EconVue Spotlight

This morning's US GDP number was a bit below consensus and another example of hard data trailing soft data and overall sentiment.  EconVue contributor Mike Lewis had forecast .7%, but he says that growth will rebound to more than 4% in Q2 (subscriber content).  Consumption was only up .3% however.  

Today’s newsletter is focused on my impressions of the IMF/World Bank meetings in Washington last week. Here is a quote that is sometimes attributed to Harry Dexter White, considered the father of these institutions, actually made by US Treasury Secretary Henry Morgenthau at Bretton Woods, in his inaugural address in July 1944. His words encapsulate the tone of the 2017 meetings.

Prosperity, like peace, is indivisible. We cannot afford to have it scattered here or there among the fortunate or to enjoy it at the expense of others. If poverty exists, it is menacing to us all and undermines the well-being of each of us. It can no more be localized than war, but spreads and saps the economic strength of all the more-favored areas of the earth.

- Inaugural address, US Treasury Secretary Henry Morgenthau Bretton Woods, July 1944 

My takeaways:

1. Due to political events since the last meeting in October 2016, globalization and its discontents were the focus of discussions.  IMF MD Christine Lagarde called for targeted policies to ameliorate income inequality. Trade is no longer seen as the guarantor of peace or broader-based prosperity; we have arrived at Globalization 2.0.
2. The benefits of the first stage of globalization were distributed unevenly within countries and regions. Why this divergence? "Local strategies matter" and furthermore labor mobility has been impaired. This goes beyond automation. 
3. The IMF GDP growth outlook was revised upwards, reversing the recent downward trend.  Productivity losses are a puzzle however. There are doubts that technology will increase productivity and if it does, fears that it will increase unemployment.
4. The TPP could be revived in another form. Many of the speakers warned against a fragmented approach to trade policy. EconVue contributor Dr Karim Pakravan discusses these dangers in his article below and on our website  "The IMF Strikes Back".
5. In response to my question, German Finance Minister Wolfgang Schäuble agreed that Germany has been the biggest beneficiary of the EMU, but said that was not by design, and that the solution was for structural reforms to make the weaker economies more competitive, rather than looser monetary policy or devaluation. Here is a link to my question which is starts at about 56 minutes: https://www.youtube.com/watch?v=Ay6xv4hBCN0&t=808s  
6. Raghuram Rajan, former central bank governor of India now back at University of Chicago, delivered a sobering lecture for the Group of 30 in which he said that although economics is global, politics is local and many feel that they gave away too much political authority upstream. Here is the entire video of his speech:  https://www.youtube.com/watch?v=nHQn3CmczEQ
7. Finally, Paul Volker, the eminence gris of the US financial system, communicated a sense of urgency in terms of regulatory reforms. You can access his speech online but here is a quote:

Given the nature of this occasion – “Bretton Woods” and all those two words evoke in terms of a grand vision of international cooperation and stable monetary systems – matters of domestic financial regulation may seem prosaic. But I hope we have learned the lesson that financial distress cannot be localized, that markets are inextricably interlinked.  

Those interested in this subject will enjoy  Marsha Vande Berg’s article fo r EconVue below, “Taking the Long View” on regulatory reform in the Trump Administration. 

STORIES IN OUR SPOTLIGHT

Ex-Treasury Secretary Larry Summers just completely trashed the Trump tax plan
Jeff Cox, 4/27/2017 CNBC

Ex-Treasury Secretary Larry Summers on the Trump tax plan. The amount of detail in the plan is underwhelming, no modeling.  

The five markets charts that matter for investors
Financial Times 4/27/2017

Perhaps President Clinton should have allowed local sales taxes for Internet purchases. By the time they were imposed buying habits had changed.

World leaders meeting in Washington are pretending they can't see the bogeyman right in front of them
Pedro Nicolaci da Costa 4/22/2017 Business Insider

What is the future of globalism and multilateralism in a world fueled by populism?

Mainstream Economics Has Become a Celebration of the Wealthy Rentier Class
Michael Hudson 4/9/2017 Evonomics

Ouch! The 1% as the Extractive Class  and economists serve their interests.

America is Regressing into a Developing Nation for Most People
Lynn Parramore 4/20/2017  Institute for New Economic Thinking

Should 80% of the US be considered an emerging market?

ASIA

Tencent Cloud Servers Float Into Five New Global Locations
Yang Ge 4/26/2017 Caixin Global

In a sea of misconceptions here Is a real China trade issue, but US negotiators focused on goods, not services

Kim Jong Un Is a Survivor, Not a Madman
Andrei Lankov , 4/26/2017, Foreign Policy

North Korea in the news again: A time to reflect
Dan Drollette Jr 4/15/2017 Bulletin of the Atomic Scientists

North Korea has the fourth largest military force in the world and soon its destructive capacity will be enormous. My comments: although the threat of immediate military conflict with the US has receded, and China appears to have cut fuel supplies to the DPRK, the Trump Administration continues to send a series of mixed signals. How can diplomacy win if the US still has no ambassadors in place in Japan, China, or South Korea?

China’s Trillion-Dollar Yuan Defense Puts Growth at Risk
Lingling Wei 4/13/2017 Wall Street Journal

A liquidity shortfall of almost $2 trillion. In spite of Nick Lardy’s recent remarks at the Boao Forum, corporate debt in China also poses a systemic risk.

RESOURCES

American energy use, in one diagram
David Roberts 4/13/2017 Vox

2/3rds of our energy is simply wasted. 

Investment Environment Reforms Target Tide of Trash
APEC press release 4/6/2017

Absent infrastructure investment, Asia will be buried in a mound of trash.

How Serious is Water Crisis in Iran?
Khalil Khani April 16/2017 The Media Express

Absolute scarcity by 2025, 50% per capita availability by 2050. Quality low now.

ECONVUE RESEARCH AND INSIGHTS

Trump’s Tax Plan is Aimed at the 2018 and 2020 Elections, Not U.S. Competitiveness
Robert Shapiro

There is no doubt that the President’s tax plan would provide enormous windfalls for the richest people in the country. Beyond that, it may or may not sustain growth through the next two elections, since even the best conservative economists commonly overstate the benefits of cutting tax rates. But the truth is, there aren’t many other options that a Republican Congress would accept.

The IMF Strikes Back 
Karim Pakravan

The IMF argues that the net impact of protectionism on the world economy is negative, leading to the disruption of international economic linkages. In good time, the disruption in trade and investment flows and the fragmentation of global logistic chains would lead to below-potential growth and productivity.  In crisis times, the lack of global coordination and cooperation would weaken the resilience of the global economy and magnify the negative impact of shocks to the system.

Taking the Long View: Financial Sector Regulatory Overhaul and the Trump Administration
Marsha Vande Berg

The very complexity of US financial services regulatory regimes itself leaves implementation and enforcement wide open as to specifics of interpretation about what is consistent with White House edicts. It is clear, however, that the Trump White House intends to tie rule promulgation and implementation to costs versus the benefits. 

“Peak Globalization” and the Future of Democracy
Banning Garrett

The world may be headed toward “peak globalization”. This shift could empower individuals and communities to strengthen democracy, while easing some of the most troublesome aspects of globalization.

Infrastructure Stimulus Has Poor Track Record (subscriber only)
Michael Lewis

The researchers focused on the $28B sent to states designated for highway spending. That was enough to boost that category by a whopping +44% over states’ 2008 outlays. Instead, states took the federal money and reduced their own highway spending accordingly. “The amount of actual highway infrastructure investment… was likely very similar to that under a no-stimulus counterfactual,” the authors found. 

China Update: Reflecting on the Trump-Xi Summit (paid content)
Nikolai Tagarov

Since Trump attaches great importance to “striking a good deal” in general, we suspect that in time he will attempt to attain a grand bargain with China so as to reduce the US trade deficit, which has continued to grow and reached $347 billion in 2016.