Monday, August 27, 2007

Playing the Market, Kenyan Style

. Monday, August 27, 2007
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The Washington Post has an interesting piece on the current enthusiasm for the stock market in Kenya. Of particular interest is the discussion of how the development of the stock market required a reorientation in the way people think about investment. In the past, investment meant buying a cow or some land; now investment means buying a stock certificate. One has obvious value; the other has value that is somewhat less obvious to new participants.

The article fails to delve deeply into possible problems--how well regulated is the market? How much fraud? Seems like these are important questions that, in the context of a country with a known record of corruption, one might want to think about prior to purchasing stocks (at least in the secondary market).

Isn't it Ironic...

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Is Mugabe practicing irony, or is this for real?

Thursday, August 23, 2007

Zimbabwe Update

. Thursday, August 23, 2007
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Inflation hits 7,638%

China's Growing Presence in Africa

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The New York Times had an interesting article on China's growing economic involvement in sub-Saharan Africa. The piece is somewhat successful in portraying the differing perspectives on China's investment and exports--some see it as imperialism with a Chinese rather than western face; others see it as an important alternative to the west that will promote economic development.

“There is no doubt China has been good for Zambia,” said Felix Mutati, Zambia’s minister of finance. “Why should we have a bad attitude toward the Chinese when they are doing all the right things? They are bringing investment, world-class technology, jobs, value addition. What more can you ask for?”

“Who is winning? The Chinese are, for sure,” said Michael Sata, a Zambian opposition politician who campaigned in last year’s presidential election on an anti-China platform. “Their interest is exploiting us, just like everyone who came before,” he said. “They have simply come to take the place of the West as the new colonizers of Africa.”

Dubai Seeks to Monopolize Gambling

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Last time they tried to take over our ports. This time they target our casinos. In addition, "Dubai World this month signed an agreement for control of the Barneys New York department store. A division of Dubai World spent $100 million this year to buy the QE2, the majestic ocean liner that has carried millions of people across the Atlantic during its 40-year history."

Oh, and by the way, this is a sovereign wealth fund.

Tuesday, August 21, 2007

Sovereign Wealth Funds

. Tuesday, August 21, 2007
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The Times has an interesting article on emerging Bush administration efforts to encourage global codes of conduct to govern the activities of so-called sovereign wealth funds. These funds, which are government controlled funds, are estimated to control about $2.5 trillion in assets. They purchase a range of fixed assets, including real estate and companies--thus transforming financial and somewhat liquid assets into fixed investments. As many of the funds come from holdings of U.S. treasury notes, these transactions also reduce foreign holdings of U.S. government debt.

Apparently, some administration officials worry that these government-controlled investment funds are insufficiently transparent given the size of the assets they control. Hence, they are pressuring the IMF and World Bank to develop codes of conduct to encourage greater transparency in the funds' investment decisions.

Friday, August 17, 2007

Your Move Now, Jean-Claude

. Friday, August 17, 2007
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Now that the Ben cut the discount rate by a half point (after adding liquidity to keep the federal funds rate from rising), the European Central Bank must decide whether it wants to keep on course to raise its rate. "The bank's president, Jean-Claude Trichet, hinted earlier this month that he would lift interest rates again to cool inflation from an expanding economy, a stance he appeared to reaffirm earlier this week by declaring that the period of recent financial market turmoil was largely over."

Monetary interdependence could make this interesting, not least because rising rates in Euroland and falling rates in the U.S. may push the euro up against the dollar, thereby sparking more pressure from Sarkozy...

Thursday, August 16, 2007

Claiming

. Thursday, August 16, 2007
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Technorati Profile

Take a Pill

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Valium, that is. "Taking aim at opponents who say he is assuming too much power, Chávez said, "I recommend they take a pill, what do they call it, a Valium."

The remark came as Chavez announced his intention to alter the Venezuelan constitution to remove term limits.

His other proposals include reducing the working day to six hours, easing restrictions on the government's ability to nationalize industries, and reasserting government control over the Venezuelan central bank

In other news about autocrats' economic policies, Mugabe's Zimbabwe draws ever closer to chaos. "Official inflation is given as 4,500 percent, the highest in the world, but independent estimates put it closer to 9,000 percent." The price controls that Mugabe imposed have emptied shops of goods as people find it unprofitable to produce anything at the price the government deems reasonable.

Not that Mugabe is unconcerned about the crisis: "I would like to invite our true and genuine friends to join hands with us in investing in the abundant natural resources of this country," Mugabe said at a ceremony to mark Defence Forces Day. Apparently not appreciating the irony, he noted that "The security and safety of their investments is guaranteed by the professionalism and loyalty of our defence forces."

Tuesday, August 7, 2007

Vacation

. Tuesday, August 7, 2007
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I'm heading north for a week in Fletcher, Vermont to escape this unbearable heat (forecast of 105 tomorrow). There is no internet access where I will be staying, so no posts until the middle of next week.

Monday, August 6, 2007

Dems and Trade

. Monday, August 6, 2007
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Democrats dither, according to David Ignatius, who asks some important questions we might all usefully ponder as we head toward 2008.

"Are today's Democrats a party of open markets and economic development, or of market restrictions and job protection?

The answer is that leading Democrats seem to want both -- they favor economic development overseas but not at the cost of U.S. jobs."

Okay, we all want to have our cake and eat it too. The question is, when it comes time to make a decision, what do they do? They dither:

"Democratic leaders in Congress say they may bring trade agreements with Panama and Peru up for a vote this fall, after gaining concessions on workers' rights and the environment. As for the Colombia agreement, it appears dead for this year. The Democratic presidential candidates, meanwhile, are scurrying to follow the party's base, rather than trying to lead it, on trade. The Democrats want to turn a page, but in the case of Latin America, they may be turning it backward."

Sunday, August 5, 2007

Draining the Wine Lake

. Sunday, August 5, 2007
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I don't know why I am on this wine theme, but... The EU is striving to reduce the surplus wine ("the wine surplus for the whole of the EU could hit 24.8 million hectoliters, or 655 million gallons, or 13.9 percent of total production, by 2011-2012").

It seems that wine prices are falling and the EU is striving to encourage consolidation in the industry. The quote most likely to rankle (from one of the "mass production" wineries): "The trade in wine is like the trade in Coca-Cola or in washing powder." (So, maybe Californian wine will be far better than French wine in the near future after all).

The effort has mobilized a fairly radical group determined to defend the traditional small producer. "The French agriculture minister, Michel Barnier, has described parts of the proposal as "madness" and promises to oppose it. Protests have arisen, ranging from marches and demonstrations to unspecific but ominous threats from a group of militants to take further action if the price of wine does not rise." The group in question has detonated one small explosive at one of the new producers.

The Wine and Cheese Crowd

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No, not in the Dean Dome...A few posts ago I asserted that Californian wine is a perfect substitute for French. This story made me think that maybe I was wrong (hat tip to Eat at Joe's).

"The intruder took a sip of their Chateau Malescot St-Exupéry and said, "Damn, that's good wine."

Your Move, Ben

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Interesting article highlighting the double uncertainty surrounding the interaction between financial markets and the Fed.

Uncertainty number one: what does the future hold under different interest rates? If the Fed cuts rates this week, will this ease the credit crunch and thereby help avoid a worsening of conditions or will it send the wrong signal aand make future bubbles more likely? If the Fed stands firm, will the credit crunch work itself out quickly and without precipitating a broader slowdown, or will it continue to fester, deteriorate further, exacerbate the housing slump and slow growth? You run the Fed, so what should you do about interest rates? The decision would be a lot easier if you could predict the future.

Uncertainty number two: financial market participants are trying to guess what Bernanke will do, and these guesses shape asset values. They had good priors about Greenspan; because Bernanke is so new, markets don't have sufficient information to make good bets about what he is likely to do. Hence, perhaps one gets more volatility than one would have seen in similar circumstances under Greenspan.

Thursday, August 2, 2007

He's Ripping You Off...

. Thursday, August 2, 2007
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I'm not always a big fan of Kristoff, but I have to respect his honesty this time around. The punchline:

"There is a familiar trajectory when a political party takes power. At first, it brims with ideals. Then it makes compromises to stay in power. Finally, it becomes devoted simply to staying in office. Can Ms. Pelosi really have compressed this downward spiral into just six months?

President Bush had sought to place a ceiling on payments to any farmer of $200,000 per year, but the Democratic leaders have set it at $1 million ($2 million for a couple). [Editorial comment: because a couple just can't get by on $1 million these days] Any time the Democrats find themselves fighting on behalf of fat cats, against a Republican White House that says enough is enough, it’s time for the donkey to kick itself in the head."

Further evidence that party really matters only to the uninformed.

Wednesday, August 1, 2007

How Many Exchange Rates Does a Currency Union Have?

. Wednesday, August 1, 2007
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That's a trick question (kind of). But an article in the Spiegel examines the impact of the euro's appreciation against the dollar on German traded goods producers. In a nutshell, German producers seem much less bothered by the appreciation than French producers. Naturally, I wonder why this is so.

Some possibilities:

1. German producers, having lived with the relatively strong mark for fifty years, are accustomed to real exchange rate appreciations. French producers, more accustomed to a stable or soft franc, are not. Hence, German producers cope, French producers whine.

2. The typical German producer earns a larger premium on its exports than the typical French producer. I've been trying to think of what I currently own or covet that is made only in France. Can't think of a single thing (if I had better [any?] fashion sense this might be different). And with all due respect to any foodies who might be reading, Californian wine is a perfectly reasonable substitute for French. In contrast, Germany produces a range of things that I (and many others) quite willingly pay a premium to own. My car is one such example. Thus, German producers can still export at a profit, but earn a smaller premium. French exporters, earning a smaller premium to begin with, have less cushion. Hence, appreciation hurts more.

3. Finally, maybe France and Germany have different real exchange rates. Institutional differences might transform a nominal exchange rate appreciation into very different real exchange rate appreciations. If factor and product markets are inflexible, then a sharp appreciation will not push factor prices down very much. Nominal appreciation thus produces a real appreciation. If markets are more flexible, factor and product prices adjust more quickly, and the nominal appreciation does not have as large of an impact on the real exchange rate. Hence, if institutional structures render French markets less flexible than German markets, the same nominal appreciation might produce a larger real exchange rate appreciation in France than in Germany. Hence, it is not a trick question after all.

I don't know if any of the three hypotheses are right. But the differential response to the same nominal appreciation is a puzzle worth considering. From a political economy perspective, the difference makes it hard for the French to build support in Germany for changes in ECB policy. Can anybody think of other possibilities?

More Protectionism

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"This year's [really poorly conceived trade bills] are calibrated to attract broader [congressional] support by softening the threat and involving international bodies. In years past, the leading currency bill threatened across-the-board 27.5 percent tariffs on all Chinese goods. The new bills would permit sanctions, but only after significant consultation between the two countries.

"It's a much more conciliatory batch of bills than their predecessors," said Gary C. Hufbauer, a trade expert at the Peter G. Peterson Institute for International Economics in Washington. "It's not slamming the hammer. It's kind of turning the screw." (But who is getting screwed here, Dr. Hufbauer?)

Some analysts expect that this fall, as the election season heats up, one of these bills will gain approval, possibly by the two-thirds majority required to override a presidential veto." (Super-majority support for protectionism is always good news.)

Maybe this reaction by 1,028 economists to the current round of congressional stupidity is OTT, but on the other hand, maybe not (Hat Tip to Greg Mankiw).

International Political Economy at the University of North Carolina: August 2007
 

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