@dlacalle_IA

Yesterday, Janet Yellen, Chairman of the Federal Reserve, announced an increase in interest rates of 25bps, the second time in a decade, and expecting three more rate hikes in 2017. At a continued rate of +25 bps per year, it will take the US nearly 10 more years to get back to a 3% Fed funds rate.

Let us remember what was promised to support the massive stimulus plan:

The White House predicted an average growth in the economy of 4-4.5 percent, unemployment would drop to 5 percent, and the budget deficit would shrink to a mere 3.5 percent of GDP.

During the Obama administration and the massive expansionary poilicies of three QEs and ultra-low rates, economic growth was a mere average of 1.4%, 2.1% if we exclude 2009. That compares to an average 3.5% with Reagan, 3.9% with Clinton and 2.1% with Bush Jr (average annual GDP growth).

The recovery growth gap compared to other recoveries since 196o has been set at $1.67 trillion. That means the weakest recovery in recent history, as well as an economic growth that has stalled at almost half of the promise. Average The Federal Reserve expects 1.9% growth for 2016 going to 2% in 2018, the weakest relative to potential and previous recoveries.

All of this is after a massive $4.7 trillion monetary stimulus and $10 trillion in new debt (a fiscal deficit increase of $13 trillion at State, local and Federal level). Public debt ballooned from 48% to 75% of GDP. Average annual deficit was 5.2% and for 2016 it is expected to be 3.2%.

Quantitative easing was launched under four premises. Provide liquidity to reduce the risk of contagion after the financial crisis, add jobs, inflation and growth.

Its first objective was clear and worked. Unfortunately it went from solving a problem of liquidity to creating the largest bubble in financial history. High yield bonds at the lowest interest rate seen in 35 years, and stocks at all-time highs, exceeding fundamental valuations and real earnings growth.

But job creation was a success. Was it not?. 4.6% unemployment! 9.3 million jobs created. Being good, and to deny it is ridiculous, employment figures are far from what is expected of the world´s leading economy after a $ 24.7 trillion fiscal and monetary stimulus. Under Reagan 12.6 million jobs were created. Under Clinton, 21 million. Even with the massive crisis, Bush Jr saw 5.7 million in job creation.

On the one hand, more than 11 million people are out of the labor force, leaving the labour participation rate at 1978 levels, and it is completely false to say that it is explained by demographics. The US has a similar demographics as the UK and labor force participation is almost ten points lower. In addition, labour force participation rate has fallen in almost all segments of age (very important between 25 and 54 years).

In October 2016 425,000 workers left the labour force, the highest level of the historical series, reaching a total of 94.6 million working age Americans that are not participating in the system or looking for a job. That shows a labour participation rate of 62.8%, not seen since 1978. In addition, the number of US citizens who supplement their income with food stamps has doubled from 20 million to more than 40.

Temporary employment stands at 18.2% (less than 35 hours per week), ie considered recessionary levels. In times of growth, the US has always had a 16.6% lower temporary rate. In the recession of 2001 it was 17% and in 2008 the maximum was 20%. With the biggest stimulus in history, it has only been reduced slightly to 18.2% even with the aforementioned poor labour participation.

Since 2009, doubling the debt, the average household income in the US has fallen in all segments (the median of $ 55,000 to $ 54,000 and the poorest segment from $ 13,000 to $ 12,000) and real wages continue to be at 2008 levels.

To top it all, in the last five years, the US annual productivity growth has been 0.6% on average, the poorest since 1978.

Inflation expectations have also been consistenly revised down throughout the period. In fact inflation expectations have only come down until the recent uptick in October, and still stand below the 2.8%-3%.

What is more interesting is that QE has been disinflationary as money velocity has collapsed and capacity utilization remains poor, at 75%. The massive creation of money has gone to create huge inflation in financial assets and disinflation in the real economy, laying the grounds for one of the most dramatic imbalances between asset classes and industry and consumption seen since the 70s.

The argument against all this is that “it would have been worse” and that the crisis was too big. None of them work, and sound more like excuses as other presidents lived through deep crises as well. But those excuses don´t stack up against the fact that the US created more than half of all the money supply in its history in the past eight years and has seen the longest period with ultra-low rates.

In summary, the Federal Reserve´s policy has generated results that range from disappointing -liquidity- to complete failure -jobs, growth and inflation- but leaves behind a massive bubble in financial assets that will not be easily sorted. Raising rates so slowly only perpetuates the bubble.

No wonder Americans have decided to vote for Trump´s promised supply side policies.

Daniel Lacalle is a PhD in Economics and author of Life In The Financial Markets and The Energy World Is Flat (Wiley)

It is not easy to understand. If one looks at media comments, China is the world´s largest renewable capacity installer. However, if we analyze the numbers of new capacity in the country and both the current and long term energy mix, the big winner is coal!

To celebrate that my book The Energy World Is Flat (Wiley, with Diego Parrilla) is to be published in China, I would like to analize the Chinese energy policy.

This year, China reduced by 30% its renewable capacity targets, but that is not a negative. China will install 110 gigawatts of solar and 210 gigawatts of wind by 2020 with the new plan. It is estimated that by 2020 15% of its energy mix will come from non-fossil fuel energy.

But 73% of electricity in China comes from thermal generation. And in 2015, 50% of the new capacity was also thermal. China´s energy mix in 2020 will come overwhelmingly from coal (65%) and nuclear. Solar, for example, will likely weigh less than 5%.

In China, the energy mix is decided from three perspectives: Benefit for the Chinese economy and jobs, competitiveness and local control of technology. Once we understand this, it is normal to understand why coal is still supported. It covers the three requirements, jobs, cost and control of the process.

Between 2013 and 2015, 50.8 gigawatts of capacity were added in coal generation. This means that in two years coal added almost half of what China plans to install to 2020.

According to official figures, there are a further 42 gigawatts of coal plants under construction, with 11 gigawatts approved only in 2015. Meanwhile, China has retired less than 10 gigawatts of obsolete capacity. If we add the figures on nuclear energy, China’s decision to double its nuclear capacity to 23 gigawatts more and go ahead with another 50 planned gigawatts places to China as the largest installer of new nuclear power in the world ( 136 reactors of approximately 340 planned in the world ).

The question, therefore, is why?

On the one hand, China’s consumption accounts for almost 50% of global coal demand, but it imports very little. First incentive in favour of coal: the balance of payments.

On the other hand, the vast majority of coal companies in the country are state owned. Second incentive: “Support” employment and “indigenous industry.” China knows that replacing coal with renewables has a negative net effect on employment, even if it is unquestionnably a creative destruction and positive from an environmental point of view. So transitions from fossil fuel to renewables have to be slow, because they affect jobs and can increase the cost of energy dramatically.

Finally, the cost and technology control. For China, which seeks to reduce its huge imbalances exporting, launching a race to renewables that ignores the cost of energy would be suicidal. But it is even more negative for its technology payment account, so it can be strategically potentially dangerous.

Despite the drop in costs, the average cost of electricity from coal in the country is much lower than solar photovoltaic, less than half. The CEO of Canadian Solar or Dinghuan Shi, chairman of the China Renewable Energy Society, estimate that solar PV will be competitive with coal in 2025, not earlier.

Of course there are environmental factors that should not be ignored, and China has reduced emissions significantly in the past years. So much in fact, that the CO2 emissions reduction of 2015 is equivalent to 200 million tons of CO2. That is roughly equal to the cumulative emissions from the 100 countries with the lowest emissions 5 . China is now on a path to achieving its Paris climate commitments well before its 2030 target date.

China´s energy revolution will happen as long as it does not damage competitiveness and jobs. China can benefit more than any other country in the world from what we call the energy broadband and the technological revolution … When costs are proven to be lower.

Daniel Lacalle is an economist and author of “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)

This article was originally published in Spanish by @elespanol