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. 

American Institute for Contemporary German Studies: A Reflection on German Chancellor Angela Merkel’s Impact on the Global Economy

Note: the following is a contribution to an anthology of views collected by the American Institute for Contemporary German Studies (AICGS) as German Chancellor Angela Merkel prepares to step down as Germany’s leader after more than 6 years in office.

Eighteen years ago in Berlin, I attended a business reception at the Staatliche Museums. As I chatted with a small group of German CEOs, I was introduced to the then opposition leader, Angela Merkel. She was then as she is now: subdued, hands clasped together with her intense gaze sizing up whomever she was talking to but also with that smile that radiates a genuine warmth and deep emotional intelligence. I was charmed as she asked me a few incisive questions about the political situation in Washington at the time before quickly moving on to greet another cluster of business leaders.

When she was out of earshot, one of the CEOs quietly explained to me – while all the other CEOs heads bobbed up and down in agreement -- “She is likely going to be the next Chancellor but I don’t know how long she will last. She really doesn’t understand global markets or the big economic issues.” Flash forward to today: Each of those CEOs is gone and she is still Chancellor, having guided Germany, the European Union and, in a real way, the rest of the world through the largest global economic challenges and crises of the last century.

Chancellor Merkel is nothing if not a superb crisis manager: From the global financial crisis of 2008 which led to the sovereign debt crisis that gripped the Eurozone, to the storm of Brexit, she handled them all. Having sat in a large global investment bank through all this tumult, I can attest it was Merkel’s constantly calm yet steely demeanor that assured the markets – the very markets those CEOs had told me she really did not understand – that she had a firm grasp on each of these situations and somehow, some way, she knew how to solve them.

So, without doubt, the legacy of Merkel’s global economic crisis leadership is assured. Looking to the future, first and foremost the question is how will Germany and the EU deal with China. Merkel has uniquely stood out in her efforts to develop stronger trade relations with China, but understands (and hopefully whoever her successor does as well) that it is not a one-way street with China. It desperately needs what Germany’s advanced industries have to offer. And that gives Germany leverage to push China to turn away from their vile human rights policies as well as more fully respect international trade rules. It will be critical for Merkel to set the tone on how to tackle the China challenge for her successors.

Closer to home, her crisis management achievements include her careful navigation through the always chaotic and occasionally minacious Trump Administration’s trade policy toward the EU in general and Germany in particular. Many in the business community today worry that we risk the election of a Republican to the White House in four years who quickly begins echoing the Trump EU trade policy. The simple fact is the Biden Administration can only do so much to try to assure businesses on both sides of the Atlantic that will not happen. What Chancellor Merkel says and does now will ultimately be that most critical assurance sought by business.

I have no doubt history will deem her leadership as extraordinary by any measure – particularly her global economic leadership. What I do fear, however, is we will all acutely best understand just how powerful and impactful she has been when she is gone from office and the next crisis is upon us. That is when those former CEOs I stood with eighteen years ago and their many successors will hail Chancellor Angela Merkel as having positively led the global economy like very few other world leaders we have seen in more than half a century.