Wednesday, December 31, 2008

All Is Full of Growth Potential

. Wednesday, December 31, 2008
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It isn't all that often that avant-garde pop music and investment banking can be mentioned in the same breath, but this was probably inevitable: Bjork is on a mission to save the Icelandic economy, and she's doing it in typically weird fashion:

As a million bankers flee the plunging markets, one brave Icelandic singer – known for coos, shrieks and a swan dress – is proudly taking their place. Björk has turned venture capitalist, with a new fund that aims to revive Iceland's economy.

Björk is working with Audur Capital, a Reykjavik-based investment company founded and managed by women. Audur Capital will oversee the fund's day-to-day dealings, directing an initial investment of 100m Icelandic krona (£575,000) toward sustainable, environmentally-friendly businesses. ...

Björk's fund will be called, er ... Björk. ...

Though Audur Capital has not divulged the material investment of Björk the singer in Björk the fund, knowing her work we imagine it is something along the lines of one heron feather, five regrets and 16 baby teeth.


(ht: Blattman)

Monday, December 29, 2008

... And Out Come the Wolves

. Monday, December 29, 2008
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We're about to witness the greatest rent-seeking moment of all time: the 2009 Economic Stimulus Package. It's gonna make the Farm Bill look like nothing at all.

How Has India Avoided the Financial Crisis?

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Lots of regulation:

“In India, we never had anything close to the subprime loan,” said Chandra Kochhar, the chief financial officer of India’s largest private bank, Icici. (A few days after I spoke to her, Ms. Kochhar was named the bank’s new chief executive, in a move that had long been anticipated.) “All lending to individuals is based on their income. That is a big difference between your banking system and ours.” She continued: “Indian banks are not levered like American banks. Capital ratios are 12 and 13 percent, instead of 7 or 8 percent. All those exotic structures like C.D.O. and securitizations are a very tiny part of our banking system. So a lot of the temptations didn’t exist.”


But different norms also may have played a role:

Part of the reason is cultural. Indians are simply not as comfortable with credit as Americans. “A lot of Indians, when you push them, will say that if you spend more than you earn you will get in trouble,” an Indian consultant told me. “Americans spent more than they earned.”


Other factors played a role too, including interest rates as high as 20%, a banking system that is 70% nationalized, and stronger regulators. Perhaps India has sacrificed some growth potential in their financial markets, but they've also created one of the most stable banking industries in the world.

The End of the United States of America

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Fun article posted online by the WSJ today:

For a decade, Russian academic Igor Panarin has been predicting the U.S. will fall apart in 2010. For most of that time, he admits, few took his argument -- that an economic and moral collapse will trigger a civil war and the eventual breakup of the U.S. -- very seriously. Now he's found an eager audience: Russian state media.
The Russian professor even has a map where he predicts that the US will break up into six entities (map can be found at the bottom of the article): 1) The Texas Republic (influenced by or under direct control of Mexico), 2) Atlantic America (influenced by or under direct control of the EU), 3) The Central-North American Republic (influenced by or under direct control of Canada), 4) The Californian Republic (influenced by or under direct control of China), 5) Alaska (which will go to Russia...of course it will), and 6) Hawaii (which will go to either Japan or China). 

Two problems: 1) There is no way in hell that South Carolina, West Virginia and Tennessee will peacefully join the European Union. 2) Texas joining Mexico - I don't think so.

Mexican Beauty Drug Trafficker?!

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Laura Zuniga, a beautiful young woman that was recently crowned Miss Hispanic America, was arrested last week outside of Guadalajara, Mexico and is in jail pending charges of engaging in racketeering, drug trafficking, and money laundering. At the time of her arrest (along with seven other upstanding Mexican citizens), Ms. Zuniga was packing various 9 mm pistols, semi-automatic rifles and $53,000 in cash and was riding around in an armored SUV. 

Newspapers plastered their front pages with images of Zuniga in bikinis and high heels. All seemed to be competing for the wittiest headlines. "Miss Narco," blared the tabloid El Metro. "Miss Sinaloa and the Seven Narcos," said the normally high brow El Universal. 
But beneath the media frolics, the tale of the fallen beauty queen highlights the dark side of how sprawling crime syndicates have penetrated so many areas of Mexican life. With the cartels estimated to make $30 billion from smuggling narcotics, the U.S. Treasury has named dozens of Mexican companies, from dairy farms to clothing chains, as money launderers. In November, the owner of a third division football club, the Mapaches of Michoacan state, was charged with drug trafficking. Crime kingpins are also alleged to finance popular Mexican singers, who croon about the gangsters' exploits.
Illicit drug trafficking in Mexico is now worth roughly $10 billion and is quickly expanding. 92% of cocaine entering the US comes through the Southwest US border, which has come to be labeled the "drug corridor." Furthermore, most of the marijuana and heroin entering the US also flows across the US-Mexico border. Drug traffickers are going to all new levels to ensure the speedy and secure transit of their products into the lucrative US market. Looks like recruiting beauty queens to handle some of the merchandise is just another way of doing business in the Mexican drug trade.

Saturday, December 27, 2008

That's Great, It Starts With an Earthquake

. Saturday, December 27, 2008
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Daniel Drezner interviewed by Megan McArdle on the consequences of the financial crisis on international politics, including the prisoner's dilemma game involving economic stimulus, and why it might lead to increased protectionism.

R.I.P. Samuel P. Huntington

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Samuel P. Huntington died on Christmas Eve. He gave us one of the more interesting recent grand theories, even if he didn't turn out to be quite the prophet that many thought he was. His earlier thesis that transitions from authoritarianism to liberalism should be undertaken gradually is more relevant now than ever. I am not a fan of his work on immigration but that does not diminish his other contributions.

Wikipedia here. An Atlantic article from 2001 by Robert Kaplan here.

Round-Up

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Icelandic charities are busier than usual.

Japan, the 2nd-largest economy in the world, may be in much much worse shape than the U.S. (and note: fiscal stimulus has had very little positive effect in Japan, and they've been trying it since 1997).

Russia is concerned about civil unrest, and is devaluing the rouble at record rates in hopes of boosting exports.

Latvia is the new Argentina.

U.S. and U.K. retailers are expecting the worst.

Some government officials in China want the government to take a more intrusive role in the economy.

Oh, and Christmas carries huge deadweight losses.

Happy Holidays.

Sunday, December 21, 2008

The Break-Up of Chimerica

. Sunday, December 21, 2008
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Niall Ferguson, with all kinds of good stuff:

We are living through a challenge to a phenomenon Moritz Schularick and I have christened “Chimerica.”1 In this view, the most important thing to understand about the world economy over the past decade has been the relationship between China and America. If you think of it as one economy called Chimerica, that relationship accounts for around 13 percent of the world’s land surface, a quarter of its population, about a third of its gross domestic product, and somewhere over half of the global economic growth of the past six years.

For a time, it was a symbiotic relationship that seemed like a marriage made in heaven. Put simply, one half did the saving, the other half the spending. Comparing net national savings as a proportion of Gross National Income, American savings declined from above 5 percent in the mid 1990s to virtually zero by 2005, while Chinese savings surged from below 30 percent to nearly 45 percent. This divergence in saving patterns allowed a tremendous explosion of debt in the United States, for one effect of the Asian “savings glut” was to make it much cheaper for households to borrow money than would otherwise have been the case.


Of course that "arrangement" is unraveling, as the Great Adjustment progresses. There is more:

Among the other developed economies, both the Eurozone and Japan are already officially in recession, ahead of the United States. The European situation is especially precarious because, contrary to popular belief, European banks are in worse shape than their American counterparts. Average bank leverage in the United States is around 12:1. In Germany the figure is 52:1. Short-term bank liabilities are equivalent to 15 percent of U.S. GDP; the British figure is 156 percent. Indeed, the United Kingdom runs a real risk of being Greater Iceland—an economy crushed by a super-sized financial sector.

Emerging markets, too, have been hammered harder by the crisis than the “decoupling” thesis promised. In the year to the end of October 2008, the U.S. stock market declined by 34 percent. But Brazil’s was down 54 percent, China’s 58 percent, India’s 64 percent and Russia’s 66 percent. When Goldman Sachs christened these four countries the BRICs, they little realized that their equity markets would one day be dropping like bricks. These figures are scarcely good advertisements for the more regulated, state-led economic models favored in Beijing and Moscow.

The financial crisis is especially bad news for energy exporters: not only belligerent Russia, whose leaders yearn for a reconstituted Soviet empire, but also those other thorns in the side of the United States, Iran and Venezuela. Any oil price below $94 a barrel is bad news for Venezuela’s fragile finances; any price below $55 spells trouble for Iran.


What does it mean? The U.S. is actually remarkably well-positioned to ride out this storm compared almost every other country; whether developed or emerging, more or less regulated, net importer or exporter. Remember that when you hear that
The American Century is over, or capitalism is dead, or any other similar sentiment.

Saturday, December 20, 2008

Detroit Gets Their Bailout (kind of)

. Saturday, December 20, 2008
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The bailout is contingent upon the Big 3 fixing themselves in three months: "The new deal threatens only to call back existing loans if the companies fail to demonstrate viability by March 31."

Anybody think there is a nonzero probability of this happening? Wanna bet? These companies haven't been viable in 25 years, as McArdle reminds us in her excellent look back at the last 50 years of the Detroit auto industry.

This statement by Bush sums up my feelings on the matter:

"Under ordinary economic circumstances, I would say this is the price that failed companies must pay, and I would not favor intervening to prevent the auto makers from going out of business," the president said. "But these are not ordinary circumstances. In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action."


He's buying time, punting to Obama, and hoping to do so in a way that doesn't cost the government much money, if any at all. I think this is probably the correct action given the present economic circumstances, and by that I'm referring to workers in Detroit but also those outside of Detroit: to the thousands of small businesses and hundreds of thousands of workers throughout the country who depends on orders from Detroit to stay alive.

Thursday, December 18, 2008

The Great Adjustment, or The Way Things Oughtta Be

. Thursday, December 18, 2008
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Matthew Yglesias sums up:

The way this is “supposed” to work is that Chinese people, being poor but growing rapidly, consume more than they produce. The current accounts balance out because savers in rich countries should be investing money in China — building up China’s capital stock and so forth. Investments in capital-poor developing countries “should” offer a high rate of return for developed world savers, and the injection of foreign capital should speed China’s growth. And for “China” you can substitute “Mexico” or “India” or what have you. The world, however, doesn’t actually work like that. Instead, China has been running persistent surpluses. And so have various energy-rich developing countries. So money keeps getting plowed into various US investments. But the US isn’t a poor, developing, capital-poor country. And so a lot of the investment in the United States seems to be going into speculative bubbles — first dot-com stocks, then MBS. Now people are buying up no-interest treasury bonds.


and quotes Brad DeLong:

If it weren’t for the fact that the furshlugginer dollar refuses to fall in value, the answer would be obvious: we will have a boom in import-competing manufacturing (and exports). But then the rest of the world has a long-run problem: if we decide to no longer be the world’s importer of last resort, than what serves as a locomotive to keep it near full employment?

But if the dollar doesn’t fall, then we have a long-run problem. The only answer I can think of is for the U.S. to then become the world’s largest private-equity fund: they lend us their money, and we then invest the money back in their economies–in industries and companies that then have a very high demand for U.S. high-tech goods and for U.S. services exports.


So an adjustment is needed, but we're not getting it. Asian central banks are continuing to buy gobs of U.S. Treasuries which keeps the value of the dollar high. And we're not investing the money back into Asian industries that demand U.S. goods and services. Instead, we're using the money to try to keep the bubble inflated, and so the adjustment is postponed.

Remember When Europe Was Going to Lead the Way?

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Germany refuses to enact stimulus until after Obama is elected:

Germany will wait to launch its next fiscal stimulus until it has a clearer view of the economic plan of Barack Obama, who is to be sworn in as US president on January 20, say German officials.

Michael Glos, economy minister, said – after a meeting of government officials and business leaders on Sunday night – the government would decide late next month whether to adopt more measures to stimulate the economy, Reuters reported.

That would mean Berlin would not top up its €12bn ($16bn, £10.7bn) growth-boosting package at an extraordinary meeting of leaders of the governing coalition on January 5, as many economists and international leaders had hoped.

“We will probably know what Obama is going to sign before January 20 but I would be surprised if any decision were made on January 5,” said an official before the meeting.


All indications are that Obama plans to enact a large-scale spending program -- probably in between $700bn and $1,000bn -- to boost economic activity in the short run while improving infrastructure in the medium run. The fact that Germany refuses to move until it gets even more specifics signals that America's standing as the leader of the international financial system has not taken such a great hit after all.

Isn't It Ironic?

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Wall Street Journal headline: "France Credits Deregulation for Cushioning Its Economy". Article here for subscribers.

The truth is obviously more complicated than that, and France's economy appears to be decaying just as everyone else's is, but that headline still gives me a chuckle. It's worth keeping in mind when you hear that the days of capitalism are over and gone: the story of this crisis is still being written, and the nature of the causes will be debated for decades. In any case, two things are almost certainly true: so far the crisis has not necessarily been milder for more regulated economies, and there is plenty of blame to be shared by government regulators and market "self-regulators".

Who Says IPE Is Boring?

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Brawls broke out in the South Korean legislature over a proposed U.S./S. Korea trade pact:

Scuffles broke out as dozens of opposition members and their aides attempted to push their way into the office. TV footage showed people from both sides shoving, pushing and shouting in a crowded hall at the National Assembly building amid a barrage of flashing cameras.

Opponents later used a sledgehammer and other construction tools to tear open the room's wooden doors, only to find barricades of furniture set up inside as a second line of defense.

Opponents counter that it will cause pain to key sectors in both nations — agriculture in South Korea and automobiles in the United States.


Note that this "free trade" deal is causing a lot of controversy primarily because tariffs aren't the only trade-distorting regulations in the two countries. The opposition party in S. Korea is (justifiably) worried that U.S. subsidies to American farmers will make S. Korean farmers unable to compete if their protections are discarded. They may be right: U.S. agricultural policy is a tragicomedy of perverse incentives, corporate welfare, and inefficiencies. American and European agricultural policies are also killing the agricultural sectors of developing countries, and this has lead to the near-abandonment of the Doha round of WTO negotiations.

America is poised to lose much of its automobile industry anyway; the only question seems to be whether we let it happen now or in a few years when the pill may be easier to swallow. So, without having studied it in depth, this deal looks great for Americans; less good for S. Koreans. Still, I tend to believe than in normal circumstances any reduction in trade barriers will bring a net gain to society, so I'd like to see this pact pass. But it's another reminder that not all "free trade" is truly free.

My hope? Deals like this will eventually force the U.S. and E.U. to abandon their own agricultural subsidies and open their markets to exports from the developing world. This would be helpful on so many levels: it could provide good jobs and strong industries to the countries that need them the most (esp. in Africa and S. America), it could eliminate a great source of waste and inefficiency in American and Europe, it could further the passage of Doha, and give the West more credibility when it talks about markets and liberty to the rest of the world.

Will that happen? I doubt it. But that's what I'd like to see.

UPDATE: Dr. Oatley posted a short video in October that highlights some of relevant points about the politics of farm subsidies. It is here

Saturday, December 13, 2008

An Easily-Answered Question

. Saturday, December 13, 2008
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Alex Tabarrok finds this question remarkable: "can market transactions generate institutional arrangements that impair the market economy?" That question was asked in 2006 by Richard Wagner, one of Tabarrok's colleagues at George Mason University. I guess the point was the question foresaw the current financial crisis (Wagner mentioned the securitization of debt earlier in his question), but students of IPE should be well aware of market transactions that can end up causing more damage than good: large volatility in capital flows, especially from the developed to less-developed countries, often generate boom-and-bust cycles that can decimate entire economies. Countries that borrow in foreign currencies sometimes leave themselves open to currency crises that have similarly devastating effects.

I'm not sure why Tabarrok (or Wagner) should be surprised that the result of market transactions can sometimes "impair the market economy". In my mind, a quick glance at history demonstrates that Wagner's question is easily answered in the affirmative.

Friday, December 12, 2008

Italy is so Cheesy!

. Friday, December 12, 2008
5 comments

From Mankiw


The WSJ reports:
The world is bailing out banks and car companies. Italy is coming to the rescue of parmigiano cheese.

In an effort to help producers of the cheese commonly grated over spaghetti, fettuccine and other pastas, the Italian government is buying 100,000 wheels of Parmigiano Reggiano and donating them to charity.

Though demand for parmigiano is strong in Italy and abroad, producers have been struggling for years to make money, putting the future of Italy's favorite cheese at risk.
An economist might suggest letting a few producers fail, so supply shrinks, prices rises, and the remaining producers become more profitable. In fact, that same logic might apply to some other industries as well.

Not looking pretty for tomorrow...

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Senate abandons auto bailout



It may get ugly in 8.5 hours when the US markets open.

Thursday, December 11, 2008

It's Not All Work here on the Hill

. Thursday, December 11, 2008
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Wednesday, December 10, 2008

The Great Adjustment (a continuing series)

. Wednesday, December 10, 2008
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China's exports dropped significantly in November, but their imports fell by an even greater margin, so their current account surplus expanded. This is likely due to the fact that many of China's imports are inputs for production rather than finished goods for consumption. This was reflected by a sharp drop in China's producer price index.

World Bank Report

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The World Bank issued a forecast Tuesday. At first glance, the report is pretty pessimistic:

The world economy is on the brink of a rare global recession, the World Bank said in a forecast released Tuesday, with world trade projected to fall next year for the first time since 1982 and capital flows to developing countries predicted to plunge 50 percent.

The projections are among the most dire in a litany of recent gloomy forecasts for the world economy, and officials at the World Bank warned that if they proved accurate, the downturn could throw many developing countries into crisis and keep tens of millions of people in poverty.

Even more troubling, several economists said, there is no obvious engine to drive a recovery.

American consumers are unlikely to return to their old spending habits, even after the United States climbs out of its current financial crisis. With growth in China slowing sharply, consumers there are not about to pick up the slack from the Americans. The collapse in oil prices — a side effect of the crisis — has knocked the wind out of consumers in oil-exporting countries.

The bank forecasts the global economy will eke out growth of 0.9 percent in 2009, down from 2.5 percent this year and 4 percent in 2006. That is the slowest pace since 1982, when global growth was 0.3 percent. Developing countries will grow an average of 4.5 percent next year — a pace that economists said constituted a recession, given the need of these countries to grow rapidly to generate enough jobs for their swelling populations.


Drezner thinks this report is actually an optimistic assessment, and I tend to agree. He gives 6 reasons but in my mind it can be summed up in one: the causes of the crisis are not only not resolved, they seem to be getting worse: credit is still frozen, and current account imbalances all over the world seem to be expanding rather than tightening. "Who adjusts?" is still the relevant question, and so far the answer from every country is "You first". There's a little bit of chicken going on, and the longer that game lasts, the more damage can be done.

Elsewhere, Krugman says (and Cowen agrees):

A scenario I fear is that we'll see, for the whole world, an equivalent of Japan's lost decade, the 1990s -- that we'll see a world of zero interest rates, deflation, no sign of recovery, and it will just go on for a very extended period," he told a news conference.

And that's unfortunately very easy to see happen.

Tuesday, December 9, 2008

Treasuries Go Negative

. Tuesday, December 9, 2008
3 comments

Yesterday, 3-month T-bills traded slightly negative, while 4-week bills traded at 0.0% interest. In other words, investors were willing to accept a small negative return rather than risk larger losses elsewhere. This is good news for the government's balance sheet, but what does it mean for investors? A few things:

1. Confidence is exceptionally low.

2. Investors alluvasudden have a negative time preference for money.

3. Expectations about future inflation indicate that investors expect a dollar to be worth more in the future than it is today. In other words, bond markets expect deflation.

1 is definitely true, 2 is definitely false. i've been harping on 3 recently but even if it is true, why not just hold cash? Anybody got a better explanation? Is this being driven by large investment institutions who have to balance budget sheets and cash (for some reason) won't suffice? I'm really at a loss.

Sunday, December 7, 2008

Who Adjusts, II

. Sunday, December 7, 2008
1 comments

Update (Back date?): This post by Brad Setser nicely links the current mess to the broader current imbalance and exchange rate arrangements in Asia.

Somehow I missed Paulson's last trip to China in connection with the Strategic Economic Dialogue. While achieving little, it did reveal a bit of information about how the Chinese government is thinking about the global recession and global imbalances. When asked about the appropriate policy response, Zhou Xiaochuan, governor of China's central bank, said "The United States should speed up domestic adjustment, raise its savings rate and reduce its trade and fiscal deficits." (HT to Kaylan).

Discouraging but not surprising news, really. Discouraging because adjusting global current account imbalance is less painful if China expands than if the US contracts. Thus, the Chinese position implies a more-painful-than-necessary adjustment path. Unsurprising because China's position reflects its interests as a large creditor. As Wang Qishan, China's deputy prime minister, put it, the United States should stabilize its economy as soon as possible to "ensure the safety of China's assets and investments in the U.S." This sounds somewhat like the advice another large country often offers emerging market governments, though that country rarely is so brash as to admit that the advice is offered to safeguard American assets.

The IHT article also contains a terrific non sequitur: "During his campaign for president, Barack Obama often accused China of manipulating its currency, but ... his choice for Treasury secretary, Timothy Geithner, has lived in China and speaks Mandarin."

Saturday, December 6, 2008

Revisiting Microfinance

. Saturday, December 6, 2008
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Tim Harford has an excellent article on the subject in FT:

This seems mysterious. How can a loan at 200 per cent APR help people to stay out of poverty? One answer is that most people turned down for a 200 per cent APR loan would be able to get one at 300, 500 or over 1,000 per cent from an informal moneylender. More important is that these loans were not used to start businesses but to help people keep jobs that they already had. If a smart new blouse or a spare part for the family moped is what it takes to stay in work, then who is to say that an expensive loan isn't a wise investment?


There is also a discussion of the battle for the soul of microfinance, with commercial interests on one side and charitable interests on the other. Many of the results discussed in the article are similar to those found by Karol Boudreaux and Tyler Cowen earlier this year:

For better or worse, microborrowing often entails a kind of bait and switch. The borrower claims that the money is for a business, but uses it for other purposes. In effect, the cash allows a poor entrepreneur to maintain her business without having to sacrifice the life or education of her child. In that sense, the money is for the business, but most of all it is for the child. Such life saving uses for the funds are obviously desirable, but it is also a sad reality that many microcredit loans help borrowers to survive or tread water more than they help them get ahead. This sounds unglamorous and even disappointing, but the alternative— such as no doctor’s visit for a child or no school for a year— is much worse.


In other words, microfinance may be a force for good, but not in the ways popularly imagined.

Thursday, December 4, 2008

How Iceland Imploded

. Thursday, December 4, 2008
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Illustrated. I still haven't heard any good plan for getting Iceland back on its feet.

Europe Coordinates

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The ECB, Bank of England, and Swedish Riksbank all slashed interest rates today. The Bank of England's rate is now the lowest since 1951, and matched with the lowest rate in its 314-year history. Sweden dropped its rate by a record 175 basis points. France announced a stimulus plan.

The effectiveness of these actions is still to be determined, of course. But greater coordination by central banks and governments will be necessary to get the global economy moving again. These sorts of actions are a step in the right direction.

Lagged Effects of the International Credit Crunch on Latin America

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The Latin American Shadow Financial Regulatory Committee (CLAAF), a group of economists from Latin America that includes former finance ministers and central bank governors, released a statement after meeting today in Washington, estimating that Latin American governments will need roughly $250 billion just to repay maturing debt and support budgets in 2009. 

The Financial Times reports:
The statement described a marked deterioration of the region’s economic prospects in the past few months caused by a flight to high quality assets and the freezing up of international credit. The region would suffer from a sharp slowdown in the world economy and falling export prices, it said.

Unless credit found its way to the region, the economists said governments would be forced to choose between two unappetising alternatives: painful fiscal adjustment that would reinforce the downturn or distortive measures, such as import restrictions and capital controls.

“In the absence of adequate international actions, beggar-thy-neighbour policy responses may be politically inevitable, seriously undermining the basis of the global co-operative system that emerged in the aftermath of World War II [that] allowed for unprecedented rates of growth of trade and incomes and a reduction in global poverty.”
Although Latin America has not been directly affected as a result of the liquidity and credit crises that have affected the American and global economies over the past year, as detailed previously on this blog, the future may see indirect effects as Latin American nations may be "crowded out" of international credit markets as Western nations expand their borrowing and run large fiscal deficits. 

How Low Will It Go?!

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The price of oil tumbled further today, settling at $43.67, it's lowest close in nearly four years.


So the question is, how much lower will it go?

Wednesday, December 3, 2008

Who Adjusts?

. Wednesday, December 3, 2008
2 comments

Funny how the world works. I was talking (or at least trying to) about contemporary global imbalances in class today, with a particular focus on the question of the relative merits of adjustment via contraction in the US and adjustment via expansion in the surplus countries, especially China. Reading the FT tonight I come across Martin Wolf's nice summation:

"Countries with large external surpluses import demand from the rest of the world. In a deep recession, this is a “beggar-my-neighbour” policy. It makes impossible the necessary combination of global rebalancing with sustained aggregate demand. John Maynard Keynes argued just this when negotiating the post-second world war order.

In short, if the world economy is to get through this crisis in reasonable shape, creditworthy surplus countries must expand domestic demand relative to potential output. How they achieve this outcome is up to them. But only in this way can the deficit countries realistically hope to avoid spending themselves into bankruptcy."

Of course, pointing out what ought to happen to get the world economy through this crisis in reasonable shape does not mean it will in fact happen. I am particularly skeptical about China's willingness to embrace this path. "Asked whether China might pursue economic policies aimed at saving the world, Mr. Lou said that the country’s leaders had a narrower focus. “China can only save herself..."

Monday, December 1, 2008

Happy Birthday!

. Monday, December 1, 2008
0 comments

The U.S. recession is one-year old today, according to the NBER.

Fixing the Food Shortage in Malawi

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International Political Economy at the University of North Carolina: December 2008
 

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