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Daily Archives: September 17, 2021

Chuckles of the Day

A woman went to the doctors office. She was seen by one of the new doctors, but after about 4 minutes in the examination room, she burst out and ran down the hall screaming. An older doctor stopped her and asked her what the problem was, and she explained. After listening, he had her sit down and relax in another room.

The older doctor marched back to the first and demanded, “What’s the matter with you? Mrs. Terry is 63 years old, she has four grown children and seven grandchildren, and you told her she was pregnant?”

The new doctor continued to write on his clipboard and said, “Does she still have the hiccups?”

* * * * * * *

Father O’Neal answers the phone.

“Hello, is this Father O’Neal?”

“It tis!”

“This is the IRS. Can you help us?”

“I can!”

“Do you know a Sean Flanders?”

“I do!”

“Is he a member of your congregation?”

“He is!”

“Did he donate $10,000 to the church?”

“He will!”

Chart: Global Trade Partners and Percentage of China and U.S. between 2000 and 2020

Source : The Economist

Inequality, Interest Rates, Aging, and the Role of Central Banks

Matthew C. Klein wrote . . . . . . . . .

Here are three facts about the recent history of the world:

  • Income has become more concentrated within societies. Both the shares of household income going to the top 1% and corporate profit shares have increased dramatically since the 1970s.
  • Inflation-adjusted interest rates are much lower now across much of the world than they were in the early 1980s. That’s contributed to a surge in asset values relative to incomes—and likely means that future investment returns will be much lower than in the past.
  • The human population has aged rapidly, with the global median age rising by about ten years since the early 1980s. The share of the population aged 65 and older in the high-income countries and China, which together account for the vast majority of global economic output, has already jumped from less than 7% in the 1970s to 13% today—and the United Nations projects that share will rise to 25% by 2060.

    New research suggests that these facts are directly connected: the drop in interest rates has been caused by changes in population structure and by shifts in the distribution of income. Lower expected returns on investment are just another consequence of deeper forces holding back economic dynamism.

    Two recent papers provide complementary explanations of the mechanisms at work. Adrien Auclert, Hannes Malmberg, Frédéric Martenet, and Matthew Rognlie focused on the demographic angle, while Atif Mian, Ludwig Straub, and Amir Sufi focused on income inequality. Before digging into their specific arguments, a brief refresher on the basics.

    What are interest rates, anyway?

    For most of history, humanity faced a harsh tradeoff: we could produce goods and services that could be enjoyed today, or we could invest in the production of capital goods and research that would hopefully support higher living standards in the future. But we couldn’t do both. Until relatively recently, simply securing enough food to prevent starvation was a major challenge.

    That constraint isn’t nearly as binding now as it was when we lived as subsistence farmers. In fact, our big problem for the past few decades has been a glut of capacity that we’ve refused to put to work. We’ve been living below our means and have been actively discouraging new investment. Nevertheless, we still retain many of the social institutions that we invented to endure the long era of scarcity.

    One of those social institutions is “interest”: a reward that society pays to those who voluntarily sacrifice spending power today in exchange for the promise of more spending power later. That sacrifice frees up resources so that others can spend more than they earn now. In exchange, the borrowers agree to either spend less later (if they are borrowing to buy consumer goods and services) or to produce more later (if they are borrowing to invest in expanding society’s productive capacity). Whether this is good or bad—and therefore deserving of reward or punishment—depends on each society’s circumstances.

    In theory, interest rates are supposed to encourage or discourage spending according to each society’s needs at different points in time. If there is too much demand for goods and services relative to current production, high interest rates can potentially help by making it more expensive to borrow and by raising the rewards for those who abstain from spending.

    But if nobody is consuming or investing, then it’s pointless to get people to spend even less. Thus inflation-adjusted interest rates tend to be higher when the economy is growing rapidly and lower (or negative) during downturns and periods of slow growth. From this perspective, the relentless decline in interest rates is a signal of serious social problems.

    The search for “neutral”

    In most economies, baseline interest rates are “set” by central banks. Private investors and traders then set the borrowing costs for businesses, households, and governments on top of those baselines according to duration, credit risk, and other factors.

    Central banks can impose any level of (local currency) borrowing costs on the economy that they want, which is why some say that “interest rates are a policy variable.” But central banks generally avoid exercising that power arbitrarily—and for good reason. Interest rates that are too high or too low relative to what makes sense can lead to undesirable consequences ranging from mass unemployment to currency collapse.6 That’s why most central banks instead try to meet the economy and financial system where it is.

    However, central bankers have an incredibly hard time estimating the “neutral” level of interest rates because there are so many countervailing forces at play. Here are just a few factors that aren’t being discussed in the recent batch of papers, but that clearly matter:

    • Governments’ willingness to spend, borrow, and tax
    • The state of consumer and “macroprudential” financial regulation
    • Perceptions of crisis risk and the need to self-insure against those risks by nonfinancial corporations, pension plans, and foreign reserve managers
    • Globalization and changes in openness to cross-border trade and finance
    • The rate of technological innovation, which in turn is affected by research productivity and by businesses’ success at commercialization and development
    • Attitudes towards debt, consumption, entrepreneurship, etc. by ordinary people and business executives

    No model can capture all of the relevant mechanisms, which is probably why every model that’s produced estimates of “neutral” (or “natural”) interest rates generates extremely strange results at least some of the time. In practice, the best that central bankers can hope for is to get reasonably close with trial and error. As Richard Clarida, the Federal Reserve’s Vice Chairman, put it at the end of 2018, the “key parameters that describe the long-run destination of the economy are unknown”—and the only solution is to constantly update your estimates as new data come in.

    Among other things, Clarida was referring to the relentless decline in estimates of the “neutral” rate over the past few decades. In fact, Fed officials’ estimate of “neutral” dropped another 0.5 percentage point just between Clarida’s 2018 speech and the end of 2019. The Fed’s new framework and the European Central Bank’s updated monetary policy strategy were both responses to this phenomenon.

    But even though it’s more or less impossible to know the level of “neutral” at any point in time, it’s easier to track changes in “neutral” over time. And that’s where the new research is particularly helpful.

    Demographics and interest rates

    Auclert et al argue that population aging—and slowing population growth—is partly responsible for the global drop in interest rates because slower population growth reduces investment. There is less reason to reward those who put off spending when there are fewer people trying to build factories, houses, or other types of capital.

    This effect should only get bigger if the United Nations’ forecasts pan out:

    There will be no great demographic reversal: through the twenty-first century, population aging will continue to push down global rates of return, with our central estimate being -123bp, and push up global wealth-to-GDP, with our central estimate being a 10% increase, or 47pp in levels.

    In the 1960s, total population growth in the major global economies (the “high-income countries” plus China) averaged almost 2% a year. That slowed to just 1.2% a year by the 1980s, 0.9% a year by the 1990s, 0.6% a year by the 2000s, and just 0.4% by the eve of the pandemic. The combined population of these economies is projected to shrink starting in the 2030s, eventually falling nearly 20% from the projected 2030 peak by the end of the century.

    Put another way, the number of children aged 0-14 in these economies fell from a peak of more than 600 million in the mid-1970s to about 465 million now. The number of children is projected to plunge almost 30% from current levels to just 335 million by 2100.

    That pushes down interest rates, according to Auclert et al, because fewer people means there is less need to provide for the desires of future generations. This effect outweighs the fact that older people have much lower saving rates than everyone else. An aging society might produce less, but demand falls even further and faster. The process began in the 1980s and could continue for decades to come.

    That’s consistent with what I noted almost six years ago when writing about Japan. There, population aging in the 1990s and 2000s pushed the household saving rate to zero during a period of sustained government budget deficits—yet interest rates went down. The reason was that households are only one piece of the broader economy. In Japan’s case, the decline in business investment and the rise in corporate profitability (which in turn was partly attributable to lower pay for workers) were more than enough to offset what was happening in the rest of the economy.

    Inequality and interest rates

    Mian, Straub, and Sufi, in a paper presented at the Federal Reserve Bank of Kansas City’s Jackson Hole Economic Symposium, focus on how changes in the income distribution affect saving rates, borrowing, and consumer spending.

    The key insight is that the ultra-rich are different from you and me: they have much higher saving rates regardless of their age. No matter how expensive your tastes, there’s a limit to how much you can consume, which means any income above that threshold has to get saved. The ultra-rich therefore spend relatively small shares of their income on goods and services that directly provide jobs and incomes to others, instead accumulating stocks, bonds, art, trophy real estate, and other assets.

    The ultra-rich need no encouragement to refrain from buying goods and services, so any increase in income concentration should put downward pressure on interest rates. Another way to look at it is that an increase in income concentration boosts the demand for financial assets, which should push up prices and push down yields.

    But that effect can be offset by the fact that rising income concentration pushes everyone else to borrow more to finance their own consumption or investment, either directly or through the government budget deficit. The supply of financial assets can rise at the same that demand is also rising. The net impact on interest rates is therefore a function of how the extra borrowing (asset sales) relates to the extra lending (asset demand).

    While there are several ways this can play out in the short-term, rising income inequality leads to some combination of higher indebtedness and weaker consumer spending.9 To simplify only slightly, in a highly-unequal global economy, the ultra-rich lend everyone else the money they need to buy the goods and services sold by the businesses the ultra-rich own. Their profits depend on the ongoing growth of these circular financial flows.

    As Mian et al put it, the increase in saving by America’s high earners was offset by everyone else saving less.

    But that’s inherently unstable. Consumers getting paid less and less relative to national income can’t keep spending more and more unless they also borrow more and more. And the only way consumers can keep taking on more and more debt relative to income is if interest rates keep falling. That dynamic also makes new investments in productive capacity less attractive: indebted consumers with minimal income growth aren’t going to be great for sales growth. All of that should push interest rates down.

    Thus the real estate, junk bond, and consumer debt bubbles of the 1980s were followed by a big decline in interest rates in the early 1990s, the EM and corporate debt bubbles of the 1990s were followed by a big decline in interest rates in the early 2000s (and the inflation of new EM and real estate debt bubbles), and the excesses of the 2000s were then followed by the collision of interest rates into the “effective lower bound.”

    All of this has happened before.

    Here’s how Marriner Eccles put it in his testimony to the U.S. Senate Finance Committee in February 1933:

    The debt structure has obtained its present astronomical proportions due to an unbalanced distribution of wealth production as measured in buying power during our years of prosperity…The time came when we seemed to reach a point of saturation in the credit structure where, generally speaking, additional credit was no longer available, with the result that debtors were forced to curtail their consumption in an effort to create a margin to apply on the reduction of debts.

    This naturally reduced the demand for goods of all kinds, bringing about what appeared to be overproduction, but what in reality was underconsumption measured in terms of the real world and not the money world…There must be a more equitable distribution of wealth production in order to keep purchasing power in a more even balance with production.

    The Great Depression didn’t really end until wartime mobilization caused a surge in incomes and production that wiped out old debts, leveled the wealth distribution, and gave people confidence in the future. The end of the war also kicked off a baby boom after a long drought of births. Not coincidentally, interest rates marched up for decades until the early 1980s.

    Since then, we’ve endured a great reversal in the trends underlying the postwar prosperity, capped off by a global financial crisis that bore many similarities to the Depression. In fact, even though the 2007-10 downturn was shallower, the subsequent recovery was so much weaker that the net effect is that GDP per American grew less in 2007-2019 than in 1929-1940.

    But there are reasons to hope that things can improve.

    The U.S. government’s response to the pandemic—and the attendant impact on household balance sheets—in some ways resembles the wartime mobilization of the 1940s, albeit at a much smaller scale. And while population aging will be tough to reverse, the trends in inequality that have retarded growth and have pushed down interest rates were choices that can be changed.

    Let’s get to work.

    1. There is also the argument that central banks are causing the increase in inequality by lowering interest rates. Lower rates lift asset prices and create a bias in favor of those who can borrow the most to buy the riskiest collateral: leveraged buyout shops, hedge funds, and real estate investors. Ordinary savers ostensibly pay the price in the form of lower returns on liquid assets.

      There’s something to this mechanism, but I think it’s more accurate to say that “the political and economic forces that put central banks in charge of responding to downturns and that require consistent declines in interest rates” increase inequality. If rising income concentration is itself one of those forces—and I think it is—then higher inequality is self-reinforcing with a normal central bank.

    2. While Mian et al frame their research as being partly opposed to Auclert et al, my reading of the two papers is that they are complementary. Auclert et al looked at the impact of aging on investment, while Mian et al looked at the impact of rising inequality on consumer spending and saving. All of those things affect interest rates.
    3. For more on this, I would recommend reading Trade Wars Are Class Wars—just released in paperback with a new preface!—especially chapter 3.
    4. There are some who argue that high interest rates are harmful in this situation because they discourage both current demand as well as investment in additional capacity that could help meet that demand.
    5. Some central banks instead manage the exchange rate and let interest rates move accordingly. Ecuador, El Salvador, and Panama all use the U.S. dollar as their currency and therefore have no direct control over domestic interest rates. Hong Kong’s Monetary Authority maintains a strict peg between the Hong Kong dollar and the U.S. dollar, with interest rates following the Federal Reserve. The Monetary Authority of Singapore manages the level of the Singapore dollar against a basket of foreign currencies, with interest rates often lower than in the U.S.
    6. Big gaps between government policy and whatever makes the most sense for the economy as a whole can show up in a variety of ways, including credit rationing and black-market exchange rates. See, for example, the Argentinian mortgage market.
    7. The downward trend in rates arguably goes back a lot further, although not from the perspective of anyone currently alive. One study from the Bank of England recently found that interest rates have been falling at least since the Renaissance.
    8. It gets even more complicated if you look at how these forces interact in individual countries within the larger context of the global economy, as Michael Pettis and I did in Trade Wars Are Class Wars.
    9. In theory, an increase in income concentration could lead to more financial asset sales by businesses, rather than consumers, which could support additional capex. That could make sense in poorer countries where resources are scarcer. But squeezing ordinary people to finance additional investments in productive capacity makes no sense in an advanced economy. Who would buy the extra goods and services once they’re available? In practice you would end up with higher indebtedness as the result of the bad investment.
    10. David Levy memorably called this the “bubble or nothing” economy.

    Source : The Overshoot

  • New Studies Find Evidence Of ‘Superhuman’ Immunity To COVID-19 In Some Individuals

    Michaeleen Doucleff wrote . . . . . . . . .

    Some scientists have called it “superhuman immunity” or “bulletproof.” But immunologist Shane Crotty prefers “hybrid immunity.”

    “Overall, hybrid immunity to SARS-CoV-2 appears to be impressively potent,” Crotty wrote in commentary in Science back in June.

    No matter what you call it, this type of immunity offers much-needed good news in what seems like an endless array of bad news regarding COVID-19.

    Over the past several months, a series of studies has found that some people mount an extraordinarily powerful immune response against SARS-CoV-2, the coronavirus that causes the disease COVID-19. Their bodies produce very high levels of antibodies, but they also make antibodies with great flexibility — likely capable of fighting off the coronavirus variants circulating in the world but also likely effective against variants that may emerge in the future.

    Immunity To COVID-19 Could Last Longer Than You’d Think

    “One could reasonably predict that these people will be quite well protected against most — and perhaps all of — the SARS-CoV-2 variants that we are likely to see in the foreseeable future,” says Paul Bieniasz, a virologist at Rockefeller University who helped lead several of the studies.

    In a study published online last month, Bieniasz and his colleagues found antibodies in these individuals that can strongly neutralize the six variants of concern tested, including delta and beta, as well as several other viruses related to SARS-CoV-2, including one in bats, two in pangolins and the one that caused the first coronavirus pandemic, SARS-CoV-1.

    “This is being a bit more speculative, but I would also suspect that they would have some degree of protection against the SARS-like viruses that have yet to infect humans,” Bieniasz says.

    So who is capable of mounting this “superhuman” or “hybrid” immune response?

    People who have had a “hybrid” exposure to the virus. Specifically, they were infected with the coronavirus in 2020 and then immunized with mRNA vaccines this year. “Those people have amazing responses to the vaccine,” says virologist Theodora Hatziioannou at Rockefeller University, who also helped lead several of the studies. “I think they are in the best position to fight the virus. The antibodies in these people’s blood can even neutralize SARS-CoV-1, the first coronavirus, which emerged 20 years ago. That virus is very, very different from SARS-CoV-2.”

    In fact, these antibodies were even able to deactivate a virus engineered, on purpose, to be highly resistant to neutralization. This virus contained 20 mutations that are known to prevent SARS-CoV-2 antibodies from binding to it. Antibodies from people who were only vaccinated or who only had prior coronavirus infections were essentially useless against this mutant virus. But antibodies in people with the “hybrid immunity” could neutralize it.

    These findings show how powerful the mRNA vaccines can be in people with prior exposure to SARS-CoV-2, she says. “There’s a lot of research now focused on finding a pan-coronavirus vaccine that would protect against all future variants. Our findings tell you that we already have it.

    “But there’s a catch, right?” she adds: You first need to be sick with COVID-19. “After natural infections, the antibodies seem to evolve and become not only more potent but also broader. They become more resistant to mutations within the [virus].”

    Hatziioannou and colleagues don’t know if everyone who has had COVID-19 and then an mRNA vaccine will have such a remarkable immune response. “We’ve only studied the phenomena with a few patients because it’s extremely laborious and difficult research to do,” she says.

    But she suspects it’s quite common. “With every single one of the patients we studied, we saw the same thing.” The study reports data on 14 patients.

    Several other studies support her hypothesis — and buttress the idea that exposure to both a coronavirus and an mRNA vaccine triggers an exceptionally powerful immune response. In one study, published last month in The New England Journal of Medicine, scientists analyzed antibodies generated by people who had been infected with the original SARS virus — SARS-CoV-1 — back in 2002 or 2003 and who then received an mRNA vaccine this year.

    Remarkably, these people also produced high levels of antibodies and — it’s worth reiterating this point from a few paragraphs above — antibodies that could neutralize a whole range of variants and SARS-like viruses.

    Now, of course, there are so many remaining questions. For example, what if you catch COVID-19 after you’re vaccinated? Or can a person who hasn’t been infected with the coronavirus mount a “superhuman” response if the person receives a third dose of a vaccine as a booster?

    Hatziioannou says she can’t answer either of those questions yet. “I’m pretty certain that a third shot will help a person’s antibodies evolve even further, and perhaps they will acquire some breadth [or flexibility], but whether they will ever manage to get the breadth that you see following natural infection, that’s unclear.”

    Immunologist John Wherry, at the University of Pennsylvania, is a bit more hopeful. “In our research, we already see some of this antibody evolution happening in people who are just vaccinated,” he says, “although it probably happens faster in people who have been infected.”

    In a recent study, published online in late August, Wherry and his colleagues showed that, over time, people who have had only two doses of the vaccine (and no prior infection) start to make more flexible antibodies — antibodies that can better recognize many of the variants of concern.

    So a third dose of the vaccine would presumably give those antibodies a boost and push the evolution of the antibodies further, Wherry says. So a person will be better equipped to fight off whatever variant the virus puts out there next.

    “Based on all these findings, it looks like the immune system is eventually going to have the edge over this virus,” says Bieniasz, of Rockefeller University. “And if we’re lucky, SARS-CoV-2 will eventually fall into that category of viruses that gives us only a mild cold.”

    Source : NPR

    With Tighter Grip, Beijing Sends Message to Hong Kong Tycoons: Fall in Line

    Clare Jim and Farah Master wrote . . . . . . . . .

    As Beijing seeks to tighten its grip over Hong Kong, it has a new mandate for the city’s powerful property tycoons: pour resources and influence into backing Beijing’s interests, and help solve a potentially destabilising housing shortage.

    Chinese officials delivered the message in closed meetings this year amid broader efforts to bring the city to heel under a sweeping national security law and make it more “patriotic,” according to three major developers and a Hong Kong government adviser familiar with the talks.

    “The rules of the game have changed,” they were told, according to a source close to mainland officials, who declined to be named because of the sensitivity of the matter. Beijing is no longer willing to tolerate “monopoly behaviour,” the source added.

    For Hong Kong’s biggest property firms, that would be a big shift. The companies have long exerted outsized power under the city’s hybrid political system, helping choose its leaders, shaping government policies, and reaping the benefits of a land auction system that kept supply tight and property prices among the world’s highest.

    The sprawling businesses of the four major developers, CK Asset (1113.HK), Henderson Land Development (0012.HK), Sun Hung Kai Properties (SHKP) (0016.HK) and New World Development (0017.HK), extend their influence even further into society. For example, the empire of Hong Kong’s richest man, Li Ka-shing of CK Assets, includes property, supermarkets, pharmacies and utilities.

    Because the tycoons are so deeply intertwined with the city’s economy and politics, it would be difficult for Beijing to sideline them completely, said CY Leung, former Hong Kong leader and now a vice-chairman of China’s top advisory body.

    “They are a major component of our political and economic ecosystem, so we need to be careful,” Leung told Reuters. “I think we need to be judicious with what we do and not throw the baby out with the bathwater.”


    Some Chinese officials and state media have blamed tycoons for failing to prevent anti-government protests in 2019 that they say were rooted in sky-high property prices.

    The protests, joined by millions of all ages and social strata, demanded greater democracy and less meddling by Beijing in Hong Kong, which had been promised wide-ranging freedoms until 2047.

    The new directives mark an inflection point in the power play between Beijing and the tycoons, who once held kingmaking sway in Hong Kong’s political leadership race.

    “Now the focus is on contribution to the country; this is not what the traditional business sector in Hong Kong is used to,” said Raymond Tsoi, chairman of Asia Property Holdings (HK) and a member of the advisory group Chinese People’s Political Consultative Conference Shanxi Committee.

    In March, Beijing made sweeping electoral changes. In a new election committee, responsible for choosing the next leader of Hong Kong and some of its lawmakers, a greater “patriotic” force has emerged, while many of the prominent tycoons, including Li, 93, will be absent for the first time since Hong Kong returned to Chinese rule in 1997.

    Hong Kong’s Constitutional and Mainland Affairs Bureau said the new election committee would be more broadly representative of Hong Kong, going beyond the vested interests of specific sectors, specific districts and specific groups, which it called “inadequacies” in the system.

    The source close to Chinese government officials told Reuters a team in the Hong Kong and Macau Affairs Office and the Liaison Office (HKMAO) had sought to curtail the influence of groups perceived to have done little for Beijing’s interests in the city.

    HKMAO and the Liaison Office did not respond to requests for comment.

    SHKP said it was confident about the future of Hong Kong and would continue to invest there and in mainland cities. Henderson Land and New World Development declined to comment, while CK Holdings did not respond to request for comment. Li did not respond to a request for comment.


    Developers have already taken measures to show the message was received.

    New World and Henderson Land have donated rural land as reserves for social housing. In recent weeks, Nan Fung Group, Sun Hung Kai, Henderson Land and Wheelock applied for a public-private partnership scheme, the first applications since the programme was launched in May 2020.

    The programme offers developers an opportunity to build on a higher percentage of open land, but they must use at least 70% of the extra floor area for public housing. Several told Reuters last year that the programme was unattractive because there were many restrictions and a risk of higher costs.

    “Beijing is not telling us what to do, but saying you need to solve this problem,” Hopewell Holdings’ Gordon Wu told Reuters, adding that “it won’t be impatient but it will give you pressure.”

    Another developer source, who declined to be named because of the sensitivity of the issue, said Chinese officials had laid out expectations, but no strategy or deadline.

    “We can continue our businesses as long as we give back more to society,” said the source, a senior official at a top developer in Hong Kong. The sector needs to step up efforts to ease the housing shortage, he added.

    Most of the developers have published statements and newspaper advertisements, along with other Chinese corporations, to support the national security legislation and electoral changes.

    Critics of the moves said they crushed democratic dreams, while authorities said they were necessary to restore stability after the 2019 demonstrations.

    Adrian Cheng, 41, who took over as chief executive of New World, founded by his grandfather, told Reuters late last year the company needs to become more relevant to society, especially in a new environment where firms have to carefully balance the interests of various parties.

    “It’s not easy. I have a lot of grey hair you can’t see,” Cheng said.

    Source : Reuters