A recent Wall Street Journal Article discusses calls by academic economists at the American Economic Association annual meeting for even stricter reforms on the banking sector beyond what has already been done. Obviously, the experts are suspecting that persistent weakness in the US banking sector provides plenty of reason to suspect that a further bursting of the liquidity buble is possible.
Take this in consideration with a recent post by former IMF economist Barry Eichengreen who points out that internationally there still isn't a significant fallback option for the international monetary system.
Eichengreen notes that the fall of Ireland is spreading contagion, more importantly, he notes elsewhere their "rescue package" is inevitably going to come back to them, adding more stress to the EU banking sector. To top this off, austerity in the rest of the Union will keep economic growth meagre at best and ultimately will prevent the Euro from usurping the USD as the global dominant currency.
He notes that there may be some room for the Canadian Loonie and the Australian Dollar to absorb some of the excess foreign investment but that the majority of it will remain in the US, largely for lack of an alternative place to settle.
That said, if the USD is the best currency available and the reforms called for by the AEA ring true to the continued fragility of the US, what does this say for the next 10 years of global economic recovery.
Perhaps its time to start pushing alternative monetary schemes as a failsafe in the case of another monetary meltdown. Even though it's still viewed as unsustainable, a nation-wide development of regional or local currencies may provide a fallback measure and encourage local cooperation should the current global market crash again.
What are the other options?
Clearly, there are more questions than answers
Tuesday, January 11, 2011
Friday, December 10, 2010
Re: Economist - Cheerier Growth for 2011
So the Economist puts out a poll of estimates for growth, current account deficits, and inflation next year on a monthly basis.
In case this seems like mumbo-jumbo to yoy, here's the main points.
> all the numbers are positive. Dispite the gloomy scepticism of all the media and commentators is this. At the end of the day, almost every country (a few outliers like Ireland and Spain) has positive numbers under "Real GDP, Percent Change" for 2010 and 2011. That means that their economies have grown both this year and the last year.
> There is concern about Canada's larger-than-expected current account deficit. This (a) shouldn't be surprising considering that the US dollar has been persistently low relative to the Canadian dollar, and (b) shouldn't be too alarming, especially with the relative increase in stability in the US financial market. They got hit hard and are putting in regulations pretty quickly. All that to say, CA deficit, IN THE SHORT RUN, is largely problematic because it represents vulnerability. Our deficit comes from US imports being cheaper and their economy is settling and not too likely to fluctuate rapidly anytime soon. Long run effects may be a problem but I don't think this is the time for CA deficits to be at the forefront of economic policy.
In case this seems like mumbo-jumbo to yoy, here's the main points.
> all the numbers are positive. Dispite the gloomy scepticism of all the media and commentators is this. At the end of the day, almost every country (a few outliers like Ireland and Spain) has positive numbers under "Real GDP, Percent Change" for 2010 and 2011. That means that their economies have grown both this year and the last year.
> There is concern about Canada's larger-than-expected current account deficit. This (a) shouldn't be surprising considering that the US dollar has been persistently low relative to the Canadian dollar, and (b) shouldn't be too alarming, especially with the relative increase in stability in the US financial market. They got hit hard and are putting in regulations pretty quickly. All that to say, CA deficit, IN THE SHORT RUN, is largely problematic because it represents vulnerability. Our deficit comes from US imports being cheaper and their economy is settling and not too likely to fluctuate rapidly anytime soon. Long run effects may be a problem but I don't think this is the time for CA deficits to be at the forefront of economic policy.
Tuesday, November 23, 2010
Life Money and Illusion Part 1
I am currently reading Mike Nickerson's book, Life, Money and Illusion. As I've been inconsistent in updating this blog. I've decided to simply write my thoughts at various points in the book.
Nickerson's undelying message in the book is that the essential problem with the global financial system is that money has stopped being a highly liquid holder of real value, and has become, in itself, a perverse form of phantom capital which was condemned as sinful in antiquity. He shows that because currency is created from nothing, speculation becomes commonplace.
I encourage you to read the book and could talk about his conclusions ad-nausium. However, I will settle to say, it is well worth a careful read.
Amongst other things, Nickerson points to the prevalence of the media and advertising industries in western culture. He points to the fact that as a result of their constant influence, they are able to "create" demand by instilling the thought that certain products are necessary. He suggests that naturally, people will work until they have enough money to meet their needs and then stop working. He notes that this point was reached in North America in the 40s and 50s as wages increased enough to merit discussion of a 30 hour work week.
In economic terms, individuals decisions to work is based on how much they value the things they can buy as opposed to how much they value their leisure time. Advertising makes the percieved value of things one can buy go up and therefore the amount of time one spends working.
IF we were to begin to value our leisure time differently, we would see a shift in waste and, I believe, and increase in our ability to enjoy life.
Nickerson's undelying message in the book is that the essential problem with the global financial system is that money has stopped being a highly liquid holder of real value, and has become, in itself, a perverse form of phantom capital which was condemned as sinful in antiquity. He shows that because currency is created from nothing, speculation becomes commonplace.
I encourage you to read the book and could talk about his conclusions ad-nausium. However, I will settle to say, it is well worth a careful read.
Amongst other things, Nickerson points to the prevalence of the media and advertising industries in western culture. He points to the fact that as a result of their constant influence, they are able to "create" demand by instilling the thought that certain products are necessary. He suggests that naturally, people will work until they have enough money to meet their needs and then stop working. He notes that this point was reached in North America in the 40s and 50s as wages increased enough to merit discussion of a 30 hour work week.
In economic terms, individuals decisions to work is based on how much they value the things they can buy as opposed to how much they value their leisure time. Advertising makes the percieved value of things one can buy go up and therefore the amount of time one spends working.
IF we were to begin to value our leisure time differently, we would see a shift in waste and, I believe, and increase in our ability to enjoy life.
RE: The Fed Can’t Serve Two Masters
http://www.cato-at-liberty.org/fed-cant-serve-two-masters/#utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CatoHomepageHeadlines+%28Cato+Headlines%29
While I was always taught that the Phillips curve is a woeful fantasy that has brought about significantly bad policy. It does beg the question, if stimulus isn't effectively increasing employment, and monetary policy CAN'T increase employment...what is the US to do about its most significant of economic woes?
I will develop this thought a bit more in the future, but consider this. Jobs are created when people engage the demand for products and services. Production expands, business start up and jobs are created...currently, there is insufficient domestic demand to support US production enough to increase jobs. Perhaps, then, one of the most globally linked economies in the world needs to focus on encouraging development elsewhere enough so that global demand bouys up policy.
By this I mean a foreign policy that is concerned about developing other countries...rather than fighting currency wars with them.
While I was always taught that the Phillips curve is a woeful fantasy that has brought about significantly bad policy. It does beg the question, if stimulus isn't effectively increasing employment, and monetary policy CAN'T increase employment...what is the US to do about its most significant of economic woes?
I will develop this thought a bit more in the future, but consider this. Jobs are created when people engage the demand for products and services. Production expands, business start up and jobs are created...currently, there is insufficient domestic demand to support US production enough to increase jobs. Perhaps, then, one of the most globally linked economies in the world needs to focus on encouraging development elsewhere enough so that global demand bouys up policy.
By this I mean a foreign policy that is concerned about developing other countries...rather than fighting currency wars with them.
Monday, August 30, 2010
Politics, Economics, and Political Economy
Having completed my Master's degree and continuing to be relatively reflexive on my education, abilities, knowledge, and skills. I find it interesting to note how often I will start with questions such as "what economic policies are best for country x" and end with questions like "what institutional regime permits certain policies to work and not others". The former is obviously a very economic-centric question while the latter is a very politically-centric question.
The reason the two often become so easily crossed in my mind is because of the types of sub-fields I'm interested in. In economics, I'm concerned with macroeconomic policy, especially development policy (i.e. fiscal and monetary policy, etc). Invariably, macro-policy is dependant on politics and, therefore, political science enters the scene.
The problem is, it makes it hard to have a debate. One can't simply come down with an opinion of whether stimulus should be halted. The timeless economics response becomes "it depends". It depends on whether we are discussing the US, Spain, or Thailand. It depends on how the stimulus was put into place, the cultural response that people will likely give, the autonomy of the government in power and whether they are will to risk a period of slow down in lieu of longer-term stability.
This is what makes economic questions political and what makes the study of the two together an opportunity for a spectacular synergy.
The reason the two often become so easily crossed in my mind is because of the types of sub-fields I'm interested in. In economics, I'm concerned with macroeconomic policy, especially development policy (i.e. fiscal and monetary policy, etc). Invariably, macro-policy is dependant on politics and, therefore, political science enters the scene.
The problem is, it makes it hard to have a debate. One can't simply come down with an opinion of whether stimulus should be halted. The timeless economics response becomes "it depends". It depends on whether we are discussing the US, Spain, or Thailand. It depends on how the stimulus was put into place, the cultural response that people will likely give, the autonomy of the government in power and whether they are will to risk a period of slow down in lieu of longer-term stability.
This is what makes economic questions political and what makes the study of the two together an opportunity for a spectacular synergy.
Saturday, July 10, 2010
Don't Worry Mr. Mankiw, Mr. Rogoff, I'll Defend You!
The hot topic on economics blogs lately, has been how the US needs to approach its post-recession economic policy. It is entirely amusing how passionate and polarized the debates are on either side (In particular, I'd advise checking out Paul Krugman's editorials for the New York Times).
Today, this lowly, green economist will take his first stab at discussing economic policy amidst the "big boys". This article is a response to a blog from Ludwig von Mises Institute website by William Anderson. Now, as background, I know little about the Mises Institute except that they come from a background of classical liberalism, libertarian political theory, and the Austrian School of economics.
http://blog.mises.org/9979/economists-and-the-zimbabwe-solution/
The article criticizes recent propositions by Greg Mankiw (Harvard Economics professor and former chief economic advisor to George W. Bush) and Kenneth Rogoff (former chief economist at the International Monetary Fund) regarding US monetary fund. They argue that a temporary lax on inflation (Rogoff suggests around 6 percent for a couple of years) would take the pressure off debt-strapped consumers and governments trying to meet their obligations.
Anderson seems to object to any monetary policy that accepts expansion as a part of regular policy. He says,
"Note that what they [Mankiw and Rogoff] really are advocating is the repudiation of debt via monetary debasement. Now, when you and I receive debased products, such as lower-quality food and other goods, we don’t like it and believe we are being cheated."
His argument hinges on the idea that by allowing more lax inflationary policy, the intrinsic value of US currency will drop. However, the value of a unit of currency is essentially a function of how much money is produced and how much a country produces. So if the inflation rate was absolutely zero, then the value of money should increase relative to other currencies because each dollar represents a larger absolute chunk of productivity.
Granted, I'm really simplifying this concept. But my main, first point is this. To say that money is becoming worth less because of inflation, is not completely accurate given general growth.
counter-argument: but Jonathan, the US economic growth rate was only 3.2 percent in Q1. Wouldn't a 6 percent inflation rate still make each dollar decrease in value.
This is true, and ultimately, the point of Mr. Rogoff's prescription. It means that, after one year, a US dollar could buy 6 percent less than it could before. Generally, a net inflation rate is acceptable for most central banks. Because people know it to be consistent, most employers generally increase wages to compensate every couple of years (or at least they should). This keeps the real wage (real value of your work) relatively constant to what you can buy. This is to say that, ya, this type of policy may decrease the value of your money a bit over the next few years a little bit faster than your employer knows to respond to, but in reality the impact of a temporary policy like this will be very small to the average consumer and, with time, wages should adjust to prices.
Now, the argument for why we should do this. While wages lag behind prices in adjusting to inflation (i.e. prices tend to increase before wages do), the one thing that doesn't change is debt. Because most debt grows at a fixed interest rate, whenever the inflation rate is higher than that interest rate, the value of the debt decreases. To make this more concrete, let's say the interest rate is 6% for the next year. As a result, the price of stuff is 6% higher, you go to your boss and ask for a raise to cover inflation (being the good boss he/she is, he/she concedes), now the portion of your income going to stuff (food, clothes, ipods, etc) is the same as a year before, however, your mortgage payments haven't changed, they stayed the same as last year. As such, your ability to your debts increases, and now you can spend a greater portion of your money buying stuff or saving your money.
Not to mention, a higher inflation relative to other countries, affects your terms of trade (conditions under which you trade). Higher inflation causes your exchange rate with other currencies to drop (depreciate) as long as they don't change their inflation rate. A depreciated currency effectively makes it easier for foreigners to buy stuff made in your country. This can encourage export business.
It just so happens that this could help alleviate the US trade deficit. Which seems to be reaccumulating since April 2009 when the balance of trade started to decrease again.
To come back to the article's point, monetary "debasement" is not at all like buying a "debased" product. Entirely because the point of money is that it isn't a "real" thing. Its a place holder to represent purchasing power. And while inflation decreases the total power your money has, it also has other effects. The problem with a lot of purely classical and liberalist traditions is that they tend to neglect the reality of the system in which any economic policy works. While I won't concede to suggest that Mr. Mankiw and Mr. Rogoff are expressly correct in their prescriptions and I certainly don't see this as a total solution for the uncertainty in the US economy, there seems to be a good reason why higher inflation may pay off in the short run (I certainly think there could be problems with a sustained policy that incorporates this level of inflation, long term but I sincerely doubt that this is what either of these economists are suggesting). From my perspective, a lot of neo-liberal economic theory gets thrown around in both the academic world and the media, without much understanding behind it. There's a conditioned response that many have towards "inflation" and "deficits" that may not be helpful in finding an objective, best policy solution to the current context.
Please note 2 final things:
1. I may have something wrong in my understand above. If this is the case, please mention it in the comments below.
2. Most economists like the word "good" instead of "stuff"..."Stuff" just sounds better to me.
Today, this lowly, green economist will take his first stab at discussing economic policy amidst the "big boys". This article is a response to a blog from Ludwig von Mises Institute website by William Anderson. Now, as background, I know little about the Mises Institute except that they come from a background of classical liberalism, libertarian political theory, and the Austrian School of economics.
http://blog.mises.org/9979/economists-and-the-zimbabwe-solution/
The article criticizes recent propositions by Greg Mankiw (Harvard Economics professor and former chief economic advisor to George W. Bush) and Kenneth Rogoff (former chief economist at the International Monetary Fund) regarding US monetary fund. They argue that a temporary lax on inflation (Rogoff suggests around 6 percent for a couple of years) would take the pressure off debt-strapped consumers and governments trying to meet their obligations.
Anderson seems to object to any monetary policy that accepts expansion as a part of regular policy. He says,
"Note that what they [Mankiw and Rogoff] really are advocating is the repudiation of debt via monetary debasement. Now, when you and I receive debased products, such as lower-quality food and other goods, we don’t like it and believe we are being cheated."
His argument hinges on the idea that by allowing more lax inflationary policy, the intrinsic value of US currency will drop. However, the value of a unit of currency is essentially a function of how much money is produced and how much a country produces. So if the inflation rate was absolutely zero, then the value of money should increase relative to other currencies because each dollar represents a larger absolute chunk of productivity.
Granted, I'm really simplifying this concept. But my main, first point is this. To say that money is becoming worth less because of inflation, is not completely accurate given general growth.
counter-argument: but Jonathan, the US economic growth rate was only 3.2 percent in Q1. Wouldn't a 6 percent inflation rate still make each dollar decrease in value.
This is true, and ultimately, the point of Mr. Rogoff's prescription. It means that, after one year, a US dollar could buy 6 percent less than it could before. Generally, a net inflation rate is acceptable for most central banks. Because people know it to be consistent, most employers generally increase wages to compensate every couple of years (or at least they should). This keeps the real wage (real value of your work) relatively constant to what you can buy. This is to say that, ya, this type of policy may decrease the value of your money a bit over the next few years a little bit faster than your employer knows to respond to, but in reality the impact of a temporary policy like this will be very small to the average consumer and, with time, wages should adjust to prices.
Now, the argument for why we should do this. While wages lag behind prices in adjusting to inflation (i.e. prices tend to increase before wages do), the one thing that doesn't change is debt. Because most debt grows at a fixed interest rate, whenever the inflation rate is higher than that interest rate, the value of the debt decreases. To make this more concrete, let's say the interest rate is 6% for the next year. As a result, the price of stuff is 6% higher, you go to your boss and ask for a raise to cover inflation (being the good boss he/she is, he/she concedes), now the portion of your income going to stuff (food, clothes, ipods, etc) is the same as a year before, however, your mortgage payments haven't changed, they stayed the same as last year. As such, your ability to your debts increases, and now you can spend a greater portion of your money buying stuff or saving your money.
Not to mention, a higher inflation relative to other countries, affects your terms of trade (conditions under which you trade). Higher inflation causes your exchange rate with other currencies to drop (depreciate) as long as they don't change their inflation rate. A depreciated currency effectively makes it easier for foreigners to buy stuff made in your country. This can encourage export business.
It just so happens that this could help alleviate the US trade deficit. Which seems to be reaccumulating since April 2009 when the balance of trade started to decrease again.
To come back to the article's point, monetary "debasement" is not at all like buying a "debased" product. Entirely because the point of money is that it isn't a "real" thing. Its a place holder to represent purchasing power. And while inflation decreases the total power your money has, it also has other effects. The problem with a lot of purely classical and liberalist traditions is that they tend to neglect the reality of the system in which any economic policy works. While I won't concede to suggest that Mr. Mankiw and Mr. Rogoff are expressly correct in their prescriptions and I certainly don't see this as a total solution for the uncertainty in the US economy, there seems to be a good reason why higher inflation may pay off in the short run (I certainly think there could be problems with a sustained policy that incorporates this level of inflation, long term but I sincerely doubt that this is what either of these economists are suggesting). From my perspective, a lot of neo-liberal economic theory gets thrown around in both the academic world and the media, without much understanding behind it. There's a conditioned response that many have towards "inflation" and "deficits" that may not be helpful in finding an objective, best policy solution to the current context.
Please note 2 final things:
1. I may have something wrong in my understand above. If this is the case, please mention it in the comments below.
2. Most economists like the word "good" instead of "stuff"..."Stuff" just sounds better to me.
Friday, July 9, 2010
Development as problem-solving systems
This entry is in response to Bill Easterly's recent blog entry,
http://aidwatchers.com/2010/07/the-answer-is-42/
I whole heartedly agree with what Professor Easterly has to say in this article. It is really a part of how we redefine the way developmentalists look at their subjects and the work they are trying to do. By framing development as the emergence of a problem-solving system as opposed to a series of solutions, it sets apart the expectations that so many people have. Processes emerge gradually and, while they can be informed by developmentalists, they cannot be imposed all at once. We've seen this in cases of Afghanistan and Iraq where the imposition of western-style democracies have been resisted. On the other hand, the "solutions" that this discipline comes up with, have to be seen in with a more even handed perspective. That they are solutions to specific problems in specific contexts, not panaceas.
One twitter correspondant replied to Prof. Easterly's article "Isn't this tautology?" (@aneldagrove)
Maybe, for those who are in the field and have been working on the ground. But for outsiders this reality is not so clear...especially when we have misleading institutions that express a sense of "catch-all" like the World Bank and the International Development Bank.
However, these instutitions are, generally, our best hope for real development inasmuch as their studies and projects combine both prescriptions for problems as well as subtle changes that affect systems. And, they carry the legitimacy of being big, knowledgable (not to mention well-funded) sources of "development".
What am I saying? I think I'm saying that the best hope for system change on the level that Prof. Easterly alludes to, is through the subtle systemic changes that have occured within countries that adapt to the advice of development agencies and institutions. Might it be that development is a case of being as shrewd as serpents and as innocent as doves?
http://aidwatchers.com/2010/07/the-answer-is-42/
I whole heartedly agree with what Professor Easterly has to say in this article. It is really a part of how we redefine the way developmentalists look at their subjects and the work they are trying to do. By framing development as the emergence of a problem-solving system as opposed to a series of solutions, it sets apart the expectations that so many people have. Processes emerge gradually and, while they can be informed by developmentalists, they cannot be imposed all at once. We've seen this in cases of Afghanistan and Iraq where the imposition of western-style democracies have been resisted. On the other hand, the "solutions" that this discipline comes up with, have to be seen in with a more even handed perspective. That they are solutions to specific problems in specific contexts, not panaceas.
One twitter correspondant replied to Prof. Easterly's article "Isn't this tautology?" (@aneldagrove)
Maybe, for those who are in the field and have been working on the ground. But for outsiders this reality is not so clear...especially when we have misleading institutions that express a sense of "catch-all" like the World Bank and the International Development Bank.
However, these instutitions are, generally, our best hope for real development inasmuch as their studies and projects combine both prescriptions for problems as well as subtle changes that affect systems. And, they carry the legitimacy of being big, knowledgable (not to mention well-funded) sources of "development".
What am I saying? I think I'm saying that the best hope for system change on the level that Prof. Easterly alludes to, is through the subtle systemic changes that have occured within countries that adapt to the advice of development agencies and institutions. Might it be that development is a case of being as shrewd as serpents and as innocent as doves?
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