Economy Archives - Page 61 of 133 - the patient investor

November 8, 2014

A Growth Pact for America by Glenn Hubbard | Project Syndicate

Glenn Hubbard, former Chairman of the Council of Economic Advisers under President George W. Bush, and Dean of Columbia Business School proposes:

….two policies are particularly promising for such a “Pact for America”: federal infrastructure spending and corporate-tax reform. Enactment of these reforms would generate a win for each side – and for both.

But such a bipartisan consensus requires removing both the left and the right’s ideological blinders, at least temporarily. On the left, a preoccupation with Keynesian stimulus reflects a misunderstanding of both the availability of measures shovel-ready projects and their desirability whether they will meaningfully change the expectations of households and businesses. Indeed, to counteract the mindset forged in the recent financial crisis, spending measures will need to be longer-lasting if they are to raise expectations of future growth and thus stimulate current investment and hiring.

The right, for its part, must rethink its obsession with temporary tax cuts for households or businesses. The impact of such cuts on aggregate demand is almost always modest, and they are poorly suited for shifting expectations for recovery and growth in the post-financial-crisis downturn….

November 3, 2014

US Freight Transport Index

Looks like a robust recovery to me.

US Freight Transport Services Index

November 3, 2014

Increasing bank capital is in the interest of shareholders

Westpac CEO Gail Kelly warns that all Australians will have to carry the cost of making the financial system safer:

“Of course you can ever increase capital and become ever more safe, but that does come at a cost. The increasing of capital ends up having ultimately having a diminishing return in terms of safety, but the costs are real, capital is not free. Those costs will flow through to impact the economy more broadly, noticing and noting that banks are strong intermediaries within the Australian economy.”

What Gail fails to consider is that Australians already carry the cost of an unsafe banking system, with the broad economy contracting when banks suffer solvency or liquidity problems. And the taxpayer effectively stands as guarantor in the event of a failure.

I agree that capital comes at a cost — higher than the direct cost of deposit funding which capital would partially replace. But when one factors in the cost of the vast infrastructure required to attract and service those deposits, the margin narrows. Increasing the level of capital will also make banks safer and reduce the risk premium, further lowering the average cost of capital. And not only for equity: improved risk ratings will lower the cost of deposit-funding as well.

Banks with higher capital ratios also benefit from higher asset and loan growth according to studies conducted by the Bank for International Settlements.

Making the banking system safer is not only in the interests of the taxpayer, but also bank shareholders.

October 30, 2014

Should Beijing raise subway fares? | Michael Pettis

Michael Pettis’ argues that not only are SOEs “destroying value in the aggregate on a huge scale” but misallocated investment is endemic in China.

I have to confess that the reason I started saying in 2006-07 that China was eventually going to replace 1980s Japan as the global archetype of investment misallocation was not because I had a lot of data proving my case. Overinvestment is almost impossible to prove until after the fact, especially when you consider the circularity of the data – the growth assumptions feed into the valuation of the investment, which then feeds back into the growth assumptions.

My reasons were much more “systemic”. I did not believe it was possible for any country not to experience significant wasted investment after so many years – more than a decade in this case – of the highest investment growth rate in the world funded by massive credit expansion at such incredibly low lending rates roughly one-third the nominal GDP growth rate, and 1-3 percentage points below the GDP deflator. Add more spicy ingredients to the stew – first, the very limited experience of Chinese bankers and regulators, and most of that in a one-way market, second, widespread moral hazard, third, weak corporate governance, fourth, very fuzzy data, and finally, no enforced system of accountability – and I found it impossible to doubt that investment was being dangerously misallocated.

He also dispels the counter-argument that “Western” models don’t apply to China and that “a very poor, low-capital-stock country far from the technological frontier like China” is able to absorb higher levels of investment.

In 2008 (Red Star) I compared China to a red star in astronomy:

Students of astronomy will tell you that a red star, far from indicating heat, is cooling appreciably. While its diameter may expand, its core is contracting and its temperature falling. Eventually it will either explode or shrink to become a dwarf star….

My warning of an imminent collapse may have been premature, but no economy can survive such high levels of investment misallocation without major upheaval. China risks following the boom-bust growth path of Japan and the Asian tigers in the 1980s and 1990s.

October 29, 2014

Surprising lack of inflation as unemployment falls | Bank of England

Sir Jon Cunliffe, Deputy Governor for Financial Stability at the Bank of England:

“The big surprise, therefore, for the [Monetary Policy Committee] … has been the extent to which employment has been able to grow without generating more inflationary pressure through higher pay increases. Understanding why that has happened and how long it will persist is, in my view, now key to deciding policy.”

One possible explanation may be a longer-than-usual lag between falls in unemployment and pay pressure emerging, which could mean that inflationary pressure is building in the pipeline that will be more difficult to curtail if the Bank does not act now. However, another is that a combination of factors has caused labour supply – the amount of hours of labour available to the economy – to be much stronger than in previous recoveries, for example due to the increase in women’s state pension age and changes to the incapacity benefits regime. And the fall in unemployment has included a high number of long-term unemployed, who probably act as less of a drag on pay.

Yet despite the biggest squeeze on real incomes for nearly a century, there appears to be little evidence that workers are demanding a catch-up in pay, Jon observes, possibly due to a shift in the psychology of UK workers resulting from the sharpness of the recession and the years of austerity that have followed it.

October 27, 2014

Alleged Oil Shock Isn’t All That Shocking

Keith Johnson discusses the impact of crude oil at $80 per barrel:

….Cheaper oil prices means lower prices at the pump and for everything that is ever shipped, from food to flip-flops. The recent fall equates to a massive, unplanned stimulus package for the world’s shoppers. Citigroup, for instance, figures that cheaper prices amount to a $1.1 trillion global shot in the arm.

October 27, 2014

Abbott’s federation reform push is sound | MacroBusiness

Abbott’s federation reform push is sound | | MacroBusiness http://t.co/S8pMt7U7vm

— Colin Twiggs (@Colin_Twiggs) October 27, 2014

October 21, 2014

RBA targets mortgage lending

Barclays: RBA considers macroprudential by end of 2014 and double risk-weight for investor home loans | MacroBusiness http://t.co/Go0jLA0Xgg

— Colin Twiggs (@Colin_Twiggs) October 22, 2014

October 15, 2014

Why Australian Consumers Are Happy With Their Finances But Aren’t Spending | Business Insider

From Greg McKenna:

There is a lot of focus on the wealth of Australians through property and super but many Australian households and Australian households in aggregate are still carrying a large amount of debt. A stock of debt which must be repaid with a flow of earnings no matter how wealthy they might be on paper.

So consumers are more confident about their finances and their financial future but they aren’t spending — yet.

Something that puzzles me is why household debt as a percentage of disposable income is constant. If consumers have accelerated their credit card and mortgage debt repayments, surely this figure should be falling.

October 15, 2014

Jean Tirole: How to regulate monopolies

Catherine De Fontenay and Sven Feldmann discuss Nobel prize-winner Jean Tirole’s work on how to regulate monopolies:

If the regulator imposes a rigid price cap, the firm has an incentive to operate efficiently and minimise costs; but since the regulator does not know the firm’s overall costs, the firm may either be very profitable or at the brink of bankruptcy depending on where the price cap was set. To avoid this problem regulators moved to regulating the rate-of-return the firm is allowed to earn based on what is deemed a “reasonable” rate of return on the firm’s investments.

But as a result the firm no longer has an incentive to operate efficiently—indeed, additional capital investments raise the cost-base on which the rate of return is calculated and thus increase the firm’s total profits. In the context of the Australian electricity grid this phenomenon is known as “gold-plating”. Thus each of these two forms of regulation addresses one problem while exacerbating the other….

This is a common problem in dealing with public utilities and even with departments within government. Absence of competition bedevils the process. Fixed price caps lead to poor quality service, while cost-plus pricing introduces an incentive to inflate expenses. The challenge is to balance the two incentives: negotiate low-margin, cost-plus pricing but with incentives for service quality and efficiency.