Monday, September 10, 2018

Monday, July 30, 2018

Trump's Trade War could have a happy ending

According to a Washington Post/Schar School poll of Americans published on July 11, only 39% of respondents approved of US President Donald Trump’s imposition of tariffs on foreign countries, while 56% were opposed. But, while it’s good news that a majority of Americans oppose their president on this key issue, Trump is plunging ahead, apparently thinking the public will like the tariffs better when they are in place.

It is a puzzle why even 39% support these policies. Ever since the Great Depression and World War II, and the 1947 General Agreement on Tariffs and Trade, the United States – both its government and its people – has been squarely in support of free trade.

In his 1776 book The Wealth of Nations, Adam Smith provided an eloquent and convincing argument for free trade, instead of trade distorted by tariffs. With free trade, the economy prospers because goods and services are sourced from the countries that are most productive in creating them.

Smith’s book was much talked about from the beginning, and the evidence supports its argument. Economists Jeffrey Frankel and David Romer have confirmed that individual countries that have freer trade have higher economic growth, and that this is not just reverse causality from growth to freer trade.

So, why are we seeing so much public support for a US-initiated trade war now?

It must stem from the job insecurity sometimes imposed by free trade, and the sense of injustice that arises when one is among the losers. Most people do not want charity. Voters in the United States responded well to “Make America Great Again.” They did not respond well to former President Barack Obama’s “spread the wealth around.”

Political scientist John Ruggie made the case in 1982 that post-World War II multilateralism and free trade was the result of a “compromise of embedded liberalism.” A multilateral system and low tariffs could be politically viable only if government intervened to stabilize citizens’ economic lives.

The economist Dani Rodrik has provided further evidence supporting Ruggie’s point. Using data from 125 countries and controlling for other factors, Rodrik found a positive correlation between countries’ economic openness and the share of government expenditure in their GDP; that is, more open economies spend more money relative to their size for goods and services for their citizens. High-trade countries are not small-government countries: it is just the opposite.

The total value of government consumption is much more important than the temporary unemployment insurance offered by many countries, or programs such as Trade Adjustment Assistance in the US. Trade Adjustment Assistance allows people who can demonstrate that their jobs were lost to foreigners because of free trade to receive temporary compensation while they find a new job. Obama wanted to see such assistance, which began with the Trade Expansion Act of 1962, expanded further, by creating wage insurance. But even this modest proposal was not enacted.

In my 2003 book The New Financial Order, I argued in favor of privately issued “livelihood insurance,” which protects against long-term loss of income and sets premiums on the basis of occupation and training. But while such programs could encourage occupational risk-taking and economic growth, they are not being implemented.

One reason why it has been so difficult to apply the principle of insurance to trade risks is that if the government offers the coverage against risks to livelihoods from free trade, it just looks like redistribution. This is especially so because the risks of maintaining free trade with low tariffs may be long-term. Losing one’s job in the US steel industry as mills shut down in the face of foreign competition may look awfully permanent. But it is hard to imagine governments subsidizing displaced workers for decades.

The problem today is that, with increased globalization an apparently permanent new condition, and with inequality within countries widening, people tend to feel that their long-term economic situation is getting riskier. We need to find a way to insure people against the risks of the global market without in any way demeaning them.

Fortunately, there is abundant precedent for in-kind government redistribution that does not seem like charity for society’s losers. When the government spends tax money on universal public education and health care, it does not strike many as redistribution, because the services are offered to everyone, and accepting them appears more patriotic than abject. As long as most people use the government schools and doctors, redistribution does not look like charity.

Another solution is to have the government encourage private livelihood insurance by subsidizing it to help cover the cost of jobs lost because of foreign trade. Private insurance companies, competing against each other and subject to appropriate regulations, may show much more entrepreneurial creativity in successfully managing the risks that free trade imposes on individuals.

Trump’s trade war is an international tragedy. But it could have a happy ending if it eventually reminds us of the risks that free trade imposes on people, and if we improve our insurance mechanisms to help them.


Monday, July 16, 2018

Robert Shiller prize from Kiel Institute

Robert Shiller has just received the Global Economy Prize at the Kiel Institute for the World Economy in Kiel, Germany, on June 17, 2018.

The award, presented by the Kiel Institute for the World Economy, the city of Kiel, and the Schleswig-Holstein Chamber of Commerce, “is meant to honor those who have proposed creative, pathbreaking initiatives to deal with globalization and who dare envision a more wholesome future by addressing the global problems of our time.”

The institute said that Shiller “is known for challenging and refuting the conventional view in economics of rational investors and efficient markets that are self-correcting and always return to equilibrium.”

Tuesday, July 10, 2018

Housing market could see further price gains

"The market has been looking overheated ever since 2012 when we saw the upsurge that has been going on now for almost six years. And it looks like it’s still going up." 

"It’s been going like that since 2012. Home prices have come down a lot, but they are getting back up.

“I like to put things in real terms. In nominal terms … we’ve surpassed 2006, which was the peak. But in real terms, we’re still fairly far below the 2006 peak. I don’t think we’re in the same enthusiasm still.”

“I think that the lenders have become more circumspect. This crisis is still remembered. And we don’t see as much securitization. Back then, it wasn’t just securitization, which by itself is a venerable concept in finance. It was inappropriate ratings of those securities and sometimes less than forthcoming behavior on the basis of securitizers. So I think we’re in a better situation now."

“It got a little crazy in 2006, as you might remember. And it had some unfortunate consequences. We shouldn’t just assume that that’s going to happen again. But it might, it might. Expectations are not as extravagant as they were 10 years ago. So it looks more like we’re still coasting, still coasting up” Mr Robert Shiller added.

Via YahooFinance

Monday, June 11, 2018

Theres thousands of crypto-currencies now

"Bitcoin won't look anything like it is today. It will have a different name, if it exists. There will have been many hard forks changing it and changing it. And, it'll be a matter of dispute whether it exists or not.

The one scenario is that something like what happened after 2013 when bitcoin topped $1,000, and then lost 80 percent of its value. It looked like bitcoin was just fading away. It's so hard to predict these things."

Tuesday, June 5, 2018

Why the US markets seem to be going up

"There is a sort of optimism about the markets under Trump, and that's still continuing. I don't see a reason for it about to change. There's something about how the world is reacting to the president. Something about his self-confidence which is gradually lifting our spirits.

We've seen an overpriced stock market. We've seen concerns about that for years now.

If you have been overexposed to the United States in your portfolio, this is a time to reconsider that. Not to pull out, but to balance things ... Europe is cheaper than the U.S." - via CNBC

Monday, April 2, 2018

Cost-push inflation

"This has happened many times before, the Fed will see that inflation is getting out of hand and worried about inflationary expectations building up. So they create a recession on purpose to break the inflation. That kind of thing could happen. But then again I don't know that President Trump wants that. And we do have an independent Fed but they might hesitate to break it up. There are people advocating more inflation now, maybe two percent is too low a target. So I could see that inflation the heading up that would mean big capital losses for bondholders. Everything has repercussions."

via cnbc

Tuesday, March 27, 2018

Donald Trump is a showman

"Well he[President Trump] has hired some extremist people. For example, Peter Navarro wrote a book with, can you believe this, with the title is 'Death by China', and then he calls the Chinese 'assassins' of our business. Pretty strong language. It seemed to me that no responsible president would give credence to that, but here we are. I think he's a showman who is doing this for political reasons within the U.S."

"And he has a philosophy of life that that's what you have to do, if you want to stay a famous celebrity, which he obviously relishes, you've got to be constantly creating news."

Tuesday, March 6, 2018

This is a first shot in a trade war

"I'd wonder if this isn't just a first step, that Trump has in mind raising other tariffs. Even if he doesn't there will be other countries who will retaliate and they'll get bigger. This is really like a first shot in a war and that's what is worrisome."

Monday, February 12, 2018

Rising interest rates will have a negative impact on US housing prices

Rising interest rates will have a negative impact on US housing prices, according to Robert Shiller.

"Obviously interest rates… it’s the price of time. It’s a fundamental factor in our economy. And people watch it. A lot of people think the stock market is overpriced, but what’s the alternative? If you go into debt, it has not been a very good return either. But that’s all changing now and maybe that’s the new narrative."

Tuesday, January 30, 2018

Blockchain technology is promising

Bitcoin may be a hype.

"I tend to think of bitcoin as an experiment. It is an interesting experiment, but it's not a permanent feature of our lives. We are over-emphasizing bitcoin, we should broaden it out to blockchain, which will have other applications."

Being able to short a financial instrument is important for price discovery.
"Financial theory says that if something is not shortable then it can be taken over by enthusiasts, and the doubters can no longer have an adequate way of vetting against. We've just seen that both the Cboe and CME have both created futures markets for bitcoin and that might make it more stable."

via CNBC

Wednesday, January 17, 2018

Donald Trump is a revolution

"Trump is a revolution unfortunately, (and one) who's reaffirming nationalism and he's showing that Americans are no better than anyone else. It's troublesome to me. I'm concerned."

"He's coming to Davos this year and he's going to try out his rhetoric on the least sympathetic audience I can imagine. He likes sympathetic audiences so I don't know how he's going to manage this one."