LA ECONOMÍA MUNDIAL EN UN ALARMANTE RESUMEN

DEMOCRACIA EN AMÉRICA HOY (TOCQUEVILLE)

According to Alexis De Tocqueville, (Democracy in America, Chapter 21), democratic ages are times of rapid and incessant transformation and true democracies should be free from disruptive political violence: “Almost all the revolutions which have changed the aspect of nations...

— Michael Pettis (@michaelxpettis) November 4, 2019

According to Alexis De Tocqueville, (Democracy in America, Chapter 21), democratic ages are times of rapid and incessant transformation and true democracies should be free from disruptive political violence:

“Almost all the revolutions which have changed the aspect of nations have been made to consolidate or to destroy social inequality.” He goes on to say: “I am aware that amongst a great democratic people there will always be some members of the community in great poverty, and others in great opulence; but the poor, instead of forming the immense majority of the nation, as is always the case in aristocratic communities, are comparatively few in number, and the laws do not bind them together by the ties of irremediable and hereditary penury. The wealthy, on their side, are scarce and powerless; they have no privileges which attract public observation”

Until there is a significant rebalancing of wealth and social opportunities in the US, it seems that history’s leading analyst of American democracy would worry whether the USA today can remain an example of American democracy.

LAS BOLSAS CHINAS SEGUN MICHAEL PETTIS

Michael Pettis sobre las bolsas chinas:

"Anyone who reads my blog is already likely to know the story. Until the market peaked on June 12, with the Shanghai Composite at 5,178, China had experienced a stock market boom that saw the Shanghai index rising in what seemed like a straight line by more than 135% in one year. The boom seemed almost inexplicable from a fundamental point of view. The market soared as growth expectations for the Chinese economy fell, corporate profitability was squeezed, and banks, who dominate the index, saw a sharp rise in NPLs. What’s more, during this period it was increasingly clear that China’s declining GDP growth was still overly reliant on excessively rapid credit growth, and that to get control of the latter the former would have to drop a lot more.

Although the market peaked in mid-June, the panic really began some time in the first week of July (July 7 is now being referred to by some as China’s “Black Tuesday”), by which time, however, the market had already lost nearly one third of its value. Since late June Beijing had implemented a series of measures to stop the decline, none of which had the desired effect, and by the weekend of July 4-5 there was a sense of complete desperation as the regulators reached for wholly unprecedented attempts to control the fall.

The stock market panic seems to have ended on July 9, when the Shanghai markets closed up 5.8% on the day, followed by strong gains the following Friday and Monday, but Tuesday’s 3.0% decline set hearts fluttering again, and the nervousness did not abate over the next three days as stocks continue to rise, but not without drama. For now I think we can safely say the panic is finally over, but none of the fundamental questions have been resolved and I expect continued volatility. Because I also think the market remains overvalued, however, I have little doubt that we will see at least one more very nasty bear market.

Either way the panic and the policy responses have opened up a ferocious debate on China’s economic reforms and Beijing’s ability to bear the costs of the economic adjustment. Among these costs are volatility. Rebalancing the economy and withdrawing state control over certain aspects of the economy, especially its financial system, will reduce Beijing’s ability to manage the economy smoothly over the short term but it may be necessary in order to prevent a very dangerous surge in volatility over the longer term.

Sunday’s Financial Times included an article with the following:

Critics of the measures unleashed by Beijing last week argue that they point to a fundamental tension at the heart of China’s political economy that a free-floating renminbi would test even more severely. The ruling Chinese Communist party, they argue, is ultimately incapable of surrendering control of crucial facets of the country’s economic and financial system. As one person close to policymakers in Beijing puts it: “The problem with this system is that it cannot tolerate volatility and markets are all about volatility.”

It’s not just that markets are about volatility. It is that volatility can never be eliminated. Volatility in one variable can be suppressed, but only by increasing volatility in another variable or by suppressing it temporarily in exchange for a more disruptive adjustment at some point in the future. When it comes to monetary volatility, for example, whether it is exchange rate volatility or interest rate and money supply volatility, central banks can famously choose to control the former in exchange for greater volatility in the latter, or to control the latter in exchange for greater volatility in the former.

Regulators can never choose how much volatility they will permit, in other words. At best, they might choose the form of volatility they least prefer, and try to control it, but this is almost always a political choice and not an economic one. It is about deciding which economic group will bear the cost of volatility.

But one way or another there will be an enormous amount of volatility within the Chinese economy, not just because it is a relatively poor developing country, which have always been more volatile economically than advanced countries, but also because it is so highly dependent on investment to generate growth. Hyman Minsky argued that economies driven by investment are extremely volatile and overly susceptible to changes in sentiment, and he is almost certainly right.

During the market panic I posted a number of short (1,500 character maximum) messages for my clients on a service available to them through Global Source, who administers my newsletter. I thought in this blog entry I would reproduce the July 8-10 messages in their entirety because they focus on a technical aspect of the Chinese markets that I think is extremely important to understand if we want to understand why volatility is not going to go away. The key point is to distinguish between the types of investment strategies that investors follow (which I discuss more explicitly in my 2013 book on China and in a November 24, 2013, blog entry) and to understand the different ways in which they interpret new information.

The more widely dispersed the investment strategies, and the greater the range of interpretations by which new information is assessed, the more stable a market is likely to be. In China not only is the market wholly speculative, for the reasons I discuss in the blog entry, but even among speculators there seems to have been a dramatic convergence in the way they interpret information. Because this has only been reinforced by the recent behavior of the regulators, it is almost inconceivable to me that we will not see more highly disruptive movement in the Chinese stock markets:

Here are the July 8-10 short messages I posted to clients:"

LAS CONSECUENCIAS ECONOMICAS DE LA DESIGUALDAD DE INGRESOS

Economic Consequences of Income Inequality - Carnegie Endowment for International Peace

What is very clear from this analysis is that there are really only three sustainable solutions to the global crisis in demand. Either the world has to embark on a surge in productive investment, or we need to reduce the income share of the state and of the rich, or we must accept that unemployment will stay high for many more years.

 

The first is possible, but with so much excess manufacturing capacity and excess infrastructure in many parts of the world, and with significant debt constraints, we need to be very careful about how we do this. Certainly countries like the United States, India and Brazil lack infrastructure, but they do so largely because of political constraints, and it is unreasonable to assume that any of these countries will soon embark on an infrastructure-building boom.

Even if they do, the amount of excess savings is likely to be huge, and without a significant redistribution of income to the middle classes and the poor, it is hard to see how we can avoid high global unemployment for many more years. Because trade war is the form in which countries assign global unemployment, I would expect trade relations to continue to be very difficult over the next few years, as countries with high unemployment and low savings intervene in trade, thus forcing the savings back into countries with excess savings.

So what are the policy implications? Clearly Europe, the US, China, Japan, and the rest of the world must take steps to reduce income inequality. Just as clearly countries like China and Germany must take steps to force up the household income share of GDP (in fact polices aimed at doing this are at the heart of the Third Plenum reform proposals in China). Because it will be almost impossible to do these quickly, as a stopgap countries with productive investment opportunities must seize the initiative in a global New Deal to keep demand high as the structural distortions that force up the global savings rate are worked out.

But redistributing income downwards is easier said than done in a globalized world, especially one in which countries are competing to drive down wages. The first major economy to attempt to redistribute income will certainly see a surge in consumption, but this surge in consumption will not necessarily result in a commensurate surge in employment and growth. Much of this increased consumption will simply bleed abroad, and with it the increase in employment.

Less global trade, in other words, will create both the domestic traction and the domestic incentives to redistribute income. In a globalized world, it is much safer to “beggar down” the global economy than to raise domestic demand, and so I expect that there will continue to be downward pressure on international trade.

Until we understand this do not expect the global crisis to end anytime soon, except perhaps temporarily with a new surge in credit-fueled consumption in the US (which will cause the trade deficit to worsen) and more wasted investment in China (which, because it is financed with cheap debt, which comes at the expense of the household sector, may simply increase investment at the expense of consumption). These will only make the underlying imbalances worse. To do better we must revive the old underconsumption debate and learn again how policy distortions can force up the savings rate to dangerous levels, and we may have temporarily to reverse the course of globalization.

I will again quote Mariner Eccles, from his 1933 testimony to Congress, in which he was himself quoting with approval an unidentified economist, probably William Trufant Foster. In his testimony he said:

It is utterly impossible, as this country has demonstrated again and again, for the rich to save as much as they have been trying to save, and save anything that is worth saving. They can save idle factories and useless railroad coaches; they can save empty office buildings and closed banks; they can save paper evidences of foreign loans; but as a class they cannot save anything that is worth saving, above and beyond the amount that is made profitable by the increase of consumer buying.

It is for the interests of the well-to-do – to protect them from the results of their own folly – that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit. This is not “soaking the rich”; it is saving the rich. Incidentally, it is the only way to assure them the serenity and security which they do not have at the present moment.

(…)

Inevitably some one will discover that Keynes and Krugman said many of these things, in which case the essay is the work of the devil and innocent young people should not be allowed to read it, or that it agrees with things that Laffer and Friedman have said, in which case ditto. In fact an awful lot of economists in the past 200 years and on every part of the political spectrum have agreed with some or all of this model, mainly because it is just basic economics. There should be no guilt by association here, please.

MICHAEL PETTIS
 
This article originally appeared in China Financial Markets.

ALGUNAS PREDICCIONES PARA EL RESTO DE LA DECADA

EconoMonitor : EconoMonitor » Some Predictions for the Rest of the Decade

"My basic sense is that we are at the end of one of the six or so major globalization cycles that have occurred in the past two centuries. If I am right, this means that there still is a pretty significant set of major adjustments globally that have to take place before we will have reversed the most important of the many global debt and payments imbalances that have been created during the last two decades. These will be driven overall by a contraction in global liquidity, a sharply rising risk premium, substantial deleveraging, and a sharp contraction in international trade and capital imbalances."

MPetiss

LAS PREDICCIONES DE MICHAEL PETTIS SON LAS SIGUIENTES:

*BRICS and other developing countries have not decoupled in any meaningful sense, and once the current liquidity-driven investment boom subsides the developing world will be hit hard by the global crisis.

* Over the next two years Chinese household consumption will continue declining as a share of GDP.

* Chinese debt levels will continue to rise quickly over the rest of this year and next.

* Chinese growth will begin to slow sharply by 2013-14 and will hit an average of 3% well before the end of the decade.

* Any decline in GDP growth will disproportionately affect investment and so the demand for non-food commodities.

* If the PBoC resists interest rate cuts as inflation declines, China may even begin slowing in 2012.

* Much slower growth in China will not lead to social unrest if China meaningfully rebalances.

* Within three years Beijing will be seriously examining large-scale privatization as part of its adjustment policy.

* European politics will continue to deteriorate rapidly and the major political parties will either become increasingly radicalized or marginalized.

* Spain and several countries, perhaps even Italy (but probably not France) will be forced to leave the euro and restructure their debt with significant debt forgiveness.

* Germany will stubbornly (and foolishly) refuse to bear its share of the burden of the European adjustment, and the subsequent retaliation by the deficit countries will cause German growth to drop to zero or negative for many years.

* Trade protection sentiment in the US will rise inexorably and unemployment stays high for a few more years.

Cada una de las predicciones anteriores es cuidadosamente expuesta y argumentada en detalle por el autor en su trabajo