Finance

China needs to convince people that home prices are on their way up in order for growth to pick up, Richard Koo, chief economist at Nomura, told CNBC’s Steve Sedgwick.
“For them to come back and borrow money, we need a narrative that says, okay, this is the bottom of the prices, the prices will start going up from this point onwards,” Koo said.
He added that a reason why Beijing is reluctant to stimulate the economy now is that authorities view China’s prior support program as a failure.

Pictured here is a real estate project under construction in Huai ‘an city, Jiangsu province, China, on April 8, 2024. 
Future Publishing | Future Publishing | Getty Images

BEIJING — China needs to convince people that home prices are on their way up in order for economic activity to pick up, Richard Koo, chief economist at Nomura Research Institute, told CNBC’s Steve Sedgwick last week.
Business and consumer appetite for new loans have had a tepid start to the year, while home prices dropped at a steeper pace in January than in February, according to Goldman Sachs’ analysis.

In other words, as Koo warned last year, China may be entering a “balance sheet recession,” similar to what Japan experienced during its economic slump.
“For them to come back and borrow money, we need a narrative that says, okay, this is the bottom of the prices, the prices will start going up from this point onwards,” Koo said.
But it’s not clear whether prices have reached an actual bottom yet. Koo and other analysts have pointed out that in China’s policy-driven economy, house prices have not fallen as much as expected given declines in other aspects of the property market.

Chinese officials have said that real estate remains in a period of “adjustment.” The country has also been emphasizing new growth drivers such as manufacturing and new energy vehicles.
Real estate and related sectors have accounted for at least one-fifth of China’s economy, depending on analyst estimates. The property market began its latest slump after Beijing cracked down on developers’ high reliance on debt in 2020.

That coincided with the shock from the Covid-19 pandemic.
It also comes as China’s population has started to shrink, Koo pointed out — a big difference with Japan, whose population didn’t start to fall until 2009, he said.
“That makes this narrative, that the prices have fallen enough, you should go out and borrow and buy houses, even more difficult to justify because [the] population is now shrinking,” Koo said.

Lessons from history

China’s economy officially grew by 5.2% in 2023, the first year since the end of Covid-19 controls. Beijing has set a target of around 5% growth for 2024.
However, many analysts have said such a goal is ambitious without more stimulus.
Chinese authorities have been reluctant to embark on large-scale support for the economy. Koo said an underlying reason is that Beijing views its prior stimulus program as a mistake.
About 15 years ago, in the wake of the global financial crisis, China launched a 4 trillion yuan ($563.38 billion) stimulus package that was initially met with skepticism — and a 70% drop in Chinese stock prices, Koo said.
“It was heading toward balance sheet recession, almost,” he said. “One year later, China had 12% growth.”

But Beijing kept up its stimulus package even after the country had achieved rapid growth, which led to an overheating of growth and speculation, on top of corruption, Koo said. “That’s one of the reasons why this government, Mr. Xi Jinping, is still reluctant to put [out] a large package because so many people think the previous one was a failure.”
Looking ahead, Koo said China should stimulate its economy to avoid a balance sheet recession, and that it should cut that support once growth reaches 12%. “Once the borrow[ing] is coming back, then you can cut, but not before.” More

A decade ago finance ministries were gripped by austerity fever. Governments were doing all they could to cut budget deficits, even with unemployment high and economic growth weak. Today things are very different. Across the West, most economies are in better shape. People have jobs. Corporate-profit growth is strong. And yet governments are spending a lot more than they are taking in.No government is more profligate than America’s. This year the world’s largest economy is projected to run a budget deficit (where spending exceeds taxation) of more than 7% of GDP—a level unheard of outside recession and wartime. But it is not the only spendthrift country. Estonia and Finland, two normally parsimonious northern European countries, are running large budget deficits. Last year Italy’s deficit was as wide as in 2010-11, following the global financial crisis of 2007-09, and France’s grew to 5.5% of GDP, well above forecasts. “I am calling for a collective wake-up call to make choices in all of our public spending,” announced Bruno Le Maire, its finance minister, last month.Chart: The EconomistSome countries have been more reserved. Last year Cyprus ran a surplus. Greece and Portugal—close to balancing their budgets—look like the model of fiscal rectitude even if they still have colossal debts. Still, the general direction is clear. The Economist has analysed data from 35 rich countries. Whereas in 2017-19 the median country in our sample ran a budget surplus, last year it ran a budget deficit of close to 2.5% of GDP (see chart 1). Measures of “primary” deficits (excluding interest payments) and “structural” deficits (abstracting from the economic cycle) have also sharply widened.Two factors explain the splurge. The first relates to taxes. Across the rich world, receipts are surprisingly weak. In America, revenue from income taxes deducted from pay fell slightly last year. Meanwhile, “non-withheld income taxes”, including on capital gains, tumbled by a quarter. Britain’s capital-gains-tax take is running 11% below its recent high. And Japan’s self-assessment tax take for this fiscal year, which includes some levies on capital gains, is on track to come in 4% below last year’s.Taxmen are suffering because of market ructions in late 2022 and early 2023. Tech firms, which pay big salaries, let staff go, trimming income-tax takes. As share prices fell, it became more difficult for households and investors to sell shares for a profit, reducing the pool of capital gains. Last year few people made money from flipping houses as property prices dropped. Senior staff at private-equity firms, who often receive income in the form of investment returns rather than a conventional salary, had a bad year.The second factor is state spending. Following the whatever-it-takes fiscal policy of the covid-19 pandemic, governments have retrenched, but not fully. In Australia elderly people in care homes may still receive financial assistance during a covid outbreak. Only in mid-2023 did Germany completely wind down the job-protection schemes implemented during the pandemic. America is still paying out substantial tax refunds to small businesses that kept people on during lockdowns. In Italy a project concocted in 2020, designed to encourage homeowners to green their homes, has spiralled out of control, with the government so far disbursing support worth €200bn (or 10% of GDP). The name of one of the schemes, “Superbonus”, would be amusing were it not so profligate.Politicians have also become more prepared to intervene—and spend money—in order to right perceived wrongs. After Russia invaded Ukraine and energy prices soared, governments in Europe allocated about 4% of GDP to protect households and companies from the effects. A few, including Poland and the Baltics, are now spending big on guns and soldiers. President Joe Biden wants to forgive as much student debt as he can before America’s presidential election in November.How long can the firehose keep blasting? At first glance, it looks like it could keep going for a while. Markets have gone on a tear, which will boost tax receipts. And a government’s debt sustainability does not change solely owing to what happens to the budget deficit. It is also a product of overall public debt, economic growth, inflation and interest rates. Since the end of the pandemic, inflation has been high and growth has been solid. Although rates have risen, they remain fairly low by historical standards.Chart: The EconomistThese conditions put politicians in a fiscal sweet spot (see chart 2). We calculate that in 2022-23 the median rich country was able to run a primary deficit of about 2% of GDP and still cut its public-debt-to-GDP ratio. The nominal value of debt would have risen, but, helped by inflation, the size of the economy would have risen by even more. A few countries faced an even more favourable environment. Italy’s debt ratio has fallen by about ten percentage points of GDP from its peak in 2021, despite its loose fiscal policy. France’s ratio has edged down, too. Greece—combining favourable economic conditions with tight fiscal policy—has seen its debt-to-gdp ratio fall by a stunning 50 percentage points.American exceptionalismNow that is changing, however. The interest rates facing governments are not yet falling, even as economic growth and inflation come down. This is already making the fiscal arithmetic more daunting. For instance, the Italian government’s primary position consistent with a stable debt ratio has fallen from a deficit of 1% of GDP last year to a surplus of 2% in this one, according to our calculations. America is in a pretty similar position. Further falls in inflation, a slowdown in growth or higher rates would make it more difficult still for governments to stabilise their debt.Small wonder that talk of fiscal consolidation has recently become louder. The Italian government believes it will soon be reprimanded by the EU for its stance. In Britain the opposition Labour Party, which hopes to take power before long, promises fiscal rectitude. The French government talks about cuts to health spending and unemployment benefits. America is the outlier. In the world’s leading economy, the conversation still has not turned. Ahead of the election, Donald Trump and Mr Biden promise tax cuts for millions of voters. But fiscal logic is remorseless. Whether they like it or not, the era of free-spending politicians will have to come to an end. ■ More

A decade ago finance ministries were gripped by austerity fever. Governments were doing all they could to cut budget deficits, even with unemployment high and economic growth weak. Today things are very different. Across the West, most economies are in better shape. People have jobs. Corporate-profit growth is strong. And yet governments are spending a lot more than they are taking in.No government is more profligate than America’s. This year the world’s largest economy is projected to run a budget deficit (where spending exceeds taxation) of more than 7% of GDP—a level unheard of outside recession and wartime. But it is not the only spendthrift country. Estonia and Finland, two normally parsimonious northern European countries, are running large budget deficits. Last year Italy’s deficit was as wide as in 2010-11, following the global financial crisis of 2007-09, and France’s grew to 5.5% of GDP, well above forecasts. “I am calling for a collective wake-up call to make choices in all of our public spending,” announced Bruno Le Maire, its finance minister, last month.Chart: The EconomistSome countries have been more reserved. Last year Cyprus ran a surplus. Greece and Portugal—close to balancing their budgets—look like the model of fiscal rectitude even if they still have colossal debts. Still, the general direction is clear. The Economist has analysed data from 35 rich countries. Whereas in 2017-19 the median country in our sample ran a budget surplus, last year it ran a budget deficit of close to 2.5% of GDP (see chart 1). Measures of “primary” deficits (excluding interest payments) and “structural” deficits (abstracting from the economic cycle) have also sharply widened.Two factors explain the splurge. The first relates to taxes. Across the rich world, receipts are surprisingly weak. In America, revenue from income taxes deducted from pay fell slightly last year. Meanwhile, “non-withheld income taxes”, including on capital gains, tumbled by a quarter. Britain’s capital-gains-tax take is running 11% below its recent high. And Japan’s self-assessment tax take for this fiscal year, which includes some levies on capital gains, is on track to come in 4% below last year’s.Taxmen are suffering because of market ructions in late 2022 and early 2023. Tech firms, which pay big salaries, let staff go, trimming income-tax takes. As share prices fell, it became more difficult for households and investors to sell shares for a profit, reducing the pool of capital gains. Last year few people made money from flipping houses as property prices dropped. Senior staff at private-equity firms, who often receive income in the form of investment returns rather than a conventional salary, had a bad year.The second factor is state spending. Following the whatever-it-takes fiscal policy of the covid-19 pandemic, governments have retrenched, but not fully. In Australia elderly people in care homes may still receive financial assistance during a covid outbreak. Only in mid-2023 did Germany completely wind down the job-protection schemes implemented during the pandemic. America is still paying out substantial tax refunds to small businesses that kept people on during lockdowns. In Italy a project concocted in 2020, designed to encourage homeowners to green their homes, has spiralled out of control, with the government so far disbursing support worth €200bn (or 10% of GDP). The name of one of the schemes, “Superbonus”, would be amusing were it not so profligate.Politicians have also become more prepared to intervene—and spend money—in order to right perceived wrongs. After Russia invaded Ukraine and energy prices soared, governments in Europe allocated about 4% of GDP to protect households and companies from the effects. A few, including Poland and the Baltics, are now spending big on guns and soldiers. President Joe Biden wants to forgive as much student debt as he can before America’s presidential election in November.How long can the firehose keep blasting? At first glance, it looks like it could keep going for a while. Markets have gone on a tear, which will boost tax receipts. And a government’s debt sustainability does not change solely owing to what happens to the budget deficit. It is also a product of overall public debt, economic growth, inflation and interest rates. Since the end of the pandemic, inflation has been high and growth has been solid. Although rates have risen, they remain fairly low by historical standards.Chart: The EconomistThese conditions put politicians in a fiscal sweet spot (see chart 2). We calculate that in 2022-23 the median rich country was able to run a primary deficit of about 2% of GDP and still cut its public-debt-to-GDP ratio. The nominal value of debt would have risen, but, helped by inflation, the size of the economy would have risen by even more. A few countries faced an even more favourable environment. Italy’s debt ratio has fallen by about ten percentage points of GDP from its peak in 2021, despite its loose fiscal policy. France’s ratio has edged down, too. Greece—combining favourable economic conditions with tight fiscal policy—has seen its debt-to-gdp ratio fall by a stunning 50 percentage points.American exceptionalismNow that is changing, however. The interest rates facing governments are not yet falling, even as economic growth and inflation come down. This is already making the fiscal arithmetic more daunting. For instance, the Italian government’s primary position consistent with a stable debt ratio has fallen from a deficit of 1% of GDP last year to a surplus of 2% in this one, according to our calculations. America is in a pretty similar position. Further falls in inflation, a slowdown in growth or higher rates would make it more difficult still for governments to stabilise their debt.Small wonder that talk of fiscal consolidation has recently become louder. The Italian government believes it will soon be reprimanded by the EU for its stance. In Britain the opposition Labour Party, which hopes to take power before long, promises fiscal rectitude. The French government talks about cuts to health spending and unemployment benefits. America is the outlier. In the world’s leading economy, the conversation still has not turned. Ahead of the election, Donald Trump and Mr Biden promise tax cuts for millions of voters. But fiscal logic is remorseless. Whether they like it or not, the era of free-spending politicians will have to come to an end. ■ More

In “Permutation City”, a novel by Greg Egan, the character Peer, having achieved immortality within a virtual reality over which he has total control, finds himself terribly bored. So he engineers himself to have new passions. One moment he is pushing the boundaries of higher mathematics; the next he is writing operas. “He’d even been interested in the Elysians [the afterlife], once. No longer. He preferred to think about table legs.” Peer’s fickleness relates to a deeper point. When technology has solved humanity’s deepest problems, what is left to do?That is one question considered in a new book by Nick Bostrom, a philosopher at the University of Oxford, whose last book argued that humanity faced a one-in-six chance of being wiped out in the next 100 years, perhaps owing to the development of dangerous forms of artificial intelligence (AI). In Mr Bostrom’s latest publication, “Deep Utopia”, he considers a rather different outcome. What happens if AI goes extraordinarily well? Under one scenario presented in the book, the technology progresses to the point at which it can do all economically valuable work at near-zero cost. Under a yet more radical scenario, even tasks that you might think would be reserved for humans, such as parenting, can be done better by AI. This may sound more dystopian than utopian, but Mr Bostrom argues otherwise.Start with the first scenario, which Mr Bostrom labels a “post-scarcity” Utopia. In such a world, the need for work would be reduced. Almost a century ago John Maynard Keynes wrote an essay entitled “Economic Possibilities for Our Grandchildren”, which predicted that 100 years into the future his wealthy descendants would need to work for only 15 hours a week. This has not quite come to pass, but working time has fallen greatly. In the rich world average weekly working hours have dropped from more than 60 in the late 19th century to fewer than 40 today. The typical American spends a third of their waking hours on leisure activities and sports. In the future, they may wish to spend their time on things beyond humanity’s current conception. As Mr Bostrom writes, when aided by powerful tech, “the space of possible-for-us experiences extends far beyond those that are accessible to us with our present unoptimised brains.”Yet Mr Bostrom’s label of a “post-scarcity” Utopia might be slightly misleading: the economic explosion caused by superintelligence would still be limited by physical resources, most notably land. Although space exploration may hugely increase the building space available, it will not make it infinite. There are also intermediate worlds where humans develop powerful new forms of intelligence, but do not become space-faring. In such worlds, wealth may be fantastic, but lots of it could be absorbed by housing—much as is the case in rich countries today.“Positional goods”, which boost the status of their owners, are also still likely to exist and are, by their nature, scarce. Even if AIs surpass humans in art, intellect, music and sport, humans will probably continue to derive value from surpassing their fellow humans; for example, by having tickets to the hottest events. In 1977 Fred Hirsch, an economist, argued in “The Social Limits to Growth” that, as wealth increases, a greater fraction of human desire consists of positional goods. Time spent competing goes up, the price of such goods increases and so their share of GDP rises. This pattern may continue in an AI Utopia.Mr Bostrom notes some types of competition are a failure of co-ordination: if everyone agrees to stop competing, they would have time for other, better things, which could further boost growth. Yet some types of competition, such as sport, have intrinsic value, and are worth preserving. (Humans may also have nothing better to do.) Interest in chess has grown since IBM’s Deep Blue first defeated Garry Kasparov, then world champion, in 1997. An entire industry has emerged around e-sports, where computers can comfortably defeat humans; their revenues are expected to grow at a 20% annual rate over the next decade, reaching nearly $11bn by 2032. Several groups in society today give us a sense of how future humans might spend their time. Aristocrats and bohemians enjoy the arts. Monastics live within themselves. Athletes spend their lives on sport. The retired dabble in all these pursuits.Everyone’s early retirementWon’t tasks such as parenting remain the refuge of humans? Mr Bostrom is not so sure. He argues that beyond the post-scarcity world lies a “post-instrumental” one, in which AIs would become superhuman at child care, too. Keynes himself wrote that “there is no country and no people, I think, who can look forward to the age of leisure and of abundance without a dread. For we have been trained too long to strive and not to enjoy…To judge from the behaviour and the achievements of the wealthy classes today in any quarter of the world, the outlook is very depressing!” The Bible puts it more succinctly: “idle hands are the devil’s workshop.”These dynamics suggest a “paradox of progress”. Although most humans want a better world, if tech becomes too advanced, they may lose purpose. Mr Bostrom argues that most people would still enjoy activities that have intrinsic value, such as eating tasty food. Utopians, believing life had become too easy, might decide to challenge themselves, perhaps by colonising a new planet to try to re-engineer civilisation from scratch. At some point, however, even such adventures might cease to feel worthwhile. It is an open question how long humans would be happy hopping between passions, as Peer does in “Permutation City”. Economists have long believed that humans have “unlimited wants and desires”, suggesting there are endless variations on things people would like to consume. With the arrival of an AI Utopia, this would be put to the test. Quite a lot would ride on the result. ■ More

In “Permutation City”, a novel by Greg Egan, the character Peer, having achieved immortality within a virtual reality over which he has total control, finds himself terribly bored. So he engineers himself to have new passions. One moment he is pushing the boundaries of higher mathematics; the next he is writing operas. “He’d even been interested in the Elysians [the afterlife], once. No longer. He preferred to think about table legs.” Peer’s fickleness relates to a deeper point. When technology has solved humanity’s deepest problems, what is left to do?That is one question considered in a new book by Nick Bostrom, a philosopher at the University of Oxford, whose last book argued that humanity faced a one-in-six chance of being wiped out in the next 100 years, perhaps owing to the development of dangerous forms of artificial intelligence (AI). In Mr Bostrom’s latest publication, “Deep Utopia”, he considers a rather different outcome. What happens if AI goes extraordinarily well? Under one scenario presented in the book, the technology progresses to the point at which it can do all economically valuable work at near-zero cost. Under a yet more radical scenario, even tasks that you might think would be reserved for humans, such as parenting, can be done better by AI. This may sound more dystopian than utopian, but Mr Bostrom argues otherwise.Start with the first scenario, which Mr Bostrom labels a “post-scarcity” Utopia. In such a world, the need for work would be reduced. Almost a century ago John Maynard Keynes wrote an essay entitled “Economic Possibilities for Our Grandchildren”, which predicted that 100 years into the future his wealthy descendants would need to work for only 15 hours a week. This has not quite come to pass, but working time has fallen greatly. In the rich world average weekly working hours have dropped from more than 60 in the late 19th century to fewer than 40 today. The typical American spends a third of their waking hours on leisure activities and sports. In the future, they may wish to spend their time on things beyond humanity’s current conception. As Mr Bostrom writes, when aided by powerful tech, “the space of possible-for-us experiences extends far beyond those that are accessible to us with our present unoptimised brains.”Yet Mr Bostrom’s label of a “post-scarcity” Utopia might be slightly misleading: the economic explosion caused by superintelligence would still be limited by physical resources, most notably land. Although space exploration may hugely increase the building space available, it will not make it infinite. There are also intermediate worlds where humans develop powerful new forms of intelligence, but do not become space-faring. In such worlds, wealth may be fantastic, but lots of it could be absorbed by housing—much as is the case in rich countries today.“Positional goods”, which boost the status of their owners, are also still likely to exist and are, by their nature, scarce. Even if AIs surpass humans in art, intellect, music and sport, humans will probably continue to derive value from surpassing their fellow humans; for example, by having tickets to the hottest events. In 1977 Fred Hirsch, an economist, argued in “The Social Limits to Growth” that, as wealth increases, a greater fraction of human desire consists of positional goods. Time spent competing goes up, the price of such goods increases and so their share of GDP rises. This pattern may continue in an AI Utopia.Mr Bostrom notes some types of competition are a failure of co-ordination: if everyone agrees to stop competing, they would have time for other, better things, which could further boost growth. Yet some types of competition, such as sport, have intrinsic value, and are worth preserving. (Humans may also have nothing better to do.) Interest in chess has grown since IBM’s Deep Blue first defeated Garry Kasparov, then world champion, in 1997. An entire industry has emerged around e-sports, where computers can comfortably defeat humans; their revenues are expected to grow at a 20% annual rate over the next decade, reaching nearly $11bn by 2032. Several groups in society today give us a sense of how future humans might spend their time. Aristocrats and bohemians enjoy the arts. Monastics live within themselves. Athletes spend their lives on sport. The retired dabble in all these pursuits.Everyone’s early retirementWon’t tasks such as parenting remain the refuge of humans? Mr Bostrom is not so sure. He argues that beyond the post-scarcity world lies a “post-instrumental” one, in which AIs would become superhuman at child care, too. Keynes himself wrote that “there is no country and no people, I think, who can look forward to the age of leisure and of abundance without a dread. For we have been trained too long to strive and not to enjoy…To judge from the behaviour and the achievements of the wealthy classes today in any quarter of the world, the outlook is very depressing!” The Bible puts it more succinctly: “idle hands are the devil’s workshop.”These dynamics suggest a “paradox of progress”. Although most humans want a better world, if tech becomes too advanced, they may lose purpose. Mr Bostrom argues that most people would still enjoy activities that have intrinsic value, such as eating tasty food. Utopians, believing life had become too easy, might decide to challenge themselves, perhaps by colonising a new planet to try to re-engineer civilisation from scratch. At some point, however, even such adventures might cease to feel worthwhile. It is an open question how long humans would be happy hopping between passions, as Peer does in “Permutation City”. Economists have long believed that humans have “unlimited wants and desires”, suggesting there are endless variations on things people would like to consume. With the arrival of an AI Utopia, this would be put to the test. Quite a lot would ride on the result. ■ More

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JPMorgan Chase Jamie Dimon chose AI as the first topic in his update of issues facing the biggest U.S. bank by assets.
In his annual letter to shareholders released Monday, Dimon said he was convinced that artificial intelligence will have a profound impact on society.
He also touched on inflation, geopolitics, social media and the bank’s First Republic deal.

Jamie Dimon, CEO of JPMorgan Chase, testifies during the Senate Banking, Housing and Urban Affairs Committee hearing titled Annual Oversight of Wall Street Firms, in the Hart Building on Dec. 6, 2023.
Tom Williams | Cq-roll Call, Inc. | Getty Images

Jamie Dimon, the veteran CEO and chairman of JPMorgan Chase, said he was convinced that artificial intelligence will have a profound impact on society.
In his annual letter to shareholders released Monday, Dimon chose AI as the first topic in his update of issues facing the biggest U.S. bank by assets — ahead of geopolitical risks, recent acquisitions and regulatory matters.

“While we do not know the full effect or the precise rate at which AI will change our business — or how it will affect society at large — we are completely convinced the consequences will be extraordinary,” Dimon said.
The impact will be “possibly as transformational as some of the major technological inventions of the past several hundred years: Think the printing press, the steam engine, electricity, computing and the Internet.”
Dimon’s letter, read widely in the business world because of his status as one of the most successful leaders in finance, hit a wide variety of topics. The CEO said that he had ongoing concerns about inflationary pressures and reiterated his warning that the world may be entering the riskiest era in geopolitics since World War II.
But his focus on AI, first mentioned in Dimon’s annual letter in 2017, stood out. The technology, which has gained in prominence since ChatGPT became a viral sensation in late 2022, can generate human-sounding responses to queries. Enthusiasm for AI has fueled the meteoric rise in chipmaker Nvidia and helped propel tech names to new heights.  
JPMorgan now has more than 2,000 AI and machine learning employees and data scientists working on 400 applications including fraud detection, marketing and risk controls, Dimon said. The bank is also exploring the use of generative AI in software engineering, customer service and ways to boost employee productivity, he said.

The technology could ultimately touch all of the bank’s roughly 310,000 employees, assisting some workers while replacing others, and forcing the company to retrain workers for new roles.
“Over time, we anticipate that our use of AI has the potential to augment virtually every job, as well as impact our workforce composition,” Dimon said. “It may reduce certain job categories or roles, but it may create others as well.”
Here are excerpts from Dimon’s letter:

Inflationary pressures:

“Many key economic indicators today continue to be good and possibly improving, including inflation. But when looking ahead to tomorrow, conditions that will affect the future should be considered… All of the following factors appear to be inflationary: ongoing fiscal spending, remilitarization of the world, restructuring of global trade, capital needs of the new green economy, and possibly higher energy costs in the future (even though there currently is an oversupply of gas and plentiful spare capacity in oil) due to a lack of needed investment in the energy infrastructure.”

On the economy’s soft landing:

“Equity values, by most measures, are at the high end of the valuation range, and credit spreads are extremely tight. These markets seem to be pricing in at a 70% to 80% chance of a soft landing — modest growth along with declining inflation and interest rates. I believe the odds are a lot lower than that.”

On interest rates & commercial real estate:

“If long-end rates go up over 6% and this increase is accompanied by a recession, there will be plenty of stress — not just in the banking system but with leveraged companies and others. Remember, a simple 2 percentage point increase in rates essentially reduced the value of most financial assets by 20%, and certain real estate assets, specifically office real estate, may be worth even less due to the effects of recession and higher vacancies. Also remember that credit spreads tend to widen, sometimes dramatically, in a recession.”

On a breakdown between banks and regulators:

“There is little real collaboration between practitioners — the banks — and regulators, who generally have not been practitioners in business…. Unfortunately, without collaboration and sufficient analysis, it is hard to be confident that regulation will accomplish desired outcomes without undesirable consequences. Instead of constantly improving the system, we may be making it worse.”

On rising geopolitical risks:

“Russia’s invasion of Ukraine and the subsequent abhorrent attack on Israel and ongoing violence in the Middle East should have punctured many assumptions about the direction of future safety and security, bringing us to this pivotal time in history. America and the free Western world can no longer maintain a false sense of security based on the illusion that dictatorships and oppressive nations won’t use their economic and military powers to advance their aims — particularly against what they perceive as weak, incompetent and disorganized Western democracies. In a troubled world, we are reminded that national security is and always will be paramount, even if its importance seems to recede in tranquil times.”

On social media:

“One common sense and modest step would be for social media companies to further empower platform users’ control over what they see and how it is presented, leveraging existing tools and features — like the alternative feed algorithm settings some offer today. I believe many users (not just parents) would appreciate a greater ability to more carefully curate their feeds; for example, prioritizing educational content for their children.”

An update on the First Republic deal:

“The acquisition of a major company entails a lot of complexity. People tend to focus on the financial and economic outcomes, which is a reasonable thing to do. And in the case of First Republic, the numbers look rather good. We recorded an accounting gain of $3 billion on the purchase, and we told the world we expected to add more than $500 million to earnings annually, which we now believe will be closer to $2 billion.”
JPMorgan acquired most of the assets of First Republic last year for more than $10 billion after regulators seized the firm amid the regional banking crisis. More

U.S. Treasury Secretary Janet Yellen said Monday that future discussions between the U.S. and China will focus on Beijing’s need to change its policy on industry and the economy.
She noted U.S. conversations with the Chinese would continue later this month at the International Monetary Fund and World Bank Group spring meetings in Washington, D.C.
Instead of global trade, Beijing’s oversupply concerns tend to focus on the deflationary aspects, detriments to banking sector health and local governments’ fiscal stress, said Yue Su, principal economist for China at The Economist Intelligence Unit.

U.S. Treasury Secretary Janet Yellen said Monday that future discussions between the U.S. and China will focus on Beijing’s need to shift its policy on industry and the economy, as she wrapped up the fourth and final full day of her trip to China on April 8. 2024.
Pedro Pardo | Afp | Getty Images

BEIJING — U.S. Treasury Secretary Janet Yellen said Monday that future discussions between the U.S. and China will focus on Beijing’s need to change its policy on industry and the economy.
“We intend to underscore the need for a shift in policy during these talks — building on the over two hours I spent on this topic with the Vice Premier last week,” she said in prepared remarks for a news conference Monday, as she wrapped up the fourth and final full day of her trip to China.

She arrived in Guangzhou on Thursday and is set to depart Beijing on Tuesday.
Yellen said her conversations with Chinese officials during the trip discussed plans Beijing had for its economy, but she did not elaborate. Yellen also declined to share what tools the U.S. might use to prevent China’s industrial policy from resulting in the loss of American jobs.
She noted U.S. conversations with the Chinese would continue later this month at the International Monetary Fund and World Bank Group spring meetings in Washington, D.C.

China’s industrial overcapacity — or excess production of goods that undercuts global competitors on price — has increasingly become a point of international concern. Other countries claim such production is often heavily subsidized.
However, instead of global trade, Beijing’s oversupply concerns tend to focus on the deflationary aspects, detriments to banking sector health and local governments’ fiscal stress, said Yue Su, principal economist for China at The Economist Intelligence Unit.

“We anticipate further anti-subsidy and anti-dumping investigations on Chinese manufacturing to take place throughout the remainder of the year, particularly as inflation becomes less of a concern for many developed economies,” Su said. “These investigations may extend to Chinese overseas factories, including those in ASEAN countries.”

A call to boost domestic demand

When asked about potential solutions, Yellen pointed to how China could boost domestic demand relative to supply by adding support for retirement or children’s education.
High costs of living, including housing and health care, have encouraged many Chinese to save rather than spend.
Yellen acknowledged that efforts to reduce industrial overcapacity or increase domestic demand would not be resolved quickly.
“This is a matter that we have discussed over more than a decade in China,” she told reporters.
Consumer demand in China didn’t rebound from the pandemic as quickly as many analysts had expected. In contrast to governments in the U.S. and Hong Kong, Beijing did not issue stimulus checks, but instead focused on cutting business taxes and fees.

National security talks

China has also sought to bolster its technological capabilities in the face of growing U.S. restrictions on how Chinese companies can access that tech.
Both Washington and Beijing have increasingly cited national security as the reason for new measures.
Yellen on Monday said both sides exchanged information on the use of economic tools in national security, and should continue to do so. “We are committed to no surprises,” she said.
During her trip, Yellen met with top Chinese officials including Premier Li Qiang in Beijing and Vice Premier He Lifeng in Guangzhou.

“Over the past year, we have put our bilateral relationship on more stable footing,” Yellen said in prepared remarks for her meeting with Li on Sunday.
“This has not meant ignoring our differences or avoiding tough conversations,” she said. “It has meant understanding that we can only make progress if we directly and openly communicate with one another.”
In a readout from China, Li said Beijing hoped the U.S. would abide by market economy norms and avoid politicizing trade issues. He said the development of China’s new energy industry will make important contributions to global carbon neutrality efforts.
The U.S. and China agreed to “intensive exchanges on balanced growth in the domestic and global economies,” according to a Treasury readout after Yellen’s meetings with Vice Premier He.
The two countries also agreed to “start Joint Treasury-PBOC Cooperation and Exchange on Anti-Money Laundering to expand cooperation against illicit finance and financial crime,” the readout said.
The Chinese side did not explicitly mention such agreements, but said both sides planned to maintain communication. Beijing also “expressed serious concerns” about U.S. trade restrictions.
The Chinese readout described the talks as “constructive,” and noted conversations about “balanced economic growth,” “financial stability” and “anti-money laundering.” That’s according to a CNBC translation.
The U.S. Treasury secretary also met Minister of Finance Lan Fo’an, the mayors of Beijing and Guangzhou, representatives of U.S. businesses, and professors and students at Peking University during the visit.

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