26 July 2018 FT — Articles to Read

26 July 2018


Question: According to Nerdwallet, what are three (3) money tasks you shouldn’t tackle on your own?


Draghi expects grilling over mixed ECB messages on rates – Pg. 2

–          …vital issue on when interest rates will rise from their record lows

–          …bank said it expected to keep interest rates on hold until “at least through the summer of 2019”.  The markets interpreted this phrase as meaning interest rates would stay at their current levels until September next year – longer than previously expected


Chinese economy – Pg. 7

–          …how it started [debt boom]…the trigger was the global financial crisis.  Between early 2004 and the late 2008, Chinese gross debt was stable at between 170 and 180% of GDP.  This was higher than in other emerging countries, but was not much higher

–          Then, in 2008, came the meltdown of the western financial system and subsequent deep recession in high-income countries.  China responded with a huge investment programme, amounting to some 12.5% of GDP, probably the biggest ever peacetime stimulus

–          The challenge confronting Beijing was to offset the impact on demand of a fall in China’s net exports of 6% of GDP between 2007 and 2011.  In 2007, net exports had been close to 9% of GDP.  Since this was neither economically nor politically sustainable, the fall was permanent

–          Such a decline in net external demand needed a permanent offset

–          …the share of gross investment in GDP soared from an already extremely high 41% of GDP in 2007 to 48% in 2010

–          ….between the fourth quarter of 2008 and the first quarter of 2018 China’s gross debt exploded from 171 to 299% of GDP

–          A simple measure of the efficiency of the investment is the incremental capital output ratio, which measures the ratio of the investment rate to the growth rate.  Until the crisis, the ICOR had not exceeded four for any sustained period.  Ever since 2011, it has been close to six

–          It was as though the high-income countries has passed the credit baton to china.  For Beijing, this response to the financial crisis has an additional drawback – distracting it away from a necessary rebalancing of its economy

–          By 2017, next exports were back down to 2% of GDP: that did represent a rebalancing.  But investment was still higher than in 2007, at 44% of GDP, private and public consumption was still only 54% of GDP and debt had soared to three times GDP.  In sum, the rebalancing of China’s external accounts came at the cost of still greater domestic imbalances

–          So what happens now?  There are four conceivable possibilities: a crisis, followed by lower growth; a crisis, not followed by lower growth; no crisis, but reduced growth; and no crisis and no reduction of growth

–          The salient characteristics of a system liable to a crisis are high leverage, maturity mismatches, credit risk and opacity


Answer: (1) Deciding when to retire (Prof Note: The question is best asked, “When do you want the option to retire?”  Remember retirement is NOT an age but an question, i.e. Passive Income >= Active Expense.); (2) Handling an IRS audit (Prof Note: Everyone runs to hire a CPA…I recommend hiring an attorney that has a CPA); (3) Filing for bankruptcy if you have anything to lose  (Prof Note: This is a complicated process and not one to be taken lightly)