May 8, 2013
Grading Growth Plans
 Imagine you’re running a country whose economy could perhaps use a bit of a boost. You could just spend some money on a few major construction projects, but you’d rather see domestic businesses grow more—especially since some have struggled to maintain high profit growth. If they improved, the whole economy would benefit. But how do you get them to turn things around? That’s the question facing Japan and China right now. And in late April, policymakers seemed to arrive at opposite conclusions. China’s approach was straightforward and predictable. The State Council ordered state-owned firms (SOE) to keep profit growth over 10% a year. Just do it. Because we said so. Well, orders are all well and good, but China’s missing a key ingredient: incentive. Where’s the motivation for firms to grow and earn more? State-Owned Assets Supervision and Administration committee (more)…
April 5, 2013
Hollande’s Own Goal Tax Plan
 In soccer (or football/futbol, depending on your nationality), an “own goal” occurs when a player scores a goal against his or her own team on accident. It’s widely considered one of the most embarrassing sports blunders there is—right up there with fumbling the snap in (American) football, missing a slam dunk in basketball or striking out on a bunt attempt in baseball. And for France’s footballers and their fans, President Francois Hollande committed an own goal this week after revising his “tax the wealthy” plan. Recall, Hollande made a 75% tax on annual incomes over €1,000,000 a cornerstone of his 2012 presidential campaign, arguing the well-off should do their part to get France back on its feet and reduce the budget deficit. Hollande’s government managed to pass a bill that would enact the tax late last year, however the French (more)…
February 28, 2013
Keep an Eye on Cyprus
 If you haven’t paid much attention to Cyprus’s bailout negotiations, I suggest you start: There’s a plan afoot that could, if enacted, set a dangerous precedent for private property rights in the eurozone. I refer to an idea tabled by eurozone finance ministers: Forcing foreign depositors in Cypriot banks to take a haircut. Yes, you read that right—forced losses on cash deposits. Here’s how it would work. Deposits would be seized (at least in part) and replaced with bank debt securities—a “bail-in” bond, in industry lingo (similar to the “bail-in” bonds eurozone bank execs may be forced to take in the event of any future bank failures in the currency union under the forthcoming regulatory scheme). Those bail-in bonds would almost immediately be subject to a giant haircut. Domestic depositors would be exempt, but foreigners would get whacked. You see, (more)…
February 26, 2013
Deciphering the Minimum Wage Debate
 President Obama’s recent State of the Union address likely sounded akin to any of his 2008 and 2012 campaign speeches for most folks: Support growth, create new jobs, boost investment, encourage green energy, promote free trade—all perfectly noble, seemingly good aims. (Whether they come to fruition and the shape they take remain to be seen.) One proposal though, has been particularly polarizing: Raising the minimum wage from $7.25 an hour to $9.00 an hour, with ongoing increases for inflation. The minimum wage debate is highly political and a sensitive subject for many folks. However, my intent here isn’t to comment on whether an increase is good or bad or to enter the fray, but only to discuss the possible economic impact. The minimum wage debate isn’t terribly new. The merits of a minimum wage have been debated by economists, politicians (more)…
February 12, 2013
Rational Optimism and the Bull Market Cycle
 A question I’ve noted in the media of late: With sentiment noticeably more positive these days, should we be worried about the bull market’s imminent end? It’s a valid question. Remember Sir John Templeton’s legendary quote: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” Sentiment is a powerful indicator of where a bull market is in its lifespan, and sentiment improves with age. As I type, this bull market’s 30 days shy of its fourth birthday. For much of that time, investors have waffled between pessimism and skepticism—news was either bad, good couched as bad, or good but it couldn’t possibly last. Lately though, there’s certainly been some less skeptical headlines. Here’s a sample: Don’t Be Fooled by the GDP Report: The Economy Is Gaining Strength Whisper It, But the British Economy (more)…
January 29, 2013
Unlimited Easing, Limited Power
 New Japanese Prime Minister Shinzo Abe got his wish this week: The Bank of Japan (BOJ) boosted its inflation target to 2% (rebranding it as a “goal”) and committed to open-ended monthly asset purchases of ¥13 trillion ($143 billion) to get there. And all Japan’s problems were … complicated. Not that you’d know it from all the hoopla accompanying the announcement—observers globally hailed it as the aggressive move Japan’s waited 20 years for—but Japan’s monetary policy won’t change a ton in the near term. The open-ended asset purchases won’t begin until January 2014—until then, the current Asset Purchase Program continues as planned. At the moment, total outstanding purchases are about ¥36 trillion ($396 billion) short of the ¥76 trillion ($836 billion) target (Exhibit 1), so monthly purchases in 2013 will likely be well short of the ¥13 trillion everyone’s salivating (more)…
January 21, 2013
Why Japan Had a Lost Decade—and Why the US Won’t
 With much of the world experiencing slower economic growth over the past year, I’ve seen a surge in the number of editorials forecasting a Japan-style “lost decade” in some nations. Based on a quick Internet search, the US, UK, Ireland and South Korea are just some of those purportedly at risk—sure, historically they’ve been resilient, but this time it’s different. Problem is, none of this analysis has an accurate understanding of what caused Japan’s lost decade—two-plus decades, now—of deflation and slow growth. Common wisdom says Japanese businesses and consumers were overleveraged during the economic boom of the 1980s, and when they were hurt by the bursting property bubble, the central bank was too slow to act, and monetary policy remains too tight today despite near-zero rates and nearly perpetual quantitative easing. Common wisdom, however, is missing some key, critical ingredients. (more)…
December 28, 2012
Harmful Protectionism in Eastern Europe
 Twenty-three years after the Iron Curtain’s fall, there’s a new dividing line in Eastern Europe: A sharp contrast in quality of life between those nations where free markets and free society have flourished, and those where the state keeps an iron grip. Free nations like the Czech Republic, Latvia and Estonia (to name but three) have grown and thrived, with the majority of the populace enjoying the fruits of capitalism. In more oppressed nations like Russia and Hungary, however, life hasn’t been nearly as sweet—and the more economic malaise sets in, the more their governments intervene, to the detriment of their citizens. Both nations were at it again this month, passing new protectionist measures that will only hurt their people. Hungary struck first, passing a constitutional amendment allowing “only Hungarian farmers” to purchase domestic farmland. On the surface, the law’s (more)…
December 11, 2012
Ken Fisher on the Looming Fiscal Can-Kick
 As debate continues swirling over the presumed-slope-that-is-mostly-a-budget-debate also known as the “Fiscal Cliff,” a few details have been trickling out regarding the state of negotiations between Republicans and Democrats. The fact finding and wrangling sheds an interesting light on how the debate is evolving—and how strong the motivation actually is to strike a deal. In a recent Financial Times article, Ken Fisher (CEO of Fisher Investments) discussed how this debate is affected by the looming 2014 midterms. Here’s some more detail on the political pressures likely driving a fiscal compromise. I don’t think I’m breaking any real news by suggesting politicians’ primary focus is nearly always on winning the next election. And, as Ken Fisher pointed out, in the next election, several sitting Democratic senators who rode to victory on President Obama’s 2008 coattails (far longer than 2012’s version) in (more)…
November 30, 2012
Good Luck, Mr. Carney
 When UK Chancellor of the Exchequer George Osborne announced Mark Carney will succeed Sir Mervyn King as BOE chief next year, the surprise was universal: The Brits picked a Canadian?! My surprise, however, was of a different sort: Osborne didn’t pick a regulatory guru?! You see, the next BOE Governor won’t have a central banker’s typical portfolio. Next year, financial regulatory oversight moves from Financial Services Authority (FSA) to the BOE, making the bank’s chief supreme overlord of monetary policy and bank regulation. Thus, the governorship’s applicant pool was rather atypical: Sure, there were a couple monetary policy wonks, but there were also politicians and regulatory officials—not exactly logical picks for a position with veto power over interest rates, quantitative easing and the like. Then again, it’s tough to argue the reverse—that a monetary policy specialist has much business chairing (more)…
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