Joseph S. Nye writes:

The World Bank recently announced that China’s economy will surpass that of the United States this year, measured according to purchasing power parity (PPP). But this is far from a holistic depiction of China’s global economic standing.

Though PPP can serve some purpose in comparing welfare across countries, it is affected significantly by population size. India, the world’s tenth largest economy measured according to the market exchange rate of the US dollar and the Indian rupee, is the third largest in PPP terms. Moreover, power resources, such as the cost of imported oil or an advanced fighter aircraft engine, are better judged according to the exchange rates of the currencies that must be used to pay for them.

But, even if China’s overall GDP surpasses that of the US (by whatever measure), the two economies will maintain very different structures and levels of sophistication. And China’s per capita income – a more accurate measure of economic sophistication – amounts to only 20% of America’s, and will take decades, at least, to catch up (if it ever does).

Moreover, as Chinese officials and researchers have acknowledged, though China surpassed Germany in 2009 as the world’s largest exporter by volume, it has yet to develop into a truly “strong” trading country, owing to lackluster trade in services and low value-added production.

China’s lagging economic sophistication is also reflected in its financial markets, which are only one-eighth the size of America’s, with foreigners permitted to own only a tiny portion of Chinese debt. Though China has tried to increase its financial clout by encouraging the international use of its currency, renminbi-denominated trade still represents just 9% of the global total, compared to the dollar’s 81% share.

Not even China’s massive foreign-currency reserves – the world’s largest, at nearly $4 trillion – will be adequate to boost its financial leverage, unless the authorities create a deep and open bond market with liberalized interest rates and an easily convertible currency. These reserves do not give China much direct bargaining power over the US, either, given that interdependent relationships depend on asymmetries.

China holds dollars that it receives from its exports to America, while the US, by keeping its market open to Chinese products, helps to generate growth, employment, and stability in China. Yes, China could bring the US economy to its knees by dumping its dollars, but not without taking a serious hit itself.

The differences between China and the US in terms of economic sophistication extend to technology as well. Despite some important achievements, China relies on copying foreign inventions more than domestic innovation for its technological progress.

In the coming decades, China’s GDP growth will slow, as occurs in all economies once they reach a certain level of development – usually the per capita income level, in PPP terms, that China is approaching. After all, China cannot rely on imported technologies and cheap labor to support growth forever. The Harvard economists Lant Pritchett and Lawrence Summers have concluded that regression to the mean would place Chinese growth at 3.9% for the next two decades.

But this straightforward statistical estimate does not account for the serious problems that China must address in the coming years, such as rising inequality between rural and urban areas and between coastal and inland regions. Other major challenges include a bloated and inefficient state sector, environmental degradation, massive internal migration, an inadequate social safety net, corruption, and weak rule of law.

Moreover, China will face increasingly adverse demographic conditions. After enforcing a one-child policy for more than three decades, China’s labor force is set to peak in 2016, with elderly dependents outnumbering children by 2030. This has raised concerns that the population will grow old before it grows rich.

China’s authoritarian political system has demonstrated an impressive ability to meet specific targets, from the construction of high-speed railways to the creation of entire new cities. What China’s government is not yet prepared to do is respond effectively to increasingly loud demands for political participation – if not democracy – that tend to accompany rising per capita GDP. Will political change occur when per capita nominal GDP, now at roughly $7,000, approaches $10,000, as occurred in neighboring South Korea and Taiwan?

It remains to be seen whether China can develop a formula to manage an expanding urban middle class, regional inequality, and, in many places, restive ethnic minorities. Its lagging economic sophistication may complicate matters further. In any case, it means that aggregate GDP, however it is measured, is inadequate to determine when – and whether – China will overtake the US in economic power.

John Muellbauer writes:  It is now a near certainty that, by the end of this year, falling energy and commodity prices will push annual inflation in the eurozone below zero – well under the European Central Bank’s target of near 2%. Rather than continue to allow misguided conventional thinking, centered on German economic ideology, to impede effective action, the ECB must pursue quantitative easing (QE) “for the people” – an adaptation of Milton Friedman’s “helicopter drops” strategy – to reverse deflation and get the eurozone back on track.

As it stands, conventional monetary policy has had – and American-style QE will have – little impact on the eurozone’s core countries. This can be explained partly by the fact that, when it comes to credit provision, capital markets do far less of the heavy lifting in the eurozone than in the United States. As a result, bringing down yields on government, corporate, and asset-backed bonds has less impact.

At the same time, the euro exchange rate – the one mechanism whereby current policies could still make a difference – cannot be pushed down much further. In Germany, France, and Italy, higher house prices spur non-owners to save more for the down payment and inspire caution among tenants, who expect future rent hikes. And the housing wealth of existing owners does not translate into significantly higher spending, given the lack of access to home-equity loans and cheap mortgage refinancing. Finally, in countries like Germany, where households’ bank and saving deposits far outweigh their debt, lower interest rates reduce total household spending.

Another factor impeding QE’s impact in the eurozone is low bond yields, which, by increasing measured pension-fund deficits, make some companies reluctant to invest.

US-style QE channels more money toward the wealthy, who have a lower propensity to spend, without providing much to the poorer people who would use it to consume more. In the eurozone, the distribution issue is especially complex, given that institutional differences between countries can give the impression of discrimination among them.

Clearly, the ECB must develop a strategy that works in the eurozone’s unique system.
One simple solution would be to distribute the funds to governments, which could then decide how best to spend them in their countries. But the eurozone’s rule against using the ECB to finance government spending bars this approach.

A more feasible option, therefore, would be to provide all workers and pensioners with social-security numbers (or the local equivalent) with a payment from the ECB, which governments would merely assist in distributing. Another alternative would be to use the electoral register, a public database that the ECB could use independently of governments.

Of the roughly 275 million adults with social-security numbers in the eurozone, some 90% are on the electoral register.  Beyond lifting the eurozone economy out of deflation, such an initiative would have massive political benefits, as it would reduce resentment toward European institutions, especially in struggling countries like Greece and Portugal, where an extra €500 would have a particularly strong impact on spending.

Germany may resist this approach by marshaling arguments about prudence and responsibility. But the fact is that Milton Friedman’s  “helicopter money” would work – and nothing in eurozone law prohibits it.

After years of austerity, infighting, and unemployment, it is time to implement a QE program that delivers what Europe needs.

Cliff Asness, founder of hedge fund AQR Capital Management, doesn’t think hedge funds hedge enough. In his opinion, a hedge fund should be about as long the market as it is short, but most hedge funds end up being mostly long the market and perform like an expensive index fund.

Generaly Asness thinks a 2% fee and 20% on profits, the normal hedge fund charges, as too high.  Some indiividual hedge fund investors are worth it, but most are not.

If a manager is twice as aggressive with your money, Asness said that would at least justify the 2% fee on money under management, as they would be able to manage half the amount of other people’s money. And Asness added that of course there are also managers who do outperform, who do generate real alpha, and these folks are worth “2 and 20.

William Pesek writes:  The Trans-Pacific Partnership trade deal, which has stalled because Japan has been unwilling to open up its auto and agricultural setors, now has a chance to be passed. Devaluation of the yen will probably not be welcomed by the Republic Congress.

Going easy on agriculture will not please Republicans.  This will put Abe in the hot seat with certain constituencies and make his life difficult as he tries to loosen labor markets, get more women in the workforce and strengthen Japan’s corporate governance.

Will the Prime Minister’s own party which is financed by agriculture go along wtih a comprehensive trade pact?