Bernard's Top 10: Ready for another taper tantrum?; Why steel prices are slumping; The strange decline of global trade; Will wages and jobs recover as the robots take over?; Techno-delfation may keep rates low; Clarke and Dawe

Here’s my Top 10 items from around the Internet over the last week or so. As always, we welcome your additions in the comments below or via email to

See all previous Top 10s here.

My must read is #5 from Andy Haldane on the nature of wages, work and jobs in the age of the machine.

1. Remember the taper tantrum? – The world’s financial markets are in a delicate state and are about to be tested in a way they haven’t been before.

The US Federal Reserve looks set to increase interest rates from almost zero for the first time in almost a decade in about a month’s time.

There are large chunks of the world’s financial markets that have never had to adjust or think about such a thing, particularly in emerging markets, that have loaded up on huge dollops of easy US dollar denominated debt.

Now they’re about to find out if they can cope with higher interest rates and a higher US dollar at the same time as their economies are slowing.

What could possibly go wrong?

We had a sneak preview of this in mid-2013 when the Fed’s decision to wind down its Quantitative Easing programme unleashed severe volatility.

There are some early warning signs from the bowels of the world’s debt markets that it might not go smoothly.

Bloomberg reports the premium charged for the riskiest type of corporate bonds relative to safer bonds has widened to its highest since the dark days of 2009. The chart below tells the story. Also The Telegraph reports on the risks of liquidity in bond markets drying up for all sorts of reasons, including that central banks and regulators have bought large amounts of bonds and then virtually banned banks from holding and trading them.

Investors from retirees to pension and insurance companies are more tied to the fate of U.S. corporations than ever after buying trillions of dollars of their debt over the past seven years.

Companies are about to face their biggest test in years, when the Fed raises interest rates from about zero, where they’ve been since 2008. The low-rate policies were intended to help these corporations borrow enough to hire more employees, pay higher salaries, allow consumers to buy more stuff and create a virtuous cycle. Perhaps that happened to some extent.

But plenty of companies simply got fat with debt without improving their revenues. Now they are paying the price, and the economy may have to foot part of the bill.


2. The price of steel – This is worth watching to see how China’s smoke-stack industries are faring and to see what Australia will soon experience, given it produces the iron ore and coal used to power China’s steel mills.

It’s not good.

Bloomberg reports steel futures prices have dropped 40% over the last year. The story is as much about supply as demand. Iron ore prices also plunged again overnight.

Forecasts for a boom in Chinese consumption helped spur a rise in production that left the segment with a massive glut. The successful realization of economic rebalancing in China, meanwhile, necessarily entails a material slowdown in that nation’s demand for steel.

Macquarie observes that global steel consumption has contracted on an annual basis throughout 2015.

“With 1.6 billion tonnes of consumption globally, steel remains the lynchpin of industrial growth,” wrote Hamilton. “However, the growth part of this equation is an increasing problem, and not only in China.”

India, which has the potential to buoy demand for steel, is also contributing significantly to supply growth. Bloomberg Intelligence’s Yi Zhu notes that 37 million metric tons of production capacity in India are currently under construction or in planning to be added.

3. Cheap money and perversity – One fascinating point is made in this article about the steel glut. Cheap money actually makes over-capacity worse. That means that all this money printing that is going on right now is helping to create deflation in the prices of goods made in these sorts of capital-intensive businesses. Talk about perverse.

Arguably, overcapacity across the commodity complex is a perverse side effect of years of near-zero interest rates and asset purchases by the Federal Reserve. Lower input prices, however, can have a silver lining. For example, the collapse in oil prices, in simple terms, represents a transfer of wealth from major oil conglomerates to consumers. The largest positive effects accrue to lower-income households that spend a heftier portion of take-home pay on energy costs.

“A world of cheap money not only sees new capacity built, it also means existing capacity doesn’t disappear,” explains Hamilton. “While most regions are well off their peak production levels over the last decade, permanent capacity closures have been few and far between.”

The old adage of “the best cure for low prices is low prices” hasn’t been able to come to fruition just yet, as low-cost credit has allowed even unprofitable production to be maintained—for now.

4. What on earth is happening to global trade? – It is one of the mysteries of the last two or three years. How is it that in an increasingly globalised world with still-growing emerging economies that global trade has started falling, both in value and volume terms.

Simon Evenett and Johannes Fritz from the London-based Centre for Economic Policy Research have written a piece over at VoxEU on the strange phenomena. It turns out there’s been quite a few trade restrictions introduced over the last year, although falling oil and other commodity prices are a factor.

I also wonder whether the shift from goods consumption to services is a factor.

World trade growth isn’t slowing down – the subject of a growing academic literature (Hoekman 2015); the latest available monthly data suggests that world trade has been contracting during 2015 in both volume and value terms. On average G20 exports have fallen 4.5% since world trade peaked in value in October 2014. 

5. ‘This time it could be different’ – I read and think a lot about how technology is changing the economy, wages and jobs. So a speech on the topic last week by Andy Haldane, the Chief Economist at the Bank of England, was the perfect thing to read.

He has some great insights and a whole lot of fresh research to bring to bear to the debate. Even he isn’t sure that the latest wave of productivity-enhancing technology will generate subsequent waves of higher wages and more job creation, as has happened for most of the last 250 years.

Here’s the release from the bank on the Haldane speech, but I’d simply recommend reading the full speech (click on this link).

Andy notes that arguments about “technological unemployment” – the idea that technological advance puts people out of work and bears down on wages – have been raging for centuries. According to Andy, most evidence shows that over the broad sweep of history technological progress has not damaged jobs but rather boosted wages: “Technology has enriched labour, not immiserated it.”

However, Andy notes that this broad pattern obscures the fact that there has an increasing skills premium has emerged with each passing wave of technological progress. This was especially the case in the late 20th century, as new machines such as computers began replacing not only physical but cognitive labour. He finds that each phase has eventually resulted in a “growing tree of rising skills, wages and productivity”.

But they have also been associated with a “hollowing out of this tree”. Indeed, this hollowing-out of jobs has “widened and deepened with each new technological wave”. This has resulted in a widening income gap between high- and low- skilled workers. Andy states: “By itself, a widening distribution of incomes need not imply any change in labour’s share of national income: in the past, technology’s impact on the labour share appears to have been broadly neutral. But this time could be different.” The question now is therefore whether the latest technological cycle will follow the pattern of its 18th and 19th century predecessors, where productivity gains eventually boost wages for all – or whether the hollowing out of employment, widening distribution of wages and fall in labour’s share of income are permanent.


6. The wage share – Haldane spends quite a bit of time looking at whether the rise of the machines will worsen or reverse the fall in the share of income going to wages over the last 30 years or so.

He’s not super confident it will get better. The charts below showing how productivity has diverged from wages is just devastating for those who argue all we need to do is improve productivity and the wages will follow…

Machines are becoming ever smarter, Andy notes. The Bank’s own calculations show that, over the course of the next several decades, many millions jobs in the UK could be at risk of automation, with those most at risk tending to be the lowest wage. As machines improve, he states: “the greater the likelihood that the space remaining for uniquely-human skills could shrink further”.

Andy states: “If these visions were to be realised, however futuristic this sounds, the labour market patterns of the past three centuries would shift to warp speed. If the option of skilling-up is no longer available, this increases the risk of large scale un- or under-employment. The wage premium for those occupying skilled positions could explode, further widening wage differentials. And labour’s share of the pie could fall even more dramatically than in the past. On this view, the tree would be so thoroughly hollowed-out that it may no longer be able to support itself.”

If technological progress reduces the bargaining power of labour relative to capital, Andy notes that “it would manifest itself in weaker than expected wage growth and a secular fall in the labour share of income over time, both of which we have seen in a number of countries”.

7. So what does it mean for interest rates? – So if there’s enormous downward pressure on wages and the wage share of income, what would happen to inflation and interest rates?

Haldane doesn’t mince words. They’ll stay super low. The implication of course is for everyone to go out there and borrow more to buy property because they can be sure of lower interest rates for longer….

It would be nice to see a speech from the Reserve Bank of New Zealand on this topic and what it might mean for interest rates. Remember that New Zealand’s OCR is a full 225 basis points higher than the Bank of England’s rate, even though Britain’s unemployment rate is 5.4% and New Zealand’s is 6.0%…

If technological progress reduces the bargaining power of labour relative to capital, Andy notes that “it would manifest itself in weaker than expected wage growth and a secular fall in the labour share of income over time, both of which we have seen in a number of countries”. The MPC’s current forecast assumes labour’s share of income reverts to its historical average, meaning that wages are expected to outpace productivity over the next few years.

While Andy agrees that this path is plausible, if labour’s bargaining power and share of income prove to be lower than in the past – as has been the case before and after the crisis in a number of countries – there is a different path possible. This would result in weaker wage growth and a “materially lower path for inflation than contained in November’s Inflation Report”, with CPI reaching 1.6% at the two year horizon.

Andy states: “That would put the balance of risks squarely towards a more protracted undershoot of the inflation target, even without any downdraught from external prices and demand.” Andy concludes: “Against that backdrop, my view is that the case for raising interest rates is still some way from being made. Whatever the reason, the economic aircraft appears to be losing speed on the runway. That is an awkward, indeed risky, time to be contemplating take-off.”

8. Robots could displace a third of jobsThe Guardian’s Heather Stuart reports on a 300 page BankofAmericaMerrillLynch report on how robots and new technology will transform the workplace in a fourth industrial revoluation. Remember. BOAML is no hotbed of communism. It’s an investment bank (that used to employ our Prime Minister),

“We are facing a paradigm shift which will change the way we live and work,” the authors say. “The pace of disruptive technological innovation has gone from linear to parabolic in recent years. Penetration of robots and artificial intelligence has hit every industry sector, and has become an integral part of our daily lives.”

However, this revolution could leave up to 35% of all workers in the UK, and 47% of those in the US, at risk of being displaced by technology over the next 20 years, according to Oxford University research cited in the report, with job losses likely to be concentrated at the bottom of the income scale.

“The trend is worrisome in markets like the US because many of the jobs created in recent years are low-paying, manual or services jobs which are generally considered ‘high risk’ for replacement,” the bank says.

“One major risk off the back of the take-up of robots and artificial intelligence is the potential for increasing labour polarisation, particularly for low-paying jobs such as service occupations, and a hollowing-out of middle income manual labour jobs.”

9. The two big risks – Bloomberg reports Credit Suisse has warned in its 2016 Global Outlook that two things could derail the global economy — a cut in Chinese investment spending and a rise in core inflation in America. The startling charts below tell the story.

And this (bolded) fact stunned me:

Chinese capital spending is bigger than U.S. consumer spending on goods.  This does not mean, however, that Chinese investment has supplanted the U.S. consumer as the engine of the global economy. The necessary qualifier here is that in the third quarter, real personal consumption expenditures on services in the U.S. were nearly double that of spending on goods.

10. Totally Clarke and Dawe with Scott Morrison. It seems GST needs to be put up up to 12.5%, before it gets put up to 15%.