Is It Time to Short HSBC Stock?

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Monday, 07 October 2013 04:24

That's what readers of an NYT column by Stephen D. King, the chief economist at HSBC, must be wondering. The piece, perversely titled "When Wealth Disappears," tries to construct a story of gloom and doom out of King's own confusion about economics.

The basic point seems to be that we have to adjust to a period of slower growth based on his claim that the growth of the period from the end of World War II until the end of the last century was an anomaly. To start with, the period of strong growth by most accounts is in fact much longer, going back well into the 19th century.

Furthermore, the accounting is more than a bit peculiar. Most of the slowdown in growth that troubles King is due to slower population growth. This means that countries might see slower overall growth, but little change in per capita GDP growth. Since it is the latter that affects living standards, why would anyone care if overall growth slows?

The same logic applies to one of the issues that troubles King. With most women now already taking part in the paid labor force, we cannot have the same gains to growth from more women entering the labor force as we did in the period from 1960 to 2000. While this is true, that growth was attributable to an increase in workers' hours, not an increase in output per worker. Certainly it is good that women have opportunities that they did not previously, but we usually think of society getting richer because we are getting more money per hour of work, not working longer hours. (On that point, if we want to adopt the Stephen King growth measure, Europe can see a 25 percent jump in output if European workers decided to put in the same number of hours each year as workers in the United States.)

If we have to fear a slowdown in productivity growth, as some economists have argued, this would imply a slower improvement in living standards. But King explicitly rejects this view:

"The end of the golden age cannot be explained by some technological reversal. From iPad apps to shale gas, technology continues to advance."

So what do we have preventing the U.S. and other economies from growing more rapidly? King never really gives us a clear story. We know he doesn't like stimulus telling readers:

"Champions of stimulus assert that another huge round of public spending or monetary easing — maybe even a commitment to higher inflation and government borrowing — will jump-start the engine. Proponents of austerity argue that only indiscriminate deficit reduction, accompanied by reforming entitlement programs and slashing regulations, will unleash the “animal spirits” necessary for a private-sector renaissance.

Both sides are wrong. It’s now abundantly clear that forecasters have been too optimistic, boldly projecting rates of growth that have failed to transpire."

Actually this is a lie. (Sorry, I'm tired of people in high places making completely unfounded assertions.) The forecasts of the advocates of stimulus, like me, have been shown to be overwhelmingly correct, including the prediction that the housing bubble would collapse and lead to a severe recession. 

At the end of the day, I doubt any reader of King's piece can figure out whether he thinks the world's economic problems are too much or too little supply. After all, he disparages the idea of the Fed keeping interest rates below the rate of inflation not because it would be inflationary, but it would be unfair to foreign creditors. He makes the same argument against reducing the value of the dollar, apparently unaware of the fact that the dollar has already fallen 20-30 percent against the value of other currencies since its peaks at the beginning of the last decade. (As a practical matter, interest rates have often been below the rate of inflation. People who lend hundreds of billions of dollars to the United States are presumably smart enough to understand this risk and also that the dollar could fall in value against other currencies.)

Anyhow, the long and short of this piece is that like most bankers, Stephen King wants people to get lower Social Security and Medicare benefits and retire later in life. He doesn't have much of an argument for this view, but hey, the chief economist at HSBC is an important person.

Note: Spelling of "Stephen King" corrected.