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As the West tries to turn the screws on Iran with the threat of sanctions, it's unclear precisely who the nuclear madman is and who has the leverage in this situation.
1. French premiere Jacques Chirac threatened to nuke Iran. John Thornhill and Peter Spiegel report in the Financial Times:
Jacques Chirac, France's president, yesterday delivered a an unexpected warning to "rogue" nations suspected of sponsoring terrorism by threatening to use nuclear weapons against any state that supported attacks on his country or considered using weapons of mass destruction.In a speech to update military officers on France's strategic doctrine, he said the end of the cold war had removed neither the threats to peace nor the justification for a nuclear deterrent.
His comments come amid deteriorating European and US relations with Iran, which last week indicated it would restart research into a nuclear programme. Analysts interpreted his remarks as aimed at Iran in particular and said they could affect the ability to negotiate a deal.
Mr Chirac, citing instability, extremism and proliferation of nuclear, biological and chemical weapons, said France's nuclear deterrence remained the fundamental guarantee of its security.
Although he conceded France's nuclear arsenal could not deter terrorists, he said it could help prevent states sponsoring them. "The leaders of states who use terrorist means against us, as well as those who would consider using, in one way or another, weapons of mass destruction, must understand that they would lay themselves open to a firm and adapted response on our part. This response could be a conventional one. It could also be of a different kind."
2. Iran is moving to punish the West by calling for oil production cuts and moving its foreign reserves out of Western banks. Gareth Smyth, Najmeh Bozorgmehr,Carola Hoyos report in the Financial Times.
Iran has called for a cut in global oil production while simultaneously preparing to shift its foreign assets out of Europe.The moves were widely interpreted as a signal that Iran is preparing for a long stand-off with the west and sees oil production as a counter weight to international economic pressure.
Tehran’s call on Friday for the Organisation of the Petroleum Exporting Countries to reduce production by 1m barrels a day helped take prices up to a four-month high of more than $68 a barrel, even though Iran is the only Opec member to call for the cut and is unlikely to find much support for the measure at Opec’s meeting in Vienna on January 31.
Some traders said Iran’s comment was a sign that Tehran might be willing to use the threat of halting its substantial oil production as a political tool in its nuclear spat with the west. Iran is the fourth biggest oil exporter and main supplier to Japan, South Korea, France and Italy. The media in Iran this week has highlighted the upward pressure on oil prices simply through talk of sanctions.
Just hours earlier, Ebrahim Sheibani, the Central Bank governor, said Iran would “transfer the foreign exchange reserves wherever we consider expedient” and confirmed a shift from Europe had begun.
Analysts say Iran is fearful that its deteriorating relationship with Europe could lead to a seizure of assets.
Mr Sheibani refused to give details or to say where Iran’s funds were going, although several local news agencies reported the destination was south-east Asia. The Central Bank manages Iran’s “windfall” oil revenue in the Oil Stabilisation Fund, which Mr Sheibani said would contain about $15bn (€12.4bn) by the end of March. Iran keeps an unknown amount of this in Europe.
According to the International Monetary Fund, Iran’s foreign exchange reserves are $30.6bn in hard currency. Tehran has another $9bn in foreign assets (but not necessarily liquid) abroad, it says.
3. Oil prices spiked today.
Posted by dan at 05:19 PM
It's amazing how powerful muscle memory can be when it comes to investing. Clearly, German investors have far less tolerance for risk than their American counterparts. Witness the bizarre activity surrounding these real estate investment funds.
Patrick Jenkins reports in the Financial Times:
Fund companies and financial advisers yesterday warned of an atmosphere of panic and hysteria as a third German open-ended property fund was closed following a run of withdrawals.KanAm, a Munich-based asset manager that on Tuesday froze its US fund after heavy outflows, yesterday said it had been forced to close its core €3.2bn ($3.87bn) global Grundinvest fund after €700m of withdrawals in 24 hours.
KanAm blamed the "panic" on "a surprising and unfounded" sell recommendation from Scope, a German fund rating agency, but said it would not be taking legal action against the agency.
One leading financial adviser said: "Hysteria has broken out across the sector. But it's crazy. There's been no earthquake. The buildings are still there."
The news came as prominent investor rights specialists said they were preparing to sue Deutsche Bank, which critics accuse of triggering the crisis in the sector when it froze its core €6.2bn German property fund last month, pending a revaluation of its assets.
Gerhard Baum, a former German interior minister turned consumer champion, has teamed up with law firm Reiter & Collegen in Düsseldorf and yesterday accused Deutsche of prompting panic among the investing public.
Julius Reiter, head of the firm, told the FT: "Deutsche Bank has behaved irresponsibly. These products have been sold as absolutely safe with no-notice access to funds. We have 100 clients who believe they have been financially disadvantaged." Other lawyers have also threatened to bring cases. Deutsche declined to comment.
Rival fund companies said that it was too early to judge whether the third fund closure in the sector within two months would trigger a fresh run of withdrawals.
CGI, the Commerzbank subsidiary that runs the biggest fund in the sector, said the rise in withdrawals after KanAm's first fund closure had not been "significant". Munich-based iii investments said its withdrawals had been "manageable". BaFin, Germany's chief financial regulator, sought to calm investors. "Other German funds are not affected," it said.
On Wednesday the Finance Ministry told the parliamentary finance committee that fresh legislation was needed to address the issue of overvalued assets in open-ended property funds.
The problems at the Deutsche Bank fund and at KanAm have very different roots. While the poorly performing Deutsche fund is being devalued because of the shrunken value of German property in its portfolio, KanAm's funds were among the best performing in the sector. The rating agency sell recommendation, triggered by the company's connection with a US real estate investment trust with accounting troubles, appears to have been the key factor
Posted by dan at 05:16 PM
On January 12, Brian Wesbury of Claymore Securities, penned an op-ed on the Wall Street Journal editorial page entitled: Supermarket.
It began as follows:
The Dow Jones Industrial Average has traded above 11,000 for three days in a row, and stands just 680 points (or 6%) from its record high. There is nothing special about 11,000; but, there seems to be some electricity in the air, a feeling that more good news for investors is on the way.
And concluded as follows:
As a result, the past five years will prove to be just another pothole in a continued bull market. While 11,000 gives us something to cheer about, a 12,500 Dow this year is imminently (and eminently) doable, as is another decade of continued prosperity.
The Dow has fallen in five of the six trading sessions since the article appeared, losing well over 300 points and wiping out its gains for the year. The Dow stands almost exactly where it stood on April 22, 1999.
Posted by dan at 03:05 PM
Well, I almost made it through the whole week of this week's Wall Street Journal editorial page without an episode--rapid head-shaking, trembling hands, loud howls. Almost.
Today, Daniel Henninger pens a somewhat sensible column about the James Frey affair and the importance of facts and truth. (It takes him to the very end to blame it on Lyndon Johnson and Jerry Rubin.) He approvingly quotes critic Morris Dickstein.
"Morris Dickstein of the Graduate Center of the City University of New York described this world as 'always at the edge of falsehood' and so people come to tolerate it 'as part of the overall media buzz of their lives.'"
Exactly. Look, for example, at the editorial next to Henninger's column, a summation of the last 25 years of fiscal and economic policy.
Here are Gigot & Co. on the 1980s.
"When the budget deficit rose in the mid-1980s, the liberals warned that if Reagan would not raise taxes interest rates would skyrocket. He didn't and rates didn't."
Gee, anybody remember what happened in the 1980s, after Reagan cut taxes in 1981? The Tax Foundation says:
"In 1981, Congress enacted the largest tax cut in U.S. history, approximately $750 billion over six years. The tax reduction, however, was partially offset by two tax acts, in 1982 and 1984, that attempted to raise approximately $265 billion."
The Journal continues:
After the 1987 stock market crash, liberal John Kenneth Galbraith wrote that "this debacle marks the last chapter of Reaganomics . . . and the irresponsible tax cuts." Again, Reagan refused to buckle and two months later the stock market recovered and the expansion roared on -- an expansion that didn't end until George H.W. Bush reversed course and raised taxes in 1990."
Sorry, guys. Taxes were rising pretty much every year in the 1980s, and in a most regressive manner. Remember the Social Security Amendments of 1983? To wit:
Advances scheduled increases in Social Security tax rates. Social Security tax rates (which include the Hospital Insurance tax rates) for employers and employees will increase to 7.0 percent in 1984, {1} 7.05 percent in 1985, 7.15 percent in 1986-87, 7.51 percent in 1988-89 and 7.65 percent in 1990 and thereafter. {1} Subject to a credit of 0.3 percent for employees.
In other words, it took about 12 years of tax increases to undo the damage created to the budget picture by the 1981 tax cuts.
Finally, they note that:
"Where Republicans have most strayed from the Reagan vision has been on controlling federal spending."
And what exactly was the Reagan record on controlling federal spending? Look at this June O'Neill article from 2000 in Policy Review:
The spending side also contributed to the 1980s deficits (see Figure 3). Outlays over the period 1981-88 averaged 22.4 percent of GDP a year, and that was 1.6 percentage points above the average for the Carter years. The popular view is that the Reagan defense buildup (reversing a decline from 1973 to 1979) was the main factor in this growth in outlays. However, the growth in interest payments on the outstanding debt (fed by the enormous rise in interest rates at the end of the ’70s and early ’80s), and a surge in entitlement spending in the early 1980s, were also major contibutors.
Sigh.
Posted by dan at 02:10 PM
Amusing snippet from David Rogers' article in the Wall Street Journal on Rep. David Dreier, "a gentleman in the not-so-gentle world of the House Republican leadership.":
Football is his metaphor of choice. "I kind of describe myself as the free safety for this speaker," Mr. Dreier says. "Wherever he throws the ball, I just want to make sure I'm there to catch it."Reminded that free safety is a position on defense, not offense, he says: "I just want to catch the pass."
Noted without comment.
Posted by dan at 02:06 PM
Excellent article by Jenny Anderson in today's New York Times on the many ways in which the various ways the various hedge fund indexes probably overstate performance. Sample graph:
Perhaps most troubling is the general upward bias that appears to exist in all the indexes.According to research by Burton G. Malkiel and Atanu Saha, both of Princeton, and the Analysis Group, an economic consulting group, the TASS database acquired by Tremont has overstated hedge fund returns by more than 4 percent a year from 1996 to 2003.
The inflation is a result of various factors including survivorship and a lack of uniform reporting standards. The performance of hedge funds that fail are erased from the database. That's a big deal considering their research showed that of the 331 funds that reported returns in 1996, only 58, or fewer than 25 percent, still existed in 2004.
According to exhibits in the research, the average return for all hedge funds included in the TASS database from 1996 through 2003 was 13.74 percent, not counting defunct funds. Accounting for those extinct funds, the average return was only 9.32 percent. The average return for mutual funds during the same period (using Lipper data) was 9.73 percent, not including defunct funds, compared with 8.49 percent when defunct funds were included.
"The bottom line is, there is a lot of survivorship bias in many of the hedge fund indices that are used to sell hedge funds," Dr. Malkiel said in an interview.
Posted by dan at 01:56 PM
Jeremy Grant reports in the Financial Times that U.S. farm subsidies are unlikely to change much, thanks to Republican dominance in the comparatively poor red states that depend on federal handouts.
"Mike Johanns, the US agriculture secretary, likes to refer to his humble farm upbringing in the grain and livestock-rearing state of Iowa. He and his two brothers would often find themselves wielding pitchforks in the family's cowshed, "knee deep in you-know-what, pitching away". While such homespun tales have helped him to connect with US farmers, they have done little to win grassroots farming support for the Bush administration's desire for a far-reaching overhaul of government support for agriculture.Farming's most powerful bloc, the American Farm Bureau Federation, voted last week to push for an extension of the current US farm bill. Passed in 2002, it is the most generous farm bill in history, projected to provide $180bn (€149bn, £102bn) over 10 years.
The Bush administration has been eager to make substantial changes to the next bill, which must be rewritten in 2007 and on which Congress will start deliberations in coming months.
Mr Johanns spent much of last year in town hall meetings with farmers floating the idea that US farm subsidies must be overhauled to help cut a ballooning federal deficit and remove the threat of legal challenges to the US subsidy regime within the World Trade Organisation.
The 2002 bill was controversial because its provisions to strengthen cash support for farmers were linked to the volume of production of specific crops, and this was seen as more trade-distorting than direct cash payments for conservation and other uses.
Mr Johanns recently sounded the alarm on the issue, citing the US rice support programme and a Canadian investigation into US corn subsidies as evidence that the current farm bill was "perhaps the most high-risk approach we could take for our nation's farmers and ranchers in the future".
Last week he told the AFBF's annual convention in Tennessee that a successful WTO challenge from Brazil against US cotton subsidies last year "shook the confidence in the ability of current policy to provide a true safety net [for farmers]". The Bush administration had hoped that farmers would agree to lower subsidies if it could win them greater market access for their exports in the Doha Round of World Trade Organisation talks.
Yet with the Doha talks stalled, the AFBF voted last week to extend "the economic safety net" provided by the current farm bill. . .
The largest 3 per cent of farms receive about a third of all government payments. In addition, 92 per cent of all so-called commodity programme spending goes to only five crops: soyabeans, maize, wheat, cotton and rice. . .
The Illinois Farm Bureau has proposed replacing support for specific crops with an "income assurance programme" that compensates farmers if their annual net income falls below a multi-year average. Henry Kallal, a board member, said: "We might as well be leading the change rather than be litigated to change."
However, the forces ranged against Mr Johanns are formidable. The cotton and rice producing states of the south still wield immense influence in Congress.
As mid-term congressional elections loom this year, politicians are unlikely to be vocal in opposing the interests of farmers.
Don Villwock, president of the Indiana Farm Bureau, says: "All politics are local and the heartland 'red' states control Congress. Very few people on the Hill would like to be perceived as cutting agricultural programme payments, even in a budget deficit year."
Posted by dan at 09:23 AM
This can't be good news. Dow Jones, the parent company of the Wall Street Journal, has made some changes to the board. Investment banker/Washington fixer Vernon Jordan and James Ottoway, the former chairman and CEO of Ottaway Newspapers Inc., a unit of Dow Jones, are out. Ottaway was a veteran newspaper executive.
Their replacements: new Dow Jones CEO Richard F. Zannino and Eduardo Castro-Wright, the president and chef executive officer of Wal-Mart Stores, USA.
So, Ottoway, one of the two board members who has ever worked at a newspaper, leaves. Zannino, the new CEO, has been with Dow Jones for about five years and joined as chief financial officer. And the outsider they bring in to replace Vernon Jordan is from Wal-Mart? He will surely provide valuable advice to the company as it figures out new, creative ways to hold down reporters' pay and benefits.
Posted by dan at 09:13 AM
Something tells me this isn't what the Austrian school had in mind. George Paker Tobias Buck and Raphael Minder report in the Financial Times on some of the new ideas put forth by Austrian Chancellor Wolfgan Schussel, who now holds the post of EU President.
"Financial investors should pay new taxes to fund the European Union, Wolfgang Schussel, the Austrian chancellor and new holder of the rotating EU presidency, said yesterday.His proposal at the European parliamsn for an EU tax on "short-term financial speculator" will be controversial, particularly in financial centres such as London. . . .
The Austrian chancellor also wants the European Commission to consider taxes on international air and sea travel in its review of the EU budget, due to be completed in 2008. . . .
Setting out his plans for the six-month Austrian EU presidency, Mr. Schussle said: "It can't be right that short-term financial speculation is not subject to taxation at all."
"It can't be that transport by air or by boat is not subject to taxation." . . .
Mr. Schussel's plan could have a disproportionate impact on the UK -- which has Europe's biggest financial centre, busiest airport and major sea routes."
Posted by dan at 09:06 AM
My latest in Slate, on collapsing "windows" in the media world.
Posted by dan at 09:05 AM
The latest chapter on the decline and fall of David Brooks as a thinker. In his December 15 column, Brooks uncritically regurgitates the argument of Rodney Stark's Victory of Reason: How Christianity Led to Freedom, Capitalism, and Western Success
What explains success? What forces drive some nations and individuals to move forward and grow rich while others stagnate? These happen to be the most important questions in the social sciences today.
In the scholarly arena, you see an array of academic gladiators wielding big books and offering theories.Over here are the material determinists. Jared Diamond, with his million-selling ''Guns, Germs, and Steel,'' says the West grew rich not because of any innate superiority, but because Europeans happened to have the right kinds of plants. Felipe Fernández-Armesto, with his tome, ''Civilizations,'' argues that success is determined by climate and geography.
Over there are the cultural determinists. Thomas Sowell argues that ethnic groups develop their own skills and values and thrive or suffer as they compete, conquer and migrate. In his great opus, ''The Wealth and Poverty of Nations,'' David Landes shows how cultural mores shaped European empires and the Industrial Revolution.
Now another academic heavyweight has entered the arena. In his new book, ''The Victory of Reason,'' the Baylor sociologist Rodney Stark argues that the West grew rich because it invented capitalism. That's not new. What's unusual is his description of how capitalism developed.The conventional view, embraced by most of his fellow cultural determinists, is that during the Renaissance and Reformation, Europeans shook off the authority of the Catholic Church. When a secular world was created alongside the sacred one, when intellectual freedom replaced obedience to authority, capitalism and scientific advances were the result.
That theory, Stark says, doesn't fit the facts. In reality, capitalism developed in the Middle Ages, and the important innovations were made by people in the belly of the faith. Religion didn't stifle economic and scientific ideas -- it nurtured them.
Stark is building upon the recent research that has reversed earlier prejudices about the so-called Dark Ages. As late as 1983, the esteemed historian Daniel Boorstin could write a chapter on the Middle Ages entitled ''The Prison of Christian Dogma.''But the more we learn, the more we realize that most of the progress we link to the Renaissance or later years actually happened during the Middle Ages. Roughly a hundred years before Copernicus, Jean Buridan (circa 1300-1358) wrote that the Earth is an orb rotating on an axis. Buridan, a rector of the University of Paris, was succeeded by Nicole d'Oresme (1323-1382), who explained why the rotation of the Earth doesn't produce wind.
Other medieval Scholastics made the same sort of discoveries in economics and technology. Five hundred years before Adam Smith, St. Albertus Magnus explained the price mechanism as what ''goods are worth according to the estimate of the market at the time of sale.''
Catholic monasteries emerged as capitalist enterprises, serving not only as manufacturing and trading centers, but also as investment houses. And engineers invented or commercialized a vast array of technologies: the compass, the clock, the round-bottom boat, wagons with brakes and front axles, water wheels, eyeglasses, and so on.These innovations and discoveries, Stark argues, were not made by the newly secular, but by people who had a distinctly Christian sense of the sacred. Catholic theology had taught them that God had created the universe according to universal laws that reason could discover. It taught that knowledge and history move forward progressively, so people should look to the future, not the past.
The church recognized the dignity of free labor at a time when most other cultures did not. It valued private property and emphasized the essential equality of human beings despite their unequal incomes and stations.
This history is important today. (And not only because Albertus Magnus knew more about reconciling faith and reason 700 years ago than the bogus culture warriors do now.) It's important because whether we are dealing with poverty around the world or at home, it is not enough to simply liberate people and assume they will automatically pursue economic prosperity. People need to be instilled with certain beliefs, like the belief that the future can be better than the present and that individuals have the power to shape their own destiny.
Ideas and culture drive civilizations. The Catholic Church nurtured one of the most impressive economic takeoffs in human history. Today, as Catholicism spreads in Africa and China, it's important to understand the beliefs that encourage people to work hard and grow rich.
I guess he didn't take any history courses at the University of Chicago. Either that, or he has somehow developed immunity to absurd triumphalist historical arguments that negate the influence of, say, Islam and Judaism on the West. Or that ignore some pretty basic truths about history. "The church recognized the dignity of free labor at a time when most other cultures did not."? Huh? But then again, Brooks has long since given up any pretensions to being an intellectual.
Now go read Alan Wolfe's fabulous review of Stark's God-awful book in The New Republic. It's relentless, rigorous, and utterly devastating. Money graph:
The Victory of Reason is the worst book by a social scientist that I have ever read. Stark's methodology has nothing to do with history, or the logic of comparative analysis, or the rigorous testing of hypotheses. Instead he simply makes claims, the more outrageous the better, and dismisses all evidence that runs contrary to his claims as unimportant, and treats anyone with a point of view different from his own as stupid and contemptible, and reduces causation in human affairs to one thing and one thing only. How in the world, I kept asking myself as I read this book, could someone spend so much of his life trying to understand something as important as religion and come away so childish?
Posted by dan at 07:27 PM
From an excellent article in the Wall Street Journal by Kemba Dunham on Americans buying second homes in Mexico.
According to a study conducted by Cemex SA, a Mexican cement giant, and Active Living International, which builds retirement and active-adult communities, about one million Americans currently live in Mexico, including 157,000 so-called active-adults -- buyers age 55 and over.
Posted by dan at 05:54 PM
The U.S. Chamber of Commerce reacts cautiously to the SEC's new proposal on disclosure of compensation for top executives of publicly held companies.
Money quote:
“We will oppose any parts of this rule that constitute a back-door attempt to regulate pay. There are relatively few who can successfully manage the CEO job, and those who do must be paid a competitive salary as determined by the independent directors of the Compensation Committee of a company’s Board."
Posted by dan at 05:52 PM
Positive effects of the Manhattan/Brooklyn housing boom: a thriving Home Depot store in Bed-Stuy. Rosalie R. Radomsky reports in the New York Times:
Each week, about 25,000 customers find their way by car, foot or public transportation to a five-month-old Home Depot store at 585 DeKalb Avenue, which sits on a five-acre site next to Public School 54, in a residential section of Bedford-Stuyvesant, Brooklyn."It's excitement all day long," said Ricky Campbell, the manager of the store, which has a steady flow of contractors and residents from the neighborhood and from areas not far away, like Williamsburg, Flatbush and Prospect Heights.
It is the 1,940th store in the Home Depot chain, but the first big-box store in Bedford-Stuyvesant.
"It's a shot in the arm for local shoppers," said Kenneth Adams, president of the Brooklyn Chamber of Commerce. "The project helps satisfy pent-up consumer demand in Bed-Stuy and neighborhoods beyond it. Bed-Stuy has fantastic housing stock and lots of do-it-yourselfers. The store should be very successful."
The company also saw great potential. "Bedford-Stuyvesant was a void for us," said Mike LaFerle, vice president for real estate at the home improvement retailer, based in Atlanta. The chain, begun in 1978, opens 5 to 10 stores a week around the country. The official opening of a new store in Charleston, Staten Island, tomorrow will increase the number of stores in New York City to 19.
"Bedford-Stuyvesant falls between our Hamilton Avenue, Long Island City and Woodhaven Boulevard stores," Mr. LaFerle said. "It's an underserved community with a lot of redevelopment and people investing in their homes. It's a very family-oriented neighborhood with a lot of brownstones and single-family homes. A lot of communities look to us for home improvement."
Mr. Campbell pointed beyond the store's 241-car parking lot. "If you look right out this door, you see buildings being renovated," he said.
The Home Depot is in a renovated industrial building that was built by I.B.M. in 1977. A 60,000-square-foot space on the second floor, with a separate entrance, has been occupied by the Brooklyn Job Corps Academy, a training program, since 2001.
Posted by dan at 05:49 PM
There are ever more ways to fake being rich. The Economist reports:
"An hour after Wall Street closed one recent Fridya, a youngish man in jeans and a sports jacket strode into the showroom of the Classic Car Club of Manhattan, a few blocks north of Tribeca. He paced between an Aston Marin V8, a Rolls-Royce Corniche, two vintage Ferraris and a dozen others, eager to find something for a night out. Ten minutes later he zipped through the hangar doors in a 2005 Lotus Elise, a bright red, curvy little number. There was no bill to pay and no insurance form to sign.Luxury car clubs are well established in Europe. Now they are catching on in the United States. The idea is that for an annual memersip fee, plus (somtimes) a weekly charge, members can have their choicr of smart cars. Ron Van Horssen, who recently opened a club near PHoenix, says the model is based on executive-jet sharing. Rich people, he thinks, are realising that "owning an asset is not necessarily the best way of getting the benefits of using it." A spin in a Van Horssen Ferrari Maranello costs $4,500 per week, plus the $7,000 annual feel. No one needs to worry about maintenance or inspection--and, as price tages on new Lamborghinis and Bentleys have climed, the rich can even save a bit of money."
Posted by dan at 10:08 AM
Mutual fund company (and .com victim) Janus Capital Group is rolling out a hedge-fund like vehicle. Minimum investment: $10,000. Alistari Barr of Marketwatch reports (registration required):
"Janus Capital Group Inc. has made its first foray into the hedge fund world.The Denver-based mutual-fund manager has started a fund, called the JanusAdviser Long/Short Fund, that uses investment strategiesu sually employed by hedge-fund managers.
THe new fund will seek to generate returns that aren't correlated wiht the equity market by using short sales as well as stock purchases, Janus said in a regulatory filing Friday."
Posted by dan at 10:03 AM
Does pride in a national currency get in the way of economic development? In an interesting op-ed in yesterday's Financial Times , Benn Steil says yes.
The post-1971 international monetary "system" comprises nearly 200 currencies, all circulating in the form of irredeemable IOUs. During gold-backed globalisation, commodity prices were aligned internationally about as well as they were across regions within countries. Today, we are so used to a world of autarkic national currencies that we consider it normal not for commodity prices to align internationally, but for the entire structure of prices in each country to shift up and down against the entire structure of other countries' prices. Thus a fall in the global (dollar) price of a commodity such as coffee tends not to produce necessary diversification away from inefficient types of production, but an engineered economy-wide inflation and devaluation in countries in which coffee exporters are politically powerful. The central bank distorts all other prices in the economy to prevent adaptation to falling world coffee prices. This is at the root of development stagnation for many poorer countries.The textbook case for floating a national currency is founded on the stabilising effects of using the exchange rate to protect domestic interest rates from movements in foreign rates and the ability to lower interest rates to counteract recessions. Yet the evidence is that the opposite happens: under floating rate regimes, developing country interest rates are more sensitive to foreign rates and, perversely, are more likely to have to go up rather than down during a recession to prevent capital flight.
Currency crises are now a big worry, particularly for countries with fixed or pegged exchange-rate regimes. Over the past two decades, severe crises have hit developing countries across Latin America and Asia, as well as those just beyond the borders of western Europe - in particular Russia and Turkey. The problem in each case emerged when they sought to take advantage of the opportunities afforded by a dollar-dominated international marketplace for capital. For developing countries that carries a fatal risk: creditors precipitate crises when they fear devaluation and in consequence default on dollar debts.
In short, developing countries do not actually see economic benefits from operating an independent monetary policy. Their interest rates are in effect tethered to US rates and their dollar capital imports expose them to currency crises - crises that would have been obviated by the gold backing that underpinned 19th-century globalisation and that deliberately disallowed independent policy.
Today, the best option for developing countries intent on globalising safely is simply to replace their currencies with internationally accepted ones, namely the dollar or the euro. Latin America's star economic performer in 2004 was politically volatile Ecuador, which grew at 6.6 per cent with 2.7 per cent inflation, the lowest in 30 years. Ecuador dollarised in 2000. If the European Union were wise, it would change its policy on extending the euro entirely and offer to assist Turkey and others in adopting it immediately.
Posted by dan at 09:54 AM
My article in VLife Magazine, on Wall Street meeting Hollywood.
Posted by dan at 05:15 PM
My latest in the New York Times, on mutual fund shareholder activists.
Posted by dan at 07:27 AM