L'an prochain à Monte-Carlo? (*)

(*) Translates as: Next year in Monte Carlo?

A thoroughly ineffectual President, who lied his way into office and who had become extremely unpopular well before mid-term, indeed breaking unpopularity records as reality progressively caught on with him, is landed with a surprise large-scale terrorist attack, which gives him a huge popularity boost. Hollande, right? Yes, correct, as this graphic confirms:

But think, with hindsight, this is also close to what happened to one G.W. Bush after 9/11:

and ... the rest is history. To keep that external conflict-induced popularity, Bush went on to start a war with the first villain available in the Middle-East, Iraq, even though it was totally unrelated to 9/11 and a deep foe of Al Qaeda.

Now, G.W. Bush started from a much higher popularity level than Hollande, who is truly desperate, garnering not even 20% job approval in the months before Charlie Hebdo was attacked, and who needs any additional boost he can get before the next presidential election in a little more than two years.

So, a relevant question has suddenly become: who will France invade next year?

It has to be close to home, as the French are used to shrug off their numerous military expeditions in Africa, which never boost any incumbent's popularity, however spectacular they may be.

If I were Luxembourg, Andorra or Monaco, I'd start worrying.

If you teach economics, this may be the most important book published in 2014

I once taught economic policy in France to civil servants for several years in a row. Of course, I always considered that the most important part of the course was the one about the Solow model and productivity growth. As Paul Krugman once pithily and famously put it: "Productivity isn’t everything, but in the long-run it’s almost everything." (*) If I had been restricted to giving only one lecture in the course, this would be the one I would have given.

What was surprising is that, a couple of times, I stood in for colleagues towards year end, professional civil servants who taught the same course than I did but had unexpectedly had to quit teaching, having been called to a higher job, and then I discovered that they had skipped this all-important bit, and that I did have in fact to give their students that lecture.

That set me thinking and I made a quick survey of soft economics textbooks, which showed me that growth theory was not always, even seldom, taught to non-economics majors. So not only was productivity growth all-important, it was also under-taught.   

In the medium term, the main driver of productivity growth, of course, is technological progress, something which happens in a very unruly and haphazard manner - and cannot be centrally planned, contrary a misconception quite common among politicians and mandarins. To make that very fundamental point clear, I used to give out to students a short but quite illuminating text, Innovation, Components and Complements [PDF] written in 2003 by the great Hal Varian, who authored in the 1980s what is still the standard graduate Microeconomics textbook and then went on to become Google's chief economist.

So I was delighted to stumble this month on another text, How we got to now, [WSJ review, NYT review] book-sized this time but extremely entertaining, which raises nearly all the important questions about innovation while being very accessible, a compulsive,  beach-compatible and exhilarating read.  

Its author, Steven Johnson, a polymath with a literary degree, has already written several popular books about the history of technological innovation, but this one, companion to a PBS series, is the most thought-out and pedagogical. If I was still teaching, it would be on the top of the required holiday readings list for students, probably together with Tim Harford's Adapt. 

Highly recommended.

(*) The Age of Diminished Expectations, 1994

Misunderstanding China, an ongoing topic

China is very large by most geographical standards. It is the most populous country on the planet. It now has arguably the largest single national economy - besides having an extremely ancient and distinct culture. So, well, it sort of does matter.

So, you would think that basic facts about China would be rather well known.

Think again. Misunderstanding it seems to be one of the most commonplace things on earth. Everyday journalists, politicians of all hues, academics of every possible kind of tenure, plus a huge number of self-declared pundits sprouting every kind of improbable brain colour or texture, brandish unchecked facts and gratuitous theories about China without having even bothered to check the country's all-important demographics and having tried to understand what they actually mean.

I was especially reminded of this yesterday when, looking for something that would fit into my new treadmill's narrow pulpit, I took out from a dark corner at the bottom of my shelves a book from 2005, which I had once unwisely bought on the strength of its enticing title (What Does China Think?) and of its flip-jacket recommendations (notably Chris Patten's - may he be cursed for an appropriate number of generations) then soon banished to down there.

It perfectly exemplified that what most "experts" fail to understand is that China will be old before it actually gets rich. Because they have not even heard of basic economic growth theory and, most of the time, do not even know what a partial derivative is (which makes them unable to understand the concept of productivity), nor have looked at what spectacularly happened to Japan post-1990 (blue line), or is now happening to Europe (green) though less to the more adaptable US (brown),

 

they cannot conceive that China's technocratic leadership, in front of all that well-grounded evidence, decided long ago that what really mattered was maximising per capita GDP in 2022 or whereabouts, when what is usually known as the 'Lewis turning point' is scheduled to occur: 

(This last graph is from one of Bei Xu's numerous papers for Natixis on the Chinese economy, all of them greatly recommended).    

So, yes, China is in a hurry to get rich and powerful - before declining, as a country's total factor productivity is unambiguously negatively linked to population ageing. 

This being a heavily managed economy, where local authorities play the role venture capitalists and institutional  investors play in genuine market economies, there are thus probably no worries to be had about Chinese economic growth in the next few years - though the obvious danger is that they try to artificially beef up growth in the run-up to 2022, a bit like what Japan spontaneously did in the run-up to 1990, to disastrous later effects.

As to why today's China - in spite of its huge frustraded hordes of angry nationalist young males created by the single child policies - is so unagressive compared to what Wilhelmine Germany used to be at a comparable economic development stage a hundred years ago, look no further: China could sure enjoy the sound of marching boots today and bask in an orgy of nationalism, but in 20 years' time, it will have to rely mostly on slipper-wearing pensioners for its defense. No enticement to go out, conquer and make enemies there.    

Having at last renounced Twitter and all his works and pomps, I will now endeavour to start posting seriously again on selected financial and economic misconceptions, a bottomless treasure trove of topics. I do apologize for the 18 month hiatus to the surprisingly high number of you that, according to Google, seem to have bothered to check this soon abandoned blog. I had no idea.  

After Cyprus: what time the short squeeze?

There has been for the last 24 hours widespread hysteria among the commenting classes about the supposed Lehman II, The Sequel-type significance of the 6.5% to 9.9% haircut imposed this week-end on Cypriot account holders.

According to their myopic and apocalyptic reading, a moderate haircut on a few people who were getting large deposit rates (6% etc) for the best part of the last 3 years in order to compensate for the obvious and well-known risk of leaving their money in long-economically bankrupt Cypriot banks, will in fact trigger the mother of all bank runs in Southern Europe.

Obviously, the fact that the Eurozone crisis is foremost a political and institutional crisis, not a financial one, has been lost on them. I can understand the boringly traditional - I have seen it at work so many times - North American incomprehension at the complicated workings of a Continent with not one but - how mind-boggling! - several different national states. This failure to encompass European political issues basically makes Americans today routinely translate the Cyprus thing as the pan-European equivalent of the FDIC suddenly closing down for the whole of the US.

Well, as those guys probably will find out quickly enough next week, this ain't the US and this ain't the FDIC. Sell on Monday morning and get short-squeezed by XXXday afternoon is probably how it will run again, especially as the bank run in Southern Europe already happened a few years ago, remember those Target 2 balances? And getting short on old news is one of the surest recipes for disaster I know.    

In fact, the EU-wide decision of not getting European taxpayers to pay for the governance-free, intentional free-riding of another midget-state is probably the best medium-term news to come out of Brussels for a long, long time and shows some realism finally creeping into what has been so far a globally denialist management of the crisis. It at last shows national states that their responsibility actually starts somewhere and that not everything is permissible for ever, a healthy warning.

Greece was peripheral to European construction, and European taxpayers have paid dearly, but Cyprus is not even that. Frankly, who cares about it at all, except because we have to, thanks to some reckless accession treaty we once signed to please ... Greece. And as to the domestic political consequences of  the marginal difference of some "ordinary" Cypriots being taxed 6.5% of their cash holdings, instead of all law-abiding "ordinary" Cypriots - i.e. taxpayers - getting taxed, well, who could care? 

Did I hear the words "exchange rate policy"?

A quick reminder that anyone mad enough to want to meddle with the world's major currency pair, the euro vs the dollar, ought to be locked up for life in a lunatic asylum.

The last time a "concerted exchange rate policy" was put in place on the dollar was at the Louvre agreement in February 1987. G7 countries decided then that the dollar was "low enough" and that they would intervene if it did go any further.

The problem was that, in retrospect, it turned out to be not that low at all. And since it was "blocked" on the way down, then something else had to give, namely interest rates.  So up they went. 10y Treasuries, which yielded 7% in January, went down 17% in price, to a yield of 9.50% in late September. Then everything exploded and yields on Treasuries climbed up to 11% intraday on October 19th, causing the Dow to drop by an unprecedented 22.5% on that day.

And that is not all, since among the Louvre agreement's long term casualties was Japan, forced to keep domestic interest rates low in spite of a huge asset bubble, from which it has not yet recovered... 

Poll shows that the core values of French society are 1) envy, 2) distrust, 3) greed and 4) xenophobia.

What a beautiful country! Le Monde commissioned a poll from Ipsos along lines not that different from those of the World Values Survey. Full results are available here (in French) and they sure are a depressing read. This, basically, is the same society that gave overwhelming support to Vichy France, there can be no mistake about it. Nearly 70 years of economic growth since the end of WWII have brought just one small change, namely which semitic people the French have decided to hate: Jews are now sort of OK but Muslims (a nickname for Arabs) are the new arch-enemy.

While other societies can have greed without too much envy, the latter here is foremost. The French profess to hate money and take a moralising view towards it: 82 % agree to the proposition that "money has corrupted the traditional values of French society". But that is just about other people's money since

1. 71 % of them also agree to the proposition that "it is a good thing to want to earn a lot of money"
2. 58 % agree to "in order have social justice, money should be taken from the rich and given to the poor".

Now, the use of the conditional in proposition 2 is weird, but highly telling, since France is the country that assigns the largest share of GDP (around 1/3) to social transfers. Basically, it shows the strength of moral imperatives inherited from both catholic and marxist religions.

Please note that those who agreed to both propositions (up to 13% of French population) look like sort of uneasy about their relative status (too poor to be taxed or too rich to be left untaxed). I can't help but wish them an uneasy sleep...  

Also, but that's nothing new, 78% distrust deeply other people - though only 62% think their politicians are corrupt. So that should indicate that they think that ordinary people are more corrupt than politicians. And then, 65% want to increase the power of French politicians over Brussel's... A logical bunch they sure are.

And as to foreigners, 70% think there are "too many of them in France" although France is quite below the European, let alone OECD, average for the proportion of foreign-born residents. Particular spite is directed toward Muslims, which 74% deem intolerant.

Oh, and 87% think France needs a strong leader to put everything back in order. Marshall Philippe Pétain was not immediately available for comment. 

50 years of Françallemagne

The Elysée Treaty turned 50 this week, a grand occasion for official hypocrisy, reporting ineptitude and a garish mixture of flonflons and umpah. Here is my attempt to make some sense of what is being celebrated.

France always tried to think of itself as a Great Power on the world stage, which is all the more surprising since  it spent most of its modern life as clearly the underdog  in the (numerous) fights it picked up: with the Habsburgs in the 16th and 17th centuries, with Britain in the 18th century, with everyone in Europe under Napoleon and finally, to tragic consequences, with Germany after 1870, a silly border dispute that caused two world wars and resulted in 60 million deaths or so.

But then, in under twenty years, in spite of all the noise it kept making, it clearly became  a dwarf  in international politics. There were three stages in that fall:

• first, 1940-45, when its legitimate government, Vichy's Etat français, sank into collaboration with Nazi Germany before being swept away with it. To cover-up, De Gaulle started the official lie that France was part of the victors, with a seat on the UN's Security Council, which prevented France from looking hard at its fabric and has greatly concurred to keep-it reform-free.  

• second, Suez in 1956, when the United States told it, as well as Britain and Israel, to pack up their field victory, go play in their room and stop bothering grown-ups. Suez  was a defining moment for all three countries, all of them wowing for such a thing to nether happen again to them, but choosing widely different paths towards that goal. Britain and Israel cozied up to the US, hence the "special relationship", while France decided to go it alone and build its own nuclear might.  

• and finally when it gave up the last remnant of its colonial Empire, Algeria, in 1962. It was then left as a moderately significant European country, a tad larger than the European average, for sure, but with little real clout left.

Nevertheless, it went on pretending being a world power, thanks to two crutches:

• blackmailing the US, a "bribe me or else" strategy initiated by De Gaulle, which was particularly effective and credible in view of the impressive size of the "enemy within" in France, namely a huge and highly organized French Communist Party, which used to and collect between 20 and 25% of the popular vote and to this day has never been blacklisted by French society as an enemy of democracy.

• making use to its own advantage of Germany's terrible criminal record. In the 1950s, the FRG, slightly more populated than France but economically much better organized, was denied a formal role in international institutions because of its past. It desperately wanted a new, clean reputation, and being friends with its former arch-enemy seemed a no-brainer to that effect. Moreover it refused on principle, for commendable therapeutic purposes, to do anything that could in any way remind of its pre-1945 militarism. It was thus clearly anxious to acquire an ally that could speak for it on the international stage and eventually use force, which it had so thoroughly renounced. It thus went out of its way to please France, claimed to be its equal or even its vassal, paid for every French whim, even the most harmful (like the absurd Common Agricultural Policy, which ate up most of the EU's budget for 35 years in subventions to mainly French farmers and ... did in fact a lot of long term harm to France by keeping its agriculture backward) and allowed France to continue to travelling first class with a second class ticket both militarily and diplomatically.

The Elysée Treaty of 1963 is cynical transcript of those policy imperatives, a mere consequence of the balance of power that resulted from 1945, 1956 and 1962. So, is there a lot to celebrate? Well, not really, as its vaunted achievement, peace between France and Germany, was brought not by it but rather by a general disgust for war after the orgy of killings that took place in WWII, and kept by demographic forces, foremost of which is Germany's aging, and by economic integration.