What keeps poor countries poor? This picture always reminds me of one important reason: "Resource misallocation".
Here's the story.
Eager to help his young country, Dr. Abdus Salam, the future Nobelist, returned to Pakistan in 1951 as a 25 years old star of the Physics world.
He wanted to build a world-class Physics department at the university he joined.
But guess what job he was handed by the head of the university? ... A soccer coach!
Here he is sitting with the soccer players (and feeling out of place).
Disappointed and unappreciated, Abdus Salam went back to UK. There, at only 30, he was offered a chair and asked to head the center for theoretical Physics at Imperial College.
Here is a picture of him in London, sitting with Physicists as the chair of the department.
Abdus Salam would win the Nobel prize.
He would also succeed in his mission to build a world-class center for Physics.
To date, over 100,000 scientists have come through this center.
Salam wanted to build this center in Pakistan ... but he was made a soccer coach.
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Are high interest rates likely to be more permanent?
The answer is often framed in terms of r*, the natural rate of interest
r* is the interest rate that balances supply and demand for loans, once near-term issues facing the economy, such as covid, have played out
(1/n)
If r* has inched up since the pandemic, then the new normal might have higher rates going forward
There's always great interest in what r* might be - e.g. markets keenly looking for clues from the upcoming Jackson Hole meeting
(2/n) reuters.com/markets/rates-…
But can we measure r* in a statistically reliably way for making statements about the future?
Unfortunately not so far
There's been some terrific work and NY Fed publishes a real-time r* estimate
But these estimates are not reliable for two main reasons
(3/n)
A dive into recent data suggests that Pakistan's economy is going off the rails
First, exports ... there was a global surge in exports post-covid, but around 2nd quarter 2022, Pak exports drop off relative to India and Bang - the gap is now over 20% 1/
This happened despite the large currency devaluation and all "efforts" to boost exports given the severe balance of payment issue
What's going on? The export drop likely reflects serious supply-side disruptions in the economy
2/
Most notably the inability to get into an IMF agreement due to extreme gov mismanagement
I've spoken in the past about PTI's role in bringing the country to this situation
Pakistan's economy is in a tailspin, going from crisis to catastrophe
The system is coming unhinged
We can see this in the increasing stagflationary forces: growth is rapidly falling, and prices are rapidly rising
🧵
These are very worrying signs
In effect, inflation is not only being fueled by large deficits and money printing, but foolish policy choices that have seriously impacted the productive capacity of the economy
I gave one example of poor policy choice back in January, and explained how it might lead to a contraction in the economy ... more recent data suggests that has indeed happened
SVB collapsed because of their exposure to interest rate risk
A 🧵 on interest rate risk at the macro level - which deserves more attention in my view
1/
Interest rate risk refers to, (a) potential change in interest expense obligations, and (b) potential change in valuation, due to change in interest rates
This risk is now the highest it has ever been in recent history (if not ever) - Why?
because of the two graphs below 2/
The right graph shows that total debt to GDP is the highest it has ever been- it has more than doubled, currently well north of 250% of GDP
The left graph shows the large n steady decline in interest rates since 1980s- a fall of about 10 %age points to near zero till recently
3/