Current Affairs

The words of Gillian Tett are worth a ponder:

…corporate leverage in regions such as Asia is considerably higher today, relative to gross domestic product, than it was before the 1998 Asian financial crisis, as Frank Neumann of HSBC notes. What is even more alarming is that these numbers might understate the risk since many emerging market companies have been using offshore vehicles to raise funds — and those flows are not well tracked.

The BIS reckons that about half of the debt securities sold between 2009 and 2013 by emerging market entities, along with a large chunk of loans, were channelled via offshore entities, not onshore parent companies. These offshore entities typically swap this money from dollars into domestic currency and repatriate it to the head office.

Brazilian, Russian and Chinese firms, for example, are thought to have created some $35bn of these internal intra-company flows in the first quarter of 2013 alone. But these flows are often recorded in the data as a “foreign direct investment flow”, not debt. The risk, then, is that companies are exposed to currency mismatches that will only become clear at a later date.

The full FT article is here.  Here is a related article, focusing on Claudio Borio.  Here are Borio and Hyum Shin from the BIS.

Taxing the safe haven demand

by on December 18, 2014 at 6:19 am in Current Affairs, Economics | Permalink

Switzerland is introducing a negative interest rate on the deposits it holds for lenders, its central bank said on Thursday, moving to hold down the value of the Swiss franc amid the turmoil in global currency markets.

The Swiss National Bank said in a statement from Zurich that it would begin charging banks 0.25 percent on bank deposits exceeding a certain threshold.

There is more here.  Here is the market reaction.

This cracks me up:

The illustrations on the banknotes show generic examples of architectural styles such as renaissance and baroque rather than real bridges from a particular member state, which could have aroused envy among other countries. “The European Bank didn’t want to use real bridges so I thought it would be funny to claim the bridges and make them real,” Stam told Dezeen.

The article headline is “Fictional bridges on Euro banknotes constructed in the Netherlands.”  Perhaps this will prove a broader and subtle metaphor for making the eurozone actually work…

For the pointer I thank Joel Cazares.

From the archives, on Cuba

by on December 17, 2014 at 12:35 pm in Current Affairs | Permalink

Here is a Cuban joke which we hope will become obsolete:

One Cuban young woman complains to another. “He lied to me! He told me that he was a luggage handler! It turns out, he’s nothing but a neurosurgeon!”

Here are many other Cuba posts from MR, interesting throughout!

The Russian ruble

by on December 17, 2014 at 1:00 am in Current Affairs, Economics | Permalink

From Neil Irwin:

As Russia has deployed its reserves to (so far unsuccessfully) stop the currency collapse, it has made traders betting against the ruble richer while leaving the Russian government poorer. Poorer by $80 billion, to be precise.

Paul Krugman has a good treatment of the basic theory, scroll through a few of his posts hereFrom Leonid Ragozin:

Many commentators were especially annoyed that the discrepancy between the ruble and other currencies means Russians are essentially barred from traveling outside the country. “So now we are under a travel ban. … They didn’t even need to introduce exit visas [like the ones people needed in Soviet times] or build an iron curtain,” Boris Yunanov, the deputy editor of the liberal New Times magazine, wrote on Facebook

The most popular vacation spots for Russians will be hurt, they left out Goa.

Let us not forget intertemporal substitution:

Retailers had to change prices multiple times to keep up with the rouble’s fall. Shoppers, on the other hand, rushed to beat the price hikes.

The main reseller of Apple in Moscow, re:Store, saw sales two to three times higher than normal at one central branch, according to a salesman, reports Jack Farchy in Moscow.

Since then Apple has shut down on-line sales.  Here are a few photos.

Kevin Drum speculates about historical parallels.  Will selling gold be their next move?  You can follow the very latest on Twitter.

From Arthur R. Kroeber, here is the summary on his economics:

This popular reading is unduly negative. Here is another that fits the facts at least as well: After a brief scare, the property market stabilized, in large measure thanks to the removal of unreasonable restrictions on house purchases, rather than an unsustainable blowout in credit growth. By the end of the year the economy was still growing at the fastest pace of any major economy (7.3 percent), although a slowdown next year seems likely given the apparent intention to constrain credit growth. In June the Politburo approved the biggest fiscal reform in 20 years, which aims to restructure troublesome local-government debts and revamp the tax structure to cut back on perverse incentives. November saw a significant opening of the capital account, as the “Hong Kong-Shanghai Stock Connect” program permitted investors in those two financial hubs to put money directly in each others’ stock markets. Partly in anticipation of this event, Chinese stocks staged a big rally in the second half of the year which made Shanghai the world’s second best performing market in 2014. And in December the People’s Bank of China released draft rules for deposit insurance, setting limits on the government’s unlimited guarantee of the financial system and setting the stage for full deposit-rate liberalization in the next year or two.

That is not exactly my view, but this is an intelligent, optimistic account of the current China.  The post is interesting throughout, and most of it is not on economic issues at all: “This record is stronger than that of any other major world leader in the last two years”  Recommended.

Hyattsville is considering a charter amendment that would lower the voting age to 16 as part of its effort to encourage more voter participation.

If adopted, the Prince George’s County city — home to 18,000 people less than a mile from the District of Columbia border — will follow Takoma Park in neighboring Montgomery County as the second municipal government in the nation to extend voting rights to minors.

There is more here.

…the swaps push-out rule — section 716 of Dodd-Frank, which would require banks to book their derivatives in subsidiaries that are not their insured depository institutions — may be killed as part of the new deal to fund the government. Or here is Mike Konczal arguing to preserve the rule. You don’t need me to tell you how terrible the politics (all politics) are — Why do financial regulation in an unrelated spending bill? Why rewrite financial regulation based on a draft by Citigroup lobbyists? – but let’s spend a minute on why it’s not worth caring about.

First: The rule doesn’t apply to most derivatives. Federal Deposit Insurance Corporation Vice Chairman Tom Hoenig:

“In fact, under 716, most derivatives — almost 95% — would not be pushed out of the bank. That is because interest rate swaps, foreign exchange and cleared credit derivatives can remain within the bank. In addition, derivatives that are used for hedging can remain in the bank. The main items that must be pushed out under 716 are uncleared credit default swaps (CDS), equity derivatives and commodities derivatives. These are, in relative terms, much smaller and where the greater risks and capital subsidy is most useful to these banking firms.”

[This is now Levine again.]  I have my biases, but I have a hard time believing equity derivatives will bring down a bank. Uncleared CDS, I’ll grant you, has a rough track record, though the market is slowly moving away from it in general. But the big derivatives risks, by notional, were going to be allowed to remain in the depository banks anyway. “Oh but no one could be blown up on interest rate swaps,” you say, as the Fed discusses the timing of rate increases.

Second: Pushing out derivatives into non-insured subsidiaries doesn’t make them go away. Defenders of the rule cite the example of AIG, which foundered on uncleared CDS and brought down the financial system. AIG: not an insured bank! Neither was Lehman! The people arguing for the swaps push-out rules are not people who, in other contexts, would say that only insured depository banks get any government support. They’d say that “too big to fail” banks (you know: derivatives dealers) pose risks to the financial system even in their non-bank subsidiaries, risks that lead to an implicit expectation of government support beyond the explicit FDIC insurance. Here, they are right. If JPMorgan blows itself up trading CDS, that will be a problem for everyone, whether it happens in the insured bank or some uninsured subsidiary. The rule won’t stop that. The rule is (was?) fine, but it’s not worth getting upset about. This is all theater.

The link is here.

Binyamin Appelbaum has a new and excellent piece on this topic:

Even the 2012 presidential election, which recorded $2.6 billion in campaign spending, underperformed many forecasts. And spending has declined in each of the last two congressional elections. Candidates and other interested parties spent $3.7 billion on this year’s midterms, down from an inflation-adjusted total of $3.8 billion in 2012, which was less than the $4 billion spent in2010, according to the nonprofit Center for Responsive Politics. (These figures do not include a few hundred million dollars in unreported spending on issue ads.) In fact, spending has dropped as the economy has grown and despite a series of contests in which at least one house of Congress was plausibly at stake. “Dire warnings rang out that the decision would herald a new era in politics,” wrote Adam Bonica, a Stanford University political scientist, in a 2013 paper about the effects of Citizens United. “Three years on, there is little evidence that these predictions have come to pass.” Over the past year, Americans spent more on almonds than on selecting their representatives in Congress.

The article is here, interesting throughout.  Campaign finance, of course, is one of the areas where “the Left” is most likely to take an anti-science stance.

Stock market losers of the year

by on December 9, 2014 at 11:29 am in Current Affairs, Economics | Permalink

A snap presidential election — and the chances of Syriza coming into power if the government fails to win enough support to push its candidate through — are all it took to push the ASE [Greek stock index] down over 10 per cent on Tuesday.

Which makes it a 27 per cent drop for the Athens bourse this year. Only the Portuguese, Nigerian, Russian (in US dollars), and Ukrainian stock markets have done worse in 2014.

From David Keohane and Joseph Cotterill in the FT, here is more.  Here is one negative scenario for those of you into Greek pessimism.  Here is a more sober look at what is going on in Greece, from Open Europe blog.

The question refers to which economies are underrated or undervalued, not which economies are the strongest.  (Along these lines, LBJ is probably the most overrated player in the NBA today, but he is still also probably the best.)

Last time I picked Pakistan and the Philippines, the latter was a good choice for sure, although now its reputation has caught up to the reality of ongoing rapid growth.  I would say Pakistan remains up for grabs, but still the growth rate has been running about five percent, which you would hardly guess from a random episode of Homeland season four.  The fiscal deficit is down from eight percent to 5.5 percent, a big step for Pakistan.  The stock market has been doing quite well.  I don’t wish to claim vindication there, but at the very least it does seem they were underrated a year ago or two and still today.

This year I am going to pick Sri Lanka as well, which has a growth rate of about eight percent, one of the highest in the world.  The country receives a lot of bad press because of its vicious, decades-long civil war.  Sri Lanka also practices censorship and has iffy democratic credentials and a potentially chaotic election coming up.  That’s what helps make it underrated, but of course the war is over now.

The educational system is reasonably good relative to per capita income, English literacy is much higher than in India, and the Chinese are building a lot of infrastructure there.  Its tourism potential will expand considerably (I loved the trip there I did with Yana).  The poverty rate is down.  Here is one overview of recent developments.  Here are a variety of country reports, lots of positive features.

Still, you don’t hear so much positive about Sri Lanka these days.  On economic terms, I don’t find this one such a tough call, it’s simply a sticky reputation because of the bad politics and previous history.

So my picks for most underrated, this year, are Sri Lanka and Pakistan.

Here are some of my quasi-predictions from 2012.

In principle, almost everyone agrees that investing more in education makes sense as it could help build human capital and see Chile advance out of “middle income status” and into the ranks of the developed world.

However, banning students from using vouchers to attend for-profit schools and prohibiting schools that receive public subsidies from receiving top-up payments from parents, also goes against the market-based system. That has startled Chile’s close-knit and conservative business class, which fears the return of statist policies once endorsed by socialist president Salvador Allende in the 1970s.

…Compounding the uncertainty is that the reform drive coincides with the end of a commodity boom that has seen the price of copper, which makes up half of Chilean exports, shrink 12 per cent this year. In the third quarter, economic growth collapsed to 0.8 per cent, from almost 5 per cent a year ago, while investment contracted 10 per cent.

Amid the abrupt slowdown, critics joke that Ms Bachelet’s unwieldy coalition, “The New Majority”, is much like Christine Lagarde’s “New Mediocre”, as the head of the International Monetary Fund recently described the world economy. Certainly, business confidence has fallen in the gloomy atmosphere, while Ms Bachelet’s popularity has plummeted to 42 per cent from 58 per cent in June.

The FT article has other points of interest.  Perhaps Chile soon will no longer be so overrated.

Africa fact of the day

by on December 6, 2014 at 12:32 pm in Current Affairs, Political Science | Permalink

For now, the advance of democracy in Africa appears to have stalled. In 1990, just three of Africa’s 48 countries were electoral democracies, according to Freedom House, a Washington-based pro-democracy advocacy group. By 1994, that number had leapt to 18. Two decades later, only 19 qualify.

That is from Drew Hinshaw and Patrick McGroarty at The Wall Street Journal, the article is interesting throughout.

Indian industries have often complained that convoluted environmental regulations are choking off economic growth. As a candidate, Mr. Modi promised to open the floodgates, and he has been true to his word. The new government is moving with remarkable speed to clear away regulatory burdens for industry, the armed forces, mining and power projects.

More permanent changes may be coming. In a report made public last week, a high-level committee assigned to rewrite India’s environmental laws assailed the existing regulatory system, saying it has “served only the purpose of a venal administration” seeking to extract bribes.

To speed up project approvals, the committee recommended scrapping a layer of government inspections; instead, it said, India should rely on business owners to voluntarily disclose the pollution that their projects will generate and then monitor their own compliance, an approach the committee described as “the concept of utmost good faith.”

That is from Ellen Barry and Neha Thirani Bagri.  I am a fan of Michael Greenstone’s work, but I did not find this recent piece on Indian pollution sufficiently penetrating.

The number of women in the United States who gave birth dropped last year, according to federal statistics released Thursday, extending the decline for a sixth year.

The National Center for Health Statistics reported Thursday that there were 3.93 million births in the United States in 2013, down slightly from 3.95 million in 2012, but 9 percent below the high in 2007.

According to the report, the general fertility rate in the United States — the average number of babies women from 15 to 44 bear over their lifetime — dropped to a record low last year, to 1.86 babies, well below the 2.1 needed for a stable population. For every 1,000 women ages 15 to 44, there were 62.5 births in 2013, compared with 63 the previous year.

From Tamar Lewin, there is more here.  Here is Clive Crook on the importance of demography.