Beggar thy currency or thy self – says the good doctor El-Erian?


Not many countries nowadays seek a strong exchange rate; a few, including systemically important ones, are already actively weakening their currencies. Yet, because an exchange rate is a relative price, all currencies cannot weaken simultaneously. How the world resolves this basic inconsistency over the next few years will have a major impact on prospects for growth, employment, income distribution, and the functioning of the global economy.

Japan is the latest country to say enough is enough. Having seen its currency appreciate dramatically in recent years, Prime Minister Shinzo Abe’s new government is taking steps to alter the country’s exchange-rate dynamic – and is succeeding. In just over two months, the yen has weakened by more than 10% against the dollar and close to 20% against the euro.

European leaders have already expressed reservations about Japan’s moves. The US auto industry is up in arms. And, a few days ago, Jens Weidmann, the president of the Bundesbank, publicly warned that the world risks a harmful and ultimately futile round of competitive exchange-rate depreciations – or, more bluntly, a “currency war”…

Of course, Japan is not the first country to go down this path. Several advanced and emerging economies preceded it, and I suspect that quite a few will follow it…

One need not be an economist to figure out that, while all currencies can (and do) depreciate against something else (like gold, land, and other real assets), by definition they cannot all weaken against each other. In order for some currencies to depreciate, others must appreciate. Here is where things get interesting, complex, and potentially dangerous…

None of this is unprecedented, and there is a lot of scholarship demonstrating why such beggar-thy-neighbor approaches result in bad collective outcomes. Indeed, multilateral agreements are in place to minimize this risk, including at the International Monetary Fund and the World Trade Organization…

Unlike the old days, the threat of currency wars is not directly related to trade imbalances and balance-of-payments crises. Rather, an important driver is major central banks’ pursuit of experimental measures in order to compensate for policy inadequacies and political dysfunction elsewhere…

The risk is that the phenomenon leads to widespread disruptions, as increasingly difficult national policy challenges stoke regional tensions and the multilateral system proves unable to reconcile imbalances safely. If policymakers are not careful – and lucky – the magnitude of this risk will increase significantly in the years ahead.

Meanwhile, the hypocrisy of nations like the United States and Japan – manipulating their own currencies counter to each other’s national interests becomes a symphony of xenophobia orchestrated by politicians and mass media, each less interested in truth than enhancing power and profit for the interests they serve. And that ain’t you and me.

Internally, they make legitimate points about liquidity, attempting to nudge the economy into something more than desultory bumps.

For even a broader examination of opinion and analysis on the topic, return to Project Syndicate and wander through their “Currency War Drums” Focal Point.

The Political Economy of 2013


Watching America’s leaders scramble in the closing days of 2012 to avoid a “fiscal cliff” that would plunge the economy into recession was yet another illustration of an inconvenient truth: messy politics remains a major driver of economic developments.

In some cases during 2012, politics was a force for good: consider Prime Minister Mario Monti’s ability to pull Italy back from the brink of financial turmoil. But, in other cases, like Greece, political dysfunction aggravated economic problems.

Close and defining linkages between politics and economics are likely to persist in 2013. Having said this, we should also expect much greater segmentation in terms of impact – and that the consequences will affect both individual countries and the global system as a whole.

In some countries – for example, Italy, Japan, and the United States – politics will remain the primary driver of economic-policy approaches. But elsewhere – China, Egypt, Germany, and Greece come to mind – the reverse will be true, with economics becoming a key determinant of political outcomes.

This duality in causation speaks to a world that will become more heterogeneous in 2013 – and in at least two ways: it will lack unifying political themes, and it will be subject to multi-speed growth and financial dynamics that imply a range of possible scenarios for multilateral policy interactions…

How politics and economics interact nationally and globally is one of the important questions for 2013 and beyond. There are three scenarios: good economics and effective politics provide the basis for a growing and more cooperative global economy; bad economics interact with dysfunctional politics to ruin the day; or the world muddles through, increasingly unstable, as a tug of war between economics and politics plays out, with no clear result or direction.

Part of the answer depends on what happens in three countries in particular – China, Germany, and the US. Their economic and political stability is essential to the well-being of a world economy that has yet to recover fully from the 2008 global financial crisis.

Current indications, albeit incomplete, suggest that the three will continue to anchor the global economy in 2013. That is the good news. The bad news is that their anchor may remain both tentative and insufficient to restore the level of growth and financial stability to which billions of people aspire.

Mohamed El-Erian pretty much speaks in moderate terms even when discussing immoderate and opportunist politicians. He’s a nice guy. Even for a NY Jets fan.

He’s worth listening to if for nothing else his experience within and without the boundaries of international economics. Between the IMF and PIMCO, politicians stand in line asking him to run for elective office. But, then, he’d have to spend even more time with politicians. Most of whom – I’m afraid – aren’t any better than the hyenas we have in Congress.

Stupid awards made by our Patent Office never cease to amaze!

Bill Gross, who runs the world’s largest mutual fund at Pacific Investment Management Co., received a U.S. patent for the methodology behind a global bond index that weighs countries by the size of their economy rather than their indebtedness. … By focusing on gross domestic product, the index avoids concentrating on countries saddled with debt and offers a greater weighting for developing markets…

…An index maintained by a third party and licensed for profit is less likely to be manipulated, since the third party’s incentives are (1) to make the index reliable so they can profit from selling it to everyone and (2) specifically not to make it unreliable so they can profit from manipulating it, since they’re in the index business rather than the trading-the-thing-referencing-it business.

That’s not Bill Gross’s business, though: he does trade the thing, rather a lot of it, and his goal in patenting this index is presumably less to profit by licensing it to anyone who asks than to profit by refusing to license it, making his the only GDP-weighted-in-this-particular-way bond fund in the land and thus competitively more desirable…

Market-cap weighting by definition gives you average performance, and if the GDP weighting is better – which the patent application argues it is – then it should in expectation give you above-average performance. So you should be able to charge a premium for it, and you should want to keep your competitors from using it.

So, like most patent applicants, he’s looking for a monopoly, and seems to have gotten one, though arguably of a rather limited kind since there’s after all more than one way to use arithmetic…But there’s arguably another, more pleasing reason for Gross to want to keep his index restricted. If investing relatively small amounts in global bonds via a GDP weighting does create outperformance, then everyone should use it. But of course the more people who use it, the less edge Pimco will have: investment strategies that reliably outperform attract imitators until the outperformance dissipates. If Bill Gross’s patent can delay others’ efforts to pile money into his strategy, that doesn’t just protect his stream of fees from investors in his funds, it also protects their performance.

Is this the sum of what the US Patent Office has become?

I have no beef with Bill Gross. His politics are reasonably mellow. He’s probably the largest single contributor to Doctors without Borders. He’s doing nothing more than meeting and matching the standard for silliness established by the world’s technology industry – with the full cooperation of our patent office. Hopefully, my tiny investment in one of his bond funds will appreciate by at least $1.67 over the next year as a result.

Still – this further provokes thoughts of somehow scrapping everything that body of bureaucrats have done in the past fifty or sixty years and starting afresh with realistic goals and standards.

Unemployment numbers are a symptom of deeper social questions

Same as it ever was…

This weekend’s Labor Day celebrations in America mark a difficult time for workers. Having experienced a multi-year decline in their share of national income, they are now suffering the brunt of the current economic malaise; and there is little to suggest that the situation will improve any time soon. As a result, the country’s economic hardships risk morphing from pressuring specific segments of the population to undermining more general aspects of social justice.

The numbers are striking — and worrisome. Over the last 30 years, labor’s share of the national pie has declined to 44 percent from 52 percent, with profits growing at twice the annual rate for average wages.

This…monthly employment report adds to the concerns. Unemployment remains very high, whether measured by the most-quoted unemployment rate (9.1 percent), the less partial under- and un-employment rate, (16.2 percent) or, most comprehensively, the proportion of total adults who are not working (42 percent compared to 35 percent 10 years ago).

The duration and composition of joblessness is very troubling. The average unemployed American has been without a job for 40 weeks, a record level, and 44 percent of the unemployed have been out of a job for more than 26 weeks. The incidence of joblessness is severe among those lacking a college degree (11 percent compared to 4 percent for college graduates). For 16-19 year olds the unemployment rate is a horrible 25 percent.

Whichever number you look at, America’s labor market problems constitute a full-blown crisis with far reaching economic, social and political consequences. If current trends continue, joblessness will become stubbornly embedded in the system and, distressingly, some of the unemployed will become unemployable…

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