Thursday, August 9, 2018

9/8/18: BRIC PMIs trace Global economy's slowdown at the start of 3Q

Recent PMIs for BRIC show a weaker start to 3Q 2018, in line with moderating growth outlook for the global economy:

In summary, Composite PMIs for July show Russia, China and Brazil underperforming global composite index, with India being the only BRIC economy trending in line with the global economy.  Much of this dynamic was down to Manufacturing sector, with Services supporting global economy to the upside:

The biggest downside momentum came from Russia's sub-50 reading in Manufacturing, followed by significant decline in growth activity in the sector in Brazil, and a more moderate slowdown in China:

For Russia, weaknesses in Manufacturing sector, for now offset by strengths in Services, are unpleasant reminders that the economy is still fundamentally on near-zero growth path, despite early 2018 hopes for 1.9-2 percent growth projections. For China, there are growing signs of the adverse impact of Trade War with the U.S. taking their toll on growth and cost dynamics.

Saturday, August 4, 2018

4/8/18: Collapsed Labor Share of Economy 1947-2016

The frightening fate of the U.S. labor is best highlighted by the share of labor in economic output. Fred database only provides the data through 2014, and then stops. BLS provides data through 3Q 2016, and then stops. No one bothers to measure the contribution of the largest factor of production to the economy any more. Here is the BLS data:

The share of labor contribution in total economic output has, basically, collapsed. The slide started with the technological revolutions of the 1960s and 1970s, followed by computerization and supply chain management revolutions of the 1980s and 1990s. But the real collapse took place starting with 2002 post-dot.Com bust. Despite the tight labor markets and very low unemployment, labor share never really recovered from this decimation.

If this chart offers a stark cross-reference to socio-political environment we are living in today, such cross-referencing is not ad hoc. Labor is what we, people, have to supply in return for the life's necessities and luxuries. For the majority of us, it is ALL that we can supply.  Even our assets, such as homes and pensions savings are, ultimately, tied to labor, not to capital, because their performance is linked to our peers' labor-paid demand. A middle class house is an asset to other middle class households. It is not an asset to the jet-set shopping for homes in the Hamptons. When that demand collapses, as is currently happening in a number of rapidly ageing economies, real assets we hold turn out to be if not completely worthless (, at least severely depressed in value (

So a decline in economic value added share accruing to labor is a transfer of income (and therefore wealth) from those who work for living to those who invest for living (invest in technology and/or financial assets). This game is a zero sum game even after we account for pensions funds and household investments: someone loses (labor), someone gains (investors). It is made even worse by higher taxes on labor and by transfers via monetary policy (Quantitative Easing).

The only way to offset such transfers is to vest labor with claims to financial returns. In other words, by providing workers with shares in the financial markets. Simply taxing and shifting income from higher earners to lower earners won't do the trick, because some higher earners are generating their income through labor (and human capital), while others are doing so through inherited and acquired financial assets. Taxing income of the latter implies taxing incomes of the former, which, in turn, depresses returns to investment in human capital (or, ultimately, returns to investment in labor).

Basic income structure of the future will have to achieve exactly that: create broad share ownership of financial instruments linked to financial and technological capital amongst those supplying labor.

Thursday, August 2, 2018

2/8/18: M&A Activity: More Concentration Risk Signals

In recent media analysis of the markets, less attention that the rise in shares buybacks has been given to the M&A markets. And there are some interesting observations to be made from the most recent data on these.

Top level (see for details) analysis is that the overall M&A markets activity is remaining at cyclical lows:

As the chart above shows both values and volumes of M&A activities are shrinking. But the numbers of mega deals are rising:

Per chart above, overall transactions in excess of $1 billion are at an all-time historical high. Per FactSet: "the first half of 2018 has reported the second-highest level of deals valued over $1 billion with 200 deals; the highest level was attained in the first half of 2007 with 210 deals. It is also worth noting that the streak of billion-dollar deals started in 2013, and since then there have been over 100 billion-dollar deals in each half-year. Even in the run-up to the financial crisis the streak was only three years (2005 to 2007). And to help complete the pattern, the dot-com boom had a similar three-year streak of 100 billion-dollar deals in each half-year from 1998 to 2000."

In other words, markets reward concentration risk taking. Mega deals generally add value through increased valuation of the acquiring firm, and through synergies on costs side. But they do not generally add value in terms of future growth capacity. Smaller deals usually add the latter value. Divergence between overall M&A activity and the mega-deals activity is consistent with the secular stagnation theses.

2/8/18: Shares Buybacks: the Evil Symptoms of an Ever More Evil Disease

Yesterday, I have posted a quite unusual (for my normal arguments) defense of the shares buybacks. Normally, as the readers of this blog know, I see buybacks as a net negative to organic investment. However, that view needs to be anchored to the economic conditions prevailing on the ground. In other words, buybacks are net negative for investment and organic economic growth, unless buybacks are companies' rational responses to specific economic and policy conditions.

With this in mind, here are my thoughts on the subject of buybacks that have accelerated in recent years:

The proposition that shares buybacks are ‘starving’ (aka slowing) the economy is false. And it is false for a number of reasons, listed below:

Reason 1: Stock buybacks can ONLY slow down economic growth in the conditions when new investment by firms can generate higher economic value added than other uses of funds in the economy (e.g. investment by other agents, than the firm, or increasing aggregate demand by investors recycling gains from buybacks into general consumption, etc). Currently, this does not appear to be the case. In fact, firms are hesitant to invest in the economy even when we control for buybacks. Thus, buybacks are similar to dividends: payouts of dividends and higher buybacks rates may signal lack of profitable investment opportunities for the firms.

Reason 2: Stock buybacks can slow down economic growth if they increase cost of capital for the firms. With equity capital (shares) being made superficially more expensive than debt (QE, tax preferences, demographic shifts in clientele reasons, etc), this is not the case. equity capital is currently more expensive than debt as a funding source for new investment for listed companies. While this situation may reverse in time (which it did only on very rare occasions in the past), companies today can borrow cheaply to retire expensive equity. This might not make sense from the economy point of view (rising degree of financial leverage, increasing risk of destabilising increases in debt carry costs, etc), it might make sense from the company and management point of view.

Reason 3: Stock buybacks can harm economic growth if they reduce returns on productivity (theory of labour productivity being unrewarded via slow wages growth). This too is not the case, because labour productivity and TFP have been collapsing since prior to the increases in shares buybacks. I wrote enough about this on this blog before in the context of the twin secular stagnations theses.

So what does the story of skyrocketing shares buybacks really tell us? The reality, consistent with Reasons 1-3 above, is that stock buybacks are a SYMPTOM of the disease, not the disease itself. Shares buybacks are driven by secular stagnation: more specifically, primarily by supply-side secular stagnation (S-SSS), and are second-order related to demand-side secular stagnation (D-SSS). How?

S-SSS implies lack of profitable investment opportunities for short and medium-term investments by the firms. With falling TFP & labour productivity, and with demographically-induced slowdown in demand, this is patently so. S-SSS also implies the need for protracted QE and other distortions in capital funding costs that disincentivise equity capital relative to debt funding channels.

D-SSS implies that with demographic, structural shifts in economic activity across generations, etc, aggregate demand side of the economy is getting pressured. Which means, again, 2nd order effects, adverse pressure on supply side.

So shares buybacks are NOT a disaster, nor a disease. The disease is the structure of the economy, with
- Technological & human capital productivity and innovation stalling,
- Adverse demographics undermining future economic capacity,
- Infrastructure investments yielding lower potential growth uplifts,
- Policies (monetary & fiscal) stuck in the 20th century extremes,
- Increasing concentration, monopolisation & oligopolization of the economy and the markets resulting in reduced entrepreneurial activity.

Shares buybacks & resulting wealth inequality or concentration are not orthogonal sets to the political & policy mismanagement that marks the last 25 years of our (Western) history. They are DIRECT outcome of these.

So, go ahead, political punks. Make the markets day. Shut down shares buybacks, so you can keep gerrymandering the economy, manipulating the markets, & bend the society to your desired ends. The longer you do this, the more you do this, the tighter is the lid on the pressure cooker. The more spectacular the blowout to follow.

Wednesday, August 1, 2018

1/8/18: Household Debt and the Cycle

So far, lack of huge uplift in household debt in the U.S. has been one positive in the current business cycle. Until, that is, one looks at the underlying figures in relevant comparative. Here is the chart from FactSet on the topic:

What does this tell us? A lot:

  1. Nominal levels of household debt are up above the pre-crisis peak. 
  2. Leverage levels (debt to household income ratio) is at 17 years low.
  3. Mortgage debt is increasing, and is approaching its pre-crisis peak: mortgage debt stood at $10.1 trillion in 1Q 2018, just 5.7% below the 2008 peak. 
  4. Consumer credit has been growing steadily throughout the 'recovery' period, averaging annual growth of 5.2% since 2010, bringing total consumer debt to an all-time high of nearly $14 trillion in early 2018. 
  5. While leverage has stabilized at around 95%, down from the 124% at the pre-crisis peak, current leverage ratio is still well-above the 58% average for 1946-1999 period.
  6. The above conditions are set against the environment of rising cost of debt carry (end of QE and rising interest rates). In simple math terms, 1% hike in interest rates will require (using 95% leverage ratio and 25-30% upper marginal tax brackets) an uplift of 1.19-1.24% in pre-tax income for an average family to sustain existent debt carry costs. 
The notion that the U.S. households are financially non-vulnerable to the cyclical changes in debt costs, employment and asset markets conditions is a stretch, even though the current levels of risks in leverage ratios are not exactly screaming a massive blow-out. Just as the U.S. Government has low levels of slack in the system to deal with any forthcoming shocks, the U.S. households have little cushion on assets side and on income / savings balances to absorb any significant changes in the economy.

As we say in risk management, the system is tightly coupled and highly complex. Which is a prescription for a disaster. 

1/8/18: Dynamic patterns in BTCUSD pricing: is there a new down cycle afoot?

Bitcoin Cycles Analysis in one chart:

As the above suggests, BTCUSD dynamics are signalling continued structural pressures on Bitcoin prices and the start of the new double-top down cycle. The Great Unknown remains with the behaviour of the buy-and-hold investors who dominate longer-term BTC markets. Increase in market breadth with arrival of more active traders from the start of 2018 has not been kind to Bitcoin. More institutional investment flowing into the cryptos market has been, on average, a net negative for the crypto.

Tuesday, July 31, 2018

31/7/18: 65 years of profligacy and few more yet to come: U.S. Government Deficits

The history and the future of the U.S. Federal Government deficits in one chart:

Which shows, amongst other things, that

  1. The post-2000 regime of deficits has shifted to a completely new trend of massively accelerating excessive spending relative to receipts;
  2. The legacy of the Global Financial Crisis and the Great Recession far exceeds traditional cyclical increases in deficits;
  3. The more recent vintage of the Obama Administration deficits has been more moderate compared to the peak crises years;
  4. The ongoing trend in the Trump Administration deficits is dynamically exactly matching the worst years of Obama Administration deficits, despite the fact that the underlying economic conditions today are much more benign than they were during the peak crises period under the Obama Administration; and
  5. Based on the most current projections, by the end of the year 2023, the U.S. is on track to increase cumulated deficit from USD 12.227 trillion at the end of 2016 to USD 20.466 trillion.  This would imply an average annual uplift of USD 1.177 trillion, which is significantly higher than the average annual increase in deficits of USD 838.3 billion recorded over the 2009-2016 period.
The good news is, fiscally responsible,  financially conservative, taxpayer interests-focused Republican Party has given full support to the Trump Administration on what in fact amounts to a restoration of the peak crises period trends in deficits accumulation.

30/7/18: Broader Unemployment vs Official Unemployment: Ireland

In the first post (see above) looking at the broader measures of unemployment and dependency ratios, recall that CSO publishes several extended series for broader unemployment rates. 

The official unemployment rate at 1Q 2018 stood at 6.4 percent (well within the pre-crisis historical range of the average of 5.31 percent and the 99% confidence interval of (3.70%, 6.92%). In more simple terms, statistically, the current official unemployment rate is indistinguishable from the average rate prevailing in 1Q 1998 - 4Q 2007. Which is the good thing, implying that in official terms, Irelands economy has recovered from the crisis at last. In fact, the recovery in official terms has been attained in 4Q 2017.

However, the CSO also reports the PLS2 measure of broader unemployment. The Above analysis was based on reported PLS1 data, covering unemployed plus discouraged workers, as a percentage of the labour force. Adding to the PLS1 those in potential additional labour force (basically able bodied adults who are neither employed nor unemployed, nor discouraged, and are not in studies or formal training), the CSO gets PLS2 measure of broader unemployment. In 1Q 208 this number read 10.2% of the Labour Force, plus Potential Additional Labour Force, which was statistically higher than the pre-Crisis average of 6.1% (falling into the 99% confidence interval range of (4.39%, 7.81%). In other words, the economy has not yet recovered from the Crisis based on PLS2 broader unemployment measure.

Extending PLS2 to cover all unemployed, plus those who want a job and not seeking for reasons other than being in education or training, in 1Q 2018 the broader PLS3 unemployment measure stood at 14.2 percent, unchanged on 4Q 2017. As with PLS2, the 1Q 2018 reading for PLS3 falls well beyond the range of the pre-crisis historical average of 8.36% (with 99% confidence interval of (6.52%, 10.20%).

As noted above, by two broader unemployment measures: PS2 and PLS3, Irish economy has not recovered from the crisis, even if we take a relatively benign recovery measure of the economy reaching the pre-crisis 1Q 1998 - 4Q 2007 average rate of unemployment. 

Worse, taking 4 year moving average and a 4 year rolling standard deviation in PS3 rates, 1Q 2018 PLS3 rate of 14.2% is closer to the upper margin of the 99% confidence interval for 1Q 2018 based on prior 4 years of data (the CI is given by (9.81%, 15.63%) range). Which means that 1Q 2018 data shows no statistically significant break-out from the PLS3 broader unemployment dynamics of the past 4 years. The same holds for the 5 years MA and rolling STDEV. 

So while the official unemployment readings are showing a very robust recovery, broader measures of unemployment continue to trend in line with the economy still carrying the hefty legacy of the recent crises. 

30/7/18: Ireland's employment data: Official Stats vs Full Time equivalents

Based on the most current data for Irish employment and working hours, I have calculated the difference between the two key time series, the Full Time Equivalent employment (FTE employment) and the officially reported employment.

Let’s take some definitions on board first:
  • Defining those in official employment: I used CSO data for “Persons aged 15 years and over in Employment (Thousand) by Quarter, Sex, and Usual Hours Worked”
  • Defining FTE employment, is used data on hours per week worked, using 40-44 hours category as the defining point for FTE. 
  • A note of caution, FTE is an estimated figures, based on mid-points of working time intervals reported by the CSO.

Based on these definitions, in 1Q 2018, there were 2.2205 million people in official employment in Ireland. However, 51,800 of these worked on average between 1 and 9 hours per week, and another 147,300 worked between 10 and 19 hours per week. And so on. Adjusting for working hours differences, my estimated Full Time Equivalent number of employees in Ireland in 1Q 2018 stood at 1.94223 million, or 278,271 FTE employees less than the official employment statistics suggested. The gap between the FTE employment and officially reported number of employees was 12.53%.

I defined the above gap as “Employment Hours Gap” (EHG): a percentage difference between those in FTE and those in official employment. A negative gap close to zero implies FTE employment is close to the official employment, which indicates that only a small proportion of those in employment are working less then full-time hours.

All the data is plotted in the chart below

Per chart above, the following facts are worth noting:
  1. In terms of official employment numbers, Ireland’s economy has not fully recovered from the crisis. The pre-Crisis peak official employment stands at 2.2522 million in 3Q 2007. The bad news is: as of 1Q 2018, the same measure stands at 2.2205 million.
  2. In terms of FTE employment, the peak pre-Crisis levels of employment stood at 1.9261 million in 3Q 2017. This was regained in 3Q 2017 at 1.9444 million. So the good news is that the current recovery is at least complete now, after a full decade of misery, when it comes to estimated FTE employment.

The improved quality of employment as reflected in better mix of FT and  >FT employees in the total numbers employed, generated in the recent recovery, is highlighted in the chart as well, as the gap has been drawing closer to zero.

One more thing worth noting here. The above data is based on inclusion of the category of employees with “Variable Hours”, which per CSO include “persons for whom no usual hours of work are available”. In other words, zero-hours contract workers who effective do not work at all are included with those workers who might work one week 45 hours and another week 25 hours. So I adjust my FTE estimated employment to exclude from both official and FTE employment figures workers on Variable Hours. The resulting change in the EHG gap is striking:

Per above, while the recovery has been associated with a modestly improving working hours conditions, it is now clear that excluding workers on Variable Hours’ put the current level of EHG still below the conditions prevailing in the early 2000s. More interestingly, we can see a persistent trend in terms of rising / worsening gap from the end of the 1990s through to the end of the pre-Crisis boom at the end of 2007, and into the collapse of the Irish economy through 2012. The post-Crisis improvement in Employment Hours Gap has been driven by the outflows of workers from the Variable Hours’ to other categories, but when one controls for this category of workers (a category that is effectively ‘catch-all-others’ for CSO) the improvements become less dramatic.

Overall, FTE estimates indicate some problems remaining in the Irish economy when it comes to the dependency ratios. Many analysts gauge dependency ratios as a function of total population ratio to those in official employment. The problem, of course, is that the economic capacity of someone working close to 40 hours per week or above is not the same as that of someone working less than 20 hours per week.

Note: More on dependency ratios next. 

30/7/18: Egg Misses the Face at the Atlantic Council: Dodgy Banks, Dodgy Reports

Buzzfeed report throws unwanted light onto the tight rope walking at the Atlantic Council, where some august fellows are earning cash on the sidelines of private sector clients with questionable reputation:

A Report On Money Laundering At Latvian Banks Raises Questions About Conflict Of Interest At The Atlantic Council

Buried at the end of the report is this quote from Damon Wilson, the council’s executive vice president: "Every Latvian politician has worked with and knows us..." Which does lift the proverbial rug just a notch over the proverbial pile of history compiled underneath the Council: the organization has been a de facto go-to shop for framing politics of Eastern Europe. The real scandal, of course, is right there. Just imagine the screams from the media if a private initiative, say called Cambridge Analytica, uttered a similar statement in public? And yet, the AC can make such a statement in defence of its activities. Smell the salts?

30/7/18: Impact of Terrorist Events on European Equity Markets

Our recent paper on the impact of terrorist events on equity markets valuations in Europe has been published in the Quarterly Review of Economics and Finance (November 2017):

Monday, July 30, 2018

30/7/18: Annotated History of the U.S. Treasury Yield Curve

Courtesy of the forgotten source (apologies) a neat summary chart plotting the timeline of the 10 year U.S. Treasury yield:

For referencing purposes… 

30/7/18: Corruption Perceptions: Tax Havens vs U.S. and Ireland

Transparency International recently released its annual Corruption Perceptions Index, a measure of the degree of public concerns with corruption, covering 180 countries. 

The Index is quite revealing. Not a single large economy is represented in the top 10 countries in terms of low perceptions of corruption. Worse, for a whole range of the much ‘talked about’ tax havens and tax optimising states, corruption seems to be not a problem. Switzerland ranks 3rd in the world in public perceptions of corruption, Luxembourg ranks 8th, along with the Netherlands, and the world’s leading ‘financial secrecy’ jurisdictions, the UK. Hong Kong is ranked 13th. Ireland is in a relatively poor spot at 19th place. 

American exceptionalism, meanwhile, continues to shine. The U.S. occupies a mediocre (for its anti-corruption rhetoric and the chest-thumping pursuits of corrupt regimes around the world) 16th place in the Corruption Perception Index, just one place above Ireland, and in the same place as Belgium and Austria (the former being a well-known centre for business corruption, while the latter sports highly secretive and creative, when it comes to attracting foreign cash, financial system). UAE (21st), Uruguay (23rd), Barbados (25th), Bhutan (26th) and more, are within the statistical confidence interval of the U.S. score. 

And consider Europe. While most of the Nordic and ‘Germanic’ Europe, plus the UK and Ireland, are  in top 20, the rest of the EU rank below the U.S. All non-EU Western European countries, meanwhile, are in the top 15. 

Now, in terms of dynamics, using TI’s data that traces comparable indices back to 2012:
- The U.S. performance in terms of corruption remains effectively poor. The country scored 73 on CPI in 2012-2013, and since then, the score roughy remained bounded between 74 and 75. Ireland, however, managed to improve significantly, relative to the past. In 2012, Irish CPI score was 69. Since then, it rose to a peak of 75 in 2015 and is currently standing at 74. So in terms of both 2012 to peak, and peak to 2017 dynamics, Ireland is doing reasonably well, even though we are still suffering from the low starting base. 

Hey, anyone heard of any corruption convictions at the Four Courts recently?

30/7/18: Burden Sharing, Reforms and Greece

Much has been said in recent years about European reforms, recovery, burden-sharing and Greece. Most of it draws links of causality along the following lines:

  • Greek crisis has been resolved on the basis of the country adoption of European and IMF-structured reforms, and no burden-sharing is needed to make things right;
  • European recovery has been organically linked to European reforms, which include future burden-sharing mechanism; and
  • No burden-sharing mechanism has been deployed during the European recovery period anywhere.
In other words, both, Greece and Europe at large are enjoying an ongoing recovery that has been underpinned by reforms, not by burden-sharing arrangements of any sort.

And yet, contrasting experts reports, Greece continues to provide evidence to the contrary:

  1. European recovery has been asymmetric to the Greek situation, where lack of tangible recovery is keeping the country constantly on the edge of slipping back into 'assisted living' via official external lenders;
  2. The above happened despite the fact that Greece has adopted more 'reforms' than any other European economy; and
  3. The above has happened during the extended period of asymmetric and massive-scale burden-sharing carried out by the ECB via its QE (Greece received no QE benefits, while the rest of the Euro area enjoys huge fiscal support subsidies from Frankfurt).
How do we know this? Why, look at the latest fiasco with Greek bonds (not covered by ECB's QE) in contrast with Italian bonds (covered by QE):

So, about the effectiveness of those reforms,  and no-burden-sharing, then...

Monday, July 16, 2018

16/7/18: Wither Free Market America

Prior to the 1990's, “U.S. markets were more competitive than European markets”, with the U.S. having a lead-start on the EU of some decades, if not centuries, when it comes to the anti-trust laws and anti-true enforcement. In fact, as noted by Germán Gutiérrez and Thomas Philippon in their new paper “HOW EU MARKETS BECAME MORE COMPETITIVE THAN US MARKETS: A STUDY OF INSTITUTIONAL DRIFT” (NBER Working Paper 24700 June 2018), it was Europe that largely copied the U.S.  legal and regulatory frameworks for dealing with excessive concentration of the market power. Thus, given the “initial conditions, one would have predicted that U.S. markets would remain more competitive than European (EU) markets.” Except they did not. As Gutiérrez and Philippon show, the U.S. “experienced a continuous rise in concentration and profit margins starting in the late 1990s. And, perhaps more surprisingly, EU markets did not experience these trends so that, today, they appear more competitive than their American counter-parts.”

“Figure 1 illustrates these facts by showing that profit rates and concentration measures have increased in the US yet remained stable in Europe. In addition, note that the U.S the increased integration among EU economies essentially shifts the appropriate measure of concentration from the red dotted line towards the blue line with triangles – which further strengthens the trend."

Figure 1: Profit Rates and Concentration Ratios: US vs. EU

Source:  Gutiérrez and Philippon (2018)

So, in summary, today, “European markets have lower concentration, lower excess profits, and lower regulatory barriers to entry.” even looking at specific industries “with significant increases in concentration in the U.S., such as Telecom and Airlines, and show that these same industries have not experienced similar evolutions in Europe, even though they use the same technology and are exposed to the same foreign competition” (see chart below).

Source:  Gutiérrez and Philippon (2018)

Of course, the point of reduced degree of competition in the U.S. markets is hardly new. I wrote about this on numerous occasions, including covering evidence on the U.S. markets monopolization, oligopolization and markets concentration risks (see links here: and I wrote about these phenomena in the context of the growing trend toward de-democratization of the U.S. politics (see:  Hence, the main issue with this evidence is: “what explains the U.S. trend in contrast to the EU?”

Gutiérrez and Philippon (2018) argue that politicians care about consumer welfare but also enjoy retaining control over industrial policy. We show that politicians from different countries who set up a common regulator will make it more independent and more pro-competition than the national ones it replaces.” In other words, once politicians surrender control to a multinational institution (e.g. the EU or ‘Brussels’ or, in the case of Switzerland, to the umbrella-type Federal Government), they tend to favour such new institutional arrangement to be more independent from national politics.

Hence, as Gutiérrez and Philippon (2018) more, “European institutions are more independent than their American counterparts, and they enforce pro-competition policies more strongly than any individual country ever did. Countries with ex-ante weak institutions benefit more from the delegation of antitrust enforcement to the EU level. “ These dynamics are reflected in the switch from the ’average of the nation states’ red dotted line in the chart above, toward a unified EU-wide measure reflected by the blue line.

This theoretical view produces three treatable hypotheses: if Gutiérrez and Philippon (2018) are correct, then:
1. EU countries agree to set up an anti-trust regulator that is tougher and more independent than their old national regulators (and the US)
2. US firms spend more on lobbying US politicians and regulators than EU firms.
3. Countries with weaker ex-ante institutions benefit more from supra-national regulation.

For Hypothesis 1, the authors look at merger and non-merger reviews and remedies that form “an EU-level competency”. Gutiérrez and Philippon (2018) “show that DG Comp is more independent and more pro-competition than any of the national regulators, including the U.S.” Furthermore, “enforcement has remained stable (or even tightened) in Europe while it has become laxer in the U.S.” More ominously (for the consumption-based economy like the U.S.), product market regulations, usually a shared competency between the member state and the EU, the authors “find that the EU has become relatively more pro-competition than the U.S. over the past 15 years. Product market regulations have decreased in Europe, while they have remained stable or increased in the U.S.”

For Hypothesis 2: Gutiérrez and Philippon (2018) look at political expenditures, and show that “U.S. firms spend substantially more on lobbying and campaign contributions, and are far more likely to succeed than European firms/lobbyists.”

For Hypothesis 3: Gutiérrez and Philippon (2018) show that “EU countries with initially weak institutions have experienced large improvements in antitrust and product market regulation. Moreover, we find that the relative improvement is larger for EU countries than for non-EU countries with similar initial institutions.”

There is, of course, a remaining issue left unaddressed by the three hypotheses above: does more enforcement by more independent regulators inhibit innovation and competition? In other words, is European advantage over the U.S. a de facto Trojan Horse by which inhibiting regulation enters the markets? Gutiérrez and Philippon (2018) “find no evidence of excessive enforcement in Europe: enforcement leads to lower concentration and profits but we find no evidence of a negative impact on innovation. If anything, (relative) enforcement is associated with faster future (relative) productivity growth, although the effects are small.”

So, put simply, part of the increasing market concentration and power in the U.S. can be explained by the tangible politicization of the American regulatory environment. Of course, as noted in my own posts on the subject (see link above), this political channel for monopolization reinforces industry structure channel (ICT ‘disruption’ channel) and other channels that support increased market power for dominant firms. All of this, taken together, means one thing: the U.S. is falling dangerously behind in terms of the degree of its economy openness to challengers to the dominant firms, resulting in barriers to entrepreneurs, innovators and smaller enterprises. The costs of this ‘Google Syndrome’ are mounting, ranging from depressed wages, to jobs insecurity, to lack of investment and productivity growth, to growing voters unease with the status quo.

The premise of the Free Markets America no longer holds. Worse, Social(list) Europe is now beating the U.S. in its own game.

Sunday, July 15, 2018

14/7/18: Elephants. China Shop, Enters a Mouse: Global Debt Bubble

Bank for International Settlements Annual Report for 2018 has a very interesting set of charts covering the growing global debt bubble, one of the key risks to the global economy highlighted in the report.

First, levels:

  • Global debt rose from 179% of GDP at the end of 2007 to 217% at the end of 2017 - adding 38 percentage points to the overall leverage carried by the global economy.
  • The rise has been more dramatic for the Emerging Economies, with debt levels rising from 113% of GDP to 176% between the end of 2007 and the end of 2017, a net addition of 63 percentage points.
  • Advanced economies faired somewhat better, posting an increase from 233% of GDP to 269%, a net rise of 36 percentage points.
  • As it stood at the end of 2017, Global Debt was well in excess of x3 the Global GDP - a degree of leverage not seen in the modern history.

As noted by BIS: “ markets are overstretched, as noted above, and we have seen a continuous rise in the global stock of debt, private plus public, in relation to GDP. This has extended a trend that goes back to well before the crisis and that has coincided with a long-term decline in interest rates".

Next, impacts of monetary policy normalization:

As the Central Banks embark on gradual, well-flagged in advance and 'orderly' overall rates and asset purchases 'normalization', the global economy is likely to bifurcate, based on individual countries debt exposures. As the chart above shows, impact from a modest, 100bps hike in rates, will be relatively significant for all economies, with greater impact on highly indebted countries.

Per BIS: "Since the mid-1980s, unsustainable economic expansions appear to have manifested themselves mainly in the shape of unsustainable increases in debt and asset prices. Thus, even in the absence of any near-term market disruptions, keeping interest rates too low for too long could raise financial and macroeconomic risks further down the road. In particular, there are reasons to believe that the downward trend in real rates and the upward trend in debt over the past two decades are related and even mutually reinforcing. True, lower equilibrium interest rates may have increased the sustainable level of debt. But, by reducing the cost of credit, they also actively encourage debt accumulation. In turn, high debt levels make it harder to raise interest rates, as asset markets and the economy become more interest rate-sensitive – a kind of “debt trap”."

Thus, the impetus for rates and monetary policies normalisation is the threat of continued debt bubble inflation, but the cost of such normalisation is the deflation of the debt bubble already present. In other words, there's an elephant and here's the china shop.

"A further complication in calibrating normalisation relates to the need to build policy buffers for the next downturn. Indeed, the room for policy manoeuvre is much narrower than it was before the crisis: policy rates are substantially lower and balance sheets much larger". And here's the mouse: cyclically, we are nearing the turning point in the current expansion. And despite all the PR releases about the 'robust recovery' current up-cycle in the global economy has been associated with lower growth rates, lower productivity growth, lower real investment (as opposed to financial flows), and more debt than equity (see

In other words, things are risky, but also fragile. Elephants in a china shop. Enters a mouse...

14/7/18: The Second Longest Recovery

One chart never ceased to amaze me - the one that shows just how unimpressive the current 'second longest in modern history' recovery (and only 9 months shy of it being the 'first longest') has been, and just how sticky the adverse shocks impacts can be in modern crises that can be best described by the VUCA (volatility, uncertainty, complexity and ambiguity) environment:

The fact that the current recovery cycle has been weak is only one part of the story, however, that would be less worrying if not for the second part. Namely, that almost every successive recovery cycle in the past three decades has been weaker than the previous one.

Here is a handy summary of the recovery cycles in the last four recessions based on annual data, for real GDP and real GDP PPP-adjusted:

Friday, July 13, 2018

12/7/18: Technology, Government Policies & Supply-Side Secular Stagnation

I have posted about the new World Bank report on Romania's uneven convergence experience in the previous post (here). One interesting chart in the report shows comparatives in labour productivity growth across a range of the Central European economies since the Global Financial Crisis.

The chart is striking! All economies, save Poland - the 'dynamic Tigers of CEE' prior to the crisis - have posted marked declines in labour productivity growth, as did the EU28 as a whole. When one recognises the fact 2008-2016 period includes dramatic losses in employment, rise in unemployment and exits from the labour force during the period of the GFC, and the subsequent Euro Area Sovereign Debt Crisis - all of which have supported labour productivity to the upside - the losses in productivity growth would be even more pronounced.

This, of course, dovetails naturally with the twin secular stagnations thesis I have been writing about in these pages before. In particular, this data supports the supply-side secular stagnation thesis, especially the technological re-balancing proposition that implies that since the late 2000s, technological innovation has shifted toward increasingly substituting sources of economic value added away from labour and in favour of software/robotics/ICT forms of capital:

Human capital is the only offsetting factor for this trend of displacement. And it is lagging in the CEE:

But the problem is worse than simple tertiary education figures suggest. Current trends in technological innovation stress data intensity, AI and full autonomy of technological systems from labour and human capital. Which implies that even educated and skilled workforce is no longer a buffer to displacement.

As the result, in countries like Romania, with huge slack in human capital and skills, investment is not flowing to education, training, entrepreneurship and other sources of human capital uplift:

While barriers to entrepreneurship remain, if not rising:

In effect, technological innovation in its current form is potentially driving down not only productivity growth, but also labour force participation. The result, as in the economies of the West:

  1. Notional large scale decline in official unemployment (officially unemployed numbers are down)
  2. Significant lags in recovery in labour force participation (hidden unemployed, permanently discouraged etc numbers are up)
  3. The two factors somewhat offset each other in terms of superficially boosting productivity growth (with real productivity actually probably even lower than the official figures suggest)
These three factors contribute to an expanding army of voters who are marginalised within the system.

Romania is a canary in the European secular stagnation mine. 

12/7/18: Romania's Uneven convergence Path: 2007-2018

A new World Bank report, led by Donato De Rosa, covers Romania's reforms and economic development experience. Worth a read! |
"From Uneven Growth to Inclusive Development : Romania's Path to Shared Prosperity"

Quick summary:

  • "Romania’s transformation has been a tale of two Romanias: one urban, dynamic, and integrated with the EU; the other rural, poor, and isolated."
  • "Reforms spurred by EU accession boosted productivity ...GDP per capita rose from 30 percent of the EU average in 1995 to 59 percent in 2016."
  • "Today, more than 70 percent of the country’s exports go to the EU, and their technological complexity is increasing rapidly... the gross value added of the information and communications technology (ICT) sector in GDP, at 5.9 percent in 2016, is among the highest in the EU."
  • "Yet Romania remains the country in the Union with by far the largest share of poor people, when measured by the $5.50 per day poverty line (2011 purchasing power parity)".  More than 26% of country population lives below that poverty line, "more than double the rate of Bulgaria (12%)."

  • "While Bucharest has already exceeded the EU average income per capita and many secondary cities are becoming hubs of prosperity and innovation, Romania remains one of the least urbanized countries in the EU, with only 55 percent of people living in cities."
  • "Overall, access to public services remains constrained for many citizens, particularly in rural areas, and there is a large infrastructure gap, which is a drag on the international competitiveness of the more dynamic Romania and limits economic opportunities for the other Romania in lagging and rural areas."
The positive effects of Accession were frontloaded, when it comes to structural reforms:
  • "Romania was invited to open negotiations with the EU in December 1999.  Until Romania joined in January 2007, EU accession remained an anchor for reforms, providing momentum for the privatization and restructuring of SOEs and for regulatory and judiciary reforms."
  • "Output gradually recovered, and until 2008 the country enjoyed high but volatile growth... Unemployment was on a declining trend, but youth and long-term unemployment remained elevated. Skills and labor shortages became increasingly widespread. High inactivity persisted stubbornly, particularly among women. Gains in labor force participation were modest overall. ...Inequality increased further, as large categories of people—the Roma in particular—continued to be excluded from the benefits of growth."
  • "Although output has recovered since 2008, institutional shortcomings have compounded the effects of the crisis, contributing to significant setbacks in poverty reduction, and are again leading to macroeconomic imbalances."
  • "Fiscal consolidation during 2009–2015 has helped place economic growth on a strong footing. However, lack of commitment and underfunding for the delivery of public services and poor targeting of social programs have contributed to the negative income growth of the bottom 40 percent of the income distribution (the so-called bottom 40) in 2009–2015, with poverty remaining above pre-crisis levels, and inequality still among the highest in the EU."

Saturday, July 7, 2018

Friday, July 6, 2018

6/7/18: Central Bank of Russia Injects Capital in Three Lenders, Continues Sector Restrcturing

Reuters reported ( on Central Bank of Russia (CBR) setting up a 'bad bank' to resolve non-performing assets in three medium- large-sized banks that CBR controls. In 2016, the CBR took over control over three medium- large-sized banks, Otkritie, B&N Bank and Promsvyazbank. Last month, the CBR announced an injection of RB 42.7 billion of funds to recapitalise Otkritie with funds earmarked to cover losses in Otkritie's pension fund.  Most Bank received RB37.1 billion in new capital. The CBR also deposited RB 174.2 billion (USD2.78 billion) in three banks (RB63.3 billion of which went to Otkritie) on a 3-5 years termed deposit basis.

The funds will be used to reorganise banks operations and shift non-performing and high risk assets to a Trust Bank-based 'bad bank' which will operate as an asset management company.

After divesting bad loans, Otkritie is expected to be sold back to private investors.

CBR's total exposure to troubled banks is now at RB 227 billion (USD3.5 billion), with CBR having spent RB 760 billion (USD 12 billion) on its overall campaign to recapitalise troubled lenders. CBR holds RB 1.3 trillion (USD30 billion) on deposit with lenders it controls.

As BOFIT note: "...the CBR to date has used over 45 billion USD (about 3% of 2017 GDP) in supporting the three banks that it took over last year. Some of this amount, however, should be recovered when assets in banks acquired by the CBR are sold off as well as in the planned privatisations of the banks." At the beginning of June, Otkritie stated that the bank aims to float a 15-20% stake in 2021. The bank said t's target for pricing will be "at least 1.3 times the capital the bank has at the end of 2020". Otkritie targets return on equity of 18% in 2020, and so far, in the first five months of 2018, the bank made RB 5.4 billion in net profit, per CBR.

Otkritie ranked sixth largest bank in Central and Eastern Europe by capitalisation by The Banker in 2017 prior to nationalisation. Following nationalisation, Otkritie ranked 16th in CEE, having lost some USD2.4 billion in capital.

Another lender, Sovetsky bank from Saint Petersburg lost its license on July 3. The bank gas been in trouble since February 2012 when the CBR approved its first plans for restructuring. In February 2018, the bank was in a "temporary administration" through the Banking Sector Consolidation Fund. The latest rumours suggest that Sovetsky deposits and loans assets will retransferred to another lender.  Sovetsky was under original administration by another lender, Tatfondbank, from March 2016, until Tatfondbank collapsed in March 2017 (official CBR statement, and see this account of criminal activity at the Tatfondbank: and Tatfondbank's tangible connection to Ireland's IFSC was covered here:

Overall, CBR have done as good a job of trying to clean up Russian banking sector mess, as feasible, with criminal proceedings underway against a range of former investors and executives. The cost of the CBR-led resolution and restructuring actions has been rather hefty, but the overall outrun has been some moderate strengthening of the sector, hampered by the tough trading conditions for Russian banking sector as a whole. A range of U.S. and European sanctions against Russian financial institutions and, more importantly, constant threat of more sanctions to come have led to higher funding costs, more acute risks profiles, lack of international assets diversification, and even payments problems, all of which reduce the banking sector ability to recover low quality and non-performing assets. The CBR has zero control over these factors.

Russia currently has 6 out of top 10 banks in CEE, according to The Banker rankings:


These banks are systemic to the Russian economy, and only the U.S. sabre rattling is holding them back from being systemic in the broader CEE region. This is a shame, because opening up a banking channel to Russian economy greater integration into the global financial flows is a much more important bet on the future of democratisation and normalisation in Russia than any sanctions Washington can dream up.

As an aside, new developments in the now infamous Danske Bank case of laundering 'blood money' from Russia, relating to the Magnitzky case were reported this week in the EUObserver:

Thursday, July 5, 2018

5/7/18: Does the WTO treat the U.S. "very badly"?

Yesterday, President Trump has suggested that the WTO is treating the U.S. "very badly"

In reality, the U.S. leads WTO in terms of dispute resolutions wins and in terms of intransigence to WTO functioning and reforms. Here is a slide from my lecture on international institutions frameworks highlighting this fact:
In the previous post, I also shown that the U.S. contributes disproportionately less than the EU and China to WTO budget:

In fact, back in October 2017, President Trump claimed that: Trump, Oct. 25: "The WTO, World Trade Organization, was set up for the benefit for everybody but us. They have taken advantage of this country like you wouldn’t believe. And I say to my people, you tell them, like as an example, we lose the lawsuits, almost all of the lawsuits in the WTO — within the WTO. Because we have fewer judges than other countries. It’s set up as you can’t win. In other words, the panels are set up so that we don’t have majorities. It was set up for the benefit of taking advantage of the United States."

WTO dispute resolution rules require that none of the panelists on each 3-person panel hearing disputes cases can be from the country involved in a dispute (per Article 8: In other words, the number of experts from any particular country that are available to serve on dispute resolution panels is immaterial to the experts service in the U.S. dispute cases.

In reality, thus, the U.S. loses slightly fewer cases brought against it, than it wins cases brought against other nations by it. The high rates of U.S. losses and wins are fully comparable with those of other advanced economies and reflect, in fact, not some WTO bias against any given nation, but rather the simple fact that majority of nations, including the U.S. tend to bring to the WTO arbitration only such cases where concerns raised are well-founded and researched. Which, in effect, means that the WTO dispute resolutions system (slow as it might be) is effective at restricting the number of frivolous cases being brought to resolution, aka, a good thing.

Much of the above evidence does not just come from my own arguments alone. Here is an intelligent and pro-trade set of arguments about why the U.S. claims of unfair treatment under the WTO regime are not only wrong, but actually conceal the much less pleasant protectionist reality of the Washington's policies:

Tuesday, July 3, 2018

3/7/18: China, EU and U.S.: Arch Stanton's grave

In a recent statement on Fox News, the U.S. President has compared China and the EU in quite stark and unfavourable, to the EU, terms: ""The European Union is possibly as bad as China, just smaller. It’s terrible what they do to us,” Trump said." Contextually, the statement relates to trade, but it prompted a torrent of replies from Mr. Trump critics, pointing to various aspects of the statement as being untrue. One example:

The problem is, as commonly the case with economic statistics, there is a number to suit any point of view, and the choice of metrics matters.

  • GDP comparatives 1: in current prices terms, expressed in billions of U.S. dollars, China's GDP in 2017 was USD12.015 trillion, against the EU's USD 17.309 trillion. The EU was 'bigger' if not 'badder' than China. The U.S, was 'bigger' than both at USD 19.391 trillion.
  • GDP comparatives 2: in Purchasing Power adjusted terms (expressed as International dollars to take account of exchange rates differentials and price differences), China GDP was IUSD23.159 trillion against smaller EU GDP of IUSD 20.983 trillion and even lower U.S. GDP of IUSD19.391 trillion. Since PPP adjustment, imperfectly, accounts for the simple fact than people in China and the EU do not live in a dollar-priced world, although some of their imports do reflect dollar-priced goods and services, this is one of the salient measures for comparing three economies. And by this measure, Mr. Trump is correct: the EU is 'smaller' than China, although the U.S. is smaller than both.
  • Trade measures: EU ranks second in the world in terms of exports and imports of merchandise trade (excluding intra-EU trade), and it ranks first in the world in terms of exports and imports of services; with total extra-EU trade accounting for 16.8 percent of EU GDP. Merchandise exports amounted to USD 1.932 trillion in 2016, with merchandise imports of USD 1.889 trillion, services exports of USD917 billion against services imports of USD771.8 billion. China ranked first in the world in merchandise exports and second in the world in merchandise imports, fifth in commercial services exports and second in services imports. China's trade with the rest of the world amounted to 20 percent of its GDP, with merchandise exports and imports of USD2.098 trillion and USD1.587 trillion, respectively, and services exports and imports of USD207.3 billion and USD449.8 billion respectively. So total EU trade volumes were USD 5.51 trillion in 2016 against China's USD 4.342 trillion. 'Large' Europe, 'small' China. The U.S. total trade volumes with the rest of the world were between the two at USD4.921 trillion, making the U.S. smaller than the EU.
'Badness measures':
  • One possible measure of a nation's 'badness' in trade is the number of official disputes involving that nation as a complainant or the respondent in the WTO. Per WTO 2018 Annual Report, over 1995-2017 period, the U.S. were involved in 115 disputes as a complainant and 134 disputes as a respondent. 'Badsky' China numbers were 15 and 39 respectively - both, fractions of the U.S. Aggregating the EU member states' numbers, EU was involved in 107 and 122 disputes, respectively, although omitting states' disputes before they joined as the EU members reduces these numbers to 98 and 111. Which means the EU is 'worse' than China, but 'better' than the U.S. when it comes to following rules-based trade. The comparative, of course, is distorted by shorter duration of China membership. Adjusting for that, China figures rise to around 50 disputes filed and 160-170 disputes responded, making things even more complicated in terms of 'badness'.
  • Another possible measure is the current account surplus each country / block runs against its trading partners. IMF delivers some stats. The U.S. is the 'Goldilocks goodie' in that department, using dollar reserve currency status to run massive deficits at USD 466.25 billion in 2017 (similar to 2016 USD451.7 billion deficit, but vastly smaller than the IMF-projected CA deficit of USD614.7 billion for 2018 - all praise Mr. Trump's profligacy). China is clearly a 'baddy' in these terms, with a current account surplus of USD 164.9 billion in 2017, down on USD202.2 billion in 2016. The EU, however, is in the league of its own 'awfulness', with current account surplus of USD417.24 billion in 2017 up on surplus of USD332.5 billion in 2016. So the EU is 'badder' than the already 'bad' China in these terms.
  • Third measure of 'badness' as it relates to trade is the physical support for WTO by each country/block, which can be measured by the annual share of each in total WTO budget. Again, per WTO report cited above: the EU share of total WTO budget is 33.6 percent, against the U.S. 11.38 percent and China 9.84 percent. While China's budget contribution should be lower due to the country having s bizarre, 'non-market economy' status in WTO standing, U.S. contribution is small relative to the country's share of global GDP, while EU's share is disproportionately large. Who's the 'baddest' in these terms?
  • Fourth measure of 'badness' can be trade-weighted average tariff imposed by the country. WTO latest data on this covers 2015. The EU run 3.0% trade-wighted average tariff across all of its trade, with average agricultural tariff of 7.8% and average non-agricultural tariff of 2.6% with 100% binding coverage. China average trade-weighted tariff was 4.4% (agricultural 9.7% and non-agricultural 4 percent) with 100% binding coverage. Which makes China 'badder' than the EU. U.S. comparable figures were 2.4%, 3.8%, and 2.3% for average trade weighted tariffs, and 99 percent binding coverage. In summary, the EU is marginally 'worse' than the U.S. and vastly 'better' than China when it comes to tariffs protection.
  • In bilateral trade protection terms, 58.3 percent of non-agricultural imports from the U.S. were duty-free in the EU, against 19.6 percent of EU imports from China. China imported 56.5 percent of its imports from the U.S. duty-free, and 46.5 percent of imports from the EU were also zero-duty. U.S. imports from the EU were 64.9 percent duty-free and its imports from China were 35.5 percent duty free. When it comes to U.S. exports, the EU was a better destination, in these terms, than China. 'Better' EU than China in these terms.
We can draw many more comparatives in trying to gauge what 'worse' and 'smaller' might mean in the case of China vs EU comparatives when it comes to possible White House-targeting criteria. In reality, economics, trade, trade policies and finance are complex. Far more complex than Spaghetti Western. Yet, even 'The Good, The Bad, and The Ugly' had serious shades of grey when it came to delineating the three villains Mexican standoff at the Arch Stanton's grave. 

Saturday, June 30, 2018

30/6/18: U.S. incarceration statistics and American Exceptionalism

The U.S. figures prominently in the world of horrific stats, as do many other countries. Perhaps the most significant difference between these, however, is the fact that the U.S. claims high moral grounds when it comes to the rest of the world, despite having its own house out of order.

Here is one example: the U.S. often positions itself as the society based on two (amongst others) core ethical principles: law and order, and public support for ethical norms. Now, if the two values are taken together, the proposition would imply that the U.S. has law & norms-abiding citizenry (the average crime rate should be below that of the countries the U.S. lectures), plus a  functioning legal system (the punitive system of justice should be functioning alongside the preventative and rehabilitative functions). In conjunction, the three factors should combine to yield a relatively benign incarceration rates in the U.S. compared to other countries.

Pew Research data shows the exact opposite: While the U.S. incarceration rate has peaked and is declining, the U.S. remains a global outlier in terms of incarcerations per 100,000 people:

This presents an impossible dilemma:

  • Either (A) the U.S. justice system is highly effective in capturing and convicting criminals (large prison population being driven by law enforcement efficiency), or (B) the U.S. justice system is highly ineffective in preventing crime and rehabilitating criminals (large prison population being driven by failure of the justice system in its other key functions), or (C) the U.S. population has high rates of disdain for law and order, criminality and recidivism.
  • What is impossible is that 'Not (A)' can simultaneously coincide with 'Not (B)' and 'Not (C)'. 
In other words, what is impossible is the very claim of U.S. exceptionalism as a society with highly effective and functioning democratic law and order institutions while, simultaneously, being a law and norms-abiding society. 

Thus, any analyst rating the U.S. legal system as being highly functional must simultaneously allow for the U.S. society to be disrespectful of laws and norms. Alternatively, any analyst claiming that the U.S. society is norms and laws-based must simultaneously allow for the U.S. justice system to be of low quality. One or the other, logically, applies. 

Friday, June 29, 2018

29/6/18: Multilateralism and the Impossible Policy Trilemmas

"Global governance requires rules, because flexibility and goodwill alone cannot tackle the hardest shared problems. With multilateralism under attack, the narrow path ahead is to determine, on a case-by-case basis, the minimum requirements of effective collective action, and to forge agreement on reforms that fulfill these conditions."

Can Multilateralism Adapt?, Jean Pisani-Ferry.

International Political Trilemma applies to both monetary and fiscal policy dimension by making it impossible for modern societies to combine:

  1. Monetary sovereignty in the form of free capital mobility, with international political stability and political autonomy of democratic systems. In simple terms, free capital mobility means that capital flows will reflect economic and demographic conditions prevailing in the specific society. If these conditions deteriorate, triggering capital outflows (perhaps due to monetary accommodation response to ageing population), the society can respond either through imposing capital controls (preserving its standing in international political institutions, and allowing its democratic institutions to remain robust) or it can pursue non0-democratic suppression of its own population (allowing capital to flow out of the economy and not imposing cost of resulting economic decline onto international partners). Alternatively, the country can continue allowing outflow of capital and retain democracy by blaming the external shocks and restricting its engagement with international political institutions.
  2. Fiscal sovereignty in the form of free capital mobility, international political stability and autonomous fiscal policy. In simple terms, the above monetary sovereignty simply transfers democratic autonomy failure to fiscal policy failure.

To my students at TCD and MIIS, these are familiar from the following summary charts:

For more academically inclined readers, here is my paper summarising these Trilemmas and putting them into the context of the euro area harmonisation: Gurdgiev, Constantin, Euro After the Crisis: Key Challenges and Resolution Options (May 30, 2016). Prepared for: GUE/NGL Group, European Parliament, October 2015:

It is, generally, not hard to find examples of the two trilemmas presence in a range of historical shocks in the past. More recent examples, however, are harder to come by due to time lags required to see these trilemmas in action. Pisani-Ferry's quote above hints at such.

During the 1990s, "After an eight-decade-long hiatus, the global economy was being reunified. Economic openness was the order of the day. ...The message was clear: globalization was not just about liberalizing flows of goods, services and capital but about establishing the rules and institutions required to steer markets, foster cooperation, and deliver global public goods."

As Pisano-Ferry argues, today, "Despite a decade of talks, the global trade negotiations launched in 2001 have gotten nowhere. The Internet has become fragmented and could break up further. Financial regionalism is on the rise. The global effort to combat climate change rests on a collection of non-binding agreements, from which the United States has withdrawn...  The very principles of multilateralism, a key pillar of global governance, seem to have become a relic from a distant past."

"...let’s face it: today’s problems did not start with Trump." In fact, the problems started with the above trilemmas. Or put differently, the problems are not an outrun of bad policies or choices, but the natural result of the impossibility of combining the conflicting policies objectives and institutions. "There is no shortage of explanations. An important one is that many participants in the international system are having second thoughts about globalization. A widespread perception in advanced countries is that the rents from technological innovation are being eroded precipitously... A second explanation is that the US strategy toward Russia and China has failed... neither Russia nor China has converged politically... Third, the US is unsure that a rules-based system offers the best framework to manage its rivalry with China. [and]... Finally, global rules look increasingly outdated. Whereas some of their underlying principles – starting with the simple idea that issues are addressed multilaterally rather than bilaterally – are as strong as ever, others were conceived for a world that no longer exists. Established trade negotiation practices make little sense in a world of global value chains and sophisticated services. And categorizing countries by their development level is losing its usefulness, given that some of them combine first-class global companies and pockets of economic backwardness."

In simple terms, the world became more complex and more fragile because we tried to make it less complex and more centralized (hegemonic positioning of the U.S. in Bretton Woods setting), while making it also more multilateral (through financial, economic, trade and human capital integration).

Pisano-Ferry offers a 50,000 feet level view on the solution to the problems: "the solution is neither to cultivate the nostalgia of yesterday’s order nor to place hope in loose, ineffective forms of international cooperation. International collective action requires rules... The narrow path ahead is to determine, on a case-by-case basis, the minimum requirements of effective collective action, and to forge agreement on reforms that fulfill these conditions." In other words, one cannot tackle trijemmas directly (correct view), but one can defuse them by limiting each node of the desired policies. E.g. less democracy here - to offset pressure from demographic of ageing, less capital mobility there - to reduce the speed of capital flows across the borders and lower volatility of financialized investment, less fiscal sovereignty - to provide better buffers for shocks arising in financial and economic systems, and less international institutions - to allow for more flexible rebalancing of monetary, trade and fiscal policies.

The problem with this is it requires for the hegemony (the U.S.) to put a hard stop to imposing its preferred solutions onto the rest of the world and international institutions. Or, put differently, the hegemony must stop being a hegemony. Good luck squaring that with American vision of the world a-la Rome 4.0.