Please read the entire article here.  Focus Economics analyses the weak productivity growth in most OECD countries.

23 economic experts weigh in: Why is productivity growth so low?

The OECD has written extensively on the subject of productivity growth observing that productivity is pro-cyclical, meaning that in times of recession productivity tends to fall and in times of economic growth, productivity tends to increase. Therefore, looking at producitvity growth in the shorter-term, such as quarterly or annually, can be misleading, as it is often extremely volatile. Most strong quarters or years of economic growth will show strong gains in productivity and vice versa. Looking at multi-year longer-term productivity growth, however, is more useful. For example, producivity growth has been low in the U.S. for the last 5 years, even as the economy has emerged from the financial crisis, which raises a lot of red flags.

Indeed, U.S. manufacturing sector productivity increased 0.5% over the last five years from 2011 to 2016, which the U.S Bureau of Labor Statistics notes is “well below the growth rate of 3.2 percent from 1987 to 2016.”

This is not exclusive to the U.S., as productivity growth has generally been low going back to the financial crisis for most developed countries. However, the drop in productivity has been going on for decades, all the way back to the 1970s in some cases

My opinion:

“The decline in productivity, in my opinion, is the result of a combination of factors:

– Perpetuating overcapacity through cheap debt and excess liquidity.
– Large increase in subsidies to obsolete or low productivity sectors (particularly so-called national champions) including currency devaluations that are indirect subsidies to rent-seekers and crony sectors.
– Large increase in government spending aimed at financing areas with no real economic return and white elephants.

These factors make capital allocation go to low productivity sectors because incentives are provided through fiscal and monetary policy. Financial repression incentivises low productivity subsidizing it.”

All text and graph courtesy of Focus Economics @focuseconomics

 

 

This article was published at The Epoch Times.

For many traders, it was a shock to see the barrel of oil collapse to 12-month lows in June, despite an agreement from producers to cut supplies. However, not many people are talking about the falling prices in other commodities, as well as the positive impact of low oil prices on global growth.

So why is a barrel of West Texas Intermediate still trading for below $50? The problem is not just due to oversupply, but also to a slowdown in the growth of Asian demand. Chinese demand has supported prices for the past decade, as demand in developed markets has reduced thanks to increases in efficiency, substitution, and technology.

However, China’s stockpiles have risen to 511 million barrels in capacity, just below the 693 million barrels the United States held in March. Chinese industrial demand is also falling, due to rebalancing away from the industrial sector and toward services.

But oil prices, in this context, are just a symptom of a much more severe illness: the excess debt and overcapacity created in China to support an unsustainable growth model.

In the first five months of 2017, China has added more debt than the United States, United Kingdom, European Union, and Japan combined. While GDP growth looks healthy as is, it appears weak and potentially dangerous when compared to the increase in the money supply. As the old economy tapers off, fewer and fewer raw materials will be needed for production.

Dollar Flows

Low oil prices have knock-on effects on other emerging markets. Commodity producers like Mexico and Saudi Arabia are facing another “sudden stop”: the abrupt reduction in U.S. dollar inflows, as debt repayments in foreign currency escalate.

Most economic growth estimates for 2017 were made using much higher oil prices, and the market is likely to see downgrades in expectations of inflation and growth in the majority of the large emerging economies. We are already seeing significant downward revisions for Brazil, Argentina, Russia, and other economies.

According to ICBC Standard Bank, emerging market debt maturities through 2020 will exceed $1.4 trillion. At the same time, as rates rise in the United States, capital flows to emerging markets are much lower than those seen in the past decade. Low interest rates may mask these risks in the short term, as central banks are increasing the money supply by more than $200 billion per month, but they do not eliminate them.

Not Just Oil

There is another factor beyond oil prices worrying investors. Copper prices, a major indicator of global economic activity, continue to be weak due to oversupply and lower Chinese demand.

Market expectations for revamped growth and higher inflation in 2017 and 2018 stand at odds with the decline in major commodities like copper and oil. More importantly, the decline might be a warning sign of a much deeper problem. The more than $20 trillion in monetary stimuli globally has delivered disappointing growth, as well as contagion risk as financial imbalances across countries rose.

Low oil and commodity prices benefit the users of such commodities like the United States and Western Europe. However, given their negative impact on weaker emerging economies, their price decline may be the canary in the coal mine for the world economy.

Daniel Lacalle is a professor at IE Business School in Madrid, a fund manager at Adriza International Opportunities, and the author of “Escape from the Central Bank Trap.”

Article courtesy of The Epoch Times

Special contribution by Amit Tal (@amital13):

 

The relationship between the capital market line model, the amount of debt, inflation expectations, and the rise in the price of assets worldwide.

Introduction

One of the main problems in the world in recent times is high asset prices (stock indices, real estate prices, and food prices at an all-time high), a phenomenon that is widely shared by many markets around the world.

The process of rising property prices is a result of a complete lack of understanding of the implications of the Keynesian method, political events in the 1970s and the evolution of the Phillips Curve, which found a positive correlation between inflation and the labor market.

The purpose of the article is an attempt to explain the behavior of record-breaking stock indices, and its conclusion is that we are in a self-sustaining bubble that necessitates a continued rapid increase in assets. The alternative to this process is the total paralysis of the global economy and the creation of social chaos.

Historical background

The “Great Depression” of the 1930s left harsh feelings among economists in those years. This depression was the longest and most difficult in the history of the United States. The depression began in 1929, and lasted more than a decade, until the United States entered World War II. The Depression reached its peak in 1933 with a 60% fall in gross national product, a decline of about 80% in industrial output, unemployment of about 25%, and over 9,000 bankruptcies.

Following that traumatic crisis, John Maynard Keynes, a British economist, wrote his economic theory in the book Economic Theory of Employment, Interest and Money. This book caused a great deal of change among economists, who saw this theory as a revolution. Keynes argued that the relative rate of savings in the economy increases with the rise in the level of income, while the increase in investments reduces the increase in savings. The funds used as savings reduce the general purchasing power of the economy, and therefore there is a relative lag in the demand for goods and services, although in absolute numbers this demand is rising. Surplus supply creates a state of imbalance, and with it, unemployment increases.

According to Keynes, the only way out of a crisis situations, in which the supply-to-demand balance is not in full employment, is government intervention. Keynes argued that the government should create a deficit and invest money in infrastructure. That same government investment will trigger a re-start of the economy.

The adoption of Keynes’ approach led to a significant increase in the level of US debt relative to previous years. The assumptions of the Keynesian model were used in later periods for the development of the Phillips Curve, which states that the inverse relationship between the unemployment rate and inflation rate caused economists to defend inflation.

Cancelling the gold standard

In 1971, the gold standard was cancelled as a basis for the dollar by US President Nixon. The background to the decision was an increase in the trade deficit and an increase in the budget deficit following the Vietnam War. The decision made it possible for the governments of the USA to increase state debt considerably.

 

Figure 1 – Federal government debt in the United States

 

 

 

Figure 2- Federal government debt.

 

Capm model (Capital Market Line)

The model is based on two central equations. One of them is the market line equation(CML). This equation shows the relationship between the expected excess yields on an investment portfolio, which results from the distribution of investments between a risk-free asset and the portfolio’s risk, which is expressed in its standard deviation.

A risk-free asset according to the model is government bonds.

 

Debt bubbles

In the 50 years since the US decided to cancel the gold standard, and following the easing of credit in the 1980s, the amount of global debt began to grow considerably.

I want to illustrate how the mechanism of credit bubbles works, in my opinion. I will do it with parallels between all economic agents and markets (government, companies, households) and the average citizen. For example, let’s say that a person is interested in taking a loan and when the time comes and he or she has to pay the bank, the person doesn’t have the financial possibility at the moment. The person faces two options: bankruptcy or a bigger loan on more favorable term (lower interest rate). In the past 45 years, all markets have preferred the second option.

This line of reasoning explains the behavior of interest rates in recent decades. In addition, whenever the interest rate rises, a crisis arises.

Figure 3- the yield of USA government bonds.

 

Is there a chance that central banks know this and try to do everything in their hands to prevent this explosion? A look at the bond market proves so.

Figure 4- Fed behavior in recent year.

A combination of the market line equation and the debt bubble

Let’s look at the equation that composes the market line

Risk-free interest is decreasing, as we understood from the debt bubble process. In order to maintain the same expectation of the portfolio investor must increase the risk in the portfolio (standard deviation of the normal).

Increasing the risk involves at some stage the taking of loans that are invested in the market. This increases the debt bubble and requires further lowering interest rates.

And so we are in an endless loop of risk-taking, price increases of self-sustaining assets.

This line of thought explains this graph

 

Figure 5- market vs debt

Is there an alternative?

In my opinion, the alternative is much worse and would be the explosion of this credit bubble, which could lead to total chaos in the market. This behavior of markets must continue. The problem will arise when the middle class collapses.

 

This is a contribution by Amit Tal @amital13

 

My response:

I explain alternative solutions in my book Escape from the Central Bank Trap.

It is undoubtable that the perennial increase in debt that governments have implemented requires what Keynesians call “moderate inflation”. The fact that the modern capitalist economy post-Bretton Woods has become a credit economy where all economic agents add more debt expecting asset prices to rise is also a fact.

However, as we have exceeded the point of debt saturation, we go from productive debt to unproductive and dangerous debt, creating weak growth and declining productivity. This makes monetary policy create abnormal price inflation and, at the same time, a disproportionate amount of debt exposed to financial assets (margin debt).

So the objective of central banks and monetary policy must be to prevent bubbles bursting into a massive financial crisis, given that the possibility of returning to full sound money policy is virtually impossible. Therefore, we can introduce limits to monetary policy in order to avoid the constant boom and bust cycles. There are numerous articles in this website about this subject if you want to expand.

I hope you enjoy Escape from the Central Bank Trap, the details are all there.

Daniel Lacalle is Chief Economist at Tressis SV, has a PhD in Economics and is author of “Escape from the Central Bank Trap”, “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)

Images courtesy Google Images, zero hedge, and Amit Tal.