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“Drowning in Debt”

By Shlomo Maital

debt drown

   A new report from McKinsey Global Research, “Global Debt: Challenges and Opportunities”, sounds the alarm, from a rather unlikely source – a consulting company that makes its living on optimism and activism.

   Here is what McKinsey says, worth heeding!

   ”The world is deep in a flood tide of debt. Do we care and what do we do about it?

….More than 8 years since the 2008 global financial crisis started the world seems to be drowning in debt. Global economic growth remains anemic..some economists attribute it to the high level of debt (govt., businesses, households have been devoting significant resources to debt servicing instead of productive activities).   …Global debt has been growing faster than the economy… as of mid 2015 it stood at 294 % of global gross domestic product, up 25 percee end of 2007 and 48 percentage points since the end of 2000. In many countries debt has increased to levels not normally seen during peacetime in advanced economies.”

     The world has painted itself into a corner.   Advanced economies desperately need major investments in infrastructure and human capital. Instead they are either a) slashing public spending, to try to control the high level of debt, or b) recycling huge debts, borrowing new money just to pay off old money, because slow growth has put the brakes on tax revenues and increased deficits.

       I see little sign of creative thinking to solve the problem.   Central Bankers recently meet at Jackson’s Hole, Wyoming, took off their ties and formal dress…. And heard Janet Yellen, head of the US Fed, speak about how she plans, maybe, perhaps, to raise interest rates a bit this year. In Europe the central bank continues to push negative interest rates, after everyone knows for sure that you cannot get out of the painted corner solely by adding to the already huge mountain of money.

     Does anyone have a creative idea? Our central bankers are completely out to lunch… literally.

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 Story-Driven Policy: Worth a Try!

By Shlomo  Maital

Kevin and Nicholas

Nicholas Kristof and friend Kevin Green, Yamhill

  The latest buzzword in professional and academic circles is “evidence-based”.  As an adjective, it modifies ‘psychology’,  ‘medical care’,  ‘policy’… everything.  Everything has to be evidence based. That usually implies a large data base mined for correlations.   Problem with that is,  G-d is in the details.  Truth is in the details.  By using data, especially Big Data, we miss the stories about the “little” people… forgotten people who struggle daily with illness, poverty, crime, drugs and other afflictions.  The Talmud says, If you save a single soul, it is as if you saved the whole world.  The point, of course, is to treat every single person with huge respect and massive importance.

    Today’s New York Times has two seemingly-unrelated stories that make this point perfectly.

    In his Op-Ed piece,  Nicholas Kristof mourns  the death of his school chum Kevin Green. They grew up together in Yamhill, Oregon, and ran cross-country together.  Kevin lost a good job, went on welfare, got divorced, became obese, lived on food stamps, got diabetes, and died at age 54.  Tea Party Republicans say he “had it easy because he got government benefits without doing anything”.  Kristof notes that Kevin collected cans and bottles by the roadside, to make $20 a day for subsistence.  Easy?  Want to trade places?  Did Republican wealth “trickle down” to Kevin and help him get a good job?  Not a chance.

    In Binyamin Applebaum’s piece on Washington, “Three stories illustrate Fed’s power and its limits”,  he covers Janet Yellen (Fed Chair) and her first speech.  Instead of an academic bore, quoting data, citing equations and analysis,   Yellen, who is brilliant, told the stories of three Chicago residents struggling to recover from the recession. She used their stories to explain why she will be very very slow and cautious in ending the Fed’s low-interest policy, despite Republican pressure to do so.   I wonder if she chose Chicago, because that is where President Obama lived and worked.

     All three ‘heroes’ in Yellen’s speech are struggling, but gaining ground.  Jermain Brownlee, 40, got a job building bus seats, though he makes less than he once did in construction.  Dorine Poole lost her job, then got a new one as a full-time office manager.  She makes $20,000 a year,  far less than the $32,000 she once made before the recession, as a claims processor.  Vicki Lara, 62,  lost her job in the recession and a year later, is serving food samples in a supermarket two days a week, six hours a day.  She wishes she could work more hours.  She owed $1,200 when she lost her job, and that debt has now ballooned to $3,700, with interest.  If she worked more, the companies to whom she owes money would simply garnish her wages.  So she had to decline a full-time job.   She told the NYT,  “When I walk home to catch the bus, I see five homeless people freezing in this weather…I wish I made enough money to help them.”

     Lots of people do make enough money to help them. But if you believe it’s their own fault, why bother?  Surely, they LOVE being homeless, outside, in the freezing cold.  Who wouldn’t? 

     I would like to see story-based policy.  If you want to cut welfare as a policy,  tell me a story about a real person and real events, to back up what you claim.    When I was a professor, I wrote papers based on data.  I always felt that the REAL story was in the story itself. But when I told stories, my papers were rejected, often with biting comments – because in Academe, “story” is a swear word.  Single cases, it is claimed, prove nothing.

    Wrong.  They prove everything.  They help us understand real people, real events, real problems.  When the U.S. Congress is populated by elected representatives, half of whom are millionaires, how in the world can they understand people like kevin, Vicki, Jerome or Dorine?    They can’t.      

QE RIP

By Shlomo Maital

QE3

  OK,  the Fed, under Janet Yellin, has officially ended QE3.  After injecting 4 trillions dollars of cash into the US economy,  $85 b. a month for almost four years, it’s over.  It’s time for a summary.  QE (quantitative easing, RIP, rest in peace).

  How well did it work?   Well, it was better than Europe’s austerity, and the EU learned nothing from Ben Bernanke’s aggressive actions to forestall a new Depression.  The U.S. unemployment rate is 5.9%,  GDP growth was 4.6% last quarter, and the dollar strengthened.   Is Europe paying attention?

  For investors?  The 3 QE plans created great uncertainty and volatility. Each time a QE (quantitative easing, meaning, the Fed buys bonds and injects money into the system, that banks can lend) was announced, the stock market rose (expecting some of the new money would go into equities) and each time it ended, the stock market fell. 

   Against expectations the QE 3  has actually lowered the 10 year Treasury bond rate, after it rose by 100 basis points.  This cost bond legend Bill Gross his job at PIMCO, the world’s biggest fixed income investment fund; he guessed wrong on the direction.

   Despite that mountain of money,   inflation remains low, because most of that money is just sitting there, not moving; money velocity has declined.  Deflation is the problem, in the U.S. but mostly in Europe. 

   Overall,  faced with the lack of fiscal policy (as politics forced Obama to slash the US federal budget deficit),  there was no other policy tool available to stimulate the economy, other than QE, boosting the supply of money.  It may yet prove harmful, because the dollar is the world’s currency, still, and there are far too many dollars washing around out there – they are causing property bubbles far away, even in Hong Kong and China.  But for now, it looks like the three QE programs led by Ben Bernanke worked not bad.  

   Let’s watch now how his successor Janet Yellin handles weaning Wall ST. from its junky addiction to cheap money.  

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
June 2019
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