Posts Tagged ‘economic crisis’
“A great sound is given forth from the empty vessel”*…
Pakistan’s economy appears to be in pretty bad shape. Riffing on a provocative thread from Atif Mian, the redoubtable Noah Smith compares the economic condition of Indian’s nuclear-armed antagonist with its island neighbor (and current basket case) Sri Lanka…
Many of the particular root causes of Pakistan’s situation are different than in Sri Lanka — they didn’t ban synthetic fertilizer or engage in sweeping tax cuts. The political situations of the two countries, though both dysfunctional, are also different (here is a primer on Pakistan’s troubles). But there are enough similarities at the macroeconomic level that I think it’s worth comparing and contrasting the two.
In my post about Sri Lanka, I made a checklist of eight features that made that country’s crisis so “textbook”:
• An import-dependent country
• A persistent trade deficit
• A pegged exchange rate
• Lots of foreign-currency borrowing
• Capital flight
• An exchange rate crash (balance-of-payments crisis)
• A sovereign default
• Accelerating inflation
[He then examines each as it pertains to Pakistan]
… Pakistan shares a lot in common with Sri Lanka. It doesn’t have a pegged exchange rate, it’s not as dependent on imported food, and it doesn’t have quite as much foreign-currency debt. But the basic ingredients for a slightly more drawn-out version of the classic emerging-markets crisis are there, and there are some indications that the crisis has already begun.
Because Pakistan didn’t peg its exchange rate and didn’t borrow quite as much in foreign currencies as Sri Lanka, it made fewer macroeconomic mistakes than its island counterpart. But in terms of long-term economic mismanagement, it has done much worse than Sri Lanka. No, it didn’t ban synthetic fertilizers — that was an especially bizarre and boneheaded move. But one glance at the income levels of Sri Lanka and Pakistan clearly shows how much the development of the latter has lagged:
Pakistan went from 3/4 as rich as Sri Lanka in 1990 to only about 1/3 as rich today. That’s an incredibly bad performance on Pakistan’s part…
Another emerging-market crisis looms: “Pakistan is in big trouble,” from @Noahpinion.
Oh, and the weather’s not helping either.
For a consideration of the interesting (that’s to say, challenging) questions that Pakistan’s predicament (and the travails of other debtor nations) pose for China, which is an increasingly large lender across the developing world, see the first set of items here.
* Pakistani proverb
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As we batten the hatches, we might spare a thought for Fazlur Rahman Malik; he died on this date in 1988. A scholar and philosopher, he was a prominent reformer in Pakistan, who devoted himself to educational reform and the revival of independent reasoning (ijtihad). While his work was widely-respected by other reformers, it drew strong criticism from conservative forces– who eventually forced him into exile. He left Pakistan in 1968 for the United States where he taught at the University of California, Los Angeles and the University of Chicago.
“Since the nation is defined by its inherent virtue rather than by its future potential, politics becomes a discussion of good and evil rather than a discussion of possible solutions to real problems”*…
Nathan Tankus (@NathanTankus) put his undergraduate studies at John Jay College of Criminal Justice on hold to become a full-time economics writer and researcher (he is Research Director at The Modern Money Network). He has been a visiting researcher at the Fields Institute and a research assistant at the University of Ottawa. He has also written for the Review of Keynesian Economics, Truthout and the financial blog Naked Capitalism. But he’s perhaps best known for (and most closely-followed on) his newsletter Notes on the Crises, from whence…
The election has come and gone, a winner has been announced and now the fallout begins. While the details are still being hashed out, and president Trump along with most of the Republican party are not accepting the results (at least not yet), my interest is not so much in the near term partisan fights but the implications of what’s happened for the future of the Coronavirus Depression. To understand this, we must look to the results in the U.S. senate. What we find there is an exceedingly mixed result. Republicans have 50 seats, Democrats have 48 seats and the final results will come from two senate runoff elections in Georgia. Even if the Democrats win those two races, that thin margin would require each and every senator to agree to pass whatever they want to pass. As I said in my pre-election piece:
This means we could possibly go until February 2021 before seeing another economic package. Worse, that package may even require a Democratic senate to become law. It’s possible that even that scenario is optimistic — it could then take a significant amount of time for Democrats to agree on a package among themselves. What happens to millions upon millions of people in that agonizing waiting period? A winter filled with a third wave of Coronavirus and no economic support to individuals is a recipe for absolute disaster — over 200,000 Americans have already died.
Since I wrote this the third wave of Coronavirus has taken off and it seems more likely than ever that we will not have an economic package passed in February. In other words, I worry that fiscal cliffication is just going to intensify. Indeed, it’s hard to imagine anything being able to break it at this point. The 2022 midterms are a long time away and there is no guarantee that the outcome would break the deadlock. We’ll likely see some sort of package go through congress in 2021 but it will very likely not be timely as the most optimistic scenarios laid out above had hoped. Meanwhile, the need is no less…
There are some overly rosy possible scenarios circulating financial twitter that make reviewing the unemployment situation important. Headline unemployment is still elevated but it is no longer at the high levels of the spring. However, this hides the damage that is happening underneath. Headline unemployment has mostly been driven by the behavior of temporary layoffs… But the real damage is in the permanent job losses.
The distinction between temporary layoffs and permanent job losses is very underemphasized in economic reporting and has led to the underlying economic damage from being missed in a lot of economics coverage. My colleagues Alex Williams and Skanda Amarnath at Employ America did a great job of making this point in their piece “The Shock and The Slog” last month. While there has been a lot of recovery in temporary layoffs, there has been a steady increase in permanent layoffs and it will likely keep on increasing as more businesses shutter and the effects of expanded benefits start filtering through the economy (and our economic data). It’s also important to emphasize that labor force participation of individuals 15-64 has only partially recovered from a very steep drop, which makes headline unemployment appear rosier than it is.
Worse still, the third wave of Coronavirus is in full swing. New York City schools could be shut as early as Monday, and indoor dining should probably already be shut. This second wave of shutdowns will be more economically harmful than the first wave because any savings they had were exhausted by the first wave and it is most likely that most affected businesses have already exhausted their access to credit (and perhaps even their willingness to take on more debt). It’s likely that the second wave of shutdowns will accelerate permanent job losses while the temporary job losses generate renewed drops in demand. In other words, the economic situation has still been deteriorating and it will likely get hammered at a time where fiscal support is, at best, months away.
In this context, the only game left in town is the Federal Reserve. Taking on responsibility for state and local governmental responses is the last thing that the Federal Reserve wants to do. However, the Federal Reserve has a mandate to to pursue maximum employment and price stability and meeting its maximum employment mandate requires it to use the tools it has available to do so…
Why the Fed is the last, best hope against post-Corona economic devastation and how that might work: “What is the Future of Fiscal Policy Now That the Election is Over?“
* “In the politics of eternity, the seduction by a mythicized past prevents us from thinking about possible futures. The habit of dwelling on victimhood dulls the impulse of self-correction. Since the nation is defined by its inherent virtue rather than by its future potential, politics becomes a discussion of good and evil rather than a discussion of possible solutions to real problems. Since the crisis is permanent, the sense of emergency is always present; planning for the future seems impossible or even disloyal. How can we even think of reform when the enemy is always at the gate?” – Timothy Snyder, On Tyranny: Twenty Lessons from the Twentieth Century
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As we muse on Modern Monetary Theory, we might recall that it was on this date in 1994 that Noel Edmonds appeared on BBC television to announce the winning numbers in the first UK National Lottery. the draw was 30, 3, 5, 44, 14 and 22; the bonus was 10; and seven jackpot winners shared a prize of £5,874,778.
“You know what’s truly weird about any financial crisis? We made it up. Currency, money, finance, they’re all social inventions.”*…
First Argentina. Now Turkey. The next country to face a financial crisis could be any one of a slew of emerging-market economies that have grown dangerously dependent on borrowing in dollars and other foreign currencies.
As of the end of 2017, corporations in emerging markets owed $3.7 trillion in dollar debt, nearly twice the amount they owed in 2008, according to the Bank for International Settlements. Analogies to 1997’s Asian financial crisis and Mexico’s “Tequila” crisis of 1994 abound. But the roots of emerging-market crises lie further back in the history books. In The Volatility Machine: Emerging Economics and the Threat of Financial Collapse, finance professor Michael Pettis urges us to look to Europe in the early 1800s, just after the end of the Napoleonic Wars. The financial conditions and innovations that gave rise to the first truly global crisis, in 1825, are in many ways similar to the conditions that have led Turkey and Argentina to their current precarious states…
Learning from the past: “The global financial crisis of 1825 foreshadowed the problems of emerging markets today.”
* Bruce Sterling
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As we contemplate currencies, we might recall that it was on this date in 1955 that the Manilla Pact was signed, creating the Southeast Asia Treaty Organization (SEATO). Intended as “an Asian NATO,” SEATO was a collective defense agreement aimed at stopping the advance of communism in the region.
Despite its name, SEATO mostly included countries located outside of the region but with an interest either in the region or the organization itself: Australia, France, New Zealand, Pakistan (including East Pakistan, now Bangladesh), the United Kingdom and the United States; only the Philippines and Thailand were actually in the region.
While SEATO-funded cultural and educational programs some long-standing effects in Southeast Asia, the alliance is largely considered a failure, as its military/defense mission never gelled. In June of 1977, after many members had lost interest and withdrawn, SEATO was dissolved.
The official flag of SEATO
“…what remains after one has forgotten everything he learned at school.”*
A guest post from Scenarios and Strategy (here, with an almanac entry)…
The Bureau of Labor Statistics reminds us that it’s smart to stay in school:
But as Calculated Risk reports, while unemployment among the best educated is still lowest, it’s increased as much in percentage terms for them during this current recession as for any other group.
click to enlargeOne notes that all four groups** were slow to rebound after the 2001 recession– not an encouraging reminder if one is hoping for a brisk employment-led, consumption-fueled recovery this time around.
But in some ways more striking is a difference we might expect, but that hasn’t yet emerged. Calculated Risk:
I’d expect the unemployment rate to fall faster for workers with higher levels of education, since their skills are more transferable, than for workers with less education. I’d also expect the unemployment rate for workers with lower levels of education to stay elevated longer in this “recovery” because there is no building boom this time. Just a guess and it isn’t happening so far … currently the unemployment rate for the highest educated group is still increasing.
Clearly, from an individual’s point-of-view, it’s still smarter to get more education than less. But the perturbations of past periods remind us that the gearing between between academic degrees and financial success isn’t always perfectly tight… Indeed, those with sharply-defined professional credentials in fields– e.g, finance– that are unlikely even in the intermediate term (if ever) to recover their bubble-fueled growth rates, may find their advanced degrees at best unhelpful; at worst, downright prejudicial.
Economic recovery and growth will be driven to some large extent by innovation; that innovation will create new– and new kinds of– jobs. Looking even just five years out, much less ten, one has to admit that it’s just not possible to predict what these emergent jobs, nor their requirements, will be. (Consider, e.g., the hottest topic– and job category– in marketing/advertising these days: “social media marketing”… which wasn’t even a glimmer a decade ago, and was just being born five year ago.) This is a challenge for those new to the work force, who have to wrangle the product of their schooling and their personal experience into a shape that can fit the entry-level positions they seek. It is a much bigger challenge for those mid-career who find themselves needy of making a move: these more mature folks have not only to learn new fields, they also have to re-direct the considerable momentum of perception and habit that characterized their old– and they have to do those things, usually, in ways that justify salaries way north of entry-level.
All of which underlines for your correspondent the extraordinary value of a liberal arts education. When one is faced with a “working adulthood” that is one transitional challenge after another, no skill is more valuable than the capacity to adapt. And no capability is more central to that adaptation than the ability effectively and efficiently to learn.
This is precisely what, at its core, a liberal arts education is about: learning to learn.
There are many, many other reasons, rooted in personal and societal benefits, to pursue a liberal arts education, and top support a strong foundation of liberal arts in higher education. But the lessons of the last couple of years– indeed, of the last several decades– suggest that the economic rationale is plenty strong as well…
And besides, it’s fun.
* “Education is what remains after one has forgotten everything he learned in school.”
– Albert Einstein
** To put these cohorts into perspective, the Census Bureau suggests that, of these folks “25 yrs. and over” (in 2008):
– 13.4% had less than a high school diploma.
– 31.2% were high school graduates, no college.
– 26.0% had some college or associate degree.
– 29.4% had a college degree or higher.
UPDATE: Reader JK directs our attention to another treatment of the data, in the NY Times. As he suggests, even more dramatic.
As we revisit our course catalogues, we might recall that it was on this date in 1933 that Congress passed the Emergency Banking Act, the first major legislative step in Franklin Delano Roosevelt’s New Deal program. The sense of urgency was sufficiently high– four days earlier Roosevelt had declared a “Banking Holiday,” closing all of the nation’s banks– that most legislators passed the Act without even reading the single copy that was available for review. The EBA gave the government authority to shutter insolvent banks; that, coupled with the Federal Reserve’s informal-but-explicit pledge to guarantee the deposits of banks allowed to reopen (de facto deposit insurance), eased the crisis of public confidence: within two weeks of banks’ re-opening on March 13, Americans had re-deposited over half the cash they’d withdrawn and hoarded through the period of bank failures that marked the first chapter of the Great Depression. Later that year, the (more considered and embracing) Banking Act of 1933 replaced the EBA, and established such lasting practices and institutions as the FDIC.
Oh the shark has pretty teeth, dear / And he shows them pearly white…
George Burgess and a momento mori
Bank robberies, for sale signs, and store closings are up, even as the household wealth of the average America family is down by 40%– the economic crisis has, as one knows, had wide and deep effects. But lest we think think that the downturn has had no positive impact, this, from the University of Florida and the Florida Museum of Natural History’s International Shark Attack File:
The recession may be responsible for a slump of a different sort: an unexpected dive in shark attacks, says a University of Florida researcher.
Shark attacks worldwide in 2008 dipped to their lowest level in five years, a sign that Americans may be forgoing vacation trips to the beach, said George Burgess, ichthyologist and director of the International Shark Attack File, which is housed at UF.
According to the latest statistics released today, the total number of shark attacks declined from 71 in 2007 to 59 in 2008, the fewest since 2003, when there were 57, said Burgess, who works at the Florida Museum of Natural History on the UF campus.
“I can’t help but think that contributing to that reduction may have been the reticence of some people to take holidays and go to the beach for economic reasons,” Burgess said.
Read the entire story here.
As we scan the surface for fins, we might recall that this is the anniversary of another traditional beneficiary of downturns: it was on this date in 1902 that “Talley’s Electric Theater,” the first American venue devoted exclusively to movies, opened in (of course) Los Angeles. The theater charged 10 cents for a one-reel show.
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