Blog Archives - Economic Presence

Morgan Stanley believes China's "Minsky moment" has arrived

3/21/2014

Via macrobusiness. (My thanks to Brent for sending the links)

Brent linked me to Naked Capitalism where the blogger said of the Morgan Stanley Report : This is an even bigger deal than you might think. The Chinese government isn’t shy about putting banks that trash-talk its economy into the penalty box as far as official business is concerned. So Morgan Stanley has to be even more confident of its view than one might ordinarily expect to be willing to incur the ire of the Chinese officialdom.

From the Morgan Stanley Report:

We have described in detail over the past two years how we believe China’s twin excesses (excessive investment funded by excessive debt) will inevitably unwind, causing a substantial slowdown in China’s economy, significantly below market expectations. In recent weeks, a trip to the region and further research into China’s shadow banking system have convinced us that China is approaching its “Minsky Moment,” (Display 1) which increases the chances of a disorderly unwind of China’s excesses. The efficiency with which credit generates economic activity is already deteriorating, as more investments are made in non-productive projects and more debt is being used to repay old debts.

Based on our analysis, our baseline case is that China may slow from the current level of 7.7% Gross Domestic Product (GDP) growth to 5.0% over the next two years. A disorderly unwind could take Chinese growth down to 4% in a shorter time frame with potentially disastrous consequences for levered Chinese assets (banks, property) and the entire commodity supply chain (commodity stocks, equipment stocks, commodity-sensitive countries and their currencies).

Mish Quotes Pettis who Quotes Eccles on Under Consumption

3/18/2014

Mish misses the point(again).
Pettis:
Former Fed Chairman (1932-48) Marriner Eccles, who may well have been the most subtle economist of the 20th Century, from his memoir, Beckoning Frontiers (1966):

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth – not of existing wealth, but of wealth as it is currently produced – to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations.

But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

Pettis again:
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."

Lower non trade barriers through the TPP

3/18/2014

Via the Physics of Finance:

Joseph Stiglitz is always worth reading. On the wrong side of globalization looks at the ongoing effort to surreptitiously create the Trans-Pacific Partnership, or TPP, which would "bring together 12 countries along the Pacific Rim in what would be the largest free trade area in the world." It's euphemistically called a "free trade" bill, yet negotiations between nations have curiously been going on in secret. Why? Mostly, Stiglitz suggests, because the TPP is really an effort to find ways for corporations to arbitrage regulations and improve profits while subverting democratic policy making around the world.

A year ago, I pointed out that these were Dean Baker's fears.

Beautiful Deleveraging

3/17/2014

Ray Dalio puts his theory of how the economy works to video. (My thanks to Dan who brought it to my attention)

Mish needs to take intermediate macroeconomics

3/17/2014

Central Banks have two principal assets - foreign reserves and government debt, purchase of either one can be used to prop up asset prices and increase the high powered money (monetary base) . Jeffrey Frankel at Harvard has suggested the ECB buy US bonds since there are no Euro bonds and buying individual country debt is " problematic". Mish went off on this suggestion as if Frankel was crazy. He needs to learn his intermediate macroeconomics.

Noam Chomsky on how to destroy an economy

3/4/2014

First half of talk on the state of the US economy summarizes many of the ideas that I have expressed on these pages.

IMO second half of the talk goes off the rails.

Goes on an environmental rant at about minute 15, anti-oil sands, anti-Canadian energy etc. He feels strongly that an environmental disaster is coming and therefore his rhetoric is much more condemning and urgent.

I am not ready to put the environment at the top of my policy preference list, I think we have other more pressing issues like inequality.

Driving the cost of energy up for the poor at this time doesn't seem like it would be helpful.

Is "Drunk Brunch" one of the horsemen of the economic apocalypse?

3/3/2014

Reformed Broker thinks so.

"You know what the twentysomethings in Manhattan are into these days? Drunk Brunch. True story. They go out on Saturday night to pre-game for the next morning, wake up half-drunk then start banging vodka drinks at 10 am while a DJ blasts oonce-oonce music and brioche french toast comes flying out of the restaurant’s kitchen. Smashed on a Sunday, dancing on tables in broad daylight, licking maple syrup off each other’s necks.

I’m not even talking about Brooklyn, I’m talking about the WASPs on the Upper East Side for god’s sake. It started a year or so ago and now it’s like THEE thing.

F*ckin’ millennials."

Me? I don't care- I Love It!

Warren Buffet talks his own book

3/3/2014

Post from Zerohedge completely misses the irony (and as is often the case with them - the point).

When you own Dairy Queen and who knows how many other "bricks and mortar" business, of course you don't want a rise in the minimum wage. Like all successful capitalists, Buffet prefers that the government subsidize his workers wages through earned income tax credits -that is socialize the true costs of employment (not to mention the tax supported government infrastructure that allows his businesses to function in the first place) for Warren's companies; but continue to privatize the gains.

Business as usual. Warren is in favour of modest increases in capital gains and personal tax rates - but what does that mean when so many of the rich and powerful corporations and individuals pay next to no tax because of tax havens. It's always somebody else's ox that should get gored.

Charlie Rose asks Eric Schmidt a question that makes him dance

3/2/2014

Minute 23:39

Are you creating jobs? How many people work for What's App? (Answer 58 ) Is productivity meaning less jobs?

Schmidt wants people to become entrepreneurs as job destruction accelerates over the next decade. This is the new meme from the 1% -we did it- do it yourself. Of course this was Romney's "big idea" solution to the unemployed youth of America. Borrow $20,000 from your folks and start a business. Mitt and Schmidt don't have any money to lend because it is all in tax havens.

Makes sense, because people in repetitive tasks that are being automated have already self selected themselves as entrepreneurs :).

In a way he has a point since new firms generate more employment then old firms and some effort should be given to increase entrepreneurism.

I just don't think it will be nearly enough.

Robert Shiller has talked about the need to "risk share" as a society; I think the future is one of GMI, higher progressive taxation, caps on inequality, and international tax harmonization.

Rithholz asks whether Elon Musk, the poster child for Ayn Rand neo libertarianism, is a Mercantilist

3/2/2014

Via Bloomberg. I think the, Duke de Suly, the father of French Statism, would be proud.

What got me thinking about this recently was an intriguing article by University of Houston professor Craig Pirrong. In "The Rent Seeker, Posing as Visionary,'' Pirrong criticized the long line of government-support programs that Elon Musk’s many companies seem to be involved in. .....

What was so galling about Musk to him? Well to begin with, his sheer level of hypocrisy. His car company, Tesla, received $452 million in government loans; after the company paid them back, Musk suddenly decided that federal investments and/or loans to promote alternative energy was a bad idea. That is to my mind, the equivalent of Citigroup Inc. and Bank of America Corp. opposing bank bailouts, but only after 2013 on.

As Pirrong points out, almost all of Musk’s companies rely in some form on government subsidies or tax breaks. Tesla’s earnings, according to Forbes, aren't derived from selling automobiles, but from selling “emissions credits mandated by the state of California’s electric vehicle requirements.”

SpaceX, Musk’s space-launch venture is dependent on government contracts (it is the recipient of a $1.6 billion contract to resupply the International Space Station). And his SolarCity, the nation’s second-largest solar-electrical contractor, also benefits from tax breaks and subsidies.

Is Musk a visionary, or a rent-seeker? I think it's premature to make the claim that he is a full-on rentier. He certainly has a foot in each camp. Where he falls on the spectrum from parasitic monopolist to visionary genius has yet to be determined. I lean towards visionary, despite how much I despise PayPal, the online-payments system that Musk sold to eBay Inc. It is fairly clear that the final verdict on Musk has yet to be determined. "