The Secular Case Against Gold
With the gold price at 23 year highs, Mahalanobis reminds us of the secular case against gold. The Dow/gold ratio isn’t pretty either. Funnily enough, gold bugs love this chart, believing it shows overvaluation in stocks!
posted on 02 December 2005 by skirchner in Economics
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Betting Against Themselves: Buffett, Gates and the Dollar
The AEI’s John Makin has put together a surprisingly good piece on the US dollar, which begins with an amusing comparison with George W Bush:
Why is the dollar like a Republican president? Answer: Because the dollar faces incessant predictions of imminent collapse, but in the end it wins out over weaker alternatives.
Weighing up the fundamental determinants of exchange rates, Makin argues that ‘it is surprising that the dollar has not risen further.’ He also highlights the absurdity underlying the doomsday cultism of Buffett and Gates:
America’s two richest men, Bill Gates and Warren Buffett, are losing hundreds of millions of dollars having bet against the dollar on the premise that rising U.S. current-account and budget deficits would have to weaken it. Maybe these two remarkable men should have pondered a little more the question of whether they could have become multibillionaires in Europe or Japan, where the environment for growth and innovation is far less friendly and the underlying vigor of the economy is less conducive to a strong currency. Beyond that, I guess they did not notice that the budget deficits and government debt are considerably larger in Europe and Japan than they are in America. Betting against the dollar meant that Gates and Buffett were betting against themselves. I can’t see why they would want to do that.
posted on 30 November 2005 by skirchner in Economics
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‘Bubble’ Collectibles
The contrarian in me thinks that when ‘bubbles’ have become collectible kitsch, we are well beyond the point of having to take alleged asset price ‘bubbles’ seriously!
posted on 29 November 2005 by skirchner in Economics
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RBA Governance
Robert Gerard’s main qualification for serving on the RBA Board were his contributions to the Liberal Party in South Australia. It now also seems that being involved in a dispute with the Australian Taxation Office, which falls within the Treasury portfolio, is no disqualification to being appointed to the Board:
Adelaide businessman Robert Gerard was appointed to the RBA board in March 2003.
The appointment came as Mr Gerard, who owns the family business Gerard Industries, was fighting the Australian Tax Office (ATO) over a Caribbean tax haven deal described as tax evasion.
A $150-million settlement in 2003 ended a 14-year investigation, that came after Mr Gerard’s appointment was taken to Cabinet by Treasurer Peter Costello.
Mr Gerard says he told Mr Costello about his ATO dispute before his appointment, and the Treasurer later contacted him and said he had no problem with him being on the board.
This has the federal opposition calling for an inquiry, but it is hardly the first time the business interests of an RBA Board member have been the cause of controversy. Anyone remember Solomon Lew and Yannon? Solomon Lew was one of the few outside appointments to the RBA Board not to serve a second term after the Yannon affair blew-up half way through his five year term.
As suggested in previous posts, the problem with the RBA Board is not so much the inevitably political nature of the appointments, but the many hats and potential conflicts of interest that some appointees bring to the Board table. The RBA’s efforts before the Administrative Appeals Tribunal to suppress the release of the minutes of Board meetings effectively acknowledges these conflicts. The setting of monetary policy should be kept separate from the other governance functions of the Bank and placed in the hands of a full-time committee of monetary policy experts, with substantial representation from outside the Bank.
posted on 29 November 2005 by skirchner in Economics
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Future Fund Chairman David Murray: ‘The Money Belongs to the Government’
Inaugural Chairman of the Future Fund David Murray makes things perfectly plain in this interview with the Australian. The money in the Fund belongs to the government and it will do with it as it pleases:
the former chief executive of the Commonwealth Bank made it clear he did not see the fund operating at arm’s length from government like the Reserve Bank…
“The money doesn’t belong to the people in the fund, it belongs to the government and the community,” he said. “It has to be managed according to the direction of government…
“The Government has the right to determine what it does on behalf of the taxpayers in the community.”
Mr Murray said he was enthusiastic about accepting the offer to chair the Future Fund, as it was “well suited to my own approach”. “I believe very strongly in the concept of intergenerational equity,” he said.
“I believe in the community being good at saving and investing in the future.”
The Future Fund is based on the premise that the national saving task implied by an aging population should be met by the government setting itself up as an inter-generational financial intermediary, with the result that financial markets are partially nationalised by the Fund. Does anyone seriously believe that a fund subject to direction by government will do a better job ‘saving and investing in the future’ than individuals?
posted on 28 November 2005 by skirchner in Economics
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Myths of the Adjustment Process
Woody Brock’s February 2004 paper on the relationship between US interest rates and the big dollar is a neat debunking of much of the conventional wisdom on this subject:
• If foreigners become disenchanted with US assets, and demand higher yields, can they get them? [No, other things being equal.]
• Can foreigners as a whole “pull out” their money from the US, thus driving up US real rates? [No.]
• Can foreigners as a whole refuse to acquire more US assets in the future (in order to finance future US trade deficits) thus driving up US interest rates? [No.]
• As the dollar falls, will the US experience a dose of “imported inflation”, thus driving up nominal interest rates? [Yes, but less than ever before due to structural changes in the global economy.]
• Can Asian central banks stop acquiring US IOUs? [Yes.] And if so, would this development send US interest rates soaring as the consensus expects? [No, the value of the dollar would take the hit much more than US yields.]
• How much more will the dollar fall before a new and more stable equilibrium can be achieved - an equilibrium including a balanced US trade account? [Much more than it has - largely because the value of the dollar has not been the cause of today’s trade imbalances.]
Woody greatly overstates the likely exchange rate adjustment in my view (eg, AUD-USD above parity,* a 300% revaluation in the yuan), but his analysis of the irrelevance of this process to the determination of US interest rates is essentially correct.
* Afterall, Australia has its own record current account deficit, for which a similar adjustment process is required.
posted on 26 November 2005 by skirchner in Economics
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Give Away Telstra
You might not recommend Telstra shares to your mother, but few Mums and Dads would say no to them if they were given away for free. In today’s Australian, Terry McCrann (no link) is once again arguing for Telstra to be given away rather than sold. With a $14 billion surplus looming in the Mid-Year Economic and Fiscal Outlook, the argument for privatising Telstra by lot seems more compelling than ever. The government has effectively conceded it does not need the money by undertaking to place the proceeds from privatisation into a Future Fund, along with part of the budget surplus, where these funds will be used to buy other financial assets. These assets are supposed to provide a revenue stream to fund future expenditures, but there is no real difference between meeting these expenditures out of current or future revenue.
Empowering individuals to provide for their own future needs by endowing them with financial assets is much less problematic than the government setting itself up as an inter-generational financial intermediary. I have long argued that that any proceeds from the sale of Telstra should be rebated directly to the private superannuation accounts that every working Australian already owns. Giving away the government’s remaining equity in Telstra amounts to much the same thing.
posted on 26 November 2005 by skirchner in Economics
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Prediction Markets Summit
Details of the Prediction Markets Summit can be found here, along with some links to related blogs.
posted on 26 November 2005 by skirchner in Economics
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Costello’s Billions
Speculation is mounting that the Mid-Year Economic & Fiscal Outlook could report a budget surplus as high as $14 billion. This is bound to give added impetus to proposals for further tax reform, with major changes to the tax system now readily affordable, even within the confines of the surplus.
The actual release date for the MYEFO remains as illusive as ever. As in previous years, the Treasurer will release the document at his own convenience, often with minimal notice. The government’s failure to adhere to a simple timetable for the release of important budget documents says a great deal about the low standards for fiscal transparency and accountability at a federal level.
posted on 24 November 2005 by skirchner in Economics
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Shameless Protectionism
Protectionism is rarely as cynical and opportunistic as this:
Prominent Liberal backbencher Bruce Baird said the Government should take 25-year-old Nguyen’s execution into consideration during negotiations with Singapore Airlines over a share of the lucrative Australia-US air route.
The Government is expected to make a decision shortly on granting the airline, owned by the Singapore government, access to the route from which Qantas makes much of its profit.
Mr Baird, who heads the parliamentary amnesty group, told ABC radio that while clemency for Nguyen should not be a condition of a Singapore Airlines deal, it should be a consideration.
“I’m not saying it should be made a condition I just think it is one of the issues that should be taken into consideration because we have made a number of requests to them to consider our position, we have no death penalty in this country so they are out of step in terms of other developed countries and imposing the death penalty,” he said.
The story neglects to mention Baird is also a member of the parliamentary Friends of Tourism group and that his electorate includes Sydney Airport.
posted on 24 November 2005 by skirchner in Economics
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Brad & Nouriel, Take Note
Ben Bernanke’s response to questions from Senator Bunning:
Concerns have been raised that the quantities of U.S. Treasury securities held by China
and other foreign investors, both private and official, have become so large as to increase the vulnerability of the U.S. economy to changes in the portfolio allocations of those investors. However, many of the reasons that investors hold these securities—their unparalleled safety and liquidity, together with the dollar’s traditional role as a reserve currency—are unlikely to disappear any time soon. Moreover, markets for dollar-denominated financial assets are extraordinarily deep; for example, foreign official holdings of U.S. Treasuries, of which holdings by China represent only a part, collectively account for only three percent of total U.S. credit market debt outstanding. Accordingly, U.S. financial markets would likely be able to absorb a significant shift in foreign official demands for U.S. debt, including by China.
posted on 24 November 2005 by skirchner in Economics
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Inflation Targeting and the Fed
Mark Thoma points to a piece in the FT by Peter Hartcher, criticising Ben Bernanke for his focus on inflation targeting at the expense of targeting asset prices. My review of Hartcher’s book, Bubble Man, explains why Bernanke is right and Hartcher is wrong:
Hartcher never ventures to suggest by how much the Fed should have tightened over this period. Instead, he quotes Fed research on the elasticity of stock prices to Fed funds rate shocks contained in a 2003 speech by then Federal Reserve Board Governor Ben Bernanke. In this context, Hartcher says that the idea that ‘monetary policy has a strong influence over the market…is supported by all the evidence from within the Fed itself’ (p. 151). Hartcher neglects to mention that the rest of Bernanke’s speech is in fact a compelling review of the theory and evidence against the proposition that monetary policy should respond to asset prices, citing no less than 20 academic papers and other sources on the subject. In particular, Bernanke summarises his argument by noting that ‘monetary policy can lower stock values only to the extent that it weakens the broader economy, and in particular that it makes households considerably worse off. Indeed, according to our analysis, policy would have to weaken the general economy quite significantly to obtain a large decline in stock prices.’
posted on 22 November 2005 by skirchner in Economics
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RBA Governance
The federal government will need to make three appointments to the RBA Board between now and July next year, with the expiry of the current terms of Frank Lowy, Don McGauchie and Warwick McKibbin. There is speculation that former federal Treasurer of the Liberal Party and Fairfax Chairman Ron Walker might be appointed to the Board. Needless to say, this has the opposition fretting for the independence of the Bank:
Opposition treasury spokesman Wayne Swan said Mr Costello should rule out making Mr Walker one of the board’s members, who earn around $50,000 a year for their services.
He said appointing Mr Walker would undermine the independence of the board. “We simply cannot let one of the most important and sensitive organisations in Australia be compromised in this way by becoming a plaything for friends of the Howard government,” Mr Swan said in a statement.
“An independent Reserve Bank board is fundamental to sound economic management and stability, and should not be treated as a destination for Liberal Party mates or a payback for services rendered to the coalition.”
The precedent for political appointments to the Board was set long ago and concerns for the independence of the Bank in opposition are rarely sustained by governing parties. When Qantas was still in public ownership, it was said that the Qantas Board was like the House of Lords, a dumping ground for political patronage, and the RBA Board has not done much better under successive governments.
The AAP story notes the McGauchie was appointed to ‘represent rural interests,’ reflecting his past affiliation with the National Farmers Federation, but also that his current role as Telstra Chairman routinely puts him in conflict with both the government and the ACCC. The long-standing politicisation of the RBA Board is in many ways a secondary issue to the conflicts of interest inherent in the many hats some appointees bring to the Board table.
This point was effectively conceded in affidavits lodged with the Administrative Appeals Tribunal in the RBA’s attempts to prevent News Ltd gaining access to Board minutes under Freedom of Information legislation, a process that was brought to an end when a conclusive certificate was issued. This episode demonstrated that the current Board arrangements are simply incompatible with increased accountability and transparency on the part of the Bank. In the absence of reform to the governance arrangements for Bank, the main qualification for most Board appointments will remain a lack of expertise in monetary policy. The contrast with the candidates being considered to replace the two vacancies on the Fed Board of Governors (see previous post) is rather telling.
posted on 22 November 2005 by skirchner in Economics
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Fed Governance
The FT reports on possible candidates to fill the two vacancies on the Federal Reserve Board of Governors:
The White House is considering appointing business leaders, financial markets participants or experts in regulation to the board, according to two people familiar with the administration’s deliberations.
“It does not mean they will not end up picking two academic economists but they feel [they] have the flexibility to look more broadly,” one of the people said.
Candidates for the vacancies include Kevin Warsh, a member of the National Economic Council, a lawyer who previously worked in Morgan Stanley’s investment banking department. Paul McCulley, a Fed-watcher and portfolio manager at Pimco, the fixed-income investment manager, is said to be one of a number of names put forward by Mr Bernanke as chairman of the White House Council.
Among the academic economists under consideration, Richard Clarida, a professor at Columbia University, was a Treasury official in President George W. Bush’s first term and is now a consultant to Clinton Group, the hedge fund. Randall Kroszner, a professor at the University of Chicago’s graduate school of business, is an expert on banking, international finance and financial regulation and served on the Council of Economic Advisers during Mr Bush’s first term.
The White House declined to comment on candidates or the timing of the nominations. There are currently no academic economists on the board.
Both Clarida and Kroszner would be excellent appointments. Appointing non-specialists with financial market backgrounds would be a mistake in my view, increasing the risk of the sort of regulatory capture by Wall Street that beset the US Treasury under Robert Rubin.
posted on 19 November 2005 by skirchner in Economics
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Incredulous Cultists
The latest data confirming record foreign demand for US assets and a decline in official sector purchases leaves the doomsday cultists simply incredulous:
if you believe the data, almost all the financing came from private investors abroad, who bought about $114 billion of US securities. That total includes around $90 billion of long-term debt. Corporate bonds were particularly popular. Central banks only bought $4 billion. I don’t believe that.
Brad is right to highlight the limitations of the TIC data. However, given recent gains in the USD index to two year highs, a reduction in foreign official sector purchases should come as no surprise, since there is less pressure on the managed exchange rate regimes of foreign central banks. There have even been suggestions that the Bank of Japan might soon intervene in foreign exchange markets to sell the USD. I’m far from convinced that such intervention is imminent, but if the BoJ turned a net seller of USD assets, this would pose a serious challenge to the view that the US is in any meaningful sense dependent on foreign central bank purchases of USD assets.
posted on 17 November 2005 by skirchner in Economics
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