Yellen: “There Will Be No New Crisis In My Lifetime”

Via Reuters:

U.S. Federal Reserve Chair Janet Yellen said on Tuesday that she does not believe that there will be another financial crisis for at least as long as she lives, thanks largely to reforms of the banking system since the 2007-09 crash.

“Would I say there will never, ever be another financial crisis?” Yellen said at a question-and-answer event in London.

“You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be,” she said.

Sounds good, right?


Not really. Perhaps she is being extremely modest in projecting her future lifespan. But regardless of whether she means 5, 10, 20 or 50 years, Yellen sounds hubristic. It’s the kind of off-the-cuff prognosticating that gets you into trouble. Like those um-and-ah gut-driven prognostications from people totally sure that Bitcoin will go to $100,000 by mid 2014. Or that gold will go to $10,000 by late 2012.

Or, like the former occupant of Yellen’s office in 2005 when it came to the housing bubble.

Via Washington Post:

Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, “largely reflect strong economic fundamentals,” such as strong growth in jobs, incomes and the number of new households.


Yellen has no data to tell her that there will be no financial crisis. She has no clue what the next crisis will look like, either. None of us do. Each crisis is unique. All she has is the last crisis to go by. Regulatory policy will always be reactive because human behaviour is intrinsically innovative. Market participants will always and by definition seek to bend rules and look for loopholes, and new and exciting ways to eke out a profit. In the long run, that is beneficent. In the short run, it can lead to all kinds of wobbles, and shakes, and tumbles.

As Hyman Minsky put it, “stability is destabilizing.” This is a tricky, trippy, counterintuitive concept to really grasp, so it is hardly surprising that neither Yellen nor Bernanke grapple with it. It is not so much a problem with the arrogance or with the  limited or skewed visions of policymakers as it is a problem with entropy. Stability makes people forget what instability feels like. Policymakers are people. Market participants are people. Heck, voters are people.

The United States had a remarkable and bounteous seventy years of strong, unwavering economic growth with improving civil rights, widening property ownership, rising real estate prices—the thing, lest we forget, that tricked Bernanke—and rising median incomes and median net worths. The United States’ government was led throughout this period predominantly by career politicians and civil servants, with ideas provided by neoliberal economists and political theorists. For the most part, it worked well. But stability is destabilizing. Only historians and bookworms have any clue what it is like to have a pussygrabbing P.T. Barnum-esque showman as emperor. So, in the wake of a great recession and rising inequality—something that was bound to happen sooner or later, even with deft macroeconomic management, after all, stability is destabilizing—the Trump thing happened.

I don’t mean to go off on an anti-Trump rant. That is not the point of this essay. My point is only that stability is destabilizing. No matter how many well-meaning historians, and philosophers, and economists argue against Trump’s flawed anti-trade economics, his authoritarian tendencies, his xenophobic wailing, and so forth, people didn’t listen in the most part. For they didn’t live under Nero, or Mussolini. They didn’t live through the era of Godwinian strongman nationalism in the 1930s. They never lived in Saudi Arabia, or Sisi’s Egypt, or Putin’s Russia. They want to see what it’s like to shake the apple tree. To destabilize things. Stability is destabilizing. Get it yet?

Of course, having that unhinged maniac and his entourage of nutjobs and wackadoodles pissing about in the White House and ignoring sound economic reasoning is a very good tell that Yellen’s prognostications will likely be tested very soon, and why the booming stock market is likely soaring toward a euphoric bubble.

As I have been writing for years and years, modern, developed trade systems are fragile to shocks. That doesn’t mean that we should eschew global trade. Far from it. The more the world trades, the richer it gets. Ricardo was completely correct in his theory on comparative advantage, and trade is overwhelmingly beneficial so long as governments compensate the communities that lose out to trade migration. (Which, the U.S. government has again and again failed to do since the beginning of the great industry migration in the 1980s).

But we should be ready for breakdowns in these complicated systems. We must be ready. And if government is taken over by a group of people who are actively hostile to the trade systems that make the United States richer, doubly, trebly, quadruply so.

I don’t know what the next crisis will look like. But I do know that central banks have already stretched their balance sheets. I know markets are once again, like 2007, engaged in speculative frenzies over exotic asset classes (like, for instance, cryptocoins) that few if any really understand. And I know that Trump is the loosest of loose cannons. One tweet from him can tank a Fortune 500 stock.

The United States has had a run as the richest, strongest nation in the world. But stabilility is destabilizing. And we are well and truly in the destabilization phase now.



Trump’s Awful Tariff Plans Will Hurt America

He plans a 35% tariff on goods manufactured by American firms abroad:

This is less coherent economic doctrine and more puffed-up pseudo-alpha male posturing. Unfortunately, given that the man is about to become President, it will also be executive policy. Things, in other words, are about to get an awful lot more expensive for the American consumer.

Because it will be the consumer who pays the price to subsidize American manufacturing. As this excellent rundown by Taos Turner and Paul Kiernan of The Wall Street Journal explains, that is what happens when countries engage in naked protectionism via import tariffs:

As U.S. President-elect Donald Trump contemplates tariffs and other limits on trade, he might consider the results of such protectionist measures in two economies on the other end of the hemisphere, in Argentina and Brazil.

For decades, South America’s two largest economies have tried to shield their workers from global trade, largely through high tariffs and regulations that promote domestic production over imports. The World Bank ranks Argentina and Brazil among the world’s most closed big economies.

In Brazil, locally made products are enshrined in the constitution. Gadget-loving Argentines often use the black market or go to Miami to buy iPhones, which were barred for years because Apple wouldn’t produce them in Argentina.

These protectionist policies have created tens of thousands of well-paid factory jobs and may have helped avoid factory layoffs like those that rattled Midwestern U.S. states like Michigan. But they have come at a huge cost to consumers, who now pay higher prices, and to taxpayers, who underwrite the subsidies. Taken together, these measures essentially transfer wealth from society at large to a smaller group of workers.

These policies have not transformed Argentina or Brazil into industrial powerhouses. Far from it. These two countries—sitting in 36th and 54th place in the world—lag way behind the United States in terms of manufacturing value added per capita.

In other words, the consumer pays massive tariff costs for the high quality foreign-made goods they want—things like, for example, iPhones, Japanese and German cars, etc—to subsidize unproductive and non-competitive domestic operations. And those subsidized operations don’t do much in terms of adding economic value. That’s because they’re not internationally competitive. Protectionism weakens a country’s domestic industry by shielding it from market competition. A choice between a cheaper but inferior subsidized domestic good, and an artificially more expensive foreign good of higher quality is a choice between the worst of both worlds.

Today, this kind of protectionism may not even do much to create subsidized jobs. Companies may well take up Trump on his offer and manufacture domestically. But that doesn’t mean jobs will come roaring back. Robotics, A.I., and automation are advancing to an extent where automated factories can churn out huge volumes without employing many people.

This would be a worst-of-both-worlds scenario. Domestic production may increase without an attendant increase in industrial employment. International goods will become inordinately expensive, hitting the American consumer—and every American is an American consumer—hard in the pocketbook.

Immigration Makes Us More Prosperous

This is a really important fact that people don’t talk about enough:

That is a huge gap. Immigrants’ economic output is almost three times their weight as a proportion of the population, a difference that adds up to $3 trillion annually.

Why would this be the case? Well, immigrants are typically pretty motivated people. Packing everything up and moving out of the country and into a completely new environment is a very motivated and committed thing to do. It is a signal that says “I want to do something really worthwhile with my life.”

Migration also takes lots of different skills such as the ability to navigate bureaucracy and different legal and cultural frameworks, the ability to learn a foreign language, and the ability to do in-demand work in the destination country.

And while there may be bad apples who go abroad to commit crimes, or leech off welfare, or engage in terrorism—just as there are some native individuals who engage in crime, and terrorism, and welfare fraud—the bigger picture detailed in the McKinsey/IMF study is one of migrants making the world much richer.

Indeed, immigrants commit a disproportionately low amount of crime per person. Skilled and highly-motivated migrants probably have less time or reason to engage in criminal activities.

And, as the FT notes: “The study also cites widespread academic work indicating that migration does not harm domestic employment or wages despite short-term negative effects in limited areas. Instead it emphasises a wage gap of 20-30 per cent between immigrant and native workers, adding that bringing immigrants’ pay closer to national averages would also boost output.”

Of course, these facts do not take away the cultural distress of people who voted for Brexit and Trump, people who may feel left behind by globalization.

But immigration restrictionism to appease these people is throwing the golden goose out with the bathwater. Immigration makes us as a whole much richer. A much more sensible answer than immigration restrictionism is to use public funds derived from the benefits of immigration to address some of these concerns. Such programs should include job retraining programs for factory workers displaced by job migration, providing language and assimilation classes for new immigrants, and screening measures to prevent the movement of people who might intend to commit acts of terrorism.

According to some theories, completely open borders would be even more beneficial, doubling global GDP.

In practice, that may not work, but a sensible migration policy would be to seek to move closer to the paradigm of open borders, to see if the theory holds up. Unfortunately, in the post-Brexit, post-Trump, post-fact world, we see no such policy. And we probably won’t for a long while yet.

Trump’s Election Win Shows That The Bank Bailouts And Quantitative Easing Have Failed

The bigger picture of the early 21st century follows: Western nations experienced a massive blowout bubble of leverage, irrational exuberance, and Hayekian pseudo-money creation.

Yet this money was not going to overwhelmingly productive causes. The real output of the Western world did not follow anything close to the ebullience of the financial markets. Without the growth and jobs needed to service the debt load, many of the debtors—including most famously subprime mortgage borrowers—defaulted.  And thus the securitized debt bubble burst when—in the midst of two large and expensive American wars—the animal spirits of the market turned to panic over debt defaults.

What followed was not, it turns out, enough to right the ship. In theory, when markets are frightened of the future and productive human and financial capital lies idle, government borrowing can re-employ these resources until the animal spirits of the market emerge from their slump. In my view, there are two key measures of this: unemployment, and interest rates on government borrowing. High unemployment rates signify idle human capital. Low interest rates signify idle financial capital.

But this balancing did not occur. Even as the Brown and Obama governments engaged in a degree of fiscal stimulus, voters were not won over by the logic of this, and austerian conservatives came to parliamentary power in both the United States and United Kingdom. Government purse strings tightened. Instead, stimulus came down to central banks, who kept interest rates super low, and used quantitative easing as a form of simulated rate cut to cut interest rates beyond the lower bound of zero.

In my view, the political collapse we have seen since in the last year in both the United Kingdom and United States illustrates that this was not enough. Moreover—and more importantly— the continuation of the low interest rate environment illustrates that this was not enough. If quantitative easing had been worked as intended, interest rates would surely have bounced back by now, rather than remaining depressed? Certainly you can make an argument that we are now in an era of depressed interest rates as a result of our ageing society, where rising numbers of retirees mean that demand for savings is outpacing demand for productive investment opportunities. There is certainly some truth in that view. But ultimately, that is just one of many facts that governments and central banks had to weigh in getting the economy back to normal after 2008.

And maybe more quantitative easing would have allowed the market to bounce back and renormalize faster. Somehow, I doubt it. Why? Because quantitative easing is a Rube Goldbergian form of stimulus. It is a matter of pushing on a string. It is leading the horse to water. But there is no guarantee that the horse will drink. And the horse—in this case, the market—has not drunk. Demand for productive investment has not recovered, in spite the fact that that the central banks have made it super cheap. So the banks that got access to the cheap financing just sat on the money, instead of using it productively.

There is a bigger picture here, and it is something that I referred to in 2011 as Japanization. To wit:

Essentially, in both the United States and Japan, credit bubbles fuelling a bubble in the housing market collapsed, leading to a stock market crash, and asset price slides, triggering deflation throughout the respective economies—much like after the 1929 crash. Policy makers in both countries—at the Bank of Japan, and Federal Reserve — set about reflating the bubble by helicopter dropping yen and dollars. Fundamental structural problems in the banking system that contributed to the initial credit bubbles—in both Japan and the United States—have not really ever been addressed. Bad businesses were never liquidated, which is why there has not been aggressive new growth. So Japan’s zombie banks, and America’s too big to fail monoliths blunder on.

They have now blundered on into full on systemic contagion. Unhappy voters have lashed out and thrown out incumbents—the European Union and David Cameron in Britain, and the Bush-Clinton dynasties in America.

Unhappiness with the economy is at the very core of this. There has already been a quite voluminous debate about whether or not Trumpism and Brexitism were fuelled by economic anxiety or whether they are a traditionalist cultural backlash. Such debates present a false dichotomy. If Trumpism and Brexitism were not about the state of the economy, why did they not occur when the economy was strong? Why did they suddenly start rising after a financial crisis in the presence of a depressed economy—just as they did in the 1930s during the Great Depression? Hitler did not come to power when Germany was economically strong. Mussolini did not come to power when Italy was economically strong. The reality is that economic weakness and economic anxiety open the door to cultural backlash. People who feel that the economy is bad are primed to listen to scapegoating. Immigrants, rising foreign powers, and establishment politicians like David Cameron and Hillary Clinton provide easy targets.

However, even within the false dichotomy of anxiety vs backlash, there is substantial evidence that the Trumpist communities that were falling behind. A Gallup analysis in August of this year found that: “communities with worse health outcomes, lower social mobility, less social capital, greater reliance on social security income, and less reliance on capital income, predicts higher levels of Trump support”. Indeed, as Max Ehrenfreund and Jeff Guo of The Washington Post—who took the “it’s not economic anxiety” position—noted, “there does seem to be a relationship between economic anxiety and Trump’s appeal”, even if that relationship is not as simple as unemployed and poor people diving into Trump’s camp.

The same is true for the Brexiteers. As Ben Chu of The Independent notes: ” new research by the labour market economists Brian Bell and Stephen Machin… suggests the Leave vote tended to be bigger in areas of the country where wage growth has been weakest since 1997″.

The financial crisis of 2008 provided politicians with an opportunity to re-engineer the economic system to prevent these groups from falling behind so dramatically. The system failed, completely and utterly. Policy makers were in a position to re-design it. The financial system could have at very least been re-engineered to provide financing, training, and education to people in areas which lost out on manufacturing jobs thanks to automation and globalization.

Instead politicians capitulated utterly to Wall Street, and bailed out a fragile zombie system, as Japan did in the 1990s. The machine keeps blundering on, sitting on vast quantities of productive capital instead of setting it to work. Later, they set in place reforms like Dodd-Frank to shore up some of the fragilities in the banking system. These—in combination with the ongoing quantitative easing—may have prevented a financial crisis since 2008 (and Trump repealing such things may make the system much more fragile again). But that did not address the underlying problems. The fragility in the financial system was absorbed by the political system, and thus transferred into the political system. And now we reap the whirlwind of those choices, in the shape of a new nationalist populism that blames globalization, trade policies, and migration for the failures of Western politicians.

Trump already is setting his stand out as a builder and an investor in infrastructure, just as Hitler did.

As Keynes wrote in his introduction to The General Theory:

The theory of aggregated production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire.

The laissez-faire West failed to implement his ideas and avoid an economic depression (albeit a relatively mild one compared to the 1930s) following 2008. Now proto-totalitarians like Trump will get their chance, instead.

The Economics of Building That Wall


Photo by: Matt Clark.

First things first: the U.S. already has a border wall with Mexico. This is a widely-documented fact, illustrated in detail by National Geographic. If Trump supporters had bothered to do so much as a Google search, they would realize that — whatever one might think of undocumented migration — it isn’t going to be stopped by a border wall. A border wall already exists, and undocumented migration continues.

But what about replacing the current border wall with a bigger one? Surely that will stop migrants from coming across the border? Well, not really. Israel has some pretty high and deep barriers with Gaza, and that hasn’t prevented Gazan militants from burrowing under them and getting in. What is going to stop Mexicans — including and perhaps especially the extremely well-financed drug gangs who surely could gain access to advanced tunnelling equipment — from doing the same thing?

So building a wall to prevent undocumented migration is really dodgy from a practical perspective.

From an economic perspective, it’s much worse than that. Getting Mexico to pay for it by confiscating it from money sent to Mexico by Mexicans in America — as Trump contends he can — would simply incentivize the use of internationalized and decentralized technologies such as Bitcoin, which could evade Trump’s confiscations. And with an estimated cost of $15 to $25 billion, that has a very high opportunity cost, regardless of who pays for it. That’s more than a dozen hospitals. Or a house for every homeless person in America. Heck, NASA could build two bases on the moon for the cost of Trump’s fantasy wall.

But all this is assuming that a wall that could successfully shut out undocumented migrants would benefit the U.S. The truth is that it wouldn’t. The reality is that shutting people out of your economy deprives it of skills and talent and labour. 100 people can produce more than 99. 1000 people can produce more than 999. When a Mexican crosses the border, they bring with them potential productivity, whether or not they are carrying papers. Shut that out, and you slow down the economy.

When people can move freely, they can find the niche where they are most efficient. Everybody is different. Everyone is in possession of unique and differing talents, and everyone’s most productive niche in the global economy differs. Mexicans stream across the border because there are niches in the U.S. economy where they can be more productive than in Mexico. Many Americans go abroad to work, too, as they find economic opportunities abroad. Denying people the right to freely move to find their most productive niche in the global economy is simply self-defeating, in economic terms. It forces people to become less productive than they otherwise could be.

Trump offers false hope to the victims of globalization. Yes, very many U.S. jobs have migrated overseas because overseas labour can do things cheaply and efficiently. Those jobs aren’t magically going to come back because a blonde buffoon is in the White House wasting resources by building walls on the Mexican border. The real hope for American victims of job migration is retraining and education and investment in new cutting-edge industries where America can gain a competitive advantage, so that people can find a new niche in the global economy.

Drone Strikes Against Alleged Terrorists Are An Abandonment Of The Rule Of Law

Watchkeeper UAV first flight in UK at MoD Aberporth. 14th April 2010.

I have no doubt that the vast majority of British people will support David Cameron’s decision to blow to smithereens two British jihadis fighting with the self-proclaimed Islamic State who were allegedly involved in planning and directing terrorist attacks on the UK, just as the vast majority of Americans support Obama doing similar things. I don’t think the Conservative government will harm its popularity in assassinating these people. The opposite, in fact, or as The Sun put it “Wham! Bam! Thank You Cam”

Going to Syria to fight with the Islamic State is seen as a form of treason: by aligning with a group directly and specifically hostile to the UK, these people (it is being argued) have effectively redesignated themselves as enemy combatants. In those terms, this was simply a mundane act of counterterrorism: the British state suspected an enemy force of plotting death and destruction upon the British people, and neutralized the threat.

At the same time, and while I am no legal expert, I see these killings as an abandonment of the rule of law, which I see as an essential and foundational component of Western civilization tracing back to Aristotle who wrote that: “law should govern”.

The UK government is not trying to argue that this was an act of war, per se. After all, the UK is not at present at war in Syria. Parliament voted against it in 2013. The UK government is trying to argue that there was “no other way” of stopping the attacks they suspected that the targets were plotting, much the same as if you walk into an airport with a gun and start shooting people, you should not be surprised if you are shot dead by an officer of the law in response. And that would be true with a gunman in an airport or shopping centre. But how can it be true of militants thousands of miles away from the UK? They might have been in contact with individuals in the UK who were planning on physically carrying out the attacks. But surely the people who were the imminent threat to the UK were the ones in the UK, not Syria? And nobody in the UK was as far as I can tell apprehended in the course of the act of carrying out an attack. What made the people in Syria such an imminent threat that they had to be killed instead of put on trial for their alleged crimes as anyone else would be?

I don’t think it is anything like as simple as saying that travelling to Syria, and joining the Islamic State should trigger a suspension of the rule of law. The British government is not by itself the law. Nor is The Sun newspaper, nor the man or woman down the pub. The British legal system is the law in the UK, and if someone is suspected of terrorist offences the only way to determine beyond reasonable doubt that they are guilty and establish a sentence is to put them on trial in front of a jury of their peers.

Obviously, Britain has no extradition treaty with the Islamic State. There was no simple and clear cut way to put these people on trial for their alleged crimes. I don’t have a brilliant plan to do it. But killing them outright makes it completely impossible to establish guilt and sentence in front of a court of law in accordance with the rule of law. It does not turn the wheels of justice. A trial may not be necessary for The Sun and The Daily Mail. But it is necessary for upholding the rule of law.

This, ultimately, is a very major element in what separates civilized countries from chaotic and despotic places like the Islamic State, where extrajudicial killing is rampant. If we abandon it, we are abandoning the principles of our own civilization.

Correction or Crisis?


After almost seven years of relative calm and stability, a stock market crash is finally upon us.

This is a very predictable crash stemming from a very widely known cause. Hundreds of analysts including myself — following the trail illuminated by Michael Pettis — have for a long time been banging on about a Chinese slowdown gathering an uncontrollable momentum, sending China into a panic, and infecting global markets.

What’s less clear yet is whether this is a correction or a crisis. My view is toward the latter, simply because confidence is fragile.  Once the animal spirits of the market turn negative, it takes a heck of a lot to soothe them. And the markets look increasingly spooked. The fear is rising. Last week I tweeted that I felt the risks of a new financial crisis are greater than ever.

The reasons why are simple: Western central banks have gone a bit nuts, and are trying to hike rates even though inflation is close to zero even after interest rates being at zero for seven years. And Western governments have gone a bit nuts (especially in the eurozone and Britain but also to a lesser extent in the United States) and are trying to encourage growth with austerity even though all the evidence illustrates that austerity is only a helpful policy in a booming economy, not in a slack one.

Those two factors weren’t too destructive in an economic situation where there was moderate economic growth. More like a minor brake on growth. Keep swimming forward, and sooner or later inflation will rear its head, and rates will have to be raised. But with a stock market crash and a growth downturn, and an unemployment spike, and deflation, things get very problematic very fast.

Let me explain how I think this plays out: interest rates are at zero. Inflation is almost at zero, and a stock market crash will only push that lower. Simply, this is the bottom falling out of the bottom. A crash here is like falling off the bicycle in spite of the Fed’s training wheels. Unconventional monetary policy has already been exhaustively tried, and central bank balance sheets are already heavily loaded with assets purchased in quantitative easing programs. Now the Fed’s balance sheet does not excessively concern me — central banks can print all the money they like to buy assets up to the point of excessive inflation. But will that be enough to reverse a new crash?

Personally, my doubts are growing. At the zero bound, I believe Keynes was right, and fiscal policy is the best answer. The post-2008 economic landscape has been defined by monetarists trying desperately to perfect new tools like quantitative easing to avoid outright debt-financed fiscal policy. But there have been problems upon problems with the transmission mechanisms. Central banks have succeeded at getting new money into the banking system. But the drip of that money into the real economy where it can do its good work and create growth, employment and prosperity has been slow and uneven. The recovery is real, but weak, even after all the trillions of QE. And it has left us vulnerable to a new downturn.

If the effects of the crash cannot be reversed with monetary policy, that leaves fiscal policy — that old, neglected, unpopular tool — to fight any breakouts of deflation or mass unemployment.

Or it leaves central banks to try really radical policies that emulate the directness of fiscal policy, like literally throwing money out of helicopters or OMFG.