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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

Someone is wrong on the internet, consumer financial regulation edition

February 21, 2018

It’s been just over a decade since the Great Recession officially began. Apparently that’s long enough for people who should know better to pretend nothing ever happened.Todd Zywicki, a law professor at George Mason University, says financial products aimed at American consumers should be regulated to prevent “unfair and deceptive actions”. His suggested reforms of the Consumer Financial Protection Bureau, however, do not appear to be informed by the experience of the past 15 years.A quick refresher:Most people can’t buy housing without borrowing large sums. This means small changes in credit supply — minimum down payment requirements, maximum debt-to-income ratios, minimum credit scores, etc — can have large effects on how much money can be spent on housing. Looser credit boosts the share

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Marcus Noland explains the North Korean economy

February 16, 2018

[embedded content]Alphachat is available on Acast, iTunes and Stitcher.This week’s episode covers the North Korean economy, how it has evolved over time, and why it is no longer accurate to think of it as the last bastion of Stalinist central planning. Our guest was Marcus Noland of the Peterson Institute for International Economics.If you found the chat interesting, you should check out these books:Unveiling the North Korean Economy: Collapse and TransitionHard Target: Sanctions, Inducements, and the Case of North KoreaThe North Korean Economy: Between Crisis and CatastropheFamine in North Korea: Markets, Aid, and ReformYou may also appreciate this additional background information:The Korean peninsula was unified into a single state about 1100 years ago. By the late 1800s it had

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Real US interest rates are sanguine about the budget and pessimistic about growth

February 14, 2018

America’s fiscal stance has loosened a bit in the past few months. Tax changes passed at the end of last year plus a recent budget deal to remove earlier caps on spending will combine to increase the federal deficit by about 1.6 percentage points of gross domestic product in the next few years. By 2027, the federal government’s net borrowing could amount to as much as 7.3 per cent of GDP.Some people think this is a problem. Traders, however, do not.The government’s real long-term borrowing costs are lower now than they were at the beginning of 2016. “Bond vigilantes” are clearly unconcerned about the government’s ability to fund its debt issuance. But this is not good news for the politicians — real yields also imply economic stagnation over the next few decades and significant risk of a

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Someone is wrong on the internet, modern servitude edition

February 14, 2018

Immigration is a contentious social question. An economist and a law professor have a plan to make it far more contentious.Eric Posner and Glen Weyl — the same duo that has called for banning index funds and replacing private property with “shared ownership” — are now arguing for a scheme to create a new underclass of indentured servants to the United States.In their plan, any American could sponsor anyone else in the world for an immigration visa as long as the immigrant is willing to pay $6000 to the sponsor. As they put it, “immigrants would no longer have special privileges to sponsor family members”, nor would there be any regulations on how employers could sponsor foreigners to come work in the US.Would-be dog-walking entrepreneurs, however, would be able to collect fees from

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Brad Setser explains how corporate tax policy affects the balance of payments

February 9, 2018

[embedded content]Alphachat is available on Acast, iTunes and Stitcher.American corporations are far more internationally-oriented than they used to be. Some of this is a natural extension of the boom in global trade in the past few decades following the collapse of the Communist empire in 1989.The rest, however, is what happens when motivated multinationals find flaws in the tax law. Much of what is considered corporate income from “foreign direct investments” comes from a handful of tiny countries known to be tax havens. America’s corporate tax code experienced some big changes at the end of last year — changes that were partly (but only partly) motivated by the desire to remove some of these distortions.In this week’s episode, Matt Klein talked with Brad Setser, the Steven A Tananbaum

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“Optimal control” strikes back?

February 8, 2018

Back in the distant dark days of 2012, the world was still struggling to recover from the financial crisis. America’s job market was only just starting to show the first flickers of growth and leaders in the euro area were still deciding whether or not to blow up the global economy.Throughout that year, Janet Yellen, then the number two at the Federal Reserve Board, began to popularise the use of “optimal control” theory in monetary policy. Here is Yellen’s description from a footnote in a speech she gave in June 2012:First, the FRB/US model’s projections of real activity, inflation, and interest rates are adjusted to replicate the baseline forecast values. Second, a search procedure is used to solve for the path of the federal funds rate that minimizes the value of an assumed loss

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Someone is wrong on the internet, wages and the stock market edition

February 7, 2018

You may have heard that share prices are generally a bit lower now than they were a week or so ago.One argument is that the drop was precipitated by the release of American job market data on Friday. Average hourly pay was reported to have grown by 2.9 per cent over the previous year — the fastest pace since June 2009. The thinking is that this will necessarily lead to faster consumer price inflation, or at least to Federal Reserve tightening in response to the fear of faster inflation.Torsten Slok, Deutsche Bank’s chief international economist, gave a good summary in a recent note to clients:The market has been worrying more and more about an overheating of the economy. That is why rates have moved higher. And these fears culminated on Friday with wage inflation hitting a post-crisis

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Options prices imply Janet Yellen is leaving on a high note

February 2, 2018

The Federal Reserve has persistently undershot its longer-run inflation goal ever since that objective was announced six years ago. Instead of growing 2 per cent each year on average, the personal consumption expenditure deflator (ex food and energy) has only grown about 1.5 per cent since the start of 2012.For some, this means the Fed did its job poorly.* Even Janet Yellen, the outgoing Fed boss, said inflation was the single item on her “‘undone’ list” at her final press conference. That was also when she warned about the danger that inflation could “chronically undershoot” the 2-per-cent objective.The good news is that options markets disagree. The cost of protection against unpleasant inflation surprises (too fast or too slow) has dwindled. Prices imply the highest confidence the Fed

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Richard Koo likes the US corporate tax cuts

January 31, 2018

America’s effective corporate tax burden has collapsed over the past few decades:This sharply raised the return to investors in US corporations. Net interest payments plus profits after taxes (excluding the Federal Reserve) have nearly doubled relative to the gross value added by the private corporate sector. The decline in the tax burden is almost entirely responsible:(Chart put together from National Income and Product Account tables 1.14, 3.2, and 6.16. Things look somewhat different if you restrict the analysis to nonfinancial corporations, but the difference between the trends in pretax and after-tax profits is still large and significant.)Investors also benefited from reductions in the government’s collection of interest, dividend, and capital gains income. Those changes are harder

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“Abenomics” as the new gold standard?

January 26, 2018

Writing about currencies often brings out the strangest comments. One, from Twitter, pointed to Japan:Okay, wow, another inflationist, I’d have never expected that. Japan has been devaluing Yen and it got them no where. Businesses operate on a margin.— Rodi Rodriguez (@Rgt881) January 26, 2018After pointing that, actually, Japanese corporate profits were at all-time highs, the interlocutor responded by saying that regular people were doing less well. That’s fair, although it’s largely attributable to the government’s consumption tax increases and the reluctance of Japanese businesses to spend.The interlocutor did not mention these factors, instead asserting that Japanese living standards could be seen in the price of gold:What about purchasing power, standard of living, economic mobility,

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Mnuchin is right about the dollar

January 26, 2018

Since the start of 2017, the US dollar has depreciated about 9 per cent against a broad basket of currencies.This is not obviously newsworthy. After all, the decline has come after a 27 per cent increase since July 2014:And the magnitude of the recent move is well within historical norms. Larger price changes in either direction have occurred quite often since the early 1970s:When asked about this, Treasury Secretary Steven Mnuchin made an anodyne and accurate statement:The dollar is one of the most liquid markets. Where it is in the short term is not a concern for us at all. A weaker dollar is good for us as it relates to trade and opportunities. Longer term, the strength of the dollar is a reflection of the strength of the US economy and that it is, and will continue to be, the primary

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NAIRU: not just bad economics, now also bad politics

January 24, 2018

Janet Yellen has long believed it’s possible for “too many” Americans to have jobs. In her view, shared by many of her generation in the economics profession, consumer prices will rise too fast unless millions of people remain unemployed.Despite this, the outgoing Federal Reserve boss is generally liked by the Left and is sometimes described as a “hero” for workers. Fed board nominee Marvin Goodfriend, however, was lambasted by Democratic Senators Sherrod Brown and Elizabeth Warren during his confirmation hearing for expressing similar opinions.The difference suggests dwindling political support for one of the most bog-standard theories in central banking. Without politicians as adept as Yellen to defend it, the Fed may be forced to abandon the conceit there is always some “natural rate”

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Michele Wucker explains “Gray Rhinos”

January 22, 2018

[embedded content]Alphachat is available on Acast, iTunes and Stitcher.In this week’s episode, Matt Klein talked with Michele Wucker about her work on “gray rhinos”: risks that can be anticipated and avoided, but often aren’t. They discussed the biases in human nature and institutions that encourage the proliferation of gray rhinos, how the concept caught on in China, and the differences between gray rhinos, “elephants in the room”, and “black swans”.Matt’s longform recommendation was “The Dark Bounty of Texas Oil” in The New Yorker. Michele recommended The Undoing Project, which is Michael Lewis’s account of how Daniel Kahneman and Amos Tversky created the field of behavioural economics.

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Stop calling GBP the Great British Peso, says DB

January 19, 2018

The United Kingdom’s politics unquestionably resemble the sorts of things foreign correspondents write about “frontier markets”. (Really, read the whole thread.)Occasionally, its economy does too:What’s more EM than being forced into cyclically inappropriate rate hike due fx weakness caused by politics & then watching fx weaken more?— Karthik Sankaran (@RajaKorman) November 2, 2017Oliver Harvey at Deutsche Bank thinks this latter characterisation is unfair. The UK has many structural problems, but unlike its neighbours trapped in the euro, the composition of the UK’s foreign assets and liabilities means that the Bank of England does not need to defend the currency for financial stability purposes:The Bank of England was able to cut rates and allow the currency to depreciate after the

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A theory about the recent crypto price plunge

January 18, 2018

Note: this is just a theory. One of those of things that pops into your head when you’re in the shower after a long run. It may be nuts — and we certainly can’t prove it — but it happens to be consistent with publicly-available information.Part 1: The North Korean regime benefits from high crypto prices:While the majority of activity from North Korea during this timeframe was not malicious, there was a smaller, but significant, amount of activity that was highly suspect. One instance was the start of Bitcoin mining by users in North Korea on May 17…The timing of this mining is important because it began very soon after the May WannaCry ransomware attacks, which the NSA has attributed to North Korea’s intelligence service, the Reconnaissance General Bureau (RGB), as an attempt to raise

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That time when American banks basically existed to fund the government

January 17, 2018

Here’s a fun chart from the Federal Reserve’s Financial Accounts database:At the end of World War Two, more than 70 per cent of US bank assets were funding the federal government. (Unfortunately the data don’t go back further to give more context.) This share gradually declined until the 1970s, and then collapsed again in the 1990s. By the eve of the financial crisis, US-chartered depository institutions held just 0.7 per cent of their financial assets in either US Treasury securities or central bank reserves.Since then, the Fed’s asset purchase programmes boosted bank reserve holdings while Basel III’s liquidity rules encouraged banks to hold “high-quality liquid assets”, which in practice means American banks have a decent incentive to own some US government debt.Some have argued these

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Bull market in bling

January 11, 2018

America’s economy did not boom in 2017, but one sector had a banner year after a decade of post-crisis austerity:American spending on jewellery soared by more than 10 per cent in 2017. In one magnificent spurt, demand for goods shiny and sparkly finally surpassed the pre-crisis peak.And to think some people say changes to corporate and estate taxes won’t flow through to consumption!(Hat tip to the latest note from the Jerome Levy Forecasting Center, which pointed us to the nominal retail sales figures. The inflation-adjusted spending data come from the underlying detail tables of the National Income and Product Accounts.)

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Why do futures markets imply a Depression-level collapse in European dividends?

January 10, 2018

Here’s a remarkable chart from Harley Bassman’s end-of-year note:The chart shows the growth in dividends paid by companies in the world’s major stock indices implied by the prices of dividend futures.Traders are effectively betting that dividends paid by members of the S&P 500 stock index will be a little more than 30 per cent larger 10 years from now than they are today. Companies in Japan’s Nikkei 225 index are also priced to deliver larger dividends in the future than today.The anomaly is Europe (SX5E). The green line shows the implied growth of dividends paid by companies in the Euro Stoxx 50 index. Futures prices imply these dividends will shrink by about 20 per cent over the next ten years.If that actually happened it would represent a catastrophe for the single currency and the

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The tax on university endowments is anti-intellectualism and cultural resentment masquerading as fiscal policy

January 9, 2018

Paying tax is a burden: the forced transfer of spending power from the private sector to the state.Fear of the law is probably the most important reason people tolerate this burden. But there is also a belief, perhaps misguided, that the tax burden is relatively “fair”. The tax system can command popular legitimacy as long as it doesn’t appear to discriminate and at least looks as if it operates according to straightforward principles. We are about to see what happens when these pretences are abandoned.One small feature of America’s tax changes passed at the end of last year was explicitly designed to punish institutions of higher learning. Universities, which are otherwise exempt from paying tax because they are non-profits, will now have to pay 1.4 per cent of their endowment income to

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Mihir Desai explains the wisdom of finance — Now with transcript!

December 22, 2017

[embedded content]Alphachat is available on Acast, iTunes and StitcherIn this episode of Alphachat, Matt Klein talks with Harvard professor Mihir Desai about the deep connections between finance and the humanities. Special thanks to Elisheba Ittoop for help with editing this episode.Desai teaches at both Harvard Business School and Harvard Law School. While his academic work focuses on the interaction between taxation and cross-border investment decisions — particularly relevant these days! — our conversation was inspired by his book The Wisdom of Finance: Discovering Humanity in the World of Risk and Return. (Here is Gillian Tett’s review from the summer.)The theme of the book, and of our conversation, is that finance is a humanistic discipline. It deals with the same question that

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The long history of dodgy art “investing”

December 21, 2017

The Crown Prince of Saudi Arabia recently transferred hundreds of millions of dollars of his nation’s wealth to a Russian oligarch via a painting of Jesus. Why he did so is unclear.Perhaps a man in charge of a country where the dominant religion strongly discourages artistic depictions of living things bought the painting because he liked it and wanted to showcase it in a museum.Or maybe there was another explanation. Bin Salman spent nearly $1 billion in 2015 just on “the world’s most expensive house” and a yacht, so his spending habits tend to attract speculation.Whatever bin Salman’s particular motivation, moving money out of Saudi Arabia is a national pastime. From a CreditSights note back in November, when the purges of the Saudi elite began:Saudi Arabia’s errors and omissions on its

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“Personal” does not mean what you think it means: a mea culpa

December 20, 2017

In a previous post, your correspondent dug into America’s regional economic accounts to show differences in tax burdens across states. We regret to inform you that some of our analysis was incomplete.The problem is that table SA50 does not capture all the taxes levied by state and local governments, which we realised belatedly after checking them against table 3.3 from the National Income and Product Accounts.When we noticed the issue late on Friday, we asked the chief of the Bureau of Economic Analysis’s regional income division to explain the difference. Here is what he emailed, with emphasis in the original:The state and local government taxes you see on table SA50 are only a subset of the state and local government taxes you see on table 3.3. The taxes on SA50 only represent “personal

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Mihir Desai explains the Wisdom of Finance

December 15, 2017

[embedded content]Alphachat is available on Acast, iTunes and StitcherIn this episode of Alphachat, Matt Klein talks with Harvard professor Mihir Desai about the deep connections between finance and the humanities. Special thanks to Elisheba Ittoop for help with editing this episode.Desai teaches at both Harvard Business School and Harvard Law School. While his academic work focuses on the interaction between taxation and cross-border investment decisions — particularly relevant these days! — our conversation was inspired by his book The Wisdom of Finance: Discovering Humanity in the World of Risk and Return. (Here is Gillian Tett’s review from the summer.)The theme of the book, and of our conversation, is that finance is a humanistic discipline. It deals with the same question that

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Tax “reform” and America’s transfer union

December 15, 2017

America’s state and local tax deduction is as old as the federal income tax. It makes sense in a country founded on the idea of local control and distrust of central authority, but it also tends to reduce the progressivity of the tax code. People with higher incomes and fancier houses pay the most in state and local taxes, and are therefore the biggest direct beneficiaries of the deduction.So it’s not inherently unreasonable to consider reducing the value of this benefit as part of a broader programme of tax reform. As it happens, all the current iterations of the Republican tax plan contain large cuts to the state and local deduction, although it’s fair to wonder whether they are motivated more by the desire for simplification or by the desire to punish people who don’t vote for them.

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Both left and right could make big changes to how the Fed operates in the next recession

December 11, 2017

Like it or not, the central bank is a central planner, shaping both the character and the level of economic activity. It should embrace this role—and the democratic accountability that goes with it—and exercise its power toward the public good.—Mike Konczal and JW MasonThe zero bound encumbrance on interest rate policy could be eliminated completely and expeditiously by discontinuing the central bank defense of the par deposit price of paper currency…The central bank could grow the aggregate stock of paper currency according to a rule designed to make the deposit price of paper currency fluctuate around par over time.—Marvin GoodfriendSooner or later there will be another recession. Federal Reserve policymakers believe “appropriate monetary policy” will cause a significant slowdown in

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2018 could be a banner year for US M&A — and bond investors are nervous

December 7, 2017

US mergers and acquisitions activity fell off a cliff in 2017. The value of deals this year has been about half what it was in 2015 and 2016, and about a third lower than 2014. Chart from CreditSights:Some of this was to be expected. We’re told that executives tend to be cautious in the first year of a new administration because they want to get a feel for how regulations and antitrust enforcement might change. (You can’t see that clearly on this chart because 2009 coincided with the cyclical nadir of the US economy and financial markets…) This was likely exacerbated by heightened uncertainty over trade and tax policy.Barring a few notable exceptions, however, the US government seems to be just as accommodating to the desires of big business as the Obama administration. Analysts at

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Just how much money did the ECB lose on its Steinhoff investment?

December 6, 2017

Q3.3 What are the risks of the programme and are there any plans to mitigate them? Will the Eurosystem be monitoring the creditworthiness of the companies behind its bond purchases?As on any diversified portfolio of credit instruments, risks from the deterioration of issuers’ credit quality or from defaults of issuers cannot be totally excluded. At the same time, risks of the programme are contained in particular by (i) setting minimum credit quality criteria at the time of purchase, (ii) ensuring diversification through issuer group limits defined relative to a neutral benchmark, and (iii) by implementing appropriate due diligence procedures and credit risk mitigation measures on an ongoing basis—Corporate sector purchase programme (CSPP) questions & answersGerman prosecutors say they are

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Private equity investors are paying through the nose for midsize companies

December 4, 2017

If finance academics have taught us anything, it’s that you make more money buying things when they’re cheap than when they’re expensive.For private equity investors, this means lower entry multiples are generally better than higher ones. Buying low makes it easier to generate the high absolute returns that attract investors to PE as a strategy. Limited partners in PE funds should therefore be concerned by the latest figures from Pitchbook on how much people are paying for companies worth less than $1 billion:Pitchbook attributes the high valuations to “the abundance of dry powder and fierce competition for limited targets”. Of course that dry powder — unused capital available for general partners to buy companies — is itself partly a reaction to the shortage of reasonably-priced

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The DOJ’s case against the AT&T/Time Warner deal makes no sense

November 29, 2017

The greatest trick the media companies ever pulled was convincing consumers to blame the cable companies for rising bills.This misconception seems to inform the US Department of Justice’s complaint against the proposed deal to combine AT&T’s distribution channels with Time Warner’s content. The DOJ lawyers say pay-TV has “huge profit margins”, and that AT&T is keen to acquire original content from Time Warner “to hinder the growth of online distributors that it views as a threat to the traditional pay-TV model”.Tellingly, the DOJ complaint cites no financial information to support its claims. Had they done so, they would have come up with a different narrative: AT&T is probably trying to buy earnings growth to offset the weakness of its core business.(Disclosure: like many Americans, I

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

November 23, 2017

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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