I am starting to see a disturbing pattern, people trying to defend Trump’s late night call to General Flynn, asking him whether its better to have a strong currency or a weak currency. The argument people are making is that economists can’t agree on whether a strong currency is good or a weak currency is good, so why shouldn’t Trump’s question be viewed as reasonable?

Because Trump’s already made up his mind on the issue!  He campaigned on the claim that China was manipulating the yuan, and that this was hurting the US.  But how can he assert that a change in the yuan/$ exchange rate hurts the US, when he doesn’t even know whether the US benefits from or is hurt by a strong yuan?  Trump’s just admitted that his campaign promises on exchange rates were meaningless, he was just blathering on about something his protectionist buddies fed him.  Trump himself doesn’t even understand this stuff, that’s why he latched onto Peter Navarro.  Navarro uses all this hyperbolic rhetoric about the Chinese destroying America, and Trump laps it up because his instincts tell him the same thing.  But if asked to explain how, he wouldn’t be able to tell you whether it was the weak yuan or the strong yuan that hurt us, just that he “knows” those “crafty Asians” must be stealing us blind.  (OK, made up quotes, but that’s how his mind seems to work.)

I hear you say, “Yes, but Trump has advisors who do have a sophisticated understanding of international economics”.

Oh really?  Peter Navarro?  Wilbur Ross?  Here is one of Trump’s top economic advisors, Gary Cohn:

At the start of 2015 there were three countries in the world that were willing to have a strong currency. The Swiss, the Chinese, and the U.S. The Swiss pulled the rip cord overnight. They just ripped it off and said, ‘We are done. We are done having a strong currency. It is too expensive to defend this.’

ROTFL

The Swiss move was a headline story.  If Cohn doesn’t even know whether the SF went up or down, then he has no idea of what’s happening.  He should not even be discussing exchange rates with the WSJ.

I’m telling you, we are being governed by people who know nothing.  Who exactly is going to do these negotiations?  I can just see them returning from Beijing with a Chinese promise to “raise” the value of the yuan from 7 to the dollar to 8 to the dollar.

PS.  And BTW, Trump did not “keep his promise” to protect America from Muslims.  His proposal is now dead.  He failed to keep his promise, and he’ll keep failing.  Think about it.  A GOP that expected to succeed would be flying out of the gate, with a first 100 days of incredible energy and achievement.  Instead we hear more and more talk that “Obamacare repeal will have to wait for 2018” or “tax reform will have to wait for 2018”. That’s a party that has no guts. Sad!

The GOP reminds me of this Monty Python routine.

PPS.  Nixon didn’t reach this stage until the summer of 1974:

The New York Times, meanwhile, painted a portrait of a brooding commander in chief, wandering the White House alone in a bathrobe at night, watching too much cable television and venting his frustrations through angry tweets.

“I think it’s a cry for help,” said Elizabeth Rosenberg, a counterterrorism expert at the Treasury Department under Obama. She said many staffers still working in the national security agencies under Trump see what’s happening and are driven by a simple motive: “Incredulity, and the need to share it.”

Thank God that Trump doesn’t drink; Nixon was getting drunk a lot towards the end.

My previous post was rushed, and perhaps a bit tautological.  So let’s take a deeper look, and try to answer the comment left by Tyler:

One shift increases national wealth, however, and the other lowers it, so why is that not a strong presumption in the direction of my answer…?

Tyler probably wanted to make the dollar appreciation occur for no particular reason.  But of course he knew that there must be a reason, so he offered this:

For the relevant thought experiment, assume an exogenous shift in noise trading boosts the value of the dollar.

In simple supply and demand terms, that means the value of the dollar rises because noise traders suddenly increase their demand for dollars.  That’s what is commonly referred to as a “monetary shock”.  In this case, a contractionary shock. Recall that a contractionary monetary shock occurs when there is either a reduction in the monetary base (less supply), or an increase in base demand. Contractionary shocks also cause the dollar to appreciate.

Now here’s where things get complicated.  Tyler is clearly interested in real wealth, not nominal wealth.  But it’s not clear that a monetary shock will affect any real variable, either the real exchange rate or the level of real wealth.  Thus if money is neutral, then a contractionary monetary shock that appreciates the dollar by 4.3% will also cause all wages and goods prices and even stock prices to fall by 4.3%. This leaves the real wealth of Americans unchanged, they don’t even notice anything when they travel overseas.

Tyler would quite rightly respond that money is not neutral in the short run, and that a 4.3% nominal appreciation of the dollar would also imply a 4.3% real appreciation in the dollar, at least in the very short run before the price level had adjusted.  OK, so let’s go with that non-neutrality assumption, assuming sticky wages and prices.

But the problem with this assumption is that it really complicates the “ceteris paribus” problem.  If it’s really true that a contractionary monetary shock makes the real exchange rate appreciate, helping our tourists when they visit France, or buy French wine, it also, ipso facto, leads to higher real wages, which reduces employment and real GDP.  How does all this net out in terms of our welfare?  I don’t know.  To answer that question there is no shortcut to a plausible macro model that generates an optimal monetary policy for our domestic welfare.  In my view the “best” position for the US dollar in forex markets is the value it would hold if monetary policy was appropriate (say NGDPLT).  If NGDP is rising less than the target rate, then policy is too tight and the dollar is too strong, and vice versa

Tyler can change his assumption so that it’s no longer a monetary shock appreciating the dollar.  It could be a real shock (to S&I), which means the real value of the dollar appreciates even after sticky wages and prices have fully adjusted.  That might better fit the recent example of the US.  (But this is also confusing, because by this criterion the Swiss franc is very weak.  It would have to be much stronger to eliminate Switzerland’s huge current account surplus.)

I’m not as good at analyzing real shocks as nominal shocks, but my instincts tell me the answer will be “it depends.”

PS.  Ironically, Tom Powers just sent me this article:

Donald Trump is unsure if strong or weak US dollar is best for the economy

Here’s Tyler Cowen:

Is a strong dollar better than a weak dollar?

Yes, for Americans though not for the world as a whole.  For the relevant thought experiment, assume an exogenous shift in noise trading boosts the value of the dollar.  That increases the wealth of individuals and institutions that are long dollars, and presumably this is the case for this country overall.  If you owned lots of ponies, would you not want the price of ponies to go up?

A weak desire to substitute into imports could blunt this result somewhat.  Or in other words, American tourists will benefit to a disproportionate degree.

I can imagine three scenarios:

A.  The dollar is currently below its optimal value for maximizing the welfare of Americans.

B.  The dollar is equal to its optimal value for maximizing the welfare of Americans.

C.  The dollar is above its optimal value for maximizing the welfare of Americans.

In case A, dollar appreciation makes Americans better off.

In case B and C, dollar appreciation makes Americans worse off.

The probability of case B is roughly 0%. So without knowing anything more I’d say there is a 50-50 chance of Tyler being right. His chance of being right is more than 50% if we can clearly establish the case for some sort of market or policy failure that results in the dollar usually being too weak for optimal welfare.  That’s possible, but it’s not obvious to me exactly what that distortion is.  And if true, it would suggest that “reverse beggar-thy-neighbor” policies might be optimal.

PS.  His noise trading assumption can be viewed as an exogenous increase in dollar demand, not motivated by fundamentals.  One can imagine other ways of getting a stronger dollar, such as a random drop in national saving.  His assumption seems aimed at getting a move in the dollar with the smallest deviation from the “other things equal” assumption.  I think his approach is plausible, and hence I do not object to the thought experiment on “reason from a price change” grounds.

Update:  It just occurred to me that my analysis only applies to tiny changes in the value of the dollar.  For large changes, random moves will push it in the wrong direction more than 50% of the time.

This is the golden age for Planet Earth.  Here is the FT:

We first asked whether young people were happy with their lives. We found that in emerging economies young people tend to be far happier than in the west: 90 per cent of Indonesians and 78 per cent of Nigerians said they were happy compared with just 57 per cent in Britain and France.

They also tend to be more optimistic. The countries with the highest proportions of young people who think the world is getting better are China, India and Nigeria; those where the highest proportion think the world is getting worse are France and Italy. The emerging economy exceptions were Argentina and Brazil, where young people are as gloomy about the future as they are in Europe.

The economic boom in the emerging markets is really starting to pay dividends in terms of human happiness.  Consider:

1.  In most of the world things are getting better at a rapid pace.

2.  Even better, the areas that are struggling, like France and Italy, are mostly already very affluent countries enjoying the “second best of times”.

3.  Even better, there are good models for these laggards, right across the border in Germany, where lots of jobs are created for young people.

4.  Even better, France and Italy are democratic countries that can freely choose the German model.

5.  Even better, we know that Germany’s success is not just cultural (although culture plays a role), nor is it based on trade surpluses that cannot be replicated worldwide.  Germany was a failed economy as recently as 2005, with 11% unemployment, despite it having the same culture and a huge trade surplus.  It was the labor market reforms of 2004 that brought success to Germany.  France and Italy can do the same, as long as they reject right-wing populism and embrace neoliberalism.  (Go Macron!)

But this is just the tip of the iceberg; there is far better news in the FT survey:

Young people in emerging economies are emphatic supporters of liberal values — even when those values run contrary to the laws of their country. In India and China more than half of young people think that same-sex marriage should be legal. Around three-quarters of young people in India, Brazil and China support equal rights for transgender people — more than in France and Japan.

Overwhelmingly, young people believe that men and women should be treated equally — with the greatest support for such values in the very different societies of Canada and China. Even in India, more than nine out of 10 young people support the principle that men and women should be treated equally — marginally higher even than in the UK and the US. We can no longer generalise about conservative developing countries and more liberal developed countries.

For all the concern about religious conservatism and polarisation, it is heartening that two-thirds of young people have close friends from other religions, and less than a fifth say a person’s religion is an important factor when deciding whether or not to be friends with them. Even in countries where this figure is highest — for instance India (29 per cent) and Indonesia (31 per cent) — two-thirds do not think a person’s religion is an important consideration when forming friendships.

Liberal attitudes are the key to progress.  The liberal attitudes of young people in the emerging markets bodes well for continued progress.

Members of Generation Z born in emerging economies are more likely to travel and forge friendships in other countries — on and offline — than any previous generation. Perhaps it isn’t surprising that they broadly agree with their contemporaries in the west on a host of personal and political issues, with some notable exceptions (Nigeria is a category of its own for religious conservatism) and, if anything, are greater supporters of the international order. With the growth of nativism around the world, it’s reassuring to know that the generation who will inherit the earth are, in most part, liberal globalists.

The future of the world has never been brighter.

Den ganzen Beitrag lesen…

The Financial Times has an article discussing the situation in Greece, which is described as being pretty bleak.  Living standards have fallen significantly:

The new report was prepared by IMF staff ahead of a February 6 board meeting to discuss the fund’s participation in an EU-led €86bn bailout of Greece and signals the continuing hard line the IMF is taking on debt relief for Athens. It offers a bleaker view of Greece’s economic dilemmas than an analysis prepared last year, warning that the debt load is “highly unsustainable” and would not improve even if it implemented further reforms recommended by the fund. . . .

“Even with these ambitious polices in place, Greece cannot grow out of its debt problem,” IMF staff warned in the report, seen by the Financial Times and drafted as part of the fund’s annual review of member economies. “Greece requires substantial debt relief from its European partners to restore debt sustainability.”

The IMF declined to comment, citing a policy of not commenting on leaked material.

The fund calculated that Greece’s debt load would reach 170 per cent of gross domestic product by 2020 and 164 per cent by 2022, “but become explosive thereafter” and grow to 275 per cent of GDP by 2060.

In contrast, the Germans believe that the Greeks need to tighten their belts, and get on with economic reforms.  Given that I’m a utilitarian, why do I favor Germany’s “tough love” approach over the soft love (or at least less tough love) approach of the IMF?

First let’s consider the “austerity” question.  In the Keynesian model, austerity may be a foolish policy during a temporary recession, or even a fairly long depression. But in the very long run, countries face hard budget constraints.  And by any stretch of the imagination the period from 2022 to 2060 must be viewed as “the very long run.”  It’s impossible to justify large and growing budget deficits during that 38-year period on the basis of “fiscal stimulus”.  That’s the road to bankruptcy.

It’s not easy to find accurate data on government spending and taxes, but the OECD has a graph showing that Greece spends just under 50% of GDP.  The IMF is simply wrong when it claims Greece’s debt situation is unsustainable.  If Greece had a smaller government sector, say closer to the 36% of GDP in Australia, or the 23% of GDP in Taiwan, then it could easily handle the challenges out to 2060.

The counterargument is that those sorts of cuts are not politically realistic in Greece, and at the moment I’d have to agree.  Some would claim the Greeks have already suffered from severe austerity.  You might wonder how that can be, given that nearly 1/2 of Greek GDP goes into government spending.  The problem here is that as G has fallen sharply, so has GDP, leaving the G/GDP ratio little changed, even as the Greek people have seen slashes in important programs.  The deeper problem is that Greece does not produce like a developed country, but its citizens expect the level of services and pensions normally associated with a developed country.  That’s why there is so much hostility to Greece in the middle-income countries of Eastern Europe, where benefit levels are lower.  I can see both sides of the debate, but next I’d like to explain why I think the German approach is the best option.

Greece faces two options.  One is to become a sort of ward of the EU, kept afloat by endless subsides, with a loss of sovereignty.  Here a model might be Puerto Rico, or the US possessions of the South Pacific, or perhaps the Native American reservations within the US.  These regions consume more than they produce, with the help of transfers from Washington.

But there is another model.  When I was young, Ireland was quite poor.  Articles were written explaining how the Irish poverty reflected some sort of flaw in the Irish culture, or even a lack of intelligence.  But then Ireland adopted a neoliberal economic model, and it has now become one of the richest countries in the world (although that’s a bit overstated, as its GDP exceeds its GNP due to heavy multinational investment.)  Still it’s a successful economy.

When I researched neoliberalism back in 2008, I was puzzled by Greece’s relatively high GDP per capita, given that it had the least neoliberal model in the entire developed world.  Of course we all know what happened next, that flawed model finally caught up with the Greeks.  Greece tried to maintain developed country living standards with a third world-type economic structure, riddled with corruption and statism, by borrowing lots of money.

I sympathize with the Greek people, but the hard truth is that they continually elected the flawed and corrupt governments that brought Greece to its current situation.  The Germans are right; Greeks need to tighten their belts and adopt neoliberal economic reforms.  This will allow them to boom like Ireland, and eventually get back to much higher living standards.

The Puerto Rican option might look tempting–have other countries pay for your consumption–but in the end the political winds in Europe will shift and Greece will be left to fend for itself.  Thus the reforms should start right now.  If they start running budget surpluses then the Greek debt is certainly serviceable in this new world of ultra-low interest rates.

Unfortunately, I don’t think they will follow my advice.  I predict that Greece will choose the Puerto Rican option.  The only question in my mind is whether the Northern Europeans will allow it.  Perhaps that’s one tiny silver lining from the new nationalism sweeping the world.

PS.  The more I find out about Trump, the less I like him.  He doesn’t even know how to do populism right:

Republicans and Democrats in Congress and in state legislatures have recently pushed legislation to rein in the long-standing practice of police seizing the cash and property of suspects who haven’t been convicted. . . .

Likening such efforts to the Iran nuclear deal he has often lambasted, Trump said no one understands the phenomenon.

He said Congress would be “beat up” badly by the voters if it stood in the way of police efforts to conduct civil asset forfeiture.

A 2014 Washington Post investigation found that police had taken billions of dollars in cash from motorists without search warrants, and without charging them with a crime.

If you read libertarian media you frequently come across almost unbelievable abuses in this areas, things that you’d expect from law enforcement in Nigeria, not America.  And Trump opposes any reforms.  Sad!

He’s just an appalling human being, in every possible way.  Fortunately he’s President of the US rather than the Philippines.  The courts will at least somewhat limit the damage over here.