Comments on The Great Demographic Reversal

Two comments received regarding Charles Goodhart and Manoj Pradhan’s “The Great Demographic Reversal” follow questions that surfaced during the CFS roundtable discussion. They include 1) the role of technology and productivity as well as 2) the internationalization of the big demographic shift.

First, Hal Varian (Chief Economist, Google and Emeritus Professor, UC Berkeley) offers a paper on advancing technology and automation vis-a-vis the impact of demographic forces on the supply of labor – https://voxeu.org/article/automation-versus-procreation-aka-bots-versus-tots.

Second, David Dodge (Senior Advisor, Bennett Jones and Former President, Bank of Canada) noted…
“I have been making the same point about the aging of the baby boom generation in Canada. This big cohort were big savers in the first two decades of this century. They will become big dis-savers from 2025 to 2045.”

The original message and link to slides are below.

—–Original Message—–
From: Lawrence Goodman lgoodman@the-cfs.org
Sent: Wednesday, October 14, 2020 12:31 PM
Subject: The Great Demographic Reversal (Goodhart and Pradhan)…

Last week, we hosted a roundtable discussion with CFS Advisory Board Member Charles Goodhart and his co-author Manoj Pradhan.

The Great Demographic Reversal is superb. It addresses head-on demographic forces that will only gain in importance over time. The book proposes that the underlying forces of demography and globalization will shortly reverse three multi-decade global trends – it will raise inflation and interest rates, but lead to a pullback in inequality. Charles and Manoj broadened the country-by-country demographic analysis by connecting many global threads and interactions among nations.

Please find their slides at
http://www.centerforfinancialstability.org/speeches/The_Great_Demographic_Reversal_CFS.pdf

The Great Demographic Reversal (Goodhart and Pradhan)

Last week, we hosted a roundtable discussion with CFS Advisory Board Member Charles Goodhart and his co-author Manoj Pradhan.

The Great Demographic Reversal is superb.  It addresses head-on demographic forces that will only gain in importance over time.  The book proposes that the underlying forces of demography and globalization will shortly reverse three multi-decade global trends – it will raise inflation and interest rates, but lead to a pullback in inequality.  Charles and Manoj broadened the country-by-country demographic analysis by connecting many global threads and interactions among nations.

Please find their slides at
http://www.centerforfinancialstability.org/speeches/The_Great_Demographic_Reversal_CFS.pdf

Penn: Quant Tools and Macro Workshop

The Penn Institute for Economic Research (PIER) will offer a workshop on Quantitative Tools for Macroeconomic Policy Analysis. Francis X. Diebold, Enrique G. Mendoza, and Frank Schorfheide will provide training on essential state-of-the-art methods.

Guest Speakers include:

– Guillermo Calvo
– Narayana Kocherlakota
– Donald Kohn (three-hour mini-workshop on the practice of Macroprudential Policy)

The workshop will be held May 4 to May 8 at the University of Pennsylvania. Details are available at http://economics.sas.upenn.edu/pier/tools-workshop.

Sargen: How Tariffs and China’s Slowdown Impact US Companies

As U.S. companies report fourth quarter earnings, a growing number have cited China’s slowdown as adversely impacting their businesses.  The most recent include industry bellwethers such as Apple, Caterpillar, and Nvidia.  In prior reports, multinationals such as Alcoa, Coca-Cola, Ford, GE, Harley-Davidson, and Whirlpool stated their earnings were being hit by higher tariffs on imports from China.

This list, moreover, is likely to grow if China slows further and/or tariffs on Chinese imports are increased.  However, this begs two questions: (i) Why is China’s economy softening; and (ii) Will the government be able to stabilize growth as it did in 2016?

One of the challenges investors confront is to assess whether China’s slowdown is primarily cyclical or secular.  Its growth rate has slowed steadily throughout this this decade, from about 10% in 2010 to 6.6% last year, the lowest in three decades.  In dissecting the recent slowdown, investors need to disentangle the effect of higher tariffs on Chinese imports from the impact of structural changes inside China.

There is general agreement that last year’s slowdown coincided with tariffs being imposed on 10% of Chinese goods imported to the U.S. during the first half of 2018.  The economy weakened further in the second half, when the list was extended to cover one half of imports from China.  Accordingly, investors believe a resolution of the trade dispute is critical to stabilize China’s economy.

Beyond this, China’s potential growth rate is decelerating for structural reasons. The country’s economic miracle was founded on agricultural workers in rural areas migrating to urban areas along the coast with higher-productivity manufacturing jobs.  But this process has become more challenging as wages in manufacturing have increased and unit labor costs have surged. Consequently, some economists believe China confronts a “middle income trap.”

Amid declining productivity growth, China’s government has relied increasingly on fiscal stimulus and credit expansion to achieve its growth target of 6.0%-6.5%.  But this has also resulted in a doubling of China’s overall debt burden from about 150% of GDP before the GFC in 2008 to 300% currently.  The problem with this strategy is it is not viable, as more and more credit is required to support each unit of output.  The reason: Much of the credit expansion has gone to SOEs, some of which the IMF labels as “zombies” – or firms that pile on debt but do not contribute positive value added.

Faced with this predicament, China’s policymakers pursued several measures last year to bolster the economy.  They included lowering short term interest rates by more than 200 basis points, allowing the yuan/dollar exchange rate to decline by 10%, while also expanding credit and lowering tax rates.  Similar actions were undertaken during China’s slowdown in 2015-2016, which proved effective in bolstering the economy.

Thus far, however, their impact is not readily apparent.  Auto sales, for example, declined in November by nearly 14% over a year ago, and Apple’s recent public filing indicated softness in consumer spending on electronics.  China’s imports plummeted in December, and exports also appear headed for a fall based on recent purchasing manager surveys and weakness in Asia and Europe.

What is clear is China’s policymakers are prepared to take additional actions to keep economic growth above the 6% threshold.  The central bank, for example, announced a one percent reduction in reserve requirements, and the government is boosting spending and lowering taxes. What is unclear is whether such action will be as effective as in the past due to the country’s rising debt burden.

The wildcard is whether an agreement on trade can be reached by the March 1 deadline.  While both sides wish to do so, the underlying issues are complex.  If the disagreement were simply about the size of the bilateral trade imbalance, the issue would be resolved, as China is willing to boost imports from the US and could direct SOEs to do so. However, the more difficult issues relate to violations of intellectual property and subsidization of businesses by the Chinese government, which the US opposes.

The most likely outcome is a temporary truce will be reached, which would bolster world equities for a while.  However, because a lasting agreement is harder to achieve, officials may in effect opt to “kick the can down the road.”

The outcome will have an important bearing on global economies.  While the US economy has withstood the impact of China’s slowdown thus far, a growing number of US companies are feeling the impact as noted previously. Furthermore, there has been a significant downward revision to earnings expectations by Wall Street analysts over the past six months. They are now calling for S&P 500 EPS growth of 8.1% in 2019 from more than 20% last year.  Yet, some observers believe the results will be weaker.

Ultimately, the market’s outcome will depend on whether China’s slowdown can be arrested by policy action.  If so, equity markets are likely to rally.  If not, they are likely to stay volatile, as the impact of a permanent slowdown has not been priced into markets.

CFIUS and Silicon Valley: We’re Still Trying to Find a Cure!

CFS senior advisor Charlie Schott writes on new twists to the Committee on Foreign Investment in the United States (CFIUS).  While in government, Charlie’s group oversaw the Treasury-chaired inter-agency Committee.

CFIUS is the place where the United State’s commitment to an Open Investment Policy meets our most important national security concerns.

Early last August Congress passed the Foreign Investment Risk Review Modernization Act (FIRRMA), making significant changes to CFIUS.  The following article covers (1) what changes have been made by the new law and (2) what to expect with CFIUS going forward.

Who should be interested in these changes?  The short answer is Silicon Valley and financial market participants!

For the paper
http://centerforfinancialstability.org/research/CFS_Schott_1_10_19.pdf

CFS Financial Crisis Timeline

As the 10-year anniversary of the global financial crisis approaches, assessment of key events before, during, and since is essential for understanding varying dimensions of the crisis.

The CFS Financial Timeline, created and managed by senior fellow Yubo Wang, seamlessly links financial markets, financial institutions, and public policies. It:

  • Covers more than 1,100 international events from early 2007 to the present.
  • Provides an actively maintained, free, and easy-to-use resource to help track developments in markets, the financial system, and forces that impact financial stability.
  • Curates essential inputs on a real time basis from established public sources.

Since 2010, the Timeline has become an integral part of the work done by scholars, students, government officials, and market analysts. View the Timeline.

We hope you find it of use and interest.

UK-US Financial Regulation: The Benefits of Greater Coherence

“UK-US Financial Regulation: The Benefits of Greater Coherence” illustrates the importance of “regulatory coherence” across borders.

Authors Ike Brannon, Bob Jennings, and Julie Chon delve into the longstanding and seminal UK and US relationship from a financial regulatory perspective.  They examine pathways to deepen and formalize cooperation with the aim to strengthen the international financial system.

As always, comments, critique, complement, or alternative thoughts are eagerly sought.

View the paper.
http://www.centerforfinancialstability.org/research/US_UK_Regulatory_Coherence.pdf

Global Markets into 2018

The Center for Financial Stability (CFS) hosted a small private workshop for leaders in finance to delve into issues that will shape the future of asset values and investment management on December 6.

CFS Special Counselor Jack Malvey set the stage with an essay “Toward the Mid-21 st Century Global Financial System” –
www.CenterforFinancialStability.org/research/MalveyGlobal_Dec_2017.pdf

Workshop topics included:

– Geopolitics and Big Picture Challenges through 2020 – AI, cyber, etc;
– Global Macro, Quantitative Tightening, and Financial Stability;
– Financial Industry Transitions – Active versus Passive Management, etc; and
– Opportunities and Risks (a selection follows).

OPPORTUNITIES

– Buy cash today – the rate of return will be extraordinarily high.
– Central banks will more actively incorporate financial stability into actions and mandates.
– Emerging markets will outperform.
– The Fed desires to move further away from the zero lower bound.
– NPLs in China are overstated / bank earnings mitigate and neutralize risks.
– Global macro investment opportunities via uneven tightening.

RISKS

– I will buy cash – but tomorrow.
– Bitcoin correction.
– Limited attractive equity names based on valuation / similar to Tokyo in 1989.
– Geopolitical tensions will increase with North Korea, China, Russia, and Saudi Arabia.
– Inflation surprise / data may be misread.
– Artificial intelligence channeled for ill.

Best wishes into the Holiday Season and 2018!

From China / Market Implications from Unconventional Monetary Policies…

The Shanghai Development Research Foundation (SDRF) recently hosted a superb dialog on issues stretching from China, the international monetary system, re-thinking the nature of money, among others.  I had the pleasure of presenting on “Market Implications from Unconventional Monetary Policies.”

My remarks centered on:

The need to assess the normalization of monetary policies through the lens of major macro shifts over the last 10 years.

Specifically, three “never befores” need to be resolved.  For instance, “never before” has there been such 1) large scale intervention by central banks and governments; 2) growth in the financial regulatory apparatus and labyrinth of rules governing markets; and 3) distortions across a wide range of financial markets.

Here, CFS monetary and financial data illustrate why goods price inflation has remained subdued and – in contrast – asset price inflation has not.

Evaluation of long-term stock and bond market valuations reveal market distortions.

Speculative positioning has been actively influenced by the patterns of rise and restraint in balance sheet operations in recent years.

Going forward, officials would benefit by seeking balance among these three “never before” forces.

For slides accompanying the presentation:  http://www.centerforfinancialstability.org/speeches/ShanghaiDRF_090517.pdf

On a parenthetical note, I left China excited with advances in mobile pay.  It will redefine the nature of money.