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 We saw emerging market currencies get pummeled in August with the first worries about QE infinity being withdrawn, as the capital flows of printed/helicoptered money looked like they were going to be withdrawn.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!

The never-ending battle. Hint: Hayek and Mises win.

The FT this morning has a piece on the UK recovery and how it's driven by consumption rather than investment, with an extended sojourn into the UK housing policy market and some points that appear to yearn for lower house prices. While an admirable attempt to look at capital markets, it's wildly off in the mark in one great  respect: the effects that are seen now in the UK are exactly what the policies of the UK government intended.

The wizard of Keynesian economics, High Priest Obama, himself made this argument not too long ago in Illinois. Railing against rising income inequality, the President said,

"This growing inequality isn't just morally wrong; it's bad economics... when middle-class families have less to spend, businesses have fewer customers. When wealth concentrates at the very top, it can inflate unstable bubbles that threaten the economy. When the rungs on the ladder of opportunity grow farther apart, it undermines the very essence of this country."


As my former boss John B. Taylor explains, this "middle-out" view holds that "wider income distribution slows economic growth by lowering consumption demand. Saving rates rise and consumption falls if the share of income shifts toward the top, according to middle-out reasoning, because people with higher incomes tend to save more than those with lower incomes." Thus, the key thing that needs to be done is to stop the rich from hoarding cash in gigantic vaults, but get that money out the door and into the hands of middle-class people who care not one whit for tomorrow and will spend spend spend.


The basis of Keynesian economics is (as by the accounting identity for GDP) that growth comes either from investment OR consumption OR government spending. So if you run up consumption, you're getting "growth." More formalized (but no less wacky) Keynesian economics relies on the idea of aggregate demand, sticky wages, and the need to move the animal spirits of the markets when they won't budge (i.e. when the rich sit on their cash in vaults). The key to all of this is increasing consumption - how can you do this? Increased liquidity. Tax "rebates" and one-time "stimulus" injections into the economy. 


The entire basis of both monetary and fiscal policies since 2008 in the OECD countries (indeed, in much of the world) has been to soften the blow of a needed recession... and the way to do that is "put money in people's pockets" and have them spend. Consumption has been the explicit target of policies... and now it's coming home to roost, some people are noticing that hey, this isn't really helping. In fact, it's even more unsustainable and leading to high levels of debt that are very sensitive to macroeconomic fluctuations. 


So the worry seems to be that the policy did exactly as it was intended to do, but somehow didn't also cure the issues (lack of investment, paralysis in the economy due to government intervention) that it actually engendered.


Sorry, this one grinds my gears too, but I always find it funny when Keynesians get mugged by reality.