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Geo-Graphics

A graphical take on geoeconomics.

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Steel Productivity has Plummeted Since Trump’s 2018 Tariffs

Studies have shown that tariffs depress productivity in protected industries. U.S. steel is a case in point.

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China
Is the BRICS Contingent Reserve Arrangement a Substitute for the IMF?
Russian President Vladimir Putin has hailed the new BRICS contingent reserve arrangement (CRA) as a substitute for the IMF, saying that it “creates the foundation for an effective protection of our national economies from a crisis in financial markets." But does it? Under the terms of the arrangement, China can, without being on an IMF program, borrow up to $6.2 billion; Brazil, Russia, and India $5.4 billion; and South Africa $3 billion.  But this is chicken feed compared to Russia and Brazil’s crisis-borrowing from the IMF over the past twenty years, as we show in the top figure above.  The IMF approved lending to Russia of $38 billion (SDR 24.786 billion) in the 1990s.  In 2002 alone, the IMF approved a 15-month stand-by credit arrangement of about $30 billion for Brazil.  Net private financial flows to emerging markets today are roughly 10 times what they were in 2002, meaning that the size of the loans necessary to address balance of payments financing problems would be even larger now. The BRICS countries know this, which is why they maintain such vast pools of foreign exchange reserves, as we show in the bottom figure. The notion that $5.4 billion from the BRICS CRA would make a difference to Russia in a genuine financial crisis is ridiculous.  Putin’s statement is clearly political hyperbole, which is why Russia currently holds over $400 billion in reserves. Time: The BRICS Don’t Like the Dollar-Dominated World Economy, but They’re Stuck With It Financial Times: The BRICS Bank Is a Glimpse of the Future People's Bank of China: Treaty for the Establishment of a BRICS Contingent Reserve Arrangement IMF: The IMF and Russia in the 1990s   Follow Benn on Twitter: @BennSteil Follow Geo-Graphics on Twitter: @CFR_GeoGraphics Read about Benn’s latest award-winning book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, which the Financial Times has called “a triumph of economic and diplomatic history.”
China
Is the BRICS Bank More "Democratic" Than the World Bank?
The launch of the new BRICS development bank “reflects the disparity and democratic deficiency in the global governance and is trying to restart, to rethink that,” according to Nobel economist Joseph Stiglitz.  But is the BRICS bank really more “democratic” than the World Bank, whose governance legitimacy its founders are challenging? As the Geo-Graphic above shows, the voting share of the World Bank’s founding members has fallen over the years from 100% to 49.7%.  This means that its 37 founders currently have less voting power than the five BRICS bank founders will ever have within their new institution.  That’s because the BRICS bank articles of agreement do not allow the founders’ voting share to fall below 55% - ever, no matter what the bank’s future membership looks like. This is like saying that immigrants can have the vote, but only until they become 45% of the population – then they cap out. Where’s the democracy in that? Geo-Graphics: Hurling BRICS at the World Bank and the $ RT: How the West Created BRICS New Development Bank Wall Street Journal: Five Things to Know About the New BRICS Bank International Bank for Reconstruction and Development: Subscriptions and Voting Power of Member Countries   Follow Benn on Twitter: @BennSteil Follow Geo-Graphics on Twitter: @CFR_GeoGraphics Read about Benn’s latest award-winning book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, which the Financial Times has called “a triumph of economic and diplomatic history.”
China
Hurling BRICS at the World Bank and the $
Brazil, Russia, India, China, and South Africa (the “BRICS”) made a splash last week with the official launch of their new development bank.  The backers made no secret of their intention to challenge the way things are done in the established international financial and monetary architecture. The irony is that India and China are the biggest beneficiaries of the current development bank architecture. They are the World Bank’s largest borrowers.  And Brazil is number 9.  As shown in the graphic above, these three nations have $66bn in World Bank loans outstanding, 32% more than the new BRICS bank’s entire initial subscribed capital of $50bn.  So it would appear that for the foreseeable future the World Bank will remain a considerably more important source of development financing for the BRICS than their own development bank. At the bank’s launch, Russian president Vladimir Putin took a shot at the prevailing global monetary architecture, contrasting it with the BRICS’ vision.  “The international monetary system … depends a lot on the U.S. dollar, or, to be precise, on the monetary and financial policy of the U.S. authorities. The BRICS countries want to change this.” However, the entire paid-in capital stock of the new BRICS bank will be in U.S. dollars.  Just 10 percent of the World Bank’s paid-in capital was contributed in U.S. dollars; the rest was contributed in member countries’ national currencies. So whose currency regime is more dependent on the dollar? Sixth BRICS Summit: Fortaleza Declaration Macro and Markets: BRICS and Mortals The Economist: An Acronym with Capital International Bank for Reconstruction and Development: Information Statement   Follow Benn on Twitter: @BennSteil Follow Geo-Graphics on Twitter: @CFR_GeoGraphics Read about Benn’s latest award-winning book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, which the Financial Times has called “a triumph of economic and diplomatic history.”
  • Monetary Policy
    Yellen vs. Bullard on Wages and Inflation: Who Is Right?
    Wage growth is “not a threat to inflation,” Fed Chair Janet Yellen said on June 18.  “[With] our 2 percent inflation objective, we could see wages growing at a more rapid rate” before having to worry. “When unemployment goes into the five range, that is going to below the natural rate,” St. Louis Fed President James Bullard said on July 9.  “I think we are going to overshoot here on inflation.” Who is right? In today’s Geo-Graphic, we look at the relationship between wage growth and inflation over the last twenty years.  Perhaps surprisingly, we find virtually none (an R-Squared of 0.03).  Wage growth has routinely exceeded so-called core inflation (consumer goods inflation excluding energy and food) by large amounts without the latter picking up.  One explanation for this phenomenon may be the growth of imports as a percentage of GDP, from 9% in 1994 to 16% today, which acts to keep tradeables prices down.  This supports Yellen’s position. This does not mean, however, that wage growth should not concern the Fed.  On the contrary, as we can see from the figure on the left, unusually high wage growth—above 4%—preceded the last two recessions, in 2001 and 2007.  The explanation may lie in the fact that high wage growth induces people to assume more debt that they would otherwise. Rapid wage growth was associated with rising debt service burdens during both periods, as shown in the figure on the right.  Increasing debt service payments tend to crowd out other forms of consumer spending, and make households more vulnerable if expected wage increases fail to materialize. Annualized wage growth at present is still moderate, running at about 2.3%.  But it is clearly on the rise.  The household debt service ratio, however, is at its lowest level since the series began in 1980, and household debt is less than it was in Q1 2008—though it has started moving up again. In short, the monetary history of the past twenty years suggests that wage growth at current or moderately higher levels is unlikely to cause a significant rise in consumer price inflation.  Yet a continued trending up in wage growth would likely presage a rise in household leverage, which is a credible indicator of economic instability ahead.  But at the current low leverage levels, far ahead. The Economist: Waiting for Inflation Wall Street Journal: America Inc. Wakes Up to Wage Inflation VoxEU: The Impact of Low-Income Economies on U.S. Inflation Financial Times: Fed Bond Buying Set to End in October   Follow Benn on Twitter: @BennSteil Follow Geo-Graphics on Twitter: @CFR_GeoGraphics Read about Benn’s latest award-winning book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, which the Financial Times has called “a triumph of economic and diplomatic history.”
  • China
    China, not Piketty, Explains “Confused Signals” in U.S. Asset Prices
    The FT’s Ed Luce recently took on the “confused signals” being sent by U.S. stock and bond prices moving in sync (upward). Which is it, he asks?  Are economic prospects good, as stock prices suggest, or bleak, as bond prices suggest? Both and neither, he offers.  High-end retailers like LMVH and Tiffany are doing great, he says, while low-end ones like Walmart and Sears are languishing.  The net effect, he concludes, is stock prices buoyed by high-end earnings optimism and bond prices supported by a hollowing out of the American middle class.  Growing inequality explains the apparent conundrum. Given the current fascination with all things Piketty, this makes a charming and topical story.  But it is also almost certainly wrong. The straight average of U.S. company stock prices in the S&P Global Luxury index is actually down 1% this year; market-cap weighted, it’s up only 3.9%.  This compares with a 6.1% rise in the S&P overall.  As for Luce’s example of Tiffany (LMVH is foreign), its stock price has lagged mid-range retailer Macy’s.  In short, there is no discernable Piketty effect in U.S. stock prices. As for bond prices, China’s central bank holds the key. After more than three years of steady appreciation, the RMB has declined over 3% this year – erasing the past year’s rise.  Driven by the Chinese government’s desire to re-juice failing economic growth, RMB depreciation has naturally been accompanied by an increase in China’s foreign exchange reserves. China usually allocates about 40 percent of its foreign exchange reserves to Treasuries; so far this year, however, its official holdings of Treasuries have actually declined.  What explains this?  Given that China comes under pressure from the U.S. Treasury and Congress whenever it appears to be pushing down its currency, China is almost certainly disguising its Treasury purchases by holding them in Belgium. As shown in the graphic above, “Belgium” accumulated abnormal amounts of Treasuries during the first quarter of the year; Brussels-based clearinghouse Euroclear has acknowledged that it is likely responsible for the increase.  China’s actions would help explain why Belgium, a country whose GDP is slightly smaller than that of New Jersey's, has become the world’s third largest holder of Treasuries, after only China and Japan. China and “Belgium” bought a massive combined $59 billion in Treasuries in January, a month in which the supply of Treasuries actually shrank by $42 billion.  This would almost surely explain a large part of the decline in Treasury yields that month from 3.03% to 2.64% In short, the “confused signals” in U.S. asset prices would appear to be driven by China’s efforts to push down the RMB, and not by Pikettification of the U.S. economy. Financial Times: Look to China for Reasons Behind Strong Demand for Treasuries New York Fed: Responses to Survey of Primary Dealers Treasury: Major Foreign Holders of Treasury Securities Wall Street Journal: China Is in No Rush to Halt Yuan’s Fall   Follow Benn on Twitter: @BennSteil Follow Geo-Graphics on Twitter: @CFR_GeoGraphics Read about Benn’s latest award-winning book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, which the Financial Times has called “a triumph of economic and diplomatic history.”