Michael Pettis had an interesting post this week about why there are changes going on in China for the better. I bring it up because I see a lot of people who are “waking up” to the notion that China has big problems in store. In fact, that fate has yet to be determined, or so Pettis’ argument goes.
To remind everyone, there has been huge over-investment and misallocations of capital in China that can be traced back to three things: (1) financial repression; (2) an undervalued currency; and (3) weak wage growth relative to worker productivity. In each instance, Pettis makes the case that changes have taken place to begin dealing with these items, even if more work still needs to be done.
With respect to too-low interest rates and working to benefit exporters and borrowers over consumers and lenders, what was once a 10+% spread between nominal GDP growth rates and lending rates is now more like 1.5% or less. As such, it becomes much harder to justify borrowing and investing in anything that moves to capture a much smaller spread.
On the topic of an undervalued currency, the Yuan has appreciated by roughly 40% against the dollar within the last decade. The problem has dissipated.
And, finally, as it relates to wage growth, they’ve actually had some. While at the same time there have been real questions about just how much productivity growth there really was. So, maybe that problem is less pronounced than it once was.
None of this is meant to suggest that there is smooth sailing ahead. There is a lot of bad debt to work through and vested interests who remain committed to the status quo. Nevertheless, the “hard landing” and “social unrest” outcomes are not a foregone conclusion. Still, we need to keep a watchful eye for continued reform and meaningful change.
Friday, September 5, 2014
Tuesday, September 2, 2014
Flash Boys
The subtitle is A Wall Street Revolt and the author is Michael Lewis (2014).
Much has already been said about this one. It's clear that HFT is a danger to the average investor and that the big banks are not our friends. It's probably that simple. Good read.
Much has already been said about this one. It's clear that HFT is a danger to the average investor and that the big banks are not our friends. It's probably that simple. Good read.
Monday, September 1, 2014
Wages of Destruction
The subtitle is The Making and Breaking of the Nazi Economy and the author is Adam Tooze (2007).
The rep on this book is that the author undermines the common narrative that the Nazis were winning the war, but then made the strategic mistake of trying to invade the Soviet Union and the tide turned. In fact, Tooze argues very credibly that the Germans never really had a chance to win the war in the first place. There is plenty to demonstrate that Hitler was driven by a psychotic racist ideology, that he viewed the long term threat as the United States, and that he believed that the Aryans were entitled to more living space and associated sustenance in the East – a potent combination that drove the world to war. But there is also lots of evidence that the Germans were a middle of the pack European economy and the Nazi’s efforts at rearmament, that started roughly the moment that they took power, constantly fell short of projections and objectives because of shortfalls in natural resources and manpower (hence the marriage of racism and necessity in the concentration camps). The Germans implemented the largest peacetime militarization in history, and their efforts still paled in comparison to what the Americans and Soviets were able to do once they decided to pick a side.
Nevertheless, Germany surprised everyone with the victory over France in 1940, and that clouds much of the common understanding of what happened. But as Tooze takes you through the economic history, what becomes clear is that the victory was more about strategic mistakes by the Allies than any overwhelming German military power under Hitler. Even at that moment in time, the Germans did not have vastly superior military assets, but instead were able to capitalize quickly on poor decisions by their enemies. Thus, as the ability to keep up military production constantly waned, the choice to invade the East was a foregone conclusion regardless of that first victory – because without the grain, oil and other resources that the Soviet Union represented, the Germans were eventually going to be defeated anyway. Moreover, as Tooze notes, when the actual strategy of the first victory is studied, it was not really repeatable. As demonstrated when it failed in the Soviet Union. The German war economy had debilitating limitations, and that trumped everything.
Tangentially, but sill interesting to me, the author notes the following: “Throughout the war, though a large part of German private income could not be spent, wages and salaries continued to rise, promising a higher post-war standard of living.” This line immediately brought me back to something that we have discussed several times on this site – the question of whether WWII brought the American economy out of depression. There are similarities between the Americans and Germans in this context – both faced conscription, rationing, and living without. All the German situation explicates is how that strategy promises you nothing, especially if you lose the war.
The rep on this book is that the author undermines the common narrative that the Nazis were winning the war, but then made the strategic mistake of trying to invade the Soviet Union and the tide turned. In fact, Tooze argues very credibly that the Germans never really had a chance to win the war in the first place. There is plenty to demonstrate that Hitler was driven by a psychotic racist ideology, that he viewed the long term threat as the United States, and that he believed that the Aryans were entitled to more living space and associated sustenance in the East – a potent combination that drove the world to war. But there is also lots of evidence that the Germans were a middle of the pack European economy and the Nazi’s efforts at rearmament, that started roughly the moment that they took power, constantly fell short of projections and objectives because of shortfalls in natural resources and manpower (hence the marriage of racism and necessity in the concentration camps). The Germans implemented the largest peacetime militarization in history, and their efforts still paled in comparison to what the Americans and Soviets were able to do once they decided to pick a side.
Nevertheless, Germany surprised everyone with the victory over France in 1940, and that clouds much of the common understanding of what happened. But as Tooze takes you through the economic history, what becomes clear is that the victory was more about strategic mistakes by the Allies than any overwhelming German military power under Hitler. Even at that moment in time, the Germans did not have vastly superior military assets, but instead were able to capitalize quickly on poor decisions by their enemies. Thus, as the ability to keep up military production constantly waned, the choice to invade the East was a foregone conclusion regardless of that first victory – because without the grain, oil and other resources that the Soviet Union represented, the Germans were eventually going to be defeated anyway. Moreover, as Tooze notes, when the actual strategy of the first victory is studied, it was not really repeatable. As demonstrated when it failed in the Soviet Union. The German war economy had debilitating limitations, and that trumped everything.
Tangentially, but sill interesting to me, the author notes the following: “Throughout the war, though a large part of German private income could not be spent, wages and salaries continued to rise, promising a higher post-war standard of living.” This line immediately brought me back to something that we have discussed several times on this site – the question of whether WWII brought the American economy out of depression. There are similarities between the Americans and Germans in this context – both faced conscription, rationing, and living without. All the German situation explicates is how that strategy promises you nothing, especially if you lose the war.
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