Desentrañando el rompecabezas chino de mano de Hank Paulson

December 4, 2016

Como sucede con los grandes temas, el volumen de literatura sobre el tema abruma. Sucede como con Internet en donde saber seleccionar y categorizar la información es clave. El entendimiento de China es una de las grandes empresas intelectuales de nuestra generación. A finales de los 70s, y después de un “siglo de humillaciones”, varias guerras y tres décadas de comunismo, China se abría al mundo marcando uno de los grandes hitos del siglo XX y que cambiarían el orden global de manera definitiva: el mundo daba un golpe de timón del Atlántico al Pacífico; Estados Unidos y China -como antes EE UU y Europa-, pasaban a configurar la relación bilateral más relevante del mundo.

En este marco se encuadra el libro Negociando con China (Deusto) del antiguo secretario del Tesoro y antiguo CEO de Goldman Sachs, Hank Paulson. El libro aborda el tema de China a partir del hilo conductor de las vivencias personales de Paulson con aquel país que se inician a principios de los 90s y hasta nuestros días a partir de tres etapas bien diferenciadas: primero como máximo responsable de Goldman Sachs (sin duda una de las mejores compañías que han sabido enriquecerse con China), segundo como Secretario del Tesoro, y por último como presidente del Paulson Institute, organismo del tercer sector.

El lector es participe de este viaje a través del crecimiento del país -el libro resume y presenta los grandes acontecimientos de la Historia reciente del país (aunque ciertamente es muy poco teórico)-, al tiempo que se describen las peripecias de Paulson tratando con China tanto como alto ejecutivo como representante político. De este modo, el libro tiene la gran virtud de incorporar una gran cantidad de vivencias prácticas y casos reales de negociación con China lo que permite hacerse una buena idea de la complejidad del país y sus mecanismos de poder.

El libro describe por ejemplo, y lo hace bastante bien, la importancia de conocer bien el “quién es quién”, la historia detrás de la persona antes de negociar o tratar con ella y también la importancia de entender los símbolos y los detalles, elementos muy importantes dentro de la cultura china. De los diferentes casos de éxito y también fracaso en China, subyace siempre la importante idea que en la primera linea de negocios en el país, la de las grandes operaciones, a la realidad económica (el ángulo puramente de negocios) se combina siempre con la realidad del país (el ángulo geopolítico); ambos importantes y que normalmente confluyen en la misma persona: los altos cargos de las grandes empresas públicas y de los llamados sectores estratégicos (entre ellos la banca), son también altos cargos políticos dentro del Partido/Gobierno. En suma, la “gran empresa de China” es su transformación económica, asegurar su crecimiento y prosperidad, su integridad territorial y su capacidad para garantizar estabilidad política. Entender esta “agenda política” es imprescindible para las grandes aventuras comerciales en China y un elemento a tener en cuenta para cualquiera que se atreva a navegar por el gigantesco, dinámico y complejo mercado chino.

Entre otras muchas cosas el libro pone en valor la figura de Zhu Rongji, lo más parecido a Gladstone en versión china -figura, comentario al margen, con la que se intenta comparar Paulson en un pasaje que da, por hablar claro, vergüenza ajena-, y describe algunas de las estrategias para implementar las reformas pro-mercado como el hecho de adquirir compromisos con el exterior (p. ej. OMC) o la entrada de socios estratégicos e inversores extranjeros en las poderosas empresas estatales chinas (SOEs) mediante estudiadas operaciones de salida a bolsa (OPVs). Siendo el autor quién, todo sea dicho de paso, se echa en falta algo más de profundidad con respecto a las implicaciones de una OPV y los elementos que determinan su éxito.

El libro acaba siendo una mezcla de experiencia política práctica, un manual sobre como negociar y hacer negocios en China (muchas de estas observaciones son válidas en la mayoría de situaciones), todo lo anterior siguiendo el hilo conductor de la historia reciente del gigante asiático y salpimentando con el “Who is Who” de la política del país. Una lectura muy recomendable para cualquiera que quiera resolver el rompecabezas China.

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Manual de referencia sobre la ciencia política por Francis Fukuyama

December 3, 2016

Adjunto reseña (más una guía de lectura) y algunas reflexiones sobre el último libro (en dos volúmenes) de Francis Fukuyama.

Auge y decadencia de la política

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Reseña (guía de lectura) de Bankia Confidencial de Nicolás Menéndez Sarriés

November 30, 2016

Adjunto mis reflexiones, se trata de una entrada en mi dietario personal de lecturas, a propósito de la lectura de Bankia Confidencial (Deusto, 2015) de Nicolas Menéndez Sarriés.

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¿Hacia un Apocalipsis financiero?, Ignacio de la Torre

November 17, 2016

No luches contra un banco central”. Este axioma permanece inmanente en la mente de mucho inversor.  Se basa en una hipótesis: la capacidad de un banco central para crear dinero es infinita, en tanto que los fondos gestionados por un inversor son finitos, por lo tanto si realizas una apuesta contraria al banco central tienes todas las de perder.

Bajo esta premisa, los inversores han aceptado como normales precios de activos que son a todas luces desorbitados. Así, Bulgaria se financia a 10 años al 1,8%, prácticamente igual que los EEUU, y Argentina, protagonista de la que fue la mayor quiebra soberana de la historia, hoy se financia al 5%… Como hemos ido elaborando en esta columna, la inflación de activos provocada por los bancos centrales no sólo ha prostituido la valoración fundamental de los bonos soberanos, sino que ha ido trasvasándose al resto de activos: crédito, bolsa y en muchos países, activos inmobiliarios. Los bancos centrales han expandido sus balances desde los seis billones (españoles) de dólares de antes de la crisis a los actuales casi dieciocho billones. Al expandir el balance se compran activos, de ahí la enorme inflación de precios. La fiesta aún no se ha acabado. Cada mes se siguen inyectando unos 200.000 millones de dólares adicionales.

Si en el pasado el oficio de invertir se basaba en encontrar disonancias entre el precio de un activo y su valor fundamental, hoy se centra mucho más en intentar intuir lo que van a hacer los bancos centrales. Sin embargo, esta última es una materia de competencia de las ciencias sociales, y me pregunto la cualificación de muchos de nosotros para pronosticar con arreglo a tan difusas y sociales luces. Hagamos un intento.

Los bancos centrales han expandido sus balances desde los seis billones (españoles) de dólares de antes de la crisis a los actuales casi dieciocho billones

El axioma que encabeza este artículo, y en el que en mi opinión se basan muchos “fundamentales” de la actual valoración, se fundamenta en una premisa cuestionable: la capacidad de los bancos centrales para crear dinero hasta el infinito. Yo creo que esta capacidad se está agotando. Los banqueros centrales realizan política monetaria como oficiales no electos, algo en general benigno para una economía. Pero dicho poder se basa en un mandato otorgado por los ciudadanos, que lo confieren a cambio de confiar en que los banqueros centrales cumplan tres objetivos (a veces difícilmente compatibles): a) generar crecimiento y reducir el desempleo, b) conseguir estabilidad en precios de consumo (el 2% es el objetivo oficioso) y c) evitar la inestabilidad financiera, que puede generar una futura crisis.

Para conseguir el primer objetivo, desde la crisis los bancos han triplicado sus balances, pero ahora toca afrontar las consecuencias: ha subido dramáticamente el riesgo de inflación de consumo, y el riesgo de inestabilidad financiera. Si en el pasado todos éramos conscientes de los riesgos que dicha política conllevaba en la adulteración de los precios de los activos, hoy cabe considerar si hemos alcanzado el punto de inflexión a raíz de los recientes datos.

En EEUU, que opera a pleno empleo, los salarios suben ya al 2,6%, lo que se filtra en forma de inflación subyacente, que en ciertas variantes supera el objetivo de la FED. En Europa, la subyacente se ha situado en niveles del 0,7-0,8%, y a medida que se reduzca el desempleo los salarios subirán, lo que alimentará más riesgo de inflación. A medida que el crédito se acelere (fenómeno que ya sucede en EEUU y poco a poco en Europa), el dinero acelerará la inflación, como muy bien saben en Argentina. La subida del petróleo añadirá leña al fuego al hacer subir la inflación general hacia la subyacente los próximos meses.

A su vez, el riesgo de inestabilidad financiera está servido. La deuda corporativa en los EEUU está en máximos, lo que podría ser el germen de una nueva crisis si la economía entrara en recesión. En Europa, los tipos ultra-reducidos están gestando una nueva crisis de crédito a medida que se vierten préstamos a precios insostenibles hacia proyectos con riesgos considerables.

Por otro lado, los bancos no están consiguiendo el objetivo primigenio de la política laxa: reducir el nivel de ahorro y subir el volumen de inversión. Ante este fracaso parcial ¿merece la pena mantener la política actual con los enormes riesgos que conlleva? Yo creo que no, y otros ciudadanos parecen opinar algo parecido, como se refleja en la sostenida reducción del nivel de apoyo popular que mantienen los bancos centrales durante la última década.

Posiblemente vayamos a más empleo de la política fiscal, nos parezca mejor o peor.

En este contexto, las posibilidades de que veamos un giro en la política monetaria los próximos meses es muy alto. Posiblemente vayamos a más empleo de la política fiscal, nos parezca mejor o peor. En cualquier caso, este giro supondrá menor demanda de bonos y mayor oferta, lo que hará caer su precio. La caída del precio de los bonos provocará caída en el resto de los precios de los activos. Si dicha corrección ocurre en poco tiempo, tendremos una crisis financiera de enorme intensidad. El escenario base es que los bancos tendrán capacidad para graduar su intervención verbal de forma que la corrección sea dilatada en el tiempo. Sin embargo, el riesgo de cola, o sea un cambio más súbito de la política monetaria por los factores expuestos en este artículo, que redunde en una corrección abrupta en los precios de los activos, sube cada día.

El apocalipsis ha sido profetizado con escaso éxito por muchas culturas a lo largo de los siglos. Afortunadamente se han equivocado.

Ojalá yerre yo en las conclusiones de esta columna.


Economic Ideas: Inflation, Price Controls and Collectivism during the French Revolution by Richard M. Ebeling

November 17, 2016

Governments have an insatiable appetite for the wealth of their subjects. When governments find it impossible to continue raising taxes or borrowing funds, they have invariably turned to printing paper money to finance their growing expenditures. The resulting inflations have often undermined the social fabric, ruined the economy, and sometimes brought revolution and tyranny in their wake.

The political economy of the French Revolution is a tragic example of this. Before the revolution of 1789, royal France was a textbook example of mercantilism. Nothing was produced or sold, imported or exported, without government approval and regulation.

Government Extravagance and Fiscal Ruin

While the French king’s government regulated economic affairs, the royal court consumed the national wealth. Louis XVI’s personal military guard numbered 9,050 soldiers; his civilian household numbered around 4,000—30 servants were required to serve the king his dinner, four of whom had the task of filling his glass with water or wine. He also had at his service 128 musicians, 75 religious officials, 48 doctors, and 198 persons to care for his body.

To pay for this extravagance and the numerous other expenses of the Court, as well as the foreign adventures financed by the King (such as the financial help extended to the American colonists during their war of independence from the British), the King had to rely on a peculiar tax system in which large segments of the entire population – primarily the nobility and the clergy – were exempt from all taxation, with the “lower classes” bearing the brunt of the burden.

One of the most hated of the taxes was the levy on salt. Every head of a household was required to purchase annually seven pounds of salt for each member of his family at a price fixed by the government; if he failed to consume all the salt purchased during the previous year and, therefore, attempted to buy less than the quota in the new year he was charged a special fine by the State. The punishments for smuggling and selling salt on the black market were stiff an inhumane.

As we saw, in a previous article, when Louis XVI assumed the throne in 1774, government expenditures were 399.2 million livres, with tax receipts only about 372 million livres, leaving a deficit of 27.2 million livres, or about 7 percent of spending. Loans and monetary expansion that year and in future years made up the difference.

In an attempt to put the government’s finances in order, in July 1774 the king appointed a brilliant economist, Anne-Robert-Jacques Turgot, to serve as finance minister. Turgot did all in his power to curb government spending and regulation. But every proposed reform increased the opposition from privileged groups, and the king finally dismissed him in May 1776.

Those who followed Turgot as controller-general of the French government’s finances lacked his vision or his integrity. The fiscal crisis merely grew worse and worse. As Thomas Carlyle (1795-1881) summarized it in his study of The French Revolution (1837):

Be it ‘want of fiscal genius,’ or some far other want, there is the palpablest discrepancy between Revenue and Expenditure; a Deficit of the Revenue . . . This is the stern problem: hopeless seemingly as squaring the circle. Controller Joly de Fleury, who succeeded [Jacque] Necker, could do nothing with it; nothing but propose loans, which were tardily filled up; impose new taxes, unproductive of money; productive of clamor and discontent.

As little could Controller d’Ormesson do, or even less; for if Joly maintained himself beyond a year and a day, d’Ormesson reckons only by the months . . . “Fatal paralysis invades the social movement; clouds of blindness or of blackness envelop us; we are breaking down then, into the black horrors of NATIONAL BANKRUPTCY?

It was the chaos of the king’s finances that finally resulted in the Estates-General’s being called into session in early 1789, followed by the beginning of the French Revolution with the fall of the Bastille in Paris in July 1789. But the new revolutionary authorities were as extravagant in their spending as the king. Vast amounts were spent on public works to create jobs, and 17 million livres ($3.4 million) were given to the people of Paris in food subsidies.

Assignats: Paper Money and Wild Price Inflation

In November 1789, Honore Mirabeau proposed an answer to all of the government’s financial difficulties. In the previous month, the National Assembly had nationalized all of the estates and properties of the Church. Mirabeau now suggested that paper notes be issued by the National Assembly, with the Church lands as collateral. The notes would first pass into circulation as spending for public works and other expenses of the government. They would be redeemable at face value in the form of purchase price for Church property.

At the same time, it was argued that the added circulation would give a “stimulus” to industry, create jobs, and put money in the pockets of the working class. (Later it would be the confiscated lands of the nobility who had fled France that would be used as the fictitious collateral behind a flood of paper money.)

On March 17, 1790, the revolutionary National Assembly voted to issue a new paper currency called the Assignat, and in April, 400 million of them ($80 million) were put into circulation. Short of funds, the government issued another 800 million ($160 million) at the end of the summer. Seymour Harris, in his study of The Assignats (1930), traces the path of the paper currency’s depreciation. By late 1791, 1.8 billion Assignats were circulating and its purchasing power had decreased 14 percent. In August 1793 the number of Assignats had increased to almost 4.9 billion, its value having depreciated 60 percent. In November 1795 the Assignats numbered 19.7 billion, and by then its purchasing power had decreased 99 percent since first issued. In five years the money of revolutionary France had become worth less than the paper it was printed on.

The effects of this monetary collapse were fantastic. A huge debtor class was created with a vested interest in the inflation because depreciating Assignats meant debtors repaid in increasingly worthless money. Others had speculated in land, often former Church properties the government had seized and sold off, and their fortunes were now tied to inflationary rises in land values. With money more worthless each day, pleasures of the moment took precedence over long-term planning and investment.

Goods were hoarded—and thus became scarcer—because sellers expected higher prices tomorrow. Soap became so scarce that Parisian washerwomen demanded that any sellers who refused to sell their product for Assignats should be put to death. In February 1793 mobs in Paris attacked more than 200 stores, looting everything from bread and coffee to sugar and clothing.

In his four-volume History of the French Revolution (1867), Henrich von Sybel (1817-1895) explain the social and psychological environment of the time:

None felt any confidence in the future in any respect; few dared to make any business investment for any length of time, and it was accounted a folly to curtail the pleasures of the moment, to acquire or save for an uncertain future . . .

Whoever possessed a handful of Assignats or silver coins, hastened to spend them in keen enjoyment, and the eager desire to catch at every passing pleasure filled each heart with pulsations. In the autumn all the theaters had been reopened and were frequented with untiring zeal . . . The cabarets and cafes were no less filled than the theaters. Evening after evening every quarter of the city resounded with music and dancing . . .

These enjoyments, too, received a peculiar coloring – glaring lights and gloomy shadows – from the recollections and feelings of the Revolution . . . In other circles no one was received who had not lost a relative by the guillotine; the fashionable ball-dress imitated the cropped hair and the turned-back collar of those who were led to execution; and the gentlemen challenged their partners to the dance with a peculiar nod, intended to remind them of the fall of the severed head.

On who did the burden of the inflation mostly fall? The poorest. Financiers, merchants, and commodity speculators who normally participated in international trade often could protect themselves. They accumulated gold and silver and sent it abroad for safekeeping; they also invested in art and precious jewelry. Their speculative expertise enabled many of them to stay ahead of the inflation and to profit from currency fluctuations. The working class and the poor in general had neither the expertise nor the means to protect the little they had. They were the ones who ended up holding the billions of worthless Assignats.

Finally, on December 22, 1795, the government decreed that the printing of the Assignatsshould stop. Gold and silver transactions were permitted again after having been banned and were recognized as legally binding. On February 18, 1796, at 9 o’clock in the morning, the printing presses, plates, and paper used to make Assignats were taken to the Place Vendôme and before a huge crowd of Parisians were broken and burned.

Disastrous Price Controls To Combat Inflation

However, before the episode with the Assignats ended, as the inflation grew worse, an outcry was heard from “the people” that prices must be prevented from rising. On May 4, 1793, the National Assembly imposed price controls on grain and specified that it could only be sold in public markets under the watchful eye of state inspectors, who were also given the authority to break into merchants’ private homes and confiscate hoarded grain and flour. Destruction of commodities under government regulation was made a capital offense.

In September 1793 the price controls were extended to all goods declared to be of “primary necessity.” Prices were prohibited from rising more than one-third in 1790. And wages were placed under similar control in the spring of 1794. Nonetheless, commodities soon disappeared from the markets. Paris cafes found it impossible to obtain sugar; food supplies decreased as farmers refused to send their produce to the cities.

American economist, Edwin Kemmerer (1875-1845), in his study of the economics of the French Revolution in his book, Money (1935), explained some of the ways the price controls were evaded:

Among the methods employed for evading this price-fixing system the following may be cited: the withdraw of goods from the market and the failure to produce new supplies when the existing stocks were exhausted; the production and sale of inferior quality, the feeding of grain to farm animals at times with the prices of grain subject to the Maximum and the prices of live animals were not; the milling of wheat into flour by the farmers when the price of wheat was controlled and the price of flour was not.

Farmers sold their produce at home clandestinely, instead of bringing it to market. When the prices of raw materials were controlled, the prices of manufactured articles frequently rose abnormally, and when the prices of necessities were held down, the price of luxuries soared.

Evasions of the law yielded large profits, when the penalties for evasion, if caught, were extreme. This led to much official corruption. The supply of goods available in the markets at the controlled prices were often inadequate and the queue, as in Russian cities of today, became a familiar institution.

The Ideology of the Total State over the Individual

During the Jacobin Republic of 1792–1794, a swarm of regulators spread across France imposing price ceilings and intruding into every corner of people’s lives; they imposed death sentences, confiscated wealth and property, and sent men, women, and children to prison and slave labor. In the name of the war effort, after revolutionary France came into conflict with many of its neighbors, all industries in any way related to national defense or foreign trade were placed under the direct control of the state; prices, production, and distribution of all goods by private enterprises were under government command. A huge bureaucracy emerged to manage all this, and that bureaucracy swallowed up increasing portions of the nation’s wealth.

This all followed naturally from the premises of the Jacobin mind, which under the shadow of Rousseau’s notion of the “general will” argued that the state had the duty to impose a common purpose on everyone. The individual was nothing; the state was everything. The individual became the abstraction, and the state the reality. Those who did not see the “general will” would be taught; those who resisted the teaching would be commanded; and those who resisted the commands would perish, because only “enemies of the people” would oppose the collectivist Truth.

The French Revolutionist Bertrand Barere (1755-1841) declared in 1793:

The Republic must penetrate the souls of citizens through all the senses . . . Some owe [France] her industry, others their fortunes, some their advice, others their arms; all owe her their blood. Thus, then, all French people of both sexes and of all ages are called upon by patriotism to defend liberty . . .

Let everyone take his post in the national and military movement that is in preparation. The youth will fight; the married men will forge arms, transport baggage and artillery, and provide subsistence; women will work at the soldier’s clothing, make tents, and become nurses in the hospitals for the wounded; the children will make lint out of linen; and the old men, again performing the mission they had among the ancients, will be carried to the public squares, there to enflame the courage of the young warriors and propagate the hatred of kings and the unity of the Republic.

All laws, customs, habits, modes of commerce, thought and language were to be uniform and the same for all. Not even the family had autonomous existence; and children? They belonged to the State. Said Barere:

The principles that ought to guide parents are that children belong to the general family of the Republic, before they belong to particular families. The spirit of private lives must disappear when the great family calls. You are born for the Republic, and not for the pride and the despotism of families.

Here was the birth of modern national collectivism and allegiance and obedience to the “people’s” State.   When in January 1793 a messenger was sent to inform the revolutionary French forces in the east of the country, who were facing the invading armies of anti-revolutionary foreign monarchs, that the French king had been executed, one of the French officers asked, “For whom shall we fight from now on,” if not the king? The reply was, “For the nation, for the Republic.”

The Return to Freer Market Principles

In late 1794 the anti-Jacobin Thermidorians gained the upper hand in the government, and the advocates of a freer market were able to make their case. One of them, M. Eschasseriaux, declared, “A system of economy is good . . . when the farmer, the manufacturer, and the trader enjoy the full liberty of their property, their production, and their industry.”

And his colleague, M. Thibaudeau, insisted, “I regard the [price] Maximum as disastrous, as the source of all the misfortunes we have experienced. It has open a career for thieves, covered France with a hoard of smugglers, and ruined honest men who respect the law . . . I know that when the government attempts to regulate everything, all is lost.”

Finally, on December 27, 1794, the price and wage controls were lifted, and market-based terms of trade were once again allowed. And following the end of the Assignats a year later, goods once more flowed to the market and a degree of prosperity was restored. As Adolph Thiers (1797-1877) described in his History of the French Revolution (1842):

Nobody any longer traded in anything but silver. This money, which had apparently been hidden away or exported aboard, took over the circulation. Whatever was hidden came into the open, whatever had left France returned there . . .

Gold and silver, like all commodities, move to where demand attracts them, their price become higher and stays at that level until the supply is adequate and the demand is satisfied. Only gold and silver were to be seen on the markets and people’s wages were paid in the same manner. One might have said that no paper money existed in France.

Warrants [Assignats] were to be found only in the hands of speculators, who received them from the government and resold them to buyers of national assets. Thus the financial crisis continued to exist for the state, but almost ceased to exist for individuals.

The types of collectivist ideas and economic policies that were experienced during the French Revolution have been experienced many times since, and have had their advocates in our more modern times, including, some have suggested, for instance, in the writings of such famous economists as John Maynard Keynes.

In late 1936, the Austrian-born economist, Joseph A. Schumpeter, wrote a review of Keynes’s recently published, The General Theory of Employment, Interest, and Money, which in a handful of years became the “bible” of the Keynesian “new economics.” Schumpeter concluded the review with the following observation:

Let him who accepts the message there expounded [in John Maynard Keynes’s The General Theory of Employment, Interest, and Money] rewrite the history of the French ancien regime [old regime] in such terms as these:

Louis XVI was a most enlightened monarch. Feeling the necessity of stimulating expenditure he secured the services of such expert spenders as Madame de Pompadour and Madame de Barry. They went to work with unsurpassable efficiency. Full employment, a maximum of resulting output, and general well-being ought to have been the consequence. It is true that instead we find misery, shame and, at the end of it all a stream of blood. But that was a chance coincidence.


Trump promises a fiscal boom and a surging dollar, if he can control himself via Telegraph.

November 12, 2016

If Donald Trump means what he says, the West is dead as a meaningful concept.
The international system and liberal trading order upheld by the US since the Second World War will disintegrate in short order.

The Asian balance of power will unravel. Weak countries on the Pacific rim will be left with no choice: cut off by an isolationist America, they will succumb to the orbit of an expansionist China. Japan will have to rearm at break-neck speed to defend itself.

Russia’s Vladimir Putin will have a free hand in Eastern Europe, able to lever his (temporary) military advantage to maximum political effect. Whether Mr Trump pulls out of NATO or merely lets it wither on the vine, the outcome will be the same. Nobody will believe in the solidarity and deterrence of Article V.
A series of walls – metaphorical and real – will obstruct the flow of global goods and capital that we take for granted. Emerging markets will be left in the lurch. Interlocking supply chains of global commerce will become unworkable. The World Trade Organisation will go the way of the League of Nations.

The Paris climate accord – agreed last year in a rare moment of world concord – will degenerate into a free-for-all since Mr Trump dismisses the CO2 threat a ‘Chinese hoax’. Those who champion open democracy in difficult places will no longer be able to draw on American moral leadership and diplomatic pressure. They will find themselves apologising, or in prison.

It is impossible for equity, bond, and currency markets to price such a strategic earthquake, which explains the wild gyrations we have seen since the election shock. All models break down.
The judgment call we have to make is whether he actually means the outlandish things he said – mostly flippantly, and in vague terms – and whether White House duties will compel him to retreat even if he did.

Washington’s permanent government and the ‘K’ street lobbyists of corporate America have a way of co-opting US leaders. It is my tentative working premise that Mr Trump is not a new Mussolini and that he will ultimately trim his excesses. Call it a ‘soft Trump’ if you like, though this too entails its own political risks.

If so, an entirely different economic picture takes shape. His manifesto amounts to a massive fiscal stimulus, with tax cuts across the board, a $1 trillion blitz on infrastructure, and an imperial navy of 350 combat ships.

It is a replay of Reaganomics in the early 1980s, a form of turbo-charged Keynesian reflation, and damn the deficit. It promises a pro-cyclical economic boom, so long as Mr Trump quietly drops his threat of 35pc tariffs against Mexico and 45pc against China.

Mr Trump enjoys the huge advantage of Republican control over the House and Senate. This averts the paralysing gridlock and obstructionism that surely awaited Hillary Clinton had she won. He can overcome the ideology of austerity in a way that she could never hope to do.

There will be friction but House Republicans will hardly resist his plan to cut corporation tax from 35pc to 15pc, or to cut income tax from 39.6pc to 33pc for the rich, to 25pc for middle earners, to 12pc for those below $54,000, and to zero for those under $29,000.

Nor are they likely to block his call for national reconstruction on bridges, tunnels, telecommunications, cyber security, water systems, pipelines and the electric grid, all built with “American steel” and supposedly modeled on Eisenhower’s highway expansion in the 1950s.

You might equally say it looks more like Roosevelt’s New Deal, even if funded partially by private money and run on a fee-earning basis. Infrastructure spending of this kind is what Left-leaning economists such Larry Summers and Paul Krugman have been calling for all along.

It starts to plug the $3.6 trillion backlog of projects identified by the American Society of Civil Engineers. It address one cause of sliding US productivity growth. It soaks up the corporate cash hoard, helping to bring investment back into alignment with savings.

The budget deficit would probably balloon by at least $450bn – or 2.4pc of GDP – even after offsetting a hiring freeze for public employees. That is potent money.

Mr Trump’s tax cuts for the rich are not to everybody’s taste. Yet in broad macro-economic terms, this fiscal rebalancing is what Keynesian and monetarist doctors ordered. It becomes easier for the US to escape the ‘Wicksellian’ trap of a negative natural rate of interest, and therefore to escape clammy embrace of quantitative easing.

Fiscal expansion allows the Federal Reserve to raise interest rates faster, ceteris paribus. Vice-chairman Stanley Fischer has even put a figure on it, suggesting that every one percentage point of GDP in fiscal loosening implies rate rises of 50 basis points.

Trumpanomics shifts the structure of US and global credit, and exchange rates. It was the same regime of “loose fiscal/tight money” that catapulted the dollar sky high in the early 1980s, with dramatic global consequences.

You would not know this from the instant reaction this morning after the vote. Traders slashed expectations of a rate rise in December. They sold the dollar. Headlines warned of a dollar crash. This is nonsense on stilts.

The greater risk is that a double shock of rising rates and a rising dollar will set off turmoil in global shadow finance, the $10 trillion nexus of debt trading outside the US that is denominated in dollars. The global financial system is more intricately tied to US policy and dollar liquidity today than at any time since the pre-War Gold Standard.

Dangers abound for everybody if mistakes are made but the fall-out from a ‘hard Trump’ is not confined to the US, whatever some in Europe and Asia fail seem to think. The lesson of the 1930s is that those countries running a structural current account surplus suffer most once protectionism takes hold.

The deficit countries get off lightly. In certain circumstances they may even benefit, as none other than Adam Smith conceded. The inexorable fact is that America that runs a $500bn deficit and serves as consumer of last resort for the world, and the world cannot afford to lose it.

Yes, the US would be damaged by trade wars but the damage would be worse for those mercantilist states that feed off the open US market without fully reciprocating. Mr Trump’s team specifically names Germany, alleging that it uses the euro mechanism to hold down its exchange rate and lock in a surplus of 8.5pc of GDP.

Yes, the US would be damaged by trade wars but the damage would be worse for those mercantilist states that feed off the open US market without fully reciprocating Mr Trump has threatened to name China a “currency manipulator” from day one, automatically triggering sanctions. This comes even though the Communist Party is now in the opposite position, struggling to stop the yuan falling because of accelerating capital flight.

Punitive tariffs would be traumatic, given the symbiotic nature of corporate ‘Chimerica’. Yet a tit-for-tat trade war between the US and China would not be symmetric. The disguised weakness of the Chinese position would become painfully obvious, and might bring forward the day of reckoning for China’s banks and corporate debtors.

However unfair, a ‘hard Trump’ might well cause more havoc in Asia, Europe, Latin America, and the Middle East than in the US itself.

This is not to say that Mr Trump will act on his threats. He is a demagogue but not ultimately a fool. The cold calculated trade at this stage is to bet on optimism.
Buy the dip, with tight political stops.


Central bankers have collectively lost the plot. They must raise interest rates or face their doom, W. Hague (via TELEGRAPH)

November 7, 2016

It was May 6 1997, and the forlorn Tory survivors of Labour’s landslide election victory five days earlier had to make our first collective decision. On that day, the new Chancellor, Gordon Brown, announced that henceforth the Bank of England would have operational independence from governments.

We decided not to demur. In private, we had considered doing the same thing ourselves. The idea that central banks should be free of political pressures and the electoral cycle as they set interest rates had become a prevailing one across the world – with good reason after the many wild swings in inflation and interest rates over previous decades. 

Ever since, the Bank, like its counterparts such as the US Federal Reserve and the European Central Bank, has been setting interest rates as it wishes to achieve a sustained, low rate of inflation. But such central banks are now in deep trouble, perhaps deeper than they realise. Eight years after the global financial crisis they are still pursuing emergency policies that are becoming steadily more unpopular and counter-productive. Unless they change course soon, they will find their independence increasingly under attack.   

Theresa May warned in her conference speech about low interest rates fuelling inequality. Donald Trump rages against the chair of the Fed, Janet Yellen. Germans are restive about the lax monetary policy of the ECB. What has gone wrong? 

In 2008 the central banks reacted to a massive crisis they had completely failed to foresee by cutting rates to record lows and embarking on “quantitative easing” – pumping trillions of dollars into their economies by buying up the assets of commercial banks. The trouble is that eight years later they are, to varying degrees, still doing it. Like doctors keeping their patients on a drip many years after an operation, they are losing credibility and producing very dangerous side effects.  

There are at least 10 serious drawbacks to this – all of which can be accepted for a short period but become either politically explosive or economically unwise if continued indefinitely. 

1. Savers find it impossible to earn a worthwhile return, which drives them into riskier assets thus causing the price of houses and shares to be inflated ever higher. 

2. Higher asset prices make people who own them much richer, while leaving out many others, seriously exacerbating social and political divides and fuelling the anger behind “populist” campaigns. 

3. Pension funds have poor returns and therefore suffer huge deficits, causing businesses to have to put more money into them rather than use it for expansion. 

4. Banks find it harder to run a viable business, contributing to the banking crisis now visibly widespread in Italy and Germany in particular. 

5. Those people who are able to save more do so, because they need a bigger pot of savings to get an equivalent return, so low interest rates cause those people to spend less, not more. 

6. Companies have an incentive to use borrowed money to buy back shares – which they are doing on a big scale – rather than spend the money on new and productive investments. 

7. Central banks are starting to buy up corporate bonds, not just government bonds, to keep the system inflated – so they are acquiring risky assets themselves and giving preference to some companies over others. 

8. “Zombie companies”, which can only stay in business because they can borrow so cheaply, are kept going even though they would not normally be successful – dragging down long-term productivity. 

9. Pumping up the prices of stock markets and houses without an underlying improvement in economic performance becomes ever more difficult to unwind and ultimately threatens an almighty crash whenever it does come to an end – wiping out business and home buyers who got used to ultra-low rates for too long. 

10. People are not stupid; when they see emergency measures going on for nearly a decade it undermines their confidence in authorities, who they think have lost the plot. 

I am not an economist but I have come to the conclusion that central banks collectively have now indeed lost the plot. The whole point of their independence was that they could be brave enough to make people confront reality. Yet in reality they are blowing up a bubble of make-believe money to avoid immediate pain, except for penalising the poor and the prudent. 

Highcharts/Bank of England

Earlier this year I put this view to the top staff at the central bank of a major Far East economy, thinking they might set my mind at rest and explain why everything made sense. But, far more alarmingly, they said they agreed with me: their problem was that no single authority can opt out of these policies because they might cause a recession for their own country unless there was a global, co-ordinated move gently to raise interest rates. 

The policies of any one central bank may well be perfectly rational, including the recent decisions of the Bank of England after the referendum. But so is a decision by any one sheep to run with the flock when in danger. The trouble is that the whole flock might be heading for a cliff. 

Some central bankers would mount a strong defence of their approach. They would explain that there is a global glut of savings, so interest rates are in any case kept low by market forces. This is true, but it does not mean those rates have to be driven to zero, or even below zero now in some places, by the authorities. 

They would also say that their mandate is to keep inflation low and positive and that’s it. All these other effects that I have mentioned are not their business, because they are not political leaders. They are just doing a technical job. 

I have bad news for them. The accumulating effects of loose monetary policy globally are intensely political. When pension funds renege on promises, or inequality widens further, or savers become desperate, huge public and political anger is gong to burst over the heads of the world’s central banks. 

The only way out is for the US Fed to summon the courage to lead the way to higher interest rates, and others to follow slowly but surely. If they fail to do so, the era of their much-vaunted independence will come, possibly quite dramatically, to its end.