What Countries Are We Worried About Right Now? Part 5: Canada (Plus Some Recent History from France)

Over the weekend there was a large (and perhaps overrated) public protest in Canada's capital, Ottawa. Many of those involved were long-distance truck drivers. It received some coverage in the U.S. media, mostly focused on the politics.

What has gotten more coverage is that in a related protest, for 3 days now Canadian truckers have blocked a border crossing into the U.S. In fact, it's the one where our own I-15 crosses the border from Montana into Alberta.

 

This is a much bigger deal (macroeconomically). There are only 3 border crossings on the interstates that truckers prefer in the 2,000 miles western part of our border with Canada. And, due to the limitations of the Jones Act, almost all commerce between Canada and the U.S. goes by truck or train. Further, the U.S. and Canada are the world's largest trading partners. 

I spent at least a minute researching this part on Google Maps. The trip from the border to Salt Lake City is usually 10 hours by the interstates that truckers love. To go around the blockade, through Calgary, Kamloops, Vancouver, Seattle, Yakima, and Boise takes more than 3 times as long. It's 4 times as long to go through Regina, Winnipeg, Fargo, Sioux City, Omaha, and Cheyenne. 

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A little common sense should also tell you that COVID-19 and the lockdowns have made truckers way more important to our macroeconomy than they were before.

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Also, truckers have discovered through actions in France over the last 5 years that they have more political power than they previously thought, and a convenient way for expressing that which inconveniences everyone else.

***

While many have joined the protests, it is centered on truckers. What they're upset about is that there's been no reconciliation between vaccination policies between Canada and the U.S. Like in the U.S. Canadian truckers are encouraged but not required to get vaccinations. But if they go from Canada to America and back, they have to quarantine for 2 weeks when re-entering Canada. This amounts to preventing them from earning a living doing their job.

The thing is, the Canadian government may have a point. They have a nationalized healthcare system, so taxpayers are paying for everyone's potential COVID-19 treatment. And the U.S. stinks at fighting COVID-19. Our case rates per 100,000 people are 3 times higher over the last 2 weeks, and 4 times higher over the last week. We also have 75% more deaths per million people than Canada does. And adjusting for the fact that our population is 9 times as large as theirs, so it stands to reason that we should have 9 times as many hospitalizations. But we don't. Instead we have 14 times as many hospitalizations currently.

Macroeconomically, we're almost 2 years into this pandemic, and our best friends don't really want to play with us. And it's creating political unrest over there.

Real GDP Growth for 2021 IV

U.S. PReal GDP for 2021 IV came out this morning. Here's the press release from the BEA.

One month after the end of the quarter, the BEA releases it's rough draft of GDP. This is called the "Advance Estimate". After another month they'll release a revision. A month after that they'll release the finished number.

And then, as we'll mostly discuss in February, they'll periodically update the data to reflect improvements in how to measure quality and prices. So that final number won't be final forever, but will be changed every so slightly every year or two. There's no plan or schedule for those, and the modifications are not large. With the passage of time, the older data gets modified less and less.

***

This morning's release shows real GDP growing at a 6.9% rate for 2021 IV. That rate is annualized, and is based on percentage growth rates. Those are the ones you learn about in middle school. They're what everyone thinks of growth rates. But they're non-linear.

In time series in macroeconomics and finance, percentage growth rates are avoided in favor of differences of natural logs, which produce an approximate growth rate. Few people in the literature note that it's an approximation, but we all know that it is, and you do too now. This approximation works best for growth rates near zero. In class, I'll show that the divergence between the two methods for growth rates this size is large enough to be noticeable, but probably not enough to make much difference in our analysis. In any event, that probably doesn't matter much: the huge advantage of taking logs and differences — that after that the math is linear — swamps concerns about the approximation sometimes being slightly inaccurate.

The growth rate for this quarter is an improvement over 2021 III, so that's good.

But, a big thing we've been worried about is how much of the high growth rates of the last several quarters is just making up losses from the lockdowns. More on that in class with spreadsheets!

Two Goals for this Post: 1) Test Your Subscription to The Wall Street Journal, 2) Continuing Coverage of China's Real Estate Problems

First, I want to test in class the directions for opening an article from The Wall Street Journal using the free subscription provided for you by the SUU School of Business. 

Help me out here. Do not work ahead. Follow the directions as accurately as you can. Help me figure out roadblocks for other students.

More Worries About Turkey

Iran sells natural gas to Turkey. 

It does not do this because they're friends, or have much in common. They do this because they're nearby, and have money.

Turkey, in fact, generates half of its electricity by burning natural gas from Iran.

Now ... it could be just a chance occurrence that Iran stopped sending natural gas down it's pipeline to Turkey. And it might just be chance that they've now turned the gas back on, but are keeping it at low pressure (a bit less than 10% of what they were doing). And it might be chance that they promise to get everything back up to 40% of what they were doing just as soon as they can.

But I think not.

When I see news like this, and I already know Turkey is in trouble, my first thought it that they're not paying their bills. Or that they didn't pay them on time, and then made a partial payment, and got less gas than usual.

In fact, the government of Turkey closed all industrial operations across the country until Thursday! And Iran only supplies about a sixth of Turkey's imported gas. Why is that having such a big effect? No one knows. You can read more about it here, here, and here, but the information is kind of limited.

N.B. One thing to keep in mind is that most countries do not have competitive industries in energy. Instead they have state-owned monopolies. So this is very much the government of Iran not selling something to the government of Turkey (to distribute around the country). Iran might be doing this as a purely political move, but this seems unlikely ... Iran needs all the money it can get. 

Update: Oops, I forgot about this one. Turkey also just did a currency swap with the United Arab Emirates. This means the UAE has contracted to accept Turkish Lira in exchange with their dirhans at a fixed rate. The deal is for about $5B worth over 3 years. The cool thing about this from the perspective of Turkey is that the dirhan is fixed to the dollar, while the lira is not. So Turkey has an outlet for its depreciating currency that will get it some dollars when it needs them. This is not the sort of thing you hear about very often.

Update 2: And that should definitely be interpreted as a bet the UAE is placing on Turkey. Why would they want to do this? Because Iran is the primary threat to the smaller countries along the Persian Gulf. This is "the enemy of my enemy is my friend" politics driving macroeconomic policy.

Optional: Background Primer on the Middle East

This one is to help understand the interaction of macroeconomics and politics, especially in relation to the post that follows this one (or is closer to the top of the screen on a blog).

American students do not tend to have a very sharp view of why things work out the way they do in the Middle East. There's a strong tendency to presume they're all Arabs and/or Moslems.

This is not correct, in important ways.

And it's old school to think that it's always Israelis vs. Arabs. A lot of non-Israeli countries in the Middle East have, over the last 10-20 years, figured out that Israel is not their big problem currently or in the future.

First off, countries derive regional and global power from the size of their economies. Second, that size is a combination of the size and richness of that countries population.

So we can figure out a lot about who has power by looking at the size of economies. The big players here currently are Turkey, Saudi Arabia, and Iran. They are all roughly the same size, and each is about twice the size of Israel.

Ultimately, as country's economies grow, population will win out, and on that count the power of the future is Egypt. But Egypt is too poor and too badly governed right now, so they may not get to the top of the heap in your lifetime. But also, Saudi Arabia will probably fall by the wayside, due to the larger populations of Turkey and Iran.

OK, so there's 3 countries to pay attention to macroeconomically. But here the blinkered view of Americans becomes a problem. None of these countries like each other ... even a little bit. 

***

A refresher on Europe might help. For example, France and the Germans fought for over 300 years. It was Austria leading the Germans first, then Prussia, then what were the German Empire and the Third Reich. 

Here's the thing: the French and the Germans aren't that much different. But they're different enough: different languages, different history of Romanization (the French were originally just Germans who crossed the Rhine to attack Rome), a bit of Celtic ancestry in France that Germany does not share, and the fact that protestant churches made much bigger inroads in Germany. Those differences were enough to create problems between comparable and competitive neighbors that lasted for centuries.

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Turkey, Iran, and Saudi Arabia see things in much the same way.

All are Moslem, but Turkey and Saudi Arabia are Sunni, while Iran is Shia. This is as significant a divide as Christianity dealt with in the 16th and 17th centuries. 

All three countries use the Koran which is written only in Arabic. But that's not the language of Turkey and Iran. 

On top of that, there are ethnic and cultural differences that are huge. Turks are the most western part of the same group of peoples that stretches across central Asia to Mongolia. Iranians are Indo-European, and as near as we can tell are descended from the same hordes of chariot-driving horse people as most of us. And Saudi Arabia is mostly Semitic people who've lived in that area for millennia.

The bottom line of all this is that they don't need much of a pretext to treat each other badly. But ... money talks.

Optional: Financial Trivia In "Trading Places"

Trading Places is a comedy film from the 80's. Funny, sometimes offensive even back then, and in parts very politically incorrect for 2022.

It's also a movie that professors talk about from time to time because there's a nugget of actual finance/macro at the core of the script. This is the story arc that two greedy old men are going to make a killing on orange juice by stealing the annual report from the Department of Agriculture and using it to set up a financial position that will improve when the news becomes public. The good guys feed them a false report indicating that the orange harvest will be bad, and the brothers buy lots of futures contracts for the delivery of orange juice at the current price (which is low because the news hasn't hit yet). When the true news hits, the brothers are in the totally wrong position, the price of orange juice falls instead of rising, and they lose their fortunes.

As far as buddy comedy movies go ... this is certainly the most financially complex plot ever attempted by Hollywood.

That report is actually a real thing! And it was in the news last week, because it predicted the worst orange harvest in about 75 years, and higher orange juice prices for the rest of the year.

P.S. Here's one more bit of trivia. Somehow, in Italy, a dubbed version of Trading Places has become a fixture of the season as the goofy rerun that families watch together every year on Christmas Eve.

What Countries Are We Worried About Right Now? Part 4: Ukraine (and Russia)

I was originally going to limit myself to just 3 countries. Isaiah even brought up Ukraine after I mentioned the three others (Kazakhstan, China, and Turkey) on the first day. It's not that I'm not interested in Ukraine. I just felt that most of what was going on there was political rather than macroeconomic.

And then I came across this post Tuesday after class, linked at Marginal Revolution. It's on Substack on a site called ChartBook.† It's entitlted "Putin's Challenge to Western hegemony - the 2022 edition" [sic]. It was written by Adam Tooze, a historian from Columbia.

I do not intend that you read the whole thing. But I did like the way he motivates Russia's behavior in terms of their foreign exchange situation. This makes it a good follow-up to the stuff I introduced the other day in discussing Turkey.

I'll return to Russia and Ukraine below.

***

I really was not trying to make the Turkey post huge. But there was a lot to explain there.

One of the simplifications I made to keep it shorter was to presume that exchange rates were flexible. This means that sellers and buyers of money meet in a decentralized setting (all online these days) and negotiate their own exchange rate. Big market participants have an incentive to make that information public, so you can watch the exchange rates inch up and down by the second.

The U.S. has had flexible exchange since 1973. Many of the other big/rich/developed countries have flexible exchange too. It's called a flexible exchange rate "system", but the hallmark is really that there's no system at all.

But governments are not inclined to approve of flexible exchange. Governments attract control freaks, and control freaks like to control things. 

In addition, flexible exchange is more difficult for business because it makes contracting more problematic. So there's definitely a constituency clamoring for the control freaks to control.

Now, if a country has a flexible exchange rate system, but its government panics once in a while and interferes, or maintains some control within acceptable bands above and below some target, we call that floating exchange. Floating exchange means, roughly, flexible when we like how that's going for us, and fixed when we change our minds and want to do something about that. So to understand what's going on I need to explain some stuff about fixed exchange rates.

In the flexible exchange rate story I told about Turkey, traders exchange one bag of money for a bag of some other kind of money. The exchange rate they agree on is either an appreciation or depreciation from where the rate was most recently. Appreciation (giving up less of your money to get more of their's) is generally viewed favorably by governments. The could interfere in that, but they usually won't. But depreciation is another matter.

From my perspective, both depreciation and appreciation have positive and negative aspects. But not so for governments: they tend to get a lot more involved around depreciations (in both good and bad ways); while appreciations they tend to be more hands off. Honestly, it's kind of weird.

Anyway, if you're a Turk with lira, it's a depreciation if either 1) you offer more lira for the same number of, say, dollars, or 2) the same amount of lira for less dollars. Focus on the second. You're already to exchange your lira for less dollars than you'd expect. At this point, an agent of the Turkish government shows up and says I'll give you more dollars than that American. You'd take the offer, right?

That's how fixed exchange rates work: the government interested in doing the fixing is always willing to step in with an offer at the rate they'd like to stay constant. The trick is, in order to do that, they have to have dollars (or some other currency) before someone wants to exchange for them. In short, they need a stockpile of other country's money, in advance.

That stockpile is called "foreign exchange" (which is an unfortunate name because that could easily mean a lot of different things, but we're stuck with it). Foreign exchange is what a government uses to "defend" its exchange rate, usually from depreciation.

Where a government gets this foreign exchange is pretty murky. The best way to think about this is in a very general way. Governments get a lot of money from different sources: taxes, fees, tariffs, even theft and war spoils. The money comes in and gets spent on stuff. View foreign exchange as one category of that stuff. But instead of buying something now, they're putting the money away to buy stuff later. And they put it away in the form of someone else's money. One common way that all this is done is for a country's government to claim that the natural resources from the land belong to the government. So there's a government firm that extracts them, sells them to foreigners, and keeps the revenue. Often this is with oil, so something like Petrobras is the national oil company of Brazil.

And finally, more foreign exchange is better than less. More foreign exchange means you can defend your money's value for longer, against bigger moves out of it. Less foreign exchange is a problem because it becomes increasingly likely you'll run out. And when you do, you can't defend your exchange rate at all, which means your stated policy of having a fixed exchange rate goes poof, and your left with decentralized trades taking your exchange rate flexibly to whatever makes traders happy. This is where Turkey is headed, and right now, it's going that way more quickly than most other countries.

Now, quickly back to floating exchange. This means that you let the rate be flexible for a while, often within an acceptable range (usually called a band). Then when you hit the upper or lower limit of the band, you switch to fixed exchange, and try to maintain at that rate until the pressure on your exchange rate recedes. 

It is premature to start reading in the middle of the article, but go to article linked above, and scroll down to the fourth chart (blue on a red chart). It shows Ukraine's exchange rate over the last 25 years. With depreciating shown as going up, and appreciation as going down. It's pretty easy to see the level areas when rates are mostly stable, punctuated by steep climbs as the country has exchange rate crises (listed in the paragraph just above the chart).

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Now back to the article about Russia and Ukraine linked above. You should read down at least until after the first chart. Tooze argues that Russia's ability to accumulate foreign reserves since 2000, has given it greater freedom of action, especially since 2007 or so.

Tooze mentions that Russia's foreign reserves are the 4th largest, after China, Japan, and Switzerland. What he does not mention is that since Russia's economy is a lot smaller than China's and Japan's, the usefulness of its reserves is proportionally larger. Switzerland is a special case, and not really comparable: the Swiss are a safe harbor for a lot of wealthy people, so it's easy to see how they could accumulate foreign reserves, and whose interests they'd defend if pushed.

You should also continue reading down to the paragraph that begins with "The third essential point ...". Someone (I forget who) brought this up after class on Tuesday with regard to Turkey. A government's deficit spending is less risky to that country's economy if they are able to borrow from their own citizens in their own money. Where many governments around the world get into trouble is that either their citizens won't lend to them, or don't have enough money to lend to them for the scale of spending they envision. So they go an borrow from foreign sources, usually in the money of that country. If you do this, and a lot of countries do, then a depreciation of your money becomes even scarier because it's making it harder to repay those foreign loans. The second chart shows that Russia has reduced the amount it owes in foreign money by about a third since 2013. 

After that, it's a big article, and I'm not concerned that you read more.

In short, Russia has been quietly getting its financial house in order. Russia is bothersome on the world stage right now because of macroeconomics. Unfortunately, it is often portrayed in the media that Russia is bothersome because they're militaristic, nationalistic, formerly communist, and so forth. This misses the big point: those things have always been part of Russia, but they act on them when their macroeconomic situation is favorable.

† Substack is a subscription only service, with a blog-like platform. A lot of former bloggers have been moving there because instead of monetizing through clicks (which is dominated now by clickbait and the algorithms that push that), you can charge for a subscription. This particular post is available free of charge.

What Countries Are We Worried About Right Now? Part 3: Turkey

There's a long story and a short story here. Short story first.

Turkey is undergoing a slow-moving currency crisis. The value of their currency is depreciating. Sustained depreciations often end in regime changes.

Turkey also has an elected president turned authoritarian dictator. So there's a sense in which this won't end well.

Turkey has also long considered itself to be part of Europe, even more so over the last century. But when it tried to join the EU, far weaker candidate countries (full of mostly white, nominally Christian, mostly Indo-European-language speaking people) were accepted, while Turkey (full of off-white, Moslem, Turkic-language speaking people) got the door slammed in its face. There's more on that in this post on Turkey and the EU from last spring.

Did I mention that Turkey is currently ruled by a strongman? Yeah, he's an Islamist who they voted in after the EU shunned them.

Interestingly, NATO, led by Americans rather than Europeans, has embraced Turkey from close to day one. 

Turkey is also a lot bigger than most Americans think. It's economy is in the top 10% in size, and it would be the 6th largest of 27 EU countries if it had joined. It's also not poor: richer than many EU members. 

In fact, Turks tend to be richer than Russians, or the Chinese, for example.

Also, depending on who has a good year, and the method of measurement (see Chapter VI in the Handbook), Turkey is between the second and fourth biggest primarily Moslem country.

In short, we haven't had a country this big in exchange rate trouble in over 20 years. The last time around was Russia under Boris Yeltsin. Since then, Putin has been in charge.

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The long story requires a lot of explanation about international trade and finance.

You can be forgiven if this is new to you. International stuff is always treated at the end of macroeconomics classes, and it often gets done quickly, if at all.

Also, international economics is riddled with misunderstandings and misinformation. Further, the international economic reality has changed a lot over the last 50 years, but many people are still interpreting it through the lens of the 19th century, or worse, the sixteenth. 

Lastly, international economics is hard, because you have to look at everything from the perspective of 2 countries instead of just one.

Anyway, here goes. I'm going to restrict myself to two countries, and I'll call them America and Mexico. 

We all know the "old school" version of trade in the Middle Ages we were taught in history classes. Fit that story to Mexico. A bunch of Mexicans load up a ship, sail to America, and come home with cool stuff. How'd they get that stuff? Well, mostly through barter, since in the Middle Ages there was no currency exchange (they did use bullion somewhat, but I want to ignore that for a while).

Now it's time to put on your economist's hat on for a minute. If they bartered, the stuff exchanged must have exactly the same value. If it didn't, you're assuming that either the Mexicans or Americans were systematically stupid. That could be true, but it wouldn't be economics.

But you may protest that when this happened in the Middle Ages, the trade goods brought back to Mexico would have been worth a lot. Not to the people on the ship before they got there! They were valuable because the ship got back to Mexico with stuff no one had seen before (the people on the ship did not think they'd gotten for a steal, and they were used to having it around). In fact, no one talks about this much, but I'm pretty sure all the stuff the traders brought with them was worth a ton in the places they landed. That's the thing with trade: both the Americans and the Mexicans thought they got a good deal.

Savor that for a moment. Everything you were taught in history about the importance of trade in the Middle Ages got the most fundamental point wrong. It wasn't the stuff that made people rich, it was the fact that it was traded from people who valued it less to those that value it more.

Now, bring that forward to 2022, and in my story, Mexico has balanced trade: their exports and imports had the same value. So does America. 

A different thing that the Mexicans could do, and which was also done in the Middle Ages, was barter for real property in America. So they bring goods, and exchange them for a house. They sail home to Mexico and everyone thinks they're idiots. But if they can load up on goods once more, and sail back to America, now they have a trading post. Or just a home away from home.

Come forward to 2022 again. Now Mexico has a trade surplus (it exports but does not import), and America has a trade deficit. Before, Mexico's surplus from exports was matched by a deficit from imports. It's still matched with a deficit, but now it's a capital account deficit. The capital account captures stuff that's unlikely to be moved across borders, like goods. In reverse, America has a trade deficit, and a capital account surplus.

Just a quick digression here. We usually talk about the capital account and the current account. The latter is goods and services rather than just goods. I'm going to switch from trade deficit/surplus to current account deficit/surplus below here.

This is a good time to point out how quickly the thinking of some people gets goofed up when thinking about trade. Many people in the U.S. (and honestly, everywhere else too) view current account deficits as bad, and capital account surpluses as bad. You know the arguments: 1) we don't make anything here anymore, and 2) foreigners are buying our land. And yet these deficits and surpluses clearly go hand in hand. In fact, because they have to, we get the principle of the balance of payments. It's called the balance of payments because the two sides have to ... wait for it ... balance. Neither one is bad: the whole thing is neutral.

Back to Mexico and America. Now I want to introduce money into the mix. This ramps up the complexity.

For a Mexican trying to sell goods or services in America, there are two basic situations. In the first, you take your goods to America, and let Americans pay for them with their dollars (this is what a hotel in Cabo is doing when you book a room from Utah). The problem here is that you now have dollars that you can only spend in America. This is OK if you're going "old school", and will buy a bunch of American goods to bring back to Mexico and sell for pesos, that you in turn can spend where you live. It's also OK if you want dollars to buy something American that will stay in America, like a factory. That first possibility isn't much different from the first Middle Ages one described above, while the second possibility isn't much different from the second Middle Ages scenario. So far introducing money hasn't goofed things up much. But what if you're a Mexican who wants to sell in America, gets paid in dollars, but really just wants to convert them to pesos? It's here that things get difficult. More on that after the next paragraph.

The second basic situation for a Mexican trying to sell goods or services to Americans happens if some American sends a buyer over to Mexico to buy your stuff and re-sell it in America (this is what Walmart does, and all you notice at the store is a "Hecho in Mexico" tag). But, of course, you're still in Mexico, so you'll make that American pay you in pesos. As a Mexican, you never have an exchange rate problem in this case.

Now, returning to the first situation, the problem is that a Mexican has dollars they need to convert to pesos (assuming they don't want to buy American goods and services or assets). The second situation is both similar and different: the American has dollars and needs to convert them into pesos. Everything would be OK if they could just get together, but that's impractical. It might even be easier for the Mexican with dollars to find another Mexican who wants to go to America with dollars to buy stuff to bring back to Mexico (which is what their superstores, like Soriana, do). By the same token, it might be easier for the American who wants pesos to find some other American that already has them from selling in Mexico (like say, Ford).

Roughly the situation ends up with a bunch of people having bags of money that they want to get rid of, but which have value to someone else.

Now, if you're a Mexican sitting their with a bag of dollars, you want pesos. It should be clear by now that there could be Mexicans or Americans with pesos, so their nationality doesn't really matter. They could be from anywhere. But if they have pesos and want dollars, you want to talk to them. Now, if they want to trade a bigger bag of pesos with you, that would be good. You'd feel that your dollars are more valuable. But we need a new word that covers that but doesn't imply that you want the dollars you're trying to get rid of. But you'd still be happy about the situation, so we call than an appreciation (of dollars, because you're getting more pesos). But we'd also say that the same transaction reveals that the value of pesos has depreciated. So when someone wants to get rid of currency it depreciates, and the other currency appreciates. 

It can also be the case that the motivation is to get into a currency. So maybe Mexico is suddenly cool and everyone wants pesos for their trip there. If you're the Mexican sitting there with dollars, you might be happy for your country, but from a business perspective the value of the dollars in your bag has depreciated.

***

Which brings us to Turkey, whose currency, (the Turkish) lira, has been depreciating for years. And it's getting worse. What does this mean? It either means people are trying to get out of lira positions (by offering to give up more of them), or that they're trying to get into the moneys of other countries. The thing is, it probably can't be the latter consistently, since there's way too many countries for all of them to be appreciating at the same time. Occam's Razor suggests that the problem is people wanting to get out of lira. 

Who would have lira that they'd want to get rid of? Well, don't be distracted by the stories told above. Those are illustrative. Are their foreigners who sold goods and services in Turkey, got paid in lira, and want to convert that? Sure, of course. Are their foreigners who've done business in Turkey, and bought capital there that they'd like to sell? Sure, of course. Are their Turks who want to get rid of their lira to acquire some other money to buy goods to take back to Turkey? Again, sure, of course. But, like I said ... don't get distracted. The biggest holders of lira will always be ... Turks. Lots of them. So if the lira is depreciating, because people are willing to give up big bags of them to get smaller bags of other currencies, the most likely culprit is normal Turks trying to get their money out of the country. 

Why would they want to do that? Because they sense they are tied to a sinking ship: their citizenship, their identity, their language ... is a form of (cultural) wealth that isn't very liquid. So they are trading away their more liquid wealth. They've made the call: they no longer want to be Turks with liras, they want to be Turks with dollars or euros, or whatever. And just like the Mexican towards the top of this post, maybe some of them want to buy foreign goods to bring home to Turkey, but now it's a lot more likely that they want to use the dollars they can get to buy capital in America, and so on. This is how people start new lives.

Always, everywhere, politicians who are in trouble will try to divert attention away from this. They'll blame foreigners or speculators. And they're not lying. There's always some of those. But be realistic: those groups will never be large compared to the mass of population. They'll also blame the rich. But, of course, those are the people who have wealth that is more than cultural, and which can be harmed by bad policies. In some sense, they are the proverbial canaries in the coal mine. Note that what all 3 groups share is movable, liquid, wealth. If they need to move it they can. The trick for a politician is to not put them in that situation in the first place. 

But, of course, in the kleptocracies that are common around the world, sometimes those rich people and the policymakers, are one in the same. So the policy can be a way to provide cover for the politicians taking their own liquid wealth out of the country.

***

Even so, politicians can easily make this worse. Generally this is through relatively expansionary monetary policy. The relative comparison that needs to be made is to how expansionary monetary policy is in other countries. Expansionary monetary policy amounts to putting more liquid assets in peoples' hands. So it should be fairly obvious that expansionary monetary policy would make it a lot easier for dissatisfied citizens to increase the size of the bag of lira they'll trade for any other currency. 

Do make sure you get the distinction right. It isn't expansionary monetary policy that causes depreciation, but rather relatively expansionary monetary policy, especially relative to your major trading partners (who you'll also be trading moneys with).

***

I have collected way to many articles to link to all of them. And I don't expect anyone to read all of these, but most of you should browse them a bit.

Turkey has been going downhill for about a decade. As a result, there were riots in 2013. These were violently suppressed. In 2018, the government was reorganized to put more power into Erdogan's hands. By reputation he is now surrounded with sycophants who won't disagree with his policies.

Of course, refer to the article linked at the top of this post about Erdogan moving cronies into positions at the central bank about a year ago.

This was followed by a pretty steady depreciation of the lira through the fall, here on 9/23, again on 10/21, a depreciation of 4% in just minutes on 11/16, here on 11/18, failed efforts to prop up the lira with central bank purchases on 12/1, followed by firing the finance minister, more central bank purchases on 12/13, a halt to all stock trading on 12/17 as people try to liquefy their holdings,

This went along with interest rate cuts, and more rate cuts, pretty much one a month all autumn.

And by the way, Turkey is the world's major exporter of hazelnuts, so if your Nutella gets too expensive, you'll know why.

Turkey's inflation rate came in for 2020 at 36% per year. While you can't forecast from a plot, the slope is close to vertical now, so extrapolate with care.

On the last day of the year, Turkey's central bank reported a change in proceeds from open market operations from a $5B loss to a $5B gain ... in one day! It's not clear where this came from. What is clear is that like most central banks it's non-profit, so the profits it does make will be poured into the government treasury.

N.B. I am not unbiased. I have economist friends who have been imprisoned by the Erdogan government.

What Countries are Macroeconomists Worried About Right Now? Part 2: China

Macroeconomists have been increasingly concerned by China over the last 30 years, sometimes for good reasons, and sometimes for bad ones.

The good ones are fairly obvious: big economy, growing fast, huge player in world trade.

The bad ones are also fairly obvious too: most populous (or second most), militant, irredentist (if you do not know that one there's this amazing thing called Bing that you can google on), communist (but maybe not with a capital "C" anymore) ... big economy, growing fast, and huge player in world trade ... and so on.

But I'd like to add another one that's more macroeconomically specific, and about with which you're probably less familiar.

China is also home to a huge asset price bubble, and is already working through a major bankruptcy associated with it (and really doesn't have a roadmap about how to do that).

***

I'll repeat what my former principles students have heard many times: recessions and financial crises are not the same thing, and do not have to occur together ... but it's a much bigger problem when they do.

Also, asset price bubbles can be a cause of financial crises. But not always. Asset price bubbles are very common, probably much more common than non-economists think, and therefore maybe not as serious as they're set out to be (a similar argument is made by some about COVID-19: stealthily common, and therefore less serious).

Assets first: these are longer-lasting things (the depreciate slowly), that are productive and therefore valuable. 

Assets can be real or financial. Real means they are a tangible, and usually physical thing ("real" has a second economic meaning in this case, and not that their value is adjusted for inflation). Financial assets are ownership claims on the value produced by assets.

Financial assets are often created in a pair with a financial liability, and the pair has zero net value. So a car is a real asset, it's title is a financial asset, and a loan to purchase the car (with the real asset used as collateral that can be repossessed) as the financial liability.

When you purchase a car with cash, you're exchanging a real asset for another one of about the same value. When you purchase a care with a loan, there are now two assets and two liabilities exchanged: the car, the cash (the bank puts in your hands), the title (the bank holds until you pay off the loan), and the loan (with its threat of repossession if you don't make payments). This is actually pretty cool, because now the financial asset and financial liability can move through time and space until they are no longer near the car, or each other. But also, their values can deviate from one another too.

Bubbles are more common in financial than in real assets. This seems to be an effect of ... well ... people thinking they know everything they need to know about them already. And sometimes they don't. For example, you rarely meet someone at a party that tells you all about the real asset — say a copier — that they bought or own. But you often hear people talk about stocks, bonds, loans, and titles with a great deal of supposed expertise.

Price bubbles are the tendency of the price of financial assets to get serially skewed upward, and to separate from the value of the underlying real asset. Here, "serially" means in a connected sort of way through time, and skewed means the distribution has a long tail one side. 

They're called bubbles because, while they go up, they come down even faster: like a bubble popping.

Bubbles are fairly common. I hesitate to call them normal, but they're definitely typical. 

I think part of that is that many people like bubbles because the run up in prices makes them feel smart about their wealth. It's like an automatic ego-stroker.

And, of course, people like bubbles because they make them richer. But it's also like the childhood games of hot potato or musical chairs. You may be winning now, but that doesn't mean you won't lose later. People don't talk about that part as much. Go figure.

What's worse is that governments often create asset price bubbles on purpose. And people who get richer that way tend to support the government.

Most governments do this with real estate. An implicit promise of all governments is: you buy here, and let us rule, and we'll make sure that value of your purchase improves. That sounds a lot like good government, and it often is, but people and governments can get carried away with that.

BTW: let me clue you in to something almost no one will ever tell you. Real estate is generally a very crappy investment; and the corollary is that when it's a good investment you should be aware of the bubble you're already in.

***

Here's how this has worked in China. 

The Chinese Communist Party (CCP) and the government — pretty much the same thing for the last 75 years — set it up so they own all the real estate. Then about 45 years ago, they started liberalizing.

One of the schemes they cooked up was for local governments to sell land to developers, with the proceeds supplementing taxes to provide government services. The developers got the money by borrowing from "banks". Except these banks are sort'of like the banks you're used to at the micro level but not at the macro level. At the macro level they mostly got deposits because the typical Chinese person had to put their savings into them. Because they didn't have other options, the rates they got paid were low, and the rates on the loans the banks made to developers were low too. The developers built cities filled with apartment complexes, then made their money by selling that finished real estate to interested buyers, and paid off their loans. The bubble part comes in because the buyer has the choice of getting rich by either putting money into banks that don't pay much interest, or by buying real estate. When their purchases get too exuberant, we get price bubbles.†

Economists have thought that the market for residential real estate in China is the biggest asset price bubble the world has ever seen ... for about a generation now. And we worry about when it's going to pop, and what the effects will be.

Enter a company called Evergrande. Evergrande is a real estate developer, one of the largest companies in China, and one of the larger ones in the world. And it went bankrupt this past year.

Well, sort of. Bankruptcy is the name we give to what's actually an orderly legal process that does a good job of preserving value when a firm's business goes bad. In many ways, the American bankruptcy system is an unsung hero in our macroeconomic success, and the envy of most of the rest of the world. The thing that attracts foreign investors to America is not the high rates of return we offer, but our ability to avoid low rates of return (including losing all your money).

The things is, China does not have a transparent and working bankruptcy process. And no experience with the failure of a business as large as Evergrande that's part of a price bubble.

Hey! Remember 2008! Remember the bankruptcy of Lehman Brothers, Bear Stearns, and the insolvency of Fannie Mae? Wasn't that fun! And we're the country that knows what it's doing with bankruptcy.

This is why macroeconomists are paying even more attention to China these days. 

† Grousing here. Most of the people you hear talking about fascism over the last few years ... don't know wtf they're talking about.Fascism, as an economic system, means the government goes out of its way to help politically-favored business owners make supernormal profits, in exchange for political loyalty and funneling some of that money back into government (recall that Oskar Schindler was a loyal Nazi, who made a lot of money before he had misgivings).. That sounds a little like what happens in the U.S., but it really sounds like what happens in China.

Update: I forgot to link to this Twitter thread noting that Local Government Financing Vehicles (LGFV's) in China are buying more land in China. In China LGFV's are the way that a government would borrow money: analogous to issuing municipal bonds in the U.S. The gist of the thread is then that local governments are using their borrowing capacity to get cash, to buy land sold by some other local government office that's just down the hall ... reading between the lines this means they are short on liquidity, a hallmark of financial players caught in a collapsing bubble.

What Countries are Macroeconomists Worried About Right Now? Part 1: Kazakhstan

Kazakhstan is currently having some issues with unrest. This week, at least, they appear to be under control.

This is more of a geopolitical concern rather than a macroeconomic one. Kazakhstan is a bigger than average and richer than the average country, but since the distribution of that data is approximately Pareto (i.e., not like a bell curve) it's not that important.

BUT, Kazakhstan is, after Belarus, the former Soviet republic that is most closely aligned with Russia currently. So, the Russians view this as a problem, and the Russians ... hmmm ... try to "fight above their weight".

In addition, the Russians view the problems in Kazakhstan as being fomented by the U.S.† This is indirect, but they are probably correct: the U.S. CIA offloaded a lot of non-spy stuff on to an NGO called the National Endowment for Democracy which they fund to stir things up.

N.B. I personally like what the NED does. But we should not fool ourselves that just because we like something that the Russians will. 

† I added this footnote after class. This link goes to the blog Zero Hedge. This blog is written by a team using the pseudonym Tyler Durden, but also includes sponsored posts from fellow travelers. It has somewhat of a bad reputation as being conservative/Republican/anti-Democrat. To me it seems more pro-finance and anti-politics. Anyway, people working in investments thrive on up to the minute news and analysis, even if that turns out later to be inaccurate. In this case, I think it's a good source.

Unintentional and Unofficial Sabbatical

I'm back posting.

I took off after the end of the Spring 2021 semester. No particular reason. 

I have been collecting articles and ideas to post about, so some of the new posts may send you back in time.