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Economy:
Similarities/Lessons for Pakistan
Some
By
Inayat U. Mangla
Professor of Finance & C. Law
Western Michigan University
Kalamazoo, MI. 49008, U.S.A
Email: inayat.mangla@wmich.edu
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Background
The Asset-Rich, Income-Poor U.S. Economy :
Some Similarities/Lessons for Pakistan
History repeats itself and conventional wisdom, despite
current global challenges, has continuous merit
We are all familiar with Japans Econ. crash of 1990s,
and its subsequent two lost decades of economic
malaise, recessions and stock market crash
Nikkei 225 dropped from 40,000 to 8,000 (80% ).
Today, around 20,000 - 1% Real growth () despite lowest
level of ST and LT rates in world history.
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U.S. Experience
K. Warsh (June 20, 2014, WSJ) calls Japans experience Balance
Sheet Recession (B.S.R.). This conclusion wasnt forgotten by
U.S. Fed during /after GFC.
What was GFC?: Some facts: Fin. Markets, Fin. Institutions,
, uu , (C.B. / Inv. B), ST-FFR and LT 10Y USGBY before and after.
Policy response: Fed engineered an extraordinarily loose M.P.,
what can be described as Balance Sheet Recovery. The Policy
started in 2008 in various forms and shapes QE1, QE2, Operation
Twist and QE3.
Summary of all these developments can be seen in the Feds B.S.,
which stood at $5T in Jan. 2015, vs. normal average of $0.7T. a
nice happy birthday on Feds 100 years.
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Coming back to the critics of Feds policy, it provides little comfort for middleclass families and small businesses that must rely on their income statements to
pay the bills. About half of American households do not own any stocks and more
than one-third dont own a residence.
The most recent March 2015 employment report reveals the troubling story for
Main Street. Only 120,000 jobs were created in March, income for most Americans
remains under stress, with only modest improvements in hours worked, and
average hourly earnings.
With the so-called improvement in the labor market, and the unemployment rate
dropping to 5.5%, Fed faces two big policy questions:
When to raise rates, and how to go about raising them.
Federal funds futures, which price off Fed policy expectations, imply the target rate
will be 1.0% by August 2015 vs. zero today.
The Fed may end up lifting rates first and dealing with its $5T balance sheet later.
Why? Conventional mechanism of excess reserves will not work.
Yellen, Fed Chair, referred to a broader measure of called U-6, which includes
part-timers looking for full time work and people who want a job but havent been
looking. U-6 has fallen sharply but is still historically high 12.1%. Its taken a full 84
months for the number of people working to get back to its previous peak, in 2007,
a discomforting postwar record.
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U.S. Corporations
Meanwhile, U.S. corporate CEOs have used financial engineering
debt financed share buybacks, M&A etc., instead of capital
investment in property, plants and equipment. In 2014, U.S.
corporations added more than $2T of new debt e.g.:
Apple, GOOG, CISCO,ATT, Pfizer etc., including even some banks.
Some of these corporations paid a lower YTM on these bonds than 10
year U.S. Treasury yields.
Institutional investors extend their risk parameters to beat their
benchmarks.
Retail investors belatedly participate in the rising asset-price
environment, and are forced to take more risk.
Simultaneously, U.S. corporations are loaded with cash of $3T, and
globally more than $4.5T- a cash headache for organizations.
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F.M. Shock
What if there is an unexpected financial shock that
causes the economy to derail in the next two years?
This could happen due to geo-political factors, too quick
risk in interest rates and inflationary expectations.
The Fed would surely be called upon to bolster asset
prices and stimulate the real economy.
It is an open ended question, but would a return by the
Fed be effective?
The common view is that neither Wall Street nor Main
Street would be comforted by a return to QuantitativeEasing.
My own view is that such a shock has a higher probability
b/c. . . .
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Some Comparisons
What is the difference between 2% economic
growth and 3% growth in the U.S. economy?
Or
3.8% VS. 7-8% growth in peer economies of
Pakistan?
The real difference is one between a balancesheet recovery that helps the well-to-do and an
income-statement recovery that advances the
interests of all citizens.
The question is: What have we done to improve
macroeconomic policy to achieve these target
growth rates?
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U.S. Economy
The US economy is weak for a number of simple
reasons and does not need multivariate regressions
to see them.
First, a great deal of business activity that used to
be conducted in the U.S. has left the U.S. for China,
Mexico and large parts of Asia because of high
corporate taxes, higher U.S. wages and excessive
regulations which discourage investment.
Second, a relatively declining educational system,
incapable of providing qualified workers for industry.
Third, an oversized government, leading to a
redistributionist psychology which badly allocates K.
Fourth, anti business growth regulation.
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Back to Pakistan
What is the relevance of the U.S. experience and
economic challenges for Pakistan?
There are a number of similarities of economic
challenges faced by Pak. Economy.
However, a fundamental difference between the
two economies is that while there is an ongoing
continuous debate and analysis about macroecon. policy in the U.S. and its evaluation;
unfortunately, there is little discussion about
coherent and consistent policy making in Pak.
Might is right approach.
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Thank you!
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