Archive for August 2018


Reveal, depress, destroy: Three types of contagion

The term ‘contagion’ is used quite a bit in the financial press, but what does it actually mean?  There are at least three very different types of contagion, each with its own policy implications:

1.  An economic crisis in one country might reveal a weakness that was not previously apparent to the international investment community.  Thus in the late 1990s, the gradual rise of China and the strengthening US dollar was slowly weakening the position of export-oriented nations in Southeast Asia, which had fixed their currencies to the US dollar and also accumulated dollar-denominated debts.  When Thailand got into trouble in mid-1997, investors looked around and noticed similarities in places like Malaysia and Indonesia.  It wasn’t so much that Thailand directly caused problems in those countries (in the way a US recession might directly cause problems for Canada); rather it revealed weaknesses that were already there.

2.  A financial crisis in a big country might depress the global Wicksellian equilibrium real interest rate.  For example, the US housing bust and banking crisis of 2007-08 triggered a global recession.  By itself, this doesn’t necessarily cause problems in other countries.  But if the foreign country is already at the zero bound (Japan), or if the foreign central bank is too slow to cut interest rates (ECB), then a lower global equilibrium interest rate might lead to tighter money in other countries.  Here I would say that the US triggered the Great Recession, but the Fed, ECB and BOJ jointly caused the Great Recession.

Similarly, under an international gold standard, the hoarding of gold in one country can depress nominal spending in other countries.  Indeed gold hoarding by the US and France was a principal cause of the Great Depression.

3.  A financial crisis in one country can affect other nations if they are linked via a fixed exchange rate regime or a single currency.  Consider Greece, which comprises less than 2% of eurozone GDP.  Fears that Greece might have to leave the eurozone caused significant stress in other Mediterranean nations.  If one country were to exit, investors might expect this to lead to an eventual breakup of the entire eurozone.  That would trigger a banking crisis, and would also lead major debtor nations such as Italy to default on their huge public debts.  This is why a small country like Greece could have such a big impact on eurozone asset markets; investors feared that a Grexit would destroy the eurozone.

So far, Turkey looks like it fits the “reveal” template best.  The greater the extent to which Turkey is viewed as a special case reflecting local conditions, the smaller the contagion effect.  If Turkey becomes seen as emblematic of much of the developing world, then contagion is more likely.

Trump derangement syndrome

It’s now enough to simply present the words of Trump and his associates.  First, John Kelly shows prosecutorial discretion:

On the recording, Mr. Kelly says Ms. Manigault Newman could be facing “pretty significant legal issues” over what he alleged was misuse of a government car. She denied misusing it.

“I’d like to see this be a friendly departure,” Mr. Kelly says on the tape. “There are pretty significant legal issues that we hope don’t develop into something that, that’ll make it ugly for you.”

“But I think it’s important to understand,” he adds, “that if we make this a friendly departure, we can all be, you know, you can look at, look at your time here in, in the White House as a year of service to the nation. And then you can go on without any type of difficulty in the future relative to your reputation.”

Then Trump explains the qualities he looks for in White House officials:

Screen Shot 2018-08-13 at 11.41.30 AMNow I understand what Trump meant by hiring the best people—he meant the people who a best at praising him.


The China Threat?

The normally sober Financial Times has a truly bizarre article on the perceived threat posed by China:

Marketing slogans aside, since at least the 1980s there has been no presumption that US companies had to operate in the national interest. Goods, capital, and labour could move where they liked — that is the definition of globalisation. Most people believed that if US companies did well, Americans would prosper. But, as the past several decades of wage stagnation have shown, the fortunes of US companies and consumers are now fundamentally disconnected.

The wealth gap alone wasn’t enough to persuade politicians from either party to rethink the rules. But China is. While tariffs are President Donald Trump’s personal preoccupation, fears over losing an economic and cultural war (and possibly a real one at some point) with China is a worry that is shared broadly in the US, no matter what circles you travel in.

In my entire life, I’ve never met a single person worried about losing a cultural war with China.  What does that even mean?  Are we worried that Americans will give up Hollywood films and start watching Chinese movies?

As far as losing an economic war, that reminds me of the absurd claims in the 1980s that Japan would overtake us.  By the early 2000s, those Japanophobes had become widely ridiculed.  Have we already forgotten that fiasco?  Is America condemned every 30 years to engage in hysterical fears about the “yellow peril”?  What “circles” does this reporter travel in?  I could sort of understand talk of a military threat, although the threat is to Taiwan and some uninhabited atolls, not the US, but a cultural and economic threat?

As far as the first paragraph, is the author unaware that for many decades US companies have been banned from selling sensitive technology with military applications to countries such as China?  Yes, it’s difficult to decide exactly which technologies meet that definition, and undoubtedly a fair bit of useful stuff slipped through, but it’s simply false to claim that companies had complete freedom to sell technology to China.

And how about the logic here:

But, as the past several decades of wage stagnation have shown, the fortunes of US companies and consumers are now fundamentally disconnected.

Let’s make the list even longer:

But, as the past several decades of wage stagnation have shown, having a democratic form of government does not guarantee consumers will do well.

But, as the past several decades of wage stagnation have shown, developing an internet does not guarantee consumers will do well.

But, as the past several decades of wage stagnation have shown, having private private property rights does not guarantee consumers will do well.

But, as the past several decades of wage stagnation have shown, having freedom of the press does not guarantee consumers will do well.

During Mao’s 27 years in office, China lacked a democratic form of government, private property rights, freedom of the press and an internet.

Therefore . . . ????

And BTW, American consumers have done fabulously well in recent decades, at least in terms of autos, TVs, phones, cameras, internet, entertainment choices, restaurant quality and choice, cheap clothing, etc., etc., etc.

PS.  I have a related post at Econlog.

PPS.  V.S. Naipaul, RIP.  Whatever you think of him, Naipaul had no patience for bullshit, from either colonialists or anti-colonialists.  I notice that his death is receiving relatively little attention in the mass media.  We lavish praise on warm and fuzzy people and shun those telling us things we don’t want to hear.  At one time or another, he said things that would annoy almost everyone (including me.)


Detroit, Orange County, and “Murica”

There are no American nationalists.  They don’t exist.  There are people like Laura Ingraham, who present themselves as American nationalists.  But they are not at all convincing.  On the other hand, there are lots of American white nationalists, including our current president.  So how can we tell the difference?  First let’s look at how Laura Ingraham perceives “the problem”:

Ingraham said on Wednesday that “in major parts of the country, it does seem that the America we know and love doesn’t exist anymore. Massive demographic changes have been foisted on the American people and they’re changes that none of us ever voted for and most of us don’t like.”

. . .

Ingraham said toward the end of Wednesday’s commentary that she was not talking about race and ethnicity, and complained a night later that the disclaimer was being missed.

On Thursday, she said she had “a message to those who are distorting my views, including all white nationalists and especially one racist freak whose name I won’t even mention, you don’t represent my views and you are antithetical to the beliefs I hold dear.”

Instead of race, she said she was talking about “a shared sense of keeping American safe and her citizens safe and prosperous.

We roll our eyes at her attempt to dig her way out of trouble.  Does anyone seriously think that Ingraham is horrified by blond immigrants from Norway (or Slovenia)?  Her concern about immigration is clearly linked to race, at some level.  But it’s also true that she fears crime, and that she associates crime with immigration.  The problem here is that the violent crime rate in many of the “American” parts of big cities like New York is dramatically higher than in the immigrant areas.

So let’s think about what it would take to avoid “massive demographic change”.  In America, blacks made up 14% of the population in 1860, and 12.6% today.  That ratio is now pretty stable, because the black birth rate is about equal to the overall birth rate, and the rate of black immigration as a share of the total is similar to the share of blacks in the US population.  You can think of recent immigration from Haiti and Nigeria as a way of keeping the black share of the population stable, i.e. a way of preserving traditional America. Is that how Ingraham thinks about Haitian immigration?

In this vision of “American” nationalism, Detroit is a red, white and blue, all-American city, while Orange County is a disturbing foreign place, where whites are only 41% of the population and blacks are almost non-existent.  It’s mostly Hispanic and Asian, many from first or second generation immigrant families.  Is that how Ingraham feels about these two places?  I think we all know the answer, one doesn’t have to be a dog to hear the hidden messages in the white nationalist rhetoric.

I claim there are no “American nationalists”, only “Murican nationalists”.  They believe in Murica, a mythical white country cleansed of the blacks, Hispanics and Native Americans who have lived here for centuries. Ingraham may see herself as an American nationalist, but I don’t believe it for a moment.

Those who believe in Murica blame inner city blacks for their plight (bad culture), while romanticizing the plight of opioid-addicted whites in Appalachia.  It’s all the fault of the Chinese, who stole their jobs.

When Trump asked why we should accept immigrants from “shithole” countries, many people focused on the insult to low-income countries.  That comment was certainly impolite, and not something an American president should be saying about countries we need to deal with; but the real problem was the implication that immigrants from shithole countries are not the sort of people that we want here.  Some whites have trouble seeing the implication of Trump’s comments, but African-Americans (and Central Americans) whose ancestors came from those exact countries certainly know what Trump was implying.  Trump was implicitly saying (to them) “we don’t like the fact that you are here”.  Interestingly, many of our most successful immigrants come from dysfunctional poor countries like India, and even immigrants from Nigeria do about average in terms of income.

Lots of Trump voters don’t care what Trump says about minorities.  But there are still a substantial number of people who vote GOP for tax cuts and Supreme Court nominees, but who would be very uncomfortable if Trump made explicitly racist statements.  Enough to swing a very close election.  These people would rather pretend that Trump’s not a racist, just being a bit politically incorrect on occasion.  So Trump continues to send out dog whistles to his white nationalist supporters, while the moderate, upper middle class Republican voters of Orange County can continue to look the other way.

There was recent speculation that Trump might have used the N-word in private conversation. (Admittedly not from a very credible source.)  Speaking for myself, the truth or falsity of this claim would in no way affect my view of Trump. I already know how he thinks about lower income minorities.  They are people that Trump doesn’t want in “Murica”.  I wish he’d just admit it.

PS.  I moved to Orange County a year ago.  Compared to Boston, it’s culture reminds me much more of the traditional (white) America I grew up in during the 1960s in Wisconsin.  Back then, if one saw an East Asian on the street (then called “Orientals”) the person seemed very foreign looking. Now they no longer look foreign.  Here’s a video from an Orange County 4th of July Parade last month, full of marching Chinese ladies.  Even Laura Ingraham might shed a tear.

PPS.  Play the video until it reaches a pop song, which starts out with rap, transitions to Christina Aguilera (I think), and then samples a Norwegian pop song from the 1980s.  Seeing the middle-aged Chinese ladies dancing to all of that is more than a bit surreal.

Erdogan reasons from a price change

[I wrote this a few weeks ago, and then decided not to post it.  After today’s news I changed my mind.]

Turkish President Erdogan claims that the way to lower inflation is to have the central bank hold down interest rates.  How’s that theory working out?

Turkey’s central bank sharply lifted its annual inflation forecast on Tuesday to 13.4 per cent just a week after keeping interest rates on hold as it grapples with a weakening currency.

The move to raise the outlook from a previous forecast of 8.4 per cent in April comes amid concerns by investors about the independence of the central bank, which has come under pressure from Recep Tayyip Erdogan, the Turkish president, who is a self-declared “enemy” of high rates.

Murat Cetinkaya, the central bank governor, pushed back against claims that political interference is limiting his ability to tackle soaring inflation. Consumer price inflation hit 15.4 per cent in June — a figure three times higher the official 5 per cent target.

NeoFisherians correctly point out that a monetary policy that produces a sustained period of low inflation will be associated with low nominal interest rates.  But cutting the central bank policy rate does not cause inflation to fall, just the opposite.

As an analogy, ownership of a Ferrari is strongly correlated with being wealthy.  However purchasing a Ferrari does not cause one to be wealthier, just the opposite.

PS.  In fairness, the Turkish central bank did recently increase rates sharply.  But it was too late; years of holding rates at 8% let the inflation genie out of the bottle.  Now it’s playing catchup.

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