QE-2?

Here is an awesome cartoon. Concept by yours truely and illustrated by Martin Whitmore.

Will Japanese Investment Overseas decline?

A consistent overseas investment by Japan was a critical phenomenon since the early 90s. Thanks to low interest rates at home and relatively benign economic growth outlook, Japanese were (to an extent) forced to invest overseas. 

Over the 90s Annaul Japanese overseas investment averaged $20 billion. In the first half of this decade, it inched up to about $ 30 billion. However, over the past five years it has accelerated from $50 billion to $ 100 billion in 2008. The net overseas investment reached a peak in 2008 and came off in 2009 according to recent report titled Japanese FDI: Recent Trends and Outlook Investment overseas by Japan institute of Overseas Investment.  It begets one question.

Will Japanese FDI reduces substantially or even reverses?

A lot of factors that contributed to Japanese investments have changed.

• Japanese domestic economic climate may be about to change. We are not sure whether it will recover or fall into a depression, but it is unlikely that the economy will amble along directionless in the next decade.
• The age profile and dependancy ratio has weakened over the years. At some point it will change from creating a pension and savings pool to using it. Thereafter we may see a draw on pensions and savings funds.
• There is also a higher global uncertainty to deal with. 

So what?

With about $100 billion at stake, I was about to dismiss Japanese investments as marginal. These days scams and Ponzi schemes run into trillions. But that is not true. 

• $ 100 billion is a substantially large FDI investment, it is almost size of a small country. 
• There are bound to repercussions for a capital-starved world economy. World economy is capital starved with large-scale frauds and write-offs and thus a bit more vulnerable than otherwise. The sovereign balance sheets are stretched to the breaking point.  In many countries bond vigilantes are doing their proverbial dance of death. 
• China may take up the slack with its large surplus. However, people are wary of Chinese influence.

In Sum

While it may not be earth-shattering, but changing preferences in Japanese investments is bound to have some impact on global economy. We need to understand it better.

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My book "Subverting Capitalism & Democracy" is available on Amazon

Elizabeth Warren - Election vs. Selection

There is a huge debate about what prevents US president Obama from nominating Dr. Elizabeth Warren, the Harvard Law professor to head the Bureau of Consumer Financial Protection Agency. Recently Fortune asks the question in an article titled Why not Elizabeth Warren for BCFP? The Warren episode exposes a fundamental political problem of election vs. selection. Political parties prefer voters and population in general to "select" one candidate.

Difference between Selection and Election

Selection refers to making a choice between available alternatives. While, procedurally similar, election refers to choosing amongst ourselves. By crowding out real representatives, career politicians leave the voters with non-options. What remains can hardly be called "election". There is hardly any difference in actions, thought processes or ideas amongst competing candidates. No matter who we select, the outcome is always detrimental to the population. Since conventional mechanism is not available, we should use opportunity to put real people's representatives in a position where they can make a difference. Such opportunity came up twice in recent past. 

The emergence of Paul Volcker as a champion of prudent finance promised to be the first moment. It passed away quietly partly, I presume, because of Volcker's age and responsibility he already shouldered. He was relegated to the role of an advisor who probably no one heeds.

The impending nomination of Elizabeth Warren promises to be the second case. I must confess that I am fan of Prof. Warren and I believe she is a true champion of middle class America. In fact, I believe, her expertise should be used diversely to advantage of common people.

Politicians be warned!

During my school years I often wondered how could Marie Antoinette could be so far removed from reality to ask the people of have cake instead of bread. I am no longer surprised. I think today's politicians are further away from reality than Marie Antoinette ever was. The appointment of Dr. Warren presents the first opportunity to redeem the political apparatus. Remember the fate of Marie Antoinette at the end of the French Revolution. 

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My book "Subverting Capitalism & Democracy" is available on Amazon

The crisis of middle-class America

FT, more often than not, does a better job of reporting than many other newspapers. Here is FT talking about middle class America - FT.com / Reportage - The crisis of middle-class America. The examples are well chosen. People with income twice the national median, working four jobs (between two adults) are not able to reliably meet their obligations. Some are stretched by healthcare expenses others while others are fighting through job losses. One can only imagine what happens at lower-than-median incomes.

Welcome to the new normal

One of the harsh realities economists talk about is the "new normal". It includes a lifestyle with smaller cost footprint. It means scaling back on purchases. It means no new clothes, no new cars, no computers and cameras. The middle class is not saving, it is simply adjusting to new levels and risks associated with their income. At least a third of American households are in this situation. So we can only imagine what it will do for a consumption-led GDP. The future does not look bright. 

The question of jobs

The government needs to look at the profile of population and profile of jobs available for the population. I mentioned in an earlier post that every economy has an ideal job profile based on education and skill levels of the population. America is losing those jobs that its people are qualified to do. They are losing these jobs thanks to uncompetitive currency, higher wages and benefits and possibly inflexible workforce (in education). This will cause further pain in the coming years.

Declining Wage profile

Just as economy has a job profile, similarly every job profile has an associated income profile based on global wages adjusting for productivity. The wages in US are higher, I believe, than global wages AFTER adjusting for productivity.  So the incomes for those jobs that americans have will not rise much or may even fall. It will stretch middle class households beyond redemption.

Volcker-Warren conundrum

At such times, America should call Volcker-Warren combine to lead the entire financial reform process.   The Warren appointment is being fought at the CFPA level itself so that it is easier to control the Warren-influence over the general Financial reforms process. I hope, rather pray, that Warren ultimately triumphs. She is the only hope in otherwise hopeless economic and political landscape. Same goes for Volcker, the ultimate Volcker rule is so watered down, I doubt Paul Volcker is really satisfied with it. It is time for leaders of America to stand up and be counted. Alas, there aren't any.

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My book "Subverting Capitalism & Democracy" is available on Amazon

Small and ineffective stimulus in 2007-2009

Paul Krugman has an blog post titled How Did We Know The Stimulus Was Too Small? He discusses three points. First shortfall was about $2 Trillion. Second, the stimulus was designed at $780 billion. Third, the multiplier that was expected to magnify the impact was not properly enabled. 

There are few points and other reasons that I have highlighted over the days:

First part of stimulus went to mending the financial system. This part is basically used in wetting the system rather than actual priming.

Second, the type of activities under stimulus determines the effectiveness of the stimulus. Some activities are better at stimulating than others. Income supporting activities are often better at stimulating than consumption driving activities. Thus the proverbial dig-a-hole-fill-that-hole Keynes stimulus had better bang for the buck than the Obama-Bush please-spend-the-tax-cut stimulus.

Third, individuals save because there is uncertainty about incomes. The only way to counter uncertainty is by creating certainty. It is OK if the level of "certain income" is lower than actual. Once there is certainty that bottom is in place, the direction of wage declines stems and even reverses.

Fourth, the choice of monetary or fiscal stimulus was available in 2007. It is still available provided you write-off the stimuli till date.

Fifth, Scott Sumner proposed that monetary and fiscal policies were acting against each other. There is an element of truth to this argument. However, predominantly the fiscal stimulus failed because it was ill-designed.

Sixth, since banking system was under threat,

• I would have created a parallel national banking system using post office infrastructure. 
• This national bank would have bought assets from the consumer (mortgage transfers) at a marked-down prices so that the balance sheet of this bank stayed healthy.
• Since we did not do this, we have a huge bailout liability and we are still not sure if banks are sound or not.

Seven, if we had designed the stimulus better and gone with a simple job-creating fiscal stimulus, we would have needed far lesser money that we needed to bailout the banks.

In Sum, there were a lot of things wrong with the stimulus. Size was just one of them.

Links

Krugman's Post "How did we know the stimulus was too small?"

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My book "Subverting Capitalism & Democracy" is available on Amazon.