Thursday, January 29, 2015


Attitudes in the EU are hardening towards Greece. Here’s the problem:

Greece already enjoys the longest debt maturities and among the lowest interest costs as a proportion of gross domestic product of any eurozone government, thanks to past bailouts. Some further easing of repayment terms is possible, but governments aren’t prepared to be generous to Greek taxpayers …

The thing is, the EU has been just as hard (if not harder) on other faltering members. And some of those members are seeing success from their austerity plans. In particular, Spain (the 4th largest economy in the EU) seems to have turned a corner.

… It is Spain rather than Germany that may prove Mr. Tsipras’s most implacable opponent. Madrid is clear that any deal with the Greek leader must be based on reform commitments at least as tough as those demanded of former Prime Minister Antonis Samaras. Anything less would represent a win for Mr. Tsipras and fuel support for Spain’s own new radical leftist party, Podemos.

The Spanish government believes that the turnaround in its own economy—growth is expected to reach close to 3% next year and unemployment fell by 400,000 in 2014—is proof that a robust pro-market reform program is the only way to exit the crisis. Madrid believes that it would be in Spain’s and the eurozone’s best interests to allow Greece to crash out of the eurozone …

Would the EU amputate a toxic Greek limb to keep its main body well? It seems like we may find out.

Read about it in “Why the Eurozone May Need to Sacrifice Greece to Save Spain” in the January 28 issue of The Wall Street Journal.

Syriza Wasn’t Bluffing

Syriza is the party that just won power in Greece.

Often in democratic elections, a party will make claims that are somewhat outlandish … and then back off of them once it wins the election.*

Syriza has only taken a few days to do just the opposite, rattling markets.

Within hours of taking office, government officials said they would stop the planned sale of the state’s majority stake in Greece’s largest port and dominant utility. They also pledged to rehire thousands of public-sector workers and reopen the country’s state broadcaster, which had been shut down by the previous government.

The moves scuttled the expectations of some European officials that Greece’s new leadership would retreat from its radical campaign platform after attaining power. Greek stocks plummeted more than 9%, with the country’s four main banks falling more than 25%. The yield on two-year debt rose by 2.63 percentage points—an enormous move by bond-market standards—to 16.5% as Greek bond prices tumbled.

What they are worried about in the EU is contagion, and a flight to quality. There’s already small signs of that:

Elsewhere in Europe, bond prices in Italy, Spain and Portugal also edged lower, giving up some of their gains since the European Central Bank announced a major bond-buying program last week. Meanwhile, German 10-year government bonds—seen as a haven in times of debt market turbulence—rose, driving the yield to 0.35%, close to a record low.

Read the whole thing, entitled “Greece’s New Leaders Act Swiftly to Reverse Austerity” in the January 28 issue of The Wall Street Journal.

* My name for this comes from a description some pundit made 20 years or so ago about why Bill Clinton was able to combine political and economic success: “he doesn’t believe his own BS”.

A Form of Inequality that Perhaps We Should be Concerned About

Inequality has been a hot topic the last few years, motivated in part by the after effects of the Great Recession.

Many economists don’t take this too seriously (and I’m among them). With more experience with the data, it’s harder for us to see that inequality has actually gotten worse, or to judge whether or not that’s a bad thing.

However, one aspect of inequality that I think is well-supported (although I’m not sure it’s a bad thing) is that over the last 30 years or so, we’ve increasingly moved towards an economy in which stars and superstars get paid more than they used to. Consider this chart:

5-01-29 Inequality from The WSJI think this is fairly accurate (and the source is 2 macroeconomists, unlike a lot of graphics you see in legacy media publications, or political discussions).

I have a lot of trouble with the common claim by progressives that the median household has seen no improvement in real income in 30-40 years. I think that’s ridiculous.

But I do think that the gains at the top have been larger, and this graphic supports that.

I’m agnostic about whether this is good or a bad thing though. I simply know of no concrete evidence that a pattern like this is harmful. So for me, it’s just a fact that I feel you need to be aware of.

Now, one argument that I do think you need to have command of, is that a problem in interpreting a chart like this, is that it’s unlikely that the top 5% are the same people from year to year. We do know that there is some churn in the top 5%, and that weakens any case that inequality is a serious issue.

I drew this chart from the article entitled “How a Two-Tier Economy Is Reshaping the U.S. Marketplace” in the January 28 issue of The Wall Street Journal.

“Every Silver Lining has a Touch of Grey”

Some U.S. firms are starting to have profitability problems because of the appreciation of the dollar.

It sounds kind of dumb at first, but when thinking about exchange rates, saying something like an appreciation/depreciation is good for everyone except those it’s bad for is actually fairly accurate.

In this case, the dollar is strong because some of the other big economies — the European Union and Japan primarily — have been doing relatively poorly.

See the article entitled “Strong Dollar Squeezes U.S. Firms” in the January 27 issue of The Wall Street Journal.

Sunday, January 25, 2015

Greece Has the Ball Today

Greece is holding its national election today. The polls are not closed yet, but the exit polls show a (not unexpected) victory by the Syriza party.

This party wants to end the fiscal austerity enacted over the last few years to help the Greek government get in a position to consistently pay its bills: basically, better tax collection, and less giveaways of government funds to the politically connected.

Syriza wants a haircut on existing debt, borrowed by the Greek government, from foreign lenders. A haircut means that the two sides will decide to revalue the debt principal at a substantially lower lever. I’ve heard rumors of a 70% cut. Syriza is ready to leave the Eurozone if no one agrees to the haircut.

Quite a lot of people in the Eurozone would gladly wave goodbye to Greece.

The problem is: what if this policy action is seen as beneficial by voters in other troubled countries? This is called contagion.

The thing you have to remember about macro is that there are no experiments to see how policy works. People may be voting on this when it sounds like a good idea before they can possibly know if it is a good idea.

Here’s one view: the way for the Eurozone to contain contagion if Greece leaves, is to do everything they can to make the situation in Greece look worse, so that voters will get the message.

A complementary view is that as we get to higher and higher levels of macroeconomic understanding, we come to appreciate that the public is better at anticipating crises, and covering their own a**es, than politicians and bureaucrats give them credit for.

In particular, we talk about self-fulfilling prophecies. For example, if people are worried about a future shortage of widgets, they’ll buy more widgets now, creating a shortage. We see this all the time with empty grocery store shelves in advance of potentially devastating storms.

So, what’s going on in Greece this winter? Hmmm. Greeks aren’t paying their taxes.* It’s almost as if people know that their taxes are going to pay foreign lenders, and they know their neighbor is voting for a party that will stop that, so they stop paying their taxes in advance, so that when that party gets into power they have no choice but to stop the payments.

The difference between a macroeconomist and a journalist is that the macroeconomist will cut those 4 words in italics off the front of that explanation.

* The link is from the Financial Times. They probably won’t let you see it unless you register. Don’t worry about, go and register. They are very good at asking you to be officially involved, but they do not make a hard sell to get you to buy their product.

Saturday, January 24, 2015

Tooting Our Horn for Us

Many of you are economics majors.

Good for you. It turns out that economics is the social science mentioned most often in The New York Times, and most often in the Congressional Record.

And yet, it’s not as popular as other majors nationwide, like psychology and history, and we barely beat out sociology.*

This won’t be on the test, but you can read the article entitled “How Economists Came to Dominate the Conversation” by (Dave Berri’s friend) Justin Wolfers in the the January 23 issue of The New York Times.

Via Greg Mankiw’s Blog.

* Economics isn’t a huge major at SUU, but we’re doing OK. Generally speaking, economics does better as a major, purely in terms of numbers of graduates, when the department is housed in a college of arts and letters. I’m not advocating that change for SUU, just pointing it out.

Tuesday, January 20, 2015

9 Things

You’re being trained as an economist in the neo-classical tradition: a little bit in principles, and much more so in this class. That’s not just because of the higher level, but also because the neo-classical paradigm has been the predominant force in overturning Keynesian macro over the last 45 years.

Anyway, Matt Yglesias wrote an article for Vox* entitled “9 Things Only Neoclassical Economists Will Understand”. There’s not much to it, just more of a list, with one-liners.

The thing is, for your purposes, several of those come up in this class each year. Noah Smith, an assistant professor at Stony Brook, has written a follow-up for Bloomberg View entitled “9 Economics Mysteries Explained” (he also blogs at Noahpinion).

Read them both as a way to start getting conversant in what economics students do at higher levels.

* Yglesias is a public intellectual — not an academic, not really a journalist, but someone who writes a lot of highbrow stuff. I guess I’d describe Yglesias him as a liberal who isn’t afraid to criticize the Democrats, or admit the Republicans are right sometimes. Vox is a site that’s kind of half-way between blog and legacy media magazine: big ideas, big name authors, long articles. 

Ridiculously Bad Macro

Newmark’s Door pointed me to this chloropleth from Business Insider:

NACo 4 indicators

Part of what you’re learning in this class is how to separate good macro from bad: and there’s a surprising amount of the latter.

This one’s pretty bad. Orange is the second worst rating here, and Iron and Washington counties get that rating. Yeah. Right.

Now, the whole thing isn’t terrible. It correctly spots the booming oil areas or North Dakota and west Texas. More generally, the plains states more or less skipped the Great Recession, And it picks up that Michigan, Illinois, and Florida are still worse off than other areas.

So what’s gone wrong here?

The first variable they use is “jobs”. This really isn’t specific enough. Anyway, employment is a trending variable. Are they measuring whether a county is above or below trend? Or just up? Have they linearized their measures? This is potentially messy and really wide open. We’ll talk about these issues a lot in February.

Their second variable is the unemployment rate. Using a rate actually may be keeping them out of trouble here. But again, we don’t know how they evaluate that rate: relative to when it peaked? Against some natural rate? More importantly, it’s hard not to see how jobs and the unemployment rate are not highly (negatively) correlated. If so, then they have a collinearity issue. This won’t really make things worse, but it does mean they’re kind’of faking having two pieces of information when they’re really just tracking one.

The same argument can be made about GDP. Presumably they’re using real GDP, but they don’t say that. Here we have the same issues as employment: relative to trend? Gross changes? Is it linearized? And they’ve doubled down on their problem of using jobs with the unemployment rate: it’s highly likely that GDP is collinear with both (which is multicollinearity — that sounds worse, but probably isn’t — in some sense the damage is already done).

The last variable they examine is home prices. At least they were sharp enough to use a median instead of the mean, since that distribution is skewed. Anyway, the economic problem with using this is that rising (falling) prices are both good and bad, depending on whether you ask owners (or potential buyers). No matter how much casual analysts insist that prices matter, they’re usually just a wash. The big problem with the Great Recession wasn’t falling home prices, it was inability of people to make transactions at all (you know, that Q thingie, rather than the P thingie).

In conclusion, this image is poorly done (at best) and misleading (at worst).

Monday, January 19, 2015

Trying to Get a Grip On the Water Balloon

Terry Keyes once passed on a great metaphor to me: some actions are like squeezing a water balloon — the balloon just bulges in some other spot.

This may be what’s going in Europe right now. Russia had trouble, then it moved to Belarus, last week it was in Switzerland, and today it’s in Denmark. Coming next week? Probably some place in eastern Europe like Hungary.*

There’s a number of arguments to link together here, so bear with me.

1) When people are nervous about a country’s future, they try to get their wealth out of it. That means they will give up the local currency at a lower price than they might otherwise (that’s called a depreciation), and will pay a little more for a foreign currency they regard as safe (that’s called an appreciation).

The Eurozone (the 19 countries that use the Euro officially) has had financial troubles of varying magnitudes since the onset of the Great Recession. So people of various Eurozone countries have tried to get their wealth out of the Eurozone, and into a financial institution in some country that’s regarded as safer. There are a lot of possible choices for that, but the big one in Europe is Switzerland — which has had a reputation of safe finance, and capable government, going back for decades.

So, there’s been pressure on the Swiss Franc to appreciate as the Euro depreciates.

2) It’s way too easy, and usually wrong, to make value judgments about price changes. Price changes don’t just happen by themselves: they’re caused by other things. And price changes both help some people and hurt others … every time. Casual analyzers of economic events tend to forget that.

And an exchange rate is a price (of one currency in terms of another). When some foreigner from the Eurozone gets rid of their Euros (so they depreciate) and buys Swiss Francs (so they appreciate) it hurts every foreigner who hasn’t done that yet, and helps every foreigner who did it before.

3) But the Swiss government and central bank care about … the Swiss, not some abstract foreigner from the Eurozone. The appreciation in the value of the Swiss Franc helps every Swiss consumer who imports, but it hurts every Swiss producer who exports. Switzerland is a small country on good terms with rich and populous neighbors, so you could probably change that to just helping every Swiss consumer (since they all import) and hurting every Swiss producer (since they export).

This will lead to political conflict between consumers and producers. My experience is that producers win the battles about exchange rates pretty much every time. So massive pressure for currency appreciation is probably not that popular in Switzerland.

4) There are two ways to run exchange rates for your country: fixed and flexible.

Flexible means you let anyone exchange any currency for your currency privately, and the search for better deals will drive exchange rates. Under flexible exchange, the Swiss Franc would have slowly appreciated.

This is, in fact, what it did do. But the appreciation was so persistent that the Swiss central bank pegged the exchange rate with the Euro in 2011.

Pegging is a form of fixing your exchange rate. What it means is that your central bank will buy or sell their currency, for whatever currency you show up with, at a known and constant rate.

Here’s how this works in practice. Someone lives in a crappy country in the Eurozone, and has some non-liquid wealth that they’re worried about losing. So they sell that for Euros, that are a little less crappy. Then they exchange those for Swiss Francs. And the Swiss national bank is left holding the crappy Euros.

But there’s a common misunderstanding amongst those with control issues. Pegging exchange rates prevents pressure for exchange rates changes from actually changing exchange rates. But it doesn’t dissipate that pressure anywhere. If things don’t change, it can continue to build. The Swiss may have hoped in 2011 that they could hold out and wait until the necessary change took place.

5) It’s naïve to think that because the Swiss central bank can “just print Francs” that this is like buying something for nothing. It isn’t. TNSTAAFL.

Yes, the Swiss central bank now owns big bags of Euros. But what exactly is it going to do with them? Buy stuff in the countries whose residents are trying to get out? Over the last 3 years the Swiss have accumulated as much foreign exchange as much larger Russia supposedly has.

A potentially bigger problem is that you’ve now given a bunch of foreigners the means to buy stuff inside your country, and maybe even to start setting up housekeeping. That prices out the locals in favor of people who may be regarded as carpetbaggers. This isn’t politically viable either.

6) So what we got last Thursday was a massive readjustment of the Franc/Euro exchange rate from the peg that wasn’t viable any more, to a new one they hope will hold (it’s not actually clear if they have a new peg, or a looser zone around some peg, or have gone completely flexible). That adjustment was about 40%. Lots of people are asking around trying to find out if there’s ever been an appreciation that large, but even at this point it’s arguable that it’s unprecedented. (Do note that depreciations that large aren’t uncommon, because most governments are better at screwing up their economies than not).

That makes Swiss consumers and foreigners who’ve obtained Swiss Francs instantly richer, and Swiss producers and the rest of the Eurozone instantly poorer. The hope is that perhaps some of that destabilizing foreign wealth will go back home and snap up the good deals.

7) As of this morning, another thriving country that’s quasi-inside the Eurozone (unlike Switzerland), Denmark, cut its interest rates. This is to discourage foreign money from coming in, because they too are pegged to the Euro.

8) Why is all this happening now? The Swiss National Bank has apparently been tipped off by the European Central Bank that the latter will be going forward with a new policy of quantitative easing.

Quantitative easing has a lot of smoke and mirrors around it, but there are really just two features that even a principles student can understand. The first is that they’ll be buying something other than short-term issues, to try and reduce longer-term interest rate. Second, they’ll be using a quantity target (and letting the interest rate go as low as it needs to) rather than picking the interest rate target (and buying as much as they need to).

The bottom line for Switzerland … and Denmark … and other places that are doing well … is that more Europeans will be bringing their wealth their way. The Swiss probably figured that they didn’t like how the peg had worked out over the last 3 years, and it was going to get worse soon. So they dropped it.

* Why Hungary? Well, really it could be a number of places, like say, Poland. But in Hungary, the mortgage lenders are mostly Swiss banks (because the domestic financial markets are not very thick). Many of the mortgages Hungarians hold are denominated in Swiss Francs, and just got very expensive overnight. Or maybe it will be Croatia, who fixed the value of their currency to the old value of the Swiss Franc within the last hour (and that move is, of course, breathtakingly stupid, since Croatians can now go to their own government to buy Swiss Francs at low exchange rates that they can spend … just about anywhere except Croatia).

Friday, January 16, 2015

Inappropriate Macroeconomic Perceptions

A poll shows that 64% of respondents say the U.S. is still in recession.

I am writing this in January 2015: our most recent GDP data is for 2014 III, and the recession ended 21 quarters ago in 2009 III.

I can't document this, but I've seen surveys like this over the last few decades, so it's not unusual.

Why are peoples' perceptions so divorced from reality? Here's some thoughts.

  • Maybe people don't know what a recession is?
  • Maybe people are inclined towards pessimism?
  • It is a FOXNews poll. Perhaps the respondents are biased against Obama? (Even so, I don't think that explains the existence of results like this going back for many years).
  • Perhaps their definition of a recession involves knowledge of anyone in their extended network who has been hurt by the economy?
  • Perhaps our threshold for feeling comfortable is higher than an economy is generally capable of achieving?

Tuesday, January 13, 2015

Labor Market Asymmetry In Charts

Business cycles aren’t symmetric: expansions are longer than contractions, troughs are sharper than peaks (yes, the names we use are kind of backwards there), and so on.

Labor market behavior associated with business cycles is even more asymmetric. This is shown in this panel of 3 charts:

Note in each case how quickly each of these (negative) aspects of the job market peaks, and how gradual the improvement is afterwards.

This behavior is typical. I remark in this class each semester what a colossal blunder it was for the Obama White House team to suggest, fairly constantly in the early part of their tenure, that they’d be able to fix the economy quickly. Any macroeconomist would know that’s nonsense because charts like those above are common to all recessions; I’m speculating that the claim they could defy historical regularities like this was made by politicians, bureaucrats, or marketers … but not by economists.

The same article contains another chart about another feature of measuring unemployment (but not one showing asymmetry). Over the last several years, you may have heard people say something like actual unemployment was, say, 6%, but “real” unemployment was much higher than that. This is another inane claim that a macroeconomist just would not make, but a politician, bureaucrat or journalist just might. The chart on the left shows this:

15-01-13 WSJ Capture of Unemployment Rates

So the beige series in the chart on the left is produced by counting the people from the three groups in the top chart in a broader measure of unemployment.

The problem with this broader rate is not that it’s uninteresting or uninformative. Instead, the problem is that it doesn’t add much to what’s contained in the announced unemployment rate: it’s kind’of like adding 6% to it each month. Big deal. Macroeconomists don’t focus too much on those alternative measures of unemployment because they’re so highly correlated with the narrower measure. Highly correlated translates into a colloquial “not much new to see”.

It’s cynical, but people in the media like having a more broadly defined unemployment rate (that looks worse) because it gives them another hook to present bad news. And bad news sells advertising, because humans have this jerky interest in bad things that happen to other people. The Germans even have a word for it: schadenfreude.

Read the whole thing, entitled “Hiring Booms, But Soft Wages Linger” in the January 9 issue of The Wall Street Journal.

Revisiting Haiti

I periodically revisit old issues posted on this blog.

Haiti is the poorest country in the western hemisphere. Five years ago this week, Haiti was hit by an earthquake.

The magnitude of this quake was comparable to the one that hit San Francisco during a World Series game in 1989. The 40 to 1 difference in per capita real GDP between the United States and Haiti translated into a 1000 to 1 difference in earthquake deaths.

Chile was hit by a much larger earthquake around the same time as Haiti. There are some mitigating reasons, but Chile is a lot more developed than Haiti, and the there were 300 times more deaths in Haiti than in Chile.

Lots of people reflexively blame problems in places like Haiti on exploitation by the rich. If anything, the exploitation seems to be going the other way.

And Haiti’s problems are not for lack of help. Consider David Brooks’ second argument from this article.

Why revisit this now? Because Congress is looking into where all the aid money for Haiti actually ended up. Their former ambassador to the U.S. alleges that most of it did not end up helping Haitians very much.

Sunday, January 11, 2015

Further Left

We’re not going to discuss this area in my class, but for curiosity and exposure purposes I want you folks to be aware that there are arguments and politicians who are currently active and to the left of the mainstream of the Democratic party.

The politician is Senator Bernie Sanders (VT), who may run for President … as a Democrat … or a Socialist … or something.

He’s chosen as his top economic advisor an advocate of what’s called Modern Monetary Theory (MMT). Her name is Stephanie Kelton; she doesn’t have a dedicated page at Google Scholar, but here’s the results of a search.

For your purposes, in the contemporary environment, MMT advocates focus much less on the negative effects of government borrowing, and much more on government spending. Essentially, it’s like Keynesian macroeconomics with an assumption that the economy is pretty much never at full employment. In this longer exposé on the policy implications of the theory from the Washington Post, one of the proponents argues that we haven’t been at full employment in a century.

If pressed, I’m dismissive of this whole viewpoint. Having said that, we need to recognize that we don’t have experimental data on this. It would be nice if some country would go out, assert they’re going to follow this practice, and then do so … and then we could all look at the data 20 years later. But that never happens. Without that, I’m kind of left with the fudge of saying that … hmmm … to me it kinda’ sorta’ looks like this is the policy followed by an Argentina or a Greece. That’s not good, but like I said, I tend to be dismissive of these folks.

Sunday, January 4, 2015

John Cochrane on Russia and the Ruble

John Cochrane is a University of Chicago business school professor who works on the borderline between macro and finance.

He’s posted a long piece on the evolving situation in Russia. Read the whole thing.

This is an interesting event on which to test out our various frameworks for thinking about macroeconomics and monetary economics.
There are three basic perspectives on exchange rates.
1. Multiple equilibria. Lots of words are used here, "speculative attacks," "sudden stops," "hot money," "self-confirming equilibria" "self-fulfilling prophecies" "contagion" and so on. Basically, the exchange rate can go up or down on the whims of traders. There is often some news sparking or coordinating the bust.  Some of the mechanism is like bank runs, pointing to "illiquidity" rather than "insolvency" as the basic problem.
This has been a dominant paradigm since the early 1990s. I've been a bit suspicious both on the nebulousness of the economics (lots of buzzwords are always a bad sign), and since the analysis seems a bit reverse engineered to justify capital controls, currency controls, (i.e. expropriation of middle-class savers and poor currency-holders), IMF rescues, and lots of nannying by self-important institutions and their advisers who will monitor "imbalances," "control" who can buy or sell what, and so forth. But models are models and facts are facts.
2. Monetary. Exchange rates come from monetary events, and primarily the actions of central banks. For example, much of the analysis of the dollar strengthening relative to euro and yen attributes it to the idea that the US Fed has stopped QE and will soon raise rates, while the ECB and Japan seem about to start QE and keep rates low.
3. Fiscal theory. Exchange rates come fundamentally from expectations of future fiscal balance of governments; whether the governments will be able and willing to pay off their debts. If people see inflation or default coming, they bail out of the currency, which sends the price of the currency down. Inflation follows; immediately in the price of traded goods, more slowly in others.

I tend to fall in the camp with # 3: exchange rate movements tell us about how people feel about one government’s credibility versus other governments.

Russia’s problems are coming from three sources: oil prices, international concerns about their behavior towards Ukraine, and kleptocracy related to the Sochi Olympics.

Oil price drops are a problem because, unlike developed “Western” nations, most poorer countries government’s own their oil reserves. So the fiscal position of the government depends critically on maintaining high prices. You may have also noticed that a lot of government officials are economically … pretty dumb. It doesn’t have to be this way, but typically governments get into trouble by locking in expensive spending plans when oil prices are high that they can’t unwind when the prices fall.

The situation with The Ukraine is a mess (and the Ukrainians aren’t entirely innocent). What’s important for a macro class a year later is that economic sanctions were put in place on Russia. Now Russia is trying to be a richer more developed country without the thick financial markets that richer developed countries … hmmm … develop as they go through the process of getting richer. So basically, they borrow a lot from foreigners, and repay those loans by borrowing even more. This has been cut off. Keep an eye on any weakening of the sanctions: this probably means that financial interests here are putting pressure on politicians here because Russians over there are threatening default. On the other hand, those same discussions of weakening sanctions are also pretty good evidence that they’re working.

Sochi: the most expensive Olympics ever, put on by an underdeveloped country, in a sub-tropical climate. Sheesh. There’s a ton of evidence that this was a big corruption event: Russia used government budgets to overpay for stuff sold to them by top supporters of the Russian government. Basically, it was money laundering. You can imagine that most of that money ended up in Cyprus, and Switzerland, and London, and even places like Park City.

Interestingly, a few weeks ago I speculated that Russia’s foreign reserves had been looted. Cochrane implies the same thing:

Russia ran big trade surpluses, meaning there are foreign assets somewhere. But those may have all ended up as Russian owned London apartments and Swiss banks and not available to Russian banks and businesses.

The last time I wrote about Russia 3 weeks back, I was unaware of the Rosneft switcheroo. Cochrane explains by quoting The New York Times coverage:

Rosneft, for example, had been clamoring for months for a government bailout to refinance debt the company ran up while making acquisitions when oil prices were high. Because of sanctions, those loans cannot be rolled over with Western banks. Debt payments are coming due later this month.
... With the oil giant in a bind, the central bank ruled that it would accept Rosneft bonds held by commercial banks as collateral for loans.
Rosneft issued 625 billion rubles about $10.9 billion at the exchange rate at the time, in new bonds on Friday. The identities of the buyers were not publicly disclosed, but analysts say that large state banks bought the issue.
When these banks deposit the bonds with the central bank in exchange for loans, Rosneft will have been financed, in effect, with an emission of rubles from the central bank. The deal roiled the ruble on Monday, according to analysts.
The reason for Monday’s currency crash is “well known,” Boris Y. Nemtsov, a former deputy prime minister who is now in the political opposition, wrote on his Facebook page. “The central bank started the printing press to help the Sechin-Putin business, and gave Rosneft 625 billion newly printed rubles. The money immediately appeared on the currency market, and the rate collapsed.”

Oops. One thing you need to recognize about government officials in a crisis is that they’re control freaks. And they think they can pull this stuff off without anyone noticing. When there’s a lot of money on the line, that doesn’t work out so well.

How can you keep an eye on this? Find a site that you like that shows the ruble/dollar exchange rate. Then, make sure it’s one that you can adjust the time axis on; you want to be looking at no less than a 3 month window. Here’s a 12 month window I snapped off of Bloomberg today:


Do note that I can’t scale the vertical axis to have a true zero. So, Bloomberg is distorting our view a bit.

What should you make of this? The sanctions were put into place in the summer. The exchange rate crisis of mid-December is the big spike. The Russian response to that, which quieted markets a big is the trough afterwards. Now note the time scale: the Russians best shot reversed their devolving position all the way back to, maybe, December 1. The slower losses of July to November added up to something larger, and they’re still there. And the exchange rate has started to get worse again since December 25.

This is not going to be fun to watch. The last time Russia had a financial crisis (1998) … we got Putin. The last time they had a crisis before that (80’s and early 90’s) … we got a coup with tanks in the streets of Moscow.


Next up on the international financial crisis list is Belarus.

FYI: Belarus is one of the former Soviet republics. It is the one that has remained most like the old Soviets, and most closely aligned with Russia over the last 20 years.

Belarus is in crisis, and it all ties back to Russia’s involvements in Ukraine. When sanctions went in place against Russia, Belarus recognized that they were tied to Russia but without the deep pockets from oil exports. So they started isolating their economy from Russia as much as possible.

The thing is, now Belarus has ticked off Russia, while still taking a body blow from the sanctions.

Last week their dictator fired some top government officials. This was after shutting down much of their internet and retail commerce the week before.

Belarus is probably not a big deal, the way Russia would be, or the way that Cyprus was a few years back (because of all the money Russians lost there), or Greece a few years before that (because of all the money German investors can’t get back out of there).

Russia has been fairly quiet the past two weeks. Perhaps they’ve just passed the crisis along to a weaker sibling.

Friday, January 2, 2015

Why Isn’t Japan In the Toilet? Because Most People Writing About Macroeconomics Can’t See the Forest for the Trees

I’m not going to claim that Japan is in great macroeconomic shape. In per capita terms, the country may not have peaked around 1990, but there certainly was a big kink in growth rates that occurred at that time. And Japan has been struggling with weak aggregate growth every since.

But, this is not the story you’ll here in the legacy media where comparisons of (national) debt to GDP are accepted without question. To these folks, Japan has the highest debt/GDP ratio of any developed country, and is headed for a crash. Here’s a common view:

To illustrate just how woeful Japan’s fiscal conditions are now, one merely has to look at how they were in March 1945. About half a year before Japan’s military-controlled government surrendered, Tokyo was borrowing at a feverish pitch to pay for its losing war effort and the Bank of Japan was furiously printing money to cover the soaring deficit.

The central government’s debt-to-gross domestic product ratio stood at 204% at the end of March 1945.

More than half a century later, this ratio–a key measure of a government’s ability to pay down debt–is already above that milestone. The Ministry of Finance estimates it will reach 227% by the end of March next year.

That’s from The Wall Street Journal, which is supposed to know better.*

Do note, before I go on, that this is the same argument by people who worry that the U.S. is in trouble because our national debt is about 100% of our GDP (both are around $17T, give or take).‡

The thing is, this is mostly nonsense. Innumeracy at a basic level is being demonstrated here. Specifically, you can always compare a stock variable to another stock variable, you can always compare a flow variable to another flow variable, but when you compare stocks to flows you get a rate, and you need to be very careful that your interpretation of that rate isn’t nonsense.

In this case, debt is a stock variable defined in yen. GDP is a flow variable measured in yen per year. Do the math: the correct figure is not 227% but 2.27 years. Reciting that it’s 227% is a scare tactic. Stating that it’s 2.27 years sounds like nonsense because it is. This measure that they’re crowing about means that if Japan devoted all of its national production to paying off national debt, it would take 2.27 years. Except that’s silly because all the residents of Japan would starve.

Appropriate alternative comparisons, which can still show that Japan is in bad shape but which rest on a foundation of numeracy, include comparisons of national debt to national wealth (both stocks) or GDP to interest payments on the national debt (both flows).

The amazing thing is that this article actually includes the former, but, it’s down at the bottom (where no ever reads), and it’s really small (because it doesn’t tell a story that the sky if falling that will sell newspapers):

If there’s one asterisk to put after the shocking comparative figures, it’s that the debt-to-GDP ratios don’t take into account Japan’s huge asset holdings. At the end of March 2012, Japan’s central government had assets totaling some Y600 trillion, roughly half of its total liabilities projected for next March, separate MOF data show. And those assets include Y250 trillion in cash, securities and loans. Critics often say Japan’s fiscal health could quickly improve if the government sells some of those assets …

Folks, they’ve just put an asterisk on the only part of the article that’s actually coherent. Pity.

* Economists know that the reporters for The Wall Street Journal are not particularly conservative/libertarian, and can’t be expected to be an improvement over most other legacy media outlets. It’s the editorial page that sets The Wall Street Journal apart, and which upsets so many progressives.

‡ If you are worried about the national debt, please worry about the present value of unfunded future obligations, which is about 13 times larger. The problem with (announced) debt is how you make the payments to your debtholders. This means that unfunded obligations are the exact same problem, just with a different name.

What Makes Macroeconomics So Hard: Regifting One of the Oldest Ideas As a Basis for Policy

We’ve always done it this way is already a part of my “What Makes Macro So Hard” lectures.

This one is subtly different: presenting the way we’ve always done things as something new. Essentially … regifting.

Here’s Thomas Sowell discussing Obamacare:

… What is older than the idea that some exalted elite know what is good for us better than we know ourselves? Obama uses the rhetoric of going "forward," but he is in fact going backward to an age when despots told everybody what they had better do and better not do.

Around the world, that elite may be determined by different means: age, skin color, wealth, education, social affiliation. And I’m not claiming that they’re not right more of the time. What I am claiming is that there ought to be more than this as a basis for policy.

I like to think I have better sense than most Republicans/conservatives/libertarians/classical-liberals: I freely recognize and admit that Obamacare is essentially Romneycare, which in turn is largely the Republican alternative to Democrat proposals circa 1990.

What bugs me about policymakers, in this case the Democrats and Obama, is the claim that this is something new. It isn’t.

How is Obamacare old? Consider:

  • … When confronted with the fact that millions of Americans stand to lose their existing medical insurance, as a result of ObamaCare, defenders of ObamaCare say that this is true only when those people have "substandard" insurance.

    Who decides what is "substandard"? …
  • … One of the fundamental reasons why private medical insurance has gotten so expensive is that politicians in state after state have mandated what this insurance must cover, regardless of what individuals want.

    Insurance covering everything from baldness treatments to sex-change operations is a lot more expensive than insurance covering only major illnesses that can drain your life's savings. Now these mandates have moved up from the state to the federal level.

    Insurance is an institution for dealing with risks. It is a costly and counterproductive way to pay for things that are not risks -- such as annual checkups, which are known in advance to occur every year.

    Your annual checkup does not cost any less because it is covered by insurance. In fact it costs more, because the person who is insured must pay premiums that cover not only the cost of the checkup itself, but also the costs of insurance company paperwork. ...  [emphasis added]
  • ... Another way in which ObamaCare is an old political story is that it began as supposedly a way to deal with the problem of a segment of the population -- those without health insurance.

    But, instead of directly helping those particular people to get insurance, the "solution" was to expand the government's power over everybody, including people who already had health insurance that they wanted to keep.

Note the pattern in the bold emphasis I added to each quote. It isn’t about hope and change, it’s about old guys in suits and ties and their busybody enablers telling everyone else what to do.

And lest you think that I’m dogmatically opposed to the Democrats and Obamacare, let me point out that the “War on Drugs” and the “War on Terror” — which get far more Republican than Democratic support — are justified with arguments that politicians have been making for centuries.