What Would Friedman Do II?
Allan Meltzer claims Friedman would not support QE, but undermines his argument when he says:
Friedman made an exception to his rule about steady-state monetary policy in case of deflation. When prices fell, as they had during the Great Depression or in Japan in the 1990s, he urged the central bank to increase money growth. I served as one of two honorary advisers to the Bank of Japan in the 1990s. With short-term rates close to zero, I gave the same advice, urging the bank several times to buy long-term bonds or foreign exchange to increase money growth until deflation ended.
All this is not relevant now, since there is no sign of deflation in the United States. The Fed’s claim that there is a risk of deflation should embarrass it.
That last paragraph is unavoidably a judgement call. Meltzer may be right in his judgement, but he has all but conceded the point that if deflation is a significant risk, then QE is the right response. Here are my reasons for thinking that it is.
posted on 04 November 2010 by skirchner in Economics, Financial Markets, Monetary Policy
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Holding Regulators to Account
Interesting developments in the Administrative Appeals Tribunal.
posted on 04 November 2010 by skirchner in Economics, Rule of Law
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Political Thuggery and the Banks
Saul Eslake notes the long history of ministerial thuggery directed at the banks, not to mention bureaucratic intimidation by the ACCC. As Saul reminds us:
the whole debate about whether the banks have some obligation to tie the timing and magnitude of movements in their lending rates to changes in the RBA’s cash rate entirely misses the crucial point that the RBA is now targeting the interest rates that borrowers actually pay when it sets the cash rate, and thus takes into account any change in the spread between the cash rate and the rates that borrowers pay.
If banks raised lending rates by an average of, say, 50 basis points, following yesterday’s 25-basis point rise in the cash rate, the RBA would remove one of the series of further 25-basis point increases in the cash rate it is clearly contemplating between now and the peak of the current mining boom.
Preventing banks raising their rates by more than the cash rate would not result in borrowers paying lower interest rates. All it would do is alter the distribution of the stream of interest payments made by borrowers between bank shareholders, bank depositors, and other sources of bank funds. And why that should be the subject of government intervention - especially by those who generally favour less rather than more government intervention in business decision-making - continues to elude me.
What eludes me is why the banks make donations to political parties that are actively seeking to damage their franchise (see, eg, CBA’s donations). These donations are clearly not buying the banks much in terms of influence. Shareholders should demand that the banks stop paying political protection money, sending a message to politicians that their shameless populism has consequences.
posted on 03 November 2010 by skirchner in Economics, Financial Markets, Monetary Policy
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Become the Boss of Me
The Business School at the University of Technology Sydney is looking to recruit a Head of the new Economics Group.
posted on 03 November 2010 by skirchner in Economics, Higher Education
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A Singaporean Perspective on the SGX-ASX Bid
A comment piece in Singapore’s Straits Times, with some input from me. Wolfgang Kasper’s original Centre for Independent Studies Policy Monograph from 1984, Capital Xenophobia, also gets a mention.
posted on 02 November 2010 by skirchner in Economics, Foreign Investment
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Hockey Beaten by Someone Else
Joe Hockey finds that populism isn’t popular:
VOTERS have rated Tony Abbott marginally better than Malcolm Turnbull to take the Coalition to the next election.
An Essential Media online survey of 1844 people taken last week found 23 per cent of voters backed Mr Abbott, while 22 per cent said Mr Turnbull would be a better person to take the Liberals to the next election.
Opposition treasury spokesman Joe Hockey (14 per cent) rated fifth behind “don’t know” (19 per cent) and “someone else” (15 per cent).
posted on 01 November 2010 by skirchner in Opinion Polls, Politics
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Peter Costello Shows Canada How to Argue Against FDI
Former Australian Treasurer Peter Costello tells the Canadians that his bogus national interest arguments for FDI protectionism are much better than their bogus national interest arguments.
In an op-ed for domestic rather than Canadian consumption, Costello opposed Chinalco’s proposed acquisition of Rio Tinto and noted that his government sought to stifle the globalisation of BHP to protect Australian jobs:
I was determined to ensure that BHP’s corporate presence did not disappear from Australia in the same way as CRA, so I put conditions on its dual-listed company structure that required the global headquarters to remain in Australia, that this be specified in all public documents, that the majority of board meetings be in Australia, and most importantly, that the chief executive and chief financial officer have their principal residences in Australia. This last condition was opposed by the company.
Several times the company sought to have these conditions eased but they remain in place, and to its credit, the company has scrupulously complied with them. The world’s largest diversified mining company is still Australian…
The head office generates the corporate, financial, legal and insurance services and the highly skilled jobs that come with them.
posted on 01 November 2010 by skirchner in Economics, Foreign Investment
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In Praise of Irrational Exuberance
Virginia Postrel on why an economy needs deluded optimists.
posted on 30 October 2010 by skirchner in Economics
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Australians Swoop on US Property
Australians show Americans how to make money on US residential property (note the apparent absence of capital xenophobia on the part of Americans in relation to residential property).
posted on 30 October 2010 by skirchner in Economics, House Prices
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Peter Costello Feels their Pain
If Peter Costello is to be believed, some former Liberal MPs are unemployable:
The point was whether he did the right thing by those MPs who would go on to lose their seats in the 2007 election. Some of them have never had a job since.
I have no idea which former MPs Costello might be referring to, but perhaps the fact that they are seemingly unemployable after three years had something to do with them losing their seat. Then there is this:
[Howard] had done nothing except politics all his adult life, and at his age there was little prospect of another career.
A little bit rich coming from someone who doesn’t have age as an excuse.
posted on 28 October 2010 by skirchner in Politics
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US T-Bills Versus Tuna
James Hamilton on the implications of negative real interest rates:
You’re better off storing a can of tuna for a year than messing with T-bills at the moment. But there’s only so much tuna you can use, and many expenditures you might want to save for can’t really be stored in your closet for the next year. It’s perfectly plausible from the point of view of more realistic economic models that we could see negative real interest rates, at least for a while.
Even so, within those models, there’s an incentive to buy and hold those goods that are storable. And in terms of the historical experience, episodes of negative real interest rates have usually been associated with rapidly rising commodity prices.
posted on 28 October 2010 by skirchner in Commodity Prices, Economics, Financial Markets, Monetary Policy
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The Behavioural Economics of the Public Sector
An important insight of the public choice literature is that relocating people from the private to the public sector does not miraculously transform them into promoters of the public interest. In my discussion of Doug Ginsburg and Joshua Wright’s paper ‘Behavioural Economics, Law and Liberty’ at the Mont Pelerin Society General Meeting in Sydney, I noted that relocating people from the private to the public sector does not make them any more rational either. This has mostly fatal implications for the attempt to hijack behavioural economics for the purposes of promoting increased government intervention discussed by Ginsburg and Wright. Matt Ridley references a paper by Slavisa Tasic which develops the point I was making in much greater detail.
posted on 27 October 2010 by skirchner in Economics
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The Right Policy Toward China
Send them flowers and chocolates argues John Cochrane:
They put a few trillion dollars worth of stuff on boats and sent it to us in exchange for U.S. government bonds. Those bonds lost a lot of value when the dollar fell relative to the euro and other currencies. Then they put more stuff on boats and took in ever more dubious debt in exchange. We’re in the process of devaluing again. The Chinese government’s accumulation of U.S. debt represents a tragic investment decision, not a currency-manipulation effort. The right policy is flowers and chocolates, or at least a polite thank-you note.
Yet Mr. Geithner thinks that the Chinese somehow hurt us. There is at work here a strange marriage of Keynesianism and mercantilism—the view that U.S. consumers supported the world economy by spending beyond our means, so that other people could have the pleasure of sending things in exchange for pieces of paper.
This is all as fuzzy as it seems. Markets and exchange rates are not always right. But it is a pipe dream that busybodies at the IMF can find “imbalances,” properly diagnose “overvalued” exchange rates, then “coordinate” structural, fiscal and exchange rate policies to “facilitate an orderly rebalancing of global demand,” especially using “medium-term targets” rather than concrete actions. The German economics minister, Rainer Brüderle, called this “planned economy thinking.” He was being generous. Planners have a clearer idea of what they are doing.
posted on 26 October 2010 by skirchner in Economics, Financial Markets
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The Rare Earths that are Neither Rare nor Earths
Tim Worstall on why we shouldn’t worry about China’s interest in rare earths:
But the non-rarity of the rare earths themselves means that China’s position isn’t sustainable. That California mine, for instance, could potentially supply 20 percent of world demand, currently around 130,000 tons a year. Another facility, Lynas Corp.‘s Mount Weld in Australia, has the capacity to produce a similar amount. In fact, there are enough rare earths in the millions of tons of sands we already process for titanium dioxide (used to make white paint) to fill the gap, while we throw away 30,000 tons a year or so in the wastes of the aluminum industry. There’s that much or more in what we don’t bother to collect from the mining of phosphates for fertilizers, and no one has even bothered to measure how much there is in the waste from burning coal.
If rare earths are so precious, why isn’t the United States working harder to collect them? The main reason is that, for these last 25 years, China has been supplying all we could eat at prices we were more than happy to pay. If Beijing wants to raise its prices and start using supplies as geopolitical bargaining chips, so what? The rest of the world will simply roll up its sleeves and ramp up production, and the monopoly will be broken.
posted on 25 October 2010 by skirchner in Commodity Prices, Economics
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Could the G20 Get Any Dumber?
Just when you thought the consenting adults view of current account balances was accepted by Australian policymakers, Wayne Swan signs-up for this:
The Obama administration on Friday urged the world’s biggest economies to set a numerical limit on their trade imbalances, in a major new effort to broker an international consensus on how to handle festering exchange-rate tensions. Officials from Britain, Canada and Australia quickly expressed support for the idea…
The Australian treasurer, Wayne Swan, called the Geithner proposal “a constructive one.”
Germany’s economy minister is not so sure:
Rainer Brüderle told reporters that the proposal could be viewed as a reversion to “planned economy thinking.”
posted on 23 October 2010 by skirchner in Economics, Financial Markets
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