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The U.S. economy is going strong. But American farmers are going bankrupt and much of the rest of the world is hitting a soft patch. Good morning. Jeff Sparshott here to take you through Europe’s deteriorating outlook, falling foreign demand for U.S. debt and graduate degrees, socialism vs. “socialism,” and the latest central bank to change course. Send us your questions, comments or suggestions by replying to this email.
IT’S A SMALL WORLD
On paper, the U.S. economy looks great. On the ground, it’s not great for everyone. A wave of bankruptcies is sweeping the Farm Belt as trade disputes add pain to already low commodity prices. Throughout much of the Midwest, U.S. farmers are filing for chapter 12 bankruptcy protection at levels not seen for at least a decade, Jesse Newman and Jacob Bunge report.
Rural America has suffered a multiyear slump in prices for corn, soybeans and other commodities touched off by stiff foreign competition and a world-wide glut. Tariff retaliation from China, Mexico and elsewhere has further roiled agricultural markets and pressured farmers’ incomes.
WHAT TO WATCH TODAY
The Bank of England releases a policy statement at 7 a.m. ET.
U.S. jobless claims are expected to fall to 225,000 from 253,000 a week earlier. (8:30 a.m. ET)
The WSJ’s monthly survey of economists is out at 10 a.m. ET.
U.S. consumer credit is out at 3 p.m. ET.
The Dallas Fed’s Robert Kaplan participates in a moderated Q&A at 9:15 a.m. ET, Vice Chairman Richard Clarida speaks at a Czech National Bank seminar at 9:30 a.m. ET, and the St. Louis Fed’s James Bullard speaks about the economy and monetary policy at 7:30 p.m. ET.
TOP STORIES
A TALE OF TWO MARKETS
One emerging theme across the globe: The U.S. economy is doing fine. Other places are a bit of a wreck. Take General Motors. The automaker is counting on U.S. buyers of pickup trucks and SUVs to bolster its bottom line. GM said its North American business posted a record fourth-quarter operating profit. The big reason: Truck buyers shelled out more for redesigned versions of the Chevrolet Silverado and GMC Sierra, Mike Colias reports. But GM’s international division swung to a $48 million loss. A sales drop in China helped pare profit there by about 40%. Add it all up, and overall operating profit in the latest quarter slipped 8% from a year earlier.
EUROPE SLASHES GROWTH FORECAST
The European Union cut its growth forecast for the eurozone and said things could get even worse as China’s economy slows and Britain stumbles toward a chaotic exit from the trade bloc. Gross domestic product in the 19-member eurozone will grow by 1.3% in 2019, the EU said in its quarterly report, down from a 1.9% forecast in November, Emre Peker reports.
The problems: Trade tensions, falling demand from China, protests in France, concerns over Italy’s debt, and weakening manufacturing and export outlook in the EU’s powerhouse, Germany. The possibility of a hard Brexit is also fueling uncertainty and raising the threat of greater-than-anticipated disruption.
BRAIN DRAIN
The international market for U.S. graduate education is softening. For the second year in a row the number of students from abroad who enrolled in U.S. graduate schools fell by 1%, Douglas Belkin reports. Higher education is one of the nation’s leading exports: International students at all levels spent a total of $42 billion in the U.S. in 2017, according to the Institute of International Education, almost double what the U.S. sells in soybeans every year.
INTO THE VOID
A steady decline in foreign demand for U.S. government bonds hasn’t been the disaster many analysts and investors feared. Foreign ownership of U.S. government debt has been decreasing since it reached a peak of about 55% during the financial crisis in 2008, Daniel Kruger and Kate Davidson report. China, the largest foreign creditor to the U.S., owned as much as 14% of all outstanding Treasury debt in 2011. Today the country owns a little more than 7%.
Deficit hawks have suggested government bond yields could jump if foreign investors shed their holdings of U.S. debt, which in turn could push up the cost of borrowing throughout the economy. Those warnings haven’t come to pass.
THE S WORD
Hugo Chávez must be spinning in his mausoleum. It’s bad enough that the socialist regime Mr. Chávez handed down to Venezuela could soon crumble. Now, to add to the indignity, the very word “socialism” has been debased into a millennial hashtag on the left and a schoolyard taunt on the right.
Would most Americans know socialism if they saw it? Taxing the rich, Medicare-for-all, and a Green New Deal that replaces fossil fuels with renewables are certainly liberal, probably radical, possibly unwise. But socialist? Hardly. They redistribute the outcomes of the market; they don’t replace the market with the state as the means of allocating production. That’s the hallmark of true socialism, and Venezuela’s catastrophic experience is a useful lesson in why it is has fallen out of favor around the world, Greg Ip writes.
DARWIN AWARDS
Predators are supposed to be lean, fast and prey on the weak. When they are fat, slow and dine on the strong, your ecosystem—or economy—has a serious problem. The predatory behavior of China’s inefficient state-owned enterprises is a concern for both policy makers there and U.S. trade negotiators. Clipping SOEs’ wings would benefit both economies. But President Xi Jinping seems unconvinced that deep-seated, market-friendly reforms are necessary. The harm that is doing to China’s private sector—what economists term ‘crowding out’—is only becoming clearer, Nathaniel Taplin writes.
CHANGING COURSE
The Reserve Bank of India surprised economists by cutting its key lending rate, looking to encourage economic growth as the country’s inflation appears to be well under control. The RBI last lowered rates a year and a half ago and has been raising them or leaving them unchanged since, Debiprasad Nayak reports.
The move is the latest among central banks to hold steady or loosen monetary policy, a reversal from 2018’s tightening trend.
ACCENTUATE THE NEGATIVE
Central banks in Europe have a problem. Policy rates in the eurozone, Switzerland, Denmark and Sweden are negative. But what happens if there’s another downturn?
Cutting rates deeper into negative territory might spur spending and investment. But it might also push people to hoard cash. The fix: Divide the monetary base into cash and electronic money. “When setting a negative interest rate on e-money, the central bank would let the conversion rate of cash in terms of e-money depreciate at the same rate as the negative interest rate on e-money,” IMF economists Ruchir Agarwal and Signe Krogstrup write. —Brian Blackstone
QUOTE OF THE DAY
We’re paddling against the current in trying to sustain public faith in the Fed. —Federal Reserve Chairman Jerome Powell, speaking to educators
TWEET OF THE DAY
[wsj-responsive-sandbox id = "0" ]WHAT ELSE WE’RE READING: TAX CUT EDITION
Offshoring U.S. corporate profits is a problem. President Trump’s tax reform made it worse. “Overall, the Tax Cuts and Jobs Act amounted to a technocratic sleight of hand—a scheme set to shift an even greater share of the federal tax burden onto the shoulders of American families,” the Council on Foreign Relations’s Brad Setser writes in the New York Times.
The 2017 Republican overhaul handed the biggest U.S. banks a $21 billion tax cut. “The 23 firms boosted dividends and stock buybacks 23 percent, and they eliminated almost 4,300 jobs. A few have signaled plans to cut thousands more,” Ben Foldy reports at Bloomberg.
A 70% top marginal tax rate? Think a little lower if you want to get the most money into Treasury coffers. “From a human capital perspective, we argue that the revenue maximizing top tax rate in the US is approximately 49 percent,” Georgetown’s Alejandro Badel and Mark Huggett, and Tsinghua University’s Wenlan Luo write.
UP NEXT: FRIDAY
The Bank of Russia releases a policy statement at 5:30 a.m. ET.
Canada’s employment report for January is out at 8:30 a.m. ET.
from Real Time Economics https://on.wsj.com/2WNz09B
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