Comments for Twofish's Blog

Comment on Not such a mystery by twofish

twofish — Wed, 13 Jan 2010 01:46:05 +0000

At that point you ask what happens if real estate prices drop, and if you have a situation in which a real estate crash is going to cause non-bank holder of an asset to lose their money, this may not be a bad thing.

Also urbanization *is* a one time productivity gain and what happens afterwards depends crucial on decisions that get made now that have long term ramifications. One reason I dislike a lot of panicky articles about how China is doomed next year, is that it avoids discussion things that will be serious problems in 2030, 2050 or 2100. There is not that much that can be done to change what happens in 2012 or 2015, but if people think about 2100, then even small changes now make big changes in the future.

Also TFP will flatten over time, the big question is how the economy will react when it does.

Comment on Disagree with Krugman, Fallows, and Pettis by twofish

twofish — Wed, 13 Jan 2010 01:40:47 +0000

I think whenever you start labeling a economic system a “whatever-ist” model that you run into problems since by labeling it it’s easy to stop thinking about what’s going on. “Merchantialism” has a lot of connotations, and if you use it to just denote a country that has external trade surplus, it becomes confusing.

Also I think that looking for “facts” in trade disputes as a bit of a red herring. The basic “fact” is that putting a trade barrier will get someone elected or not elected, and anything else is something of a smoke screen.

Comment on Why you should or should not go to MIT by dan

dan — Tue, 12 Jan 2010 07:17:01 +0000

So Penny,

Would you suggest MIT MBA, then?

Dan

Comment on Notes on Gillian Tett’s book Fools Gold by dadelson

dadelson — Thu, 07 Jan 2010 22:33:14 +0000

i had trouble reading Fool’s Gold because tett mirrors the habit of so many in the finance industry of gushing constantly about how “smart” these financial engineers are…everyone’s “brilliant”, etc. they may be bright people, but i suspect that there are plenty of bright people running around, and what distinguishes those who rise from those who don’t relates as much to personality and orientation as it does to intelligence. i agree with nassim taleb, who is conscious of the limitations of his ability, and that of others, to understand what is happening at any given moment.

the book generally, to the point i’ve gotten in it, also seems to accept the thesis that securitization is a potentially good thing gone wrong, and that the problem is that those using it behaved imprudently. this notion is itself related to the idea that speculation is good if it part of a system that lowers funding costs for productive enterprises. my own prejudiced view is that keynes was correct when he argued that speculation per se **is** the problem, and that the ultimate cost to a productive economy of too much speculation is disaster, and by too much let’s take an arbitrary number, say, 5% of total financial actiivty. compare that number to simon johnson’s reporting, in his great atlantic monthly piece entitled The Quiet Coup, that in the 2000′s, the finance industry garnered 41% of U.S. corporate profits…

Comment on Disagree with Krugman, Fallows, and Pettis by Moumou

Moumou — Tue, 05 Jan 2010 09:13:55 +0000

China follows a mercantilistic model, full stop. Otherwise large and persistent external surplusses would be undersirable. If we assume that they are not, and that the government has the power and tools to change the currency regime if it wanted to, as they do, then this has to be the case. I cite mercantilism to denote a model, not whether it is good or bad. Hong Kong is the same way, so is Singapore for the most part, though both are economically tiny. China needs trade disputes with the US, and to focus on the USD/RMB rate to take attention away from looming trade problems with its neigbors. The US output and employment shares from manufacturing has not really changed in recent years, though the industrial composition has shifted. This shifts the politics, and creates problems. The bigger problems, however, will come from inter-regional trade frictions in Asia, where there are more substantive problems related to the currency policy and regime. The real story is not the RMB USD rate, it is the RMB/Baht/Ringit/Peso/Won rates. Trade frictions between the US and China are just a useful distraction for all sides. It is worrying, however, when there are a bunch of sectors, like steel, where China has excess capacity on a global scale, and simply because there is a very narrowly targetted measure, that the US suddenly becomes comprehensively protectionist. I would not be surprised at all if China were dumping pipes and other low-end steel products. Mercantile nations dodn’t like restrictions on trade regardless of whether actual practices go against agreed upon international rules. I have seen nothing refuting the US actions in this case (and there are other cases where the US actions were later shown to be baseless) that have been backed by anything other than angry propaganda. Seek truth from facts. China has offered no facts to back its displeasure, and rarely does. The US side needs more facts in recent cases as well, and should make the rationale (including the math) for trade measures transparent and public.

Comment on Not such a mystery by Moumou

Moumou — Tue, 05 Jan 2010 08:58:47 +0000

No, the issue is that bad loans are being sold by commercial banks to non-bank financial institutions. Lots of people in finance in Beijing know this, and if you do some math with bank asset balances, new loan growth and asset balances system wide, the numbers don’t add up to the tune of RMB 1 trillion. This is not using government funds; it is just using an AMC bond like scheme, except with non-government funds. Sure, I agree about the benefits from urbanization, and this will both require and warrant fiscal injection. But I think a structural problem is that China is playing the same financial games that Japan did – cross holding of financial risk, for example relying on bank to bank and insurance company purchases of subordinated debt to sure up weakening capital bases for much of 2009. Fiscal health is another matter, and is decent. But when financial institutions are still acting like quasi-fiscal entities, as they did during 2009, then assumed forward liabilities of the government start to look darker, and quickly. And a note on productivity – the output of a worker that goes from the fields to a factory increases by about 5x, assuming that they can get a job. This is a one time productivity gain. What happens after that is far less certain, especially because the next generation of urbanized people will have far lower levels of education than the first one. This is not good forproductivity. So give them more capital, and labor productivity increases, but these are not workers that are going to be running big machines; they will be diggers and low-end services workers. Not areas where productivity growth is strong. If long-term growth is a function of productivity and demographics at the highest level, then productivity growth will need to be very strong over time (lets call it TFP, and not simply look at worker output) to make up for the fact that the working age population will soon start to shrink. This is not guaranteed simply through urbanization.

Comment on Disagree with Krugman, Fallows, and Pettis by Oyomei

Oyomei — Tue, 05 Jan 2010 04:09:31 +0000

Twofish,

What do you think about Krugman’s other columns, regarding the stimulus and the need to continue quantitative easing.

Comment on Disagree with Krugman, Fallows, and Pettis by asdf

asdf — Mon, 04 Jan 2010 16:17:29 +0000

Fallows is an idiot. In one inteview, he paints all of china racist because he didn’t feel obama received a warm enough welcome. Krugman is a fool. The guy is high on his nobel.

Comment on Not such a mystery by twofish

twofish — Sun, 03 Jan 2010 16:19:46 +0000

Moumou: The banks cannot make bad loans, package them, and sell them to some other financial institution for very long without problems arising.

Of course but I think the issues here are the numbers. What is the fraction of bad loans? What is the bad thing happening? In the case of China (and for that matter the US) is that the bad loans get transferred to the government debt, which may not be such a bad thing if it keeps worse things from happening.

Moumou: This cannot go on indefinately because it is unsustainable, and when things are that way they never last.

*Nothing* can go on indefinitely. The question is when it will end and how, and that involves looking at the numbers. Something that is the case is that over the next forty years, China is going to get a productivity boost from moving from farm to city, and this is enough to justify some fiscal injection.

Comment on Not such a mystery by Moumou

Moumou — Wed, 30 Dec 2009 05:13:09 +0000

Why should low-return investment (in financial terms), such as infrastructure projects, be done with private instead of public capital? The problem is that banks in China are serving a quasi-fiscal function, funding things that should be financed through public channels, even municipal bonds, instead of lending to areas that would provide far higher returns in the private sector. I don’t share your sense of disillusionment with economics. What has happened is that the Washington Consensus, call it policy orthodoxy, has finally been applied to the US and others, otherwise there would be no framework for understanding what has happened to date and what might likely happen in the future. The same holds true for China, and macro theory provides a lot of insight into the structural eventualities there as well. The banks cannot make bad loans, package them, and sell them to some other financial institution for very long without problems arising. This applied to real estate financing, and is happening as we speak in China in much lower-tech way. We cannot call what is happening in China securitization because the laws and regulations that would govern such an industry/market don’t really exist. So it is simply the selling of loans to a willing buyer, who is probably buying the loans with borrowed funds, creating a loop of fiction similar to the AMC bonds. This cannot go on indefinately because it is unsustainable, and when things are that way they never last. So no, China should not necessarily consume more, because it will need more coerced deposits in its financial institutions to sure up their funding base. And, by the way, Chinese firms are notorious for not paying people in the best of times, not to mention rough patches. I have been on the receiving end of this, and was able (better able than a migrant worker) to get through it because I save.