Archive for January 2016


Napoleon is on the march

It’s early 1815, and Napoleon has returned to France from exile in Elba, landing on the coast.  The French people have mixed views of this:

Napoleon drew most of his support from the workers and peasants. They loved him not so much because he was an “Emperor”, but because they believed he was a true son of the Revolution who would never reverse the Revolution’s reforms, something many feared Louis XVIII might soon do. Furthermore, Napoleon pledged himself to constitutional government in hopes of winning more support. The aristocracy and the middle class were unsure of how to feel about Napoleon’s return. However, since he had the support of the lower classes, the aristocracy and middle class said little, waiting to see what would happen. Thus, Napoleon was able to regain control of France bloodlessly; indeed, not a shot was fired. Yet, while beloved in France, Napoleon was hated in the rest of Europe: international conflict was inevitable.

The French king sent an army to stop him:

The 5th Regiment was sent to intercept him and made contact just south of Grenoble on March 7, 1815. Napoleon approached the regiment alone, dismounted his horse and, when he was within gunshot range, shouted to the soldiers, “Here I am. Kill your Emperor, if you wish.”[167] The soldiers quickly responded with, “Vive L’Empereur!” Ney, who had boasted to the restored Bourbon king, Louis XVIII, that he would bring Napoleon to Paris in an iron cage, affectionately kissed his former emperor and forgot his oath of allegiance to the Bourbon monarch. The two then marched together towards Paris with a growing army. The unpopular Louis XVIII fled to Belgium after realizing he had little political support.

When Napoleon landed in France, the Paris newspapers warned that the “traitor” was on the march.  As he approached Paris the coverage steadily got better, day by day. (Someone find me a link.) The media greeted him as a hero as he entered the capitol.

And here’s the Washington Post:

Late Thursday night, National Review, the storied conservative magazine founded by William F. Buckley, published an issue denouncing Donald Trump.

“Trump is a philosophically unmoored political opportunist who would trash the broad conservative ideological consensus within the GOP in favor of a free-floating populism with strong-man overtones,” the editors wrote. “Donald Trump is a menace to American conservatism who would take the work of generations and trample it underfoot in behalf of a populism as heedless and crude as the Donald himself.”

The Republican National Committee reacted swiftly — immediately revoking the permission it had given National Review to host a Republican presidential debate next month. “Tonight, a top official with the RNC called me to say that National Review was being disinvited,” the magazine’s publisher wrote online. “The reason: Our ‘Against Trump’ editorial.”

That soft flapping sound you hear is the Grand Old Party waving the flag of surrender to Trump. Party elites — what’s left of the now-derided “establishment” — are acquiescing to the once inconceivable: that a xenophobic and bigoted showman is now the face of the Republican Party and of American conservatism.

The Wall Street Journal editorial page had long criticized Trump’s candidacy, publishing an editorial in July arguing that the conservative media who applaud Trump “are hurting the cause.” The editors opined: “If Donald Trump becomes the voice of conservatives, conservatism will implode along with him.”

A week ago, the Journal reversed course. “Mr. Trump is a better politician than we ever imagined, and he is becoming a better candidate,” the editorialists wrote, speculating that “he might possibly be able to appeal to a larger set of voters than he has so far.”

I’m 60 years old and this is by far the worst humiliation I’ve ever seen a political party experience, much worse that the 1968 Democratic convention (which I recall vividly).  Seriously, will someone just kill off the GOP and put it out of its misery? Perhaps the Whigs could be brought back.

The only thing worse than a two party system is a one party system, and that’s what we’ve now got in America.

It’s the Democrats. Period. End of story.

Next up . . . Waterloo.

Update:  Miguel Madeira sent me the Napoleon story I was looking for.  Even if your French is as bad as mine, you can probably read it without translation:

Maintenant, si on veut le suivre dans sa marche victorieuse jusqu’à Paris, on n’a qu’à consulter le Moniteur. Pour guider nos lecteurs dans cette recherche historique, nous allons en donner un extrait assez curieux. On y trouvera la marche graduée de Napoléon vers Paris, avec la modification que son approche produisait dans les opinions du journal.
– L’anthropophage est sorti de son repaire.
– L’ogre de Corse vient de débarquer au golfe Juan.
– Le tigre est arrivé à Gap.
– Le monstre a couché à Grenoble.
– Le tyran a traversé Lyon.
– L’usurpateur a été vu à soixante lieues de la capitale.
– Bonaparte s’avance à grands pas, mais il n’entrera jamais dans Paris.
– Napoléon sera demain sous nos remparts.
– L’empereur est arrivé à Fontainebleau.
– Sa Majesté Impériale et Royale a fait hier son entrée en son château des Tuileries au milieu de ses fidèles sujets !

OK, OK, for you Trump supporters here’s the google translate:

Now if we want to follow him in his victorious march to Paris, we only need consult the Monitor. To guide our readers in this historic research, we will give a curious extract. We will find the graduated march of Napoleon to Paris, with the modification that the approach produced in the opinions of the newspaper.
– The cannibal went out of his lair.
– The Corsican ogre just landed the Gulf of Juan.
– The tiger arrived at Gap.
– The monster slept in Grenoble.
– The tyrant has gone through Lyon.
– The usurper was seen at sixty leagues from the capital.
– Bonaparte is advancing with great strides, but it will never enter Paris.
– Napoleon will be under our ramparts tomorrow.
– The Emperor arrived at Fontainebleau.
– His Imperial and Royal Majesty yesterday made its entry into the Tuileries surrounded by his loyal subjects!

Update#2:  As I expected, Bloomberg’s likely to run if it’s Sanders vs. Trump.

Expectations fairies take asset markets on a wild ride, and economists pretend not to notice

In the physical sciences, researchers identify empirical facts, and try to model them.  In economics, we observe empirical facts, and then create models to explain why these facts cannot possibly actually occur.  Consider:

U.S. stock futures pointed to another strong session for Wall Street on Friday, as oil prices continued to climb and investors were encouraged by signals of potential central-bank stimulus, at the end of a tough week for global markets.

Dow Jones Industrial Average futures YMH6, +1.29% leapt 210 points, or 1.3%, to 15,997, while S&P 500 futures ESH6, +1.46% jumped 27.25 points, or 1.3%, to 1,888.75. Nasdaq-100 futures NQH6, +1.86% gained 72 points, or 1.8%, to 4,202.75.

Friday was looking like a repeat of Thursday, when oil led the market higher. Then, U.S. crude prices CLH6, +5.22% rose $1.58, or 5.3%, to $31.10 a barrel, while Brent crude LCOH6, +6.36% jumped $1.88, or 6.4%, to $31.10 a barrel.

Oil and global stocks got a boost after European Central Bank President Mario Dragi dropped heavy hints on Thursday that more stimulus could be in store when the ECB meets in March. The Stoxx Europe 600 index SXXP, +3.18% was up 2.6% on Friday, while Asian markets finished with solid gains, including a nearly 6% rise for the Nikkei 225 index NIK, +5.88%

The Nikkei got a boost after an aide to Prime Minister Shinzo Abe said Thursday that “conditions for additional easing have fallen into place,” according to The Wall Street Journal. The Bank of Japan will meet on Jan. 28-29, and some expect the central bank’s asset-purchasing program could be increased.

So the expectations fairies are causing wild stock and commodity price movements, even though both Japan and the eurozone are at the zero bound.  And yet in the comment section I’ll have people “proving” this cannot be so, because in highly unrealistic New Keynesian DSGE models, monetary policy is totally ineffective at the zero bound.

Or they’ll say it worked, but through the expectations channel, so that “doesn’t count.”  Oh really, don’t New Keynesians believe the highly expansionary monetary policy of the 1960s sharply raised NGDP growth?  Isn’t that the standard NK explanation?  But interest rates rose during the 1960s, so how can that be?  They respond, “yes but that’s because inflation expectations rose sharply, real interest rates actually fell.”  Oh, so you are saying the 1960s monetary stimulus worked by lowering real interest rates, and that only occurred because inflation expectations rose?  So even when not at the zero bound, it’s all about the expectations channel? Then what makes the zero bound special?

Meanwhile Narayana Kocherlakota has a new post entitled:

It’s Time to Make a Hard U-Turn

It’s very short, so rather than try to excerpt it, and not do it justice, I’ll just ask you to read the whole thing.  Can we all agree now that Kocherlakota was not crazy last fall, as so many people assumed?  “Hey, there’s one FOMC member who wants to cut rates”   “Ha ha ha”

Yeah, who got the last laugh?

Update:  Update, I also recommend this blog post by Lars Svensson, another central bank dissenter who turned out to be absolutely correct.

Just imagine if Kocherlakota and Svensson were made chair and vice chair of the Fed (in either order.)

HT:  Julius Probst,  Marcus Nunes

A few thoughts on politics and the actual meaning of clown metaphors

Here’s something by Jim Geraghty of the National Review:

Let me offer a thought that every conservative should contemplate, even though it’s one we would rather avoid: What if the American people don’t want smaller government that spends less?

This is where we usually hear talk about how small-government conservatives need “better messaging.” Or someone will insist that there’s a broad desire for a smaller government that spends less, but those Washington insiders and establishment sold out the conservative agenda. But what if Americans have heard the arguments for smaller government, understand the arguments — or understand them as well as they’re ever going to — and have rejected them?

Does a country where the popular vote in the last six elections went for Clinton, Clinton, Gore, Bush, Obama and Obama really crave smaller government?

Polling indicates that 70 percent want a smaller deficit . . . but the only spending cut that gets anywhere near a majority support is to foreign aid — about one percent of the budget — and even that’s close to an even split. “For 18 of 19 programs tested, majorities want either to increase spending or maintain it at current levels.” People want smaller government right up until the point where it actually affects them.

The current Republican front-runner is running against entitlement reform:

Trump opposes any cuts to Social Security and Medicare — and Medicaid, for that matter. In April, at the New Hampshire Republican Leadership Summit, Trump criticized his fellow Republicans for proposing reforms of the entitlement programs that are bankrupting the country: “Every Republican wants to do a big number on Social Security, they want to do it on Medicare, they want to do it on Medicaid. And we can’t do that.” Medicare and Social Security alone face more than $69.1 trillion in unfunded liabilities, but Trump insists that the programs can be saved without cuts. “All these other people want to cut the hell out of it,” Trump said of Social Security. “I’m not going to cut it at all. I’m going to bring money in, and we’re going to save it.

1. It’s meaningless to talk about public opinion on “big government.”  The public doesn’t even understand what the term means.  You might think that big government means Social Security, Medicare, tariffs on Chinese goods, etc., but I assure you that this is now how Americans view the concept.  And since their views on taxes and spending are impossible to meet, in a very real sense they have no opinion.  Or you could say that their opinions could never be enacted, so politicians might just as well ignore them, and instead consider how the public would react to various options that the policymakers are actually contemplating.  That’s where public opinion matters.

2. To a libertarian like me, conservatism that discards the “small government” component represents 100% pure unadulterated evil.  But it would make life much simpler.  I could simply go with the liberal tribe, and no more lame explanations that “I’m conservative on economics and liberal on other issues.”  In my view, Trump is running on a platform of pure evil.

3.  It’s common for the policy preferences of candidates to not add up.  But I’ve never seen a gap anywhere near as large as with Trump.  His statement that he’s going to “bring money in” is almost comically at variance with his tax plan, which basically says “no one should have to pay any taxes“, or at least something pretty close to that.  Since he also favors much more government spending, his plan would bankrupt the country far faster than the plans of Bush, Rubio, etc.  So it’s a nonstarter, which means we basically don’t know anything about what a President Trump would actually do.  Probably the best way to try to figure that out would be to look at what he said before he was a candidate.  I recall he praised Hillary, and thus suspect a President Trump would be essentially an even more macho version of President Hillary Clinton. Or even Obama. Obviously I may be wrong, but whatever he does, it clearly won’t be the issues he’s campaigning on. He won’t expel the illegals (who would pick the fruits and vegetables?) or stop imports from China.

4.  The support for Trump is partly due to the tendency of GOP leaders in Congress to cave on spending issues.  They are viewed as “pussies”.  Trump avoids that problem by promising to be a big spender.  Seriously, where does his support come from?  It comes from those who want to turn the GOP into a European populist party—big government plus xenophobia and macho behavior.  Sarah Palin (who once nearly came to be one heartbeat from the Presidency) says Trump won’t “pussyfoot” around.  But we have a two party system, which is why I continue to predict failure for the GOP in 2016. The Dems can rally around utilitarianism, and politely disagree on whether to follow the Clinton or Sanders versions, whereas the GOP can’t even agree on core values.  Eventually this will sort itself out; in a two party system the two parties always take turns over the longer run.  But the “against utilitarianism” party has a really difficult time right now, especially given that many of its brightest members are approximately right wing utilitarians (at least on economics.)  Geraghty may think that Americans have turned away from small government, but a sizable bloc of the GOP most certainly has not.  A GOP that got rid of the small government faction would have little ability to attract talented people like Greg Mankiw.  (He’s already implied that Trump has a quasi-fascist approach to politics, and I’d guess that’s a pretty serious negative in Mankiw’s eyes.) Recall the recent election where Le Pen came in second in the first round of voting, and lost the general election 75% to 25%.  It wouldn’t be that bad here (Le Pen had to run against the moderate right) but they’d have a hard time getting to 50%.  It’s OK to have a party that’s toxic to intellectuals, and gets 20% to 30% of the vote . . . in Europe. That’s a pretty successful party in a multi-party democracy.  But in the US two party system that won’t work.  The GOP has a lot of work ahead of it.

5.  Someone will have to put Humpty Dumpty back together again in 2017.  I suspect that Paul Ryan will become the de facto leader of the GOP at that time.  It will be interesting to see what he tries to do with the remnants of the party (which might well still control the House.)

6.  You could argue that Ted Cruz is a small government version of Trump, and also a very skilled debater.  If in the end Cruz is not able to beat Trump, it wouldn’t necessarily mean GOP voters like big government, but it would at least suggest the issue is not very high on their radar screen.

7.  Just to be clear, I do not believe that the mainstream candidates (Bush, Rubio, Kasich, Christie, etc.) would bring smaller government to America.

PS.  Of course I was joking when I said Trump proposes to eliminate taxes.  But Trump also likes to clown around; indeed I’ve argued he’s running as a clown.  Here’s the actual plan:

1. If you are single and earn less than $25,000, or married and jointly earn less than $50,000, you will not owe any income tax. That removes nearly 75 million households – over 50% – from the income tax rolls. They get a new one page form to send the IRS saying, “I win,” those who would otherwise owe income taxes will save an average of nearly $1,000 each.

The loss of revenue will be “offset” by massively lower taxes on the upper middle class and wealthy.  And a massive tax cut for corporations.  And more entitlement spending.  With Trump, we’ll all “win”, even the hedge fund guys.  A nation of winners.  Hey, what could go wrong?

Anyone who doesn’t see that Trump is a clown is not paying attention.  Read “I win” 100 times in a row, until it sinks in as to what his game is.  Yes, he’s quite smart when he takes the clown costume off, but so are many circus clowns.  If I wanted to call him dumb, I would not use the clown metaphor.

PPS.  I was completely wrong about Trump’s prospects a few months back (and Paul Krugman was right), so no one should take my views on politics at all seriously.

Good news, bad news

The good news is that the Fed is unlikely to raise rates in the near future.  The bad news is that the Fed is unlikely to raise rates in the near future.  How can two mutually exclusive claims both be true?  If you can’t embrace contradictions, then you are not a true macroeconomist.  (I’m looking at you Bob.)

The good news is that given the condition of the economy, the Fed is unlikely to raise rates soon.

The bad news is that the Fed’s unlikeliness to raise rates soon shows the poor condition of the economy, caused by the Fed itself.

The Fed is unlikely to raise rates soon because in 2015 they signaled that they were anxious to tighten monetary policy, which lowered expected NGDP growth.  The market also knows that (just as in 1937) the Fed is reluctant to admit mistakes, because it makes them look bad.  So they wait too long to change course (as in 1937-38.)  That’s already priced in, already being factored into investor’s decisions. So if a negative shock comes along (say a fall in velocity) the Fed is not prepared to react.

Here’s a fed funds futures bleg.  Am I reading the table below correctly, that the markets expect roughly a 0.9% fed funds rate in December 2017?  If so, it would be below the 1.0% figure that Fed insiders laughed at back in September, when Kocherlakota’s dot was trailing far behind all the others.  Now it looks like even he was too pessimistic optimistic (and I was even further off course, but at least not as far off as the Fed.)  Just as Jimmy Carter “promoted” G. William Miller to the meaningless job of Treasury Secretary after just 18 months on the job, and replaced him with Volcker, Obama should promote Yellen to Treasury Secretary, and replace her with Kocherlakota.

Kocherlakota was right, the Fed should have cut rates in September.  I’m embarrassed to admit that I missed that call.

The much, much, much bigger story here (which I predict readers will overlook) is that the Fed desperately needs a new policy regime.  It’s the lack of level targeting, stupid.

Screen Shot 2016-01-20 at 1.38.41 PM


China’s GDP figures

Last June the consensus forecast called for 6.9% RGDP growth in China in 2015, and 6.8% growth in 2016.  A week ago the consensus called for 6.9% in 2015 and 6.4% in 2016.  Today China announced that 2015 growth came in at 6.9%, right on the consensus forecast.  Nominal GDP grew by 6.4%. The fourth quarter RGDP growth rate was 6.8%, with nominal growth of only 5.8%.  A few comments:

The data may be fake, and hence meaningless, but global stock and commodity markets rallied on the news.  Bond yields rose. That tells me the data is probably not meaningless, although clearly it may be biased (and the market may be filtering out that bias, looking for the grains of truth within.)  It’s interesting that global asset markets seem to respond more strongly to the supposedly meaningless Chinese data than to the US GDP data.  If the markets are interested, then market monetarists are interested.

The transition from industry to services continues:

Resilient growth in the emerging services sector helped cushion the slowdown in manufacturing and construction. The services sector grew 8.2 per cent in real terms in the fourth quarter versus 6.1 per cent for the industrial sector. . . .

Fixed-asset investment — which covers infrastructure and factory construction — grew 10 per cent in 2015, the weakest full-year growth since 2000 and down from 10.2 per cent in the first 11 months of the year. Infrastructure was the biggest drag, as growth fell back in December after fiscal stimulus had sparked a brief rally in previous months.

“The GDP figure looks fine but the disappointing part is very weak fixed-asset investment,” said Zhu Haibin, China economist at JPMorgan in Hong Kong.

“It raises questions about how effective fiscal policy has been. A big concern is whether the manufacturing slowdown will cause big unemployment. But if the service sector is resilient, that will create new jobs. The divergence in the economy will continue,” he added.  .  .  .

While the rebalancing of the economy away from manufacturing and construction continued, services growth slowed from 8.6 per cent in the third quarter as the contribution from financial services weakened.

“Based on this data, policymakers definitely need to do more,” said Xu Gao, chief economist at Everbright Securities in Beijing.

“The slide in services growth was expected, given the stock market. That’s going to continue in 2016, so if there’s not a clear recovery in the industrial sector and infrastructure investment, it will be very tough to meet next year’s 6.5 per cent target.”

And Reagan would be pleased by this, but will they carry through?  (I say only about 20% of what they should do.)

At the outset of his presidency, Xi Jinping billed himself as a transformative leader in the mould of Deng Xiaoping, the Chinese strongman who set the country’s economic rise in motion in the 1980s. Now Mr Xi is turning to two more political giants of that decade — Ronald Reagan and Margaret Thatcher — for inspiration as he seeks a “supply side” revolution for China’s economy.

Like the late US president and UK prime minister before them, Mr Xi and his premier, Li Keqiang, want to reduce taxes and red tape for businesses as they seek to cushion the decline of heavy industry with the rise of the consumer and service sectors. . . .

While there is no denying the dynamism of China’s consumer and service sectors — many of them dominated by private and foreign enterprise — the government has not traditionally been willing to take decisive action to reduce industrial overcapacities.

“Mergers and acquisitions rather than bankruptcy and liquidation would be the [government’s] preferred approach to ‘zombie companies’,” Tim Condon, ING chief Asia economist, wrote last week. “The industrial restructuring debate frequently pits Anglo-Saxon restructuring, where costs are recognised up front, against Japan-style restructuring where concessions and debt relief spread the costs over time. We see the [Chinese] authorities adopting an in-between approach.”

Another FT post has my view of the situation:

In a China-watching community where those at the extremes — “maximum” bulls and “coming collapse” Cassandras — often make the most noise, Jonathan Anderson at the Shanghai-based Emerging Advisors Group has long been regarded as one of the most thoughtful analysts. For years he laid out a convincing case for cautious optimism on the Chinese economy, but not any more.

“For years we have been waiting for China to make the tough choice and sacrifice near-term growth in order to stabilise macro balance sheets and stop its exploding debt cycle,” he wrote on January 4, the first day of this month’s market and currency mayhem. “[But] the costs of taking real adjustment are clearly too high for the government to bear . . . Right now we put the initial potential crisis threshold at around five years.”

China will likely eventually face some sort of financial crisis, but it’s impossible to predict when.  So the safest prediction is for continued rapid growth, slowing gradually over time.  I am predicting 6.0% growth for 2016, and hence am more bearish than the consensus.

In terms of policy, they need a more expansionary monetary policy and a more contractionary credit policy.  A 10% devaluation of the yuan would make restructuring less painful.