It’s easy to get lost bouncing from one doom-laden headline to another, whether it’s Deutsche Bank woes, protests in Hong Kong, or bond market jitters. So this week we present podcasts synthesising the best research on the biggest issues of the day. Ever wondered what were the common traits of the financial crises that have hit large economies over the past two hundred years? Well, we have just the podcast for you – according to former banker Richard Vague, it turns out that the answer is real estate debt problems coupled with poor current account dynamics.
This puts China, rather than Europe, at the top of the worry list, and so it’s there that we turn with our second podcast. China watcher Carl Walter suggests that President Xi is engulfed with multiple crises which are being kept out of the domestic media spotlight.
On Europe, Brookings have an excellent podcast that highlights the impressive track-record of Christine Lagarde as IMF chief. If she is able to replicate her track record in her potential new role as ECB president, then not only could transition risk be low as Draghi steps down, but she could also help the EU assert its global power.
Finally, we have two podcasts that answers two perennial questions. What make countries rich? And what makes start-ups successful? Answering the first, Dr. Yuen Yuen Ang, a professor at the University of Michigan, takes a systems approach and finds that ‘directed improvisation’ is critical for countries. Deng Xiaoping did this with China, but Xi is reversing it. Meanwhile, Michael Bloomberg discusses the importance of execution and hiring experienced staff as the swing factor for the success of start-ups.
Finally, for some life advice, check out my latest podcast: Simple Truths On Love, Life and Money According To Oscar Wilde.
“A Brief History of Doom: Two Hundred Years of Financial Crises” (New Books in Economics, 37 mins)
Over the past 200 years, the top 6 countries in the World (accounting for 50% of World GDP) have endured 43 crises. In his new book, Richard Vague shows that they all share a similar cause: a rapid private debt accumulation and compromised credit standards in real estate. The importance of real estate lies in its scale. The US has $30 trillion private debt, compared to $20 trillion of government debt, and half of that is in real estate. Small adverse swings in debt valuations could therefore be catastrophic. Surprisingly, government debt levels tend to give counter-intuitive signals. For example, government debt in Spain in the run-up to the 2008 crisis actually improved by 13% as a share of GDP. Vague did find one factor that helped offset private debt risk: a significant current account surplus of at least 10% of GDP. As for today, he finds only small pockets of similar debt issues, largely in Asia, and he doesn’t see any major systemic threats for now. All his analysis and data is freely available at https://www.bankingcrisis.org/
Why does this matter? Since the 2008 global financial crisis and the 2012 European crisis, there’s been constant predictions of debt crises, but this provides some analytical thinking to identifying crisis factors. We need to watch real estate debt and current account balances, which make Asia look most vulnerable.
Middle Kingdom Microscope (Grant’s Current Yield Podcast, 30 mins)
The podcast features an interview of Carl Walter. He’s a veteran China watcher, having spent over twenty years in Beijing. He argues President Xi is engulfed by problems. These include the trade war with the US, Hong Kong unrest, an economy that is slowly plunging, a huge debt problem, and now a surge in illegal organ harvesting. Many in the region are concerned about the militarisation of the South China Sea, which breaks the 2016 agreement with President Obama. Walter highlights the failure of Baoshang Bank, which despite being small has $80 billion of assets in a banking sector of $40 trillion and is causing trouble throughout the interbank market (at 8 mins in). This reveals the fragility of the banking system. It is the biggest in the World, with total assets representing 47% of World GDP and a high concentration in the top four banks. Part of the challenge of watching China is the lack of information transparency. Walter argues that even the senior leadership of China has neither precise data nor an interest in knowing how the economy is performing. The system is increasingly based on telling the official story and showing loyalty.
Why does this matter? A stark reminder that all is not well in China, despite official rhetoric to the contrary. This suggests that under President Xi, China appears to be becoming more fragile.
“How China Escaped the Poverty Trap” (New Books in Economics, 41 mins)
Conventional economic development theory gets stuck in circular reasoning: good institutions generate economic development, but economic development is necessary to generate good institutions. In this podcast, Dr Yuen Yuen Ang from the University of Michigan takes an alternative systems approach, finding that countries that take advantage of their weaknesses and deploy ‘directed improvisation’ are the ones that develop. She uses China as a template in her new book revealing how Chinese leader Deng Xiaoping introduced democratising reforms in the 1980s. These included the delegation of powers to local provinces, accountability to economic targets, competition between provinces, and term limits. Whilst China still has no elections, it seems leaders grasped that autocracy isn’t sustainable long term. Today under President Xi Jinping, however, those reforms are being reversed, which could prove negative for China’s growth model.
Why does this matter? There’s a global trend towards strongman dictatorial politics that is partly inspired by China’s autocratic model. Yuen Ang’s work suggests that aspiring dictators are using the wrong Chinese leader as their template for economic success – it should be Deng not Xi.
“How will Christine Lagarde Lead the European Central Bank?”(The Current by Brookings Institution, 11 mins)
Perhaps the most insightful piece currently out there discussing the probable impact of Christine Lagarde as potential new ECB president. Brooking’s Senior Fellow Douglas Rediker argues that at the IMF, Lagarde turned morale around after Dominique Strauss-Kahn’s unstable tenure. She elevated the IMF to the centre of the global policy nexus by leading G20 summits. She also wasn’t afraid to take on politically sensitive topics like corruption, the elimination of which she introduced as a central target for the IMF. Should she become ECB President, she will be faced with weak Euro-area growth and will additionally need to tackle financial stability issues (e.g. weak banks). Much of this role will be political in nature, which suggests she is well placed to take on the role.
Why does this matter? Running the ECB is a complex and political role, which Lagarde seems well qualified to take on. This reduces the chances of a policy error. The podcast didn’t discuss this directly, but Lagarde could also help the process of the EU asserting its global power along with the US and China.
Lessons from Billionaire Michael Bloomberg (We Study Billionaires, 31 mins)
The podcast analyses interviews of Michael Bloomberg to extract his main principles of business. A core one is to not spend too much time constructing long term plans as the future is extremely uncertain. Rather, focus on ‘the now’ and put in the hard work. Early on in his career, Bloomberg was the first one in and the last one out, which gave him exposure to clients and opportunities others missed. He sees failure as periods for growth, prefers to learn by doing, and focuses on working with people smarter than him. Indeed, when he launched his business, he spent the early days focused on finding the right people to hire much more than building product. He views having good business ideas as common, but sees good execution as rare, which may explain the failure of many start-ups. He’s surprised that young entrepreneurs don’t hire older people, who would bring vital experience to the table.
Why does this matter? Whether we have our own start-up or invest in start-ups, it may be tempting to focus on the idea or product, but Bloomberg’s tactics may be the more useful criteria for indicating the likelihood of success.
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