Readables

Your Thursday readables:

- So it begins: emerging markets pass the developed world in foreign direct investment receipts

- The US economy returns to positive growth. Break out the party hats!

- Now listen to this podcast, and put your party hats away. This is excellent.

- What story can you tell in 6 words?

- Very cool nature pictures

Why The US Dollar Will Not Weaken (yet)

Barry Eichengreen, the reliably even-handed Berkeley prof, has written an article arguing that the future of the US dollar is not nearly as grim as some would have you believe:

"The blogosphere is abuzz with reports of the dollar’s looming demise."

With posts like this one, Barry? Onwards:

"The first thing to say about this is that one should be sceptical about economists’ predictions, especially those concerning the near term. Our models are, to put it bluntly, useless for predicting currency movements over a few weeks or months.... Over periods of several years, our models do better. Over those time horizons, the emphasis on the need for the US to export more and on the greater difficulty the economy will have in attracting foreign capital are on the mark. These factors give good grounds for expecting further dollar weakness. The question is, Weakness against what?"

This is precisely the point that one of our readers brought up when I discussed this issue a couple of weeks ago (see? we read your comments). The argument goes like this: the dollar is weakening, but so are the currencies of all other major economies due to stimulus packages and mounting government debt. If you are going to abandon the dollar, you need to switch to something else. Barry dismisses the likelihood of the USD being replaced by the euro or yen, and points out that China will not be ready to introduce the remnibi as a viable alternative for quite some time.

Nor is inflation a plausible threat right now, either: despite what some shrill voices may be saying, the Federal Reserve is still determined (and credible) in its fight against inflation.

So without an alternative currency to the dollar, there's nowhere to go. Aha! that is where gold comes in, right? Not so fast, says Nouriel Roubini in a recent interview:

"I don’t believe in gold. Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity, and demand is weak, and there’s slack in the labor markets with unemployment peeking above 10 percent in all the advanced economies.... The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense."

I think that these are all important counter-arguments to those inclined to write the dollar's obituary. My earlier post suggested that the evidence pointed to a long-run decline in the dollar - and that argument still holds. But for the short term? I leave the last word to Prof. Eichengreen:

"For the moment, the patient is stable, external symptoms notwithstanding. But there will be grounds for worry if he doesn’t commit to a healthier lifestyle."

Burgernomics: Iceland Edition

McDonald's is not only a giant in the fast-food world, but it is also the source of handy economic indicators. See, for instance, The Economist's Big Mac Index and its alternative.

But there's a much more blunt McD's indicator: it occurs when, despite operating in about 120 countries worldwide, the burger chain decides that your country is a lost cause:

Iceland edged further towards the margins of the global economy on Monday when McDonald's announced the closure of its three restaurants in the crisis-hit country and said that it had no plans to return. The move will see Iceland, one of the world’s wealthiest nations per capita until the collapse of its banking sector last year, join Albania, Armenia and Bosnia and Herzegovina in a small band of European countries without a McDonald’s.

That is serious.

Remainders

A controversial topic deserves a second-, and third-look:

-A shock poll out of the UK says one in five Britons would 'seriously consider' voting for the BNP following Griffin's Question Time appearance. This underlines my major point: Wake up, Britain.

-Lest you confuse my support for freedom of speech and political assembly with approval for the BNP, I give you the blokes at The Bugle and their take on the BNP.

'Nick Griffin is a man with a face that screams out, 'hit me with a plank of wood.'

Thoughts on...Nick Griffin and Question Time

Many of our readers will be familiar with the controversy in Britain over the appearance of the British National Party's (BNP) leader on the BBC's Question Time program. In short, the political and media establishment has rounded on the BBC over its decision to let Nick Griffin appear on the Thursday evening show, in my opinion the best political television program in the world. They argue that by granting the BNP a mainstream platform alongside the three most prominent parties (Labour, Tories and Lib Dems), the BBC is legitimizing the far-right party and providing its incendiary leader with a national audience to direct his 'fascist' message. The BBC has held its ground, and Griffin appeared on the program just hours ago while protesters clashed with police outside.

I have a few quick thoughts on this whole ordeal. One, Question Time is over and the constitutional monarchy stands (that was a close one!). Two, it is a slippery slope between between banning hate speech and repressing the legitimate political views of organized, well-supported parties. Griffin's views are despicable. But that does not mean he should be refused the opportunity to sit down at a table and debate those issues. That is what separates us from the animals. And as prehistoric as the BNP's views might be, they are a modern political party with a real, and growing, base of support in Britain.

Three, I recognize that there is a chance the BNP will incite violence or intolerance amongst its supporters or impressionable minds. But that is an insufficient test of whether they should be allowed on a program like Question Time. In my own country, members of the Republican Party have likened my president to Stalin, claimed he was a foreigner lacking the birthright to hold the office and warned that his government was coming to take away the guns of law-abiding citizens. There was a disturbing spike in gun purchases prior to Obama's inauguration. They have also labeled immigration over our southern border an 'invading army', leading private citizens to patrol that border with weapons (rhetoric likely to find a home with the BNP). But no serious political mind would argue that these elected representatives should be denied a chance to speak on any of our news networks. In fact, they have a whole network devoted to them!

Most representatives of the Republican Party wouldn't utter these words if they didn't resonate with their supporters. Likewise, the BNP's recent success at the polls is but a symptom of the growing resonance of its message. Disillusionment with Westminster has likely played a role in this as well, as the performance of smaller parties in the last elections demonstrated. If more and more people were not drawn to the BNP, there would be no demand for its leader to debate the political establishment on issues like immigration and European integration.

That is the real issue that the British establishment has conveniently ignored, instead directing their anger and insecurity at the BNP itself. I was disappointed that much of the panel debate and most of the audience questions this evening focused on the legitimacy of the BNP itself, as a political party, instead of forcing Griffin to openly debate its platform with members of the more established parties. It seems much easier, and more convenient, to attack the BNP than to debate why this party's support is growing. Those answers are likely far more difficult to deal with, and cut directly to the national character and social contract.

The BNP is a deplorable party. But Nick Griffin was on Question Time for a reason tonight. For his invitation, the BBC deserves enormous credit.

Thoughts on Flying

I just spent twelve hours of my day flying and hanging around in airports, so my brain is pretty numb at the moment. But here's a thought that struck me right as my plane was about to land: why do we still use lap-belts in airplanes?

Lap-belts were banned from land vehicles because they cause spinal/internal injuries in accidents. Even most back-seats have three-point seat belts because they are much more effective. In fact, I think airline pilots and even the cabin staff have 5-point harnesses - so what does it say about the passenger when they're only given a lap-belt? I see several possibilities:

1) You are not worth as much to the airline as the pilots & staff, so they have invested less money in your safety.

2) In the event of the plane crashing, the seatbelt will have such a minimal effect on your survival that upgrading to a three-point belt is not going to make a difference. The only purpose of the belt is to keep you from knocking your head in the event of turbulence, so a lap-strap is enough to do the job. But then why do the pilots have more secure equipment?

3) Consumers would complain loudly about lack of comfort and mobility, or,

4) Consumers would complain about feeling less safe in a 5-point harness because it would make one acutely aware of the dangers of flying.

It seems to me that points 3 & 4 are the most likely, but also unsatisfactory - the same arguments applied to the introduction of mandatory seat-belts in the 1960s, but we went ahead anyway because it's a good idea. And #2 doesn't stand up to scrutiny, either.

That leaves me with point #1, which is a less-than-encouraging thought. What have I missed?

Bernanke on Imbalances

The Fed chief has sounded the alarm and echoed my comments on global imbalances, saying it was 'extraordinarily urgent' that the US and Asia implement policies to combat the return to old habits. For the US, this includes a sustainable and credible fiscal consolidation, and for Asia, a shift away from export-led growth and greater exchange-rate flexibility.

He also made the connection between global imbalances (capital flows) and regulatory failures, and called on countries to address these issues simultaneously.

Quick hits and pink picks: A bit of the bubbly

Last week, the Dow surpassed the 10,000 point mark. A meaningless number, but to many an important psychological marker of the recovery. The financial markets are back...or not?

-The Opinionator blog at NYTimes.com aggregates some commentary on the meaning of Dow 10,000.

-Wolfgang Munchau sees all froth, and considerable risks of a new crisis.

-Russia plans to take advantage of the euphoria and float its first international bond in a decade.

-Hedge funds are pushing into new alternative markets, including divorce.

On Currencies and Imbalances

In its biannual report to Congress, the US Treasury has criticized China for its 'lack of [currency] flexibility' and record build-up of foreign-exchange reserves. It said these factors risked undermining the progress made in unwinding global imbalances. Critically, though, the Treasury stopped short of officially labeling the country a currency manipulator.

Despite the fact that the FT characterized this as a 'hardening' of language, the report isn't remarkable. For one, the US can hardly afford to challenge the Chinese over the renminbi. Second, what criticism did exist was meant less for the Chinese and more for congressional and European ears. Plus, the renminbi is obviously undervalued and leaving it out of the report would have exposed the administration to fierce domestic politicking. Lou Dobbs, I am looking in your direction.

Anyway, a couple of interesting points are raised by the reemergence of the renminbi issue. First, the US seems to be doing its part in addressing global imbalances. Despite its 'strong dollar' rhetoric, the US is passively watching the dollar depreciate against the major currencies. China, on the other hand, is continuing to stockpile record reserves as it holds down the value of its currency. This keeps its end of the global ledger swollen, and at least partially offsets the gains made on the US account.

Second, there is little immediate incentive for the Chinese to revalue, either through a gradual appreciation or sudden float. The Chinese are chiefly concerned with sustaining economic growth and averting any domestic political turmoil, and thus appear committed to maintaining the export-led model.

Finally, with the Americans reluctant to offend their Chinese overlords, the Europeans are emerging as China's main antagonists re: renminbi revaluation. Dollar depreciation vis-a-vis the Euro extends to the renminbi through its dollar peg. As China's largest trading partner, Europe's, and especially Germany's, competitiveness thus suffers. Unfortunately, the Europeans have even less leverage with the Chinese than do the Americans, and are therefore unlikely to get the Chinese to move, especially with the US on the sidelines.

The stark reality with respect to imbalances is that it all really depends on the Chinese, and they have yet to show a willingness to alter their exchange rate policy or reliance on export-led growth. China talks a big game about its 'peaceful rise' and has desperately wanted the world to recognize its remarkable economic achievements. But as I asked China's representative to the WTO when he spoke at an Economic Diplomacy seminar at LSE, 'When will China assume its rightful place at the table and take a proactive and constructive role in international relations?' It must be said that on critical issues like climate change, Iran and global imbalances, it hasn't (and in case you're wondering, I never got a straight answer, but that's diplomacy for ya).

As The Economist recently remarked, 'The world has accepted that China is emerging as a great power; it is a pity that it still does not always act like one.'

Readables

Your Wednesday readables are as follows:

- Awesome: The newsmap

- Nutty: The Higgs boson is traveling back in time to sabotage the Large Hadron Collider. I sincerely hope that this does not impact adversely on the sales of the Junior Wizard Supercollider.

- Rant: Careers in investment banking are still popular for recent grads "for the simple reason that... these jobs are f**king awesome."

- Funny: "You must understand what bankers do: we don't make furniture; we don't write novels; we make money."

Duping Your Way To Recovery

In what amounts to a healthy rejoinder to my post from Sunday, Yves Smith challenges the notion that a con job is enough to stimulate economic recovery:

The one bit of policy, if you care to call it that, that has worked well is the Administration’s concerted campaign to talk up the stock market. Its success in using the bogus stress tests to goose bank stocks was remarkably effective, particularly since anyone who knew anything about banking and was not in on the con was highly critical of the tests. But the media played them to the max... And the Administration kept pointing to the improved tone of the markets as proof that the economy was on the mend. And some readers have noticed a cheerleading stance in news outlets that were once more evenhanded, particularly Bloomberg.

Can a con job lead to recovery? The continuing lousy news on the employment front suggests not, but as long as the stock market remains relatively buoyant, few want to challenge this thesis. I had drinks with a hedge fund manager who was recently pilloried at a buy side/sell side get together when he dared suggest that the fourth quarter might not look as robust as everyone assumed. He said the argument against him boiled down to, “We are all feeling better and spending more, so everyone else surely is too.” The fact that they are all in the top 1% of the population and beneficiaries of TARP and other government bennies means it is a huge leap to generalize from them to the other 99%, but they didn’t see it that way.

Thinking About Wealth

Over at The Economist, Buttonwood has an excellent piece on how we think about, and often are confused about, wealth. In particular, the article points to the dangers of confusing financial assets with real ones:

[F]inancial assets are not “wealth” but a claim on real wealth. If those claims multiply or rise in price, that does not mean aggregate wealth has increased. If a pizza is cut into eight instead of four slices, there is no more food to eat. If everyone sitting at the table is given shares in the pizza and the share price rises from $1 to $2, the meal will still be no bigger.

Which leads to further questions:

Not long ago the BBC transmitted a programme about credit-card use. One man said he felt “wealthier” because he was given a credit-card limit of £5,000 ($8,000). Of course, once he used the card he was poorer. Not only did he have to repay the £5,000, but he had to service a double-digit interest rate as well. Similarly those who buy an overvalued asset with borrowed money have not made themselves richer but poorer.

Thinking about wealth in this way is also useful when assessing rescue packages for the economy. Will these policies boost the amount of goods and services the economy produces in the long run, or will they have consequences that actually restrict economic activity? Does quantitative easing really boost wealth or simply create more claims on the same underlying pool of assets?

These are good points: there's the risk that the stimulus packages have artificially boosted the indicators of economic performance. In other words, we're being deceived into thinking the economy is recovering when in fact the resulting national debt and inflation is making us poorer in the long run. This is certainly the case at the micro level, where - as with the British man referenced above - the use of debt to fund purchases can be net negative.

But at the macro level the distinction between artificial and real wealth is not always so clear. One of the key arguments in favour of the stimulus packages was that they would foster market confidence. When market participants are more confident, they are more willing to spend - the more they spend, the more firms are willing to invest in products/services on which money can be spent. Through playing the confidence game, government spending can use the artificial sense of wealth to stimulate the production of goods and services, or "real wealth." More pizzas, if you will.

This is the theoretical argument, in any case. And it only works in the short-run, since sustained high levels of spending will not have the same impact on market confidence, and may actually reverse it. But whether this artificial-to-real wealth effect balances out the long run costs of higher debt & inflation is something which remains to be seen.

Obama wins Nobel Peace Prize, Moon predictably cynical

Does anyone think its hilarious that Obama won the Nobel Peace Prize on the day we are... bombing the moon?!?

One (contrarian) view of the IMF's crisis performance

The IMF meetings in Istanbul are something of a victory lap following what many consider a banner year for the Fund. Faced with questions of relevancy just two years ago, the Fund is now globally lauded for its role in fighting fires from Pakistan to Ukraine. While critical questions remain over funding and governance, the IMF looks certain to assume a central role in the post-crisis global financial regulatory regime.

Which makes a new paper out of the Centre for Economic Policy and Research (CEPR) particularly interesting. The think tank argues that, far from helping 31 borrowing countries avert depression, the Fund may actually have made their crises worse.

"More than a decade after the Asian Economic Crisis brought world attention to major IMF policy mistakes, the IMF is still making similar mistakes in many countries," CEPR Co-Director and lead author of the paper, economist Mark Weisbrot said. "The IMF supports fiscal stimulus and expansionary policies in the rich countries, but has a much different attitude toward low-and-middle income countries."

The argument is essentially two-fold: one, the Fund's researchers woefully misjudged the severity of the crisis, both globally and in individual countries, and failed to foresee the risks to the global economy. Two, contrary to what you've heard, the Fund did not learn the lessons of past crises, instead pushing pro-cyclical, austerity and exchange rate policies that plunged low-and-middle income countries deeper into the abyss (Asia-redux). Take, for instance, Latvia. The preservation of the exchange rate peg, which the Fund pushed, has forced the country to pour money into defending an overvalued currency and undertake painful economic adjustment.

The Fund has vigorously denied the allegations in the paper (duh):

"The CEPR reaches seriously misleading conclusions about the pro-cyclicality of policies in IMF-supported programmes, relying on faulty analysis and often inaccurate information.

"The main point of this report is that growth forecasts were too optimistic when programs were designed, leading to excessively tight fiscal and monetary policies. Reality is quite the opposite.

"In virtually all programmes, fiscal targets were quickly and substantially relaxed once the extent of the crisis became apparent. Monetary and fiscal policies have deliberately sought to offset the fall in global demand."

I agree with the Fund. For one, the argument that the Fund's performance is overshadowed by its failure to forecast the crisis is intellectually weak. Just about everyone failed to foresee the extent of the crisis. The Fund's GDP forecasts were in many cases optimistic, but it was highlighting the severity of the crisis well before many big governments. And who is to say that government's would have independently acted sooner had the Fund taken an even more pessimistic line. That's a pretty easy answer: they wouldn't have.

Second, I can't challenge the CEPRs analysis of 41 different arrangements, but I'm pretty sure the Fund's flexibility and counter-cyclical recommendations during the crisis are widely recognized (and applauded), and not just in developed countries. Dominique Strauss-Kahn was calling for fiscal stimulus in early 2008, well before most government's threw-out the neoclassical handbook. The flexible credit facility is downright revolutionary given the Fund's recent history. And even you identify strict conditionality in certain arrangements, I would argue that governments like Ukraine still need to swallow the bitter pill that the IMF is uniquely positioned to provide. The Fund's historical failures are more the result of its inflexible, dogmatic approach, less in the particular conditions it attaches to loans.

No international institution can walk away from this crisis with clean hands. As a pillar of the prior regime, the Fund should be critiqued for its role in fostering the conditions that led to the great unraveling. But its crisis performance was a net success (for now), and the CEPR misses this by wading too far into the weeds.

We will post something soon

I promise.

Remainders

After a light posting week, some weekend reading:

-The Commission on the Measurement of Economic Performance and Social Progress, established by French President Nicolas Sarkozy and counting among its members Nobel Prize winners Joseph Stiglitz and Amartya Sen, has concluded that GDP is a misleading and incomplete metric, too much so to be the primary measurement of a country's economic health. You can find the report here, and speeches introducing the report here.

-Moody's says the US and UK 'could become vulnerable' to ratings cuts after 2012 if...I know what you're thinking: it seems pretty stupid for a ratings agency to speculate over a country's credit rating years in advance. I agree.

-The FT introduces the 'new Tory establishment.' If, of course, they win.