Im-Politic: Trump-ism Without Trump for America as a Whole?

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"Defund the Police", allies, CCP Virus, China, climate change, coronavirus, court packing, COVID 19, Democrats, election 2020, enforcement, Executive Orders, filibuster, Green New Deal, Huawei, human rights, Im-Politic, Immigration, Joe Biden, judiciary, lockdowns, mask mandate, masks, metals, multilateralism, Muslim ban, Phase One, progressives, Republicans, sanctions, Senate, shutdowns, stimulus, Supreme Court, tariffs, taxes, Trade, trade wars, Trump, unions, Wuhan virus

Since election day, I’ve spent some time and space here and on the air speculating about the future of what I called Trump-ism without Donald Trump in conservative and Republican Party political ranks. Just this weekend, my attention turned to another subject and possibility: Trump-ism without Mr. Trump more broadly speaking, as a shaper – and indeed a decisive shaper – of national public policy during a Joe Biden presidency. Maybe surprisingly, the chances look pretty good.

That is, it’s entirely possible that a Biden administration won’t be able to undo many of President Trump’s signature domestic and foreign policies, at least for years, and it even looks likely if the Senate remains Republican. Think about it issue-by-issue.

With the Senate in Republican hands, there’s simply no prospect at least during the first two Biden years for Democratic progressives’ proposals to pack the Supreme Court, to eliminate the Senate filibuster, or to recast the economy along the lines of the Green New Deal, or grant statehood Democratic strongholds Puerto Rico and the District of Columbia. A big tax increase on corporations and on the Biden definition of the super-rich looks off the table as well.

If the Senate does flip, the filibuster might be history. But big Democratic losses in the House, and the claims by many veterans of and newcomers to their caucus that those other progressive ambitions, along with Defunding the Police, were to blame, could also gut or greatly water down much of the rest of the far Left’s agenda, too.

CCP Virus policy could be substantially unchanged, too. For all the Biden talk of a national mask mandate, ordering one is almost surely beyond a President’s constitutional powers. Moreover, his pandemic advisors are making clear that, at least for the time being, a sweeping national economic lockdown isn’t what they have in mind. I suspect that some virus economic relief measures willl be signed into law sometime this spring or even earlier, but they won’t carry the total $2 trillion price tag on which Democratic House Speaker Nancy Pelosi seems to have insisted for months. In fact, I wouldn’t rule out the possibility of relief being provided a la carte, as Congressional Republicans have suggested – e.g., including popular provisions like some form of unemployment payment bonus extension and stimulus checks, and excluding less popular measures like stimulus aid for illegal aliens.

My strong sense is that Biden is itching to declare an end to President Trump’s trade wars, and as noted previously, here he could well find common cause with the many Senate Republicans from the party’s establishment wing who have never been comfortable bucking the wishes of an Offshoring Lobby whose campaign contributions it’s long raked in.

Yet the former Vice President has promised his labor union supporters that until the trade problems caused by China’s massive steel overproduction were (somehow) solved, he wouldn’t lift the Trump metals tariffs on allies (which help prevent transshipment and block these third countries from exporting their own China steel trade problems to the United States) – even though they’re the levies that have drawn the most fire from foreign policy globalists and other trade and globalization zealots.

As for the China tariffs themselves, the latest from the Biden team is that they’ll be reviewed. So even though he’s slammed them as wildly counterproductive, they’re obviously not going anywhere soon. (See here for the specifics.) 

Later? Biden’s going to be hard-pressed to lift the levies unless one or both of the following developments take place: first, the allied support he’s touted as the key to combating Beijing’s trade and other economic abuses actually materializes in very convincing ways; second, the Biden administration receives major Chinese concessions in return. Since even if such concessions (e.g., China’s agreement to eliminate or scale back various mercantile practices) were enforceable (they won’t be unless Biden follows the Trump Phase One deal’s approach), they’ll surely require lengthy negotiations. Ditto for Trump administration sanctions on China tech entities like the telecommunications giant Huawei. So expect the Trump-ian China status quo to long outlast Mr. Trump.

Two scenarios that could see at least some of the tariffs or tech sanctions lifted? First, the Chinese make some promises to improve their climate change policies that will be completely phony, but will appeal greatly to the Green New Deal-pushing progressives who will wield much more power if the Senate changes hands, and who have demonstrated virtually no interest in China economic issues. Second, Beijing pledges to ease up on its human rights crackdowns on Hong Kong and the Muslims of Xinjiang province. These promises would be easier to monitor and enforce, but the Chinese regime views such issues as utterly non-negotiable because they’re matters of sovereignty. So China’s repressive practices won’t even be on the official agenda of any talks. Unofficial understandings might be reached under which Beijing would take modest positive steps or suspend further contemplated repression. But I wouldn’t count on such an outcome.

Two areas where Biden supposedly could make big decisions unilaterally whatever happens in the Senate, are immigration and climate change. Executive orders would be the tools, and apparently that’s indeed the game plan. But as Mr. Trump discovered, what Executive Orders and even more routine adminstrative actions can do, a single federal judge responding to a special interest group’s request can delay for months. And these judicial decisions can interfere with presidential authority even on subjects that for decades has been recognized as wide-ranging – notably making immigration enforcement decisions when border crossings impact national security, as with the so-called Trump “Muslim ban.”

I know much less about climate change, but a recently retired attorney friend with long experience litigating on these issues told me that even before Trump appointee Amy Coney Barrett joined the Supreme Court, the Justices collectively looked askance on efforts to create new policy initiatives without legislating. Another “originalist” on the Court should leave even less scope for ignoring Congress.

The bottom line is especially curious given the almost universal expectations that this presidential election would be the most important in recent U.S. history: A deeply divided electorate could well have produced a mandate for more of the same – at least until the 2022 midterms.

Im-Politic: When It’s Open Borders for U.S. Stimulus Funds

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CCP Virus, Central America, coronavirus, COVID 19, El Salvador, Financial Times, Guatemala, Honduras, illegal aliens, Im-Politic, immigrants, Immigration, Mexico, Nicaragua, Open Borders, remittances, stimulus, The Washington Post, Wuhan virus, {What's Left of) Our Economy

Ever since the CCP Virus began devastating the U.S. economy, I’ve been calling for the U.S. government to “go big” on stimulus. That means I’ve been especially frustrated with the large number of Congressional Republicans who seem determined to keep down the amount of unemployment and other aid to be provided by the new round of proposed relief legislation that’s still being debated – even after the last supplemental jobless benefits have run out.

Here’s a development, though, that justifies some skepticism about shoveling money out the door as fast as possible: As reported in both The Washington Post and the Financial Times, it’s clear that a pretty sizable share of the income support funds being sent to immigrants in the United States have been forwarded on to their home countries, especially Mexico and the Central American states of El Salvador, Guatemala, Nicaragua, and Honduras. And it’s surely the same story for whatever Paycheck Protection Program monies have been sent to businesses owned by newcomers from these countries. 

In addition, these articles add to the evidence undercutting the common claim (debunked already in RealityChek posts like this one) that even illegal residents greatly benefit the U.S. economy on net because these border crossers wind up spending so much on domestic goods and services, thereby boosting America’s growth and overall employment, and contributing to the national tax base.

Compared with the total size of the U.S. economy and all the stimulus funding provided to date, the sums sent overseas (called remittances) are piddling. Mexico, for example, received $36 billion worth of these payments last year, and are running 10.6 percent higher this year so far. And this source tells us that nearly all came from the United States. Yet the federal government has provided literally trillions of dollars worth of virus-related aid to individuals and businesses.

At the same time, compared with the U.S. population (currently some 330 million), the share born in these countries and living in the United States both legally and illegally remains pretty modest itself – about 14.8 million in 2016 (the latest data available). That’s less than five percent. Further, illegals from Mexico and the Central American countries represented an estimated 46 percent of the total foreign born population in the United States as of 2017, and they’re not eligible for federal relief.  This means that it’s a relatively small number of Americans sending those tens of billions of dollars overseas, and a significant amount of resources transferred abroad per immigrant. (The number of actual senders is even smaller if you just count workers and business owners, and not their non-working family members.) 

Still, at a time of great privation in the United States, why are any government resources going right out the door (other than spending on imports – which of course takes place among these immigrants, too)? Clearly there are currently many millions of Americans for whom collectively about $35 billion would make a real difference nowadays.

By the way, remittances aren’t sent home only by immigrants in the United States from Mexico and Central America. Immigrants from everywhere transfer these funds (including to China, reported to be second biggest recipient country).  But Mexico is Number One by far and the Central American countries rank high as well.  ` 

The remittances information in the Post and Financial Times articles is also difficult at best to square in particular with the claim that illegal aliens are major engines of U.S. growth and prosperity. It’s already well-established that most work in low-wage jobs – so their spending power is pretty modest to start with. Now, both the Post and Financial Times articles report that it’s common for them to send abroad hundreds and even thousands of dollars each month.

These funds are overwhelmingly going to help hard-pressed family members in sending countries, which clearly stems from admirable values. Nevertheless, this is all money that does little, if anything, to enrich the U.S. economy, or create more employment for Americans. Unless you think that families in Mexico or Central America that depending heavily on funds from the United States are spending like gangbusters on imports of U.S.-made goods and services?

Because I’m a “go big” stimulus supporter, I’m in a lousy position logically speaking to insist that legislation going forward contain lots of strings to prevent waste and even fraud.  Those can’t be neglected, but they can’t be top priorities for anyone like me who believes that this is still a full-blown economic emergency. But I’m also wondering how hard it would be for Washington at least to tax funds like remittances that simply leave the country. 

What I’m even less optimistic about, though:  that even when confronted with this new information about remittances from illegals, the bipartisan Open Borders Lobby will stop making transparently absurd claims that that ever more of these newcomers are essential for ensuring continued American well-being, or rebuilding it.

Those Stubborn Facts: A High Cost of Easy Money?

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bailouts, capitalism, corporate finance, debt, interest rates, monetary policy, Ruchir Sharma, stimulus, The Wall Street Journal, Those Stiubborn Facts, zombie companies

Share of publicly traded companies in the U.S. that were zombie companies*, 1980s: 2 percent

Share of publicly traded companies in the U.S. that were zombie companies, “by the eve of the pandemic”: 19 percent

*”[C]ompanies that, over the previous three years, had not earned enough profit to make even the interest payments on their debt.”

(Source: “The Rescues Ruining Capitalism,” by Ruchir Sharma, The Wall Street Journal, July 24, 2020, https://www.wsj.com/articles/the-rescues-ruining-capitalism-11595603720 )

 

Making News: Two National Radio Interview Podcasts Now On-Line!

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Breitbart News Tonight, CCP Virus, coronavirus, COVID 19, Making News, manufacturing, Market Wrap with Moe Ansari, stimulus

I’m pleased to announce that podcasts are now on-line of two recent national radio interviews focusing on the CCP Virus’ impact on the American economy.

Last night, I appeared on “Breitbart News Tonight” to discuss the likely effectiveness of the various stimulus programs already approved and certainly coming down the road.  To listen, click here, punch “Alan Tonelson” into search engine and scroll all the way down (for some reason, the segments aren’t listed in chronological order) till you see my name and April 2.

On Monday, it was great to return to “Market Wrap with Moe Ansari.” Click onto this link for a timely segment on the virus and the U.S. manufacturing sector in particular.

And keep checking in with RealityChek for news of upcoming (and recent) media appearances and other developments.

(What’s Left of) Our Economy: Growth is Now Not Only Bubbly, but Increasingly Government-Fueled

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an economy built to last, bubble, bubble decade, GDP, government spending, gross domestic product, housing, inflation-adjusted growth, Obama, personal consumption, recovery, state and local government, stimulus, {What's Left of) Our Economy

Popes and Chinese leaders and the like come and go through history and through Washington, but the basic developments shaping the U.S. economy keep rolling on – and not for the better. So I’ve decided to focus today on those that have been revealed by the latest government report on the economy’s growth rate, and on two especially disturbing takeaways.

The first should be familiar to RealityChek readers: The makeup of the U.S. economy is still excessively dominated by personal consumption and housing, the same toxic combination that inflated the bubble of the previous decade whose bursting nearly collapsed the American and global economies. The second is less familiar largely because it’s much newer – and because the media hasn’t picked it up yet: Government spending is now unmistakably making a comeback as a significant growth driver – but not where you might think.

Although President Obama, as I’ve noted, has done a great job in identifying the need to create an “economy that’s built to last” in America, consuming and housing still comprise a bigger share of the total economy than during that bubble decade. When the recession started, at the end of 2007, these two components of the inflation-adjusted gross domestic product GDP) added up to 71.16 percent of the economy after inflation.

Thanks largely to the recession and housing bust (which fed on each other), this share fell to 70.94 percent by mid-2009, when the recovery officially began. That drop of course wasn’t big, but at least it represented progress. Since then, however, the numbers have resumed moving in the wrong direction. So it was welcome to learn, last Friday morning, that the economy grew at a solid 3.90 percent annual rate in the second quarter of this year, according to the government’s final (for now) reading. But less decidedly less encouraging was learning that the personal spending and housing share of the economy had hit 71.65 percent.

Indeed, that’s only slightly lower than the 71.67 percent figure for the first quarter, and considerably higher than the 71.13 percent during the second quarter of 2014 and the 71.19 percent of the second quarter of 2013.

The new prominence of government as a growth engine isn’t good news, either – that is, if you believe that the private sector is the nation’s best hope for better and sustainable prosperity and living standards (which you should).

That latest second quarter GDP report estimated that government spending at all levels in the United States grew at a 2.60 percent annual rate during that three-month period – its best performance by far since the 2.90 percent advance in the second quarter of 2010, when government stimulus spending was fueling much of the emerging recovery. Just as important, the second quarter government spending gain represented the third such rise in the last five quarters. You’d need to go back to the recovery’s earliest stages, starting in mid-2009, to find a stretch like that.

Government’s contribution to real growth, therefore, has picked up notably, too. According to the (for now) final reading for the second quarter of this year, government’s growth accounted for 0.46 percentage points if the 3.90 percent overall annualized expansion. That’s 11.79 percent of total economic growth. As with the government growth rate as such, that’s the biggest growth contribution in absolute terms since the second quarter of 2010, although then, government’s growth role accounted for 15.35 percent of that quarter’s (identical) 3.90 percent real expansion.

Also as with government’s growth per se, government’s contribution to growth has now been positive for three of the last five quarters – which hasn’t been seen since that early, public-spending-led phase of the current economic recovery. Significant as well – the government contribution to growth during this year’s overall strong second quarter has been much greater than in the last quarters when growth has been impressive.

For instance, in the second quarter of 2014, when annualized real growth clocked in at 4.30 percent, higher government spending only generated 7.67 percent of that growth. In the following quarter, the economy’s hot streak continued, but the government spending increase came to only 4.57 percent of that improvement.

One other important aspect of the resurgence of government spending: It’s happening largely on the state and local level, and this was especially the case during the second quarter. During that period, state and local government spending in real terms grew by 4.30 percent on an annualized basis – the fastest rate since way back in the fourth quarter of 2001. Federal spending was literally flat. 

To repeat a point I’ve made before: Nothing in this or previous posts should be taken as an argument that government spending is either “good” or “bad,” or that government now, at whatever level, is spending too little or too much. But again, if you consider the private sector to be likelier to generate healthier growth than government, the public sector’s increasing role in fostering economic vigor should be a matter of concern. The big remaining questions facing the nation is whether this rebound represents a return to pre-financial crisis norms, and whether that in and of itself should be praised or condemned. You can bet I’ll be weighing in on that matter before long!

(What’s Left of) Our Economy: A Gathering Storm?

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Alan Greenspan, bottom line growth, bubbles, China, commodities, currency, currency wars, devaluation, emerging markets, executive compensation, Federal Reserve, Financial Crisis, free trade agreements, George W. Bush, infrastructure, interest rates, Janet Yellen, mergers and acquisitions, Obama, productivity, profits, quantitative easing, recovery, secular stagnation, stimulus, stock buybacks, stock markets, stocks, top line growth, Trade, valuations, yuan, {What's Left of) Our Economy

The wild swings of stock markets around the world today should caution anyone against reading too much into recent global financial turmoil. As should be obvious to everyone – but is so easy to forget – these stock market declines are anything but the first that have been seen, and they’re anything but the worst that have been seen. The same goes for the economic situation in China and elsewhere – which matters much more.

But although this clearly is no end-of-the-world moment or even close, the latest news is a warning that the dangerous weaknesses that plunged the world into genuinely terrifying financial crisis and then savage recession just seven years ago have only been papered over, and have begun worsening again. More seriously, the United States and the rest of the world look much less capable of resisting powerful downdrafts.

Just to review very quickly, as I see it, the last crisis resulted fundamentally not from failures to regulate Wall Street adequately, the housing bubble, or any largely financial conditions. These were simply symptoms of mounting weaknesses in America’s real economy stemming largely from disastrously shortsighted trade policies. Both major parties became so enamored with offshoring-friendly trade deals and other policies that they sent overseas a critical mass of the U.S. productive base, and therefore a critical mass of the income-earning opportunities available to middle- and working-class families.

The George W. Bush administration, the Congress, and the Federal Reserve under then-Chairman Alan Greenspan could have reversed or even slowed this trade policy approach in order to restore these crucial domestic sources of income- and wealth-creation. Instead, they decided to double down on the offshoring. But to enable consumers (who are after all voters) to preserve their living standards, they decided to create then-unprecedented amounts of easy money, which made possible substituting borrowings (typically based on the bubble-ized home prices) for inadequate paychecks. Until that bubble’s inevitable bursting, the results were widely praised as having produced an economy whose “fundamentals” were “strong.“

Once the crisis struck, the Fed and other major world central banks have sought to reestablish and preserve national and global economic momentum through yet greater money printing and thus credit-creation. National governments in the United States (during President Obama’s first year in office) and especially in China lent a big hand through stimulus programs aimed at creating new government-supported demand for goods and services, and therefore for workers.

Seven years later, the results are in, and it’s fair to say that they have produced growth and employment levels that keep lagging historical standards not only in the United States, but everywhere. In fact, largely because the Fed so quickly and energetically capitalized on its massive credit-creation powers, America is a conspicuous out-performer. But as I’ve also pointed out, the makeup of the U.S. economy still strongly resembles that of the housing- and consumption-heavy bubble decade, which is why a more compelling description of America’s situation is not “ho-hum recovery” but “secular stagnation.” This concept, popularized by former Clinton-era Treasury Secretary and Obama chief economic adviser Larry Summers, holds that the nation has lost so much productive oomph that it’s forced to rely on Fed-created bubbles for whatever growth it can muster – and thus to run the ongoing risks of bubble-bursting as well.

Something, though, has clearly changed in recent weeks. The one-word description is “China” but the real answer is of course much more complicated, and looks to be a function of a seemingly fatal flaw of global easy-money policies: They’ve fostered way too little productive, growth-boosting investment, and way too much mal-investment. The latter has barely kept growth in positive territory but that’s gifted Wall Street and executives at big publicly traded companies with huge windfalls thanks to a (so far) mutually reinforcing cycle of share buybacks and rising stock prices that has supercharged their largely stock price-based pay. Other uses for cash and credit that have seemed more tempting than servicing economically fragile and in many cases still-cautious American consumers included buying up other companies and, mainly for Wall Street, simply parking the money at the Fed, where big finance firms could earn a bit of interest on trillions of dollars for doing absolutely nothing.

But still other distorted investment choices have included so-called emerging markets. In those lower income countries, higher levels of risk brought attractive levels of return, but investors (and not just financiers) were also impressed with relatively high growth rates. And that’s where much of the latest round of troubles is rooted.

Several big and chronic weaknesses and vulnerabilities of these countries – including China – were largely overlooked. First, because incomes were comparatively low, these countries were never able to grow mainly by turning out goods and services for their own populations. Growing fast enough to spur significant economic progress required finding markets “where the money is,” which meant abroad generally and disproportionately in the United States. When growth in the United States merely kept slogging along, many of the new factories that were built with American consumers in mind began looking awfully risky.

Just as bad, many of these emerging market countries themselves got greedy. Their governments and central banks took advantage of low global interest rates by trying to juice extra growth and rising incomes by offering easy credit to their consumers, home-builders, and other businesses, too. But they weren’t able to borrow sufficiently in their own currencies, and many jumped at the chance to take on abundant dollar-denominated debt – including companies that could borrow on their own, without working directly through their governments. Moreover, many of these low-income countries (and some wealthy counterparts, like Australia and Canada) had gotten an added boost from China’s seemingly endless demand for their raw materials, which produced the lion’s share of their growth. But they failed to use earnings from the resulting high commodity prices to diversify their economies and take at least a few eggs out of that basket.

Lately, both China and the Federal Reserve have hit the emerging world with several punishing whammies. China itself continued to depend heavily on exports for its growth, and therefore started slowing itself as global demand continued disappointing. Its performance was additionally undermined by a decision to let permit the yuan to strengthen, in order to win it reserve currency status and greater long-term economic independence.

Beijing had also been trying to subsidize more growth led by domestic demand. But as with other third world countries, because Chinese incomes remain so low even after impressive pay raises, massive amounts of stimulus ranging from infrastructure and housing investment to (most recently) stock market manipulation did more to saddle that country with immense debts than to keep growth and job-creation at levels that were both economically acceptable, and politically essential – i.e., strong enough to keep the masses reasonably happy.

If official data is close to accurate (hardly a certainty), China’s growth rate is still world-class. But even its recent decline from previous blistering levels clearly has been enough to ravage global demand for fuels, industrial metals, and foodstuffs alike – and in turn the economic prospects of the commodity producers. Since the economic prospects of these erstwhile johnny-one-note high-riders began worsening so markedly, foreign investors began pulling money out, putting downward pressure on their currencies, and consequently on their ability to import – including from the United States. At the same time, China’s own recent yuan devaluation deepened this predicament – by further diminishing the PRC’s own purchasing power, and by reducing the price competitiveness of all the finished goods that the commodity producers and their more manufacturing-oriented third world counterparts needed to sell.

If anything, the Fed’s impact on the developing world has been still more destructive. Like the United States, much and even most of its recent growth has depended on artificially cheap credit. But unlike the United States, it can’t borrow in its own currencies. As a result, these countries are exposed to exchange-rate risk (created mainly by the rising dollar) as well as to interest rate risk (which can be created not only by the actual Fed interest rate hike that Chairman Janet Yellen and colleagues have been promising, but by a perception of impending hikes that reduces the third world’s creditworthiness and thus their access to affordable new money.

The real U.S. economy is more than capable of staying relatively unscathed by this global turmoil. For despite the best efforts of American leaders, it’s still less reliant on trade, foreign investment, and the well-being of the rest of the world than practically any other economy. U.S. stock markets, by contrast, could be in for greater trouble, which could be the single most important reason for their recent drop (keeping in mind that their levels are always determined by a great variety of long and short-term influences).

The reason? Among the major props for stocks during the current feeble U.S. recovery has been American companies’ remarkable ability to grow profits despite the real economy’s woes. As widely noted, much of this growth has been on the bottom line – resulting from greater efficiencies rather than better revenues. Human ingenuity’s power should never be underestimated, but by the same token, it’s hard to believe that infinite amounts of blood can be drawn from that stone. Indeed, faltering recent American productivity performance strongly indicates that diminishing returns are in store for these efforts. Emerging markets, with their historically high growth rates and gargantuan populations, have long been viewed as business’ best future hope for accelerated top line growth, and so far they’ve performed well enough to justify considerable confidence.

This latest set of emerging market troubles, including China’s, signals that this ace in the hole really isn’t – which understandably raises questions about whether current stock valuations can be sustained. As usual, please take all forecasting efforts, including mine, with a big boulder of salt. But it seems to me at least conceivable that, just as Wall Street has for years comforted itself by observing that “the stock market is not the economy,” unless Washington screws up royally, Main Street will start becoming grateful for this divide.

But that doesn’t mean that a healthy speed up in the recovery is in sight. Speculation has abounded lately that the Fed might not only postpone those interest rate hikes but need to launch another round of bond-buying – i.e. “quantitative easing.” Yet why a new influx of easy money would generate more sustainable growth than its predecessors isn’t at all apparent.  Washington could return to greatly increased deficit spending, but with so much of U.S. consumer and business demand being satisfied by imports, and with foreign currency devaluations likely to continue, the growth and employment benefits seem more certain than ever to leak overseas.  In principle, this new spending could be targeted on domestic infrastructure, but however popular this idea has been in Washington, it hasn’t yet been popular enough to produce enacted programs, and the intensifying presidential cycle could well turn into a new obstacle.

What about tariffs on imports, which could spur growth by cutting the trade deficit – and without budget-busting tax cuts or stimulus programs? As usual, they’re completely off the table. Indeed, new trade agreements, and therefore higher deficits and even slower growth, appear to be next on that front – though perhaps not until both Democrats and Republicans are safely past the next election.

That leaves fostering an unhealthy speed up in the recovery – kicking the can down the road yet again secular stagnation-style, for the usual unspecified reasons expecting meaningfully different results, and acting surprised when crisis clouds begin gathering anew.        

 

(What’s Left of) Our Economy: Japan Goes All In

Tags

asset prices, Bank of Japan, bubbles, currency, currency manipulation, dollar, Fed, Financial Crisis, free markets, Global Imbalances, investing, Japan, QE, stimulus, Trade, Trans-Pacific Partnership, yen, {What's Left of) Our Economy

I was already having a hard enough time trying to figure out whether to focus this morning on three big data releases or on some of the other economic and non-economic developments crowding the headlines – and then the Japanese government rocked the economic world with two mega-announcements.

So the Labor Department’s Employment Cost Index, the Commerce Department’s survey of personal incomes and saving, and the Chicago purchasing managers‘ new monthly sounding all will have to take a back seat to the Japanese central bank’s unveiling of a massive new stimulus program, and the Japanese government pension fund’s announcement that it’s going to start investing considerably more in stocks both in Japan and around the world.

There’s no need to review the most obvious implications of this news. Just Google “Bank of Japan” and “GPIF” (Government Pension Investment Fund). You’ll quickly see that the former’s decision to buy many more Japanese government bonds, along with stocks and other financial assets, is expected to boost the prices of the such assets all around the world, further weaken Japan’s yen, and fend off another bout of deflation — with all the damage that would do to the Japanese and global economies. Financial assets will also get a major lift – all else equal of course! – from the Japanese government employee pension fund (the world’s biggest public sector investor) shifting its strategy to buying more stocks in Japan and abroad.

To me, the less obvious implications matter more, especially these two:

First, one of the biggest long run dangers of the unprecedented central bank stimulus programs adopted to contain the financial crisis is that investment capital around the world will be spent badly. The idea is that if investors know that the Federal Reserve and the European Central Bank or the Bank of Japan will ride to their rescue with yet more credit if they make mistakes in allocating funds, the discipline that’s supposed to be one of the main virtues of free markets and capitalism will be badly eroded and possibly destroyed.

The crisis itself clearly was fueled in the first place by the glut of credit provided by the Fed in particular during the bubble decade. Super-easy money encouraged both Wall Street and homeowners to bid up the price of fundamentally unproductive assets like houses wildly beyond sensible levels. Government housing subsidies and implicit guarantees didn’t hurt, either.

The Fed doesn’t buy stocks but its Japanese counterpart has invested in exchange-traded funds and real estate investment trusts. Now the Bank of Japan will triple those purchases, along with boosting its bond buys. Is it remotely possible that this step will increase the efficiency of capital allocation in Japan, the United States, or anywhere?

In addition, the $1 trillion-plus Japan government pension fund, the world’s largest public investor, will more than double its holdings of Japanese and foreign stocks to 25 percent each. Of course, public pension funds have long been major players in financial markets. But U.S. funds hire private sector investment professionals to manage their portfolios. That hardly makes them perfect, but at least they have a history of responding in standard ways to market (and more recently, government and central bank) signals.

The GPIF’s portfolio, by contrast, is run by government bureaucrats. Moreover, they’re bureaucrats from the Japanese government, whose devotion to free markets has been historically difficult to spot. I’m someone who actually thinks that Tokyo has a good record of intervening in the economy, especially in manufacturing. But that doesn’t mean I have much confidence in it as a stock- or sector-picker – which of course is a different animal altogether from identifying approaches to nurture the long-term development of industries. Moreover, why would anyone hewing to the conventional wisdom about Japan’s allegedly disastrous penchant for “picking losers” believe that its leaders will now suddenly start making decisions that improve the efficiency of their own economy, let alone economies anywhere else?

The second less-than-obvious set of implications of Japan’s new policies concerns trade flows and trade policy. As widely recognized, the extra BOJ bond-buying has already brought the yen to roughly seven-year lows versus the U.S. dollar. The question Washington needs to ask is why it’s still pursuing a Trans-Pacific Partnership trade deal when the biggest economy involved in the talks so far outside the United States, which already has a strong record of protectionism, has just moved to cheapen the price of its exports and raise the price of its imports – and all for reasons having nothing to do with market forces?

Further, this latest instance of Japanese currency manipulation will likely affect trade flows more than Fed easing ever could – even if ZIRP and QE haven’t been accompanied by a stronger, not weaker dollar. For as defenders of this Japanese exchange-protectionism keep ignoring, the BOJ isn’t simply mimicking the Fed because monetary easing policies in a mercantile, production and export-led economy like Japan’s will always have fundamentally different – and inevitably more protectionist – effects than easing policies in a consumption- and import-focused economy like America’s.

Finally, even though Washington reportedly is more determined than ever to ignore foreign currency devaluations in the mistaken belief that its leading, and slow-growing, trade partners deserve such help, the much weaker yen is likeliest to spur similar moves – or the introduction of other beggar-thy-neighbor measures – in other mercantile, export-led economies in Asia, notably Korea and China.

Without a meaningful U.S. response – meaning a sharp turnabout in import- and deficit-friendly American trade policies – the inevitable results will be an even bigger U.S. trade shortfall, a consequently weaker American recovery, and reflation of the global imbalances that played such a prominent role in triggering the financial crisis to begin with. Unless, finally, this time, for reasons no one has yet identified, it really is different?