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?
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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