Recommended Weekend Reads

August 30 - September 1, 2024

Please find below our recommended reads from reports and articles we read in the last week.  We hope you find these useful and that you have a relaxing weekend.   And let us know if you or someone you know wants to be added to our distribution list.

Geoeconomics & Markets 

• What is Driving China’s Long-Dated Bonds?  Carnegie China

  The People’s Bank of China (PBoC) is determined to rein in what it fears might be a government bond bubble because of its possible disruptive impact on Chinese banks. Yields on long-dated sovereign bonds have been falling since December of last year when, after a few fairly stable months during which China’s ten-year sovereign bond traded between 2.60 and 2.70 percent, bond prices rose sharply, causing yields to drop 10 basis points during the month.  What is driving this frenzy?

• The Downward Spiral: A Macroeconomic Analysis of the Opioid Crisis   Federal Reserve Bank of Cleveland Working Paper

  There have been more than 700,000 opioid overdose deaths since 2000. To analyze the opioid epidemic, a model is constructed where individuals choose whether to use opioids recreationally, knowing the probabilities of addiction and dying. These odds are functions of recreational opioid usage. The model is fit to estimated Markov chains from the US data that summarize the transitions into and out of opioid addiction as well as to a deadly overdose. The epidemic is broken down into two subperiods: 2000-2010 and 2010–2019. The opioid epidemic's drivers, their impact on employment, and the impact of medical interventions are examined. Lax prescribing practices and misinformation about the risk of addiction are important drivers of the first half of the epidemic. Falling prices for black-market opioids combined with an increase in their lethality are found to be important for the second half.

• Work More, Make Much More?  The Relationship between Lifetime Hours Worked and Lifetime Earnings   Federal Reserve Bank of St. Louis

  Earnings inequality in the U.S. and around the globe is a major topic of research among economists. A key objective of this research is to isolate the quantitatively important forces that shape inequality. In this post, we consider a factor that has been largely neglected so far by the literature, namely differences among individuals in hours worked. In particular, we investigate the relationship between lifetime earnings inequality and lifetime hours worked. In line with many empirical studies, lifetime here refers to ages 25 to 55, a person’s prime working years.  In this blog post, we focus on male workers, who were more likely to have uninterrupted employment histories than female workers during the period we are examining. We are able to construct a sample of 3,006 male workers for whom we have observations of earnings, weeks worked and weekly hours worked for each age from 25 to 55 (either via a direct report or via a simple imputation procedure for missing observations). Since we are interested in lifetime earnings, our sample already conditions on having worked in at least one year between 25 and 55.

Mexico’s Judicial Reform Crisis

• Last Crusade of Mexico’s President: A Drastic Redesign of the Judiciary  New York Times

  President Andrés Manuel López Obrador (AMLO) is scheduled to step down from power in October, succeeded by recently elected Claudia Sheinbaum.  But before he leaves, AMLO is driving hard to push through a highly contentious legislative effort that would require all judges to be elected and no longer appointed.  Foreign governments – including Canada and the US – and foreign investors have been openly critical of the effort as it will likely not only highly politicize the judiciary but also open it to significant interference by the drug cartels.   The effort is already having a significant negative impact on the Mexican Peso.

• Mexico Will Pay Dearly for AMLO’s Judicial Revenge   Bloomberg Opinion

  The ruling party’s huge constitutional overhaul sets the country on a volatile path, hurting investment potential and complicating the incoming political transition.  Just how intense is the pressure Mexican President Andrés Manuel López Obrador (AMLO) putting on judges?  Mexican Supreme Court judges have been told they can resign now and keep their pensions or risk competing in an election next year and then lose their benefits.  Mexico is in uproar over the future of its justice system.

China’s Unemployment and the World Economy

• China’s unemployment conundrum and its implication for global trade  Hinrich Foundation

  How bad exactly is unemployment in China? Consider these examples: An increasing number of fresh college graduates are joining the gig economy by taking low-skilled jobs such as delivering food as they struggle to find jobs commensurate with their degrees. The number of people under the age of 25 who applied for manual jobs in the first quarter of 2024 surged 165% compared with the same period in 2019. A memo from an airport in Wenzhou city indicated that the airport had hired architects and engineers as ground managers and bird controllers. Since December 2022, over 10 protests occurred at Carrefour stores across the country due to store closures and unpaid wages. Alibaba, China’s e-commerce giant, cut 20,000 jobs, or 12.8% of the total employment in the 2023 fiscal year, following a 7% cut in the previous year.

German State Elections

• Putin’s Next Coup Politico EU

  This coming Sunday, elections are being held in three eastern German states—Brandenberg, Saxony, and Thuringia—that are likely to usher in Russia-friendly parties, giving the Kremlin a foothold once again in Germany.

• Germany’s far-left disruptor claims credit for limiting aid to Ukraine: Sahra Wagenknecht’s party rises in polls ahead of regional elections in Eastern German States  Financial Times
  Sahra Wagenknecht, Germany’s most prominent far-left politician, has taken credit for the government’s decision to limit military aid to Kyiv, saying her strong opposition to arming Ukraine was influencing Berlin’s policy on the war. Her political party, the Sahra Wagenknecht Alliance (BSW)—yes, she named the party after herself—has surged in the polls in the three eastern German states holding elections this coming Sunday.

• German coalition unlikely to last until September 2025  Official Monetary and Financial Institutions Forum/David Marsh

  The Chairman of OMFIF, David Marsh, who is also a noted scholar of German politics and economics, writes that a sense of foreboding is building in Germany about prospects for government stability. Under pressure from all sides, the fractious three-party coalition under Chancellor Olaf Scholz may not last the legislative period up to the scheduled general election in September 2025. Scholz is trying to keep his creaking administration intact given the high-tension international environment, but the forces leading to break-up could soon become overwhelming.  And the ongoing and long-running public bickering among the coalition members over the 2025 budget is not helping. 

Recommended Weekend Reads

August 16 - 18, 2024

Please find below our recommended reads from reports and articles we read in the last week.  We hope you find these useful and that you have a relaxing weekend.   And let us know if you or someone you know wants to be added to our distribution list.

Hacking, Deep Fakes, and the 2024 U.S. Elections

• 100 Days Until Election 2024   U.S. Director of National Intelligence

  Already seeing the foreign governments attempting to meddle in the upcoming U.S. elections, The Office of the Director of National Intelligence (DNI) issued this unclassified memo explaining how the U.S. intelligence community is monitoring foreign actors trying to influence and disrupt the upcoming elections.  Well worth the read to understand the threat at hand.

• How Foreign Governments Sway Voters with Online Manipulation   Scientific American

  2024 is the year of elections, with more than half the world’s population heading to the polls to vote. More than 100 countries including India, Taiwan, the UK, France, Russia, Venezuela, and soon, the United States, have held are holding national elections.  Most of the elections were free and fair, while others – such as Russia and Venezuela – were rigged, and opposition candidates either arrested or “disappeared.”  But one constant in most of these elections has emerged: Foreign government efforts to interfere and either discourage voters or mislead them with disinformation.  Scientific American Magazine did a deep dive into how malign foreign governments use social media and other mediums to achieve their goals.
  

• Iran Steps into U.S. Election 2024 with Cyber-Enabled Influence Operations Campaign  Microsoft On the Issues

  Two weeks ago, news broke that the Trump campaign had been hacked, and the most likely culprit is Iran.  How is this happening?  In a new report from Microsoft details how foreign countries are seeking to negatively influence the 2024 US election.  As the report details, these malign forces started off slowly in 2024 but have steadily picked up the pace over the last six months. Russia was primarily the initial operator, but more recently, Iran has picked up the pace.  China is not far behind.

Source: Microsoft On the Issues

• Iran using covert influence campaigns to undermine Trump's candidacy, U.S. intelligence says     CNN

  CNN reports how Iran is using covert social media activity and related influence operations in an effort to undercut the candidacy of former President Donald Trump, a US intelligence official said Monday in an updated assessment of threats to the November election.

China

• China’s Imaginary Trade Data   Brad Setser/Council on Foreign Relations “Follow the Money” Blog

  Council on Foreign Relations Senior Fellow Brad Setser took a deep dive into the IMF’s latest assessment of China.  In the appendix, he found something interesting: China has a new way of calculating its good trade balance - and that calculation is deeply misleading and helps to explain the apparent fall in the current account surplus.  For example, Setser believes the new method understates the current account surplus by $300 billion as of the second quarter of 2024 and that the actual surplus is closer to $700 billion.
  

• China’s Great Wall of Villages   The New York Times

  President Xi calls them “border guardians.”  In this superb interactive report using satellite imagery, the New York Times reports on how the government built twelve new villages in frontier areas claimed by other countries in recent years, the New York Times reported based on satellite images. They are among more than fifty new villages in frontier areas, and while civilian in nature, they provide access points for China’s military. A spokesperson for the Chinese Embassy in Washington said regarding border issues, Beijing seeks “fair and reasonable solutions” through peaceful consultation.

Source: New York Times

• Marijuana and Mexican cartels: Inside the stunning rise of Chinese money launderers  NBC News

  Over the past decade, Chinese organized crime groups in the U.S. quietly became the dominant money launderers for Mexican cartels. Then they used the profits to take over the illicit marijuana trade.  Experts worry that the organizations that now dominate money laundering worldwide pose a potential national security threat to the U.S.

Geoeconomics

• Don’t Believe the AI Hype   Daron Acemoglu/Project Syndicate

  Acemoglu, an MIT Economics Professor, writes that if you listen to tech industry leaders, business-sector forecasters, and much of the media, you may believe that recent advances in generative AI will soon bring extraordinary productivity benefits, revolutionizing life as we know it. Yet neither economic theory nor the data support such exuberant forecasts.
  

• Has the Recession Started?    Pascal Michaillat (UC Santa Cruz) and Emmanuel Saez (UC Berkeley)

  Abstract: To answer this question, we develop a new Sahm-type recession indicator that combines vacancy and unemployment data. The indicator is the minimum of the Sahm indicator -  the difference between the 3-month trailing average of the unemployment rate and its minimum over the past 12 months—and a similar indicator constructed with the vacancy rate—the difference between the 3-month trailing average of the vacancy rate and its maximum over the past 12 months. We then propose a two-sided recession rule: When our indicator reaches 0.3pp, a recession may have started; when the indicator reaches 0.8pp, a recession has started for sure. This new rule is triggered earlier than the Sahm rule: on average, it detects recessions 1.4 months after they have started, while the Sahm rule detects them 2.6 months after their start. The new rule also has a better historical track record: it perfectly identifies all recessions since 1930, while the Sahm rule breaks down before 1960. With July 2024 data, our indicator is at 0.5pp, so the probability that the US economy is now in recession is 40%. In fact, the recession may have started as early as March 2024.

The Future of TikTok in America: My Interview in Handelsblatt

April 20, 2024

I was delighted to be interviewed this week by Handelsblatt, the leading German newspaper, about the U.S. Congress’ legislative move to ban TikTok.

The legislation now looks assured of passage following the House of Representatives passing a new version to meet the demands of key Senators. A final vote in the Senate is likely on Tuesday, April 23, but it could be delayed by a week.

Is this really the end for TikTok in the U.S.? Not immediately. While the legislation now about to be passed dealt with some of the potential legal issues, look for ByteDance (the parent company of TikTok) to immediately go to the U.S. Federal Court to overthrow the legislation, likely on an argument that it violates the First Amendment rights of both the company and its users. That all but assures a prolonged - perhaps multi-year - battle before TikTok disappears from users’ screens.

You can read the interview HERE (and unless you speak or read German, you might want to use Google Translate or another system to read it!).

The Disappearance of Key Economic Data from China

Last week, markets were surprised Beijing temporarily suspended the scheduled publication of GDP figures. Most observers believed they did not want the number to cloud the ongoing Communist Party Congress and crowning of President Xi Jinping for an unprecedented third term. But the reality is this has been an ongoing trend for quite some time under President Xi. The Financial Times published a great chart today showing just how much is no longer made available. Markets need to get used to this great disappearing act - it is likely only going to get worse.

Talking Hedge Conference - Toronto: Panel Discussion on China’s Futures Markets

Last week I had the great pleasure of moderating a truly fantastic panel exploring and explaining China’s futures markets. From left to right: Me, Fanzine Hachemian of Eagle Investment Solutions, Misha Malyshev of Teza Technologies, and Greg Adamsick of Nashua USA LLC. These three gentlemen are giants of the Chinese futures markets. The discussion was a tour de force of how China has brilliantly developed a robust futures markets which is helping power their growth and coming to dominate the markets.

About those rumors of a coup in China…

Over the weekend, the internet was saturated with reports of an apparent coup in China, removing President Xi Jinping from power. The rumor, of course, comes in advance of the October 16th Congress of the Communist Party of China (CCP), where Xi will be given an unprecedented third term as President.   

We spoke with several sources about the rumor and the risk of an actual coup and can find no validity to any of these rumors. US officials we talked to Sunday were not particularly concerned about the risk of a coup. 

As we understand it, Xi is likely self-quarantining following his attendance at the Shanghai Cooperation Organization meeting in Uzbekistan. We also know the schedule and invitations for the Congress were issued this past weekend, and Xi is among the listed attendees. Xi's name is all over the schedule – clearly, not something that would happen if Xi had been removed from power.

What is the genesis of the rumors, then?   One US government official pointed to Falun Gong, the quasi-religious dissent organization based in Deerpark, New York. 

The group has been the subject of intense suppression inside China and a ferocious critic of Beijing worldwide. The Falun Gong owns The Epoch Times (which has published stories speculating about a possible coup). 

Nevertheless, all the news around Bejing’s power machinations is worth watching as we approach the Congress.  The Congress will undoubtedly be a historical event simply for re-electing Xi for a third term. But we are likely to see other significant shifts in the power apparatus in Beijing, including Xi being granted the title of "chairman" – a title not used since Chinese Communist Party founder Mao Zedong and putting him on par with Mao.

Granting Xi such a title would be beyond simply rewarding him with a new honorific. Many observers believe it would signal a rejection of a significant portion of the Post-Mao reforms and a new path – politically, socially, and economically – under Xi and his philosophy which was inserted into the Chinese constitution in 2017. 

It is formally known as "Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era" - or "Xi Jinping Thought" for short - and is focused on a return to a more strict form of Marxist-Leninism and the overall goals of communism. The Chinese Ministry of Education via educational research institutes, writings, and classroom teaching.  

We expect other major announcements to come out of the CCP Congress. But a coup removing Xi from power will likely not be one of them.

We hope this is helpful.  Please let us know if you have any questions.

A Great New Podcast: “Vying for Talent”

My friend, Ryan Hass (Senior Fellow, Foreign Policy Center and Michael H. Armacost Chair at the Brookings Institution) and Jude Blanchette (Freeman Chair in China Studies at the Center for Strategic Studies (CSIS), have just launched a superb new podcast. Called “Vying for Talent”, the pair explore the role human talent plays in the sprawling competition between China and the United States. They are tackling an issue that is defining the competition of our age. Sign up and listen close - it really is great and highly informative.

You can sign up and listen via Apple, Spotify, or wherever you listen to podcasts. Send feedback email to podcasts@brookings.edu, and follow and tweet at @policypodcasts on Twitter.