Sanity Check

Courtesy of FiveThirtyEight:

When Hillary Clinton laid out her economic vision for her prospective presidency in a speech last July, she made sure to work in a shoutout to her husband’s economic record as president. “The results speak for themselves,” Clinton said. “Under President Clinton — I like the sound of that — America saw the longest peacetime expansion in our history.”

Now Clinton is doubling down on that message. On Sunday, she told voters in Kentucky that she would put her husband “in charge of revitalizing the economy” because “he knows how to do it.” Aides subsequently told The New York Times’ Amy Chozick that the former president would more specifically focus on parts of the country that are struggling.

Whatever Bill Clinton’s exact role in a Hillary Clinton administration would be, it’s no surprise that she is looking to tie herself to his economic legacy. Bill Clinton’s second term was the last time the U.S. economy was unequivocally strong; for most voters this November, it was the best economy they’ve ever known. But while Hillary Clinton wants voters to look back fondly on the first Clinton presidency, she should hope they don’t remember too much about what happened next.

The economy at the end of Bill Clinton’s term was really, really good. In 2000, the final year of his presidency, the unemployment rate dropped below 4 percent for the first time in three decades, while the share of adults that were working hit an all-time high. Wages rose steadily. The stock market soared. The budget deficit turned into a surplus. Inflation, much to the surprise of many economists, stayed under control.

Perhaps most importantly, the late 1990s were a period of shared prosperity. The strong labor market drove up wages for workers throughout the earnings ladder, while drawing in people who traditionally struggle to find work, such as convicted felons and the disabled. The racial wealth gap narrowed. Inequality continued to rise, but families of all income levels saw gains.

The bursting of the tech bubble in 2000, and the subsequent recession, revealed that the 1990s boom was, at least to some degree, a mirage, the result of cheap money and, in then-Fed Chairman Alan Greenspan’s famous phrase, “irrational exuberance.” The recession that followed the tech bust, however, was relatively mild. If that were the worst consequence of the Clinton era, it might seem a small price to pay for a decade of solid growth.

But the Clinton boom, and even some specific Clinton policies, also helped sow the seeds for the far more severe Great Recession of the late 2000s. Mortgage-backed securities and subprime loans weren’t invented in the 1990s, but they expanded greatly during the period, part of a broader “financialization” of the U.S. economy that contributed directly to the severity of the Great Recession. Critics on the right argue Clinton-administration policies promoting increased lending to low-income and minority applicants contributed to the subsequent bubble; critics on the left, including Bernie Sanders, argue that Clinton’s deregulation of the banking industry paved the way for the crisis.

Bill Clinton deserves, at most, a small sliver of the blame for the financial crisis. But he probably doesn’t deserve much credit for the late-’90s boom, either. The reality is, presidents have at best limited influence over the economy. Clinton’s economic policy was determinedly centrist: modest tax increases, free trade (including the signing of the North American Free Trade Agreement) and limited government regulation and spending (the latter due in part to the Republican Congress). Those policies no doubt affected the economy, for good or bad. But their impact pales in comparison to that of forces beyond Clinton’s control: the rise of the internet, the entrance of the baby boomers into their peak earning years, the “peace dividend” that came from the fall of the Soviet Union.

It is a stretch, then, for Hillary Clinton to argue that her husband — or anyone else — “knows how” to ensure a good economy. But there are still lessons to take from the late 1990s. Most importantly, that low unemployment is crucial to generating wage gains for low-income workers — and that a period of such low unemployment need not lead to runaway inflation. The surest way to create an economy that works for everyone is to make sure that anyone who wants one can have a job.

Quote of the Day

From Yves Smith:

"Hillary has the classic resume of someone who has failed upward: a series of every-splashier job titles, but with no or negative accomplishments."

The False Narrative

Per David Sikora:

The availability of financial information and "new economy" companies created intense upward pressure on stocks from all sectors as the world ushered in a new millennium. Between 1994 and 2000, the Dow Jones industrial average exploded from 3,834 to 10,786, while the Nasdaq jumped from 751 to over 4,000. Over the same period, the value of shares traded on the New York Stock Exchange increased nearly fivefold, from $2.45 trillion to $11.06 trillion, though even it paled in comparison to the value of shares traded on the Nasdaq, which grew ninefold from $1.45 trillion to $20.40 trillion.

The flurry of stock trading that took place over this period created sizable short- and long-term capital gains, delivering the windfall that led to the federal government's budget surplus. These were unusual circumstances that political leaders just happened to be in the right place at the right time to oversee — not the result of a coordinated set of policies implemented by the Clinton administration, or by elected officials from either party for that matter.

As the presidential campaign season heats up, we will undoubtedly hear candidates advocate higher taxes on American citizens, arguing that greater taxation on productivity will not drive behavioral change but will inexorably bring the country back to the golden age of budget surpluses we enjoyed when Clinton was in the White House. But without an innovation as profound as the Internet, higher taxes on Americans — who themselves are often job creators — could be more of a dangerous drag than surefire solution for the U.S. economy.

Economics Always Trumps...

Per Stratfor:

Pakistani foreign affairs adviser Sartaj Aziz recently confirmed that his country was still interested in resuming the comprehensive bilateral dialogue with India. Although having custody of Jadhav may strengthen Islamabad's bargaining position — and thus give Pakistan a compelling reason to revive the talks — economics offers a more likely explanation for Aziz's statement. The ruling Pakistan Muslim League-Nawaz party faces an election in 2018. If Sharif wants his party to avoid the fate of its predecessor, the Pakistan People's Party, which was voted out of office in 2013 over its poor handling of the economy, he will have to reinvigorate his stalled economic reforms. Warming ties with India could provide the jump-start the Pakistani economy needs by facilitating a more robust trade relationship between the two.

Chile

Per Stratfor:

Despite Chile's vulnerability to boom-and-bust cycles, a key factor in its recent stability is its commitment to fiscal responsibility. The Chilean government's resistance to potentially destabilizing moves — particularly those prioritizing major increases in public spending — is enforced by Chilean law. This has not always been the case. As in other Latin American countries, Chile's governments in the 1960s encouraged fiscal deficits, and the efforts to finance those deficits led to high inflation. Chile's economic stability was secured by a fiscal rule instituted in 2000, and later enshrined in law, mandating that the government must attempt each year to secure a structural surplus equal to 1 percent of the gross domestic product.

That requirement significantly curtails the government's capacity to boost populist spending because it must save money in an effort to reach the target. The surplus can then be used to bolster the country's public finances during lean times. It is unlikely that future governments will undo the fiscal rule to, for example, boost public spending. Without a majority in Chile's National Congress, any political party would find changing the law a challenge.

France

Per Stratfor:

Despite its problems, France is still a fundamentally wealthy nation whose global reach knows no rival in continental Europe. Many French companies are leaders worldwide, and the country remains a significant agricultural producer. Furthermore, contemporary French governments still espouse military intervention abroad. Sarkozy and Hollande were willing to protect France's interests in the Levant and sub-Saharan Africa in ways that Britain seems increasingly reluctant to and Germany can't even dream of.

Additionally, France has some of the highest birthrates in Europe and, by midcentury, will probably have the largest population on the Continent. This means that a substantial number of young people will keep entering the workforce each year, pay work-related taxes, sustain the pensions of the elderly, and consume goods and services.

On the other hand, a growing population also means a permanent risk of social unrest if the French economy fails to absorb the future cohorts of workers. Boasting not only the strongest nationalist party but also the largest Muslim community in Western Europe, France will prove a test case for the evolution of nationalism and the role of Muslims in Europe. Though birthrates are falling in France across all segments of the population, Muslim families have higher birthrates relative to non-Muslim families, which means the Muslim community will likely play a greater political and social role in France in the coming years.

What the end looks like...

In the context of the typical question "How can the Fed ever lose control of the bond market, since they can always print more money?", today's Ask Fleck had a submission that probably spells out the answer...

Specifically, there is a quote in the most recent Barron's from Bill Gross:

"Years of easing by central banks mean that interest rates in most of the developed world will fluctuate narrowly. That offers an opportunity to sell volatility to create return. If you bought a 10-year Treasury bond today and nothing changed, you would get a 1.9% yield. If you bought a seven-year German Bund, you’d get zero. If, however, you sold a three-month call or three-month put on that same Treasury with a 20-basis-point [hundredths of a percentage point] variation—in other words, the yield stayed in the range of 1.7%-2.1% for three months—the trade would produce an annual return of 6%, as opposed to 1.9%.

The risk is that interest rates will go up or down by more than 20 basis points over a three-month period. But my premise is that central bankers will do anything possible to contain interest-rate fluctuations. The sale of volatility is producing the predominant amount of return in my fund."

The reader goes on to suggest (reasonably) that if Gross is pursuing this strategy, then plenty of other money managers are as well.  Which leads to his pertinent insight:

"You've been asked over the years how the fed could ever not control the outcome in the bond market (in so many words). After all, can't they just print money and buy bonds? Well, trillions upon trillions of notional bond money, leveraged and selling volatility on top of it? That's how - they will be totally overcome when the time comes as these managers are forced to deal with portfolio problems all at the same time. Again, it's not today's business, treasury bond yield will likely move lower, perhaps much lower, during a nasty equity bear market (see Europe and Japan). But that would likely reinforce this behavior in the bond market of selling vol on leverage. If ever there were a coiled spring the Fed would be unable to deal with this is it..."