Coppola Comment

Global trade is awful. Really, it is. For the last five years, trade volumes have been growing at their slowest sustained rate since the early 1980s. Here's a horrible chart from the World Trade Organisation's latest forecast: And in the last year, things have got worse: Import demand of developing economies fell 3.2% in Q1 before staging a partial recovery of 1.5% in Q2.  Meanwhile, developed economies recorded positive import growth of 0.8% in Q1 and negative growth of -0.8% in Q2.  Overall, world imports stagnated in the first half of 2016, falling 1.0% in Q1 and rising 0.2% in Q2.  This translated into weak demand for exports of both developed and developing economies.  For the year-to-date, world trade has been essentially flat, with the average of exports and imports in Q1 and Q2 declining 0.3% relative to last year. Oh great. The WTO's chart shows that flat trade eventually translates into flat growth. And as this chart from the World Bank shows, growth is

This chart has been doing the rounds on Twitter (h/t @dbcurren) . It shows manufacturing employment in the USA.  See that huge drop? That's the drain of manufacturing jobs to South East Asia. And see that uptick since 2010, that appears to be tailing off? That's the return of manufacturing jobs to the USA. What they call "reshoring". Reshoring is hype, isn't it? Related reading U.S. reshoring: over before it began? - ATKearney (pdf)

Japan has just introduced negative rates on reserves, following the example of the Riksbank, the Danish National Bank, the ECB and the Swiss National Bank. The Bank of Japan has of course been doing QE in very large amounts for quite some time now, and interest rates have been close to zero for a long time. But this is its first experiment with negative rates. The new negative rate framework is complicated, to say the least. The Bank of Japan has helpfully produced a pretty picture to explain it: The bottom tier is a "basic balance" which is the existing reserve level in the banking system: The average outstanding balance of current account, which each financial institution held during benchmark reserve maintenance periods from January 2015 to December 2015, corresponds to the existing balance and will be regarded as the basic balance to which a positive interest rate of 0.1 percent will be applied. So existing reserves will (overall) continue to bear posi

Daiwa Securities has forecast Armageddon. They say that over-investment in China in recent years has created a debt bubble so great that Chinese authorities would not able to manage its collapse, resulting in a debt deflationary spiral which would make 2008 look like a walk in the park. Such a meltdown would, in their words, "send the global economy into a tailspin". But they also outline another scenario, in which China's economy undergoes a nasty, possibly prolonged recession, from which it will emerge with lower growth. Which of these scenarios will play out? Well, as I discuss in my latest Forbes post, it really depends what Chinese authorities do. They insist that "everything is under control". But are they actually in the wrong trousers? Read my analysis and conclusions here . Related reading: Never mind Greece, look at China Lessons for China from Japan China's economy: no collapse, but it's serious and so are the politics - Georg

(But that doesn't mean we don't have a problem). Deutsche Bank has frightened everyone by  warning that  if China sold substantial quantities of US Treasuries (USTs) to support the yuan, this would amount to a substantial tightening of US monetary policy. The reason why China accumulated USTs in the first place was because of its trade surplus: The excess of exports over import sucked dollars into China, where the People’s Bank of China (PBoC) exchanged them for domestic currency (yuan). The PBoC therefore acquired large amounts of dollars, which it stored in the form of USTs. By doing so, it took USTs out of circulation and returned to the world economy the dollars that had been sucked into China. This can be regarded as a form of dollar quantitative easing (QE). Therefore, Deutsche Bank argues, if PBoC sells its USTs, this amounts to undoing QE. But it’s not that simple..... To read the rest of this Forbes post, click here .

While all eyes are focused on Greece, there is a potentially far more important crash going on. Via Sober Look comes this pair of charts: China's stock market is crashing. It's very evidently a bubble bursting. The question is, what will be the knock-on effect to the Chinese economy, and indeed to the whole of South East Asia, Brutal sell-offs of this kind are rarely without economic cost, especially when the bubble is debt financed (as this one is). I can't see this ending well. Related reading: China stocks are battered anew - WSJ

The Economist has an interesting graphic. Here are the world's 10 biggest banks year by year since 2004, apparently: Umm, not quite. This graphic actually shows the banks with the largest amount of shareholders' equity (Tier1 capital) in US$. It says nothing at all about the absolute size of these banks in assets, and since the Tier1 capital is expressed in dollars rather than as a percentage of assets, it says absolutely nothing about the safety of these banks either. Cross-checking the figures for 2013 against other metrics gives interesting results. Relbank reports that by assets, Britain's HSBC is the second largest bank in the world , but The Economist's list has HSBC in fifth place by Tier 1 capital. So it appears that its capital is deficient relative to China Construction Bank, JP Morgan and Bank of America. But the accounting treatment affects the definition of assets. In particular, there are significant differences between US GAAP and IFRS regarding t

Scott Sumner has been reading Piketty . And in the first of (apparently) several posts he picks Piketty apart, starting with this passage: "In my view, there is absolutely no doubt that the increase of inequality in United States contributed to the nation’s financial instability. The reason is simple: one consequence of increasing inequality was virtual stagnation of the purchasing power of the lower and middle classes in the United States, which inevitably made it more likely that modest households would take on debt, especially since unscrupulous banks and financial intermediaries, freed from regulation and eager to earn good yields on the enormous savings injected into the system by the well-to-do, offered credit on increasingly generous terms." "Where does one begin?" cries Sumner. And he then proceeds to give five reasons why this particular passage is wrong: "1.  In my view there is plenty of doubt as to whether inequality contributed to the crisis

At Forbes, I explain how monetary policy and the control of the US dollar is actually shared between the Fed and the People's Bank of China: There has been a sort of trade war going on between the US and China for a long time. It surfaces briefly during election campaigns – remember  Mitt Romney promising  to end China’s “currency manipulation”? But the rest of the time it simmers coldly under the surface. The chief protagonists in this war are the two central banks – the Federal Reserve and the People’s  Bank of China  (PBOC). And the principal weapons are US dollars and US Treasuries (USTs). Read the whole post here .