Friday , November 24 2017
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Matthew C Klein

Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist. I have worked at the world’s largest hedge fund and read every FOMC transcript since May, 1987

Articles by Matthew C. Klein

What the foreign direct investment data tell us about corporate tax avoidance

19 hours ago

American corporations pay much less in tax than they used to. Figures from the National Income and Product Accounts imply the effective levy on profits has halved since the 1960s:You could therefore be forgiven for thinking that “corporate tax reform” would be about increasing the government’s take, rather than reducing it.If that were the agenda, reformers should start by cracking down on corporate tax havens. In particular, they should focus on the distortions caused by a peculiar rule letting American companies defer tax on profits earned abroad as long as those profits are reinvested there. This rule has inspired many large companies to “reinvest” much of their foreign earnings, but mostly into vehicles that hold dollar-denominated fixed income. These decisions are driven by tax,

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Guest post: Time for a UK sovereign wealth fund

20 hours ago

In this guest post, Tristan Hanson and Eric Lonergan of M&G Investments argue that the British government should issue bonds and use the proceeds to acquire and develop higher-yielding assets.With the Brexit deadline looming, is now the time for the Government to think big and tap the bond markets to invest in a bold growth agenda for the UK economy?Such an initiative would provide a shot in the arm for the UK economy, which has been slowing in recent quarters, and would help mitigate any possibly negative economic impact Brexit may bring. Even better if such an agenda could help towards tackling the problems of low public investment and income inequality.A sovereign wealth fund, tasked with boosting socially useful investment in the UK economy from inadequate levels could be the

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The euro is not a punishment system

14 days ago

One of the most striking moments in the euro crisis saga was when European elites forced Silvio Berlusconi to leave office in favour of unelected Mario Monti. This was possible because Italy is a member of the euro area, and is therefore uniquely vulnerable to capital flight and bank runs.At first blush, the bloodless coup in Italy seems like a good reason to stay out of the monetary union, for those who still have the choice. But we recently attended a fascinating conference hosted by the Centre for European Reform where some argued the European Central Bank’s veto over elected politicians is a feature, rather than a bug.In this line of thinking, the ECB is a constitutional safeguard that could have prevented the kind of creeping authoritarianism that’s taking place in Hungary and Poland.

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European leaders seem determined to remake the “global savings glut” on a massive scale

15 days ago

The Asian financial crisis was so harrowing for those involved, and those who observed it from a close distance, that governments across the region determined never again to be at the mercy of foreign creditors — especially the hated International Monetary Fund. One consequence was a massive increase in “self-insurance” in the form of current account surpluses. It’s harder to have a currency crisis when you’re a net lender to the rest of the world.The euro crisis, which was even more painful, seems to have had a similar effect. That’s bad enough, but even worse, the institutional changes recommended by euro-area elites will likely exacerbate global imbalances. The rest of the world should be warned.First, recall what happened twenty years ago.Big rich countries had weak growth and low

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Greece’s membership of the euro is still tenuous

17 days ago

There is almost no precedent for what has happened to Greece since 2008. Yet despite the salutary counterexamples of emerging markets that let their currencies float to provide monetary stimulus, Greece has thus far determined to remain a member of the euro area.Some attribute this to love: the latest Eurobarometer survey shows 64 per cent of Greeks support “a European economic and monetary union with one single currency, the euro”, while only 32 per cent are opposed. Others attribute it to fear: the last time Greeks questioned their membership of the euro — in the summer of 2015 — the result was bank closures and a renewed economic downturn.The darker possibility is that support for the euro is more fragile than the headline numbers suggest. We recently had a chance to hear a presentation

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The most elegant corporate tax reform

24 days ago

American politicians are thinking about changing how they tax businesses. There are good reasons to reform the existing system, but unfortunately the proposals under consideration miss the mark.An elegant solution, first seriously advocated by Dean Baker, should get more attention. Instead of trying to collect regular payments from businesses based on reported profits, the government should just capitalise its expected tax take up front by demanding nonvoting equity stakes.People form businesses to make money. Unsurprisingly, governments want to tax these people.The question is how. Taxing income paid to workers is pretty straightforward. Taxing explicit payments to investors — dividends and interest — should also be easy to do. Same for capital gains when stocks and bonds are sold at a

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The San Francisco Fed’s hidden message on optimal monetary policy

24 days ago

Central banking is hard. But the Federal Reserve Bank of San Francisco makes it look easy.They have a game called “Chair the Fed” where you get to set the level of short-term interest rates once every three months. You can’t go below zero or above 20 per cent, there is no option for large-scale asset purchases, there is no forward guidance, and there are no emergency lending programmes. Deflation can never be worse than -3 per cent per year, while unemployment can never go below 1.5 per cent.(The European Central Bank has its own game, which we once wrote about, that was similarly limited but also more fun thanks to the colourful characters.)The SF Fed’s game is premised on the idea that inflation is determined mostly by the difference between the actual jobless rate and its “natural”

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Some of what we couldn’t cover in our chat with Stephen Kotkin about Stalin

27 days ago

We hope you’ve been enjoying the earlier posts in this series. If you haven’t already, please be sure to listen to our chat with Stephen Kotkin and read our previous piece on what you need to know from Paradoxes of Power, the first volume of Kotkin’s epic biography.This post covers some of the fascinating material in Waiting for Hitler that we couldn’t fit into our chat.The major omission from our conversation was Kotkin’s analysis of Stalin as the architect of Soviet security policy.As with domestic policy, Soviet international relations were determined first and foremost by ideological considerations. Bolshevism was a conspiracy that believed it posed a mortal threat to the established order.Once in power, the Bolsheviks were convinced they were surrounded — and penetrated — by enemies.

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Stephen Kotkin explains how Stalin defined the Soviet system

28 days ago

[embedded content]Alphachat is available on Acast, iTunes and Stitcher.There is no “socialism with a human face”, as the cliché had it during the Prague Spring, because it already had a human face — and that face was Stalin’s face.This week’s Alphachat is an interview with Princeton historian Stephen Kotkin about Joseph Stalin.Kotkin is in the midst of writing a multi-volume biography of the man who defined how communism worked in the real world. The oustanding first volume — Paradoxes of Power — came out three years ago. (Here’s a post we did to give context for this chat, and here’s the FT review.)We had a chance to talk with Kotkin about Volume 2: Waiting for Hitler, available at the end of this month. (Kotkin thought Halloween would be a “suitably ghoulish” release date.)The book

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Some context for our chat with Stephen Kotkin about Stalin

28 days ago

We recently had the chance to chat with Princeton historian Stephen Kotkin about the second volume of his biography of Joseph Stalin: Waiting for Hitler.The podcast will go live tomorrow, but we thought those who haven’t yet had the chance to read Paradoxes of Power — Kotkin’s first volume in the three-volume series — might appreciate a quick primer. There will also be a post on Monday covering material from Waiting for Hitler that we didn’t get a chance to discuss during our chat.Kotkin’s core argument in Paradoxes of Power is that the first fifty years of Stalin’s life can be explained by his fanatical devotion to Marxist-Leninism, his intelligence, and his incredible work ethic.(Kotkin expands this thesis in Waiting for Hitler by arguing that Stalin’s personality was warped by his long

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Is “growing the pie” overrated, and does that explain why everything is terrible?

October 19, 2017

The most important question in all of economics is: what can societies do to get richer? Sadly, nobody has a great answer. Only a handful of countries* have ever moved from “significantly poorer than the richest” to “about as rich as the richest”.There has been plenty of research on differences between rich and poor countries, gaps in prosperity within countries, and even how to improve productivity within individual businesses. But there is no consensus on what governments can do to improve their citizens’ lot in life, in the aggregate. Most differences seem to be attributable to history, geography, and culture rather than identifiable policy choices.Even economists who think they have discovered reforms they believe will make a meaningful difference admit the impact of these policies is

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Central bankers have one job and they don’t know how to do it

October 18, 2017

I have absolutely no doubt that if you keep interest rates very low for long enough the unemployment rate will go to 3.5, then 3, then 2.5, and I promise you at some point that you will have the rate of inflation that you want.–Former International Monetary Fund Chief Economist Olivier BlanchardThe Phillips curve is just not very important as part of the inflation process.–Federal Reserve Governor Lael BrainardRightly or wrongly, most central bankers think their mission is to keep the growth rate of consumer prices slow and stable. Even in places, such as America, that also ask the central bank to promote “maximum employment”, the inflation mandate is paramount.The standard argument is that unemployment and living standards are real things outside the purview of the monetary authority,

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Cross-currency basis, RIP?

October 11, 2017

It was one of the more interesting stories of 2016 — but now it’s gone. Pour one out for the cross-currency basis:(Chart via Zoltan Pozsar.)The question is: what happened?For the handful of Alphaville readers who don’t remember one of the most exciting stories of 2016, the picture shows the widening difference between the cost of borrowing dollars in America and the cost of borrowing dollars in Japan. More specifically, it compares the short-term interest rate differentials implied from the overnight index swap markets and the currency markets.In theory, the gap is not supposed to exist. The exchange rate between dollars and yen three months in the future should be the exchange rate today adjusted for the interest you can earn holding dollars and yen for three months. An American buying US

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Is the “globalisation –> disinflation” thesis bunk?

October 6, 2017

Since the early 1990s, inflation in the rich world has been quiescent and the share of domestic consumption satisfied by imports has soared. It’s not unreasonable to think these two facts may be related. A clever new note from SocGen’s Omair Sharif, however, suggests otherwise.In the past, the common narrative goes, prices were affected by the relationship between domestic supply — represented roughly by the unemployment rate — and domestic demand. Mass joblessness, callously called “slack”, supposedly kept inflation subdued. Labour markets favourable to workers, on the other hand, created the risk of “overheating”.Whether or not this was ever an accurate description of how the economy worked, it became even less plausible after the Berlin Wall fell and billions of people entered the

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More evidence that bail-ins are better than bailouts

October 5, 2017

Government responses to financial crises can be sorted according to who bears the losses. The state can concentrate the pain on the individuals and institutions who made bad decisions — they can be bailed in — or policymakers can bail out the people who caused the problem by spreading the damage across the rest of society.Bail-ins are theoretically preferable because they preserve market discipline without causing undue harm to innocent people. Bailouts, by contrast, are unfair and inefficient. Governments tend to do them, however, out of misplaced concern about “preserving the system”. This stokes (justified) resentment that elites care about protecting their friends more than they care about helping regular people. Anyone concerned about institutional resilience should therefore be wary

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The Fed is going to make interest rate risk great again (sort of)

October 2, 2017

Interest rate volatility has been really low. Here’s the Move index, which is basically the Vix for US bond yields:This sanguine picture could change as the Federal Reserve reduces its balance sheet. Here’s the baseline forecast from the Federal Reserve Bank of New York:The portfolio of Treasury bonds and mortgage-backed securities guaranteed by Fannie Mae, Ginnie Mae, and Freddie Mac is expected to shrink by a third between now and 2021, after which the balance sheet will grow in line with demand for physical currency, foreign dollar deposits, etc.But even as the balance sheet grows, holdings of agency MBS are expected to keep shrinking. The plan is to start in October by refraining from reinvesting some of the principal payments from maturing bonds into new debt.(Obviously you should

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Further reading

September 28, 2017

Elsewhere on Thursday…— “In September 2015, the multi-millionaire engineer at the heart of the patent and trade secrets lawsuit between Uber and Waymo, Google’s self-driving car company, founded a religious organization called Way of the Future” (Wired)—JP Konig on “The siren call of T+0”–Tech salaries are highest in Charlotte, NC after accounting for lower living costs (Indeed)–The Federal Reserve has published its triennial 1200+ page chartpack on the distribution of wealth and income–“Even the first daughter isn’t immune to pressures on Manhattan’s rental market, which is suffering from an oversupply” (Bloomberg)–“The proof that most publishers are getting the pivot to video wrong is how terrible the video user experience is for viewers. If video were comparable to text-based digital

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The Fed’s forecasts imply a tough (recessionary?) 2020

September 21, 2017

I think it’s a myth that expansions die of old age. I do not think that they die of old age.–Janet Yellen, December 16 2015The Federal Reserve released forecasts through the year 2020 for the first time on Wednesday. Those forecasts imply that America’s central bankers will deliberately tighten monetary policy to slow the US economy, possibly to the point of outright recession, by the early 2020s.Every few months, the Fed polls the members of the Open Market Committee, which sets monetary policy, to ask them how they think real output, unemployment, and inflation will behave under “appropriate monetary policy” for the next several years. They also ask everyone where they think short-term interest rates should be at the end of each year.There is no way to identify each individual set of

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Going off gold did the opposite of what many people think

September 19, 2017

Imagine you can choose between living in two kinds of societies:Dynamic world prone to wild swings and big crashes, but ultimately more growth in the long runSafe and stable world with greater consistency, less volatility, and much lower risk of catastrophyYou might think that Americans and Europeans effectively decided to move from option 1 to option 2 between the late 19th and mid-20th centuries. Depending on your politics, you might attribute this to the stultification of modernity, or the triumph of the enlightened welfare state.Regardless, you would be wrong.The growth of government as a service provider and guarantor of financial security — backed by fiat money — has actually coincided with faster trend growth and greater variance around that trend line. Moreover, the likelihood of

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Target2 balances reflect euro area’s potential to be better than traditional exchange rate peg regime

September 15, 2017

I have a confession to make: for many years, I never felt comfortable talking about Target2 balances. Recently, however, I’ve come to think I understand it well enough to express an opinion: they matter, but because of what they represent rather than because they are direct policy variables.Target2 is the name of the payments processing network for the euro area, analogous to Fedwire in America. It is not obvious from the official description why it would be controversial:Operated by the Eurosystem, TARGET2 enables transactions to be settled using central bank money and with immediate finality…The payments settled via TARGET2 relate mainly to refinancing operations with national central banks, transactions between credit institutions and settlement in central bank money conducted by other

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Anyone awake in the 1980s should have known about the dangers in the 2000s

September 13, 2017

Lots of people were supposed to prevent the financial crisis. But while a few warned about the dangers in real time, most policymakers, risk managers, and academics failed in their responsibility to protect the rest of us.After the fact, the common defence was that the crisis so complex and unusual that it would have been impossible to predict. How could regulators on government salaries or ivory tower professors have been able to understand CDO-squareds and the nuances of the repo market? The aggressive form of this argument is that those who were worried during the go-go years of the 2000s were simply perpetual pessimists who had gotten lucky.Their logic collapses when faced with the most obvious parallel to the 2000s boom-bust cycle: the credit boom and subsequent balance sheet

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What if there isn’t a “global financial cycle” after all?

September 12, 2017

There is a potent global financial cycle in gross capital flows, credit creation and asset prices, which has tight connections with fluctuations in uncertainty and risk aversion.–Helene Rey, August 2013Centre-country phenomena and common factors do not explain much of the time series variation in capital flows…Periods of financial stress – that is, high and/or rapidly rising values of the VIX or the dollar – do not seem to be systematically associated with unusual capital flow movements (at the quarterly frequency) across our sample of countries.–Eugenio Cerutti, Stijn Claessens, and Andrew K Rose, August 2017Rey’s thesis makes a lot of intuitive sense. Most of the world’s assets are owned by the well-to-do in the big rich countries. Small changes in their preferences can have big effects

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America’s benefits system is backwards

August 25, 2017

If you tax something, you will get less of it. If you want to be efficient and fair, you should target government benefits to the people who need them most.These two principles sound simple and uncontroversial enough, but combining them into a coherent system has proven surprisingly difficult in the US and many other countries. The result is a system that punishes the poor when they make more money even as it transfers wealth from workers to well-off retirees.One fix: make benefits for potential workers universal, rather than targeted, and make benefits for the elderly targeted, rather than universal.America’s tax system does a reasonable job of transferring resources from the richest to the poorest. Effective average tax rates rise steadily with income, and those at the low end pay much

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America’s Governmental Accounting Standards Board is giving ruinously bad advice

August 23, 2017

America’s state and local governments are mismanaged: resources are wasted and obligations are hidden.There are many reasons for this, but the official guidance published by the Governmental Accounting Standards Board deserves much of the blame. Politicians are encouraged to low-ball both the value of public assets and the cost of promises made to public-sector workers. It’s a recipe for poor governance, if not outright corruption. Adopting the sorts of standards used by private companies — as recommended by the International Public Sector Accounting Standards Board — could make a big difference.Start with the asset side.The public sector owns subway stations, schoolhouses, ports, parking lots, office buildings, and more. Excluding public parks and historical heritage sites, these

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Real interest rates aren’t particularly low

August 17, 2017

Here’s a chart worth studying closely:It comes from new research by Oscar Jorda, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. (Alphaville covered the paper’s discussion of the historical returns to owning housing in a previous post.)The dashed black line tracks the level of short-term risk-free interest rates adjusted for inflation across rich countries since 1870. The average real short rate across countries has been about 80-90 basis points, although there have been significant variations over shorter periods of time, such as when real rates spiked in the late 1920s and early 1930s and in the early 1980s.This long-term perspective is useful because it makes for a stark contrast with much of the commentary on this subject. A few years back, for example, the

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Housing for the long run?

August 15, 2017

Residential real estate, not equity, has been the best long-run investment over the course of modern history.–“The Rate of Return on Everything, 1870–2015” by Jorda, Knoll, Kuvshinov, Schularick, and TaylorThat’s one of several surprising findings in a new paper from the crew that’s been studying historical economic data on everything from the growth of mortgage lending to the relationship between loose monetary policy and financial excess.Using a new set of data they constructed by hand from news articles, advertisements, statistical abstracts, and more, they estimated the investment performance of deposits, government bonds, residential real estate, and stocks across 16 rich countries. (Alphaville will look into some of their other big findings in subsequent posts.)Housing beat stocks

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Podcast: Gabriel Zucman on tax evasion and inequality

August 4, 2017

[embedded content]Alphachat is available on Acast, iTunes and Stitcher.In this episode we had the chance to talk with Gabriel Zucman, an economist at the University of California-Berkeley, about tax evasion and the extent to which it exacerbates inequality. Zucman is the author of several important works on the subject, most notably his book The Hidden Wealth of Nations.Using publicly-available data from central banks and the International Monetary Fund, he found that global financial assets are under-reported by about 8 per cent. Moreover, the discrepancy between reported assets and the associated claims is concentrated in a handful of places known to facilitate tax avoidance, such as Switzerland, Luxembourg, and Caribbean financial centres. The book — and our chat — covers his

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Time to worry about the American consumer?

August 3, 2017

Two basic ways to spend more money: you can earn more and save the same, or you can earn the same and save less. Newly revised data from the Bureau of Economic Analysis show that American consumers have spent the past two years embracing option 2. The average American now saves about 35 per cent less than in 2015:Not since the beginning of 2008 have Americans saved so little — and that’s before accounting for inflation. It could be a sign of trouble ahead.Start by looking at table 1B of the release. Employee compensation — wages, salaries, and benefits — was about 1 per cent lower in 2016 than previously reported. Government transfer income was also slightly down. Consumption spending, however, was about 0.5 per cent higher than thought. The net effect means today’s estimate of personal

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How to improve Japanese corporate governance: shame (and glory)

August 2, 2017

Ever since Ruth Benedict applied the terms “guilt culture” and “shame culture” to explain what she perceived as a fundamental contrast in the psychological makeup of Japanese and Americans, the applicability of the guilt-vs-shame dichotomy has been a controversial and much-debated topic both with relation to the study of Japanese culture and with regard to its relevance for the anthropological study of culture in general…Many Japanese have reacted strongly against being labeled a “shame culture” and have interpreted Benedict’s work as a pejorative account of their culture written by an outsider asserting the superiority of Western traditions.–“Revisiting Shame and Guilt Cultures: A Forty-year Pilgrimage”, Millie R ChreightonCultural generalisations aside, new research from Akash

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Clearing up some misconceptions about how the stock market works

July 28, 2017

You can learn lots of interesting things by closely studying America’s Financial Accounts (formerly known as the Flow of Funds) published by the Federal Reserve, such as how the US stock market actually works.First, the standard theory:Just like everyone else, companies that want to spend more than they take in can raise money by selling financial assets to investors. Borrowing money from a bank or the bond market is common, but risky. If you miss an interest payment or violate any of the other covenants associated with your debt, you might end up being forced to shutter an otherwise worthwhile enterprise.One alternative is to raise money by selling claims on future profits. If the business isn’t as successful as hoped, the company might have a tougher time raising additional funds, but it

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