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  • BeyondOverton Travel
    • Silk Road (1): If Turkey is in crisis, it’s not obvious visiting it
    • Silk Road (2): Could beautiful nature and ancient history create a false sense of entitlement?
    • Silk Road (3): Fast Car
    • Silk Road (4):We took a bus ride to Iran
    • Silk Road (5): Border bothers
    • Silk Road (6): Chevrolet Land
    • Silk Road (7): Free-roaming camels and wild horses
    • Silk Road (8): China West to East
    • Silk Road (9): I have not told half of what I saw
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  • g88kboy Travel
    • On the Silk Road
    • Bulgaria : The Chicken crossed the Road
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    • Georgia on my Mind
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    • Iran – The Curious Land
    • An American in Azerbaijan
    • Uzbekistan: Golden Teeth and Neon Signs
    • Kazakhstan: Thirty Sweating Seniors
    • China Part One – Pandas Are Extinct
    • China Part Two: My TED Talk (Deep Analysis)
    • Phillipines – They Relax, I (pretend to😉) Study
    • Singapore: flashing trees and a torrent of tears
    • Malaysia: That ain’t no croc, it’s a log
    • Brunei: The Instinctive Fight for Superior Domination
    • Phillipines: Hello Friend Again
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Category Archives: Uncategorized

A summary of Putin’s speech recognizing the independence of DNR/LNR

22 Tuesday Feb 2022

Posted by beyondoverton in Uncategorized

≈ Leave a comment

The speech is very long, more than 6000 words. There is no yet a full official English translation. There is partial one here: http://en.kremlin.ru/events/president/news/67828 About 2,500 words (the start of the speech) are about the common history between Russia and Ukraine beginning with “time immemorial” and ending with the Maidan situation in 2014. Then about 1,000 words are about what happened post Maidan and March 21 when, according to Putin, Ukraine adopted a new military strategy which is what triggered the current Russian response. Then, there are about 2,500 words on what exactly that strategy is. Finally, the actual decision: the declaration of the independence of DNR/LNR is about 100 words.

Whether one agrees with the speech or not is beside the point: Putin makes it clear where Russia is coming from and that this is not a random decision. I will spare you the details of history – ‘his story’ is always written by the victors and while we may know the ‘facts’, it is more difficult to fully know the nuances and context which is what really matters when we make a judgement. Here are a few quotes though:

“Since time immemorial, the people living in the south-west of what has historically been Russian land have called themselves Russians and Orthodox Christians.”

“
modern Ukraine was entirely created by Russia or, to be more precise, by Bolshevik, Communist Russia.”

This is not just about Ukraine, Putin is lamenting the dissolution of the whole Soviet Union:

“The September 1989 plenary session of the CPSU Central Committee approved a truly fatal document, the so-called ethnic policy of the party in modern conditions, the CPSU platform. It included the following provisions, I quote: “The republics of the USSR shall possess all the rights appropriate to their status as sovereign socialist states.””

But Putin’s issue is not so much with the fact that the Soviet Union does not exist any more (“our people who accepted the new geopolitical reality that took shape after the dissolution of the USSR, and recognised the new independent states.”) but with the way particularly Ukraine behaved in the aftermath (“it was striking how the Ukrainian authorities always preferred dealing with Russia in a way that ensured that they enjoy all the rights and privileges while remaining free from any obligations.”)

Putin reminds us in his speech that Russia “provided to Ukraine along with economic and trade preferences, the overall benefit for the Ukrainian budget in the period from 1991 to 2013 amounted to $250 billion.” What Russia got back was “Kiev tried to use dialogue with Russia as a bargaining chip in its relations with the West, using the threat of closer ties with Russia for blackmailing the West to secure preferences by claiming that otherwise Russia would have a bigger influence in Ukraine.” The culmination of that was Maidan’2014 “coup d’Ă©tat where…they received direct assistance from foreign states. “ But Maidan “did not bring Ukraine closer to democracy and progress
” but “into the abyss of civil war” and economic collapse.

It seems Russia’s patience brew over in March 2021 when Ukraine adopted a new Military Strategy which was “almost entirely devoted to confrontation with Russia aiming to draw foreign states into conflict with our country”. He quotes from that document claiming Ukraine has organized terrorist activities in “Russian Crimea and on the territory of Donbas”. Moreover, and what follows is the gist of why Russia is undertaking the present actions, “Ukraine is going to create its own nuclear weapons, and this is not empty bravado
it is only a matter of time
. We cannot but react to this real danger, especially since, I repeat, Western patrons can contribute to the emergence of such weapons in Ukraine”
” In recent years, under the pretext of exercises, military contingents of NATO countries have been almost constantly present on the territory of Ukraine. The command and control system of Ukrainian troops has already been integrated with NATO’s”. He goes into a lot more details on this latter point about how NATO is operating on the territory of Ukraine even though “Article 17 of the Constitution of Ukraine does not allow the deployment of foreign military bases on its territory.”

And the point about each country has the right to choose its own foreign policy alignment, “Yes, of course, each country has the right to choose its own security system, to conclude military alliances
.” But “…international instruments explicitly enshrine the principle of equal and indivisible security, which, as you know, includes obligations not to strengthen one’s security at the expense of the security of other States. I can refer here to the 1999 OSCE Charter for European Security, adopted in Istanbul, and to the OSCE Astana Declaration of 2010. In other words, the choice of security methods should not pose a threat to other states, and Ukraine’s accession to NATO is a direct threat to Russia’s security.”

The point about NATO being a defensive alliance: “they are trying to convince us time after time that NATO is a peace-loving and purely defensive alliance. Like, there are no threats to Russia. Again, they offer to take their word for it. But we are well aware of the real price of such words. In 1990, when the question of German reunification was discussed, the Soviet leadership was promised by the United States that there would be no extension of NATO’s jurisdiction or military presence by a single inch in the eastern direction. And that the unification of Germany will not lead to the expansion of the NATO military organization to the East. It’s a quote
 They spoke, gave verbal assurances, and everything turned out to be empty words. Later, we were assured that the accession of the countries of Central and Eastern Europe to NATO would only improve relations with Moscow, rid these countries of fears of a difficult historical legacy and even, moreover, create a belt of states friendly to Russia. Everything turned out to be exactly the opposite.”

This is in stark contrast to what Russia did: “Russia has fulfilled all its obligations, including the withdrawal of troops from Germany, from the states of Central and Eastern Europe and thereby made a huge contribution to overcoming the legacy of the Cold War. We have consistently proposed various options for cooperation, including in the format of the NATO-Russia Council and the OSCE.”

Naturally, “As a result, the Alliance and its military infrastructure went directly to Russia’s borders. This was one of the key causes of the crisis of European security, had the most negative impact on the entire system of international relations, led to the loss of mutual trust.”

And this: “In NATO documents, our country is officially explicitly declared the main threat to Euro-Atlantic security. And Ukraine will serve as a forward springboard for such a strike.”

He then goes on to describe that negotiating with the US has been a waste of time. “The dog barks, and the caravan goes”. Then he turns to the situation in Donbas and how Ukraine has failed to implement the Minsk Agreement. “On the contrary, it is trying to organize a blitzkrieg in the Donbas again, as it was already in 2014 and 2015.” So, he plays the human rights card, well known and practiced across the world by the US. He mentions the word genocide to 4m people “fighting for their elementary rights – to live on their land, to speak their language, to preserve their culture and traditions.”

And here it is: “How long can this tragedy last? How much longer can we tolerate this? Russia has done everything to preserve the territorial integrity of Ukraine, all these years persistently and patiently fought for the implementation of UN Security Council Resolution 2202 of February 17, 2015, which consolidated the Minsk Package of Measures of February 12, 2015 to resolve the situation in the Donbas.”

Basically, he is saying, enough is enough,  “In this regard, I consider it necessary to make a long-overdue decision to immediately recognize the independence and sovereignty of the Donetsk People’s Republic and the Lugansk People’s Republic.”

The big question is whether this is where it all ends. If it was not for the 2,500 words of historical preface about Ukraine being an integral part of Russia, I would have said that “Yes, this is where it ends: Russia simply wanted Ukraine to honour the Minsk Agreement and it had to do what it had to do given that Ukraine didn’t”. I am not so sure any more. But I doubt it Russia would go all the way unless it is provoked.

Money on the sidelines?

24 Wednesday Jun 2020

Posted by beyondoverton in Monetary Policy, Uncategorized

≈ Leave a comment

MMF AUM has grown by about $1.1Tn since the beginning of the year. This is not surprising given Fed’s balance sheet growth of $3Tn, bank deposits growth of $2Tn and bank reserves growth of $1.6Tn.

Source: FRED

None of this is money on the sidelines.

This is money which has already been accounted for. The Fed did a liquidity and duration swap – out of UST coupons and MBS (mostly, some corporate credit) into T-Bills/reserves/deposits. That’s all. Ok, maybe some of that money will eventually go into risky assets, but why should it? If it wanted to, it would have gone even before the Fed swap. Obviously, it is not moving at the moment. It would have declined naturally after tax payments go though, but that could possibly be delayed again.

The only thing we see, is a flattening of the growth rate. Total AUM is back to early May level, which is where bank reserves have declined to as well. Again, that’s not surprising.

Is there money on the sidelines?

Yes, the only way to create that is to increase private sector net financial assets. Normally, this is done when the private sector receives income in exchange for work. In the early 1980s, this mechanism, unfortunately stalled, and the majority of the private sector income was generated in exchange of debt, which is kind of like money on the sidelines (net cash ‘creation’ through leverage), but it is a doble-edged weapon as that debt has an expiration and a positive interest rate. We are working on both the former – debt forgiveness, and the latter – interest rates are close to 0% now.

The only entity that can create financial assets without the debt liability, ‘money on the sidelines’, is the government: the Fed only lends money into existence, the Treasury spends it. This is exactly what the US government has done with the CARES Act: the SBA PPP could provide for about $600Bn of loan forgiveness ($112Bn of which has gone through) while the Recovery Rebates provide for about $300Bn of direct family assistance, no strings attached. This is not permanent, but it is an important step towards UBI/Helicopter money. This could change everything.

Liquidity down, equities up, Fed around the corner

08 Monday Jun 2020

Posted by beyondoverton in Equity, Uncategorized

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Tags

Fed

Repo volumes are rising in a similar fashion to the beginning of the crisis in February. Liquidity is leaving the system. Last two days, repos (O/N and term) rose above $100Bn. S&P500 topped on February 19 while repo volumes were about half of what we are seeing today. By the time we hit $100Bn in repos (March 3), the index had dropped 10%.

We had about two weeks (March 3-March 22) of repos printing about $128Bn on average per day. S&P 500 bottomed on March 23 as the Fed started stepping in with its various programs. Repos went down below $50Bn on average a day. More importantly liquidity started flooding the system. Reverse repos skyrocketed from $5bn on average per day to $143Bn a day by mid-April! Equities rallied in due course.

April/May, things went back to normal: repo volumes between $0Bn and $50Bn a day and reverse repos averaging about $2-3Bn a day->Goldilocks: liquidity was just about fine. Equities were doing well. Then in the first week of June, repos jumped above $50Bn, and last Friday and today they went above $100Bn. Reverse repos are firmly at $0Bn: they have literally been $0Bn for the last 4 days.

Again, just like in February, liquidity is starting to get drained from the system. By that level of repo volumes in March, equities were already 10% lower from peak. S&P500 is just a couple % below that previous peak, but Nasdaq is above!

I am not sure why the market is here. It could be that, in a perfect Pavlovian way, investors are giving the benefit of the doubt to the Fed that it will announce an increase of its asset purchasing program at this week’s FOMC meeting. If it doesn’t, US equities are a sell.

And don’t be fooled by no YCC or any forward guidance. The Fed needs to step in the UST market big way. YCC on 2-3 year will do nothing. Fed needs to do YCC on at least up to 10yr. As to really address the liquidity leaving the system, Fed needs to at least double its weekly UST purchases.

What to expect from a potential 10-15 mbd OPEC++ cut

03 Friday Apr 2020

Posted by beyondoverton in Energy, Uncategorized

≈ Leave a comment

Tags

oil, OPEC

After yesterday President Trump tweeted about it, there is today continuous noise about a possible OPEC++ (global coalition of all crude oil producers) meeting next week with the expectations of substantial cut in production, anywhere between 10 to 15mbd. On one hand, if this materializes, it will be an unprecedented (not counting the 1970s oil embargos). On another, it will barely go to match the lost demand from the (almost) whole world going on economic standby for at least a month, maybe much longer on the back of COVID-19.

Let’s put this into context. We got a 25% decline in oil prices (from low 40s on WTI to low 30s) when Saudi Arabia and Russia (OPEC+) could not agree on a 1.5mbd cut a month ago, and Saudi instead announced they ‘might’ increase production by 1.5-2mbd (but as of yet they really haven’t). Arguably, if they had agreed on a cut, oil prices may have rallied a bit, maybe to mid or high 40s.

But then we got another 30% decline (from low 30s to low 20s) when the negative effect of COVID-19 on demand became more evident. In an alternative reality if OPEC+ deal had happened a month ago, prices could have then collapsed to the low to mid 30s (30% off mid to high 40s). Don’t forget that oil had already sold off about 30% YTD at the time of pre-OPEC+ no-deal weekend. These are the milestones to keep in mind when considering the scenarios ahead of a possible crude production cut in the next few days. 

So, this is the way I am looking at this:

  1. The likelihood of ‘everyone’ (not just Saudi and Russia, but OPEC++) really agreeing on a 10-15mbd cut is very close to nil;
  2. But the likelihood of a ‘fudge’ agreement is very high.

‘Everyone’ benefits from a ‘deal’, even the oil importers as crude has become the main sentiment indicator and that would help risk assets: OPEC++ could decide to announce a ‘deal’ simply to stabilize the market with the idea that no one is expected to really cut production (perhaps negative effects of COVID-19 eventually wear off and demands comes back0.

Reality is that, in a similar manner to Saudi Arabia not really ‘wanting’, or, arguably, even being unable to hike production by 2mbd (they have never really managed to sustain production above 12mbd), no one really intends to, or is willing to go the other way (cutting production may actually entail lost capacity for ever). So, in both cases, everybody is playing the waiting game and hopes to do nothing. But the trick is in delivering the right message.

But what could happen to crude prices if there is an announcement of a 10-15mbd cut?

One would expect that the low range point of a bounce would be the low-to-mid 30s on WTI (where prices would have been, had a cut happened between Russia and Saudi Arabia a month ago, and the demand lost we can project at the moment from COVID-19). We are just above 30 on WTI as of right now, on Friday close. But given the much larger cuts this time, the high point of the range could indeed be the low 40s where prices were before the Russia – Saudi deal fiasco.

What happens if there is not even a ‘fudge deal’ in the coming few days? We go back to the low 20s immediately and then we wait to see how much more demand is destroyed.

Stocks have vastly outpaced corporate profits this past decade

24 Tuesday Dec 2019

Posted by beyondoverton in Uncategorized

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The stock market is a forward discounting mechanism.

How much forward?

It seems quite a lot judging by this chart above.

At 28.6% return YTD, the S&P Index is on course to one of its best years on record. Going back to 1927, only 10 years have seen more than 30% returns. It will also wrap up a spectacular decade for the index: with still a few days left in 2019, it can still beat 2013, the best year of this past decade, which finished just shy of 30%, at 29.6%.

While US corporate profits have remained flat since 2012, the S&P Index has doubled. That’s a lot of discounting. But that pales in comparisons to Apple’s share price which has doubled from the lows this year, while its revenue is down during that period (latest numbers for Apple are only as of Q3, so things may change with Q4 numbers released).

To be fair, the spectacular performance of US stocks this last decade may be just catching up with the previous decade (2000-2009) during which S&P 500 Index declined while US corporate profits increased 2.5x. So, starting point matters.

Therefore, it is best to look at the long term-chart, at the beginning of the post, going back to 1947.  S&P Index and US corporate profits moved hand in hand until the early 1980s when US financialization kicked in (shareholders primacy and the share buybacks era). There had been, of course, some going back and forth between the two even before 1980 but at the beginning of the 1980s they were ‘on top of each other’.

The volatility between the two sharply increased thereafter. Stocks raced higher and while corporate profits also grew, the growth rate of the S&P index outperformed. Then in the mid-1990s, corporate profits stopped growing but the S&P index continued to race higher. The dotcom crisis and the 2008 financial crisis served as a reset but it still took until 2012 for US corporate profits to ‘catch up’ to US stocks.

The time post 2012 seems very similar to the 1995-2000 period whereby corporate profits did not grow but US stocks rose nevertheless. Only this time, at the end of 2019, the disconnect between the two seems to be the most extreme ever.

The stock market is a forward discounting mechanism indeed, but judging from history a reset is more likely to ‘justify’ that discounting. One problem though: no one can claim to know when that will happen.

China Part Two: My TED Talk (Deep Analysis)

19 Tuesday Mar 2019

Posted by g88kboy in Uncategorized

≈ 1 Comment

!! ⚠ CAUTION! MAY CAUSE EXTREME BOREDOM ⚠!!

YOU’VE BEEN WARNED

OK. *breathes in*

Let’s do this.

We only spent around 4 weeks in China, but by then, I had noticed some recurrent behaviour traits:

– Ill manners: rudness was pervasive. It was present mostly at train stations: I was shocked to see grown-ups fighting like children, pushing past each other to get on the carriage and to grab a seat, even before others had gotten off. So, most of the time, we ended up standing in the carriage. I watched other passengers to see if this bothered them, but they turned a blind eye whenever this happened. It must be cultural norm, I then thought.

Similarly, in the Forbidden City, Beijing, which was incredibly busy, people were always shoving past each other to take a picture. I almost dropped my phone on several occasions, which would have been a disaster, since I had just repaired it (in Xi’an😄).

– Littering: The Chinese government seems to buy into some basic environmental policy by providing lots of bins and cleaners everywhere, even on the station and running trains! Unfortunately, the citizens don’t seem to share the same environmental concerns and regularly disregard any common rules on disposing of garbage or personal fluids.

We witnessed many examples of this. A particularly amusing one, for me, was on the tube where a young boy eating a chocolate bar subtly dropped the wrapper under the seats and pushed it away with his leg. Apart us pointing and chuckling no one else seemed bothered.

Unfortunately it wasn’t just big city behavior. While descending down the Yellow Mountains a man, ignoring the bin situated right by his feet, threw a bottle deep down the cliff, left to decompose for eternity. In the same countryside experience, people were smoking in non-smoking areas (while, in smoking areas, even though there were plenty of people, no-one was smoking!).

Generally speaking it was also hard not to witness constant relieving of personal fluids. People seemed unfussy about opening their zipper and urinate whenever nature called. Also, my mum had warned me of the cultural habit of spitting and I’ve been wary since then. Once, at a cafe, after seeing a man outside the window spitting all over the ground I made sure I kept track of where it went so that, when we left, I avoided the spitwads. After that little episode, I noticed that every now and then, somebody would lean over and dispose of their saliva.

To be honest, by the time we ended up in Beijing I grew quite disgusted with the amount of people spitting and littering. It really hit me at the Beijing stadium where Coke cans and tissues were strewn across the grass.

– Aseptic nature: It looks like the Chinese government also feels responsible for taming nature to fit neatly into an health and safety proof entertainment.

This was evident in the Yellow Mountains again. All throughout the walk, we were accompanied by built-in stairs and handrails which seemed completely at odds with the idea of mountaineering. In addition, a service of a chair manually carried was offered. I mean, it would make sense if there was a real necessity but I witnessed a young child carried on the chair, while playing on his phone (and people complain that the new generation are too lazy! Maybe that’s due to the naive parents who turn their head away when their children sit on the couch, watching TV or play video games all day long) .

In the Gobi Desert we encountered a similiar approach. Planks of wood and handrail were built across some of the dunes! We, of course, took the longer and fun way up, old school, climbing up the sand, barefooted.

The Silver cave at Yuangshan, an impressive work of nature on its own right, had also been subject to the beautification process. Man-made lights were set up to make the cave seem so much more dazzling, but it felt unnatural and artificial, because it removed the sense of nature’s accomplishment and replaced it with what human civilization has made.

I reminiscented of the days where we would hike in the countryside in Britain. The most civilised works would be the gates to keep out the aggressive cows.

I personally found it hard to enjoy the works of nature when works of humanity were clearly present, begging for attention.

– Friendliness (or lack of): Overall, in China, people’s attitude towards foreigners seemed either extremely unfriendly and unhelpful oral as extremely friendly and generous. We were lucky enough to encounter some of the latter. Random people offered us their help and some taxi drivers did try their best to understand us and get us to our destination (even though they often struggled to understand the Western name of the place we wanted to go to).

China may get plenty of tourists, but we still attracted many curious locals. Once, in Dunghuan, we stopped by a restaurant owned by a family with two boys. The children, who were studying late in the night, were particularly curious and we developed a bond and had a great conversation. They even taught us how to hold chopsticks properly, which was a relief, because since then it wasn’t such a struggle to eat food.

It also became obvious to me that the Chinese have a little pet peeve about loose laces. Every now and then, my shoelaces would undo themselves and a random stranger on the street would pat me on the shoulder and gesture to my shoe. Once a man even went as far as lifting up one leg while walking to point at his own shoe (since he probably couldn’t speak English) and gesturing to me. Another time, I was playing with my sister and this woman shouted across the entire room, frantically pointing at my undone shoelaces. And no, I’m not exaggerating.

– Cuteness: Another thing that perplexed me was how the society was eager to educate children through cartoons. For instance, short clips of safety were presented on the TVs in the trains. I can see why it makes sense though, because these children are going to be the next generation – among the cluster of kids, included a future president, teacher, soldier, doctor. These were going to be people who could possibly change the course of history and the Chinese society is determined to bring the best out of them.

Moving on to Dunghuan, I spotted a cute dog on the streets. Many were present throughout our journey on the Silk Road and they were all homeless. So, I was wary about stroking it, but it was still a cute animal. We had carried on walking and then I realised the dog was following us. At some point, we were inside a shop buying breakfast and the dog was waiting outside for us. Here’s a picture to show just how adorable it was.

The dog followed us the whole way. Unfortunately that day we were leaving to go to Zhangye so it broke my heart to see the dog scampering after the car we drove away in.

I wonder if it will ever think about me.

– Spices (and crawlies): If there’s one thing that was common in China, it was spices. The pungent substances were everywhere. Almost every dish we ate had spices. Plenty of shops in the market were selling spices. What would be a lot of spice to us would be very little spice for the Chinese. In addition, in Beijing, I spotted some live baby scorpions on a stick sold as food, which totally freaked me out. Even now (writing this in Myanmar) I shudder at the mere thought of these tiny animals squirming and wiggling.

To conclude: while China does offer excellent sights and polite locals, littering, smoking and spitting is present almost everywhere and you are bound to be shoved by people, adamant to get on the train. It was an experience like no other and I wonder if I will see things differently when (and if) I return to London.

And that’s China for you, folks.

*curtains close*
*applause*

Fiscal policy is next but it’s also unlikely to work

03 Sunday Feb 2019

Posted by beyondoverton in Monetary Policy, Politics, Uncategorized

≈ 1 Comment

Simon Wren-Lewis wrote an interesting article yesterday The Interest Rate Lower Bound Trap and the ideas that keep us there

Unfortunately, the ideas that keep us plugging pointlessly at monetary policy are not that dissimilar to the ideas which will push us into trying fiscal policy: both of them are based on using the old industrial model of labor and capital income distribution which is much less suitable in the digital age where technology takes center stage.

What particularly caught my attention was the 3rd paragraph and this very relevant question: “If these countries really did have a zero output gap, then why is inflation below target?” Which gets to the core of the issue about how technology has possibly substantially increased potential output.

Yet, our models do not fully capture that. Perhaps that is because we continue to put too much weight on capital and labor in the production function when clearly technology has marginalized them both, the evidence being in zero rates and flat wages.

Let’s take capital.

1) there is a large corporate capital surplus;

2) digital technology does not require so much capital;

3) consumer debt is maxed out.

All three of the above lead to low demand for credit meaning low interest rates regardless/independent of monetary policy.

So, after years of zero/negative/low rates (decades in Japan) it is finally obvious that the monetary transmission mechanism is now clogged (see above). Naturally, despite all the opposition, we are probably just a recession away to switching to fiscal policy.

But as labor’s turn comes, there is no guarantee and zero evidence (see, again, Japan) that fiscal policy would work as its transmission mechanism is probably also clogged. And the reason can be found in the fact that it is easier for corporates to switch from labor to technology in automating production.

A diversion.

That’s where the debate about technological unemployment comes in. And here I am in the camp believing that this time things are different because technology is more advanced and is taking away ‘IQ’ jobs in addition to just ‘brawn’. ‘EQ” jobs are humans’ last call of resistance but maybe not for too long.

Sure, no evidence of this for now but that’s because in the initial stages, with aggregate demand low, companies will choose to focus on cost reduction by using cheaper labor (taking advantage of the threat of automation keeping a lid on wages), than higher output/higher productivity using technology.

We’ve had jobless recoveries before but post GFC’08, we’ve had a ‘wageless’ recovery – plenty of jobs but anaemic wages. Neither is particularly good for aggregate demand as individual purchasing power barely increases.

The situation is even worse now as consumer debt to disposable income keeps rising (people now need two jobs to survive).

In the short run, we could potentially see a rise in wages as the labor pool gets gradually depleted, but the switch to automation would also be faster which would push unemployment up/wages back down. In the long run, technology substitution becomes inevitable as both its cost continues to decline and its capabilities to rise.

And, by the way, we are not helping, as apparently we are also getting dumber (see “Were the Victorians cleverer than us?” by M. Woodley et all).

Diversion ends.

So, the most obvious fiscal policy stimulus is infrastructure spending. That’s much easier to get voted in given the state of our roads and bridges, etc., and the fact that there are probably already too many people shuffling papers on desk jobs working for the government.

Infrastructure spending could be the most economically beneficial option but could also contribute the least to aggregate demand if it bypasses labor due to automation: awarding a billion $ contract to a company to renovate a bridge using mostly automated machinery is hardly going to increase labor’s purchasing power.

My feeling is fiscal policy will indeed soon become the default option. Sadly, not necessarily because it would work better overall for increasing aggregate demand but simply because it has become plain obvious that monetary policy is powerless.

Instead, we need to think ‘beyond the Overton Window’. The income transmission mechanism which we have adopted since the first industrial revolution, Work->Job->Income is broken. Monetary and fiscal policy thus become redundant. We need a new model more suitable for the digital age.

Silk Road (6): Chevrolet Land

03 Saturday Nov 2018

Posted by beyondoverton in EM, Travel, Uncategorized

≈ 2 Comments

I know probably you would not believe me, having also said that every second car in Georgia is a Toyota Prius, but in Uzbekistan, pretty much every new car is a Chevrolet. Ok, I looked it up: thanks to a joint venture between GM and the government, apparently 95% of the new cars in Uzbekistan are Chevrolets.

Because of Uzbekistan’s vast resources of gas (and no oil), majority of those cars are adjusted for methane and propane, which are half the
price of oil. It was strange the first time we took a long-distance taxi and it
had to refill: the driver stopped about 200m away from the gas station and
asked us to get out of the car for safety.

I was really looking forward to visiting Uzbekistan. The country was a major destination along the Silk Road and I had heard so much about the magic of Samarkand already in my school days in Bulgaria. I was also very curious to see a country which was literally locked up for so many years after the breakdown of the Soviet Union: Uzbekistan’s borders were pretty much shut down until 2005 – during and until the end of Islam Karimov’s reign, the first president after gaining independence.

In fact, developing deep and meaningful international relations are still in their early stages. For example, the tourist visa regime was only recently simplified, and only a couple of months before our visit, Uzbekistan finally introduced e-visas. But also, because the country was closed off for the majority of the world for so long, it actually learned to produce a lot of goods locally. Ironically, the joint venture with GM was both an example
of this (locally produced cars) and an exception (foreign joint venture).

One could say that we entered Uzbekistan through the “back door”, from Beyneu, Kazakhstan. In fact, Uzbekistan is one of only two double land-locked countries in the world – these are countries which border land-locked countries themselves – yet another curious feature which made me
eager to visit it..

“Back door” is also in reference to the way tourists travel when they visit the country: they normally fly into Tashkent, go to Samarkand, and then Bukhara. Some of the more adventurous may go to Khiva as well. And
then back. We did it the other way around: Khiva-Bukhara-Samarkand-Tashkent.

We encountered a peculiarity about Uzbek culture already in the
border town there: vodka. When it comes to liquor, restaurants seem to offer a large variety of vodka, and pretty much nothing else (and people do drink their vodka – and it shows!). I seldom saw beer, and when I ordered it, it was not particularly good.

What is surprising, though, is the lack of wine. Uzbekistan has different varieties of amazingly sweet grapes but, as far as I know, not much of a choice when it comes to wine. We did try a bottle of wine in Nukus,
the only one on the menu; it was OK, but it turned out it was sweet (what a
surprise!).

But while we may have gone ‘against the tourist traffic’, so to say, we definitely went with the local traffic. The train left Beyneu,
the last stop before the Uzbek border at 4am. We had ‘camped out’ at the train station for the night which was full of people; in fact, at some point one could barely even stand there. There were traders selling all kinds of stuff outside along the railway line. It was incredibly busy!

The kids by now were used to such an experience and promptly fell asleep on the chairs, their heads resting on their knapsacks. As our trip has progressed, it is actually interesting to see how they finally started to grasp the concept of different kinds of comfort. For example, before
this trip, they were used to staying in 4 and 5 star hotels where their concern would normally be if the facilities include a swimming pool. Now they worry not only about the availability of Wi-Fi but sometimes, as in the case of Beyneu, also of a bed!

Around 2 am, a kind officer in the train station, with whom I struck a conversation about football, informed us that we could actually board the train. What was our surprise when we found out that we did not have any assigned seats, it was ‘first come, first serve’ kind of service, and people had already taken any seats where one could lie down! Eventually we managed to find two bench-seats for the kids.

As usual by now when crossing land borders, majority of travellers were ‘traders’: we were asked several times whether we could take some of their stuff in our bags. Overall, however, people were very nice and we
were simply treated as a curiosity. The border crossing was fast and
straightforward. The customs officer did ask us though whether we were bringing any history books!

We arrived in Nukus after 17 hours, travelling through mostly desert-like terrain. There, at the train station, trying to figure out a way to get to a hotel (we had no booking) I encountered another peculiar feature of Uzbekistan culture: they don’t seem to like to negotiate. Having travelled through all the other countries, but especially Turkey and Iran, where negotiating was part of the process, I found this strange. The taxi drivers in Nukus, for example, had very strict rules, one could say, the equivalent of taxis in the West with meter machines: 5,000 Soum (that’s the local currency) for the first 3km and 500 for each after. They would simply
zero out their odometers on every ride.

Even in the bazaars, Uzbek people did not seem to engage in negotiations. They were a bit more flexible there, but they would almost get offended if it went for too long and eventually refuse to sell you the product at any price if “pushed”. I don’t know if this is a specific Uzbek
characteristic or it is a vestige of the Soviet system but I had to respect that this is the way it is.

Our first planned stop was Khiva, a 3h drive from Nukus. The day we drove to Khiva, the temperature dropped from almost 30C, from the day before, to half that. We did not expect such a big change in weather that
soon, and definitely did not welcome it!

Khiva’s old town is surrounded by a wall, inside which old residential houses stand next to centuries old mosques and madrases. Both Uzbekistan’s history and culture are interlinked with those of Iran (and, later, Turkey), so the structure of the mosques is somewhat similar. Yet, unlike Iran, Uzbekistan is famous for its madrases, Muslim religious schools. Samarkand’s Registan, for example is composed of three madrases (but there is one small mosque in one of them).  

Despite this, Uzbekistan did not strike me as a particularly religious country. We barely saw women wearing hijabs (actually they were predominant only in Tashkent’s old town). We even had pork in a restaurant in Nukus (the proprietor was Korean) and in a cafe in Tashkent.

As we advanced more eastwards, the arid land gave way to some green vegetation, orchards and grapes. Along the roads, there were people
selling fruits and vegetables at almost any time of the day and (probably)
night. What was amazing to see was the melons: apparently Uzbekistan has the biggest varieties of melons of any country in the world (and the ones we tried were exceptionally sweet – it is a shame they do not juice them like in Iran).

Uzbekistan has plenty of cotton fields. As we were in the country right at the time of harvesting it, we could see people picking up the cotton and piling up the bags in massive containers along the road. We were told that students had to help with the harvest as well (i.e. no school for a month!). I remembered with fondness that we had to do the same in Bulgaria when I was a student there in the 1980s.

Unfortunately, the weather refused to ‘cooperate’ and it got progressively colder. So much, that we had to buy my son a winter jacket in the local market in Bukhara (he had lost his warm jacket somewhere along the
Silk Road before!). We were also forced to wear pretty much all our layers just to keep warm. Yet, that did not seem to help Georgia who fell ill and had to stay one full day in bed! The next day, while feeling better and able to walk around the streets, she also bought something to keep her warmer: a traditional long Uzbek coat. She looked different in it, and enjoyed the curious (from some, the older ones, obviously approving, from the others, the younger generation, amusing) gazes of the locals as we passed them by.

Another reason I wanted to visit Samarkand was Timur the Great, the legendary local leader I had read about as a kid. He created an empire which spanned a vast area, going deep into Persia and all the way to Delhi. However his reign was a one-off, i.e. there were no successors who could maintain his expansions. Timur was peculiar in a sense that he was illiterate himself, but he believed in the power of knowledge and appreciated the beauty of art. Legend has it that when he first ransacked Samarkand ,he killed the majority of the population but he spared the lives of architects, teachers and generally, people of knowledge. Then, under his guidance, Samarkand was rebuilt with the focus exclusively on madrases and other places of knowledge (Ulug Beg, the famous astronomer lived approximately at the same time).

Our last stop in Uzbekistan was its capital, Tashkent. I did not expect much of Tashkent, especially after visiting all these other places before that. Still, I was looking forward to being there because a friend of mine from both university and Morgan Stanley, whom I had not seen for decades, lives there. Unfortunately, he surprisingly had to go to New York the same week we turned up there. It was a shame, not only because I was looking forward to reconnect with him but also because speaking to a local, who I knew previously,would have enriched massively our view of Uzbekistan. As it was, Uzbekistan, after Iran, was a bit of an anticlimax.

However, we managed to get the best of our visit nevertheless. In fact, I enjoyed Tashkent, if not for anything else, for the blast from my ‘Soviet’ past that it provided, more than any other ex-Soviet capital I had ever been to.

So, a lot of things reminded me of how it used to be in Bulgaria in the 1980s: the monuments, the old block of apartments, the local market (where people would still offer to record music for you!), the circus. Even the main department store in the town where I went to high school was called ‘Tashkent’. We took the metro a lot (by the way, there was no metro in Bulgaria back in the ’80s). Some of the metro stations had very interesting decorations, the way I remember the Moscow metro when I visited it in the late 1980s.

The one thing we struggled with in Tashkent was knowing which restaurant was worth going to. In fact, that is one of the things we missed the most on our travels – after eating ‘street food’ most of the time, we were craving some variety…some
vegetables. Luckily, our next stop, Almati, would offer plenty of it.

Silk Road Footnote

08 Monday Oct 2018

Posted by beyondoverton in Travel, Uncategorized

≈ 2 Comments

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footnotes

Travelling across countries, where everything you know is different, from the language to the food, WC habits, social customs, etc., while knowing it is going to be never-ending, is overwhelming. Being always transient in each place is disorienting. Having to figure out every new encounter in terms of friends or foe, exhausting.

This trip proves to be very tiring on our emotional intelligence. I realized that in most of our daily life before, we rarely used emotional intelligence because everything is more or less a routine. Now, we have to constantly assess the situation: are people genuine, do they mean good, are we doing something inappropriate?

Saying that, I am not yet regretting our choice. Each day feels remarkable in a way that our previous daily routine, which was far from being stress-free anyhow, never was. We are also learning to adjust our expectations quicker, which, I think is improving our capacity to just relax and be… we have had especially a lot of waiting to do at borders, which was a full on training!

Most of my vivid impressions, in fact, on this trip are from crossing land (and now sea) borders because 1) they take a really long time; 2) they set your expectations for the rest of the country; 3) they are at the intersection of sometimes vastly different cultures, religions, customs; 4) they could open up new opportunities; 5) waiting at the borders gives me the time to reflect and also write.

For me, this trip is massively going out of my comfort zone and facing my fears on all possible levels with an ultimate goal. To quote Walter Mitty: “To see the world, things dangerous to come to, to see behind walls, draw closer, to find each other, and to feel. That is the purpose of life.”

We just arrived in Bukhara, Uzbekistan, after visiting, Khiva and Nukus, and following a 14h train ride from Beyneu, Kazakhstan. We gave ourselves, roughly a week to go through the country, which is slower than we have done till now (except Iran). Thus I am hoping this might give me a chance to do some writing.

Low productivity is the least of our problems

17 Tuesday Oct 2017

Posted by beyondoverton in Uncategorized

≈ Leave a comment

Low productivity is the least of our problems. Why would we want to produce more output, when there is no one able to consume it, is beyond me. If we take care of our stagnating aggregate incomes and put more real purchasing power in the consumers’ wallets, productivity will take care of itself. However, it is a fact that the 200-year old Industrial Revolution-time model of income generation and distribution has broken down due to the spread of globalization and the rise of sophisticated technology which displaces even cognitive and non-routine human jobs. The problem is that we keep wanting to fix it instead of coming up with a new model which fits better our economic realities.

  • Low wages are not a result of low productivity. It is the other way around.
  • If full employment comes at the cost of lower wages, purchasing power may not rise and aggregate demand may not rise->output stagnates.
  • Stagnating numerator (output) and a rising denominator (employment)-> decreasing productivity.
  • Work dynamics have changed dramatically. The 200-yr old distribution model of Work=Job=Income is broken.
  • Machines are cheaper, more efficient and smarter than humans in increasingly more industry sectors.
  • The rate of growth of human cognitive skills (education and training) is unlikely to keep pace with the rate of growth of machine learning.
  • IBM Watson reads 1m books per second (now probably even more): 100k of human evolution is now ‘equal’ to 7 minutes of machine learning.
  • New ‘job’ creation in the digital era will happen but is unlikely to keep pace with the destruction of old jobs.
  • We will always want to work but do we need a job? If we create AGI but insist on people having a job for survival, we would have totally failed.
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