Nigel Andrews on Where the Wild Things Are

From his film review in today's Financial Times:

Maurice Sendak's fantasy picture-book was a marvel: an enchanted Träumerei set in a monster-mad forest. Sendak's creatures were and on page still are cuddly, scary, indelible. Jonze, formerly of Being John Malkovich , and his co-screenwriter Dave Eggers, a gold-chip novelist who with this and Away We Go is becoming a Hollywood liability, do everything wrong. They come at it like killjoy opera directors wanting to set The Magic Flute in Auschwitz. Little Max (Max Records) runs from a quarrelling home to a remote fantastical island, reached across rough seas in a sailboat. We are bursting to go "Oo-er!" at the awaited ogres, combined with "Coochy-coo" for the cute ones. Instead we go, "What the hell are these?" Performers in manky creature-suits, wearing oversize soft-toy heads, waddle into frame and spout banal, tetchy dialogue. The familiar voices (James Gandolfini, Forest Whitaker, Catherine Keener) somehow add to the sense of cheat and cheesiness.

The scenery is dead-leaved trees in a dun wilderness, with ashy dunescapes for variation. Has the Bomb gone off? Something has blown the plot to pieces. I wasn't sure what the creatures were quarrelling about, but quarrel they do endlessly, sometimes with dirt-clod fights, sometimes with verbal abuse. The Jonze/Eggers message must be that Max's fantasyland duplicates his home life and that maybe mimicry and reflection will exorcise reality. But shouldn't therapy, at least in art for or about childhood, be fun? The book was entrancing. The book deserved better. Happily there is still time, before the world ends, for someone else to film it.

Andrews's mention of Away We Go calls to mind A.O. Scott's review of that movie.

The FT on the Nobel Peace Prize

Beautiful day here in North Jersey. The sun's out, and the Giants just routed the Raiders. Here's the Financial Times on Obama's Nobel Peace Prize, from yesterday, "Urgency of Now?". Excerpt:

The Norwegian Nobel committee has made odd decisions before. Awarding this year’s peace prize to Barack Obama, however, is not merely bizarre but bad: for Mr Obama, for the prize, and for the cause of peace itself.

[...]

This is the first time the prize is given for what remain, for now, mere aspirations.

[...]

Despite Mr Obama’s undeniable diplomatic ambitions for a more peaceful world, there has simply been no time for him either to realise or betray them. So – to borrow from his own rhetoric – why the fierce urgency of now?

The answer is a Nobel Committee trapped in an adolescent adulation of Mr Obama that, if once shared by many, most have put behind them. Its continuing desire to flatter a particular tendency in US politics – Al Gore and Jimmy Carter are recent laureates – risks painting it as an annex to the left wing of the US Democratic party. Hoping the prize will strengthen Mr Obama domestically is deeply misguided: it will embarrass his allies and egg on his detractors.

Elsewhere, it will come to be seen as awarded for wishful thinking, not hard work. Peace is not served by devaluing the moral force of the prize, whose greatest impact has always been the moral support it can give those who fight oppression with their lives – a von Ossietzky, a King or a Walesa – or leaders who make heavy concessions needed for peace. Mr Obama has done neither. It is, however, in his hands to rescue the prize from itself – by declining it in deference to those more worthy than he.

China's New, Self-Propelled Economy

A few months ago, we mentioned James Kynge's 'China Continental' thesis. In that post, we excerpted an essay Kynge had written in the Financial Times explicating his thesis for China's continuing growth in the wake of declining exports. This was the excerpt we quoted from Kynge's essay:

China is going continental. Just as the US during the 19th century underwent a transition from export-oriented growth to a greater reliance on inner dynamism, so China is looking inwards for the engine to drive its economy.

In China’s case it is still early days, but evidence suggests the conventional view of an export-dependent, river delta-driven economy no longer matches the reality. The argument here is not that trade has somehow become unimportant to China, but rather that the energy generating the world’s fastest economic growth rate this year is increasingly coming from within.

A series of indicators reveals the shift to “China Continental” – the transition of the world’s most populous country into an increasingly self-propelling economic force.

A couple of items that appeared earlier this week in the Financial Times suggest that Kynge's thesis may have been correct. This item from Monday's Lex column, "China's Stimulus" is one, and Martin Wolf's column from Monday's FT, "Wheel of fortune turns as China outdoes west", is another. Here are a couple of brief excerpts from both.

Lex:

There is no precise breakdown of stimulus spending by geography. But $366bn falls under the heading of infrastructure and post-quake recovery; another $113bn under public housing and rural development. Only a small slice – $54bn to stimulate “technological innovation” – seems to explicitly favour developed regions. Output in 12 western provinces grew an average 8 per cent in the first half – a whole percentage point better than 11 provinces in the east.

This structural shift was evident in first-half figures from ICBC, China’s largest commercial lender. Its year-on-year percentage increase in operating income in the Yangtze and Pearl river deltas fell, but rose in central and western regions. In short, China would rather finance roads in Chengdu than sweatshops in Guangdong. Many private, export-led companies in coastal areas, lacking collateral in the form of land or government relationships, are still struggling for funds. Trade data on Friday showed exports and imports falling for the 10th month, year-on-year. Weak external demand is not the only cause; this is an unabashed internalisation of growth.

Martin Wolf:

China has emerged as the most significant winner from the financial and economic crisis. At the end of 2008, many questioned whether China would achieve its growth target of 8 per cent in 2009. Who now dares to do so?

Cushioned by its more than $2,100bn (€1,440bn, £1,260bn) of foreign currency reserves, huge trade and current account surpluses and a robust fiscal position, Beijing has been able to deploy all its levers over the financial system and the economy.

[...]

Three immediate questions arise. How has China responded to the crisis? Is its resurgent growth sustainable? How far will its recovery help the world economy?

The answer to the first question is: astonishingly. According to data reported at the end of last week, industrial output expanded 12.3 per cent in the 12 months to August, up from a 10.8 per cent increase in July. This is the fastest growth for a year.

[...]

Is this growth surge sustainable? In a word, yes. Inevitably, the torrid growth of bank credit and money is spilling over into asset prices, particularly equities. But there is little danger of excessive inflation in an economy with an appreciating currency, fully embedded in a world economy still threatened more by deflation than by inflation, at least in the near term. Moreover, the government is solvent. As premier Wen Jiabao noted in Dalian, "we . . . kept budget deficit and government debt at around 3 per cent and 20 per cent of the GDP respectively". Should bad loans increase, China is well able to recapitalise its financial system.

This is good news, of course, for companies selling raw materials to China, for vendors to those companies (e.g., Alloy Steel International), and, more broadly, for countries such as Australia and Brazil that export significant amounts of raw materials to China.

James Kynge's Thesis: "China Continental"; John Authers's Follow Up

James Kynge laid out his thesis for China's continuing growth in the wake of declining exports in a recent Financial Times column, "China Continental". Excerpt:

China is going continental. Just as the US during the 19th century underwent a transition from export-oriented growth to a greater reliance on inner dynamism, so China is looking inwards for the engine to drive its economy.

In China’s case it is still early days, but evidence suggests the conventional view of an export-dependent, river delta-driven economy no longer matches the reality. The argument here is not that trade has somehow become unimportant to China, but rather that the energy generating the world’s fastest economic growth rate this year is increasingly coming from within.

A series of indicators reveals the shift to “China Continental” – the transition of the world’s most populous country into an increasingly self-propelling economic force.

Kynge lists a few different specific metrics to back up his case, including increases in China's retail sales and domestic cargo traffic, and survey results on consumer spending intentions, before addressing China skeptics in his conclusion:

Sceptics argue that China’s performance this year has come through huge but ultimately unsustainable government intervention. Such spending, they say, will boost growth for a time but achieve little but industrial overcapacity in the longer run. These arguments are not without merit, but they miss a newer, more interesting prospect; that Chinese growth is increasingly self-generating and continentally driven.

Recent moves in the commodity markets support Kynge's thesis, as John Authers noted in his Financial Times column today ("China's health gives rise to fresh growth theory"):

Industrial commodities, that benefit most from economic growth, have surged, with lead and copper up more than 50 per cent in three months. Gold, an inflation hedge, has barely gained.

Authers went on to summarize the debate about China's economy (both sides of which have been fleshed out by Kynge and Zeihan, respectively):

As a whole, even before yesterday's strong headline to the US jobless report, world markets were plainly working on the assumption that China has saved the world from Depression. Is the market right to do so?

There are two camps. The optimistic side, laid out by James Kynge in the Financial Times last week, is "China Continental"; like the US in the late 19th century, China can turn itself into a great economic power, by building links to its interior and unleashing its buying power.

The pessimistic side suggests China has poured money into the public sector, and will merely form excess capacity. The huge demand for industrial metals may be artificial.

Electricity generation is down year-on-year. Supply managers surveys show new export orders are barely expanding. So maybe China is caricaturing the US in the 1930s, and paying some people to dig holes and others to fill them in.

If so, the gains could soon be in for another ugly recoupling. Either way, nothing just now is more important than the health of the Chinese economy.

Geography as Destiny? Zeihan on China

Below is an excerpt from the China-related part of Peter Zeihan's column The Geography of Recession.

China's core is the farmland of the Yellow River basin in the north of the country, a river that is not readily navigable and is remarkably flood prone. Simply avoiding periodic starvation requires a high level of state planning and coordination. (Wrestling a large river is not the easiest thing one can do.) Additionally, the southern half of the country has a subtropical climate, riddling it with diseases that the southerners are resistant to but the northerners are not. This compromises the north's political control of the south.

Central control is also threatened by China's maritime geography. China boasts two other rivers, but they do not link to each other or the Yellow naturally. And China's best ports are at the mouths of these two rivers: Shanghai at the mouth of the Yangtze and Hong Kong/Macau/Guangzhou at the mouth of the Pearl. The Yellow boasts no significant ocean port. The end result is that other regional centers can and do develop economic means independent of Beijing.

With geography complicating northern rule and supporting southern economic independence, Beijing's age-old problem has been trying to keep China in one piece. Beijing has to underwrite massive (and expensive) development programs to stitch the country together with a common infrastructure, the most visible of which is the Grand Canal that links the Yellow and Yangtze rivers. The cost of such linkages instantly guarantees that while China may have a shot at being unified, it will always be capital-poor.

Beijing also has to provide its autonomy-minded regions with an economic incentive to remain part of Greater China, and "simple" infrastructure will not cut it. Modern China has turned to a state-centered finance model for this. Under the model, all of the scarce capital that is available is funneled to the state, which divvies it out via a handful of large state banks. These state banks then grant loans to various firms and local governments at below the cost of raising the capital. This provides a powerful economic stimulus that achieves maximum employment and growth — think of what you could do with a near-endless supply of loans at below 0 percent interest — but comes at the cost of encouraging projects that are loss-making, as no one is ever called to account for failures. (They can just get a new loan.) The resultant growth is rapid, but it is also unsustainable. It is no wonder, then, that the central government has chosen to keep its $2 trillion of currency reserves in dollar-based assets; the rate of return is greater, the value holds over a long period, and Beijing doesn't have to worry about the United States seceding.

Because the domestic market is considerably limited by the poor-capital nature of the country, most producers choose to tap export markets to generate income. In times of plenty this works fairly well, but when Chinese goods are not needed, the entire Chinese system can seize up. Lack of exports reduces capital availability, which constrains loan availability. This in turn not only damages the ability of firms to employ China's legions of citizens, but it also removes the primary reason the disparate Chinese regions pay homage to Beijing. China's geography hardwires in a series of economic challenges that weaken the coherence of the state and make China dependent upon uninterrupted access to foreign markets to maintain state unity. As a result, China has not been a unified entity for the vast majority of its history, but instead a cauldron of competing regions that cleave along many different fault lines: coastal versus interior, Han versus minority, north versus south.

China's survival technique for the current recession is simple. Because exports, which account for roughly half of China's economic activity, have sunk by half, Beijing is throwing the equivalent of the financial kitchen sink at the problem. China has force-fed more loans through the banks in the first four months of 2009 than it did in the entirety of 2008. The long-term result could well bury China beneath a mountain of bad loans — a similar strategy resulted in Japan's 1991 crash, from which Tokyo has yet to recover. But for now it is holding the country together. The bottom line remains, however: China's recovery is completely dependent upon external demand for its production, and the most it can do on its own is tread water.

James Kynge of the Financial Times has an entirely different take on China's near-term economic prospects. We'll save Kynge's thesis for the next post, to keep this one from getting too long.

The image above comes from Zeihan's column.

More on the Inflation Debate: Hussman and Wolf Weigh In

In his market commentary this week, "Anything But Academic", John Hussman weighed in on the debate between Paul Krugman and John Taylor. Dr. Hussman first summarizes Dr. Krugman's thesis:

Krugman's argument boils down to the recognition that "monetary velocity" is currently very low - that is very accurate. The problem is that unless it remains low indefinitely, the more than doubling of the U.S. monetary base over the past year, along with the additional issuance of Treasury debt, leaves a far larger quantity of government liabilities to be absorbed until and unless those liabilities are extinguished by fiscal surpluses. The only way to absorb them without driving up the price level is to hold down velocity indefinitely, or to have an equal expansion in real economic output without any further expansion on the monetary side.

And then summarizes Dr. Taylor's thesis (while parenthetically noting his personal connection to Taylor):

In the other academic corner is John Taylor, an economics professor at Stanford (and more to the point, one of my former dissertation advisors), who wrote in the Financial Times last week “To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling in prices. That 100 percent increase would make nominal GDP twice as high, and thus cut the debt-to-GDP ratio in half, back to 41 from 82 percent. A 100 percent increase in the price level means about 10 percent inflation for 10 years^[1], but that would not be smooth – probably more like the great inflation of the late 1960s and 1970s, with boom followed by bust and recession every three or four years, and a successively higher inflation rate after each recession.”

Dr. Hussman seems to agree with Krugman's benign view of inflation in the short-term (i.e., the next few years) but share Taylor's view of a doubling of the price level within the next 10 years. Hussman also included an entertaining anecdote in his column which I'll quote below.

There's an economists' riddle that goes “Why are the debates in academia so bitter?” – the answer – “Because the stakes are so low.”^[2] Now, very often, that's true. I remember a presentation that Paul Krugman gave at Stanford where he was talking about a model of economic development. Paul drew a diagram on the board, and as he described it, he drew a few little arrows indicating migration of businesses from one area to another. A respected economic theorist at Stanford, Mordecai Kurz (who never drew an arrow without a differential equation), immediately jumped up and shouted “You haven't described the dynamics!!” to which Paul responded that he was indicating a general movement of economic activity toward one place to improve efficiency. Dr. Kurz pounded the table and screamed “Then erase the arrows!! ERASE THE ARROWS!!” and then stormed out of the room and slammed the door behind him. I think that was probably the exact moment that I decided to go into finance.

Martin Wolf also weighed in on this debate in his Financial Times column earlier this week, "Rising government bond rates prove policy works". It's worth reading in its entirety, as is Hussman's commentary, but here are the most salient excerpts:

Is the US (and a number of other high-income countries) on the road to fiscal Armageddon? Are recent jumps in government bond rates proof that investors are worried about fiscal prospects? My answers to these questions are: No and No. This does not mean there is no reason for worry. It is rather that there are powerful arguments against fiscal retrenchment right now and strong reasons for welcoming recent moves in the bond markets.

[...]

People need to believe that the extraordinarily aggressive monetary and fiscal policies of today will be reversed. If they do not believe this, there could well be a big upsurge in inflationary expectations long before the world economy has recovered. If that were to happen, policymakers would be caught in a painful squeeze and the world might indeed end up in 1970s-style stagflation.

The exceptional policies used to deal with extreme circumstances are working. Now, as a result, policymakers are walking a tightrope: on one side are premature withdrawal and a return to deep recession; on the other side are soaring inflationary expectations and stagflation. It is irresponsible to insist either on immediate tightening or on persistently loose policies. Both the US and the UK now risk the latter. But their critics risk making an equal and opposite mistake. The answer is both clear and tricky: choose sharp tightening, but not yet.

The illustration above, by Ingram Pinn, accompanied Martin Wolf's column.

^[1]Here Dr. Hussman, a former options mathematician, repeats the basic math error Dr. Taylor made in his Financial Times column: due to compounding, it wouldn't take 10 years for 10% annual inflation to double the price level; it would only take about 7.3 years. This error was noted by an FT letter writer earlier this week, who in turn made his own mathematical error in his letter, which was corrected by a subsequent letter writer. All of this raises the question of why one of the world's leading business newspapers didn't have a numerate enough editor to catch Taylor's error in the first place.

^[2]Dick Armey, the economics professor and former GOP House Majority Leader once shared this same quote when asked by a reporter if the debates in academia were more civil than those in Congress.

Are Inflation Fears Overdone?

So say (separately) the editors of the Financial Times and New York Times columnist/Princeton economist Paul Krugman.

In an editorial yesterday ("US not in bondage") the FT editors wrote,

Shock, horror: US government bond rates are jumping. Soon, goes the story, long-term interest rates will leap, the Federal Reserve will monetise, inflation will soar and civilisation will end. Actually, no. What is happening is precisely the normalisation the Fed has sought. The government is not off the fiscal hook. But it does have at least some time.

[...]

What has happened, quite simply, is normalisation of inflation expectations

[...]

Does this mean nobody needs to worry? Certainly not. Desirable normalisation could yet become a panic over the massive prospective bond issuance. Now that the worst of the panic has passed, the administration and Congress need to agree a credible plan for elimination of the huge structural fiscal deficits. As the Congressional Budget Office’s forecasts demonstrate, President Barack Obama’s budget proposal is not such a plan: it leaves deficits of between 4 and 6 per cent of gross domestic product as far as the eye can see. This will need to change soon. But, right now, everybody needs to keep calm. Normalisation is a big success, not a danger.

In his New York Times column yesterday ("The Big Inflation Scare"), Dr. Krugman made a similar point: Inflation isn't a near-term concern, but we do

[H]ave a long-run budget problem, and we need to start laying the groundwork for a long-run solution.

Krugman also brought up the example of Japan, which has borrowed massively in recent years without driving up its interest rates or inflation. What many Americans fear -- our country losing its triple-A credit rating and having its government debt exceed 100% of its GDP -- has already happened in Japan (The CIA World Factbook says Japan's public debt exceeds 170% of its GDP). And yet, Japan's borrowing costs are significantly lower than ours. For example, according to Bloomberg, the current yield on 10-year U.S. Treasuries is 3.46%, versus 1.49% on the 10-year Japanese government bond.

I've wondered for some time about why Japan has so much lower borrowing costs than the U.S., despite having a lower sovereign debt rating and a much higher ratio of debt to GDP, but I haven't heard a convincing explanation yet. When I asked The Atlantic's Megan McCardle about this, she said the answer was Japan's Postal Savings System, but according to Wikipedia, prior to the beginning of its privatization in 2007, that system only held about 20% of Japan's government debt. Perhaps someone will leave a more convincing answer in the comment thread below.

China's Economic Transition

China's exports were down 22.6% year-over-year in April, continuing a six month negative trend. That's the obvious cloud in China's economic forecast, but in an article in yesterday's Financial Times ("Chinese tap an inner dynamic to drive growth"), James Kynge highlighted the silver lining:

Just as the US during the 19th century underwent a transition from export-oriented growth to a greater reliance on inner dynamism, so China is looking inwards for the engine to drive its economy.

In China's case it is still early days, but evidence suggests the conventional view of an export-dependent, river delta-driven economy no longer matches the reality. The argument here is not that trade has somehow become unimportant to China, but rather that the energy generating the world's fastest economic growth rate this year is increasingly coming from within.

A series of indicators reveals the shift to "China Continental" - the transition of the world's most populous country into an increasingly self-propelling economic force. There are caveats, of course, but first the evidence.

Retail sales have held up much better in China this year than in other big economies, growing at a real 15.9 per cent in March year-on-year. But more important than the overall trend is the composition of the retail spending.

The most robust consumer spending figures are coming from inland and lower-tier cities rather than from the traditional growth powerhouses clustered around the Yangtze and Pearl river deltas.

Kynge also notes another sign of this transition, "that domestically bound cargo traffic through ports is increasing year-on-year, while foreign trade volumes are slumping".

The photo above, of a Wal-Mart in Chongqing, comes from the USDA's Foreign Agricultural Service. Chongqing is one of the lower tier cities Kynge referred to in his article.

Has Nassim Nicholas Taleb Jumped the Shark?

That's a question¹ that came to mind when reading his op/ed in today's Financial Times, "Ten principles for a Black Swan-proof world", parts of which seem strikingly simplistic. Below are a few examples, with commentary.

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.

I wouldn't be surprised if nuclear plant managers do have some sort of incentive bonuses -- and why wouldn't they? The lesson here should be that bonuses need to be structured so the interests of shareholders and managers (and, yes, taxpayers) are aligned, not that bonuses need to be eliminated. In the case of a nuclear plant manager, for example, his bonus might be tied to meeting certain goals for safety, efficiency, etc. Obviously, a bonus that encouraged him to ignore safety would be stupid, but there's no reason to structure a bonus that way.

6. Do not give children sticks of dynamite, even if they come with a warning. Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.

Why deprive investors of the means to hedge their risks? You could argue, as Soros has, that certain derivatives (e.g., credit default swaps) should be limited to those who have an insurable interest, but why ban them altogether?

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).

Where to begin with this one? If citizens shouldn't depend on financial assets for their retirement, on what should they depend? On defined benefit pensions (which, aside from being scarce in the private sector, are themselves dependent on financial assets)? Taleb seems to be suggesting that business owners put all of their assets into their businesses instead of putting some into passive investments, but what of the majority of citizens who don't own their own businesses?

10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.

"Clawing back the bonuses of those who got us here" makes some sense, but does Taleb really believe our economy ought to have "no leverage"? Does he envision people buying homes for 100% cash, with no mortgages? Wouldn't the more reasonable suggestion be that we have less leverage instead of no leverage?


The image above, of the Happy Days character Fonzie (played by Henry Winkler) jumping the shark comes from Media Bistro.

¹For those unfamiliar with the phrase, see the Urban Dictionary's definition of "jumping the shark".

Green Energy from Bad Debt?

Professor Yu's idea to transfer some Asian holdings of U.S. Treasuries into an infrastructure fund, which we mentioned in a recent post ("The Latest Warning from China about the U.S. Dollar and Debt"), reminded me of another proposal related to infrastructure and sovereign debt. An article a couple of weeks ago in the Financial Times ("‘Green’ plan to consign Argentina’s debt woes to history") described a proposal by Argentine lawyer Pablo Giancaterino to assuage the hold-outs of Argentina's 2005 debt swap and give Argentina access to the international bond market by closing the books on litigation associated with its default in 2001. According to the FT, Mr. Giancaterino

[P]roposes creating a trust into which hold-outs would deposit the verdicts won against Argentina, in essence “freezing” them, but leaving them as a guarantee that they could be executed if Argentina defaulted on the new deal.

The trust would issue investors with certificates of participation tradable in New York.

Argentina would receive the old bonds and all it would pay would be interest, with a 66 per cent so-called “haircut” on the original capital, similar to the 2005 swap that hold-outs rejected as too cheap.

Interest would be paid into the trust, which would be obliged to invest the funds in tax-free energy and infrastructure projects for 11 years. Those investments would generate returns to pay back the hold-outs without them having to accept a haircut.

The image above, of the Agua del Toro hydroelectric dam in Argentina, comes from Industcards.com.

English versus Brazilian Portuguese

The Financial Times invited a series of guest columnists to opine about the future of capitalism this week, and one of those guests was the president of Brazil, Luiz Inácio Lula da Silva. Lula's essay ("The Future of Human Beings is What Matters"), which was mocked by a letter writer later in the week¹, doesn't offer much revelation. Lula recounts his hardscrabble background, which may be of interest to those still unfamiliar with his biography, and describes some of Brazil's recent successes in growing its economy while increasing aid to its poor. In truth though, the Brazilian president deserves more credit for what he hasn't done. He has avoided the radical populist policies of some of his neighbors, and Brazil has continued some sensible macroeconomic policies on his watch. As a result, it looks to be in a better position to weather the current downturn.

That op/ed by the Brazilian president reminded me of something I read years ago, a comparison of American English to Brazilian Portuguese in Mark Helprin's 1997 novel, Memoir from an Antproof Case. The speaker below, the narrator of Helprin's novel, is an elderly American who has settled in Brazil after a long and rather picaresque life, and teaches English at the Brazilian naval academy in Rio de Janeiro:

Portuguese is a magnificent language -- Intimate, sensual, and fun. The great poets make it sound like a musical incantation of slurred elisions and rhythmic dissolves, and day-to-day, corrupted, vital, and undisciplined, it is ideal for the dissolute life of a modern city, though what it gains in humor and intimacy it loses in precision and resolution. In fact, it is, when compared to English, almost like a baby language.

Do not misinterpret me. I love baby language, for babies, but among adults it can be rather annoying, especially if you have been here thirty years with not a day of relief, having arrived fully formed and mature, and having come, as I did, from a place where language is not a perfumed cushion but a tightly strung bow that sends sharp arrows into the heart of everything.

The language of my boyhood was the language of ice and steel. It had the strong and lovely cadence of engines in a trance. The song of the world in snow, it was woefully inadequate for conveying material ecstasy, but more than enough for the expression of spiritual triumph.

Portuguese of course isn't a "baby language", but it does lend itself well to song, for reasons Helprin lyrically describes above.

The photo above is a snapshot Cheryl took a few years ago of part of Rio de Janeiro from the top of one of the local tourist sites, Pão de Açúcar (Sugar Loaf) mountain.

¹Letter writer Prof. Alex Callinicos wrote, in part:

Sir, I’m delighted to learn that Luiz Inácio Lula da Silva, president of Brazil, thinks that “the future of human beings is what matters” (March 10). Evidently your series on the Future of Capitalism is stimulating real thinking outside the box. But even worse than the familiar banalities of grandees (at least you seem to be sparing us Bono) is your own special pleading.

More on Moyo

In a post last month ("An African Economist on Western Aid to Africa"), we mentioned the Zambian-born economist and author Dambisa Moyo, and posted an excerpt from the interview with her in the Financial Times. Today's New York Times Magazine features an interview with Moyo as well ("Questions for Dambisa Moyo -- The Anti-Bono"). From the interview:

Q: As a native of Zambia with advanced degrees in public policy and economics from Harvard and Oxford, you are about to publish an attack on Western aid to Africa and its recent glamorization by celebrities. ‘‘Dead Aid,’’ as your book is called, is particularly hard on rock stars. Have you met Bono?
I have, yes, at the World Economic Forum in Davos, Switzerland, last year. It was at a party to raise money for Africans, and there were no Africans in the room, except for me.

[...]

You argue in your book that Western aid to Africa has not only perpetuated poverty but also worsened it, and you are perhaps the first African to request in book form that all development aid be halted within five years.
Think about it this way — China has 1.3 billion people, only 300 million of whom live like us, if you will, with Western living standards. There are a billion Chinese who are living in substandard conditions. Do you know anybody who feels sorry for China? Nobody.

Maybe that’s because they have so much money that we here in the U.S. are begging the Chinese for loans.
Forty years ago, China was poorer than many African countries. Yes, they have money today, but where did that money come from? They built that, they worked very hard to create a situation where they are not dependent on aid.

The photo above, of Ms. Mayo, accompanied Deborah Solomon's interview.

Martin Wolf on Lessons from Japan's "Lost Decade"

The graphic above accompanies Martin Wolf's latest Financial Times column, ("Japan’s lessons for a world of balance-sheet deflation"), and he uses it to make the point that, although the balance sheet deflation in the U.S. is a lot shallower than Japan's, the crisis is a lot broader today because it's global, i.e., Japan was still able to increase its exports (and thus ameliorate its economic situation) during its "lost decade" because there was healthy demand for those exports in countries with strong economies.

Another point Wolf makes is about the relative effectiveness of Japanese fiscal policy during its "lost decade":

[T]hose who argue that the Japanese government’s fiscal expansion failed are, again, mistaken. When the private sector tries to repay debt over many years, a country has three options: let the government do the borrowing; expand net exports; or let the economy collapse in a downward spiral of mass bankruptcy.

Despite a loss in wealth of three times GDP and a shift of 20 per cent of GDP in the financial balance of the corporate sector, from deficits into surpluses, Japan did not suffer a depression. This was a triumph. The explanation was the big fiscal deficits. When, in 1997, the Hashimoto government tried to reduce the fiscal deficits, the economy collapsed and actual fiscal deficits rose.

Something to consider when reading comments on various blogs about how Japan spent a lot of expensive infrastructure and still had a "lost decade".

The Pain in Spain

The Times of London reports that, as the unemployment rate has reached 14.4% in Spain in the wake of the real estate bust there, more housewives are turning toward prostitution to make ends meet ("Few jobs and little hope as Spain faces growing crisis" -- Hat tip, Matthew Yglesias). In his post on this on his Think Progress blog, Yglesias notes that, in pre-Euro recessions, Spain had the option of devaluing its currency, which would stimulate its economy by making Spanish exports more attractive. An article by Edward Chancellor in today's Financial Times elaborates on the role the Euro is playing in the current crisis ("EMU on the rocks and all exits closed"). Below are a few excerpts from it.

The euro was created to bring economic stability to Europe. However, the politicians who promoted European Monetary Union ignored inherent flaws in the project. The credit crisis has exposed these flaws. As a result, a number of the weaker eurozone members are facing severe deflation and a quite desperate economic outlook.

The leading European politicians behind the euro project, such as former French president Francois Mitterrand, weren’t much interested in economics. In a new book, The Euro: The Politics of the New Global Currency (Yale) David Marsh shows how these politicians brushed aside the concerns of their advisers as they rushed eagerly towards monetary union. Mr Mitterrand’s vision for the single currency, says Mr Marsh, was “based on emotion, psychology and wishful thinking” rather than rational economics.

It was hoped that the euro would bring faster and more stable economic growth, while exporting Germany’s record of price stability to other members of the single currency. But many potential economic problems with European Monetary Union were identified decades ago. In 1973 Derek Mitchell, a British Treasury official, observed that the loss of exchange rate flexibility would remove a simple method for rectifying imbalances between Europe’s economies. Without the option of exchange rate depreciation, once imbalances appeared “equilibrium could only then be restored”, declared Mr Mitchell, “by inflation in the ‘high performance’ countries and unemployment and stagnation in the ‘low performance’ countries, unless central provision is made for the imbalances to be offset by massive and speedy resource transfers”.

It's worth reading the rest of Chancellor's article. He goes on to argue that the euro is playing a similarly deflationary role today as the gold standard did in the 1930s, but that it would be more difficult for euro-zone countries to extricate themselves from the euro than it was to drop the gold standard.

The photo above, of the Spanish royal family in better times, comes from King Juan Carlos's website.

An African Economist on Western Aid to Africa

In a recent post ("The UN High Commissioner of Refugees Imitates The Onion"), we mentioned the NYU development economist William Easterly, who has been critical of traditional Western approaches to providing aid to Africa and other parts of the developing world. Coincidentally, today's Lunch with the FT interview in the Financial Times is with a Zambian-born economist, Dambisa Moyo, who seems to share Easterly's disdain of traditional aid approaches ("Lunch with the FT: Dambisa Moyo"). In fact, Moyo says that African countries would be better off if they were given a warning that foreign aid would be cut off in five years, and were forced to seek funds from the bond market instead. Moyo argues that bond investors would impose a discipline on African governments that aid donors so far haven't. Herewith, a few brief excerpts:

[A]s the historian Niall Ferguson (a contributing editor to the FT), notes in a foreword to Moyo’s book, she is venturing into a debate that has to date been colonised by white men – be they rock stars such as Bono, politicians such as Tony Blair or the academics Jeffrey Sachs and Bill Easterly.

[...]

So what of the rock and Hollywood stars, who have appointed themselves advocates of making poverty history? She is withering: “Most Brits would be irritated if Michael Jackson started offering advice on how to resolve the credit crisis. Americans would be put out if Amy Winehouse went to tell them how to end the housing crisis. I don’t see why Africans shouldn’t be perturbed for the same reasons,” she replies

[...]

We finish with a coffee. Moyo’s book ends on an equally energising note, that of an African proverb: “The best time to plant a tree is 20 years ago. The second-best time is now.”

George Soros Recaps His Investment Decisions in 2008

From a sidebar to an article by George Soros in yesterday's Financial Times about the financial crisis ("The Game Changer"), a self-assessment by the billionaire investor:

THE SOROS INVESTMENT YEAR:

Positions I took were too big for ever more volatile markets

Although I positioned myself reasonably well for what was coming last year, one thing I got wrong cost me dearly: there was no decoupling between markets of the developed and developing worlds.

Indian and Chinese stocks were hit even harder than those in the US and Europe. Since we did not reduce our exposure, we lost more money in India than we had made the year before. Our Chinese manager did better by his stock selection; we were also helped by the appreciation of the renminbi.

I had to push very hard in my macro-account to offset both these losses and those incurred by our external managers. This had its own drawback: I overtraded. The positions I took were too large for the increasingly volatile markets and, in order to manage my risk, I could not go against the market in a big way. I had to try to catch minor moves.

That made it difficult to maintain short positions. Although I am an experienced short-seller, I got caught several times and largely missed the biggest down-draught, in October and November.

On the long side, where I stuck to my guns, I lost an enormous amount of money. I was impressed by the potential in the new deep-water oilfield in Brazil and bought a large strategic position in Petrobras, only to see it decline by 75 per cent at one point in time. We also got caught in the developing petrochemical industry in the Gulf.

We did get out of our strategic long position in CVRD, the Brazilian iron ore producer, in time for the end of the commodity bubble and shorted the other big iron ore groups. But we missed an opportunity in the commodities themselves – partly because I knew from experience how difficult it is to trade them.

I was also slow to recognise the reversal of fortune for the dollar and gave back a large portion of our profits. Under the direction of my new chief investment officer, we did make money in the UK, where we bet that short-term interest rates would decline and shorted sterling against the euro. We also made good money by going long on the credit markets after their collapse.

Eventually I understood that the strength of the dollar was due not to people choosing to hold dollars but to their inability to maintain or roll over their dollar obligations. In a very real sense the strength of the dollar, like the fever associated with sickness, was a measure of the disruption of the financial system. This insight helped me to anticipate the downturn of the dollar at the end of 2008. As a result, we ended the year almost meeting my target of 10 per cent minimum return, after spending most of the year in the red.

"Unable to Read the Air"

In yesterday's Financial Times, letter writer Takashi Ito introduces a Japanese idiom to describe ousted Merrill Lynch CEO John Thain's recent behavior:

Sir, The hot new word in Japan is “KY”. An abbreviation for “kuuki-yomenai”, it literally means unable to read the air. For an ex-Goldman Sachs partner, John Thain was astoundingly KY. He decorated his office as he laid off Merrill Lynch employees, and then he asked for a $10m bonus when the whole country had turned against excessive executive compensation. There was also the little detail that his company was not doing that well.

The height of his KY was the fact that he was buying company stock the day before he was ousted!

Now a true believer (in Goldman superiority) may say that he was buying stock because he knew his departure would ignite the share price, but I am not willing to give Mr Thain that much credit. Anyway, the stock dived on the news.

Talking Turki, Part II

In today's Financial Times, letter writer Sue Kelly responds to Turki al-Faisal's op/ed column of last week:

Sir, So the patience of Saudi Arabia is running out (Comment, January 23). So also is the patience of the average US citizen, but not in the way Turki al-Faisal might think.

[...]

Many US citizens are tired of the double talk of people like Prince Turki. He is old enough and educated enough to know better than to make such statements.

If Saudi Arabia truly wants peace, enough to return the violence genie to its bottle, it will stop its own citizens from funding war and work with the Palestinians to stop Hamas's firing of rockets at Israel, and with the Israelis to end their building new settlements in the West Bank.

The Saudis owe the Arab world nothing less than the strongest effort to build the will of all Arabs forward towards peace and away from the constant aggrievement over the past. It is clear from Prince Turki's article that he has not been able to do this for himself, let alone be able to influence others.

Thinking about this some more, I'm struck by the way al-Faisal brought up the threat of jihad in his FT column, given the carnage caused by Saudi jihadis in the U.S. on 9/11, in Iraq over the last several years, and (to a far lesser extent) even within Saudi Arabia itself. If he weren't a former longtime diplomat, I'd chalk it up to tactlessness, or tone deafness, but given his background, he must realize how provocative this is.

Then there's that letter al-Faisal claims was sent to the Saudi government by the president of Iran. Surely, he must wonder what motives Ahmadinejad has, beyond his stated concern for the plight of the Palestinians (especially given the flattery the Shiite Ahmadinejad included about Sunni-ruled Saudi Arabia being the leader of all Muslim nations)?

How Tight are Goldman Sachs Alumni?

That question occurred to me when reading William Cohan's evisceration of Bank of America CEO Ken Lewis in yesterday's Financial Times ("The tattered strategy of the banker of the year"). In that piece Cohan wrote,

[W]hen he announced the Merrill deal, Mr Lewis boasted that he was able to move so quickly because his adviser, the ubiquitous private equity expert, Chris Flowers, had already done the due diligence on Merrill’s books and pronounced them much improved since John Thain, Merrill chief executive, took over at the company a year ago. With Mr Flowers’ apparent blessing, Mr Lewis agreed to pay billions of his shareholders’ money for Merrill’s worthless equity and in the process absorbed billions of dollars more of its debt on to his balance sheet at par. While Barclays was buying Lehman Brothers’ US assets for pennies on the dollar and Jamie Dimon at JPMorgan Chase had done pretty much the same in his acquisitions of Bear Stearns and Washington Mutual, Mr Lewis was paying retail prices for companies that had already been remaindered.

Now, not surprisingly, Bank of America’s shareholders are paying the price. Since Mr Lewis agreed to the Merrill deal during the fateful weekend of September 15, Bank of America’s stock has crashed to about $7 per share, down a whopping 80 per cent from the $34 a share the stock was trading at the day before the Merrill deal was announced, and 40 per cent so far in 2009. Bank of America’s total market value is now less than the $50bn it offered for Merrill’s stock last September.

Perhaps because Goldman Sachs alumni are ubiquitous in high finance, Cohan didn't note that J. Christopher Flowers is a Goldman Sachs alumnus, as of course is John Thain. One would think that, as an adviser to Bank of America, Flowers had a fiduciary responsibility to objectively conduct his due diligence on Merrill's books; perhaps Flowers did, and the math whiz was simply off by a wide margin. In any case, the result is that one Goldman Sachs alumnus (Thain) got to sell his new firm for what appears now to be an inflated valuation, thanks to an analysis done by another Goldman Sachs alumnus (Flowers).

Back to Cohan on Lewis:

Mr Lewis’s end cannot come quickly enough. There really is no excuse for his decision to do these ego-driven deals at the prices he did them. It is one thing to feel the need to do one’s patriotic duty; it is quite another to miss the mark so completely at the expense of your shareholders. It was probably just a matter of time, anyway, before he joined the other former “bankers of the year” such as Ken Thompson (2005), former chief of Wachovia, and Kerry Killinger (2001), former chief of Washington Mutual, on the junk heap of history.

The photo of Flowers above comes from Cityfile.

Nigel Andrews on Darren Aronofsky

Nigel Andrews of the Financial Times on Darren Aronofsky's new movie The Wrestler ("Fallen star shines again"):

After more than a decade of failure or renegade moonlighting (including a spell as a boxer), Rourke re-enters that well-lit hoosegow, Hollywood. The Wrestler , a Rocky -ish melodrama redeemed mainly or solely by Rourke's performance, is directed by, of all people, Darren Aronofsky. After Pi , Requiem for a Dream and The Fountain - a geek masterwork about maths, an existential drugs tragedy and a film about time and metaphysics - Aronofsky must have decided, "I'll make one for the airheads."

I have no comment on The Wrestler, as I haven't seen it, but I've seen the other three Aronofsky movies Andrews mentions (the first and third of which were also written or co-written by Aronofsky), and liked them all, particularly the third one Andrews mentions, The Fountain.

The action of The Fountain (2006) takes place in three different story lines/time lines: in one, a Spanish conquistador (played by Hugh Jackman) searches for the Fountain of Youth/Tree of Life in Central America for his queen (played by Aronofsky's wife, Rachel Weisz); in the second story line, Jackman plays a scientist in the present day searching for a cure for brain cancer in a rare compound extracted from a tree in Central America, while his wife, played by Weisz, is dying from brain cancer; in the third story line, Jackman is a sort of futuristic, yogic astronaut, traveling with the Tree of Life to a distant nebula representing the Mayan underworld. Reviews for The Fountain were mixed, but here is an excerpt from Glenn Kenny's four-star review in Premiere:

The Fountain is probably the deftest stories-within-stories narrative film I've seen since the very different 1965 Polish film The Saragossa Manuscript (itself based on an early 19th-century novel). By The Fountain's end, the multilayered meta-narrative (which Aronofsky co-conceived with Ari Handel) resolves (or does it?) into a kind of diegetic Möbius strip, to stunning effect.

This may all sound kind of dry and cerebral, and the fact that Aronofsky is currently being compared to Stanley Kubrick (and this film in particular to 2001: A Space Odyssey) no doubt adds to that impression. Aronofsky's work certainly resembles Kubrick's in terms of conceptual audacity and meticulousness of execution (Aronofsky's prior feature, 2000's Requiem for a Dream, showcased a scattershot deployment of a fecund visual facility; here he's got his formidable apparatus under control), but Aronofsky is a romantic with a capital "R," which Kubrick was certainly not. As it happens, each one of these tales is also a love story, and The Fountain is Aronofsky's profession of faith concerning love's place in the idea of eternity. It's a movie that's as deeply felt as it is imagined.

Below is the trailer for The Fountain. Watch it with the volume on your computer turned on to get a sample of Clint Mansell's score, which fits the film perfectly. Incidentally, due to budget constraints, the special effects in The Fountain included almost no CGI.