out of recession — but it ain’t happening.

Most distressing was the continued withdrawal of workers from the US labor market, with half a million (!!?!!!) workers quitting the labor force.   That is more than five times as many workers leaving the labor force as found jobs last month, according to the household survey.  And this is supposed to be a recovery?  7.6 million workers remain in part-time work despite expressing a desire for full-time employment.

Canada too is sinking, having lost 54,000 jobs in March, with unemployment ticking up for the first time in months.  And unemployment in Europe hit a new all-time high at 12% for the Eurozone as a whole.

It is time to recognize that in terms of labor markets, there IS NO RECOVERY.  The U.S. economy is expanding only because people are again tapping their savings (US savings rates dropped early this year to their lowest level since the recession began), and because  corporations can conjure growth out of thin air by borrowing money from the Fed at zero or negative interest rates and investing in bonds, real estate and other speculative assets. But there is no real growth in consumption or output — people are treading water and paying to do so.

As Christine Owens wrote in the NY Times today: “This seems to be a long-term sleeper crisis too, as we think about long-term unemployed workers who are in midlife and older workers who are likely dipping into retirement savings in order to stay afloat,” said Christine L. Owens, executive director of the National Employment Law Project. “We’re setting ourselves up for somewhere, 10 years down the road, when a lot of retirees who didn’t expect to live in poverty are going to be in poverty.”

It is remarkable that policy-makers remain as addicted to self-inflicted pain as any medieval mystic (of course the pain they are inflicting is on their citizens, not themselves, so maybe psychopath is a better adjective).

We have had a major banking/fiscal crisis in the U.S. and southern Europe, at the exact time that the world balance of payments is shifting due to China trying to move from export-led growth to consumption-driven growth.  The logical response is for the strong economies of northern Europe to borrow and spend to compensate for the necessary retrenchment in southern Europe, and for the US to be counter-cyclical in spending and force corporations and banks to inject liquidity into the economy.

Instead, northern European countries are preoccupied with their own rigid austerity in the name of fiscal virtue, thus making it impossible for southern European countries to recover regardless of the suffering and sacrifices they endure.  At the same time, the U.S. is taxing workers (restoring the additional 2% levy on all wages for social security taxes) while corporations and the rich enjoy their largest gains in three generations — which they are simply stashing away in overseas havens and government bonds because there is no growth in purchasing power to stimulate investment.  And all this is before we feel the effects of the sequestration which is now locked in to reduce government spending for the next decade.

And during this so-called ‘temporary’ retrenchment, an entire cohort of older folks in the US, and younger folks in Europe and America, are being flushed out of the job market for years, losing irreplaceable experience and training.  Indeed, in the US many young folks are staying in school and taking out huge loans which they may never repay in the hope that they will someday have a better job.  We are thus building up long-term deficits in skills, and long-term debt burdens, that will weigh down our economies for years to come.  Yet no action is being taken to prevent older workers from opting for disability as the ‘new welfare;’ or to fund education and training for young people — quite the reverse, as college costs are being driven up by declines in public funding, forcing more people to enroll in for-profit schools and pay higher private tuition if they seek post-secondary training.

All this means that the lives of ordinary workers are being sacrificed on the altar of austerity.  This is going to be a looooong recession; indeed given that most economies of the world are still sinking, not recovering, it is only a matter of time before we rechristen this a depression.

 

Posted in The Global Economy, U.S. Politics | Tagged , , , | 1 Comment

From Russia, with thought

Posted on April 1, 2013 by

As the world “slow” pops up more and more (today, slower than expected US factory growth, and lower than expect PMI in China), it might be a good time to post a presentation I gave earlier this year in Moscow:

The New System of the Global Economy

My research specialty is long-term economic change, rather than short-term financial policies. So I am going offer a picture of why the current world order is ending, and what I think the new economic and political order will look like. I also will present some ideas on what will be the best responses to that change.

The change will be difficult to accept. I see the world economy, in a manner of speaking, as pregnant with a new order that is waiting to be born. But it will take time, and like with many pregnancies, there will be periods of discomfort, there will be birth pains, and we will not know exactly what the new child will look like before it is here.

Why do I say that the current world order is ending? We are in a periodic crisis of the kind that only comes to the world once or twice in a century, where existing patterns of technology and economic and social order have played themselves out and are going to be replaced by new ones. For the last thirty years, the world economy was driven by several processes that contributed to rapidly expanding globalization. In China, and to a slightly lesser degree in India and other developing countries, we saw billions of new workers added to the global work force. Particularly in China, they came with very low wages, but good discipline and good infrastructure, and contributed greatly to world output. The surpluses earned by Chinese workers were circulated as capital through the banks of the United States, Europe, and East Asia. The banks turned that capital into credit, which was extended to consumers and businesses, and that financed a global consumption boom that in turn created a boom in commodities, to the great benefit of countries like Russia, Canada, Brazil, and Australia. All of this worked very well for decades, and the demand for ever more credit fueled a huge boom in banking profits as well. However, credit expansion cannot continue indefinitely. Once credit expansion exceeds the rate of growth in the underlying economies and credit levels for sovereign states, companies, and households start to approach 70, 80, 90, 100, 120 percent of current income, this situation is no longer sustainable. Creditors no longer believe that the debt can adequately be serviced and repaid. We reached this point for many banks, financial institutions, and sovereign debtors in 2007-2009. Since then, following a wave of defaults, bankruptcies, and bailouts, we entered a stage of deleveraging, writing off debts, and adjusting to a world in which easy credit for all consumers and businesses is a thing of the past. Central banks have replaced this with rapid expansion of the money supply, which has driven down interest rates for the most credit-worthy borrowers.

Nonetheless, the contraction of easy credit and global deleveraging has produced a brake on the growth of global demand that that is contributing to the current Great Recession, and which will likely sustain it for several more years.

This contraction may be a cyclical effect. Yet other things are happening that will create lasting changes for the future. First, as the full impact of China’s one-child policy arrives, the growth of the Chinese labor force has ended. China’s census announced that in 2012, for the first time, the working age population declined. Growth in the labor force is also slowing down in India, Mexico, Brazil, and Indonesia. All of this means that the easy access to low cost labor to drive rapid increases in manufacturing will not be here. In fact, if you look at the world as a whole, 90% of all children under age 15 are growing up in developing countries outside of China, in areas where infrastructure, education, worker discipline, and security are far weaker. That is in Africa, the Middle East, parts of Central Asia, parts of South Asia.

And indeed Africa is, in a sense, the new China. Half of all global population growth in the next few decades will take place in Africa. However, Africa cannot simply step in to take up China’s role as a source of low-cost labor for the global economy; too much of Africa lacks the infrastructure or the labor force skills for its large and fast-growing population to match Chinese productivity. Thus a major adjustment of the global economy in the next 20 to 30 years will be China shifting to an economy that relies far less on exports driven by low cost labor, and far more on domestic consumption and higher productivity of labor. At the same time, the world will be striving to find a replacement for China’s role in the world economy by creating new sites for labor-intensive manufacturing, and seeking to develop the low cost labor force that is growing fast in Africa. But these changes will not occur very quickly. They will take decades.

Europe is also going through a period of major adjustment. I believe Europe is heading towards greater integration, but a great deal remains to be seen as to whether that integration will lead to stronger governance from Brussels, or to policies that are dominated by national leaders, particularly those of Germany. Europe will be wrestling with the form its integration will take — more centralized? more federal? It will be wrestling with the reform of its banking system and adapting it to cope with differences in productivity between different countries. Most importantly, Europe will be looking for new sources of economic growth. I think Europe will emerge as a stronger, more united continent, but those changes will take time.

Finally, the US and Russia are also going through changes. The United States is going through a boom in cheap energy, driven by an expansion of natural gas and crude oil production. Manufacturing that is driven by the search for low cost energy will increasingly move back to the United States. All of this will be difficult for the Russian economy, which has depended on high-volume, but relatively high cost, production of natural gas and oil. As the global market for oil and gas is increasingly saturated by expanding production outside of Russia, Russia will have to greatly diversify its economy and change its core economic relationships.

What we will see, then, in the next thirty years is capital being redeployed on a large scale to Africa to increase agricultural, mining, and manufacturing output and to improve human capital in that continent. At the same time, we will see a competition for capital in Europe, Asia, North America, and Latin America trying to put the available capital to the most productive and efficient uses.

All of this will put great strains on the welfare state model of European and rich country economies. The welfare state model functioned to drive resources to the elderly for pensions and to those needing health care, and to workers needing support in the marketplace. All of that was perfectly feasible when countries had fairly strong population growth, large youth cohorts, and rapid increases in productivity. But all of those conditions are now going away. All of the rich countries are facing rapid aging, and all of them are struggling to maintain productivity growth at the levels of the post WWII period. Indeed, the level of aging soon coming to countries from Europe to Japan – with populations over age 50 comprising half of all adults – have never been seen nor were anticipated. The U.S. has a somewhat younger population, but this will be offset by the combination of a large increase in the aged, as the baby-boomers move into retirement, and America’s far higher medical costs than prevail in other advanced countries. The basic contours of the welfare state, with governments providing generous pensions, heath care, and support for the unemployed, is going to have to be substantially restructured and rethought.

Technology is on the edge of some truly amazing and dramatic changes. Three-dimensional printing will have an unknown effect on mass manufacturing. Nanotechnology will have an unknown effect on the basic materials we use. The advent of driverless cars, most of them with electric motors, will change the way we organize our ground transportation. We are going to see a new thorium-based nuclear cycle that will lead to an expansion of safe and efficient nuclear power and greatly aid the electrification of our economies. The problem is that all of these technologies are in their infancy. Unlike computer and information technology, which has been the driving force of innovation the last 20 to 30 years, these new technologies will effect basic processes of energy production, transportation, and materials and will therefore have, I believe, a much bigger impact on our life than tablets or the internet. But it will be three or four decades before these processes are mature, and before they can replace our existing energy and transportation infrastructure. Technology thus will not come to our rescue; rather we face several decades in which the major economies of the world will have to adjust to powerful demographic shifts and economic constraints before the next wave of technological advances can transform our lives.

One last point that I wish to raise about global change: we have seen a spread of democracy that has been as inevitable and global as the growth of population and the growth of the economy. The number of countries claiming to be democratic in their government has grown from a handful in the 19th century to the great majority of the countries in the world today. But the very meaning of democracy is under contention now in a way that it has not been. In Europe, the question is whether democracy will continue to function mainly at the level of the individual states—Germany, Bulgaria, the United Kingdom—so that these governments set the policy for Europe, or will there be a new democracy in Europe focused on Brussels so that European voters as a whole shape the continent’s policies? This issue will take years to resolve, but will have to be resolved in order for Europe to function effectively.

In the United States, we have a problem with our two-party system becoming so ideologically driven that it ceases to function. This week, a major budget cut occurred in the United States not because of a deliberate policy choice, but because of a default that reflected a failure to make policy choices. Meanwhile, countries that do not currently have a competitive party system dominating their politics—China, Russia, countries in the Middle East, Africa, and Central Asia—will have to grapple with demands for greater accountability from their people. It will be a difficult time because corruption and poor governance that was tolerable during a period of rapid economic growth will be intolerable when people are struggling with major economic adjustments.

In sum, we will see huge changes in technology, in the configuration of the global economy, and in the meaning and operation of democracy that will need to be settled in the next 20 to 30 years. These are likely to be years of conflicts, major adjustments, and considerable power shifts in the world economy. I believe those countries that are most open to creative destruction, to moving away from the past, and to welcoming investment for the future will emerge as most successful countries 30 years from now. Nonetheless, the new world order that arises will look very different than that of today.

Posted in The Global Economy | Tagged , | 5 Comments

Relentless optimism?

Posted on March 28, 2013 by

As Europe waits to see what follows the Cypress haircut and Italian political deadlock; Japan waits to see if its efforts at halting deflation produce progress, ignite excess inflation, or fail; China waits to see if it can sustain growth while coping with raging inequality and corruption; and the rest of the world waits for growth, it is nice to see such optimism about markets and America. Tight oil and fracked gas, a return of manufacturing, the housing market nearly back to normal — all good, right?

Perhaps I remain the only skeptic left on the housing market. To me, much of the recovery was spurred by investors snapping up single-family houses at depressed rates in order to rent them out. That is fine, but it makes housing a speculative asset market, rather than a market driven by a steady expansion of basic demand from new household formation.

Speculative asset markets peter out or crash. Steady demand-driven markets underwrite long-term real growth. So there is a real question whether the housing market revival portens the former or the latter.

Here is what the demography and economics suggest. The size of the first-time home-buyer cohort (25-40) will grow by just under 1% per year for the next ten years; that is not bad. But two other factors come into play. First, people buy new homes when they are expecting their first or additional children. The fertility rate in the US has fallen to an all-time low, and the number of births is declining. Even more important, the ability of young people to buy homes is being hit both by heavy burdens of student debt (so that student loan payments compete with mortgage payments for available income) and stagnant wages. In fact the percent of people 20 and older living with their parents has doubled in the last 20 yrs, from 1 in 10 to 1 in 5.

So expect the new home market will level off soon — barring a big upswing in incomes or birth rates, neither of which I see as likely.

Posted in The Global Economy, U.S. Politics | 4 Comments

A Haircut in Cyprus

Posted on March 18, 2013 by

It’s baaaack! Many thought the EU crisis had been safely put behind us, thanks to Magic Mario and the ECB’s promise to do whatever it takes to save the Euro. Even the near deadlocked election in Italy, the continued squeeze of austerity policies on Eurozone GDP (flash- it’s still shrinking), and turmoil in Spain couldn’t raise a panic.

Today, however, an amazingly cynical move by the European Commission — who seemed to figure this will only hurt Russians, so who cares? — put panic back on the table.

Cyprus is a tiny country with some very big banks, not unlike Iceland and Ireland.  In fact, deposits in the country’s banks, driven largely by Russian investors parking Euros in what they thought were safe, EU protected accounts, are many times larger than Cyprus’s GDP.  But as in Iceland and Ireland, Cypriot banks made bad bets — mainly on Greek sovereign debt (oops!) — and now cannot meet their obligations.

Now Cyprus’ second largest bank is about to collapse, other banks are in deep trouble as well, and the entire financial sector could implode due to interbank ties. So the EU decided the only way to stabilize the situation was to reduce the bank’s immediate debts by taking money from depositors!  Every depositor in Cyprus’ banks was told they will lose either 9.9% of their deposits — for accounts over 100,000 Euros — or 6.75% for smaller accounts.  This is intended to raise roughly six billion Euros to put toward a seventeen billion Euro bailout, with the rest provided by the EU.

About half of the bailout money will come from Russian banks and corporations, who have 31 billion dollars sitting in Cypriot bank accounts.  The other half will come from European and Cypriot depositors.

This is not plain highway robberty — the Cypriot Prime Minister has promised that depositors would be offered bank shares (!) covering the full amount of their losses.  In addition, he promised that those who left their savings in banks for another two years would be rewarded with bonds backed by future income expected to come from development of Cyprus’s natural gas deposits.  This makes the haircut more of a forced loan, with depositors’ losses being — hopefully — returned with interest or capital gains a few years from now, if all goes well.

Still, this is a remarkable measure to take.  To be sure it is still pending; Cyprus’s Parliament still must approve the deal, and negotiations are continuing to see if smaller depositors can be spared some pain.  Nonetheless, it is an amazing act — depositors with billions of dollars in cash in EU banks, with deposits denominated in Euros, will wake up Tuesday to find they have 10% less cash in those accounts than they had on Friday.

Normally, this kind of instability of Euro accounts would create a panic — if a Euro in the bank in cash on Friday is worth only nine-tenths of a Euro in the bank the following Tuesday, why should anyone hold Euros in EU bank accounts?  What guarantee is there that the EU commission or ECB won’t rescue soggy banks — of which there remain many in the EU — by using similar measures elsewhere?  None, of course, is the answer.

The only reason this makes any sense is that the overwhelming portion of large accounts in Cypriot banks are held by overseas depositors, mainly Russians.  This means that Europeans may not have to fear that their accounts in their banks will be treated the same way.   Still, this is a crazy precedent.  Banks rely on the belief by depositors that all cash account holders will be treated the same way.  If this ceases to be true, the entire banking industry may be in for a shake-up.

So this is step with unforeseeable consequences.  Obviously, the European Commission thinks this is no big deal, that other countries will see Cyprus as a rare exception, and that fears of contagion or repeat of this policy will quickly fade.  Perhaps they are right.

It will be an interesting week to watch.

 

 

Posted in The Global Economy | Leave a comment

Wealth and Social Justice

Posted on March 12, 2013 by

The news this week was good — U.S. national wealth had returned to pre-recession levels.

Or was it?

Pry into the details and it turns out that wealth in housing — which affects most middle class people (the poor have no wealth to speak of, so set them aside for the moment) — remains 20% below 2006 levels.  But wealth in financial assets – which affects mainly the top 1% — is 4% higher than 2007 levels.

So five years after the Great Recession, those who were most involved in finance, which started it all, have actually gained from the recession and recovery, while everyone else has lost about 20% of their wealth.

That this outcome arose in a democracy is remarkable.    But so it appears is the state of our economy and government that this is still hailed as good news.

Posted in Uncategorized | 2 Comments