Tag Archives: Global Business Forecasts

What Mr. Trump May Be Thinking About US Trade

It’s often said a few pictures are worth thousands of words. But pictures can be a little misleading, when everything is globally interconnected.

First, look at the standard view of the ever-widening US trade deficit and negative US balance of payments. Then, focusing on Mexico – a Trump whipping boy – let’s pry open the box and look inside to see what is traded back and forth. What the numbers suggest is that the greatest part of the US trade deficit is involved with “trade by related parties”, i.e. multinational companies importing parts and other goods to the US, sometimes for assembly here and export. Many of these are US companies who have used international operations to cut production costs, but then gain access to US customers on favorable terms through their time-honored sales channels.

The Standard Picture

Just looking at the standard US trade statistics, the story is grim. Imports to the US have persistently exceeded US exports since the 1980’s, with the negative balance soaring just before the Great Recession of 2008-2009 to around $200 billion.

Four countries, China, Germany, Mexico, and Japan are the largest contributors to the US trade deficit, as the following chart shows.

Sharp erosion in the US balance of international payments accompanies these import and export curves.

But What Does Mexico Import Into the US?

This is where we have to adopt a new way of looking at these facts.

So, in recent years, US Trade authorities have begun to maintain a new kind of statistical data, relating to trade by related parties, a.k.a. trade between parts of the same (multinational) company.

Mexico, in fact, has a large portion of this trade by related parties, as the following Table indicates.

Readers may also want to consult J.W. Mason’s The Slack Wire What Exactly Does Mexico Export to the US? 

Now there are all sorts of measurement issues involved in measuring trade by related parties, and, of course, the import prices for within-company trade can be somewhat suspect.

But, its interesting some years ago, the Middle Class Political Economist calculated that –

Thus, things are more complicated than suggested by trade in wine from Portugal and textiles from Old Blighty.

In fact, a scholar at Harvard has one of the most compelling pictures highlighting the global supply chain.

Thus, the 787 Development Team encompasses 50 suppliers located in 9 countries (Australia, France, Germany, Italy, Japan, Korea, Sweden, the United Kingdom and the United States). 70 percent of the 787s parts are produced abroad.

 From Pol Antras’ CREI Lectures in Macroeconomics Contracts and the Global Organization of Production, June 2012

So, this is the sort of complexity which enfuriates the “stranded white working class,” left behind when the factories move abroad, but the company marketing organization builds new offices in the nearby metropole.

From which I also deduce that the conflict between Mr. Trump, Mr. Bannon, and powerful interests on the other side is likely to be a serious battle. This is not a win-win, as global trade always was presented (even though it has “distributional impacts”). Border taxes will intervene in these global commodity chains which have been constructed to further the pursuit of profits by multinationals. So border taxes will in fact also have distributional consequences, but these impacts will extend to company profits and involve reorganization of production.

I mean this is like going to be a pitched battle.

Negative Interest Rates

What are we to make of negative interest rates?

Burton Malkiel (Princeton) writes in the Library of Economics and Liberty that The rate of interest measures the percentage reward a lender receives for deferring the consumption of resources until a future date. Correspondingly, it measures the price a borrower pays to have resources now.

So, in a topsy-turvy world, negative interest rates might measure the penalty a lender receives for delaying consumption of resources to some future date from a more near-term date, or from now.

This is more or less the idea of this unconventional monetary policy, now taking hold in the environs of the European and Japanese Central Banks, and possibly spreading sometime soon to your local financial institution. Thus, one of the strange features of business behavior since the Great Recession of 2008-2009 has been the hoarding of cash either in the form of retained corporate earnings or excess bank reserves.

So, in practical terms, a negative interest rate flips the relation between depositors and banks.

With negative interest rates, instead of receiving money on deposits, depositors must pay regular sums, based on the size of their deposits, to keep their money with the bank.

“If rates go negative, consumer deposit rates go to zero and PNC would charge fees on accounts.”

The Bank of Japan, the European Central Bank and several smaller European authorities have ventured into this once-uncharted territory recently.

Bloomberg QuickTake on negative interest rates

The Bank of Japan surprised markets Jan. 29 by adopting a negative interest-rate strategy. The move came 1 1/2 years after the European Central Bank became the first major central bank to venture below zero. With the fallout limited so far, policy makers are more willing to accept sub-zero rates. The ECB cut a key rate further into negative territory Dec. 3, even though President Mario Draghi earlier said it had hit the “lower bound.” It now charges banks 0.3 percent to hold their cash overnight. Sweden also has negative rates, Denmark used them to protect its currency’s peg to the euro and Switzerland moved its deposit rate below zero for the first time since the 1970s. Since central banks provide a benchmark for all borrowing costs, negative rates spread to a range of fixed-income securities. By the end of 2015, about a third of the debt issued by euro zone governments had negative yields. That means investors holding to maturity won’t get all their money back. Banks have been reluctant to pass on negative rates for fear of losing customers, though Julius Baer began to charge large depositors.

These developments have triggered significant criticism and concern in the financial community.

Japan’s Negative Interest Rates Are Even Crazier Than They Sound

The Japanese government got paid to borrow money for a decade for the first time, selling 2.2 trillion yen ($19.5 billion) of the debt at an average yield of minus 0.024 percent on Tuesday…

The central bank buys as much as 12 trillion yen of the nation’s government debt a month…

Life insurance companies, for instance, take in premiums today and invest them to be able to cover their obligations when policyholders eventually die. They price their policies on the assumption of a mid-single-digit positive return on their bond portfolios. Turn that return negative and all of a sudden the world’s life insurers are either unprofitable or insolvent. And that’s a big industry.

Pension funds, meanwhile, operate the same way, taking in and investing contributions against future obligations. Many US pension plans are already borderline broke, and in a NIRP environment they’ll suffer a mass extinction. Again, big industry, many employees, huge potential impact on both Wall Street and Main Street.

It has to be noted, however, that real (or inflation-adjusted) interest rates have gone below zero already for certain asset classes. Thus, a highlight of the Bank of England Study on negative interest rates circa 2013 is this chart, showing the emergence of negative real interest rates.


Are these developments the canary in the mine?

We really need some theoretical analysis from the economics community – perspectives that encompass developments like the advent of China as a major player in world markets and patterns of debt expansion and servicing in the older industrial nations.

The Interest Rate Conundrum

It’s time to invoke the parable of the fox and the hedgehog. You know – the hedgehog knows one thing, sees the world through the lens of a single commanding idea, while the fox knows many things, entertains diverse, even conflicting points of view.

This is apropos of my reaction to David Stockman’s The Fed’s Painted Itself Into The Most Dangerous Corner In History—–Why There Will Soon Be A Riot In The Casino.

Stockman, former Director of Office of Management and Budget under President Ronald Reagan who later launched into a volatile career in high finance (See https://en.wikipedia.org/wiki/David_Stockman) currently lends his name to and writes for a spicy website called Contra Corner.

Stockman’s “Why There Will Soon Be a Riot in The Casino” pivots on an Op Ed by Lawrence Summers (Preparing for the next recession) as well as the following somewhat incredible chart, apparently developed from IMF data by Contra Corner researchers.


The storyline is that planetary production fell in current dollar terms in 2015. This isn’t because physical output or hours in service dropped, but because of the precipitous drop in commodity prices and the general pattern of deflation.

All this is apropos of the Fed’s coming decision to raise the federal funds rate from the zero bound (really from about 0.25 percent).

The logic is unassailable. As Summers (former US Treasury Secretary, former President of Harvard, and Professor of Economics at Harvard) writes –

U.S. and international experience suggests that once a recovery is mature, the odds that it will end within two years are about half and that it will end in less than three years are over two-thirds. Because normal growth is now below 2 percent rather than near 3 percent, as has been the case historically, the risk may even be greater now. While the risk of recession may seem remote given recent growth, it bears emphasizing that since World War II, no postwar recession has been predicted a year in advance by the Fed, the White House or the consensus forecast.


Historical experience suggests that when recession comes it is necessary to cut interest rates by more than 300 basis points. I agree with the market that the Fed likely will not be able to raise rates by 100 basis points a year without threatening to undermine the recovery. But even if this were possible, the chances are very high that recession will come before there is room to cut rates by enough to offset it. The knowledge that this is the case must surely reduce confidence and inhibit demand.

So let me rephrase this, to underline the points.

  1. Every business recovery has a finite length
  2. The current business recovery has gone on longer than most and probably will end within two or three years
  3. The US Federal Reserve, therefore, has a limited time in which to restore the federal funds rate to something like its historically “normal” levels
  4. But this means a rapid acceleration of interest rates over the next two to three years, something which almost inevitably will speed the onset of a business downturn and which could have alarming global implications
  5. Thus, the Fed probably will not be able to restore the federal funds rate – actually the only rate they directly control – to historically normal values
  6. Therefore, Fed tools to combat the next recession will be severely constrained.
  7. Given these facts and suppositions, secondary speculative/financial and other responses can arise which themselves can become major developments to deal with.

Header pic of fox and hedgehog from willpowered.co.

Coming Attractions

Well, I have been doing a deep dive into financial modeling, but I want to get back to blogging more often. It gets in your blood, and really helps explore complex ideas.

So- one coming attraction here is going to be deeper discussion of the fractal market hypothesis.

Ladislav Kristoufek writes in a fascinating analysis (Fractal Markets Hypothesis and the Global Financial Crisis:Scaling, Investment Horizons and Liquidity) that,

“..it is known that capital markets comprise of various investors with very different investment horizons { from algorithmically-based market makers with the investment horizon of fractions of a second, through noise traders with the horizon of several minutes, technical traders with the horizons of days and weeks, and fundamental analysts with the monthly horizons to pension funds with the horizons of several years. For each of these groups, the information has different value and is treated variously. Moreover, each group has its own trading rules and strategies, while for one group the information can mean severe losses, for the other, it can be taken a profitable opportunity.”

The mathematician and discoverer of fractals Mandelbrot and investor Peters started the ball rolling, but the idea maybe seemed like a fad of the 1980’s and 1990s.

But, more and more,  new work in this area (as well as my personal research) points to the fact that the fractal market hypothesis is vitally important.

Forget chaos theory, but do notice the power laws.

The latest  fractal market research is rich in mathematics – especially wavelets, which figure in forecasting, but which I have not spent much time discussing here.

There is some beautiful stuff produced in connection with wavelet analysis.

For example, here is a construction from a wavelet analysis of the NASDAQ from another paper by Kristoufek


The idea is that around 2008, for example, investing horizons collapsed, with long term traders exiting and trading becoming more and more short term. This is associated with problems of liquidity – a concept in the fractal market hypothesis, but almost completely absent from many versions of the so-called “efficient market hypothesis.”

Now, maybe like some physicists, I am open to the discovery of deep keys to phenomena which open doors of interpretation across broad areas of life.

Another coming attraction will be further discussion of forward information on turning points in markets and the business cycle generally.

The current economic expansion is growing long in tooth, pushing towards the upper historically observed lengths of business expansions in the United States.

The basic facts are there for anyone to notice, and almost sound like a litany of complaints about how the last crisis in 2008-2009 was mishandled. But China is decelerating, and the emerging economies do not seem positioned to make up the global growth gap, as in 2008-2009. Interest rates still bounce along the zero bound. With signs of deteriorating markets and employment conditions, the Fed may never find the right time to raise short term rates – or if they plunge ahead will garner virulent outcry. Financial institutions are even larger and more concentrated now than before 2008, so “too big to fail” can be a future theme again.

What is the best panel of financial and macroeconomic data to watch the developments in the business cycle now?

So those are a couple of topics to be discussed in posts here in the future.

And, of course, politics, including geopolitics will probably intervene at various points.

Initially, I started this blog to explore issues I encountered in real-time business forecasting.

But I have wide-ranging interests – being more of a fox than a hedgehog in terms of Nate Silver’s intellectual classification.

I’m a hybrid in terms of my skill set. I’m seriously interested in mathematics and things mathematical. I maybe have a knack for picking through long mathematical arguments to grab the key points. I had a moment of apparent prodigy late in my undergrad college career, when I took graduate math courses and got straight A’s and even A+ scores on final exams and the like.

Mathematics is time consuming, and I’ve broadened my interests into economics and global developments, working around 2002-2005 partly in China.

As a trivia note,  my parents were immigrants to the US from Great Britain , where their families were in some respects connected to the British Empire that more or less vanished after World War II and, in my father’s case, to the Bank of England. But I grew up in what is known as “the West” (Colorado, not California, interestingly), where I became a sort of British cowboy and subsequently, hopefully, have continued to mature in terms of attitudes and understanding.

Recent Events in the US Stock Market

The recent drop in US stocks is dramatic, as the steep falloff of the SPY exchange traded fund (ETF) Monday, August 24th– almost the most recent action in the chart – shows.


At the same time, this is by no means the steepest drop in closing prices, as the following chart of daily returns highlights.


TV commentators and others point to China and the prospective liftoff of US short term interest rates, with the Federal Reserve finally raising rates off the zero bound in – it was thought – September.

I have been impressed at the accuracy of Michael Pettis’ predictions in his China Financial Markets. Pettis has warned about a debt bubble in China for two years and consistently makes other correct calls. I have some first-hand experience doing business in China, and plan a longer post of the collapse of Chinese stock markets and the economic slowdown there.

You can imagine, if you will, a sort of global input-output table with a corresponding table of import/export flows. China has gotten a lot bigger since 2008-2009, absorbing significant amounts of the global output of iron and steel, oil, and other commodities.

Also, in 2008-2009 and in the earlier recession of 2001, China led the way to greater spending, buoying the global economy which, otherwise, was in sad shape. That’s not going to happen this time, if a real recession takes hold.

All very scary, but while the latest stuff took place, this is what I was doing.


In other words, I was the father of the groom at a splendid wedding for my younger son at the Pearl Buck estate just outside Philadelphia.

Well, that wonderful thing being done, I plan to return to more frequent posting on BusinessForecastblog.

I also apologize for having the tools to predict the current downturn, at least after developments later last week, and not signaling readers.

But frankly, I’m not sure the extreme value prediction algorithms (EVPA) reliably predict major turning points. In fact, there seem to be outside influences at key junctures. However, once a correction is underway, predictability returns. Thus, the algorithms do more than simply forecast the growth in stock prices. The EVPA also works to predict the extent of downturns.

Here’s a tip. Start watching ratios such as those between  differences between the  opening price in a trading day and the previous day’s high or low price, divided by the previous day’s high or low price, respectively. Very significant predictors of the change in daily highs and lows, and with significance for changes in closing prices, if you bring some data analytics to bear.

Economic Outlook – July 2015

For my money, Janet Yellen’s speech July 10 – parts of which I quote below – is important.

Yellen says the Fed plans the first increase in interest rates this year – in September or December, given Fed meeting schedules.

I believe the fact that we have virtually zero interest rates, and have for some time, creates distortions in economic discussions, not to mention its bizarre effects on the real economy.

On the one hand, the US Federal Reserve must realize that if it does not raise interest rates in this phase of the business cycle, it may be a very long time before we get off the zero lower bound. This creates a tendency to “happy talk” from monetary officials, although not Ms. Yellen specifically, papering over weakness in the US and global economy.

On the other hand, I suspect there are now economic interests invested in continuation of low rates, and their contribution going forward may be to sound the alarm at the slightest sign of economic troubles.

And, truly, this expansion phase of the current business cycle is “growing long in the tooth.” It began, according to the National Bureau of Economic Research, in summer 2009. This makes for 96 months from the previous trough of the business cycle to the current time. Only two previous US business expansions historically are longer than this, and only by one or two years.

The price of (economic) freedom is eternal vigilance. With that in mind, consider some of the datapoints on the current economic outlook.

United States

There is an extensive extract from Ms. Yellen’s speech, assessing US economic conditions, the latest report indicating retail sales softened, and the earlier May 2015 consensus forecast of the Survey of Professional Forecasters, indicating lower economic growth expectations.

Janet Yellen’s Speech at the City Club of Cleveland, Ohio

Let me turn now to where I think the economy is headed over the next several years. The latest estimates show that both real GDP and industrial production actually edged down in the first quarter of this year. Some of this weakness appears to be the result of factors that I expect will be only transitory, such as the unusually harsh winter weather in some regions of the country and the West Coast port labor dispute that briefly restrained international trade and caused disruptions in manufacturing supply chains. Also, statistical noise or measurement issues may have played some role. This is not the first time in recent years that real GDP has been reported to decline, or grow unusually slowly, in the first quarter of the year. There is a healthy debate among economists–many within the Federal Reserve System–about some of the technical factors that may lie behind this pattern.4 Nevertheless, at least a couple of other more persistent factors also likely weighed on economic output and industrial production in the first quarter. In particular, the higher foreign exchange value of the dollar that I mentioned, as well as weak growth in some foreign economies, has restrained the demand for U.S. exports. Moreover, lower crude oil prices have significantly depressed business investment in the domestic energy sector. Indeed, industrial production continued to decline somewhat in April and May. We expect the drag on domestic economic activity from these factors to ease over the course of this year, as the value of the dollar and crude oil prices stabilize, and I anticipate moderate economic growth, on balance, for this year as a whole. As always, however, the economic outlook is uncertain. Notably, although the economic recovery in the euro area appears to have gained a firmer footing, the situation in Greece remains unresolved.


Looking further ahead, I think that many of the fundamental factors underlying U.S. economic activity are solid and should lead to some pickup in the pace of economic growth in the coming years. In particular, I anticipate that employment will continue to expand and the unemployment rate will decline further.

An improving job market should, in turn, help support a faster pace of household spending growth. Additional jobs and potentially faster wage growth bolster household incomes, and lower energy prices mean consumers have more money to spend on other goods and services. In addition, growing employment and wages should make consumers more comfortable in spending a greater portion of their incomes than they have been in the aftermath of the Great Recession. Moreover, increases in house values and stock market prices, along with reductions in debt in recent years, have pushed up households’ net worth, which also should support more spending. Finally, interest rates faced by borrowers remain low, reflecting the FOMC’s highly accommodative monetary policies. Indeed, recent encouraging data about retail sales and light motor vehicle purchases in the beginning of the second quarter could be an indication that the pace of consumer spending is picking up.

Another positive factor for the outlook is that the drag on economic growth in recent years from changes in federal fiscal policies appears to have waned. Temporary fiscal stimulus measures supported economic output during the recession and early in the recovery, but those stimulus measures have since expired, and additional policy actions were taken to reduce the federal budget deficit. By 2011, these changes in fiscal policies were holding back economic growth. However, the effects of those fiscal policy actions now seem to be mostly behind us.5

There are a couple of factors, however, that I expect could restrain economic growth. First, business owners and managers remain cautious and have not substantially increased their capital expenditures despite the solid fundamentals and brighter prospects for consumer spending. Businesses are holding large amounts of cash on their balance sheets, which may suggest that greater risk aversion is playing a role. Indeed, some economic analysis suggests that uncertainty about the strength of the recovery and about government economic policies could be contributing to the restraint in business investment.6

A second factor that could restrain economic growth regards housing. While national home prices have been rising for a few years and home sales have improved recently, residential construction has remained quite soft. Many households still find it difficult to obtain mortgage credit, but, more generally, the weak job market and slow wage gains in recent years appear to have induced people to double-up on housing. For example, many young adults continue to live with their parents. Population growth is creating a need for more housing, whether to rent or to own, and I do expect that continuing job and wage gains will encourage more people to form new households. Nevertheless, activity in the housing sector seems likely to improve only gradually.

Regarding inflation, as I mentioned earlier, the recent effects of lower prices for crude oil and for imports on overall inflation are expected to wane during this year. Combined with further tightening in labor and product markets, I expect inflation will move toward the FOMC’s 2 percent objective over the next few years. Importantly, a number of different surveys indicate that longer-term inflation expectations have remained stable even as recent readings on inflation have fallen. If inflation expectations had not remained stable, I would be more concerned because consumer and business expectations about inflation can become self-fulfilling.

From the New York Times – To my ears, most of Ms. Yellen’s speech expertly laid out why the economy is not ready for interest rate increases anytime soon. Then, toward the end, she said that based on her views, she expected to begin raising rates “at some point later this year.” That would mean a rate hike in three months, at the Fed’s next meeting in September, or six months hence at its December meeting.


The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for June, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $442.0 billion, a decrease of 0.3 percent (±0.5%)* from the previous month, but up 1.4 percent (±0.9%) above June 2014. Total sales for the April 2015 through June 2015 period were up 1.7 percent (±0.7%) from the same period a year ago. The April 2015 to May 2015 percent change was revised from +1.2 percent (±0.5%) to +1.0 percent (±0.3%).

Retail trade sales were down 0.3 percent (±0.5%)* from May 2015, but up 0.6 percent (±0.7%)* above last year. Food services and drinking places were up 7.7 percent (±3.3%) from June 2014 and sporting goods, hobby, books and music were up 6.6 percent (±1.9%) from last year. Gasoline stations were down 17.1% (±1.4%) from the previous year.

Second Quarter 2015 Survey of Professional Forecasters

(Release Date: May 15, 2015) Weaker Outlook for Growth

The outlook for growth in the U.S. economy over the next three years looks weaker now than it did in February, according to 44 forecasters surveyed by the Federal Reserve Bank of Philadelphia. The forecasters predict real GDP will grow at an annual rate of 2.5 percent this quarter and 3.1 percent next quarter. On an annual-average over annual-average basis, real GDP will grow 2.4 percent in 2015, down 0.8 percentage point from the previous estimate. The forecasters predict real GDP will grow 2.8 percent each in 2016 and 2017, and 2.5 percent in 2018.


Emerging markets made up some of the slack in the global economy after 2008-2009, but today are everywhere slowing, as the latest revision of the International Monetary Fund (IMF) World Economic Outlook indicates.

IMF July World Economic Outlook – Slower Growth in Emerging Markets, a Gradual Pickup in Advanced Economies

Global growth is projected at 3.3 percent in 2015, marginally lower than in 2014, with a gradual pickup in advanced economies and a slowdown in emerging market and developing economies. In 2016, growth is expected to strengthen to 3.8 percent.

  • A setback to activity in the first quarter of 2015, mostly in North America, has resulted in a small downward revision to global growth for 2015 relative to the April 2015 World Economic Outlook (WEO). Nevertheless, the underlying drivers for a gradual acceleration in economic activity in advanced economies—easy financial conditions, more neutral fiscal policy in the euro area, lower fuel prices, and improving confidence and labor market conditions—remain intact.
  • In emerging market economies, the continued growth slowdown reflects several factors, including lower commodity prices and tighter external financial conditions, structural bottlenecks, rebalancing in China, and economic distress related to geopolitical factors. A rebound in activity in a number of distressed economies is expected to result in a pickup in growth in 2016.
  • The distribution of risks to global economic activity is still tilted to the downside. Near-term risks include increased financial market volatility and disruptive asset price shifts, while lower potential output growth remains an important medium-term risk in both advanced and emerging market economies. Lower commodity prices also pose risks to the outlook in low-income developing economies after many years of strong growth.

Link to Blanchard video

China May Tip World Into Recession: Morgan Stanley

Also there is this interesting chart From Dr. Ed’s Blog


Impending Disaster In Greece

My take is that the harsh dealing with Greece led by, apparently, the Germans is more symbolic than directly material to global economic conditions. Nevertheless, it is an ugly symbol, representing, it seems, the end of dreamy thoughts about European integration and the onset of recognition of new German hegemony in Europe.

I am an admirer of modern Germany, having struggled to relearn enough German to read newspapers recently and ask for items in German bakeries. I see the German perspective, but I deeply regret its narrow scope. I think more conservative Germans are missing the big picture here. Of course, the plight of the Greeks is desperate and lamentable.

One final remark – forecasting comes to the fore at junctures such as these. Are we on the cusp, have we started to slide down, or is there still some upside? Compelling questions.

Failures of Forecasting in the Greek Crisis

The resounding “No” vote today (Sunday, July 5) by Greeks vis a vis new austerity proposals of the European Commission and European Central Bank (ECB) is pivotal. The immediate task at hand this week is how to avoid or manage financial contagion and whether and how to prop up the Greek banking system to avoid complete collapse of the Greek economy.


Thousands celebrate Greece’s ‘No’ vote despite uncertainty ahead

Greece or, more formally, the Hellenic Republic, is a nation of about 11 million – maybe 2 percent of the population of the European Union (about 500 million). The country has a significance out of proportion to its size as an icon of many of the ideas of western civilization – such as “democracy” and “philosophy.”

But, if we can abstract momentarily from the human suffering involved, Greek developments have everything to do with practical and technical issues in forecasting and economic policy. Indeed, with real failures of applied macroeconomic forecasting since 2010.

Fiscal Multipliers

What is the percent reduction in GDP growth that is likely to be associated with reductions in government spending? This type of question is handled in the macroeconomic forecasting workshops – at the International Monetary Fund (IMF), the ECB, German, French, Italian, and US government agencies, and so forth – through basically simple operations with fiscal multipliers.

The Greek government had been spending beyond its means for years, both before joining the EU in 2001 and after systematically masking these facts with misleading and, in some cases, patently false accounting.

Then, to quote the New York Times,

Greece became the epicenter of Europe’s debt crisis after Wall Street imploded in 2008. With global financial markets still reeling, Greece announced in October 2009 that it had been understating its deficit figures for years, raising alarms about the soundness of Greek finances. Suddenly, Greece was shut out from borrowing in the financial markets. By the spring of 2010, it was veering toward bankruptcy, which threatened to set off a new financial crisis. To avert calamity, the so-called troika — the International Monetary Fund, the European Central Bank and the European Commission — issued the first of two international bailouts for Greece, which would eventually total more than 240 billion euros, or about $264 billion at today’s exchange rates. The bailouts came with conditions. Lenders imposed harsh austerity terms, requiring deep budget cuts and steep tax increases. They also required Greece to overhaul its economy by streamlining the government, ending tax evasion and making Greece an easier place to do business.

The money was supposed to buy Greece time to stabilize its finances and quell market fears that the euro union itself could break up. While it has helped, Greece’s economic problems haven’t gone away. The economy has shrunk by a quarter in five years, and unemployment is above 25 percent.

In short, the austerity policies imposed by the “Troika” – the ECB, the European Commission, and the IMF – proved counter-productive. Designed to release funds to repay creditors by reducing government deficits, insistence on sharp reductions in Greek spending while the nation was still reeling from the global financial crisis led to even sharper reductions in Greek production and output – and thus tax revenues declined faster than spending.

Or, to put this in more technical language, policy analysts made assumptions about fiscal multipliers which simply were not borne out by actual developments. They assumed fiscal multipliers on the order of 0.5, when, in fact, recent meta-studies suggest they can be significantly greater than 1 in magnitude and that multipliers for direct transfer payments under strapped economic conditions grow by multiples of their value under normal circumstances.

Problems with fiscal multipliers used in estimating policy impacts were recognized some time ago – see for example Growth Forecast Errors and Fiscal Multipliers the IMF Working Paper authored by Oliver Blanchard in 2013.

Also, Simon Wren-Lewis, from Oxford University, highlights the IMF recognition that they “got the multipliers wrong” in his post How a Greek drama became a global tragedy from mid-2013.

However, at the negotiating table with the Greeks, and especially with their new, Left-wing government, the niceties of amending assumptions about fiscal multipliers were lost on the hard bargaining that has taken place.

Again, Wren-Lewis is interesting in his Greece and the political capture of the IMF. The creditors were allowed to demand more and sterner austerity measures, as well as fulfillment of past demands which now seem institutionally impossible – prior to any debt restructuring.

IMF Calls for 50 Billion in New Loans and Debt Restructuring for Greece

Just before to the Greek vote, on July 2, the IMF released a “Preliminary Draft Debt Sustainability Analysis.”

This clearly states Greek debt is not sustainable, given the institutional realities in Greece and deterioration of Greek economic and financial indicators, and calls for immediate debt restructuring, as well as additional funds ($50 billion) to shore up the Greek banks and economy.

There is a report that Europeans tried to block IMF debt report on Greece, viewing it as too supportive of the Greek government position and a “NO” vote on today’s referendum.

The IMF document considers that,

If grace periods and maturities on existing European loans are doubled and if new financing is provided for the next few years on similar concessional terms, debt can be deemed to be sustainable with high probability. Underpinning this assessment is the following: (i) more plausible assumptions—given persistent underperformance—than in the past reviews for the primary surplus targets, growth rates, privatization proceeds, and interest rates, all of which reduce the downside risk embedded in previous analyses. This still leads to gross financing needs under the baseline not only below 15 percent of GDP but at the same levels as at the last review; and (ii) delivery of debt relief that to date have been promises but are assumed to materialize in this analysis.

Some may view this analysis from a presumed moral high ground – fixating on the fact that Greeks proved tricky about garnering debt and profligate in spending in the previous decade.

But, unless decision-makers are intent upon simply punishing Greece, at risk of triggering financial crisis, it seems in the best interests of everyone to consider how best to proceed from this point forward.

And the idea of cutting spending and increasing taxes during an economic downturn and its continuing aftermath should be put to rest as another crackpot idea whose time has passed.

Video Friday

Here are some short takes on topics of the day related to the economic outlook for the rest of 2015, nationally and globally.

First a couple of videos on the poor performance of the US economy in the first quarter 2015, when real GDP contracted slightly. This also happened last year, and so there may be a rebound, and, of course, the estimates are released at a significant lag – so we won’t know for a while.

US economy shrank in the first quarter of 2015

U.S. Economy Shrank in First Quarter

Then, a couple of videos on the Chinese stock market crash and condition of the Chinese economy – worrisome since China plays a bigger and bigger role in global business. Bear with the halting English in the first video; there is a payoff in terms of a look from the inside. The second is from a couple of months ago, but is extremely informative vis a vis the big picture.

Stock market of China Falls 16, June 2015

China’s Economy: The Numbers Look Scary

And finally Greece.

Greek crisis in 90 seconds | FT Markets

In closing, I have a comments on technical forecasting issues suggested by the above.

First, “nowcasting” with mixed frequency data should always be applied to these prognostications of what will happen to past economic growth, e.g. the 2nd quarter of 2015. My sense is this is not being done widely, but it’s easy to show its efficacy. There is no reason to drawl on about imponderables, when you can just apply available weekly and monthly data, maybe using MIDAS, to get a better idea of what number we are likely see for the 2nd quarter 2015.

Secondly, I doubt data analytics can provide much light on the situation in China, precisely because there is a lot of evidence the data being announced are suspect. You can go too far in claiming this, but there are warning signs about Chinese data these days. It’s probably comparable to assessing the integrity of Chinese company financials – which see very creative accounting. in certain cases.

As far as Greece goes, I think the outcome is completely unpredictable. Greece is a small economy. If turning Greece away means catastrophic consequences, assistance should be forthcoming, and there are resources available for the size of the problem.  Events, however, may have moved beyond rationality.

The crux of the matter seems to be that there needs to be a way to recirculate funds from the surplus exporters (Germany, largely) to the deficit importers (peripheral Europe).

One proposal is for Germany to create a kind of “New Deal” to invest in the European periphery, so that down the line, their economies can become more balanced and competitive. Another approach, which seems to be that of the Christian Democratic Union (CDU) of Germany, is the neoliberal “solution.” Essentially, force wages and living standards down in debtor countries to the point where they again become globally competitive.

What’s Going On?

Teaching economics during Vietnam and, later, the onset of Reagan – I developed a sort of sideline patter about current events. Later, I realized this bore resemblance to a kind of global system dynamics.

Then, my consulting made these considerations more relevant – to the point that, in recent years, I make correlations between what you might call a global regional analysis and sales prospects, as well as corporate strategy.

How do you go about developing this perspective? The question is especially relevant for me now, since I am emerging from a deep dive into hands-on statistical modeling.

Well, one way to visualize this is as a series of threads through time. Each of these threads is strung with events that can turn out one way or another. There are main threads as believed to be constituted by “serious people.” The conventional view of things, if you will. There also are many outliers, story lines which incorporate unusual, perhaps foreboding developments. I guess you could think of these threads as scenarios, too. A whole bunch of movie scripts about how the future is going to unfold.

Now before getting into specifics, let me make what might be considered an obscure remark, but one relevant to forecasting. What you want to do is disentangle and identify as many of these threads as you have the energy to consider, and then, watch for convergences. If there are several ways, in other words, for some events to become manifested, these events become more likely.

One of the things this methodology accommodates is a fact that it seems to me that many people overlook or downplay. This is that there can be really fundamental differences between how different groups of people, perhaps with different interests or things to gain or lose out of situations, look at things.

One of the clearest examples, perceptually, is the arrow illusion.


So this is one reason why I try to glean perspectives from all over – including heterodox and contrarian views.

Noone at this point can convince me this is not a good practice, even though it may make those who busy themselves with thought control (“reality construction”) uncomfortable.

For example, many years ago, I was sitting at my father’s breakfast nook glancing at some books he had recently bought, and I found Andrei Amalrik’s Will the Soviet Union Survive Until 1984? What a preposterous idea, it seemed to me. Collapse of the Soviet Union.

It pays to look at heterodox views, even if only a few of these will have any relevance to the future.

Some Specifics

Well, today we have the internet – a font of views of all types.

In thinking about developing this and its successors on the same or similar topics this morning, I first turned to Zero Hedge. From Wikipedia,

Zero Hedge is a financial blog that aggregates news and presents editorial opinions from original and outside sources. It has been described as offering a “deeply conspiratorial, anti-establishment and pessimistic view of the world”… It reports on economics, Wall Street, and the financial sector and is credited with bringing the controversial practice of flash trading to public attention in 2009 via a series of posts alleging that Goldman Sachs’ access to flash order information allowed it to gain unfair profits. The news portion of the site is written by a group of editors who collectively write under the pseudonym “Tyler Durden”, a character from the novel and film Fight Club.

Since I have been out of the loop for a while, the litany of shocking or bad news on this site does not bother me yet.

Some of the headings include:

Iran Forces Seize US Cargo Ship With 34 People On Board, Al Arabiya Reports

West Baltimore In Ashes: A Night Of Violence And Looting In Photos

Stocks Soar On Non-War, Bad-News-Is-Good-News V-Shaped Recovery

Well, I’m not sure what to make of all that. Conflict is increasing. War and riot memes.

Another site I frequently turn to, quite frankly, is Naked Capitalism, and, in particular, Links assembled by “Yves Smith” and others. Today, these range over topics like the Greek-European Union negotiations and the threat of an exit of Greece from the Eurozone, the TPP (trans-Pacific Partnership secret trade bill), Yemen and Syria, and a reference to a new and important report from MIT about the decline in US science spending –The Future Postponed.

I also consult what I would call “libertarian” financial blogs such as Mish Shedlock’s Global Economic Trend Analysis.

Then, I guess, after surveying these “oppositional views,” I turn to official forecasts and publications of US and European banks and financial institutions, as well as central banks.

I’ve given play to JP Morgan forecasters here, as well as Bloomberg’s list of leading macroeconomic forecasters.  It is always good to try to keep tabs on the latest sayings of these celebrity forecasters.

The Bank of England Financial Stability Report, most recently issued December 2014, is a relevant publication.

I also tend to look at, but basically discount, sources such as the Survey of Professional Forecasters, assembled by the Philadelphia Federal Reserve Bank. The record of macroeconomic forecasting is truly abysmal. But, apart from turning points, there may be value in tracking the projected movement of indicators and their trends.

The Central Issue

I have not mentioned slowing of the Chinese economy in the above discussion or several other megatrends, but let me move on to a key pivot for the next few years.

Business expansions never last forever. The current expansion, perhaps because it began so slowly, has sustained for a relatively long time already.

Another key point is that many central banks have pushed interest rates to near the zero bound, and they remain historically very low.

Frankly, it challenges my capabilities to imagine a future in which interest rates sort of disappear as key economic factors – although this may be a thread we need to consider. The attack on cash and movement to purely electronic money could be part of this, with negative interest rates entering the picture in a real way.

But assuming that does not happen, central banks will have to encourage higher interest rates, and that will have wide-ranging effects on business, it seems certain. There are many tangible forecasting problems associated with this prospective development.

I have to believe this is the central issue at present. How can the US Federal Reserve, for example, move off the zero bound for the federal funds rate, when the US economic recovery should, according to historical patterns, be moving toward its final months or years?

There are other tough issues – in the Middle East, the Ukraine, climate change, and so forth – but, as an economic or business forecaster, I have to believe this tension between normal banking practice and the business cycle is fundamental.

In any case, I want to return to putting up business forecasts, including longer term scenarios, in addition to carrying forth with my stock market forecasting experiment.


Blogging gets to be enjoyable, although demanding. It’s a great way to stay in touch, and probably heightens personal mental awareness, if you do it enough.

The “Business Forecasting” focus allows for great breadth, but may come with political constraints.

On this latter point, I assume people have to make a living. Populations cannot just spend all their time in mass rallies, and in political protests – although that really becomes dominant at certain crisis points. We have not reached one of those for a long time in the US, although there have been mobilizations throughout the Mid-East and North Africa recently.

Nate Silver brought forth the “hedgehog and fox” parable in his best seller – The Signal and the Noise. “The fox knows many things, but the hedgehog knows one big thing.”

My view is that business and other forecasting endeavors should be “fox-like” – drawing on many sources, including, but not limited to quantitative modeling.

What I Think Is Happening – Big Picture

Global dynamics often are directly related to business performance, particularly for multinationals.

And global dynamics usually are discussed by regions – Europe, North America, Asia-Pacific, South Asia, the Mid-east, South American, Africa.

The big story since around 2000 has been the emergence of the People’s Republic of China as a global player. You really can’t project the global economy without a fairly detailed understanding of what’s going on in China, the home of around 1.5 billion persons (not the official number).

Without delving much into detail, I think it is clear that a multi-centric world is emerging. Growth rates of China and India far surpass those of the United States and certainly of Europe – where many countries, especially those along the southern or outer rim – are mired in high unemployment, deflation, and negative growth since just after the financial crisis of 2008-2009.

The “old core” countries of Western Europe, the United States, Canada, and, really now, Japan are moving into a “post-industrial” world, as manufacturing jobs are outsourced to lower wage areas.

Layered on top of and providing support for out-sourcing, not only of manufacturing but also skilled professional tasks like computer programming, is an increasingly top-heavy edifice of finance.

Clearly, “the West” could not continue its pre-World War II monopoly of science and technology (Japan being in the pack here somewhere). Knowledge had to diffuse globally.

With the GATT (General Agreement on Tariffs and Trade) and the creation of the World Trade Organization (WTO) the volume of trade expanded with reduction on tariffs and other barriers (1980’s, 1990’s, early 2000’s).

In the United States the urban landscape became littered with “Big Box stores” offering shelves full of clothing, electronics, and other stuff delivered to the US in the large shipping containers you see stacked hundreds of feet high at major ports, like San Francisco or Los Angeles.

There is, indeed, a kind of “hollowing out” of the American industrial machine.

Possibly it’s only the US effort to maintain a defense establishment second-to-none and of an order of magnitude larger than anyone elses’ that sustains certain industrial activities shore-side. And even that is problematical, since the chain of contracting out can be complex and difficult and costly to follow, if you are a US regulator.

I’m a big fan of post-War Japan, in the sense that I strongly endorse the kinds of evaluations and decisions made by the Japanese Ministry of International Trade and Investment (MITI) in the decades following World War II. Of course, a nation whose industries and even standing structures lay in ruins has an opportunity to rebuild from the ground up.

In any case, sticking to a current focus, I see opportunities in the US, if the political will could be found. I refer here to the opportunity for infrastructure investment to replace aging bridges, schools, seaport and airport facilities.

In case you had not noticed, interest rates are almost zero. Issuing bonds to finance infrastructure could not face more favorable terms.

Another option, in my mind – and a hat-tip to the fearsome Walt Rostow for this kind of thinking – is for the US to concentrate its resources into medicine and medical care. Already, about one quarter of all spending in the US goes to health care and related activities. There are leading pharma and biotech companies, and still a highly developed system of biomedical research facilities affiliated with universities and medical schools – although the various “austerities” of recent years are taking their toll.

So, instead of pouring money down a rathole of chasing errant misfits in the deserts of the Middle East, why not redirect resources to amplify the medical industry in the US? Hospitals, after all, draw employees from all socioeconomic groups and all ethnicities. The US and other national populations are aging, and will want and need additional medical care. If the world could turn to the US for leading edge medical treatment, that in itself could be a kind of foreign policy, for those interested in maintaining US international dominance.

Tangential Forces

While writing in this vein, I might as well offer my underlying theory of social and economic change. It is that major change occurs primarily through the impact of tangential forces, things not fully seen or anticipated. Perhaps the only certainty about the future is that there will be surprises.

Quite a few others subscribe to this theory, and the cottage industry in alarming predictions of improbable events – meteor strikes, flipping of the earth’s axis, pandemics – is proof of this.

Really, it is quite amazing how the billions on this planet manage to muddle through.

But I am thinking here of climate change as a tangential force.

And it is also a huge challenge.

But it is a remarkably subtle thing, not withstanding the on-the-ground reality of droughts, hurricanes, tornados, floods, and so forth.

And it is something smack in the sweet spot of forecasting.

There is no discussion of suitable responses to climate change without reference to forecasts of global temperature and impacts, say, of significant increases in sea level.

But these things take place over many years and, then, boom a whole change of regime may be triggered – as ice core and other evidence suggests.

Flexibility, Redundancy, Avoidance of Over-Specialization

My brother (by a marriage) is a priest, formerly a tax lawyer. We have begun a dialogue recently where we are looking for some basis for a new politics and new outlook, really that would take the increasing fragility of some of our complex and highly specialized systems into account – creating some backup systems, places, refuges, if you will.

I think there is a general principle that we need to empower people to be able to help themselves – and I am not talking about eliminating the social safety net. The ruling groups in the United States, powerful interests, and politicians would be well advised to consider how we can create spaces for people “to do their thing.” We need to preserve certain types of environments and opportunities, and have a politics that speaks to this, as well as to how efficiency is going to be maximized by scrapping local control and letting global business from wherever come in and have its way – no interference allowed.

The reason Reid and I think of this as a search for a new politics is that, you know, the counterpoint is that all these impediments to getting the best profits possible just result in lower production levels, meaning then that you have not really done good by trying to preserve land uses or local agriculture, or locally produced manufactures.

I got it from a good source in Beijing some years ago that the Chinese Communist Party believes that full-out growth of production, despite the intense pollution, should be followed for a time, before dealing with that problem directly. If anyone has any doubts about the rationality of limiting profits (as conventionally defined), I suggest they spend some time in China during an intense bout of urban pollution somewhere.

Maybe there are abstract, theoretical tools which could be developed to support a new politics. Why not, for example, quantify value experienced by populations in a more comprehensive way? Why not link achievement of higher value differently measured with direct payments, somehow? I mean the whole system of money is largely an artifact of cyberspace anyway.

Anyway – takeaway thought, create spaces for people to do their thing. Pretty profound 21st Century political concept.

Coming attractions here – more on predicting the stock market (a new approach), summaries of outlooks for the year by major sources (banks, government agencies, leading economists), megatrends, forecasting controversies.

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