Wednesday, February 21, 2018

21/2/18: Cryptos Fans Checkmating Themselves on Petro


Venezuela launched the Petro, an oil-backed cryptocurrency that is supposed to augment (strike that: replace) the totally debased fiat currency the country has. And the launch is a pure gas, surrounded by bombastic claims from crypto-fans who can't be bothered to read the script.

Behold the following bits from the priceless writeup by the Bloomberg (https://www.bloomberg.com/news/articles/2018-02-20/venezuela-is-jumping-into-the-crypto-craze):


Apparently, Dubai has an asset-backed or commodity-backed currency. It does not.

Apparently, currency is what makes Dubai Dubai. It does not.

Apparently, all that differentiates Dubai from Venezuela is... err... I am not sure what it might be in the eyes of the cryptos experts, but here is a tangible metric of difference:



One ranks 179th in the world in Economic Freedom Index, another ranks 10th. And similar rankings differences apply across all reputable measures of economic, social, legal and political institutions quality, and country risk measures.

But, not to be outdone by their own ignorance, the crypto-fans brigade soldiers on:

Free markets led by some of the most corrupt, venally politicized Government officials in the world.

Check mating oneself publicly is, apparently, a required condition for being a crypto expert these days.

Friday, February 9, 2018

9/2/18: Markets Mess: Sunday Business Post


My Sunday Business Post article from last week on the beginnings of the stock markets troubles: https://www.businesspost.ie/business/markets-mess-unable-take-decisive-much-needed-downward-correction-yet-equally-unable-push-valuations-much-higher-408224.


As predicted: we had a messy week, with no catalyst to inflict a real, much needed and deeper correction onto grossly overvalued markets.

My next instalment on the continued mess is due this Sunday. Stay tuned.

9/2/18: Money Velocity and Signals of Households Leverage Risks


Fed has a problem, folks. Not a new one, but a very, very persistent one: velocity of money.

Here is the data:

What does this mean? The velocity of money is defined as the frequency at which a unit of currency is used to purchase domestically-produced goods and services within a given time period. As FRED database states, "it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy."

The Fed measures this parameter across three metrics:

  • M1, the narrowest component of money which covers currency in circulation (notes and coins, traveler’s checks, demand deposits, and checkable deposits. "A decreasing velocity of M1 might indicate fewer short- term consumption transactions are taking place. We can think of shorter- term transactions as consumption we might make on an everyday basis."
  • The broader M2 includes M1 plus saving deposits, certificates of deposit (less than $100,000), and money market deposits for individuals. Comparing the velocities of M1 and M2 provides some insight into how quickly the economy is spending and how quickly it is saving. When M2 is above M1, there are net savings being accumulated in the economy.
  • Per FRED: "MZM (money with zero maturity) is the broadest component and consists of the supply of financial assets redeemable at par on demand: notes and coins in circulation, traveler’s checks (non-bank issuers), demand deposits, other checkable deposits, savings deposits, and all money market funds. The velocity of MZM helps determine how often financial assets are switching hands within the economy."
So here is what we have as of 4Q 2017:
  • M1 velocity stands at 5.488, lowest reading since 1Q 1973 and 48.6 percent below pre-crisis highs. Which is in part probably reflective of the reduced importance of physical cash in our payments systems, but is also indicative of shrinkages across demand deposits money - the stuff we have in our bank accounts. Note: demand deposits capture electronic transactions, so changes in physical cash spending are offset by changes in electronic cash spending;
  • M2 velocity is now 26 quarters running below pre-crisis peak, down 35.1 percent on pre-crisis highs. The metric rose in the last quarter to 1.431 from 1.427 in 3Q 2017, but the levels are still below 1Q 2016. Which suggests that savings are weak.
  • Broadest money velocity is at 1.299, unchanged on 1Q 2016 and below pre-crisis highs for the 40th quarter running. The indicator is barely off historical lows of 1.295 achieved in 2Q 2017. MZM velocity is currently 63.4 percent below pre-crisis highs.
  • Finally, the gap between the M2 and M1 velocities (a measure of savings) is at negative 4.1 which indicates dis-saving in the economy.

Patently, there are no signs in this data of any positive Fed QE impact on households' balances or propensity to spend. Equally, there is no sign of a serious balancesheet recovery for the households. Yes, the rate of dissaving has fallen from M2-M1 velocity gap of 8.7 around 2007-2008 to current 4.1, but that still implies no deleveraging. Longer term U.S. households financial wellbeing remains under water, with only less liquid assets, such as property and financial investments underpinning household assets and no significant savings cushion held in liquid assets forms.

Equally patent is the fact that the traditional indicators of forward inflationary pressure (e.g. money velocity) are not quite in agreement with the measured inflation (which has exceeded the Fed target four months in a row now and has been beating analysts' expectations over the last three months). The only way the two figures can be reconciled is via increased debt levels on household balances sustaining consumption growth. Not a great sign for the future, folks.


9/2/18: Angus Deaton on Monopolization and Inequality


For anyone interested in the topics of wealth inequality, structure of the modern (anti-market) economy and secular stagnation, here is an interview with economist Angus Deaton on the subject of market concentration, rent seeking and rising inequality: https://promarket.org/angus-deaton-discussed-driver-inequality-america-easier-rent-seekers-affect-policy-much-europe/.

I cover this in our economics courses, both in TCD and MIIS, as well as on this blog (see here: http://trueeconomics.blogspot.com/2018/02/7218-american-wages-corporotocracy-why.html).

In simple terms, rising degree of oligopolization or monopolization of the U.S. (and global) economy is, in my opinion, responsible for simultaneous loss of dynamism (diminished entrepreneurship, weakened innovation) in the markets, the dynamics of the secular stagnation and, as noted in our working paper here (http://trueeconomics.blogspot.com/2017/09/7917-millennials-support-for-liberal.html), for the structural decline in our preferences for liberal, Western, values.

As Deaton notes, "Monopoly, I think, is a big part of the story. Both monopoly and monopsony contribute to lower real wages (including higher prices, fewer jobs, and slower productivity growth)—just a textbook case! But there are things like contracting out, which are making it much harder at the bottom, or local licensing requirements—mechanisms for making rich people richer at the expense of stopping poor people starting businesses and stifling entrepreneurship. There are also more traditional mechanisms other than rent-seeking, like the tax system. All these affect the distribution of income very directly. One of the things that seem to be going on more than it used to be is rent-seeking that’s redistributing upwards."

While I agree with his top level analysis on the evils of monopolization, I find the arguments in favour of unions-led 'redistribution downward' to be extremely selective. Unions co-created the current rent-seeking system through (1) collusion with capital owners, and (2) selective redistribution based on membership, as opposed to merit. In other words, unions were the very same rent seekers as corporations. And, just as capital owners, unions restricted redistribution downstream to select few workers at the expense of all others. Which means returning unions to a monopoly power of representation of labor is a fallacious approach to solving the current problem. Instead, we need to make people shareholders in capital via direct provision of carefully structured equity.

Disagreements aside, a very good interview with Deaton, worth reading.


Wednesday, February 7, 2018

7/2/18: American Wages, Corporotocracy & Why the Millennials Should be Worried


Pooling together a range of indicators for wages, Goldman Sachs' Wage Tracker attempts to capture more accurate representation of wages dynamics in the U.S. Here is the latest chart, courtesy of the Zero Hedge (https://www.zerohedge.com/news/2018-02-05/goldman-exposes-americas-corporatocracy-wage-growth-slowing-not-rising)


According to GS, wage growth is not only anaemic, at 2.1% y/y in 4Q 2017, and contrary to the mainstream media reports and official stats far from blistering, but it has been anaemic since the Global Financial Crisis. The latter consideration is non-trivial, because it implies two things:

  1. Structural change, consistent with the secular stagnation thesis, that is also identified in the GS research that attributes wages stagnation to increasing degree of concentration of market power in the hands of larger multinational enterprises (or, put more succinctly, oligopolization or monopolization of the U.S. economy); and
  2. A decade long (and counting) period in the U.S. economic development when growth has been consistent with continued leveraging, not sustained by underlying income growth.
The first point falls squarely within the secular stagnation thesis on the supply side: as the U.S. economy becomes more monopolistic, the engines for technological innovation switch to differentiation through less significant, but more frequent incremental innovation. This means that more technology is not enabling more investment, reducing the forces of creative destruction and lowering entrepreneurship and labor productivity growth.

The second point supports secular stagnation on the demand side: as households' leverage is rising (slower growth in income, faster growth of debt loads), the growth capacity of the economy is becoming exhausted. Longer term growth rates contract and future income growth flattens out as well. The end game here is destabilization of the social order: leverage risk carries the risk of significant underfunding of the future pensions, it also reduces households' capacity to acquire homes that can be used for cheaper housing during pensionable years. Leveraging of parents leads to reduced capacity to fund education for children, lowering quantity and quality of education that can be attained by the future generation. Alternatively, for those who can attain credit for schooling, this shifts more debt into the earlier years of the household formation for the younger adults, depressing the rates of their future investment and savings.

Goldman's research attempts to put a number on the costs of these dynamics, saying that in the longer run, rising concentration in the American private sector economy implies a 0.25% annual drop in wages growth since 2001. While the number appears to be small, it is significant. From economic perspective this implies 3.95% lower cumulative life cycle earnings for a person starting their career. And that is without accounting for the effects of the Great Recession. A person with a life cycle average earnings of USD50,000 would earn USD940,000 less over a 30-year long career under GS estimated impact scenario, than a person working in the economy with lower degree of corporate concentration. 

The 0.25% effect GS estimate is ambiguous. So take a different view: prior to the Global Financial Crisis, longer term wages growth was averaging above 3% pa. Today, in the 'Best Recovery, Ever' we have an average of around 2.2-2.4%. The gap is greater than 0.6-0.8 percentage points and is persistent. So take it at 0.6% over the longer term, forward, the lower envelope of the gap. Under that scenario, life cycle earnings of the same individual with USD 50,000 average life cycle income will be lower, cumulatively, by USD 1.53 million (or -6.4%). 

That is a lot of cash that is not going to be earned by people who need to buy homes, healthcare, education, raise kids and save for pensions.

Remember the "Don't be evil" motto of one of these concentration behemoths that we celebrate as the champion of the American Dream? Well, their growing market power is doing no good for that very same Dream.

Meanwhile, on academic side of things, the supply side secular stagnation thesis must be, from here on, augmented by yet another cause for a long term structural slowdown: the rising market concentration in the hands of the American Corporatocracy. 

Friday, February 2, 2018

2/2/18: Irish Media and the Property Crisis: A New Paper


A new paper covering the history of the financial crisis in Ireland, from the media complacency perspective, has been published by the New Political Economy journal. "The Irish Newspapers and the Residential Property Price Boom" by Ciarán Michael Casey (see http://www.tandfonline.com/doi/abs/10.1080/13563467.2018.1426562) references my warnings about the Irish property market in 2005 comment to the Irish Times.

For completeness of the record, here is my 2004 article for Business & Finance magazine stating my, then, view on the property market in Ireland: http://trueeconomics.blogspot.com/2016/01/10116-my-2004-article-on-irish-property.html.

2/2/18: CFR: What Financial Economics Tells Us About Bitcoin


My new contribution to the Cayman Financial Review is available, covering the key aspects of the fundamentals (or lac of such) behind the crypto currencies valuations: http://www.caymanfinancialreview.com/2018/01/29/learning-from-the-present-what-financial-economics-tells-us-about-bitcoin/.


Wednesday, January 31, 2018

31/1/18: What Teachers of Piketty Miss on r vs g


A popular refrain in today’s political and socio-economic analysis has been the need for aggressive Government intervention (via taxation and regulation) to reverse growing wealth inequality. The narrative is supported by the increasing numbers of center and centre-left voters, and is firmly held in the key emerging demographic of the Millennial voters. The same narrative can also be traced to the emergence of some (not all) populist movements and political figures.

Yet, through regulatory restrictions, Governments in the recent past not only attempted to manage risks, but also created a system of superficial scarcity in supply of common goods & services (healthcare, education, housing etc) and skills, as well as access to professional services markets for practitioners. This scarcity de facto redistributes income (& thus, wealth) from the poor to the rich, from those not endowed with assets to those who inherit them or acquire them through other non-productive means, e.g. marriage, corruption, force. Many licensing requirements, touted by the Governments as the means for ensuring consumer protection, delivering social good, addressing markets failures and so on are either too cumbersome (creating a de facto bounds to supply) or outright skewed in favour off the incumbents (e.g. financial services licensing restrictions in trivial areas of sales and marketing). 

The re-distribution takes the form of high rents (paid for basic services that are woefully undersupplied: consider the California ‘water allocations’ and local authorities dumping federal subsidies to military personnel onto private sector renters, or consider the effect of pensions subsidies to police and other public services providers that are paid for by poorer taxpayers who themselves cannot afford a pension). 

This benevolent-malevolent counter-balancing in Government actions has fuelled wealth inequality, not reduced it, and the voters appear to be largely oblivious to this reality.

Crucially, the mechanism of this inequality expansion is not the simple r>g relationship between returns to capital (r) and the growth rate in the economy (g), but a more complex r(k)>r(hh)>r(g)>r(lh) relationship between returns to financial & restricted (r(k)), inc property & water rights in California, etc, high-quality human capital (r(hh)), inc returns to regulated (rationed) professions, the rate of growth in the economy (g), and the returns to low-quality human capital (r(lh)), inc returns to productive productive), but un-rationed professions. 

Why this is crucial? Because the r>g driven inequality, the type that was decried by Mr. Piketty and his supporters is missing a lot of what is happening in the labor markets and in large swathes of organisational structures, from limited partnerships to sole traders. Worse, lazy academia, across a range of second-tier institutions, has adopted Piketty’s narrative unchecked, teaching students the r vs g tale without considering the simple fact that neither r, nor g are well-defined in modern economics and require more nuanced insight. 

Yes, we now know that r>g, and by a fat margin (see https://www.frbsf.org/economic-research/files/wp2017-25.pdf). And, yes, that is a problem. But that is only one half off the problem, because it helps explain, in part, the 1% vs 99% wealth distribution imbalances. But it cannot explain the 10% vs 90% gap. Nor can it explain why we are witnessing the hollowing-out of the middle class, and the upper middle class. A more granular decomposition of r (and a more accurate measurement of g - another topic altogether) can help.

The non-corporate entities and high human capital individual earners can still benefit from the transfers from the poorer and the middle classes, but these benefits are not carried through traditional physical and financial capital returns or corporate rent seeking. (Do not take me wrong: these are also serious problems in the structure of the modern economy). 

Take for example, two professionals. Astrophysicist employed in a research lab and a general medical practitioner. The two possess asymmetric human capital: astrophysicist has more of it than a general medical doctor. Not only in duration of knowledge acquisition (quantity), but also in the degree of originality of knowledge (quality). But, one’s supply of competitors is rationed by the market (astrophysics high barrier to entry is… er… the need to acquire a lot of hard-to-earn human capital, with opportunity costs sky-high), another is rationed by the licensing and education systems. Guess which one earns more? And guess which one has access to transfers from the lower earners that can be, literally, linked to punitive bankruptcy costs? So how much of the earnings of the physician (especially the premium on astrophysicist’s wage) can be explained by a license to asymmetric information (extracting rents from patients) and by restrictions on entry into profession that go beyond assurance of quality? How much of these earnings are compensation for the absurdity of immense tuition bills collected by the medical schools with their own rent-seeking markets for professional education? And so on.

In a way, thus, the Governments have acted as agents for creating & sustaining wealth inequality, at the same time as they claimed to be the agents for alleviating it. 

Yes, consumer protecting regulation is necessary. No question. Yes, licensing is often necessary too (e.g. in the case of a physician as opposed to a physicist). But, no - transfers under Government regulations are not always linked to the delivery of real and tangible benefits of quality assurance. Take, for example, restrictive development practices and excessively costly planning bureaucracies in cities, like, San Francisco. While some regulation and some bureaucracy are necessary, a lot of it is pure transfer from renters and buyers to bureaucrats as well as investors. So, do a simple arithmetic exercise. Take $100 of income earned by a young professional. Roughly 33% of that goes in various taxes and indirect taxes to the Governments. Another 33% goes to to the landlord protected by these same Governments from paying the full cost of bankruptcy (limited liability) and from competition by restrictive new building and development rules. Another 15% goes to pay for various insurance products, again - regulated and/or required by the Governments - health, cars, renters’ etc. What’s left? Less than 20% of income puts gas into the car or pays for transportation, buys food and clothing. What exactly remains to invest in financial and real assets that earn the r(k) and alleviate wealth inequality? Nada. And if you have to pay for debt incurred in earning your r(hh) or even r(lh), you are… well… insolvent. Personal savings averaged close to 6.5-7% of disposable income in 2010-2014. Since then, these collapsed to 2.4% as of December 2017. Remember - the are percentages of the disposable income, not gross income. Is that enough to start investing in physical and/or financial capital? No. And the numbers quoted are averages, so \median savings are even lower than that.

Meanwhile, regulated auto loans debt is now at $4,340 per capita, regulated credit card debt is at $2,930 per capita, and regulated student loans debt is now at $4,920 per capita. Federal regulations on credit cards debt are know n to behaviourally create barriers to consumers paying this debt down and/or using credit cards prudently. Federal regulations make student loans debt exempt from bankruptcy protection, effectively forcing borrowers who run into financial troubles into perpetual vicious cycle of debt spiralling out of control. Auto loans regulations effectively create and encourage sub-prime markets for lending. So who is responsible for the debt-driven part of wealth inequality? Why, the same Government we are begging to solve the problem it helps create.

Now, add a new dimension, ignored by many followers of Mr. Piketty: today’s social & sustainability narratives risk to deliver more of the same outcome by empowering Governments to create more superficial scarcity. This does not mean that all regulations and all restrictions are intrinsically bad, just as noted before. Nor does it mean that social and environmental risks are not important concepts. Quite the opposite, it means that we need to pay more attention to regulations-induced transfers of wealth and income from the lower 90% to the upper 10% and to companies and non-profits across the entire chain of such transfers. If we want to do something about our social and environmental problems (and, yes, we do want) we need to minimise the costs of other regulations. We need to increase r(hh) and even more so, r(lh). And we need to increase the g too. What we do not need to do is increase the r(k) without raising the other returns. We also need to recognise that on the road paved with good (environmental) intentions, we are transferring vast amounts of income (and wealth) from ordinary Joe and Mary to Elon Musk and his lenders and investors. As well as to a litany of other rent-seeking enterprises and entrepreneurs. The subsidies fuel returns to physical and fixed capital, intellectual property (technological capital), financial capital, and to a lesser extent to higher quality human capital. All at the expense of general human capital.

Another aspect of the over-simplified r vs g narrative is that by ignoring the existent tax codes, we are magnifying the difference between various forms of r and the g. Take the differences in tax treatment between physical, financial and human capital. Set aside the issue of tax evasion, but do include the issue of tax avoidance (legal and practiced with greater intensity the higher do your wealth levels reach). I can invest in fixed capital via a corporate structure that allows depreciation tax claws-backs and interest deductions. I can even position my investment in a tax (non-)haven jurisdiction, like, say Michigan or Wisconsin, where - if I am rich and I do invest a lot, I can get local tax breaks. I can even get a citizenship to go along with my investment, as a sweetener. Now, suppose I invest the same amount in technological capital (or, put more cogently, in Intellectual Property). Here, the world is my oyster: I can go to tax advantage nations or stay in the U.S. So my tax on these gains will be even lower than for fixed capital. Investing in financial capital is similar, with tax ranges somewhere between the two other forms of capital. Now, if I decided to invest in my human capital, my investments are not fully tax deductible (I might be able to deduct some tuition, but not living expenses or, in terms of corporate finance, operating expenses and working capital). Nor is there a depreciation claw back. There is not a tax incentive for me to do this. And my returns from this investment will be hit with all income taxes possible - state, and federal. It is almost sure as hell, my tax rate will be higher than for any form of non-human capital investment. Worse: if I borrow to invest in any form of capital other than human capital, and I run into a hard spot, I can clear the slate by declaring bankruptcy. If I did the same to invest in human capital, student loans are not subject to bankruptcy protection.

Not to make a long argument any longer, but to acknowledge the depth of the tax policy problems, take another scenario. I join as a partner a start up and get shares in the company. Until I sell these shares as a co-founder, I face no tax liability. Alternatively, I join the same start up as a key employee, with human capital-related skills that the start up really, really needs to succeed. I get the same shares in the company. Under some jurisdictions rules, I face immediate tax liability, even if I can never sell these shares in the end. Why? Ah, no reason, other than pure stupidity of those writing tax codes. 

The net effect is the same across all of the above points: risk-adjusted after tax returns on investment in human capital are depressed - superficially - by policies. Policies, therefore, are driving wealth inequality. After-tax risk-adjusted returns to human capital are lower than after-tax risk-adjusted returns on physical, financial and technological capital.

Once again, we need to increase returns to human capital without raising returns to other forms of capital. And we need to increase real rates of economic growth (what that means in the real world - as opposed to what it means in the world of Piketty-following academia is a different subject all together). And we need to get Government and regulators out of the business of transferring our income and potential wealth from us to the 1%-ers and the 10%-ers. 

How do we achieve this? A big question that I do not have a perfect answer to, and as far as I am aware, no one does. 

One thing we must consider is systemically reducing rents obtained through inheritance, rent seeking and other unproductive forms of capital acquisition. 

Another thing we must have is more broadly-spread allocation of financial assets linked to the productive economy (equity). In a way, we need to dramatically broaden share holding in real companies’ assets, among the 90%. Incidentally, this will go some ways in addressing the threat to the social fabric poised by automation and robotisation: making people the owners of companies puts robots at work for people. 

Third thing is what we do not need: we do not need is a penal system of taxation that reduces r(hh) and r(lh). Progressive income taxation delivers exactly that outcome. 

Fourth thing: we need to recognize that some assets derive their productivity from externalities. The best example is land, which derives most of its value from socio-economic investments made by others around the site. These externalities-related returns must be taxed as a form of unearned income/wealth. A land value tax or a site value tax can do the job.

As I noted above, I do not claim to hold a solution to the problem. I do claim to hold a blue print for a systemic approach to devising such a solution. Here it is: we need sceptical, independent  & continuous impact analysis of every piece of regulation, of every restriction, of every socially and environmentally impactful (positive or negative) measure. But above all, we need to be sceptical about the role of the Government, just as we have become sceptical about the capacity of the markets. Scepticism is healthy. Cheerleading is cancerous. Stop cheering, start thinking deeper about the key issues around inequality. And stop begging for Government action. Government is not quite the panacea we imagine it to be. Often enough, it is a problem we beg it to solve. 



Sunday, January 28, 2018

28/1/18: Political Polarization: Evidence form the U.S. trends


What's 'normal'? Pew Research data on political polarization in the U.S. (full report here http://www.people-press.org/interactives/political-polarization-1994-2017/).





A very dramatic drift toward the tails of the original distributions for both the Republicans and the Democrats, and, associated with this, an effective collapse in the numbers of the U.S. voters in the overlapping/shared position.

Removing the potential filter for political affiliation skewing the results:



Looking at pure preferences (excluding party identification), there has been a flattening (left-skewed) of public preferences spectrum. This also is consistent with growing polatization, but it is also consistent with increasing support by the voters for Extreme-Left and Left positions. The Center worldview has diminished substantially.

You can read my view on longer term trends and drivers for this dynamic here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3033949.

27/1/18: Human Freedom Index 2017: U.S. Exceptionalism vs Irish Example


Cato released their 2017 Human Freedom Index. The link is here: https://object.cato.org/sites/cato.org/files/human-freedom-index-files/2017-human-freedom-index-2.pdf and all data is available here: https://www.cato.org/human-freedom-index.

Two things worth noting:

Ireland: the country ranks in top 5 in the overall Index, in the 4th place overall, which is unchanged on 2016 report. This compares against 3rd place ranking in 2013-2014 index. One key area of strength - Economic Freedom sub-index. This is a problem area for the Index, which relies on GDP-based metrics and, thus, significantly overstates Irish economic performance. Aside from this, in many other areas, the index presents a correct picture of the country.

The U.S.: the index consistently debunks the myth of American exceptionalism. The country is ranked lowly 17th in 2017 overall, with Personal Freedom ranking of disastrous 24th and with a respectable 11th rank in Economic Freedom.

Here is what is going wrong the U.S. side of the Index:

  • In the Rule of Law section, the U.S. scores below 7.0 (poor showing for an advanced economy) in both civil and criminal justice systems assessments;
  • In Religious Freedom, the U.S. scores low 7.3 in Harassment and Physical Hostilities category;
  • In Expression and Information, the country scores 7.5 in Political Pressure, Control Media;
  • In Identity and Relationships, the U.S. score is 7.0 for Legal Gender
  • The country scores below 9.0 in overall Rule of Law grouping, in Homicide category, in overall Religious Freedom grouping, and in Laws and Reg. That Influence Media category.
  • Sadly, there are no rankings relating to the extent of personal lives control by the 'Deep State' or security forces. Neither do Cato folks measure access to healthcare, quality of public services, education etc - the key aspects of the functional society that are clearly sub-standard in the U.S. case. Nor does the Index address the extent of bureaucratic over-reach into the lives of the residents. Were these aspects to be considered, I doubt the U.S. would be ranked anywhere near top 30.
When it comes to Economic Freedom, in absolute terms, the U.S. is not exceptional by any measure, either. In fact, the country scores above 9 only in the following categories/groupings:

  • Sound Money, a grouping that includes: Money Growth, Standard Deviation of Inflation, Inflation: Most Recent Year, Freedom to Own Foreign. Currency
  • Black-Market Exchange Rates category, and
  • Credit Market Regulations and Labor Market Regulations categories
This is hardly the stuff of legends. The U.S. ranking performance is mediocre for a nation that promotes itself as a bastion of personal and economic freedoms and the leading light for liberty. 

Just take this last number into consideration: when it comes to rating the U.S. on freedom of movement of capital and people, Cato gave the nation a miserly score of 3.7/10. And in Freedom to Trade Internationally, the nation that claims moral leadership across the WTO, TPP, TTIP, Nafta and beyond, the 'guardian of the seas' scores 7.5/10, with sub-8.5 scores in Tariffs and Regulatory Trade Barriers categories.

 Irony has it, the 2017 ranking for the U.S. (at #17) is vastly better than 2016 ranking (at #24).  Neither is, however, good enough. Data wrinkles aside, tiny Ireland offers more grounds for global leadership-by-example than the U.S. does.

27/1/18: VCs Funding Bonanza. Missing Central Coast


Based on data compiled by Bloomberg, 2017 was a bumper year for VC-funded startups across the U.S., with significant increase in the geographic diversification of funds flows across many states.

You can see the full analysis here: https://www.bloomberg.com/graphics/2018-venture-capital-deals/.

From our local, Monterey, perspective, here is the kicker: in 2017, Monterey County (with population around 415,000) was ranked below its neighbor, Santa Cruz County (with population of around 262,000) in terms of total VC-funded deals volumes. And by a significant margin lower.

You can see this from the chart for 2017


Of course, every cloud has a silver lining, of sorts. The one this year is that at least Monterey County managed to register on the VCs' radar. Back in 2015 it was just a blank void for start ups investment.


Tuesday, January 23, 2018

22/1/18: Interest Rates, Demographics and Secular Stagnation: Euro Area 2018-2025


An interesting recent paper from ECB on the link between monetary policy (interest rates) and secular stagnation. Ferrero, Giuseppe and Gross, Marco and Neri, Stefano, ECB Working Paper, titled "On Secular Stagnation and Low Interest Rates: Demography Matters" (July 26, 2017, ECB WP No. 2088: https://ssrn.com/abstract=3009653) argues that adverse demographic developments can account for a long-run (since the mid-1980s) trend decline in real and nominal interest rates. In particular,  demographic factors linked to secular stagnation, have "exerted downward pressures on real short- and long-term interest rates in the euro area over the past decade."


Using EU Commission projected dependency ratios to 2025, the authors "illustrate that the foreseen structural change in terms of age structure of the population may dampen economic growth and continue exerting downward pressure on real interest rates also in the future".

Specifically, "the counterfactual projections suggest an economically and statistically relevant role for
demography. Interest rates would have been higher and economic activity growth measures stronger under the assumed more favorable historical demographic assumptions. Concerning the forward-looking assessment, interest rates would remain at relatively low levels under the assumption that demography develops as projected by the EC, and would rise visibly only under the assumed more favorable forward paths for dependency ratios."

Here are the dependency ration projections (red dots = EU Commission report projections; purple dots = 2015 outrun remains stable over 2016-2025 horizon, green line = mid-point between EU Commission forecast and static 2015 scenario):

And now, translating the above dependency ratios into macroeconomic performance:
Notice the following: under both, the adverse (European Commission estimates) and the moderate (central - green) scenarios, we have real GDP growth materially below 1 percent by 2025 and on average, below historical average levels for pre-crisis period. This is secular stagnation. In fact, even under the benign scenario of no demographic change from 2015, growth rate is unimpressive. Potential output panel confirms this.