My strategic investment talk with the Hong Kong University Graduate Association on 7 March, 2017 - entitled Implications of a Trump Presidency and Shifts in the World Order - Where to put your money in 2017
In his Paper of February, 2017, Homi Kharas, a senior fellow and deputy director of the Global Economy and Development program at the Brookings Institution, outlines the unprecedented expansion of the global middle-class, 88% in Asia.
The following are extracts from his report -
• There were about 3.2 billion people in the middle class at the end of 2016, 500 million more than .... previously estimated. This implies that in two to three years there might be a tipping point where a majority of the world’s population, for the first time ever, will live in middle-class or rich households.
• The rate of increase of the middle class, in absolute numbers, is approaching its all-time peak. Already, about 140 million are joining the middle class annually and this number could rise to 170 million in five years’ time.
• An overwhelming majority of new entrants into the middle class— ..... 88 percent of the next billion—will live in Asia.
• The absolute market size of middle-class spending is larger than previously estimated. In 2015, middle-class spending was about $35 trillion (in 2011 PPP terms), roughly 12 percent higher than ... previous estimate. It now accounts for one-third of the global economy.
• The global middle-class market is now clearly bifurcated: a slow-growing developed country middle class, and a fast-growing emerging economy middle class—with growth in both instances measured in terms of either numbers of people or total spending.
• The most dynamic segment of the global middle-class market is at the lower end of the scale, among new entrants with comparatively low per capita spending.
• Big geographic distributional shifts in markets are happening, with China and India accounting for an ever-greater market share, while the European and North American middle class basically stagnates.
• At a growth of about 4 percent in real terms, the middle-class market is growing faster than global GDP growth, but not as fast as it did in the 1960s and 1970s, the boom years for the middle class.
A larger middle-class population and market has significant environment and social implications. Naturally, assuming technology does not change, the carbon footprint per person will rise as the middle class expands.
Two mitigating factors could limit the extent of this. First, middle-class growth is associated with migration from rural to urban areas and, for a given level of income, households in urban areas tend to have a smaller carbon footprint than households in rural areas, especially for transport. Second, middle-class households tend to invest more in their children’s education and this, in turn, can reduce fertility rates and decrease the long-term population trajectory for the world.
The social implications of a larger middle class are also important. There is considerable evidence that a larger middle class will also imply a happier population, at least for new entrants into the middle class (Kahneman and Deaton, 2010). But there is little evidence to suggest that this will create pressures for more democratic governance or for better delivery of public services, both of which are required for sustained growth. In fact, governments may find themselves unable to meet the growing expectations for middle-class enhancing programs, such as universal health care, public education, pensions, and affordable housing, without resorting to deeply unpopular tax increases.
Getting the right balance between taxes on the middle class and services to support them likely presents the greatest source of uncertainty for this paper’s forecasts.
According to theFinancial Times, China overtakes the eurozone as world’s biggest bank system, more than double that of the United States. China's bank assets amounted to $33tn at the end of 2016, compared with $31tn for the eurozone, $16tn for the US and $7tn for Japan. The value of China’s banking system is more than 3.1 times the size of the country’s GDP, compared with 2.8 times for the eurozone.
While the status reflects global influence, it also reflects on reliance on debt to fuel the economy.
For perspective, let's not forget the gigantic 247 trillion-dollar derivative risks in the US banking system, according to a report in Infowars, a US online free-speech platform. This represents a much greater systemic risk to the banking systems of the whole world.
All in all, it's perhaps time to re-visit Professors Carmen M Reinhart and Kenneth Rogoff's post-Financial Crisis warning shot - This Time Is Different? - Eight Centuries of Financial Folly, Princeton University Press, 2009.
In an Op-ed of the New York Times (8th February, 2017), the above proposition is put forth in a Paper to be released by the Climate Leadership Council. The Op-ed is jointly penned by Martin Feldstein, chairman of the Council of Economic Advisers under President Ronald Reagan, Gregory Mankiw, chairman under President George W. Bush, and Ted Halstead, founder and chief executive of the Climate Leadership Council.
Co-authors of the Paper include James A. Baker III, Treasury Secretary for President Ronald Reagan and Secretary of State for President George H. W. Bush; Henry M. Paulson Jr., Treasury Secretary for President George W. Bush; George P. Shultz, Treasury Secretary for President Richard Nixon and Secretary of State for Mr. Reagan; Thomas Stephenson, a partner at Sequoia Capital, a venture-capital firm; and Rob Walton, who recently completed 23 years as chairman of Walmart.
This heavyweight Paper presents a plan that buys into deep-seated Conservative pro-business, anti-regulation, pro-growth, pro-exports, and pro-jobs principles. It is based on four pillars -
"First, the federal government would impose a gradually increasing tax on carbon dioxide emissions. It might begin at $40 per ton and increase steadily. This tax would send a powerful signal to businesses and consumers to reduce their carbon footprints.
Second, the proceeds would be returned to the American people on an equal basis via quarterly dividend checks. With a carbon tax of $40 per ton, a family of four would receive about $2,000 in the first year. As the tax rate rose over time to further reduce emissions, so would the dividend payments.
Third, American companies exporting to countries without comparable carbon pricing would receive rebates on the carbon taxes they’ve paid on those products, while imports from such countries would face fees on the carbon content of their products. This would protect American competitiveness and punish free-riding by other nations, encouraging them to adopt their own carbon pricing.
Finally, regulations made unnecessary by the carbon tax would be eliminated, including an outright repeal of the Clean Power Plan."
The Op-ed suggests that this plan could meet America’s commitment under the Paris climate agreement, all by itself. Above all, it facilitates President Trump's move to free shackles on the oil and gas industries. It also contains broad-based elements that should appeal to Conservatives, libertarians, populists and environmentalists alike, thereby ensuring bi-partisan support.
Absent further details, an apparent fly in the ointment is that only exports to countries without comparable carbon pricing can benefit from the tax rebate. As not all oil and gas production is for export and not all exports are to such countries, a sizable proportion would have to bear the tax burden. If true, it is open to question whether such a plan would gain enough support from influential hard-nosed energy interests inside the GOP corridors of power.