A🧵on what Feb 8 elections mean for Pakistan

Pakistan’s economy has consistently fallen behind globally – last year was one of the worse, with the economy actually contracting

Every macro fundamental is flashing red: inflation, growth, debt, investment, to name a few
1/n The federal gov has no money

It cannot even afford to pay the salary of a peon or a soldier without borrowing

The entire tax revenue is consumed after paying provinces their share, pensions to retirees, and interest on debt
2/n

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-…

A 🧵comparing Ghana, Sri Lanka and Pakistan, and what it teaches us about dealing with crises ...

Ghana and Sri Lanka formally defaulted during the last two years, Pakistan did not

but currency devalued by 1/2 for both Pakistan and Ghana, and 1/3rd for Sri Lanka So Pak currency has devalued significantly more than SL's

More importantly, let's compare Pakistan's trajectory with that of SL and Ghana after they default ...

here is SL, the red arrow starts post-default

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/

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

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/

A 🧵on accounting vs economics when it comes to balance of payment crises

There's a temptation to look at financing or current account deficits and say, "we are short X billion dollars, let's bridge that gap through administrative actions by curtailing imports" Tempting as this might be, it's a foolish policy that results in even greater disaster

When you try to cut imports through administrative restrictions, you essentially open multiple auction markets where some bureaucrat decides what is "essential" and what is not

What is corruption? 🧵

The most damaging sort of corruption is legal

It is the self-serving set of rules that allow the governing elite to allocate land and state gifts to their own names for pennies to the dollar It is the subsidies and protections that political elite build for themselves to make undeserved profits

It is how the privileged build walls to exclude those of lesser faith or ethnicity to maintain their positions of power

🧵on the connection between crypto and MMT, and what that tells us about money and public finance ... The crypto bandwagon was about privatizing money

- A decentralized techno-utopia where society was to break free of the "tyranny" of fiat money

It is a great honor to speak virtually at the 4th annual Asma Jahangir conference

A few words on the late Asma Jahangir sahiba, who is an inspiration to many of us - a voice for justice and humanity, a voice for sanity in insane times ... As we celebrate her life, I'm reminded of this couplet
آج یوسف پہ اگر وقت یہ لائے ہو تو کیا
کل تمہیں تخت بھی دو گے اسی زندانی کو

No one cares for the dictators who imprisoned her or the clerics who railed against her
But her name will live on, for she defended the defenseless

Congrats to Bernanke-Diamond-Dybvig on the much-deserved recognition

A 🧵on their work and the broader public-interest policy questions

https://twitter.com/NobelPrize/status/1579408493211422721

Their work was done in the early `80s

Research is a business for patient people

It often takes time for a work's true import to be understood

BDD papers influenced follow up academic work (including my own) in a serious way. More on this 👇🏽

nobelprize.org/uploads/2022/1…

Politicians and journalists are clamoring to reduce petrol price in Pakistan

This is irresponsible and short-sighted

Petrol in Pakistan is currently 20% cheaper than neighboring India Pakistan just had a very serious balance of payment crisis - it is only due to IMF nod that there is some stability in exchange rate

This is hardly the time to throw caution to the wind

Pakistan needs a real strategy to get out of perennial bop trouble

Pakistan's economy is in deep crisis

a long 🧵 The spread on $ debt (16%+) is in range where the number only matters for speculators now, the country is effectively shut off from private capital markets

Rupee has lost 20% of its value in 3 months, while current account remains negative and $ rollovers coming due

🇵🇰 PM voted out of office by parliament after 3.5 years

He inherited a bad economy, but leaves it in even worse shape
🧵 There's been zero increase in average income, and Pakistan never got out of the balance of payment (bop) crisis

Covid gave temporary respite to bop crisis as oil imports and domestic demand contracted due to pandemic, but with pandemic receding, 🇵🇰 is back in serious trouble

The Economist has a good writeup on why the world is saving "too much"

(ok i'm biased here as it also cites my work with @ludwigstraub and @profsufi)

But I'd like to add one important point about the role of inequality in driving high savings ...

economist.com/briefing/2022/… When measuring how much the very rich save, it is very important to properly include their saving via corporations

As Chen, Neiman and Karabarbounis have shown, there has been a large rise in corporate saving

New @nberpubs paper out today with @ludwigstraub and @profsufi

How large a deficit can governments like the US run *permanently* without their debt becoming unsustainable?

One key result: R < G is not enough

We need: R < G - φ
🧵
nber.org/papers/w29707?… In recent decades, nominal interest rate (R) on debt has been less than the nominal growth rate (G) of economy in developed economies like the U.S.

i.e. R < G

Pakistan's current account swung positive when Covid contracted GDP in 2020

But as GDP started recovering in 2021, it has again gone deeply negative - approaching 5% of GDP now

What does this tell us? 🧵 The key insight is the same as I have been emphasizing for a while:

Pakistan's growth process is unbalanced such that high growth is fundamentally unsustainable

Pakistan's economy is not in a good place - per capita income has not risen in 3 years (in fact down slightly)

Even over the last 20 years, income per capita has grown at a paltry 1.9%

🧵 The core problem?

A fundamental imbalance between its anemic supply (domestic productive capacity) and the exaggerated external demand driven by its rentier economy

Are very low interest rates market neutral?

Or do low rates tend to tilt the scale in favor of market leaders, thus reducing competition?

We have a new empirical paper out that suggests falling rates help the rise of superstars

A short thread ...

nber.org/papers/w29368?… Borrowing spread paid by industry followers relative to leaders is stable or even rising as level of interest rate has fallen to all time lows

=> borrowing capacity of leaders expands much more rapidly, and in fact "snowballs" as interest rates fall to near-zero

Prices are increasingly less likely to be informative for understanding where Chinese economy is heading

The latest Evergrande bond deal (see link) is the likely template for all potentially systemic events ...
ft.com/content/d1f2a7… Since the state essentially owns the financial sector, it will bank-roll debt rollovers via central bank if necessary

All of this will minimize price impact on financial assets - and hence financial contagion will be minimized ... this is likely to be the state's goal

Is Evergrande China's Lehman moment?

This question is quickly reaching cliche status, but is somewhat irrelevant.

First, a bit about Lehman, and then I'll talk about China ... Lehman is at times seen as the "colossal error" that triggered the 2008 Great Recession (GR)

But this is a case where the narrative has sprinted ahead of reality

Of course Lehman did not help, nobody wants meltdowns

But the roots of GR ran much deeper