Thursday, May 24, 2018

24/5/18: America, the Medici Cycle and the Corporate Powers in Politics

A recent paper by Luigi Zingales of the University of Chicago, titled "Towards a Political Theory of the Firm" (NBER Working Paper No. 23593, July 2017: deals with the issue of rent-seeking behavior by monopolistic firms through political influence. "Neoclassical theory assumes that firms have no power of fiat any different from ordinary market contracting, thus a fortiori no power to influence the rules of the game," writes Zingales. "In the real world, firms have such power. I argue that the more firms have market power, the more they have both the ability and the need to gain political power. Thus, market concentration can easily lead to a “Medici vicious circle,” where money is used to get political power and political power is used to make money."

In his opening to the paper, Zingales notes 2016 report by Global Justice Now showing that 69 of the world’s largest 100 economic entities are now corporations, not governments. Using "both corporation and government revenues for 2015, ten companies appear in the largest 30 entities in the world: Walmart (#9), State Grid Corporation of China (#15), China National Petroleum (#15), Sinopec Group (#16), Royal Dutch Shell (#18), Exxon Mobil (#21), Volkswagen (#22), Toyota Motor (#23), Apple (#25), and BP (#27). All ten of these companies had annual revenue in higher than the governments of Switzerland, Norway, and Russia in 2015. ...In some cases, these large corporations had private security forces that rivaled the best secret services, public relations offices that dwarfed a US presidential campaign headquarters, more lawyers than the US Justice Department, and enough money to capture (through campaign donations, lobbying, and even explicit bribes) a majority of the elected representatives. The only powers these large corporations missed were the power to wage war and the legal power of detaining people, although their political influence was sufficiently large that many would argue that, at least in certain settings, large corporations can exercise those powers by proxy."

Despite this reality, economic theory largely ignores the issue of political power of the firms despite the fact that throughout modern history, "the largest modern corporations facilitated a massive concentration of economic (and political) power in the hands of a few people, who are hardly accountable to anyone." And despite the well-established fact (including through the precedent of the U.S. sanctions), that "...many of those giants (like State Grid, China National Petroleum, and Sinopec) are overseen by a member of the Chinese Communist party." Worse, as Zinglaes notes, "In the United States, hostile takeovers of large corporations have (unfortunately) all but disappeared, and corporate board members are accountable to none. Rarely are they not reelected, and even when they do not get a plurality of votes, they are coopted back to the very same board (Committee on Capital Market Regulation, 2014). The primary way for board members to lose their jobs is to criticize the incumbent CEO (see the Bob Monks experience in Tyco described in Zingales, 2012). The only pressure on large US corporations from the marketplace is exercised by activist investors, who operate under strong political opposition and not always with the interest all shareholders in mind."

So Zingales argues "that the interaction of concentrated corporate power and politics it a threat to the functioning of the free market economy and to economic prosperity it can generate, and a threat to democracy as well." Which, of course, is simply consistent with existence of the set of market-linked trilemmas, such as The International Relations (Order) Trilemma that implies that in the presence of perfect capital mobility, the nation states can either pursue a democratic sovereign political set up or an objective of international stability/order, as well as. (see more on these here:

Logically, thus, economics need to be asking the following questions, largely ignored in the neo-classical theory of the firm: "To what extent can the power firms have in the marketplace be transformed into political power? To what extent can the political power achieved by
firms be used to protect but also enhance the market power firms have?"

As Zingales notes correctly, "US economic patterns in the last few decades have seen a rise in the relative size of large companies," as also documented in a number of posts on this blog:
for example, the rise of monopolistic competition here:

monopsonistic power here:

effects on regulatory enforcement efficiency here:

effects on democratic institutions here:

As the result, Zinglaes calls "attention to the risk of a “Medici Vicious Circle.” The “signorias” of the Middle Ages—the city-states that were a common form of government in Italy from the 13th through the 16th centuries--were a takeover of a democratic institution (“communes)” by rich and powerful families who ran the city-states with their own commercial interests as main objective. The possibility and extent of this Medici Vicious Circle depend upon several non-market factors. I identify six of them: the main source of political power, the conditions of the media market, the independence of the prosecutorial and judiciary power, the campaign financing laws, and the dominant ideology. I describe when and how these factors play a role and how they should be incorporated in a broader “Political Theory” of the firm."

The driver for this 'Medici Circle' dynamic is market concentration or monopolistic competition. Product differentiation and market regulation can bestow onto a firm a degree of market power that translates into market concentration (rising and significant share of market activity captured by the firm). While in the environment of continued innovation, such competitive advantage generates only temporary abnormal profits, the degree of market power can be significant enough to provide the firm with substantial resources (profits) to engage in lobbying activities, corruption and other rent-seeking activities. There are also symmetric incentives for the firms to engage in rent seeking. As Zinglaes notes: "If the ability to influence the political power increases with economic power, so does the need to do so, because the greater the market power a firm has, the greater the fear of expropriation by the political power". This sounds strange, but it is quite intuitive: as a firm gains market power, it's prices rise above the marginal cost, yielding abnormal economic profits to the firm at the expense of consumers. The Governments can (and do) claim political mandate to limit these profits by taxing the market dominant firms' profits (either through regulation or direct taxation), thus expropriating part of the abnormal profits.

In simple terms, "Most firms are actively engaged in protecting their source of competitive advantage: through a mixture of innovation, lobbying, or both. As long as most of the effort is along the first dimension, there is little to be worried about. ...What is more problematic is when a lot of effort is put into lobbying. In other words, the problem here is not temporary market power. ...The fear is of what I call a “Medici vicious circle,” in which money is used to gain political power and political power is then used to make more money. ...In the case of medieval Italy, it turned Florence from one of the most industrialized and powerful cities in Europe to a marginal province of a foreign empire. At least the Medici period left some examples of great artistic beauty in Florence. I am not sure that market capitalism of the 21st century will be able to do the same."

Zingales relates the Medici circle concept to the modern day U.S. economy. "In the last two decades more than 75 percent of US industries experienced an increase in concentration levels, with the Herfindahl index increasing by more than 50 percent on average. During this time, the size of the average publicly listed company in the United States tripled in market capitalization: from $1.2 billion to $3.7 billion in 2016 dollars... This phenomenon is the result of two trends. On the one hand, the reduction in the rate of birth of new firms, which went from 14 percent in the late 1980s to less than 10 percent in 2014. On the other hand, a very high level of merger activity, which for many years in the last two decades exceeded $2 trillion in value per year... The market power enjoyed by larger firms is also reflected in the increasing difficulty that smaller firms have in competing in the marketplace: in 1980, only 20 percent of small publicly traded firms had negative earnings per share, in 2010, 60 percent did... Barkai (2016) ...finds that the decrease in labor share of value added is not due to an increase in the capital share (that is, the cost of capital times amount of capital divided by value added), but by an increase in the profits share (the residuals), which goes from 2 percent of GDP in 1984 to 16 percent in 2014. ...By separating the return to capital and profits, we can appreciate when profits come from (non-replicable) barriers to entry and competition, not from capital accumulation. Distinguishing between capital and share allows Barkai (2016) also to gain some insights on the cause of the decline in the labor share. If markups (the difference between the cost of a good and its selling price) are fixed, any change in relative prices or in technology that causes a decline in labor share must cause an equal increase in the capital share. If both labor and capital share dropped, then there must be a change in markups—that is, the pricing power firms to charge more than their cost."

And fresh from the presses today: "US IG Chart of the Day: Global M&A deal flow has doubled YTD for a total of $1.5 trillion of announced deals. US-only deals account for about 37% of the global total, for $555 billion of transactions."

While firms require market power to acquire political power, access to political power is required to protect abnormal profits arising from market power. Which, in a highly polarised society (aka, the U.S. system of politics dominated by two mainstream parties) can result in political representation concentrated in the hands of minorities (e.g. Trump Presidency, gained absent major corporate support), and in ineffectiveness of lobbying monitoring (As Zinglaes notes: "Even when it comes to lobbying, the actual amount spent by large U.S corporations is very small, at least as a fraction of their sales. For example, in 2014 Google (now Alphabet) had $80 billion in revenues and spent $16 million in lobbying".) Which is, of course, quite ironic, given that the ongoing Robert Mueller probe of the Trump campaign is focusing almost exclusively on the violations in the legal or declared channels of lobbying, instead of the indirect forms of political influencing.

I will quote Zingales' conclusion almost in full here, for it is a powerful reminder to us all that we live in a world where corporatism (integration of State and corporate powers) and monopolisation / concentration of the markets are two key features of our environment, not only in the economic sense, but in the political / democratic domains as well.

"In a famous speech in 1911, Nicholas Murray Butler, President of Columbia University, considered the practical advances made by large corporations in the late 19th and early 20th century and stated: 'I weigh my words, when I say that in my judgment the limited liability corporation is the greatest single discovery of modern times, whether you judge it by its social, by its ethical, by its industrial or, in the long run, its political, effects.' Butler was right, but this discovery of the modern corporate form – like all discoveries – can be used to both to foster progress or to oppress. The size of many corporations exceeds the modern state. As such, they run the risk of transforming small- and even medium-sized states into modern versions of banana republics, while posing economic and political risks even for the large high-income economies. To fight these risks, several political tools might be put into use: increases in transparency of corporate activities; improvements in corporate democracy; better rules against revolving doors and more attention to the risk of capture of scientists and economists by corporate interests; more aggressive use of the antitrust authority; and attention to the functioning and the independence of the media market. Yet the single most important remedy may be broader public awareness."

The latter bit is still woefully lacking in the Fourth Rome of Washington DC, where the usual, tired, unrealistic narrative of American Exceptionalism reigns supreme, and where the U.S. flags at the 4th of July picnics are still confused for meaningful symbols of the U.S. meritocracy and the American Dream, the native entrepreneurialism and the social mobility. Wake up, folks, and smell the roses.

Wednesday, May 23, 2018

23/5/18: Contingent Workforce, Online Labour Markets and Monopsony Power

The promise of the contingent workforce and technological enablement of ‘shared economy’ is that today’s contingent workers and workers using own capital to supply services are free agents, at liberty to demand their own pay, work time, working conditions and employment terms in an open marketplace that creates no asymmetries between their employers and themselves. In economics terms, thus, the future of technologically-enabled contingent workforce is that of reduced monopsonisation.

Reminding the reader: monopsony, as defined in labour economics, is the market power of the employer over the employees. In the past, monopsonies primarily were associated with 'company towns' - highly concentrated labour markets dominated by a single employer. This notion seems to have gone away as transportation links between towns improved. In this context, increasing technological platforms penetration into the contingent / shared economies (e.g. creation of shared platforms like Uber and Lyft) should contribute to a reduction in monopsony power and the increase in the employee power.

Two recent papers: Azar, J A, I Marinescu, M I Steinbaum and B Taska (2018), “Concentration in US labor markets: Evidence from online vacancy data”, NBER Working paper w24395, and Dube, A, J Jacobs, S Naidu and S Suri (2018), “Monopsony in online labor markets”, NBER, Working paper 24416, dispute this proposition by finding empirical evidence to support the thesis that monopsony powers are actually increasing thanks to the technologically enabled contingent employment platforms.

Online labour markets are a natural testing ground for the proposition that technological transformation is capable of reducing monopsony power of employers, because they, in theory, offer a nearly-frictionless information and jobs flows between contractors and contractees, transparent information about pay and employment terms, and low cost of switching from one job to another.

The latter study mentioned above attempts to "rigorously estimate the degree of requester market power in a widely used online labour market – Amazon Mechanical Turk, or MTurk... the most popular online micro-task platform, allowing requesters (employers) to post jobs which workers can complete for."

The authors "provide evidence on labour market power by measuring how sensitive workers’ willingness to work is to the reward offered", by using the labour supply elasticity facing a firm (a standard measure of wage-setting (monopsony) power). "For example, if lowering wages by 10% leads to a 1% reduction in the workforce, this represents an elasticity of 0.1." To make their findings more robust, the authors use two methodologies for estimating labour supply elasticities:
1) Observational approach, which involves "data from a near-universe of tasks scraped from MTurk" to establish "how the offered reward affected the time it took to fill a particular task", and
2) Randomised experiments approach, uses "experimental variation, and analyse data from five previous experiments that randomised the wages of MTurk subjects. This randomised reward-setting provides ‘gold-standard’ evidence on market power, as we can see how MTurk workers responded to different wages."

The authors "empirically estimate both a ‘recruitment’ elasticity (comparable to what is recovered from the observational data) where workers see a reward and associated task as part of their normal browsing for jobs, and a ‘retention’ elasticity where workers, having already accepted a task, are given an opportunity to perform additional work for a randomised bonus payment."

The findings from both approaches are strikingly similar. Both "provide a remarkably consistent estimate of the labour supply elasticity facing MTurk requesters. As shown in Figure 2, the precision-weighted average experimental requester’s labour supply elasticity is 0.13 – this means that if a requester paid a 10% lower reward, they’d only lose around 1% of workers willing to perform the task. This suggests a very high degree of market power. The experimental estimates are quite close to those produced using the machine-learning based approach using observational data, which also suggest around 1% reduction in the willing workforce from a 10% lower wage."

To put these findings into perspective, "if requesters are fully exploiting their market power, our evidence implies that they are paying workers less than 20% of the value added. This suggests that much of the surplus created by this online labour market platform is captured by employers... [the authors] find a highly robust and surprisingly high degree of market power even in this large and diverse spot labour market."

In evolutionary terms, "MTurk workers and their advocates have long noted the asymmetry in market structure among themselves. Both efficiency and equality concerns have led to the rise of competing, ‘worker-friendly’ platforms..., and mechanisms for sharing information about good and bad requesters... Scientific funders such as Russell Sage have instituted minimum wages for crowd-sourced work. Our results suggest that these sentiments and policies may have an economic justification. ...Moreover, the hope that information technology will necessarily reduce search frictions and monopsony power in the labour market may be misplaced."

My take: the evidence on monopsony power in web-based contingent workforce platforms dovetails naturally into the evidence of monopolisation of the modern economies. Technological progress, that held the promise of freeing human capital from strict contractual limits on its returns, while delivering greater scope for technology-aided entrepreneurship and innovation, as well as the promise of the contingent workforce environment empowering greater returns to skills and labour are proving to be the exact opposites of what is being delivered by the new technologies which appear to be aiding greater transfer of power to technological, financial and even physical capital.

The 'free to work' nirvana ain't coming folks.

23/5/18: American Exceptionalism, Liberty and... Amazon

"And the star-spangled banner in triumph shall wave
O'er the land of the free and the home of the brave!"

The premise of the American Exceptionalism rests on the hypothesis of the State based on the principles of liberty.

Enter Amazon, a corporation ever hungry for revenues, and the State, a corporation ever hungry for power and control. Per reports (, Amazon "has developed a powerful and dangerous new facial recognition system and is actively helping governments deploy it. Amazon calls the service “Rekognition."

As ACLU notes (emphasis is mine): "Marketing materials and documents obtained by ACLU affiliates in three states reveal a product that can be readily used to violate civil liberties and civil rights. Powered by artificial intelligence, Rekognition can identify, track, and analyze people in real time and recognize up to 100 people in a single image. It can quickly scan information it collects against databases featuring tens of millions of faces, according to Amazon... Among other features, the company’s materials describe “person tracking” as an “easy and accurate” way to investigate and monitor people."

As I noted elsewhere on this blog, the real threat to the American liberal democracy comes not from external challenges, attacks and shocks, but from the internal erosion of the liberal democratic institutions, followed by the decline of public trust in and engagement with these institutions. The enemy of America is within, and companies like Amazon are facilitating the destruction of the American liberty, aiding and abetting the unscrupulous and power-hungry governments, local, state and beyond.

Tuesday, May 22, 2018

22/5/18: Poor Showing by the U.S. Cities

Mercer 2018 Quality of Living rankings are out: Summary of key results:

  • Top 25:

  • Not a single U.S. city makes it into top 25.
  • Highest-ranked U.S. city, San Francisco, ranks 30th in the world, Boston and Honolulu - second and third highest ranked U.S. cities are in 35th and 36th places.
  • Canada dominates North American rankings with 5 cities in top 35 against U.S. two cities.
  • Only one North American city, Vancouver, makes it in top 10 globally.
  • Switzerland and Germany (3 cities each) dominate top 10 rankings.
  • Dublin ranks 34th in the world and London 41st, competitive relative to the U.S. cities, and against key peer European cities.

Quality of urban life is a key determinant of economic development, competitiveness and growth potential in the advanced economies. From this perspective, U.S. cities are lagging behind their global counterparts due to low value for money in quality of housing, poor transportation and connectivity systems, poor public safety, underinvestment in social and public amenities, and lower quality of schools. Controlling for private education and healthcare (benefits of which are highly concentrated at the top of income distributions), the U.S. cities competitiveness would be even less impressive than the above rankings suggest.

Monday, May 21, 2018

21/5/18: Truth Decay and Fake News: Four Links

Some useful links on recent research  concerning the relationship between empirical/factual evidence, newsflows and policy discourse in the West:

21/5/18: Italian Sovereign Risks Are Blowing Up

As I noted in my comment to ECR / Euromoney and in my article for Sunday Business Post (see links here: and, the ongoing process of Government formation in Italy represents a fallout from the substantial VUCA events arising from the recent elections, and as such warrants a significant (albeit delayed) repricing of country sovereign risks. This process is now underway:

Source: Holger Zschaepitz @Schuldensuehner

Per chart above, Italy's 10 year bonds risk premium over Germany jumped to 181 bps on markets concerns with respect to fiscal dynamics implied by the new Government formation. This, however, is just a minor side show compared to the VUCA environment created by the broader dynamics of political populism and opportunism. And in this respect, Italy is just another European country exposed to these risks. In fact, as the latest data from the Timbro's Authoritarian Populism Index, Europe-wide, political populism is on the rise:

21/5/18: Risk experts take flight over Italy's political risk

Euromoney and ECR are covering the story of Italian political risk, with my comments on the rise of populism in Italy and its effects on sovereign risk with respect to the Italian Government formation negotiations:

21/5/28: Trouble is brewing in the Euro paradise

My article for the Sunday Business Post on the continued risk/VUCA from politics of populism to the Euro area reforms and stability:

Sunday, May 20, 2018

19/5/18: Leverage risk in investment markets is now systemic

Net margin debt is a measure of leverage investors carry in their markets exposures, or, put differently, the level of debt accumulated on margin accounts. Back at the end of March 2018, the level of margin debt in the U.S. stock markets stood at just under $645.2 billion, second highest on record after January 2018 when the total margin debt hit an all-time-high of $665.7 billion, prompting FINRA to issue a warning about the unsustainable levels of debt held by investors.

Here are the levels of gross margin debt:


And here is the net margin debt as a ratio to the markets valuation - a more direct measure of leverage, via Goldman Sachs research note:
Which is even more telling than the absolute gross levels of margin debt in the previous chart.

Per latest FINRA statistics (, as of the end of April 2018, debit balances in margin accounts rose to $652.3 billion, beating March levels

And things are even worse when we add leveraged ETFs to the total margin debt:

In simple terms, we are at systemic levels of risk relating to leverage in the equity markets.

Saturday, May 19, 2018

19/5/18: The Scary Inefficiency & Environmental Costs of Bitcoin

Bitcoin is just one of the cryptocurrencies, albeit the dominant one by market capitalisation and mining assets deployment. The cryptocurrency is best known for volatility of its exchange rate to key fiat currencies and other commodities, but the more interesting aspect of the Bitcoin (and other cryptos) is their hunger for energy. Cryptos are based on blockchain technologies that promise a range of benefits (majority unverified or untested or both), amongst which the high degree of security and peer-to-peer data registry, both of which are supported by the mining processes that effectively require deployment of  a vast amount of hash/algorithmic calculations in order to create data storage units, or blocks. In a sense, energy (electricity) is the main input into creation of blockchain records of transactions.

As the result, it is important to understand Bitcoin (and other cryptos) energy efficiency and utilisation, from three perspectives:
1) Direct efficiency - value added by the use of energy in mining Bitcoin per unit of BTC and unit of information recorded on a blockchain;
2) Economic efficiency or opportunity cost of using the energy expended on mining; and
3) Environmental efficiency - the environmental impact of energy used.

To-date, estimating the total demand for electricity arising from Bitcoin mining (let alone from mining of other cryptos) has been a huge challenge, primarily because Bitcoin miners are too often located in secretive jurisdiction, do not report any data about their operations and, quite often, can be highly atomistic. Although Bitcoin mining is a concentrated activity - with a small number of mega-miners and mining pools dominating the market - there is still a cottage industry of amateur and smaller scale miners sprinkled around the globe.

Thus, to-date, we have only very scant understanding of just how much of the scarce resource (energy) does the new industry of cryptos mining consume.

A new paper, published in a peer-reviewed journal, Joule, which is a reputable academic journal, titled "Bitcoin's Growing Energy Problem" and authored by Alex de Viries (Experience Center of PwC, Amsterdam, the Netherlands) attempts exactly this. The paper is the first in the literature to be peer-reviewed and uses a new methodology to discern trends in Bitcoin's electric energy consumption. The paper does not cover other cryptos, so its conclusions need to be scaled to estimate the entire impact of cryptocurrencies energy use.

The findings of de Viries are striking. He estimates the current Bitcoin usage of energy at 2.55 gigawatts, close to that of Ireland (3.1GW), approaching 7.67GW that "could already be reached in 2018", comparable to Austria (8.2GW). When reached, this will amount to 0.5% of the total world electricity consumption.

Per 'efficiency of blockchain', a single transaction on Bitcoin network uses as much electricity as an average household in the Netherlands uses in a month. Which is, put frankly, mad, wasteful and utterly unrealistic as far as transactions costs go for the network.

Per de Viries: "As per mid-March 2018, about 26 quintillion hashing operations are performed every second and non-stop by the Bitcoin network (Figure 1). At the same time, the Bitcoin network is only processing 2–3 transactions per second (around 200,000 transactions per day). This means that the ratio of hash calculations to processed transactions is 8.7 quintillion to 1 at best. The primary fuel for each of these calculations is electricity."

The key to the above numbers is that they vastly underestimate the true costs of Bitcoin and other cryptos to the global economy. The paper focuses solely on energy used on mining. However, other activities that sustain Bitcoin and blockchains are also energy-intensive, including trading in coins/tokens, storage of information blocks, etc. Worse, mining and processing / servicing of the networks required use of constant electricity supply, which means that the energy mix that goes to sustain cryptocurrencies operations is the worst from environmental quality perspective and must rely on heavy use of fossil fuels in the top up range of electricity demand spectrum. The environmental costs of Bitcoin and cryptos is staggering.

Scaling up Bitcoin figures from de Viries; paper to include other major cryptocurrencies would require factoring in the BTC's share of the total crypto markets by energy use. A proxy (an imperfect one) for this is BTC's total share of the cryptocurrencies publicly traded markets which stood at around 37.3% as of May 16, 2018. Assuming this proxy holds for mining and servicing costs, total demand for electricity from the cryptocurrencies and blockchain use around the world is more than 2.55GW/0.37 or more than 6.9GW, with de Viries' model implying that by year end, the system of cryptocurrencies can be burning through a staggering 1.35% of total electricity supply around the world.

The problem with the key cryptocurrencies proposition is that the system of blockchain-based public networks can deliver lower cost, higher efficiency alternatives to current records creation and storage. This proposition simply does not hold in the current energy demand environment.

The full paper can be read here: de Vries: "Bitcoin's Growing Energy Problem"

Friday, May 18, 2018

18/5/18: Euro area current accounts 1980-2017

What happened to the Euro area current accounts since the introduction of the Euro?

Periodically, I update my charts on the Euro effects on the external balances of the EA-12, the original economies of the Euro area. Here are the updates:

Considering first cumulated current account balances over 1980-2017 period, the chart below aggregates the EA12 into two sub-groups:

  • The 'periphery' defined as a group composed of Italy, Greece, Spain and Portugal
  • The 'core' group composed of the remaining EA12 countries

The chart shows several interesting facts
  1. Current account deficits in the 'peripheral' states predate the introduction of the Euro
  2. Since the introduction of the Euro through 2013 there was a consistent increase in the current account deficits amongst the 'periphery' states, with acceleration in deficits staring exactly at the point of the introduction of the Euro
  3. Current account deficits in the Euro area 'peripheral' states were rapidly accelerating into 2009
  4. Since 2014, current account deficits in the 'peripheral' states have been drawn down, at a moderate rate, as consistent with the internal deleveraging of these economies
  5. Meanwhile, the introduction of the Euro accelerated accumulation of current account surpluses within the 'core' group of EA12
  6. The rate of current account surpluses acceleration increased dramatically around 2004 and then again starting with 2009
In terms of external balances, the creation of the Euro area clearly resulted in compounding pre-Euro era existent structural imbalances in the EA12 economies.

Meanwhile, there is no discernible impact of the Euro on supporting growth in trade within the Euro area (here, we use changing countries composition of the Eurozone):

  As per above chart:
  • From 2000 and prior to 2014, Eurozone performance in terms of growth rates in exports of goods and services largely underperformed other advanced economies (ex-G7) and was in line with G7 performance
  • Before 2000, Eurozone was broadly in line with both the G7 and other advanced economies in terms of growth rates in exports of goods and services
  • Lastly, starting with 2014, the Euro area has been outperforming both the G7 and other advanced economies in terms of growth in exports of goods and services - a development that is more consistent with the fallout from the twin Global Financial Crisis (2007-2009) and the Euro Area Sovereign Debt Crisis (2011-2013), as the process of internal devaluation forced a number of Eurozone countries into more aggressive exporting
On the net, there remains no current account-linked evidence to support an argument that the creation of the Euro has been a net positive for the Eurozone member states in terms of improving their external balances and exports flows. On the other hand, there is little evidence that the Euro has hindered trade flows growth rates, whilst there is strong evidence to claim that the Euro has exacerbated current account imbalances between the 'core' and the 'periphery' states.

17/5/18" Timeline of Russian Growth 1992-2023 (forecasts)

I have annotated the timeline of Russia's GDP per capita from 1992 through forecast (IMF) out to 2023 with the inflation dynamics and presidential terms. For comparison, BRICS ex-Russia GDP per capita dynamics are presented as well.

Draw any conclusions you want:

Thursday, May 17, 2018

17/5/18: U.S. Labour Markets and the Trump Administration Record

The Global Macro Monitor have published an exhaustive study of the U.S. labour market trends over the first 15-16 months of the President Trump's tenure. The  post is long, brilliantly detailed, and empirically and intuitively flawless (yeah, I know, I don't think I ever used this descriptor of an economics research piece before). So read it in full here:

Top line conclusions are:

  • Comparing the "first 15 [monthly] payroll reports of the Trump administration to the last 15 of the Obama administration",  "as of the end of April 2018, the Trump economy has generated 2.7 million jobs versus 3.1 million in Obama’s economy, or 373k fewer workers added to payrolls"
  • Growth in employment was of lower quality during the Trump tenure to-date too: "the private sector has also added 124k fewer jobs in the Trump economy. Net job creation in the government sector under President Trump is relatively flat." The latter metric puts a boot into the arguments that President Trump is a fiscal conservative aiming to reduce public sector weight in the economy. 
  • Earnings comparatives are also wobbly: "There is relatively little difference in the growth of average hourly earnings in the Trump and Obama employment reports." Which is more striking when one recognises that the Trump Administration inherited a tightening labour market, in which, normally, one would expect more wages inflation.
  • "Job creation in President Trump’s economy outperforms the Obama economy in 5 of the 13 private sector industry groups, most significantly in manufacturing and mining", but "Almost all of the relative outperformance in mining is the result of the reversal in oil prices. Coal mining and auto manufacturing employment has not recovered". In other words, even in the core industries targeted by the Administration for growth, the Administration efforts have little to do with any recovery in the mining sector./ 
  • Cyclically, the authors note that "The results are surprising as GDP growth was significantly higher during the Trump payroll reports, averaging of 2.53 percent on an annual basis, versus 1.56 percent during the last five quarters of the previous administration". However, this also means that current jobs creation is coming toward the end of the expansion cycle, and can be expected to be lower due to constraints of labour supply.
  • Key observation, from macroeconomic environment point of view is that "the economy continues to reward capital over labor disproportionately". There is a fundamental problem with this development. The U.S. labour markets flexibility represents a net positive for the private sector productivity in the short run. However, as capital and technological deepening of production processes progresses, the very same flexibility leads to lower degree of upskilling and re-training of the existent workforce. This is a huge source of risk and uncertainty for the U.S. economy forward in terms of longer run potential growth and productivity growth.

In short, read the original post - it is packed with highly informative and very important data and observations!


Tuesday, May 15, 2018

15/5/18: S&P500 Earnings Diversification: International Trading Pays

An intersting (and occasionally covered on this blog) chart via FactSet on earnings and revenue growth for S&P500 constituents based on their exposures to international markets:

As the above clearly shows, globally diversified (by source of activity) companies have stronger growth in earnings and aggregate earnings. Not surprising, in general, but given the relative strength of the U.S. growth, compared to other regions' dynamics, this shows the value of income diversification.

15/518: Four macro charts that explain Trumpvolution

The current growth cycle has been the second longest on record:

Source: FactSet

But it has been much shallower than the previous cycles: "real GDP growth in the current expansion lags the other three expansions—by a lot. As of the first quarter of 2018, real GDP has expanded by 21% since the beginning of the current expansion; this is far lower than the 36% compound growth we saw at this point in the 1991‑2001 expansion. The chart also shows that the growth path for the longest expansions has continued to shift lower over time; the 1961‑1969 expansion saw real GDP grow by 52% by the end of its ninth year, while the economy had grown by just 38% by the end of year eight of the 1982‑1990 expansion."

Source: FactSet

And here's a summary of why loading risks of recession onto households is not such a great idea: "Real consumption has grown by 23% since the summer of 2009, compared to growth rates of 41% and 50% at the same point in the expansions of 1991‑2001 and 1961‑1969, respectively. The reluctance of consumers to spend in this expansion is not surprising when you consider how much of the brunt of the last recession was borne by this group."

Households' net worth collapse in the GFC has been more dramatic and the recovery from the crisis has been less pronounced than in the previous cycles:

Source: FactSet

Hey, you hear some say, but the recovery this time around has been 'historic' in terms of jobs creation. Right? Well, it has been historic... as in historically low:
Source: FactSet

So, despite the length of the recovery cycle, current state of the economy hardly warrants elevated levels of optimism. The recovery from the Global Financial Crisis and the Great Recession has been unimpressively sluggish, and the burden of the crises has been carried on the shoulders of ordinary households. Any wonder we have so many 'deplorables' ready to vote populist? As we noted in our recent paper (see:, the rise of populism has been a logical corollary to (1) the general trends toward secular stagnation in the economy since the mid-1990s, and (2) the impact of the twin 2008-2010 crises on households.

15/5/18: Beware of the Myth of Europe's Renaissance

My article for last Sunday's Business Post on why the Euro area growth Renaissance is more of a fizzle than a sizzle, and what Ireland needs to do to decouple from the Go Slow Europe: Hint: not an Irexit... and not more Tax Avoidance Boxes...

15/5/18: TrueEconomics makes top 100 blogs list

Delighted to see True Economics blog making Top 100 Economics Blogs list with the Intelligent Economist Huge thanks to all my readers for making this possible!

Saturday, May 12, 2018

12/5/18: Bubbles or Gartner Cycles? Tech is in it, again...

Nice visual on Gartner-maturity curve structure of sentiment driven fads in sectoral valuations:

12/5/18: Monetary Activism at ECB: A Chart of Failure

A simple chart, a great observation by Holger Zschaepitz @Schuldensuehner: "Chart of failure: #Eurozone core inflation has plunged to 0.7% despite #ECB balance sheet at record high. If ECB permanently fails to hit its #inflation target, it's time to rethink target. By the way, there is inflation in stocks, bonds, real estate not measured in official CPI."

The story of ECB racing away from the Fed and even BoJ in pursuit of the inflation Nirvana:

Which brings us to a bigger question: with ECB at play, what is there to brag about when it comes to Europe's latest growth "renaissance"? Read my article in the Business Post tomorrow... 

12/5/18: U.S. War in Afghanistan: when the patient yields to the compulsion to repeat

On and off, I have written occasionally about the complete lack of value-for-money accounting in the U.S. military spending and its imaginary successes. This is just another one of such occasions.

Here is a summary of the Special Report by the U.S. military watchdog, filed by the neoconservative in it is geopolitical positioning Foreign Policy magazine (the folks who support wars, like the one conducted in the Afghanistan):

I have summed the main findings in a series of tweets reproduced here:

Special Inspector General for Afghanistan reconstruction report of May 1: suicide attacks in Afghanistan up 50% in 2017, opium production +63%. Last GDP growth was recorded in 2012, since then, continued recession +

+ U.S. spent $126bn in relief & investment in Afghanistan over 17 years. The country now ranks 183 in the world to "do business.” < 1/3 of Afghans are connected to power grid. +

+ Number of bombs dropped by the West in Afghanistan in Jan-Feb 2018 was the highest it's been since 2013. Suicide attacks in Afghanistan are up 50% in 2017. Casualties from attacks are steadily rising. Sectarian attacks tripled in 2017. +

+ Only 65% of the Afghan population lives under government control, even though direct US expenditures to Afghan security forces of $78bn > than third largest military budget in the world. +

+ Number of serving Afghan military & police fell sharply in 2017, but U.S. forces presence is rising. "Insider attacks by Afghan soldiers are rising".

Note: the IMF data does not show decline in Afghanistan's GDP since 2013 in real terms (domestic currency), or in current US dollar terms, or in PPP-adjusted terms. The issue here is that the IMF data shows national accounts that include U.S. and Western Coalition spending and investment in the country and does not account for population growth. In fact: Afghanistan ranked 23rd lowest in the world in income per capita terms (using PPP-adjusted international dollars) in 2012. In 2017 it was ranked 19th lowest. This does mean that the economy got worse in Afghanistan in recent years. In line with this, Reuters reported earlier this year that Afghanistan's poverty rates have risen "sharply" over the last five years ( from 38% in 2011-2012, to 55% in 2016-2017. "Food insecurity has risen from 30.1 percent to 44.6 percent in five years, meaning many more people are forced to sell their land, take their children out of school to work or depend on food aid".

More details?  In September 2014, Foreign Policy wrote about another report by the same watchdog, headlining their story with a telling tag line: "Watchdog: United States Made Corruption in Afghanistan ‘Pervasive and Entrenched’". It is worth repeating that Foreign Policy is an intellectual bulwark of neoconservative doctrine that saw nothing wrong with any war the U.S. has started in the past.

The U.S. has already spent more on the war in Afghanistan (and related 'investments' there) than the entire country's GDP over the last decade. And it is tied into spending vastly more ( and

In January this year, to make the valiant efforts by the Western Coalition (read: Washington) in Afghanistan more transparent, Pentagon sought to withhold key information about the campaign from the public (

Yet, despite the U.S. larger-than-reported presence in the country, January report by SIGAR noted that  "43 percent of Afghanistan’s districts were either under Taliban control or being contested". This was after more than 16 years of war waged against the Taliban and other extremist groups by the largest, the mightiest and the best-equipped military force in the world. "Last year [2017], U.S. forces in Afghanistan restricted the amount of data it provided on the ANDSF, including casualties, personnel strength and attrition rates - data that has now been completely withheld." (See for more details).

In 2011, ten years into the campaign that promised to bring democracy and human rights to Afghanistan, the U.S. State Department stopped listing human rights as an objective for the U.S. Afghanistan policies. Not because these rights have been fully restored (or rather instituted), but because it became too embarrassing to keep them in policy documents as a reminder of the U.S. failures.

Seventeenth year into what amounts to a small war for the enormous military machine of the Fourth Rome, and the 'most brilliant', 'highly decorated', grossly overpaid and deeply revered in the popular media culture U.S. generals and politicos are clueless as to why the exceptionalist U.S. of A. has failed to control a dispersed gang of resistance fighters that, unlike the Vietnamese of the 1970s and the North Koreans of the 1950s, do not even have a superpower standing directly behind them. The reason, of course, is in the very ethos of the American power, the notions of exceptionalism and self-appointed mandate, both of which imply zero capacity to think based on historical and rational premises. As one of the authors on the topic quipped, quoting from Freud's 1914 paper Recollecting, Repeating, and Working Through,  "...the patient yields to the compulsion to repeat, which now replaces the impulsion to remember... The greater the resistance, the more extensively will acting out repetition replace remembering."

The Freud's quote (part of it) appears in this article from 2017 on the depressing comprehensiveness of the American war failure. It is worth a read: for it narrates in some detail the process of the repeated denial of reality by, at this stage, the third presidential administration in Washington engaged in an imperial dance of victory amidst the defeat.

The staggering cost of the Washington's adventurism in Afghanistan (and Iraq, and Libya, and next up - Syria, as well as in other parts of the world) has now cost the U.S. one of its historically closest proxies/allies, Pakistan (  This is a major, strategic defeat, given Pakistan's role in the region and the potential for the strengthening of the Pakistan-India-China-Iran cluster of power contests that will undoubtedly shape the entire region into the future. In simple terms, the U.S. has lost not just the war in Afghanistan, but it is losing dominance over the large swath of land that constitutes the largest cluster of world's population and has strategically central importance to the global economy and resources.

These failures are not surprising, once one takes a more rational look at the U.S. military machine and the religious devotion to it exhibited by Washington and American press. Quoting at length from Forbes (
"As it happens, the Pentagon is unique among federal agencies in having never undergone a full audit, an oversight with serious national security consequences. ...The good news is Congress has finally mandated an audit be completed by September of 2017, a deadline reached after the Department of Defense managed to skirt a government-wide audit requirement for more than two decades. The bad news is likely the audit results themselves. After all, a recent audit of the Army General Fund found bookkeepers somehow screwed up their accounting by $6.5 trillion in 2015. That number is particularly remarkable given that it is 13 times the size of the entire Pentagon budget for that year. “How could the Army misplace, fudge, misappropriate or otherwise lose $6.5 trillion?” asked an incredulous Matthew Gault reporting on the Army audit for War Is Boring. “It’s simple. Years of no oversight, bad accounting practices and crappy computer systems created this problem. And remember, this is just the Army and just its general fund.” If that’s the sort of rot we find in a single branch of the military, imagine the fiscal horrors yet to be uncovered throughout."

Note: the Defense Department delayed the audit start until December 2017 and is now promising a report from the auditors by November 2018. Worse, the audit is conducted by internal teams, in other words, the lunatics who run the asylum are now counting plates and pills in the place too. To put some veneer on this exercise, the Inspector General has hired 'external audit firms' to help analyse data collected by Pentagon's teams. The same 'audit firms' are some of the largest military and security consulting contractors, of course.

Meanwhile, the idiotic parroting of the past and failed narratives remains the leitmotif of the Washington's policy. Best exemplified by the amnesia-ridden, Ivy League-trained army of status quo dependent 'experts' and the headlines in the U.S. media echoing them: "Armed with a new strategy and renewed support from old allies, the Trump administration now believes it has everything it needs to win the war in Afghanistan." This, pretty much, sums up the best that the American-trained 'intellectual class' of the West Point-graduated generals and Harvard-trained 'analysts' can produce in place of a strategy.

The logical denouement of the U.S. failure to learn from Afghanistan adventure is the loss of the U.S. position in the region to China, followed by Iran, Pakistan, India and Russia - in that exact order. Afghanistan is likely to be the next - much larger than Syria - theatre of confrontation between Iran and Saudi-U.S. coalition, with Israel at a play too, and the American liabilities in such a conflict will be well beyond anything experienced in Iraq and Afghanistan combined. A proxy war between Iran and the U.S. via Afghanistan can risk spilling into an outright war between the two countries, which the U.S. will lose more decisively than Afghanistan, although the toll on Iran will be huge as well.

What Afghanistan has been exposing over the last 16 years, plus, is that the Pax Americana lacks not fire power, but vision, and that the lack of vision is what loses wars, and ends empires. Sail on, my thought-lacking friends from the Western Academia, military colleges, Washington's circles of Byzantine power-brokering expertise, and 'influential media'. Keep those aircraft carriers busy circling the globe. Keep awarding your military ranks free parking spaces at Walmarts and rent subsidies in the Paradise.

Wednesday, May 9, 2018

8/5/18: BRICS DECK: Part 2: PMIs, Investment and Inflation

In a recent post ( I have provided top level analysis of growth dynamics in the BRICS economies based on the IMF WEO April 2018 update. Here is the section of my BRICS deck with updated view on PMIs, Aggregate Investment and Inflation:

8/5/18: Law of Unintended Consequences and Complexity: Tax Cuts and Jobs Act 2017

The law of unintended consequences (or second order effects, as we call in economics) is ironclad: any policy reform has two sides to the coin, the side of forecasted and analyzed changes the reform engenders, and the side of consequences that appear after the reform has been enacted. The derivative proposition to this theorem is that the first side of the coin is what gets promoted by politicos in selling the reform, while the other side of the coin gets ignored until its consequences smack you in the face.

Behold the U.S. Tax Cuts and Jobs Act 2017, aka Trump's Tax Cuts, aka GOP's Gift for the Rich, aka... whatever you want to call it. Fitch Ratings recently released their analysis of the Act's unintended consequences, the impact the new law is likely to have on U.S. States' fiscal positions. And it is a tough read (see full note here:

"Recently enacted federal tax changes (H.R.1) are making budgeting and revenue forecasting more complex for many U.S. state governments," says Fitch. "...provisions including the cap on SALT deductions are a likely trigger behind a spike in state revenue collections for the current fiscal year. In Massachusetts for example, individual income tax collections through January 2018 were up nearly 12% from the prior year, this after the commonwealth recorded just 3% annual growth in January 2017. Many states are seeing robust year-over-year gains in revenue collections, though this will likely amount to little more than a one-time boost with income tax collections set to level off for the rest of the fiscal year."

State tax revenues can increase this year because, for example, of reduced Federal tax liabilities faced by households. As income tax at federal level falls, State tax deductions taken by households on their personal income for Federal tax liabilities will also fall, resulting in an increase in tax revenues to the States. Similarly, as Federal corporate income tax falls, and, assuming, corporate income rises, States will be able to collect increased revenues from the corporate activity domiciled in their jurisdictions. All of this implies higher tax revenues for the States. Offsetting these higher tax revenues, the Federal Government transfers to the individual states will likely decline as deficits balloon and as Pentagon demands an ever-greater share of Federal Budget.

In other words, the tax cuts are working, but do not expect these to continue working into the future. Or put differently, don't spend one-off revenue increases, folks. For high-spending States, like California, it is tempting to throw new money onto old bonfires, increasing allocations to public pensions and state hiring programs. But 2017 Tax Reform is a combination of permanent and temporary measures, with the latter more dominant than the former. Expiration of these measures, as well as complex interaction between various tax measures, suggest that the longer term effect of the Act on States' finances is not predictable and cannot be expected to remain in place indefinitely.

As Fitch noted: "Assessing the long-term implications of H.R. 1 will not be an easy task due to the complicated interrelationships of the law changes and because many of the provisions are scheduled to expire within the next decade. Yet-to-be finalized federal regulations around the tax bill and the possibility of additional federal legislation add more complexity and risk for states."

Tuesday, May 8, 2018

8/5/18: Germany's ifo: World Economic Climate Deteriorates

Here is the summary of the Germany's ifo Institute World Economic Climate outlook update (emphasis is mine):

"The ifo World Economic Climate has deteriorated. The indicator dropped from 26.0 points to 16.5 points in the second quarter, returning to more or less the same level as in the fourth quarter of 2017. Experts’ assessments of the current economic situation remained as favourable as last quarter, but their expectations are far less optimistic. The world economy is still experiencing an upturn, but it is losing impetus.

The economic climate deteriorated in nearly all regions. Both assessments of the current economic situation and expectations fell significantly in the USA. In the European Union, Latin America, the CIS countries, the Middle East and North Africa economic expectations also cooled down. Assessments of the current economic situation, by contrast, improved. Economic expectations also clouded over in the Asian emerging economies and developing countries. Assessments of the current economic situation, by contrast, remained more or less unchanged.

In line with rising inflation expectations, short and long-term interest rates will rise over the next six months. Experts also expect far weaker growth in world trade, partly because they are reckoning with higher trade barriers. Overall, experts expect world gross domestic product to increase by 3.9 percent this year."

This is in line with my recent warnings on the pressures building up in the global economy, as raised in a series of recent articles for the Sunday Business Post see and, and for the Cayman Financial Review see:

Thursday, May 3, 2018

3/5/18: BRICS Deck 2018: IMF Updates

The first part of my slidedeck on BRICS economies, covering headline growth and macro performance dynamics and forecasts from the IMF WEO database: