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August 6 - August 18, 2017
an investment binge can be judged by what it leaves behind.
The hangover from a binge on good investments in factories or technology tends to increase productivity for years after the boom has ended.
no country has figured out how to leapfrog the stage of building basic factories that make simple goods such as clothing, and that require only relatively simple skills that can be mastered by workers coming straight off the farm.
Tech booms also originate and remain centered in the leading technology powers, including Britain in the nineteenth century or the United States today.
Often the trigger that sends investors rushing into a bad binge is a chance to capitalize on spiking prices for a coveted asset, such as housing, or a natural resource, such as copper or iron ore.
The quality of an investment binge—whether it is good or bad for the economy—also depends heavily on how businesses pay for it.
the dot-com boom of the late 1990s is now recognized as a classic good binge.
the subsequent boom in the U.S. housing market was a bad binge financed largely by debt.
Real estate binges are often pumped up by borrowing and, as a result, tend to end in a serious economic slowdown.
That suggests a rough benchmark for when a real estate investment binge reaches a manic stage—when it reaches about 5 percent of GDP.
Most emerging countries that invest heavily in the production of raw materials are unable to grow rapidly for any long stretch of time,
the average income has stagnated or fallen behind in 90 percent of these oil-rich countries.
The discovery of oil has stunted development, which is why it has come to be seen as a curse.
The way the curse works is that the production of oil sets off a scramble among elites to secure shares of the profits rather than invest to ...
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The oil windfall tends to undermine every local industry other than oil.
Over the past decade, this disease has struck in Brazil, Russia, South Africa, and much of the rest of Africa.
So while heavy investment in manufacturing stabilized societies such as Thailand and South Korea, heavy investment in commodities proved deeply destabilizing in an economy like Nigeria.
The two-hundred-year history of commodity prices is that, in inflation-adjusted terms, the average price of commodities is unchanged.
manufacturing binges tend to fuel other good binges, in infrastructure or technology, commodity investment binges tend to fuel equally bad binges in commercial or residential real estate.
There is one case in which a commodity investment can qualify as a good binge, and that is when the investment uses new technology for extracting the commodity from the ground.
When investment rises steadily as a share of GDP for many years, it often begins to shift from good targets to bad ones. In the late stages of a good boom, the number of opportunities to invest in high-return factories or technologies will diminish before the optimism does.
Binges motivated by nationalist or personal pride rarely pan out quite the way they are planned.
if the average rate of investment remained below 20 percent of GDP for a decade, the nation had a 60 percent chance of growing at a paltry rate of less than 3 percent over the course of that decade.
The quick rule of thumb is that the best investment binges are those that go toward manufacturing, technology, and infrastructure, including roads, power grids, and water systems.
High inflation is always a bad sign, and low inflation is often a good sign.
Nations that post long runs of strong growth are almost always investing a large share of their national income, and that investment creates the strong supply networks that keep inflation low.
Inflation discourages savings,
Eventually, high inflation will force the central bank to take action by increasing the price of money through higher interest rates,
When inflation is very high—say, in the double digits—it also tends to be volatile,
The economy then becomes permanently inflation prone.
A world of inflation-driven price chaos and uncertainty has given way to an inflation-flattened world in which the outliers are easily exposed.
In part, the victory was a product of opening to global trade.
But globalization has had an opposite effect on asset prices, by opening up local markets to a vastly larger pool of potential buyers from abroad.
One rule of thumb is that the bigger the run-up in home or stock prices, the more likely a crash.
History shows that many long runs of economic growth ended in a house price bust, so the real estate market is worth especially close watching.
The Fed now leads a global culture of central bankers who see their job as stabilizing prices, but for consumer goods only, come what may in the asset markets.
the country has an overpriced currency, it will encourage both locals and foreigners to move money out of the country, eventually sapping domestic economic growth.
It is thus impossible to accurately measure the value of currencies unless you correct for relative inflation rates.
The most common measure is the Real Effective Exchange Rate (REER), which attempts to adjust the value of a nation’s currency for the rate of consumer price inflation in its major trading partners.
in general a rising currency tends to be rising against most major currencies.
the most important perspective on any currency is how it feels relative to the dollar.
The dollar is still the world’s favorite currency.
In the absence of an accepted standard for comparing currency values, politicians can pick a yardstick to make any case they want.
The truth is that if a cup of coffee at the corner café feels overpriced, big business deals are likely to feel expensive as well.
If the currency feels cheap, yet money is still fleeing the country, something is seriously wrong.
The key to tracking cross-border flows of money can be found in the balance of payments,
Within the balance of payments, the critical category to watch is the current account,
The current account thus reveals whether a country is consuming more than it produces and whether it has to borrow from abroad to finance its consumption habits.
Signals of a turn for the worse flash when the current account deficit has been rising for about four years and hits a single-year peak of 5 percent of GDP.
If a country runs a current account deficit as high as 5 percent of GDP each year for five years, then a significant economic slowdown is highly likely,
