Tuesday, March 29, 2005
Orwellian Headline of the Week
Tuesday, March 22, 2005
Pressures on Inflation Have Picked Up
FRB: Press Release--FOMC statement and Board discount rate action--March 22, 2005
Producer price inflation is the highest since 1995
U.S. February Producer Prices Rise 0.4%; Core Rate Up 0.1%
Monday, March 21, 2005
What if Venezuela spends all its petrodollars?
Chavez wants to use those dollars to build infrastructure and housing for the poor, which sounds like a laudable goal. But what is likely to happen in real life? Reserves will be spent, aggregate demand will increase, and Venezuela will either run a big trade deficit (which means that it will be forced to run a surplus in the future) or otherwise there will be inflation or shortages of goods in sectors where there is not enough installed capacity to meet demand.
In the end, it's all awash...
Chavez seeks access to surplus reserves
Inflation Pressures Become More Evident
In other words, the trade-off between inflation and unemployment has just become much more steep, after a decade or more of structurally declining inflation. When there are cost-push inflationary pressures that are unrelated to domestic demand, it becomes much more difficult to keep inflation in check while leaving unemployment untouched. Greenspan's successor is going to have a tough job.
Bloomberg.com: Fed Reconsiders 'Measured' Pace as Inflation Pressures Mount
Saturday, March 19, 2005
Argentina Gets the Wrong Idea
The economist has some details
Thursday, March 17, 2005
Does political instability lead to inflation?
...a higher degree of political instability, measured using several political and institutional variables, generates higher inflation rates and seigniorage. Higher numbers of cabinet changes or government crises measure not only political instability but also economic policy variability, since every new cabinet that takes over power might have a new set of preferences regarding inflation and unemployment levels. In addition, since every new government is inserted in a very unstable political and institutional environment, it is also very likely to be removed in a short period. These perverse mechanisms greatly affect the way governments conduct monetary and fiscal policies, generating higher inflation and seigniorage. We have also shown that the mechanisms indicated previously are more pervasive and stronger in developing and, especially, in high-inflation (above 50 percent) countries than in developed and low-inflation countries.
Tuesday, March 15, 2005
Mumbai, City of the Future
The congress party is not strong in Mumbai, but it is the congress government that is leading the effort to modernize Mumbai. The Asia Times quotes Prime Minister Manmohan Singh:
"When we talk of a resurgent Asia, people think of the great changes that have come about in Shanghai. I share this aspiration to transform Mumbai in the next five years in such a manner that people would forget about Shanghai and Mumbai will become a talking point," the prime minister said. "I have a dream that we can do it. I believe we can become number one through modernization, expansion and development and make Mumbai the number one city in our country,"The government of Maharashtra has indeed announced a US$6.5 billion plan to modernize the city, including a Metro-rail link, and plenty of other infrastructure projects. It takes an optimist to believe that Mumbai can even vaguely resemble the magnificence of Shanghai, but Mumbai has a huge amount of character, and just a little beautification will go a long way.
If India gets serious about enhancing its urban infrastructure, and about making its cities (especially Mumbai) livable, a huge step forward will be made.
Monday, March 14, 2005
Developing Countries Gang Up on the US and Europe
Things are looking tough for the farmers of the US.
India gains as Brazil fights US farm sops - The Economic Times
Sunday, March 13, 2005
Surprise! State-owned banks are less competitive
Why Orwell Matters
"[One possibility is that] the Americans will decide to use the atomic bomb while they have it and the Russians haven't....In any case this is, I think, the least likely outcome of the three, because a preventive war is a crime not easily committed by a country that retains any traces of democracy."From Julian Sanchez
Saturday, March 12, 2005
Is debt being forced upon the US?
Bernanke tells us that the crises that plagued emerging markets during the 90s and 00s (Mexico, Asia, Russia, Argentina) rendered these countries shy to consume, and therefore they had plenty of savings left over that they need to invest somewhere else.
In response to these crises, emerging-market nations either chose or were forced into new strategies for managing international capital flows. In general, these strategies involved shifting from being net importers of financial capital to being net exporters, in some cases very large net exporters.These capital exports had to go somewhere, and it turns out that most of those capital exports wound up in the US, where they inflated equity and housing prices, and depressed interest rates, thus encouraging consumption.
...events outside U.S. borders--such as the financial crises that induced emerging-market countries to switch from being international borrowers to international lenders--have played an important role in the evolution of the U.S. current account deficit, with transmission occurring primarily through endogenous changes in equity values, house prices, real interest rates, and the exchange value of the dollar. One might ask why the current-account effects of the increase in desired global saving were felt disproportionately in the United States relative to other industrial countries. The attractiveness of the United States as an investment destination during the technology boom of the 1990s and the depth and sophistication of the country's financial markets (which, among other things, have allowed households easy access to housing wealth) have certainly been important.I have many problems with his arguments, but here I will focus on only one. It is difficult to believe that emerging market crises were major protagonists in this dilemma for two reasons. The first is that emerging markets have been having periodic balance of payments crises for centuries, and time has shown that emerging market borrowing is extremely resilient. The second reason follows Bernanke's own argument. He states that correcting the US fiscal deficit will not do much to improve the current account deficit because
to the extent that a reduction in the federal budget resulted in lower interest rates, the principal effects might be increased consumption and investment spending at home rather than a lower current account deficit.I agree with this point, and moreover it should apply to emerging markets as well. If the emerging markets follow policies that increase their creditworthiness (accumulation of international reserves, prudent fiscal spending, etc) their current accounts should be moving into deficit, not surplus. This is because their citizens will spend rather than save. After all, there is a tremendous amount of repressed consumption in these countries that is ready to be unleashed.
We need a better explanation for the current account deficit, Mr. Bernanke.
Some common features of inflations
• It takes a long time for people to catch on to what is happening, even during the more dramatic episodes of inflation. At first, firms believe that what they are witnessing is genuine pricing power. That is, that they have oligopolistic positions.
• Inflations tend to happen in the context of adverse balance of payments and aversion to taxation. The extreme of adverse balance of payments, of course, was Germany right after WWI. They were hit with massive reparations payments which clearly could not be made.
• Different prices rise at different rates, and there are often great changes in relative prices. To give an example of an extreme case, in the early 1920’s in Germany it was sometimes the case that it was more expensive to travel to the center of town than it was to travel to another city, as the prices of trams were adjusted more often than the prices of trains.
• Producers of producer goods benefit at the expense of producers of consumer goods. Manufacturers and traders make out like bandits. The closer you are to the ground, the better. Buy miners.
• Savings are wiped out; debtors benefit at the expense of creditors. In the case of the current inflation, the losers will be pensioners, and the winners will be debtors. That said, debtors will not feel like they are winning in the beginning, unless they are producers of inputs into production (commodities, industrial goods, consumer durables, etc). This is because wages do not rise as fast as prices in the beginning of an inflation. It is only after some time and considerable erosion of purchasing power that workers actually start demanding compensation for the debasement of the currency.
• There is considerable real depreciation of the currency at first. That is, the prices of domestic goods and especially services do not rise as quickly as the price of foreign exchange. This is because currencies are traded in very liquid, competitive markets and often even overshoot beyond the required adjustment.
Friday, March 11, 2005
Bretton Woods II? I don't think so...
The above results do not support the conventional wisdom that Asian currencies have gravitated back towards a US dollar bloc since the Asian crisis. Certainly, both the renminbi and the Malaysian ringgit adopted hard links to the dollar during the crisis, prompting some observers to argue that these would drag other regional currencies back towards dollar pegs (Ogawa and Ito (2002)). Academics and others discerned an “East Asian dollar standard” and a “neo-Bretton Woods”.6 However, the significantly positive elasticities estimated above do not lend support to such views, which would predict a negligible systematic relationship between Asian currencies and the yen or the euro.
If Asian currencies are not trading as a dollar bloc, how then should their current trading patterns be characterised? While some observers have envisioned gravitation towards the yen (Kwan (2001), Kim et al (2004)), a more plausible conjecture is that Asian currencies have moved in the direction of an effective exchange rate orientation, somewhat like that of the Singapore dollar (Kawai (2002)). This conjecture is consistent with the observed increase in the volatility of bilateral exchange rates relative to effective exchange rates in 2004 compared to 1996 among the Asian currencies with more flexible exchange rates (Graph 2).7 The Singapore dollar has long seen higher volatility againstthe US dollar than against a basket of its trading partners’ currencies.8 It has more recently been joined by the Thai baht. The Indonesian rupiah and the Korean won show nearly equal bilateral and effective volatilities.
Thursday, March 10, 2005
Mapping the Global Capital Markets
global capital markets are huge: we calculate that the world's financial assets now total more than $118 trillion and will exceed $200 trillion by 2010 if current trends persist. The stock of global financial assets has grown faster than the world's GDP, indicating that financial markets are becoming deeper and more liquid. With a few qualifications, this trend bodes well for the world's economies, since deeper markets provide better access to capital and improve the allocation of risk.On the geographical breakdown (and poor Latin America)
The United States has a unique position not only as the world's largest financial market but also as the global hub and conduit of capital. With the creation of the euro, however, European financial markets are integrating and gaining share. Japan's financial markets are becoming less important in the global financial system, while China's are growing rapidly. Financial markets in the rest of the world—including Singapore and all of Latin America—are negligible in a global context. Latin America's financial markets are notably underdeveloped compared with those of middle-income countries in other regions: despite representing over 4 percent of global GDP, Latin America has less than 2 percent of the world's total financial assets.
Wednesday, March 09, 2005
Slowly, inflationary pressures are building
It's little wonder people are starting to sell bonds.
ABC News: Treasury Yields Jump on Inflation Fears
Tuesday, March 08, 2005
Gasoline to Hit $2.15 Per Gallon
Inflation will rise in China
At the same time, inflation pressure is surging in places like Argentina and Brazil, where liquidity is abundant thanks to an overflow of dollars.
India, Brazil, South Africa
A summit between Brazil, India, and South Africa is the latest manifestation of this theme.-
Monday, March 07, 2005
Inflation Shall Rise Again
It seems clear that the US is in a position of excessive indebtedness, with its net foreign liabilities at over 30% of GDP. It is also clear that the US has a fantastic advantage over other countries that have found themselves in a similar position, such as Argentina. That advantage, of course, is that most of the assets that foreigners own in the US are denominated in dollars. Moreover, a large proportion of the assets that US residents own abroad are denominated in foreign currency.
If the US is in over its head, then the easy way out is clearly to let the dollar weaken. My guess, and that of many observers I trust, is that the dollar will have to weaken considerably, as the US needs to not just water down its existing liabilities, but there actually needs to be a correction in the trade balance. Worse yet, if the world catches on to the fact that the dollar is a one-way bet, and central banks in Japan and the developing world stop supporting the dollar, US interest rates will probably jump, and the current account will get bigger because interest payments on existing liabilities will go up.
All this spells lots of dollar weakness for a very long time, which is exactly what we’ve been seeing for the last three years.
Dollar weakness, in turn, is inflationary no matter how you look at it. If the rest of the world tries the China/mercantilist way out and buys dollars to keep its currency weak, they will be printing currency to buy those dollars (how else do you do it?) and therefore stimulating their economies, ultimately causing prices of things to go up. This is clear from the experience of China, and the prices they’re driving up happen to be commodities, and in this way the inflation is bouncing around the world like a hot potato.
The dollar wants to weaken, but the Chinese don’t want it to weaken so they buy reserves, but this causes their money supply to expand (sterlization doesn’t work) and therefore economic activity to speed up, thus driving up the demand for commodities, and thus the 24 cents extra that you’ll have to pay at the pump next month is ultimately the work of the Fed, either directly or indirectly.
Play this movie for a while and you see inflationary pressure only building up. As firms discover that the prices of inputs (metals, lumber, paper, energy, coffee, orange juice, you name it) are permanently rising, they will be much less reluctant to pass on these costs to their customers. Consumers also catch on to the fact that prices are rising, and inflation expectations rise. We know from economics that inflation expectations easily turn into actual inflation.
I see no way around this. Creeping inflation will be with us for years to come.
Markets in everything
Sunday, March 06, 2005
What do India and China's newly minted engineers mean for US competitiveness?
"If the world's best engineers are produced in India or Singapore, that is where our companies will go," Barrett says without batting an eyelid. "This is the reality in the modern world. We locate facilities where we can find or import talent."The concerns have to do with slippage in the US education system, along with an improvement in the higher education systems in India and China.
Asian colleges now produce six times the number of engineering degrees produced in the US. For the first time, other nations are about to produce more patents per year than the US.I don't completely share those concerns. First of all, Asia might produce a very large number of engineers, but frankly the quality is quite low, especially in India. Of 2 million engineers that India mints each year, only about 150,000 are good enough to work in the IT industry. The rest...I have no idea what they do. Second, the existing infrastructure in the US is much, much better than anything that can be found in India or China, and the real problem is one of cost. A weaker dollar would go a long way toward bringing the IT industry back to the US.
The real problem is with competitiveness of the real exchange rate. If dollars become cheaper, suddenly there are a lot of bodies and graduates around and available to invent things.
Economic liberalization and its critics
Contreras, 44, and her husband, Luis, struggle to pay for this luxury of running water, not to mention the other expenses necessary to keep their household of six functioning in its two-room concrete-block home. This week they scrambled to find their 18-year-old son a pair of black shoes to comply with the public school uniform. At least this year the cost of school registration is the lowest it has ever been, but work remains irregular and scarce and so Contreras considers leaving her family and her country for work that seems, to her eyes, so abundant abroad.I agree. There is much more to be done, but does this represent a failure of economic liberalization, or does it represent the failure of something else? It is easy to point out the dire living conditions and the lack of employment, but before blaming economic liberalization, and proposing protectionism as a solution, we should ask a few relevant questions:
- What is the alternative?
- Before economic liberalization, were things materially better?
- Have countries that have chosen the protectionist route to development, for example India, done a lot for their poor? For employment?
- Are there confounding factors, such as the massive influx of displaced people resulting from violence, that are increasing the labor supply and therefore making jobs scarce?
Sanchez also points to decentralization of spending as a result of the drive toward liberalization, but the true story is more complicated than that. Decentralization was a result of a political process that culminated in Colombia's 1991 constitution, where Colombians debated the role of the center versus the role of the states. Unfortunately, the result was the transfer of revenues to the provinces without a corresponding transfer of responsibilities or even technical ability to spend these revenues on welfare-improving projects. Much of the central government revenue that goes to these provinces is wasted or, more often, stolen. This has nothing to do with orthodox versus unorthodox economics, but rather with plain old corruption, and with distorted incentives.
Saturday, March 05, 2005
Warren Buffet is concerned about the landlord
Mr Buffett stepped up his warning about the US trade deficit and the need to finance it with foreign investment, devoting more than two full pages of the annual report to the topic.
“This force-feeding of American wealth to the rest of the world is now proceeding at the rate of $1.8bn daily, an increase of 20 per cent since I wrote you last year,” he said. “Consequently, other countries and their citizens now own a net of about $3,000bn of the US”
In particular, he warned that this meant a sizeable portion of what US citizens earned in future would have to be paid to foreign landlords.
“A country that is now aspiring to an “Ownership Society” will not find happiness in – and I’ll use hyperbole here for emphasis – a “Sharecropper’s Society,” added Mr Buffett. “But that’s precisely where our trade policies, supported by Republicans and Democrats alike, are taking us.”
His bet against the dollar, and mine, are paying off handsomely. That said, apparently his other investments didn't do very well last year.
China has slums?
The post below on the "latin americanization" of China inspired me to do a bit more research, and I'm finding out that the idea I had that the right way to urbanize is the Chinese way could be very wrong. Indeed, the
...UN Habitat... biannual report, "The State of the World's Cities"... places China in the same league as Bangladesh, India and Pakistan in their share of urban slum dwellers. Habitat estimates that almost 40 per cent of the urban population in Chinese cities are slum dwellers and that half of them live on less than US$ 1 a day - almost double the percentage which do so in countries such as Sri Lanka and Thailand.This really came as a surprise. Maybe the biggest difference between India and China is indeed its freedom. This quote from the head of China's housing industry association is quite
"It's not that there aren't people doing research. In fact, there are many scholars focusing on this issue in China, but few of them speak out," she said. "This is mostly because there's general disagreement about what the main problem is, and where we should focus our efforts."
Friday, March 04, 2005
The Latin Americanization of China?
China’s economic reforms have created what Sun Liping of Tsinghua University calls a “cloven society.” The new rich and powerful now live in walled, guarded villas and modern apartment complexes, enjoying vast differences in wealth, power, and rights from the swelling ranks of the rural poor and urban dispossessed...
There are two possible outcomes:
The outcome of this ... crisis, though it will certainly involve increasing scope and intensity of conflict and confrontation, need not be endless discord or regime collapse. China’s tumultuous reform process could see the creation of new, more liberal legal and social institutions. Transforming migrants into urban citizens with equal rights and allowing social groups to organize and articulate their own interests would both improve the ability of the government to govern effectively and minimize longterm threats to stability and economic development.What if China were to go down this second route? You can say goodbye to the fantastic rates of growth, as the amount of resources that go into rent-seeking would sky-rocket.
But other outcomes are also possible. The statecould refuse to allow liberal institutional innovation and slip into a modern form of authoritarian corporatism in which political leaders might seek to channel social energies toward nationalist ends— the “revolution from above” about which Barrington Moore warned. Or alternatively, China could catch the Latin American disease, characterized by a polarized urban society, intensifying urban conflict, and failed economic promise. Indeed, despite aggressive efforts to make the state more responsive and adaptive, the speed with which social cleavages and conflicts are growing today arguably makes this last outcome easier to imagine than the others.
Brazil eliminates tariffs on steel imports, US unlikely to follow
Thus, we see that Brazil eliminated tariffs on steel imports today, and that India cut its top tariff to 15% from 20% in its latest budget.
Shouldn't the US lead by example?
Mexico is more open to reform than I thought
The energy sector is one of the vulnerable points of Mexico's economy, as there is clearly insufficient investment at the moment to satisfy Mexico's future energy needs. One clear way to boost this investment without cutting into the government's spending on health care and education would be to allow the private sector in.
Now this could happen.
Thursday, March 03, 2005
How is India different from China?
Here is the survey, and what follows is a quote. I can't help but to think of the fable of the tortoise and the hare. Yes, India might take its time with reforms, but it sure seems to have a more effective way to deal with its social pressures, and that might come back to haunt China.
Take the way the two countries reacted to the recent deaths of two reformist leaders. India's P.V. Narasimha Rao, who died in December, was prime minister of India in 1991, when his government rescued the country from financial crisis and launched India's economic reforms. He served until 1996, but was later convicted of corruption. Although he won an appeal, the taint never quite left his name. His death, however, was marked by a state funeral and seven days of official mourning. The media vigorously debated his legacy.
When Zhao Ziyang, a former Chinese prime minister and head of the Communist Party, died three weeks later, he got just a couple of lines from the official news agency. He had been out of favour since siding with student protesters in Beijing's Tiananmen Square against hardliners in his own party in 1989. Dissidents were prevented from attending his funeral. It took two weeks to negotiate an official obituary. His successors, nervous that his memory might evoke the bloody suppression of the protests, did their best to erase it.
Dominoes of democracy in the Middle East?
They think not...
How far-reaching is this new spirit? The Arab world is large and diverse, so there is always a risk of connecting the dots in a way that produces a distorted picture. One oddity is that Iraq, Palestine and Lebanon—all three of the prime exhibits being used to make the case for democracy—happen to be under foreign occupation, by America, Israel and Syria respectively. Each is in many ways a special case....
The foreign occupation of Lebanon began in 1976, when Syria’s dictator, Hafez Assad, sent his army to intervene in Lebanon’s brutal three-cornered civil war between Maronite Christians, Muslims and Palestinians. The mass protests that forced Lebanon’s pro-Syrian government in Lebanon to resign this week would probably not have happened but for a powerful shock: last month’s murder of Rafik Hariri, the country’s former prime minister and most popular politician. This was the catalyst for a chain reaction. For the Lebanese, what some are calling a “cedar revolution” and others a “peaceful intifada” carries the promise of an end not just to Syrian occupation but also to a corrupt spoils system that has long sapped the country’s talent and morale....
In Palestine, too, the advance of democracy may have been helped by the weakness of the government. The Palestinian Authority (PA), created by the 1993 Oslo accords to run the occupied territories until a final deal on statehood was reached, is missing many of a sovereign state’s usual attributes. Israel controls natural resources, borders, coast and airspace, the currency, the collection of customs duties, and, in most areas, security and internal freedom of movement. Yet Palestine’s political system is vibrant and pluralistic....
An Arab democratic opening will be long and tortuous. The regimes that block it are strong, cunning and ruthless. The rhetoric of “resistance”—Islamist, Arab nationalist, anti-American, anti-globalisation, or whatever—retains a powerful grip. Many Arabs still support groups such as al-Qaeda. A huge amount still depends on the outcome in Iraq: a descent into chaos or the failure of the political process there could crush democratic stirrings throughout the region. For all these reasons, it is probably too early for the Americans to crow about an Arab year of revolutions. All the same, the distance between George Bush’s talk of freedom and Arab aspirations, which only recently seemed to yawn so wide, may at last be starting to close.
I can be just as hypocrytical...
Wednesday, March 02, 2005
Finally, a way to curb the current account deficit
Surging trade with China is increasing the strain on Los Angeles and Long Beach, which together receive nearly 80 per cent of traffic to the western US. The Pacific Maritime Association, which represents west coast ports, predicts import volumes will increase by a further 14 per cent on average this year the same rate as last year.
Container ships bound for California last year had to wait offshore for several days before a berth became free, delaying deliveries to retailers and pushing up costs for carriers and shippers.
The ports, with their powerful labour unions, limited working hours and outdated technology, must increase investment and productivity if further disruption is to be averted, said the executives and analysts. “The congestion we faced [in the US] last year is likely to be repeated this year,” David Lim, chief executive of Neptune Orient Lines, a Singapore-based ocean freight carrier, told a conference on trans-Pacific shipping this week. “There is a need for closer co-ordination between industry, government and other interested parties to make sure much-needed investment [in US ports] is not further delayed.”
The result? Higher prices for imported goods. Frankly, I don't understand how anyone can still talk about deflation during times like these.
Chavez's Latest: If I Kill Myself, You Can't Have Any Oil
Go figure. The sad thing is it's probably true. It's not quite clear whether we should laugh or cry.
Tuesday, March 01, 2005
What price for a low interest rate loan?
Of course, the review article begins by citing Niall Ferguson, who has argued that the British empire was actually a good thing because, among other things, countries under British rule had access to a much more abundant flow of capital than would have otherwise been the case. Ferguson, it turns out, does not mention Kenya anywhere in his book on the British empire other than in the introduction, where he is talking about himself. And yet what happened in Kenya was very dramatic, and frankly I would pass up a low interest rate loan if it implied suffering through the following:
The British declared the Kenya Emergency in 1952, when seven years of restless dissatisfaction with British rule culminated in the full-scale rebellion known as Mau Mau. It was very largely the struggle of the Kikuyu, the country’s majority ethnic group – about 1.5 million in a native population of five million – who had lost much of their land to white settlers and had moved into reservations or continued farming as tenants. The Emergency saw out two prime ministers – Churchill and Eden – and ended in January 1960. In that time, Mau Mau supporters killed at least 2000 African civilians and inflicted some 200 casualties on the army and police. In all, 32 white settlers died in the rebellion. For their part, the British hanged more than 1000 Kikuyu, detained at least 150,000 and, according to official figures, killed around 12,000 in combat, though the real figure, in David Anderson’s view, is ‘likely to have been more than 20,000’. In addition, Caroline Elkins claims, up to 100,000 died in the detention camps.
Taking cows a little bit too seriously
A new goratna (cow products) stall at the BJP's souvenir shop is rapidly outselling dry political tracts, badges, flags and saffron-and-green plastic wall clocks with the face of former prime minister Atal Behari Vajpayee.The good news is that this stuff could really revolutionize medicine. One of these medicines "battles cancer, hysteria, and irregular periods." And here I was totally barking up the wrong tree, looking to the Indian pharmaceutical industry which, by the way, is promising in its own way.
And, speaking of cows, it appears that they are a lot more complex than we thought. Indeed, according to the Sunday Times,
Cows are ... capable of feeling strong emotions such as pain, fear and even anxiety — they worry about the future. But if farmers provide the right conditions, they can also feel great happiness...
Dairy cow herds can also be intensely sexual. Webster describes how the cows become excited when one of the herd comes into heat and start trying to mount her. “Cows look calm, but really they are gay nymphomaniacs,” he said.
Donald Broom, professor of animal welfare at Cambridge University, who is presenting other research at the conference, will describe how cows can also become excited by solving intellectual challenges.
Next time you look a cow in the eye, remember: she is a gay nymphomaniac.