Aurelia Butler

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This article is an on-site version of Martin Sandbu’s Free Lunch newsletter. Sign up here to get the newsletter sent straight to your inbox every ThursdayThe US economy is soaring. It grew at an annualised 4.9 per cent pace in the third quarter. That followed three quarters where growth exceeded the 2 per cent or so many people see as the long-term speed limit. My colleagues over at the FT Unhedged newsletter illustrate how this growth shows up in strong US business results, too. Meanwhile, Europe is stagnating. The transatlantic difference is the topic of today’s column.But first a pro tip for Free Lunch readers: join The Global Boardroom on November 8-10, when FT journalists meet leaders in government and business, including the European Central Bank president, the Bank of Japan governor and the World Bank Group’s chief economist. Register for free today.The divergence between the US and the EU economies is astonishing. That is not a statement about the long run. While the US has grown much more than Europe this century, that is virtually all down to different rates of population growth. If you compare inflation-adjusted gross domestic product per capita, expressed in internationally comparable currency, the EU and US have performed identically since 2000, as the chart below shows. The EU’s GDP/capita (which, remember, includes the poorer countries of central, eastern and south-eastern Europe) has hovered around 70 to 73 per cent of the US’s throughout the period.Since the pandemic, though, the two regions have diverged massively. Both recovered better than anyone had expected — but the US much more so than the EU. As the chart below shows, the US passed its pre-pandemic peak in early 2021, half a year before the EU. Then, the US briefly stagnated while the EU picked up. But now the divergence is widening: where the US accelerates from an already healthy pace, the EU and the eurozone have flatlined for a year. And if we compare current GDP with the 2015-19 trend, the most recent growth burst means the US falls just 1 to 2 per cent short, much better than Europe’s 5 per cent shortfall. So while the transatlantic economic race is a dead heat over the long run, this round has been won by the US. This raises the interesting question of why. As the US Treasury has pointed out, much of the growth comes down to US households, whose consumption and investment are strong and getting stronger. But what — in particular, which policy choices — can explain this domestic demand exuberance relative to Europe?Let’s first note that the two have had pretty similar monetary policy. The Federal Reserve has raised rates by 5.25 percentage points since it started tightening. The European Central Bank (which sets rates for 5/6ths of the EU economy) has raised them by 4.5.The obvious other suspect is fiscal policy. And here there is a big difference. The next chart shows one measure of fiscal stimulus: the change in the government’s primary (before debt service) deficit in the US and the EU. America’s increase in 2020 was more than 2 percentage points of GDP larger than the EU’s. (Budget tightening in 2022 was much stronger, according to IMF data, which fits with how America’s recovery stumbled more than Europe’s that year.)And unlike European finance ministries, Washington has allowed the deficit to widen a lot again this year — in the IMF’s estimate the US primary deficit will increase by 4.2 per cent of GDP compared with 2022 while the average in the EU will not change at all. Admittedly, other methodologies give different results: the Hutchins Center’s fiscal impact measure puts the current impact at about zero — but that’s at least a huge improvement on the strongly negative impact it attributes to US government budgets last year. In addition, some US policies were more progressive than Europe’s. They focused on unemployment benefits, which were temporarily made very generous, for those who lost their jobs rather than on wage support for those who kept them but were temporarily furloughed. The US also saw significant wage compression as the strong labour market in the recovery raised wages faster at the bottom than at the top. All this, plus the direct cash distributions Washington opted for several times, made for a much larger accumulation of unspent money in the US than in Europe, and more of it in liquid assets. My colleague Soumaya Keynes recently wrote about this. A recent research note from UniCredit economists also charts these developments in some detail, and adds that overall net worth increased more in the US than in the EU (due to asset prices), which may also have boosted consumer spending. They conclude, however, that the spur to spending may be coming to an end about now.Is it all down to different fiscal policies, then? My colleague Chris Giles (whose new central banking newsletter you should sign up to) has pointed out that the energy price shock also affected the US and Europe very differently. The US is (just about) a net energy exporter with huge domestic production of oil and gas, whereas the EU is seriously import-dependent. That obviously matters for inflationary pressures (though inflation has behaved quite similarly in the two regions) but should matter for growth, too.The different “terms of trade shocks” — for the non-economists, that means a change in the relative prices of what you import and what you export — are evident if you look at how the two regions’ trade balances evolved through the crisis. The EU’s current account, which has long been in large structural surplus, fell into deficit in 2022. The US’s didn’t move much; if anything, the shock was positive. I am not entirely convinced, however, that this can explain the difference in growth performance. For if the EU had a large negative terms of trade shock last year, it has had a large positive one this year, as global energy and food prices came down. So if anything, we should have seen the US outperform the EU in 2022 and vice versa this year; the opposite has happened. It is, of course, possible that we are watching a delayed effect — in which case Europe’s prospects may be rosier than they appear.Free Lunch readers may have their own explanations — do share them with me. Here is one intriguing possibility: some thought that the US willingness to let people lose their jobs in the pandemic would allow for more productive reallocation later. Is there any evidence of this playing out? Send me your thoughts at [email protected] least one lesson for policy can be tentatively drawn. It seems clear that the size and nature of Washington’s pandemic fiscal stimulus is still bringing the American economy significant benefits. Despite the chorus of criticism from the pillars of the economic establishment that the fiscal response was too big, that response is still holding up the US economy at no greater inflationary cost than what the EU has experienced. And if you think, as I do, that monetary policy has been tightened too much, the US budget, unlike European ones, has done the service of offsetting the damage inflicted by central bankers.Other readablesNumbers newsRecommended newsletters for youChris Giles on Central Banks — Your essential guide to money, interest rates, inflation and what central banks are thinking. Sign up hereUnhedged — Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Japan’s Fumio Kishida is staking the future of his premiership on a $113bn stimulus plan centred on tax cuts and cash handouts, as he seeks to tackle the fallout from high inflation and record-low approval ratings.Kishida’s gambit follows a big reversal of fortunes for the prime minister, who had seized on Russia’s full-scale invasion of Ukraine to increase defence spending and scored a series of diplomatic wins including a historic rapprochement with South Korea.Kishida on Thursday announced a sweeping stimulus package of about ¥17tn ($113bn), of which ¥13tn will be funded by a supplementary budget for the remainder of the fiscal year until the end of March 2024.At the heart of the package are measures to address higher costs of living, including roughly ¥5tn in temporary cuts to income and residential taxes as well as cash handouts to low-earning households.The package also includes an extension of subsidies to offset rising petroleum and electricity prices as well as support for businesses to raise wages and strengthen supply chains. “By combining wage increases [by companies] and a cut in income tax, I want to create a situation where the growth in public income will exceed the rise in prices by next summer,” Kishida said at a news conference on Thursday. “By doing so, an exit from deflation will be in sight.”But even before the stimulus was signed off by his cabinet earlier in the day, Kishida’s plan had already backfired.Approval for his administration has fallen to 33 per cent, the lowest since he was appointed prime minister in October 2021, according to a poll by Nikkei this week. Of those surveyed, 65 per cent disapproved of his plan to cut income tax.With the yen sinking to a multi-decade low, import costs rising and real wages falling, surveys have shown that households are more worried about future tax rises to fund a significant boost in defence spending and more generous childcare benefits.According to the Nomura Research Institute, the temporary tax cuts and handouts are expected to boost Japan’s real gross domestic product by just 0.2 per cent on an annual basis. Similar measures in the past have failed to spur meaningful consumption since Japanese households tend to save extra cash.Despite pushing back plans to increase corporate and other taxes, Kishida has suffered from a persistent impression that he will aggressively pursue fiscal discipline — spawning a nickname on social media linking his eyeglasses with his tax-raising image.“He felt strongly that a tax cut was needed to address his tax hike image, and his willingness to take on a gambit accelerated,” said Takao Toshikawa, editor-in-chief of political newsletter Insideline. “But despite his political instincts that tax rebates would resonate with the public, he lacked communication skill and the ability to deliver a strong message.”Had the economic package translated into higher popularity, Kishida would have probably called a snap election before the year’s end, according to Toshikawa. That prospect has now diminished, and it remains unclear whether he will call a poll before his term as head of the ruling Liberal Democratic party expires next September.Analysts said the prime minister should have triggered an election after he received a temporary boost in the wake of successfully hosting the G7 summit in May, which was attended by Ukraine’s president Volodymyr Zelenskyy. Since then, his administration has been rocked by scandals involving his son and closest aide, and data management issues with a national identification system.Members of his own party and economists have criticised the tax cuts, saying measures to fuel an already robust economy are risky at a time when inflation is proving to be stickier than expected.The stimulus package also comes days after the Bank of Japan took a significant step to end its seven-year policy of capping long-term interest rates, setting the stage for a gradual unwinding of ultra-loose monetary easing measures.The yield on 10-year Japanese government bonds has recently risen to its highest level in a decade on the back of a surge in US Treasury yields. That has prompted the BoJ to revise its so-called yield curve control policy so that the 10-year JGB yield can rise above 1 per cent.The tax cuts are only expected to take effect in June, which could come after the BoJ has lifted negative interest rates, with some economists forecasting a policy change in April.“We believe that the BoJ will be careful not to spike JGB yields through its incoming policy normalisation, but if the fiscal discipline is met with doubt by market participants, this could spell difficulty for the central bank,” UBS economist Masamichi Adachi wrote in a recent note.The central bank also significantly revised its inflation forecast upward, saying it expected 2.8 per cent core inflation in the 2024 fiscal year as oil prices rebound in response to the war between Israel and Hamas.Annual core inflation, which excludes energy and fresh food prices, was 4.2 per cent in September. More

This article is an on-site version of our Unhedged newsletter. Sign up here to get the newsletter sent straight to your inbox every weekdayGood morning. On Tuesday, we asked what it was about Disney’s streaming business that makes its economics so much worse than Netflix’s. It seems that Disney thinks part of the reason is scale and control: Disney has offered to buy the third of Hulu that it does not already own for $8.6bn. Think it will help? Email us: [email protected] and [email protected] talks tighter financial conditionsAn economy in rude health buys a central bank time to wait. No surprise, then, that Federal Reserve chair Jay Powell did not sound like a man in a hurry to raise rates yesterday. In his post-meeting press conference, Powell cheered inflation “progress”, rising labour supply, moderating payroll growth, and inflation expectations in a “good place”.All the same, he said that the question on his mind remains “should we hike again?” not “should rates rise or fall from here?”. The Fed’s tightening bias remains intact. And, unhelpfully, inflation progress has slowed. Monthly core inflation was up in August and September, and ex-housing services inflation is on the rise again. Shortly before yesterday’s meeting, September data showed job openings ticking up, defying expectations. Five per cent real GDP growth is good news, but it might not be consistent with inflation at 2 per cent. It is too early for the Fed to relax. Here’s Powell: A few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably . . . Evidence of growth persistently above potential, or the tightness in the labour market is no longer easing, could put further progress on inflation at risk and could warrant further tightening.That is all to say not much has changed. But yesterday’s official statement included a new reference to tighter financial conditions. This is likely a pointer to the rising 10-year Treasury yield. In theory, high long rates should suppress growth and inflation. Powell left open the possibility that higher yields could at some point act as substitutes for further rate increases.That’s how the market read it. It took the press conference as a sign the Fed would go a bit easier. The two-year Treasury yield fell 12 basis points, stocks rallied and the dollar weakened — all loosening financial conditions.The market may be getting a bit ahead of itself. To be confident that inflation is coming down, the Fed wants to see somewhat lower growth. In isolation, tighter financial conditions could deliver that. But remember why financial conditions have tightened recently: because of a rally in long-term real interest rates (see chart below). That is partly down expectations of higher growth. So on the margin, if growth falls, yields will follow, loosening financial conditions, and opening the way for growth to reaccelerate. We should not rely too much on higher long-term rates to do the Fed’s work for it.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Nor is the Fed relying too much on long rates. Yesterday Powell laid out two requirements for the Fed to forgo rate rises on the basis of tighter financial conditions. They are, first, that tightness should be sustained and, secondly, that a rise in yields should reflect more than just higher near-term policy rates. This is a high bar. Financial conditions have changed a lot. But the Fed’s reaction function seems mostly the same. (Ethan Wu)Journalism as a tool for trading, or vice versaHere’s a new business model: A group of veteran US financial journalists is teaming up with investors to launch a trading firm that is designed to trade on market-moving news unearthed by its own investigative reporting.The business, founded by investor Nathaniel Brooks Horwitz and writer Sam Koppelman, would comprise two entities: a trading fund and a group of analysts and journalists producing stories based on publicly available material, according to several people familiar with the matter. The fund would place trades before articles were published . . . but would not trade on information that was not publicly available.So reported the Financial Times yesterday. Congratulations, Mr Horwitz and Mr Koppelman. You have invented the hedge fund. Lots of investors hire journalists, or people who have journalistic skills, to gather information about companies — information that is not in the financial statements and indeed is not available to most investors. Some of them, most notoriously short sellers, make trades before publishing what they have found. This is an ancient practice.(Another thing, Mr Horwitz and Mr Koppelman: what follows is not legal advice, and I’m not a lawyer.) The obvious question about this nascent enterprise — to be owned through a start-up called “Hunterbrook” — is whether it will explode on contact with insider trading laws. Journalists get their big stories by having sources inside companies. Only a fool would propose an investing business model, or for that matter a journalism business model, based only on a bunch of journalists combing through public documents.But there is no obvious reason that a fund based on journalistic sourcing would be illegal. The crucial question with insider trading, from the point of view of criminal as opposed to civil law, is whether a company insider violated a duty in providing information to an outsider. Whether the insider did that depends, in turn, on whether they expected personal benefit from it. If they didn’t, it is fine for the recipient of the information to profit from it. After all, making money from non-public corporate information is an important part of the newspaper business model, and that is fine (for the newspaper, anyway). And any information that is gathered that does not come from within a company (conversations with customers and suppliers, satellite images of empty parking lots, watching who goes in and out of headquarters) is standard investment industry stuff, and standard journalism stuff, too.“Think about what short sellers do. Is it OK to collect information about a company? Yes. Is it OK to trade on that information before you publish it? Yes,” Daniel Richman, a professor at Columbia Law School, told me yesterday. The crucial thing, again, is that the source does not stand to benefit. “Even if the collection and exploitation of the information is something that regular members of the public might not be able to do . . . I don’t think the fact that [the recipient] is making money makes any difference.”What if Hunterbrook trades ahead of a report that turns out to be wrong? “Short seller reports have been proved wrong. We’ve seen this movie before,” Richman says. Lawsuits may ensue, of course, as well as criminal investigations of market manipulation. The point is that the situation with Hunterbrook is not fundamentally different from business models that have long existed in finance.So the Hunterbrook business model is not intrinsically unlawful. That does not mean it does not have legal risks. The risk of a Securities and Exchange Commission lawsuit is significant, as a lawyer with long experience of the agency explained to me. The threshold for what counts as “benefit” is very low, in a civil law context especially. A lunch? Expectation of friendship? Hopes of a cameo in a Michael Lewis book? Any of this is enough to set the SEC sniffing around. Similarly, the trigger for a market manipulation investigation on a report that moves the market is going to be very sensitive indeed.Jacob Frenkel, a lawyer specialising in securities enforcement at Dickinson Wright, put it more bluntly: “SEC enforcement would scrutinise vigorously trading by the principals of a publication that reaches into a company, obtains non-public information, and trades on the information.”Of course it could be that Hunterbrook doesn’t plan to “reach in” to anybody. It might instead plan to build mosaics of little bits of information available to everyone in documents and other public sources. If so, it can get in line behind a zillion other well-staffed hedge funds, and expect to earn the same mediocre returns that they do, over what is likely be a short corporate lifespan.The most interesting question is whether owning a trading operation is a good way to finance journalism. If you found out something awful about your employer, something the world should know, would you want to share it with a company that was going to trade on that information before publishing it? Would you trust a news organisation that was funded by trading on its stories before you got to read them? These questions are important, because Hunterbrook is only an interesting idea if it is a news organisation supported by a trading operation. Trading operations supported by journalistic work are a dime a dozen.One good readHow Bridgewater might work.FT Unhedged podcastCan’t get enough of Unhedged? Listen to our new podcast, hosted by Ethan Wu and Katie Martin, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.Recommended newsletters for youSwamp Notes — Expert insight on the intersection of money and power in US politics. Sign up hereChris Giles on Central Banks — Your essential guide to money, interest rates, inflation and what central banks are thinking. Sign up here More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Every time the world economy totters and governments start putting up trade barriers, a ritual alarm sounds that we’re heading back towards the destructive protectionism of the 1930s.In reality we’re not time-travelling to the Depression so much as to the 1970s and 1980s, which were far less economically calamitous. (Also, if we’re going culturally retro, it’s surely better to have punk, disco and electropop than big band and swing.)In the 1970s, the US began to face what (rather quaintly now) seemed the existential threat of Japan emerging as a major exporter. Washington forced Tokyo into a series of exercises in “managed trade”, notably for autos and semiconductors.In an echo of that era, Donald Trump (crudely) and Joe Biden (with more precision) have used quotas and trade barriers to protect the US steel and aluminium industry. The Biden administration is currently threatening the EU with the reintroduction of tariffs — temporarily suspended since 2021 and replaced with import quotas — unless Brussels signs up to a club to keep out steel imports from China. Brussels is correctly reluctant to do so. Certainly in its original version it’s a pretty blatant breach of World Trade Organization law and would undermine the carbon border pricing scheme that’s central to its environmental policy.So how should it and other trading partners respond, and what lessons can be learnt from the 1970s and 1980s? Some of the countervailing forces present at that time are absent now, but there are still some general lessons about rolling with the punch while trying to avoid permanent damage.The supposedly free-market Reagan administration pressed the auto VER on Japan in 1981, setting annual ceilings for Japanese car exports to the US and securing more US access to the Japanese market. Tokyo, concerned about a widescale trade war, complied — and in fact continued to limit exports for nearly a decade after Reagan lifted the VER requirements in 1985.Ultimately the VER ended for two reasons. One, the multilateral “Uruguay round” of trade talks under the WTO’s predecessor, the General Agreement on Tariffs and Trade (Gatt), concluded in 1994 and outlawed such managed trade arrangements. Two, Japanese manufacturers set up in the US to serve the American market. Neither of these, unfortunately, provide models for the EU today. The Biden administration has little concern for WTO law, and the US wants to protect its existing steel producers in the electoral swing states of Ohio and Pennsylvania, not invite in new ones.With semiconductors, the US and Japan in 1986 agreed rules to prevent low-priced Japanese chip exports flooding the US and global market — and more access for American producers to Japan. The trade restrictions were lifted by 1991 after the US lost a Gatt case in 1988 and US computer manufacturers increasingly pushed back against rising chip prices.With the power of WTO law dwindling, the US’s trading partners today have resorted to expedient and opportunistic approaches. Japan, for example, managed to head off threats of car tariffs by Trump in 2019 by promising new import quotas for US agricultural products.The EU harrumphed at this shift towards managed trade. But the European Commission had already made its own (somewhat more guileful) concession the previous year, bamboozling Trump by making promises to import more US soyabeans and liquefied natural gas that it had no ability to implement. In 2020, China agreed a deal with the US pledging a massive increase in imports from America, which in the event produced almost nothing.When dealing with Biden’s China steel proposal, the EU is best advised to minimise political conflict and the short-term economic hit without making damaging long-term commitments. The EU seems insistent that the suspended tariffs be permanently removed as early as possible, even before negotiations are complete. Certainly the temporary quota system is messy and unsatisfactory, but isn’t disastrous for the EU steel industry or global trade rules. Leaving it in place while protracted transatlantic negotiations continue is probably the least bad option.At the least, the EU should be prepared to help Biden politically by keeping the fix in place until next year’s presidential election rather than riling the steel-producing states by loudly demanding the quotas and tariffs be lifted. Biden’s managed trade is a bad idea, but it’s far better than four years of Trump’s economic nihilism. In a world of weak multilateral trade rules, it’s important to pick your fights. A full-on EU-US trade conflict over steel and aluminium isn’t wise for either side. The lessons of managed trade in the 1970s and 1980s are to sway with the wind without letting yourself be uprooted. Back then, Japanese car and semiconductor industries continued their path to becoming global players despite the machinations of the US. Today, the EU can preserve its economy and its environmental commitments by yielding where it’s necessary and holding firm where it’s [email protected] More