Inequality, thus far, has been discussed in extremely limited terms, Macarena has learned.
Namely, she thought it was all about think-tank types insisting that inequality hurts growth whilst promoting the redistributive flavor of the day.
And about economists, such as Becker and Murphy, reminding people that the real question is why, if inequality stems from the returns to education, don’t more people seize that opportunity?.
How wrong she was:
An interdisciplinary team of McGill researchers has uncovered a connection between growing economic inequality and an increase in the number of plant and animal species that are threatened with extinction.
"Our study suggests that if we can learn to share economic resources more fairly with fellow members of our own species, it may help us to share ecological resources more fairly with other species," said Dr. Greg Mikkelson, assistant professor in the McGill School of Environment and Department of Philosophy.
16.5.07
Thoughts on Brazil & the 120-Club
The very prestigious 120-Plus-Reserves-Club has a new member: Brazil. The first Latin Nation to be admitted will now cavort with Asian icons --China, Japan, Korea, Hong Kong, Taiwan India and Singapore--- and with emerging Europe’s Russia. These very few countries now hold over US$4 trillion in the form of official reserves.
Not only are reserves high, but the pace of accumulation has accelerated in the past (very) few years.
This means two things at the same time.
First, it means many countries are revealing their monetary policy preferences quite clearly: floating is simply not the monetary regime a large number of countries feel happy with. Rather, revealed preferences show that many countries abhor appreciation and are willing to put up a good fight.
Second, it is also a constraint posed on all other policy variables, and it gets increasingly stronger as a constraint as the size of accumulation rises. Failure to sterilize massive FX interventions, for instance, tends to heat things up and in some countries (China) the added heat can be too much. But, alas, sterilization sometimes reminds Macarena of a dog biting its tail. Foreign investors want domestic money in order to buy all kinds of domestic assets, not just Government debt. So if you want them to hold only debt, you have to pay a price, i.e higher interest rates. So all asset classes become more attractive, so more foreigners want them, and the cycle begins anew…
Some people think that by using capital controls authorities can decouple exchange rates from interest rates, i.e decouple themselves from the world and from all its impolite and improper preferences. The evidence is not there to support this idea at the macroeconomic level, quite the contrary. Regarding the microeconomic effects of capital controls, its effects on firms,… let´s put it in the words of Kristin Forbes:
“First, capital controls tend to reduce the supply of capital, raise the cost of financing, and increase financial constraints (…). Second, capital controls can reduce market discipline (…) leading to a more inefficient allocation of capital and resources. Third, capital controls significantly distort decision-making by firms and individuals, as they attempt to minimize the costs of the controls or even evade them outright. Fourth, the effects of capital controls can vary across different types of firms and countries, reflecting different pre-existing economic distortions. Finally, capital controls can be difficult and costly to enforce, even in countries with sound institutions and low levels of corruption”
So let us sum it up: the most important emerging market economies do not take freely floating exchange rates to heart and prefer to fight appreciation by seriously constraining all other policy instruments, i.e surrendering a large chunk of their hallowed monetary independence.
Rather than embarking themselves on the perilous trail of capital controls, countries have two more intelligent options.
Number one: give up on intervention and allow the currency to float. Who knows, in these post modern times? They may even receive a pleasant surprise, finding out that their currency is already at or below (pdf) equilibrium!!.
Number two: go ahead and establish very hard pegs, surrendering what little is left of monetary independence anyway and assuring stable interest rates and breathing space for the private sector.
Not only are reserves high, but the pace of accumulation has accelerated in the past (very) few years.
This means two things at the same time.
First, it means many countries are revealing their monetary policy preferences quite clearly: floating is simply not the monetary regime a large number of countries feel happy with. Rather, revealed preferences show that many countries abhor appreciation and are willing to put up a good fight.
Second, it is also a constraint posed on all other policy variables, and it gets increasingly stronger as a constraint as the size of accumulation rises. Failure to sterilize massive FX interventions, for instance, tends to heat things up and in some countries (China) the added heat can be too much. But, alas, sterilization sometimes reminds Macarena of a dog biting its tail. Foreign investors want domestic money in order to buy all kinds of domestic assets, not just Government debt. So if you want them to hold only debt, you have to pay a price, i.e higher interest rates. So all asset classes become more attractive, so more foreigners want them, and the cycle begins anew…
Some people think that by using capital controls authorities can decouple exchange rates from interest rates, i.e decouple themselves from the world and from all its impolite and improper preferences. The evidence is not there to support this idea at the macroeconomic level, quite the contrary. Regarding the microeconomic effects of capital controls, its effects on firms,… let´s put it in the words of Kristin Forbes:
“First, capital controls tend to reduce the supply of capital, raise the cost of financing, and increase financial constraints (…). Second, capital controls can reduce market discipline (…) leading to a more inefficient allocation of capital and resources. Third, capital controls significantly distort decision-making by firms and individuals, as they attempt to minimize the costs of the controls or even evade them outright. Fourth, the effects of capital controls can vary across different types of firms and countries, reflecting different pre-existing economic distortions. Finally, capital controls can be difficult and costly to enforce, even in countries with sound institutions and low levels of corruption”
So let us sum it up: the most important emerging market economies do not take freely floating exchange rates to heart and prefer to fight appreciation by seriously constraining all other policy instruments, i.e surrendering a large chunk of their hallowed monetary independence.
Rather than embarking themselves on the perilous trail of capital controls, countries have two more intelligent options.
Number one: give up on intervention and allow the currency to float. Who knows, in these post modern times? They may even receive a pleasant surprise, finding out that their currency is already at or below (pdf) equilibrium!!.
Number two: go ahead and establish very hard pegs, surrendering what little is left of monetary independence anyway and assuring stable interest rates and breathing space for the private sector.
11.5.07
Nuisance Monies
On the issue of monetary policy, Macarena –loathing the verb to lose-- has always been a sucker for the winners. In Spain, some years back, she was scolded for a girlish delight at the prospect of finally burying the Peseta and leaving monetary policy where it should be: Frankfurt-types with no sense of humor. They had a 60-odd year winning streak, period.
Partly because of the 1992-93 mayhem all over Europe, partly because of the sequence of “financial crises” in the emerging markets the rest of the decade, and partly because of some good looking jerk working at Banco de España´s research service, she thinks the euro is the best thing that has happened to Spain in decades.
Simply put, there are just too many (180 or so) useless little nuisance-monies roaming around, annoying as those dreadful little toy dogs rich ladies carry around. Except that nuisance-currencies´ bark sometimes wreak havoc.
National money is supposed to be "good for the country". As we are reminded in a delightful recent article, in Latin America, to take one example, the presumed benefit stemming from ANY of the many national moneys moving around, does not even come close to making up for the cost of enduring, year in and year out, interest rates that typically exceed by 500 basis points or more what they would be under full dollarization.
Partly because of the 1992-93 mayhem all over Europe, partly because of the sequence of “financial crises” in the emerging markets the rest of the decade, and partly because of some good looking jerk working at Banco de España´s research service, she thinks the euro is the best thing that has happened to Spain in decades.
Simply put, there are just too many (180 or so) useless little nuisance-monies roaming around, annoying as those dreadful little toy dogs rich ladies carry around. Except that nuisance-currencies´ bark sometimes wreak havoc.
National money is supposed to be "good for the country". As we are reminded in a delightful recent article, in Latin America, to take one example, the presumed benefit stemming from ANY of the many national moneys moving around, does not even come close to making up for the cost of enduring, year in and year out, interest rates that typically exceed by 500 basis points or more what they would be under full dollarization.
10.5.07
The Wolfowitz Thing
Macarena´s take: some guy is offered the top position in a large institution with 10,000 employees or so and it just happens to be that his girlfriend is one of them.
Many people will say that he should not have accepted, many others will say that she should have resigned, period. Macarena can just see the delightful I-am-so-certain look on their faces.
Think about it. Both solutions lack economic sense, unless you can show that two individuals who, on any given basis, have been judged as adequate for the institution, will be detrimental to it if working together. A love-related externality of sorts. This is ludicrous.
Now, if what you have is not a financial but rather an “ethical” issue with having them work together, then get rid of her. Your “ethical” problem can obviously be solved for a certain price, the reasonable thing to do is to figure out what that price is. Likewise, pay him not to accept.
The wage hike that has outraged so many good folks the world over reflects, Macarena thinks, roughly the following estimate: she will be receiving a stipend exactly equal to her former wage, plus the wage equivalent to non-wage benefits (such as those derived from a very generous pension scheme).
Who wins and who loses financially?. She is exactly where she was before (compensation-wise), the institution pays exactly the same for her services, but does not appropriate them, they have been outsourced, so to speak. The loser is the World Bank, provided she was a good employee.
Was Wolfowitz appointed in a transparent way? Are his politics correct? Is his managerial style hurting the institution? Very important topics indeed. But, alas, not the issue.
90% of World Bank Staffers want Wolfowitz to go, and will probably have their way. Hmmmmmmm.
Having known her share of them, Macarena would be very concerned if current staffers, under current governance, loved the guy presiding their comfortable cocoon.
Many people will say that he should not have accepted, many others will say that she should have resigned, period. Macarena can just see the delightful I-am-so-certain look on their faces.
Think about it. Both solutions lack economic sense, unless you can show that two individuals who, on any given basis, have been judged as adequate for the institution, will be detrimental to it if working together. A love-related externality of sorts. This is ludicrous.
Now, if what you have is not a financial but rather an “ethical” issue with having them work together, then get rid of her. Your “ethical” problem can obviously be solved for a certain price, the reasonable thing to do is to figure out what that price is. Likewise, pay him not to accept.
The wage hike that has outraged so many good folks the world over reflects, Macarena thinks, roughly the following estimate: she will be receiving a stipend exactly equal to her former wage, plus the wage equivalent to non-wage benefits (such as those derived from a very generous pension scheme).
Who wins and who loses financially?. She is exactly where she was before (compensation-wise), the institution pays exactly the same for her services, but does not appropriate them, they have been outsourced, so to speak. The loser is the World Bank, provided she was a good employee.
Was Wolfowitz appointed in a transparent way? Are his politics correct? Is his managerial style hurting the institution? Very important topics indeed. But, alas, not the issue.
90% of World Bank Staffers want Wolfowitz to go, and will probably have their way. Hmmmmmmm.
Having known her share of them, Macarena would be very concerned if current staffers, under current governance, loved the guy presiding their comfortable cocoon.
23.4.07
Baltics (Update)
March inflation numbers are in in Latvia: 8.5% y-o-y, with monthly numbers (1.4%) far exceeding expectations (0.5%). The Baltic Times put it, Macarena reckons, in rather straight-forward terms:
In Latvia, inflation soared 1.4 percent in March, a full percentage point above expectations. The result baffled economists, who had predicted 0.4 - 0.5 percent. On closer analysis, however, it became clear that the culprit was the lat, which had lost a portion of its value against the euro as more forex traders sold the Latvian currency in favor of euros. (see here).
In Estonia numbers were also higher than expected: 1% in March, 5.3% y-o-y.
Let the games continue!
In Latvia, inflation soared 1.4 percent in March, a full percentage point above expectations. The result baffled economists, who had predicted 0.4 - 0.5 percent. On closer analysis, however, it became clear that the culprit was the lat, which had lost a portion of its value against the euro as more forex traders sold the Latvian currency in favor of euros. (see here).
In Estonia numbers were also higher than expected: 1% in March, 5.3% y-o-y.
Let the games continue!
Colomb-Economists and their odd Musings
Macarena finds the exchange rate debate in Colombia very entertaining.
An entire generation of otherwise reasonable people seems to have learned in grammar school that “productivity”, “export orientation” and “currency depreciation” are synonymous concepts.
Colomb-economists, as a very wicked friend of Macarena’s calls them, are quite a lovely bunch of mostly 40 and 50-something male oracles. They exhibit stern circumspection in arguing, in the local power point-intensive seminar circuit, that flexible exchange rates are a “good thing for the Country".
The problem is that ---whilst loving flexible exchange rates--- they hate exchange rate flexibility.
Or, at least, they despise any deviation of the real world rate, from where they would like to see the parity.
In thinking about deviations from their prior "estimates", colomb-economists come up with some very funny stuff… Hence Macarena’s delight whenever the peso moves around a bit, especially upwards.
In line with what has happened in many countries, the peso has strengthened in the last couple of years. In this 2-year perspective, appreciation vis-à-vis the U.S Dollar is roughly equal to that of Chile and Brazil, within the Latin American region, or Australia and Israel, outside the region. There has been a lot of volatility, true, but this probably has to do with Colombia’s much shallower and much more regulated derivative markets, rather than with anything profoundly macroeconomic.
Though there are many close competitors, Macarena’s most cherished colomb-economist model is the following.
Theorem 1: Exchange rate trends are explained by fiscal policy.
Nothing too surprising, right?. All reasonable models allow one to think that if fiscal policy becomes unsustainable, interest rates will increase, reflecting insolvency risks, people will want to substitute domestic assets for external assets, and so on. All of which will lead to currency depreciation, banking sector difficulties, run on reserves, and so on. The thirty year old first-generation BOP crisis model is a fixed exchange rate example of this: money-financed fiscal deficits cause a run on reserves, and so on. Easy enough to translate into the quasi flexible context of Colombia. Modern multiple-equilibrium models are not even necessary in this quite trivial fiscal insolvency scenario.
Theorem 2 (Macarena’s favorite): Any move towards fiscal insolvency appreciates the nominal exchange rate.
Now this is what Macarena calls a substantial contribution from Colomb-Economists to the world: If authorities want to strengthen their currencies, reduce interest rates, increase asset prices, and increase FDI and other capital flows TO the country, all they have to do is become fiscally insolvent, just as Colombia has –in their peculiar view— done in the last few years.
An entire generation of otherwise reasonable people seems to have learned in grammar school that “productivity”, “export orientation” and “currency depreciation” are synonymous concepts.
Colomb-economists, as a very wicked friend of Macarena’s calls them, are quite a lovely bunch of mostly 40 and 50-something male oracles. They exhibit stern circumspection in arguing, in the local power point-intensive seminar circuit, that flexible exchange rates are a “good thing for the Country".
The problem is that ---whilst loving flexible exchange rates--- they hate exchange rate flexibility.
Or, at least, they despise any deviation of the real world rate, from where they would like to see the parity.
In thinking about deviations from their prior "estimates", colomb-economists come up with some very funny stuff… Hence Macarena’s delight whenever the peso moves around a bit, especially upwards.
In line with what has happened in many countries, the peso has strengthened in the last couple of years. In this 2-year perspective, appreciation vis-à-vis the U.S Dollar is roughly equal to that of Chile and Brazil, within the Latin American region, or Australia and Israel, outside the region. There has been a lot of volatility, true, but this probably has to do with Colombia’s much shallower and much more regulated derivative markets, rather than with anything profoundly macroeconomic.
Though there are many close competitors, Macarena’s most cherished colomb-economist model is the following.
Theorem 1: Exchange rate trends are explained by fiscal policy.
Nothing too surprising, right?. All reasonable models allow one to think that if fiscal policy becomes unsustainable, interest rates will increase, reflecting insolvency risks, people will want to substitute domestic assets for external assets, and so on. All of which will lead to currency depreciation, banking sector difficulties, run on reserves, and so on. The thirty year old first-generation BOP crisis model is a fixed exchange rate example of this: money-financed fiscal deficits cause a run on reserves, and so on. Easy enough to translate into the quasi flexible context of Colombia. Modern multiple-equilibrium models are not even necessary in this quite trivial fiscal insolvency scenario.
Theorem 2 (Macarena’s favorite): Any move towards fiscal insolvency appreciates the nominal exchange rate.
Now this is what Macarena calls a substantial contribution from Colomb-Economists to the world: If authorities want to strengthen their currencies, reduce interest rates, increase asset prices, and increase FDI and other capital flows TO the country, all they have to do is become fiscally insolvent, just as Colombia has –in their peculiar view— done in the last few years.
Manly Money: British Dilemmas
Let me see if I get the British –Macarena told me late last night—.
Number one: inflation has been increasing and now exceeds the comfort limit of 3%, to the point that for the first time since the Old Lady was made independent, the Governor of the Bank of England had to write the dreaded, and legally mandated, “explanation letter” to the Chancellor.
Number two: the British Pound has appreciated beyond the US$2 mark for the first time since 1992, an event terrible, linked to the infamous Black Wednesday affair.
Number three: the conventional wisdom rationalizes this apparent paradox (accelerating inflation + currency appreciation) by invoking the expectation of future interest rate hikes: Since people anticipate tighter (more expensive) money tomorrow, they view today´s prices as cheap.
Hmmmm.
A simple country-girl, you know, Macarena does not get it. In her simple world, if inflation were indeed a serious concern, investors would punish the Pound and we would observe currency devaluation, as well as nominal interest-rate increases and a steepening of the yield curve. Her arguments are:
1. The real interest rate reflects economic fundamentals, mostly productivity. Evidence shows that, if anything, various measures of productivity in the UK slightly outpace those observed elsewhere. Real interest rate determinants are thus either constant or slightly to the downside.
2. Nominal interest rates are a monetary (and expectations-related) phenomenon. Monetary conditions, as suggested by the slope of the yield curve (actually, inverted) and by the exchange rate, suggest that monetary conditions are not expansionary. Given the fact that a relatively important current account deficit exists (about 3.5% of GDP), a factor excercising force towards to the weak side, the currency´s behavior perhaps even implies quite the contrary....
3. As mentioned by the Governor in his letter, energy prices have a lot to do with the bad outcome observed in March.
4. Conclusion: Monetary tightening, such a manly thing, is responding to temporary one-time relative price swings. The expectations generated by its almost inevitable course, is indeed the leading cause of the accelerating inflation-strenghtening currency paradox.
Macarena´s view: Down the road, “true” inflation will be revealed as being much more in line with fundamentals, i.e much closer to the 2% goal, and pressure will build to lighten up on monetary policy. In Macarena´s view, and she is a contrarian, monetary authorities should take it easy and stay put, instead of acting virile now, and reversing course later, perhaps even this year.
Number one: inflation has been increasing and now exceeds the comfort limit of 3%, to the point that for the first time since the Old Lady was made independent, the Governor of the Bank of England had to write the dreaded, and legally mandated, “explanation letter” to the Chancellor.
Number two: the British Pound has appreciated beyond the US$2 mark for the first time since 1992, an event terrible, linked to the infamous Black Wednesday affair.
Number three: the conventional wisdom rationalizes this apparent paradox (accelerating inflation + currency appreciation) by invoking the expectation of future interest rate hikes: Since people anticipate tighter (more expensive) money tomorrow, they view today´s prices as cheap.
Hmmmm.
A simple country-girl, you know, Macarena does not get it. In her simple world, if inflation were indeed a serious concern, investors would punish the Pound and we would observe currency devaluation, as well as nominal interest-rate increases and a steepening of the yield curve. Her arguments are:
1. The real interest rate reflects economic fundamentals, mostly productivity. Evidence shows that, if anything, various measures of productivity in the UK slightly outpace those observed elsewhere. Real interest rate determinants are thus either constant or slightly to the downside.
2. Nominal interest rates are a monetary (and expectations-related) phenomenon. Monetary conditions, as suggested by the slope of the yield curve (actually, inverted) and by the exchange rate, suggest that monetary conditions are not expansionary. Given the fact that a relatively important current account deficit exists (about 3.5% of GDP), a factor excercising force towards to the weak side, the currency´s behavior perhaps even implies quite the contrary....
3. As mentioned by the Governor in his letter, energy prices have a lot to do with the bad outcome observed in March.
4. Conclusion: Monetary tightening, such a manly thing, is responding to temporary one-time relative price swings. The expectations generated by its almost inevitable course, is indeed the leading cause of the accelerating inflation-strenghtening currency paradox.
Macarena´s view: Down the road, “true” inflation will be revealed as being much more in line with fundamentals, i.e much closer to the 2% goal, and pressure will build to lighten up on monetary policy. In Macarena´s view, and she is a contrarian, monetary authorities should take it easy and stay put, instead of acting virile now, and reversing course later, perhaps even this year.
Finance Islamique (Update)
A nice story from the Financial Times tells us that:
In what ministers believe will be an important gesture to Britain’s Muslim community, the Treasury will say Monday that it is paving the way for the launch of the first Sharia compliant UK government bonds by 2008.
Macarena is delighted, of course, but thinks that it is also true that the "gesture" will collect a lot of money for the Treasury. This would, in turn, be a nice gesture on the part of the muslim community (and non-muslims, such as Macarena, who simply loves the thrill) towards the (by then) freshly minted Prime Minister. A guy who in his (by then) former position as Chancellor, was among the first to call attention to the potential this new issue will harness. It will be a success. Good for GB, and good for GB.
In what ministers believe will be an important gesture to Britain’s Muslim community, the Treasury will say Monday that it is paving the way for the launch of the first Sharia compliant UK government bonds by 2008.
Macarena is delighted, of course, but thinks that it is also true that the "gesture" will collect a lot of money for the Treasury. This would, in turn, be a nice gesture on the part of the muslim community (and non-muslims, such as Macarena, who simply loves the thrill) towards the (by then) freshly minted Prime Minister. A guy who in his (by then) former position as Chancellor, was among the first to call attention to the potential this new issue will harness. It will be a success. Good for GB, and good for GB.
21.4.07
Virginia Tech Tragedy: Come On!
Some guy shoots dozens of people in unheard-of , unbelievable, cold blood and then, a couple of days later, the victims and their families have to endure this nonsense on the topic of who is guilty?.
The hideputa, as Macarena and her fellow countrymen put it, is guilty, that´s who. Period.
Not his parents, who worked hard to make a life and a build a future for the family (the hideputa included) it in a tough, sometimes brutal, environment.
Not his peers, who have enough already dealing with their own post-adolescent hardships and challenges and their own competitive, law-abiding, decent and hard lives. Guilty by not "embracing" every crazy looking, 20-something loner, writing "aggresive stuff" that abounds in every university campus in every country of the world?. Come on!
Not his teachers, who have to deal with the substantive issue of molding the next generation of bright young adults out of the primitive, rebellious, difficult, aggresive clay of adolescents whom they are handed over for safe-keeping, while at the same time learning more, publishing more, raising families, managing tough competition the world over.
(Macarena wagers that 99.9% of loner, mean-writing, wry students are not assasins and are as talented and as peaceful (deep down) as the 99.9% of non-assasins in the "normal" community. Do you think, say, Tarantino was an all american apple-pie child? Would you suggest we "embrace" such an extremely talented, guy like him, or just let him "do his thing", as americans so wonderfully put it?)
Not the college administrators whose job it is to keep a major university up and running, competing for an ever increasing standing in a global community, making sure 24/7 that an environment made up of tens of thousands of extremely talented, demanding, individuals, works like a clock.
Not the lack of stiff gun legislation, pieces of paper that constitute the horror of many honest law-abiding citizens who want them, and the laughing stock of the true criminals the world-over. Macarena asks herself: do you seriously think that this hideputa, who puts chains on doors so that nobody escapes, lest he miss someone, would have any trouble finding a gun regardless of what the legislation says? Maybe he would have payed a few dollars more, but, Come on!
Bottom line: Macarena is very upset with all this "embracing" nonsense and with what James Lavergne has called the blame game. A Becker-fan type of girl, she thinks the way forward is punishment. She knows full well that the only thing we can punish at this time is this hideputa´s memory, but she still thinks it is useful.
Macarena is no arquitect, but she suggests that this hideputa´s burial site should be a place where we can all vent our profound ire. A place where some other lonely kid, writing or filming extremely violent stuff as we speak, can sense the anger and the outrage every person in the world feels towards his would-be idol. Think about what would happen if this kid, instead, senses a bunch of baffled idiots blaming everyone but the hideputa..
Morever, if there is an excess demand for "embracing", Macarena thinks we should embrace the victims. The world will never know the full extent of what this hideputa really murdered. A path breaking scientific discovery that would have saved millions of lives? A major work of art? A new way to use technology and cure poverty?. We will never know, but the victims surely fit the profile of the best and the brightest. And this is what we should embrace, because the hideputa has also murdered a piece of all of our futures.
The hideputa, as Macarena and her fellow countrymen put it, is guilty, that´s who. Period.
Not his parents, who worked hard to make a life and a build a future for the family (the hideputa included) it in a tough, sometimes brutal, environment.
Not his peers, who have enough already dealing with their own post-adolescent hardships and challenges and their own competitive, law-abiding, decent and hard lives. Guilty by not "embracing" every crazy looking, 20-something loner, writing "aggresive stuff" that abounds in every university campus in every country of the world?. Come on!
Not his teachers, who have to deal with the substantive issue of molding the next generation of bright young adults out of the primitive, rebellious, difficult, aggresive clay of adolescents whom they are handed over for safe-keeping, while at the same time learning more, publishing more, raising families, managing tough competition the world over.
(Macarena wagers that 99.9% of loner, mean-writing, wry students are not assasins and are as talented and as peaceful (deep down) as the 99.9% of non-assasins in the "normal" community. Do you think, say, Tarantino was an all american apple-pie child? Would you suggest we "embrace" such an extremely talented, guy like him, or just let him "do his thing", as americans so wonderfully put it?)
Not the college administrators whose job it is to keep a major university up and running, competing for an ever increasing standing in a global community, making sure 24/7 that an environment made up of tens of thousands of extremely talented, demanding, individuals, works like a clock.
Not the lack of stiff gun legislation, pieces of paper that constitute the horror of many honest law-abiding citizens who want them, and the laughing stock of the true criminals the world-over. Macarena asks herself: do you seriously think that this hideputa, who puts chains on doors so that nobody escapes, lest he miss someone, would have any trouble finding a gun regardless of what the legislation says? Maybe he would have payed a few dollars more, but, Come on!
Bottom line: Macarena is very upset with all this "embracing" nonsense and with what James Lavergne has called the blame game. A Becker-fan type of girl, she thinks the way forward is punishment. She knows full well that the only thing we can punish at this time is this hideputa´s memory, but she still thinks it is useful.
Macarena is no arquitect, but she suggests that this hideputa´s burial site should be a place where we can all vent our profound ire. A place where some other lonely kid, writing or filming extremely violent stuff as we speak, can sense the anger and the outrage every person in the world feels towards his would-be idol. Think about what would happen if this kid, instead, senses a bunch of baffled idiots blaming everyone but the hideputa..
Morever, if there is an excess demand for "embracing", Macarena thinks we should embrace the victims. The world will never know the full extent of what this hideputa really murdered. A path breaking scientific discovery that would have saved millions of lives? A major work of art? A new way to use technology and cure poverty?. We will never know, but the victims surely fit the profile of the best and the brightest. And this is what we should embrace, because the hideputa has also murdered a piece of all of our futures.
So Sorry
With this euro apreciation thing, Macarena has been simply too busy indulging, so her posting has suffered lately. She is so sorry.
In fact, while she was in New York, as part of her Currency Appreciation Holiday, she was identified as a British citizen . Outrageous.
In fact, while she was in New York, as part of her Currency Appreciation Holiday, she was identified as a British citizen . Outrageous.
2.4.07
Foucault and his Bla-Blas meet Germany
The conventional wisdom regarding the Eurozone economy runs something like the conventional wisdom regarding all things in the 50-and-over category. Muscles and nerves do begin to suffer the all too notorious signs of age.
The specifics upon which the CW rests: In Europe the obstinate rigidity of vested interests imposes itself insurmountable as a barrier to progress. Her costly welfare-state, high labor costs, sky-high tax-rates and monstrous bureaucratic red tape, seriously affect her ability to face two specific challenges: those derived from a rapidly aging population and those derived from globalization.
This is all quite true, but Macarena finds the endless digression on the part of the structurally pessimistic and the chic-skeptics quite boring and extremely pointless. They have said nothing new in years and have not been able to convince anybody to actually go ahead and…… do it, as Michael Jordan used to say.
At a younger age, she used to feel the same way about this now-prehistoric band of guys ---Foucault and his bla-blas--- whom she was inhumanely forced into reading.
Anyway, rather than insist on the largely-obvious, it seem interesting to reflect about one very significant caveat that is in order. Let us run through a few facts.
First, wage restraint has been a very important part of the recent German story, and by “recent” I don’t mean a year or two, but a decade or so. In cumulative terms, relative (nominal) wages in the rest of the Eurozone have increased by 8.5% with respect to Germany, while relative consumer prices have increased by about 6%.
Secondly, and this not surprising, since 1999, Germany’s exports, measured in terms of volume, have increased by more than 50%. The runner-up in Europe, Macarena is happy to say, is Spain where the increase is under 30%.
Thirdly, Germany outperformed the region in 2006 and any reasonable assessment must attribute much of this to productivity gains. After all, everybody did experience the same global cycle, eh?. 2007, on the other hand, has begun quite well, thank you very much. The Federal Statistics Office estimated Q4 growth at 3.7%, led by a continued surge in investment, while unemployment continued to fall in 07QI.
Fourth, perhaps more importantly, Germany is in the midst of the most interesting and dynamic economic reform debate in any advanced economy. A tax package that includes a significant 3-point increase in the VAT (from 16% to 19%), is in place since January, and the cabinet has given the go-ahead for a significant reduction in the corporate tax, from 38.5% to under 30%, expectations are that it will clear the Congress by July.
Of course, one must bear in mind a thing or two.
A thing: Hourly labor costs, at around €30, are still among the highest in the world and generate what Hans Werner Sinn has interestingly termed “Bazaar Economy” effect: value added by the booming export sector is rising by less than exports as a whole, as value-generating jobs all along the productive process that ultimately lead to an export item are outsourced to countries like Poland, where hourly labor costs are €5 instead of €30. There is little doubt that failing to push forward the de-facto labor reform taking place during the last decade, let alone reversing it, would be a terrible blow.
Likewise, the corporate tax reform still has to undergo congressional debate and observers, interested in the likely effect on future investment, must keep an eye on the outcome regarding the effective marginal corporate rate, rather than the headline-grabbing nominal rate. The elimination of interest-payment deductions not only compensates the favorable competitiveness effect of the rate reduction, but can also distort investment-financing decisions in dangerous ways.
Bottom line: Europe has been deservedly criticized for her economic complacency and rigidity, a troubling burden to carry when you have a lot of debt, when you are aging, and when you are part of an increasingly integrated world.
Germany has, for the last ten years, and increasingly so, lived a reform process, notably in the labor market but also in other areas, which gives ample reason to conclude that, even at 50, and despite the aches, the pains, and the delayed gratification, it is not too late for anything. Rather than mock the still-prominent tummy of a determined and disciplined middle-ager, who began to work out at 40, we should be figuring out ways to convince the truly sclerotic to throw out all the Foucault bla-bla band-type nonsense, get out there, and…… do the same.
The specifics upon which the CW rests: In Europe the obstinate rigidity of vested interests imposes itself insurmountable as a barrier to progress. Her costly welfare-state, high labor costs, sky-high tax-rates and monstrous bureaucratic red tape, seriously affect her ability to face two specific challenges: those derived from a rapidly aging population and those derived from globalization.
This is all quite true, but Macarena finds the endless digression on the part of the structurally pessimistic and the chic-skeptics quite boring and extremely pointless. They have said nothing new in years and have not been able to convince anybody to actually go ahead and…… do it, as Michael Jordan used to say.
At a younger age, she used to feel the same way about this now-prehistoric band of guys ---Foucault and his bla-blas--- whom she was inhumanely forced into reading.
Anyway, rather than insist on the largely-obvious, it seem interesting to reflect about one very significant caveat that is in order. Let us run through a few facts.
First, wage restraint has been a very important part of the recent German story, and by “recent” I don’t mean a year or two, but a decade or so. In cumulative terms, relative (nominal) wages in the rest of the Eurozone have increased by 8.5% with respect to Germany, while relative consumer prices have increased by about 6%.
Secondly, and this not surprising, since 1999, Germany’s exports, measured in terms of volume, have increased by more than 50%. The runner-up in Europe, Macarena is happy to say, is Spain where the increase is under 30%.
Thirdly, Germany outperformed the region in 2006 and any reasonable assessment must attribute much of this to productivity gains. After all, everybody did experience the same global cycle, eh?. 2007, on the other hand, has begun quite well, thank you very much. The Federal Statistics Office estimated Q4 growth at 3.7%, led by a continued surge in investment, while unemployment continued to fall in 07QI.
Fourth, perhaps more importantly, Germany is in the midst of the most interesting and dynamic economic reform debate in any advanced economy. A tax package that includes a significant 3-point increase in the VAT (from 16% to 19%), is in place since January, and the cabinet has given the go-ahead for a significant reduction in the corporate tax, from 38.5% to under 30%, expectations are that it will clear the Congress by July.
Of course, one must bear in mind a thing or two.
A thing: Hourly labor costs, at around €30, are still among the highest in the world and generate what Hans Werner Sinn has interestingly termed “Bazaar Economy” effect: value added by the booming export sector is rising by less than exports as a whole, as value-generating jobs all along the productive process that ultimately lead to an export item are outsourced to countries like Poland, where hourly labor costs are €5 instead of €30. There is little doubt that failing to push forward the de-facto labor reform taking place during the last decade, let alone reversing it, would be a terrible blow.
Likewise, the corporate tax reform still has to undergo congressional debate and observers, interested in the likely effect on future investment, must keep an eye on the outcome regarding the effective marginal corporate rate, rather than the headline-grabbing nominal rate. The elimination of interest-payment deductions not only compensates the favorable competitiveness effect of the rate reduction, but can also distort investment-financing decisions in dangerous ways.
Bottom line: Europe has been deservedly criticized for her economic complacency and rigidity, a troubling burden to carry when you have a lot of debt, when you are aging, and when you are part of an increasingly integrated world.
Germany has, for the last ten years, and increasingly so, lived a reform process, notably in the labor market but also in other areas, which gives ample reason to conclude that, even at 50, and despite the aches, the pains, and the delayed gratification, it is not too late for anything. Rather than mock the still-prominent tummy of a determined and disciplined middle-ager, who began to work out at 40, we should be figuring out ways to convince the truly sclerotic to throw out all the Foucault bla-bla band-type nonsense, get out there, and…… do the same.
31.3.07
La Finance Islamique en Plein Boom
Macarena can only wish she was clever enough to come up with a title like that. It actually comes from a September issue of Le Figaro, which caught her attention. Le Figaro, let us put it mildly, is not exactly your average pro-business journal catering to your average pro-business society.
Why come up with a thing like that? Well, islamic finance is generating more than a great deal of, sorry about the word, interest, among many big league players. Gordon Brown, for one, wants London to be the center for them, while estimates put the specifics at, say, US$500 billion.
As told in one of Macarena´s favorite stories in a long, long time:
Oil prices and religious fervor are both on the rise again. This time, Western financial firms have noticed that you don’t have to be Islamic to bank in accordance with sharia. All you need is a board of religious scholars to approve your operation. Muslim is as Muslim does.
Think about it. You really think the profit motive cannot work miracles?
Why come up with a thing like that? Well, islamic finance is generating more than a great deal of, sorry about the word, interest, among many big league players. Gordon Brown, for one, wants London to be the center for them, while estimates put the specifics at, say, US$500 billion.
As told in one of Macarena´s favorite stories in a long, long time:
Oil prices and religious fervor are both on the rise again. This time, Western financial firms have noticed that you don’t have to be Islamic to bank in accordance with sharia. All you need is a board of religious scholars to approve your operation. Muslim is as Muslim does.
Think about it. You really think the profit motive cannot work miracles?
30.3.07
Inflation in Venezuela: A Country Girl at Heart
According to Banco Central de Venezuela (BCV), consumer Inflation in the Caracas Metropolitan Area, reached 20.4% yoy in February (latest available!!), whilst producer prices increased 18.6%. Moreover, the data suggests that inflation seems to be accelerating in the Bolivarian Republic.
Her Venezuelan-economist friends, a lovely bunch of very funny guys, tell Macarena that very few people are now betting against the odds that we will, again, see their motherland experiencing inflation of 30% or more, come December.
Macarena, a simple country-girl at heart, thinks that inflation might have something to do with money. The data is quiet clear on this issue: the stock of high-powered money doubled between early 2006 and early 2007, from B21.7 billion, to B43.6 billion.
So, the question is: what on earth did the BCV buy with all these freshly minted Bolivares?. Not too surprisingly, the answer is: U.S Dollars. BCV bought foreign currency big-time: B16.3 billion, or about 75% of the initial monetary base.
Other interesting things happened: PDVSA monetized much of its initial deposits in the BCV, adding about one more billion to the bonfire, while the BCV played some interesting games: credit outstanding did decrease, but, alas, net worth was diminished by the exact amount. Lastly, a very interesting “other net accounts” (might that have a thing or two to do with central bank credit?) added about B5 billion to the money supply.
Macarena is anxious to hear the forthcoming Chavonomics on the delicate issue of accelerating inflation. She refuses to accept the idea that all we will see are the traditional price controls, export prohibitions, taxpayer enhanced public utilities and so forth. No sir. Chavismo is much more imaginative than that. How about making barter a cornerstone of the revolution?. There´s a country-girl thought: no money, no inflation!!
Her Venezuelan-economist friends, a lovely bunch of very funny guys, tell Macarena that very few people are now betting against the odds that we will, again, see their motherland experiencing inflation of 30% or more, come December.
Macarena, a simple country-girl at heart, thinks that inflation might have something to do with money. The data is quiet clear on this issue: the stock of high-powered money doubled between early 2006 and early 2007, from B21.7 billion, to B43.6 billion.
So, the question is: what on earth did the BCV buy with all these freshly minted Bolivares?. Not too surprisingly, the answer is: U.S Dollars. BCV bought foreign currency big-time: B16.3 billion, or about 75% of the initial monetary base.
Other interesting things happened: PDVSA monetized much of its initial deposits in the BCV, adding about one more billion to the bonfire, while the BCV played some interesting games: credit outstanding did decrease, but, alas, net worth was diminished by the exact amount. Lastly, a very interesting “other net accounts” (might that have a thing or two to do with central bank credit?) added about B5 billion to the money supply.
Macarena is anxious to hear the forthcoming Chavonomics on the delicate issue of accelerating inflation. She refuses to accept the idea that all we will see are the traditional price controls, export prohibitions, taxpayer enhanced public utilities and so forth. No sir. Chavismo is much more imaginative than that. How about making barter a cornerstone of the revolution?. There´s a country-girl thought: no money, no inflation!!
28.3.07
Peruvian Pensions: Principles as Taxes?
The Peruvian congress has approved, and President Alan Garcia has signed into law, the so-called “Free Separation” Libre Desafiliación pension reform. The basic point: Peruvians who, as late as 1995, migrated themselves to the private fully-funded system, can go back to the public defined-benefits system, beginning next August, pending a 3-month waiting period. The bill has other components, such a guaranteed minimum private pension, but, alas, let us think about one thing at a a time.
President García could not be happier. Macarena, a fan of all things virile, was especially thrilled by the following phrase: “(…) one can make economic estimates, one can make actuarial estimates, but principles will not be sacrificed” (see here). Bravo, big guy!! she applauded avidly.
But then, as usual, she composed herself. The Peruvian system, set up in 1993, combines a public defined-benefits network (SNP), along with a private defined-contributions system (SPP), currently operated by four pension fund administrators, AFP.
Until the new law, any worker could migrate from SNP to SPP, and could also move within SPP from one operator to another. But, wisely, thinks Macarena, no-one could migrate back from SPP to SNP. The total potential number of affiliates who could now migrate back to SNP has been estimated at 600 thousand, about 15% of total membership.
This is a bad thing for many reasons, chiefly because Macarena, for one, would migrate only if the defined benefits to which she moves, add some taxpayer money to her defined contributions. Otherwise she would not trouble herself with all the paperwork. By definition, then, all migration amounts to a claim on future taxpayers, the size of which depends on the difference between the defined benefit and the market value of savings.
On the other hand, as assets from migrating accounts are transferred back to the Government, a debt write down will immediately occur, stemming from the fact that the debt is no longer held by the public. This, of course, simply shifts the denomination of a future claim, held by the affiliate who migrated in the first place, from an explicit piece of paper, to an implicit –equally binding-- defined benefit.
The main point: a new tax has been created. This simple point, Macarena thinks, is the exact, mundane, meaning of what President Garcia much more thrillingly, described the “principles that will not be sacrificed”. Certainly the right to tax ranks up there with the best of them!!
President García could not be happier. Macarena, a fan of all things virile, was especially thrilled by the following phrase: “(…) one can make economic estimates, one can make actuarial estimates, but principles will not be sacrificed” (see here). Bravo, big guy!! she applauded avidly.
But then, as usual, she composed herself. The Peruvian system, set up in 1993, combines a public defined-benefits network (SNP), along with a private defined-contributions system (SPP), currently operated by four pension fund administrators, AFP.
Until the new law, any worker could migrate from SNP to SPP, and could also move within SPP from one operator to another. But, wisely, thinks Macarena, no-one could migrate back from SPP to SNP. The total potential number of affiliates who could now migrate back to SNP has been estimated at 600 thousand, about 15% of total membership.
This is a bad thing for many reasons, chiefly because Macarena, for one, would migrate only if the defined benefits to which she moves, add some taxpayer money to her defined contributions. Otherwise she would not trouble herself with all the paperwork. By definition, then, all migration amounts to a claim on future taxpayers, the size of which depends on the difference between the defined benefit and the market value of savings.
On the other hand, as assets from migrating accounts are transferred back to the Government, a debt write down will immediately occur, stemming from the fact that the debt is no longer held by the public. This, of course, simply shifts the denomination of a future claim, held by the affiliate who migrated in the first place, from an explicit piece of paper, to an implicit –equally binding-- defined benefit.
The main point: a new tax has been created. This simple point, Macarena thinks, is the exact, mundane, meaning of what President Garcia much more thrillingly, described the “principles that will not be sacrificed”. Certainly the right to tax ranks up there with the best of them!!
27.3.07
Global Imbalances: The Adult Within Her
Macarena is not one to miss a chance to revive the joys of her fairy-tale childhood. So she is only too happy about the way grown up guys argue on whether the economy is “Goldilocks” , “Three Bears” or whatever…. So much more satisfying than the “hard landing” , “soft landing” nonsense…. Macarena and her girlfriends, let me tell you, are fed up with the hard/soft dichotomy!!
Anyway, a few recent papers have sharpened the adult within her, spoiled her fun, and put her in the ever so boring “thoughtful” mode. Instead of something like the Cinderella economy, or the tic-tac-toe carry-trade, which she has been toying with, along comes a mature, suggestive, concept like…. (gulp)… Asset Shortage.
Global imbalances, along with other established stylized facts of the last few years, you see, can be usefully thought of as market solutions to problems that have roots much deeper than the stupidity routinely attributed to policy practitioners by desk-top Monday morning quarterbacks. Namely, the fact that asset demand has been growing at a very strong rate, while asset supply has been constrained by a combination of institutional limitations, and changing fiscal realities..
Demand is growing strongly. Among other reasons, the current account surplus in many countries, (i.e what Chairman Bernanke has dubbed “savings gluts”), the need to collateralize and diversify the enormous credit risks originated in the last few years, the need to match the ageing process and other demographic realities with specific financial instruments, and so on.
Supply, on the other hand, is insufficient overall, because not all potential issuers are credible enough to play in the big leagues. Why does your typical central bank demand such a narrow set of asset classes when investing reserves? Sure, there are many compelling reasons, please don’t bother to list them. But think hard about these reasons. Would it not make sense for the Reserve Bank of India to invest its reserves in Infrastructure projects instead of U.S Treasury bills, as has recently been proposed?
The reason why the Indian proposal was received with such yawn among the knowledgeable are understandable: claims on investment projects are a poor support for the Rupee, period. There are serious operational and technological limitations in the development of the market in which a potential claim on infrastructure cash flows would trade. There are liquidity limitations that might seriously affect the reserve management strategy implemented by the RBI. There are sovereign risk considerations. And so on and so on. Many more savers, aside from the RBI, will also prefer assets issued by the U.S Treasury over assets issued by the Indian Infrastructure Fund, and will do so for similar reasons. Important investment projects continue to fail in delivering the type of financial claims required by big leaguers, like the RBI, despite having very promising cash flows.
Supply is also below requirements for another reason: the recent fiscal adjustment in many economies. We are now used to governments routinely announcing lower deficits, yet another debt buyback, and so on. Policy observers the world over, ever more stern in their calls for fiscal muscle, have seemingly not noticed that, according to a recent estimation, the total stock of sovereign debt outstanding has been constant, at about 75% of GDP, since 1996. In other words, not only is there an institutional constraint hindering admission to the big leagues, but also a reluctance to issue within the middle and even the little leagues.
When coupled with the development of global financial markets of the last decade, a fascinating process which has implied a surge in the demand for more and for ever more diverse assets, this mature, very adult, supply-shortage story makes enormous sense to Macarena. She is now trying to figure out a cute way to call it. How does “Gilligan’s Island economy” sound?
Anyway, a few recent papers have sharpened the adult within her, spoiled her fun, and put her in the ever so boring “thoughtful” mode. Instead of something like the Cinderella economy, or the tic-tac-toe carry-trade, which she has been toying with, along comes a mature, suggestive, concept like…. (gulp)… Asset Shortage.
Global imbalances, along with other established stylized facts of the last few years, you see, can be usefully thought of as market solutions to problems that have roots much deeper than the stupidity routinely attributed to policy practitioners by desk-top Monday morning quarterbacks. Namely, the fact that asset demand has been growing at a very strong rate, while asset supply has been constrained by a combination of institutional limitations, and changing fiscal realities..
Demand is growing strongly. Among other reasons, the current account surplus in many countries, (i.e what Chairman Bernanke has dubbed “savings gluts”), the need to collateralize and diversify the enormous credit risks originated in the last few years, the need to match the ageing process and other demographic realities with specific financial instruments, and so on.
Supply, on the other hand, is insufficient overall, because not all potential issuers are credible enough to play in the big leagues. Why does your typical central bank demand such a narrow set of asset classes when investing reserves? Sure, there are many compelling reasons, please don’t bother to list them. But think hard about these reasons. Would it not make sense for the Reserve Bank of India to invest its reserves in Infrastructure projects instead of U.S Treasury bills, as has recently been proposed?
The reason why the Indian proposal was received with such yawn among the knowledgeable are understandable: claims on investment projects are a poor support for the Rupee, period. There are serious operational and technological limitations in the development of the market in which a potential claim on infrastructure cash flows would trade. There are liquidity limitations that might seriously affect the reserve management strategy implemented by the RBI. There are sovereign risk considerations. And so on and so on. Many more savers, aside from the RBI, will also prefer assets issued by the U.S Treasury over assets issued by the Indian Infrastructure Fund, and will do so for similar reasons. Important investment projects continue to fail in delivering the type of financial claims required by big leaguers, like the RBI, despite having very promising cash flows.
Supply is also below requirements for another reason: the recent fiscal adjustment in many economies. We are now used to governments routinely announcing lower deficits, yet another debt buyback, and so on. Policy observers the world over, ever more stern in their calls for fiscal muscle, have seemingly not noticed that, according to a recent estimation, the total stock of sovereign debt outstanding has been constant, at about 75% of GDP, since 1996. In other words, not only is there an institutional constraint hindering admission to the big leagues, but also a reluctance to issue within the middle and even the little leagues.
When coupled with the development of global financial markets of the last decade, a fascinating process which has implied a surge in the demand for more and for ever more diverse assets, this mature, very adult, supply-shortage story makes enormous sense to Macarena. She is now trying to figure out a cute way to call it. How does “Gilligan’s Island economy” sound?
25.3.07
Spain: Current Account Lamentos ?
According to Banco de España, the current account deficit in Spain increased from €66 billon in 2005, to €86 billion in 2006, or from 7.3% to 8.8% of GDP. Surely there must be something horribly wrong here… or is there?
Macarena always counts on doomsayer-extraordinaire, Nouriel Roubini, to eloquently run her through the many reasons why almost any financial number in any corner of the world is a sure sign of imminent crisis. The Spanish external deficit surely must have merited some catastrophic prediction. Surely enough, about one year ago, Roubini suggested that Macarena´s native Spain (along with, inter-alia, the U.S and Australia) was a leading candidate to be “the next Iceland”. Reasons? His usual, the world-over: housing-bubble-credit-boom and…….. current account deficit.
In the year since, the current account deficit has grown, while interest rates (where investor fears should show up quickly) have remained exactly where they stood, vis-à-vis the rest of the region, proving that there were no Spain-Specific fears appearing during the last year or so, despite the fact that Nouriel´s usual suspects showed little in the way of turning around.
As a member of a currency union, and with about 75% of her total trade being within the union, Spanish authorities lack recourse to a perennial favorite adjustment strategy: nominal devaluation of the currency. With a fiscal surplus, and huge practical political difficulties to push it further up, it also lacks the ability to adjust via fiscal retrenchment. What is left? Structural reform, meaning labor market flexibility and wage moderation (to enhance competitiveness). After all, since 1995, unit labor costs have risen 21% with respect to the rest of the region. This, of course, is a prominent member of the predictable "easier-said-than-done" family of advice that philosophers rutinely (and not always costlessly) offer practioners. In any case it takes time, plenty of it, and if the process takes place in good international times, with ample global willingness to finance external deficits, then the right choice is not to make a choice. That is, never be cornered into the "either-or" dialectics, so typical of inmature men and zealous ideologues. One does not have to choose between structural reform and external financing: i.e, there is no serious reason to give up external funds and higher growth, through virile, manly, fiscal retrenchment, while structural reform proceeds at a politically feasible and sustainable path.
It is of course trivially true that a world in which nobody runs external deficits, where credit grows at exactly the same rate as the economy as a whole, and where asset prices move in line with consumer prices, we would be “safer” than the real world in which large external imbalances and important asset–price booms are usual occurences, some with dire consequences. This "safer" world will also be a world in which growth, in many countries, would be lower than has been the case. In the case of Spain, growth has been linked with external finanancing, along with strong immigration trends and a very competitive banking sector.
Macarena always sees many reasons to worry herself (she did, after all, study a bit of dismal science), but as a woman who has seen a thing or two, feels little per-se despair when a country runs sizeable external deficits. In the case of her own country, Macarena simply lacks the nerve to conclude that the risks associated with having the highest external deficit in the region, have outweighed --or do, at present, outweigh--- the benefits of having one of its the strongest growth rates.
Macarena always counts on doomsayer-extraordinaire, Nouriel Roubini, to eloquently run her through the many reasons why almost any financial number in any corner of the world is a sure sign of imminent crisis. The Spanish external deficit surely must have merited some catastrophic prediction. Surely enough, about one year ago, Roubini suggested that Macarena´s native Spain (along with, inter-alia, the U.S and Australia) was a leading candidate to be “the next Iceland”. Reasons? His usual, the world-over: housing-bubble-credit-boom and…….. current account deficit.
In the year since, the current account deficit has grown, while interest rates (where investor fears should show up quickly) have remained exactly where they stood, vis-à-vis the rest of the region, proving that there were no Spain-Specific fears appearing during the last year or so, despite the fact that Nouriel´s usual suspects showed little in the way of turning around.
As a member of a currency union, and with about 75% of her total trade being within the union, Spanish authorities lack recourse to a perennial favorite adjustment strategy: nominal devaluation of the currency. With a fiscal surplus, and huge practical political difficulties to push it further up, it also lacks the ability to adjust via fiscal retrenchment. What is left? Structural reform, meaning labor market flexibility and wage moderation (to enhance competitiveness). After all, since 1995, unit labor costs have risen 21% with respect to the rest of the region. This, of course, is a prominent member of the predictable "easier-said-than-done" family of advice that philosophers rutinely (and not always costlessly) offer practioners. In any case it takes time, plenty of it, and if the process takes place in good international times, with ample global willingness to finance external deficits, then the right choice is not to make a choice. That is, never be cornered into the "either-or" dialectics, so typical of inmature men and zealous ideologues. One does not have to choose between structural reform and external financing: i.e, there is no serious reason to give up external funds and higher growth, through virile, manly, fiscal retrenchment, while structural reform proceeds at a politically feasible and sustainable path.
It is of course trivially true that a world in which nobody runs external deficits, where credit grows at exactly the same rate as the economy as a whole, and where asset prices move in line with consumer prices, we would be “safer” than the real world in which large external imbalances and important asset–price booms are usual occurences, some with dire consequences. This "safer" world will also be a world in which growth, in many countries, would be lower than has been the case. In the case of Spain, growth has been linked with external finanancing, along with strong immigration trends and a very competitive banking sector.
Macarena always sees many reasons to worry herself (she did, after all, study a bit of dismal science), but as a woman who has seen a thing or two, feels little per-se despair when a country runs sizeable external deficits. In the case of her own country, Macarena simply lacks the nerve to conclude that the risks associated with having the highest external deficit in the region, have outweighed --or do, at present, outweigh--- the benefits of having one of its the strongest growth rates.
23.3.07
Growth in Argentina: Tango del Rebound
Argentina’s recent growth performance has produced an air of confidence and excitement which, among other things, has positioned President Kirchner, with a current 70% approval rate, as a very secure bet to win the October elections. The most recent polls indeed reveal that he would beat former minister Roberto Lavagna, now in second place, by a landslide 56%-17%. Not to talk of the other guys.
It also suggests an important question: Those things that were said, circa 2002, regarding the horrors to befall a nation opting for default, just plain nonsense?
Data are quite clear in showing that as of 2006, GDP per capita is about the same that it was in 1998, before the recession. And, one must begin any discussion by acknowledging that this is much better than expected by all commentators... M. included… :(
But it is also a very sobering number. And sets the tone for the really important questions: are current trends sustainable? Or will Argentina return to its century-old tradition of disappointing us optimists?
The way economist friends tell Macarena to think through this hard question is by examining the sources of growth (investment in physical and human capital and productivity, they call it) in an explicit fashion and then to “model their various interactions”. WOW.
Lacking the patience & skills needed to embark in such endeavor, and preferring to spend that time by the pool sipping Jerez and flirting with handsome andaluces, Macarena finds it very useful to see what others are finding.
A nice paper was produced some months ago by Carlos Zarazaga, at the Dallas Fed.
His conclusions: Number one: a strictly constructed real business cycle (RBC) model, calibrated with Argentinean data, is consistent with the view that the stellar 2002-05 performance is simply a rebound from the deep recession that preceded it. There is no evidence that this performance is linked to structural change in productivity.
Number two: much more interestingly: Carlos’ model predicts that GDP per working age population should have increased by 35% in 2002-05, whereas in reality the number was much lower: 23%.
In other words, the view that we are witnessing an exciting new structural trend is wrong. The truth is (gulp)....... Argentina may well be underperforming.
It also suggests an important question: Those things that were said, circa 2002, regarding the horrors to befall a nation opting for default, just plain nonsense?
Data are quite clear in showing that as of 2006, GDP per capita is about the same that it was in 1998, before the recession. And, one must begin any discussion by acknowledging that this is much better than expected by all commentators... M. included… :(
But it is also a very sobering number. And sets the tone for the really important questions: are current trends sustainable? Or will Argentina return to its century-old tradition of disappointing us optimists?
The way economist friends tell Macarena to think through this hard question is by examining the sources of growth (investment in physical and human capital and productivity, they call it) in an explicit fashion and then to “model their various interactions”. WOW.
Lacking the patience & skills needed to embark in such endeavor, and preferring to spend that time by the pool sipping Jerez and flirting with handsome andaluces, Macarena finds it very useful to see what others are finding.
A nice paper was produced some months ago by Carlos Zarazaga, at the Dallas Fed.
His conclusions: Number one: a strictly constructed real business cycle (RBC) model, calibrated with Argentinean data, is consistent with the view that the stellar 2002-05 performance is simply a rebound from the deep recession that preceded it. There is no evidence that this performance is linked to structural change in productivity.
Number two: much more interestingly: Carlos’ model predicts that GDP per working age population should have increased by 35% in 2002-05, whereas in reality the number was much lower: 23%.
In other words, the view that we are witnessing an exciting new structural trend is wrong. The truth is (gulp)....... Argentina may well be underperforming.
Deja-Vu from the Baltics?
Macarena is --like-- SO interested in recent data from the baltic countries. In Latvia, for instance, real growth in 2006 was 12%, while the current account deficit was 21% of GDP.
If you think that is interesting, take a look at policy. Investors are obviously concerned (even the rating agencies, WOW, have "warned" about overheating) and there is very strong pressure on the lat (the local currency), which is pegged to the Euro within a narrow band of 1%. The peg, Macarena notes, is quite firm: international reserves more than double the monetary base at current exchange rates.
Last week, the central bank raised interest rates to 5.5% (Macarena finds this almost too cute, inflation is well above 6%) seeking a signal that might strenghten credibility.
This reminds Macarena of worrisome times. Deja-vu all over again, as the great Yogi Berra once said. Most recently, macro adjustment in little Iceland (population: 500,000) caused significant global turmoil. More dramatically, and much less recently, Macarena remembers Thailand 10 years ago. The baht devaluation generated a chain reaction which affected everybody.
Though Latvia is an extreme case, Macarena invites you to take a look at, and to think about, recent data from Lithuania and Estonia, where things are less dramatic, but equally directed and poignant.
Macarena thinks that the links between the baltic-country credit boom and the foreign banks that have provided their ammunition is a serious problem, much more serious, say, than the U.S sub prime mortgage market drama.
If you think that is interesting, take a look at policy. Investors are obviously concerned (even the rating agencies, WOW, have "warned" about overheating) and there is very strong pressure on the lat (the local currency), which is pegged to the Euro within a narrow band of 1%. The peg, Macarena notes, is quite firm: international reserves more than double the monetary base at current exchange rates.
Last week, the central bank raised interest rates to 5.5% (Macarena finds this almost too cute, inflation is well above 6%) seeking a signal that might strenghten credibility.
This reminds Macarena of worrisome times. Deja-vu all over again, as the great Yogi Berra once said. Most recently, macro adjustment in little Iceland (population: 500,000) caused significant global turmoil. More dramatically, and much less recently, Macarena remembers Thailand 10 years ago. The baht devaluation generated a chain reaction which affected everybody.
Though Latvia is an extreme case, Macarena invites you to take a look at, and to think about, recent data from Lithuania and Estonia, where things are less dramatic, but equally directed and poignant.
Macarena thinks that the links between the baltic-country credit boom and the foreign banks that have provided their ammunition is a serious problem, much more serious, say, than the U.S sub prime mortgage market drama.
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