Finance and Econ From the Web: Everyone Loves Budget Deficits, the Next Obama, Bull/Bears On China

This week, we have a flurry of pieces on increasing US debt (the good and the bad), raising taxes on the rich and some excellent century-spanning data on English wealth. On growth, almost all economists expect a US recession by 2021 at the latest, the Fed hints at following BoJ policy if things get bad, and the geo-politics of trade agreements. On the latter, we also have some articles on the 5G issue and China as well as challenges China is facing in its Belt and Road Initiative. The markets side, a trading strategy that combines momentum and signals from the options market, an eye-opening interview with an algo trader and why hasn’t the euro become the reserve currency yet. Finally, some interesting angles on Trump and Brexit as well as a discussion of Germany stepping up its military influence. Enjoy

Inequality, Taxes and Debt

The Federal Debt of the United States, 1791 to 2018: A Presidential Ranking #3 Harry Truman, #2 Obama, #1…

Tax Luxury, Not Wealth Or Income “Extra consumption is not an important motivation for the superrich, so perhaps high taxes are not a disincentive…you want a punitive tax on very high consumption-say beyond $50,000,000/year”

Who’s Afraid Of Budget Deficits? I Am David Henderson questions advocates for deficits, like Larry Summers, who argue it is feasible because” the interest rate the federal government pays on the debt is so low.“. But Henderson suggests that “the fact that interest rates have been low for a long time is not strong enough evidence to conclude that they will remain low”. He goes on to show that CBO projections of a  small increases in the real interest rate will still see “ net interest on the debt as a percentage of GDP will almost double to 3% [by 2029], up from 1.6% in 2018. “

How America Learned to Stop Worrying and Love Deficits and Debt Since the election of a Republican President the new mantra has become from all sides has become “with low interest rates to the horizon, no evident inflation pressures, and with worthwhile policies that could enhance the nation’s long-term outlook — it’s foolish not to borrow money.” This has given rise to Modern Monetary Theory. Good article laying out a brief history of the politics around debt since the Clinton years.

The missing English middle class: Evidence from 60 million death and probate records Excellent research that looks at inheritance records and finds that the decline in the wealth share of the 1% over the 1900s only led to gains for the top 30%, the rest of the population hasn’t seen any gains. Moreover, the majority of the English die without any wealth to pass on. 

Business Cycle

Business Economists Expect Recession by 2021 “While only 10% of panelists expect a recession in 2019, 42% say a recession will happen in 2020, and 25% expect one in 2021.”

Digital Abundance and Scarce Genius: Implications for Wages, Interest Rates, and Growth Digital labor and capital can be reproduced much more cheaply than its traditional forms. But if labor and capital are becoming more abundant, what is constraining growth? We posit a third factor, ‘genius’, that cannot be duplicated by digital technologies…. Geniuses are those that possess exceptional talent. Their skills are not substituted by robots. Instead, they are relatively rare individuals who know how to leverage the new technology to create new goods, services, or enterprises.

Assessing U.S. aggregate fluctuations across time and frequencies  GDP growth is largely a high-frequency phenomenon whereby inflation and nominal interest rates are characterized largely by low-frequency components. In contrast, unemployment is a medium-term phenomenon

The role of financial constraints on labour share developments: macro- and micro-level evidence Technological advancements have been affecting labour shares through a steep decline in the relative price of investment goods. This has lowered the cost of capital allowing firms to replace labour with capital. Industries highly dependent on external finance face a lower decline in the labour share following a drop in the relative investment price than industries that are less dependent on external finance, possibly because they are more constrained in accessing funds to finance investment;

Work of the Past, Work of the Future Urban U.S. labor markets today are vastly more educated and skill-intensive than they were five decades ago. Yet, urban non-college workers currently perform substantially less skilled work than in prior decades. This deskilling reflects the joint effects of automation and international trade, which have eliminated the bulk of non-college production, administrative support, and clerical jobs, yielding a disproportionate polarization of urban labor markets. 

Monetary Policy

The Federal Reserve’s Review of Its Monetary Policy Strategy, Tools, and Communication Practices Richard Clarida talks possible new tools including “a temporary ceiling for Treasury yields at longer maturities by standing ready to purchase them at a preannounced floor price.”

Inflationary Effects of Trade Disputes with China The Fed estimates that the tariffs implemented thus far may have contributed an estimated 0.1% to CPI and an across-the-board 25% tariff on all Chinese imports would raise CPI  an additional 0.3%.

Markets

The euro’s global role in a changing world: a monetary policy perspective Speech by Benoît Cœuré, Member of the Executive Board of the ECB, “The decline in the euro’s international role in recent years is primarily a symptom of the initial fault lines in Economic and Monetary Union. There is thus a close alignment between the policies that will strengthen the euro’s global role and the policies that are needed to make the euro area more robust. “

Option-Implied Skewness and the Momentum Anomaly It seems that using option skewness as a signal can help avoid momentum strategy drawdowns.

Soybeans! “Global prices have converged, likely on the expectation of a trade deal with China. But the arbitrages that developed back when U.S. beans were selling at a discount are in some ways more interesting.” [good piece on the soybean market]

An Interview with an Anonymous Algorithmic Trader “At the end of the day, for the manager, it’s as important to gather a lot of assets as it is to run a successful strategy. And gathering assets can be largely a marketing game.”

Year One: Indonesian Coal Derivatives Didn’t know about this market, the CME does a review of it. 

The Greatest Investor You’ve Never Heard Of: An Optometrist Who Beat The Odds To Become A Billionaire “You take what you earn with the sweat of your brow, then you take a percentage of that and you invest it in other people’s labor,” Wertheim says of his near-religious devotion to tithing his wages into the stock market.

International  macro

The role of regulations and immigration in firms’ offshoring decisions Using data on 2,000 Danish manufacturing firms, the authors find higher levels of labour market rigidity, credit risk, and corruption all lower the probability of offshoring to a given country, while immigrant networks within the firm increase the likelihood of offshoring to their home countries. 

Mars or Mercury redux: the geopolitics of bilateral trade agreements ECB paper finds “that defense pacts boost the probability of trade agreements by as much as 20 percentage points.” And “were the U.S. to alienate its geopolitical allies, the likelihood and benefits of successful bilateral agreements would fall significantly”

China

Misreading China’s Strength Bullish China piece by Stephen Roach. Worth reading with a more agnostic piece China’s High Savings Rate

A crisis brewing in the Chinese labour market? Bearish China piece by George Magnus 

One key reason Trump delayed the trade deadline with China Good point that Trump could be using a delay to get China onside with North Korea.

Full steam ahead for China-Myanmar high-speed railway A long stalled rail project to connect the two nations has been given new impetus under Aung San Suu Kyi’s isolated government. Worth reading with this contrasting story on troubles with China’s investments in Pakistan: Balochistan: China’s achilles hill 

U.S.-China showdown: Huawei has ‘completely taken over’ the Mobile World Congress “Barcelona is normally the place where deals are made, with big announcements about carriers choosing equipment suppliers and discussions about 5G use cases. [but] the Huawei issue has now completely taken over the normal course of events.”

U.S. Efforts To Block Huawei Gives China An Advantage Useful summary of the issues around Huawei. Makes the point that “ It is currently the only provider that can deliver an end-to-end solution for 5G networks” and”  If ‘the west’ delays 5G deployment while China implements it, Chinese companies will have the time advantage to create the products which will run on top of the new global communication layer.”

US politics

Who Will Be The Obama Of 2020? FiveThirtyEight team debate this question. Punchline seems to be “ I tend to think Beto O’Rourke (if he decides to run) and Booker will end up running Obama-like campaigns, appealing to voters with personas as much as their policy agendas. I would put Kamala Harris in this group as well.”

The Classicist Who Sees Donald Trump as a Tragic Hero The author uses as many examples as he could of the classic Western: “whether it was “Shane” or “High Noon” or “The Magnificent Seven.” They all are the same—the community doesn’t have the skills or doesn’t have the willpower or doesn’t want to stoop to the corrective method to solve the existential problem, whether it is cattle barons or banditos. So they bring in an outsider, and immediately they start to be uneasy because he is uncouth—his skills, his attitude—and then he solves the problem, and they declare to him, whether it is Gary Cooper in “High Noon” or Alan Ladd in “Shane,” “I think it’s better you leave. We don’t need you anymore. We feel dirty that we ever had to call you in.” I think that is what is awaiting Trump.”

European issues

Contemporary European Historians on Brexit Great set of blogs, which asked 19 historians of Europe working within very different national and historiographical traditions to reflect on the historical significance and contexts that gave rise to Brexit and within which it should be understood. Includes titles like “Brexit: 100 Years in the Making,”, “‘Britain – the Sicily of Europe?’ Continental Perspectives on Britain’s Amour Propre,” and “New Versailles or a Velvet Revolution? Brexit and the Exits of Central and Eastern European History, 1916–2016,

Germany Lags Behind Asia in E-Car Battery Race The Chinese conglomerate CATL wants to build Europe’s largest electric car battery plant near Erfurt, Germany. Having failed to build a gigafactory of their own, German carmakers are worried the project represents a mortal threat.

Will Germany Permit Joint European Security? Former German Foreign Minister, Joschka Fischer, argues “Germany’s rearmament on its own would raise many questions and historical concerns. Rearmament with and for Europe and NATO, however, would be a completely different matter. One way or another, Europe must grow stronger. It is in everyone’s interest that Germany be productively engaged in that process.”

Bilal

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