Financial Repression: Coming Soon to a Market Near You
It’s not inflation you have to worry about:
It is conjectured here that the pressing needs of governments to reduce debt rollover risks and curb rising interest expenditures in light of the substantial debt overhang (combined with the widespread “official aversion” to explicit restructuring) are leading to a revival of financial repression—including more directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, and tighter regulation on cross-border capital movements.
posted on 10 September 2011 by skirchner in Economics, Financial Markets
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Stephen Williamson on John Quiggin’s Zombie Economics
Can’t blame Rupert Murdoch for this one.
posted on 09 September 2011 by skirchner in Economics
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Sovereign Wealth Funds as ‘Social Control of Public Wealth’
The Greens are big supporters of making greater use of sovereign wealth funds. This op-ed in The Age helps explain the appeal of sovereign wealth funds to the left:
contemporary Left thinkers have increasingly argued that the ‘‘financialisation’’ of society - the replacement of government-funded retirement with individually-funded savings invested in financial markets, the privatisation of core services, the increasing ownership of society by hedge funds and the explosive use of credit - needs some tempering through social control of public wealth. That could come through government ownership of vehicles such as sovereign wealth funds.
In other words, the role of SWFs is to disintermediate the private sector from saving and investment decisions. This is perfectly understandable coming from a left-wing perspective. However, it begs the question as to why so many Coalition MPs, such as Malcolm Turnbull and Josh Frydenburg, are also such enthusiastic supporters of SWFs.
The private sector already saves and invests for the future through private capital markets. It is governments that routinely squander future wealth thorough increased public spending and borrowing. Increased public saving via a SWF sounds virtuous, until you recognise that public saving is just deferred government spending. Unless you think future governments are going to make better spending decisions than the governments we have actually had, the argument for increased public saving via a SWF is decidedly weak.
In this op-ed, I argue that some of the objectives behind a sovereign wealth fund could be better achieved through binding fiscal responsibility legislation. If a politician supports a SWF, but opposes fiscal responsibility legislation, then you know they can’t be trusted with a SWF.
posted on 07 September 2011 by skirchner in Economics, Financial Markets, Fiscal Policy
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How to Fix a Conflicted RBA Board
I have an op-ed in today’s AFR arguing for monetary policy decision-making to separated from the Reserve Bank Board. Full text below the fold (may differ slightly from edited AFR text).
continue reading
posted on 07 September 2011 by skirchner in Economics, Financial Markets, Monetary Policy
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How to Respond to the Terms of Trade Boom
From this week’s Ideas@theCentre:
Listening to some commentators, you could be forgiven for thinking that the terms of trade boom was the worst thing that ever happened to the Australian economy.
Relative to what we pay for our imports, Australia now gets higher prices for its exports than at any time since at least 1870. This was illustrated by Reserve Bank Governor Glenn Stevens’ observation that ‘five years ago, a ship load of iron ore was worth about the same as about 2,200 flat screen television sets. Today it is worth about 22,000 flat-screen TV sets.’
This increased international purchasing power is attributable not only to rising commodity prices, but also lower prices for imports, not least manufactured goods. The flip side of Australia’s terms of trade boom is the collapse in the terms of trade for countries like Japan.
It wasn’t supposed to be this way. In the 1950s, economists Raúl Prebisch and Hans Singer argued that manufactured goods prices would enjoy a secular rise relative to commodity prices and that developing countries should engage in activist industrial policy and import substitution to avoid a declining terms of trade. The same argument has long been made in Australia, but would have had disastrous consequences if its policy prescriptions had been followed in response to previous terms of trade slumps.
Julian Simon would certainly agree with the proposition that real commodity prices should decline in secular terms, but he also noted the broader gains in real purchasing power from increased productivity and declining real prices for manufactured goods. It is fair to say that Simon would have been agnostic on any trend in their relative prices.
The terms of trade boom came about in part because it was unexpected, not least by the mining industry itself. It underinvested in the 1990s, partly because of implicit acceptance of the Prebisch-Singer hypothesis on the part of many investors. Historical experience highlights the danger of conditioning public policy on assumptions about the future direction of relative prices for traded goods.
Our best response to the terms of trade boom is to become even more open to inflows of foreign labour and capital and to reduce the government’s command over resources so that the mining industry can expand with less pressure on other sectors. While the non-mining sectors will contract relative to mining, they can still expand in absolute terms if we continue to remove government-imposed resource constraints to overall economic growth.
posted on 02 September 2011 by skirchner in Economics, Foreign Investment, Free Trade & Protectionism, Population & Migration
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The Shadow RBA Board
The Centre for Applied Macroeconomic Analysis at the ANU has put together a Shadow RBA Board:
Made up of senior Australian economists, the shadow board was set up as a research project by The Australian National University to look at interest rate setting by monetary policymakers.Director of the Centre for Applied Macroeconomic Analysis at ANU Professor Shaun Vahey said board members were asked to rank their preferred target interest rate, and to give the probability that each interest rate is appropriate.“Each economist gave a percentage value for how much they preferred each interest rate using an electronic voting system,” he said.
“The board members are not forecasting actual RBA board behavior, but are considering what they believe is the appropriate rate.”
Of course, what you believe to be the appropriate rate should be the same as your prediction for the actual interest rate outcome, unless you think the RBA Board is behaving inappropriately! Not surprisingly, at the August meeting, every member of the Shadow Board except Shaun assigned the single highest weight to the current official cash rate setting, endorsing the current stance of monetary policy.
This highlights a major point of difference between the Shadow RBA Board and its overseas namesakes. The US Shadow Open Market Committee and the UK’s Shadow Monetary Policy Committee were established specifically to critique current policy from a monetarist perspective, as well as advocating reform of existing monetary institutions. The members of the Shadow RBA Board for the most part share with the RBA the standard New Keynesian framework for monetary policy, which is unlikely to lead Shadow Board members to adopt a radically different policy stance, even in a probabilistic setting. This is not to say that the New Keynesian model is an inappropriate framework. As Ed Nelson has shown, the basic features of the New Keynesian model can be derived explicitly from quantity theory identities.
One possibly unintended consequence of the Shadow RBA Board will be to hold it members accountable for their policy prescriptions. Having confidently announced in a press release that ‘the current interest rate is at the correct level,’ it will now be more difficult for members of the Shadow RBA Board to retrospectively criticise the stance of monetary policy. Unlike the US and UK shadow policymaking bodies, the Shadow RBA Board may find themselves locked-in to defend the official policy position.
posted on 30 August 2011 by skirchner in Economics, Monetary Policy
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‘Everybody’s Money’s the Same Colour to Us’
Australian farmers don’t want a bar of scare-mongering by the Farmers Federation:
farmers such as Simon Tiller have a clear message to any foreigner interested in his multi-million-dollar operation: come on down.
The 29-year-old father of two would not say where the “considerable overseas interest” was coming from for his $15.5 million wheat, barley and canola concern east of Esperance, 700km southeast of Perth, but he is adamant foreign investment is pivotal to keeping Australian agriculture strong and productive.
“Can you imagine the mining industry getting off the ground without foreign investment? It’s a sophisticated global economy and we need to keep pace,” he told The Weekend Australian.
While the West Australian Farmers Federation has warned about the dangers of “large-scale Chinese ownership” following moves on Australia’s sugar industry and rumours China was seeking 80,000ha of WA farmland, grain producers such as Mr Tiller around Esperance won’t have a bar of any “scaremongering”...
Foreign investment was good for farmers who wanted to sell - it gave them an out - and those that didn’t as it “kept values rising”.
I make related arguments in this op-ed.
posted on 27 August 2011 by skirchner in Economics, Foreign Investment
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Are People Hard-Wired for Density?
Hunter-gatherers validate Julian Simon:
Every additional person requires less land than the previous one. That’s an important statement. Not only does it say we’re hardwired for density, it also says a group becomes 15 percent more efficient at extracting resources from the land every time their population doubles. Each successive doubling in turn frees up 15 percent more resources to be directed towards something other than hunting and gathering. In other words, complex societies didn’t just evolve as a way to cope with high-density—they evolved in part because of high density.
posted on 25 August 2011 by skirchner in Economics, Population & Migration
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The PBO is Not the End of Politics
Bloomberg is seemingly the only news organisation to have thought that the introduction of the Parliamentary Budget Office legislation is worthy of note. The Bloomberg report suggests that the federal opposition have unrealistic expectations for the new body:
“We want an independent source,” opposition Finance spokesman Andrew Robb told the Melbourne Age newspaper last month. “I’d expect next time there will be no debate over our costings.”
As I argued in this piece for The Drum, it would certainly be desirable to put an end to pointless partisan bickering over costing assumptions and instead focus on the merits of the policies being proposed apart from their assumed implications for the budget bottom line. Unfortunately, the political process is such that politicians cannot admit to being wrong and they are unlikely to accept contrary opinions from the PBO, no matter how independent. My guess is the PBO will very quickly disappoint the expectations of the opposition and independents and will itself become embroiled in partisan conflict. This was the Canadian experience, discussed by Peter Reith here. Reith seems to think we can do better, but gives us no real reason to think that we will.
Robert Carling and I have a better idea.
posted on 23 August 2011 by skirchner in Economics, Fiscal Policy
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Selling the Gold Stock as Bailout of Last Resort
Michael Lewis quotes a senior Bundesbank official on selling the gold stock to meet an ECB insolvency:
The E.C.B. itself might face insolvency, which would mean turning for funds to its solvent member governments, led by Germany. (The senior official at the Bundesbank told me they already have thought about how to deal with the request. “We have 3,400 tons of gold,” he said. “We are the only country that has not sold its original allotment from the [late 1940s]. So we are covered to some extent.”)
The IMF bailed itself out by selling its gold stock. Why not the members of the ECB?
posted on 21 August 2011 by skirchner in Economics, Financial Markets, Gold
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Why Raising the US Debt Ceiling Was a Mistake
I have an article at The Conversation arguing that failure to raise the US debt ceiling need not have led to sovereign debt default:
It was the failure of US politicians to acknowledge the policy implications of long-run budget sustainability that decided the recent ratings action by Standard & Poor’s. Failing to raise the debt ceiling would not have led to debt default if US politicians had taken the necessary decisions to put the budget on a sustainable footing. Raising the debt ceiling kicks the problem down the road and creates the risk of a far more serious fiscal crisis in future.
A fiscally responsible US president would have joined with responsible members of Congress in refusing to sign a further increase in the debt ceiling. The Obama administration could have used the unthinkable prospect of debt default to force spendthrift members of Congress to reduce government spending and stabilise expectations for the future path of net debt that are currently weighing on economic growth.
Congress and the Administration know that if they lead the US to default on its obligations, the American people will sweep them from office. For politicians, incentives don’t come much stronger than that.
My CIS colleague Adam Creighton has been making similar points in Crikey, although I’m far better disposed towards quantitative easing than he is.
See also Jonah Goldberg, Wake Up and Smell the Tea.
posted on 11 August 2011 by skirchner in Economics, Financial Markets, Fiscal Policy, Monetary Policy
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Does Murdoch Own the Journal of Economic Literature Too?
Stephen Williamson reviews John Quiggin’s Zombie Economics:
I knew absolutely nothing about John Quiggin, until someone asked me to write a short review of Zombie Economics for the Journal of Economic Literature. The timing was good, as I was about to leave for Australia to give a plenary talk at the Australian Conference of Economists in Canberra in July. I could read the book on the plane (though a trip from St. Louis to Chicago would actually be sufficient) and might actually come across the man himself, or news of him, at the conference.
By the time I got to Canberra, I had read Zombie Economics, and had written a draft of my review which panned the damn thing.
The review we commissioned for the CIS journal Policy was a little more friendly.
posted on 04 August 2011 by skirchner in Economics
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Politicians’ Relative Pay and Fiscal Performance
I would call this evidence suggestive rather than definitive, but interesting nonetheless:
The chart below compares the pay of legislators in 13 countries with those countries’ fiscal space. The best “deal” for the taxpayer comes at the top left of the chart, where legislators are relatively low paid but the country has a large fiscal space. The worst deal comes at the bottom right of the chart, where pay is high but fiscal space low.
My CIS colleague Adam Creighton has suggested that politicians’ pay should be a fixed multiple of three times the median wage, ensuring that politicians’ incentives are aligned with those of the rest of the population. The linked chart suggests that this multiple is a little high by international standards. I would further modify Adam’s suggestion and tie politicians’ pay to a fixed multiple of the median real wage as an added anti-inflationary incentive.
Robert Carling and I have further argued that politicians suffer pecuniary penalities for breaches of our proposed fiscal responsibility legislation.
posted on 03 August 2011 by skirchner in Economics, Fiscal Policy
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The Real Cost of the CPRS Mk II
Ricardian Ambivalence highlights the real cost of the CPRS Mark II in the presence of political capital constraints:
The fact is the government can’t open a new tax battle while the carbon tax is taking all the oxygen. This is the hidden cost of the carbon tax. Not only will it do nothing to change the climate it is also crowding out a discussion of controversial but important policy debates.
The government’s apparent determination to die in a ditch over the CPRS Mark II is puzzling from a public choice perspective. There is nothing wrong with dying in a ditch for something worthwhile, but this is not typical behavior for politicians and begs the question why they don’t do it for something more worthwhile if they really are putting principle ahead of political expediency. Implementing the entirety of the Henry review would surely come at lower political cost and could even gain bipartisan political support.
Rudd and Turnbull realised they had to form a policy cartel on the CPRS to avoid it consuming them both. Neither wanted to fight an election on the issue. It was a bipartisan political conspiracy that nearly paid-off. A policy cartel is consistent with the median voter model. The CPRS Mk I would be operating today were it not for the coalition revolt against Turnbull’s leadership. Turnbull’s judgment that this would be electorally fatal to the Coalition was spectacularly wrong. Breaking the Rudd-Turnbull CPRS policy cartel destroyed Rudd and nearly won the Coalition the 2010 election.
posted on 01 August 2011 by skirchner in Economics, Politics
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Monetising the US Gold Stock
Monetising the US gold stock is a tried and true method of keeping the bond bailiffs at bay:
the nation owns about a quarter billion ounces of gold, valued at the quaint old figure of $42 2/9 per ounce. This stock serves as collateral for about $11 billion of gold certificates on the books of the Federal Reserve. The Treasury and the Fed could swap the old certificates for new ones based on a value closer to the current market price of $1,650 per ounce. To balance its books, the Fed would credit the Treasury’s account an additional $400 billion or so. This should be enough for even our improvident government to run for a few more months. Such an accounting transaction has the attraction of being done before in identical circumstances, as pointed out by my colleague Alex Pollock. In 1953, the Fed similarly “monetized” the gold after the Congress failed to pass an increase in the debt ceiling. This by the way, highlights the bipartisan nature of debt-ceiling dramatics. At the time, Republicans held the presidency and majorities in both chambers of the Congress.
Plenty of irony there for gold bugs.
posted on 30 July 2011 by skirchner in Economics, Financial Markets, Gold
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