Category Archives: Global Economics

“…the Nature of Capitalism”

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My Comments: There are changes afoot, and 45 and his cronies seem to have few clues. Or, more likely, they don’t give a damn.

The disparity between those at the top of the economic food chain and the rest of us not at the top, is called ‘income inequality’. The different approach taken by the two primary political parties, assuming there is a motivation to govern, is that ‘income inequality’ results from laziness and social giveaways, while the other party argues there are pressures whose origins are beyond the capacity for anyone to influence.

The disparities show up now as anemic job growth numbers across the nation, to the rise in disaffected people who show up at Trump rallies, to the tension in so many communities between law enforcement and the people they are supposed to be protecting, to the tension between rural and urban populations, and on and on and on.

There are huge implication for people with years of retirement left to navigate. This is a good read and very thought provoking.

by Oscar Williams-Grut | November 5, 2016

Lord Adair Turner, the former vice chairman of Merrill Lynch Europe and ex-head of the Britain’s financial watchdog, is “increasingly worried” that advances in technology are undermining capitalism and stopping the global economy recovering from its “post-crisis malaise.”

In an interview with Business Insider, Lord Turner said: “We have an economic malaise where the capitalism system is not delivering as well or to enough people to maintain its legitimacy.

“There’s a certain sort of equality of citizenship that requires that everybody does OK. I think that may breakdown. I think it may breakdown because of the fundamental nature of technology. You have to be aware that the way that capitalism works will vary depending on the different stages of technology that we’re in.”

‘Huge returns for them and relatively low and precarious returns for an increasing percentage’

Lord Turner ran the Confederation of British Industry (CBI) in the mid-1990s, before becoming vice chairman of Merrill Lynch Europe from 2000 to 2006. He then served as head of the UK’s former financial watchdog the Financial Service Authority from 2008 to 2013, taking the jobs on the eve of the global financial crisis sparked by the US mortgage security bubble.

Lord Turner is now chairman of George Soros’ economic think thank the Institute for New Economic Thinking and this year authored “Between Debt and the Devil” on the global financial crisis. (There are those on the right who claim George Soros, despite his billions, it really a communist, interested in destroying capitalism – TK)

He told Business Insider that businesses like Facebook, Uber, and Airbnb are focusing huge amounts of wealth in the hands of relatively few people and generating fewer jobs than previous technological breakthroughs. This is undermining the fundamental promise of capitalism that advances in technology and the wider economy will bring some benefit to everyone.

He said: “Look at Facebook — it now has a market cap of about $370 billion. It only employs 14,000 people and it had to do very little investment in order to get there. The reason is this technology has this extraordinary feature that once you develop one copy of software, the next billion copies don’t cost you anything.

“There’s zero marginal cost of replication. That is just completely different from the world of electromechanical machinery. Once Henry Ford had built one factory, if he wanted another he’d have to build it all over again. He had to put in lots of millions of stock.”

Technological innovations, such as industrialisation, have traditionally generated more jobs than they destroyed. But research by Citi and Oxford University earlier this year found a “downward trend in new job creation” from the 1980s onwards, with technology generated fewer, lower-skilled jobs than past revolutions.

The World Economic Forum has already forecast that 5 million jobs could be eradicated by technology by 2020 and 57% of all jobs across the OECD are at risk of automation, according to research by Citi and Oxford University.

Lord Turner says: “The problem is this: I think we probably are on the verge of a wave of automation and robotisation and the application of big data etc., which will tend to create an economy of huge returns for the people clever enough to create the software, do the big of data analytics, create the computer game, create the new business model or the data system that sits at the centre of Airbnb or Uber.

‘One of the things is it does seem to be driving inequality’

Multi-billion dollar tech platforms like Airbnb and Uber pitch themselves as part of the “gig economy,” which they say helps people earn extra money through either flexible work or renting out their assets.

But British economist Guy Standing argues that most of the people who work on these types of platforms are part of what he terms the “precariat” — low-paid workers with precarious job security. He claims these types of platforms that connect workers with employers are part of a wider trend of low-paid agency work.

Tech platforms’ role in society has been in focus recently, with a British employment tribunal ruling that Uber drivers were in fact staff rather than freelancers on the platform. As a result, they are legally be entitled to things like holiday pay and sick pay.

Lord Turner says: “I think we’re just at the beginnings of understanding what deep things this [technological change] does. One of the things is it does seems to driving of inequality. This information and communication technology enables huge wealth creation with very little investment for some categories of people in the economy and creates jobs that are very low pay for others.”

Lord Turner thinks this tech-driven inequality has contributed to the popular resentment for elites and mainstream politics that drove the Brexit vote and support from Donald Trump in the US elections.

He says: “I think we may be at a turning point in the nature of capitalism. Our assumption for the last 200 years has been that although there are ups and downs year by year, broadly speaking decade-by-decade capitalism delivers an increase in GDP per capita and although it’s not an equal system, some people do better than others, on average over a couple of decades everybody does OK.”

‘I am increasingly convinced and worried there are more fundamental forces at work’

Lord Turner suggested that a solution the tech-driven equality could be a universal basic income — a flat wage paid to all citizens that is enough for them to live on. Experiments with this are being carried out in Holland and Kenya.

An alternative could be that the government ensures people are paid a “living wage” for essential human roles such as health and social care, Lord Turner says.

He told BI: “There are many jobs that we need to do in our society, care etc., that you can’t automate and you wouldn’t want to automate. They need to be done but it may be that if you leave those entirely to the private sector or the state in trying to buy them, using competitive bidding processes to continually drive the price down, those things where we do need people to do the job will be at rates so low that it doesn’t give people enough income and dignity.

“Does that mean that we just have to accept that the state has to say through the social care system and health care system it’s going to employ people and pay people at a rate which it considers reasonable — a living wage or whatever — rather than at the lowest rate at which it can put it out to competitive bidding?”

But Lord Turner added: “I think it’s a fundamental social issue that we will increasingly have to debate and I think we don’t really know what the policy levers there are.”
Lord Turner believes that finding a solution to the problems presented by the new tech economy are essential not just to repairing global trust in capitalism but also in repairing the global economy itself.

Lord Turner argued in his book, “Between the Debt and the Devil”, that the global economy’s painfully slow recovery from the 2008 crisis has been caused by the huge debt overhang created by a half century of loose credit conditions in the run up to the crash.

But he told BI: “Whereas soon are 2008 I felt our problem was fundamentally just an enormous debt overhang generated by an out of control credit boom, I am increasingly convinced and increasingly worried that there are some more fundamental forces at work which is why it’s taking so long to get out of, and why we’re still not out of, this post-crisis malaise.”

Growth Is Not Dead, But It Is Dying

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My Comments: My post on May 26th last about Demographics and Money suggested reasons why economic growth in long established nations will be nothing to brag about going forward. Despite the current Administration suggesting a return to not just 3% annual growth for the US economy, but wait for it, 4% annual growth, it’s just not going to happen.

The tax plan outlined by the White House the other day makes the basic assumption that with high growth, tax revenues will grow to pay for everything. What is not said is that without significant growth, the hole we are in now will simply get deeper.

Right now the Federal deficit is almost $20T. That’s a staggering amount. Pretty soon, the annual cost to service that debt will be $1T per year. That money has to come from tax revenues, which means you and I. Are you prepared to pay your share when the top 1% get more tax breaks?

I’m far from a pacifist, but do we really need to keep paying more annually for our military than the next seven nation’s combined spending? Yes, some of that spending filters back into the economy and functions as a stimulus, but the Administration wants to spend more than we do now.

May 28, 2017 Lorenzo Fioramonti

Growth is dying as the silver bullet for success. Why this may be good thing

The idea that the economic “pie” can grow indefinitely is alluring. It means everybody can have a share without limiting anybody’s greed. Rampant inequality thus becomes socially acceptable because we hope the growth of the economy will eventually make everybody better off.

In my new book “Wellbeing Economy: Success in a World Without Growth” I point out that the “growth first” rule has dominated the world since the early 20th century. No other ideology has ever been so powerful: the obsession with growth even cut through both capitalist and socialist societies.

But what exactly is growth? Strangely enough, the notion has never been reasonably developed.

For common sense people, there is growth when – all things being equal – our overall wealth increases. Growth happens when we generate value that wasn’t there before: for instance, through the education of children, the improvement of our health or the preparation of food. A more educated, healthy and well-nourished person is certainly an example of growth.

If any of these activities generate some costs, either for us individually or for society, we should deduct them from the value we have created. In this logical approach, growth equals all gains minus all costs.

Paradoxically, our model of economic growth does exactly the opposite of what common sense suggests.

Negative values of growth

Here are some examples. If I sell my kidney for some cash, then the economy grows. But if I educate my kids, prepare and cook food for my community, improve the health conditions of my people, growth doesn’t happen.

If a country cuts and sells all its trees, it gets a boost in GDP. But nothing happens if it nurtures them.

If a country preserves open spaces like parks and nature reserves for the benefit of everybody, it does not see this increase in human and ecological wellbeing reflected in its economic performance. But if it privatises them, commercialising the resources therein and charging fees to users, then growth happens.

Preserving our infrastructure, making it durable, long-term and free adds nothing or only marginally to growth. Destroying it, rebuilding it and making people pay for using it gives the growth economy a bump forward.

Keeping people healthy has no value. Making them sick does. An effective and preventative public healthcare approach is suboptimal for growth: it’s better to have a highly unequal and dysfunctional system like in the US, which accounts for almost 20% of the country’s GDP.

Wars, conflicts, crime and corruption are friends of growth in so far as they force societies to build and buy weapons, to install security locks and to push up the prices of what government pays for tenders.

The earthquake in Fukushima like the Deep Water Horizon oil spill were manna for growth, as they required immense expenditure to clean up the mess and rebuild what was destroyed.

Disappearing growth

Against this pretty grim depiction, you may ask yourself: where is the good news? Well, the good news is that growth is disappearing, whether we like it or not. Economies are puffing along. Even China, the global locomotive, is running out of steam.

And consumption has reached limits in the so-called developed world, with fewer buyers for the commodities and goods exported by developing countries.
Energy is running out, particularly fossil fuels, and even if polluting energy sources were endless – as some supporters of shale gas, or fracking, suggest – global agreements to fight climate change require us to eliminate them soon.

As a consequence, mitigating climate change forces industrial production to contract, thus limiting growth even further. What this means is that, on the one hand, growth is disappearing due to the systemic contraction of the global economy. On the other, the future of the climate (and all of us on this planet) makes a return of growth, at least the conventional approach to industry-driven economic growth, politically and socially unacceptable.

Window of opportunity for change

Even the International Monetary Fund and mainstream neoliberal economists like Larry Summers agree that the global economy is entering a “secular stagnation”, which may very well be the dominant character of the 21st century.

This is a disastrous prospect for our economies, which have been designed to grow – or perish. But it is also a window of opportunity for change. With the disappearance of growth as the silver bullet to success, political leaders and their societies desperately need a new vision: a new narrative to engage with an uncertain future.

In my new book, I argue that as we begin to recognize the madness behind growth, we start exploring new paths. These include: forms of business that reconcile human needs with natural equilibria; production processes that emancipate people from the passive role of consumers; systems of social organisation at the local level that reconnect individuals with their communities and their ecosystems, while allowing them participate in a global network of active change makers.

This is what I call the “wellbeing economy”. In the wellbeing economy, development lies not in the exploitation of natural and human resources but in improving the quality and effectiveness of human-to-human and human-to-ecosystem interactions, supported by appropriate enabling technologies.

Fulfilling lives

Decades of research based on personal life evaluations, psychological dynamics, medical records and biological systems have produced a considerable amount of knowledge about what contributes to long and fulfilling lives.

The conclusion is: a healthy social and natural environment. As social animals, we thrive thanks to the quality and depth of our interconnectedness with friends and family as well as with our ecosystems. But of course, the quest for wellbeing is ultimately a personal one.

Only you can decide what it is. This is precisely why I believe that an economic system should empower people to choose for themselves. Contrary to the growth mantra, which has standardised development across the world, I believe an economy that aspires to achieve wellbeing should be designed but those who live it, in accordance with their values and motives.

Source article: http://theconversation.com/growth-is-dying-as-the-silver-bullet-for-success-why-this-may-be-good-thing-78427

Ethanol In Our Gas?

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My Comments: Do you ever notices those little signs on the gas pumps? The small notices that tell us 10% is actually not gasoline? Do you ever wonder why they are there? Me neither.

Clean air, global warming, political deal making, the Paris Climate Agreement – who knew this stuff was so complicated?

William O’Keefe | Saturday, November 26, 2016

To get enough votes to pass the 1990 Clean Air Act Amendments, Democrats led by Henry Waxman made a deal with the corn lobby. In exchange for its support, Congressman Waxman committed to an oxygenate provision — essentially a mandate to blend corn derived ethanol into gasoline.

As a way of disguising this requirement, Congress wrote the oxygenate provision in a way that made it part of a formula for gasoline — government gas. Section 211 (k) of the Clean Air Act spells out in detail specific component levels for gasoline. Just think, lawmakers acting like chemists, telling refiners how to make gasoline.

Prior to the passage of the 1990 Amendments, it was clear that initiatives to improve air quality would mean that tailpipe emissions would become more stringent. In anticipation, the oil and auto industries undertook the most extensive fuel-engine research program ever conducted. The objective was to determine the most cost-effective ways to meet lower emission standards and to provide research based data that could be used by government.

Since the mandate went into effect, almost 26 years ago, its cost has been about $200 billion or more.

The two industries briefed Congress on the research and made one primary request: set emission standards to achieve Clean Air Act objectives but give the two industries the freedom to determine how best to achieve them. That request was rejected because of a deal with the corn lobby.

Ever since then, motorists have been stuck with higher fuel costs and lower mileage, and consumers have been stuck with higher food prices. Corn production has continued to increase and Congress expanded the mandate to include specific volumes. The cost of the ethanol mandate has been documented extensively as has the lack of real environmental benefits. In 2015, the Manhattan Institute published a report — The Hidden Corn Ethanol Tax — that concluded in 2013 the mandate cost consumers $10.6 billion. Since the mandate went into effect, almost 26 years ago, its cost has been about $200 billion or more.

President-elect Trump has pledged to “drain the swamp.” The ethanol mandate is a good place to start because it may be the most visible and lasting example of how crony capitalists create Baptist and Bootlegger schemes to enrich themselves with taxpayer dollars.

Ethanol manufacturers have perfected championing the environment with corn farmer support for both to get richer. Bringing the ethanol mandate to an end would send a clear signal that campaign promises to take on crony capitalists was more than just rhetoric. Changing the Washington culture has to break the link between special interests, lobbyists, lawyers, the alliance between Bootleggers and Baptists.

Re-Negotiate NAFTA?

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My Comments: The North American Free Trade Agreement was passed by Congress on 11/30/1994. It was approved by 34 Republicans and 27 Democrats. It’s purpose was to increase trade across North America without creating a single currency among the three countries involved.

22 years later, industries specific to each country have evolved to reflect strengths and weaknesses inherent across the region. The drive for economic survival among those industries means there have been winners and losers, but with a 22 plus year history, those strengths and weaknesses have either surfaced or been culled out.

On balance, NAFTA has been good for the agricultural sector. We have a warmer climate than Canada and more rain than Mexico. Of the hundreds of nations across the planet, we are the only one with net exports of food. Everyone one else has to import some of their food.

In anticipation of a disruption of imports of American food stuffs into Mexico, they have now started a move to import more of their food requirements from China. That won’t create jobs in the US.

I think it’s ok and necessary to re-evaluate ideas from time to time. But changes will have consequences, some of them will hurt and US farmers are nervous. This explains why.

By PAUL WISEMAN, AP Economics Writer/May 19, 2017

Why Trump’s combative trade stance makes US farmers nervous

WASHINGTON (AP) — A sizable majority of rural Americans backed Donald Trump’s presidential bid, drawn to his calls to slash environmental rules, strengthen law enforcement and replace the federal health care law.

But last month, many of them struck a sour note after White House aides signaled that Trump would deliver on another signature vow by edging toward abandoning the North American Free Trade Agreement.

Farm Country suddenly went on red alert.

Trump’s message that NAFTA was a job-killing disaster had never resonated much in rural America. NAFTA had widened access to Mexican and Canadian markets, boosting U.S. farm exports and benefiting many farmers.

“Mr. President, America’s corn farmers helped elect you,” Wesley Spurlock of the National Corn Growers Association warned in a statement. “Withdrawing from NAFTA would be disastrous for American agriculture.”

Within hours, Trump softened his stance. He wouldn’t actually dump NAFTA, he said. He’d first try to forge a more advantageous deal with Mexico and Canada — a move that formally began Thursday when his top trade negotiator, Robert Lighthizer, announced the administration’s intent to renegotiate NAFTA.

Farmers have been relieved that NAFTA has survived so far. Yet many remain nervous about where Trump’s trade policy will lead.

As a candidate, Trump defined his “America First” stance as a means to fight unfair foreign competition. He blamed unjust deals for swelling U.S. trade gaps and stealing factory jobs.

But NAFTA and other deals have been good for American farmers, who stand to lose if Trump ditches the pact or ignites a trade war. The United States has enjoyed a trade surplus in farm products since at least 1967, government data show. Last year, farm exports exceeded imports by $20.5 billion.

“You don’t start off trade negotiations … by picking fights with your trade partners that are completely unnecessary,” says Aaron Lehman, a fifth-generation Iowa farmer who produces corn, soybeans, oats and hay.

Many farmers worry that Trump’s policies will jeopardize their exports just as they face weaker crop and livestock prices.

“It comes up pretty quickly in conversation,” says Blake Hurst, a corn and soybean farmer in northwestern Missouri’s Atchison County.

That county’s voters backed Trump more than 3-to-1 in the election but now feel “it would be better if the rhetoric (on trade) was a little less strident,” says Hurst, president of the Missouri Farm Bureau.

Trump’s main argument against NAFTA and other pacts was that they exposed American workers to unequal competition with low-wage workers in countries like Mexico and China.

NAFTA did lead some American manufacturers to move factories and jobs to Mexico. But since it took effect in 1994 and eased tariffs, annual farm exports to Mexico have jumped nearly five-fold to about $18 billion. Mexico is the No. 3 market for U.S. agriculture, notably corn, soybeans and pork.

“The trade agreements that we’ve had have been very beneficial,” says Stephen Censky, CEO of the American Soybean Association. “We need to take care not to blow the significant gains that agriculture has won.”

The U.S. has run a surplus in farm trade with Mexico for 20 of the 23 years since NAFTA took effect. Still, the surpluses with Mexico became deficits in 2015 and 2016 as global livestock and grain prices plummeted and shrank the value of American exports, notes Joseph Glauber of the International Food Policy Research Institute.

Mexico has begun to seek alternatives to U.S. food because, as its agriculture secretary, Jose Calzada Rovirosa, said in March, Trump’s remarks on trade “have injected uncertainty” into the agriculture business.

Once word had surfaced that Trump was considering pulling out of NAFTA, Sonny Perdue, two days into his job as the president’s agriculture secretary, hastened to the White House with a map showing areas that would be hurt most by a pullout, overlapped with many that voted for Trump.

“I tried to demonstrate to him that in the agricultural market, sometimes words like ‘withdraw’ or ‘terminate’ can have a major impact on markets,” Perdue said in an interview with The Associated Press. “I think the president made a very wise decision for the benefit of many agricultural producers across the country” by choosing to remain in NAFTA.

Trump delivered another disappointment for U.S. farm groups in January by fulfilling a pledge to abandon the Trans-Pacific Partnership, which the Obama administration negotiated with 11 Asia-Pacific countries. Trump argued that the pact would cost Americans jobs by pitting them against low-wage Asian labor.

But the deal would have given U.S. farmers broader access to Japan’s notoriously impregnable market and easier entry into fast-growing Vietnam. Philip Seng of the U.S. Meat Export Federation notes that the U.S. withdrawal from TPP left Australia with a competitive advantage because it had already negotiated lower tariffs in Japan.

Trump has also threatened to impose tariffs on Chinese and Mexican imports, thereby raising fears that those trading partners would retaliate with their own sanctions.

Farmers know they’re frequently the first casualties of trade wars. Many recall a 2009 trade rift in which China responded to U.S. tire tariffs by imposing tariffs on U.S. chicken parts. And Mexico slapped tariffs on U.S. goods ranging from ham to onions to Christmas trees in 2009 to protest a ban on Mexican trucks crossing the border.

The White House declined to comment on farmers’ fears that Trump’s trade policy stands to hurt them. But officials say they’ve sought to ease concerns, by, for example, having Agriculture Secretary Perdue announce a new undersecretary to oversee trade and foreign agricultural affairs.

Many farmers are still hopeful about the Trump administration. Some, for example, applaud his plans to slash environmental rules that they say inflate the cost of running a farm. Some also hold out hope that the author of “The Art of the Deal” will negotiate ways to improve NAFTA.

One such way might involve Canada. NAFTA let Canada shield its dairy farmers from foreign competition behind tariffs and regulations but left at least one exception — an American ultra-filtered milk used in cheese. When Canadian farmers complained about the cheaper imports, Canada changed its policy and effectively priced ultra-filtered American milk out of the market.

“Canada has made business for our dairy farmers in Wisconsin and other border states very difficult,” Trump tweeted last month. “We will not stand for this. Watch!”

Some U.S. cattle producers would also like a renegotiated NAFTA to give them something the current version doesn’t: The right to label their product “Made in America.” In 2015, the World Trade Organization struck down the United States’ country-of-origin labeling rules as unfair to Mexico and Canada.

Many still worry that Trump’s planned overhaul of American trade policy is built to revive manufacturing and that farming remains an afterthought.

“So much of the conversation in the campaign had been in Detroit or in Indiana” and focused on manufacturing jobs,” said Kathy Baylis, an economist at the University of Illinois. The importance of American farm exports “never made it into the rhetoric.”

AP Writers David Pitt in Des Moines and Mary Clare Jalonick in Washington contributed to this report.

What Is The World Coming To?

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My Comments: What’s your poison? Politics? Money? Entertainment? Sports? Religion?

Well, this post is about economics and finance. Some of you will run and hide. That’s OK. It comes from Guggenheim Investments and is a quick and dirty look at the next few months…

With spreads tight in high-yield corporate bonds, loans, structured credit, and Agency mortgage-backed securities, we expect an uptick in volatility this summer. While we see some near-term weakness ahead, our positioning, informed by the long-term themes identified in the highlights below, should provide a sound footing for our portfolios. Our Sector teams, Portfolio Managers, and Macroeconomic and Investment Research Group discuss shorter-term, sector-specific tactics for managing through current market conditions in the pages of this edition of the Fixed-Income Outlook.

Report Highlights

▪ With the Federal Reserve (Fed) set to continue to raise interest rates—and at a faster pace than that which is priced in the market—positioning for a flattening yield curve will remain a major theme in our portfolios.

▪ In addition to two more hikes this year, we expect the Fed will raise rates four more times in 2018. The Fed is also plotting a strategy to reduce its balance sheet; this should pressure yields higher in the short end and belly of the curve, which is where most of the new Treasury issuance is likely to come.

▪ Our view on the global macroeconomic environment is positive, which should support strong credit fundamentals for several years. China has stabilized, Europe is recovering, and corporate earnings in the U.S. are rising.

▪ We are focused on the legislative complexities of passing President Trump’s pro-growth agenda. Failure to put his plans into effect in a timely manner may cause markets to realize that the Trump rally is long on promise and short on delivery.

Equality or Chaos?

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‘We get signals that the system is under enormous stress’ – Mohamed El-Erian

A leading global economist and investor believes world leaders, and global capitalism, have reached a fork in the road between equality and chaos.

Mohamed El-Erian is a name known to me for many years. When he speaks, I listen. I recommend you listen too.

Nils Pratley and Jill Treanor/May 13, 2017

The bad news is that another economic crisis could strike within two years. The good – or better – news is that such a shock is not nailed on. It’s a 50% chance. But the developed world is approaching a T-junction. One road leads to higher growth and a more inclusive form of capitalism while the other turns towards recession, instability and turmoil.

The speaker is Mohamed El-Erian, one of the biggest names in financial markets, who advised President Obama. Born in New York to Egyptian parents, he spent 14 years at Pimco, the world’s biggest bond fund manager. Six of those years were as chief executive before he quit, citing the need to have a different perspective on life and spend more time with his family. His daughter, when she was 13, handed him a 22-item list of key moments in her life he had missed.

He was educated in the UK, at Cambridge and Oxford universities, and began his career at the International Monetary Fund. These days he is chief economic adviser to Allianz, the German financial powerhouse that owns Pimco and where the former UK prime minister Gordon Brown is another adviser.

One of El-Erian’s signals of trouble in the system is Brexit. Others include the fact that 30% of the world’s government debt traded with negative yields at one point last year – meaning investors were paying to own an asset from which they could only lose money. Then there was the election of President Trump, plus a French election in which both establishment parties were blown away in the first round. No one would have predicted all those events 18 months ago.

Why aren’t the financial markets in uproar at the loss of so many supposed certainties? On Brexit, El-Erian says politicians were smart to slow down the process, extend the timetable and avoid being forced into decisions by markets. It allowed investors to stop obsessing over “hard” and “soft” forms of exit and think in terms of “slow Brexit”.

“We are still now in the pause phase, including up to and after your general election. Thereafter markets will slowly, and I stress slowly, start to get impatient and start to pay more attention than they have before now to negotiating stances on both sides.”

Similarly with Trump: the protectionist part of his campaign, which was meant to be scary for markets, looks less frightening today. In fact, says El-Erian, protectionism was never a “day one” problem: “He inherited a spaghetti bowl of trade agreements.” At the end of the day, El-Erian expects concessions that allow the president to say trade is “still free but fairer”.

What was the day one issue? “The legacy of too many years of low growth and insufficiently inclusive growth: that the breakage to the system accumulates over time and it’s very hard to predict tipping points.”

This is the nub of El-Erian’s analysis of why the developed world is approaching a fork in the road. The inequality generated by the current low-growth climate has three elements: inequality of wealth, income and opportunity. The last of the three – manifested in high youth unemployment in many eurozone countries, for example – is the most explosive element.

“The minute you to start talking about the inequality of opportunity, you fuel the politics of anger. The politics of anger have a tendency to produce improbable results. The major risk is that we don’t know how much we’ve strained the underlying system. But what we do know is we are getting signals that suggest it’s under enormous stress, which means the probability of either a policy mistake or market accident goes up.”

The head-scratching part is that financial markets are not reflecting these worries. Measures of volatility stand at their lowest since 1983. “If you talk to investors, they will tell you how worried they are about geopolitics,” says El-Erian. “And, if you ask them how they are positioned, they will tell you ‘almost maximum risk’.”

There is an explanation of sorts, he thinks. Investors have been conditioned to think central banks can suppress volatility. They also see that the low growth appears stable. And they think the piles of cash on some companies’ balance sheets will come their way in the form of dividends and share buybacks. “You need a major shakeout to change that mindset,” he says.

But there is “unambiguous evidence” that these “artificial” conditions can’t last, he says. After the financial crisis of 2008-09, there was a small chance to engineer a new growth model in which governments would come through with infrastructure spending and reforms.

Instead, the sense of urgency went away. Central banks stemmed the crisis, but the rest of the package didn’t follow. We are now seeing the limits of relying on central banks, El-Erian believes.

“The politics have become too disruptive, the finance has become too disruptive. Depending on where you view the political process, we’re either going to take a turn towards higher, more inclusive growth that will reduce political polarisation and the politics of anger. Or, alternatively, low growth becomes recession, artificial financial stability becomes unsettling volatility, and the politics get a lot messier.”

How do we take the high, benign road? El-Erian has a four-point plan.

First, “we need to get back to investing in things that promote economic growth, infrastructure, a more pro-growth tax system for the US, serious labour retooling … If you’re in Europe, youth employment is an issue you’ve really got to think about very seriously.”

Second, countries that can afford to do so must “exploit the fiscal space,” meaning borrowing to invest or cutting taxes. He puts the US and Germany unambiguously in that category “and to a certain extent the UK”.

Third, pockets of extreme indebtedness must be addressed, a lesson he learned working with the IMF in Latin America in the 1980s. “When you have a debt overhang, it’s like a black cloud,” he argues. “It sucks oxygen out of the system. You cannot grow of it: whether it’s Greece or student loans in the US, you need to deal with debt overhangs.” The process of debt forgiveness is hard, he concedes, because some people are unfairly rewarded – “but the alternatives are worse.”

Fourth, regional and global governance needs repair. He compares the eurozone to a stool with one-and-a-half legs instead of four. The complete leg is monetary union, the half is banking union. The missing legs are fiscal integration, meaning a common budget, and political harmonisation. No wonder the eurozone is unstable, he says: “You can do three legs, you can’t do one and half.”

To return to El-Erian’s core T-junction analogy, none of the required manoeuvres sound easy. “You don’t need a big bang,” he replies. “If you want to take the good turn you have to see some progress on some of these elements. If you don’t, then we take the other turn.” He ascribes equal probabilities – “it’s a political judgment.”

What’s an investor to do? El-Erian says his own approach, which he admits is hard for the average person to copy, is framed like a bar-bell. At one end, he’s invested in high-risk startups where you don’t need all to succeed. At the other, he’s in cash and cash-like investments. In the middle, he’ll invest in public markets only tactically.

The bottom line: “I’m risk off.” ■

Source article: https://goo.gl/oCnNGP

America’s Wealth Inequality Is Getting Worse

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My Comments: Readers of this blog know I’ve railed against the growing income inequality in this country for a long time.

Income inequality is inherent in the human condition. Since recorded time began, it’s clear there were “haves” and “have-nots”. In recent times, the disparity really started to diminish following the great depression in the 1930’s.

What we call the middle class, those somewhere between the “haves” and “have-nots”, established itself as an economic force in the world, especially here in the US. It led to economic prosperity across the entire population which gave rise to our dominant trading status on the planet. By increasing the economic prosperity of a larger percentage of the population, you allowed the “haves” to grow and keep their share of influence and status.

The most recent national election cycle brought us the phrase Make America Great Again. It’s easy to say and though it has different interpretations across our people, it’s a reflection of our global strength and economic dominance. But that’s declining and we can attribute the decline for the emergence of Donald Trump and company.

I really don’t understand why there is absolutely no apparent effort by this new administration to address the growing economic disparity in this country. You’d think there’s be an interest in everything necessary to promote the middle class, from universal healthcare, to education for the masses, to a more equitable tax code, everything necessary to support the efforts of the declining middle class to once again Make America Great.

Elena Holodny / May 1, 2017

It’s no secret that the US has an inequality problem.

But it is worth considering what may be the factors exacerbating the disparity.

In his recent commentary, Byron Wien, the vice chairman of Blackstone Advisery Partners, offered some thoughts as to why the inequality gap in the US has grown wider since 2000.
He argues that it has something to do with the fact that the wealthy own homes and stocks, while the less affluent do not.

“How did [the widening inequality gap] happen? Wealthy people own the expensive real estate where they live, and may have other expensive properties as well. They are also more likely to own common stocks. Both the real estate and the equities have appreciated,” he wrote.

“The less affluent tend to be renters with limited equity holdings. Many live paycheck to paycheck and their personal wealth has not appreciated significantly,” he added.

Wien also argued in his commentary that “in spite of the wealth disparity, inequality does not seem to be a major political issue at this time.” However, given the rise of populist movements both in the United States and across the world, at a time when inequality has grown amid increased globalization, some could argue that there might be a correlation between rising inequality and shifts in the political climate.

In any case, taking a look at the data on US inequality is pretty eye-opening.

Back in November, Deutsche Bank’s chief international economist Torsten Sløk sent around a chart showing the share of US household wealth by income level. Notably, the top 0.1% of households now hold about the same amount of wealth as the bottom 90%.

Relatedly, back in August, Goldman Sachs’ Sumana Manohar and Hugo Scott-Gall shared a chart comparing a given country’s gross domestic product per capita to its Gini coefficient.

The Gini coefficient is a measurement of the income distribution within a country that aims to show the gap between the rich and the poor. The number ranges from zero to one, with zero representing perfect equality (everyone has the same income) and one representing perfect inequality (one person earns the entire country’s income and everyone else has nothing.) A higher Gini coefficient means greater inequality.

Developed-market economies such as those in Germany, France, and Sweden tend to have a higher GDP per capita and lower Gini coefficients.

On the flip side, emerging-market economies in countries like Russia, Brazil, and South Africa tend to have a lower GDP per capita but a higher Gini coefficient.

The US, however, is a big outlier. Its GDP per capita is on par with developed European countries like Switzerland and Norway, but its Gini coefficient is in the same tier as Russia’s and China’s, both of which are emerging markets.

And finally, the Goldman duo also shared a chart comparing the mean and median incomes in the US from 1975 to 2014.

This is another informal measure of inequality: A handful of hyper-affluent people can skew a mean upward while not changing the median very much. That means a higher degree of inequality will most likely be reflected in a bigger spread between a mean and median income.

As you can see in this last chart, the gap between the two has been widening over time, which suggests that income inequality has been growing.