Saturday, 28 February 2009
-Obama unveiled his massive 2010 budget proposal, much of which breaks with the conservative consensus that governed US policy for much of the past 30 years. $634bn in health care spending will be, in theory, offset by tax increases on American's earning over $250,000 a year. The US president also vowed to cut the deficit in half by 2012. More than a few people questioned the likelihood, and math, of this plan.
-Obama fulfilled a core campaign pledge by announcing a withdrawal date for US combat troops in Iraq (August 2010). He aims to have all troops out by 2011. Oddly, congressional Republicans embraced the president's announcement. Didn't their candidate for the oval office just run on not "cutting and running"? I guess after seeing their poll numbers plummet in the wake of their stimulus obstructionism, they latched on to a sure political winner.
-In Pakistan, Taleban leaders in Bajaur province declared a unilateral ceasefire, a week after a negotiated truce was reached in the Swat valley. In Islamabad, Nawaz Sharif and his brother Shahbaz, the chief minister of Punjab province, were banned from holding political office by the Supreme Court, causing the Punjab government to collapse and igniting protests. Political instability + balance of payments crisis + losing control of large portions of your territory = failed state.
-In her first foreign trip abroad, US secretary of state Hillary Clinton promoted pragmatism in US-China relations, overlooking human rights in favor of economic and financial cooperation...and US treasuries. Days later, a US State Department report laid the smack-down on China over the very issue Clinton skirted face-to-face. China was not pleased.
-Cracks in the Russian power structure?
-The central banks of Poland, Czech Republic, Hungary and Romania issued coordinated statements defending their currencies, while a consortium of international institutions announced a loan package for the troubled region.
-The US government increased its stake in Citigroup to as much as 36%, days after Bernanke and Obama sought to calm fears over nationalization. Bernanke said the debate essentially "misses the point." The US Treasury also provided details on its upcoming stress tests.
-ASEAN signed trade agreements with Australia and New Zealand.
-The defense of the rouble appears to have been a success. For now.
-In the Champion's League, ManU held Inter to a draw in the San Siro, Arsenal beat Roma on a Van Persie penalty, and Liverpool beat Real Madrid in typical Kop Champion's League fashion. In the UEFA Cup, two of the favorites, AC Milan and Aston Villa, crashed out.
-This. Is. Crazy.
-The Times of London looks at "Japan: the nation that loves robots."
-Slumdog Millionaire was the big winner at the 81st Academy Awards.
Friday, 27 February 2009
Among the steps taken in his first five weeks in office: passing the Lilly Ledbetter Fair Pay Act, giving notice that he planned to rescind in 30 days a last-minute Bush administration rule that expanded the federal protection for, and scope of, the so-called "conscience clause" for healthcare providers, lifting the federal funding ban for international family planning groups that provide abortion services, expansion of the State Children's Health Insurance program, to name but a few. White House advisor David Axelrod has said Obama will soon lift the federal funding ban on stem-cell research. His 2010 budget includes substantial increases for student loan assistance (in fact, it proposes a complete reform the system by cutting out the private lenders who distribute federal loans) and $634 bn over the next decade for health care reform, to name just two provisions. This list doesn't even begin to include his actions on the foreign policy front (for instance, Iraq withdrawal date or interrogation and detention guidelines) or his intention to let the Bush tax cuts expire in a year's time.
Paul Krugman summed up Obama's actions in his NYT column,
"President Obama’s new budget represents a huge break, not just with the policies of the past eight years, but with policy trends over the past 30 years. If he can get anything like the plan he announced on Thursday through Congress, he will set America on a fundamentally new course."
We are all grabbed by the headlines on the economy, banking system and foreign policy challenges facing his administration. But the US president has quietly implemented an agenda that will transform the US social contract. The so-called Reagan revolution is being drawn back, and I would say, somewhat surprisingly, the majority of the American people are on board. The relationship between Americans and their government is changing; a fundamental sea change is upon us.
Now if only he could figure out how to pay for it all...
Thursday, 26 February 2009
“International credit markets are linked, and so a snowballing credit crisis in Eastern Europe and the Baltic countries could cause New York municipal bonds to fall.”Actually, it's less the New York municipal bonds and more the Austrian banking system, which has a collective exposure to the region equivalent to some 70% of GDP. Belgian and Swedish banks are also heavily exposed to the danger of a spike in the number of nonperforming loans.
It's important not to overgeneralize - there are plenty of countries in the CEE and not all of them are facing the same challenges. Moreover, those countries within the EU have access to a different support system than those on the outside. As one Austrian banker pointed out in this FT article:
“What’s been lost in this crisis very often has been the ability of people to differentiate.”But that's exactly the problem with financial contagion - people generalize, leap to conclusions, and make rash decisions. For example, one consequence of this phenomenon is that, rightly or wrongly, the citizens of Central and Eastern Europe appear to be growing increasingly skeptical of the value of the EU free market integration project. It would be too rash to predict a complete halt to the process, or even a splitting of the EU, but the crisis certainly isn't helping.
So it doesn't look like Euromageddon just yet, but Europhiles are going to have work a lot harder over the next short while if they're going to keep the project going. If only there were some encouraging news to hang on to....
(Unless otherwise stated, stats used in this post originate from RGE Monitor)
Yet not all is lost amidst the fear and uncertainty. A few developments provide hope that the crises will be met with an effective political response. The most immediate is a report by Alan Beattie of the FT that a group of multilateral institutions will announce on Friday a coordinated lending package of €25bn to the region's banks. This follows a report earlier this week that foreign banks were pumping cash into their subsidiaries in the region. The lending is key because the IMF simply lacks the resources to tackle the crisis on its own; it also masks the failures of Western European governments to follow through on anything but rhetorical promises of support. At the most basic level, however, an influx of Euros is desperately needed, and it looks like we are finally moving in the direction of a coordinated response.
The second promising development is more of a discussion than trend at this point. The merits and timing of Eurozone accession are hotly debated in the region (and Western European capitals). But it seems the attraction of the common currency's relative security has crystallized under the current crisis; Slovakia and Slovenia are perceived to be safe, for now, a feat many attribute to Euro membership. The Polish government has reportedly entered discussions for an accelerated accession to the ERM II (though, the Polish central bank was quick to temper those ambitions when it bluntly warned against joining the Euro too quickly). Even debate in the UK (I know, not in the region, just making a point) has started to discuss the merits of joining. Many, including us at IPE Journal, have opined on the threats posed to the common currency by the present crisis. But is it possible that the Euro could emerge from all the turmoil if not stronger, at least larger? Wolfgang Munchau and others argue its in fact preferable, a necessary step to stabilizing Central and Eastern Europe. But accession criteria, such as the ERM II timeframe and reference rate of inflation, would have to be scrapped (again, preferable).
On the political front, many of the governments in the region have demonstrated over the past week that they recognize the way out. In what should be held up as a lesson to the leaders of their western neighbors, the central banks of Poland, Hungary, Romania and the Czech Republic issued coordinated statements denouncing the currency instability and effectively pledging to defend their currencies. This intervention signalled to many a commitment to monetary discipline, affirmed by Hungary's decision to hold steady at 9.5%. Forward-rate contracts are now averaging in a 60 basis-point increase over the next three months. The choice is a stark one for the governments in the region: defend the currency or growth. Given the political pressure, defending the currency won't be an easy choice. But its the right one.
A final point- the countries in the region have tended to be lumped under the acronym CEE for Central and Eastern Europe (by myself included, just look above). It's rhetorically convenient, but many are calling it intellectually lazy (even irresponsible), and they have a point. Slovakia's circumstances are different than Hungary's, whose policy options may be different than the Czech Republic's. Dave rightfully noted this variance in his post above. Lumping these countries together not only fails to distinguish their relative circumstances, but risks indirectly stoking the contagion everyone hopes to avoid.
Wednesday, 25 February 2009
Tuesday, 24 February 2009
I've read bits of Ferguson's other historical books (Colossus and Empire) and have found myself very skeptical about his theories. But I agree with Rory: the Ascent of Money documentary is something I would highly recommend. It's a very digestible way to become familiar with the main elements of the crisis (subprime mortages, derivatives, bond markets) without... well, bothering to read about them.
I particularly liked that he finished off the video with a discussion of the problem of macroeconomic imbalances. My only quibble is that Ferguson has decided to nickname the issue "Chimerica," after the two biggest players in the drama. The trouble is, global macroeconomic imbalances really are global - this Chimerica thing risks ignoring the role played by Japan, East Asia, the Gulf region and other countries in creating the imbalances dilemma. This China-centric view is reminiscent of the (exaggerated) fears about Japan in the 1980s and isn't healthy for the broader public debate. Global macroeconomic imbalances may not be as catchy as Chimerica, but it's more accurate - and it still sounds better than AbuSaudiChimericapan.
Thanks to Jeff for the pointer. Also: There will be blood - Ferguson predicts an increase in violent conflict as a result of the financial collapse.
Monday, 23 February 2009
So let's try this out with one topic that we've been hammering on about for quite some time: the value of free trade over protectionism. Here is a set of arguments on why a faith-based defense of free trade is problematic.
Bang for Buck - Paul Krugman has pointed out that, if you lack a set of internationally coordinated stimulus measures (like now), then the problem with injecting money into your economy is that some of it will be spent on the products of other economies (imports). And yet, the entire debt burden of additional spending falls upon the shoulders of the government that actually spends the stimulus money. The result is less-than-sufficient fiscal stimulus and a global economy that recovers very slowly.
If, however, every country shut down its economic borders and focuses on stimulating the local economy, then in theory, "protectionism can make the world as a whole better off." It's a second-best solution, but perhaps more politically feasible than international coordination.
Defense - What good is creating a wealthy society that cannot defend itself from aggressors? Some aspects of economic activity are crucial to defending the livelihood of society, and should thus be protected from foreign competition. Even Adam Smith, the prophet of free-marketeers, recognized the importance of Britain's navy to its overall wellbeing: "As defence, however, is of much more importance than opulence, the [monopolistic] act of nagivation is, perhaps, the wisest of all the commercial regulations of England." We've moved from sail-powered to nuclear-powered ships, but the principle is the same.
Monopoly - If a country possesses a monopoly over the production and sale of a particular good or service, there may very well be a higher marginal rate of return if prices are artificially raised by a tariff or something similar. With freer trade, those monopoly rents would disappear.
Development - The Ricardian model of comparative advantage that is taught in ECON1000 courses to explain why free trade works is oversimplified. Among other things, it assumes frictionless trade between economies. The reality of international trade is very different (see Dani Rodrik). Despite the progress achieved through the WTO, there remain high transaction costs for international trade. Moreover, labour mobility is still heavily restricted, which disadvantages poorer, labour-rich economies.
Protectionism-as-threat - It can be used to threaten other nations to back off from beggar-thy-neighbour policies. Protectionism can also be a tool to pry open foreign markets.
Ardent free traders insist that these costs are offset by economy-wide gains "a rising tide raises all boats." Let's leave aside for the moment the argument that the gains from more affordable toys for you kids is more than offset by the loss of your job - that's obvious. But there is evidence suggesting that the gains from trade are not all they're cracked up to be.
...the elimination of most fiscal and financial subsidies put a strain on the manufacturing sectors relative rate of return. And although financial liberalization led to a serious restructuring of Mexicos banking sector, domestic credit for productive activities and for investment has been severely rationed for the last ten years....
Thus a dual structure has been taking shape in Mexico's manufacturing sector. On the one hand, there are a few very large firms whose links with transnational corporations (TNCs) and access to foreign capital have helped them to become important players in export markets; on theother hand, vast numbers of medium and small firms struggle to survive the intensified pressure from their external competitors.
Note that few of these arguments dispute the underlying logic of free trade theory, strictly speaking; these are instead exceptions to the theory or political economy realities which fall outside of the theory's scope. But these exceptions to the theory are ubiquitous in the real world of economic affairs, which means they need to be addressed. If NAFTA isn't doing for Mexico what it said on the box, simply re-iterating Ricardo's arguments or shouting "Heretic!" at all those who point out this inconvenient fact is not helping.
Friday, 20 February 2009
- Evidence for #4 is provided by the FPs own annoying pop-up as you link to the page.
- I flatter myself to think #1 explains my new job, precisely for the reasons he outlined. It was either that, or #8, or going back to school.
- I'm very curious to see if #6 holds true. It probably will, at least for a while. But it's worth noting that the cautious savers of the past decade got hit just as hard as everyone else. At the very least, those who have come into "intellectual maturity" just in time to watch The Great Moderation dissolve before their eyes will be more cautious about future claims regarding the "self-regulation" of financial markets.
- With #7, Dan seems to be supporting my crank theory of fashion (which, not coincidentally, also appeared on a Friday)
- I hope #13 holds true as well; it certainly can't hurt. At the very least, if people are more aware of the examples of individual and collective suffering during that period, it will help put our current state of affairs in perspective.
Try, for example, this set of interviews broadcast on This American Life a couple of months back (see Act 1: Hard Times). If I went through something similar, I don't think I'd be able to eat mustard anymore either.
[Update: another unexpected consequence? A decline in shark attacks.]
Thursday, 19 February 2009
-Succumbing to financial reality, Russian lawmakers have cut the budget for the Sochi Winter Games by 15%.
-Proving that even cheesy continental television contests aren't absent geopolitical tensions, the Georgian entry for this year's Eurovision final is called "We Don't Wanna Put In", a song that mocks Russia and its Prime Minister Vladimir Putin (get it, Put In=Putin). This is clearly an irresponsible provocation; expect Russian troops in Tbilisi by Sunday!
-Two interesting reports on the intelligence front. First, The Telegraph is reporting that Israel has been conducting a covert war against Iran, "using hitmen, sabotage, front companies and double agents to disrupt the regime's illicit weapons project." Concluding that a direct military strike is too risky/ineffective/unsanctioned by the US, the Israeli strategy seeks to, according to a former US intelligence officer, "delay, delay, delay until you can come up with some other solution or approach."
Second, the cross section of international terrorism and technology is widely appreciated. Al Qaeda's use of the internet and certain media outlets for propaganda and fundraising is highly developed, as is the use of advanced military technology in attacking terrorist networks (for example, unmanned drones in Pakistan/Afghanistan). But the US may be more than a little unhappy with one of the world's most largest technology firms: Google. The US and Pakistani governments have long denied that the US was conducting military operations from Pakistani soil. Well, apparently a simple search on Google Earth blew that denial out of the water; the Times of London obtained satellite images clearly showing predator drones at Shamsi airbase in Baluchistan as early as 2006.
Wednesday, 18 February 2009
For a look at the implications of Chinalco's proposed investment in Rio Tinto, check out my recent piece at zzzeitgeist.
Tuesday, 17 February 2009
Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut....As the article points out, $400 billion is also well beyond the capacity of the IMF. So where is the money going to come from? Or are we going to see swathes of bankrupt EU member states? This is messy stuff.
Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets....
Whether it takes months, or just weeks, the world is going to discover that Europe's financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus....
What's interesting is that recent history is filled with examples of countries who have set themselves up for precisely this sort of problem. In the mid-1990s, many East Asian countries (and their banks) were fueling their rapid economic growth with large amounts of short-term debt that was constantly in need of being "rolled over," or pushed off until a later date. But if creditors decide not to roll over your debt, you're in trouble - especially because creditors tend to be fairweather friends who will ask for their money back as soon as your financial situation starts looking shaky.
Moreover, many of these countries suffered from what are called currency mismatches: a state/firm borrows in a foreign currency and holds assets in the domestic currency. If the value of the domestic currency plummets, suddenly the debt becomes a whole lot more expensive - the assets are basically worth less to your creditors than they were a short time ago. That's what happened in East Asia, and sure enough, that's exactly what's happened once more. Again from the article:
In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle....And just to tie this all together:
"This is much worse than the East Asia crisis in the 1990s," said Lars Christensen, at Danske Bank.It's discouraging reading. But from a political economy point of view, I'm curious as to what sort of incentives led banks to place themselves in this situation once more. Since they were probably aware of the precedent, there must have been incentives that outweighed their sense of prudence. Was it greed? Moral hazard? Prudential regulatory failures? A tragedy of the financial commons? I think I smell a steaming pile of Ph.D theses.
Monday, 16 February 2009
Japan's finance minister is facing calls for him to resign amid claims he was drunk at a recent G7 meeting.
Shoichi Nakagawa has apologised for his behaviour but blamed cold remedies for a slurred performance at a news conference in Rome at the weekend.
You may recall similar suspicions following Nicolas Sarkozy's "winded" press conference at the '07 G8 in Heiligendamm. Which begs the question: what are they serving at these summits (and where can I get some)??
Update: Nakagawa's gone, can Aso be far behind?
We talk a lot about sports, fashion, Japanese robotics and booze around here not just because they are personal interests, but to provide a break from the constant doom and gloom in the global political economy. It sounds cliche, but, now more than ever, we need our distractions, our little points of inspiration and excitement.
Eduardo's remarkable performance was exactly that.
(photo: Getty Images)
Sunday, 15 February 2009
But even if we replace my bad examples with more traditional assets (land, buildings, machinery, government bonds) the argument stays exactly the same.
-G7 finance ministers meet in Rome following the passage of an $787bn US stimulus package. US Treasury Secretary Geithner received a not-so welcome reception at the meeting, with some ministers critical of the US deficit and "Buy America(n)" provision present in the final bill. While the meeting provided window treatment to the tensions over protectionism, it is clear that a substantive lack of coordination and consensus is setting the global economy up for a period of tense economic relations. G7 communique text here.
-The Israeli election ended in a stalemate as Kadima won a shock 1-seat minority victory over Likud. The insurgent candidacy of far-right party Yisrael Beitenu and its leader Lieberman shook the political establishment, banishing Labour to the political wilderness and winning the key to an eventual coalition government.
-Venezuelans voted again on abolishing term limits. Chavez has raised tensions in the run up to this vote by denouncing an opposition and US-led "coup" plot.
-For the first time, Pakistan officially acknowledged that "some part of the conspiracy" against Mumbai was carried out on its soil.
-US Treasury secretary Geithner unveiled an "outline" of the Obama administration's financial system rescue plan. The heavy on intentions, light on details presentation was immediately rebuffed by markets, commentators and policymakers begging for more clarity and substance.
-Karl-Theodore zu Guttenberg assumed the economic portfolio in Angela Merkel's coalition. The move comes less than a week after it was announced that German industrial output fell in December by its largest margin since unification.
-In testimony before Congress, US director of national intelligence Dennis C. Blair said that the global economic crisis was the most urgent threat to US, and global, security. The global political instability, economic uncertainty and diminished US authority stemming from the crisis surpassed the threats posed by terrorism and nuclear proliferation.
-In the FA Cup, Everton beat Villa, ManU over Derby, and Swansea forced a replay against Fulham at the Cottage. In other Prem news, Big Phil went bye bye. In Serie A, Becks looked set to return to L.A. after the MLS imposed Friday deadline (or tactic?) passed without a deal. In Spain, Raul broke the all-time goals record at Real Madrid.
-In the biggest study of its kind, researchers found that regular multivitamin use did little to prevent cancer or heart disease in older women.
-Walking down Amsterdam Avenue in Manhattan yesterday, my wife and I stumbled upon a disheveled, mad scientist looking Malcolm Gladwell. As we approached the best-selling author, he very clearly slowed down to walk parallel to us, awkwardly incapable of disguising the fact that he was eavesdropping on our animated, but admittedly unremarkable, conversation. I am convinced that we are now the subject of his next book, Caring for the Elderly, and demand royalties.
Friday, 13 February 2009
The authors take issue with the view that asset bubbles (of the kind that we saw in the US housing market) should be left to inflate and pop on their own. According to this line of argument, policymakers cannot know in advance when a bubble is forming, or at what point it has reached its peak. Instead, they should focus on creating an environment where these price fluctuations will not have such strong adverse effects. In other words, it's not up to government to prick the asset bubbles, but to soften the blow if one should burst.
The authors put forward the following, rather blunt, declaration:
However, the wreck that is today’s financial system is testimony to the catastrophically flawed nature of that doctrine. Policymakers have no choice but to have a view on what constitutes a reasonable or equilibrium level of all asset prices. (emphasis added)They go on to recommend that governments set "zones" within which fluctuations will be tolerated. How big are the zones to be? It depends. Are these zones to be national or international? It depends. What sort of policies would you use to contain price fluctuations? It depends. Are you suggesting that we return to that era in the 1970s when members of the government sat down every week to decide the price of milk? No. Well, maybe.
I'm not sure which is more galling, the very principle of the thing they're suggesting or their complete disregard for the practicalities involved. Because if they're willing to set zones for the prices of assets like housing, oil, and carrots, why not also set zones for prices on other things, like your salary - your wage is, after all, the price of your labour. Now, you might argue that the Obama administration has done just that. But even the latest decision to cap banking execs salaries at $500,000 applies only to those banks who are applying for public bailout funds. Geithner is not crazy enough to apply that to the economy as a whole.
But even if you're sympathetic to the idea of creating price zones for all assets, how on earth would you pull it off? OPEC has enough trouble coordinating oil prices and they represent less than half of the world's oil-producing capacity. What would happen if you tried to do the same thing with rice? Similarly, countries often try to set "zones" for a particular type of asset: their currency. But recent history is filled with examples of the failure of such attempts - sometimes with catastrophic results for the economy.
While I sympathize with the authors' sentiments, I think they've taken things too far. I agree that, in the case of the US housing market, there was a clear bubble and steps should have been taken to discourage, rather than encourage, such widespread financial irresponsibility. But to suggest that the government establish a reasonable price range for every single asset strikes me as ridiculous. This range is either going to be too restrictive to allow for normal price adjustments, or so wide as to be practically irrelevant.
It also seems to ignore the lessons from previous (failed) attempts by national governments to fine-tune their economy. I suspect this column is what happens when intellectuals who are paid to produce good ideas on a regularized schedule occasionally come up with a pretty bad one instead.
Thursday, 12 February 2009
-The Project for Excellence in Journalism profiles "The New Washington Press Corps". It finds that while the "traditional" media's footprint in the US capital has shrunk dramatically, niche media (small and targeted) and foreign correspondents have increased their presence. The Washington bureau of Mother Jones is now roughly the same size as Time's, while Al Jazeera now rivals CBS.
-Dubai is fastly becoming one of the biggest casualties of the credit crunch. The real estate market has collapsed and foreign workers (approx. 90% of the emirate's labor force) are being laid off en masse. The NYT looks at one aspect of the deteriorating economic situation: foreign professionals fleeing the debt and luxury vehicles they accumulated during the boom.
-Eduardo came on for Croatia last night in a friendly v. Romania, and Arsenal hearts were, if only for a moment, lifted.
Wednesday, 11 February 2009
Tuesday, 10 February 2009
Globalization has also produced some interesting effects on markets for alcoholic beverages. For instance, I enjoy quizzing Guinness drinkers on which country consumes the most of Ireland's famous black liquor. They are usually surprised to learn that Nigeria has taken over the largest share of the Guinness market, with more sales than either Ireland or the UK. In fact, a reliable source suggests that Africa accounts for 40% of Guinness' brew and sales.
So globalized markets are great for beer connoisseurs in Africa. However, I'm sorry to say that there are limits to the globalization of alcoholic beverages, and we've reached them. The line has been crossed. If this trend is not corrected, then I'm leaving the globalization fan club. I'll be handing in my members mug and hoisting a poorly-designed placard, donning my gas mask and joining an anti-globalization rally somewhere. Because, you see, this morning I learned that the Asians are drinking all the scotch.
I was in the liquor store inquiring about why a certain bottle of single malt was no longer being carried, and was it possible for it to be ordered. Following a Q & A, I learned that, despite being one of the largest purchasers of alcoholic beverages in the world, my government-monopoly-owned liquor store is losing its market share of single malt scotch to Asia. Not only has the selection declined, but the prices of the remaining scotches is going up. Indeed, I have watched in horror as the price of one particular bottle - Lagavulin - has increased 25% over the past 6 months. The same trend repeats itself across the shelf, although in varying degrees.
There are some basic economic factors at play here. First, demand in Asia is waaaay up. So much so that suppliers are having a difficult time keeping up with their orders. The high-growth markets are the BRIC countries (Brazil, Russia, India, China) as well as Singapore, South Korea and other smaller markets. Furthermore, I was told by the manager of the aforementioned liquor store that the profit margins are higher in East Asia when compared to the more mature markets of North America - this, despite the fact that they need to ship the booze further and that Asian consumers are less-wealthy, as a group. I wonder if the lack of competition helps as well: in North America, (Scottish) scotch has to compete with Irish whiskey, Canadian whiskey, bourbon and similar products. I doubt the same is true of South Korea.
Thus, by harnessing some of the benefits of globalization, major emerging markets have grown wealthy and have begun importing products on which to spend that wealth. The effect, perversely, is that the globalization of markets has actually made products in my part of the world both less available and more expensive.
A few more points are worth pondering:
- First, is this trend going to repeat itself with other luxury goods like Persian rugs, French wine and German cars?
- Second, given the way things are going lately, this trend makes distilling scotch one of the few areas of UK business where things are looking good (that, and bankruptcy law). In fact, several new distilleries have been built to deal with the surge in demand. Will these new distilleries be able to ride the wave long enough to compete with more established brands? The Asian Generation of single malts, perhaps.
- A final, and related, point is that Asia is set to be very hard hit by the fallout from the current financial turmoil. Will that curb their enthusiasm for delicious scotch? It's reasonable to suspect that it will, but only temporarily. As Frank the Tank put it so eloquently: "Once it touches your lips..."
Monday, 9 February 2009
-Ukraine has all but abandoned compliance with the conditions of its $16.5bn IMF standby facility. According to the FT, Ukraine has sent letters to a number of countries (US, Russia, China, EU, Japan) requesting emergency loans to plug a revenue shortfall. Kiev's unwillingness to balance the 2009 budget and cut deficit spending alarmed an IMF delegation last week, who warned of "serious problems" in Ukraine's economy. It is unclear how this visit will affect further disbursements of IMF funds.
-In a VoxEu article, Jeffry Frieden looks at the difficult balancing act policymakers must navigate in building domestic support for international cooperation in response to the worsening economic crisis.
-Ahead of the Treasury Secretary's official announcement tomorrow, the NYT is reporting that Timothy Geithner prevailed over top administration aids calling for stricter conditions in the second banking bailout. Geithner was reportedly concerned that too much government intervention would discourage private investors from participating and increase the cost to taxpayers in the long run.
-Jonah Lehrer at the great science blog The Frontal Cortex asks: why can't Federer beat Nadal? Conventional wisdom is that tennis is a young man's game and 28 is the apex of every great career. As Federer hits that wall (he turns 28 in August), his decline is all but inevitable. But Lehrer points to the post-30 performance of great athletes in sports like basketball or track and field as proof that the body doesn't necessarily decay in our late 20's. So what's unique about tennis? Lehrer echoes my own observation following Federer's post-Aussie tear fest: its mental.
So what happens to tennis stars? Why can Federer no longer defeat Nadal? I'm guessing performance anxiety. I think tennis, perhaps more than any other sport, is a game of self-confidence. Unforced errors are inevitable - the margin for error when hitting a ball that fast with a metal racket is simply too small. The question is how you deal with these mistakes. Players with swagger - say, the Federer of 2006-2007 or the Nadal of now - brush off their errors and come back with an ace. With age, however, comes the nagging tremors of self-doubt. When I watch the Federer of 2009 I see a player who no longer knows he's the best - his face occasionally betrays anxiety and insecurity. The end result is a dangerous form of self-consciousness, as Federer starts thinking too much about his serve, or that backhand whip shot, or his forehand down the line. Why aren't his shots going in? Why is his serve 5 mph slower? Why can't he beat this annoying young Spaniard in the capri pants?
The problem with such reflections is that tennis needs to be played on auto-pilot. Once you start thinking about your shots - and I think Federer is especially self-conscious when playing against Nadal - you lose the necessary fluidity and grace. These deliberate thoughts - the by-product of age-related insecurity - interfere with the trained movements of our muscles, so that we start regressing on the court. When players worry about not hitting a shot in, they're bound to hit it out. Federer doesn't need a new trainer: he needs a shrink.
Saturday, 7 February 2009
-US Vice President Joe Biden outlined the foreign policy vision of the young Obama administration in a speech at Munich. He called for a "reset" of US-Russian relations, offered Iran "meaningful incentives" to abandon its nuclear program, and called on America's allies (i.e. Europe/NATO) to shoulder a greater burden in security (Afghanistan, Guantanamo detainees). The speech comes days after Kyrgyzstan, under Kremlin pressure, announced it would close an American military base of great strategic importance. Russia embraced the "reset" concept.
-The US Senate reached a tentative deal on a $827 trillion stimulus package. After fierce political debate that all but shattered Obama's "post-partisan age", the Democrats appear to have picked off three Republican votes by cutting direct aid to states and localities and increasing the percentage of tax incentives in the bill (the bill cuts the size of the so-called 'middle-class tax cut' while increasing incentives to purchase homes and cars). Congress must now reconcile the House and Senate bills before a final package can be sent to Obama's desk.
-Morgan Tsvangirai returned to Zimbabwe to form a coalition government with Robert Mugabe. The president will sign a constitutional amendment allowing Tsvangirai to become prime minister, while a judge threw out treason charges against an important MDC figure.
-Abdul Qadeer Kahn, father of Pakistan's nuclear bomb and prolific nuclear proliferator, was freed from house arrest after 5 years. France and the US immediately criticized the move.
-The US unemployment rate hit 7.6% and GDP plummeted 3.6% in Q4 2008. According to The Economist, the fall would have been over 5% if not for a sharp rise in inventories. Elsewhere, German industrial output fell by a record 4.6% in December.
-The BoE cut rates to 1%, while the ECB held steady once again.
-Obama imposed a cap on executive compensation at companies receiving "exceptional assistance" from the US government. Politics 101: if you want to appeal to public anger, but have little intention of widely enforcing a rule, insert a vague definition like "exceptional assistance."
-The rouble floor announced by the Russian central bank was tested this week; traders are betting the floor was set too high; oil price and capital flows volatility will continue to weigh on the currency.
-In the Prem, Torres fires Liverpool top of the table (for now), Chelsea are in free fall (bye bye Big Phil?), and Arsenal just suck. In Italy, Milan's initial formal offer for Becks was rejected outright by LA Galaxy.
-French street artist JR brought his "28 millimetres: Women" project to Kibera, Kenya. The artist imposes facial images on homes and buildings, providing an identity and voice to the women of one of Africa's largest slums.
-Over 84 people have been killed in Australia's deadliest fire disaster. The state of Victoria has been ravaged by the bushfires, fueled by a prolonged drought and soaring temperatures.
-Scientists have identified a key protein in the process by which the H5N1 virus replicates itself. It is hoped that the discovery will lead to more effective drugs to combat the virus. Egypt confirmed its second human case this year, while both Hong Kong and Vietnam announced new cases in birds.
Friday, 6 February 2009
But here's a Wiki-article worth reading: Bastiat's parable of the broken window. It's a helpful story for anyone who'se feeling over-stimulated by the stimulus debate.
Also Greg Mankiw reports on a modern-day example of the broken window fallacy literally put into action.
Nothing would prevent India and China from choosing to raise tariffs thus on items of export interest to the US. Besides, they could shift their own purchases of aircraft away from Boeing to Airbus, and of nuclear reactors from American to French companies. The response would, of course, be for the enraged US congressmen to start enacting their own retaliation. The game would become lively.
In the interest of balance, I point you to a column by Oxfam's Duncan Green that argues that protectionism is not all bad, particularly for developing countries. I had the pleasure of having Duncan give a guest lecture in one of my graduate school classes - he offered a refreshingly blunt assessment of what it was like to work for an NGO, both good and bad.
As far as his argument goes, I think he's in good intellectual company when he points out that the poorest developing countries may need trade barriers to help them escape from a poverty trap. I think the well-respected development economist Paul Collier argues as much in The Bottom Billion. To be fair, however, we've been focusing our criticism on the Buy America, Buy China and Buy India type policies enacted by members of the G20. For these countries, at least, Duncan thinks protectionism is a rotten idea.
...and on fiscal stimulus. There's no end to the material provided by all sides of this lively discussion, but I particularly enjoyed this sarcastic op-ed by Benn Steil:
Citing Keynes gives us special licence to talk economics without using any. To paraphrase the lawyers’ dictum, when the facts are on our side, we pound the facts; when theory is on our side, we pound theory; and when neither the facts nor theory are on our side, we pound Keynes – and to great effect.
I think that Keynes is right when it comes to the need compensate for market downturns through active policy measures, rather than simply waiting things out, and Stein takes Keynes' quote about how "in the long run we are dead" out of context. But his target is not so much some long-dead economist but rather the people who are inclined to use the name of some long-dead economist as justification for spending our money. Just because there is a clear need to "do something" significant doesn't mean our legislators should be given a free reign. With huge stimulus packages being proposed by almost every major Western government, it has become more important than ever to ensure that the money is A) being spent on what's being promised, B) having the effect that's promised, and C) not mortgaging our financial future in the process.
Easier said than done.
Update: Brad DeLong retorts to the Steil piece.
Thursday, 5 February 2009
Broadly speaking, it certainly wouldn't hurt to have a more educated populace. While we're at it, it would be great if people knew advanced biology, another language and could play an instrument. But there are opportunity costs to learning these things, so the question becomes: is this important enough to include macro & micro economics in the core curriculum of secondary schools and universities? The report argues that it is.
I think a case can be made for the importance of certain economic principles. The idea of an opportunity cost, already mentioned in this post, is helpful when making decisions. Similarly, the basics of sunk costs, supply & demand, savings & investment, operating at the margin, taxation, etc, are all very relevant concepts in day-to-day life. One particularly topical issue is that of comparative advantage: the idea that Country A can be better off specializing in the production of beer and trading it to Country B for pizza, even when it can produce both beer & pizza more efficiently than Country B. I've heard econ profs talk about how it's always a real challenge to teach such a counter-intuitive idea to first-year students, and yet that's the fundamental principle behind free trade. Maybe if more people understood how comparative advantage works, "Buy America" provisions would be less popular. Maybe.
But there are other issues to consider. Take the example of the humanities (philosophy, theology, literature, classics). My own public school upbringing left me pretty under-exposed to most of these fields. I feel as though, if I had been attending Eton or Harrow in the late 19th Century, maybe I wouldn't be having to play "catch-up" on basic philosophy in my spare time. But if everyone got a more thorough training in the humanities, maybe we would have fewer people inclined to take up a trade or a job requiring hard labour. In other words, there might be unanticipated costs for more education. The same might be true for economics.
Let me put it another way. A quote from the report reads:
The study found that only 16 percent of Americans could differentiate free markets from central government planning. Less than 30 percent of those surveyed understood the relationship between taxes and government spending, and less than 40 percent knew what sort of fiscal policy would produce economic stimulus.I agree that this represents a bit of a problem, but the joke of it is, I'm pretty sure less than 40 percent of PhD-trained economists know what sort of fiscal policy would produce economic stimulus. So is society better off if we have more plumbers or more economists? (I apologize to any humanist plumbers with economics training for my over-generalizations).
So to summarize, I think it would be helpful if people had more familiarity with some of the basic principles of economics - the ability, even in passing, to do what my 2nd year econ prof referred to as "putting on one's economic glasses." But those glasses have a very distinct way of looking at the world and it's very important to be able to take them off now and again. At the very least, if we're going to invest time and energy in educating our youth on our socio-political history and institutions (Civics class) then this should be complemented by an understanding of our economic institutions and how the two sets interact. But beyond that, it's not clear to me that economics is something that is so necessary as to be part of the core curriculum. Any thoughts?
(Photo: Financial Sense)
Wednesday, 4 February 2009
I think answering the first part is easy: yes, we should spend more time teaching youth the basics of personal finance. As the report points out, a large - and growing - chunk of [American] children make use of debit and credit cards, but few have a strong grasp of concepts like credit risk, interest rates and so on. One paragraph reads:
...more than half of all high-school seniors do not realize that paying off a credit card balance more slowly will result in higher finance charges. Only one in three teens knows how to read a bank statement, balance a checkbook, or pay a bill. In short, young adults have ready access to finance, but not to education about finance.That's discouraging, particularly in light of how we've seen the consequences of consumers in Anglo-American economies taking on completely unsustainable levels of personal debt. Now, society as a whole might be better off if we were better educated in plenty of areas - a basic understanding of, say, automechanics and carpentry. But those are fields that can be safely contracted out to specialists; personal finance is an area that has the potential for more wide-ranging costs and benefits.
I would put it in the same category as health and sexual education: the more aware you are of the basic facts, the more informed your decisions will be and people around you will benefit. For instance, perhaps more education on the basics of infectious disease will lead to more people getting vaccinated - that's a public good. Similarly, it's become clear that poor finance has contagious effects as well.
This is one reason why I think high school math courses should place greater emphasis on teaching risk and probability. In my personal experience, once you moved past basic math courses you were offered Algebra & Geometry, Calculus and other high-level material. But very few of our daily decisions require an understanding of calculus. By contrast, a great deal of them require some basic assessments on risk, probabilities and returns: everything from card games to deciding whether to go back to school, from buying a stock to starting your own business, right down to family planning.
Moreover, psychologists have plenty of experimental evidence suggesting that, as a species, we are very poor at guaging probabilities and risks: we tend to discount high-probability events like heart disease, but focus on low-probability, attention-grabbing events like airplane crashes. So we need all the help we can get. For the topic at hand, a basic understanding of risk and probability might help some people realize that they need more diversity in their financial portfolio than that which is provided by a 401(k), or something similar.
So for me, a stronger emphasis on the basics of personal finances in school would be an excellent idea. However, I'm not sure the case is so clear for the study of economics more generally - but I'll look at that next. In the meantime, does anyone have suggestions for other areas we could beef up on when it comes to secondary and higher education? Comment away.
Monday, 2 February 2009
"Let me just be blunt. Protectionism is the crack cocaine of economics. It may provide a high. It's addictive and it leads to economic death"
Editor's note: the provision in question has been alternately referred to as "Buy America" or "Buy American." I started using "Buy America" because Reuters (the source of my initial post on the provision) does. However, it seems "Buy American" is more widely used.
Legendary journalist William Safire has a weekly column in the New York Times Sunday Magazine called, "On Language", in which he explores the origins, meanings, and uses of popular words or phrases. I think the "Buy America"/"Buy American" distinction would be an interesting case. While the essence is the same, does the addition of the 'n' alter the implied scope or meaning in some subtle way? Sadly, I can't answer that.
-Political violence is on the rise in South Africa. A string of high profile assassinations in Kwa-Zulu Natal reflect rising tensions in the province between ANC and IFP supporters. Meanwhile, Cope (the party formed out of the ANC split last year) leader Mosiuoa “Terror” Lekota issued his strongest criticism yet of the ANC and Zuma, claiming the party will push through immunity for the presidential favorite after the coming general election.
-Davos utterly failed its agenda: "shaping the post-crisis world". Chris Giles, Peter Thal Larsen, and Gillian Tett of the FT found the attendees united in their lack of confidence and inspiration.
- Anti-protectionist writing continues to pour out of the economic blogosphere. You can find a writer at Free Exchange dismantling the populist argument here; the Davos crowd is understandably nervous, and Willem Buiter is his usual, uncompromising self. A sample:
If anything like the Buy American clause inserted by the House survives in the bill president Obama gets on his desk, he must veto it. The questionable value of the fiscal stimulus is overwhelmed by the unquestionable domestic and global harm caused by the Buy American clause. If president Obama fails to veto a protectionism-laced bill, it will be clear that we have a wuss in the White House.
- China's manufacturing sector contracted for the sixth consecutive month in January. But in fact the trend is much wider than that, and much worse. Cue the trade war.
Sunday, 1 February 2009
-As the financial crisis rolls on, the next phase of government (re)action is developing: US House approves an $819bn stimulus package (with a certain provision we don't like very much) and the FT reports that Obama will unveil a "Big Bang" package of banking/financial/housing reforms this week (now next), Harper's minority government unveils a federal budget that includes the country's first fiscal deficit in over a decade, Merkel has reportedly settled on a plan to create government-backed "bad bank" vehicles to clean up balance sheets, and Aso unveiled his own stimulus package under considerable opposition (he also pledged $17bn in aid to other Asian nations).
-62% of Bolivian voters approved a new constitution in last Sunday's referendum. The new constitution increases the government's control over strategic industries (including natural resources), strengthens indigenous rights, and furthers land reform. Despite the popular majority, 4 of the country's 9 provinces voted against the changes.
-North Korea voided all political and military agreements with the South this week, as mounting tensions on the Korean peninsula threaten all out military conflict. While Kim's motivation is unclear, a few theories seem plausible: 1) he is pushing his way onto Obama's agenda, 2) he is provoking an international crisis to stem any internal revolt amid his ailing health, 3) he has lost control and hardliners are their authority over foreign policy.
-Social and political instability is spreading across Europe: Iceland's government fell, massive strikes paralyzed France, and British workers walked off the job to protest the use of foreign workers amid rising British unemployment. Nationalism, protectionism, and industrial action are all on the rise.
-Iraqis voted in provincial elections. Despite a lower than hoped turnout, the elections were peaceful.
-The IMF reduced its global GDP forecast for 2009 to 0.5%, and the global economy shed over 70,000 jobs in one day.
-Sterling had a small recovery this week on a slight confidence jump in UK banks, the Euro slipped amid eurozone economic weakness and lack of faith in the ECB, and the USD and Yen both endured "rollercoaster" weeks.
-Exxon Mobile reported record earnings for the 4th quarter. The Lex column in the FT praised the company for "generating free cash flows as others invested" during the good times, positioning itself to pick off rivals and acquire assets in the bad. This conservatism has acted as a hedge against the rapid fall in prices.
-In the Prem, ManU go 2 clear with 1 in hand, Liverpool score 2 late to take all 3 from a 10-man Chelsea, and Arsenal throw up a big 0 at home against West Ham. Elsewhere, Becks scores his second for Milan as speculation mounts over his return to LA.
-In tennis, Nadal beat Federer in 5 for the Australian Open title. Rafa's performance was simply incredible, coming less than 48 hours after his Australian open record 5 hour, 14 minute semifinal match against fellow Spaniard Fernando Verdasco. Many took Federer's uncontrollable tears in the post-match ceremony as a sign that even the Swiss great doubted his ability to ever beat Nadal again in a major final and catch Sampras' record 14 major titles.
-In Olympic swimming, Oops!
-While much of the fashion world has been tailoring collections to reflect our dark economic times, these designers look to color.
-Move over Highlander, meet Turritopsis nutricula: immortal jellyfish.