Where is the Recovery Going to Come From?

Over the past few weeks, my occasional glances at the market reporting pages suggested that there was some positive news to be had. Markets were launching small rallies. There was a return to risky assets. The UK and Germany, among others, were turning out surprisingly positive signs of economic recovery. But upon taking a step back from the day-to-day churn of financial reporting, I have to admit I'm a bit baffled by all of this: where are these positive vibes coming from?

Although the recession probably ended (technically) in the United States sometime last summer, the global recovery - such as it is - seems remarkably fragile. Unemployment is obviously the biggest indicator. German unemployment continues to drop, but in the US the there are some 15 million unemployed, and even more who are underemployed. Nearly half of the unemployed have been off the job for 6 months or more. That's a deep hole. (More charts here)

Moreover, many of the underlying problems have not gone away. Sovereign debt concerns are still a biggy. The collapse of the Eurozone has been staved off through the promise of access to an unprecedented level of EU-backed funds for the weakest members. But most analysts agree that, as far as Greece is concerned, the can has simply been kicked down the road. Only Spain, the UK, and some Baltic states seem to be taking the necessary steps to address the underlying problems. Even there, the steps being taken should raise worry about delaying the recovery even further.

Another underlying problem is that of macroimbalances. Any movement towards re-balancing over the past two years was the result of the peculiarities of the financial crisis. We're seeing quite clearly now that the fundamental asymmetries of the global market for goods & assets have not gone anywhere. Capital flows have started returning to their pre-crisis trends. Moreover, everyone (everyone!) is talking about exporting their way out of recovery.

That is literally not possible. Where is the demand going to come from? US household wealth is low (decimated by decline in housing & job losses), consumer spending is weak, while savings will likely increase. The EU is fragile, and the best-performing country (Germany) is growing from...you guessed it: exports.

What about demand in emerging markets? The biggest, China, is currently trying to delicately apply the brakes to avoid domestic overheating and still does not have sufficient demand to offset the decline in the US/EU. Capital flows into India have slowed in recent months, which restricts their ability to fund further growth and demand. News out Japan is underwhelming.

On top of this, many of the East/Southeast Asian countries that built up their domestic currency reserves during the lead-up to the Great Recession to act as a buffer against crises will feel vindicated: they have fared relatively well. Why on earth would they change strategies now?

As noted below, the fragility of the situation is not lost on Mervyn King, head of the Bank of England. Similarly, US Federal Reserve's beige book recently described a decidedly "beige outlook" for the United States. In fact, even this morning, the estimates of US GDP growth disappointed market watchers.

The only good news I can think of is that we are not hurtling down an economic crevasse. And let's be clear: this is really REALLY good news. Catastrophe was a definite possibility a couple of months ago as observers watched the European sovereign debt problems cause the EZ to teeter on the precipice. But despite their dithering, the euro-zone economies have, for the moment, escaped the worst possible outcomes. The bank stress tests, despite widely reported weaknesses, have been met by a neutral-to-positive response. Tyler Cowen suggests that wages in Europe have been less sticky than he predicted, which seems to be prompting some signs of recovery. Another indicator of uncertainty - both for inflation and deflation - is gold. Gold is holding steady at the moment, suggesting that fear of impending doom is abated.

But if not hurtling down an economic crevasse is the best news you've got, things are still pretty grim. Taking stock of the situation from my little peephole, I have really got to ask myself: where is the recovery going to come from?

UPDATE: Some honesty from Tyler Cowen: "Macroeconomics is rarely simple... We still don't know what we are doing." Read the rest.

Wednesday Readables

- Mervyn King warns against getting ahead of ourselves:

"The gradual improvement in credit conditions that was evident earlier in the year seems to have come to a halt in recent months. And financial markets more generally have been volatile. In part that is because continuing concerns about the ability of some countries to achieve necessary fiscal consolidation are affecting confidence in the ability of banks to repair their balance sheets. More fundamentally, the key underlying causes of the crisis – in terms of the imbalances in global demand – have still not been tackled. Those imbalances are likely to be larger this year than last, and will probably still be around three-quarters of their level at the peak immediately prior to the crisis. Until these underlying problems are resolved, uncertainty about the outlook for the world economy will remain."

(FT Alphaville provides comment)

- Flooding in China pushes the Three Gorges dam ever closer to capacity

- Does happiness affect productivity? Yes. Quality? Not really.

- In praise of Dark Ages

- Catalonia bans bullfighting. Good. I attended a bullfight in Madrid recently - I arrived with what I had hoped was an open mind, willing to make an effort to appreciate this part of Spanish culture. I was left disgusted by what is, essentially, ritualized slaughter for the sake of entertainment. Don't get me wrong: I was impressed by the matadors themselves. Bullfighting clearly requires a great deal of skill and cajones. But so did being a gladiator in ancient Rome. The Italians gave up their bloodthirst many centuries ago. Maybe it's time Spain did the same.

Photo Of The Day: Consequences of Inflation

A photo circulating by email around Zimbabwe of a supposed sign along the Zim-South Africa border (from Good Morning Afrika, via Free Exchange):




















And I thought it was only Goldman Sachs executives who did that kind of thing...

Conversations with Taxi Drivers: Singapore

As I am currently a resident of an airport for the near future, I feel it best to catch up on some long overdue blogging. Having spent the better portion of 2 weeks in Singapore, that seems like as good a topic as any. I don't pretend to have become an expert on the place, but I have picked up a few tidbits which have piqued my interest. Many of these have derived from my favourite source of information: taxi drivers.

Singapore is an interesting case, to put it mildly. Much of its recent history is a blur, cobbled together from various travelers' notebooks, journals and the occasional scribbled map. For much of the 17th and 18th centuries it was probably uninhabited. As recently as 50 years ago, the place was still a backwater entrepot, with very little in the way of a diverse economy.

Yet in visiting modern Singapore, this is difficult to imagine. The city-state is modern, vibrant, wealthy, and stuffed with the sort of cultural icons we associate with truly global cities. New resorts and theme parks are sprouting up left and right, while international business people continue to arrive in droves to the business district and conference centers. Next month, the city state will be hosting the 2010 Youth Olympics.* And despite a huge number of foreign workers (a million, according to one cabbie), there is a continuing need for more.

Because it is so tiny, Singapore's success has not been able to rely on natural resources or a large labour force to drive its economic growth. Instead, its limited resources have been carefully "channeled" towards certain key areas to create an open and highly competitive economy. What's more, as they are so vulnerable to the shifting economic winds, the city state has been forced to continue to innovate and shift to new areas. For instance, they are now making a concerted effort towards becoming a world leader in biotechnology research, while the financial services sector continues to grow in regional importance. There is also the recently announced launch of the largest power grid research station in Asia. Further examples abound.

Clearly Singapore has had success where other countries in the region have not. So are there lessons to be learned for other emerging markets? Many appear tempted to dismiss Singapore as a "unique case" that is difficult to copy. There are some good reasons for this.

Obviously, it is small. This makes it easier for the government to carefully allocate economic resources. But many other countries are small and fail to achieve something similar. Access to water and its position along a major shipping route clearly helps, but this does not account for the diversity of Singapore's economy. The colonial background has also left its mark on certain ways in which the country functions, notably the legal system.

The stable political situation certainly plays a role. Although the system is nominally a representative democracy, in practice it is a semi-authoritarian one-party state. Freedom House ranks the country as "Partly Free" (up from "Not Free" a little while back) due to what they label as draconian restrictions on freedom of speech and assembly. Yet, according to one senior diplomat here, the system still kind of works. The ruling party is scared of losing power and local government representatives hold regular council meetings wherein residents can air their grievances. Voices are heard, potholes are fixed. The Lion State's size once again makes this a workable option.

So while its true that, in many respects, Singapore is a unique case, this does not mean that its lessons are not transferrable. This is not news to some; China has long been watching its tiny neighbour grow from a poor nation to an immensely prosperous one, looking for hints on how to do the same. I would also wager to guess that a number of the Gulf Emirates have attempted to out-Singapore Singpore - they certainly share an obsession with heavily air-conditioned shopping malls and a need for economic diversification.

But just what kind of lessons are we talking about? To my eyes, one of the most striking things about Singapore is how multicultural it is - there are people living in Singapore from just about every country in the region. What's more, they appear to do so harmoniously. This is something supposedly modern European cities struggle to achieve. My most recent cabbie, of Indian descent, seemed to agree. Despite being a minority, he felt reasonably well represented. For instance, although the Chinese population dominates the government, there are a number of senior ministers with important portfolios who are Indian.

The noticeable exception is the substantial Malay minority who, despite being the indigenous population and still more populous than the Indians, are less well represented in government. They continue to face restrictions on practicing their culture are also economically disadvantaged (although policies are being developed to mitigate this).

But despite this imbalance, things in Singapore are a far cry from the race riots which apparently caused havoc in the slums of Singapore back in the 1960s. One possible explanation for this are the ubiquitous HDB flats, or subsidized housing projects nicknamed after the Housing and Development Board, which oversees them.

Some 85% of Singaporeans live in HDB flats (private property on the island is obscenely expensive). Although some HDBs can themselves still be quite costly, they offer what appears to be an intelligent solution to addressing the imbalance between the wealthy and the poor. For instance, although HDBs are subsidized, they do seem to be mere handouts. There are conditions attached, and there is the possibility for upward mobility if you work hard and achieve economic success. This creates positive incentives for HDB-dwellers, whereas most public housing projects tend to leave their residents to stagnate.

At least that's the theory. Whether this is true in practice, I have no idea. But the results would appear to speak for themselves. It's not for nothing that, as noted above, China has been closely watching the HDB system's progress over the years as it searches for ways to deal with the challenges caused by a huge increase in urban populations.

More importantly, my taxi driver thought the system works pretty well. That's good enough for me.


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*I confess to have never heard of the Youth Olympics before; I felt slightly less stupid upon discovering that this is the very first time such an event has been held. Now ya know.

The Globalization of the Scotch Market, cntd.

A little while back I wrote a tongue-in-cheek post about the curious effects of globalization on the market for scotch. The increased wealth and subsequent demand for luxury goods in East Asia, it seemed, was causing the price of scotch in North America to rise and the selection to fall.

There were several reasons for this, including: the sheer size and rapid growth of the market for luxury goods in Asia, higher margins for scotch producers & distributors, and - as was my guess - less competition from similar liquors that could act as substitutes for scotch (like whisky, bourbon, rye, etc.).

Sure enough, I arrived at the Singapore Changi international airport yesterday and a quick scan of the duty free shop* supports the theory: the liquor section is dominated primarily by a lot (a lot!) of high-end scotches, as well as cognac, wine and some champagne. There is far less competition from your usual suspects of rums, ryes, vodkas, gins, and the like.

This is a place, in other words, that has its priorities straight.


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*I recognize that a duty free shop in an airport is not accurate guage of what a regular liquor store will carry. But that is sort of the point: it caters to the wealthier crowd that can afford to travel or do business in and around the region. I suspect, however, that the inventory in duty free stores is dictated by a wider variety of considerations than simply consumer demand, so it will be worth finding a liquor store in a wealthy part of town to do a comparison.

Readables

- The great risk rebalancing

- Thoughtful arguments in favour of cosmopolitan eduation, from the point of view of an American

- "A nuclear explosion over the leak," he says nonchalantly puffing a cigarette as he sits in a conference room at the Institute of Strategic Stability, where he is a director. "I don't know what BP is waiting for, they are wasting their time. Only about 10 kilotons of nuclear explosion capacity and the problem is solved." Here.

- Whisky: a liquid investment (har har)

- Iran lectures Canada on human rights following the G20 summit. I have no words.

- 100 greatest movie insults. Redundant Warning: salty language

Paul Krugman and the Richard Dawkins effect

I don't read Paul Krugman anymore.

Actually, that's not technically true: over Christmas I read through his book on the recent financial crisis. This is partly because Krugman has a rare gift for making economic concepts accessible to the lay reader: it's hard to find anyone who can write a book that explains the complexities of the financial crisis as lucidly as he does.

But I don't read Paul Krugman the blogger/op-edder anymore. This is not because I'm not open to his ideas, or that I don't think he has anything important to say - it's more because I feel that I already know what he's going to say.

You see, I fear that the blogger Krugman is no longer contributing nuanced ideas to the debate over economic policy. Rather, he has developed a set of positions and has chosen to simply bang on about them repeatedly. It is as though he has given up on his academic roots to become a mere public pundit for a particular point of view. The debate is over; all that's left is to convince the other side that your side is right.

He has, in other words, become the Richard Dawkins of the macroeconomy debate. Both are very clever and accomplished academics who have contributed original and valuable insights into their respective fields of study. Both have since taken up positions of being public spokespersons for controversial topics. And both are increasingly one-sided and uncompromising in their views. They have become almost a caricature of the viewpoints they espouse. Indeed, Krugman seems to have become more a slogan-generating-machine than anything else.

And it's entertaining stuff, no doubt. This sort of approach is great for running up blog traffic and book sales. However, I'm willing to bet that most people who read Paul Krugman do so to either a) reinforce their own preconceptions and feel better about themselves, or b) find a reason to get really angry. Ditto for Richard Dawkins, by the way.

The unfortunate bit about all of this is that anyone who is genuinely interested in a nuanced discussion about the economy and public policy must look elsewhere. As a case in point, the Economist's latest lead article is on the debate over government austerity measures. Krugman is mentioned in the piece as being a leading figure of the anti-austerity crowd, but is criticized for his "crude Keynesianism." Krugman's responsive post was entitled "I’m Gonna Haul Out The Next Guy Who Calls Me “Crude” And Punch Him In The Kisser." This, despite the fact that the article actually sides more closely with his point of view than the austerity folks.

Like I said, I get it: Paul's being funny and hyperbolic and whimsical. This is entertaining to read. But it doesn't actually address the issue. By focusing who is being labelled as what, who is on which side of the debate and who is falling victim to latest playful slogan that he's come up with, Krugman is reducing the quality of the debate as opposed to enhancing it. What a shame.