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s what a bubble looks like we can also see that the financial crisis of 2008 sent stock prices close to the lowest levels similar to what happened during the double recession of the early 80s since then stock prices have recovered but they remain low relative to any of the previous years even if we ignore the 90s as an aberration compared to the expansion of the 80s or the 2000s the stock market today remains cheap and by cheap we mean that to justify current prices we do not need a very optimistic view on growth or that investors are demanding a very high risk premium in other words the stock market tells us that either investors are pessimistic about growth or very risk averse which is the opposite of what you expect to see during a typical bubble does this mean that the stock market is undervalued no it all depends on whether our current growth expectations or risk assessment are correct growth might surprise us and be even lower than what we think today risk could be a lot higher maybe 10 year interest rates are a really low indicator of what interest rates are going to look like in the next 10 years in all these scenarios the stock market will look more expensive than what it looks today but growth could also surprise us through gains in productivity and it might be that some of the current risks do not look that likely a few years from now and then the stock market will look really cheap that s the uncertainty that we always have when trying to assess the pricing of the stock market a note on real growth expectations our view on growth has clearly been revised downwards because of unfavorable changes in demographics and productivity it is possible that future real gdp growth today is 1 below what it was in the 80s or the 2000s but even if we were to make that correction to our index the stock market would not look expensive if you look carefully at today s index the number is about 1 5 lower than in the 80s and about 2 3 lower than in the 2000s these differences are larger than revisions to potential gdp growth rates in summary unlike the strong warning signals we get when looking at record level nominal stock prices or even at the p e ratio a simple adjustment of p e ratios by current levels of interest rates paints a very different picture of the stock market adjusted for current levels of real interest rates p e ratios tell us that the stock market today is on the cheap side relative to previous similar phases of the business cycle antonio fatás posted at 10 17 2016 11 20 00 pm email this blogthis share to x share to facebook share to pinterest tuesday august 9 2016 you can lower interest rates but can you raise inflation last week the bank of england lowered their interest rates this combined with previous moves by the ecb and the bank of japan and the reduced probability that the us federal reserve will increase rates soon is a reminder that any normalization of interest rates towards positive territory among advanced economies will have to wait a few more months or years or decades the message from the bank of england which is not far from recent messages by the bank of japan or the ecb is that they could cut interest rates again if needed or be more aggressive with qe purchases long term interest rates across the world decreased even further the current levels of long term interest rates have made the yield curve extremely flat and in several countries e g switzerland interest rates at all horizons are falling into negative territory the fact that long term interest rates is typically seen as the outcome of large purchases of assets by central banks around the world in fact many see it as a success of monetary policy actions but if monetary policy is being successful we expect inflation expectations and growth expectations to increase both of these forces should push long term interest rates higher not lower something is fundamentally not working when it comes to monetary policy and it is either the outcome of some forces that the central banks are unable to counteract or the fact that central banks are not getting their actions and communications right on the communications i will repeat the argument i made earlier when central banks repeat over and over again that they can lower interest rates even more they are misleading some to believe that lower interest rates long term and short term real and nominal are a measure of success of monetary policy this is not right lower nominal interest rates across all maturities cannot be an objective when inflation and growth are seen as too low success must mean higher nominal interest rates and success must mean at some point a steeper yield curve not a flatter one why are central banks failing in their communications i see two reasons 1 they want to send a message that they are both powerful and not out of ammunition repeat with me interest rates are low and they can get even lower 2 these are interesting times with short terms rates stuck around zero all the action of the yield curve has to come from long term rates and in addition qe and the massive purchase of assets is also a new phenomenon that is not always well understood by market participants my guess is that it is this combination of circumstances that are unusual by historical standards and the difficulty of communicating a complex monetary policy strategy by central banks that are sending long term interest rates to even lower levels these levels are not consistent with any reasonable scenario for growth or interest rates over the next decades when 30 or even 50 year interest rates are negative or close to zero something is not right either this is the end of growth as we know it or the start of a 30 year period of extremely low inflation combined with deflation or our expectations are seriously off and we are up for an interesting surprise antonio fatás posted at 8 09 2016 09 58 00 pm email this blogthis share to x share to facebook share to pinterest wednesday august 3 2016 experts facts and media jean pisani ferry has written a very interesting post about the need for trusted experts in a democracy the post addresses the criticisms that economic experts have received as a result of the brexit vote quoting from his post representative democracy is based not only on universal suffrage but also on reason ideally deliberations and votes result in rational decisions that use the current state of knowledge to deliver policies that advance citizens wellbeing very well said he also brings up the point that the lack of influence of economic experts is not that different from that of other experts as illustrated by the debates on climate science gmos i share that view and my guess is that the mistrust of economic experts is simply more visible because of their influence or lack of in the political debates that tend to be a lot more present in the media than the debates on scientific issues how to enhance the trust on experts not obvious according to pisani ferry what is needed is a combination of of discipline among the community of experts an education system that equips citizens with the tools to distinguish between facts and fiction and the development of better venues for dialogue and informed debate good luck unfortunately we are very far from this ideal scenario education has reached more citizens than ever more so in advanced economies but we see little difference it might be that the complexity of the issues that are being debated is at a level which still does not allow us to have an informed discussion based on facts and not ideology opinions that are expressed using either the wrong facts or no facts at all somehow are able to reach the public and have an influence that is as large as that of those who present the facts and the media does not serve at all as a filter maybe because controversy sells or maybe because there is a need to present a balanced view of the debate or simply because of self interest here is my example of the day that illustrates this point the financial times published two articles yesterday on the merits of quantitative easing one argued for more qe under the logic that is working and we just need to increase the dosage the second one presented the view that quantitative easing as well as expansionary fiscal policy are the wrong tools to use to generate a recovery and that they are likely to lead to a very unhappy ending if you read the second article you will notice the use of dubious facts and an economic logic that anyone who has ever taken any economics course should realize that is badly flawed let me pick one example the article starts with the figure of 300 of gdp for global debt and then it argues that if the average interest rate is 2 per cent then a 300 per cent debt to gdp ratio means that the economy needs to grow at a nominal rate of 6 per cent to cover interest this is just wrong on so many counts the increase in debt in the world is matched by an increase in assets the interest rate paid by borrowers goes to lenders so the world or a given country does not need to find income to pay for this interest this is a transfer from borrowers to lenders borrowers need to pay for the interest but if debt is coming from a mortgage to buy a house i do not need to pay rent anymore looking at interest payments alone or at liabilities without taking into account assets is just wrong the 300 number cannot be associated to a country or a government most debt is internal no country has an external debt that is anywhere close to that level same is true for governments with the exception of japan which is not far but once again most of this debt is internal so the interest that the government of japan has to pay goes to the japanese citizens who happen to be the taxpayers even if you had a government that had 300 of debt the calculation above is simply wrong if interest rates are 2 you need to grow at 2 not 6 to ensure that the debt to gdp ratio stays constant as long as your additional borrowing or saving is zero of course this is something that is taught in a principle of economics course the authors are confusing the value of interest payments and the required growth to make that level of debt sustainable the rest of the article contains many other mistakes it is embarrassing that the financial times is willing to publish such a low quality article will this article influence anyone s view on the debate on monetary policy i do not know but what i know is that the pessimistic view presented in the article on the role that monetary and fiscal policy is popular enough that is still influencing both the debate around and also the outcome of current economic policies so we are very far from having informed and factual debates about the economic and scientific issues that shape economic and social outcomes as an economist i continue to do my best by sharing my views and analysis with a wide audience through blog posts like this one but it is depressing to see how those that rely on flawed analysis often manage to reach the public through the validation of the most respected media antonio fatás posted at 8 03 2016 01 53 00 am email this blogthis share to x share to facebook share to pinterest wednesday june 8 2016 9 8 7 6 7 speculating on china growth the deceleration of china s gdp growth rate has been seen both as a natural transition towards more sustainable growth rates and a sign that the chinese model of growth is coming to an end how does this deceleration of growth rates compared to similar historical episodes for other countries is 6 7 a sustainable growth rate for china let s frame these questions in the traditional model economists use to look at growth rates of emerging and low income economies the convergence model based on the work of robert solow the main prediction countries that are lagging have more opportunities for investment and they are likely to grow faster than countries at the technology frontier because of faster growth rates we expect to see convergence in gdp per capita as convergence happens growth rates will naturally slowdown to reach those of the countries at the frontier the theory also states that not all countries might converge to the same level of gdp per capita but let s ignore that for a second and focus on the predictions of relative growth rates start with an example that nicely validates the theory south korea let s plot the level of gdp per capita of south korea relative to the us at the beginning of each of the last three decades and then compare it to the growth rate of gdp per capita during the years that followed i will treat the 2000 2014 period as the decade of the 2000s the plot above click on it for a larger picture shows that south korea starts in 1980 with a level of gdp per capita below 20 of the us leading to annual growth during the 1980 90 period of about 7 this allows the country to reach a level of 30 relative to the us by 1990 at that point growth is decelerating and during the next 10 years it goes below 5 5 the transition continues with decelerating growth during the next decade around 4 today south korea has a gdp per capita of about 65 of the us level and it is likely that over the coming years we will see a further slowing down of its growth rate as it continues its convergence towards the us so far so good for our theory how about china in 1980 china starts at a much lower level of gdp per capita and consistently with our logic a very fast growth rate of about 7 but as the country converges towards the us growth rates accelerate to above 8 during the 90s one potential explanation for this acceleration is that china was moving towards a more natural growth rate given how low its gdp per capita was relative to say south korea but the next decade 2000 2014 will bring yet one more increase in growth rates towards 9 at that point the growth rate looks spectacular compared to the case of south korea to put it in perspective by 2015 china has reached a level of 25 of us gdp per capita the vertical red line and when south korea had reached that level it was already growing at less than 6 the comparison to south korea makes clear that growth rates of 8 9 in china given its current development would have looked like a true miracle what if south korea is used to benchmark future chinese growth rates given the current gdp per capita of china we are looking at a growth rate of slightly below 6 over the next decade and a growth rate that will decelerate further as time passes this number is slightly lower than the current target of the chinese government but not far given that we are talking about 10 years in a path that is likely to be one of decelerating growth rates note that the growth rates above are in per capita terms working age population is currently not growing much in china so the gdp figures should not be too different final question is south korea a good benchmark for china let s look at other potential fast ...
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