• Reflections from a Round-the-World Tour
  • Greece Settles Quietly, for a Change
  • May Jobs Report Disappoints


The alarm goes off. I have no idea where I am or what time it is. Slowly, the truth is revealed: I see Chinese characters on the telephone, so I’m not in London anymore. There is no note apologizing for internet restrictions, so it isn’t Beijing. The weather report calls for moderate humidity, so it can’t be Singapore. It must be Hong Kong! Now, on to the next challenge: do I have any clean shirts left?

I had never done a round-the-world trip before, and I wouldn’t recommend it to pleasure travelers. All of those time zones can challenge one’s stamina, but I gained immense energy from the conversations. Following are some reflections from a breathless tour of world capitals.

    • How does a country achieve the benefits of association without ceding too much control? That seems to be a central question, from Washington to London to Hong Kong. How permeable should borders be to the flow of goods and people? How much freedom should nations have to manage the value of their currencies? How much autonomy should be granted to individual members of a federation?

      These issues are not new. Britain’s relationship with continental Europe, for example, has been
complicated for millennia
      . The same goes for Hong Kong’s relationship with Beijing. But today’s trade, financial and information flows have raised the stakes. There are more parties to economic decisions than ever before; finding the optimal course is incredibly complicated.

    • It was a clear day in Beijing, at least atmospherically. Clarity on the Chinese economy remains hard to come by. Concerns have eased, but questions remain over whether growth targets can be met. The Chinese housing market has experienced renewed vigor in recent months, thanks to some relaxation of lending restrictions.

      Private borrowing in China continues rising at a rapid pace. The good news is that almost all this debt is denominated in the local currency, so borrowers are not exposed to increases in U.S. interest rates or the strengthening of the dollar. Nonetheless, non-performing loans are rising quickly and so is concern over the solvency of Chinese banks.

      There was considerable buzz in Beijing over an anonymous editorial that appeared in the Shanghai People’s Daily. It seemed to criticize the expanding leverage, warning of problems down the road. Given the tight control over the press in China, the consensus was that the article had been strategically placed.

      Chinese officials have proposed securitizing bad debt and selling it to investors as a way to clean up bank balance sheets. This technique was employed successfully to address the Latin debt crisis of the 1980s and the American savings-and-loan crisis a decade later. But securitizing bad assets makes their true value transparent and could raise speculation about the worth of loans still on Chinese bank balance sheets. Maybe it’s better to inject more capital into financial institutions and let them work the loans out quietly.

    • Retirement systems around the world are being challenged by aging demographics and low interest rates. Even those that were disciplined in their planning could not have foreseen that yields would be low (and even negative) for such a long time. To minimize market fluctuations, pension schemes typically move toward bonds as benefits payments approach. But this timing has greatly diminished the yields that they earn.

      In recent years, some systems sought enhanced returns through alternative asset classes. But these have proven expensive and somewhat disappointing; there seems to be quite an
exodus from the hedge fund sector
      occurring at the moment. The good news is that people are living longer in most countries, but the bad news is that pension annuities are also growing longer.

      There is only so much that can be done with benefits adjustments (and in some places like Illinois, it seems like nothing can be done on this front). Some public and private systems are consolidating to save costs and enhance capability. But capital infusions will be needed to avoid the challenge of having to “pay as you go.”

      This is something that central banks might want to consider as they contemplate monetary policy. There is a cost to a lower-for-longer policy; it might be outweighed by the benefits, but this equation needs constant rebalancing.

    • Speaking of central banks, the May employment report changed expectations of the Fed tightening monetary policy at the June or July meeting. All eyes are on Janet Yellen’s speech next week and incoming economic reports prior to the July meeting. We’ll have a complete preview of the June meeting in next week’s commentary.

      If future reports suggest that the May employment data were a temporary deviation and the Fed pulls the trigger, some emerging markets will be pleased at this prospect, as it will tend to strengthen the U.S. dollar and improve terms of trade for everyone else. But for places like Hong Kong, which has a currency peg against the dollar, the Fed’s tightening becomes their tightening. Economic growth in Hong Kong remains positive, but exports have fallen by 7% over the last year and property prices finally seem to have peaked. No other economy in the world illustrates so acutely the dichotomy between the U.S. and China.

    • Food was never far from my thoughts. The breakneck pace didn’t afford a lot of time to actually eat, but I had a few treats. Thanks to Howard for the egg custard on the way back from Macau, to Robert for the traditional English breakfast in Gloucester, and to Julie for the wonderful Hubei lunch in Beijing. Guy, next time I am in London, we’ll get to your butcher shop and have that barbecue showdown: Yanks versus Kiwis.

      I’m back in Washington this week for more consultations with colleagues and policy makers. Compared with recent travels, the 98-minute flight seemed like a walk in the park. And thank God I didn’t have to clear customs again.

Greece: Postponing the Uncomfortable

      European officials made sure Greece stays away from the headlines this summer. With a significant payment due at the end of the month, the parties to Greek financial negotiations seemed headed for another round of potentially stressful discussions. But quite unexpectedly, they reached an agreement weeks before the deadline.

      Under the latest deal, Greece secured €10.3 billion financing, of which €7.5 billion would be disbursed in June and the rest in September. Furthermore, the Eurogroup also agreed that partial debt relief may be offered after 2018, based on a review of required economic reforms and an assessment of debt sustainability.

      In return for the bailout, Greece agreed to an additional €5.4 billion (3.1% of gross domestic product, or GDP) of fiscal tightening over the next three years — on top of the 3% of GDP in fiscal restraint it agreed to for this year. If this latest round of tightening is insufficient to push the primary budget surplus to 3.5%, additional contingency measures worth 2% of GDP would be automatically implemented.

      Aside from reducing uncertainty and allowing the government to pay its arrears, the deal provides little succor to the Greek economy, which is expected to contract by another 1% this year. Aggressive spending cuts, tax increases, economic uncertainty and pension cuts continue to be a drag on growth. The bulk of the new funding would go toward paying the official creditors, not stimulating the economy.

      Clarity was expected from the European Central Bank (ECB) at its latest meeting over whether it may now accept Greek government bonds as collateral or buy them under its asset purchases. But the ECB disappointed. The issue of collateral is crucial, since local banks are unable to pledge Greek bonds with the ECB and are forced to rely on the costlier emergency liquidity assistance.

      Current policies are antithetical to growth in the near term; reforms take time to deliver growth while austerity bites immediately. The absence of growth makes the already over-ambitious primary surplus target of 3.5% of GDP virtually unattainable. The International Monetary Fund (IMF) has been at pains to highlight this.

      The IMF has broken ranks with the European negotiators over the last few months and advocated further debt relief, since the current debt burden is unsustainable. The ratio of public debt to GDP exceeds 180% and is unlikely to come down, given negative GDP growth and a large fiscal deficit.

      However, the fund did sign the deal, settling for a promise of conditional debt relief post-2018. The British referendum on its EU membership and the political difficulties of German Chancellor Angela Merkel likely forced the IMF’s hand. A feud would have boosted the likelihood of the British voting to leave the increasingly unpopular Union, while Merkel would have faced the wrath of voters wary of giving Greece more money.

      At the same time, the IMF did not provide new funding and will wait until the end of this year to reassess the debt sustainability and progress on reforms. A successful review may mean another €2 billion for Greece.

      Politicians have once again kicked the can down the road, buying more time — which can be a useful strategy to tire out the markets. However, stress postponed is not stress reduced. The parties may be back at the bargaining table before too long.

June Is Off the Table

      The headlines of the May employment report are, needless to say, disappointing. The key takeaway is that the June 14-15 Federal Open Market Committee will most likely end without a change in the federal funds rate.

      The unemployment rate fell 0.3 percentage points to 4.7%, which sounds good on the surface but came about for the wrong reasons. Although the number of unemployed persons dropped in May, the reduction in the labor force participation rate (62.6% in May) brought the jobless rate down. The texture of employment also took a step back: part-time employment rose 468,000 in May, the largest increase since September 2012.

      The dramatic slowing of payroll employment gains to only 38,000 in May (which is partly exaggerated by the striking 35,000 Verizon workers) stands out. Downward revisions of hiring in each of the prior two months accounted for a loss of 59,000 jobs. All in, job gains indicate a sharp decelerating trend, even after discounting for temporary striking employees.

      Details of the report show widespread weakness. In the goods sector, the mining component posted job losses related to the energy industry’s woes. Hiring in both the construction and factory sectors fell in May. Private sector employment rose only 61,000 last month; of these jobs, a large percentage of hiring occurred in the health care sector (46,000). All other major categories showed declines or small gains. Hourly earnings increased 0.2% in May, leaving the year-to-year increase at 2.5%.

      Prior to today’s employment report, the preponderance of economic evidence supported expectations of a higher policy rate at the June 14-15 FOMC meeting. Fed rhetoric also voiced a similar opinion. The only impediment seemed to be the Brexit referendum on June 23, which will be a source of market uncertainty.

    But the May employment data takes a tightening move off the table this month. Analysts inside and outside the Fed will have to determine whether the May employment numbers are an aberration. The answer to that question will determine whether or not the July 26-27 FOMC gathering is a “live” meeting.


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