From Joseph Salerno: "The sharp decline in the value of the peso does not represent the onset of a so-called 'currency crisis' but rather the very means of resolving a crisis already long underway." A good way to think of crises as not the problem in and of themselves, but the indicator of other underlying factors.
One of the reasons that Kazakhstan and Russia (and others, like Argentina) have jumped into the currency devaluation race is based on a gigantic economic fallacy: the belief that a country's "competitiveness" can be magically spurred through the lowering of relative prices. This thinking is typified in this comment on Russia's managed downward drift:
A more market-based exchange-rate “makes Russia simply more competitive,” Dmitri Fedotkin, an economist at VTB Capital, said yesterday by phone from Moscow. “For the last few months, Russian producers were competitive on the global market. After this devaluation Kazakhstan has matched them.”
The multiple fallacies in this belief include:
1. Competitiveness is based on price alone: Yes, a currency devaluation means that all of a sudden, the relative price of a currency is cheaper than it was, meaning goods that are denominated in that currency are suddenly cheaper. Holding everything else constant, a change in prices should shift the demand curve and increase the demand of good X from country Y. However, in the real world, you can't always hold everything else constant. In particular, countries that produce goods at the margin can't realistically expect to see a huge jump in exports simply because their good X is cheaper; what if Russia's cars are still more expensive than China's? What if Kazakh clothing is still perceived as being of lower-quality than Vietnamese? In this case, monetary price has changed, but actual price (i.e. all of the other considerations that go into what we think of as "price," including time, availability of substitutes, reputation, willingness to pay, etc.) may still be holding firm.
Moreover, this belief totally betrays a lack of understanding of "price," which is not uncommon in relation to policymakers. A market-determined price for something that is low means there is less willingness to pay, or demand is lower. A price that is managed downward does not necessarily mean that there is a shift in demand, but merely a change in the monetary price - much like a minimum wage or price support, the shift of a currency's management (really, a soft price floor) can temporarily disrupt equilibrium until the market clears again - if it's allowed to clear. But market clearance in the currency realm is difficult, because of government management and central bank intervention. So you end up taking a distortion (an already-managed price that markets have settled on as second-best) and add two more on top (sudden change in price, imposed disequilibrium). Keynesians are way off the mark on most things, but in currency markets you might actually see "sticky" prices... because governments apply the tar to make them stick.
2. Competitiveness at the country level is just about temporary relative price changes: Believing that this temporary price change can somehow set a country on the path to righteousness not only ignores all of the other factors that actually go into actual competitiveness, it conflates the two. A country may be able to produce cars cheaper because of worker productivity, not because of cheaper labor. But calling competitiveness as an outcome of cheapening prices, you miss all of the infrastructure, institutions, education, and capital that went into that productivity. You focus on the outcome (relative cheapness!) as opposed to the inputs.
3. Devaluations can happen in a vacuum. Now, there is no sane politician that argues that their move towards devaluation won't have an effect on other countries... in fact, the whole idea of a competitive devaluation is to get in first before the other guy does. However, a key fact in the modern global economy is that no nation, not even North Korea, is autarkic - no one makes everything at home with no interaction with the outside world. In fact, intermediate goods are hugely important, as even a country that makes cars needs the steel (or carbon-fiber or aluminum) from somewhere. And with a currency devaluation, those inputs are now relatively more expensive. So you might not even get the evanescent boost you want, simply because it costs more to buy the steel to make your cars.
So there you have it - devaluation is really not the panacea for all that ills. It's not even good medicine, as it can be an exchange rate-managed way to increase inflation. And what do you get for it? Currency wars and a week of a growth boost. Seems not worth it to me.
I think this is going to be a big deal, actually, as KZ is not only firing a shot across the bow of Russia and its Customs Union partners, but it's also the opening salvo in QE infinity related tightening as well. In their statement explaining the devaluation, the National Bank of Kazakhstan pointed the finger at the Fed:
“As a result of the reductions in quantitative easing in the U.S., capital is flowing from developing markets into developed markets, which has led to pressure on currencies,” the central bank said in the statement.
Now, this begs several questions:
1. We saw emerging market currencies get pummeled in August with the first worries about QE infinity being withdrawn, as the capital flows of printed/helicoptered money looked like they were going to be withdrawn. The whole QE experiment may have stopped the US economy from dying (as if that were ever a possibility), but it has left it on life support, with everyone worried what happens once the government unplugs the machine. And while policymakers in DC thought that they were doing the best thing for the US economy (doubtful), they also didn't care about the consequences outside the borders, which was a capital flow boom... with interest rates at nil in the US and advanced economies, the artificial money had to go somewhere, and that somewhere was emerging markets. How much do you want to bet that the policy response, led by ninnies like Joe Stiglitz, will be that capital controls are now necessary again?
2. The National Bank of Kazakhstan (NBK) has always been a bit of a rogue when it comes to policies; in my current position, I worked with them a few years ago looking at their response to the financial crisis vis a vis Ireland and Iceland. This move, which is much bigger than expected, may signal that they have a sense that things are going to go south quickly, and they want first-mover advantage. Or else, they really are doing such a dramatic move to strike at Russia?
3. How will this hit the ruble? As of right now, it's holding steady, but the ruble has already been in a bit of a free-fall. Is this a tit for tat between Customs Union members? Or is that in store?
4. What will this do for Ukraine? Does Yanukovych, even if he does hang on, want to put his perilously overleveraged, antiquated, and dilapidated economy in the middle of a currency war? The hryvnia is already in a free-fall of its own.
So this could be an isolated, regional effort that shows the difficulties inherent in the Customs Union project. Or it could portend something much worse for the global economy. Stay tuned!
It appears that the Russian-led Eurasian Customs Union is having the exact same kind of growing pains that the EU is still having, in that lack of a common monetary policy is causing all sorts of frictions. The news from Astana this morning is that the Kazakh authorities have undergone an immediate 25% devaluation of the currency (the tenge). The announced reason has to do with competitiveness in the Customs Union, which makes sense, since Russian monetary authorities have let the ruble plummet fairly quickly in 2014. Whether this signals a new round of beggar-thy-neighbor devaluations across emerging markets is tough to say, but it does show that the vaunted Customs Union, the one that Russia is paying Ukraine to think about joining, still has a lot of issues... and that Kazakhstan can't be rolled like Ukraine or Belarus as easily.
A talk of mine with Dukascopy Swiss Financial TV, on the outlook for the BRICS countries in 2014. Conducted on the way back from the Gaidar Forum in a taxi during a snowstorm. Gotta love being a pundit.
A friend of mine and co-habitating visiting researcher at BOFIT, Vikas Kakkar, has just released some of the work he was doing at BOFIT at the same time as me. Entitled, "Determinants of real exchange rates: An Empirical Investigation," it looks at the reasons for persistent gaps in nominal exchange rates.
I mention this paper because it's central to his work, but as I mentioned to Mrs. Institutional Economist last night, exchange rates and their determination is probably one of the most technical, least-useful, and unbelievably mind-numbingly boring facets of economics. Just the mention of any aspect of exchange rates causes, in the words of PJ O'Rourke, MEGO: my eyes glaze over.
This doesn't mean that exchange rates aren't important, though. As the ever-astute Mrs. Institutional Economist also noted, movements in the ruble/USD exchange rates have been so terrible of late, that I am actually losing $36,000 off my promised, nominal US salary. If someone could publish a paper to make my employer care about this loss, then THAT would be a contribution to the literature.
And for those of you about to conference (specifically, the ASSA meetings in Philadelphia, January 3-5), we salute you! And if you're actually in town, I'm at the Association for Comparative Economic Studies (ACES) Poster Session on Friday morning at 10:15AM (Philadelphia Marriott, Grand Ballroom - Salon A) and also discussing a paper on Sunday at 10:15AM with some of my compatriots from the Bank of Finland. Hope to see you there!
My latest piece, on humanity's love/hate relationship with freedom. Apologies for the lack of posting, but my time at the Bank of Finland is now over, and once the holidays are done, I'll be back on-line and granting the world its much-needed institutional economics angle!
It's that time of year again, and I wanted to make a brief digression that only appears as such... with Christmas barreling down upon us like a freight train, it's high time someone took a look at the most reprehensible song ever concocted: Band-Aid's, "Do They Know It's Christmas?" In this posting, I want to explore, using the song's own lyrics, why this song is perhaps the most racist, smug, and perfect summation of white "progressive" thinking over the past... well, forever. In short, this song is quite possibly the worst piece of art that humanity has ever produced. Including this. And the worst part is, it's so damn catchy!
Masterminded by Bob Geldof, notorious do-gooder and lover of charity-type things, the all-star supergroup Band-Aid was something you could not get away from if you were coming of age in the 80s. Coupled with USA for Africa (which PJ O'Rourke has already amply taken down), the Band-Aid song came first and was so full of earnest nutty rock starts trying to do good that it just warmed your heart (because isn't that what politics is all about, anyway?)! Phil Collins, Boy George, Bono, Bananarama, Duran Duran... if you were a big deal in the 80s (especially in Britain), you sang on that song.
But why is it terrible? Let's look at some of the lyrics. It opens with a beautiful paean to the idealized Christmas, peace on earth/goodwill to men, etc.:
There's no need to be afraid
At Christmastime, we let in light and we banish shade
And in our world of plenty we can spread a smile of joy
Throw your arms around the world at Christmastime
So far so good! Uh-oh, there's trouble on the horizon when George Michael (and presumably the other guy from Wham!) comes in to portend doom:
But say a prayer
Pray for the other ones
At Christmastime it's hard, but when you're having fun
Well, yes, that's the basis of most world religions. You are supposed to think of others, do unto to them etc. And yes, it's difficult at all times of the year to think of others, especially when things are going so well for you. No quibbles there. Odd that they would point it out though.
There's a world outside your window
And it's a world of dread and fear
Where the only water flowing is the bitter sting of tears
And the Christmas bells that ring there are the clanging
chimes of doom
Whoa!!! We just went from throwing our arms around the world to finding out that the world bit back! Apparently, right outside the kitchen door is a world of dread and fear that is only held back by a thin pane of glass. The chimes of doom bit is a nice touch too, in case you didn't get the subtle imagery of a river of tears across a parched wasteland. Additionally, there is some sort of death bell ringing! This place is terrible! Why did I throw my arms around this place???
Well tonight thank God it's them instead of you!
At this point, Bono ups the ante. I mean, hugely. Remember, we have JUST gone from noting that we should pray for "the other ones," no matter how difficult it is, to realizing that they other ones might actually be nasty people who are alongside a river of tears with a large death bell of doom in the background. So, when we finally take time out to pray from our fun-having, the only thing we say to God is "thanks for not making me them." You'd think that, if you made the time to pray, you might ask for something good for others, instead of slapping God on the back and saying, "yeah, good on me!" How hard is it to ask God for a little bit more? Are you that busy? I guess if you're Boy George in the '80s you are... and besides, Boy George in the '80s probably didn't want to talk to God that much, because God had some issues with him.
And now we get to the chorus, which is the history of failed economics/politics/human action summed up nicely in just a few lines. And the best part is, they believed it!!! Let's go through this line by line:
And there won't be snow in Africa this Christmastime
Well THAT'S a blanket statement! First off, they assume that "Africa" is this big monolithic country of poverty and rivers of tears, which it isn't. Depending upon whom you talk to, there are as many as 62 countries in Africa (although less than that in the 1980s), each with a different governance structure, culture, and history. Oh yeah, and climate. There actually WAS snow in Africa that Christmastime, as there often is - Mt. Kilimanjaro saw record cold temperatures in 1984, and there is almost always snow at its summit. In fact, somebody famous (see left) wrote a book about it once. So if we assume by "Africa" they meant the entire damn continent, yeah, there was snow in Africa that Christmastime.
Oh, what was the other problem with this? Well, if you look at a MAP of Africa, you can see that the Equator neatly bisects it. That means that half of the continent is in the Southern Hemisphere. Where, in December, it's SUMMER. No, there won't be snow in Africa this Christmastime. Nor will there be snow in Italy in July. Why is there no song about this? Those poor Italians, eating their pasta outside with no snow to gaze at! An additional point of the poor grasp of geography of this song: given the bisection of Africa by the equator, that means a lot of the continent is actually in the tropics. They tend not to get snow either, even if they're NOT on the continent of doom bells. I don't recall hearing a song that bemoaned the lack of snow in Vanuatu at Christmas... why the Seychelles are so deprived in September... why Hawaii is just a dreadfully doom-laden place because of the lack of snow. Yep, we have a pile of do-gooders earnestly singing about a place that they've never been or, apparently, cannot even locate on a map. But they don't stop there:
The greatest gift they'll get this year is life.
Well, I would say that's a great gift no matter what, especially with all those British twits praying to God about how thankful they are that someone else is in the gutter. But apart from that, fertility rates in Africa were pretty high in the early 1980s, according to this report. If anything, we didn't begin to see a fertility drop throughout the entire continent until about 1985, or the year after Band-Aid went all racist on us. Perhaps all those African would-be mothers were too depressed to bring a child into a world that thought Africa was a big doom-laden continent? Or maybe it was because Western donors introduced the concept of family planning, i.e. that maybe you should wear a condom, decide not to have a few more kids, and, of course, abort the ones you don't want? Same site talks about the "successes" of Kenya's family planning endeavors in the 1980s and 1990s and how they brought down the fertility rate. So the only thing that was out there preventing the "gift of life" after Band-Aid was precisely the same sort of do-gooders, out there in the steppes and grasslands telling people to not get sooooo many kids. If that's not a bit of irony, I don't know what is.
And the song continues:
Where nothing ever grows
No rain nor rivers flow
Wait, I thought there were rivers of tears? Apart from this easy-to-make mistake (I often find myself missing the rivers of tears of my enemies, apart from when I'm bathing in it), once again, a bunch of Brits decided that Africa must be a horrible, HORRIBLE place. No Harrod's! No Rolls Royces! No Christmas cakes! Africa sounds sooooo icky! But really, nothing EVER grows?
Of course, I"m being a bit cheeky here, since the whole "Band-Aid" thing was devised in response specifically to one part of Africa, the famines in Ethiopia over 1983-85. But as Amartya Sen has famously noted, famine isn't a problem of there not BEING enough to east, it's a problem of people not GETTING enough to eat. In his (more eloquent) words, “If one person in eight starves regularly in the world, this is… the result of his inability to establish entitlement to enough food; the question of the physical availability of the food is not directly involved.” That is, property rights help to ameliorate the threat of famine, because, left to their own devices, people find a way to survive. They find a way to make things grow - and if they don't, they move. The only ways that this survival instincts are blocked is if there's someone else with a gun telling you you can't move/grow, etc. We saw it in China under Mao and of course Stalin's deliberate starving of the Ukrainians in the 1930s. A Marxist government that takes away the food leads to famine.
Guess what? Ethiopia had a Marxist government in the 1980s, one supported directly by Moscow. In the wake of terrible droughts, the Marxist government... well,they did was Commies do, which is try to exterminate the "wreckers" and "saboteurs" that were obviously destroying the glorious new world order of hope and change. The Derg, the revolutionary committee that ran Ethiopia, was waging a war against insurgents at precisely the same time, with the famine, death, and destruction accompanying the drought leading to famine in precisely the conflict-affected areas. But no one is singing, "where nothing ever grows as a RESULT OF MARXIST POLICIES." Indeed, the Marxist government forcibly relocated large swathes of the population from the north to the south of the country, partly to fight famine but mostly to fight the insurgency.
This is probably the most heart-breaking part of the whole Band-Aid/Ethiopia problem - that there was a direct human cause of the problem that exacerbated the natural issue of no rain (not FOREVER, just during those years), but that a bunch of smug liberals sat on their hands (not even praying to God!) and bemoaned that terrible place those people must live to have no snow or food. And, as USA for Africa demonstrated a year later, the solution they offered is the same since time immemorial - we need to spend more money! Send food! Spend more on foreign aid! Guess what? Didn't work. After Live-Aid in 1985, also a Bob Geldof creation, well, let me let Wikipedia tell it: "The event was one of the most widely-viewed television broadcasts in history. However, the aid was not actually used by the Ethiopian government; instead, 56,000 tons of food were left rotting in a port while the forced relocations continued." The beatings will continue until morale improves, indeed.
Do they know it's Christmastime at all?
Probably the Christians (including the Coptic Christians in Egypt and Ethiopia), and even the Muslims in North Africa were aware of it, yes.
(Here's to you) raise a glass for everyone
(Here's to them) underneath that burning sun
I can't tell if they're serious or earnest here, but isn't this what all of these rock stars are doing? Raising a glass but not doing a whole hell of a lot? And why are people just standing in the sun? Apparently, to Brits who see nothing buy grey skies and rain for 90% of the year, the sun is a giant orb of flame and gas to be feared. Someone should douse it with a river of tears.
Feed the world!
Let them know it's Christmastime again!
Blessedly, the song comes to a conclusion, but not before we are commanded to FEED THE WORLD! Um, that might be tough since I only cooked one Christmas turkey, and I don't think I can fit Africa in the dining room. Who are they commanding? Who is to feed the world? In fact, when anyone tries to feed the world (new seeds, genetically-modified and drought-resistant crops), people like this go all up in arms and try to block it. And if we just used petrol instead of ethanol, how many millions of acres of crops would be available for food instead of gas for the Prius? Well, I guess they weren't really laying out an action plan, so much as telling us to... something.
And finally, we are roused to let the people of the country of Africa know it's Christmastime. That is, those who don't know, or just plumb forgot because they're not Christian or are fighting government troops that are trying to collectivize their farm. I could think of no worse fate to befall Ethiopia in 1984 than to have Boy George show up and tell them it's Christmas. I'm sure that would go over well in Muslim North Africa as well.
So there you have it - smug thinking in a handy song that is so damn catchy but embodies precisely the set of thoughts that begin with "feed the world" and end with "the forced relocations continued as people starved." Not such a slippery slope as a gently, linear wooded path, paved with good intentions.
But I can't leave you without at least giving you the chance to see horrible 1980s fashions in technicolor:
Courtesy of Ukraine, which has not just gone off the deep end but is actively attempting to become the poorest nation in Europe, a list of how to completely and utterly botch an economic transition:
Sounds like a perfect recipe, one that Ukraine is following to the letter. Ukraine - the country of the future.