January 12, 2004
The Lost[?] Promise of International Capital Flows

Those of us card-carrying neoliberals who pushed for large-scale opening of capital flows in the early 1990s had a particular vision of the future in our minds' eyes--a vision of the future did not come to pass. We looked at how extraordinarily strongly the world's system of relative prices was tilted against the poor: how cheap were the products that they exported, and how expensive were the capital goods made in the post-industrial core that they needed to import in order to industrialize and develop. "Why not free up capital flows and so encourage large-scale lending from the rich to the poor?" we asked. Such large-scale lending might cut a generation off the time it would take economies where people were poor to converge to the industrial structures and living standards of countries where people were rich. Certainly such large-scale borrowing and lending had played a key role in the economic development of the late-nineteenth century temperate periphery--Canada, the western United States, Australia, New Zealand, Chile, Argentina, Uruguay, and South Africa--more than a century ago. But the future we saw did not come to pass. Instead of capital flowing from rich to poor, it flowed from poor to rich--and...

Posted by DeLong at 11:58 PM

January 09, 2004
The Tentacles of the World Market

British science-fiction author Charlie Stross quails as the tentacles of the world market snatch away pieces of his livelihood: I was deeply unamused to notice the US dollar continuing its slide... you can now buy 1.8025 dollars with a single pound sterling.... [T]he dollar was at 1.50 to the pound for almost the whole of the 1990's.... [T]he majority of my sales... are to publishers in the United States.... If the dollar loses 15% of its value against the pound between a contract being negotiated and the books written, delivered and paid for, then the author loses 15% of his or her pay packet.... [I]f you're a British SF/fantasy writer, then almost by default (if you want to earn a living) you're a one-person export industry aimed at the North American market. Which is why headlines like this one (No end in sight to dollar's descent) do not fill me with joy and goodwill towards all Federal Reserve bankers. But what the world market taketh away, the world market also giveth. Big businesses that want to lock-in overseas earnings against exchange-rate fluctuations use derivatives contracts to do so. Within the decade, I predict, Charlie will find it possible to (with...

Posted by DeLong at 06:52 AM

December 11, 2003
Alan Greenspan Is Polite

Alan Greenspan says that--no matter what fellow Republicans Don Evans and Karl Rove say--U.S. unemployment is not manufactured by China's exchange rate policy: Forbes.com: US unlikely to get lift from yuan float-Greenspan: "A rise in the value of the renminbi would be unlikely to have much, if any effect on aggregate employment in the United States, but a misaligned Chinese currency, if that is indeed the case, could have adverse effects on the global financial market and, hence, indirectly on U.S. output and jobs," Greenspan said in remarks prepared for the World Affairs Council of Greater Dallas... Nevertheless, the judicious and polite Greenspan warns China that its central bank cannot keep buying dollar-denominated assets forever without risking substantial domestic inflation....

Posted by DeLong at 10:50 AM

November 30, 2003
Note: Is America's Trade Deficit Sustainable?

Dooley, Folkerts-Landau, and Garber argue that the U.S. trade deficit is sustainable: Economist.com | Economics focus: ...Michael Dooley... David Folkerts-Landau and Peter Garber... come to the same sanguine conclusion... the deficit is manageable... because it replicates the post-war Bretton Woods era. America is once again at the centre of an international monetary system. On the periphery, where post-war Europe once stood, now stands East Asia, with its cosseted capital markets and fear of floating against the dollar. The players have changed, but the rules of the game are much the same. Under Bretton Woods, the Europeans, as they regained their exporting strength, amassed ever greater dollar claims on America. Similarly, under today's "revived" Bretton Woods system, the East Asians hoard their export earnings in low-yielding dollar assets, such as Treasury bills. What East Asia hoards, America happily spends: the inflow of Asian capital keeps American interest rates low and demand high. Moreover, America tends to spend its cheap East Asian loans on cheap East Asian goods. America and Europe used to enjoy a similar relationship. As Jacques Rueff, a French economist, put it in 1965: "If I had an agreement with my tailor that whatever money I pay him returns...

Posted by DeLong at 05:44 PM

November 29, 2003
Something I Don't Understand

In an otherwise very good article on currency values, the Economist writes something I don't understand: Economist.com | Currencies: Of course, one reason the dollar has fallen so sharply against the euro is that it cannot fall freely against Asia's major currencies. China’s authorities have kept the yuan controversially pegged to the dollar and Japan’s have spent well over ¥13 trillion ($120 billion) so far this year to keep the yen's value down. Asia’s central banks do not buy dollars as a rational investment; they are not looking for the best mix of risk and return. They are buying dollar assets to keep their own currencies competitive. If they think the dollar is going to fall, they may well buy more of them, rather than less... U.S. annual GDP is about $11 trillion, Euro-zone GDP $10 trillion, Japanese GDP $6 trillion, Chinese GDP $1.3 trillion. It's easy to see how large-scale interventions by the Bank of Japan and Bank of China can move the values of the yen or the renminbi against the dollar away from what it would otherwise be. It's hard to see how their interventions would have a significant effect on the dollar-euro rate. Think of it....

Posted by DeLong at 11:55 AM

November 24, 2003
Robert Rubin Makes a Mistake

Robert Rubin and Jacob Weisberg's In an Uncertain World has many delightful little passages. One of my favorites is: p. 185: "That was all correct, but... I [had] mistakenly discussed [foreign exchange] intervention in an intellectually serious way." Note the authors: Rubin and Weisberg. How often do you see that--the person who actually writes the prose getting a full coauthorship credit? Bob Rubin is a class act....

Posted by DeLong at 08:08 PM

October 07, 2003
The Value of the Dollar

A correspondent writes: "What's prevented a much sharper dollar correction of late is that demand from central banks has been essentially perfectly elastic:  what the foreign private sector won't finance at current exchange rates, they will.  That came to $220 billion last year, and looks to be running ahead of that pace this year." Remarkable......

Posted by DeLong at 03:39 PM

October 06, 2003
Why Oh Why Can't We Have a Better Press Corps? Part CCCCLXXI

Further degrading National Review's near-laughable reputation, Larry Kudlow writes that: Larry Kudlow on the Dollar & Exhange Rates on NRO Financial: Manipulating the dollar so that it is worth less and buys less seems like a foolish way to manage a nation's currency or economy. Doing so today, at worst, could derail the fledgling bull-market recovery, just as an overly cheap dollar ended the 1980's boom... God knows that I am no fan of George W. Bush's sorry half-excuse for an economic policy, and God knows that I think that the right way to talk down the dollar is through promises of looser monetary policy (rather than attempts to increase the perceived risk of holding dollar-denominated assets), but this claim of Larry Kudlow's is simply whacko. The boom of the 1980s ended because the Federal Reserve's attempt to reduce inflation a little bit through higher interest rates collided with the oil price spike of 1990 and Saddam Hussein's invasion of Kuwait. The decline in the dollar from 1985-1987 had very, very little to do with the rise in inflation that concerned the Federal Reserve....

Posted by DeLong at 08:03 PM

October 03, 2003
A Dissent on the Dollar

An economist working for a large bureaucratic organization who thus needs to remain anonymous writes: Brad, Paul Krugman, Kenneth Rogoff and a lot of other people who are much smarter than I am continue to make Econ. 101 level mistakes about the current account deficit and the dollar. These authors--and the conventional wisdom generally--miss two, closely related points. First, foreign investors' risk exposure to dollar assets has essentially nothing to do with the current account deficit. Second, the ability of U.S. households, firms, and the government to service their liabilities has essentially nothing to do with whether those liabilities are owed to foreign or domestic investors. Point one. Foreign investors don't hold an asset called "net claims" on the U.S. Rather, they hold various gross claims: bonds, equities, FDI an the like. These gross claims are the source of foreign investors' risk exposure to changes in the value of the dollar and the price of dollar assets. (If the dollar falls, for example, foreign investors suffer a home currency capital loss on their dollar assets; liabilities to the U.S., denominated largely in the home currency, aren't much affected.) The right metric for analyzing foreign investors' risk exposure to dollar assets...

Posted by DeLong at 10:26 AM

June 09, 2003
Joining the Euro

The British Treasury says it says "not yet" to the euro. But of the reasons it adduces for not joining the euro yet, two--the greater correlation of British with American than European business cycles, and the greater vulnerability of Britain to interest rate shocks--aren't going to go away any time soon. Thus I cannot see what changes in the economy or in the economics (as opposed to the political) analysis in the next five to ten years could lead to a different conclusion. So I suspect that--even though the British Treasury is saying that it is saying "not yet"--that the British Treasury is really saying "never." Quicken Brokerage - News Center: LONDON -- Britain's Treasury announced Monday that the economic conditions are not yet right for Britain to join the 12-nation euro zone and swap its pounds and pence for euro notes and coins. From misaligned exchange rates to oversensitivity to interest-rate changes, the economic studies commissioned by the Treasury indicate that the "clear and unambiguous" case for the United Kingdom dropping the pound in favor of the euro cannot yet be made, the Treasury said. The general tone of the documents was not strongly in favor of or against...

Posted by DeLong at 06:45 AM

June 05, 2003
Gains From International Trade and Investment

An Irish-Arizonian-Australian cross-disciplinary alliance of Kieran Healy and John Quiggin is thinking about Pierre-Olivier Gourinchas and Olivier Jeanne's brand-new "The Elusive Benefits of International Financial Integration"--the conclusion of which is that in standard neoclassical models freeing up capital flows across nations has the capability to boost economic welfare by an amount on the order of magnitude of one percent: John Quiggin: (Small) gains from trade: (Small) gains from trade: Kieran Healy links to a paper by Pierre-Olivier Gourinchas and the missing-from-the-web Olivier Jeanne in which a calibrated growth accounting model is used to show that the gains from unrestricted capital mobility are likely to be of the order of 1 per cent of GDP. Gains from risk sharing aren't mentioned but other papers are cited to say that these are of a similar magnitude. Those who listen to the general pronouncements of economists might be surprised by the modest size of the estimated gains. But for those who have looked at similar exercises in the past there is no surprise here. One of the better-kept secrets of economics is the fact that most studies suggest that the replacement of a typical high-tariff regime (say Australia's in the 1960s) will yield...

Posted by DeLong at 07:09 AM

May 30, 2003
Another British Economist Scared of the Euro

Sam Brittan crosses the aisle and now opposes replacing the pound with the euro: A case for currency freedom - Samuel Brittan: New Economy 06/03: ...I have never regarded the direct economic effects of euro membership as terribly important one way or the other. The main reason why I formerly supported it was that it seemed for many years the most likely way of establishing an operationally independent central bank. The independence of the European Central Bank was established by treaty on the lines of the Bundesbank in Germany and seemed pretty safely ensconced. But since the incoming Labour government took many people by surprise in 1997 by unilaterally establishing operational independence for the Bank of England - and still more because of the favourable track record of the new regime - that particular argument for the euro goes out of the window. The case I now wish to make is a positive one, not against the euro - still less against the European Union - but in favour of a floating exchange rate which the UK now enjoys and could not continue to have inside the euro. A floating exchange rate automatically balances a country's overseas payments - current...

Posted by DeLong at 11:20 AM

May 21, 2003
Gerard Baker Offers Kudos to John Snow

The Financial Times's Gerard Baker tries to give John Snow kudos for trying to educate the world's press and currency traders about the realities of exchange rate determination: It is not just that the formal ending of the strong dollar policy had been prefigured by a succession of clumsy attempts at clarification by Mr Snow and Paul O'Neill, his policymaking Doppelgaenger. It is that the whole notion of a dollar policy is a piece of fiction that should have been abandoned years ago. Policymakers can set interest rates, tax rates and public spending levels. They can no more set the price of a nation's currency than they can set the price of an apple or a company's stock.... Before Mr Snow spoke, the dollar had been falling for two years - by more than 25 per cent against the euro, somewhat less against other currencies - because it was bound to.... And it will surely fall further. Mr Snow and his colleagues for once deserve some credit for belatedly simply trying to get out of its way. Gerard Baker is largely right, but I see two problems with his analysis: You can fix the price of your currency--if you have...

Posted by DeLong at 08:35 PM

Why Oh Why Can't We Have a Better Press Corps? Part CCXXI

The New York Times beats up on the Bush administration Treasury: ... stature gap... Paul O'Neill the gaffe-prone... John Snow... credibilit... impaired... policies which are now discredited... credibility in question, Mr. Snow... antagonizing America's trading partners... dangerous confusion in currency markets... I cannot disagree: for someone used to Bentsen-Rubin-Summers O'Neill and Snow seem a long, long, long way down. But then the Times tells why it is beating up on the Treasury Secretary, and in the process reveals how pitifully little those who write--and review, and edit--it know about finance and economics: The dollar's decline... certainly amounts a vote of no confidence in America... it isn't as if Europe is attracting investment on its own merits... This makes me want to say, "But... But... But..." Over the past year investors have become convinced (rightly, I believe) that the Federal Reserve is seriously concerned about the dangers of deflation and is willing to keep interest rates low to prevent even a shadow of a chance of a full-scale deflation, while the European Central Bank is not. This means that European interest rates are likely to be significantly higher than American interest rates for years to come. This makes euro-denominated bonds more...

Posted by DeLong at 10:13 AM

May 19, 2003
Perhaps John Snow Was Trying to Say Something Intelligent...

Perhaps Treasury Secretary John Snow was trying to say something intelligent. Probably he was. He might have been attempting to say one (or more) of several things, like: I don't determine the value of the dollar, the market does. The market determines the value of the dollar based on the relative attractiveness of dollar-, yen-, pound-, and euro-denominated assets. I don't have any effective influence over the attractiveness of dollar-denominated assets, but Alan Greenspan does. Go ask him how he thinks his monetary policies are affecting the value of the dollar. If two of the world's major economies are in deflation, the third will see the value of its currency decline. That's just arithmetic. If you think I'm trying to have the U.S. join the eurozone and Japan in deflation just to maintain the exchange value of the dollar, you're nuts. Currencies fluctuate for good and bad reasons. Don't try to overinterpret or overanalyze their movements. They're not news unless you're way long or way short. But the problem is that he failed to make sure that the financial market headlines were keyed off of some form of the following paragraph: Although the value of the dollar is a...

Posted by DeLong at 04:25 PM

May 04, 2003
The Coming Decline in the Dollar

Morgan Stanley's Stephen Roach hopes and thinks that the dollar will fall far, will fall soon, and that in fact the return to equilibrium valuations is already underway. I'm not sure that it is underway and I'm not at all confident that it will be soon: I recall the late Rudi Dornbusch, who always said that currency value imbalances last much longer than anyone sane would believe possible, and then turn themselves around much more quickly than anyone lulled by the previous period had imagined possible. Fundamentals are on Roach's side. But fundamentals plus $2.80 will get you a BART ticket from Lafayette to Berkeley. Stephen Roach: ...But there?s even a deeper significance to dollar depreciation. Largely for political or other institutional reasons, both Europe and Japan have been unwilling or unable to adopt pro-growth policy measures. Japan is fearful of ending the ?convoy system? of zombie-like companies; the resulting rise in unemployment is an anathema to a system where social contracts still involve some form of lifetime employment. Europe is constricted by a misguided rules-based system of macro policy determination. Monetary policy is still aimed at fighting inflation in an increasingly deflationary world. And fiscal policy is set by...

Posted by DeLong at 11:13 AM

February 11, 2003
A Short Dialogue on International Trade in Agricultural and Fishery Products

"Okay. One of the things that we are going to eat for lunch has travelled 9000 miles--almost halfway around the world--to land on our table. What is it?" "Bananas!" "Very good guess. But no. Bananas come from the Caribbean and Central America, and travel only 3000 miles or so to get here. It's the smoked salmon, from Tasmania, island off of the southeastern tip of Australia." "I've heard that most animals native to Tasmania are endangered. Is that true?" "BA-NA-NAS!" "It's certainly true that large Tasmanian marsupials are under very heavy pressure from introduced Eurasian forms that fill the same niches..." "BA-NA-NAS HAVE NO THUMBS!" "But does anybody have an idea why I would buy smoked salmon from Tasmania--Royal Tasmanian brand?" "So that you can torture your children with another boring lecture about international trade, the international division of labor, and the importance of human pwogwess through the mutual weduction of twade bawwiews?" "Plausible, but not true in this case..." "BANANAS STAND UP STRAIGHT!" "Because they were cheap?" "Yes, exactly, why were they cheap--half the price of Alaskan smoked salmon?" "BANANAS HAVE NO THUMBS!" "Either because you got a bargain, or because you don't know something about the quality of...

Posted by DeLong at 03:05 PM