The Australian Dollar’s Carbon Footprint
As the Australian dollar makes new 18-year highs against the greenback, Terry McCrann suggests we ponder the relationship between the currency, the terms of trade and carbon emissions:
The core driver of our rising dollar—and pretty much everything else in and around our economy—is the explosive growth in China’s demand for, and consumption of, commodities.
Principally, so far as we are concerned, iron ore to make steel and coal to generate power. Along with pretty much everything else—globally importantly, oil and copper.
In short, not to put too fine a point on it: our dollar is pivoting on a truly momentous eruption of greenhouse gases. Yet we and the world are—at least hypothetically—committed to not just capping that eruption, but reversing it.
Let me spell that out a little more specifically. We have a dollar challenging conventional currency gravity; on the promise of pumping more and more commodities into the Chinese “greenhouse gas factory”. Yet we want to in effect burn that factory down.
Add on the certainty that even on the assumption that the factory keeps on belching, our dollar will overshoot; what happens if we actually “succeed” in persuading China to please let us leave all the stuff in the ground?
posted on 24 July 2007 by skirchner in Economics, Financial Markets
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Capital Xenophobia
Stephen Mayne attempts to whip-up capital xenophobia against Singapore’s ‘financial imperialism:’
Planes, child-care centres, shopping centres, department stores, satellites, hotels, power lines, gas pipelines and mobile phones: the Singapore Government owns all that and more in Australia yet this is barely mentioned in public debate.
Does anybody else out there feel a little uneasy about this phenomenon, especially given the secretive, autocratic and undemocratic tendencies of the Singapore Government?
Mayne can’t bring himself to fully explain why we should feel uneasy, probably because he realises how close he is to sounding like Pauline Hanson.
In fact, we should be grateful that Singapore saves so much that it needs to export direct investment capital on a large scale (as indeed, does Australia, albeit on the part of mostly private rather than government-linked businesses). Australia is the beneficiary of this cheap foreign capital, which allows us to sustain higher rates of consumption and investment than would otherwise be possible.
Since foreign-owned businesses operating in Australia are subject to Australian law, their activities can hardly be considered objectionable. Indeed, investing in Australia makes the activities of Singapore’s government-linked corporations more transparent, something a shareholder activist like Mayne would surely welcome.
As Mayne suggests, if you don’t like these foreign ownership arrangements, there is also no obligation to transact with these businesses:
I, for one, switched my mobile phone contract from Optus to Telstra as a small consumer protest when Australian drug trafficker Van Nguyen was executed by the immovable Singapore authorities in 2005.
Most of us have a somewhat better sense of perspective.
posted on 23 July 2007 by skirchner in Economics, Financial Markets
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Governor Bollard’s Prop Trading Operation
This week, the RBNZ joined the RBA in effectively entering the foreign exchange proprietary trading business. The RBNZ announced that it would abandon its practice of matching its foreign currency assets with foreign currency liabilities. The RBNZ is now looking to increase its foreign exchange reserves on an unhedged basis. The official rationale for the move is to give the RBNZ access to internally funded foreign exchange reserves in the event of a ‘crisis’ in which the NZ dollar falls sharply.
For a small open economy with an open capital account and a floating exchange rate, such a ‘crisis’ seems an extremely remote possibility. Regular readers will recall that we ridiculed Nouriel Roubini last year for predicting that Australia and NZ were about to suffer an exchange rate crisis. The Australian and NZ dollars have since marched to new multi-decade highs in another one of Nouriel’s many spectacular forecasting failures. As recently as 2001, the New Zealand economy weathered a depreciation in the NZD-USD exchange rate to 0.3900 without recourse to intervention and with no adverse macroeconomic consequences. Indeed, the circumstances that might give rise to a negative exchange rate shock are likely to be those in which a sharp depreciation in the exchange rate would be an entirely appropriate and stabilising response. Sharp exchange rate depreciations can be invaluable in insulating the domestic economy from negative external shocks, just as the current appreciation in the NZ dollar is partly insulating the NZ economy from the positive external shock associated with a rising terms of trade. Countries that experience exchange rate ‘crises’ typically do so because of their commitment to managed exchange rate regimes. The problem simply doesn’t arise with floating exchange rates.
The RBNZ argues that by not having to borrow in international capital markets to fund future intervention to support the NZD, it is avoiding the risk of capital losses on these borrowings. This is a tacit admission of the likely ineffectiveness of foreign exchange market intervention, since an effective intervention operation to support NZD should yield capital gains, not losses. Since a central bank’s balance sheet is denominated in its own, ultimately irredeemable, monetary liabilities, it is not clear why the RBNZ should be at all concerned with capital losses in this context.
Like other central banks, the RBNZ will be able to take a long view on the management of its foreign exchange reserves, buying the NZD low and selling high, which should earn the RBNZ a tidy profit over the long-run, although maintaining an unhedged foreign exchange exposure will be more expensive than the former approach to reserves management, given the high yield on NZD denominated assets. In that sense, the new approach to foreign exchange reserves management is harmless enough. But it does highlight the fact that the RBNZ under Governor Bollard has little faith or no faith in the stabilising properties of open capital markets and floating exchange rates. In some respects, this is just the flip side of Bollard’s misguided preoccupation with the domestic-saving investment imbalance in his rationalisation of monetary policy. The real danger is not anything the RBNZ might do in relation to intervention or the management of its foreign exchange reserves, but that Governor Bollard, like Nouriel Roubini, simply doesn’t understand open economy macro.
posted on 13 July 2007 by skirchner in Economics, Financial Markets
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Mischiefs that Ought Justly Be Apprehended from a Rudd Government
The ACCC will be kept very busy doing not very much under a prospective Rudd government. Rudd wants increased scrutiny of supermarket prices, in addition to the increased surveillance of petrol prices he has already proposed. As Jennifer Hewett notes, these proposals are redundant at best:
Labor’s big pronouncement yesterday on referring grocery prices to the Australian Competition and Consumer Commission for review is not just a triumph of populism. It’s also a complete absurdity.
The ACCC already has the power to investigate possible pricing anomalies and does so regularly.
But the idea that Graeme Samuel can do a better job of lowering prices than Coles or Woolies is ludicrous.
The timing of Rudd’s opportunistic announcement only makes that more obvious.
At Woolworths’ release of its sales figures on Tuesday, CEO Mike Luscombe spent a long time justifying to analysts why his business was investing so much money in reducing prices rather than increasing its margins.
Bottom line: it wants to beat Coles by attracting more customers willing to buy more products. That involves a constant battle to lower its own costs as well as the cost to consumers.
Labor Party bleating about unjustified price rises suggests they either don’t understand what drives an aggressively competitive market, or they are just feigning ignorance. It’s difficult to decide which is worse.
Of course, one could say much the same about the ACCC itself. The ACCC has a dismal track record in the courts on these and many other issues.
posted on 12 July 2007 by skirchner in Economics, Financial Markets
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Carbon Offsets
Live Earth helps Chris Dillow reduce his carbon footprint:
The moment it came on, I turned the TV off.
At the same time, Live Earth Sydney was held against the backdrop of a terrifying drought:
Faced with record beer queues, thirsty fans at Saturday’s Live Earth concert at Sydney’s Aussie Stadium were seen by the Herald offering others $50 for their beer rather than wait an hour to buy refreshments.
Thousands, deprived of the traditional rock ‘n’ roll accompaniment, went to a Coca-Cola stand, forgetting that its manufacturers had been under fire in India for allegedly creating water shortages and pollution around their bottling facilities.
Scores were seen leaving within the first two hours of the nine-hour festival, fed up with the lack of basic services, cutting their losses on a $99 ticket. Gate attendants were heard telling the human tide that they should complain to the promoter.
It was “unAustralian”, one spectator protested. “This is what happens when you let hippies organise a big event,” another said. One woman, asked by Missy Higgins “how you all are back there”, earned a wry round of applause from the stands when she shouted: “Sober.”
Be sure to put your TV back on for this.
UPDATE: More global warming ‘denialism’ from Scott Armstrong and Kesten Green:
We asked scientists and others involved in forecasting climate change to tell us which scientific articles presented the most credible forecasts. Most of the responses we received (30 out of 51) listed the IPCC Report as the best source. Given that the Report was commissioned at an enormous cost in order to provide policy recommendations to governments, the response should be reassuring. It is not. The forecasts in the Report were not the outcome of scientific procedures. In effect, they present the opinions of scientists transformed by mathematics and obscured by complex writing… We have been unable to identify any scientific forecasts to support global warming. Claims that the Earth will get warmer have no more credence than saying that it will get colder.
posted on 09 July 2007 by skirchner in Economics, Financial Markets
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Wisdom Beyond Their Years
Treasurer Peter Costello encounters a teenager who understands dynamic inconsistency:
Recently a student at Melbourne High School asked me whether the recent superannuation changes I announced could be undone by a future government. Why would it bother you? I asked him. ‘Because I want to put as much money into superannuation as I can this year’ he said.
Of course, if the kid fully understood dynamic inconsistency, he would realise that asking Costello is pretty pointless.
posted on 06 July 2007 by skirchner in Economics, Financial Markets
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Gold Buggery
The WSJ is peddling more gold buggery on its op-ed pages, this time from David Ranson and Penny Russell:
Depreciation of currencies relative to gold has become unpredictable, chronic and planet-wide…
currencies depreciating against gold across the board is a sign of world-wide inflation—and it has begun to set off alarm bells in many major economic capitals. But in Washington, our own central bankers remain placidly confident that everything will turn out all right.
The unfortunate result is that the current crisis of confidence in paper money goes largely undiagnosed by the bulk of economists and policy makers.
One could equally say ‘appreciation of [insert name of commodity here] has become unpredictable, chronic and planet-wide.’ In other words, commodity prices have been going up. The ‘depreciation’ in the USD against gold is matched by a similar depreciation against base metals, as well as a broad range of other commodities. Commodities are becoming more expensive in terms of a broad-range of currencies because of supply-demand imbalances in the global markets where commodity prices are determined. The appreciation in commodity prices in terms of a broad-range of currencies tells us this is a real, not a monetary phenomenon. Far from signaling a ‘crisis of confidence,’ it points to the current strength of the global economy.
posted on 05 July 2007 by skirchner in Economics, Financial Markets
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Federal Election Betting Markets
Canberra bookie Portlandbet has opened a book on the outcome of every federal seat ahead of this year’s general election:
Punters have the opportunity to bet on any and every seat for the first time with prices on all 150 seats being offered.
On current prices, Portlandbet forecasts the Coalition to return to government with a reduced majority, winning 77 seats to 71 for the Australia Labor Party. Independents should win 2 seats.
This is consistent with the flow of money for the Coalition in recent weeks, who have firmed in Portlandbet markets from $2.15 to $1.87.
posted on 05 July 2007 by skirchner in Economics, Financial Markets
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Hedge-bots
John Cassidy of The New Yorker profiles Harry Kat, who maintains:
It is possible to design mechanical futures-trading strategies which generate returns with the same, and often better, risk-return properties as hedge funds.
The trading strategies employed by some hedge funds are based on little more than glorified technical analysis within the framework of an overall capital management strategy. To that extent, Kat’s results should not be entirely surprising.
posted on 03 July 2007 by skirchner in Economics, Financial Markets
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Jeffrey Sachs as Central Planner
William Easterly, on the ideology of development:
The ideology of Development is not only about having experts design your free market for you; it is about having the experts design a comprehensive, technical plan to solve all the problems of the poor. These experts see poverty as a purely technological problem, to be solved by engineering and the natural sciences, ignoring messy social sciences such as economics, politics, and sociology.
Sachs, Columbia University’s celebrity economist, is one of its main proprietors. He is now recycling his theories of overnight shock therapy, which failed so miserably in Russia, into promises of overnight global poverty reduction. “Africa’s problems,” he has said, “are … solvable with practical and proven technologies.” His own plan features hundreds of expert interventions to solve every last problem of the poor—from green manure, breast-feeding education, and bicycles to solar-energy systems, school uniforms for aids orphans, and windmills. Not to mention such critical interventions as “counseling and information services for men to address their reproductive health needs.” All this will be done, Sachs says, by “a united and effective United Nations country team, which coordinates in one place the work of the U.N. specialized agencies, the IMF, and the World Bank.”
So the admirable concern of rich countries for the tragedies of world poverty is thus channeled into fattening the international aid bureaucracy, the self-appointed priesthood of Development. Like other ideologies, this thinking favors collective goals such as national poverty reduction, national economic growth, and the global Millennium Development Goals, over the aspirations of individuals. Bureaucrats who write poverty-reduction frameworks outrank individuals who actually reduce poverty by, say, starting a business. Just as Marxists favored world revolution and socialist internationalism, Development stresses world goals over the autonomy of societies to choose their own path. It favors doctrinaire abstractions such as “market-friendly policies,” “good investment climate,” and “pro-poor globalization” over the freedom of individuals.
posted on 03 July 2007 by skirchner in Economics, Financial Markets
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Bong Hits 4 Bollard
The RBNZ has issued an op-ed style article designed to explain its intervention in foreign exchange markets. The article signals a departure from the RBNZ’s usual standards of openness and transparency, stating that:
Foreign exchange intervention is an ongoing process and the Bank will not be commenting publicly on its specific intervention activities.
Instead, analysts will have to rely on the RBNZ’s financial accounts to infer the scale of intervention. This lack of transparency from the RBNZ is counter-productive, since the Bank is denying itself the benefit of an announcement effect when it intervenes. Since the first intervention on June 11, market participants have only been guessing at whether the RBNZ is in the market. For example, the RBNZ was rumoured to be selling in New York trade last Friday, although you would be hard pressed to discern this from the price action in NZD.
The statement argues that:
Intervention operates at the margin, affecting the balance of demand and supply for the New Zealand dollar. It can have an immediate downward impact on the exchange rate as it did on 11 June. That can help to moderate the ‘peaks’ in the exchange and the length of time we spend at peak levels. It does not attempt to defend a particular level of the exchange rate. Rather it sends a signal that, in the Bank’s view, the exchange rate is out of alignment with the economic fundamentals. Those speculating in the New Zealand dollar need to be aware that the exchange rate is not a one-way bet; they need to be cautious.
The statement neglects to mention that both NZD-USD and the NZD TWI are now significantly higher than they were when the RBNZ first intervened on June 11. The ‘immediate downside impact’ is proving very short-lived. Adding another seller to what is a reasonably deep and liquid market does not significantly change the price dynamics for the NZD. Most traders see RBNZ intervention as an opportunity to get set at better levels rather than a significant downside risk to the currency.
The RBNZ is correct in noting that RBNZ intervention is not constrained by its ability to supply New Zealand dollars, contrary to media reports that erroneously suggested that the RBNZ’s foreign exchange reserves are a constraint. But RBNZ intervention is effectively constrained by the current stance of monetary policy. The RBNZ has sought to argue that intervention is both independent from, but complementary with, monetary policy. But it should be obvious that the RBNZ’s intervention to sell the NZD is at cross purposes with the current stance of monetary policy.
Walter Bagehot once said in relation to capital inflows that ‘eight percent will bring gold from the moon.’ With an official cash rate of 8.00% and threatening to go higher, the RBNZ will face an uphill battle containing further NZD appreciation through intervention.
posted on 27 June 2007 by skirchner in Economics, Financial Markets
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Austrianism or Agnosticism at the BIS?
The WSJ’s Greg Ip claims that:
Although the concluding chapter of the BIS’s latest annual report, released Sunday, never mentions the Austrian school, it is suffused with its influence.
My own reading of it would suggest that it is studiously agnostic on most issues. We have previously had occasion to ridicule the notion of the BIS as a home of Austrian School thinking. Greg Ip says that:
The BIS’s leading “Austrian” is a Canadian, William White, the head of the bank’s monetary and economic department and sometimes-rumored successor to retiring Bank of Canada governor David Dodge. In a 2006 paper Mr. White wrote that under Austrian theory, “credit creation need not lead to overt inflation. Rather…. the financial system … create[s] credit which encourages investments that, in the end, fail to prove profitable.” This leads to an “an eventual crisis whose magnitude would reflect the size of the real imbalances that preceded it [because] the capital goods produced in the upswing are not fungible, but they are durable. Mistakes then take a long time to work off.” He argued that in recent decades, “financial liberalisation has increased the likelihood of boom-bust cycles of the Austrian sort.”
As we noted when it was released, White’s paper was little more than Bretton Woods revivalism dressed-up in Austrian clothes. The notion that Austrian business cycle theory provides a basis for a revival of Bretton Woods institutions and central bank targeting of asset prices is absurd, but it is not hard to understand why these conclusions might appeal to a central banker.
There is little evidence to support Austrian business cycle theory as even a stylised account of business cycle and financial market dynamics, at least under current central bank operating procedures in the major industrialised countries, which have been dominated by interest rate and inflation targeting for at least the last 10 years.
The Taylor rule and related literature shows that it is much easier to explain monetary policy with reference to the economy than it is to explain the economy with reference to monetary policy. This is just another way of saying that monetary policy for the most part responds endogenously to economic developments and the exogenous component of monetary policy is very small. Anyone who has tried to motivate a role for official interest rates in standard economic models (the sort of empirical work that few would-be Austrians are prepared to undertake) knows what a problematic exercise this can be. Growth in money and credit aggregates can be given a similar endogenous interpretation.
This makes the claim that, but for the supposed monetary policy errors of central banks, the amplitude of business and asset price cycles would be greatly reduced extremely implausible, at least under contemporary interest rate/inflation targeting regimes. Indeed, we know that under the gold standard, the preferred monetary regime for many Austrians, volatility was more pronounced, with inflexibility in prices and exchange rates simply forcing any adjustment on to the real side of the economy.
The increased prominence of Austrian business cycle theory in popular discourse actually has profoundly anti-market implications, because it leads people to believe that there is something wrong with macroeconomic and financial market outcomes that are in fact largely market-determined and have very little to do with either monetary policy or asset price ‘bubbles.’
posted on 26 June 2007 by skirchner in Economics, Financial Markets
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Gordon Brown Wants You for the BoE MPC
Outgoing Chancellor of the Exchequer Gordon Brown wants to advertise for new members for the Bank of England’s Monetary Policy Committee:
Gordon Brown yesterday bowed to pressure to reduce the secrecy surrounding appointments to the Bank of England’s rate-setting body by pledging to advertise the positions.
Making his final appearance before the Treasury select committee as chancellor, the prime minister-elect said he would invite “expressions of interest’’ from economists and other experts for the four outside appointments to the nine-member monetary policy committee.
The advertisements would be more specific about the criteria and skills the Treasury was looking for than under current rules, he said, amid fears that under-qualified people might be appointed.
Last year, four former MPC members raised concerns that Mr Brown might have received advice to appoint a non-economist to replace Stephen Nickell, an economics professor who now heads Nuffield College, Oxford.
The House of Lords’ economic affairs committee last year described the appointments process as one which was “shrouded in mystery and may not always recommend the most suitable candidates”.
Mr Brown also pledged to lay out a timetable for appointments. Mervyn King, Bank governor, has criticised the Treasury for a “very informal” approach resulting in appointments being made “very much at the last minute” instead of in a “timely” fashion.
In Australia, we know all about timely appointments of qualified persons to the Board of the Reserve Bank.
posted on 18 June 2007 by skirchner in Economics, Financial Markets
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How to Beat Warren Buffett
It’s as easy as investing in Australian banks:
Research from global consulting firm Stern Stewart, commissioned by The Australian, shows the banks beat Buffett in terms of total shareholder return (share price growth plus dividends) over one, three, five, 10 and 15 years.
posted on 16 June 2007 by skirchner in Economics, Financial Markets
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Fertility and the Exchange Rate
Fertility has been a long-standing preoccupation of the authorities in Singapore, so it is perhaps not surprising that the Monetary Authority of Singapore should examine the links between fertility and the exchange rate:
We use a quinquennial data set covering 87 countries between 1975 and 2005 to investigate the relationship between fertility and the real effective exchange rate. Theoretically a country experiencing a decline in its fertility rate can be expected to have higher savings, lower investment, a current account surplus, and accordingly a real depreciation. We test and confirm this hypothesis, controlling for a host of potential determinants such as PPP deviations and the Balassa-Samuelson effect. We find a statistically significant and robust link between fertility and the exchange rate. Our point-estimate is that a decline in the fertility rate of one child per woman is associated with a depreciation of approximately .15% in the real effective exchange rate.
The number of births in Australia in the year-ended December 2006 was the highest in 35 years, while the real effective exchange rate in Q4 2006 was the highest since Q1 1985.
posted on 13 June 2007 by skirchner in Economics, Financial Markets
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