Monday, January 22, 2018

21/1/18: Student Loans Debt Crisis: It Only Gets Worse

A new research from the Brookings Institution has shed some light on the exploding student debt crisis in the U.S. The numbers are horrifying (for details see (emphasis mine):

"Trends for the 1996 entry cohort show that cumulative default rates continue to rise between 12 and 20 years after initial entry. Applying these trends to the 2004 entry cohort suggests that nearly 40 percent may default on their student loans by 2023." In simple terms, even 12-20 years into the loan, default rates are rising, which means that after we take out those borrowers who are more likely to default (earlier defaulters within any given cohort), the remaining borrowers pool is not improving. This applies to the cohort of borrowers who entered the labour markets at the end/after the Recession of 2001 - a cohort that started their careers before the Global Financial Crisis and the Great Recession, and that joined the labor force at the time of rapid growth and declining unemployment.

"The new data show the importance of examining outcomes for all entrants, not just borrowers, since borrowing rates differ substantially across groups and over time. For example, for-profit borrowers default at twice the rate of public two-year borrowers (52 versus 26 percent after 12 years), but because for-profit students are more likely to borrow, the rate of default among all for-profit entrants is nearly four times that of public two-year entrants (47 percent versus 13 percent)." Which means that the ongoing process of deregulation of the for-profit education providers - a process heavily influenced by the Trump Administration close links to the for-profit education sector (see and  - is only likely to make matters worse for younger cohorts of Americans.

On a related: "Trends over time are most alarming among for-profit colleges; out of 100 students who ever attended a for-profit, 23 defaulted within 12 years of starting college in the 1996 cohort compared to 43 in the 2004 cohort (compared to an increase from just 8 to 11 students among entrants who never attended a for-profit)." So not only things are getting worse over time on their own, but they will be even worse given the direction of deregulation drive.

"The new data underscore that default rates depend more on student and institutional factors than on average levels of debt. For example, only 4 percent of white graduates who never attended a for-profit defaulted within 12 years of entry, compared to 67 percent of black dropouts who ever attended a for-profit. And while average debt per student has risen over time, defaults are highest among those who borrow relatively small amounts." This highlights, amongst other things, the absurd nature of the U.S. legal frameworks governing the resolution of student debt insolvency: the easier/less costly cases to resolve (lower borrowings) in insolvency are effectively exacerbated by the lack of proper bankruptcy resolution regime applying to the student loans.

Some charts:

Data above clearly highlights the dramatic uplift in default rates for the more recent cohort of borrowers. At this point in time, borrowers from the 2003-2004 cohort already exhibit higher cumulative default rates than the previous cohort exhibited over 20 years horizon. Worse, the rate of increases in default rates is still higher for the later cohort than for the earlier one. Put differently, things are not only worse, but are getting worse faster.

And here is the breakdown by the type of institution:
For-profit institutions' loans default rates are now at over 50% and rising. In simple terms, this is a form of legislatively approved and supported debt slavery, folks.

Beyond the study, here is the latest data on student loans debt. Student loans - aggregate - transition into delinquency is highest of all household credit lines:

And the total volume of Student Loans debt is now second only to mortgages:

Friday, January 19, 2018

19/1/18: Tears over QE & U.S. Household Debt Problem

As (some) White House-linked (or favouring) economists lament the Fed's QE (and there are reasons to lament it), one thing is clear: the unprecedented monetary policies of the recent years have achieved two things:

  1. The Fed QE has fuelled an unprecedented boom in risky assets (bonds, equities, property, cryptos, you name it); and
  2. The Fed QE sustained a dangerous explosion of personal household debt
Which, taken together, means that the rich got richer, and the middle classes and the poor got poorer. Because debt is not wealth. Worse, the policies past have set the stage for a massive unraveling of the credit bubble to come, if the Fed were to attempt to seriously raise rates.

Note: the figures below are not reflective of a reportedly massive jump in consumer credit in 4Q 2017 (see: 

Here is the latest data on personal household debt:

\And here is the aggregate data (also through 3Q 2017) from the NY Fed:

Year on year, 3Q 2015 growth in total household debt in the U.S. stood at 3.03%. This fell to 2.36% in 2016, before rising to 4.90% in 2017, the highest annual rate of growth for the third quarter period since Q3 2007.

Aggregate household debt in 3Q 2017, relative to 2005-2007 average was:
  • 11.8% higher in 3Q 2017 for Mortgages;
  • 23.4% lower for HE Revolving;
  • 51.9% higher for Auto Loans;
  • 6.6% higher for Credit Cards;
  • 201.2% higher for Student Loans;
  • 6.5% lower for Other forms of debt; and
  • 19.7% higher for Total household debt
In current environment, a 25 bps hike in Fed rate, if fully passed through to household credit markets, will increase the cost of household credit by USD32.4 billion per annum. The same shock five years ago would have cost the U.S. household USD 28.3 billion per annum. Now, put this into perspective: current markets expectations are for three Fed rate hikes (and increasingly, the markets are factoring a fourth surprise hike) in 2018. Assuming the range of 3-4 hikes moves to raise rates by 75-100 basis points, the impact on American households of the QE 'normalization' can be estimated in the region of USD98-130 billion per annum. Since much of this will take form of the non-deductible interest payments, the Fed 'unwinding' risks wiping out the entire benefit from the recent tax cuts for the lower-to-upper-middle class segments of population. 

Now, let's cry about the QE... 

Thursday, January 18, 2018

18/1/18: The Arctic: A New "Old Conflicts" Frontier

A must-read set of three in-depth articles/visualizations from Bloomberg, documenting evolution of key environmental issues relating to the Arctic over time.

The first part covers the issue of the ice cap: The second part details the scale of political and geopolitical issues: Finally, part 3 covers economics of the Arctic region

A genuinely impressive material worth reading.

As an added resource, Reuters are running a dedicated page on the news and issues involving the Arctic

17/1/18: Apple's Plans for Foreign Cash and the Need for Larger Reforms

There is a lot that can be criticized in the GOP/Trump tax reforms passed late last year, but some things do make sense. Back in November 2016, in my column for the Cayman Financial Review (see here:, I argued that a comprehensive tax reform of the U.S. corporate tax system, alongside a generous repatriation scheme for off-shored profits of the U.S. MNCs can provide a significant boost to the U.S. economy.

Today, we got some news confirming my assertion. Apple is planning to bring some USD350 billion back to the U.S. with a large scale investment portfolio aligned to this repatriation:

However, to really lock in the new investment, President Trump and the Congress need to significantly revamp the existent system of work permits, work and business visas, starting with the current H1B system. Returning financial capital back to the U.S. is but the first step on the road to increasing the U.S. economic potential.

The second step must be opening up U.S. labor and entrepreneurship markets to inflow of talent from abroad (these markets are currently extremely closed). This will require not only revising numerical quotas, but also the following:

  1. Shifting admissions away from contingent workforce employers (contractors) and in favor of direct employment and sustainable, skills-based self-employment;
  2. Increasing ability (and incentives) for integration into the American society for newcomers (including, but not limited to, improving bureaucratic barriers to access to permanent residency and naturalization, improving the culture and the climate of government bureaucracies vis-a-vis higher skilled newcomers, etc);
  3. Creating new, more open, programs for entry into the U.S. for highly skilled and entrepreneurial migrants; and
  4. Encouraging greater mobility across employers for foreign highly skilled workers.
The third step must involve regulatory reforms that remove markets, financial & contractual supports for incumbent monopolistic firms (the rent-seekers, like big telecoms, large banks, automakers, etc). Opening the sectors to genuine competition will be the only chance the U.S. has to compete with the likes of China, and increase its own potential GDP).

Finally, the fourth step (partially already targeted by the recent tax reforms) must involve reducing the burden of direct and indirect taxes on the American wage earners, especially those with higher skills levels. The key here is to focus on both, direct and indirect taxation, and the latter, in my opinion, includes the cost of healthcare and pensions. 

Apple's announcement is the good news. And President Trump does deserve credit on this.  But tax holiday alone won't fix the problem of economic sclerosis that has plagued the U.S. economy for a good part of two decades now.

Tuesday, January 16, 2018

15/1/18: Of Fraud and Whales: Bitcoin Price Manipulation

Recently, I wrote about the potential risks that concentration of Bitcoin in the hands of few holders ('whales') presents and the promising avenue for trading and investment fraud that this phenomena holds (see post here:

Now, some serious evidence that these risks have played out in the past to superficially inflate the price of bitcoins: a popular version here, and technical paper on which this is based here (ungated version)

Key conclusion: "The suspicious trading activity of a single actor caused the massive spike in the USD-BTC exchange rate to rise from around $150 to over $1 000 in late 2013. The fall was even more dramatic and rapid, and it has taken more than three years for Bitcoin to match the rise prompted by fraudulent transactions."

Oops... so much for 'security' of Bitcoin...

Thursday, January 11, 2018

11/1/18: Physical Mobility and Liberal Values: The Causal Loop

One of the key arguments relating the decline in the Millennials' support for liberal democratic values to socio-economic trends, identified in our recent paper on the subject (see Corbet, Shaen and Gurdgiev, Constantin, Millennials’ Support for Liberal Democracy Is Failing: A Deep Uncertainty Perspective (August 7, 2017): the argument that reduced socio-economic mobility for the younger generation Americans (and Europeans) is driving the younger voters away from favouring the liberal economic system of resources allocation.

In this context, here is an interesting piece of supporting evidence, showing how the rates of physical migration across the states of the U.S. have declined in recent years - a trend that pre-dates in its origins the Great Recession:

In basic terms, two sets of factors are hypothesised to be behind the declining mobility in the U.S. and these can be related to the broader theses of secular stagnation:

  • On the demand side of the secular stagnation thesis, as the article linked above states, "social and demographic factors such as an aging population and declining birth rates; older people tend to stay put more and starting families often motivates people to go out on their own";
  • On the supply side of the secular stagnation thesis, "The decline in mobility is due partly to what has become a less-dynamic and fluid American labor market, some economists believe".
Note: I explain the two sides of secular stagnation theses here:

On balance, these are troubling trends. Jobs churn has been reduced - by a combination of structural changes in the American economy (e,g. rise of corporatism that reduces rates of new enterprise formation, and lack of new business investment), as well as demographic changes (including preferences shifting in favour of lower mobility).  But there are also long-term cyclical factors at play, including rampant house price inflation in recent years in key urban locations, and the significant growth in debt exposures carried by the younger households (primarily due to student debt growth). There is also a structural demographic factor at work in altering the 'normal' dynamics of career advancement in the workplace: older workers are staying longer in their positions, reducing promotional opportunities available to younger workers. Finally, the rise of low-security, high-volatility types of employment (e.g. the GigEconomy) also contributes to reduced mobility.

In simple terms, lower mobility is a symptom of the disease, not the cause. The real disease has been ossification of the U.S. economy and the continued rise of the status quo promoting rent-seeking corporates. Lack of dynamism on the supply side translates into lack of dynamism on the demand side, and the loop closes with a feedback effect from demand to supply. 

22/1/18: For-Profit CSR: Bounds of Effectiveness?

Quite an interesting paper concerning the potential limitations to the structured CSR (Corporate Social Responsibility) programs impact.

From the abstract (emphasis mine):

Prosocial incentives and Corporate Social Responsibility (CSR) initiatives are seen by many firms as an effective way to motivate workers. … We argue that the benefits crucially depend on the perceived intention of the firm. Workers use prosocial incentives as a signal about the firm's type and if used instrumentally in order to profit the firm, they can backfire. We show in an experiment in collaboration with an Italian firm, that monetary and prosocial incentives work very differently. While monetary incentives used instrumentally increase effort, instrumental charitable incentives backfire compared to non-instrumental incentives. This is especially true for non-prosocially-motivated workers who do not care about the prosocial cause but use prosocial incentives only as a signal about the firm. The results contribute to the understanding of the limits of prosocial incentives by focusing on their signaling value to the agent about the principal's type.”

Which raises some questions:

Often, these days, we think of CSR-to-improve-bottom-line ideas for structuring CSR and broader Social Impact programs. In the light of this research, should we continue focusing on the bottom line-linked CSR? Traditional corporate view of CSR has been that ’we spend resources to do good’. This perception of CSR within corporations quite often results in CSR function becoming secondary to other profit-centric functions. As a response to this, academics and consultants working in the field of Social Impact have advocated for years that companies and organisations need to define CSR as an organic profit-related function. The latest research suggests that this can be counter-productive to other objectives of the CSR programs.

If we do continue to focus on CSR as profit-related function in our teaching and research, what are the limitations to its effectiveness? The paper findings are based on a very restricted data set, derived from a single firm. We do not know the key factors driving the limitations uncovered in the study and we do not know how these factors translate into other geographical, cultural, social and macroeconomic contexts.

Are mixed/hybrid enterprises (socially-mandated for profit enterprises) have to rely on a biased selection of employees to mitigate for this effect? In other words, are mixed/hybrid enterprises, that explicitly rely on conflating the notions of Social Impact and profitability, subject to lower productivity risks when employing ’non-prosocially-motivated’ workers? If so, are systemic biasing filters used in selecting best-fit employees for such enterprises to avoid such workers? Can these filters be identified and tested against other biases (or worse, potential discriminatory hiring practices)?

As educators, we might think about structuring these questions into our classroom discussions. As researchers, we can see this study as opening up the gates for further research. The questions the study prompts are big, important and poorly researched.

Full paper: NBER Working Paper No. w24109
Ungated version:

Saturday, January 6, 2018

6/1/18: Spent 'Putin's Call' Means Growing Pressure for Reforms

Some interesting new trends emerging in Russian public opinion as the next Presidential election approaches. State-linked Russian

Academy of Sciences publishes relatively regular polls of public opinion that look into voters' preferences, including preferences for either "significant changes" in policy course in Russia or "stability" of the present course.

Here is the latest data:

Some 'Russia analysts' in the Western media have been quick to interpret these numbers as a sign of rising anti-Putin sentiment. Things are more subtle than that.

There is, indeed, a rather remarkable shift in public preferences in favor of "significant changes". Which can be attributed to the younger demographic who are predominantly supportive of reforms over their preferences for "stability". This is good. However, we do not know which changes the voters would prefer. Another potential driver for this shift is the ongoing weak recovery in the Russian economy from the 2014-2016 crisis - a recovery that fades to the background voters' previous concerns with the Russian State's geopolitical standing in the international arena (key pillar of Putin's third presidency) and the movement to the forefront of economic concerns (key pillar of Medvedev's interim presidency and, so far, an apparent area of significant interest for Putin looking forward to his fourth term).

These gel well with other public opinion data.

Here is Pew data from earlier 2017 showing that Russian voters nascent sentiment in favor of reforms may not be incongruent with their simultaneously continued support for Putin's leadership:

When one looks at the same polls data on core areas of domestic policy that the Russians feel more concerned about, these are: corruption (#1 priority), economy (#2 priority) and civil society (#3 priority). In other words, more liberal issues are ranked toward lower priority than other reforms (economy and corruption, which are both seen by the majority of the Russians as the domain of State power, not liberal order reforms). Civil society is an outlier to this. And an interesting one. Perhaps, indicative of the aforementioned demographics shift. But, perhaps, also indicative of the dire lack of alternatives to Putin-centric political spectrum in Russia. Again, whether the voters actually see Putin as a barrier to achieving these reforms is the key unknown.

Worse, not a single one area of domestic policies has plurality disapproval rating.

Somewhat confusing, Putin's personal approval ratings - for specific areas of policy - have been deteriorating over time:

This is significant, because traditionally, Russians view Presidential office as distinct from the Government (the 'good Tzar, bad Boyars' heuristic) and the tendency to view domestic objectives as key priorities or targets for disapproval would normally be reflected in falling support for the Government, not the President. This time around, things appear to be different: Russian voters may not be blaming Putin's Presidency outright, but their confidence in the President's ability to manage the policy areas of their key concerns is deteriorating.

The 'Putin call' - past bet on forward growth to sustain power centralization - is now out of money:

Weakest points are: corruption and economy. And these are the toughest nuts to crack for Putin's regime because it rests strong Federalization drive of 1999-present on the foundations of balancing the interests of the rent-seekers surrounding it (aka, on corruption around it, a trade-off between loyalty to the Federal State and the President, in return for access to wealth and the ability to offshore this wealth to the likes of London, a world's capital for grey and black Russian money).  Ironically, Western sanctions and broader policies toward Russia are actively constraining the scope and the feasibility of all reforms - be it reforms of the economy or civil society, anti-corruption measures or political liberalization.

Note: an interesting read on the changes in the Kremlin-backing 'opposition' is also afoot, as exemplified by the new leadership emerging within the Russian Communist Party (read this well-researched and unbiased view, a rarity for WaPo, via David Filipov:

Taken together, the above suggests that Putin needs some quick wins on the hardest-to-tackle issues: corruption and economy, if he were to address the pivot in voters' preferences for change. The 'if' bit in this statement reflects severe uncertainty and some ambiguity. But assuming Putin does opt to react to changes in the public opinion, we can expect two policy-related moves in months ahead:

  1. Corruption: we are likely to see public acceleration in prosecution of smaller/lower-end bureaucrats, deflecting attention from the top brass surrounding the centre. Alongside promotion of some fresh names to regional leadership posts (governors etc), already ongoing, we are also likely to see some additional consolidation of the oligarchic power in the economy. There will be no cardinal wide-spread change in power ministries and within the Deep State institutions. But, even the beginnings of such acceleration in cleaning up mid-tier of the top echelons of power will prompt hysterical comparatives to Stalin's purges in the Western media.              
  2. Economy: we are also likely to see a new 'Program for 2030' aiming to 'modernize' the economy, deepen capital investment, on-shore funds stashed away in Cyprus, Austria, Germany, the Baltics, the UK and elsewhere. Note, the list of Russian-preferred offshore havens - it is littered with the countries currently beating the Russophobic drums, which will make such on-shoring double-palatable for Kremlin, and more acceptable to the Russian power circles. The process of on-shoring has already began, even if only in the more public and more benign context ( The Program is also likely to see some reforms of the tax code (potentially, raising 13% flat tax rate and tweaking capital gains tax regime). A deeper push can come on enforcement and compliance side, with Moscow finally attempting to shift tax enforcement away from its current, highly arbitrary and politicized, practices. Putin is acutely aware of the fact that Russian public investment sits too low, while ammortization and depreciation are accelerating. We can expect some announcements on this front before the election, and, assuming economic growth becomes a new priority of the fourth term, an acceleration in State funding for infrastructure projects. This time around, new funding will have to flow to key public services - health and education - and not into large-scale transport projects, .e.g Crimean and Vladivostok bridges. Russia is well-positioned to support these initiatives through some monetary policy accommodation, with current inflationary dynamics implying that the current 7.75% benchmark CBR rate can be lowered to around 6% mark (this process is also ongoing). beyond fiscal and monetary aspects of reforms, Russia can opt to move more aggressively with revamping its Byzantine system of standards and certification systems to align them more closely to the best practices (in particular, those prevalent in the EU). Such alignment can support, over time, diversification of Russian exports to Europe and to other regions, where european standards effectively goldplate local ones.
What we are not likely to see, in the short term, is unfortunately what is needed as much as the above reforms: changes in legal and enforcement regimes. Poor legal enforcement and outdated, politicized and often corrupt judicial system are stifling entrepreneurship, enterprise scaling, international and domestic investment and, equally importantly, development of the civil society. It also weakens the Federal State by presenting a bargain in which local loyalty to Moscow is secured by allocating local authorities power to shadow justice systems. This bargain undermines voters' trust and reduces efficiency of resources flowing across regions and from Moscow.

As a number of more astute observers, e.g. Leonid Bershidsky (@Bershidsky) and David Filipov (@davidfilipov) have implied/stated in the past, promising reforms after nearly two decades in power will be a hard sell proposition for Putin. Which means Programs alone won't cut it. Kremlin will need to deliver and deliver fast, in order to break away from the 'Putin 3' track:

Wednesday, January 3, 2018

1/3/18: BRIC Manufacturing Sector ends 2017 with an upside

Quarterly Manufacturing Sector PMIs for BRIC economies have once again underperformed global indicators in 4Q 2017.

Global Manufacturing PMI for 4Q 2017 stood at 54.0, up on 53.0 in 3Q 2017 and marking the fastest rate of quarterly expansion in the sector on record (since 2Q 2013*). In comparison, BRIC Manufacturing quarterly PMI-based indicator stood at 51.6 in 4Q 2017, up on 51.0 in 3Q 2017. This marks the highest reading for the BRIC Manufacturing PMIs (quarterly basis) since 1Q 2013.

For individual BRIC economies:

Brazil Manufacturing Quarterly PMI measure was up at 52.4 in 4Q 2017, rising from 50.6 in 3Q 2017 and marking the third consecutive quarter of above 50.0 (nominal) readings. In statistical terms, 4Q 2017 was the first quarter with statistically significant growth signal since 1Q 2013, and marked the second fastest pace of expansion since 1Q 2011. With three consecutive quarters of above 50.0 nominal indicator readings, it is reasonable to assume that the Manufacturing sector recession of 3Q 2013-1Q 2017 is now over and the economy is moving into a new period of expansion.

Russia Manufacturing q-PMI measure slipped from 52.1 in 3Q 2017 to 51.5 in 4Q 2017. Russian Manufacturing has been posting distinctly weaker PMI readings in 2Q 2017 - 4Q 2017, with sharper pace of expansion of 4Q 2016 - 1Q 2017 being replaced by rather anaemic rates of growth since the start of 2Q 2017. This stands contrasted by Services sector that currently drives Russian economic growth. 

China Manufacturing posted q-PMI reading of 51.1 in 4Q 2017, marginally unchanged on 51.2 in 3Q 2017. Since 3Q 2016, Chinese Manufacturing was held within the pattern of weak growth, with q-PMIs ranging from 50.1 though 51.3. In fact, last time Chinese Manufacturing q-PMI reached above 51.3 was in 1Q 2013. Judging by PMIs, Chinese manufacturing is barely growing. Which continuously puts a big question mark over both the headline GDP figures coming out of China and the PMIs.

India Manufacturing qPMI jumped from 50.1 in 3Q 2017 to 52.5 in 4Q 2017, the highest rate in 12 quarters. Both Services (48.0) and Manufacturing (50.1) were very soft in 3Q 2017, and the to-date (through November 2017) reading for qPMI for Services sector (50.1) is still weak, so 4Q reading for Manufacturing qPMI is a welcome sign that things might be firming up on the growth side.

All, in, BRIC Manufacturing sector remains a weak contributor to Global growth. This weakness appears to be structural and consistent across a range of years. Dynamically, both Global and Manufacturing qPMIs are closely correlated and have been running in tandem since 2Q 2014.

*Please, note: my data for this indicator - not reported by Markit, but based on market’s monthly reports - goes only to 2Q 2013. Markit have repeatedly ignored my requests for data going back before that period, despite their claim that they assist independent academic researchers in gaining access to their data.

2/1/18: Limits to Knowledge or Infinity of Complexity?

Occasionally, mass media produces journalism worth reading not to extract a momentary piece of information (the news) of relevance to our world, but to remind ourselves of the questions, quests, phenomena and thoughts worth carrying with us through our conscious lives (assuming we still have these lives left). 

With that intro, a link to just such a piece of journalism: This piece, published in The Atlantic, is worth reading. For at least two reasons:

Reason 1: it posits the key question of finiteness of human capacity to know; and
Reason 2: it posits a perfect explanation as to why truly complex, non-finite (or non-discrete) phenomena are ultimately not knowable in perfect sense.

Non-discrete/non-finite phenomena belong human and social fields of inquiry (art, mathematics, philosophy, and, yes, economics, psychology, sociology etc). They are defined by the absence of the end-of-the-game rule. Chess, go, any and all games invented by us, humans, have a logical conclusion - a rule that defines the end of the game. They are discrete (in terms of ability to identify steps that sequentially lead to the end-rule realisation) and they are finite (because they always, by definition of each game, result in either a draw or a win/loss - they are bounded by the end-of-game rule). 

Knowledge is, well, we do not know what it is. And hence, we do not know if the end-of-game rule even exists, let alone what it might be. 

Worth a read, folks.