Commentary on Political Economy

Tuesday 31 August 2021


 Kerry Stokes must have read my mind... or else he is a brilliant economics theoretician ! This, in the AFR just now : 

"“There is no value to capital, labour has not improved – there’s been no giant inflation in wages – and so it just comes back to land. Land has been the only thing that’s had a rapid rise.

“At the end of the day, there are three equations: capital, labour and land. And if they’re out of kilter, one of them will respond more than the other. At the moment, land and buildings have skyrocketed based on yields, based on current interest rates.”

Bartholomewsz in The Age today:

The Fed’s post-pandemic world is built on a rocky foundation
Stephen Bartholomeusz
Stephen Bartholomeusz
Senior business columnist
August 30, 2021 — 11.58am
Normal text sizeLarger text sizeVery large text size
Leave a comment

Most of the focus on Jerome Powell’s Jackson Hole speech last Friday has been on what it said about the prospect of a tapering of the US Federal Reserve Board’s asset purchases this year. There were, however, sections of the speech that canvassed more interesting questions.

In his address, the Fed’s chairman said that he has now joined the ranks of the members of the Open Market Committee who favour reducing, or “tapering” the rate of its $US120 billion ($164 billion) a month of bond and mortgages purchases – if the US economic recovery evolved “broadly as anticipated.”

Jerome Powell’s eagerly-awaited virtual speech raises many questions.
Jerome Powell’s eagerly-awaited virtual speech raises many questions.CREDIT:BLOOMBERG

That’s a “maybe” rather than a commitment and one built, it was apparent from other elements of the speech, on an assumption that, post-recovery, the economy and its macro settings will look reasonably similar to those which pre-dated the emergence of COVID-19.

The pandemic ravaged the US (and other) economies, briefly.

Powell said it had displaced 30 million workers in the US and that the decline in economic output in the second quarter of last year was twice the full decline experienced during the “Great Recession” of 2007-09 that followed the global financial crisis.

Global economy
The world is watching as China’s Delta outbreak hits an already vulnerable economy
Stephen Bartholomeusz
Stephen Bartholomeusz
Senior business columnist

The pace of the recovery, however, had exceeded expectations with output surpassing its previous peak after only four quarters, less than half the time it took to achieve that outcome after the 2007-2009 recession.

An unusual feature of the pandemic’s impact on economies has been the uneven distribution of its impacts.

There has been a boom in consumer spending on appliances, furniture, cars, IT-related goods and other household items but a collapse in spending on services like restaurants, travel, leisure and other services that require close contact with others.

That boom in consumer goods has driven US inflation to 30-year highs. Last Friday the Fed’s preferred measure of core inflation showed a 4.2 per cent increase in July, sustaining the run of inflation data this year at more than twice the level targeted by the Fed.

Despite that, Powell and the Fed more broadly are still holding on to their thesis that the spike in inflation is transitory.

There are some changes that the pandemic has wrought that may not be reversed, at least not in their entirety.

“The spike in inflation so far is largely the product of a relatively narrow group of goods that have been directly affected by the pandemic and the reopening of the economy,” he said. From long experience the Fed expected the inflationary effects to be transitory and “wash out over time.“

Later in the speech he outlined the historical basis for the Fed’s conviction.

Since the 1990s, he said, inflation in many advanced economies had run “somewhat” below two per cent even in good times. That pattern of low inflation likely reflected sustained disinflationary forces, including technology, globalisation and demographic factors as well as the successful commitment of central banks to maintaining price stability.

“While the underlying global disinflationary factors are likely to evolve over time, there is little reason to think that they have suddenly reversed or abated. It seems more likely that they will continue to weigh on inflation as the pandemic passes into history.“

The shortages of semi-conductors and of container ships and containers that the dramatic shifts in consumption patterns have caused may not be resolved for years.
The shortages of semi-conductors and of container ships and containers that the dramatic shifts in consumption patterns have caused may not be resolved for years.CREDIT:GETTY

There are several assumptions in that statement open to question, not the least of which is that the pandemic will pass into history anytime soon, or at least within the timeframes within which the Fed will have to decide whether to taper the asset purchases and low interest rates that are helping to keep short-term rates around the world near zero.

The more fundamental question is whether economies post-pandemic, whenever that might be, will simply return to pre-pandemic norms.

The prices of durable goods, as Powell noted, had been falling by almost two per cent a year in the decades leading up to the pandemic.

That was driven by the combination of globalisation, technology and demographics that Powell referred to but also owed much to the rise of China as the world’s low-cost manufacturing sector. China exported deflation to the rest of the world.

There are some changes that the pandemic has wrought that may not be reversed, at least not in their entirety.

The shock of the pandemic severely disrupted supply chains and exposed the rest of the world’s over-reliance on China for critical goods and on global supply chains.

With the continuing trade conflict and the increasing economic and geopolitical tensions and competition between the US and China, the prospect of “re-shoring” and “on-shoring” of production of goods has increasingly become more tangible.

The shortages of semi-conductors and of container ships and containers that the dramatic shifts in consumption patterns have caused aren’t going to resolved, according to the shipping industry, for years and in the meantime will continue to drive shipping costs up, adding to inflation and to the incentive to re-shore production.

"With China no longer as low-cost a production centre as it once was; no longer as high-growth and economy as it was previously and with its economic strategies shifting away from a mercantilist model to being more focused on its domestic consumption, it may be less of a force for global deflation than in pre-pandemic times.

A presumption that life and inflation beyond the pandemic will simply return to their pre-pandemic settings therefore appears a somewhat unsophisticated assumption, given the structural changes that seem to be taking place within the global and domestic economies."

As you can see from the Bloomberg piece below, El-Erian is now literally in the throes of despair! In particular, if you read carefully his five points of analysis or interpretation of Powell's speech, at least two of which -the essential ones - are identical with Terry McCrann's analysis, the President of Queen's College will soon join McCrann and several others in our party checking in the nearest psychiatric facility - meaning, we have had it...

Fed’s Powell Cheers Markets But Risks a Mistake
Investors will happily continue to give the Federal Reserve chair the benefit of the doubt, but there’s good reason to question his characterization of policy being “well positioned.”

By Mohamed A. El-Erian
August 30, 2021, 5:30 AM GMT+8
Powell’s dovish Jackson Hole speech soothed markets but risks being out of touch with economic reality.
Powell’s dovish Jackson Hole speech soothed markets but risks being out of touch with economic reality. Photographer: Daniel Acker/Bloomberg
Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is president of Queens’ College, Cambridge; chief economic adviser at Allianz SE, the parent company of Pimco where he served as CEO and co-CIO; and chair of Gramercy Fund Management. His books include "The Only Game in Town" and "When Markets Collide."
Read more opinion
Follow @elerianm on Twitter
Federal Reserve Chair Jerome Powell’s speech Friday at the annual Jackson Hole forum was consistent with his very gradual and highly measured approach to policy changes – an approach that financial markets love as it implies a longer period of very loose liquidity that fuels ever higher asset prices. The real question, however, is whether the speech will end up being out of touch with actual economic and financial developments as they unfold over the remainder of this year and beyond.

By refraining from breaking new ground or providing operational details of any evolution in policy, both of which would have inevitably tilted more hawkish at this point, Powell gave investors more reason to take stocks and bonds higher. And indeed, stocks rallied to a new record while bond prices also rose.

Economists, however, seemed less convinced by the argumentation, the stated outlook and what it implies for the Fed’s go-slow policy evolution that markets like so much. More concerned about the two-sided nature of the inflation risk and the potential for a policy mistake, some would have favored a firmer signal about an imminent taper of the Fed’s large-scale asset purchases, something that I have argued is not just needed for both economic wellbeing and longer-term financial stability, but is also overdue.

Opinion. Data. More Data.
Get the most important Bloomberg Opinion pieces in one email.

Sign up to this newsletter
More from
Biden’s Alliance with Big Tech Shows a Power Shift
The IMF Needs to Sync Its Belarus Policy with the West
India’s Investments in Afghanistan Led to a Diplomatic Dead End
How to Make Vietnam a Powerful Trade Ally for the U.S.
Powell in his speech appeared mindful not only of the latest facts on the ground that could guide Fed action, but also of the highly visible and accelerating hawkish swing among a growing number of members the policy-making Federal Open Market Committee. Specifically, in evaluating recent economic developments against the Fed’s formal dual mandate (price stability and employment), he observed that the Fed’s "substantial further progress" test of the economic recovery has been met as regards inflation, and that “there has also been clear progress toward maximum employment.” 

As these remarks would imply him being inclined toward an earlier taper timetable than he favored just a few weeks ago, Powell was quick to wrap this economic assessment in a twin packaging that was more dovish than what markets expected.

First, Powell made a point of separating the move toward tapering from interest rate hikes that would normally follow. He stated that “the timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test.”

Second, in addition to refraining from providing details on the timing and pace a possible taper program, he built into such a future announcement quite a bit of what I suspect he hopes is constructive ambiguity. This included him stating that “we have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis.”

This messaging is clearly meant to avoid the market disruptions that followed the first taper announcement in 2013 under then-Fed Chairman Ben Bernanke and Powell’s own experience in the fourth quarter of 2018. However, there’s good reason to question the characterization of Fed policy being “well positioned.” For example:

The five reasons that Powell set out to support his oft-repeated argument that the recent spike in prices is likely transitory do little to alleviate current concerns about an inflation dynamic that is already proven and, judging from Friday’s data, continues to be hotter and more persistent than the Fed expects.
His failure to mention housing and rental inflation missed an important part of the evolving inflation story, and one that has consequential economic, social and political implications. 
Powell’s outlook for the economy doesn’t seem to reflect sufficient appreciation of the bottom-up, cost-push pressures that the majority of companies are experiencing and that several regional Fed presidents have cited in their own assessments of the economic outlook and their associated call for an early taper.
After a balanced historical reading of policy reactions to higher inflation, Powell’s characterization of the current risk of a potential policy mistake appears overly biased in favor of an overreaction to inflation. If anything, the Fed is quite far from this given that it is still maintaining the uber-stimulative policy stance that it adopted well over a year ago at the height of the Covid disruptions to the economy and markets.  
Finally, while rightly pointing to the uncertainties associated with the delta variant, Powell shied away from discussing the considerable and increasing decoupling of finance from the real economy.
Investors will happily continue to give Powell the benefit of the doubt; after all, his policy approach has paved the way for increasing financial wealth. Economists, though, are more divided. The beneficial impact on the economy of the Fed’s massive asset purchases are limited, if any, while the risks to economy and the financial system continue to mount.

I continue to believe there is just cause for concern about a monetary policy mistake that could undermine future economic wellbeing and financial stability, with adverse social, institutional and political spillovers. I am hoping that my worries are misplaced but unfortunately, both the numbers and the analysis suggest otherwise.

You will note Powell's exasperatingly sophistic - in fact, wholly irrational, stupid, fanciful - hairsplitting dichotomy of inflation and employment is centrestage in both McCrann's and El-Erian's critiques.... as we say in Carrapippi... "na ntorcia a sant'Antonio..:.

Hahaha... with Biden and Powell in command, Kabul will come to Pennsylvania Avenue (the site of White House and Federal Reserve in Washington)...

The article below from today’s WSJ contains a useful example and reference to Alec Pigou, the Cambridge economist, and his concept of “externalities”. You don’t need much intelligence, just a little common sense, to understand that if you assume that an economic system is fundamentally utility maximising, then any detracting factor can be called an “externality”. The trouble with capitalism is that in reality the system overall is absolutely destructive of the environment and thence of individual welfare or “utility” because of its ingrained need to spawn excess population and consumption! 
Marx most certainly saw the “overpopulation” bit. What is astounding is that he NEVER even remotely intuited or noticed the “finiteness” of environmental resources! His focus, as is widely known, was solely on the notion of “exploitation”, the production of “surplus value”.
Thus, whilst Pigou rendered great service by pointing out this obvious flaw in marginal utility theory, his description of it as “externality” and his confining the concept to market “subsystems” served to obfuscate more than it clarified!

In this piece, Sonos acknowledges that markets threaten to destroy Chinese society.... and that XI IS DOING SOMETHING ABOUT IT! 
Consequently,  markets will destroy the West but not China. Therefore,  Soros urged US authorities to stop Western investors from helping China... because Xi is their ENEMY. In other words, for Soros,  Xi does not understand Western markets... BECAUSE HE IS PLAYING THEM FOR SUCKERS! 

George Soros: Investors in Xi’s China face a rude awakening
The leader’s crackdown on private enterprise shows he does not understand the market economy
Xi Jinping regards all Chinese companies as instruments of a one-party state
Xi Jinping regards all Chinese companies as instruments of a one-party state © Li Xueren/Xinhua/AP
August 30, 2021 12:58 pm by George Soros
The writer is chair and founder of Soros Fund Management and the Open Society Foundations

Xi Jinping, China’s leader, has collided with economic reality. His crackdown on private enterprise has been a significant drag on the economy. The most vulnerable sector is real estate, particularly housing. China has enjoyed an extended property boom over the past two decades, but that is now coming to an end. Evergrande, the largest real estate company, is over-indebted and in danger of default. This could cause a crash. 

The underlying cause is that China’s birth rate is much lower than the statistics indicate. The officially reported figure overstates the population by a significant amount. Xi inherited these demographics, but his attempts to change them have made matters worse. 

One of the reasons why middle-class families are unwilling to have more than one child is that they want to make sure that their children will have a bright future. As a result, a large tutoring industry has grown up, dominated by Chinese companies backed by US investors. Such for-profit tutoring companies were recently banned from China and this became an important element in the sell-off in New York-listed Chinese companies and shell companies. 

The crackdown by the Chinese government is real. Unnoticed by the financial markets, the Chinese government quietly took a stake and a board seat in TikTok owner ByteDance in April. The move gives Beijing one seat on a three-person board of directors and first-hand access to the inner workings of a company that has one of the world’s largest troves of personal data. The market is more aware that the Chinese government is taking influential stakes in Alibaba and its subsidiaries. 

Xi does not understand how markets operate. As a consequence, the sell-off was allowed to go too far. It began to hurt China’s objectives in the world. Recognising this, Chinese financial authorities have gone out of their way to reassure foreign investors and markets have responded with a powerful rally. But that is a deception. Xi regards all Chinese companies as instruments of a one-party state. Investors buying into the rally are facing a rude awakening. That includes not only those investors who are conscious of what they are doing, but also a much larger number of people who have exposure via pension funds and other retirement savings. 

Investors in China should beware Beijing’s unpredictability
Pension fund managers allocate their assets in ways that are closely aligned with the benchmarks against which their performance is measured. Almost all of them claim that they factor environmental, social and corporate governance (ESG) standards into their investment decisions.

The MSCI All Country World Index (ACWI) is the benchmark most widely followed by global equity asset allocators. An estimated $5tn is passively managed, which means that it replicates the index. A multiple of this amount is actively managed, but it also closely tracks the MSCI index.

In MSCI’s ACWI ESG Leaders Index, Alibaba and Tencent are two of the top 10 constituents. In BlackRock’s ESG Aware emerging market exchange-traded fund, Chinese companies represent a third of total investments. These indices have effectively forced hundreds of billions of dollars belonging to US investors into Chinese companies whose corporate governance does not meet the required standard — power and accountability is now exercised by one man who is not accountable to any international authority.

The US Congress should pass a bipartisan bill explicitly requiring that asset managers invest only in companies where actual governance structures are both transparent and aligned with stakeholders. This rule should obviously apply to the performance benchmarks selected by pensions and other retirement portfolios.

If Congress were to enact these measures, it would give the Securities and Exchange Commission the tools it needs to protect American investors, including those who are unaware of owning Chinese stocks and Chinese shell companies. That would also serve the interests of the US and the wider international community of democracies.

SEC chair Gary Gensler has repeatedly warned the public of the risks they take by investing in China. But foreign investors who choose to invest in China find it remarkably difficult to recognise these risks. They have seen China confront many difficulties and always come through with flying colours. But Xi’s China is not the China they know. He is putting in place an updated version of Mao Zedong’s party. No investor has any experience of that China because there were no stock markets in Mao’s time. Hence the rude awakening that awaits them.

Note how Soros in the end chides Xi only for "allowing markets to go too far" in their sell-off, NOT because his punitive measures are wrong! 
Next, he chastises Western investors for helping Xi in his failure to understand markets! 
Soros is either a nitwit or a hypocrite. I think he is a hypocrite who is willing to twist logic to suit his case!

No comments:

Post a Comment